Annual Report - HDFC Bank - 2010-2011

HDFC BANK LIMITED

ANNUAL REPORT 2010-2011

DIRECTOR'S REPORT

TO
THE MEMBERS,

Your Directors have great pleasure in presenting the Seventeenth Annual
Report on the business and operations of your Bank together with the
audited accounts for the year ended March 31, 2011.



FINANCIAL PERFORMANCE

(Rs. in crore)
For the year ended
March 31, 2011 March 31, 2010

Deposits and Other Borrowings 222,980.5 180,320.1

Advances 159,982.7 125,830.6

Total Income 24,263.4 20,155.8

Profit before Depreciation
and Tax 6,316.1 4,683.5

Net Profit 3,926.4 2,948.7

Profit brought forward 4,532.8 3,455.6

Total Profit available for
Appropriation 8,459.2 6,404.3

Appropriations :

Transfer to Statutory Reserve 981.6 737.2

Transfer to General Reserve 392.6 294.9

Transfer to Capital Reserve 0.4 199.5

Transfer to/(from) Investment
Fluctuation Reserve 15.6 (1.5)

Proposed Dividend 767.6 549.3

Tax Including Surcharge and
Education Cess on Dividend 124.5 91.2

Dividend (including tax/cess thereon)
pertaining to previous year paid during
the year 2.7 0.9

Balance carried over to Balance Sheet 6,174.2 4,532.8

*Change pursuant to reclassification

The Bank posted total income and net profit of Rs. 24,263.4 crore and Rs.
3,926.4 crore respectively for the financial year ended March 31, 2011 as
against Rs. 20,155.8 crore and Rs. 2,948.7 crore respectively in the
previous year. Appropriations from net profit have been effected as per the
table given above.

DIVIDEND

Your Bank has had a consistent dividend policy that balances the dual
objectives of appropriately rewarding shareholders through dividends and
retaining capital, in order to maintain a healthy capital adequacy ratio to
support future growth. It has had a consistent track record of moderate but
steady increases in dividend declarations over its history with the
dividend payout ratio ranging between 20% and 25%. Consistent with this
policy, and in recognition of the overall performance during this financial
year, your directors are pleased to recommend a dividend of Rs. 16.50 per
share for the financial year ended March 31, 2011, as against Rs. 12 per
share for the year ended March 31, 2010. This dividend shall be subject to
tax on dividend to be paid by the Bank.

AWARDS

As in the past years, awards and recognition were conferred on your Bank by
leading domestic and international organizations during the fiscal year
ended March 31, 2011.

Some of them are:

- Asian Banker 2011

* Strongest Bank in the Asia Pacific region

- Bloomberg UTV's Financial Leadership Awards 2011

* Best Bank

- Outlook Money 2010 Awards

* Best Bank

- Businessworld Best Bank Awards 2010

* Best Bank (Large)

- NDTV Business Leadership Awards 2010

* Best Private Sector Bank

- IDRBT Technology 2009 Awards

* Best IT Infrastructure

* Best use of IT within the Bank

- Dun & Bradstreet Banking Awards 2010 a Overall Best Bank

* Best Private Sector Bank

* Best Private Sector Bank in SME Financing

- Celent's 2010 Banking Innovation Award

* Model Bank Award

- Global Finance Awards

* Best Trade Finance Provider in India for 2010

- The Asset Triple A Awards

* Best Cash Management Bank in India

- IDC FIIA Awards 2011

a Excellence in Customer Experience

- The Banker and PWM 2010 Global Private Banking Awards a Best Private Bank
in India

- IBA Banking Technology Awards 2010

* Technology Bank of the Year

* Best Online Bank

* Best Customer Initiative

* Best Use of Business Intelligence

* Best Risk Management System

- Forbes Asia

* Fab 50 Companies - 5th Year in a Row

* MIS Asia IT Excellence Award 2010

* Best Bottom-Line IT Category

- FE-EVI Green Business Leadership Award a Best Performer in the Banking
Category

- Avaya Global Connect 2010

* Customer Responsiveness Award - Banking and Financial Services Category

RATINGS

Instrument Rating Rating Agency Comments

Fixed CARE CARE(1) Represents instruments
Deposit AAA(FD) considered to be of the
Program best credit quality,
offering highest safety
for timely servicing of
debt obligations, and
carry minimal credit
risk'

Certificate F1+(Ind) FITCH(2) Indicates the strongest
of Deposit capacity for timely
payment of financial
commitments relative to
other issuers or issues
in the country

PR 1+ CARE Represents strong capacity
for timely payment of short
- term debt obligations and
carry lowest credit risk.
The +sign indicates
relatively better credit
characteristics within this
category

Long term CARE AAA CARE Represents instruments
unsecured, considered to be 'of
subordinated the best credit quality,
(Tier II) offering highest safety
bonds for timely servicing of
debt obligations, and
carry minimal credit
risk'

AAA (ind) FITCH Represents the best
with a credit risk relative
stable to all other issuers
outlook or issues in the
country

Tier I CARE AAA CARE Represents instruments
perpetual considered to be 'of
Bonds the best credit quality,
offering highest safety
for timely servicing of
debt obligations, and
carry minimal credit
risk'

AAA/Stable CRISIL(3) Judged to offer the highest
degree of safety with regard
to timely payment of financial
obligations. Any adverse
changes in circumstances are
most unlikely to affect
the payments of the
instrument.

Upper Tier CARE AAA CARE Represents instruments
II Bonds considered to be 'of
the best credit quality,
offering highest safety
for timely servicing of
debt obligations, and
carry minimal credit
risk'

AAA/Stable CRISIL Judged to offer the highest
degree of safety with regard
to timely payment of
financial obligations. Any
adverse changes in
circumstances are most
unlikely to affect the
payments of the instrument

Governance GVC Level 1 CRISIL Represents the highest
and Value capability with regard
Creation to corporate governance
and value creation for
all stakeholders

(1) - CARE - Credit Analysis & Research Limited

(2) - FITCH - Fitch Ratings India Private Limited (100% subsidiary of
Fitch Inc.)

(3) - CRISIL - CRISIL Ltd. (A Standard & Poor's company)

ISSUANCE OF EQUITY SHARES

During the year under review, 74.8 lac shares were allotted to the
employees of your Bank pursuant to the exercise of options under the
Employee Stock Option Schemes of the Bank. These include the shares
allotted under the Employee Stock Option Schemes of the erstwhile Centurion
Bank of Punjab.

The Board of Directors of your Bank considered and approved the sub-
division (split) of one equity share of your Bank having a nominal value of
Rs. 10 each into five equity shares of nominal value of Rs. 2 each. The
record date for the same shall be determined subsequently. The subdivision
of shares will be subject to approval of the shareholders and any other
statutory and regulatory approvals, as applicable. The stock split has been
recommended with a view to make the stock more affordable from the retail
investors' perspective and thereby encourage greater participation from the
retail segment.

EMPLOYEE STOCK OPTIONS

The information pertaining to Employee Stock Options is given in an
annexure to this report.

CAPITAL ADEQUACY RATIO

Your Bank's total Capital Adequacy Ratio (CAR) calculated in line with the
Basel II framework stood at 16.2%, well above the regulatory minimum of
9.0%. Of this, Tier I CAR was 12.2%.

SUBSIDIARY COMPANIES

Your Bank has two subsidiaries, HDFC Securities Limited ('HSL') and HDB
Financial Services Limited ('HDBFS').

HSL is primarily in the business of providing brokerage services through
the internet and other channels with a focus to emerge as a full-fledged
financial services provider offering a bouquet of financial services along
with the core broking product. The company continued to strengthen its
distribution franchise and as on March 31, 2011 had a network of 150
branches across the country catering to the needs of its customers. During
the year under review, the company's total income amounted to Rs. 260.5
crore as against Rs. 235.3 crore in the previous year. The operations
resulted in a net profit after tax of Rs. 77.2 crore.

HDBFS is a non-deposit taking non-bank finance company ('NBFC'), the
customer segments being addressed by HDBFS are typically underserviced by
the larger commercial banks, and thus create a profitable niche for the
company to operate. Apart from lending to individuals, the company grants
loans to small and medium business enterprises and micro small and medium
enterprises. The principle businesses of HDBFS are as follows :

- Loans - The company offers a range of loans in the unsecured and secured
loans space that fulfill the financial needs of its target segment.

- Insurance Services - HDBFS is a corporate agent for HDFC Standard Life
Insurance Company and sells standalone insurance products as well as
products such as Loan Cover and Asset Cover.

- Collections - BPO Services - The Company runs 6 call centers with a
capacity of over 1,500 seats. These centers cover collection requirements
at over 100 towns through its calling and field teams. Currently the
company has a contract with your Bank for collection services.

