HDFC — H. T. Parekh’s Mad Idea That Built India’s Most Valuable Bank

Before HDFC Bank was India’s most valuable private bank, there was only one man quietly trying to convince the government that lending Indians money to buy their own homes could be a business. His friends thought he had lost his mind. The Reserve Bank laughed him out of the room. Twice.

A Mad Idea in a Bombay Drawing Room

It is 1977. India is a year past Emergency, still socialist in every ministry, and a young Indira Gandhi has just been voted out of power. The Sensex does not exist yet. “Retail lending” is a phrase no Indian banker has ever used in earnest. If you want to buy a house in Bombay, Delhi or Madras, your options are two: inherit one, or save for thirty years.

In a flat in Mumbai’s Malabar Hill, a slim, soft-spoken 66-year-old Gujarati banker named Hasmukhbhai Thakorlal Parekh — everyone called him H.T. — sits with a legal pad and does some math. He has just retired as chairman of ICICI, the country’s premier development financial institution. Most of his peers are already booking cruises to Europe.

Parekh instead writes a memo to himself. It is three pages long. Its central idea is deceptively simple: if a bank will lend a businessman ₹10 lakh to set up a factory, why will it not lend a middle-class clerk ₹1 lakh to buy his own home? The default risk, Parekh argues, is actually lower in housing. People will sell their car before they default on a loan secured by the roof over their family’s head.

“The house is the one asset an Indian family will die to defend. Build a bank on that impulse, and you cannot lose money.”
— H. T. Parekh, note to himself, 1977

The Year Nobody Returned His Calls

Parekh takes his memo to the Reserve Bank of India, to LIC, to the Finance Ministry, to ICICI itself. The reception is uniformly polite and uniformly dismissive.

The RBI’s objection is philosophical: a housing loan is, by definition, a long-term asset (20 years) funded by short-term deposits (3 years). It is an asset-liability mismatch at an industrial scale — a slow-motion liquidity accident waiting to happen. The finance ministry’s objection is political: lending to individuals smells of “consumerism,” a dirty word in a country still stitched to Five-Year Plans. ICICI’s own board, which Parekh had recently chaired, is kind but firm. It is not our business.

Parekh is undeterred. He does three things over the course of eighteen months that will eventually change India’s balance sheet.

1. He reframes the pitch as a development story, not a banking story. India will need 30 million homes by the year 2000. The state cannot build them. If the private sector cannot either, the country will drown in slums. Housing finance, he argues, is not retail banking — it is social infrastructure disguised as a balance sheet.
2. He gets the International Finance Corporation (IFC) on side. The World Bank’s private-sector arm agrees to take 5% of the new institution for $500,000. For a tentative RBI, an IFC endorsement is the signal that this is not some cousin’s shell company.
3. He recruits his own nephew. A 32-year-old chartered accountant named Deepak Satwalekar Parekh, then working at Chase Manhattan in New York, is summoned home. H.T. tells him: “I am building something that will outlive me. Come and help me.” Deepak takes a 60% pay cut and boards a flight.

In October 1977, the Reserve Bank finally grants a licence. Housing Development Finance Corporation Limited — HDFC — is registered. Paid-up capital: ₹10 crore. Office: two rented rooms in the Ramon House building in Churchgate, shared with a travel agency. Staff: six people, including H.T. Parekh himself, who did not draw a salary for the first three years.

The Very First Loan

On 30 June 1978, HDFC disburses its first housing loan. The amount is ₹30,000. The borrower is D. B. Remedios, an employee of a Thane-based pharmaceutical company buying a flat in Mumbai. He repays in 16 years and keeps the mortgage-release letter framed in his living room for the rest of his life.

Over the next three years, HDFC writes around 2,000 such loans. The average ticket size is ₹25,000. The non-performing-asset ratio is — astonishingly, in a country where NPAs at state-owned banks are crossing double digits — under 1%.

H.T.’s thesis has been validated: Indians do not default on their homes.

The Quiet Compounding Years

Between 1978 and 1994, HDFC does something unusual for a financial company in India: it grows profitably without making the front page of any newspaper. There are no scandals. There is no flashy chairman. No TV interviews. No press releases about “disruption.” Just a clean balance sheet, year after year, compounding at around 25% CAGR.

