Inside HDFC Bank’s digital stumble

The 34-kilometer trip by Jain, a former IDBI Bank Ltd chief executive officer (CEO), was more of symbolic import than anything else.

HDFC Bank, India’s largest private sector lender by assets, had sparked consternation among its customers some weeks ago when online transactions ran into glitches. Jain’s visit to the bank’s data centre was to drive home to HDFC Bank that the regulator had taken serious note of the digital transaction failures.

“By sending a deputy governor to its data centre, the regulator was trying to convey to the bank management that it meant business,” said a person aware of the matter who spoke on the condition that he wouldn’t be identified.

Social media had been inundated with complaints, many of them tagging the central bank. Customers complained that they had been unable to transfer funds or even check their account balance. At its bi-monthly monetary policy press conference in December 2019, RBI officials also confronted questions from the media over what had gone wrong at HDFC Bank and responded that they were trying to stanch the problems.

Between 1 and 31 December, the bank’s shares on the BSE slid 0.22%, while the benchmark Sensex was up 1.13%. In a conference call with journalists a few weeks later, Sashidhar Jagdishan, then the head of finance, said that the bank had underestimated the volume of its digital transactions.

In October 2020, Jagdishan became the CEO after Aditya Puri’s retirement, after one of the longest stints at the helm by a private sector Indian banker. The digital outages weren’t a legacy he would have welcomed. More importantly, the fact that outages have repeatedly hit India’s most valued private bank is a broader problem for the industry and the regulator, especially at a time when the pandemic has hastened the digital shift. What’s in store when more Indians decide to access banking services mainly via the internet?

An email sent to HDFC Bank seeking comments remained unanswered. However, Jagdishan, sent an email to employees on 19 April 2021 which contained official reasons for each of the outages. For instance, the December 2019 disruption was on account of a faulty system upgrade patch and that, in November 2020, it was caused by a third-party human error, he wrote.

An email sent to RBI remained unanswered as well.

What went wrong?

Subsequent to the initial spate of digital transaction failures in 2019, HDFC Bank suffered at least two other major online outages. Customers complained again and the bank apologized. But it was to become a pattern. Customer complaints would be followed by news reports, the bank would say sorry, and life would go on. At a loss to explain what was going on, analysts questioned the bank at regular intervals, trying to push for a substantial response. The bank continued to offer abstruse explanations, holding back more than it gave away.

Experts say that a lack of sufficient investments in information technology (IT), which ran counter to HDFC Bank’s attempt to position itself as a frontline digital bank, was one possible reason for the glitches that beset the lender.

The bank wanted to be a leader in digital banking, but without infusing a commensurate amount of money to ensure the system was failsafe. According to industry executives who didn’t want to be named, two possibilities may explain what went wrong at the bank in 2019 and why the glitches surfaced so often.

One, expanding its business at a brisk pace, the bank had become complacent and did not upgrade its IT infrastructure sufficiently, these executives said. Second, the bank’s servers were simply overwhelmed into capitulation in December 2019 by an extraordinary amount of digital traffic resulting from a suspected cyberattack, a theory HDFC Bank has denied.

Indeed, consultants said, HDFC Bank has followed a prudent strategy in terms of maintaining its cost to…