FORM 424(B)(1)
Table of Contents

Filed Pursuant to Rule 424(b)(1)
Registration No. 333-121096

6,644,665 American Depositary Shares

(HDFC BANK LOGO)

Representing 19,933,995 Equity Shares


          HDFC Bank Limited is offering 19,933,995 equity shares in the form of American Depositary Shares or ADSs. Each American Depositary Share represents three equity shares of HDFC Bank Limited.

          Our American Depositary Shares are listed on the New York Stock Exchange under the symbol “HDB.” On January 20, 2005, the closing price of an ADS on the New York Stock Exchange was U.S.$39.26.

PRICE U.S.$39.26 PER AMERICAN DEPOSITARY SHARE


Investing in our American Depositary Shares involves risks.

See “Risk Factors” beginning on page 9.


                         
Underwriting
Discounts and
Price to Public Commissions Proceeds to Us



Per ADS
  U.S.$ 39.26     U.S.$ 1.1287     U.S.$ 38.1313  
Total
  U.S.$ 260,869,548     U.S.$ 7,500,000     U.S.$ 253,369,548  

          Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

          We have granted the underwriters the right to purchase up to an additional 996,700 American Depositary Shares at the public offering price, less underwriting discounts and commissions, within 30 days from the date of this prospectus to cover over-allotments.

          The underwriters expect to deliver the ADSs to purchasers on or about January 25, 2005.


Joint Global Coordinators and Joint Bookrunners


(listed alphabetically)
 
Merrill Lynch International Morgan Stanley


 
CLSA Asia-Pacific Markets UBS Investment Bank

The date of this prospectus is January 20, 2005


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DILUTION
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RECENT DEVELOPMENTS
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      You should rely only on the information contained in or incorporated by reference in this prospectus. We have not authorized anyone to provide you with different information. We are not making an offer of these securities in any jurisdiction where the offer is not permitted. You should not assume that the information provided by this prospectus is accurate as of any date other than the date on the front of this prospectus.


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EXCHANGE RATES AND CERTAIN DEFINED TERMS

      In this prospectus, all references to “we,” “us,” “our,” “HDFC Bank” or “the Bank” shall mean HDFC Bank Limited. 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 “$” or “U.S.$” 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 prospectus, except with respect to the nine month periods ended December 31, 2004 and 2003 and except as otherwise noted, are prepared in accordance with United States generally accepted accounting principles, or U.S. GAAP. (We generally prepare and publish our financial statements in accordance with Indian generally accepted accounting principles, or Indian GAAP, except for purposes of the financial statements contained in our Annual Report on Form 20-F which we file with the Securities and Exchange Commission, or the SEC, and for reconciliations of certain information contained in our Reports on Form 6-K as of and for six month periods ended September 30, which are prepared in accordance with 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 the 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 2002, the rupee consistently depreciated against the dollar. However, the Indian rupee appreciated in fiscal 2004 compared to fiscal 2003. The rupee’s appreciation has been due to remittances from exporters and non-resident Indians, foreign direct investment and foreign institutional investor inflows, along with the weakening of the U.S. dollar against major currencies.

      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 for cable transfers of Indian rupees as certified for customs purposes by the Federal Reserve Bank of New York:

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





2000
    43.65       43.40       43.75       42.50  
2001
    46.85       45.74       47.47       46.63  
2002
    48.83       47.71       48.91       46.58  
2003
    47.53       48.43       49.07       47.53  
2004
    43.40       45.96       47.46       43.40  

(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





July (2004)
    46.40       46.06       46.45       45.66  
August
    46.35       46.32       46.40       46.21  
September
    45.91       46.05       46.35       45.81  
October
    45.30       45.74       45.87       45.30  
November
    44.47       45.03       45.40       44.47  
December
    43.27       43.85       44.52       43.27  

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      Although we have translated selected Indian rupee amounts in this prospectus 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. 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 U.S.$1.00 = Rs. 45.91 on September 30, 2004. The Federal Reserve Bank of New York certifies this rate for customs purposes on each date the rate is given. The noon buying rate on January 20, 2005, was Rs. 43.70 per U.S.$1.00.

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INCORPORATION OF CERTAIN INFORMATION BY REFERENCE

      The SEC allows us to incorporate by reference the information we furnish to or file with it, which means that we can disclose important information to you by referring you to those documents. The information incorporated by reference is considered to be part of this prospectus, and some later information that we file with the SEC will automatically be deemed to update and supersede this information. We incorporate by reference the following documents that have been furnished or filed with the SEC:

  •  The Registration Statement on Form 8-A we filed with the SEC on July 16, 2001;
 
  •  The Annual Report on Form 20-F we filed with the SEC on September 28, 2004 for the fiscal year ended March 31, 2004, which we refer to as our Form 20-F;
 
  •  The Report on Form 6-K we furnished to the SEC on November 2, 2004;
 
  •  The Report on Form 6-K we furnished to the SEC on November 8, 2004;
 
  •  The Report on Form 6-K we furnished to the SEC on November 22, 2004; and
 
  •  The Report on Form 6-K we furnished to the SEC on December 1, 2004.

      We also incorporate by reference into this prospectus any future filings on Form 20-F made with the SEC pursuant to the Exchange Act of 1934, as amended (the “Exchange Act”), after the date of this prospectus and prior to the consummation of this offering, and to the extent designated therein, future reports on Form 6-K furnished to the SEC.

      Any statement contained in a document, all or a portion of which is incorporated or deemed to be incorporated by reference herein, shall be deemed to be modified or superseded for purposes of this prospectus to the extent that a statement contained herein or in any other subsequently filed or furnished document which also is or is deemed to be incorporated by reference herein modifies or supersedes such statement. Any statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute part of this prospectus.

      We will provide without charge to each person, including any beneficial owner of our common shares or of ADSs, to whom a copy of this prospectus is delivered, upon the written or oral request of any such person, a copy of any or all of the documents referred to above which have been or may be incorporated herein by reference, other than exhibits to such documents (unless such exhibits are specifically incorporated by reference in such documents). Requests should be directed to Sanjay Dongre, 2nd floor, Process House, Kamala Mills Compound, Senapati Bapat Marg, Lower Parel, Mumbai 400 013, India (Telephone: 91-22-2490-2934 or 91-22-2496-1616, Ext. 3473).

      We file reports, including annual reports on Form 20-F, and other information with the SEC pursuant to the rules and regulations of the SEC that apply to foreign private issuers. Copies of any materials filed with or furnished to the SEC may be read and copied at the SEC’s Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains a website at http://www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC.

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FORWARD LOOKING STATEMENTS

      We have included statements in this prospectus which contain words or phrases such as “will,” “aim,” “will likely result,” “believe,” “expect,” “will continue,” “anticipate,” “estimate,” “intend,” “plan,” “contemplate,” “seek to,” “future,” “objective,” “goal,” “project,” “should,” “will pursue” 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, cash flow projections 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 in India and the other countries which have an impact on our business activities or investments; the monetary and interest rate policies of the government of India; 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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PROSPECTUS SUMMARY

      You should read the following summary with the more detailed information about us and our financial statements included in this prospectus.

Overview of Business

      We are a leading private sector bank and financial services company in India. Our goal is to be the preferred provider of financial services to upper and middle income individuals and leading corporations in India. We have experienced significant growth while maintaining strong asset quality and a low-cost funding structure.

      Our strategy is to provide a wide range of financial products and services to our customers through multiple distribution channels with high quality service and superior execution. For fiscal 2004, we had net income of Rs. 4.8 billion and a return on equity of 16.6%. For the six months ended September 30, 2004, we had net income of Rs. 3.2 billion (U.S.$69.3 million) and an annualized return on equity of 20.1%. As of September 30, 2004, we had total assets of Rs. 439.1 billion (U.S.$9.6 billion).

      We have three principal business activities:

  •  Retail banking. We strive to be a one-stop shop that meets the financial needs of our retail customers by offering a variety of deposit products as well as loans, credit cards, debit cards, third party mutual funds and insurance products and investment advisory services. We aim to provide our customers with high quality service on an “anytime, anywhere, anyhow” basis through our multiple distribution channels, which include a network of 379 branches (including 24 extension counters) and 1,002 ATMs. As of September 30, 2004, we had approximately 5.1 million customer accounts and approximately 2.5 million debit card holders. We are also a leading provider of retail depositary services for holding securities, with approximately 0.6 million operative accounts.
 
  •  Wholesale banking. We provide loans, credit substitutes, deposit products, documentary credits (primarily letters of credit), guarantees and foreign exchange and derivative products primarily to large highly-rated Indian corporations and small and medium sized enterprises meeting our credit requirements. We also provide a broad range of transactional banking services to a wide variety of corporations and financial institutions. Through our cash management services, we provide our clients with physical and electronic payment and collection mechanisms that are faster and more cost effective than traditional Indian payment and clearing systems. We also provide clearing and cash settlement services to eight stock exchanges in India. In addition, we provide custody services to Indian mutual funds and correspondent banking services to more than 20 foreign banks and more than 1,100 cooperative banks. We were also the first of five private sector banks to be appointed by the government of India to collect direct taxes on its behalf.
 
  •  Treasury operations. Our treasury group manages our balance sheet and provides foreign exchange and derivatives products to our clients. Our proprietary securities trading is limited principally to Indian government securities and our proprietary derivatives trading is limited primarily to rupee-based interest rate swaps.

      Since we commenced operations, we have made substantial investments in our technology platform and distribution capabilities. In addition to our growing branch and ATM network, we offer 24-hour automated telephone banking, real-time internet banking and banking services by mobile telephone. These and other resources give us the capability to deliver a broad selection of banking products through multiple delivery channels that are convenient for our customers. We believe this positions us well to grow as the Indian financial services industry evolves.

      Our business has expanded rapidly over the past several years. Net income has grown at a compound annual rate of 30.5% since fiscal 2001 and we have extended our market and geographical penetration from 0.9 million customers in 53 cities as of March 31, 2001 to 5.1 million customers in 182 cities as of September 30, 2004. Our total assets have grown from Rs. 161.1 billion as of March 31, 2001, to

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Rs. 426.8 billion and Rs. 439.1 billion as of March 31, 2004 and September 30, 2004, respectively. While our business has grown quickly, we have maintained a disciplined growth strategy and a strong balance sheet. As of September 30, 2004, customer deposits represented 82.3% of our total liabilities and we had an average cost of funds excluding equity for the six months ended September 30, 2004 of 3.2%, which we believe was one of the lowest of all banks in India. As of September 30, 2004, our net non-performing assets constituted 0.2% of our net customer assets, which we also believe is one of the lowest of all banks in India.

Our Competitive Strengths

      We attribute our growth and 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 by mobile phone, to offer customers convenient access to our products. Our technology platform has also driven the development of innovative new products and reduced our operating costs.
 
  •  We deliver high quality service with superior execution. Through intensive staff training and the use of our technology platform, we deliver efficient service with rapid response times. Our focus on knowledgeable and personalized service draws customers to our products and increases the loyalty of the customers we already have.
 
  •  We offer a wide range of products to our clients to service their banking needs. Whether in retail or wholesale banking, we consider ourselves a “one-stop shop” for our customers’ banking needs. Our broad array of products creates multiple cross-selling opportunities for us and improves our customer retention rates.
 
  •  We have an experienced management team. Most of our senior management team has been with us since our inception, has substantial experience in multinational banking and shares 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 create new opportunities for our business.

Market Opportunity

      India has had average real GDP growth of 6.1% per annum over the last decade and has liberalized many sectors of its economy. India is also witnessing a favorable shift in its demographic profile, with the upper and middle class constituting an expanding share of the population. We believe that banking in India remains an under-penetrated market with substantial growth opportunities, particularly for a private sector bank in a market traditionally dominated by large public sector banks.

Our Business Strategies

      Our business strategy emphasizes the following elements:

  •  Increase our market share in 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 our focus on our competitive strengths. We also aim to increase geographical and market penetration by expanding our branch and ATM network and increasing our efforts to cross-sell our products.
 
  •  Maintain our current high standards for asset quality through disciplined credit risk management. We have maintained high quality loan and investment portfolios through careful targeting of our customer base, a comprehensive risk assessment process and diligent risk monitoring and remediation procedures. We believe we can maintain our asset quality while still achieving growth.

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  •  Maintain a low cost of funds. We believe we can maintain our low-cost funding base by expanding our base of retail 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. We intend to maintain our focus on earnings growth with low volatility through conservative risk management techniques and low cost funding. In addition, we intend not to rely heavily on revenue derived from trading so as to limit volatility.

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The Offering

 
ADSs offered 6,644,665 ADSs.
 
ADS/equity share ratio One ADS represents three equity shares, par value Rs. 10 per share.
 
Equity shares outstanding after this offering 306,885,208 equity shares, not including the equity shares to be issued in the event the underwriters’ over-allotment option is exercised in full. If the underwriters exercise their over-allotment option in full, 309,875,308 equity shares will be outstanding after this offering.
 
Use of proceeds The net proceeds from the offering will be used for funding future growth by strengthening our capital base.
 
Depositary JPMorgan Chase Bank, N.A.
 
Voting rights The ADSs will have no voting rights. Under the deposit agreement, the depositary will abstain from voting the equity shares. See “Description of the American Depositary Shares — Voting Rights.”

Corporate Information

      We were incorporated in August 1994 as a public limited company under the laws of India. 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 91-22-5652-1000 and our web site address is www.hdfcbank.com. Our registered agent in the United States is Depositary Management Corporation, 570 Lexington Avenue, 44th Floor, New York, NY 10022, 212-319-7600. The information on our website is not a part of this prospectus.

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Summary Financial and Other Data

      The following table sets forth our summary financial and operating data. Our summary income statement data for the fiscal years ended March 31, 2002, 2003 and 2004 and the six month periods ended September 30, 2003 and 2004 and the summary balance sheet data as of March 31, 2003 and 2004 and September 30, 2004 are derived from our audited financial statements included in this prospectus together with the report of Deloitte Haskins & Sells, independent registered public accounting firm. Our summary balance sheet data as of March 31, 2002 are derived from our audited financial statements not included in this prospectus. For the convenience of the reader, the summary financial data as of and for the six months ended September 30, 2004 have been translated into U.S. dollars at the rate on such date of Rs. 45.91 per U.S.$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.

                                                 
Years ended March 31, Six months ended September 30,


2002 2003 2004 2003 2004 2004






(In millions, except per equity share data)
Selected income statement data:
                                               
Interest and dividend revenue
    Rs. 16,448.0       Rs. 19,424.8       Rs. 24,591.5       Rs. 12,010.9       Rs. 13,592.5     U.S.$   296.1  
Interest expense
    10,762.5       11,779.2       11,983.1       6,006.8       6,214.9       135.4  
     
     
     
     
     
     
 
Net interest revenue
    5,685.5       7,645.6       12,608.4       6,004.1       7,377.6       160.7  
Allowance for credit losses, net
    451.6       741.5       2,343.4       1,217.5       1,098.3       23.9  
     
     
     
     
     
     
 
Net interest revenue after allowance for credit losses
    5,233.9       6,904.1       10,265.0       4,786.6       6,279.3       136.8  
Non-interest revenue, net
    3,215.1       4,397.3       4,697.6       2,498.8       3,608.5       78.6  
     
     
     
     
     
     
 
Net revenue
    8,449.0       11,301.4       14,962.6       7,285.4       9,887.8       215.4  
Non-interest expense
    4,196.0       6,057.9       8,369.3       3,840.6       5,055.6       110.1  
     
     
     
     
     
     
 
Income before income taxes
    4,253.0       5,243.5       6,593.3       3,444.8       4,832.2       105.3  
Income tax expense
    1,294.6       1,729.7       1,838.8       1,078.1       1,652.7       36.0  
     
     
     
     
     
     
 
Net income
    Rs. 2,958.4       Rs. 3,513.8       Rs. 4,754.5       Rs. 2,366.7       Rs. 3,179.5     U.S.$ 69.3  
     
     
     
     
     
     
 
Per equity share data:
                                               
Earnings per share, basic
    Rs. 11.10       Rs. 12.57       Rs. 16.87       Rs. 8.41       Rs. 11.16     U.S.$ 0.24  
Earnings per share, diluted
    11.04       12.51       16.70       8.36       11.11       0.24  
Dividends per share
    2.50       3.00       3.50                    
Book value(1)
    79.06       93.36       110.36       99.86       113.39       2.47  
Equity share data:
                                               
Equity shares outstanding at end of period
    279.0       279.7       282.8       281.5       286.2       286.2  
Weighted average equity shares outstanding — basic
    266.6       279.6       281.9       281.3       284.8       284.8  
Weighted average equity shares outstanding — diluted
    267.9       281.4       284.7       282.9       286.1       286.1  

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As of March 31, As of September 30,


2002 2003 2004 2004 2004





(In millions)
Selected balance sheet data:
                                       
Total assets
    Rs. 243,032.2       Rs. 311,840.7       Rs. 426,835.6       Rs. 439,079.1     U.S.$ 9,563.8  
Cash and cash equivalents
    34,590.6       23,944.9       33,010.4       19,688.2       428.8  
Term placements(2)
          7,747.4       3,565.2       3,053.9       66.5  
Loans, net of allowance
    71,528.9       118,299.9       177,681.1       210,666.0       4,588.7  
Of which:
                                       
 
Non-performing loans, net of specific allowances
    536.4       683.3       269.9       433.6       9.4  
Investments:
                                       
 
Investments held for trading
    3,837.6       3,976.1       6,233.8       3,053.0       66.5  
 
Investments available for sale
    80,320.6       98,929.2       133,274.6       167,692.7       3,652.6  
 
Investments held to maturity(3)
    35,429.9       38,426.7       36,368.4              
   
Total
    119,588.1       141,332.0       175,876.8       170,745.7       3,719.1  
   
Of which:
                                       
     
Credit substitutes(4)
    35,126.0       29,752.8       16,557.9       14,833.3       323.1  
Total liabilities
    220,971.3       285,727.6       395,619.8       406,623.3       8,856.9  
Long-term debt
    2,157.9       2,116.0       6,086.0       5,043.4       109.9  
Short-term borrowings
    21,600.3       21,579.6       24,064.2       30,701.9       668.7  
Total deposits
    176,538.1       223,760.0       304,062.0       334,657.9       7,289.4  
Shareholders’ equity
    22,060.9       26,113.1       31,215.8       32,455.8       706.9  
                                                   
Years ended March 31, Six months ended September 30,


2002 2003 2004 2003 2004 2004






(In millions)
Period average(5)
                                               
Total assets
    Rs. 202,013.2       Rs. 257,020.8       Rs. 357,123.8       Rs. 320,597.7       Rs. 416,402.4     U.S.$ 9,070.0  
Interest-earning assets
    183,488.8       230,451.9       327,523.4       296,734.8       394,166.9       8,585.6  
Loans, net of allowance
    59,374.9       82,461.2       136,527.4       120,824.6       185,339.1       4,037.0  
Total liabilities
    185,512.4       232,933.8       328,458.9       293,066.9       384,923.1       8,384.3  
Interest-bearing liabilities
    137,681.1       175,598.6       236,551.0       220,481.3       277,556.7       6,045.7  
Long-term debt
    2,159.7       2,280.3       2,605.9       2,074.4       5,665.4       123.4  
Short-term borrowings
    18,105.9       15,362.9       33,040.7       31,710.5       35,811.3       780.0  
Total deposits
    142,854.5       186,847.7       262,707.7       235,473.4       313,275.3       6,823.7  
Of which:
                                               
 
Interest-bearing deposits
    117,415.5       157,955.4       200,904.4       186,696.4       236,080.0       5,142.2  
Shareholders’ equity
    16,500.8       24,087.0       28,664.9       27,530.8       31,479.3       685.7  

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As of or for the six
As of or for the years months ended
ended March 31, September 30,


2002 2003 2004 2003 2004





(In percentage)
Profitability:
                                       
Net income as a percentage of:
                                       
 
Average total assets
    1.5       1.4       1.3       1.5 (13)     1.5 (13)
 
Average shareholders’ equity
    17.9       14.6       16.6       17.1 (13)     20.1 (13)
Dividend payout ratio(6)
    23.8       24.2       21.0              
Spread(7)
    2.4       2.7       3.5       3.6 (13)     3.4 (13)
Net interest margin(8)
    3.1       3.3       3.8       4.0 (13)     3.7 (13)
Cost-to-net revenue ratio(9)
    49.7       53.6       55.9       52.7       51.1  
Cost-to-average assets ratio(10)
    2.1       2.4       2.3       2.4 (13)     2.4 (13)
Capital:
                                       
Total capital adequacy ratio(11)
    13.9       11.1       11.7       10.9       10.9  
Tier 1 capital adequacy ratio(11)
    10.8       9.5       8.0       9.1       7.8  
Tier 2 capital adequacy ratio(11)
    3.1       1.6       3.7       1.8       3.1  
Average shareholders’ equity as a percentage of average total assets
    8.2       9.4       8.0       8.6       7.6  
Asset quality:
                                       
Gross non-performing loans as a percentage of gross loans
    2.7       2.0       1.7       2.2       1.6  
Gross non-performing customer assets as a percentage of gross customer assets(12)
    1.9       1.6       1.6       2.0       1.6  
Net non-performing loans as a percentage of net loans
    0.7       0.6       0.2       0.5       0.2  
Net non-performing customer assets as a percentage of net customer assets(12)
    0.5       0.5       0.2       0.5       0.2  
Net non-performing loans as a percentage of total assets
    0.2       0.2       0.1       0.2       0.1  
Specific allowance for credit losses as a percentage of gross non-performing loans
    72.6       71.1       91.0       75.9       87.6  
Total allowance for credit losses as a percentage of gross non-performing loans
    81.9       78.8       116.8       86.9       121.2  
Allowance for credit losses as a percentage of gross total loans
    2.2       1.6       1.9       1.9       2.0  


  (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 the six month period ended September 30, 2004 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 are prevented from establishing a held to maturity portfolio until after March 31, 2007. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
 
  (4)  Credit substitutes consist of investments in commercial paper, debentures and preference shares issued by our corporate customers. See “Business — Commercial Banking Products — Commercial Loan Products and Credit Substitutes.”
 
