HDFC Bank Limited (HDFCBANK) Earnings Call Transcript & Summary

Hello, everyone, and welcome to Morgan Stanley's Virtual Financial Trip. This is Sumeet Kariwala, India Bank's Analyst at Morgan Stanley. And I'm glad to host our first session with HDFC Bank. It gives me great pleasure to introduce Mr. Srinivasan Vaidyanathan, CFO at HDFC Bank. Srini joined the bank around 2.5 years back. And before that Srini has had a long stint with Citigroup almost 27 years. During his tenure at Citi, he has held various regional and global leader positions in diverse geographies, such as Singapore, Hong Kong and New York. I'll hand over to Srini for some opening remarks. But before that, I'll read out the standard disclaimer. Please note that there are participants in the session who are not from Morgan Stanley Research, and their views can defer that -- from that of the resource department. Srini, with that let me pass it over to you for some opening remarks. Many thanks for joining us for a discussion from your very busy schedule. And I think it will be great if you can start by sharing your thoughts on the macro, the interest rate environment and lots being discussed there, growth and then move on to some basic update on the HDFC Bank.

Okay. Sure. Thanks, Sumeet, and giving us an opportunity at this time, I really, really appreciate. As you've said, why we're here, and we will take you through. Let's -- as you said, it's a -- chart on the macro front, something that has -- we should be aware to probably start a place to go back to sometime August, September and then get from there in terms of how things have progressed to where we are as we speak in early March, right? Just after the peak of the COVID, things started to get slightly better and turnaround, inflection point was perhaps September, right, August and September, that kind of a time frame is what we see as the kind of an inflection point. And since then, if you look at the activity indicators, they've been doing very good across. And one thought, the October to December time frame of various activities that we were able to watch and see, there was always a kind of a question whether it was more driven through the festival time period. This is simply something like a revenge demand that things that are bottled up for about 6 months period from March, April, getting unleashed. And is that something temporarily sustainable and so on. So these were the kind of thoughts that we're going through October to December. But then if you look at the activities, even since then, some of the activities, let's call it, the first, the GST collections. Of course one of the key macro leading indicator in terms of how to look at things as it is progressing. It has been at like INR 1.2 trillion. It has progressively moved up, right? Every month, slightly above the prior month, and things have looked up on that front. And if you look at the PMI that, again, 57.7%, 57.8% or so. A few decimals, right? So that's kind of an improvement sequentially, month-after-month you are seeing on that front, which also August well, right? It seems to be holding up well and doing. Again, certain things, like think about the passenger car sales, if you go back to pre-COVID, that's one of the things that have been -- that have bog down the economy macro too, right? Where the vehicle segment have been subdued, pre-COVID. Now post-COVID, that has done very well across various categories of the vehicle segment, things have done well. The passenger car sales double-digit continuously in the November month was somewhat subdued, February month was somewhat subdued. But then still, right, if you look at it on the whole, because the month here, month there can go up and down depending on how it has been done. Look at the quarter as a whole, things has held up very well across all of those. The 2-wheeler sales are the attractive type of sales, which are more good indicators of what widens in the semi-urban and rural that has done very well, too. And so also have the crop season bit, which is, touchwood, and let's keep praying for it, which is the agri sector has tremendously performed across the crop seasons last year and this year -- early this year, has done very well. Again, thanks to the least impact from many of the natural calamities or the other issues. With farmer agitations, et cetera, still the crop production has been what it has been very good. And the other things are getting sorted out as well. So these are some of the kind of indicators that you can say, at the macro level. And then that culminated into what recently, I think, a week ago, 10 days ago, you saw the GDP kind of number that cars produces 0.4. Again, that is something that we indicated some of those things that happened in the quarter, October to December. And within that, the private capital formation which had been questioned all along leans again to show that there is some kind of early indicators to getting that back to life, right? It's really early days, but at least from a GDP components point of view when you look at that we're showing and holding very well and getting back to life. So that's something from a macro point of view. Our house view is that, that we are progressing and sustaining on this momentum. The January to March quarter on the house view we are at the GDP of 1.5% -- plus 1.5% is the growth rate that from our house view, our economist view we have. So it is building up from there and going. That's the kind of a macro. In that context of the macro, if you see what has happened with the fiscal budget, that is little more than a month, 1.5 months or so in terms of the fiscal budget that came in. The most anticipated budget, so to say, right, very widely advertised and very widely expected, kept up many of the promises that were required. If you think about the budget in terms of the infrastructure spending on the budget, what has been done, 35% growth in infrastructure spending. And one thing that is different from what you have seen over the last 2 years or so. Remember GDP came from 7-odd percent to 4.5% or so. Progressively things did slowdown in the country. This is pre-COVID. It did come down. At that time there has always been a question, there has always been a kind of a demand or kind of an expectation that, why the government is not pulling in and spending to leave this kind of a growth back to where the potential of the economy is. That's the kind of -- it came down from the -- some came down from that potential to some kind of a suboptimal, why the government was not pushing. And there was always -- there was this debate about the budget deficit, at what level is it appropriate. And of course, the predominant thinking at that was that the budget deficit seemed to be wholly kind of a number and is not going to be something that is sacrosanct and not going to be broken, right? That was a kind of a feeling one got. And so the actions weren't coming forth from there. However, we saw that globally, due to COVID, every government, every administration was spending vehemently to revive