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Restrictions on new credit card issuances lifted, embargo continues on Digital 2.0 offering

HDFC Bank has informed stock exchanges that the RBI vide its letter dated 17th Aug’21, has relaxed the restriction placed on sourcing of new credit cards. However, restrictions on all new launches of digital business generating activities planned under the bank’s Digital 2.0 initiative will continue till further review by RBI. HDFC Bank in its FY21 annual report highlighted that third-party audit of the bank’s IT systems was over and the report was submitted to the regulator.

It was awaiting decision from the RBI. With the embargo being there for almost 8 months since 2 nd Dec’20 and incremental disclosures on audit being over and report submitted, relaxation of the restriction is an expected and positive development. The stock has underperformed ~15% to bank nifty since Dec’20. Bank has highlighted it is well prepared to gain market share in credit card once the embargo is lifted. Maintain BUY with an unchanged target price of Rs1,818.

RBI has issued an order dated 2 nd Dec’20 with regard to certain incidents of outage in the internet banking / mobile banking / payment utilities of the HDFC Bank over the past 2 years, including outages in the bank’s internet banking and payment system on 21st Nov’20 due to a power failure in the primary data centre.

RBI, vide the order, advised the Bank as follows:

* To stop all digital business generating activities planned under its ‘Digital 2.0’ and proposed Business generating applications digital also imposed restrictions and

* To stop sourcing of new credit card customers. However, the embargo has been lifted only partially and there still are restrictions on all new launches of digital business generating activities planned under Digital 2.0. Bank will continue to engage with RBI and ensure compliance on all parameters. Lifting of restrictions on Digital 2.0 offerings will provide more confidence.

* Digital 2.0 essentially was about re-imagining digital platforms providing the customer with a frictionless financial experience. The objective was to move customers from a single transaction to a complete financial solutions journey and thereby, meet all their financial needs – be it pay, save, invest, borrow, shop, trade, insure, or advice.

* Bank has pro-actively partnered with online platform / fintech players to provide value-added benefits to its customers. By deploying data analytics, it intended to maximise the digital impact in terms of context and targeting. This digitally synchronised marketing approach will help it acquire new customers more efficiently.

* It will also enable differentiated experiences through development of new platforms and applications, creation of APIs to enable new user stories and empowering customer interactions through analytics.

* The above transition was expected to result in significant cost efficiencies on the back of automation and reduction in origination costs. Simultaneously, revenue generation opportunities for the bank will also increase.

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