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Notes to Accounts of HDFC Bank Ltd.

Mar 31, 2015

Rs. in ''000

As at As at 31-Mar-15 31-Mar-14

SCHEDULE 12 - CONTINGENT LIABILITIES

I Claims against the bank not acknowledged as debts - taxation 8,979,600 8,309,000

II Claims against the bank not acknowledged as debts - others 713,542 825,707

III Liability on account of outstanding forward exchange contracts 6,740,520,896 4,753,861,196

IV Liability on account of outstanding derivative contracts 2,433,779,738 2,009,620,394

V Guarantees given on behalf of constituents :

- In India 240,381,176 210,323,779

- Outside India 32,080,401 35,915,763

VI Acceptances, endorsements and other obligations 279,900,503 192,095,251

VII Other items for which the Bank is contingently liable 15,983,683 20,598,048

Total 9,752,339,539 7,231,549,138

2 Earnings per equity share

Basic and diluted earnings per equity share have been calculated based on the net profit after taxation of Rs. 10,215.92 crore (previous year: Rs. 8,478.38 crore) and the weighted average number of equity shares outstanding during the year of 2,42,37,77,245 (previous year: 2,39,02,89,717).

Following is the reconciliation between basic and diluted earnings per equity share:

Basic earnings per equity share have been computed by dividing net profit for the year attributable to the equity shareholders by the weighted average number of equity shares outstanding for the year. Diluted earnings per equity share have been computed by dividing the net profit for the year attributable to the equity shareholders by the weighted average number of equity shares and dilutive potential equity shares outstanding during the year, except where the results are anti-dilutive. The dilutive impact is on account of stock options granted to employees by the Bank. There is no impact of dilution on the profits in the current year and previous year.

Following is the reconciliation of weighted average number of equity shares used in the computation of basic and diluted earnings per share:

3 Reserves and Surplus

Draw down from reserves

The Bank has not undertaken any drawdown from reserves during the year ended March 31, 2015 except towards share issue expenses, incurred for the equity raised through the Qualified Institutions Placement (QIP) and American Depository Receipt (ADR) routes, which have been adjusted against the share premium account in terms of section 52 of the Companies Act, 2013. There has been no drawdown from reserves during the year ended March 31, 2014.

Statutory Reserve

The Bank has made an appropriation of Rs. 2,553.98 crore (previous year: Rs. 2,119.59 crore) out of profits for the year ended March 31, 2015 to Statutory Reserve pursuant to the requirements of section 17 of the Banking Regulation Act, 1949 and RBI guidelines dated September 23, 2000.

Capital Reserve

During the year ended March 31, 2015, the Bank appropriated Rs. 224.92 crore (previous year: Rs. 58.27 crore), being the profit from sale of investments under HTM category, net of taxes and transfer to statutory reserve, from Profit and Loss Account to Capital Reserve account.

General Reserve

The Bank has made an appropriation of Rs. 1,021.59 crore (previous year: Rs. 847.84 crore) out of profits for the year ended March 31, 2015 to General Reserve pursuant to provisions of the Companies Act, 2013 for the current year and pursuant to Companies (Transfer of Profits to Reserves) Rules,1975 for the previous year.

Investment Reserve Account

During the year ended March 31, 2015, the Bank has appropriated Rs. 27.54 crore (net) (previous year: Rs. 3.22 crore (net)) from Profit and Loss Account to Investment Reserve Account.

4 Dividend on shares allotted pursuant to exercise of stock options

The Bank may allot equity shares after the Balance Sheet date but before the book closure date pursuant to the exercise of any employee stock options. These equity shares will be eligible for full dividend for the year ended March 31, 2015, if approved at the ensuing Annual General Meeting.

5 Accounting for employee share based payments

The shareholders of the Bank approved grant of equity share options under Plan "C" in June 2005, Plan "D" in June 2007, Plan "E" in June 2010 and Plan "F" in June 2013. Under the terms of each of these Plans, the Bank may issue Equity Stock Options (''ESOPs'') to employees and whole time directors of the Bank, each of which is convertible into one equity share. All the plans were framed in accordance with the SEBI (Employee Stock Option Scheme & Employee Stock Purchase Scheme) Guidelines, 1999 as amended from time to time.

Plans C, D, E and F provide for the issuance of options at the recommendation of the Nomination & Remuneration Committee at the closing price on the working day immediately preceding the date when options are granted. The price being the closing price of the share on an Indian stock exchange with the highest trading volume as of the working day preceding the date of grant.

Vesting conditions applicable to the options are at the discretion of the Nomination & Remuneration Committee. These options are exercisable on vesting, for a period as set forth by the Nomination & Remuneration Committee at the time of grant. The period in which options may be exercised cannot exceed five years. During the years ended March 31, 2015 and March 31, 2014, no modifications were made to the terms and conditions of ESOPs as approved by the Nomination & Remuneration Committee.

The erstwhile Centurion Bank of Punjab (''eCBoP'') had granted stock options to its employees prior to its amalgamation with the Bank. The options were granted under the General ESOP scheme framed in accordance with the SEBI (Employee Stock Option Scheme & Employee Stock Purchase Scheme) Guidelines, 1999 as amended from time to time. The outstanding options granted by eCBoP and the grant price thereof were converted into equivalent HDFC Bank options and prices in the swap ratio of 1:29 i.e. 1 stock option of HDFC Bank for every 29 stock options granted and outstanding of eCBoP as on May 23, 2008, the effective date of the amalgamation, in accordance with clause 9.9 of the scheme of amalgamation of eCBoP with the Bank. The vesting dates for the said stock options granted in various tranches were revised as per clause 9.9 of the Scheme. The aforesaid stock options are exercisable within a period of 5 years from the date of vesting. Options granted under the General ESOP scheme were granted at the market price. The market price was the latest available closing price, prior to the date of meeting of the Board of Directors/Nomination & Remuneration Committee in which options were granted or shares were issued, on the stock exchange on which the shares of the Bank were listed. If the shares were listed on more than one stock exchange, then the stock exchange where there was highest trading volume on the said date was considered.

Method used for accounting for shared based payment plan

The Bank has elected to use intrinsic value method to account for the compensation cost of stock options to employees and whole time directors of the Bank. Intrinsic value is the amount by which the quoted market price of the underlying share exceeds the exercise price of the option.

Fair value methodology

The fair value of options used to compute proforma net income and earnings per equity share have been estimated on the dates of each grant using the binomial option-pricing model. The Bank estimates the volatility based on the historical share prices. 4,16,59,000 options were granted during the year ended March 31, 2015 (previous year: 4,70,60,000). The various assumptions considered in the pricing model for the ESOPs granted during the years ended March 31, 2015 and March 31, 2014 were:

6 Other liabilities

- The Bank held contingent provisions towards standard assets amounting to Rs. 1,558.42 crore as on March 31, 2015 (previous year: Rs. 1,260.54 crore). These are included under other liabilities.

- Provision for standard assets is made in accordance with RBI guidelines. Provision for standard assets is made @ 0.25% for direct advances to agriculture and Small and Micro Enterprises (SMEs) sectors, @ 1% for advances to commercial real estate sector and @ 0.75% for advances to commercial real estate - residential housing sector. For all types of restructured standard advances (effective June 1, 2013) provision for standard assets is made @ 5% for a prescribed number of years from the date of restructuring or upgradation as the case may be and for the stock of restructured standard advances outstanding as on May 31, 2013 provision for standard assets is made @ 4.25% (which will be increased to 5% in a phased manner by March 31, 2016). For housing loans offered at a comparatively lower rate of interest in the first few years after which rates are reset at higher rates (teaser rate loans), provision for standard assets is made @ 2% until after one year from the date on which the rates are reset at higher rates. For accounts classified under special mention account "SMA-2" category, provision for standard advances is made @ 5% where the Bank under consortium / multiple banking arrangement has the largest Aggregate Exposure (AE) or second largest AE with aggregate exposure of Rs. 1,000 million or above and Joint Lenders'' Forum (JLF) is not formed or the JLF fails to agree upon a common corrective action plan within the stipulated time frame. The Bank maintains general provision for standard assets including credit exposures computed as per the current marked to market values of interest rate and foreign exchange derivative contracts at levels stipulated by RBI from time to time. In accordance with regulatory guidelines and based on the information made available by its customers to the Bank, for exposures to customers who have not hedged their foreign currency exposures, provision for standard assets is made at levels ranging up to 0.80% depending on the likely loss the entities could incur on account of exchange rate movements. For all other loans and advances provision for standard assets is made @ 0.40%. Provision for standard assets of overseas branches has been made at higher of rates prescribed by the overseas regulator or RBI.

- The Bank has presented gross unrealised gain on foreign exchange and derivative contracts under other assets and gross unrealised loss on foreign exchange and derivative contracts under other liabilities. Accordingly, other liabilities as on March 31, 2015 include unrealised loss on foreign exchange and derivative contracts of Rs. 6,914.10 crore (previous year: Rs. 12,609.15 crore).

7 Unhedged foreign currency exposure

- The Bank has in place a policy and process for managing currency induced credit risk. The credit appraisal memorandum prepared at the time of origination and review of a credit is required to discuss the exchange risk that the customer is exposed to from all sources, including trade related, foreign currency borrowings and external commercial borrowings. It could cover the natural hedge available to the customer as well as other hedging methods adopted by the customer to mitigate exchange risk. For foreign currency loans granted by the Bank beyond a defined threshold the customer will be encouraged to enter into appropriate risk hedging mechanisms with the Bank. Alternatively, the Bank will satisfy itself that the customer has the financial capacity to bear the exchange risk in the normal course of its business and / or has other mitigants to reduce the risk. On a monthly basis, the Bank will review information on the unhedged portion of foreign currency exposures of customers, whose total foreign currency exposure with the Bank exceeds a defined threshold. Based on the monthly review, the Bank will propose suitable hedging techniques to the customer to contain the risk. A Board approved credit risk rating linked limit on unhedged foreign currency position of customers is applicable when extending credit facilities to a customer. The compliance with the limit is assessed by estimating the extent of drop in a customer''s annual EBID due to a potentially large adverse movement in exchange rate impacting the unhedged foreign currency exposure of the customer. Where a breach is observed in such a simulation, the customer is advised to reduce its unhedged exposure.

- In accordance with RBI guidelines, provisions held for standard assets and capital maintained by the Bank as at March 31, 2015 in respect of the unhedged foreign currency exposure of customers was Rs. 76.49 crore and Rs. 199.59 crore respectively.

- Repo transactions

In accordance with RBI''s guidelines, accounting of repo / reverse repo transactions excludes those done with the RBI. Following are the details of the repo / reverse repo transactions deals done during the years ended March 31, 2015 and March 31, 2014:

- Investments include securities of Face Value (FV) aggregating Rs. 1,563.00 crore (previous year: FV Rs. 1,845.00 crore) which are kept as margin for clearing of securities, of FV Rs. 16,249.30 crore (previous year: FV Rs. 5,693.30 crore) which are kept as margin for Collateralised Borrowing and Lending Obligation (CBLO) and of FV aggregating Rs. 63.25 crore (previous year: FV Rs. 120.35 crore) which are kept as margin for Forex Forward segment - Default Fund with the Clearing Corporation of India Ltd.

- Investments include securities of FV aggregating Rs. 16.00 crore (previous year: FV Rs. 16.00 crore) which are kept as margin with National Securities Clearing Corporation of India Ltd. (''NSCCIL), of FV aggregating Rs. 13.00 crore (previous year: FV Rs. 13.00 crore) which are kept as margin with MCX - SX Clearing Corporation Ltd., of FV Nil (previous year: FV Rs. 0.30 crore) which are kept as margin with United Stock Exchange for transacting in the currency derivative segment and of FV aggregating Rs. 2.00 crore (previous year: Rs. 2.00 crore) which are kept as margin with Indian Clearing Corporation Limited in the BSE currency derivatives segment.

- Investments having FV aggregating Rs. 34,127.16 crore (previous year: FV Rs. 35,013.64 crore) are kept as margin towards Real Time Gross Settlement (RTGS) and those having FV aggregating Rs. 19,077.83 crore (previous year: Rs. 26,139.39 crore) are kept as margin towards repo transactions with the RBI.

- The Bank has made investments in certain companies wherein it holds more than 25% of the equity shares of those companies. Such investments do not fall within the definition of a joint venture as per AS-27, Financial Reporting of Interest in Joint Ventures and the said accounting standard is thus not applicable. However, pursuant to RBI guidelines, the Bank has classified and disclosed these investments as joint ventures.

- During the year ended March 31, 2015, the aggregate book value of investment sold from, and transferred to / from, HTM category was in excess of 5% of the book value of investments held in HTM category at the beginning of the year. The market value of investments (excluding investments in subsidiaries / joint ventures, deposits with NABARD, SIDBI and National Housing Bank under the priority / weaker sector lending schemes) under HTM category as on March 31, 2015 was Rs. 83,733.68 crore and was higher than the book value thereof as of that date. In accordance with the RBI guidelines, sale from, and transfer to / from, HTM category excludes:

S one-time transfer of securities permitted to be undertaken by banks at the beginning of the accounting year with approval of the Board of Directors; and

S sale to the RBI under pre-announced open market operation auctions.

- Qualitative disclosures on risk exposure in derivatives

Overview of business and processes

Derivatives are financial instruments whose characteristics are derived from underlying assets, or from interest and exchange rates or indices. These include forwards, swaps, futures and options. The notional amount of financial instruments such as foreign exchange contracts and derivatives provide a basis for comparison with instruments recognised on the Balance Sheet but do not necessarily indicate the amount of future cash flows involved or the current fair value of the instruments and, therefore, do not indicate the Bank''s exposure to credit or price risks. The following sections outline the nature and terms of the derivative transactions generally undertaken by the Bank.

Interest rate contracts

Forward rate agreements give the buyer the ability to determine the underlying rate of interest for a specified period commencing on a specified future date (the settlement date). There is no exchange of principal and settlement is effected on the settlement date. The settlement amount is the difference between the contracted rate and the market rate prevailing on the settlement date.

Interest rate swaps involve the exchange of interest obligations with the counterparty for a specified period without exchanging the underlying (or notional) principal.

Interest rate caps and floors give the buyer the ability to fix the maximum or minimum rate of interest. The writer of the contract pays the amount by which the market rate exceeds or is less than the cap rate or the floor rate respectively. A combination of interest rate caps and floors is known as an interest rate collar.

Interest rate futures are standardised interest rate derivative contracts traded on a recognised stock exchange to buy or sell a notional security or any other interest bearing instrument or an index of such instruments or interest rates at a specified future date, at a price determined at the time of the contract.

Exchange rate contracts

Forward foreign exchange contracts are agreements to buy or sell fixed amount of currency at agreed rates of exchange on future date. All such instruments are carried at fair value, determined based on either FEDAI rates or on market quotations.

Cross currency swaps are agreements to exchange principal amount denominated in different currencies. Cross currency swaps may also involve the exchange of interest payments on one specified currency for interest payments in another specified currency for a specified period.

Currency options give the buyer, on payment of a premium, the right but not an obligation, to buy or sell specified amount of currency at agreed rates of exchange on or before a specified future date. Option premia paid or received is recorded in Statement of Profit and Loss for rupee options at the expiry of the option and for foreign currency options on premium settlement date.

Currency futures contract is a standardised contract traded on an exchange, to buy or sell a certain underlying asset or an instrument at a certain date in the future, at a specified price. The underlying instrument of a currency future contract is the rate of exchange between one unit of foreign currency and the INR.

Most of the Bank''s derivative transactions relate to sales and trading activities. Sale activities include the structuring and marketing of derivatives to customers to enable them to hedge their market risks (both interest rate and exchange risks), within the framework of regulations as may apply from time to time. The Bank deals in derivatives on its own account (trading activity) principally for the purpose of generating a profit from short term fluctuations in price or yields. The Bank also deals in derivatives to hedge the risk embedded in some of its Balance Sheet assets and liabilities.

Constituents involved in derivative business

The Treasury front office enters into derivative transactions with customers and inter-bank counterparties. The Bank has an independent back-office and mid-office as per regulatory guidelines. The Bank has a credit and market risk department that assesses various counterparty risk and market risk limits, within the risk architecture and processes of the Bank.

Derivative policy

The Bank has in place a policy which covers various aspects that apply to the functioning of the derivative business. The derivative business is administered by various market risk limits such as position limits, tenor limits, sensitivity limits and value-at-risk limits that are approved by the Board and the Risk Policy and Monitoring Committee (''RPMC''). All methodologies used to assess credit and market risks for derivative transactions are specified by the market risk unit. Limits are monitored on a daily basis by the mid-office.

The Bank has implemented a Board approved policy on customer suitability & appropriateness to ensure that derivative transactions entered into are appropriate and suitable to the customer''s nature of business / operations. Before entering into a derivative deal with a customer, the Bank scores the customer on various risk parameters and based on the overall score level it determines the kind of product that best suits its risk appetite and the customer''s requirements.

Classification of derivatives book

The derivative book is classified into trading and hedging book. Classification of the derivative book is made on the basis of the definitions of the trading and hedging books specified in the RBI guidelines. The trading book is managed within the trading limits approved by the RPMC.

Hedging policy

For derivative contracts designated as hedge the Bank documents, at inception, the relationship between the hedging instrument and the hedged item, the risk management objective for undertaking the hedge and the methods used to assess the hedge effectiveness. Hedge effectiveness is ascertained at the time of inception of the hedge and periodically thereafter. Hedge effectiveness is measured by the degree to which changes in the fair value or cash flows of the hedged item that are attributable to a hedged risk are offset by changes in the fair value or cash flows of the hedging instrument.

The hedging book consists of transactions to hedge Balance Sheet assets or liabilities. The tenor of hedging instrument may be less than or equal to the tenor of underlying hedged asset or liability. Derivative contracts designated as hedges are not marked to market unless their underlying asset or liability is marked-to-market. In respect of derivative contracts that are marked-to-market, changes in the market value are recognised in the Statement of Profit and Loss in the relevant period. Gain or losses arising from hedge ineffectiveness, if any, are recognised in the Statement of Profit and Loss. Foreign exchange forward contracts not intended for trading, that are entered into to establish the amount of reporting currency required or available at the settlement date of a transaction, and are outstanding at the Balance Sheet date, are effectively valued at the closing spot rate. The premia or discount arising at the inception of such forward exchange contract is amortised as expense or income over the life of the contract.

- Provisioning, collateral and credit risk mitigation

The Bank enters into derivative transactions with counter parties based on their business ranking and financial position. The Bank sets up appropriate limits upon evaluating the ability of the counterparty to honour its obligations in the event of crystallisation of the exposure. Appropriate credit covenants are stipulated where required as trigger events to call for collaterals or terminate a transaction and contain the risk.

The Bank, at the minimum, conforms to the RBI guidelines with regard to provisioning requirements. Overdue receivables representing crystallised positive mark-to-market value of a derivative contract are transferred to the account of the borrower and treated as non-performing assets, if these remain unpaid for 90 days or more. Full provision is made for the entire amount of overdue and future receivables relating to positive marked-to-market value of non-performing derivative contracts.

- Details of Single Borrower Limit (SGL), Group Borrower Limit (GBL) exceeded by the Bank

During the year ended March 31, 2015 the Bank''s credit exposures to single borrowers and group borrowers were within the limits prescribed by RBI except in case of Reliance Industries Limited, where the single borrower limits were exceeded. The Board of Directors of the Bank approved the said excess in respect of this exposure, which was within the ceiling of 20% of capital funds. During the year ended March 31, 2014, the Bank''s credit exposures to single borrowers and group borrowers were within the limits prescribed by RBI.

- Unsecured advances

Advances for which intangible collaterals such as rights, licenses, authority, etc. are charged in favour of the Bank in respect of projects financed by the Bank, are reckoned as unsecured advances under Schedule 9 of the Balance Sheet in line with extant RBI guidelines. There are no such advances outstanding as on March 31, 2015 (previous year: Nil).

- Inter-bank participation with risk sharing

The aggregate amount of participation issued by the Bank, reduced from advances as per regulatory guidelines, outstanding as of March 31, 2015 was Rs. 7,600.00 crore (previous year: Rs. 4,450.00 crore).

15 Provisions, contingent liabilities and contingent assets

Given below is the movement in provisions and a brief description of the nature of contingent liabilities recognised by the Bank.

c) Description of contingent liabilities

1 Claims against the Bank not acknowledged as debts - taxation

The Bank is a party to various taxation matters in respect of which appeals are pending. The Bank expects the outcome of the appeals to be favorable based on decisions on similar issues in the previous years by the appellate authorities, based on the facts of the case and the provisions of Income Tax Act, 1961.

2 Claims against the Bank not acknowledged as debts - others

The Bank is a party to various legal proceedings in the normal course of business. The Bank does not expect the outcome of these proceedings to have a material adverse effect on the Bank''s financial conditions, results of operations or cash flows.

3 Liability on account of forward exchange and derivative contracts

The Bank enters into foreign exchange contracts, currency options, forward rate agreements, currency swaps and interest rate swaps with inter-bank participants on its own account and for customers. Forward exchange contracts are commitments to buy or sell foreign currency at a future date at the contracted rate. Currency swaps are commitments to exchange cash flows by way of interest / principal in one currency against another, based on predetermined rates. Interest rate swaps are commitments to exchange fixed and floating interest rate cash flows. The notional amounts of financial instruments such as foreign exchange contracts and derivatives provide a basis for comparison with instruments recognised on the Balance Sheet but do not necessarily indicate the amounts of future cash flows involved or the current fair value of the instruments and, therefore, do not indicate the Bank''s exposure to credit or price risks. The derivative instruments become favorable (assets) or unfavorable (liabilities) as a result of fluctuations in market rates or prices relative to their terms.

4 Guarantees given on behalf of constituents, acceptances, endorsements and other obligations

As a part of its commercial banking activities, the Bank issues documentary credit and guarantees on behalf of its customers. Documentary credits such as letters of credit enhance the credit standing of the Bank''s customers. Guarantees generally represent irrevocable assurances that the Bank will make payments in the event of the customer failing to fulfill its financial or performance obligations.

5 Other items for which the Bank is contingently liable

These include: a) Credit enhancements in respect of securitised-out loans; b) Bills rediscounted by the Bank; c) Capital commitments; d) Underwriting commitments

*Also refer Schedule 12 - Contingent liabilities

Definitions of certain items in Business Ratios / Information:

1. Working funds is the daily average of total assets during the year.

2. Operating profit is net profit for the year before provisions and contingencies.

3. "Business" is the total of net advances and deposits (net of inter-bank deposits).

4. Productivity ratios are based on average employee numbers.

5. Gross advances are net of bills rediscounted and interest in suspense.

6. Net NPAs are non-performing assets net of interest in suspense, specific provisions, ECGC claims received, provisions for funded interest term loans classified as NPAs and provisions in lieu of diminution in the fair value of restructured assets classified as NPAs.

