HDFC Bank Limited (HDFCBANK) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the group call with HDFC Bank management hosted by Macquarie. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Suresh Ganapathy, Head of Financial Research, India, from Macquarie. Thank you, and over to you, sir.

Thanks, Imba. Good afternoon, everyone. Welcome to the conference call with HDFC Bank senior management hosted by Macquarie. We have with us today Parag Rao, Country Head, Cards, Payments and Digital Banking at HDFC Bank; and Srinivasan Vaidyanathan, the Chief Financial Officer of HDFC Bank. And also, we have from Investor Relations Ajit Shetty. The format of the call is going to be some kind of a fireside session that we'll be having with Parag and Srini. And then after about 30, 35 minutes, we can open up the floor for any questions from the investors. So thanks so much, Parag and Srini, for agreeing to do the call with us today.

Thank you. Suresh.

Thank you, Suresh, yes. Thank you.

Okay. So I was just going through one of the news articles yesterday saying that the Reserve Bank of India is open to allow a proposal for NBFCs issue credit cards. And the last 12 to 24 months, Parag and Srini, we have seen a mushrooming of all these fintech players, guys like Slice and Unicas and the fintech players are issuing 2 to 3 lakh cards per month. I mean that's the kind of number of cards that they're issuing, and they seem to be targeting a lot of these millennials. So I mean, is there a risk that the segment credit cards is facing with so much of competition. You may also see Citibank getting more active by when its portfolio is actually being sold to another guy in the market. So it looks like a lot of competition in the space. So you being the largest player, how do you look at the space and profitability? Yes. Over to you, Parag.

Okay. Thanks Suresh. Lovely question, good start for the thing. I think one of the reasons why we are here -- assembled here today is to actually look at how do you build a profitable card model. And therefore, switching back to that, I'd start off with a comment to say issuing number of cards is actually only 1% of the journey. The balance, 99% starts only after we issue the card. Let me explain. So like I said, as part of issuing, you do credit underwriting, you choose the right kind of customers, you build distribution channels. important parts of this thing, but that is focused on sort of getting customers onboarded and starting to -- start issuing a plastic or a virtual card, [ if not so ]. The core job starts immediately after that, getting that person to start using the card, getting the person to start expanding the number of users or the number of MCCs, as we call, to be put on his card. In a nutshell, you -- the whole objective of starting to build a good card portfolio, one aspect of it is to get his entire wallet share or as much as his wallet share as possible, which means if he spends, let's say, INR 100 a month on cardable expenses or electronic means, as much as you can get on your card is as much -- will define your success in capturing his wallet share. Having said that, that's again -- that's the next stage. The next -- the stage after that is about how do you get him to use value-added services, how do you get him to revolve on your card, if he is a revolver-type profile, how do you get them to pay back on time, et cetera. And then the whole virtual sort of cycle keeps on going on all over again, et cetera. So portfolio management in short, as we call it, is exactly about that. One part is exactly sourcing the right kind of customer. But then subsequently, after that getting his wallet share, making him spend, making him revolve wherein you earn income, making him use the various other services and the product features, which you have built in, in your card, making him pay on time or, even if he chooses to revolve, give you a particular set of income and then sort of pay back on time so that he doesn't go delinquent and so on and so forth, okay? So that's the whole life cycle of building -- a card profitable card portfolio. Having said this, competition for us, the way we look at it is, I think, very welcome. Card penetration in India is actually very small. It's probably the smallest by way of penetration payment forms. And therefore, it's not just us as the largest issuer in the country who can do it, but we need the entire industry to sort of start getting on more number of good customers on to a credit card platform. And so to that extent, a good number of issuers [indiscernible] is going to help expand the marketplace. Over the last 5 years with this digitization drive and a huge number of customers getting on to electronic means of payment, which has essentially been displacement from cash to electronic modes. You've got a maturer set of customers who now are used to electronic ways of making payments and receiving payments. The logical step for these customers is to move up to much more advanced and more sophisticated forms of payment, credit card being sort of at the top of the pyramid, lying up there. And so therefore, it's actually opening and increasing the denominator, and we sort of, in that sense, welcome that group. But as we all know, with about 20 years of experience under the belt of having built the largest portfolio in the country, I think the journey starts there. And a lot of work and a lot of investments, a lot of time needs to go and good portfolio management to build a profitable and sustainable and growing portfolio. Suresh, I hope that answers your question in some context...

Yes. Yes. Sure, sure. So Srini, maybe can you tell us the -- see, you have 70 million customers, right? So maybe 15 million cards. So is there a sufficient penetration done? Or do you think there is still a significant proportion of the balance, 40 million or 50 million customers, that -- any numbers you can share, any target audience that you have got, even within your existing customer base itself, yes?

Certainly. So I'll start off and then Parag will -- he has go much more traction that he is executing to, but let me start off, right? See, out of the customers that we have, about 68 million, and we are growing [ 2.5% ] or so approximately, call it 8 million to 10 million a year on a run rate basis, that's what we are adding. And we have 15 million cards, call it, 12 million, 13 million customers or so, right? So that's the kind of card base that we are having. So from a penetration point of view, we have a long runway to grow. And in terms of what is that we have in our pipeline in terms of to whom we are prepared and we are doing some marketing. And again, credit card is not the only thing, Parag handles the broader payment products, including the debit cards and so on. So I'll invite him. You want to talk, Parag, in terms of your action on the base that we are having and also open market, too, yes?

