HDFC Bank Limited (HDFCBANK) Earnings Call Transcript & Summary

Yes. Hi, everybody. On behalf of CLSA, I'll love to extend a very warm welcome to everybody. Good evening to all of us who've joined us from India and Asia, and good morning to participants joining us from Europe and U.S. Today, we have the senior management team of HDFC Bank with us, represented by Mr. Srinivasan Vaidyanathan, the CFO at the bank. He joined the bank in 2019 from Citigroup, where he was Managing Director of Finance and Deputy Treasurer in the Institutional Client Group. We also have Mr. Rahul Shukla, who heads Commercial and Rural Banking at HDFC Bank. He was -- he's had 30 years of experience. He joined Citi in 1991 and has been through various functions, including investment banking, corporate finance and capital markets in India, Singapore and Hong Kong. Welcome, Rahul, and welcome Srini. So participants, I think the reason why we thought we should have this call was we'll focus this conversation a lot about a newly carved out segment for HDFC Bank, Commercial and Rural, where management expects and we also believe that the prospects of growth and profitability is very strong. And yes, so that's largely the topic of discussion today. So again, Srini and Rahul, welcome.

Since -- I'll just like to start off, Srini. First is, as we get started on the sector, on the conversation, I just wanted to understand from a top-down perspective, the way the banks disclose data and looked at segments was more like retail and non-retail earlier. And sometime last year, we kind of looked at the book and now we split it into 3 parts where we've carved out Commercial and Rural and obviously, in a lot of conversations, we've spoken about the growth prospects as well. So can you give a top-down view of why the segregation was done and how you are looking at it? And how this piece blends into the bank?

Okay. Very good. Thank you. That's -- that actually takes us back to early part of last year when we announced the future ready organization, right, that was -- we announced it in May. We're working at it from the beginning part of that 2021 time period. What we had seen, right, 2 underlying facts which are there. One, this particular segment of business, the middle market, they called SME, called the Rural. They are, for a good part, integrated as one and waiting to grow big, right? And we want it to be captured in a large product. So that's one in terms of the opportunity to be positioned for future and keep growing. The second aspect of that is, during the comment, we noticed that many of the corporates were leveraging the supply chain and the distribution chain and pushing the working capital requirements into that segment. And then that is -- that combined with the prior comment that I made in terms of how from a growth prospect and importance in the country point of view, the positioning in the GDP profile point of view that this was important. We said, okay. We need to bring the similar kind of a mindset leadership from the corporate banking, which have shown a tremendous amount of growth over the 3, 4-year period driven through digital, driven through relationship management and the reach that we do, and how do we bring that and participate there? So which means, we take Rahul as an example, the leader who was running that. Bring that experience of the relationship with corporate, bring it down here, leverage the supply chain distribution chain connectivity and broad-based that growth kind of a mindset and approach and using the digital approach to driving it. So that was part of how we wanted to participate. And one, market opportunity; two, our execution strength, and we try to bring both together, and that is how this Commercial and Rural segment was created, to say that. That's how we participate and get the larger market share that we want, and it's critical to the bank. And I don't need to talk about the -- the other aspect of how we fix in with the financials and so on so forth. Rahul will talk about how from a liquidity point of view, asset growth point of view, profitability point of view. What are the top notch of the company, and so how do we grow that bit. So that is part of the genesis of how this came into being at that time, and so you fit it in with what we call the future ready organization at that time.

Got it. No, that's useful, Srini. And since we have you, I will -- given it's topical, before I move to Rahul with very specific questions is, we've had a bit of a macro issue, right? Oil is at a $115, [ $120 ], it has its own impact. I know it's still too early, situation is quite fluid. But what do you anticipate from a bank's perspective, if any impact on growth in asset quality, if you can?