As on March 31, 2011 HDBFS had 100 branches in 65 cities in order to
distribute its products and services. During the financial year ended March
31, 2011 the company's total income increased by over 80% to Rs. 179.4
crore as compared to Rs. 97.6 crore in the previous year. During the same
period the company's net profit was Rs. 16.1 crore as compared to Rs. 9.9
crore in the previous year. During the year under review the loan
disbursements made by HDBFS increased to Rs. 1,208 crore as compared to Rs.
525 crore in the previous year.

In terms of the approval granted by the Government of India, the provisions
contained under Section 212(1) of the Companies Act, 1956 shall not apply
in respect of the Bank's subsidiaries. Accordingly, a copy of the balance
sheet, profit and loss account, report of the Board of Directors and the
report of the auditors of HSL and HDBFS have not been attached to the
accounts of the Bank for the year ended March 31, 2011.

Shareholders who wish to have a copy of the annual accounts and detailed
information on HSL and HDBFS may write to the Bank for the same. Further,
the said documents shall also be available for inspection by shareholders
at the registered offices of the Bank, HSL and HDBFS.

MANAGEMENT DISCUSSION AND ANALYSIS

Macro-economic and Industry Developments

After a strong revival last year, the domestic growth cycle remained
robust, extending and consolidating the recovery set forth in the fiscal
year ended March 31, 2011. While emerging headwinds from tightening
monetary conditions and a scale back in fiscal stimulus measures (put in
place during the global credit crisis of the calendar year 2008) led to
some moderation in industrial growth, service sector growth and
agricultural performance were strong and picked up the slack from industry.
This is likely to have pushed the headline GDP growth in the year ended
March 31, 2011 to 8.6% from 8.0% in the previous year.

Stimulus driven government spending has dissipated as a major driver of
growth and private demand has successfully taken over. Structural factors
such as strong rural demand, low product penetration and favorable
demographics have remained key supports for private consumption. While
government consumption growth is likely to have eased substantially from
16.4% in the fiscal year ended March 31, 2010 to 2.6% in fiscal year ended
March 31, 2011, private consumption has remained strong growing by 8.2% in
the financial year ended March 31, 2011 as against 7.3% a year ago.

However, even as domestic consumption growth has remained robust,
investment demand has somewhat disappointed with infrastructure project
execution by the government remaining tardy and the corporate capital
expenditure cycle remaining subdued. Investments are likely to have grown
by 8.2% in the fiscal year ended March 31, 2011 against 12.2% a year ago
and this has impinged on industrial performance. Growth in capital goods
has fallen from 29.0% in the first half of the fiscal year ended March 31,
2011 to -1.3% in the second half pulling industrial growth lower from 10.3%
in the first half of the financial year to 6.3% for the full year.

The service sector has however remained strong with services such as
finance, insurance, trade, transportation and communication performing well
and taking overall service sector growth to 9.6% against 10.0% a year ago,
despite a visible slowdown in government related services such as
community, personal and social services. Further, a good monsoon season has
meant that agricultural production has recovered from last year's drought.
Total food grain production is expected to grow by a strong 8.3% while
agricultural growth is likely to have been close to 5.4% against 0.4% a
year ago. This, along with income support schemes by the government such as
the Mahatma Gandhi National Rural Employment Scheme (MGNREGS) have meant
that the rural economy has performed well and has been an active
participant in domestic growth dynamics.

While the rural sector has added to the robustness of the domestic growth
cycle it has also contributed to the stickiness in inflationary pressures.
Strong agricultural growth has meant that food inflation has cooled from
21% in June, 2010 to 9.2% in March, 2011 but the pace of decline has been
diluted by demand-supply mismatches in specific categories such as protein-
based food items (milk, eggs, meat, fish) and fruits and vegetables - an
indication of rising rural incomes and the change in dietary patterns this
entails. This has been exacerbated by supply chain problems and an
inefficient food distribution system. As a result, while WPI inflation has
fallen from a peak of 11.0 % in April, 2010 it has been slower to ease than
initially anticipated settling in the 8.5-9.0% range in the fourth quarter
of the fiscal year ended March 31, 2011 and averaging a rate of 9.4% in the
full fiscal year.

Domestic inflationary pressures however, are no longer driven by food
prices alone and inflation has become more broad-based over the past year.
Firm international commodity prices, especially items such as crude oil, as
well as the return of pricing power amongst domestic manufacturing firms
amidst firm demand have pushed manufactured goods inflation higher.
Further, 'core' inflation or manufactured goods inflation net of food price
effects has been rising steadily. While headline inflation eased from 9.0%
in October, 2010 to 8.3% in February, 2011, core inflation has picked up
from 5.0% to 6.0%.

Monetary policy has, as a result, become more restrictive over the past
year with the RBI changing policy focus from calibrating the exit from an
accommodative stance to tackling inflation more aggressively. Policy rates
(repo and reverse repo rate) have been hiked by 225-275 basis points over
the last year but the effective tightening in rates has been far higher.
Structural pressures on banking system liquidity from subdued deposit
growth such as leakages from the deposit base towards currency in
circulation have meant that the monetary transmission mechanism has been
quick. Additionally, frictional liquidity stress from tardy government
spending has also kept liquidity under pressure swinging the system from a
surplus of over Rs. 1,00,000 crore in March, 2010 ( as measured by the
Liquidity Adjustment Facility (LAF) reverse repo window) to an average
deficit of a similar magnitude in March, 2011 (as measured by the LAF repo
window). A heavy government borrowing target of Rs. 4,37,000 crore has only
exaggerated the pressure on the system.

As a result, the effective policy rate has shifted from the reverse repo
rate (rate consistent with surplus liquidity) to the repo rate (rate
consistent with deficit liquidity) involving incremental tightening of 100-
150 basis points over and above the policy rate hikes over the year. While
short-term interest rates such as the overnight MIBOR has moved higher by
close to 300 basis points, the yield on the benchmark 10-yr G-sec has
increased by 15-20 basis points. Liquidity pressure has meant that the
yield curve has flattened with the spread between the

10-yr G-sec and the 1-yr G-sec yields moving from 280 basis points to 50
basis points.

Lending rates have moved higher by an average of 100-150 basis points as
funding conditions have come under strain. However, credit growth has been
robust despite interest rate increases and has gathered pace over the year
moving from 16.0% in March, 2010 to 23.0% in March, 2011. While
infrastructure has continued to dominate credit growth in the past year,
credit off-take has been relatively more broad-based with retail credit
disbursements such as vehicle loans and housing loans as well as funding to
services such as trade and Non Banking Financial Companies gathering
ground. Credit growth towards infrastructure continued to grow at last
year' s level of around 40%, growth in personal loans accelerated sharply
from 4% to 16% while the growth in service sector credit picked up from 15%
to 24%.

Deposit rates have also been hiked by an average of 150-200 basis points
and while this has helped deposit growth move higher from a low of 14.0% in
June, 2010 to 16.9% in March, 2011, deposit mobilization has been weak in
the last year. Net foreign inflows into the country have been subdued and
have been a major factor constraining money supply and deposit growth.
Capital inflows into the country have been strong in the past year and are
likely to have been USD 66 billion against USD 54 billion a year ago on the
back of strong portfolio flows (both debt and equity), heavy external
commercial borrowings and strong trade credit. However, the bulk of these
inflows have been absorbed in financing a large current account deficit.
The current account gap over the last financial year is likely to be close
to 2.5-2.8% of GDP or USD 48 billion leaving net foreign inflows into the
country at close to USD 16.4 billion - just slightly higher than net
inflows of USD 13.4 billion in the previous year.

That said, there have been some offsets in recent months. A recovery in
export growth and a turn in invisibles (private transfers and service
exports) as well as a normalization in import growth in line with
moderating industrial momentum in the third quarter of the last fiscal year
has meant that the current account gap has reduced from 4.3% of GDP in the
second quarter of the last year to 2% in the third quarter. While the drag
on foreign inflows during the last year is still expected to be a long term
concern, the pressure on external balances has relatively eased in the near
term.

Reflecting the improvement in global growth conditions driven by fiscal and
monetary stimulus measures, export growth in the last quarter of the fiscal
year ended March 31, 2011 was a strong 42.0%. Growth was driven by
categories such as engineering goods, chemicals, gems and jewellery and
electronic goods, this has been a vital support to the domestic industry
amidst flagging investment momentum. Import growth slowed down from 32.8%
in the first half of the last financial year to 10.0% in the second half,
inflows from invisibles picked up pace in the third quarter of the fiscal
year ended March 31, 2011 growing by 17.0% on the year against a decline of
2.6% Y-o-Y in the first half of the same year. The risk however is that
firm global commodity prices could push import growth higher going ahead
and the likelihood of further improvement in external balances is somewhat
limited.

Macroeconomic Risks and Concerns

While the balance of risks in the last financial year were largely
external, rising domestic interest rates as well as firm inflationary
pressures have meant that domestic factors have now emerged as points of
concern for growth in the current fiscal year. Further, the withdrawal of
monetary and fiscal stimulus measures last year has meant that the domestic
growth cycle is likely to be far more vulnerable to external shocks going
ahead.