7. Net advances are equivalent to gross advances net of specific loan loss provisions, ECGC claims received, provision for funded interest term loans classified as NPA and provisions in lieu of diminution in the fair value of restructured assets.

8. Provision coverage ratio does not include assets written off.

17 Interest income

Interest income under the sub-head income from investments includes dividend received during the year ended March 31, 2015 on units of mutual funds, equity and preference shares amounting to Rs. 192.58 crore (previous year: Rs. 89.86 crore).

18 Earnings from standard assets securitised-out

There are no Special Purpose Vehicles (''SPV''s) sponsored by the Bank for securitisation transactions. During the years ended March 31, 2015 and March 31, 2014, there were no standard assets securitised-out by the Bank.

Form and quantum of services and liquidity provided by way of credit enhancement

The Bank has provided credit and liquidity enhancements in the form of cash collaterals / guarantees / subordination of cash flows etc., to the senior Pass Through Certificates (''PTC''s) as well as on loan assignment transactions. The RBI issued addendum guidelines on securitisation of standard assets vide its circular dated May 7, 2012. Accordingly, the Bank does not provide liquidity or credit enhancements on the direct assignment transactions undertaken subsequent to these guidelines. The total value of credit enhancement outstanding in the books as at March 31, 2015 was Rs. 345.79 crore (previous year: Rs. 348.28 crore), and liquidity enhancement was Rs. 8.10 crore (previous year: Rs. 8.10 crore). Outstanding servicing liability was Rs. 0.14 crore (previous year: Rs. 0.19 crore).

19 Other income

- Commission, exchange and brokerage income

S Commission, exchange and brokerage income is net of correspondent bank charges.

S Commission income for the year ended March 31, 2015 includes fees of Rs. 454.01 crore (previous year: Rs. 337.56 crore) in respect of life insurance business and Rs. 137.07 crore (previous year: Rs. 116.69 crore) in respect of general insurance business.

- Miscellaneous income

Miscellaneous income includes recoveries from written-off accounts amounting to Rs. 716.33 crore (previous year: Rs. 622.61 crore).

20 Other expenditure

Other expenditure includes outsourcing fees amounting to Rs. 671.38 crore (previous year: Rs. 590.31 crore) and commission paid to sales agents amounting toRs. 1,305.11 crore (previous year:Rs. 1,003.26 crore), exceeding 1% of the total income of the Bank.

Provident fund

The guidance note on AS-15, Employee Benefits, states that employer established provident funds, where interest is guaranteed are to be considered as defined benefit plans and the liability has to be valued. The Actuary Society of India (ASI) has issued a guidance note on valuation of interest rate guarantees on exempt provident funds. The actuary has accordingly valued the same and the Bank holds a provision of Rs. 0.52 crore as on March 31, 2015 (previous year: Rs. 0.52 crore) towards the present value of the guaranteed interest benefit obligation. The actuary has followed deterministic approach as prescribed by the guidance note.

23 Disclosures on remuneration Qualitative Disclosures

A. Information relating to the composition and mandate of the Remuneration Committee

Composition of the Remuneration Committee

The Board of Directors of the Bank has constituted the Remuneration Committee (hereinafter, the ''Remuneration Committee'') for overseeing and governing the compensation policies of the Bank. The Remuneration Committee is comprised of four independent directors and is chaired by the Chairman of the Board of Directors of the Bank. Further, two members of the Remuneration Committee are also members of the Risk Policy and Monitoring Committee (''RPMC'') of the Board.

The Remuneration Committee is comprised of the Chairperson, Mrs. Shyamala Gopinath, Dr. Pandit Palande, Mr. Partho Datta and Mr. Bobby Parikh. Further, Mrs. Shyamala Gopinath and Mr. Partho Dutta are also members of the RPMC.

Mandate of the Remuneration Committee

The primary mandate of the Remuneration Committee is to oversee the implementation of compensation policies of the Bank.

The Remuneration Committee periodically reviews the overall compensation policy of the Bank with a view to attract, retain and motivate employees. In this capacity it is required to review and approve the design of the total compensation framework, including compensation strategy programs and plans, on behalf of the Board of Directors. The compensation structure and pay revision for Whole Time Directors is also approved by the Remuneration Committee. The Remuneration Committee co-ordinates with the RPMC to ensure that compensation is aligned with prudent risk taking.

B. Information relating to the design and structure of remuneration processes and the key features and objectives of remuneration policy

I. Key Features and Objectives of Remuneration Policy

The Bank''s Compensation Policy (hereinafter, the ''Policy'') is aligned to business strategy, market dynamics, internal characteristics and complexities within the Bank. The ultimate objective of the Policy is to provide a fair and transparent structure that helps in retaining and acquiring the talent pool critical to build competitive advantage and brand equity. The Policy has been designed basis the principles for sound compensation practices in accordance with regulatory requirements and provides a framework to create, modify and maintain appropriate compensation programs and processes with adequate supervision and control.

The Bank''s performance management system provides a sound basis for assessing employee performance holistically The Bank''s compensation framework is aligned with the performance management system and differentiates pay appropriately amongst its employees based on degree of contribution, skill and availability of talent owing to competitive market forces by taking into account factors such as role, skills, competencies, experience and grade / seniority

The compensation structure for both the categories of employees is determined by the Remuneration Committee and ensures that:

(a) the compensation is adjusted for all types of prudent risk taking;

(b) compensation outcomes are symmetric with risk outcomes;

(c) compensation payouts are sensitive to the time horizon of risk; and

(d) the mix of cash, equity and other forms of compensation are aligned with risk.

II. Design and Structure of Remuneration

a) Fixed Pay

The Remuneration Committee ensures that the fixed component of the compensation is reasonable, taking into account all relevant factors including industry practice.

Elements of Fixed Pay

The fixed pay component of the Bank''s compensation structure typically consists of elements such as base salary, allowances, perquisites, retirement and other employee benefits. Perquisites extended are in the nature of company car, hard furnishing, company leased accommodation, club membership and such other benefits or allowances in lieu of such perquisites / benefits. Retirement benefits include contributions to provident fund, superannuation fund (for certain job bands) and gratuity. The whole time directors of the Bank are entitled to other post-retirement benefits such as car and medical facilities, in accordance with specified terms of employment as per the policy of the Bank, subject to RBI approval. The Bank also provides pension to certain employees of the erstwhile Lord Krishna Bank (eLKB) under the Indian Banks'' Association (''IBA'') structure.

Determinants of Fixed Pay

The fixed pay is primarily determined by taking into account factors such as the job size, performance, experience, location, market competitiveness of pay and is designed to meet the following key objectives of:

(a) fair compensation given the role complexity and size;

(b) fair compensation given the individual''s skill, competence, experience and market pay position;

(c) sufficient contribution to post retirement benefits; and

(d) compliance with all statutory obligations.

For Whole Time Directors additional dimensions such as prominence of leadership among industry leaders, consistency of the Bank''s performance over the years on key parameters such as profitability, growth and asset quality in relation to its own past performance and that of its peer banks would be considered. The quantum of fixed pay for Whole Time Directors is approved by the Remuneration Committee as well as the Board and is subject to the approval of the RBI.

b) Variable Pay

The performance management system forms the basis for variable pay allocation of the Bank. The Bank ensures that the performance management system is comprehensive and considers both, quantitative and qualitative performance measures.

Whole Time Directors

The bonus for Whole Time Directors will not exceed 70% of the fixed pay in a year, thereby ensuring that there is a balance between the fixed and variable pays. The variable pay for Whole Time Directors is approved by the Remuneration Committee as well as the Board and is subject to the approval of the RBI. The variable pay component is paid out subject to the following conditions:

- The Bank has devised appropriate malus and claw back clauses as a risk mitigant for any negative contributions of the Bank and / or relevant line of business in any year. Under the malus clause the incumbent foregoes the vesting of the deferred variable pay in full or in part. Under the claw back clause the incumbent is obligated to return all the tranches of payout received of bonus amounts pertaining to the relevant performance year

Employees other than Whole Time Directors

The Bank has formulated the following variable pay plans:

- Annual bonus plan

The quantum of variable payout is a function of the performance of the Bank, performance of the individual employee, job band of the employee and the functional category. Basis these key determinants and due adjustment for risk alignment, a payout matrix for variable pay is developed. Market trends for specific businesses / functions along with inputs from compensation surveys may also be used in finalising the payout.

Bonus pools are designed to meet specific business needs therefore resulting in differentiation in both the quantum and the method of payout across functions. Typically higher levels of responsibility receive a higher proportion of variable pay vis-à-vis fixed pay. The Bank ensures that the time horizon for risk is assessed and the deferment period, if any, for bonus is set accordingly. Employees on the annual bonus plan are not part of performance-linked plans. The following is taken into account while administering the annual bonus :

S In the event the proportion of variable pay to fixed pay is substantially high (variable pay exceeding 50% of fixed pay), the Bank may devise an appropriate deferment schedule after taking into consideration the nature of risk, time horizon of risk, and the materiality of risk.

S In cases of deferment of variable pay the Bank makes an assessment prior to the due date for payment of the deferred portion for any negative contribution. The criteria for negative contribution are decided basis pre-defined financial benchmarks. The Bank has in place appropriate methods for prevention of vesting of deferred variable pay or any part thereof, on account of negative contribution. The Bank also has in place claw back arrangements in relation to amounts already paid in the eventuality of a negative contribution.

- Performance-linked Plans (PLPs)

PLPs are formulated for sales personnel who are given origination / sales targets but have limited impact on risk since credit decisions are exercised independent of the sales function. All PLP payouts are subject to achievement of individual targets enumerated in the respective scorecards of the employees. A portion of the PLP payouts is deferred till the end of the year to provide for any unforeseen performance risks.

Risk, Control and Compliance Staff

The Bank has separated the Risk, Control and Compliance functions from the Business functions in order to create a strong culture of checks and balances thereby ensuring good asset quality and to eliminate any possible conflict of interest between revenue generation and risk management and control. Accordingly, the overall variable pay as well as the annual salary increment of the employees in the Risk, Control and Compliance functions is based on their performance, functional objectives and goals. The Bank ensures that the mix of fixed to variable compensation for these functions is weighted in favour of fixed compensation.

c) Guaranteed Bonus

Guaranteed Bonuses may not be consistent with sound risk management or pay for performance principles of the Bank and therefore do not form an integral part of the general compensation practice.

For critical hiring for some select strategic roles, the Bank may consider granting of a sign-on bonus as a prudent way to avoid loading the entire cost of attraction into the fixed component of the compensation which could have a long term cost implication for the Bank. For such hiring, the sign-on bonus is generally decided by taking into account appropriate risk factors and market conditions.

For hiring at levels of Whole Time Directors / Managing Director a sign-on bonus, if any, is limited to the first year only and is in the form of Employee Stock Options.

d) Employee Stock Option Plan (''ESOP''s)

The Bank considers ESOPs as a vehicle to create a balance between short term rewards and long term sustainable value creation. ESOPs play a key role in the attraction and retention of key talent. The Bank grants equity share options to its Whole time Directors and other employees above a certain grade. All plans for grant of options are framed in accordance with the SEBI guidelines, 1999 as amended from time to time and are approved by the shareholders of the Bank. These plans provide for the grant of options post approval by the Remuneration Committee.

The grant of options is reviewed and approved by the Remuneration Committee. The number of options granted varies at the discretion of the Remuneration Committee after considering parameters such as the incumbent''s grade and performance rating, and such other appropriate relevant factors as may be deemed appropriate by the Remuneration Committee. Equity share options granted to the Whole Time Directors are subject to the approval of the Remuneration Committee, the Board and the RBI.

e) Severance Pay

The Bank does not grant severance pay other than accrued benefits (such as gratuity, pension) except in cases where it is mandated by any statute.

f) Hedging

The Bank does not provide any facility or fund or permit its Whole Time Directors and employees to insure or hedge their compensation structure to offset the risk alignment effects embedded in their compensation arrangement.

III. Remuneration Processes

Fitment at the time of Hire

Pay ranges of the Bank are set basis the job size, experience, location and the academic and professional credentials of the incumbent.

The compensation of new hires is in line with the existing pay ranges and consistent with the compensation levels of the existing employees of the Bank at similar profiles. The pay ranges are subject to change basis market trends and the Bank''s talent management priorities. While the Bank believes in the internal equity and parity as a key determinant of pay it does acknowledge the external competitive pressures of the talent market. Accordingly, there could be certain key profiles with critical competencies which may be hired at a premium and treated as an exception to the overall pay philosophy. Any deviation from the defined pay ranges is treated as a hiring exception requiring approval with appropriate justification.

Increment / Pay Revision

It is the endeavor of the Bank to ensure external competitiveness as well as internal equity without diluting the overall focus on optimising cost. In order to enhance our external competitiveness the Bank participates in an annual salary survey of the banking sector to understand key market trends as well as get insights on relative market pay position compared to peers. The Bank endeavors to ensure that most employees progress to the median of the market in terms of fixed pay over time. This coupled with key internal data indicators like performance score, job family, experience, job grade and salary budget form the basis of decision making on revisions in fixed pay.

Increments in fixed pay for majority of the employee population are generally undertaken effective April 1 every year. However promotions, confirmations and change in job dimensions could also lead to a change in the fixed pay during other times of the year.

The Bank also makes salary corrections and adjustments during the year for those employees whose compensation is found to be below the market pay and who have a good performance track record. However such pay revisions are done on an exception basis.

C. Description of the ways in which current and future risks are taken into account in the remuneration processes. It should include the nature and type of the key measures used to take account of these risks

The Bank takes into account all types of risks in its remuneration processes. The Bank takes into consideration the fact that a portion of the Bank''s profits are directly attributable to various types of risks the Bank is exposed to, such as credit risk, market risk, operational risk and other quantifiable risks. Based on the surplus available post adjustment of the cost of capital to cover all such risks and factoring the impact of bonus payout on operating costs an appropriate bonus pool is arrived at.

The Bank also provides for deferment of bonus in the event the proportion of variable pay as compared to fixed pay is substantially high. The Bank has also devised appropriate malus and claw back clauses as a risk mitigant for any negative contributions of the Bank and/or relevant line of business in any year. Under the malus clause, the incumbent foregoes the vesting of the deferred variable pay in full or in part. Under the claw back clause, the incumbent is obligated to return all the tranches of payout received of bonus amounts pertaining to the relevant performance year.

D. Description of the ways in which the Bank seeks to link performance during a performance measurement period with levels of remuneration

Levels of remuneration in the Bank are linked to the performance of the individual employees and the respective business functions. The performance driven pay culture is briefly described below :

Fixed pay

At the conclusion of every financial year the Bank reviews the fixed pay portion of the compensation structure basis merit-based increments and market corrections. These are based on a combination of performance rating, job band and the functional category of the individual employee. For a given job band, the merit increment is directly related to the performance rating. The Bank strives to ensure that most employees progress to the median of the market in terms of fixed pay over time. All other things remaining equal, the correction percentage is directly related to the performance rating of the individual.

Variable pay

Basis the individual performance, role, and function, the Bank has formulated the following variable pay plans :

- Annual bonus plan

The Bank''s annual bonus is computed as a multiple of the standardised gross salary for every job band. The bonus multiple is based on performance rating, job band and the functional category of the individual employee. All other things remaining equal, for a given job band, the bonus multiple is directly related to the performance rating. The proportion of variable pay to fixed pay increases with job band. Employees on the annual bonus plan are not part of the PLPs.

- Performance-linked plans

The Bank has formulated PLPs for its sales personnel who are given origination / sales targets. All PLP payouts are subject to the achievement of individual targets enumerated in the respective scorecards of the employees. A portion of the PLP payouts is deferred till the end of the year to provide for any unforeseen performance risks.

E. A discussion of the Bank''s policy on deferral and vesting of variable remuneration and a discussion of the Bank''s policy and criteria for adjusting deferred remuneration before vesting and after vesting

Whole Time Directors

The bonus for Whole Time Directors will not exceed 70% of the fixed pay in a year, thereby ensuring that there is a balance between the fixed and variable pay. The variable pay for Whole Time Directors is approved by the Remuneration Committee as well as the Board and is subject to the approval of the RBI. The variable pay component is paid out subject to the following conditions:

- The Bank has devised appropriate malus and claw backclauses as a risk mitigant for any negative contributions of the Bank and / or relevant line of business in any year.

S Malus clause

Under the malus clause the incumbent foregoes the vesting of the deferred variable pay in full or in part. In the event there is a deterioration in specific performance criteria (such as criteria relating to profit or asset quality) that are laid down by the Remuneration Committee, then the Remuneration Committee would review the deterioration in the performance taking into consideration the macroeconomic environment as well as internal performance indicators and accordingly decide whether any part of the deferred tranche pertaining to that financial year merits a withdrawal.

S Claw back clause

Under the claw back clause the incumbent is obligated to return all the tranches of payout received of bonus amounts pertaining to the relevant performance year. In the event there is any act attributable to the concerned Whole Time Director / Managing Director resulting in an incident of willful and deliberate misinterpretation / misreporting of financial performance (inflating the financials) of the Bank, for a financial year, which comes to light in the subsequent three years, the incumbent is obligated to return all the tranches of payout received of bonus amounts pertaining to the relevant performance year.

The specific criteria on the applicability of malus and claw back arrangements are reviewed by the Remuneration Committee annually.

Employees other than Whole Time Directors

The Bank has formulated the following variable pay plans:

- Annual bonus plan

The quantum of variable payout is a function of the performance of the Bank, performance of the individual employee, job band of the employee and the functional category. Basis these key determinants and due adjustment for risk alignment, a payout matrix for variable pay is developed. Market trends for specific businesses / functions along with inputs from compensation surveys may also be used in finalising the payout.

Bonus pools are designed to meet specific business needs therefore resulting in differentiation in both the quantum and the method of payout across functions. Typically higher levels of responsibility receive a higher proportion of variable pay vis-à-vis fixed pay. The Bank ensures that the time horizon for risk is assessed and the deferment period, if any, for bonus is set accordingly. Employees on the annual bonus plan are not part of the PLPs. The following is taken into account while administering the annual bonus:

S In the event the proportion of variable pay to fixed pay is substantially high (typically variable pay exceeding 50% of fixed pay), the Bank may devise an appropriate deferment schedule after taking into consideration the nature of risk, time horizon of risk, and the materiality of risk.

S In cases of deferment of variable pay the Bank makes an assessment prior to the due date for payment of the deferred portion for any negative contribution. The criteria for negative contribution are decided basis pre-defined financial benchmarks. The Bank has in place appropriate methods for prevention of vesting of deferred variable pay or any part thereof, on account of negative contribution. The Bank also has in place claw back arrangements in relation to amounts already paid in the eventuality of a negative contribution.

- Performance-linked plans

PLPs are formulated for sales personnel who are given origination / sales targets but have limited impact on risk since credit decisions are exercised independent of the sales function. All PLP payouts are subject to the achievement of individual targets enumerated in the respective scorecards of the employees. A portion of the PLP payouts is deferred till the end of the year to provide for any unforeseen performance risks.

F. Description of the different forms of variable remuneration (i.e. cash, shares, ESOPs and other forms) that the Bank utilises and the rationale for using these different forms.

The Bank recognises the importance of variable pay in reinforcing a pay for performance culture. Variable pay stimulates employees to stretch their abilities to exceed expectations.

- Annual bonus plan

These are paid to reward performance for a given financial year. This covers all employees and excludes employees receiving PLP payouts. This is based on performance rating, job band and functional category of the individual.

- Performance-linked plans

These are paid to frontline sales staff for the achievement of specific sales targets but have limited impact on risk as credit decisions are exercised independent of the sales function. Further, it has been the endeavor of the Bank to ensure that the objectives set are based on the principles of a balanced scorecard rather than just the achievement of financial numbers. All PLP payouts are subject to the achievement of individual targets enumerated in the respective scorecards of the employees. A portion of the PLP payouts is deferred till the end of the year to provide for any unforeseen performance risks.

- Employee stock option plan

This is to reward for contribution of employees in creating a long term, sustainable earnings and enhancing shareholder value. Only employees in a certain job band and with a specific performance rating are eligible for Stock Options. Performance is the key criteria for granting stock options.

Quantitative disclosures

The quantitative disclosures cover the Bank''s Whole Time Directors and Key Risk Takers. Key Risk Takers are individuals who can materially set, commit or control significant amounts of the Bank''s resources, and / or exert significant influence over its risk profile. The Bank''s Key Risk Takers include Whole Time Directors, Group Heads, Business Heads directly reporting to the Managing Director and select roles in the Bank''s Treasury and Investment Banking functions.

24 Segment reporting

Business segments

Business segments have been identified and reported taking into account, the target customer profile, the nature of products and services, the differing risks and returns, the organisation structure, the internal business reporting system and the guidelines prescribed by RBI. The Bank operates in the following segments:

a) Treasury

The treasury segment primarily consists of net interest earnings from the Bank''s investment portfolio, money market borrowing and lending, gains or losses on investment operations and on account of trading in foreign exchange and derivative contracts.

b) Retail banking

The retail banking segment serves retail customers through a branch network and other delivery channels. This segment raises deposits from customers and provides loans and other services to customers with the help of specialist product groups. Exposures are classified under retail banking taking into account the status of the borrower (orientation criterion), the nature of product, granularity of the exposure and the quantum thereof.

Revenues of the retail banking segment are derived from interest earned on retail loans, interest earned from other segments for surplus funds placed with those segments, subvention received from dealers and manufacturers, fees from services rendered, foreign exchange earnings on retail products etc. Expenses of this segment primarily comprise interest expense on deposits, commission paid to retail assets sales agents, infrastructure and premises expenses for operating the branch network and other delivery channels, personnel costs, other direct overheads and allocated expenses of specialist product groups, processing units and support groups.

c) Wholesale banking

The wholesale banking segment provides loans, non-fund facilities and transaction services to large corporates, emerging corporates, public sector units, government bodies, financial institutions and medium scale enterprises. Revenues of the wholesale banking segment consist of interest earned on loans made to customers, interest/fees earned on the cash float arising from transaction services, earnings from trade services and other non-fund facilities and also earnings from foreign exchange and derivative transactions on behalf of customers. The principal expenses of the segment consist of interest expense on funds borrowed from external sources and other internal segments, premises expenses, personnel costs, other direct overheads and allocated expenses of delivery channels, specialist product groups, processing units and support groups.

d) Other banking business

This segment includes income from para banking activities such as credit cards, debit cards, third party product distribution, primary dealership business and the associated costs.

e) Unallocated

All items which are reckoned at an enterprise level are classified under this segment. This includes capital and reserves, debt classified as Tier I or Tier II capital and other unallocable assets and liabilities such as deferred tax, prepaid expenses, etc.

