Yeah. Hi, everybody. On behalf of CLSA, I'd 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 has 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. Participants, I think the reason why we thought we should have this call was, you know, we will 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. That's largely the topic of discussion today. Again, Srini and Rahul, welcome. Since I'll just like to start off, Srini.
First is, as we get started on the conversation, I just wanted to understand from a top-down perspective, the way the banks disclosed data and looked at segments was more like retail and non-retail earlier. Sometime last year, we kind of looked at the book and now we split it into three parts, where we've carved out commercial and rural, and obviously, in a lot of conversation, we've spoken about the growth prospects as well. Can you give a top-down view of why this segregation was done and how you are looking at it and how this piece blends into the bank?
Okay. No, very good. Thank you. That's actually takes us back to early part of last year when we announced that the future-ready organization, right? That was, we announced it in May. We'd been working at it from beginning part of that 2021 time period. What we had seen, right, two underlying facts which are there. One, this particular segment of business, the middle market, we call the SME, the rural, they are for good part integrated as one and waiting to grow big, right? We wanted to be capturing a large part of it. That's one in terms of the opportunity to be positioned for future and keep growing.
The second aspect of that is, during the COVID, 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. Then that is that combined with that 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 had shown tremendous amount of growth over the three, four year period, driven through digital, driven through relationship management and the reach that we do, and how do we bring that and participate here?" Which means, take Rahul as an example, the leader who was running that, bring that experience of the relationship with corporate, bring it down here, leverage that supply chain, distribution chain connectivity and broad-base that growth kind of a mindset and approach, and using the digital approach to driving it.
That was part of how we wanted to participate in, one, market opportunity, two, our execution strength, and we tried 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. It's critical to the bank. I don't need to talk about the other aspect of how it fits in with the financials and so on and so forth. Rahul will talk about how from a liquidity point of view, asset growth point of view, profitability point of view, one of the top-notch in the company, and so how do we grow that bit. That is part of the genesis of how this came into being at that time.
It fitted in with what we call the future-ready organization at that time.
Got it. No, that's useful, Srini. Since we have you, I will, given it's topical, before I move to Rahul with very specific questions, we've had a bit of a macro issue, right? Oil's at $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 and asset quality, if at all?
Okay. Good. Actually it's early, as you said, but it's a good way to think and we do need to keep a watch on these things, right? We commit continuous assessment of these, 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 scenarios assumes that until June, there is some level of such anxiety.
Under that scenario, our economists have viewed and reviewed to say that the GDP growth in FY 2023, which we expected to be, call it 8.2%, 8.3% thereabout, 8+% , can come to slightly above 7+% . There could be a 100 basis point impact, 50 basis point impact to the overall economy's GDP. That is. Think about that as a very macro impact that it could have, right? Now, if you peel that and go down below that, okay, if that's at the high level, what does it do to the various sectors and segments, right, if you get down to that? If you go down to the retail segment or consumer segment, private consumption to be much more precise.
Private consumption part of the GDP, you know, is about, call it 60% or thereabout, right. The high 50%, 60 kind of percentage is the private consumption component in the GDP. Right. Within that, our economist estimate is that about 70% of [oil] is the component that gets driven through fuel, transport, and so on and so forth, right, out of that. Now that is where this particular oil and the direct, indirect impact of all of those comes into that, right. That is where that impact on the GDP can come from. That's where it can impact by about 50 basis points or could be 100, but 50 basis points at least 7.2%-7.7% is what we estimate the GDP will be from 8.2%, right? It can change like that.
That's one element of it. Again, that is one element of it. The second element of this is also determined, which is currently unknown, but we're keeping a watch on it and as much as you will analyze and see we are, 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 what gets flowed through. Remains to be seen. We don't know at this stage, right?
Whether it can impact INR 10-INR 20 per liter to the ultimate gas prices at the stations, we don't know, right? How much will get passed on, it depends on that. Within the literature there is a bid and ask range in terms of what that impact could be. That's on the macro, what it can do. Now, does that change significantly the disposable incomes? Consequently, when private consumption goes down and so on, what is the disposable income that can be impactful to the end consumer?
There can be slight impact, but we don't think that it will meaningfully change because at the end if it's a 50 basis point GDP impact and there will be some, but not a zero impact, some impact in 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, right, in inflation, while 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% is expected to go to 6.2%. From a nominal growth point of view, it will continue to be at that kind of a previous level, right, call it 13% or thereabout. 12%-13% or so nominal growth, right?
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. Then from a 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 incomes, some marginal impact can be there because they will spend a little more, but it cannot because these are a discretionary for good amount of good part, right?
There may be some pullback into certain other kind of a spend and, there quite an amount of discretionary spends that they all have at the consumer level to offset this impact. If it sustains for a longer period, it's a different story, right? We need to figure out what scenarios we need to run to look at that. 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. If there's any change in the plan on that, which so far we have not heard if there is, then there will be some kind of a term outplay.
