Annual Report - HDFC - 2009-2010

HOUSING DEVELOPMENT FINANCE CORPORATION LIMITED

ANNUAL REPORT 2009-2010

DIRECTOR'S REPORT

TO THE MEMBERS

Your directors are pleased to present the Thirty-third Annual Report of your
Corporation with the audited accounts for the year ended March 31, 2010.



FINANCIAL RESULTS For the year ended
March 31, 2010 March 31, 2009
(Rs. in crores)

Profit before Tax 3,915.99 3,219.04
Provision for Tax 1,089.50 934.00
Provision for Fringe Benefit Tax - 2.50
Profit after Tax 2,826.49 2,282.54
Appropriations have been made as under:
Special Reserve No. II 500.00 400.00
General Reserve 695.01 553.04
Additional Reserve (under Section 29C
of the National Housing Bank Act, 1987) 432.00 342.00
Shelter Assistance Reserve 9.00 7.00
Proposed Dividend (at Rs. 36 per share) 1,033.60 853.36
Additional Tax on Proposed Dividend 171.67 140.69
Additional Tax on Dividend - Credit taken (15.16) (14.05)
Dividend pertaining to Previous Year paid
during the year 0.37 0.50
2,826.49 2,282.54
Dividend:

Your directors recommend payment of dividend for the year ended March 31,
2010 of Rs. 36 per equity share as against Rs. 30 per equity share for the
previous year.

The dividend payout ratio for the current year, inclusive of additional tax
on dividend will be 42% as compared to 43% for the previous year.

Sub-division of Shares:

With the objective of increasing retail participation in the equity shares
of the Corporation and considering the requests received from several
individual shareholders, the Board of Directors at its meeting held on May
3, 2010, approved a proposal to sub-divide the nominal face value of the
equity shares of the Corporation from Rs. 10 per equity share to Rs. 2 per
equity share. The proposal is subject to the approval of the members and
the requisite resolutions for approval of the members have been set out in
the notice convening the 33rd Annual General Meeting (AGM).

Simultaneous Issue of Warrants and Non-Convertible Debentures:

Pursuant to the approval of the Shareholders of the Corporation at the 32nd
AGM held on July 22, 2009, the Corporation raised Rs. 4,301 crores through
the first ever issue of Warrants simultaneously with Non-Convertible
Debentures (NCDs) to Qualified Institutional Buyers (QIBs) on a Qualified
Institutions Placement (QIP) basis, in accordance with the provisions of
Chapter XIII-A of SEBI (Disclosure and Investor Protection) Guidelines,
2000.

The Corporation issued and allotted 1,09,53,706 Warrants at an issue price
of Rs. 275 per Warrant with a right exercisable by the Warrant holders to
exchange each Warrant with one equity share of face value of Rs. 10 each of
the Corporation, at any time on or before August 24, 2012, at a Warrant
Exercise Price of Rs. 3,000 per equity share, to be paid by the Warrant
holder at the time of exchange of the Warrants. Simultaneously, the
Corporation also issued and allotted 20,000 zero coupon NCDs of the face
value of Rs. 10,00,000 each due August 24, 2011 aggregating to Rs. 2,000
crores at an annualised yield to maturity (YTM) of 7.15% and 20,000 zero
coupon NCDs of the face value of Rs. 10,00,000 each due August 24, 2012
aggregating to Rs. 2,000 crores at an annualised YTM of 7.85%.

The Warrants and NCDs are listed on the respective segments of the Bombay
Stock Exchange Limited and National Stock Exchange of India Limited.

The maximum dilution that could take place in future, if all the Warrants
are exchanged for equity shares of the Corporation at the Warrant Exercise
Price would be up to 3.5% of the expanded equity share capital of the
Corporation.

Lending Operations:

Loan approvals during the year were Rs. 60,611 crores as compared to
Rs.49,166 crores in the previous year, representing a growth of 23%. Loan
disbursements during the year were Rs. 50,413 crores as against Rs. 39,650
crores in the previous year, representing a growth of 27%.

Cumulative loan approvals and disbursements as at March 31, 2010 were
Rs.2,98,061 crores and Rs. 2,42,219 crores respectively. This is in respect
of approximately 3.5 million housing units.

The demand for individual home loans picked up significantly in the second
half of the financial year, reflecting rising consumer confidence and
overall improvement of economic conditions. Other enabling factors included
the strong demand for residential housing, lower interest rates, rising
disposable incomes and continued fiscal incentives on housing loans. The
average size of individual loans stood at Rs. 16.90 lacs.

Sale of Loans:

During the year, the Corporation, under the loan assignment route sold
individual loans of Rs. 4,870 crores to HDFC Bank pursuant to the buyback
option embedded in the home loan arrangement between the Corporation and
HDFC Bank. Out of the total loans assigned, Rs. 3,258 crores qualify as
priority sector advances for the bank.

As at March 31, 2010, loans outstanding in respect of loans sold under the
mortgage backed securities and loan assignment route to HDFC Bank and other
parties stood at Rs. 9,216 crores. HDFC continues to service the loans sold
under these transactions and is entitled to the residual interest on the
loans sold.

During the year, the Corporation also sold Rs. 885 crores of its
nonindividual loan portfolio. The outstanding amount of the nonindividual
loans sold by the corporation as at March 31, 2010 stood at Rs. 1,085
crores. The Corporation, however, continues to hold the security of these
loans on a pari passu basis with the purchaser.

The residual income on the loans sold is being recognised at the time of
actual collections, (i.e. over the life of the underlying loans), and not
on an upfront basis. Where individual loans have been sold, the issues
carry a rating indicating the highest degree of safety.

Repayments:

During the year under review, Rs. 31,872 crores were received by way of
scheduled repayment of principal through monthly instalments as well as
redemptions ahead of schedule, as compared to Rs. 23,525 crores received
last year.

Loan Book:

As at March 31, 2010, the loan book stood at Rs. 97,967 crores as against
Rs. 85,198 crores in the previous year an increase of 15%. The growth in
the loan book would have been higher at 22% if the loans sold were included
in the loan book.

Foreign Currency Convertible Bonds (FCCB):

In September 2005, the Corporation concluded the issue of USD 500 million
zero coupon FCCB. The bonds are convertible into equity shares of the
Corporation of the face value of Rs. 10 each up to the close of business
hours on July 29, 2010 at the option of the holders, at Rs. 1,399 per
equity share, representing a conversion premium of 50% over the initial
reference share price. The premium payable on redemption of the bonds is
charged to the Securities Premium Account over the life of the bonds.

Up to March 31, 2010, the Corporation had allotted 1,27,92,711 equity
shares of Rs. 10 each pursuant to the conversion of the FCCB, representing
81.9% of the bonds.

If the balance bonds are not conver ted within the abovementioned
conversion period, the remaining bondholders would have the right to redeem
the outstanding bonds on September 27, 2010 at a YTM of 4.62% per annum.

Conversion of Warrants Issued by HDFC Bank Limited (HDFC Bank) into Equity
Shares:

In order for HDFC as a promoter to retain its current shareholding in HDFC
Bank pursuant to the merger of Centurion Bank of Punjab with HDFC Bank and
having obtained the requisite approvals, HDFC Bank had made a preferential
offer to the Corporation to subscribe to 2,62,00,220 Warrants convertible
into 2,62,00,220 equity shares of Rs. 10 each of HDFC Bank, at a price of
Rs. 1,530.13 per equity share, in accordance with the provisions of Chapter
XIII of the SEBI (Disclosure and Investor Protection) Guidelines, 2000.

In June 2008, under the terms and conditions of the said Warrants, the
Corporation had paid a sum of 10% of the price of the equity shares to be
issued upon exercise of such Warrants at the time of allotment.

In November 2009, the Corporation exercised its right to convert
2,62,00,220 Warrants into an equivalent number of equity shares of Rs. 10
each of HDFC Bank for an amount of Rs. 3,608.06 crores, being the balance
90% of the subscription amount.

Resource Mobilisation:

Subordinated Debt:

During the year, the Corporation raised Rs. 500 crores through the issue of
long-term Unsecured Redeemable Non-Conver tible Subordinated Debentures.
The subordinated debt was assigned a AAA' rating from both CRISIL Limited
(CRISIL) and ICRA Limited (ICRA).

