`Our Path Was Laid Out'

Indian banks, sheltered from competition for decades, are notorious for surly staff and bundles of red tape. Withdrawals require an hour of standing in line. Small loans can take months because the manager is "out." The few foreign banks here, such as Citibank, mostly cater wealthy people, with pricey services to match. "It's a no-brainer that the middleclass needs better banking," says Aditya Puri, HDFC's founder and managing director. `Our path was laid out for us'

The bank was created in 1995, after New Delhi's free-market reforms allowed for the formation of private banks here. Mr Puri returned to India to build the bank after 20 years at Citibank in Asia, Europe and the Middle East. He was recruited by Mumbai-based Housing Development & Finance Corp, a leading mortgage provider, which is itself run by an Indian who is a former executive of Chase Manhattan Bank.

Today, management is littered with other executives with experience abroad, who were eager to come home to India and apply their skills. In the early days that was a tough sell, Mr Puri says. "I was telling [job candidates] they would be joining the best bank in India," he says - a bemusing claim, considering banking's abominable reputation. HDFC Bank also had to contend with established foreign banks, which have far deeper pockets.

But HDFC Bank did have an important starting asset: Itsparent, Housing Development Finance Corporation, is considered one of India's best-managed companies. In a few years, HDFC Bank built a profitable business in corporate banking and capital-market services.

New Frontier

Last year, Mr Puri started pushing into an area that offers the richest profits: retail banking. He predicts it will account for half of revenue in three years, compared with just 10 per cent for the fiscal year ended March 31. This has brought new challenges, such as teaching customers how to use automated teller machines. Until last year they were alien, except for in a few big cities.

The bank also has attracted some big-name investors. Chase Manhattan Bank bought a 15 per cent stake in HDFC Bank in early May, through two venture-capital funds. "This is a bank that knows its destiny," says Robert Fallon, Chase's head of the Asian-Pacific division.

To be sure, HDFC is still tiny. Total deposits were $681 million as of March 31, and net profit for the year was $19.2million. Both grew by 30 per cent from the year-earlier period. By comparison, India's biggest bank, State Bank of India, which accounts for about 20 per cent of total banking-system assets nationwide, had deposits of $30.4 billion as of March 31.

Ready for Change

The middle-class market HDFC Bank is targeting is primed for change: Customers are weary of bad service but can't afford the foreign banks. Citibank's for instance, requires a minimum combined balance of 300,000 rupees ($7,000); HDFC Bank requires Rs 5,000.

HDFC customer GV Narasimha, a 38-year-old mechanical engineer in New Delhi who earns Rs 15,000 a month, recalls how he used to use a state-owned bank. To avoid the hot, smelly, crowded lobby, he would make only one withdrawal a month, which his wife would store in a cupboard. "It wasn't earning any interest," she notes.

On family trips to their hometown of Bangalore, a 36-hour train ride, Narasimha would lug a briefcase stuffed with rupees. Times have changed. Today when his wifegoes food-shopping, she stops at an ATM on the way to the vegetable market. And Narasimha waits until he reaches Bangalore and uses an HDFC machine there.

Since ATMs are in their infancy here, the growth potential is high -- but so is the learning curve. A typical problem: Customers fear they will lose money if there is a power failure (a common occurrence) during a transaction. HDFC has hired "personal bankers," who among other things take customers by the hand, literally, to demonstrate the machines.

As an incentive, HDFC also stocks its machines only with crisp new bills. It is common practice among Indian banks to staple bills together, leaving much of India's currency so badly tattered that stores sometimes reject it.

Other Conveniences

In addition to ATMs and telephone banking, HDFC Bank offers weekend and evening hurs, and in some cities electric and cellular-phone bills can be paid at its ATMs. It also makes house calls. When retired teacher Suman Dandass applied to open an account forher 81-year-old father, who was bedridden at the time, a banker brought the forms to her house, along with a Polaroid camera (for an obligatory snapshot of the account-holder as required by law).

Puri, who was born in the northern Indian state of Punjab, says he is proud of what he has achieved so far. And he says his family was "delighted" to return to India.

Nevertheless, it took him a year to accept the offer. For one thing, as the former head of Citibank in Malaysia, he had to agree to a 30 per cent to 40 per cent pay cut. It also required a big personal adjustment.

"I knew I would have to face the vagaries of the phone system, people who don't do their jobs, and heavy bureaucracy," he says. Once back in India, he had hoped to open the bank in three months; it took twice as long.

Four years later, the fight is only just beginning. State banks are investing in technology and customer service. Many are installing ATMs.

Others are opening on Sundays.

Foreign banks don't pose much of athreat because of strict government limits on their activities. India's central bank issues only eight to 10 licenses a year for new foreign-bank branches. Citibank, in India since 1902, has only eight branches in seven cities. "Citibank is lucky if it gets permission to open one new branch every three years," one banking analyst says. "That makes life easier for an aggressive local player like HDFC Bank."

-- The Wall Street Journal