The Original HDFC
A House for Many: H.T. Parekh and HDFC Limited
“They[storms] are unpredictable. They arise suddenly, they sweep the regions, leaving much debris. Capital markets, stock markets and money markets have their own storms and cyclones from time to time. They sweep people off their feet. They up- turn things, like trees. The world over, these winds have moved with ferocious speed, sometimes shaking the very foundations of these markets.”
-H.T. Parekh, 1983
H.T. Parekh, banker prime, said these words in June 1983. A lot like him, we at GreySwan aim to focus on the unpredictable, analyze the tempests and front-run the winds of change.
So it’s only fitting that we talk about Hasmukh Thakordas Parekh, or H.T. Parekh, as the world knows him today. This is the story of a pioneer. This is also the story of HDFC. And hidden in it, is the story of modern India. A story of dreams getting dashed, a story of dreams taking shape and a tale of determination and growth.
The Early Days
H.T. Parekh, a Gujarati Jain born in Surat, was good at academics. His father, Thakordas Parekh, was the first employee of the Central Bank of India, and his brother Shantilal Parekh, had spent about 40 years in the same bank till he retired as Deputy General Manager.
But, the protagonist of our story decided to start his life in academia. After his studies in the famed London School of Economics, he returned to India and began his career as a lecturer at St. Xavier's College, Bombay in the 1940s.
But, then, like most other Gujaratis, he will soon get attracted to the Equity Market.
After three years of teaching others to make a better living, he began his financial career with one of the biggest brokers in Bombay in those times, Harkisandass Lukhmidass. It is here that he articulated his dream to his employer. He proposed the creation of a housing finance company.
Needless to say, it was summarily rejected.
But the Indian banking system was just taking its first baby steps. Prodded by post World War II, financial institutions, specifically World Bank and IFC, India was quickly warming up to the idea of private credit to finance private enterprise.
The Making of ICICI
In Oct 1953 Reserve Bank of India set up a committee under Ardeshir Darabshaw Shroff to boost bank credit for the private sector. All this led to the formation of the Industrial Credit and Investment Corporation of India (ICICI) and a number of State Developmental Financial and Industrial Corporations.
P. S. Beale was appointed as the first General Manager of the new ICICI in January 1955. Beale was appointed on the behest of the World Bank, one of the first international investors in ICICI. The World Bank believed having a non-Indian at the helm of the new organization will protect it from local and political pressures. And so began Beale's stint in ICICI.
With the establishment of ICICI, a financier and an underwriter of public issues, brokers of Bombay smelled an opportunity for business. Harkisandass Lukhmidass, the biggest broker in Bombay too was interested.
So Parekh in a bid to strengthen the relationship as well as win some valuable business nurtured a strong relationship with the Englishman (Beale).
Young and dynamic Parekh continued to visit Beale providing him with market news, gossip and insights from the ground, in the process greatly impressing him with his acumen.
But the challenge for Beale was cut out. In the first three years, ICICI had done nothing to make foreign currency loans available. On top of it, more and more organisational problems were coming to the fore.
Parekh, in spite of such problems, was quickly warming up to the immense potential of ICICI for the Indian economy.
H.T. Parekh Joins ICICI
The Board of ICICI, under G.D. Birla, was only growing aware of the challenge Beale was facing in steering the organization. Birla in his wisdom, diagnosed it as Beale being spread too thin. What Beale needed was an assistant, a right-hand man, a doer.
It is at this time, Parekh’s name popped up. Everyone was convinced that the young strapping LSE educated Parekh, was the right person for the job.
G.D. Birla (the Chairman of the Board), Ardeshir Shroff, and P.S. Beale (the General Manager of ICICI) was convinced Parekh had it in him.
Parekh received his letter of appointment in March of 1956 and joined in the same month.
Parekh - the man of the moment
Under him, ICICI changed. And changed for good. The company created new capacities for consumption, durable, and capital goods - the three pillars of a modern economy.
