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HDFC Bank Ltd.

BSE: 500180 Sector: Financials
NSE: HDFCBANK ISIN Code: INE040A01034
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VOLUME 346362
52-Week high 1304.10
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P/E 27.03
Mkt Cap.(Rs cr) 681,620
Buy Price 1244.15
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Sell Price 1244.15
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OPEN 1247.70
CLOSE 1245.00
VOLUME 346362
52-Week high 1304.10
52-Week low 1011.50
P/E 27.03
Mkt Cap.(Rs cr) 681,620
Buy Price 1244.15
Buy Qty 3.00
Sell Price 1244.15
Sell Qty 2.00

HDFC Bank Ltd. (HDFCBANK) - Director Report

Company director report

Dear Stakeholders

Your Directors take great pleasure in presenting the 25th Annual Report on the businessand operations of your Bank together with the audited accounts for the year ended March31 2019. A journey of a thousand miles begins with a single step. Ours began a quarter ofa century back with the launch of the first branch in Mumbai on February 18 1995. On thesame day in 2019 your Bank entered its silver jubilee year by opening its 5000th branchagain at Mumbai. Along the way it has metamorphosed from a wholesale bank into one with anequally strong retail presence and is well underway in its journey of offering an omnichannel customer experience. In the semi urban and rural areas where your Bank has overhalf its banking outlets it is acting as a change agent not only through its bankingservices but social initiatives as well under the umbrella brand Parivartan. As itenters its silver jubilee year your Bank has impacted the lives of about 10 crore Indiansdirectly or indirectly ie over 4.9 crore customers the 5 crore plus people through itssocial initiatives and families of its over 1.9 lakh employees (including that of its twosubsidiaries).

In the year ended March 312019 your Bank continued on this path. This came in aneconomic environment where the Indian economy stood out as an outlier despite facingvarious challenges both externally and internally. Externally it was buffeted by volatilecrude prices rising interest rates in the developed world particularly in the USheightened trade tensions and geopolitical uncertainties in some parts of the world.Internally the economy was affected by serious concerns regarding the financial health ofthe NBFC sector the continuing high NPA levels in the banking space slowing consumptiondemand and some concerns on the fiscal side. Not to mention the uncertainty caused by theimminent general elections. The Indian economy however continued to be the fastest growingin the world thanks to the reforms of the past few years.

In the year under review your Bank delivered a strong financial performance on theback of an improvement in a majority of its key parameters.

Financial Parameters

Your Bank recorded an improvement in a majority of its key financial parameters. AtRs.48243.2 crore Net Interest Income rose by 20.3 per cent. Core Net Interest Marginremained stable at 4.3 per cent. Gross Non-Performing Assets (NPAs) at 1.36 per cent isamong the lowest in the industry. This was largely due to the Bank's prudent creditevaluation of the targeted customer profile and having a diversified loan book spreadacross customer segments products and sectors plus managing risk-return decisions withdiscipline. Your Bank's Net Profit at Rs.21078.1 crore went up by 20.5 per cent.

In addition the year stood out for one of the largest fund raising in your Bank'shistory. It also continued to transform lives through Parivartan and securingrecognition.

1) Fund Raising

Your Bank raised Rs.23715.9 crore in the year under review. This comprises apreferential allotment to Housing Development Finance Corporation Ltd of Rs.8500 crore aQualified Institutional Placement of Rs.2775.0 crore and an ADR offering of $ 1820million (Rs.12440.9 crore). Consequent to the above issuances share capital increased byRs.20.89 crore and share premium increased by Rs.23568.7 crore. This is net of shareissue expenses of Rs.126.3 crore. The issuances were made pursuant to the shareholder andregulatory approvals. This has resulted in a strengthening of its capital structureincreasing solvency and shoring up of its Capital Adequacy Ratio.

2) Parivartan

The Bank in the year under review has continued its journey of social commitmentthrough Parivartan which means change. Your Bank firmly believes that businessescannot prosper if the communities in which they operate don't. This is what has beeninspiring its social initiatives. This change has been brought about principally by about10 per cent of the Bank's workforce which works on the Sustainable Livelihood Initiative(SLI) which helps people improve their lives by upgrading their skillsets and thusenabling them to break out of the cycle of poverty. And through its‘Teaching-The-Teacher' (3T) initiative which has potentially impacted 1.6 crorestudents as well as the Holistic Rural Development Programme which has already touchedanother possible 14.4 lakh people spread across more than 1100 villages. We are alsohappy to report that in the year under review your Bank has met the mandatory CSRexpenditure through a spend of Rs.443.8 crore.

