HDFC is one of the most extraordinary players in the Indian banking industry. What started as an ordinary bank with a handful of visionary ambitious bankers has now turned into the largest and perhaps the most powerful private sector entity in the Indian banking space. 
If you look at the stock price of HDFC in the past 21 years, it has shot up by more than 8000%. Going from just 17.86 rupees in Jan 2000 to more than 1400 rupees today. What’s mind-blowing is that this return rate in the past 20 years is more than the stock returns of reliance, Microsoft, and even amazon. In the past 10 years, the revenue of the company has shot up by 350% going from 34,184 Cr in 2012 to 1,55,885 Cr in 2021.
- How did HDFC become such a powerful entity in the Indian banking space?
- How did it break the monopolies of the nationalized banks in India?
- What are the business strategy lessons that we need to learn from the legendary leaders of HDFC bank?
How does a bank work?
In simple words, a bank collects money from people like you and me, the businessman, and corporates by providing us with saving accounts and current accounts.
These are the most valuable assets to a bank because they have to pay very less interest to both these stakeholders. Furthermore using this deposited money the bank offers services like “home loans” and “car loans” for which they charge interest to the borrower. Therefore
Profit of the Banks = interest collected from the borrowers - interest paid to the depositors
History of HDFC Bank
The catch over here is that back in the 1990s even though HDFC had the license of RBI, even though it was backed by “Mr. Deepak Parekh”(HDFC Chairman) himself. Considering all the scams that were going on no one trusted a new bank. Therefore in its initial days, HDFC did not have enough deposits because of this it could not offer lucrative services to the borrowers.
The legendary team of HDFC went on to do some extensive market research to find out the gaps in the market. One such gap they found was the pain of the cooperative bank transactions. Back in 1998 cooperative banks were restricted to one state and their customers and branches were only in that particular state. So the moment they had to do any interstate transfer, they were dependent on another bank in another state.
For example, let’s take the example of two people Mr. Gopal and Mr. Sundar. Mr. Gopal is a Maharashtra Cooperative bank customer who buys 10 lakh rupees worth of cement from Sundar who is from Gujarat. Gopal pays by check. So Sundar goes back to Gujarat and deposits the cheque in his ABC bank. This ABC bank clears the cheque and pays Sundar but charges a processing fee plus takes three to four days to deposit the money.
Why?
Because they had to send the cheque to their Maharashtra partner bank to clear the cheque. so for three to four days, 10 lakh rupees of Sundar was stuck with the bank plus he has to pay a processing fee. When this happened with Sundar for two to three clients Sundar needed 30 lakhs of extra working capital just because of the tedious procedure of the bank.
This is the reason why most suppliers were not at all willing to accept a cooperative bank’s cheque. As a result, the cooperative banks were losing these big-ticket accounts of local businessmen. Here HDFC offered a simple solution. HDFC said that because it has branches all across the country. It will issue cheques at par to all cooperative bank customers. By when Gopaldas writes a cheque to Sundar for 10 lakh rupees instead of sending the cheque back to Maharashtra Sundar can deposit this cheque at his local HDFC branch in Gujarat. And HDFC will clear the cheque without any fees or delay.
This is how cooperative banks could pay their suppliers all across the country because of which they were able to retain their high-ticket customers but in return, HDFC asks these cooperative banks to keep interest-free deposits with HDFC bank. For example, if 10 cooperative banks deposited 20 lakh rupees with HDFC, HDFC had two crore rupees of low-risk interest-free capital that they could use to give out car loans, home loans, and other services eventually to make a profit.
The second gap that the legendary team of HDFC spotted was the functioning of the stock market. To tell you about it back in 1998 just like today back then we had five entities in the stock trading system the buyer, broker of the buyer, stock exchange, broker of the seller, and the seller. Before 1990 all these transactions used to happen physically through share certificates but as the computer revolution picked up in the 1990s the process of trading started to change. And we saw the rise of the dematerialization of stocks. Wherein instead of being physically traded the transfer of stock started to happen electronically. But the catch over here was that although the share transfer happened electronically the funds were still being transferred physically.
For example:
If you are Mr. Patel and you are a buyer from Maharashtra using SBI. If you want to buy 10 shares at 500 rupees per share. You have to give a cheque for 5000 rupees to the broker. Who had an ICICI bank account? He then gave another check to the stock exchange for 5,000 rupees which had an account in Canara bank. And then assuming that the exchange has a seller it will then carry out the exchange by giving a 5,000 rupees cheque to the broker of the seller. Lastly, the broker of the seller then gives another check to the seller that is Mr. Singh. After this transfer was done the shares used were electronically transferred immediately to the buyer. But the problem with the system was that this was a very inefficient system. It caused four major problems for the entities of the supply chain.
4 Major Problems to entities of the supply chain
1. Each one of these transactions used to take two to three days sometimes even five to seven days to be carried out this was because each entity in the supply chain had a different bank that had different transaction times.
2. This process became even more complex when a broker had multiple customers. Who again had different bank accounts with different processing times.