  (5)  Average balances are the average of daily outstanding amounts. Average figures are unaudited.

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  (6)  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 of each year are typically paid in the following fiscal year. See “Dividend Policy.”
 
  (7)  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.
 
  (8)  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, net interest margin is greater than spread. If average interest-bearing liabilities exceed average interest-earning assets, net interest margin is less than spread.
 
  (9)  Represents the ratio of non-interest expense to the sum of net interest revenue and non-interest revenue.

(10)  Represents the ratio of non-interest expense to average total assets.
 
(11)  Tier 1 and Tier 2 capital adequacy ratios are computed in accordance with the guidelines of the Reserve Bank of India, based on financial statements prepared in accordance with Indian GAAP. See “Supervision and Regulation.”
 
(12)  Customer assets consist of loans and credit substitutes.
 
(13)  Figures are annualized.

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RISK FACTORS

      You should carefully consider the following risk factors as well as the other information contained in this prospectus in evaluating us and our business.

Risks Relating to Our Business

 
If we are unable to manage our rapid growth, our business could be adversely affected.

      Our asset growth rate has been significantly higher than the Indian GDP growth rate and the Indian banking industry growth rate over the last five fiscal years. For example, our total assets in the three-year period ended March 31, 2004 grew at a compound annual growth rate of 38.4%. Our rapid growth has placed, and if it continues will place, significant demands on our operational, credit, financial and other internal risk controls. Such growth has also increased and will continue to increase the challenges involved in:

  •  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; and
 
  •  maintaining high levels of customer satisfaction.

      Our inability to manage growth effectively could have a material adverse effect on our business, our future financial performance and the price of our equity shares and ADSs.

 
Our business is vulnerable to volatility in interest rates.

      Our results of operations depend to a great extent on our net interest revenue. In the six months ended September 30, 2004, net interest revenue before allowances for credit losses represented 67.2% of our net revenue before such allowances. Changes in market interest rates could affect the interest rates charged on our interest-earning assets differently from the interest rates paid on our interest-bearing liabilities and also affect investment values. This difference could result in an increase in interest expense relative to interest revenue, leading to a reduction in our net interest revenue and net interest margin. In addition, a rise in interest rates could negatively affect demand for our retail loans and other products.

      Interest rates are highly sensitive to many factors beyond our control, including the monetary policies of the Reserve Bank of India (the “RBI”), deregulation of the financial sector in India, domestic and international economic and political conditions and other factors. Any volatility in interest rates could adversely affect our business, our future financial performance and the price of our equity shares and ADSs. Yields on the Indian government’s ten-year bonds were 6.2%, 5.2% and 6.2% as of March 31, 2003, March 31, 2004 and September 30, 2004, respectively.

 
If the level of non-performing loans in our portfolio increases, then our business could suffer.

      Our gross non-performing loans and impaired credit substitutes represented 1.6% of our gross customer assets as of September 30, 2004. Our non-performing loans and impaired credit substitutes net of specific loan loss provisions represented 0.2% of our net customer assets portfolio as of September 30, 2004. As of September 30, 2004, we had provided for 121.2% of our total non-performing loans. We cannot assure you that our provisions will 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 not experienced a significant and prolonged downturn in the economy.

      A number of factors outside of our control could affect our ability to control and reduce non-performing loans. These factors include developments in the Indian economy, movements in global 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 Indian government. In

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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 may be required to increase our provisions, which may affect our earnings and may result in us being unable to execute our business plan as expected, which could adversely affect the price of our equity shares and ADSs.
 
We have high concentrations of customer 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.

      We calculate customer and industry exposure in accordance with Indian GAAP and the policies established by the RBI. In the case of customer exposure, 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 and equity shares). As of September 30, 2004, our ten largest customer exposures totaled approximately Rs. 43.2 billion, representing approximately 133.5% of our capital funds, and none of these was classified as non-performing. Our largest single customer exposure as of that date was Rs. 7.9 billion, representing approximately 24.5% of our capital funds. Our largest non-performing exposure as of that date was our 95th largest customer exposure. However, if any of our ten largest customer exposures were to become non-performing, the quality of our portfolio and our business could be adversely affected.

      We monitor concentration of exposures to individual industries as a proportion of funded exposures. As of September 30, 2004, our largest industry concentrations were as follows: land transport operators (including commercial vehicle operators which we otherwise classify as retail) (8.7%), automotive manufacturers (8.2%), housing finance (4.8%) and the telecommunications industry (3.5%). In addition, as of that date, approximately 30% of the concentration of our exposure was retail (excluding commercial vehicle operators). As of that date, our total non-performing loans and investments were concentrated in the following industries: electronics (18.3%), automotive manufacturers (16.9%), textiles (11.7%) and iron and steel (6.5%). Industry specific difficulties in these or other sectors could increase our level of non-performing customer assets and adversely affect our business, our future financial performance and the price of our equity shares and ADSs.

      In addition, we hold bonds issued by several state-sponsored financial institutions to meet directed lending requirements. As of September 30, 2004, these bonds represented 7.4% of funded exposures. If these institutions experienced financial difficulties, as a result of difficulties in the sectors to which they lend (such as agriculture and housing) or otherwise, our business could also be adversely affected.

 
We face greater credit risks than banks in more developed countries.

      One of our principal activities is providing financing to our customers, almost all of whom are based in India. We are subject to the credit risk that our borrowers may not pay us in a timely fashion or at all. The credit risk of all our borrowers is higher than in other developed countries due to the higher uncertainty in our regulatory, political and economic environment. In addition, unlike several developed countries, India does not have a well-established nationwide credit bureau, which may affect the quality of information available to us about the credit history of our borrowers, especially individuals and small businesses. Higher credit risk may expose us to greater potential losses, which would adversely affect our business, our future financial performance and the price of our equity shares and ADSs.

 
We may be unable to foreclose on collateral when borrowers default on their obligations to us, which may result in failure to recover the expected value of collateral security.

      Although we typically lend on a cash-flow basis, we take collateral for a large proportion of our loans, consisting of liens on inventory, receivables and other current assets, and in some cases, charges on fixed assets, such as real property, movable assets, such as vehicles, and financial assets, such as marketable securities.

      Although there has been recent legislation which may strengthen the rights of creditors and lead to faster realization of collateral in the event of default, we cannot guarantee that we will be able to realize the full value of our collateral, due to, among other things, delays on our part in taking immediate action, delays in

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bankruptcy foreclosure proceedings, stock market downturns, defects in the perfection of collateral and fraudulent transfers by borrowers. In the event a specialized regulatory agency gains jurisdiction over the borrower, creditor actions can be further delayed.

      In addition, the RBI has set forth guidelines on corporate debt restructuring. The guidelines envisage that for debt amounts of Rs. 200 million and above, lenders holding greater than 75% of such debt can decide to restructure the debt and such a decision would be binding on the remaining lenders. In situations where we own 25% or less of the debt of a borrower, we could be forced to agree to a long-drawn restructuring of debt, in preference to foreclosure of security or a one-time settlement, which has generally been our practice.

 
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, and other executive officers. 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 have a material adverse effect on our business, results of operations, financial condition and ability to grow.

 
In order to sustain our growth, we will need to maintain a minimum capital adequacy ratio. There is no assurance that we will be able to access the capital markets when necessary to do so.

      The RBI requires a minimum capital adequacy ratio of 9% to our total risk weighted assets. We must maintain this minimum capital adequacy level to support our continuous growth. Our capital adequacy ratio was 9.4% on December 31, 2004, which reflected in part the increased risk weights on consumer credit and investments in mortgage backed securities pursuant to new directives implemented by the RBI on December 23, 2004. (See “Supervision and Regulation.”) Our capital adequacy ratio was 12.2% as of December 31, 2004 on an as adjusted basis to give effect to this offering (assuming no exercise of the underwriters’ over-allotment option and using the exchange rate as of such date). The implementation of the Basel II capital adequacy standards could also result in a decline in our capital adequacy ratio. Our ability to support and grow our business could be limited by a declining capital adequacy ratio if we are unable to or have difficulty accessing the capital markets.

 
Material changes in Indian banking regulations could harm our business.

      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 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. We cannot assure you that laws and regulations governing the banking sector will not change in the future or that any changes will not adversely affect our business, our future financial performance and the price of our equity shares and ADSs.

 
We compete directly with banks that are much larger than we are.

      We face strong competition in all areas of our business, and many of our competitors are much larger than we are. We compete directly with the large public sector banks, which generally have much larger customer and deposit bases, larger branch networks and more capital than we do. These banks will become more competitive as they improve their customer services and technology. Some of the other private sector banks in India are also larger than we are, based on such measurements. In addition, we compete directly with

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foreign banks, some of which are part of the largest multinational financial companies in the world. Due to competitive pressures, we may be unable to execute our growth strategy successfully and offer products and services that generate reasonable returns, which may impact our business and our future financial performance.
 
Consolidation in the banking industry could adversely affect us.

      The Indian banking industry may experience greater consolidation. Recently, the government has indicated its desire to consolidate certain public sector banks. In addition, there may be mergers and consolidations among private banks. The Finance Minister of India recently indicated that the government may soon permit foreign ownership of up to 74% of the equity of private sector banks and eliminate or modify the prohibition on any person voting more than 10% of the equity of a bank. Although no such changes have been implemented nor have any specific proposals been published at this time, it is possible that the rules for foreign investment in private sector banks may be liberalized at any time, thus enabling consolidations between foreign banks and private sector banks. Therefore, we may face more competition from larger banks as a result of any such consolidation.

 
Our funding is primarily short and medium-term and if depositors do not roll over deposited funds upon maturity, our business could be adversely affected.

      Most of our funding requirements are met through short-term and medium-term funding sources, primarily in the form of retail deposits. However, a portion of our assets have long-term maturities, creating a potential for funding mismatches. 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 could be adversely affected and we may be required to seek more expensive sources of funding to finance our operations, which could have a material adverse effect on our business.

 
We could be subject to volatility in revenue from our treasury operations.

      Treasury revenue is vulnerable to volatility in the market caused by changes in interest rates, exchange rates, equity prices, commodity prices and other factors. Any increase in interest rates would have an adverse effect on the value of our fixed income securities portfolio and may have an adverse effect on our net revenue. Any decrease in our income due to volatility in revenue from these activities could have a material adverse effect on the price of our equity shares and ADSs.

 
We could be adversely affected by the development of a nationwide inter-bank settlement system.

      Currently, 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 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. The RBI has recently introduced a new inter-bank settlement system called the Real Time Gross Settlement (“RTGS”) system. The system facilitates real time settlements primarily between banks, initially in select locations. This system is currently not fully operational. Once fully operational, this system could have an adverse impact on the cash float and fees we have enjoyed from some of our cash management services and therefore could adversely affect our future financial performance and the price of our equity shares and ADSs.

 
Because of our many transactions with stock market participants, our business could suffer if there is a prolonged or significant downturn on the Indian stock exchanges.

      We provide 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

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shares and initial public offering finance for retail customers, stock exchange clearing services and depositary accounts. As of September 30, 2004, loans and margin guarantees to Indian and foreign institutional share brokers were Rs. 7.3 billion and personal loans secured by shares were Rs. 5.2 billion. As a result of our exposure to this industry, a significant or prolonged downturn on the Indian stock exchanges could have a material adverse effect on our business and could cause the price of our equity shares and ADSs to go down.
 
Significant fraud, system failure or calamities could adversely impact our business.

      We seek to protect our computer systems and network infrastructure from physical break-ins as well as fraud and system failures. Computer break-ins and power and communication disruptions could affect the security of information stored in and transmitted through our computer systems and network infrastructure. We employ security systems, including firewalls and password encryption, designed to minimize the risk of security breaches. Although we intend to continue to implement security technology and establish operational procedures to prevent fraud, break-ins, damage and failures, there can be no assurance that these security measures will be adequate. A significant failure of security measures or operational procedures could have a material adverse effect on our business and our future financial performance.

      In addition, both our centralized data center and our back-up systems are separately located in the greater Mumbai area. In the event of a regional disaster such as an earthquake, it is possible that both systems could be simultaneously damaged or destroyed. Although we have established a remote disaster recovery site at Chennai that replicates our network and certain applications currently based in Mumbai, and believe that we will be able to retrieve critical applications within an optimal time-frame, it would still take some time to make the system fully operational.

 
HDFC Limited controls a significant percentage of our share capital and exercises substantial influence over board decisions.

      Housing Development Finance Corporation Limited (“HDFC Limited”) and its subsidiaries owned 24.0% of our equity as of December 31, 2004 and will continue to own more than 20% of our equity after this offering. So long as HDFC Limited and its subsidiaries hold at least a 20.0% equity stake in us, HDFC Limited is entitled to nominate the two directors who are not required to retire by rotation to our board, including the Chairman and our Managing Director, subject to RBI approval. Accordingly, HDFC Limited may be able to exercise substantial control over our board and over matters subject to a shareholder vote.

 
We may face potential conflicts of interest relating to our principal shareholder, HDFC Limited.

      Although we currently 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 or may effectively prevent us from taking advantage of business opportunities. As a result, any conflicts of interest between HDFC Limited and us or any other HDFC group companies and us could adversely affect our business and the price of our equity shares and ADSs.

 
Recently proposed RBI guidelines relating to ownership in private banks could discourage or prevent a change of control or other business combination involving us and could require HDFC Limited to reduce substantially its equity interest in us.

      The RBI recently issued draft guidelines concerning ownership in private sector banks. If the guidelines are enacted as currently drafted, no entity or group of related entities would 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. We do not know whether such guidelines will be adopted in their current form or at all. However, 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 stockholders. In addition, although the RBI approved the equity interest in us held by HDFC Limited and its subsidiaries when the RBI approved HDFC Limited’s application to promote us, HDFC Limited would have to seek new approval to

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maintain such interest if such guidelines are adopted in their current form. If it failed to obtain such approval, it may be required to reduce substantially such equity interest, which could adversely affect us. Any such sale of shares by HDFC Limited could also result in a decline in the market price of our equity shares and ADSs.
 
  If we fail to comply with new regulations of the Securities and Exchange Board of India or with Section 404 of the Sarbanes-Oxley Act of 2002, our reputation and the value of our securities may be adversely affected.

      On October 29, 2004, the Securities and Exchange Board of India (“SEBI”) issued a circular requiring all Indian stock exchanges to modify Clause 49 of their standard listing agreements. The revised Clause 49 has many requirements that are similar to certain requirements of the Sarbanes Oxley Act of 2002, including requirements relating to the composition and roles of the board of directors and the audit committee, ethics standards, related party disclosures and fraud.

      Among other matters, the revised Clause 49 requires our chief executive officer and chief financial officer to certify that they have evaluated the effectiveness of our internal control systems, have disclosed to our auditors and our board of directors any deficiencies in the design or operation of internal controls and have described the steps taken or proposed to be taken to remediate any identified deficiencies. The consequences of failing to comply are not clear. Although it is possible that the effectiveness of the new requirements could be delayed because they were only recently announced, the revised Clause 49 is scheduled to take effect on March 31, 2005.

      Section 404 of the Sarbanes Oxley Act of 2002 (“Section 404”) similarly requires us to include in our Annual Report on Form 20-F management’s assessment of the effectiveness of our internal controls over financial reporting, together with an attestation report from our auditors. Section 404 applies to us as of March 31, 2006.

      We have recently begun a formal process to evaluate our internal controls for the purposes of compliance with Section 404 and the revised Clause 49. Due to the preliminary nature of this work, we cannot say whether we will encounter problems or delays in completing our review or whether we will be able to comply with these requirements by the respective required dates. If we are unable to comply with the requirements of either Section 404 or the revised Clause 49 on a timely basis, our reputation and the value of our securities may be adversely affected.

 
  A change in U.S. GAAP accounting standards for employee stock options is likely to have an adverse impact on our net income.

      In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123(R), Share-Based Payment, which eliminates the ability to account for share-based compensation transactions using the intrinsic value approach, which we currently use, and requires instead that such transactions be accounted for using a fair-value based method. Application of SFAS 123(R) is likely to reduce our net income from what we would otherwise report using the intrinsic value approach. We are required to apply SFAS 123(R) to all awards granted, modified or settled in our first reporting period under U.S. GAAP after June 15, 2005. In applying the standard, we can elect to follow either a prospective method or a retrospective method under which we would restate our previously issued financial statements. We have not yet decided what method we will use in implementing SFAS 123(R). If we were to adopt the standard using the retrospective method, our net income would have been Rs. 158.2 million less than reported in the year ended March 31, 2004 and Rs. 342.7 million less than reported in the six months ended September 30, 2004. See also “Management’s Discussion and Analysis — New Accounting Pronouncements — Share-Based Payments” and Note 2(q) to our audited financial statements included elsewhere herein.

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Risks Relating to Investments in Indian Companies

 
A slowdown in economic growth in India could cause our business to suffer.

      Our performance and the quality and growth of our assets are necessarily dependent on the health of the overall Indian economy. A slowdown in the Indian economy could 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 could be adversely affected by the continuing high oil prices. India’s economy could 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. It is difficult to gauge the impact of these fundamental economic changes on our business.

 
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 could 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 role of the Indian central and state governments in the Indian economy as producers, consumers and regulators has remained significant. The leadership of India has changed many times since 1996. The current coalition-led central government, which came to power in May 2004, 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 could change, and specific laws and policies affecting banking and finance companies, foreign investment, currency exchange and other matters affecting investment in our securities could change as well. Any significant change in India’s economic liberalization and deregulation policies could 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 could adversely affect the financial markets and our business.

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

 
Natural calamities could have a negative impact on the Indian economy and cause our business to suffer.

      India has experienced natural calamities such as earthquakes, a tsunami, floods and drought in the past few years. The extent and severity of these natural disasters determines their impact on the Indian economy. For example, as a result of drought conditions in the country during fiscal 2003, the agricultural sector recorded a negative growth of 5.2%. The erratic progress of the monsoon in 2004 has also adversely affected sowing operations for certain crops. Further prolonged spells of below normal rainfall or other natural calamities could have a negative impact on the Indian economy, adversely affecting our business and the price of our equity shares and ADSs.

      Based on reports to date, the tsunami that struck the eastern coast of India and other Asian countries on December 26, 2004 did not result in any fatalities or serious injuries to our staff nor any damage to our

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properties, and we do not believe we had significant aggregate loan or other exposure to persons directly affected by the disaster. However, the full effects of the tsunami, particularly its effects on economic conditions in India generally, are not yet known and therefore we cannot predict at this time whether it will have a significant effect on our business.
 
