BOOK REVIEW

HDFC BANK
2.0: FROM DAWN TO DIGITAL – By Tamal
Bandyopadhyay

Finally,
here is a book that narrates the transformation of HDFC Bank from a startup in
1994 to striding across the Indian banking sector like a colossus in a little
over two decades. The bank celebrated its twenty fifth anniversary in 2019.

Tamal
Bandyopadhyay is one of India’s most respected writers and columnists on
finance. He tells the exciting tale of how HDFC Bank has transformed itself
with its digital foray. It chronicles how India’s most valued lender faced its
toughest challenge of turning itself into a digital bank.

The author
has made it clear that his objective is not merely to write the bank’s history
but to tell the story of the making of a successful bank, born after economic
liberalisation and reinventing itself continuously to expand its reach and
remain ahead of the competition. It tells the story of HDFC Bank in the context
of the overall banking space in India, which has been changing dramatically
with new products, new ideas and technology and, of course, the pile of bad
loans that is forcing the industry to take a re-look at loan appraisal and risk
management. It is divided into three parts – The Digital Journey, The Flashback
and The Puri Legacy.

THE DIGITAL JOURNEY

The strategy
was to provide speed, use technology to do credit and risk management at scale,
improve the consumer experience and apply Artificial Intelligence (AI) to
massive amounts of data for prediction and decision-making. It could provide
far more convenience to customers and it was also believed that with full digitisation
the bank could reduce its operational costs. It was truly a win-win situation.
The digitisation drive has resulted in slashing of documents’ movement, saving
two million sheets of paper every month and shrinking the cost-to-earnings
ratio to 40% from 49% between 2012 and 2018.

The HDFC
Bank 2.0 journey began with MD Aditya Puri’s trip to California in September,
2014 to see the developments and innovations in technology and to understand
their impact. He came back convinced that his bank had to move fast and take
advantage of digital disruption. He had seen how the fintech companies, the new
kids on the tech block, were getting into fund transfers, mobile banking and
shopping. They could build products to give quick loans and provide a lot of convenience
and a slick user interface to customers on their phones. Aditya and HDFC
Bank decided that they would rather disrupt themselves than be disrupted.

It was also
important that the bank combined global trends in technology like smartphones,
AI, the cloud, etc. with the state-of-the-art infrastructure that India had
built as digital public goods – Aadhaar, e-KYC, Unified Payments Interface
(UPI) and other elements of the India stack.

This enabled
the bank to launch new products quickly that could be targeted across the
country, at both urban and rural customers. For example, the 10-second loan is
a genuine innovation based on the principle of ‘paperless, presence-less and
cashless’ banking. It is a great example of combining the traditional strength
of the bank in credit underwriting and risk management with the latest
technology. HDFC Bank has taken this innovative approach to car loans, loans
against securities, loans against mutual funds and, with increased data about
small businesses coming in after the implementation of the Goods and Services
Tax (GST), similar products could well be rolled out for small business lending
as well.

As a part of
digitisation, in 2015 the bank introduced a fully integrated marketplace
platform, an aggregator called SmartBuy, hosting links to various sites
catering to shopping, travel, etc., with 3,000 to 4,000 registered merchants.
The first bank in India to do so, HDFC Bank clocked Rs. 40 billion from this in
2018. Clearly, India’s most valued lender has been turning itself into a
digital bank not in a superficial manner but by driving fundamental change. All
this is taking place at warp speed – around 85% of all its transactions were
digital in 2018.

THE FLASHBACK

This part
deals with the making of the bank, viz. its conceptualisation, the team
building and the startup fervour of the initial days.

The idea of
floating a bank occurred to Mr. Deepak Parekh and the HDFC Board in 1987. The
starting point was to initiate non-mortgage opportunities for HDFC, then engage
in housing financing. In 1993, soon after the liberalisation of India’s economy
in 1991, the Reserve Bank of India issued guidelines on the entry of new
private banks. HDFC Bank was incorporated in August, 1994 and got the banking
licence in January, 1995 along with nine others such as ICICI, IDBI, UTI, Times
Bank, Centurion Bank, IndusInd Bank, etc. In February, 1995, Mr. Manmohan
Singh, the then Finance Minister, inaugurated HDFC Bank’s corporate office at
Worli.

Aditya
Puri, ex-Citibank, was appointed as CEO with his first 13 men, the lucky 13,
who shared the same vision of creating a bank with a difference and
believing that they would be working in the best bank in India. Most of
them, earlier with Citibank and Bank of America, left their lucrative positions
and global opportunities, took pay cuts for this vision and joined the startup
private bank. The first bank to give stock options to its employees, HDFC Bank
used this route to create a balance between short-term rewards and long-term
sustainable value creation. And the money did come their way as the bank and
the stock did phenomenally well. Aditya gave the lucky 13 the freedom to
bring their own people to the bank, people who would share the same dream and
passion. But he had one caveat – not too many people could be hired from
particular banks, as this would make it difficult for HDFC Bank to evolve its
own culture.

The book
contains many inside stories of the Natwest misadventure and the two mergers by
HDFC Bank, viz., Times Bank and Centurion Bank of Punjab, with all the minute
details.

The author,
with his rich experience in the banking space, makes two critical observations
worth mentioning:

1. When one gauges a bank, there are three key
things to look at – profitability, growth and stability. There is also the
critical component of trust. One associates the idea of a bank with
something one can trust – that ‘You can bank on somebody’.

2. Globally, banks have never failed because of
lack of technology, or great products or people. What the failed banks
really missed was risk management – they did not manage the risks well.
Herein comes the understanding of the risk-reward trade-off, or balancing of
business growth with the risk taken in delivering it.

THE PURI LEGACY

What makes Aditya, the longest-serving
Managing Director of any bank globally, different from his peers? The author
tries to analyse this by pointing out that Aditya, B.Com. and a qualified
Chartered Accountant, is a common-sense banker with a strong belief
that common sense and curiosity are far more important than anything else in
banking. One of the most remarkable things about him is his eye for detail. He
and HDFC Bank have been known for spotting trends and then executing plans with
lightning speed, scale and, yet, with proper risk controls. According to
Aditya, HDFC Bank is not a bank anymore but a financial experience.
Under his leadership, from a life-cycle bank, HDFC Bank is transforming itself
into a lifestyle bank.

He is good at maintaining
work-life balance by following a principle of doing extraordinary things in an
ordinary way. In spite of heading such a large institution he leaves office by
5.30 pm regularly and spends time with his family. He never delegates. He
empowers.

He has always been ahead of the
curve and had foreseen the digital banking revolution and knew a convergence
would happen and people would want everything on the phone. However, it is
pertinent to note that he does not use a mobile phone and email for himself!

Under his leadership, the bank
has shown that with an agile leadership which has foresight and flawless
execution at speed and scale, even a giant bank can take on the nimblest of
startups and become a pioneer and market leader. It is an object lesson on how
incumbents in many industries can respond to the digital disruption that is
staring at them.

The Puri
legacy is all about an institution which will continue to grow and go to the
next level with the same drive, value, ethos and culture, and with the same
consistency.

Book reviewer’s
notes

Mr. Deepak Parekh was never on
the Board of the bank despite being closely involved in creating it, including
lending the brand name ’HDFC’ at no cost! It can be said that it was his
conceptualisation, vision and leadership ability to give space to the CEO to
grow and develop.