3) Awards and Recognition

The Bank continued to win awards and laurels. Notably it was named India's mostvaluable brand for the fourth year in a row in the BrandZ survey of Top 50 Most ValuableIndian Brands. HDFC Bank was also ranked No 1 in India by customers in the first editionof the ‘World's Best Banks' survey by Forbes magazine. The publication partnered withmarket research firm Statista to measure the best banks in 23 countries and customers wereasked to rate banks on overall recommendation and satisfaction as well as on the 5 keyattributes namely: Trust; Terms and Conditions; Customer Service; Digital Device;Financial Advice.

Summary

To sum up your Bank is geared up for the next phase of growth given the looming marketopportunities and its strong positioning in each of its major franchises. And also make agreater contribution to bridge the divide between India and Bharat be it through itsbusiness or social initiatives. This of course would not have been possible without thecontribution of our over 98000 employees.

Mission and Strategic Focus

Your Bank's mission is to be a ‘World-Class Indian Bank.' Its business philosophyis based on five core values: Customer Focus Operational Excellence Product LeadershipPeople and Sustainability. The last value Sustainability should be viewed in consonancewith Environmental Social and Governance criteria. As a part of this HDFC Bank throughits umbrella brand Parivartan seeks to bring about change in the lives ofcommunities mainly in Rural India.

The business objective has been to continue building sound customer franchises acrossdistinct businesses so as to be a preferred banking services provider to achieve healthygrowth in profitability consistent with the Bank's risk appetite.

In line with the above your Bank's business strategy was to take digitisation to thenext level to achieve the following:

• Deliver superior experience and greater convenience to customers

• Increase market share in India's expanding banking and financial servicesindustry

• Expand geographical reach

• Cross-sell the broad financial product portfolio

• Sustain strong asset qualify through disciplined credit risk management

• Maintain low cost of funds

Your Bank is committed to do this while ensuring the highest levels of ethicalstandards professional integrity corporate governance and regulatory compliance. This isarticulated through a well-documented Code of Conduct that every employee has to affirmannually that he/she will abide by.

Summary of Financial Performance

(Rs. crore)

For the year ended/As on

March 31 2019 March 31 2018
Deposits and Other Borrowings 1040226.1 911875.6
Advances 819401.2 658333.1
Total Income 116597.9 95461.7
Profit Before Depreciation and Tax 33339.8 27603.6

 

Particulars

For the year ended/As on

March 31 2019 March 31 2018
Profit After Tax 21078.1 17486.8
Profit Brought Forward 40453.4 32668.9
Total Profit Available for Appropriation 61531.5 50155.7
Appropriations
Transfer to Statutory Reserve 5269.5 4371.7
Transfer to General Reserve 2107.8 1748.7
Transfer to Capital Reserve 105.3 235.5
Transfer to/(from) Investment Reserve - (44.2)
Transfer to/(from) Investment Fluctuation Reserve 773.0 -
Dividend (including tax/cess thereon) pertaining to previous year paid during the year 4052.6 3390.6
net of dividend tax credits
Balance carried over to Balance Sheet 49223.3 40453.4

Dividend

Your Bank has a dividend policy that inter alia balances the objectives ofappropriately rewarding shareholders and retaining capital in order to fund future growth.It has a consistent track record of steady increase in dividend distribution with theDividend Payout Ratio ranging between 20 per cent and 25 per cent-a range that the Boardendeavours to maintain.

The dividend policy of your Bank is available on the Bank's website at the followinglink: http://www.hdfcbank.com/htdocs/common/pdf/corporate/Dividend-Distribution-Policy.pdf

Consistent with this policy and in recognition of the overall performance during theyear under review your Directors are pleased to recommend a dividend of Rs.15 per equityshare of Rs.2 as against Rs.13 per equity share in the previous year. As you are awarethis dividend will be subject to tax to be paid by the Bank. In terms of revisedAccounting Standard (AS) 4 ‘Contingencies and Events occurring after the BalanceSheet Date' as notified by the Ministry of Corporate Affairs through amendments toCompanies (Accounting Standards) Amendment Rules 2016 the Bank has not appropriatedproposed dividend from Profit and Loss Account for the year ended March 312019. Howeverthe effect of the proposed dividend including tax on dividend aggregating to Rs.4924.64crore has been reckoned in determining capital funds in the computation of capitaladequacy ratio as at March 312019.