Any downgrading of India’s debt rating by an international rating agency could have a negative impact on our business.

      Any adverse revisions to India’s credit ratings for domestic and international debt by international rating agencies may adversely impact our ability to raise additional financing and the interest rates and other commercial terms at which such additional financing is available. This could have an adverse effect on our business and future financial performance and our ability to obtain financing and fund our growth.

Risks Relating to the ADSs and Equity Shares

 
Historically, our ADSs have traded at a significant 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 at a substantial premium to the trading prices of our underlying equity shares on the Indian stock exchanges. Please 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. The completion of the transaction described in this prospectus will significantly increase the number of ADSs we have outstanding. Also, 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. No assurances can be made that the historical premium enjoyed by ADSs compared to equity shares will not be reduced or eliminated as a result of this offering or similar transactions in the future, a change in Indian law permitting further conversion of equity shares into ADSs or changes in investor preferences.

 
You will not be able to vote your ADSs.

      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.”

 
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. It is possible that this 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 New York Stock Exchange, we cannot be certain that any trading market for our ADSs will be sustained, or that the present price will correspond to the future price

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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. For example, on May 17, 2004, the BSE Sensex fell by 565 points from 5,070 to 4,505. Both The Stock Exchange, Mumbai and The National Stock Exchange of India Limited (the “National Stock Exchange”) halted trading on the exchanges in view of the sharp fall in securities prices. In addition, 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. Although the price of our stock has not been as volatile as the markets generally, future fluctuations could have a material adverse affect 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 The Stock Exchange, Mumbai. 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.

 
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 company’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 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, as it generally has over the past several years, 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

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  •  the U.S. dollar equivalent of cash dividends, if any, paid in Indian rupees on the equity shares represented by our ADSs.
 
The future sales of securities by existing shareholders or by us may depress the market price of our ADSs.

      The market price of our ADSs could decline as a result of sales of a large number of our equity shares due to the enactment of the proposed RBI guidelines on ownership in private sector banks or otherwise, or the perception that such sales could occur. These sales might also make it more difficult for us to sell equity shares in the future at a time and at a price we deem appropriate. Of our principal shareholders, HDFC Limited and its affiliates and the Bennett Coleman group have agreed to lock-up arrangements extending for a period of 90 days. See “Principal Shareholders” and “Underwriting.”

 
Financial instability in other countries, particularly emerging market countries, could disrupt our business and affect the price of our equity shares and ADSs.

      Although economic conditions are different in each country, investors’ reactions to developments in one country can have adverse effects on the securities of companies in other countries, including India. A loss of investor confidence in the financial systems of other emerging markets may cause increased volatility in Indian financial markets and indirectly, in the Indian economy in general. Any worldwide financial instability could also have a negative impact on the Indian economy, including the movement of exchange rates and interest rates in India, which could adversely affect the Indian financial sector, including us. Any financial disruption could have an adverse effect on our business, our future financial performance, our shareholders’ equity and the price of our equity shares and 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 but one of our directors and executive officers and some of the experts named in this prospectus 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 executive officers and experts named in the prospectus 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. See “Enforcement of Civil Liabilities.”

 
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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USE OF PROCEEDS

      The net proceeds to us from the offering will be approximately U.S.$253 million (U.S.$291 million if the underwriters’ over-allotment option is exercised in full). The net proceeds from the offering will be used for funding future growth. In particular, by strengthening our capital base, the net proceeds will enhance our ability to make loans and investments and provide other financing products to our customers. In the short term, the net proceeds will reduce our use of overnight call borrowings as a funding source.

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PRICE RANGE OF OUR AMERICAN DEPOSITARY SHARES AND EQUITY SHARES

      Our ADSs, each representing three equity shares, par value Indian Rs. 10 per share, are listed on the New York Stock Exchange 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 Stock Exchange, Mumbai 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 New York Stock Exchange

      The following table shows:

  •  the reported high and low prices for our ADSs in U.S. dollars on the New York Stock Exchange; and
 
  •  the average daily trading volume for our ADSs on the New York Stock Exchange.
                           
Price per ADS Average Daily

ADS Trading
High Low Volume



(number of ADSs)
Fiscal:
                       
2002
                       
 
Second Quarter (beginning July 20, 2001)
  U.S.$ 17.3     U.S.$ 12.4       106,942  
 
Third Quarter
    17.0       13.6       56,503  
 
Fourth Quarter
    17.0       13.5       37,439  
2003
                       
 
First Quarter
    15.9       12.7       32,772  
 
Second Quarter
    15.2       12.7       40,370  
 
Third Quarter
    14.3       11.9       41,419  
 
Fourth Quarter
    16.3       13.3       57,205  
2004
                       
 
First Quarter
    19.3       15.4       42,013  
 
Second Quarter
    23.8       18.8       63,563  
 
Third Quarter
    34.4       21.9       79,561  
 
Fourth Quarter
    34.9       27.0       87,982  
2005
                       
 
First Quarter
    33.1       19.6       103,313  
 
Second Quarter
    34.0       25.7       37,966  
 
Third Quarter
    45.9       30.5       88,325  
 
July
    27.6       25.7       44,586  
 
August
    28.2       26.2       37,114  
 
September
    34.0       28.2       32,238  
 
October
    35.5       30.5       64,910  
 
November
    42.4       33.9       95,262  
 
December
    45.9       36.0       104,055  

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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.
                                           
Price per Equity Share Price per Equity Share


Average Daily Equity
High Low High Low Share Trading Volume





(number of equity shares)
Fiscal:
                                       
1999
    Rs.  86.1       Rs.  48.0     U.S.$ 1.9     U.S.$ 1.0       150,201  
2000
    295.0       58.5       6.4       1.3       175,291  
2001
    285.0       185.1       6.2       4.0       153,089  
2002
    255.0       184.1       5.6       4.0       85,109  
2003
                                       
 
First Quarter
    241.5       198.8       5.3       4.4       83,396  
 
Second Quarter
    226.0       200.0       4.9       4.4       57,943  
 
Third Quarter
    223.0       186.0       4.9       4.1       124,813  
 
Fourth Quarter
    256.0       205.0       5.6       4.5       111,915  
2004
                                       
 
First Quarter
    267.2       231.0       5.8       5.0       147,219  
 
Second Quarter
    303.5       235.1       6.6       5.1       258,724  
 
Third Quarter
    385.1       265.5       8.4       5.8       401,645  
 
Fourth Quarter
    406.8       300.6       8.9       6.5       365,279  
2005
                                       
 
First Quarter
    400.0       256.2       8.7       5.6       250,044  
 
Second Quarter
    416.7       341.1       9.1       7.4       338,098  
 
Third Quarter
    530.0       396.2       11.5       8.6       346,242  
 
July
    379.5       341.1       8.3       7.4       257,662  
 
August
    381.9       353.1       8.3       7.7       177,308  
 
September
    416.7       366.2       9.1       8.0       579,323  
 
October
    425.0       396.2       9.3       8.6       269,239  
 
November
    504.4       415.5       11.0       9.1       378,750  
 
December
    530.0       464.5       11.5       10.1       384,934  

      The closing price for our equity shares on the National Stock Exchange was Rs. 511.4 (U.S.$11.1) per share on January 20, 2005.

      As of September 30, 2004, there were 206,151 holders of record of our equity shares, excluding ADSs, of which 31 had registered addresses in the United States and held an aggregate of 33,584 of our equity shares.

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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 paid on the equity shares, both exclusive of dividend tax. All dividends were paid in rupees.

                                 
Total Amount of
Dividend per Equity Share Dividends Paid1


(In millions)
Relating to Fiscal Year
                               
2000
    Rs.1.60     U.S.$ 0.035       Rs.323.9     U.S.$ 7.1  
2001
    2.00       0.044       487.2       10.6  
2002
    2.50       0.054       703.4       15.3  
2003
    3.00       0.065       850.5       18.5  
2004
    3.50       0.076       1,000.5       21.8  


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

      Our dividends are generally declared and paid in the fiscal year following the year as 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.

      Currently, we pay a 12.5% direct tax, a 2.5% surcharge and a 2% add-on tax in respect of dividends paid by us. 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, and in fiscal 2003, a dividend tax was payable by shareholders.

      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 your ADSs will be paid to the depositary in Indian rupees and, except as otherwise described under “Description of American Depositary Shares — Share Dividends and Other Distributions,” will be converted by the depositary into U.S. dollars. The depositary will distribute these proceeds to you. 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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CAPITALIZATION

      The following table sets forth our capitalization as of September 30, 2004 prepared in accordance with U.S. GAAP in Indian rupees and, for convenience, in U.S. dollars:

  •  on an actual basis; and
 
  •  on an as adjusted basis to give effect to this offering (assuming no exercise of the underwriters’ over-allotment option).

      There have been no material changes to our capitalization since September 30, 2004.

      You should read this capitalization table together with “Selected Financial and Operating Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Selected Statistical Information” and the audited financial statements and related notes appearing elsewhere in this prospectus.

                               
As of September 30, 2004

Actual As Adjusted


(In millions)
Indebtedness
                           
 
Deposits(1)
    Rs. 334,657.9       U.S.$7,289.4     Rs. 334,657.9     U.S.$7,289.4  
 
Short-term borrowings(1)
    30,701.9       668.7     30,701.9     668.7  
 
Subordinated debt
    5,000.0       108.9     5,000.0     108.9  
 
Other long-term debt
    43.4       1.0     43.4     1.0  
     
     
   
   
 
Total indebtedness
    370,403.2       8,068.0     370,403.2     8,068.0  
     
     
   
   
 
Shareholders’ equity:(2)
                           
 
Equity shares(3)
    2,862.3       62.3     3,061.6     66.7  
 
Additional paid-in capital (4)
    13,112.6       285.6     24,545.5     534.6  
 
Advance received pending allotment of shares(5)
    64.9       1.4     64.9     1.4  
 
Retained earnings
    10,374.6       226.0     10,374.6     226.0  
 
Statutory reserve(6)
    5,254.4       114.5     5,254.4     114.5  
 
Deferred stock-based compensation(7)
    (114.3 )     (2.5 )   (114.3)     (2.5 )
 
Accumulated other comprehensive income(8)
    901.3       19.6     901.3     19.6  
     
     
   
   
 
Total shareholders’ equity
    32,455.8       706.9     44,088.0     960.3  
     
     
   
   
 
Total capitalization
    Rs. 402,859.0       U.S.$8,774.9     Rs. 414,491.2     U.S.$9,028.3  
     
     
   
   
 


(1)  Deposits and short term borrowings as of December 31, 2004 were Rs. 374,285.2 million and Rs. 24,002.9 million, respectively. These changes were in the normal course of banking operations.
 
(2)  We have not issued share capital since our IPO on July 25, 2001, other than through our employee stock option schemes and the Employees Welfare Trust. See Note 3 below and Note 20 to our Financial Statements.
 
(3)  Rs. 10 par value; 450 million shares authorized, 286,232,913 shares issued and outstanding; 306,166,908 shares issued and outstanding, as adjusted. The number of equity shares issued and outstanding and the number of equity shares issued and outstanding as adjusted do not include 309,900 equity shares issued on October 6, 2004 in respect of options exercised and paid for prior to September 30, 2004, or equity shares that are subject to options granted under our stock option plans. The 309,900 equity shares were among 12,765,500 options outstanding as of September 30, 2004. The number of equity shares issued and outstanding and the number of equity shares issued and outstanding as adjusted do not include 408,400 equity shares issued on January 7, 2005 in respect of options exercised.
 
(4)  Estimated underwriting discounts and commissions and offering expenses payable by us of U.S.$7,500,000 have been deducted from the gross proceeds of the sale of ADSs pursuant to the offering.

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(5)  Represents the amount received in respect of exercised stock options described in note (3).
 
(6)  Represents the amounts that are required under Indian law to be appropriated from net income computed as per Indian GAAP and transferred to a statutory reserve, which may not be distributed via dividends.
 
(7)  Represents the unamortized portion of compensation cost from options granted under our stock option plans which have been deferred. This amount will be fully amortized by fiscal 2007.
 
(8)  Represents unrealized gains and losses on investments available for sale, net of applicable income taxes.

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DILUTION

      If you invest in the ADSs offered by us in this offering, your interest will be diluted to the extent of the difference between the offering price per ADS set forth on the cover of this prospectus and the net tangible book value per ADS upon the completion of this offering.

      As of September 30, 2004, our net tangible book value was Rs.32.5 billion (U.S.$706.9 million), or U.S.$7.41 per ADS. Net tangible book value per ADS represents the book value of our total tangible assets minus our total liabilities, divided by the total number of ADSs that would have been outstanding as of September 30, 2004 if all of our outstanding shares as of such date were represented by ADSs.

      After giving effect to the sale of the ADSs sold by us in the offering (assuming no exercise of the underwriters’ over-allotment option) and after deducting estimated underwriting discounts and commissions and offering expenses payable by us, but without taking into account any other changes in such tangible book value after September 30, 2004, our net tangible book value per ADS would increase to U.S.$9.41 per ADS. This represents an immediate increase of U.S.$2.00 per ADS in net tangible book value to holders of our shares outstanding as of September 30, 2004 and an immediate dilution of U.S.$29.85 per ADS in net tangible book value to investors purchasing ADSs in this offering at the offering price.

      The following table illustrates such dilution on the basis of U.S. GAAP:

         
U.S.$

Offering price per ADS
    39.26  
Net tangible book value per ADS as of September 30, 2004
    7.41  
Increase in net tangible book value per ADS attributable to the offering
    2.00  
Adjusted net tangible book value per ADS after the offering
    9.41  
Dilution in net tangible book value per ADS to new investors
    29.85  

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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, 2002, 2003 and 2004 and the six month periods ended September 30, 2003 and 2004 and the selected balance sheet data as of March 31, 2003 and 2004 and September 30, 2004 are derived from our audited financial statements included in this prospectus together with the report of Deloitte Haskins & Sells, independent registered public accounting firm. Our selected balance sheet data as of March 31, 2002 are derived from our audited financial statements not included in this prospectus. For the convenience of the reader, the selected financial data as of and for the six months ended September 30, 2004 have been translated into U.S. dollars at the rate on such date of Rs. 45.91 per U.S.$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.

                                                 
Years ended March 31, Six months ended September 30,


2002 2003 2004 2003 2004 2004






(In millions, except per equity share data)
Selected income statement data:
                                               
Interest and dividend revenue
    Rs. 16,448.0       Rs. 19,424.8       Rs. 24,591.5       Rs. 12,010.9       Rs. 13,592.5     U.S.$ 296.1  
Interest expense
    10,762.5       11,779.2       11,983.1       6,006.8       6,214.9       135.4  
     
     
     
     
     
     
 
Net interest revenue
    5,685.5       7,645.6       12,608.4       6,004.1       7,377.6       160.7  
Allowance for credit losses, net
    451.6       741.5       2,343.4       1,217.5       1,098.3       23.9  
     
     
     
     
     
     
 
Net interest revenue after allowance for credit losses
    5,233.9       6,904.1       10,265.0       4,786.6       6,279.3       136.8  
Non-interest revenue, net
    3,215.1       4,397.3       4,697.6       2,498.8       3,608.5       78.6  
     
     
     
     
     
     
 
Net revenue
    8,449.0       11,301.4       14,962.6       7,285.4       9,887.8       215.4  
Non-interest expense
    4,196.0       6,057.9       8,369.3       3,840.6       5,055.6       110.1  
     
     
     
     
     
     
 
Income before income taxes
    4,253.0       5,243.5       6,593.3       3,444.8       4,832.2       105.3  
Income tax expense
    1,294.6       1,729.7       1,838.8       1,078.1       1,652.7       36.0  
     
     
     
     
     
     
 
Net income
    Rs. 2,958.4       Rs. 3,513.8       Rs. 4,754.5       Rs. 2,366.7       Rs. 3,179.5     U.S.$ 69.3  
     
     
     
     
     
     
 
Per equity share data:
                                               
Earnings per share, basic
    Rs. 11.10       Rs. 12.57       Rs. 16.87       Rs. 8.41       Rs. 11.16     U.S.$ 0.24  
Earnings per share, diluted
    11.04       12.51       16.70       8.36       11.11       0.24  
Dividends per share
    2.50       3.00       3.50                    
Book value(1)
    79.06       93.36       110.36       99.86       113.39       2.47  
Equity share data:
                                               
Equity shares outstanding at end of period
    279.0       279.7       282.8       281.5       286.2       286.2  
Weighted average equity shares outstanding — basic
    266.6       279.6       281.9       281.3       284.8       284.8  
Weighted average equity shares outstanding — diluted
    267.9       281.4       284.7       282.9       286.1       286.1  

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As of March 31, As of September 30,


2002 2003 2004 2004 2004





(In millions)
Selected balance sheet data:
                                       
Total assets
    Rs. 243,032.2       Rs. 311,840.7       Rs. 426,835.6       Rs. 439,079.1     U.S.$ 9,563.8  
Cash and cash equivalents
    34,590.6       23,944.9       33,010.4       19,688.2       428.8  
Term placements(2)
          7,747.4       3,565.2       3,053.9       66.5  
Loans, net of allowance
    71,528.9       118,299.9       177,681.1       210,666.0       4,588.7  
Of which:
                                       
 
Non-performing loans, net of specific allowances
    536.4       683.3       269.9       433.6       9.4  
Investments:
                                       
 
Investments held for trading
    3,837.6       3,976.1       6,233.8       3,053.0       66.5  
 
Investments available for sale
    80,320.6       98,929.2       133,274.6       167,692.7       3,652.6  
 
Investments held to maturity(3)
    35,429.9       38,426.7       36,368.4              
   
Total
    119,588.1       141,332.0       175,876.8       170,745.7       3,719.1  
   
Of which:
                                       
     
Credit substitutes(4)
    35,126.0       29,752.8       16,557.9       14,833.3       323.1  
Total liabilities
    220,971.3       285,727.6       395,619.8       406,623.3       8,856.9  
Long-term debt
    2,157.9       2,116.0       6,086.0       5,043.4       109.9  
Short-term borrowings
    21,600.3       21,579.6       24,064.2       30,701.9       668.7  
Total deposits
    176,538.1       223,760.0       304,062.0       334,657.9       7,289.4  
Shareholders’ equity
    22,060.9       26,113.1       31,215.8       32,455.8       706.9  
                                                   
Years ended March 31, Six months ended September 30,


2002 2003 2004 2003 2004 2004






(In millions)
Period average(5)
                                               
Total assets
    Rs. 202,013.2       Rs. 257,020.8       Rs. 357,123.8       Rs. 320,597.7       Rs. 416,402.4     U.S.$ 9,070.0  
Interest-earning assets
    183,488.8       230,451.9       327,523.4       296,734.8       394,166.9       8,585.6  
Loans, net of allowance
    59,374.9       82,461.2       136,527.4       120,824.6       185,339.1       4,037.0  
Total liabilities
    185,512.4       232,933.8       328,458.9       293,066.9       384,923.1       8,384.3  
Interest-bearing liabilities
    137,681.1       175,598.6       236,551.0       220,481.3       277,556.7       6,045.7  
Long-term debt
    2,159.7       2,280.3       2,605.9       2,074.4       5,665.4       123.4  
Short-term borrowings
    18,105.9       15,362.9       33,040.7       31,710.5       35,811.3       780.0  
Total deposits
    142,854.5       186,847.7       262,707.7       235,473.4       313,275.3       6,823.7  
Of which:
                                               
 
Interest-bearing deposits
    117,415.5       157,955.4       200,904.4       186,696.4       236,080.0       5,142.2  
Shareholders’ equity
    16,500.8       24,087.0       28,664.9       27,530.8       31,479.3       685.7  

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As of or for the
As of or for the years six months ended
ended March 31, September 30,


2002 2003 2004 2003 2004





(In percentage)
Profitability:
                                       
Net income as a percentage of:
                                       
 
Average total assets
    1.5       1.4       1.3       1.5 (13)     1.5 (13)
 
Average shareholders’ equity
    17.9       14.6       16.6       17.1 (13)     20.1 (13)
Dividend payout ratio(6)
    23.8       24.2       21.0              
Spread(7)
    2.4       2.7       3.5       3.6 (13)     3.4 (13)
Net interest margin(8)
    3.1       3.3       3.8       4.0 (13)     3.7 (13)
Cost-to-net revenue ratio(9)
    49.7       53.6       55.9       52.7       51.1  
Cost-to-average assets ratio(10)
    2.1       2.4       2.3       2.4 (13)     2.4 (13)
Capital:
                                       
Total capital adequacy ratio(11)
    13.9       11.1       11.7       10.9       10.9  
Tier 1 capital adequacy ratio(11)
    10.8       9.5       8.0       9.1       7.8  
Tier 2 capital adequacy ratio(11)
    3.1       1.6       3.7       1.8       3.1  
Average shareholders’ equity as a percentage of average total assets
    8.2       9.4       8.0       8.6       7.6  
Asset quality:
                                       
Gross non-performing loans as a percentage of gross loans
    2.7       2.0       1.7       2.2       1.6  
Gross non-performing customer assets as a percentage of gross customer assets(12)
    1.9       1.6       1.6       2.0       1.6  
Net non-performing loans as a percentage of net loans
    0.7       0.6       0.2       0.5       0.2  
Net non-performing customer assets as a percentage of net customer assets(12)
    0.5       0.5       0.2       0.5       0.2  
Net non-performing loans as a percentage of total assets
    0.2       0.2       0.1       0.2       0.1  
Specific allowance for credit losses as a percentage of gross non-performing loans
    72.6       71.1       91.0       75.9       87.6  
Total allowance for credit losses as a percentage of gross non-performing loans
    81.9       78.8       116.8       86.9       121.2  
Allowance for credit losses as a percentage of gross total loans
    2.2       1.6       1.9       1.9       2.0  


  (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 the six month period ended September 30, 2004 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 are prevented from establishing a held to maturity portfolio until after March 31, 2007. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
 
  (4)  Credit substitutes consist of investments in commercial paper, debentures and preference shares issued by our corporate customers. See “Business — Commercial Banking Products — Commercial Loan Products and Credit Substitutes.”
 