Absolutely. So thanks, Srini, for setting the [ boundary ]. So like Srini said that we've got ample of headroom. Even within the bank, we have a very robust retail, CASA, savings account and salary account franchise, which grows at roughly around 2 million, 2.5 million new accounts a month, and that's a large growing engine. So at any point in time, we have significant headway or headroom for us. So even if I were to look at only the bank's existing customer base, so like I said, we've got 60 million customers. We've got 15 million cards, and that still gives you a sense of the kind of opportunity we have only within the bank. Cutting another slice further, we also have a product within the debit card portfolio, what we call being able -- a customer being able to use his debit card to purchase an item on EMI at the -- at a merchant place, we call it debit EMI. Now there, we've got roughly 30 million plus of debit cards. And approximately 25 million of these debit card holders have an underwritten line of credit allocated to these 25 million customers, okay? Once again, that metric, if you take about 25 million customer, debit card holders with a line, we only have 15 million credit cards. So just the gap of 10 million itself presents a significant opportunity for us as a bank to look at it. Now these are opportunities within the bank. When I look outside the bank, which is the so-called new-to-bank customers, our strategy of now doing alliances and partnerships with select large partners, good brands, et cetera, is another way in which we would be reaching out to the customers' database, the partners' database, doing what we call a joint look at the creditworthiness of each customer in the partners' database, okay? And then once again, offering co-branded products or co-branded co-co-created credit cards to this customer base. So that's once again reaching out to another set of good customers, underwritten customers jointly done with a co-created, co-branded sort of offering, wherein we'll be reaching the new-to-bank customers. So like we said, Suresh, we are bullish on the credit card growth and opportunity. We have -- we believe we have a significant headway to grow [ ourselves ]. I explained like within the bank itself or bank customers, we have a significant way to grow. Our robust strategy of select partnerships and alliances also gives us that headway to significantly grow. At an industry level, published numbers would tell you that, say, 5 years back, the industry was at less than 30 million cards. Today, notwithstanding pandemic, et cetera, et cetera, we are -- I think the industry is around 60 million plus. Assuming that the pandemic weren't there, probably that number would have been higher than the 60 million. And so therefore, we see good robust growth happening and that 60 million galloping over to much higher milestones over the next 2 to 3 years. So Suresh, yes, we see good room to growth, a good growth happening in the overall credit ecosystem. We, as the largest issuer, have got very aggressive plans of continuing our growth in this segment. Like I said, our -- and our strategy at the ground level is not going to change. We will continue sourcing a significant portion of our cards from within the bank base or, as we call, cross-selling to a customer who already has an existing liability relationship with the bank. And a smaller proportion will be through the partnerships and alliances or what we call new-to-bank customers as well. So we have -- so we are, like we said, pretty bullish on the growth prospects in the credit card industry.

Okay. Another question which keeps getting popped up in the minds of investors is, are you catering across the spectrum of various clientele. Because what it looks like, the Gen Z is being catered by the BNPL and the fintech cards with a better technology, with a faster issuance. But do you really cater to the less than 30 years age kind of clientele segment? Some cater to the student population. A whole lot of target segments are emerging, which is going to be the future. So is HDFC Bank well prepared to target these customers or in the pursuit of pristine asset quality and the traditional focus of credit cards you're missing out in some of these younger customers who are looking for a better, a seamless experience?

Okay. So let me sort of give you one fact on our portfolio. On our existing 15 million card portfolio, we have approximately 30-odd percent -- actually, it's coincident, roughly 30-odd percent of our current cardholders who are less than 30 years, okay? Mind you, because a large portion of our source -- our new acquisition card sourcing is in what we call the salaried base. HDFC Bank is one of the largest salary account banks in the country. And these customers who are bank customers, therefore, form a significant large portion of customers. And as you know, it's [indiscernible] in the salary base. So We get a significant large number of customers -- card customers with accounts who are below the age of 30, people who have just joined a lot of corporate [ bands ]. So even as we speak to it, 30% of the base is below 30. You can classify them as Gen Z, whatever you can call them. And these guys are the -- they are the starting points of their financial careers and [indiscernible]. And we see pretty good behavior on these kind of customers, okay? Having said this, to answer your question, some of the trends which we observed of many of the younger generation who start off on their electronic journeys today by using UPI, a lot of them actually use debit cards, and we see good debit card usage in the younger generation, probably because they don't have a credit card. We also see, when we do focus group studies and consumer studies, et cetera, a lot of aspiration to own a credit card. And therefore, we've actually got 3 products at the entry level, if you may call, also what we call mass cards, which addresses the needs of these millennials, if you can call them on one side or the Gen Z on the other side. And we've got a very strong and ground-level strategy to target these new set of customers who are just about getting on to the credit card sort of platform. As compared to 5 years back, I think the newer set of customers who are coming and actually are far more used to electronic payments because they're already on UPI or already using the debit card, which makes it that much more easier for them to adopt credit card payments and avail of all the great facilities, which they get on a credit card, which is far more than what they would probably get on a UPI or a debit card.

Okay. Great. So the next question is on UPI itself. Today, when I was trying to do an order on Zomato, something where I wanted to order at home, what it did was that instead of going and using my HDFC Bank credit card, I just went and used Google Pay and UPI, very convenient to make a payment. These are some of the new websites that my card is not stored at times. I find it very convenient to just use my PIN number and get the transaction done. So is this not a structural set? I mean the convenience of UPN payment itself is that many people like me now and, in fact, I [ will stream the session ], even paying for a smaller value transactions, people are convenient using UPI. So you are taking -- UPI is taking away market share with what would have been using credit cards, right? Do you -- don't you see that as a big threat for your overall portfolio, Parag?

