About HDB Financial Services Limited
BUSINESS OVERVIEW
HDB Financial Services is one of the leading, diversified retail-focused non-banking financial companies (NBFCs) in India, ranked by Total Gross Loan Book size (CRISIL Report). Categorized as an Upper Layer NBFC (NBFC-UL) by the Reserve Bank of India (RBI), the company operates across three verticals: Enterprise Lending, Asset Finance, and Consumer Finance.
Established in 2007 as a subsidiary of HDFC Bank Limited, India’s largest private sector bank by total assets (₹36,880.7 billion as of September 30, 2024), HDB Financial Services benefits from brand strength and institutional governance while functioning independently across sourcing, underwriting, operations, and risk management.
It maintains one of the largest and fastest growing customer franchises in India, with 17.5 million customers as of September 30, 2024, growing at a CAGR of 28.22% since March 2022. The company primarily serves underserved and underbanked low- to middle-income households, including salaried individuals, self-employed professionals, and small business owners.
The loan book is highly granular, with the top 20 customers contributing less than 0.36% of Total Gross Loans. The distribution strategy follows a “phygital” model, integrating 1,772 branches across 1,162 towns in 31 States and Union Territories, with 80% of branches outside India’s top 20 cities, supported by over 140,000 dealer and retailer touchpoints and partnerships with 80+ OEMs and brands.
Underwriting follows a hybrid model: centralized systems for small-ticket, short-tenure consumer loans, and localized assessments for larger, long-tenure loans under Enterprise Lending and Asset Finance. With seasoned loan performance through multiple credit cycles and tech-enabled processes, the company consistently maintains strong asset quality and low credit costs amid rapid growth.
As of March 31, 2025, the company have total 60,432 permanent employees. The Bankers to the Company are State Bank of India and HDFC Bank Limited.
INDUSTRY ANALYSIS
Industry Overview: NBFC Sector in India
Systemic Credit Trends
Corporate credit, forming about two-thirds of systemic credit, heavily influences overall credit growth. In FY21, credit growth dropped to 6.3% due to economic slowdown and increased risk aversion among lenders. However, retail credit proved resilient, growing 9% in FY21 and 13% in FY22, outpacing non-retail segments.
Systemic credit rose 10.5% YoY in FY22, reaching ₹161 trillion, driven by increased government spending, private investments, and a rebound in business activity. The upward trend continued with 12.8% growth in FY23 and a healthy 14.1% in FY24, supported by robust retail disbursements, especially in housing and vehicle loans, and demand from NBFCs and trade segments.
Retail Credit Outlook
Retail credit, covering home, auto, gold, education, personal loans, credit cards, and microfinance, reached ₹75 trillion in FY24. It expanded at a 15% CAGR between FY19 and FY24. After a dip during the pandemic (FY21 growth of ~9%), retail credit rebounded, achieving 22% growth in FY23 and 20% in FY24 due to rising consumption and private bank activity.
Retail credit is projected to grow at 14-16% CAGR from FY24 to FY27. However, risk weight adjustments by RBI (Nov 2023), elevated inflation, and rising interest rates may temper this growth.
Role of NBFCs
While banks dominate India’s financial ecosystem, NBFCs play a critical role by reaching underbanked segments and customers lacking formal credit histories or adequate collateral. Their focus on niche retail lending has enhanced financial inclusion in semi-urban and rural areas.
MSME Sector in India: Overview and Financing Landscape
Sector Significance
The MSME sector has become a key growth driver of the Indian economy, with ~70 million enterprises as of FY22. It plays a pivotal role in employment generation, regional industrialisation, and equitable wealth distribution.
MSMEs contributed 29.2% to India’s GDP in FY22, with a target to reach 40-50% by FY30. They also account for ~45.7% of total exports as of FY24. Employment recorded via UDYAM registrations stood at 196 million as of October 2024.
