Specialist in Indian Banking and Economic Research

Hemindra Hazari

This analyst’s <a href="https://hemindrahazari.com/2021/09/24/deafening-silence-from-media-and-sell-side-on-hdfc-banks-processing-fee-scandal/" target="_blank" rel="noopener">research</a> note on September 24, 2021 highlighted <a href="https://www.smartkarma.com/entities/hdfc-bank-ltd-4b6b7a92-9087-468d-9dbe-ab169e77f014" target="_blank" data-smartkarma-citation="entities:558:1" rel="noopener">HDFC Bank (HDFCB IN)</a>’s disturbing practice of extracting ‘processing fees’ from prospective customers who applied for loans using false/fabricated documents. Following this, the media finally woke up (<a href="https://www.livemint.com/industry/banking/hdfc-bank-didn-t-flag-forgery-whistleblower-11632939515803.html?utm_source=share&amp;utm_medium=social&amp;utm_campaign=share_via_web" target="_blank" rel="noopener">here</a> and <a href="https://www.bloombergquint.com/business/the-curious-case-of-hdfc-banks-penalties-on-fraudulent-loan-applications" target="_blank" rel="noopener">here</a>) from their self-induced slumber. HDFC Bank was forced to issue a <a href="https://timesofindia.indiatimes.com/business/india-business/no-fee-refund-for-fraud-loan-applications-hdfc-bank/articleshow/86695841.cms" target="_blank" rel="noopener">media statement</a>  on October 1, 2021 wherein it justified levying processing fees, citing the additional due diligence required when loan applicants submitted “discrepant/suspected documents”. HDFC Bank also claimed that the bank filed police complaints in a “number of cases” where the processing cost was levied.  The bank also explicitly stated that the fees were not for closing the case. There are some issues with HDFC Bank’s clarification to the media:<ol style="list-style-type: lower-roman;">
<li>
The statement by HDFC Bank has not been published as a <a href="https://www.hdfcbank.com/personal/about-us/news-room/press-release" target="_blank" rel="noopener">press release</a>, nor has it been informed to the stock exchanges, which would have been the proper procedure. It has been given to select media agencies and to those analysts who have specifically requested it. This is unfortunate, as it is an important clarification, which required that it be publicly disclosed.
</li>
<li>Most Indian banks do not levy fees for rejecting a loan application where false documentation has been detected.  It is also unlikely that a person who was not a customer of the bank would voluntarily agree to pay a processing fee to a bank which has rejected his/her loan application.</li>
<li>There is no specific mention in HDFC Bank’s statement to the effect that Income Tax authorities had been informed in cases where fake Permanent Account cards (PAN) and dual PAN were submitted by prospective customers applying for a loan. The bank has specifically mentioned that internal and industry databases were updated and the police were informed.</li>
<li>HDFC Bank had earlier informed this analyst that it had recently stopped levying processing fees for false documentation. If the bank’s practice was legitimate and conformed to the law why did it discontinue the practice soon after the whistle blower raised these allegations?</li>
</ol>These questions can only be answered by a thorough investigation by the Reserve Bank of India (RBI) and by the Income Tax authorities to determine whether HDFC Bank was indulging in unfair practices, and whether loan applicants who were not HDFC Bank customers were voluntarily paying the “processing fees”.It is important for the regulator and for stakeholders to examine HDFC Bank’s significant fee income and the practices and policies that are driving it. HDFC Bank should not suffer the fate that befell <a href="https://www.smartkarma.com/entities/wells-fargo-co" target="_blank" data-smartkarma-citation="entities:232:1" rel="noopener">Wells Fargo &amp; Co (WFC US)</a>.

This analyst’s research note on September 24, 2021 highlighted HDFC Bank (HDFCB IN)’s disturbing practice of extracting ‘processing fees’ from prospective customers who applied for loans using false/fabricated documents. Following this, the media finally woke up (here and here) from their self-induced slumber. HDFC Bank was forced to issue a media statement  on October 1, 2021 wherein it justified levying processing fees, citing the additional due diligence required when loan applicants submitted “discrepant/suspected documents”. HDFC Bank also claimed that the bank filed police complaints in a “number of cases” where the processing cost was levied.  The bank also explicitly stated that the fees were not for closing the case. There are some issues with HDFC Bank’s clarification to the media:

The statement by HDFC Bank has not been published as a press release, nor has it been informed to the stock exchanges, which would have been the proper procedure. It has been given to select media agencies and to those analysts who have specifically requested it. This is unfortunate, as it is an important clarification, which required that it be publicly disclosed.