Ratings

Instrument Rating Rating Agency Comments
Fixed Deposit Programme CARE AAA (FD) CARE Ratings Instruments with this rating are considered to have the highest degree of safety regarding timely servicing of financial obligations. Such instruments carry the lowest credit risk.
IND Taaa India Ratings Instruments with this rating are considered to have the highest degree of safety regarding timely servicing of financial obligations. Such instruments carry the lowest credit risk.
Certificate of Deposits Programme CARE A1 + CARE Ratings Instruments with this rating are considered to have very strong degree of safety regarding timely servicing of financial obligations. Such instruments carry the lowest credit risk.
IND A1 + India Ratings Instruments with this rating are considered to have very strong degree of safety regarding timely servicing of financial obligations. Such instruments carry the lowest credit risk.
Long Term Unsecured Subordinated (Lower Tier 2) Bonds CARE AAA CARE Ratings Instruments with this rating are considered to have the highest degree of safety regarding timely servicing of financial obligations. Such instruments carry the lowest credit risk.
IND AAA India Ratings Instruments with this rating are considered to have the highest degree of safety regarding timely servicing of financial obligations. Such instruments carry the lowest credit risk.
Upper Tier 2 Bonds CARE AAA CARE Ratings Instruments with this rating are considered to have the highest degree of safety regarding timely servicing of financial obligations. Such instruments carry the lowest credit risk.
CRISIL AAA CRISIL Instruments with this rating are considered to have the highest degree of safety regarding timely servicing of financial obligations. Such instruments carry the lowest credit risk.
Infrastructure Bonds CARE AAA CARE Ratings Instruments with this rating are considered to have the highest degree of safety regarding timely servicing of financial obligations. Such instruments carry the lowest credit risk.
CRISIL AAA CRISIL Instruments with this rating are considered to have the highest degree of safety regarding timely servicing of financial obligations. Such instruments carry the lowest credit risk.
Additional Tier I Bonds (Under Basel III) CARE AA+ CARE Ratings Instruments with this rating are considered to have high degree of safety regarding timely servicing of financial obligations. Such instruments carry very low credit risk.
CRISIL AA+ CRISIL Instruments with this rating are considered to have high degree of safety regarding timely servicing of financial obligations. Such instruments carry very low credit risk.
IND AA+ India Ratings Instruments with this rating are considered to have high degree of safety regarding timely servicing of financial obligations. Such instruments carry very low credit risk.
Tier II Bonds (Under Basel III) CARE AAA CARE Ratings Instruments with this rating are considered to have the highest degree of safety regarding timely servicing of financial obligations. Such instruments carry the lowest credit risk.
CRISIL AAA CRISIL Instruments with this rating are considered to have the highest degree of safety regarding timely servicing of financial obligations. Such instruments carry the lowest credit risk.

Issuance of Equity Shares and Employee Stock Options (ESOP)

As on March 31 2019 the issued subscribed and paid up capital of your Bank stood atRs.5446613220 comprising 2723306610 equity shares of Rs.2 each. During the yearunder review the Bank issued 39096817 equity shares to Housing Development FinanceCorporation Limited on a preferential basis 12847222 equity shares on a qualifiedinstitutions placement and 52500000 equity shares underlying 17500000 AmericanDepository Receipts (ADRs). Further 23772304 equity shares of face value of Rs.2 eachwere issued pursuant to exercise of Employee Stock Option (ESOP) by the Bank. Theinformation pertaining to ESOPs is given in ANNEXURE 1 to this report.

The Board of Directors at its meeting held on May 22 2019 considered and approved thesub-division of one equity share of the Bank having face value of Rs.2/- each into twoequity shares of face value of Re. 1/- each and consequential alteration in the relevantclauses relating to capital of the Memorandum of Association of the Bank. The sub-divisionof equity shares as above is subject to the approval of the members at the ensuing AnnualGeneral Meeting of the Bank.