back. And similarly, we also took that opportunity to revert back the budget deficit pegged for the March '21 year ending at about 9.5% or so. You can see the kind of a trust that when to spend. And there were no qualms in getting that done. And similarly, the fiscal budget for the forthcoming year FY '22 is estimated at 6.8% deficit. I'd say, call it, around 7% or so. And not only that, the Finance Minister has said that until 2026, we don't expect it to come below 4.5%. So that means, gave an indication that there will be the sustained level of spend -- sustained level of development spending that will happen from the administration to support the broader macro. And so much so that you can see the activity that has come in, India will be one of the few countries, U.S. being the other one where the absolute level of GDP will come and cross and surpass the pre-COVID levels by end of this year, end of the calendar year. We should see that happen. We're at the absolute level, it goes up. Of course, from a percentage growth point of view, 11.5% is our house view, and that is broadly the view across the economy to that 11.5% will be the GDP growth. But 11.5% is not something that you would think it is staggering because the base has been lowered due to the COVID impact, the base is lower. But then that is the more important thing is that from an absolute level surpassing the pre-COVID. And one of the few countries, U.S., India, and there's 1 or 2 across the globe, if you look at the list of countries, which should have an output, which is absolute level of output getting back to pre-COVID. This is one of the country that will do that, right? So from that sense, a lot of momentum coming in. Then you saw that support coming from both the government as well as the monetary policy from the reserve bank all through. And it seems to be sustaining. If you think about the rates, yes, after the government announced some of the measures in terms of the borrowing, the rates did spike up a bit, right, 5.9 seemed to be a sweet spot, 5.96 seems to be a sweet spot, but went up to 6.2 or so, the 10-year benchmark government yield if you look at that as one of the kind of -- you'll be able to see. But there has always been both rhetorically [Audio Gap] for house view that it is transient that some of the rates have spiked. But hopefully, with both rhetorics as well as the actions, potential actions and the action across from reserve bank and from others that the rate should come and settle at a reasonable level, right? That's what our view that it will come back to settle there. While it has spiked up more. It is not just our country. It's I think globally also, the rates have spiked the 10-year as a benchmark has spiked everywhere and most of the administration is trying to pull it back globally, and so also in the country we are seeing that come back. But then what is the kind of -- if all of this is good, what is the kind of inflation outlook, right, which is, we believe inflation -- this target is 4% plus/minus 2%, right? So it's all within that kind of a range. And now, call it, 4.06% or 4.1% or 4.2% or thereabouts, if you read -- if you take the reading for the last 2 or 3 readings that came, seems to be smack in the middle of that kind of thought range on the inflation. But however, the forecast of inflation, our house view as well as the general market view is that, the inflation in the first half of the new fiscal could be as high as 5%, 5.5%. And the second half, could settle around 5.5%. But still, the overall inflation is within that range, but still it is towards the higher end of the trade. So that is the kind of, call it, something that is getting watched, and that is why you're seeing both from a policy point of view, cautious approach to see how we manage and clean the growth here, so that it doesn't get out of hand. So that is part of, I would say, where the macro is and where we are heading. The underlying growth is the last -- I'll stop with this last bit of thing. See, as a country, the credit demand has been something historically and as we speak now, and we expect that going forward. So the credit demand always outstrips supply. Which means for the bank, the credit is up for taking at our choice because we can pick and choose the credits that we want. And so because the credit demand is so high, it's never been met. The demand has never been met, the demand is pretty high on the credit side. And if you think about the basics of why the credit demand is always high, as a country the credit penetration is pretty low. We don't have -- you can compare it to the western countries. One might argue that it's not perhaps the right kind of comparison. As it compares to some other kind of an emerging market country, Thailand, Turkey, China, whatever type -- and across various measurements, when you look at it, you will see that the credit penetration is pretty low. And so thereby, that gives raise to a bigger demand as some of the lifestyle and aspirations of the middle class emerge well. And the mass market is producing towards mass affluent and there is some kind of transition in lifestyle that is happening. We do see that there is a great deal of a demand. And most of the demand doesn't get fulfilled. And one of the things that gets fulfilled is also there is 10,000, 12,000 NBFCs in the country, they have been born over a couple of decades in recent past. And you'll see that those NBFCs have been meeting some of those demands. While admittedly, we don't play in the mass market. We play in the mass affluent or other from a customer segmentation point of view. But then there are other players who are playing at a different kind of customer segment, and that is where it is getting -- the demand is getting met and treated. And thereby, the kind of a segmentation provision, the continuum across the segmentation is happening. And that makes it really fertile for the banks to have a good credit. And so if you look at the macro credit growth that we have seen 5.9% or 6% or 6.1% in the last few days. And the -- we just which is good. But of course, from a potential point of view, you can see even historically, things have been a few percentage points more than that in the past. And there should be some progress that is happening on that as the macro is moving up. And from a deposit point of view, growing at 11-odd percent, is also something which is important to note. There seems to be people generally seems to be liquid and kept their powder dry in terms of selecting how they want to spend and where they want to spend. And that should -- the mean reversion on that can happen any time as the economy starts to progress well and go. So this is broadly where I would perhaps stop, Sumeet, and then perhaps get on to anything specific you want address, but this is on macro point of view, all indications are that with great deal of a government support and monetary policy, RBI support, it seems to be taking good shape too, take off from the inflection point of that September and then been progressively moving up.

