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Indian banking industry has evolved at a very fast pace over last decade in terms of speed of service, customer focus and array of products. During the recent global financial meltdown where the likes of Lehman Brothers have filed bankruptcy, Indias banking sector has been one of the very few to maintain resilience while continuing to provide growth opportunities. Banking in India has seen lot of changes during the recent years and is now on a high growth path clocking around 15%-20%. With the advent of technology like Internet Banking, Credit Cards, Mobile Banking and ATMs the reach of banks has increased multifold. Core banking has also enabled the automation of processes inside bank reducing the cycle time of transactions. In the recent years collaboration between Indian and foreign banks have also increased with them increasing their stakes in Indian banks. This has widened the horizons for a bank considerably and enabled them to operate at global level providing variety of services. HDFC bank is one such private bank which has benefited a lot by effectively and efficiently using both technology and global platform to grow at better than industry average. The bank has been awarded for being the best Indian bank from the Asia Money 2012, Dun & Bradstreet Corporate Awards and many more for their efficient and effective banking. This paper talks about how HDFC bank operates and how it has developed a competitive advantage over the last few years by configuring its

service/product parameters in such a way that it is perceived to provide most value to end consumers. We also intend to put down what else it could do going forward to ensure that it maintains its competitive position over time. Complete information about the operations of HDFC Bank or any other bank is gained primarily based on the authors interaction with the bank as customers and secondary data available on the companys homepage and in business articles available online.

Bank of Hindustan was set up in 1870; it was the earliest Indian Bank. Later, three presidency banks under Presidency Bank's act 1876 i.e. Bank of Calcutta, Bank of Bombay and Bank of Madras were set up, which laid foundation for modern banking in India. In 1921, all presidency banks were amalgamated to form the Imperial Bank of India which carried out limited number of central banking functions till the Reserve Bank of India was established in 1934. Indias banking industry has grown at much faster pace during recent time primarily boosted by countrys economic growth, liberal attitude towards personal debt and increased purchasing power of dual income households. India is an under penetrated market having lot of potential of growth. Banking industry in India functions under the guidance/regulatory control of Reserve Bank of India. Banking industry mainly consists of: Public Sector Banks Includes Reserve Bank of India, 20 public sector banks, State Bank of India along with its associate branches and some regional rural banks Private Sector Banks this sector primary include old and new private banks, foreign bank subsidiaries in India, scheduled and non-scheduled banks. Cooperative Banks this sector includes central and state cooperative banks, agriculture credit societies, land and urban development banks and state land development banks. Image Source: http://cscjournals.org/csc/manuscript/Journals/IJBRM/volume3/Issue1/IJBRM-64.pdf HDFC bank falls in the private sector banks category, it has major share of its equities held by foreign entities.

When Reserve Bank of India (RBI) started the liberalization of Indian banking industry in 1994, Housing Development Finance Corporation Limited (HDFC) was amongst the first few to receive an approval from them to setup a bank in the private sector. The bank was incorporated in August 1994 in the name of HDFC Bank Limited with its registered office in Mumbai, India. They commenced their operations as a scheduled

commercial bank in January 1995. The bank has a mission to be a world class Indian Bank, and its business philosophy is based on four core values operational excellence, customer focus, product leadership and people. The Bank at present has a network of 2,544 branches spread in 1,399 cities across India. All branches are linked on an online real-time basis. Customers in over 500 locations are also serviced through Telephone Banking. The Bank also has 9,709 networked ATMs across these cities. Moreover, HDFC Bank's ATM network can be accessed by all domestic and international Visa/MasterCard, Visa Electron/Maestro, Plus/Cirrus and American Express Credit/Charge cardholders. They offer a wide range of commercial, transactional and treasury products to its wholesale and retail customers. They have three key business segments: Wholesale banking services, Retail banking services and treasury services.