Okay, yes, good. Good. Actually, it's early, as you said, but it's a good way to think that, and we do need to keep a watch on these things, right? But we commit continuous assessment of this, and let me give you some flavor of what we are thinking and how it could be impactful or not impactful, or not known at this stage. See, we have done several scenarios. One of the baseline scenario assumes that, until June, the -- there is some level of such anxiety. And under that scenario, our economists viewed and reviewed to say that the GDP growth in FY '23, which we expect it to be, call it, 8.2%, 8.3%, there about 8-plus percent, can come to slightly above 7%, 7-plus percent. So there could be a 100 basis point impact, 50 basis point impact on the overall economy in GDP. So that is -- think about that as a very macro impact that it could have, right? And now, if you peel that and go down below that, okay, that's at the high level, what does it do to various sectors and segments, right, if you get down to that? So if you go down to the Retail segment, Consumer segment, private consumption to be much more precise. Private consumption part of the GDP, it's about, call it, 60% or thereabout, right there with the -- high 50, 60 kind of percentage is the private consumption component in the GDP. Within that, our economists estimate is that about 17% or so is the component that gets driven through fuel, transport and so on and so forth, right, all of that. Then now, that is very -- this particular oil and the direct, indirect impact of all of those comes into the [indiscernible]. That -- this way, that impact on the GDP can come from. That's where it can impact by about 50 basis points, so that could be 100 or 50 basis points. At least 7.2% to 7.7% is what we estimate the GDP will be deferred from 8.2%, right? It can change like that. So that's -- and again, that is one element of it. The second element of this is it's also determined, which is currently unknown, but we are keeping a watch on it and as much as we will analyze and see [indiscernible], which is what part of the oil price and consequently the fuel price is passed on ultimately to the consumer, and what part of it remains at the fiscal deficit level? Which means, how much of this will be subsidized by the government in the form of fiscal deficit and how [indiscernible] to be seen. We don't know at this stage, right? Whether it can impact INR 10, INR 20 to the -- per liter to the ultimate gas prices on the stations, we don't know, right, how much will get passed on. It depends on that. But within the [indiscernible] ask range in terms of what that impact would be. So that's on the macro of what it can do. Now, does that change significantly the disposable incomes? Consequently, the concentrate goes on and so on. What is the disposable income that can be impactful to the end consumer? There can be a slight impact, but we don't think that it will meaningfully change because at the end, if it's a 50 basis points GDP impact and there will be some, but not a 0 impact, some impact on the disposable income. But it is still within the manageable range from a credit growth point of view. At the end of the day, credit growth, call it a nominal GDP rating inflation. When this can go down to 7.5% or 7.2% or something on the real GDP, the inflation, similarly from an expectation of 5.2%, it's expected to go to 6.2%. So from a nominal growth point of view, it will continue to be at that kind of a previous level, right, to call it 13% of thereabout, [indiscernible] 13% or so nominal growth, right? And that's where we should think that the money flow and the bank credit will go from. There can be some impact. Very early to say what that credit growth impact can be, that is one thing. And then from credit quality, second aspect of your question, this is what is on the high level credit, what is the credit quality? Too early, as I said disposable income, some margin impact can be there because they will spend a little more. But it cannot be because these are discretionary for good amount of good [ path ], right? So there may be some pullback into certain other kind of a spend and the -- quite an amount of discretionary spends that they all have at the consumer level to offset this impact. If it sustains for a long period, it's a different story, right? We need to figure out what the scenarios we need to run to look at that. But at least in this scenario, this is what we think on the retail front. On the wholesale front, there could be some impact on the term funding, which corporates are expected to follow the government infrastructure spending. And if there's any change in the plan on that, which so far you have not heard if there is, then there will be some kind of a term outlet. That means either capacity augmentation, our participated patient and the infrastructure can be impactful. But again, within reason, depending on the time that it takes to come back to -- to not full normal, but at least to a semblance of normalcy, it remains to be watchful and see what happens to that.

Got it, that was helpful, Srini. Now, I'll probably switch to Rahul right now. Obviously, the segment is a large part of the book and a heavy lift from a growth perspective for the bank. Since it's newly carved out, can you start off talking about how do you break up the book? How do you look at it? What are competitions in each of the segments of the book? If -- a general background because I believe as we go along, some disclosures would improve there as well. But if you can just talk about how the book is structured and how you look at it.

Sure. Thanks, Adarsh. So there are 6 distinct divisions in Commercial and Rural banking. If you start from the first one, that is the mid-corporate group, we call it emerging corporates. And these are all corporates with a turnover somewhere between INR 250 crores and INR 1,000 crores. We have a successful business. It's a strong growth area. Below this segment is the wholesale SME business, which are businesses with turnovers between INR 7.5 crores to about INR 250 crores. This is again a business that's been with me for 4 years, and we're just trying to replicate the model into many other areas. Below this segment is the retail SME, the small mom-and-pop shops, hardware stores, et cetera. These are up to turnover of INR 7.5 crores, and credit can be very small. The number of entities are very, very large. We also have health care finance, where we finance hospitals, et cetera. And equipment, and that's the fourth piece. There are 2 other pieces. One is transportation finance group, where we finance either dealers or end buyers of commercial vehicle, construction equipment, tractors, et cetera. That is the transportation finance group. And the last piece, which is the very important piece, is basically the rural banking group, where we actually finance farmers and the rural and agri ecosystem. Now if you think about it, that these are 3 to 6 groups, why are these together? And what is the synergy that I'm supposed to bring and drive, right? Number one, basically, there is commonality of delivery channels. We work with branches. We work with the virtual relationship management team. We work with CSC. And we also have a direct sales channel, so it is basically a common delivery platform through which sourcing and delivery platform, through which we go out and approach this business. Secondly, where are these businesses located? Predominantly, they are located in semi urban and rural segment. So there is a certain amount of geographic synergy that you are pushing. If you see -- I mean, if you look at India, the opportunity is in urban and metros, but there is an equally strong or slightly bigger opportunity in this space. The third reason I must tell you is that if you look at industry studies, for every INR 1 that you lend to a large corporate and to an SME, right, you make 2.5x earnings in the SME business. Now, you just have to basically make sure that you manage the NPA very tightly as you would do in the large corporate segment and suddenly you have a huge earnings kicker that comes in, right? So my move into this business is to bring that GNPA discipline, where we've made a significant amount of progress, and to basically give that earnings alpha to the company. And the fourth thing, which is very important, is that this book is predominantly priority sector lending. You are in India, you're a bank, you want to continue to grow with great ambitions. You will always -- basically we looked at whether you are doing your bit in terms of directed lending practices, and this is supposed to grow, keeping in mind the overall growth plans of the bank.

Perfect, Raul. Just from a market sizing perspective, right? Just putting things together, this is about a INR 3.8 trillion book. And if I take the SME book of the system and the CV portfolios, it looks like you'll have a 15% market share, obviously, differently distributed across categories. So how do you -- the 15% is kind of not like a very, very low share. So how do you look at the market sizing and the opportunity that comes with that?