As at March 31, 2010, the Corporation's outstanding subordinated debt stood
at Rs. 1,875 crores. The debt is subordinated to present and future senior
indebtedness of the Corporation and has been assigned the highest rating by
CRISIL and ICRA. Based on the balance term to maturity, as at March 31,
2010, Rs. 1,555 crores of the book value of subordinated debt is considered
as Tier II under the guidelines issued by the National Housing Bank (NHB)
for the purpose of capital adequacy computation.

Non-Convertible Debentures (NCD):

During the year, the Corporation issued NCDs amounting to Rs. 7,400 crores
on a private placement basis (excluding Rs. 4,000 crores of NCDs raised
under the Simultaneous Issue of Warrants and Non-Convertible Debentures).
The Corporation's NCD issues have been listed on the Wholesale Debt Market
segment of the NSE. The Corporation's NCDs have been assigned the highest
rating of AAA' by both CRISIL and ICRA. As at March 31, 2010, NCDs
outstanding stood at Rs. 33,093 crores.

Short-Term Foreign Currency Borrowings by Housing Finance Companies:

As a temporary measure, the Reserve Bank of India (RBI) had permitted
Housing Finance Companies to raise short-term foreign currency borrowings
for a maximum period of three years, under the approval route for
refinancing short-term liabilities.

Under this borrowing route, the RBI stipulated that the all-in-cost ceiling
should not exceed 6 months LIBOR + 200 bps and the borrowing needs to be
fully swapped into Indian Rupees.

During the year, HDFC availed loans amounting to USD 175 million under the
said scheme for a period of three years.

Loans from Banks:

During the year, the Corporation raised loans amounting to Rs. 25,037
crores from commercial banks, of which Rs. 9,319 crores were under the
priority sector category of commercial banks. The Corporation further
raised Rs. 2,357 crores from the banking sector as FCNR (B) loans.

HDFC's long-term and short-term bank loan facilities have been assigned the
highest rating of AAA' and PR1+' respectively by CARE, signifying highest
safety for timely servicing of debt obligations.

Refinance from National Housing Bank (NHB):

NHB has an internal rating mechanism for Housing Finance Companies (HFCs)
and the Corporation has been assigned the highest rating for its refinance
schemes by NHB. During the year, the Corporation has drawn refinance
amounting to Rs. 239 crores under NHB's Refinance Scheme to Housing Finance
Companies, 2003.

Deposits:

Deposits continued to grow during the financial year under review despite
strong competition from banks. During the year, deposits accounted for 29%
of the incremental borrowing of the Corporation. As at March 31, 2010,
outstanding deposits stood at Rs. 23,081 crores as against Rs. 19,375
crores in the previous year an increase of 19%. The depositor base stood at
approximately 9 lac depositors.

CRISIL and ICRA have for the fifteenth consecutive year, reaffirmed their
AAA' rating for HDFC's deposits. This rating represents highest safety,
attractive returns and impeccable service standards' as regards timely
repayment of principal and interest.

During the year, the Corporation introduced HDFC Systematic Savings Plan',
which is a monthly savings plan offering a variable rate of interest.

The support of the agents and their commitment to the Corporation has been
instrumental in HDFC's deposit products continuing to be a preferred
investment for households and trusts.

Unclaimed Deposits:

As of March 31, 2010, public deposits amounting to Rs. 251.78 crores had
not been claimed by 38,846 depositors. Since then, 9,277 depositors have
claimed or renewed deposits of Rs. 83.88 crores. Depositors were intimated
regarding the maturity of deposits with a request to either renew or claim
their deposits.

As per the provisions of Section 205C of the Companies Act, 1956, deposits
remaining unclaimed for a period of seven years from the date they became
due for payment have to be transferred to the Investor Education and
Protection Fund (IEPF) established by the Central Government. Accordingly,
during the year, despite repeated reminders being sent to depositors, an
amount of Rs. 31.14 lacs has been transferred to the IEPF. In terms of the
said section, no claims would lie against the Corporation or the IEPF after
the transfer.

KfW Lines/Grant:

During the year, the Corporation disbursed Rs. 9.14 crores under the KfW
Entwicklungsbank (KfW) lines in the area of low-income housing and micro-
finance by way of bulk loans to partner non-government organisations (NGOs)
and microfinance institutions (MFIs). These schemes have been approved out
of the third line from KfW of Euro 15.3 million. The projects are
administered as group or individual loans designed for the economically
weaker sections (EWS) of society for improving their access to
institutional credit. Against the cumulative loan approvals of Rs. 94.02
crores, the Corporation has disbursed Rs. 86.02 crores as at March 31,
2010.

The surplus funds of Euro 1.12 million available under the fourth line of
grant (Euro 10.22 million) were reprogrammed by KfW towards EWS housing
projects with objectives and criteria similar to the third line. During the
year, HDFC has concluded the utilisation of these surplus funds.

Non-Performing Loans:

Despite the financial turbulence during part of the year under review, the
recovery performance of the Corporation continued to be very good. Gross
non-performing loans as at March 31, 2010 amounted to Rs. 782.85 crores.
This is equivalent to 0.79% of the portfolio (as against 0.81% in the
previous year) comprising loans as well as debentures issued by corporates
and corporate deposits placed for financing their real estate projects.
This is the twenty-first consecutive quarter end at which the nonperforming
loans have been lower than the corresponding quarter in the previous year.

Based on a six months overdue basis, the non-performing loans as at March
31, 2010 stood at 0.53% of the loan portfolio as against 0.56% in the
previous year. In terms of the prudential norms as stipulated by NHB, the
Corporation is required to carry a provision of Rs. 325.29 crores in
respect of nonperforming assets and general provision on outstanding
standard non-housing loans.

The balance in the provision for contingencies account as at March 31, 2010
stood at Rs. 655.57 crores, which is equivalent to 0.66% of the portfolio.
As at March 31, 2010, the Corporation's net nonperforming loans stood at
0.13%.

The Securitisation and:

Reconstruction of Financial Assets and Enforcement of Security Interest
Act, 2002 (SARFAESI) has proved to be a useful recovery tool and the
Corporation has been able to successfully initiate recovery action under
this Act in the case of wilful individual and corporate defaulters.

Regulatory Guidelines/Amendments:

HDFC has complied with the Housing Finance Companies (NHB) Directions, 2001
prescribed by NHB regarding accounting standards, prudential norms for
asset classification, income recognition, provisioning, capital adequacy
and credit rating. The Corporation is also in compliance with the
concentration of investments and capital market exposure norms other than
on its investment in HDFC Bank, wherein NHB has granted the Corporation
time for such compliance as the Corporation is a promoter of HDFC Bank.

HDFC's capital adequacy ratio stood at 14.6% of the risk weighted assets,
as against the minimum requirement of 12%. Tier I capital was 12.8% against
a minimum requirement of 6%.

Codes and Standards:

NHB has issued comprehensive Know Your Customer (KYC) Guidelines and Anti
Money Laundering Standards in the context of recommendations made by the
Financial Action Task Force on Anti Money Laundering Standards and on
Combating Financing of Terrorism Standards. During the year, the board
reviewed and approved the amendments to the Corporation's KYC and
Prevention of Money Laundering Policy as stipulated by NHB. The Corporation
has adhered to the compliance requirements in terms of the said policy for
monitoring and reporting cash/suspicious transactions.

The Fair Practices Code framed by NHB seeks to promote good and fair
practices by setting minimum standards in dealing with customers, increase
transparency so customers have a better understanding of what they can
reasonably expect of the services being offered, encourage market forces
through competition to achieve higher operating standards, promote fair and
cordial relationships between customers and the housing finance company and
foster confidence in the housing finance system. During the year, the
Corporation has adhered to the Fair Practices Code as approved by the Board
of Directors.

The Corporation has adopted the Model Code of Conduct for Direct Selling
Agents and Guidelines for Recovery Agents engaged by HFCs as approved by
the Board of Directors.

Risk Management Framework:

The Corporation has a Risk Management Framework, which provides the
mechanism for risk assessment and mitigation. The Risk Management Committee
(RMC) comprises the Managing Director as the chairperson, the Executive
Director and some members of senior management.

During the year, the RMC reviewed the risks associated with the business of
the Corporation, its root causes and the efficacy of the measures taken to
mitigate the same. Thereafter, the Board of Directors also reviewed the key
risks associated with the business of the Corporation, the procedures
adopted to assess the risks and their mitigation mechanisms.

