HDFC Bank may take longer time than anticipated to be able to source new credit card customers as it struggles to fully sort out its technical issues to convince the Reserve Bank of lifting the ban on the launch of its digital 2.0 initiatives. This will allow more time for competitors like the State Bank of India (SBI), ICICI Bank and Axis Bank to ramp up their credit card customer base.
Though HDFC Bank has indicated that a lot of work on this has been undertaken, it has said that the medium term may take about six months to complete from now on while the long-term strategies would take between 12 and 18 months.
“We had demarcated the actions between certain things that are short term, medium term and long term. Keep long term to the side; it could be 12 months, 18 months. Cloud strategy, for example, is one such thing which is long term,” said HDFC Bank chief financial officer Srinivasan Vaidyanathan.
The short-term plan includes “some enhancements in security” and “DR resiliency where recovery time and the recovery point are tuned”. In the medium term, “some more security enhancements” would be undertaken. And both in the short and medium term, the “application network monitoring tools would come through”.
“So this is how we address it as short, medium and long term. And some of these are frankly items that are new standards,” elaborated Vaidyanathan.
So would the Reserve Bank of India’s removal of the ban be subject to completion of HDFC Bank’s upgrades?
“I do not have visibility on what are contingent upon regulatory discussion. But that's our conversation with the regulator more than here,” Vaidyanathan told analysts in the bank’s fourth-quarter FY21 earnings conference call on Saturday.
How long would the medium-term rectification take from now? “The medium-term would be about six months or so,” said Vaidyanathan.
Brokerage firms are concerned about the RBI’s temporary ban on the launch of HDFC Bank’s digital initiatives. “No visibility on the lifting of the RBI ban can be a near-term constraint on multiples. Though the management of HDFC Bank highlighted that they have taken the necessary short and medium term steps, they refrained from indicating any timeline for removal of the ban. We maintain our target price at Rs 1,825 based on a 3.5x FY23 book and 22x FY23 earnings and reiterate our buy rating on HDFC Bank as it is trading below long-term average multiples,” said foreign brokerage firm CLSA.
Emkay said in its report after the earnings call conference that the “RBI's suspension of new card acquisiton due to continued technical outages remains an irritant”. The management of HDFC Bank clarified that the net and mobile outage on 30 March was mainly due to compatibility issues between hardware and software rather than capacity constraints. “The bank has a detailed plan to clear outages but it is awaiting clearance from the RBI,” the report added.
Just last month, HDFC Bank customers experienced downtime on their internet and mobile banking with services not accessible to them for several hours. The bank highlighted that the outages were intermittent due to server hardware failure. It is building up technological capabilities on the core system: setting higher standards, enhancing security, migrating to cloud for resilience, card management and activation.
In December, the RBI directed HDFC Bank to temporarily halt all launches of its digital business generating activities under ‘Digital 2.0’, along with sourcing new credit card customers. The regulator also asked the bank’s board to examine these lapses and fix accountability. The restrictions shall be considered for lifting based on “satisfactory compliance with the major critical observations”, the order stated.
RBI’s order, dated 2 December, came after HDFC Bank suffered its third big outage within two years. On 21 November, the bank’s internet banking and payment system were disrupted by an outage, the first since Shashidhar Jagadeeshan took over as the new chief executive after the retirement of Aditya Puri in October.
HDFC Bank has a share of 45% of the payments market and 10% of the loan market. The bank used to add 2 lakh cards every month before the outbreak of Covid-19.
