HDFC Bank: Discover how India’s largest private bank shares its roots with a Peepal Tree

We all dream of having a home. For some, it represents the comfort of retirement, a shelter to enjoy the golden years. For others, it's where they can start a family and make happy memories together. For many, it means being independent and having a personal space to be oneself.

A home for everyone - this vision laid the foundation for India’s largest private bank, HDFC Bank.

Yet, the lesser-known story of HDFC Bank, which started as a housing finance corporation and became the country’s leading bank, spans almost half a century and is a remarkable tale of foresight and perseverance by the country’s smartest banking leaders.

Until the mid-1990s, for a large section of the Indian middle class, owning a home remained largely a distant dream, achievable only at retirement when one received a lump sum from a provident fund or employer gratuity. Housing finance companies were virtually nonexistent, and banks could not lend for housing to individuals or builders since housing did not qualify as an ‘industry’.

Mr Hasmukh Thakordas Parekh, who retired as the chairman of ICICI Bank in 1976, recognised this acute shortage of housing finance options and established the Housing Development Finance Corporation (HDFC Limited) in 1977 with a clear vision to provide affordable housing to the masses.

HDFC was soon joined by Deepak Parekh, the nephew of H.T. Parekh. Deepak was around 34 years old when he joined HDFC, having previously worked for E&Y, Grindlays Bank, and JP Morgan, where he gained experience in banking and finance. Deepak’s addition to HDFC changed its future course.

Around 1987, while HDFC was increasingly capturing its housing market share, Deepak and his team were convinced that a pure-play housing financing business alone would not fully justify the strengths and capabilities of HDFC and thus they started exploring other opportunities to venture into mutual funds, private equity, insurance, property funds, and banking, a few years before the RBI decided to open the banking sector to private companies.

However convincing the HDFC board to start a bank was hard for Deepak, as the board was doubtful on many parts, such as why we need a bank and who would run it. Deepak applied for the license and began assembling the dream team for the upcoming bank.

Deepak had three names in mind that he needed to onboard!

The first was SS Thakur, the former controller of foreign exchange in India.

Thakur had played a key role in formulating India's Foreign Exchange Regulation Act (FERA), which was implemented to regulate foreign payments. After a long stint with the RBI, Thakur joined the UN's International Civil Services as a senior advisor. When Deepak reached out to him, he briefed Thakur on the bank's idea and expressed his desire for Thakur to be the bank's founder-chairman, as he aimed for a high level of corporate governance and regulatory compliance.

However, resigning from the prestigious United Nations job was a tough decision, especially considering Thakur's handsome tax-free package. Despite this, Thakur agreed because he found the challenge appealing and appreciated Deepak’s sincerity.

Soon after, Deepak visited Malaysia to meet Aditya Puri, then CEO of Citibank Malaysia.

Aditya, in his forties, was a rising star at Citibank and was selected by Citibank's Chairman as one of the '50 Executives' worldwide identified as crucial for the future of US banking. Deepak knew him from the past and informed Aditya that HDFC was about to secure a banking license and was seeking a CEO. After Deepak's hard persuasion, Aditya agreed to consider the offer, provided he would have complete freedom to run the bank and a substantial equity stake. His rationale was straightforward – if the bank succeeded, it would compensate for leaving Citibank's lucrative pay. Additionally, Aditya wanted to spend more time with his ageing father in India.

In fact, Citibank was not willing to accept Aditya's resignation until he firmly stated he would not change his mind. He received no official farewell.

Deepak's third choice was not a banker but a corporate executive and close friend, Vinod Yennemadi who had experience working with many local and foreign companies as a top executive. In fact, he was the first employee on the bank’s payroll. Thakur was on a contract while Aditya was serving his notice period.

For Deepak, half the battle was over. He had got the people he wanted—a bright young banker with a vision, a former central banker who knew the rules and regulations of banking like the back of his hand, and a trusted friend who was thorough with the intricacies of the corporate world.

However, Deepak was skeptical about using "HDFC Bank" as the name, believing that the brand would suffer if the bank failed to take off. However, others argued that HDFC's reputation could help capitalize on brand goodwill. ‘Bank of Bombay’ (BoB) was initially chosen as the name for the upcoming bank, which could have caused confusion with the well-known "Bank of Baroda" (BoB). Other suggested names included "Bombay Bank”, "Everest Bank of India," and "Bombay International Bank." Eventually, the bank was named “HDFC Bank” after a majority voted for the name.

