Fintech History - HDFC Bank | Fintech Inside - 04th Nov, 2024

Hi Insiders, I’m Osborne, investor in early stage startups.

Welcome to the 85th edition of Fintech Inside. Fintech Inside is the front page of Fintech in emerging markets.

HDFC Bank is India’s most revered private financial institution, but it was also a startup at one point. I’ve always wondered what the HDFC origin story was and so little is known about the institution among today’s founders.

Most posts I read about HDFC Bank left me with more questions than answers - what were the circumstances under which HDFC was formed? who founded HDFC? what was HDFC’s scale when HDFC Bank listed? and many more.

With today’s piece I sought to answer all of those questions, mostly for myself, and maybe help you learn a little about the origins of HDFC Bank.

As they say, history rhymes, and I hope by knowing a little bit more about HDFC’s origins, this piece inspires founders to start up in India’s financial sector.

You could imagine this is a fairly long post - it has a lot of incredible pictures, charts and tables from the 70’s and 90’s. It’s best read on the web version.

As usual, there’s also a beautiful song recommendation at the end, if you’d like to listen to a song in the background while you read this. Do share your recommendations with me too :)

Thank you for supporting me and sticking around. Enjoy another great week in fintech!

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🤔 One Big Thought

HDFC Bank - A humble man’s not-so-humble ambition

Disclaimers: 

1. This is not a stock recommendation or financial analysis of any kind. Please do you own research.

2. I’ve tried being as factually correct as possible. Not enough information is available online regarding HDFC or HDFC Bank pre-1990’s, so it was tough to corroborate some of the stories mentioned here. Please keep this in mind while reading. 

3. I have direct and indirect investments in HDFC Bank.

Valued at $158bn, The Housing Development Finance Corporation Bank, now known as HDFC Bank, is India’s largest bank by market capitalization, AUM, deposits and possibly every other metric. 

As of writing this post, HDFC Bank is also the world’s 10th largest bank by market capitalization, trailing JP Morgan Chase Bank (#1, $626bn market cap), Bank of America (#2, $322bn market cap), ICBC (#3, $284bn market cap). 

Though back in 1977, The Housing Development Finance Corporation was contrived as just an experiment - founded by a very humble man, with a not so humble ambition. 

Hasmukh Thakordas Parekh, known across the industry as Hasmukhbhai, was born to Mr. Thakurdas Parekh and Ms. Diwaliben Parekh, in the diamond city of Surat, Gujarat on 10th March, 1911. 

His father was one of the first few employees of the Central Bank of India. Little did Mr. Thakusdas know, his son would go on to play a pivotal role in India’s financial services landscape. Hasmukh and his parents moved to Mumbai when he was very young and lived in a chawl, where he had to work part time to support himself and further his interest in education. 

Hasmukh graduated from Mumbai University in Economics and then obtained a Bachelor of Science degree in Banking and Finance at the London School of Economics. 

Hasmukh then returned to India in 1936, aged 25 and became an economics lecturer at Xavier’s College, Mumbai for three years. But like most Gujaratis, the stock markets came calling and at 28 years of age, Hasmukh began working with Harkisandass Lukhmidass, India’s largest stock broking firm at the time. 

Hasmukh valued his time at the stock broker where he learned everything about the financial services business. He even proposed setting up a housing finance lender while at the broker. 

During his travels, he’d seen how people in London would own homes that were financed. He wanted something similar for Indians, who at the time were going through a period of extreme poverty, wars, and many more difficulties. His idea was struck down back then. 

Around the same time, global financial institutions, led by the World Bank, US AID and IFC, were starting to look at supporting India economically to reduce poverty. US’s economic assistance to India began in 1951 and provided $13bn in loans and humanitarian support back then for this cause. 

In the early 1950’s, during his time at Harkisandass Lukhmidass, the RBI set up a committee to boost bank credit to the private sector. That committee led to the setting up of a project finance platform, with investments from World Bank, IFC and others, which would be led by P. S. Beale. The project was formalised in Jan, 1955 as the Industrial Credit and Investment Corporation of India Limited, now known as ICICI Ltd. 