Marketing and Distribution:

To reach out effectively to customers, the Corporation's distribution
network now spans 279 outlets, which include 65 offices of the HDFC's
wholly owned distribution company, HDFC Sales Private Limited (HSPL). To
further augment this network, HDFC covers over 90 additional locations
through its outreach programmes. HDFC has offices in London, Singapore and
Dubai. The Dubai office reaches out to its customers across West Asia
through its service associates based in Kuwait, Qatar, Oman, Sharjah, Abu
Dhabi and Saudi Arabia-Al Khobar, Jeddah and Riyadh.

HDFC's reach and presence is also enhanced by its distribution channels,
which include HSPL, HDFC Bank and a few third party direct selling
associates (DSAs). These channels only source loans, while HDFC continues
to retain control over the credit, legal and technical appraisal, thereby
ensuring that the quality of loans disbursed is not compromised in any way
and is consistent across all distribution channels.

During the year, HDFC ran a key brand campaign-'HDFC-because every family
needs a home.' The objective of the campaign was to connect with HDFC's
existing customers as well as prospective customers, making the HDFC brand
synonymous with a home.

HDFC organises property fairs across major cities in the country. The aim
of these fairs is to provide a wide spectrum of approved projects under a
single roof. These fairs in turn help customers in making their decision to
buy a home. Under Indian Homes Fair', HDFC brings together eminent
builders who show case their properties for the Indian Diaspora. During the
year, HDFC organised Indian Homes Fair' in London, Singapore and Kuwait.

Cross Selling and Distribution of Financial Products and Services:

HDFC's subsidiary companies have strong synergies with HDFC and hence
efforts are channelled into cross selling so as to offer customers a wide
range of financial products and services under the HDFC' brand.

HDFC is a Composite Corporate Agent for HDFC Standard Life Insurance
Company Limited (HDFC-SL) and HDFC ERGO General Insurance Company Limited
(HDFC-ERGO).

International Housing Finance Initiatives:

HDFC's expertise in housing finance is well regarded and therefore a number
of existing and new housing finance companies in various parts of the world
are keen to tap HDFC for training, strategic input and technical assistance
in housing finance.

During the year, the Corporation under its Technical Services Agreement
with Housing Development Finance Corporation, Plc., Maldives, provided
technical and consultancy services in key mortgage functions.

Senior executives of the Corporation were invited to Indonesia, Maldives,
Philippines and Oman for seminars, consultancy or training assignments in
housing finance.

In July 2009, the Frankfurt School of Finance & Management and HDFC jointly
organised the second Housing Finance Summer Academy' in Germany, which is
a course that aims to provide housing finance solutions for emerging
markets through a combination of academic knowledge and practical
experience.

In November 2009, HDFC conducted its own international training programme
Housing Finance Management' at its training centre, Centre for Housing
Finance, located at Lonavla, India. Participants from different countries
across Asia and Africa attended a weeklong residential training programme.

Delegates from Bangladesh, Indonesia and Romania visited the Corporation to
understand key mortgage finance operations. Shelter Assistance Reserve
(SAR) HDFC continued to partner and support worth while projects undertaken
by NGOs, foundations and local bodies through the SAR. During the year,
HDFC has made a commitment of Rs. 10.48 crores and disbursed Rs. 8.48
crores from the SAR towards a wide spectrum of development programmes and
activities.

HDFC supported the mid-day meal scheme for children reaching 285 schools in
Gandhinagar and Ahmedabad, partnered a society in raising awareness on
multiple sclerosis and helped an organisation refurbish a rehabilitation
centre for the physically challenged in Bhubaneshwar. Support and financial
assistance was also extended towards realisation of Adivasi' (tribal)
children's right to education through ashram shalas' (residential schools)
in Raigad, construction of a dormitory in a shelter home for boys in Ajmer
and towards treatment and medical aid for patients suffering from
haemophilia in New Delhi. HDFC made corpus contributions from the SAR to
the Indian Cancer Society-New Delhi, Vision Research Foundation-Chennai,
Society for the Rehabilitation of Crippled Children-Mumbai and the Deep
Griha Society-Pune, amongst others.

In addition, the SAR was utilised towards providing relief assistance to
victims in the flood-affected areas of Karnataka and Andhra Pradesh during
October 2009.

Training and Human Resource Management:

The Corporation believes that the HDFC brand comes alive at various touch
points where the customer interacts with HDFC. Hence, strong emphasis is
placed on appraisal of competencies and upgradation of skills of employees
to achieve current and emerging business needs.

During the year, besides the induction training for management trainees,
specific orientation programmes were designed for staff members in
operations, accounts, recoveries and deposits.

The Corporation also nominated staff members for a variety of external
programmes on affordable housing, rural housing, treasury and risk
management, taxation, information security, business management and
International Financial Reporting Standards.

Other Initiatives:

Education:

The Corporation is keen to develop sustainable business models in the
education space. As an initial step, during the year, the Corporation
acquired a 41% stake in the fully diluted share capital of Credila
Financial Services Private Limited, which is a company that exclusively
focuses on providing education loans.

Indian Institute for Human Settlements (IIHS):

The urban environment is embedded in increasing density of traffic,
insufficient infrastructure and lack of quality amenities all of which
impact the value and joy of housing. In order to improve the urban
environment, there is a need for trained professionals.

During the year, the Corporation disbursed Rs. 2 crores out of a commitment
of Rs. 4 crores to IIHS. IIHS will establish a privately funded National
University focused on urban practice - a new multidisciplinary profession,
drawing on transportation and infrastructure planning, architecture,
sociology, economics, law and management. IIHS will provide in-service
training as well as educate graduates and post graduates to work on
planning, implementation and governance for towns and cities. Various
reputed international universities and a number of India's leading
academicians and practitioners are participating in this venture. The first
IIHS campus will be set up in Bengaluru.

Awards and Recognitions:

During the year, some of the awards and recognitions received by the
Corporation include:

* Top Indian Company in the Financial Institutions/Non-Banking Financial
Companies/Financial Services' category at the Dun & Bradstreet-Rolta
Corporate Awards 2009. The Corporation has won this award for four
consecutive years.

* Motilal Oswal Financial Services for the second time ranked HDFC as the
Most Consistent Wealth Creator' in its 14th Annual Wealth Creation Study
that analyses the top 100 wealth creating companies in India.

* HDFC featured amongst the Top 50 Best Companies to Work For-2009' in a
study by the Great Place to Workr Institute-India in association with The
Economic Times. In addition, HDFC was adjudged as the Best Company for
Management Credibility'.

Subsidiary Companies:

In terms of Section 212(8) of the Companies Act, 1956, the Central
Government has granted its approval, exempting the Corporation from the
requirement of attaching to its annual report, the balance sheet, profit
and loss account and the report of the directors and auditors thereon, in
respect of all its fifteen subsidiary companies. Accordingly, a copy of the
balance sheet, profit and loss account, report of the Board of Directors
and Report of the Auditors of the following subsidiary companies of the
corporation-HDFC Developers Limited, HDFC Investments Limited, HDFC
Holdings Limited, HDFC Asset Management Company Limited, HDFC Trustee
Company Limited, HDFC Realty Limited, HDFC Standard Life Insurance Company
Limited, HDFC ERGO General Insurance Company Limited, GRUH Finance Limited,
HDFC Sales Private Limited, HDFC Ventures Trustee Company Limited, HDFC
Venture Capital Limited and HDFC Property Ventures Limited, and the
following step-down subsidiary companies - HDFC Asset Management Company
(Singapore) Pte. Limited and Griha Investments have not been attached to
the balance sheet of the Corporation for the financial year ended March 31,
2010.

The Annual Report of the Corporation, the annual accounts and the related
documents of the Corporation's subsidiary companies are posted on the
website of the Corporation, www.hdfc.com. Shareholders who wish to have a
copy of the annual accounts and detailed information on any subsidiary
company can download the same from the website or may write to the
Corporation for the same. Further, the said documents shall be available
for inspection by the shareholders at the registered office of the
Corporation and at the office of the respective subsidiary company.

The Corporation has not made any loans or advances in the nature of loans
to any of its subsidiary or associate company or companies in which its
directors are interested, other than in the ordinary course of business.

Review of Key Subsidiary and Associate Companies:

HDFC Bank Limited (HDFC Bank):

HDFC and HDFC Bank continue to maintain an arm's length relationship in
accordance with the regulatory framework. Both organisations, however,
capitalise on the strong synergies through a system of referrals, special
arrangements and cross selling in order to effectively provide a wide range
of products and services under the HDFC brand name.