So thank you, Srini. That's a great backdrop to have. High-frequency indicators, sustaining interest rates, benign fiscal support.

So in that context, let me start with some questions on asset quality that I've been getting from investors. The first is, with respect to, let me devise this into 2 parts. First is with respect to some segments, there were still facing stress when we spoke in the December quarter results, it was MFI, commercial vehicles, to an extent, SME, not dramatically. And then also, they were somewhat higher NPLs with respect to HDB. So can you just provide an update as to how asset quality is behaving in those segments in the light of the macro backdrop that you just kind of laid out?

Okay. All right. Yes. See, what, I think Jimmy had talked about in detail in terms of how things were developing as we were giving our updated probably several weeks ago right now. There is nothing new that we have seen other than good progress across various fronts that are happening there, right across the board. Which is what he had alluded to by segment-by-segment from retail to SME to agri to wholesale. We can take one at a time and keep thinking about how things are progressing. On the wholesale front, things have been strong. And both from our origination quality point of view, which I think we had indicated about 4.3 something on an average in the book and which is equal into a AA type, 4.3-odd, our internal rating, which is equivalent to say AA. So from a book holding point of view, the quality that has come through the door has been phenomenal. And we continue to see robustness in that book, right, so there's nothing that we've seen very different from what we have seen in the past. If you think about the SME segment, SME segment, we keep testing and we keep stressing the book to look for anything and we haven't found anything different to work with it. The government guarantee scheme, I think, as we had alluded to, has been very helpful in the market broadly, both from our portfolio and from a market portfolio that has done tremendously well. And we have been good and judicious in terms of getting government guarantee scheme rolls out to the extent that there is a good management. The promoters are quite genuine and working towards revival post-COVID. And the business, pre-COVID has been profitable and has been in the line of business that has got the potential. So with all the kind of ingredients that we have seen and we have -- there, we have extended and try to avoid as much as possible that it is not into a problem area, rather we take those losses now, rather than postpone, which is what Jimmy alluded to in his updates, too, which is how we have approached it. And a few things that have come and aided us in this process of the SME segment is that our holistic relationship, right, from a customer point of view, it is not just about lending. The whole set of products that we offer from trade financing to FX where it is required to cash management activity with the SME. Just like the way we handle the wholesale and actually the same team handles this, too. So that is how we have approached it. And more particularly, we have looked at it as a holistic relationship, recognizing that in SME segment, the promoters versus businesses, the kind of a demarcation could be, not a bright line, could be somewhat hazy where funds could move from left to right, right to left, periodically. So much so that we do have the promoters accounts also with us where we have the visibility of the debits and the credits that happen, moving across business to personnel and so on. Not only that, including the family accounts which are there, right? And so one of the important ratio that we always measure is the self-funding ratio, which means the promoter, the promoter's associates and their employees and if you look at the holistic relationship and look at what is the liability that means the deposits they have with us, the wealth they have put with us almost, call it, 80% or so, we have, right, funded. And north of 80% is what we have funded. And similarly from a collateral point of view, apart from the regular plant and machinery and stock and trade further kind of collateral. The secondary collateral in the form of their homes or their kind of fixed deposit pledge and so on and so forth, almost close to 80%, 90%, we have secondary collateral, too. Which what we have made is that we have done it in such a way that there is -- there's a greater scheme in the game for the SMEs rather than leaving it open. And that also helps us to look at when we have all these combined accounts with us, it helps us to get some early indicators in terms of what's happening. And this is where we were confident and even our stress test analysis, we always assume there's no support from anywhere, right? But then that is not kind of a realistic scenario but that is a kind of a doomsday scenario. And that is how we need to plan and that is how we need to forecast and look at things to start with. And then as actions get unfolded, you will see that there are other things that are coming in to help and revive, and which is what has happened. And so that segment seems to have been turned around by and large. And that's part of the vibrancy you're seeing in the market, is also one of the factors that SME segment vibrancy is what you are seeing. On the retail front, there's a broad base. We talked about how -- even before COVID where we started our delinquency situation, which was of the -- getting better sequentially all the time. And then COVID came and then we started to say that how or the book is positioned with the industry, when we look at the Credit Bureau, where if the bureau was showing 1.0, our book is anywhere from 0.4 to 0.7, depending on the portfolio. This is, I think, little more than -- about little, maybe around 4 quarters ago, we had told you this fact that normally, which we don't normally talk about it, but Jimmy was kind enough to talk about these things at that time. So that on a relative sense, one can get an idea of where our book is positioned, right? And that is also driven through the origination score, right? The score on the origination 750 or above score. We lead the market in the form of the proportion of our book, which is 750 or above credit score, at least 12 percentage points above the total average, right? So that means, predominant book that we have is for 750 and above score which are fantastic credit score on the retail front. Yes, you specifically alluded to whether the CE or the MFI, they have been performing well. Of course, every book, right, not just 1 book or 2 kind of a customer segment. We are cautious about everything, right, as the revival is happening and things are coming back, we cautiously approach all of the segments, right? And thereby, the sustainability is seen there. And that is how we approach it. There's nothing specific that we have seen since what Jimmy has alluded to in terms of whether any more actions are required or not from a credit policy, which is what is because of the closed loop process that we have, which is on one side where we have a monitoring mechanism. And where we have a collection process, including the predictive calling and post delinquency calling. And that feedback loop goes into the front end. And front-end pretty much gets that in the closed-loop in terms of how the underwriting policies have to be tuned. Ever since September, our underwriting policies have been losing so much so at this stage, pretty much across the board, including those portfolios that you mentioned back to pre-COVID levels in terms of the policy on origination. And that was again, coming from the closed-loop feedback, where what you see in the monitoring mechanism or the calling and collection mechanism that feedback into the credit underwriting process is that, things are getting to normal. So the front end policy is pretty much fully back to pre-COVID type of levels where the originations are happening in full swing, which is what is the experience that we are seeing that. Even the December quarter, we said the durations at or above -- slightly above the pre-COVID level. And right now, we are surpassing that in terms of how the originations are happening. So the inherent demand and which is what we see and we tapped that to the extent that within our credit architecture, what we can. And the policy from an underwriting point of view is completely open back to pre-COVID from that sense. I hope it addresses broadly what you're asking?.