So look, if you look at the MSME potential lending in the country, you looking at what is currently funded in working capital and other banking areas by scheduled commercial banks as well as NBFCs. And that sizing, if you look at reports of BCG or TransUnion or any other reports, would estimate that the total market size is about INR 20 trillion, right? Our market share in that business is about 13%, and it puts us as the largest in the segment. And fine, 13% may look high. But if you look at the total credit needs in the MSME segment that exists in the country which is not being serviced either by banks or being serviced as LAP or through the informal systems, that's about INR 50 trillion. Now, if I look at INR 50 trillion, the market is 2.5x bigger and you divide 13 by 2.5, since you're so smart in mathematics. Certainly, you will find that my market share is 4% or 5%, should that be -- should that be. Obviously, you will ask me saying, when you grow, it will have other issues in this area and we are going to address as you go along in all of that questions. The second thing is the transportation finance group, right? We choose and play in certain areas. MSCV is an area of strength where I think, in a year, we've increased our market share from about 17% to about 28%. And in the LCV as well as the tractor finance business, I think we've increased our market share from ballpark about 5% to very high single digits. That's sort of where we are, and we are taking it one step at a time. And so that's sort of where we are. But in each one of these segments, the growth potential is pretty strong. And since you asked who do we see as a competition? Yes, I mean, there's no doubt there's competition in India. There are 230 banks of all shapes and sizes. But the one that we find I have a lot of respect for and continue to learn from is Sate Bank of India. That is what we would like to continue to emulate our model upon with our own HDFC Bank way of doing business.

Perfect, Rahul, that's super helpful. Now obviously, each parts of the book that you alluded to would have a growth prospect, right? So when you've been talking about very strong growth prospects overall for the book, right. Within that, what parts lead this growth engine forward? There would be certain parts where you would be, from a growth perspective, next 3 to 5 years, more bullish on? If you could just highlight the key drivers out of the 5, 6, 7 of them, that will be helpful.

Sure. So number one is just basically geography expansion. This is a fundamental tenet. We are in 100 plus cities in the mid-corporate group, and next year, we will cross 200 cities. We will have present, we will have lending, that is how we look at the business. When you come back and think about the SME business, we today are in 573 districts, and next year, we plan to go up to 606 districts. And for all the listeners, these are the smallest sort of administrative zones of the country, and there are about 730 districts in the country. And we estimate that in a couple of years, 650 ballpark is where you find economic activity. And the third piece is the village. We, today are present in about 100,000 villages. We've made progress since October when we said we're going to expand in this area. And by -- in 2 years from now, our estimate is to be in 200,000 villages. Now, you think about 200,000 villages, do I saturate my growth potential? No, because there are 640,000 villages today in the country and I'm planning to be in 200,000, and that's the rate at which we are growing. Now, second thing I must tell you is that there's a huge untapped potential in just the SME business. We talked about 50 trillion. There's a lot of people who borrow from outside. I -- last weekend, I was in a village in Eastern UP, where people hadn't heard about ECLGS, they hadn't heard about CGTMSE. And there was a school with about 20 buses, and they were continuing to fund all of their EMI payments without any default or stress, right? So if you think about, basically, in that sense, today, we have a lot of data, the GST data. And if you go to a Kerala store, even he or she is filing GST today, which is pretty helpful in terms of going out and doing expansion of credit and bringing all of these entities in. Think about health care finance. In the last 4 years, there are about 30 hospitals and medical colleges that have been built in Uttar Pradesh, and in the next 3 years, similar number which is getting constructed in every single district, which is effectively the potential. I mean, that is a business where credit is not growing because during COVID, they had huge cash flows and they've run the book down. But that's sort of how you look at it. Think about rural. You have this piece where agricultural is just about 15% of the GDP, but 60% of the people live over there. And if you think about the lending, it is not just pre-crop funding today. That nature of credit extension is moving to gold loans. It's moving to home improvement loans. It's moving to consumer durable loans, and 2-wheeler loans. In a very small village, today, you find showers. Normally, people use a tap in villages to take bath, and you have the electric pumps available. I met a customer in Indore yesterday, a good client of ours, and these are solar pumps, would basically get you the water under pressure, and they're using that. You're having Western-style commode, sorry for just naming it. But those who are in India, they will know what a dramatic change that is, from open defecation to basically having a toilet inside the Indian style to the Western style. And you have all of these things getting sold. So rural is changing quite dramatically, and rural has an opportunity because even today 70% of rural districts have a credit-to-deposit ratio of less than 10% because banks have not done justice in terms of just the aspirations of people over there. Transportation, there is a lot of focus on multi-mode, et cetera, that is happening. So that's why I continue to be quite bullish about the prospects of this business, and we talk about a dramatic one plus one expansion next year. Now, you may ask, saying how will you do basically this one plus one? Today, what has happened Adarsh is that in the last 2 years, not only large corporates have delevered, even the SME have delevered and balance sheets are strong, right? And now they're going through the growth phase. We have already gone out and given 20% or 30% ECLGS, which does not require collateral, so they have the loan availability for funding this particular growth. So we are in a good position because we basically were strong in terms of ECLGS extension, and we're going to basically see the benefit of that in business growth in the next 2 to 3 years. The third thing I must tell you that the cash conversion cycle of these businesses has shrunk quite dramatically pre-pandemic. What was 90 or 120 days is, today, 30 or 45. Now in this event, looking at my book, why should I not basically dream about a dramatic expansion, which is basically what the intention is out over here? Because we have great confidence in how we do this business, how we've been guided by our MD and CFO and risk seniors, and we just want to capitalize on this huge opportunity that exists today.

Yes. And Rahul, if you -- you did mention about geographical reach and how you want to expand that. Just to start off, what puts HDFC, obviously, you're a large player already in the segment. What's the key unique mode that HDFC would have that you could, like, make it into a leadership business?