As at March 31, 2010, gross advances of HDFC Bank stood at Rs. 1,27,262
crores-an increase of 27% over the previous year. As at March 31, 2010,
HDFC Bank's distribution network included 1,725 branches and 4,232 ATMs in
779 cities as against 1,412 branches and 3,295 ATMs in 528 cities as of
March 31, 2009.

For the year ended March 31, 2010, HDFC Bank reported a profit after tax of
Rs. 2,949 crores as against Rs. 2,245 crores in the previous year,
representing an increase of 31%. HDFC Bank recommended a dividend of Rs. 12
per share as against Rs. 10 per share in the previous year.

HDFC together with its wholly owned subsidiaries, HDFC Investments Limited
and HDFC Holdings Limited holds 23.73% of the equity share capital of HDFC
Bank.

HDFC Standard Life Insurance Company Limited (HDFC-SL):

Gross premium income of HDFC-SL for the year ended March 31, 2010 stood at
Rs. 7,005 crores as compared to Rs. 5,565 crores in the previous year. The
sum assured inforce for the current year was Rs. 72,610 crores as compared
to Rs. 57,158 crores in the previous year.

The company has a portfolio of 32 retail products and 4 group products
covering saving, investment, protection and retirement needs of the
customers, along with five optional rider benefits.

HDFC-SL covers approximately 700 cities and towns in India through its 568
distribution points in the country with approximately 2,00,000 financial
consultants appointed by the company. HDFC-SL also has a strong association
with its bancassurance partners, which has contributed significantly to the
growth of the company during the year.

HDFC-SL has reported a loss of Rs. 275 crores for the year ended March 31,
2010. Like most life insurance companies in the initial phase, HDFC-SL has
reported losses. This is essentially due to the accounting norms applicable
to insurance companies wherein the commission expenses are charged upfront
in the year in which they are incurred while the corresponding income is
recognised over the entire life of the policies issued. The mismatch
between expenses and income has the effect of magnifying the initial losses
of HDFC-SL. HDFC holds 72.56% of the equity share capital in HDFC-SL.

HDFC Asset Management Company Limited (HDFC-AMC) HDFC and Standard Life
Investment Limited are the co-sponsors of HDFC Mutual Fund.

As at March 31, 2010, HDFC-AMC managed 33 debt and equity oriented schemes
of HDFC Mutual Fund. During the year, the average assets under management
was Rs. 1,00,898 crores (which is inclusive of average assets under
discretionary portfolio management/advisory services). The number of
investor accounts increased to over 39 lacs as at March 31, 2010 as
compared to 34 lacs in the previous year.

As at March 31, 2010, HDFC-AMC has points of acceptances in 206 locations
across the country.

For the year ended March 31, 2010, HDFC-AMC reported a profit after tax of
Rs. 208.37 crores as against Rs. 129.11 crores in the previous year. HDFC-
AMC paid an interim dividend of Rs. 22 per share for the financial year
ended March 31, 2010. HDFC holds 60% of the equity share capital of HDFC-
AMC.

HDFC ERGO General Insurance Company Limited (HDFC-ERGO):

For the year ended March 31, 2010, HDFC-ERGO emerged as the fifth largest
private sector player in the general insurance industry. Following a multi-
product and multi-channel strategy, HDFC-ERGO has expanded its branch
network to 78 as compared to 50 last year.

The company offers a complete range of insurance products like motor,
health, travel, home and personal accident in retail segment and customised
products like property, marine, aviation and liability insurance in the
corporate segment. In addition, HDFC-ERGO continues to leverage on HDFC
group's distribution capability to drive its growth. The company has a
balanced portfolio mix with corporate business accounting for 52% for the
business and retail accounting for the balance.

The general insurance industry registered a growth of 13% in FY 2009-10 as
compared to 9% in the previous year. In comparison, during the year, HDFC-
ERGO recorded a growth of 168% as compared to 56% in the previous year with
a Gross Written Premium (including cessions from the motor pool) of
Rs.1,004 crores as against Rs. 374 crores in the previous year.

During the year, the company made a loss of Rs. 94 crores. The loss for the
year was primarily on account of significant investments in the scale-up of
business, continued pricing pressure as a result of detariffing and higher
share of losses from Indian Motor Third Party Pool.

HDFC holds 74% of the equity share capital of HDFC-ERGO.

HDFC Property Funds:

HDFC Venture Capital Limited (HVCL) is the investment manager to HDFC
Property Fund, a registered venture capital fund with the Securities and
Exchange Board of India (SEBI).

HDFC Property Fund currently has two schemes. The first scheme is HDFC
India Real Estate Fund (HIREF), with a corpus of Rs. 1,000 crores, which
has been fully invested. Exits are being explored for some of the
investments of the scheme.

The second scheme, HDFC IT Corridor Fund has a corpus of Rs. 446.40 crores.
This scheme has disbursed the entire corpus in rental income yielding
commercial properties in major cities in India and exits are being explored
for some investments of the scheme. During the year, HVCL made a profit
after tax of Rs. 12.73 crores. The directors of HVCL approved the payment
of two interim dividends aggregating Rs. 205 per equity share.

HDFC holds 80.5% of the equity share capital of HVCL.

HDFC Property Ventures Limited (HPVL) provides investment advisory services
to Indian and overseas asset management companies (AMCs). Such AMCs in turn
manage and advise Indian and offshore private equity funds.

HDFC holds 100% of the equity share capital of HPVL.

GRUH Finance Limited (GRUH):

GRUH is a housing finance company with operations primarily in the states
of Gujarat and Maharashtra and has now expanded its network to other states
like Karnataka, Madhya Pradesh, Rajasthan, Chhatisgarh and Tamil Nadu.
During the year, GRUH disbursed loans amounting to Rs. 780 crores.

For the year ended March 31, 2010, GRUH reported a profit after tax of Rs.
68.96 crores as compared to Rs. 50.28 crores in the previous year - an
increase of 37%. The company recommended a dividend of Rs. 6.50 per share
as compared to Rs. 4.80 per share in the previous year.

HDFC's holding in GRUH currently stands at 61.36%.

HDFC Sales Private Limited (HSPL):

HDFC Sales Private Limited (HSPL) continues to strengthen the Corporation's
marketing and sales efforts by providing a dedicated sales force to sell
home loans and other financial products.

HSPL has a presence in 65 locations. During the period under review, HSPL
sourced loans accounting for 46% of individual loans disbursed by HDFC.
HSPL is a wholly owned subsidiary of HDFC.

Particulars of Employees HDFC had 1,505 employees as of March 31, 2010.
During the year, 44 employees employed throughout the year and 1 employee
employed for part of the year were in receipt of remuneration of Rs. 24
lacs or more per annum.

In accordance with the provisions of Section 217(2A) of the Companies Act,
1956 and the rules framed thereunder, the names and other particulars of
employees are set out in the annex to the Directors' Report. In terms of
the provisions of Section 219(1)(b)(iv) of the Companies Act, 1956, the
Directors' Report is being sent to all the shareholders of the Corporation
excluding the annex. Any shareholder interested in obtaining a copy of
the said annex may write to the Corporation.

Employees Stock Option Scheme (ESOS):

Presently, stock options granted by the Corporation to the employees

operate under the following schemes: ESOS-05, ESOS-07 and ESOS-08. Further,
ESOS-02 was in force up to October 16, 2009 and in accordance with its
provisions was inoperative from October 17, 2009. During the year, no new
options were granted by the Corporation.

ESOS-05, ESOS-07 and ESOS-08 (Schemes):

During the year, under these Schemes, options vested aggregated to
56,47,778 and options exercised aggregated to 20,31,366. The money realised
due to exercise of the said options was Rs. 233.93 crores and consequently,
20,31,366 equity shares of Rs. 10 each have been allotted to the concerned
employees.

During the year, under these Schemes, 1,69,458 options lapsed. Options in
force as on March 31, 2010 under these Schemes stood at 1,16,09,033. During
the financial year under review, there has been no variation in the terms
of the options granted earlier.

Listed below are disclosures in accordance with the SEBI (Employee Stock
Option Scheme and Employee Stock Purchase Scheme) Guidelines, 1999, as
amended:

Since options were granted at the market price, the intrinsic value of the
option is nil. Consequently, the accounting value of the option
(compensation cost) was also nil. However, if the fair value of the options
using the Black-Scholes model was used, considering the assumptions as of
the date of grant, the compensation cost (net) would have been Rs. 59.28
crores, the profit after tax would have been lesser by Rs. 59.28 crores and
basic and diluted Earnings Per Share (EPS) would have been Rs. 96.72 and
Rs. 93.90 respectively.