The setting up of ICICI Ltd. was a great opportunity for a stock broker to sell their services of underwriting and financing public issues. Hasmukh would visit Beale often and provided him with market news, insights from the ground and more. In the process, Hasmukh became a valuable asset to Beale. 

Initially, ICICI wasn’t able to grow too much as Beale’s bandwidth was getting spread thin. The board believed he needed to get someone onboard to help him out. Hasmukh became the best option, having the education, the experience and having nurtured the relationship with P. S. Beale over the years. 

In March, 1956, after spending nearly 20 years at the stock broker, Hasmukh joined ICICI Ltd. as Deputy General Manager, and became one of the early employees of the company. His contribution to growing ICICI Ltd. was invaluable and the lender evolved manifold. Over the years, Hasmukh grew through the ranks and in 1972 became the Chairman and Managing Director of ICICI Ltd. 

It was Mr. H.T. Parekh’s constant lobbying for an investment vehicle of mutual funds that led to the setting up of Unit Trust of India in 1964 by TTK who was India’s Finance Minister then. 

Even when he was at ICICI, he drew a plan to set up a housing finance product, however, under Bank of Baroda, a government bank, but the proposal was shot down. In those days it was unthinkable to provide loans to retail customers. It was just never done before. 

Then in 1975, at age 64, Hasmukh decided to retire as Managing Director of ICICI Ltd. This was the period of Emergency in India. By no means was it a time for risk taking endeavours, capital was tough to come by and people were scared and on edge. 

Hasmukh was so convinced with his vision of providing housing finance for all, that during that tumultuous period, he met with various stakeholders to pursue it. By 1977, when the emergency ended, he even met with the then new prime minister of India to seek the government’s support - not financial but just an “in-principle” support. He received it! For the first time in over 40 years someone believed his vision. 

With financial support from ICICI Ltd., the Aga Khan Foundation, IFC, LIC of India and others, Hasmukhbhai Thakordas Parekh finally launched Housing Development Finance Corporation Limited on 17th Oct, 1977 - making his dream a reality at the age of 66 years. 

HDFC Ltd. got off to a slow start. They had to learn things as they went about as no one had done housing finance before. In 1978, HDFC Ltd. disbursed its first home loan of Rs. 30,000 at a 10.5% fixed rate to Mr. D. B. Remedios for his Rs. 70,000 home in Malad, a suburb in Mumbai.

In the same year, HDFC Ltd. went public and had no takers in the markets. IFC decided to double down on its stake in the lender, but retail participation was undersubscribed and its listing was also below its issue price.  

Mr. H.T. Parekh called on his nephew Deepak Parekh to join the firm. Deepak at the time was a banker, having worked at Ernst & Young, Grindlays Bank, and Chase Manhattan Bank as its assistant representative for South Asia. 

Deepak was living the high life, flying between New York, Hong Kong and Singapore. Mr. H.T. Parekh persuaded Deepak to join the lender with a 50% pay cut when he was 34 years old.

Deepak started with HDFC as a Deputy General Manager and worked his way up to Executive Director and then Managing Director to eventually becoming Chairman in February 1993.

Despite the IPO challenges and the initial slow growth, HDFC Ltd. persevered, obviously. HDFC then went on to grow significantly well and at one point accounted for 100% of the retail loan market. It had limited to no competition. More importantly, Mr. H.T. Parekh architected the home finance product in India and proved the viability of the product in an unregulated environment. 

There was no regulatory interest (housing loans was a small sector) for over 10 years, after which the National Housing Bank (NHB) was formed in 1988 under the RBI to regulate the market. 

By 1987, HDFC disbursed Rs. 175.52cr ($135M in those days, 1987 USD1=INR12.96), growing 20% (IYKYK). It launched new products and later helped the government and other public sector entities set up SBI Home Finance, Canfin Home Finance, GIC Housing Finance and GRUH Finance. 