That means either, capacity augmentation or participation in the infrastructure can be impactful. Again, within reason, depending on the time that it takes to come back, to not full normal, but at least some semblance of normalcy. It remains to be watchful, and seeing what happens to that.
Got it. No, that was helpful, Srini. Now I'll probably switch to Rahul right now. You know, obviously the segment is a large part of the book and a heavy lifter 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 competitors in each of the segments of the book? If you know, a general background because you know, as 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 six distinct divisions, you know, in commercial and rural banking. If you start, you know, from the first one, that is the mid-corporate group. We call it emerging corporates. These are all corporates, you know, with a turnover somewhere between, you know, INR 250 crore and INR 1,000 crore. We have a successful business, you know, it's a strong, you know, growth area. Below this segment is the wholesale SME business, which are businesses with turnovers, you know, between INR 7.5 crore to about INR 250 crore. This is again a business that's been with me for four years. We're just trying to replicate, you know, the model into, you know, many other areas.
Below this segment is the retail SME, you know, the small mom and pop shops, you know, hardware stores, et cetera. These are up to turnover of, you know, INR 7.5 crore. Credit, you know, can be very small. The number of entities are very, very large. We also have healthcare finance, where we finance, you know, hospitals, et cetera, and equipment. And that's, you know, the fourth piece. There are two other pieces. One is transportation finance group, where we finance either dealers or end buyers of commercial vehicle, construction equipment, tractors, et cetera. You know, that is the transportation finance group.
The last piece, you know, which is a 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, you know that these are three to six groups. Why are these together and what is, you know, the synergy that I'm supposed to, you know, bring and drive? Right? Number one, you know, basically there is commonality of delivery channels. We work with, you know, branches. We work with a virtual relationship management team. We work with, you know, [TSE]. We also have, you know, direct sales channels. It is basically a common sourcing and delivery platform through which, you know, we go out and approach this business.
Secondly, where are these businesses located? Predominantly they are located in semi-urban and rural segment. There is a certain amount of geographic synergy that, you know, you are pushing. If you see, you know, I mean, if you look at India, the opportunity is in, you know, 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, you know, a large corporate, and to an SME, right? You make 2.5 x, you know, earnings in the SME business.
Now you just have to basically make sure that you manage, you know, the NPA very tightly as you would do in the large corporate segment. Suddenly you have a huge, you know, earnings kicker that, you know, comes in, right? My move into, you know, this business is to bring that GNPA, you know, discipline where we've made a significant amount of progress and to, you know, basically give that earnings alpha, you know, to the company. The fourth thing, which is very important, is that this book is predominantly priority sector lending. You know, you are in India, you are a bank, you want to continue to grow, you know, with great ambitions.
You will always, you know, basically be looked at whether you are doing your bit in terms of directed lending, you know, practices. This is supposed to, you know, grow keeping in mind the overall growth plans of the bank.
Perfect, Rahul. Thanks for that. Just from a market sizing perspective, right? Just putting things together, this is about INR 3.8 trillion rupee book. 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. How do you look at the market sizing and the opportunity that comes with that?
If you look at the, you know, MSME potential lending in the country, you're looking at what is, you know, currently funded in working capital and other, you know, banking areas by scheduled commercial banks as well as NBFCs. That sizing, if you look at, you know, 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%. That puts us as, you know, the largest in the segment. Fine, you know, 13% may look, you know, high.
If you look at the total credit needs, you know, in the MSME segment that exists in the country, which is not being serviced, either, you know, by banks or being serviced as, you know, LAP or through the informal systems, that's about, you know, INR 50 trillion. Now, if I look at, you know, INR 50 trillion, the market is, you know, 2.5 x bigger and you divide, you know, 13 by 2.5, since you're so smart in mathematics, suddenly you will find that, my market share is, you know, 4% or 5%, should that be?
Obviously, you will ask me saying, you know, when you grow, you know, it will have other issues, you know, in this area, and we are going to address as you go along, you know, all of that question. The second thing is the transportation finance group, right? We choose and play in certain areas. MHCV is an area of strength where I think in a year we've increased our market share from about 17% to about 28%. In the LCV as well as the tractor finance, you know, business, I think, you know, we've increased our market share from ballpark about 5% to you know, very high single digits.
That's sort of, you know, where we are and we are taking it, you know, one step at a time. That's sort of where we are. In each one of these segments, the growth potential is, you know, pretty strong. Since you asked, you know, who do we see as competition? Yes, you know, I mean, there's no dearth of competition in India. You know, there are 230 banks of all shapes and sizes. The one that we find have a lot of respect for and continue to learn from is State Bank of India. That is what we would like to continue to, you know, emulate our model upon with our own HDFC Bank way of doing business.
Perfect, Rahul. That is super helpful. Now, obviously each parts of the book that you alluded to would have a growth prospect, right? You've been talking about very strong growth prospects overall for the book, right? Within that, what parts lead this growth engine forward? There'd be certain parts where you would be, from a growth perspective, next three to five years more bullish on. If you could just highlight the key drivers out of the five, six, seven of them, that'll be helpful.