Segment revenue includes earnings from external customers plus earnings from funds transferred to other segments. Segment result includes revenue less interest expense less operating expense and provisions, if any, for that segment. Segment-wise income and expenses include certain allocations. Interest income is charged by a segment that provides funding to another segment, based on yields benchmarked to an internally approved yield curve or at a certain agreed transfer price rate. Transaction charges are levied by the retail banking segment to the wholesale banking segment for the use by its customers of the retail banking segment''s branch network or other delivery channels. Such transaction costs are determined on a cost plus basis. Segment capital employed represents the net assets in that segment.

Geographic segments

The geographic segments of the Bank are categorised as Domestic Operations and Foreign Operations. Domestic Operations comprise branches in India and Foreign Operations comprise branches outside India.

Qualitative disclosure on LCR

The Liquidity Coverage Ratio (LCR) is a global minimum standard for bank liquidity. It aims to ensure that a bank has an adequate stock of unencumbered high-quality liquid assets (HQLA) that can be converted into cash easily and immediately to meet its liquidity needs for a 30 calendar day liquidity stress scenario.

The LCR is calculated by dividing the amount of high quality liquid unencumbered assets (HQLA) by the estimated net outflows over a stressed 30 calendar day period. The net cash outflows are calculated by applying RBI prescribed outflow factors to the various categories of liabilities (deposits, unsecured and secured wholesale borrowings), as well as to undrawn commitments and derivatives-related exposures, partially offset by inflows from assets maturing within 30 days. The average LCR was at 100.80% for the quarter ended March 31, 2015. The average HQLA were Rs. 71,931.23 crore of which government securities constituted about 75%. The outflows related to derivatives exposures (net of cash inflows) / collateral requirements and undrawn commitments constituted about 2% and 5% respectively of average cash outflow of Rs. 244,342.97 crore. Average inflows from assets were Rs. 172,982.55 crore.

A strong and diversified liabilities profile has been a part of the Bank''s growth strategy. The Bank has consistently maintained a robust funding profile with a significant portion of funding through deposits. As of March 31, 2015, the top 20 depositors constituted 6.2% of total deposits.

26 Related party disclosures

As per AS-18, Related Party Disclosure, the Bank''s related parties are disclosed below:

Promoter

Housing Development Finance Corporation Limited

Subsidiaries

HDFC Securities Limited

HDB Financial Services Limited

Associates

Atlas Documentary Facilitators Company Private Limited

HBL Global Private Limited

International Asset Reconstruction Company Private Limited

Welfare trust of the Bank

HDB Employees Welfare Trust

Key management personnel

Aditya Puri, Managing Director

Paresh Sukthankar, Deputy Managing Director

Harish Engineer, Executive Director (retired from the services of the Bank effective September 30, 2013)

Kaizad Bharucha, Executive Director (appointed with effect from December 24, 2013)

Related parties to key management personnel

Salisbury Investments Private Limited, Anita Puri, Amit Puri, Amrita Puri, Adishwar Puri, Aarti Sood, Sangeeta Sukthankar, Dattatraya Sukthankar, Shubhada Sukthankar, Akshay Sukthankar, Ankita Sukthankar, Madhavi Lad, Sudha Engineer, Shreematiben Engineer, Nikhil Engineer, Uma Engineer, Mahesh Engineer, Havovi Bharucha, Huzaan Bharucha, Danesh Bharucha, Daraius Bharucha.

In accordance with paragraph 5 of AS - 18, the Bank has not disclosed certain transactions with relatives of key management personnel as they are in the nature of banker-customer relationship.

The significant transactions between the Bank and related parties for year ended March 31, 2015 are given below. A specific related party transaction is disclosed as a significant related party transaction wherever it exceeds 10% of all related party transactions in that category:

- Interest paid: Housing Development Finance Corporation Limited Rs. 7.60 crore (previous year: Rs. 8.83 crore); Atlas Documentary Facilitators Company Private Limited Rs. 4.25 crore (previous year: Rs. 4.15 crore); HDFC Securities Limited Rs.2.89 crore (previous year: Rs. 0.65 crore); HDB Financial Services Limited Rs. 1.99 crore (previous year: Rs. 0.67 crore).

- Interest received: HDB Financial Services Limited Rs. 117.17 crore (previous year: Rs. 89.32 crore).

- Rendering of services: Housing Development Finance Corporation Limited Rs. 144.37 crore (previous year: Rs. 130.81 crore).

- Receiving of services: HBL Global Private Limited Rs. 589.50 crore (previous year: Rs. 492.75 crore); Atlas Documentary Facilitators Company Private Limited Rs. 449.50 crore (previous year: Rs. 430.00 crore); Housing Development Finance Corporation Limited Rs. 139.83 crore (previous year: Rs. 85.71 crore).

- Dividend paid: Housing Development Finance Corporation Limited Rs. 269.35 crore (previous year: Rs. 216.27 crore).

- Dividend received: HDB Financial Services Limited Rs. 25.00 crore (previous year: Nil); HDFC Securities Limited Rs. 7.58 crore (previous year: Rs. 0.95 crore).

Remuneration paid excludes value of employee stock options exercised during the year.

The Bank being an authorised dealer, deals in foreign exchange and derivative transactions with parties which include i


Mar 31, 2014

1. Earnings per equity share

Basic and diluted earnings per equity share have been calculated based on the net profit after taxation of Rs. 8,478.38 crore (previous year : Rs. 6,726.28 crore) and the weighted average number of equity shares outstanding during the year of 2,390,289,717 (previous year : 2,360,960,867).

Basic earnings per equity share have been computed by dividing net profit for the year attributable to the equity shareholders by the weighted average number of equity shares outstanding for the year. Diluted earnings per equity share have been computed by dividing the net profit for the year attributable to the equity shareholders by the weighted average number of equity shares and dilutive potential equity shares outstanding during the year, except where the results are anti-dilutive. The dilutive impact is on account of stock options granted to employees by the Bank. There is no impact of dilution on the profits in the current year and previous year.

2. Reserves and surplus Draw down from reserves

There has been no draw down from reserves during the year ended March 31, 2014 (previous year : Nil).

Statutory reserve

The Bank has made an appropriation of Rs. 2,119.59 crore (previous year : Rs. 1,681.57 crore) out of profits for the year ended March 31, 2014 to Statutory Reserve pursuant to the requirements of section 17 of the Banking Regulation Act, 1949 and RBI guidelines dated September 23, 2000.

Capital reserve

During the year ended March 31, 2014, the Bank appropriated Rs. 58.27 crore (previous year : Rs. 85.85 crore), being the profit from sale of investments under HTM category, net of taxes and transfer to statutory reserve, from Profit and Loss Account to Capital Reserve account.

General reserve

The Bank has made an appropriation of Rs. 847.84 crore (previous year : Rs. 672.63 crore) out of profits for the year ended March 31, 2014 to General Reserve pursuant to Companies (Transfer of Profits to Reserves) Rules, 1975.

Investment reserve account

During the year ended March 31, 2014, the Bank has appropriated Rs. 3.22 crore (net) (previous year : Rs. 17.66 crore (net)) from Profit and Loss Account to Investment Reserve account.

3. Dividend on shares allotted pursuant to exercise of stock options

The Bank may allot equity shares after the Balance Sheet date but before the book closure date pursuant to the exercise of any employee stock options. These equity shares will be eligible for full dividend for the year ended March 31, 2014, if approved at the ensuing Annual General Meeting.

4. Accounting for employee share based payments

The shareholders of the Bank approved grant of equity share options under Plan "B" in June 2003, Plan "C" in June 2005, Plan "D" in June 2007, Plan "E" in June 2010 and Plan "F" in June 2013. Under the terms of each of these Plans, the Bank may issue Equity Stock Options (''ESOPs'') to employees and whole time directors of the Bank, each of which is convertible into one equity share. All the plans were framed in accordance with the SEBI (Employee Stock Option Scheme & Employee Stock Purchase Scheme) Guidelines, 1999 as amended from time to time.

Plans B, C, D, E and F provide for the issuance of options at the recommendation of the Compensation Committee at the closing price on the working day immediately preceding the date when options are granted. For Plan B the price is that quoted on an Indian stock exchange with the highest trading volume during the preceding two weeks, while for Plans C, D, E and F the price is the closing price of the share on an Indian stock exchange with the highest trading volume as of the working day preceding the date of grant.

Vesting conditions applicable to the options are at the discretion of the Compensation Committee. These options are exercisable on vesting, for a period as set forth by the Compensation Committee at the time of grant. The period in which options may be exercised cannot exceed five years. Modifications, if any, made to the terms and conditions of ESOPs as approved by the Compensation Committee are disclosed separately.

The erstwhile Centurion Bank of Punjab (''eCBoP'') had granted stock options to its employees prior to its amalgamation with the Bank. The options were granted under the General ESOP Scheme framed in accordance with the SEBI (Employee Stock Option Scheme & Employee Stock Purchase Scheme) Guidelines, 1999 as amended from time to time. The outstanding options granted by eCBoP and the grant price thereof were converted into equivalent HDFC Bank options and prices in the swap ratio of 1:29 i.e. 1 stock option of HDFC Bank for every 29 stock options granted and outstanding of eCBoP as on May 23, 2008, the effective date of the amalgamation, in accordance with Clause 9.9 of the scheme of amalgamation of eCBoP with the Bank. The vesting dates for the said stock options granted in various tranches were revised as per Clause 9.9 of the Scheme. The aforesaid stock options are exercisable within a period of 5 years from the date of vesting. Options granted under the General ESOP scheme were granted at the market price. The market price was the latest available closing price, prior to the date of meeting of the Board of Directors / Compensation Committee in which options were granted or shares were issued, on the stock exchange on which the shares of the Bank were listed. If the shares were listed on more than one stock exchange, then the stock exchange where there was highest trading volume on the said date was considered.

Method used for accounting for shared based payment plan

The Bank has elected to use intrinsic value method to account for the compensation cost of stock options to employees and whole time directors of the Bank. Intrinsic value is the amount by which the quoted market price of the underlying share exceeds the exercise price of the option.

5. Other liabilities

- The Bank held contingent provisions towards standard assets amounting to Rs. 1,260.54 crore as on March 31, 2014 (previous year : Rs. 1,035.74 crore). These are included under Other Liabilities.

- In line with RBI guidelines, provision for standard assets is made @ 0.25% for direct advances to agriculture and small and micro enterprises (SMEs) sectors, @ 1%for advances to commercial real estate sector and @ 0.75% for advances to commercial real estate - residential housing sector. For all types of restructured standard advances (effective June 1, 2013) provision for standard assets is made@ 5% for a prescribed number of years from the date of restructuring or up gradation as the case may be and for the stock of restructured standard advances outstanding as on May 31, 2013 provision for standard assets is made @ 3.50% (which will be increased to 5% in a phased manner by March 31, 2016). For housing loans offered at a comparatively lower rate of interest in the first few years after which rates are reset at higher rates (teaser rate loans), provision for standard assets is made @ 2% until after one year from the date on which the rates are reset at higher rates. For all other loans and advances provision for standard assets is made @ 0.40%. Provision for standard assets of overseas branches has been made at higher of rates prescribed by the overseas regulator or RBI.

- The Bank has presented gross unrealised gain on foreign exchange and derivative contracts under other assets and gross unrealised loss on foreign exchange and derivative contracts under other liabilities. Accordingly, other liabilities as on March 31, 2014 include unrealised loss on foreign exchange and derivative contracts of Rs. 12,609.15 crore (previous year : Rs. 7,036.66 crore).

- No share application monies were outstanding as on March 31, 2014. As of March 31, 2013 ''Other liabilities'' include share application monies of Rs. 22.15 crore, received on exercise of employee stock options pending allotment of equity shares, which were subsequently allotted on April 4, 2013.

- Investments include securities of Face Value (FV) aggregating Rs. 1,845.00 crore (previous year : FV Rs. 1,745.00 crore) which are kept as margin for clearing of securities, of FV Rs. 5,693.30 crore (previous year : FV Rs. 12,100.00 crore) which are kept as margin for Collateralised Borrowing and Lending Obligation (CBLO) and of FV aggregating Rs. 120.35 crore (previous year : FV Rs. 40.00 crore) which are kept as margin for Forex Forward segment - Default Fund with the Clearing Corporation of India Ltd.

- Investments include securities of FV aggregating Rs. 16.00 crore (previous year : FV Rs. 6.00 crore) which are kept as margin with National Securities Clearing Corporation of India Ltd. (''NSCCIL''), of FV aggregating Rs. 13.00 crore (previous year : FV Rs. 5.00 crore) which are kept as margin with MCX - SX Clearing Corporation Ltd., of FV aggregating Rs. 0.30 crore (previous year : FV Rs. 0.30 crore) which are kept as margin with United Stock Exchange for transacting in the currency derivative segment and of FV aggregating Rs. 2.00 crore (previous year : Nil) which are kept as margin with Indian Clearing Corporation Limited in the BSE currency derivatives segment.

- Investments having FV aggregating Rs. 35,013.64 crore (previous year : FV Rs. 29,376.69 crore) are kept as margin towards Real Time Gross Settlement (RTGS) and those having FV aggregating Rs. 26,139.39 crore (previous year : Rs. 38,188.32 crore) are kept as margin towards liquidity adjustment facility with the RBI.

- The Bank has made investments in certain companies wherein it holds more than 25% of the equity shares of those companies. Such investments do not fall within the definition of a joint venture as per AS-27, Financial Reporting of Interest in Joint Ventures and the said accounting standard is thus not applicable. However, pursuant to RBI guidelines, the Bank has classified and disclosed these investments as joint ventures.

- During the year ended March 31, 2014, there has been no sale from, and transfer to / from, HTM category in excess of 5% of the book value of investments held in HTM category at the beginning of the year. In accordance with the RBI guidelines, this excludes :

6. one-time transfer of securities permitted to be undertaken by banks at the beginning of the accounting year with approval of the Board of Directors; and

7. sales to the RBI under pre-announced open market operation auctions.

- In August 2013, the RBI, as a one-time measure, permitted banks to transfer SLR securities from the AFS / HFT category to the HTM category. Accordingly, during the year ended March 31, 2014, the Bank transferred SLR securities having face value aggregating Rs. 1,932.49 crore from the AFS category to the HTM category. In accordance with RBI guidelines, this transfer is excluded from the 5% cap prescribed for value of sales and transfer of securities to / from the HTM category.

- Qualitative disclosures on risk exposure in derivatives

Overview of business and processes

Derivatives are financial instruments whose characteristics are derived from underlying assets, or from interest and exchange rates or indices. These include forwards, swaps, futures and options. The notional amounts of financial instruments such as foreign exchange contracts and derivatives provide a basis for comparison with instruments recognised on the Balance Sheet but do not necessarily indicate the amounts of future cash flows involved or the current fair value of the instruments and, therefore, do not indicate the Bank''s exposure to credit or price risks. The following sections outline the nature and terms of the derivative transactions generally undertaken by the Bank. Interest rate contracts

Forward rate agreements give the buyer the ability to determine the underlying rate of interest for a specified period commencing on a specified future date (the settlement date). There is no exchange of principal and settlement is effected on the settlement date. The settlement amount is the difference between the contracted rate and the market rate prevailing on the settlement date.

Interest rate swaps involve the exchange of interest obligations with the counterparty for a specified period without exchanging the underlying (or notional) principal.

Interest rate caps and floors give the buyer the ability to fix the maximum or minimum rate of interest. The writer of the contract pays the amount by which the market rate exceeds or is less than the cap rate or the floor rate respectively. A combination of interest rate caps and floors is known as an interest rate collar.

Interest rate futures are standardised interest rate derivative contracts traded on a recognised stock exchange to buy or sell a notional security or any other interest bearing instrument or an index of such instruments or interest rates at a specified future date, at a price determined at the time of the contract.

Exchange rate contracts

Forward foreign exchange contracts are agreements to buy or sell fixed amounts of currency at agreed rates of exchange on future date. All such instruments are carried at fair value, determined based on either FEDAI rates or on market quotations.

Cross currency swaps are agreements to exchange principal amounts denominated in different currencies. Cross currency swaps may also involve the exchange of interest payments on one specified currency for interest payments in another specified currency for a specified period.

Currency options give the buyer, on payment of a premium, the right but not an obligation, to buy or sell specified amounts of currency at agreed rates of exchange on or before a specified future date. Option premia paid or received is recorded in Statement of Profit and Loss for rupee options at the expiry of the option and for foreign currency options on premium settlement date.

Currency futures contract is a standardised contract traded on an exchange, to buy or sell a certain underlying asset or an instrument at a certain date in the future, at a specified price. The underlying instrument of a currency future contract is the rate of exchange between one unit of foreign currency and the INR.

Most of the Bank''s derivative transactions relate to sales and trading activities. Sale activities include the structuring and marketing of derivatives to customers to enable them to hedge their market risks (both interest rate and exchange risks), within the framework of regulations as may apply from time to time. The Bank deals in derivatives on its own account (trading activity) principally for the purpose of generating a profit from short term fluctuations in price or yields. The Bank also deals in derivatives to hedge the risk embedded in some of its Balance Sheet assets and liabilities.

Constituents involved in derivative business

The Treasury front office enters into derivative transactions with customers and inter-bank counterparties. The Bank has an independent back-office and mid-office as per regulatory guidelines. The Bank has a credit and market risk department that assesses various counterparty risk and market risk limits, within the risk architecture and processes of the Bank.

Derivative policy

The Bank has in place a policy which covers various aspects that apply to the functioning of the derivative business. The derivative business is administered by various market risk limits such as position limits, tenor limits, sensitivity limits and value-at-risk limits that are approved by the Board and the Risk Policy and Monitoring Committee (''RPMC''). All methodologies used to assess credit and market risks for derivative transactions are specified by the market risk unit. Limits are monitored on a daily basis by the mid-office.

The Bank has implemented a Board approved policy on Customer Suitability & Appropriateness to ensure that derivative transactions entered into are appropriate and suitable to the customer''s nature of business / operations. Before entering into a derivative deal with a customer, the Bank scores the customer on various risk parameters and based on the overall score level it determines the kind of product that best suits its risk appetite and the customer''s requirements.

Classification of derivatives book

The derivative book is classified into trading and hedging book. Classification of the derivative book is made on the basis of the definitions of the trading and hedging books specified in the RBI guidelines. The trading book is managed within the trading limits approved by the RPMC.

Hedging policy

For derivative contracts designated as hedge the Bank documents, at inception, the relationship between the hedging instrument and the hedged item, the risk management objective for undertaking the hedge and the methods used to assess the hedge effectiveness. Hedge effectiveness is ascertained at the time of inception of the hedge and periodically thereafter. Hedge effectiveness is measured by the degree to which changes in the fair value or cash flows of the hedged item that are attributable to a hedged risk are offset by changes in the fair value or cash flows of the hedging instrument.

The hedging book consists of transactions to hedge Balance Sheet assets or liabilities. The tenor of hedging instrument may be less than or equal to the tenor of underlying hedged asset or liability. Derivative contracts designated as hedges are not marked to market unless their underlying asset or liability is marked to market. In respect of derivative contracts that are marked to market, changes in the market value are recognised in the Statement of Profit and Loss in the relevant period. Gain or losses arising from hedge ineffectiveness, if any, are recognised in the Statement of Profit and Loss.

- Provisioning, collateral and credit risk mitigation

The Bank enters into derivative transactions with counter parties based on their business ranking and financial position. The Bank sets up appropriate limits upon evaluating the ability of the counterparty to honor its obligations in the event of crystallisation of the exposure. Appropriate credit covenants are stipulated where required as trigger events to call for collaterals or terminate a transaction and contain the risk.

The Bank, at the minimum, conforms to the RBI guidelines with regard to provisioning requirements. Overdue receivables representing crystallized positive mark-to-market value of a derivative contract are transferred to the account of the borrower and treated as non-performing assets, if these remain unpaid for 90 days or more. Full provision is made for the entire amount of overdue and future receivables relating to positive marked to market value of non-performing derivative contracts.

8. The notional principal amount of foreign exchange contracts classified as Hedging and Trading outstanding as on March 31, 2014 amounted to Rs. 26,147.11 crore (previous year : Rs. 787.13 crore) and Rs. 449,239.01 crore (previous year : Rs. 445,998.94 crore) respectively.

- The notional principal amounts of derivatives reflect the volume of transactions outstanding as at the Balance Sheet date and do not represent the amounts at risk.

- For the purpose of this disclosure, currency derivatives include currency options purchased and sold and cross currency interest rate swaps.

- Interest rate derivatives include interest rate swaps, forward rate agreements and interest rate caps.

- The Bank has computed the maximum and minimum of PV01 for the year based on the balances as at the end of every month.

- In respect of derivative contracts, the Bank evaluates the credit exposure arising therefrom, in line with RBI guidelines. Credit exposure has been computed using the current exposure method which is the sum of :

(a) the current replacement cost (marked to market value including accruals) of the contract or zero whichever is higher; and

(b) the Potential Future Exposure (PFE). PFE is a product of the notional principal amount of the contract and a factor that is based on the grid of credit conversion factors prescribed in RBI guidelines, which is applied on the basis of the residual maturity and the type of contract.

and the related upgradation / recoveries even if these are within the same reporting period, the Bank has accordingly reflected these additions / reductions and the related provisions in the above table. Further, slippages and the related upgradation / recoveries that may occur on more than one occasion for the same customer in the reporting period are aggregated and accordingly counted more than once under additions and reductions respectively, in the above table. As a result, the additions to NPAs and reductions in NPAs on account of upgradation / recoveries increased by the same amount and the amounts of opening NPAs, closing NPAs, write offs and the related provisions remained unchanged. Previous year''s figures have accordingly been re-classified.

- Details of Single Borrower Limit (SGL), Group Borrower Limit (GBL) exceeded by the Bank

During the years ended March 31, 2014 and March 31, 2013, the Bank''s credit exposure to single borrowers and group borrowers were within the limits prescribed by RBI.

- Unsecured advances

Advances for which intangible collaterals such as rights, licenses, authority, etc. are charged in favour of the Bank in respect of projects financed by the Bank, are reckoned as unsecured advances under Schedule 9 of the Balance Sheet in line with extant RBI guidelines. There are no such advances outstanding as on March 31, 2014 (previous year : Nil).

- Inter-bank Participation with risk sharing

The aggregate amount of participation issued by the Bank, reduced from advances as per regulatory guidelines, outstanding as of March 31, 2014 was Rs. 4,450.00 crore (previous year : Rs. 2,330.00 crore).

Definitions of certain items in Business Ratios / Information :

1. Working funds is the daily average of total assets during the year.

2. Operating profit is net profit for the year before provisions and contingencies.

3. "Business" is the total of net advances and deposits (net of inter-bank deposits).