  (5)  Average balances are the average of daily outstanding amounts. Average figures are unaudited.

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  (6)  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 of each year are typically paid in the following fiscal year. See “Dividend Policy.”
 
  (7)  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.
 
  (8)  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, net interest margin is greater than spread. If average interest-bearing liabilities exceed average interest-earning assets, net interest margin is less than spread.
 
  (9)  Represents the ratio of non-interest expense to the sum of net interest revenue and non-interest revenue.

(10)  Represents the ratio of non-interest expense to average total assets.
 
(11)  Tier 1 and Tier 2 capital adequacy ratios are computed in accordance with the guidelines of the Reserve Bank of India, based on financial statements prepared in accordance with Indian GAAP. See “Supervision and Regulation.”
 
(12)  Customer assets consist of loans and credit substitutes.
 
(13)  Figures are annualized.

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RECENT DEVELOPMENTS

      On January 8, 2005, we published financial information required by the Indian stock exchanges as of and for the quarter and nine months ended December 31, 2004 and as compared with the quarter and nine months ended December 31, 2003 in accordance with Indian GAAP. The information is included in our Form 6-K dated January 10, 2005 which we have furnished to the SEC and the exhibit to which is included in this prospectus. All amounts in this Recent Developments section are derived from such information and are reported in accordance with Indian GAAP.

      We routinely prepare financial information in accordance with Indian GAAP for purposes of reporting to the RBI and the Indian stock exchanges. Our financial information included in this prospectus is, except for such quarter and nine month information and as otherwise noted, presented in accordance with U.S. GAAP. We have not published financial information in accordance with U.S. GAAP for any interim period other than for the six month periods ended September 30, 2004 and 2003. As there are significant differences between Indian GAAP and U.S. GAAP, the results discussed below may not be comparable to the other information in this prospectus.

      For a discussion of differences between Indian GAAP and U.S. GAAP and for a reconciliation of net income and shareholders’ equity reported in U.S. GAAP to Indian GAAP for the fiscal year ended March 31, 2004 and the six months ended September 30, 2004, please see the additional information beginning on page F-52 of our financial statements included in this prospectus.

      For the quarter ended December 31, 2004, total interest income (which includes dividends) was Rs. 7.8 billion, an increase of 17.8% over Rs. 6.6 billion in the quarter ended December 31, 2003. This included interest and discount on advances and bills of Rs. 4.3 billion, an increase of 42.7% from Rs. 3.0 billion in the corresponding quarter of the preceding year. This was primarily due to an increase of 74.5% in the average volume of retail loans and a 49.5% increase in the average volume of wholesale loans over the corresponding quarter of the preceding year, with a marginal decrease in yields on the total loan portfolio. Interest on investments remained flat at Rs. 3.3 billion compared to the corresponding quarter of the previous year. Other income was Rs. 2.0 billion, an increase of 65.6% over Rs. 1.2 billion in the corresponding quarter of the previous year, primarily due to fees and commissions, which increased by 85.0% to Rs. 1.5 billion compared to Rs. 0.8 billion. The increase in fees and commission was mainly due to retail banking transactional fees and card related fees. Interest expended was Rs. 3.4 billion compared to Rs. 3.0 billion in the corresponding quarter of the previous year.

      Net interest margin was 3.7% after deducting retail loan customer acquisition costs from interest income. Under Indian GAAP, customer origination costs are expensed as incurred.

      Net revenue (interest income plus other income, less interest expended) was Rs. 6.4 billion, up 33.9% over Rs. 4.8 billion for the corresponding quarter of the previous year. Operating expenses were Rs. 2.8 billion or 43.5% of net revenues, compared to 44.3% of net revenues in the corresponding quarter of the previous year. Provisions and contingencies were Rs. 1.1 billion, compared to Rs. 0.8 billion in the corresponding quarter of the previous year, principally because of larger amortization of premiums on held to maturity investments. Provision for taxes was Rs. 0.8 billion compared to Rs. 0.5 billion in the corresponding quarter of the previous year. We had a net profit of Rs. 1.7 billion, an increase of 31.1% over Rs. 1.3 billion in the quarter ended December 31, 2003.

      As of December 31, 2004, total deposits were Rs. 374.3 billion, an increase of 23.1% over Rs. 304.1 billion as of March 31, 2004, of which savings deposits increased by 39.4% over March 31, 2004 to 108.8 billion. Total assets were Rs. 475.6 billion compared to Rs. 423.1 billion as of March 31, 2004. Capital adequacy ratio declined to 9.4% from 11.7% as of March 31, 2004 as a result of our asset growth and after factoring the increased risk weights on consumer credit and investments in mortgage backed securities pursuant to new directives implemented by the RBI. See “Supervision and Regulation.” Tier 1 capital ratio was 6.9%.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

      You should read the following discussion and analysis of our financial condition and results of operations together with our audited financial statements included in this prospectus. The following discussion is based on our audited financial statements, which have been prepared in accordance with U.S. GAAP, and on information publicly available from the RBI and other sources.

Introduction

 
Overview

      We are a leading private sector bank and financial services company in India. Our principal business activities are retail banking, wholesale banking and treasury operations. Our retail banking division provides a variety of deposit products as well as loans, credit cards, debit cards, third party mutual funds and insurance, investment advisory services and depositary services. Through our wholesale banking operations we provide loans, deposit products, documentary credits, guarantees, bullion trading and foreign exchange and derivative products. We also provide cash management services, clearing and settlement services for stock exchanges, tax and other collections for the government, custody services for mutual funds and correspondent banking services. Our treasury group manages our balance sheet and our foreign exchange and derivative products.

      Since fiscal 2001, we have experienced significant growth in our customer and geographical base, expanding from 0.9 million customers in 53 cities as of March 31, 2001 to 5.1 million customers in 182 cities as of September 30, 2004. In addition, we have changed our focus and business mix so that retail banking rather than wholesale banking is our more significant area, as net revenue from retail products has grown from 45.3% of total revenue for the fiscal year ended March 31, 2002 to 59.1% of total revenue for the six months ended September 30, 2004. The higher proportion of retail loans in our portfolio has allowed us to maintain our net interest margins even as market yields in the overall economy were falling. However, with this increase in retail loans, we have increased our unallocated and specific loan loss provisions.

      Our revenue consists of interest and dividend revenue as well as non-interest revenue. Our interest and dividend revenue is primarily generated by interest on loans, securities and other activities. We offer a wide range of loans to retail customers and offer primarily working capital loans to corporate customers. The primary components of our securities portfolio are statutory liquidity ratio investments, credit substitutes and other investments. Statutory liquidity ratio investments principally consist of government of India treasury securities. Credit substitutes, principally consisting of our investments in commercial paper, debentures and preference shares issued by corporations, are part of the financing products we provide to our customers. Other investments include investment grade bonds issued by public sector undertakings and public financial institutions principally to meet RBI directed lending requirements, asset backed securities, mortgage backed securities as well as equity securities and mutual funds. Interest revenue from other activities consists primarily of interest from inter-bank loans and interest paid by the RBI on cash deposits to meet our statutory cash reserve ratio requirements.

      Two important measures of our results of operations are net interest revenue, which is equal to our interest and dividend revenue net of interest expense, and net interest revenue after allowance for credit losses. Interest expense includes interest on deposits as well as on borrowings. Our interest revenue and expense are affected by fluctuations in interest rates as well as volume of activity. Our interest expense is also affected by the extent to which we fund our activities with low-interest or non-interest bearing deposits (including the float on transactional services), and the extent to which we rely on borrowings. Our allowance for credit losses includes our loan loss provision. Impairments of credit substitutes are not included in our loan-loss provision, but are included as realized losses on securities.

      We also use net interest margin and spread to measure our results. Net interest margin represents the ratio of net interest revenue to average interest-earning assets. Spread represents the difference between yield on average interest-earning assets and cost of average interest-bearing liabilities including current accounts which are non-interest bearing.

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      Our non-interest revenue includes fee and commission income, realized gains and losses on sales of securities and spread from foreign exchange and derivative transactions. Our principal sources of fee and commission revenue are retail banking services, cash management services, documentary credits and bank guarantees, distribution of third party mutual funds and insurance products and capital market services.

      Our non-interest expense includes expenses for salaries and staff benefits, premises and equipment, depreciation and amortization, and administrative and other expenses. The costs of outsourcing back office and other functions are included in administrative and other expenses.

      Our financial condition and results of operations are affected by general economic conditions prevailing in India. The Indian economy has grown steadily over the past three years. GDP growth was 5.4% in fiscal 2002, 4.4% in fiscal 2003 and 8.1% in fiscal 2004. In addition, interest rates have generally declined during the last three years in line with global trends and due to huge inflows of foreign capital, recent appreciation of the Indian rupee to the U.S. dollar, and the RBI’s general policy during that period of assuring adequate liquidity to the banking system and of generally lowering the rate at which it lent to banks in India.

      In the current fiscal year, the liquidity in the Indian banking system has decreased as the RBI has begun to raise interest rates.

Critical Accounting Policies

      We have set forth below some of our critical accounting policies under U.S. GAAP. Readers should keep in mind that we prepare our general purpose financial statements in accordance with Indian GAAP and also report to the RBI and the Indian stock exchanges in accordance with Indian GAAP. In certain circumstances, as discussed under “Financial Condition — Transfers within Investment Portfolio” below, we may take action that is required or permitted by Indian banking regulations which may have different consequences under Indian and U.S. GAAP.

 
Allowance for loan losses

      Our allowance for credit losses is based on our best estimate of losses inherent in our loan portfolio and consists of our allowances for retail loans and wholesale loans.

 
Retail loans

      We establish specific and unallocated allowances for our retail loans. For all retail loans (including credit cards), we establish a 50% specific allowance when the loan is past due for more than 90 days. If the loan remains 120 days past due, we increase our specific allowance to 100% of any uncollected amounts. We write off uncollected credit card balances which are 150 days past due, and write off uncollected balances for all other retail loans when they are 180 days past due. We also establish unallocated allowances for each of our retail loan products. See “Selected Statistical Information — Investment Portfolio — Retail Loans.”

 
Wholesale

      We establish specific allowances for our wholesale loans.

      We evaluate our wholesale loan portfolio on a periodic basis and grade our accounts considering both qualitative and quantitative criteria. Although we believe our grading and surveillance process is comprehensive, it is inherently subjective as it is based on information we have available and requires us to exercise judgment in determining a borrower’s grading and therefore may not be correct in all cases. Our grading is subject to revision as more information becomes available.

      We consider wholesale loans to be impaired when it is probable that we will be unable to collect scheduled payments of principal or interest when due. In arriving at our estimate, we consider the borrower’s payment status, financial condition and the value of collateral we hold.

      We establish specific allowances for our wholesale loans for each non-performing wholesale loan customer in the aggregate for all funded exposures. This allowance is based on either the present value of

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expected future cash flows discounted at the loan’s effective interest rate or the net realizable value of any collateral we hold. Our estimate of future cash flows from a borrower is inherently subjective as it is based on our expectations of the probability and timing of default. Our estimate of the net realizable value of any collateral we hold is also subjective, as the collateral we hold is generally working capital such as book debt or inventory.

      With effect from April 1, 2003, in light of the significant growth in the size and diversity of our wholesale loan portfolio, we established an unallocated allowance for wholesale loans based on an internal credit slippage matrix, which measures our historic losses for our standard loan portfolio.

      For more information on the methodologies we have used to establish our allowance for credit losses, see “Selected Statistical Information — Non-Performing Loans — Recognition of Non-Performing Loans.”

 
Interest Accrual and Revenue Recognition

      Interest income from loans is recognized on an accrual basis when earned except with respect to loans placed on non-accrual status, for which interest income is recognized when received. Beginning in fiscal 2004, loans have been placed on non-accrual status when they are past due for more than one quarter. Prior to that time, loans were generally placed on non-accrual status when they were past due for more than two quarters. We generally do not charge up-front loan origination fees. Nominal application fees are charged, which offset the related costs incurred.

      Fees and commissions from guarantees issued are amortized over the contractual period of the commitment, provided the amounts are collectible.

      Dividends from investments are recognized when declared.

      Realized gains and losses on sales of securities are recorded on the trade date and are determined using the weighted average cost method.

      Other fees and income are recognized when earned, which is when the service that results in the income has been provided.

  Valuation of Investments

      Investments consist of securities purchased as part of our treasury operations, such as government securities and other debt and equity securities, investments purchased as part of our wholesale banking operations, such as credit substitute securities issued by our wholesale banking customers, which include commercial paper, short term debentures and preference shares and asset and mortgage backed securities.

      Securities that are held principally for resale in the near term are classified as held for trading (“HFT”), with changes in fair value recorded in earnings.

      Debt securities that management has the positive intent and ability to hold to maturity are classified as held to maturity (“HTM”).

      Securities with fair values that are not classified as held to maturity or held for trading are classified as available for sale (“AFS”). Unrealized gains and losses on such securities, net of applicable taxes, are reported in accumulated other comprehensive income (loss), a separate component of shareholders’ equity.

      We generally report our investments in debt and equity securities at fair value, except for debt securities classified as HTM securities, which are reported at amortized cost. Fair values are based on market quotations where a market quotation is available and otherwise based on present values at current interest rates for such investments.

      For HTM and AFS securities, other than temporary declines in fair values that are below cost will be reflected in earnings as realized losses. We identify other than temporary declines based on an evaluation of all significant factors, including the length of time and extent to which fair value is less than cost and the financial condition and economic prospects of the issuer. We do not recognize an impairment for debt securities if the

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cause of the decline is related solely to interest rate increases and where we have the ability and intent to hold the security until the fair value is recovered. Estimates of any other than temporary declines in the fair values of credit substitute securities are measured on a case by case basis together with loans under the overall exposure to those customers and recognized as realized losses. As our exposures in respect of such securities are similar to our exposures on the borrower’s loan portfolio, additional disclosures have been provided on impairment status in Note 8 and on concentrations of credit risk in Note 12 of the Financial Statements.

New Accounting Pronouncements

     Share based payment

      In December 2004, the FASB issued SFAS No. 123(R), Share-Based Payment, which establishes accounting standards for all transactions in which an entity exchanges its equity instruments for goods and services. SFAS No. 123(R) focuses primarily on accounting for transactions with employees, and carries forward without change prior guidance for share-based payments for transactions with non employees.

      SFAS No. 123(R) eliminates the intrinsic value alternative in APB Opinion 25 and generally requires us to measure the cost of employee services received in exchange for an award of equity instruments based on the fair value of the award on the date of the grant. The standard requires grant date fair value to be estimated using either an option-pricing model which is consistent with the terms of the award or a market observed price, if such a price exists. Such cost must be recognized over the period during which an employee is required to provide service in exchange for the award — the requisite service period (which is usually the vesting period). The standard also requires us to estimate the number of instruments that will ultimately be issued, rather than accounting for forfeitures as they occur.

      We are required to apply SFAS No. 123(R) to all awards granted, modified or settled in our first reporting period under U.S. GAAP after June 15, 2005. We are also required to use either the “modified prospective method” or the “modified retrospective method.” Under the modified prospective method, we must recognize compensation cost for all awards after we adopt the standard and for the unvested portion of previously granted awards that are outstanding on that date.

      Under the modified retrospective method, we must restate our previously issued financial statements to recognize the amounts we previously calculated and reported on a pro forma basis, as if the prior standard had been adopted. See Note 2(q) to our audited financial statements included elsewhere in this prospectus.

      Under both methods, we are permitted to use either a straight line or an accelerated method to amortize the cost as an expense. The standard permits and encourages early adoption.

      We have commenced our analysis of the impact of SFAS 123(R), but have not yet decided: (1) whether we will elect to adopt early, (2) if we elect to adopt early, then at what date we would do so, (3) whether we will use the modified prospective method or elect to use the modified retrospective method, and (4) whether we will elect to use straight line amortization or an accelerated method. Additionally, we cannot predict with reasonable certainty the number of options that will be unvested and outstanding on April 1, 2006. Accordingly, we cannot currently quantify with precision the effect that this standard would have on our financial position or results of operations in the future, except that we probably will recognize a greater expense for any awards that we may grant in the future than we would using the current guidance.

      If we were to adopt SFAS No. 123(R) using the modified retrospective method, our net income would have been Rs. 158.2 million less than reported in the year ended March 31, 2004 and Rs. 342.7 million less than reported in the six months ended September 30, 2004.

     Other-than-temporary impairments of securities

      In November 2003, the Financial Accounting Standards Board (“FASB”) ratified a consensus on the disclosure provisions of Emerging Issues Task Force (“EITF”) Issue 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments.” In March 2004, the FASB reached a consensus regarding the application of a three-step impairment model to determine whether investments

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accounted for in accordance with SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” and other cost method investments are other-than-temporarily impaired. However, with the issuance of FASB Staff Position EITF 03-1-1, the provisions of the consensus relating to the measurement and recognition of other-than-temporary impairments have been deferred pending reassessment by the FASB. The remaining provisions of this standard, which primarily relate to disclosure, have been applied to all investments accounted for in accordance with SFAS No. 115 and other cost method investments. We cannot determine the impact of EITF 03-1 until after the FASB completes its reassessment.

     Loans on debt securities acquired in a transfer

      In December 2003, the Accounting Standards Executive Committee of the AICPA issued Statement of Position (“SOP”) 03-3, “Accounting for Certain Loans or Debt Securities Acquired in a Transfer.” SOP 03-3 addresses accounting for differences between contractual cash flows and cash flows expected to be collected from an investor’s initial investment in a loan or debt security acquired in a transfer, if those differences are attributable, at least in part, to credit quality. It limits the yield that may be accreted to the excess of the investor’s estimate of undiscounted expected cash flows over the initial investment in the loan or debt security. The SOP is effective for loans acquired in fiscal years beginning after December 15, 2004, with earlier adoption encouraged. We are evaluating the above standard to determine whether it will have a material effect on our financial position or results of operations.