Most Indian banks do not levy fees for rejecting a loan application where false documentation has been detected.  It is also unlikely that a person who was not a customer of the bank would voluntarily agree to pay a processing fee to a bank which has rejected his/her loan application.
There is no specific mention in HDFC Bank’s statement to the effect that Income Tax authorities had been informed in cases where fake Permanent Account cards (PAN) and dual PAN were submitted by prospective customers applying for a loan. The bank has specifically mentioned that internal and industry databases were updated and the police were informed.
HDFC Bank had earlier informed this analyst that it had recently stopped levying processing fees for false documentation. If the bank’s practice was legitimate and conformed to the law why did it discontinue the practice soon after the whistle blower raised these allegations?
These questions can only be answered by a thorough investigation by the Reserve Bank of India (RBI) and by the Income Tax authorities to determine whether HDFC Bank was indulging in unfair practices, and whether loan applicants who were not HDFC Bank customers were voluntarily paying the “processing fees”.It is important for the regulator and for stakeholders to examine HDFC Bank’s significant fee income and the practices and policies that are driving it. HDFC Bank should not suffer the fate that befell Wells Fargo &amp; Co (WFC US).

The Mystery of Why Rejected Applicants Paid HDFC Bank ‘Processing Fees’

Head of Research, IPOs & Placements, Aequitas Research

Sumeet Singh

Head of Research, IPOs & Placements

IPOs and Placements coverage across Asia Pacific

Aequitas Research

We cover all listing across the Asia Pacific along with follow-up placements. As of Dec 2020, our team had covered 539 IPOs with a hit rate of 73.5% and 685 placements with a hit rate of 66.8%.

We combine fundamental bottom-up views with our proprietary quantitative framework to provide a holistic coverage across new listings and placements. Our coverage includes pre-IPO notes before the deal is launched, follow-up analysis once the deal is live and post-listing trading analysis as well.

Equity Capital Markets

Aditya Birla Sun Life AMC / Equity Capital Markets

Aditya Birla Sun Life Asset Management Company’s (ABSL) shareholders aim to raise around US$369m via reducing their stake in the company’s Indian IPO. ABSL is the largest non-bank affiliated asset management company (AMC) in India by quarterly average assets under management (QAAUM) and the fourth largest AMC in India. according to CRISIL.ABSL managed total AUM of INR2.9tn across mutual funds, portfolio management services, offshore and real estate offerings, as of Jun 21.ABSL enjoys a strong brand name in the country. However, unlike other AMC’s it lacks a strong parent, i.e. a bank for it to piggyback on its network. Therefore, the company has lagged its larger peers in terms of equity AUM exposure, which flows down to it having lower profitability as well.We have covered various aspects of the deal in our previous note, <a href="https://www.smartkarma.com/insights/aditya-birla-sun-life-amc-pre-ipo-strong-profit-growth-but-it-s-losing-market-share" target="_blank" rel="noopener">Aditya Birla Sun Life AMC Pre-IPO - Strong profit growth but it’s losing market share</a>.In this note, we will talk about valuations.

Aditya Birla Sun Life Asset Management Company’s (ABSL) shareholders aim to raise around US$369m via reducing their stake in the company’s Indian IPO. ABSL is the largest non-bank affiliated asset management company (AMC) in India by quarterly average assets under management (QAAUM) and the fourth largest AMC in India. according to CRISIL.ABSL managed total AUM of INR2.9tn across mutual funds, portfolio management services, offshore and real estate offerings, as of Jun 21.ABSL enjoys a strong brand name in the country. However, unlike other AMC’s it lacks a strong parent, i.e. a bank for it to piggyback on its network. Therefore, the company has lagged its larger peers in terms of equity AUM exposure, which flows down to it having lower profitability as well.We have covered various aspects of the deal in our previous note, Aditya Birla Sun Life AMC Pre-IPO - Strong profit growth but it’s losing market share.In this note, we will talk about valuations.  