Indian banks have made high-quality progress over the years, which are quite evident from multiple factors: credit growth of 23% from 2006-2011, profitability around 15% over the same period and NPAs reduced from 3.3% to 2.3% as on March 31st 2011. During the period HDFC bank maintained a net interest margin of 4.2%, highest among all the banks. The company has recorded an increase of 33% in net profit for FY 2011 of Rs. 3926 crore over the previous year. The Capital Adequacy Ratio (CAR) stood at 16.2% as against the regulatory minimum of 9.0%. Of this, Tier I CAR was 12.2% as on March 31, 2011 Market Share Credit Portfolio in Rs. Billion Non Performing Assets in % Source: Annual Report 2011, ICRA

According to Harvard Professor, Michael E. Porter there is 5 key structural determinants for intensity of competition in an Industry. Collective strength of these 5 forces determines the degree of competition and as a result the profit potential in the industry Image Source: http://www.vectorstudy.com/management_theories/img/porters_five_forces.png

- HDFC operates mostly in tier1 and tier2 cities with few exceptions. And major competitors who operate in the same market are ICICI, Axis, SBI and PNB. ICICI bank

is the second largest private sector bank and SBI the largest public sector bank in India and both are well reputed in the industry - Entry of foreign banks (like deutsche bank) has also intensified the competitive rivalry since all these banks will compete for the same customers and resources

- Switching costs from one bank to another bank are much lower than they were before. This puts continuous pressure on the bank to provide competitive offerings. - Indian banking industry is high growth and profitable position and thus many foreign banks are entered into the market. All of these banks have similar financial products and services and this will lead to get a choice to the customers - High menace from substitutes like NBFCs, Mutual funds, Government securities and T-bills

- The global financial crisis and the weak economic outlook for most of the developed countries is encouraging many banks to open shops in Indian sub-continent, as it has shown resilience to the economic downturn. - Even many domestic non banking financial companies (NBFC) are also eagerly waiting to receive banking license from RBI. This situation is critical for existing banks including SBI and the competition will become high - Growth of micro finance in rural area also gives a competition to the industry

- The primary needs for bank are for IT hardware, software license and maintenance supplies. The switching cost for the bank in such cases is too high, and this provides bargaining power to suppliers. - Secondary needs for the bank are stationary supplies, office furniture etc. However with the standardization of bank all branches purchase the items from the same supplier to have purchasing efficiency and same look and feel. This has resulted in reduced bargaining power of those suppliers.

- With increasing penetration of internet within cities, customers are more aware of the different products available with the banks. Any launch of innovative product which provides unique value to the customers puts immediate pressure on HDFC bank to respond in order not to lose their existing share of business. - Increased advertising and marketing in banking industry has armed customers with enough information to bargain with the bank for instance in case of home loan interest

rates.

- Full support from stakeholders - High reliance & use of information technology - Early movers advantage in net banking and ATM domain - Superior customer service with efficient and effective execution - Great brand image and high customer satisfaction - Presence mostly in urban markets having high profit potential - Access to huge base of corporate and high net-worth clients - Products have required accreditations - Dedicated workforce aiming at making a long-term career in the field

- Absence from rural markets (bottom of Pyramid), where competition like ICICI, SBI and PNB score better - Narrow target segment and lacks penetration as the bank focuses mostly on high networth clients, this limits cross-selling and up-selling activities. - Revenue per customer is higher than competitors, hence a few customers moving out will have more effect on balance sheet

- Has better asset quality than most of the competitive banks, hence revenues and profits are likely to increase in future - Has the right infrastructure for overseas expansion opportunities - Still lot of growth is left in Indian banking industry - Has good reputation in maintaining corporate salary accounts. Hence the increase in number of private companies will boost revenues, which is highly likely.

- High competition in the banking industry, especially in the banks target segment - With high revenue per customer, the revenues are volatile

- Entry of foreign banks (like deutsche bank) has also intensified the competitive rivalry in already downward going economy - Lack of expertise and infrastructure to penetrate rural India - Growth of microfinance and other competitive banks like ICICI in rural area - Vulnerable to reactive attack by major competitors

