Form 20-F
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

 

 

FORM 20-F

 

 

 

¨ REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

 

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended March 31, 2010

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             

OR

 

¨ SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Date of event requiring this shell company report                     

Commission file number 001-15216

 

 

HDFC BANK LIMITED

(Exact name of Registrant as specified in its charter)

 

 

Not Applicable

(Translation of Registrant’s name into English)

India

(Jurisdiction of incorporation or organization)

HDFC Bank House, Senapati Bapat Marg, Lower Parel, Mumbai 400013, India

(Address of principal executive offices)

Name: Sanjay Dongre, Executive Vice President (Legal) and Company Secretary,

Telephone: 91-22-2490-2934 /or 91-22-2496-1616, Ext. 3473,

Email: sanjay.dongre@hdfcbank.com,

Address: 2nd floor, Process House, Kamala Mills Compound, Senapati Bapat Marg, Lower Parel, Mumbai 400 013, India.

(Name, telephone, e-mail and/or facsimile number and address of company contact person)

 

 

Securities registered or to be registered pursuant to Section 12(b) of the Act:

 

Title of each class        Name of each exchange on which registered

American Depositary Shares, each representing three

Equity Shares, Par value Rs. 10 per share

     The New York Stock Exchange

Securities registered or to be registered pursuant to Section 12(g) of the Act: Not Applicable

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: Not Applicable

 

 

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report:

Equity Shares, as of March 31, 2010                 457,743,272

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes x    No ¨

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.    Yes ¨    No x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes x    No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes x    No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer x

   Accelerated filer ¨    Non-accelerated filer ¨

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

U.S. GAAP  x    International Financial Reporting Standards as issued by the International Accounting Standards Board  ¨    Other  ¨

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow:   Item 17 ¨  Item 18 ¨

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes ¨     No x

This Annual Report on Form 20-F is incorporated by reference to our Registration Statement on Form F-1 Filed on July 12, 2001 (File No. 333-13718).

 

 

 


Table of Contents

TABLE OF CONTENTS

 

CROSS REFERENCE SHEET

   ii

EXCHANGE RATES AND CERTAIN DEFINED TERMS

   1

FORWARD-LOOKING STATEMENTS

   2

BUSINESS

   3

RISK FACTORS

   24

PRICE RANGE OF OUR AMERICAN DEPOSITARY SHARES AND EQUITY SHARES

   34

DESCRIPTION OF EQUITY SHARES

   36

DESCRIPTION OF AMERICAN DEPOSITARY SHARES

   40

DIVIDEND POLICY

   47

SELECTED FINANCIAL AND OTHER DATA

   48

SELECTED STATISTICAL INFORMATION

   51

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

   70

MANAGEMENT

   90

PRINCIPAL SHAREHOLDERS

   107

RELATED PARTY TRANSACTIONS

   108

TAXATION

   111

SUPERVISION AND REGULATION

   117

EXCHANGE CONTROLS

   131

RESTRICTIONS ON FOREIGN OWNERSHIP OF INDIAN SECURITIES

   133

ADDITIONAL INFORMATION

   136

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

   F-1

EXHIBIT INDEX

  

 

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CROSS REFERENCE SHEET

Form 20-F

 

    

Item Caption

  

Location

   Page

Part I

        
Item 1    Identity of Directors, Senior Management and Advisors   

Not Applicable

  
Item 2    Offer Statistics and Expected Timetable   

Not Applicable

  
Item 3    Key Information   

Exchange Rates and Certain Defined Terms

   1
     

Risk Factors

   24
     

Selected Financial and Other Data

   48
Item 4    Information on the Company   

Business

   3
     

Selected Statistical Information

   51
     

Management’s Discussion and Analysis of Financial Condition and Results of Operations

   70
     

Principal Shareholders

   107
     

Related Party Transactions

   108
     

Supervision and Regulation

   117
Item 4A    Unresolved Staff Comments   

Management’s Discussion and Analysis of Financial Condition and Results of Operations

   89
Item 5    Operating and Financial Review and Prospects   

Management’s Discussion and Analysis of Financial Condition and Results of Operations

   70
     

Merger of Centurion Bank of Punjab

   71
Item 6    Directors, Senior Management and Employees   

Business—Employees

   22
     

Management

   90
     

Principal Shareholders

   107
Item 7    Major Shareholders and Related Party Transactions   

Principal Shareholders

   107
     

Management—Loans to Members of our Senior Management

   100
     

Related Party Transactions

   108
Item 8    Financial Information   

Business—Legal Proceedings

   23
Item 9    The Offer and Listing   

Price Range of Our American Depositary Share and Equity Shares

   34
     

Restrictions on Foreign Ownership of Indian Securities

   133
Item 10    Additional Information   

Management

   90
     

Description of Equity Shares

   36
     

Dividend Policy

   47
     

Taxation

   111
     

Supervision and Regulation

   117
     

Exchange Controls

   131
     

Restrictions on Foreign Ownership of Indian Securities

   133
     

Additional Information

   136
Item 11    Quantitative and Qualitative Disclosures About Market Risk   

Business—Risk Management

   17
     

Selected Statistical Information

   51
Item 12    Description of Securities Other than Equity Securities   

Not Applicable

  
Item 12D    ADSs fee disclosure   

Description of American Depository Shares—Fees and Charges for Holders of American Depository Shares

   43


Table of Contents
    

Item Caption

  

Location

   Page

Part II

        
Item 13    Defaults, Dividend Arrearages and Delinquencies   

Not Applicable

  
Item 14    Material Modifications to the Rights of Security Holders and Use of Proceeds   

Not Applicable

  
Item 15    Controls and Procedures   

Management—Controls and Procedures

   101
     

Management’s Report on Internal Control Over Financial Reporting

   137
     

Report of Independent Registered Public Accounting Firm

   138
Item 16A    Audit Committee Financial Expert   

Management—Audit and Compliance Committee Financial Expert

   102
Item 16B    Code of Ethics   

Management—Code of Ethics

   102
Item 16C    Principal Accountant Fees and Services   

Management—Principal Accountant Fees and Services

   102
Item 16D    Exemption from the Listing Standards for Audit Committees   

Not Applicable

  
Item 16E    Purchases of Equity Securities by the Issuer and Affiliated Purchasers   

Not Applicable

  
Item 16F    Changes in or disagreements with accountants   

Not Applicable

  
Item 16G    Significant Differences in Corporate Governance Practices   

Management—Compliance with NYSE Listing Standards on Corporate Governance

   103

 

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EXCHANGE RATES AND CERTAIN DEFINED TERMS

In this document, all references to “we,” “us,” “our,” “HDFC Bank” or “the Bank” shall mean HDFC Bank Limited or where the context requires also to its subsidiaries whose financials are consolidated for accounting purposes. References to the “U.S.” or “United States” are to the United States of America, its territories and its possessions. References to “India” are to the Republic of India. References to “$” or “US$” or “dollars” or “U.S. dollars” are to the legal currency of the United States and references to “Rs. “ or “rupees” or “Indian rupees” are to the legal currency of India.

Our financial statements are presented in Indian rupees and in some cases translated into U.S. dollars. The financial statements and all other financial data included in this report, except as otherwise noted, are prepared in accordance with United States generally accepted accounting principles, or U.S. GAAP. References to a particular “fiscal” year are to our fiscal year ended March 31 of such year.

Fluctuations in the exchange rate between the Indian rupee and the U.S. dollar will affect the U.S. dollar equivalent of the Indian rupee price of the equity shares on the Indian stock exchanges and, as a result, will affect the market price of our American Depositary Shares (“ADSs”) in the United States. These fluctuations will also affect the conversion into U.S. dollars by the depositary of any cash dividends paid in Indian rupees on the equity shares represented by ADSs.

From 1980 until fiscal 2003, the rupee consistently depreciated against the dollar. In fiscal 2004 and 2005, the Indian rupee appreciated compared to fiscal 2003. However, in 2006, the rupee depreciated against the U.S. dollar. During fiscal 2007 and fiscal 2008, the rupee appreciated against the U.S. dollar. This trend was reversed during fiscal 2009 when the rupee depreciated against the U.S. dollar. In fiscal 2010 the rupee has appreciated against the U.S. dollar (the high and low during the period being Rs 50.48 per US$1.00 and Rs. 44.94 per US$1.00, respectively).

The following table sets forth, for the periods indicated, information concerning the exchange rates between Indian rupees and U.S. dollars based on the noon buying rate in The City of New York:

 

Fiscal Year

   Period End(1)    Average(1)(2)    High    Low

2006

   44.48    44.17    46.26    43.05

2007

   43.10    45.11    46.83    42.78

2008

   40.02    40.13    43.05    38.48

2009

   50.87    45.84    51.96    39.73

2010

   44.95    47.39    50.48    44.94

 

(1)

The noon buying rate at each period end and the average rate for each period differed from the exchange rates used in the preparation of our financial statements.

(2)

Represents the average of the noon buying rate for all days during the period.

The following table sets forth the high and low noon buying rate for the Indian rupee for each of the previous six months:

 

Month

   Period End    Average    High    Low

March 2010

   44.95    45.45    46.01    44.94

April 2010

   44.20    44.44    44.79    44.10

May 2010

   46.31    45.77    47.49    44.46

June 2010

   46.41    46.50    47.08    45.64

July 2010

   46.35    46.76    47.23    46.25

August 2010

   47.02    46.46    47.02    45.70

Although we have translated selected Indian rupee amounts in this document into U.S. dollars for convenience, this does not mean that the Indian rupee amounts referred to could have been, or could be, converted to U.S. dollars at any particular rate, the rates stated above, or at all. Unless otherwise stated, all translations from Indian rupees to U.S. dollars are based on the noon buying rate in the City of New York for cable transfers in Indian rupees at US$1.00 = Rs. 44.95 on March 31, 2010. The noon buying rate on September 24, 2010 was Rs. 45.10 per US$1.00.

 

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FORWARD-LOOKING STATEMENTS

We have included statements in this report which contain words or phrases, such as “will”, “aim”, “believe”, “expect”, “will continue”, “anticipate”, “estimate”, “intend”, “plan”, “future”, “objective”, “project”, “should”, and similar expressions or variations of these expressions, that are “forward-looking statements”. Actual results may differ materially from those suggested by the forward-looking statements due to certain risks or uncertainties associated with our expectations with respect to, but not limited to, our ability to implement our strategy successfully, the market acceptance of and demand for various banking services, future levels of our non-performing loans, our growth and expansion, the adequacy of our allowance for credit and investment losses, technological changes, volatility in investment income, our ability to market new products, cash flow projections, the outcome of any legal, tax or regulatory proceedings in India and in other jurisdictions we are or become a party to, the future impact of new accounting standards, our ability to pay dividends, the impact of changes in banking regulations and other regulatory changes in India and other jurisdictions on us, our ability to roll over our short-term funding sources and our exposure to market and operational risks. By their nature, certain of the market risk disclosures are only estimates and could be materially different from what may actually occur in the future. As a result, actual future gains, losses or impact on net income could materially differ from those that have been estimated.

In addition, other factors that could cause actual results to differ materially from those estimated by the forward-looking statements contained in this document include, but are not limited to: general economic and political conditions, instability or uncertainty in India and other countries which have an impact on our business activities or investments, caused by any factor including terrorist attacks in India, the United States or elsewhere, anti-terrorist or other attacks by the United States, a United States-led coalition or any other country, tensions between India and Pakistan related to the Kashmir region, military armament or social unrest in any part of India, the monetary and interest rate policies of the government of India, natural calamities, inflation, deflation, unanticipated turbulence in interest rates, foreign exchange rates, equity prices or other rates or prices, the performance of the financial markets in India and globally, changes in Indian and foreign laws and regulations, including tax, accounting and banking regulations, changes in competition and the pricing environment in India, and regional or general changes in asset valuations. For further discussion on the factors that could cause actual results to differ, see “Risk Factors”.

 

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BUSINESS

Overview

We are a new generation private sector bank in India. Our goal is to be the preferred provider of financial services to upper and middle income individuals and corporations in India. Our strategy is to provide a comprehensive range of financial products and services for our customers through multiple distribution channels, with what we believe is high quality service and superior execution. We have three principal business activities: retail banking, wholesale banking and treasury operations.

We have grown rapidly since commencing operations in January 1995. In the five years ended March 31, 2010, we expanded our operations from 467 branches and 1,147 ATMs in 211 cities to 1,725 branches and 4,232 ATMs in 779 cities. During the same five years, our customer base grew from 6.8 million customers to over 19 million customers. As our geographical reach and market penetration have expanded, our assets have grown from Rs. 535.5 billion as of March 31, 2005 to Rs. 2,416.5 billion as of March 31, 2010. Our net income has increased from Rs. 6.6 billion for fiscal 2005 to Rs. 24.6 billion for fiscal 2010 at a compounded annual growth rate of 30.1%.

Our rapid growth is in part attributable to our acquisition of Centurion Bank of Punjab Limited (CBoP). CBoP was a private sector Indian bank that offered retail, small and medium enterprise and corporate banking products and services, similar to ours. Our shareholders approved the acquisition on March 27, 2008, and it became effective May 23, 2008. As consideration for the acquisition, every 29 equity shares of CBoP were exchanged for one of our equity shares. The primary purpose of the acquisition was to realize potential synergies and growth opportunities.

As a result of our acquisition of CBoP, our network increased by 404 branches and 426 ATMs with a geographical spread mainly across areas such as Punjab, Haryana and Kerala. We acquired over two million customers and approximately Rs. 266,834.6 million in assets and assumed approximately Rs. 239,003.1 million in liabilities. The fair value of the net assets we acquired was Rs. 27,831.5 million on the date we acquired CBoP, which resulted in goodwill of Rs. 74,937.9 million. Had the CBoP acquisition taken place at the beginning of fiscals 2008 and 2009, our combined net income would have been Rs. 12,059.5 million and Rs. 14,174.5 million for fiscals 2008 and 2009, respectively (our actual net income was Rs. 13,154.2 million and Rs. 15,104.3 million for fiscals 2008 and 2009, respectively).

Notwithstanding our pace of growth, we have maintained a strong balance sheet and a low cost of funds. As of March 31, 2010, net non-performing customer assets (which consist of loans and credit substitutes) constituted 0.3% of net customer assets as per Indian generally accepted accounting principles, or Indian GAAP. In addition, our net customer assets represented 75.7% of our deposits and customer deposits represented 75.3% of our total liabilities and shareholders’ equity. The average non-interest bearing current accounts and low-interest bearing savings accounts represented 48.5% of total deposits for fiscal 2010. These low-cost deposits and the cash float associated with our transactional services, led to an average cost of funds including equity (calculated under Indian GAAP) for fiscal 2010 of 4.0%.

We are part of the HDFC group of companies established by our principal shareholder, Housing Development Finance Corporation Limited (“HDFC Limited”), a listed public limited company established under the laws of India. HDFC Limited is primarily engaged in financial services, including mortgages, property-related lending and deposit services. The subsidiaries and associated companies of HDFC Limited are also largely engaged in a range of financial services, including asset management, life and other insurance. HDFC Limited and its subsidiaries owned 23.7% of our outstanding equity shares as of March 31, 2010. Our Chairman and Managing Director were nominated by HDFC Limited and appointed with the approval of the shareholders and the Reserve Bank of India (“RBI”). Mr. Keki Mistry – Vice Chairman & Chief Executive Officer of HDFC Limited and Mrs. Renu Karnad – Managing Director of HDFC Limited are also members of our Board of Directors. Effective July 16, 2010, Mrs. Renu Karnad retired from the Board of the Bank on completion of her tenure. See also “Principal Shareholders”. We have no agreements with HDFC Limited or any of its group companies that restrict us from competing with them. We currently offer products of HDFC Limited and its group companies, such as home loans of HDFC Limited, life and general insurance products of HDFC Standard Life Insurance Company Limited and HDFC ERGO General Insurance Company Limited respectively and mutual funds of HDFC Asset Management Company Limited.

We had a cash outflow of approximately Rs. 6.5 billion, Rs. 6.9 billion and Rs. 6.0 billion in fiscals 2008, 2009 and 2010, respectively, principally for property, plant and equipment, including our branch network expansion and our technology and communications infrastructure. We have current plans for aggregate capital expenditures of approximately Rs. 5.9 billion in fiscal 2011. This budgeted amount includes Rs. 1.1 billion to expand our branch and back office network, Rs. 1.1 billion to expand our ATM network, Rs. 0.2 billion to expand our Electronic Data Capture terminal network and Rs. 3.5 billion to upgrade and expand our hardware, data center, network and other systems. We may use these budgeted amounts for other purposes depending on, among other factors, the business environment prevailing at the time, consequently our actual capital expenditures may be higher or lower than our budgeted amounts.

 

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The Bank has two subsidiaries: HDFC Securities Limited (“HSL”) and HDB Financial Services Limited (“HDBFS”). HSL is primarily in the business of providing brokerage services through the internet and other channels. HDBFS is a non-deposit taking non-bank finance company (“NBFC”). We have consolidated the accounts of Atlas Documentary Facilitators Company Private Ltd. (“ADFC”), which provides back office transaction processing services, in our U.S. GAAP financial statements.

Our principal corporate and registered office is located at HDFC Bank House, Senapati Bapat Marg, Lower Parel, Mumbai 400 013, India. Our telephone number is 91-22-6652-1000. Our agent in the United States for the 2007 ADS offering is Depositary Management Corporation, 570 Lexington Avenue, 44th Floor, New York, NY 10022 and that for the 2001, 2005 ADS offerings and Patriot Act information gathering is CT Corporation, 111 Eighth Avenue, New York, NY 10011.

Our Competitive Strengths

We attribute our growth and continuing success to the following competitive strengths:

We are a leader among Indian banks in our use of technology

Since our inception, we have made substantial investments in our technology platform and systems. We have built multiple distribution channels, including an electronically linked branch network, automated telephone banking, internet banking and banking through mobile phones, to offer our customers convenient access to our products.

We have templatized credit underwriting through automated customer data de-duplication and real-time scoring in our loan origination process. We have enhanced our cross selling and upselling capabilities through data mining and analytical customer relationship management solutions. Our technology enables us to have a 360 0 view of our customers through entity resolution technology based customer data integration. We employ event detection technology based customer messaging and have deployed an enterprise wide data warehousing solution as a back bone to intelligence enable our enterprise.

We have introduced faster Automated Teller Machines (“ATMs”) by reducing customer clicks by approximately 40% through use of advanced personalization solutions on our ATMs. Implementation of a robust risk management engine for all our internet transactions has reduced phishing and man-in-the-middle attacks significantly since October 2008. Additionally we offer our corporate internet banking customers a robust digital certificates based security engine. Credit and debit cards usage by our customers is secured by powerful proactive risk manager technology solutions which undertake rules-based SMS alerts as well as prompt our customer service representatives to call the customer on detecting abnormal usage behavior to prevent fraud and minimize losses to customers. Sophisticated automated switch-over and switch-back solutions power our disaster recovery management strategy for key core banking solutions in our data center.

Our use of technology has driven the development of innovative product features, reduced our operating costs, enhanced customer service delivery and reduced inherent risks. We have been an early adopter of many of the new technology-based systems, such as: (a) a centralized core banking system; (b) an integrated data warehouse for retail banking; (c) mobile banking; (d) an on-line ATM switch and ATM solution with on-line authorization in the host; (e) an image-based data entry system for account opening; and (f) a digital signature based corporate internet banking solution using Public Key Infrastructure technology for our corporate customers. We believe that early adoption of new technologies has increased our efficiency and effectiveness and reduced turn-around times.

We deliver high quality service with superior execution

Through intensive training of our staff and the use of our technology platform, we deliver efficient service with rapid response time. Our focus on knowledgeable and personalized service draws customers to our products and increases existing customer loyalty.

Many of our operational processes are certified under the International Organization for Standardization (ISO) 9001:2008. This certification requires the underlying processes to be robust, effective and efficient. The ISO certification ensures that: (a) we have a set of procedures that cover key processes; (b) our processes are monitored to ensure effectiveness; (c) adequate records are maintained; and (d) outputs are monitored for any defects so that appropriate and accurate remedial actions can be undertaken.

Some of our operational achievements, which we believe have enabled us to deliver high quality service, include: (i) deposit accounts are processed by our operations team with a turn-around-time of less than two working days; (ii) welcome kits are dispatched to customers within two working days of opening a deposit account; and (iii) internet banking personal identification numbers (PINs) are generated within one working day of a request logged in our systems.

 

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We offer a wide range of products to our clients in order to service their banking needs

Whether in retail or wholesale banking, we consider ourselves a “one-stop shop” for our customers’ banking needs. Our retail banking products range from almost all kinds of retail loans, deposit products and other products and services such as private banking, depositary accounts, foreign exchange services, distribution of third party products such as insurance and mutual funds, bill payments and sale of precious metals such as gold and silver. In addition we offer our customers broking accounts through our subsidiary HDFC Securities Limited. On the wholesale banking side we offer customers working capital loans, term loans, bill collections, letters of credit and guarantees and forex and derivative products. In addition we offer a wide range of deposit and transaction banking services such as cash management, custodial and clearing bank services and correspondent banking. We collect taxes for the government and are bankers to public issues. Our wide range of products creates multiple cross-selling opportunities for us and improves our customer retention rates.

We have an experienced management team

Many of the members of our senior management team have been with us since the inception of the Bank. They have substantial experience in banking across various countries and share our common vision of excellence in execution. We believe this team is well suited to leverage the competitive strengths we have already developed as well as to create new opportunities for our business. See also “Management”.

Our Business Strategy

Our business strategy emphasizes the following elements:

Increase our market share of India’s expanding banking and financial services industry

In addition to benefiting from the overall growth in India’s economy and financial services industry, we believe we can increase our market share by continuing to focus on our competitive strengths. We also aim to increase geographic and market penetration by expanding our branch and ATM networks and increasing our efforts to cross-sell our products.

Maintain strong asset quality through disciplined credit risk management

We have maintained high quality loan and investment portfolios through careful targeting of our customer base, and putting in place what we believe are comprehensive risk assessment processes and diligent risk monitoring and remediation procedures. Our ratio of gross non-performing assets to customer assets was 1.4% as of March 31, 2010 and our net non-performing assets amounted to 0.3% of net customer assets as per Indian GAAP. Additionally, the Bank has restructured the payment terms of certain loans. As of March 31, 2010, these represented 0.3% of our gross customer assets.We believe we can maintain strong asset quality appropriate to the loan portfolio composition, while achieving growth.

Maintain a low cost of funds

As of March 31, 2010, our average cost of funds (including equity) was 4.0% as per Indian GAAP. We believe we can maintain a relatively low-cost funding base as compared to our competitors, by expanding our base of retail savings and current deposits and increasing the free float generated by transaction services, such as cash management and stock exchange clearing.

Focus on high earnings growth with low volatility

Our aggregate earnings have grown at a compounded average rate of 30.1% during the five-year period ending March 31, 2010. We intend to maintain our focus on steady earnings growth through conservative risk management techniques and low-cost funding. In addition, we aim not to rely heavily on revenue derived from trading so as to limit earnings volatility.

 

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Our Principal Business Activities

Our principal business activities consist of retail banking, wholesale banking and treasury operations. The following table sets forth our net revenues attributable to each area for the last three years.

 

     Year ended March 31,  
     2008     2009     2010  
     (in millions, except percentages)  

Retail banking

   Rs. 42,342.8    68.5   Rs. 67,089.8    77.9   Rs. 84,685.7    US$ 1,884.1    80.1 %

Wholesale banking

     18,040.4    29.2     15,151.9    17.6     14,125.6      314.3    13.4 %

Treasury operations

     1,431.4    2.3     3,848.3    4.5     6,825.8      151.9    6.5 %
                                  

Net revenue

   Rs. 61,814.6    100   Rs. 86,090.0    100   Rs. 105,637.1    US$ 2,350.3    100 %
                                  

Retail Banking

Overview

We consider ourselves a one-stop shop for the financial needs of upper and middle income individuals. We provide a comprehensive range of financial products including deposit products, loans, credit cards, debit cards, third-party mutual funds and insurance products, investment advice, bill payment services and other services. Our retail banking loan products include loans to small and medium enterprises for commercial vehicles, construction equipment and other business purposes, which together account for slightly less than a third of our total retail banking loans. We group these loans as part of our retail banking business considering, among other things, the customer profile, the nature of the product, the differing risks and returns, our organization structure and our internal business reporting mechanism. Such grouping ensures optimum utilization and deployment of specialized resources in our retail banking business.