Even as food inflation is likely to stabilize, firm international commodity
prices are likely to keep manufactured goods inflation strong. Rising
global oil prices remain a foremost risk to inflation and India's fiscal
and current account deficits this year. With uncertainty surrounding the
political crisis in the Middle East and North Africa (MENA) region oil
prices are unlikely to move to lower levels in a hurry. The price of crude
(as measured by the India crude oil basket) has already spiked up by 40% on
the year to USD 108 per barrel and the expectation is that the average
price of crude oil is unlikely to fall below the USD 95-100 per barrel
mark. It is anticipated that inflation is likely to average close to 8.5%
in the fiscal year ended March 31, 2012 just slightly lower than the
average inflation rate of 9.4% in the past year, this is likely to see the
Reserve Bank of India (RBI) hike its repo and reverse repo rate by a total
of 100-125 basis points this year. The risk however is that further
escalation in oil prices and a faster than expected build up of inflation
could push the central bank to tighten interest rates to a level that could
impinge on private investment and leveraged consumer spending and constrain
future growth.

The government has indicated its resolve to tame its imbalances and is
targeting a fiscal deficit of 4.6% of GDP in the current year against 5.1%
last year. It will be a challenge to achieve this target should key outlays
such as oil, fertilizer and food subsidy payments turn out to be higher
than budgeted. There is an additional risk that moderating industrial
growth could dampen government revenues below budgeted levels. This could
entail a larger government draft on the market and the banking system
posing an upside risk to interest rates.

While the fundamentals of the Indian economy remain strong, the domestic
equity markets and for that matter fund flows into the domestic financial
system on the whole are dependent on the developments in the global economy
and general risk appetite to a large extent. Any adverse changes therefore
in the global economic or financial environment could have a negative
impact on the domestic markets and the availability of foreign funds. In
this regard, we see a few risks on the global front that could adversely
impact the domestic markets.

The single largest external risk that could impact inflows into the country
stems from the normalization in global liquidity and monetary conditions.
The great wall of liquidity provided by accommodative monetary conditions
in major developed economies like the United States of America, Japan,
United Kingdom and the Euro-area have been crucial in driving yield seeking
flows to risky assets and emerging markets such as India. Inflation
concerns however are gradually building up and with global commodity prices
likely to remain firm it is unlikely that the magnitude of liquidity pumped
into the global financial system over the last two years will continue.

However the risks to external balances are not only limited to capital
inflows. The likelihood of firm commodity prices as well as escalating oil
prices means that the current account deficit could come under stress. With
foreign exchange reserves of USD 305 billion in March, 2011 pressure on
external liquidity and solvency in this event is unlikely to pose a serious
threat to external stability in the near-term. However, there are
implications for both exchange rate volatility as well as domestic
liquidity. A large current account deficit is likely to trim net foreign
inflows into the country placing undue depreciation pressure on the rupee
and impacting domestic liquidity.

Stress on domestic funding conditions is likely to get exacerbated by an
oil price shock and this is likely to make for a challenging operating
environment for the banking system. Offsets could come from open market
operations by the RBI which bought back government securities of nearly Rs.
70,000 crore in the last fiscal year but the strain on system liquidity
could sustain.

While adequate capital provisioning and stringent prudential regulations
largely shielded the domestic banking system from the global crisis, some
cyclical deterioration in asset quality remains a concern. There is some
evidence, both formal and anecdotal that credit quality in both the retail

and wholesale portfolios of banks has deteriorated. There is also some
concern that a portion of the loans that banks were allowed to restructure
given the sharp cyclical deterioration in the economy may remain impaired
and will add to the stock of non-performing loans. Recent stress tests have
revealed however that the banking system as a whole remains robust enough
to withstand a sharp increase in asset quality slippages.

Outlook

Further withdrawal of stimulus measures-both fiscal and monetary, are
likely to moderate headline GDP growth in the year ahead and the
expectation is that growth is likely to soften slightly from 8.6% in the
last year to 8.0%. Additional monetary tightening in the current fiscal
year could curtail private investment and leveraged consumer spending from
entirely picking up the slack from fiscal compression and a cut back in
government spending. However, this is unlikely to detract from structural
positives and the premium attached to India as a rapidly growing economy.
World output is likely to grow by 3.5% in 2011 and despite the
configuration of external and domestic risks looming over the horizon,
India is likely to continue to outperform the global economy by a large
margin. Pressures are likely to be cyclical and key structural supports
from a growing rural economy, favorable demographics and low product
penetration are likely to continue to keep private consumption strong.
Structural positives are likely to therefore offset downside risks to
growth and keep India an attractive investment destination next year.

Mission and Business Strategy

Your Bank's mission is to be 'a World Class Indian Bank', benchmarking
itself against international standards and best practices in terms of
product offerings, technology, service levels, risk management and audit
and compliance. The objective is to continue building sound customer
franchises across distinct businesses so as to be a preferred provider of
banking services for its target retail and wholesale customer segments, and
to achieve a healthy growth in profitability, consistent with the Bank's
risk appetite. Your Bank is committed to do this while ensuring the highest
levels of ethical standards, professional integrity, corporate governance
and regulatory compliance.

The Bank's business strategy emphasizes the following :

- Develop innovative products and services that attract its targeted
customers and address inefficiencies in the Indian financial sector;

- Increase its market share in India's expanding banking and financial
services industry by following a disciplined growth strategy focusing on
balancing quality and volume growth while delivering high quality customer
service;

- Leverage its technology platform and open scaleable systems to deliver
more products to more customers and to control operating costs;

- Maintain high standards for asset quality through disciplined credit risk
management;

- Continue to develop products and services that reduce its cost of funds;
and

- Focus on healthy earnings growth with low volatility.

Financial Performance :

The financial performance of your Bank during the fiscal year ended March
31, 2011 remained healthy with total net revenues (net interest income plus
other income) increasing by 20.3% to Rs. 14,878.3 crore from Rs. 12,369.5
crore in the previous financial year. Revenue growth was driven both by an
increase in net interest income and other income. Net interest income grew
by 25.7% primarily due to acceleration in loan growth to 27.1% coupled with
a stable net interest margin (NIM) of 4.3% for the year ending March 31,
2011.

From April 01, 2010 the RBI mandated that interest payable on savings
deposits be calculated on daily average balances, this resulted in an
increase in savings deposit costs by approximately 70-80 basis points.
Further, due to tight liquidity conditions that were prevalent in the
monetary system during the second half of the fiscal year ended March 31
2011, your Bank witnessed an increase of over 200 basis points in its
retail term deposit rates during this period. Your Bank has however
maintained steady NIMs which are amongst the highest within its peer group
by managing the yields across its various customer and product segments in
line with its cost of funds.

Other income grew 8.8% over that in the previous year to Rs. 4,335.2 crore
during the financial year ended March 31, 2011. This growth was driven
primarily by an increase in fees and commissions earned and income from
foreign exchange and derivatives, offset in part by a loss on sale /
revaluation of investments of Rs. 52.6 crore as compared to a gain of Rs.
345.1 crore in the previous financial year. In the fiscal year ended March
31, 2011, commission income increased by 19.7% to Rs. 3,596.7 crore with
the primary drivers being commissions from the distribution of third party
insurance and mutual funds, fees on debit and credit cards, transactional
charges and fees on deposit accounts and processing fees on retail assets.
The banking industry witnessed regulatory changes that resulted in the
capping of earnings from the distribution of insurance products, however
the increase in your Bank's sales volumes partly made up for the reduction
in unit commissions, as a result the growth in income from the distribution
of third party products remained a healthy 28.0%. Foreign exchange and
derivatives revenues grew by 26.2% from Rs. 623.2 crore in the previous
financial year to Rs. 786.3 crore in the fiscal year ended March 31, 2011.

Operating (non-interest) expenses grew in line with net revenues and
increased from Rs. 5,939.8 crore in the previous financial year to Rs.
7,152.9 crore in the year under consideration. During the year your Bank
opened 261 new branches and over 1,200 ATMs which resulted in higher
infrastructure and staffing expenses. In spite of that, the ratio of
operating cost to net revenues (excluding bonds gains) for your Bank
improved to 47.9% during the fiscal year ended March 31, 2011, from 49.4%
in the previous year.