Aditya Birla Sun Life AMC IPO - At a Slight Discount but There’s No Compelling Reason to Buy

“hush money”: money paid to someone to prevent them from disclosing embarrassing or discreditable information – Concise Oxford English Dictionary<a href="https://www.smartkarma.com/entities/hdfc-bank-ltd-4b6b7a92-9087-468d-9dbe-ab169e77f014" target="_blank" data-smartkarma-citation="entities:558:1" rel="noopener">HDFC Bank (HDFCB IN)</a> , India’s most valuable bank, has been found to be levying ‘processing fees’ on prospective retail customers who submitted spurious documents for availing a loan from the bank. On July 28, 2021, the noted HDFC Bank whistle blower who uses the pseudonym ‘Madanlal Dahariya’ <a href="https://threadreaderapp.com/thread/1420219262027722755.html" target="_blank" rel="noopener">tweeted</a>  that when prospective retail customers seeking a loan submitted false or misleading documents such as fake Permanent Account Numbers (PAN), dual PANs, forged Income Tax returns, and spurious salary slips/balance sheets, HDFC Bank did not report these individuals to the concerned authorities. Instead, the bank decided to convert this into a fee-enhancing opportunity, by calling these individuals and allegedly threatening to report them if they did not pay a ‘processing fee’ to the Bank. The whistle blower even uploaded samples of the fee receipts issued by HDFC Bank to such prospective retail customers.What is appalling, but not at all surprising, is that even though ‘Madanlal Dahariya’ tweeted this development on July 28, 2021, nobody in the business media and sell-side research – many of whom diligently report on the most mundane of issues pertaining to HDFC Bank – demonstrated any inclination to verify this story. This is especially strange since many journalists follow the whistle blower on Twitter.On August 24, 2021, this analyst, after making his own enquiries, sent a questionnaire to HDFC Bank mentioning the senior executives who reportedly originated this scheme many years ago and the charging of fees to prospective retail customers who had provided spurious documents. He asked whether it was accurate that the Reserve Bank of India was querying the bank on these incidents. On September 21, 2021, HDFC Bank responded and stated that the bank reported all such instances of spurious documents to the credit bureaus; there were very few cases where the bank had levied a fee of 2% of the loan amount to prospective customers; and the bank has since ceased such practices. Pertinently, HDFC Bank did not refute any of the allegations cited in the questionnaire.The issue is whether banks can engage in extracting ‘processing fees’ from retail customers who submit false documents, instead of reporting the incident to the concerned authorities such as the Income Tax department (for false PAN, dual PAN etc) or the concerned state investigative agencies. Many of these violations are liable for criminal prosecution under the Indian Penal Code, 1860. Indeed, the bank’s own conduct of levying a fee to customers and not reporting it to the concerned state agencies could be construed as abetment of a criminal offence.Stakeholders, the banking regulator, the Income Tax authorities and other state agencies have to take this issue extremely seriously as it pertains to a prominent Indian bank. HDFC Bank’s board of directors have to also conduct an internal investigation to determine whether this practice was the conduct of a few rogue employees or it was a business strategy to generate higher fees, as the whistle blower alleges in the tweets.  The RBI, the Income Tax department and other concerned state agencies also have to conduct their own investigations to determine how HDFC Bank was levying fees to non-customers without rendering any service, and instead for not reporting these incidents to the government agencies.These incidents appear to be a legacy issue, and this analyst is confident that Sashidhar Jagdishan, the present Chief Executive Officer (CEO), HDFC Bank will immediately address the issue. However, if this practice is found to have been widespread in HDFC Bank, no banking regulator in the world can permit any bank to indulge in such activities without severe penalties. Therefore, in such a case, the RBI must impose stringent penalties such as restricting profitable business for a lengthy time span, as a lesson to the shareholders and the board of directors for not exercising the necessary due diligence.