Fair enough. And just with respect to underwriting. So the continued delay in NPL recognition headed by Supreme Court, has that impacted underwriting decision from the ground, like, are the NPL -- if the NPLs are not getting recognized and a potential borrower could be defaulter, how are you addressing that issues? And one of the things I've heard in the media is that, banks are reporting restructured loans et cetera in a different format to the bureaus. So if you could provide an update on that.

Yes. Okay. No, no, broadly, it is not affecting -- it is affecting how one declares an NPA as such. But it does not -- there is no bar in rolling the bucket. So that is very clear and transparent, and you can see how things are rolling through the bucket. And we as a bank and so also all the other private sector banks and I cannot talk about the entire industry what each one is doing, but all the peers that we look at it and we work with have done something called the pro forma, which is, if there were no such restrictions to how things would have happened. So we all know how that is progressing and getting reported. So that there are no surprises down the line from that then. But from our origination point of view, it has not deterred us because the 0 data is available, within market as an NPA, but you market as the number of days past due exactly tells us how things are and what we should do. So from that sense, while the Supreme Court has changed the declaration of an NPA, we have analytically arrived at analytically means by rolling the buckets, right? What is rolling path, if it were not there, how it would have rolled. That is how we have determined. And we work with something called pro forma, which is run approximately to see this is how it will do. And it is not something that was bothered from an origination point of view.

Questions. I'm taking questions from investors as well. And I see a couple of questions on margins. So let's take them one by one. The first question is with respect to competition levels. And we have seen some increase in competitive intensity in the mortgage side of planning. Have you seen that in other segments? And do you think there's a risk-to-loan spread as competition continues to increase.

Okay. Then a fair question. Good question in terms of the price and the competition. The competition always existed, right? It's not -- competition is not new. It's always existed across various segments, customer segments, wholesale, or SME, or retail, the competition existed. Yes, mortgage front we have seen, but that's in line with how people have priced their deposits, right? Deposit pricing has also come down. The asset pricing comes down with a lag after the deposit pricing comes down, which is what we are seeing in the area of mortgage. And to the extent that they are all risk-based pricing, and there is always an element of how the experience of the risk is that. And thereby, the pricing is in the case of mortgage is a secured product. And if the risk is pursued to be less the price they're getting less in the market. We are -- as you know, our share in the mortgages market is in the mid-single digits. So we're comfortable where we are. And the way we approach the pricing is in an ALCO we determine first the cost of funds. First we determine 2 times a month we have the ALCO that runs and discusses about how we price our deposit products to start with and where it goes. And that is the ingredient -- key ingredient in terms of one of the key ingredients that goes onto be other pricing. And so we calibrate in such a way that from there on and there is, of course, there is a bid on ourselves, the spread within that, that is kept in terms of how, from a customer relationship point of view. And the way we approach most of our lending product is on a relationship based approach. Because if you go only on a product basis, then to commoditize, and then price is the only variable in the commodity, then it is difficult to grow a franchise as such. But the way we approach it is a relationship-based approach in terms of how we think about it. And if you have a lending, you know that in our unsecured loan, for example, on a personal loan, as an example, that -- it is more than 70%, 75%, is to our existing customers and predominantly, 80-odd percent is to salaried customers. If you think about our card, more than 2/3 to 70% is to existing customers, right, and more than 70% is to salaried customer. So if you think about those kind of how that -- the relationship was stacked, that is how we progress more towards a full based relationship. You have a liability relationship and thereby, that is one of the key kind of a fertile ground to work on an asset relationship. And same with mortgages too, right? You have a relationship and you try to work on it through our branch channel, and for most parts, and that's how we try to get that work. Yes, the price can be -- it is always competitive in the market. There is no runaway pricing or runaway demand that we could take and go. We need to work within the context of the competition that operate. But we approach it on a relationship basis, and that is where we try to bring the difference and part of our strategy that we have articulated in the past is exactly that, which is to say, the reimagining the branch channel, one of the pillars of our strategy is about the relationship with depth, how to deepen the relationship, how to have the engagement. And which is what the -- another pillar of our strategy is the VRM strategy, Virtual Relationship Management. It said, wherever you have kind of a good relationship and there is a depth that you are able to see and so why wouldn't you replicate this across the entire 60 million customer base that you have. VRM was in the step to the direction to say, there should be no customer who's left out. And how do we bring inclusive process of having a relationship, so whereby, we can deepen the process. So that is why -- that is how you approach it rather than simply a pricing of a product. It is about the relationship that comes with it on a holistic basis. I hope that tries to give you an idea of how we are approaching the competitiveness in pricing. It is competitive, but we approach it on a total relationship basis, on a risk-based approach. So thereby, we maintained the spreads, and we maintain the profitability and move on.