Yes. So let me answer that in 2 ways. There were 2 -- amongst many issues, which the payment industry has, the payment industry at large, there are 2 important issues: one is cash and the fact that the objective of the payment electronic industry was always to sort of displace cash. So cash was a very large component, as you all know, in the Indian ecosystem. And the second was this whole customer experience of doing a seamless transaction. Picking up these 2, UPI actually addressed, in that sense, both. The huge or the tremendous growth, which we have seen, all of us have seen in UPI over the last 3 to 4 years, I think a bulk of it is actually targeting cash, and it's done. So -- in a wonderful manner. Like I said, it's also being able to onboard a large number of customers who erstwhile did not use any electronic form, did not even use their debit card, did not have a credit card. And a lot of that has actually displaced cash. So of the total volumes, approximately 50% is payment to merchants, and the balance 50% is money transfers between 2 individuals, okay? Both of these -- if you see the P2P side, the money transfer, erstwhile we would all do it in cash, okay, at best, the money transferred through [indiscernible], but bulk of it was cash because they are low ticket. So it's completely displaced cash there. The ticket sizes, which you see in the P2M or the payments made to merchants are also the lower -- or at the lower level, far lower than what you would typically see on a credit card or even for that matter on a debit card. And which again indicates that these are payments made for -- by far for things, which erstwhile people use cash. So I think UPI has done a wonderful job in displacing cash. And I think that journey is far away. It's only just started. Cash is still a large portion of the Indian economy and ecosystem. And so I think you'll continue seeing growth in the UPI segment for displacing cash. I think they've also done a wonderful job in terms of creating a very simple user interface, tap, put in your PIN and sort of pay for the transaction, and money is debited from your account immediately. And I think there are good learnings from that. We are building a very extremely similar way of transacting on our new PayZapp. As you know, we have a product, which is a mobile payment app, which includes a marketplace, which is all merchants in one app or PayZapp. We will be soon launching the PayZapp 2.0, which is a completely revamped version of the existing PayZapp. There are significant improvements on the platform, the back-end technology, the number of merchants, the UI/UX, many more forms of payment beyond just simple -- and we've benchmarked it to the best apps in the country and globally also putting many more other form factors. The earlier PayZapp did not have UPI. The new one has UPI. The earlier PayZapp did not have a tap and pay, which means I can take my mobile, tap it on an NFC terminal in a merchant and make a payment or a money transfer. And many more such security features and convenience features. So the PayZapp 2.0, the new one will be our answer to address these 2 issues, of displacing a lot of cash and the same -- because it includes UPI also. And of course, it includes a huge ecosystem of merchants, which were in PayZapp, will be accepted as an acceptance mark and integrated deeply with many of the online and app merchants. And of course, it has -- it will have very contemporary and very simple customer user interface, which will make transacting very simple, seamless one-touch type of experience, okay? So we acknowledge that these 2 are very important factors in driving usage, especially on the mobile and PayZapp 2.0 is our answer to that.

Okay. Okay. So Parag, before, again, I go back to the card space, since you are on the PayZapp, I think the feedback that we received from a lot of investors or for that matter from your customers is that at times using some of your apps, like an HDFC Bank mobile app or a SmartBuy platform, the UI/UX is not that friendly and there is a lot more to go. And also, there is some kind of confused positioning, right? You have an HDFC mobile app, you have PayZapp, your SmartBuy platform. So is there a plan -- you have already talked about PayZapp. But is there a plan to integrate everything into a super app so that you get rid of this confusion which is there? Or you think you can really significantly enhance the UI/UX and the other aspects also so that you are best in class in terms of the offering to the consumer compared to the other banks in the country, yes?

Okay. Yes. So first of all, thanks for all the feedback and to all of these on the call and even our consumers for giving us that feedback. The UI/UX, journey, just as I mentioned, for PayZapp, the work on for changing and contemporizing the UI/UX in line with our learnings over the last 2 to 3 years is all, even for the MobileBanking app, as we speak, and for SmartBuy and, of course, a couple of other customer-facing apps, which the bank has, okay? We are convinced that having a great UI/UX is one very important part of the customer journey in keeping on reusing an app, okay, and making them sticky and keep on trying out more and more transactions. PayZapp, you'll see the new PayZapp coming out in a couple of months. And the other apps I talked about also will be a thing, but it's a concerted journey. It's part of our Digital Factory initiatives, which we've sort of set up to drive digitization and creation of digital platforms. And UI/UX is an important part of our digital journey, okay? So that's on the [indiscernible], okay? Regarding the question about super app, our current understanding of what the customer says and the way he transacts tells us that no, as of now, the thinking is not to really go down the way of a super app. We still believe that customers require a separate app for making these day-to-day payments, an app which you can pull out once, twice, 3, 4 times a day to keep on making simple, seamless payments or receiving payments, and he sort of gels with that. And our understanding also tells us that a customer still requires a different app for doing his banking transactions, which is typically what most banks offer is the mobile banking app generically called, okay? But the common thing between both is that they require a very seamless experience. They're are single sign-ons that you can navigate between the 2; intuitive features; pulling out data, which is already available with the bank so that he doesn't have to pre-fill every time he fills up a form or an application or a request for a service. Simple means in which he can get in touch with in case he has any problem, et cetera, et cetera, et cetera. And so these are the principles, which we're building into inventory redoing the UI/UX. What we can also do is between the MobileBanking app of the bank and PayZapp, et cetera, we will also be building a link, which we make also, wherein from one app, you can very seamlessly navigate to the other in case if he is on the banking app and he wants to purchase something or buy something and vice versa. So that's the link, which we're building between the 2. And that's whatever research and our understanding and knowledge tells us right now, okay? And that's the direction which we're sort of going on.