Further the Bank had issued 11430383 underlying equity shares representing GlobalDepository Receipts (GDRs) of the Bank which are listed on the Luxembourg Stock Exchange.The Depository for GDRs is represented in India by J.P Morgan Chase Bank N.A. Due to lowtrading/conversion volume in GDR the Board of Directors of the Bank at its meeting heldon April 20 2019 has decided to terminate the GDR program. The requisite notice oftermination is being issued to the custodian and the depository.

Capital Adequacy Ratio (CAR)

As on March 312019 your Bank's total CAR calculated in line with Basel III capitalregulations stood at 17.1 per cent well above the regulatory minimum of 11.025 per centincluding the Capital Conservation Buffer of 1.875 per cent. Of this Tier I CAR was 15.8per cent. The effect of the proposed dividend has been taken into account in computingthese ratios.

MANAGEMENT DISCUSSION AND ANALYSIS

Macroeconomic and Industry Developments

The Indian economy faced several headwinds both domestic and external for much of theyear ended March 312019. Encouragingly despite global headwinds like volatile oilprices elevated trade tensions geo-political uncertainties in some parts of the worldand interest rate tightening cycle in some of the developed countries notably the US theIndian economy stood out as an outlier in terms of growth with an estimated growth of 7per cent in the year under review (as per the second advance estimates of the CentralStatistics Office). The economy remains a high growth achiever and various policy reformmeasures over the past couple of years (such as Goods and Service Tax 2017 Insolvency andBankruptcy Code 2016 and Bank recapitalization plan 2017) will help improve India'smacro-economic stability considerably going forward. Domestically India faced issuesrelated to financial health of the NBFC sector high NPA levels in the banking spaceslowing consumption demand and some concerns on the fiscal side. On the back of variousmeasures to address the issue of bad loans in the banking sector the NPA cycle is nowlooking to be bottoming out. As per the RBI's December 2018 Financial Stability ReportGross Non-Performing Assets (GNPA) ratio of scheduled commercial banks declined from 11.5per cent in March 2018 to 10.8 per cent in September 2018. The ratio is expected to havedeclined further to 10.3 per cent by March 2019. The Government along with the RBI hasalso taken several measures to infuse greater liquidity in the NBFC sector and plans totake measures to bring in stability in this sector.

Consistent slowdown in domestic consumption growth is one of the major challenges thatthe economy faces going into 2019-20. As per the second advance estimates of the CentralStatistics Office (CSO) India's real GDP growth dropped to 6.6 per cent in the thirdquarter of 201819-a five-quarter low-from 7 per cent in the second quarter and 8 per centin the first quarter. Growth is expected to inch down further to 6.5 per cent in the lastquarter.

On an annual basis GDP growth is expected to drop to 7 per cent in 2018-19 from 7.2per cent in 2017-18. From the production side the current slowdown is mainly on accountof the agriculture sector (due to weak kharif season) which is expected to grow at alower rate of 2.7 per cent in the year under review from 5 per cent in the previous year.On the demand side the slowdown emanates from the consumption side. While the recovery inprivate consumption remains tepid Government consumption is expected to sharply slow downto 8.9 per cent in the year ended March 312019 from a double digit growth of 15 per centin the previous year. Going by the 2019-20 Interim Budget the focus of fiscal policy inthe coming year will be on revival of the rural economy (through schemes such as PradhanMantri Kisan Samman Nidhi) which is likely to partly boost consumption in the comingyear. Overall adherence to fiscal discipline remains critical at this juncture so thatproductive expenditure is not pruned in a bid to meet the fiscal targets.

Encouragingly investment revival remains on track in line with the trends in capacityutilization. For the last five quarters investments growth (Gross Fixed CapitalFormation) has averaged at 11.3 per cent much higher than the average of 7.78 per cent forprivate consumption. Construction activity also seems to be picking up pace with a 9.6 percent growth in the third quarter of the year under review compared to 8 per cent growthregistered in the previous year. The government's focus on low-cost housing and other keyinfrastructure projects awarded through the roads and highway ministry seems to be havinga favorable impact on the construction sector and the positive momentum is likely tocontinue.