To power these three engines, ICICI created capacities for industrial materials such as steel, cement, paper, and basic chemicals. India’s manufacturing sector was taking shape. Parekh, rightly diagnosed that a growing India will also need credit.
It was time for him to return back to his 20-year-old dream. He pushed again for affordable financial support for basic needs such as housing. So, he made another proposal for a housing finance company. Only this time it was for Bank of Baroda to set up a subsidiary for housing finance. In 1973, he sent it to the finance ministry's consideration. But, as luck would have it, no one was interested again.
The Second Inning
He retired from ICICI in December 1975, at the age of 65. India was 6 months into the emergency and was going through a difficult period in its polity. By March 1977, the Janata government had replaced the Congress government.
This change in the guard was just what Parekh needed- a catalyst to innovate. Parekh flew to New Delhi to meet H.M. Patel, the then Finance Minister, to share with him his brainchild.
He shared with Patel, about his dream of a housing finance company. He stressed he was not looking for any financial help but merely for an ‘in-principle’ support.
“What are you waiting for, go ahead, it is an excellent idea”, pat came the reply.
And Parekh heaved a sigh of relief. He had the green light from the power that be.
On the fateful morning of 17th of October, the 5th day of the Navratri celebrations, and at the peak of the Indian autumn, a company named HDFC came into being.
The Board of Directors of ICICI had agreed to back the project by taking up ₹50 lakhs of equity, i.e. 5% of the proposed capital. Mukhtar Munjee (a regular contributor of Aga Khan’s Trust) convinced Aga Khan to be their investor. He will also ask his son Nasser Munjee to join this budding institution as the first set of employees. LIC also provided the initial funds. In many ways, ICICI as an organization acted like a ‘big brother’ to HDFC. Something that was to be paid forward by HDFC about four decades later.
H T Parekh formally launched HDFC on October 22, 1977, (Dussehra day) in Bombay, with Mr. H.M. Patel as the Chief Guest and with an initial capital of 10 crores.
The Scion Joins. Enter Deepak Parekh.
In May 1978, HDFC had their public issues. Within a year, H T Parekh called upon his nephew who was then in his late thirties. He was shuttling back and forth between New York, Hong Kong and Singapore. With a lucrative career with Ernst & Young, Grindlays Bank and Chase Manhattan Bank, the nephew was going places.
Parekh Sr. chided his nephew: ‘We are doing something new, why don’t you join us instead of running all over the world?’
Somewhere it must have been the entrepreneur in him that made him pick up the challenge. And so he did. Deepak Parekh joined as the Deputy General Manager in November 1978. On a 50 percent salary cut.
Talk about moving up in life!
Talking about his decision later in his life, he reveals - “To be fair, my uncle did not pressurize me; he persuaded me. I saw an opportunity in my uncle’s vision and the job was also challenging, given the business environment. There were heavy regulations and people were also debt-averse. There was also no concept of housing finance.”
Deepak started with HDFC as a Deputy General Manager and worked his way up to Executive Director and then Managing Director to eventually becoming Chairman in February 1993.
HDFC-Powerhouse in Making
For years, HDFC’s business model was simple. Borrow money from international agencies at wholesale rates, to fund its retail loans in India. It had no competition, very little risk - interest, regulatory or credit for that matter and the going was good. So good, that until the late 1980s, it dominated the entire housing loan business in India. So gung-ho was HDFC on its business prospects, that it doubled down on the Indian housing sector. It floated four more entities focussing on retail loans, which Deepak Parekh later jokes as ‘HDFC created competition for itself’.
HDFC started GRUH Finance in 1986-87, with investments from International Finance Centre(IFC), and the Aga Khan Foundation.
It would prove to be a visionary and landmark business decision. GRUH would diversify HDFC’s clientele from metropolitan background, to tier II and III towns. As history would have it, GRUH was a growth engine from day 1.
By 1987, their disbursements reached Rs 175.52 crore, registering increases of 20 % (yes the same 20%, with which we all associate HDFC Bank today). Innovations kept coming and growth kept chugging along. Step-Up Repayment Facility (SURF), Telescopic Loans (TLP) and Short Term Bridging Loans (STBL) were a few of them.
