Ladies and gentlemen, good day and welcome to the group call with HDFC Bank Management hosted by Macquarie. As a reminder, all participant lines will be in the listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference call, please signal an operator by pressing star and then zero on your touchtone telephone. Please note that this conference is being recorded. I now hand the conference over to Mr. Suresh Ganapathy, Head of Financial Services Research India from Macquarie. Thank you and over to you, sir.
Thanks, Zimba. Good afternoon, everyone. Welcome to the conference call with HDFC Bank senior management hosted by Macquarie. We have with us today Parag Rao, Country Head, Cards, Payments and Digital Banking at HDFC Bank, and Srinivasan Vaidyanathan, the Chief Financial Officer of HDFC Bank. Also we have from Investor Relations, Ajit Shetty. The format of the call is going to be some kind of a fireside chat session that we'll be having with Parag and Srini. After about 30 minutes-35 minutes, we can open up the floor for any questions from the investors. Thanks so much, Parag and Srini, for agreeing to do the call with us today.
Thank you, Suresh.
a pleasure, Suresh. Thank you.
Okay. You know, I was just going through one of the news articles yesterday saying that, you know, the Reserve Bank of India is open to allow a proposal for NBFCs to issue credit cards, you know. The last 20-24 months, Parag and Srini, we have seen a mushrooming of all these FinTech players. You know, guys like Slice and Uni Cards and the FinTech players are issuing 2-3 lakh cards per month. I mean, that's the kind of number of cards that they're issuing, and they seem to be targeting a lot of these millennials. I mean, is there a risk that, you know, the segment credit cards is facing with so much of competition?
You may also see Citibank getting more active by when its portfolio is actually being sold to another guy in the market. It looks like a lot of competition in the space. You being the largest player, how do you look at the space and profitability? Yeah. Over to you, Parag.
Okay. Thanks, Suresh. Lovely question. Good start to the thing. I think one of the reasons why we are here, assembled here today is to actually look at how do you build a profitable card model. Therefore switching back to that, I'd start off with a comment to say issuing number of cards is actually only 1% of the journey. The balance 99% starts only after we issue the card. Let me explain. Like I said, as part of issuing, you do credit underwriting, you choose the right kind of customers, you build distribution channels, important parts of this thing. That is focused on sort of getting customers onboarded and issuing a plastic or a virtual card, if not so.
The core job starts immediately after that, getting that person to start using the card, getting the person to start expanding the number of users or the number of MCCs, as we call, to be put onto his card. In a nutshell, the whole objective of starting to build a good card portfolio, one aspect of it is to get his entire wallet share or as much of his wallet share as possible, which means if he spends, let's say INR 100 a month, on cardable expenses or electronic means, as much as you can get on your card is as much will define your success in capturing his wallet share. Having said that's again the next stage. The next
The stage after that is about how do you get him to use value-added services? How do you get him to revolve on your card? If he's a revolver type, how do you get him to pay back on time, et cetera? The whole virtuous sort of cycle keeps on going on all over again, et cetera. Portfolio management, in short, as we call it, is exactly about that. One part is exactly sourcing the right kind of customer.
Subsequently after that, getting his wallet share, making him spend, making him revolve wherein you earn income, making him use the various other services and the product features which you have built into your card, making him pay on time, or even if he chooses to revolve, give you a particular set of income and then sort of pay back on time so that he doesn't go in delinquent and so on and so forth. Okay. That's the whole life cycle of building a profitable card portfolio. Having said this, competition for us, the way we look at it is, I think very welcome. Card penetration in India is actually very small. It's probably the smallest by way of penetration, payment forms.
Therefore, it's not just us as the largest issuer in the country who can do it, but we need the entire industry to sort of start getting on more number of good customers onto a credit card platform. To that extent, a good number of issuers actually doing is going to help expand the marketplace. Over the last five years with this digitization drive and a huge number of customers getting onto electronic means of payment, which has essentially been displacement from cash to electronic modes, you've got a more mature set of customers who now are used to electronic ways of making payments and receiving payments.
The logical step for these customers is to move up to much more advanced and more sophisticated forms of payments, credit card being sort of at the top of the pyramid, lying up there. Therefore it's actually opening and increasing the denominator. We sort of in that sense welcome that group. As we all know, with about 20 years of experience under the belt of having built the largest portfolio in the country. I think the journey starts there and a lot of work and a lot of investments, a lot of time needs to go in good portfolio management to build a profitable and sustainable and growing portfolio. Suresh, I hope that answers your question in some context.
Yeah. Yeah, sure. Sure. Srini, maybe can you tell us. See, you have 60-70 million customers, right? Maybe 15 million cards. Is there sufficient penetration done or you think there is still a significant proportion of the balance 40 million or 50 million customers that, you know, any numbers you can share, any target audience that you have got even within your existing customer base itself? Yeah, yeah.
Yes, you know, certainly I'll start off and then Parag will. He's got much more traction that he is executing, too, but let me start off, right?
Yeah.
See, out of the customers that we have, 68 million, and we are growing two and a half or so approximately, call it 8-10 million a year on a run rate basis. That's what we are adding. We have 15 million cards, call it 12-13 million customers or so, right? That's the kind of card base that we are having. From a penetration point of view, we have a long runway to grow. In terms of what is that we have in our pipeline in terms of to whom we are prepared and we are doing some marketing. Again, credit card is not the only thing. Parag handles the broader payment products, including the debit cards and so on. I'll invite him.
Parag, you want to talk, Parag, in terms of your action on the base that we are having and also open market too? Yeah.
