The country’s largest private lender, HDFC Bank has been hauled up by the regulator for a series of technical glitches it has experienced in the past two years. The Reserve Bank of India (RBI) has put temporary restrictions on the bank’s new digital banking launches and proposed business generating IT applications until it resolves the outage issues.
Additionally, in what will pinch HDFC Bank even more, the regulator has temporarily barred it from onboarding any new credit card customers. The bank is the largest credit card issuer in the country with at least 1.45 crore credit cards in circulation as on June 30.
As per an order dated December 2, “RBI advised the Bank to temporarily stop i) all launches of the Digital Business generating activities planned under its program ‐ Digital 2.0 (to be launched) and other proposed business generating IT applications and (ii) sourcing of new credit card customers.”
RBI has directed the bank’s board to examine the lapses and fix accountability, only after which RBI would consider lifting these restrictions.
“The order states that the Bank’s Board examines the lapses and fixes accountability. The above measures shall be considered for lifting upon satisfactory compliance with the major critical observations as identified by the RBI,” HDFC Bank disclosed in an exchange notification.
Why the restrictions?
The move comes after HDFC Bank faced a series of technical glitches over the last two years, involving incidents of outages in the internet and mobile banking services, and payment utilities. Its internet banking services last faced an outage as recently as November 21, which the bank stated was due to a power failure in its primary data center. HDFC Bank's digital payment services were down over for at least 2-3 days then, with net-banking, debit card payments, UPI, IMPS, and NEFT remaining inoperative for its 5.4 crore customers. People were also unable to withdraw money from ATMs.
Similarly, HDFC Bank’s digital banking channels faced an outage in December 2019, which caused its customers to be locked out of their net and mobile banking accounts for over 48 hours. It had faced a similar outage on its mobile application in 2018 while launching a new version of the application.
For a bank that claims to be a pioneer in digital banking, and prides itself on using technology to bring seamless services to its large customer base, these glitches did not go down too well with the regulator, resulting in this action.
Suresh Ganapathy of Macquarie in his note said, "When the bank is growing at a rapid pace and running way faster than the system, challenges are bound to crop up in our view. While the system loan growth has been at 5%, HDFC Bank has grown its loan book at a level of 16-17% - almost 3x that of the system and this growth comes on the back of 10% market share base. Add to that they have a market share of 35-40% in the payments market. While market share in credit cards on an outstanding basis was 26% for HDFC Bank, on an incremental basis, market share was 31% CYTD’20. So, when growth is happening at such a furious pace, technology, unfortunately, is not able to keep up the pace in our view."
HDFC Bank’s Response
In its statement to exchanges, HDFC Bank said that over the last two years, it has taken several measures to fortify its IT systems and will continue to work swiftly to close out the balance and would continue to engage with the Regulator in this regard.
“The Bank has been taking conscious, concrete steps to remedy the recent outages on its digital banking channels and assures its customers that it expects the current supervisory actions will have no impact on its existing credit cards, digital banking channels and existing operations.”
HDFC Bank also added that these measures will not materially impact its overall business.
Macquarie in its note added, that some of the bank's initiatives that were planned under Digital 2.0 like launching of new APIs, faster processes, better omni-channel experience for sales force, better usage of AI and analytics etc will now get delayed, but other businesses will continue.
"Though credit card business has a higher ROA of 4% in our view compared to 1.8-2.0% overall ROA and possibly contributes 10-15% of overall profits, the impact on profitability will only be limited to lack of ability to issue new credit cards. Existing credit card book will continue to drive good profits," Ganapathy said.