Parag, one more thing, Parag. SmartBuy, you didn't touch upon that if you...

Okay. Yes. Okay. So SmartBuy, too, is also a part of the UI/UX. The way -- simplistically put, okay, the bank has partnered with merchants to create a sort of what we call a platform where all our merchants are able to offer great deals, et cetera, across multiple categories. SmartBuy is the web version. PayZapp will be the mobile version in effect, which he could either go to the net or he could go to -- so you'll see a lot of synergies also building between SmartBuy and PayZapp also. But fundamentally, whether it's on the web, where he can directly go to the current version of SmartBuy or on the mobile through PayZapp, he'll get the same experience on that. So all the changes, which we're doing even on PayZapp and the MobileBanking app, will also be applicable to SmartBuy. So in a couple of months, you will see complete revamp, UI/UX customer experience, many more merchants integrated.

Yes, go ahead, Parag.

Sorry, I dropped off. There was a sort of bad call, yes. So like I said, I think I dropped off at this stage where I was sort of concluding on SmartBuy. So SmartBuy, too, would be receiving the same treatment, will be a complete revamp of the UI/UX including, like I said, much more synergy between the mobile version and the web version. And the customer will see one interface, and he can choose to go either to the web or to the mobile. He'll get the same experience, the same kind of merchants, the same kind of checkout experiences across this shopping experience.

Okay. Okay. So thanks, Parag. A couple of other important questions from my end before we open up the floor for questions. The first thing is on the recent revolver issue, right? So the question here is, of course, many banks are saying this is cyclical in nature and typically it happens when you go through a tough phase. But it looks like, Parag, we are seeing increasing penetration of EMI financing, paying -- prepaying for kind of products, BNPL players, NBFCs, all of them actually pushing some of these very good innovative credit products. You have some of the CPI guys giving pay-in-3 and pay-in-4 kind of thing. The point here is, do you think all these products eventually could poach away the share of revolvers permanently? So while you may argue that currently it is cyclical, there could be a structural element to the fact that revolvers permanently can stabilize at lower levels. And are you mentally prepared for that kind of an outcome?

Okay. So let me put it this way. So typically, the card portfolios consist of sort of 3 types of customers, okay? One is the transactors, we all know transactors. These are people who spend and pay back on time. They avail of the free credit period and sort of pay back on time, okay? Then there is another set of -- so that's one set. The other 2 are essentially revolvers, but revolvers as we see from differences in behavior, we see there are 2 types of revolvers. One is what we call the opportunistic revolver. This is a guy who probably sees a good deal to purchase. He probably doesn't need the revolve facility. But once in a while, which is his lifestyle, et cetera, he may choose to sort of evolve and say, hey, no problem. I don't mind paying some interest rate and pay increment fee, et cetera. These are guys who typically would revolve maybe once, twice, thrice a year, et cetera. That's the second set of revolvers. And the third set of before are what we call the chronic revolvers. These are people who sort of, what people call, live by credit. And typically, if you say, these are the people who would revolve maybe 4, 5, 6, 7, 8 times a year sort of -- kind of revolve. Okay? Now every portfolio has all these 3 type of customers. A good, well-balanced portfolio, and what do I mean by a good, well-balanced portfolio is you have growing spends where you have increased wallet share across all these 3 sets of customers, a healthy growth in top line and revenues, revenues coming from fee income, from revolve income, interest income, et cetera. And at the same time, a very healthy, well in control sort of credit exposure and delinquencies, which you may call it so. It's an optimal mix of all the 3. Now coming to the point, if you see -- you asked this question about easy EMI and what you call BNPL. Let me give you some more factoids. Our insights into -- and BNPL is actually an early category kind of product. It's only been in existence actually over the last year, 1.5 years and more so only in the last year in the industry. But what little insight we've gained, we've actually understood from BNPL is that a significant portion of BNPL users today, in my estimate, it could be as high as 60% to 70% of BNPL users are actually people who avail off the buy-now-pay-later feature, which is buy now and pay in 15 days, 30 days, whatever, et cetera, but actually pay back on time. Okay? And only the balance 20%, 30%, 35% are the people who actually roll over, pay charges for the utilization of their credit line and, of course, give the kind of delinquencies, which one has sort of seen in the industry. What does that tell us? That tells us that a large portion of even BNPL customers are using a credit line for small ticket. They're not using the credit facility because they're paying back on time, which means they're essentially transactor-type profile. Or in other words, they are people who are using the BNPL feature because -- fairly because of -- either it's a novelty or because of its convenience, okay? But having said this, is there a need for, therefore, some people to use convenience and, therefore, avail of buying products [indiscernible], yes, the answer is yes. So you have those kind of BNPL profile, et cetera, et cetera. Easy EMI, as a product, has been there embedded within a credit card ever since credit cards have been launched, okay? Today, typically, across the industry, easy EMI, which is purchasing goods on easy EMI at the point of purchase, either online or at a physical merchant, okay, would range anywhere between 10% to 15% of the total card portfolio spend, okay? We see that growing significantly as consumerism, purchase of durables, purchase of things on credit card increases, okay? And typically -- and as the availability of EMI at merchant stores also keeps on increasing. So that -- but having said this, easy EMI comes at slightly lower yield. So once again, I think the point I'm making is you'll have a set of chronic revolvers who would choose to sort of give much higher yields because they choose to revolve on their retail spend. You'll have a set of customers who use products like easy MI, where they can also revolve in structured EMIs and pay back in structured EMIs, but at a lower yield. And of course there will be a set of transactors typically who sort of utilize the credit period -- free credit period and pay back on time, okay? Each of these segments are growing in their own way as retailing increases and consumerism increases. And we always see that it will be a judicious mix in any card portfolio of all of these 3 kind of players. Does that answer your question, Suresh?

