'E-economy is ruthless. You don't get a second chance'

A mong the new age private sector banks in India, HDFC Bank is riding the crest of fame these days. It has been chosen as India's best bank by international financial magazines Euro Money and Finance Asia for the second year in running.

The recent absorption of TimesBank has given it, besides size, a headstart in the race for the top slot among all the non public sector banks in India.

HDFC Bank's ascent to the top has been marked by timely strategic alliances, non-stop launch of new products since its inception in 1994-1995, and unprecedented passion for technological innovation in operations. Within six years, the organisation has earned the desirable label of a world-class bank, which, anyway, was its stated objective from the very beginning. Now, the bank is gearing up for the challenges of the Net age.

In this exclusive five-part interview with Associate Editor Y Siva Sankar, Managing Director Aditya Puri dissects HDFC Bank's operations over the last six years to cull out what could be a formula for success in the Indian banking industry.

Puri, 50, headed Citibank in Malaysia before returning to India to set up HDFC Bank at a ramshackle textile mill in south Bombay. Now there are 100-plus branches in Indian cities. He has put in more than two decades in the industry during which he earned the reputation of being a superbanker and a smart manager.

His well-appointed 14 x 10 office on the second floor of Sandoz House in south central Bombay overlooks a busy, noisy artery. The big-size Net-compatible television in a corner is off; the plastic adhesive strip on the remote sensor of its keyboard on Puri's table shows signs of coming off shortly. A glossy wooden tray encases golf balls embossed with naughty comments -- 'I wish you all the breast,' 'I wish you more balls' -- mementoes from colleagues in Malaysia. The flat-screen tubeless computer monitor lends a touch of class to the ambience. So does the suave Puri himself, as he peppers conversations with technical details of his bank's "hi-tech architecture."

Puri wears his crown lightly and credits the success to his team -- which, actually, means the entire staff whose names he loves to reel off at the drop of the hat: "C N Ram, Paresh Sukthankar, Srikrishnan, Neeraj Swaroop, Uma Krishnan, Harish Engineer, Sameer Bhatia.... I'm the first among equals. They are the ones who work hard. I lead a charmed life." Excerpts from the interview:

What are HDFC Bank's plans for Non Resident Indians?

For the NRIs, we did a survey to find out what are their needs. What they need here is a convenient mode of access on which they can deal, which we think is the Internet or the telephone.

Secondly, since they are not resident as the name implies, they need somebody here to do the nitty-gritty, in terms of tax returns, in terms of dealing with the RBI, any other advisory that they may need.

Thirdly, they need the usual gamut of financial services: that is, deposits, loans, buying and selling of shares, gifts and advisory.

So, we said, why not come up with a product that on a one-stop basis achieves all of these? And that is our basic NRI offering. Whatever we don't do, because we can't in a short span do everything ourselves, we have tied up with other parties.

So, for instance, we have tied up with Deloitte & Touche for tax and liaison with the RBI. What we want to provide is good service from a valuable brand name at a reasonable price point which they (the NRIs) will be comfortable with.

Our affiliate company has an easy-to-shop (www.easy2shop.com) site on the Web. On that, we are adding on, over the next 15, 20 days, what most people require: computers, consumer durables, music, books, clothes, gifts like chocolates, flowers, etc.

Mind you, HDFC Bank is not doing this itself. Banks in India are not allowed to do this. So we have a separate company called Net Savvy. They have set up a site called easy2shop. We are only linking up with them.

But that is not the main benefit there. What we intend to do is pass on to our customers a large portion of the discounts that the merchants give us. So that is not our profit centre; that is intended to be a convenience to our customers.

You add on to this the fact that we are almost in 45-plus cities and we will be going up to 60 or 65 cities, linked online real-time, and you have a very powerful offering that counts.

In addition, we are giving the highest interest rate.

Every second bank in India claims it is reinventing itself and foraying into e-commerce. A thin line seems to separate hype and reality about e-banking in India. What is the reality at HDFC Bank?

The good part is we don't have to reinvent ourselves. We are still inventing ourselves.

The second part to that is, we say our vision is to use enabling technology to provide value-added services to our customers at value-for-money price point. So technology for us is not a support function, it is an integral part of our business vision. Now I won't get into what others are doing or not doing. I'll tell you what we are doing. And why it is not hype.

We were fortunate to start off at a time when the convergence revolution was already beginning. Having recognised that, we went in for three or four basic principles which have held us in good stead.

We first said that power will shift from the seller to the buyer. This paradigm then requires that you have to look at everything not on a product focus basis but on a customer focus basis. The net evolution of this for us as strategy was that, we said we will have multiple delivery channels which would allow us to meet the paradigm that the buyer requires of anytime, anyhow, anywhere.

Once you have stated this, the technology that lies behind this if you are to get twin benefits of the conversions -- which is, additional market and lower costs -- becomes reasonably simple. So, right from Day One, we went in for centralised processing, open systems -- we don't use the mainframe or NASY, it's an open system that is scalable -- and distributed servicing.