HDFC Bank was finally granted a license by the RBI on August 30, 1994, alongside other institutions like IndusInd, IDBI, and Bank of Punjab. In fact, their application was the best among the 113 applications that the RBI received.

Parallelly, Aditya drew the blueprint for HDFC Bank in Malaysia while he was on a three-and-a-half-month exit notice at Citibank. Aditya's vision was to create an Indian bank capable of competing globally. Public sector banks, with over 90% of the branch network, had the advantage of distribution; foreign banks had the products. Aditya wanted to combine the products and services of foreign banks with the relationships, funding, and distribution networks of state-run banks.

Aditya, Vinod, and Thakur began assembling the founding team, giving them the freedom to bring their own people to the bank—individuals who shared the same dream and passion. However, there was one condition: not too many hires could come from any particular bank, as this might hinder HDFC Bank from developing its own unique culture.

Despite being laughed at and ridiculed by others in the industry, Aditya assured his team they had no choice but to succeed if they wanted substantial rewards. Unable to offer high salaries, he compensated with stock options. As the bank and its stock performed exceptionally well, money followed. However, at that point, none of them fantasized about compensation; they only dreamed of creating a bank with a difference.

When the bank was formed, for most of the year, the sixth floor of Ramon House, HDFC's headquarters, served as the camp office for Aditya's army. While the commander was in Malaysia serving his notice period, Vinod held the fort. As CFO, Vinod signed appointment letters, managed logistics, and oversaw all the necessities of a new company, including drafting the memorandum and articles of association, searching for a new office, and even negotiating to reduce the price of granite for the office floor.

When HDFC Bank’s own office was under construction at Kamala Mills, an old textile mill that was still operational, everyone was informed to report at Kamala Mills the following Monday over a weekend. Simultaneously, this was a period just before the formal launch of the bank, and a large number of people were scheduled to join. The existing team reported at Kamala Mills but did not realize that a group of new employees had reported at the previous location. When the new recruits turned up, the security guard informed them, 'Bank bandh ho gaya', and Aditya's team was left wondering why the newly hired employees had not turned up. When they realized what had happened, they began making calls to each of the new recruits.

Since there was no meeting room at Kamala Mills initially, the bank held meetings under a Peepal tree like in the ancient Gurukul system. When the mill siren wailed to announce lunch hour, mill workers would troop out in groups only to see a bunch of young bankers sitting around a Peepal tree. Curious, they would surround the bankers to ask them random questions.

As part of the strategy, Aditya and the team took a firm call that the initial focus of the bank would be on corporate banking rather than retail banking because the cost of setting it up was lower and any loss they might incur would be smaller. Secondly, most of HDFC Bank's senior employees, including Aditya, came from a background of wholesale and corporate business in foreign banks.

As a start-up, HDFC Bank had to earn its way before it could invest in different directions. It was the most logical way to go in the first stage because corporate business was the sort of business they understood and where they had relationships. And even if they had the expertise (which they did not) and wanted to get into retail from day one, they could not have done so because of cost factors.

HDFC Bank also demonstrated technology as a differentiator. It was the first to launch mobile banking in 2000 even when it was not fully launched in the West. It was not a great offering but the bank went ahead and launched it first to demonstrate what technology could do.

Not just that, as a start-up, HDFC Bank was very careful with costs. Vinod, who was acting as the CFO, banned the use of paper cups for tea and coffee in 1997 and asked everyone to bring their own mug from home, as the bank was roughly spending about 50 lakh a year on cups alone. His philosophy was simple: if we cannot control costs at the initial stage, it will be difficult to control them later. The bank has taken many such decisions - hard and unpopular.

The initial days also meant hard work and long hours, but everyone swore by the HDFC brand. Day in and day out, Aditya reminded them that the bank's services had to be perfect and must not tarnish the parent brand.

Almost every principle holds true until today; the Bank's humble beginnings and unwavering commitment to excellence have paved the way for its remarkable success. From assembling a passionate team to embracing technology and cost-efficiency, the bank's pioneering spirit continues to drive its growth. As India's leading private bank, HDFC Bank stands as a testament to the power of vision, perseverance, and a customer-centric approach. Its journey serves as an inspiration for aspiring entrepreneurs and reaffirms the importance of staying true to one's roots while adapting to changing times.

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