Sure. Number one is, you know, just basically geography expansion. This is a fundamental tenet. We are in 100+ cities in the mid-corporate group, and next year we will cross 200 cities. We will have presence, we will have lending, you know, 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. For all the listeners, you know, these are the smallest sort of administrative zones of the country, and there are about 730 districts in the country.
We estimate that in a couple of years, you know, 650 ballpark is, you know, where you find economic activity. The third piece is the village. We today are present in about 100,000 villages. We've made progress, you know, since October when we said we're gonna expand in this area. By in two years from now, our estimate is to be in 200,000 villages. Now, you think about 200,000 villages. Do I saturate my growth, you know, 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 INR 50 trillion. There's a lot of, you know, people who borrow from outside. 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, you know, continuing to fund all of their EMI payments without any default or stress, right? If you think about, you know, basically in that sense, today we have a lot of data, the GST data.
Adarsh, you go to a kirana store, even he or she is filing GST today, which is pretty helpful in terms of going out and doing, you know, expansion of credit and bringing all of these entities in. Think about healthcare finance. In the last four years, there are about 30 hospitals and medical colleges that have been built in Uttar Pradesh, and in the next three years, there's a similar number which is getting constructed in every single district, which is, you know, 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, you know, how you look at it. Think about rural.
You have this piece where you know agricultural is just about 15% of the GDP, but 60% of the people live over there. If you think about you know 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 you know two-wheeler loans. In a very small village today, you find showers. Normally people use a tap you know in villages to take bath. You have the electric you know pumps available.
I met a customer in Indore yesterday, a good client of ours, and these are solar pumps, you know, which basically get you the water under pressure, and they're using that. You're having, you know, Western-style commode. Sorry for, you know, just naming it, but those who are in India, they will know, you know, what a dramatic change that is, from open defecation to, you know, basically having a toilet inside, the Indian style to the Western style. You have all of these things, you know, getting sold. Rural is changing, you know, quite dramatically.
Rural has an opportunity because even today, 70% of rural districts have a credit to deposit ratio of less than 10% because banks have, you know, not done justice in terms of just the aspirations of people over there. Transportation, there is a lot of, you know, focus on multi-mode, et cetera, you know, that is happening. That's why I continue to be, you know, quite bullish, you know, about the prospects of this business, and we talk about a dramatic, you know, one plus one expansion next year.
Now you may ask saying, "How will you do, you know, basically this 1 + 1 ?" Today what has happened, Adarsh, is that in the last two years, not only the large corporates have delevered, even the SME have delevered and balance sheets are strong, right? Now they are going through the growth phase. We have already gone out and given 20% or 30% ECLGS, which does not require collateral. They have the loan availability for funding, you know, this particular growth. We are in a good position because, you know, we basically were strong in terms of ECLGS extension and we're gonna, you know, basically see the benefit of that in business growth in the next two to three years.
The third thing I must tell you that the cash conversion cycle of these businesses has, you know, 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, you know, basically, dream about a dramatic expansion, you know, 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, you know, risk seniors. We just want to capitalize on this huge opportunity that exists today.
Yeah. Rahul, you didn't mention about geographical reach and how you wanna expand that. Just to start off, what puts HDFC, you know, obviously you're a large player already in this segment, what's the key unique moat that HDFC would have where you could like make it into a leadership business?
You know what customers tell me. Since 1st of October, every week, you know, I've traveled and not to the big cities, you know, but to the small cities. 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 small businesses traditionally, you know, banked with the banks where relationship was started by their grandfather or great-grandfather. These are, you know, good luck accounts. During the pandemic, you know, when digital wasn't working, they basically said either they can have the good luck account or good luck in terms of continuity of business.
Which is when, you know, basically there is a dramatic movement that has started happening. 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, you know, contracts, you name it, FX, et cetera, you know, all of that is being used. Many clients say that they actually, you know, give us a premium, because they are, 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?
You know, I mean, the largest bank over there is the J&K Bank. This district is 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 two things for, you know, being successful in this business. For being successful in this business, you have to have, you know, the distribution, which is what the bank has, right? In every single area, not just CRB. The second is that you have to have digital.
Because today, you know, when they have to get started before they get used to it, they need hand-holding, you know, which is what basically, you know, is something, you know, that they need help with. The third thing I also must tell you, the second thing other than my digital is that we have been investing in this business, you know, for several years. I've been around, you know, for last four years, right? We've been at it. You know, 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, you know, basically, be married, so, you know, the family of the wife, son's wife's family. When you think about it, you know, that network effect is, you know, what is benefiting HDFC Bank today, which is, you know, very difficult to replicate. Because, if you look at, the network law or value of network, Metcalfe's Law, right? The larger number or market share you have, the faster you should expand, and that's, you know, how you look at it. 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, can you just talk about directionally, even if not specific numbers about profitability of the portfolio? Once you think of expanding it the way that you are intending to, does that materially change? Did you see change in profitability? The absolute profitability directionally, and then does that change once the book starts growing at a fast pace?