Six Months Ended September 30, 2004 Compared to Six Months Ended September 30, 2003

  Net Interest Revenue After Allowance For Credit Losses

      Our net interest revenue after allowances for credit losses increased by 31.2% from Rs. 4.8 billion in the six months ended September 30, 2003 to Rs. 6.3 billion in the six months ended September 30, 2004. However, our annualized net interest margin decreased from 4.0% in the six months ended September 30, 2003 to 3.7% in the six months ended September 30, 2004. The following table sets out the components of net interest revenue after allowance for credit losses:

                                   
Six months ended September 30,

Increase/ Increase/
2003 2004 (decrease) (decrease)




(In millions, except percentages)
Interest on loans
    Rs.5,182.3       Rs.7,148.7       Rs.1,966.4       37.9 %
Interest on trading account and securities, including dividends
    6,352.8       5,719.8       (633.0 )     (10.0 )
Other interest revenue
    475.8       724.0       248.2       52.2  
     
     
     
         
Total interest and dividend revenue
    12,010.9       13,592.5       1,581.6       13.2  
     
     
     
         
Interest on deposits
    5,149.8       5,324.8       175.0       3.4  
Interest on short term borrowings
    740.3       674.4       (65.9 )     (8.9 )
Interest on long term debt
    116.7       215.7       99.0       84.8  
     
     
     
         
Total interest expense
    6,006.8       6,214.9       208.1       3.5  
     
     
     
         
Net interest revenue
    6,004.1       7,377.6       1,373.5       22.9  
Allowance for credit losses:
                               
 
Retail
    561.6       1,137.0       575.4       102.5  
 
Wholesale
    655.9       (38.7 )     (694.6 )     (105.9 )
     
     
     
         
 
Total
    1,217.5       1,098.3       (119.2 )     (9.8 )
     
     
     
         
Net interest revenue after allowance for credit losses
    4,786.6       6,279.3       1,492.7       31.2  
     
     
     
         

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  Interest and Dividend Revenue

      Interest revenue from loans increased as average volume of loans increased 53.4% from Rs. 120.8 billion in the six months ended September 30, 2003 to Rs. 185.3 billion in the six months ended September 30, 2004. Our average volume of retail loans increased by 66.9% from Rs. 43.1 billion in the six months ended September 30, 2003 to Rs. 71.9 billion in the six months ended September 30, 2004, primarily due to higher penetration of our retail loan products in existing markets and our expansion into new geographical areas. Our average volume of wholesale loans increased by 45.9% from Rs. 77.7 billion in the six months ended September 30, 2003 to Rs. 113.4 billion in the six months ended September 30, 2004 due to increased lending to existing customers as well as new customer acquisitions. However, these volume increases were partially offset by a reduction in yields. Yields on our loans decreased from an average of 8.6% in the six months ended September 30, 2003 to 7.7% in the six months ended September 30, 2004. Loan yields declined as a result of the general decline in interest rates and increased competition.

      Interest and dividend revenue from securities declined principally due to lower receipts of dividends on mutual fund units in the six months ended September 30, 2004 as well as a decline in yields. These decreases were partially offset by an increase in the volume of investments.

      Other interest revenue increased by 52.2% for the six months ended September 30, 2004 compared to the six months ended September 30, 2003 due to an increase in earnings from balances maintained with the RBI. This increase in balances was on account of higher statutory cash reserve maintenance requirements during the six months ended September 30, 2004.

  Interest Expense

      Our interest expense on deposits increased due to an increase in average volume of deposits of 33.0% from Rs. 235.5 billion in the six months ended September 30, 2003 to Rs. 313.3 billion in the six months ended September 30, 2004 primarily as a result of our expanded branch network. Our average cost of deposits decreased from 4.4% in the six months ended September 30, 2003 to 3.4% in the six months ended September 30, 2004 primarily as a result of a decline in the average cost of time deposits from 6.6% to 5.6% and an increase in the proportion of relatively lower cost average current accounts (which are non interest-bearing) and savings account balances to average total deposits from 43.3% in the six months ended September 30, 2003 to 52.5% in the six months ended September 30, 2004.

      Our interest expense on short-term borrowings decreased as a result of a decrease in the average cost of such borrowings from 4.7% to 3.8%, offset partially by an increase in borrowings in the inter-bank call-money market. Our interest expense on long-term debt increased, primarily due to Rs. 4.0 billion of subordinated debt issued in the last quarter of fiscal 2004.

  Allowance for Credit Losses

      Allowances for credit losses decreased by 9.8% for the six months ended September 30, 2004 compared to the six months ended September 30, 2003. During the same period, allowances for credit losses for retail loans increased by 102.5% in line with the growth in the retail loan book. However, allowances for credit losses for the wholesale segment decreased by 105.9%, primarily due to a large number of recoveries during the six months ended September 30, 2004 compared to the six months ended September 30, 2003, and also due to enhanced specific allowances provided for certain impaired large accounts during the six months ended September 30, 2003.

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Non-Interest Revenue

      Our non-interest revenue increased by 44.4% from Rs. 2.5 billion in the six months ended September 30, 2003 to Rs. 3.6 billion in the six months ended September 30, 2004. The following table sets forth the components of our non-interest revenue:

                                 
Six months ended
September 30,

Increase/ Increase/
2003 2004 (decrease) (decrease)




(In millions, except percentages)
Fees and commissions
    Rs.1,325.4       Rs.2,806.3       Rs.1,480.9       111.7 %
Realized gains (losses) on sales of AFS securities
    372.8       (89.1 )     (461.9 )     (123.9 )
Realized gains (losses) on sales of HFT securities
    272.5       (3.4 )     (275.9 )     (101.2 )
Foreign exchange
    299.7       374.1       74.4       24.8  
Derivative transactions
    223.0       47.6       (175.4 )     (78.7 )
Other
    5.4       473.0       467.6       8,659.3  
     
     
     
         
Total non-interest revenue
    Rs.2,498.8       Rs.3,608.5       Rs.1,109.7       44.4  
     
     
     
         

      Fees and commissions increased primarily because of growth in service and processing fee income related to retail banking services, which was due largely to an increased volume of ATM, credit card and debit card transactions and other retail loans, and an increase in the standard rates for fees on retail transactions. In addition, our depositary fees increased as a result of increased stock market activity as did fees from the distribution of third party mutual funds and insurance.

      The realized losses from sale of securities were primarily due to trading losses booked on government securities due to a sharp increase in yields in the six months ended September 30, 2004.

      Revenue from foreign exchange increased primarily due to an increase in the volume of foreign exchange transactions with retail and wholesale customers.

      Revenue from derivatives declined primarily due to lower customer volumes on derivatives as well as a decline in fair values on interest rate swaps due to increases in interest rates.

      The increase in other non-interest revenue resulted from the gain on the sale of our portfolio of automobile and commercial vehicle loans.

 
Non-Interest Expense

      Our non-interest expense was comprised of the following:

                                                 
% of net
revenues
for six months
Six months ended ended
September 30, September 30,

Increase/ Increase/
2003 2004 (decrease) (decrease) 2003 2004






(In millions, except percentages)
Salaries and staff benefits
    Rs.999.5       Rs.1,459.4       Rs.459.9       46.0 %     13.7 %     14.8 %
Premises and equipment
    873.9       1,041.3       167.4       19.2       12.0       10.5  
Depreciation and amortization
    600.0       674.7       74.7       12.5       8.2       6.8  
Administrative and other
    1,367.2       1,880.2       513.0       37.5       18.8       19.0  
     
     
     
                         
Total non-interest expense
    Rs.3,840.6       Rs.5,055.6       Rs.1,215.0       31.6       52.7       51.1  
     
     
     
                         

      Total non-interest expense increased by 31.6% from Rs. 3.8 billion in the six months ended September 30, 2003 to Rs. 5.1 billion in the six months ended September 30, 2004. This was primarily due to

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increased infrastructure costs related to the expansion of our branch and ATM networks and geographical coverage for our retail loan products. As a percentage of our net revenues, non-interest expense decreased to 51.1% in the six months ended September 30, 2004 compared to 52.7% in the six months ended September 30, 2003.

      Salaries and staff benefits rose in absolute terms and as a percentage of revenue principally due to increased headcount to support our future growth. Our headcount increased from 5,571 employees as of September 30, 2003 to 7,354 employees as of September 30, 2004. Salaries and staff benefits in the six months ended September 30, 2004 also included a charge of Rs. 262.0 million for compensation expense arising out of options granted compared to Rs. 31.5 million in the six months ended September 30, 2003. Our premises and equipment expense increased because we expanded our distribution network from 253 branches and 838 ATMs as of September 30, 2003 to 379 branches and 1,002 ATMs as of September 30, 2004. Depreciation and amortization and administrative and other expenses increased primarily due to an expansion of our branch and ATM networks and higher spending on technology and infrastructure to support growth in our retail loans and credit card business.

  Income Tax

      Our income tax expense increased by 53.3% from Rs. 1.1 billion in the six months ended September 30, 2003 to Rs. 1.7 billion in the six months ended September 30, 2004. Our effective tax rate increased from 31.3% in the six months ended September 30, 2003 to 34.2% in the six months ended September 30, 2004, principally due to an increase of 0.72% in the statutory income tax rate and higher permanent differences in the form of stock based compensation and lower tax-exempt income in the six months ended September 30, 2004. Tax-exempt income consists principally of dividends and investment income from tax-exempt investments such as preference shares, mutual fund units and infrastructure bonds.

  Net Income

      As a result of the foregoing factors, our net income after taxes increased by 34.3% from Rs. 2.4 billion in the six months ended September 30, 2003 to Rs. 3.2 billion in the six months ended September 30, 2004.

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Fiscal Year Ended March 31, 2004 Compared to Fiscal Year Ended March 31, 2003

  Net Interest Revenue After Allowance For Credit Losses

      Our net interest revenue after allowances for credit losses increased by 48.7% from Rs. 6.9 billion in fiscal 2003 to Rs. 10.3 billion in fiscal 2004. Our net interest margin increased from 3.3% in fiscal 2003 to 3.8% in fiscal 2004. The following table sets out the components of net interest revenue after allowance for credit losses:

                                   
Year ended March 31,

Increase/ Increase/
2003 2004 (decrease) (decrease)




(In millions, except percentages)
Interest on loans     Rs. 7,805.3       Rs. 11,705.0       Rs. 3,899.7       50.0 %
Interest on trading account and securities, including dividends
    10,386.1       11,776.9       1,390.8       13.4  
Other interest revenue
    1,233.4       1,109.6       (123.8 )     (10.0 )
     
     
     
         
Total interest and dividend revenue
    19,424.8       24,591.5       5,166.7       26.6  
     
     
     
         
Interest on deposits
    10,508.5       10,279.2       (229.3 )     (2.2 )
Interest on short term borrowings
    1,032.9       1,435.9       403.0       39.0  
Interest on long term debt
    237.8       268.0       30.2       12.7  
     
     
     
         
Total interest expense
    11,779.2       11,983.1       203.9       1.7  
     
     
     
         
Net interest revenue
    7,645.6       12,608.4       4,962.8       64.9  
Allowance for credit losses:
                               
 
Retail
    122.7       918.5       795.8       648.6  
 
Wholesale
    618.8       1,424.9       806.1       130.3  
     
     
     
         
 
Total
    741.5       2,343.4       1,601.9       216.0  
     
     
     
         
Net interest revenue after allowance for credit losses
    Rs. 6,904.1       Rs. 10,265.0       Rs. 3,360.9       48.7  
     
     
     
         

  Interest and Dividend Revenue

      Interest revenue from loans increased as average volume of loans increased by 65.6% from Rs. 82.5 billion in fiscal 2003 to Rs. 136.5 billion in fiscal 2004. Our average volume of retail loans increased by 153.8% from Rs. 20.9 billion in fiscal 2003 to Rs. 52.9 billion in fiscal 2004, primarily because of the expansion of our core retail loan products and our expansion into new geographical areas. Our average volume of wholesale loans increased by 35.7% from Rs. 61.6 billion in fiscal 2003 to Rs. 83.6 million in fiscal 2004 due to a general increase in business. This growth in volume was partially offset as yields on our loans decreased from an average of 9.5% in fiscal 2003 to 8.6% in fiscal 2004. Loan yields declined in line with the general decline in interest rates and due to increased competition.

      Interest and dividend revenue from securities increased principally due to an increase in the interest revenue from securities held to meet the statutory liquidity ratio. This was due to an increase in the average volume of our statutory liquidity ratio investments, which increased by 55.2% from Rs. 54.8 billion in fiscal 2003 to Rs. 85.1 billion in fiscal 2004, partially offset by a decline in yields. The increase in interest and dividend income was also due to higher dividend income from mutual fund units and additional investments made to comply with our directed lending obligations.

      Other interest revenue decreased due to a smaller number of inter-bank placements in U.S. dollars as the interest differential between the U.S. market and India narrowed.

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  Interest Expense

      Our interest expense on deposits decreased as a result of a decrease in interest rates despite the average volume of deposits increasing by 40.6% from Rs. 186.8 billion in fiscal 2003 to Rs. 262.7 billion in fiscal 2004.

      Our average cost of deposits decreased from 5.6% in fiscal 2003 to 3.9% in fiscal 2004 as a result of a decline in the cost of time deposits from 7.7% to 6.2% and an increase in the proportion of relatively lower cost average current and savings account balances to average total deposits from 35.0% in fiscal 2003 to 46.9% in fiscal 2004.

      Our interest expense on short-term borrowings increased as a result of an increase in borrowings in the inter-bank call-money market from Rs. 15.4 billion to Rs. 33.0 billion, offset partly by a drop in the average cost of such borrowings from 6.7% to 4.3%. Our interest expense on long-term debt increased marginally due to the partial impact of the Rs. 4.0 billion of subordinated debt issued in the last quarter of fiscal 2004.

  Allowance for Credit Losses

      The increase in our allowance for credit losses in fiscal 2004 reflected higher gross additions to non-performing loans in both retail and wholesale banking. Also, we made an unallocated allowance of Rs. 589.2 million in fiscal 2004 for performing commercial and retail loans. No such unallocated allowance was created in fiscal 2003.

  Non-Interest Revenue

      Our non-interest revenue increased by 6.8% from Rs. 4.4 billion in fiscal 2003 to Rs. 4.7 billion in fiscal 2004. The following table sets out the components of our non-interest revenue:

                                 
Year ended March 31,

Increase/ Increase/
2003 2004 (decrease) (decrease)




(In millions, except percentages)
Fees and commissions
    Rs.2,306.4       Rs.3,140.7       Rs.834.3       36.2 %
Realized gains (losses) on sales of AFS securities
    721.7       (48.3 )     (770.0 )     (106.7 )
Realized gains (losses) on sales of HFT securities
    507.8       396.8       (111.0 )     (21.9 )
Foreign exchange
    445.3       740.0       294.7       66.2  
Derivative transactions
    379.1       443.9       64.8       17.1  
Other
    37.0       24.5       (12.5 )     (33.8 )
     
     
     
         
Total non-interest revenue
    Rs.4,397.3       Rs.4,697.6       Rs.300.3       6.8  
     
     
     
         

      Fees and commissions grew primarily because of an increase in the volume of ATM transactions for other banks’ customers, debit card transactions, processing fees relating to retail loans, service charges for non-maintenance of minimum balances, depository fees (as there was an increase in activity due to recovery in the stock markets) and fees from the distribution of third party mutual funds.

      The realized losses in the AFS book in 2004 are due to losses on redemption of mutual fund units post receipt of dividends. We made a higher profit in fiscal 2003 compared to fiscal 2004 in the HFT category as we took advantage of a larger decline in interest rates in fiscal 2003 than in fiscal 2004.

      Revenues from foreign exchange increased primarily as a result of the introduction of the sale of foreign exchange products to retail customers and increased volume of transactions with wholesale customers.

      Revenues from derivatives increased principally due to higher customer volumes on interest rate swaps.

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  Non-Interest Expense

      Our non-interest expense was comprised of the following:

                                                 
% of net
revenues
for year ended
Year ended March 31, March 31,

Increase/ Increase/
2003 2004 (decrease) (decrease) 2003 2004






(In millions, except percentages)
Salaries and staff benefits
    Rs.1,661.2       Rs.2,154.0       Rs.492.8       29.7 %     14.7 %     14.4 %
Premises and equipment
    1,343.6       1,828.5       484.9       36.1       11.9       12.2  
Depreciation and amortization
    1,052.4       1,254.9       202.5       19.2       9.3       8.4  
Administrative and other
    2,000.7       3,131.9       1,131.2       56.5       17.7       20.9  
     
     
     
                         
Total non-interest expense
    Rs.6,057.9       Rs.8,369.3       Rs.2,311.4       38.2       53.6       55.9  
     
     
     
                         

      Salaries and staff benefits rose principally due to increased headcount to support our growth. Our headcount increased from 4,791 employees as of March 31, 2003 to 5,673 employees as of March 31, 2004. Our premises and equipment expense, depreciation and amortization expense and administrative and other expenses increased principally because we expanded our distribution network from 231 branches and 732 ATMs as of March 31, 2003 to 312 branches and 910 ATMs as of March 31, 2004 and also as a result of the infrastructure that we implemented to support growth in the retail loan book and credit card business.

  Income Tax

      Our income tax expense increased by 6.3% from Rs. 1.7 billion in fiscal 2003 to Rs. 1.8 billion in fiscal 2004. Our effective rate of tax decreased from 33.0% in fiscal 2003 to 27.9% in fiscal 2004, principally due to a decrease of 0.88% in the statutory income tax rate and higher tax-exempt income. Tax-exempt income consists principally of dividends and investment income from tax-exempt investments such as preference shares, mutual fund units and infrastructure bonds.

  Net Income

      As a result of the foregoing factors, our net income after taxes increased by 35.3% from Rs. 3.5 billion in fiscal 2003 to Rs. 4.8 billion in fiscal 2004.

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Fiscal Year Ended March 31, 2003 Compared to Fiscal Year Ended March 31, 2002

 
Net Interest Revenue After Allowance For Credit Losses

      Our net interest revenue after allowances for credit losses increased by 31.9% from Rs. 5.2 billion in fiscal 2002 to Rs. 6.9 billion in fiscal 2003. Our net interest margin increased from 3.1% in fiscal 2002 to 3.3% in fiscal 2003. The following table sets forth the components of net interest revenue after allowance for credit losses:

                                   
Year ended March 31,

Increase/ Increase/
2002 2003 (decrease) (decrease)




(In millions, except percentages)
Interest on loans
    Rs.6,130.7       Rs.7,805.3       Rs.1,674.6       27.3 %
Interest on trading account and securities, including dividends
    8,166.4       10,386.1       2,219.7       27.2  
Other interest revenue
    2,150.9       1,233.4       (917.5 )     (42.7 )
     
     
     
         
Total interest and dividend revenue
    16,448.0       19,424.8       2,976.8       18.1  
     
     
     
         
Interest on deposits
    9,158.5       10,508.5       1,350.0       14.7  
Interest on short term borrowings
    1,328.1       1,032.9       (295.2 )     (22.2 )
Interest on long term debt
    275.9       237.8       (38.1 )     (13.8 )
     
     
     
         
Total interest expense
    10,762.5       11,779.2       1,016.7       9.4  
     
     
     
         
Net interest revenue
    5,685.5       7,645.6       1,960.1       34.5  
Allowance for credit losses:
                               
 
Retail
    96.8       122.7       25.9       26.8  
 
Wholesale
    354.8       618.8       264.0       74.4  
     
     
     
         
 
Total
    451.6       741.5       289.9       64.2  
     
     
     
         
Net interest revenue after allowance for credit losses
    5,233.9       6,904.1       1,670.2       31.9  
     
     
     
         
 
Interest and Dividend Revenue

      Interest revenue from loans increased as our average volume of loans increased by 38.9% from Rs. 59.4 billion in fiscal 2002 to Rs. 82.5 billion in fiscal 2003. Our average volume of retail loans increased by 115.1% from Rs. 9.7 billion in fiscal 2002 to Rs. 20.9 billion in fiscal 2003, primarily because of the expansion of our core retail loan products and our expansion into new geographical areas. Our average volume of wholesale loans increased by 24.0% from Rs. 49.7 billion in fiscal 2002 to Rs. 61.6 billion in fiscal 2003. Yields on our loans decreased from an average of 10.3% in fiscal 2002 to 9.5% in fiscal 2003. Loan yields declined in line with the general decline in interest rates and due to increased competition.

      Interest and dividend revenue from securities increased primarily because of an increase in the volumes of investments held to meet our statutory liquidity ratio, tax-exempt investments and investments made to comply with our directed lending obligations. These increases were offset in part by declines in yields reflecting the general decline in interest rates.

      Other interest revenue decreased due to a smaller number of inter-bank placements in U.S. dollars as the interest differential between the U.S. market and India narrowed.