We market our services aggressively through our branches and alternate sales channels, as well as through our relationships with automobile dealers and corporate clients. We seek to establish a relationship with a retail customer and then expand it by offering more products. As part of our growth strategy we continue to expand our distribution channels so as to make it easier for the customer to do business with us. We believe this strategy, together with the general growth of the Indian economy and the Indian upper and middle classes, affords us significant opportunities for growth.

As of March 31, 2010, we had 1,725 branches, including 9 extension counters, and 4,232 ATMs in 779 cities. We also provide telephone banking in 778 cities as well as internet and mobile banking. We plan to continue to expand our branch and ATM network as well as our other distribution channels, subject to receiving regulatory approvals.

Retail Loans and Other Asset Products

We offer a wide range of retail loans, including loans for the purchase of automobiles, personal loans, retail business banking loans, loans for the purchase of commercial vehicles and construction equipment finance, two-wheeler loans, credit cards, and loans against securities. Our retail loans were 55.5% of our gross loans as of March 31, 2010. Apart from our branches, we use our ATM screens and the internet to promote our loan products and we employ additional sales methods depending on the type of products. We perform our own credit analyses of the borrowers and the value of the collateral. See “—Risk Management—Credit Risk—Retail Credit Risk.” We also buy mortgage and other asset-backed securities and invest in retail loan portfolios through assignments. In addition to taking collateral in many cases, we generally obtain post-dated checks covering all payments at the time a retail loan is made. It is a criminal offense in India to issue a bad check. We also sometimes obtain instructions to debit the customer’s account directly for the making of payments. However, unsecured personal loans are still a greater credit risk for us than our secured loan portfolio because they are not supported by any collateral. We may be unable to collect in part or at all on an unsecured personal loan in the event of non-payment by the borrower. Accordingly, personal loans are granted at a higher loan yield since they carry a higher credit risk as compared to secured loans. Also see “Risk Factors—Our unsecured personal loan portfolio is not supported by any collateral that could help ensure repayment of the loan, and in the event of non-payment by a borrower of one of these loans, we may be unable to collect the unpaid balance.

 

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The following table shows the value and share of our retail credit products:

 

     At March 31, 2010 Value    % of Total
Value
 
     (in millions)       

Retail Loans:

        

Auto loans

   Rs. 197,507.7    US$ 4,393.9    26.7 %

Personal loans

     90,955.0      2,023.5    12.3   

Retail business banking

     144,733.7      3,219.9    19.6   

Commercial vehicles and construction equipment finance

     94,205.1      2,095.8    12.7   

Two wheeler loans

     18,180.1      404.5    2.5   

Credit cards

     38,458.1      855.6    5.2   

Loans against securities

     9,071.6      201.8    1.2   

Housing loans

     87,887.0      1,955.2    11.9   

Other retail loans

     51,985.9      1,156.5    7.0   
                    

Total retail loans

     732,984.2      16,306.7    99.1   

Mortgage-backed securities

     6,226.3      138.5    0.8   

Asset-backed securities

     682.2      15.2    0.1   
                    

Total retail assets

   Rs. 739,892.7    US$ 16,460.4    100.0 %
                    

 

Note: The figures above exclude securitized-out receivables. Mortgaged-backed securities and asset-backed securities are reflected at fair values.

Auto Loans

We offer loans at fixed interest rates for financing new and used automobile purchases. In addition to our general marketing efforts for retail loans, we market this product through our relationships with car dealers, direct sales agents, corporate packages and joint promotion programs with automobile manufacturers.

Personal Loans

We offer unsecured personal loans at fixed rates to specific customer segments, including salaried individuals and self-employed professionals. In addition, we offer unsecured personal loans to small businesses and individual businessmen.

Retail Business Banking

We address the borrowing needs of the community of small businessmen primarily located near our bank branches by offering facilities such as credit lines, term loans for expansion or addition of facilities and discounting of receivables. We classify these business banking loans as a retail product. Such lending is typically secured with current assets as well as immovable property and fixed assets in some cases. We also offer letters of credit, guarantees and other basic trade finance products, foreign exchange and cash management services to such businesses.

Commercial Vehicles and Construction Equipment Finance

We provide secured financing for commercial vehicles and provide working capital, bank guarantees and trade advances to transport operators. In addition to funding domestic assets, we also finance imported assets for which we open foreign letters of credit and offer treasury services, such as forward exchange covers. We coordinate with manufacturers to jointly promote our financing options to their clients.

Two-Wheeler Loans

We offer loans for financing the purchase of scooters and motorcycles. We market this product in ways similar to our marketing of auto loans.

Credit Cards

We offer credit cards from the VISA and MasterCard stable, including gold, silver, corporate, platinum, titanium, signature, infinite and world credit cards. We had approximately 4.5 million cards outstanding as of March 31, 2010, as against 4.4 million as of March 31, 2009.

 

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Loans Against Securities

We offer loans against equity shares, mutual fund units, bonds issued by the RBI and other securities that are on our approved list. We limit our loans against equity shares to Rs. 2.0 million per retail customer in line with regulatory guidelines and limit the amount of our total exposure secured by particular securities. We lend only against shares in book-entry (dematerialized) form, which ensures that we obtain perfected and first-priority security interests. The minimum margin for lending against shares is prescribed by the RBI.

Other Retail Loans

Such loans primarily include overdrafts against time deposits, health care equipment financing loans, tractor loans, loans against gold and ornaments, loans to self-help groups and small loans to farmers.

Mortgage-backed Securities and Housing Loans

In fiscal 2003, we entered the home loan business through an arrangement with HDFC Limited. Under this arrangement, we sell home loans provided by HDFC Limited, which approves the credit sanctioning and disburses the loans. The loans are kept on the books of HDFC Limited, and we are paid a sourcing fee. Under the arrangement, HDFC Limited is obligated to offer us up to 70% of the disbursed home loans sourced under the arrangement through the issue of mortgage-backed pass-through certificates (“PTCs”) or through the loan assignment route. We have the option to purchase the mortgage-backed PTCs or the underlying loans at the underlying home loan yields less a spread of 1.25% payable towards the administration and servicing of the loans. A part of the home loans may also qualify for our directed lending requirement.

We also invest in mortgage-backed securities of other originators. These mortgages are generally in India. Most of these securities also qualify towards our directed lending obligations.

After the merger of CBoP with HDFC Bank, the CBoP portfolio of home loans was transferred to HDFC Bank’s loan book.

Asset-backed Securities

We invest in auto loans, two-wheeler loans, commercial vehicle loans and other asset-backed securities, represented by PTCs. These securities are normally credit-enhanced and may qualify for our directed lending requirements. These assets are generally in India.

Loan Assignments

We purchase loan portfolios, generally in India, from other banks, financial institutions and financial companies, which are similar to asset-backed securities, except that such loans are not represented by PTCs. Some of these loans also qualify toward our directed lending obligations. Such loans are included within the categories described above based on underlying exposures.

Sale/Transfer of Receivables

We securitize our retail loan receivables through independent special purpose vehicles (“SPVs”) from time to time. In respect of these transactions, we provide credit enhancements generally in the form of cash collateral/guarantees/interest spreads and/or by subordination of cash flows to senior PTCs. We also enter into sale transactions, which are similar to asset-backed securitization transactions through the SPV structure, except that such portfolios of retail loan receivables are assigned directly to the purchaser and are not represented by PTCs. During fiscal 2009, we sold performing retail loans with carrying values of Rs. 22.2 billion. In fiscal 2010 we did not sell any performing loans.

 

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Retail Deposit Products

Retail deposits provide us with a low cost, stable funding base and have been a key focus area for us since commencing operations. Retail deposits represented 67.1% of our total deposits as of March 31, 2010 as per Indian GAAP. The following chart shows the number of accounts and value of our retail deposits by our various deposit products:

 

     At March 31, 2010  
     Value (in millions)    % of total     Number of accounts
(in thousands)
   % of total  

Savings

   Rs. 479,483.4    US$ 10,667.1    42.8 %   11,126    76.3 %

Current

     180,781.5      4,021.8    16.1      815    5.6 %

Time

     461,550.5      10,268.1    41.1      2,641    18.1 %
                               

Total

   Rs. 1,121,815.4    US$ 24,957.0    100.0 %   14,582    100 %
                               

Our individual retail account holders have access to the benefits of a wide range of direct banking services, including debit and ATM cards, access to our growing branch and ATM network, access to our other distribution channels and eligibility for utility bill payments and other services. Our retail deposit products include the following:

 

   

Savings accounts, which are demand deposits in checking accounts designed primarily for individuals and trusts. These accrue interest at a fixed rate set by the RBI (currently 3.5% per annum calculated on the daily average balances in the account with effect from April 01, 2010); see also “Supervision and Regulation”.

 

   

Current accounts, which are non-interest bearing checking accounts designed primarily for business customers. Customers have a choice of regular and premium product offerings with different minimum average quarterly account balance requirements.

 

   

Time deposits, which pay a fixed return over a predetermined time period.

We also offer special value-added accounts, which offer our customers added value and convenience. These include a time deposit account that allows for automatic transfers from a time deposit account to a savings account, as well as a time deposit account with an automatic overdraft facility.

Other Retail Services and Products

Debit Cards

Our debit cards may be used with more than 450,000 merchant point-of-sale machines and over 50,000 ATMs in India and more than 27 million merchant outlets and 1.6 million ATMs worldwide. We were the first in India to issue international Visa Electron debit cards on a nationwide basis and currently issue both Visa and MasterCard debit cards.

Individual Depositary Accounts

We provide depositary accounts to individual retail customers for holding debt and equity instruments. Securities traded on the Indian exchanges are generally not held through a broker’s account or in a street name. Instead, an individual has his own account with a depositary participant. Depositary participants, including us, provide services through the major depositaries established by the two major stock exchanges. Depositary participants record ownership details and effectuate transfers in book-entry form on behalf of the buyers and sellers of securities. We provide a complete package of services, including account opening, registration of transfers and other transactions and information reporting.

Mutual Fund Sales

We offer our retail customers units in most of the large and reputable mutual funds in India. In some cases we earn front-end commissions for new sales and additional fees in subsequent years. We distribute mutual fund products primarily through our branches and our private banking advisors.

Insurance

As of March 31, 2010, we had arrangements with HDFC Standard Life Insurance Company and HDFC ERGO General Insurance Company Limited to distribute their life insurance products and general insurance products respectively to our customers. We earn upfront commissions on new premiums collected as well as some trailing income in subsequent years while the policy is still in force.

 

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Precious Metals

We import gold and silver bars for sale to our retail customers through our branch network.

Investment Advice

We offer our customers a broad range of investment advice, including advice regarding the purchase of Indian debt, equity shares, and mutual funds. We provide our high net worth private banking customers with a personal investment advisor who can consult with them on their individual investment needs.

Bill Payment Services

We offer our customers utility bill payment services for leading utility companies, including electricity, telephone, and internet service providers. Customers can also review and access their bill details through our direct banking channels. We believe this is a valuable convenience that we offer our customers. We offer these services to customers through multiple distribution channels—ATMs, telephone banking, internet banking and mobile telephone banking.

Corporate Salary Accounts

We offer Corporate Salary Accounts, which allow employers to make salary payments to a group of employees with a single transfer. We then transfer the funds into the employees’ individual accounts and offer them preferred services, such as preferential loan rates, and in some cases lower minimum balance requirements. As of March 31, 2010, these accounts constituted approximately 47.7% of our total retail savings accounts by number and approximately 31.6% of our retail savings deposits by value.

Non-Resident Indian Services

Non-resident Indians are an important target market segment for us given their relative affluence and strong ties with family members in India. Our non-resident deposits amounted to Rs. 100.1 billion as of March 31, 2010.

Retail Foreign Exchange

We purchase foreign currency from and sell foreign currency to retail customers in the form of cash, traveler’s checks, demand drafts, foreign exchange cards and other remittances, including services offered in partnership with third parties, such as Western Union. We also carry out foreign currency check collections.

Customers and Marketing

Our target market for our retail services is comprised of upper and middle income individuals and high net worth customers. We also target small businesses, trusts and non-profit corporations. As of March 31, 2010, 10% of our retail deposit customers contributed approximately 35% of our retail deposits. We market our products through our branches, telemarketing and a dedicated sales staff for niche market segments. We also use third-party agents and direct sales associates to market certain products and to identify prospective new customers.

Additionally, we obtain new customers through joint marketing efforts with our wholesale banking department, such as our Corporate Salary Account package. We cross-sell many of our retail products to our customers. We also market our auto loan and two-wheeler loan products through joint efforts with relevant manufacturers and distributors.

We have programs that target other particular segments of the retail market. For example, our private and preferred banking programs provide customized financial planning to high net worth individuals in order to preserve and enhance their wealth. Private banking customers receive a personal investment advisor who serves as their single-point contact and compiles personalized portfolio tracking products, including mutual fund and equity tracking statements. Our private banking program also offers equity investment advisory products. While not as service-intensive as our private banking program, preferred banking offers similar services to a slightly broader target segment. Top revenue-generating customers of our preferred banking program are channeled into our private banking program.

 

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Wholesale Banking

Overview

We provide our corporate and institutional clients a wide array of commercial banking products and transactional services with an emphasis on high quality customer service and relationship management.

Our principal commercial banking products include a range of financing products, documentary credits (primarily letters of credit) and bank guarantees, foreign exchange and derivative products and corporate deposit products. Our financing products include loans, overdrafts, bill discounting and credit substitutes, such as commercial papers, debentures, preference shares and other funded products. Our foreign exchange and derivatives products assist corporations in managing their currency and interest rate exposures.

For our commercial banking products, our customers include companies that are part of private sector business houses, public sector enterprises and multinational corporations, as well as small and mid-sized businesses. Our customers also include suppliers and distributors of corporations to whom we provide credit facilities and with whom we thereby establish relationships as part of a supply chain initiative for both our commercial banking products and transactional services. We aim to provide our corporate customers with high quality customized service. We have relationship managers who focus on particular clients and who work with teams that specialize in providing specific products and services, such as cash management and treasury advisory services.

Loans to small and medium enterprises, which are generally in the nature of loans for commercial vehicles, construction equipment and business purposes, are included as part of our retail banking business. We group these loans as part of our retail banking business considering, among other things, the customer profile, the nature of the product, the differing risks and returns, our organization structure and our internal business reporting mechanism. Such grouping ensures optimum utilization and deployment of specialized resources in our retail banking business.

Our principal transactional services include cash management services, capital markets transactional services and correspondent banking services. We provide physical and electronic payment and collection mechanisms to a range of corporations, financial institutions and government entities. Our capital markets transactional services include custodial services for mutual funds and clearing bank services for the major Indian stock exchanges and commodity exchanges. In addition, we provide correspondent banking services, including cash management services and funds transfers, to foreign banks and cooperative banks.

Commercial Banking Products

Commercial Loan Products and Credit Substitutes

Our principal financing products are working capital facilities and term loans. Working capital facilities primarily consist of cash credit facilities and bill discounting. Cash credit facilities are revolving credits provided to our customers that are secured by working capital such as inventory and accounts receivable. Bill discounting consists of short-term loans which are secured by bills of exchange that have been accepted by our customers or drawn on another bank. In many cases, we provide a package of working capital financing that may consist of loans and a cash credit facility as well as documentary credits or bank guarantees. Term loans consist of short- and medium-term loans which are typically loans of up to five years in duration. More than 90% of our loans are denominated in rupees with the balance being denominated in various foreign currencies, principally the U.S. dollar.

We also purchase credit substitutes, which are typically comprised of commercial paper, debentures and preference shares issued by the same customers with whom we have a lending relationship in our wholesale banking business. Investment decisions for credit substitute securities are subject to the same credit approval processes as loans, and we bear the same customer risk as we do for loans extended to these customers. Additionally, the yield and maturity terms are generally directly negotiated by us with the issuer. Our credit substitutes have declined over the last three years primarily due to our customers’ increased preference for loans which may have resulted from regulations that require the listing and rating of corporate paper.

 

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The following table sets forth the asset allocation of our commercial loans and financing products by asset type. For accounting purposes, we classify cash credit facilities and bill discounting as working capital loans, and commercial paper, debentures and preference shares as credit substitutes (which in turn are classified as investments).

 

     As of March 31,
     2008    2009    2010    2010
     (in millions)

Gross commercial loans:

           

Working capital

   Rs. 118,766.9    Rs. 154,054.9    Rs. 228,276.2    US$ 5,078.4

Term loans

     168,002.0      236,597.1      359,680.6      8,001.8
                           

Total commercial loans

   Rs. 286,768.9    Rs. 390,652.0    Rs. 587,956.8    US$ 13,080.2
                           

Credit substitutes:

           

Commercial paper

   Rs. 349.8    Rs. 961.1    Rs. 197.1    US$ 4.4

Non-convertible debentures

     4,645.0      3,262.1      2,279.2      50.7

Preference shares

     52.1      29.1      —        —  
                           

Total credit substitutes

   Rs. 5,046.9    Rs. 4,252.3    Rs. 2,476.3    US$ 55.1
                           

Customer assets

   Rs. 291,815.8    Rs. 394,904.3    Rs. 590,433.1    US$ 13,135.3
                           

While we generally lend on a cash-flow basis, we also require collateral from a large number of our borrowers. As of March 31, 2010, approximately 67.8% of the aggregate principal amount of our gross wholesale loans was secured by collateral (approximately Rs. 189.3 billion in aggregate principal amount of loans were unsecured). However, collateral securing each individual loan may not be adequate in relation to the value of the loan. All borrowers must meet our internal credit assessment procedures, regardless of whether the loan is secured. See “—Risk Management—Credit Risk—Wholesale Credit Risk.”

We price our loans based on a combination of our own cost of funds, market rates, our rating of the customer and the overall revenues from the customer. An individual loan is priced on a fixed or floating rate based on a margin that depends on the credit assessment of the borrower.

The RBI requires banks to lend to specific sectors of the economy. For a detailed discussion of these requirements, see “Supervision and Regulation—Regulations Relating to Making Loans—Directed Lending.”

Bill Collection, Documentary Credits and Bank Guarantees

We provide bill collection, documentary credit facilities and bank guarantees for our corporate customers. Documentary credits and bank guarantees are typically provided on a revolving basis. The following table sets forth, for the periods indicated, the value of transactions processed with respect to our bill collection, documentary credits and bank guarantees:

 

     As of March 31,
     2008    2009    2010    2010
     (in millions)

Bill collection

   Rs. 526,461.8    Rs. 971,231.8    Rs. 1,876,968.0    US$ 41,756.8

Documentary credits

     194,879.8      357,541.3      319,658.0      7,111.4

Bank guarantees

     42,578.8      65,200.6      88,439.1      1,967.5
                           

Total

   Rs. 763,920.4    Rs. 1,393,973.7    Rs. 2,285,065.1    US$ 50,835.7
                           

Bill collection. We provide bill collection services for our corporate clients in which we collect bills on behalf of a corporate client from the bank of our client’s customer. We do not advance funds to our client until receipt of payment.

Documentary credits. We issue documentary credit facilities on behalf of our customers for trade financing, sourcing of raw materials and capital equipment purchases.

Bank guarantees. We provide bank guarantees on behalf of our customers to guarantee their payment or performance obligations. A large part of our guarantee portfolio consists of margin guarantees to brokers issued in favor of stock exchanges.

 

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Foreign Exchange and Derivatives

Our foreign exchange and derivative product offering to our customers covers a range of products, including foreign exchange and interest rate transactions and hedging solutions, such as spot and forward foreign exchange contracts, forward rate agreements, currency swaps, currency options, and interest rate derivatives. These transactions enable our customers to transfer, modify or reduce their foreign exchange and interest rate risks. A specified group of relationship managers from our Treasury front office works on such product offerings jointly with the relationship managers from Wholesale Banking.

Forward exchange contracts are commitments to buy or sell foreign currency at a future date at the contracted rate. A currency option is a contract where the purchaser of the option has the right but not the obligation to either purchase or sell and the seller of the option agrees to sell or purchase an agreed amount of a specified currency at a price agreed in advance and denominated in another currency on a specified date or by an agreed date in the future. A forward rate agreement is a financial contract between two parties to exchange interest payments for a ‘notional principal’ amount on the settlement date, for a specified period from the start date to the maturity date. Currency swaps are commitments to exchange cash flows by way of interest in one currency against another currency and exchange of principal amounts at maturity based on predetermined rates. Rupee interest rate swaps are commitments to exchange fixed and floating rate cash flows in rupees.

The following table presents the aggregate notional principal amounts of our outstanding foreign exchange and derivative contracts with our customers as of March 31, 2008, 2009 and 2010, together with the fair values on each reporting date:

 

    As of March 31,
    2008   2009   2010   2010
    Notional   Fair Value   Notional   Fair Value   Notional   Fair Value   Notional   Fair Value
    (In millions)

Interest rate swaps and forward rate agreements

  Rs. 562,077.2   Rs. 201.9   Rs. 135,612.0   Rs. (3,059.6)   Rs. 191,878.3   Rs. (1,462.7)   US$4,268.7   US$(32.5)

Forward exchange contracts, currency swaps, currency options and interest rate caps and floors

  Rs. 349,785.6   Rs. (1,266.9)   Rs. 354,385.6   Rs. 20,657.0   Rs. 420,632.2   Rs. 1,565.9   US$9,357.8   US$34.8

Investment banking

We have recently launched investment banking services. We currently focus on providing debt and loan syndication as well as private placements as an added offering for our wholesale banking customers.

Precious Metals

We are in the business of importing gold and silver bullion to leverage our distribution and servicing strengths and cater to the domestic bullion trader segment. We generally import bullion on a consignment basis so as to minimize price risk.

Wholesale Deposit Products

As of March 31, 2010, we had wholesale deposits totaling Rs. 550.6 billion, which represented 32.9% of our total deposits and 22.8% of our total liabilities, including shareholders’ equity. We offer both non-interest bearing current accounts and time deposits. We are allowed to vary the interest rates on our wholesale deposits based on the size of the deposit (for deposits greater than Rs. 1.5 million) so long as the rates booked on a day are the same for all customers of that deposit size for that maturity. See “Selected Statistical Information” for further information about our total deposits.

Transactional Services

Cash Management Services

We provide cash management services in India. We were among the top three banks in India with respect to managing National Electronic Funds Transfer (NEFT) and Real Time Gross Settlement (RTGS) payments based on statistics published by RBI. We received the Asset Triple A Award for The Best Cash Management Bank in India during the fiscal year ended March 2010. Our services make it easier for our corporate customers to expedite inter-city check collections, make payments to their suppliers more efficiently, optimize liquidity and reduce interest costs. In addition to benefiting from the cash float, which reduces our overall cost of funds, we may also earn commissions for these services.

 

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Our primary cash management service is check collection and payment. Through our electronically linked branch network, correspondent bank arrangements and centralized processing, we can effectively provide nationwide collection and disbursement systems for our corporate clients. This is especially important because there is no nationwide payment system in India, and checks must generally be returned to the city from which written, in order to be cleared. Because of mail delivery delays and the variations in city-based inter-bank clearing practices, check collections can be slow and unpredictable, and can lead to uncertainty and inefficiencies in cash management. We believe we have a strong position in this area relative to most other participants in this market. Although the public sector banks have extensive branch networks, many of their branches typically are still not electronically linked. The foreign banks are restricted in their ability to expand their branch network.

As of March 31, 2010, over 4,000 wholesale banking clients used our cash management services. These clients include leading Indian private sector companies, public sector undertakings and multinational companies. We also provide these services to most Indian insurance companies, many mutual funds, brokers, financial institutions and various government entities.

We have also implemented a straight-through processing solution to link our wholesale banking and retail banking systems. This has led to reduced manual intervention in transferring funds between the corporate accounts which are in the wholesale banking system and beneficiary accounts residing in retail banking systems. This initiative will help reduce transaction costs.We have a large number of commercial clients using our corporate Internet banking for financial transactions with their vendors, dealers and employees who bank with us.

