HDFC BANK TOP 2 CASE STUDY & BUSSINES MODEL BY VIKAS
I’m going to share the story of HDFC Bank I’m going to explain how this bank started and what was their initial team and later I will explain the business model as well. I will share some interesting stories in between . Let’s start with their history . In the 90’s , Government run banks controlled the majority of this business As a matter of fact , 91 % of all the branches were owned by Government run banks , the rest were owned by some old and foreign banks. but this changed in 1994 when RBI decided to give bank license to some private companies.
The reason they decided to do that was to introduce some competition and efficiency in the system as Government run banks had a monopoly HDFC ( housing finance ) was very well known until then and the chairman , Mr Deepak Parekh , decided to apply for the bank license They got the bank license in a very short amount of time but now they needed a new team for the bank because HDFC was a housing finance company but they needed a new team for the bank there were three main people in their initial team. The first one is Mr. Aditya Puri , who still runs this company . So how did he enter the banking sector ?
Normally , the management of a bank has a baking background but this was not the case of Mr. Aditya Puri. His first job was in Mahindra and Mahindra but one of his cousins, who was working in Citibank as a trainee , was earning really well while Mr. Aditya Puri was living as a paying guest and travelling by train every day so he decided to apply in Citibank with the help of his cousin to have a better salary and after some years ,
he became the CEO of Malaysia division ( 100 000 $ salary ) Mr. Deepak Parekh decided to call Mr. Aditya Puri as soon as he knew that he was going to get the license but you might be asking what’s the connection between the two of them ? That’s because Mr. Deepak Parekh’s cousin knew Mr. Aditya Puri and he knew that he was doing well in Citibank At that time , Mr. Aditya Puri was doing really well and Mr. Deepak Parekh was clear that they won’t be able to match that salary because the bank was just going to start but he was willing to give stock options instead so if the company did well , he would be compensated accordingly Mr. Aditya Puri had just one condition ,
he wanted full freedom to run this bank and they both agreed to it . The second person in the team was Mr. S S Thakur, who was working in the foreign exchange department of RBI . So what is the relationship between Mr. Deepak Parekh and S S Thakur ? He had helped HDFC in their initial stages because nobody trusted them with deposits. He helped them get access to deposits from other companies He was appointed as the chairman of HDFC Bank because he knew the rules and regulations of this industry The third person in the team was Mr. Vinod Yennemadi. Mr Deepak Parekh got to know him when he was doing Chartered accountancy in London in 1960’s Interestingly ,
he had never worked in a bank before but he knew the corporate world very well as he had worked in several big companies but that didn’t hold Mr. Deepak Parekh back because the truth is that before working in HDFC , he hadn’t worked in a financial company before either So why did they name it HDFC bank because that was not their initial idea ?
At that time , HDFC was known as a housing finance company . HDFC was a very well known brand but they didn’t want to name the bank as HDFC bank because if anything went wrong , it would affect their brand directly So they came up with some names such as Bank of Bombay because they were the only one with headquarters in Bombay they rejected that idea because the short form would be ” BOB ” and that is already taken by Bank of Baroda.
They also came up with Everest Bank of India as it would reach the peak but at the end they settled for HDFC Bank because they knew that people trust that brand and that would give them an advantage Now , let’s take a look at the business and how it has evolved. Mr. Aditya Puri wanted two things in place before starting the business.
The first one is technology. He knew the important of it while he was working in Citibank. Let’s take a look at the changes they made. All the banks at that time used to do ” branch banking ” That means that all the operations were done in that branch and they weren’t centralized so the operations were carried in the branches and only the people there knew what was happening HDFC Bank opted for centralized banking.
Any branch manager or superior would know what is happening in any branch. It keeps everything connected unlike other banks. The second main change was in ATMs. Nobody used to care about the technology behind these machines. The majority of the ATMs were following the offline method. Let me explain what that means. Let’s imagine you have 1 000 Rs in your bank account and you decide to withdraw all that money tomorrow morning but the system was offline.
so it got updated only at the end of the day that means that in the evening , I can go to an ATM and still take out 1 000 Rs because my account would be updated at night HDFC bank followed an online approach were you would get the update at the same moment on the screen The second thing they did was cost cutting. They spent a lot of money on their first branch , especially on interior decoration but they soon realized that people only want a fast transaction in the bank.