Mission of HDFC Bank is to be A world class Indian Bank. The idea is to build a huge retail and wholesale customer base across target business segments and being the preferred banking services provider for them. Its business philosophy is based on four core values operational excellence, customer focus, product leadership and people. Bank is committed to do this while ensuring the highest levels of ethical standards, professional integrity, corporate governance and regulatory compliance. Their business strategy emphasizes on the following: To consistently increase market share in Indias expanding banking and financial services by following a disciplined growth strategy focusing on healthy growth in profitability and meeting risk appetite goals. They focus on quality of asset and not quantity to ensure better value for its stakeholders. Develop and leverage a technology platform to deliver high quality, better customer service, reduce transaction cycle times and come up with innovative products and services while keeping tab on operating costs. Maintain high standard for asset quality through better corporate governance and disciplined credit risk management. To attract targeted customers by providing them with high quality, customized experience and superior execution comparable to international standards, engage with them effectively to retain them by addressing & removing inefficiencies in Indian financial sector. To improve bottom line by continuous process improvement initiatives to control and reduce operating costs.

HDFC bank has carefully chosen its path to remain competitive in the banking industry and create value for customers and stakeholders. To ensure low cost of operations, high product and service quality, on-time delivery and flexibility, they have chosen to: - Not to go for mass banking instead targeting high net worth clients - Automation of many of the banking processes like funds transfer, term deposit creation,

check account balance etc. - Create processes to reduce NPAs and maintain high asset quality - Heavily use technology in day to day operations - Implement 5 S methodology to sort, straighten out, sweeping, standardize and sustain - Outsource many of its backend operations - Trained their employees on how to treat their customers - Created positions for customer relationship managers to engage better with customers - Increased parameters for the configuration of the products - Attract salary accounts from corporate world - Operate through multiple channels like branch banking, net banking, phone banking, mobile banking, ATMs - Offer a wide range and breath of products - And many more such strategic choices

It is said that, Operations Strategy means adding Value for the Customers of the company. This will reduce product costs to customers, make the product more readily available to the customers on time and as per their desire, provide faster and prompt service to them, provide customers with additional relevant information of the product (its key features and differentiation from near-by competitors) and last but not the least, customize the product to the customers specific needs. HDFC has focused on the following operation strategies:

HDFC bank runs on a highly automated environment enabled with state of art technology and communication systems that are among the best available internationally. The entire bank branches and ATMs are connected online, which enables customers to access their account and do transactions from any branch or ATMs anywhere in India or Abroad. The bank has made huge investments in the area of internet and has web enabled many of its core process like fund transfer, check balance, print statement, create or liquidate term deposits, apply for loan/credit card, bill payments, contact customer support etc. They have enabled multiple channels for banking transactions today HDFC is on mobile, on premise and available on web for the customers to do transactions.

 HDFC works on a network which resembles to hub and spoke architecture. The branches are distributed across regions and each of them connects to its regional hub, which is connected to its main data centre. HDFC allows its branches to connect to more than one hub as a backup strategy to reduce any downtime.

HDFC bank has strived a lot to make the customer experience much better by providing better quality service coupled with superior execution. They have improved a lot on the ambience of bank branches by making them all airconditioned, defining dress-codes for branch executives, training the branch executives both soft and hard aspects before they join operations etc. They have reduced the transaction cycles times for many of the bank processes by defining the maximum response time for a given activity and adding it to the KPIs of their executives. They have adapted themselves to the Japanese technique Kaizen to be efficient and effective in what they do over their competitors Kaizen ensures all wastage is made visible, everyone participates, every task has owner and organize better

HDFC bank was among the first few banks that allowed customers to operate from any bank branch and provided net banking facility. HDFC keeps launching innovative and attractive products in market time and again, recent such launches were Infinia Credit Cards, Dual Rate home loan products, Sweep-in Sweep-out savings accounts etc.

HDFC has developed a culture that keeps customer satisfaction at the core of every business activity and strives to even go beyond. They have inculcated the following formulas in their culture: Provide Personal Touch, Go that extra mile, Deliver on promise, Resolve Problems well and Keep it simple. They have invested a lot in building the service attitude within the culture of bank. For instance introducing the concept of relationship managers

To help achieve its targeted, annual growth in profits, the bank uses out-tasking for certain functions, enabling management to focus on core banking expertise and strategic initiatives rather than process requirements. The banks IT department out-tasks branch management, application development and

customization, and management of backup operations in its data center. The bank considers its backup operations extremely important and holds its out-tasking provider to high standards with rigorous Service Level Agreements and Key Performance Indicators.