Very clear, Srini. I have two more questions on margins. So one is, what is the margin outlook in case interest rates were to rise in India over the next 2, 3 years, how will you manage that, given that you have a relatively higher fixed rate loan book.

Relatively high what?

Fixed rate loan book. Fixed rate.

What was your question? Oh, okay. Got it. Got it. Got your question. Well, I don't specifically address the forecast, which, as a bank we don't give an outlook. But then we can tell you how to think about how -- we can tell you our thought process, how we manage this and how we think and work about it, right? One of the factor means that if you think about our historical performance, call it, 1-year, 3 years or 5 years or 10 years historical performance if you look at it, we operate within a narrow band. 4%, 4.1% on the lower end, 4.4%, 4.5% on the higher end. That's the band at which we operate, right? In any given quarter, 10, 20 basis points, 10, 15 basis points left or right, can happen depending on, what is that particular quarter activity that we do. But you should look at it over a period of a year, how this progress or how the stability on the net interest margin, net interest income operates where the stability is what is important. A quarter or two left, right can move, but that's within this range of a small narrow band as well it can move. And the reason how we manage, and how we try to keep it stabile is our process of pricing. First is, as I described a few minutes ago in terms of the deposit pricing. That is one of the key ingredients in terms of how we approach it, right? So we first price the deposit to see at what levels and what kind of quantity that we want and what price levels we want, right? There are several price points we have tested on the liabilities. CASA, we kept moving it down, and it has been stable where we are. Time deposits, we always switch the time deposits as low as we can, but slightly above the State Bank type of level, right? At a similar level to our other competitive peers who have priced fixed deposit but somewhere reasonably, slightly above State Bank. That's how we have done. And again, from a fixed deposit point of view, we have a long kind of a runway to grow on that one because our penetration is pretty low. We need every one of our customers, because in their asset allocation -- customers asset allocation, there would be, and there will be in a reasonable approach of asset allocation, there will be one of the components of fixed deposit. And why we, as a bank should not have that fixed deposit. So we have no qualms in offering to our customers the fixed deposit is being sold there. But it is not at the cost of savings account because that will get replenished over time. In their asset allocation, there will be one fixed deposit. We want -- [indiscernible] some other bank, it should come to us, right? And that's how we have addressed it. And that's how we have looked at our contribution of retail to total in terms of the deposit portfolio is pretty high and quite robust and very high-value in terms of how we get those deposits. That is one of the key ways we think about to price the liability. And then from there comes the asset pricing because that is a kind of backdrop on which the asset pricing happens. And asset pricing happens with the overall spread in mind in terms of net interest income, net interest margin, how do we keep that given within that band. That's how that pricing happens. So rather than getting into what the forecast says, I'll point to you the robustness of the process to keep that kind of in a narrow band, that's how you should expect, and that's how we are operating.

There are a couple of questions on the RBI investigation into the digital outage, what's the status now? And when do you expect to go back to normal business?

Okay. See, I think we have mentioned talking about the RBI appointing an external auditor. I think that is in progress from around February or so, working with us. And the process is that the external auditor would complete the review, send the report to RBI and to us. And thereafter, RBI will review it, engage with the management and perhaps, whatever is the process, both -- I have no idea what process the regulator will follow, but once that engagement happens, then the next step will be not. The timing is something that we have no control or no visibility to. We know that this is temporary. But from a timing point of view, we have -- do not have a particular indication. Whether there is a quarter or 2, whatever it takes. But from our business and franchise point of view, we seem to be working in terms of whatever it takes to get the customers what they want from a product demand point of view and also from a technology development point of view, we are continuing to develop and test. The rollout of that will happen whenever there is -- and there is nothing imminently pending to roll out as such. And the rollout will happen whenever there'll be permission and the authority gives the kind of a green signal to go ahead, right? So from a timing point of view, I do not have anything specific, which we also mentioned. As we get to now, we will do -- we'll let you know. But as now, the process of the auditor examination and in terms of their conclusion and the reports, that's where we are all waiting for.