Total loan loss provisions including specific provisions for non-performing
assets and floating provisions decreased from Rs. 1,988.9 crore to Rs.
1,433.0 crore for the financial year ended March 31, 2011, on account of
healthy asset quality across customer and product segments. Your Bank' s
provisioning policies for specific loan loss provisions remain higher than
regulatory requirements, the coverage ratio based on specific provisions
alone without including writeoffs technical or otherwise was 82.5% and that
including general and floating provisions was well over 100% as on March
31, 2011. Your Bank has made contingent provisions on account of
contingencies towards the loans that it has extended to micro finance
institutions, in view of the credit concerns arising out of the disruptions
in that sector. The Reserve Bank of India had reduced the general
provisioning requirements for certain asset classes in May 2008, this
reduced the requirements for general provisions for the Bank' s loan book.
Your Bank however, continued to maintain the general provisions that were
already created. As a result of the above, the requirement for general
asset provisions was lower than what the Bank held on its books as on March
31, 2011 and the Bank did not have to make any additional general asset
provisions on account of the increase in its loan book.

Your Bank' s profit after tax increased by 33.2% from Rs. 2,948.5 crore in
the previous financial year to Rs. 3,926.4 crore in the year ended March
31, 2011. Return on average net worth was 16.5% while the basic earnings
per share increased from Rs. 67.56 to Rs. 85.02 per equity share.

As at March 31, 2011, your Bank's total balance sheet size was Rs. 277,353
crore an increase of 24.7% over Rs. 222,458 crore as at March 31, 2010.
Total Deposits increased 24.6% from Rs. 167,404 crore as on March 31, 2010
to Rs. 208,586 crore as on March 31, 2011. Savings account deposits grew by
27.2% to Rs. 63,448 crore while current account deposits at Rs. 46,460
crore witnessed an increase of 24.8% as compared to those on March 31,
2010. Adjusting current account deposits for one offs at year end amounting
to Rs. 3,700 crore the growth was 14.9%. The proportion of core current and
savings deposits (CASA) to total deposits continued to be healthy at 51% as
on March 31, 2011. During the financial year under review, gross advances
grew by 26.8% to Rs. 161,359 crore, while system loan growth was
approximately 21%. Your Bank's loan growth was driven by an increase of
26.8% in retail advances to Rs. 80,113 crore, and an increase of 26.7% in
wholesale advances to Rs. 81,246 crore. The Bank had a market share of 3.7%
in total system deposits and 4.2% in total system advances. The Bank's
Credit Deposit (CD) Ratio was 76.7% as on March 31, 2011. Adjusted for
overseas funding by its international operations, primarily funded from
term borrowings, the CD Ratio was lower at 74.5%.

Business Segments' Update :

Consistent with its performance in the past, in the last financial year,
your Bank has achieved healthy growth across various operating and
financial parameters. This performance reflected the strength and diversity
of the Bank's three primary business franchises - retail banking, wholesale
banking and treasury, and of its disciplined approach to risk - reward
management.

Retail Banking

Your Bank caters to various customer segments with a wide range of products
and services. The Bank is a 'one stop shop' financial services provider of
various deposit products, of retail loans (auto loans, personal loans,
commercial vehicle loans, mortgages, business banking, loan against gold
jewellery etc.), credit cards, debit cards, depository (custody services),
investment advisory, bill payments and several transactional services.
Apart from its own products, the Bank distributes third party financial
products such as mutual funds and life and general insurance.

The growth in your Bank's retail banking business was robust during the
financial year ended March 31, 2011. The Bank's total retail deposits grew
by over 23.3% to Rs. 139,961 crore in the financial year ended March 31,
2011, driven by retail savings balances which grew much faster at 28.0%
during the same period. The Bank's retail assets grew by 26.8% to Rs.
80,113 crore during the financial year ended March 31, 2011 driven
primarily by a growth in mortgages, business banking, commercial vehicle
loans and auto loans.

Branch Banking

This year your Bank expanded its distribution network from 1,725 branches
in 779 cities as on March 31, 2010 to 1,986 branches in 996 Indian cities
on March 31, 2011. The Bank's ATMs increased from 4,232 to 5,471 during the
same period. Your Bank' s branch network is deeply entrenched across the
country with significant density in areas conducive to the growth of its
businesses. The Bank's focus on semi-urban and under-banked markets
continued, with over 70% of the Bank's branches now outside the top nine
Indian cities. The Bank's customer base grew in line with the growth in its
network and increased product penetration initiatives, this currently
stands at 21.9 million customers. The average savings balance per account
which is a good indicator of the strength of the Bank's retail liability
franchise grew over 17%. The Bank continues to provide unique products and
services with customer centricity a key objective.

In order to provide its customers increased choices, flexibility and
convenience the Bank continued to make significant headway in its multi
channel servicing strategy. Your Bank offered its customers the use of
ATMs, internet, phone and mobile banking in addition to its expanded branch
network to serve their banking needs.

The increase in the Bank' s debit card base this year coupled with a growth
in its ATM network translated to an increase in ATM transactions by 14%.
The Bank also made strong inroads in its internet banking channel with
around 60% of its registered customers now using net banking facilities for
their banking requirements. Your bank now offers phone banking in 996
locations in addition to giving its customers the convenience of accessing
their bank accounts over their mobile phones. The success of the Bank's
multi-channel strategy is evidenced in the fact that over 80% of customer
initiated transactions are serviced through the non-branch channels.

Retail Assets

Your Bank continued to grow at a healthy pace in almost all the retail loan
products that it offers and further consolidated its position amongst the
top retail lenders in India. The Bank grew its retail asset portfolio in a
well balanced manner focusing on both returns as well as risk. While the
Bank's auto finance business remained a key business driver for its retail
asset portfolio, other retail loan products exhibited robust growth rates
and good asset quality.

The Bank continued its focus on internal customers for its credit cards
portfolio. Overall credit cards remained a profitable business for your
Bank with over 5 million cards in force as at March 2011. As part of its
strategy to drive usage of its credit cards the Bank also has a significant
presence in the 'merchant acquiring' business with the total number of
point-of-sale (POS) terminals installed at over 120,000.

In addition to the above products the Bank does home loans in conjunction
with HDFC Limited. Under this arrangement the Bank sells loans provided by
HDFC Limited through its branches. HDFC Limited approves and disburses the
loans, which are booked in their books, with the Bank receiving a sourcing
fee for these loans. HDFC Limited offers the Bank an option to purchase up
to 70% of the fully disbursed home loans sourced under this arrangement
through either the issue of mortgage backed pass through certificates
(PTCs) or by a direct assignment of loans; the balance is retained by HDFC
Limited. Both the PTCs and the loans thus assigned are credit enhanced by
HDFC Limited upto a AAA level. The Bank purchases these loans at the
underlying home loan yields less a fee paid to HDFC Limited for the
administration and servicing of the loans. Your Bank originated
approximately an average Rs. 700 crore of mortgages every month in the
financial year ended March 31, 2011, an increase from the Rs. 550 crore per
month that it originated in the previous year. During the year the Bank
also purchased from HDFC Ltd. under the 'loan assignment' route
approximately Rs. 4,300 crores of AAA credit enhanced home loans most of
which qualified as priority sector advances.

Your Bank also distributes life, general insurance and mutual fund products
through its tie-ups with insurance companies and mutual fund houses. The
income from these businesses continued to demonstrate robust growth largely
due to an expanded branch network and the increased penetration of the
Bank's managed portfolio despite the fact that during the year there were
regulatory changes which in some cases impacted the commission paid by the
manufacturers of these products to the Bank. The success in the
distribution of the above products has been demonstrated with the growth in
the Bank's fee income. Third party distribution income contributes
approximately 25% of total fee income.

The Bank's data warehouse, Customer Relationship Management (CRM) and
analytics solutions have helped it target existing and potential customers
in a cost effective manner and offer them products appropriate to their
profile and needs. Apart from reducing costs of acquisition, this has also
led to deepening of customer relationships and greater efficiency in fraud
control and collections resulting in lower credit losses. The Bank is
committed to investing in advanced technology in this area which will
provide cutting edge in the Bank's product and service offerings.

Wholesale Banking

The Bank provides its corporate and institutional clients a wide range of
commercial and transactional banking products, backed by high quality
service and relationship management. The Bank's commercial banking business
covers not only the top end of the corporate sector but also the emerging
corporate segments and some small and medium enterprises (SMEs). The Bank
has a number of business groups catering to various segments of its
wholesale banking customers with a wide range of banking services covering
their working capital, term finance, trade services, cash management,
foreign exchange and electronic banking requirements.

The business from this segment registered a healthy growth in the financial
year ended March 31, 2011. The Bank's wholesale deposits grew by around
27.4%, while wholesale advances showed a growth of over 26.7% both of which
were significantly faster than the growth in the system during the same
period. Your Bank provides its customers both working capital and term
financing. The Bank witnessed an increase in the proportion of its medium
tenor term lending, however working capital loans and short tenor term
loans retained a large share of its wholesale advances. While the duration
of the Bank's term loans largely remained small to medium term, the Bank
did witness an increase in its longer duration term loans, and project
lending including loans to the infrastructure segment.

