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’

Research and consultancy, Tabbush Report

Daniel Tabbush

Research and consultancy

Tabbush Report

We provide research and consultancy on Asian banks. Our focus is on what we call “Asian bank research, without the noise.” We are interested in the most critical swing-factors for banks, the NPL and credit cycle, and where we believe there is a gap between perception and reality. We often focus on the less studied components of bank financial statements.  Our research is highly thematic, sometimes examining unlisted banks and companies as a window on mainstream banks. 

Being independent allows us to look at smaller banks, often overlooked by others. Analysis of BIS bank guidelines in the context of Asia, is also a focal point, while we also analyze global banks operating in the region. We use what we believe is the most comprehensive, reliable financials database, SNL Financial. S&P Capital IQ augments our database, with corporate data and CEIC, with economics. 

Asian bank research, without the noise.

Thematic (Sector/Industry)

There are stark differences in how loan loss provisioning levels have changed since late 2019 to early 2021. This can have implications for relative credit costs during FY21. STAN does not fare well, Mizuho looks best.

There are stark differences in how loan loss provisioning levels have changed since late 2019 to early 2021. This can have implications for relative credit costs during FY21. STAN does not fare well, Mizuho looks best. 

The story for banks now is about credit cost reversals, reinstatement of dividends, and lastly resumption of loan growth. Data from some US banks may have incredibly positive read through for DBS, others.

The story for banks now is about credit cost reversals, reinstatement of dividends, and lastly resumption of loan growth. Data from some US banks may have incredibly positive read through for DBS, others.

While most banks globally are seeing sharply lower credit costs in the March 2021 quarter, this is not the case in India. There are discreet risks in India related to the impact of poor air quality and the syndemic, but also with respect to pre-existing financial weakness and limited central bank relief.

While most banks globally are seeing sharply lower credit costs in the March 2021 quarter, this is not the case in India. There are discreet risks in India related to the impact of poor air quality and the syndemic, but also with respect to pre-existing financial weakness and limited central bank relief. 

Asset Allocation & Fund Positioning, Copley Fund Research

Steven Holden

Asset Allocation & Fund Positioning

Copley Fund Research

Copley Fund Research provide research and data on asset allocation among Global and Emerging Market equity funds.  The analysis details absolute and relative positioning across countries, sectors and industries together with highly granular data on single stock and single fund allocations.  The data is updated monthly with time series going back to January 2011.

Global Research - Analysis of 165 prominent Global equity funds, combined AUM $335bn
GEM Research - Analysis of 127 prominent global EM equity funds, combined AUM $250bn

Asset Allocation - Global and GEM Equity

Cross Asset Strategy

Across our active Global fund universe, Value managers have seen $41bn in outflows over the past 5-years, compared to $65bn of inflows in to Growth funds.With Value funds capturing some long awaited outperformance this year, we analyse the current holdings set up among the 63 active Value funds in our analysis.Overweights in EMEA persist against underweights in Asia and the Americas.  Financials, Materials and Industrials are the key overweights versus underweights in Information Technology.US Financials are the standout overweight, with <a href="https://www.smartkarma.com/entities/citigroup-inc" target="_blank" data-smartkarma-citation="entities:279:1" rel="noopener">Citigroup Inc (C US)</a> and <a href="https://www.smartkarma.com/entities/american-express-co" target="_blank" data-smartkarma-citation="entities:916:1" rel="noopener">American Express Co (AXP US)</a> the key positions.  The FAAMG group of stocks remain key underweight holdings, though <a href="https://www.smartkarma.com/entities/microsoft-corp" target="_blank" data-smartkarma-citation="entities:15273:1" rel="noopener">Microsoft Corp (MSFT US)</a> is the most widely held of the group. <a href="https://www.smartkarma.com/entities/tesla-motors-inc" target="_blank" data-smartkarma-citation="entities:20279:1" rel="noopener">Tesla Motors (TSLA US)</a> is almost totally avoided and in Asia, <a href="https://www.smartkarma.com/entities/meituan-dianping" target="_blank" data-smartkarma-citation="entities:26970:1" rel="noopener">Meituan (3690 HK)</a> , <a href="https://www.smartkarma.com/entities/jd-com-inc-adr" target="_blank" data-smartkarma-citation="entities:446:1" rel="noopener">JD.com Inc (ADR) (JD US)</a> and <a href="https://www.smartkarma.com/entities/pinduoduo-inc" target="_blank" data-smartkarma-citation="entities:27250:1" rel="noopener">Pinduoduo (PDD US)</a> screen as 'Unloved' by global active Value managers.

Across our active Global fund universe, Value managers have seen $41bn in outflows over the past 5-years, compared to $65bn of inflows in to Growth funds.With Value funds capturing some long awaited outperformance this year, we analyse the current holdings set up among the 63 active Value funds in our analysis.Overweights in EMEA persist against underweights in Asia and the Americas.  Financials, Materials and Industrials are the key overweights versus underweights in Information Technology.US Financials are the standout overweight, with Citigroup Inc (C US) and American Express Co (AXP US) the key positions.  The FAAMG group of stocks remain key underweight holdings, though Microsoft Corp (MSFT US) is the most widely held of the group. Tesla Motors (TSLA US) is almost totally avoided and in Asia, Meituan (3690 HK) , JD.com Inc (ADR) (JD US) and Pinduoduo (PDD US) screen as 'Unloved' by global active Value managers.

United States

Wells Fargo & Company is a diversified financial services company providing banking, insurance, investments, mortgage, leasing, credit cards, and consumer finance.  The Company operates through physical stores, the Internet and other distribution channels across North America and elsewhere internationally.

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Wells Fargo & Co (WFC US)

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

Banks – Provisioning

There are stark differences in how provisioning levels changed since 4Q29 to early 2021. This can have implications for relative credit costs...

Daniel Tabbush

JPM, WFC, DBS – Credit Costs

The story for banks now is credit cost reversals, reinstatement of dividends, and lastly resumption of loan growth. Data from some US banks may...

Daniel Tabbush

India – Not Time

There are discreet risks in India related to the impact of poor air quality and the syndemic, but also with respect to pre-existing financial...

Daniel Tabbush

Where Are Global Value Funds Positioned?

With Value funds capturing some long awaited outperformance this year, we analyse the current holdings set up among the active Global Value funds...

Steven Holden

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