Our MD & CEO's Message in the Integrated Annual Report 2020-21

Dear Stakeholders, 

Let me start by wishing all of you good health and happiness. The financial year gone by has taught all of us to value this more than anything else. Many of you may have lost your near and dear ones. My heartfelt condolences to all of you. We in the HDFC Bank family too have lost several colleagues. My head bows in grief and sorrow. We are supporting and will continue to support their families.
 
The year gone by saw people across the world being largely confined to their homes with several travel restrictions in place. They faced myriad personal and professional challenges perhaps never before encountered in our lifetime. This obviously had an effect on the economy with the world officially being plunged into recession.
 
Governments and Central Banks across the world reacted introducing a range of measures to revive the economy and help people move forward.
 
Challenging Environment 
Our country was no exception. The Reserve Bank of India (RBI) and the Government introduced a slew of measures to revive the economy. These measures bore fruit with the economy growing by 1.6 per cent in the fourth quarter of the year while it had contracted by 24.4 per cent at the end of the first quarter. In the current financial year India is expected to be one of the fastest growing economies in the world. The second wave of the pandemic has dented the optimism a bit, but the peak of the pandemic clearly appears to be behind us. As the vaccine rollout gathers momentum, the economy is expected to be on a much stronger footing especially from the second quarter.
 
Our Performance
We posted a healthy growth in Net Profit, Net Interest Income and Balance Sheet size without compromising on asset quality. Net Profit increased by 18.5 per cent to Rs31,116.5 Crore in FY21 and balance sheet size by 14.1 per cent to Rs1,746,871 Crore. Gross NPAs increased to 1.32 per cent in FY21 from 1.26 per cent in the previous year. Net interest income, an indication of the difference between interest earned and interest paid grew by 15.5 per cent to Rs64,879.6 Crore. The details of our performance are elaborated in the report.
 
I am proud of my colleagues and thank all of them (and their families too) for this performance despite, the difficulties they had to face during the year. As an organisation we learnt and relearnt on the way, pivoted our way to a Work from Home culture and continued to serve our customers. I am delighted by the way our colleagues responded to the myriad challenges we all faced.
 
Strengths 
At this point I would like to elaborate on some of our strengths and also talk about things that we could have done better.
 
One of our biggest strengths has been the legacy of over a quarter century. Our iconic ex-Managing Director, Mr Aditya Puri created an institution with strong foundation and fundamentals. It is a huge advantage as well as a privilege to inherit and build upon this. Thanks to his leadership, we today have a strong balance sheet with among the lowest NPAs in the banking industry and strong capitalisation. This has helped us to lend even during difficult times, build market leadership and deliver shareholder value without compromising on our commitment to society and the environment.
 
Areas for Improvement
Technology. Quite frankly, it continues to remain both a strength as well as an area for improvement. In the last couple of years our technological capability has been questioned. Justifiably. But at the same time, we cannot afford to miss the big picture. We would not have become a Bank of this scale, size, and grown market share consistently year after year, without having a strong technology backbone. We are one of the largest transaction processing Banks and have come up with cutting edge customer solutions like 10-second personal loans and digital loan against mutual funds. Not to forget the rollout of Video KYC during the pandemic which helped people to become a bank customer from the safety of their homes. Or the DigiDemat and Trading Account which we introduced in partnership with our subsidiary last year. In the last 28 months, we have, however, been in the spotlight for the wrong reasons when it comes to technology. Also, there have been deficiencies in compliance.
 
The technology problems as well as the compliance issues have led to regulatory actions. This brings me to my focus areas.
 
My Focus Areas 
The last technology downtime led to the Reserve Bank of India banning us from issuing new credit cards as well as putting on hold new launches under Digital 2.0 initiative. Further, the regulator also appointed a third party audit of our IT systems. This audit is now over and the report has been submitted to the regulator. We now await the decision from RBI.
 