During the financial year ended March 31, 2011, growth in the wholesale
banking business continued to be driven by new customer acquisition and
higher cross-sell with a focus on optimizing yields and increasing product
penetration. Your Bank's cash management and vendor & distributor (supply
chain) finance products continued to be an important contributor to growth
in the corporate banking business. Your Bank further consolidated its
position as a leading player in the cash management business (covering all
outstation collection, disbursement and electronic fund transfer products
across the Bank' s various customer segments) with volumes growing to over
Rs. 30 trillion. The Bank also strengthened its market leadership in cash
settlement services for major stock exchanges and commodity exchanges in
the country. The Bank met the overall priority sector lending requirement
of 40% of net bank credit and also strived for healthy growth in the sub-
targets such as weaker sections, direct agriculture and the micro and SME
segments.

The Bank's financial institutions and government business group (FIG)
offers commercial and transaction banking products to financial
institutions, mutual funds, public sector undertakings, central and state
government departments. The main focus for this segment remained offering
various deposit and transaction banking products to this segment besides
deepening these relationships by offering funded, non-funded treasury and
foreign exchange products.

International Operations

The Bank has a wholesale banking branch in Bahrain, a branch in Hong Kong
and two representative offices in UAE and Kenya. The branches offer the
Bank's suite of banking services including treasury and trade finance
products to its corporate clients. Your Bank has built up an asset book
over USD 1 billion through its overseas branches. The Bank offers wealth
management products, remittance facilities and markets deposits to the non-
resident Indian community from its representative offices.

Treasury

The treasury group is responsible for compliance with reserve requirements
and management of liquidity and interest rate risk on the Bank's balance
sheet. On the foreign exchange and derivatives front, revenues are driven
primarily by spreads on customer transactions based on trade flows and
customers' demonstrated hedging needs. During the financial year ended
March 31, 2011, revenues from foreign exchange and derivative transactions
grew by 26.2% to Rs. 786.3 crore. These revenues were distributed across
large corporate, emerging corporate, business banking and retail customer
segments for plain vanilla foreign exchange products and across primarily
large corporate and emerging corporate segments for derivatives. The Bank
offers Indian rupee and foreign exchange derivative products to its
customers, who use them to hedge their market risks. The Bank enters into
foreign exchange and derivative deals with counterparties after it has set
up appropriate counterparty credit limits based on its evaluation of the
ability of the counterparty to meet its obligations in the event of
crystallization of the exposure. Appropriate credit covenants may be
stipulated where required as trigger events to call for collaterals or
terminate a transaction and contain the risk. Where the Bank enters into
foreign currency derivative contracts with its customers it lays them off
in the inter-bank market on a matched basis. For such foreign currency
derivatives, the Bank does not have any open positions or assume any market
risks but carries only the counterparty credit risk (where the customer has
crystallized payables or mark-to-market losses). The Bank also deals in
Indian rupee derivatives on its own account including for the purpose of
its own balance sheet risk management. The Bank recognizes changes in the
market value of all rupee derivative instruments (other than those
designated as hedges) in the profit and loss account in the period of
change. Rupee derivative contracts classified as hedge are recorded on an
accrual basis.

Given the regulatory requirement of holding government securities to meet
the statutory liquidity ratio (SLR) requirement, your Bank maintains a
portfolio of government securities. While a significant portion of these
SLR securities are held in the 'Held-to-Maturity' (HTM) category, some of
these are held in the 'Available for Sale' (AFS) category.

Information Technology

Since its inception, your Bank has made substantial investments in its
technology platform and systems, built multiple distribution channels,
including an electronically linked branch network, automated telephone
banking, internet banking and banking through mobile phones, to offer its
customers convenient access to various products.

The Bank has templatized credit underwriting through automated customer
data de-duplication and real-time scoring in its loan origination process.
Having enhanced its cross selling and up-selling capabilities through data
mining and analytical customer relationship management solutions, the
Bank's technology enables it to have a 360 0 view of its customers. Your
Bank employs event detection technology based customer messaging and has
deployed an enterprise wide data warehousing solution as a back bone to its
business intelligence system.

Implementation of a risk management engine for internet transactions has
reduced the phishing and man in the middle attacks significantly. The bank
has also implemented a digital certificates based security engine for
corporate internet banking customers. Credit and debit cards usage of the
Bank's customers is secured by powerful proactive risk manager technology
solutions which does rules based SMS alerts as well as prompts customer
service representatives to call the customer on detecting abnormal usage
behavior. This prevents frauds and minimizes losses to customers, if the
card has been stolen and yet to be hot listed.

Sophisticated automated switch-over and switch-back solutions power the
Bank's disaster recovery management strategy for key core banking solutions
in its data center, improving availability of your Bank's services to its
customers.

With the various initiatives that your Bank has taken using technology, it
has been successful in driving the development of innovative product
features, reducing operating costs, enhancing customer service delivery and
minimizing inherent risks.

Service Quality Initiatives

Your Bank was one of the few banks in the country to have put in place a
team dedicated to improve service quality through the Lean and Six Sigma
methodologies with a focus on right origination, cost effective and error
free operations and effective complaint resolution. The Bank continued
driving improvements in Service Quality (SQ) initiatives encompassing all
customer touch points namely branches, ATMs, phone banking, net banking, e-
mail service as well as back office support functions impacting customer
service through a dedicated Quality Initiatives Group (QIG) team. Some of
the key elements covered by the QIG team are workplace management,
etiquette and courtesy, lobby management, complaints management, management
of turn-around times, overall customer service and compliance with the
Bank's internal processes as well as regulatory compliance. The group also
runs programs such as 'voice of the customer' and 'voice of the employee'
for effective complaint resolution and process improvement. Various
departments of the Bank are empowered to deliver superior customer
experience through improvements in products, processes and people skills.
To this effect, your Bank has designed and implemented customized Lean
Sigma Project Management (LSPM) methodology that incorporates the Lean
philosophy into the Six Sigma framework to deliver faster and sustainable
results clubbed with customer delight and improved profitability. The Bank
also takes advantage of various information technology platforms to improve
products, processes and services. Your Bank does not believe in designing a
product and fitting it into the customers' needs rather it designs products
to meet customer needs. The Bank has always ensured that its products and
services are delivered through processes which are in line with the
prevalent regulatory framework and has adequate controls to safe-guard
against possible misuse.

Your Bank has taken various steps to improve the effectiveness of its
grievance re-dressal mechanism across its delivery channels. Some key
measures taken up by the Bank include a three layered grievance re-dressal
mechanism, bank-wide online complaint resolution system, root cause
remediation, customer service committees at the branch level and at the
corporate headquarters level with representation from customers. The levels
of customer service are periodically reviewed by the board of directors of
the Bank.

Apart from the above, your Bank continued with the ongoing service quality
initiatives which include the audit of services as well as mystery shopping
at various customer touch points to capture and improve customer
experiences. Your Bank has also set up a robust training mechanism; both on
the online platform as well as using conventional class room sessions, to
enable its employees improve the quality of customer service.

Risk Management and Portfolio Quality

Taking on various types of risk is integral to the banking business. Sound
risk management and balancing risk-reward trade-offs are critical to a
bank's success. Business and revenue growth have therefore to be weighed in
the context of the risks implicit in the Bank's business strategy. Of the
various types of risks your Bank is exposed to, the most important are
credit risk, market risk (which includes liquidity risk and price risk) and
operational risk. The identification, measurement, monitoring and
management of risks accordingly remain a key focus area for the Bank. For
credit risk, distinct policies and processes are in place for the retail
and wholesale businesses. In the retail loan businesses, the credit cycle
is managed through appropriate front-end credit, operational and collection
processes. For each product, programs defining customer segments,
underwriting standards, security structure etc., are specified to ensure
consistency of credit buying patterns. Given the granularity of individual
exposures, retail credit risk is monitored largely on a portfolio basis,
across various products and customer segments. During the financial year
ended March 31, 2008 the Bank obtained an ISO 9001:2008 certification of
its retail asset underwriting. Last year, the second surveillance audit was
conducted successfully at key locations and the certification was confirmed
with no instances of non-conformity. For wholesale credit exposures,
management of credit risk is done through target market definition,
appropriate credit approval processes, ongoing post-disbursement monitoring
and remedial management procedures. Overall portfolio diversification and
reviews also facilitate mitigation and management.

The Risk Policy and Monitoring Committee of the Board monitors the Bank's
risk management policies and procedures, vets treasury risk limits before
they are considered by the Board, and reviews portfolio composition and
impaired credits.

As of March 31, 2011, the Bank's ratio of gross non-performing assets
(NPAs) to gross advances was 1.05%. Net non-performing assets (gross non-
performing assets less specific loan loss provisions, Export Credit
Guarantee Corporation (ECGC) claims received and provision in lieu of
diminution in the fair value of restructured assets) were 0.2% of customer
assets as of March 31, 2011. The specific loan loss provisions that the
Bank has made for its non-performing assets continue to be more
conservative than the regulatory requirement.