By 1992, HDFC Ltd. became a force to reckon with. It cumulatively financed 300K homes i.e. more than the next 10 housing finance companies combined. It commanded 30% of the entire market for a long time. As of 1991, HDFC grew disbursals by 39% on average over 1987-1991 to Rs. 668cr ($294M, 1991 USD1=INR22.74) and grew borrowers by 28% during the same period to 116K. 

Unfortunately, I couldn’t find any financial information on HDFC between 1991 and 1994 except this World Bank report, but by the powers of imaginative assumption and extrapolation, we could say that HDFC was generating between Rs. 100-150cr a year. Accounting for inflation, that’s roughly Rs. 850-1,200cr of annual income today. 

HDFC’s main focus was on execution and service but it was dependent on offshore sources of capital for disbursements and growth. It maintained its promise of low interest rates. In the table below, you can see that HDFC maintained its 14.1% interest rate to borrowers over five years, even though its interest cost grew from 11.6% to 12.7% during that period. 

The early 1990’s was an important period in Indian history. Firstly, I was born :) 

Jokes apart, the ongoing gulf war mentioned above brought in global price shocks, inflation and high interest rates. In 1991 India suffered a damaging economic crisis. Years of heavy imports had led to a twin deficit, a near-exhaustion of foreign exchange reserves, depreciation of the currency, sovereign downgrades and a failure to pass a budget. India made it through the crisis after pledging its gold reserves as collateral for an emergency IMF loan.

The Indian government introduced the 1991 liberalisation policy known as the New Economic Policy - a series of reforms that opened the country's markets to foreign investment, reduced restrictions on private companies, and created a more competitive market environment.

Following the liberalisation policy, in Jan 1993, the RBI introduced new licensing guidelines for private sector companies - this was the first time the private sector was allowed to participate in India’s banking system. This was big. 

Another important aspect of that RBI guideline was that banks needed to be “computerised” from day one and “they should result in upgradation of technology in the banking sector”. This was important because technology was not even remotely available widely and the internet was made available to the general public only in 1995. 

Lastly, the RBI guideline mentions that it wanted to avoid concentration of bank headquarters in any one city (banking was still branch based), so RBI intentionally said it will only approve one banking licence in a city. This was so fascinating to me. Remember this nugget for later in the story. 

The early 1990’s was an important time in HDFC’s history as well. It had been 15 years since HDFC was operational. It was a massive company, given the times, in Indian financial services. But the gulf war brought in higher interest rates on the loans from offshore lenders that HDFC was dependent on. 

A banking licence would open up retail deposits which meant significantly lower interest costs and lower dependence on global capital markets. HDFC would have been a prime applicant for the licence with its 15 year experience, brand presence and public trust. It couldn’t make more sense for HDFC to apply, right? 

Mr. Deepak Parekh would certainly agree with you. But the HDFC board shot down that plan citing insufficient funds and networth for the bank. The lender had some Rs. 100cr ($33M then) net worth and Rs. 50cr ($16M then) reserve capital but the minimum capital requirement to apply was Rs. 300cr ($100M then). The irony of not having insufficient balance to open a bank! Sorry, last joke.

But here’s the important thing, in 1993, HDFC had a very strong business, a market leading position and a high growth of 30-40% YoY but limited capital. Anyone would have thought it foolish to reallocate a major portion of that capital from a growing business and put it towards something so risky and that has never been tried in India before. 

Deepak Parekh persisted and went back to the board with a stronger proposal and the board agreed to apply for the licence but with HDFC owning 25% of the banking entity. 

HDFC applied for the banking licence immediately after and received in-principle approval in September, 1993. It was the only applicant to receive the licence approval from Bombay as per RBI’s guidelines of one licence in a city. It was for this reason that HDFC Bank was almost going to be named The Bank of Bombay, but didn’t (thankfully) and we have one more protagonist to thank for that.

