Deepak Parekh: A Salaried Entrepreneur
"My mindset is salaried and I never had that kind of courage to branch out," Parekh tells BQ Prime's Menaka Doshi.
For a veteran banker who helped build India's largest mortgage lender founded by his uncle, Deepak Parekh stands out for one reason. He owns a mere 0.04% of Housing Development Finance Corp.
"My mindset is salaried, and I never had that kind of courage to branch out...," Parekh told BQ Prime's Menaka Doshi in an interview. "Today, most youngsters don't want to do a salaried job, they want to be on their own. It was not that 40 years ago."
Could his uncle Hasmukh Thakordas Parekh have kept aside some equity? "He didn't have that kind of money. He was living in a rented house," Deepak Parekh said.
Parekh's stake in HDFC, which has a market cap of more than Rs 3.9 lakh crore, is worth a little over Rs 155 crore at current valuations. By comparison, top executives of some of India's tech-backed financial services firms are worth billions of dollars.
So, doesn't Parekh regret that maybe in the last 25 years he could have raised some funding and owned a significant share of HDFC?
"I don’t regret it," he said. "I didn't want to borrow and do all that. I have never borrowed money, and I did not want to."
Still, he ran the housing finance company like an entrepreneur. "The mindset may be salaried, but you had to sit here the whole day and think how to grow, how to build it. So, you continue working."
Chasing Dreams
When in his mid-30s, Parekh left his job with Chase Manhattan Bank to join his uncle at HDFC. Two factors led to that decision, he said.
"I was very comfortable, very happy in my job but they were transferring me to Saudi Arabia at that time because of the oil boom there and Americans were reluctant to go," he said. "I didn't want to go. I just felt that is not a place I want to go at that time."
Second, Parekh said his uncle was very keen that he come and support him in Mumbai. "He told me to stop gallivanting around the world. He didn't have any children, he looked upon me as a son and so there was some family obligation also, to be honest."
On What HDFC Got Right
Parekh said that the one thing HDFC got right was the timing of entering the banking sector. "I wish we had a larger holding in it rather than 21%. But we got into banking at the right time. I think we got into the insurance business at the right time; and [on] asset management, we were a bit slow, we were not the first, we were probably the last or one of the last, but we did well and so there are no regrets at all."
Parekh said the board had to be thoroughly convinced to apply for a banking licence. "I had to argue and fight with them. They said you don't know any banking, I said we will hire a team; and then they insisted on getting a foreign collaboration and that's the reason ... Aditya Puri and I went to London. We met NatWest, we met DBS, we met Bankers Trust. Everyone said yes, but NatWest was the first."
Parekh said lending money on cash flow and not on an asset value was his first principle.
According to him, affection and sympathy go a long way in treating a customer. "Every customer who walks into our office for a mortgage loan has his or her tale of woes. You may not be able to service the loan, you have to listen patiently at their sorrows, at their stories, and be as sympathetic as you could."
"You have to be caring, you have to be affectionate," he said. "We did not advertise. It was word of mouth that got us more business."
What Next?
With no new role defined for Parekh in the merged entity HDFC Bank-HDFC, the pace of life will go down several notches for the former chairman. "I will keep my feet up and relax."
Any chance of joining politics? "Never," he said.
"I will go and have lunch with Sashi [Sashidhar Jagdishan] once in a while," he said. "I am going to have lunch with the chairman of the bank once in a while..."
Watch the full interview here:
Edited excerpts from the interview:
Mr. Parekh, your uncle HT Parekh had this vision that Indians should be able to afford a home. That was his driving agenda to found HDFC. You joined him. What was your driving agenda to build this institution over the last four decades. What goal did you wake up with every single day?
It was very tough in the beginning. As you know, our IPO failed miserably, it went into the neck of underwriters. We had to get it underwritten and it was quoting at a 20% discount to listed price to the offer price, and it took two-three years for us to even get to the par value, to the IPO value. So, it was difficult in the early days, but you know, I have also studied in London, I have seen every street corner there's a building society, everyone you work with in the office, everyone has a loan. They get a degree and they get a loan. They get a job and they get a loan. They get a degree, they get a job, they get a loan and they pay over 20-25 years, and the mortgage is transferable when they move places. So, it is such an easy system. The family dependence overseas is not that much as it is in India. In India, it was a lot dominated by family help, and you want to buy a home after you graduate and get a job; the family supports you. But to be absolutely candid, why mortgages had not been done 50 years ago, 100 years ago in India, when it was hundreds of years in U.K., [is because] we did not have a floating rate mechanism. Indian banking for many, many years until some 30 or 35 years ago, we had a fixed rate. So, it was difficult for banks to borrow fixed rate money because their retail deposit rates keep changing and so there was no appetite for banks to give 15-year loans because the liabilities were not 15 years. There would be a total mismatch of asset liabilities and when we started we only gave fixed interest rate for many years, for a decade almost, where we borrowed five-year, 10-year money and then gave that money. We didn't do one-month, three-month borrowing, but we did longer term borrowings, and that's how we had to manage. Later on, variable interest rate became the norm and once it became the norm every bank in India started those loans.
