Book Extract: The Story Of A Bank

My office in lower parel is nextto HDFC Bank’s headquarters and whilst from one window of my office I can see the cubicles of HDFC Bank’s top brass, from the other window I can see Kamala Mills, the place where the bank set up its first large office over twenty years ago. Whilst the geographical distance between Kamala Mills and HDFC Bank’s current headquarters is barely a hundred metres, the actual transition that the bank has made—operationally, financially and psychologically—over the past two decades is of a completely different scale.

Started by a group of highly motivated bankers from large foreign banks like Citibank and Bank of America, HDFC Bank is today India’s largest private sector bank franchise (by market capitalization). Globally, as of 2 April 2016, HDFC Bank is the only Indian bank to feature in the list of the top fifty largest banks in the world. The bank has achieved all of this under a single CEO, Aditya Puri, and a team that has been with the bank, by and large, from its inception. In my meetings with bankers, industrialists and journalists who cover the banking sector and investors who have bought shares in the bank, the one word that is repeatedly mentioned in the context of HDFC Bank is ‘execution’. Relentless execution of its goals and a steady focus on profitability lie at the core of HDFC Bank’s story.

As simple as it sounds, execution has made HDFC Bank stand apart from other banks. After all, banking is all about acquiring funds at a low cost and selling them as loans and services to customers. Banking products (such as a savings account, a fixed deposit or a loan) are shorn of glamour and have no aspirational value. In such a generic market, HDFC Bank has excelled at executing both sides of the game—acquiring funds at a low cost and selling them at a lucrative rate of interest. It has done this without any compromise on the quality of its loans and with a focus on profitability, thereby maintaining a high quality of loan book and, at the same time, a high net interest margin. Backed by mortgage financing giant HDFC Limited (HDFC), HDFC Bank started from scratch in 1994. Its subsequent transition towards becoming one of the remarkable success stories of post-1991 India is an engrossing journey that I discuss here in three phases.

Phase 1: 1994–99 A corporate bank with a difference HDFC Bank’s roots go back to the mortgage giant HDFC Limited (which currently owns 21.5 per cent of HDFC Bank). Housing Development Finance Corporation or HDFC was started in 1977 by Hasmukhbhai Parekh, who was the chairman of ICICI Bank in 1972. HDFC was the pioneer in mortgage lending (or home loans, as they are popularly known in India). In fact, one of my first memories of a financial services transaction is accompanying my father as he negotiated a home loan from the HDFC branch in Safdarjung Enclave in New Delhi in the early 1980s. Parekh’s nephew, and now one of India’s most distinguished corporate leaders, Deepak Parekh took over as managing director of HDFC in 1994. When HDFC received its banking licence from the RBI in 1994, it was Deepak Parekh who zeroed in on Aditya Puri to run this newly formed bank. As veteran journalist Tamal Bandyopadhyay describes in the opening chapter of his book, A Bank for the Buck: The Story of HDFC Bank, hiring Puri was no easy task.

Puri was heading Citibank’s Malaysia operations when he received an offer from Parekh to join the bank. Puri was a career banker from Citibank, having earlier worked for the American banking behemoth in India, Saudi Arabia and Hong Kong. He was a rising star in Citibank and was among the fifty executives worldwide identified by Citibank’s chairman and CEO as being crucial for the bank’s future.

Hence, he was well paid and had sizeable stock options incentivizing him to remain with the bank. It took a lot of persuasion from Parekh to convince Puri to accept the offer. Sizeable stock options and the opportunity to be with his father finally convinced Puri to accept it.

Puri built most of his team by hiring young bankers from Citibank (Paresh Sukhtankar, Samir Bhatia and Shailendra Bhandari), Bank of America (A. Rajan, C.N. Ram, Harish Engineer and B. Chandramouli) and Hong Kong and Shanghai Banking Corporation (HSBC) (Luis Miranda and Girish Marathe). It was the reputation and pedigree of Puri and Parekh, along with an opportunity to build a bank from scratch, that would eventually convince people like Luis Miranda, Harish Engineer, Shailendra Bhandari and many more to quit their comfortable and glamourous jobs at reputed foreign banks and join a ‘start-up’ bank.

