How the Parekhs helped build HDFC Bank into India's second-largest company

Headquarters of India's HDFC bank is pictured in Mumbai, India  Image: Shailesh Andrade/ Reuters
 
Quite often, turning 65 means hanging up one’s boots. But here have been some notable exceptions, too. Captain CP Krishnan Nair set up the first Leela Hotel in 1987 when he was 65 and built it into one of India’s best-known luxury hotel chains. Ashok Soota, the technology veteran, started Happiest minds in 2011 when he was 68, and is today among India’s richest people with a net worth of $1.2 billion. Although not quite 65, Falguni Nayar founded Nykaa at 49 and turned it into a beauty and fashion behemoth by the time she is nearly 60.  
 
But long before they all did that, and inspired many others, it was perhaps Hasmukh Thakordas Parekh, who disregarded conventional norms of his time to start a venture that has now gone on to rewrite corporate India’s annals. HT Parekh founded Housing Development Finance Corporation Limited (HDFC), India’s first retail housing finance company, soon after he had retired as the chairman of Industrial Credit and Investment Corporation of India (ICICI) at the age of 65.
 

“At that time, it was akin to a startup,” Deepak Parekh, his nephew and chairman of HDFC wrote in the book, India Transformed, published by Penguin Books. “The only difference was that, unlike most startups, which are largely set up by young entrepreneurs, this one was a post-retirement venture by the founder, HT Parekh.”
 
On April 4, 45 years since that ambitious leap of faith, HDFC announced that it will merge with the country’s largest private lender, HDFC Bank, to create a banking behemoth that will also become the country’s second-largest company. In sheer size, it will be twice as big as ICICI Bank, India’s third-largest bank. Soon after the announcement, the market capitalisation of both the companies zoomed to over Rs 14 lakh crore, about Rs 4 lakh crore less than that of India’s largest company, Reliance Industries Limited.
 
HDFC, set up in 1977, issues mortgages to more than half of the home buyers in India. HDFC Bank, which began operations in 1994 as a subsidiary of HDFC, is currently India’s second-largest bank. Post the merger, HDFC will hold 41 percent of HDFC Bank Ltd. Its shareholders will get 42 shares of HDFC Bank for every 25 shares of the non-banking financial company (NBFC) held by them. The deal, which has pending regulatory approvals, is likely to be completed over the next 12 to 18 months until which both institutions will continue to function as independent entities.
 
"As the son grows older, he acquires the father's business,” Deepak Parekh, the chairman of HDFC said at the time of the announcement. “This is a friendly merger. We won't be thrown out. After 45 years in housing finance, we have to find a home for ourselves, which we found in our own family company HDFC Bank.”
 
For Parekh too, the announcement is something of a homecoming. He had joined his uncle, Hasmukh Parekh, at HDFC as a 33-year-old, after a stint with investment banking. If not for his uncle, who had convinced him to join HDFC, Parekh would perhaps have been lost to some foreign bank, like many of his peers. At HDFC, Parekh was instrumental in bringing the company closer to people, particularly those with housing needs. Since then, HDFC has provided over 9 million home loans.
 
“No one in India had so far attempted to finance individuals for their housing needs,” Parekh wrote in the book. “Access to long-term finance was difficult and no foreclosure norms existed. At that time, most Indians were extremely debt-averse. HDFC remained the only housing finance player in India till the late 1980s when insurance companies, public-sector banks, and a few private players set up housing finance companies. HDFC also promoted four other housing finance companies. In effect, HDFC created competition for itself.”

Deepak Parekh left his job with chase Manhattan to join HDFC in 1978
Image: Ashesh Shah/The The India Today Group via Getty Images

 

No rest, No retirement

In many ways, the story of HDFC is all about the grit of the Parekhs. The company began operations in 1977 as a mortgage lender as the brainchild of HT Parekh. HT, or Hasmukhbhai, as he was commonly known, had graduated with a bachelor’s degree in banking and finance from London School of Economics. In 1936, he returned to India and began his career with the stockbroking firm Harkisandass Lukhmidass while also teaching at the St Xavier’s College in Mumbai for about three years.
 
Over the next two decades, Parekh would go on to work with the brokerage before leaving in 1956 to join the newly set up development finance institution, ICICI, as its deputy general manager. ICICI was one of the earliest institutions sponsored by the World Bank in co-operation with the Government of India and the US government. In 1972, Parekh grew to become the company’s chairman, a post he held until 1978.
 
In 1977, Parekh, tired of seeing millions of Indians turning to buy a house only towards their retirement, after saving up for years, began working on an institution that would lend towards home loan financing. “Why can’t Indians have a home of their own with housing finance in the earlier years of their lives? Why should they have to wait till the end of their working careers?” Parekh is reported to have asked.
 
That led to the setting up of HDFC without any support from the government. “The challenge of growing the housing finance business predominantly concerned raising adequate long-term resources. During the 1980s, HDFC had successfully tapped long-term international funding from the World Bank (guaranteed by the Government of India), International Finance Corporation, and the United States Agency for International Development (USAID) under the housing guarantee programme,” Parekh writes in India Transformed.
 
In 1978, Parekh’s nephew, Deepak who was working at Chase Manhattan, joined his uncle on a 50 percent salary cut as a deputy general manager. “The business of HDFC was a simple one,” Parekh further writes. “Borrowing wholesale funds and lending them to retail customers at a fixed rate of interest, typically earning a modest spread of 2 percent.” Forbes India had sought an interaction with Deepak Parekh but was turned down.
 