But that explains the business dynamic. What explains the Deepak Parekh dynamic? Your uncle had a vision of building a mortgage finance company. Did you share the same dream or were your motivations different--you wanted to be entrepreneurial, not just an employee of another bank?
I am still an employee although I am retired. I was always an employee in HDFC. I may have run it like an entrepreneur, but I didn't own it.
So, what was your dream? You were in your mid-30s, when you joined this.
Two factors were there. One was I was with Chase Manhattan Bank very comfortable, very happy. They were transferring me to Saudi Arabia at that time because of the oil boom there and Americans were reluctant to go. Fancy salary, two months’ vacation, all kinds of privileges. I didn't want to go to Saudi Arabia. I just felt that is not a place I want to go at that time and so I would have to look for another job here. Secondly, my uncle was very keen that I come and support him and help him. Although he didn't own it, he had only 10 shares of Rs 100. He never had any more shares, but he would say that, 'stop gallivanting around the world' and he didn't have any children. He looked upon me as a son and so there was some family obligation also, to be honest.
So through all of this, did you have your own deep aspiration to build out, you know, your own institution?
Once I joined, yes, we had to, I remember in our first annual report, we had the photo of the first borrower of HDFC. So, it was a very exciting journey. The best part was that during these years, the financial sector opened up in India with liberalisation. So, we saw an ad in the newspaper which said that the RBI is willing to look at new applications for banks. We convinced our board, had a team prepare a draft balance sheet and submitted our plan to RBI. Then, I was on the committee set up by the government (as) to whether insurance should open up under RN Malhotra, the ex-Governor of RBI and while spending 6-8 months working on that report, I thought it's a great business to be in.
And you were the first to get the licence.
That journey has been quite interesting.
So, I want to talk about that. What do you think you got right? I know you can’t outline everything. But as you look back, there must be one or two things that you got right?
We got into banking at the right time. I wish we had a larger holding in it rather than 21%. But we got into banking at the right time. I think we got into the insurance business at the right time and asset management we were a bit slow, we were not the first, we were probably the last or one of the last, but we did well and so there are no regrets at all.
Not regrets, just what did you get right in building out these many institutions? Because you have a variety of financial services businesses.
You need governance, you need good people, and you hire good managers and let them without interfering work on it. Delegate to the extent that it is abdication.
Let me suggest one thing, risk management. I think one of the things that most of the top two HDFC institutions have gotten right is the ability to manage risk unlike most of the financial services businesses in the country. How did you do that?
Everyone who came for a mortgage loan also wants a much higher amount. But we had to give based on his earning capacity, on his cash flow, not on the value of the property but on the cash flow. Always lend money on cash flow and not on asset value, that is the first principle. I think that can all be followed in personal loans. Therefore, we have, probably in the whole industry, we have the tiniest loans against property today, maybe 2% of our portfolio. Because if the income is going to repay the loan for the business and if the business doesn't do well, then you will have problems.
So risk management was one thing I identified, the second thing was, if I can call it 'the Deepak Parekh factor'. I believe you are the one who suggested the bank licence to the board and the first response of the board was 'No', and you had to convince them at that point in time, and I can't for the life of me imagine if you had listened to the board and decided not to apply and pick up the bank licence, what would have happened. So, that's one. I am also told, from everyone I speak to, that you have the ability to hire some of the best talent out there in the industry. So, is there 'a Deepak Parekh factor' to this?
I guess you have to create an atmosphere, an environment, a working environment, which is conducive, and which is easy, with good governance standards, and then people come and work with you.
That's great. How did you convince the board? Let me put the same question to you differently, you had to fight with them?
I had to argue with them, fight with them, and they said that 'you don't know any banking'. I said, 'you hire the right people, we will hire a team' and we hired a team and then, they insisted on getting a foreign collaboration. And that's the reason we went, Aditya Puri and I went to London, we met NatWest, we met DBS, we met Bankers Trust. Everyone said yes, but NatWest was the first.
I think, as you have expressed now, and in previous interviews, you wished you hadn't given as much equity to NatWest at that point of time?