“hush money”: money paid to someone to prevent them from disclosing embarrassing or discreditable information – Concise Oxford English DictionaryHDFC Bank (HDFCB IN) , India’s most valuable bank, has been found to be levying ‘processing fees’ on prospective retail customers who submitted spurious documents for availing a loan from the bank. On July 28, 2021, the noted HDFC Bank whistle blower who uses the pseudonym ‘Madanlal Dahariya’ tweeted  that when prospective retail customers seeking a loan submitted false or misleading documents such as fake Permanent Account Numbers (PAN), dual PANs, forged Income Tax returns, and spurious salary slips/balance sheets, HDFC Bank did not report these individuals to the concerned authorities. Instead, the bank decided to convert this into a fee-enhancing opportunity, by calling these individuals and allegedly threatening to report them if they did not pay a ‘processing fee’ to the Bank. The whistle blower even uploaded samples of the fee receipts issued by HDFC Bank to such prospective retail customers.What is appalling, but not at all surprising, is that even though ‘Madanlal Dahariya’ tweeted this development on July 28, 2021, nobody in the business media and sell-side research – many of whom diligently report on the most mundane of issues pertaining to HDFC Bank – demonstrated any inclination to verify this story. This is especially strange since many journalists follow the whistle blower on Twitter.On August 24, 2021, this analyst, after making his own enquiries, sent a questionnaire to HDFC Bank mentioning the senior executives who reportedly originated this scheme many years ago and the charging of fees to prospective retail customers who had provided spurious documents. He asked whether it was accurate that the Reserve Bank of India was querying the bank on these incidents. On September 21, 2021, HDFC Bank responded and stated that the bank reported all such instances of spurious documents to the credit bureaus; there were very few cases where the bank had levied a fee of 2% of the loan amount to prospective customers; and the bank has since ceased such practices. Pertinently, HDFC Bank did not refute any of the allegations cited in the questionnaire.The issue is whether banks can engage in extracting ‘processing fees’ from retail customers who submit false documents, instead of reporting the incident to the concerned authorities such as the Income Tax department (for false PAN, dual PAN etc) or the concerned state investigative agencies. Many of these violations are liable for criminal prosecution under the Indian Penal Code, 1860. Indeed, the bank’s own conduct of levying a fee to customers and not reporting it to the concerned state agencies could be construed as abetment of a criminal offence.Stakeholders, the banking regulator, the Income Tax authorities and other state agencies have to take this issue extremely seriously as it pertains to a prominent Indian bank. HDFC Bank’s board of directors have to also conduct an internal investigation to determine whether this practice was the conduct of a few rogue employees or it was a business strategy to generate higher fees, as the whistle blower alleges in the tweets.  The RBI, the Income Tax department and other concerned state agencies also have to conduct their own investigations to determine how HDFC Bank was levying fees to non-customers without rendering any service, and instead for not reporting these incidents to the government agencies.These incidents appear to be a legacy issue, and this analyst is confident that Sashidhar Jagdishan, the present Chief Executive Officer (CEO), HDFC Bank will immediately address the issue. However, if this practice is found to have been widespread in HDFC Bank, no banking regulator in the world can permit any bank to indulge in such activities without severe penalties. Therefore, in such a case, the RBI must impose stringent penalties such as restricting profitable business for a lengthy time span, as a lesson to the shareholders and the board of directors for not exercising the necessary due diligence.

Deafening Silence from Media and Sell-Side on HDFC Bank’s ‘Processing Fee’ Scandal