Now, a lot of people say banks are spending disproportionately on technology. We at HDFC Bank don't have to spend much because we have the right architecture. You want Internet? All we need to do is put in the TCP/IP, appropriate security mechanism, and he plugs into the processing engine. You want telephone banking? Fine. You want to add mobile banking? Fine. You want now mobile banking to have SMS/WAP? Our base operating engines are open to all these. We are also introducing appropriate switching systems. We have a base 24 switch.

Yes, in the first two years, we (HDFC Bank) were laggards among the new private sector banks because it costs more to put up the right infrastructure upfront. But having had people who had experience in various international banks, we knew very well that trying to save money initially will cost you three times as much later.

So for us it's no hype. And it's not a major expenditure nor downside. It's part of a philosophy that we started with from Day One -- we don't have to reinvent. Given that and, as I stated, our vision, if you go business by business -- we also said we will be market leaders in the segments that we participate -- today, for the second year running, both Euro Money and Finance Asia have named us the best bank in India.

If you go through that, that's based on certain precepts. So, let's say, corporate banking. If we are acknowledged there as market leaders, you must remember we had said up-front that we will only go for the top tier corporates because we wanted a low probability of default. What it also led to was that this became the most over-banked segment. We needed cutting-edge technology and cutting-edge products, which is why we tied up with Chase to provide the complete range.

Today, for the corporates, we are market-leaders in the top 200 segment, and across products as well. For cash management, we are Number 2 -- we will be Number 1 within the next 12 months. We are market-makers in dollar-rupee and have substantial trade going through us. We are a major player in the money market. We are definitely a major player in the working capital funding requirements of the companies. We are leaders in dividend payments. This is in the real economy.

We are positioned well for the second stage, which is the e-economy. Cash management (by being the leader for the top 200 corporates) means what? We are collecting from the distributors, and paying to the suppliers and also banking with the company. One natural evolution from this is supply chain management. But because there is no clearing bank today, initially this has to be a closed users' group.

So the top 40 companies have already signed up with us for our product called eNet. It is an excellent product that is from our affiliate company Net Savvy. What it does is, it allows every workstation in the company to deal with the bank in a secure environment on the Net. So there is no hard wiring, nothing...it's a simple product. And we can grade it according to the security levels and the transaction dealings that he wants. So, if he wants only enquiry, we can give him, basically, a digital signature, 128-bit encryption, authentication at the other end on a floppy. If he wants to go higher up, then it's a smart card application that costs Rs 8,000 which he can put into any PC.

So we have really taken the bank to the customer's office, he can put it on any workflow that he wants. So for the top 40, we have tied up the suppliers, the working capital, the distributor; and where he is in a consumer product, the end-user. And all of it, they do through us. We also have a system where we link it to his ERP implementation. Otherwise, all ERP implementations stop short of the final conclusion, which is cash. So we link it there.

We have also tied up with Sesami which is the local distributor for Commerce One. So, we have our e-procurement auction, reverse option model. Which will be the next step? When a clearing bank comes in, all these people will migrate.

So we will maintain our lead in cash management for closed users' group, and get on to an e-commerce related portal. Then the market-places will automatically develop there.

But the infrastructure here again is complete. Not too much spending is required, nothing. Marketing is going on.

So, that's as far as corporate banking, old economy, new economy are concerned.

We will grow both in the old economy based on the customers' growing and new economy... that is, we will look at the growth over three periods: one is current growth, next is the growth over the next two, three years, and finally, what is a paradigm shift.

So our basic growth is new geography, new customers, new products across our current customer base. Next step will be where we get a much large share through supply chain management and we are already learning from our e-commerce initiatives.

Abroad, banks are said to adopt e-commerce as a defensive strategy, to retain their customers. In India, it is seen as an offensive approach. Why?

For any old institution, what is going to happen is... they have a large market-share as it is. They must protect that market-share. And if you go back to the original thing, it is... power has shifted to the buyer. You can only protect that market-share by changing according to the buyer's needs.

So if you are in a dominant position in any business, and the market around you is changing, which is offering customers larger choice, if you don't change with it, you will lose your dominant position.

But, I do not believe in this pendulum theory that you can be on either this side or that. I think, over a period of time, as the hype disappears, people will have realised there is a place for both. And it is the customer who is going to decide how he is going to deal with you.

As far as the organisation is concerned, if you go into any of these for hype, you will fail.

E-economy is ruthless. You don't get a second chance. And you better know where you are going to go, where your money is going to come from and what your strategy is. So anybody going in for hype should be careful. We are not going for hype.

Part II: 'In trying to be a one-stop financial services shop, we are not spreading ourselves thin'

Part III: 'Our low NPAs mean we are playing smart, not safe'

Part IV: 'A debit card is really more appropriate for the Indian psyche'

Part V: 'Banking regulations in India are not as restrictive as people make them out to be'

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