HDFC bank strives hard to maintain a good asset quality, even on cost of volumes, by keeping tabs on margin, which is one of the highest in the Indian banking industry

Image Source: http://www.isesec.com/Admin/Research/1659808644_Indian%20Banking %20Industry.pdf

Indian banking industry had high growth during last few years and this growth has significantly changed how people bank today. HDFC bank is one of the best performing banks in Indian banking Industry having great brand value and trust of its stakeholders. It has been awarded in multiple categories over the years for its world class services and products. Since inception the bank has been on high growth trajectory clocking around 30% profit in recent years. However, this may not be the case in future, as it is easy for a company to grow in an already growing industry as your shortcomings are ignored by the market. There is usually lot of market to capture and every company in the industry gets the share it can afford based on its capacity. However, when the industry matures, then the competition intensifies and tests the fundamentals of the companies. This is when the weakness emerges and only few companies can sustain in such an environment. Bank has strong fundamentals: loyal clientele, good asset quality, efficient and effective operations, wide array of products and services, trained and loyal workforce and flexible IT infrastructure. However we foresee the following risks with the current strategy of the bank: - Bank focuses primarily on high-net worth individuals and sells them a broad array of its products. This resulted in high revenue per customer. This also means they have low penetration in the country, with access to few distinct individuals. This limits the bank to cross-sell or up-sell products. It also can prove to be a hindrance in maintaining the same growth when the industry matures and competition intensifies further. - Bank has exposure to mainly urban areas within the country. They hardly have any branches/exposure to rural India. In other words, bank is not focusing on bottom of the pyramid. This approach is working as most of the economic activity (i.e. money and investments) is in urban areas. However, if the scenario changes and the economic

activity start shifting towards rural areas, this will push HDFC bank to back foot and provide advantage to its competitors who already have presence in rural areas. - Bank has marginal international presence whilst ICICI Bank, one of its major competitors, has been aggressively chasing international growth. This makes the bank performance very much tied with growth and decline of Indian economy as against its competitors.

Based on the risks identified in the analysis section and general risks to the industry we have following recommendations

HDFC bank must work towards increasing the number of customers. A wider penetration would allow them access to more number of customers and into more number of households. It will reduce the variance in the results of bank profits with churn out of existing customers. It will allow bank to both up-sell and cross-sell their products to wider population. It will also make Indian consumers more aware about the benefits of banking with HDFC.

Rural markets are seen as the new profitable investment for banks in India with banks like ICICI bank have been able to popularize micro financing in which they did a tie up with the self help group. HDFC bank must also work towards increasing their rural presence; this will make them reach towards the bottom of pyramid. Though initial returns might be lower, this will help in the long run in scenarios when: economic activity shifts from cities to rural area, or when the industry matures or when the urban market is already saturated.

Like its competitors, HDFC bank must increase their global exposure in order to diversify the economic risks of a country. Indian economy is already heating up due to continued high inflation for last few years; this may result in reduced growth numbers and reduced market activity. Global exposure will also help them to widen their portfolio of products for their high net worth Indian customers who travel quite often. Such customers usually need remittance or banking services when on foreign lands. They may also target the NRI customer base.

HDFC bank has good control over their operations cost and quality and hence we recommend them to aggressively expand their portfolios by buying distressed assets from

the public sector and smaller/weaker banks. These assets would probably be available at deep discounts and can promise more market penetration, wider geographical coverage and better returns.

- Bank should put in more effort to keep customers experience safe. It should ensure security of customer data, keep their transactions safe and secure, sensitize customers of possible security risks and limit their liability on fraudulent transactions. This would increase customers trust with the bank. - Bank should keep differentiating itself with unique innovative products that make banking easier for customers. They should derive from systems thinking and reengineering principles and try to remove the waste from their processes to further bring down costs and add value to customer experience. - Bank should invest to improve the quality of its services further to reach the global standards. Bank should make use of the social media to find out the customer grievances and resolve them amicably. - Bank should aggressively market and advertise its products in order to increase penetration. Posted 3 weeks ago by Ashutosh 0

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