Filling the shoes of Aditya Puri—the 70-year old iconic banker who retired from HDFC Bank after a 26-year-long career on October 26—was never meant to be an easy task for Sashidhar Jagdishan.

Jagdishan has been with HDFC Bank since 1996 and was its chief financial officer since 2008. In many ways, he is the perennial insider, with an intricate knowledge not only of the bank's history, but also the many challenges it faces in these uncertain times. And many did think that as an insider, Jagdishan's first 100 days would have been easy.

In fact, Jagdishan’s first month in office, if viewed through the lens of market capitalisation, seemed more than smooth as the bank added ₹1.14 lakh crore in value at ₹7.93 lakh crore on November 27, compared to ₹6.79 lakh crore on October 27 when Jagdishan took charge as HDFC Bank’s MD & CEO.

But barely a month into his job, it seems that Jagadishan has been handed his very first challenge. And from none other but from the country's banking sector regulator—Reserve Bank of India (RBI).

The broad contours of the event are well known by now. On December 2—the 37th day since Jagdishan took charge—an order from RBI asked HDFC Bank to temporarily halt all digital businesses under its yet-to-be-launched program, Digital 2.0. The private lender was also told to stop sourcing of new credit card customers.

RBI took this step in reaction to a service outage on the night of November 21, which lasted for nearly 12 hours, and had been HDFC Bank's third major outage—the other two occurring in November 2018 and December 2019.

In response, the next day when HDFC Bank submitted the regulatory action in its stock exchange filing, the stock corrected by over 2%. In value terms, at the close of trading on December 3, HDFC Bank’s market value was eroded by a whopping ₹16,464 crore—at ₹7.58 lakh crore compared to previous day’s ₹7.75 lakh crore.

While HDFC Bank tried to downplay the regulatory clampdown, but by evening Jagdishan had reached out to the bank’s customers in a message on the bank’s website. Assuring that the bank would comply with the regulator's requirements, the new CEO tried to assure existing customers that there was no reason to worry, and they can continue to transact with the bank without any concern.

“We realise that as our valued customer, you expect us to maintain a very high standard of service quality and experience,” Jagdishan wrote. “And sometimes, we have not been able to live up to your expectations. For that, please accept our sincere apologies,” he added. Jagdishan also noted that the bank will work with the experts and the regulator to fortify the identified areas for improvement.

A day later, on December 4, two days after the order was issued by the RBI, governor Shaktikanta Das made a major exception to his post-policy media interaction. While ideally the central bank office bearers dodge questions pertaining to individual banks, Das broke with the unsaid protocol and addressed the HDFC bank issue. He told media that as a custodian of the digital payment segment, the central bank is bound to act.

A Business Standard article quoted Das as saying, “You see, we cannot put thousands or lakhs of customers who are using digital banking into any kind of difficulty for hours together…. Especially when we are ourselves giving so much of emphasis on digital banking, it is important that the public confidence in digital banking is maintained.”

Digital banking is now a serious area, and RBI realises this. While the embracing of digital banking got a push during and after Demonetisation, the Covid-19 pandemic has been an even larger catalyst, accelerating its adoption. Experts argue that even with the pandemic subsiding in the near future, the changes it has wrought in people's behaviour—of which reliance on digital being an important element—is not likely to go away. The post-Covid world will be a very different one. The key takeaway from Das' comment, therefore, is that RBI will not exercise leniency where digital banking is concerned. It will clamp down, and clamp down hard, if need be.

Several analysts too seem to echo this interpretation.

A December 3 research report from JM Financial, by a team of analysts led by Sameer Bhise, pointed out that RBI's tough stance is an indication of its non-tolerance towards technological lapses in the banking infrastructure. In fact, the report argues that such lapses from HDFC Bank weren't really expected. “Given HDFC Bank’s dominant status in payments/credit cards and its strong commitment to tech-enabled growth, this development comes as a negative surprise,” the analysts wrote.

Moreover, digital banking aside, the gag on adding new credit cards customer is a business challenge for HDFC Bank. As per data from RBI, at the end of September, HDFC Bank has outstanding credit cards in excess of 14.98 million, which accounts for over 25.5% of over 58.7 million outstanding credit cards across the country. And in terms of the credit card point of sale (POS) transactions for the same month, HDFC Bank with transaction value of ₹15,273 crore accounted for 31.3% of the total credit card POS transactions worth ₹50,140 crore.

According to the JM Financial analysts, HDFC Bank’s credit card base has been growing at a compounded annual growth rate (CAGR) of 17% (in volumes) from FY17 to September 2020. They also believe that this technological issue could take 3 to 6 months to resolve, and, thus, could impinge on growth of card portfolio which accounts for nearly 5.5% of HDFC Bank’s loan book.

The analysts, however, do also remark that HDFC Bank would be able to resolve these technical issues and “assuage the regulatory concerns satisfactorily over the medium term.” They did not change the bank's rating.

The numbers too seem to be on the side of HDFC Bank. Government-owned State Bank of India (SBI) and HDFC Bank's private sector rival, ICICI Bank, had clocked POS transaction values of ₹9,915 crore and ₹7,466 crore each respectively in September. That leaves a substantial gap of ₹5,358 crore between the number 2 and number 1 player, and a gap of ₹2,449 crore between the number 2 and number 3 player. Clearly, SBI and ICICI Bank, with 11.01 million and 9.27 million outstanding credit cards each, are unlikely to shake-up HDFC Bank’s number one position in the medium term.

Similarly, according to a report from Edelweiss Securities, three analysts led by Santanu Chakrabarti point out that HDFC Bank's current disruption will be short lived and would break no new ground on the private bank's long-term competitiveness. In the trio’s view, it is obvious that the bank will have some elements of its digital backbone dependent on legacy IT systems. “After all, one of the oft touted competitive advantages for fintech and new lenders has been zero legacy tech,” the trio noted. “The incident is, therefore, not a reflection on its new leadership, but wages of approaching middle-age for the franchise.”

Chakrabarti and team also point out that in regulatory regimes, across the world, fines have often been perceived as an easy way out for financial institutions. “To that extent, a moratorium on new business acquisition until all the boxes are ticked in RBI’s check list demonstrates regulatory intent to effect intervention,” they noted. “It also puts HDFC Bank’s tech plan on a non-discretionary accelerated time frame,” they added.

Clearly, as these analysts argue, if HDFC Bank uses this opportunity to go ahead with all its near-term planned fixes, and not just restrict itself to merely the regulator’s mandate, it could, on balance, gain from this incident. And, Jagdishan, in his message to customers, seems to be thinking on those exact lines: “Internally, we are looking at this as an opportunity to further improve ourselves and emerge stronger.”

Jagdishan also emphasised the bank’s commitment to its customer, and said that it would leave no stone unturned in their quest to ensure a smooth user experience across its digital channels. “We shall keep striving to further reinforce the trust you have reposed on us,” Jagdishan said.

Of course, the large shoes Jagdishan had to fit in have become even larger now. And, RBI is not a casual challenger to have an encounter with. The ink on Jagadishan's first challenge will not go dry soon.

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