 
Interest Expense

      Our interest expense on deposits increased as our average volume of deposits increased by 30.8% from Rs. 142.8 billion in fiscal 2002 to Rs. 186.8 billion in fiscal 2003 as a result of our expanded branch network. This was offset by a decrease in average cost of deposits from 6.4% in fiscal 2002 to 5.6% in fiscal 2003. This decline was due to a decrease in cost of term deposits from 9.0% to 7.7% and an increase in the proportion of

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average current and savings account balances to average total deposits from 33.9% in fiscal 2002 to 35.0% in fiscal 2003.

      Our interest expense on short-term borrowings decreased as a result of a decrease in borrowings in the inter-bank call-money market.

  Allowance for Credit Losses

      Allowance for credit losses increased primarily due to the deterioration of some large accounts in the wholesale book.

  Non-Interest Revenue

      Our non-interest revenue increased by 36.8% from Rs. 3.2 billion in fiscal 2002 to Rs. 4.4 billion in fiscal 2003. The following table sets forth the components of our non-interest revenue:

                                 
Year ended March 31,

Increase/ Increase/
2002 2003 (decrease) (decrease)




(In millions, except percentages)
Fees and commissions     Rs. 1,620.5       Rs. 2,306.4       Rs. 685.9       42.3 %
Realized gains (losses) on sales of AFS securities
    344.4       721.7       377.3       109.6  
Realized gains (losses) on sales of HFT securities
    600.9       507.8       (93.1 )     (15.5 )
Foreign exchange
    391.4       445.3       53.9       13.8  
Derivative transactions
    249.7       379.1       129.4       51.8  
Other
    8.2       37.0       28.8       351.2  
     
     
     
         
Total non-interest revenue
    Rs. 3,215.1       Rs. 4,397.3       Rs. 1,182.2       36.8  
     
     
     
         

      Fees and commissions grew primarily because of an increase in the volume of ATM transactions for other banks’ customers, debit card transactions, processing fees relating to retail loans, service charges for non-maintenance of minimum balances, retail transactions through other channels, and depository fees.

      We realized higher aggregate gains on our investment portfolios, mainly on account of increased market values caused by the decline in interest rates in the fiscal year and increased trading activity in the securities market.

      Revenue from foreign exchange increased primarily due to an increase in the volume of customer transactions.

      Revenue from derivatives increased principally as a result of expansion in our range of derivative products as well as profits on unwinding of certain currency swaps by customers.

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  Non-Interest Expense

      Our non-interest expense was comprised of the following:

                                                 
% of net
revenues for
year ended
Year ended March 31, March 31,

Increase/ Increase/
2002 2003 (decrease) (decrease) 2002 2003






(In millions, except percentages)
Salaries and staff benefits     Rs. 1,184.6       Rs. 1,661.2       Rs. 476.6       40.2 %     14.0 %     14.7 %
Premises and equipment
    913.8       1,343.6       429.8       47.0       10.8       11.9  
Depreciation and amortization
    675.7       1,052.4       376.7       55.7       8.0       9.3  
Administrative and other
    1,421.9       2,000.7       578.8       40.7       16.8       17.7  
     
     
     
                         
Total non-interest expense
    Rs. 4,196.0       Rs. 6,057.9       Rs.1,861.9       44.4       49.7       53.6  
     
     
     
                         

      Salaries and staff benefits rose principally due to increased headcount to support our growth. Our headcount increased from 3,742 employees as of March 31, 2002 to 4,791 employees as of March 31, 2003. Salaries and staff benefits in fiscal 2003 also included a charge of Rs. 136.9 million for compensation expense arising out of options granted compared to Rs. 89.8 million in fiscal 2002.

      Our premises and equipment expense, depreciation and amortization expense and our administrative and other expense increased principally because we expanded our distribution network from 171 branches and 479 ATMs as of March 31, 2002 to 231 branches and 732 ATMs as of March 31, 2003 and also due to infrastructure set up to support new lines of businesses, especially the two wheeler, commercial vehicle and credit card businesses.

 
Income Tax

      Our income tax expense increased by 33.6% from Rs. 1.3 billion in fiscal 2002 to Rs. 1.7 billion in fiscal 2003. Our effective rate of tax increased from 30.4% in fiscal 2002 to 33.0% in fiscal 2003, principally due to an increase of 1.05% in the statutory income tax rate and less tax-exempt income. Tax-exempt income consists principally of dividends and investment income from tax-exempt investments such as preference shares and infrastructure bonds.

 
Net Income

      As a result of the foregoing factors, our net income after taxes increased by 18.8% from Rs. 3.0 billion in fiscal 2002 to Rs. 3.5 billion in fiscal 2003.

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Liquidity and Capital Resources

      Our growth over the last three years has been financed by a combination of cash generated from operations, increases in our customer deposits, borrowings and new issuances of equity capital.

      The following table sets forth our cash flows from operating activities, investing activities and financing activities in a condensed format. We have aggregated certain line items set forth in the cash flow statement that is part of our financial statements included elsewhere in this prospectus in order to facilitate understanding of significant trends in our business.

                                                 
Year ended March 31, Six month periods ended September 30,


2002 2003 2004 2003 2004 2004






(In millions)
Cash flows from operating activities:
                                               
Net income
    Rs.2,958.4       Rs.3,513.8       Rs.4,754.5       Rs.2,366.7       Rs.3,179.5     U.S.$ 69.3  
Non cash adjustments to net income
    1,219.6       1,394.6       4,515.6       1,786.6       2,607.9       56.8  
     
     
     
     
     
     
 
Subtotal
    4,178.0       4,908.4       9,270.1       4,153.3       5,787.4       126.1  
Net change in other assets and liabilities
    393.0       9,579.1       30,985.8       (8,427.1 )     (24,507.2 )     (533.7 )
     
     
     
     
     
     
 
Net cash provided by/(used in) operating activities
    4,571.0       14,487.5       40,255.9       (4,273.8 )     (18,719.8 )     (407.6 )
Cash flows from investing activities:
                                               
Net change in term placements
          (7,747.4 )     4,182.2       2,426.7       511.3       11.1  
Net change in investments
    (45,808.0 )     (14,051.0 )     (57,535.2 )     (22,258.4 )     4,190.7       91.3  
Proceeds from loans securitized
                5,917.4             17,581.1       382.9  
Increase in loans originated, net of principal collections
    (20,897.3 )     (47,512.5 )     (67,765.8 )     (21,073.8 )     (51,358.1 )     (1,118.7 )
Additions to property and equipment, net of sales
    (1,581.6 )     (2,517.3 )     (2,119.0 )     (1,094.4 )     (1,145.6 )     (25.0 )
     
     
     
     
     
     
 
Net cash used in investing activities
    (68,286.9 )     (71,828.2 )     (117,320.4 )     (41,999.9 )     (30,220.6 )     (658.4 )
     
     
     
     
     
     
 
Cash flows from financing activities:
                                               
Net increase in deposits
    59,957.0       47,221.9       80,302.0       28,187.0       30,595.9       666.4  
Net increase/(decrease) in short-term borrowings
    4,929.1       (20.7 )     2,484.6       9,463.0       6,637.8       144.6  
Net increase/(decrease) in long term debt
    (62.7 )     (41.9 )     3,970.0       (15.1 )     (1,042.7 )     (22.7 )
Proceeds from issuance of equity shares and ADSs
    7,890.6       86.7       203.6       72.7       493.7       10.7  
Proceeds from applications received for shares pending allotment
          146.5       125.5             64.9       1.4  
Payment of dividends and dividend tax
    (528.6 )     (697.5 )     (955.7 )     (955.7 )     (1,131.4 )     (24.6 )
     
     
     
     
     
     
 
Net cash provided by financing activities
    72,185.4       46,695.0       86,130.0       36,751.9       35,618.2       775.8  
     
     
     
     
     
     
 
Net change in cash
    8,469.5       (10,645.7 )     9,065.5       (9,521.8 )     (13,322.2 )     (290.2 )
Cash and cash equivalents, beginning of year
    26,121.1       34,590.6       23,944.9       23,944.9       33,010.4       719.0  
     
     
     
     
     
     
 
Cash and cash equivalents, end of year
    Rs.34,590.6       Rs.23,944.9       Rs.33,010.4       Rs.14,423.1       Rs.19,688.2     U.S.$ 428.8  
     
     
     
     
     
     
 
 
Cash flows from operations

      Our net cash from operations reflects our net income, adjustments for tax and non-cash charges such as depreciation and amortization, as well as changes in other assets and liabilities. Our net income after adjusting for tax and non-cash adjustments increased in the periods shown. However, movements in other assets and liabilities had a significant impact on our overall position and caused a large part of the overall increase in net cash from operations in fiscal 2003 and 2004, and resulted in our net cash from operations being negative for the two six month periods. These changes arose primarily from our role as a payment bank to corporations that

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make initial public offerings. In such capacity, we issue demand drafts to persons whose subscriptions for shares are rejected (due to oversubscription or other reasons). The issuer advances funds to us for the payment of such drafts. The delay between the receipt of funds from the issuer and issuance of such demand drafts on the one hand, and the cashing of those drafts by the recipients on the other, can result in significant movements in our accrued expenses and other liabilities from period to period. In particular, during fiscal 2004 we received large amounts of cash against which we issued demand drafts which remained unpaid at March 31, 2004. Primarily as a result of this activity, our accrued expenses and other liabilities increased by Rs. 31.2 billion in fiscal 2004 compared to fiscal 2003. As these drafts were paid during the six months ended September 30, 2004, our accrued expenses and other liabilities decreased by Rs. 27.1 billion.
 
Cash flows from financing activities

      Our primary sources of cash flows from financing activities are deposits and, to a lesser extent, borrowings. Deposits have increased over time as our business has expanded. As market yields continued to decline, our overall deposit growth in fiscal 2003 was less than in fiscal 2002. This reflected a slowdown in the rate of growth in time deposits, as customer preferences shifted to other investments. Although this trend continued in fiscal 2004 versus fiscal 2003, the rate of growth in current and savings accounts was greater, which contributed to the significant overall increase in deposits. In addition, the fiscal 2004 increase in deposits reflected the collection of over Rs. 20.0 billion received from applicants for shares in various initial public offerings in the Indian markets. These amounts were outstanding on our books as of March 31, 2004 and were paid out during the six months ended September 30, 2004. Because of the trends in deposits discussed above, we increased our short term borrowings during the six months ended September 30, 2003 in order to fund our growth. Because of the temporary benefit of the funds related to initial public offerings, the increase in borrowings for the fiscal year ended March 31, 2004 was not as great as in the six month period ended September 30, 2003. As such funds were paid out during the six months ended September 30, 2004, short term borrowings increased again.

      As our retail loan book increased, we were required to increase our capital ratios. We privately placed long term subordinated debt of Rs. 4.0 billion in February 2004. Subordinated debt of Rs. 1.0 billion was repaid at maturity during the six months ended September 30, 2004.

      We raised equity capital of Rs. 7.8 billion in July 2001, through an initial public offering of ADSs in the United States. This strengthened our capital position in order to support balance sheet growth.

 
Cash flows from investing activities

      We used our cash from operations and financing activities primarily to invest in our retail loan book. Our growth in investments reflected primarily an increase in statutory liquidity ratio investments that was required as our business expanded. As the pace of growth of our retail loans was much faster than growth in deposits, our liquidity and capital position were strained. As a result, we sold our automotive and commercial vehicle loan book of Rs. 17.3 billion. During the six months ended September 30, 2004, as yields reversed their downward trend, we substantially closed out our trading positions in investments to insulate any immediate valuation losses due to the downward movement in bond prices.

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Financial Condition

  Assets

      The following table sets forth the principal components of our assets as of March 31, 2004 and September 30, 2004:

                                 
As of As of
March 31, September 30, Increase/ Increase/
2004 2004 (decrease) (decrease)




(In millions, except percentages)
Cash and cash equivalents     Rs.33,010.4       Rs.19,688.2       Rs.(13,322.2 )     (40.4 )%
Term placements
    3,565.2       3,053.9       (511.3 )     (14.3 )
Investments held for trading
    6,233.8       3,053.0       (3,180.8 )     (51.0 )
Investments available for sale
    133,274.6       167,692.7       34,418.1       25.8  
Investments held to maturity
    36,368.4             (36,368.4 )     (100.0 )
Securities purchased under agreements to resell
    19,950.0       15,251.0       (4,699.0 )     (23.6 )
Loans, net
    177,681.1       210,666.0       32,984.9       18.6  
Accrued interest receivable
    4,178.7       5,219.6       1,040.9       24.9  
Property and equipment
    6,169.1       6,446.4       277.3       4.5  
Other assets
    6,404.3       8,008.3       1,604.0       25.0  
     
     
     
         
Total assets
    Rs. 426,835.6       Rs. 439,079.1       Rs. 12,243.5       2.9  
     
     
     
         

      Our total assets increased by 2.9% to Rs. 439.1 billion as of September 30, 2004.

      Investments held for trading declined due to lower trading opportunities in view of the rising interest rate environment.

      Investments available for sale increased primarily due to a reclassification of our HTM portfolio to AFS as described below under “— Transfers Within Investment Portfolios.”

      Net loans increased due to increases in both our retail and wholesale products. Our retail loan volume increased by 25.5% to Rs. 92.0 billion in the six months ended September 30, 2004, which reflected our increased focus on retail loans. This increase was net of sales of automobile and commercial vehicle loans aggregating Rs. 17.3 billion in securitization transactions during the six months ended September 30, 2004.

      Our property and equipment increased as we expanded our distribution network from 312 branches and 910 ATMs as of March 31, 2004 to 379 branches and 1,002 ATMs as of September 30, 2004 and invested in other infrastructure to support our growth.

  Transfers Within Investment Portfolio

      In the six months ended September 30, 2004, because interest rates were rising in the Indian market, we elected to transfer investments with a fair value of Rs. 11.2 billion from our HTM portfolio to our AFS portfolio because these investments were yielding higher than prevailing market yields. The transfer thus provided some relief in our Indian GAAP accounts from the effects of losses in the AFS portfolio as a result of further increases in interest rates. This transfer was permitted by RBI regulations. However, because this transfer was not considered acceptable under U.S. GAAP, our HTM portfolio was deemed “tainted” and we were required to re-classify the remaining HTM portfolio as AFS. We are not permitted to establish a new HTM portfolio under U.S. GAAP until after March 31, 2007 and, accordingly, the investment classifications under U.S. GAAP and Indian GAAP could vary materially in the future. This reclassification resulted in an increase to shareholders’ equity of Rs. 507.5 million and had no effect on net income.

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  Liabilities and Shareholders’ Equity

      The following table sets forth the principal components of our liabilities and shareholders’ equity as of March 31, 2004 and September 30, 2004:

                                 
As of As of
March 31, September 30, Increase/ Increase/
2004 2004 (decrease) (decrease)




(In millions, except percentages)
Interest bearing deposits     Rs.215,710.8       Rs.258,240.8       Rs.42,530.0       19.7 %
Non-interest bearing deposits
    88,351.2       76,417.1       (11,934.1 )     (13.5 )
     
     
     
         
Total deposits
    304,062.0       334,657.9       30,595.9       10.1  
Short-term borrowings
    24,064.2       30,701.9       6,637.7       27.6  
Accrued interest payable
    4,165.4       5,958.8       1,793.4       43.1  
Long-term debt
    6,086.0       5,043.4       (1,042.6 )     (17.1 )
Accrued expenses and other liabilities
    57,242.2       30,261.3       (26,980.9 )     (47.1 )
     
     
     
         
Total liabilities
    395,619.8       406,623.3       11,003.5       2.8  
Shareholders’ equity
    31,215.8       32,455.8       1,240.0       4.0  
     
     
     
         
Total liabilities and shareholders’ equity
    Rs.426,835.6       Rs.439,079.1       Rs.12,243.5       2.9  
     
     
     
         

      Our total liabilities increased by 2.8% to Rs. 406.6 billion as of September 30, 2004. The increase in our interest bearing deposits was principally due to new customers acquired as we expanded our branch network and achieved greater penetration of our customer base through cross sales of our products. However, there was a decline in non-interest bearing deposits as we held a substantial amount of temporary initial public offering collection money on March 31, 2004 which subsequently was paid out. Of our total deposits as of September 30, 2004, retail deposits accounted for 72.1% and wholesale deposits accounted for the balance.

      Accrued expenses and other liabilities decreased principally because of a decrease in bills payable as of September 30, 2004 compared to March 31, 2004. Bills payable decreased due to payment of refund orders of unallotted collection monies of those who applied for initial public offerings of companies, which we owed as of March 31, 2004.

      Long term debt decreased due to the repayment at maturity of subordinated debt of Rs. 1.0 billion.

      Most of our funding requirements are met through short term and medium term funding sources. Of our total non-equity sources of funding as of September 30, 2004, deposits accounted for approximately 82.3% (of which retail deposits were 72.1%) with short term borrowings accounting for approximately 7.6% and long-term debt accounting for approximately 1.2%. In our experience, a substantial portion of our deposits are rolled over upon maturity and are, over time, a stable source of funding. However, the continuation of our deposit base could be adversely affected in the event of deterioration in the economy or if the interest rates offered by us differ significantly from those offered by our competitors.

      Shareholders’ equity increased primarily due to an increase in our retained earnings. As of September 30, 2004, our shareholders’ equity included Rs. 0.9 billion of unrealized gains on available for sale securities, net of tax, which includes the effect of the reclassification of the HTM portfolio discussed above.

      We believe that our existing cash balances, funds generated from operations and borrowings will be sufficient for us to meet our liquidity requirements for at least the next twelve months.

  Capital

      We are subject to the capital adequacy requirements of the RBI, which are primarily based on the capital adequacy accord reached by the Basel Committee of the Bank of International Settlements in 1988. For a description of the RBI’s capital adequacy guidelines, see “Supervision and Regulation — Capital Adequacy Requirements.” We are required to maintain a minimum ratio of total capital to risk adjusted assets as determined by a specified formula of 9.0%, at least half of which must be Tier 1 capital, which is generally shareholders’ equity.

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      Our regulatory capital and capital adequacy ratios as measured in accordance with Indian GAAP are as follows:

                   
As of March 31, As of September 30,
2004 2004


(In millions, except percentages)
Tier 1 capital
    Rs.22,297.0       Rs.25,379.7  
Tier 2 capital
    10,081.2       9,927.2  
     
     
 
 
Total capital
    32,378.2       35,306.9  
     
     
 
Total risk weighted assets and contingents
    Rs.277,738.2       Rs.324,323.1  
     
     
 
Capital ratios:
               
 
Tier 1
    8.03 %     7.83 %
 
Total capital
    11.66 %     10.89 %
Minimum capital ratios required by the RBI:
               
 
Tier 1
    4.50 %     4.50 %
 
Total capital
    9.00 %     9.00 %

      As shown above, our Tier 1 capital ratio decreased to 7.83% and our total capital ratio declined to 10.89% as of September 30, 2004. The decrease in our Tier 1 capital ratio was primarily on account of the growth in risk weighted assets due to an increase in our customer assets. The decrease in our Tier 2 capital was primarily due to redemption at maturity of subordinated debt in the six months ended September 30, 2004 and reduction in the portion of subordinated debt eligible to be considered Tier 2 capital.

      Our Indian GAAP financial statements include general provisions (unallocated allowances) of Rs. 1.6 billion and Rs. 1.6 billion as of March 31, 2004 and September 30, 2004, respectively, which qualify for Tier 2 capital subject to a ceiling of 1.25% of risk weighted assets.

      In an effort to create a prudent policy for utilizing gains realized on the sale of investments, the RBI issued guidelines in fiscal 2002 requiring the appropriation of a minimum of 5% of the investment portfolio to an investment fluctuation reserve over the five year period ending March 31, 2006. We currently carry an investment fluctuation reserve of Rs. 4.1 billion in Indian GAAP, which is 3.6% of the investment portfolio, excluding investments held to maturity as per Indian GAAP. This amount is included in retained earnings in U.S. GAAP.