They want the process to be fast and they don;t care much about the interior So they used to spend very little on interior decoration compared to others. While Citibank would spend 2 500 Rs per square foot for decoration , HDFC bank would spend 800 Rs per square foot but they didn’t stop there.
They realized they were wasting 50 lakh rupees on paper cups in the office and they forced everyone to bring their own mugs in the office I will share one interesting story. People in the cash management department, who were dealing with cash had chairs without handles. So why chairs without handles ? That’s because when you are counting cash , you use both of your hands so you don’t actually need handles. These were two things they focused before starting .
Now let’s understand how they did start their business. The bank knew that they can’t start with retail operations. There are some reason behind this decision Firstly, the management of this bank had experience in the corporate world and they weren’t familiar with the retail business at that time They also knew that they would need a wide distribution with many branches to make the retail business successful you can’t succeed in the retail business with only two products so you need to offer a variety of products as well In the initial years ,
they had to focus more on profits and the expense with corporate banking was less compared to retail business. These were the main reason why they didn’t start with retail banking. Let’s try to understand that how they started doing business with other companies. Initially they wanted to do business with only Triple A rated ( blue chip ) companies because these companies were able to earn well in bad times as well. At that time ,
Triple A rated companies would only borrow money from Indian banks. That’s the only reason they did business with Indian Banks. they used to work with foreign banks for transactional banking ( day to day transactions ) and foreign exchange ( dealing with international clients ) and HDFC bank took full advantage of this situation because they knew they had the technology to provide this service at an attractive price and the management had experience on how to deal with these big companies .
They started helping triple A companies with foreign exchange and transaction banking keep in mind that this was not something new. Other banks were doing it as well but they didn’t understand the scope of this product There was one downside to this side of business. As they were working with big companies , their margins and profits were very slim. but they were ok with it because they knew that in bad times ,
these companies have stable earnings They ended with 50 corporate clients in the first year with some big names such Tata , Birla and Ambani . but then they decided to expand this business and go down the value chain. As you know , these large companies have suppliers and vendors So they started providing services to the suppliers and vendors of these large companies and they were helping them with transactions.
and they also started doing business with small companies but they always knew that their biggest advantage is their technology and they took full advantage of it. Let me give you an example. In those days , NSE and BSE ( stock exchanges ) had to clear many settlements daily but they didn’t have the technology so they only used to do it once a week. This was a very big risk as it kept piling on for several days In this case , HDFC bank had the technology to make these settlements live. It means that they could clear the settlements at that very moment. Nobody could offer this service because they didn’t have the technology .
In exchange for this service , the brokers had to open accounts with HDFC bank and this was one of the ways they were able to get clients to the bank but now you might be asking , so how did they start the retail business ? After some years ,they realized that if they wanted to keep growing at a rapid pace , they would have to enter the retail business but they knew the competition was very high Government run banks already had many branches and they had the distribution although they didn’t have the same level of technology such as HDFC bank.
So HDFC bank started targeting the rural area because the competition was low plus the rural area was growing at a very rapid pace because many people were shifting to this area Let me explain how did they attract those clients. They realized that there were two types of loans that worked very well in that area. The first one is gold loans because these households have some amount of gold .
and they know they can get cash easily in exchange and that’s why this product is so important for them the second product is two wheeler finance because the demand is very high for two wheeler. so now we know their main products and they want to target the rural area but how did they exactly attract their clients ?
They realize that the best method was to have direct agents on fields in festivals who could give loans at the spot these agents were able to issue loans at the same spots and this was one advantage of gold loans because you can verify the purity and weight of gold at the moment.
and you can give cash as a loan but there was one small issue with this segment because they weren’t able to issue home loans that’s because HDFC was also issuing home loans so if the bank start offering the same product , they will directly compete with HDFC They found a solution in 2002. HDFC bank would source home loans because they already had a wide distrubtion with many branches and they would send this loan to HDFC in exchange for a small commission
and they have the right to buy back 70 % of the loan if they want this was important because home loans was a very important product for rural areas so now you know how they created this business because they still operate transaction and rural business.