In 2005, the RBI introduced an inter-bank settlement system called the Real Time Gross Settlement (“RTGS”) system. The RTGS system facilitates real time settlements primarily between banks and therefore could have an adverse impact on our cash management services. However, we believe our cash management services offer certain advantages not present in RTGS, including the provision of greater information to our clients regarding the source and identity of payments. In addition, through our cash management services our clients receive checks from their customers, which we believe many of our clients prefer because the issuance of a bad check is a criminal offense in India. See “Risk Factors—Risks Relating to Our Business—We could be adversely affected by the development of a nationwide inter-bank settlement system.”

Clearing Bank Services for Stock and Commodity Exchanges

We serve as a cash-clearing bank for major stock and commodity exchanges in India, including the National Stock Exchange of India Limited (“National Stock Exchange”) and the Bombay Stock Exchange Limited. As a clearing bank, we provide the exchanges or their clearing corporations with a means for collecting cash payments due to them from their members or custodians and a means of making payments to these institutions. We make payments once the broker or custodian deposits the funds with us. In addition to benefiting from the cash float, which reduces our cost of funds, in certain cases we also earn commissions on such services.

Custodial Services

We provide custodial services principally to Indian mutual funds, as well as to domestic and international financial institutions. These services include safekeeping of securities and collection of dividend and interest payments on securities. Most of the securities under our custody are in book-entry (dematerialized) form, although we provide custody for securities in physical form as well for our wholesale banking clients. We earn revenue from these services based on the value of assets under safekeeping and the value of transactions handled.

Correspondent Banking Services

We act as a correspondent bank for cooperative banks, cooperative societies and foreign banks. We provide cash management services, funds transfers and services, such as letters of credit, foreign exchange transactions and foreign check collection. We earn revenue on a fee-for-service basis and benefit from the cash float, which reduces our cost of funds.

We are well positioned to offer this service to cooperative banks and foreign banks in light of the structure of the Indian banking industry and our position within it. Cooperative banks are generally restricted to a particular state, and foreign banks have limited branch networks. The customers of these banks frequently need services in other areas of the country that their own banks cannot provide. Because of our technology platforms, geographical reach and the electronic connectivity of our branch network, we can provide these banks with the ability to provide such services to their customers. By contrast, although the public sector banks have extensive branch networks and also provide correspondent banking services, many of them have not yet created electronically connected networks and their branches typically operate independently of one another.

 

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Tax Collections

We were the first private sector bank to be appointed by the government of India to collect direct taxes. In fiscal 2009 and fiscal 2010, we collected more than Rs. 700 billion and Rs. 800 billion, respectively, of direct taxes for the government of India. We are also appointed to collect sales, excise and service tax within certain jurisdictions in India. In fiscal 2009 and fiscal 2010, we collected over Rs. 160 billion and Rs. 200 billion, respectively, of such indirect taxes for the government of India and relevant state governments. We earn a fee from each tax collection and benefit from the cash float. We hope to expand our range of transactional services by providing more services to government entities.

Treasury

Our Treasury Group manages our balance sheet, including our maintenance of reserve requirements and the management of market and liquidity risk. Our Treasury Group also provides advice and execution services to our corporate and institutional customers with respect to their foreign exchange and derivatives transactions. In addition, our Treasury Group seeks to optimize profits from our proprietary trading, which is principally concentrated on Indian government securities.

Our client-based activities consist primarily of advising corporate and institutional customers and transacting spot and forward foreign exchange contracts and derivatives. Our primary customers are multinational corporations, large and medium sized domestic corporations, financial institutions, banks and public sector undertakings. We also advise and enter into foreign exchange contracts with some small companies and non-resident Indians.

The following describes our activities in the foreign exchange and derivatives markets, domestic money markets and debt securities desk and equities market. See also “—Risk Management” for a discussion of our management of market risk including liquidity risk, interest rate risk and foreign exchange risk.

Foreign Exchange and Derivatives

We enter into forward exchange contracts, currency options, forward rate agreements, currency swaps and rupee interest rate swaps with inter-bank participants, similar to our Wholesale Banking business, where we enter into such transactions with our customers. To support our clients’ activities, we are an active participant in the Indian inter-bank foreign exchange market. We also trade, to a more limited extent, for our own account. We also engage in proprietary trades of rupee-based interest rate swaps and use them as part of our asset liability management. Forward exchange contracts are commitments to buy or sell foreign currency at a future date at the contracted rate. A currency option is a contract where the purchaser of the option has the right but not the obligation to either purchase or sell and the seller of the option agrees to sell or purchase an agreed amount of a specified currency at a price agreed in advance and denominated in another currency on a specified date or by an agreed date in the future. A forward rate agreement is a financial contract between two parties to exchange interest payments for a ‘notional principal’ amount on the settlement date, for a specified period from the start date to the maturity date. Currency swaps are commitments to exchange cash flows by way of interest in one currency against another currency and exchange of principal amount at maturity based on predetermined rates. Rupee interest rate swaps are commitments to exchange fixed and floating rate cash flows in rupees.

The following table presents the aggregate notional principal amounts of our outstanding foreign exchange and derivative inter-bank contracts as of March 31, 2008, 2009 and 2010, together with the fair values on each reporting date:

 

    As of March 31,
    2008   2009   2010   2010
    Notional   Fair Value   Notional   Fair Value   Notional   Fair Value   Notional   Fair Value
    (In millions)

Interest rate swaps and forward rate agreements

  Rs. 3,009,854.9   Rs. (1,241.4)   Rs. 1,241,193.2   Rs. 791.0   Rs. 1,830,447.4   Rs. (98.0)   US$40,721.9   US$(2.2)

Forward exchange contracts, currency swaps, currency options and interest rate caps and floors

  Rs. 1,752,656.1   Rs. 4,535.0   Rs. 2,141,088.9   Rs. (11,876.2)   Rs. 2,260,135.8   Rs. 2,597.9   US$50,281.1   US$57.8

 

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Domestic Money Market and Debt Securities Desk

Our principal activity in the domestic money market and debt securities market is to ensure that we comply with our reserve requirements. These consist of a cash reserve ratio, which we meet by maintaining balances with the RBI, and a statutory liquidity ratio, which we meet by purchasing Indian government securities. See also “Supervision and Regulation—Legal Reserve Requirements.” Our local currency desk primarily trades Indian government securities for our own account. We also participate in the inter-bank call deposit market and engage in limited trading of other debt instruments.

Equities Market

We trade a limited amount of equities of Indian companies for our own account. As of March 31, 2010, we had an internal approved limit of Rs. 400 million for secondary market purchases and Rs. 100 million for primary purchases of equity investments for proprietary trading and our exposure as of March 31, 2010 was within the said limits. We set limits on the amount invested in any individual company as well as stop-loss limits.

Distribution Channels

We deliver our products and services through a variety of distribution channels, including branches, ATMs, telephone and mobile telephone banking and internet banking.

Branches

As of March 31, 2010, we had an aggregate of 1,725 branches, including 9 extension counters. Our branch network covers 779 cities. All of our branches are electronically linked so that our customers can access their accounts from any branch regardless of where they have their accounts.

Almost all of our branches focus exclusively on providing retail services and products, though a few also provide wholesale banking services. The range of products and services available at each branch depends in part on the size and location of the branch. Our extension counters typically are small offices, primarily within office buildings, that provide specific commercial and retail banking services.

As part of its branch licensing conditions, the RBI requires that at least 25% of our branches (not including extension counters) be located in semi-urban or rural areas. A semi-urban area is defined as a center with a population of greater than 10,000 but less than 100,000 people. A rural area is defined as a center with a population of less than 10,000 people. These population figures relate to the 2001 census conducted by the government of India. As of March 31, 2010, 584 of our branches (not including extension counters) were in such semi-urban or rural areas. Recently the RBI has given a general permission to Scheduled Commercial Banks to open branches in locations having a population lower than 50,000 and in the case of the north eastern states of India including the state of Sikkim without having the need to obtain prior approvals. The banks are directed to report full details of the branches opened in terms of the above general permission. We offer various banking services to our customers through our arrangements with correspondent banks and exchange houses in overseas locations.

We have representative offices in the United Arab Emirates and Kenya and have a wholesale banking branch in Bahrain which commenced operations in September 2008. Through this branch we provide services to Indian corporates and their affiliates to cater to their international banking requirements.

Automated Teller Machines

As of March 31, 2010, we had a total of 4,232 ATMs, of which 2,311 were located at our branches or extension counters and 1,921 were located off site, including at large residential developments, or on major roads in metropolitan areas.

Customers can use our ATMs for a variety of functions, including withdrawing cash, monitoring bank balances, depositing cash / cheques and paying utility bills. Customers can access their accounts from any of the HDFC Bank ATMs or Non-HDFC Bank ATMs. ATM cards issued by other banks in the Plus, Cirrus and Amex networks can be used in our ATMs and we receive a fee for each transaction. Our Debit Cards can be used on ATMs of other banks while our ATM cards can be used on most of the ATM networks (other than Visa and Mastercard).

 

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Telephone Banking

We provide telephone banking services to our customers in 778 cities. Customers can access their accounts over the phone through our 24-hour automated voice response system and can order check books, conduct balance inquiries and order stop payments on checks. In select cities, customers can also engage in financial transactions (such as cash transfers, opening deposits and ordering demand drafts). In certain cities, we also have staff available during select hours to assist customers who want to speak directly to one of our telephone bankers.

Mobile Telephone Banking

Using our mobile banking platform, customers can perform enquiry based non-financial transactions such as balance enquiries, requests for account statements and requests for mini statements of their transactions etc. We offer our customers the ability to carry out financial transactions from their mobile phone using “ ngpay.” Customers can carry out financial transactions, such as transferring funds within and outside the Bank and mobile commerce using their HDFC Bank account by downloading this application on their mobile phone.

Internet Banking

Through our “net banking” channel, customers can access account information, track transactions, order check books, request stop check payments, transfer funds between accounts and to third parties who maintain accounts with us, open fixed deposits, give instructions for the purchase and sale of units in mutual funds, pay bills, and make demand draft requests. We encourage use of our internet banking service by offering some key services for free or at a lower cost.

Risk Management

Risk is inherent in our business and sound risk management is critical to our success. The major types of risk we face are credit risk, market risk, liquidity risk and operational risk. We have developed and implemented comprehensive policies and procedures to identify, assess, monitor and manage risk throughout the Bank.

Credit Risk

Credit risk is the possibility of loss due to the failure of any counterparty to abide by the terms and conditions of any financial contract with us. We identify and manage this risk through (a) our target market definitions, (b) our credit approval process, (c) our post-disbursement monitoring, and (d) our remedial management procedures.

Wholesale Credit Risk

The Wholesale Credit Risk team, within the Credit and Market Risk Department, is primarily responsible for implementing the credit risk strategy approved by the Board, developing procedures and systems for managing credit risk, carrying out an independent assessment of credit risk, approving individual credit exposures and ensuring portfolio composition and quality. In addition to the credit approval process, there is also a framework for the review and approval of credit ratings.

For our wholesale banking products, we seek to target the leaders in each of the segments that we operate in. Thus, we target leading private businesses and public sector enterprises in the country, subsidiaries of multinational corporations and leaders in the Small and Medium Enterprises (SME) segment. We also have product specific offerings for entities engaged in the capital markets and commodities businesses.

We consider credit risk of a counter-party comprehensively, and thus, our credit policies and procedures apply to not only credit exposures but also credit substitutes and contingent exposures. The Bank’s Credit Policies & Procedure Manual and Credit Programs, (“Credit Policies”) are central in controlling credit risk in various activities and products. These articulate the credit risk strategy of the Bank and thereby the approach for credit origination, approval and maintenance. The Credit Policies generally address such areas as target markets, portfolio mix, prudential exposure ceilings, concentration limits, price and non-price terms, structure of limits, approval authorities, exception reporting system, prudential accounting and provisioning norms.

Each credit is evaluated by the business units against the credit standards prescribed in the Credit Policies of the Bank. They are then subjected to a greater degree of risk analysis based on product type and customer profile by credit risk specialists in the Credit and Market Risk Department.

 

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The Bank has in place a process of grading each borrower according to its financial health and the performance of its business, and each borrower is assigned a rating on a scale of 1 to 10 (1 indicating the best and 10 the worst). We have specific models applicable to each significant segment of wholesale credit (e.g. large corporate, SME – manufacturing, SME – Services, and NBFC). Each model assesses the overall risk over four major categories – industry risk, business risk, management risk and financial risk. The inputs in each of the categories are combined to provide an aggregate numerical rating, which is a function of the aggregate weighted scores based on the assessment under each of these four risk categories.

Based on what we believe is an adequately comprehensive risk assessment, credit exposure limits are set on individual counterparties. These limits take into account the overall potential exposure on the counterparty, be it on balance sheet or off balance sheet, across the banking book and the trading book, including foreign exchange and derivatives exposures. These are reviewed in detail at annual or more frequent intervals.

We do not extend credit on the judgment of one officer alone. The credit approval process at the Bank is based on a three approval system that combines credit approval authorities and discretionary powers. The required three approvals are provided by Credit Approvers who derive their authority from their credit skills and experience. The level for approval of a credit varies depending upon the grading of the borrower, the quantum of facilities required and whether we have been dealing with the customer by providing him credit facilities in the past. Thus, initial approvals would typically require a higher level of approval for a borrower with the same grading and for sanctioning the same facility.

To ensure adequate diversification of risk, concentration limits have been set up in terms of:

a) Borrower / business group—Exposure to a borrower/business group is subject to the general ceilings established by the RBI from time to time, or specific approval by RBI. The exposure-ceiling limit for a single borrower is 15 percent of the Bank’s capital funds. This limit may be exceeded by an additional 5 percent (i.e. up to 20 percent) provided the additional credit exposure is on account of lending to infrastructure projects. The exposure-ceiling limit in the case of a borrower group is 40 percent of the Bank’s capital funds. This limit may be exceeded by an additional 10 percent (i.e. up to 50 percent) provided the additional credit exposure is on account of extensions of credit for infrastructure projects. In addition to the above exposure limit, the Bank may, in exceptional circumstances, with the approval of its Board, consider increasing its exposure to a borrower up to an additional 5 percent of its capital funds. For certain blue chip clients and reputed groups or in particular for entities whose borrowings / bonds qualify as Priority Sector Lending, the Bank may approach the RBI for single/group borrower ceilings higher than the prescribed limits. Exposures (both lending and investment, including off balance sheet exposures) of the Bank to a single Non-Banking Finance Company (NBFC) / NBFC – Asset Financing Company (AFC) / NBFC – Infrastructure Finance Company (IFC) should not exceed 10%, 15%, and 15% respectively of the Bank’s capital funds. The Bank may, however, assume exposures on a single NBFC /NBFC-AFC /NBFC-IFC, up to 15%, 20% and 20% respectively, of its capital funds, provided the exposure in excess of 10%, 15% and 15% specified earlier is on account of funds on-lent by the NBFC /NBFC-AFC / NBFC-IFC to the infrastructure sector.

b) Industry—Exposure to any one industry cannot exceed 12 percent of aggregate exposures – for this purpose advances and investments (customer assets) are aggregated. Retail advances are exempt from such ceiling. Further, exposure to banks and state sponsored financial institutions is capped at a level of 25 percent.

c) Risk grading—The Bank does not assume any incremental exposures on borrowers with an internal risk grading of 7 or worse, except on a highly secured basis or as part of a rehabilitation/restructuring plan. Further, the Bank has set quantitative ceilings on aggregate funded exposure (excluding retail assets) specific to each rating category.

While we primarily make our credit decisions on a cash flow basis, we also obtain security for a significant portion of credit facilities extended by the Bank as a second potential remedy. This can take the form of a floating charge on the movable assets of the borrower or a (first or residual) charge on the fixed assets and properties owned by the borrower. We may also require guarantees and letters of support from the flagship companies of the group in cases where facilities are granted based on our comfort level or relationship with the parent company.

We have a process for regular monitoring of all accounts at several levels. These include periodic calls to the customer, plant visits, credit reviews and monitoring of secondary data. These are designed to detect any early warning signals of deterioration in credit quality so that we can take timely corrective action.

The RBI restricts us from lending to companies with which we have any directors in common. Also, the RBI directs a portion of our lending to certain specified sectors (“Priority Sector Lending”). See “Supervision and Regulation – Regulations Relating to Making Loans – Directed Lending”.

 

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Retail Credit Risk

The Bank offers a range of retail products, such as auto loans, personal loans, two-wheeler loans, loans against securities, commercial vehicle loans, construction equipment loans, loans to transport operators and credit cards. Our retail credit policy and approval process are designed for the fact that we have high volumes of relatively homogeneous, small value transactions in each retail loan category. There are product programs for each of these products, which define the target markets, credit philosophy, process, detailed underwriting criteria for evaluating individual credits, exception reporting systems and individual loan exposure caps.

For individual customers to be eligible for a loan, minimum credit parameters, so defined, are to be met for each product. Any deviations therefrom need to be approved at the designated levels. The product parameters have been selected based on the perceived risk characteristics specific to the product. The quantitative parameters considered include income, residence stability, the nature of the employment/business, while the qualitative parameters include accessibility, contactability and profile. Our credit policies/product programs are based on a statistical analysis of our own experience and industry data, in combination with the judgment of our senior officers.

The Retail Credit Risk team manages Credit Risk in retail assets and has the following constituents:

(a) Central Risk Unit: The Central Risk Unit drives credit risk management centrally for retail assets. It is responsible for formulating policies and evaluates proposals for launch of new products and new geographies. The Central Risk Unit also conducts periodic reviews that cover Portfolio MIS, Credit MIS and Post-Approval Reviews. The product risk teams conduct detailed studies on portfolio performance in each customer segment.

(b) Retail Underwriting: This unit is primarily responsible for approving individual credit exposures and ensuring portfolio composition and quality. The unit ensures implementation of all policies/procedures, as applicable.

(c) Risk Intelligence and Control: This unit is responsible for sampling of documents to ensure prospective borrowers with fraudulent intent are prevented from availing themselves of loans. The unit initiates market reference checks to avoid recurrence of frauds and financial loss to the Bank.

(d) Retail Collections Unit: This unit is responsible for remedial management of problem exposures in retail assets. The collections unit uses specific strategies for various segments and products for remedial management.

We mine our borrower account behavior and static data regularly to monitor the portfolio performance of each product segment regularly, and use these as inputs in revising our product programs, target market definitions and credit assessment criteria to meet our twin objectives of combining volume growth and maintenance of asset quality.

Our retails loans are generally secured by a charge on the asset financed (in two-wheeler, auto, commercial vehicle loans and loans against securities), in most cases we obtain direct debit instructions or post-dated checks from the customer. It is a criminal offence in India to issue a bad check.

Market Risk

Market risk refers to the potential loss on account of adverse changes in market variables or other risk factors which affect the value of financial instruments which the Bank holds. The financial instrument holdings may include investment in securities and money market instruments, including equities, bonds, foreign exchange products and derivative instruments (linear as well as non-linear products).

The market variables which affect the valuation of these instruments typically include interest rates, equity prices, commodity prices, exchange rates and volatilities. Any change in the relevant market risk variable has an adverse or favorable impact on the valuation depending on the direction of the change and the type of position held (long or short). While the positions are taken with a view to earning from the upside potential, there is always a possibility of downside risk. Thus, the Bank has to constantly review the positions to ensure that the risk on account of such positions is within the Bank’s overall risk appetite. The Bank’s risk appetite is set through a pre-approved treasury limit, counterparty exposure limit and Asset Liability Management (“ALM”) limit. The process for monitoring and review of risk exposure is outlined in the risk procedure manual and policies.

 

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The board of directors reviews and approves the policies for the management of market risks by way of risk limits. The Risk Monitoring Committee of the board of directors approves market risk policies and procedures and reviews market risk limits of various operating levels. The board of directors has delegated the responsibility for ongoing balance sheet market risk management to the Asset Liability Committee. This committee, which is chaired by the Managing Director and includes the heads of the business groups, meets every alternate week and more often when conditions require. The Asset Liability Committee reviews the product pricing for deposits and assets as well as the maturity profile and mix of our assets and liabilities. It articulates the interest rate view and decides on future business strategy with respect to interest rates. It reviews and sets funding policy and also reviews developments in the markets and the economy and their impact on the balance sheet and business. Finally, it ensures adherence to ALM market risk limits and decides on the inter-segment transfer pricing policy. The Market Risk Department specifies the risk valuation methodology of various treasury products, formulates procedures for portfolio risk valuation, assesses market risk factors and recommends various market risk controls for various treasury desks. The treasury mid-office is responsible for reporting market risks arising from the treasury desks.

The Financial Control Department is responsible for collecting data, preparing regulatory and analytical reports and monitoring whether the interest rate and other policies and limits established by the Asset Liability Committee are being observed. Our Treasury Group also assists in implementing our asset liability strategy and in providing information to the Asset Liability Committee.

The following briefly describes our policies and procedures with respect to asset liability management, liquidity risk, price risk and other risks, such as foreign exchange and equities risks.

Asset Liability Management

We fund core customer assets, consisting of loans and credit substitutes, with core customer liabilities, consisting principally of deposits. The Bank also transacts in the inter-bank market mainly for management of short-term liquidity mismatches.

We maintain a substantial portfolio of liquid, high-quality Indian government securities. The Bank on a regular basis prepares a Structural Liquidity Report in order to analyze the liquidity position of the Bank. The same is submitted to the RBI on a monthly basis.

The Bank has adopted the Gap Analysis Method to measure Interest Rate Risk. The gap or mismatch risk is measured by calculating gaps over different time intervals as on a given date. Gap Analysis measures mismatches between rate sensitive liabilities and rate sensitive assets. An asset or liability is classified as rate sensitive if:

 

  1) Within the time interval under consideration, there is a cash flow

 

  2) The interest rate resets or reprocesses contractually during the interval

 

  3) The RBI changes the interest rates in cases where interest rates are administered

 

  4) It is contractually pre-payable or withdrawable before the stated maturity

The interest rate gap is the difference between Rate Sensitive Assets (RSA) and Rate Sensitive Liabilities (RSL) for each time bucket. If the Bank has a positive gap (RSA>RSL), then it will benefit from rising interest rates. If the Bank has a negative gap (RSA<RSL), then it will benefit from declining interest rates. Thus the gap is used as a measure of interest rate sensitivity.

The Bank has set a Cumulative Gap Limit which is obtained by adding individual time bucket-wise gaps in the Interest Rate Sensitive Assets and Interest Rate Sensitive Liabilities.

 

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The ALCO is responsible for ensuring adherence to the limits set by the Board of Directors for liquidity and Interest Rate Risk. The treasury department is responsible for providing market related inputs i.e. interest rate, liquidity, and exchange rate scenarios to the ALCO. The treasury department is also responsible for implementing the asset and liability strategies as decided by the ALCO.

Our asset liability committee addresses the two principal aspects of our asset liability management program as follows:

First, the Asset Liability Committee monitors the liquidity gap and, at the corporate level, recommends appropriate financing or asset deployment strategies depending on whether the gap is a net asset position or a net liability position, respectively. Operationally, in the short-term, our Treasury Group implements these recommendations through transactions in the money market.

Second, the Asset Liability Committee monitors our interest rate gap and, at the corporate level, recommends repricing of our asset or liability portfolios. Operationally, in the short-term, our Treasury Group implements these recommendations by entering into transactions in the money market and interest rate swaps market.

In the longer term, our wholesale banking and retail banking groups implement these recommendations through changes in the interest rates offered by us for different time period categories to either attract or discourage deposits and loans in those time period categories. See “Selected Statistical Information” for information on our asset-liability gap and the sensitivity of our assets and liabilities to changes in interest rates.

Liquidity Risk

The purpose of liquidity management is to ensure sufficient cash flow to meet all financial commitments and to capitalize on opportunities for business expansion. This includes our ability to meet deposit withdrawals either on demand or at contractual maturity, to repay borrowings as they mature and to make new loans and investments as opportunities arise.

Liquidity is managed on a daily basis by the Treasury Group under the direction of the Asset Liability Committee. The Treasury Group is responsible for ensuring that we have adequate liquidity, ensuring that our funding mix is appropriate so as to avoid maturity mismatches and price and reinvestment rate risk in case of a maturity gap, and monitoring local markets for the adequacy of funding liquidity.