      The RBI Tier 1 capital and total capital ratios are expected to change with the implementation of the Basel II standards in late fiscal 2006 or early fiscal 2007. Under Basel II, there will be three methods for determining the risk weighting of assets for purposes of calculating capital requirements for credit risk, consisting of one “standardized” method in which external ratings are used and two methods in which a bank’s internal ratings are used. The RBI has said that Indian banks should use the standardized method but it may later permit banks to migrate to the internal ratings based approaches. We have been closely following the development of Basel II and have participated in studies conducted by the RBI to analyze the effects of Basel II. Since the publication of the final framework in June 2004, we have been reviewing our systems and procedures, particularly in the areas of credit rating, risk architecture, technology support and process documentation, to ensure that we are in a position to implement the new framework and, in particular, to follow an internal ratings based approach once that is permitted by the RBI. This will supplement the risk management systems that we already have in place.

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Capital Expenditures

      Our capital expenditures consist principally of branch network expansion, as well as investments in our technology and communications infrastructure. Since April 1, 2004, we have invested approximately Rs. 1.0 billion in capital expenditures. We have current plans for aggregate capital expenditures of approximately Rs. 2.9 billion in fiscal 2005, of which we intend to invest approximately Rs. 1.7 billion in technology and Rs. 1.2 billion to expand our branch, ATM and Electronic Data Capture terminal networks. As of September 30, 2004, we had entered into capital commitments of Rs. 214 million, which we plan to fund through internal accruals. However, we have no commitments to make the balance of the planned capital expenditures and the foregoing amounts and purposes may change depending on business conditions.

 
Financial Instruments and Off-Balance Sheet Arrangements
 
Foreign Exchange and Derivatives

      We enter into foreign exchange and derivative transactions for our customers and for our own account. Our foreign exchange contracts include forward exchange contracts, currency swaps and currency options. Our derivative contracts include rupee-based interest rate swaps, forward rate agreements and cross-currency derivatives primarily for corporate customers. We enter into transactions with our customers and typically lay off exposures in the inter-bank market. We also trade rupee-based interest rate swaps for our own account and enter into foreign exchange contracts to cover our own exposures. We earn profit on customer transactions by way of a margin as a mark-up over the inter-bank exchange or interest rate. We earn profit on inter-bank transactions by way of a spread between the purchase rate and the sale rate. These profits are recorded as income from foreign exchange and derivative transactions. The RBI imposes limits on our ability to hold overnight positions in foreign exchange and derivatives. See “Business — Treasury — Derivatives.”

      The following table presents the aggregate notional principal amounts of our outstanding foreign exchange and derivative contracts as of March 31, 2004 and September 30, 2004, together with the related fair value, which is the mark-to-market impact of the derivative and foreign exchange products on the reporting date. We do not net exposures to the same counterparty in calculating these amounts.

                                 
As of March 31, As of September 30,
2004 2004


Notional Fair Value Notional Fair Value




(In millions)
Interest rate swaps and forward rate agreements
    Rs.343,913.6       Rs.(15.4 )     Rs.689,301.3       Rs.106.4  
Forward exchange contracts, currency swaps and currency options
    439,917.0       496.6       419,658.0       320.2  

      Our trading activities for the above derivative instruments are carried out in the inter-bank market, which is a non-exchange informal market. However, these markets generally either provide price discovery or sufficient data to reliably estimate fair values of financial instruments.

  Guarantees and Documentary Credits

      As a part of our commercial banking activities, we issue documentary credits and guarantees. Documentary credits, such as letters of credit, enhance the credit standing of our customers. Guarantees generally represent irrevocable assurances that we will make payments in the event that the customer fails to fulfill its financial or performance obligations. Financial guarantees are obligations to pay a third party beneficiary where a customer fails to make payment toward a specified financial obligation. Performance guarantees are obligations to pay a third party beneficiary where a customer fails to perform a non-financial contractual obligation.

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      The nominal values of guarantees and documentary credits for the dates set forth below were as follows:

                   
As of March 31, As of September 30,
2004 2004


(In millions)
Bank guarantees:
               
 
Financial guarantees
    Rs.7,497.0       Rs.8,257.8  
 
Performance guarantees
    8,916.8       10,618.0  
Documentary credits
    18,921.0       28,988.5  
     
     
 
 
Total
    Rs.35,334.8       Rs.47,864.3  
     
     
 

      Guarantees and documentary credits outstanding increased by 35.5% to Rs. 47.9 billion as of September 30, 2004, principally due to general growth in our wholesale banking business.

  Loan Sanction Letters

      In some cases we issue sanction letters to customers, indicating our intent to provide new loans. The amount of loans referred to in these letters that have not yet been made increased from Rs. 44.5 billion as of March 31, 2004 to Rs. 61.0 billion as September 30, 2004. If requested, we make these loans subject to the customer’s credit worthiness at that time and at interest rates in effect on the date the loans are made. We are not obligated to make these loans, and the sanctions are subject to periodic review. See also Note 23 to our Financial Statements.

Contractual Obligations and Commercial Commitments

  Contractual Obligations

                                         
Payments due by period, as of September 30, 2004

Less than After
Total 1 year 1-3 years 4-5 years 5 years





(In millions)
Subordinated debt
    Rs.5,000.0       Rs.—       Rs.1,000.0       Rs.—       Rs.4,000.0  
Other long term debt(1)
    43.4       24.8       14.9       3.7        
Operating leases(2)
    5,584.4       783.3       1,520.4       1,454.3       1,826.4  
Unconditional purchase obligations(3)
    213.9       213.9                    
     
     
     
     
     
 
Total contractual cash obligations
    Rs.10,841.7       Rs.1,022.0       Rs.2,535.3       Rs.1,458.0       Rs.5,826.4  
     
     
     
     
     
 

(1) Other long term debt consists of capital lease obligations of Rs. 30.9 million pertaining to assets taken on leases, such as ATMs, VSATs and other equipment, which we assumed at the time of our merger with Times Bank in 2000, and Rs. 12.5 million being a concessional loan from an agency for the purchase of solar power panels.
 
(2) Operating leases are principally for the lease of office, branch and ATM premises, and residential premises for executives.
 
(3) Unconditional purchase obligations principally constitute the capital expenditure commitments made as of September 30, 2004. See “— Capital Expenditures.”

  Commercial Commitments

      Our commercial commitments consist principally of letters of credit, guarantees, foreign exchange contracts and derivative contracts.

      Based on historical trends, we have recognized a liability of Rs. 121.2 million in respect of guarantees issued or modified after December 31, 2002 as required by FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees,” issued in November 2002.

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      As part of our risk management activities, we continuously monitor the credit worthiness of customers as well as guarantee exposures. However, if a customer fails to perform a specified obligation to a beneficiary, the beneficiary may draw upon the guarantee by presenting documents that are in compliance with the guarantee. In that event, we make payment to the beneficiary on account of the indebtedness of the customer or make payment on account of the default by the customer in the performance of an obligation, up to the full notional amount of the guarantee. The customer is obligated to reimburse us for any such payment. If the customer fails to pay, we would, as applicable, liquidate collateral and/or set off accounts.

      The residual maturities of the above obligations as of September 30, 2004 are set forth in the following table:

                                         
Amount of commitment expiration per period

Total amounts Less than
committed 1 year 1-3 years 4-5 years Over 5 years





(in millions)
Documentary Credits
    Rs.28,988.5       Rs.28,181.0       Rs.802.4       Rs.5.1       Rs.—  
Guarantees
    18,875.8       14,791.8       2,861.9       234.5       987.6  
Forward exchange contracts
    370,716.0       352,224.2       18,491.8              
Derivative contracts*
    738,243.3       167,132.8       280,709.3       279,299.8       11,101.4  
     
     
     
     
     
 
Total contractual cash obligations
    Rs.1,156,823.6       Rs.562,329.8       Rs.302,865.4       Rs.279,539.4       Rs.12,089.0  
     
     
     
     
     
 

* Denotes notional principal amounts.

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BUSINESS

Overview

      We are a leading private sector bank and financial services company in India. Our goal is to be the preferred provider of financial services to upper and middle income individuals and leading corporations in India. Our strategy is to provide a comprehensive range of financial products and services for our customers through multiple distribution channels, with 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 three years ended March 31, 2004, we expanded our operations from 131 branches and 207 ATMs in 53 cities to 312 branches and 910 ATMs in 163 cities. During the same three years, our customer base grew from 0.9 million customers accounts to 4.4 million customers. As of September 30, 2004, we had 379 branches and 1,002 ATMs in 182 cities, and over 5.1 million customers. As our geographical reach and market penetration have expanded, so too have our assets, which grew from Rs. 161.1 billion as of March 31, 2001 to Rs. 426.8 billion as of March 31, 2004 and to Rs. 439.1 billion as of September 30, 2004. Our net income has increased from Rs. 2.1 billion for fiscal 2001 to Rs. 4.8 billion for fiscal 2004 — a compound annual growth rate of 30.5%.

      Notwithstanding our pace of growth, we have maintained a strong balance sheet and a low cost of funds. As of September 30, 2004, net non-performing customer assets (which consist of loans and credit substitutes) constituted 0.2% of net customer assets. In addition, our total customer assets represented 67.4% of our deposits and customer deposits represented 82.3% of our total liabilities. On average, non-interest bearing current accounts and low-interest savings accounts represented 52.5% of these deposits as of September 30, 2004. These low-cost deposits, which include the cash float associated with our transactional services, led to an average cost of funds excluding equity for the six months ended September 30, 2004 of 3.2%, which we believe is one of the lowest of all banks in India.

      We are part of the HDFC group of companies founded by our parent, HDFC Limited, a public limited company established under the laws of India. HDFC Limited and its subsidiaries owned approximately 24.0% of our outstanding equity shares as of December 31, 2004 (22.5% on an as adjusted basis to give effect to this offering, assuming no exercise of the underwriters’ over-allotment option). For more information, please see “Principal Shareholders.”

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 by mobile phone, to offer customers convenient access to our products. Our technology platform has also driven the development of innovative products and reduced our operating costs.

 
We deliver high quality service with superior execution.

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

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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 broad array of products creates multiple cross-selling opportunities for us and improves our customer retention rates.

 
We have an experienced management team.

      Most of our senior management team has been with us since our inception, has substantial experience in multinational banking and shares 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 create new opportunities for our business.

Our Business Strategy

      Our business strategy emphasizes the following elements:

 
Increase our market share in 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 geographical and market penetration by expanding our branch and ATM network and increasing our efforts to cross-sell our products.

 
Maintain our current high standards for asset quality through disciplined credit risk management.

      We have maintained high quality loan and investment portfolios through careful targeting of our customer base, a comprehensive risk assessment process and diligent risk monitoring and remediation procedures. Our ratio of gross non-performing assets to customer assets was 1.6% as of September 30, 2004 and our net non-performing assets amounted to 0.2% of net customer assets. We believe we can maintain our asset quality while still achieving growth.

 
Maintain a low cost of funds.

      As of September 30, 2004, our average cost of funds excluding equity was 3.2%. We believe we can maintain this low-cost funding base 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 compound average rate of 30.5% per year during the three year period ending March 31, 2004 and our basic earnings per share grew from Rs. 12.57 for fiscal 2003 to Rs. 16.87 for fiscal 2004. We intend to maintain our focus on earnings growth with low volatility through conservative risk management techniques and low cost funding. In addition, we intend not to rely heavily on revenue derived from trading so as to limit volatility.

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Our Principal Business Activities

      Our principal banking 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.

                                                           
Years Ended March 31, Six Months Ended September 30,


2002 2003 2004 2003 2004 2004 2004







(In millions, except percentage)
Retail banking
    Rs.3,825.4       Rs.6,150.2       Rs.8,847.9       Rs.3,526.5       Rs.5,847.2     U.S.$ 127.4       59.1%  
Wholesale banking
    2,861.0       3,004.0       4,653.2       1,991.5       3,454.3       75.2       34.9%  
Treasury operations
    1,762.6       2,147.2       1,461.5       1,767.4       586.3       12.8       5.9%  
     
     
     
     
     
     
     
 
 
Net revenue
    Rs.8,449.0       Rs.11,301.4       Rs.14,962.6       Rs.7,285.4       Rs.9,887.8     U.S.$ 215.4       100.0%  
     
     
     
     
     
     
     
 

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. We offer high quality service and greater convenience by leveraging our technology platforms and multiple distribution channels. Our goal is to provide banking and financial services to our retail customers on an “anytime, anywhere, anyhow” basis.

      We market our services aggressively through our branches and direct sales associates, 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 and expanding 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. We consider upper and middle income individuals to be those with Rs. 100,000 or more per year in income.

      As of September 30, 2004, we had 379 branches, including 24 extension counters, and 1,002 ATMs in 182 cities. We also provide telephone banking in 105 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.

 
Retail Loans and Other Asset Products

      We offer a wide range of retail loans, including loans for the purchase of automobiles, two wheelers and commercial vehicles, personal loans, loans against securities, and credit cards. Our retail loans were 42.8% of our gross loans as of September 30, 2004. Because there is no well established credit bureau in India, we perform our own credit analyses of the borrowers or 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 irrevocable instructions to debit the customer’s account directly for the making of payments.

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

                                 
As of September 30, 2004

% of Total
Number of Loans Value Value



(In thousands) (In millions)
Auto loans(1)
    110       Rs. 32,371.1     U.S.$ 705.3       25.6 %
Commercial vehicles and construction equipment finance(1)
    28       14,885.4       324.2       11.8  
Personal loans
    158       15,030.8       327.4       11.9  
Loans against securities
    28       8,700.2       189.5       6.9  
Two wheeler loans
    317       7,516.8       163.7       5.9  
Retail business banking
    1       5,708.6       124.3       4.5  
Credit cards
    814 (2)     4,317.4       94.0       3.4  
Other retail loans
    115       3,429.2       74.7       2.7  
     
     
     
     
 
Total retail loans
    1,571       91,959.5       2,003.1       72.7  
     
     
     
     
 
Mortgage backed securities (home loans)(3)
            12,090.7       263.4       9.6  
Asset backed securities(3)
            14,074.1       306.6       11.0  
Loan assignments
            8,476.8       184.6       6.7  
             
     
     
 
Total retail assets
            Rs. 126,601.1     U.S.$ 2,757.7       100.0 %
             
     
     
 


(1)  Net of receivables securitized.
 
(2)  Number of cards in force.
 
(3)  Reflected at fair value.
 
Auto Loans

      We offer secured 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 relationships with car dealers, corporate packages and joint promotion programs with automobile manufacturers in more than 1,000 locations across India.

 
Commercial Vehicles and Construction Equipment Finance

      We provide secured financing for commercial vehicles and provide working capital, bank guarantees and trade advances to customers who are transportation operators. In addition to the funding of domestic assets, we also finance imported assets for which we open foreign letters of credit and offer treasury services such as forward exchange cover. We co-ordinate with more than 30 manufacturers to jointly promote our financing options to their clients. Prior to fiscal 2004, these loans were classified as part of our wholesale banking division.

 
Personal Loans

      We offer unsecured personal loans at fixed rates to specific customer segments, including salaried individuals and self-employed professionals.

 
Loans Against Securities

      We offer loans against equity securities, mutual fund units and bonds issued by the RBI that are on our approved list. We limit our loans against equity securities 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

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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 currently 40%.
 
Two Wheeler Loans

      We offer loans for financing the purchase of new scooters or motorcycles. We market this product in ways similar to auto loans.

 
Retail Business Banking

      We offer business loans, which we consider a retail product, to address the borrowing needs of the community of small businessmen near our bank branches by offering facilities such as credit lines, term loans for expansion/addition of facilities, discounting of credit card receivables, letters of credit, guarantees and other basic trade finance products and cash management services for their businesses. The lending is typically secured with current assets as well as immovable property and fixed assets in some cases.

 
Credit Cards

      We have offered gold and silver VISA and Mastercard credit cards since December 2001 and have approximately 814,000 cards in force as of September 30, 2004.

 
Other Retail Loans

      Such loans primarily include over-drafts against time deposits.

 
Mortgage Backed Securities (Home Loans)

      We have recently entered the home loan business through an arrangement with HDFC Limited. Under this arrangement, we sell home loans provided by HDFC Limited, which approves and disburses the loans. The loans are booked in the books of HDFC Limited, and we are paid a sourcing fee. Under the arrangement, HDFC Limited offers us up to 70% of the fully disbursed home loans sourced under the arrangement through the issue of mortgage-backed pass-through certificates (“PTCs”). We purchase the mortgage backed PTCs at the underlying home loan yields less a fee paid to HDFC Limited for administration and servicing of the loans. A part of the home loans also qualifies for our directed lending requirement. We also invest in mortgage backed securities of other originators. Most of these securities also qualify toward our directed lending obligations.

 
Asset Backed Securities

      We invest in auto and commercial vehicle backed securities, represented by PTCs. These securities are normally credit enhanced and sometimes qualify for our directed lending requirements.

 
Loan Assignments

      We purchase loan portfolios 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.

 
Securitization of Our Receivables to Others

      From time to time we securitize commercial vehicle and auto loans to special purpose vehicles. Post-securitization, we continue to maintain customer account relationships and service the transferred loans. We provide credit enhancements generally in the form of cash collateral and/or by subordination of cash flows on any equity interest we retain. Otherwise the transferred loans are without recourse to us. During fiscal 2004 and during the six months ended September 30, 2004, we securitized loans with carrying values of Rs. 5.7 billion and Rs. 17.3 billion, respectively.

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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 72.1% of our total deposits as of September 30, 2004. The following chart shows the number of accounts and value of our retail deposits by our various deposit products:

                                         
As of September 30, 2004

% of Number of % of
Value Total Accounts Total




(In millions) (In thousands)
Savings
    Rs.98,088.4     U.S.$ 2,136.5         40.7 %   3,113.5         75.6 %
Current
    38,498.6       838.6         16.0     282.8         6.9  
Time
    104,695.4       2,280.5         43.3     721.3         17.5  
     
     
       
   
       
 
Total
    Rs.241,282.4     U.S.$ 5,255.6         100.0 %   4,117.6         100.0 %
     
     
       
   
       
 

      Our individual retail account holders receive the benefit 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 that accrue interest at a fixed rate set by the RBI (currently 3.5% per annum).
 
  •  Current accounts, which are non-interest-bearing checking accounts designed primarily for small businesses.
 
  •  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 of up to 90% of the balance in the account. E-Brokering accounts are offered as current accounts to customers of stock brokers where all transactions are routed electronically between the broker and beneficiaries.

 
Other Retail Services and Products
 
Debit Cards

      We believe we are one of the larger debit card issuers in India, with approximately 2.5 million holders. Our debit cards may be used with more than 135,000 merchants in India and more than 13 million merchants worldwide, and at more than 12,000 ATMs in India and more than 850,000 ATMs worldwide. We were the first bank in India to issue international Visa Electron debit cards on a nationwide basis, and currently issue both Visa Electron and MasterCard Maestro cards.

 
Individual Depositary Accounts

      We provide depositary accounts to individual retail customers in connection with the holding of debt and equity securities. Securities traded on the Indian exchanges are generally not held through a broker’s account or in street name. Instead, an individual will have his own account with a depositary participant for the particular depositary. Depositary participants, including us, provide services through the major depositories established by two major stock exchanges. 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. We earn front-end commissions for new sales and in some cases additional fees in subsequent years. We distribute mutual fund products primarily through our branches and our private banking advisors.

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Insurance

      We have arranged with HDFC Standard Life Insurance Company and HDFC Chubb Ltd to distribute their life insurance products and general insurance products to our customers. We earn up front commissions on new premiums collected as well as trailing income in the subsequent years while the policy continues to be in force.

 
Investment Advice

      We offer our customers a broad range of investment advice including advice regarding the purchase of Indian debt and equity securities and mutual funds. We provide each of our high net worth private banking customers with a personal investment advisor.

 
Bill Payment Services

      We offer our customers utility bill payment services for more than 55 leading utility companies including electricity, telephone, mobile phone and leading internet service providers. Customers can also review and access their bill details through our direct banking channels. This service is valuable to customers because utility bills must otherwise be paid in person in India. Although other banks offer this service, we believe we are one of the few banks to offer it 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 one transfer. We then disburse the funds into the employees’ individual accounts, and offer them preferred customer services, such as preferred rates on loans and in some cases lower minimum balance requirements. As of September 30, 2004, these accounts constituted approximately 44.1% of our total savings accounts by number and approximately 25.1% 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 links to family members in India. Our non-resident deposits amounted to Rs. 26.0 billion as of September 30, 2004.