FSN E-Commerce Ventures (Nykaa) / Equity Capital Markets

FSN E-commerce (Nykaa) aims to raise around US$550m, via selling a mix of primary and secondary shares in its Indian IPO. Nykaa is a lifestyle focussed e-commerce platform and consumer brand offering a portfolio of beauty, personal care and fashion products, including its own branded products. As per RedSeer, it was the largest Specialty Beauty and Personal Care Platform in India in terms of value of products sold in FY21.As of March 21, it had 43.7m cumulative downloads across all its mobile applications. Its offline channel comprises 73 physical stores across 38 cities in India. It reported a gross merchandise value (GMV) of INR40,459.8m (around US$550m) in FY21. As of Mar 21, it offered approximately 2.0m SKUs from 3,826 national and international brands across its business verticals. Nykaa’s GMV, revenue and gross profit have more than doubled over FY19-21, even though the company suffered from a drop in orders due to COVID-19 in 4Q20 and 1Q21. Overall, GMV grew by 62.7% in FY20 and 50.7% in FY21. Revenue growth has broadly kept pace with GMV growth while the company has managed to turn a profit in FY21. However, the growth for its largest segment, beauty and personal care, appears to have slowed down in FY21. While its fashion segment is operated as a marketplace and hence, won’t be a big driver of revenue growth till it scales.

FSN E-commerce (Nykaa) aims to raise around US$550m, via selling a mix of primary and secondary shares in its Indian IPO. Nykaa is a lifestyle focussed e-commerce platform and consumer brand offering a portfolio of beauty, personal care and fashion products, including its own branded products. As per RedSeer, it was the largest Specialty Beauty and Personal Care Platform in India in terms of value of products sold in FY21.As of March 21, it had 43.7m cumulative downloads across all its mobile applications. Its offline channel comprises 73 physical stores across 38 cities in India. It reported a gross merchandise value (GMV) of INR40,459.8m (around US$550m) in FY21. As of Mar 21, it offered approximately 2.0m SKUs from 3,826 national and international brands across its business verticals. Nykaa’s GMV, revenue and gross profit have more than doubled over FY19-21, even though the company suffered from a drop in orders due to COVID-19 in 4Q20 and 1Q21. Overall, GMV grew by 62.7% in FY20 and 50.7% in FY21. Revenue growth has broadly kept pace with GMV growth while the company has managed to turn a profit in FY21. However, the growth for its largest segment, beauty and personal care, appears to have slowed down in FY21. While its fashion segment is operated as a marketplace and hence, won’t be a big driver of revenue growth till it scales.

FSN E-Commerce (Nykaa) Pre-IPO - Mixed Bag - Fashion Growing, Beauty Slowing

Financials & FinTech research, Galliano’s Financials Research

Victor Galliano

Financials & FinTech research

Financials & FinTech, EM & Developed Markets

Galliano’s Financials Research

Galliano's Financials Research provides fundamental research in Emerging Markets financials, including FinTech, as well as financials in select Developed Markets.

The investment style applied is generally value oriented, although Growth At Reasonable Price (GARP) strategies can also be used where appropriate. 

Our investment research approach aim is often contrarian, looking to capitalise on overly sceptical or optimistic consensus views. In terms of valuation techniques, the focus is on PBV ratio to ROE, PE multiples and dividend yield, as well as the application of PEG ratios and, where appropriate, Sum of the Parts (SOTP) valuations.

Thematic (Sector/Industry)

<ul>
<li>We screen 7 Indian banks for their core profitability and their credit quality credentials, in order to identify banks that are good value and have potential to deliver higher returns going forward</li>
<li>We use a number of metrics including pre-provision and post-provision profit, cost of risk and credit quality, as well as capital adequacy ratios</li>
<li>We expect credit quality to continue to worsen in the coming quarters, especially as the moratorium on new NPL classification began to normalise as from April; yet we believe that certain Indian banks are well positioned and have already taken action to counter the threat of higher delinquencies, through cost of risk charges and write-offs</li>
<li>We highlight <a href="https://www.smartkarma.com/entities/axis-bank-ltd" target="_blank" data-smartkarma-citation="entities:768:1" rel="noopener">Axis Bank Ltd (AXSB IN)</a> as a restructuring and earnings recovery story, and <a href="https://www.smartkarma.com/entities/hdfc-bank-ltd-4b6b7a92-9087-468d-9dbe-ab169e77f014" target="_blank" data-smartkarma-citation="entities:558:1" rel="noopener">HDFC Bank (HDFCB IN)</a> for its high quality balance sheet and premium returns, which are not yet fully reflected in valuations; we also see <a href="https://www.smartkarma.com/entities/state-bank-of-india" target="_blank" data-smartkarma-citation="entities:160:1" rel="noopener">State Bank Of India (SBIN IN)</a> as an attractive value play, despite its lighter core capital ratio</li>
<li>We are cautious on <a href="https://www.smartkarma.com/entities/canara-bank" target="_blank" data-smartkarma-citation="entities:543:1" rel="noopener">Canara Bank (CBK IN)</a>, seeing it as a potential value trap; at first look, <a href="https://www.smartkarma.com/entities/bandhan-bank-ltd" target="_blank" data-smartkarma-citation="entities:26705:1" rel="noopener">Bandhan Bank Ltd (BANDHAN IN)</a> looks appealing on prospective PBV ratio to ROE and high pre-provision returns but we are wary of its high share of micro-finance and SME credit risk exposure in the light of rising NPA ratios</li>
<li>Risks to our view include, for our bullish calls, worse than expected credit quality resulting in higher cost of risk, higher than expected opex and weak revenue generation; for our bear calls, better than expected revenues with lower than expected opex and cost of risk leading to higher post-provision returns</li>
</ul>


