##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 20-F (Mark One)o
    
    REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended March 31, 2004ORo
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from to
 Commission file number 001-15216 HDFC BANK LIMITED
(Exact name of registrant as specified in its charter) Not Applicable
(Translation of Registrants name into English) India
(Jurisdiction of incorporation or organization) HDFC Bank House,
Senapati Bapat Marg, Lower Parel, Mumbai- 400 013, India
(Address of principal executive offices) Securities registered or to be registered pursuant to Section 12(b) of the Act. Title of each classAmerican Depositary Shares
    
    Name of each exchange on which registered
The New York Stock ExchangeEach representing three equity shares, par value Rs. 10 per share
(Title of Class)
 Securities registered pursuant to Section 12(g) of the Act.
Not Applicable Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.
Not Applicable
(Title of Class) Indicate the number of outstanding shares of each of the issuers classes of
capital or common stock as of the close of the period covered by the annual
report. 282,844,438 Equity Shares Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. þ  Yes
    
    o  No
 Indicate by check mark which financial statement item the registrant has
elected to follow. o  Item 17
    
    þ  Item 18
 September 28, 2004




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TABLE OF CONTENTS PageCross Reference Sheet
    
    
    2Exchange Rates
    
    
    4Forward Looking Statements
    
    
    5Business
    
    
    6Risk Factors
    
    
    29Price Range of Our American Depositary Shares and Equity Shares
    
    
    38Description of Equity Shares
    
    
    40Dividend Policy
    
    
    41Selected Financial and Operating Data
    
    
    42Selected Statistical Information
    
    
    44Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    59Management
    
    
    80Principal Shareholders
    
    
    94Related Party Transactions
    
    
    95Taxation
    
    
    98Information About India:Supervision and Regulation
    
    
    105Exchange Controls
    
    
    120Restrictions on Foreign Ownership of Indian Securities
    
    
    121Additional Information
    
    
    123Index to Financial Statements
    
    
    F-1EX-12.1 CERTIFICATION TO RULE 13a-14bEX-12.2 CERTIFICATION TO RULE 13a-14bEX-13 CERTIFICATION TO SECTION 1350
 1




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##### Table of Contents



CROSS REFERENCE SHEET Form 20-F ItemNumber
    
    Item Caption
    
    Location
    
    PagePart IItem 1
    
    Identity of Directors, Senior Management and Advisors
    
    Not ApplicableItem 2
    
    Offer Statistics and Expected Timetable
    
    Not ApplicableItem 3
    
    Key Information
    
    Exchange Rates
    
    
    4Risk Factors
    
    
    29Selected Financial and Operating Data
    
    
    42Item 4
    
    Information on the Company
    
    Business
    
    
    6Selected Statistical Information
    
    
    44Managements Discussion and Analysis
    
    
    59Principal Shareholders
    
    
    94Related Party Transactions
    
    
    95Supervision and Regulation
    
    
    105Item 5
    
    Operating and Financial Review and Prospects
    
    Managements Discussion and Analysis
    
    
    59Item 6
    
    Directors, Senior Management and Employees
    
    BusinessEmployees
    
    
    27Management
    
    
    80Principal Shareholders
    
    
    94Item 7
    
    Major Shareholders and Related Party Transactions
    
    Principal Shareholders
    
    
    94Related Party Transactions
    
    
    95Item 8
    
    Financial Information
    
    Financial Statements
    
    
    F-1Item 9
    
    The Offer and Listing
    
    Price Range of Our American Depositary Share and Equity Shares
    
    
    38Item 10
    
    Additional Information
    
    Management
    
    
    80Description of Equity Shares
    
    
    40Taxation
    
    
    98Supervision and Regulation
    
    
    105Exchange Controls
    
    
    120Restrictions on Foreign Ownership of Indian Securities
    
    
    121Additional Information
    
    
    123Item 11
    
    Quantitative and Qualitative Disclosures
    
    BusinessRisk Management
    
    
    22About Market Risk
    
    Selected Statistical Information
    
    
    44Notes to Financial Statements
    
    
    F-7Item 12
    
    Description of Securities Other than Equity Securities
    
    Not ApplicablePart IIItem 13
    
    Defaults, Dividend Arrearages and Delinquencies
    
    Not Applicable
 2




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Form 20-F ItemNumber
    
    Item Caption
    
    Location
    
    PageItem 15
    
    Controls and Procedures
    
    Management
    
    
    90Item 16A
    
    Audit Committee Financial Expert
    
    Management
    
    
    90Item 16B
    
    Code of Ethics
    
    Management
    
    
    90Item 16C
    
    Principal Accountant Fees and Services
    
    Management
    
    
    91Part IIIItem 18
    
    Financial Statements
    
    Financial Statements
    
    
    F-1Report of Independent Auditors
    
    
    F-2Item 19
    
    Exhibits
    
    Exhibits
 3




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EXCHANGE RATES Fluctuations in the exchange rate between the Indian rupee and the US
dollar will affect the US 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 US dollars by the depositary of any cash dividends
paid in Indian rupees on the equity shares represented by ADSs. Until fiscal 2002, the rupee consistently declined against the dollar
since 1980. However, the Indian rupee appreciated in 2004 as against 2003. The
rupees appreciation has been due to remittances from exporters, non- resident
Indians, foreign direct investment and foreign institutional investor inflows,
along with the weakening of the US dollar against major currencies. The following table sets forth, for the periods indicated, information
concerning the exchange rates between Indian rupees and US 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(1)
    
    Average(1)(2)
    
    High
    
    Low1999
    
    
    42.50
    
    
    
    42.27
    
    
    
    43.60
    
    
    
    39.412000
    
    
    43.65
    
    
    
    43.46
    
    
    
    43.75
    
    
    
    42.502001
    
    
    46.85
    
    
    
    45.88
    
    
    
    47.47
    
    
    
    46.632002
    
    
    48.83
    
    
    
    47.70
    
    
    
    48.91
    
    
    
    46.582003
    
    
    47.53
    
    
    
    48.43
    
    
    
    49.07
    
    
    
    46.852004
    
    
    43.40
    
    
    
    45.95
    
    
    
    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 on the last day of each
month during the period. The following table sets forth the high and low noon buying rate for the
Indian rupee for each of the previous ten months. Month
    
    Period End
    
    Average
    
    High
    
    LowNovember 2003
    
    
    45.82
    
    
    
    45.55
    
    
    
    45.95
    
    
    
    45.30December 2003
    
    
    45.55
    
    
    
    45.57
    
    
    
    45.77
    
    
    
    45.50January 2004
    
    
    45.32
    
    
    
    45.46
    
    
    
    45.68
    
    
    
    45.29February 2004
    
    
    45.32
    
    
    
    45.27
    
    
    
    45.32
    
    
    
    45.22March 2004
    
    
    43.40
    
    
    
    44.97
    
    
    
    45.32
    
    
    
    43.40April 2004
    
    
    44.52
    
    
    
    43.89
    
    
    
    44.52
    
    
    
    43.40May 2004
    
    
    45.42
    
    
    
    45.18
    
    
    
    45.57
    
    
    
    44.55June 2004
    
    
    45.99
    
    
    
    45.50
    
    
    
    46.21
    
    
    
    44.94July 2004
    
    
    46.40
    
    
    
    46.05
    
    
    
    46.45
    
    
    
    45.66August 2004
    
    
    46.35
    
    
    
    46.32
    
    
    
    46.40
    
    
    
    46.21
 Although we have translated selected Indian rupee amounts in this report
into US dollars for convenience, this does not mean that the Indian rupee
amounts referred to could have been, or could be, converted into US dollars at
any particular rate, the rates stated below, or at all. All translations from
Indian rupees to US dollars are based on the noon buying rate in the City of
New York for cable transfers in Indian rupees at US$1.00 = Rs. 43.40 on March
31, 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 September 13,
2004, was Rs. 46.18 per US$1.00. 4




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FORWARD LOOKING STATEMENTS We have included statements in this report 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 successfully implement our strategy, the
market acceptance of and demand for various banking services, future levels of
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 actually occur in
the future. As a result, actual future gains, losses or impact on net interest
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
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 domestic and foreign
laws, regulations and taxes, 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. 5




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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
leading corporations and middle and upper-income individuals in India. Since
commencing operations in January 1995, we have grown rapidly while maintaining
strong asset quality and a low-cost funding structure. 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: wholesale
banking, retail banking and treasury operations. We are regulated as a banking
company by the Reserve Bank of India (or RBI) in accordance with rules and
regulations framed by the RBI from time to time. While our business has expanded rapidly over the past nine years, we have
maintained a disciplined growth strategy and a strong balance sheet. At March
31, 2004, our total customer assets (which consist of loans and credit
substitutes) represented 65.2% of our deposits and customer deposits
represented 76.9% of our total liabilities. On average, checking accounts and
low-interest savings accounts represented 46.9% of these deposits in fiscal
2004. These low-cost deposits, which include the cash float associated with our
transactional services, led to a cost of funds excluding equity for fiscal 2004
of 3.6%. At March 31, 2004, our net non-performing loans and impaired credit
substitutes constituted 0.2% of our net customer assets. 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. We have centralized
transaction processing and open, scaleable systems that can accommodate
significant future growth. These 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. We were incorporated in August 1994 as a public limited company under the
laws of India. On February 26, 2000 we merged with Times Bank Limited. The
merger was a stock-for-stock transaction where we issued one share for every
5.75 shares of Times Bank Limited resulting in 23,478,261 of our shares being
issued. Our legal name is HDFC Bank Limited, though we are also known
commercially as HDFC Bank. Our principal corporate and registered office is
located at HDFC Bank House, Senapati Bapat Marg, Lower Parel, Mumbai- 400 013,
India, our telephone is 91-22-5652 1000, and our website is www.hdfcbank.com.
Our registered agent in the United States is Depositary Management Corporation,
570 Lexington Avenue, 44th Floor, New York, NY 10022 . We are part of the HDFC group of companies founded by our parent, Housing
Development Finance Corporation Limited (HDFC Limited), a public limited
company under the laws of India. HDFC Limited and its 100% owned subsidiary,
HDFC Investments Limited, own approximately 24.2% of our outstanding equity
shares. For more information, please see Principal Shareholders. Our Business Strategy Our goal is to be the leading private sector bank to leading corporations
and middle and upper-income individuals in India by providing a comprehensive
range of products and services as well as superior customer service at
competitive prices. Our business strategy emphasizes the following elements:  
    
    Increase our market share in Indias expanding banking and
financial services industry by following a disciplined growth strategy
and delivering high quality customer service.Indias banking and financial services industry is undergoing a
period of change and expansion. We believe this process will be further
hastened by the growth of the Indian economy, expansion of the middle
and upper-income classes as well as increasing globalization. In
addition to benefiting from this growth, we believe we can increase our
market share by following a disciplined, targeted strategy. We believe
we can distinguish ourselves from many of our competitors by 6




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continuing to emphasize high quality service, efficient and
reliable execution, multiple distribution channels and comprehensive
product offerings at a good value to our customers.
    
    Leverage our technology platform and open, scaleable systems to
deliver more products to more customers and to control operating costs.Since beginning operations in 1995, we have invested heavily in our
technology platform and systems and believe we can increasingly leverage
these systems to deliver additional products to more customers. We refer
to our systems as open because they are compatible, in terms of
connectivity, with a variety of hardware and software systems and as
scaleable because the capacity of our systems can be increased so as
to accommodate more customers and more products without overhauling all
aspects of the system. Our multiple distribution mechanisms include an
electronically-linked branch network, 24-hour ATMs, telephone banking,
internet banking and banking by mobile telephone. This investment has
provided us with centralized transaction processing in Mumbai, together
with a number of regional centers. We also outsource certain back-office
functions to reduce operating costs. As a result, we believe we can
efficiently expand both the types of products offered and the base of
customers served.
    
    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. Under US GAAP, our ratio of gross non-performing assets to
customer assets (which includes gross loans and credit substitutes) was
1.6% at March 31, 2004, and our net non-performing assets were 0.2% of
net customer assets.
    
    Develop innovative products and services that attract our targeted
customers and address inefficiencies in the Indian banking sector.We concentrate on developing and delivering products and services
that address the evolving needs of our targeted customers and the
inefficiencies in the Indian financial sector. For example, through our
cash management services, we provide payment and collection mechanisms
that are more efficient and cost effective than the traditional Indian
systems. We have leveraged our experience in transactional services by
becoming the first private sector bank to be appointed to collect direct
taxes. We are one of the few private sector banks to have recently
received a mandate to collect indirect taxes like excise duty and
service tax. In retail banking, we were the first or one of the first
banks to offer international debit cards, real-time internet banking,
banking services by mobile telephone and an internet secure card. We
plan to continue to capitalize on opportunities to be the first mover in
products and services that utilize our technological and delivery
strengths without requiring significant capital commitment.
    
    Continue to develop products and services that reduce our cost of
funds.We believe we have one of the lowest overall cost of funds in the
Indian banking industry. For fiscal 2004, our average cost of funds
excluding equity was 3.6%. We believe we can maintain and enlarge this
low-cost funding base by increasing our base of retail deposits as well
as the free float generated by our cash management, stock exchange
clearing and other services. In the retail sector, we believe we can
increase our deposit base by offering a superior range of products and
high quality service and by expanding our geographic reach to targeted
locations. We believe we can increase our transactional services through
a variety of measures, including aggressive cross-selling to our
corporate and institutional client base and expanding our services to
cover dividend distribution and tax collection. 7




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
    
    Focus on high earnings growth with low volatility.Our earnings have grown rapidly, both on an aggregate basis and a
per share basis. Our aggregate earnings (as per US GAAP) have grown at a
compound average rate of 35.2% per year during the three-year period
ending March 31, 2004. This was driven in part by a growth in our retail
assets portfolio and an increase in branch expansion, which provides a
stable and a low cost retail fund base. 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 maintaining our
focus on low cost funding. In addition, we intend not to rely heavily on
revenue derived from trading so as to limit volatility. Our Principal Business Activities Our principal banking activities consist of wholesale banking, retail
banking and treasury operations. The following table sets forth our net
revenues attributable to each area for the last three years. Years ended March 31,2002
    
    2003
    
    2004
    
    2004
    
    2004(in millions, except
percentages)Wholesale banking
    
    Rs.
    2,803.1
    
    
    Rs.
    2,960.5
    
    
    Rs.
    4,653.0
    
    
    US$
    107.2
    
    
    
    31.1
    %Retail banking
    
    
    3,883.3
    
    
    
    6,193.7
    
    
    
    8,848.1
    
    
    
    203.9
    
    
    
    59.1
    %Treasury operations
    
    
    1,762.6
    
    
    
    2,147.2
    
    
    
    1,461.5
    
    
    
    33.7
    
    
    
    9.8
    %Net revenues
    
    Rs.
    8,449.0
    
    
    Rs.
    11,301.4
    
    
    Rs.
    14,962.6
    
    
    US$
    344.8
    
    
    
    100.0
    %
 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, bills 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. 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. We were the first
private sector bank to be appointed by the government of India to collect
direct taxes. We are one of the few private sector banks to have received a
mandate from RBI to collect indirect taxes on behalf of the Central Board of
Excise and Customs (CBEC). Our capital markets transactional services include
custodial services and stock exchange clearing bank services. We provide
custodial services primarily to Indian mutual funds. We are a clearing bank for
eight major Indian stock exchanges, including the National Stock Exchange and
The Stock Exchange, Mumbai. In addition, we provide correspondent banking
services, including cash management services and funds transfers, to
approximately 24 foreign banks and more than 1,100 cooperative banks. We have
recently commenced being the clearing banking services for major commodity
exchanges in the country. 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. We also target suppliers and distributors of top
end corporations as a part of the supply chain initiative for both our
commercial banking products and transactional services. We provide 8




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transactional services to a wide range of corporations, as well as financial
institutions and government entities. 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. Commercial Banking Products Commercial Loan Products and Credit Substitutes Our principal financing products are working capital facilities consisting
of short or medium-term loans, cash credit facilities and bill discounting.
Cash credit facilities are revolving credits provided to our customers, which
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. We also purchase commercial paper, non-convertible debentures and
redeemable preference shares and selectively extend longer-term loans. More
than 90% of our loans are denominated in rupees with the balance being
denominated in various foreign currencies, principally the US dollar. All our
loans have been made to customers in India. If a borrower wishes to renew
or rollover 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, and we rely on such review in connection with a rollover or renewal.
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 bills discounting as loans, and classify commercial
paper, debentures and preference shares as credit substitutes. At March 31,2002
    
    2003
    
    2004
    
    2004
    
    2004(in millions)Gross commercial loans:Term loans
    
    Rs.
    32,181.8
    
    
    Rs.
    43,005.0
    
    
    Rs.
    53,819.3
    
    
    US$
    1,240.1
    
    
    
    43.1
    %Cash credit facilities
    
    
    10,010.9
    
    
    
    18,769.5
    
    
    
    20,363.8
    
    
    
    469.2
    
    
    
    16.3Bills discounting
    
    
    16,640.8
    
    
    
    26,760.7
    
    
    
    33,740.7
    
    
    
    777.4
    
    
    
    27.0Total commercial loans
    
    Rs.
    58,833.5
    
    
    Rs.
    88,535.2
    
    
    Rs.
    107,923.8
    
    
    US$
    2,486.7
    
    
    
    86.4Credit substitutes:Commercial paper
    
    
    12,028.9
    
    
    
    6,009.7
    
    
    
    906.7
    
    
    
    20.9
    
    
    
    0.7Non-convertible debentures
    
    
    21,874.3
    
    
    
    22,898.7
    
    
    
    15,286.4
    
    
    
    352.3
    
    
    
    12.2Preference shares
    
    
    1,222.8
    
    
    
    844.4
    
    
    
    848.4
    
    
    
    19.5
    
    
    
    0.7Total credit substitutes
    
    Rs.
    35,126.0
    
    
    Rs.
    29,752.8
    
    
    Rs.
    17,041.5
    
    
    US$
    392.7
    
    
    
    13.6Customer
assets
    
    Rs.
    93,959.5
    
    
    Rs.
    118,288.0
    
    
    Rs.
    124,965.3
    
    
    US$
    2,879.4
    
    
    
    100.0
    %
 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. Our secured
demand and short-term loans are generally secured against receivables and
inventory. Our medium and long-term loans are generally secured by fixed
assets. We may also require corporate parent or personal guarantees or other
collateral. We generally do not make purely collateral-based loans, project
loans or loans to property developers. See Risk ManagementCredit
RiskCorporate Credit Risk. In addition to our loan products, we provide cash credit facilities, which
are revolving overdraft lines of credit for meeting working capital needs.
These facilities are generally secured in the same manner as our short-term
loans. We typically extend cash credit facilities for one year, subject to
annual review. We provide bills discounting through negotiable instruments.
These instruments can then be re-discounted with other banks or financial
institutions, which provides us liquidity. We provide financing to corporations through a variety of credit
substitutes. We apply the same credit evaluation process to these investments
and arrangements as we do to our loans. We purchase a variety of debt
securities including commercial paper generally for 90-day periods,
non-convertible debentures generally for 9




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periods ranging from 30 days to five years and preference shares, which are
usually redeemable in one to five years. We price our loans based on a combination of our own cost of funds, market
rates and our rating of the customer. Currently we have prime lending rates
that vary by the term of the loans. An individual loan is priced on a fixed or
floating rate basis based on one of these rates with a margin that depends on
the credit assessment of the borrower. The RBI has advocated for banks a benchmark Prime Lending Rates (PLR)
taking into account their actual cost of funds, operating expenses, a minimum
margin to cover regulatory requirement of provisioning, capital charge and the
profit margin. Since all other lending rates can be determined with reference
to the benchmark PLR, the system of tenor-linked PLR has been discontinued. The RBI requires banks to lend to specific sectors of the economy. For a
detailed discussion of these requirements, see Information About
IndiaSupervision and RegulationRegulations Relating to Making LoansDirected
Lending. Bills Collection, Documentary Credits and Guarantees We provide bills 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 years indicated, the value of transactions processed of our bills
collection, documentary credits and bank guarantees: Years ended March 31,2002
    
    2003
    
    2004
    
    2004
    
    2004(in millions, except percentages)Bills collection
    
    Rs.
    109,909
    
    
    Rs.
    117,809
    
    
    Rs.
    172,623.6
    
    
    US$
    3,977.5
    
    
    
    74.5
    %Documentary credits
    
    
    22,981
    
    
    
    25,721
    
    
    
    44,030.0
    
    
    
    1,014.5
    
    
    
    19.0Bank guarantees
    
    
    13,539
    
    
    
    9,696
    
    
    
    15,197.0
    
    
    
    350.2
    
    
    
    6.5Total
    
    Rs.
    146,429
    
    
    Rs.
    153,226
    
    
    Rs.
    231,850.6
    
    
    US$
    5,342.2
    
    
    
    100.0
    %
 Bills 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. The term is typically less than one year. Bank guarantees.We provide bank guarantees on behalf of our customers
to guarantee their payment or performance obligations. The term of our
guarantees is generally less than 24 months but can have tenors up to five
years. A large part of our guarantee portfolio consists of margin guarantees to
brokers issued in favor of stock exchanges. These are typically one year
guarantees generally secured by cash and share margins of 25-40%. 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. We provide these products to our corporate
clients through the joint efforts of our wholesale banking and treasury groups.
See TreasuryForeign Exchange and Derivatives. We have now been allowed to
offer to customers Indian rupee currency options and exchange traded interest rate futures by
the RBI. 10




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Gold Distribution The abolition of the Gold Control Act in the mid 1990s made the import of
gold into India more lucrative and potentially rewarding. After the Act was
abolished, the Government of India authorized about 10 institutions comprising
banks and non banking entities to enter the business of importing bullion into
India for sale to end user clients. Since 1997, more entities have entered
this line of business and at last count, the number of such institutions has
crossed 18. HDFC Bank entered this segment last year to leverage its
distribution and servicing strengths and cater primarily to the domestic
bullion trader segment. We import gold on a consignment basis typically on
concluding an arrangement to sell. Wholesale Deposit Products At March 31, 2004, we had wholesale deposits totaling Rs. 103.8 billion
which represented 34.1% of our total deposits and 24.3% of our total
liabilities, including stockholders equity. We offer both non-interest-bearing current accounts and time
deposits. We accept time deposits from our corporate customers with terms
ranging from seven days to five years. 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
(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 payments 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
interbank clearing practices, check collections can be slow and unpredictable,
which can mean 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. In practice,
the foreign banks are restricted in their branching ability. At March 31, 2004, approximately 3,000 wholesale banking clients used our
cash management services. These clients include leading 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 over 1,500 commercial clients directly using e-net, the Banks
corporate internet banking solutions. The number of corporate users, primarily
comprising of vendors and distributors, is over 18,500. The RBI has recently introduced a new inter-bank settlement system called
the Real Time Gross Settlement (RTGS). The system facilitates real time
settlements between banks, initially in select locations. This system is
currently not fully operational. 11




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Clearing Bank and Stock Exchange Services We serve as a cash-clearing bank for eight major stock exchanges in India,
including the National Stock Exchange and The Stock Exchange, Mumbai. Prior to
1997, each Indian stock exchange typically used just one clearing bank. We
introduced the concept of multiple clearing banks by seeking to participate in
the clearing business of the National Stock Exchange. Today, most Indian stock
exchanges use several banks for these services. In fiscal 2004, we estimate
that we handled approximately 65%-70% of the cash clearing volumes on the
National Stock Exchange and more than 45% on The Stock Exchange, Mumbai. As a clearing bank, we provide the stock 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. In
addition to benefiting from cash float, which enables us to reduce our cost of
funds, in certain cases we earn a commission on such services. We believe our clearing bank services are at the core of our range of
stock market and broker-related services, which also include working capital
funding and margin guarantees to brokers, depositary accounts for retail
customers and loans against securities. For further information about our stock
exchange-related services, see Retail BankingOther Services and
ProductsIndividual Depositary Accounts and Retail BankingRetail Loan
ProductsLoans Against Securities. 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
approximately 24 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
bank cannot provide. Because of our technology platforms, geographical reach
and 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, their branches typically operate
independently of one another and do not constitute an electronically connected
nationwide network. Tax Collections Effective April 1, 2001, we were appointed by the government of India to
collect direct taxes. We were the first new private sector bank to be appointed
to provide this service. In the fiscal year 2004 we collected more than Rs.
125.1 billion of direct taxes for the government of 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. We are one of the few private sector banks to have received a mandate from RBI
to collect indirect taxes on behalf of the Central Board of Excise and Customs
(CBEC). 12




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Marketing and Customers We are committed to providing high quality, customized service to our
corporate and institutional clients. We have dedicated relationship managers
who are each responsible for a set of accounts. Our relationship managers work
with other staff who specialize in particular products and services such as
cash management services, foreign exchange services and other fee-based
services in order to cross-sell products and to expand our relationship with
the customer. For example, our treasury advisory group works with our wholesale
banking group to provide foreign exchange and derivative products to our
corporate clients. Our retail group representatives work with our wholesale
banking group to offer Corporate Salary Account packages to employees of our
corporate clients. In these ways, we emphasize not only high quality service in
the delivery of traditional banking products, but also working with our
customers to develop services and products that meet almost their entire
financial needs. Our primary target market for our commercial banking products is the top
end of the corporate market in India. This includes private sector companies
affiliated with the best known Indian business houses, large public sector
companies and leading multinational companies. We focus in particular on large
manufacturing companies. At March 31, 2004, we had more than 700 customers in
our primary target area of which we defined approximately 350 as core
relationships. We have extended our commercial banking products and transactional
services to suppliers and customers of our corporate clients. For enterprises
that have dealings with large corporate customers of the Bank we extend credit
facilities for transactions. This helps our corporate customers complete their
supply chain management (SCM) and help their business associates to optimize
their borrowing. Over the past two years, we have acquired the supply chain business of
over 150 large corporate customers thereby developing relationships with around
1,300 dealers and around 3,500 vendors. We have a range of products for SCM
clients including bills discounting, invoice discounting, purchase order
discounting, current account with various product features, overdrafts, cash
credit, loans, cash management services, and internet banking with a straight
through processing facility to name some. We provide our transactional services to a wide range of corporations,
financial institutions and government entities. For example, we provide
employee trust customers and insurance companies with custody services,
security settlement services and nationwide payments. For our mutual fund
clients, we market our services as a one-stop shop, providing custodial
services, cash management collection, redemption services and mutual fund
sales. As a leading provider of cash clearing services to stock exchanges, we
deal with a large number of domestic and foreign brokers to whom we extend
various transactional services and in some cases working capital facilities. We
also extend to this segment margin guarantees including on a product program
basis for mid-sized brokers. Retail Banking Overview Our retail banking group strives to be a one-stop shop for the financial
needs of middle and upper-income and high net worth individuals. We provide a
comprehensive range of financial products including deposit products, loans,
credit cards, debit cards, bill payment services, third party mutual funds,
investment advice 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, personal bankers
and direct sales associates, as well as through our relationships with
stockbrokers and corporate clients and through franchise arrangements with
cooperative banks. We seek to develop 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 middle and upper classes, affords us significant opportunities
for growth. 13




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At March 31, 2004, we had 312 branches, including 21 extension counters,
and 910 ATMs. We expect to add approximately 100 branches and 150 ATMs by March
2005, subject to regulatory approvals. We plan to continue to expand our other
distribution channels, such as telephone banking, internet banking and mobile
banking. A second avenue for growth will be to target our marketing efforts to
particular segments of the retail market. We seek to acquire customers who are
high net worth individuals through our priority and preferred banking services,
in which we offer an extensive range of products and dedicated customer service
representatives. We work with our corporate banking group to target
corporations where we can offer our Corporate Salary Account product package
and various retail loan products and credit cards to hundreds or thousands of
employees at a time. We also plan to put greater emphasis on targeting the
affluent non-resident Indian population through specialized deposit products,
non-resident tax services and our internet banking channel. A third avenue for
growth will be to expand our products. We offer credit cards and have recently
commenced distributing a range of insurance products and mutual funds
underwritten by other companies. Retail Loan Products We offer a wide range of retail loans, including loans against securities,
auto loans, personal loans and two-wheeler loans and business banking loans.
Price, speed of commitment and quality of service are the key competitive
factors. Our retail loans were 40.4% of our gross loans at March 31, 2004.
Apart from our branches we use our ATM screens and website to promote our loan
products, and we employ additional sales methods depending on the type of
product. Because there is no 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. The following table shows the value and share of our retail loan products: At March 31, 2004% of totalNumber of loans
    
    Value in millions
    
    valueLoans against securities
    
    
    25,000
    
    
    Rs.
    9,379.8
    
    
    US$
    216.1
    
    
    
    12.8
    %Auto loans(1)
    
    
    129,000
    
    
    
    28,362.6
    
    
    
    653.5
    
    
    
    38.7Personal loans
    
    
    108,000
    
    
    
    10,526.1
    
    
    
    242.5
    
    
    
    14.4Two wheeler loans
    
    
    190,000
    
    
    
    4,345.0
    
    
    
    100.1
    
    
    
    5.9Business banking
    
    
    1,000
    
    
    
    2,659.3
    
    
    
    61.3
    
    
    
    3.6Credit cards
    
    
    530,000
    (2)
    
    
    2,489.9
    
    
    
    57.4
    
    
    
    3.4Commercial vehicle(1)
    
    
    23,900
    
    
    
    12,152.7
    
    
    
    280.0
    
    
    
    16.6Other retail loans
    
    
    27,000
    
    
    
    3,336.2
    
    
    
    76.9
    
    
    
    4.6Total
    
    
    1,033,900
    
    
    Rs.
    73,251.6
    
    
    US$
    1,687.8
    
    
    
    100.0
    %
  (1)
    
    net of receivables securitized out.(2)
    
    no. of cards in force. Loans Against Securities We offer loans against equity securities, mutual fund units and against
bonds issued by RBI that are on our approved list. We lend only against shares
in book-entry (dematerialized) form, which ensures that we obtain perfected and
first priority security interests. The minimum margin for lending against
shares is 40%. We also limit our loans 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 currently mark collateral subject to price
variations to market at least every week or more often if conditions require
and demand additional collateral as necessary. Auto Loans We offer auto loans at fixed interest rates for financing new automobile
and used car purchases. In addition to the pledge of the vehicle, we generally
obtain post-dated checks covering all payments at the time the loan is made. It
is a criminal offense in India to issue a bad check. These loans typically
range in value from Rs. 100,000 to Rs. 3.0 million, with a repayment period
ranging from 12 to 60 months. We also offer a corporate employee car loan
program and a preferred customer car loan program for existing deposit account
holders. Subject to subsequent credit verification, we offer pre-approved auto
loans for certain of our Corporate Salary Account 14




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customers and select branch customers and high networth individuals. 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 185 cities across
India. Personal Loans We offer unsecured personal loans at fixed rates, in amounts ranging from
Rs. 25,000 to Rs. 1,000,000, repayable in equal monthly installments over a
period of 12 to 60 months. We obtain post-dated checks to cover all payments at
the time the loan is made. We have also introduced the direct debit facilities
for our existing bank customers and electronic clearing system (ECS) for
external customers. Our personal loan products include loans for salaried
individuals, corporate employee loan programs, loans to self-employed
professionals (such as doctors and chartered accountants) and loans to
self-employed businessman. We have introduced various surrogate programs aimed
at addressing specific customer segments. Two Wheeler Loans We offer loans at fixed rates in amounts ranging from Rs. 7,000 to Rs.
200,000, repayable in monthly installments typically over a period up to 36
months for financing the purchase of new scooters or motor cycles. We obtain
post-dated checks to cover all payments at the time the loan is made. Subject
to subsequent credit verification, we offer fast approval processes, including
fax and internet approvals. The bank considers the two wheeler loan segment as
an opportunity to be a significant player. The bank expects to increase its
geographical presence significantly for this product in fiscal 2005. The Bank has discontinued marketing consumer durable loans from a risk and
profitability perspective. Business Loans We offer business loans to address the borrowing needs of the trading
community around the bank branches by offering them various facilities like
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. The sizes of advances typically
vary between Rs. 100,000 to Rs. 100 million and tenor varies between 1 year to
5 years for term loans with repayments typically through equated monthly
installments. The lending is normally secured with current assets hypothecated
to us with additional collateral of immovable property and fixed assets in some
cases. Credit Card Receivables We offer silver and gold credit cards with the average spend per active
card ranging between Rs. 5,000 to Rs. 6,000. Customers are billed every month,
and are expected to repay a minimum percentage of the billed value, and can
revolve the balance at their option, or repay the full amount. Approximately
70% of the billed amount typically is revolved between one month and the next. Commercial Vehicles We cater to the needs of the transport industry by financing for
commercial vehicles. We also selectively provide working capital, bank
guarantees and trade advances to customers who are transport operators. The
average size of the disbursement for commercial vehicles is around Rs 400,000
with repayment spread over three to four years in the form of equated monthly
installments, secured by the vehicle. Construction Equipment Finance We serve the infrastructure sector of the country by financing
construction equipment used for highways, ports, mining and other construction
related activities. Our loans range from Rs. 500,000 to Rs. 20 million for a 15




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tenor up to five years. 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 like forward exchange cover. We co-ordinate with almost 33
manufacturers and jointly promote our financing options to their clients. Housing Loans We have recently commenced home loan business under an arrangement with
HDFC Ltd., whereby we act as a service associate to sell the HDFC Home Loan
product. Under this arrangement HDFC Ltd. approves and disburses the loans, which
are booked in the books of HDFC Ltd. For such loans, we are paid a sourcing
fee. HDFC Ltd. will provide credit, legal and technical appraisal for these
loans. HDFC Ltd. is obligated to sell up to 70% of the fully disbursed home
loans sourced under the arrangement through the issue of mortgage backed pass
through certificates (PTCs) and the balance would be retained by HDFC Ltd. The
mortgage backed PTCs will be invested in by us at the underlying home loan
yields less a fee paid to HDFC Ltd. for administration and servicing of the
loans. A part of the home loans also qualifies for our directed lending. The arrangement seeks to leverage the strengths of the two organizations
in terms of HDFC Ltds product acceptance, operational efficiencies and credit
expertise on one hand and our sales origination and distribution on the other. Other Retail Loans These primarily constitute overdraft facilities against time deposits
placed with us. We typically lend up to 75-90% of the amount of the time
deposit with us. Securitization of Receivables The Bank from time to time securitizes out commercial loans to a special
purpose vehicle. Post securitization, we continue to maintain customer account
relationships and service the loans transferred to this special purpose
vehicle. The securitized paper is without recourse to us. We provide credit
enhancements generally in the form of cash collaterals and/or by subordination
of cash flows to senior pass through certificates (PTCs). During the fiscal
year 2004 we securitized loans with a carrying value of Rs. 8,698 million. Retail Deposit Products Retail deposits provide the bank with a low cost, stable funding base and
have been a key focus area for us since commencing operations. The following
chart shows the number of accounts and value of total deposits by our various
deposit products: At March 31, 2004Number ofaccountsValue (in millions)
    
    % of total
    
    (in thousands)
    
    % of totalSavings
    
    Rs.
    70,745.0
    
    
    US$
    1,630.1
    
    
    
    35.3
    %
    
    
    2,645.2
    
    
    
    73.1
    %Current
    
    
    32,301.4
    
    
    
    744.3
    
    
    
    16.1
    
    
    
    233.2
    
    
    
    6.4Time
    
    
    97,256.4
    
    
    
    2,240.9
    
    
    
    48.6
    
    
    
    741.3
    
    
    
    20.5Total
    
    Rs.
    200,302.8
    
    
    US$
    4,615.3
    
    
    
    100.0
    %
    
    
    3,619.7
    
    
    
    100.0
    %
 Our individual retail account holders receive the benefit of a wide range
of direct banking services, including an ATM card, access to our growing branch
and ATM network, access to our other distribution channels and eligibility for
utility bill payment and other services. Our retail deposit products include
the following:  
    
    Current accounts, which are non-interest-bearing checking accounts
designed primarily for small businesses. Customers have a choice of
regular and premium product offerings with different minimum average
quarterly account balance requirements. 16




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
    
    Savings accounts, which are demand deposits in checking accounts
designed primarily for individuals and trusts. These accrue interest at
a fixed rate set by the RBI (currently 3.5% per annum).
    
    Fixed or time deposits, which pay a fixed return over a
predetermined time period.
    
    Special value-added accounts, which offer our customers added value
and convenience. These include a fixed deposit account that allows for
automatic transfers from the fixed deposit to savings, as well as a
fixed deposit account with an automatic overdraft facility of up to 75%
to 90% of the balance in the account. We also offer Corporate Salary
Accounts, which allow the employer to make salary payments to a group
of employees with one transfer, which we disburse directly into
individual employees accounts held with us. The employees receive
preferred customer services, such as preferred rates on loans and in
some cases lower minimum balance requirements. See Retail BankingCustomers and MarketingCorporate Salary Account.
    
    E-Brokering accounts are offered as checking accounts to customers
of stock brokers where all transactions are routed electronically
between the broker and beneficiaries. Other Services and Products International Debit Cards Our international debit card allows our customers to purchase goods and
make ATM transactions in India and abroad. Our debit cards may be used with
more than 65,000 merchants in India and more than 10 million merchants
worldwide, and at more than 10,000 ATMs in India and more than 850,000 ATMs
worldwide. In addition to an annual fee charged to most debit card holders, we
receive a portion of the fee charged to the merchant (or to the customer of
another bank in the case of ATM transactions) for each transaction. We believe
we are one of the largest debit card issuers in India, with approximately 2.06
million current holders. 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. Bill Payment Services We offer our customers utility bill payment services for more than 45
leading utility companies including insurance, 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. We had approximately
92,000 registered users of this service at March 31, 2004. We currently offer
this service free to our customers and charge the utility a fee. We have now
outsourced the bill pay operations and charge a nominal fee to our customers. 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 exchange. Depositary participants, including us,
provide services through the major depositories established by two major stock
exchanges. Depositary participants record ownership details and effectuate transfers
in book-entry form on behalf of the buyers and sellers of securities. We
provide a complete package of services, including account opening, registration
of transfers and other transactions and information reporting. For retail
customers, we only provide depositary services for securities in scripless or
dematerialized form and provide dematerialization and rematerialization
services. We earn fixed fees based on the opening and maintenance of the
account as well as variable revenue based on the value of transactions
processed. 17




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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. We also target select customer segments such as
institutional buyers and high net worth retail customers. We offer our in-house
research to add value to the customers investment decisions. 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,
as well as advice on other investment products. We provide our high net worth
private banking customers a personal investment advisor. Internet Brokerage We acquired a 29.5% equity stake in an affiliate company, HDFC Securities
Limited, which provides stock brokerage services through the internet
and other channels. Credit Cards Our credit card business has been in operation since December 2001, when
we soft launched our credit card in Chennai. The business was operational in
twenty four cities in India in fiscal 2004 and we had a credit card base of
approximately 530,000 cards at March 31, 2004. We offer silver and gold credit
cards with standard limits ranging from Rs.15,000 to Rs. 300,000. In addition
to this, there are value-added co-branded product offerings like the eSeva
card, and the Health Plus Card which offer features like ease of payment
options for government utilities, medical insurance, etc. This product, being
only in the second full year of operation, has yet to break even. Electronic Data Capture (EDC) Terminals We deploy Electronic Data Capture (EDC) Terminals at merchant locations to
improve acceptability of our credit and debit cards issued and to earn fees as
an acquirer of card transactions. We earn a fee for all transactions acquired
by the Bank and the float on the banking account maintained by the merchant. At
the end of fiscal 2004 we had more than 26,000 EDC terminals installed at
various merchant locations across the country. Insurance We have arranged with HDFC Standard Life Insurance Company and HDFC Chubb
Ltd., a related party as a corporate agent for distribution of life insurance
products and general insurance products to our customers. We offer life
insurance solutions to our retail customers. We earn upfront commission on new
premiums collected as well as trail income in the subsequent years while the
policy continues in force. Retail Distribution Channels In order to provide anytime, anywhere, anyhow retail banking products
and service, we have multiple distribution channels, including a branch network
with 312 branches, including 21 extension counters, in 163 cities across India
staffed with dedicated service specialists, 910 ATMs, 24-hour telephone
banking, mobile telephone banking and internet banking. For further information
about our distribution channels, see Distribution Channels. 18




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Customers and Marketing Our target market for our retail services comprises middle and upper
income persons and high net worth individuals. We also target small businesses,
trusts and non-profit corporations. At March 31, 2004, 1.3% of our retail
customers contributed approximately 37% of our retail deposits. We have a
marketing strategy that focuses on key market segments primarily in nine Indian
cities. We also obtain new customers through joint marketing efforts with our
wholesale banking department, in which we feature our Corporate Salary Account
package. We also cross-sell our retail products to customers we obtain through
our capital markets transactional services to stockbrokers, such as our
depositary account customers. In addition, we market our products through our
branches, telephone sales calls, dedicated sales staff for niche market
segments and foreign representative offices targeting non-resident Indians.
Finally, we market our auto loan and consumer durable loan products through
joint efforts with relevant manufacturers. We use third-party agents or direct sales associates to market our
products and identify prospective new customers. In the case of deposit
accounts these are then contacted by our own staff for fulfillment. An
affiliated company, HBL Global Private Limited, employs some of the direct sales staff.
See Related Party TransactionsHBL Global Private Limited. We have programs that target particular segments of the retail market,
such as the following: Private and Preferred Banking.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 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. We currently
service over 2,500 private banking customers and over 60,000 preferred
customers. Corporate Salary Accounts.We market our Corporate Salary Accounts
package to corporations and their employees. With just one transfer, the
employer can make salary payments to a group of employees, as we debit the
employers account and credit each of the employees individual accounts.
Employees receive individual deposit accounts, generally with no or lower
minimum balance requirements, preferred rates on loans, free ATM and debit
cards, telephone banking, an overdraft facility of up to 50% of net take-home
salary and our utility bill payment service. At March 31, 2004, we had more
than 12,.000 companies disbursing their payrolls through us, with more than 1.1
million salary accounts. These constitute approximately 43% of our total
savings accounts by number and approximately 27% 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 were Rs. 3.3 billion at
March 31, 2000. Since that time we have expanded our marketing efforts and our
non-resident deposits have grown by more than 800% to Rs. 26.9 billion at March
31, 2004. We offer products such as convertible, non-repatriable and
repatriable rupee accounts, along with our international debit card. 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
transactions. In addition, our treasury group seeks to optimize profits from
our proprietary trading, which is principally concentrated on Indian government
securities. We have technologically sophisticated trading operations located in
Mumbai with the latest voice systems and electronic terminals with access to
real-time market information feeds. Our client-based activities consist primarily of advising corporate and
institutional customers and transacting spot and forward foreign exchange
contracts, rupee currency based derivatives and cross-currency derivatives. We
have been recently allowed by 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 and public sector undertakings. We also advise and
transact with 19




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some small companies and non-resident Indians. We believe we have become a
significant participant in these markets by virtue of the strength of our
client service and our structuring and execution capabilities. We are also a
competitive Indian option for public sector undertakings and similar
institutions who have traditionally used foreign banks for structured foreign
exchange and derivative products because most Indian banks did not have the
necessary expertise. 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 one year with our customers. To support our clients
activities, we are an active participant in the Indian interbank 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 US$ 51.0 billion
in foreign exchange traded in fiscal 2004. The major participants in the foreign exchange market are the State Bank
of India and other large public sector banks as well as the large foreign
banks. We believe we are one of the few private sector banks that is a
significant participant. The RBI imposes limits on our ability to borrow or lend in foreign
currencies and on our capital account transactions. In addition, the RBI limits
our overnight exposure. We also impose additional limits on intraday and
overnight exposure. We aim to have a near square position at the end of each
day. As a contractual matter, trades between participants are generally not
netted, although the practice of bilateral netting is developing. In addition,
mechanisms for broader electronic trading are being developed, and a clearing
corporation has been established that would clear foreign exchange as well as
money market trades among bank participants. See also Risk ManagementMarket
RiskPrice Risk. 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 interest rate 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. The Indian derivatives market is relatively young and is still developing,
largely due to regulatory restrictions on the use and trading of derivatives.
The RBI prohibits banks from having unmatched positions in G7 derivatives at
any time, and limits the ability of corporations to use derivatives. Banks
have recently been allowed by the RBI to trade in rupee currency options. The
RBI has also allowed banks to use interest rate futures to cover the interest
rate risk in Government Securities. Consistent with RBI regulations, we
generally maintain a matched book with respect to our positions at all times
(other than rupee-based interest rate swaps and now rupee options). 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 Information About IndiaSupervision and RegulationLegal
Reserve Requirements. Our local currency desk primarily trades Indian
government securities for our own account. We also participate in the interbank
call deposit market and engage in limited trading of other debt instruments. 20




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Equities Market We trade a very limited amount of equities of Indian companies for our own
account. At March 31, 2004, we had a Board approved limit of Rs. 200 million
for such equity investments for proprietary trading, although our exposure at
March 31, 2004 was small, at approximately Rs. 22.1 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 traditional bank branches, ATMs, telephone and mobile
telephone banking and the internet. Branch Network At March 31, 2004, we had an aggregate of 312 branches, including 21
extension counters. Our branch network covers 163 cities in India, with 86
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 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 account. Approximately 90% of our branches focus exclusively on providing retail
services and products. The range of products and services available at other
branches depends in part on its size and location. Our extension counters are
small offices primarily within office buildings, that provide specific
commercial and retail banking services. Except for seven locations, each branch
and extension counter has at least one ATM. 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. As a result,
73 of our branches are in semi-urban or rural areas. Subject to receiving the necessary licenses from the RBI, we plan to add
an aggregate of approximately 100 branches or extension counters by March 31,
2005. Automated Teller Machines At March 31, 2004, we had a total of 910 ATMs, of which 355 are located at
our branches or extension counters and 555 are located off-site, including at
large residential developments, or on major roads in metropolitan areas. All
our ATMs are available 24 hours per day. By March 2005, we intend to expand our
ATM network by approximately 150 ATMs. 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, regardless of where they originally opened
their account. Our ATM cards cannot be used in non-HDFC Bank ATM machines,
although our debit cards can be used. ATM cards issued by banks in the Plus,
Cirrus and Amex networks can be used in our ATMs and we receive a fee for each
transaction. These fee-generating transactions account for approximately 3.7%
of our total ATM transactions in fiscal 2004. Telephone Banking Call Centers We provide telephone banking services to our customers in 80 cities. This
service covers approximately 60% 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 21




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Mumbai, customers can also engage in financial transactions (such as cash
transfers, opening deposits and ordering demand drafts). In nine cities we also
have staff available 9 hours each day (four hours on weekends and holidays) to
assist customers who want to speak directly to one of our telephone bankers.
Our telephone banking service receives more than 1.4 million customer calls
every month. Internet Banking In September 1999, we launched NetBanking, a real-time internet banking
service. Through our website, customers can access account information, track
transactions, transfer funds between accounts and to third parties who maintain
accounts with the bank, 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 free or at a lower cost. We use 128-bit
encryption technology to ensure all transactions are secure. More than 1.4
million of our customers have registered for internet banking services, with
approximately 14% of that number using NetBanking at least once a quarter.
NetBanking is also an important channel for serving our non-resident Indian
customers. 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 more than 110
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. We use short messaging services, or SMS, as
the main platform for this service. Approximately 300,000 of our customers
have registered to use our mobile telephone banking services. Approximately
250,000 mobile telephone banking transactions take place every month. 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 and market risk,
which includes liquidity risk and price risk. We also face operational risk. We
have developed and implemented comprehensive policies and procedures to
identify, monitor and manage risk across the bank. Credit Risk Credit risk is the possibility of loss due to the failure of any
counterparty to abide by the terms and conditions of any financial contract
with us. We identify and manage this risk through (a) our target market
definitions, (b) our credit approval process, (c) our post-disbursement
monitoring and (d) our remedial management procedures. Corporate Credit Risk We primarily target large manufacturing corporations in our corporate
lending activities. Although we have some middle market borrowers, our
corporate 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 corporate clients, we have a detailed risk
grading system that is applied to each counterparty on an annual basis. We also
have limits for funded exposure to individual industries and for borrowers and
groups of borrowers, regardless of whether the exposure is in the form of loans
or non-funded exposures. 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 similar to that used by rating agencies and 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 22




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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 instrument
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, 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 weightage
for non fund based exposures which previously was 50% is now 100%. We had three
exposures to companies and an exposure to a group of companies that were above the general limit at March 31, 2004 for
which we had approvals of the RBI. On March 31, 2004, our largest exposure to a
single borrower was 34.1% of our capital funds, and our largest group exposure
was 47.9% of our capital funds; all these borrowers are performing according to
the terms of the contracts. The RBI has advised that banks may, in exceptional circumstances, with the
approval of their Boards, consider enhancement of the exposure to a borrower by
a further 5% of the capital funds. See Credit Exposure LimitsSupervision
and Regulation. The RBI prohibits loans to companies with which we have any directors in
common. We obtained approval for an exception to this policy that allows us to
hold until maturity a loan to HDFC, made by Times Bank, which loan we acquired
as part of the merger with Times Bank. The RBI also requires that a portion of
our lending activities be directed to specific priority sections. See
Information About IndiaSupervision and Regulation. We follow a policy of portfolio diversification by industry. At March 31,
2004, our customer assets in any single industry did not exceed 10% of our
total outstanding customer assets. All working capital loans are subject to
review at annual or shorter intervals. 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 other letters of support from the
corporate parent. 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
Factors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 exposing us to a potential loss. Our credit approval process for corporate 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
corporate loan can be made without all three approvals. Once a loan is made, we undertake ongoing credit analysis and monitoring
at several levels. Our policies are designed to promote early detection of
counterparty, industry or product exposures that require special monitoring.
The Risk Management Committee of our board of directors, together with our
senior credit officers, monitors overall portfolio risk as well as individual
problem loans and potential problem loans on a regular basis. Our senior credit
officers also work with our relationship managers to monitor individual
counterparty performance and condition as well as industry wide market trends.
We update our grading of all counterparties on an annual basis. A variety of
other reports and analyses are prepared periodically. Remedial strategies are
developed once a loan is identified as a problem loan. Exposures that slip
below targeted market norms or risk standards are placed on a phase-out list,
and an exit process for each exposure is put into operation. 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 US banks), our policies
regarding provisioning for loans and information concerning our non-performing
assets and allowance for credit losses. 23




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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
delivery of post-dated checks to cover all payments. In India bouncing of
checks is a criminal offence. In the case of most automobile loans as well as
unsecured personal loans, we require that the borrower provide post-dated
checks for all payments on the loan at the time the loan is made. Loans against
shares, automobile loans and consumer loans are all secured loans. We will
generally lend up to 60% of the market value of shares in the case of a loan
against 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 corporate lending risk. We apply our risk
assessment grading system to our 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 and derivative
instruments, as well as from balance sheet or structural positions. 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 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 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 the interest rate view of the
bank and decides on future business strategy with respect to interest rates. It
reviews and sets funding policy. It 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 the banks 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. 24




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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 interbank market. We use the
majority of our funds to make loans or purchase securities. Most of our
liabilities and assets are short-term. We maintain a substantial portfolio of liquid high-quality Indian
government securities. While generally this market provides an adequate amount
of liquidity, the interest rates at which funds are available can sometimes be
volatile. 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 two principal aspects of our asset
liability management programme. 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. 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 to prevent 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 25




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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
overnight position limits. 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 our outstanding foreign exchange
instruments. Our Value at Risk model statistically estimates the potential
loss in earnings that would arise if we held our foreign exchange gap positions
for three days. We currently use three days for our estimate, as this is the
period within which we are 99% confident that we could theoretically close out
all our foreign exchange gap positions and incur a loss that is less than our
estimated Value at Risk. Our Value at Risk model is applied to our holdings on
a portfolio basis, and takes into account reductions in risk that may arise
from diversification amongst the different currencies that we are exposed to.
Our Value at Risk model uses historical data for foreign exchange provided by
Reuters. As at March 31, 2004 the Value at Risk relating to all foreign
exchange instruments we held was estimated at Rs. 50.6 million. 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 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 reputation
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 pro-actively recommend improvements. 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
departments report directly to the chairman of the board of directors and the
Audit and Compliance Committee of the board as well as indirectly to the
managing director. The Audit and Compliance Committee meets every two months to
review all procedures, the effectiveness of the controls and compliance with
RBI regulations. In addition, the committee conducts a half-yearly review of
the performance of the department itself. 26




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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. 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,
transactional and foreign exchange services, while the large public sector
banks have extensive branch networks and large local currency funding
capabilities. 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 have 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. Treasury In our treasury advisory services for corporate clients, we compete
principally with foreign banks in foreign exchange and derivatives trading, as
well as the State Bank of India and other public sector banks in the foreign
exchange and money markets business. Employees We had 5,673 employees, 4,791 employees, and 3,742 employees at March 31,
2004, 2003 and 2002, respectively. At March 31, 2004 approximately 10.3% of our
employees were managers or senior managers, and 3.4% were assistant vice
presidents, vice presidents or group heads. By geographical location,
approximately 47.2%, 26.3%, 19.5% and 7.0% of our employees are located in the
western, northern, southern and eastern regions of India respectively. More
than 95% of our employees have university degrees. We consider our relations with our employees to be good. Our employees do
not belong to any union. 27




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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 we at present are required to pay to
employees a minimum 8.5% annual return. 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 funds. 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 undergo a 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 a
need-based basis, with training program modules varying from two to four days
in length. Properties Our registered office and corporate headquarters are located at HDFC Bank
House, Senapati Bapat Marg, Lower Parel, Mumbai- 400 013, India. This is our
premises which was commenced during the third quarter of fiscal 2004. Near 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.
At March 31, 2004, we had a network consisting of 312 branches, including 21
extension counters, and 910 ATMs including 555 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 at March 31, 2004 was Rs.
1812.5 million. We have constructed our own corporate office at Lower Parel,
Mumbai. which was commissioned during the third quarter of fiscal 2004. Legal and Regulatory 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. 28




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RISK FACTORS You should carefully consider the following risk factors as well as the
other information contained in this report 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 36.9%. Our rapid growth
has placed, and if it continues will place, significant demands on our
operational, credit, financial and other internal risk controls. An inability
to manage our growth effectively could have a material adverse effect on our
business, our future financial performance and the price of our equity shares
and our ADSs. Our business is vulnerable to volatility in interest rates. Our results of operations depend to a great extent on our net interest
income. In fiscal 2004, net interest revenue before allowances for credit
losses represented 72.8% 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 our bond gains. This difference could
result in an increase in interest expense relative to interest income leading
to a reduction in our net interest income. Interest rates are highly sensitive
to many factors beyond our control, including the RBIs monetary policies,
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. In fiscal 2004, year-end yields on the
Indian governments ten-year bonds moved from 6.16% to 5.14%, with a high of
6.09% and low of 4.95%. From the start of fiscal 2004-05 till September 17, 2004, the interest
rate have taken a U- turn. Owing to oil prices, inflation expectations and Fed
actions, the yield on the benchmark 10 year bond has since moved up by 97 basis
points to 6.11%. The sudden increase in the yield curve may have an immediate
impact on the value of our fixed income portfolio and hence our net revenue. 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 at March 31, 2004, 1.6% at March 31, 2003,
1.9% at March 31, 2002 and 2.1% at March 31, 2001. Our non-performing loans and
impaired credit substitutes net of specific loan loss provisions represented 0.2% of
our net customer assets portfolio at March 31, 2004, 0.5% at March 31,
2003, 0.6% at March 31, 2002 and 0.7% at March 31, 2001. At March 31, 2004, we
had provided for 91.0% 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 young bank and we have not
experienced a significant, prolonged downturn in the economy. A number of factors which are not in 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 directed lending. In addition, the
expansion of our business and our entry into the credit card business may cause
our non-performing loans to increase and the overall quality of our loan
portfolio to further deteriorate. If our non-performing loans increase, we may
be unable to execute our business plan as expected and that could adversely
affect the price of our equity shares and ADSs. 29




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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 against securities and
initial public offering finance for retail customers, stock exchange clearing
services and depositary accounts. At March 31, 2004, loans to Indian and
foreign institutional share brokers were Rs. 1,350.9 million, retail loans
secured against shares were Rs. 5,549.2 million and margin guarantees were Rs.
4,307.5 million. 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. We face greater credit risks than banks in more developed countries. One of our principal activities is providing financing to our clients,
almost all of them 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 and
difficulties that many of our borrowers face in adapting to instability in
world markets and rapid technological advances taking place across the world.
Higher credit risk may expose us to 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 and
financial assets, such as marketable securities. As a part of the financial sector reforms, the government of India
recently passed a new law called Securitisation and Reconstruction of
Financial Assets and Enforcement of Security Interest Act, 2002. The Act
provides banks and other lenders with increased powers which we believe could
lead to better and faster realization of the collateral underlying against the
non performing assets. We cannot guarantee that we will be able to realize the
full value on our collateral, due to, among other things, delays on our part in
taking immediate action, delays in bankruptcy foreclosure proceedings, stock
market downturns, defects in the perfection of collateral and fraudulent
transfers by borrowers. In the event a specialized regulatory agency gains
jurisdiction over the borrower, creditor actions can be further delayed. RBI
has come out with guidelines on corporate debt restructuring (CDR) framework
for restructuring of debt of viable companies facing problems. The framework
envisages that for debt amounts of Rs. 200 million and above referred by
lenders/borrowers to the CDR cell, lenders holding greater than 75% of the
referred debt can decide to restructure the referred debt and such a decision
would be binding on the remaining 25% or less of the lenders. In situations
where we own 25% or less of the debt, 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. 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 deposit bases, more
capital and larger customer bases than we do. We also compete directly with
foreign banks, some of which are a part of the largest multinational financial
companies in the world. Due to competitive pressures, we may be unable to successfully execute our
growth strategy and offer products and services at reasonable returns, which
may impact our business and our future financial performance. 30