In accordance with the guidelines issued by the Reserve Bank of India on
Basel II, your Bank migrated to the standardized approach for Credit Risk
and the Basic Indicator approach for operational risk in the financial year
ended March 31, 2009. Through the year, your Bank has been continuing work
on various initiatives which would enable it to comply with the standards
laid out for the more advanced capital approaches under Basel II. While the
core systems which support such initiatives are more or less in place, the
Bank has been working towards testing the results and fine-tuning such
systems and plugging the gaps to meet the operational requirements for the
advanced approaches. This is a long process, which requires not only having
the quantitative inputs in place, but also a strong culture of risk
management and awareness in the Bank, which rely on these inputs for
decision making. The Bank has made reasonable progress in this regard. The
implementation of the Basel II framework is in harmony with the Bank's
objective of adopting best practices in risk management.

INTERNAL AUDIT AND COMPLIANCE

The Bank has Internal Audit and Compliance functions which are responsible
for independently evaluating the adequacy of all internal controls and
ensuring operating and business units adhere to internal processes and
procedures as well as to regulatory and legal requirements. The audit
function also pro-actively recommends improvements in operational processes
and service quality. To ensure independence, the audit department has a
reporting line to the Chairman of the Board of Directors and the Audit and
Compliance Committee of the Board and only a dotted line to the Managing
Director. To mitigate operational risks, the Bank has put in place
extensive internal controls including restricted access to the Bank's
computer systems, appropriate segregation of front and back office
operations and strong audit trails. The Audit and Compliance Committee of
the Board also reviews the performance of the audit and compliance
functions and reviews the effectiveness of controls and compliance with
regulatory guidelines.

CORPORATE SOCIAL RESPONSIBILITY

Your Bank views Corporate Social responsibility as its commitment to
operate ethically and contributing to economic development while improving
the quality of life of its employees as well as that of the local
communities and society at large. Pursuing a vision towards the socio-
economic empowerment of underprivileged and marginalized sections of
society, the Bank reiterates its commitment to support social initiatives
with a special focus on education and livelihood support.

The major initiatives that your Bank has taken in this direction over the
last few years cover the following areas :

- Education

- Livelihood training and support

- Environmental sustainability

- Employee welfare, health and well being

- Employee engagement

Education Initiatives

School adoption project

This is a public private partnership to ensure that children in municipal
schools have access to quality education; the program provides direct
learning inputs to slow learners through academic support centers. These
centers provide children with access to concept based, child friendly
focused teaching methods. Teachers are also assisted with innovative
teaching methods and learning material. Your Bank is presently supporting
seven schools in Mumbai covering 1,850 children; in addition the Bank is
working with 10 schools in Pune on a reading program that covers over 5,000
children.

Special educational sponsorships for the girl child

Girls who are at the risk of dropping out of school on account of
affordability and poor academic performance are identified and supported
under a special sponsorship program. This program covers their material
needs with regard to their education as well as provides them with academic
support. Presently, this program covers 1,500 girls in Mumbai, Sheopur and
Chattisgarh.

Educational assistance

Under this program your Bank provides education support to children who
have dropped out of school with an aim to reintegrate them into the
mainstream education channels. Simultaneously, support classes are also
conducted in high risk areas to reduce dropouts and increase the level of
learning. Over 1,000 children in Mumbai, Bangalore, Hyderabad and Kolkata
are being covered through this educational assistance program.

Pre-schools

The Bank has initiated partnerships to operate pre-schools in areas where
there is a high concentration of out of school children. These are focused
predominantly towards first generation learners, the pre-primaries prepare
children for schooling while at the same time counseling their parents on
the importance of education. On completion of the pre-school module
children are enrolled into school. Your Bank currently reaches out to over
9,000 children in Mumbai, Delhi and Hyderabad under this program.

Financial Literacy

We believe that by inculcating sound economic practices in rural children,
we can tangibly demonstrate the power of the savings habit. This financial
education program aims to inculcate practices in children that would over
time empower them with the right decision making skills in terms of saving
money, making financial decisions based on real needs, and differentiate
between good and bad spending. Your Bank has tied up with 464 schools in
Maharashtra covering over 69,000 children through this program.

Livelihood Training and Support

With the economic upliftment of the underprivileged in mind, the Bank
provides support for vocational training to individuals in order to enable
them to have regular and sustainable income. Under this program your Bank
supports non formal vocational and technical education programs in trades
such as welding, plumbing, electrical maintenance, mobile repair, tailoring
etc. We also support training courses in making of paper bags, gel candles,
wax candles, chef caps and courses on physiotherapy for visually challenged
candidates. Further through onsite skills up-gradation courses in basic
trades related to the construction industry, we are reaching out to the
unorganized sector and have provided training to over 2,650 youth and
women.

Your bank has an active lending program wherein it focusses on lending to
customers typically below the poverty line for income generation purposes
through the formation of self-help groups. The bank believes that this
lending should be supported with training programs that nurture the
appropriate skill sets as well as the provision of market linkages to the
primary markets in order to ensure that the livelihood activities are
sustainable.

To this effect your bank conducts capacity building and training sessions
that focus on enhancing the skills of the borrowers, some of these in the
past have included basket weaving, agarbatti rolling etc. The bank also has
in place a program that assists in providing market linkages to the self
help groups so that they can sell the products produced at a fair price and
in a hassle free manner. In addition to the above the bank provides
counselling to all the self help groups that it works with on the benefits
of the savings habit, wise investing habits etc.

Environmental Sustainability

Your Bank believes in taking responsibility for the effects of its
operations in society and on the environment and this belief embodies its
approach to the reduction of carbon emissions. Taking forward this
commitment the Bank has undertaken the following projects :

Annual Foot-printing / Calculation of its carbon emissions

The Bank has developed and put in place a template to collate and calculate
its carbon emissions on an annual basis. This provides us with our
emissions regarding travel, electricity, paper and other utilities, which
then enables us to take efforts in specific areas in order for the Bank to
reduce the impact of its operations on the environment.

Carbon Disclosure Project

The Bank has been associated with the carbon disclosure project since 2007,
adhering to their disclosure practices, each year we have strived to
improve the quality of reporting and the number of parameters that go into
the disclosure. In the year 2010, your Bank registered as a signatory to
the carbon disclosure project.

Carbon Management Awareness

Employees are made aware of the importance of conservation of natural
resources and smart resource management techniques through various e-
mailers and other communications sent out periodically.

Sustainability Reporting

We have engaged consultants to create an in-house capability for triple
bottom line / sustainability reporting, based on the Global Reporting
Initiative guidelines. This is a disclosure tool used to communicate
important information regarding the organization and its performance across
social, environmental, and economic parameters to stakeholders.

Green Initiative

In line with its commitment to green and sustainable development your bank
has followed green principles in the construction of its back office
premises located in Mumbai. The building core and shell has been designed
and implemented in lines with a LEED rating of 'gold'. All materials used
in the construction of the interiors of the building conform to green norms
for commercial premises. The operations of the premises consume less than
one watt per square foot of space. Indoor air quality is monitored through
Co2 control and sewage for the building is treated and recycled.

Employee Health, Welfare and Well Being

Your Bank has its people as one of its stated values. Keeping in line with
this we ensure equal opportunities, living wages, social security and well
being of our employees. Employee development is integral to the bank, which
is achieved through a range of training and developmental program and
activities.

Employee Participation

The Bank encourages employee participation at all levels to strengthen its
corporate social responsibility initiatives as well as inculcate a stronger
sense of ownership amongst its employees of each of these initiatives.

Employee Payroll Giving

Employees are provided with an easy and convenient system to donate through
the employee payroll giving. The donor enjoys the flexibility of choice
with regards to the amount that they wish to donate and the cause that they
wish to support. The Bank adds a matching amount to the contribution to
endorse its support to the cause chosen by the employees.

Employee Volunteering

Employees are an integral part of the Bank's social initiatives, they are
encouraged to participate in philanthropy work involving their time and
skills in many possible ways. Employees can choose NGO partners they would
like to work with and the manner in which they would like to dedicate their
time and skill. Your Bank's employees have increasingly participated in
summer camps; conducted english-speaking classes; collected paper waste,
assisted in academic support programs, donated blood and so on.

With its focus on creating self-reliance and promoting education in the
interiors of the country, your Bank has been able to make meaningful
differences a small group of individuals through its many programs. Going
forward we would like to look at CSR not as a stand-alone function but as
an ideology that is interwoven into every aspect of your Bank's operations.

FINANCIAL INCLUSION

Over the last few years, your Bank has been working on a number of
initiatives to promote Financial Inclusion across identified sections of
rural, under-banked and un-banked consumers. These initiatives target
segments of the population that have limited or no access to the formal
banking system for their basic banking and credit requirements, by building
a robust and sustainable model that provides relevant services and viable
and timely credit that ultimately results in economically uplifting its
customers. The Banks financial inclusion initiatives have been integrated
across its various businesses, across product groups. By March 31, 2014
your Bank will endeavor to bring 10 million households currently excluded
from basic banking services under the fold of this program.