4. Productivity ratios are based on average employee numbers.

5. Gross advances are net of bills rediscounted and interest in suspense.

6. Net NPAs are non-performing assets net of interest in suspense, specific provisions, ECGC claims received, provisions for funded interest term loans classified as NPAs and provisions in lieu of diminution in the fair value of restructured assets classified as NPAs.

7. Net advances are equivalent to gross advances net of specific loan loss provisions, ECGC claims received, provision for funded interest term loans classified as NPA and provisions in lieu of diminution in the fair value of restructured assets.

8. Provision coverage ratio does not include assets written off.

9. Interest income

Interest income under the sub-head Income from Investments includes dividend received during the year ended March 31, 2014 on units of mutual funds, equity and preference shares amounting to Rs. 89.86 crore (previous year : Rs. 180.35 crore).

10. Earnings from standard assets securitised-out

There are no Special Purpose Vehicles (''SPV''s) sponsored by the Bank for securitisation transactions. During the years ended March 31, 2014 and March 31, 2013, there were no standard assets securitised-out by the Bank.

Form and quantum of services and liquidity provided by way of credit enhancement

The Bank has provided credit and liquidity enhancements in the form of cash collaterals / guarantees / subordination of cash flows etc., to the senior pass through certificates (''PTC''s) as well as on loan assignment transactions. The RBI issued addendum guidelines on securitisation of standard assets vide its circular dated May 7, 2012. Accordingly, the Bank does not provide liquidity or credit enhancements on the direct assignment transactions undertaken subsequent to these guidelines. The total value of credit enhancement outstanding in the books as at March 31, 2014 was Rs. 348.28 crore (previous year : Rs. 353.47 crore), and liquidity enhancement was Rs. 8.10 crore (previous year : Rs. 8.10 crore). Outstanding servicing liability was Rs. 0.19 crore (previous year : Rs. 0.27 crore).

11. Other income

- Commission, exchange and brokerage income

- Commission, exchange and brokerage income is net of correspondent bank charges.

- Commission income for the year ended March 31, 2014 includes fees (net of service tax) of Rs. 337.56 crore (previous year : Rs. 469.21 crore) in respect of life insurance business and Rs. 116.69 crore (previous year :Rs. 125.47 crore) in respect of general insurance business.

- Miscellaneous income

Miscellaneous income includes recoveries from written-off accounts amounting to Rs. 622.61 crore (previous year : Rs. 496.54 crore).

12. Other expenditure

Other expenditure includes outsourcing fees amounting to Rs. 590.31 crore (previous year : Rs. 530.26 crore) and commission paid to sales agents amounting to Rs. 1,003.26 crore (previous year : Rs. 963.30 crore), exceeding 1% of the total income of the Bank.

13. Provisions and contingencies

The break-up of provisions and contingencies included in the Statement of Profit and Loss is given below : (Rs. crore)

Particulars March 31, 2014 March 31, 2013

Provision for income tax

- Current 4,269.41 3,275.76

- Deferred 24.27 (251.42) Provision for wealth tax 0.75 0.60 Provision for NPAs 1,632.58 1,234.21 Provision for diminution in value of non-performing investments (4.12) 52.21 Provision for standard assets 221.29 123.71 Other provisions and contingencies* (262.48) 266.27

Total 5,881.70 4,701.34

*Includes (write-back) / provisions for tax, legal and other contingencies Rs. (265.33) crore (previous year : Rs. (133.21) crore), floating provisions Rs. 30.00 crore (previous year : Rs. 400.00 crore), provisions for securitised-out assets Rs. (26.21) crore (previous year : Rs. 5.92 crore) and standard restructured assets Rs. (0.94) crore (previous year : Rs. (6.44) crore).

Provident fund

The guidance note on AS-15, Employee Benefits, states that employer established provident funds, where interest is guaranteed are to be considered as defined benefit plans and the liability has to be valued. The Actuary Society of India (ASI) has issued a guidance note on valuation of interest rate guarantees on exempt provident funds. The actuary has accordingly valued the same and the Bank holds a provision of Rs. 0.52 crore as on March 31, 2014 (previous year : Rs. 9.57 crore) towards the present value of the guaranteed interest benefit obligation. The actuary has followed Deterministic approach as prescribed by the guidance note.

The Bank does not have any unfunded defined benefit plan. The Bank contributed Rs. 143.34 crore (previous year : Rs. 129.54 crore) to the provident fund and Rs. 43.22 crore (previous year : Rs. 37.33 crore) to the superannuation plan.

14. Disclosures on remuneration Qualitative Disclosures

A. Information relating to the composition and mandate of the Remuneration Committee

Composition of the Remuneration Committee

The Board of Directors of the Bank has constituted the Remuneration Committee (hereinafter, the ''Remuneration Committee'') for overseeing and governing the compensation policies of the Bank. The Remuneration Committee is comprised of four independent directors and is chaired by the Chairman of the Board of Directors of the Bank. Further, two members of the Remuneration Committee are also members of the Risk Policy and Monitoring Committee (''RPMC'') of the Board.

The Remuneration Committee is comprised of the Chairman, Mr. C. M. Vasudev, Dr. Pandit Palande, Mr. Partho Datta and Mr. Bobby Parikh. Further, Mr. CM. Vasudev and Mr. Partho Dutta are also members of the RPMC.

Mandate of the Remuneration Committee

The primary mandate of the Remuneration Committee is to oversee the implementation of compensation policies of the Bank.

The Remuneration Committee periodically reviews the overall compensation policy of the Bank with a view to attract, retain and motivate employees. In this capacity it is required to review and approve the design of the total compensation framework, including compensation strategy programs and plans, on behalf of the Board of Directors. The compensation structure and pay revision for Whole Time Directors is also approved by the Remuneration Committee. The Remuneration Committee co-ordinates with the RPMC to ensure that compensation is aligned with prudent risk taking.

B. Information relating to the design and structure of remuneration processes and the key features and objectives of remuneration policy

I. Key Features and Objectives of Remuneration Policy

The Bank''s Compensation Policy (hereinafter, the ''Policy'') is aligned to business strategy, market dynamics, internal characteristics and complexities within the Bank. The ultimate objective of the Policy is to provide a fair and transparent structure that helps in retaining and acquiring the talent pool critical to build competitive advantage and brand equity. The Policy has been designed basis the principles for sound compensation practices in accordance with regulatory requirements and provides a framework to create, modify and maintain appropriate compensation programs and processes with adequate supervision and control.

The Bank''s performance management system provides a sound basis for assessing employee performance holistically. The Bank''s compensation framework is aligned with the performance management system and differentiates pay appropriately amongst its employees based on degree of contribution, skill and availability of talent owing to competitive market forces by taking into account factors such as role, skills, competencies, experience and grade / seniority.

The compensation structure for both the categories of employees is determined by the Remuneration Committee and ensures that :

(a) the compensation is adjusted for all types of prudent risk taking;

(b) compensation outcomes are symmetric with risk outcomes;

(c) compensation payouts are sensitive to the time horizon of risk; and

(d) the mix of cash, equity and other forms of compensation are aligned with risk.

II. Design and Structure of Remuneration

a) Fixed Pay

The Remuneration Committee ensures that the fixed component of the compensation is reasonable, taking into account all relevant factors including industry practice.

Elements of Fixed Pay

The fixed pay component of the Bank''s compensation structure typically consists of elements such as base salary, allowances, perquisites, retirement and other employee benefits. Perquisites extended are in the nature of company car, hard furnishing, company leased accommodation, club membership and such other benefits or allowances in lieu of such perquisites / benefits. Retirement benefits are comprised of contributions to provident fund, superannuation fund (for certain job bands) and gratuity. The Bank also provides pension to certain employees of the erstwhile Lord Krishna Bank (eLKB) under the Indian Banks'' Association (''IBA'') structure.

Determinants of Fixed Pay

The fixed pay is primarily determined by taking into account factors such as the job size, performance, experience, location, market competitiveness of pay and is designed to meet the following key objectives of :

(a) fair compensation given the role complexity and size;

(b) fair compensation given the individual''s skill, competence, experience and market pay position;

(c) sufficient contribution to post retirement benefits; and

(d) compliance with all statutory obligations.

For Whole Time Directors additional dimensions such as prominence of leadership among industry leaders, consistency of the Bank''s performance over the years on key parameters such as profitability, growth and asset quality in relation to its own past performance and that of its peer banks would be considered. The quantum of fixed pay for Whole Time Directors is approved by the Remuneration Committee as well as the Board and is subject to the approval of the RBI.

b) Variable Pay

The performance management system forms the basis for variable pay allocation of the Bank. The Bank ensures that the performance management system is comprehensive and considers both, quantitative and qualitative performance measures.

Whole Time Directors

The bonus for Whole Time Directors will not exceed 70% of the fixed pay in a year, thereby ensuring that there is a balance between the fixed and variable pays. The variable pay for Whole Time Directors is approved by the Remuneration Committee as well as the Board and is subject to the approval of the RBI. The variable pay component is paid out subject to the following conditions :

- The Bank has devised appropriate malus and claw back clauses as a risk mitigant for any negative contributions of the Bank and / or relevant line of business in any year. Under the malus clause the incumbent foregoes the vesting of the deferred variable pay in full or in part. Under the claw back clause the incumbent is obligated to return all the tranches of payout received of bonus amounts pertaining to the relevant performance year.

Employees Other Than Whole Time Directors

The Bank has formulated the following variable pay plans :

- Annual Bonus Plan

The quantum of variable payout is a function of the performance of the Bank, performance of the individual employee, job band of the employee and the functional category. Basis these key determinants and due adjustment for risk alignment, a payout matrix for variable pay is developed. Market trends for specific businesses / functions along with inputs from compensation surveys may also be used in finalising the payout.

Bonus pools are designed to meet specific business needs therefore resulting in differentiation in both the quantum and the method of payout across functions. Typically higher levels of responsibility receive a higher proportion of variable pay vis-à-vis fixed pay. The Bank ensures that the time horizon for risk is assessed and the deferment period, if any, for bonus is set accordingly. Employees on the annual bonus plan are not part of the incentive plans. The following is taken into account while administering the annual bonus :

- In the event the proportion of variable pay to fixed pay is substantially high (typically variable pay exceeding 50% of fixed pay), the Bank may devise an appropriate deferment schedule after taking into consideration the nature of risk, time horizon of risk, and the materiality of risk.

- In cases of deferment of variable pay the Bank makes an assessment prior to the due date for payment of the deferred portion for any negative contribution. The criteria for negative contribution are decided basis pre-defined financial benchmarks. The Bank has in place appropriate methods for prevention of vesting of deferred variable pay or any part thereof, on account of negative contribution. The Bank also has in place claw back arrangements in relation to amounts already paid in the eventuality of a negative contribution.

- Incentive Plans

Incentive Plans are formulated for sales personnel who are given origination / sales targets but have limited impact on risk since credit decisions are exercised independent of the sales function. Most incentive plans have quarterly payouts and are based on the framework of a balanced scorecard. In alignment with the principles of prudent risk management, a portion of the incentive payouts are deferred till the end of the year and are linked to attainment of targets for the full year.

Risk, Control and Compliance Staff

The Bank has separated the Risk, Control and Compliance functions from the Business functions in order to create a strong culture of checks and balances thereby ensuring good asset quality and to eliminate any possible conflict of interest between revenue generation and risk management and control. Accordingly, the overall variable pay as well as the annual salary increment of the employees in the Risk, Control and Compliance functions is based on their performance, functional objectives and goals. The Bank ensures that the mix of fixed to variable compensation for these functions is weighted in favour of fixed compensation.

c) Guaranteed Bonus

Guaranteed Bonuses may not be consistent with sound risk management or pay for performance principles of the Bank and therefore do not form an integral part of the general compensation practice.

For critical hiring for some select strategic roles, the Bank may consider granting of a sign-on bonus as a prudent way to avoid loading the entire cost of attraction into the fixed component of the compensation which could have a long term cost implication for the Bank. For such hiring, the sign-on bonus is generally decided by taking into account appropriate risk factors and market conditions.

For hiring at levels of Whole Time Directors / Managing Director a sign-on bonus, if any, is limited to the first year only and is in the form of Employee Stock Options.

d) Employee Stock Option Plan (''ESOPs'')

The Bank considers ESOPs as a vehicle to create a balance between short term rewards and long term sustainable value creation. ESOPs play a key role in the attraction and retention of key talent. The Bank grants equity share options to its Whole time Directors and other employees above a certain grade. All plans for grant of options are framed in accordance with the SEBI guidelines, 1999 as amended from time to time and are approved by the shareholders of the Bank. These plans provide for the grant of options post approval by the Remuneration Committee.

The grant of options is reviewed and approved by the Remuneration Committee. The number of options granted varies at the discretion of the Remuneration Committee after considering parameters such as the incumbent''s grade and performance rating, and such other appropriate relevant factors as may be deemed appropriate by the Remuneration Committee. Equity share options granted to the Whole Time Directors are subject to the approval of the Remuneration Committee, the Board and the RBI.

e) Severance Pay

The Bank does not grant severance pay other than accrued benefits (such as gratuity, pension) except in cases where it is mandated by any statute.

f) Hedging

The Bank does not provide any facility or fund or permit its Whole Time Directors and employees to insure or hedge their compensation structure to offset the risk alignment effects embedded in their compensation arrangement.

III. Remuneration Processes

Fitment at the time of Hire

Pay ranges of the Bank are set basis the job size, experience, location and the academic and professional credentials of the incumbent.

The compensation of new hires is in line with the existing pay ranges and consistent with the compensation levels of the existing employees of the Bank at similar profiles. The pay ranges are subject to change basis market trends and the Bank''s talent management priorities. While the Bank believes in the internal equity and parity as a key determinant of pay it does acknowledge the external competitive pressures of the talent market. Accordingly, there could be certain key profiles with critical competencies which may be hired at a premium and treated as an exception to the overall pay philosophy. Any deviation from the defined pay ranges is treated as a hiring exception requiring approval with appropriate justification.

Increment / Pay Revision

It is the endeavor of the Bank to ensure external competitiveness as well as internal equity without diluting the overall focus on optimizing cost. In order to enhance our external competitiveness the Bank participates in an annual salary survey of the banking sector to understand key market trends as well as get insights on relative market pay position compared to peers. The Bank endeavors to ensure that most employees progress to the median of the market in terms of fixed pay over time. This coupled with key internal data indicators like performance score, job family, experience, job grade and salary budget form the basis of decision making on revisions in fixed pay.

Increments in fixed pay for majority of the employee population are generally undertaken effective April 1 every year. However promotions, confirmations and change in job dimensions could also lead to a change in the fixed pay during other times of the year.

The Bank also makes salary corrections and adjustments during the year for those employees whose compensation is found to be below the market pay and who have a good performance track record. However such pay revisions are done on an exception basis.

C. Description of the ways in which current and future risks are taken into account in the remuneration processes. It should include the nature and type of the key measures used to take account of these risks

The Bank takes into account all types of risks in its remuneration processes. The Bank takes into consideration the fact that a portion of the Bank''s profits are directly attributable to various types of risks the Bank is exposed to, such as credit risk, market risk, operational risk and other quantifiable risks. Based on the surplus available post adjustment of the cost of capital to cover all such risks and factoring the impact of bonus payout on operating costs an appropriate bonus pool is arrived at.

The Bank also provides for deferment of bonus in the event the proportion of variable pay as compared to fixed pay is substantially high. The Bank has also devised appropriate malus and claw back clauses as a risk mitigant for any negative contributions of the Bank and / or relevant line of business in any year. Under the malus clause, the incumbent foregoes the vesting of the deferred variable pay in full or in part. Under the claw back clause, the incumbent is obligated to return all the tranches of payout received of bonus amounts pertaining to the relevant performance year.

D. Description of the ways in which the Bank seeks to link performance during a performance measurement period with levels of remuneration

Levels of remuneration in the Bank are linked to the performance of the individual employees and the respective business functions. The performance driven pay culture is briefly described below :

Fixed Pay

At the conclusion of every financial year the Bank reviews the fixed pay portion of the compensation structure basis merit-based increments and market corrections. These are based on a combination of performance rating, job band and the functional category of the individual employee. For a given job band, the merit increment is directly related to the performance rating. The Bank strives to ensure that most employees progress to the median of the market in terms of fixed pay over time. All other things remaining equal, the correction percentage is directly related to the performance rating of the individual.

Variable Pay

Basis the individual performance, role, and function, the Bank has formulated the following variable pay plans :

- Annual Bonus Plan

The Bank''s annual bonus is computed as a multiple of the standardised gross salary for every job band. The bonus multiple is based on performance rating, job band and the functional category of the individual employee. All other things remaining equal, for a given job band, the bonus multiple is directly related to the performance rating. The proportion of variable pay to fixed pay increases with job band. Employees on the annual bonus plan are not part of the incentive plans.

- Incentive Plans

The Bank has formulated incentive plans for its sales personnel who are given origination / sales targets. All incentive payouts are subject to the achievement of individual targets enumerated in the respective scorecards of the employees. A portion of the incentive payouts are deferred till the end of the year and are linked to attainment of targets for the full year.

E. A discussion of the Bank''s policy on deferral and vesting of variable remuneration and a discussion of the Bank''s policy and criteria for adjusting deferred remuneration before vesting and after vesting

Whole Time Directors

The bonus for Whole Time Directors will not exceed 70% of the fixed pay in a year, thereby ensuring that there is a balance between the fixed and variable pay. The variable pay for Whole Time Directors is approved by the Remuneration Committee as well as the Board and is subject to the approval of the RBI. The variable pay component is paid out subject to the following conditions :

- The Bank has devised appropriate malus and claw back clauses as a risk mitigant for any negative contributions of the Bank and / or relevant line of business in any year.

- Malus Clause

Under the malus clause the incumbent foregoes the vesting of the deferred variable pay in full or in part. In the event there is a deterioration in specific performance criteria (such as criteria relating to profit or asset quality) that are laid down by the Remuneration Committee, then the Remuneration Committee would review the deterioration in the performance taking into consideration the macroeconomic environment as well as internal performance indicators and accordingly decide whether any part of the deferred tranche pertaining to that financial year merits a withdrawal.

- Claw back Clause

Under the claw back clause the incumbent is obligated to return all the tranches of payout received of bonus amounts pertaining to the relevant performance year. In the event there is any act attributable to the concerned Whole Time Director / Managing Director resulting in an incident of willful and deliberate misinterpretation / misreporting of financial performance (inflating the financials) of the Bank, for a financial year, which comes to light in the subsequent three years, the incumbent is obligated to return all the tranches of payout received of bonus amounts pertaining to the relevant performance year.

The specific criteria on the applicability of malus and claw back arrangements are reviewed by the Remuneration Committee annually.

Employees Other Than Whole Time Directors

The Bank has formulated the following variable pay plans :

- Annual Bonus Plan

The quantum of variable payout is a function of the performance of the Bank, performance of the individual employee, job band of the employee and the functional category. Basis these key determinants and due adjustment for risk alignment, a payout matrix for variable pay is developed. Market trends for specific businesses / functions along with inputs from compensation surveys may also be used in finalising the payout.

Bonus pools are designed to meet specific business needs therefore resulting in differentiation in both the quantum and the method of payout across functions. Typically higher levels of responsibility receive a higher proportion of variable pay vis-à-vis fixed pay. The Bank ensures that the time horizon for risk is assessed and the deferment period, if any, for bonus is set accordingly. Employees on the annual bonus plan are not part of the incentive plans. The following is taken into account while administering the annual bonus :

- In the event the proportion of variable pay to fixed pay is substantially high (typically variable pay exceeding 50% of fixed pay), the Bank may devise an appropriate deferment schedule after taking into consideration the nature of risk, time horizon of risk, and the materiality of risk.

- In cases of deferment of variable pay the Bank makes an assessment prior to the due date for payment of the deferred portion for any negative contribution. The criteria for negative contribution are decided basis pre-defined financial benchmarks. The Bank has in place appropriate methods for prevention of vesting of deferred variable pay or any part thereof, on account of negative contribution. The Bank also has in place claw back arrangements in relation to amounts already paid in the eventuality of a negative contribution.

- Incentive Plans

Incentive Plans are formulated for sales personnel who are given origination / sales targets but have limited impact on risk since credit decisions are exercised independent of the sales function. Most incentive plans have quarterly payouts. In alignment with the principles of prudent risk management, a portion of the incentive payouts are deferred till the end of the year and are linked to attainment of targets for the full year.

F. Description of the different forms of variable remuneration (i.e. cash, shares, ESOPs and other forms) that the Bank utilizes and the rationale for using these different forms.

The Bank recognises the importance of variable pay in reinforcing a pay for performance culture. Variable pay stimulates employees to stretch their abilities to exceed expectations.

- Annual Bonus Plan

These are paid to reward performance for a given financial year. This covers all employees and excludes employees receiving incentives. This is based on performance rating, job band and functional category of the individual.

- Incentive Plans

These are paid to frontline sales staff for the achievement of specific sales targets but limited impact on risk as credit decisions are exercised independent of the sales function. Further, it has been the endeavor of the Bank to ensure that the objectives set are based on the principles of a balanced scorecard rather than just the achievement of financial numbers. Incentives are generally paid every quarter. A portion of the incentive payouts are deferred till the end of the year and are linked to attainment of targets for the full year.

- Employee Stock Option Plan

This is to reward for contribution of employees in creating a long term, sustainable earnings and enhancing shareholder value. Only employees in a certain job band and with a specific performance rating are eligible for Stock Options. Performance is the key criteria for granting stock options.

15. Segment reporting

Business Segments

Business segments have been identified and reported taking into account, the target customer profile, the nature of products and services, the differing risks and returns, the organisation structure, the internal business reporting system and the guidelines prescribed by RBI. The Bank operates in the following segments :

a) Treasury

The treasury segment primarily consists of net interest earnings from the Bank''s investment portfolio, money market borrowing and lending, gains or losses on investment operations and on account of trading in foreign exchange and derivative contracts.

b) Retail Banking

The retail banking segment serves retail customers through a branch network and other delivery channels. This segment raises deposits from customers and provides loans and other services to customers with the help of specialist product groups. Exposures are classified under retail banking taking into account the status of the borrower (orientation criterion), the nature of product, granularity of the exposure and the quantum thereof.