Let me quote what customers tell me. Since first of October, every week, I've traveled, and not to the big cities but to the small cities. And the clients basically tell, and many of them say that it was -- it is our SME digital platform, which they use. What has happened during the pandemic is that, look, business -- small businesses traditionally with the banks, which -- where relationship was started by their grandfather or great grandfather. And so these are good luck accounts. During the pandemic, when digital wasn't working, they basically say, either they can have the good luck account or good luck in terms of continuity of business. Which is when, basically, there is a dramatic movement that has started happening. You can -- today, over 75% of my customer base is on my SME digital banking platform, where they can do everything digitally, right? BC -- whether it is LC, BG, your collections and payments, bidding for contracts, you name it, FX, et cetera, all of that is being used. And many clients say that they actually gave us a premium because they think that they will not be able to adapt to other platforms that exist in the marketplace. Now, digital is not the only story. If you look at, say, a district called Samba, which is in Jammu and Kashmir, right? I mean -- and the largest bank over there is the J&K Bank. And this district is between the border of -- at the border of Pakistan and India. We are the second largest in terms of number of business accounts, and 100% is digitally activated. It tells you 2 things for being successful in this business. For being successful in this business, you have to have the distribution, which is what the bank has, right, in every single area, not just CRB. And the second is that you have to have digital because today, when they have to get started before they get used to it, they need handholding, which is what basically is something that they need help with. The third thing also, I must tell you -- the second thing, other than my digital is that we have been investing in this business for several years. I've been around for the last 4 years, right? We've been at it. How does -- today, I feel because this is a push business, but I feel that HDFC Bank has reached a position where we are actually getting the benefit of brand pull and network effect. Because there will be a promoter, who will basically be married, so the family of the wife, son, son's wife's family. When you think about it, that network effect is what is benefiting HDFC Bank today, which is very difficult to replicate. Because if you look at the network law or value of network [indiscernible] right, the larger number or market share you have, the faster you should expand, and that's how you look at it. So we are basically getting in that sweet spot a brand pull today, Adarsh.

Got it. No, that was useful. If I shift gears, Rahul, given that the book is PSL compliant, just talk about directionally, even if not specific numbers about profitability of the portfolio? And once you think of expanding it the way that you are intending to, does that materially change in -- did you see change in profitability? So the absolute profitability directionally and then does that change once the book starts growing at a fast pace?

So profitability, I won't sort of comment. I mentioned the INR 1 lending, what do you earn in SME in the general industry. And and you're a smart guy, you can basically go through that. We make a living out of it. But the second thing I must tell you is that, look, where is India headed, right, in terms of banking? You can bank large corporates, and you can bank customers in urban centers, and there are a lot of banks over there. The story of India is basically going deeper. And obviously, managing the book quality is an issue, but -- that we have a method behind our madness which has worked for us, right? That's why the numbers are so dramatically different compared to what we see in the industry. But when you go deeper today to the shopkeeper, to the street vendor, to across basically in the country, the loan sizes are miniaturizing. They're getting smaller, right? And when it miniaturizes, you should see that your profit basically increases. So you have to miniaturize your loans to maximize your profitability because, to a certain extent, you're right. As you go to a certainly smaller number, deeper, much larger book, much larger number of entities, you have to build a certain level of cost of credit while you are managing it. And so you will have to work through all of that. And frankly, I think I basically see a better outcome 2, 3 years down the road than it is today because loan sizes will continue to become smaller. So it's granular, we like it. It's profitable. Generally, we have a good experience in terms of collections, et cetera, that we do. So I'm pretty sanguine about the development of the profitability curve sort of speed.

Perfect. And Rahul, this brings me to the next question on asset quality, right? Again, if you go through system data, SME is -- and the nature of the businesses could be a little more volatile. So the NPAs of certain PSU banks are high, but we've historically had good data coming out on the business banking side. So how -- again, once you expand the book, how do you maintain asset quality? What are the mitigants? What's the competitive advantage, let's say, vis-a-vis an SPI you have in underwriting or in data analyticals? And here, what I'm doing in this question, Rahul, is also blending 1 or 2 questions that I have got from investors so, yes, if you could answer that.

No, Adarsh, look. At the end of the day, credit is tough, but it is also simple. You've got to know the person that you're doing business with, right? So when you have to know, I think many of these customers are basically still -- relationships with the bank on the liability side. I was in Pratapgad, there was a small furniture guy who had about 5 acres of land. His borrowing was from a nationalized bank, but his savings was with HDFC Bank. And he said it was a very well respected bank in a small town. It's down where you have one main road, and there is settlements on both sides, and that's how it is. So -- plus a lot of mosquitoes. So -- but that's how they think about the bank. So we know the customers. We know account behavior, right? And those are the customers we are tapping. So as the branch reach increases, you can imagine, basically, I get to know even more. I went to a village where there were 25 colleges and schools and there was a rice miller in the middle of nowhere with a turnover of INR 75 crores. And we said, okay, we're going to open a branch over there because there was a good business over there. So we basically work together with a branch so that we know the customer. The second thing is that you know -- you need to know what they do, and so you have to look at cash flows. And we've often said that cash flow lending, cash flow lending, everybody says the same thing. But cash flow lending has worked for us because you remember the month of May 2019, we were, even at that point of time, a very large SME bank. And at that point of time, the capacity utilization of MSME industry in the country was 13%. And even then, we did not have a spike in NPA. Now you can say, oh, there was moratorium X, Y and Z. When the moratorium went away, even then that SME book continue to basically remain intact. And so we're very confident in terms of that. Now, why are we confident? When you basically have a client who banks with you, wife's accounts, savings account is with you, the daughter's savings account with -- is with you. Everybody opens basically a fixed deposit with their daughter and their daughter's son, et cetera, that is with you. They put their locker, so there is a full 360-degree relationship management. Now, that person may still default because business goes belly up. But if you have a full relationship, intentionally, nobody is going to go [indiscernible] , and that's the way of doing business. And then add to that, basically, our collateral cover and things like that, those are there. So the most important things which help me is that I know you know the customer and their behavior. They are coming through a network effect or in the branch or a very strong referral. Many times that our clients who tell us don't onboard that particular client, and it's happened in Varanasi. A client said, look, I told you 2 years ago, and in 3 months that account went bad, because we didn't onboard. Taking the client feedback. So the network effect is playing, the branch effect is playing, and the full 360-degree relationship on which we are maniacally focused. We just do not deviate from that, and that will continue to help me, yes, Adarsh.

