Why HDFC is the BEST Bank in INDIA? | How Banks make money | Finance with
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- čas přidán 4. 07. 2024
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HDFC is the largest bank in the country. HDFC Q3 2023 topline sales were 45,000 Crores. ICICI Bank Q3 2023 topline sales were 31,000 crores. Axis, Kotak Mahindra bank, and others are way below that. How can we say HDFC is the biggest bank? To understand this we need to understand how banks make money. If all banks make money only by collecting money from the depositor and lending it to the borrowers then what is the difference between all these banks? Why are some banks valued higher than others? Because lending and borrowing are not the only things that the banks do. There is much more to the story.
In this video, I’ve explained how HDFC is beating the competition and how banks make money in the first place. Imagine if HDFC Bank has ₹40,000 in its accounts. Now, this 40k is given to 4 different entities as loans. First is the spare parts manufacturer of Maruti. Let’s assume they manufacture gearboxes and tires. Then it gives 10k as loans to Maruti itself, 10k to the Maruti dealer showroom owner, and lastly 10k to the customer who is looking to buy a Maruti Car. In this example, the trust is coming from the brand Maruti.
How does this entire ecosystem work? The spare part manufacturer gets 10k from Maruti and starts manufacturing gearboxes, tires, etc., and sends it to Maruti. Now Maruti has taken a loan from HDFC. Now the spare parts manufacturer can give back the loan of 10k he had taken. Then Maruti assembles the car and gives it to the dealer. The dealer has already taken 10k from HDFC and he pays that back to Maruti. Maruti uses this money to pay back the loan it took from HDFC. Then the manufacturer sells the car to the customer who has also taken a loan from HDFC to pay for the Maruti car. The manufacturer pays the loan back to HDFC. In this way, whatever money HDFC disburses comes back to HDFC.
The point is that banks never let the money get out of their ecosystem. If the money gets out of their ecosystem then it’s a problem. Leakages happen when people default on their loans during the pandemic time many people didn’t have enough money to pay back their loans. That becomes NPA or Non-Performing assets for the bank. To prevent leakages, the banks only give out loans to a person who is creditworthy. Banks also ensure that the system in which the individuals are operating is also creditworthy. This ecosystem is used by HDFC a lot. Because of this if you compare HDFC to any other bank then the NPAs of HDFC is lower than any other bank. Even during March 2020, the HDFC bank had the least amount of NPAs. While other banks had close to 10% NPAs, HDFC was still in the range of 2%. HDFC is calling itself a collection department.
In the current fintech space, many people are defaulting on their loans which is why many fintechs are incurring a loss. How can you make a loss while giving a loan? If your borrowers are defaulting, you need to find another borrower from the amount of money you are lending out. Once the VC fund dries out, the business model is unclear for fintech startups. Another thing we need to understand is that the money is working for HDFC n number of times. Once received back the initial loans, HDFC can lend out the same amount of money in a different ecosystem for a long time. HDFC thus generates additional interest income on the same money. This is an example of your money generating more income for you.
Because of the looming recession, people are going out and looking for loans. Banks that have a lower NPA are the clear winners in this scenario because they have the best collection agents in the market. HDFC has the best collection agents which is what makes it the topmost bank in India.
About Me
I publish meaningful and valuable content on this channel. My aim is to make business news more accessible and easy to grasp. If you find my videos informative and insightful then make sure to subscribe and leave a comment. I’ll see you in the next video
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Chapters
0:00 - Intro
0:32 - Video Pointers
0:53 - How do banks make money?
3:47 - NPA
5:32 - Loss of fintech startups
6:09 - Money working multiple times for HDFC
7:05 - Why credit demand is increasing?
7:52 - Summary
8:18 - Outro
Banks make money by borrowing and lending is a more accurate and simplistic answer. This video which was supposed to be a more detailed account of the workings of banks is half baked, wayward and misleading, while ignoring the basic concepts of bank capitalization, net interest margin etc. Money working multiple times for HDFC made me scratch my head. I would encourage you to better prepare when you have the voice to influence and educate thousands of people.