Overall on the back of the assumption of a normal monsoon season continued recoveryin private investment gradual traction in private consumption with support fromGovernment-led spending we expect the real GDP growth to come in at 7 to 7.2 per cent inthe current financial year compared to the expected 7 per cent in the year under review.

The moderation in inflation which was seen in 2017-18 continued in the year underreview as well with the CPI falling to 1.97 per cent in January 2019 driven mainly bylower food inflation. Having averaged 4.3 per cent in the first half of 2018-19 inflationhas eased down further in the second half (average close to 2.53 per cent during Oct-Mar2018-19). However unwinding of base effect and slight sequential uptick in food inflationled to the overall headline inflation inching up to 2.86 per cent in March 2019.

On account of sustained downside in food inflation we estimate FY19 inflation at 3.4per cent. Though headline inflation for FY20 is estimated to average higher at 3.7 percent it is likely to remain well within the RBI's target range of 4+/-2 per cent.

Moderation in growth numbers amid an environment of subdued inflation is suggestive ofpossible rate cuts by the Reserve Bank of India. The RBI had cut the repo rate first inFebruary 2019 and again in April 2019 in order to support the growth momentum in theeconomy. The Repo Rate now stands at 6 per cent and the monetary policy stance is now"neutral" as against "calibrated tightening" prior to the Februarypolicy.

Going forward one of the major risks to the economy remains sharp increases in oilprices which could adversely affect inflation fiscal deficit and the current accountdeficit. Risks on the external front continue to loom on account of a possible slowdown inthe global economy elevated protectionist tendencies Brexit related uncertainty in theUK and monetary policy uncertainty in the developed nations especially in the US.

Financial Performance

The financial performance of your Bank during the year ended March 312019 remainedhealthy with Total Net Revenue (Net Interest Income Plus Other Income) rising by 19.1 percent to Rs.65869.1 crore from Rs.55315.2 crore in the previous year. Revenue growth wasdriven by an increase in both Net Interest Income and Other Income. Net Interest Incomegrew by 20.3 per cent to Rs.48243.2 crore due to acceleration in loan growth coupled withCore Net Interest Margin (CNIM) of 4.3 per cent.

Other Income grew by 15.8 per cent to Rs.17625.9 crore. The largest component was Feesand Commissions which increased by 21.2 per cent to Rs.13805.5 crore. Foreign Exchangeand Derivatives Revenue was Rs.1720.4 crore gain on revaluation and sale of investmentswas Rs.386.8 crore and recoveries from written-off accounts were Rs.1430.8 crore.

Operating (Non-Interest) Expenses rose to Rs.26119.4 crore from Rs.22690.4 crore.During the year your Bank has set up 316 new Banking Outlets and 525 ATMs. This alongwith strong growth in retail asset and card products resulted in higher infrastructureand staffing expenses. Staff expenses also went up due to employee additions and annualwage revisions. Despite higher infrastructure expenses the Cost to Income Ratio improvedto 39.7 per cent from 41.0 per cent.

Total Provisions and Contingencies were Rs.7550.1 crore as compared to Rs.5927.5crore the preceding year. Your Bank's provisioning policies remain more stringent thanregulatory requirements.

The Coverage Ratio based on specific provisions alone excluding Write-offs was 71 percent; including General and Floating provisions it was 117 per cent. Your Bank madeGeneral Provisions of Rs.648.4 crore during the year. Your Bank's Gross Non-PerformingAssets (GNPA) were at 1.36 per cent of Gross Advances as against 1.30 per cent thepreceding year. Net NPA ratio stood at 0.4 per cent for both the years.

Profit Before Tax grew by 20.6 per cent to Rs.32199.6 crore. After providing forIncome Tax of Rs.11121.5 crore Net Profit increased by 20.5 per cent to Rs.21078.1crore from Rs.17486.8 crore. The Return on Average Net Worth was 16 per cent while theBasic Earnings Per Share was Rs.78.6 up from Rs.67.8.

As on March 31 2019 your Bank's Total Balance Sheet stood at Rs.1244541 crore anincrease of 17 per cent over Rs.1063934 crore on March 31 2018. Total Deposits rose by17 per cent to Rs.923141 crore from Rs.788771 crore.

