HDFC Bank SECRET Business Strategy
A bank started from small industrial area,
Who used to give training to their employees under a peepal tree,
Could anybody ever imagine that it will become India’s biggest and most powerful private sector bank?
HDFC Bank is India’s biggest and most powerful private sector bank.
It gave year on year 28.86% compounded annual returns to their investors.
Banking is a traditional business, by doing small innovations in it,
Today how did HDFC Bank become India’s most powerful by beating Axis, ICICI, Canara, Kotak?
And most importantly what are those powerful business lessons we can learn and implement in our business?
This Post is brought to you by smallcase about which we will talk later.
The story starts in 1994,
When the word startup didn’t exist in India at that time Deepak Parikh started HDFC Bank as a startup.
To scale up the business he convinced Aditya Puri – CEO of CitiBank Malaysia to join HDFC Bank.
And their growth started.
When Aditya Puri joined HDFC Bank,
before taking any step he conducted a full proof market research.
While doing this research he came to know about 3 problems in Indian banking sector.
1) Product and Distribution Combination.
At that time, Indian Banking sector was somewhat like this –
Public Sector banks had powerful distribution and lots of money.
But they lacked good services and products.
On the other side, Foreign Banks had lots of money and good products but lacked a powerful distribution network.
Due to this, neither public sectors banks didn’t serve their customers properly nor private or foreign banks.
And due to this HDFC Bank speedily opened its branches in small areas.
HDFC was doing this but a problem arised.
The problem was Lack of Funds.
HDFC had no money to open their branches everywhere.
As compared to Axis, ICICI and Federal Bank, HDFC had very less funds.
This thing placed them in a critical situation.
All this was going but Aditya Puri came across a really crazy thing in banking sector.
The thing was Mid Segments Service Gap.
To know this first you need to know how banks operate?
So any Bank earns money from these 3 ways-
1) Interests
Banks give two types of account opening services.
1) Savings Account – Banks give 1.5-5% annual returns to their customers.
2) Current Account – In this, no interest is paid to depositors.
The money deposited by people is used to give loans to others.
And the remaining margin is the bank’s income.
2) Services
Stock Broker, Mutual Funds, Insurance, Credit Card –
Banks generate lots of money by giving these services.
3) Investments
The surplus funds available are invested by banks.
And then banks also earn from their returns.
HDFC heavily needed more funds
That means they needed more depositors.
And then Aditya Puri identifies- The mid-segment gap.
Before 2010, whether they are Public sector banks or private, foreign banks,
Their biggest focus was to give big Corporate loans.
B’coz in big Corporate loans there is high volume as well as profit.
But there’s a big problem in this – NPA
By any chance company defaults on the loan then Bank’s NPA(Non-Performing Asset ) increases.
And this is very dangerous for banks.
Before 2010, all banks focused on corporate loans.
But nobody thought about one thing – Retail Segment.
When other banks were busy in maintaining NPA,
HDFC Bank targeted retail market, small vendors and solved stock market-related issues.
In past, people used to pay suppliers in cash or cheque.
And if the supplier belongs to some other city then there are high chances of payment through cheque.
The bank account of customers and suppliers were opened in any corporate bank.
And during cheque transaction, the whole process was like this –
Suppose I am a supplier from Pune,
I supplied 50 lakhs goods to my friend Vaibhav who lives in Patna.
In return for this, Vaibhav gave me 50 lakh cheque.
I submitted this cheque to my local co-operative bank’s branch.
Now bank takes 3-5 days to process this cheque and also take the processing fee from me.
As my bank is local co-operative, so it does not have interstate presence.
So my bank sends this cheque to his partner bank which has an interstate presence, to process it.
Then this bank verifies the cheque from Vaibhav’s bank and then finally clear my payment.
This process was too complex and used to take 5-10 days to complete it.
Now imagine if a supplier supplies goods to 4 businesses and take payment through cheque,
Then his 2 Cr rupees will be locked for 10 days.
And due to this supplier needed more working capital requirements.
B’coz his money will come after 10 days, but for 10 days he needs money to spend in his business.
To solve this, HDFC Bank made Issue and Clear at Par System.
So after getting my cheque, I can deposit it in local HDFC Bank.
And then HDFC Bank will clear it within 2-3 days without any processing fees.
But there was a condition that Buyer and Supplier need to have HDFC Bank account.
And after this masterstroke, buyers and suppliers both opened current savings accounts in HDFC Bank.
And then fate of HDFC completely changed.
After 1990s, Dematerialization was introduced in stock market.
That means stocks transaction became from physical to digital.
But there was a problem.
The problem was that in the stock market, the transaction was only possible through cash or cheque.
This process was complex as well as time-consuming.
At that time the process looked like this –
Suppose I purchased 10 lakhs worth Reliance shares from my friend Vaibhav.
So I will give money to Vaibhav and he will transfer shares to me.
But the process was not simple like this.
Now carefully look how actually the process looked –
Suppose I want to buy 10 lakh shares then I will submit a 10 lakh Rs cheque to my broker’s account.
Then my broker will deposit this money in Stock Exchange’s bank account.
And then Stock Exchange will deposit this money to Vaibhav’s broker.
After Vaibhav’s broker gets money, he will transfer to Vaibhav.
And then Vaibhav will electronically transfer his shares to my Demat account.
In this process, there were 3 problems –
1) Multiple Bank Accounts
It can happen that my bank account is in ICIC Bank, my broker’s in Canara, Vaibhav’s broker’s in Axis Bank.