HDFC Bank was finally incorporated in Aug, 1994. Unfortunately, Mr. H.T. Parekh passed away in 1994, aged 83, and wasn’t around to see the behemoth HDFC, his vision, would go on to become. 

In 1994, Deepak Parekh wanted to continue as Chairman of HDFC Bank and not become the Managing Director. Mr. Parekh was already on the board of many blue chip companies in India at the time and believed that if he became the MD of HDFC, it will hamper the bank’s business prospects, as RBI doesn’t allow a bank’s Managing Director to be on the boards of companies that could conflict with the bank’s operations. 

He called on Aditya Puri, then the CEO of Citibank Malaysia, to join HDFC Bank as its first Managing Director, with a reportedly 50% pay cut (history rhymes). Mr. Puri had one condition though: he would join only if the bank was not called the “Bank of Bombay”. HDFC Bank has been shaped almost entirely by Mr. Aditya Puri. He went on to become the longest serving MD of any Indian bank. 

HDFC Bank began operations in Jan, 1995 and opened its first branch in Worli, Mumbai. In Mar, 1995 it IPO’d and was 55x oversubscribed. Within two months, the stock was trading at a 300% premium to listing price.

In its first Annual Report of FY1995 (ended Mar, 1995), it reported a princely net profit of Rs. 80.2lacs or $250K (inflation adjusted, that’s Rs. 5.5cr or $650K). I couldn’t tell for certain how many users it acquired or how much user deposits it earned. I’d recommend you read the annual report to learn from it. 

Meanwhile at HDFC, by 2005, its market capitalisation was around $2.0bn, making HDFC among the 10 largest listed companies in India. Moreover, HDFC was the only non-bank in

India that has a AAA rating from the two leading Indian rating agencies. It had a market share of around 30% and was by far the largest supplier of housing finance in India.

HDFC Bank then went on to merge with Times Bank in Feb, 2000 (yes the Times Group had a banking business). This was HDFC Bank’s first big deal that pushed the deal into the big leagues in terms of business and valuation. It listed its shares on NYSE in 2001. 

In Feb, 2008, HDFC Bank merged with Centurion Bank of Punjab for $2.4bn, which back then was India’s largest merger in banking history. Centurion Bank of Punjab itself was the amalgamation of three banks i.e. Bank of Muscat (2003), Bank of Punjab (2005) and Lord Krishna Bank (2007). 

Finally, in 2023, HDFC Bank would go full circle and merge with its parent company HDFC Ltd. in a $40bn deal. ICICI Bank merged with its parent company ICICI back in 2002. 

As of Sep, 2024, HDFC Bank has 95M customers, $5Bn in quarterly net revenue, $2Bn quarterly in net profit, $300bn in net advances with 0.4% NNPA, and $300bn in deposits. The growth metrics, key ratios and operational metrics are firing on all cylinders. 

Not to forget, HDFC Bank also has subsidiaries HDB Financial Services (small business finance), HDFC Life Insurance, HDFC AMC, HDFC ERGO General Insurance and HDFC Securities. Each of those businesses are gigantic in their respective sectors. 

Back in 1977, HDFC was a startup story like any other. I’ve focussed most of this story only on that origin story and didn’t write about the past 15-20 years of the HDFC story because it’s better known. There’s a lot for founders to learn from the HDFC origin story - rejections, challenges, success, fund raising, team building and much more. I hope you were able to learn something new from HDFC’s story about building financial services in India. 

(Fans of Acquired podcast, how’d you think do?)

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🎵 Song on loop

Fintech updates can get boring, so here's an earworm: Pearl Jam is my favourite band of all time. Surprised I haven’t ever shared a song of theirs. So here’s a relatively less known song of theirs: Wishlist by Pearl Jam (Youtube / Spotify)

👋🏾 That's all Folks

If you’ve made it this far - thanks! As always, you can always reach me at os@osborne.vc. I’d genuinely appreciate any and all feedback. If you liked what you read, please consider sharing or subscribing.

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