Absolutely. Thanks Srini for setting the ball, right. Like Srini also said that we've got an ample of headroom even within the bank. We have a very robust retail CASA savings account and salary account franchise, which grows at roughly around 2.5 million new accounts a month. And that's a large growing engine. At any point in time, we have significant headway or headroom for us to grow, even if I were to look at only the bank's existing customer base. Like I said, we've got 60 million customers, we've got 15 million cards, and that itself gives you a sense of the kind of opportunity we have only within the bank.
Cutting another slice further, we also have a product within the debit card portfolio, what we call a customer being able to use his debit card to purchase an item on EMI at a merchant place. We call it Debit EMI. Now, there we've got roughly 30 million plus debit cards, and approximately 25 million of these debit card holders have an underwritten line of credit allocated to these 25 million customers. Okay. Once again, that metric, if you take, I've got 25 million customer debit card holders with a line. We only have 15 million credit cards. Just the gap of 10 million itself will present a significant opportunity for us as a bank to look at it. Now, these are opportunities within the bank.
When I look outside the bank, which is the so-called new-to-bank customers, our strategy of now doing alliances and partnerships with select large partners, good brands, et cetera, is another way in which we would be reaching out to the customer's database, the partner's database, doing what we call a joint look at the creditworthiness of each customer in the partner's database. Okay? Then once again, offering co-branded products or co-branded, co-created credit cards to this customer base. That's once again reaching out to another set of good customers, underwritten customers, jointly done with a co-created, co-branded sort of offerings, wherein we'll be reaching to new-to-bank customers.
Like we said, Suresh, we are bullish on the credit card growth and opportunity. We believe we have a significant headway to grow our itself. I explained, like within the bank itself or bank customers, we have a significant way to grow. Our robust strategy of select partnerships and alliances also gives us that headway to significantly grow. At an industry level, published report numbers would tell you that, say five years back, the industry was at less than 30 million cards. Today, notwithstanding pandemic et cetera, we are at, I think the industry is around 60 million plus. Assuming that the pandemic weren't there, probably that number would have been higher than the 60 million.
Therefore we see good robust growth happening, and that 60 million galloping over to much higher milestones over the next two to three years. Suresh, yes, we see good growth, a good growth happening in the overall credit ecosystem. We as the largest issuer have got very aggressive plans of continuing our growth in this segment. Like I said, our strategy at the ground level is not gonna change. We will continue sourcing a significant portion of our cards from within the bank base or as we call cross-selling to a customer who already has an existing liability relationship with the bank. A smaller proportion will be through the partnerships and alliances or what we call new to bank customer growth.
We are, like you said, pretty bullish on the growth prospects in the credit card industry.
Okay. Thanks, Parag. Another question which keeps getting popped up in the minds of investors is, are you catering across the spectrum of various clientele? Because what it looks like the Gen Z is being catered by the BNPL and the FinTech guys with a better technology, with a faster issuance, you know. You really cater to the less than 30 years age kind of client segment, some cater to the student population. A whole lot of target segments are emerging, which is going to be the future. Is HDFC Bank well prepared to target these customers or in the pursuit of pristine asset quality and, you know, the traditional focus of credit cards, you're missing out in some of these younger customers who are looking for a better seamless experience.
Okay. Let me sort of give you one fact on our portfolio.
Yeah.
On our existing 15 million card portfolio, we have approximately 30-odd%. Actually, it's coincident. Roughly 30-odd% of our current cardholders who are less than 30 years, okay?
Mm-hmm.
Mind you, because a large portion of our source, our new acquisition card sourcing, is in what we call the salary base. HDFC Bank is one of the largest salary account banks in the country. These customers who are bank customers therefore form a significant large portion of our customers. As you know, it's a pyramid in the salary base. We get a significant large number of customers, card customers with accounts, who are below the age of 30. People who have just joined a lot of corporate, et cetera. Even as we speak today, 30% of the base is below 30. You can classify them as Gen Z, whatever you can call them.
These guys are the starting points of their financial careers and it's a building. We see this. We see pretty good behavior on these kind of customers. Okay, having said this, to answer your question, some of the trends which we observe of many of the younger generation who start out on their electronic journeys today by using UPIs, a lot of them actually use debit cards, and we see good debit card usage in the younger generation, probably because they don't have a credit card. We also see when we do focus group studies and consumer studies, et cetera, a lot of aspiration to own a credit card. Therefore, we've actually got three products at the entry level, if you may call.
What we call in the mass cards, which addresses the needs of these millennials, if you may call them on one side, or the Gen Z on the other side. We've got a very strong and ground-level strategy to target these new set of customers who are just about getting onto the credit card sort of platform. As compared to five years back, I think the newer set of customers who are coming in actually are far more used to electronic payments because they're already on UPI or already using their debit card. Which makes this that much more easier for them to adopt credit card payments and avail of all the great facilities which they get on a credit card, which is far more than what they would probably get on a UPI or a debit card.
Oh, okay. Great. The next question is on UPI itself. You know, today when I was trying to do an order on Zomato, something what I wanted to order at home, what I did was that instead of going and using my HDFC Bank credit card, I just went and used Google Pay and UPI. Very convenient to make a payment. These are some of the new websites where my card is not stored at times. I find it very convenient to just use my PIN number and get the transaction done. You know, is this not a structural threat? I mean, the convenience of UPI and payment itself that many people like me now, and in fact, I was seeing the session, he was saying for a smaller value transactions, people are convenient using UPI.
UPI is taking away market share with what would have been using credit cards, right? Don't you see that as a big threat for your overall portfolio, Parag?
