HDFC Bank Limited (HDFCBANK) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the HDFC Bank conference call hosted by CLSA India Private Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Adarsh Parasrampuria from CLSA. Thank you. And over to you, sir.

Good morning and good afternoon to all participants on this call. On behalf of CLSA, I would like to extend a very warm welcome to the senior management team of HDFC Bank and all participants on this call. Today from the bank, we have Mr. Sashidhar Jagdishan, the MD and CEO designate; Mr. Srinivasan Vaidyanathan, the CFO; and Ajit Shetty, the Head of Investor Relations. Thanks a lot, HDFC Bank team, for doing the call with us. I think over the last few weeks, the bank has engaged with investors, and Sashi has spoken about his strategy and focus areas for the bank over the last few calls with investors. We thought that it'd be appropriate and better to start off with the Q&A sessions on a few key topics that I thought either were not taken up or needed more clarification. And then we'll open up the floor for Q&A. A request to the moderator would be if you can just start, you can just make an announcement for the Q&A, and then we'll start off with the questions, please.

[Operator Instructions] I now hand the conference back to Mr. Adarsh.

Sashi and team, thanks again. And very hearty congratulations and all the best for your tenure as MD and CEO from October. You know the first -- we were listening through the few investor calls and asked investors as well what they would like to know from you and from the bank overall. So I want to start off with the first topic is -- and which has been, I thought, less discussed as well that your views on the wholesale book, right? Over the last few years, we've seen HDFC building prominence in the wholesale book. Wanted to understand, are you even building the wholesale business, the HDFC bank way, right? In the last 10 years, we've seen a lot of accidents by most banks in the sector. How differently we are gaining prominence in this segment? And what different are we doing here? If you can outline how do you look at this from the next 3-, 5-year perspective?

Right. Thank you, Adarsh, for your wishes. Thank you for arranging this conference call. Thank you all the investors for joining on this call. Sri and I will be -- will try our best to answer whatever you have in terms of questions. As regard to your question on wholesale business, Adarsh, actually, when you really go back in history, we have always maintained a certain proportion of our business coming out of wholesale and a certain proportion of our business coming in retail. We have seen -- and if you really go back and trace that growth rate, our wholesale has been less publicized. We are more known as a retail bank. But what people have not really looked at it is that the wholesale business has been consistently growing at a pace of 15% to 20% through this entire 10-year period or even prior to that, which is the reason why we always have this ratio of around the 45% to 50% being the -- what we call the wholesale book. If it has not gone consistently, then you would not be able to maintain this balanced customer segmented book. So that's part 1. We have -- you probably are looking at some of the growth numbers that we are seeing now over the last couple of quarters, which has been higher than that the market is going, is higher than a lot of other peer banks who have been building the wholesale book, and even amongst our own portfolio, the wholesale growth rates have been tracking much higher growth rates than ever before. It is a fact. But these kind of growth rates we have seen in the past, including some time in -- during the global financial crisis, where we did see, even at that point in time, a flight to safety. A lot of -- where there were a lot of disruptions. And there's a lot of uncertainty. A fair amount of good corporates actually came to us. Even here, even in the last couple of quarters, you have been seeing the economic activity going down with -- and there were a lot of concerns from the banking system whether this will sort of steer or this will sort of push more delinquencies in the system, will there be issues of the capital position for banks. So I think what happens naturally as a consequence of this is a lot of corporations, especially the good corporations where there is a need for stable funding will go to banks, which -- where they are extremely comfortable. So I wouldn't say that the underlying has changed. It is a reflection of the economy and economic activity. But the good corporations and large part of the government corporations, which are strategically important to the government and have extremely low risk and a very high rating from our own internal perspective, I think they have been sort of coming to us. So we have not been chasing growth. It's just that we have been lucky and we've been fortunate that because of our positioning amongst all parameters, whether it is the brand, whether it is the asset quality, whether it is a funding capability, which is a very key element of our growth because we have been having adequate liquidity, and Srini will -- has been saying this, our actual liquidity position has been getting better and better, probably more than what is required. We have almost at any point in time $8 billion to $10 billion of extra liquidity. And the capital position in terms of -- in fact, even -- ever since we rose -- we raised capital in July 2018 of almost $3 billion, we only expanded our capital ratios. We have gained almost by 170 basis points from that point in time. So when you look at all these things, I think people -- normally, good customers who would want to patronize banks which have the ability to have sustained incremental funding requirements for these corporations. And that's something that we saw even in the global financial crisis. And this is something that we saw it out here. So we've rode very well on our distribution strength. We rode pretty well on our energy levels across the linked and beveled organization, which has helped us to continue our growth path faster than the system or faster than some of the others. So wholesale, the strategy has not changed. We continue to be in the working capital space largely, 50% to 70% of our wholesale is in the working capital space. We are a part of a lot of consortiums with multi-banking arrangements. The share probably has gone up a bit in these consortiums because of what I said. On the term side, it still is around the 30% to 40%, which is a term, which is greater than 1-year tenor. We are, again, not getting into any dramatically different philosophies out here. We've always maintained that we largely patronize either the brownfield projects or projects of known promoters and known groups or where the project has already started to deliver cash flows, and it's not in the construction phase. That particular portion is a very minimal amount in extreme cases. Otherwise, it's largely brownfield projects, which is what is driving growth or refinancing of that, which is what opportunities that may come about, which is what we are doing, of course, taking into account the regulatory guidelines that come out on refinancing. So this is what it is. If you have seen or heard Srini and our CRO, Jimmy, talk about in the recent quarters, in the last couple of quarters, in the quality of book that is being put up, the incremental rating, the internal rating, which is on a scale of 1 to 10, 1 being the best and 10 being the worse, our rating has been actually better. The incremental stock that we're putting on the wholesale has been actually better than the average stock that we have, which means that the quality of assets that we have been putting in the recent past is only getting better and better. A large part of it, I think, we have also mentioned 70% to 75%, 80% is all BAA and above corporates. So reasonably sanguine about the quality of the book that we are putting up even despite its slightly higher and faster growth rates in the wholesale segment. So let me pause out here. All in all, our philosophy and strategy has not changed. We continue to patronize the same philosophy that we had much earlier over the last 10 years, in terms of that because of the positioning, we have had a unique advantage of getting a slightly higher share in the best of corporates that we have been dealing with, including some of the more strategically important government companies.

