Frequently, reaching the age of 65 signifies retiring from one’s endeavors. Nonetheless, remarkable outliers exist. Captain CP Krishnan Nair, at 65, established the inaugural Leela Hotel in 1987, molding it into one of India’s premier luxury hotel chains. Ashok Soota, a tech veteran, initiated Happiest Minds in 2011, aged 68, and now stands among India’s wealthiest with a net valuation of $1.2 billion. Falguni Nayar, though not yet 65, founded Nykaa at 49, evolving it into a dominant force in beauty and fashion before her sixties.
However, preceding these achievements and inspiring numerous others, Hasmukh Thakordas Parekh ventured ahead, challenging conventional norms to found an enterprise that has since reshaped corporate India. After stepping down as chairman of the Industrial Credit and Investment Corporation of India (ICICI), Parekh, aged 65, established Housing Development Finance Corporation Limited (HDFC), India’s foremost retail housing finance company.
Deepak Parekh, his nephew, and HDFC’s chairman, noted, “During that period, it was comparable to a startup. The distinction lay in its originator, HT Parekh, who embarked on this post-retirement enterprise, deviating from the typical young entrepreneur-driven startups.”
On April 4, forty-five years after this audacious leap, HDFC declared its merger with HDFC Bank, India’s largest private lender, forming a financial powerhouse and the nation’s second-largest corporation. The merged entity’s magnitude will double that of ICICI Bank, India’s third-largest financial institution. Following the announcement, both firms’ market capitalization soared beyond Rs 14 lakh crore, trailing India’s largest company, Reliance Industries Limited, by around Rs 4 lakh crore.
Established in 1977, HDFC extends mortgages to over half of India’s homebuyers. HDFC Bank, launched in 1994 as a subsidiary, stands as India’s second-largest bank. Post-merger, HDFC will retain 41 percent ownership of HDFC Bank Ltd. Shareholders will exchange 42 HDFC Bank shares for every 25 non-banking financial company (NBFC) shares they own. The transaction, contingent on regulatory green lights, is set to conclude within the next 12 to 18 months, during which both entities will continue their autonomous operations.
“As the son embraces the father’s enterprise with age,” affirmed Deepak Parekh, HDFC’s chairman during the announcement, “this merger is a congenial union. We won’t be ousted. After 45 years in housing finance, we are finding our abode within our own familial entity, HDFC Bank.”
For Parekh, the revelation carries a sense of homecoming. At 33, he joined his uncle Hasmukh Parekh at HDFC, departing from a spell in investment banking. Had it not been for his uncle’s persuasion, Parekh might have sought refuge in a foreign bank, akin to many of his contemporaries. At HDFC, Parekh played a pivotal role in bringing the company closer to the masses, especially those with housing requisites. HDFC has, since then, furnished over 9 million home loans.
“In India, no prior endeavors targeted financing individuals’ housing necessities,” Parekh underscored in his book. “Long-term financial access was scarce, and foreclosure norms were absent. In those days, most Indians shied away from debt. HDFC remained the solitary housing finance player until the late 1980s when housing finance companies were set up by insurance firms, public-sector banks, and select private players. HDFC even nurtured four other housing finance entities, essentially fostering competition for itself.”
No Rest, No Retirement
HDFC’s narrative fundamentally revolves around the determination of the Parekh family. Commencing operations in 1977 as a mortgage lending enterprise, the brainchild behind this venture was HT Parekh, often referred to as Hasmukhbhai. Holding a banking and finance bachelor’s degree from the London School of Economics, he returned to India in 1936, commencing his professional journey with the stockbroking firm Harkisandass Lukhmidass. During this period, he also engaged in teaching at St Xavier’s College in Mumbai for approximately three years.
Over the ensuing two decades, Parekh collaborated with the brokerage before departing in 1956 to assume the role of deputy general manager at the newly established development finance institution, ICICI. Sponsored by the World Bank in collaboration with the Governments of India and the United States, ICICI emerged as a pioneering institution. By 1972, Parekh’s influence grew, propelling him into the position of the company’s chairman, a role he held until 1978.
In 1977, driven by the sight of countless Indians deferring home purchases until retirement after years of saving, Parekh embarked on a mission to establish an institution focused on providing housing loan financing earlier in individuals’ lives. This question arose: “Why must Indians wait until their careers conclude to attain their own homes through housing finance?”. This query catalyzed the creation of HDFC, accomplished without government support. Parekh noted, “The primary challenge in expanding the housing finance business was securing substantial long-term resources.” Throughout the 1980s, HDFC adeptly secured long-term international funding from the likes of the World Bank (with Government of India guarantees), International Finance Corporation, and the United States Agency for International Development (USAID) via the housing guarantee program, as detailed in Parekh’s account, “India Transformed.”
In 1978, Parekh’s nephew, Deepak, employed at Chase Manhattan, joined his uncle, accepting a 50 percent reduction in salary as deputy general manager. Elaborating on HDFC’s business model, Parekh stated, “The foundation of HDFC’s operations rested on wholesale fund borrowing, directed towards retail customers at a consistent interest rate, typically yielding a modest 2 percent spread.” While Forbes India attempted an interview with Deepak Parekh, the request was declined.
During the early 1990s, as India confronted a potential economic crisis and the global repercussions of the Kuwait war escalated oil prices, leading to a depletion in India’s foreign currency reserves, the central bank responded by elevating interest rates to counter double-digit inflation. Parekh detailed, “Home loan interest rates had already reached a peak of 18.5 percent per annum.” He further emphasized that HDFC remained steadfast in meeting its home loan commitments, necessitating the exploration of novel avenues for resource acquisition.