Let me answer that in two ways. Amongst the many issues which the payments industry has, payments industry at large, there were two important issues. One is cash, and the fact that the objective of the electronic payments industry was always to sort of displace cash. Cash was a very large component, as you all know, in the Indian ecosystem. The second was this whole customer experience of doing a seamless transaction. Picking up these two, UPI actually addresses in that sense both, the huge or the tremendous growth which we have seen, all of us have seen in UPI over the last three to four years. I think, bulk of it is actually targeting cash, and it's done so, in a wonderful manner.
Like I said, it's also being able to onboard a large number of customers who erstwhile did not use any electronic form, did not even use their debit card, did not have a credit card. A lot of that is actually, you know, displaced cash. Of the total volumes, approximately 60% is payment to merchants. The balance 50% is approximately money transfers between two individuals, okay? Both of these, if you see the P2P side, the money transfer, erstwhile we would all do it in cash, okay? At best, the money transferred through an NEFT, RTGS, but bulk of it was cash because they are low tickets. It's completely displaced cash there.
The ticket sizes which you see in the P2M or the payments made to merchants are also at the lower levels, far lower than what you would typically see on a credit card or even for that matter on a debit card. Which again indicates that these are payments made for bypass for things which erstwhile people use cash. I think UPI has done a wonderful job in displacing cash, and I think that journey is far away. It's only just started. Cash is still a large portion of the Indian economy and ecosystem. I think you'll continue seeing growth in the UPI segment for displacing cash.
I think they've also done a wonderful job in terms of creating a very simple user interface tap, put in your PIN and sort of pay for the transaction, and money is debited from your account immediately. I think there are good learnings from that. We are building a very extremely similar way of transacting on our new PayZapp. As you know, we have a product which is a mobile payment app, which includes a marketplace, which is all merchants in one app called PayZapp. We will be soon launching the PayZapp 2.0, which is a completely revamped version of the existing PayZapp.
There are significant improvements on the platform, the back-end technology, the number of merchants, the UI/UX, many more forms of payment go beyond just simple. We've benchmarked it to the best apps in the country and globally also put in many more other form factors. The earlier PayZapp did not have UPI. The new one has UPI. The earlier PayZapp did not have a tap and pay, which means I can take my mobile, tap it on an NFC terminal in a merchant and make a payment or a money transfer. Many more such security features and convenience features.
The PayZapp 2.0, the new one, will be our answer intended to address these two issues of displacing a lot of cash, and it is safe because it includes UPI also, and of course, it includes a huge ecosystem of merchants wherein PayZapp will be accepted as an acceptance mark and integrated deeply with many of the online and app merchants. And of course, it has very contemporary and very simple customer user interface, which will make transacting a very simple, seamless one-touch type of experience. Okay? We acknowledge that these two are very important factors in driving usage, especially on the mobile, and PayZapp 2.0 is our answer to that.
Parag, before again I go back to the card space, since you are on the PayZapp, I think the feedback that we receive from a lot of investors or for that matter from your customers is that at times you know using some of your apps like an HDFC Bank mobile app or a SmartBuy platform, the UI/UX is not that friendly and there is a lot more to go. Also there is some kind of confused positioning, right? You have an HDFC Bank mobile app, you have PayZapp, you have SmartBuy platform. Is there a plan? You have already talked about PayZapp, but is there a plan to integrate everything into a super app so that you get rid of this confusion which is there?
You think you can really significantly enhance the UI/UX of the other aspects also so that you are best in class in terms of the offerings to the consumer compared to the other banks in the country? Yeah.
Okay. Yeah. First of all, thanks for all the feedback and to all of these on the call and even our consumers for giving us that feedback. The UI/UX journey, just as I mentioned for PayZapp, the work on for changing and contemporizing the UI/UX in line with our learnings over the last two to three years is on even for the mobile banking app as we speak and for SmartBuy and of course a couple of other customer facing apps which the bank has. We are convinced that having a great UI/UX is one part, very important part of the customer journey in keeping on reusing an app, and making him sticky and keep on trying out more and more transactions. PayZapp, you'll see the new PayZapp coming out in a couple of months.
The other apps I talked about also will be a thing, but it's a concerted journey. It's part of our digital factory initiatives which we've sort of set up to drive digitalization and creation of digital platforms. UI/UX is an important part of our digital journey. Okay, so that's on the cards also. Okay? Regarding the question about super app, our current understanding of what the customer says and the way he transacts tells us that no, we may not. As of now, the thinking is not to really go down this way of a super app. We still believe that customers require a separate app for making his day-to-day payments.
An app which he can pull out once, twice, three, four times a day, to keep on making simple seamless payments or receiving payments. He sort of gels with that. Our understanding also tells us that a customer still requires a different app for doing his banking transactions, which is typically what most banks offer is the mobile banking app generically called. The common thing between both is that they require a very seamless experience, say a single sign-on, so that he can navigate between the two. Intuitive features, pulling out data which is already there, so already available with the bank so that he doesn't have to pre-fill every time he fills up a form or an application or a request for a service.
Simple means in which he can get in touch with, if in case he has any problem, et cetera. These are the principles which we're building into when we're redoing the UI/UX. What we will also do is between the mobile banking app of the bank and PayZapp, et cetera, we will also be building a link, if you may call so, wherein from one app you can very seamlessly navigate to the other in case if he's on the banking app and he wants to purchase something or buy something, and vice versa. That's the link which we're building between the two and that's whatever research and our understanding and knowledge tells us right now. That's the direction which we're sort of going on.
Okay.
