The HDFC Journey
HDFC (which started off as the Housing Development Finance Corporation) was set up in 1977 as India’s first retail housing finance company. At that time, it was akin to a start-up. The only difference was that, unlike most start-ups, this start-up was a post-retirement venture by H T Parekh who was 65 years old when he started the company.
For me, as an investment banker, changing tracks to start-up a new company that was still being seen with a great deal of scepticism was a risky proposition. There were many conflicts. Unlike today, it was a time when there was no start-up culture either. Until then, no one in India had attempted to finance individuals for their housing needs. Access to long-term finance was difficult and no foreclosure norms existed. At the time, most Indians were also extremely debt-averse.
Though HDFC’s beginnings were small, there was an instant sense of gratification in the work we were doing. One thing was clear: the need for housing finance was dire and the demand for home loans was immense.
On the personal front, it meant a drastic reduction in terms of my salary and other benefits. It also required making financial adjustments for the family. Perhaps it was the excitement and challenge of building a new institution that goaded me to join HDFC. Though HDFC’s beginnings were small, there was an instant sense of gratification in the work we were doing. One thing was clear: the need for housing finance was dire and the demand for home loans was immense.
My shareholding in HDFC, in 41 years of association, is only through employee stock options and stock options are given to each and every employee at HDFC. My shareholding stands at a microscopic 0.07% of HDFC’s overall market capitalisation. What I have to share with you is 40 years of my experience in building new institutions.
Lessons from Failure
While HDFC’s success today is reflected in its market capitalisation, one cannot forget the lessons learnt from its Initial Public Offering (IPO), which flopped and left the burden to its underwriters. Despite this, there was a niche business model to bank on. People came to HDFC for a home loan after they had exhausted all their resources, including borrowings from family and friends. HDFC became the last-mile funding to bridge the gap. The gratitude expressed by those who received the loans made the company realise how precious a home was. There was trust that the borrowers would not default on their loans, especially because they were first-time home buyers and lived in the houses they had borrowed for.
As HDFC was the only retail housing finance company in India, we had no role model to follow. We adopted a ‘learning by doing’ philosophy. We ensured learning from the mistakes that we made during our journey.
When HDFC started, we wanted to build an institution on the founding principles of kindness, fairness, efficiency and effectiveness. Perhaps this has held us in good stead over the years. These principles are the pillars upon which we have built a customer-centric organisation. We put the customer in the centre and revolved all business activities and services around the customer.
We adopted a ‘learning by doing’ philosophy. We ensured learning from the mistakes that we made during our journey.
The demand for housing was always there, but the greater challenge was finding long-term resources to fund the home loan business. We tapped every resource we could – banks, LIC (the one and only life insurance company that was there at that time), multilateral agencies like the World Bank, the International Finance Corporation (IFC) and the Commonwealth Development Corporation (CDC). There was a time when we were worried that we were receiving far too many home loan applications and were not too sure whether we would be able to raise enough money to fund them. This period coincided with the 1991 economic crisis when India was on the brink of default, interest rates had zoomed up and liquidity was very tight.
Just as we were about to lose hope, we realised that we had built up a reliable brand name that was synonymous with trust and this was a good time to reach out to the common man for his savings. We then began to raise retail deposits. We built a strong retail deposit franchise, mainly from customers who were retired and wanted a higher return on their savings. Throughout all these years, in adverse financial conditions, it has always been the retail funding window that has come to our rescue. In volatile times, retail funding is the most stable.
When HDFC started, we wanted to build an institution on the founding principles of kindness, fairness, efficiency and effectiveness. Perhaps this has held us in good stead over the years.
A Financial Sector Journey
HDFC Bank today is a leading private sector bank and is only the fifth Indian company to cross ₹ 3 trillion or three lakh crores in market capitalisation in 2016.1 But I must share with you how this bank came about. Today, it is hard to imagine how primitive the condition of India’s financial system was for a very long time. It was only in 1993 that the banking sector was opened up to privatisation and only in the year 2000 that the insurance sector was also opened to privatisation. In 1993, the Reserve Bank of India (RBI) had just come out with new guidelines for private sector banks and there was an advertisement in the newspapers calling for potential applicants. This aroused my curiosity and I thought it would be a good idea to apply for a bank license.
The threshold entry limit for a private bank was high, with a minimum capital requirement of ₹100 crore. At that time, HDFC’s net worth was around ₹300 crore. I was convinced that the time was right for HDFC to have some diversification in its business. However, when the proposal to apply for a bank license was placed before HDFC’s board of directors, they were taken aback and gave an initial rejection.