Perfect. I just -- participants, I see some questions being typed in. I'll have 1 or 2 more questions and we'll open the floor two ways. [Operator Instructions] Now, the other thing is if you go through the whole pandemic period, and SME was a sector which got a material amount of dispensations. Be it in the form of restructuring, be it the form of ECLGS, and now you've got a commodity shock, right, as you come out of those shocks. How do you see portfolio tracking? Because I think whole of the investment community would broadly agree that large corporates and now retail after COVID looks relatively stable, but there are some question marks on how the SME portfolio holds out, how the ECLGS portfolio holds out. So if you can just give what you're seeing on ground as we come out of those dispensations?

Look, there are about 65 million MSME entities in the country, right? And there are about 15 million in the banking system -- formal banking system. I'm sure that there are entities which have issues, but by number of entities, my numbers are not so large. And I have a set of basically customers who I do business with within the HDFC Bank tenets, and we are okay. We were okay during the pandemic and we are okay on our portfolio post-pandemic. In fact, I must tell you, Adarsh, that whatever was our new NPA creation in 2018, last year, the new NPA creation was half of that. And this year, the new NPA creation is flat at the same level for SME business, and that is how confident I am. So the book has become more than twice, and the new NPA creation has become basically half and remains stable, and the book continues to grow at 35%, 40%. You guys look at everybody's growth rate, if you just add my BBG and EEG growth rate, that is at 39% and 10% Q-o-Q. So on the largest book, this is basically the growth rate, so I feel very confident. Now you have this new issue, right? And we have to monitor that, right? So at this point of time, what are your customers saying? Is the input cost gone up? Yes, it has gone up. If you look at agrochemicals, they use crude oil, and in crude oil, that particular cost has gone up 30%. In auto, there is metals and alloys, they use that. That cost has gone up 30%. Cashew processing. The raw cashew prices have gone up 15% to 20%. If you look at ceramic, the gas and freight are the biggest element of cost that's gone up 80%. So you have basically a large proportion on consumption and as well as the non-consumption, non-consuming industries because we also took stock. And during the pandemic, we did this, when we looked at cash flows, how much cash everybody has and looked at our portfolio. And this also we've been doing our portfolio analysis and we continue to do every 2 weeks a big survey with my set of customers, right? Now, to what extent is the ability to pass on these increases? In agrochemical, it is 90%. In auto, brass, cashew processing, casting, it's 100%. If you look at poultry industry, the ability to pass on is about 70%. If you look at poultry layers, I mean, obviously, there is no issue. It just goes pass through. Pulse mills, ability to pass on 90%. We are basically paying for that at the point of purchase. PVC pipe industry, where PVC resin has gone up to [indiscernible] in terms of cost, but the ability to pass on the price is about 25%, right? But in most of these, given the strong growth dynamics that everybody sees for basically the next quarter, they don't see an impact in the extent of demand, will the demand get pulled down. right? Now, that's a fair amount of detail. I don't know whether people want more detail, I'm happy to give. But on transportation side, right, all the CV manufacturers. The cost has gone up about 5% to 7%. The ability to push out, basically, that is about 3% to 4% and this industry has been increasing all the while. But the industry is also aided by the heavy infrastructure spending by the government, right? So -- so far, so good, but this is -- portfolio management is an art and also a science. You have to basically take stock every 2 weeks or every week depending on how turbulent the situation is. And so at this point of time, we feel pretty confident. There is, yes, a cost impact. But is there a demand impact largely other than maybe people postponing purchases of jewelry that is a segment, right? That will get postponed. Nobody may want to buy when gold is at $2,000 though yesterday, and it came off $85 or so. So -- but mostly, I think demand impact is not seen or not talked about at this point of time.

Perfect. So Rahul, I'm just starting to read out participants. Just as a reminder, I do see questions, but please type in or raise your hands. So Rahul, one of the questions is, for a long time, we've heard the argument against spreading to rural being prohibitively high collection costs post-default. Has that changed? Is there a digital initiative there? And how is it economically viable today, right? So going and collecting in rural post-default and is that changing? Is that prohibitively expensive?