You are right. The video is good but it should be clarified that only one of the main aspect of how how banks make money is explained in this video.
It is still a useful video for me.
Agreed!
as MBA interviews are around the corner we want more of such videos on businesses
really good. I only have one point to add. You should not only have a good collection system but also a good credit appraisal system to perform better in times of recession. wonderful effort. all the best.- a retired banker and a life time learner.
Well done!! Supa dupa insightful
Thank you for this valuable information.
Very helpful. Thank you Sir for information 😊🙏
Informative video sir 👌
Insightful information. Thanks sir
Thanks for the knowledge sir
What you're missing in this video is that banks make a LOT more money by selling ancillary and 3P products like insurances. ~20% of profits of new insurance companies are paid out to banks. Given banks have no investment in these products that income is mostly pure profits. Otherwise NII doesn't really add up to bank profits a great deal because interest rates are centrally governed and other than sales push, there isn't much to differentiate one bank from the other
Even in the company that I work in (Bajaj Finance) the moat is collections team only. No doubt we work on other functions as well, but the business owners have confidence that the money will come back. However, strong collection teams sometimes have their concerns which a customer might not like. So we need to find that thin line between business and customer emotions as well.
quite informative video
Could you please also make a video on investment banks like jp morgan, Goldman Sachs like how they earn and manage funds
Sir is there any source where we can get to know about it in detail? Because I want to know what % of their loans have these ecosystem in place as this seems to have many variables in it.
P.S- Really liked the video. Learnt an entirely new way in which HDFC is operating. 🙌
as a supply chain professional, I'd like to substitute "ecosystem" with "supply chain" - also a new buzzword for many these days :). If banks control entire supply chain, with other factors such as due diligence and low NPA of course, that makes them at a position of competitive advantage :)
Agree!
Thank you Pavan for making these concept even more easier to understand.
You're most welcome
sir, if collecting the money back plays a crucial role ,then why dont the remaining banks focus on this aspect? is it that tough?
sir need more explaination didn't understood properly that ecosystem part...
Fractional reserve banking
well explained, Bank earn money by circulating same money again and again in economy. for every 100 rupees it make virtual currency of 1000 rupees. otherwise bank can't survive only on profit of borrowing and lending money.
Finally, bank are making money by lending money. When you put money in the market it multiplies. That's why government encourage spending and saving both. Collection and credit comes in picture only when bank agress to lend money.
Pavan garu If possible we need this content in Telugu
What if the loans are ammortized?
@pavan - I am interested in doing some number crunching of India’s top banks. Do we have a public dataset available like kaggle to get this data ? Just wanted to check with you….
I am not sure. I usually get numbers directly from banks P&L statements
Pardon for silly question : Why would the Maruti not pay directly to HDFC or the Dealer? You were trying to make some point about it I think but I couldn't really grasp it.
Also the ₹10k each will come back more than ₹10k I suppose because of interest paid by each of the 4 entities?
What other sources of income you were mentioning on those ₹40k?
The same ₹40k is doing a lot of income I suppose.
Hi Piyush,
Yes - the 10K will come back as 10k+Interest.
Now, that (10k+ interest) can be once again given out as loan and hence additional income.
Hope this makes sense.
Maruti does pay HDFC w.r.t. the dues it owes. Similarly it has to pay the supplier as well. Not sure if I get your question completely!
Could you provide some sources and tips on researching business strategies?
The primary source is quarterly results documents published on the company's website. And also, their conference call. Both of them are pure gold!
You should make a Video on how the financial ecosystem crumbles due to NPA growth or coz of wilful defaulters ... As far as I know this is the only reason stopping India from growing to the next level.....
Sir
You are mistaken. The reason is future growth
The IDFC FIRST BANK is better.
still looking for the other ways banks make money apart from lending 😜
Not detailed vdo, disappointed
Banks make money from saving accounts
This confused me more now
Indian Accent bro
Another finfluencer about to get his ass whooped for presenting half baked and low tier info.
You can't speak half decent language in a public platform. Show it to your family and then let them decide what to do for your comment
HDFC ka dalal😂