Sashi, just to follow up on this before we get to the next topic would have been that, given the kind of share inch-up that we are seeing in the segment, is it to say that, that strengthens your transactional relationship, like are you accreting more share there? And could you put that in context to the current account regulations, right, that we've had recently from RBI?

Right. So yes, we had a reason -- reasonable amount of share. It doesn't mean that in -- we have a dominant share in any of our corporates. It could be a handful of corporates where we have a dominant share. When I say increase in share, it means from -- suppose if I had about a 10%, it can go to 12%, 13%, 14%, or 10% to 15%, anywhere in that range is what I mean. Or if I have in some certain corporations, 20%, it probably can go up to 23%, 24%. So it's not a kind of a dominant and it's not something that we also would like to have. We would rather prefer to have a fair amount of equal distribution in the consortium as well. So that comes to your point on the transaction business. That has been one of our USPs all along. As I said, even though in certain cases, some of the shares of the corporations on the lending side may be smaller, we do have a slightly higher share on the transaction side of the business. Now the recent current account regulations that have come about or likely to come about is something that, of course, will have an impact, but we have assessed the impact on an overall basis. We believe it should -- there will be a bit of a gain in some cases. Some cases, we may lose out because there would be a lot of other banks which probably may have a higher share. All in all, I think we should be on a more or less on a neutral basis because of these new current account regulations.

Perfect, Sashi. This is very helpful. The second topic relates to a lot of what you've discussed on your strategy over the course of the last few calls with the investor, about customer acquisition and doubling that, right, one, through the branch network and then in the rural centers as well. So I just wanted to understand, what will be the key monitorable, right? And what will it require within the bank to go from employees from a technology perspective? You already have a huge base of customers. So now doubling the acquisition pace would be a huge task, right? So probably more relating to your customer acquisition strategy, right? How do you -- like what will be the key monitorables in the next 3, 5 years that investors should be looking at?