Sure. So let me address this, right? I mean, when you see India from a macro perspective and from a policymaker perspective, in rural, agri is just 15% of our GDP, but 60% of the people still are there. So you will have a lot of government policy push in terms of completely changing the rural nature from agrarian to a rural small industry, or agri -- small agri business and things like that. That is how basically the push has been. Even when you look at MSME, right? If you think about it, 99% of the MSME entities are micro entities. And I say that the chota baniya always remains a chota baniya in this country, never becomes a bada baniya. If all of them, 62.5 million, were moved from being micro to a small business and hired just one more person, that is roughly about 62 million jobs. You saw basically the election results, the narrative. It's all about jobs and it is going to basically get -- that chatter will increase, right? Now, why is the government focused on that? When you make the micro entity a slightly larger and they hire one person, 62 million jobs is not bad. But if that one person is -- supports like 3 other people in the family, that's about spending capacity is getting raised for 250 million people. That's the policy. That is how we're looking at it. So I have to basically look at it from the same style. Now, what has changed in terms of collections, right? Firstly, my presence is much larger today compared to several years ago. I have the farmers saving account, Mrs. Farmer's saving account. Sorry, we don't have too many she farmers, right? I mean, that's just the nature of the thing other than in tax application or so. But those accounts are there, those cash flows are there. Now, so those things and collections are well tied up, you have to do that. Now there is one element where you say that, look, there might be an issue, which is like shopkeeper financing. Because the shopkeeper basically does business in cash. At 3:00 or 4:00, its peak time, he or she cannot come to the branch to go out and deposit, and you need to basically do daily collections. So you have basically the digital wallet solutions. Team up with them. They will go and collect the money at 8 p.m. They charge you, but they basically send it back. Secondly, a lot of insurance is available today in the marketplace to go out and protect your portfolio. And the last bit that I must tell you is that the government has about 25 or 30 different schemes, which guarantee in some form or shape. If there is a dispensary getting opened in a rural area, today, a greenfield, 75% is guaranteed by the government. ECLGS, 100% guaranteed by the government. You are a buyer of LCV, that is CGTMSE. You look at PM Kusum. You look at the poultry, piggery and all of these schemes. Agri infra fund, I'm told that we're going to be felicitated by the minister soon, but I don't know whether the dates are fixed up or not. But that is up to INR 20 million that is guaranteed by the government. Now, you have to follow. You are in India. You've got to do business over here. You have to follow where the government is taking you. You have to apply your mind saying where the growth will come, because jobs have to come and where the government policy is going to get pushed, and you do business in that fashion. Digital works. I mean, yesterday, you saw that there is a UPI that has started on non-Internet connected phones, right, in India? So when we did an NPCI or just those online remittance, the world didn't believe. Then UPI, the world didn't believe. And now we are on non-Internet money transfers, and the world may not believe, but one day, the numbers are going to basically go out and become very large. So the digital ecosystem is fantastic. The credit bureau data is today mature and fantastic. Use it, right? The GST and the company law, et cetera, data is out there and available, use it. And then there are collection mechanisms. You put it together, the margins are also higher now for me to be able to pick up the cost.

Got it, Rahul. Rahul, one of the questions is they says that they've picked up extensively from channel checks with small banks that HDFC Bank is underwriting the customers at lower yields. These banks seem to be confident, it's not possible to work with so low yields, and that doesn't price the risk adequately. So how do you -- like, basically saying that HDFC goes and refinances at yields which is not like adequately well-priced for the risks, so if you could elaborate on that?

Look, I don't know. I also hear and I also see examples, and I don't want to quote these examples. But tell me, we are in a slightly, I mean, yield compression scenario, right, in the last 1 year. And we've had a cost of funding, which is what it is, right? You were having a growth of -- basically, last quarter, we said BBG and EEG about 39%, 40%, right? So logically, you would think that NIM is going to compress, if what other banks are telling you is basically right. But others that is not happening. So I can -- instead of giving you anecdotes or telling you about practices, maybe it is -- I don't know, it's [indiscernible] or whatever it is, but at the end of the day, my results demonstrate. And I must tell you that we saw in our discussions that yields have to tighten, inflation basically is going to come. I mean, liquidity was a wash. There was some pullback in all of that. I mean, if you go back 6 months ago, we've done so much homework that if in the next fiscal, Adarsh, that interest rates and funding costs actually increased, right? The funding cost increase, right? We will still be all right in terms of our delivery. That is what my confidence about my portfolio is because I have done a significant amount of work from October to the month of March in preparing, basically, for a scenario that should funding costs were to shoot up. What would happen given inflation is going up.

Perfect, Rahul. The other question comes from [indiscernible]. How do you ensure -- Yes.

Adarsh, Adarsh. One other way to think, Rahul is also right, when you hear that the people don't price for risk. We don't price for their risk. We price for our risk, right? So you should have that in mind, right. There is nobody, any of these banks, whatever you are referring to from a credit cost point of view or NPA point of view, [indiscernible] . So for them, they need to price their risk, right. We price our risk, that's all. So our yield cannot be equated to their risk model.

Got it. No, fair point. I'll go to the next question, Rahul, is how do you ensure customer service remains healthy despite a sharp rise in customer base? Small banks, regional banks have always said that that's where they have differentiated from the large banks, right, be this [indiscernible]. So a little more customized service, a little more RM-based approach for the regional small banks help them. So, Rahul, when you go mass scale, is that --

So RM is okay, we have the branch in the RM. But that is not going to basically materially lower customer issues. You have to continuously train your people on how to resolve these issues, and also make it available to the customer that they can resolve it by themselves. So when you -- when I say SME digital banking, 75% of the people are there, customers over there, you should know that most of the options are self-service. So today, it doesn't happen that if they submit a stock statement on e-mail and somebody forgets to basically go out, and this has happened in another bank, forgets to update it and then the limits drop and check start bouncing. In our case, they can basically submit it digitally on the platform, and it does an auto update, so there is no question of limit dropping. What is the nature of these queries? These are the types of queries that happen on interest rates and things like that. A lot of these have to be the front end. So we've gone, in retail SME, 100% digital origination and 100% digital self-service, right? And we are moving towards a majority of basically the disbursement on digital where there is all e-signing, et cetera, no paper involved. It's only the credit piece where we are basically going to continue to scale up, given that we've been at it for the last 3, 4 years on our system. So let me give you a stat, right? I mean, obviously, a bank will have a lot of complaints. And mostly in retail, if there's an issue, I don't get a check book, I write. The way I write, it may be treated as a complaint. I think if you look at the commercial and rural banking, given the number of customers that we handle, it may be about 0.35% of the total number of complaints in the bank. And what we do, because [indiscernible] is so focused on this, is that we look at it on a weekly basis. And each one of these are basically tracked for TATs, and they basically are responded to. And then customers will make a lot of complaints. Somebody may just want a rate reduction, somebody may need freebies, somebody may have genuine issues, right, all of that. But as a bank, as a service company, you have to address it. So we have, in CRB, a customer service team whose job is to only do that. And let me tell you that that team reports to me directly. So I am the owner of basically customer queries in my unit that we basically push. So make your platform that queries are minimized, and when the queries basically come, go out and respond to it very promptly.