Apart from that, 18 months after they got into difficulties in England, so they had to come and sell their stake, and they first offered it to us and it was at Rs 70. I said, it would be foolish, we gave it to them at Rs 10, and then two years later, it's Rs 70, and we have to buy it at Rs 70? So, we said we are not interested; we should have bought in at that time.
Why Aditya Puri or anybody in his place to run the bank? Why not you, why did you not decide to take on the role yourself? You had by then built a fairly successful knowledge.
I know, we needed a banker, we needed an Aditya. He worked very hard. He did a remarkable job for us.
I am not taking anything away from Mr. Puri, and I am just saying at that point of time, why did you, and you feel that 'okay, I have built this mortgage finance company', you had this good leadership, and you could have moved on.
Frankly, I never thought of it because I am quite happy sitting here and handling this job, that I never thought of it. And, you know, the bank also, the board also said 'get bankers to run it', so we got Paresh [Sukthankar, former deputy managing director at HDFC Bank] and Aditya helped us get more people whom he knew from the banking circle.
You come from a family of professional salaried bankers, if I can call it that. You know, your uncle founded this company, neither one of you owned it ever. Can you talk me through why? I'm just curious, why is this not a promoter-owned institution?
We don't have the money.
But you founded it many years ago, Deepak Parekh, HT Parekh are synonymous with HDFC from a brand point of view.
Everyone thinks we own it, but we don't own it. We own only less than 1%.
That's what I want to underscore. How did that come to be?
You are the employee, you are a salaried employee, you are not an owner, you don't have the money to buy.
But you are the founder?
You are the founder, but you are a professional founder.
You could have kept some of the equity for yourself. Not you, but Mr. HT Parekh could have kept some of the equity for himself.
For free, without money? But he didn't have that kind of money. He was living in a rented house. He didn't have that kind of money.
So, at no point in this journey of four decades, have you been tempted to say, 'I wish I had a large ownership stake in this'. Do you regret that at all?
Never. You know the market cap and what are you going to do with this money, acquire more things? You eat two meals a day, you eat two meals a day. When your time has come to go, you go. You have enough money to educate your kids, that is their future.
In fact, I read in one place you said you took on positions in some of the boards outside of the HDFC empire company just to earn some money so you could put your kids through the education that they wanted. So, I'm still trying to square this. I mean, I know that you don't own any stake, or some insignificant ESOP through stake in this company. I am just curious as to how or why through these four decades, neither Mr. HT Parekh nor you thought that you should own a larger chunk of this business. After a point, it could not have been just capital, may be in the early days?
Not four decades, because I retired 12 years ago from an executive position. I got no ESOP in the last 12 years.
So, what is your shareholding in HDFC now?
It is 0.04% or something.
So, I ask you this question again, Mr. Parekh, in three decades, I am not saying you regret it. Was there any point in time where you all thought that okay, maybe we can raise some funding and own a significant share of HDFC?
I don’t regret it. I didn't want to borrow and do all that. I have never borrowed money, and I did not want to.
You have never borrowed money. Do you want to rethink that statement now, given that you run two of the largest lending institutions in this country?
It is not in your nature.
Because you could not have built this without being an entrepreneur. You have said in so many places you ran this like an entrepreneur. You ran it like your own company, and yet at no point you felt that you wanted to own any chunk of it?
Mindset is salaried; I never had that kind of courage to branch out and start a private equity. You know, like today, most youngsters want to do, most youngsters don't want to do a salaried job. They want to be on their own. It was not that 40 years ago.
That's what I was challenged in reconciling that if the mindset was salaried, how did you build this so entrepreneurially?
Mindset may be salaried but you had to sit here the whole day and think how to grow, how to build it. So, you continue working.
Okay. I have one question that comes from all the institutions that HDFC has helped spawn over the years, whether it is from within the group itself or outside--IDFC, Crisil, Cibil. And that question has to do with IL&FS. I think this is the only question that has come up against you in the last 10 years, is that how is it that so many blue-chip institutions owned IL&FS, and nobody spotted what was going wrong there?
See, I was involved with it in the first 10 years, it then had one subsidiary. After I left, in the last 10 years, they brought up some 200-300 subsidiaries. No one knew the financial worth of those subsidiaries and whether they were in road, in power, and in education, and as you know, they started working with the state governments. When the intentions of people go wrong, that 'let's make money', then no institution can survive. Everyone knew it was weak. Everyone knew with so many subsidiaries, it was weak and with state governments as partners on water project and all these are 20-year projects, to start investing, you don't get returns--Tirupur water and power projects, and so on. I think it was a big, big problem, a big fraud and when intentions went awry of the senior management, then you can convince anyone to become shareholders, give limited information and cheat the people, cheat the investors.