Right. So the first thing that we needed to do, which is already implemented, is on the branch strategy itself. See, the branch is being one of the largest feeders of our business, whether it is just a claim liability customers, which is the feeder for any other upsell of any products, other -- the retail asset products, the third-party, investment in insurance products, whether it's the SME businesses. So they are a large feeder of businesses across the spectrum of our bank other than the corporate and emerging corporate businesses. Now what we realized is, look, there is a certain amount of sales process that -- where we have been focusing upon, but we realized that it is not institutionalized. All that we said is over the last couple of years that let us try and institutionalize the branch, its process, on the ground level, and in the way the supervisors of the branch banking hierarchies were to control these particular processes, that should give us a huge lift in the customer acquisition. So we tried to bring in a fair amount of technology tools which will make their lives far more easier and more efficient. We define the customer relationship management system to be far more relevant. Two, is we ensure that all the products are able to provide the right narratives on the product range as to what is the value proposition of these for the customer. Three, we also rode on the artificial intelligence platforms and more -- which sort of provided more insight with analytics on the customer to the front end. So when -- Adarsh, when you walk into a branch, it is not that, I meet -- I'm the personal banker, I should be in a position to know more about you and ask you the relevant ones, basis analytics, the top -- the propensity of what you would want to have. So basis is insight, the engagement and the conversation and the narratives between the front-end staff and the customer was far more relevant and wherein they could in large portions of their time would have a more engaging conversation with the person rather than the person rushing away. I wouldn't say that it's 0, but at least the proportion of engagement went up. The entire supervisory architecture, their PRAs were redefined to mentor and to review the sales process which will provide insight as to which of the customers who have the potential but are not banking with us primarily. Is it because they don't like us or they don't like our service delivery? Or they don't like our product delivery? What are the things we need to change to be able to go back to the customer and then try and lead him away? If there are customers who like us, am I getting a slightly better share? This is a very simple process, but it has to be institutionalized. The measurement and the monitoring has to be institutionalized. And when you do that, you will get what you are envisaging as a goal. Now this is what we had envisaged. I mean we had a certain amount of branch -- branches. There was a certain run rate of businesses that -- or customer acquisitions which are coming about. In the year 2019, we sort of -- we clocked about 3 million customer acquisitions. 2018, it was about 2 million. But we said that, I think when this matures, with all these kind of narratives and energy, we should be able to double our acquisition. 2019 and '20, we clocked, we doubled, almost about 6 million customer acquisitions came out of this branch channel. That itself was a wonderful achievement. It sort of laid a foundation that what -- how important it is in terms of institutionalizing this. Now you may say, so we are not sort of -- let's say if they have a finance capacity of people manning these branches. So for our existing set of branches, I'm not talking about the new set of branches that we are adding and we will be adding. For those set of branches, I think we have achieved the target of doubling. Okay, now to double from here, we need to obviously double the branch distribution, our distribution emanating out of our business correspondents like the CSCs and other partnerships that we will be linking much. We will be trying to step up our acquisitions by -- on our digital front where we will be collaborating a lot of our partnerships with the platform players. We will be integrating our APIs onto their platforms. That should on its own have a new -- it's a new channel all together that we'll be creating going forward. And last but not least, with better customer journeys, which is what we are now -- we have been talking about and which we will be implementing in our Digital 2.0, I think the unassisted acquisition arising out of digital marketing should also sort of give us a step-up in customer acquisition. So our customer acquisition, at least from a branch side, is more or less achieved what we had stated to. We should -- it's here to have this kind of an elevated level of acquisitions now. But anything more beyond that will be addition of branches. Of course, there is still room of getting in better tools and better technology, but that is something that we need to dimension as we go by. But the scope for stepping up customer acquisition in terms of various partnerships is there. So we should be driving this going forward. So that's an important metric by itself, which is what we're doing. So that is one of the questions. Did you have another question in that -- within that?

No. And a lot of it has been -- the question is, a lot of it is driven by systems and improving processes. And we've already seen cost ratios kind of come down, right? It has been a very meaningful drop over the last 5, 7 years.

Right.

And beyond the point, right? So the question is that, how much more, right, in the next 3, 5 years, can we get to -- what's the thought process there, right? I think if you go back 5 years, you would have overachieved in terms of where we are on the cost ratios currently, right? So where do we get from here?

Okay. The opportunity is still there, but let me pause right here and request my colleague, our CFO, to sort of comment on that. Srini, would you want to take that? What's your -- yes.

Sure. I will. I will. See, Adarsh and the rest, the way to think about the cost or the runway that is ahead in terms of how to think about the cost will go, and what has been the pipeline for us to do, right, 3, 4 things. One is, while we are far advanced in digitizing various processes, transactions. There is still more to do. There are several handoffs that happen. And we have been on a journey of a continuous improvement where we try to look for those kind of fall-throughs that happen and then pick up and take and how do we make it straight-through and automated. And if anything, this COVID type of time frame has given a much more impetus to get that accelerated, which we have done, ever since -- in fact, unbelievable in terms of some of the activities that we were able to put through, which would have taken us 6 months to do, but got done in like 2 weeks, a lot of things, right? And some of them are already invoked, in play right now, some digitization. More to do. That is one, processes. The second thing is, entirely rethinking the process itself, and along with that, comes the technology, too. So a different way of thinking, which is, we don't get to change the technology to suit a process. We change the process to suit the technology. And that mindset has come in over the last couple of years, and it is gaining much more momentum now. So what is that doing is it is actually doing the real reengineering that you will think about or get talked about. How do you reengineer the entire thing? So that is another thing that is happening. The third one that is happening is, in terms of how we acquire customers digitally, how do we service customers digitally and how the transactions we talked about, I'm talking about even the acquisition, the digital marketing, and how we get -- those sort of -- those are also gaining traction over the last 12, 18 months. And some more new technologies are in play right now, which you will hear over the next quarter or 2 to see how we perfect them and scale them up. That's the third thing that is important. The fourth thing is the natural process, to the extent that we keep the jaws open, which is we do things in such a way that we have the revenue growth outpacing the expense growth. So you keep the positive jaws and keep moving along, so that itself gives you an inertia of the opening up of the cost to income. These 3, 4 things are very much, what we think, will drive it. And we have said in the past, last 1, 2, 3 years, if you see, we have said that there is a good runway for us to take in the kind of the next 3, 5 years to mid-30s. Normally, we don't give an outlook. We don't say this particular number is what we get to. But on the expenses front, we gave some kind of an indication to say, as a bank, as a goal, as a drive, this is where we want to get to, which is kind of a mid-30s type. And one quarter is not kind of a trend. And I wouldn't say that we will linearly get there. There will be some technology investments you will see. There will be people and process changes that would call for more investments to be done. We will do those things. So not necessarily that we'll be linearly getting down all the time. But quarter-to-quarter variations will happen. But on a trend basis, like the way we came from 48, 49 up to 38, 39, you will see that some kind of an improvement that is in the works that is going to come there.