Savings Account Deposits grew by 11.1 per cent to Rs.248700 crore while CurrentAccount Deposits rose by 19.5 per cent to Rs.142498 crore. Time Deposits stood atRs.531943 crore representing an increase of 19.4 per cent. CASA Deposits accounted for42.4 per cent of Total Deposits. Advances stood at Rs.819401 crore representing anincrease of 24.5 per cent. The Bank's domestic loan portfolio of Rs.802329 crore grew by24.6 per cent over March 31 2018. The Bank had a share of approximately 7.2 per cent inTotal Domestic Deposits and 8.2 per cent in Total Domestic Advances.

BUSINESS OPERATIONS

Your Bank's operations are split into domestic and international.

DOMESTIC BUSINESS COMPRISES THE FOLLOWING:

A) Retail Banking

Your Bank's Retail Banking Business registered robust growth in the year under review.Total Retail Deposits grew by 22.3 per cent to Rs.709085 crore from Rs.580006 crore inthe preceding year while Retail Advances rose by 15 per cent to Rs.432687 crore fromRs.376167 crore.

The Personal Loan Business surged to nearly Rs.93000 crore on the back of strongproduct offering and speedy disbursal. Happy to report it emerged as the key driver forthe Retail Business in the year under review.

It has been increasing its unsecured exposure but without sacrificing credit qualitywhich is well within that prescribed in the product programme.

Digitalisation has been the key with your Bank emerging as a pioneer in various digitalloans be it the 10 second Personal Loan Digital Loan Against Shares and more recentlyLoan Against Mutual Funds. All these are industry firsts.

The Bank is a leader in the Auto Loans Segment with a strong presence in passengercommercial vehicle and 2-wheeler loans. While it has a stable and strong loan portfolio inthis segment growth in the 4 wheeler segment was muted at 9.6 per cent. The performanceof this segment must be seen in the context of slowing auto segment sales. Your Bankcountered the slowdown in demand in the cities by increasing its geographic spread. Thishas enabled it to grow its book size without having to compromise on price and assetquality. A key differentiator in this journey has been digitalization which has enabledcustomer delight through convenience.

In 2-wheeler financing your Bank built on its inherent strengths to post a growth ofnearly 16 per cent by financing 11.4 lakh units.

In Commercial Vehicles your Bank was able to ward off intense competition and logrobust growth.

The Payments Business where your Bank has a dominant presence merits a special mention.In credit cards your Bank continued to build on its strong base. It ended the year underreview with 1.25 crore credit cards after becoming the first bank in the country to issueone crore credit cards last year. Existing customers accounted for around 80 per cent ofthe new cards issued.

The Payments Business not only acts as a catalyst for cashless transactions but alsospurs consumption. With 2.69 crore debit cards 1.25 crore credit cards and almost amillion acceptance points (across all form factors) your Bank is among the largestfacilitators of cashless payments in the country. The Bank's payments business haslaunched digital offerings such as PayZapp Bharat QR Code UPI and SMS pay solutions. Ithas also pioneered path-breaking products such as the SmartHub app which facilitatescashless payments for small merchants and DigiPos which enables traditional PoS machinesto accept digital payments. Merchants and customers alike have found these solutionsuseful.

In the year under review the Virtual Relationship Management (VRM) programmme gainedsubstantial traction. Through this relationship managers reach out to customers throughremote and digital platforms leading to deeper engagement in a cost-effective manner.These managers are a single point of contact for customers banking and financial needs.This programme which offers tailor-made solutions using carefully drawn customer levelplans has been well received since its launch.

As regards physical distribution network the Bank also added 316 Banking Outletsduring the year taking the total to 5103 spread across 2748 cities/towns. The share ofsemi-urban and rural outlets in the total network is 53 per cent reflecting our continuedfocus on these markets. The number of ATMs also increased to 13160 from 12635.

The total number of customers your Bank catered to as on March 312019 was over 4.90crore up from 4.36 crore in the previous year. The Bank as you are aware operates in theHome Loan Business in conjunction with HDFC Limited. As per this arrangement the Banksells HDFC Home Loans while HDFC Ltd approves and disburses them. The Bank receivessourcing fee for these loans and as per the arrangement with HDFC Ltd has the option topurchase up to 70 per cent of the fully disbursed loans either through the issue ofmortgage backed Pass Through Certificates (PTCs) or by a direct assignment of loans. Thebalance is retained by HDFC Ltd. Your Bank originated on an average Rs.2100 crore ofHome Loans every month in the year under review and purchased Rs.23982 crore as directassignment of loans.