Rural Initiative

The Bank has a number of its branches in rural and under-banked locations.
In these branches the Bank offers products and services such as savings,
current, fixed & recurring deposits, loans, ATM facilities, investment
products such as mutual funds and insurance, electronic funds transfers,
drafts and remittances etc. The Bank also leverages some of these branches
as hubs for other inclusion initiatives such as direct linkages to self
help groups and to promote mutual guarantee micro-loans, POS terminals and
information technology enabled kiosks, as well as other ICT initiatives
such as mobile banking in these locations. The Bank covers over 4,000
villages in the country through various distribution set ups, these include
branches and business correspondents. Over half of the above villages are
those having a population of less than 2,000 that have typically been
financially excluded from the formal banking sector.

A number of retail credit products such as two-wheeler loans, car loans,
mortgages etc. that are consumption products in urban centers happen to be
means of income generation for rural consumers. Apart from loans directly
linked to agriculture such as pre and post harvest credit, there are many
other credit products that the Bank uses to aid financial betterment in
rural locations. The Bank has extended provision of its retail loans to
large segments of the rural population where the end use of the products
acquired (by availing our loans) is used for income generating activities.
For example, loans for tractors, commercial vehicles, two wheelers etc.
supplement the farmer's income by improving productivity and reducing
expenses.

No Frills Savings Accounts

A savings account is the primary requirement for the provision of other
banking services; the account promotes the habit of saving, provides
security, and inculcates confidence among the target segment in the banking
sector.

The Bank provides 'No Frills' savings accounts through all its branches as
a stepping stone towards financial inclusion. These accounts are offered
only to customers who do not have any other bank account (are un-banked)
and who are either beneficiaries of a government welfare scheme or have
annual incomes less than a defined threshold (constitute the bottom of the
economic pyramid). Apart from the basic no frills savings account your Bank
also offers these segments other accounts such as no frills salary accounts
and limited KYC accounts. Your Bank has been empanelled by the unique
identification authority of India in 444 districts of the country allowing
citizens to open small savings accounts with your Bank in a convenient,
hassle free manner at the time of registration for the 'Aadhar'.

Loans to Self Help Groups and Mutual Guarantee Micro loans

Your Bank has been working with various non government organizations
(appointing them as business correspondents) in order to cover a wider
consumer base than that it could have reached through its branch network.
The NGOs that the Bank partners work with the objective of providing credit
for income generation activities, (often by providing training, vocational
guidance and marketing support to their members). Leveraging their
distribution, credit expertise and on-ground knowledge, the Bank funds self
help groups. Over the last one year the Bank has accelerated its direct
linkage program to self-help groups, under this program the Bank itself
works at the grass root level with women in villages, conducts financial
literacy programs, forms groups and then funds these groups for income
generation activities. Till date the Bank has lent to over 54,000 self help
groups covering approximately 8 lakh households. Your Bank also disburses
loans to its rural customers under the mutual guarantee micro loan product.
This product works on the principle of group guarantees and provides clean
(not backed by any collateral) loans to the borrowers based on a guarantee
by other borrowers.

Agriculture and Allied Activities

A large portion of India's un-banked population relies on agriculture as
the main source of livelihood. We believe provision of credit to marginal
farmers through various methods that your Bank has employed replaces the
traditional money lending channel, while at the same time providing income
generating activities. The Bank provides various loans to farmers through
its suite of specifically designed products such as the Kisan Gold Card,
tractor and cattle loans etc. In addition the Bank offers post-harvest cash
credit, warehouse receipt financing and bill discounting facilities to
mandi (markets for grain and other agricultural produce) participants and
farmers. These facilities enable the mandi participants to make timely
payments to farmers. The Bank carries out this business through over 200
branches that are located in close proximity to mandis.

The Bank targets specific sectors to capture supply chain of certain crops
from the production stage to the sales stage. On the basis of these
cashflows, your Bank is able to finance specific needs of the farmers. This
is further supported by using business correspondents closer to their
respective locations and helping them to create a savings and banking
habit. This model has currently been implemented with dairy and sugarcane
farmers.

The initiative currently underway includes the appointment of dairy
societies and sugarcane co-operatives as business correspondents, through
whom the Bank opens accounts of individual farmers attached to these
societies. The societies route all payments to the farmers through this
account.

Small and Micro Enterprises

One of the means to financial inclusion is by supporting small and micro
enterprises which in turn provide employment opportunities to the
financially excluded. Though indirect, we believe this model may in many
instances be more effective than providing subsidies that are often
unsustainable, or never reach the intended beneficiary.

The Bank offers complete banking solutions to micro, small and medium scale
enterprises across industry segments including manufacturers, retailers,
wholesalers / traders and services. The entire suite of financial products
including cash credit, overdrafts, term loans, bills discounting, export
packing credit, letter of credit, bank guarantees, cash management services
and other structured products are made available to these customers.

Gold Loans

Gold loans are the simplest and most effective means of unlocking the value
of the widest held security in India. The Bank offers loans against gold
jewellery to its customers at interest rates that are fair in a quick
hassle free manner. A number of these loans are availed by housewives,
small entrepreneurs and farmers both for income generation activities as
well as for emergency needs. This product provides customers with easy
credit as and when they need it without their having to resort to loans
disbursed by local money lenders typically at usurious rates of interest.

Promoting Financial Awareness

In addition to providing various products and services to the financially
excluded, that Bank believes that imparting education and training to these
target segments is equally essential to ensure transparency and create
awareness. To this effect the Bank has put in place various training
programs, these are conducted by Bank staff in local languages and cover
not only the customers but also various intermediaries such as the Bank's
business correspondents. Through these programs the Bank provides credit
counseling and information on parameters like savings habit, better
utilization of savings, features of savings products, credit utilization,
asset creation, insurance, income generation program etc.

HUMAN RESOURCES

The total number of employees of your bank were 55,752 as of March 31,
2011. The Bank continued to focus on training its employees, both on - the
- job as well as through training programs conducted by internal and
external faculty. The Bank has consistently believed that broader employee
ownership of its shares has a positive impact on its performance and
employee motivation.

HDFC Bank lists 'people' as one of its stated core values. The Bank
believes in empowering its employees and constantly takes various measures
to achieve this.

STATUTORY DISCLOSURES

The information required under Section 217(2A) of the Companies Act, 1956
and the rules made there under as ammended, are given in the annexure
appended hereto and forms part of this report. In terms of section
219(1)(iv) of the Act, the Report and Accounts are being sent to the
shareholders excluding the aforesaid annexure. Any shareholder interested
in obtaining a copy of the said annexure may write to the Company Secretary
at the Registered Office of the Bank. The Bank had 55,752 employees as on
March 31, 2011. 84 employees employed throughout the year were in receipt
of remuneration of more than Rs. 60 lacs per annum and 8 employees employed
for part of the year were in receipt of remuneration of more than Rs. 5
lacs per month.

The provisions of Section 217(1)(e) of the Act relating to conservation of
energy and technology absorption do not apply to your Bank. The Bank has,
however, used information technology extensively in its operations.

The report on Corporate Governance is annexed herewith and forms part of
this report.

The Ministry of Corporate Affairs has issued 'Corporate Governance
Voluntary Guidelines' in December 2009. While these guidelines are
recommendatory in nature, the Bank has adopted most of these guidelines as
detailed in the Corporate Governance Report. The Bank will examine the
possibilities of adopting the remaining guidelines in an appropriate
manner.

RESPONSIBILITY STATEMENT

The Board of Directors hereby state that:

i) In the preparation of the annual accounts, the applicable accounting
standards have been followed along with proper explanation relating to
material departures;

ii) We have selected such accounting policies and applied them consistently
and made judgments and estimates that are reasonable and prudent so as to
give a true and fair view of the state of affairs of the Bank as on March
31, 2011 and of the profit of the Bank for the year ended on that date;

iii) We have taken proper and sufficient care for the maintenance of
adequate accounting records in accordance with the provisions of the
Companies Act, 1956 for safeguarding the assets of the Bank and for
preventing and detecting frauds and other irregularities; and

iv) We have prepared the annual accounts on a going concern basis.

DIRECTORS

Mr. Ashim Samanta will retire by rotation at the ensuing Annual General
Meeting and is eligible for re-appointment.

Mr. C.M. Vasudev, who has been a Director of the Bank since October 2006,
has been appointed as the Chairman of the Bank with effect from August 26,
2010 with the approval of the Reserve Bank of India for a period of 3
years. The Reserve Bank of India has also granted approval for the
remuneration payable to him. The approval of the shareholders is being
sought at the ensuing Annual General Meeting for the appoinment of the
Chairman and remuneration payable to him.