Correct. The last 2 questions from my side, Sashi, before we open it up for Q&A, was, one is this whole journey, the change in journey started with a visit to Silicon Valley. Now given that we've heard a lot about fin-tech, which parts of our business today you think are more prone to this intermediation, right? Because we've seen some payment space, there are participants, not so much on lending, a little bit on lending, but not as much. So when you try and take a stock today, right, it's been some time. What's the -- which parts of businesses you would be a little more worried about than others?

See, Adarsh, we are not worried about anything. But at the same time, what our thought process is that we have to be geared to accept the reality or a fact that in future, maybe all our products and services could be commoditized, and there could be disruptions in every element of that. Whether it's SME, whether it is in the asset lending, whether it's the payment space, within the card space, et cetera. So if -- there are 2 things. We don't want to be like an Ostrich trying to say that everything is hunky-dory, and we would like to bury ourselves in sand, no. So that's been one of our philosophies that, look, always think that tomorrow is going to be different from today. So try and see how you can be up the curve not just in terms of trying to compare yourself with the neighborhood banks but also something that a large players like the large platform players can, if at all, become and decide to become a bank, they can disrupt you, principally because of their consumer journeys. So we are preparing ourselves to sort of confront the situation wherein there could be a potential. I don't -- I can't find the pulse of what will happen. But we don't want to be sorry about that situation. We are -- we have a fair amount of dominance. We have a fair amount of brand, capital, good asset quality, good banking practices. And I think we have an opportunity for us to disrupt ourselves, and then try and nibble away the kind of share that we have been doing so over the last 25 years. So that's our -- that's the thought process. I don't think we have a fear in our mind. We are looking at as an opportunity. So what are we trying to do? Obviously, one of the most important things that what -- someone who is better than you are in the way the journeys are coming out of the new technology stacks. So the first thing that -- which is what we have all been collectively doing. I mean it's not something that I am trying to think of something new. This is something that Mr. Puri and the entire team talk about it. And we are now probably in a much more -- it's just a coincidence of the timing in terms of trying to embark on something new. We decided this some time ago, and we are trying to disrupt ourselves by having a normal paddled stack, which will be unparalleled or provides a very seamless -- it's a fuse in technology infrastructure, which loosely call what neo banks would have, et cetera, but within the same umbrella of a bank, to be able to step to provide a wow or a delight to customers across multiple products and service deliveries and journeys. So that's the first thing that we are planning to do. So once you do that, once you sort of have that done and implemented, then the ability to provide similar kinds of services are of a certain frictionless experience to the customer, the customer will say, why do I need to go out? I can get everything inside this particular box. So -- which is what we are trying to do. So that's our first priority amongst the 5 or 6 strategies that we've always been discussing about. This is our first priority. The second is, trying to see how we can trap our cash flows. The fact that you -- we are dominant in multiple, whether it's corporate, whether it's the supply chain, whether it's the retail. And there are various customer segments that drive and -- this kind of a dominance, we're now trying to see how we can create ecosystems within to be able to counter what an ecosystem that a platform player can provide. So I think, yes. We are just preparing ourselves, putting our socks and trying to be -- bracing ourselves to say that, look, there is an opportunity, what you are able to see as new technologies is something that is available for us to leverage upon and then run our businesses the way we have been doing, but on a far more efficient and a frictionless scale. And with this, we believe that because of the positioning that we are at the Indian Banking System and Indian Financial Services, the opportunity, the runway is very large for us to nibble away more share than what we have done thus far. So that's the premise that we are going with. We are all void on that discount. This is not something that there's a question mark whether this will happen or not. It will happen. It will take a bit of a time. Maybe you will start to see snippets of that every 3 to 6 months as to what's coming out of our stable. But we are quite well prepared to be in the counter anything that's going to come as a threat to the -- in our ecosystem.

Perfect. Thanks a lot, Sashi. And last question, which we keep getting in -- recently in the last 2 weeks we've got, is on the capital raise, right? Most banks have raised capital. But to start with our capital, CET1 at 17% was better, right, and very resilient. So do we really need to raise more capital? Are we comfortable with where we are? If you can address that question. And then I'm going to open it up for Q&A from participants.

Srini, this is now on your highway.

Okay. Yes. The way, Adarsh, we thought -- we have thought and we have time and again articulated, including the last big investor call we had on the 18th of July, is that, our internal generation of capital has been quite robust, right? 33, 30, little more than 30, call it 33 basis points we generated last quarter. And Sashi alluded to in the beginning of the call, too, that over a period of 15 months from last April to now, almost 170 basis points is what we have generated capital, internal generation. And then if you go back even further to middle of 2018 when we actually issued capital to augment our ratios, that was about 230 basis points or so. But we haven't consumed that 230 basis points. We have generated another 170 basis points. And so we did not see any need for additional capital, right? And we have time and again mentioned that, that we don't need. And just to keep in mind the context, this question comes in the context of few other banks on the street trying to issue capital, and so why you're not issuing, the rest are issuing? It's okay. Each one has got different needs for use of capital, and that is why perhaps there are other issues, and for us, there's no issue. But I do want to highlight that our capital ratios, when you compare to post issuance of some of our peer groups, are still higher. That means our peer groups who raised capital, their ratios are lower than our current ratio of capital. So still, we feel that we are quite strongly capitalized, and we don't need in the short run to do anything.