As a Bank we are certainly sorry for what has happened. And have taken this as an opportunity to improve and redouble our efforts to fix this problem for good. We have now embarked on a scale changing technology adoption and transformation agenda to help drive our ambitious future growth plans. Some of the specific initiatives that we have embarked on in our Technology Transformation Agenda are:  

1. Infrastructure Scalability: We have invested heavily in the scale up of our infrastructure to handle any potential load for the next 3/5 years. We are also in the process of accelerating our cloud strategy to be on the cutting edge leveraging best-in-class cloud service providers.
2. Disaster Recovery (DR) Resiliency: We have strengthened our process of monitoring our Data Centre (DC) and have shifted key applications to a new DC. This includes key consumer facing ones. We have strengthened the Disaster Recovery trials and processes so as to bounce back to serve our customers faster and quicker.
3. Security Enhancements: We have strengthened our firewalls further. We have to be scanning the horizon for potential security issues and be ever prepared to face them. We haven’t had any security issues in the past. But this is always an important area of focus and action plans are underway for further robustness.
4. Monitoring Mechanisms: An enhanced application monitoring mechanism has been put in place across the board to enable us to keep our IT systems Always On.
   
   

While we execute this Technology Transformation agenda, there will sometimes be pain and outages beyond our control. But this is the bitter pill we need to swallow. As mentioned earlier we are putting in place measures that will ensure that downtimes will not be prolonged. Yes, it will take some time but we will get around this. And live up to the standards that people have come to expect from us.
 
Compliance 
There has also been some discussion around the deficiencies in compliance regarding the selling of GPS products. For many years we had been bundling the financing of GPS systems and cars. The teams believed this was a routine lending activity. Also, a particular vendor had entered into an arrangement with us directly. These products were never sold on a standalone basis but only bundled along with the purchase of cars. In November 2019, a whistle blower alleged that the vendor was incentivising some of the employees in the auto loan team to bundle these products with our car loans. We immediately conducted an enquiry and basis the findings have taken necessary actions against the involved employees including termination of their services and also terminated the arrangement with the vendor. RBI in the meanwhile also issued a show cause notice in connection with the Bank’s arrangement with the vendor. They contended that such an arrangement was in violation of provisions of the Banking Regulation Act, 1949 and hence the Bank is liable for penal action.
 
Subsequently we have been asked to pay a penalty of Rs 10 Crore and have also been instructed to repay the commission that we earned from this process back to customers. We accept this verdict and will comply with the directives.
 
Importance of Culture 
These incidents have made us realise that we need to reiterate what culture is. Business objectives should be driven keeping in mind the three Cs: Culture, Conscience and Customers. Customers are at the heart of everything we do. But every individual has to ask himself: Am I doing the right thing for the customer? Am I doing the right thing for the organisation? Does my conscience permit this? As a Bank we have always taken pride in our integrity. However, the unscrupulous practices of a few people has made all of us resolve for far greater process controls to address this. I am personally determined to fix this. At an organisational level there is a greater focus on the role of Credit, Risk, Compliance, Audit and other enabling functions so that our checks and balances get strengthened.
 
Customers are the reason we exist and our primary goal is to serve and delight them. We are proud of what we have achieved so far and still understand that we have a long way to go in improving our customer experience as consumer behaviours and expectations are changing every day. We realise that. As a Bank, we strongly believe we exist to enable our customers make better money choices, today and tomorrow. To pursue and realise this belief we are encouraging within the bank the principles of Simplicity, Knowledge and Empathy. Simplicity to make day-to-day transactions for our customers intuitive and rewarding, Knowledge to help customers realise their future dreams with the right choice of offerings from us and Empathy in the way we deal with our customers. We have put in place a systemic way of measuring our Customer Experience in the last year by adopting the Net Promoter System. We now have the ability to listen to our customers post transactions and journeys and we commit to use this feedback to solve their problems. We are committed to relook at the consumer journeys and redesign them to delight our customers including making investments in newage omni-channel customer experience technology and training our people to enable and empower our front end colleagues to serve our customers better.
 
Reinforcing the three Cs: Culture, Conscience and Customers across the organisation is a clear focus area for both me and the Bank.
 
Strategy 
Let me now come to our strategy. The hallmark of our strategy is that it has the ability to adapt, and evolve without losing the core. We are building upon our stated strategy of expanding our distribution footprint leveraging the Branch Channel and Virtual Relationship Channel with the addition of Digital Marketing as a key channel. This will enable us to capture the growth potential in both India and Bharat and different consumer segments like the tech-savvy and millennials going forward. While we continue to focus on the Corporate Cluster and Government Business to increase penetration, we have created a new business segment of Commercial (MSME) and Rural Banking to capture the next wave of growth. We will continue to strengthen our leadership position in the payments business and retail assets business and have added Wealth Management and Private Banking as a core focus area for us.
 
