HDFC FD and Shareholder Loyalty programs

I remember that 14 years ago, when demat accounts just started, my broker joked:
A DEMAT account is just like a savings account. Only difference is that instead of the book keeping being done in INR, it would be done in RIL.

Maybe now one might not get the context of the joke, but at that time Reliance Industries was one of the most widely held companies in the world (not just India). For most people (esp. Gujarati) NIFTY/Sensex performance meant nothing, their entire portfolio consisted exclusively of RIL shares. (Of course many Indians also owned UTI’s Unit 64, but at that time it was never perceived as a mutual fund, it was classified as an fixed deposit scheme with annual dividends)

However there has not been any other Indian firm that has ever enjoyed so much of investor loyalty. HDFC has a simple and effective scheme. It offers its shareholders 25bps higher interest rate. Not too high to create a dent in its income statement, but just high enough to entice non-traders to consider buying the stock. (typically customers investing in Fixed deposit schemes are likely to be investors who invest in a stock and forget it for a couple of years… and not the typical trader/speculator which invests in indian companies)
Most Indian companies don’t pay much attention to shareholder relations (so forget shareholder loyalty). The quarterly results are not published in time, transcripts of earnings release are not published, annual report is sketchy etc.
However it seems that HDFC has realized that, thanks to BASEL norms for higher capital adequecy requirements, and robost growth in credit demand, no bank can grow at 15-25% yoy without having to tap into the stock market every couple of years.
Hence the determining factor between a bank that is able to grow and one that is not is its shareholder loyalty. Diverse shareholding pattern can help stock price survive bear runs. Hence enabling firms to grow in spite of the Dalal street sentiments.
Also firms are increasingly issuing ESOPs to retain talent. This would be effective only if the firm shows consistent growth in its share price. And the only way to do that is to attract investors rather than speculators.

PS: This post is less about how good HDFC banks are but more about why firms should develop shareholder loyalty programs and how little it costs them.

Insurance Scam

Ever wondered why your doctor/mechanic asks for insurance before treating your/your car?
Let me illustrate.
Here is what happened to me 2 weeks ago.
My car (maruti alto k10) developed a problem because some rain water seeped inside its clutch. The mechanic (maruti authorized service center) was ready to repair it in 2 hours and would cost me 150/- and 350/- to tow the vehicle. He additionally recommend me to get my upholstery cleaned which was smelling due to water stagnation.
Since it was a brand new car, and the cleaning of carpet would take 2 days, I thought of claiming insurance (Tata AIG)

Net result was that instead of the 2000/- that i had to clean for the entire process:
The total mechanic bill came to: 5200/-
Insurance paid 2500/- (3000/- – deduction of 500/-) and I had to pay 2,700/-.
On top of it, I lost no claim insurance bonus worth 1500/- and had to shell out another 300*7 days = 2100/- for autorichshaw charges to commute to my office. (even if i deduct for the fuel, i lost 1000/- and an added inconvenience of 9 days)

without insurance
mechanic: +2000
Myself: -2000 – 450 (auto – fuel) = -2450 and I would have got my car on the 3rd day.

with insurance
insurance company: -2500 + 1500 (no claim bonus) = -1000/-
mechanic: 5200/-
myself: -2700 – 1500 (insurance) – 1050 (auto) = 5250/- and I got my car on the 9th day.

During my MBA classes, I was told that options, like insurance, are a zero sum game. No wealth is created and it is just transferred from one account to another. (usually from the client to the broker)
Out here, it seems that the only person who gained was my mechanic.

You could have argued that I should have contested the excess charges. Well when one claims insurance, the mechanic provides you with itemized billing and with physical and photo graphical evidence of all the work he/she does. So it becomes very hard to contest.
I have heard of so many cases where some hospitals also inflate the bills when the client has insurance.

I wonder when will the customers realize that because of this malpractice, their insurance premiums are higher. Hence it is they who ends up paying 2-3 times for the same service.