Profitability, I won't, you know, sort of comment. I mentioned, you know, that INR 1 lending, you know, what do you earn in SME in you know the general industry, and you're a smart guy, you can, you know, basically go through that, make a living out of it. 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, you know, customers in urban centers, and there are a lot of banks over there.
The story of India is, you know, basically going deeper. Obviously, managing, you know, the book quality is an issue, but, you know, that we have a method behind our madness, you know, which has worked for us, right? You know, that's why the numbers are so dramatically, you know, different compared to what we see in the industry. When you go deeper, you know, today, to the shopkeeper, to the street vendor, to across, you know, basically the country, the loan sizes are miniaturizing. They're getting smaller, right? When it miniaturizes, you should see that your profit basically increases. You have to miniaturize your loans to maximize your, you know, profitability, because to a certain extent, you know, you're right.
As you go to a certainly, you know, smaller number, deeper, much larger book, much larger number of entities, you have to build a certain, you know, level of cost of credit while you are, you know, managing it. You will have to work through all of that. Frankly, I think, you know, I basically see a better outcome, you know, two, three years down the road, than it is today because loan sizes will continue to, you know, become smaller. It's granular. We like it. You know, it's profitable. Generally, we have a good experience in terms of collections, et cetera, you know, that we do. I'm pretty sanguine about the development of, you know, the profitability curve, so to speak.
Perfect. Rahul, this brings me to the next question on asset quality, right? Again, you know, if you go through system data, SMEs and the nature of the businesses could be a little more volatile. So the NPAs of certain, you know, PSU banks are high, but we've historically had good data coming out on the business banking side. How you know, 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-à-vis an SBI you have in underwriting or in data analytics? And here what I'm doing, in this question, Rahul, is also blending one or two questions that I have got from investors. Yeah, if you could answer that.
Adarsh, look, you know, at the end of the day, credit is tough, but it is also simple. You got to know, you know, the person that you're doing, you know, business with, right? When you have to know, I think many of these, you know, customers are basically still, you know, relationships with the bank on the liability side.
Yeah.
I was in Pratapgarh. There was a small furniture guy who had about 5 acre of land. His borrowing was from a nationalized bank, but his savings was with HDFC Bank. He said, you know, it was a very well-respected bank in a small town. It's a town where you have one main road and there is settlements on both sides, and that's how it is. Plus a lot of mosquitoes. That's how, you know, they think about the bank. We know the customers. We know, you know, account behavior, right? And those are the customers we are, you know, tapping.
As the branch reach increases, you can imagine, you know, basically I get to know even more. I went to a village where there were, you know, 25 colleges and schools and there was a rice miller in the middle of nowhere with a turnover of, you know, INR 75 crore, and we said, "Okay, we're gonna open a branch over there," because there was a good business over there. We basically work together with the branch so that we know, you 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. We've often said that, you know, cash flow lending, everybody says, you know, the same thing.
Cash flow lending has, you know, worked for us because you remember the month of May 2019, we were even at that point of time a very large SME bank. At that point of time, the capacity utilization of MSME industry in the country was 13%. 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, you know, continued to, you know, basically remain intact. We're very confident in terms of that. Now, why are we confident? When you know, basically have a client who banks with you, wife's account, savings account is with you. The daughter's, you know, savings account is with you.
Everybody opens, you know, basically a fixed deposit with, you know, their daughter and, you know, for their daughter's son, et cetera. That is with you. They put their locker. There is a full 360-degree relationship management. Now, that person may still default because business, you know, goes belly up. If you have a full relationship intentionally, nobody is going to go rogue on you. That's the way of doing business. Then, you know, add to that, basically our collateral cover, you know, and things like that, those are there. 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 there are clients who tell us, "Don't onboard, you know, that particular client." It's happened. In Varanasi, a client said, "Look, I told you two years ago, and in three months, you know, that account went bad," because we didn't onboard, you know, taking the client's 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, you know, deviate from that. That will continue to help me, yeah, Adarsh.
Perfect. I just, participants, I see some questions being typed in. I'll have one or two more questions, and we'll open the floor. Two ways, you can either type in a question in the Q&A tab, or you can raise your hands and we'll take your question. Now the other thing is, if you go through the whole pandemic period and, you know, SME was a sector which got material amount of dispensations, be it in the form of restructuring, be it the form of ECLGS, and now you got a commodity shock, right? As you come out of those shocks. How do you see portfolio tracking?
Because I think you know the whole of the investment community would broadly agree that large corporates and now retail after COVID looks relatively stable. There are some question marks on how the SME portfolio holds out, how the ECLGS portfolio holds out. If you can just give what you're seeing on ground as we come out of those dispensations.
Look, you know, there are about 65 million MSME entities in the country, right? There are about 15 million in the banking system, formal banking system.