The diluted EPS is Rs. 95.92 against a basic EPS of Rs. 98.80.

Unclaimed Dividend:

As at March 31, 2010, dividend amounting to Rs. 7.52 crores has not been
claimed by shareholders of the Corporation. The Corporation has been
periodically intimating the concerned shareholders requesting them to
encash their dividend before it becomes due for transfer to the IEPF.

As per the provisions of Section 205C of the Companies Act, 1956, unclaimed
dividend amounting to Rs. 35.41 lacs for the financial year 2001-02 was
transferred to the IEPF on September 23, 2009. Further, the unclaimed
dividend amounting to Rs. 37.63 lacs in respect of the financial year 2002-
03 must be claimed by August 23, 2010, as it is required to be transferred
to the IEPF within a period of 30 days from the said date. In terms of said
section, no claim would lie against the Corporation or the IEPF after the
transfer.

Particulars Regarding Conservation of Energy, Technology Absorption and
Foreign Exchange Earnings and Outgo:

The particulars regarding foreign exchange earnings and expenditure appear
as Item No. 13 in the Notes to the Accounts. Since HDFC does not own any
manufacturing facility the other particulars relating to conservation of
energy and technology absorption as stipulated in the Companies (Disclosure
of Particulars in the Report of the Board of Directors) Rules, 1988 are not
applicable.

Directors:

Mr. Deepak S. Parekh retired as the Managing Director of the Corporation
(designated as Chairman') with effect from the close of business hours on
December 31, 2009. Mr. Parekh had joined the Corporation in a senior
management position in 1978. Mr. Parekh was inducted as a wholetime
director of the Corporation in 1985 and appointed as the Managing Director
of the Corporation (designated as Chairman') in 1993 and he continued to
be re-appointed as such, from time to time.

The Board of Directors wishes to place on record its appreciation and
gratitude for the dedicated service and contributions made by Mr. Parekh
during his tenure as the Managing Director of the Corporation (designated
as Chairman').

The Board of Directors, at its meeting held on December 4, 2009, appointed
Mr. Parekh as an additional director of the Corporation with effect from
January 1, 2010, to hold office as such, up to the date of the ensuing
Annual General Meeting (AGM), pursuant to the provisions of Section 260 of
the Companies Act, 1956. Mr. Parekh continues as the Chairman of the
Corporation.

Pursuant to receipt of notices from some members under the provisions of
Section 257 of the Companies Act, 1956 along with deposits of Rs. 500 each,
the Board of Directors, at its meeting held on May 3, 2010, recommended,
for the approval of the members, the appointment of Mr. Parekh as a
director of the Corporation, liable to retire by rotation in terms of the
provisions of the Companies Act, 1956 and Articles of Association of the
Corporation. Mr. Parekh would be eligible for re-appointment and on being
re-appointed, would continue to be the Chairman of the Corporation.

At the meeting held on December 4, 2009, the board re-designated Mr. Keki
M. Mistry as the Vice Chairman & Chief Executive Officer of the Corporation
and subject to the approval of the members at the ensuing AGM, appointed
Ms. Renu Sud Karnad as the Managing Director of the Corporation for a
period of 5 years with effect from January 1, 2010.

At the said meeting, the board also appointed Mr. V. Srinivasa Rangan as an
additional director of the Corporation, to hold office as such up to the
date of the ensuing AGM pursuant to the provisions of Section 260 of the
Companies Act, 1956 and pursuant to receipt of a notice under the
provisions of Section 257 of the Companies Act, 1956, along with a deposit
of Rs. 500, approved his appointment as the whole-time director of the
Corporation (designated as Executive Director') for a period of 5 years
with effect from January 1, 2010, subject to the approval of the members at
the ensuing AGM.

In accordance with the provisions of the Companies Act, 1956 and the
Articles of Association of the Corporation, Mr. Keshub Mahindra, Mr. D.M.
Sukthankar and Mr. N.M. Munjee are liable to retire by rotation at the
ensuing AGM. They are eligible for re-appointment.

Necessary resolutions for the appointment/re-appointment of the aforesaid
directors have been included in the notice convening the ensuing AGM. All
the directors of the Corporation have confirmed that they are not
disqualified from being appointed as directors in terms of Section
274(1)(g) of the Companies Act, 1956.

Auditors

Messrs Deloitte Haskins & Sells, Chartered Accountants, having registration
number 117366W, statutory auditors of the Corporation and branch auditors
to audit the accounts at the Corporation's branches in India and offices in
London and Singapore hold office until the conclusion of the ensuing AGM
and are eligible for re-appointment.

The Corporation has received a confirmation from Messrs Deloitte Haskins &
Sells to the effect that their appointment, if made, would be within the
limits prescribed under Section 224(1B) of the Companies Act, 1956.

Messrs PKF, Chartered Accountants, having registration number 10 was
appointed as the branch auditors to audit the accounts of the Corporation's
branch office in Dubai. Their term expires at the end of the ensuing AGM
and they are eligible for re-appointment.

Directors' Responsibility Statement:

In accordance with the provisions of Section 217(2AA) of the Companies Act,
1956 and based on the information provided by the management, your
directors state that:

i. In the preparation of annual accounts, the applicable accounting
standards have been followed;

ii. Accounting policies selected were applied consistently. Reasonable and
prudent judgements and estimates were made so as to give a true and fair
view of the state of affairs of the Corporation as at the end of March 31,
2010 and of the profit of the corporation for the year ended on that date;

iii. Proper and sufficient care has been taken for the maintenance of
adequate accounting records in accordance with the provisions of the
Companies Act, 1956 for safeguarding the assets of the Corporation and for
preventing and detecting frauds and other irregularities; and

iv. The annual accounts of the Corporation have been prepared on a going
concern basis.

Management Discussion and Analysis Report and Report of the Directors on
Corporate Governance:

In accordance with Clause 49 of the listing agreements, the Management
Discussion and Analysis Report nd the Report of the Directors on Corporate
Governance form part of this report.

Corporate Governance-Voluntary Guidelines:

The Board of Directors have taken cognisance of the Corporate Governance
Voluntary Guidelines 2009' issued by the Ministry of Corporate Affairs
(MCA) in December 2009. While the guidelines are recommendatory in nature,
the board recognises the importance and need to constantly assess
governance practices thereby ensuring a sustainable business environment
that generates longterm value to all key stakeholders. The board would
consider adopting the relevant provisions of the said guidelines as and
when deemed appropriate.

Acknowledgements:

The Corporation would like to acknowledge the role of all its stakeholders-
shareholders, borrowers, depositors, key partners and lenders for their
continuing support to the Corporation.

The directors appreciate the guidance received from various regulatory
authorities including NHB, RBI, SEBI, MCA, Registrar of Companies,
Financial Intelligence Unit (India), Foreign Investment Promotion Board,
the Stock Exchanges and the Depositories.

Your directors value the professionalism of all the employees of the
Corporation who have relentlessly worked in a challenging environment and
whose efforts have stood the Corporation in good stead.

On behalf of the Board of Directors

PLACE: MUMBAI DEEPAK S. PAREKH
DATE : May 3, 2010 Chairman

MANAGEMENT DISCUSSION AND ANALYSIS

Macroeconomic Overview

During the year under review, the Indian economy belied expectations with
the speed of its recovery from the global financial crisis. The economy
showed great traction with the country's GDP growing at 7.4% in FY 2009-10.
The low agricultural output on account of a deficient monsoon was offset by
a strong industrial revival and continued buoyancy in the services sector.

One of the key concerns for the authorities during the year was the sharp
increase in inflation, predominantly driven by primary commodities. In
March 2010, the headline Wholesale Price Index touched 9.9%. Although the
surge in inflation was mainly a supply side phenomenon, the Reserve Bank of
India (RBI) took various measures to anchor inflationary expectations.

While the RBI has been adopting a measured and calibrated approach towards
withdrawing the monetary stimulus package, credit off-take picked up
significantly in the last quarter of FY 2009-10, signifying rising optimism
and confidence in the economy.

Market Scenario:

The real estate sector in India was quick to make its way out of the
economic downturn. The revival was led by the demand for affordable
residential property. A correction in real estate prices, softening of
interest rates, comfortable liquidity conditions and improved economic
sentiments led residential buyers back to the market. However, in the
second half of the financial year, backed by a strong demand, residential
prices particularly in certain pockets of the country began to increase
once again.