Of note, was SURF. SURF provided for a repayment schedule that was linked to the expected growth in an SME’s income. And SURF, did help HDFC ‘surf’ the waves of growth. It grew leaps and bounds and accounted for one-fifth of total loan approvals just the following year.
Growth And Maturity
What’s perhaps not surprising is that HDFC had its ears firmly glued to the ground in its initial years. Its entire portfolio of home-loans, including home improvement loans, home extension loans, SURF, TIL, STBL - all of them were ‘monster growth engines’ in their own right.
The immense popularity of these products spoke to the fantastic product-market fit they evoked.
But let this sink in. Atleast till the late ’80s, HDFC owned 100% of the retail loan market. HDFC had to float four entities all for itself. A curious question is really why?
For this, one needs to understand the primitive structure of the Indian economy till 1980s. Economists tell us, that India was and remains a credit-strapped country.
But the extent to which this is so is only visible when we sample this fact: No institution, banks or otherwise, existed to lend retail loans. In fact, till the late 90’s, no bank focussed on growing its retail portfolios.
The remnant of the same we are seeing today, where public sector banks still stuck in the era of corporate, wholesale lending, let NBFCs steal their lunch.
The First Crisis
Just when the first embers of growth were glowing in India, Gulf War broke out. The ensuing oil shock rippled across the region, flared up double-digit inflation in India. With inflation-shock, came RBI’s aggressive policy correction. RBI raised interest rates overnight and HDFC which relied on wholesale funding came under immense pressure.
Overnight, HDFC’s cost of funds soared, while its commitments to its customers stayed where they were - at the lower rates. HDFC was staring down the ‘interest-risk’ barrel.
HDFC needed a new source of ready funding which was cheap enough to maintain the profitability. In came the idea of raising retail deposits.
The History repeats
As 1993, rolled in, it brought banking reforms and invitation of private application for banking licenses. Deepak Parekh - buoyed by the goodwill that brand HDFC had on the street, buffeted by the extraordinary popularity of the retail deposit scheme begun a few years back - decided that HDFC was ready for a banking license.
They say, history rhymes, if not repeats. Like Parekh Sr. was rejected forty years back, Deepak’s idea of applying for a banking license was also rejected. This time by HDFC’s own board.
But then, unlike Parekh Sr, Deepak had a lot more influence over the decision-makers. And so HDFC Bank was born.
And just like Parekh Sr. had pitched his nephew, echoing the same words, Deepak pitched to Aditya Puri
‘You run around the world a lot. Now come back to the country, do some real work, build a bank.'
And just like Deepak who was onboarded with a 50% salary cut, Puri took the same cut. It was history all over again.
A new beginning
HDFC created a network of institutions in its mould. In many ways, HDFC paid forward the ‘debt’ of nurture that it received from ICICI in its first days. HDFC created a bank, a microfinance institution and an insurance company - all in its own image. Deepak Parekh in his very first Chairman’s statement when he took over from his uncle, noted ‘By thus creating a network of HDFC financial service institutions we are exporting essentially a style that reflects its carefully developed world view’
And HDFC’s worldview was based on three pillars - integrity, effectiveness and service. Each of them were the cornerstone in a sector that was and is a very tricky sector - real estate lending in a country with poor title records, long-pending litigation and the huge contribution of black money.
Thus HDFC had to innovate its processes, not to outstrip competitors but to stay relevant. Right from the idea of property value appraisal to maintaining a strict loan to value ratio, HDFC led the path with its integrity and effectiveness.
Today, HDFC remains NBFC numero uno in India. In many ways, Infosys, Reliance and HDFC together script the story of modern India.
But then that’s a story of another day.
END Trivia: While planning for the retail Bank, Deepak had one name in mind: The Bank of Bombay. His logic was they were the only one among a group of ten new private lenders allowed to have its headquarters in Mumbai. Aditya Puri, said, I am NOT coming to join this Bank. I, will, only when you name it HDFC Bank.