Revenues of the retail banking segment are derived from interest earned on retail loans, interest earned from other segments for surplus funds placed with those segments, subvention received from dealers and manufacturers, fees from services rendered, foreign exchange earnings on retail products etc. Expenses of this segment primarily comprise interest expense on deposits, commission paid to retail assets sales agents, infrastructure and premises expenses for operating the branch network and other delivery channels, personnel costs, other direct overheads and allocated expenses of specialist product groups, processing units and support groups.

c) Wholesale banking

The wholesale banking segment provides loans, non-fund facilities and transaction services to large corporate, emerging corporate, public sector units, government bodies, financial institutions and medium scale enterprises. Revenues of the wholesale banking segment consist of interest earned on loans made to customers, interest / fees earned on the cash float arising from transaction services, earnings from trade services and other non-fund facilities and also earnings from foreign exchange and derivative transactions on behalf of customers. The principal expenses of the segment consist of interest expense on funds borrowed from external sources and other internal segments, premises expenses, personnel costs, other direct overheads and allocated expenses of delivery channels, specialist product groups, processing units and support groups.

d) Other banking business

This segment includes income from para banking activities such as credit cards, debit cards, third party product distribution, primary dealership business and the associated costs.

e) Unallocated

All items which are reckoned at an enterprise level are classified under this segment. This includes capital and reserves, debt classified as Tier I or Tier II capital and other unallowable assets and liabilities such as deferred tax, prepaid expenses, etc.

Segment revenue includes earnings from external customers plus earnings from funds transferred to other segments. Segment result includes revenue less interest expense less operating expense and provisions, if any, for that segment. Segment-wise income and expenses include certain allocations. Interest income is charged by a segment that provides funding to another segment, based on yields bench marked to an internally approved yield curve or at a certain agreed transfer price rate. Transaction charges are levied by the retail-banking segment to the wholesale banking segment for the use by its customers of the retail banking segment''s branch network or other delivery channels. Such transaction costs are determined on a cost plus basis. Segment capital employed represents the net assets in that segment.

Geographic segments

The geographic segments of the Bank are categorized as Domestic Operations and Foreign Operations. Domestic Operations comprise branches in India and Foreign Operations comprise branches outside India.

16. Related party disclosures

As per AS-18, Related Party Disclosure, the Bank''s related parties are disclosed below :

Promoter

Housing Development Finance Corporation Limited

Enterprises under common control of the promoter

- HDFC Asset Management Company Limited

- HDFC Developers Limited

- HDFC Investments Limited

- GRUH Finance Limited

- HDFC ERGO General Insurance Company Limited

- HDFC Ventures Trustee Company Limited

- Griha Investments

- HDFC Education and Development Services Private Limited

- HDFC Property Ventures Limited

- HDFC Life Pension Fund Management Company Limited

- Grandeur Properties Private Limited

- Pentagram Properties Private Limited

- Haddock Properties Private Limited

- HDFC Standard Life Insurance Company Limited

- HDFC Holdings Limited

- HDFC Trustee Company Limited

- HDFC Realty Limited

- HDFC Venture Capital Limited

- HDFC Sales Private Limited

- Credila Financial Services Private Limited

- HDFC Investments Trust

- Griha Pte Limited

- H T Parekh Foundation

- Windermere Properties Private Limited

- Winchester Properties Private Limited

Subsidiaries

HDFC Securities Limited HDB Financial Services Limited

Associates

Atlas Documentary Facilitators Company Private Limited

HBL Global Private Limited

International Asset Reconstruction Company Private Limited

Welfare trust of the Bank

HDB Employees Welfare Trust

Key management personnel

Aditya Puri, Managing Director

Paresh Sukthankar, Deputy Managing Director

Harish Engineer, Executive Director (retired from the services of the Bank effective September 30, 2013)

Kaizad Bharucha, Executive Director (appointed with effect from December 24, 2013)

Related parties to key management personnel

Salisbury Investments Private Limited, Anita Puri, Amit Puri, Amrita Puri, Adishwar Puri, Aarti Sood, Sangeeta Sukthankar, Dattatraya Sukthankar, Shubhada Sukthankar, Akshay Sukthankar, Ankita Sukthankar, Madhavi Lad, Sudha Engineer, Shreematiben Engineer, Nikhil Engineer, Uma Engineer, Mahesh Engineer, Havovi Bharucha, Huzaan Bharucha, Danesh Bharucha, Daraius Bharucha.

In accordance with paragraph 5 of AS-18, the Bank has not disclosed certain transactions with relatives of Key Management Personnel as they are in the nature of banker-customer relationship.

The significant transactions between the Bank and related parties for year ended March 31, 2014 are given below. A specific related party transaction is disclosed as a significant related party transaction wherever it exceeds 10% of all related party transactions in that category :

- Interest paid : Housing Development Finance Corporation Limited Rs. 8.83 crore (previous year : Rs. 9.79 crore); HDFC Standard Life Insurance Company Limited Rs. 8.23 crore (previous year : Rs. 1.10 crore); Atlas Documentary Facilitators Company Private Limited Rs. 4.15 crore (previous year : Rs. 4.08 crore).

- Interest received : HDB Financial Services Limited Rs. 89.32 crore (previous year : Rs. 55.43 crore).

- Rendering of services : HDFC Standard Life Insurance Company Limited Rs. 340.90 crore (previous year : Rs. 472.33 crore); Housing Development Finance Corporation Limited Rs. 130.81 crore (previous year : Rs. 139.59 crore); HDFC ERGO General Insurance Company Limited Rs. 117.40 crore (previous year : Rs. 126.31 crore); HDFC Asset Management Company Limited Rs. 75.19 crore (previous year : Rs. 68.41 crore).

- Receiving of services : HBL Global Private Limited Rs. 492.75 crore (previous year : Rs. 464.56 crore); Atlas Documentary Facilitators Company Private Limited Rs. 430.00 crore (previous year : Rs. 393.48 crore).

- Dividend paid : Housing Development Finance Corporation Limited Rs. 216.27 crore (previous year : Rs. 169.08 crore); HDFC Investments Limited Rs. 82.50 crore (previous year : Rs. 64.50 crore).

Figures in bracket indicate maximum balance outstanding during the year based on comparison of the total outstanding balances at each quarter-end.

Remuneration paid excludes value of employee stock options exercised during the year.

The Bank being an authorised dealer, deals in foreign exchange and derivative transactions with certain parties which includes the promoter and related group companies. The foreign exchange and derivative transactions are undertaken in line with the RBI guidelines. The notional principal amount of foreign exchange and derivative contracts transacted with the promoter that were outstanding as on March 31, 2014 is Rs. 250.00 crore (previous year : Rs. 250.00 crore). The contingent credit exposure pertaining to these contracts computed in line with the extant RBI guidelines on exposure norms is Rs. 8.82 crore (previous year : Rs. 7.42 crore).

During the year ended March 31, 2014, the Bank purchased securities from Credila Financial Services Private Limited Rs. 236.56 crore (previous year : Nil) and from HDB Financial Services Limited Rs. 65.00 crore (previous year : Rs. 180.00 crore). During the year ended March 31, 2013, the Bank had also purchased securities from HDFC Standard Life Insurance Company Limited Rs. 294.24 crore. During the year ended March 31, 2014, the Bank sold securities to HDFC Standard Life Insurance Company Limited with book values aggregating Rs. 336.88 crore (previous year : Rs. 650.02 crore), to HDFC ERGO General Insurance Company Limited Rs. 24.86 crore (previous year : Rs. 217.16 crore). During the year ended March 31, 2014, the Bank redeemed securities of Credila Financial Services Private Limited Rs. 50.00 crore (previous year : Nil). During the year ended March 31, 2013 the Bank had also sold securities to Key Management Personnel Rs. 5.26 crore.

As of March 31, 2014, investment of HDFC Standard Life Insurance Company Limited in the Bank''s tier II bonds amounted to Rs. 85.00 crore (previous year : Rs. 61.00 crore) and that of HDFC ERGO General Insurance Company Limited amounted to Rs. 5.00 crore (previous year : Rs. 5.00 crore).

During the year ended March 31, 2014, the Bank paid rent of Rs. 0.66 crore (previous year : Rs. 0.66 crore) to parties related to the Bank''s key management personnel in relation to residential accommodation. As at March 31, 2014, the security deposit outstanding was Rs. 3.50 crore (previous year : Rs. 4.28 crore).

The deposit outstanding from HDB Employees Welfare Trust as of March 31, 2014 was Rs. 45.12 crore (previous year : Rs. 49.66 crore). The Bank also paid interest on deposit from HDB Employees Welfare Trust aggregating to Rs. 4.41 crore (previous year : Rs. 4.55 crore).

17. Penalties levied by the RBI

During the year ended March 31, 2014, the RBI imposed a penalty of Rs. 4.50 crore on the Bank for certain irregularities and violations discovered by the RBI, viz., non-observance of certain safeguards in respect of arrangement of "at par" payment of cheques drawn by cooperative banks, exceptions in periodic review of risk profiling of account holders, non-adherence to KYC rules for walk-in customers (non-customers) including for sale of third party products, sale of gold coins for cash in excess of Rs. 50,000 in certain cases and non-submission of proper information required by the RBI.

- Top areas of customer complaints

The average number of customer complaints per branch, including ATM transaction disputes, was 6.2 per month during the year ended March 31, 2014 (previous year : 8.0 per month). For the year ended March 31, 2014, retail branch banking segment accounted for 74.19% of the total complaints (an increase from 74.12% for the previous year) followed by credit cards at 17.22% of the total complaints (an increase from 12.99% for the previous year), retail assets at 4.04% of the total complaints (a reduction from 6.90% for the previous year), while other segments accounted for 4.55% of total complaints (as against 5.99% in the previous year). The top 10 areas of customer complaints for the year ended March 31, 2014, including ATM transaction disputes, accounted for 67.05% of total complaints as against 66.83% for the year ended March 31, 2013. The top 5 areas of customer complaints on which the Bank is working towards root cause remediation are - ''cash not dispensed or less cash dispensed in the Bank''s ATMs'', ''statement related - credit cards'', ''address change request given at branch not done'', ''instant account not activated - personal details not updated'' and ''Sales related - credit cards''.

- Position of BO complaints as per RBI annual report

As per a report published by the RBI for the year ended June 30, 2013, the number of BO complaints per branch for the Bank was 1.67 (previous year : 2.28). The number of BO complaints other than credit cards per 1,000 accounts was at 0.11 (previous year : 0.15). The number of BO complaints (credit card related) per 1,000 cards was at 0.08 (previous year : 0.06) for the Bank.

18. Disclosure of Letter of Comforts (LoCs) issued by the Bank

The Bank has not issued any Letter of Comfort during the years ended March 31, 2014 and March 31, 2013.

19. Small and micro industries

Under the Micro, Small and Medium Enterprises Development Act, 2006 which came into force from October 2, 2006, certain disclosures are required to be made relating to Micro, Small and Medium enterprises. There have been no reported cases of delays in payments to micro and small enterprises or of interest payments due to delays in such payments.

20. Off-Balance sheet SPVs

There are no Off-Balance Sheet SPVs sponsored by the Bank, which need to be consolidated as per accounting norms.

21. Credit Default Swaps

The Bank has not transacted in credit default swaps during the year ended March 31, 2014 (previous year : Nil).

22. Comparative figures

Figures for the previous year have been regrouped and reclassified wherever necessary to conform to the current year''s presentation


Mar 31, 2013

A BACKGROUND

HDFC Bank Limited (''HDFC Bank'' or ''the Bank''), incorporated in Mumbai, India is a publicly held banking company engaged in providing a range of banking and financial services including commercial banking and treasury operations. The Bank is governed by the Banking Regulation Act, 1949. The Bank has overseas branch operations in Bahrain and Hong Kong.

B BASIS OF PREPARATION

The financial statements have been prepared and presented under the historical cost convention and accrual basis of accounting, unless otherwise stated and are in accordance with Generally Accepted Accounting Principles in India (''GAAP''), statutory requirements prescribed under the Banking Regulation Act 1949, circulars and guidelines issued by the Reserve Bank of India (''RBI'') from time to time, Accounting Standards notified under the Companies Accounting Standard Rules, 2006 to the extent applicable and current practices prevailing within the banking industry in India.

Use of estimates

The preparation of financial statements in conformity with GAAP requires the management to make estimates and assumptions considered in the reported amounts of assets and liabilities (including contingent liabilities) as of the date of the financial statements and the reported income and expenses for the reporting period. Management believes that the estimates used in the preparation of the financial statements are prudent and reasonable. Actual results could differ from these estimates. Any revision in the accounting estimates is recognised prospectively in the current and future periods.

Amounts in Notes forming part of the Financial Statements for the year ended March 31, 2013 are denominated in Rupee crore to conform to extant RBI guidelines.

1 Sub-division of equity shares

The shareholders of the Bank at the 17th Annual General Meeting held on July 6, 2011 approved sub-division (split) of one equity share of the Bank from nominal value of Rs. 10/- each into five equity shares of nominal value of Rs. 2/- each.

2 Change in Classification

- As per market practice, the Bank pays commission to sales agents and also receives front ended subventions I commission / fees from dealers and manufacturers for originating retail asset products. The net commission paid is expensed in the year in which it is incurred. Pursuant to RBI''s instructions vide its letter dated March 22, 2013, the Bank has, effective year ended March 31, 2013, classified the net commission as follows :

- Commission paid to sales agents for originating fixed tenor retail loans is classified under Operating Expenses and subvention received from dealers and manufacturers is classified under Other Income.

- The net commission paid was hitherto reduced from Interest Income. Accordingly, Rs. 738.58 crore (previous year : Rs. 624.44 crore) of commission paid to sales agent is included under Operating Expenses and Rs. 48.42 crore (previous year : Rs. 36.60 crore) of subvention received from dealers and manufacturers is included under Other Income. Figures for the previous year have accordingly been regrouped / reclassified to conform to current year''s classification. The above change in classification has no impact on the profit and loss of the Bank for the years ended March 31, 2013 and March 31, 2012.

- The Bank recognises in the Statement of Profit and Loss Account, provision for NPAs, direct charge offs, write back of provision for NPAs and recoveries from written off accounts. Pursuant to RBI''s instructions vide its letter dated March 22, 2013, the Bank has, effective year ended March 31, 2013, classified the recoveries from written off accounts under Other Income and the direct charge offs under Operating Expenses. These were hitherto included in the specific loan loss charge under Provisions and Contingencies. Accordingly, Rs. 496.54 crore (previous year : Rs. 503.33 crore) of recoveries from written-off accounts are included under Other Income and Rs. 78.93 crore (previous year : Rs. 63.14 crore) of direct charge offs are included under Operating Expenses. Figures for the previous year have accordingly been regrouped / reclassified to conform to current year''s classification. The above change in classification has no impact on the profit and loss of the Bank for the years ended March 31, 2013 and March 31, 2012.

3 Capital adequacy

The Bank''s Capital to Risk-weighted Asset Ratio (''Capital Adequacy Ratio'') is calculated in accordance with the RBI''s ''Prudential Guidelines on Capital Adequacy and Market Discipline - Implementation of the New Capital Adequacy Framework'' (''Basel II''). Under the Basel II framework, the Bank is required to maintain a minimum capital adequacy ratio of 9% on an ongoing basis for credit risk, market risk and operational risk, with a minimum Tier I capital ratio of 6%. Further, the minimum capital maintained by the Bank as on March 31, 2013 is subject to a prudential floor, which is the higher of the following amounts :

a) Minimum capital required as per the Basel II framework.

b) 80% of the minimum capital required to be maintained under the Basel I framework.

The difference between risk weighted assets under the Basel I and Basel II framework is a net impact of the following key changes :

- Under the Basel II framework, risk weights are applicable to claims on corporates corresponding to their external rating or in the absence of it ranging from 20% to 150%, compared to a uniform 100% under Basel I.

- Exposures qualifying for inclusion in the regulatory retail portfolio under Basel II framework attract a risk weight of 75% as against 100% under Basel I.

- The Basel II framework recognises risk mitigation techniques in the form of eligible financial collaterals such as cash margins, deposits, bonds, gold, debt mutual funds, etc., whilst under Basel I only cash margins and deposits are considered as eligible financial collateral.

- Restructured assets attract a risk weight of 125% under the Basel II framework compared to 100% under Basel I.

- Operational risk is subject to a capital charge under the Basel II framework.

- Under the Basel II framework, capital is subjected to a charge for valuation adjustment for illiquid position of derivative and non-derivative portfolio.

Subordinated debt (lower Tier II capital), upper Tier II capital and innovative perpetual debt instruments outstanding as at March 31, 2013 are Rs. 12,428.00 crore (previous year : Rs. 6,981.00 crore), Rs. 3,958.75 crore (previous year : Rs. 3,924.65 crore) and Rs. 200.00 crore (previous year : Rs. 200.00 crore) respectively.

Based on the balance term to maturity as at March 31, 2013, 93% (previous year : 93%) of the book value of subordinated debt (lower Tier II capital) and upper Tier II capital is considered as Tier II capital for the purpose of capital adequacy computation.

4 Earnings per equity share

Basic and diluted earnings per equity share have been calculated based on the net profit after taxation of Rs. 6,726.28 crore (previous year : Rs. 5,167.09 crore) and the weighted average number of equity shares outstanding during the year was 2,360,960,867 (previous year : 2,336,704,062).

Basic earnings per equity share have been computed by dividing net profit for the year attributable to the equity shareholders by the weighted average number of equity shares outstanding for the year. Diluted earnings per equity share have been computed by dividing the net profit for the year attributable to the equity shareholders by the weighted average number of equity shares and dilutive potential equity shares outstanding during the year, except where the results are anti-dilutive. The dilutive impact is on account of stock options granted to employees by the Bank. There is no impact of dilution on the profits in the current year and previous year.

5 Reserves and surplus Draw down from reserves

There has been no draw down from reserves during the year ended March 31, 2013.

General reserve

The Bank has made an appropriation of Rs. 672.63 crore (previous year : Rs. 516.71 crore) out of profits for the year ended March 31, 2013 to General Reserve pursuant to Companies (Transfer of Profits to Reserves) Rules, 1975.

Investment reserve account

During the year ended March 31, 2013, the Bank has appropriated Rs. 17.66 crore (net) from Profit and Loss Account to Investment Reserve Account. In the previous year, the Bank transferred Rs. 41.69 crore (net) from Investment Reserve Account to Profit and Loss Account.

6 Accounting for employee share based payments

The shareholders of the Bank approved grant of equity share options under Plan "B" in June 2003, Plan "C" in June 2005, Plan "D" in June 2007 and Plan "E" in June 2010. Under the terms of each of these Plans, the Bank may issue Equity Stock Options (''ESOPs'') to employees and directors of the Bank, each of which is convertible into one equity share. All the plans were framed in accordance with the SEBI (Employee Stock Option Scheme & Employee Stock Purchase Scheme) Guidelines, 1999 as amended from time to time.

Plans B, C, D and E provide for the issuance of options at the recommendation of the Compensation Committee at the closing price on the working day immediately preceding the date when options are granted. For Plan B the price is that quoted on an Indian stock exchange with the highest trading volume during the preceding two weeks, while for Plans C, D and E the price is that quoted on an Indian stock exchange with the highest trading volume as of the working day preceding the date of grant.

Vesting conditions applicable to the options are at the discretion of the Compensation Committee. These options are exercisable on vesting, for a period as set forth by the Compensation Committee at the time of grant. The period in which options may be exercised cannot exceed five years. Modifications, if any, made to the terms and conditions of ESOPs as approved by the Compensation Committee are disclosed separately.

The erstwhile Centurion Bank of Punjab had granted stock options to its employees prior to its amalgamation with the Bank. The options were granted under the following Schemes framed in accordance with the SEBI (Employee Stock Option Scheme & Employee Stock Purchase Scheme) Guidelines, 1999 as amended from time to time :

1. Key ESOP

2. General ESOP

The outstanding options granted under each of the above schemes and the grant prices were converted into equivalent HDFC Bank options and prices in the swap ratio of 1:29 i.e. 1 stock option of HDFC Bank for every 29 stock options granted and outstanding of eCBoP as on May 23, 2008, the effective date of the amalgamation, in accordance with Clause 9.9 of the scheme of amalgamation of eCBoP with the Bank. The vesting dates for the said stock options granted in various tranches were revised as per Clause 9.9 of the Scheme. All the aforesaid stock options are exercisable within a period of 5 years from the date of vesting. Key options were granted at an exercise price, which was less than the then fair market price of the shares. General options were granted at the fair market price. The fair market price was the latest available closing price, prior to the date of meeting of the Board of Directors in which options were granted or shares were issued, on the stock exchange on which the shares of the Bank were listed. If the shares were listed on more than one stock exchange, then the stock exchange where there was highest trading volume on the said date was considered.

Along with approving the sub-division of the Bank''s equity shares, the shareholders at the AGM also approved the consequent adjustments to the stock options to employees under its various schemes such that all employee stock options available for grant (including lapsed and forfeited options available for reissue) and those already granted but not exercised as on record date were proportionately converted into options for shares of face value of Rs. 2/- each and the grant price of all the outstanding stock options (vested, unvested and unexercised options) on the record date was proportionately adjusted by dividing the existing grant price by 5. The record date for this purpose was fixed as July 16, 2011.

All the numbers in the tables appearing hereinafter pertaining to stock options are given post sub-division of shares as stated above.

Method used for accounting for shared based payment plan

The Bank has elected to use intrinsic value method to account for the compensation cost of stock options to employees and directors of the Bank. Intrinsic value is the amount by which the quoted market price of the underlying share exceeds the exercise price of the option.

The fair value of options used to compute proforma net income and earnings per equity share have been estimated on the dates of each grant using the binomial option-pricing model. The Bank estimated the volatility based on the historical share prices. No options were granted during the year ended March 31, 2013. The various assumptions considered in the pricing model for the ESOPs granted during the year ended March 31, 2012 were :

7. Other liabilities

- The Bank held contingent provisions towards standard assets amounting to Rs. 1,035.74 crore as on March 31, 2013 (previous year : Rs. 910.79 crore). These are included under Other Liabilities.

In line with RBI guidelines, provision for standard assets is made @ 0.40% except for direct advances to agriculture and small and micro enterprises (SMEs) sectors where provision is made @ 0.25%, for advances to commercial real estate sector where provision is made @ 1%, for restructured standard advances where provision is made @ 2.75% for a prescribed number of years from the date of restructuring or upgradation as the case may be, and for housing loans offered at a comparatively lower rate of interest in the first few years after which rates are reset at higher rates, where provision is made @ 2% until after one year from the date on which the rates are reset at higher rates. Provision for standard assets of overseas branches has been made at higher of rates prescribed by the overseas regulator or RBI.

- The Bank has presented gross unrealised gain on foreign exchange and derivative contracts under other assets and gross unrealised loss on foreign exchange and derivative contracts under other liabilities. Accordingly, other liabilities as on March 31, 2013 include unrealised loss on foreign exchange and derivative contracts of Rs. 7,036.66 crore (previous year : Rs. 12,735.50 crore).

- Other liabilities include share application monies of Rs. 22.15 crore as on March 31, 2013 (previous year : Nil), received on exercise of employee stock options pending allotment of equity shares. These shares were subsequently allotted on April 4, 2013.