Price Risk

Price risk is the risk arising from price fluctuations due to market factors, such as changes in interest rates and exchange rates. Our Treasury Group is responsible for implementing the price risk management process within the limits approved by the board of directors. We measure price risk through a three-stage process, the first part of which is to estimate the sensitivity of the value of a position to changes in market factors to which our business is exposed. We then estimate the volatility of market factors. Finally, we aggregate portfolio risk. We manage price risk principally by establishing limits for our money market activities, foreign exchange activities, interest rate and equities and derivatives activities. In addition, certain limits are also prescribed by the RBI.

We monitor and manage our exchange rate risk through a variety of limits on our foreign exchange activities. The RBI also limits the extent to which we can deviate from a “near square” position at the end of the day (where sales and purchases of each currency are matched). Our own policies set limits on maximum open positions in any currency during the course of the day as well as on overnight positions. We also have gap limits that address the matching of forward positions in various maturities and for different currencies. In addition, the RBI approves the aggregate gap limit for us. This limit is applied to all currencies. We also have stop-loss limits that require our traders to realize and restrict losses. We evaluate our risk on foreign exchange positions on a daily basis using a value-at-risk model.

We impose position limits on our trading portfolio of marketable securities. These limits, which vary by tenor, restrict the holding of marketable securities of all kinds depending on our expectations about the yield curve. We also impose trading limits such as value-at-risk and stop-loss limits.

Our derivatives risk is managed by the fact that we do not enter into or maintain unmatched positions with respect to non-rupee-based derivatives. Our proprietary derivatives’ trading is primarily limited to rupee-based interest rate swaps and rupee currency options. We impose trading limits, such as value-at-risk and stop-loss limits.

The day-to-day monitoring and reporting of market risk and counterparty risk limits is carried out independently by the treasury mid-office department. The treasury mid-office department is independent of the treasury department and has a reporting line to the head of credit and market risk.

 

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Operational Risk

Operational risk is defined as the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. Operational risk management encompasses identification, assessment, review, control and reporting of key operational risks.

We believe we have effective operational risk management because of our, segregation of functions, strong management team with vast experience in diverse fields, well defined processes, standard operating manuals, transaction verification and authorization systems, distributed processing, staff training and an effective internal audit process.

As part of our overall Operational Risk Management, there is a clear line of reporting of every function which facilitates reporting, monitoring and control of operational risk events. Further, reporting and measurement is also achieved through various Management Information Systems attached to each operational process which are generated and monitored regularly. Losses and issues relating to operational risk are promptly reviewed and gaps, if any, are suitably addressed.

We have an information technology platform with disaster recovery capability for critical components apart from having an integrated Business Continuity Planning (BCP) initiative for business operations of the bank. A BCP committee oversees strategy and implementation of the disaster and business continuity framework of the Bank. The Bank has an Information Security Committee which oversees strategy and implementation of information security policies and procedures for the entire Bank.

We have adopted the ‘Basic Indicator Approach’ for operational risk capital calculations as mandated by the RBI.

Competition

We face strong competition in all of our principal lines of business. Our primary competitors are large public sector banks, other private sector banks, foreign banks and, in some product areas, non-banking financial institutions.

Retail Banking

In retail banking, our principal competitors are the large public sector banks, which have much larger deposit bases and branch networks, other new generation private sector banks, old generation private sector banks, foreign banks and non-banking finance companies in the case of retail loan products. The retail deposit share of the foreign banks is quite small by comparison to the public sector banks. However, some of the foreign banks have a significant presence among non-resident Indians and also compete for non-branch-based products.

In mutual fund sales and other investment related products, our principal competitors are brokers, foreign banks and new private sector banks.

Wholesale Banking

Our principal competitors in wholesale banking are public and new private sector banks as well as foreign banks. The large public sector banks have traditionally been the market leaders in commercial lending. Foreign banks have focused primarily on serving the needs of multinational companies and Indian corporations with cross-border financing requirements including trade and transactional services and foreign exchange products and derivatives, while the large public sector banks have extensive branch networks and large local currency funding capabilities.

Treasury

In our treasury advisory services for corporate clients, we compete principally with foreign banks in foreign exchange and derivatives, as well as public sector banks and new private sector banks in the foreign exchange and money markets business.

Employees

The number of our employees remained roughly stable at 51,888 as of March 31, 2010 as compared to 52,687 as of March 31, 2009. Most of our employees are located in India.

 

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We consider our relations with our employees to be good. On acquisition, a few employees of Centurion Bank of Punjab continue to be part of a labor union. These employees represent less than 1% of our total employee strength.

We use incentives in structuring compensation packages and have established a performance-based bonus scheme under which permanent employees have a variable pay component of their salary.

In addition to basic compensation, employees are eligible to participate in our provident fund and other employee benefit plans. The provident fund, to which both we and our employees contribute, is a savings scheme, required by government regulation, under which the fund is required to pay to employees a minimum annual return, which at present is 8.5%. If the return is not generated internally by the fund, we are liable for the difference. Our provident fund has generated sufficient funds internally to meet the annual return requirement since inception of the fund. We have also set up a superannuation fund to which we contribute defined amounts. In addition, we contribute specified amounts to a gratuity fund set up pursuant to Indian statutory requirements.

We focus on training our employees on a continuous basis. We have a training center in Mumbai, where we conduct regular training programs for our employees. Management and executive trainees generally undergo up to eight-week training modules covering every aspect of banking. We offer courses conducted by both internal and external faculty. In addition to ongoing on-the-job training, we provide employees courses in specific areas or specialized operations on an as-needed basis.

Properties

Our registered office and corporate headquarters is located at HDFC Bank House, Senapati Bapat Marg, Lower Parel, Mumbai 400 013, India. In addition to the corporate office we have administrative offices in most of the metros and some major cities in India.

As of March 31, 2010, we had a network consisting of 1,725 branches, including 9 extension counters, and 4,232 ATMs, including 1,921 at non-branch locations. These facilities are located throughout India with the exception of one branch which is located in Bahrain.

Legal Proceedings

We are involved in a number of legal proceedings in the ordinary course of our business. However, we are currently not a party to any proceedings which, if adversely determined, might have a material adverse effect on our financial condition or results of operations.

 

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RISK FACTORS

You should carefully consider the following risk factors in evaluating us and our business.

Risks Relating to our Business

If we are unable to manage our rapid growth, in particular our growth as a result of the merger with CBoP, our operations may suffer and our performance may decline.

Our asset growth rate has been significantly higher than India’s gross domestic product (“GDP”) growth rate as well as the growth rate of the Indian banking industry over the last three fiscal years. For example, our total advances in the three-year period ended March 31, 2010 grew at a compounded annual growth rate of about 34%, as against slightly over 18% for the Indian Banking Industry. This growth rate is partially attributable to our acquisition of CBoP in May 2008. See “Business—Overview”.

Our rapid growth has placed, and if it continues will place, significant demands on our operational, credit, financial and other internal risk controls such as:

 

   

recruiting, training and retaining sufficient skilled personnel;

 

   

upgrading and expanding our technology platform;

 

   

developing and improving our products and delivery channels;

 

   

preserving our asset quality as our geographical presence increases and customer profile changes;

 

   

complying with regulatory requirements such as the “Know Your Customer” (KYC) norms; and

 

   

maintaining high levels of customer satisfaction.

If we fail to properly manage our rapid growth, our operations would suffer and our performance as a whole would be materially adversely affected.

Our business is vulnerable to volatility in interest rates, which adversely affects our net income.

Our results of operations depend to a great extent on our net interest revenue. During fiscal 2010, net interest revenue after allowances for credit losses represented 59.4% of our net revenue. Changes in market interest rates affect the interest rates charged on our interest-earning assets differently from the interest rates paid on our interest-bearing liabilities and also affect the value of our investments. An increase in interest rates could result in an increase in interest expense relative to interest revenue if we are not able to increase the rates charged on our loans, which would lead to a reduction in our net interest revenue and net interest margin. Further, an increase in interest rates could negatively affect demand for our loans and credit substitutes. A decrease in interest rates could result in a decrease in interest revenue relative to interest expense due to the repricing of our loans at a pace faster than the rates we pay on our interest-bearing liabilities. The quantum of the changes in interest rates for our assets and liabilities may also be different, especially since a portion of our deposits are at rates of interest regulated by the RBI.

Interest rates are currently rising and there is a possibility that they will rise further due to many factors beyond our control, including the monetary policies of central banks such as the RBI, deregulation of the financial sector, domestic and international economic and political conditions and other factors. Yields on the Indian government’s ten-year bonds were 7.9%, 7.0% and 7.9% as of March 31, 2008, 2009 and 2010, respectively. If interest rates increase and demand for loans is negatively affected, we may not be able to achieve our volume growth, which would adversely affect our net income. Any volatility in interest rates could adversely affect our net income. See “Selected Statistical Information—Analysis of Changes in Interest Revenue and Interest Expense: Volume and Rate” and “Selected Statistical Information—Yields, Spreads and Margins”.

 

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If the level of non-performing loans in our portfolio increases, we will be required to increase our provisions which would negatively impact our income.

Our gross non-performing loans and impaired credit substitutes as per Indian GAAP represented 1.4% of our gross customer assets as of March 31, 2010. Our non-performing loans and impaired credit substitutes net of specific loan loss provisions represented 0.3% of our net customer assets portfolio as of March 31, 2010. Additionally, the Bank has restructured the payment terms of certain loans. As on March 31, 2010 these represented 0.3% of our gross customer assets. Our management of credit risk involves having appropriate credit policies, underwriting standards, approval processes, loan portfolio monitoring, remedial management and overall architecture for managing credit risk. In the case of our secured loan portfolio, the frequency of the valuation of collateral may vary based on the nature of the loan and the type of collateral. A decline in the value of collateral or an inappropriate collateral valuation increases the risk in the secured loan portfolio because of inadequate coverage of collateral. We had taken some collateral for approximately 73.9% of our loan book as of March 31, 2010. Our risk mitigation and risk monitoring techniques may not be accurate or appropriately implemented and we may not be able to anticipate future economic and financial events, leading to an increase in our non-performing loans. See note 10—Loans, in our consolidated financial statements.

The RBI has mandated that banks in India should augment their provisioning cushions consisting of specific provisions against NPAs as well as floating provisions, and ensure that their total provisioning coverage ratio (PCR), including floating provisions, is not less than 70 percent. Banks have been directed to comply with this requirement on or before September 30, 2010. As of March 31, 2010, we were compliant with this requirement.

Provisions are created by a charge to expense, and represent our estimate for loan losses and risks inherent in the credit portfolio. See “Selected Statistical Information—Non-Performing Loans”. The determination of an appropriate level of loan losses and provisions required inherently involves a degree of subjectivity and requires that we make estimates of current credit risks and future trends, all of which may undergo material changes. Our provisions may not be adequate to cover any further increase in the amount of non-performing loans or any further deterioration in our non-performing loan portfolio. In addition, we are a relatively young bank and we have yet not experienced a significant and prolonged downturn in the economy.

A number of factors outside of our control affect our ability to control and reduce non-performing loans. These factors include developments in the Indian economy, domestic or global turmoil, movements in commodity markets, global competition, changes in interest rates and exchange rates and changes in regulations, including with respect to regulations requiring us to lend to certain sectors identified by the RBI, or the government of India. In addition, the expansion of our business may cause our non-performing loans to increase and the overall quality of our loan portfolio to deteriorate. If our non-performing loans increase, we will be required to increase our provisions, which would result in our net income being less than it otherwise would be and would adversely affect our financial condition.

We have high concentrations of exposures to certain customers and sectors and if any of these exposures were to become non-performing, the quality of our portfolio could be adversely affected and our ability to meet capital requirements could be jeopardized.

We calculate customer and industry exposure (i.e. the loss we will incur due to the downfall of a customer or an industry) in accordance with the policies established by Indian GAAP and the RBI. In the case of customer exposures, we aggregate the higher of the outstanding balances of, or limits on, funded and non-funded exposures. Funded exposures include loans and investments (excluding investments in government securities, units of mutual funds, deposit certificates issued by banks and equity shares). As of March 31, 2010, our largest single customer exposure was Rs. 42.0 billion, representing approximately 17% of our capital funds valuation, and our ten largest customer exposures totaled approximately Rs. 238.7 billion, representing approximately 97% of our capital funds valuation, in each case as per RBI guidelines based on Indian GAAP figures. None of the ten largest customer exposures were classified as non-performing as on March 31, 2010. However, if any of our ten largest customer exposures were to become non-performing, our net income would decline and, due to the magnitude of the exposures, our ability to meet capital requirements could be jeopardized. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for a detailed discussion on customer exposures.

We monitor concentration of exposures to individual industries as a proportion of funded exposures. As of March 31, 2010, our largest industry concentrations, in each case based on Indian GAAP figures, were as follows: banks and financial institutions (7.0%), automotive manufacturers (5.5%) , and wholesale and retail trade (5.3%). In addition, as of that date approximately 42% of the concentration of our exposure was retail (except where otherwise included in the above classification). As of that date, our total non-performing loans and investments based on Indian GAAP figures were concentrated in the following industries: wholesale and retail trade (12.4%), textiles and garments (4.8%), land transport (4.7%), construction (3.1%), agriculture and allied activities (1.5%). Because approximately one-half of our loss exposure is retail, a downturn in the retail sector in India would likely have a proportionate impact on our earnings. Industry-specific difficulties in these or other sectors may increase our level of non-performing customer assets. If we experience a downturn in an industry in which we have concentrated exposure, our net income will likely decline significantly and our financial condition may be materially adversely affected.

 

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We may be unable to foreclose on collateral in a timely fashion or at all when borrowers default on their obligations to us, or the value of collateral may decrease, any of which may result in, failure to recover the expected value of collateral security, increased losses and a decline in net income.

Although we typically lend on a cash-flow basis, the collateral consists of liens on inventory, receivables and other current assets, and in some cases, charges on fixed assets, such as property, movable assets (such as vehicles) and financial assets (such as marketable securities). As on March 31, 2010 approximately 73.9% of our loans were secured by some collateral.

Although there has been recent legislation which strengthens the rights of creditors and leads to quicker realization of collateral in the event of a default, we may not be able to realize the full value of the collateral, due to, among other things, delays on our part in taking immediate action, delays in bankruptcy foreclosure proceedings, stock market downturns, defects in the perfection of collateral and fraudulent transfers by borrowers. In the event that a specialized regulatory agency gains jurisdiction over the borrower, creditor actions can be further delayed. In addition, the value of collateral may be less than we expect or may decline. For example, the global economic slowdown and other domestic factors led to a downturn in real estate prices in India. If we are unable to foreclose on our collateral or realize adequate value, our losses will increase and our net income will decline. The RBI has set forth guidelines on corporate debt restructuring. The guidelines envisage that for debt amounts of Rs. 1 billion and above, 60% of the creditors by number, in addition to 75% of creditors by value, can decide to restructure the debt and such a decision would be binding on the remaining creditors. In situations where we own 20% or less of the debt of a borrower, we could be forced to agree to an extended restructuring of debt, instead of foreclosure of security or a one-time settlement, which has generally been our practice. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Contractual Obligations and Commercial Commitments—Commercial Commitments”.

Our success depends in large part upon our management team and skilled personnel and our ability to attract and retain such persons.

We are highly dependent on our management team, including the continued efforts of our Chairman, our Managing Director, our Executive Directors and members of our senior management. Our future performance will be affected by the continued service of these persons. We also face a continuing challenge to recruit and retain a sufficient number of skilled personnel, particularly if we continue to grow. Competition for management and other skilled personnel in our industry is intense, and we may not be able to attract and retain the personnel we need in the future. The loss of key personnel may restrict our ability to grow and consequently have a material adverse impact on our results of operations and financial position.

Our unsecured loan portfolio is not supported by any collateral that could help ensure repayment of the loan, and in the event of non-payment by a borrower of one of these loans, we may be unable to collect the unpaid balance.

We offer unsecured personal loans and credit cards to the retail customer segment, including salaried individuals and self-employed professionals. In addition, we offer unsecured loans to small businesses. Unsecured personal loans are a greater credit risk for us than our secured loan portfolio because they may not be supported by realizable collateral that could help ensure an adequate source of repayment for the loan. Although we normally obtain direct debit instructions or post dated checks from our customers for our unsecured loan products, we may be unable to collect in part or at all in the event of non-payment by a borrower. Further, any expansion in our unsecured loan portfolio could require us to increase our provision for credit losses, which would decrease our earnings. Also see “Business—Retail Banking—Retail Loans and Other Asset Products”.

In order to support and grow our business, we must maintain a minimum capital adequacy ratio, and a lack of access to the capital markets may prevent us from maintaining an adequate ratio.

The RBI requires a minimum capital adequacy ratio of 9% of our total risk-weighted assets. The Bank adopted the Basel II framework as of March 31, 2009. Our capital adequacy ratio, calculated in accordance with Indian GAAP, was 17.4% as of March 31, 2010 as per Basel II and 16.5% as per Basel I. Our ability to support and grow our business would be limited by a declining capital adequacy ratio. While we anticipate accessing the capital markets to offset declines in our capital adequacy ratio, we may be unable to access the markets at the appropriate time or the terms of any such financing may be unattractive due to various reasons attributable to changes in the general environment, including political, legal and economic conditions.

 

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Material changes in Indian banking regulations may adversely affect our business and our future financial performance.

We operate in a highly regulated environment in which the RBI extensively supervises and regulates all banks. Our business could be directly affected by any changes in policies for banks in respect of directed lending, reserve requirements and other areas. For example, the RBI could change its methods of enforcing directed lending standards so as to require more lending to certain sectors, which could require us to change certain aspects of our business. In addition, we could be subject to other changes in laws and regulations, such as those affecting the extent to which we can engage in specific businesses or those that reduce our income through a cap on either fees or interest rates chargeable to our customers or those affecting foreign investment in the banking industry, as well as changes in other governmental policies and enforcement decisions, income tax laws, foreign investment laws and accounting principles. Laws and regulations governing the banking sector may change in the future and any changes may adversely affect our business, our future financial performance and the price of our equity shares and ADSs. See “—We could experience a decline in our revenue generated from activities on the equity markets if there is a prolonged or significant downturn on the Indian stock exchanges, or we may face difficulties in getting regulatory approvals necessary to conduct our business if we fail to meet regulatory limits on capital market exposures.”

We compete directly with banks that are much larger than we are and which benefit from economies of scale, which makes it challenging for us to offer competitive prices to retain existing customers and solicit new business.

We face strong competition in all areas of our business, and some of our competitors are much larger than we are. We compete directly with the large public sector banks, which generally have much larger customer, asset and deposit bases, larger branch networks and more capital than we do. These banks are becoming more competitive as they improve their customer services and technology. One of the other private sector banks in India is also larger than we are, based on such measurements. In addition, we compete directly with foreign banks, which include some of the largest multinational financial companies in the world. The economies of scale our larger competitors benefit from, make it difficult for us to offer competitive pricing on products and services to retain existing customers and attract new customers so that we can execute our growth strategy successfully. If we are unable to retain and attract new customers, our revenue and net income will decline, which could materially adversely affect our financial condition. See “Business—Competition”.

Our funding is primarily short- and medium- term and if depositors do not roll over deposited funds upon maturity our net income may decrease.

Most of our funding requirements are met through short-term and medium-term funding sources, primarily in the form of retail deposits. Short-term deposits are those with a maturity not exceeding one year. Medium-term deposits are those with a maturity of greater than one year but not exceeding three years. See “Selected Statistical Information—Funding”. However, a portion of our assets have long-term maturities, which sometimes causes funding mismatches. As of March 31, 2010, about 42% of our loans were short-term and about 43% of our loans were medium-term. As of March 31, 2010, about 29% of our deposits were short-term and about 50% of our deposits were medium-term. In our experience, a substantial portion of our customer deposits has been rolled over upon maturity and has been, over time, a stable source of funding. However, if a substantial number of our depositors do not roll over deposited funds upon maturity, our liquidity position will be adversely affected and we may be required to seek more expensive sources of funding to finance our operations, which would result in a decline in our net income and have a material adverse effect on our financial condition.

Any increase in interest rates would have an adverse effect on the value of our fixed income securities portfolio and could have a material adverse effect on our net income.

Any increase in interest rates would have an adverse effect on the value of fixed income securities portfolio and could have a material adverse effect on our net revenue. As per extant RBI guidelines, we are required to invest 25% of our liabilities (computed as per guidelines issued by the RBI) in Government issued bonds. Our investments in Government issued securities constituted approximately 87% of our total investments as of March 31, 2010 as per Indian GAAP. Any decrease in our income from these investments could have a material adverse effect on our net income and financial condition.

 

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The development of a well entrenched nationwide inter-bank settlement system would adversely impact our cash float and decrease fees we receive in connection with check collection.

Currently, there is no well entrenched nationwide payment system in India, and checks must generally be returned to the city from which they were written in order to be cleared. Because of mail delivery delays and the variation in city-based inter-bank clearing practices, check collections can be slow and unpredictable. Through our electronically linked branch network, correspondent bank arrangements and centralized processing, we effectively provide a nationwide collection and disbursement system for our corporate clients. We enjoy cash float and earn fees from these services. In 2005, the RBI introduced the RTGS inter-bank settlement system which facilitates real time settlements primarily between banks. Although we believe our services offer advantages not offered by payment systems currently available, the development of a robust payments system would have an adverse impact on the cash float and fees we have enjoyed from our cash management services, which could materially adversely affect our financial condition.

We could experience a decline in our revenue generated from activities on the equity markets if there is a prolonged or significant downturn on the Indian stock exchanges, or we may face difficulties in getting regulatory approvals necessary to conduct our business if we fail to meet regulatory limits on capital market exposures.

The Bank provides a variety of services and products to participants involved with the Indian stock exchanges. These include working capital funding and margin guarantees to share brokers, personal loans secured by shares and initial public offering finance for retail customers, stock exchange clearing services, collecting bankers to various public offerings and depositary accounts. If there is a prolonged or significant downturn on the Indian stock exchanges, our revenue generated by offering these products and services may decrease, which would have a material adverse effect on our financial condition.

The Bank is required to maintain its capital market exposures within the limits as prescribed by the RBI. The Bank’s capital market exposures are comprised primarily of investments in equity shares, loans to share brokers and financial guarantees issued to stock exchanges on behalf of share brokers.

As per RBI norms, a bank’s capital market exposure is limited to 40.0% of its net worth under Indian GAAP, both on a consolidated and non-consolidated basis. The Bank’s capital market exposure as of March 31, 2010 was 31.4% of its net worth on a non-consolidated basis and 32.0% on a consolidated basis. See “Supervision and Regulation—Regulations Relating to Capital Market Exposure Limits.” In the future if we fail to meet these regulatory limits, we may face difficulties in getting other regulatory approvals necessary to conduct business in the normal course, which would have a material adverse effect on our business and operations.

Significant fraud, system failure or calamities would disrupt our revenue generating activities in the short-term and could harm our reputation and adversely impact our revenue-generating capabilities.

Our business is highly dependent on our ability to efficiently and reliably process a high volume of transactions across numerous locations and delivery channels. We place heavy reliance on our technology infrastructure for processing this data and therefore ensuring system security and availability is of paramount importance. Our systemic and operational controls may not be adequate to prevent adverse impact from frauds, errors, hacking and system failures. A significant system breakdown or system failure caused due to intentional or unintentional acts would have an adverse impact on our revenue-generating activities and lead to financial loss. We have established a geographically remote disaster recovery site to support critical applications, and we believe that we will be able to restore data and resume processing. However it may take considerable time to make the system fully operational and achieve complete business resumption using the alternate site. Therefore, in such a scenario, where the primary site is completely unavailable, there may be significant disruption to the Bank’s operations, which would materially adversely affect our reputation and financial condition.

 

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HDFC Limited controls a significant percentage of our share capital and exercises substantial influence over board decisions, which could result in HDFC Limited making decisions or foregoing opportunities to benefit HDFC Limited that restrict our growth and harm our financial condition.