Parag, one more thing, Parag. SmartBuy, you didn't touch upon that. If you-
SmartBuy too is also a part of the UI/UX. I think the way simplistically put, the bank has partnered with merchants to create a sort of what you call a platform where all our merchants are able to offer great deals, et cetera, across multiple categories. SmartBuy is the web version. PayZapp will be the mobile version. In effect. You'll see a lot of synergies also building between SmartBuy and PayZapp also. But fundamentally, whether it's on the web, where you can directly go to the current version of SmartBuy or on the mobile through PayZapp, he'll get the same experience on that.
All the changes which we're doing even on PayZapp and the mobile banking app will also be applicable to SmartBuy. In a couple of months, you will see complete revamps, UI/UX customer experience, many more merchants integrated.
Yeah. Go ahead, Parag.
Hello. Sorry. I dropped off. There was a sort of bad call. Yeah. Like I said, I think I dropped off at the stage when I was sort of concluding on SmartBuy. SmartBuy too-
Yeah.
It will be receiving the same treatment. There'll be a complete revamp of the UI/UX, including, like I said, much more synergy between the mobile version and the web version. The customer will see one interface, and he can choose to go either to the web or to the mobile. He'll get the same experience, the same kind of merchants, the same kind of checkout experiences across his shopping experience.
Okay. Thanks, Parag. Couple of other important questions from my end before we open up the floor for questions. The first thing is on the recent revolver issue, right? The question here is, of course, many banks are saying this is cyclical in nature, and typically it happens when you go through a tough phase. It looks like, Parag, we are seeing increasing penetration of EMI financing, Pay- in- three, Pay-in-four kind of products, BNPL players, NBFCs, all of them actually pushing some of these very good innovative credit products. We have some of the UPI guys giving Pay- in-three and Pay-in-four kind of things. The point here is, do you think all these products eventually could force away the share of revolvers permanently?
While you may argue that currently it is cyclical, there could be a structural element to the fact that revolvers permanently can stabilize at lower levels. Are you mentally prepared for that kind of an outcome?
Okay. Let me put it this way. Typically card portfolios consist of sort of three types of customers. Okay? One is the transactors. We all know transactors. These are people who spend and pay back on time. They avail of the free credit period and sort of pay back on time. Okay? That's one set. The other two are essentially revolvers, but revolvers, as we see from differences in behavior, we see there are two types of revolvers. One is what we call the opportunistic revolver. This is a guy who probably sees a good deal to purchase.
He probably doesn't need the revolve facility, but once in a while, which is his lifestyle, et cetera, he may choose to sort of revolve and say, "Hey, no problem. I don't mind paying some interest rate and paying streaming fees," et cetera. These are guys who typically would revolve maybe once, twice, thrice a year, et cetera. That's the second set of revolvers. The third set of revolvers are what we call the chronic revolvers. These are people who sort of, you know, what people call live by credit. Typically, these are the people who would revolve maybe four, five, six, seven, eight times a year, sort of, kind of revolve. Now, every portfolio has all these three type of customers. A gr...
A good well-balanced portfolio, and what do I mean by a good well-balanced portfolio is you have growing spends where you have increased wallet share across all these three set customers. A healthy growth in top line and revenues. Revenues coming from fee income, from revolve income, interest income, et cetera. At the same time, a very healthy well in control sort of credit exposure and delinquency, which you may call it so. It's an optimal mix of all the three. Now coming to the point, if you see, you asked this question about EasyEMI and what you call BNPL. Let me give you some more factoids. Our insights into BNPL is actually an early category kind of product. It's only been exi...
In existence actually over the last year and a half, and more so only in the last years in the industry. What little insight we've gained, we've actually understood from BNPL is that a significant portion of BNPL users today, in my estimate, it could be as high as 60%-70% of BNPL users are actually people who avail of the buy now, pay later feature, which is buy now and pay in fifteen days, thirty days, whatever, et cetera, but actually pay back on time. Okay? Only the balance, 20%, 30%, 35% are the people who actually roll over, pay charges for the utilization of their credit line, and of course, give the kind of you know, delinquencies which one has sort of seen in the industry. What does that tell us?
That tells us that a large portion of even BNPL customers are using a credit line for small ticket. They're not using the credit facility because they're paying back on time, which means they're essentially transactor type profile. In other words, they're people who are using the BNPL feature because, sheerly because of it. Either it's a novelty or because if it's a convenience. Okay. Having said this, is there a need for therefore some people to use convenience and therefore avail of buying products at this 0.5? Yes, the answer is yes. You have those kind of BNPL profiles et cetera. EasyEMI as a product has been there embedded within a credit card ever since credit cards have been launched. Okay?
Today, typically across the industry, EasyEMI, which is purchasing goods on EMI at the point of purchase, either online or at a physical merchant, would range anywhere between 10%-15% of the total card portfolio spends. We see that growing significantly as consumerism purchase of durables, purchase of things on credit card increases. Typically, the availability of EMI at merchant stores also keeps on increasing. Having said this, EasyEMI comes at slightly lower yield. Once again, I think the point I'm making is you'll have a set of chronic revolvers who would choose to sort of give much higher yield, because they choose to revolve on their retail spends.
You'll have a set of customers who use products like EasyEMI, where they can also revolve in structured EMIs and pay back in structured EMIs but at a lower yield. Of course, there'll be a set of transactors typically who sort of utilize the credit period, free credit period, and pay back on time. Okay. Each of these segments is growing in their own way as retailing increases and you know consumerism increases. We always see that it'll be a judicious mix in any card portfolio of all of these three kind of players. Does that answer your question, Suresh?
Yeah, yeah, that's fine. Cool. Let me move on to the next question from my end before we open up the floor.
Sure.