- Investments include securities of Face Value (FV) aggregating Rs. 1,745.00 crore (previous year : FV Rs. 1,345.00 crore) which are kept as margin for clearing of securities, of FV Rs. 12,100.00 crore (previous year : FV Rs. 5,732.27 crore) which are kept as margin for Collateralised Borrowing and Lending Obligation (''CBLO'') and of FV aggregating Rs. 40.00 crore (previous year : FV Rs. 65.00 crore) which are kept as margin for Forex Forward segment - Default Fund with the Clearing Corporation of India Ltd.

- Investments include securities of FV aggregating Rs. 6.00 crore (previous year : FV Rs. 6.00 crore) which are kept as margin with National Securities Clearing Corporation of India Ltd. (''NSCCIL''), of FV aggregating Rs. 5.00 crore (previous year : FV Rs. 5.00 crore) which are kept as margin with MCX - SX Clearing Corporation Ltd. and of FV aggregating Rs. 0.30 crore (previous year : FV Rs. 0.30 crore) which are kept as margin with United Stock Exchange for transacting in the currency derivative segment.

- Investments having FV aggregating Rs. 29,376.69 crore (previous year : FV Rs. 25,631.20 crore) are kept as margin towards Real Time Gross Settlement (''RTGS'') and those having FV aggregating Rs. 38,188.32 crore (previous year : Rs. 22,698.32 crore) are kept as margin towards liquidity adjustment facility with the RBI.

- The Bank has made investments in certain companies wherein it holds more than 25% of the equity shares of those companies. Such investments do not fall within the definition of a joint venture as per AS-27, Financial Reporting of Interest in Joint Ventures and the said accounting standard is thus not applicable. However, pursuant to RBI guidelines, the Bank has classified these investments as joint ventures.

- During financial year ended March 31, 2013, there has been no sale from, and transfer to / from, HTM category in excess of 5% of the book value of investments held in HTM category at the beginning of the year. In accordance with the RBI guidelines, this excludes :

- one-time transfer of securities permitted to be undertaken by banks at the beginning of the accounting year with approval of the Board of Directors; and

- sales to the RBI under pre-announced open market operation auctions.

- Qualitative disclosures on risk exposure in derivatives

Overview of business and processes

Derivatives are financial instruments whose characteristics are derived from underlying assets, or from interest and exchange rates or indices. These include forwards, swaps, futures and options. The notional amounts of financial instruments such as foreign exchange contracts and derivatives provide a basis for comparison with instruments recognised on the Balance Sheet but do not necessarily indicate the amounts of future cash flows involved or the current fair value of the instruments and, therefore, do not indicate the Bank''s exposure to credit or price risks. The following sections outline the nature and terms of the derivative transactions generally undertaken by the Bank.

Interest rate contracts

Forward rate agreements give the buyer the ability to determine the underlying rate of interest for a specified period commencing on a specified future date (the settlement date). There is no exchange of principal and settlement is effected on the settlement date. The settlement amount is the difference between the contracted rate and the market rate prevailing on the settlement date.

Interest rate swaps involve the exchange of interest obligations with the counterparty for a specified period without exchanging the underlying (or notional) principal.

Interest rate caps and floors give the buyer the ability to fix the maximum or minimum rate of interest. The writer of the contract pays the amount by which the market rate exceeds or is less than the cap rate or the floor rate respectively. A combination of interest rate caps and floors is known as an interest rate collar.

Interest rate futures are standardised interest rate derivative contracts traded on a recognised stock exchange to buy or sell a notional security or any other interest bearing instrument or an index of such instruments or interest rates at a specified future date, at a price determined at the time of the contract.

Exchange rate contracts

Forward foreign exchange contracts are agreements to buy or sell fixed amounts of currency at agreed rates of exchange on future date. All such instruments are carried at fair value, determined based on either FEDAI rates or on market quotations.

Cross currency swaps are agreements to exchange principal amounts denominated in different currencies. Cross currency swaps may also involve the exchange of interest payments on one specified currency for interest payments in another specified currency for a specified period.

Currency options give the buyer, on payment of a premium, the right but not an obligation, to buy or sell specified amounts of currency at agreed rates of exchange on or before a specified future date. Option premia paid or received is recorded in Statement of Profit and Loss for rupee options at the expiry of the option and for foreign currency options on premium settlement date.

Currency futures contract is a standardised contract traded on an exchange, to buy or sell a certain underlying asset or an instrument at a certain date in the future, at a specified price. The underlying instrument of a currency future contract is the rate of exchange between one unit of foreign currency and the INR.

Most of the Bank''s derivative transactions relate to sales and trading activities. Sale activities include the structuring and marketing of derivatives to customers to enable them to hedge their market risks (both interest rate and exchange risks), within the framework of regulations as may apply from time to time. The Bank deals in derivatives on its own account (trading activity) principally for the purpose of generating a profit from short term fluctuations in price or yields. The Bank also deals in derivatives to hedge the risk embedded in some of its Balance Sheet assets and liabilities.

Constituents involved in derivative business

The Treasury front office enters into derivative transactions with customers and inter-bank counterparties. The Bank has an independent back-office and mid-office as per regulatory guidelines. The Bank has a credit and market risk department that assesses various counterparty risk and market risk limits, within the risk architecture and processes of the Bank.

Derivative policy

The Bank has in place a policy which covers various aspects that apply to the functioning of the derivative business. The derivative business is administered by various market risk limits such as position limits, tenor limits, sensitivity limits and value-at-risk limits that are approved by the Board and the Risk Policy and Monitoring Committee (''RPMC''). All methodologies used to assess credit and market risks for derivative transactions are specified by the market risk unit. Limits are monitored on a daily basis by the mid-office.

The Bank has implemented a Board approved policy on Customer Suitability & Appropriateness to ensure that derivative transactions entered into are appropriate and suitable to the customer''s nature of business / operations. Before entering into a derivative deal with a customer, the Bank scores the customer on various risk parameters and based on the overall score level it determines the kind of product that best suits its risk appetite and the customer''s requirements.

Classification of derivatives book

The derivative book is classified into trading and hedging book. Classification of the derivative book is made on the basis of the definitions of the trading and hedging books specified in the RBI guidelines. The trading book is managed within the trading limits approved by the RPMC.

Hedging policy

For derivative contracts designated as hedge the Bank documents, at inception, the relationship between the hedging instrument and the hedged item, the risk management objective for undertaking the hedge and the methods used to assess the hedge effectiveness. Hedge effectiveness is ascertained at the time of inception of the hedge and periodically thereafter. Hedge effectiveness is measured by the degree to which changes in the fair value or cash flows of the hedged item that are attributable to a hedged risk are offset by changes in the fair value or cash flows of the hedging instrument.

The hedging book consists of transactions to hedge Balance Sheet assets or liabilities. The tenor of hedging instrument may be less than or equal to the tenor of underlying hedged asset or liability. Derivative contracts designated as hedges are not marked to market unless their underlying asset or liability is marked to market. In respect of derivative contracts that are marked to market, changes in the market value are recognised in the Statement of Profit and Loss in the relevant period. Gain or losses arising from hedge ineffectiveness, if any, are recognised in the Statement of Profit and Loss.

* Provisioning, collateral and credit risk mitigation

The Bank enters into derivative transactions with counter parties based on their business ranking and financial position. The Bank sets up appropriate limits upon evaluating the ability of the counterparty to honour its obligations in the event of crystallisation of the exposure. Appropriate credit covenants are stipulated where required as trigger events to call for collaterals or terminate a transaction and contain the risk.

The Bank, at the minimum, conforms to the RBI guidelines with regard to provisioning requirements. Overdue receivables representing crystalised positive mark-to-market value of a derivative contract are transferred to the account of the borrower and treated as non-performing assets, if these remain unpaid for 90 days or more. Full provision is made for the entire amount of overdue and future receivables relating to positive marked to market value of non-performing derivative contracts.

- During the years ended March 31, 2013 and March 31, 2012, no assets were sold to securitisation / reconstruction companies (SC / RC) for asset reconstruction.

- During the years ended March 31, 2013 and March 31, 2012, there were no non-performing financial assets sold.

- During the years ended March 31, 2013 and March 31, 2012, there were no non-performing financial assets that were purchased by the Bank.

11 Details of exposures to real estate and capital market sectors, risk category-wise country exposures, single / group borrower exposures, unsecured advances and concentration of deposits, advances, exposures and NPAs

- Details of Single Borrower Limit (''SGL''), Group Borrower Limit (''GBL'') exceeded by the Bank

During the years ended March 31, 2013 and March 31, 2012, the Bank''s credit exposure to single borrowers and group borrowers were within the limits prescribed by RBI.

- Unsecured advances

Advances for which intangible collaterals such as rights, licenses, authority, etc. are charged in favour of the Bank in respect of projects financed by the Bank, are reckoned as unsecured advances under Schedule 9 of the Balance Sheet in line with extant RBI guidelines. There are no such advances outstanding as on March 31, 2013 (previous year : Nil).

- Inter-bank Participation with risk sharing

The aggregate amount of participation issued by the Bank, reduced from advances as per regulatory guidelines, outstanding as of March 31, 2013 was Rs. 2,330.00 crore (previous year : Rs. 2,540.00 crore).

8 Interest income

Interest income under the sub-head Income from Investments includes dividend received during the year ended March 31, 2013 on units of mutual funds, equity and preference shares amounting to Rs. 180.35 crore (previous year : Rs. 299.61 crore).

9 Earnings from standard assets securitised-out

There are no Special Purpose Vehicles (''SPV''s) sponsored by the Bank for securitisation transactions. During the years ended March 31, 2013 and March 31, 2012, there were no standard assets securitised-out by the Bank.

Form and quantum of services and liquidity provided by way of credit enhancement

The Bank has provided credit and liquidity enhancements in the form of cash collaterals / guarantees / subordination of cash flows etc., to the senior pass through certificates (''PTC''s) as well as on loan assignment transactions. The RBI issued addendum guidelines on securitisation of standard assets vide its circular dated May 7, 2012. Accordingly, the Bank does not provide liquidity or credit enhancements on the direct assignment transactions undertaken subsequent to these guidelines. The total value of credit enhancement outstanding in the books as at March 31, 2013 was Rs. 353.47 crore (previous year : Rs. 358.97 crore), and liquidity enhancement was Rs. 8.10 crore (previous year : Rs. 8.10 crore). Outstanding servicing liability was Rs. 0.27 crore (previous year : Rs. 0.40 crore).

10 Other income

* Commission, exchange and brokerage income

- Commission, exchange and brokerage income is net of correspondent bank charges.

- Commission income for the year ended March 31, 2013 includes fees (net of service tax) of Rs. 469.21 crore (previous year : Rs. 453.63 crore) in respect of life insurance business and Rs. 125.47 crore (previous year : Rs. 109.50 crore) in respect of general insurance business.

11 Other expenditure

Other expenditure includes outsourcing fees amounting to Rs. 530.26 crore (previous year : Rs. 516.40 crore) and commission paid to sales agents amounting to Rs. 963.30 crore (previous year : Rs. 774.56 crore), exceeding 1% of the total income of the Bank.

Provident fund

The guidance note on AS-15, Employee Benefits, states that employer established provident funds, where interest is guaranteed are to be considered as defined benefit plans and the liability has to be valued. The Actuary Society of India (''ASI'') has issued a guidance note on valuation of interest rate guarantees on exempt provident funds. The actuary has accordingly valued the same and the Bank holds a provision of Rs. 9.57 crore as on March 31, 2013 (previous year : Rs. 9.77 crore) towards the present value of the guaranteed interest benefit obligation. The actuary has followed Deterministic approach as prescribed by the guidance note.

The guidance note on valuation of interest rate guarantee embedded in provident fund issued by ASI is effective from April 1, 2011. In the absence of any valuation guidance for the earlier periods, the obligation has not been valued for the earlier years.

The Bank does not have any unfunded defined benefit plan. The Bank contributed Rs. 129.54 crore (previous year : Rs. 116.54 crore) to the provident fund and Rs. 37.33 crore (previous year : Rs. 32.71 crore) to the superannuation plan.

12 Disclosures on remuneration Qualitative Disclosures

A Information relating to the composition and mandate of the Remuneration Committee Composition of the Remuneration Committee

The Board of Directors of the Bank has constituted the Remuneration Committee (hereinafter, the ''Committee'') for overseeing and governing the compensation policies of the Bank. The Committee is comprised of four independent directors and is chaired by the Chairman of the Board of Directors of the Bank. Further, two members of the Committee are also members of the Risk Policy and Monitoring Committee (''RPMC'') of the Board.

The Committee is comprised of the Chairman, Mr. C. M. Vasudev, Dr. Pandit Palande, Mr. Partho Datta and Mr. Bobby Parikh. Further, Mr. C. M. Vasudev and Mr. Partho Dutta are also members of the RPMC.

Mandate of the Remuneration Committee

The primary mandate of the Committee is to oversee the implementation of compensation policies of the Bank.

The Committee periodically reviews the overall compensation policy of the Bank with a view to attract, retain and motivate employees. In this capacity it is required to review and approve the design of the total compensation framework, including compensation strategy programs and plans, on behalf of the Board of Directors. The compensation structure and pay revision for Whole Time Directors is also approved by the Committee. The Committee co-ordinates with the RPMC to ensure that compensation is aligned with prudent risk taking.

B Information relating to the design and structure of remuneration processes and the key features and objectives of remuneration policy

I Key Features and Objectives of Remuneration Policy

The Bank''s Compensation Policy (hereinafter, the ''Policy'') is aligned to business strategy, market dynamics, internal characteristics and complexities within the Bank. The ultimate objective of the Policy is to provide a fair and transparent structure that helps in retaining and acquiring the talent pool critical to build competitive advantage and brand equity. The Policy has been designed basis the principles for sound compensation practices in accordance with regulatory requirements and provides a framework to create, modify and maintain appropriate compensation programs and processes with adequate supervision and control.

The Bank''s performance management system provides a sound basis for assessing employee performance holistically. The Bank''s compensation framework is aligned with the performance management system and differentiates pay appropriately amongst its employees based on degree of contribution, skill and availability of talent owing to competitive market forces by taking into account factors such as role, skills, competencies, experience and grade / seniority.

The compensation structure for both the categories of employees is determined by the Committee and ensures that :

(a) the compensation is adjusted for all types of prudent risk taking;

(b) compensation outcomes are symmetric with risk outcomes;

(c) compensation payouts are sensitive to the time horizon of risk; and

(d) the mix of cash, equity and other forms of compensation are aligned with risk.

II Design and Structure of Remuneration (a) Fixed Pay

The Committee ensures that the fixed component of the compensation is reasonable, taking into account all relevant factors including industry practice.

Elements of Fixed Pay

The fixed pay component of the Bank''s compensation structure typically consists of elements such as base salary, allowances, perquisites, retirement and other employee benefits. Perquisites extended are in the nature of company car, hard furnishing, company leased accommodation, club membership and such other benefits or allowances in lieu of such perquisites / benefits. Retirement benefits are comprised of contributions to provident fund, superannuation fund (for certain job bands) and gratuity. The Bank also provides pension to certain employees of the erstwhile Lord Krishna Bank (''eLKB'') under the Indian Banks'' Association (''IBA'') structure.

Determinants of Fixed Pay

The fixed pay is primarily determined by taking into account factors such as the job size, performance, experience, location, market competitiveness of pay and is designed to meet the following key objectives of :

(a) fair compensation given the role complexity and size;

(b) fair compensation given the individual''s skill, competence, experience and market pay position;

(c) sufficient contribution to post retirement benefits; and

(d) compliance with all statutory obligations.

For Whole Time Directors additional dimensions such as prominence of leadership among industry leaders, consistency of the Bank''s performance over the years on key parameters such as profitability, growth and asset quality in relation to its own past performance and that of its peer banks would be considered. The quantum of fixed pay for Whole Time Directors is approved by the Committee as well as the Board and is subject to the approval of the RBI.

(b) Variable Pay

The performance management system forms the basis for variable pay allocation of the Bank. The Bank ensures that the performance management system is comprehensive and considers both, quantitative and qualitative performance measures.

Whole Time Directors

The bonus for Whole Time Directors will not exceed 70% of the fixed pay in a year, thereby ensuring that there is a balance between the fixed and variable pays. The variable pay for Whole Time Directors is approved by the Committee as well as the Board and is subject to the approval of the RBI. The variable pay component is paid out subject to the following conditions :

- The Bank has devised appropriate malus and claw back clauses as a risk mitigant for any negative contributions of the Bank and / or relevant line of business in any year. Under the malus clause the incumbent foregoes the vesting of the deferred variable pay in full or in part. Under the claw back clause the incumbent is obligated to return all the tranches of payout received of bonus amounts pertaining to the relevant performance year.

Employees Other Than Whole Time Directors

The Bank has formulated the following variable pay plans :

- Annual Bonus Plan

The quantum of variable payout is a function of the performance of the Bank, performance of the individual employee, job band of the employee and the functional category. Basis these key determinants and due adjustment for risk alignment, a payout matrix for variable pay is developed. Market trends for specific businesses / functions along with inputs from compensation surveys may also be used in finalising the payout.

Bonus pools are designed to meet specific business needs therefore resulting in differentiation in both the quantum and the method of payout across functions. Typically higher levels of responsibility receive a higher proportion of variable pay vis-a-vis fixed pay. The Bank ensures that the time horizon for risk is assessed and the deferment period, if any, for bonus is set accordingly. Employees on the annual bonus plan are not part of the incentive plans. The following is taken into account while administering the annual bonus :

- In the event the proportion of variable pay to fixed pay is substantially high (typically variable pay exceeding 50% of fixed pay), the Bank may devise an appropriate deferment schedule after taking into consideration the nature of risk, time horizon of risk, and the materiality of risk.

- In cases of deferment of variable pay the Bank makes an assessment prior to the due date for payment of the deferred portion for any negative contribution. The criteria for negative contribution are decided basis pre-defined financial benchmarks. The Bank has in place appropriate methods for prevention of vesting of deferred variable pay or any part thereof, on account of negative contribution. The Bank also has in place claw back arrangements in relation to amounts already paid in the eventuality of a negative contribution.

- Incentive Plans

Incentive Plans are formulated for sales personnel who are given origination / sales targets but have limited impact on risk since credit decisions are exercised independent of the sales function. Most incentive plans have quarterly payouts and are based on the framework of a balanced scorecard. In alignment with the principles of prudent risk management, a portion of the incentive payouts are deferred till the end of the year and are linked to attainment of targets for the full year.

Risk, Control and Compliance Staff

The Bank has separated the Risk, Control and Compliance functions from the Business functions in order to create a strong culture of checks and balances thereby ensuring good asset quality and to eliminate any possible conflict of interest between revenue generation and risk management and control. Accordingly, the overall variable pay as well as the annual salary increment of the employees in the Risk, Control and Compliance functions is based on their performance, functional objectives and goals. The Bank ensures that the mix of fixed to variable compensation for these functions is weighted in favour of fixed compensation.

(c) Guaranteed Bonus

Guaranteed Bonuses may not be consistent with sound risk management or pay for performance principles of the Bank and therefore do not form an integral part of the general compensation practice.

For critical hiring for some select strategic roles, the Bank may consider granting of a sign-on bonus as a prudent way to avoid loading the entire cost of attraction into the fixed component of the compensation which could have a long term cost implication for the Bank. For such hiring, the sign-on bonus is generally decided by taking into account appropriate risk factors and market conditions.

For hiring at levels of Whole Time Directors / Managing Director a sign-on bonus, if any, is limited to the first year only and is in the form of Employee Stock Options.

(d) Employee Stock Option Plan (''ESOP''s)

The Bank considers ESOPs as a vehicle to create a balance between short term rewards and long term sustainable value creation. ESOPs play a key role in the attraction and retention of key talent. The Bank grants equity share options to its Whole time Directors and other employees above a certain grade. All plans for grant of options are framed in accordance with the SEBI guidelines, 1999 as amended from time to time and are approved by the shareholders of the Bank. These plans provide for the grant of options post approval by the Committee.

The grant of options is reviewed and approved by the Committee. The number of options granted varies at the discretion of the Committee after considering parameters such as the incumbent''s grade and performance rating, and such other appropriate relevant factors as may be deemed appropriate by the Committee. Equity share options granted to the Whole Time Directors are subject to the approval of the Committee, the Board and the RBI.

(e) Severance Pay

The Bank does not grant severance pay other than accrued benefits (such as gratuity, pension) except in cases where it is mandated by any statute.

(f) Hedging

The Bank does not provide any facility or fund or permit its Whole Time Directors and employees to insure or hedge their compensation structure to offset the risk alignment effects embedded in their compensation arrangement.

III Remuneration Processes Fitment at the time of Hire

Pay ranges of the Bank are set basis the job size, experience, location and the academic and professional credentials of the incumbent.

The compensation of new hires is in line with the existing pay ranges and consistent with the compensation levels of the existing employees of the Bank at similar profiles. The pay ranges are subject to change basis market trends and the Bank''s talent management priorities. While the Bank believes in the internal equity and parity as a key determinant of pay, it does acknowledge the external competitive pressures of the talent market. Accordingly, there could be certain key profiles with critical competencies which may be hired at a premium and treated as an exception to the overall pay philosophy. Any deviation from the defined pay ranges is treated as a hiring exception requiring approval with appropriate justification.

Increment / Pay Revision

It is the endeavor of the Bank to ensure external competitiveness as well as internal equity without diluting the overall focus on optimizing cost. In order to enhance our external competitiveness the Bank participates in an annual salary survey of the banking sector to understand key market trends as well as get insights on relative market pay position compared to peers. The Bank endeavors to ensure that most employees progress to the median of the market in terms of fixed pay over time. This coupled with key internal data indicators like performance score, job family, experience, job grade and salary budget form the basis of decision making on revisions in fixed pay.

Increments in fixed pay for majority of the employee population are generally undertaken effective April 1 every year. However promotions, confirmations and change in job dimensions could also lead to a change in the fixed pay during other times of the year.

The Bank also makes salary corrections and adjustments during the year for those employees whose compensation is found to be below the market pay and who have a good performance track record. However such pay revisions are done on an exception basis.

C Description of the ways in which current and future risks are taken into account in the remuneration processes. It should include the nature and type of the key measures used to take account of these risks

The Bank takes into account all types of risks in its remuneration processes. The Bank takes into consideration the fact that a portion of the Bank''s profits are directly attributable to various types of risks the Bank is exposed to, such as credit risk, market risk, operational risk and other quantifiable risks. Based on the surplus available post adjustment of the cost of capital to cover all such risks and factoring the impact of bonus payout on operating costs an appropriate bonus pool is arrived at.

The Bank also provides for deferment of bonus in the event the proportion of variable pay as compared to fixed pay is substantially high. The Bank has also devised appropriate malus and claw back clauses as a risk mitigant for any negative contributions of the Bank and / or relevant line of business in any year. Under the malus clause, the incumbent foregoes the vesting of the deferred variable pay in full or in part. Under the claw back clause, the incumbent is obligated to return all the tranches of payout received of bonus amounts pertaining to the relevant performance year.