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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 which could have a material adverse effect on our business. We could be subject to volatility in income from our treasury operations. Treasury revenue is vulnerable to volatility in the market caused by
changes in exchange rates, interest rates, equity 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 income from these
activities could have a material adverse effect on the price of our equity
shares and ADSs. We intend to enter new product lines in which we may not be successful. We intend to continue to explore new business opportunities in both retail
and corporate banking. For example, we launched a credit card business in
fiscal 2002. This product, being only in the second full year of operation, has
yet to break even. We cannot assure you that we have accurately estimated how
long it will take us to become profitable or the risks and costs of this
business. Our inability to succeed in this or any other new product launch
could adversely affect our future financial performance and the price of our
equity shares and our ADSs. A decline in our capital adequacy ratio could restrict our further business
growth. The RBI has stipulated a minimum capital adequacy ratio of 9% to our total
risk weighted assets. We need to continue to maintain the minimum capital
adequacy to support our continuous growth. Our capital adequacy ratio has
increased from 11.12% on March 31, 2003 to 11.66% as on March 31, 2004 due to a
subordinated debt issue of 4,000 million. Our growth in business could suffer
due to declining capital adequacy ratio. We have high concentrations of funded exposures to certain customers and
to certain sectors and if any of these exposures were to become non-performing,
the quality of our asset portfolio could be adversely affected. At March 31, 2004, our ten largest exposures, which include the aggregate
of all outstanding balances of loans and investments, totaled approximately Rs.
33.3 billion. This represented approximately 18.7% of our net loans and
investments and 106.6% of our shareholders equity. Our largest single funded
exposure, based on outstanding balances at that date, was Rs. 8,125.2 million.
This represented approximately 2.3% of our net loans and investments and
approximately 26.0% of our shareholders equity. At March 31, 2004, none of
our ten largest funded exposures based on outstanding balances was classified
as non-performing. Our largest non-performing loan was our 44th largest funded
exposure based on outstanding principal balance. However, if any of our ten
largest exposures were to become non-performing, the quality of our asset
portfolio and the price of our equity shares and ADSs could be adversely
affected. At March 31, 2004, as a percentage of gross loans and credit substitutes,
approximately 40.4% were individual or retail advances, 9.8% were to automotive
manufacturers and 3.3% were to companies in the heavy engineering industry. At
that date, Rs. 2,016.4 million or 67.4% of our gross non-performing loan
portfolio was concentrated in four industries: automotive, electronics, iron
and steel and textiles. Recently, there has been some upturn in the automotive
and iron and steel industries, while the position in textile and electronic
industries has not shown any significant variation. Some of these sectors could
be affected in future by change in trade regulations, commodity prices or
slowdown in industrial growth. Industry specific difficulties in these and
other sectors could increase our level of non-performing loans and adversely
affect our business, our future financial performance and the price of our
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HDFC Limited controls a significant percentage of our share capital and
exercises substantial influence over board decisions. HDFC Limited and its subsidiaries owned 24.2% of our equity at March 31,
2004. 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 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 which may not be in our interest. We may face potential conflicts of interest relating to our principal
shareholder, HDFC Limited. We have no agreements with HDFC Limited or any other HDFC group companies,
which restrict us from offering products and services that are offered by them.
Our relationship with these companies may however cause us to arrive at
mutually beneficial arrangements which could limit the extent to which we may
compete with HDFC Limited and HDFC group companies. 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. Material changes in Indian banking regulations and infrastructure 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 and reserve
requirements. 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, as well as changes in other governmental policies, income
tax laws and accounting principles. The RBI has issued guidelines on banks
exposure to the capital markets. The guidelines place a ceiling on bank
financing of equities and investments in shares equal to 5% of a banks total
outstanding advances at the end of the prior year. Certain funded and
non-funded exposures are subject to the ceiling. For more information on the
new guidelines on exposure to the capital markets, see Supervision and
RegulationRegulation Relating to Capital Markets Exposure. 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 our ADSs. 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 days and the variation in city based interbank
clearing practices , check collections can be slow and unpredictable. Through
our electronically linked branch network, correspondant bank arrangements and
centralized processing, we effectively provide 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). The system
facilitates real time settlements between banks, initially in select locations.
This system is currently not fully operational. Once fully operational this
could have an adverse impact on the cash float enjoyed so far from some of our
cash management services and hence our future financial performance and the
price of our equity shares and our ADS. Significant fraud, systems 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 systems failures. Computer break-ins
and power 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
break-ins, damage and failures, there can be no assurance that these security
measures will be successful. A significant failure of security measures 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, there is the possibility that both systems 32




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could be simultaneously damaged or destroyed. Though, we have established a
remote disaster recovery site at Chennai which replicates our network and
certain applications which are 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 it fully operational. 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 Indian
economy could adversely effect our business, including our ability to grow our
asset portfolio, the quality of our assets, and our ability to implement our
strategy. 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. Indian law limits our ability to raise capital outside India and may limit
the ability of others to acquire us, which could prevent us from operating our
business or entering into a transaction that is in the best interests of our
shareholders. Indian law constrains our ability to raise capital outside India through
the issuance of equity or convertible debt securities and we may not be able to
raise sufficient funds within India to support our growth. Generally, any
foreign investment in, or an acquisition of, an Indian company requires
approval from relevant government authorities in India including the RBI. As a
result, our ability to seek and obtain additional equity investment by foreign
investors is constrained. In addition, these restrictions may prevent us from
entering into a transaction, such as an acquisition by a non-Indian company,
which would otherwise be beneficial for us and the holders of our equity shares
and ADSs. RBI has recently issued draft guidelines for the ownership and governance
in private sector banks. The objective of the draft guidelines is to have a
regulatory road map for ownership and governance in private sector banks in the
interests of the depositors and financial stability. The underlying thread of
the draft guidelines is to ensure that the ultimate ownership and control of
banks is well diversified, banks are owned and managed by fit and proper
persons/entities and well capitalized and that the processes are transparent
and fair. The guidelines propose that the minimum capital of all private
sector banks should be a minimum of Rs. 3.0 billion within three years. An
investment by any category of investors greater than 5 percent in a private
sector bank shall have to meet the fit and proper criteria prescribed by the
RBI. The guidelines propose that no single entity or group of related entities
should have shareholding or control, direct or indirect, in excess of 10 per
cent of paid up capital of a private sector bank. Any private sector bank or a
foreign bank with a presence in India will not be allowed to hold shares above
5 per cent of the paid up capital of the investee private sector bank. 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 continued
economic liberalization policies that have been pursued by previous central
governments. 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. A significant change in Indias economic
liberalization and deregulation policies could adversely affect business and
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If regional hostilities increase, our business could suffer and the price
of our equity shares and ADSs could go down. India has from time to time experienced social and civil unrest and
hostilities with neighbouring countries. In recent years there have been
military confrontations between India and Pakistan in the Kashmir region. These
hostilities and tensions could lead to political or economic instability in
India and a possible adverse effect on Indian stock exchanges, our business,
our future financial performance and the price of our equity shares and ADSs. 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. 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. Risks Relating to the ADSs and Equity Shares You will not be able to vote your ADSs. Investors in ADSs will have no voting rights unlike holders of the equity
shares who have voting rights. 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 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 as
described below. For a discussion of the legal restrictions triggered by a
withdrawal of the equity shares from the depositary facility upon surrender of
ADSs, see Information About India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. Foreign
investors generally require government approval. Investors who withdraw equity
shares from the depositary facility will be subject to Indian regulatory
restrictions on foreign ownership upon withdrawal. It is possible that this
withdrawal process may be subject to delays. An ADS holder who surrenders an
ADS and withdraws shares may be able to redeposit those shares in the
depositary facility in exchange for ADSs. In addition, an investor who has
purchased shares in the Indian market may be able to deposit them in the ADS
program. However, in either case, the deposit or redeposit of equity shares may
be limited by securities law restrictions and will be restricted so that the
cumulative aggregate number of shares that can be deposited or redeposited as
of any time cannot exceed the cumulative aggregate number represented by ADSs
converted into underlying shares as of such time. For a discussion of the legal
restrictions triggered by a withdrawal of equity shares from the depositary
facility upon surrender of ADSs, see Information About IndiaRestrictions on
Foreign Ownership of Indian Securities. Your ability to sell in India any equity shares withdrawn from the
depositary facility may be subject to delays if specific government approval is
required. Investors seeking to sell in India any equity shares withdrawn upon
surrender of an ADS will require RBI approval for each transaction unless the
sale of those equity shares is made on an Indian stock exchange or in
connection with an offer made under the Indian regulations regarding takeovers.
Further, since currency exchange controls exist in India, the RBI will approve
the foreign currency equivalent of the price at which your equity shares are
transferred based on a specified form, and a higher price per share may not be
permitted. Additionally, except in limited circumstances, if you seek to
convert the rupee proceeds from your sale of equity shares in India into
foreign currency and then repatriate that foreign currency from India, you will
have to obtain an additional RBI approval for each transaction. If approval is
required, we cannot guarantee that any approval will be obtained in a timely
manner or at all. Because of possible delays in obtaining requisite approvals,
investors in equity shares may be prevented from realizing gains during periods
of price increases or limiting losses during periods of price declines. 34




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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 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. 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, The Stock Exchange, Mumbai and The Stock Exchange, Ahmedabad.
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.
US 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 US investors in our ADSs to exercise their preemptive
rights and any other factors we consider appropriate at the time. We do not
commit that we would file a registration statement under these 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 US 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 US dollar declines, as it has
generally over the past several years, each of the following values will also
decline:  
    
    the US dollar equivalent of the Indian rupee trading price of our
equity shares in India and indirectly the US dollar trading price of
our ADSs in the United States may also decline;
    
    the US dollar equivalent of the proceeds that you would receive
upon the sale in India of any equity shares that you withdraw from the
depositary; and
    
    the US dollar equivalent of cash dividends, if any, paid in Indian
rupees on the equity shares represented by our ADSs. Investors that seek to convert the rupee proceeds of a sale of equity
shares withdrawn upon surrender of ADSs into foreign currency and export the
foreign currency will need to obtain the approval of the RBI for each such
transaction. In addition, investors that seek to sell equity shares withdrawn
from the depository facility will have to obtain approval from the RBI, unless
the sale is made on a stock exchange or in connection with an offer made under
the regulations regarding takeovers. Holders of rupees in India may also
generally not purchase foreign currency without general or special approval
from the RBI. 35




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We have unsecured subordinated debt that, in case of payment default,
could result in an issuance of a significant number of equity shares. Certain of our subordinated debt agreements with various government-owned
Indian financial institutions contain provisions (which are commonly found in
loan agreements of this nature in India) that entitle the primary lenders to
exercise the right to convert at their option in most cases, up to 20% of
outstanding principal and interest into fully-paid shares (at a conversion
price equal to the par value, Rs. 10, of the equity shares) where the borrower
is in default under the loan agreement. Although we have never missed a payment
on this or any other debt, in the event we were to default on all such debt,
the number of shares that could be so issued could represent a significant
proportion of our equity share capital and could dilute the effective ownership
of other shareholders, including holders of our equity shares and the ADSs. See
Description of Equity SharesIssuance of Equity Shares under Subordinated
Debt. The future sales of securities by our company or existing shareholders 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 securities on an Indian stock exchange or elsewhere, or
the perception that sales could occur. These sales might also make it more
difficult for us to sell equity securities in the future at a time and at a
price we deem appropriate. You may be subject to Indian taxes arising out of capital gains if you
exchange your ADSs for equity shares and sell the equity shares. Generally, capital gains, whether short-term or long-term, arising on the
sale of the underlying equity shares in India are subject to Indian capital
gains tax. For purposes of computing the amount of capital gains subject to
tax, Indian law specifies that the cost of acquisition of the equity shares
will be deemed to be the share price prevailing on The Stock Exchange, Mumbai
or the National Stock Exchange on the date the depositary advises the custodian
to redeem receipts in exchange for underlying equity shares. The period of
holding of such equity shares for determining whether the gain is long-term or
short-term commences on the date of the giving of such notice by the depositary
to the custodian. Investors are advised to consult their own tax advisers and
to consider carefully the potential tax consequences of an investment in our
ADSs. The current Finance Act 2004-05 has exempted long term capital
gains on sale of shares traded in a recognized stock exchange and has
also introduced Securities Transaction Tax (STT) from a date to be
notified. See TaxationIndian Tax. You may be subject to Indian taxes on dividends payable on your ADSs In view of changes in the Indian Income Tax law, effective financial year
2003-04 a Company paying the dividend is subject to dividend distribution tax @
12.5%, plus surcharge of 2.5% and an educational cess of 2% on the total tax
on the total amount it distributes as dividend to its shareholders in addition
to the normal corporate tax on its income. See TaxationIndian Tax.
Because of the dividend distribution tax, the company need not withhold tax at
source from the dividend to the ADS holders. These laws could change in the
future. 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 annual report are residents of India and almost all of our assets
and the assets of these persons are located in India. India is not a party to any international treaty in relation to the
recognition or enforcement of foreign judgments. We have been advised by our
Indian legal advisors that recognition and enforcement of foreign judgments is
provided for under Section 13 of The Code of Civil Procedure, 1908 of India on
a statutory basis and that foreign judgments shall be conclusive regarding any
matter directly adjudicated upon except:  
    
    where the judgment has not been pronounced by a court of competent jurisdiction;
    
    where the judgment has not been given on the merits of the case;
    
    where it appears on the face of the proceedings that the judgment
is founded on an incorrect view of international law or a refusal to
recognize the law of India in cases in which Indian law is applicable; 36




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##### Table of Contents




    
    where the proceedings in which the judgment was obtained were opposed to natural justice;
    
    where the judgment has been obtained by fraud; or
    
    where the judgment sustains a claim founded on a breach of any law in force 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. Furthermore, it is
unlikely that an Indian court would enforce foreign judgments if it viewed the
amount of damages as excessive or inconsistent with Indian practice. There may be less company information available in 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. The Securities and Exchange Board of India and RBI are responsible
for improving disclosure and other regulatory standards for the Indian
securities markets. The Securities and Exchange Board of India 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. 37




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##### Table of Contents



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 of India under the symbol HDFCBANK, The Stock Exchange,
Mumbai under the code 500180 and The Stock Exchange, Ahmedabad under the Stock
Code 00500. The majority of trading in our equity shares is carried out on the
National Stock Exchange and The Stock Exchange, Mumbai. 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 ADSHigh
    
    Low
    
    trading volume2003Third Quarter
    
    US$
    23.8
    
    
    US$
    18.8
    
    
    
    63,563October
    
    
    26.0
    
    
    
    21.9
    
    
    
    62,848November
    
    
    26.4
    
    
    
    22.5
    
    
    
    101,205December
    
    
    34.4
    
    
    
    26.2
    
    
    
    78,3412004January
    
    
    34.9
    
    
    
    28.3
    
    
    
    106,635February
    
    
    31.9
    
    
    
    27.5
    
    
    
    99,579March
    
    
    32.0
    
    
    
    27.0
    
    
    
    62,183April
    
    
    32.0
    
    
    
    29.0
    
    
    
    50,505May
    
    
    33.1
    
    
    
    19.6
    
    
    
    161,195June
    
    
    29.8
    
    
    
    24.6
    
    
    
    100,995July
    
    
    27.6
    
    
    
    25.7
    
    
    
    44,586August
    
    
    28.2
    
    
    
    26.2
    
    
    
    37,114September (through September 13)
    
    
    29.7
    
    
    
    28.2
    
    
    
    18,088
 38




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##### Table of Contents



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 US dollars based on a rate of Indian Rs. 43.40 per US
dollar; and
    
    the average daily trading volume for our equity shares on the
National Stock Exchange. Price per
    
    Price perEquity share
    
    Equity share
    
    Average dailyEquity shareHigh
    
    Low
    
    High
    
    Low
    
    trading volume1999
    
    Rs.
    86.1
    
    
    Rs.
    48.0
    
    
    US$
    2.0
    
    
    US$
    1.1
    
    
    
    150,2012000
    
    
    295.0
    
    
    
    58.5
    
    
    
    6.8
    
    
    
    1.3
    
    
    
    175,2912001
    
    
    285.0
    
    
    
    185.0
    
    
    
    6.6
    
    
    
    4.3
    
    
    
    153,0882002First Quarter
    
    
    255.0
    
    
    
    220.0
    
    
    
    5.9
    
    
    
    5.1
    
    
    
    73,674Second Quarter
    
    
    241.5
    
    
    
    199.8
    
    
    
    5.6
    
    
    
    4.6
    
    
    
    83,395Third Quarter
    
    
    226.0
    
    
    
    200.0
    
    
    
    5.2
    
    
    
    4.6
    
    
    
    57,943Fourth Quarter
    
    
    223.0
    
    
    
    186.0
    
    
    
    5.1
    
    
    
    4.3
    
    
    
    105,5872003First Quarter
    
    
    256.0
    
    
    
    187.3
    
    
    
    5.9
    
    
    
    4.3
    
    
    
    111,915Second Quarter
    
    
    267.2
    
    
    
    231.0
    
    
    
    6.2
    
    
    
    5.3
    
    
    
    147,219Third Quarter
    
    
    303.5
    
    
    
    235.1
    
    
    
    7.0
    
    
    
    5.4
    
    
    
    258,724October
    
    
    329.9
    
    
    
    275.5
    
    
    
    7.6
    
    
    
    6.3
    
    
    
    432,034November
    
    
    323.0
    
    
    
    265.5
    
    
    
    7.4
    
    
    
    6.1
    
    
    
    280,551December
    
    
    385.1
    
    
    
    304.0
    
    
    
    8.9
    
    
    
    7.0
    
    
    
    492,2472004January
    
    
    406.8
    
    
    
    300.6
    
    
    
    9.4
    
    
    
    6.9
    
    
    
    563,193February
    
    
    383.4
    
    
    
    325.5
    
    
    
    8.8
    
    
    
    7.5
    
    
    
    296,284March
    
    
    400.0
    
    
    
    335.2
    
    
    
    9.2
    
    
    
    7.7
    
    
    
    235,948April
    
    
    400.0
    
    
    
    368.0
    
    
    
    9.2
    
    
    
    8.5
    
    
    
    228,853May
    
    
    395.0
    
    
    
    256.2
    
    
    
    9.1
    
    
    
    5.9
    
    
    
    226,836June
    
    
    392.0
    
    
    
    346.0
    
    
    
    9.0
    
    
    
    8.0
    
    
    
    277,571July
    
    
    379.5
    
    
    
    341.1
    
    
    
    8.7
    
    
    
    7.9
    
    
    
    257,662August
    
    
    381.9
    
    
    
    353.1
    
    
    
    8.8
    
    
    
    8.1
    
    
    
    177,308
 At March 31, 2004, there were 215,630 holders of record of our equity
shares, excluding ADS, of which 32 had registered addresses in the United
States and held an aggregate of 15,378 of our equity shares. 39




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##### Table of Contents



DESCRIPTION OF EQUITY SHARES We incorporate by reference the information disclosed under Description
of Equity Shares in our registration statement on Form F-1, dated July 20,
2001 (File No. 333-13718). 40




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##### Table of Contents



DIVIDEND POLICY The Banks dividend policy is based on the need to balance the twin
objectives of appropriately rewarding shareholders with cash dividends and of
retaining capital to meet the Banks investment needs and to maintain a healthy
capital adequacy ratio to support future growth. 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 increase the
dividend amount recommended by the board of directors. Dividends may be paid
out of company profits for the fiscal year in which the dividend is declared.
We have paid dividends every year since fiscal 1997. Consistent with our dividend policy we have had a track record of moderate
but steady increases in dividend declarations and the dividend payout
ratio(1) in the last few years has been in the range of 22% to 24%. 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. For
convenience of the reader, we have provided US dollar equivalent amounts, which
have been computed on the basis of the March 31, 2004, noon buying rate of Rs.
43.40 per US dollar. Dividend
    
    Total amount ofper equity share
    
    dividends paid(in millions)Relating to Fiscal Year2000
    
    Rs.
    1.60
    
    
    US$
    0.037
    
    
    Rs.
    323.9
    
    
    US$
    7.52001
    
    
    2.00
    
    
    
    0.046
    
    
    
    487.2
    
    
    
    11.22002
    
    
    2.50
    
    
    
    0.058
    
    
    
    703.4
    
    
    
    16.22003
    
    
    3.00
    
    
    
    0.069
    
    
    
    849.5
    
    
    
    19.62004
    
    
    3.50
    
    
    
    0.081
    
    
    
    1,000.5
    
    
    
    23.1
 Our dividends are generally declared and paid in the fiscal year following
the year to which they relate. The dividend relating to fiscal year 2004 was
paid in May 2004. This was subject to a dividend distribution tax of 12.5% plus
a surcharge of 2.5% which was paid by the Bank. The shareholders of the Bank
were not subjected to any withholding tax. The above tax actions were a result
of changes in tax laws effective for dividends paid in fiscal 2004 onwards. For
dividends paid in fiscal 2004, there was a distribution tax liability on the
Bank of Rs. 128.2 million. Future dividends will depend on our revenues, cash flow, 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. The equity shares represented by ADSs will rank equally
with our existing equity shares in respect of dividends. Before paying any dividend on our equity shares, we are required under the
Indian Banking Regulation Act to write off all expenses capitalized under
Indian GAAP. Before declaring dividends, we are required to transfer at least
25% of the balance of profits of each year determined in accordance with Indian
GAAP to a reserve fund. The RBI has issued new guidelines in April 2004,
regarding declaration and payment of dividend including interim dividend) by
banks with effect from the accounting year ended 31 March 2004. For description
on regulation of dividend, see Restrictions on Payment of
DividendsSupervision and Regulation. For a description of the tax consequences of dividends paid to our
shareholders, see TaxationIndian TaxTaxation of
Distributions. (1) Dividend payout ratio is dividend paid (before dividend distribution tax)
upon net income for the year. 41




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##### Table of Contents



SELECTED FINANCIAL AND OPERATING DATA The following table sets forth our selected financial and operating data.
The financial data have been derived from our financial statements prepared in
accordance with US GAAP. The summary income statement data for the fiscal years
ended March 31, 2002, 2003 and 2004 and the summary balance sheet data as of
March 31, 2003 and 2004 are derived from our audited financial statements
included in this annual report, together with the report of Deloitte Haskins
and Sells, independent auditors. Our summary balance sheet data as of March 31,
2000, March 31, 2001 and March 31, 2002 and our summary income statement data
for the fiscal years ended March 31, 2000 and March 31, 2001 are derived from
our audited financial statements not included in this report. For the
convenience of the reader, the summary financial data as of and for the year
ended March 31, 2004 have been translated into US dollars at a rate of US$1.00
= Rs. 43.40. 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. Year ended March 31,2000
    
    2001
    
    2002
    
    2003
    
    2004
    
    2004(in millions, except per equity share data)Selected income statement data:Interest revenue
    
    Rs.
    6,812.5
    
    
    Rs.
    12,561.5
    
    
    Rs.
    16,448.0
    
    
    Rs.
    19,424.8
    
    
    Rs.
    24,591.5
    
    
    US$
    566.6Interest expense
    
    
    3,765.1
    
    
    
    7,573.4
    
    
    
    10,762.5
    
    
    
    11,779.2
    
    
    
    11,983.1
    
    
    
    276.1Net interest revenue
    
    
    3,047.4
    
    
    
    4,988.1
    
    
    
    5,685.5
    
    
    
    7,645.6
    
    
    
    12,608.4
    
    
    
    290.5Allowance for credit losses, net
    
    
    455.9
    
    
    
    247.0
    
    
    
    451.6
    
    
    
    741.5
    
    
    
    2,343.4
    
    
    
    54.0Net interest revenue after allowance for
credit losses
    
    
    2,591.5
    
    
    
    4,741.1
    
    
    
    5,233.9
    
    
    
    6,904.1
    
    
    
    10,265.0
    
    
    
    236.5Non-interest revenue, net
    
    
    1,082.0
    
    
    
    1,627.1
    
    
    
    3,215.1
    
    
    
    4,397.3
    
    
    
    4,697.6
    
    
    
    108.3Net revenue
    
    
    3,673.5
    
    
    
    6,368.2
    
    
    
    8,449.0
    
    
    
    11,301.4
    
    
    
    14,962.6
    
    
    
    344.8Non-interest expense
    
    
    1,640.4
    
    
    
    3,162.5
    
    
    
    4,196.0
    
    
    
    6,057.9
    
    
    
    8,369.3
    
    
    
    192.8Income before income taxes
    
    
    2,033.1
    
    
    
    3,205.7
    
    
    
    4,253.0
    
    
    
    5,243.5
    
    
    
    6,593.3
    
    
    
    152.0Income tax expense
    
    
    642.3
    
    
    
    1,065.1
    
    
    
    1,294.6
    
    
    
    1,729.7
    
    
    
    1,838.8
    
    
    
    42.4Net income
    
    Rs.
    1,390.8
    
    
    Rs.
    2,140.6
    
    
    Rs.
    2,958.4
    
    
    Rs.
    3,513.8
    
    
    Rs.
    4,754.5
    
    
    US$
    109.6Per equity share data:Earnings per share, basic
    
    Rs.
    7.05
    
    
    Rs.
    8.97
    
    
    Rs.
    11.10
    
    
    Rs.
    12.57
    
    
    Rs.
    16.87
    
    
    US$
    0.39Earnings per share, diluted
    
    
    7.03
    
    
    
    8.87
    
    
    
    11.04
    
    
    
    12.51
    
    
    
    16.70
    
    
    
    0.38Dividends
    
    
    1.60
    
    
    
    2.00
    
    
    
    2.50
    
    
    
    3.00
    
    
    
    3.50
    
    
    
    0.08Book value(1)
    
    
    36.72
    
    
    
    44.88
    
    
    
    79.06
    
    
    
    93.36
    
    
    
    110.4
    
    
    
    2.54Equity shares outstanding at end of period
(in millions of equity shares)
    
    
    238.1
    
    
    
    239.7
    
    
    
    279.0
    
    
    
    279.7
    
    
    
    282.8
    
    
    
    282.8Weighted average equity shares outstanding-
basic (in millions of equity shares)
    
    
    197.2
    
    
    
    238.6
    
    
    
    266.6
    
    
    
    279.5
    
    
    
    281.9
    
    
    
    281.9Weighted average equity shares outstanding-
diluted (in millions of equity shares)
    
    
    197.7
    
    
    
    241.2
    
    
    
    267.9
    
    
    
    281.3
    
    
    
    284.7
    
    
    
    284.7Selected balance sheet data:Total assets
    
    Rs.
    119,967.7
    
    
    Rs.
    161,128.5
    
    
    Rs.
    243,032.2
    
    
    Rs.
    311,840.7
    
    
    Rs.
    426,835.6
    
    
    US$
    9,834.9Cash and cash equivalents
    
    
    16,181.9
    
    
    
    26,121.1
    
    
    
    34,590.6
    
    
    
    23,944.9
    
    
    
    33,010.4
    
    
    
    760.6Term placements
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,747.4
    
    
    
    3,565.2
    
    
    
    82.1Loans, net of allowance
    
    
    36,058.5
    
    
    
    51,083.2
    
    
    
    71,528.9
    
    
    
    118,299.9
    
    
    
    177,681.1
    
    
    
    4,094.0Investments held for trading
    
    
    
    
    
    
    
    
    
    
    3,837.6
    
    
    
    3,976.1
    
    
    
    6,233.8
    
    
    
    143.6Investments available for sale
    
    
    58,700.5
    
    
    
    69,928.9
    
    
    
    80,320.6
    
    
    
    98,929.2
    
    
    
    133,274.6
    
    
    
    3,070.8Investments held to maturity
    
    
    
    
    
    
    
    
    
    
    35,429.9
    
    
    
    38,426.7
    
    
    
    36,368.4
    
    
    
    838.0Non-performing loans, net
    
    
    844.6
    
    
    
    485.5
    
    
    
    536.4
    
    
    
    683.3
    
    
    
    269.9
    
    
    
    6.3Total liabilities
    
    
    111,224.4
    
    
    
    150,368.7
    
    
    
    220,971.3
    
    
    
    285,727.6
    
    
    
    395,619.8
    
    
    
    9,115.6Long-term debt
    
    
    1,720.0
    
    
    
    2,220.6
    
    
    
    2,157.9
    
    
    
    2,116.0
    
    
    
    6,086.0
    
    
    
    140.2Short-term borrowings
    
    
    15,734.7
    
    
    
    16,671.2
    
    
    
    21,600.3
    
    
    
    21,579.6
    
    
    
    24,064.2
    
    
    
    554.5Total deposits
    
    
    84,277.2
    
    
    
    116,581.1
    
    
    
    176,538.1
    
    
    
    223,760.0
    
    
    
    304,062.0
    
    
    
    7,006.0Shareholders equity
    
    
    8,743.3
    
    
    
    10,759.8
    
    
    
    22,060.9
    
    
    
    26,113.1
    
    
    
    31,215.8
    
    
    
    719.3
  (1)
    
    Represents the difference between total assets and total liabilities,
divided by the number of shares outstanding at the end of each reporting
period. 42




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##### Table of Contents



At March 31,2000
    
    2001
    
    2002
    
    2003
    
    2004
    
    2004(in millions)Period average:(2)Total assets
    
    Rs.
    65,223.3
    
    
    Rs.
    130,056.0
    
    
    Rs.
    202,013.2
    
    
    Rs.
    257,020.8
    
    
    Rs.
    357,123.6
    
    
    US$
    8,228.7Interest-earning assets
    
    
    59,837.7
    
    
    
    119,714.5
    
    
    
    183,488.8
    
    
    
    230,452.0
    
    
    
    327,523.3
    
    
    
    7,546.6Loans, net of allowance
    
    
    19,210.1
    
    
    
    39,004.4
    
    
    
    59,374.9
    
    
    
    82,461.2
    
    
    
    136,527.4
    
    
    
    3,145.8Total liabilities
    
    
    59,023.2
    
    
    
    120,216.2
    
    
    
    185,512.4
    
    
    
    232,933.8
    
    
    
    328,458.8
    
    
    
    7,568.2Interest-bearing liabilities
    
    
    41,920.6
    
    
    
    86,738.9
    
    
    
    137,681.1
    
    
    
    175,598.6
    
    
    
    236,550.9
    
    
    
    5,450.5Long-term debt
    
    
    1,598.0
    
    
    
    1,718.2
    
    
    
    2,159.7
    
    
    
    2,280.3
    
    
    
    2,605.9
    
    
    
    60.0Short-term borrowings
    
    
    7,338.0
    
    
    
    10,472.9
    
    
    
    18,105.9
    
    
    
    15,362.9
    
    
    
    33,040.7
    
    
    
    761.3Total deposits
    
    
    45,752.6
    
    
    
    97,110.9
    
    
    
    142,854.5
    
    
    
    186,847.7
    
    
    
    262,707.6
    
    
    
    6,053.2Of which:Interest-bearing deposits.
    
    
    32,984.6
    
    
    
    74,547.8
    
    
    
    117,415.5
    
    
    
    157,955.4
    
    
    
    200,904.4
    
    
    
    4,629.1Shareholders equity
    
    
    6,200.1
    
    
    
    9,839.8
    
    
    
    16,500.8
    
    
    
    24,087.0
    
    
    
    28,664.9
    
    
    
    660.5
  (2)
    
    Average balances are the average of daily outstanding amounts. At or for the year ended March 31,2000
    
    2001
    
    2002
    
    2003
    
    2004(in percentages)Profitability:Net income as a percentage of:Average total assets
    
    
    2.1
    
    
    
    1.6
    
    
    
    1.5
    
    
    
    1.4
    
    
    
    1.3Average shareholders equity
    
    
    22.4
    
    
    
    21.8
    
    
    
    17.9
    
    
    
    14.6
    
    
    
    16.6Dividend payout ratio(3)
    
    
    23.3
    
    
    
    22.8
    
    
    
    23.8
    
    
    
    24.2
    
    
    
    21.0Spread(4)
    
    
    4.5
    
    
    
    3.6
    
    
    
    2.4
    
    
    
    2.6
    
    
    
    2.4Net interest margin(5)
    
    
    5.1
    
    
    
    4.2
    
    
    
    3.1
    
    
    
    3.3
    
    
    
    3.9Cost-to-net revenue ratio(6)
    
    
    44.7
    
    
    
    49.7
    
    
    
    49.7
    
    
    
    53.6
    
    
    
    55.9Cost-to-average assets ratio(7)
    
    
    2.5
    
    
    
    2.4
    
    
    
    2.1
    
    
    
    2.4
    
    
    
    2.3Capital:Total capital adequacy ratio(8)
    
    
    12.2
    
    
    
    11.1
    
    
    
    13.9
    
    
    
    11.1
    
    
    
    11.7Tier 1 capital adequacy ratio(8)
    
    
    9.6
    
    
    
    8.7
    
    
    
    10.8
    
    
    
    9.5
    
    
    
    8.0Tier 2 capital adequacy ratio(8)
    
    
    2.6
    
    
    
    2.4
    
    
    
    3.1
    
    
    
    1.6
    
    
    
    3.7Average shareholders equity as a percentage of average total assets
    
    
    9.5
    
    
    
    7.6
    
    
    
    8.2
    
    
    
    9.4
    
    
    
    8.0Asset quality:Gross non-performing loans as a percentage of gross loans
    
    
    4.4
    
    
    
    2.9
    
    
    
    2.7
    
    
    
    2.0
    
    
    
    1.7Gross non-performing loans and credit substitutes to gross customer assets(9)
    
    
    3.2
    
    
    
    2.1
    
    
    
    1.9
    
    
    
    1.6
    
    
    
    1.6Net non-performing loans as a percentage of net loans
    
    
    2.3
    
    
    
    1.0
    
    
    
    0.7
    
    
    
    0.6
    
    
    
    0.2Net non-performing loans and credit substitutes to net customer assets(9)
    
    
    1.7
    
    
    
    0.7
    
    
    
    0.6
    
    
    
    0.5
    
    
    
    0.2Net non-performing loans as a percentage of total assets
    
    
    0.7
    
    
    
    0.3
    
    
    
    0.2
    
    
    
    0.2
    
    
    
    0.1Specific allowance for credit losses as a percentage of gross non-performing loans
    
    
    47.5
    
    
    
    67.6
    
    
    
    72.6
    
    
    
    71.1
    
    
    
    91.0Total allowance for credit losses as a percentage of gross non-performing loans
    
    
    56.4
    
    
    
    77.1
    
    
    
    81.9
    
    
    
    78.8
    
    
    
    116.8Allowance for credit losses as a percentage of gross total loans
    
    
    2.5
    
    
    
    2.2
    
    
    
    2.2
    
    
    
    1.6
    
    
    
    1.9
  (3)
    
    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.(4)
    
    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,
including current accounts which are non-interest bearing.(5)
    
    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.(6)
    
    Represents the ratio of non-interest expense to the sum of net interest
revenue and non-interest revenue.(7)
    
    Represents the ratio of non-interest expense to average total assets.(8)
    
    Tier 1 and Tier 2 capital adequacy ratios are computed in accordance with
the guidelines of the RBI, based on financial statements prepared in
accordance with Indian GAAP. See Information About IndiaSupervision and
Regulation.(9)
    
    Customer assets consist of loans and credit substitutes. Credit
substitutes consist of investments in commercial paper, debentures and
preference shares. 43




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##### Table of Contents



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 US GAAP. 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
    
    2004Interest
    
    Average
    
    
    
    
    
    Interest
    
    Average
    
    
    
    
    
    Interest
    
    AverageAverage
    
    revenue/
    
    yield/
    
    Average
    
    revenue/
    
    yield/
    
    Average
    
    revenue/
    
    Yield/Balance
    
    expense
    
    cost
    
    Balance
    
    expense
    
    cost
    
    balance
    
    expense
    
    cost(in millions, except percentages)Assets:Interest-earning assets:Cash equivalents and term
placements
    
    Rs.
    35,324.8
    
    
    Rs.
    2,150.9
    
    
    
    6.1
    %
    
    Rs.
    21,622.7
    
    
    Rs.
    1,233.5
    
    
    
    5.7
    %
    
    Rs.
    29,475.2
    
    
    Rs.
    1,109.6
    
    
    
    3.8
    %Investments available for
sale:Tax free(1)
    
    
    13,859.8
    
    
    
    1,080.9
    
    
    
    7.8
    %
    
    
    7,779.0
    
    
    
    494.5
    
    
    
    6.4
    %
    
    
    25,286.0
    
    
    
    1,475.6
    
    
    
    5.8
    %Taxable
    
    
    48,395.9
    
    
    
    4,586.5
    
    
    
    9.5
    %
    
    
    75,867.8
    
    
    
    5,649.5
    
    
    
    7.5
    %
    
    
    99,107.3
    
    
    
    7,129.2
    
    
    
    7.2
    %Investments held to maturity
    
    
    24,130.9
    
    
    
    2,280.3
    
    
    
    9.5
    %
    
    
    36,775.4
    
    
    
    3,763.2
    
    
    
    10.2
    %
    
    
    31,576.2
    
    
    
    2,882.5
    
    
    
    9.1
    %Investments held for trading
    
    
    2,402.5
    
    
    
    218.7
    
    
    
    9.1
    %
    
    
    5,945.8
    
    
    
    478.9
    
    
    
    8.1
    %
    
    
    5,551.3
    
    
    
    289.6
    
    
    
    5.2
    %Loans, net
    
    
    59,374.9
    
    
    
    6,130.7
    
    
    
    10.3
    %
    
    
    82,461.2
    
    
    
    7,805.4
    
    
    
    9.5
    %
    
    
    136,527.4
    
    
    
    11,705.0
    
    
    
    8.6
    %Total interest-earning
assets
    
    Rs.
    183,488.8
    
    
    Rs.
    16,448.0
    
    
    
    9.0
    %
    
    Rs.
    230,452.0
    
    
    Rs.
    19,424.9
    
    
    
    8.4
    %
    
    Rs.
    327,523.3
    
    
    Rs.
    24,591.5
    
    
    
    7.5
    %Non-interest-earning assets:Cash
    
    
    712.4
    
    
    
    
    
    
    
    
    
    
    
    848.3
    
    
    
    
    
    
    
    
    
    
    
    1,631.4Property and equipment
    
    
    3,799.0
    
    
    
    
    
    
    
    
    
    
    
    4,924.5
    
    
    
    
    
    
    
    
    
    
    
    5,424.2Other assets
    
    
    14,013.0
    
    
    
    
    
    
    
    
    
    
    
    20,796.0
    
    
    
    
    
    
    
    
    
    
    
    22,544.7Total non-interest earning
assets
    
    
    18,524.4
    
    
    
    
    
    
    
    
    
    
    
    26,569
    
    
    
    
    
    
    
    
    
    
    
    29,600.3Total assets
    
    Rs.
    202,013.2
    
    
    Rs.
    16,448.0
    
    
    
    8.1
    %
    
    Rs.
    257,020.8
    
    
    Rs.
    19,424.9
    
    
    
    7.6
    %
    
    Rs.
    357,123.6
    
    
    Rs.
    24,591.5
    
    
    
    6.9
    %Liabilities:Interest-bearing liabilities:Savings account deposits
    
    Rs.
    23,005.5
    
    
    Rs.
    700.0
    
    
    
    3.0
    %
    
    Rs.
    36,419.7
    
    
    
    1,125.2
    
    
    
    3.1
    %
    
    Rs.
    61,535.8
    
    
    Rs.
    1,633.9
    
    
    
    2.7
    %Time deposits
    
    
    94,410.0
    
    
    
    8,458.5
    
    
    
    9.0
    %
    
    
    121,535.7
    
    
    
    9,383.3
    
    
    
    7.7
    %
    
    
    139,368.6
    
    
    
    8,645.3
    
    
    
    6.2
    %Short-term borrowings
    
    
    18,105.9
    
    
    
    1,328.1
    
    
    
    7.3
    %
    
    
    15,362.9
    
    
    
    1,032.9
    
    
    
    6.7
    %
    
    
    33,040.7
    
    
    
    1,435.9
    
    
    
    4.3
    %Long-term debt
    
    
    2,159.7
    
    
    
    275.9
    
    
    
    12.8
    %
    
    
    2,280.3
    
    
    
    237.7
    
    
    
    10.4
    %
    
    
    2,605.9
    
    
    
    268.0
    
    
    
    10.3
    %Total interest-bearing
liabilities
    
    Rs.
    137,681.1
    
    
    Rs.
    10,762.5
    
    
    
    7.8
    %
    
    Rs.
    175,598.5
    
    
    Rs.
    11,779.2
    
    
    
    6.8
    %
    
    
    236,550.9
    
    
    
    11,983.1
    
    
    
    5.1
    %Non-interest-bearing
liabilities:Non-interest-bearing
deposits(2)
    
    
    25,439.0
    
    
    
    
    
    
    
    
    
    
    
    28,892.3
    
    
    
    
    
    
    
    
    
    
    
    61,803.3Other liabilities
    
    
    22,392.3
    
    
    
    
    
    
    
    
    
    
    
    28,442.9
    
    
    
    
    
    
    
    
    
    
    
    30,104.6Total non-interest-bearing
liabilities
    
    
    47,831.3
    
    
    
    
    
    
    
    
    
    
    
    57,335.4
    
    
    
    
    
    
    
    
    
    
    
    91,907.8Total liabilities
    
    Rs.
    185,512.4
    
    
    Rs.
    10,762.5
    
    
    
    5.8
    %
    
    Rs.
    232,933.8
    
    
    Rs.
    11,779.2
    
    
    
    5.1
    %
    
    Rs.
    328,458.8
    
    
    Rs.
    11,983.1
    
    
    
    3.6
    %Shareholders equity
    
    
    16,500.8
    
    
    
    
    
    
    
    
    
    
    
    24,087.0
    
    
    
    
    
    
    
    
    
    
    
    28,664.9Total liabilities and
shareholders equity
    
    Rs.
    202,013.2
    
    
    Rs.
    10,762.5
    
    
    
    5.3
    %
    
    Rs.
    257,020.8
    
    
    Rs.
    11,779.2
    
    
    
    4.6
    %
    
    Rs.
    357,123.6
    
    
    Rs.
    11,983.1
    
    
    
    3.4
    %
   (1)
    
    Yield on tax free securities are not on a tax equivalent basis.(2)
    
    Includes current accounts and cash floats from transactional services. 44




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##### Table of Contents



Analysis of Changes in Interest Revenue and Interest Expense Volume and Rate Analysis The following table sets forth, for the periods indicated, the allocation
of the changes in our interest revenue and interest expense between average
volume and changes in average rates. Fiscal 2003 vs. Fiscal 2002
    
    Fiscal 2004 vs. Fiscal 2003Increase (decrease)(1) due to
    
    Increase (decrease)(1) due toChange
    
    
    
    
    
    
    
    
    
    Changein
    
    
    
    
    
    
    
    
    
    InNet
    
    average
    
    Change in
    
    Net
    
    Average
    
    Change inChange
    
    volume
    
    Average rate
    
    change
    
    Volume
    
    Average rate(in millions)Interest revenue:Cash and cash equivalents
    
    Rs.
    (917.4
    )
    
    Rs.
    (834.3
    )
    
    Rs.
    (83.1
    )
    
    Rs.
    (123.9
    )
    
    Rs.
    447.9
    
    
    Rs.
    (571.8
    )Investments available for sale:Tax free
    
    
    (586.4
    )
    
    
    (474.2
    )
    
    
    (112.2
    )
    
    
    981.1
    
    
    
    1,112.8
    
    
    
    (131.7
    )Taxable
    
    
    1,063.0
    
    
    
    2,603.5
    
    
    
    (1,540.5
    )
    
    
    1,479.7
    
    
    
    1,730.5
    
    
    
    (250.8
    )Investments held to maturity
    
    
    1,482.8
    
    
    
    1,194.9
    
    
    
    287.9
    
    
    
    (880.7
    )
    
    
    (532.0
    )
    
    
    (348.7
    )Investments held for trading
    
    
    260.2
    
    
    
    322.5
    
    
    
    (62.3
    )
    
    
    (189.3
    )
    
    
    (31.7
    )
    
    
    (157.6
    )Loans, net
    
    
    1,674.7
    
    
    
    2,383.8
    
    
    
    (709.1
    )
    
    
    3,899.6
    
    
    
    5,117.6
    
    
    
    (1,218.0
    )Total interest-earning assets
    
    Rs.
    2,976.9
    
    
    Rs.
    5,196.2
    
    
    Rs.
    (2,219.3
    )
    
    Rs.
    5,166.5
    
    
    Rs.
    7,845.1
    
    
    Rs.
    (2,678.6
    )Interest expense:Savings account deposits
    
    Rs.
    425.2
    
    
    Rs.
    408.2
    
    
    Rs.
    17.0
    
    
    Rs.
    508.7
    
    
    Rs.
    775.9
    
    
    Rs.
    (267.2
    )Time deposits
    
    
    924.9
    
    
    
    2,430.3
    
    
    
    (1,505.4
    )
    
    
    (738.1
    )
    
    
    1,376.8
    
    
    
    (2,114.9
    )Short-term borrowings
    
    
    (295.3
    )
    
    
    (201.2
    )
    
    
    (94.1
    )
    
    
    403.0
    
    
    
    1,188.5
    
    
    
    (785.5
    )Long-term debt
    
    
    (38.1
    )
    
    
    15.4
    
    
    
    (53.5
    )
    
    
    30.3
    
    
    
    33.9
    
    
    
    (3.6
    )Total interest-bearing liabilities
    
    Rs.
    1,016.7
    
    
    Rs.
    2,652.7
    
    
    Rs.
    (1,636.0
    )
    
    Rs.
    203.9
    
    
    Rs.
    3,375.1
    
    
    Rs.
    (3,171.2
    )Net interest revenue
    
    Rs.
    1,960.20
    
    
    Rs.
    2,543.60
    
    
    Rs.
    (583.4
    )
    
    Rs.
    4,962.6
    
    
    Rs.
    4,470.0
    
    
    Rs.
    492.6
   (1)
    
    The changes in net interest revenue between periods have been reflected
as attributed either to volume or rate changes. For purposes of this
table, changes which are due to both volume and rate have been allocated
solely to changes in rate. 45




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##### Table of Contents



Yields, Spreads and Margins The following table sets forth, for the periods indicated, the yields,
spreads and interest margins on our interest-earning assets. Years ended March 31,2002
    
    2003
    
    2004(in millions, except percentages)Interest revenue
    
    Rs.
    16,448.0
    
    
    Rs.
    19,424.8
    
    
    Rs.
    24,591.5Average interest-earning assets
    
    
    183,488.8
    
    
    
    230,452.0
    
    
    
    327,523.3Interest expense
    
    
    10,762.5
    
    
    
    11,779.2
    
    
    
    11,983.1Average interest-bearing liabilities
    
    
    137,681.1
    
    
    
    175,598.5
    
    
    
    236,550.9Average total assets
    
    
    202,013.2
    
    
    
    257,020.8
    
    
    
    357,123.6Average interest-earning assets as a percentage of average total
assets
    
    
    90.8
    %
    
    
    89.7
    %
    
    
    91.7
    %Average interest-bearing liabilities as a percentage of average total
assets
    
    
    68.2
    %
    
    
    68.3
    %
    
    
    66.2
    %Average interest-earning assets as a percentage of average interest-
bearing liabilities
    
    
    133.3
    %
    
    
    131.2
    %
    
    
    138.5
    %Yield
    
    
    9.0
    %
    
    
    8.4
    %
    
    
    7.5
    %Cost of funds(1)
    
    
    5.8
    %
    
    
    5.1
    %
    
    
    3.6
    %Spread(2)
    
    
    2.4
    %
    
    
    2.7
    %
    
    
    3.5
    %Net interest margin(3)
    
    
    3.1
    %
    
    
    3.3
    %
    
    
    3.8
    %
   (1)
    
    Excludes equity.(2)
    
    Spread is the difference between yield on average interest-earning assets
and cost of average interest-bearing liabilities (including checking account
balances which currently carry zero interest rate)(3)
    
    Net interest margin is 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 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 the
spread. If average interest-bearing
liabilities exceed average
interest-earning assets, net interest
margin is less than the spread. 46




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##### Table of Contents



Returns on Equity and Assets The following table presents selected financial ratios for the periods indicated. Years ended March 31,2002
    
    2003
    
    2004(in millions, except percentages)Net income
    
    Rs.
    2,958.4
    
    
    Rs.
    3,513.8
    
    
    Rs.
    4,754.5Average total assets
    
    
    202,013.2
    
    
    
    257,020.8
    
    
    
    357,123.6Average shareholders equity
    
    
    16,500.8
    
    
    
    24,087.0
    
    
    
    28,664.9Net income as a percentage of average total assets
    
    
    1.5
    %
    
    
    1.4
    %
    
    
    1.3
    %Net income as a percentage of average shareholders equity
    
    
    17.9
    %
    
    
    14.6
    %
    
    
    16.6
    %Average shareholders equity as a percentage of average total
assets
    
    
    8.2
    %
    
    
    9.4
    %
    
    
    8.0
    %
 The following table sets forth, for the periods indicated, information
related to our investments available for sale. At March 31,2002
    
    2003
    
    2004Gross
    
    Gross
    
    
    
    
    
    
    
    
    
    Gross
    
    Gross
    
    
    
    
    
    
    
    
    
    Gross
    
    GrossAmortized
    
    Unrealized
    
    Unrealized
    
    Fair
    
    Amortized
    
    Unrealized
    
    Unrealized
    
    Fair
    
    Amortized
    
    Unrealized
    
    Unrealized
    
    FairCost
    
    Gain
    
    Loss
    
    Value
    
    Cost
    
    Gain
    
    Loss
    
    Value
    
    Cost
    
    Gain
    
    Loss
    
    Value(in millions)Government
securities
    
    Rs.
    34,322.1
    
    
    Rs.
    752.8
    
    
    Rs.
    4.7
    
    
    Rs.
    35,070.2
    
    
    Rs.
    45,149.6
    
    
    Rs.
    784.8
    
    
    Rs.
    19.1
    
    
    Rs.
    45,915.3
    
    
    Rs.
    63,535.0
    
    
    Rs.
    1,426.9
    
    
    Rs.
    37.4
    
    
    Rs.
    64,924.5Other debt
securities
    
    
    33,752.7
    
    
    
    505.9
    
    
    
    141.7
    
    
    
    34,116.9
    
    
    
    29,357.8
    
    
    
    1,802.3
    
    
    
    186.7
    
    
    
    30,973.4
    
    
    
    30,554.7
    
    
    
    2,106.7
    
    
    
    101.1
    
    
    
    32,560.3Total debt
securities
    
    
    68,074.8
    
    
    
    1,258.7
    
    
    
    146.4
    
    
    
    69,187.1
    
    
    
    74,507.4
    
    
    
    2,587.1
    
    
    
    205.8
    
    
    
    76,888.7
    
    
    
    94,089.7
    
    
    
    3,533.6
    
    
    
    138.5
    
    
    
    97,484.8Non-debt
securities
    
    
    11,051.4
    
    
    
    151.3
    
    
    
    69.2
    
    
    
    11,133.5
    
    
    
    21,649.8
    
    
    
    493.0
    
    
    
    102.3
    
    
    
    22,040.5
    
    
    
    35,083.4
    
    
    
    907.4
    
    
    
    201.0
    
    
    
    35,789.8Total
    
    Rs.
    79,126.2
    
    
    Rs.
    1,410.0
    
    
    Rs.
    215.6
    
    
    Rs.
    80,320.6
    
    
    Rs.
    96,157.2
    
    
    Rs.
    3,080.1
    
    
    Rs.
    308.1
    
    
    Rs.
    98,929.2
    
    
    Rs.
    129,173.1
    
    
    Rs.
    4,441.0
    
    
    Rs.
    339.5
    
    
    Rs.
    133,274.6
 The following table sets forth, for the periods indicated, information
related to our investments held to maturity. At March 31,2002
    
    2003
    
    2004Gross
    
    Gross
    
    
    
    
    
    
    
    
    
    Gross
    
    Gross
    
    
    
    
    
    
    
    
    
    Gross
    
    GrossFair
    
    Unrealized
    
    Unrealized
    
    Amortized
    
    Fair
    
    Unrealized
    
    Unrealized
    
    Amortized
    
    Fair
    
    Unrealized
    
    Unrealized
    
    AmortizedValue
    
    Gain
    
    Loss
    
    Cost
    
    Value
    
    Gain
    
    Loss
    
    Cost
    
    Value
    
    Gain
    
    Loss
    
    Cost(in millions)Government
securities
    
    Rs.
    14,597.3
    
    
    Rs.
    1,209.8
    
    
    Rs.
    