Yes, yes, that's fine. Cool. So let me move on to the next question from my end before we open up the floor. Yes, the RBI's digital payments paper, and there is a lot of worry about a possible MDR cut for credit cards. Now the thing is, recently, you guys actually reduced the reward points across some of your card portfolio. How are you guys mentally preparing for an actual cut in the MDR and therefore you go ahead -- went ahead and incurred your reward points? Do you think there are sufficient levers as a credit card player that if at all such a thing were to happen, you can still remain profitable? Generate that 6%, 7%, 8%, 9% pretax [indiscernible] that you can get on your cards portfolio irrespective what the regulation is? How are you guys going to tackle this in case there is going to be a regulatory [indiscernible]?

Okay, Suresh. So let me answer in 2, 3 ways. So you're alluding to us sort of tweaking our reward points as a product feature, okay? One is, let me tell you that relooking product features, functionalities, I think, is a constant task, which we keep on doing in the bank, okay, in our card portfolio. Okay? You realize that you launch products with a particular thought process, features -- along with some features. Some features stick on very well. Some features don't do so very well. And therefore, we do a constant product review and a product feature review. And at every point of time in a year, every product gets some tweaks, some changes, some additions, some subtraction, et cetera, et cetera. So changing and tweaking product features, I think, is a continuous process, which we -- it's not necessarily only to do with any event or any event which you may think is around the corner, okay, just as much as we do proactive portfolio. So the recent tweaking of reward points, et cetera, especially we did it on our Infinia and Diners Black, okay? Is one such -- where we optimized the entire reward point program to ensure that customers clearly saw much more value. Having said this, okay, the impact on that has nothing to do with MDR or anything else because on Diners Black and Infinia, just to give you, put together, these are about 400,000-odd cards in our portfolio, and we have a 15 million card portfolio. So anything they're going to have any -- wouldn't have hardly had any impact on any cost or anything else. But having said this, I said -- the larger point I'm saying is that we keep on sort of tweaking. As you know, immediately post the embargo, we actually relaunched 3 of our products for the mass market, a Millennia Card, a MoneyBack card, okay, and a Freedom Card. These were tuned taking into account a lot of customer feedback to really target what is the changing needs of customers at the end. And these -- all these 3 products actually target the entry-level customers or the millennials or the Gen Z, as you asked in the previous question, because we are very keen to onboard many of these customers and ensure that the full wallet share of these customers come on to our cards, okay? So that's part of our product strategy. Having -- okay, now getting back to your actual question about the intervention of MDR, et cetera, we've seen a couple of years back, there was intervention in the MDR on debit cards, which was sort of reduced as a consequence. So what did you see there? You actually saw therefore, that many of the banks stripped off a lot of the features, which they had on their debit cards, okay? But even despite the drop in MDR, you've seen actually debit card expense grow. UPI is another example where there is actually no product features, but yet we're seeing zooming volumes on UPI again because of -- because -- not because of cash-back or reward points or anything, but surely because of convenience. So having said this, credit card as a form factor has multiple revenue lines. MDR and interchange are only one of them, okay? Having said this, we as of now don't see too much of a sort of move towards rationalizing MDRs on credit cards. But having said this, even in case in the outer events such as eventuality happens, we've got a full 360-degree sort of approach and strategy to managing profitability on the card portfolio, including looking at optimizing product features, including changing mix of revolvers and transactors, including deep penetration into high-spending targets, including looking at segments like business cards, et cetera, wherein you get much higher ticket card spend, et cetera, et cetera. So it's a dynamic thing. Our portfolio management and deep engagement product management ensures that at any point in time, even if a particular because of environmental requirements or any particular revenue line is sort of going to change, we are able to sort of recalibrate some of the other vectors, thereby -- and ensure that the profitability metrics on the card portfolio don't fall too much.

Okay, fine. Great. Operator, can we now open up the floor for any questions, please?

[Operator Instructions]. Mr. [ Patrick Adell ]

I want to ask about the decline in card fees we saw in the last quarter. How much of that did come from lower revolver usage? How much of it came from some of the promotions and 0 fee discounts you gave? And how much from kind of other factors? So if you could just kind of break down that decline in a little bit more detail.