D Description of the ways in which the Bank seeks to link performance during a performance measurement period with levels of remuneration Levels of remuneration in the Bank are linked to the performance of the individual employees and the respective business functions. The performance driven pay culture is briefly described below :

Fixed Pay

At the conclusion of every financial year the Bank reviews the fixed pay portion of the compensation structure basis merit-based increments and market corrections. These are based on a combination of performance rating, job band and the functional category of the individual employee. For a given job band, the merit increment is directly related to the performance rating. The Bank strives to ensure that most employees progress to the median of the market in terms of fixed pay over time. All other things remaining equal, the correction percentage is directly related to the performance rating of the individual.

Variable Pay

Basis the individual performance, role, and function, the Bank has formulated the following variable pay plans :

- Annual Bonus Plan

The Bank''s annual bonus is computed as a multiple of the standardised gross salary for every job band. The bonus multiple is based on performance rating, job band and the functional category of the individual employee. All other things remaining equal, for a given job band, the bonus multiple is directly related to the performance rating. The proportion of variable pay to fixed pay increases with job band. Employees on the annual bonus plan are not part of the incentive plans.

- Incentive Plans

The Bank has formulated incentive plans for its sales personnel who are given origination / sales targets. All incentive payouts are subject to the achievement of individual targets enumerated in the respective scorecards of the employees. A portion of the incentive payouts are deferred till the end of the year and are linked to attainment of targets for the full year.

E A discussion of the Bank''s policy on deferral and vesting of variable remuneration and a discussion of the Bank''s policy and criteria for adjusting deferred remuneration before vesting and after vesting

Whole Time Directors

The bonus for Whole Time Directors will not exceed 70% of the fixed pay in a year, thereby ensuring that there is a balance between the fixed and variable pay. The variable pay for Whole Time Directors is approved by the Committee as well as the Board and is subject to the approval of the RBI. The variable pay component is paid out subject to the following conditions :

- The Bank has devised appropriate malus and claw back clauses as a risk mitigant for any negative contributions of the Bank and / or relevant line of business in any year.

- Malus Clause

Under the malus clause the incumbent foregoes the vesting of the deferred variable pay in full or in part. In the event there is a deterioration in specific performance criteria (such as criteria relating to profit or asset quality) that are laid down by the Committee, then the Committee would review the deterioration in the performance taking into consideration the macro economic environment as well as internal performance indicators and accordingly decide whether any part of the deferred tranche pertaining to that financial year merits a withdrawal.

- Claw back Clause

Under the claw back clause the incumbent is obligated to return all the tranches of payout received of bonus amounts pertaining to the relevant performance year. In the event there is any act attributable to the concerned Whole Time Director / Managing Director resulting in an incident of willful and deliberate misinterpretation / misreporting of financial performance (inflating the financials) of the Bank, for a financial year, which comes to light in the subsequent three years, the incumbent is obligated to return all the tranches of payout received of bonus amounts pertaining to the relevant performance year.

The specific criteria on the applicability of malus and claw back arrangements are reviewed by the Committee annually.

Employees Other Than Whole Time Directors

The Bank has formulated the following variable pay plans :

- Annual Bonus Plan

The quantum of variable payout is a function of the performance of the Bank, performance of the individual employee, job band of the employee and the functional category. Basis these key determinants and due adjustment for risk alignment, a payout matrix for variable pay is developed. Market trends for specific businesses / functions along with inputs from compensation surveys may also be used in finalising the payout.

Bonus pools are designed to meet specific business needs therefore resulting in differentiation in both the quantum and the method of payout across functions. Typically higher levels of responsibility receive a higher proportion of variable pay vis-a-vis fixed pay. The Bank ensures that the time horizon for risk is assessed and the deferment period, if any, for bonus is set accordingly. Employees on the annual bonus plan are not part of the incentive plans. The following is taken into account while administering the annual bonus :

- In the event the proportion of variable pay to fixed pay is substantially high (typically variable pay exceeding 50% of fixed pay), the Bank may devise an appropriate deferment schedule after taking into consideration the nature of risk, time horizon of risk, and the materiality of risk.

- In cases of deferment of variable pay the Bank makes an assessment prior to the due date for payment of the deferred portion for any negative contribution. The criteria for negative contribution are decided basis pre-defined financial benchmarks. The Bank has in place appropriate methods for prevention of vesting of deferred variable pay or any part thereof, on account of negative contribution. The Bank also has in place claw back arrangements in relation to amounts already paid in the eventuality of a negative contribution.

- Incentive Plans

Incentive Plans are formulated for sales personnel who are given origination / sales targets but have limited impact on risk since credit decisions are exercised independent of the sales function. Most incentive plans have quarterly payouts. In alignment with the principles of prudent risk management, a portion of the incentive payouts are deferred till the end of the year and are linked to attainment of targets for the full year.

F Description of the different forms of variable remuneration (i.e. cash, shares, ESOPs and other forms) that the Bank utilizes and the rationale for using these different forms.

The Bank recognises the importance of variable pay in reinforcing a pay for performance culture. Variable pay stimulates employees to stretch their abilities to exceed expectations.

- Annual Bonus Plan

These are paid to reward performance for a given financial year. This covers all employees and excludes employees receiving incentives. This is based on performance rating, job band and functional category of the individual.

- Incentive Plan

These are paid to frontline sales staff for the achievement of specific sales targets but limited impact on risk as credit decisions are exercised independent of the sales function. Further, it has been the endeavor of the Bank to ensure that the objectives set are based on the principles of a balanced scorecard rather than just the achievement of financial numbers. Incentives are generally paid every quarter. A portion of the incentive payouts are deferred till the end of the year and are linked to attainment of targets for the full year.

- Employee Stock Option Plan

This is to reward for contribution of employees in creating a long term, sustainable earnings and enhancing shareholder value. Only employees in a certain job band and with a specific performance rating are eligible for Stock Options. Performance is the key criteria for granting stock options.

13 Related party disclosures

As per AS-18, Related Party Disclosure, the Bank''s related parties are disclosed below : Promoter

Housing Development Finance Corporation Limited

Enterprises under common control of the promoter

- HDFC Asset Management Company Limited

- HDFC Developers Limited

- HDFC Investments Limited

- GRUH Finance Limited

- HDFC ERGO General Insurance Company Limited

- HDFC Ventures Trustee Company Limited

- Griha Investments

- HDFC Education and Development Services Private Limited

- HDFCProperty VenturesLimited

- HDFC Life Pension Fund Management Company Limited

- HDFC Standard Life Insurance Company Limited

- HDFC Holdings Limited

- HDFC Trustee Company Limited

- HDFC Realty Limited

- HDFC Venture Capital Limited

- HDFC Sales Private Limited

- Credila Financial Services Private Limited

- HDFC Asset Management Company (Singapore) Pte. Limited

- Griha Pte Limited

- HT Parekh Foundation

Subsidiaries

HDFC Securities Limited

HDB Financial Services Limited Associates

Atlas Documentary Facilitators Company Private Limited

HBL Global Private Limited

Centillion Solutions and Services Private Limited (ceased to be an associate from December 31, 2011)

International Asset Reconstruction Company Private Limited

Welfare trust of the Bank

HDB Employees Welfare Trust

Key management personnel

Aditya Puri, Managing Director

Paresh Sukthankar, Executive Director

Harish Engineer, Executive Director

Related parties to key management personnel

Salisbury Investments Private Limited, Anita Puri, Amit Puri, Amrita Puri, Adishwar Puri, Aarti Sood, Sangeeta Sukthankar, Dattatraya Sukthankar, Shubhada Sukthankar, Akshay Sukthankar, Ankita Sukthankar, Madhavi Lad, Sudha Engineer, Shreematiben Engineer, Nikhil Engineer, Uma Engineer, Mahesh Engineer.

In accordance with paragraph 5 of AS-18, the Bank has not disclosed certain transactions with relatives of Key Management Personnel as they are in the nature of banker-customer relationship.

The significant transactions between the Bank and related parties for year ended March 31, 2013 are given below. A specific related party transaction is disclosed as a significant related party transaction wherever it exceeds 10% of all related party transactions in that category :

- Interest paid : Housing Development Finance Corporation Limited Rs. 9.79 crore (previous year : Rs. 7.55 crore); Atlas Documentary Facilitators Company Private Limited Rs. 4.08 crore (previous year : Rs. 4.04 crore).

- Interest received : HDB Financial Services Limited Rs. 55.43 crore (previous year : Rs. 44.09 crore).

- Rendering of services : Housing Development Finance Corporation Limited Rs. 139.59 crore (previous year : Rs. 106.97 crore); HDFC Standard Life Insurance Company Limited Rs. 472.33 crore (previous year : Rs. 456.37 crore); HDFC ERGO General Insurance Company Limited Rs. 126.31 crore (previous year : Rs. 110.44 crore)

- Receiving of services : HBL Global Private Limited Rs. 464.56 crore (previous year : Rs. 360.40 crore); Atlas Documentary Facilitators Company Private Limited Rs. 393.48 crore (previous year : Rs. 324.43 crore).

- Dividend paid : Housing Development Finance Corporation Limited Rs. 169.08 crore (previous year : Rs. 129.76 crore); HDFC Investments Limited Rs. 64.50 crore (previous year : Rs. 49.50 crore)

The Bank being an authorised dealer, deals in foreign exchange and derivative transactions with certain parties which includes the promoter and related group companies. The foreign exchange and derivative transactions are undertaken in line with the RBI guidelines. The notional principal amount of foreign exchange and derivative contracts transacted with the promoter that were outstanding as on March 31, 2013 is Rs. 250.00 crore (previous year : Rs. 250.00 crore). The contingent credit exposure pertaining to these contracts computed in line with the extant RBI guidelines on exposure norms is Rs. 7.42 crore (previous year : Rs. 15.23 crore).

During the year ended March 31, 2013, the Bank purchased securities from HDFC Standard Life Insurance Company Limited Rs. 294.24 crore (previous year : Rs. 23.97 crore) and from HDB Financial Services Limited Rs. 180.00 crore (previous year : Nil). During the year ended March 31, 2013, the Bank sold securities to HDFC Standard Life Insurance Company Limited with book values aggregating Rs. 650.02 crore (previous year : Rs. 227.92 crore), to HDFC ERGO General Insurance Company Limited Rs. 217.16 crore (previous year : Rs. 230.59 crore) and to Key Management Personnel Rs. 5.26 crore (previous year : Nil).

As of March 31, 2013, investment of HDFC Standard Life Insurance Company Limited in the Bank''s tier II bonds amounted to Rs. 61 crore (previous year : Rs. 11 crore) and that of HDFC ERGO General Insurance Company Limited amounted to Rs. 5 crore (previous year : Nil).

During the year ended March 31, 2013, the Bank paid rent of Rs. 0.66 crore (previous year : Rs. 0.66 crore) to parties related to the Bank''s key management personnel in relation to residential accommodation. As at March 31, 2013, the security deposit outstanding was Rs. 4.28 crore (previous year : Rs. 4.28 crore).

The deposit outstanding from HDB Employees Welfare Trust as of March 31, 2013 was Rs. 49.66 crore (previous year : Rs. 44.59 crore). The Bank also paid interest on deposit from HDB Employees Welfare Trust aggregating to Rs. 4.55 crore (previous year : Rs. 2.85 crore). During the previous year ended March 31, 2012, the Bank purchased 685,161 shares of HDFC Securities Limited for Rs. 9.87 crore from HDB Employees Welfare Trust.

14 Penalties levied by the RBI

No penalties were levied by the RBI during the year ended March 31, 2013.

15 Dividend in respect of shares to be allotted on exercise of stock options

Any allotment of shares after the Balance Sheet date but before the book closure date pursuant to exercise of options will be eligible for full dividend, if approved at the ensuing Annual General Meeting.

* Top areas of customer complaints

The average number of customer complaints per branch was 4 per month during the year ended March 31, 2013 (previous year : 5 per month). For the year ended March 31, 2013, retail branch banking segment accounted for 74.12% of the total complaints (an increase from 71.18% for the previous year) followed by credit cards at 12.99% of the total complaints (a reduction from 14.90% for the previous year), retail assets at 6.9% of the total complaints (a reduction from 7.42% for the previous year), while other segments accounted for 5.99% of total complaints (as against 7.31% in the previous year). The top 10 areas of customer complaints for the year ended March 31, 2013 accounted for 37.08% of total complaints as against 38.51% for the year ended March 31, 2012. The top 5 areas of customer complaints on which the Bank is working towards root cause remediation are - ''instant account not activated - personal details not updated'', ''address change request given at branch not done'', ''cheque deposited at branch not credited/delayed'', ''delay in closure of account'' and ''cash not dispensed or less cash dispensed in the Bank''s ATMs''.

* Position of BO complaints as per RBI annual report

As per a report published by the RBI for the year ended June 30, 2012, the number of BO complaints per branch for the Bank was 2.28 as against the industry average of 3.21. The number of BO complaints other than credit cards per 1,000 accounts was at 0.15 for the Bank as against the industry average of 0.24. The number of BO complaints (credit card related) per 1,000 cards was at 0.06 for the Bank as against the industry average of 0.17.

16 Disclosure of Letter of Comforts (''LoC''s) issued by the Bank

The Bank has not issued any Letter of Comfort during the years ended March 31, 2013 and March 31, 2012.

17 Small and micro industries

Under the Micro, Small and Medium Enterprises Development Act, 2006 which came into force from October 2, 2006, certain disclosures are required to be made relating to Micro, Small and Medium enterprises. There have been no reported cases of delays in payments to micro and small enterprises or of interest payments due to delays in such payments.

18 Off-Balance sheet SPVs

There are no Off-Balance Sheet SPVs sponsored by the Bank, which need to be consolidated as per accounting norms.

19 Credit Default Swaps

The Bank has not transacted in credit default swaps during the year ended March 31, 2013 (previous year : Nil).

20 Comparative figures

Figures for the previous year have been regrouped and reclassified wherever necessary to conform to the current year''s presentation.


Mar 31, 2012

1 Sub-division of equity shares

The shareholders of the Bank at the 17th Annual General Meeting held on July 6, 2011 approved sub-division (split) of one equity share of the Bank from nominal value of Rs 10/- each into five equity shares of nominal value of Rs 2/- each. All shares and per share information in the financial statements reflect the effect of sub-division (split) retrospectively.

2 Capital adequacy

The Bank's Capital to Risk-weighted Asset Ratio ('Capital Adequacy Ratio') is calculated in accordance with the RBI's 'Prudential Guidelines on Capital Adequacy and Market Discipline - Implementation of the New Capital Adequacy Framework' ('Basel II'). Under the Basel II framework, the Bank is required to maintain a minimum capital adequacy ratio of 9% on an ongoing basis for credit risk, market risk and operational risk, with a minimum Tier I capital ratio of 6%. Further, the minimum capital maintained by the Bank as on March 31, 2012 is subject to a prudential floor, which is the higher of the following amounts :

(a) Minimum capital required as per the Basel II framework.

(b) 80% of the minimum capital required to be maintained under the Basel I framework.

The Bank's capital funds as on March 31, 2012 are higher than the minimum required under the Basel I and Basel II framework.

The difference between risk weighted assets under the Basel I and Basel II framework is a net impact of the following key changes :

- Under the Basel II framework, risk weights are applicable to claims on corporates corresponding to their external rating or in the absence of it ranging from 20% to 150%, compared to a uniform 100% under Basel I.

- Exposures qualifying for inclusion in the regulatory retail portfolio under Basel II framework attracts a risk weight of 75%, against 100% under Basel I.

- The Basel II framework recognises risk mitigation techniques in the form of eligible financial collaterals such as cash margins, deposits, bonds, gold, debt mutual funds, etc., whilst under Basel I only cash margins and deposits are considered as eligible financial collateral.

- Restructured assets attract a risk weight of 125% under the Basel II framework compared to 100% under Basel I.

- Operational risk is subject to a capital charge under the Basel II framework.

- Under the Basel II framework, capital is subjected to a charge for valuation adjustment for illiquid position of derivative and non derivative portfolio.

Subordinated debt (lower Tier II capital), upper Tier II capital and Innovative perpetual debt instruments outstanding as at March 31, 2012 are Rs 6,981,00 lacs (previous year : Rs 3,331,20 lacs), Rs 3,924,65 lacs (previous year : Rs 3,861,85 lacs) and Rs 200,00 lacs (previous year : Rs 200,00 lacs) respectively.

1) Coupon rate of 8.70% per annum payable for first 10 years and stepped-up coupon rate of 9.20% per annum for next 5 years if call option is not exercised at the end of 10 years from the date of allotment.

2) Call option exercisable on July 7, 2020 at par with the prior approval of RBI.

Based on the balance term to maturity as at March 31, 2012, 93% of the book value of subordinated debt (lower Tier II capital) and upper Tier II capital is considered as Tier II capital for the purpose of capital adequacy computation.

3 Earnings per equity share

Basic and diluted earnings per equity share have been calculated based on the net profit after taxation of Rs 5,167,09 lacs (previous year : Rs 3,926,40 lacs) and the weighted average number of equity shares outstanding during the year was 233,67,04,062 (previous year : 230,90,34,888) (previous year numbers are restated, refer note 1 to Schedule 18)

Basic earnings per equity share have been computed by dividing net profit after taxation by the weighted average number of equity shares outstanding for the year. Diluted earnings per equity share have been computed by dividing net profit after taxation by the weighted average number of equity shares and dilutive potential equity shares outstanding during the year.

4 Reserves and surplus Draw down from reserves

There has been no draw down from reserves during the year ended March 31, 2012 and the year ended March 31, 2011.

General reserve

The Bank has made an appropriation of Rs 516,71 lacs (previous year : Rs 392,64 lacs) out of profits for the year ended March 31, 2012 to General Reserve pursuant to Companies (Transfer of Profits to Reserves) Rules, 1975.

Investment reserve account

During the year, the Bank has transferred Rs 41,69 lacs (net) from Investment reserve account to Statement of Profit and Loss. In the previous year, the Bank transferred Rs 15,56 lacs (net) from Statement of Profit and Loss to Investment reserve account.

5 Accounting for employee share based payments

The shareholders of the Bank approved grant of equity share options under Plan "A" in January 2000, Plan "B" in June 2003, Plan "C" in June 2005, Plan "D" in June 2007 and Plan "E" in June 2010. Under the terms of each of these Plans, the Bank may issue Equity Stock Options ('ESOPs') to employees and directors of the Bank, each of which is convertible into one equity share. All the plans were framed in accordance with the SEBI (Employee Stock Option Scheme & Employee Stock Purchase Scheme) Guidelines, 1999 as amended from time to time. Plan A provides for the issuance of options at the recommendation of the Compensation Committee of the Board (the "Compensation Committee") at an average of the daily closing prices on the Bombay Stock Exchange Limited during the 60 days preceding the date of grant of options. Plans B, C, D and E provide for the issuance of options at the recommendation of the Compensation Committee at the closing price on the working day immediately preceding the date when options are granted. For Plan B the price is that quoted on an Indian stock exchange with the highest trading volume during the preceding two weeks, while for Plan C, Plan D and Plan E the price is that quoted on an Indian stock exchange with the highest trading volume as of working day preceding the date of grant.

Such options vest at the discretion of the Compensation Committee. These options are exercisable for a period following vesting at the discretion of the Compensation Committee, subject to a maximum of five years, as set forth at the time of grant. Modifications, if any, made to the terms and conditions of ESOPs as approved by the Compensation Committee are disclosed separately.

The eCBoP had granted stock options to its employees prior to its amalgamation with the Bank. The options were granted under the following Schemes framed in accordance with the SEBI (Employee Stock Option Scheme & Employee Stock Purchase Scheme) Guidelines, 1999 as amended from time to time :

1) Key ESOP

2) General ESOP

The outstanding options granted under each of the above schemes and the grant prices were converted into equivalent HDFC Bank options and prices in the swap ratio of 1:29 i.e. 1 stock option of HDFC Bank for every 29 stock options granted and outstanding of eCBoP as on May 23, 2008, the effective date of the amalgamation, in accordance with Clause 9.9 of the scheme of amalgamation of eCBoP with the Bank. The vesting dates for the said stock options granted in various tranches were revised as per Clause 9.9 of the Scheme. All the aforesaid stock options are exercisable within a period of 5 years from the date of vesting. Key options were granted at an exercise price, which was less than the then fair market price of the shares. General options were granted at the fair market price. The fair market price was the latest available closing price, prior to the date of meeting of the Board of Directors in which options were granted or shares were issued, on the stock exchange on which the shares of the Bank were listed. If the shares were listed on more than one stock exchange, then the stock exchange where there was highest trading volume on the said date was considered.

Along with approving the sub-division of the Bank's equity shares, the shareholders at the AGM also approved the consequent adjustments to the stock options to employees under its various schemes such that all employee stock options available for grant (including lapsed and forfeited options available for reissue) and those already granted but not exercised as on record date were proportionately converted into options for shares of face value of Rs 2/- each and the grant price of all the outstanding stock options (vested, unvested and unexercised options) on the record date was proportionately adjusted by dividing the existing grant price by 5. The record date for this purpose was fixed as July 16, 2011.

All the numbers in the tables appearing hereinafter pertaining to stock options are given / restated post sub-division of shares as stated above.

Method used for accounting for shared based payment plan

The Bank has elected to use intrinsic value method to account for the compensation cost of stock options to employees and directors of the Bank. Intrinsic value is the amount by which the quoted market price of the underlying share exceeds the exercise price of the option. Following is the activity in the options outstanding under the Employee Stock Options Plan as at March 31, 2012 and as at March 31, 2011. These tables reflect an adjustment effected in the current year to include the effect of options forfeited / lapsed in respect of resigned employees.

6 Other liabilities

Other liabilities includes contingent provisions towards standard assets of Rs 910,79 lacs (previous year : Rs 760,29 lacs). In line with RBI guidelines, provision for standard assets has been made @ 0.40% except for direct advances to agriculture and SME sectors where provision is made @ 0.25%, for advances to commercial real estate sector where provision is made @ 1%, for restructured standard advances where provision is made@ 2% and for housing loans offered at a comparatively lower rate of interest in the first few years, after which rates are reset at higher rates, where provision is made @ 2%. Provision for standard assets of overseas branches has been made at higher of rates prescribed by the overseas regulator or RBI.