Is that maybe one of the few regrets though your exposure to it was limited?
I could not do anything because I was there for the first 10 years as chairman, and it ran, and I could say that it was okay. There was only one subsidiary and not multiple subsidiaries. But it is the same thing with IDFC also, we had a tough time in running IDFC and these were the main PPAs we had to fund because we had limited scope to only fund infrastructure and it was government (that) had given the money, Rs 1,000 crore. So, it was difficult, and telecom and power were the only thing because roads were not that popular those days. Large roads were under construction when IDFC started. If you don't disperse, the feeling is that you are not doing anything. So, you had to disperse because government felt that we started it and no one is doing anything, no disbursement is taking place and then we made mistakes in some power purchase agreements.
They were one-sided, the state government reneged. So, we learned the hard way, we learned the hard way in IDFC, and we had no choice but to become a bank.
There are two things I have identified in many of your interviews that I think you have said, have worked in building out these institutions. One is the affection with which HDFC has treated its customers and the second is accessibility, the accessibility that you have always given people as a leader. I want you to tell me how these two attributes can be scaled to the level that you have managed to scale them because it's very easy to understand what it means to have affection for a customer and to be an accessible leader. To do it at this level across these many institutions under a brand is very difficult. How did you achieve this?
Please understand every customer who walks into our office for a mortgage loan has his or her own tale of woes. 'Not enough money, price is too high.' You may not be able to service the loan, you have to listen patiently at their sorrows, at their stories and be as sympathetic as you could. You may have to reject the case but reject it in a nice manner. So that the person doesn't feel offended, and we have to train people that way because we were sitting with files ourselves. We were appraising in the beginning. I used to go to my branches and we used to take files to the hotel and sit and go through what loan did he ask for, what is his background with the bank manager. So, customer service was something we had to engrain into our people that you have to hear the story, you have to be patient and therefore sometimes you know productivity of some people is less because it's not like a car loan, in 10 minutes you can do it. It's the biggest asset a person is purchasing, he is putting all money from different sources together, support from family, so you have to be sympathetic, you have to be caring, you have to be affectionate. Only then he will feel comfortable, he will come to you, and we did not advertise. Word of mouth was the best advertising for us. We didn't spend lakhs and crores of rupees in advertising even when we started. It was word of mouth that got us more business.
Can these attributes survive in this day and age? Affection in the day and age of WhatsApp loans? Accessibility even after Mr. Parekh leaves office?
I feel it can survive; you can be sympathetic; you can be concerned even on WhatsApp. You don't have to be rude; you have to be tolerant, and I think it's possible. But it needs a great amount of training, as you have 6,000 branches in the bank. How do you train all those people? And attrition is low with us, but at the bank, at the lower level, attrition is higher. Like in IT, the attrition is 100%. That means you keep training people, they leave, you keep training people, they leave. So to get that kind of customer centricity, customer service, a delight to a customer is not that easy. It's possible in small, if you become too large it becomes impersonal. The other way you can do it is, even today, I get complaints, also from HDFC but bank, insurance, asset management. I handle it myself. In the sense, I send it to the CEO, saying 'please revert' and my secretary has a list of who has not reverted, which is not solved, etc. So you have to take that personal interest because you know, it takes a long time for someone to complain to the Chairman. So, he must be agitated, he must be upset. I call people. Just calling them comforts them. It says someone took care, someone read our letter and called.
So, this is my last question, what next after you retire because you say you want to retire but I can't imagine you retired. So will it be politics which apparently is one of your regrets I read somewhere, or will it be friends of Deepak Parekh, which I'm told is what your club of friends is informally called.
Keep my feet up and relax.
Nobody is going to believe that Mr. Parekh, keep your feet up and relax?
Wait and see. Politics never.
I read somewhere that you said you felt like maybe you regretted not considering some public role.
Public role, not politics. I was offered some public sector bank at that time.
You were also offered Finance Ministership once, but you came close to it.
It is all rubbish. No politics, it was only in some of these public sector, regulatory bodies, public sector.
So, is that something you will consider?
No, at this age you cannot consider. It's not politics. I have never said I'll join politics. It was only public sector jobs I was offered. I don't want to say what, a number of them, but I sort of stayed away.
So, now you are seriously saying this, that you want to put your feet up?
Yes, I have no role in the merged entity.
You have chosen not to take a role. Your bank chairman says he would love to have you as an advisor. You can’t have an executive role of any sort or on the board because of age limits.
I will go and have lunch with Shashi once in a way. I am going to have lunch with the Chairman of the bank once in a way.