    
    
    Rs.
    13,387.5
    
    
    Rs.
    20,392.6
    
    
    Rs.
    1,145.5
    
    
    Rs.
    7.3
    
    
    Rs.
    19,254.4
    
    
    Rs.
    28,424.2
    
    
    Rs.
    1,180.1
    
    
    Rs.
    1.1
    
    
    Rs.
    27,245.2Other debt
securities
    
    
    22,292.0
    
    
    
    460.1
    
    
    
    210.5
    
    
    
    22,042.4
    
    
    
    19,715.7
    
    
    
    580.9
    
    
    
    37.5
    
    
    
    19,172.3
    
    
    
    9,633.4
    
    
    
    511.1
    
    
    
    0.9
    
    
    
    9,123.2Total debt
securities
    
    
    36,889.3
    
    
    
    1,669.9
    
    
    
    210.5
    
    
    
    35,429.9
    
    
    
    40,108.3
    
    
    
    1,726.4
    
    
    
    44.8
    
    
    
    38,426.7
    
    
    
    38,057.6
    
    
    
    1,691.2
    
    
    
    2.0
    
    
    
    36,368.4Non-debt
securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    Rs.
    36,889.3
    
    
    Rs.
    1,669.9
    
    
    Rs.
    210.5
    
    
    Rs.
    35,429.9
    
    
    Rs.
    40,108.3
    
    
    Rs.
    1,726.4
    
    
    Rs.
    44.8
    
    
    Rs.
    38,426.7
    
    
    Rs.
    38,057.6
    
    
    Rs.
    1,691.2
    
    
    Rs.
    2.0
    
    
    Rs.
    36,368.4
 47




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##### Table of Contents



The following table sets forth, for the periods indicated, an analysis of
the residual maturity profile of our investments in government and corporate
debt securities classified as available for sale securities and their market
yields. At March 31, 2004More than tenUp to one year
    
    One to five years
    
    Five to ten years
    
    yearsAmount
    
    Yield
    
    Amount
    
    Yield
    
    Amount
    
    Yield
    
    Amount
    
    Yield(in millions, except percentages)Government securities
    
    Rs.
    11,748.4
    
    
    
    4.5
    %
    
    Rs.
    25,593.4
    
    
    
    4.8
    %
    
    Rs.
    25,328.2
    
    
    
    4.9
    %
    
    Rs.
    2,254.5
    
    
    
    5.2
    %Other debt securities
    
    
    7,471.0
    
    
    
    5.5
    %
    
    
    18,452.1
    
    
    
    6.3
    %
    
    
    6,601.8
    
    
    
    6.5
    %
    
    
    35.4
    
    
    
    7.4
    %Total debt securities
    
    
    19,219.4
    
    
    
    4.9
    %
    
    
    44,045.5
    
    
    
    5.4
    %
    
    
    31,930.0
    
    
    
    5.3
    %
    
    
    2,289.9
    
    
    
    5.3
    %Total amortized cost
    
    
    18,949.0
    
    
    
    
    
    
    
    42,364.0
    
    
    
    
    
    
    
    30,537.0
    
    
    
    
    
    
    
    2,239.8Total market value
    
    Rs.
    19,172.8
    
    
    
    
    
    
    Rs.
    44,092.1
    
    
    
    
    
    
    Rs.
    31,930.0
    
    
    
    
    
    
    Rs.
    2,289.9
 Funding Our funding operations are designed to ensure both stability and cost of
funding and effective liquidity management. The primary source of funding is
deposits raised from retail customers, which were 65.9% of total deposits at
March 31, 2004. Wholesale banking deposits represented 34.1% of total deposits
at March 31, 2004. Total Deposits The following table sets forth, for the periods indicated, our outstanding
deposits and the percentage composition by each category of deposits. The
average cost (interest expense divided by average of daily balances) of savings
deposits was 3.0% in fiscal 2002, 3.1% in fiscal 2003 and 2.7% in fiscal 2004.
The average costs of time deposits was 9.0% in fiscal 2002, 7.7% in fiscal 2003
and 6.2% in fiscal 2004. Years ended March 31,2002
    
    2003
    
    2004Amount
    
    % of total
    
    Amount
    
    % of total
    
    Amount
    
    % of total(in millions, except percentages)Non-interest-bearing demand deposits
    
    Rs.
    42,201.8
    
    
    
    23.9
    %
    
    Rs.
    49,509.6
    
    
    
    22.1
    %
    
    Rs.
    88,351.2
    
    
    
    29.0
    %Savings deposits
    
    
    29,574.5
    
    
    
    16.8
    
    
    
    46,631.4
    
    
    
    20.8
    %
    
    
    78,043.0
    
    
    
    25.7
    %Time deposits
    
    
    104,761.8
    
    
    
    59.3
    
    
    
    127,619.0
    
    
    
    57.1
    %
    
    
    137,667.8
    
    
    
    45.3
    %Total
    
    Rs.
    176,538.1
    
    
    
    100.0
    %
    
    Rs.
    223,760.0
    
    
    
    100.0
    %
    
    Rs.
    304,062.0
    
    
    
    100.0
    %
 As of March 31, 2004, time deposits in excess of Rs. 4.5 million
(approximately US$100,000) have a balance to maturity profile as follows: At March 31, 2004Up to 3
    
    
    
    
    
    
    
    
    
    9 to 12
    
    More than 1months
    
    3 to 6 months
    
    6 to 9 months
    
    months
    
    Year(in millions)Balance to maturity for deposits
exceeding Rs. 4.5 million each
    
    Rs.
    24,098.0
    
    
    Rs.
    10,980.0
    
    
    Rs.
    3,737.1
    
    
    Rs.
    4,877.1
    
    
    Rs.
    10,554.6
 Short-term Borrowings The following table sets forth for the periods indicated, information
related to our short-term borrowings, which are comprised primarily of
money-market borrowings, excluding deposits. Year ended March 31,2002
    
    2003
    
    2004(in millions, except percentages)Period end balance
    
    Rs.
    21,600.3
    
    
    Rs.
    21,579.6
    
    
    Rs.
    24,064.2Average balance during the period(1)
    
    
    18,105.9
    
    
    
    15,362.9
    
    
    
    33,040.7Maximum outstanding
    
    
    29,857.9
    
    
    
    32,221.7
    
    
    
    52,274.3Average interest rate during the period(2)
    
    
    7.4
    %
    
    
    6.3
    %
    
    
    4.3
    %Average interest at period end(3)
    
    
    6.5
    %
    
    
    6.9
    %
    
    
    4.1
    %
   (1)
    
    Average of daily balances outstanding.(2)
    
    Represents the ratio of interest expense on short-term borrowings to the
average of daily balances of short-term borrowings.(3)
    
    Represents the weighted average rate of short-term borrowings outstanding
at March 31, 2002, 2003 and 2004. Subordinated Debt We also obtain funds from the issuance of unsecured non-convertible
subordinated debt securities, which qualify as Tier 2 risk-based capital
under the RBIs guidelines for assessing capital adequacy. The Bank has
issued subordinated debt at various date from fiscal 1998 and fiscal 2004
at various coupon rates. The first tranche aggregating Rs. 1,000.0
million was issued on various dates between January 29, 1998 and March 20,
1998 and carries a coupon rate of 13.00%. This tranche is repayable on
various dates between July 28, 2004 and September 19, 2004. The second
tranche aggregating Rs. 500.0 million was issued on various dates between
March 30, 1999 and June 5, 1999 and carries a coupon rate of 13.75%. This
tranche is repayable on various dates between June 29, 2006 and September
4, 2006. The third tranche aggregating Rs. 500.0 million was issued on 48




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##### Table of Contents



March 22 and March 23, 2001 and carries a coupon rate of 11.00%. This
tranche is repayable by June 22, 2006. The Bank in the current year issued
subordinated debts aggregating to Rs. 4,000 million, issued on February 4,
2004 of which Rs. 3,950 million carries a coupon rate of 5.90% and matures
in May 2013 and Rs. 50 million carries a coupon rate of 6.0% and matures in
May 2016. Asset Liability Gap and Interest Sensitivity Data The following table sets forth, for the periods indicated, our
asset-liability gap position. At March 31, 2004(1)Greaterthan one
    
    Greater thanTotal
    
    year and
    
    three years
    
    Greater91-180
    
    6-12
    
    within one
    
    up to three
    
    and up to
    
    than five0-28 days
    
    29-90 days
    
    days
    
    months
    
    year
    
    years
    
    five years
    
    years
    
    Total(in millions)Cash and cash
Equivalents(2),(3)
    
    
    19,711.9
    
    
    
    656.7
    
    
    
    820.9
    
    
    
    1,806.0
    
    
    
    22,995.5
    
    
    
    9,850.7
    
    
    
    164.2
    
    
    
    
    
    
    
    33,010.4Term placements
    
    
    
    
    
    
    543.1
    
    
    
    563.1
    
    
    
    1,035.30
    
    
    
    2,141.5
    
    
    
    1,423.7
    
    
    
    
    
    
    
    
    
    
    
    3,565.2Investments held for
trading(4)
    
    
    5,797.4
    
    
    
    436.4
    
    
    
    
    
    
    
    
    
    
    
    6,233.8
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,233.8Investments available
for sale(5),(6)
    
    
    13,191.5
    
    
    
    5,825.0
    
    
    
    6,732.1
    
    
    
    12,272.8
    
    
    
    38,021.4
    
    
    
    58,449.0
    
    
    
    16,306.0
    
    
    
    20,498.2
    
    
    
    133,274.6Investments held to
maturity(5)
    
    
    6,169.7
    
    
    
    2,330.8
    
    
    
    1,927.2
    
    
    
    5,125.4
    
    
    
    15,553.1
    
    
    
    17,673.6
    
    
    
    2,870.8
    
    
    
    270.9
    
    
    
    36,368.4Securities purchased
under agreement to
resell
    
    
    19,950.0
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    19,950.0
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    19,950.0Loans, net(7), (8)
    
    
    30,868.8
    
    
    
    40,998.8
    
    
    
    15,572.3
    
    
    
    20,128.5
    
    
    
    107,568.4
    
    
    
    60,246.4
    
    
    
    8,884.8
    
    
    
    981.5
    
    
    
    177,681.1Accrued interest
Receivable
    
    
    4,178.7
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,178.7
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,178.7Other assets
    
    
    6,340.1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,340.1
    
    
    
    
    
    
    
    
    
    
    
    64.2
    
    
    
    6,404.3Total financial
Assets
    
    
    106,208.1
    
    
    
    50,790.8
    
    
    
    25,615.6
    
    
    
    40,368.0
    
    
    
    222,982.5
    
    
    
    147,643.4
    
    
    
    28,225.8
    
    
    
    21,814.8
    
    
    
    420,666.5Deposits(9)
    
    
    46,486.4
    
    
    
    11,676.8
    
    
    
    12,113.6
    
    
    
    37,594.1
    
    
    
    107,870.9
    
    
    
    193,695.8
    
    
    
    2,495.3
    
    
    
    
    
    
    
    304,062.0Securities sold under
repurchase
agreementsDebt(10)
    
    
    17,899.5
    
    
    
    1,513.2
    
    
    
    5,737.5
    
    
    
    
    
    
    
    25,150.2
    
    
    
    1,000.0
    
    
    
    
    
    
    
    4,000.0
    
    
    
    30,150.2Other liabilities
    
    
    
    
    
    
    60,380.8
    
    
    
    
    
    
    
    
    
    
    
    60,380.8
    
    
    
    1,026.8
    
    
    
    
    
    
    
    
    
    
    
    61,407.6Total financialLiabilities
    
    
    64,385.9
    
    
    
    73,570.8
    
    
    
    17,851.1
    
    
    
    37,594.1
    
    
    
    193,401.9
    
    
    
    195,722.6
    
    
    
    2,495.3
    
    
    
    4,000.0
    
    
    
    395,619.8Asset/liability gap
    
    
    41,822.2
    
    
    
    (22,780.0
    )
    
    
    7,764.5
    
    
    
    2,773.9
    
    
    
    29,580.6
    
    
    
    (48,079.2
    )
    
    
    25,730.5
    
    
    
    17,814.8
    
    
    
    25,046.7Cumulative gap
    
    
    41,822.2
    
    
    
    19,042.2
    
    
    
    26,806.7
    
    
    
    29,580.6
    
    
    
    29,580.6
    
    
    
    (18,498.6
    )
    
    
    7,231.9
    
    
    
    25,046.7
    
    
    
    25,046.7Cumulative gap as a
percentage of total
assets
    
    
    39.4
    %
    
    
    37.5
    %
    
    
    104.6
    %
    
    
    73.2
    %
    
    
    13.3
    %
    
    
    (12.5
    %)
    
    
    25.6
    %
    
    
    114.8
    %
    
    
    6.0
    %
   (1)
    
    Assets and liabilities are classified into the applicable maturity
categories based on residual maturity unless specifically mentioned.(2)
    
    Cash on hand is classified in the 0-28 day bucket.(3)
    
    Cash and cash equivalents include balances with the RBI to satisfy its
cash reserve ratio requirements. These balances are held in the form of
overnight cash deposits but we classify these balances to the applicable
maturity categories on a basis proportionate to the classification of
related deposits.(4)
    
    Securities in the trading book are classified in the 0-28 days or 29-90
days maturity bucket based on the expected time of realization for the
said investments.(5)
    
    Securities held towards satisfying the statutory liquidity requirement
(SLR) prescribed by the RBI are classified based the applicable maturity
categories on a basis proportionate to the classification of related
deposits.(6)
    
    Shares and units of open ended mutual funds are classified in the
greater than five years category.(7)
    
    Net Non-performing loans are classified in the
greater than five
years category.(8)
    
    Ambiguous maturity overdrafts are classified under various maturity
buckets based on the historical behavioral analysis of such advances.(9)
    
    Non maturity deposits are classified under various maturity buckets based
on the historical behavioral analysis of such deposits.(10)
    
    Includes short-term borrowings and long-term debt.
For further information on how we manage our asset liability risk, see
BusinessMarket Risk. 49




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##### Table of Contents



Loan Portfolio and Credit Substitutes At March 31, 2004, our gross loan portfolio was Rs. 181.2 billion and
represented approximately 1.1 million contracts outstanding. At March 31, 2004,
our gross credit substitutes outstanding were Rs. 17.0 billion and represented
112 credit substitutes outstanding. All our gross loans and credit substitutes
are to Indian borrowers and over 90% are denominated in rupees. For a
description of our wholesale and retail loan products, see
BusinessWholesale
BankingCommercial Banking ProductsCommercial Loan Products and Credit
Substitutes and Retail BankingRetail Loan
Products. The following table sets forth, for the periods indicated, our gross loan
portfolio classified by product group. At March 31,2000
    
    2001
    
    2002
    
    2003
    
    2004(in millions)Working capital
    
    Rs.
    14,638.6
    
    
    Rs.
    19,974.7
    
    
    Rs.
    28,200.8
    
    
    Rs.
    45,521.9
    
    
    Rs.
    54,104.5Term loans
    
    
    15,804.2
    
    
    
    23,678.5
    
    
    
    30,579.8
    
    
    
    43,005.0
    
    
    
    53,819.3Investment in finance leases
    
    
    218.0
    
    
    
    137.2
    
    
    
    52.9
    
    
    
    8.3Retail loans
    
    
    6,305.0
    
    
    
    8,447.1
    
    
    
    14,301.3
    
    
    
    31,631.4
    
    
    
    73,251.6Gross loans
    
    Rs.
    36,965.8
    
    
    Rs.
    52,237.5
    
    
    Rs.
    73,134.8
    
    
    Rs.
    120,166.6
    
    
    Rs.
    181,175.4Credit substitutes,
    
    
    13,056.2
    
    
    
    22,344.2
    
    
    
    35,329.9
    
    
    
    30,255.5
    
    
    
    17,041.5Gross loans plus credit substitutes
    
    Rs.
    50,022.0
    
    
    Rs.
    74,581.7
    
    
    Rs.
    108,464.7
    
    
    Rs.
    150,422.1
    
    
    Rs.
    198,216.9
 Maturity and Interest Rate Sensitivity of Loans The following table sets forth, for the periods indicated, the maturity
and interest rate sensitivity of our loans. At March 31, 2004Due in one
    
    Due in one
    
    Due afteryear or less
    
    to five years
    
    five years(in millions)Retail
    
    Rs.
    27,560.8
    
    
    Rs.
    45,512.2
    
    
    Rs.
    178.6Wholesale
    
    Rs.
    78,430.9
    
    
    Rs.
    26,072.3
    
    
    Rs.
    3,420.6Gross loans
    
    Rs.
    105,991.7
    
    
    Rs.
    71,584.5
    
    
    Rs.
    3,599.2
 At March 31, 2004Due in one
    
    Due in one
    
    Due afteryear or less
    
    to five years
    
    five years(in millions)Interest rate classification of loans by maturity:Variable rates
    
    Rs.
    2,710.1
    
    
    
    
    
    
    
    Fixed rates
    
    Rs.
    104,858.3
    
    
    Rs.
    69,131.2
    
    
    Rs.
    981.5Gross loans
    
    Rs.
    107,568.4
    
    
    Rs.
    69,131.2
    
    
    Rs.
    981.5
 Concentration of Loans and Credit Substitutes Pursuant to the guidelines of the RBI, our exposure to individual
borrowers generally may not exceed 15% of our capital funds calculated under
Indian GAAP. We had three exposures to companies that were above the general
limit at March 31, 2004 for which we had approvals of the RBI. Our exposure to
a group of companies under the same management control generally may not exceed
40% of our capital funds without the prior approval of the RBI. In some cases,
the exposure to a group of companies under the same management control may be
up to 50% of our capital funds. For further information, see Information
About IndiaSupervision and Regulation. The following table sets forth, for the periods indicated, our gross loans
and credit substitutes outstanding by the borrowers industry or economic
activity and as a percentage of our gross loans and fair value of credit
substitutes. At March 31,2000
    
    2001
    
    2002
    
    2003
    
    2004(in millions, except percentages)1. Automotive manufacturers
    
    
    1,614.2
    
    
    
    3.2
    %
    
    
    3,138.6
    
    
    
    4.2
    %
    
    
    9,999.2
    
    
    
    9.2
    %
    
    
    13,393.2
    
    
    
    8.9
    %
    
    
    19,370.2
    
    
    
    9.8
    %2. Heavy Engineering
    
    
    824.1
    
    
    
    1.6
    %
    
    
    4,808.2
    
    
    
    6.4
    %
    
    
    3,903.4
    
    
    
    3.6
    %
    
    
    3,830.1
    
    
    
    2.5
    %
    
    
    6,630.9
    
    
    
    3.3
    %3. Cement manufacturers
    
    
    929.9
    
    
    
    1.9
    %
    
    
    3,173.2
    
    
    
    4.3
    %
    
    
    2,990.6
    
    
    
    2.8
    %
    
    
    4,171.9
    
    
    
    2.8
    %
    
    
    6,348.3
    
    
    
    3.2
    %4. Land transport
    
    
    12.1
    
    
    
    0.0
    %
    
    
    7.9
    
    
    
    0.0
    %
    
    
    1,270.3
    
    
    
    1.2
    %
    
    
    2,420.1
    
    
    
    1.6
    %
    
    
    5,352.4
    
    
    
    2.7
    %5. Hire purchase
    
    
    2,057.7
    
    
    
    4.1
    %
    
    
    2,394.7
    
    
    
    3.2
    %
    
    
    5,367.0
    
    
    
    4.9
    %
    
    
    5,877.1
    
    
    
    3.9
    %
    
    
    4,498.5
    
    
    
    2.3
    %6. Investment and finance
    
    
    2,169.3
    
    
    
    4.3
    %
    
    
    2,422.9
    
    
    
    3.2
    %
    
    
    204.0
    
    
    
    0.2
    %
    
    
    2,188.1
    
    
    
    1.5
    %
    
    
    4,491.3
    
    
    
    2.3
    %7. Iron and steel
    
    
    943.1
    
    
    
    1.9
    %
    
    
    1,191.5
    
    
    
    1.6
    %
    
    
    2,456.0
    
    
    
    2.3
    %
    
    
    2,270.2
    
    
    
    1.5
    %
    
    
    4,258.8
    
    
    
    2.1
    %8. Telecom
    
    
    487.7
    
    
    
    1.0
    %
    
    
    1,393.6
    
    
    
    1.9
    %
    
    
    2,490.1
    
    
    
    2.3
    %
    
    
    921.0
    
    
    
    0.6
    %
    
    
    4,054.0
    
    
    
    2.0
    %9. Drugs and pharmaceuticals
    
    
    1,003.0
    
    
    
    2.0
    %
    
    
    1,734.4
    
    
    
    2.3
    %
    
    
    1,853.4
    
    
    
    1.7
    %
    
    
    2,358.0
    
    
    
    1.6
    %
    
    
    4,014.0
    
    
    
    2.0
    %10. Others
    
    
    39,980.9
    
    
    
    79.9
    %
    
    
    54,316.7
    
    
    
    72.8
    %
    
    
    77,930.7
    
    
    
    71.8
    %
    
    
    112,992.3
    
    
    
    75.1
    %
    
    
    139,198.5
    
    
    
    70.3
    %11. Total
    
    Rs.
    50,022.0
    
    
    
    100.0
    %
    
    Rs.
    74,581.7
    
    
    
    100.0
    %
    
    Rs.
    108,464.7
    
    
    
    100.0
    %
    
    Rs.
    150,422.0
    
    
    
    100.0
    %
    
    Rs.
    198,216.9
    
    
    
    100.0
    %
 50




---



##### Table of Contents



Our ten largest funded exposures consisting of loans, investments
including credit substitutes at March 31, 2004 totaled approximately Rs. 33.3
billion and represented approximately 16.8% of our total gross loan and credit
substitutes. The largest group of companies under the same management control
accounted for approximately 0.7% of our loans and credit substitutes. Directed Lending The RBI has established guidelines requiring Indian banks to lend 40% of
their net bank credit to certain specified sectors called priority sectors.
Priority sectors include small-scale industries, the agricultural sector, food
and agro-based industries and small businesses. See Information About
IndiaSupervision and Regulation. We are required to comply with the priority sector lending requirements at
the last reporting Friday of each fiscal year, a date specified by RBI for
reporting. Apart from our loans to the specified sectors outlined above, we may
invest in bonds of specified institutions to meet our mandated lending
requirements. Any shortfall in the amount required to be lent to the priority
sectors may be required to be deposited with Indian development banks like the
National Bank for Agriculture and Rural Development and the Small Industries
Development Bank of India. These deposits have a maturity of up to five years
and carry interest rates lower than market rates. These deposits also satisfy
part of our priority sector requirement. The following table sets forth, for the periods indicated, our directed lending
broken down by sector. At March 31,2000
    
    2001
    
    2002
    
    2003
    
    2004(in millions)Directed lending:Agriculture
    
    Rs.
    1,630.3
    
    
    Rs.
    1,206.8
    
    
    Rs.
    1,493.4
    
    
    Rs.
    8,858.8
    
    
    Rs.
    13,220.2Small scale industries
    
    
    3,249.2
    
    
    
    1,772.8
    
    
    
    2,730.5
    
    
    
    2,949.6
    
    
    
    4,370.6Other
    
    
    978.6
    
    
    
    3,788.6
    
    
    
    3,509.2
    
    
    
    2,372.6
    
    
    
    7,633.3Total directed lending
    
    Rs.
    5,858.1
    
    
    Rs.
    6,768.2
    
    
    Rs.
    7,733.1
    
    
    Rs.
    14,181.0
    
    
    Rs.
    25,224.1
 51




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##### Table of Contents



Non-Performing Loans The following discussion of non-performing loans is based on US GAAP. For
classification of non-performing loans under Indian regulatory requirements,
see Information About IndiaSupervision and Regulation. The Indian economy has expanded steadily during the past three years with
GDP growth of, 5.4% in fiscal 2002, 4.4% in fiscal 2003 and 8.1% in fiscal
2004. Since 1991, the government of India has pursued a policy of gradual
liberalization and deregulation. Indian corporations have had to respond to
these pressures through a process of restructuring and repositioning. This
restructuring process is taking place in several industries, primarily in
sectors where many small, unprofitable manufacturing facilities have existed,
such as the iron and steel and textiles industries. This led to a decline in
the operating performance of some Indian corporations and the impairment of
related loan assets in the financial system, including some of our assets. The
decline in certain sectors of the Indian economy has been offset by growth in
segments such as financial services and information technology. At March 31, 2004, our gross non-performing loans as a percentage of gross
loan assets was 1.7% and our gross non-performing loans net of valuation
allowances as a percentage of net loan assets was 0.2%. We have made total
specific valuation allowances for 91.0% of gross non-performing loans. These
allowances are based on the expected realization of cash flows from these
assets and from the underlying collateral. All of our non-performing loans are
rupee-denominated. At March 31, 2004, we had four non-performing loans in the
directed lending sector. Non-performing loans to the directed lending sector as
a percentage of gross loans was 0.1%. The following tables set forth, for the periods indicated, information
about our gross non-performing loan portfolio. At March 31,2000
    
    2001
    
    2002
    
    2003
    
    2004(in millions, except percentages)Non-performing loans:Working capital loans
    
    Rs.
    1,126.7
    
    
    Rs.
    727.6
    
    
    Rs.
    993.9
    
    
    Rs.
    1,455.6
    
    
    Rs.
    1,867.8Term loans
    
    
    401.1
    
    
    
    609.5
    
    
    
    785.7
    
    
    
    810.2
    
    
    
    721.3Investment in finance leases
    
    
    77.4
    
    
    
    65.9
    
    
    
    39.6
    
    
    
    26.9
    
    
    
    Retail loans
    
    
    3.2
    
    
    
    93.3
    
    
    
    140.7
    
    
    
    74.9
    
    
    
    403.5Gross non-performing loans
    
    Rs.
    1,608.4
    
    
    Rs.
    1,496.3
    
    
    Rs.
    1,959.9
    
    
    Rs.
    2,367.6
    
    
    Rs.
    2,992.6Specific valuation allowances
    
    Rs.
    763.8
    
    
    Rs.
    1,010.8
    
    
    Rs.
    1,423.5
    
    
    Rs.
    1,684.3
    
    
    
    2,722.7Unallocated valuation allowances
    
    
    143.5
    
    
    
    143.5
    
    
    
    182.4
    
    
    
    182.4
    
    
    
    589.2Non-performing loans net of specific valuation allowance
    
    
    844.6
    
    
    
    485.5
    
    
    
    536.4
    
    
    
    683.3
    
    
    
    269.9Gross loan assets
    
    Rs.
    36,965.8
    
    
    Rs.
    52,237.5
    
    
    Rs.
    73,134.8
    
    
    Rs.
    120,166.6
    
    
    Rs.
    181,175.4Net loan assets
    
    
    36,058.5
    
    
    
    51,083.2
    
    
    
    71,528.9
    
    
    
    118,299.9
    
    
    Rs.
    177,681.1Gross non-performing loans as a percentage of gross loans
    
    
    4.35
    %
    
    
    2.86
    %
    
    
    2.68
    %
    
    
    1.97
    %
    
    
    1.65
    %Non-performing loans net of specific valuation allowance as a
percentage of net loan assets
    
    
    2.34
    %
    
    
    0.95
    %
    
    
    0.74
    %
    
    
    0.58
    %
    
    
    0.15
    %Specific valuation allowance as a percentage of gross non-
performing loans
    
    
    47.49
    %
    
    
    67.55
    %
    
    
    72.63
    %
    
    
    71.14
    %
    
    
    90.98
    %Total valuation allowance as a percentage of gross
non-performing
loans
    
    
    56.41
    %
    
    
    77.14
    %
    
    
    81.94
    %
    
    
    78.84
    %
    
    
    116.76
    %
 Recognition of Non-Performing Loans We classify our loan portfolio into loans that are performing and loans
that are non-performing or impaired. We consider a loan to be performing when no principal or interest payment
is one quarter or more past due and where we expect to recover all amounts due
to us. We have analyzed our gross loans into their performance status as follows: At March 31,2000
    
    2001
    
    2002
    
    2003
    
    2004(in millions)Performing
    
    Rs.
    35,357.4
    
    
    Rs.
    50,741.2
    
    
    Rs.
    71,174.9
    
    
    Rs.
    117,799.0
    
    
    Rs.
    178,182.8Non-performing or impaired:On accrual status
    
    
    481.4
    
    
    
    235.4
    
    
    
    61.6
    
    
    
    51.9On non-accrual status
    
    
    1,127.0
    
    
    
    1,260.9
    
    
    
    1,898.3
    
    
    
    2,315.7
    
    
    
    2,992.6Total Non-performing or impaired
    
    
    1,608.4
    
    
    
    1,496.3
    
    
    
    1,959.9
    
    
    
    2,367.6
    
    
    
    2,992.6Total
    
    Rs.
    36,965.8
    
    
    Rs.
    52,237.5
    
    
    Rs.
    73,134.8
    
    
    Rs.
    120,166.6
    
    
    Rs.
    181,175.4
 Non-performing or impaired loans consist of loans that are on accrual
status as well as loans that have been placed on non-accrual status. We place loans on non-accrual status when interest or principal payments
are one quarter past due, at which time no further interest is accrued and
overdue interest not collected is reversed. We make specific allowances for all
loans on non-accrual status based on the loss we expect to incur for each such
loan. 52




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##### Table of Contents



We also identify other loans as non-performing or impaired even when
principal or interest payments are less than one quarter past due but where we
believe recovery of all principal and interest amounts is doubtful. We make
specific and unallocated allowances for these loans based on our estimate of
losses inherent in the loan portfolio. Our policy of placing loans on non-accrual status when interest or
principal payments are 90 days or more overdue is consistent with what is
required by the RBI and, we believe, is the general market practice in India.
The RBI had announced that beginning March 31, 2004, Indian banks will be
required to follow a 90-day non-accrual standard. Our methodology for determining specific and unallocated allowances for
non-performing loans is discussed below separately for each category of loan. Commercial Loans.We make specific allowances for credit losses for all
commercial loans on non-accrual status. We also make specific allowances for
commercial loans that are on accrual status, when we consider these loans to be
impaired despite being less than one quarter past due. We identify commercial loans on accrual status as being impaired based on
our assessment of each wholesale banking customer, taking into account
quantitative and qualitative factors such as payment status, adverse situations
that may affect the borrowers ability to repay, the value of any collateral
held, our view of the industry and general economic conditions. Impairment is measured for each non-performing wholesale banking customer
for the aggregate of all commercial loans made to that customer. We establish a
specific allowance for the difference between the carrying value of the loan
and the present value of expected future cash flows including the net
realizable value of any collateral, discounted at the loans effective interest
rate. We do not establish a specific allowance for loans where the fair value
of any collateral we hold exceeds the outstanding loan balance. Commercial loans that experience insignificant payment delays and payment
shortfalls are generally not classified as impaired but are placed on a
surveillance watch list and closely monitored for deterioration. We determine
the significance of payment delays and payment shortfalls on a case-by-case
basis, taking into consideration all of the circumstances surrounding the loan
and the borrower, including the length of the delay, the reasons for the delay,
the borrowers prior payment record and the amount of the shortfall in relation
to the principal and interest owed. Retail Loans.Retail loans principally consist of loans against
securities, auto loans and other personal loans. We make specific allowances
for all retail loans that are on non-accrual status where the fair value of the
collateral is less than the outstanding amount of the loan. We also make
unallocated allowances for retail loans that are on an accrual status, which
consist of loans that are less than one quarter past due. Our retail loan
portfolios comprise groups of a larger number of small value homogeneous loans.
Our unallocated allowance is based on our estimate of the expected amount of
losses inherent in each retail loan portfolio. Our specific and unallocated allowances are determined separately for each
product category, as follows: Loans Against Securities.For loans made where marketable securities are
held as collateral, we monitor margin positions of customers based on the
market price of the underlying collateral. To the extent that declines in the
market value of the collateral cause our margin to be eroded, we generally call
for additional margin to be deposited by the customer to restore the loan to
value ratio to an acceptable level. In the event that the customer does not
meet such margin calls within a short time frame, we give notice of our intent
to liquidate the collateral. After the notice period, subject to market
conditions, we sell the underlying collateral. We establish a specific
allowance for any shortfall between the proceeds realized and the carrying
value of the loan. At each reporting date, we stratify our loans against securities portfolio
based on loan to value ratios computed using current market prices for the
collateral. The probability of loss increases with increased loan to value
ratios as our margin gets eroded in such instances. For each loan to value
strata which is above an acceptable loan to value ratio, we make an unallocated
allowance which reflects the estimated shortfall between the aggregate amount
of loans and the net realizable value of the collateral held for the loans in
such strata. We estimate our loss factors based on historical delinquency rates
and losses we have incurred on this portfolio. Auto Loans.Our auto loans are secured by a pledge of the underlying
vehicle that has been financed. In the event of a default, we initiate a
collection process which includes repossession and sale of the vehicle. We establish a specific allowance for the entire balance outstanding for
all auto loans that are on non-accrual status, which is when the loan is past
due for one quarter or more. We also establish a specific allowance for all
auto loans where we have repossessed and sold the vehicle, based on the
difference between the carrying value of the loan and the realized value of the
collateral. 53




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##### Table of Contents



We establish an unallocated allowance for auto loans that are past due for
less than one quarter. We do this by stratifying such loans based on the number
of days past due. We establish an unallocated allowance for each strata which
reflects our estimate of the shortfall between the aggregate carrying value of
the loans in that strata and the net realizable value of the collateral. Our
estimate of the expected loss for each strata is based on historical losses we
have observed. Other Personal Loans.Our other personal loans consist primarily of
unsecured installment loans. We establish a specific allowance for the entire
balance outstanding for all personal loans that are on non-accrual status,
which is when the loan is past due for one quarter or more. We establish an unallocated allowance for personal loans that are past due
for less than one quarters. We do this by stratifying such loans based on the
number of days past due. We establish an unallocated allowance for each strata
which reflects our estimate of the amount of loss based on historical losses we
have observed. Lease Financing. Aggregate rentals on finance lease transactions, net of
related unearned income and security deposits collected from the lessee, are
evaluated for impairment on the same basis as for commercial loans. Unearned
income is recognized as income using the internal rate of return method over
the primary period of the lease. Income on non-performing leases is recognized
on the same basis as for non-performing
commercial loans. Credit Cards.Delinquency in our credit cards business is measured,
tracked and managed on also Days Past Due (DPD) basis with reference to the
original billing date for payment. An account is considered past due or
delinquent when a contractually agreed payment is not received on a date
mutually agreed between the cardholder and the Bank. We create a 100% provision
for an account when the delinquency status reaches 120 days past due. Commercial Vehicle and Construction equipment finance. Our
commercial vehicle loans are secured by a pledge of the underlying assets
financed. In the event of default a collection process is initiated which
includes repossessions and sale. We create an allowance of 100% in cases where
the amount is past 120 days due. 54




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##### Table of Contents



Analysis of Non-Performing Loans and Credit Substitutes by Industry Sector The following table sets forth, for the periods indicated, our
non-performing loans by borrowers industry or economic activity and as a
percentage of our loans in the respective industry or economic activity sector. At March 31,2000
    
    2001
    
    2002
    
    2003
    
    2004Non-
    
    
    
    
    
    
    
    
    
    Non-
    
    
    
    
    
    
    
    
    
    Non-
    
    
    
    
    
    
    
    
    
    Non-
    
    
    
    
    
    
    
    
    
    Non-Gross
    
    performing
    
    
    
    
    
    Gross
    
    performing
    
    
    
    
    
    Gross
    
    performing
    
    
    
    
    
    Gross
    
    Performing
    
    
    
    
    
    Gross
    
    PerformingLoans
    
    loans
    
    %
    
    loans
    
    loans
    
    %
    
    loans
    
    loans
    
    %
    
    loans
    
    Loans
    
    %
    
    loans
    
    Loans
    
    %(in millions, except percentages)Individual
advances
    
    Rs.
    6,305.0
    
    
    Rs.
    3.2
    
    
    
    0.1
    %
    
    Rs.
    8,447.1
    
    
    Rs.
    10.1
    
    
    
    0.1
    %
    
    Rs.
    14,301.3
    
    
    Rs.
    134.1
    
    
    
    0.9
    %
    
    Rs.
    31,631.4
    
    
    Rs.
    74.9
    
    
    
    0.2
    %
    
    Rs.
    73,251.6
    
    
    Rs.
    403.5
    
    
    
    0.6
    %Distilleries
    
    
    252.6
    
    
    
    208.7
    
    
    
    82.6
    
    
    
    196.0
    
    
    
    154.0
    
    
    
    78.6
    
    
    
    147.6
    
    
    
    147.6
    
    
    
    100.0
    
    
    
    191.0
    
    
    
    142.1
    
    
    
    74.4Textiles
    
    
    857.8
    
    
    
    326.5
    
    
    
    38.1
    
    
    
    641.9
    
    
    
    331.4
    
    
    
    51.6
    
    
    
    457.3
    
    
    
    321.4
    
    
    
    70.3
    
    
    
    698.5
    
    
    
    372.0
    
    
    
    53.7
    
    
    
    1,327.6
    
    
    
    356.2
    
    
    
    26.8Manufacture of
rubber and
rubber
products
    
    
    42.0
    
    
    
    39.4
    
    
    
    93.8
    
    
    
    279.6
    
    
    
    39.4
    
    
    
    14.1Fertilizers
    
    
    1,240.0
    
    
    
    28.1
    
    
    
    2.3
    
    
    
    2,540.5
    
    
    
    28.3
    
    
    
    1.1
    
    
    
    1,706.2
    
    
    
    72.8
    
    
    
    4.3
    
    
    
    3,760.4
    
    
    
    30.2
    
    
    
    0.8
    
    
    
    1,974.7
    
    
    
    22.6
    
    
    
    1.1Drugs and
pharmaceuticals
    
    
    704.2
    
    
    
    35.4
    
    
    
    5.0
    
    
    
    877.1
    
    
    
    36.5
    
    
    
    4.2
    
    
    
    1,442.1
    
    
    
    133.8
    
    
    
    9.3
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,039.5
    
    
    
    40.0
    
    
    
    1.3Petrochemicals
    
    
    956.9
    
    
    
    0.6
    
    
    
    0.1Iron and steel
    
    
    846.1
    
    
    
    209.7
    
    
    
    24.8
    
    
    
    1,072.4
    
    
    
    207.4
    
    
    
    19.3
    
    
    
    937.6
    
    
    
    440.1
    
    
    
    46.9
    
    
    
    1,141.8
    
    
    
    437.3
    
    
    
    38.0
    
    
    
    3,616.6
    
    
    
    440.4
    
    
    
    12.2Manufacture of
metal
products
    
    
    307.4
    
    
    
    61.6
    
    
    
    20.0
    
    
    
    298.2
    
    
    
    21.7
    
    
    
    7.3
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    897.9
    
    
    
    3.4
    
    
    
    0.3Heavy Engineering
    
    
    544.1
    
    
    
    277.1
    
    
    
    50.9
    
    
    
    2,533.4
    
    
    
    184.7
    
    
    
    7.3
    
    
    
    1,640.2
    
    
    
    147.9
    
    
    
    9.0
    
    
    
    2,581.3
    
    
    
    56.1
    
    
    
    2.2
    
    
    
    6,050.0
    
    
    
    56.1
    
    
    
    0.9Electrical
machinery
    
    
    765.2
    
    
    
    50.0
    
    
    
    6.5
    
    
    
    1,121.9
    
    
    
    49.4
    
    
    
    4.4
    
    
    
    1,853.4
    
    
    
    66.2
    
    
    
    3.6
    
    
    
    1,430.8
    
    
    
    76.1
    
    
    
    5.3
    
    
    
    1,376.6
    
    
    
    76.1
    
    
    
    5.5Automotive
manufacturers
    
    
    672.8
    
    
    
    39.3
    
    
    
    5.8
    
    
    
    1,831.9
    
    
    
    41.7
    
    
    
    2.3
    
    
    
    8,856.0
    
    
    
    41.9
    
    
    
    0.5
    
    
    
    12,096.3
    
    
    
    642.9
    
    
    
    5.3
    
    
    
    18,541.1
    
    
    
    653.7
    
    
    
    3.5Miscellaneous
industries
    
    
    1,259.4
    
    
    
    21.9
    
    
    
    1.7
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    675.7
    
    
    
    5.6
    
    
    
    0.7Construction
    
    
    101.3
    
    
    
    24.7
    
    
    
    24.3
    
    
    
    651.3
    
    
    
    23.5
    
    
    
    3.6
    
    
    
    67.6
    
    
    
    23.5
    
    
    
    34.9
    
    
    
    207.5
    
    
    
    23.4
    
    
    
    11..3
    
    
    
    27.5
    
    
    
    21.9
    
    
    
    79.6Diamond, gems
and jewellery
exports
    
    
    862.6
    
    
    
    156.0
    
    
    
    18.1
    
    
    
    862.6
    
    
    
    129.3
    
    
    
    15.0
    
    
    
    1,029.4
    
    
    
    131.5
    
    
    
    12.8
    
    
    
    1,343.4
    
    
    
    130.9
    
    
    
    9.7
    
    
    
    1,473.8
    
    
    
    129.1
    
    
    
    8.8Other wholesale
trade
    
    
    485.4
    
    
    
    45.9
    
    
    
    9.5
    
    
    
    517.0
    
    
    
    43.1
    
    
    
    8.3
    
    
    
    1,174.2
    
    
    
    46.2
    
    
    
    3.9
    
    
    
    1,882.8
    
    
    
    43.4
    
    
    
    2.3
    
    
    
    2,526.6
    
    
    
    40.9
    
    
    
    1.6Share brokers
    
    
    2,939.0
    
    
    
    2.3
    
    
    
    0.1
    
    
    
    1,748.0
    
    
    
    105.0
    
    
    
    6.0
    
    
    
    639.5
    
    
    
    7.4
    
    
    
    1.2
    
    
    
    823.9
    
    
    
    6.7
    
    
    
    0.8Investment and
finance and
leasing
    
    
    769.2
    
    
    
    46.7
    
    
    
    6.1
    
    
    
    777.0
    
    
    
    40.7
    
    
    
    5.2
    
    
    
    79.2
    
    
    
    40.7
    
    
    
    57.9Other chemicals
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    455.2
    
    
    
    61.6
    
    
    
    13.5
    
    
    
    469.1
    
    
    
    51.9
    
    
    
    11.1Electricity
generation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    486.0
    
    
    
    26.8
    
    
    
    5.5
    
    
    
    1,577.1
    
    
    
    26.8
    
    
    
    1.7
    
    
    
    759.5
    
    
    
    26.8
    
    
    
    3.5Activities allied
to agriculture
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15.2
    
    
    
    15.2
    
    
    
    100
    
    
    
    216.5
    
    
    
    16.4
    
    
    
    7.6Plastic and plastic
products
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15.9
    
    
    
    3.1
    
    
    
    19.5
    
    
    
    26.9
    
    
    
    3.2
    
    
    
    11.9Electronics
    
    
    737.4
    
    
    
    26.9
    
    
    
    3.6
    
    
    
    867.7
    
    
    
    50.1
    
    
    
    5.8
    
    
    
    960.8
    
    
    
    23.5
    
    
    
    2.5
    
    
    
    1,754.6
    
    
    
    207.8
    
    
    
    11.8
    
    
    
    2,261.1
    
    
    
    639.1
    
    
    
    28.3Glass and glass
products
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    135.9
    
    
    
    11.0
    
    
    
    8.1
    
    
    
    419.8
    
    
    
    9.1
    
    
    
    2.2Mfg of Dairy
products
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,091.0
    
    
    
    3.4
    
    
    
    0.1
    
    
    
    3,144.4
    
    
    
    3.4
    
    
    
    0.1Paper and paper
products
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    806.6
    
    
    
    70.3
    
    
    
    8.7Retail trade
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,484.8
    
    
    
    2.1
    
    
    
    0.1
    
    
    
    200.1
    
    
    
    3.4
    
    
    
    1.7Total
    
    
    
    
    
    Rs.
    1,608.4
    
    
    
    
    
    
    
    
    
    
    Rs.
    1,496.3
    
    
    
    
    
    
    
    
    
    
    Rs.
    1,959.9
    
    
    
    
    
    
    
    
    
    
    Rs.
    2,367.6
    
    
    
    
    
    
    
    
    
    
    Rs.
    2,992.6Specific allowance
for credit
losses
    
    
    
    
    
    Rs.
    763.8
    
    
    
    
    
    
    
    
    
    
    Rs.
    1,010.8
    
    
    
    
    
    
    
    
    
    
    Rs.
    1,423.5
    
    
    
    
    
    
    
    
    
    
    Rs.
    1,684.3
    
    
    
    
    
    
    
    
    
    
    Rs.
    2,722.7Non-performing
loans, net
    
    
    
    
    
    Rs.
    844.6
    
    
    
    
    
    
    
    
    
    
    Rs.
    485.5
    
    
    
    
    
    
    
    
    
    
    Rs.
    536.4
    
    
    
    
    
    
    
    
    
    
    Rs.
    683.3
    
    
    
    
    
    
    
    
    
    
    Rs.
    269.9
 Our gross non-performing loans as a percentage of gross loans in the
respective industries was the highest in the textiles, construction and
electronics industries. Electronics.The consumer electronics industry has been exposed to
severe competition during the last few years due to the advent of foreign
competition. Competition has amplified the pressure on oil prices, inflated
selling / distribution costs and paced margins, even though the demand growth
has been steady. In such a scenario, players who are cost-competitive and able
to implement innovative product and marketing strategies have managed to stay
ahead of the pace. In the medium to long term, this is expected to result in
further consolidation in the industry. Construction.In India, construction is the largest economic activity
after agriculture, accounting for 11 per cent of GDP. During the next five
years, the industry is expected to grow at a CAGR of over 10 per cent, with
infrastructure and housing sectors being the main drivers of growth.
Favourable government policies are expected to encourage investment in this
sector. Textiles.Over the next five years, the textile industry in India is
expected to regain its cost-competitiveness and strengthen Indias growing
dominance of world trade in cotton textiles. Dismantling of quotas post
January 2005 is expected to enhance this process significantly. The growth
will thus be mainly driven by exports. 55




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Top Ten Non-Performing Loans At March 31, 2004, we had 35 wholesale non-performing loans outstanding,
of which the top ten represented 75.5% of our gross non-performing loans, 76.4%
of our net non-performing loans and 1.5% of our gross loan portfolio. The following table sets forth, for the period indicated, information
regarding our ten largest non-performing loans. The table also sets forth the
value (as set forth on the borrowers books) of collateral securing the loan.
However, the net realizable value of such collateral may be substantially less
or may be zero. At March 31, 2004Principaloutstanding net
    
    
    
    
    
    CurrentlyType of
    
    Gross
    
    of allowance
    
    
    
    
    
    servicingbanking
    
    principal
    
    for credit
    
    Collateral-
    
    all interestIndustry
    
    arrangement
    
    outstanding
    
    losses
    
    our share
    
    payments(1)(in millions)Borrower A
    
    Electronics
    
    Multiple
    
    Rs.
    657.1
    
    
    
    44.1
    
    
    
    44.1
    
    
    NoBorrower B
    
    Automotive manufacturers
    
    Multiple
    
    
    642.9
    
    
    
    
    
    
    
    
    
    
    NoBorrower C
    
    Iron and steel
    
    Consortium
    
    
    296.8
    
    
    
    80.3
    
    
    
    80.3
    
    
    NoBorrower D
    
    Diamond gems and jewellery export
    
    Consortium
    
    
    166.0
    
    
    
    7.7
    
    
    
    39.8
    
    
    NoBorrower E
    
    Textiles
    
    Consortium
    
    
    146.2
    
    
    
    
    
    
    
    
    
    
    NoBorrower F
    
    Iron and steel
    
    Consortium
    
    
    129.9
    
    
    
    
    
    
    
    
    
    
    NoBorrower G
    
    Iron and steel
    
    Consortium
    
    
    110.5
    
    
    
    
    
    
    
    
    
    
    NoBorrower H
    
    Textiles
    
    Multiple
    
    
    99.5
    
    
    
    
    
    
    
    
    
    
    NoBorrower I
    
    Electrical machinery
    
    Consortium
    
    
    76.4
    
    
    
    
    
    
    
    
    
    
    NoBorrower J
    
    Paper and paper products
    
    Multiple
    
    
    70.3
    
    
    
    
    
    
    
    
    
    
    NoTotal
    
    
    
    
    
    Rs.
    2,395.6
    
    
    Rs.
    132.2
    
    
    Rs.
    164.2
   (1)
    
    We classify loans as non-performing once we determine that the payment of
interest or principal is doubtful. Since the classification occurs even
before the borrower stops paying interest and principal, some of our
non-performing loans other than our ten largest non performing loans are
currently servicing all interest payments. 56




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Interest Foregone Interest foregone is the interest due on non-performing loans that has not
been accrued in our books of accounts. The following table sets forth, for the
periods indicated, the cumulative amount of interest foregone on existing non-
performing loans. Interest foregone(in millions)Fiscal 2000
    
    
    86.4Fiscal 2001
    
    
    202.2Fiscal 2002
    
    
    325.5Fiscal 2003
    
    
    334.0Fiscal 2004
    
    
    274.2
 Restructuring of Non-Performing Loans Our non-performing loans are restructured on a case-by-case basis after
our management has determined that restructuring is the best means of realizing
repayment of the loan. These loans continue to be on a non-accrual basis and
will be reclassified as performing loans only after sustained performance under
the loans renegotiated terms for at least a period of one year. We may also be compulsorily required to restructure loans if decided by a
majority of the lenders under a Corporate Debt Restructuring system in line
with RBI guidelines. The following table sets forth, for the periods indicated, our
non-performing loans that have been restructured through rescheduling of
principal repayments and deferral or waiver of interest. At March 31,2000
    
    2001
    
    2002
    
    2003
    
    2004(in millions, except percentages)Gross restructured loans
    
    Rs.
    370.5
    
    
    Rs.
    502.1
    
    
    Rs.
    172.2
    
    
    Rs.
    2.7
    
    
    
    Allowance for credit losses
    
    
    227.4
    
    
    
    320.5
    
    
    
    119.3
    
    
    
    2.7
    
    
    
    Net restructured loans
    
    
    143.1
    
    
    
    181.6
    
    
    
    52.9
    
    
    
    
    
    
    
    Gross restructured loans as a percentage of gross non-
performing loans
    
    
    23.0
    %
    
    
    33.6
    %
    
    
    8.8
    %
    
    
    0.1
    %
    
    
    Net restructured loans as a percentage of net non-performing loans
    
    
    16.9
    %
    
    
    37.4
    %
    
    
    2.7
    %
    
    
    
    
    
    
    
 There were certain loans where the restructuring done during the earlier
years has been withdrawn during the fiscal 2004. Non-Performing Loan Strategy Our non-performing loan strategy is focused on early problem recognition
and active remedial management efforts. As we are involved primarily in working
capital finance, we track our borrowers performance and liquidity on an
ongoing basis. This enables us to define remedial strategies proactively and
manage our exposures to industries or customers that we believe are displaying
deteriorating credit trends. Relationship managers drive the recovery effort,
together with strong support from the credit group from the corporate office in
Mumbai. Recovery is pursued vigorously through the legal process, enforcement
of collateral, negotiated one-time settlements and other similar strategies.
The particular strategy pursued depends upon the level of cooperation of the
borrower and on our assessment of the borrowers management integrity and
long-term liability. 57




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Allowance for Credit Losses The following table sets forth, for the periods indicated, movements in
our allowance for credit losses. For the years ended March 31,2000
    
    2001
    
    2002
    
    2003
    
    2004(in millions)Specific allowance for credit losses
at the beginning of the year
    
    Rs.
    105.8
    
    
    Rs.
    763.8
    
    
    Rs.
    1,010.8
    
    
    Rs.
    1,423.5
    
    
    Rs.
    1684.3Additions to allowance for credit losses for the year:Working capital
    
    
    191.2
    
    
    
    201.9
    
    
    
    366.5
    
    
    
    615.6
    
    
    
    1,476.1Term loans
    
    
    154.3
    
    
    
    135.2
    
    
    
    253.8
    
    
    
    327.5
    
    
    
    578.4Leasing finance
    
    
    20.3
    
    
    
    2.5
    
    
    
    
    
    
    
    
    
    
    
    Less allowances no longer required on account of
recoveries
    
    
    (53.4
    )
    
    
    (92.6
    )
    
    
    (207.6
    )
    
    
    (201.6
    )
    
    
    (300.3
    )Net expense for additions to specific allowance for
credit
losses
    
    
    312.4
    
    
    
    247.0
    
    
    
    412.7
    
    
    
    741.5
    
    
    
    1,754.2Transferred on acquisition of Times Bank Limited:Working capital
    
    
    243.9
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Term loans
    
    
    101.7
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Provision no longer required on account of write
offs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (480.7
    )
    
    
    (715.8
    )Specific allowance for credit losses
at the end of fiscal year
    
    
    763.8
    
    
    
    1,010.8
    
    
    
    1,423.5
    
    
    
    1,684.3
    
    
    
    2,722.7Unallocated allowance for credit losses
at the beginning of the year
    
    
    
    
    
    
    143.5
    
    
    
    143.5
    
    
    
    182.4
    
    
    
    182.4Additions during the year
    
    
    143.5
    
    
    
    
    
    
    
    38.9
    
    
    
    
    
    
    
    589.2Unallocated allowance for credit losses
at the end of the year
    
    
    143.5
    
    
    
    143.5
    
    
    
    182.4
    
    
    
    182.4
    
    
    
    771.6Total allowance for credit losses
at the beginning of the year
    
    
    105.8
    
    
    
    907.3
    
    
    
    1,154.3
    
    
    
    1,605.9
    
    
    
    1,866.7Provision no longer required on account of writeoffs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (480.7
    )
    
    
    (715.8
    )Net addition to total allowance for
the year charged to expense
    
    
    455.9
    
    
    
    247.0
    
    
    
    451.6
    
    
    
    741.5
    
    
    
    2,343.4Transferred on acquisition of Times Bank Limited
    
    
    345.6
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total allowance for credit losses at the end of the year
    
    Rs.
    907.3
    
    
    Rs.
    1,154.3
    
    
    Rs.
    1,605.9
    
    
    Rs.
    1,866.7
    
    
    Rs.
    3,494.3
 The following table sets forth the allocation of the total allowance for
credit losses at March 31, 2004: At March 31, 2004Commercial
    
    Rs.
    2,377.1Retail
    
    
    345.6Unallocated
    
    
    771.6Allowance for credit losses
    
    Rs.
    3,494.3
 58




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##### Table of Contents



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 report. The following discussion is based on our
audited financial statements, which have been prepared in accordance with US
GAAP, and on information publicly available from the RBI and other sources. Our
fiscal year ends on March 31 of each year so all references to a particular
fiscal year are to the twelve months ended March 31 of that year. Introduction Overview We are a leading private sector bank and financial services company in
India. Our principal business activities are wholesale banking, retail banking
and treasury operations. 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 retail banking division provides a variety
of deposit products as well as loans, bill payment services, credit cards,
debit cards, third party distribution, investment advisory services, card and
ATM acquiring transactions and depositary services. Our treasury group manages
our balance sheet and provides foreign exchange and derivative products for our
clients. Our revenue consists of interest and dividend revenue, which comes from
financing products, investments and other sources, as well as non-interest
revenue, which comes primarily from our transactional services, sales of
securities and foreign exchange and derivative transactions, trade finance
offerings, and distribution services. Our interest and dividend revenue is
primarily generated by interest on loans, securities and other activities. We
offer working capital and term loans, and also lend to retail customers. The
primary components of our securities portfolio are statutory liquidity ratio
investments, credit substitutes and other securities. 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 from other activities consists primarily
of interest from interbank 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 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 at zero
cost. 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 documentary credits and bank guarantees, retail banking services, cash
management services and capital market services. 59




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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 due to huge
inflows of external money, consequent appreciation of the Indian rupee to the
US dollar and the RBIs policy of assuring adequate liquidity to the banking
system and generally lowering the rate at which it lends to Indian banks. Critical Accounting Policies Loan Loss Allowances Our allowance for credit losses consists of specific and unallocated
allowances. Our allowance is an estimate and is therefore inherently
subjective. Our estimate is susceptible to significant revision as more
information becomes available. We establish specific allowances for all loans that are past due for one
quarter or more. In addition, we establish specific and unallocated allowances
for loans that are past due for less than one quarter where we do not expect to
recover all principal and interest amounts due to us. For our commercial loans, we have established specific allowances for
all loans that are past due for one quarter. We have also established
specific allowances for loans past due for less than one quarter that are
considered impaired, based on an assessment of each wholesale banking
customer which takes into account qualitative and quantitative factors. With
effect from April 1, 2003, the Bank also established an unallocated allowance
for non homogenous standard loans based on the overall
portfolio quality, asset growth, economic condition and other risk factors. For our loans against securities portfolio, we have established specific
allowances for all loans that are past due for one quarter and for loans where
we have liquidated the collateral. In addition, we have provided an unallocated
allowance for loans past due for less than one quarter where the loan to value
ratio is not acceptable. For our auto loans and commercial vehicle loans, we have established
specific allowances for the entire balance of all loans that are past due for
more than one quarter and for loans where we have repossessed and sold the
collateral. In addition, we have established an unallocated allowance for loans
past due for less than one quarter based on the number of days overdue and
historical loss rates. For our other personal loans including credit cards receivables, we have
established specific allowances for the entire balance of all loans that are
past due for more than one quarter. In addition we have established an
unallocated allowance for loans past due for less than one quarter based on the
number of days overdue and historical loss rates. 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 in respect of loans placed on non-accrual status, where it is recognized
when received. Prior to March 31, 2004 loans were generally placed on
non-accrual status when they were past due for more than two quarters. From
March 31, 2004, loans are placed on non-accrual status when they are past due
for more than one quarter. The Bank generally does not charge up front loan
origination fees. Nominal application fees are charged which 60




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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 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 We account for our investments in securities in accordance with SFAS No.
115, Accounting for Certain Investments in Debt and Equity Securities. SFAS No.
115 requires that investments in debt and equity securities be reported at fair
value, except for debt securities classified as held to maturity securities,
which are reported at amortized cost. Securities that are held principally for resale in the near term are
recorded in the trading assets account at fair value, with changes in fair
value recorded in earnings. Debt securities which management has the positive intent and ability to
hold to maturity are classified as held to maturity and recorded at amortized
cost. Securities with readily determinable fair values that are not classified
as held to maturity or trading are classified as available for sale and
recorded at fair value. 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. Declines in the fair values of held to maturity and available for sale
securities below their cost that are other than temporary are reflected in
earnings as realized losses, based on managements best estimate of the value
of the investment. Investments consist of government securities, other debt and equity
securities, asset and mortgage backed securities and credit substitute
securities. Credit substitute securities 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 for loans, and we bear the same customer risk as
we do for loans extended to those customers. Additionally the yield and
maturity terms are generally directly negotiated by us with the issuer. Fair
values for asset and mortgage backed securities and credit substitute
securities are estimated based on present values at current interest rates for
such instruments. Estimates of any declines in the fair values of such securities that are
other than temporary are measured on a case by case basis together with loans
under the overall program to those customers and recognized as realized losses.
As our exposures to such securities are similar to our exposures on its loan
portfolio, additional disclosures have been provided on and impairment status
in Note 8 and on concentrations of credit risk in Note 11 of the Financial
Statements. All other securities are actively managed as a part of our treasury
operations and are held primarily to meet our statutory and regulatory
requirements. The issuers of such securities are either the government, public
financial institutions or private issuers. These investments are typically
purchased from the market, and debt securities are generally public rated. Fair
values for such securities are based on market quotations. 61




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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
48.7% from Rs. 6,904.1 million in fiscal 2003 to Rs. 10,265.0 million in fiscal
2004. The following table sets out the components of net interest revenue after
allowance for credit losses: Year ended March 31,2003
    
    2004(in millions)Interest and dividend revenue
    
    Rs.
    19,424.8
    
    
    Rs.
    24,591.5Interest expense
    
    
    11,779.2
    
    
    
    11,983.1Net interest revenue
    
    Rs.
    7,645.6
    
    
    Rs.
    12,608.4Allowance for credit losses, net
    
    
    741.5
    
    
    
    2,343.4Net interest revenue after allowance for credit losses
    
    Rs.
    6,904.1
    
    
    Rs.
    10,265.0
 The increase in net interest revenue after allowances for credit losses
was as a result of an increase in total interest revenue from Rs. 19,424.8
million in fiscal 2003 to Rs. 24,591.5 million in fiscal 2004, offset in part
by an increase in total interest expense of 1.7% from Rs. 11,779.2 million in
fiscal 2003 to Rs. 11,983.1 million in fiscal 2004, and an increase in the
allowance for credit losses from Rs. 741.5 million in fiscal 2003 to Rs.
2,343.4 million in fiscal 2004. The Bank established an unallocated allowance
of Rs. 589.2 million for non homogenous standard loans based on overall
portfolio quality, asset growth, economic condition and other risk factors. The increase in our net interest revenue after allowance for credit losses
reflected the increase in our average volume of interest earning assets of
42.1%, as a result of general growth in our business. Our net interest margin
increased marginally from 3.3% in fiscal 2003 to 3.8% in fiscal 2004 while
the spread we achieved increased from 2.7% to 3.5% in those years,
respectively. The average checking accounts and low interest saving accounts
represented 46.9% of total deposits in fiscal 2004 as against 35.0% in fiscal
2003. Interest and Dividend Revenue The following table sets out the components of interest and dividend
revenue: Year ended March 31,2003
    
    2004(in millions)Interest on loans
    
    Rs.
    7,805.3
    
    
    Rs.
    11,705.0Interest on securities, including dividends
    
    
    10,386.1
    
    
    
    11,776.9Other interest revenue
    
    
    1,233.4
    
    
    
    1,109.6Total interest and dividend revenue
    
    Rs.
    19,424.8
    
    
    Rs.
    24,591.5
 Interest revenue from loans increased by 50.0% from Rs. 7,805.3 million in
fiscal 2003 to Rs. 11,705.0 million in fiscal 2004, reflecting an increase in
the average volume of loans as a result of the general growth in our business,
offset in part by a decrease in yields. Our average volume of loans increased 65.6% from Rs. 82,461.2 million in
fiscal 2003 to Rs. 136,527.4 million in fiscal 2004. Our average volume of
corporate loans increased by 35.7 % from Rs. 61,614.7 million in fiscal 2003 to
Rs. 83,623.7 million in fiscal 2004 due to increase in business. Our average
retail loans increased by 153.8 % from Rs. 20,846.5 million in fiscal 2003 to
Rs. 52,903.7 million in fiscal 2004 primarily because of the expansion of our
core retail loan products and our expansion into new geographical areas. Yields on our loans decreased from an average of 9.5% in fiscal 2003 to
8.6% in fiscal 2004. Corporate loan yields declined in line with the general
decline in interest rates and due to increased competition. 62




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Interest and dividend revenue from securities increased by 13.4% from Rs.
10,386.1 million in fiscal 2003 to Rs. 11,776.9 million in fiscal 2004. The
following table sets out the components of interest and dividend revenue from
securities: Year ended March 31,2003
    
    2004(in millions)Interest on statutory liquidity ratio investments
    
    Rs.
    4,963.9
    
    
    Rs.
    6,478.4Interest and dividends on credit substitutes
    
    
    2,479.5
    
    
    
    1,793.9Other interest and dividends from securities
    
    
    2,942.7
    
    
    
    3,504.6Total interest and dividend revenue from securities
    
    Rs.
    10,386.1
    
    
    Rs.
    11,776.9
 Our interest revenue from statutory liquidity ratio securities, which is
derived from government of India treasury securities held primarily to meet our
statutory liquidity ratio requirement, increased by 30.5% from Rs. 4,963.9
million in fiscal 2003 to Rs.6,478.4 million in fiscal 2004 primarily as a
result of an increase in the volume of investments, offset in part by a
decrease in yields. The average volume of our statutory liquidity ratio
investments increased by 55.2% from Rs. 54,821.6 million in fiscal 2003 to Rs.
85,103.8 million in fiscal 2004 due to the increase in total liabilities
subject to reserve requirements. Yields from statutory liquidity ratio
securities declined from 9.1% in fiscal 2003 to 7.6% in fiscal 2004, reflecting
the general decline in interest rates during this period. Our interest and dividend revenue from credit substitutes decreased by
27.7% from Rs. 2,479.5 million in fiscal 2003 to Rs. 1,793.9 million in fiscal
2004 primarily as a result of a decrease in the volume of investments, and
decrease in yields. The average volume of our credit substitute investments
decreased by 21.1% from Rs. 28,558.8 million in fiscal 2003 to Rs. 22,524.2
million in fiscal 2004 because of a shift in corporate preferences towards the
vanilla loan products than credit substitutes.. Yields from credit substitutes
declined from 8.7% in fiscal 2003 to 7.8% in fiscal 2004, reflecting the
general decline in interest rates during this period and increased competition. Our interest and dividend revenue from other securities increased by 19.1%
from Rs. 2,942.7 million in fiscal 2003 to Rs. 3,504.6 million in fiscal 2004
primarily as a result of an increase in the volume of investments, offset by a
decrease in yields. The average volume of our other investments increased by
41.4% from Rs. 42,987.5 million in fiscal 2003 to Rs. 60,792.6 million in
fiscal 2004 primarily because of additional tax-exempt investments and
investments made to comply with our directed lending obligations. Yields from
other securities declined from 6.9% in fiscal 2003 to 5.8% in fiscal 2004,
reflecting the general decline in interest rates during this period. Other interest revenue decreased by 10.0% from Rs. 1,233.4 million in
fiscal 2003 to Rs. 1,109.6 million in fiscal 2004. This decline was due to a
smaller number of interbank placements in US dollars as the interest
differential between the US market and India narrowed. Interest Expense Our total interest expense increased by 1.7% from Rs. 11,779.2 million in
fiscal 2003 to Rs. 11,983.1 million in fiscal 2004, reflecting primarily the
increase in our deposit base as a result of the general growth of our business.
Our average cost of funds decreased from 5.1% to 3.6% in fiscal 2004. Our interest expense on deposits decreased by 2.2% to Rs. 10,279.2
million in fiscal 2004 as a result of decrease in the interest rate. Our
average total deposits increased by 40.6% from Rs. 186.8 billion in fiscal 2003
to Rs. 262.7 billion in fiscal 2004 as a result of our expanded branch network. 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 cost of term deposits from 7.7% to 6.2%
and an increase in the proportion of 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 by 39.0% from Rs.
1,032.9 million in fiscal 2003 to Rs. 1,435.9 million in fiscal 2004 as a
result of increase in borrowings in the interbank call-money market from Rs.
15,362.9 million to Rs. 33,040.7 million offset partly by a drop in cost of
borrowings from 6.7% to 63