As per the recommendatory provisions of AS-31, Financial Instruments : Presentation, the Bank has grossed up unrealised gain on foreign exchange and derivative contracts under other assets and unrealised loss on foreign exchange and derivative contracts under other liabilities. Accordingly, other liabilities as on March 31, 2012 includes unrealized loss on foreign exchange and derivative contracts of Rs 12,735,50 lacs (previous year : Rs 7,369,45 lacs)

- Details of investments category-wise

The details of investments held under the three categories viz. 'Held for Trading', 'Available for Sale' and 'Held to Maturity' is as under :

- Investments include securities of Face Value (FV) aggregating Rs 1,345,00 lacs (previous year : FV Rs 820,00 lacs) which are kept as margin for clearing of securities and of FV Rs 5,732,27 lacs (previous year : FV Rs 2,150,00 lacs) which are kept as margin for Collateral Borrowing and Lending Obligation (CBLO) with the Clearing Corporation of India Ltd.

- Investments include securities of FV aggregating Rs 6,00 lacs (previous year : FV Rs 6,00 lacs) which are kept as margin with National Securities Clearing Corporation of India Ltd. ('NSCCIL') and of FV Rs 5,00 lacs (previous year : FV Rs 5,00 lacs) which are kept as margin with MCX - SX Clearing Corporation Ltd.

- Investments having FV amounting to Rs 25,631,20 lacs (previous year : FV Rs 30,556,80 lacs) are kept as margin with the RBI towards Real Time Gross Settlement (RTGS).

- Other investments include certificate of deposits : Rs 4,382,09 lacs (previous year : Rs 4,854,46 lacs), commercial paper : Rs 1,039,11 lacs (previous year : Rs 1,161,17 lacs), investment in debt mutual fund units : Rs 897,28 lacs (previous year : Rs Nil), pass through certificates Rs 338,86 lacs (previous year : Rs 516,72 lacs), security receipts issued by reconstruction companies : Rs 50,78 lacs (previous year : Rs 25,04 lacs), deposits with National Bank of Agriculture and Rural Development ("NABARD") under the RIDF Deposit Scheme : Rs 9,115,48 lacs (previous year : Rs 6,503,04 lacs), deposits with Small Industries Development Bank of India ("SIDBI") and NHB under the Priority / Weaker Sector Lending Schemes : Rs 3,639,09 lacs (previous year : Rs 2,755,38 lacs).

- The Bank has made investments in certain companies wherein it holds more than 25% of the equity shares of those companies. Such investments do not fall within the definition of a joint venture as per AS-27, Financial Reporting of Interest in Joint Ventures, issued by the ICAI, and the said accounting standard is thus not applicable. However, pursuant to RBI circular DBOD. nO. BP.BC.3/21.04.141/2002, dated July 11, 2002, the Bank has classified these investments as joint ventures.

- During financial year ended March 31, 2012, there has been no sale from HTM categories in excess of 5% of the book value of investments held in HTM category at the beginning of the year. There has been no transfer to or from HTM categories during the financial year ended March 31, 2012.

During the year, the Bank classified its investments of Rs 9,233,86 lacs in deposits with development banks such as the NABARD and SIDBI, under Held to Maturity category. These deposits were hitherto reported under AFS category.

- Qualitative disclosures on risk exposure in derivatives

Overview of business and processes

Derivatives are financial instruments whose characteristics are derived from underlying assets, or from interest and exchange rates or indices. These include forwards, swaps, futures and options. The notional amounts of financial instruments such as foreign exchange contracts and derivatives provide a basis for comparison with instruments recognised on the Balance Sheet but do not necessarily indicate the amounts of future cash flows involved or the current fair value of the instruments and, therefore, do not indicate the Bank's exposure to credit or price risks. The following sections outline the nature and terms of the most common types of derivative transactions undertaken by the Bank.

Interest rate contracts

Forward rate agreements give the buyer the ability to determine the underlying rate of interest for a specified period commencing on a specified future date (the settlement date). There is no exchange of principal and settlement is effected on the settlement date. The settlement amount is the difference between the contracted rate and the market rate prevailing on the settlement date.

Interest rate swaps involve the exchange of interest obligations with a counterparty for a specified period without exchanging the underlying (or notional) principal.

Interest rate caps and floors give the buyer the ability to fix the maximum or minimum rate of interest. The writer pays the amount by which the market rate exceeds or is less than the cap rate or the floor rate respectively. A combination of interest rate caps and floors is known as an interest rate collar.

Interest rate futures are standardised interest rate derivative contracts traded on a recognised stock exchange to buy or sell a notional security or any other interest bearing instrument or an index of such instruments or interest rates at a specified future date, at a price determined at the time of the contract.

Exchange rate contracts

Forward foreign exchange contracts are agreements to buy or sell fixed amounts of currency at agreed rates of exchange on future date. All such instruments are carried at fair value, determined based on either FEDAI rates or on market quotations.

Cross currency swaps are agreements to exchange principal amounts denominated in different currencies. Cross currency swaps may also involve the exchange of interest payments on one specified currency for interest payments in another specified currency for a specified period.

Currency options give the buyer, on payment of a premium, the right but not an obligation, to buy or sell specified amounts of currency at agreed rates of exchange on or before a specified future date. Option premia paid or received is recorded in Statement of Profit and Loss for rupee options at the expiry of the option and for foreign currency options on premium settlement date.

Currency futures contract is a standardised contract, traded on an exchange, to buy or sell a certain underlying asset or an instrument at a certain date in the future, at a specified price. The underlying instrument of a currency future contract is the rate of exchange between one unit of foreign currency and the INR.

Most of the Bank's derivative transactions relate to sales and trading activities. Sale activities include the structuring and marketing of derivatives to customers to enable them to hedge their market risks (both interest rate and exchange risks), within the framework of regulations as may apply from time to time. The Bank deals in derivatives on its own account (trading activity) principally for the purpose of generating a profit from short term fluctuations in price or yields. The Bank also deals in derivatives to hedge the risk embedded in some of its Balance Sheet assets and liabilities.

Constituents involved in derivative business

The Treasury front office enters into derivatives transactions with customers and inter-bank counterparties. The Bank has an independent back-office and mid-office as per regulatory guidelines. The Bank has a credit and market risk department that makes various counterparty and market risks limit assessments, within the risk architecture and processes of the Bank.

Derivative policy

The Bank has in place a policy which covers various aspects that apply to the functioning of the derivatives business. The derivatives business is administered by various market risk limits such as position limits, tenor limits, sensitivity limits and value-at-risk limits that are approved by the Board and the Risk Policy and Monitoring Committee ('RPMC'). All methodologies used to assess credit and market risks for derivative transactions are specified by the market risk unit. Limits are monitored on a daily basis by the mid-office.

The Bank has implemented a Board approved policy on customer suitability & appropriateness to ensure that derivative transactions entered into are appropriate and suitable to the customer's nature of business / operations. Before entering into a derivative deal with a customer, the Bank scores the customer on various risk parameters and based on the overall score level it determines the kind of product that best suits its risk appetite and the customer's requirements.

Classification of derivatives book

The derivative book is classified into trading and hedging book. Classification of books is made on the basis of the definitions of the trading and hedging books as specified in the RBI guidelines Ref. No. DBOD. No. BP.(SC). BC.98/ 21.04.103/99 dated October 7, 1999. The trading book is managed within the trading limits approved by the RPMC.

Hedging policy

For derivative contracts in the hedging book designated as hedge, the Bank documents at inception the relationship between the hedging instrument and the hedged item, the risk management objective for undertaking the hedge and the methods used to assess the hedge effectiveness. The assessment is done on an on-going basis to test if the derivative is still effective. Hedge effectiveness is the degree to which changes in the fair value or cash flows of the hedged item that are attributable to a hedged risk are offset by changes in the fair value or cash flows of the hedging instrument.

The hedging book consists of transactions to hedge Balance Sheet assets or liabilities. The hedge may be against a single asset or liability or against a portfolio of asset or liability in specific tenor buckets. The tenor of derivative hedges may be less than or equal to tenor of underlying asset or liability. If the underlying asset or liability is not marked to market, then the hedge is also not marked to market.

- Provisioning, collateral and credit risk mitigation

The Bank enters into derivative transactions with counter parties based on their business ranking and financial position. The Bank sets up appropriate limits upon evaluating the ability of the counterparty to honour its obligations in the event of crystallisation of the exposure. Appropriate credit covenants are stipulated where required as trigger events to call for collaterals or terminate a transaction and contain the risk.

The Bank, at the minimum, conforms to the RBI guidelines with regard to provisioning requirements. Overdue receivables representing crystalised positive mark-to-market value of a derivative contract are transferred to the account of the borrower and treated as non-performing asset, if these remain unpaid for 90 days or more. Full provision is made for the entire amount of overdue and future receivables relating to positive marked to market value of non-performing derivative contracts.

(*) As per the recommendatory provisions of AS-31, Financial Instruments : Presentation, marked to market position is reported on gross basis from March 31, 2011 onwards.

- The notional principal amount of foreign exchange contracts classified as hedging and trading outstanding as on March 31, 2012 amounted to Rs Nil (previous year : Rs Nil) and Rs 564,876,45 lacs (previous year : Rs 301,417,25 lacs) respectively.

- The notional principal amounts of derivatives reflect the volume of transactions outstanding at balance sheet date and do not represent the amounts at risk.

- For the purpose of this disclosure, currency derivatives include options purchased and sold (including rupee options), cross currency interest rate swaps and currency futures.

- Interest rate derivatives include interest rate swaps and forward rate agreements.

- The Bank has computed maximum and minimum of PV01 for the year based on balances at the end of every month.

- In respect of derivative contracts, the Bank evaluates the credit exposure arising therefrom, in line with the RBI Circular DBOD. NO. BP.BC.57/21.04.157/2008-09 dated October 13, 2008. Credit exposure has been computed using the current exposure method which is the sum of

(a) the current replacement cost (marked to market value including accruals) of the contract or zero whichever is higher, and

(b) the Potential Future Exposure (PFE). PFE is a product of the notional principal amount of the contract and a factor. The factor used is based on the RBI-Basel II grid of credit conversion factors, and is applied on the basis of the residual maturity and the type of contract.

NPAs include all assets that are classified as non-performing by the Bank. Till the year ended March 31, 2011, additions, upgradations or recoveries in retail NPAs were computed at a portfolio level. From the year ended March 31, 2012, these movements are computed at an account / contract level by comparing non-performing accounts outstanding at the beginning and at the end of the year. Previous year's figures have been reclassified accordingly.

- During the years ended March 31, 2012 and March 31, 2011, there were no non-performing financial assets sold, excluding those sold to SC / RC.

- During the years ended March 31, 2012 and March 31, 2011, there were no non-performing financial assets that were purchased by the Bank.

- Details of Single Borrower Limit (SGL), Group Borrower Limit (GBL) exceeded by the Bank

During the years ended March 31, 2012 and March 31, 2011, the Bank's credit exposure to single borrowers and group borrowers were within the limits prescribed by RBI.

- Unsecured advances

During the years ended March 31, 2012 and March 31, 2011, there are no unsecured advances for which intangible securities such as charge over the rights, licenses, authority, etc. has been taken by the Bank.

- Concentration of deposits, advances, exposures and NPAs

(*) As per the recommendatory provisions of AS-31, Financial Instruments : Presentation, the Bank has grossed up unrealised gain on foreign exchange and derivative contracts under other assets and unrealised loss on foreign exchange and derivative contracts under other liabilities.

(**) From March 31, 2012, bullion outstanding representing stock on consignment is not reflected on the Balance Sheet.

Definitions :

1. Working funds is the daily average of total assets during the year

2. Operating profit is net profit for the year before provisions and contingencies.

3. "Business" is the total of net advances and deposits (net of inter-bank deposits).

4. Productivity ratios are based on average employee numbers.

5. Net NPAs are non-performing assets net of interest in suspense, specific loan loss provisions, ECGC claims received, provisions for funded interest term loans classified as NPAs and provisions in lieu of diminution in the fair value of restructured assets classified as NPAs.

6. Customer assets include net advances, credit substitutes like debentures, commercial papers and loans and investments in securitised assets bought in.

7. Net advances are equivalent to gross advances net of bills rediscounted, specific loan loss provisions, interest in suspense, ECGC claims received, provision for funded interest term loans classified as NPA and provisions in lieu of diminution in the fair value of restructured assets.

8. Provision coverage ratio does not include assets written off.

7 Interest income

Interest income under the sub-head Income from Investments includes dividend received during the year ended March 31, 2012 on units of mutual funds, equity and preference shares amounting to Rs 299,61 lacs (previous year : Rs 187,88 lacs).

8 Earnings from standard assets securitised-out

During the years ended March 31, 2012 and March 31, 2011, there were no standard assets securitised-out by the Bank.

Form and quantum of services and liquidity provided by way of credit enhancement

The Bank has provided credit and liquidity enhancements in the form of cash collaterals / guarantees / subordination of cash flows etc., to the senior pass through certificates (PTCs). The total value of credit enhancement outstanding in the books as at March 31, 2012 was Rs 358,97 lacs (previous year : Rs 446,21 lacs) and liquidity enhancement was Rs 8,10 lacs (previous year : Rs 16,65 lacs). Outstanding servicing liability was Rs 40 lacs (previous year : Rs 62 lacs).

9 Other income

- Commission, exchange and brokerage income

- Commission, exchange and brokerage income is net of correspondent bank charges

- Commission income includes fees / remuneration (net of service tax) of Rs 563,13 lacs (previous year : Rs 713,25 lacs) in respect of the bancassurance business undertaken by the Bank during the year.

- Miscellaneous income

Miscellaneous income includes loss of Rs 126,53 lacs (previous year : Rs 134,50 lacs) pertaining to derivative transactions.

10 Other expenditure

Other expenditure includes outsourcing fees amounting to Rs 516,40 lacs (previous year : Rs 419,38 lacs) exceeding 1% of the total income of the Bank. Further, during previous year, expenses on collections and recoveries amounting to Rs 320,74 lacs was exceeding 1% of the total income of the Bank.

* Includes (write-back) / provisions for : tax, legal and other contingencies Rs (16,449) lacs (previous year : Rs 474,90 lacs), floating provisions Rs 700,00 lacs (previous year : Rs 670,00 lacs), securitised-out assets Rs 9,84 lacs (previous year : Rs 2,59 lacs) and restructured assets Rs (4,13) lacs (previous year : Rs (4,40) lacs).

Expected rate of return on investments is determined based on the assessment made by the Bank at the beginning of the year with regard to its existing portfolio. The Bank's investments have been made in insurance funds and securities.

The Bank does not have any unfunded defined benefit plan.

The Bank contributed Rs 116,54 lacs (previous year : Rs 92,88 lacs) to the provident fund and Rs 32,71 lacs (previous year : Rs 25,86 lacs) to the superannuation plan.

Provident fund

The guidance note on AS-15, Employee Benefits, states that employer established provident funds, where interest is guaranteed are to be considered as defined benefit plans and the liability has to be valued. The Actuary Society of India (ASI) has issued a guidance note on valuation of interest rate guarantees on exempt provident funds. The actuary has accordingly valued the same and the Bank has made a provision of Rs 9,77 lacs towards the present value of the guaranteed interest benefit obligation. The actuary has followed deterministic approach as prescribed by the guidance note.

The guidance note on valuation of interest rate guarantee embedded in provident fund issued by ASI is effective from April 1, 2011. In the absence of any valuation guidance for the earlier periods, the obligation has not been valued for the last four years.

An amount of Rs 5,003,64 lacs pertaining to grossed up unrealised gain on foreign exchange and derivatives contracts has been reclassified from 'Unallocated' to 'Treasury' segment in the segmental capital employed (asset - liabilities) as at March 31, 2011.

11 Related party disclosures

As per AS-18, Related party disclosure, issued by the ICAI, the Bank's related parties are disclosed below : Promoter

Housing Development Finance Corporation Limited Enterprises under common control of the promoter

HDFC Asset Management Company Limited

HDFC Standard Life Insurance Company Limited

HDFC Developers Limited

HDFC Holdings Limited

HDFC Investments Limited

HDFC Trustee Company Limited

GRUH Finance Limited

HDFC Realty Limited

HDFC ERGO General Insurance Company Limited

HDFC Venture Capital Limited

HDFC Ventures Trustee Company Limited

HDFC Sales Private Limited

HDFC Property Ventures Limited

HDFC Asset Management Company (Singapore) Pte. Limited Griha Investments

Credila Financial Services Private Limited

HDFC Education and Development Services Private Limited

Subsidiaries

HDFC Securities Limited

HDB Financial Services Limited

Associates

Atlas Documentary Facilitators Company Private Limited HBL Global Private Limited

Centillion Solutions and Services Private Limited (ceased to be an associate from December 31, 2011)

International Asset Reconstruction Company Private Limited

Welfare trust of the Bank

HDB Employees Welfare Trust

Key management personnel

Aditya Puri, Managing Director

Paresh Sukthankar, Director

Harish Engineer, Director

Related parties to key management personnel

Salisbury Investments Private Limited, Anita Puri, Amit Puri, Amrita Puri, Adishwar Puri, Aarti Sood, Sangeeta Sukthankar, Dattatraya Sukthankar, Shubhada Sukthankar, Akshay Sukthankar, Ankita Sukthankar, Madhavi Lad, Sudha Engineer, Shreematiben Engineer, Nikhil Engineer, Uma Engineer, Mahesh Engineer.

In accordance with paragraph 5 of AS 18, the Bank has not disclosed certain transactions with key management personnel and relatives of key management personnel as they are in the nature of banker-customer relationship.

The significant transactions between the Bank and related parties for year ended March 31, 2012 are given below. A specific related party transaction is disclosed as a significant related party transaction wherever it exceeds 10% of all related party transactions in that category :

- Purchase of fixed assets : HBL Global Private Limited Rs 20 lacs (previous year : Rs 10 lacs); HDFC Securities Limited - Rs Nil (previous year : Rs 59 lacs).

- Sale of fixed assets : HDB Financial Services Limited Rs 14 lacs (previous year : Rs Nil); Atlas Documentary Facilitators Company Private Limited Rs 13 lacs (previous year : Rs Nil).

- Interest paid : Housing Development Finance Corporation Limited Rs 7,55 lacs (previous year : Rs 4,88 lacs); HDFC Securities Limited - Rs Nil (previous year : Rs 2,37 lacs). HDFC ERGO General Insurance Company Limited Rs 2,04 lacs (previous year : Rs Nil); Atlas Documentary Facilitators Company Private Limited Rs 4,04 lacs (previous year : Rs 2,05 lacs).

- Interest received : HDB Financial Services Limited Rs 44,09 lacs (previous year : Rs 22,94 lacs).

- Rendering of services : Housing Development Finance Corporation Limited Rs 106,97 lacs (previous year : Rs 96,47 lacs); HDFC Standard Life Insurance Company Limited Rs 456,37 lacs (previous year : Rs 669,64 lacs); HDFC ERGO General Insurance Company Limited Rs 110,44 lacs (previous year : Rs 77,99 lacs)

- Receiving of services : HBL Global Private Limited Rs 360,40 lacs (previousyear : Rs 290,19 lacs); Atlas Documentary Facilitators Company Private Limited Rs 324,43 lacs (previous year : Rs 266,66 lacs).

- Dividend paid : Housing Development Finance Corporation Limited Rs 129,76 lacs (previous year : Rs 94,37 lacs); HDFC Investments Limited Rs 49,50 lacs (previous year : Rs 36,00 lacs);

During the year, the Bank purchased 6,851,61 shares of HDFC Securities Limited for Rs 9,87 lacs from HDB Employees Welfare Trust. The deposit outstanding from HDB Employees Welfare Trust as of March 31, 2012 was Rs 44,59 lacs (March 31, 2011 : Rs 34,13 lacs). The Bank also paid interest on deposit from HDB Employees Welfare Trust aggregating to Rs 2,85 lacs (previous year : Rs 2,10 lacs).

Figures in bracket indicate maximum balance outstanding during the year based on comparison of the total outstanding balances at each quarter end. Remuneration paid excludes value of employee stock options exercised during the year.

The Bank being an authorised dealer, deals in foreign exchange and derivative transactions with certain parties which includes the promoter and related group companies. The foreign exchange and derivative transactions are undertaken in line with the RBI guidelines. The notional principal amount of foreign exchange and derivative contracts transacted with the promoter that were outstanding as on March 31, 2012 is Rs 250,00 lacs (previous year : Rs 250,00 lacs). The contingent credit exposure pertaining to these contracts computed in line with the extant RBI guidelines on exposure norms is Rs 15,23 lacs (previous year : Rs 11,08 lacs).

During the previous year, the Bank has entered into an operating lease agreement with a counter-party for leasing certain assets. These are in the process of being deployed. The future lease payment for this lease is linked to volume of usage of the leased assets and accordingly, the future minimum lease payments cannot be estimated at this stage.

The Bank has sub-leased certain of its properties taken on lease. There are no provisions relating to contingent rent.

The terms of renewal and escalation clauses are those normally prevalent in similar agreements. There are no undue restrictions or onerous clauses in the agreements.

12 Penalties levied by the RBI

The RBI issued a show cause notice in October 2010 to the Bank for having contravened the guidelines issued by the RBI and provisions of Foreign Exchange Management (Foreign Exchange Derivative Contracts) Regulation 2000 in respect of derivative deals done by the Bank as observed in its annual financial inspection of the Bank with respect to its financial position as at and for the years ended March 31, 2007 and March 31, 2008. Subsequently, the Bank, vide its letter dated October 19, 2010, submitted a detailed response to the RBI explaining the Bank's position and clarifying that the Bank was in compliance with the RBI guidelines. While RBI accepted some of the submissions made by the Bank, few other submissions made in the matter were not accepted by RBI. RBI, accordingly, imposed a penalty of Rs15 lacs for non-compliance of the RBI's directions and instructions in terms of Section 47A(1)(b) read with Section 46(4) of the Banking Regulation Act, 1949. The stated amount was paid by the Bank during the fiscal year ended 2012.

13 Dividend in respect of shares to be allotted on exercise of stock options

Any allotment of shares after the Balance Sheet date but before the book closure date pursuant to the exercise of options during the said period will be eligible for full dividend, if approved at the ensuing Annual General Meeting.

14 Disclosure of Letter of Comforts (LoCs) issued by the Bank

The Bank has not issued any letter of comfort during the years ended March 31, 2012 and March 31, 2011.

15 Changes in accounting estimates Useful life of fixed assets

During the previous year ended March 31, 2011, the Bank revised the estimated useful life of point of sale machines and certain information technology servers. Depreciation on these assets is charged prospectively over the revised useful life of the asset. Consequently, profit after tax for the previous year was lower by Rs 39,05 lacs.

16 Small and micro industries

Under the Micro, Small and Medium Enterprises Development Act, 2006 which came into force from October 2, 2006, certain disclosures are required to be made relating to micro, small and medium enterprises. There have been no reported cases of delays in payments to micro and small enterprises or of interest payments due to delays in such payments.

17 There are no Off-Balance Sheet SPVs sponsored by the Bank, which need to be consolidated as per accounting norms.

18 Comparative figures

Figures for the previous year have been regrouped and reclassified wherever necessary to conform to the current year's presentation.

 
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