HDFC Limited and its subsidiaries owned 23.7% of our equity as of March 31, 2010. So long as HDFC Limited and its subsidiaries hold at least a 20.0% equity stake in us, HDFC Limited is entitled to nominate two directors including our Chairman and Managing Director who are not required to retire by rotation to our board, subject to RBI approval. Our current Chairman and Managing Director were nominated by HDFC Limited and appointed with the approval of the shareholders and the RBI. Two of our other directors as on March 31, 2010 also have relationships with HDFC Limited—Mr. Keki Mistry is Vice Chairman and Chief Executive Officer of HDFC Limited and Mrs. Renu Karnad is the Managing Director of HDFC Limited. Accordingly, HDFC Limited can exercise substantial influence over our board and over matters subject to a shareholder vote. Mr. D. M. Sukthankar is the father of our Executive Director Mr. Paresh Sukthankar and serves as an independent director on the Board of HDFC Limited. Mr. D. M. Sukthankar has been on the Board of HDFC Limited since 1989. Mr. Paresh Sukthankar was one of our early employees and also a part of the senior management team. He was appointed as our Executive Director in October 2007. Both are associated with the respective companies in their independent professional capacities and we believe that none is in a position to exercise influence over the other.

There have been reports in the Indian media suggesting that we may merge with HDFC Limited. We consider business combination opportunities as they arise. At present, we are not actively considering a business combination with HDFC Limited. Any significant business combination would involve compliance with regulatory requirements and shareholder and regulatory approvals. Were such a combination to occur, we cannot predict the impact it would have on our business, growth prospects or the prices of our equity shares and ADSs.

We may face conflicts of interest relating to our principal shareholder, HDFC Limited, which could cause us to forgo business opportunities and consequently have an adverse effect on our financial performance.

HDFC Limited is primarily engaged in financial services, including home loans, property-related lending and deposit products. The subsidiaries and associated companies of HDFC Limited are also largely engaged in a range of financial services, including asset management, life and other insurance and mutual funds. Although we have no agreements with HDFC Limited or any other HDFC group companies that restrict us from offering products and services that are offered by them, our relationship with these companies may cause us not to offer products and services that are already offered by other HDFC group companies and may effectively prevent us from taking advantage of business opportunities. See “Related Party Transactions” in the 20-Fs for fiscal 2008, 2009 and 2010 for a summary of transactions we have engaged in and strategic investments made with HDFC Limited during fiscal 2008, 2009 and 2010 respectively. Also see Note 26 to our consolidated financial statements. We currently offer products of HDFC Limited and its group companies. If we forgo opportunities because of our relationship with HDFC Limited, it could have a material adverse effect on our financial performance.

RBI guidelines relating to ownership in private banks could discourage or prevent a change of control or other business combination involving us, such as with HDFC Limited, which could restrict the growth of our business and operations.

RBI guidelines prescribe a policy framework for the ownership and governance of private sector banks. The guidelines state that no single entity or group of entities will be permitted to own or control, directly or indirectly, more than 10% of the paid-up capital of a private sector bank without RBI approval. The implementation of such a restriction could discourage or prevent a change in control, merger, consolidation, takeover or other business combination involving us, which might be beneficial to our shareholders. The RBI’s acknowledgement is required for the acquisition or transfer of a bank’s shares, which will increase the aggregate holding (both direct and indirect, beneficial or otherwise) of an individual or a group to the equivalent of 5% or more of its total paid-up capital. The RBI, while granting acknowledgement, may take into account all matters that it considers relevant to the application, including ensuring that shareholders whose aggregate holdings are above specified thresholds meet fitness and propriety tests. The RBI has accorded its approval for HDFC Limited to hold more than 10% of our stock not exceeding 23.27%. HDFC Limited’s substantial stake in us could discourage or prevent another entity from exploring the possibility of a combination with us. These obstacles to potentially synergistic business combinations could have a material adverse effect on our ability to compete effectively with other large banks and consequently our ability to maintain and improve our financial condition.

We may face increased competition as a result of revised guidelines that relax restrictions on the presence of foreign banks in India and a proposal by the RBI to grant fresh banking licenses for the establishment of new banks in the private sector which could cause us to lose existing business or be unable to compete effectively for new business.

The Government of India regulates foreign ownership in private sector banks. The total foreign ownership in a private sector bank cannot exceed 74% of its paid-up capital. The RBI on February 28, 2005 released a “Roadmap for Presence of Foreign Banks in India and Guidelines on ownership and Governance in Private Sector Banks” (the “Roadmap”).

 

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The Roadmap envisages two phases. During the first phase, between March 2005 and March 2009, foreign banks were permitted to establish their presence in India by way of setting up a wholly-owned banking subsidiary (“WOS”) or converting their existing branches into a WOS. The WOS must have minimum capital of Rs. 3 billion and ensure sound corporate governance.

Initially, equity participation by banks would be permitted only in the private sector banks that are identified by the RBI for restructuring. On an application made by a foreign bank for acquisition of 5% or more in any private bank, the RBI would consider the standing and reputation of the foreign bank and shall permit such acquisition only if it is satisfied that the investment by such foreign bank is in the long-term interest of all the stakeholders of the investee bank.

It was proposed that phase 2, beginning April 2009, would allow foreign banks to acquire up to 74% of equity capital in private sector banks in India. However, in light of the global financial turmoil and concerns regarding financial strength of banks around the world, the RBI decided to put on hold the second phase of the Roadmap and leave unchanged its policy on the presence of foreign banks in the country. While announcing its annual policy for fiscal 2010 the RBI said that it would continue with the current policy and procedures governing the presence of foreign banks in India. A review will happen once there is greater clarity regarding stability, recovery of the global financial system, and a shared understanding on the regulatory and supervisory architecture around the world. Any growth in the presence of foreign banks or in foreign investments in Indian banks may increase the competition that we face and as a result have a material adverse effect on our business. See “Restrictions on Foreign Ownership of Indian Securities.”

On August 11, 2010, the RBI released a discussion paper on the entry of new banks in the private sector. In this discussion paper the RBI proposes to grant banking licenses to new entrants in the private sector. If the number of banks in the country increase, we will face increased competition in the businesses we operate in. This would have a material adverse effect on our business.

Delays in obtaining prior RBI approval for opening new branches to increase our infrastructure and expand our reach into different geographical segments will restrict our expansion plans and have a negative impact on our future financial performance by preventing us from realizing anticipated revenue from the new branches.

The RBI introduced a liberalized branch licensing policy in September 2005. We have applied for branches under the policy in the past and obtained approvals for opening branches under the policy. See “Supervision and Regulation—Regulation Relating to the Opening of Branches”. However, there can be no assurance that we will receive licenses promptly or at all, any prolonged delay in the receipt of such licenses will adversely affect our financial performance by preventing us from realizing anticipated revenue from the new branches.

If the goodwill recorded in connection with our recent acquisitions becomes impaired, we may be required to record impairment charges, which would decrease our net income and total assets.

In accordance with US GAAP, we have accounted for our acquisitions using the purchase method of accounting. We recorded the excess of the purchase price over the fair value of the assets and liabilities of the acquired companies as goodwill. US GAAP requires us to test goodwill for impairment at least annually, or more frequently if events or changes in circumstances indicate that goodwill may be impaired. Goodwill is tested by initially estimating fair value of the reporting unit and then comparing it against the carrying amount including goodwill. If the carrying amount of a reporting unit exceeds its estimated fair value, we are required to record an impairment loss. The amount of impairment and the remaining amount of goodwill, if any, is determined by comparing the fair value of the reporting unit as of the test date against the fair value of the assets and liabilities of that reporting unit as of the same date. See Note 2—Business Combination to our consolidated financial statements.

 

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Many of the Bank’s branches have been recently added to the Bank’s branch network and are not operating with the same efficiency as compared to the rest of the Bank’s existing branches, which adversely affects our profitability.

As at March 31, 2008, we had 761 branches. As a result of our acquisition of Centurion Bank of Punjab effective May 23, 2008, our network expanded by over 400 branches while we continued to grow organically by commissioning new branches. As at March 31, 2010, we had 1,725 branches, a more than doubling of our branch network over the last two fiscal years. The newly added branches are currently operating at a lower efficiency level as compared with our established branches. While we believe that the newly added branches will achieve the productivity benchmark set for our entire network over time, the success in achieving our benchmark level of efficiency and productivity will depend on various internal and external factors, some of which are not under our control. The sub-optimal performance of the newly added branches, if continued over an extended period of time, would have a material adverse effect on our profitability.

Risks Relating to Investments in Indian Companies

A slowdown in economic growth in India would cause us to experience slower growth in our asset portfolio and deterioration in the quality of our assets.

Our performance and the quality and growth of our assets are necessarily dependent on the health of the overall Indian economy. The global slowdown of the financial markets had contributed to a slowdown in the Indian financial and economic environment, with attendant higher unemployment rates and decreases in purchasing power. While we have started witnessing an overall improvement in the general financial and economic conditions, a reversal which would result in a continued slowdown in the Indian economy would adversely affect our business, including our ability to grow our asset portfolio, the quality of our assets and our ability to implement our strategy. In particular, because India depends significantly on imported oil for its energy needs, the Indian economy would be adversely affected by volatile oil prices and consequent inflation and would also be adversely affected by a general rise in interest rates, weather conditions adversely affecting agriculture or other factors. In addition, the Indian economy is in a state of transition. The share of the services sector of the economy is rising, while that of the industrial, manufacturing and agricultural sectors is declining. Finally, India faces major challenges in sustaining its growth, which include the need for substantial infrastructure development and improving access to healthcare and education. If the Indian economy deteriorates, our asset base may erode, which would result in a material decrease in our net income and total assets.

Political instability or changes in the government in India could delay the liberalization of the Indian economy and adversely affect economic conditions in India generally, which would impact our financial results and prospects.

Since 1991, successive Indian governments have pursued policies of economic liberalization, including significantly relaxing restrictions on the private sector. Nevertheless, the roles of the Indian central and state governments in the Indian economy as producers, consumers and regulators have remained significant. The leadership of India has changed many times since 1996. The current coalition-led central government, which came to power in May 2009, has announced policies and taken initiatives that support the economic liberalization policies that have been pursued by previous central governments. However, we cannot assure you that these liberalization policies will continue in the future. The rate of economic liberalization is subject to change, and specific laws and policies affecting banking and finance companies, foreign investment, currency exchange and other matters affecting investment in our securities are continuously evolving as well. Any significant change in India’s economic liberalization and deregulation policies would adversely affect business and economic conditions in India generally and our business in particular.

Terrorist attacks, civil unrest and other acts of violence or war involving India and other countries would negatively affect the Indian market where our shares trade and lead to a loss of confidence and impair travel, which could reduce our customers’ appetite for our products and services.

Terrorist attacks, such as those in Mumbai in November 2008, and other acts of violence or war may negatively affect the Indian markets on which our equity shares trade and also adversely affect the worldwide financial markets. These acts may also result in a loss of business confidence, make travel and other services more difficult and as a result ultimately adversely affect our business. In addition, any deterioration in relations between India and Pakistan might result in investor concern about stability in the region, which could adversely affect the price of our equity shares and ADSs.

India has also witnessed civil disturbances in recent years and future civil unrest as well as other adverse social, economic and political events in India could have an adverse impact on us. Such incidents also create a greater perception that investment in Indian companies involves a higher degree of risk, which could have an adverse impact on our business and the price of our equity shares and ADSs.

 

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Risks Relating to the ADSs and Equity Shares

Historically, our ADSs have traded at a premium to the trading prices of our underlying equity shares, a situation which may not continue.

Historically, our ADSs have traded on the New York Stock Exchange (the “NYSE”) at a premium to the trading prices of our underlying equity shares on the Indian stock exchanges, although this premium has declined in recent years. See “Price Range of Our American Depositary Shares and Equity Shares” for the underlying data. We believe that this price premium has resulted from the relatively small portion of our market capitalization previously represented by ADSs, restrictions imposed by Indian law on the conversion of equity shares into ADSs, and an apparent preference for investors to trade dollar-denominated securities. Over time, some of the restrictions on issuance of ADSs imposed by Indian law have been relaxed and we expect that other restrictions may be relaxed in the future. It is possible that in the future our ADSs will not trade at any premium to our equity shares and could even trade at a discount to our equity shares.

Investors in ADSs will not be able to vote.

Investors in ADSs will have no voting rights, unlike holders of the equity shares. Under the deposit agreement, the depositary will abstain from voting the equity shares represented by the ADSs. If you wish, you may withdraw the equity shares underlying the ADSs and seek to vote (subject to Indian restrictions on foreign ownership) the equity shares you obtain upon withdrawal. However, this withdrawal process may be subject to delays and you may not be able to redeposit the equity shares. For a discussion of the legal restrictions triggered by a withdrawal of the equity shares from the depositary facility upon surrender of ADSs, see “Restrictions on Foreign Ownership of Indian Securities” and “Description of American Depository Shares—Voting Rights”.

Your ability to withdraw equity shares from the depositary facility is uncertain and may be subject to delays.

India’s restrictions on foreign ownership of Indian companies limit the number of equity shares that may be owned by foreign investors and generally require government approval for foreign investments. Investors who withdraw equity shares from the ADS depositary facility for the purpose of selling such equity shares will be subject to Indian regulatory restrictions on foreign ownership upon withdrawal. The withdrawal process may be subject to delays. For a discussion of the legal restrictions triggered by a withdrawal of equity shares from the depositary facility upon surrender of ADSs, see “Restrictions on Foreign Ownership of Indian Securities”.

There is a limited market for the ADSs.

Although our ADSs are listed and traded on the NYSE, any trading market for our ADSs may not be sustained, and there is no assurance that the present price of our ADSs will correspond to the future price at which our ADSs will trade in the public market. Indian legal restrictions may also limit the supply of ADSs. The only way to add to the supply of ADSs would be through an additional issuance. We cannot guarantee that a market for the ADSs will continue.

Conditions in the Indian securities market may affect the price or liquidity of our equity shares and ADSs.

The Indian securities markets are smaller and more volatile than securities markets in more developed economies. The Indian stock exchanges have in the past experienced substantial fluctuations in the prices of listed securities. The governing bodies of the Indian stock exchanges have from time to time imposed restrictions on trading in certain securities, limitations on price movements and margin requirements. Future fluctuations could have a material adverse effect on the price of our equity shares and ADSs.

Settlement of trades of equity shares on Indian stock exchanges may be subject to delays.

The equity shares represented by our ADSs are listed on the National Stock Exchange and Bombay Stock Exchange Limited. Settlement on these stock exchanges may be subject to delays and an investor in equity shares withdrawn from the depositary facility upon surrender of ADSs may not be able to settle trades on these stock exchanges in a timely manner.

 

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You may be unable to exercise preemptive rights available to other shareholders.

A company incorporated in India must offer its holders of equity shares preemptive rights to subscribe and pay for a proportionate number of shares to maintain their existing ownership percentages prior to the issuance of any new equity shares, unless these rights have been waived by at least 75% of the Bank’s shareholders present and voting at a shareholders’ general meeting. U.S. investors in our ADSs may be unable to exercise preemptive rights for our equity shares underlying our ADSs unless a registration statement under the Securities Act of 1933 (the “Securities Act”) is effective with respect to those rights or an exemption from the registration requirements of the Securities Act is available. Our decision to file a registration statement will depend on the costs and potential liabilities associated with any registration statement as well as the perceived benefits of enabling U.S. investors in our ADSs to exercise their preemptive rights and any other factors we consider appropriate at the time. We do not commit to filing a registration statement under those circumstances. If we issue any securities in the future, these securities may be issued to the depositary, which may sell these securities in the securities markets in India for the benefit of the investors in our ADSs. There can be no assurance as to the value, if any, the depositary would receive upon the sale of these securities. To the extent that investors in our ADSs are unable to exercise preemptive rights, their proportional interests in us would be reduced.

Because the equity shares underlying our ADSs are quoted in rupees in India, you may be subject to potential losses arising out of exchange rate risk on the Indian rupee and risks associated with the conversion of rupee proceeds into foreign currency.

Fluctuations in the exchange rate between the U.S. dollar and the Indian rupee may affect the value of your investment in our ADSs. Specifically, if the relative value of the Indian rupee to the U.S. dollar declines, each of the following values will also decline:

 

   

the U.S. dollar equivalent of the Indian rupee trading price of our equity shares in India and, indirectly, the U.S. dollar trading price of our ADSs in the United States;

 

   

the U.S. dollar equivalent of the proceeds that you would receive upon the sale in India of any equity shares that you withdraw from the depositary; and

 

   

the U.S. dollar equivalent of cash dividends, if any, paid in Indian rupees on the equity shares represented by our ADSs.

You may not be able to enforce a judgment of a foreign court against us.

We are a limited liability company incorporated under the laws of India. All of our directors and members of our senior management and some of the experts named in this report are residents of India and almost all of our assets and the assets of these persons are located in India. It may not be possible for investors in our ADSs to effect service of process outside India upon us or our directors and members of our senior management and experts named in the report that are residents of India or to enforce judgments obtained against us or these persons in foreign courts predicated upon the liability provisions of foreign countries, including the civil liability provisions of the federal securities laws of the United States. Moreover, it is unlikely that a court in India would award damages on the same basis as a foreign court if an action were brought in India or that an Indian court would enforce foreign judgments if it viewed the amount of damages as excessive or inconsistent with Indian practice.

There may be less company information available on Indian securities markets than securities markets in developed countries.

There is a difference between the level of regulation and monitoring of the Indian securities markets and the activities of investors, brokers and other participants and that of markets in the United States and other developed economies. SEBI and the stock exchanges are responsible for improving disclosure and other regulatory standards for the Indian securities markets. SEBI has issued regulations and guidelines on disclosure requirements, insider trading and other matters. There may, however, be less publicly available information about Indian companies than is regularly made available by public companies in developed economies.

 

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PRICE RANGE OF OUR AMERICAN DEPOSITARY SHARES AND EQUITY SHARES

Our ADSs, each representing three equity shares, par value Rs. 10 per share, are listed on the NYSE under the symbol “HDB.” Our equity shares, including those underlying the ADSs, are listed on the National Stock Exchange under the symbol “HDFCBANK” and the Bombay Stock Exchange Limited under the code 500180. Our fiscal quarters end on June 30 of each year for the first quarter, September 30 for the second quarter, December 31 for the third quarter and March 31 for the fourth quarter.

Trading Prices of Our ADSs on the NYSE

The following table shows:

 

   

the reported high and low prices for our ADSs in U.S. dollars on the NYSE; and

 

   

the average daily trading volume for our ADSs on the NYSE.

 

     Price per ADS    Average daily ADS
trading volume

Fiscal

   High    Low    (Number of ADSs)

2006

   U.S.$ 59.7    U.S.$ 40.0    166,883

2007

     80.0      43.0    230,175

2008

     145.4      63.5    458,907

2009

        

First Quarter

     119.5      69.3    549,005

Second Quarter

     97.0      61.2    855,756

Third Quarter

     96.0      44.9    748,908

Fourth Quarter

     77.5      45.5    609,457

2010

        

First Quarter

     110.2      59.4    557,116

Second Quarter

     119.7      89.0    350,606

Third Quarter

     140.3      108.8    326,764

Fourth Quarter

     140.9      109.9    296,674

Most Recent Six Months

        

March 2010

     140.9      122.0    283,678

April 2010

     156.4      140.0    257,762

May 2010

     152.2      126.7    342,070

June 2010

     156.0      133.2    264,432

July 2010

     164.9      140.0    287,524

August 2010

     172.1      156.0    251,345

September 2010 to date

     185.9      162.6    260,212

The closing price for our ADSs on the NYSE was US$ 184.1 per ADS on September 24, 2010.

Trading Prices of Our Equity Shares on the National Stock Exchange

The following table shows:

 

   

the reported high and low market prices for our equity shares in rupees on the National Stock Exchange;

 

   

the imputed high and low closing sales prices for our equity shares translated into U.S. dollars; and

 

   

the average daily trading volume for our equity shares on the National Stock Exchange.

 

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     Price per
equity share
   Price per
equity share
   Average daily
equity share
trading volume
     High    Low    High    Low   

Fiscal Year

              

2006

   Rs. 812.0    Rs. 448.0    U.S.$ 18.1    U.S.$ 10.0    423,339

2007

     1,160.0      615.2      25.8      13.7    521,217

2008

     1,789.0      901.4      39.8      20.1    607,542

2009

              

First Quarter

     1,547.8      1,007.4      34.4      22.4    756,159

Second Quarter

     1,339.7      903.6      29.8      20.1    1,643,711

Third Quarter

     1,295.3      821.2      28.8      18.3    2,023,652

Fourth Quarter

     1,100.4      798.7      24.5      17.8    1,784,389

2010

              

First Quarter

     1,558.9      1,000.0      34.7      22.2    1,602,846

Second Quarter

     1,650.5      1,362.6      36.7      30.3    1,021,353

Third Quarter

     1,833.3      1,600.5      40.8      35.6    690,164

Fourth Quarter

     1,965.1      1,567.4      43.7      34.9    975,436

Most Recent Six Months

              

March 2010

     1,965.1      1,745.0      43.7      38.8    1,024,254

April 2010

     2,000.5      1,902.8      44.5      42.3    623,941

May 2010

     1,974.9      1,803.8      43.9      40.1    636,259

June 2010

     2,001.6      1,853.1      44.5      41.2    705,345

July 2010

     2,126.9      1,907.4      47.3      42.4    696,367

August 2010

     2,231.3      2,073.2      49.6      46.1    684,432

September 2010 to date

     2,495.3      2,149.3      55.5      47.8    930,173

The closing price for our equity shares on the National Stock Exchange was Rs. 2,495.3 (US$ 55.5) per share on September 24, 2010.

As of March 31, 2010, there were 441,347 holders of record of our equity shares, including the shares underlying ADSs and GDRs, of which 103 had registered addresses in the United States and held an aggregate of 122,635 of our equity shares representing 0.03% of our shareholders. In our books only, the Depository, J.P. Morgan Chase Bank and Deutsche Bank Trust Company Americas, are the shareholders with respect to equity shares underlying ADSs and GDRs. We are unable to estimate the number of record holders of ADSs and GDRs in the United States and elsewhere.

 

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DESCRIPTION OF EQUITY SHARES

The Company

We are registered under Corporate Identity Number (CIN) L65920MH1994PLC080618 with the Registrar of Companies, Maharashtra State, India. Our Articles permit us to engage in a wide variety of activities, including all of the activities in which we currently engage or intend to engage, as well as other activities in which we currently have no intention of engaging.

Dividends

Under Indian law, a company pays dividends upon a recommendation by its board of directors and approval by a majority of its shareholders at the annual general meeting of shareholders held within six months of the end of each fiscal year. The shareholders have the right to decrease but not increase the dividend amount recommended by the board of directors. Dividends are generally declared as a percentage of par value and distributed and paid to shareholders in proportion to the paid up value of their equity shares. The Companies Act provides that shares of a company of the same class must receive equal dividend treatment.

These distributions and payments are required to be deposited into a separate bank account and paid to shareholders within 30 days of the annual general meeting where the resolution for declaration of dividends is approved.

The Companies Act states that any dividends that remain unpaid or unclaimed after that period are to be transferred to a special bank account. Any money that remains unclaimed for seven years from the date of the transfer is to be transferred by us to a fund created by the Government of India. No claims for the payment of dividends unpaid or unclaimed for a period of seven years shall lie against the fund of the Government of India or against us.

Our Articles authorize our board of directors to declare interim dividends, the amount of which must be deposited in a separate bank account within five days and paid to the shareholders within 30 days of the declaration.

Under the Companies Act, final dividends payable can be paid only in cash to the registered shareholder at a record date fixed prior to the relevant annual general meeting, to his order or to the order of his banker.

Before paying any dividend on our shares, we are required under the Indian Banking Regulation Act to write off all capitalized expenses (including preliminary expenses, organization expenses, share-selling commission, brokerage, amounts of losses incurred or any other item of expenditure not represented by tangible assets). We are permitted to declare dividends of up to 33.33% of net profit calculated under Indian GAAP without prior RBI approval subject to compliance with certain prescribed requirements. Further, upon compliance with the prescribed requirements, we are also permitted to declare interim dividends subject to the above mentioned cap computed for the relevant accounting period.

Dividends may only be paid out of our profits for the relevant year and in certain contingencies out of the reserves of the company. Before declaring dividends, we are required, under the Indian Banking Regulation Act, to transfer 25% of the balance of profits of each year to a reserve fund.

Bonus Shares

In addition to permitting dividends to be paid out of current or retained earnings calculated under Indian GAAP, the Companies Act permits our board of directors, subject to the approval of our shareholders, to distribute to the shareholders, in the form of fully paid-up bonus equity shares, an amount transferred from the capital surplus reserve or legal reserve to stated capital. Bonus equity shares can be distributed only with the prior approval of the RBI. These bonus equity shares must be distributed to shareholders in proportion to the number of equity shares owned by them.