Yeah, the RBI's digital payments paper and, you know, there is a lot of worry about a possible MDR cut for credit cards. Now, the thing is recently, you guys actually reduced your reward points across some of your card portfolio. Are you guys mentally preparing for an actual cut in the MDR and therefore you went ahead and tinkered your reward points? Do you think there are sufficient levers as a credit card player that if at all such a thing were to happen, you can still remain profitable, generate that 6%, 7%, 8, 9% pre-tax ROA that you can get on your cards portfolio, irrespective of what the regulation is? How are you guys going to tackle this in case there is going to be a regulatory diktat?
Okay, Suresh. Let me rather answer in two, three ways. You're alluding to us sort of tweaking our reward points as a product feature. Okay. One is, let me tell you that relooking product features, functionalities, I think is a constant task which we keep on doing in the bank, okay, in our card portfolio. Okay. You realize that you launch products with a particular thought process, features, along with some features. Some features take on very well, some features don't do so very well. Therefore, we do a constant product review and a product feature review. At any point of time in a year, every product gets some tweaks, some changes, some additions, some subtraction, et cetera. Changing and tweaking product features, I think is a continuous process which we are.
It's not necessarily only to do with any event which you may think is around the corner. Okay. Just as much as we do proactive portfolio. The recent tweaking of reward points, et cetera, especially when we did it on our Infinia and Diners Black, okay, is one such where we optimize the entire, you know, reward point program to ensure that customers really saw much more value. Having said this, the impact on that has nothing to do with MDR or anything else, because on Diners Black and Infinia just to give you, put together these are about 400,000 odd cards in our portfolio. We have a 15 million card portfolio.
Any tweak there wouldn't have hardly had any impact on any cost or anything else. Having said this, as I said, the larger point I'm saying is that we keep on sort of tweaking. As you know, immediately post the embargo, we actually relaunched three of our products for the mass market, our Millennia card, our Money Back card, okay, and our Freedom card. These were tuned taking into account a lot of customer feedback to really target what are the changing needs of customers at the end. These, all these three products actually target the entry level customers or the millennials or the Gen Z, as you asked in the previous question. Because we are very keen to onboard many of these customers and ensure that the full wallet share of these customers come onto our cards. Okay?
That's part of our product strategy. Having said. Okay, now getting back to your actual question about the intervention of MDR, et cetera. We've seen a couple of years back, there was intervention in the MDR on debit cards, which was sort of reduced and as a consequence. What did you see there? You actually saw therefore that many of the banks stripped off a lot of the features which they had on their debit cards. Even despite the drop in MDR, you've seen actually debit card spends grow. UPI is another example where there is actually no product features, but yet we've seen zooming volumes on UPI again because of, not because of cashback or reward points or anything else, but purely because of convenience.
Having said this, credit card as a form factor has multiple revenue lines. MDR and interchange are only one of them. Okay? Having said this, we as of now don't see too much of a sort of move towards rationalizing MDRs on credit cards. But having said this, even in case in the outer event that such eventuality happens, we've got a full 360-degree sort of approach and strategy to managing profitability on the card portfolio. Including looking at optimizing product features, including changing mix of revolvers and transactors, including deep penetration into high-spending targets, including you know looking at segments like business cards, et cetera. Where you get much high ticket each time et cetera et cetera.
It's a dynamic thing. Our portfolio management and deep engagement for product management ensures that at any point in time, even if because of environmental requirements or any particular revenue line is sort of tweaked or changed, we are able to sort of recalibrate some of the other vectors and thereby ensure that the profitability metrics on the card portfolio don't fall too much.
Okay. Fine. Great. Operator, can we now open up the floor for any questions, please?
Sure, sir. Thank you very much. Ladies and gentlemen, we'll now begin the question and answer session. Anyone who wishes to ask a question may enter star and one on their touchtone telephone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use handsets while asking a question. Anyone who has a question may enter star and one. Ladies and gentlemen, we will wait for a moment while the question queue assembles. Mr. Patrick Adels, could you please go ahead with your question?
Great. Hi there. I want to ask about the decline in card fees we saw in the last quarter. How much of that did come from lower revolver usage? How much of it came from some promotions and zero fee discounts you gave, and how much from kind of other factors? If you could just kind of break down that decline in a little bit more detail.
Okay. I'm not too sure whether we'll be able to talk about the breakdown exactly, but let me say two, three factors have happened that you see over the pandemic over the last two, three years, over the last two years specifically. During the pandemic, obviously, there has been tightening of credit across all issuers and across all banks who are issuing loans, okay? Typically, in a credit card, when you touch a revolver, you know, you actually get impacted on three or four revenue lines, not just one. When you hit a transactor, you lose spends and you lose interchange income.
When you do a revolver, in addition to the spends and interchange, you also lose interest income and there are other fees which a revolver sort of would sort of end up paying as part of its behavior of revolving, okay? To that extent, in a pandemic which is pretty natural that credit tightening, et cetera, happens, this is one phenomena which is sort of what hits, okay, to an extent. This as I see is a phenomena which has happened across the industry. The other phenomena which is specific to HDFC Bank, as you all know, we had a nine-month embargo imposed upon us wherein we could not issue credit cards.
At that point in time, too, also we were the largest issuer of credit cards on an incremental basis, okay? Typically, when you issue a new credit card, it starts kicking in with its income lines because you issue, the person starts spending, and then he starts revolving or otherwise, and starts therefore accruing to the fee pool, okay? For us, during the last two quarters, the impact of the last nine months of lack of sourcing, I think has obviously hit in terms of a significant large number of customers not contributing to those headlines. We now have a lag effect since we've started sort of sourcing post-August.