Establishing India’s Premier Banking Institution
In 1993, as India initiated the privatization of its banking sector, Parekh and his adept team were poised to embrace the opportunity. The newspapers carried an appeal for potential applicants, sparking Parekh’s curiosity and prompting him to contemplate seeking a bank license.
The prevailing regulations mandated a capital requirement of Rs 100 crore. After diligent persuasion, the board concurred to transition from a single-product company to uncharted domains. This transition involved entrusting the new venture to autonomous and proficient management. Thus, in August 1994, HDFC Bank Limited was incorporated. Within a year, the bank inaugurated its inaugural branch in Churchgate, south Mumbai.
Summarily, the inception of HDFC Bank was no ordinary feat—history attests to that. In 1993, over 40 hopefuls aspired for a banking license; some applicants even resorted to fictitious submissions via postcards. S.S. Marathe, a board member of RBI, chaired the committee responsible for granting licenses. Among the prerequisites, a key condition stipulated that the bank’s headquarters be located outside Mumbai. HDFC Bank seized the opportunity and requested Mumbai as its headquarters. To the bank’s astonishment, it secured the first bank license. Marathe conveyed that HDFC’s application stood out, affirming the decision to allow Mumbai as the head office location.
Initially, HDFC Bank concentrated on corporate lending but transitioned toward retail clientele. It gained acclaim for achieving nearly 30 percent net profit growth each quarter for a decade. This remarkable feat occurred during the rapid expansion of India’s economy in the 2000s. The bank’s journey included a merger with Times Bank in 2000 and the acquisition of Centurion Bank in 2008. Notably, it engaged in a legendary rivalry with ICICI Bank, both vying for similar customers. This rivalry led to memorable instances, including the setup of tents near each other’s exhibition venues.
HDFC Bank’s trajectory has been guided by its Managing Director, Aditya Puri, formerly the CEO of Citibank Malaysia. Presently, the bank serves a base of 6.8 crore customers across 3,000 cities and towns, boasting more than 6,300 branches. As of December 31, 2021, the bank’s total assets surpassed Rs 19 lakh crore. Aditya Puri, who built the bank’s success, passed on the baton to Sashidhar Jagdishan upon his retirement in 2020.
Puri expressed, “I conveyed my desire for autonomy and institution-building to Deepak. I intended to join only if I could operate with freedom and align with the vision.” Puri credited Deepak Parekh for accepting this condition, highlighting Parekh’s support as a valuable sounding board.
In 2017, India’s central bank, the Reserve Bank of India (RBI), designated HDFC Bank as part of an exclusive list of Indian lenders classified as “too big to fail.” This classification includes only three banks—State Bank of India, ICICI Bank, and HDFC Bank. The implication is that the failure of these banks could have severe repercussions for the country’s financial system and economy.
HDFC Bank’s triumph can be attributed significantly to its emphasis on retail loans, constituting 55 percent of its loan portfolio at one point. In recent years, this proportion dipped to 47 percent, while maintaining an impressively low bad-debt ratio. The bank’s retail offerings encompass personal loans, housing loans, vehicle loans, education loans, and credit cards, among other financial products.
As of December 31, 2021, HDFC Bank’s loan book stood at an astounding Rs 12.6 trillion, surpassing the Rs 10.82 trillion figure from the previous year. The bank’s advances increased by 5.1 percent from Rs 11.98 billion in September 2020 (Q2FY22).
The Expanded Enterprise
Presently, the HDFC Group, with the bank as its cornerstone, has established a diverse array of subsidiary ventures. These encompass HDFC Life, engaged in life insurance, HDFC Ergo, specializing in general insurance, and an educational loan enterprise, among other ventures. Concurrently, the merger presents an extensive prospect to unleash the latent potential within its subsidiary operations.
Analysts Gaurav Jani and Palak Shah from Prabhudas Liladher expound in their report, “The merger not only diminishes single-product vulnerability for HDFC Ltd but also unveils avenues for cross-selling across a broader customer spectrum. Moreover, it augments product variety, while concurrently reducing the bank’s exposure to unsecured loans. The amalgamation leverages HDFC’s lowered funding costs from the banks and its expansive distribution network, as well as HDFC Bank’s proficiency in real estate and streamlined loan processing. At present, a significant 70 percent of HDFC Ltd and its subsidiary customers are non-HDFC Bank patrons, representing the substantial potential for cross-selling within the merged entity.”
Moreover, the merger will enable HDFC Bank to integrate mortgages as a primary offering, thereby augmenting its housing loan portfolio. Home loans presently constitute a mere 6.2 percent of HDFC Bank’s lending portfolio. Keki Mistry, Vice Chairman and CEO of HDFC communicated to the media, “HDFC Bank is poised to seamlessly provide home loans, leveraging the extensive base of over 68 million HDFC Bank customers.”
In the ensuing months, while regulatory approvals are sought, HDFC’s leader Parekh and his team will meticulously refine the deal’s nuances and strategize the company’s forthcoming phase of expansion—a testament to the foundation they’ve meticulously constructed. Upon the culmination of the merger, HDFC Ltd will possess a 41 percent stake in HDFC Bank. Nevertheless, with Parekh’s managerial departure in accordance with regulations, the group will embark on its journey without a Parekh steering the helm for the first time.
In this manner, the family’s journey will have come full circle after an almost five-decade span.