So there's a question on loan growth, okay? And if you can talk about when can retail start to pick up share in the overall loan growth trends. And then there is -- I'll add one more question to this. Is the potential for fiscal '22 loan growth anywhere near to fiscal '19 levels of 25% or near to fiscal '18 levels of 19%. Just -- I do think you'll guide, but just give us some flavor on how we should think about this number.

Okay. Yes. It is a good question to ask and think about. There are two things that are on the table that you've asked, right? One is, the retail growth, how is it? Actually, three questions. How is the retail growth? And the mix of the wholesale and retail, how that is progressing. And third one is the growth rate itself on the total loans, how to think about it, right? We can address those in one manner. See, the way we have urged, even in our prior big call that we had around the January time frame, is that the rate of growth has to be looked at sequentially and not year-on-year, right? Think about something that I mentioned several minutes ago on the GDP at 11.5%. GDP under 11.5% is because of the baseline that has been low ball, right, due to COVID, there has been a drop in the baseline. And so when things come back and when you start to measure, because the absolute level of output, end of this calendar year, it is going to surpass. Absolute level. But the growth rate 11.5%, right? So you can't look at a growth rate as such year-on-year. So in order to look at the momentum that is building, one has to look at the sequential momentum. Sequentially how things are growing. That is how you should look at. And that's what we are looking at too. Otherwise, if you look at the growth rate at some point in time, with hardly any retail happening between April to August or so at some point in time, we may have growth rate on the -- and only pay downs were happening with hardly any booking. Retail will show 30%, 40% at some point in time, but that's not what you want to look at because it will be misleading to say that growing at that kind of a speed. It is not. But you need to look at sequentially how things are moving and how the momentum is coming back to pre-COVID level. And one of the indicators I have given is that, from a disbursals point of view, right, that we are -- we were even the December quarter, we had alluded to say that we have reached pre-COVID levels and surpassed in some cases. And right now, we are seeing robustness, which is far above the pre-COVID level on that front, right? So you should look at sequential more than anything. And so thereby, the mix, if you look at it, we saw that the wholesale continued to be robust even through the COVID time period because highly rated corporates, globally, it happened and in India, it happened, too. There was a great deal of a credit demand from good corporates because they wanted to remain liquid to keep their powder dry. Nobody knew what was coming through the COVID pipeline. And so people wanted to sit on liquidity, big corporates. And so there is a big kind of a draw down and wholesale growth that we saw, the wholesale growth can moderate from there, right, because you can't have a sustainable, that kind of a 20%, 30% growth all the time. The sizes, one, become bigger. And two, the corporates, you see that over a period of -- in this COVID time period, improved their margins, either improved through cost management, improved through supply chain management, came up with good margins, which is what you are seeing in the stock price, too. Most of the corporates, very good margin turnout, right? That is -- and when there is a great margin and great profitability, what happens is, the cash flows are rich. They have great cash flows. And so you will see some kind of a subdued or not that kind of vehement necessity that you saw during the COVID or pre-COVID time in terms of the credit demand from wholesale. So they are sitting on high pockets of liquidity, which they have to consume. And some of which is getting invested, as you saw some early shoots in terms of private capital formation or anything from that sense. But in a larger scale, quarter or 2, we'll know whether the wholesale how participates and tax along with the government in the form of infrastructure spending and the buildup that happens, we'll see. And so during this time period, what you saw the retail to wholesale is that, retail, which was 52%, 53% of our book, came down to 48%. And then the wholesale reversed, its 47%, 48% went to 52%, 53%. So you saw that the migration happening as retail was subdued and controlled in terms of the booking. And the wholesale was happening with good quality customer. We would see that over a period of time that has to reverse, right? Starting now, we see that the reversal happening where the robustness in the retail is far higher than wholesale. So thereby, you see that slowly migrating. In a few quarters' time, we expect that to be even. And over a period of few more quarters down the line, we would expect that to get back to pre-COVID level of call it 52%, I'm calling round numbers, 52% retail and 48% retail. That was the previous mix pre-COVID. We should see that in a few quarters time, we'd get back to that kind of mix of retail and wholesale coming through. I hope that answers that.

Yes. No, that's helpful, Srini. There's a question on asset quality. How concerned are you about recent spike in the COVID cases? Does that impact or can potentially impact your credit cost guidance for fiscal '22?