Yeah.
I'm sure that there are entities, you know, which have issues. By number of entities, you know, my numbers are not so large, and I have a set of, you know, basically customers who I do business with within, you know, the HDFC Bank tenets. We are okay. We were okay, you know, during the pandemic, and we are okay on our portfolio post the pandemic. In fact, I must tell you, Adarsh, that whatever was our new NPA creation in 2018, last year, you know, the new NPA creation was half of that. This year, the new NPA creation is flat at the same level for SME business. That is how, you know, confident I am.
The book has become more than twice and the new NPA creation has, you know, become basically half and remains stable and the book continues to grow at, you know, 35%-40%. You guys look at everybody's growth rate. If you just add my BBG and EEG growth rate, that is at 39%, you know, and 10%, you know, QoQ. On the largest book, you know, this is basically the growth rate. I feel very confident. Now, you have this new issue, right? You know, and we have to monitor that, right? At this point of time, what are your customers saying? Is the input cost, you know, gone up? Yes, it has gone up.
If you look at agrochemicals, you know, they use crude oil, you know, and in crude oil, that particular cost has gone up 30%. In auto, there is metals and alloys. You know, they use that. That cost has gone up 30%. Cashew processing. The raw cashew, you know, processing prices have gone up 15%-20%. If you look at ceramic, the gas and freight are the biggest element of cost. That's gone up 80%. You have, you know, basically a large proportion on consumption, and as well as the non-consumption, non-consuming industries, because we also took stock and, you know, during the pandemic we did this. You know, when we looked at cash flows, how much cash everybody has and looked at our portfolio.
This also we've been doing, you know, our portfolio analysis, and we continue to do every two weeks a big survey with my set of customers, right? Now, to what extent is the ability to pass on, you know, these increases? In agrochemical it is 90%. In auto, brass, cashew processing, casting, it's 100%. If you look at poultry industry, you know, the ability to pass on is about 70%. If you look at poultry layers, you know, I mean, obviously there is no issue, you know, it just goes pass through. Pulse mills, you know, ability to pass on 90%. We are basically, you know, paying for that at the point of purchase.
PVC pipe industry, where, you know, PVC resin has gone up to 150% in terms of cost, but the ability to pass on the price is about 25%, right? In most of these, given the strong growth dynamics that everybody sees, you know, for basically the next quarter, they don't see an impact in the extent of, you know, 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. On transportation side, right, you know, all the CV manufacturers, the cost has gone up about 5%-7%. The ability to push out, you know, basically that is about 3%-4%, and this industry has been increasing all the while.
The industry is also aided by the heavy infrastructure spending, you know, by the government, right? So far so good, but this is, you know, portfolio management is an art and also a science. You have to, you know, basically take stock every two weeks or every week, you know, depending on how turbulent the situation is. So at this point of time, you know, we feel pretty confident. There is, yes, you know, a cost impact, but is there a demand impact? You know, largely other than, you know, maybe people postponing purchases of jewelry, that is a segment, right? You know, that will get postponed.
Nobody may want to buy when gold is at $2,000, though yesterday I think it came off $85 or so. Mostly, you know, I think demand impact is not seen or not talked about at this point of time.
Perfect. 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. Rahul, you know, one of the questions is for a long time we've heard the argument against spreading too rural being prohibitively high collection cost post-default. Has that changed? Is there digital initiatives there, and how is it economically viable today, right? You know, going and collecting in rural post-default and is that changing? Is that prohibitively expensive? Yeah.
Sure. Let me address this, right? You know, I mean, when you see India, you know, from a macro perspective and from a policy maker's perspective, in rural agri is just 15% of our GDP, but 60% of the people still, you know, are there. You will have a lot of government policy push in terms of completely changing, you know, the rural nature from agrarian to a rural, you know, small industry, or agri small agri business and, you know, things like that. That is how, you know, 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.
You know, I say that the [Non-English content] always remains a [Non-English content] in this country, never becomes a [Non-English content] . If all of them, you know, 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, you know, basically the election results, the narratives, it's all about jobs and it is going to, you know, 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, you know, bad.
If that one person supports, you know, like three other people in the family, that's about, you know, spending capacity is getting raised for 250 million people. That's the policy. That is how we're looking at it. I have to, you know, basically look at it, you know, from the same style. Now, what has changed in terms of collections, right? Firstly, you know, my presence is much larger today compared to, you know, several years ago. I have, you know, the farmers' saving account, Mrs. Farmers, you know, saving account. Sorry, you know, we don't have, you know, too many she farmers, right? You know, I mean, that's just the nature of the thing other than in, you know, tax application or so. But those accounts are there, those cash flows are there.
Now, those things and collections are well tied up. You know, 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, you know, basically does business in cash. You know, at 3:00 PM or 4:00 PM, it's peak time, you know, he or she cannot, you know, come to the branch to go out and deposit. You need to, you know, basically do daily collections. You have, you know, basically the digital wallet solutions. Team up with them. They will go and, you know, collect the money at 8:00 P.M. They charge you, but they, you know, basically send it back.