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4.3%. Our interest expense on long-term debt increased by 12.7% from Rs. 237.8
million in fiscal 2003 to Rs. 268.0 million in fiscal 2004. Allowance for Credit Losses The following table sets forth, for the periods indicated, movements in
our allowance for credit losses: For the years ended March 31,2003
    
    2004(in millions)Specific allowance for credit losses at the beginning of the year
    
    Rs.
    1,423.5
    
    
    Rs.
    1,684.3Additions to allowance for credit losses for the year:Working capital
    
    
    615.6
    
    
    
    1,476.1Term loans
    
    
    327.5
    
    
    
    578.4Less allowance no longer required
    
    
    (201.6
    )
    
    
    (300.3
    )Net expense for additions to specific allowance for credit losses
    
    
    741.5
    
    
    
    1,754.2Allowance no longer required on account of write-offs
    
    
    (480.7
    )
    
    
    (715.8
    )Specific allowance for credit losses at the end of fiscal year
    
    Rs.
    1,684.3
    
    
    Rs.
    2,722.7Unallocated allowance for credit losses at the beginning of the year
    
    
    182.4
    
    
    
    182.4Additions during the year
    
    
    
    
    
    
    589.2Unallocated allowance for credit losses at the end of the year
    
    
    182.4
    
    
    
    771.6Total allowance for credit losses at the beginning of the year
    
    
    1,605.9
    
    
    
    1,866.7Allowance no longer required on account of write-off
    
    
    (480.7
    )
    
    
    (715.8
    )Net addition to total allowance for the year charged to expense
    
    
    741.5
    
    
    
    2,343.4Total allowance for credit losses at the end of the year
    
    Rs.
    1,866.7
    
    
    Rs.
    3,494.3
 Our net expense for the change in our allowance for credit losses was Rs.
741.5 million in fiscal 2003 and Rs. 2,343.4 million in fiscal 2004. This
increase in expense reflected higher gross additions to non-performing loans in
fiscal 2004 compared to fiscal 2003 and an additional provision of Rs. 589.2
million made in fiscal 2004 for non homogenous standard commercial and retail loans. Non-Interest Revenue Our non-interest revenue increased by 6.8% from Rs. 4,397.3 million in
fiscal 2003 to Rs. 4,697.6 million in fiscal 2004. The following table sets out
the components of our non-interest revenue: Year ended March 31,2003
    
    2004(in millions)Fees and commissions
    
    Rs.
    2,306.4
    
    
    Rs.
    3,140.7Realized gains (losses) on sales of AFS securities
    
    
    721.7
    
    
    
    (48.3
    )Trading Account
    
    
    507.8
    
    
    
    396.8Foreign exchange
    
    
    445.3
    
    
    
    740.0Derivative transactions
    
    
    379.1
    
    
    
    443.9Other
    
    
    37.0
    
    
    
    24.5Total non-interest revenue
    
    Rs.
    4,397.3
    
    
    Rs.
    4,697.6
 Our fee and commission revenue is discussed below. In fiscal 2004 we had a
net realized loss on sales of AFS securities of Rs. 48.3 million, compared to
net realized gain of Rs. 721.7 million in fiscal 2003. The bank made a profit
of Rs. 396.8 million in fiscal 2004 in the held for trading category of
securities. The decrease in realized gains from sale of investments is
primarily due to lower trading gains booked on government securities and losses
on debt mutual fund units post receipt of dividends. 64




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Revenue from foreign exchange increased by 66.2% from Rs. 445.3 million in
fiscal 2003 to Rs. 740.0 million in fiscal 2004, primarily due to an increase
in volumes of corporate foreign exchange business. Fees and commissions from documentary credits and bank guarantees
increased by 8.1% primarily due to increase in bills for collection volumes to
corporate customers. Fees and commission grew by 36% in fiscal 2004 over fiscal 2003. This was
primarily because of retail banking services which increased by 36.2%
principally driven by an increase in the volumes of ATM transactions for other
banks customers, debit card transactions, processing fees relating to retail
loans, service charges for non maintenance of minimum balances, channel
transactions, 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. Non-Interest Expense Our non-interest expense was comprised of the following: Year ended March 31,2003
    
    2004(in millions)Salaries and staff benefits
    
    Rs.
    1,661.2
    
    
    Rs.
    2,154.0Premises and equipment
    
    
    1,343.6
    
    
    
    1,828.5Depreciation and amortization
    
    
    1,052.4
    
    
    
    1,254.9Administrative and other
    
    
    2,000.7
    
    
    
    3,131.9Total non-interest expense
    
    Rs.
    6,057.9
    
    
    Rs.
    8,369.3
 Total non-interest expense increased by 38.2% from Rs. 6,057.9 million in
fiscal 2003 to Rs. 8,369.3 million in fiscal 2004. As a percentage of our net
revenues, non-interest expense increased to 55.9% in fiscal 2004 compared 53.6%
in fiscal 2003. This is on account of the increase in infrastructure costs for
our branch and ATM expansion, expansion of geography for retail loan products
and increased allowance for credit losses leading to lower net revenues. Salaries and staff benefits rose by 29.7% from Rs. 1,661.2 million in
fiscal 2003 to Rs. 2,154.0 million in fiscal 2004 principally due to increased
headcount to support our growth. Salaries and staff benefits in fiscal 2004
also included a charge of Rs. 135.1 million for compensation expense arising out
of options granted compared to Rs. 138.0 million in fiscal 2003. As a
percentage of net revenues, salaries and staff benefits decreased marginally
from 14.7% in fiscal 2003 to 14.4% in fiscal 2004. 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 increased as a percentage of net
revenues from 11.9% in fiscal 2003 to 12.2% in fiscal 2004 principally because
we expanded our distribution network from 231 branches and 732 ATMs at March
31, 2003 to 312 branches and 910 ATMs at March 31, 2004. Depreciation and amortization increased from 1,052.4 in fiscal 2003
to 1,254.3 in fiscal 2004. This was primarily due to an increase in our branch
and ATM network and increased spend on technology. However as a percentage of
our net revenue, depreciation and amortization expenses has decreased from 9.3%
in fiscal 2003 to 8.4% in fiscal 2004. Our administrative and other expense as a percentage of net revenues
increased from 17.7% in fiscal 2003 to 20.9% in fiscal 2004, principally
because of our growth in retail loans and credit card business. 65




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Income Tax Our income tax expense increased by 6.3% from Rs. 1,729.7 million in
fiscal 2003 to Rs. 1,838.8 million in fiscal 2004. Our effective rate of tax
decreased from 33.0% in fiscal 2003 to 27.9% in fiscal 2004, principally due
to an decrease of 0.88% in the statutory income tax rate and higher permanent
differences in the form of tax-exempt income. Tax-exempt income principally
consists of dividends and investment income from tax-exempt investments such as
preference shares, units and infrastructure bonds. Of our total income tax
expense of Rs. 1,838.8 million in fiscal 2004, our current income tax expense
was Rs. 2,427.2 million and our deferred income tax benefit was Rs. 588.4
million. Net Income As a result of the foregoing factors, our net income after taxes increased
by 35.3% from Rs. 3,513.8 million in fiscal 2003 to Rs. 4,754.5 million in
fiscal 2004. Our basic earnings per equity share increased by 34.2% from Rs.
12.57 to Rs. 16.87 per equity share. Our diluted earnings per share increased
by 33.5% from Rs. 12.51 to Rs. 16.70 per equity share. Our basic earnings per
ADS was Rs. 50.61 per ADS for fiscal 2004, where each ADS represents three
equity shares. Our diluted earnings per ADS was Rs. 50.10 per ADS for fiscal
2004. 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
31.9% from Rs. 5,233.9 million in fiscal 2002 to Rs. 6,781.3 million in fiscal
2003. The following table sets out the components of net interest revenue after
allowance for credit losses: Year ended March 31,2002
    
    2003(in millions)Interest and dividend revenue
    
    Rs.
    16,448.0
    
    
    Rs.
    19,424.8Interest expense
    
    
    10,762.5
    
    
    
    11,779.2Net interest revenue
    
    Rs.
    5,685.5
    
    
    Rs.
    7,645.6Allowance for credit losses, net
    
    
    451.6
    
    
    
    741.5Net interest revenue after allowance for credit losses
    
    Rs.
    5,233.9
    
    
    Rs.
    6,904.1
 The increase in net interest revenue after allowances for credit losses
was as a result of an increase in total interest revenue of 18.1% from Rs.
16,448 million in fiscal 2002 to Rs. 19,424.8 million in fiscal 2003, offset in
part by an increase in total interest expense of 9.4% from Rs. 10,762.5 million
in fiscal 2002 to Rs. 11,779.2 million in fiscal 2003, and an increase in the
allowance for credit losses from Rs. 451.6 million in fiscal 2002 to Rs. 741.5
million in fiscal 2003. The increase in our net interest revenue after allowance for credit losses
reflected the increase in our average volume of interest earning assets of
25.6%, as a result of general growth in our business. Our net interest margin
increased marginally from 3.1% in fiscal 2002 to 3.3% in fiscal 2003 while
the spread we achieved increased from 2.4% to 2.6% in those years,
respectively. The average checking accounts and low interest saving accounts
represented 35.0% of total deposits in fiscal 2003 as against 33.9% in fiscal
2002. 66




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Interest and Dividend Revenue The following table sets out the components of interest and dividend
revenue: Year ended March 31,2002
    
    2003(in millions)Interest on loans
    
    Rs.
    6,130.7
    
    
    Rs.
    7,805.3Interest on securities, including dividends
    
    
    8,166.4
    
    
    
    10,386.1Other interest revenue
    
    
    2,150.9
    
    
    
    1,233.4Total interest and dividend revenue
    
    Rs.
    16,448.0
    
    
    Rs.
    19,424.8
 Interest revenue from loans increased by 27.3% from Rs. 6,130.7 million in
fiscal 2002 to Rs. 7,805.3 million in fiscal 2003, reflecting an increase in
the average volume of loans as a result of the general growth in our business,
offset in part by a decrease in yields. Our average volume of loans increased 38.9% from Rs. 59,374.9 million in
fiscal 2002 to Rs. 82,461.2 million in fiscal 2003. Our average volume of
corporate loans increased by 24.0% from Rs. 49,682.2 million in fiscal 2002 to
Rs. 61,614.7 million in fiscal 2003 due to increase in business. Our average
retail loans increased by 115.1% from Rs. 9,692.7 million in fiscal 2002 to Rs.
20,846.5 million in fiscal 2003 primarily because of the expansion of our core
retail loan products and our expansion into new geographical areas. Yields on our loans decreased from an average of 10.3% in fiscal 2002 to
9.5% in fiscal 2003. Corporate loan yields declined in line with the general
decline in interest rates and due to increased competition. Interest and dividend revenue from securities increased by 27.2% from Rs.
8,166.4 million in fiscal 2002 to Rs. 10,386.1 million in fiscal 2003. The
following table sets out the components of interest and dividend revenue from
securities: Year ended March 31,2002
    
    2003(in millions)Interest on statutory liquidity ratio investments
    
    Rs.
    4,083.7
    
    
    Rs.
    4,963.9Interest and dividends on credit substitutes
    
    
    2,346.1
    
    
    
    2,479.5Other interest and dividends from securities
    
    
    1,736.6
    
    
    
    2,942.7Total interest and dividend revenue from securities
    
    Rs.
    8,166.4
    
    
    Rs.
    10,386.1
 Our interest revenue from statutory liquidity ratio securities, which is
derived from government of India treasury securities held primarily to meet our
statutory liquidity ratio requirement, increased by 21.6% from Rs. 4,083.7
million in fiscal 2002 to Rs. 4,963.1 million in fiscal 2003 primarily as a
result of an increase in the volume of investments, offset in part by a
decrease in yields. The average volume of our statutory liquidity ratio
investments increased by 23.6% from Rs. 44,362.4 million in fiscal 2002 to Rs.
54,821.6 million in fiscal 2003 due to the increase in total liabilities
subject to reserve requirements. Yields from statutory liquidity ratio
securities declined marginally from 9.2% in fiscal 2002 to 9.1% in fiscal 2003,
reflecting the general decline in interest rates during this period. Our interest and dividend revenue from credit substitutes increased by
5.7% from Rs. 2,346.1 million in fiscal 2002 to Rs. 2,479.5 million in fiscal
2003 primarily as a result of an increase in the volume of investments, offset
in part by a decrease in yields. The average volume of our credit substitute
investments increased by 14.1% from Rs. 25,023.9 million in fiscal 2002 to Rs.
28,558.8 million in fiscal 2003 because of growth from existing and new
customers. Yields from credit substitutes declined from 9.4% in fiscal 2002 to
8.7% in fiscal 2003, reflecting the general decline in interest rates during
this period and increased competition. Our interest and dividend revenue from other securities increased by 69.5%
from Rs. 1,736.6 million in fiscal 2002 to Rs. 2,942.7 million in fiscal 2003
primarily as a result of an increase in the volume of investments, offset by a
decrease in yields. The average volume of our other investments increased by
121.6% from Rs. 19,402.8 million in fiscal 2002 to Rs. 42,987.5 million in
fiscal 2003 primarily because of additional tax-exempt investments and
investments made to comply with our directed lending obligations. Yields from
other securities 67




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declined from 9.0% in fiscal 2002 to 6.9% in fiscal 2003, reflecting the
general decline in interest rates during this period. Other interest revenue decreased by 42.7% from Rs. 2,150.9 million in
fiscal 2002 to Rs. 1,233.4 million in fiscal 2003. This decline was due to a
smaller number of interbank placements in US dollars as the interest
differential between the US market and India narrowed. Interest Expense Our total interest expense increased by 10.6% from Rs. 10,762.5 million in
fiscal 2002 to Rs. 11,779.2 million in fiscal 2003, reflecting primarily the
increase in our deposit base as a result of the general growth of our business.
Our average cost of funds decreased from 5.8% to 5.1% in fiscal 2003. Our interest expense on deposits increased by 14.7% to Rs. 10,508.5
million in fiscal 2003 as a result of an increase in the average volume of
deposits caused by our growth. Our average total 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, offset partly by decrease in yields. Our average cost of deposits decreased from 6.4% in fiscal 2002 to 5.7% in
fiscal 2003 as a result of a decline in cost of term deposits from 9.0% to 7.7%
and an increase in the proportion of 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 by 13.8% from Rs.
1,328.1 million in fiscal 2002 to Rs. 1,032.9 million in fiscal 2003 as a
result of a decrease in borrowings in the interbank call-money market. Our
interest expense on long-term debt decreased by 7.9% from Rs. 275.9 million in
fiscal 2002 to Rs. 237.8 million in fiscal 2003 68




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Allowance for Credit Losses The following table sets forth, for the periods indicated, movements in
our allowance for credit losses: For the years ended March 31,2002
    
    2003(in millions)Specific allowance for credit losses at the beginning of the year
    
    Rs.
    1,010.8
    
    
    Rs.
    1,423.5Additions to allowance for credit losses for the year:Working capital
    
    
    366.5
    
    
    
    615.6Term loans
    
    
    253.8
    
    
    
    327.5Leasing finance
    
    
    
    
    
    
    Less allowance no longer required
    
    
    (207.6
    )
    
    
    (201.6
    )Net expense for additions to specific allowance for credit losses
    
    
    412.7
    
    
    
    741.5Allowance no longer required on account of write-offs
    
    
    
    
    
    
    (480.7
    )Specific allowance for credit losses at the end of fiscal year
    
    
    1,423.5
    
    
    
    1,684.3Unallocated allowance for credit losses at the beginning of the year
    
    
    143.5
    
    
    
    182.4Additions during the year
    
    
    38.9
    
    
    
    Unallocated allowance for credit losses at the end of the year
    
    
    182.4
    
    
    
    182.4Total allowance for credit losses at the beginning of the year
    
    
    1,154.3
    
    
    
    1,605.9Allowance no longer required on account of write-off
    
    
    
    
    
    
    (480.7
    )Net addition to total allowance for the year charged to expense
    
    
    451.6
    
    
    
    741.5Transferred on acquisition of Times Bank Limited
    
    
    
    
    
    
    Total allowance for credit losses at the end of the year
    
    Rs.
    1,605.9
    
    
    Rs.
    1,866.7
 Our net expense for the change in our allowance for credit losses was Rs.
451.6 million in fiscal 2002 and Rs. 741.5 million in fiscal 2003. This
increase in expense reflected higher gross additions to non-performing loans in
fiscal 2003 compared to fiscal 2002. Non-Interest Revenue Our non-interest revenue increased by 40.6% from Rs. 3,215.1 million in
fiscal 2002 to Rs. 4,520.1 million in fiscal 2003. The following table sets out
the components of our non-interest revenue: Year ended March 31,2002
    
    2003(in millions)Fees and commissions
    
    Rs.
    1,620.5
    
    
    Rs.
    2,306.4Realized gains (losses) on sales of AFS securities
    
    
    344.4
    
    
    
    721.7Trading Account
    
    
    600.9
    
    
    
    507.8Foreign exchange
    
    
    391.4
    
    
    
    445.3Derivative transactions
    
    
    249.7
    
    
    
    379.1Other
    
    
    8.2
    
    
    
    37.0Total non-interest revenue
    
    Rs.
    3,215.1
    
    
    Rs.
    4,397.3
 Our fee and commission revenue is discussed below. In fiscal 2002 we had a
net realized gain on sales of securities of Rs. 344.4 million, compared to
realized gain of Rs. 721.7 million in fiscal 2003. The increase in profit in
fiscal 2003 is on account of fall in yield in investments in fiscal 2003 over
fiscal 2002. The bank made a profit of Rs. 507.8 million on account of trading in the
held for trading category of securities. This was 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. 69




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Revenue from foreign exchange increased by 13.8% from Rs. 391.4 million in
fiscal 2002 to Rs. 445.3 million in fiscal 2003, primarily due to an increase
in volumes of corporate foreign exchange business. Fees and commission grew by 42% in fiscal 2003 over fiscal 2002. This was
primarily because of retail banking services which increased by 57.2%
principally driven by an increase in the volumes of ATM transactions for other
banks customers, debit card transactions, processing fees relating to retail
loans, service charges for non maintenance of minimum balances, channel
transactions and depository fees as there was an increase in activity due to
recovery in the stock markets. Non-Interest Expense Our non-interest expense was comprised of the following: Year ended March 31,2002
    
    2003(in millions)Salaries and staff benefits
    
    Rs.
    1,184.6
    
    
    Rs.
    1,661.2Premises and equipment
    
    
    913.8
    
    
    
    1,343.6Depreciation and amortization
    
    
    675.7
    
    
    
    1,052.4Administrative and other
    
    
    1,421.9
    
    
    
    2,000.7Total non-interest expense
    
    Rs.
    4,196.0
    
    
    Rs.
    6,057.9
 Total non-interest expense increased by 44.4% from Rs. 4,196.0 million in
fiscal 2002 to Rs. 6,057.9 million in fiscal 2003. As a percentage of our net
revenues, non-interest expense increased to 53.61% in fiscal 2003 compared to
49.7% in fiscal 2002. This is on account of the increase in infrastructure
costs for our branch and ATM expansion, expansion of geography for retail loan
products, launch of our credit card business, which is yet to break even,, and
increased selling and marketing expenditure for our retail business and
reduction in net revenues on account of higher allowances for credit losses. Salaries and staff benefits rose by 40.2% from Rs. 1,184.6 million in
fiscal 2002 to Rs. 1,661.2 million in fiscal 2003 principally due to increased
headcount to support our growth. 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. As a
percentage of net revenues, salaries and staff benefits increased marginally
from 14.4% in fiscal 2002 to 14.7% in fiscal 2003. Our headcount increased from
3,742 employees as of March 31, 2002 to 4,791 employees as of March 31, 2003. Our premises and equipment expense increased as a percentage of net
revenues from 10.8% in fiscal 2002 to 11.9% in fiscal 2003 principally because
we expanded our distribution network from 171 branches and 479 ATMs at March
31, 2002 to 231 branches and 732 ATMs at March 31, 2003. Depreciation and amortization expense as a percentage of net revenues
increased from 8.0% in fiscal 2002 to 9.3% in fiscal 2003. This is primarily
because of the increase in premises (both branch and ATM) and technology
infrastructure. Our administrative and other expense as a percentage of net revenues
increased from 16.8% in fiscal 2002 to 17.7% in fiscal 2003, principally
because of our growth in retail loans and investments in new lines of business
especially, the two wheeler, commercial vehicle and credit card business. The
principal components of our administrative and other expense were as set out in
the table below: 70




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Income Tax Our income tax expense increased by 33.6% from Rs. 1,294.6 million in
fiscal 2002 to Rs. 1,729.7 million 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 lesser permanent
differences in the form of tax-exempt income. Tax-exempt income principally
consists of dividends and investment income from tax-exempt investments such as
preference shares, and infrastructure bonds. Of our total income tax expense of
Rs. 1,729.7 million in fiscal 2003, our current income tax expense was Rs.
1,769.6 million and our deferred income tax benefit was Rs. 39.9 million. Net Income As a result of the foregoing factors, our net income after taxes increased
by 18.8% from Rs. 2,958.4 million in fiscal 2002 to Rs. 3,513.8 million in
fiscal 2003. Our basic earnings per equity share increased by 13.2% from Rs.
11.10 to Rs. 12.57 per equity share. Our diluted earnings per share increased
by 13.32% from Rs. 11.04 to Rs. 12.51 per equity share. Our basic earnings per
ADS was Rs. 37.71 per ADS for fiscal 2003, where each ADS represents three
equity shares. Our diluted earnings per ADS was Rs. 37.53 per ADS for fiscal
2003. 71




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Related Party Transactions The Bank enters into transactions with related parties in the normal
course of business. The principal related parties are the Banks affiliates,
the subsidiaries and affiliates of HDFC, the Employee Welfare Trust and
companies that are owned by the Banks employees and officers. These
transactions are generally at arms length and in line with the market pricing.
The Bank does not have any obligation to provide financial support or meet any
obligations of these related parties. For further information see Related
Party Transactions. Liquidity and Capital Resources Our growth over the last five years has been financed by a combination of
cash generated from operations, increases in our customer deposits, borrowings
and new issuances of equity capital. Cash Flows from Operations Our operations generated cash flows of Rs. 4,571.0 million, Rs. 14,487.5
million and Rs. 40,258.5 million in the fiscal years ended March 31, 2002, 2003
and 2004, respectively. Net cash from operations in fiscal 2004 of Rs. 40,258.5 million resulted
primarily from net income of Rs. 4,754.5 million, a net increase in other
liabilities of Rs. 30,945.6 million resulting from an increase
in refund pay
orders of initial public offerings, remittances in transit in our cash
management services business, decrease in other assets of Rs. 2,113.7 million,
a decrease in our accrued interest income on loans Rs. 2,105.1 million, non
cash adjustments for allowances for credit losses, amortization of investments,
depreciation and amortization and stock based compensation aggregating Rs.
5,628.4 million. These increases were offset in part by an increase in trading
account assets of Rs. 2,257.7 million and a decrease in accrued interest
expense on our deposits and borrowings of Rs. 2,731.9 million. Net cash from operations in fiscal 2003 of Rs. 14,487.5 million resulted
primarily from net income of Rs. 3,513.8 million, a net increase in other
liabilities of Rs. 11,075.2 million resulting from an increase in remittances
in transit in our cash management services business, partly offset by an
increase in other assets of Rs. 2,406.2 million, an increase in our accrued
interest expense on our deposits and borrowings of Rs. 2,718.6 million and non
cash adjustments for allowances for credit losses, amortization of investments,
depreciation and amortization and stock based compensation aggregating Rs.
2,759.8 million. These increases were offset in part by an increase in trading
account assets of Rs. 138.5 million and an increase in accrued interest income
on our loans of Rs. 2,199.9 million. Net cash from operations in fiscal 2002 of Rs. 4,571.0 million resulted
primarily from net income of Rs. 2,958.4 million, a net increase in other
liabilities of Rs. 4,340.9 million resulting from an increase in remittances in
transit in our cash management services business, an increase in our accrued
interest expense on our deposits and borrowings of Rs. 1,214.8 million,
increase in other assets Rs. 347.5 million principally arising from checks in
course of collection at the balance sheet date and non cash adjustments for
allowances for credit losses, depreciation and amortization and stock based
compensation aggregating Rs. 1,763.0 million. These increases were offset in
part by, an increase in accrued interest income on our loans of Rs. 1,774.1
million. Checks in course of collection offset the net increase in deposits
until cleared. Cash Flows from Investing Activities Net cash used in investing activities was Rs. 68,286.9 million, Rs.
71,828.2 million, and Rs. 117,320.4 million in the years ended March 31, 2002,
2003 and 2004 respectively. Our investing activities principally consist of
making loans to our wholesale and retail customers, making investments
primarily to comply with the statutory liquidity reserve requirements of the
RBI and for our own account, and capital expenditures for our branch network,
technology and infrastructure. 72




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We used net cash in investing activities in fiscal 2004 of Rs. 117,196.6
million primarily to increase our loans, net of repayments, by Rs. 67,765.7
million, increase our net investment portfolio including repurchase
transactions by Rs. 57,535.2 million and for capital expenditures of Rs.
2,143.9 million to expand our branch network and other infrastructure offset by
decrease in our term placements by Rs. 4,182.2 million. We received Rs. 5,917.3
million by way of scrutinizing of our loans. We used net cash in investing activities in fiscal 2003 of Rs. 71,828.2
million primarily to increase our loans, net of repayments, by Rs. 47,512.5
million, increase our term placements by Rs. 7,747.4 million, increase our net
investment portfolio including repurchase transactions by Rs. 14,051.0 million
and for capital expenditures of Rs. 2,533.5 million to expand our branch
network and other infrastructure. We used net cash in investing activities in fiscal 2002 of Rs. 68,286.9
million primarily to increase our loans, net of repayments, by Rs. 20,897.3
million, increase our net investment portfolio including repurchase
transactions by Rs. 45,808.0 million and for capital expenditures of Rs.
1,682.6 million to expand our branch network and other infrastructure. Our loans, investments and fixed assets are discussed in greater detail in
the section Financial Condition below. Cash Flows from Financing Activities Net cash provided by financing activities was Rs. 72,185.4 million, Rs.
46,695.0 million, and Rs. 86,127.4 million in the years ended March 31, 2002,
2003 and 2004, respectively. Our financing sources are primarily our deposit
base, short term and long term borrowings and issuance of equity. Net cash provided by financing activities in fiscal 2004 of Rs. 86,127.4
million resulted primarily from issuance of equity shares of Rs. 203.6 million
as a result of options that were exercised, an increase in our deposits of Rs.
80,302.0 million, issuance of long-term debt of Rs. 4,000.0 million, and an
increase in our short term borrowings aggregating Rs. 2,484.6 million. These
were offset in part by repayment of long term debt of Rs. 30.0 million, and
dividends paid of Rs. 958.3 million. Net cash provided by financing activities in fiscal 2003 of Rs. 46,695,
million resulted primarily from issuance of equity shares of Rs. 86.7 million
as a result of options that were exercised, an increase in our deposits of Rs.
47,221.9 million, offset in part by repayments of long-term debt of Rs. 41.9
million, a decrease in our short term and long-term borrowings aggregating Rs.
62.6 million, and dividends paid of Rs. 697.5 million. Net cash provided by financing activities in fiscal 2002 of Rs. 72,185.4
million resulted primarily from issuance of equity shares and ADSs of Rs.
7,890.6, an increase in our deposits of Rs. 59,957.0 million and an increase in
our short term and long-term borrowings aggregating Rs. 4,929.1 million, offset
in part by repayments of long-term debt of Rs. 62.7 million and dividends paid
of Rs. 528.6 million. Our financing sources are discussed in greater detail in the section
Financial Condition below. 73




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Financial Condition Assets The following tables set forth the principal components of our assets at
March 31, 2002 and 2003: At March 31,2003
    
    2004(in millions)Cash and cash equivalents
    
    Rs.
    23,944.9
    
    
    Rs.
    33,010.4Term placements
    
    
    7,747.4
    
    
    
    3,565.2Investments held for trading
    
    
    3,976.1
    
    
    
    6,233.8Investments available for sale
    
    
    98,929.2
    
    
    
    133,274.6Investments held to maturity
    
    
    38,426.7
    
    
    
    36,368.4Securities purchased under agreements to resell
    
    
    
    
    
    
    19,950.0Loans, net
    
    
    118,299.9
    
    
    
    177,681.1Accrued interest receivable
    
    
    6,283.8
    
    
    
    4,178.7Property and equipment
    
    
    5,277.5
    
    
    
    6,169.1Other assets
    
    
    8,955.2
    
    
    
    6,404.3Total assets
    
    Rs.
    311,840.7
    
    
    Rs.
    426,835.6
 Our total assets increased 36.9% to Rs. 426.8 billion at March 31, 2004.
This increase was comprised of increases of 38.6% in total investments and 50.2% in loans, increase in cash and cash equivalents of 37.9%. Investments available for sale increased by 34.7% to Rs. 133.3 billion at
March 31, 2004. This was primarily due to increases in our statutory liquidity
ratio securities, asset backed securities, mortgage backed securities, mutual
fund units and investments qualifying for directed lending. Our statutory
liquidity ratio requirements increased due to growth in our liabilities subject
to reserve requirements. Of our total available for sale investment portfolio
at March 31, 2004, 48.7% consists of securities issued by the government of
India and state governments. Net
loans increased 50.2% to Rs. 177.7 billion at March 31, 2004, due to
increases in both our wholesale and retail products. Our retail loans increased
by 112.9% to Rs. 73.2 billion with our increased focus on retail loans. Our property and equipment increased by 16.9% to Rs. 6.2 billion at March
31, 2004 as we expanded our branch network from 231 branches to 312 branches
and our ATM network from 732 ATMs to 910 ATMs and invested in other
infrastructure to support our growth. 74




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Liabilities and Shareholders Equity The following tables set forth the principal components of our liabilities
and shareholders equity at March 31, 2002 and 2003: At March 31,2003
    
    2004(in millions)LiabilitiesInterest bearing deposits
    
    Rs.
    174,250.4
    
    
    Rs.
    215,710.8Non-interest bearing deposits
    
    
    49,509.6
    
    
    
    88,351.2Total deposits
    
    
    223,760.0
    
    
    
    304,062.0Securities sold under repurchase agreements
    
    
    4,600.0
    
    
    
    Short-term borrowings
    
    
    21,579.6
    
    
    
    24,064.2Accrued interest payable
    
    
    6,897.3
    
    
    
    4,165.4Long-term debt
    
    
    2,116.0
    
    
    
    6,086.0Accrued expenses and other liabilities
    
    
    26,774.7
    
    
    
    57,242.2Total liabilities
    
    
    285,727.6
    
    
    
    395,619.8Shareholders equity
    
    
    26,113.1
    
    
    
    31,215.8Total liabilities and shareholders equity
    
    Rs.
    311,840.7
    
    
    Rs.
    426,835.6
 Our total liabilities increased 38.5% to Rs. 395.6 billion at March 31,
2004. This increase was principally comprised of an increase of 23.8% in
interest bearing deposits, and an increase of 113.8% in accrued expenses and
other liabilities. The increase in our interest bearing deposits was principally due to
general growth in our business, new customers acquired as we expanded our
branch network and greater penetration of our customer base achieved through
cross sales of our products. Of our interest bearing deposits at March 31,
2004, retail deposits accounted for 77.3%, and wholesale deposits accounted for
the balance. Non-interest bearing deposits increased by 78.5%. Of our non-interest
bearing deposits at March 31, 2004, wholesale deposits accounted for 63.4% with
retail deposits accounting for the balance. Our non-interest bearing deposits
include floats arising out of our cash management and capital markets services
to our customers. Accrued expenses and other liabilities increased principally because of an
increase of 278.9 % in accounts payable and an increase of 330.9.% in bills
payable. Bills payable increased due to amounts to be refunded on collection
for Initial Public Offerings of companies. Accounts payable increased due to
various amounts payable to vendors. Long-term debt increased by Rs. 3,970.0 million because of issuance of
subordinated debt of Rs. 4,000.0 million offset partly by repayment of long
term borrowing of Rs. 30.0 million. Most of our funding requirements are met through short term and medium
term funding sources. Of our total non-equity sources of funding, deposits
accounted for approximately 76.8% (of which retail deposits were approximately
50.6%) with short term borrowings accounting for approximately 6.0% and long
term debt accounting for approximately 1.5%. In our experience, a substantial
portion of our deposits are rolled over upon maturity and are, over time, a
stable source of funding. The continuation of our deposit base could be
adversely affected in the event of deterioration in the economy and if the
interest rates offered by the Bank differ significantly from those offered by
our competitors. Shareholders equity increased 19.5% to Rs. 31,215.8 million at March 31,
2004, primarily due to the increase in our retained earnings. Of our net income
of Rs. 4,754.5 million in fiscal 2004, we transferred Rs. 1,273.8 million to
statutory reserve as required under Indian law and proposed dividends of Rs.
1,128.7 million. By law, our statutory reserve is not distributable. Our
shareholders equity also includes Rs. 2,528.4 million of unrealized gains on
available for sale securities, net of tax. 75




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We may need additional capital to support our growth, principally to
maintain our capital ratios within the RBIs guidelines. Although there is no
assurance that future financing will be available at terms which are acceptable
to us, we may seek additional funds through public or private debt or equity
offerings and through increases in our deposit base. 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. 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 arise out of
spot and forward foreign exchange transactions with corporate and non-corporate
customers and inter-bank counterparties. Our derivative contracts include
rupee-based derivatives and cross-currency derivatives primarily for corporate
customers. We also trade rupee-based interest rate swaps for our own account.
We earn profit by way of a margin as a mark-up over the exchange or interest
rate offered on customer transactions. 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 derivatives. For
further information see TreasuryDerivatives. The following table presents the aggregate notional principal amounts of
our outstanding foreign exchange and derivative contracts at March 31, 2003 and
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. At March 31,2003
    
    2004Notional
    
    Fair value
    
    Notional
    
    Fair value(in millions)Interest rate swap agreements
    
    Rs.
    174,841.7
    
    
    Rs.
    0.4
    
    
    Rs.
    343,015.7
    
    
    Rs.
    (15.4
    )Currency
Options
    
    
    1,549.2
    
    
    
    
    
    
    
    28,232.8
    
    
    
    36.3Forward exchange contracts
    
    
    197,725.5
    
    
    
    127.1
    
    
    
    294,440.8
    
    
    
    467.0Forward rate Agreements
    
    
    
    
    
    
    
    
    
    
    897.9
    
    
    
    Currency swap agreements
    
    
    9,659.5
    
    
    
    (6.7
    )
    
    
    17,243.4
    
    
    
    
 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 guarantees and
documentary credits such as letters of credit and guarantees to enhance the
credit standing of our customers, for which we charge fees and commissions. 76




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Amounts of guarantees and documentary credits outstanding are set out
below: At March 31,2003
    
    2004(in millions)Bank guarantees:Financial guarantees
    
    Rs.
    5,743.6
    
    
    Rs.
    7,497.0Performance guarantees
    
    
    8,445.4
    
    
    
    8,916.8Documentary credits
    
    
    11,715.1
    
    
    
    18,921.0Total
    
    Rs.
    25,904.1
    
    
    Rs.
    35,334.8
 Guarantees and documentary credits outstanding increased by 36.4% to
Rs. 35.3 billion at March 31, 2004, principally due to growth in documentary
credits, performance guarantees and financial guarantees. 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 decreased from Rs. 58.5 billion at March 31, 2003
to Rs. 44.5 billion at March 31, 2004. If we were to make these loans, the
interest rates would be dependent on lending rates in effect on the date the
loans were made. We are not obligated to make these loans, and the sanctions
are subject to periodic review. See also Note 22 of our Financial Statements. 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 (or Basel Committee) in 1988. For a
description of the RBIs capital adequacy guidelines, see Information About
India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. Our regulatory capital and capital adequacy ratios as measured in
accordance with Indian GAAP are as follows: At March 31,2003
    
    2004(in millions)Tier 1 capital
    
    Rs.
    19,850.2
    
    
    Rs.
    22,297.0Tier 2 capital
    
    
    3,414.7
    
    
    
    10,081.2Total capital
    
    Rs.
    23,264.9
    
    
    Rs.
    32,378.2Total risk weighted assets and contingents
    
    Rs.
    209,177.1
    
    
    Rs.
    277,738.2Capital adequacy ratios:Tier 1
    
    
    9.49%
    
    
    
    8.03%Total capital
    
    
    11.12%
    
    
    
    11.66%Minimum capital ratios required by the RBI:Tier 1
    
    
    4.5%
    
    
    
    4.5%Total capital
    
    
    9.0%
    
    
    
    9.0%
 As shown above, our Tier 1 capital ratio decreased to 8.03% and our total
capital ratio increased to 11.66% at March 31, 2004. The decrease in our Tier 1
capital ratio is primarily on account of the growth in risk weighted assets due
to increase in our customer assets. The increase in Tier 2 capital is primarily
due to an increase of Rs. 4,000 million on account of the issue of subordinated
debt in the last quarter of fiscal 2004. 77




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Our Indian GAAP financial statements include general provisions of Rs.
1,147.0 million and Rs. 1,589.3 million at March 31, 2003 and 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 need for banks to follow a prudent policy for
utilizing gains realized on sale of investments, the RBI issued guidelines in
fiscal 2002 on the need to appropriate a minimum of 5% of the investment
portfolio to an investment fluctuation reserve over a period of five years. We
currently carry an investment fluctuation reserve of Rs. 4,091.9 million in
Indian GAAP which is 3.0% of the investment portfolio, excluding investments
held to maturity. Capital Expenditures Our capital expenditure consists principally of branch network expansion,
as well as investments in our technology and communications infrastructure.
Since April 1, 2003, we have invested approximately Rs. 2,175.8 million in
capital expenditures. We have current plans for an aggregate capital
expenditure of approximately Rs. 1.7 billion for fiscal 2005 when we intend to
invest approximately Rs. 107.0 million for our disaster recovery plan, Rs. 341.1
million in technology, Rs. 403.2 million to expand our branch network, Rs.
158.8 million for new Electronic Data Capture (EDC) terminals and Rs. 136.7
million to install approximately new ATMs. At March 31, 2004, we had entered
into capital commitments of Rs. 608.6 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. Contractual Obligations and Commercial Commitments Contractual Obligations Payments due by periodTotal
    
    Less than 1 year
    
    1-3 years
    
    4-5 years
    
    After 5 years(in millions)Long-term debt(1)
    
    Rs.
    6,041.5
    
    
    Rs.
    1,030.5
    
    
    Rs.
    1,005.9
    
    
    Rs.
    5.1
    
    
    Rs.
    4,000.0Capital lease
obligations(2)
    
    
    44.5
    
    
    
    27.3
    
    
    
    17.2
    
    
    
    
    
    
    
    Operating leases(3)
    
    
    3,903.3
    
    
    
    612.5
    
    
    
    1,627.7
    
    
    
    936.5
    
    
    
    726.6Unconditional
purchase
obligations(4)
    
    
    608.6
    
    
    
    608.6
    
    
    
    
    
    
    
    
    
    
    
    Total contractual
cash obligations
    
    
    10,597.9
    
    
    
    2,278.9
    
    
    
    2,650.8
    
    
    
    941.6
    
    
    
    4,726.6
  (1)
    
    Long term debt mainly consists of Rs. 6,000 million of subordinated debt,
Rs. 27.5 million being the long term borrowing by our Employees Welfare
Trust and the balance Rs. 14.0 million being a concessional loan from an
agency to purchase of eco-friendly solar power panels.(2)
    
    Capital lease obligations pertain to assets taken on lease like ATMs,
VSATs and other equipment which was taken over at the time of our merger
with Times Bank.(3)
    
    Operating leases are principally the operating lease arrangements entered
by us with parties for the lease of office, branch and ATM premises and
residential premises for executives.(4)
    
    Unconditional purchase obligations principally constitute the capital
expenditure commitments in fiscal 2004. See Capital Expenditure section in
Managements Discussion and Analysis. 78




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Commercial Commitments Our commercial commitments principally consists of letters of credit,
guarantees, foreign exchange and derivative contracts. Based on historical trends, the Bank has recognized a liability of Rs.
112.7 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 (FIN 45), issued in November 2002. As part of its risk management activities, the Bank continuously monitors
the credit-worthiness of the customer as well as the guarantee exposure;
however, if the customer fails to perform the specified obligation to the
beneficiary, the beneficiary may draw upon the guarantee by presenting
documents that are in compliance with the guarantee. In that event the Bank
makes payment on account of the indebtedness of the customer or makes payment
on account of the default by the customer in the performance of an obligation,
to the beneficiary up to the full notional amount of the guarantee. The
customer is obligated to reimburse the Bank for any such payment. If the
customer fails to pay, the Bank would, as applicable, liquidate collateral
and/or set off accounts. The residual maturity of the above is set forth in the following table: Amount of commitment expiration per periodTotal amounts
    
    Less than
    
    
    
    
    
    
    
    
    
    Overcommitted
    
    1 year
    
    1-3 years
    
    4-5 years
    
    5 years(in millions)Documentary Credits
    
    Rs.
    18,921.0
    
    
    Rs.
    16,694.1
    
    
    Rs.
    2,210.3
    
    
    Rs.
    16.6
    
    
    Rs.
    Guarantees
    
    
    16,413.8
    
    
    
    6,399.4
    
    
    
    8,159.4
    
    
    
    838.9
    
    
    
    1,016.1Forward exchange
contracts
    
    
    394,440.8
    
    
    
    347,446.6
    
    
    
    46,012.7
    
    
    
    981.5
    
    
    
    Derivative contracts*
    
    
    389,389.8
    
    
    
    31,368.2
    
    
    
    340,985.6
    
    
    
    15,820.6
    
    
    
    1,215.4Total contractual
cash obligations
    
    
    819,165.4
    
    
    
    401,908.3
    
    
    
    397,368.0
    
    
    
    17,657.6
    
    
    
    2,231.5
 * Denotes notional principal amounts. 79




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MANAGEMENT Directors and Executive Officers Our organizational documents provide that until otherwise determined by a
general meeting of shareholders, the number of our directors shall not be less
than three or more than 15 directors, excluding directors appointed pursuant to
the terms of our issued debt. Our board of directors currently consists of ten
members (as of March 31, 2004: eleven members and as of 31st March, 2003: nine
members). As per the Indian Companies Act, 1956, two third of our directors are
required to retire by rotation, with one third of these retiring at each annual
general meeting. However, any retiring director may be re-appointed by
resolution of the shareholders. Under the terms of our organizational documents, HDFC Limited has a right
to nominate two directors who are not required to retire by rotation, so long
as HDFC Limited, its subsidiaries or any other company promoted by HDFC Limited
either singly or in aggregate holds not less than 20% of our paid up equity
share capital. Two directors who are not liable to retire nominated by HDFC
Limited include the chairman and the Managing Director. The India Private
Equity Fund (Mauritius) and Indocean Financial Holding Limited, two funds
advised by J P Morgan Partners Advisors, Singapore (collectively the Strategic
Investors) have the right to appoint two directors so long as their combined
equity share holding is 10% or greater and one director if less than
10% but at least 7%. Since the shareholding of the Strategic
Investors has declined to less than 7% of the share capital of the Bank, there is no longer a nominee of
the Strategic Investors on the Board. The Bennett Coleman Group has the right
to appoint one director so long as its equity holdings do not fall below 5%.
Mr. Vineet Jain has been nominated by the Bennett Coleman Group. The Banking Regulation Act, 1949 requires that not less than 51% of the
board members shall have special knowledge or practical experience in one or
more of the following areas: accounting, finance, agriculture and rural
economy, banking, co-operation, economics, law, small scale industry and any
other matter as the RBI may specify. Out of these, not less than two directors
shall have specialised knowledge or practical experience in respect of
agriculture and rural economy, co-operation or small scale industry. Dr.
(Mrs.) Amla Samanta has specialised knowledge and experience with small scale
industries. Dr. Samanta relinquished the office of the Director with effect
from April 25, 2004 pursuant to the provisions of the Banking Regulation Act,
1949 which provides that no Director of a banking company other than the whole
time director can hold office for a continuous period exceeding eight years.
Dr. Gadwal has specialised knowledge and experience in the agricultural sector. Interested directors may not vote at board proceedings, except where the
interest is based solely on a contract of indemnity for which the director is a
surety, the interest is based on the directors involvement as director of
another company and holder of shares of that company, or where a proper
notification has been given under the Companies Act, 1956. None of our directors or executive officers holds 1% or more of our shares
except as set forth in the section Principal Shareholders. 80




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Our board of directors as at March 31, 2004 are as follows: Name
    
    Position
    
    AgeMr. Jagdish Capoor
    
    Chairman
    
    
    65Mr. Aditya Puri
    
    Managing Director
    
    
    54Mr. Anil Ahuja
    
    Non-executive Director
    
    
    42Dr. V. R. Gadwal
    
    Non-executive Director
    
    
    66Mr. Vineet Jain
    
    Non-executive Director
    
    
    38Mr. K. M. Mistry
    
    Non-executive Director
    
    
    50Dr. (Mrs.)
Amla Samanta (1)
    
    Non-executive Director
    
    
    49Mrs. Renu Karnad
    
    Non-Executive Director
    
    
    52Mr. Arvind Pande
    
    Non-Executive Director
    
    
    62Mr. Bobby Parikh (2)
    
    Non-Executive Director
    
    
    40Mr. Ranjan Kapur (3)
    
    Non-Executive Director
    
    
    61
  1)
    
    Dr. (Mrs.) Amla Samanta relinquished the office of the director with
effect from April 25, 2004.2)
    
    Mr. Bobby Parikh was appointed as an additional director with effect
from January 9, 2004.3)
    
    Mr. Ranjan Kapur was appointed as an additional director with effect
from January 9, 2004. 81




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Our executive officers as at September 2004 are as follows: Name
    
    Position
    
    Age
    
    Loans Outstanding(1)(As of March 31, 2004)(Rs. million)Mr. Aditya Puri
    
    Managing Director
    
    
    54
    
    
    
    5.0Mr. Vinod G. Yennemadi
    
    Head, Finance, Administration, Legal and Secretarial
    
    
    63
    
    
    
    2.1Mr. Samir Bhatia
    
    Head, Corporate Banking
    
    
    41
    
    
    
    4.6Mr. Harish Engineer
    
    Head, Wholesale Banking
    
    
    56
    
    
    
    2.3Mr. Sudhir Joshi
    
    Head, Treasury
    
    
    57
    
    
    
    Mr. C. N. Ram
    
    Head, Information Technology
    
    
    47
    
    
    
    Mr. Bharat Shah
    
    Head, Custody and Depository Services
    
    
    57
    
    
    
    4.1Mr. G. Subramanian
    
    Head, Audit, Compliance, Vigilance and Service Quality
    
    
    57
    
    
    
    4.3Mr. Paresh Sukthankar
    
    Head, Credit and Market Risk and Human Resource
    
    
    43
    
    
    
    4.0Mr. Neeraj Swaroop
    
    Head, Retail Banking
    
    
    46
    
    
    
    3.2Mr. A. Rajan
    
    Head, Operations
    
    
    52
    
    
    
    
   (1)
    
    Loans to management
comprise housing loans and personal loans given as per the terms and
conditions of employment. The Bank had not granted any loans to the
management when the blanket of prohibition on loans existed as per SEC
rules. Mr. H. Srikrishnan, Head, Transactional Banking and Operations, resigned
from the services of the Bank with effect from April 6, 2004. The business address for our directors and officers is HDFC Bank House,
Senapati Bapat Marg, Lower Parel (West), Mumbai - 400 013, India. The following are brief biographies of our existing directors: Mr. Jagdish Capoorholds a Master of Commerce degree and is a Certified
Associate of the Indian Institute of Bankers. Mr. Capoor was appointed as
part-time Chairman of the Bank for a period of 3 years with effect from July 6,
2001. Prior to joining us, Mr. Capoor was a Deputy Governor of the RBI. Mr.
Capoor was Chairman of Deposit Insurance & Credit Guarantee Corporation of
India and Bharatiya Reserve Bank Note Mudran Ltd. Presently, Mr. Capoor is a
director in Indian Hotels Co. Ltd, Assets Care Enterprise Ltd. and Agricultural
Finance Corporation Ltd. He is also a member of the Board of Governors of the
Indian Institute of Management, Indore and The Stock Exchange, Mumbai. At the
Annual General Meeting of the Bank held on May 26, 2004, the
shareholders
approved the re-appointment of Mr. Capoor as Chairman on a part time basis for
a period of three years with effect from July 6, 2004 at the revised terms and
conditions. 82




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Mr. Aditya Puriholds a Bachelors degree in Commerce from Punjab
University and is an associate member of the Institute of Chartered Accountants
of India. Mr. Puri has been our Managing Director since September, 1994. Mr.
Puri has over 27 years of experience in both domestic and international
banking. Prior to joining us, Mr. Puri was chief executive officer of Citibank
Malaysia from 1992 to 1994. At the Annual General Meeting of the Bank held on
May 26, 2004, the shareholders approved the re-appointment of Mr. Puri as
Managing Director from September 30, 2005 to March 31, 2007 at the revised
terms and conditions. Mr. Anil Ahujaholds a Bachelor of Technology degree from the Indian
Institute of Technology, New Delhi and a Post-Graduate Diploma in Business
Management from the Indian Institute of Management, Ahmedabad. Mr. Ahuja has
served as a non-executive director since July 16, 1999. Presently, he is the
CEO of J.P. Morgan Partners Advisors, Singapore. He also serves as a director
on the boards of HDFC Securities Limited, MTR Foods Limited and Dominos Pizza
India Pvt. Ltd. In the past, he had served as an executive director to
Indocean Chase Capital Advisors and as a Vice President of Citibank N.A.
Mr. Ahuja was a nominee of The India Private Equity Fund (Mauritius) and
Indocean Financial Holding Limited (Strategic Investors). Since the
shareholding of the Strategic Investors has declined to less than 7% of the
share capital of the Bank, Mr. Ahuja is no longer a nominee of the Strategic
Investors. He is now on the Board of the Bank in his individual capacity. Dr. V.
R. Gadwalholds Bachelor and Master of Science degrees from Osmania
University and a doctorate in agriculture from the Indian Agricultural Research
Institute. He is also a Fellow Member of the Botanical Society of India and the
Indian Society of Genetics and Plant Breeding. Dr. Gadwal has been one of our
non-executive directors since March 15, 1999. Dr. Gadwal also serves as
consultant and advisor to agricultural research and development institutions
such as Maharashtra Hybrid Seeds Co. Ltd. (MAHYCO) and MAHYCO Research
Foundation. He also serves as an advisor to the Agricultural Research and
Development Organisation. Presently, Dr. Gadwal is the President of the Indian
Society for Cotton Improvement. Mr. Vineet Jainholds a Bachelors degree in Science and a degree in
International Business Administration - Marketing. Mr. Jain has been our
non-executive director since April 14, 2001. He also serves as the Managing
Director of Bennett, Coleman & Co. Limited, as director of Times Internet
Limited, Times Online Money Limited, Times Infotainment Media Limited, The
Press Trust of India Ltd, Bharat Nidhi Limited and Magz International Limited.
Mr. Jain has transformed the Times Group from Indias leading publishing house
to Indias largest diversified and multi faceted media conglomerate. Mr. Jain
is a nominee of the Bennett Coleman group and is required to retire by
rotation. Mr. K.
M. Mistryholds a degree of Bachelor of Commerce in Advanced
Accountancy and Auditing and is also a Chartered Accountant. He was actively
involved in setting up of several HDFC group companies, including HDFC Bank.
Mr. Mistry had been deputed on consultancy assignments to the Commonwealth
Development Corporation (CDC) in Thailand, Mauritius, the
Caribbean Islands and
Jamaica. He has also worked as a consultant for the Mauritius Housing Company
and for the Asian Development Bank. Mr. Keki Mistry is the Managing Director
of Housing Development Finance Corporation Ltd and Chairman of GRUH Finance
Limited. He serves as director in HDFC Developers Ltd., HDFC Chubb General
Insurance Company Ltd., HDFC Trustee Company Ltd, HDFC Standard Life Insurance
Co Ltd., Credit Information Bureau (India) Ltd., Infrastructure Leasing &
Financial Services Ltd., Intelenet Global Services Ltd., Sun Pharmaceuticals
Industries Ltd., Mahindra Holidays and Resorts India Ltd. and The Great Eastern
Shipping Co. Ltd. Mrs. Renu Karnadis a law graduate and also holds a Master degree in
Economics from Delhi University. Mrs. Karnad has been with HDFC Ltd. since
1978 and was appointed as the executive director of HDFC Ltd. in 2000. She is
in charge of overall business activities for HDFC Ltd. in the North India
region and state of Gujarat and oversees all aspects of lending operations on
an all India basis. She is a director in HDFC Asset Management Co. Ltd., GRUH
Finance Ltd., HDFC Realty Ltd., Credit Information 83




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Bureau (India ) Ltd. (CIBIL ), Feedback Ventures Ltd., HDFC Chubb General
Insurance Company Ltd., Mother Dairy Fruits & Vegetables Ltd., Ascendas Ltd.
and ICI India Ltd. Mr. Arvind Pandeis a Bachelor of Science from Allahabad University, a
Bachelor and Master of Arts in Economics from Cambridge University, U.K. He
started his career in the Indian Administrative Services and has held various
responsible positions in the Government of India. He was a Joint Secretary to
the Prime Minister of India for his expertise in Economics, Science and
Technology issues. He was a director of the department of Economic Affairs in
the Ministry of Finance for the Government of India and has dealt with World
Bank aided projects. He was the Chairman and Chief Executive Officer of The
Steel Authority of India Limited (SAIL). He has travelled extensively within
and outside of India and participated in several aid/trade/procurement related
negotiations. Mr. Pande is a director in Sandhar Locking devices Limited, IVRCL
Infrastructure & Projects Limited and Assets Care Enterprise Limited. Mr. Bobby Parikhis a Chartered Accountant and has specialised in the
areas of Tax and Business Advisory Services with extensive experience in
advising clients across a range of industries. Mr. Parikh is a member of
various trade and business associations and their committees. He is also on the
advisory/executive boards of several non-Government and non-profit
organisations. Mr. Parikh was the Country Managing Partner of Arthur Anderson &
Co. and until recently, the Chief Executive Officer of Ernst & Young. Mr. Bobby
Parikh is in the Board as an US GAAP financial expert. Mr. Ranjan Kapuris an M.A. in English from St. Stephens College, New
Delhi. He started his career with Citibank, N.A. Mr. Kapur had served senior
positions in Ogilvy & Mather India Private Limited (O&M). He was nominated to
the world wide board of O&M in 1998 and was elevated to the position of
Executive Chairman, India and Vice-Chairman, Asia Pacific, a year later. He
retired from O&M on December 31, 2003. Mr. Kapur is a director of Pidilite
Industries Limited and three other private limited companies. The following are brief biographies of our existing executive officers: Mr. Vinod G. Yennemadiholds a Bachelor of Commerce degree, and is also a
Fellow of the Institute of Chartered Accountants of India and an Associate of
the Institute of Chartered Accountants in England and Wales. Mr. Yennemadi has
been the Head, Finance, Administration, Legal, and Secretarial since April
1994. In addition, Mr. Yennemadi serves as a director of Softcell Technologies
Limited, HDFC Securities Limited, SolutionNET India Private Limited, Atlas
Documentary Facilitators Private Limited, Flexcel International Private Limited
and as a trustee for the HDFC Bank Employee Welfare Trust. Mr. Samir Bhatiaholds a Bachelor of Commerce degree from the University
of Bombay, a Cost Accountancy degree from the Institute of Cost and Works
Accountants of India and a Chartered Accountancy from the Institute of
Chartered Accountants of India. He is currently our Head, Corporate Banking,
and had previously served as our Regional Head, Corporate Banking in various
regions of India since September 1994. Mr. Harish Engineerholds a Bachelor of Science degree in Physics and
Chemistry and a Diploma in Business Management. Mr. Engineer has serves as
Head, Financial Institution Group since November 1999, and previously served as
Head, Corporate Banking since July 1994. Mr. Sudhir Joshiholds a Bachelor of Science degree in Chemistry from the
University of Pune and is a Certified Associate of the Indian Institute of
Bankers. Mr. Joshi has held the position of Head, Treasury since April 2000. He
was Head, Financial Investment Group for a brief period between February 2000
and March 2000. From June 1995 until joining us, Mr. Joshi served as executive
vice president, treasury, of Times Bank Limited. Mr. C.
N. Ramholds a Bachelor of Technology degree in Electrical
Engineering from the Indian 84