Deepak Parekh, who takes over as chairman in 1993 after H.T. retires, has a famous line for anyone who asks about strategy:

“We do one thing. We lend to people who want to buy homes. Occasionally, we say no. That’s it.”
— Deepak Parekh

By 1994, HDFC has a book size of around ₹6,500 crore, is listed on the BSE, and is the most respected lender in the country. It has also become, in Deepak’s own description, “a cash machine looking for a bigger use of its capital.”

1994: The Licence That Created HDFC Bank

In 1993, P. V. Narasimha Rao’s government liberalises banking. The RBI invites private-sector applications to set up new banks — the first such invitation in three decades. Ten licences are issued in total. Among them: ICICI Bank, UTI Bank (which will later become Axis), and HDFC Bank, the first to be issued a licence under the new 1993 guidelines.

To run the new bank, Deepak Parekh makes a hire that every business school now teaches: he calls a 44-year-old Citibank career banker in Malaysia named Aditya Puri and offers him the job.

Puri is earning a handsome Citibank salary and lives with his family in Kuala Lumpur. The HDFC Bank offer is a 40% pay cut. But it comes with a promise Puri cannot get anywhere else: “Run it your way. The board will not interfere.”

Puri famously negotiates two conditions before he accepts:

1. His daughter’s school year must finish first. He will not move for nine months.
2. He will leave the office at 5:30 p.m. sharp, every day, forever. No exceptions. No evening meetings. No weekend calls. “If I cannot run a bank in eight hours, I shouldn’t be running it at all.”

Deepak Parekh says yes to both. Puri lands in Bombay in late 1994.

The Bank With No Banking Experience (And Everyone Else’s Fear)

HDFC Bank opens for business in January 1995. Aditya Puri’s first hires are deliberately chosen from outside Indian public-sector banking. He refuses to recruit SBI or Canara Bank veterans. “Their first reflex when a customer walks in is to say no,” he tells his team. “Everything in this bank has to be built on the opposite reflex.”

He brings in:

• Paresh Sukthankar — from Citibank, to build the credit and risk machine. He will later become deputy MD.
• Harish Engineer — from Bank of America, corporate banking.
• Neeraj Swaroop — retail.
• A software architect named Anil Jaggia — to build, from day one, the technology spine. Puri insists HDFC Bank’s core banking system be centralised and real-time, while every other Indian bank is still running branch-level ledgers that reconcile overnight. This single decision will, over the next twenty years, create a cost-to-income gap of ten percentage points vs PSU rivals.

The bank’s first office is in Sandoz House, Worli. The first branch opens in Ramon House, the same building that houses the parent HDFC. Customers trickle in. By the end of year one, the bank has 5 branches. By 2000, it has 131. By 2020, over 5,400.

The Merger with Times Bank — A Master Class in Restraint

In February 2000, Bennett Coleman’s Times Bank, a small but clean private bank, is struggling to scale. HDFC Bank buys it in an all-stock deal — the first major bank merger in post-liberalisation India. What makes the deal famous is not the price. It is Aditya Puri’s instruction to his own team the day before the merger closes:

“There will be no Times Bank person fired for being from Times Bank. We have bought them, not conquered them. If we mishandle this, nobody will ever sell themselves to us again.”
— Aditya Puri, internal memo, February 2000

The cultural integration is finished in 90 days — a timeline that bankers in Frankfurt or New York would consider science fiction. HDFC Bank’s subsequent merger with Centurion Bank of Punjab in 2008 follows the same playbook.

The Bet on Rural India Nobody Else Made

By 2005, HDFC Bank is a metro bank — known for salaried-class credit cards, home loans and NRI deposits. That year, Puri makes a bet that surprises his own board.

He proposes opening branches in unbanked rural tehsils. Not semi-urban. Unbanked. Places where the nearest existing branch is 40 km away on a dirt road. His argument is brutally simple: “Everybody else is fighting over the same 25 million urban customers. There are 600 million customers outside the cities. Whoever gets there first, owns the next decade.”

Within five years, HDFC Bank has more rural and semi-urban branches than SBI has added in the same period. The rural book — small-ticket tractor loans, gold loans, micro-business credit — quietly becomes one of the most profitable segments of the bank.

The Deposit Franchise That Nobody Noticed

By 2020, the real moat of HDFC Bank is not its loan book. It is its CASA ratio — the share of current-account and savings-account deposits in total deposits. CASA deposits pay near-zero interest, so a high CASA ratio means the bank’s cost of funds is structurally the lowest in the system.