In the early 1990s, as India’s economy seemed on the verge of a collapse, and the global economic crisis caused by the Kuwait war pushed oil prices higher, leading to a depletion in India’s foreign currency reserves, the central bank took a decision to raise interest rates, and in the process fight double-digit inflation rates. “Home loan interest rates had already reached a peak of 18.5 percent per annum,” Parekh wrote about the early days. “HDFC knew that it could not afford to renege on its home loan commitments. It just had to find new avenues of raising resources.”
 

Building India’s best bank

That meant, in 1993, as India opened up its banking sector to the private sector, Parekh and his team were ready to jump into the fray. “There was an advertisement in newspapers calling for potential applicants,” Parekh wrote. “This aroused my curiosity and I thought it would be a good idea to apply for a bank licence.”
 
The rules then stipulated a capital requirement of Rs 100 crore, and it also took him some serious efforts at convincing the board, before they agreed to move away from a single product company into newer frontiers, with the idea that the new business is run by an independent and professional management. The bank was incorporated in August 1994 as HDFC Bank Limited, and a year later, opened its first branch in south Mumbai’s Churchgate neighbourhood.
 
“In short, HDFC Bank almost did not happen—but that is history now,” Parekh writes. “In 1993, there were over 40 aspiring applicants for a banking licence—some were even fictitious, having sent in their application on a postcard. The chairman of the committee appointed by the RBI to grant the licences was SS Marathe, who was also a member on RBI’s board. One of the conditions stipulated for getting a licence was that the head office of the bank would have to be in a city other than Mumbai. HDFC took its chances and requested for the head office to be in Mumbai. To our surprise, it was the first to receive a bank licence. Marathe mentioned to me that HDFC’s application was the best and hence we were allowed our preference of having the head office in Mumbai.”
 
In its early days, HDFC Bank had largely focussed on corporate lending, before making a shift towards retail customers, and is widely regarded for growing its net profit by almost 30 percent every quarter for a decade, at a time when India’s economy was growing at a breakneck period in the 2000s. In 2000, HDFC Bank merged with Times Bank, and by 2008, the company acquired Mumbai-based Centurion Bank. For long, it also had a fabled rivalry with ICICI Bank, at a time when both the banks were vying for similar customers, so much so that about two decades ago, chaos erupted when one of them set up tents to solicit clients near an exhibition venue of the other.
 
Since its inception, HDFC Bank has been led by managing director Aditya Puri, a former CEO of Citibank Malaysia. Today, the bank has a base of 6.8 crore customers, across 3,000 cities and towns with over 6,300 branches. The bank has also grown to have total assets of over Rs 19 lakh crore as of December 31, 2021. In 2020, Puri, who had served as the longest-serving CEO of an Indian bank at HDFC Bank, finally retired, handing over the reins to Sashidhar Jagdishan.
 
“I told Deepak I want a free hand, I want to build an institution, so I will only come if I have a free hand in running it because then you have fun; if you believe in the vision, you go on with the vision then it’s great," Puri, who is credited with building the banking business, told CNBC-TV 18 in 2020. "To his credit, he (Deepak Parekh) said yes, and I must say if I asked for his help or used him as a sounding board, he came on board but other than that he never once interfered."
 
In 2017, India’s central banker, the Reserve Bank of India (RBI) added HDFC Bank to an elite list of Indian lenders, who were deemed “too big to fail”. Today, it is one of the three banks that fall in the category apart from State Bank of India, and ICICI Bank, which means that their failure could be catastrophic for the country’s financial system and economy.
 
Much of the bank's success came largely due to its focus on retail loans, which used to constitute some 55 percent of its loan book. Over the past few years, that had declined to some 47 percent, even as the bank continues to have the lowest bad-debt ratio. The lender’s retail portfolio includes personal loans, housing, vehicle, education loans, and credit cards among others.
 
HDFC Bank’s loan book stood at a staggering Rs 12.6 trillion as of December 31, 2021, compared to over Rs 10.82 trillion a year ago while its advances rose by 5.1 percent from Rs 11.98 billion in September 2020 (Q2FY22).
 

Diversified empire

Today, the HDFC Group, of which the bank remains the mainstay, has also built numerous subsidiaries, including life insurance business HDFC Life, general insurance business HDFC Ergo, and an education loan business, among others. The merger, meanwhile, also provides a massive opportunity to unlock potential for its subsidiary businesses.
 
“The merger would further mitigate single product risk for HDFC Ltd and opens up avenues for cross-selling to a larger customer base as well as enhance product diversity while the bank’s exposure to unsecured loans would also reduce,” Gaurav Jani and Palak Shah, analysts at Prabhudas Liladher, said in a report. “HDFC would benefit from the lower funding cost of the banks and its large distribution franchise while HDFC bank would gain from the former’s expertise in real estate and efficient loan processing. As of now, 70 percent of HDFC Ltd and its subsidiaries customers do not bank with HDFC Bank which would provide tremendous cross-sell opportunities to the merged entity.”
 
In addition, the merger will also allow HDFC Bank’s customers to be offered mortgages as a core product, as the bank looks to build on its housing loan portfolio. Home loans form only about 6.2 percent of HDFC Bank’s lending book. “HDFC Bank will enable seamless delivery of home loans and leverage on the large base of over 68 million customers of HDFC Bank,” Keki Mistry, vice chairman and CEO, HDFC, told the media.
 
Now, over the next few months, as the regulators scrutinise the deal for approvals, Parekh and his team at HDFC will be working on the final nuances and plotting the next phase of growth for the company he had built brick by brick. With the merger complete, HDFC Ltd will own 41 percent of the HDFC Bank. But, in the process, with him stepping away from management, as rules stipulate, the group will be without a Parekh at the helm for the first time.
 
With that, life would have come full circle for the family after nearly five decades.