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Institute of Technology and a Post Graduate Diploma in Management from the
Indian Institute of Management. Mr. Ram has served as Head, Information
Technology since July 1994. In addition, he also serves as a director on the
board of a number of companies, including our affiliates SolutionNET India
Private Limited, Flexcel International Private Limited and Softcell
Technologies Limited. Mr. Bharat Shahholds a Bachelor of Science degree from Bombay University,
and a Higher National Diploma in Applied Chemistry from London University. He
has served as our Head, Custody and Depositary Services since December 1994 and
served in the past as our Head, Human Resources. Mr. Shah also serves as a
non-executive director of Computer Age Management Services Private Limited,
HDFC Securities Limited and Atlas Documentary Facilitators Private Limited. Mr. G. Subramanianholds a Bachelor of Science degree in Chemistry from
Madras Christian College and is a Certified Associate of the Indian Institute
of Bankers, Mr. Subramanian has been the Head, Audit, Compliance, Vigilance and
Service Quality since January 1995. Prior to that Mr. Subramanian was deputy
general manager of the RBI. Mr. Subramanian also serves as a director on the
board of Computer Age Management Services Limited. Mr. Paresh Sukthankarholds a Bachelor of Commerce degree and Master in
Management Studies from Bombay University. Mr. Sukthankar has held the position
of Head, Credit and Market Risk Management since September 1994 and since
December 1999 also supervises the Human Resources function. Mr. Neeraj Swaroopholds a Bachelor of Technology degree from the Indian
Institute of Technology, a Master of Business Administration from the Indian
Institute of Management, and a Diploma in Retail Bank Management from the
Graduate School of Retail Bank Management, University of Virginia. He has held
the position of Head, Marketing and Retail Assets since April 1999 and is
currently Head, Retail Banking. Mr. Swaroop also serves as a director on the
board of SolutionNet India Private Limited. Mr. A. Rajanholds a bachelors degree in Science. He has 24 years of
experience in all aspects of Operations in International Banking with
significant accomplishments in operations integration, system implementations
and enhancement in operational efficiency through radical re-engineering of
processes and optimal technology. He was part of the core management team
which set up HDFC Bank as its Head of Operations, responsible for creating the
Operations team and detailed Operating Procedures. He was also the CEO of
Flexcel International for 3 years, and was responsible for setting up and
marketing a pioneering concept of ASP in providing core banking solutions and
data center management for the banking industry in India. He is presently, the
Country Head  Operations and is responsible for Bank Operations which
includes, TBG Operations, Retail Operations and Treasury Operations. Corporate Governance Audit and Compliance Committee The terms of reference of the Audit and Compliance Committee are in
accordance with paragraph C and D of clause 49(II) of the Listing Agreement
entered into with the Stock Exchanges. The Audit and Compliance Committee
approves and reviews our audit and compliance procedures, techniques and other
regulatory requirements. It also reviews our internal control systems and the
functioning of our branches and divisions, recommends appointment and removal
of external auditors and fixing of their fees, pre-approves all services to be
provided by our auditors, reviews with management the annual financial
statements with special emphasis on accounting polices and practices,
compliance with accounting standards and other legal requirements concerning
financial statements. As of March 31, 2004, the members of the Audit and
Compliance Committee were Mr. Jagdish Capoor, Mr. Anil Ahuja, Dr. (Mrs.) Amla
Samanta, Mr. Arvind Pande and Mr. Bobby Parikh. 85




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Mr. Bobby Parikh was inducted as a member with effect from March 26, 2004.
On April 16, 2004 the Audit Committee of the Bank was reconstituted whereby
Dr. Samanta ceased to be its member. Mr Bobby Parikh has been nominated by the
board as financial expert. Risk Monitoring Committee The Risk Monitoring Committee monitors our credit and market risk policies
and procedures, approves and reviews dealing authorities and limits for our
treasury operations and reviews our risk monitoring systems and risk reporting
procedures. The committee also ensures that our credit exposure to any one
group or industry does not exceed the internally set limits and that the risk
is diversified. The members of the committee as of March 31, 2004 were Mr.
Aditya Puri, Mr. Anil Ahuja and Mrs. Renu Karnad. Credit Approval Committee The Credit Approval Committee approves credit exposures that are beyond
the powers delegated to our executive officers. The members of the committee as
of March 31, 2004 were Mr. Jagdish Capoor, Mr. Keki Mistry, Dr. (Mrs.) Amla
Samanta and Mr. Aditya Puri. Mr. Keki Mistry was inducted as a member of the Credit Approval Committee
with effect from July 14, 2003. On April 16, 2004 the Credit Approval Committee was reconstituted whereby
Mr. Bobby Parikh was inducted as member of the Committee and Dr. Samanta ceased
to be a member. Compensation Committee The Compensation Committee has the following purposes:  
    
    To review the overall compensation structure and policies with a view
to retain and motivate our employees;
    
    To review our position in the industry in relation to compensation
levels through compensation surveys;
    
    To consider employee stock options; and
    
    To consider any other compensation related issues or matters relating
to our employees other than the managing director and the chairman. The members of the Compensation Committee as of March 31, 2004 were Mr.
Jagdish Capoor, Mr. Anil Ahuja, Dr. (Mrs.) Amla Samanta and
Dr. V. R. Gadwal. On April 16, 2004 the Compensation Committee was reconstituted whereby Mr.
Ranjan Kapur was inducted as a member of the Committee and Dr. Samanta ceased
to be a member of the Committee. Share Committee (Shareholders and Investors Grievance Committee) The Share Committee approves and monitors transfers, transmissions,
splitting and consolidation of our shares and bonds. The committee also
monitors responses/redressals to complaints from shareholders relating to
transfer of shares, non-receipt of balance sheet, dividends and other issues.
The members of the committee as of March 31, 2004 were Mr. Jagdish Capoor and
Mr. Aditya Puri. 86




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Premises Committee The Premises Committee approves the purchase or lease of premises for the
use of our branches, ATM premises, executive offices and residential premises
for executives in accordance with the guidelines set by the board of directors.
The members of the committee are Mr. Aditya Puri, Dr. (Mrs.) Amla Samanta, Dr.
V. R. Gadwal, Mr. Ranjan Kapur and Mr. K. G. Krishnamoorthy, the latter in an
advisory capacity. On April 16, 2004, the Premises Committee was reconstituted whereby Mr.
Ranjan Kapur and Dr. V. R. Gadwal were inducted as members of the Committee and
Dr. Samanta ceased to be a member of the Committee. Nomination Committee The Bank has constituted a Nomination Committee for recommending
appointment of independent/non-executive directors for the Board of the Bank.
The Nomination Committee will be required to scrutinize the nominations
received for the independent/non-executive directors with reference to their
qualifications and experience. It will assess the formal qualifications,
previous experience, track record and integrity of the candidate to ensure that
he/she is the Fit and Proper person. The integrity of the candidate may be
assessed on the basis of features like criminal records, financial position,
civil actions undertaken to pursue personal debts, refusal of admission to and
expulsion from professional bodies, sanctions applied by regulators or similar
bodies and previous questionable business practices. The Committee was
constituted on April 15, 2003. The members of the Nomination Committee are Mr. Jagdish Capoor, Mr. Anil
Ahuja, Dr. V. R. Gadwal and Mr. Arvind Pande. Committees of Executives We have also constituted committees of executives that meet frequently to
discuss and decide on management of assets and liabilities, as well as matters
including other operations and personnel, and other operational issues. Borrowing Powers of Directors Under our articles of association, our directors may, by way of a
resolution at a meeting of the board, direct the bank to borrow money for our
business purposes. Borrowings may be made upon such terms and conditions as the
directors determine to be appropriate. Such terms may include the lenders
right to appoint directors, the allotment of shares to certain public financial
institutions, and (with prior shareholder and regulatory approval) the
allotment of shares to other entities. Compensation of Directors and Executive Officers The compensation of our Managing Director is approved by the shareholders
and the Reserve Bank of India on the recommendation of the board of directors.
In fiscal year 2004, none of our executive officers earned a salary plus bonus
in excess of US$ 200,000 (at the average conversion rate). During the year, our Chairman received a salary of
Rs. 600,000/- per annum. At the Annual General Meeting of the Bank held on May 26,
2004, the shareholders approved the revised remuneration payable to Mr. Capoor
with effect from July 6, 2004 at Rs. 900,000/- per annum and Bank leased
accommodation. Our Managing Director received a monthly salary of Rs. 300,000/-
and other 87




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emoluments as have been approved by the shareholders of the Bank at the 8th
Annual General Meeting held on May 30, 2002 till March 31, 2004. At the 10th
Annual General Meeting of the Bank held on May 26, 2004, the shareholders
approved the revision in the remuneration and other emoluments payable to the
Managing Director with effect from April 1, 2004. For the fiscal year ended
March 31, 2004, the aggregate amount of compensation paid to all of our
executive officers was approximately Rs. 178.5 million. For the fiscal year
ended March 31, 2004, the aggregate amount accrued by us to provide pension,
retirement or similar benefits for our directors and executive officers was
approximately Rs. 11.3 million. Under our organizational documents, each director, except the Managing
Director, is entitled to remuneration for attending each meeting of the board
or of a board committee. The amount of remuneration is set by the board from
time to time in accordance with limitations prescribed by the Indian Companies
Act or the government of India. Remuneration for attending board meetings and
committee meetings is Rs. 10,000 per meeting, except in case of meetings of the
Share Committee of the Bank where the remuneration is Rs. 5,000 per meeting. We
reimburse directors for travel and related expenses in connection with board
and committee meetings and with related matters. The RBI had issued guidelines relating to salary and other remuneration
payable to the Chairman, Managing Director and Whole Time Directors of new
Private Sector Banks. Pursuant to the guidelines, the RBI has permitted banks
to fix the performance bonus payable to the Managing Director/Whole Time
Directors on either of two criteria:  (a)
    
    up to a maximum of 25% of the salary; or(b)
    
    the average bonus paid to the officers/employees, provided that there are
more than one category of officers/employees (excluding top management)
who are eligible for variable performance bonus. The average bonus paid to
officers/employees is calculated by dividing the total salary bill by the
total bonus paid to them. The Reserve Bank of India has also advised the Banks to review and fix at
their discretion, the monthly remuneration paid to their CEOs/Managing
Directors keeping in view the bonus guidelines stated above. Accordingly, a
resolution was passed at the 10th Annual General Meeting of the Bank held on
May 26, 2004 for revision in the remuneration payable to the Managing Director. Other than our Chairman and Managing Director, none of our directors has a
service contract with us. Employees Stock Option Scheme During the year, the Bank granted 6.8 million options under ESOS 4, 2.5
million options under ESOS 5 and 1.7 million options under ESOS 6 (an aggregate
of 11.0 million options) at prices of Rs. 358.60, Rs. 366.30 and Rs. 362.90 per
option respectively. The prices for the options under ESOS 4 & 6 are based on
the market price of the shares of the Bank on the immediately preceding
business day (of National Stock Exchange of India Limited) on the date of grant
of option. These options are governed by the shareholders resolution passed at
the 9th Annual General Meeting of the Bank held on June 2, 2003. The price for
the options under ESOS 5 is based on the average daily closing price of the
shares of the Bank quoted on The Stock Exchange, Mumbai for a period of sixty
days preceding the grant of option. These options were governed by the
shareholders resolution passed at the Extra-ordinary General Meeting of the
Bank held on January 1, 2000. The options would vest over a period of 3 years
on the expiry of minimum period of one year from the date of the grant. Out of the options granted under the Employees Stock Option Scheme in January,
2001 (ESOS 2) and February, 2002 (ESOS 3), 1.5 million and 0.4 million options,
respectively, have been vested in the employees. During the year under review, 2.8 million options were exercised and allotted
by the Bank resulting in an increase in the paid-up capital of Rs. 27.5 million
and share premium by Rs. 476.8 million. The allotment 88




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of 1.1 million shares in respect of options exercised in the last quarter was
made on April 5, 2004. The new shares issued under ESOS would rank pari-passu
with the existing shares in all respects. During the year 0.5 million options
lapsed on account of staff resignations. After considering the exercised and
lapsed options, 14.32 million options are still outstanding as at 31 March,
2004. Employees Welfare Trust Plan An Employees Welfare Trust (the EWT) was established in 1994 for
various welfare activities for the benefit of the Banks employees. The EWT
has borrowed funds from third parties and initially subscribed to an aggregate
of 10,000,000 equity shares of the Bank at the same price as available to other
shareholders, and from time to time, also makes open market purchases of
shares. In pursuance to the Trusts objectives, grants are allotted to
employees, directors and advisors at prices designated by the trustees. The
vesting period varies at the discretion of the trustees from grant to grant,
but is generally between twelve and twenty four months. Purely from an accounting perspective under US GAAP, as required by AICPA
Statement of Position No. 93-6, the Bank is required to account for the equity
shares of the Bank held by the EWT as treasury shares until transferred and
report the external borrowings of the EWT as borrowings of the Bank.
Consequently, dividends paid to the EWT are eliminated, and the interest cost
incurred by the EWT and stock based compensation are charged as an expense by
the Bank. Since November 1994, the EWT has granted an aggregate of 9,723,225
grants. The Bank has recognized deferred stock based compensation on each grant
as the difference between the closing price on The Stock Exchange, Mumbai and
the applicable grant price. The Bank has recognized stock based compensation
expense under this scheme of Rs. 56.7 million, Rs. 125.9 million and Rs. 113.7
million, for the years ended March 31, 2002, 2003 and 2004, respectively. Other Compensation All employees, including our managing director and officers, receive the
benefit of our gratuity and provident fund retirement schemes. Our
superannuation fund covers all employees at manager level or above, including
our managing director. Our gratuity fund, required under Indian law, is a
defined benefit plan that, upon retirement, death while employed or termination
of employment, pays a lump sum equivalent to 15 days salary for each completed
year of service. The superannuation fund is a retirement plan under which we
annually contribute 13% (15% for the managing director) of the employees
eligible annual salary to the administrator of the fund. Under the provident
fund, required by Indian law, both we and the employee contribute monthly at a
determined rate (currently 12% of the employees salary) to a fund set up by
us, which is administered by a board of trustees. For employees whose basic
salary is less than Rs. 6,500 per month a portion (currently 8.33% of the
employees salary) of the employers contribution is transferred to a fund
administered by the government in accordance with the Provident Fund Act. We
retain liability for future payments under the gratuity fund, but not under the
superannuation or provident funds. 89




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Controls and procedures Evaluation of
disclosure controls and procedures Based on their evaluation as of a date within 90 days of the filing of
this Annual Report on Form 20-F, our principal executive officer and principal
financial officer have concluded that our disclosure controls and procedures as
defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of
1934 (the Exchange Act) are effective to ensure that information required to
be disclosed by us in reports that we file or submit under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in the Securities and Exchange Commission rules and forms. Changes in internal
controls There were no significant changes in our internal controls or in other
factors that could significantly affect these controls subsequent to the date
of their evaluation. There were no significant deficiencies or material
weaknesses, and therefore there were no corrective actions taken. Audit committee financial
expert Mr. Bobby Parikh joined our board of directors on January 9, 2004. On the
same day our Board nominated Mr. Parikh as a member of its audit committee. Our
board of directors has determined Mr. Bobby Parikh as an audit committee
financial expert as defined in Item 401(h) of Regulation S-K, and is
independent pursuant to applicable SEC rules. Code of ethics On July 14, 2004 , our audit committee adopted a written code of ethics as
defined in Item 406 of Regulation S-K, applicable to the Managing Director
(Chief Executive Officer), The Chief Financial Officer and Group Heads of the
Bank . We will provide a copy of such code of ethics to any person without
charge, upon request. On July 14, 2004 , our audit committee also adopted a Whistle Blower
Policy wherein it has established procedures for receiving, retaining and
treating complaints received, and procedures for the confidential, anonymous
submission by employees of complaints regarding questionable accounting or
auditing matters, conduct which results in a violation of law by HDFC Bank or
in a substantial mismanagement of Banks resources. Under this policy our
employees are encouraged to report questionable accounting matters, any
reporting of fraudulent financial information to our shareholders, the
government or the financial markets any conduct that results in a violation of
law by HDFC Bank our management (on an anonymous basis, if employees so
desire). Likewise, under this policy, we have prohibited discrimination,
retaliation or harassment of any kind against any employee who, based on the
employees reasonable belief that such conduct or practices have occurred or
are occurring, reports that information or participates in an investigation. 90




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Principal Accountant Fees and Services The following table sets forth for the fiscal years indicated the fees
paid to our principal accountant and its associated entities for various
services they provided us in these periods. Fiscal year endedMarch 31,
    
    March 31,Type of Service
    
    2003
    
    2004
    
    Description of Services(in millions)Audit services
    
    Rs.
    3.8
    
    
    Rs.
    3.9
    
    
    Audit of financial statementsAudit
related services
    
    
    
    
    
    
    1.8
    
    
    Services related to review of
financial statements and due diligenceTax fees
    
    
    
    
    
    
    
    
    
    Tax audit, tax returns, tax
processing, tax filing and advisory servicesOther services
    
    
    
    
    
    
    0.6
    
    
    Statutory certifications, quality
registrar, work permit related services and other advisory servicesRs.
    3.8
    
    
    Rs.
    6.3
 Our audit committee charter requires us to take the prior approval of our audit
committee on every occasion we engage our principal accountants or their
associated entities to provide us any non-audit services. We disclose to our
audit committee the nature of services that are provided and the fees to be
paid for the services. The Bank has put in place a pre-approval policy for audit and non audit services to ensure the independence of the public accountant. All of the non-audit services provided by our principal
accountants or their associated entities in the previous year have
been pre-approved by our Audit Committee. 91




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Compliance with NYSE Listing Standards on Corporate Governance We are incorporated under the Indian Companies Act, 1956, and our equity shares
are listed on the major stock exchanges in India. Our corporate governance
framework is in compliance with the Indian Companies Act, 1956, the regulations
and guidelines of the Securities and Exchange Board of India (SEBI) and the
requirements of the listing agreements entered into with the Indian stock
exchanges. We also have American Depositary Shares (ADS) listed on the New
York Stock Exchange (the NYSE). On November 4, 2003, the Securities and Exchange Commission (the SEC)
approved new rules proposed by the NYSE intended to strengthen corporate
governance standards for listed companies. These new corporate governance
listing standards supplement the corporate governance reforms already adopted
by the SEC pursuant to the Sarbanes-Oxley Act of 2002. Section 303A.11 of the NYSE Corporate Governance Standards requires listed
companies that are foreign private issuers to disclose the significant ways in
which their corporate governance practices differ from those followed by U.S.
companies under the NYSE Corporate Governance Standards. The table below sets
forth the differences between the rules applicable to U.S. companies under the
NYSE Corporate Governance Standards and HDFC Banks practices under Indian law. NYSE rule applicable toU.S. listed companies
    
    Indian law and HDFC Bank's practiceCompanies must have a majority
of independent directors.
(NYSE Corporate Governance
Standard 303A.01)
    
    Under Indian law, if the chairman of the
board of directors is not an executive
officer of the company, at least one third
of the directors should be independent.
If the chairman is an executive officer,
at least 50% of the companys directors
should be independent. The chairman of
our board of directors is not an executive
officer and 7 out of 10 members of the
board are independent.Certain heightened standards
apply to independent
directors (NYSE Corporate
Governance Standard 303A.02)
    
    Under Indian law, a director is
independent so long as he or she does
not have any material pecuniary
relationship or transactions (apart from
directors remuneration) with the company,
its promoters, its management or its
subsidiaries, which in the judgment of the
board may affect the independence or
judgment of the director. We apply the
Indian definition of independent. Under that definition, the board considers
Mr. Jagdish Capoor, the chairman of the
board, to be independent.Non-management directors must
meet at regularly scheduled
executive sessions without
management. (NYSE Corporate
Governance Standard 303A.03)
    
    Under Indian law, there is no requirement
for such sessions. HDFC Bank does not
regularly hold such meetings.Companies must have a
nominating/corporate
 governance committee composed
entirely of independent
directors. (NYSE Corporate
Governance Standard 303A.04)
    
    Under Indian law, a nominating/corporate
governance committee is not required.
However, HDFC Bank has a Nomination
Committee that is responsible for
recommending the appointment of
independent/non-executive directors to
the board of directors. The Nomination
Committee is composed of four
non-executive directors, all of whom are
independent.The nominating/corporate
governance committee must have
a written charter that
addresses certain specific
committee purposes and
responsibilities and provides
for an annual performance
evaluation of the committee.
(NYSE Corporate Governance
Standard 303A.04)
    
    Since Indian law does not require a
nominating/corporate governance committee,
it also does not require a charter for
such a committee. As a result, we have no
such charter.Companies must have a
compensation committee
composed entirely of
independent directors. (NYSE
Corporate Governance Standard
303A.05)
    
    Under Indian law, a companys board of
directors sets the compensation for
non-executive directors. Non-mandatory
Indian law recommends that companies
establish a remuneration committee
composed of non-executive directors and an
independent chairman to determine the
compensation of executive directors. HDFC
Bank has a Compensation Committee of four
non-executive directors, all of whom are
independent.The compensation committee
must have a written charter
that addresses certain
specific purposes and
responsibilities of the
committee and provides for an
annual performance evaluation
of the committee. (NYSE
Corporate Governance Standard
303A.05)
    
    Indian law does not require that the
compensation committee have a charter.
HDFC Bank does not have a charter.Companies must have an audit
committee that satisfies the
independence requirements of
Rule 10A-3 under the Exchange
Act and the requirements of
NYSE Corporate Governance
Standard 303A.02. (NYSE
Corporate Governance Standards
303A.06 and 303A.07)
    
    An audit committee is required under
Indian Law. HDFC Bank has an Audit and
Compliance Committee composed of four
non-executive directors, all of whom are
independent. The Committees chairman is
independent.The audit committee must have
a written charter that
addresses certain specific
purposes and responsibilities
of the committee, provides for
an annual performance
evaluation of the committee
and sets forth certain minimum
duties and responsibilities.
(NYSE Corporate Governance
Standard 303A.07)
    
    HDFC has a written audit committee charter
that provides for specific purposes and
responsibilities.Companies must adopt and
disclose corporate governance
guidelines. (NYSE Corporate
Governance Standard 303A.09)
    
    Indian law does not require the adoption
and disclosure of corporate governance
guidelines. However, information with
respect to corporate governance can be
found in our annual report for 2003-2004
under the heading Corporate Governance.Companies must adopt and
disclose a code of business
conduct and ethics for
directors, officers and
employees, and promptly
disclose any waivers of the
code for directors or
executive officers. (NYSE
Corporate Governance Standard
303A.10)
    
    As required by SEBI regulations, HDFC Bank
has adopted a code governing trading in
the companys securities by insiders. In
addition, HDFC Bank has adopted a Code of
Ethics for the Managing Director, CFO and
Senior Management of the company.
 92




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Memorandum and Articles of Association Set forth in this section are certain important provisions in the Banks
Memorandum and Articles of Association (the Articles). The main objects of the Bank are to carry on banking activity and other related
activities. The Banks objects and purposes can be found in clauses A and B
of the Articles. Under the Articles, a director may not vote, participate in discussions or be
counted for purposes of a quorum with respect to any decision relating to
whether the Bank will enter into any contract or arrangement if the director is
directly or indirectly interested in such contract or arrangement. The board
of directors may not hold meetings in the absence of a quorum. Pursuant to the
Indian Companies Act, 1956, directors of the Bank have the power to borrow
money for business purposes only with the consent of the shareholders (with
certain limited exceptions). Sections 172 through 187 of the Articles set forth certain rights and
restrictions relating to dividend distributions. One of these restrictions is
that dividends may be approved only at a general meeting of shareholders, but
in no event in an amount greater than the amount recommended by the board of
directors. Subject to the Indian Companies Act, 1956, profits of the Company are divisible
among shareholders in proportion to the amount of capital paid-up on the shares
held by them respectively. In the event of liquidation, surplus will be
distributed in proportion to the capital paid up or which ought to have been
paid up on the shares held by shareholders respectively at the time of
commencement of the winding up (without prejudice to the rights of the holders
of shares issued upon special terms or conditions). The board of directors may
make calls on shareholders in respect of all moneys unpaid on the shares held
by them and not by the conditions of allotment thereof. The rights and privileges of any class of shareholders may not be modified
without the approval of three-fourths of the issued shares of that class or the
sanction of a special resolution passed at a separate meeting of the holders of
the issued shares of that class. The annual general meeting shall be called for a time during business hours at
the registered office of the Bank or at some other place within the city in
which the registered office of the Bank is situated as the board of directors
may determine. The notice of the meeting shall specify it as the annual
general meeting. The board may also call an extraordinary meeting, and if
there is not a quorum of directors within India, any director or two
shareholders may call such a meeting. The board is required to call an
extraordinary meeting upon the requisition of a set number of shareholders, as
set forth in the Indian Companies Act, 1956. 93




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PRINCIPAL SHAREHOLDERS The following table contains information relating to the beneficial
ownership of our equity shares at March 31, 2004:  
    
    Each person or group of affiliated persons known by us to beneficially
own 5.0% or more of our equity shares; and
    
    All of our directors and officers as a group Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and includes voting and investment power
with respect to equity shares. Unless otherwise indicated, the persons in the
table have sole voting and sole investment control with respect to all equity
shares beneficially owned. We were founded by Housing Development Finance Corporation Limited, known
as HDFC Limited, the leading housing finance company in India. At March 31,
2004, HDFC Limited, together with its subsidiaries, held an aggregate of 24.18
% of our equity shares. Number ofequity shares
    
    Percentage oftotal
equityShares outstanding(4)HDFC group (not including the HDFC Bank Employees Welfare
Trust)
    
    
    68,861,000
    (1)
    
    
    24.18Funds advised by J P Morgan Partners Advisors Pte Ltd.
    
    
    15,603,638
    (2)
    
    
    5.48Bennett Coleman group
    
    
    16,192,408
    (3)
    
    
    5.69
  1)
    
    Includes: 38,860,000 equity shares held directly by HDFC Limited,
30,000,000 equity shares held by HDFC Investments Limited and 1,000 equity
shares held by HDFC Holdings Limited. HDFC Investments Limited and HDFC
Holdings Limited are controlled by HDFC Limited. Under the Indian Banking
Regulation Act, no person holding equity shares in a banking company can
vote more than 10.0% of the outstanding equity shares.2)
    
    Includes: 11,620,886 equity shares held by The India Private Equity Fund
(Mauritius) and 3,982,752 equity shares held by Indocean
Financial Holding Limited.3)
    
    Includes: 8,849,929 equity shares held by Bennett Coleman & Company
Limited, 2,486,956 equity shares held by Dharmayug Investments Limited and
4,855,523 equity shares held by other Bennett Coleman group entities.4)
    
    The percentage of total equity shares outstanding is calculated based on
the outstanding number of shares in accordance with Indian GAAP. 94




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RELATED PARTY TRANSACTIONS The following is a summary of transactions we have engaged in with our
principal shareholder, HDFC Limited and its subsidiaries and other related
parties since April 1, 2003. HDFC Limited is our promoter company. The HDFC
group companies own 24.2% of our equity shares. See Principal Shareholders. All transactions with HDFC group companies and the other related parties
listed below are on terms that we believe are as favorable to us as those that
could be obtained from a non-affiliated third party in an arms-length
transaction. In addition, our banking license from the RBI stipulates that we
can only transact business with HDFC Limited and its affiliates on an
arms-length basis. Atlas Documentary Facilitators Company Private Limited (ADFC) ADFC specializes in back-office processing. We regularly transact
business with ADFC. In fiscal 2004, we paid ADFC approximately Rs. 205.6
million for back-office processing services to the Bank, at unit rates in line
with the market. As at March 31, 2004, the Bank had provided a security
deposit amounting to Rs. 6.0 million to ADFC for the various services provided
by ADFC. We have made an equity investment of Rs. 0.2 million in ADFC which
represents 29.0% of share capital of ADFC. We believe that the transactions
entered into with ADFC are at arms length. HBL Global Private Limited (HBL Global) HBL Global Private Limited is a subsidiary of Atlas Documentary
Facilitators Company Private Limited, and provides the Bank with direct sales
support for certain products of the Bank. HBL Global was paid a fee of Rs.
742.2 million in the year ended March 31, 2004 which is line with the market
rates. As at March 31, 2004 the bank had provided a security deposit of Rs.
40.7 million for the services provided by HBL Global. An amount of Rs. 6.6
million was receivable from HBL Global as of that date. We do not presently
have any direct investment in HBL Global. Flexcel International Private Limited (Flexcel) Flexcel is a joint venture that has been promoted by the Bank and a leading
financial technology provider. Flexcel provides application service provider
(ASP) services to smaller banks. We made an investment of Rs. 15.3 million in
Flexcel. As HDFC Banks share of total accumulated losses made by Flexcel
exceeded the investment value, the same has been written off. A loan amount of
Rs. 5.0 million was outstanding in our books as on the balance sheet date.
Flexcel was paid Rs. 1.1 million for services received by the Bank. Salisbury Investments Private Limited We paid security deposits of Rs. 21 million and rent of Rs. 1.1 million
for the residential accommodation of the Managing Director to Salisbury
Investments Private Limited in which the relatives of the Managing Director
hold a stake. The value of security deposit and rent is based on an independent
assessment by a professional property valuation expert. HDFC Securities Limited (HSL) We acquired an equity stake in HDFC Securities Limited, which provides
broking services through the internet and other channels. We own 29.5% of the
equity shares and HDFC group companies own an aggregate of 68.5%. The two funds
advised by Indocean Chase Capital Advisors own 28.5%. We have paid Rs 3.7
million for sales assistance provided by HSL and Rs. 3.3 million as rent and
maintenance charges. We have received Rs. 1.7 million as recovery of costs
incurred by the Bank on behalf of HSL. We made an investment of Rs. 8.8 million
in HSL. As HDFC Banks share of total accumulated losses made by HSL exceeded
the investment value, the same has been written off. 95




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HDFC Limited (HDFC) From time to time, we borrow medium to long term funds, some of which are
from affiliates. At March 31, 2004, HDFC Limited held Rs. 27.5 million of the
debt issued by HDFC Bank Employees Welfare Trust which we have accounted for as
a leveraged ESOP and recognized this borrowing on our balance sheet. We
obtained regulatory approval to maintain a loan to HDFC Limited for Rs. 375
million that was originally made by and acquired from Times Bank Ltd. The loan
matured during the current year. The Bank earned interest of Rs. 23.4 million
from the said loan. Housing Loans We have recently commenced home loan business under an arrangement with
HDFC Ltd., whereby we act as a service associate to sell the HDFC Home Loan
product. Under this arrangement HDFC Ltd. approves and disburses the loans which
are booked in the books of HDFC Ltd. For such loans, we are paid a sourcing
fee. HDFC Ltd. will provide credit, legal and technical appraisal for these
loans. HDFC Ltd. is obligated to sell up to 70% of the fully disbursed home
loans sourced under the arrangement through the issue of mortgage backed pass
through certificates (PTCs) and the balance would be retained by HDFC Ltd. The
mortgage backed PTCs will be invested in by us at the underlying home loan
yields less a fee paid to HDFC Ltd. for administration and servicing of the
loans. The Bank has earned Rs. 9.1 million from HDFC Ltd. during the current
year. Property We have three premises located on properties owned or leased by HDFC. In
fiscal 2004, we paid an aggregate of Rs. 5.2 million per annum in rental fees
to HDFC for use of these properties. We believe that we pay market rates for
these properties. We have also given HDFC a deposit of Rs. 0.2 million to
secure these leased properties and have paid Rs. 2.5 million to HDFC as
maintenance and service charges. Enterprises under common control of HDFC Ltd., our largest shareholders
include: HDFC Developers Ltd.          HDFC Realty Limited (HDFC Realty) We paid Rs. 1.2 million to HDFC Realty towards property related services. HDFC Standard Life Insurance Company Ltd. (HDFC Standard Life) We paid Rs. 0.1 million to HDFC Standard Life as life risk premium for our
employees covered under superannuation. We received fees and commission
aggregating Rs. 29.9 million towards sale of insurance policies. 96




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HDFC Asset Management Company Ltd. (HDFC AMC) We paid Rs. 2.9 million as rent and maintenance charges to HDFC AMC and
placed a security deposit of Rs. 1.7 million to secure leased property. We
received Rs. 58.6 million from HDFC AMC for distribution of units of mutual
funds. We have entered into an arrangement with HDFC AMC, whereby, the latter
will invest the Banks funds in primarily debt instruments up to an amount
approved by our Board. HDFC AMC will act in a fiduciary capacity with regard
to the Banks funds. The amount of investment outstanding as on March 31, 2004
was Rs. 3,033.2 million. The Bank paid Rs. 0.6 million to HDFC AMC for
professional fees during the year. HDFC Chubb General Insurance Company Ltd. (HDFC Chubb) We paid Rs. 7.5 million to HDFC Chubb towards insurance premium. We have entered into normal banking transactions with some of the above
parties and we believe the same to be at arms length. Other Strategic Investments We frequently partner with other HDFC group companies when making
strategic investments. We currently have three strategic investments where HDFC
group companies are co-investors. By law, we cannot hold more than a 30% equity
stake in another company. The following is a list of strategic investments made
by us and HDFC group companies: Total HDFCHDFC Bank
    
    HDFC Bank
    
    GroupCompany
    
    Type of business
    
    investment
    
    ownership
    
    ownership(in millions)Computer Age Management Services Private Limited (CAMS)
    
    Unit Capital Accounting and Transfer Agency Services
    
    Rs.   6.1
    
    
    19.0%
    
    
    
    49.0%SolutionNET India Private Limited
    
    Information Technology consulting and services
    
    Rs.   7.6
    
    
    19.0%
    
    
    
    50.0%Softcell Technologies Limited (Softcell)
    
    Business-to-business software services
    
    Rs. 26.0
    
    
    12.0%
    
    
    
    26.0%
 We routinely conduct business with some of the companies in which we have
made strategic investments. In fiscal 2004, we paid CAMS Rs. 0.7 million and
Softcell Rs. 6.3 million for providing software-related services to us. We have
also paid Rs. 21.4 million to Softcell towards capital advances or purchase of
fixed assets. 97




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TAXATION Indian Tax The following discussion summarizes the Indian tax consequences for
investors in ADSs and equity shares received upon redemption of ADSs who are
not resident in India whether of Indian origin or not. This discussion is based
on the provisions of the Indian Income Tax Act, 1961, including the special tax
regime for ADSs contained in Section 115AC, which has recently been extended to
cover additional ADSs that an investor may acquire in an amalgamation or
restructuring of the company, and certain regulations implementing the Section
115AC regime. The Indian Income Tax Act is amended every year by the Finance
Act of the relevant year. Some or all of the tax consequences of the Section
115AC regime may be amended or modified by future amendments to the Indian
Income Tax Act. The summary is not intended to constitute a complete analysis of the tax
consequences under Indian law of the acquisition, ownership and sale of ADSs
and equity shares by non-resident investors. Potential investors should,
therefore, consult their own tax advisers on the tax consequences of such
acquisition, ownership and sale, including specifically the tax consequences
under Indian law, the law of the jurisdiction of their residence, any tax
treaty between India and their country of residence, and in particular the
application of the regulations implementing the Section 115 AC regime. Residence For the purpose of the Act, an individual is a resident of India during
any fiscal year, if he (a) is in India in that year for 182 days or more, or
(b) having within the four years preceding that year been in India for a period
or periods amounting in all to 365 days or more and is in India for period or
periods amounting in all to 60 days or more in that year. The period of 60 days
is substituted by 182 days in case of an Indian citizen or person of Indian
origin who being outside India comes on a visit to India during the fiscal year
or an Indian citizen who leaves India for the purposes of his employment during
the fiscal year. A company is resident in India in any fiscal year if it is
an Indian Company or the control and management of its affairs is situated
wholly in India in that year. A firm , association of persons or any other
person as defined in the Act, is resident in India except where during that
year, the control and the management of its affairs are situated wholly outside
India. Taxation of Distributions Dividends paid to shareholders (whether or not resident in India) will not
be subject to tax in the hands of the shareholders. However a company paying
the dividend is subject to a dividend distribution tax of 13.07% (including
Surcharge and Education Cess) on the total amount it pays to its shareholders
as dividend, in addition to the normal corporate tax on its income. Taxation on Sale of Equity Shares or ADSs Any transfer of ADSs outside India by a non-resident investor to another
non-resident investor does not give rise to Indian capital gains tax. Subject to any relief under any relevant double taxation treaty and the
exemption of Capital Gains Tax discussed elsewhere in this Note, a gain
ordinarily arising on the sale of an equity share, whether to a resident or a
non-resident or whether inside India or outside India, will give rise to a
liability for Indian capital gains tax. Such tax is required to be withheld at
source. Where the equity share has been held for more than 12 months (measured
from the date of advice of redemption of the ADS by the depositary), the rate
of tax is 10% (plus applicable Surcharge and Education Cess). Where the equity
share has been held for 12 months or less, the rate of tax varies and will
depend on a number of factors, including without limitation the status of the
non-resident investor, subject to a maximum tax rate of 41.82% (including
applicable Surcharge and Education Cess) in the 98




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case of a foreign company. However there is a concessional rate of tax of 10%
(plus applicable Surcharge and Education Cess) on the sale of an equity share
of a company held for 12 months or less, if the sale is entered into in a
recognized Stock Exchange, on or after the date on which Chapter VII of the
Finance (No. 2) Act, 2004 comes into force and such transaction of sale is
chargeable to Securities Transaction Tax (STT). During the period the underlying equity shares are held by non-resident
investors on a transfer from the depositary upon redemption of ADSs, the
provisions of the Double Taxation Treaty entered into by the Government of
India with the country of residence of the non-resident investors will be
applicable in the matter of taxation of any capital gain arising on a transfer
of the underlying equity shares. The double taxation treaty between the United
States and India does not provide US residents with any relief from Indian tax
on capital gains. For purposes of determining the amount of capital gains arising on a sale
of an equity share for Indian tax purposes, the cost of acquisition of an
equity share received upon redemption of an ADS will be the price of the share
prevailing on the Bombay Stock Exchange or the National Stock Exchange on the
date on which the depositary advises the custodian of such redemption and not
the acquisition cost of the ADS being redeemed. The holding period of an equity
share received upon redemption of an ADS will commence from the date of advice
of redemption by the depositary. Exemption of Capital Gains Any gain arising on the sale of an equity share of a company held for more
than 12 months is exempt from tax if the sale is entered into in a recognized
Stock Exchange, on or after the date on which Chapter VII of the Finance (No.
2) Act, 2004 comes into force and such transaction of sale is chargeable to
STT. Rights Distribution to non-resident holders of additional ADSs or equity shares
or rights to subscribe for equity shares made with respect to ADSs or equity
shares are not subject to tax in the hands of the non-resident holder. Stamp Duty Upon the issuance of the equity shares underlying the ADSs, we are
required to pay a stamp duty of 0.1% per share of the issue price. A transfer
of ADSs is not subject to Indian stamp duty. Normally, upon the acquisition of
equity shares from the depositary in exchange for ADSs representing such equity
shares in physical form, an investor would be liable for Indian stamp duty at
the rate of 0.5% of the market value of the equity shares at the date of
registration. Similarly, a sale of equity shares by an investor would also be
subject to Indian stamp duty at the rate of 0.5% of the market value of the
equity shares on the trade date, although customarily such tax is borne by the
transferee, that is, the purchaser. However, our equity shares are compulsorily
deliverable in dematerialized form except for trades up to 500 shares only
which may be for delivery in physical form. Under Indian stamp law, no stamp
duty is payable on the acquisition or transfer of equity shares in
dematerialized form. 99




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Securities Transaction Tax As per Chapter VII of the Finance (No. 2 Act), 2004 pertaining to STT which
will come into force on such date as the Indian Government notifies, the STT
shall be payable as under: Sr. No.
    
    Taxable Securities Transaction
    
    Rate
    
    Payable by1.
    
    Purchase of an equity share in a company,
where -
    
    0.075 per cent
    
    Purchasera)
    
    the transaction of such purchase is
entered into in a recognized stock exchange;
andb)
    
    the contract for purchase of such share
is settled by the actual delivery or
transfer of such share2.
    
    Sale of an equity share in a company, where -
    
    0.075 per cent
    
    Seller(a)
    
    the transaction of such sale is entered
into in a recognized stock exchange; and(b)
    
    the contract for sale of such share is
settled by the actual delivery or transfer
of such share3.
    
    Sale of an equity share in a company, where -
    
    0.015 per cent
    
    Seller(a)
    
    the transaction of such sale is entered
into in a recognized stock exchange; and(b)
    
    the contract for sale of such share is
settled otherwise than by the actual
delivery or transfer of such share
 The recognized Stock Exchange is responsible for collecting the STT and paying
it into the Government Treasury. Other Taxes At present, there are no taxes on wealth, gifts and inheritance which may
apply to the ADSs and underlying equity shares. Service Tax Brokerage or commission paid to stock brokers in connection with the sale
or purchase of shares is subject to a service tax of 10.2%. The stock broker
is responsible for collecting the service tax and paying it into the Government
Treasury. 100




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United States Tax The following summary describes the material United States federal income
tax consequences relating to the ownership and disposition in our equity shares
or ADSs. This summary is based on the Internal Revenue Code of 1986, as
amended, its legislative history, existing final, temporary and proposed
Treasury Regulations, rulings and judicial decisions, all as currently in
effect and all of which are subject to prospective and retroactive rulings and
changes. We will not seek a ruling from the Internal Revenue Service with
regard to the United States federal income tax treatment relating to investment
in our equity shares or ADSs and, therefore, there can be no assurance that the
IRS will agree with the conclusions set forth below. This summary does not purport to address all United States federal income
tax consequences that may be relevant to a particular investor and you are
urged to consult your own tax advisor regarding your specific tax situation.
The summary applies only to holders who hold equity shares or ADSs as capital
assets (generally, property held for investment) under the United States
Internal Revenue Code, and does not address the tax consequences that may be
relevant to investors in special tax situations including, for example:  
    
    insurance companies;
    
    regulated investment companies and real estate investment trusts;
    
    tax-exempt organizations;
    
    broker-dealers;
    
    traders in securities that elect to mark to market;
    
    banks or other financial institutions;
    
    investors whose functional currency is not the United States dollar;
    
    United States expatriates;
    
    investors that hold our equity shares or ADSs as part of a hedge, straddle or conversion transaction; or
    
    holders that own, directly, indirectly, or constructively 10.0% or more of our total combined voting stock. Further, this summary does not address the alternative minimum tax
consequences of an investment in equity shares or ADSs or the indirect
consequences to holders of equity interests in entities that own our equity
shares or ADSs. In addition, this summary does not address the state, local and
foreign tax consequences of an investment in our equity shares or ADSs. You should consult your own tax advisor regarding the United States
federal, state, local and foreign tax consequences of purchasing, owning, and
disposing of our equity shares or ADSs in your particular circumstances. You
are a US Holder if you are a beneficial owner of equity shares or
ADSs and you are for United States federal income tax purposes:  
    
    a citizen or resident of the United States;
    
    a corporation, or any other entity taxable as a corporation,
created or organized in or under the laws of the United States or any
state thereof, including the District of Columbia; 101




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
    
    an estate the income of which is subject to United States federal
income tax regardless of its source; or
    
    a trust if a court within the United States is able to exercise
primary supervision over its administration and one or more United
States persons have the authority to control all substantial decisions
of the trust, or if the trust has made a valid election to be treated
as a United States person. If a partnership holds equity shares or ADSs, the tax treatment of a
partner will generally depend upon the status of the partner and upon the
activities of the partnership. Partners of partnerships holding our equity
shares or ADSs should consult their own tax advisors. For United States federal income tax purposes, a US Holder of an ADS will
generally be treated as the owner of the equity shares represented by the ADS.
Accordingly, no gain or loss will be recognized upon the exchange of an ADS for
equity shares. A US Holders tax basis in the equity shares will be the same as
the tax basis in the ADS surrendered therefore, and the holding period in the
equity shares will include the period during which the holder held the
surrendered ADS. However, the US Treasury has expressed concerns that parties
to whom depositary shares are pre-released may be taking actions that are
inconsistent with the claiming of foreign tax credits by the holders of ADSs.
Accordingly, the analysis of the creditability of Indian taxes paid with
respect to the ADSs could be affected by future actions that may be taken by
the US Treasury. Distributions on Equity Shares or ADSs Cash distributions made by us to a US Holder with respect to equity shares
or ADSs (including net amounts withheld in respect of any Indian withholding
taxes) generally will be taxable to such US Holder as ordinary dividend income
when such US Holder receives the distribution, actually or constructively, to
the extent paid out of our current or accumulated earnings and profits (as
determined for United States federal income tax purposes). Under recently
enacted legislation, if these dividends constitute qualified dividend income
(QDI), individual US Holders of our equity shares or ADSs will generally pay
tax on such dividends received before 2009 at a maximum rate of 15%, provided
certain holding period requirements and other conditions are satisfied.
Assuming we are not a passive foreign investment company (as discussed below),
foreign personal holding company or foreign investment company, dividends paid
by us will be QDI if we are a qualified foreign corporation (QFC) at the time
the dividends are paid. We believe that we are currently, and will continue to
be, a QFC so as to allow all dividends paid by us to be QDI for United States
federal income tax purposes. Distributions in excess of our current or
accumulated earnings and profits will be treated first as a non-taxable return
of capital reducing such US Holders tax basis in the equity shares or ADSs.
Any distribution in excess of such tax basis will be treated as capital gain
and will be either long-term or short-term capital gain depending upon whether
the US Holder held the equity shares or ADSs for more than one year. Dividends
paid by us generally will not be eligible for the dividends received deduction
available to certain United States corporate shareholders. Subject to certain limitations, a US holder may be entitled to a credit or
deduction against its US federal income taxes for the amount of any Indian
taxes that are withheld from dividend distributions made to such US holder.
The decision to claim either a credit or deduction must be made annually, and
will apply to all foreign taxes paid by the US holder to any foreign country or
US possession with respect to the applicable tax year. The limitation on
foreign taxes eligible for credit is calculated separately with respect to
specific classes of income. Dividends received with respect to the equity
shares or ADSs will be treated as foreign source income and will constitute
passive income or, in the case of certain holders, financial services
income for United States foreign tax credit limitation purposes. The rules
regarding the availability of foreign tax credits are complex and US holders
may be subject to various limitations on the amount of foreign tax credits that
are available. We therefore urge you to consult your tax advisor regarding the
availability of the foreign tax credit under your particular circumstances. The amount of any cash distribution paid in Indian rupees will equal the
US dollar value of the distribution, calculated by reference to the exchange
rate in effect at the time the distribution is received by the depositary (in
the case of ADSs) or by the US Holder (in the case of equity shares held
directly by such US Holder), regardless 102




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of whether the payment is in fact converted to US dollars at that time.
Generally, US Holder should not recognize any foreign currency gain or loss if
such Indian rupees are converted into US dollars on the date received. If the
Indian rupees are not converted into US dollars on the date of receipt,
however, gain or loss may be recognized upon a subsequent sale or other
disposition of the Indian rupees. Such foreign currency gain or loss, if any,
will be ordinary income or loss that is United States source. Sale or Exchange of Equity Shares or ADSs A US Holder will generally recognize capital gain or loss upon the sale,
exchange or other disposition of the equity shares or ADSs measured by the
difference between the US dollar value of the amount received and the US
Holders tax basis (determined in US dollars) in the equity shares or ADSs. Any
gain or loss will be long-term capital gain or loss if the equity shares or
ADSs have been held for more than one year and will generally be United States
source gain or loss. Your ability to deduct capital losses is subject to
limitations. Under certain circumstances described under Indian
TaxTaxation
on Sale of Equity Shares or ADSs in this report, you may be subject to Indian
tax upon the disposition of equity shares or ADSs. In such circumstances and
subject to applicable limitations, you may elect to treat the gain as foreign
source income and to credit the Indian tax against your United States federal
income tax liability with respect to the gain. You should consult your tax
advisor regarding the availability of the foreign tax credit under your
particular circumstances. For cash-basis US Holders who receive foreign currency in connection with
a sale or other taxable disposition of equity shares or ADSs, the amount
realized will be based upon the United States dollar value of the foreign
currency received with respect to such equity shares or ADSs as determined on
the settlement date of such sale or other taxable disposition. Accrual-basis US Holders may elect the same treatment required of
cash-basis taxpayers with respect to a sale or other taxable disposition of
equity shares or ADSs, provided that the election is applied consistently from
year to year. Such election cannot be changed without the consent of the United
States Internal Revenue Service. Accrual-basis US Holders that do not elect to
be treated as cash-basis taxpayers (pursuant to the Treasury Regulations
applicable to foreign currency transactions) for this purpose may have a
foreign currency gain or loss for United States federal income tax purposes
because of differences between the United States dollar value of the foreign
currency received prevailing on the date of such sale or other taxable
disposition and the value prevailing on the date of payment. Any such currency
gain or loss will generally be treated as ordinary income or loss that is
United States source, in addition to the gain or loss, if any, recognized on
the sale or other taxable disposition of equity shares or ADSs. Passive Foreign Investment Company Rules US Holders generally will be subject to a special, adverse tax regime that
would differ in certain respects from the tax treatment described above if we
are, or were to become, a passive foreign investment company (PFIC) for
United States federal income tax purposes. Although the determination of
whether a corporation is a PFIC is made annually, and thus may be subject to
change, we do not believe that we are, nor do we expect to become, a PFIC for
United States federal income tax purposes. However, the matter is not free from
doubt. We urge you to consult your own tax advisor regarding the adverse tax
consequences of owning the equity shares or ADSs of a PFIC and making certain
elections designed to lessen those adverse consequences. Backup Withholding and Information Reporting In general, dividends on equity shares or ADSs, and payments of the
proceeds of a sale, exchange or other disposition of equity shares or ADSs,
paid to a US Holder within the United States or through certain United
States-related financial intermediaries are subject to information reporting
and may be subject to backup withholding at a rate currently equal to 28%
unless the holder: 103




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
    
    is a corporation or other exempt recipient; or
    
    provides an accurate taxpayer identification number and certifies
that no loss of exemption from backup withholding has occurred. You generally will be allowed a credit of the amount of any backup
withholding against your United States federal income tax liability or you may
obtain a refund of any amounts withheld under the backup withholding rules that
exceed your income tax liability by filing a refund claim with the United
States Internal Revenue Service. 104




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SUPERVISION AND REGULATION The main legislation governing commercial banks in India is the Banking
Regulation Act. Other important legislation includes the Reserve Bank of India
Act, the Negotiable Instruments Act, Securitisation And Reconstruction of
Financial Assets and Enforcement of Security Interest Act (SARFESI) and the
Bankers Books Evidence Act. Additionally, the RBI, from time to time, issues
guidelines to be followed by the banks, under the various provisions of the
Banking Regulation Act. Reserve Bank of India Regulations The RBI is the central banking and monetary authority in India. Commercial
banks in India are required under the Banking Regulation Act to obtain a
license from the RBI to carry on banking business in India. Before granting the
license, the RBI must be satisfied that specific conditions are complied with,
including (a) that the bank has the ability to pay its present and future
depositors in full as their claims accrue; (b) that the affairs of the bank
will not be or are not likely to be conducted in a manner detrimental to the
interests of present or future depositors; (c) that the bank has adequate
capital and earnings prospects; and (d) that the public interest will be served
if the license is granted to the bank. The RBI can cancel the license if the
bank fails to meet the above conditions or if the bank ceases to carry on
banking operations in India. As a licensed banking company, we are regulated and supervised by the RBI.
The RBI requires us to furnish statements and information relating to our
business. It has issued guidelines for commercial banks on recognition of
income, classification of assets, maintenance of capital adequacy and
provisioning for non-performing assets. The RBI has set up a Board for
Financial Supervision, under the chairmanship of the Governor of the RBI. This
Board is assisted by the Department of Financial Supervision of the RBI in
supervising commercial banks and financial institutions. The appointment of the
auditors of the banks is subject to the approval of the RBI. The RBI can direct
a special audit in the interest of the depositors or in the public interest. Regulations Relating to the Opening of Branches Banks are required to obtain licenses from the RBI to open new branches.
Permission is granted based on factors such as the financial condition and
history of the company, its management, adequacy of capital structure and
earning prospects and the public interest. The RBI may cancel the license for
violations of the conditions under which it is granted. Under the banking
license granted to us by the RBI, we are required to have at least 25% of our
branches (excluding extension counters) located in rural/semi-urban areas. A
rural area is defined to have a population of less than 10,000. A semi-urban
area is defined to have a population of greater than 10,000 but less than
100,000. These population figures relate to the latest census conducted by the
government of India. Capital Adequacy Requirements The RBI has promulgated minimum capital adequacy standards for banks based
on the guidelines of the Basel Committee on Banking Regulations and Supervisory
Practices. Under these guidelines, we are required to maintain a minimum ratio
of capital to risk adjusted assets and off-balance sheet items of 9.0%, at
least half of which must be Tier 1 capital. The total capital of a banking company is classified into Tier 1 and Tier
2 capital. Tier 1 capital, the core capital, provides the most permanent and
readily available support against unexpected losses. It comprises paid-up
capital and reserves consisting of any statutory reserves, free reserves and
capital reserve in terms of Indian Income Tax Act as reduced by equity
investments in subsidiaries, intangible assets, deferred tax asset, gap in
provisioning and losses in the current period and those brought forward from
the previous period. Tier 2 capital consists of undisclosed reserves, revaluation reserves (at
a discount of 55%), general provisions and loss reserves (allowed up to a
maximum of 1.25% of weighted risk assets), investment fluctuation reserve,
hybrid debt capital instruments (which combine features of both equity and debt 105




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securities), cumulative perpetual preference shares (which should be fully paid
up and should not contain clauses that permit redemption by the holder) and
subordinated debt with an initial maturity of not less than five years. Any
subordinated debt is subject to progressive discounts each year for inclusion
in Tier 2 capital and total subordinated debt considered as Tier 2 capital
cannot exceed 50% of Tier 1 capital. Investments in the instruments issued
by banks/financial institutions that are eligible for capital status will
attract 100% risk weight for credit risk for capital adequacy purposes. The
Banking Regulation Act does not allow banks established on or after January 15,
1937 to issue preferred equity. Risk adjusted assets and off-balance sheet items considered for
determining the capital adequacy ratio are the risk weighted total of specified
funded and non-funded exposures. Degrees of credit risk expressed as percentage
weighting have been assigned to various balance sheet asset items and
conversion factors to off-balance sheet items. The value of each item is
multiplied by the relevant weight or conversion factor to produce risk-adjusted
values of assets and off-balance-sheet items. Financial guarantees are treated
as similar to funded exposure and are subject to similar risk weighting. The
credit conversion factor for certain off-balance sheet items such as
performance bonds, bid bonds and standby letters of credit related to
particular transactions is 50% while that for short-term self liquidating
trade-related contingencies such as documentary credits collateralized by the
underlying shipments is 20%. All open position limits on foreign exchange and
gold carry a 100% risk weight. Investment in government and approved securities
are also assigned a risk weight for market risk. The aggregate risk weighted
assets are taken into account for determining the capital adequacy ratio. In order to ensure that the internationally accepted norms for capital
charge for market risk under Basel I are adopted, banks were advised by RBI in
June 2004 to maintain an explicit capital charge for market risks on the lines
of the standardized duration method prescribed under the 1996 Amendment to the
Capital Accord issued by the Basel Committee on Banking Supervision (BCBS).
This would apply to the trading book, excluding securities under the Available
for Sale (AFS) category, by March 2005 and to the entire trading book,
including securities under AFS category, by March 2006. Trading book for the purpose of these guidelines will include:  
    
    Securities included under the Held for Trading category;
    
    Securities included under the Available for Sale category;
    
    Open gold positions;
    
    Open foreign exchange position limits;
    
    Trading positions in derivatives; and
    
    Derivatives entered into for hedging trading book exposures. The RBI has advised banks in its annual policy statement for 2004-2005
that banks should examine in-depth the options available under Basel II and
draw a road map by end-December 2004 for migration to Basel II and review the
progress made thereof at quarterly intervals. Loan Loss Provisions and Non-Performing Assets In April 1992, the RBI issued formal guidelines on recognition of income,
classification of assets, provisioning against assets and valuation of
investments applicable to banks, which are revised from time to time. These
guidelines are applied for the calculation of non-performing assets under
Indian GAAP. The discussion of asset quality in this report is under US GAAP
and the US GAAP standards applied are set forth in Selected Statistical
Information. The principal features of these RBI guidelines, which have been
implemented with respect to our loans, debentures, lease assets and bills, are
set forth below. Non-Performing Assets A non-performing asset is an asset in respect of which any amount of
interest or principal has remained past due for more than one quarter. In
particular, loans are not classified as non-performing until the interest
payment or principal payment is 90 days past due. Prior to March 31, 2004 RBI
regulations classified a loan as non- 106




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performing if interest or principal payment were overdue for more than two
quarters. Interest in respect of non-performing assets is not recognized or
credited to the income account unless collected. Asset Classification Assets are classified as described below:  
    
    Standard Assets.Assets that do not have any problems or do not
carry more than normal risk attached to the business.
    
    Sub-Standard Assets.Assets that are non-performing assets for a
period not exceeding 18 months (12 months with effect from March 31,
2005).
    
    Doubtful Assets.Assets that are non-performing assets for more
than 18 months and have not been written off, either wholly or
partially (12 months with effect from March 31, 2005).
    
    Loss Assets.Assets that are considered uncollectible and
identified as a loss by us, the RBI or our external auditors. Renegotiated or rescheduled loans must have no past due amounts for one
year after renegotiation or rescheduling for the loan to be upgraded. Provisioning and Write-Offs Provisions are based on guidelines specific to the classification of the
assets. The following guidelines apply to the various asset classifications:  
    
    Standard Assets.A general provision of 0.25% of loans and advances is required.
    
    Sub-Standard Assets.A specific provision of 10% of the loan outstanding is required.
    
    Doubtful Assets.A 100% specific provision is required to be
taken against the unsecured portion of the doubtful asset and charged
against income. The value assigned to the collateral securing a loan is
the amount reflected on the borrowers books or the realizable value
determined by third-party appraisers. In cases where there is a secured
portion of the asset, depending upon the period for which the asset
remains doubtful, a 20% to 50% provision of the loan outstanding is
required to be made against the secured asset as follows:  
    
    Up to one year:20% provision.
    
    One to three years:30% provision.
    
    More than three years:50% provision.  
    
    Loss Assets.The entire asset is required to be written off or provided for. While the provisions as indicated above are mandatory, a higher provision
in a loan account would be required if the auditors consider it necessary. RBI has recently advised that in respect of all doubtful advances
remaining outstanding for more than three years on or after April 1, 2004, a
100% provision would have to be made. In respect of all advances which are
classified as doubtful for more than three years as on March 31, 2004,
additional provision, in a phased manner, over a three year period would have
to be made. 107




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Act relating to recovery of non performing assets As a part of the financial sector reforms the government of India
promulgated a new act called Securitisation and Reconstruction of Financial
Assets and Enforcement of Security Interest Act 2002. The act provides banks
and other lenders increased powers in the recovery of the collateral underlying
against the non performing assets. Regulations Relating to Making Loans The provisions of the Banking Regulation Act govern the making of loans by
banks in India. The RBI issues directions covering the loan activities of
banks. Some of the more important guidelines of RBI, which are now in effect,
are as follows:  
    
    The RBI has prescribed norms for bank lending to non-bank financial companies.
    
    Banks are free to determine their own lending rates but each bank must declare its prime lending rate as approved by the
board of directors. The prime lending rate is a reference or benchmark rate for banks and banks can offer loans at below
prime lending rates. The interest charged by banks on advances up to Rs. 2,00,000 to any one entity (other than most
consumer banking loans) must not exceed the prime lending rate. Interest rates in specified categories of advances are
regulated by the RBI. Each bank must declare its benchmark PLR. The benchmark PLR must take into account the banks actual
cost of funds, operating expenses, a minimum margin to cover regulatory requirement of provisioning, capital charge and the
profit margin. The pricing for borrowers would be arrived at by adding time-varying term premiums, risk premiums and other
cost elements.
    