Revised definitions in 2020 (based on turnover and investment thresholds) and the inclusion of traders under MSME classification in 2021 expanded eligibility for financial benefits and formal sector inclusion.
MSME Credit Gap
Despite their importance, MSMEs face significant credit access challenges. As per the IFC's 2018 report, formal credit addressed just 16% of the ₹69.3 trillion credit demand in FY17, with a ₹58.4 trillion gap filled by informal sources (charging 30–60% interest).
Post-COVID disruptions and limited eligibility under government schemes like ECLGS have widened the credit gap further. By FY24, total credit demand from MSMEs was estimated at ₹138 trillion, with only 25% met through formal channels. The current credit gap is projected at ₹103 trillion.
Addressable Demand and Opportunity
After excluding new, unviable, or non-seeking micro MSMEs, the addressable credit demand stood at ₹67.5 trillion in FY24. Formal credit covered ₹35 trillion, leaving a gap of ₹32.5 trillion that financial institutions can target with tailored offerings.
Improved bank support, government incentives, tech integration, and data-driven credit assessments are enabling more MSMEs—especially new-to-credit ones—to access formal financing. The increased uptake of UDYAM registrations is also expanding credit eligibility.
Post-Pandemic Recovery and Credit Growth
MSME revenues and credit uptake rebounded post-pandemic. In FY23, SME revenue grew 11%, while MSME credit expanded by 30%. This momentum continued in FY24, driven by rising demand and greater lender focus, indicating growing confidence in the segment.
Conclusion
India’s NBFC and MSME financing landscape is undergoing a transformation. With systemic credit growth rebounding and retail credit remaining strong, NBFCs have a significant role in deepening financial inclusion. The MSME sector, though constrained by a persistent credit gap, presents a high-growth opportunity for lenders willing to innovate and bridge the gap using digital tools and inclusive frameworks.
BUSINESS STRENGTHS
1. Highly Granular Retail Loan Book with Underbanked Focus
Among India’s largest and fastest-growing customer franchises with 17.5 million customers as of September 30, 2024, growing at a CAGR of 28.22% since March 2022. Strong alignment with government financial inclusion efforts, targeting underbanked, low- to middle-income segments.
2. Diversified and Seasoned Lending Portfolio
A robust portfolio of 13 lending products across Enterprise Lending, Asset Finance, and Consumer Finance, catering to business, personal, and consumption-driven credit needs. Offers income-generating, lifestyle, and working capital solutions. Also provides fee-based services including BPO and insurance product distribution.
3. Tailored, Pan-India Omni-Channel Distribution
A digitally enabled "phygital" network, comprising internal and external distribution systems, covering all regions of India with no single region accounting for more than 35% of the loan book. Focused expansion beyond metro cities to tap fragmented, underpenetrated markets.
4. Advanced Technology and Analytics Platform
A comprehensive tech infrastructure enhancing customer sourcing, onboarding, underwriting, operations, and collections. Drives higher efficiency, productivity, and asset quality while lowering cost-to-serve across the business lifecycle.
5. High-Quality, Diversified Liability Franchise
Backed by AAA (Stable) credit ratings from CRISIL and CARE—the highest possible rating for an NBFC in India. Ensures access to low-cost, stable funding, with an average cost of borrowing at 7.53% as of March 31, 2024, among the lowest in the sector.
6. Sustainable Financial Performance
Total Gross Loan Book expanded from ₹613.3 billion (FY22) to ₹986.2 billion (Sep 2024), at a CAGR of 20.93%. Interest income grew at 15.50% CAGR from FY22 to FY24, while fee income rose at 29.42% CAGR during the same period, driven by insurance distribution and value-added services.
7. Experienced Leadership and Professional Governance
A leadership team with over 25 years of sector experience, many with long-standing tenures at the company. The 11-member Board includes 9 independent directors, bringing cross-functional expertise and ensuring sound corporate governance.