Commercial real estate, however, continued to remain subdued on account of
an oversupply. There was a significant drop in the absorption of commercial
real estate across all major cities. This also led to a sharp drop in
rentals.

Interest Rate Scenario:

Liquidity conditions remained comfortable during the year. In line with the
interest rate movements in the economy, HDFC revised its Retail Prime
Lending Rate (RPLR) and its Corporate Prime Lending Rate (CPLR) for non-
individual loans during the year under review. The CPLR is a dynamic
benchmark based on an index of money market instruments.

Approvals and Disbursements:

Total approvals during the year stood at Rs. 60,611 crores as against
Rs.49,166 crores in the previous year, representing a growth of 23%.
Disbursements during the year were Rs. 50,413 crores as against Rs. 39,650
crores in the previous year, representing a growth of 27%.

The demand for individual home loan continued to be strong during the year.
The average size of individual loans stood at Rs. 16.9 lacs during the
year.

Sale of Loans:

During the year, the Corporation, under the loan assignment route sold
individual loans of Rs. 4,870 crores to HDFC Bank pursuant to the buyback
option embedded in the home loan arrangement between the Corporation and
HDFC Bank. Out of the total loans assigned, Rs. 3,258 crores qualify as
priority sector advances for the bank. As at March 31, 2010, loans
outstanding in respect of loans sold under the mortgage backed securities
and loan assignment route to HDFC Bank and other parties stood at Rs. 9,216
crores. HDFC continues to service the loans sold under these transactions
and is entitled to the residual interest on the loans sold.

During the year, the Corporation also sold Rs. 885 crores of its non-
individual loan portfolio. The outstanding amount of the non-individual
loans sold by the Corporation as at March 31, 2010 stood at Rs. 1,085
crores. The Corporation, however, continues to hold the security of these
loans on a pari passu basis with the purchaser.

The residual income on the loans sold is being recognised at the time of
actual collections, (i.e. over the life of the underlying loans), and not
on an upfront basis. Where individual loans have been sold, the issues
carry a rating, indicating the highest degree of safety.

Loan Portfolio:

The loan approval process of HDFC is decentralised, with varying approval
limits. Approval of lending proposals beyond certain limits is referred to
the committee of management (COM). Larger proposals, as appropriate, are
referred to the Board of Directors.

During the year, HDFC's loan book increased to Rs. 97,967 crores from
Rs.85,198 crores in the previous year. In addition to this, loans
securitised and/or assigned by the Corporation and outstanding as on March
31, 2010 amounted to Rs. 10,301 crores.

The net increase in the loan book of Rs. 12,769 crores has been determined
after taking into account loan repayments of Rs. 31,872 crores (previous
year Rs. 23,525 crores) and net loans written off during the year amounting
to Rs. 16.38 crores (previous year Rs. 10.15 crores).

During the year, the Corporation purchased individual loan portfolios from
originators amounting to Rs. 121.13 crores. These loans were purchased
after the Corporation undertook due diligence and cherry picked the retail
loan portfolios. The assignment of all right, title and interest, along
with the underlying security of the purchased portfolios are in favour of
the Corporation.

The loan book, net of loans sold has grown by 15% during the year. However
after considering the loans sold by the Corporation wherein the Corporation
continues to service the loans sold, the increase in the loan book would be
22%.

Marketing and Distribution:

HDFC's distribution network spans 279 outlets, which include 65 offices of
the wholly owned distribution company, HDFC Sales Private Limited (HSPL).
In addition, HDFC covers over 90 locations through outreach programmes.

To ensure a wider geographic reach, third party channels form an integral
part of the distribution network. Distribution channels sourcing loans for
HDFC include HSPL, which provides HDFC with a dedicated sales force, HDFC
Bank and a few third party direct selling associates (DSAs). Distribution
channels only source loans, while HDFC continues to retain control over the
credit, legal and technical appraisal, ensuring no compromise on the
quality of loans disbursed and is consistent across all distribution
channels.

Total loans sourced from distribution channels during the year accounted
for 82% of individual loans disbursed by HDFC in value terms. The total
commission payable to distribution channels amounted to Rs. 151.59 crores.
The entire amount has been charged to the profit and loss account against
fee income.

During the year, HDFC ran a key brand campaign-'HDFC-because every family
needs a home.' The objective of the campaign was to connect with HDFC's
existing customers as well as prospective customers, making the HDFC brand
synonymous with a home.

HDFC organises property fairs across major cities in the country. The aim
of these fairs is to provide a wide spectrum of approved projects under a
single roof. These fairs in turn help customers in making their decision to
buy a home. Under India Homes Fair', HDFC brings together eminent builders
who showcase their properties for the Indian Diaspora. During the year,
HDFC organised India Homes Fair' in London, Singapore and Kuwait.

Cross-selling of financial products and services continued to form the
cornerstone of HDFC's marketing strategy, thereby providing a wide range
of financial services and products under the HDFC umbrella'. HDFC
distributes insurance products under a referral fee programme with HDFC
Standard Life Insurance Company Limited (HDFC-SL) and HDFC ERGO General
Insurance Company Limited (HDFC-ERGO).

Investments:

The Investment Committee constituted by the Board of Directors is
responsible for approving investment proposals in line with the limits as
set out by the Board of Directors. The Executive Directors are members of
the Committee.

The investment function supports the core business of housing finance. The
investment mandate includes ensuring adequate levels of liquidity to
support core business requirements, maintaining a high degree of safety and
optimising the level of returns, consistent with acceptable levels of risk.

As at March 31, 2010, the investment portfolio stood at Rs. 10,727 crores
as against Rs. 10,469 crores last year. The proportion of investments to
total assets was 10%. Housing Finance Companies (HFCs) are required to
maintain a statutory liquidity ratio (SLR) in respect of public deposits
raised. Currently the SLR requirement is 12.5% of public deposits. As at
March 31, 2010, HDFC has invested Rs. 1,129 crores in bonds and deposits of
the National Housing Bank (NHB) and bank deposits and Rs. 1,139 crores in
government securities.

As at March 31, 2010, the treasury portfolio (excluding investments in
equity shares) had an average balance period to maturity of 22 months. The
average yield on the non-equity portfolio for the year was 8.01% per annum.

HDFC has classified its investments into current and long-term investments.
The current investments have been entirely marked to market'. In respect
of long-term investments, provisions have been made to reflect any
permanent diminution in the value of investments. The aggregate provision
on account of such current and long-term investments amounts to Rs. 36.41
crores. After considering the opening balance of Rs. 85.33 crores in the
diminution in the value of Investments account and the write back of
provisions on account of investments sold, a net amount of Rs. 48.92 crores
has been written back to the Provision for Contingencies account.

As at March 31, 2010, the market value of quoted investments as higher by
Rs. 16,668 crores as compared to the value at which these investments are
reflected in the balance sheet. This unrealised gain includes appreciation
in the market value of investments held by HDFC's wholly owned
subsidiaries, HDFC Investments Limited and HDFC Holdings Limited.
Subsidiaries and Associates:

Though housing remains the core business, HDFC has continued to make
investments in its subsidiary and associate companies. These investments
are made in companies where there are strong synergies with HDFC. HDFC will
continue to explore avenues for such investments with the objective of
providing a wide range of financial services and products under the HDFC
brand name.

During the year, HDFC made gross investments in the equity capital of its
subsidiary companies, HDFC-SL (Rs. 127.28 crores) and HDFC-ERGO (Rs. 159.10
crores).

In order for HDFC as a promoter to retain its current shareholding in HDFC
Bank pursuant to the merger of Centurion Bank of Punjab with HDFC Bank and
having obtained the requisite approvals, HDFC Bank made a preferential
offer to the Corporation to subscribe to 2,62,00,220 Warrants convertible
into 2,62,00,220 equity shares of Rs. 10 each, at a price of Rs. 1,530.13
per share, in accordance with Chapter XIII of the Securities and Exchange
Board of India (Disclosure and Investor Protection) Guidelines, 2000.

Under the terms and conditions of the said Warrants, the Corporation paid a
sum of 10% of the price of the equity shares to be issued upon exercise of
such Warrants at the time of allotment. The Warrants were allotted to the
Corporation on June 3, 2008. The Warrants were converted into equity shares
of HDFC Bank on December 2, 2009 on payment of the balance consideration of
Rs. 3,608.05 crores.