Secondly, you know, a lot of insurance is available today in the marketplace, you know, to go out and protect your portfolio. 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, you know, today, greenfield, 75% is guaranteed by the government. ECLGS was 100% guaranteed by the government. You are a buyer of LCV, there is CGTMSE. You look at PM-KUSUM. You look at, you know, the poultry, piggery, you know, and all of these schemes. Agri Infra Fund , I'm told that, you know, we're gonna be felicitated by the minister soon.
I don't know, you know, whether the dates are fixed up or not. That is up to, you know, INR 20 million, it is guaranteed by the government. Now, you have to follow. You are in India, you gotta do business over here. You have to follow, you know, where the government is taking you. You have to apply your mind saying, you know, where the growth will come because, you know, jobs have to come and, where, you know, the government policy is going to get pushed. You do business in that fashion. Digital works. I mean, yesterday you saw that there is a UPI that has started on non-internet, you know, connected phones, right? In India.
Yeah.
When we did an NPCI or just those online remittance, you know, the world didn't believe. UPI, the world didn't believe. Now we are on non-internet, you know, money transfers. The world may not believe, but one day, you know, the numbers are going to basically go out and become very large. The digital ecosystem is fantastic. The credit bureau data is today, you know, mature and fantastic. Use it, right? The GST and the company law, et cetera, you know, data is out there and available. Use it. Then there are collection mechanisms. You put it together, the margins are also higher, no? For me to be able to, you know, pick up the cost.
Got it, Rahul. Rahul, one of the questions is that it says that they've picked up extensively from channel checks with small banks that HDFC Bank is underwriting their 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. How do you like, you know, basically saying that HDFC goes and refinances at yields which is not, like, adequately well priced, so for the risk. If you could elaborate on that.
Look, I don't know. I also hear and I also, you know, see examples and I don't want to quote these examples. Tell me, we are in a slightly, you know, I mean, yield compression scenario, right? In the last one year. We've had a cost of funding, you know, which is what it is, right? You're having a growth of, you know, basically last quarter we said, you know, BBG and EEG about 39%-40%, right? Logically, you would think that NIM is going to compress if what other banks are telling you is, you know, basically right. Adarsh, that is not happening. I can...
Instead of giving you anecdotes or telling you about practices, maybe it is, you know, I don't know, it's envy or whatever it is, but at the end of the day, my results demonstrate. I must tell you that we saw in our discussions that yields have to, you know, tighten. Inflation, you know, basically is going to come. You know, I mean, liquidity was, you know, awash. There was, you know, some pullback in all of that. I mean, if you go back, you know, six months ago, we've done so much homework that if in the next fiscal, Adarsh, interest rates and funding cost actually increased, right? If funding cost increased, 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 significant amount of work from October to, you know, the month of March in preparing, you know, basically, for a scenario that should, you know, funding costs were to shoot up, what would happen given inflation is, you know, going up.
Perfect, Rahul. The other question comes from Prashant [Dadiam]. How do you ensure?
Adarsh?
Yes.
One other way to think about it is also, right, when you hear that some 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're referring to, from a credit cost point of view or NPA point of view are close to us. 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. Now, how do you ensure customer service remains healthy despite sharp rise in customer base? Small banks, regional banks have always said that's where they've differentiated from the large banks, right? Be it SBI or HDFC. A little more customized service, a little more RM based approach for the regional small banks help them. Rahul, when you go mass scale, is that-
RM is okay. You know, we have the branch and the RM. That is not going to, you know, basically materially lower, you know, customer issues. You have to continuously, you know, train your people on how, you know, to resolve these issues and also make it available to the customer that they can resolve it by themselves. 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.
Today it doesn't happen that if they, you know, submit a stock statement on email and somebody forgets to basically go out and this has happened in another bank, forgets to update it and then the limits drop and, you know, checks start bouncing. In our case, you know, they can basically just submit it, you know, digitally, on the platform, and it does an auto update. There is no question of, you know, limit dropping. What is the nature of, you know, these queries? These are, you know, the types of queries that happen on interest rates and things like that. A lot of these have to be, you know, the front end. We've gone, in retail SME 100%, you know, digital origination and 100%, you know, digital self-service, right?
We are moving towards a majority of, you know, basically the disbursements on digital where there is all e-signing, et cetera, no paper involved. It's only the credit piece, you know, where we are basically going to continue to, you know, scale up, given that we've been at it, you know, for the last, you know, three, four years on our system. So let me give you a stat, right? You know what I mean? Obviously, a bank will have a lot of, you know, complaints and, mostly in, you know, retail, if there's an issue, I don't get a checkbook, I write, you know, the way I write it may be treated as a complaint.