    There are guidelines on loans against shares in respect of amount, margin and purpose. Directed Lending Priority Sector Lending The RBI has established guidelines requiring banks to lend a minimum of
40.0% of their net bank credit (total domestic loans less marketable debt
instruments and exemptions permitted by the RBI from time to time; currently
specified categories of deposits from non-resident Indians are exempted) to
specified sectors called priority sectors. Priority sectors include small-scale
industries, the agricultural sector, food and agro-based industries, small
business enterprises and weaker sections of society. The RBI also has set out the minimum percentage of net bank credit that
banks may direct to specific priority sectors. The minimum percentage of credit
to agriculture sector is 18% and that for weaker sections is 10%. The balance
can be loaned to the following:  
    
    Credit to small scale industrial units which are entities engaged
in manufacturing, processing and providing services and whose
investment in plant and machinery does not exceed Rs. 10.0 million;
    
    Credit to small businesses including small road and water transport
operators, retail traders and professional and other self employed
persons;
    
    Educational and other loans to the weaker sections of society; and
    
    Direct home loans up to Rs. 1.0 million disbursed in urban and
metropolitan areas and investment in bonds of National Housing Bank and
Housing and Urban Development Corporation exclusively for the financing
of housing; 108




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Any shortfall in the amount required to be lent to the priority sectors
may be required to be deposited with developmental banks like National Bank for
Agriculture and Rural Development and Small Industries Development Bank of
India. These deposits can be for a period of one year to five years. The RBI requires banks to lend up to 3.0% of their incremental deposits in
the previous fiscal year towards housing finance. This can be in the form of
home loans to individuals or subscription to the debentures and bonds of
National Housing Bank and housing development institutions recognized by the
government of India. Export Credit The RBI also requires us to make loans to exporters at concessional rates
of interest. This enables exporters to have access to an internationally
competitive financing option. Pursuant to existing guidelines, 12% of our net
bank credit is required to be in the form of export credit. We provide export
credit for pre-shipment and post-shipment requirements of exporter borrowers in
rupees and foreign currencies. For certain tenors of rupee export credit, the
RBI has prescribed ceiling rates linked to the PLR. Regulation Relating to Bridge Loans Banks may consider approval of bridge loan or interim finance to its
customers for a maximum period of four months against commitments made by other
financial institutions or banks only in cases where the latter lending
institution faces temporary liquidity constraint. These loans are subject to
the following conditions specified by the RBI:  
    
    the bank extending bridge loan or interim finance must obtain prior
approval of other banks and financial institutions, which have approved
the term loans; and
    
    the approving bank must obtain a commitment from other banks and
financial institutions that the latter would directly remit the amount
of term loan to it at the time of disbursement.
    
    Banks are also permitted to sanction bridge loans to companies
for a period not exceeding one year against expected equity flows /
issues. Such loans are required to be accommodated within the ceiling
as may be prescribed by the RBI. Credit Exposure Limits As a prudent measure aimed at better risk management and avoidance of
concentration of credit risk, the RBI has prescribed credit exposure limits for
banks in respect of their lending to individual borrowers and borrower groups. The RBI limits exposure to individual borrowers to not more than 15% of
capital funds of the bank and limits exposure to a borrower group to not more
than 40% of capital funds of the bank. In the case of infrastructure projects,
such as power, telecommunications, road and port projects, an additional
exposure of up to 5% of capital funds is allowed. Exposure is the aggregate of:  
    
    all approved fund-based limits or outstandings (whichever are
higher);
    
    investments in shares, debentures and commercial papers of
companies and public sector undertakings; 109




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
    
    approved non-fund-based limits, underwriting and similar
commitments or outstandings, whichever is higher; and
    
    foreign exchange and derivative contracts at their replacement cost
value Capital funds for determining the exposure ceilings comprises both Tier I
and Tier II capital. Our loan exposures to individual borrowers and borrower groups are within
the above limits, except in some cases where we have obtained the approval of
the RBI for exceeding the above limits. In its annual policy statement for 2004-05, the RBI has decided to
discontinue with the practice of giving case by case approvals for exceeding
the above limits. Banks may, in exceptional circumstances, with the approval of
their Boards, consider enhancement of the exposure to a borrower by a further
5% of the capital funds. Banks would need to make appropriate disclosures in
their annual financial statements in respect of the exposures where the bank
had exceeded the prudential exposure limits during the year. Excess exposures
beyond the prescribed limits would need to be phased out either by increasing
capital funds or reducing exposures by March 31, 2005. To ensure that exposures are evenly spread, the RBI requires banks to fix
internal limits of exposure to specific sectors. These limits are subject to
periodical review by the banks. We have fixed a ceiling of 12% on our exposure
to any one industry and monitor our exposures accordingly. Regulation regarding limit on unsecured advances: Banks were required to limit their commitments by way of unsecured
exposure in such a manner that 20 per cent of a banks outstanding unsecured
guarantees plus the total of its outstanding unsecured advances should not
exceed 15 per cent of its total outstanding advances. In order to extend further flexibility to banks on their loan policies,
the RBI has removed the above limit on unsecured advances and the banks have
been given the freedom to fix their own policy with respect thereto. However,
an additional provision of 10% i.e. a total provision of 20% is required to be
made in respect of such advances in the substandard category. Regulation Relating to Country Risk Management The RBI has issued detailed guidelines on country risk management that
cover banks exposures to those countries to which they have a net funded
exposure of 2% of their total assets (1% with effect from March 31, 2005).
Banks are required to address the issues of identifying, measuring,
monitoring and controlling country exposure risks. Provisions are required to
be maintained by banks on these exposures on a graded scale ranging from 0.25%
to 100 % relating to the level of risk in respect of such countries. Regulation Relating to Capital Markets Exposure The RBI has issued revised guidelines on financing by banks of equities
and investments in shares. The revised guidelines place a ceiling on the
overall exposure of a bank to the capital markets. The following exposures are
subject to the ceiling:  
    
    Direct investment by a bank in equity shares, convertible bonds and
debentures and units of equity-oriented mutual funds.
    
    Advances against shares to individuals for investments in equity
 shares (including initial public offerings), bonds and debentures,
units of equity-oriented mutual funds and similar securities.
    
    Secured and unsecured advances to stockbrokers and guarantees
issued on behalf of stockbrokers and market makers. 110




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The ceiling is equal to 5% of the banks total outstanding advances
(including commercial paper) as reduced by the amount of bills rediscounted at
March 31 of the previous year. Within this ceiling, the total investment in
shares, convertible bonds and debentures and units of equity oriented mutual
funds by a bank should not exceed 20% of its net worth. Non-fund based
facilities and investment by banks in non-convertible debentures and other
similar instruments (excluding commercial paper) should not be included in
computing the total outstanding advances of the bank. Further, for purposes of
computing the ceiling, direct investment in shares by banks will be calculated
at the historical cost of such shares. Exposures subject to the ceiling will not include collateral consisting of
equity shares, bonds and debentures pledged to a bank by a corporate customer,
other than Non-Banking Financial Companies (NBFC), to secure a loan for working
capital or other productive purposes which do not involve stock broking or
investment in capital markets. Advances made by banks to individuals for
personal purposes like education, housing, consumption etc. will also be
outside the 5% ceiling. The banks capital market exposure was 4.81% as on March 31 2004, well
within the stipulated norm of 5%. Regulations Relating to Investments Exposure Limits Credit exposure limits specified by the RBI in respect of a banks lending
to individual borrowers and borrower groups apply in respect of non-convertible
debt instruments. Further, investments in equity securities, convertible bonds
and debentures and units of equity oriented mutual funds are subject to the
ceiling of 5% of the banks total advances (including commercial paper) at
March 31 of the previous year. Within this ceiling the said investments by a
bank should not exceed 20% of its net worth. Banks aggregate investment in bonds eligible for Tier 2 capital status
issued by other banks/financial institutions are restricted up to 10% of the
investing banks capital funds (Tier 1 plus Tier 2 capital). The RBI has
recently advised that the ceiling of 10% would be applicable to investments
made by banks/financial institutions in equity shares, preference shares,
subordinated debt instruments, hybrid debt capital instruments and any other
instruments approved as being in the nature of capital issued by other
banks/financial institutions. In order to contain the risks arising out of investment by banks in non
statutory liquidity ratio (non-SLR) securities and in particular the risks
arising out of investment in bonds through private placement, the RBI has
issued detailed guidelines in November, 2003. Banks have been advised to
restrict their fresh investments in unlisted securities to 10% of their total
non-SLR investments as on March 31 of the previous year. Banks are permitted
to invest in unlisted non-SLR securities within this limit, provided that such
securities comply with prescribed disclosure requirements for listed companies.
A transition time to comply with these guidelines has been prescribed by RBI.
With effect from January 1, 2005 only banks whose investment in unlisted
non-SLR securities is within the limit of 10% may make fresh investment in such
securities and up to the prudential limit. Investment in security receipts
issued by securitization companies/reconstruction companies registered with
RBI, and in asset backed securities/mortgage backed securities carrying the
minimum investment grade, are excluded from this limit. The guidelines do not
cover investments in venture capital funds, commercial paper, certificates of
deposit and in mutual fund schemes where any part of the corpus can be invested
in equity. Non Performing Investments The RBI has recently defined non-performing investments as those where the
principal/interest is unpaid for more than 90 days (until March 31, 2004 it
was 180 days), including preference shares where the fixed dividend is not
paid. In case investment in equity shares is valued at Rupee 1 per company on 111




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account of the non availability of the latest balance sheet of the
company, those equity shares would also be reckoned as non-performing
investments. Restrictions on Investments in a Single Company No bank may hold shares in any company exceeding 30% of the paid up share
capital of that company or 30% of its own paid up share capital and reserves,
whichever is less. Limit on Transactions through Individual Brokers The guidelines issued by the RBI require banks to empanel brokers for
transactions in securities. The guidelines also require that a disproportionate
part of the banks business should not be transacted through only one broker or
a few brokers. The RBI specifies that not more than 5% of the total
transactions through empanelled brokers can be transacted through one broker.
If for any reason this limit is breached, the RBI has stipulated that the board
of directors of the bank concerned should ratify this action. Prohibition on Short Selling The RBI does not permit short selling of securities by banks. Valuation of Investments The RBI has issued guidelines for the valuation of investments. These
guidelines require banks to classify their entire portfolio of approved
securities under three categories namely held for trading, available for
sale and held to maturity. However, for disclosure and valuation purpose
as per Indian GAAP, the investments are classified under six groups (hereafter
called groups)government securities, other approved securities, shares,
debentures and bonds, investments in subsidiaries and joint ventures and other
investments. The held to maturity category cannot exceed 25% of the total investments
of the Bank, excluding investments classified as exceptions by the RBI and
debentures in the nature of deemed advances. Securities held in the held to
maturity category would have to be valued at cost and any premium paid over
face value would be amortized over the period of maturity of the instrument.
Investment held under held for trading cannot be held for more than 90 days. In September 2004, the RBI has issued revised guidelines on classification
of investment portfolio by banks. Banks have been allowed to exceed the
present limit of 25% of total investments under held to maturity category
provided that this excess comprises only SLR securities, and that the total SLR
securities held in this category is not more than 25% of their total demand and
time liabilities. Consequently, banks have been allowed as a one time measure,
to shift SLR securities to the held to maturity category any time, once more,
during the accounting year 2004-05. Such shifting should be done at the
acquisition cost/book value/fair value on the date of transfer, whichever is
the least, and the depreciation, if any, on such transfer should be fully
provided for. The non-SLR securities held as part of held to maturity
category may remain in that category. No fresh non-SLR securities are permitted
to be included in this category. Investments in the available for sale and held for trading categories are
required to be marked to market based on market quotes or on the basis of the
yield curve provided by the Fixed Income Money Market Dealers Association of
India and Primary Dealers Association of India. Any net loss on the revaluation
of investments of each group in the held for trading and available for
sale category would have to be recognized in the income account. Net gain on
revaluation of investments shall not be recognized in the income account. Banks
would be able to shift investments from one category to another category only
with the approval of the board of directors. With a view to building up of adequate reserves to guard against any
possible reversal of interest rate environment in future due to unexpected
developments, banks were advised by the RBI in January 2002 to build up
Investment Fluctuation Reserve (IFR) of a minimum 5 per cent of the investment
portfolio within a period of 5 years. IFR is computed with reference to
investments the held for trading and available 112




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for sale category. However, banks are free to build up a higher
percentage of IFR up to 10 per cent of the portfolio depending on the size and
composition of their portfolio, with the approval of their board of directors.
Banks should transfer maximum amount of the gains realized on sale of
investment in securities to the IFR. The IFR, consisting of realized gains from
the sale of investments from the two categories, viz., held for trading and
available for sale, is eligible for inclusion in Tier 2 capital. Transfer to
IFR is an appropriation of net profit after appropriation to statutory
reserve. Regulations Relating to Deposits The RBI has permitted banks to independently determine rates of interest
offered on fixed deposits. However, no bank is permitted to pay interest on
current account deposits. Further, banks can pay interest of 3.5% per annum on
savings deposits. In respect of savings and time deposits accepted from
employees, we are permitted by the RBI to pay an additional interest of 1% over
the interest payable on deposits from the public. Domestic time deposits can have a minimum maturity of seven days and
maximum maturity of ten years. Time deposits from non-resident Indians
denominated in foreign currency can have a minimum maturity of one year and
maximum maturity of three years. Rupee time deposits from non-resident Indians
can have a minimum maturity of six months and maximum maturity of three years. Starting April 1998, the RBI has permitted banks the flexibility to offer
varying rates of interests on domestic deposits of the same maturity subject to
the following conditions:  
    
    Time deposits are of Rs. 1.5 million and above; and
    
    Interest is paid in accordance with the schedule of interest rates
disclosed in advance by the bank and not pursuant to negotiation
between the depositor and the bank. The RBI regulates the interest rates offered on deposits accepted from
non-residents. Insurance of Deposits Demand and time deposits of up to Rs. 100,000 accepted by Indian banks
have to be mandatorily insured with the Deposit Insurance and Credit Guarantee
Corporation, a wholly owned subsidiary of the RBI. Banks are required to pay
the insurance premium for the eligible amount to the Deposit Insurance and
Credit Guarantee Corporation on a semi-annual basis. The cost of the insurance
premium cannot be passed on to the customer. Regulations Relating to Knowing the Customer The RBI requires banks to open accounts only after verifying the identity
of customers as to their name, residence and other details to ensure that the
account is being opened by the customer in his own name. To open an account, a
prospective customer requires an introduction by:  
    
    an existing customer who has had his own account with the bank for
at least six months duration and has satisfactorily conducted that
account; or
    
    a well known person in the local area where the prospective
customer is residing. If the prospective customer does not have an introducer, documents of the
prospective customer, like his identity card, passport or details of bank
accounts with other banks, are required to be submitted. With a view to safeguarding banks from being unwittingly used for the
transfer or deposit of funds derived from criminal activities (both in respect
of deposit and borrowal accounts) RBI has reinforced their earlier 113




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instructions/guidelines on Know Your Customer norms and Cash transaction.
The guidelines are also applicable to foreign currency accounts/transactions.
The guidelines have been issued under section 35(A) of the Banking Regulation
Act, 1949 and the steps initiated in compliance with the various guidelines are
required to be advised to RBI. The guidelines also envisage that the board of
directors of banks should have in place adequate policies that establish
procedures to verify the bona fide identification of individuals/corporates
opening an account. To further plug the money laundering activities, the Income Tax authorities
have mandated banks to accept cash deposits over Indian Rupees 50,000 only
against the evidence of a permanent account number ( PAN ). Banks have to
provide information to the revenue authorities on a periodic basis on all cash
deposits done over Indian Rupees 50,000. Legal Reserve Requirements Cash Reserve Ratio A banking company such as HDFC Bank is required to maintain a specified
percentage of its demand and time liabilities by way of a balance in a current
account with the RBI. This is to maintain the solvency of the banking system.
The cash reserve ratio was 4.5% as on March, 31, 2004. The RBI has, in
September 2004, decided to increase the ratio to 4.75% with effect from
September 18, 2004 and to 5.0% with effect from October 2, 2004. For this
purpose, the following liabilities are not considered:  
    
    inter-bank liabilities; and
    
    refinance from RBI and other institutions permitted to offer refinance to banks. The RBI pays no interest on the cash reserves up to 3.0% of the demand and
time liabilities and pays interest at the prevailing Bank Rate (6.0% per annum)
on the balance. The RBI has, in September 2004, decided that with effect from
September 18, 2004, banks will be paid interest at the rate of 3.5 per cent per
annum on their cash reserves as against the current practice of payment of
interest at the Bank Rate. The cash reserve ratio has to be maintained on an average basis for a
two-week period and should not fall below 70% of the required cash reserve
ratio on any particular day. Statutory Liquidity Ratio In addition to the cash reserve ratio, a banking company like us is
required to maintain in India a specified percentage of its total demand and
time liabilities by way of liquid assets like cash, gold or approved
securities, such as government of India securities and state government
securities. This is to maintain liquidity in the banking system. The percentage
of this liquidity ratio is fixed by the RBI from time to time. Currently, the
RBI requires banks to maintain a liquidity ratio of 25% on its total demand and
time liabilities. For this purpose the following liabilities are not
considered:  
    
    any advance taken from the RBI or from institutions notified in this regard; and
    
    interbank liabilities to the extent of interbank assets. Regulations for Asset Liability Management At present, RBI regulations for asset liability management require banks
to draw up two types of asset-liability gap statements separately for rupee and
for four major foreign currencies. These gap statements are prepared by
scheduling all assets and liabilities according to the stated or anticipated
re-pricing date, or maturity date. These statements have to be submitted to the
RBI on a quarterly basis. The RBI has advised banks to actively monitor the
difference in the amount of assets and liabilities maturing or being re-priced
in a particular period and place internal prudential limits on the gaps in each
time period, as a risk control mechanism. Additionally, the RBI requires banks
to manage their asset-liability structure so that the negative liquidity gap in
the one to 14 day and 15 to 28 day time periods does not exceed 20% of the cash
outflows in these time periods. 114




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Foreign Currency Dealership RBI has granted us a full authorized dealers license to deal in foreign
exchange through our designated branches. Under this license, we have been
granted permission to:  
    
    engage in foreign exchange transactions in all currencies;
    
    open and maintain foreign currency accounts abroad;
    
    raise foreign currency and rupee-denominated deposits from non resident Indians;
    
    grant foreign currency loans to on-shore and off-shore corporations;
    
    open documentary credits;
    
    grant import and export loans;
    
    handle collection of bills, funds transfer services;
    
    issue guarantees; and
    
    enter into derivative transactions and risk management activities
that are incidental to our normal functions authorized under our
organizational documents. Our foreign exchange operations are subject to the guidelines specified by
the RBI in the exchange control manual. As an authorized dealer, we are
required to enroll as a member of the Foreign Exchange Dealers Association of
India, which prescribes the ground rules relating to foreign exchange business
in India. Authorized dealers such as HDFC Bank are required to determine their
limits on open positions and maturity gaps in accordance with RBI guidelines
and these limits are approved by the RBI. Further, we are permitted to hedge
foreign currency loan exposures of Indian corporations in the form of interest
rate swaps, currency swaps and forward rate agreements, subject to specific
conditions. Statutes Governing Foreign Exchange and Cross Border Business Transactions The foreign exchange and cross border transactions undertaken by banks are
subject to the provisions of Foreign Exchange Management Act. All branches
should monitor all non-resident accounts to prevent money laundering. These
transactions are regulated by the Foreign Exchange Management Act and will be
regulated by the Prevention of Money Laundering Act, once it is put in force. Requirements of Banking Regulation Act Reserve Fund Any bank incorporated in India is required to create a reserve fund to
which not less than 25% of the profits of each year before dividends must be
transferred. If there is an appropriation from this account, the bank is
required to report the same to the RBI within 21 days, explaining the
circumstances leading to the appropriation. Restrictions on Payment of Dividends The Banking Regulation Act requires that a bank shall pay dividends on its
shares only after all its expenses capitalized under Indian GAAP (including
preliminary expenses, organization expenses, share selling 115




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commission, brokerage on public offerings, amounts of losses and any other item
of expenditure not represented by tangible assets) have been written off. The government of India may, on recommendation of the RBI, exempt a bank
from requirements relating to its reserve fund and the restrictions on dividend
payments. The RBI has issued new guidelines in April 2004, regarding declaration and
payment of dividend including interim dividend) by banks with effect from the
accounting year ended March 31, 2004. Banks which comply with the following
prudential requirements would be eligible to declare dividends without the
prior approval of the RBI:  
    
    Capital adequacy ratio should be at least 11% for the preceding two
completed years and the accounting year for which the bank proposes to
declare dividend;
    
    Net NPAs are less than 3%;
    
    The bank has complied with the provisions of Sections 15 and 17 of
the Banking Regulation Act, 1949;
    
    The bank should comply with the prevailing regulations/ guidelines
issued by RBI, including creating adequate provisions for impairment of
assets and staff retirement benefits, transfer of profits to Statutory
Reserves and Investment Fluctuation Reserve, etc.; and
    
    The RBI has not placed any explicit restrictions on the bank for
declaration of dividend. Banks, which comply with the above prudential requirements, can pay dividends
without obtaining prior approval of the RBI, subject to compliance with the
following conditions:  
    
    Dividend payout ratio [calculated as a percentage of dividend
payable in a year (excluding dividend tax) to net profit during the
year] should not exceed 33.33%. Whilst calculating the net profit, any
extraordinary items should be excluded;
    
    Dividend should be payable out of the current years profits; and
    
    If the financial statements for which dividend is declared have any
audit qualifications which have an adverse bearing on the profits, the
same should be adjusted whilst calculating the dividend payout ratio. Prior to the above guidelines, a prior approval of the RBI was required for a
dividend payment above 25% of par value of a companys shares or for an interim
dividend payment. Restriction on Share Capital and Voting Rights Banks can issue only ordinary shares. Banks incorporated before January
15, 1937 can also issue preference shares. The Banking Regulation Act specifies
that no shareholder in a banking company can exercise voting rights on poll in
excess of 10% of total voting rights of all the shareholders of the banking
company. RBI has recently issued draft guidelines for the ownership and governance
in private sector banks. The objective of the draft guidelines is to have a
regulatory road map for ownership and governance in private sector banks in the
interests of the depositors and financial stability. The underlying thread of
the draft guidelines is to ensure that the ultimate ownership and control of
banks is well diversified, banks are owned and managed by fit and proper
persons/entities and well capitalized and that the processes are transparent
and fair. The guidelines propose that the minimum capital of all private
sector banks should be a minimum of Rs. 3.0 billion within three years. An
investment by any category of investors greater than 5 percent in a private
sector bank shall have
to meet the fit and proper criteria prescribed by the RBI. The
guidelines propose that no single entity or group of related entities should
have shareholding or control, direct or indirect, in excess of 10 per cent of
paid up 116




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capital of a private sector bank. Any private sector bank or a foreign
bank with a presence in India will not be allowed to hold shares above 5 per
cent of the paid up capital of the investee private sector bank. Restriction on Transfer of Shares RBI approval is required before we can register the transfer of shares for
an individual or group which acquires 5.0% or more of our total paid up
capital. Regulatory Reporting and Examination Procedures The RBI is empowered under the Banking Regulation Act to inspect a bank.
The RBI monitors prudential parameters at quarterly intervals. The results of
these inspections are provided to the bank, but are required by law to be kept
confidential. To this end and to enable off-site monitoring and surveillance by
the RBI, the banks are required to report to the RBI on financial and operating
measures such as:  
    
    assets, liabilities and off-balance sheet exposures;
    
    the risk weighting of these exposures, the capital base and the capital adequacy ratio;
    
    the unaudited balance sheet/statement of income
    
    asset quality;
    
    concentration of exposures;
    
    connected and related lending and the profile of ownership, control and management; and
    
    other prudential parameters. The RBI also conducts periodical on-site inspections on matters relating
to the banks portfolio, risk management systems, internal controls, credit
allocation and regulatory compliance, at intervals ranging from one to three
years. We have been subject to the on-site inspection by the RBI at yearly
intervals. The inspection report, along with the report on actions taken by us,
has to be placed before our board of directors. On approval by our board of
directors, we are required to submit the report on actions taken by us to the
RBI. The RBI also discusses the report with our management team including our
chief executive officer. The RBI also conducts on-site supervision of our selected branches with
respect to their general operations and foreign exchange related transactions. Keeping in view the emerging scenario under the Basel II accord and the
need to allocate supervisory resources in accordance with the risk profile of
banks, RBI intends to switch over from micro regulation to Risk Based
Supervision (RBS). RBI has recently conducted a pilot study of select banks
under RBS and has developed and circulated to the banks detailed standardized
Risk Profile Templates for different business areas to be used by banks for
undertaking self assessment of the risks to which they are exposed. Penalties The RBI can impose penalties on banks and its employees in case of
infringement of regulations under the Banking Regulation Act. The penalty can
be a fixed amount or be related to the amount involved in any contravention of
the regulations. The penalty may also include imprisonment. Assets to be Maintained in India Every bank is required to ensure that its assets in India (including
import-export bills drawn in India and RBI approved securities, even if the
bills and the securities are held outside India) are not less than 75% of its
demand and time liabilities in India. 117




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Secrecy Obligations Our obligations relating to maintaining secrecy arise out of common law
principles governing our relationship with our customers. We cannot disclose
any information to third parties except under clearly defined circumstances.
The following are the exceptions to this general rule:  
    
    where disclosure is required to be made under any law;
    
    where there is an obligation to disclose to the public;
    
    where we need to disclose information in our interest; and
    
    where disclosure is made with the express or implied consent of the customer. We are required to comply with the above in furnishing any information to
any parties. We are also required to disclose information if ordered to do so
by a court. The RBI may, in the public interest, publish the information
obtained from the bank. Appointment and Remuneration of our Chairman, Managing Director and other Directors We require prior approval of the RBI to appoint our chairman and managing
director and any other directors and to fix their remuneration. The RBI is
empowered to remove the appointee on the grounds of public interest or the
interest of depositors or to ensure the proper management of the bank. Further,
the RBI may order meetings of the banks board of directors to discuss any
matter in relation to the bank, appoint observers to these meetings and in
general may make changes to the management as it may deem necessary and can
also order the convening of a general meeting of the company to elect new
directors. RBI has issued guidelines relating to salary and other remuneration
payable to the Chairman, Managing Director and Whole Time Directors of new
Private Sector Banks. Pursuant to the guidelines, the RBI has permitted banks
to fix the performance bonus payable to the Managing Director/Whole Time
Directors on either of the two criteria:  (a)
    
    up to a maximum of 25% of the salary; or(b)
    
    the average bonus paid to the officers/employees. The average bonus
paid to officers/employees is calculated by dividing the total salary bill by
the total bonus paid to them. Securities and Exchange Board of India Regulations and Guidelines The Securities and Exchange Board of India was established to protect the
interests of public investors in securities and to promote the development of,
and to regulate, the Indian securities market. We are subject to Securities and
Exchange Board of India regulations in respect of our activities as agents for
collecting subscriptions to public offerings of securities made by other
companies. These regulations provide for registration with the Securities and
Exchange Board of India for each of these activities, the functions,
responsibilities and a code of conduct applicable for these activities. Regulations Relating to Setting up of Off-shore Banking Units The Government of India introduced Special Economic Zones (SEZs) with a
view to providing an internationally competitive and a hassle-free environment
for export production. Offshore Banking Units (OBUs) have been permitted to be
set up in SEZs. These units would be virtually foreign branches of Indian
banks but located in India. These OBUs, inter alia, would be exempted from
cash reserve requirements and would be able to provide finance to SEZ units and
SEZ developers at international rates of interest. 118




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Finance Act 2004 The recent Finance Act 2004 made some changes in the tax laws, which may
have an effect on our business. The statutory tax rates ( including surcharge
and cess ) for companies has marginally increased from 35.875% in fiscal year
ended March 2004 to 36.59% for the fiscal ended March 2005. The Finance Act
2004 has introduced an educational cess of 2 percent on all taxes. The
Finance Act 2004 also  
    
    Exempted from taxation, long-term capital gains arising from
transfer of shares or units of an equity oriented mutual fund on a
recognized stock exchange in India from a date to be notified and
such transaction of sale is chargeable to Securities Transaction Tax (STT).
    
    Reduced the rate of taxation on short term capital gains rising
from transfer of shares or units of an equity oriented mutual fund on a
recognized stock exchange in India from a date to be notified.
    
    Withdraws the exemption of tax deduction at source on interest on
FCNR/NRE/RFC deposits with effect from April 1, 2005.
    
    Service tax of 10.2% (including the education cess of 2%) has been
applied to fees and charges on core banking activities such as issue of
payorder, demand drafts, letter of credit, bank guarantees, safe
deposit charges, operation of bank accounts etc. 119




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EXCHANGE CONTROLS Restrictions on Conversion of Rupees There are restrictions on the conversion of rupees into dollars. Before
February 29, 1992, the RBI determined the official value of the rupee in
relation to a weighted basket of currencies of Indias major trading partners.
In the February 1992 budget, a new dual exchange rate mechanism was introduced
by allowing conversion of 60% of the foreign exchange received on trade or
current account at a market-determined rate and the remaining 40% at the
official rate. All importers were, however, required to buy foreign exchange at
the market rate except for specified priority imports. In March 1993, the
exchange rate was unified and allowed to float. In February 1994 and again in
August 1994, the RBI announced relaxations in payment restrictions in the case
of a number of transactions. Since August 1994, the government of India has
substantially complied with its obligations owed to the International Monetary
Fund, under which India is committed to refrain from using exchange
restrictions on current international transactions as an instrument in managing
the balance of payments. Effective July 1995, the process of current account
convertibility was advanced by relaxing restrictions on foreign exchange for
various purposes, such as foreign travel and medical treatment. Restrictions on Sale of the Equity Shares underlying the ADSs and for Repatriation of Sale Proceeds ADSs issued by Indian companies to non-residents have free transferability
outside India. However, under Indian regulations and practice, the approval of
the RBI is required for the sale of equity shares underlying the ADSs (other
than a sale on a stock exchange or in connection with an offer made under the
takeover regulations) by a non-resident of India to a resident of India as well
as for renunciation of rights to a resident of India. Contrary to prior
regulations, an investor who surrenders an ADS and withdraws equity shares may
be entitled to redeposit those equity shares in the depositary facility in
exchange for ADSs and the depositary may accept deposits of outstanding equity
shares purchased by a non-resident on the local stock exchange and issue ADSs
representing those equity shares. However in each case, the aggregate number of
equity shares redeposited or deposited by such persons cannot exceed the number
represented by ADSs converted into underlying equity shares. Pursuant to the announcement of the Finance Minister in the Budget for
fiscal 2002, the RBI has issued a notification inter-alia permitting Indian
companies to sponsor ADR/GDR issues against shares held by its shareholders at
a price to be determined by the lead manager.Investors who seek to sell in
India any equity shares (other than a sale on a stock exchange or in connection
with an offer made under the takeover regulations) withdrawn from the
depositary facility and to convert the rupee proceeds from the sale into
foreign currency and repatriate the foreign currency from India will, subject
to the foregoing, have to obtain RBI approval for each transaction. 120




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RESTRICTIONS ON FOREIGN OWNERSHIP OF INDIAN SECURITIES The government of India regulates ownership of Indian companies by
foreigners. Foreign investment in Indian securities is generally regulated by
the Foreign Exchange Management Act, 1999. The Foreign Exchange Management Act,
1999, when read together with a series of regulations issued thereunder by the
RBI, which permits transactions involving the inflow or outflow of foreign
exchange and empowers the RBI to prohibit or regulate such transactions. The Foreign Exchange Management Act permits most transactions involving
foreign exchange except those prohibited or restricted by the RBI. The Foreign
Exchange Management Act has eased restrictions on current account transactions.
However, the RBI continues to exercise control over capital account
transactions (i.e., those that alter the assets or liabilities, including
contingent liabilities, of persons). The RBI has issued regulations under the
Foreign Exchange Management Act to regulate the various kinds of capital
account transactions, including certain aspects of the purchase and issuance of
shares of Indian companies. The RBI has issued a notification under the provisions of the Foreign
Exchange Management Act relaxing the requirement of prior approval for an
Indian company making an ADS issue provided that the issuer is eligible to
issue ADSs pursuant to the guidelines issued by the Ministry of Finance and has
the necessary approval from the Foreign Investment Promotion Board. Under the foreign investment rules, the following restrictions are
applicable to foreign ownership:  
    
    Under the foreign direct investment route, foreign investors may
own our equity shares only with the approval of the Foreign Investment
Promotion Board; this approval is granted on a case-by-case basis;
    
    Under the Issue of Foreign Currency Convertible Bonds and Equity
Shares (through Depositary Receipt Mechanism) Scheme, 1993, foreign
investors may purchase ADSs or GDRs, subject to the receipt of all
necessary government approvals at the time the depositary receipt
program is set up. With a view to liberalizing the operational
procedures, the government of Indias Ministry of Finance and the RBI
have granted a general approval to ADS or GDR issues, subject to
specified restrictions; and
    
    Under the portfolio investment route, foreign institutional
investors, subject to registration with the Securities and Exchange
Board of India and the RBI, non-resident Indians, subject to a
resolution of the Board of Directors and a special resolutions of the
shareholder; may be permitted to own in the aggregate up to 49% of our
equity shares that are not represented by ADSs or GDRs; no single
foreign institutional investor may own more than 10% of our equity
 shares and no single non-resident Indian may own more than 5% of our
total equity shares. As an investor in ADSs, you do not need to seek the specific approval from
the government of India to purchase, hold or dispose of your ADSs. In our ADS
offering, we obtained the approval of the relevant stock exchanges and the
Foreign Investment Promotion Board. We were not required to obtain the prior
approval of the RBI. Notwithstanding the foregoing, if a foreign institutional investor,
non-resident Indian or overseas corporate body were to withdraw its equity
shares from the ADS program, its investment in the equity shares would be
subject to the general restrictions on foreign ownership noted above and may be
subject to the portfolio investment restrictions, including the portfolio
investment limitations mentioned above. The application of these limitations,
however, is not clear. Secondary purchases of securities of Indian companies in
India by foreign direct investors or investments by non-resident Indians,
persons of Indian origin, overseas corporate bodies and foreign institutional
investors above the ownership levels set forth above require government of
India approval on a case-by-case basis. It is unclear whether similar
case-by-case approvals of ownership of equity shares withdrawn from the
depositary facility by foreign institutional investors, non-resident Indians
and overseas corporate bodies would be required. 121




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Further, if you withdraw your equity shares from the ADS program and your
direct or indirect holding in us exceeds 15% of our total equity, you would be
required to make a public offer to the remaining shareholders under the
Takeover Code. 122




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##### Table of Contents



ADDITIONAL INFORMATION In accordance with the Securities Act, we filed with the Securities and
Exchange Commission a registration statement on Form F-1, which includes
relevant exhibits and schedules with respect to the ADSs and the underlying
equity shares issued in our initial public offering. The registration
statement, including its exhibits and schedules, may be inspected without
charge at the principal office of the Securities and Exchange Commission
located at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and the
regional offices of the Securities and Exchange Commission located at Citicorp
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of this material may also be obtained by mail from the Public
Reference Branch of the Securities and Exchange Commission at 450 Fifth Street,
N.W., Washington, D.C. 20549, at prescribed rates. 123




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##### Table of Contents



INDEX TO FINANCIAL STATEMENTS PageFinancial Statements of HDFC Bank Limited:Report of independent registered public accounting firm
    
    
    F-2Balance sheets as of March 31, 2003 and 2004
    
    
    F-3Statements of income for the years ended March 31, 2002, 2003 and 2004
    
    
    F-4Statements of cash flows for the years ended March 31, 2002, 2003 and 2004
    
    
    F-5Statements of shareholders equity for the years ended March 31, 2002, 2003 and 2004
    
    
    F-6Notes to financial statements
    
    
    F-7
 F-1




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors
HDFC Bank Limited: We have audited the accompanying balance sheets of HDFC Bank Limited (the
Bank) as of March 31, 2003 and 2004, and the related statements of income,
cash flows and shareholders equity for each of the years in the three year
period ended March 31, 2004. These financial statements are the responsibility
of the Banks management. Our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion. In our opinion, such financial statements present fairly, in all material
respects, the financial position of HDFC Bank Limited as of March 31, 2003 and
2004, and the results of its operations and cash flows for each of the years
in the three year period ended March 31, 2004, in conformity with accounting
principles generally accepted in the United States of America. As described in Note 2 (a) to the financial statements, these financial
statements have been prepared in accordance with accounting principles
generally accepted in the United States of America, which differ in certain
material respects from accounting principles generally accepted for banks in
India, which form the basis of the Banks general purpose financial
statements. /s/ DELOITTE HASKINS & SELLS CHARTERED ACCOUNTANTS
Mumbai, India
April 16, 2004 F-2




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##### Table of Contents



HDFC BANK LIMITED
BALANCE SHEETS
As of March 31, 2003 and 2004 As of March 31,2003
    
    2004
    
    2004(In millions)ASSETS:Cash and cash equivalents
    
    Rs.
    23,944.9
    
    
    Rs.
    33,010.4
    
    
    US$
    760.6Term placements
    
    
    7,747.4
    
    
    
    3,565.2
    
    
    
    82.1Investments held for trading, at market
    
    
    3,976.1
    
    
    
    6,233.8
    
    
    
    143.6Investments available for sale, at market
    
    
    98,929.2
    
    
    
    133,274.6
    
    
    
    3,070.8Investments held to maturity, at amortized cost
    
    
    38,426.7
    
    
    
    36,368.4
    
    
    
    838.0Securities purchased under agreements to resell
    
    
    
    
    
    
    19,950.0
    
    
    
    459.7Loans (net
of allowance of Rs. 1,866.7 and Rs. 3,494.3, respectively)
    
    
    118,299.9
    
    
    
    177,681.1
    
    
    
    4,094.0Accrued interest receivable
    
    
    6,283.8
    
    
    
    4,178.7
    
    
    
    96.3Property and equipment
    
    
    5,277.5
    
    
    
    6,169.1
    
    
    
    142.1Other assets
    
    
    8,955.2
    
    
    
    6,404.3
    
    
    
    147.7Total assets
    
    Rs.
    311,840.7
    
    
    Rs.
    426,835.6
    
    
    US$
    9,834.9LIABILITIES AND SHAREHOLDERS EQUITY:LiabilitiesInterest-bearing deposits
    
    Rs.
    174,250.4
    
    
    Rs.
    215,710.8
    
    
    US$
    4,970.3Non-interest bearing deposits
    
    
    49,509.6
    
    
    
    88,351.2
    
    
    
    2,035.7Total deposits
    
    
    223,760.0
    
    
    
    304,062.0
    
    
    
    7,006.0Securities sold under repurchase agreements
    
    
    4,600.0
    
    
    
    
    
    
    
    Short-term borrowings
    
    
    21,579.6
    
    
    
    24,064.2
    
    
    
    554.5Accrued interest payable
    
    
    6,897.3
    
    
    
    4,165.4
    
    
    
    96.0Long-term debt
    
    
    2,116.0
    
    
    
    6,086.0
    
    
    
    140.2Accrued expenses and other liabilities
    
    
    26,774.7
    
    
    
    57,242.2
    
    
    
    1,318.9Total liabilities
    
    Rs.
    285,727.6
    
    
    Rs.
    395,619.8
    
    
    US$
    9,115.6Contingencies (See Note 25)
    
    
    
    
    
    
    
    
    
    
    Shareholders equity:Equity
shares: par valueRs. 10 each; authorized 450,000,000 shares; issued and
outstanding 279,718,938 shares and 282,844,438 shares,
respectively
    
    
    2,797.2
    
    
    
    2,828.4
    
    
    
    65.2Additional paid in capital
    
    
    11,758.9
    
    
    
    12,527.3
    
    
    
    288.6Advance received pending allotment of shares
    
    
    146.5
    
    
    
    125.5
    
    
    
    2.9Retained earnings
    
    
    6,532.1
    
    
    
    9,057.1
    
    
    
    208.7Statutory reserve
    
    
    3,249.9
    
    
    
    4,523.7
    
    
    
    104.2Deferred stock based compensation
    
    
    (60.2
    )
    
    
    (374.6
    )
    
    
    (8.6
    )Accumulated other comprehensive income
    
    
    1,688.7
    
    
    
    2,528.4
    
    
    
    58.3Total shareholders equity
    
    
    26,113.1
    
    
    
    31,215.8
    
    
    
    719.3Total liabilities and shareholders equity
    
    Rs.
    311,840.7
    
    
    Rs.
    426,835.6
    
    
    US$
    9,834.9
 See accompanying notes to financial statements F-3




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##### Table of Contents



HDFC BANK LIMITED
STATEMENTS OF INCOME
For each of the years ended March 31, 2002, 2003 and 2004 Years ended March 31,2002
    
    2003
    
    2004
    
    2004(In millions, except share and per share amounts)Interest and dividend revenue:Loans
    
    Rs.
    6,130.7
    
    
    Rs.
    7,805.3
    
    
    Rs.
    11,705.0
    
    
    US$
    269.7Trading account
    
    
    218.7
    
    
    
    478.9
    
    
    
    289.6
    
    
    
    6.7Securities, including dividend
    
    
    7,947.7
    
    
    
    9,907.2
    
    
    
    11,487.3
    
    
    
    264.7Other
    
    
    2,150.9
    
    
    
    1,233.4
    
    
    
    1,109.6
    
    
    
    25.5Total interest revenue
    
    
    16,448.0
    
    
    
    19,424.8
    
    
    
    24,591.5
    
    
    
    566.6Interest expense:Deposits
    
    
    9,158.5
    
    
    
    10,508.5
    
    
    
    10,279.2
    
    
    
    236.8Short-term borrowings
    
    
    1,328.1
    
    
    
    1,032.9
    
    
    
    1,435.9
    
    
    
    33.1Long-term debt
    
    
    275.9
    
    
    
    237.8
    
    
    
    268.0
    
    
    
    6.2Total interest expense
    
    
    10,762.5
    
    
    
    11,779.2
    
    
    
    11,983.1
    
    
    
    276.1Net interest revenue
    
    
    5,685.5
    
    
    
    7,645.6
    
    
    
    12,608.4
    
    
    
    290.5Allowance for credit losses, net
    
    
    451.6
    
    
    
    741.5
    
    
    
    2,343.4
    
    
    
    54.0Net interest revenue after allowance for credit losses
    
    
    5,233.9
    
    
    
    6,904.1
    
    
    
    10,265.0
    
    
    
    236.5Non-interest revenue, net:Fees and commissions
    
    
    1,620.5
    
    
    
    2,306.4
    
    
    
    3,140.7
    
    
    
    72.4Trading account gains, net
    
    
    600.9
    
    
    
    507.8
    
    
    
    396.8
    
    
    
    9.1Realized (losses)/gains on sales of available
for sale securities, net
    
    
    344.4
    
    
    
    721.7
    
    
    
    (48.3
    )
    
    
    (1.1
    )Foreign exchange transactions
    
    
    391.4
    
    
    
    445.3
    
    
    
    740.0
    
    
    
    17.1Derivative transactions
    
    
    249.7
    
    
    
    379.1
    
    
    
    443.9
    
    
    
    10.2Other, net
    
    
    8.2
    
    
    
    37.0
    
    
    
    24.5
    
    
    
    0.6Total non-interest revenue, net
    
    
    3,215.1
    
    
    
    4,397.3
    
    
    
    4,697.6
    
    
    
    108.3Total revenue, net
    
    
    8,449.0
    
    
    
    11,301.4
    
    
    
    14,962.6
    
    
    
    344.8Non-interest expense:Salaries and staff benefits
    
    
    1,184.6
    
    
    
    1,661.2
    
    
    
    2,154.0
    
    
    
    49.6Premises and equipment
    
    
    913.8
    
    
    
    1,343.6
    
    
    
    1,828.5
    
    
    
    42.1Depreciation and amortization
    
    
    675.7
    
    
    
    1,052.4
    
    
    
    1,254.9
    
    
    
    28.9Administrative and other
    
    
    1,421.9
    
    
    
    2,000.7
    
    
    
    3,131.9
    
    
    
    72.2Total non-interest expense
    
    
    4,196.0
    
    
    
    6,057.9
    
    
    
    8,369.3
    
    
    
    192.8Income before income tax
    
    
    4,253.0
    
    
    
    5,243.5
    
    
    
    6,593.3
    
    
    
    152.0Income tax
    
    
    1,294.6
    
    
    
    1,729.7
    
    
    
    1,838.8
    
    
    
    42.4Net income
    
    Rs.
    2,958.4
    
    
    Rs.
    3,513.8
    
    
    Rs.
    4,754.5
    
    
    US$
    109.6Per share information: (see note 28)Earnings per equity sharebasic
    
    Rs.
    11.10
    
    
    Rs.
    12.57
    
    
    Rs.
    16.87
    
    
    US$
    0.39Earnings per equity sharediluted
    
    Rs.
    11.04
    
    
    Rs.
    12.51
    
    
    Rs.
    16.70
    
    
    US$
    0.38Per ADS information (where 1 ADS represents 3 shares):Earnings per ADSbasic
    
    Rs.
    33.30
    
    
    Rs.
    37.71
    
    
    Rs.
    50.61
    
    
    US$
    1.17Earnings per ADSdiluted
    
    Rs.
    33.12
    
    
    Rs.
    37.53
    
    
    Rs.
    50.10
    
    
    US$
    1.15
 See accompanying notes to financial statements F-4




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##### Table of Contents



HDFC BANK LIMITED
STATEMENTS OF CASH FLOWS
For each of the years ended March 31, 2002, 2003 and 2004 Years ended March 31,2002
    
    2003
    
    2004
    
    2004(In millions)Cash flows from operating activities:Net income
    
    Rs.
    2,958.4
    
    
    Rs.
    3,513.8
    
    
    Rs.
    4,754.5
    
    
    US$
    109.6Adjustment to reconcile net income to net cash provided by operating
activitiesAllowance for credit losses
    
    
    451.6
    
    
    
    741.5
    
    
    
    2,343.4
    
    
    
    54.0Depreciation and amortization
    
    
    675.7
    
    
    
    1,052.4
    
    
    
    1,254.9
    
    
    
    28.9Amortization of deferred stock based compensation
    
    
    89.8
    
    
    
    138.0
    
    
    
    135.1
    
    
    
    3.1Amortization of deferred acquisition costs
    
    
    46.7
    
    
    
    66.3
    
    
    
    405.4
    
    
    
    9.3Amortization of investments
    
    
    499.2
    
    
    
    761.6
    
    
    
    1,489.6
    
    
    
    34.3Provision for deferred income taxes
    
    
    (105.6
    )
    
    
    (102.8
    )
    
    
    (588.4
    )
    
    
    (13.5
    )Provision made for guarantees
    
    
    
    
    
    
    
    
    
    
    112.7
    
    
    
    2.6Gain on securitization of loans
    
    
    
    
    
    
    
    
    
    
    123.8
    
    
    
    2.9Accrued interest income
    
    
    (1,774.1
    )
    
    
    (2,199.9
    )
    
    
    2,105.1
    
    
    
    48.5Net realized (gain)/loss on sale of available for sale securities
    
    
    (344.4
    )
    
    
    (721.7
    )
    
    
    48.3
    
    
    
    1.1Accrued interest expense
    
    
    1,214.8
    
    
    
    2,718.6
    
    
    
    (2,731.9
    )
    
    
    (62.9
    )Loss/(gain) on disposal of property and equipment, net
    
    
    8.1
    
    
    
    (10.8
    )
    
    
    4.4
    
    
    
    0.1Net change in:Other assets
    
    
    347.5
    
    
    
    (2,406.2
    )
    
    
    2,113.7
    
    
    
    48.7Other liabilities
    
    
    4,340.9
    
    
    
    11,075.2
    
    
    
    30,945.6
    
    
    
    713.0Trading account assets
    
    
    (3,837.6
    )
    
    
    (138.5
    )
    
    
    (2,257.7
    )
    
    
    (52.0
    )Net cash provided by operating activities
    
    
    4,571.0
    
    
    
    14,487.5
    
    
    
    40,258.50
    
    
    
    927.7Cash flows from investing activities:Net change in term placements
    
    
    
    
    
    
    (7,747.4
    )
    
    
    4,182.2
    
    
    
    96.4Activity in available for sale securities:Purchases
    
    
    (300,993.8
    )
    
    
    (382,916.3
    )
    
    
    (265,970.2
    )
    
    
    (6,128.3
    )Proceeds from sales
    
    
    243,462.6
    
    
    
    341,254.1
    
    
    
    209,229.1
    
    
    
    4,820.9Maturities, prepayments and calls
    
    
    25,514.1
    
    
    
    24,209.6
    
    
    
    22,626.0
    
    
    
    521.3Activity in held to maturity securities:Purchases
    
    
    (23,281.5
    )
    
    
    (56,274.0
    )
    
    
    (78,592.0
    )
    
    
    (1,810.9
    )Maturities, prepayments and calls
    
    
    10,213.3
    
    
    
    52,896.0
    
    
    
    79,721.9
    
    
    
    1,836.9Net change in repos and reverse repos
    
    
    (722.7
    )
    
    
    6,779.6
    
    
    
    (24,550.0
    )
    
    
    (565.7
    )Proceeds from loans securitized
    
    
    
    
    
    
    
    
    
    
    5,917.4
    
    
    
    136.3Increase in loans originated, net of principal collections
    
    
    (20,897.3
    )
    
    
    (47,512.5
    )
    
    
    (67,765.8
    )
    
    
    (1,561.5
    )Additions to property and equipment
    
    
    (1,682.6
    )
    
    
    (2,533.5
    )
    
    
    (2,143.9
    )
    
    
    (49.4
    )Proceeds from sale or disposal of property and equipment
    
    
    101.0
    
    
    
    16.2
    
    
    
    24.9
    
    
    
    0.6Net cash used in investing activities
    
    
    (68,286.9
    )
    
    
    (71,828.2
    )
    
    
    (117,320.4
    )
    
    
    (2,703.4
    )Cash flows from financing activities:Net increase in deposits
    
    
    59,957.0
    
    
    
    47,221.9
    
    
    
    80,302.0
    
    
    
    1,850.3Net increase/(decrease) in short-term borrowings
    
    
    4,929.1
    
    
    
    (20.7
    )
    
    
    2,484.6
    
    
    
    57.2Proceeds from issuance of long-term debt
    
    
    
    
    
    
    
    
    
    
    4,000.0
    
    
    
    92.2Repayments of long-term debt
    
    
    (62.7
    )
    
    
    (41.9
    )
    
    
    (30.0
    )
    
    
    (0.7
    )Proceeds from issuance of equity shares and ADSs
    
    
    7,890.6
    
    
    
    86.7
    
    
    
    203.6
    
    
    
    4.7Proceeds from applications received for shares pending allotment
    
    
    
    
    
    
    146.5
    
    
    
    125.5
    
    
    
    2.9Payment of dividends and dividend tax
    
    
    (528.6
    )
    
    
    (697.5
    )
    
    
    (958.3
    )
    
    
    (22.0
    )Net cash provided by financing activities
    
    
    72,185.4
    
    
    
    46,695.0
    
    
    
    86,127.4
    
    
    
    1,984.6Net change in cash
    
    
    8,469.5
    
    
    
    (10,645.7
    )
    
    
    9,065.5
    
    
    
    208.9Cash and cash equivalents, beginning of year
    
    
    26,121.1
    
    
    
    34,590.6
    
    
    
    23,944.9
    
    
    
    551.7Cash and cash equivalents, end of year
    
    Rs.
    34,590.6
    
    
    Rs.
    23,944.9
    
    
    Rs.
    33,010.4
    
    
    US$
    760.6Supplementary cash flow information:Interest paid
    
    Rs.
    9,547.7
    
    
    Rs.
    9,183.4
    
    
    Rs.
    14,819.5
    
    
    US$
    341.5Income taxes paid
    
    Rs.
    1,487.0
    
    
    Rs.
    2,374.7
    
    
    Rs.
    2,843.9
    
    
    US$
    65.5Supplementary information on non cash transactions:Investments transferred from available for sale to held to maturity category
    
    Rs.
    22,627.0
    
    
    Rs.
    
    
    
    Rs.
    
    
    
    US$
    Investments transferred from held to maturity to available for sale category
    
    Rs.
    
    
    
    Rs.
    450.0
    
    
    Rs.
    4.9
    
    
    US$
    0.1Investments transferred from trading to available for sale category
    
    Rs.
    
    
    
    Rs.
    1,162.3
    
    
    Rs.
    
    
    
    US$
    
 See accompanying notes to financial statements F-5




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##### Table of Contents



HDFC BANK LIMITED
STATEMENTS OF SHAREHOLDERS EQUITY
For each of the years ended March 31, 2002, 2003 and 2004 Advancereceived
    
    
    
    
    
    
    
    
    
    
    
    
    
    AccumulatedEquity
    
    Additional
    
    pending
    
    
    
    
    
    
    
    
    
    Deferred
    
    other
    
    TotalNumber of
    
    share
    
    paid in
    
    allotment
    
    Retained
    
    Statutory
    
    stock based
    
    comprehensive
    
    Shareholdersequity shares
    
    capital
    
    capital
    
    of shares
    
    Earnings
    
    reserve
    
    compensation
    
    income (loss)
    
    equity(In millions, except for equity shares)Balance at March 31, 2001
    
    
    239,738,286
    
    
    Rs.
    2,397.3
    
    
    Rs.
    3,957.2
    
    
    Rs.
    
