All information copy paste from Goldman Sachs report on HDFC Bank . September 19
All credit to Goldman Sachs’s
Rahul jain , Abhijeet sakhare , Mayank Bukhrediwala
How they will penetrate in rural area and why rural market is important for them
How important are the rural regions to HDBK
The agriculture/rural/semi-urban-focused loan book is c.16-18% of HDBK’s loan book – one of the largest portfolios within Pvt banks – at c.US$20bn, as of FY19.
The bank has seen an increase in delinquencies in crop loans as well certain products that are exposed to rural/semi-urban areas.
The tier-2/-3 centers have been a big focus area for HDBK over the last few years.
The bank has acquired up to 19% of incremental market share in rural communities.
Given that HDBK is acquiring significant market share in tier-2/-3 geographies and with larger markets saturating in terms of further market-share gains, rural/semi-urban is increasingly becoming critical for the bank, particularly from an expanding customer-acquisition standpoint.
For that they r doing this
CSCs – a low-cost, customer-acquisition model; potential to add c.8-28% to its retail loan book
Common service centers (CSC) provide approximately 250 different types of central/state government services in rural/semi-urban centers and are allowed to be a banking facilitator.
HDBK provides basic banking facilities in 32,000 of these CSCs so far, and plans to expand the number to over 100,000 centers. With about 300 footfalls per day, a village level entrepreneur (VLE) is able to earn about Rs30,000 from offering government services and that can potentially increase to Rs50,000 per month by distributing financial services. The asset-side opportunity is larger for VLEs due to under-penetration and higher incentives in rural regions
A VLE can potentially source one car loan per month, one 2-wheeler and personal loan per week and five microloans per month
Based on a simple assumption considering similar productivity at the pan India level with 32,000 VLEs, could potentially translate to Rs350-400bn (US$5-5.7bn) of annual disbursements over near-term and Rs1.1-1.2tn (US$16-18bn) over the medium-term, in our view. Commissions are close to Rs3,000 for a car loan, Rs800 for a 2W, and similar payouts for other products such as personal loans and microfinance loans.
The VLE that we visited had already opened 100 SA accounts and a few asset cases within 2 months of being operational with HDBK with nearly all accounts having reasonable balances. HDBK has nearly 40% deposit market share in that catchment area, as per on-the-ground feedback.
Key challenges for HDBK: (1) scaling up this business by signing on more VLEs; (2) the quality of customer acquisition; (3) maintaining the right incentive structure so that the VLEs are motivated to sell HDBK’s products; and (4) ensuring regular transactions and increasing cross-sell. The bank has been constantly providing training to the VLEs.
The variable cost nature of this model mitigates these risks for the bank, in our view.
Risks from competition:
While HDBK’s arrangement with a VLE is not exclusive, system integration and the bank’s strong processes and execution strength, alongwith ability to underwrite and turn around a wide array of products, will likely provide a much better user experience. This should help VLEs to earn better commissions through better volumes, even if a new entrant were to offer a higher commission rate.
Thanks
Ashit