I think, you know, if you look at the Commercial and Rural Banking, given the number of customers that we handle, it may be about, you know, 0.35% of the total number of complaints in the bank. What we do, because Shashi is so focused on this, is that we look at it on a weekly basis, and each one of these are, you know, basically tracked for tags and they basically are responded to. Then customers will make, you know, a lot of complaints. Somebody may just, you know, want a rate reduction. Somebody may need, you know, freebies. Somebody may have genuine issues, right? All of that. But as a bank and a service company, you have to address it. We have in CRB a customer service team whose job is to only do that.
Let me tell you that team reports to me directly. I am the owner of, you know, basically customer queries in my unit that we, you know, basically push. Make your platform that queries are minimized and when the queries, you know, basically come, go out and, you know, respond to it, you know, very promptly.
Got it. Now the next question is from Olivier. He asked that you mentioned SME being the 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'll probably need to compete for market share against it.
No, look, you know, I mean, in this country, everybody's learned banking, you know, from State Bank of India, right? That's just a truism, and we have to continue to learn because there are so many good practices. Whatever we may have achieved, you know, fine, it is not something to talk less about because, you know, we've done pretty well, but we still, you know, go out and learn. There are areas where I go and we call on, you know, basically, the regional managers. We want to work together in the ecosystem and that's how we basically learn.
SBI, you know, goes out and supports their clients, you know, basically helps them, you know, through tough times or cycles, you know. I mean, they do a fantastic job of that. There are many other, you know, such practices that we have to look at it. At the end of the day, if you look at our balance sheet today, that, you know, represents, you know, in its composition, you know, 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, you know, basically the tougher bits, but managing, you know, the NPA very, very prudently and carefully.
Got it. A related question was, like apart from SBI, this comes from Vivek. Apart from SBI, what's like the competition, right? 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 first mover advantage that the bank has in how you've kind of gone ahead with the geographical expansion and the reach and the products in this segment?
Look, sorry, Adarsh. Look, you know, if you think about SBI and us, we would be banks, you know, above INR 2 trillion in terms of our exposure.
Yeah.
SME. You know, the others are less than INR 1 trillion, so it's okay.
Got it. No, it can always be, Rahul. The question is always be it either there are pockets of people working geographically, not the INR 1 trillion size, but either there are or 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, you know, I understand, you know, you analyze banks and investors, you know, basically put money and, you know, whatever it may be. I think one thing that continues to, you know, I feel these days is underappreciated about us is our distribution muscle. Whether you look at in the border of, you know, Arunachal Pradesh or the border of, you know, in Jammu and Kashmir or you look at Mumbai, and there are different banks with, you know, different digital capabilities.
When I analyze, you know, the SLBC data, I have market share and I have, you know, mostly in most of these places, 99%, 100%, you know, digital usage. I don't see that, you know, basically in, you know, when I survey the competition in terms of that data, that in the SLBC inputs that come to us. Look, frankly, look, let me put it this way. You can push me and ask me and I can be, you know, competition-centric, right? I think it's a negative, you know, basically vibe or way of thinking.
We can all look and say that the pie is so large and maybe I'm learning from SBI. Others can, you know, learn from us, you know, what we are doing, and that we can all continue to grow. That is what we are focused on, and that's a positive approach, right? I don't, you know, basically bother that much about, you know, 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. Yeah.
Okay. Let me add one thing, Adarsh. The network effect, the investments and the distribution strength that Rahul alluded to. I'll give you a couple of things, right? You take the nine months period to December, nine months of this financial year to December. We expanded our physical distribution by 171 branches. This is supplement to the digital effort. We need some physical too, right? 171 we expanded. Keep in mind that the April to June period was a terrible period, right? Almost a washout. Despite that, we had 171 branches. Go back.
During this period, I don't need to say, you benchmark and see what other significant competitors were investing and adding distribution. Go back since the period of COVID. Take it from March 2020 onwards, right? Beginning of COVID. We've added 525 branches, right? During this COVID period. March 2020, April 1st, 2020 onwards, we've added 525 branches. It takes us longer time to bring this to be a fruitful growth because the kind of maturity model in a branch is one and a half, two years. Call it six to eight quarters it takes for a mature model. We continue to make these investments 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. Rather a comment and a request coming from participant, and I think all of us will echo the same is 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? Is this that investors deserve a little bit more in this time when, you know, this segment is becoming a very large part of the bank, right? 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, you know, it's a fairly, you know, 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 it to see how we should approach it. Quite valid in terms of what is being asked, right? I do want to give two contexts for you, right? We will give a thought to it and see how we should approach it. For sure we'll do take that feedback. Two things that I want to leave the thought here. One is, in terms of, I'll tell you, it happened about three, four 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.
When we gave that information, the next thing I got is for a period of the next one week to two 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?" The question that the competition banks locally are getting, right? My branch people call me to say, "Why? What is the need for you to talk and unnecessarily bother us here? Leave us alone. We are doing the business, you let us do." Right? That's one thing, right?
The second point I want to leave is even in this call, you can see in the last 20, 30 minutes how many times we talked about competition, what competition says and what competition does. Right? I just want to leave that thought and go. This is what I did give three, four quarters ago some things, and I got a big backlash from my own people in the branches to say, "Why you do this?