Okay. I'm not too sure whether I will be able to talk about the breakdown exactly. But let me say, 2, 3 factors have happened that you see over the pandemic over the last 2, 3 years -- over the last 2 years specifically. During the pandemic, obviously, there have been tightening of credit across all issuers and across all banks who are issuing loans, okay? Typically, in a credit card, when you touch a revolver, you actually get impacted on 3 or 4 revenue lines, not just 1. When you hit a transactor, you lose spends and you lose interchange income. But when you do a revolver, in addition to the spends and interchange, you also lose interest income and there are other fees, which a revolve sort of would sort of end up paying as part of its behavior of revolving, okay? And so to that extent, in a pandemic, which is pretty natural that credit tightening, et cetera, happens, this is one phenomenon, which sort of further got hit, okay, to an extent. And this, as I see, is a phenomenon which has happened across the industry. The other phenomenon, which is specific to HDFC Bank, as you all know, we had a 9-month embargo imposed upon us wherein we could not issue credit cards. At that point in time, too, also, we were the largest issuer of credit cards on an incremental basis, okay? Typically, when you start issuing -- when you issue a new credit card, it starts kicking in with its income lines because you issue, the person starts spending, and then he starts revolving or otherwise, in fact, therefore accruing to the fee pool, okay? So for us during the last 2 quarters, the impact of the last 9 months of lack of sourcing, I think, has obviously hit in terms of a significant large number of customers not contributing to those headlines. We now have a lag effect since we've started sort of sourcing post-August. A lot of that will soon get corrected as the customers -- and we've sourced a significant number of cards over the last 3, 4 months. And they will start kicking in, in terms of revenues, et cetera. So a lot of that will sort of get changed and corrected in terms of the incremental flow of revenues. These are the 2 key things, which have happened sort of the portfolio. What we are correcting now or what we're changing right now is twofold. Like I said, one is on the new sourcing. On the new sourcing, we are doing a lot of data analytics on our bank's base. I talked about the headroom available in the bank's base to source more new customers. We're doing a lot of -- and driving a lot of our propensity models to upfront identify a lot of revolvers and sort of source them upfront so that on an incremental basis, you start getting much more revolved. On the existing portfolio, we've sort of dissected our entire portfolio, looked at cutting portfolios into the signs of propensity, doing a lot of limit enhancements, doing a lot of upgrades to many of these revolvers, thereby sort of -- in a way, it's slightly loosening up of the policy, which was sort of credit policy, which was tightened over the last 2 years because of the external conditions. And sort of driving a lot of spends on to the revolver base, which is there on our current portfolio to sort of look at what we've done and correcting the situation over the next 2 to 3 quarters. So that's what we are doing on the portfolio, and that's what actually happened. Srini, if you want to sort of chip in here.

You covered most of it, Parag. One other thing is, of course, the customer behavior itself, right? Certain things, if you look at some of the features of the card, right, if you think about the -- cash advance is one of them. Or going for a limit increase is another one. Or going for a freely -- making the late payment and not worrying about the fee to be paid for late payment, et cetera. These are behaviors, right? Apart from those 2 things that you said that we -- it is within our kind of -- put the risk back on, right? We were risk off and now put the risk back on. And the second thing is getting the inflow of cards to replace any exiting of cards that's happening. The third thing is about the customer behavior, which we like to wait and see how the customer behaves. And a couple of things that I had already mentioned a month ago, which is to say that the liquidity with the customers, particularly our customer base at an aggregate level, we see enormous liquidity where 1:5. So that means if the card at an aggregate level is 100, card advances or card receivables is 100, from that bunch of customers, we see liability, deposits at 5x, right? And pre-COVID, it was slightly under 4x. So we do see people sitting with cash and so taking cash advances, et cetera. That behavior needs to come for a change, right? And also similarly credit limited utilization. While on one hand, we have been risk-off from curtailing credit limits, cutting back lines and closing accounts and all of that. In fact, vehemently we have done after the [ Div2 ], which is the April to June quarter, subsequent to the June quarter, particularly in the period July to September -- July to October time frame, we have done, we have done some of those actions. The credit limit utilization for the customers who remained very good and remained with us is significantly down, line utilization. They are still -- while the spends are going up, it has got some more miles to go before we can say that the behavior is back to some kind of a pre-COVID level in terms of what happens there.

Okay. Just one follow-up on that. So I think on the earnings call, you mentioned there have been some fee promotions or 0 fee offers. Are those still in place? And is that an additional headwind?

No, that is the -- periodically, we run. That was not around-the-year programs that we run. And that was more of a festival time period, October to December, where more such promotions were done. Between Jan to March, it -- we don't expect that kind of a promotion to be all through the quarter, but on and off, localized we do run. But it is not a -- first, that impact wasn't -- we mentioned it as one of the items. It's not a significant part of that item. And second thing is that I wouldn't say that it gets to 0 in this quarter because different programs get run in different time periods.

Got it. And so your time taken for revolver usage to increase and for customer behavior to change, is that going to be a couple of quarters? I mean how long till we get back to kind of normal fee income growth from the cards business?

Cards maturity cycle -- Parag, you can jump in and change me -- correct me. The card maturity cycle for all of this is, call it, 2 to 4, 2 to 5 quarters type of how fast a customer responds. So that is where certain things that we control reaction, right? But from a customer behavior, that we don't control.

Yes, yes, correct. So like I said, a lot of the things intervention, whether it's a revolver or a transactor, especially on new sourcing, 2 to 5 quarters is -- 4 or 5 quarters is exactly the kind of behavior, which we can do in a planned manner, wherein we can intervene with customers, increase their spends, widen their MCC spends, change -- give -- offer them upgrades of products, et cetera, et cetera. This is typically anywhere between 2 to 4 quarters, 5 quarters is the kind of change which one can expect. But as Srini said, overall ecosystem change in behavior, in customers, whether it's overall at an industry level, revolve dropping or whether it's more number of customers having liquidity and hence utilizing credit itself on the line, these are things which we will have to see as the economy sort of opens up. Not really predictable how that will work. So what's in our control, we will drive.

No, it does have a good attention from us, I can assure you. From a credit continuum of an individual, if you imagine to see that it starts with -- once this kind of a big event comes in, it starts with the secured and then it gets into some kind of an unsecured, which is within reach of a very good rate. Then it comes into cards, and then it goes into other products, which could be even more costlier from an individual point of view. So that is the credit continuum of an individual.

Our next question is from the line of Prasoon Agrawal from BlackRock.

I have a more broader question. If -- based on our interaction with multiple fintechs across the board, it looks like while banks overall are okay and there's not much disruption, in fact, there's multiple levels of partnerships happening. But when I look at credit card portfolio particularly, from lending to fees, to kind of cash-back, et cetera, it looks like there are multiple level of competition coming specifically in this particular portfolio. And when I look at the profitability of this portfolio, I suppose, it's pretty high, right? I mean if you look at SBI cards, et cetera, very high ROE, what is being reported. So is there -- I mean there must be pressure coming from various aspects as you look at like newbies, like Slice or Uni who are adding as many cards as you guys are or SBI cards are. So some part of growth has been taken away there. Fee income is a little bit under pressure. So my broader question is, is the industry profitability under some threat medium term? Or would we rather say that we will want to protect this profitability even if it means we may sacrifice on growth a little bit.