Perfect. No, that was very helpful, Srini. So yes, that is a set of some questions. Operator, can you just announce for Q&A once and start taking the queued up questions, please.

[Operator Instructions] We take the next question from the line of Alexei Kapkin from JPMorgan Asset Management.

I have kind of maybe 2 follow-ups to kind of -- to a large extent, to the previous questions, but kind of it's a just broader question on the sustainability and -- of your growth and the return on equity. If I look for the last, say, 10 or even 20 years, you broadly grew your deposits and loans by about 20%, and if I -- and while maintaining return on equity between 17% and 20%. So very kind of a robust growth and profitability. But if I kind of decompose the growth of your balance sheet of your, say, loan and deposits, I can see that 13% out of this growth of 20% comes from the system growth. System was growing a bit faster than nominal GDP say of 10%, and the rest was being really market share taking. And we took market share say from 1% from 2000 to kind of 8%, 9% in 2019. So the question is that, what are the challenges now going forward for the next 5 years to maintain this growth and profitability? But also maybe there are new opportunities which allows you to maintain this growth and ROE.

Sure. Thank you so much for your question. The first one is, let me sort of get your -- the question into 2 parts. One is the market opportunity itself and, two, is what is our strategy to nibble away that market opportunity. I think if you've seen, the very reason why we have come into the space 25 years ago is that we believe that India is a great destination. Indeed, the financial services in India is underserved and underpenetrated. We may have had a little bit of improvement over the last 25 years. We have gained about 8% to 9% of share. But still, even as we speak today, we still believe that there's a lot kind of population which are bankable, which have not sort of really got the entire suite of financial services, product and service offerings that one would get in other developed parts of the world. So the runway is very high. And you can dimension that in multiple ways, and you'll get the same answer. I mean one of the things you can dimension it is in terms of the banking system itself. There are about 70% of the banking share is still with the state-owned public sector banks. We've had a lot of debates and discussions on that, but there are certain DNAs which are going to be difficult to dislodge in an existing political structure in the country today. I'm not saying it will never happen, but it will take a long time before anyone can dislodge that current structure in terms of the relationship between the government, the labor unions of the state-owned banks and the compensation structure that comes with the structure. And hence, the service, the product that will be standards are not necessarily innovations. They are something that you -- the particular PSU bank is forced to sell or is there to sell. And it is -- they don't reach out to the customers. It is only out of certain watch like say exuberance of certain wonderful quality managers, which I think they have. The PSU banks have fantastic quality managers. They have been able to infuse something and they have been able to infuse that kind of a good culture. And that is how the banks have been drawn. So here we are, where we believe that we are professionally run. We have the entire suite of products, whether it's for the large corporates, whether it's for the MSME, whether it's for the retail corporates. And for each of them, we have the entire suite of products, both on the asset and the liability side of the balance sheet, or from an investment perspective or from an insurance perspective or from a shopping perspective. So we are -- we probably have the ability to fulfill the needs of any customer in any customer segment. Three, is we also have technology, which we keep on changing with changing times. Probably, we are still about 10, 15 years behind, which is what we want to disrupt ourselves to be ahead in terms of technology. Banking technology being somewhere similar to what you get in the e-commerce platforms. So when you look at all that, and as long as you're focused, you have the drive, you have energy, you have the capital, you have a philosophy, you have a good tone of the top in terms of ethos, culture, et cetera, and I think nibbling away share, as we have done over the last 25 years, should not be a problem. In fact, if at all, as Mr. Puri did mention in his annual report, and he has been sort of energizing all of us to say that he is expecting the best of the bank yet to come. So the opportunity is there. The platform is something that is -- we believe, is reasonably, very resilient and sound. I think we have an opportunity to nibble away that kind of the growth. So that's on the market opportunity. That's one way of dimensioning it. You can although dimension it in terms of the population demography. You look at -- geographically, you will have almost about 60% to 70% of India living in semi-urban and rural parts of the country. And there, you are seeing the -- with series of GDP growth, whether it is between the 3% to a 7% or 8% over the last 20 years, leave aside the current growth rates, which is quite natural, there has been a lot of the per capita, both at a country level and also as the semi-urban and rural parts of the country, the per capita GDP has also been moving up. We have probably reached an inflection point, which is what we were always expecting over the last many years, which is why we wanted to put up investments way ahead, that you will reach an inflection point where the demand for consumer goods and for financial services takes a dramatic turn. Now we are not wanting the entire space. I mean, obviously, we are -- we have a finance capacity. And we are very clear. One of the things that we are very clear about right along is the need to maintain your customer segmentation, whether it's the -- in the retail side, which is the middle and the upper middle income, whether there would be SME, which is very -- which is cash flow based, probably you can take a secondary collateral in the form of an urban general property, or the corporates, which has predominantly been in above corporates. Now you may think that why you're still being so conservative, and that is how we are. We are saying that when you still have an opportunity to nibble away the best of customers, why do you want to go down the risk ladder? So when you're talking about 70% as a total market in the semi-urban and rural, what we need is the top 20%, similar to what I may have missed out in saying, even on the -- in the PSU banks, I don't want all the entire public sector bank customers. I just need the top 20%, 25%. So that itself is about 14% to 16% market share. However, you sort of dice it up. So the runway is so large. Just in our own target customer base -- rather target customer segmentation, that you can continue to nibble away that just by your execution capability. And that is what we are probably confident that we will do. But the third aspect of it is -- or the second aspect, are we going to grow? When we grow, it is something that is -- we don't normally chase growth. Let me be very clear. We grow only if we are confident about the underlying economy. See, when you look at the GDP spectrum of the economy, almost about 60% to 70% of the GDP is out of consumption. The balance 40% is split equally between government spending and infrastructure or investment, okay? We -- our growth or our composition of our book mirrors that GDP spectrum. So we will grow only if there is a kind of a reasonable assurances about a growth. And our credit architecture should allow us to grow in a comfortable position so that the risk rewards continue to be maintained. So all in all, I think the opportunity for India to come out and continue its Hindu growth story as one popularly calls is something that will happen. I think we have -- the demography suggests that there is an opportunity for us to come back to go -- apart from ignoring this kind of an extreme impact that a lockdown has created -- arisen out of the pandemic. So we say that the underlying economy is growing. I think we should -- we are well positioned to nibble away that particular growth better than what the market is going to grow. So I hope I've answered that, but that was -- we would like to sort of -- we are cautiously optimistic. But our key is -- opportunity is there to grow. Market opportunity is there. Our platform is ready to grow. But we will grow only if the underlying GDP of economic activity also supports us to grow. If not, we will -- we are not going to be apologetic not to grow if there is going to be a bit of -- the shock of what we are seeing now continues for the longer time.