Due to this when multiple bank accounts were involved, this process used to delay.
2) Verification
Stock Exchange had no system to verify that do this broker have that much money in his bank account to invest or not.
To verify, they used to send data to both brokers’ bank accounts to verify they had that much money or not to place a trade.
3) As this process used to take 5-7 days, so brokers had to keep a high working capital.
B’coz their money will come after 5-7 days.
But they will have to place the trade today.
And to solve this problem, HDFC Bank introduced – Microbanker.
Microbanker used to allow buyer, seller or broker to easily transfer funds electronically.
The work which used to take 5-7 days before was now possible in 2-3 days.
As the process became fast, brokers don’t need high working capital.
And as now everything was electronic, Stock Exchange could easily verify how much money the broker had.
Due to this, the people who used to operate in stocks opened their account in HDFC Bank.
And to others brokers said –
“Please open an account in HDFC Bank as it will be easy for you as well as me.”
And so many people became customers of HDFC.
HDFC now had lots of funds to give loans.
But do you know that HDFC didn’t gave huge corporate loans to companies?
I know you would be thinking that without corporate loans,
How this bank became so much powerful?
There’s a big secret behind it.
HDFC Bank started from small idea and is now India’s largest and most powerful bank.
This bank’s share price was 5 Rs in 1995 and today it’s trading at 1500 Rs.
That means 25,000% return.
It is very fascinating to invest in ideas and here is a simple idea –
As India’s economy will rise, people’s income will rise and FMCG and Banking sector will also grow.
I people will earn more, banks will have more money and better services to give.
And if people will earn more then they will surely consume more.
And most of the money is spent on food items only.
Therefore, FMCG and Banking sector, both will grow.
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In Indian Banking market, co operate banking has high competition.
But HDFC Bank didn’t enter in corporate market till 2015.
And today also, HDFC gives very less corporate loans.
The question is how HDFC became so powerful bank without giving too much corporate loans?
What HDFC did that today their market capitalization is more than 5,70,00 Crs?
In banking sector, profit is seen but losses are identified later.
Most of the banks prefer corporate loans b’coz they get high volume in it.
And high volume equals to high profit.
But the problem arises when the companies fail to return the loan.
Between 2000 – 2008, Indian Economy was booming at high speed.
To benefit from this many companies like Postcon, Kingfisher, Reliance Communication, Reliance Power –
All these companies took huge corporate loans from banks.
And we clearly know about their current situation.
These companies made defaults and bank’s NPA increased.
If you closely look then NPA of many big banks is high.
PNB – 14.21%, Bank of Baroda – 9.4% and IDBI – 26.8%.
One side these banks have so much NPA and in 2020, HDFC Bank’s NPA was only 1.26%.
I know you would be thinking How is this possible?
HDFC focused on small Retail loans rather than big corporate loans.
But the question is how HDFC captured huge market by giving retail loans?
So the answer is hidden in HDFC Bank’s Central Banking System.
Now listen to me very very carefully.
HDFC gave loans to big companies like – Tata, Birla, Reliance
They gave short-term working capital loans to them instead of long-term loans.
The companies who took short term loan from HDFC,
It was compulsory for them to open current account in HDFC Bank.
HDFC was very much selective in passing loans.
So HDFC Bank gave loans to only blue-chip companies like – Tata, Birla, Reliance.
But this was just the beginning.
When these companies opened their accounts in HDFC Bank, then HDFC gave them an offer.
That through HDFC’s Central Banking System you can transfer salary to your employees directly electronically.
So all your employees will get salary digitally and no headache to cut salary cheques.
After this the companies who had HDFC’s current account, opened their employee’s salary account in HDFC Bank.
This thing was like lottery for HDFC.
Aditya Puri knew to retain and generate revenue from him if customer once came to him.
The salary employees whose account is opened with HDFC, are now HCFC customers.
HDFC provided Education, Home loan, Car loan, Insurance and many more services to them.
And today with 6 Cr+ customers and 5500+ branches all across India,
HDFC is India’s largest private sector bank.
And most importantly, what are those powerful business lessons we can learn and implement in our business?
1) Be a Possibility Scanner
In India, the banking space was becoming saturated.
Aditya Puri could easily give up if he wanted after knowing this fact.
But he didn’t give up.
And he identified those gaps in market that no one addressed.
And after addressing those gaps, he made HDFC so powerful.
2) Businesses are built on Processes.
If your business is people dependent then when your employees will leave,
Then your business will also fail.
No business should be employee dependent but process dependent.
Moreover, by designing small processes you can fulfill those gaps which no one addressed.
Like how HDFC Bank did.
3) Sometimes it is very profitable to sit back and watch the competitor
Do you know in many things, HDFC Bank is not first-mover?
But still HDFC Bank is at the top in everything.
Had you ever thought Why is this so?
HDFC’s biggest competitor is ICICI Bank – which is actually the first mover.
They do all things before HDFC.
But still HDFC is always one step ahead from them.
The question is HOW???
B’coz ICICI does all the things before HDFC.
So they will make mistakes first, have losses first and learn from their mistakes first.
On the other side as HDFC do all things after ICICI they learn from their mistakes.
And with negligible losses, they bring amazing products in market to beat their competitors.
Honestly, No Business is small.
Can you imagine that from 1 Rs toffee, somebody could earn 300 Crs?
Well similar is the story of Pulse Candy.
By beating competitors like Alpenliebe, Eclairs and Mangobite
Pulse Candy earned 300 Crs within 2 years.
The question is How Pulse Candy did it?
To know, watch the right side Post…