The shareholding of HDFC (together with its nominees) in its key subsidiary
and associate companies as at March 31, 2010 is as follows:

Company Shareholding %

HDFC Developers Limited 100.0
HDFC Investments Limited 100.0
HDFC Holdings Limited 100.0
HDFC Trustee Company Limited 100.0
HDFC Realty Limited 100.0
HDFC Property Ventures Limited 100.0
HDFC Sales Private Limited 100.0
HDFC Ventures Trustee Company Limited 100.0
HDFC Venture Capital Limited 80.5
HDFC Ergo General Insurance Company Limited 74.0
HDFC Standard Life Insurance Company Limited 72.6
GRUH Finance Limited 61.4
HDFC Asset Management Company Limited 60.0
HDFC Bank Limited* 23.7

* (Inclusive of shareholding of HDFC Investments Limited and HDFC Holdings
Limited).

Recoveries:

With effect from March 31, 2005, an asset is a non-performing asset (NPA)
if the interest or instalment is overdue for 90 days as against the earlier
norm where a loan was a NPA if the account was in arrears for over 6
months.

Gross non-performing loans outstanding (along with debentures and corporate
deposits for financing real estate projects) amounted to Rs. 782.85 crores
as at March 31, 2010, constituting 0.79% of the portfolio. The principal
outstanding in respect of individual loans where the instalments were in
arrears constituted 0.85% of the individual portfolio and the corresponding
figure was 0.71% in respect of the non-individual portfolio. HDFC has
written off loans aggregating to Rs. 16.67 crores during the year. This
pertains to the housing loans outstanding in respect of 1,353 individual
borrowers. These loans have been written off pursuant to one-time
settlements, where HDFC will continue making efforts to recover the money.
During the year, HDFC has written back loans aggregating to Rs. 0.29 crores
(these were loans written off in earlier years). The net write off for the
year is Rs. 16.38 crores. With this, HDFC has, since inception, written off
loans (net of subsequent recovery) aggregating to Rs. 93.17 crores. Thus as
at March 31, 2010, the total loan write offs stood at 4 basis points of
cumulative disbursements since inception of the Corporation.

Provision for Contingencies

As per the prudential norms prescribed by NHB, HDFC is required to carry a
provision of Rs. 325.29 crores as at March 31, 2010 in respect of non-
performing assets and provisioning for standard nonhousing assets. As a
matter of prudence, however, over the years, HDFC has been transferring
additional amounts to the provision for contingencies account.

During the year, HDFC has utilised Rs. 23.96 crores out of the balance in
provision for contingencies primarily on account of provision in diminution
of value of investments and loan write-offs. After taking into account the
transfers as well as the net utilisation, the balance in provision for
contingencies as at March 31, 2010 stood at Rs. 655.57 crores.

Fixed Assets:

Net fixed assets as at March 31, 2010 amounted to Rs. 222.11 crores
(previous year Rs. 203.41 crores).

Subordinated Debt:

During the year, the Corporation raised Rs. 500 crores through the issue of
long-term Unsecured Redeemable Non-Convertible Subordinated Debentures. The
subordinated debt was assigned a AAA' rating from both CRISIL Limited
(CRISIL) and ICRA Limited (ICRA).

As at March 31, 2010, the Corporation's outstanding subordinated debt stood
at Rs. 1,875 crores. The debt is subordinated to present and future senior
indebtedness of the Corporation and has been assigned the highest rating by
CRISIL and ICRA. Based on the balance term to maturity, as at March 31,
2010, Rs. 1,555 crores of the book value of subordinated debt is considered
as Tier II under the guidelines issued by the National Housing Bank (NHB)
for the purpose of capital adequacy computation.

Foreign Currency Convertible Bonds (FCCB):

In September 2005, the Corporation concluded the issue of USD 500 million
zero coupon FCCB. The bonds are convertible into equity shares of the
Corporation of the face value of Rs. 10 each up to the close of business
hours on July 29, 2010 at the option of the holders, at Rs. 1,399 per
equity share, representing a conversion premium of 50% over the initial
reference share price. The premium payable on redemption of the bonds is
charged to the Securities Premium Account over the life of the bonds.

Upto March 31, 2010, the Corporation had allotted 1,27,92,711 equity shares
of Rs. 10 each pursuant to the conversion of the FCCB, representing 81.9%
of the bonds.

If the balance bonds are not conver ted within the abovementioned
conversion period, the remaining bondholders would have the right to redeem
the outstanding bonds on September 27, 2010 at a Yield to Maturity (YTM) of
4.62% per annum.

Borrowings:

Borrowings as at March 31, 2010 amounted to Rs. 96,565 crores as against
Rs. 83,856 crores in the previous year-an increase of 15%. Borrowings
constituted 86% of funds employed as at March 31, 2010. Of the total
borrowings, bonds and debentures constituted 42%, domestic term loans 32%,
deposits 24%, international borrowings and FCCB 2%.

Foreign Currency Borrowings:

The outstanding foreign currency borrowings constitute borrowings from FCNR
(B) loans from domestic commercial banks (USD 574.26 million), Asian
Development Bank under the Housing Finance Facility Project (USD 75.78
million), International Finance Corporation (USD 100 million), KfW of
Germany (Euro 7.67 million), DEG, a member of the KfW Group (USD 10
million) and Short-Term Foreign Currency Borrowings (USD 175 million)
raised during the year. The Corporation had also issued Foreign Currency
Convertible Bonds in the international markets.

During the year, the Corporation raised Short Term Foreign Currency
Borrowings amounting to USD 175 million from international banks. The loans
are repayable at the end of 3 years from the date of drawdown. In term of
the RBI guidelines, these borrowings have been hedged into Indian Rupees
for the entire maturity of the loan.

Deposits:

As at March 31, 2010, outstanding deposits stood at Rs. 23,081 crores as
against Rs. 19,375 crores in the previous year, representing a growth of
19%. During the year, deposits accounted for 29% of the net incremental
borrowing of the Corporation. The depositor base stood at approximately 9
lac depositors.

CRISIL and ICRA have for the fifteenth consecutive year, reaffirmed their
AAA' rating for HDFC's deposits. This rating represents highest safety'
as regards timely repayment of principal and interest.

HDFC pays brokerage to agents who mobilise retail deposits. The brokerage
is linked to the amount and the period of deposit and is paid up-front for
the full term of the deposit. In addition, agents who achieve certain
collection targets are paid an incentive every year. In line with
international accounting standards, HDFC has been amortising the brokerage,
proportionately over the term of the deposit. Incentive brokerage is being
fully charged to the profit and loss account in the year of payment.

Borrowings from Banks and Financial Institutions During the year, HDFC
raised loans from commercial banks aggregating to Rs. 25,037 crores. Out of
this, loans amounting to Rs. 9,319 crores qualify for priority sector
allocation. HDFC raised a further Rs. 2,357 crores from the banking sector
as FCNR (B) loans.

As at March 31, 2010, the total loans outstanding from banks, financial
institutions and the National Housing Bank amounted to Rs. 30,360 crores as
compared to Rs. 23,175 crores as at March 31, 2009.

Simultaneous Issue of Warrants and Non-Convertible Debentures:

Pursuant to the approval of the Shareholders of the Corporation at the 32nd
Annual General Meeting held on July 22, 2009, the Corporation raised
Rs.4,301 crores through the first ever issue of Warrants simultaneously
with Non-Convertible Debentures to Qualified Institutional Buyers (QIBs) on
a Qualified Institutions Placement (QIP) basis in accordance with the
provisions of Chapter XIII-A of SEBI (Disclosure and Investor Protection)
Guidelines, 2000.

The Corporation issued and allotted 1,09,53,706 Warrants at an issue price
of Rs. 275 per Warrant with a right exercisable by the Warrant holder to
exchange the Warrants with one equity share of face value of Rs. 10 each of
the Corporation, on or before August 24, 2012, at a Warrant Exercise Price
of Rs. 3,000 per equity share, to be paid by the Warrant holder at the
time of exchange of the Warrants. The amount of Rs. 301.23 crores received
on issue of Warrants has been added to Capital Reserve.

Simultaneously, the Corporation issued and allotted 20,000 zero coupon NCDs
of the face value of Rs. 10,00,000 each due August 24, 2011 aggregating to
Rs. 2,000 crores at an annualised YTM of 7.15% and 20,000 zero coupon NCDs
of the face value of Rs. 10,00,000 each due August 24, 2012 aggregating to
Rs. 2,000 crores at an annualised YTM of 7.85%.

The Warrants and NCDs are listed on the respective segments of the Bombay
Stock Exchange Limited and National Stock Exchange of India Limited.