[Operator Instructions] The next question is from the line of Avnish Tiwari from East Bridge.

Sashi, I had a question around this strategy you are pursuing on the ecosystems, the digital ecosystems. Which ecosystems you think can be transformational value creative for HDFC Bank? And I understand they are at a stage where they are not, let's say, predictive completely in nature. But where you are thinking, let's say, could be very big if they are successful? And second, when we think about the platform economics and platform businesses, they basically either have an SO full effect or scale economies. And in which case, they attract everybody, right, outside out there. So this strategy you are pursuing, is it more to make your customers or the customers of HDFC Bank more hooked down to HDFC? Or is it that other banks customers will also get attracted -- like a -- will also get enticed to join this ecosystem? Hence, you become a natural -- national player that everybody wants to bank with.

Yes. Thank you. Thank you for a good question. See, by virtue of being one of the largest working capital bankers to a lot of corporations in the country, the largest retail asset bank in the country, the largest salary bank in the country, one of the largest cash management bank in the country, one of the largest payment bank in the country, we have pockets of dominance that we have in each of these respective spaces that we have just spoken about. Now when you look at it, we have sort of gained -- we're still a long way in terms of having market dominance and market share from a banking sector perspective. But still, the spaces that we've just spoken about, whether it is the pharmaceuticals or it's auto or whether it's a payments -- from the trade and payment space, we are reasonably dominant. Now it's not that what we are talking about means that we don't have an ecosystem. We all have an ecosystem today. Let's face it. Let's take the health care which is the first one we went off the block. Whether it is the pharmaceutical companies, whether it's the diagnostic companies, whether it is the health insurance companies, whether it's the hospitals, whether it's the doctors, whether it's the diagnostic centers, whether it's the pharmacies, whether it's the e-diagnostic centers, the e-pharmacies, and of course, the customer base, we have a large portfolio of them in our -- whether it's the retail portfolio or the SME portfolio or the corporate portfolio. Now all that we're trying to do is we are -- whilst we have a reasonable amount of dominance out here, we are saying that, can we stitch this digitally so that we not only are able to provide a value addition to our customers that when you think of medical, you think of HDFC Bank, we are not going to -- we are not a trading platform. We're just stitching all the members of this particular ecosystem. We're just going to be at a center wherein we will see the entrapment of cash flows in that system. We will provide a basis analytics and riding on artificial intelligence to provide better products and services. This is the flow that will happen. We can -- we have better consumer journeys that we have -- which we are building. We should be able to provide a lot more unassisted journeys without compromising on our risk standards. In addition to that, the moment you have a space for a large part of your customers in this ecosystem, both from a B2C perspective and a B2B perspective, you also try and see whether the cash flows which may be moving out, both from a consumer side and from a B2B perspective, can be kept within your particular things. So that's a primary motive for us, which would answer one of your main question. But in addition to that, when you're providing this platform wherein when you want any customer to think about medical care, and you are able to get the entire backward and forward integration of anything that is required from the medical perspective, whether it's from an inventory ordering basis for the B2B, whether it's from a payment basis, whether it's on a stock perspective, whether it's on the B2C perspective, the payment or the loans -- or even from a B2B perspective, any lending that is required from a country working capital need or from a term perspective where you want to put up a diagnostic center or a better equipment, we as a bank can provide. And of course, this should also attract a fair amount of new participants joining into the system. So we are not just looking at existing. As I said, you are right. This will take a bit of a time. It's a very complicated thing to stitch the entire -- both -- all the pieces together. It's a very ambitious thing. But I -- we always believe in the bank for the past 25 years, and that's a kind of a mentoring that we've had from Mr. Puri and team, saying that when you do difficult things, it is very difficult for a competition to replicate or do this. We have seen it in ourselves over the last 5 years. Like, for example, do your own loan against mutual funds or do your own loan against shares, it's so pretty complicated that there's not been many people who can replicate it. So which is why -- this is a very important part of our future growth strategy. Not just having a book for our existing customers on a B2B and B2C basis to get more and interact the flows within the bank, but also attract new customers. So the focus areas, there's going to be auto, health care, trade and merchant services, and also, in the rural ecosystem as well for a start. I think that's part 1 before we went -- go on to other ecosystems like education and others, but that is in Phase 2.