Preemptive Rights and Issue of Additional Shares

The Companies Act gives shareholders the right to subscribe for new shares in proportion to their existing shareholdings unless otherwise determined by a resolution passed by three-fourths of the shareholders present and voting at a general meeting. Under the Companies Act and our Articles, in the event of an issuance of securities, subject to the limitations set forth above, we must first offer the new shares to the holders of equity shares on a fixed record date. The offer, required to be made by notice, must include:

 

   

the right, exercisable by the shareholders of record, to renounce the shares offered in favor of any other person;

 

   

the number of shares offered; and

 

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the period of the offer, which may not be less than 15 days from the date of the offer. If the offer is not accepted, it is deemed to have been declined.

Our board of directors is permitted to distribute equity shares not accepted by existing shareholders in the manner it deems beneficial for us in accordance with our Articles. Holders of ADSs may not be able to participate in any such offer. See “Description of American Depositary Shares—Share Dividends and Other Distributions.”

General Meetings of Shareholders

There are two types of general meetings of shareholders: annual general meetings and extraordinary general meetings. We are required to convene our annual general meeting within six months after the end of each fiscal year. We may convene an extraordinary general meeting when necessary or at the request of a shareholder or shareholders holding on the date of the request at least 10% of our paid up capital. A general meeting is generally convened by our company secretary in accordance with a resolution of the board of directors. Written notice stating the agenda of the meeting must be given at least 21 days prior to the date set for the general meeting to the shareholders whose names are in the register at the record date. Those shareholders who are not registered at the record date do not receive notice of this meeting and are not entitled to attend or vote at this meeting.

The annual general meeting is held in Mumbai, the city in which our registered office is located. General meetings other than the annual general meeting may be held at any location if so determined by a resolution of our board of directors.

Voting Rights

A shareholder has one vote for each equity share and voting may be by a show of hands or on a poll. However, under the Indian Banking Regulation Act, on poll, a shareholder cannot exercise voting rights in excess of 10% of the total voting rights of all shareholders. Unless a poll is demanded by a shareholder, resolutions are adopted at a general meeting by a majority of the shareholders having voting rights present or represented. The quorum for a general meeting is five members personally present. Generally, resolutions may be passed by simple majority of the shareholders present and voting at any general meeting. However, resolutions such as an amendment to the organizational documents, commencement of a new line of business, an issue of additional equity shares without preemptive rights and reductions of share capital, require that the votes cast in favor of the resolution (whether by show of hands or on a poll) are not less than three times the number of votes, if any, cast against the resolution. As provided in our Articles, a shareholder may exercise his voting rights by proxy to be given in the form prescribed by us. This proxy, however, is required to be lodged with us at least 48 hours before the time of the relevant meeting. A shareholder may, by a single power of attorney, grant general power of representation covering several general meetings. A corporate shareholder is also entitled to nominate a representative to attend and vote on its behalf at all general meetings.

The Companies Act has recently been amended to provide for the passing of resolutions in relation to certain matters specified by the government of India, by means of a postal ballot.

ADS holders have no voting rights with respect to the deposited shares. See “Description of American Depositary Shares—Voting Rights.”

Annual Report

At least 21 days before an annual general meeting, we must circulate either a detailed or abridged version of our Indian GAAP audited financial accounts, together with the Directors’ Report and the Auditor’s Report, to the shareholders along with a notice convening the annual general meeting. We are also required under the Companies Act to make available upon the request of any shareholder our complete balance sheet and profit and loss account.

Under the Companies Act, we must file with the Registrar of Companies our Indian GAAP balance sheet and profit and loss account within 30 days of the conclusion of the annual general meeting and our annual return within 60 days of the conclusion of that meeting.

Register of Shareholders, Record Dates and Transfer of Shares

The equity shares are in registered form. We maintain a register of our shareholders in Mumbai. We register transfers of equity shares on the register of shareholders upon presentation of certificates in respect of the transfer of equity shares held in physical form together with a transfer deed duly executed by the transferor and transferee. These transfer deeds are subject to stamp duty, which has been fixed at 0.25% of the transfer price.

 

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For the purpose of determining equity shares entitled to annual dividends, the register of shareholders is closed for a period prior to the annual general meeting. The Companies Act and our listing agreements with the stock exchanges permit us, pursuant to a resolution of our board of directors and upon at least 7 days’ advance notice to the stock exchanges, to set the record date and close the register of shareholders after seven days’ public notice for not more than 30 days at a time, and for not more than 45 days in a year, in order for us to determine which shareholders are entitled to certain rights pertaining to the equity shares. Trading of equity shares and delivery of certificates in respect of the equity shares may, however, continue after the register of shareholders is closed.

Transfer of Shares

Shares held through depositories are transferred in the form of book entries or in electronic form in accordance with the regulations laid down by Securities Exchange Board of India (“SEBI”). These regulations provide the regime for the functioning of the depositories and the participants and set out the manner in which the records are to be kept and maintained and the safeguards to be followed in this system. Transfers of beneficial ownership of shares held through a depositary are exempt from stamp duty.

SEBI requires that our equity shares for trading and settlement purposes be in book-entry form for all investors, except for transactions that are not made on a stock exchange and transactions that are not required to be reported to the stock exchange. Transfers of equity shares in book-entry form require both the seller and the purchaser of the equity shares to establish accounts with depositary participants appointed by depositories established under the Depositaries Act, 1996. Charges for opening an account with a depositary participant, transaction charges for each trade and custodian charges for securities held in each account vary depending upon the practice of each depositary participant. Upon delivery, the equity shares shall be registered in the name of the relevant depositary on our books and this depositary shall enter the name of the investor in its records as the beneficial owner. The transfer of beneficial ownership shall be effected through the records of the depositary. The beneficial owner shall be entitled to all rights and benefits and subject to all liabilities in respect of his securities held by a depositary.

The requirement to hold the equity shares in book-entry form will apply to the ADS holders when the equity shares are withdrawn from the depositary facility upon surrender of the ADSs. In order to trade the equity shares in the Indian market, the withdrawing ADS holder will be required to comply with the procedures described above.

Our equity shares are freely transferable, subject only to the provisions of the Companies Act under which, if a transfer of equity shares contravenes the Securities and Exchange Board of India Act, 1992 or the regulations issued under it or the Sick Industrial Companies (Special Provisions) Act, 1985, or any other similar law, the Indian Company Law Board may, on application made by us, a depositary incorporated in India, an investor, SEBI or certain other parties, direct a rectification of the register of records. It is a condition of our listing that we transfer equity shares and deliver share certificates duly endorsed for the transfer within one month of the date of lodgment of transfer. If a company without sufficient cause refuses to register a transfer of equity shares within two months from the date on which the instrument of transfer is delivered to the company, the transferee may appeal to the Indian Company Law Board seeking to register the transfer of equity shares. The Indian Company Law Board may, in its discretion, issue an interim order suspending the voting rights attached to the relevant equity shares before completing its investigation of the alleged contravention. Our Articles provide for certain restrictions on the transfer of equity shares, including granting power to the board of directors in certain circumstances, to refuse to register or acknowledge transfer of equity shares or other securities issued by us. Furthermore, the RBI requires us to obtain its approval before registering a transfer of equity shares in favor of a person which together with equity shares already held by him represent more than 5.0% of our share capital.

Our transfer agent, Datamatics Financial Services Limited, is located in Mumbai. Certain foreign exchange control and security regulations apply to the transfer of equity shares by a non-resident or a foreigner. See “Restrictions on Foreign Ownership of Indian Securities.”

Disclosure of Ownership Interest

The provisions of the Companies Act generally require beneficial owners of equity shares of Indian companies that are not holders of record to declare to the company details of the holder of record and holders of record to declare details of the beneficial owner. While it is unclear whether these provisions apply to holders of an Indian company’s ADSs, investors who exchange ADSs for equity shares are subject to this provision. Failure to comply with these provisions would not affect the obligation of a company to register a transfer of equity shares or to pay any dividends to the registered holder of any equity shares in respect of which this declaration has not been made, but any person who fails to make the required declaration may be liable for a fine of up to Rs. 1,000 for each day this failure continues. However, under the Indian Banking Regulation Act, a registered holder of any equity shares, except in certain conditions, shall not be liable to any suit or proceeding on the ground that the title to those equity shares vests in another person.

 

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Acquisition by the Issuer of Its Own Shares

Until recently, the Companies Act did not permit a company to acquire its own equity shares because of the resulting reduction in the company’s capital. However, the government of India amended the Companies Act and consequently this reduction in capital is permitted in certain circumstances. The reduction of capital requires compliance with buy-back provisions specified in the Companies Act and by SEBI.

ADS holders will be eligible to participate in a buy-back in certain cases. An ADS holder may acquire equity shares by withdrawing them from the depositary facility and then sell those equity shares back to us. ADS holders should note that equity shares withdrawn from the depositary facility may only be redeposited into the depositary facility under certain circumstances. See “Description of American Depositary Shares—Deposit, Withdrawal and Cancellation.”

There can be no assurance that the equity shares offered by an ADS investor in any buy-back of shares by us will be accepted by us. The position regarding regulatory approvals required for ADS holders to participate in a buy-back is not clear. ADS investors are advised to consult their Indian legal advisers prior to participating in any buy-back by us, including in relation to any regulatory approvals and tax issues relating to the buy-back.

Liquidation Rights

Subject to the rights of depositors, creditors and employees, in the event of our winding up, the holders of the equity shares are entitled to be repaid the amounts of capital paid up or credited as paid up on these equity shares. All surplus assets remaining belong to the holders of the equity shares in proportion to the amount paid up or credited as paid up on these equity shares, respectively, at the commencement of the winding up.

Acquisition of the Undertaking by the Government

Under the Indian Banking Regulation Act, the government may, after consultation with the RBI, in the interest of our depositors or banking policy or better provision of credit generally or to a particular community or area, acquire our banking business. The RBI may acquire our business if it is satisfied that we have failed to comply with the directions given to us by the RBI or that our business is being managed in a manner detrimental to the interest of our depositors. Similarly, the Government of India may also acquire our business based on a report by the RBI.

Takeover Code and Listing Agreements

Under the Securities and Exchange Board of India (Substantial Acquisitions of Shares & Takeovers) Regulations, 1997 (the “Takeover Code”), upon the acquisition of more than 5% of the outstanding shares or voting rights of a publicly listed Indian company, a purchaser is required to notify the company and the company and the purchaser are required to notify all the stock exchanges on which the shares of such company are listed. Such notification is also required upon acquisition of 10% and 14% of the outstanding shares or voting rights of a publicly listed Indian company. An ADS holder would be subject to these notification requirements.

Upon the acquisition of 15% or more of such shares or voting rights, or a change in control of the company, the purchaser is required to make an open offer to the other shareholders, offering to purchase at least 20% of all the outstanding shares of the company at a minimum offer price as determined pursuant to the Takeover Code. Since we are a listed company in India, the provisions of the Takeover Code will apply to us. However, the Takeover Code provides for a specific exemption from this provision to an ADS holder and states that this provision will apply to an ADS holder only once he or she converts the ADSs into the underlying equity shares.

We have entered into listing agreements with each of the Indian stock exchanges on which our equity shares are listed. Each of the listing agreements provides that if a purchase of a listed company’s shares results in the purchaser and its affiliates holding more than 5% of the company’s outstanding equity shares or voting rights, the purchaser and the company must report its holding to the company and the relevant stock exchanges. The agreements also provide that if an acquisition results in the purchaser and its affiliates holding equity shares representing more than 15% of the voting rights in the company, then the purchaser must, before acquiring such equity shares, make an offer on a uniform basis to all remaining shareholders of the company to acquire equity shares that have at least an additional 20% of the voting rights of the total equity shares of the company at a prescribed price.

 

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DESCRIPTION OF AMERICAN DEPOSITARY SHARES

American Depositary Shares

JPMorgan Chase Bank, N.A., as depositary, issued the American Depositary Shares, or ADSs. Each ADS represents an ownership interest in three equity shares, which we have deposited with the custodian, as agent of the depositary, under the deposit agreement among ourselves, the depositary and each ADR holder. In the future, each ADS will also represent any securities, cash or other property deposited with the depositary but which it has not distributed directly to an ADR holder. The ADSs are evidenced by what is known as American Depositary Receipts or ADRs.

The depositary’s office is located at 4 New York Plaza, 13th Floor, New York, NY 10004.

Investors may hold ADSs either directly or indirectly through their broker or other financial institution. If an investor holds ADSs directly, by having an ADS registered in his name on the books of the depositary, he is an ADR holder. This description assumes that the investor holds his ADSs directly. If an investor holds the ADSs through his broker or financial institution nominee, he must rely on the procedures of such broker or financial institution to assert the rights of an ADR holder described in this section. Investors should consult with their broker or financial institution to find out what these procedures are.

Because the depositary’s nominee will actually be the registered owner of the shares, investors must rely on it to exercise the rights of a shareholder on their behalf. The obligations of the depositary and its agents are set out in the deposit agreement. The deposit agreement and the ADSs are governed by New York law.

The following is a summary of the material terms of the deposit agreement. Because it is a summary, it does not contain all the information that may be important to investors. For more complete information, investors should read the entire deposit agreement and the form of ADR which contains the terms of the ADSs. Investors can read a copy of the deposit agreement which was filed as an exhibit to the registration statement on Form F-1 we filed on July 12, 2001. Investors may also obtain a copy of the deposit agreement at the Securities and Exchange Commission Office, Public Reference Room, which is located at 100 F Street, N.E., Washington, D.C. 20549. Investors may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.

Share Dividends and Other Distributions

We may make various types of distributions with respect to our securities. The depositary has agreed to pay to the investor the cash dividends or other distributions it or the custodian receives on shares or other deposited securities, after deducting its expenses. The investor will receive these distributions in proportion to the number of underlying shares that the investor’s ADSs represent.

To the extent the depositary is legally permitted, it will deliver such distributions to ADR holders in proportion to their interests in the following manner:

Cash

The depositary will distribute any U.S. dollars available to it resulting from a cash dividend or other cash distribution if this is practicable and can be done in a reasonable manner. The depositary will attempt to distribute this cash in a practicable manner, and may deduct any taxes required to be withheld, any expenses of converting foreign currency and transferring funds to the United States and other expenses and adjustments. If exchange rates fluctuate during a time when the depositary cannot convert a foreign currency, investors may lose some or all of the value of the distribution.

Shares

In the case of a distribution in shares, the depositary will issue additional ADRs to evidence the number of ADSs representing such shares. Only whole ADSs will be issued. The depositary will sell any shares which would result in fractional ADSs and distribute the net proceeds to the ADR holders entitled to them.

Rights to Receive Additional Shares

In the case of a distribution of rights to subscribe for additional shares or other rights, if we provide satisfactory evidence that the depositary may lawfully distribute the rights, the depositary may arrange for ADR holders to instruct the depositary as to the exercise of the rights. However, if we do not furnish that evidence or if the depositary determines it is not practical to distribute the rights, the depositary may:

 

   

sell the rights, if practicable, and distribute the net proceeds as cash, or

 

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allow the rights to lapse, in which case ADR holders will receive nothing.

We have no obligation to file a registration statement under the Securities Act in order to make any rights available to ADR holders.

Other Distributions

In the case of a distribution of securities or property other than those described above, the depositary may either:

 

   

distribute such securities or property in any manner it deems equitable and practicable,

 

   

to the extent the depositary deems distribution of such securities or property not to be equitable and practicable, sell such securities or property and distribute any net proceeds in the same way it distributes cash, or

 

   

hold the distributed property, in which case the ADSs will also represent the distributed property.

Any U.S. dollars will be distributed by checks drawn on a bank in the United States for whole dollars and cents (fractional cents will be withheld without liability for interest and added to future cash distributions).

The depositary may choose any practical method of distribution for any specific ADR holder, including the distribution of foreign currency, securities or property, or it may retain those items, without paying interest on or investing them, on behalf of the ADR holder as deposited securities.

The depositary is not responsible if it decides that it is unlawful or impractical to make a distribution available to any ADR holders.

We cannot assure investors that the depositary will be able to convert any currency at a specified exchange rate or sell any property, rights, shares or other securities at a specified price, or that any of such transactions can be completed within a specified time period.

Deposit, Withdrawal and Cancellation

The depositary issues ADSs upon the deposit of shares or evidence of rights to receive shares with the custodian.

Except for shares that we deposit, no shares may be deposited by persons located in India, residents of India or for, or on the account of, such persons. Under current Indian laws and regulations, the depositary cannot accept deposits of outstanding shares and issue ADRs evidencing ADSs representing such shares without prior approval of the Government of India. However, an investor who surrenders an ADS and withdraws shares may be permitted to redeposit those shares in the depositary facility in exchange for ADSs and the depositary may accept deposits of outstanding shares purchased by a non-resident of India on the local stock exchange and issue ADSs representing those shares. However, in each case, the number of shares re-deposited or deposited cannot exceed the number represented by ADSs converted into underlying shares.

Shares deposited in the future with the custodian must be accompanied by certain documents, including instruments showing that such shares have been properly transferred or endorsed to the person on whose behalf the deposit is being made. Only the following may be deposited with the depositary or custodian:

 

   

shares issued as a free distribution in respect of deposited securities;

 

   

shares subscribed for or acquired by holders from us through the exercise of rights distributed by us to such persons in respect of shares; and

 

   

securities issued by us as a result of any change in par value, subdivision, consolidation and other reclassification of deposited securities or otherwise.

We will inform the depositary if any of the shares permitted to be deposited do not rank pari passu with the shares issued in any offering and the depositary will arrange for the ADSs issuable with respect to such shares to be differentiated from those issued in such offering until such time as they rank pari passu with the shares issued in such offering.

 

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The custodian will hold all deposited shares for the account of the depositary. ADR holders thus have no direct ownership interest in the shares and only have such rights as are contained in the deposit agreement. The custodian will also hold any additional securities, property and cash received on or in substitution for the deposited shares. The deposited shares and any such additional items are referred to as “deposited securities.”

Upon each deposit of shares, receipt of related delivery documentation and compliance with the other provisions of the deposit agreement, including the payment of the fees and charges of the depositary and any taxes or other fees or charges owing, the depositary will issue an ADR or ADRs in the name of the person entitled thereto evidencing the number of ADSs to which such person is entitled. Certificated ADRs will be delivered at the depositary’s principal New York office or any other location that it may designate as its transfer office.

When an investor turns in his ADRs at the depositary’s office, the depositary will, upon payment of certain applicable fees, charges and taxes, and upon receipt of proper instructions, deliver the underlying shares in dematerialized form, for which the ADS holder will be required to open an account with a depositary participant of the National Securities Depositary Limited or Central Depositary Services (India) Limited to hold and sell the shares in dematerialized form upon payment of customary fees and expenses. See “Description of Equity Shares—Transfer of Shares.”

The depositary may only restrict the withdrawal of deposited securities in connection with:

 

   

temporary delays caused by closing the Bank’s transfer books or those of the depositary or the deposit of shares in connection with voting at a shareholders’ meeting, or the payment of dividends;

 

   

the payment of fees, taxes and similar charges; or

 

   

compliance with any U.S. or foreign laws or governmental regulations relating to the ADRs or to the withdrawal of deposited securities.

This right of withdrawal may not be limited by any other provision of the deposit agreement.

Voting Rights

Investors who hold ADRs have no voting rights with respect to the deposited equity shares. The depositary will abstain from exercising the voting rights of the deposited equity shares. The RBI examined the matter relating to the exercise of voting rights by the depositary and issued a circular dated February 5, 2007 pursuant to which the Bank furnished to the RBI a copy of its agreement with the depository. We have given an undertaking to the RBI stating that we will not recognize voting by the depositary if the vote given by the depositary is in contravention of its agreement with us and that we or the depositary will not bring about any change in our depository agreement without the prior approval of the RBI.

Equity shares which have been withdrawn from the depositary facility and transferred on our register of shareholders to a person other than the depositary or its nominee may be voted by that person. However, such shareholders may not receive sufficient advance notice of shareholder meetings to enable them to withdraw the underlying shares and vote at such meetings.

Record Dates

The depositary may fix record dates for the determination of the ADR holders who will be entitled to receive a dividend, distribution or rights, subject to the provisions of the deposit agreement.

Reports and Other Communications

The depositary will make available for inspection by ADR holders any written communications from us which are both received by the custodian or its nominee as a holder of deposited securities and made generally available to the holders of deposited securities. We will furnish these communications in English.

Additionally, if we make any written communications generally available to holders of our shares, including the depositary or the custodian, and the depositary or the custodian actually receives those written communications, the depositary will mail copies of them, or, at its option, summaries of them to ADR holders.

 

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Fees and Charges for Holders of American Depositary Shares

J.P. Morgan Chase Bank, N.A., as the depositary for our ADSs, collects fees for the issuance and cancellation of ADSs from the holders of our ADSs, or intermediaries acting on their behalf, against the deposit or withdrawal of ordinary shares in the custodian account. The depositary also collects the following fees from holders of ADRs or intermediaries acting in their behalf:

 

Category

  

Depositary actions

  

Associated fee

(a) Depositing or substituting the underlying shares    Issuing ADSs upon deposits of shares, including deposits and issuances in respect of share distributions, stock splits, rights, mergers, exchanges of securities or any other transaction or event or other distribution affecting the ADSs or the deposited shares.    U.S.$5.00 for each 100 ADSs (or portion thereof) evidenced by the new shares deposited.
(b) Receiving or distributing dividends    Distribution of dividends.    U.S.$0.02 or less per ADSs (U.S.$2.00 per 100 ADSs).
(c) Selling or exercising rights    Distribution or sale of securities.    U.S.$5.00 for each 100 ADSs (or portion thereof), the fee being in an amount equal to the fee for the execution and delivery of ADSs which would have been charged as a result of the deposit of such securities.
(d) Withdrawing an underlying security    Acceptance of ADSs surrendered for withdrawal of deposited shares.    U.S.$5.00 for each 100 ADSs (or portion thereof) evidenced by the shares withdrawn.
(e) Transferring, splitting or grouping receipts    Transferring, combining or grouping of depositary receipts.    U.S.$1.50 per ADS.
(f) General depositary services, particularly those charged on an annual basis.    Other services performed by the depositary in administering the ADSs.    U.S.$0.02 per ADS (or portion thereof) not more than once each calendar year.
(g) Other    Expenses incurred on behalf of holders in connection with:    The amount of such expenses incurred by the Depositary.
   compliance with foreign exchange control regulations or any law or regulation relating to foreign investment;   
   the depositary’s or its custodian’s compliance with applicable law, rule or regulation;   
   stock transfer or other taxes and other governmental charges;   
   cable, telex, facsimile transmission/delivery;   
   expenses of the depositary in connection with the conversion of foreign currency into U.S. dollars (which are paid out of such foreign currency); or   
   any other charge payable by depositary or its agents.   

As provided in the Deposit Agreement, the Depositary may charge fees for making cash and other distributions to holders by deducting fees from distributable amounts or by selling a portion of the distributable property. The Depositary may generally refuse to provide services until its fees for those services are paid.

 

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Fees Paid by the Depositary to Us

Direct Payments

The depositary has agreed to reimburse certain reasonable expenses related to our ADS program incurred by us in connection with the program. Under certain circumstances, including termination of our ADS program prior to June 14, 2014, we may be required to repay to the depositary amounts reimbursed in prior periods.

The table below sets forth the types of expenses that the Depositary has reimbursed us during fiscal 2010.

 

Category

   Amount
reimbursed

Legal, accounting fees and other expenses incurred in connection with our ADR program

   U.S.$ 1,013,691.5

Indirect Payments

As part of its service to us, the Depositary has agreed to waive fees for the standard costs associated with the administration of our ADS program, associated operating expenses and investor relations advice up to a minimum of US$ 215,000 per year.

Payment of Taxes

ADR holders must pay any tax or other governmental charge payable by the custodian or the depositary on any ADS or ADR, deposited security or distribution. If an ADR holder owes any tax or other governmental charge, the depositary may:

 

   

deduct the amount thereof from any cash distributions, or

 

   

sell deposited securities and deduct the amount owing from the net proceeds of such sale.