The maximum dilution that could take place in future, if all the Warrants
are exchanged for equity shares of the Corporation at the Warrant Exercise
Price would be up to 3.5% of the expanded equity share capital of the
Corporation.

Non-Convertible Debentures (NCDs):

During the year, the Corporation issued NCDs amounting to Rs. 7,400 crores
on a private placement basis (excluding Rs. 4,000 crores of zero coupon
NCDs raised under the QIP). The Corporation's NCD issues have been listed
on the Wholesale Debt Market segment of the National Stock Exchange of
India Limited (NSE). The Corporation's NCDs have been assigned the highest
rating of AAA' by both CRISIL and ICRA.

During the year, Corporation utilised Rs. 198.81 crores out of the
Securities Premium Account in accordance with Section 78 of the Companies
Act, 1956. Out of the above, Rs. 6.42 crores has been utilised towards
expenditure incurred for raising zero coupon NCDs through the QIP route and
Rs. 192.39 crores has been utilised towards the proportionate premium
payable on redemption of zero coupon NCDs and FCCBs. The Corporation has
written back Rs. 3.46 crores on conversion of FCCBs to the Securities
Premium Account, being the provision for premium on redemption of FCCBs
created in the earlier years by debit to the Securities Premium Account.

Risk Management:

The Financial Risk Management and Hedging Policy as approved by the Audit
Committee sets limits for exposures on currency and interest rates. HDFC
manages its interest rate and currency risk in accordance with the
guidelines prescribed. The risk management strategy has been to protect
against foreign exchange risk, whilst at the same time exploring any
opportunities for an upside, so as to keep the maximum all-in cost on the
borrowing in line with or lower than the cost of a borrowing in the
domestic market for a similar maturity.

HDFC has to manage various risks associated with the mortgage business.
These risks include credit risk, liquidity risk, foreign exchange risk and
interest rate risk. HDFC manages credit risk through stringent credit
norms. Liquidity risk and interest rate risks arising out of maturity
mismatch of assets and liabilities are managed through regular monitoring
of the maturity profiles.

HDFC has from time to time entered into risk management arrangements in
order to hedge its exposure to foreign exchange and interest rate risks.
The currency risk on the borrowings is actively hedged through a
combination of dollar denominated assets, long-term forward contracts,
principal only swaps, full currency swaps and currency options.

As at March 31, 2010, the Corporation had foreign currency borrowings of
USD 1,036.03 million equivalent. The entire principal on the foreign
currency borrowings has been hedged by way of principal only swaps,
currency options, forward contracts and risk management arrangements with
financial institutions. Further, interest rate swaps on a notional amount
of USD 90 million equivalent are outstanding and have been undertaken to
hedge the interest rate risk on the foreign currency borrowings. As at
March 31, 2010, the Corporation's net foreign currency exposure on
borrowings net of risk management arrangements was nil.

As a part of asset liability management and on account of the predominance
of HDFC's Adjustable Rate Home Loan product as well as to reduce the
overall cost of borrowings, HDFC has entered into interest rate swaps
wherein it has conver ted its fixed rate rupee liabilities of a notional
amount of Rs. 16,065 crores as at March 31, 2010 for varying maturities
into floating rate liabilities linked to various benchmarks. In addition,
HDFC has entered into cross currency swaps of a notional amount of
USD693.86 million equivalent wherein it has converted its rupee liabilities
into foreign currency liabilities and the interest rate is linked to
benchmarks of the respective currencies.

The total net foreign currency exposure inclusive of cross currency swaps
is USD 462.31 million. The open position is at 2.17% of the total
borrowings of HDFC.

Assets and liabilities in foreign currency net of risk management
arrangements are revalued at the rates of exchange prevailing at the end of
the year. Cross currency swaps have been marked to market at the year end.

Asset-Liability Management:

As at March 31, 2010, assets and liabilities with maturity up to 1 year
amounted to Rs. 30,837 crores and Rs. 29,352 crores respectively. Asset and
liabilities with maturity of between 2 years and 5 years amounted to
Rs.50,962 crores and Rs. 51,340 crores respectively and assets and
liabilities with maturity beyond 5 years amounted to Rs. 34,767 crores and
Rs. 35,874 crores respectively.

HDFC does not generally take an interest rate mismatch. As at March 31,
2010, 79% of the assets and 78% of the liabilities were on a floating rate
basis.

Internal Audit and Control:

HDFC has instituted adequate internal control systems commensurate with
the nature of its business and the size of its operations. Internal audit
is carried out by independent firms of chartered accountants and cover all
the offices and key areas of business. All significant audit observations
and follow-up actions thereon are reported to the Audit Committee. The
Audit Committee comprises three independent directors. The committee met
five times during the financial year under review.

Profit and Loss Account Key elements of the profit and loss account for the
year ended March 31, 2010 are:

* Profit before tax grew by 22% and profit after tax grew by 24%.

* Income tax provision for the year amounted to Rs. 1,089.50 crores as
compared to Rs. 936.50 crores in the previous year. The effective tax rate
is 27.8% as compared to 29.1% in the previous year.

* Pre-tax return on average assets was 3.8% and the post-tax return on
average assets was 2.7%.

* Return on equity is 20.0% in the current year.

* HDFC's cost to income ratio is 7.9% for the year ended March 31, 2010 as
against 8.8% in the previous year. HDFC's cost income ratio continues to be
among the lowest in the financial sector in Asia.

* Administrative expenses, as a percentage of average assets was 0.29% as
at March 31, 2010 as against 0.35% in the previous year.

* For the year ended March 31, 2010, a dividend of Rs. 36 per share is
being recommended as against Rs. 30 per share in the previous year. HDFC
would be paying the distribution tax and education cess on the dividend
declared.

* The dividend payout ratio will be 42% as against 43% in the previous
year.

Spread on Loans:

The average yield on loan assets during the year was 10.90% per annum as
compared to 12.20% per annum in the previous year. The average all-
inclusive cost of funds was 8.59% per annum as compared to 9.99% per annum
in the previous year. The spread on loans over the cost of borrowings for
the year was to 2.31% per annum as against 2.21% per annum in the previous
year.

Prudential Norms for Housing Finance Companies (HFCs):

NHB has issued guidelines to HFCs on prudential norms for income
recognition, provisioning, asset classification, provisioning for bad and
doubtful debts, capital adequacy and concentration of credit/investments.
HDFC's position with respect to the guidelines is as follows:

* HDFC's capital adequacy ratio stood at 14.6% of the risk weighted assets
(of which Tier I capital was 12.8%) as against the minimum requirement of
12%.

* HDFC is in compliance with the limits prescribed by NHB in respect of
concentration of credit, exposure to investment in real estate and capital
market exposure and concentration of investments other than on its
investment in HDFC Bank, wherein NHB has granted the Corporation time for
such compliance as the Corporation is a promoter of HDFC Bank.

Human Resources:

Human resources are HDFC's most valuable assets. The efficiency of HDFC's
staff is evident from the fact that, the number of offices increased from
41 in 1998 to 214 (excluding offices of HSPL) currently as against the
number of employees which increased from 806 to 1,505 during the same
period.

Total assets per employee as at March 31, 2010 stood at Rs. 74 crores as
compared to Rs. 65 crores in the previous year and net profit per employee
as at March 31, 2010 was Rs. 188 lacs as compared to Rs. 153 lacs in the
previous year.

Audited Consolidated Accounts:

In accordance with the accounting standards prescribed by the Institute of
Chartered Accountants of India, the consolidated financial statements
comprise the individual financial statements of the Corporation together
with its subsidiaries which are consolidated on a line-by-line basis and
its associates which are accounted on the equity method.

Like most life insurance companies in the initial phase, HDFC-SL has
reported losses. This is essentially due to the accounting norms applicable
to insurance companies wherein the commission expenses are charged upfront
in the year in which they are incurred while the corresponding income is
recognised over the entire life of the policies issued. The mismatch
between expenses and income has the effect of magnifying the initial losses
of HDFC-SL.

On a consolidated basis, the total income for the year ended March 31, 2010
was Rs. 12,356.66 crores as compared to Rs. 11,706.42 crores in the
previous year. Profit before tax was Rs. 3,883.63 crores as compared to
Rs.2,862.93 crores in the previous year. Profit after tax was Rs. 3,240.98
crores as compared to Rs. 2,310.50 crores in the previous year.
Consolidated return on equity was 18.9%.