Okay. The recent spike in COVID and concern. Yes. Anything -- any spike in COVID is a concern. But thankfully, on a relative sense, we have been saved versus what we have seen Phase 2, Phase 3, Phase 4, many countries are seeing seen that kind of resurgence from different variations of COVID. But thankfully, the administration, the overall macro management, the regulatory approach to COVID has been quite stringent. And that there is -- certainly, if it's going to be a runaway issue, it is a concern, but that's not what we are seeing, right? Things seems to be under largely controlled. There is some surge, but it's within reason managed. And you're seeing that the broad basing of the vaccination is also helpful from that sense. And to the extent that there is a further acceleration in vaccine management, it will lend much more in terms of how the economy opens up further. To gallop faster, right? We -- yes, we have to be watchful. We are watchful to see what is going on from a resurgence of COVID point of view. But we do see that it is limited, but we are keeping an eye so that it doesn't get out of hand. And we have to be personally and professionally, we all have to be very vigilant and careful to ensure. And as a bank, we continue to have those process and policy of work from home. To the maximum possible, we try to implement and stay away social distancing. Our branches are open for business. But, again, with all the precautions that are required, and that's how we are trying to approach it.

There's a question on HDFC Financial. If you can talk about recent trends on growth and asset quality. It seems that HDB Financials have funded a lot of pain, and the HDB cycle has been recovering well. Is there a potential for good write-backs in this business?

Okay, good, yes. The HDB, from a segment -- customer segment point of view, is a notch or 2 notches below the customer segment the bank operates. And that is one of the predominant reason for HDB to exist itself? That's not where the bank operates. So we have an NBFC that operates and that kind of a segment. And the model of that segment is slightly different from the bank model. The model on HDB, the model on the NBFC is that, a lot driven through a personal approach, which means in-person approach, in the branch or the non branch there's an outreach approach in terms of how the customer is handled in-person. And during the COVID, when there is restrictions on travel, restrictions on going out and social distancing and so on. So there is a natural process of delay that happens in terms of meeting the customer to get the recovery and so on. So you saw the spike in delinquency and which you have reported. And HDB, among all NBFCs is a leader in terms of how the recognition happens, right? That means they follow the bank type of an approach in terms of recognizing these things, and so they did report a lot of spike in the delinquency. But then as time goes by, I think we said that we are seeing that the peak is already attained, and things are moving in the right direction, better direction. And the same closed loop example, I will give you here too, which is a reality that we are seeing, which is -- as we see the robustness picking up in the collection, in the monitoring area and the ability to meet the customer and have business, you see that loop getting transmitted to the credit underwriting. And we -- I think have told him that meeting in January or February. January, that we're booking the front end booking on HDB 2 from credit policy and in terms of how we look at the volumes coming through the door is far outstripped and far higher than the pre-COVID levels there, too. That shows that when the left-hand and the right-hand are trying to hum together and clap and move, things are going in tandem. That means as things we see are improving on one side, the transmission of that kind of a message on the front line for underwriting is happening. And you see, and that also, again, transfers back to the back end in terms of what you are seeing from a demand point of view. Thereby, get the better collections point of view. So from our sense, we have seen a great deal of progress happening, both on the front end and the back end in HDB.

So there's a question on NUE. So we have seen media it goes around your tie up with Tata, Kotak, et cetera. What is the game plan here? And what should we expect for the next couple of years coming out of this entity.

Okay. So we as a bank have always participated in these kind of an infrastructure rollout that happened. If you think about the [ NLP ] or if you think about the depository institutions, et cetera, we as a bank have always been in the front for a development of the macro. And there are two things to look at in this umbrella entity. One is a financial investment, purely a financial investment, right? So it makes sense. This is part of macro growth, it's part of what the country needs in terms of the infrastructure. And we are there, right? It's a good financial investment. That is one thing. And the second thing is also the management participation. We have an -- NPCI. And there are a couple of more alternatives to NPCI that is in the process of development. And there are different technologies, each one will bring on, particularly because NPCI that has been there for a long time and runs with certain technology. And this umbrella entity will come and will bring some state-of-the-art technology and processes. And we will also have some kind of a management inputs into that trade process and between us and Kotak and Tatas and all of them. We'll drive towards how we adopt the latest technology, the latest processes and this is part of the country getting digitized, right? There is enormous kind of a tailwind that comes from the government in terms of how all of us should move towards digitizing the economy for various good, individual good, collective-macro good for everything. And this is -- and for which there needs to be an alternative infrastructure railroad that needs to be built in addition to NPCI a few more, and that is what we are trying, both from a financial investment and management in terms of how we think in terms of driving the technology of the future. So you should expect something different and more elegant from a technology point of view. And our participation is right in the center of that 2 drivers.

So we have a question on capital. Your capital ratios are quite good, thinking of 16.8%, actually higher than many last year's capital. So can there be any capital raising plans by HDFC Bank near-term but generally or to infuse capital in HDB? What are your thoughts over there?

