How HDFC's Genius strategies KILLED the Banking Monopolies in India

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 eight thousand per cent going from just 17.86 rupees in Jan 2000 to more than 1 400 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 fact in the past 10 years the revenue of the company has shorter by 350 going from thousand one eighty-five closed in twenty twelve to one lakh fifty-five thousand eight eighty-five crores in twenty twenty-one.

• The question is 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 

The first thing that we need to understand is how does a bank work first place in simple words a bank collects money from people like you and me the businessman and the 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 the profit of the bank equals the interest collected from the borrowers minus the interest paid to the depositors 

Now 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 Parikh 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 which it could not offer lucrative services to the borrowers 

So you know what the legendary team of hdfc went on to do some extensive market research to find out the gaps in the market and one such gap they found was the pain of the cooperative bank transactions

To tell you about it 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 das and Mr sham sunder 

Mr Gopal das is a Maharashtra cooperative bank customer who buys 10 lakh rupees worth of cement from Shyam Sundar who is from gujarat gobaldas pays by check so sham Sundar goes back to Gujarat and deposits the cheque in his ABC bank 

This ABC bank clears the cheque and pays sham 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 Shyam Sundar was stuck with the bank plus he has to pay a processing fee 

Now when this happened with sham Sundar for two to three clients Shyam 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 check as a result the cooperative banks were losing these big-ticket accounts of local businessmen but here's where 

Hdfc offered a simple solution hdfc said that because it has branches all across the country it will issue checks at par to all cooperative bank customers by which when gobaldas writes a check to sham Sundar for 10 lakh rupees instead of sending the cheque back to Maharashtra sham Sundar can deposit this cheque at his local Hdfc branch in Gujarat and hdfc will clear the check 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 so 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 and 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 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 parcel 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 check of 5000 rupees to the broker who had an icici bank account he then gave another check to the stock exchange for 5000 rupees which had an account in Canada 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 and 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 to be electronically transferred immediately to the buyer but the problem with the system was that this was a very very inefficient system and it caused three major problems to the entities of the supply chain 

Number one 

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 

Number Two

This process became even more complex when a broker had multiple customers who again had different bank accounts with different processing times

Number Three

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 lacks of rubies in his account which will only be used to pay back the sellers 

Number Four

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 which is why to mitigate this risk the exchanges had to send data on dues of various brokers to the bank at the end of the day to check whether the brokers had enough money to honour their trade or not

In this case, every single day in the evening Canada 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 TDS and costly but this is why ladies and gentlemen 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 and what followed next was nothing short of a revolution 

Now 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 

First of 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 

secondly, the exchange could immediately check if the brokers had enough funds to carry out the transaction or not because of which it saved them a lot of headaches 

Thirdly 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, now some people might say yeah bro so what is the big deal with using computers and the internet for banking well for those people I gotta tell you guys that this was not like ordering pizza online 

We are talking about using new-age technology to carry out critical transactions and that too in the stock market this requires a ton of efforts into reskilling your employees set up new systems and procedures that no one has ever used in India and 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 

Guess what 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 and starting with the NSC in 1998 

The hdfc bank became the clearing member of all major exchanges by fy2000 and 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 markets 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 stockbrokers of India.

This is how lees and german HDFC bank ended up getting the most valuable current accounts in saving accounts giving them a huge chunk of funds to then be utilized for financial services and lastly they even carried out a similar process to tap into huge corporate accounts by digitizing their employee salary system 

Because of this hdfc got crows of rupees in its bank account in the form of current accounts of large corporates and 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 

This brings me to the most important part of the episode and that are the lessons from the case study.

Moving on there are three very very important lessons that we need to learn from the rise of hdfc lesson 

Number One whenever you are a new player in the market before jumping into the mainstream market always trying to find the gaps in the market and we even saw this in the case of Asian pins, 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 

Number Two as the legend 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 

Number Three please read this book called the unusual billionaires and this book called the bang for your buck both of these books have given me some fascinating insights about hdfc bank 

Lastly, 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 eventually turning these newbies into legends leaving the bureaucrats struggling in the market, so always keep your evaluations tight and kill your inefficiency before someone else kills your business.

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