In either case the ADR holder remains liable for any shortfall. Additionally, if any tax or governmental charge is unpaid, the depositary may also refuse to effect any registration, registration of transfer, split-up or combination of deposited securities or withdrawal of deposited securities (except under limited circumstances mandated by securities regulations). If any tax or governmental charge is required to be withheld on any non-cash distribution, the depositary may sell the distributed property or securities to pay such taxes and distribute any remaining net proceeds to the ADR holders entitled to them.

Reclassifications, Recapitalizations and Mergers

If we take certain actions that affect the deposited securities, including (1) any change in par value, split-up, consolidation, cancellation or other reclassification of deposited securities or (2) any recapitalization, reorganization, merger, consolidation, liquidation, receivership, bankruptcy or sale of all or substantially all of our assets, then the depositary may choose to:

 

   

amend the form of ADR;

 

   

distribute additional or amended ADRs;

 

   

distribute cash, securities or other property it has received in connection with such actions;

 

   

sell any securities or property received and distribute the proceeds as cash; or

 

   

take no action.

If the depositary does not choose any of the above options, any of the cash, securities or other property it receives will constitute part of the deposited securities and each ADS will then represent a proportionate interest in such property.

Amendment and Termination

We may agree with the depositary to amend the deposit agreement and the ADSs without the consent of ADR holders for any reason. ADR holders must be given at least 30 days notice of any amendment that imposes or increases any fees or charges (other than stock transfer or other taxes and other governmental charges, transfer or registration fees, cable, telex or facsimile transmission costs, delivery costs or other such expenses), or affects any substantial existing right of ADR holders. If an ADR holder continues to hold an ADR or ADRs after being notified of these changes, the ADR holder is deemed to agree to such amendment. Notwithstanding the foregoing, an amendment can become effective before notice is given if this is necessary to ensure compliance with a new law, rule or regulation.

 

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No amendment will impair an ADR holder’s right to surrender its ADSs and receive the underlying securities. If a governmental body adopts new laws or rules which require the deposit agreement or the ADS to be amended, the Bank and the depositary may make the necessary amendments, which could take effect before an ADR holder receives notice thereof.

The depositary may terminate the deposit agreement by giving the ADR holders at least 30 days prior notice, and it must do so at our request. After termination, the depositary’s only responsibility will be (i) to deliver deposited securities to ADR holders who surrender their ADRs, and (ii) to hold or sell distributions received on deposited securities. As soon as practicable after the expiration of six months from the termination date, the depositary will sell the deposited securities which remain and hold the net proceeds of such sales, without liability for interest, in trust for the ADR holders who have not yet surrendered their ADRs. After making those sales, the depositary shall have no obligations except to account for such proceeds and other cash. The depositary will not be required to invest such proceeds or pay interest on them.

Limitations on Obligations and Liability to ADR Holders

The deposit agreement expressly limits the obligations and liability of the depositary, ourselves and our respective agents. Neither we nor the depositary nor any such agent will be liable if:

 

   

a change in law or regulation governing any deposited securities, act of God, war or other circumstance beyond its control shall prevent, delay or subject to any civil or criminal penalty any act which the deposit agreement or the ADRs provide shall be done or performed by it;

 

   

it exercises or fails to exercise discretion under the deposit agreement or the ADR;

 

   

it takes any action or inaction in reliance upon the advice of or information from legal counsel, accountants, any person presenting shares for deposit, any registered holder of ADRs, or any other person believed by it to be competent to give such advice or information; or

 

   

it performs its obligations without gross negligence or bad faith;

 

   

it relies upon any written notice, request, direction or other document believed by it to be genuine and to have been signed or presented by the proper party or parties.

Neither the depositary nor its agents have any obligation to appear in, prosecute or defend any action, suit or other proceeding in respect of any deposited securities or the ADRs. We and our agents shall only be obligated to appear in, prosecute or defend any action, suit or other proceeding in respect of any deposited securities or the ADRs, which in our opinion may involve us in expense or liability, if indemnity satisfactory to us against all expense (including fees and disbursements of counsel) and liability is furnished as often as we require.

The depositary will not be responsible for failing to carry out instructions to vote the deposited securities or for the manner in which the deposited securities are voted or the effect of the vote.

The depositary may own and deal in deposited securities and ADSs.

Disclosure of Interest in ADSs

From time to time we may request ADR holders and beneficial owners of ADSs to provide information as to:

 

   

the capacity in which they own or owned ADSs;

 

   

the identity of any other persons then or previously interested in such ADSs; and

 

   

the nature of such interest and various other matters.

Investors in ADSs agree to provide any information requested by us or the depositary pursuant to the deposit agreement. The depositary has agreed to use reasonable efforts to comply with written instructions received from us requesting that it forward any such requests to investors in ADSs and other holders and beneficial owners and to forward to us any responses to such requests to the extent permitted by applicable law.

We may restrict transfers of the shares where any such transfer might result in ownership of shares in contravention of, or exceeding the limits under, the governmental approval which we received from the Indian government in connection with any offering, applicable law or our organizational documents. We may also instruct ADR holders that we are restricting the transfers of ADSs where such a transfer may result in the total number of shares represented by the ADSs beneficially owned by ADR holders contravening or exceeding the limits under the applicable law or our organizational documents. We reserve the right to instruct ADR holders to deliver their ADSs for cancellation and withdrawal of the shares underlying such ADSs.

 

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Requirements for Depositary Actions

We, the depositary or the custodian may refuse to:

 

   

issue, register or transfer an ADR or ADRs;

 

   

effect a split-up or combination of ADRs;

 

   

deliver distributions on any such ADRs; or

 

   

permit the withdrawal of deposited securities (unless the deposit agreement provides otherwise), until the following conditions have been met:

 

   

the holder has paid all taxes, governmental charges and fees and expenses as required in the deposit agreement;

 

   

the holder has provided the depositary with any information it may deem necessary or proper, including, without limitation, proof of identity and the genuineness of any signature; and

 

   

the holder has complied with such regulations as the depositary may establish under the deposit agreement.

The depositary may also suspend the issuance of ADSs, the deposit of shares, the registration, transfer, split-up or combination of ADRs, or the withdrawal of deposited securities (unless the deposit agreement provides otherwise), if the register for ADRs or any deposited securities is closed or if we or the depositary decide it is advisable to do so.

Books of Depositary

The depositary or its agent will maintain a register for the registration, registration of transfer, combination and split-up of ADRs. ADR holders may inspect the depositary’s designated records at its office during regular business hours.

The depositary will maintain facilities to record and process the registration, registration of transfer, combination and split of ADRs. These facilities may be closed from time to time, to the extent not prohibited by law.

Pre-release of ADSs

The depositary may issue ADSs prior to the deposit with the custodian of shares (or rights to receive shares). This is called a pre-release of the ADSs. A pre-release is closed out as soon as the underlying shares (or other ADSs) are delivered to the depositary. The depositary may pre-release ADSs only if:

 

   

the depositary has received collateral for the full market value of the pre-released ADSs; and

 

   

each recipient of pre-released ADSs agrees in writing that he or she:

 

   

owns the underlying shares;

 

   

assigns all rights in such shares to the depositary;

 

   

holds such shares for the account of the depositary; and

 

   

will deliver such shares to the custodian as soon as practicable, and promptly if the depositary so demands.

In general, the number of pre-released ADSs will not evidence more than 30% of all ADSs outstanding at any given time (excluding those evidenced by pre-released ADSs). However, the depositary may change or disregard such limit from time to time as it deems appropriate. The depositary may retain for its own account any earnings on collateral for pre-released ADSs and its charges for issuance thereof.

The Depositary

JPMorgan Chase Bank, N.A., a national banking association organized under the laws of the United States, is a commercial bank offering a wide range of banking and trust services to its customers in the New York metropolitan area, throughout the United States and around the world.

 

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DIVIDEND POLICY

We have paid dividends every year since fiscal 1997. The following table sets forth, for the periods indicated, the dividend per equity share and the total amount of dividends declared on the equity shares, both exclusive of dividend tax. All dividends were paid in rupees.

 

     Dividend per equity share    Total amount of dividends declared  (1)
               (in millions)

Relating to Fiscal Year

           

2006

   Rs. 5.50    US$ 0.122    Rs. 1,722.3    US$ 38.3

2007

     7.00      0.156      2,235.7      49.7

2008

     8.50      0.189      3,012.7      67.0

2009

     10.00      0.222      4,253.8      94.6

2010

     12.00      0.267      5,492.9      122.2

 

(1) Includes dividends declared on shares held by the Employees Welfare Trust.

Our dividends are generally declared and paid in the fiscal year following the year to which they relate. Under Indian law, a company pays dividends upon a recommendation by its board of directors and approval by a majority of the shareholders at the annual general meeting of shareholders held within six months of the end of each fiscal year. The shareholders have the right to decrease but not to increase the dividend amount recommended by the board of directors.

Effective April 1, 2007, we pay a 15.0% direct tax in respect of dividends paid by us. In addition, we pay a 10.0% surcharge (effective April 1, 2010 the said surcharge was reduced to 7.5%) on 15.0% direct tax and a 3.0% add-on tax on such 15.0% direct tax including surcharge. These are direct taxes paid by us; these taxes are not payable by shareholders and are not withheld or deducted from the dividend payments set forth above. The tax rates imposed on us in respect of dividends paid in prior periods varied.

Future dividends will depend on our revenues, cash flows, financial condition (including capital position) and other factors. ADS holders will be entitled to receive dividends payable in respect of the equity shares represented by ADSs. Cash dividends in respect of the equity shares represented by ADSs will be paid to the depositary in Indian rupees and, except in certain instances will be converted by the depositary into U.S. dollars. The depositary will distribute these proceeds to ADS holders. The equity shares represented by ADSs will rank equally with all other equity shares in respect of dividends.

For a description of regulation of dividends, see “Supervision and Regulation—Requirements of the Banking Regulation Act—Restrictions on Payment of Dividends.”

 

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SELECTED FINANCIAL AND OTHER DATA

The following table sets forth our selected financial and operating data. Our selected income statement data for the fiscal years ended March 31, 2008, 2009 and 2010 and the selected balance sheet data as of March 31, 2009 and 2010 are derived from our audited financial statements included in this report together with the report of Deloitte Haskins & Sells, independent registered public accounting firm. Our selected balance sheet data as of March 31, 2006, March 31, 2007, March 31, 2008 and selected income data for the years ended March 31, 2006 and March 31, 2007 are derived from our audited financial statements not included in this report. For the convenience of the reader, the selected financial data as of and for the year ended March 31, 2010 have been translated into U.S. dollars at the rate on such date of Rs. 44.95 per US$1.00.

You should read the following data with the more detailed information contained in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements. Footnotes to the following data appear below the final table. We acquired Centurion Bank of Punjab effective May 23, 2008. The selected financial and other data is presented accordingly.

 

    Year ended March 31,
    2006   2007   2008   2009   2010   2010
    (in millions, except per equity share data and ADS data)

Selected income statement data:

           

Interest and dividend revenue

  Rs. 43,528.0   Rs. 70,061.6   Rs. 104,249.7   Rs. 158,996.8   Rs. 158,651.3   US$ 3,529.6

Interest expense

    19,621.8     33,145.1     49,414.0     86,114.9     77,720.0     1,729.0
                                   

Net interest revenue

    23,906.2     36,916.5     54,835.7     72,881.9     80,931.3     1,800.6

Provisions for credit losses, net

    5,032.0     8,250.3     13,367.7     20,394.9     18,193.9     404.8
                                   

Net interest revenue after provisions for credit losses

    18,874.2     28,666.2     41,468.0     52,487.0     62,737.4     1,395.8

Non-interest revenue, net

    12,147.9     14,999.7     20,346.6     33,603.0     42,899.7     954.5
                                   

Net revenue

    31,022.1     43,665.9     61,814.6     86,090.0     105,637.1     2,350.3

Non-interest expense

    17,846.8     27,426.1     42,261.8     63,154.9     68,410.9     1,522.1
                                   

Income before income tax expense

    13,175.3     16,239.8     19,552.8     22,935.1     37,226.2     828.2

Income tax expense

    3,965.7     5,142.9     6,307.6     7,737.4     12,338.4     274.5
                                   

Net income before noncontrolling interest

    9,209.6     11,096.9     13,245.2     15,197.7     24,887.8     553.7

Less: Net income attributable to noncontrolling interest

    22.5     57.2     91.0     93.4     317.1     7.1
                                   

Net income attributable to HDFC Bank Limited

  Rs. 9,187.1   Rs. 11,039.7   Rs. 13,154.2   Rs. 15,104.3   Rs. 24,570.7   US$ 546.6
                                   

Per equity share data:

           

Earnings per equity share, basic

  Rs. 29.45   Rs. 35.10   Rs. 38.24   Rs. 36.40   Rs. 56.30   US$ 1.25

Earnings per equity share, diluted

    29.08     34.60     37.75     36.21     55.61     1.24

Dividends per share

    5.50     7.00     8.50     10.00     12.00     0.27

Book value (1)

    176.49     205.10     336.44     586.52     667.59     14.85

Equity share data:

           

Equity shares outstanding at end of period

    313.1     319.4     354.4     425.4     457.7     457.7

Weighted average equity shares outstanding — basic

    311.9     314.6     344.0     415.0     436.4     436.4

Weighted average equity shares outstanding — diluted

    315.9     319.1     348.4     417.1     441.8     441.8

ADS data (where 1 ADS represents 3 shares):

           

Earnings per ADS — basic

    88.36     105.30     114.72     109.20     168.90     3.76

Earnings per ADS — diluted

    87.24     103.80     113.25     108.63     166.83     3.71

 

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    As of March 31,
    2006   2007   2008   2009   2010   2010
    (in millions)

Selected balance sheet data:

           

Cash and cash equivalents

  Rs. 61,194.3   Rs. 80,546.4   Rs. 147,208.0   Rs. 171,224.4   Rs. 297,558.5   US$ 6,619.8

Term placements (2)

    10,243.7     12,815.8     5,917.6     34,473.2     58,166.3     1,294.0

Loans, net of allowance

    395,274.3     536,730.9     715,345.3     986,495.0     1,297,180.4     28,858.3

Investments:

           

Investments held for trading

    2,945.6     4,284.1     113,557.8     35,386.2     28,158.8     626.4

Investments available for sale

    273,457.0     304,241.1     419,008.8     508,106.3     481,398.8     10,709.7

Investments held to maturity (3)

    —       —       —       —       —       —  

Total

    276,402.6     308,525.2     532,566.6     543,492.5     509,557.6     11,336.1

Total assets

  Rs. 790,969.4   Rs. 1,013,185.9   Rs. 1,507,988.9   Rs. 2,020,744.8   Rs. 2,416,520.4   US$ 53,760.3

Long-term debt (including current portion)

    17,899.9     33,601.5     32,832.4     68,452.2     75,854.4     1,687.5

Short-term borrowings (excluding current portion of long-term debt)

    74,805.4     95,472.4     129,330.3     26,383.6     98,165.0     2,183.9

Total deposits

    557,305.4     682,348.0     1,005,910.1     1,426,288.6     1,672,400.3     37,205.8

Of which:

           

Interest-bearing deposits

    410,181.2     484,542.9     718,646.9     1,142,281.9     1,301,046.0     28,944.3

Non-interest bearing deposits

    147,124.2     197,805.1     287,263.2     284,006.7     371,354.3     8,261.5

Total liabilities

    735,476.6     947,356.2     1,388,281.6     1,770,691.7     2,110,066.2     46,942.5

Noncontrolling interest

    225.3     321.6     462.0     555.4     872.5     19.4

Total HDFC Bank Limited Shareholders’ equity

    55,267.5     65,508.1     119,245.3     249,497.7     305,581.7     6,798.2

Total liabilities and shareholders’ equity

  Rs. 790,969.4   Rs. 1,013,185.9   Rs. 1,507,988.9   Rs. 2,020,744.8   Rs. 2,416,520.4   US$ 53,760.3
    Year ended March 31,
    2006   2007   2008   2009   2010   2010
    (in millions)

Period average (4)

           

Interest-earning assets

  Rs. 589,311.1   Rs. 841,352.1   Rs. 1,077,606.7   Rs. 1,579,423.9   Rs. 1,756,963.3   US$ 39,087.1

Loans, net of allowance

    323,709.9     467,362.5     641,422.4     992,040.0     1,106,474.4     24,615.7

Total assets

    621,249.5     885,171.5     1,251,281.2     1,917,502.6     2,095,543.0     46,619.4

Interest-bearing deposits

    338,085.5     491,948.4     661,884.6     1,114,880.3     1,202,813.6     26,758.9

Non-interest bearing deposits

    125,616.3     170,468.2     247,083.6     248,822.0     295,675.6     6,577.9

Total deposits

    463,701.8     662,416.6     908,968.2     1,363,702.3     1,498,489.2     33,336.8

Interest-bearing liabilities

    419,000.5     594,152.0     763,617.7     1,253,236.8     1,325,841.7     29,495.9

Long-term debt

    6,669.7     26,812.5     32,218.4     43,493.5     72,433.5     1,611.4

Short-term borrowings

    74,245.3     75,391.1     69,514.7     94,863.0     50,594.6     1,125.6

Total liabilities

    572,893.7     826,187.9     1,149,483.2     1,696,255.7     1,825,399.3     40,609.6

HDFC Bank Limited Shareholders’ equity

    48,355.8     58,983.6     101,797.9     221,246.9     270,143.7     6,009.9

 

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     As of or for the year ended March 31,
     2006    2007    2008    2009    2010
     (in percentage)

Profitability:

              

Net income attributable to HDFC Bank Limited as a percentage of:

              

Average total assets

   1.5    1.2    1.1    0.8    1.2

Average shareholders’ equity

   19.0    18.7    13.0    6.8    9.1

Dividend payout ratio (5)

   18.7    20.3    22.9    28.2    22.4

Spread (6)

   3.8    4.0    4.8    4.3    4.2

Net interest margin (7)

   4.1    4.4    5.1    4.6    4.6

Cost-to-net revenue ratio (8)

   57.5    62.8    68.4    73.4    64.8

Cost-to-average assets ratio (9)

   2.9    3.1    3.4    3.3    3.3

Capital:

              

Total capital adequacy ratio (10)

   11.41    13.08    13.60    15.69    17.44

Tier 1 capital adequacy ratio (10)

   8.55    8.57    10.30    10.58    13.26

Tier 2 capital adequacy ratio (10)

   2.86    4.51    3.30    5.11    4.18

Average HDFC Bank Limited shareholders’ equity as a percentage of average total assets

   7.8    6.7    8.1    11.6    12.9

Asset quality:

              

Gross non-performing customer assets as a percentage of gross customer assets (11)

   1.2    1.2    1.2    1.9    1.5

Net non-performing customer assets as a percentage of net customer assets (11)

   0.4    0.4    0.4    0.6    0.4

Total allowance for credit losses as a percentage of gross non-performing credit assets

   118.2    128.1    144.2    125.5    123.3

 

1) Represents the difference between total assets and total liabilities, divided by the number of shares outstanding at the end of each reporting period.
2) Includes placements with banks and financial institutions with original maturities of greater than three months.
3) During fiscal 2005 we transferred certain securities classified as “held to maturity” to the “available for sale” category for reasons not permitted under U.S. GAAP. As a result, we were required to transfer all remaining securities to the “available for sale” category and we were prevented from establishing a “held to maturity” portfolio until after March 31, 2007.
4) Average balances are the average of daily outstanding amounts. Average figures are unaudited.
5) Represents the ratio of total dividends payable on equity shares relating to each fiscal year, excluding the dividend distribution tax, as a percentage of net income of that year. Dividends declared each year are typically paid in the following fiscal year. See “Dividend Policy.”
6) Represents the difference between yield on average interest-earning assets and cost of average interest-bearing liabilities. Yield on average interest-earning assets is the ratio of interest revenue to average interest-earning assets. Cost of average interest-bearing liabilities is the ratio of interest expense to average interest-bearing liabilities. For purposes of calculating spread, interest-bearing liabilities include non-interest bearing current accounts and cash floats from transactional services.
7) Represents the ratio of net interest revenue to average interest-earning assets. The difference in net interest margin and spread arises due to the difference in the amount of average interest-earning assets and average interest-bearing liabilities. If average interest-earning assets exceed average interest-bearing liabilities, the net interest margin is greater than the spread. If average interest-bearing liabilities exceed average interest-earning assets, the net interest margin is less than the spread.
8) Represents the ratio of non-interest expense to the sum of net interest revenue after provision for credit losses and non-interest revenue.
9) Represents the ratio of non-interest expense to average total assets.
10) Tier 1 and Tier 2 capital adequacy ratios are computed in accordance with the guidelines of the RBI, based on the financial statements prepared in accordance with the Indian GAAP up to March 31, 2008 as per Basel I guidelines and as of March 31, 2009 and 2010 as per Basel II guidelines. See “Supervision and Regulation.”
11) Customer assets consist of loans and credit substitutes.

 

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SELECTED STATISTICAL INFORMATION

The following information should be read together with our financial statements included in this report as well as “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” All amounts presented in this section are in accordance with U.S. GAAP, other than capital adequacy ratios, and are audited, except for average amounts. Footnotes appear at the end of each related section of tables.

Average Balance Sheet

The table below presents the average balances for interest-earning assets and interest-bearing liabilities together with the related interest revenue and expense amounts, resulting in the presentation of the average yields and cost for each period. The average balance is the daily average of balances outstanding. The average yield on average interest-earning assets is the ratio of interest revenue to average interest-earning assets. The average cost on average interest-bearing liabilities is the ratio of interest expense to average interest-bearing liabilities. The average balances of loans include non-performing loans and are net of allowance for credit losses. We have not recalculated tax-exempt income on a tax-equivalent basis.

 

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    Year ended March 31,  
    2008     2009     2010  
    Average balance   Interest
revenue/
expense
  Average
yield/
cost
    Average
balance
  Interest
revenue/
expense
  Average
yield/
cost
    Average
balance
  Interest
revenue/
expense
  Average
yield/
cost
 
    (in millions, except percentages)  

Assets:

                 

Interest-earning assets:

                 

Cash equivalents

  Rs. 30,631.2   Rs. 1,760.4   5.7 %   Rs. 35,407.4   Rs. 1,434.7   4.1 %   Rs. 26,923.5   Rs. 732.9   2.7 %

Term placements

    14,248.4     1,182.7   8.3        25,020.3     1,261.4   5.0        37,059.7     1,804.1   4.9   

Investments available for sale:

                 

Tax free(1)

    8,333.0     472.4   5.6        5,731.8     232.1   4.0        2,942.2     170.5   5.8   

Taxable

    327,523.6     24,789.0   7.6        481,193.9     35,404.8   7.4        488,450.4     33,134.1   6.8   

Investments held to maturity

    —       —     —          —       —     —          —       —     —     

Investments held for trading

    55,448.1     3,449.3   6.2        40,030.5     3,382.3   8.4        95,113.1     4,445.2   4.7   

Loans, net:

                 

Retail loans

    361,791.4     46,794.0   12.9        579,838.1     73,874.5   12.7        615,331.2     79,462.0   12.9   

Wholesale loans

    279,631.0     25,801.9   9.2        412,201.9     43,407.0   10.5        491,143.2     38,902.5   7.9   
                                                     

Total interest-earning assets:

  Rs. 1,077,606.7   Rs. 104,249.7   9.7 %   Rs. 1,579,423.9   Rs. 158,996.8   10.1 %   Rs. 1,756,963.3   Rs. 158,651.3   9.0 %
                                                     

Non-interest-earning assets:

                 

Cash

    95,172.9         122,664.9         113,018.5    

Property and equipment

    9,364.2         15,862.3         19,890.9    

Other assets

    69,137.4         199,551.5         205,670.3    

Total non-interest earning assets

    173,674.5         338,078.7         338,579.7    
                                                     

Total assets

  Rs. 1,251,281.2   Rs. 104,249.7   8.3 %   Rs. 1,917,502.6   Rs. 158,996.8   8.3 %   Rs. 2,095,543.0   Rs. 158,651.3   7.6 %
                                                     

Liabilities:

                 

Interest-bearing liabilities:

                 

Savings account deposits

  Rs. 222,473.6   Rs. 5,757.6   2.6 %   Rs. 314,433.5   Rs. 8,463.5   2.7 %   Rs. 414,444.4   Rs. 11,431.1   2.8 %

Time deposits

    439,411.0     36,909.5   8.4        800,446.8     68,284.6   8.5        788,369.2     58,422.9   7.4   

Short-term borrowings (2)

    69,514.7     4,100.9   5.9        94,863.0     5,876.5   6.2        50,594.6     1,813.4   3.6   

Long-term debt

    32,218.4     2,646.0   8.2        43,493.5     3,490.3   8.0        72,433.5     6,052.6   8.4   
                                                     

Total interest-bearing liabilities

  Rs. 763,617.7   Rs. 49,414.0   6.5 %   Rs. 1,253,236.8   Rs. 86,114.9   6.9 %   Rs. 1,325,841.7   Rs. 77,720.0   5.9 %
                                                     

Non-interest-bearing liabilities:

                 

Non-interest-bearing deposits (3) 

    247,083.6         248,822.0         295,675.6    

Other liabilities

    138,781.9         194,196.9         203,882.0    

Total non-interest-bearing liabilities

    385,865.5         443,018.9         499,557.6    
                             

Total liabilities

  Rs. 1,149,483.2   Rs. 49,414.0   4.3 %   Rs. 1,696,255.7   Rs. 86,114.9   5.1 %   Rs. 1,825,399.3   Rs. 77,720.0   4.3 %

HDFC Bank Limited Shareholders’ equity

    101,797.9         221,246.9         270,143.7    
                                                     

Total liabilities and shareholders’ equity

  Rs. 1,251,281.2   Rs. 49,414.0   3.9 %   Rs. 1,917,502.6   Rs. 86,114.9   4.5 %   Rs. 2,095,543.0   Rs. 77,720.0   3.7 %
                                                     

 

1) Yields on tax free securities are not on a tax equivalent basis.