Got it. Now the next question is from [ Olivier ]. He asked that -- you mentioned SME being a benchmark in rural and SME. Just -- could you expand on that statement? I think what implies is that the brand or share distribution or there are more moats against which you would probably need to compete for market share gains there?

No. Look, I mean, in this country, everybody has learned banking from State Bank of India, right? So that's just a truism and we have to continue to learn because there are so many good practices. Whatever we may have achieved, fine. It is not not something to talk less about because we've done pretty well, but we still go out and learn. There are areas where I go, and we call on basically the regional managers. We want to work together in the ecosystem, and that's how we basically learned. So SBI goes out and support their clients, basically helps them through tough times or cycles. I mean, they do a fantastic job of that. And there are many other such practices that we have to look at it. At the end of the day, if you look at our balance sheet today, that represents, in its composition, maybe closer to SBI, right, in how we look at it. Because we are not choosing only to do the easy bits, we are learning and choosing to do basically the tougher bits, but managing the NPA very, very prudently and carefully.

Got it. And a related question was like apart from SBI, this comes from Vivek. Apart from SBI, what's like the competition, right? Like, you were starting -- you started to move early and expanding now. Are there similar banks on the private side that you see? Or is it like a fairly large fast mover advantage that the bank has, and how you've kind of gone ahead with the digital -- sorry, with the geographical expansion and the reach and the products in this segment?

Look, sorry, Adarsh, look. If you think about SBI and us, we would be banks above INR 2 trillion in terms of our exposure in SME, and the others are less than INR 1 trillion, so it's okay.

Got it. Got -- No, but it can always be, Rahul, the question is always be either there are pockets people working geographically, not the INR 1 trillion size, but either there are -- are people working from, let's say, 1/4 your size, but getting there and hence, being meaningful competition?

Look, I don't see them in 606 districts and 100,000 villages. Look, Adarsh -- I understand you analyze banks and investors, basically put money and whatever it may be. I think one thing that continues to -- I feel these days is underappreciated about us is our distribution muscle. And whether you look at in the border of Arunachal Pradesh or the border of in Jammu and Kashmir or you look at Mumbai, and there are different banks with different digital capabilities. But when I analyze the SLBC data, I have market share, and I have mostly, in most of these places, 99%, 100% in digital usage. But I don't see that basically in -- when I survey the competition in terms of that data, that -- in the SLBC inputs that come to us. So look, frankly, look, let me put it this way. You can push me and ask me, and I can be competition-centric, right? And I think it's a negative, basically, vibe, or way of thinking. Or we can all look and say that the pie is so large, and maybe I'm learning from SBI, others can learn from us, what we are doing, and that we can all continue to grow. And that is what we are focused on and that's a positive approach, right? I don't basically bother that much about who's the new competition in town because there will always be a competition in some area or the other. I mean, that's the name of the game in banking.

So let me add one thing, Adarsh, let me add you one thing. The network effect the investments and the distribution strength and all of that Rahul alluded to. We'll give you a couple of things. You take the 9-months period to December, 9 months of this financial year to December. We expanded our physical distribution by 171 branches. To supplement the digital effort, we need some physical too, right, 171 we expanded. Keep in mind that the April to June period was a term period, right, almost a washout. Despite that, we had 171 branches. Go back -- during this period, you -- I don't need to say you benchmark and see what other significant competitors were investing and adding distribution. Go back since a period of COVID, take it from March '20 onwards, at beginning of COVID. We've added 525 branches, right, during this COVID period. March '20, April 1st, 2020 onwards, we've added 525 branches. And it takes us longer time to bring this to be a fruitful growth because the kind of maturity model in a branch is 1.5, 2 years, call it, 6 to 8 quarters, it takes for the maturity model. We continue to make this investment for exactly the reason that Rahul alluded to why they are important, and fits our context for the growth, right? That's the kind of investments we have done.

Got it. One of the questions, rather a comment and a request of coming from participants, and I think all of us will echo the same, could you start sharing more granular data on your portfolios on a quarterly basis and lead disclosures for the commercial segment, being the largest bank in the country? It's just that investors deserve a little bit more in this time when this segment is becoming a very large part of the bank, right? So I think I don't disagree, I think Srini, Rahul and the Investor Relations team, that's a request coming in from investors. And I think fairly, it's a fairly, I would say, a practical request in the sense that we should share a little more data on a more consistent basis on this segment.

