hi everybody 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 and if you look at the stock price of
htfc in the past 21 years it has shot up by more than eight thousand percent
going from just 17.86 rupees in jan 2000 to more than 1 400 rupees today and
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 and most importantly what are the business
strategy lessons that we need to learn from the legendary leaders of hdfc bank
people the first thing that we need to understand is how does a bank work in the
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 an 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 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 gopaldas and mr sham
sunder mr gopaldas is a maharashtra cooperative bank customer who buys 10 lakh
rupees worth of cement from sham 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 sham sudar 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
sdfc branch in gujarat and hdsc 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 hdc
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 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 partel
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 which had different transaction times secondly this process
became even more complex when a broker had multiple customers who again had
different bank accounts with different processing times and thirdly 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 and lastly 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 honor 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 tedious and costly but this is why ladies and gentlemen hdse 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 micro banker was a
fully integrated online banking automation system whereas other banks either saw
online banking as way ahead of its time or they stuck with offline banking or
they had a hybrid of both online and offline and 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 and this gave the entire supply chain
three features that was nothing less than a superpower to the stakeholders first
of all 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 headache and 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 what is the big deal with using computer
and 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 a 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 setting 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 case
of hdfc the meticulous execution of this strategy paid off dividends that were
far beyond anyone's expectations and guess what this resulted into 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 and by late 1990s hdfc bank had captured 80
market 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 stock brokers of india this is
how lees and german hdlc 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 and 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 hdc went from being an ordinary bank to becoming a legendary
company in the indian banking sector and this brings me to the most important
part of the episode and that are the lessons from the case study meanwhile if
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link in the description 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 case of asian pins in this
case it was the cooperative bank's pain of transactions that hdc 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 and
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 and 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 that's all from my side for today guys if you learned something
valuable please make sure to the like button in order to make youtube baba happy
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to our channel thank you so much for watching i will see you in the next one bye
bye [Music]