 

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2) Includes securities sold under repurchase agreements.
3) Includes current accounts and cash floats from transactional services.

Analysis of Changes in Interest Revenue and Interest Expense: Volume and Rate

The following table sets forth, for the periods indicated, the allocation of the changes in our interest revenue and interest expense between average volume and average rate.

 

      Fiscal 2009 vs. Fiscal 2008
Increase (decrease)(1) due to
    Fiscal 2010 vs. Fiscal 2009
Increase (decrease)(1) due to
 
      Net change     Change in
average
volume
    Change in
average rate
    Net change     Change in
average

volume
    Change in
average rate
 
     (in millions)  

Interest revenue:

            

Cash equivalents

   Rs. (325.7   Rs. 451.5      Rs. (777.2   Rs. (701.8   Rs. (164.6   Rs. (537.2

Term placements

     78.7        894.1        (815.4     542.7        607.0        (64.3

Investments available for sale:

            

Tax free

     (240.3     (147.5     (92.8     (61.6     (113.0     51.4   

Taxable

     10,615.8        11,630.7        (1,014.9     (2,270.7     533.9        (2,804.6

Investments held to maturity

     —          —          —          —          —          —     

Investments held for trading

     (67.0     (959.1     892.1        1,062.9        4,654.1        (3,591.2

Loans, net:

            

Retail loans

     27,080.5        28,202.1        (1,121.6     5,587.5        4,522.0        1,065.5   

Wholesale loans

     17,605.1        12,232.5        5,372.6        (4,504.5     8,312.9        (12,817.4
                                                

Total interest-earning assets

   Rs. 54,747.1      Rs. 52,304.3      Rs. 2,442.8      Rs. (345.5   Rs. 18,352.3      Rs. (18,697.8
                                                

Interest expense:

            

Savings account deposits

   Rs. 2,705.9      Rs. 2,379.9      Rs. 326.0      Rs. 2,967.6      Rs. 2,692.0      Rs. 275.6   

Time deposits

     31,375.1        30,326.2        1,048.9        (9,861.7     (1,030.3     (8,831.4

Short-term borrowings

     1,775.6        1,495.4        280.2        (4,063.1     (2,742.3     (1,320.8

Long-term debt

     844.3        926.0        (81.7     2,562.3        2,322.4        239.9   
                                                

Total interest-bearing liabilities

   Rs. 36,700.9      Rs. 35,127.5      Rs. 1,573.4      Rs. (8,394.9   Rs. 1,241.8      Rs. (9,636.7
                                                

Net interest revenue

   Rs. 18,046.2      Rs. 17,176.8      Rs. 869.4      Rs. 8,049.4      Rs. 17,110.5      Rs. (9,061.1
                                                

 

1) The changes in net interest revenue between periods have been reflected as attributed either to volume or rate changes. For purposes of this table, changes which are due to both volume and rate have been allocated solely to changes in rate.

 

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Yields, Spreads and Margins

The following table sets forth, for the periods indicated, the yields, spreads and interest margins on our interest-earning assets.

 

     Year ended March 31,  
     2008     2009     2010  
     (in millions, except percentages)  

Interest revenue

   Rs. 104,249.7      Rs. 158,996.8      Rs. 158,651.3   

Average interest-earning assets

     1,077,606.7        1,579,423.9        1,756,963.3   

Interest expense

     49,414.0        86,114.9        77,720.0   

Average interest-bearing liabilities

     763,617.7        1,253,236.8        1,325,841.7   

Average total assets

     1,251,281.2        1,917,502.6        2,095,543.0   

Average interest-earning assets as a percentage of average total assets

     86.1     82.4     83.8

Average interest-bearing liabilities as a percentage of average total assets

     61.0     65.4     63.3

Average interest-earning assets as a percentage of average interest-bearing liabilities

     141.1     126.0     132.5

Yield

     9.7     10.1     9.0

Cost of funds(1)

     4.3     5.1     4.3

Spread(2)

     4.8     4.3     4.2

Net interest margin(3)

     5.1     4.6     4.6

 

1) Excludes HDFC Bank Limited shareholders’ equity.
2) Represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities. The yield on average interest-earning assets is the ratio of interest revenue to average interest-earning assets. The cost of average interest-bearing liabilities is the ratio of interest expense to average interest-bearing liabilities. For purposes of calculating spread, interest-bearing liabilities include non-interest bearing current accounts and cash floats from transactional services.
3) The net interest margin is the ratio of net interest revenue to average interest-earning assets. The difference in the net interest margin and spread arises due to the difference in the amount of average interest-earning assets and average interest-bearing liabilities. If average interest-earning assets exceed average interest-bearing liabilities, the net interest margin is greater than the spread. If average interest-bearing liabilities exceed average interest-earning assets, the net interest margin is less than the spread.

Returns on Equity and Assets

The following table presents selected financial ratios for the periods indicated.

 

     Year ended March 31,  
     2008     2009     2010  
     (in millions, except percentages)  

Net income

   Rs. 13,154.2      Rs. 15,104.3      Rs. 24,570.7   

Average total assets

     1,251,281.2        1,917,502.6        2,095,543.0   

Average HDFC Bank Limited shareholders’ equity

     101,797.9        221,246.9        270,143.7   

Net income as a percentage of average total assets

     1.1 %     0.8 %     1.2 %

Net income as a percentage of average HDFC Bank Limited shareholders’ equity

     12.9 %     6.8 %     9.1 %

Average HDFC Bank Limited shareholders’ equity as a percentage of average total assets

     8.1 %     11.5 %     12.9 %

Dividend payout-ratio

     22.9 %     28.2 %     22.4 %

 

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Investment Portfolio

Available for Sale Investments

The following tables set forth, as of the dates indicated, information related to our investments available for sale.

 

    At March 31,
    2008   2009   2010
    Amortized
Cost
  Gross
unrealized
gain
  Gross
unrealized
loss
  Fair value   Amortized
cost
  Gross
unrealized
gain
  Gross
unrealized
loss
  Fair value   Amortized
cost
  Gross
unrealized
gain
  Gross
unrealized
Loss
  Fair Value
    (in millions)

Government securities

  Rs. 351,477.0   Rs. 481.8   Rs. 2,527.2   Rs. 349,431.6   Rs. 461,558.7   Rs. 13,467.8   Rs. 676.9   Rs. 474,349.6   Rs. 470,083.7   Rs. 2,752.3     Rs.3,079.7   Rs. 469,756.3

Other debt securities

    40,399.6     58.1     118.8     40,338.9     20,989.5     104.7     3.6     21,090.6     3,980.7     110.4     —       4,091.1
                                                                       

Total debt securities

  Rs. 391,876.6   Rs. 539.9   Rs. 2,646.0   Rs. 389,770.5   Rs. 482,548.2   Rs. 13,572.5   Rs. 680.5   Rs. 495,440.2   Rs. 474,064.4   Rs. 2,862.7     Rs.3,079.7   Rs. 473,847.4
                                                                       

Non-debt securities

    29,034.0     315.0     110.7     29,238.3     12,679.4     221.4     234.7     12,666.1     7,474.4     113.2     36.2     7,551.4
                                                                       

Total

  Rs. 420,910.6   Rs. 854.9   Rs. 2,756.7   Rs. 419,008.8   Rs. 495,227.6   Rs. 13,793.9   Rs. 915.2   Rs. 508,106.3   Rs. 481,538.8   Rs. 2,975.9     Rs.3,115.9   Rs. 481,398.8
                                                                       

 

Held to Maturity Investments

 

As of March 31, 2008, 2009 and 2010, the Bank had no investments held to maturity.

 

Held for Trading Investments

 

The following table sets forth, as of the dates indicated, information related to our investments held for trading:

 

 
    At March 31,
    2008   2009   2010
    Amortized
cost
  Gross
unrealized
gain
  Gross
unrealized
loss
  Fair value   Amortized
cost
  Gross
unrealized
gain
  Gross
unrealized
loss
  Fair value   Amortized
cost
  Gross
unrealized
gain
  Gross
Unrealized
loss
  Fair value
    (in millions)

Government securities

  Rs. 12,572.9   Rs. 3.3   Rs. 41.1   Rs. 12,535.1   Rs. 34,833.3   Rs. 3.3   Rs. 108.8   Rs. 34,727.8   Rs. 20,867.9   Rs. 1.0   Rs. 8.0   Rs. 20,860.9

Other debt securities

    8,630.8     3.3     31.4     8,602.7     606.3     4.6     —       610.9     7,189.2     40.7     0.6     7,229.3
                                                                       

Total debt securities

  Rs. 21,203.7   Rs. 6.6   Rs. 72.5   Rs. 21,137.8   Rs. 35,439.6   Rs. 7.9   Rs. 108.8   Rs. 35,338.7   Rs. 28,057.1   Rs. 41.7   Rs. 8.6   Rs. 28,090.2
                                                                       

Non-debt securities

    92,418.7     5.1     3.8     92,420.0     44.8     2.8     0.1     47.5     69.7     0.4     1.5     68.6
                                                                       

Total

  Rs. 113,622.4   Rs. 11.7   Rs. 76.3   Rs. 113,557.8   Rs. 35,484.4   Rs. 10.7   Rs. 108.9   Rs. 35,386.2   Rs. 28,126.8   Rs. 42.1   Rs. 10.1   Rs. 28,158.8
                                                                       

 

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Residual Maturity Profile

The following table sets forth, for the periods indicated, an analysis of the residual maturity profile of our investments in government and corporate debt securities classified as available-for-sale securities and their market yields.

 

     At March 31, 2010  
     Up to one year     One to five years     Five to ten years     More than ten years  
     Amount    Yield     Amount    Yield     Amount    Yield     Amount    Yield  
     (in millions, except percentages)  

Government securities

   Rs. 163,834.5    4.5 %   Rs. 163,990.2    6.5 %   Rs. 89,009.2    6.8 %   Rs. 52,922.4    8.2 %

Other debt securities

     2,152.6    7.3        1,757.9    5.6        180.6    8.2           —     
                                    

Total debt securities, fair value

   Rs. 165,987.1    4.5 %   Rs. 165,748.1    6.5 %   Rs. 89,189.8    6.8 %   Rs. 52,922.4    8.2 %
                                    

Total amortized cost

   Rs. 165,109.2      Rs. 165,126.2      Rs. 89,724.1      Rs. 54,104.9   
                                    

Funding

Our funding operations are designed to ensure stability, low cost of funding and effective liquidity management. The primary source of funding is deposits raised from retail customers, which were approximately 70% and 67% of total deposits as of March 31, 2009 and March 31, 2010, respectively. Wholesale banking deposits represented approximately 30% and 33% of total deposits as of March 31, 2009 and March 31, 2010, respectively.

Total Deposits

The following table sets forth, for the periods indicated, our average outstanding deposits and the percentage composition by each category of deposits. The average cost (interest expense divided by the average of the daily balance for the relevant period) of savings deposits was 2.6% in fiscal 2008, 2.7% in fiscal 2009 and 2.8% in fiscal 2010. The average cost of time deposits was 8.4% in fiscal 2008, 8.5% in fiscal 2009 and 7.4% in fiscal 2010. The average deposits for the periods set forth are as follows:

 

     Year ended March 31,  
     2008     2009     2010  
     Amount    % of total     Amount    % of total     Amount    % of total  
     (in millions, except percentages)  

Current deposits(1)

   Rs. 247,083.6    27.2 %   Rs. 248,822.0    18.2 %   Rs. 295,675.6    19.7 %

Savings deposits

     222,473.6    24.5        314,433.5    23.1        414,444.4    27.7   

Time deposits

     439,411.0    48.3        800,446.8    58.7        788,369.2    52.6   
                                       

Total

   Rs. 908,968.2    100.0 %   Rs. 1,363,702.3    100.0 %   Rs. 1,498,489.2    100.0 %
                                       

 

1) Includes current accounts and cash floats from transactional services.

As of March 31, 2010, individual time deposits in excess of Rs. 0.1 million had a balance to maturity profile as follows:

 

     At March 31, 2010
     Up to 3 Months    3 to 6 months    6 to 12 Months    More than  1
Year
     (in millions)

Balance to maturity for deposits exceeding Rs. 0.1 million each

   Rs. 176,379.0    Rs. 120,722.2    Rs. 232,069.2    Rs. 148,843.0

 

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Short-term Borrowings

The following table sets forth, for the periods indicated, information related to our short-term borrowings, which are comprised primarily of money-market borrowings. Short-term borrowings include securities sold under repurchase agreements.

 

     Years ended March 31,  
     2008     2009     2010  
     (in millions, except percentages)  

Period end

   Rs. 173,477.6      Rs. 27,237.0      Rs. 98,165.0   

Average balance during the period

   Rs. 69,514.7      Rs. 94,863.0      Rs. 50,594.6   

Maximum outstanding

   Rs. 178,157.0      Rs. 197,578.3      Rs. 141,802.3   

Average interest rate during the period(1)

     5.9 %     6.2 %     3.6 %

Average interest rate at period end(2)

     7.3 %     2.3 %     4.6

 

 

1) Represents the ratio of interest expense on short-term borrowings to the average of daily balances of short-term borrowings.
2) Represents the weighted average rate of short-term borrowings outstanding as of March 31, 2008, 2009 and 2010.

 

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Subordinated Debt

We also obtain funds from the issuance of unsecured non-convertible subordinated debt securities, which qualify as Tier 1 or Tier 2 risk-based capital under the RBI’s guidelines for assessing capital adequacy. Subordinated debt (Lower Tier 2 capital), Upper Tier 2 capital and Innovative Perpetual Debt Instruments outstanding as on March 31, 2010 are Rs. 33.92 billion (previous year: Rs. 34.60 billion), Rs. 27.60 billion (previous year: Rs. 28.24 billion), and Rs. 2.00 billion (previous year: Rs. 2.00 billion), respectively. The breakup of the same is shown hereunder:

 

Type

  Currency   Year of
issue
  Year of
maturity
  Average
tenor
(years)
  Interest rate
(%)
  Year of call   Step-up
rate
(%)
  Face value
(Rupees in billions)

Lower Tier 2

  INR   2003-04   2014-15   10.3   5.90   —     —     3.95

Lower Tier 2

  INR   2003-04   2017-18   13.3   6.00   —     —     0.05

Lower Tier 2

  INR   2005-06   2015-16   9.6   7.50   —     —     4.14

Lower Tier 2

  INR   2005-06   2015-16   9.3   7.75   —     —     2.31

Lower Tier 2

  INR   2005-06   2015-16   9.7   8.25   —     —     2.57

Lower Tier 2

  INR   2005-06   2015-16   9.9   8.60   —     —     3.00

Lower Tier 2

  INR   2006-07   2016-17   10.0   8.45   —     —     1.69

Upper Tier 2

  INR   2006-07   2021-22   15.0   8.80   2016-17   9.55   3.00

Lower Tier 2

  INR   2006-07   2016-17   10.0   9.10   —     —     2.40

Upper Tier 2

  INR   2006-07   2021-22   15.0   9.20   2016-17   9.95   3.00

Perpetual Debt

  INR   2006-07   —     —     9.92   2016-17   10.92   2.00

Upper Tier 2

  INR   2006-07   2021-22   15.0   8.95   2016-17   9.7   0.36

Upper Tier 2

  USD   2006-07   2021-22   15.1   LIBOR+1.2   2016-17   LIBOR+2.2   4.49

Lower Tier 2

  INR   2008-09   2018-19   10.0   10.70   —     —     11.50

Upper Tier 2

  INR   2008-09   2023-24   15.0   10.85   2018-19   11.35   5.78

Lower Tier 2

  INR   2008-09   2018-19   10.0   9.75   —     —     1.50

Upper Tier 2

  INR   2008-09   2023-24   15.0   9.95   2018-19   10.45   2.00

Upper Tier 2

  INR   2008-09   2023-24   15.0   9.85   2018-19   10.35   7.97

Lower Tier 2

  INR   2002-03   2010-11   7.3   8.30   —     —     0.03

Lower Tier 2

  INR   2004-05   2010-11   5.9   6.85   —     —     0.28

Lower Tier 2

  INR   2004-05   2014-15   9.9   7.05   —     —     0.15

Lower Tier 2

  INR   2004-05   2010-11   5.3   6.85   —     —     0.02

Lower Tier 2

  INR   2004-05   2010-11   5.4   8.50   —     —     0.29

Lower Tier 2

  INR   2004-05   2014-15   9.3   8.75   —     —     0.04

Upper Tier 2

  INR   2007-08   2022-23   15.0   10.84   2017-18   14.34   1.00

Lower Tier 2

  INR   2003-04   2011-12   7.0   7.25   —     —     0.002

The Upper Tier 2 U.S. dollar debt depicted in the table above is for an amount of US $100 million raised during fiscal 2007 carrying an interest rate of Libor + 1.20%. In the table above, the rupee equivalent is based on the translation rate of Rs. 44.90 = US $1.00. We have a right to redeem certain of the issuances as noted above under “year of call.” If not called, the interest rate increases to the step-up rate.

 

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Asset Liability Gap

The following table sets forth, for the periods indicated, our asset-liability gap position:

 

    As of March 31, 2010 (1)  
    0-28 Days     29-90 days     91-180 days     6-12 months     Total within
one year
    Over
1 year
to 3 years
    Over 3
years
to 5 years
    Over 5
years
    Total  
    (in millions, except percentages)  

Cash and cash equivalents(2)(3)

  200,948.3      6,828.6      5,496.6      6,882.4      220,155.9      53,562.4      12,158.7      11,681.5      297,558.5   

Term placements

  558.7      1,448.4      340.4      678.2      3,025.7      14,185.7      8,109.2      32,845.7      58,166.30   

Investments held for trading(4)

  19,306.4      7,069.4      —        —        26,375.7      —        1,783.0      —        28,158.8   

Investments available for sale (5)(6)

  69,211.2      23,803.3      22,740.5      28,830.5      144,585.5      221,258.3      50,949.5      64,605.4      481,398.8   

Securities purchased under agreement to resell

  20,000.0      —        —        —        20,000.0      —        —        —        20,000.0   

Loans, net (7) (8)

  96,379.9      162,198.4      138,007.8      147,480.2      544,066.3      554,880.1      94,698.2      103,535.8      1,297,180.4   

Accrued interest receivable

  13,767.3      —        —        —        13,767.3      —        —        —        13,767.3   

Other assets

  76,838.5      —        —        —        76,838.5      32,459.7      —        —        109,298.2   
                                                     

Total financial assets

  497,010.2      201,348.1      166,585.3      183,871.3      1,048,815.0      876,346.2      167,698.7      212,668.4      2,305,528.3   
                                                     

Deposits (9) (10)

  170,056.1      91,542.1      87,254.8      139,360.3      488,213.3      829,889.8      181,273.4      173,023.8      1,672,400.3   

Debt (11)

  31,710.5      37,791.3      8,722.7      24,741.5      102,966.0      5,783.0      4,140.0      61,130.4      174,019.4   

Securities Sold under repurchase agreements

  —        —        —        —        —        —        —        —        —     

Other Liabilities (12) (13)

  153,521.9      1,071.0      —        —        154,592.9      101,450.7      —        7,602.9      263,646.5   
                                                     

Total financial liabilities

  355,288.5      130,404.4      95,977.5      164,101.8      745,772.2      937,123.5      185,413.4      241,757.1      2,110,066.2   
                                                     

Asset/Liability Gap

  141,721.7      70,943.7      70,607.8      19,769.5      303,042.8      (60,777.3   (17,714.7   (29,088.6   195,462.1   
                                                     

Cumulative gap

  141,721.7      212,665.4      283,273.2      303,042.8      303,042.8      242,265.5      224,550.7      195,462.1      195,462.1   

Cumulative gap as a percentage of total financial assets

  28.5   30.5   32.8   28.9   28.9   12.6   10.7   8.5   8.5

 

1) Assets and liabilities are classified into the applicable maturity categories based on residual maturity unless specifically mentioned.
2) Cash on hand is classified in the “0-28” days category.
3) Cash and cash equivalents include balances with the RBI to satisfy its cash reserve ratio requirements. These balances are held in the form of overnight cash deposits but we classify these balances as part of the applicable maturity categories on a basis proportionate to the classification of related deposits.
4) Securities in the trading book are classified based on the expected time of realization for such investments.
5) Securities held towards satisfying the statutory liquidity requirement prescribed by the RBI are classified based on the applicable maturity categories on a basis proportionate to the classification of related deposits.
6) Shares and units of open-ended mutual funds in the available-for-sale investment portfolio are classified in the “greater than five years” category.
7) Includes net non-performing loans which are classified in the “Over 3 years to 5 years” and “Over 5 years” categories.
8) Ambiguous maturity overdrafts are classified under various maturity categories based on a historical behavioral analysis that we have performed to determine the appropriate maturity categorization of such advances.

 

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9) Non-maturity deposits are classified under various maturity categories based on a historical behavioral analysis that we have performed to determine the appropriate maturity categorization of such deposits.
10) Time deposits under Rs. 50 million are classified under various maturity categories based on the historical behavioral analysis that we have performed to determine the appropriate maturity categorization of such deposits taking into account rollovers and premature withdrawals. The rest have been classified under various maturity categories based on the residual maturity.
11) Includes short-term borrowings and long-term debt.
12) Cash floats are classified under various maturity categories based on the historical behavioral analysis that we have performed to determine the appropriate maturity categorization of such floats.
13) Includes accrued interest payable classified in the “0-28 days” category.

For further information on how we manage our asset liability risk, see “Business — Market Risk.”

 

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Loan Portfolio and Credit Substitutes

As of March 31, 2010, our gross loan portfolio amounted to Rs. 1,320.9 billion. As of that date, our gross credit substitutes outstanding were Rs. 2.5 billion and represented 5 credit substitutes outstanding. Almost all of our gross loans and credit substitutes are to borrowers in India and over 90% are denominated in rupees. For a description of our retail and wholesale loan products, see “Business — Retail Banking — Retail Loans and Other Asset Products” and “Business — Wholesale Banking — Commercial Banking Products — Commercial Loan Products and Credit Substitutes.”

The following table sets forth, for the periods indicated, our gross loan portfolio classified by product group:

 

     At March 31,
     2006    2007    2008    2009    2010
     (in millions)

Retail loans

   Rs. 229,301.4    Rs. 318,606.1    Rs. 441,312.4    Rs. 620,393.9    Rs. 732,984.2

Wholesale loans

     171,626.2      226,139.3      286,768.9      390,652.0      587,956.8
                                  

Gross loans

   Rs. 400,927.6    Rs. 544,745.4    Rs. 728,081.3    Rs.