3. From the seller’s end the broker had to settle the transaction for the volume of shares sold by Mr. Singh. So he had to pay 5000 rupees to Mr. Singh even if the money did not hit his bank account yet. This meant that the broker had to have a huge amount of working capital with lakhs of rupees in his account. Which will only be used to pay back the sellers.
4. While this transaction was being carried out the exchange had no way to figure out if the broker had enough balance to execute the trade or not. This is why to mitigate this risk the exchanges had to send data on the dues of various brokers to the bank at the end of the day. To check whether the brokers had enough money to honor their trade or not. In this case, every single day in the evening Canara bank used to send the data saying Mr. Singh and Mr. Sheikh have one lakh rupees and they are supposed to execute trade worth 80,000 rupees and 1.2 lakh rupees respectively. This further made the process extremely inefficient, tedious, and costly.
How HDFC Solved and Revolutionalized the Banking System
HDFC bank came up with a revolution and opted in for a software solution called the “Micro Banker”. Which was developed by a company called iflex solutions. The micro banker was a fully integrated online banking automation system, whereas other banks either saw online banking as the way ahead of its time or they stuck with offline banking or they had a hybrid of both online and offline.
This gave HDFC the superpower to transfer funds electronically with minimal human interaction. What followed next was nothing short of a revolution. HDFC could make sure that not just the shares but even the funds could be transferred electronically to the entities of the supply chain in the stock market and hence the transaction time reduced from 5 to 10 days to just two to three days.
This gave the entire supply chain three features that were nothing less than a superpower to the stakeholders
Three features provided by HDFC Bank to supply chain
- All the buyers and sellers could carry out the transaction within two to three days making this entire process extremely effective in terms of both ease of calculation and strategy.
- The exchange could immediately check if the brokers had enough funds to carry out the transaction or not which it saved them a lot of headaches.
- The broker needed very less working capital to operate. For example, instead of having three lakh rupees, he could operate with just one lakh rupees because the funds were coming in and moving out very-very quickly and because of this, they had enough time to settle the transaction.
This is how HDFC revolutionized the stock market system in India. Some people might say “yeah bro so what is the big deal with using a computer and the internet for banking”
Well for those people I’m gonna tell you guys that this was not like ordering pizza online. We are talking about using a new-age technology to carry out critical transactions and that too in the stock market
This requires a ton of effort into reskilling your employees and setting up new systems and procedures that no one has ever used in India.
Most importantly it comes at the cost of putting the company itself at risk because you’re dealing with critical transactions. But in the case of HDFC the meticulous execution of this strategy paid off dividends that were far beyond anyone’s expectations.
The success of HDFC Banks
This resulted in a viral opening of HDFC accounts from 1999 onwards not only did all the brokers switch to HDFC but also asked their customers to switch to HDFC accounts. Starting with the NSE in 1998 the HDFC bank became the clearing member of all major exchanges by Financial Year 2000. In total 800 broker accounts and a majority of custodians were using HDFC bank services by FY2000.
By the late 1990s, HDFC bank had captured 80% market in the settlement business. In addition to that HDFC even started offering lines of credit to brokers to settle their excess transactions giving them one more reason to win the big-ticket accounts of the stock brokers of India.
This is how HDFC bank ended up getting the most valuable current accounts and saving accounts. Giving them a huge chunk of funds to them to utilize for financial services.
They even carried out a similar process to tap into huge corporate accounts by digitizing their employee salary system. Because of this HDFC got crores of rupees in its bank account in the form of current accounts of large corporates. On the other side, they also achieved extraordinary penetration into retail banking because all the employees of these companies also shifted to HDFC accounts. This is the reason why from 1994 to 2000 in just six years HDFC went from being an ordinary bank to becoming a legendary company in the Indian banking sector.
3 Business Lessons we need to learn from the rise of HDFC Bank
1. Always trying to find the gaps in the market if you are new
Whenever you are a new player in the market before jumping into the mainstream market always try to find the gaps in the market and we even saw this in the case of Asian paints. In this case, it was the cooperative bank’s pain of transactions that HDFC leveraged in order to get low-risk industry deposits which then laid the foundation for its growth.
2. “Innovation always happens when a company jumps to the next curve and reinvents an existing process”
As the legendary guy, Kawasaki once said “innovation always happens when a company jumps to the next curve and reinvents an existing process” in this case the legendary dream of HDFC had the audacity to jump to digitalization.
3. Always keep your evaluations tight and kill your inefficiency before someone else kills your business
Always remember no matter how big a company you are. If your processes are inefficient even the smallest player in the market with a better process could actually become the biggest threat to your company.
In this case, it was the complacency of the nationalized banks of India that was disrupted by the likes of ICICI, HDFC, and Axis bank.
Study Material
- Unusual billionaires
- Bank for your Buck (Story of HDFC Bank Book)
Shareholding Pattern of HDFC Bank
Check out HDFC Bank Ltd on Tickertape. Visit Tickertape
| Total Promoter Holding | 25.73% |
|---|---|
| Mutual Funds | 18.03% |
| Other Domestic Instituion | 9.08% |
| Foreign Institutions | 32.31% |
| Retail & Others | 14.85% |
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