I don't know whether industry-level profitability is under threat. I do know that -- definitely that unless we don't build a very strong regime of card issuing and card portfolio management, it's unlikely that you would build a good profitable card portfolio, okay? And yes, for such players, then you would have a situation where you'll be throwing a lot of money behind attracting spend, but not necessarily translating into loyalty, repeat usage and profitability thereof, okay? So that's the way they do. We don't see this. So we're very clear with 15 years -- or almost 18, 20 years of experience in the card space. We understand that just headline number is not just going to give you anything. Yes, it does give you headlines. But we also know that you've got to pick and choose the right kind of customers, build scale. We build scale, and we will continue building scale not just -- like I said, not just on our own bank portfolio, but also with our partnership and alliances. We will do product innovation. We will do deep engagement of portfolio. But our objective ultimately is to build a strong, robust, scalable, sustainable portfolio of customers -- spending customers, revolving customers, transacting customers, okay? And so to that extent, our focus is very clear. Okay? In the interim, in short term, in certain bits and pieces, will there be intense competition? Yes, there will be. I guess that happens in every industry, in every segment, depending on the life cycle. It's happened in the telco industry. It's happened -- and it'll keep on happening everywhere else. But we're very clear that we've built up a long-term, sustainable approach to great underwriting, picking and cherrypicking the right kind of product at scale, okay, doing deep portfolio analytics and driving a lot of customer engagement, which will therefore build us a sustainable book. Okay? So that's our approach. Like I said, it's a very optimized mix of many of these. And at the end of the day, of course, you've got to also manage delinquencies, et cetera, et cetera, very well, okay? You've got to manage all of these factors simultaneously. You slip on one, you could have outages on your portfolio, okay? And that's what impacts profitability, okay? So I hope that answers your question in sort of a different way. Will there be pockets of competition? The answer is yes. But do we believe we have an overall wholesome strategy to sort of maintain consistent growth in this portfolio? Answer is also, yes.

One other thing, if I may add, Parag, to this is that in the market, if you see, right, in the mature markets, you would imagine that people have 4, 5 or 6 cards in their wallet, right? And then it's a question of juggling between those and whoever is in the top of the mind wins. From a market maturity, not -- I'm not talking about the bank maturity, because we've been running it for 20 years, but from a market maturity of the product, it's a long way to go, 60 million, 70 million cards in this country. And you can imagine the number of people and the potential to cardify them, so a lack of any other words, you can say. That issue of whether profitability is under pressure and how do you manage this, that is certainly valid in a very mature market where fully -- the economy is fully carded and people are having 5, 6 cards in their wallet, and now each one is trying to grab other's share, and the rate of growth is in line with what the economy is growing and nothing more. Then comes the question of how do you manage profitability. At this stage, it seems to be quite open on growth prospects point of view.

If I may squeeze one more question, sorry. So if I look at the unsecured portfolio of not just HDFC Bank, but everybody else is growing in an environment where revolvers have been coming down for credit cards. Would there be any overlap of these revolver customers who are now going for unsecured loan because they are far cheaper? So a revolver would be paying 30% to 40% or whatever, 42% annualized rate, whereas these unsecured loans are 14%, 15%. So is there a mix shifting there? And is there any overlap?

Srini, you want to take that question?

Yes. Yes. Yes, I will. So from a practical point of view, you would think that is the way a rational customer will move to. That is why I was talking in the prior question, I was trying to say from a product continuum point of view, what -- after such a huge crisis event, right, COVID crisis, health crisis, what we have seen in this market, right? The first thing that got off the block when the first wave of COVID went, what's the secured product? What's a secured product? Think about the things on the mortgages or a loan against the home or against some property or against gold and so on. That was the first to get out of the block and go because that's the most economical, somebody wants to do something with. The next thing that came up very well was kind of an unsecured personal loan because the salaried customers would be very much made available to such a customer on a personal loan. So that came up first because any rational customer will go to that in the second instance, right, to get it. And then even while you're in on our own base, we have -- 70% of our customers are salaried customers, right? And they are our own customers with a liability base that we are having. And so then it comes to -- in terms of when do you spend? And then when you spend it, then this is a personal loan that when you take it, you're stuck for a particular tenure. And when you don't want it that Parag described about somebody who revolves for 2, 3 months or 3, 4 months in a period of 12 months, right, so those kind of customers come in and jump first. And then come the other customers who are a little more longer term in terms of revolving.

We'll take a next question from the line of Dhaval Gada from DSP.

Parag, just to go back to that conversation on the merchant fee waiver that we did in the third quarter, I just wanted to understand the thought process that went behind going with this program? And what is the measurable of this action? Would it lead to higher spend market share, sort of faster growth in merchant lending business? So if you could just explain the thought process and the measurable. And also eventually, like what we did with the other programs, annual programs, we made it more frequent. Is that something that we'll do with this strategy as well?

I'm sorry I didn't get your reference that you talked about some merchant fee waivers. What exactly are you suggesting?

So the incentives that we gave to the merchant in terms of the industry not being levied for our merchants, which led to the fee income coming off in the third quarter.

No, no. It is not that. I don't know from where Dhaval picked up. That is -- the one what we described is that we ran certain promotions for card customers for them to avail of certain loan facilities where the fees were waived and which had a small impact to our fee line.