    
    
    Rs.
    2,997.6
    
    
    Rs.
    1,538.3
    
    
    Rs.
    (63.7
    )
    
    Rs.
    (66.9
    )
    
    Rs.
    10,759.8Shares issued upon exercise of
options
    
    
    1,875,900
    
    
    
    18.8
    
    
    
    68.3
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    87.1Shares issued as ADSs upon IPO
in the United
States (See Note 20)
    
    
    37,418,652
    
    
    
    374.2
    
    
    
    7,429.3
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,803.5Transfer to statutory reserve
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (742.6
    )
    
    
    742.6
    
    
    
    
    
    
    
    
    
    
    
    Dividends, including dividend
tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (528.6
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (528.6
    )Stock options issued
    
    
    
    
    
    
    
    
    
    
    224.3
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (224.3
    )
    
    
    
    
    
    
    Amortization of deferred stock
based compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    89.8
    
    
    
    
    
    
    
    89.8Sub Total
    
    
    279,032,838
    
    
    
    2,790.3
    
    
    
    11,679.1
    
    
    
    
    
    
    
    1,726.4
    
    
    
    2,280.9
    
    
    
    (63.2
    )
    
    
    (66.9
    )
    
    
    18,211.6Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,958.4
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,958.4Unrealized gain on available
for sale securities, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    890.9
    
    
    
    890.9Sub Total
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,958.4
    
    
    
    
    
    
    
    
    
    
    
    890.9
    
    
    
    3,849.3Balance at March 31, 2002
    
    
    279,032,838
    
    
    
    2,790.3
    
    
    
    11,679.1
    
    
    
    
    
    
    
    4,684.8
    
    
    
    2,280.9
    
    
    
    (198.2
    )
    
    
    824.0
    
    
    
    22,060.9Shares issued upon exercise of
options
    
    
    686,100
    
    
    
    6.9
    
    
    
    79.8
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    86.7Dividends, including dividend
tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (697.5
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (697.5
    )Advance paid pending allotment
of shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    146.5
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    146.5Amortization of deferred stock
based compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    138.0
    
    
    
    
    
    
    
    138.0Transfer to statutory reserve
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (969.0
    )
    
    
    969.0
    
    
    
    
    
    
    
    
    
    
    
    Sub Total
    
    
    279,718,938
    
    
    
    2,797.2
    
    
    
    11,758.9
    
    
    
    146.5
    
    
    
    3,018.3
    
    
    
    3,249.9
    
    
    
    (60.2
    )
    
    
    824.0
    
    
    
    21,734.6Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,513.8
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,513.8Unrealized gain on available
for sale securities, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    864.7
    
    
    
    864.7Sub Total
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,513.8
    
    
    
    
    
    
    
    
    
    
    
    864.7
    
    
    
    4,378.5Balance at March 31, 2003
    
    
    279,718,938
    
    
    
    2,797.2
    
    
    
    11,758.9
    
    
    
    146.5
    
    
    
    6,532.1
    
    
    
    3,249.9
    
    
    
    (60.2
    )
    
    
    1,688.7
    
    
    
    26,113.1Shares issued upon exercise of
options
    
    
    3,125,500
    
    
    
    31.2
    
    
    
    318.9
    
    
    
    (146.5
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    203.6Stock options granted
    
    
    
    
    
    
    
    
    
    
    449.5
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (449.5
    )
    
    
    
    
    
    
    Dividends, including dividend
tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (955.7
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (955.7
    )Advance paid pending allotment
of shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    125.5
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    125.5Amortization
of deferred stock based compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    135.1
    
    
    
    
    
    
    
    135.1Transfer to statutory reserve
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,273.8
    )
    
    
    1,273.8
    
    
    
    
    
    
    
    
    
    
    
    Sub Total
    
    
    282,844,438
    
    
    
    2,828.4
    
    
    
    12,527.3
    
    
    
    125.5
    
    
    
    4,302.6
    
    
    
    4,523.7
    
    
    
    (374.6
    )
    
    
    1,688.7
    
    
    
    25,621.6Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,754.5
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,754.5Unrealized gain on available
for sale securities, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    839.7
    
    
    
    839.7Sub Total
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,057.1
    
    
    
    
    
    
    
    
    
    
    
    839.7
    
    
    
    5,594.2Balance at March 31, 2004
    
    
    282,844,438
    
    
    Rs.
    2,828.4
    
    
    Rs.
    12,527.3
    
    
    Rs.
    125.5
    
    
    Rs.
    9,057.1
    
    
    Rs.
    4,523.7
    
    
    Rs.
    (374.6
    )
    
    Rs.
    2,528.4
    
    
    Rs.
    31,215.8Balance at March 31, 2004
    
    
    
    
    
    US$
    65.2
    
    
    US$
    288.6
    
    
    US$
    2.9
    
    
    US$
    208.7
    
    
    US$
    104.2
    
    
    US$
    (8.6
    )
    
    US$
    58.3
    
    
    US$
    719.3
 See accompanying notes to financial statements F-6




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HDFC BANK LIMITED
NOTES TO FINANCIAL STATEMENTS 1. The Bank HDFC
Bank Limited (the Bank) was incorporated in August 1994 with its
registered office in Mumbai, India. The Bank is a banking company governed by
Indias Banking Regulations Act, 1949. The Banks shares are listed on The
Stock Exchange, Mumbai, the National Stock Exchange, India, The Stock
Exchange, Ahmedabad and its ADSs are listed on the New York Stock Exchange. The Banks largest shareholder is HDFC Limited, who controls 24.2% of the
Banks equity. The India Private Equity Fund (Mauritius) and Indocean
Financial (Holding) Ltd., both funds advised by Indocean Chase Capital
Advisors (the Indian affiliate of J.P. Morgan Partners), have a combined stake
of 5.5% of the Banks equity. The balance of the Banks equity is widely held
by the public and by foreign and Indian institutional investors. The Bank provides a wide range of traditional banking and financial
services including corporate lending, trade finance, cash management,
corporate finance advisory services, foreign exchange, retail lending, credit
cards, bullion sale and custodial and depositary services. In addition, the
Bank trades in debt and equity securities and derivatives on its own account. 2. Summary of Significant Accounting Policies a. Basis of presentation and consolidation The Bank does not have any subsidiaries. Entities where the Bank controls
between 20% to 50% of the voting stock of the investee company are considered
affiliates and are accounted for using the equity method. These financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of
America (US
GAAP). US GAAP differs in certain material respects from accounting
principles generally accepted in India, the requirements of Indias Banking
Regulations Act and related regulations issued by the Reserve Bank of India
(RBI) (collectively Indian GAAP), which form the basis of the statutory
general purpose financial statements of the Bank in India. Principal
differences insofar as they relate to the Bank include: determination of the
allowance for credit losses; valuation of investments; accounting for:
deferred income taxes, stock based compensation, retirement benefits and
affiliates, loan origination fees, and the presentation and format of the financial statements and
related notes. b. Use of Estimates The preparation of financial statements in conformity with US GAAP
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosures of contingent assets and
liabilities at the date of these financial statements and the reported amounts
of revenues and expenses for the years presented. Actual results could differ
from these estimates. Material estimates included in these financial
statements that are susceptible to change include the allowance for credit
losses and the valuation of unlisted investments. c. Cash and cash equivalents The Bank considers all highly liquid financial instruments, which are
readily convertible into cash and have original maturities of three months or
less on the date of purchase, to be cash equivalents. The carrying value of
cash equivalents approximates fair value. d. Intangible assets The Bank capitalizes the cost of purchased goodwill. Until March 31, 2001, the Bank amortized the cost of goodwill on a
straight-line basis over its estimated useful life. With effect from April 1, 2001, the Bank adopted Statement of Financial
Accounting Standard (SFAS) No. 142, Goodwill and Other Intangible Assets,
and ceased to amortize the remaining unamortized cost at March 31, 2001 of
goodwill that arose on the acquisition of Times Bank Limited. In accordance
with the two step methodology required by SFAS No. 142, the Bank tests the
carrying value of goodwill for impairment annually on March 31 or upon the
occurrence of triggering event. The adoption of SFAS No. 142 resulted in an increase in net income for
the year ended March 31, 2002 of Rs. 6.7 million. F-7




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##### Table of Contents



HDFC BANK LIMITED
NOTES TO FINANCIAL STATEMENTS(Continued) e. Customer acquisition costs Customer acquisition costs principally consist of commissions paid to
third party referral agents who obtain retail loans and are deferred and
amortized as a yield adjustment over the life of the loans. Advertising and
marketing expenses incurred to solicit new business are expensed as incurred. f. Investments in securities The Bank accounts for its investments in securities in accordance with
SFAS No. 115, Accounting for Certain Investments in Debt and Equity
Securities. SFAS No. 115 requires that investments in debt and equity
securities be reported at fair value, except for debt securities classified as
held to maturity securities, which are reported at amortized cost. Securities that are held principally for resale in the near term are
recorded in the trading assets account at fair value, with changes in fair
value recorded in earnings. Debt securities which management has the positive intent and ability to
hold to maturity are classified as held to maturity and recorded at amortized
cost. Securities with readily determinable fair values that are not classified
as held to maturity or trading are classified as available for sale and
recorded at fair value. 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. Declines in the fair values of held to maturity and available for sale
securities below their cost that are other than temporary are reflected in
earnings as realized losses, based on managements best estimate of the value
of the investment. Investments consist of government securities, other debt and equity
securities and credit substitute securities. Credit substitute securities are typically comprised of commercial paper,
short term debentures and preference shares issued by the same customers with
whom the Bank has a lending relationship in its wholesale banking business.
Investment decisions for credit substitute securities are subject to the same
credit approval processes as for loans, and the Bank bears the same customer
risk as it does for loans extended to those customers. Additionally the yield
and maturity terms are generally directly negotiated by the Bank with the
issuer. Fair values for such securities are estimated based on present values
at current interest rates for such instruments. Estimates of any declines in the fair values of such securities that are
other than temporary are measured on a case by case basis together with loans
under the overall program to those customers and recognized as realized
losses. As the Banks exposures to such securities are similar to its
exposures on its loan portfolio, additional disclosures have been provided on
the maturity profile and impairment status in Note 8 and on concentrations of
credit risk in Note 11. All other securities are actively managed as a part of the Banks
treasury operations and are held primarily to meet the Banks statutory and
regulatory requirements. The issuers of such securities are either the
government, public financial institutions or private issuers. These
investments are typically purchased from the market, and debt securities are
generally publicly rated. Fair values for such securities are based on market
quotations. On April 1, 2001, the Bank transferred securities with a fair value of
Rs. 22,627.0 million to the held to maturity category. Where the management makes a determination that an HTM securitys credit
rating has been irrevocably downgraded, and continued holding it to maturity
is likely to result in increased losses, it transfers the security to AFS,
pending its disposal at the best available price, as permitted by SFAS No.
115. g. Loans The Bank grants commercial and consumer loans to customers. Commercial
loans are made to customers as either short or medium term loans, cash credit
facilities or bills discounting. Cash credit facilities are revolving credits
provided to customers which are secured by working capital such as inventory
or accounts receivable. Bills discounting consists of short term loans that
are secured by bills of exchange that have been accepted by the Banks
customers or drawn on another bank. Loans that management has the intent and ability to hold for the
foreseeable future or until maturity or payoff are reported at their
outstanding unpaid principal balances adjusted for an allowance for credit
losses. Loans are reported at the principal amount outstanding, inclusive of
interest accrued and due. Interest is accrued on the unpaid principal balance
and is included in interest income. Loans are placed on non-accrual status
when interest or principal payments are past due, at which time no further
interest is accrued and overdue interest is written off against interest
income. Loans are returned to accrual status when all principal and interest
amounts contractually due are brought current and future payments are
reasonably assured. For the years ended March 31, 2002 and 2003, loans were
place on non-accrual status when interest or principal payments were two
quarters past due, and to the extent that interest was accrued on loans that
were more than one quarter overdue but not yet considered for non accrual
status, the Bank considered the collectibility as a part of the allowance for
credit losses. In accordance with RBI guidelines with effect from March 31,
2004, loans are placed on non-accrual status when interest or principal
payments are one quarter overdue. F-8




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##### Table of Contents



HDFC BANK LIMITEDNOTES TO FINANCIAL STATEMENTS(Continued) h. Allowance for credit losses The Bank provides an allowance for credit losses based on managements
best estimate of losses inherent in the loan portfolio. The allowance for
credit losses consists of specific and unallocated components. The allowance
for credit losses is evaluated on a regular basis by management and is based
upon managements view of the probability of recovery of loans in light of
historical experience, nature and volume of the loan portfolio, adverse
situations that may affect the borrowers ability to repay, the estimated
value of any underlying collateral, factors affecting the industry which the
loan exposure relates to and prevailing economic conditions. This evaluation
is inherently subjective as it requires estimates that are susceptible to
significant revision as more information becomes available. Credit losses are
charged against the allowance when management believes that the loan balance
cannot be recovered. Subsequent recoveries, if any, are credited to the
allowance. The Bank evaluates its entire credit portfolio on a periodic basis and
grades its accounts considering both qualitative and quantitative criteria.
Non homogeneous loans are considered impaired when, based on current
information and events, it is probable that the Bank will be unable to collect
scheduled payments of principal or interest when due according to the
contractual terms of the loan agreement. Factors considered by management in
determining impairment include payment status, the financial condition of the
borrower, the value of collateral held, and the probability of collecting
scheduled principal and interest payments when due. Impairment is measured for each non homogeneous loan customer in the
aggregate for all facilities, including term loans, cash credits, bills
discounted and lease finance, based on either the present value of expected
future cash flows discounted at the loans effective interest rate, the loans
obtainable market price, or the net realizable value of the collateral if the
loan is collateral dependent. Non-homogenous loans that experience insignificant payment delays and
payment shortfalls are generally not classified as impaired but are placed on
a surveillance watch list and closely monitored for deterioration. Management
determines the significance of payment delays and payment shortfalls on a
case-by-case basis, taking into consideration all of the circumstances
surrounding the loan and the borrower, including the length of the delay, the
reasons for the delay, the borrowers prior payment record, and the amount of
the shortfall in relation to the principal and interest owed. With
effect from April 1, 2003, the Bank also establishes an unallocated
allowance for non homogenous standard loans based on the overall portfolio
quality, asset growth, economic condition and other risk factors. For loans made where marketable securities are held as collateral, the
Bank monitors margin positions of customers based on the market price of the
underlying collateral. To the extent that declines in the market value of the
collateral cause the Banks margin to be eroded, the Bank generally calls for
additional margin to be deposited by the customer to restore the loan to value
ratio to an acceptable level. In the event that the customer does not meet
such margin calls within a short time frame, the Bank gives notice of its
intent to liquidate the collateral. After the notice period, subject to market
conditions, the Bank sells the underlying collateral. The Bank recognizes as a
realized loss any shortfall between the proceeds realized and the carrying
value of the loan. At each reporting date, the Bank stratifies its loans against securities
portfolio based on loan to value ratios computed using current market prices
for the collateral. The probability of loss increases with increased loan to
value ratios and with increased volatility in the equities markets. The Bank
establishes a specific allowance for the shortfall in collateral for all loans
where the loan to value ratio exceeds 100% and it is probable that the
borrower will not repay the full amount of the outstanding principal or
interest. Additionally, the Bank also establishes an unallocated allowance for
credit losses using loss factors for loans which fall into a high risk loan to
value strata based on historical losses incurred in each such strata in the
last 3 years. Retail loans other than loans made with shares as collateral are
comprised of large groups of smaller balance homogeneous loans. Such loans are
collectively evaluated for impairment and an unallocated allowance is
established using a historical default rate determined separately for each
class of loan. The Bank does not separately identify individual retail
consumer loans for impairment disclosures. Additionally, the Bank provides a
specific allowance for loan losses for retail loans that have payment arrears
of one quarters or more (two quarters or more for years ended March 31, 2002
and 2003) in an amount equivalent to the outstanding principal and interest
balance. Loans include aggregate rentals on finance lease transactions, net of
related unearned income and security deposits collected from the lessee.
Unearned income is recognized as income using the internal rate of return
method over the primary period of the lease. Income on non-performing leases
is recognized on the same basis as non-performing loans. Provision for credit card reward points is based on their expected
redemption value as per prevailing market practice. i. Sales of Receivables HDFC Bank sells finance receivables to special purpose entities (SPEs) in
securitization transactions. Recourse is in the form of the Companys
investment in subordinated securities issued by these SPEs and cash
collateral. In accordance with SFAS No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities, the
receivables are derecognized in the balance sheet when they are sold and
consideration has been received by the Company. Sales and transfers that do
not meet the criteria for surrender of control are accounted for as secured
borrowings. Gains or losses from the sale of receivables are recognized in the period
the sale occurs based on the relative fair value of the portion sold and the
portion allocated to retained interests, and are reported net of the estimated
cost of servicing by the Company. Fair Values are determined based on the present value of expected future
cash flows, using the best estimates of key assumptions such as prepayment
rates, credit losses and discount rates, commensurate with the
risk involved. F-9




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##### Table of Contents



HDFC BANK LIMITEDNOTES TO FINANCIAL STATEMENTS(Continued) j. Property and equipment Property and equipment are stated at cost, less accumulated depreciation.
Depreciation is provided over the estimated useful lives of fixed assets on a
straight-line basis at the following rates: Type of Asset
    
    Rate of depreciationBuildings
    
    
    1.61
    %Leasehold improvements
    
    Over the period of leaseATMs
    
    
    12.50
    %VSAT terminals
    
    
    10.00
    %Office equipment
    
    
    16.21
    %Computer equipment
    
    
    33.33
    %Motor cars
    
    
    25.00
    %Software
    
    
    25.00
    %
 k. Impairment or disposal of long lived assets Whenever events or circumstances indicate that the carrying amount of
tangible long lived assets may not be recoverable, the Bank subjects such long
lived assets to a test of recoverability based on the undiscounted cash flows
from use or disposition of the asset. Such events or circumstances would
include changes in the market, technology obsolescence, adverse changes in
profitability or regulation. If the asset is impaired, the Bank recognizes an
impairment loss estimated as the difference between carrying value and the net
realizable value. l. Foreclosed or repossessed assets Assets acquired through or in lieu of foreclosure or through repossession
are generally held for sale and initially recorded at fair value on the date
of foreclosure or repossession. On subsequent dates, such assets are
periodically evaluated by management for changes in fair value, and are
carried at the lower of the fair value on the date of foreclosure or
repossession and the net realizable value on the balance sheet date. Net
realizable value represents the anticipated sale price less the estimated
costs of disposal. Revenues and expenses from the operation of such assets and
changes in the fair value are included in earnings. m. Income tax Income tax comprises the current tax provision and the net change in the
deferred tax asset or liability in the year. Deferred tax assets and liabilities are recognized for the future tax
consequences of temporary differences between the carrying values of assets
and liabilities and their respective tax bases, and operating loss carry
forwards. Deferred tax assets are recognized subject to managements judgement
that realization is more likely than not. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable income in
the years in which the temporary differences are expected to be received or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in the income statement in the period of enactment of the
change. n. Financial instruments The Bank enters into forward exchange contracts and currency swaps with
its corporate clients (See below in Note 2(x)). The Bank also enters into interest rate swaps with its corporate clients
as well as for trading purposes. Interest rate swaps are accounted for at
their fair value based on the yield curve of the transaction with changes in
fair value recognized in earnings. F-10




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##### Table of Contents



HDFC BANK LIMITEDNOTES TO FINANCIAL STATEMENTS(Continued) o. Retirement benefits Gratuity In accordance with Indian law, the Bank provides for gratuity, a defined
benefit retirement plan covering all eligible employees. The plan provides for
lump sum payments to vested employees at retirement, death while in employment
or on termination of employment in an amount equivalent to 15 days salary
payable for each completed year of service. Vesting occurs upon completion of
five years of service. The Bank makes annual contributions to a fund
administered by trustees and managed by the Life Insurance Corporation of
India (LIC) in an amount notified by the LIC. The Bank accounts for the
liability for future gratuity benefits in accordance with SFAS No. 87,
Employers Accounting for Pensions, based on an external actuarial valuation
carried out annually. Superannuation Employees of the Bank are entitled to receive retirement benefits under
the Banks superannuation fund. The superannuation fund is a defined
contribution plan under which the Bank annually contributes a sum equivalent
to 13% of the employees eligible annual salary to the LIC, who administer the
fund. The Bank has no liability for future superannuation fund benefits other
than its annual contribution, and recognizes such contributions as an expense
in the year incurred. Provident fund In accordance with Indian law, all employees of the Bank are entitled to
receive benefits under the provident fund, a defined contribution plan in
which both the employee and the Bank contribute monthly at a determined rate
(currently 12% of employees salary). These contributions are made to a fund
set up by the Bank and administered by a board of trustees, except that in
case of employees who receive a salary of up to Rs. 6,500 (specified employees)
the Bank contributes at a determined rate (currently 8.33% of the employees
salary) out of the aforesaid contribution of the employer, to the Pension
Scheme administered by the Regional Provident Fund Commissioner (RPFC).
Employees are credited with interest, which is subject to a government
specified minimum rate. The Bank has no liability for future provident fund
benefits other than its annual contribution and any shortfall between the
government specified rate and the rate at which employees are credited, and
recognizes such contributions as an expense in the year incurred. p. Revenue recognition Interest income from loans and from investments in finance leases is
recognized on an accrual basis when earned except in respect of loans or
finance leases placed on non-accrual status, where it is recognized when
received. The Bank generally does 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 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. The Bank amortizes the annual fees on credit cards over the
contractual period of the fees. F-11




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##### Table of Contents



HDFC BANK LIMITEDNOTES TO FINANCIAL STATEMENTS(Continued) q. Foreign currency transactions The Banks functional currency is the Indian rupee. Foreign currency
transactions are recorded at the exchange rate prevailing on the date of the
transaction. Foreign currency denominated monetary assets and liabilities are
converted into Indian rupees using exchange rates prevailing on the balance
sheet dates. Gains and losses arising on conversion of foreign currency
denominated monetary assets and liabilities and on foreign currency
transactions are included in the determination of net income. r. Stock Based Compensation The Bank has elected to use the intrinsic value method specified under
APB Opinion No. 25 to account for the compensation cost of stock options and
awards granted to employees of the Bank. The Bank uses the fair value approach
for any options that are granted to individuals who do not qualify as
employees in accordance with FASB Interpretation No. 44. Pro formadisclosures
required by SFAS No. 123, as amended by SFAS 148, have been provided in Note
19. s. Debt issuance costs Issuance costs of long-term debt are amortized over the tenure of the
debt. t. Dividends Any dividends declared by the Bank are based on the profit available for
distribution as reported in the statutory financial statements of the Bank
prepared in accordance with Indian GAAP. Additionally, the Banking Regulation
Act requires the Bank to transfer 25% of its Indian GAAP profit after tax to a
non-distributable statutory reserve. Accordingly, the net income reported in
these financial statements may not be fully distributable. As of March 31,
2004, the amount available for distribution is Rs. 1,000.5 million. Dividends
for the years ended March 31, 2002, 2003 and 2004 were Rs. 2.50, Rs. 3.00 and
Rs. 3.50 per equity share, respectively. u. Earnings per share The Bank reports basic and diluted earnings per equity share in
accordance with SFAS No. 128, Earnings Per Share. Basic earnings per equity
share has been computed by dividing net income by the weighted average number
of equity shares outstanding for the period. For the purpose of determining
the weighted average number of equity shares outstanding, the Bank treats cash
received from optionees who exercise their options as issued shares even if
the administrative formalities of allocating equity shares have not been
completed. Diluted earnings per equity share has been computed using the
weighted average number of equity shares and dilutive potential equity shares
outstanding during the period, using the treasury stock method for options,
except where the result would be anti dilutive. The Bank also reports basic
and diluted earnings per ADS, where each ADS represents three equity shares.
Earnings per ADS have been computed as earnings per equity share multiplied by
the number of equity shares per ADS. A reconciliation of the number of shares
used in computing earnings per share has been provided in Note 28. v. Comprehensive Income The
Bank reports comprehensive income in accordance with SFAS No. 130,
Reporting Comprehensive Income. Accounting principles generally require that
recognized revenue, expenses, gains and losses be included in net income.
Unrealized gains and losses on available for sale securities along with net
income are components of comprehensive income. w. Segment information The Bank operates in three segments, namely wholesale banking, retail
banking and treasury services. Segment-wise information has been provided in
Note 24. F-12




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##### Table of Contents



HDFC BANK LIMITEDNOTES TO FINANCIAL STATEMENTS(Continued) x. Derivative Financial Instruments The Bank adopted SFAS No. 133, Accounting for Derivatives Instruments and
Hedging Activities, and SFAS No. 138, Accounting for Certain Derivative
Instruments and Certain Hedging Activitiesan amendment of FASB Statement No
133, with effect from April 1, 2001 and SFAS 149, Amendment of SFAS No. 133 on
Derivative Instruments and Hedging Activities,that amends and clarifies
financial accounting and reporting for derivative instruments, including
certain derivative instruments embedded in other contracts (collectively
referred to as derivatives) and for hedging activities under SFAS.133, with
effect from June 30, 2003. In doing so, the Bank did not incur any transition
adjustments to earnings. In accordance with the above standards, the Bank recognizes all
derivative instruments, including certain derivative instruments embedded in
other contracts, as assets or liabilities in the balance sheet and measures
them at fair value, unless those instruments qualify to be accounted for as
hedge contracts. For a derivative not designated as a hedging instrument,
changes in fair value are recognized in net income in the period of change. Certain forward exchange contracts and currency swaps qualify as a hedge
of the foreign currency exposure of a foreign currency denominated
transaction. SFAS No. 133 provides for matching the timing of the recognition
of the gain or loss on such hedge contracts with the recognition of the
changes in the fair value of the item being hedged in net income. The Bank enters into forward exchange contracts or currency swaps with
its customers as accommodations. The Bank also enters into forward exchange or
currency swap contracts to lay off such customer accommodation exposures in
the inter-bank foreign exchange markets, and also to take trading positions
and to cover its own foreign exchange exposures. All such instruments are
carried at fair value, determined based on market quotations. The Bank enters into rupee interest rate swaps for trading purposes. The
Bank also enters into interest rate currency swaps and interest rate swaps in
foreign currency cash flows as customer accommodations and lays these off in
the inter-bank market. Such contracts are carried on the balance sheet at fair
value, determined based on market quotations. y. New Accounting Pronouncements In May 2003, the FASB issued SFAS 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. SFAS 150
establishes classification and measurement standards for certain financial
instruments with characteristics of both liabilities and equity, and requires
that such financial instrument, if previously classified as equity, be now
classified as a liability. The standard is effective for instruments entered
into or modified after May 31, 2003, and pre-existing instruments as of the
beginning of the first interim period that commenced after June 15, 2003. The
Bank does not have any such financial instruments at present. In December 2003, FASB revised FIN 46 Consolidation of Variable Interest
Entities. FIN 46 establishes consolidation criteria for entities for which 
Control is not easily discernable from ownership of voting shares. FIN 46
provides guidance for identifying entities where indirect control exists and
requires that their assets, liabilities and results of the activities should
be included in the consolidated financial statements of the controlling
entity. The interpretation is effective for the Bank no later than the end of
the first reporting period that ends after December 15, 2003. The Bank does
not have any interests in variable interests entities. In December 2003, AcSec issued Statement of Position (or 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/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/debt security.
The SOP is effective for loans acquired in fiscal years beginning after
December 15, 2004, with earlier adoption encouraged. Neither of these above interpretation/standards are expected to have a
material impact on the results of operations, financial position or cash flows
of the bank when adopted. z. Convenience Translation The accompanying financial statements have been expressed in Indian
rupees (Rs.), the Banks functional currency. For the convenience of the
reader, the financial statements as at and for the year ended March 31, 2004
have been translated into US dollars at US$1.00 = Rs. 43.40 based on the noon
buying rate for cable transfers on March 31, 2004 as certified for customs
purposes by the Federal Reserve Bank of New York. Such translation should not
be construed as a representation that the rupee amounts have been or could be
converted into United States dollars at that or any other rate, or at all. aa. Reclassifications Certain amounts in fiscal 2002 and fiscal 2003 have been reclassified to
conform to the presentation in the fiscal 2004. These reclassifications have
no effect on the stockholders equity or net income as previously reported. F-13




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##### Table of Contents



HDFC BANK LIMITEDNOTES TO FINANCIAL STATEMENTS(Continued) 3. Cash and cash equivalents Cash and cash equivalents as of March 31, 2003 and 2004 include balances
of Rs. 19,152.8 million and Rs. 22,877.9 million,
respectively, maintained with the RBI for meeting the Banks cash reserve
ratio requirement. This balance is subject to withdrawal and usage
restrictions. 4. Term placements Term placements comprises of placements with banks and financial
institution in the ordinary course of business. These placements have
remaining maturities for periods between 3 months and 6 years. 5. Investments, held for trading The portfolio of trading securities at March 31, 2003 and 2004 is as
follows: As of March 31, 2003Gross
    
    GrossAmortized
    
    unrealized
    
    unrealized
    
    Faircost
    
    gains
    
    losses
    
    Value(In millions)Government of India securities
    
    Rs.
    3,783.4
    
    
    
    
    
    
    Rs.
    36.6
    
    
    Rs.
    3,746.8Securities issued by
Government of India
sponsored
institutions
    
    
    37.0
    
    
    
    
    
    
    
    5.4
    
    
    
    31.6Debentures
    
    
    207.4
    
    
    
    
    
    
    
    9.7
    
    
    
    197.7Total
    
    Rs.
    4,027.8
    
    
    
    
    
    
    Rs.
    51.7
    
    
    Rs.
    3,976.1
 As of March 31, 2004Gross
    
    GrossAmortized
    
    unrealized
    
    unrealized
    
    Faircost
    
    gains
    
    losses
    
    Value(In millions)Government of India securities
    
    Rs.
    4,244.2
    
    
    Rs.
    25.0
    
    
    Rs.
    
    
    
    Rs.
    4,269.2Securities issued by
Government of India
sponsored
institutions
    
    
    1,483.6
    
    
    
    
    
    
    
    13.7
    
    
    
    1,469.9Corporate Bonds
    
    
    153.0
    
    
    
    
    
    
    
    
    
    
    
    153.0Debentures
    
    
    350.0
    
    
    
    1.1
    
    
    
    9.4
    
    
    
    341.7Total
    
    Rs.
    6,230.8
    
    
    Rs.
    26.1
    
    
    Rs.
    23.10
    
    
    Rs.
    6,233.8Total
    
    US$
    143.7
    
    
    US$
    0.6
    
    
    US$
    0.5
    
    
    US$
    143.6
 Interest and dividends on trading securities and gross realized
gains and gross realized losses from sales of such securities are
set out below: Year ended March 31,2002
    
    2003
    
    2004
    
    2004(In millions)Gross realized gains on sale
    
    Rs.
    680.3
    
    
    Rs.
    793.4
    
    
    Rs.
    587.1
    
    
    US$
    13.5Gross realized losses on sale
    
    
    (79.4
    )
    
    
    (285.6
    )
    
    
    (190.3
    )
    
    
    (4.4
    )Dividends and interest
    
    
    218.7
    
    
    
    478.9
    
    
    
    289.6
    
    
    
    6.7Total
    
    Rs.
    819.6
    
    
    Rs.
    986.7
    
    
    Rs.
    686.4
    
    
    US$
    15.8
 F-14




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##### Table of Contents



HDFC BANK LIMITED
NOTES TO FINANCIAL STATEMENTS(Continued) 6. Investments, available for sale The portfolio of available for sale securities at March 31, 2003 and 2004
is as follows: As of March 31, 2003Gross
    
    GrossAmortized
    
    unrealized
    
    Unrealized
    
    Faircost
    
    gains
    
    Losses
    
    value(In millions)Government of India securities
    
    Rs.
    45,128.6
    
    
    Rs.
    782.3
    
    
    Rs.
    19.1
    
    
    Rs.
    45,891.8Securities issued by Government of
India sponsored institutions
    
    
    17,545.8
    
    
    
    1,581.9
    
    
    
    125.8
    
    
    
    19,001.9State government securities
    
    
    21.0
    
    
    
    2.5
    
    
    
    
    
    
    
    23.5Securities issued by state
government sponsored institutions
    
    
    514.2
    
    
    
    38.2
    
    
    
    6.5
    
    
    
    545.9Credit substitutes (See Note 8)
    
    
    10,973.6
    
    
    
    178.4
    
    
    
    49.6
    
    
    
    11,102.4Corporate bonds
    
    
    324.2
    
    
    
    3.8
    
    
    
    4.8
    
    
    
    323.2Fixed maturity investments
    
    
    74,507.4
    
    
    
    2,587.1
    
    
    
    205.8
    
    
    
    76,888.7Mortgage backed securities
    
    
    4,650.6
    
    
    
    86.2
    
    
    
    
    
    
    
    4,736.8Asset backed securities
    
    
    14,538.6
    
    
    
    375.8
    
    
    
    62.6
    
    
    
    14,851.8Equity securities
    
    
    148.8
    
    
    
    23.5
    
    
    
    3.1
    
    
    
    169.2Mutual fund units
    
    
    2,311.8
    
    
    
    7.5
    
    
    
    36.6
    
    
    
    2,282.7Total
    
    Rs. 96,157.2
    
    Rs.
    3,080.1
    
    
    Rs.
    308.1
    
    
    Rs. 98,929.2
 As of March 31, 2004Gross
    
    GrossAmortized
    
    unrealized
    
    Unrealized
    
    Faircost
    
    gains
    
    Losses
    
    value(In millions)Government of India securities
    
    Rs.
    63,252.8
    
    
    Rs.
    1,407.9
    
    
    Rs.
    37.3
    
    
    Rs.
    64,623.4Securities issued by Government of
India sponsored institutions
    
    
    22,495.8
    
    
    
    1,970.1
    
    
    
    97.9
    
    
    
    24,368.0State government securities
    
    
    282.2
    
    
    
    19.0
    
    
    
    0.1
    
    
    
    301.1Securities issued by state
government sponsored institutions
    
    
    47.7
    
    
    
    0.5
    
    
    
    
    
    
    
    48.2Credit substitutes (See Note 8)
    
    
    7,812.3
    
    
    
    136.0
    
    
    
    2.3
    
    
    
    7,946.0Corporate Bonds
    
    
    198.9
    
    
    
    0.1
    
    
    
    0.9
    
    
    
    198.1Fixed maturity investments
    
    
    94,089.7
    
    
    
    3,533.6
    
    
    
    138.5
    
    
    
    97,484.8Mortgage backed securities
    
    
    8,878.7
    
    
    
    275.3
    
    
    
    
    
    
    
    9,154.0Asset backed securities
    
    
    19,978.4
    
    
    
    593.2
    
    
    
    13.1
    
    
    
    20,558.5Equity securities
    
    
    180.9
    
    
    
    26.5
    
    
    
    2.0
    
    
    
    205.4Mutual fund units
    
    
    6,045.4
    
    
    
    12.4
    
    
    
    185.9
    
    
    
    5,871.9Total
    
    Rs.
    129,173.1
    
    
    Rs.
    4,441.0
    
    
    Rs.
    339.5
    
    
    Rs.
    133,274.6Total
    
    US$
    2, 976.3
    
    
    US$
    102.3
    
    
    US$
    7.8
    
    
    US$
    3,070.8
 F-15




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##### Table of Contents



HDFC BANK LIMITED
NOTES TO FINANCIAL STATEMENTS(Continued) The aggregate fair values of securities carrying an unrealized loss of Rs.
339.5 million is Rs. 13,788.3 million. The contractual residual maturity of fixed maturity available for sale
securities as of March 31, 2004 is set out below: As of March 31, 2004Amortized cost
    
    Fair value
    
    Fair value(In millions)Within one year
    
    Rs.
    18,949.0
    
    
    Rs.
    19,219.4
    
    
    US$
    442.8Over one year through five years
    
    
    42,364.0
    
    
    
    44,045.5
    
    
    
    1,014.9After five years through ten years
    
    
    30,537.0
    
    
    
    31,930.0
    
    
    
    735.7Over ten years
    
    
    2,239.8
    
    
    
    2,289.9
    
    
    
    52.8Total
    
    Rs.
    94,089.7
    
    
    Rs.
    97,484.8
    
    
    US$
    2,246.2
 Available
for sale investments of Rs. 45,915.3 million and Rs.
64,924.5 million as of March 31, 2003 and 2004, respectively, are held
to meet the Banks statutory liquidity ratio requirements. These
balances are subject to withdrawal and usage restrictions, but may be
freely traded by the Bank within those restrictions. Interest and dividends on available for sale securities and gross
realized gains and gross realized losses from sales of such securities
are set out below: Years ended March 31,2002
    
    2003
    
    2004
    
    2004(In millions)Gross realized gains on sale
    
    Rs.
    484.9
    
    
    Rs.
    991.4
    
    
    Rs.
    710.3
    
    
    US$
    16.4Gross realized losses on sale
    
    
    (140.5
    )
    
    
    (269.7
    )
    
    
    (758.6
    )
    
    
    (17.5
    )Dividends and interest
    
    
    5,667.4
    
    
    
    6,144.0
    
    
    
    8,604.8
    
    
    
    198.3Total
    
    Rs.
    6,011.8
    
    
    Rs.  6,865.7
    
    Rs.
    8,556.5
    
    
    US$
    197.2
 F-16




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##### Table of Contents



HDFC BANK LIMITED
NOTES TO FINANCIAL STATEMENTS(Continued) 7. Investments, held to maturity The portfolio of held to maturity securities at March 31, 2003 and
2004 is as follows As of March 31, 2003Gross
    
    Grossunrecognized
    
    unrecognizedFair
    
    holding
    
    holding
    
    Amortizedvalue
    
    gains
    
    losses
    
    Cost(In millions)Government of India securities
    
    Rs.
    20,392.6
    
    
    Rs.
    1,145.5
    
    
    Rs.
    7.3
    
    
    Rs.
    19,254.4Securities issued by
Government of India sponsored
institutions
    
    
    562.6
    
    
    
    40.7
    
    
    
    
    
    
    
    521.9Credit substitutes (See Note 8)
    
    
    19,153.1
    
    
    
    540.2
    
    
    
    37.5
    
    
    
    18,650.4Total
    
    Rs.
    40,108.3
    
    
    Rs.
    1,726.4
    
    
    Rs.
    44.8
    
    
    Rs.
    38,426.7
 As of March 31, 2004Gross
    
    Grossunrecognized
    
    unrecognizedFair
    
    holding
    
    holding
    
    Amortizedvalue
    
    gains
    
    losses
    
    Cost(In millions)Government of India securities
    
    Rs.
    28,424.2
    
    
    Rs.
    1,180.1
    
    
    Rs.
    1.1
    
    
    Rs.
    27,245.2Securities issued by
Government of India sponsored
institutions
    
    
    537.9
    
    
    
    26.6
    
    
    
    
    
    
    
    511.3Credit substitutes (See Note 8)
    
    
    9,095.5
    
    
    
    484.5
    
    
    
    0.9
    
    
    
    8,611.9Total
    
    Rs.
    38,057.6
    
    
    Rs.
    1,691.2
    
    
    Rs.
    2.0
    
    
    Rs.
    36,368.4Total
    
    US$
    877.0
    
    
    
    39.0
    
    
    
    0.0
    
    
    US$
    838.0
 The contractual residual maturity of fixed maturity held to maturity
securities as of March 31, 2004 is set out below: As of March 31, 2004Fair value
    
    Amortized cost
    
    Amortized cost(In millions)Within one year
    
    Rs.
    24,134.8
    
    
    Rs.
    23,957.4
    
    
    US$
    552.0Over one year through five years
    
    
    12,011.0
    
    
    
    10,892.3
    
    
    
    251.0After five years through ten years
    
    
    1,911.8
    
    
    
    1,518.7
    
    
    
    35.0Total
    
    Rs.
    38,057.6
    
    
    Rs.
    36,368.4
    
    
    US$
    838.0
 Held to maturity investments of Rs. 19,254.4 million and Rs. 27,245.2
million as of March 31, 2003 and 2004 respectively, are held to meet the
Banks statutory liquidity ratio requirements. These balances are subject to
withdrawal and usage restrictions, but may be freely traded by the Bank
within those restrictions. F-17




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##### Table of Contents



HDFC BANK LIMITEDNOTES TO FINANCIAL STATEMENTS(Continued) Interest on held to maturity securities is set out below: Years ended March 31,2002
    
    2003
    
    2004
    
    2004(In millions)Interest
    
    Rs.
    2,280.3
    
    
    Rs.
    3,763.2
    
    
    Rs.
    2,882.5
    
    
    US$
    66.4Total
    
    Rs.
    2,280.3
    
    
    Rs.
    3,763.2
    
    
    Rs.
    2,882.5
    
    
    US$
    66.4
 On April 14, 2002, the Bank transferred securities with an amortized
cost of Rs. 450.0 million from held to maturity category to the available
for sale category for reasons permitted by SFAS No. 115, primarily due to
downgrades in credit ratings. The unrealized holding loss of Rs. 40.1
million on the date of the transfer has been recorded in other comprehensive
income, a separate component of shareholders equity. In April, 2003, the Bank transferred securities with a carrying value
net of valuation allowance of Rs. Nil, book value of Rs. 4.9 million, from
held to maturity category to the available for sale category for reasons
permitted by SFAS No. 115, primarily due to downgrades in credit ratings. F-18




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##### Table of Contents



HDFC BANK LIMITEDNOTES TO FINANCIAL STATEMENTS(Continued) 8. Credit Substitutes Credit substitutes consist of securities that are negotiated as part of
an overall extension of credit to certain customers. Such securities share many
of the risk and reward characteristics of loans and are managed by the Bank
together with other facilities extended to the same customers. The fair values
of credit substitutes have been analyzed by type of instrument as of March 31,
2003 and 2004 are as follows: As of March 31,2003
    
    2004Amortized cost
    
    Fair value
    
    Amortized cost
    
    Fair value(In millions)Available for sale credit substitute
securities:Debentures
    
    Rs.
    4,963.9
    
    
    Rs.
    5,092.7
    
    
    Rs.
    6,905.6
    
    
    Rs.
    7,039.3Commercial paper
    
    
    6,009.7
    
    
    
    6,009.7
    
    
    
    906.7
    
    
    
    906.7Total
    
    Rs.
    10,973.6
    
    
    Rs.
    11,102.4
    
    
    Rs.
    7,812.3
    
    
    Rs.
    7,946.0Held to maturity credit substitute
securities:Debentures
    
    Rs.
    17,806.0
    
    
    Rs.
    18,268.4
    
    
    
    7,812.7
    
    
    
    8,247.1Preferred shares
    
    
    844.4
    
    
    
    884.7
    
    
    
    799.2
    
    
    
    848.4Total
    
    Rs.
    18,650.4
    
    
    Rs.
    19,153.1
    
    
    Rs.
    8,611.9
    
    
    Rs.
    9,095.5Total credit substitutes, net
    
    Rs.
    29,624.0
    
    
    Rs.
    30,255.5
    
    
    Rs.
    16,424.2
    
    
    Rs.
    17,041.5Total credit substitutes, net
    
    
    
    
    
    
    
    
    
    US$
    378.4
    
    
    US$
    392.6
 The fair values of credit substitutes have been analyzed as follows: As of March 31,2003
    
    2004
    
    2004(In millions)Performing
    
    Rs.
    30,205.5
    
    
    Rs.
    16,946.9
    
    
    US$
    390.4Impairedgross balance
    
    
    104.8
    
    
    
    189.3
    
    
    
    4.4Less amounts written off for impairments other than
temporary
    
    
    (54.8
    )
    
    
    (94.6
    )
    
    
    (2.2
    )Impaired credit substitutes, net
    
    
    50.0
    
    
    
    94.7
    
    
    
    2.2Total credit substitutes, net
    
    Rs.
    30,255.5
    
    
    Rs.
    17,041.5
    
    
    US$
    392.6
 F-19




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##### Table of Contents



HDFC BANK LIMITED
NOTES TO FINANCIAL STATEMENTS(Continued) Impaired credit substitutes as of March 31, 2003 and 2004 have been analyzed as
follows: As of March 312003
    
    2004
    
    2004(In millions)Gross impaired credit substitutes:on accrual status
    
    Rs.
    100.0
    
    
    Rs.
    100.0
    
    
    US$
    2.3on non-accrual status
    
    
    4.8
    
    
    
    89.3
    
    
    
    2.1Total
    
    Rs.
    104.8
    
    
    Rs.
    189.3
    
    
    US$
    4.4Gross impaired credit substitutes by industry:Textiles
    
    Rs.
    100.0
    
    
    Rs.
    100.0
    
    
    US$
    2.3Oil and gas
    
    
    4.8
    
    
    
    
    
    
    
    Financial institution
    
    
    
    
    
    
    89.3
    
    
    
    2.1Total
    
    Rs.
    104.8
    
    
    Rs.
    189.3
    
    
    US$
    4.4Average impaired credit substitutes
    
    Rs.
    104.8
    
    
    Rs.
    147.1
    
    
    
    3.4Interest foregone on impaired credit substitutes
    
    Rs.
    3.2
    
    
    Rs.
    10.3
    
    
    US$
    0.2Interest income recognized on impaired credit substitutes
    
    Rs.
    
    
    
    Rs.
    12.0
    
    
    US$
    0.3Interest income recognized on impaired credit substitutes on a cash basis
    
    Rs.
    
    
    
    Rs.
    12.0
    
    
    US$
    0.3
 As of March 31, 2004, the Bank has not committed any additional funds to
borrowers whose credit substitutes were impaired. 9. Securities sold under repurchase agreements and securities purchased under
resell agreements Securities sold under agreements to repurchase are classified as secured
borrowings and generally mature within 14 days of the transaction date. Such
repurchase transactions are recorded at the amount of cash received on the
transaction. Repurchase transactions outstanding as of March 31, 2003 and 2004
are Rs. 4,600.0 million and Rs. 0.0 million, respectively. As of March 31,
2004, investments available for sale with a fair value of Rs. nil were pledged
as collateral. Securities purchased under agreements to resell are classified separately
from investments and generally mature within 14 days of the transaction date.
Such resell transactions are recorded at the amount of cash advanced on the
transaction. Resell transactions outstanding as of March 31, 2003 and 2004 are
Rs. 0.0 million and Rs. 19,950.0 million, respectively. F-20




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##### Table of Contents



HDFC BANK LIMITEDNOTES TO FINANCIAL STATEMENTS(Continued) 10. Loans and Securitization Loans analyzed by facility as of March 31, 2003 and 2004 are as follows: As of March 31,2003
    
    2004
    
    2004(In millions)Working capital finance
    
    Rs.
    42,739.1
    
    
    Rs.
    54,104.5
    
    
    US$
    1,246.6Term loans
    
    
    43,005.0
    
    
    
    53,819.3
    
    
    
    1,240.1Investment in finance leases
    
    
    8.3
    
    
    
    
    
    
    
    Retail loans
    
    
    34,414.2
    
    
    
    73,251.6
    
    
    
    1,687.8Gross loans
    
    
    120,166.6
    
    
    
    181,175.4
    
    
    
    4,174.5Less: Allowance for credit losses
    
    
    1,866.7
    
    
    
    3,494.3
    
    
    
    80.5Total
    
    Rs.
    118,299.9
    
    
    Rs.
    177,681.1
    
    
    US$
    4,094.0
 The contractual residual maturity of gross loans as of March 31, 2004 is
set out below: As of March 31, 2004Working
    
    
    
    
    
    InvestmentCapital
    
    Term
    
    in finance
    
    RetailFinance
    
    loans
    
    Leases
    
    loans
    
    Total(In millions)Maturity profile of loans:Within one year
    
    Rs.
    45,234.5
    
    
    Rs.
    33,196.4
    
    
    
    
    
    
    Rs.
    27,560.8
    
    
    Rs.
    105,991.7Over one year through
five years
    
    
    8,870.0
    
    
    
    17,202.3
    
    
    
    
    
    
    
    45,512.2
    
    
    
    71,584.5After five years through
ten years
    
    
    
    
    
    
    3,420.6
    
    
    
    
    
    
    
    178.6
    
    
    
    3,599.2Total Gross loans
    
    Rs.
    54,104.5
    
    
    Rs.
    53,819.3
    
    
    Rs.
    
    
    
    Rs.
    73,251.6
    
    
    Rs.
    181,175.4Total Gross loans
    
    US$
    1,246.6
    
    
    US$
    1,240.1
    
    
    US$
    
    
    
    US$
    1,687.8
    
    
    US$
    4,174.5
 Gross loans analyzed by performance are as follows: As of March 31,2003
    
    2004
    
    2004(In millions)Performing
    
    Rs.
    117,799.0
    
    
    Rs.
    178,182.8
    
    
    US$
    4,105.5Impaired
    
    
    2,367.6
    
    
    
    2,992.6
    
    
    
    69.0Total Gross loans
    
    Rs.
    120,166.6
    
    
    Rs.
    181,175.4
    
    
    US$
    4,174.5
 F-21




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##### Table of Contents



HDFC BANK LIMITED
NOTES TO FINANCIAL STATEMENTS(Continued) The Bank entered into securitization transaction for the first time in fiscal
2004. The following table summarizes pre-tax gains on securitizations and
certain cash flows received from customers and paid to SPEs for sales that
were completed during the year ended March 31, 2004: For the years ended March 31,2004
    
    2004(In millions)Gross proceeds from new securitizations
    
    Rs.
    5,917.4
    
    
    US$
    136.3Less: Fair value of finance receivables
derecognized
    
    
    5,772.0
    
    
    
    133.0Less: Estimated costs of servicing
    
    
    21.6
    
    
    
    0.4Pre-tax gains on securitizations
    
    Rs.
    123.8
    
    
    
    2.9Cash flow informationCollections against securitized receivables
    
    
    682.1
    
    
    
    15.7Payments made to SPEs
    
    
    264.4
    
    
    
    6.1Cash flows on retained interests
    
    
    21.1
    
    
    
    0.5
 Key assumptions used in measuring the retained interests in finance
receivables of sales completed during the years ended March 31, 2004 as of the
dates of such sales were as follows: For the yearended March 31,2004Key assumptions: (rates per
annum)Annual prepayment rate
    
    
    0.2
    %Expected credit losses
    
    
    0.7
    %
 Credit losses and prepayment losses are estimated on the basis of historical
losses as a percentage to the gross loans disbursed on a similar portfolio. The table below outlines the economic assumptions and the sensitivity of the
estimated fair value of retained interests in finance receivables at March 31,
2004 to immediate 10% and 20% changes in those assumptions: As of March 31, 2004(In millions)Carrying value/fair value of retained interestsAnnual prepayment rate:Impact of 10% adverse change
    
    Rs.
    2.0
    
    
    US$
    0.1Impact of 20% adverse change
    
    
    4.0
    
    
    
    0.1Expected credit losses:Impact of 10% adverse change
    
    
    2.4
    
    
    
    0.1Impact of 20% adverse change
    
    
    4.9
    
    
    
    0.1
 The discount rate used for the valuation of retained interests is the rate of
return to the transferees of the various pools of securitized receivables and,
therefore, is not subject to change. Weighted average life in years of the
securitized receivables is also not subject to change except in case of a
change in the prepayment rate assumption. Consequently, the above sensitivity
analysis does not include the impact on the estimated fair values of the
retained interests due to adverse change in the weighted average life in years
and the discount rate. These sensitivities are hypothetical and should be used with appropriate
caution. A 10% change in the assumptions may not result in lineally
proportionate changes in the fair values of retained interests. Adverse
changes assumed in the above analysis and the resultant change in the fair
values of retained interests are calculated independent of each other. In
reality, any change in one factor may cause change in the other factors. F-22




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##### Table of Contents



HDFC BANK LIMITED
NOTES TO FINANCIAL STATEMENTS(Continued) Impaired loans as of March 31, 2003 and 2004 have been analyzed by
facility as follows: As of March 31,2003
    
    2004
    
    2004(In millions)Working capital finance
    
    Rs.
    1,482.5
    
    
    Rs.
    1,867.8
    
    
    US$
    43.0Term loans
    
    
    810.2
    
    
    
    721.3
    
    
    
    16.6Retail loans
    
    
    74.9
    
    
    
    403.5
    
    
    
    9.3Gross impaired loans
    
    
    2,367.6
    
    
    
    2,992.6
    
    
    
    69.0Less: Specific allowance for credit losses
    
    
    1,684.3
    
    
    
    2,722.7
    
    
    
    62.7Impaired loans, net of specific allowance
    
    Rs.
    683.3
    
    
    Rs.
    269.9
    
    
    US$
    6.3Gross impaired loans:without valuation allowance
    
    Rs.
    683.3
    
    
    Rs.
    269.9
    
    
    US$
    6.3with valuation allowance
    
    
    1,684.3
    
    
    
    2,722.7
    
    
    
    62.7Total
    
    Rs.
    2,367.6
    
    
    Rs.
    2,992.6
    
    
    US$
    69.0Gross impaired loans:on accrual status
    
    Rs.
    51.9
    
    
    
    
    
    
    US$
    on non-accrual status
    
    
    2,315.7
    
    
    
    2,992.6
    
    
    
    69.0Total
    
    Rs.
    2,367.6
    
    
    Rs.
    2,992.6
    
    
    US$
    69.0Gross impaired loans by industry:Automotive
    
    Rs.
    642.9
    
    
    Rs.
    653.7
    
    
    US$
    15.1Electronic machinery
    
    
    207.8
    
    
    
    639.1
    
    
    
    14.7Iron and steel
    
    
    437.3
    
    
    
    440.4
    
    
    
    10.1Textiles
    
    
    372.0
    
    
    
    356.2
    
    
    
    8.2Others (none > than 5% of impaired loans)
    
    
    707.6
    
    
    
    903.2
    
    
    
    20.9Total
    
    Rs.
    2,367.6
    
    
    Rs.
    2,992.6
    
    
    US$
    69.0
 Summary information relating to impaired loans as of March 31, 2002, 2003
and 2004 is as follows: As of March 31,2002
    
    2003
    
    2004
    
    2004(In millions)Average impaired loans, net of allowance
    
    Rs.
    511.0
    
    
    Rs.
    609.9
    
    
    Rs.
    476.6
    
    
    US$
    11.6Cumulative interest foregone on impaired loans
    
    Rs.
    325.5
    
    
    Rs.
    334.0
    
    
    Rs.
    274.2
    
    
    US$
    6.3Interest income recognized on impaired loans
    
    Rs.
    27.2
    
    
    Rs
    7.7
    
    
    Rs.
    31.6
    
    
    US$
    0.7Interest income recognized on impaired loans on a cash basis
    
    Rs.
    15.2
    
    
    Rs.
    1.1
    
    
    Rs.
    31.6
    
    
    US$
    0.7
 As of March 31, 2004, the Bank has not committed any additional funds to
borrowers whose loans were impaired. F-23




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##### Table of Contents



HDFC BANK LIMITEDNOTES TO FINANCIAL STATEMENTS(Continued) Changes in the allowance for credit losses are as follows: As of March 31,2003
    
    2004
    
    2004(In millions)Specific allowance for credit losses, beginning of year
    
    Rs.
    1,423.5
    
    
    Rs.
    1,684.3
    
    
    US$
    38.8Gross provision for credit losses
    
    
    943.1
    
    
    
    2,054.5
    
    
    
    47.3Allowance no longer required due to:Cash recoveries
    
    
    (201.6
    )
    
    
    (300.3
    )
    
    
    (6.9
    )Write-offs
    
    
    (480.7
    )
    
    
    (715.8
    )
    
    
    (16.5
    )Specific allowance for credit losses, end of year
    
    Rs.
    1,684.3
    
    
    Rs.
    2,722.7
    
    
    US$
    62.7Unallocated provision for credit losses, beginning of year
    
    Rs.
    182.4
    
    
    Rs.
    182.4
    
    
    US$
    4.2Additions during the year
    
    
    
    
    
    
    589.2
    
    
    
    13.6Unallocated provision for credit losses, end of year
    
    Rs.
    182.4
    
    
    Rs.
    771.6
    
    
    US$
    17.8Total allowance for credit losses, end of year
    
    Rs.
    1,866.7
    
    
    Rs.
    3,494.3
    
    
    US$
    80.5
 Interest and fees on loans analyzed by facility are as follows: Years ended March 31,2002
    
    2003
    
    2004
    
    2004(In millions)Working capital finance
    
    Rs.
    2,388.2
    
    
    Rs.
    2,861.8
    
    
    Rs.
    2,178.9
    
    
    US$
    50.2Term loans
    
    
    2,945.3
    
    
    
    2,922.2
    
    
    
    3,538.1
    
    
    
    81.5Finance leases
    
    
    9.8
    
    
    
    5.1
    
    
    
    
    
    
    
    Retail loans
    
    
    787.4
    
    
    
    2,016.2
    
    
    
    5,988.0
    
    
    
    138.0Total
    
    Rs.
    6,130.7
    
    
    Rs.
    7,805.3
    
    
    Rs.
    11,705.0
    
    
    US$
    269.7
 11. Concentrations of credit risk Concentrations of credit risk exist when changes in economic, industry
or geographic factors similarly affect groups of counterparties whose
aggregate credit exposure is material in relation to the Banks total credit
exposure. The Bank manages its credit risk collectively for credit
substitute securities and its loan portfolio as these instruments are
usually negotiated as part of an overall lending program for corporate
customers; accordingly, information on concentrations of credit risk has
been provided for these exposures together. F-24




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##### Table of Contents



HDFC BANK LIMITEDNOTES TO FINANCIAL STATEMENTS(Continued) The Banks portfolio of loans and credit substitute securities is broadly
diversified along industry and product lines, and as of March 31, 2003 and
2004 the exposures are as follows: As of March 31, 2003Fair values ofGross
    
    creditCategory
    
    loans
    
    substitutes
    
    Total
    
    %(In millions, except percentages)Automotive manufacturers
    
    Rs.
    12,096.3
    
    
    Rs.
    1,296.9
    
    
    Rs.
    13,393.2
    
    
    
    8.9Heavy industrial organic chemicals
    
    
    5,993.2
    
    
    
    2,304.9
    
    
    
    8,298.1
    
    
    
    5.5Hire purchase
    
    
    2,307.4
    
    
    
    3,569.7
    
    
    
    5,877.1
    
    
    
    3.9Fertilizers
    
    
    3,760.4
    
    
    
    1,405.5
    
    
    
    5,165.9
    
    
    
    3.4Consumer goods
    
    
    4,367.4
    
    
    
    
    
    
    
    4,367.4
    
    
    
    2.9Petrochemicals, fuel oils, lubricants
    
    
    3,584.5
    
    
    
    663.8
    
    
    
    4,248.3
    
    
    
    2.8Cement
    
    
    1,464.6
    
    
    
    2,707.3
    
    
    
    4,171.9
    
    
    
    2.8Leasing companies
    
    
    29.7
    
    
    
    4,136.4
    
    
    
    4,166.1
    
    
    
    2.7Heavy engineering
    
    
    2,581.3
    
    
    
    1,248.8
    
    
    
    3,830.1
    
    
    
    2.5Electrical machinery
    
    
    1,430.8
    
    
    
    1,999.6
    
    
    
    3,430.4
    
    
    
    2.3Manufacturing of dairy, bakery,
confectionery products
    
    
    3,091.0
    
    
    
    
    
    
    
    3,091.0
    
    
    
    2.1Others (none > than 2%)
    
    
    79,460.0
    
    
    
    10,922.6
    
    
    
    90,382.6
    
    
    
    60.2Total
    
    Rs.
    120,166.6
    
    
    Rs.
    30,255.5
    
    
    Rs.
    150,422.1
    
    
    
    100.0
 F-25




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##### Table of Contents



HDFC BANK LIMITED
NOTES TO FINANCIAL STATEMENTS(Continued) As of March 31, 2004Fair values ofGross
    
    creditCategory
    
    loans
    
    substitutes
    
    Total
    
    Total
    
    %(In millions, except percentages)Automotive manufacturers
    
    Rs.
    18,541.1
    
    
    Rs.
    829.1
    
    
    Rs.
    19,370.2
    
    
    US$
    446.3
    
    
    
    9.8Heavy engineering
    
    
    6,050.0
    
    
    
    580.9
    
    
    
    6,630.9
    
    
    
    152.8
    
    
    
    3.3Cement
    
    
    1,838.5
    
    
    
    4,509.8
    
    
    
    6,348.3
    
    
    
    146.3
    
    
    
    3.2Land transport
    
    
    5,352.4
    
    
    
    
    
    
    
    5,352.4
    
    
    
    123.3
    
    
    
    2.7Hire purchase
    
    
    3,088.8
    
    
    
    1,409.7
    
    
    
    4,498.5
    
    
    
    103.7
    
    
    
    2.3Investment and finance
    
    
    1,940.8
    
    
    
    2,550.5
    
    
    
    4,491.3
    
    
    
    103.5
    
    
    
    2.3Iron and steel
    
    
    3,616.6
    
    
    
    642.2
    
    
    
    4,258.8
    
    
    
    98.1
    
    
    
    2.1Telecom
    
    
    3,744.4
    
    
    
    309.6
    
    
    
    4,054.0
    
    
    
    93.4
    
    
    
    2.0Drugs and pharmaceuticals
    
    
    3,039.5
    
    
    
    974.5
    
    
    
    4,014.0
    
    
    
    92.5
    
    
    
    2.0Others (none > than 2%)
    
    
    133,963.3
    
    
    
    5,235.2
    
    
    
    139,198.5
    
    
    
    3,207.3
    
    
    
    70.3Total
    
    Rs.
    181,175.4
    
    
    Rs.
    17,041.5
    
    
    Rs.
    198,216.9
    
    
    US$
    4,567.2
    
    
    
    100.0
 The Bank has a geographic concentration of credit risk, with exposure
to borrowers based in Mumbai comprising 36.1% and 28.0% of the total loan
and credit substitute security portfolio as of March 31, 2003 and 2004,
respectively. While such borrowers are based in Mumbai, they may use the
funds provided by the Bank for a variety of uses that may or may not be
related to the economy in Mumbai. Loan and credit substitute exposures as of
March 31, 2003 and 2004 based on the region in which the instruments are
originated are as follows: As of March 31, 2003Fair values ofGross
    
    credit
    
    TotalRegion of origination
    
    Loans
    
    substitutes
    
    exposure
    
    %(In millions, except percentages)Mumbai
    
    Rs.
    35,102.1
    
    
    Rs.
    19,149.8
    
    
    Rs.
    54,251.9
    
    
    
    36.1Western region, other than
Mumbai
    
    
    17,374.2
    
    
    
    4,321.0
    
    
    
    21,695.2
    
    
    
    14.4Northern region
    
    
    22,825.3
    
    
    
    4,053.2
    
    
    
    26,878.5
    
    
    
    17.9Eastern region
    
    
    14,488.1
    
    
    
    747.1
    
    
    
    15,235.2
    
    
    
    10.1Southern region
    
    
    30,376.9
    
    
    
    1,984.4
    
    
    
    32,361.3
    
    
    
    21.5Total
    
    Rs.
    120,166.6
    
    
    Rs.
    30,255.5
    
    
    Rs.
    150,422.1
    
    
    
    100.0
 F-26




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##### Table of Contents



HDFC BANK LIMITED
NOTES TO FINANCIAL STATEMENTS(Continued) As of March 31, 2004Fair values ofGross
    
    credit
    
    Total
    
    TotalRegion of origination
    
    loans
    
    substitutes
    
    exposure
    
    exposure
    
    %(In millions, except percentages)Mumbai
    
    Rs.
    48,004.4
    
    
    Rs.
    7,451.6
    
    
    Rs.
    55,456.0
    
    
    US$
    1,277.8
    
    
    
    28.0Western region, other than
Mumbai
    
    
    31,246.7
    
    
    
    5,664.7
    
    
    
    36,911.4
    
    
    
    850.5
    
    
    
    18.6Northern region
    
    
    40,084.5
    
    
    
    2,552.7
    
    
    
    42,637.2
    
    
    
    982.4
    
    
    
    21.5Eastern region
    
    
    17,872.5
    
    
    
    149.3
    
    
    
    18,021.8
    
    
    
    415.2
    
    
    
    9.1Southern region
    
    
    43,967.3
    
    
    
    1,223.2
    
    
    
    45,190.5
    
    
    
    1,041.3
    
    
    
    22.8Total
    
    Rs.
    181,175.4
    
    
    Rs.
    17,041.5
    
    
    Rs.
    198,216.9
    
    
    US$
    4,567.2
    
    
    
    100.0
 The Banks exposures to its five largest borrowers as of March 31, 2003
and 2004 are as follows: As of March 31, 2003Investments(including credit
    
    TotalLoans
    
    Substitutes)
    
    exposure(In millions)Borrower 1
    
    Rs.
    
