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Tuesday, March 28, 2023

Killing Monopoly in India: Growth Story of HDFC

The growth history of HDFC has been quite fascinating and a matter of research especially among stock managers. HDFC can be said to be one of the astonishing companies in the Indian banking sector. What was earlier started merely as an ordinary bank can may now be referred as one of the most powerful banking entity in the Indian market space

Observing the stock price of HDFC in the past twenty – one year, it has gone up by more than 8000% i.e., from Rupee 17.86 in January, 2000 to more than Rupee 1200 in May, 2022. What is pertinent to note here is that the rate of return given by HDFC is more than that of the stock return of “Microsoft” and “Amazon”. Indeed, in the past 10 years, the revenue of HDFC has gone up by 350%, going from 34,185 crores in 2012 to 1,55,885 crores in 2021. 


In simple terms, the profit of the banking industry or bank per se can be defined as the difference between ‘interest collected from the borrowers’ to ‘interest paid to its depositors’.

Going back to the 1990s even though HDFC had a licence from the Reserve Bank of India (RBI), the bank had faced repercussions of all the ‘banking scams’ that took place during the time. Result of which people were reluctant and did not trust a new entity in the market to go with.Therefore, in its initial days, HDFC didn’t have enough deposits and customer base, because of which it couldn’t offer any ‘premium or lucrative’ services to its existing clients. 


In order to mark its presence in the growth story of India, the management team did extensive research to find out the ‘sweet spot’. Thus, embarking the journey to mitigate the pain of ‘cooperative transactions.


Back in 1998 Cooperative banks were restricted to one state only and their branches and customers were present only in that respected state. Due to this in order to facilitate any inter-state transfer they were highly dependent on another bank which was situated in another state of the country.

For instance ,if in a transaction where Mr. X who happens to be a state cooperative bank customer buys goods worth of Rs 5 Lakhs via a cheque from Mr. Y who is from another state

then firstly, Mr. Y needs to deposited the cheque in his respected state ‘ABC Bank’. Then the ‘ABC Bank’ in Mr. Y state shall obtain clearance from the partner bank of Mr. X and after deducting the processing fee the bank shall pay him the amount. This whole process for a single transaction took a long-time frame of at least 3 to 4 days.


Result of which most of the suppliers were now not accepting any cheques from Cooperative Banks via which these cooperative banks were losing ‘big-ticket amounts from the local businessman. 

Here, HDFC looked at it as a great opportunity and since it had its branches across the country it started offering its services to cooperative banks customers. HDFC issues cheques at par to all cooperative bank’s customers through which now the customer did not need to deposit or wait for the long clearance process of the other party’s bank. With reference to our previous example, now Mr Y can deposit the received cheque to his nearby HDFC Bank branch and HDFC will clear the cheque without any fee or delay. 

By this, cooperative banks now pay their suppliers all across the country without much delay and can retain their high-ticket customers. In return, HDFC asked these cooperative banks to keep ‘interest-free deposit’ with it. Thus, HDFC can accumulate low-risk interest-free capital and eventually utilise it to provide home loans, car loans, and other services to make profits.


When the computer revolution picked up in the 1990s the process of trading in the stock market started to change and the stride of ‘dematerialization’ of stocks came into the picture. But the whole process of ‘de-mat’ took around 5 to 10 days to complete the transaction, as each entity in the supply chain had a different bank account, which further had different transaction times which created a hindrance to complete the demat transaction quickly. 


HDFC without wasting any time came up with a revolutionary product i.e., ‘micro-banker’ which was developed by the company called, ‘I-flex Solutions’. It was a fully integrated online banking automation system, thanks to which the transaction time got reduced from 5 to 10 days to just 2 to 3 days in the demat process.  

When the other banks saw online banking as ‘a thing ahead of its times’ or stuck themselves to conventional offline banking, the HDFC from its creative and bold move captured around 80% of the market share in the ‘settlement-business’ by the late 1990s. 


From 1994 to 2000 i.e In just 6 years HDFC went from just being an ordinary bank to being one of the market pioneers. Today the bank has more than 5000 branches across 2900 cities and towns in India and it is still playing an imperative role in India’s growth story.


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