Okay. So the merchant doesn't benefit in this case?

Merchant is not in this picture, right? You get to engage with a card customer to say, wouldn't you convert this into a loan. And when it converts into a loan, there is a fee to be paid, you waive the fee.

Understood, understood.

This is an incentive or a part of behavior -- inducing behavior change from a customer.

Understood. Very clear. In terms of the -- so eventual outcome, what will decide the frequency of such an engagement cost, I mean, the sustainability of this? You said that you will pull back some of it this quarter. But just what would decide when to switch on again on such a large program?

This is a program that we run all the time. It's the kind of -- from how intense we go about running it. Parag, maybe you want to talk? Festival quarter was a top quarter. We run such programs. And other times in the year, it may be less valuable from a customer penetration. So maybe you want to give a perspective?

Yes, yes. So during the quarter 3, October, as you know, we run at HDFC Bank for the last 2 years, in fact has been running 3 years now, have been running a branded program called Festive Treats. And as part of that Festive Treats, because it's the festive season in traditional India, we sort of bring our merchants together and our customers together on the platform of Festive Treats and sort of give them great deals to HDFC Bank customers using their card and, therefore, drive a lot of spend during that. As part of that whole festive season program is when the intensity of some of these programs of customers wanting to take loans also sort of gets incentivized. So like Srini said, whilst we keep on doing it at regular interval, but during the festive season, the intensity is slightly higher. Because quarter 3 typically in a card-type business is where the maximum amount of spend per quarter happens in a year. Okay? And that's the time where there's a natural increase in customer spends, consumer spends, et cetera, et cetera. So that's the festive period. So that's when we sort of increase the intensity of all of our marketing communication, our marketing offers, et cetera, et cetera.

Understood. And in terms of market share, will we see a substantial jump? If you can quantify index, the pre-offer market share to post, some perspective about what kind of delta you provided on market share?

Well, let me say, on the merchant acceptance side -- I'll just give you that. So we've seen a consistent increase in our market share, both on the physical side and on the e-comm side or the online space. Okay? On the online space, in fact, merchant-acquiring share has really gone up to close to 50-odd percent. And at the beginning of the year, it was close to 47%, 48%. So despite pandemic lockdown, we've seen an increase in market share. Similarly -- so in the physical merchant space, at the beginning of the year, it was somewhere close to around 40%, 41%. That's gone up to almost 44%, 45% market share. Okay? That's on the acquiring side. On the UPI side, also as an acquirer, if you take the P2M kind of space, at the beginning of the year, our share was closer to 8%, 9%. We've sort of taken it up now to close on a run rate basis. So it's almost close to 14%, 15%. So we see robust growth on the acceptance side. On the issuing side, it's a little mixed bag because if you must say that whilst we -- during the embargo period where we could not put on a large number of cards, we did lose a little bit of market share on the incremental sourcing base. We managed to retain flat our market share on the spend side because we did the portfolio engagement. Now that we've started reissuing cards again post the embargo, we do expect to see both the number share and the market share, volume share to now continuously grow here on afterwards, once the impact of the new issuance starts sort of kicking in.

We'll take our next question from Mr. Amey Sathe of Tata Asset Management.

Just 2 questions from my side. Firstly, one observation, if you can share. Whenever you rationalize your reward points, do you think -- do you -- have you seen the customer behavior changing in the sense that usage of cards sort of comes down whenever there is a reduction [indiscernible] reward points? And second question is, at what point do you think we'll be comfortable sharing numbers on, say, PayZapp or SmartBuy platform, say, in terms of active users or GMV that you're doing there?

Okay. So the first point, yes, I mean, obviously, we -- when we tweak any product feature, we do have to do a pre and post to sort of check on and seeing what it is. Having said this, on reward points, when we did the changes on Infinia and Black, okay, we did that change. This is also a benchmarking with the industry. So by far, I think the changes have been welcomed because when we're seeing a lot of social media sort of responses and sort of independent blogs and surveys, when they do, focusing on the kind of value which card issuers provide, we do see that. I think the Infinia card and Diners Black card still stand out as the most value, which customers in that segment in particular see, notwithstanding the fact that we might have harmonized or optimized some of the product features, okay? So these decisions are typically taken -- like I said, this is customer feedback, basic benchmarking with the competition basis, also understanding where we need to sort of reallocate some of our resources in which areas and sort of which areas we wouldn't, et cetera. Some of these things are taken into account, and we constantly take feedback on that. Regarding talking about the metrics, I don't know, Ajit, you may want to answer that. We don't typically do a product-wise revaluation of sort of many of the metrics. But Ajit, if you want to sort of take that on a little about the second part of the question?

Go ahead. Ajit. Go ahead, yes.

Sure, Srini, you can go ahead.

Yes. No, all I was supposed to say is that the SmartBuy platform users or PayZapp users is something that we haven't particularly talked in terms of what are the count of users. We will take a point and see at what point in time it makes sense for us to talk more further about it. But certainly, we can talk about the features of what it provides for customers and particularly customers to be engaged with that. But we'll take your point and see what to do.

That was the last question. I now hand the floor back to Mr. Suresh Ganapathy for closing comments. Over to you, sir.

Yes. Thanks, Parag, Srini and Ajit for this very insightful session, and we are closer to 200 participants in the call. So it's been a very insightful session from all of you. Thanks so much for the support.

Thank you. Thank you, Suresh, for the opportunity to talk to us. Thank you. Thank you very much. Bye.

Thanks, Suresh. Yes. Bye-bye.

Thank you. Ladies and gentlemen, on behalf of Macquarie, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.