The Unusual Billionaires
Case Study: HDFC Bank
HDFC Bank was started by a group of bankers previously working in eminent foreign banks such as Bank of America and Citibank. As of writing the book, the author states that HDFC Bank was the only Indian bank to be featured in the list of top fifty largest banks in the world. The bank is known for its flawless and consistently successful execution. The engrossing journey of HDFC Bank is discussed in three phases.
Phase 1: 1994-99
HDFC Bank was promoted by HDFC Ltd, the mortgage financing company. HDFC was amongst the first private banks in India and received the banking license in 1994. Now the task of Deepak Parekh, the then managing director of HDFC was to find a suitable leader to head the bank and make it a success. He zeroed in on Aditya Puri, but bringing him back to India leaving a well-paying stable job at CitiBank Malaysia was quite a task.
Puri was also very adamant to build the bank on his own terms. He brought some well-known talent from CitiBank and Bank of America, incentivizing them with the opportunity to build a bank from scratch and of course working under the banking and financial services veteran Aditya Puri and Deepak Parekh respectively. Puri’s ability to influence Parekh was so much as he even forced him to keep the name of the bank as HDFC Bank instead of Bombay Bank as thought of by Deepak Parekh. He thought so because starting a bank was a risky venture and did not want to harm the image of HDFC brand if the bank was unsuccessful. But Puri being himself, threatened to abandon the plans altogether if he did not get the name. HDFC brand of course gave the bank a head start.
HDFC bank is known as a retail banker but what very few of us knew is that it started as a corporate banker. However, the risk averseness was in the blood of these bankers since inception and hence would lend only to the top blue-chip corporates where although the margin was lower but safety was assured.
The strategy behind sustaining even at low margins was getting the cost of raw material (deposits) down. This made HDFC bank think of a novel cheque settlement method for cooperative banks. Earlier suppliers were reluctant to accept cooperative bank cheques as they would have to pay extra to their banks in order to get it cleared. Additionally, it used to take 3-4 long days. What HDFC bank did was it issued at par cheques to the cooperative bank customers. These would be given to the supplier and the supplier could encash it through any HDFC bank branch in their respective cities. This saved overhead charges and working capital getting struck. However, in return for this, the cooperative banks had to keep deposits at HDFC bank free of any charges.
HDFC Bank was also the first bank in India to have a centralized system. A centralized system is one where the risk management and key decision-making lies in the hands of the headquarter branch. This reduces the possibility of fraudulent practices at the branch level.
Another remarkable innovation was introducing a real time electronic processing system to replace the manual payment process in the stock exchanges. This got the entire supply chain – investors, brokers, exchanges and custodians into the ambit of HDFC bank. The next step was obvious to launch the loans against securities as a by-product of relations built through it.
What ticked HDFC right in its inception days itself was instead of concentrating on high margin loans, they focused on generating low-cost deposits. This way they had the higher CASA ratio as well as the highest net interest margin in the industry turning into higher return on assets by the end of first phase itself.
Phase 2: 2000-08
Till now HDFC was a corporate bank. However, they were well aware of the opportunities in retail banking. Hence by 2000 they started being aggressive in this area. However, rather than concentrating its resources on expansion of branches and ATMs (like Axis Bank), they instead concentrated on providing superior technology and solutions to its retail clients. Therefore, the bank became the first Indian bank to launch mobile banking in the year 2000. By 2003, they launched credit cards and two-wheeler loans. Over the coming years the bank had expanded to a number of areas in retail banking, however, home loans were still a missing piece. They could not start this business as it would be a conflict of interest with its promoters, “HDFC Ltd ''. Therefore, they tried instead to become a distributor of HDFC’s home loans for a fee of 0.7%. The arrangement was so successful that, by FY15, HDFC Bank originated one-fourth of the total loans disbursed by HDFC.
The next expansion strategy was selling third party products like mutual funds and insurance and also acquiring point of sale terminals to earn a fee every time a card was swiped.
Phase 3: 2009-16
Aditya Puri was a very big believer in the rural and semi urban areas in India which inhabited 70% of the population. They had built a strong rural franchise helped by the acquisition of Centurion Bank of Punjab.
This was also a testing time for the loan quality for Indian banks. The shocks that started from Lehman Brothers in the US had its trembles felt even in the Indian lending market. Most Indian banks, public or private faced NPAs or lack of recoveries of the loans. However, for HDFC Bank there were no such instances. For them it was mostly business as usual. During the FY09-15 period, HDFC bank was able to grow its retail loan book at a CAGR of 20% in comparison to 13% industry growth.
This period also marked the digital expansion of the bank. Puri was of the view that since the bank already was a market leader in retail loans, payment business and advisory business, why not disrupt it using technology to remain the market leader in the future as well. Puri is said to even visit Silicon Valley to understand how fintech is disrupting the banking space. In FY15, HDFC bank launched a slew of products like mobile wallet PayZapp, ten seconds pre-approved loans, among many others.
HDFC Bank can be titled as a pioneer in bringing many technological revolutions in how we do bank today. The centralized banking system was one of the major innovations of the bank. The other innovations were real time processing for stock exchanges, mobile banking, ten-second loan disbursal process, and many others.
The story of how HDFC Bank got its name has already been discussed. The reputation of the HDFC brand can be felt by the eagerness of Puri to keep the name of the bank on the mortgage lender itself. The bank is also said to spend very less on marketing in comparison to other private sector banks. They have also been endorsed by celebrities like Axis Bank and ICICI Bank.
The consistency in financial outperformance is a result of the strong internal architecture of the bank. The bank has fixed allocations for each of its segments in order to control the risk for the overall bank. The bank has a well established process and hence is sometimes even called an SOP bank.
The branch network, ATMs and 25 million retail saving accounts remain the strategic assets of the bank.