All these core business areas would be supported by further strengthening our foundational capability in Technology and Digital domains.
 
Our subsidiaries help us fulfil consumer needs for holistic financial solutions and we will continue to invest in them.
To realise this strategy we have unveiled Project Future Ready
 
Project Future Ready 
As a Bank we have grown for over a quarter of a century due to our ability to execute what we have laid out as per our plans. Project Future Ready aims to continue the same tradition by calling out clear areas of focus to further add strength to our strategic and execution muscle.

1. We have clearly identified our growth engines: Corporate Banking, Commercial Banking (MSME) and Rural, Government and Institutional Banking, Private Banking, Retail Assets and Payments to be driven by our delivery channels of Branch Banking, Tele-Sales/Service/Relationship and Digital Marketing. These growth engines would be powered by our robust technology and digital platforms. These growth engines will account for the bulk of our future investments and can be broadly classified as Business Verticals and Delivery Channels.
2. Our growth engines will be fully supported by our renewed focus and vigour on Technology/Digital investments that would act as the core backbone to both Run and Build the Bank. As mentioned earlier, while we strengthen our Enterprise Technology Factory to keep our systems always ‘ON’, available and secure, we are creating a new Digital Factory. The mandate of the new Digital Factory is to foster innovations in the Product and Consumer experience domain through own build / collaborate with new age fin-tech and big-tech companies. Hollowing the core, moving to the cloud, creation of micro-services / API based architecture, innovating through partnerships leveraging API interconnectivity all backed by a strong Data / AI strategy would form the core of what we intend to pursue going forward. We are working on many new exciting opportunities to improve our consumer experience and introduce new innovations like ‘Banking on the Edge’, which would be announced in due course of time.
3. We have also put in place the right talent to drive Project Future Ready. The underlying philosophy is to develop employees with diverse skills, multifunctional exposure with a One Bank collaborative mindset to deliver on Project Future Ready and enable more opportunities for career growth.
4. We will continue to strengthen our core enabling functions of Internal Audit, Credit and Underwriting, Risk Management and Compliance/ Governance to support the growth ambitions.
   
   

I firmly believe Project Future Ready will catalyse, create and capture the next wave of growth.
 
Environment, Social and Governance Strategy 
The year gone by has brought home to all of us how interconnected our destinies are. Our ESG strategy is based on this interconnectedness, especially in the Environment and Social spheres. Climate change is possibly the biggest threat to humanity after the pandemic. Global warming has huge potential to disrupt both lives and livelihood. Over the years we have been taking small but sure steps to mitigate the impact of global warming.
 
Recently, we have committed ourselves to becoming carbon neutral by the FY32. As a part of this initiative, the Bank is looking at reducing its emissions, energy and water consumption. The Bank will continue to incorporate and scale up the use of renewable energy in its operations. As a part of the roadmap, we will focus on offering loans for green products like electric vehicles at lower interest rates and incorporate ESG scores while making credit decisions. The Bank is also working on a framework for issuing green bonds. All this while we continue to transform lives through our CSR initiatives under Parivartan through which we have already impacted over 8.5 Crore lives.
 
Compassion 
I would like to end by once again thanking all my colleagues and their families for their tremendous efforts this year in spite of trying circumstances. Finally, my heartfelt gratitude to our customers who continue to repose their faith in us and keep pushing us to strive for more. To all of them, I would like to say this: There might have been instances where we may not have kept our timelines in serving you, as we used to, due to the pandemic situation we have found ourselves in. Our sincere apologies and many thanks for your understanding and consideration. I want to reiterate that we are committed to delight you with renewed vigour as we move forward.
 
One last word. As we grapple with many pandemic induced uncertainties, it is important to not lose the human touch while dealing with people in our day to day lives. It is the true wealth that we can bequeath to the world. While business and professional goals have their place, nothing really comes before human life. Take care of your health and stay safe.
 
Sashidhar Jagdishan
Managing Director & Chief Executive Officer
HDFC Bank Limited

 To read the entire HDFC Bank Integrated Annual Report 2020-21, click here.