We screen 7 Indian banks for their core profitability and their credit quality credentials, in order to identify banks that are good value and have potential to deliver higher returns going forward
We use a number of metrics including pre-provision and post-provision profit, cost of risk and credit quality, as well as capital adequacy ratios
We expect credit quality to continue to worsen in the coming quarters, especially as the moratorium on new NPL classification began to normalise as from April; yet we believe that certain Indian banks are well positioned and have already taken action to counter the threat of higher delinquencies, through cost of risk charges and write-offs
We highlight Axis Bank Ltd (AXSB IN) as a restructuring and earnings recovery story, and HDFC Bank (HDFCB IN) for its high quality balance sheet and premium returns, which are not yet fully reflected in valuations; we also see State Bank Of India (SBIN IN) as an attractive value play, despite its lighter core capital ratio
We are cautious on Canara Bank (CBK IN), seeing it as a potential value trap; at first look, Bandhan Bank Ltd (BANDHAN IN) looks appealing on prospective PBV ratio to ROE and high pre-provision returns but we are wary of its high share of micro-finance and SME credit risk exposure in the light of rising NPA ratios
Risks to our view include, for our bullish calls, worse than expected credit quality resulting in higher cost of risk, higher than expected opex and weak revenue generation; for our bear calls, better than expected revenues with lower than expected opex and cost of risk leading to higher post-provision returns


Indian Banks; Screening for Investment Ideas, Despite the Credit Quality Hurdles

India

HDFC Bank Ltd. offers a wide range of services to the global corporate sector. The Bank provides corporate banking and custodial services and is active in the treasury and capital markets. HDFC also markets project advisory services and capital market products such as Global Deposit Receipts, Euro currency loans, and Euro currency bonds.

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HDFC Bank (HDFCB IN)

The Mystery of Why Rejected Applicants Paid HDFC Bank ‘Processing Fees’

If the bank’s practice was legitimate and conformed to the law why did it discontinue the practice soon after the whistle blower raised these...

Hemindra Hazari

Aditya Birla Sun Life AMC IPO - At a Slight Discount but There’s No Compelling Reason to Buy

Aditya Birla Sun Life Asset Management Company’s (ABSL) shareholders aim to raise around US$369m via reducing their stake in the company’s Indian IPO.

Sumeet Singh

Deafening Silence from Media and Sell-Side on HDFC Bank’s ‘Processing Fee’ Scandal

When a couple of cockroaches crawl out, there always remains an apprehension as to how many more may be lurking out of sight.

Hemindra Hazari

FSN E-Commerce (Nykaa) Pre-IPO - Mixed Bag - Fashion Growing, Beauty Slowing

FSN E-commerce (Nykaa) aims to raise around US$550m, via selling a mix of primary and secondary shares in its Indian IPO.

Sumeet Singh

Indian Banks; Screening for Investment Ideas, Despite the Credit Quality Hurdles

Screening for ideas, we are positive on Axis Bank and HDFC Bank, and State Bank of India too; due to credit quality concerns, we are cautious on...

Victor Galliano

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