Year after year, HDFC Bank’s CASA stays north of 42–46% while most peers sit at 30–35%. It is not a loan bank. It is a deposit machine that happens to lend.

This is the quiet secret of compounding in Indian banking: cheap funds, disciplined underwriting, no scandals. HDFC Bank’s NPA ratio in twenty years of operation never once crossed 2% — the lowest of any large Indian bank across two full cycles, including COVID-19.

2008, 2013, 2018, 2020: The Crises That Didn’t Happen

Consider the stress tests this bank has walked through:

• 2008 Global Financial Crisis — Lehman falls. Indian private banks bleed deposits. HDFC Bank’s deposit base grows that quarter. Savers, in a panic, move from ICICI and Axis to “the safest name.”
• 2013 Rupee Crisis — FII outflows. The rupee loses 25% in months. HDFC Bank’s stock dips 20%, recovers within 90 days.
• 2018 IL&FS / NBFC Meltdown — HDFC Bank’s exposure to the failed NBFCs is nil. Puri had turned down those deals quietly over 2016–17 citing governance red flags.
• 2020 COVID Moratorium — Two-thirds of Indian borrowers opt into the RBI moratorium. At HDFC Bank, under 9% opt in. The loans were already being written to people who didn’t need rescuing.

2023: The Mega-Merger

On 1 July 2023, the unthinkable happens. The parent, HDFC Ltd — the 46-year-old housing finance company that H.T. Parekh founded in a rented Churchgate room — merges into its own subsidiary, HDFC Bank. In pure size, it becomes the fourth-largest bank in the world by market capitalisation, behind only JPMorgan, ICBC and Bank of America. Combined balance sheet: over ₹25 lakh crore. Combined customer count: over 120 million.

The ceremony is televised. Deepak Parekh, now 79, presses a symbolic button at the BSE to mark the swap ratio going live. Later, a reporter asks him what his uncle H.T. would have said about this day. Deepak thinks for a long time.

“He would have said, ‘Finally. We have built a full bank. A bank that lends to homes, to businesses, to farmers, and to itself. Now, get back to work.'”
— Deepak Parekh, 1 July 2023

The Shareholder Story

What has all this been worth to shareholders?

Consider a hypothetical: an individual who, in 1978, took a punt on a tiny new housing finance company nobody had heard of and put ₹10,000 into HDFC’s founding share allotment. Held through every bonus, every split, every spin-off, and finally through the 2023 HDFC–HDFC Bank merger.

By mid-2024, that ₹10,000, simply left alone, would be worth well over ₹15 crore — with cumulative dividends crossing another ₹2 crore. A 46-year compounded annual return of approximately 26%. No leverage. No clever trading. Just one good business, held by a patient shareholder who never sold.

What the Story Actually Teaches

• The best businesses start from rejection. H.T. Parekh’s idea was turned down by the Reserve Bank, the Finance Ministry, and his own former employer. Every great moat in business began as a “this will never work” from people with better resumes.
• Culture is more durable than strategy. Deepak Parekh’s “we do one thing”; Aditya Puri’s “our first reflex must be yes”. Neither of these is a strategy. Both are cultural codes, and both compounded for decades.
• Cost of funds eats everything else. HDFC Bank’s quiet 42%+ CASA ratio is the single most underrated statistic in Indian finance. It is the reason the bank can underprice peers on loans and still be more profitable.
• The best time to build is when nobody believes in the category. In 1977, housing finance was a non-category. In 1994, private-sector retail banking was a non-category. HDFC built the first mover in both — and first-mover advantages in banking, unlike in software, last forever.
• A great shareholder is a boring shareholder. The people who made 26% CAGR from HDFC are almost entirely people who did nothing at all. They never timed the 2008 dip. They never sold at the 2020 panic. They simply held.

H.T. Parekh died on 18 November 1994 — one month before HDFC Bank opened its first branch. He never saw the bank he had made possible. His last recorded words to Deepak, spoken in a hospital bed at Breach Candy, were reportedly: “Nobody ever defaulted on a home. Remember that.”

Forty-seven years later, the institution he founded in a rented Churchgate room has lent into over 120 million Indian homes, offices, factories and farms — and the non-performing loan ratio, across two full economic cycles and a pandemic, has never broken 2%.

His mad 1977 idea turned out to be the cleanest investment thesis in Indian financial history.