Story of the HDFC bank
India’s largest private sector bank by all parameters - the HDFC bank.
When Indian economy was changing its course in 1991 and the banking sector was opened up for private players, a new success story was in the making. In the year 1994, a banker Mr. Deepak Parekh was looking to setup a modern private bank in India. In those days, people used to crib about poor customer service at public sector banks, lack of good banking products, too much political interference in distribution of loans etc.
He approached his fellow banker friend Aditya Puri who was the CEO of Citi bank. Then they made their A-team by hiring some young bankers of Citibank, Bank of America, HSBC etc. Getting bankers of top-notch banks in those times for a new bank was a big deal then. But Mr. Puri was able do that. He believed that public sector banks in India had good network and distribution but no good products. He demanded a free hand in running the bank and Mr Parekh who was the MD, agreed.
For a new bank to compete in the market, finding its niche was important. HDFC bank was a small bank in the mid 90s. It knew that it won’t be able to compete in the corporate banking sector with the big banks of the time. So it focussed on giving innovative technological solutions of corporates instead of giving loans. It focussed more on transactional and cash management business.
So HDFC introduced ‘Cheque Settlement System’ by which any cheque of a cooperative bank could be settled immediately in any local branch of HDFC bank. For this service, cooperative banks had to deposit some funds at HDFC bank. This was a very effective method to get deposits without even paying interest on it.
In the 90s, corporate employees were paid salary through cheques. Then the employees had to deposit cheques in banks and had to wait for the cheque to get cleared. HDFC through its core-banking solution made the cheque system obsolete and enabled corporates to deposit salary directly in their employees accounts without the hassles of cheque. But it was pre-conditioned on opening HDFC accounts for all salary accounts in the companies if they wanted this service from HDFC. This is how it acquired customers and deposits initially at low cost and low interests to pay.
The CASA (Current account / Savings account) ratio of HDFC bank also began to rise. A higher CASA ratio means that the company is able to acquire deposits at a much lower cost. This is so because there is no interest to be paid on current account and minimal interest on savings account. A lower CASA ratio would mean that more deposits of a bank are in FD or higher interest paying deposit instruments. Thus, the fund acquisition cost reduced dramatically for HDFC compared to its competitors like ICICI.
Then, in late 1990s, the settlement of shares was electronic but payment was manual. HDFC came up with automatic share settlement. This reduced manual payment work of stock brokers and helped the stock exchanges too. To get this benefit, it was made compulsory for them to open HDFC bank accounts.
The cash management business of HDFC bank has grown by 35-40% annually. Even in corporate lending, HDFC bank focussed on only blue chip companies for corporate lending and underwent due diligence. From early 2000s, it started focussing on retail banking. It increased its bank branches from 57 in 1999 to 761 in 2008. HDFC was the first bank in India to launch mobile banking. It launched products like Loan against Shares, Loan For IPOs. They extensively partnered with merchants for POS (point of sale) terminals. They were early movers in this sector.
Even after the 2008 crisis, when other banks were reeling under NPAs, HDFC bank held its ground. This is attributed to HDFC banks due diligence, diversified loans and preference for loans to blue chip companies.
The IPO of HDFC bank had come in 1995. The share price of HDFC bank has been rising by 26% compounded annual growth.
To summarise, the key lessons which HDFC bank’s story gives us is:
1. Do not compete in the segment where there already is too much competition. Find your niche. HDFC did not compete in corporate lending when it was small. It introduced innovative services like Cheque settlement, share fund settlement to acquire deposits.
2. Take first mover advantage by leveraging on technology. HDFC did it through mobile banking and POS terminals
3. Manage your risk well. It exercised due diligence and restraint in lending. That is why it did not get trapped in the NPA problem
Last year only, Mr Aditya Puri retired and hung up his boots. He sold his 95% of hist total stake in HDFC bank for Rs 843 cr.
At a time when people are so brand conscious and like to flaunt and brag about the foreign brands, Mr. Aditya Puri said last year that he preferred to wear Bata footwear. Recently in his address to shareholders, the bank's chief recalled his long-standing relationship with the company.
“We came to start this bank 25 years ago, a bunch of us so-called kids at that time, who had grown up in middle-class backgrounds sharing a coke and wearing Bata shoes," said Aditya Puri in his address.
HDFC bank’s story is a success story of entrepreneurship, professionalism and corporate governance thriving in post economic reform sun in India. It is a story worth telling.
Source: Bank for the Buck by Tamal Bandhopadhyay