Okay. Again, fairly, very, very good question, and it comes up very often, as you know. Almost every quarter. And as a process, we also review it periodically in terms of where we stand. The last time we went to the market was the middle of 2018. And since then, we have been consumed. We raised at that time, almost 230 basis points of capital. And we haven't consumed that. If anything, we built more on that, right? If you look at our capital ratio, we've built more every quarter. Subsequently, we have built more capital. That means the generation -- internal generation of capital has been more than the consumption of capital. There are a few things that have helped the process, both from a regulatory standpoint in terms of RWA and the earnings that you all have. There's been a few things, tailwinds that we have had in terms of how we have not consumed as much. But our rate has remained quite reasonable. At today, the total capital is close to 19% and close to 17% on the Tier 1. So we continuously review it, we'll review it periodically. I can never say never, which means I can never say we are never going to come to the market to get the growth capital and there will be at some point in time, I have no kind of a time frame to mention right now. But this is a process that we handle every quarter and look at, what is a good time and what is the kind of an appropriate levels at which you need to go and you need to get. So we will continuously evaluate it. That is one thing. Second thing, you also alluded to HDB in terms of which we have said in the past in 1 or 2 meetings in the last year or so, if you think about that HDB as an entity, at some point in time, we will work -- we are working with the regulators to see at what level of dilution the bank can have in HDB, thereby the bank can offload some shares. And HDB is also very highly capitalized at about 19% or so. There's no immediate need. But again, they also evaluate periodically at some point in time, there will be growth capital that is required to, but that as us now quite robustly capitalized. And so the bank can reduce the holding in HDB and thereby, unlock the potential gains which are there. And that also provides the natural capital growth for the bank, right? So there's one going to the market, too, with the HDB kind of a sale that we can do partially or in whatever shape and form that we agree and slowly kept that show down, the holding ratio down. There are a few ways that capital can come. And they are all on the table, timing as timing. We do not know.

Got it. Srini, I'll take the final question, which is on digital. How is it helping you expand your target margin? Can you give us an example of business that you may not have done it for now, but then for, if not for digital? And how is this going to change over the next few years? This is the final question.

Okay. All right. Yes. See, the digital is something that we have always led from the front, think about 4, 5 years ago, the 10 second personal loan as an example, right. That was something that we led the market. And until now it is something very unique in the market. Nobody else could be with that kind of an approach. So there are several cases we can say where we lead on the digital front, including the latest one on the merchant side the smart hub, if you think about some of those features or the festival offers, which are, again, one kind of a digital offering that we have on the festival offers, the hyper local offers, where our customers are made offers from the merchants with whom we have relationship. And when we talk of -- they go through by sending catalogs on whatsapp approach are through other medium they reach and bring the footfall into their merchants. So there are several examples we can think of are, including the wholesale growth of recent times in terms of how digitization has helped, either the API-based integration or host-to-host integration through the COVID period, if you think about how people despite the lack of ability to reach out in-person can move documents, can move the processes and can start to borrow from trade financing to lending to any transaction, including the FX transactions when they want to do. Don't even need to pick up a phone to do an FX transaction. From system to system, one could be afraid and transactions are done. That is part of how we have grown that through all this, including when the COVID struck, we accelerated the process of stitching, our digital account opening process not to have any kind of handoff and go straight through, right? Within a matter of 2 weeks, we developed that and said, get this straight through so that we don't need the digital accounting account opening process we rebranded as stack. And we said, those go straight through without any handoffs. So there are several things that we keep doing. And including, I think, we've talked about how we disrupt ourselves how we develop a FinTech of ourselves. That means FinTech within a bank that challenges the traditional bank in terms of how we approach and keep both sides on the feet in terms of progressing and looking forward. And so there are several things. And we do see that across all fronts, let it be from a customer experience world factor. Working with third-party FinTechs or having a digital-only stack that call that a challenger stack to a Champion Bank, which is the bank within a bank. That approach, of bringing in the latest AI under which we have from moving it away from a simple Jazz talk into an action because we have testing several of those in different scales and different segments and how do you broad base stack, right? So several things are in the works from a digitalization, taking it to the next several points, and we are making progress on all of them. I'll leave it there with a couple of examples that you are, say, quoted in terms of how digital has helped us. And I leave it with the thought that our customer acquisition process which is a key kind of a metric for everything, both from a liability relationship and the asset relationship. That last quarter, we said we had about 2 million customer relationships, right? If you go back to 2019, we had 3.5 million liability relationship. FY '20, we had 6.5 million liability relationship. Last quarter, we had 2 million liability relationship. So we're making lot of progress, and that comes -- that kind of a scale buildup come, where both our internal processes are digitized to take care of it. And the external process of how we reach out to customers, potential customers to get them into relationship. That process is also including the digital marketing, right? How we identify a potential, and how we bring them in from that process to fulfillment process to servicing, delivery, engagement process, which I alluded to in terms of a customer experience in the world factor. Across all of that, right, front, middle or back across all factors is what digitization is all about. It's not one activity or one product, it is all [ privacy ] across the bank, and that's why we approach to get this moving.

Great, Srini. With that, we're running out of time. I have some more investor questions, but I'll have to stop here. Thanks a lot, Srini, for joining discussion and helping us do the call at a slightly early India Time. Thanks a lot investors for sending your questions. In terms of questions which I left unanswered, I will get back to them separately. We'll stop here, and join through next question in 10 minutes. Thanks a lot, everyone.

Okay. Thank you, Sumeet, and thank you to the participants for engaging with us. We appreciate this opportunity for us. Have a great one. Thank you.

Thanks, Srini.

Yes, good bye.