I see the point. We'll give a thought to see how we should approach it. Quite valid in terms of what is being asked, right? But I do want to give two contexts for you, right? We will give a thought on it and see how we should approach, for sure we'll take that feedback. But two things that I want to leave to talk here. One is in terms of -- I tell you, it happened about 3, 4 quarters ago, right. We gave some -- not necessarily on the yield, I gave some information about the customer acquisition, right, what are we acquiring on the customers. And when we get that information, the next thing I got is for a period of the next 1 weeks to 2 weeks. I got several calls from my branches, right, to say, why are you talking about these things, about how we are acquiring and how many we are acquiring? Because immediately, some of the competition banks calls various regions and districts and intensifies to say, how is the bank across your street doing this and you're not able to do? That is the question that the competition banks locally are getting, right? So my branch people call me to say, what is the need for you to talk and unnecessarily burden us here? Leave us alone. We are doing the business. We let us do, right? So that's one thing, right? The second point I want to leave is that even in this call, you can see in the last 20, 30 minutes, how many times we talked about competition and what competition says and what competition does. So I just want to give the thought on book. This -- I didn't give 3 or 4 quarters ago or somethings, and I got a big backlash from my own people in the branches to say, what are you doing?

Appreciate your constraints as well, Srini, and the bank. So yes, we appreciate that. The next question, a little more macro. So it's a question more on data privacy is, how does HDFC Bank managed to increase exposure to personal information managed through its new digital offerings? All the data privacy and security matters, and it's getting more increasingly, more customer acquisitions, more data insights you get, how do you manage that, Srini?

Well, we have the -- we have an information security team. We have an information security council and a policy that we follow, both taken from the government mandates as well as RBI mandates, and we have a committee at the board that reviews our policies and procedures and how it is implemented. And we believe that we are on the top notch in terms of information security management.

Got it. Rahul, one question and rebuttal to your one plus one expectation and disbursement is obviously, some of this gets premised on strong nominal GDP growth and hence, reflected in the bank's growth. But with inflation spiking, commodity prices being a little heavier, what would be the sensitivity of a little tougher macro on how you would look at those one plus one disbursements and your growth going forward?

So look, at this point of time, from what I see, and we are all watching the crisis and there's a shortage of sunflower, shortage of basically blend oil, shortage of basically -- or not -- I mean, wheat prices have spiked up and so on and so forth. But I don't see an issue with that. Obviously, if the economy changes dramatically, then it's a different issue. Now if this is -- remains persistent, you can see that global supply chains are going to get localized, and which basically means it is going to fuel higher inflation. We are moving away from loss of competitive advantage, and we're going to go towards lower growth. India will have better growth. But yes, we may have an inflation issue, et cetera, and those things that are given because oil prices are high and [ CAD ] will go up, et cetera. But remember, we are the only large market that is open in a very positive manner to the Western world, right? So we will always have supply chains that will get developed in the country. And as these things exit from other areas of the world, they may not just go back to the U.S. or Western Europe, some of them may just come over here. So it's a tough one, but it's not a given that it's all negative, negative, right? And we have to bear that in mind. Obviously, if the situation changes dramatically, then we're going to alter our plan, right? All plans are dynamic. You assume a certain baseline when you think about the growth. I mean, during the pandemic, I was running a corporate bank. At that point of time, you guys used to ask the question all the time, this dramatic growth, will it lead to NPA, lowering of asset quality. None of that has materialized. But at that point of time when in 2019 February, we went through our budgeting cycle, and come April, when we were under lockdown, we went out and increased our budget in corporate bank, right, so think the dynamic. And we moderated it a little bit in SME. So we will basically look at it, right, rather than just say, okay, this is what we have to do. So we'll have -- we'll see. But I think basically, as you can see until June that much visibility you have, you look all right. And then by June, it should be clear what will be the shape of the conflict and how the world order changes, and whether the inflation is for the long haul or not, and then we'll take a call here.

Perfect. And maybe in the interest of time, I'll just squeeze in the last 2 questions, more macro. So either Srini and Rahul, what you see on the ground is, there is a slowdown in rural demand, right, that reflects in 2-wheelers, tractors. FMCG companies selling soaps, oils talking about a slowdown. Crop has not been bad, so is it sentiment? Is it some impact from rural savings getting a little depleted because of COVID, what --

Yes. So COVID, basically savings did get depleted. There was January, which was an issue. But look at basically the wheat crop that is coming in the month of April. People are saying that they've not seen these prices or expected levels of profitability in the last decade or more, right? Soybean prices are high. Cotton prices are high. You go [indiscernible], so there is money. In fact, today, the issue is that as we are approaching quarter end, you continue to acquire customers, you continue to make the disbursement, but you also have a lot of funds that come in because sales are happening or government is releasing money, and that comes and pulls you down in terms of basically your earning assets, right? And it's not a bad thing that people are paying you, but it's sort of all right. I mean, that's not the thing that I see. Yes, there is a pandemic. I mean, there's a lot of research, I have also read through in terms of [indiscernible]. People at really lower end, falling below the poverty line. They're not able to go out and purchase 2-wheeler and that's an indication, et cetera. But I think from what I see in my client base, which is across 100,000 villages and about 0.5 million farmers or so, I basically feel comfortable with that situation today. And in fact, I think that it is only credit positive because the cash flows are going to remain very strong.

Perfect. And the last question is, what do you say is a larger contributor of your growth rate, right, or growth expectations? So market expansion, market share gain or formalization of, like, credit to those segments?

It's all the 3. It's an easy one.

I knew that was coming. But no, this has been super helpful. We have taken a bit of more time than what we budgeted for, but this has been very helpful, very insightful, Rahul, Srini, Ajit and the whole team. So thank you for joining us, and -- and yes, we look forward to more such interactions and more importantly, as investors request and we request, hopefully some more [indiscernible] as well as we go along.

Sure.

Thank you, and see you, Srini and see you, Rahul. Take care.

Thank you. Thanks for engaging. Bye-bye.

And thank you, participants for joining in. Bye-bye.