I met Samir Bhatia, an avid marathoner and now the founder of SMECorner.com, in his office (also in Lower Parel). Bhatia was head of corporate banking at HDFC Bank when he left in 2006. ‘Competence and chemistry—that’s what the team got right at the start. We came with a similar mindset, some knew each other and hence were aware of our paths.’

Shailendra Bhandari, who joined HDFC Bank in 1994 from Citibank and subsequently went on to lead other banks like Centurion Bank of Punjab and ING Vysya, told me, ‘When the bank was first being set up, and before it was known who would form the team, someone from HDFC reached out and asked for a meeting, where the topic of joining the bank was broached. I politely declined, and thought the matter was over, the next day at work, when I got a call from Citibank, Kuala Lumpur. It was Aditya, who, in his usual style, said, “I will be joining in a few months to head the bank, and I want a few key people with me to create and run this.” I mentioned that my wife might not want me to move, and again in his typical style, he said that he would call her if required and convince her. That was not needed, and by the end of the phone call, I agreed to join the bank.’

HDFC Bank’s founding team thus included some of India’s finest young bankers. Also part of the founding team was Vinod Yennamedi, a career finance executive who had worked with large corporate groups like Shell International and RPG Group, amongst others. Parekh knew him from his chartered accountancy days in London and trusted him to keep an eye on the young bankers who were joining HDFC Bank from foreign banks.

With most of the bank’s initial hires coming from foreign banks, when the bank opened for business in 1994, it was but natural for it to focus on corporate banking. With neither a balance sheet size nor a branch network, HDFC Bank made inroads into corporate banking by offering innovative solutions to corporates and customers.

An early example of the sort of innovative solutions that HDFC Bank would become famous for was the novel cheque settlement system that it rolled out for cooperative banks in 1998. Cooperative banks are restricted to one state and their customers and branches are only in that state. The moment they had to do any interstate transfer, they were dependent on another bank. For example, a customer of a cooperative bank situated in state A issues a cheque to his supplier who is in state B. When the supplier deposits the cheque to his bank in state B, the supplier’s bank charges a fee to the supplier as the supplier’s bank had to send this cheque to its own branch in state A where the settlement happened. In the 1990s, this entire process took three to four days before the money was credited to the supplier’s account.

So the supplier was not willing to accept a cooperative bank’s cheque. HDFC Bank offered a simple solution to cooperative banks. It issued cheques at par to cooperative bank customers through which they could pay their suppliers anywhere in India. The supplier’s bank used to settle the money with the local branch of HDFC Bank. However, cooperative banks had to keep interest-free deposits with HDFC Bank to get this service. This enabled HDFC Bank to get free money.

However, given its acutely risk-aware DNA, HDFC Bank focused its lending activities only on blue-chip corporates, which meant that the bank had to operate in the most competitive segment in Indian banking. Hence, the only way HDFC Bank could make inroads into these corporates was by having lower cost of funds and/or offering innovative services/solutions to corporates. Therefore, from the outset, the focus of the bank was on raising low-cost liabilities (for a bank, a liability is the source of funds; for example, a savings deposit is a liability for a bank since it is obligated to repay the deposit to the customer), on finding gaps in the existing offerings of competing banks and on finding innovative solutions to fill these gaps. As HDFC Bank did not have the balance sheet size to lend to corporates, the initial focus was on capturing transactional and cash management business from these corporates rather than lending money to them.

With the advent of the Internet in the mid-1990s, technology was transforming the way banking was done. HDFC Bank’s managers knew that technology had to be at the core of its services. Thus, when it came to selecting its core banking platform, the bank looked for a centralized real-time system and decided in favour of Microbanker, an offering from Iflex Systems. As several members of the bank’s founding team told me, in spite of a strong pitch from others, what swung the decision in favour of Iflex’s offering was that Microbanker was a fully integrated online banking automation system compared to others which were offline systems.

In the years that followed, this system helped HDFC Bank provide several innovative solutions to customers which could not have been offered with an offline system. H. Srikrishnan, then head of transactional banking and operations, gave me an example, ‘We looked at funds transfer—which was manual—such as MTs (mail transfers) and TTs (telegraphic transfers). When we implemented a centralized banking solution, the key things we could do were to sweep across multiple locations and get the balances of customers or transfer funds from one location to another using core banking. Those were big problems we solved.’

HDFC Bank was thus the first among Indian banks to have a centralized system.