    
    
    Rs.
    6,242.2
    
    
    Rs.
    6,242.2Borrower 2
    
    
    3,000.0
    
    
    
    2,594.8
    
    
    
    5,594.8Borrower 3
    
    
    
    
    
    
    5,244.7
    
    
    
    5,244.7Borrower 4
    
    
    3,276.5
    
    
    
    1,356.6
    
    
    
    4,633.2Borrower 5
    
    
    
    
    
    
    4,554.7
    
    
    
    4,554.7
 As of March 31, 2004Investments(including credit
    
    Total
    
    TotalLoans
    
    Substitutes)
    
    Exposure
    
    exposure(In millions)Borrower 5
    
    Rs.
    
    
    
    Rs.
    8,125.2
    
    
    Rs.
    8,125.2
    
    
    US$
    187.2Borrower 2
    
    
    
    
    
    
    6,210.3
    
    
    
    6,210.3
    
    
    
    143.1Borrower 3
    
    
    
    
    
    
    6,008.1
    
    
    
    6,008.1
    
    
    
    138.4Borrower 6
    
    
    500
    
    
    
    1,974.7
    
    
    
    2,474.7
    
    
    
    57.0Borrower 7
    
    
    1,953.8
    
    
    
    
    
    
    
    1,953.8
    
    
    
    45.0
 F-27




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##### Table of Contents



HDFC BANK LIMITED
NOTES TO FINANCIAL STATEMENTS(Continued) 12. Property and equipment Property and equipment by asset category is as follows: As of March 31,2003
    
    2004
    
    2004(In millions)Land and premises
    
    Rs.
    1,933.5
    
    
    Rs.
    2,508.9
    
    
    US$
    57.8Software and systems
    
    
    579.5
    
    
    
    1,288.7
    
    
    
    29.7Equipment and furniture
    
    
    5,589.8
    
    
    
    6,377.4
    
    
    
    146.9Property and equipment, at cost
    
    
    8,102.8
    
    
    
    10,175.0
    
    
    
    234.4Less: Accumulated depreciation
    
    
    2,825.3
    
    
    
    4,005.9
    
    
    
    92.3Property and equipment, net
    
    Rs.
    5,277.5
    
    
    Rs.
    6,169.1
    
    
    US$
    142.1
 Depreciation charged for the years ended March 31, 2002, 2003 and 2004
was Rs. 675.7 million, Rs. 1,052.4 million and
Rs. 1,254.9 million
respectively. 13. Other assets Other assets include the following: As of March 31,2003
    
    2004
    
    2004(In millions)Checks in the course of collection
    
    Rs.
    2,944.5
    
    
    Rs.
    784.1
    
    
    US$
    18.1Security deposits for leased property
    
    
    879.0
    
    
    
    753.0
    
    
    
    17.4Sundry accounts receivable
    
    
    2,781.1
    
    
    
    1,539.6
    
    
    
    35.5Stamps and Stationery
    
    
    9.4
    
    
    
    16.6
    
    
    
    0.4Bonds and Debentures pending allotment
    
    
    
    
    
    
    92.5
    
    
    
    2.1Advance tax (net of provision for taxes)
    
    
    888.6
    
    
    
    1,297.8
    
    
    
    29.9Advances to vendors
    
    
    403.8
    
    
    
    180.1
    
    
    
    4.1Advances for capital work in progress
    
    
    98.8
    
    
    
    91.8
    
    
    
    2.1Prepaid expenses
    
    
    736.6
    
    
    
    845.3
    
    
    
    19.5Unrealized gain on foreign exchange transactions
    
    
    127.1
    
    
    
    602.6
    
    
    
    13.9Goodwill arising on the acquisition of TBL, net of
    
    
    
    
    
    
    
    
    
    
    0amortization and write offs (See Note 2(d))
    
    
    53.6
    
    
    
    53.6
    
    
    
    1.2Other
    
    
    32.7
    
    
    
    147.3
    
    
    
    3.5Total
    
    Rs.
    8,955.2
    
    
    Rs.
    6,404.3
    
    
    US$
    147.7
 F-28




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##### Table of Contents



HDFC BANK LIMITED
NOTES TO FINANCIAL STATEMENTS(Continued) 14. Deposits Deposits include demand deposits, which are non-interest-bearing, and
savings and time deposits, which are interest-bearing. Deposits as of
March 31, 2003 and 2004 are as follows: As of March 31,2003
    
    2004
    
    2004(In millions)Interest-bearing:Savings deposits
    
    Rs.
    46,631.4
    
    
    Rs.
    78,043.0
    
    
    US$
    1,798.2Time deposits
    
    
    127,619.0
    
    
    
    137,667.8
    
    
    
    3,172.1Total interest-bearing deposits
    
    
    174,250.4
    
    
    
    215,710.8
    
    
    
    4,970.3Non-interest bearing demand deposits
    
    
    49,509.6
    
    
    
    88,351.2
    
    
    
    2,035.7Total
    
    Rs.
    223,760.0
    
    
    Rs.
    304,062.0
    
    
    US$
    7,006.0
 As of March 31, 2003 and 2004, time deposits of Rs. 97,330.0 million
and Rs. 95,083.7 million, respectively, have a residual maturity of less
than one year. The balance of the deposits mature between one and five
years. As of March 31, 2003 and 2004, time deposits in excess of Rs. 4.5
million (approximately US$ 100,000) aggregated Rs. 52,077.1 million and Rs.
54,246.8 million, respectively. F-29




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##### Table of Contents



HDFC BANK LIMITEDNOTES TO FINANCIAL STATEMENTS(Continued) 15. Short-term borrowings Short-term borrowings are mainly comprised of money market borrowings. These
borrowings are unsecured and are availed of by the Bank as part of its treasury
operations. Short-term borrowings as of March 31, 2003 and 2004 are comprised
of the following: As of March 31,2003
    
    2004
    
    2004(In millions)Borrowed in the call market
    
    Rs.
    11,767.1
    
    
    Rs.
    10,582.9
    
    
    US$
    243.8Overdrawn nostro balances
    
    
    80.4
    
    
    
    
    
    
    
    Term borrowings from institutions/banks
    
    
    8,610.0
    
    
    
    5,880.0
    
    
    
    135.5Foreign currency borrowings
    
    
    237.4
    
    
    
    6,601.3
    
    
    
    152.1Bills rediscounted
    
    
    750.0
    
    
    
    1,000.0
    
    
    
    23.0Export credit refinanced by the RBI
    
    
    134.7
    
    
    
    
    
    
    
    Total
    
    Rs.
    21,579.6
    
    
    Rs.
    24,064.2
    
    
    US$
    554.5Total borrowings outstanding:Maximum amount outstanding
    
    Rs.
    32,221.7
    
    
    Rs.
    52,274.3
    
    
    US$
    1,204.5Average amount outstanding
    
    Rs.
    15,362.9
    
    
    Rs.
    33,040.7
    
    

    US$
    761.3Weighted average interest rate
    
    
    6.3
    %
    
    
    4.3
    %
    
    
    4.3
    %
 16. Long-term debt Long-term debt as of March 31, 2003 and 2004 is comprised of the following: As of March 31,2003
    
    2004
    
    2004(In millions)Subordinated debt
    
    Rs.
    2,000.0
    
    
    Rs.
    6,000.0
    
    
    US$
    138.3Capital lease obligations
    
    
    71.6
    
    
    
    44.5
    
    
    
    1.0Term borrowings
    
    
    44.4
    
    
    
    41.5
    
    
    
    0.9Total
    
    Rs.
    2,116.0
    
    
    Rs.
    6,086.0
    
    
    US$
    140.2
 The scheduled maturities of long-term debt are set out below: As of March 31,2004
    
    2004Due in the year ending March 31:2005
    
    Rs.
    1,057.8
    
    
    US$
    24.42006
    
    
    19.5
    
    
    
    0.42007
    
    
    1,003.6
    
    
    
    23.12008
    
    
    2.9
    
    
    
    0.1Thereafter
    
    
    4,002.2
    
    
    
    92.2Total
    
    Rs.
    6,086.0
    
    
    US$
    140.2
 F-30




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##### Table of Contents



HDFC BANK LIMITED
NOTES TO FINANCIAL STATEMENTS(Continued) Long-term debt as of March 31, 2003 and 2004 includes unsecured
non-convertible subordinated debt aggregating Rs. 6,000 million. This debt
is subordinate to present and future senior indebtedness of the Bank and
qualifies as Tier 2 risk-based capital under the RBIs guidelines for
assessing capital adequacy. This subordinated debt was privately placed in
three tranches, and does not permit prepayment by the Bank. Details are as
follows: The first tranche aggregating Rs. 1,000.0 million was issued on various
dates between January 29, 1998 and March 20, 1998 and carries a coupon rate
of 13.00%. This tranche is repayable on various dates between July 28, 2004
and September 19, 2004. The second tranche aggregating Rs. 500.0 million was issued on various
dates between March 30, 1999 and June 5, 1999 and carries a coupon rate of
13.75%. This tranche is repayable on various dates between June 29, 2006 and
September 4, 2006. The third tranche aggregating Rs. 500.0 million was issued on March 22
and March 23, 2001 and carries a coupon rate of 11.00%. This tranche is
repayable by June 22, 2006. The Bank in the current year issued subordinated debts aggregating to
Rs. 4,000 million, issued on February 4, 2004 of which Rs. 3,950 million
carries a coupon rate of 5.90% and matures in May 2013 and Rs. 50 million
carries a coupon rate of 6.0% and matures in May 2016. The capital lease obligation was assumed in the acquisition of TBL and
is secured by computers, ATMs and VSAT terminals acquired from TBL. The term borrowing as of March 31, 2003 and March 31, 2004 consists of
a Rs. 27.5 million unsecured loan borrowed from HDFC Limited, a related
party, with a coupon rate of 11.5%. Additionally, the Bank has a loan with
an unpaid balance of Rs. 16.9 million and Rs.14.0 million as of March 31,
2003 and 2004, respectively, from the Indian Renewable Energy Development
Authority. This loan was obtained at a concessional coupon rate of 2.5% and
used to finance the purchase of solar power equipment. The loan is secured
by a charge on the solar power system in use at the Banks central
transaction processing facility in Mumbai. 17. Accrued expenses and other liabilities Accrued expenses and other liabilities include the following: As of March 312003
    
    2004
    
    2004(In millions)Bills payable
    
    Rs.
    8,511.2
    
    
    Rs.
    36,672.7
    
    
    
    845.0Remittances in transit
    
    
    12,323.1
    
    
    
    13,540.5
    
    
    
    312.0Provisions for expenses
    
    
    410.6
    
    
    
    482.7
    
    
    
    11.1New account deposits
    
    
    3,242.4
    
    
    
    1,752.3
    
    
    
    40.4Deferred income tax payable, net
    
    
    1,162.3
    
    
    
    1,026.8
    
    
    
    23.7Accounts payable
    
    
    593.5
    
    
    
    2,248.9
    
    
    
    51.8Cash margins on guarantees and documentary credits and
securities purchased under resell agreements
    
    
    13.3
    
    
    
    969.4
    
    
    
    22.3Unearned income
    
    
    474.7
    
    
    
    398.2
    
    
    
    9.2Liabilities for guarantees
    
    
    
    
    
    
    112.7
    
    
    
    2.6Other
    
    
    43.6
    
    
    
    38.0
    
    
    
    0.8Total
    
    Rs.
    26,774.7
    
    
    Rs.
    57,242.2
    
    
    US$
    1,318.9
 F-31




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##### Table of Contents



HDFC BANK LIMITED
NOTES TO FINANCIAL STATEMENTS(Continued) 18. Income taxes The income tax expense comprises the following: Years ended March 31,2002
    
    2003
    
    2004
    
    2004(In millions)Current income tax expense
    
    Rs.
    1,400.2
    
    
    Rs.
    1,769.6
    
    
    Rs.
    2,427.2
    
    
    US$
    55.9Deferred income tax benefit
    
    
    (105.6
    )
    
    
    (39.9
    )
    
    
    (588.4
    )
    
    
    (13.5
    )Income tax expense
    
    Rs.
    1,294.6
    
    
    Rs.
    1,729.7
    
    
    Rs.
    1,838.8
    
    
    US$
    42.4
 The following is the reconciliation of estimated income taxes at the Indian
statutory income tax rate to income tax expense as reported: Years ended March 31,2002
    
    2003
    
    2004
    
    2004(In millions)Net income before taxes
    
    Rs.
    4,253.0
    
    
    Rs.
    5,243.5
    
    
    Rs.
    6,593.3
    
    
    US$
    152.0Effective statutory income tax rate
    
    
    35.70
    %
    
    
    36.75
    %
    
    
    35.87
    %
    
    
    35.87
    %Expected income tax expense
    
    
    1,518.3
    
    
    
    1,927.0
    
    
    
    2,365.4
    
    
    
    54.5Adjustments to reconcile expected income tax
to actual tax expense:Permanent differences:Stock based compensation (net of
forfeitures)
    
    
    30.1
    
    
    
    50.3
    
    
    
    48.5
    
    
    
    1.1Income exempt from taxes
    
    
    (143.8
    )
    
    
    (273.1
    )
    
    
    (529.4
    )
    
    
    (12.2
    )Other, net
    
    
    (86.4
    )
    
    
    6.8
    
    
    
    (17.9
    )
    
    
    (0.4
    )Effect of change in statutory tax rate
    
    
    (23.6
    )
    
    
    18.7
    
    
    
    (27.8
    )
    
    
    (0.6
    )Income tax expense
    
    Rs.
    1,294.6
    
    
    Rs.
    1,729.7
    
    
    Rs.
    1,838.8
    
    
    US$
    42.4
 F-32




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##### Table of Contents



HDFC BANK LIMITED
NOTES TO FINANCIAL STATEMENTS(Continued) The tax effects of significant temporary differences are as follows: As of March 31,2003
    
    2004
    
    2004(In millions)Tax Effect of:Deductible temporary differences:Allowance for loan losses
    
    Rs.
    572.0
    
    
    Rs.
    1,107.5
    
    
    US$
    25.5Investment income deferred for tax
    
    
    23.9
    
    
    
    178.8
    
    
    
    4.1Minimum alternate tax credit
    
    
    23.7
    
    
    
    23.1
    
    
    
    0.5Other
    
    
    138.5
    
    
    
    141.0
    
    
    
    3.3Deferred tax asset
    
    
    758.1
    
    
    
    1,450.4
    
    
    
    33.4Taxable temporary differences:Property and equipment
    
    
    834.6
    
    
    
    959.1
    
    
    
    22.1Unrealized gain on available for sale securities arising on the
acquisition of TBL
    
    
    69.9
    
    
    
    68.2
    
    
    
    1.6Unrealized gain on securities available for sale
    
    
    972.1
    
    
    
    1,401.7
    
    
    
    32.3Unrealized gain on investments transferred to held to maturity
category
    
    
    34.4
    
    
    
    33.5
    
    
    
    0.8Debt issue expenses
    
    
    9.4
    
    
    
    14.7
    
    
    
    0.3Deferred tax liability
    
    
    1,920.4
    
    
    
    2,477.2
    
    
    
    57.1Net deferred tax liability
    
    Rs.
    1,162.3
    
    
    Rs.
    1,026.8
    
    
    US$
    23.7
 Management believes that the realization of the recognized deferred tax
assets is more likely than not based on expectations as to future taxable
income. F-33




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##### Table of Contents



HDFC BANK LIMITEDNOTES TO FINANCIAL STATEMENTS(Continued) 19. Stock based compensation The stock based compensation plans of the Bank are as follows: Employees Stock Option Scheme: The shareholders of the Bank approved Employees Stock Option Schemes in
January 2000 (Plan A) and June 2003 (Plan B) respectively. Under the terms
of each of these Plans, the Bank may issue stock options to employees and
directors of the Bank, each of which is convertible into one equity share. The
Bank reserved 10 million equity shares, with an aggregate
nominal value of Rs. 100 million, for issuance under each Plan. Plan A provides for the issuance of options at the recommendation of
the Compensation Committee of the Board (the Compensation Committee) at an
average of the daily closing prices on the Mumbai Stock Exchange during the 60
days preceding the date of grant of options, which was the minimum prescribed
option price under regulations then issued by the Securities and Exchange
Board of India. Plan B provides for the issuance of options at the recommendation of
the Compensation Committee of the Board (the Compensation Committee) at the
closing price on the working day immediately preceding the date when options
are granted on an Indian stock exchange where there is the highest trading
volume during a period of two weeks preceding the said date, which was the
minimum prescribed option price under regulations then issued by the
Securities and Exchange Board of India. Such options vest at the discretion of the Compensation Committee,
subject to a maximum vesting not exceeding five years, and the vesting period
is notified to optionees at the time the grants are made. Such options are
exercisable for a period following vesting at the discretion of the
Compensation Committee, subject to a maximum of five years, and is notified to
optionees at the time of the grant. On February 8, 2002, the Bank granted 1,406,900 options to employees
under the Plan A at an option price of Rs. 226.96 each. Such options vest at
the rate of 30%, 30% and 40% on each successive anniversary of the grant date.
The option price computed in accordance with the formula was Rs. 1.91 higher
than the closing quoted market price on the date of the grant; accordingly, no
stock based compensation arose on these grants. On December 26, 2003, the Bank granted 6,823,400 options to employees
under the Plan A at an option price of Rs. 358.60 each. Such options also vest
at the rate of 30%, 30% and 40% on each successive anniversary of the grant
date. The option price computed in accordance with the formula was Rs. 21.20
lower than the closing quoted market price on the date of the grant;
accordingly, the Bank recognized aggregate deferred stock based compensation
of Rs. 144.6 million, which is being amortized as an expense over the vesting
period. On March 26, 2004, the Bank granted 2,424,500 options to employees under
the Plan A at an option price of Rs. 366.30 each. Such options also vest at the
rate of 30%, 30% and 40% on each successive anniversary of the grant date. The
option price computed in accordance with the formula was Rs. 8.13 lower than
the closing quoted market price on the date of the grant; accordingly, the
Bank recognized aggregate deferred stock based compensation of Rs. 19.7
million, which is being amortized as an expense over the vesting period. On March 26, 2004, the Bank granted 1,745,100 options to employees under
the Plan B at an option price of Rs. 362.90 each. Such options also vest at the
rate of 30%, 30% and 40% on each successive anniversary of the grant date. The
option price computed in accordance with the formula was Rs. 11.20 lower than
the closing quoted market price on the date of the grant; accordingly, the
Bank recognized aggregate deferred stock based compensation of Rs. 19.5
million, which is being amortized as an expense over the vesting period. F-34




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##### Table of Contents



HDFC BANK LIMITEDNOTES TO FINANCIAL STATEMENTS(Continued) Activity in the options available to be granted under the Employee Stock
Option Scheme is as follows: Options available to be grantedYears ending March 31,2002
    
    2003
    
    2004Options available to be granted, beginning of year
    
    
    2,513,600
    
    
    
    1,534,200
    
    
    
    2,048,300Equity shares allocated for grant under the plan
    
    
    
    
    
    
    
    
    
    
    10,000,000Options granted
    
    
    (1,406,900
    )
    
    
    
    
    
    
    (10,993,000
    )Forfeited/lapsed
    
    
    427,500
    
    
    
    514,100
    
    
    
    530,500Options available to be granted, end of year
    
    
    1,534,200
    
    
    
    2,048,300
    
    
    
    1,585,800
 F-35




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##### Table of Contents



HDFC BANK LIMITED
NOTES TO FINANCIAL STATEMENTS(Continued) Activity in the options outstanding under the Employee Stock Option Scheme
is as follows: Years ended March 31,2002
    
    2003
    
    2004Weighted
    
    
    
    
    
    Weighted
    
    
    
    
    
    Weightedaverage
    
    
    
    
    
    average
    
    
    
    
    
    averageexercise
    
    
    
    
    
    exercise
    
    
    
    
    
    exerciseOptions
    
    price
    
    Options
    
    price
    
    Options
    
    priceOptions outstanding, beginning of year
    
    
    7,168,400
    
    
    Rs.
    179.15
    
    
    
    7,788,100
    
    
    Rs.
    189.48
    
    
    
    6,602,900
    
    
    Rs.
    193.07Granted
    
    
    1,406,900
    
    
    
    226.96
    
    
    
    
    
    
    
    
    
    
    
    10,993,000
    
    
    
    360.98Exercised
    
    
    (359,700
    )
    
    
    131.33
    
    
    
    (671,100
    )
    
    
    132.00
    
    
    
    (2,746,000
    )
    
    
    163.90Forfeited
    
    
    (427,500
    )
    
    
    188.43
    
    
    
    (514,100
    )
    
    
    218.48
    
    
    
    (530,500
    )
    
    
    251.07Options outstanding, end of year
    
    
    7,788,100
    
    
    Rs.
    189.48
    
    
    
    6,602,900
    
    
    Rs.
    193.07
    
    
    
    14,319,400
    
    
    Rs.
    325.42Weighted average fair value of
options granted
during the year
    
    
    
    
    
    Rs.
    225.05
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Rs.
    374.10
 An
Employees Welfare Trust (the EWT) was established in 1994 for
various welfare activities for the benefit of the Banks employees. The EWT
has borrowed funds from third parties and initially subscribed to an aggregate
of 10,000,000 equity shares of the Bank at the same price as available to other
shareholders, and from time to time, also makes open market purchases of
shares. In pursuance to the Trusts objectives, grants are allotted to
employees, directors and advisors at prices designated by the trustees. The
vesting period varies at the discretion of the trustees from grant to grant,
but is generally between twelve and twenty four months. Purely from an accounting perspective under US GAAP, as required by AICPA
Statement of Position No. 93-6, the Bank is required to account for the equity
shares of the Bank held by the EWT as treasury shares until transferred and
report the external borrowings of the EWT as borrowings of the Bank.
Consequently, dividends paid to the EWT are eliminated, and the interest cost
incurred by the EWT and stock based compensation are charged as an expense by
the Bank. Since November 1994, the EWT has granted an aggregate of 9,723,225
grants. The Bank has recognized deferred stock based compensation on each grant
as the difference between the closing price on The Stock Exchange, Mumbai and
the applicable grant price. The Bank has recognized stock based compensation
expense under this scheme of Rs. 56.7 million, Rs. 125.9 million and Rs. 113.7
million, for the years ended March 31, 2002, 2003 and 2004, respectively. F-36




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##### Table of Contents



HDFC BANK LIMITEDNOTES TO FINANCIAL STATEMENTS(Continued) Activity in the grants available to be allotted under the EWT Plan is as
follows: Years ending March 31,2002
    
    2003
    
    2004Grants available to be allotted, beginning of year
    
    
    2,806,375
    
    
    
    1,244,775
    
    
    
    1,250,775Grants allotted
    
    
    (1,561,600
    )
    
    
    (15,000
    )
    
    
    (974,000
    )Grants cancelled
    
    
    
    
    
    
    21,000
    
    
    
    Grants available to be allotted, end of year
    
    
    1,244,775
    
    
    
    1,250,775
    
    
    
    276,775
 Activity in the allotted grants outstanding under the EWT Plan is as
follows: As of March 31,2002
    
    2003
    
    2004Weighted
    
    
    
    
    
    Weighted
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    average
    
    
    
    
    
    AverageExercise
    
    
    
    
    
    exercise
    
    
    
    
    
    ExerciseGrants
    
    price
    
    Grants
    
    price
    
    Grants
    
    PriceGrants allotted, beginning of year
    
    
    1,051,600
    
    
    Rs.
    29.50
    
    
    
    1,097,000
    
    
    Rs.
    38.64
    
    
    
    1,076,000
    
    
    
    38.64New grants
    
    
    1,561,600
    
    
    
    37.35
    
    
    
    15,000
    
    
    
    35.00
    
    
    
    974,000
    
    
    
    46.00Grants exercised
    
    
    (1,516,200
    )
    
    
    30.97
    
    
    
    (15,000
    )
    
    
    35.00
    
    
    
    (379,500
    )
    
    
    38.64Grants cancelled
    
    
    
    
    
    
    
    
    
    
    (21,000
    )
    
    
    38.64
    
    
    
    
    
    
    
    Grants allotted, end of year
    
    
    1,097,000
    
    
    Rs.
    38.64
    
    
    
    1,076,000
    
    
    Rs.
    38.64
    
    
    
    1,670,500
    
    
    
    42.93Weighted
average fair value of grants allotted during the year
    
    
    
    
    
    Rs.
    227.80
    
    
    
    
    
    
    Rs.
    229.70
    
    
    
    
    
    
    Rs.
    299.25
 F-37




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##### Table of Contents



HDFC BANK LIMITED
NOTES TO FINANCIAL STATEMENTS(Continued) Had compensation cost for the Banks stock option plans been determined
based on the fair value at the grant dates for awards, consistent with the
method prescribed by SFAS No. 123, as amended by SFAS 148, the Banks net
income and earnings per share would have been as per the pro forma amounts
indicated below: Years ended March 31,2002
    
    2003
    
    2004
    
    2004(In millions, except per share amounts)Net Income:
    
    As reported
    
    Rs.
    2,958.4
    
    
    Rs.
    3,513.8
    
    
    Rs.
    4,754.5
    
    
    US$
    109.6Add: Stock-based employee
compensationexpense
included in net income
    
    As reported
    
    
    89.8
    
    
    
    138.0
    
    
    
    135.1
    
    
    
    3.1Less: Stock based
compensation expensedetermined under fair
value based method:
    
    Pro forma
    
    
    (393.6
    )
    
    
    (329.4
    )
    
    
    (293.3
    )
    
    
    (6.6
    )Net Income:
    
    Pro forma
    
    Rs.
    2,654.6
    
    
    Rs.
    3,322.4
    
    
    Rs.
    4,596.3
    
    
    US$
    106.1Basic earnings per share
    
    As reported
    
    Rs.
    11.10
    
    
    Rs.
    12.57
    
    
    Rs.
    16.87
    
    
    US$
    0.39Pro forma
    
    
    9.96
    
    
    
    11.88
    
    
    
    16.31
    
    
    
    0.38Diluted earnings per share
    
    As reported
    
    Rs.
    11.04
    
    
    Rs.
    12.51
    
    
    Rs.
    16.70
    
    
    US$
    0.38Pro forma
    
    
    9.91
    
    
    
    11.81
    
    
    
    16.14
    
    
    
    0.37Basic earnings per ADS
    
    As reported
    
    Rs.
    33.30
    
    
    Rs.
    37.71
    
    
    Rs.
    50.61
    
    
    US$
    1.17Pro forma
    
    
    29.88
    
    
    
    35.64
    
    
    
    48.93
    
    
    
    1.13Diluted earnings per ADS
    
    As reported
    
    Rs.
    33.12
    
    
    Rs.
    37.53
    
    
    Rs.
    50.10
    
    
    US$
    1.15Pro forma
    
    
    29.73
    
    
    
    35.43
    
    
    
    48.42
    
    
    
    1.12
 F-38




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##### Table of Contents



HDFC BANK LIMITED
NOTES TO FINANCIAL STATEMENTS(Continued) The fair value of options used to compute pro forma net income and basic
earnings per equity share have been estimated on the dates of each grant using
the Black-Scholes option pricing model for fiscal year 2002 and a Binomial
option pricing model for fiscal 2004 with the following assumptions: Years ended March 31,2002
    
    2003
    
    2004Dividend yield
    
    
    1
    %
    
    
    
    
    
    
    0.9
    %Expected volatility
    
    
    30.2
    %
    
    
    
    
    
    
    45.0
    %Risk-free interest rateESOS Plan
    
    
    7.1
    %
    
    
    
    
    
    
    4.4%-4.5
    %EWT Plan
    
    
    6.2
    %
    
    
    
    
    
    
    4.5
    %Expected lives:ESOS Plan
    
    7.1 years
    
    
    
    
    
    1-3 yearsEWT Plan
    
    1-2.1 years
    
    
    
    
    
    1.2-2.2 years
 The following summarizes information about stock options outstanding as of
March 31, 2004: As of March 31, 2004Number of
    
    Weighted
    
    Weightedshares arising
    
    average
    
    averagePlan
    
    Range of exercise price
    
    out of options
    
    remaining life
    
    exercise priceESOS
    
    Rs. 131.33
to Rs. 226.96 (or US$3.0 to US$5.2)
    
    
    3,436,700
    
    
    0.16 yrs
    
    
    213.73ESOS
    
    Rs. 358.60 to Rs. 366.30 (or US$8.3 to US$8.4)
    
    
    10,882,700
    
    
    1.95 yrs
    
    
    361.00EWT
    
    Rs. 44.00 to 48.00 (or US$1.01 to US$1.11)
    
    
    1,670,500
    
    
    1.5 yrs
    
    
    46.00
 20. Share Capital On July 20, 2001, the Bank issued 10,845,986 ADSs, representing 32,537,958
equity shares pursuant to its initial public offering in the United States, at
an issue price of US$ 13.83 per ADS. On July 25, 2001, the underwriters to the
issue exercised their over allotment option; accordingly, the Bank issued a
further 1,626,898 ADSs representing 4,880,694 equity shares. The net proceeds
of the issue, after expenses and underwriting discount, was Rs. 7,803.5
million. F-39




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##### Table of Contents



HDFC BANK LIMITEDNOTES TO FINANCIAL STATEMENTS(Continued) 21. Retirement benefits Gratuity The following table sets out the funded status of the Gratuity Plan and
the amounts recognized in the Banks financial statements as of March 31, 2003
and 2004. As of March 31,2003
    
    2004
    
    2004(In millions)Change in benefit obligations:Projected benefit obligation, beginning of the year
    
    Rs.
    34.0
    
    
    Rs.
    65.0
    
    
    US$
    1.4Service cost
    
    
    11.6
    
    
    
    16.7
    
    
    
    0.4Interest cost
    
    
    3.0
    
    
    
    4.7
    
    
    
    0.1Actuarial loss
    
    
    17.8
    
    
    
    21.1
    
    
    
    0.5Benefits paid
    
    
    (1.4
    )
    
    
    (4.4
    )
    
    
    (0.1
    )Projected benefit obligation, end of the year
    
    
    65.0
    
    
    
    103.1
    
    
    
    2.3Change in plan assets:Fair value of plan assets, beginning of the year
    
    
    25.9
    
    
    
    30.9
    
    
    
    0.7Actual return on plan assets
    
    
    2.8
    
    
    
    2.9
    
    
    
    0.1Employer contributions
    
    
    7.0
    
    
    
    20.4
    
    
    
    0.5Benefits paid
    
    
    (1.4
    )
    
    
    (4.4
    )
    
    
    (0.1
    )Actuarial (loss) gain
    
    
    (3.4
    )
    
    
    3.2
    
    
    
    0.1Fair value of plan assets, end of the year
    
    
    30.9
    
    
    
    53.0
    
    
    
    1.3Accrued benefit
    
    Rs.
    (34.1
    )
    
    Rs.
    (50.1
    )
    
    US$
    (1.0
    )
 The Banks expected contribution towards the gratuity fund for the next fiscal
year is estimated at Rs. 30.0 million. The accumulated benefit obligation for
the years ended March 31, 2002, 2003 and 2004 was
21.3 million, 32.9 million and
49.6 million respectively. Net gratuity cost for the years ended March 31, 2002, 2003 and 2004 comprises
the following components: Years ended March 31,2002
    
    2003
    
    2004
    
    2004(In millions)Service cost
    
    Rs.
    9.1
    
    
    Rs.
    11.6
    
    
    Rs.
    16.7
    
    
    US$
    0.4Interest cost
    
    
    1.5
    
    
    
    3.0
    
    
    
    4.7
    
    
    
    0.1Expected return on plan assets
    
    
    (1.0
    )
    
    
    (2.5
    )
    
    
    (2.7
    )
    
    
    (0.1
    )Actuarial (gain) loss
    
    
    
    
    
    
    (2.5
    )
    
    
    14.6
    
    
    
    0.3Amortization of actuarial loss in excess of 10% of PBO
    
    
    0.4
    
    
    
    
    
    
    
    
    
    
    
    Net gratuity cost
    
    Rs.
    10.0
    
    
    Rs.
    9.6
    
    
    Rs.
    33.3
    
    
    US$
    0.7
 The assumptions used in accounting for the gratuity plan for the years
ended March 31, 2002, 2003 and 2004
are set out below: Years ended March 31,2002
    
    2003
    
    2004(%)Discount rate
    
    
    9.5
    
    
    
    9.0
    
    
    
    7.0Rate of increase in compensation levels of covered employees
    
    
    7.0
    
    
    
    10.0
    
    
    
    10.0Rate of return on plan assets
    
    
    10.0
    
    
    
    8.0
    
    
    
    6.5
 F-40




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##### Table of Contents



HDFC BANK LIMITED
NOTES TO FINANCIAL STATEMENTS(Continued) The following benefit payments, which reflect expected future service, as
appropriate are expected to be paid. Year ending March 31,
    
    (In millions)2005
    
    
    Rs.2.22006
    
    
    1.12007
    
    
    2.82008
    
    
    1.82009
    
    
    6.3
 Superannuation The Bank contributed Rs. 14.5 million, Rs. 16.6 million and Rs. 19.7
million to the superannuation plan for the years ended March 31, 2002, 2003 and
2004 respectively. Provident fund The Bank contributed Rs. 42.5 million, Rs. 55.6 million and Rs. 71.1
million to the provident fund for the years ended March 31, 2002, 2003 and
2004, respectively. 22. Financial instruments Foreign exchange and derivative contracts The Bank enters into foreign exchange forward contracts, currency swaps
and rupee based interest rate swaps with inter-bank participants on its own
account and for customers. These transactions enable customers to transfer,
modify or reduce their foreign exchange and interest rate risks. Forward foreign exchange contracts are commitments to buy or sell foreign
currency at a future date at the contracted rate. Currency swaps are
commitments to exchange cash flows by way of interest in one currency against
another currency and exchange of notional principal amount at maturity based on
predetermined rates. The market and credit risk associated with these products, as well as the
operating risks, are similar to those relating to other types of financial
instruments. Market risk is the exposure created by movements in interest rates
and exchange rates, during the tenure of the transaction. The extent of market
risk affecting such transactions depends on the type and nature of the
transaction, value of the transaction and the extent to which the transaction
is uncovered. Credit risk is the exposure to loss in the event of default by
counter-parties. The extent of loss on account of a counter-party default will
depend on the replacement value of the contract at the ongoing market rates. Fair values for off Balance Sheet derivative financial instruments are
based on quoted market prices, except in the case of certain options and
currency swap where pricing models are used. The following table presents the aggregate notional principal amounts of
the Banks outstanding foreign exchange and interest rate derivative contracts
as of March 31, 2003 and 2004, together with the fair values on each reporting
date. As of March 31,2003
    
    2004
    
    2004Fair
    
    
    
    
    
    Fair
    
    
    
    
    
    FairNotional
    
    value
    
    Notional
    
    value
    
    Notional
    
    value(In millions)Interest rate swap agreements
    
    Rs.
    174,841.7
    
    
    Rs.
    0.4
    
    
    Rs.
    343,015.7
    
    
    Rs.
    (15.4
    )
    
    US$
    7,903.6
    
    
    US$
    (0.4
    )Currency options
    
    
    1,549.2
    
    
    
    
    
    
    
    28,232.8
    
    
    
    36.3
    
    
    
    650.5
    
    
    
    0.8Forward exchange contracts
    
    
    197,725.5
    
    
    
    127.1
    
    
    
    394,440.8
    
    
    
    467.0
    
    
    
    9,088.5
    
    
    
    10.8Forward rate agreements
    
    
    
    
    
    
    
    
    
    
    897.9
    
    
    
    
    
    
    
    20.7
    
    
    
    Currency swap agreements
    
    
    9,659.5
    
    
    
    (6.7
    )
    
    
    17,243.4
    
    
    
    
    
    
    
    397.3
    
    
    
    
 F-41




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##### Table of Contents



HDFC BANK LIMITED
NOTES TO FINANCIAL STATEMENTS(Continued) Guarantees As a part of its commercial banking activities, the Bank has issued
guarantees and documentary credits, such as letters of credit, to enhance the
credit standing of its customers. These generally represent irrevocable
assurances that the Bank will make payments in the event that the customer
fails to fulfill his financial or performance obligations. Financial
guarantees are obligations to pay a third party beneficiary where a customer
fails to make payment towards 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. The guarantees are
generally for a period not exceeding 18 months. The credit risk associated with these products, as well as the operating
risks, are similar to those relating to other types of financial instruments. The fair values of guarantees and documentary credits have been estimated
based on fees currently charged for such contracts. Details of guarantees and documentary credits outstanding are set out
below: As of March 31,2003
    
    2004
    
    2004(In millions)Nominal values:Bank guarantees:Financial guarantees
    
    Rs.
    5,743.6
    
    
    Rs.
    7,497.0
    
    
    US$
    172.7Performance guarantees
    
    
    8,445.4
    
    
    
    8,916.8
    
    
    
    205.5Documentary credits
    
    
    11,715.1
    
    
    
    18,921.0
    
    
    
    436.0Total
    
    Rs.
    25,904.1
    
    
    Rs.
    35,334.8
    
    
    US$
    814.2Estimated fair values:Guarantees
    
    Rs.
    85.1
    
    
    Rs.
    (14.2
    )
    
    US$
    (0.3
    )Documentary credits
    
    Rs.
    18.7
    
    
    Rs.
    30.3
    
    
    
    0.7Total
    
    Rs.
    103.8
    
    
    Rs.
    16.1
    
    
    US$
    0.4
 Based on historical trends, the Bank has recognized a liability of Rs.
112.7 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 (FIN 45), issued in November 2002. As part of its risk management activities, the Bank continuously monitors
the credit-worthiness of the customer as well as the guarantee exposure;
however, if the customer fails to perform the specified obligation to the
beneficiary, the beneficiary may draw upon the guarantee by presenting
documents that are in compliance with the guarantee. In that event the Bank
makes payment on account of the indebtedness of the customer or makes payment
on account of the default by the customer in the performance of an obligation,
to the beneficiary up to the full notional amount of the guarantee. The
customer is obligated to reimburse the Bank for any such payment. If the
customer fails to pay, the Bank would, as applicable, liquidate collateral
and/or set off accounts. Loan sanction letters The Bank has issued sanction letters indicating its intent to provide new
loans to certain customers. The aggregate of loans contemplated in these
letters that had not yet been made was Rs. 44,526.4 million as of March 31,
2004. If the Bank were to make such loans, the interest rates would be
dependent on the lending rates in effect when the loans are disbursed. The Bank
has no commitment to lend under these letters. Among other things, the making
of a loan is subject to a review of creditworthiness of the customer at the
time the customer seeks to borrow, at which time the Bank has the unilateral
right to decline to make the loan. 23. Estimated fair value of financial instruments The Banks financial instruments include financial assets and liabilities
recorded on the balance sheet, as well as off-balance sheet instruments such as
foreign exchange and derivative contracts. Management uses its best judgement
in estimating the fair value of the Banks financial instruments; however,
there are inherent weaknesses in any estimation technique. Therefore, for
substantially all financial instruments, the fair value estimates presented
herein are not necessarily indicative of all the amounts the Bank could have
realized in a sales transaction as of either March 31, 2003 or 2004. The
estimated fair value amounts for the years ended March 31, 2003 and 2004 have
been measured as of the respective year ends, and have been not been
reevaluated or updated for purposes of these financial statements subsequent to
those respective dates. As such, the estimated fair values of these financial
instruments subsequent to the respective reporting dates may be different than
the amounts reported at each year end. F-42




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##### Table of Contents



HDFC BANK LIMITEDNOTES TO FINANCIAL STATEMENTS(Continued) Financial instruments valued at carrying value: The respective carrying values of certain on-balance-sheet financial
instruments approximated their fair value. These financial instruments include
cash and amounts due from banks, interest-bearing deposits in banks, securities
purchased and sold under resale and repurchase agreements, accrued interest
receivable, short-term borrowings, acceptances, accrued interest payable, and
certain other assets and liabilities that are considered financial instruments.
Carrying values were assumed to approximate fair values for these financial
instruments as they are short-term in nature and their recorded amounts
approximate fair values or are receivable or payable on demand. Trading securities: Trading securities are carried at fair value based on quoted market
prices. For more information on the fair value of these securities, refer to
Note 5. Available for sale securities: Available for sale investments principally comprise debt securities and
are carried at fair value. Such fair values were based on quoted market prices,
if available. If quoted market prices did not exist, fair values were estimated
using market yield on balance period to maturity on similar instruments and
similar credit risk. The fair values of asset backed securities is estimated
based on revised estimated cash flows at each balance sheet date, discounted at
current market pricing for transactions with similar risk. For more information
on the fair value of these securities, refer to Note 6. Held to maturity securities: Held to maturity securities are carried at amortized cost less diminution
other than temporary, if any. Fair values of these securities were based on
quoted market prices, if available. If quoted market prices did not exist, fair
values were estimated using market yield on balance period to maturity on
similar instruments and similar credit risk. For more information on these
securities, refer to Note 7. Loans: The fair values of consumer installment loans and other consumer loans
that do not reprice frequently were estimated using discounted cash flow
models. The discount rates were based on current market pricing for loans with
similar characteristics and risk factors. Since substantially all individual
lines of credit and other variable rate consumer loans reprice frequently, with
interest rates reflecting current market pricing, the carrying values of these
loans approximate their fair values. The fair values of commercial loans that do not reprice or mature within
relatively short time frames were estimated using discounted cash flow models.
The discount rates were based on current market interest rates for loans with
similar remaining maturities and credit ratings. For commercial loans that
reprice within relatively short time frames, the carrying values approximate
their fair values. For purposes of these fair value estimates, the fair values of impaired
loans were computed by deducting an estimated market discount from their
carrying values to reflect the uncertainty of future cash flows. Deposits: The fair value of demand deposits, savings deposits, and money market
deposits without defined maturities are the amounts payable on demand. For
deposits with defined maturities, the fair values were estimated using
discounted cash flow models that apply market interest rates corresponding to
similar deposits and timing of maturities. For variable-rate deposits with
fixed repricing dates, the first repricing date was considered the maturity
date for purposes of fair value calculation. Long-term debt: The fair values of the Banks unquoted long-term debt instruments were
calculated based on a discounted cash flow model. The discount rates were based
on yield curves appropriate for the remaining maturities of the instruments. Term Placements: The fair values of term placements were estimated using discounted cash
flow models. The discount rates were based on current market pricing for
placements with similar characteristics and risk factors. F-43




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##### Table of Contents



HDFC BANK LIMITEDNOTES TO FINANCIAL STATEMENTS(Continued) A comparison of the fair values and carrying values of financial instruments
other than derivatives (see Note 22) is set out below: As of March 31,2003
    
    2004Carrying
    
    Estimated
    
    Carrying
    
    Estimatedvalue
    
    fair value
    
    value
    
    fair value(In millions)Financial Assets:Cash and cash equivalents
    
    Rs.
    23,944.9
    
    
    Rs.
    23,944.9
    
    
    Rs.
    33,010.4
    
    
    Rs.
    33,010.4Term placements
    
    
    7,747.4
    
    
    
    7,944.6
    
    
    
    3,565.2
    
    
    
    3,721.0Investments held to maturity
    
    
    38,426.7
    
    
    
    40,108.3
    
    
    
    36,368.4
    
    
    
    40,208.9Investments held for trading
    
    
    3,976.1
    
    
    
    3,976.1
    
    
    
    6,233.8
    
    
    
    6,233.8Investments available for sale
    
    
    98,929.2
    
    
    
    98,929.2
    
    
    
    133,399.9
    
    
    
    133,399.9Securities purchased under agreements to resell
    
    
    
    
    
    
    
    
    
    
    19,950.0
    
    
    
    19,950.0Loans
    
    
    118,299.8
    
    
    
    121,078.4
    
    
    
    177,681.1
    
    
    
    177,765.0Accrued interest receivable
    
    
    6,283.9
    
    
    
    6,283.9
    
    
    
    4,178.7
    
    
    
    4,178.7Financial Liabilities:Interest-bearing deposits
    
    
    174,250.4
    
    
    
    175,075.4
    
    
    
    215,710.8
    
    
    
    214,715.3Non-interest bearing deposits
    
    
    49,509.6
    
    
    
    49,509.6
    
    
    
    88,351.2
    
    
    
    88,351.2Securities sold under repurchase agreements
    
    
    4,600.0
    
    
    
    4,600.0
    
    
    
    
    
    
    
    Short term borrowings
    
    
    21,579.6
    
    
    
    21,579.6
    
    
    
    24,064.2
    
    
    
    24,064.2Accrued interest payable
    
    
    6,896.3
    
    
    
    6,896.3
    
    
    
    4,165.4
    
    
    
    4,165.4Long-term debt
    
    
    2,116.0
    
    
    
    2,399.8
    
    
    
    6,086.0
    
    
    
    6,499.9Accrued expenses and other liabilities
    
    
    26,774.7
    
    
    
    26,774.7
    
    
    
    57,242.2
    
    
    
    57,242.2
 24. Segment Information The Bank operates in three segments: wholesale banking, retail banking and
treasury services. The revenue and related expense recognition policies are set
out in Note 2. Substantially all operations and assets are based in India. The wholesale banking segment provides loans and transaction services to
corporate customers. Revenues of the wholesale banking segment consist of
interest earned on loans made to corporate customers, investment income from
credit substitutes, interest earned on the cash float arising from transaction
services, and fees from such transaction services. The principal expenses of
the segment consist of interest expense on funds borrowed from other segments,
premises expenses, personnel costs, other direct overheads and allocated
expenses. The retail banking segment serves retail customers through a branch
network and other delivery channels. This segment raises deposits from
customers and makes loans and provides advisory services to such customers.
Revenues of the retail banking segment are derived from interest earned on
retail loans, fees for banking and advisory services and interest earned from
other segments for surplus funds placed with those segments. Expenses of this
segment primarily comprise interest expense on deposits, infrastructure and
premises expenses for operating the branch network and other delivery channels,
personnel costs, other direct overheads and allocated expenses. The treasury services segment undertakes trading operations on the
proprietary account, foreign exchange operations and derivatives trading.
Revenues of the treasury services segment primarily consist of fees and gains
and losses from trading operations. Effective
this fiscal year, commercial vehicle loan division, which was
earlier a part of wholesale division has now been classified as retail banking
in line with the change in segment focus for this product. Last year figures
have been readjusted to confirm with current year classification. F-44




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HDFC BANK LIMITEDNOTES TO FINANCIAL STATEMENTS(Continued) Segment-wise income and expenses include certain allocations. Interest
income is charged by a segment that provides funding to another segment, based
on yields benchmarked to an internally developed composite yield curve which
broadly tracks market discovered interest rates. Transaction charges are made
by the retail banking segment to the wholesale banking segment for the use by
corporate customers of the retail banking segments branch network or other
delivery channels; such transaction costs are determined on a cost plus basis. Directly identifiable shared overheads are generally allocated at actual
amounts incurred. Indirect shared costs, principally corporate office expenses,
are generally allocated equally to each segment. Income taxes for each segment
have been allocated based on the effective rate applicable to the Bank,
adjusted for specifically identifiable permanent differences relating to each
segment. Summarized segment information for the years ended March 31, 2002, 2003
and 2004 is as follows: Years ended March 31,2002
    
    2003
    
    2004Wholesale
    
    Retail
    
    Treasury
    
    Wholesale
    
    Retail
    
    Treasury
    
    Wholesale
    
    Retail
    
    Treasurybanking
    
    banking
    
    services
    
    Banking
    
    banking
    
    services
    
    banking
    
    banking
    
    services(In millions)Net interest
revenue
    
    Rs.
    2,553.7
    
    
    Rs.
    2,948.5
    
    
    Rs.
    183.3
    
    
    Rs.
    2,155.0
    
    
    Rs.
    4,530.3
    
    
    Rs.
    960.3
    
    
    Rs.
    5,112.3
    
    
    Rs.
    7,159.7
    
    
    Rs.
    336.4Allowance for credit
losses
    
    
    412.7
    
    
    
    38.9
    
    
    
    
    
    
    
    662.3
    
    
    
    79.2
    
    
    
    
    
    
    
    1,425.1
    
    
    
    918.3
    
    
    
    Net interest
revenue,
after allowance
for credit losses
    
    
    2,141.0
    
    
    
    2,909.6
    
    
    
    183.3
    
    
    
    1,492.7
    
    
    
    4,451.1
    
    
    
    960.3
    
    
    
    3,687.2
    
    
    
    6,241.4
    
    
    
    336.4Non-interest
revenue
    
    
    662.1
    
    
    
    973.7
    
    
    
    1,579.3
    
    
    
    1,467.8
    
    
    
    1,742.6
    
    
    
    1,186.9
    
    
    
    965.8
    
    
    
    2,606.7
    
    
    
    1,125.1Non-interest
expense
    
    
    (1,117.3
    )
    
    
    (2,870.1
    )
    
    
    (208.6
    )
    
    
    (1,182.1
    )
    
    
    (4,350.4
    )
    
    
    (525.4
    )
    
    
    (1,521.5
    )
    
    
    (6,250.0
    )
    
    
    (597.8
    )Income before
income tax
    
    Rs.
    1,685.8
    
    
    Rs.
    1,013.2
    
    
    Rs.
    1,554.0
    
    
    Rs.
    1,778.4
    
    
    Rs.
    1,843.3
    
    
    Rs.
    1,621.8
    
    
    Rs.
    3,131.5
    
    
    Rs.
    2,598.1
    
    
    Rs.
    863.7Segment assets:Segment average
total assets
    
    Rs.
    124,378.3
    
    
    Rs.
    43,218.1
    
    
    Rs.
    33,454.8
    
    
    Rs.
    172,541.6
    
    
    Rs.
    79,682.3
    
    
    Rs.
    28,289.5
    
    
    Rs.
    178,753.3
    
    
    Rs.
    142,643.0
    
    
    Rs.
    42,907.2
 25. Commitments and contingent liabilities Commitments and contingent liabilities other than for off balance sheet
financial instruments (see Note 22) are as follows: Capital commitments The Bank has entered into committed capital contracts, principally for
branch expansion and technology upgrades. The estimated amounts of contracts
remaining to be executed on the capital account as of March 31, 2003 and 2004
aggregated Rs. 587.5 million and Rs. 608.6 million, respectively. Contingencies The Bank is party to various legal and tax-related proceedings in the
normal course of business. The Bank does not expect the outcome of these
proceedings to have a material adverse effect on the Banks results of
financial condition, operations or cash flows. F-45




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##### Table of Contents



HDFC BANK LIMITEDNOTES TO FINANCIAL STATEMENTS(Continued) 26. Related party transactions The Banks principal related parties consist of HDFC Limited, its
principal shareholder, and its affiliates as well as companies where directors
and officers have an equity interest. The Bank enters into transactions with
its related parties, such as providing banking services, sharing costs and
service providers, purchasing services, making joint investments, and borrowing
from related parties and subletting premises. The Bank is prohibited from
making loans to companies with which it has directors in common; however, it
obtained RBI approval to maintain a loan to HDFC Limited that was originally
made by and acquired from Times Bank. The Bank also makes loans at concessional
rates to its employees. The Banks related party balances and transactions are
summarized as follows: Balances payable to related parties are as follows: As of March 31,2003
    
    2004
    
    2004(In millions)Balances in current account
    
    Rs.
    720.1
    
    
    Rs.
    1,098.2
    
    
    US$
    25.3Balances in fixed deposits
    
    
    344.1
    
    
    
    293.6
    
    
    
    6.8Long term debt
    
    
    27.5
    
    
    
    27.5
    
    
    
    0.6Borrowings
    
    
    1,200.0
    
    
    
    
    
    
    
    Accounts payable
    
    
    6.1
    
    
    
    13.6
    
    
    
    0.3Total
    
    Rs.
    2,297.8
    
    
    Rs.
    1,432.9
    
    
    US$
    33.0
 Balances receivable from related parties are as follows: As of March 31,2003
    
    2004
    
    2004(In millions)Deposits to secure leased property
    
    Rs.
    85.4
    
    
    Rs.
    22.9
    
    
    US$
    0.5Loans and overdrafts
    
    
    418.1
    
    
    
    11.6
    
    
    
    0.3Loans to officers and employees
    
    
    690.9
    
    
    
    835.3
    
    
    
    19.2Capital advances
    
    
    1.7
    
    
    
    2.3
    
    
    
    0.1Other deposits
    
    
    46.0
    
    
    
    46.8
    
    
    
    1.1Total
    
    Rs.
    1,242.1
    
    
    Rs.
    918.9
    
    
    US$
    21.2
 Purchases of fixed assets from related parties for the years ended March
31, 2003 and 2004 were Rs. 43.0 million and Rs. 19.4 million, respectively. Included in the determination of net income are the following significant
transactions with related parties: Years ended March 31,2002
    
    2003
    
    2004
    
    2004(In millions)Service charges income
    
    Rs.
    1.7
    
    
    Rs.
    29.9
    
    
    Rs.
    99.4
    
    
    US$
    2.3Service charges expense
    
    
    (12.3
    )
    
    
    (13.9
    )
    
    
    (11.9
    )
    
    
    (0.3
    )Outsourcing charges
    
    
    (224.7
    )
    
    
    (594.8
    )
    
    
    (949.0
    )
    
    
    (21.9
    )Interest income
    
    
    34.7
    
    
    
    34.7
    
    
    
    23.9
    
    
    
    0.6Rent and maintenance expense
    
    
    (10.1
    )
    
    
    (18.3
    )
    
    
    (17.0
    )
    
    
    (0.4
    )Net expense from related parties
    
    Rs.
    (210.7
    )
    
    Rs.
    (562.4
    )
    
    Rs.
    (854.6
    )
    
    US$
    (19.7
    )
 Outsourcing charges comprises mainly of payments made by the Bank to its
affiliates Atlas Documentary Facilitators Company Private Limited (ADFC), for
back office processing and HBL Global Private Limited (HBL) for the direct sale
support for certain products of the Bank. The Bank believes that the
transaction entered into with ADFC and HBL are at arms length. F-46




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##### Table of Contents



HDFC BANK LIMITEDNOTES TO FINANCIAL STATEMENTS(Continued) 27. Capital adequacy The Bank is a banking company within the meaning of the Indian Banking
Regulation Act, 1949, registered with and subject to examination by the RBI.
Failure to meet minimum capital requirements could lead to regulatory actions
by the RBI that, if undertaken, could have a material effect on the Bank and
its financial position. The Banks regulatory capital and capital adequacy ratios are measured in
accordance with Indian GAAP and are as follows: As of March 31,2003
    
    2004
    
    2004(In millions)Tier 1 capital
    
    Rs.
    19,850.2
    
    
    Rs.
    22,297.0
    
    
    US$
    513.8Tier 2 capital
    
    
    3,414.7
    
    
    
    10,081.2
    
    
    
    232.3Total capital
    
    Rs.
    23,264.9
    
    
    Rs.
    32,378.2
    
    
    US$
    746.1Total risk weighted assets and contingents
    
    Rs.
    209,177.1
    
    
    Rs.
    277,738.2
    
    
    US$
    6,399.5Capital ratios of the Bank:Tier 1
    
    
    9.49
    %
    
    
    8.03
    %
    
    
    8.03
    %Total capital
    
    
    11.12
    %
    
    
    11.66
    %
    
    
    11.66
    %Minimum capital ratios required by the RBI:Tier 1
    
    
    4.50
    %
    
    
    4.50
    %
    
    
    4.50
    %Total capital
    
    
    9.00
    %
    
    
    9.00
    %
    
    
    9.00
    %
 28. Earnings per equity share A reconciliation of the equity shares used in the computation of basic and
diluted earnings per equity share has been provided below. None of the
potential equity shares outstanding during the fiscal years ended March 31,
2002, 2003 and 2004 were anti-dilutive. Years ended March 31,2002
    
    2003
    
    2004Weighted average number of equity shares used in
computing basic earnings per equity share
    
    
    266,609,698
    
    
    
    279,596,510
    
    
    
    281,856,152Effect of potential equity shares for stock options
outstanding
    
    
    1,263,690
    
    
    
    1,795,656
    
    
    
    2,863,744Weighted average number of equity shares used in
computing diluted earnings per equity share
    
    
    267,873,388
    
    
    
    281,392,166
    
    
    
    284,719,896
 For the purpose of determining the weighted average number of equity
shares outstanding, the Bank treats cash received from optionees who exercise
their option as issued equity shares even if the administrative formalities of
allocating equity shares have not been completed. F-47




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##### Table of Contents



HDFC BANK LIMITEDNOTES TO FINANCIAL STATEMENTS(Continued) The following are reconciliations of basic and diluted earnings per equity
share and earnings per ADS: Years ended March 31,2002
    
    2003
    
    2004Basic earnings per share
    
    Rs.
    11.10
    
    
    Rs.
    12.57
    
    
    Rs.
    16.87Effect of potential equity shares for stock options
outstanding
    
    
    0.06
    
    
    
    0.06
    
    
    
    0.17Diluted earnings per share
    
    Rs.
    11.04
    
    
    Rs.
    12.51
    
    
    Rs.
    16.70Basic earnings per ADS
    
    Rs.
    33.30
    
    
    Rs.
    37.71
    
    
    Rs.
    50.61Effect of potential equity shares for stock options
outstanding
    
    
    0.18
    
    
    
    0.18
    
    
    
    0.51Diluted earnings per ADS
    
    Rs.
    33.12
    
    
    Rs.
    37.53
    
    
    Rs.
    50.10
 F-48




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##### Table of Contents



Exhibit Index  12.1
    
    Certification by our Managing Director pursuant to
Rule 13a-14(b) of the Securities Exchange Act12.2
    
    Certification by our Chief Financial Officer pursuant to
Rule 13a-14(b) of the Securities Exchange Act13
    
    Certifications by our Managing Director and Chief Financial
Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002