Just if I can have one follow-up. How has been the success of SmartBuy platform? What have you learned from that? And how is that progressing?

Yes. The SmartBuy platform is a wonderful success that it has sort of gained a lot of interest in both on the merchants getting onto the platform and offering a lot of attractive offers to the customers of HDFC Bank. So you are able to -- you had -- this is a wonderful question because this was a kind of a small experiment that we did in terms of -- since we are the largest payment side of the business, we said -- and if you know, this kind of an evolution, all of them wanted to view our wholesale. Initially, we started with a very simple portal or a dumb portal like the Discovery platform to say, which city, which merchant is asking which customer. The customer is to go there on a portal, look at it, and then go and shop, and do it from the off-line platform. But now we said, why can't we upgrade it by allowing them to click on it and get on to the other person's platform? The success is good. But we realize that it is still a very clunky platform. So we need to, as part of our Digital 2.0, I think we are in the verge of trying to make it far more robust and resilient in the journey. The user experience and user journey needs to be far more easy. So we are rationalizing that. And now I think as a part of our next 6 to 9 months, you will see better journeys, and that should be a wonderful hook to our both B2B and the B2C journey. This is -- the experiment was good. Like any other experiments you have seen in other larger players, I think, the -- once proven, once we know what the problem is in terms of clunkiness, we know what we have to do, we know what to fix. I think we will be fixing it and then sort of expanding our footprint there.

[Operator Instructions] The next question is from the line of Mr. Sujay Kamath from CLSA.

Wonderful thoughts. I just want to ask you the question in the context of the recent data point that we received, which is a close to 25% drop in GDP. I mean what gives you the confidence of still maintaining this guidance in terms of NPAs from about 1.3% to 2%?

See, see, the -- well, let's face it. I mean, as I've said, that you have this kind of a drop in -- because of the lockdown. It's not that we were not expecting this. I mean this is something that we had expected it, saying that the first half of the year is going to be washed up. So it all depends on your positioning and customer segmentation. Yes, people have -- will get impacted, whether it's caused some of the top players in certain sectors, some of the SMEs, the self-employed and the small micro enterprises, surely, haven't got impacted. And in terms of the retail, depending on where you are, in which part of the place, if you're salaried, in which sector. If you're nonsalaried, then yes, that's a different issue with CET. So this is something that was quite evident. I mean we still believe that on an -- if you're saying 24% is what we are dropping -- we have dropped by -- not to -- even if you look to say that, okay, the informal sector is something that is not there, maybe that will be even more. But we still believe that on an overall basis, for FY '21, the GDP is likely to contract somewhere around the 7.5% to 8%, which means that once the lockdown is done and dusted, and then I'll come to that, we should see a bit of a spring back in terms of that activity. And that is the -- that is what we are all hoping for in the third and the fourth quarter of this year. So I know the pandemic spread is still lingering. And as I was mentioning to Adarsh, this was primarily -- I would say that whilst a number of cases is moving up, it's also a function of the fact that India now has an ability to do a lot more testing. As it is doing testing, it is sort of the statistics that's going up. But we are also seeing that the intensity of the virus is also going down. So people are unless and until, they are having some severe comorbidities, I think other than a 14-day quarantine, which would probably bring them back into action, I think we should be all right. So it is something that we will expect. You are entering into a lot more areas of flexibility is going to come about. We just got the so-called one festivity, which got over, which is very popular across the country. And now as you move into September and into December, India, as we know, is a land of festivities. You will have a lot more, and people probably will shrug off the 6 months of lockdown that they have been countering, so there will be a lot more -- less of social distancing, which will spring that up. But I think people have realized that, look, livelihood is going to be more important than life. And especially if they are not suffering from any comorbidities, I think they will take a chance. They will -- probably, if they do get infected, probably they will see some of them going through a quarantine, but then they don't want to stop any of these livelihoods. I think the governments have -- in India, both the federal and the state -- central government, has been taking this kind of a pressure for some time. And that is a thought process that is going on. So we are hoping, barring in certain severe containment zones, barring the population which are aged or the population which probably may have comorbidities, I think, largely, you will start to see economic activity coming back, with the kind of a slight revenge from September, October onwards is what our hunch is. So with all the measures that the government have taken in terms of providing moratorium, providing liquidity support to the SMEs through the government-guaranteed schemes, the talks of trying to restructure both from the person side and from the corporate side, which is what is going to come about through a committee which has been nominated by the government and the RBI, I think we should see much lesser impact on the asset quality of the bank. This restructuring is going to be completely different from what one would have otherwise thought in the past. This is not trying to kick the can down the road because when you look at the controls of the restructuring, I think, broadly, I think they've all agreed that there has to be a couple of conditions met that you were indeed very good even prior to the pandemic, you were actually impacted by the pandemic, and three, is with this restructuring, you will actually resurrect on a more at the 95% confidence and get back on your feet. So I think we -- a lot of the -- all these combinations that I've spoken, I think the fear of what's carrying into a very extreme position on asset quality will not be there. There would be, of course. I'm not saying -- please don't mistake me on that one. We will have slight higher slippages, but it's going to be much more manageable than what one would have expected if some of the measures and the government had brought in were not to be there.