A lot of that will soon get corrected, as the customers, and we've sourced a significant number of cards over the last three-four months, and they will start kicking in in terms of revenues, et cetera. A lot of that will sort of get changed and corrected in terms of the incremental flow of revenues. These are the two key things which have happened sort of on the portfolio. What we're correcting now or what we're changing right now is twofold. Like I said, one is on the new sourcing. On the new sourcing, we're doing a lot of data analytics on our bank's base. I talked about the headroom available in the bank's base to source more new customers.
We're driving a lot of our propensity models to upfront identify a lot of revolvers and sort of source them upfront so that on an incremental basis you start getting much more revolvers.
On the existing portfolio, we've sort of dissected our entire portfolio, looked at cutting portfolios into designs of propensity, doing a lot of limited advancements, doing a lot of upgrades to many of these revolvers, thereby sort of in a way slightly loosening up the credit policy which was tightened over the last two years because of the external conditions and sort of driving a lot of spends onto the revolver base which is there on our current portfolio, to sort of look at what we've done and correcting the situation over the next two to three quarters. That's what we're doing on the portfolio, and that's what actually happened. Srini, if you want to sort of chip in here.
Yeah. You covered most of it, Parag. One other thing is, of course, the customer behavior itself, right? Certain things, if you look at some of the features of the card, right? If you think about the cash advance is one of them or going for a limit increase is another one, or going for a freely making the late payment and not worrying about the fee to be paid for late payment, et cetera. These are behaviors. Right. Apart from those two things that you said that we, it is within our kind of put the risk back on, right? We were risk off and now put the risk back on. The second thing is getting the inflow of cards to replace any exiting of cards that's happening.
The third thing is about the customer behavior, which we like to wait and see how the customer behaves. Couple of things that I have already mentioned a month ago, which is to say that, the liquidity with the customers, particularly our customer base at an aggregate level, we see enormous liquidity where, one is to five. That means, if the card at an aggregate level is, 100, card advances or card receivables is 100, from that bunch of customers, we see liability deposits at 5x . Right? Pre-COVID it was slightly under 4x . We do see people sitting with cash and so taking cash advances, et cetera. That behavior needs to come for a change, right? Also similarly, credit limit utilization.
While on one hand we have been risk off for, from curtailing credit limits and cutting back lines and closing accounts and all of that, in fact, vehemently we have done after the wave two, which is April to June quarter, subsequent to April to June quarter, particularly in the period, July to September, July to October time frame we have done. We have done some of those actions. The credit limit utilization for the customers who remained very good and remained with us is significantly down the line utilization. They are still, while the spends are going up, it has got some more miles to go, before we can say that the behavior is back to some kind of a pre-COVID level in terms of what happens there.
Okay, thanks. Just one follow-up on that. I think on the earnings call you mentioned there's been some fee promotions or zero fee offers. Are those still in place and is that an additional headwind?
No, that is the periodic one we run. That is not a year-round program that we run. That was more of a festive time period, October to December, where more such promotions were done. Between January to March, we don't expect that kind of a promotion to be all through the quarter, but on and off localized we do run. It is not that. First, that impact wasn't it. We mentioned it as one of the items. It's not a significant part of that item. Second thing is that, I wouldn't say that it gets to zero in this quarter because different programs get run in different time periods.
Got it. Thanks. Typically the time taken for revolve usage to increase and so customer behavior to change, is that gonna be a couple of quarters? I mean, how long till we get back to kind of normal fee income growth from the cards business?
The cards maturity cycle, Parag, you can jump in and change me, correct me. The card maturity cycle for all of this, call it, two to four, two to five quarters type of, how fast customer responds. That is where certain things that we control, we action. Right? From a customer behavior, that we don't control.
Yeah. Yeah. Correct. Like I said, a lot of the things intervention, whether it's a revolver or a transaction, especially on new sourcing, two to five quarters, four to five quarters is exactly the kind of behavior which we can do in a planned manner wherein we can intervene with customers, increase their spends, you know, widen their MCC spends, change, you know, offer them upgrades of products, et cetera. This is typically anywhere between two to four quarters. Five quarters is the kind of change which one can expect. As Srini said, overall ecosystem change in behaviors in customers, whether it's overall at an industry level revolver dropping or whether it's more number of customers, you know, having liquidity and hence utilizing credit itself, on the line.
These are things which we will have to see as the economy sort of opens up, not really predictable how that will work. What's in our control, we will drive.
All right. Thank you very much.
It does have a good attention from us, I can assure you. From a credit continuum of an individual, if you imagine to see that it starts with once this kind of a big event comes in, it starts with a secured and then it gets into some kind of an unsecured, which is within reach of a very good rate. Then it comes into cards, and then it goes into other products, which could be even more costlier from an individual point of view. That is the credit continuum of an individual.
Thank you. Thank you.
Thank you. Our next question is from the line of Prasoon Agrawal from BlackRock. Please go ahead.
Hi, Parag, Srini. Thanks for this.
Hi.
I have a, you know, more broader question. If, you know, based on our interactions with multiple FinTechs, across the board, it looks like, you know, while banks overall are okay and, you know, there's not much disruption, in fact, there's multiple levels of partnerships happening. But when I look at credit card portfolio particularly, from lending to fees, to, you know, kind of cash back, et cetera, it looks like there are multiple, you know, level of competition coming specifically in this particular portfolio. When I look at the profitability of this portfolio, it's of course pretty high, right? I mean, if you look at SBI Card, et cetera, very high ROA, ROE, what is being reported.
Is there, I mean, there must be pressure coming from various aspects if you look at like newbies, like, Slice or Uni who are adding as many cards as you guys are or as their cards are. Some part of growth is being taken away there. Fee income is a little bit under pressure. My broader question is the industry profitability under some threat medium-term? Or would we rather say that we will want to protect this profitability even if it means we may sacrifice on growth a little bit?