8. Strong Parentage and Brand Equity of HDFC Bank
A subsidiary of HDFC Bank, India’s largest private sector bank with ₹36.88 trillion in assets as of September 30, 2024. As promoter, HDFC Bank holds 94.36% equity (fully diluted basis), providing brand strength, institutional backing, and consumer trust.
BUSINESS STRATEGIES
1. Product Diversification to Broaden Customer Reach
Focused on expanding and enhancing a diverse portfolio of lending products to address evolving customer lifecycle needs. Product innovation—such as automated underwriting for Two-Wheeler Loans—enables access to broader geographies and underbanked segments, while supporting stronger cross-sell potential across business verticals.
2. Expansion of Pan-India Omni-Channel Distribution
Aims to strengthen a hybrid distribution model, comprising 1,772 branches across 1,162 towns in 31 States/UTs, supported by digital channels, 80+ OEM/brand partnerships, and a network of 140,000+ dealer and retailer touchpoints. Plans include opening new branches and expanding third-party alliances to ensure comprehensive national reach.
3. Continued Investment in Technology and AI
Committed to deepening integration of data analytics, machine learning, and generative AI across the lending lifecycle—from sourcing and onboarding to collections. These tools are key to improving customer experience, cross-sell opportunities, operational efficiency, and employee productivity, while also enhancing digital security frameworks.
4. Funding Diversification for Cost Efficiency
Strategy includes expanding the lender base to optimize leverage and borrowing costs. As of September 30, 2024, USD 1 billion raised through ECBs, alongside funding from banks, mutual funds, insurance firms, pension funds, and others. Instruments include term loans, NCDs, subordinated and perpetual bonds, and commercial papers.
5. Strengthening Risk Management and Credit Underwriting
Enhancing an already robust risk framework through customized credit assessment, improved underwriting models, and tech-enabled collections processes. Emphasis on maintaining high asset quality while scaling, based on a 17-year track record and deep insight into customer behavior across business verticals.
6. Talent Development and Cultural Alignment
Prioritizing recruitment, continuous employee training, and retention strategies to foster a high-performing workforce. Organizational culture focuses on growth with prudence and sustainability, aiming to build a long-term, resilient consumer lending franchise that benefits customers, partners, employees, and communities.
BUSINESS RISK FACTORS & CONCERNS
1. Macroeconomic Dependency
Entire operations, customer base, and revenue are India-centric. Any adverse changes in the Indian macroeconomic environment could significantly affect business performance, cash flows, and financial condition.
2. Brand Dependency on HDFC Bank
Operates under a trademark license agreement with HDFC Bank, which permits the use of the HDFC Bank logo. Any reputational damage to the HDFC Bank brand or termination of the agreement could impair brand recognition and affect business operations and financial outcomes.
3. Regulatory Risk from RBI Inspections
Subject to regular inspections by the Reserve Bank of India (RBI) under the RBI Act, 1934. Non-compliance with RBI’s observations could lead to penalties, operational restrictions, or cancellation of the NBFC license.
4. Capital Adequacy Compliance Risk
Required to maintain a minimum capital adequacy ratio (CAR) of 15%, with Tier I capital not below 10%, as mandated by RBI's Scale-Based Regulation for NBFCs. Although current CAR levels meet regulatory norms, any future non-compliance could materially impact operations and financial stability.
5. High Exposure to New-to-Credit Borrowers
A significant portion of the loan book is extended to new-to-credit (NTC) borrowers, who lack formal credit histories. These borrowers, constituting 12.02% of the portfolio as of September 30, 2024, present a higher risk of default due to the limited ability to assess creditworthiness and greater vulnerability to economic stress.
HDB Financial Services faces several business risks linked to macroeconomic exposure, regulatory compliance, dependency on brand association with HDFC Bank, and the credit risk involved in lending to new-to-credit customers. These vulnerabilities could impact operational stability, brand perception, capital adequacy, and asset quality.