The next question is from the line of Mr. Adarsh Parasrampuria.

Sashi, we'll just take 1 or 2 last questions. I got one on e-mail. It relates again to asset quality, right? So I think it was very fair that you kind of explained why the impact on asset quality will not be as drastic vis-à-vis what the macro numbers suggest. What people are trying to understand is that, every 2 months, we would assess the situation in India in different parts continues to be, if not national lockdown, rural lockdown. So are you -- the risk clearly remains of these regional lockdowns that continue and numbers don't abate. So one part of the economy where we are very -- we are well intrinsic is the semi-urban rural side business owners segment. What is the outlook that you would have on that particular segment, because that's a segment which could actually see the brunt of the lockdown? CVs, loan against property, MSME loans, that segment.

So you're right. And see, I'm not oversimplifying whatever I'm just trying to say. You're right that the virus spread in the rural economy could be a bit of acute because of the kind of migration we saw, the rate of migration we saw going back to the home states, especially in Uttar Pradesh and Bihar. But still, relative to what we are seeing in the metropolitan cities, I think it's much lesser. Now we need to wait and watch how it is. But fortunately, I think the rural economy has been reasonably sound and has been, if at all, even in your minus 24% GDP growth. The only positive aspect of that has been the agri. In fact, that's the only one which has positively grown at about 3.4%, okay, which itself is a positive thing. And we -- mind you, the monsoon and the sowing season for Kharif and the monsoon has been pretty good. So we're expecting the Kharif crop, which is to come now in this month and probably by October, should be much, much better than what it has done in the past. So this is very important from overall buoyancy in the rural economy. I think this -- also, the fact that there has been a lot of social spending more in the rural areas than what we have seen in the urban areas, where it's PMAY scheme or -- and the MGNREGA scheme, I think that has also been reasonably buoyant over the last couple of months. So we should see -- I mean it doesn't mean that I'm saying that everything is hunky-dory. Yes, there will be pockets of areas where there's a lockdown even in rural. But the government has demonstrated in the May and June period, how you can continue or how you can provide the necessary logistics support and infrastructure support to be able -- for the large part of the farmers to be able to get their produce to the markets to be -- and then provide the necessary minimum support price even there. So I think that, frankly, in the entire picture, this is what we believe is -- and we are seeing that at the ground level. We may not have opened it up. I mean we may have a contrarian of credit and architecture and infrastructure -- credit architecture is independent, as you know. And they may have a -- they would like to wait and watch on an overall basis. But we are seeing a fair amount of flows coming in from the rural sector. The deposit growth is very good. The secured products are doing well. We may not have opened up on the unsecured side as yet. We are not gating down to all the customer segments, only the certain portions of that. The tractor sales have gone up. The 2-wheeler sales are going up. The underlying people who are buying these are people who are extremely comfortable. So all in all, I think there is not too much of an issue we see from a rural India perspective now, whether in our portfolio or in the future. I think, if at all, when we -- when our credit architecture sort of looks at it far more holistically and they open it up, I think we should see that particular geography actually pushing up growth even better than what we had anticipated, without compromising on our credit quality.

Perfect. Thank you, Sashi. I think we're running out of time. So that was the last question. Any closing remarks from your side, Sashi, or I can wrap up either way?

I just wanted to thank everyone for joining in today. And happy to take any calls or any further questions to Srini and me through e-mails. As I said, we are quite cautiously optimistic about the future. I think -- so time will tell. And whether with me or without me, I'm very confident that the bank is going to be rolling into the future reasonably steadily without diluting our ethos, our margins and the standards.

Perfect. And thanks a lot, Sashi and Srini and all participants who've joined in. Have a good day. And yes, good afternoon. See you all soon.

Thank you.

Thank you.

Thank you, Sashi.

Thank you very much. On behalf of CLSA India Private Limited, that concludes the conference. Thank you for joining us. Ladies and gentlemen, you may now disconnect your lines.