I don't know whether industry level profitability is under threat. I do know that definitely that unless you don't build a very strong regime of card issuing and card portfolio management, it's unlikely that you would build a good profitable card portfolio. Okay. Yeah, for such players, then you would have a situation where you'll be throwing a lot of money behind attracting spend, but not necessarily translating into loyalty, repeat usage, and profitability thereof. Okay. That's the way to do. We don't see this. We are very clear with 15 years or almost 18 years, 20 years of experience in the card space. We understand that just headline number is not just going to give you anything. Yeah, it does give you headlines.
We also know that you've got to pick and choose the right kind of customers. Build scale. We build scale, and we will continue building scale, not just like I said, not just on our own bank portfolio, but also with our partnerships and alliances. We will do product innovation. We will do deep engagement of portfolio. Our objective ultimately is to build a strong, robust, scalable, sustainable portfolio of customers, spending customers, revolving customers, transacting customers. Okay? To that extent, to that extent, our focus is very clear. Okay. In the interim, in short term, in certain bits and pieces, will there be intense competition? Yes, there will be. I guess that happens in every industry, in every segment, depending on the life cycle. It's happened in the telco industry.
It's happened and it will keep on happening everywhere else. We're very clear that that we've built up a long-term sustainable approach to great underwriting, picking and cherry-picking the right kind of products at scale, okay? Doing deep portfolio analytics and driving a lot of customer engagement, which will therefore build us a sustainable book. Okay, that's our approach. Like I said, it's a very optimized mix of many of these, and at the end of the day, of course, you've got to also manage, delinquencies, et cetera, very well. Okay? You've got to manage all of these factors simultaneously. You slip on one, you could have outages on your portfolio, okay? That's what impacts profitability. Okay?
I hope that answers your question in sort of a different way. Will there be pockets of competition? Answer is yes. Do we believe we have an overall wholesome strategy to sort of maintain consistent growth in this portfolio? Answer is also yes.
One other thing, if I may add Parag , just to tighten this.
Yeah.
In the market, if you see, right, in a mature market, you would imagine that people have four, five or six cards in their wallet, right? Then it's a question of juggling between those and whoever is in the top of the mind to use. From a market maturity, I'm not talking about the bank maturity, which we've been running for 20 years. From a market maturity of the product is a long way to go. 60 million, 70 million cards in this country, and you can imagine the number of people and the potential to cardify them. For lack of any other words, that's what I say.
That issue of whether profitability is under pressure and how do you manage this, that is certainly valid in a very mature market where the economy is fully carded and people are having five, six cards in their wallet and now each one is trying to grab other share and the rate of growth is in line with what the economy is growing and nothing more. Comes the question of how do you manage profitability. At this stage, it seems to be quite open from a growth prospects point of view.
Yeah, thanks. If I may squeeze one more question. Sorry. If I look at, you know, the unsecured portfolio of not just HDFC Bank, but everybody else is growing in an environment where revolvers have been coming down for credit cards, would there be any overlap of these revolver customers who are now going for unsecured loan because they are far cheaper? You know, a revolver would be paying 30 to 40 or whatever, 42% annualized rate, whereas these unsecured loans are 14%-15%. Is there a mix shifting there and is there any overlap?
Srini, you want to take that question or?
Yes, right. From a practical point of view, you would think that is the way a rational customer will move to. That is why I was talking in the prior question. I was trying to say from a product continuum point of view. After such a huge crisis event, right, COVID crisis, health crisis event, what we have seen in this market, right? The first thing that got off the block when the first wave of the COVID went was the secured product. What's a secured product? Think about the things around the mortgages or a loan against a home or against some property or against gold and so on. That was the first to get out of the block and go, because that's the most economical. Somebody wants to do something like.
The next thing that came out very well was kind of an unsecured personal loan, because the salaried customers would be very much made available to such a customer on a personal loan. That came up first because every rational customer will go to that in the second instance, right, together. Even on our own base, we have 70% of our customers are salaried customers, right? They are our own customers with the liability base that w e are having.
Comes this in terms of then do you spend, and then when you spend it, then this is a personal loan. You know that when you take it, you are stuck for a particular tenure, and when you don't want it for a tenure that Parag described about somebody who revolves for 2 months-3 months or 3 months-4 months in a period of 12 months, right? Those kind of customers come in and jump first, and then comes the other customers who are little more longer term in terms of revolving.
Thank you. We'll take our next question from the line of Dhaval Gada from DSP. Please go ahead.
Yeah. Hi. Thanks for the opportunity. Parag, just to go back to that conversation on the merchant fee waiver that we did in the third quarter. I just wanted to understand the, you know, the thought process that went behind going with this program and what is the measurable of this action. Would it lead to higher spend market share, you know, sort of faster growth in merchant lending business? If you could just, you know, explain the thought process and the, you know, measurable and also, you know, eventually, like what we did with the, you know, the other programs, annual programs, we made it more frequent.
Is that something that we'll do with this strategy as well?
I'm sorry, I didn't get your reference. Like you talked about some merchant fee waivers. What exactly are you trying to say?
The incentive that we gave to the merchant in terms of you know the interchange not being levied for our merchants which led to the fee income coming off in the third quarter.
No, no, it is not that.
Okay.
I don't know from where that got picked up. That is, the one what we described is that we ran certain promotions for card customers for them to avail of certain loan facilities where the fees were waived and which had a small impact to our fee line.
Okay. The merchant doesn't benefit in this case?