HDFC Bank today is a leading private sector bank and was only the fifth Indian company to cross ₹ 3 trillion or three lakh crores in market capitalisation in 2016.
The argument put forth was that HDFC was a single product company, with no experience in banking. Some board members asked why a well-established company should risk its reputation by venturing into a business it had no expertise in? Needless to say, it took a lot of convincing to get the board to agree just to put in an application. The board finally consented and agreed that HDFC would have to tap an external talent pool if we did get a license. In short, HDFC Bank almost did not happen. But that is history now.
The opening up of the insurance sector took much longer as there was a great deal of resistance to allowing foreign partners. We were very lucky to find like-minded partners in Standard Life of the United Kingdom (UK). Our joint venture partner provided the initial handholding on technical aspects like actuaries. Even though Standard Life is a large international group, it is their investment in HDFC Life that has created the maximum value for shareholders of Standard Life. It crossed the ₹1 trillion or one lakh crore market cap in April 2018.2
On the non-life insurance side, our beginning was a bit rocky. We had initially tied up with Chubb Global Financial Services, one of the largest property-casualty insurers in the United States (US). But unfortunately, a meeting of minds could not happen with our joint venture partner who believed India to be a high-risk country and therefore was too rigid in their underwriting. Meanwhile, all the other new non-life insurance companies were growing at a fast clip. It was the first time we were faced with the failure of a joint venture. It was hard realising that we needed to cut our losses quickly.
Fortunately, HDFC had the wherewithal to buy out Chubb’s stake. We then were extra cautious in identifying our new joint venture partner. The key lesson learnt was that we needed partners who shared our long-term commitment to growing the business in India. Five months after the fallout with our first partner, the ball started rolling again with our new joint venture with ERGO International AG, a Munich Re subsidiary and then it was business as usual once again.
What really helped us was the strong retail distribution franchise, a clear mandate that we preferred steady growth and returns on our investments, rather than trying our hand at risky investments which would make the portfolios highly volatile.
Our other large company is the HDFC Asset Management Company (AMC). HDFC was amongst the first entrants in all the other financial services when the sectors opened up. But this was not the case with mutual funds. Unit Trust of India had been the first mutual fund set up in 1963, followed by public sector mutual funds in 1987. The AMC business was opened up to the private sector in 1993. But HDFC set up its AMC with Standard Life as its partner only in the year 2000, making it a very late entrant. But HDFC scaled up rapidly.
What really helped us was the strong retail distribution franchise, a clear mandate that we preferred steady growth and returns on our investments, rather than trying our hand at risky investments which would make the portfolios highly volatile. This strategy paid off well and currently HDFC is one of the largest mutual funds in the country with average assets under management of ₹ 3.06 lakh crore, close behind ICICI Prudential as of July 2018.3 More importantly, HDFC Mutual Fund has the largest market share of individuals investing in Systematic Investment Plans (SIPs). HDFC Mutual Fund, with almost nine million individual accounts is helping more people earn better through the equity and debt markets.
What do households value?
HDFC had built up a strong presence across the financial space and the question we kept asking ourselves is – what next? Ironically, if one introspects, most solutions tend to lie in one’s own backyard. We went back to the drawing board and asked: what do Indian households value the most?
It is therefore of utmost importance that we are careful, conservative and cautious in all our business dealings because, at the end of the day, financial dealings are about trust and confidence.
First, people spend on housing and the second major spending is education for their children. That is how our foray into education began. The objective was to capitalise on our strong brand name and provide affordable education. So in our education stable, we have a company called Credila that provides loans for higher studies and we have a chain of K-12 schools, called The HDFC School.
Within the HDFC group, the brand name has been lent purely on the basis of trust. All our businesses largely deal with retail customers. It is therefore of utmost importance that we are careful, conservative and cautious in all our business dealings because, at the end of the day, financial dealings are about trust and confidence.
Chairman of HDFC Asset Management, HDFC Standard Life Insurance Co and HDFC Ergo General Insurance in addition to HDFC, Deepak Parekh received the Padma Bhushan in 2006. Deepak Parekh is the non-executive chairman in India of Siemens, Glaxo Smithkline Pharmaceuticals and BAE Systems India (Services). He is also on the boards of Indian Hotels Company Ltd and National Investment and Infrastructure Fund (NIIF) and International boards of DP World – UAE, Vedanta Resources plc and Fairfax Financial Holdings Corporation – Canada. Mr Parekh has won several international awards including the Cross of the Order of Merit by Germany in 2014 and the Knight in the Order of the Legion of Honour by France in 2010. He was the first international recipient of the Outstanding Achievement Award by Institute of Chartered Accountants in England and Wales in 2010.