Mr. Partho Datta, Mr. Bobby Parikh and Mr. Anami N Roy have been appointed
as additional directors by the Board during the year and they shall hold
office up to the conclusion of the ensuing Annual General Meeting. The Bank
has received notices pursuant to Section 257 of the Companies Act, 1956
from some of its shareholders proposing the candidature of Mr. Partho
Datta, Mr. Bobby Parikh and Mr. Anami N Roy as Directors of the Bank at the
ensuing Annual General Meeting.

Mrs. Renu Karnad retired as a Director of the Bank in July 2010 on
completion of a tenure of eight years as permitted under the Banking
Regulation Act, 1949. Mrs. Karnad has been re-appointed as an additional
director in January 2011 in accordance with the relevant applicable
guidelines of the Reserve Bank of India, subject to the approval of the
shareholders. The Bank has received a notice pursuant to Section 257 of the
Companies Act, 1956 from a shareholder proposing the candidature of Mrs.
Karnad as a Director at the ensuing Annual General Meeting.

Mr. Jagdish Capoor retired as the Chairman of the Board with effect from
the close of business hours on July 05, 2010. Mr. Gautam Divan retired as a
Director of the Bank with effect from July 22, 2010 on attaining the age of
70 as prescribed by the Reserve Bank of India. Mr. Arvind Pande and Mr.
Keki Mistry ceased to be directors of the Bank with effect from the close
of business hours on January 14, 2011 and March 26, 2011 respectively on
completing the permitted tenure of eight years as Directors as per the
Banking Regulation Act, 1949.

Your Directors would like to place on record their sincere appreciation of
the contributions made by Mr. Jagdish Capoor, Mr. Gautam Divan, Mr. Arvind
Pande and Mr. Keki Mistry during their tenure as Directors of the Bank.

The brief resume / details relating to Directors who are to be appointed /
re-appointed are furnished in the report on Corporate Governance.

AUDITORS

The Auditors, M/s. BSR & Co., Chartered Accountants will retire at the
conclusion of the forthcoming Annual General Meeting and are eligible for
re-appointment. Members are requested to consider their re-appointment on
remuneration to be decided by the Audit and Compliance Committee of the
Board.

ACKNOWLEDGEMENT

Your Directors would like to place on record their gratitude for all the
guidance and co-operation received from the Reserve Bank of India and other
government and regulatory agencies. Your Directors would also like to take
this opportunity to express their appreciation for the hard work and
dedicated efforts put in by the Bank's employees and look forward to their
continued contribution in building a World Class Indian Bank.

On behalf of the Board of Directors

C.M. Vasudev
Mumbai, April 18, 2011 Chairman.

Annexure to Directors' Report for the year ended March 31, 2011

EMPLOYEES' STOCK OPTIONS

Details of the stock options granted, vested, exercised, forfeited and
lapsed during the year under review are as under :

Scheme(s) A B C D E

ESOP IV 358.60 - - 58600 -

ESOP V 366.30 - - 20700 -

ESOP VI 362.90 - - 25400 -

ESOP VII 630.60 - - 625900 -

ESOP VIII 994.85 - - 717700 -

ESOP IX 994.85 - - 786200 -

ESOP X 1098.70 - - 222000 -

ESOP XI 1098.70 - - 437600 -

ESOP XII 1098.70 - - 2048400 -

ESOP XIII 1126.45 - 626500 313500 -

ESOP XIV 1446.10 - 5276250 1597750 69500

ESOP XV 1704.80 - 1695250 75300 120000

ESOP XVI 2200.80 6593500 - - 20000

eCBoP Key ESOP 116.00 - - - -

eCBoP 2004 -
Scheme 1 565.50 - - 521 -

eCBoP 2004 -
Scheme 2 442.25 - - 6303 -

eCBoP 2004 -
Scheme 3 442.25 - - 1104 -

eCBoP 2004 -
Scheme 4 442.25 - - 893 -

eCBoP 2004 -
Scheme 5 536.50 - - 33094 -

eCBoP 2004 -
Scheme 6 536.50 - - 2441 -

eCBoP 2004 -
Scheme 7 593.05 - - 41457 -

eCBoP 2004 -
Scheme 8 859.85 - - 52767 -

eCBoP 2007 -
Scheme 1 1162.90 - - 306699 -

eCBoP 2007 -
Scheme 2 1258.60 - - 108083 -

Total 6593500 7598000 7482412 209500

Scheme(s) F G

ESOP IV 3500 37900

ESOP V 6000 6900

ESOP VI 3600 17000

ESOP VII 1600 663700

ESOP VIII 10500 1130300

ESOP IX 5600 705700

ESOP X - 248200

ESOP XI - 531300

ESOP XII - 2293000

ESOP XIII - 880500

ESOP XIV 103250 3575250

ESOP XV - 1619950

ESOP XVI - 6573500

eCBoP Key ESOP - 64816

eCBoP 2004 -
Scheme 1 39 868

eCBoP 2004 -
Scheme 2 - 8238

eCBoP 2004 -
Scheme 3 - 1415

eCBoP 2004 -
Scheme 4 - 3917

eCBoP 2004 -
Scheme 5 - 69116

eCBoP 2004 -
Scheme 6 173 12506

eCBoP 2004 -
Scheme 7 - 98430

eCBoP 2004 -
Scheme 8 1295 58066

eCBoP 2007 -
Scheme 1 60149 409782

eCBoP 2007 -
Scheme 2 52757 148851

Total 248463 19159205

A = Exercise Price (Rs.)
B = Options Granted
C = Options Vested
D = Options Exercised & Shares Allotted*
E = Options Forfeited
F = Options Lapsed
G = Total Options in Force as on March 31, 2011

*One (1) share would arise on exercise of (1) stock option.

Other details are as under :

Money realized by exercise of The Bank received Rs. 7,48 lacs
options towards share capital and Rs.
820,68 lacs towards share premium
on account of 7,482,412 stock
options exercised and allotted
during the year under review.

Pricing Formula for ESOS XVI Closing market price on the stock
exchange where there is highest
trading volume on the immediately
preceding working day of the date
of grant.

Details of options granted to : Name Options Granted

i. Directors & Senior managerial Aditya Puri 90,000
personnel
Paresh Sukthankar 60,000

Harish Engineer 60,000

Rahul Bhagat 40,000

Kaizad Bharucha 40,000

Abhay Aima 40,000

Anil Jaggia 40,000

Sashi Jagdishan 40,000

Rajan Ananthanarayan 40,000

Pralay Mondal 40,000

Navin Puri 40,000

Ashish Parthasarthy 40,000

Jimmy Tata 40,000

Bhavesh Zaveri 40,000

ii. Other employee who receives a None
grant in any one year of option
amounting to 5% or more of option
granted during that year

iii. Identified employees who were None
granted option, during any one
year, equal to or exceeding 1% of
the issued capital (excluding
outstanding warrants and
conversions) of the company at the
time of grant

Diluted Earnings Per Share (EPS) The Diluted EPS of the Bank
pursuant to issue of shares on calculated after considering the
exercise of option calculated in effect of potential equity shares
accordance with Accounting Standard arising on account of exercise of
(AS) - 20 (Earnings Per Share). options is Rs. 84.03

Where the company has calculated Had the Bank followed fair value
the employee compensation cost method for accounting the stock
using the intrinsic value of the option compensation expense would
stock options, the difference have been higher by Rs.334.2
between the employee compensation crores. Consequently profit after
cost so computed and the employee tax would have been lower by Rs.
compensation cost that shall have 223.2 crores and the basic EPS of
been recognized if it had used the the Bank would have been Rs.80.19
fair value of the options, shall be per share (lower by Rs.4.83 per
disclosed. The impact of this share) and the Diluted EPS would
difference on profits and on EPS of have been Rs.79.25 per share (lower
the company shall also be by Rs. 4.78 per share)

disclosed.

Weighted-average exercise prices The weighted average price of the
and weighted-average fair values of stock options exercised is Rs.
options shall be disclosed 1,106.8 and the weighted average
separately for options whose fair value is Rs. 389.2
exercise price either equals or
exceeds or is less than the market
price of the stock options.

A description of the method and The Securities Exchange Board of

significant assumptions used during India (SEBI) has prescribed two
the year to estimate the fair methods to account for stock
values of options, at the time of grants; (i) the intrinsic value
grant including the following method; (ii) the fair value method.
weighted-average information: The Bank adopts the intrinsic value
method to account for the stock
options it grants to the employees.
The Bank also calculates the fair
value of options at the time of
grant, using internally developed
and tested model with the following
assumptions:

i. Risk-free interest rate, 7.53% to 7.62%

ii. Expected life, 1-6 years.

iii. Expected volatility, 30%

iv. Expected dividends, and 0.55%

v. The price of the underlying The per share market price was Rs.
share in market at the time of 2,200.80 at the time of grant of

option grant options under ESOS XVI.