The merchant is not in this picture, right? You get to engage with the card customer to say, "Why don't you convert this into a loan?" When it converts into a loan, there is a fee to be paid. You waive the fee.
Understood.
This is an incentive or a part of behavior inducing behavior change from a customer.
Understood. Very clear. In terms of, you know, the strategy, eventual outcome, what will decide the frequency of such a, you know, engagement cost? I mean, the sustainability of this, you said that you will pull back some of it this quarter, but just, what would decide when to switch on again on such a large program?
This is a program that we run all the time. It's a kind of a from a how intense you go about running it. Perhaps maybe you want to talk. Festive quarter was a top quarter. We run such programs and certain other times in the year, it may be less valuable from a customer penetration. Maybe you want to give a perspective.
Yeah. During the quarter three October, as you know, we ran a HDFC Bank for the last two years. In fact, it has been running three years now. It has been running a branded program called Festive Treats. You know, as and as part of that Festive Treats, because it's the festive season in traditional India, we sort of bring our merchants together and our customers together on the platform of Festive Treats and sort of give them great deals to HDFC Bank customers using their cards. And therefore drive a lot of spends during that process. As part of that whole festive season program is when the intensity of some of these programs of customers wanting to take loans also sort of gets incentivized.
Like Srini said, while we keep on doing it at regular intervals, but during the festive season, the intensity is slightly high because quarter three typically in a card type business is where the maximum amount of spend per quarter happens in a year, okay? That's the time where, you know, as you know, there's a natural increase in customer spends, consumer spends, et cetera, et cetera. That's the festive period. That's when we sort of increase the intensity of all of our marketing communication, our marketing offers, et cetera, et cetera.
Understood. In terms of market share, did we see a substantial jump? If you can quantify the pre-offer market share to post, you know, some perspective about what kind of delta it provided on market share?
Let me say. On the merchant acceptance side, I'll just give you that. We've seen a consistent increase in our market share, both on the physical side and on the e-com side or the online space. On the online space, in fact, our acquiring share has really gone up to close to 50-odd%. At the beginning of the year it was close to 47%-48%. Despite pandemic lockdown, we've seen an increase in market share. Similarly in the physical merchant space, at the beginning of the year, it was somewhere close to around 40%-41%. That's gone up to almost 44%-45% market share. That's on the acquiring side.
On the UPI side also as an acquirer, if you take the P2M kind of space, at the beginning of the year, our share was closer to 8%-9%. We've sort of taken it up now to close on a run rate basis, so it's almost close to 14%-15%. We see robust growth on the acceptance side. On the issuing side, it's a little mixed bag because if you are saying that whilst we, during the embargo period where we could not put on a large number of cards, we did lose a little bit of market share on the incremental sourcing bit. We managed to retain our flat market share on the spend side because we did the portfolio engagement.
Now that we've started reissuing cards again post the embargo, we do expect to see both the number share and the market share volume share to now continuously grow here on afterwards once the impact of the new issuing starts sort of kicking in.
Yeah. Operator, we can take one last quick question, please.
Thank you.
Yeah.
We'll take our next question from Mr. Amey Sathe of Tata Asset Management. Please go ahead.
Hi. Just two questions from my side. Firstly, one observation if you can share. Whenever you rationalize your reward points, do you think, have you seen the customer behavior changing in the sense that usage of card sort of comes down whenever there is a reduction or rationalization in reward points? Second question is, at what point do you think you'll be comfortable sharing numbers on, say, PayZapp or SmartBuy platform, say, in terms of active users or GMV that you are doing there? Thank you.
Okay. On the first bit, yeah, I mean, obviously, when we tweak any product feature, we do have to do a pre and post to sort of check on things and seeing what it is. Having said this on reward points, when we did the changes on Infinia and Black, we did that change basis also benchmarking with the industry.
By far I think the changes have been welcome because when we've seen a lot of social media sort of responses and sort of independent blogs and surveys when they do focusing on the kind of value which card issuers provide, we do see that I think the Infinia card and the Diners Club Black card still stand out as the most value which customers in that segment particular see, notwithstanding the fact that we might have harmonized or optimized some of the product features. Okay. These decisions are typically taken, like I said, basis customer feedback, basis benchmarking with the competition, basis also understanding where we need to sort of reallocate some of our resources in which areas and sort of which areas we wouldn't, et cetera.
Some of these things are taken into account, and we constantly take feedback on that. Regarding talking about the metrics, I don't know, Ajit, you may want to answer that. We don't typically do a product-wise revelation of sort of many of the metrics. Ajit, if you want to sort of take that on a little about the second part of the question.
Yeah.
I mean.
Go ahead, Ajit. Go ahead, yeah.
Sure, Srini. You can go ahead.
Yeah.
No, all I was about to say is that the SmartBuy platform users or PayZapp users is something that we haven't particularly talked in terms of what are the count of users. We'll take your point and see at what point in time it makes sense for us to talk more further about it. Certainly we can talk about the features of what it provides for customers and potential customers to be engaged with us. We'll take your point and see what to do.
Okay, thanks.
Thank you. That was the last question. I now hand the floor back to Mr. Suresh Ganapathy for closing comments. Over to you, sir.
Yeah. Thanks, Parag, Srini, and Ajit for this very insightful session. We are closer to 200 participants in the call, so it's been a very insightful session from all of you. Thanks so much for the support.
Thank you. Thank you, Suresh, for the opportunity for me to talk to us.
Thank you.
Thank you. Thank you very much.
Bye-bye. Bye.
Thanks, Suresh. Bye-bye.
Thank you. Ladies and gentlemen, on behalf of Macquarie, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.