 
Customers and Marketing

      Our target market for our retail services comprises upper and middle income persons and high net worth customers. We also target small businesses, trusts and non-profit corporations. As of September 30, 2004, 1.4% of our retail customers contributed approximately 33% of our retail deposits. We market our products through our branches, telephone sales calls and 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, and through cross-selling our retail products to customers we obtain through our capital markets transactional services. Finally, we 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 HDFC Bank contact, and who 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

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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.

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, bill discounting and credit substitutes, such as commercial paper, debentures 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, we generally target the top end of the Indian corporate sector, including companies that are part of the large private sector business houses, large public sector enterprises and multinational corporations, as well as leading small and mid-sized businesses. We also target suppliers and distributors of top end corporations as a part of a supply chain initiative for both our commercial banking products and transactional services whereby we provide credit facilities to these suppliers and distributors and thereby establish relationships with them. 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 in order to cross-sell products and expand our relationships with these clients.

      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 the newly created commodity exchanges. In addition, we provide correspondent banking services, including cash management services and funds transfers, to more than 20 foreign banks and more than 1,100 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 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. More than 90% of our loans are denominated in rupees with the balance being denominated in various foreign currencies, principally the U.S. dollar. All of our commercial loans have been made to customers in India.

      We also purchase credit substitutes, which are typically comprised of commercial paper, short term 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.

      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,

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and classify commercial paper, debentures and preference shares as credit substitutes (which are in turn classified as investments).
                                           
As of March 31, As of September 30,


2002 2003 2004 2004 2004





(In millions)
Gross commercial loans:
                                       
 
Working capital
    Rs.28,200.8       Rs.42,739.1       Rs.54,104.5       Rs.58,604.7     U.S.$ 1,276.5  
 
Term loans
    30,632.7       43,013.3       53,819.3       64,329.2       1,401.2  
     
     
     
     
     
 
 
Total commercial loans
    Rs.58,833.5       Rs.85,752.4       Rs.107,923.8       Rs.122,933.9     U.S.$ 2,677.7  
     
     
     
     
     
 
Credit substitutes:
                                       
 
Commercial paper
    12,028.9       6,009.7       906.7       543.4       11.8  
 
Non-convertible debentures
    21,874.3       22,898.7       14,852.0       13,859.5       301.9  
 
Preference shares
    1,222.8       844.4       848.4       430.4       9.4  
     
     
     
     
     
 
 
Total credit substitutes
    Rs.35,126.0       Rs.29,752.8       Rs.16,557.9       Rs.14,833.3     U.S.$ 323.1  
     
     
     
     
     
 
Customer assets
    Rs.93,959.5       Rs.115,505.2       Rs.124,481.7       Rs.137,767.2     U.S.$ 3,000.8  
     
     
     
     
     
 

      While we generally lend on a cash-flow basis, we also require collateral from the majority of our borrowers. 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 and our rating of 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 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 of our bill collection, documentary credits and bank guarantees:

                                           
Years Ended March 31, Six Months Ended September 30,


2002 2003 2004 2004 2004





(In millions)
Bill collection
    Rs.109,909       Rs.117,809       Rs.172,623.6       Rs. 155,541.1     U.S.$ 3,388.0  
Documentary credits
    22,981       25,721       44,030.0       38,832.3       845.8  
Bank guarantees
    13,539       9,696       15,197.0       7,612.7       165.8  
     
     
     
     
     
 
 
Total
    Rs.146,429       Rs.153,226       Rs.231,850.6       Rs.201,986.1     U.S.$ 4,399.6  
     
     
     
     
     
 

      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

      We offer our corporate customers foreign exchange and derivative products including spot and forward foreign exchange contracts, interest rate swaps, currency swaps, currency options and other derivatives. We are a leading participant in many of these markets in India and believe we are one of the few Indian banks with significant expertise in derivatives, a market currently dominated by the foreign banks.

 
Precious Metals

      Last year, we entered into the business of importing gold 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. Recently, we have also entered into the distribution of silver bullion.

 
Wholesale Deposit Products

      As of September 30, 2004, we had wholesale deposits totaling Rs. 93.4 billion, which represented 27.9% of our total deposits and 23.0% of our total liabilities, including shareholders’ equity. We offer both non-interest-bearing current accounts and time deposits. Under RBI regulations, we cannot pay interest for periods of less than seven days. 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 are a leading provider of cash management services in India. 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 also earn commissions for these services.

      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, most of their branches typically are still not electronically linked. The foreign banks are also restricted in their ability to expand their branch network.

      As of September 30, 2004, approximately 3,200 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 new initiative will help in reducing 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.

      The RBI has recently introduced a new inter-bank settlement system called the Real Time Gross Settlement (“RTGS”) system. The system facilitates real time settlements primarily between banks, initially

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in select locations. This system is currently not fully operational. 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 eight major stock exchanges in India, including the National Stock Exchange and The Stock Exchange, Mumbai. In fiscal 2004, we estimate that we handled over 60% of the cash clearing volume on the National Stock Exchange and more than 40% on The Stock Exchange, Mumbai. Recently, we commenced operations as a clearing bank for three newly created Indian commodity exchanges.

      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 to make payments to these institutions. We make payments once the funds are deposited by the broker or custodian with us. We benefit from the cash float, which enables us to reduce our cost of funds.

 
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 more than 1,100 cooperative banks and more than 20 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 enables us to reduce 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, most of them have not yet created electronically connected networks and their branches typically operate independently of one another.

 
Tax Collections

      In April 2001, we were the first private sector bank to be appointed by the government of India to collect direct taxes. In fiscal 2004 we collected more than Rs. 125.1 billion of direct taxes for the government of India. We have also been appointed to collect sales, excise and other indirect taxes within certain jurisdictions in India. 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 our 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 transac-

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tions. 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. We have recently been allowed by the RBI to offer Indian rupee options and interest rate exchange traded futures to our clients. 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 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

      We trade spot and forward foreign exchange contracts, primarily with maturities of up to three years 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 believe we are a market maker in the dollar-rupee segment. Although spreads are very narrow, our total volume of trading is significant with U.S.$51.0 billion in foreign exchange traded in fiscal 2004.

 
Derivatives

      We believe we are one of the few Indian banks that is a significant participant in the derivatives market, which is dominated by foreign banks. We offer rupee-based interest rate swaps, cross-currency swaps, forward rate agreements, options and other products. We also engage in proprietary trades of rupee-based interest rate swaps and use them as part of our asset liability management.

 
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 September 30, 2004, we had an internal approved limit of Rs. 200 million for secondary market purchases and Rs. 100 million for primary purchases of equity investments for proprietary trading. Our exposure as of September 30, 2004 was approximately Rs. 180.4 million. 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 the internet.

 
Branch Network

      As of September 30, 2004, we had an aggregate of 379 branches, including 24 extension counters. Our branch network covers 182 cities in India, with 115 branches concentrated in the four largest cities, Mumbai, Delhi, Chennai and Kolkata (Calcutta). We centralize our processing of transactions and back office operations in Mumbai and Chennai. This structure enables the branch staff to focus on customer service and

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selling our products. 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 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 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. The population figures relate to the census prevailing at the time the branch is opened. A total of 93 of our branches (not including extension counters) are in such semi-urban or rural areas.

 
Automated Teller Machines

      As of September 30, 2004, we had a total of 1,002 ATMs, of which 430 were located at our branches or extension counters and 572 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 and, at most of our ATMs, making deposits, ordering demand drafts and paying utility bills. Customers can access their accounts from any of our ATMs. Our ATM cards cannot be used in non-HDFC Bank ATMs, although our debit cards can be. 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.

 
Telephone Banking Call Centers

      We provide telephone banking services to our customers in 105 cities. This service covers approximately 65% of our customer base. Customers can access their accounts over the phone through our 24-hour automated voice response system and can order check books, inquire as to balances and order stop payments. In Delhi and Mumbai, customers can also engage in financial transactions (such as cash transfers, opening deposits and ordering demand drafts). In twelve cities, we also have staff available during select hours to assist customers who want to speak directly to one of our telephone bankers.

 
Internet Banking

      Through our “NetBanking” channel, customers can access account information, track transactions, transfer funds between accounts and to third parties who maintain accounts with us, make fixed deposits, pay bills, request stop payments 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.

 
Mobile Telephone Banking

      We launched mobile telephone banking services in January 2000, making us the first bank to do so in India. Currently our customers in 75 cities are eligible to sign up for mobile telephone banking, which allows them to access their accounts on their mobile telephone screens and to conduct a variety of banking transactions including balance inquiries, stop payment orders and utility bill payments.

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 (which includes liquidity risk and price risk) and operational risk. We have developed and implemented comprehensive policies and procedures to identify, monitor and manage risk throughout the Bank.

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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

      For our commercial banking products, we generally target the top end of the Indian corporate sector, including companies that are part of the large private sector business houses, large public sector enterprises, multinational corporations and leading small and mid-sized businesses. As a result, our wholesale lending is generally concentrated among highly rated customers. In addition to market targeting, the principal means of managing credit risk is the credit approval process. We have policies and procedures to evaluate the potential credit risk of a particular counterparty or transaction and to approve the transaction. For our wholesale clients, we have a risk grading system that is applied to each corporate counterparty on an annual basis. We also have limits for funded exposure to individual industries. In addition, we have limits for exposure to borrowers and groups of borrowers for funded and non-funded exposures. Our credit risk policies for loans also apply to credit substitutes. We also have a review process that ensures the proper level of review and approval depending on the size of the facility and risk grading of the credit.

      Our risk grading system is based on a combination of quantitative, qualitative and capitalization measures. We assign each customer or counterparty a numerical grade, based on an analysis of key ratios such as interest coverage, debt coverage, profit margin and leverage, as well as capitalization or tangible net worth. We also consider qualitative variables such as industry risk, market position, management competence and other factors. This grade may be modified depending on the maturity of the facility being considered.

      We are subject to RBI policies that limit our exposure to particular counterparties and with respect to particular instruments. The RBI provides that without prior approval, not more than 15% of our capital funds (under Indian GAAP) may be extended as credit exposure to an individual borrower (unless the individual borrower falls within the category of infrastructure lending, in which case the limit is 20%), and not more than 40% of our capital funds may be extended as credit exposure to a group of companies under the same management. Effective April 1, 2003, in determining the credit exposure for single and group borrowers, the non-funded exposures are weighted at 100% rather than 50%. We had two exposures to individual companies that were above the general limit as of September 30, 2004, and we had obtained RBI approval for both. On September 30, 2004, our largest exposure to a single borrower was 24.5% of our capital funds, and our largest group exposure was 38.9% of our capital funds. All of these borrowers are current in their payments. (The figures above are calculated in accordance with Indian GAAP).

      The RBI has stated that banks may, in exceptional circumstances and with the approval of their boards of directors, consider enhancement of the exposure to a borrower by a further 5% of the capital funds. See “Supervision and Regulation — Credit Exposure Limits.”

      The RBI prohibits loans to companies with which we have any directors in common. The RBI also requires that a portion of our lending activities be “directed” to specific priority sectors. See “Supervision and Regulation — Regulations Relating to Making Loans — Directed Lending.”

      We follow a policy of portfolio diversification by industry. As of September 30, 2004, our funded exposures in any single industry did not exceed 12% of our total funded exposures.

      While we make our lending decisions largely on a cash-flow basis, we also take collateral for a large number of our loans. Our short and medium-term loans are typically secured by a first charge over inventory and receivables, and in some cases are further supported by a second charge over fixed assets. Longer term loans are usually secured by a charge over fixed assets. For some loans, we also require guarantees or letters of support from corporate parents. We generally do not make project loans or loans to property developers, although we may take a charge over real property as part of the security for a loan to a corporate borrower. Although we take collateral, we may not always be able to realize its value in a default situation. See “Risk

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Factors — Risks Relating to Our Business — We may be unable to foreclose on our collateral when borrowers default on their obligations to us which may result in failure to recover the expected value of collateral security.”

      Our credit approval process for wholesale loans requires three different officers to approve the credit. Although the particular level of approval varies depending on the size of the loan and the borrower risk grading, no wholesale loan can be made without all three approvals. All working capital loans are subject to review at annual or shorter intervals.

      Once a loan is made, we undertake ongoing credit analysis and monitoring at several levels. Our policies are designed to promote early detection of exposures that require special monitoring. If a borrower wishes to renew or roll over the loan, we apply substantially the same standards as we would to granting a new loan except that we do not usually perform an entirely new credit review. Typically, we perform an annual credit review of each loan customer and update the review during the course of the year as circumstances warrant. We generally rely on such review in connection with a rollover or renewal.

      See “Selected Statistical Information” for a discussion of our policies regarding classification of loans and advances as non-performing (and certain differences between our policies and the practices of U.S. banks), our policies regarding provisioning for loans and information concerning our non-performing assets and allowance for credit losses.

 
Retail Credit Risk

      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. Because of the nature of retail banking, our credit policies are based primarily on statistical analyses of risks with respect to different products and types of customers. We monitor our own and industry experience to determine and periodically revise product terms and desired customer profiles. We then verify that an individual customer meets our lending criteria. Our retail loans are generally either secured or made against direct debit instructions or delivery of post-dated checks to cover all payments. In India, bouncing checks is a criminal offense. In the case of most automobile and other vehicle loans as well as unsecured personal loans, we require that the borrower provide post-dated checks for a certain number of payments on the loan at the time the loan is made. Automobile and commercial vehicle loans, two wheeler loans and other vehicle loans, as well as loans against securities are all secured loans. We will generally lend up to 60% of the market value of securities in the case of loans against equity shares, 90% of the value of the automobile in case of automobile loans and 85% of the value of the two wheeler in the case of two wheeler loans.

 
Foreign Exchange, Derivatives and Trading Activities

      The credit risk of our foreign exchange and derivative transactions is managed the same way as we manage our wholesale lending risk. We apply our risk grading system to our corporate counterparties and set individual counterparty limits. With respect to debt securities, we primarily trade government of India securities for our own account.

 
Market Risk

      Market risk refers to potential losses arising from volatility in interest rates, foreign exchange rates, equity prices and commodity prices. Market risk arises with respect to all market risk sensitive financial instruments, including securities, foreign exchange contracts, equity instruments and derivative instruments, as well as from balance sheet gaps. The objective of market risk management is to avoid excessive exposure of our earnings and equity to loss and to reduce our exposure to the volatility inherent in financial instruments.

      Our board of directors reviews and approves the policies for the management of market risks and dealing authorities and limits. The Risk Management Committee of the board of directors monitors market risk policies and procedures and reviews market risk limits. The board of directors has delegated the responsibility for ongoing general market risk management to the Asset Liability Committee. This committee, which is

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chaired by the Managing Director and includes the heads of our business groups, meets every alternate week and more often when conditions require. The Asset Liability Committee reviews our product pricing for deposits and assets as well as the maturity profile and mix of our assets and liabilities. It articulates our 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 our balance sheet and business. Finally, it ensures adherence to market risk limits and decides on our inter-segment transfer pricing policy. The market risk department specifies risk valuation methodology of various treasury products, formulates procedures for portfolio risk valuation, assesses market risk factors and assists in monitoring market risks for various treasury desks. Our treasury back-office is responsible for reporting market risks of 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 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 generally fund our core customer assets, consisting of loans and credit substitutes, with our core customer liabilities, consisting principally of deposits. We also borrow in the short-term inter-bank market. We use the majority of our funds to make loans or purchase securities. Most of our liabilities and assets are short and medium term.

      We maintain a substantial portfolio of liquid high-quality Indian government securities. We prepare regular maturity gap analyses to review our liquidity position, and must submit a monthly analysis to the RBI.

      We measure our exposure to fluctuations in interest rates primarily by way of a gap analysis. We classify all rate sensitive assets and liabilities into various time period categories according to contracted residual maturities or anticipated re-pricing dates, whichever is earlier. The difference in the amount of assets and liabilities maturing or being re-priced in any time period category gives us an indication of the extent to which we are exposed to the risk of potential changes in the margins on new or re-priced assets and liabilities. We place limits on the gap between the assets and liabilities that may be reset in any particular period.

      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 market borrowings or placements.

      Second, the Asset Liability Committee monitors our interest rate gap and, at the corporate level, recommends re-pricing of our asset or liability portfolios. Operationally, in the short term, our treasury group implements these recommendations by entering into interest rate swaps.

      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.

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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. These limits are independently monitored by the treasury operations group. We measure price risk through a two-stage process, the first part of which is to assess the sensitivity of the value of a position to changes in market factors to which our business is exposed. We then assess the probability of these changes or the volatility of market factors. We manage price risk principally by establishing limits for our money market activities and foreign exchange activities.

      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 gap positions on a daily basis using a Value at Risk model applied to all of our outstanding foreign exchange instruments.

      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 stop-loss limits and aggregate contract limits, which require that trading losses be kept below prescribed limits and as a result may require the realization of losses and elimination of positions.

      Our treasury operations department monitors actual positions against the required limits. The treasury operations department is independent of the treasury department and has a separate reporting line to the Managing Director through the head of operations.

      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.

 
Operational Risk

      Operational risks are risks arising from matters such as non-adherence to systems and procedures or from frauds resulting in financial or reputational loss. Our internal audit and compliance department plays an essential role in monitoring and limiting our operational risk. The primary focus of the audit department is:

  •  to independently evaluate the adequacy of all internal controls;
 
  •  to ensure adherence to the operating guidelines, including regulatory and legal requirements; and
 
  •  to recommend operation process improvements.

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      The department also performs special investigations and ad hoc reviews. In addition, our internal audit and compliance department liaises with statutory auditors, central bank authorities and other regulatory bodies.

      In order to ensure total independence, the internal audit and compliance department reports directly to the Chairman of the board of directors and the Audit and Compliance Committee of the board of directors as well as indirectly to the Managing Director. The Audit and Compliance Committee meets at least once per quarter to review all procedures, the effectiveness of the controls and compliance with RBI regulations. In addition, the committee conducts a semiannual review of the performance of the department itself.

      Pursuant to RBI guidelines, some activities are required to be audited continuously. More than half of our business, measured by transaction volume, is subject to concurrent auditing, including foreign exchange, derivatives, equities, securities transactions, depositary services, retail liability operations, reversals to the profit and loss account and monitoring of inter-branch routing accounts. All other lines of business, our information technology department, branches, services and products are audited on a set schedule, which is usually quarterly or half-yearly. Our information technology is also subject to audit review and certification of all software, including application software and system controls.

      We are also subject to inspections conducted by the RBI under the Indian Banking Regulation Act. The RBI has adopted the global practice of subjecting banks to examination on the basis of the CAMELS model, a model that assigns confidential ratings to banks based on their capital adequacy, asset quality, management, earnings, liquidity and systems.

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 private sector banks and foreign banks 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, and has also declined in the last five years, which we attribute principally to competition from new private sector banks. However, some of the foreign banks have a significant presence among non-resident Indians and also compete for non-branch-based products such as auto loans and credit cards.

      We face significant competition primarily from foreign banks in the debit and credit card segment. 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, 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 in the foreign exchange and money markets business.

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Employees

      We had 7,354 employees as of September 30, 2004. Approximately 9.1% of our employees were managers or senior managers, and 2.8% were assistant vice presidents, vice presidents or group heads. More than 99% of our employees have university degrees.

      We consider our relations with our employees to be good. Our employees do not belong to any union.

      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 an 8-12 week training module 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. These premises were established during the third quarter of fiscal 2004.

      Close to the corporate headquarters is the administrative center at Kamala Mills Compound in Lower Parel, Mumbai. We own our 120,000 square foot operations, training and information technology centers in Chandivili, Mumbai. As of September 30, 2004, we had a network consisting of 379 branches, including 24 extension counters, and 1,002 ATMs, including 572 at non-branch locations. These facilities are located throughout India. Nineteen of these branches are located on properties owned by us; the remaining facilities are located on leased properties. The net book value of all our owned properties, including branches, administrative offices and residential premises as of September 30, 2004 was Rs. 2.1 billion. We also rent property in Chennai to house our disaster recovery site, which we would use to replicate our core banking and transaction systems in the event of a regional calamity in Mumbai.

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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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.

                                                                           
Years ended March 31,

2002 2003 2004



Interest Average Interest Average Interest Average
Average Revenue/ Yield/ Average Revenue/ Yield/ Average Revenue/ Yield/
Balance Expense Cost Balance Expense Cost Balance Expense Cost









(In millions, except percentages)