Appreciate your constraints as well, Srini and the bank. Yeah, we appreciate that. The next question, little more macro. It's a question more on data privacy is how does HDFC Bank manage the increased exposure to personal information managed through its new digital offerings. All the data privacy and security matters, you know, and it's getting more increasingly more customer acquisitions, more data insights you get. How do you manage that, Srini?
Well, 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. We have a committee of the board that reviews our policies and procedures and how it is implemented. We believe that we are one of the top-notch in terms of information security management.
Got it. Rahul, one question and you know rebuttal to your 1 + 1 expectation and disbursement is obviously some of this gets premised on strong nominal GDP growth and hence reflected in the bank's growth. With inflation spiking, commodity prices being a little haywire, what would be the sensitivity of a little tougher macro on how you would look at those 1 + 1 disbursements and your growth going forward?
Look at this point of time from what I see and you know we are all watching you know the crisis and there's a shortage of sunflower there's a shortage of you know basically blend oil a shortage of you know basically I mean wheat prices have spiked up and so on and so forth. You know I don't see an issue with that. Obviously if the economy you know changes dramatically then it's a different issue. Now if this remains persistent you know you can see that global supply chains are going to get localized and which basically means you know it is going to fuel you know higher inflation.
We are moving away from laws of competitive advantage, and we are going to, you know, go towards lower growth. India will have better growth, but yes, you know, we may have an inflation issue, et cetera. You know, I mean, those things are a given because oil prices are high and, you know, CAD will go up, et cetera. Remember, we are the only large market that is open in a very positive manner to the Western world, right? We will always have, you know, supply chains, you know, that will get developed in the country. As you know, these things, you know, exit from other areas of the world, they may not just straight go back to the U.S. or Western Europe. You know, some of them may just come over here.
You know, it's a tough one, but it's not a given that it's all negative-negative, right? We have to bear that in mind. Obviously, if the situation, you know, changes, you know, dramatically, then we are going to alter our plan, right? You know, all plans are dynamic. You assume a certain baseline, you know, when you think about, you know, the growth. I mean, during the pandemic, you know, I was running corporate bank. At that point of time, you guys used to ask the question all the time, you know, this dramatic growth, will it lead to NPA, lowering of, you know, asset quality? None of that has materialized.
At that point of time when in 2019, February, you know, 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 things are dynamic. And we moderated it, you know, a little bit in SME. So we will, you know, basically look at it, right? You know, rather than just say, "Okay, you know, this is what we have to do." We'll see. I think, you know, basically, as you can see until June, that much visibility you have, you look all right.
By June, you know, it should be clear, you know, what will be the shape of the conflict and how the world order changes and, you know, whether the inflation is, you know, for the long haul or not. We'll take a call. Yeah.
Perfect. Maybe in the interest of time, I'll just squeeze in the last two questions, more macro. Either Srini and Rahul, what you see on the ground is a slowdown in rural demand, right? That reflects in two-wheelers, tractors, FMCG companies, selling soaps and oils, talking about a slowdown. Crop's not been bad, so is it sentiment? Is it some impact from rural savings getting a little depleted because of COVID? What.
Yes. COVID, you know, basically savings, you know, did get depleted. You know, there was January, which was an issue. Look at, you know, basically the wheat crop that is coming in, the month of April. You know, people are saying that they've not, you know, 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 staple after staple. There is money. In fact, today the issue is that as we are, you know, 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, you know, government is releasing money and, you know, that comes and pulls you down in terms of, you know, basically your earning assets, right? It's not a bad thing that people are paying you. It's sort of all right. I mean, that's not the thing that I see. Yes, there is a pandemic, you know. I mean, there's a lot of research I've also read through in terms of K-shaped people at, you know, the really lower end, you know, fallen below the poverty line. They're not able to, you know, go out and, you know, purchase two-wheeler, and that's an indication, et cetera.
I think from what I see in my client base, you know, which is across 100,000 villages in, you know, about 500,000 farmers or so, you know, I basically feel comfortable, you know, with that situation today. In fact, you know, I think that it is only credit positive, you know, because the cash flows are going to remain very strong.
Perfect. The last question is, what do you say is a larger contributor of your growth rate, right? Or growth expectations. Market expansion, market share gain, or formalization of like, you know, credit to those segments?
It's all the three. It's easy one.
I knew that was coming. No, this has been super helpful. I've taken a bit of more time than what we budgeted for. This has been very helpful, very insightful, Rahul , Srini, Ajit, and the whole team. Thank you for joining us. Yeah, we look forward to more such interactions, and more importantly, as investors request and we request, hopefully some more disclosures as well as we go along.
Sure.
Anything else? Thank you. See you, Srini, and see you, Rahul. Take care.
Thank you. Thanks for engaging. Bye-bye.
Thank you, participants, for joining in. Bye-bye.