Third Party Products:

The Bank distributes Life Insurance General Insurance and Mutual Funds often referredto as Third-Party Products. Income from this business grew by 5 per cent to Rs.2200 crorefrom Rs.2091 crore crore and accounted for 16 per cent of Total Fee Income in the yearended March 312019 compared with 18 per cent in the preceding year.

Insurance

The open architecture adopted by the Bank for Insurance distribution with nineinsurance providers was made more robust by leveraging more branches and increasing theproduct bouquet. Continuing with the digital focus straight through process from prospectto proposal stage was introduced with real-time integration across all insurers. Allproduct offerings by insurers were made available on NetBanking platform. Premiummobilization in Life Insurance for the year ended March 31 2019 was Rs.4233 crore agrowth of 30 per cent over the previous year. This was against the backdrop of an overallindustry growth of 10 per cent.

In the Non-Life space the Bank has increased product offerings opened new channelsand introduced easy Point of Sale Person Certification for distribution of General andHealth Products. It has also introduced new digital platforms like STP Upscaler MobileApp and Insurance help-line for continuously improving knowledge levels of the staff aswell as easing distribution in true open architecture model. These initiatives are thefirst of their kind in the industry. Overall General and Health Insurance Business grew by29 per cent over the previous year with premium mobilization of Rs.2273 crore. Theindustry grew by 13 per cent in the same period.

Mutual Funds

Global headwinds like trade wars interest rate hike by the US coupled with domesticconcerns like depreciating currency FPI outflows and impact of default by IL&FS toother companies dampened market sentiment. At the Industry level there were regulatorychanges like SEBI categorisation and rationalization of schemes reduction in TotalExpense Ratio from 20 basis points to 5 basis points on the existing AUM and ban onUpfront commission. Six months to one year (Short term) returns on majority of theequity/hybrid schemes were negative. The impact of all this was the slowing down of theMutual Fund distribution business which in turn resulted in a lower Mutual Fund FeeIncome.

B) Wholesale Banking

This business focuses on institutional customers such as the Large and EmergingCorporates SMEs and Government. Your Bank's offerings in this segment include WorkingCapital and Term Loans as well as Trade Credit Cash Management Supply Chain FinancingForeign Exchange and Investment Banking services. The Wholesale Banking business recordeda healthy 31.9 per cent growth. The Bank was able to expand its share of the customerwallet primarily using sharper customisation cross-selling and expanding into greatergeographies. The Bank ended the year under review with a domestic loan book size ofRs.370000 crore which constituted 46 per cent of the Bank's domestic advances as perBasel II classification.

Corporate Banking which focuses on large well-rated companies remained the biggestcomponent of the Wholesale Banking book. The Bank selectively participated in severalrefinancing cases through the NCLT route of companies which have been acquired bypromoters with a good track record.

The Emerging Corporates Group which focuses on the mid-market segment too witnessedsignificant growth. Your Bank leveraged its vast geographical reach technology backboneautomated processes suite of financial products and quick turnaround times to offercustomers a differentiated service leading to both new customers as well as acquiring ahigher share of the wallet from existing customers. The business continues to have adiversified portfolio in terms of both industry and geography. In the last five years thisbusiness has doubled its presence to 47 cities in India.

The year under review has been the one that has seen the greater formalisation of theMicro Small and Medium Enterprises (MSMEs) sector due to the adoption of the Goods andService Tax platform by several Micro and Small Enterprises. The Bank's advances to MSMEsamounted to Rs 128 976.5 crore as on March 312019.

The Investment Banking business cemented its prominent position in the Debt and EquityCapital Markets. For four consecutive years now your Bank has been ranked 2nd in theBloomberg rankings of Rupee Bond Book Runners. The Bank is actively assisting clients inequity fund raising and your Bank is ranked 9th in PRIME Database IPO League Tables for FY18-19 for private sector issues.

In the Government business the Bank sustained its focus on tax collections collectingdirect tax of over Rs.3.15 lakh crore and indirect tax of approximately Rs.36000 croreduring the year. In addition to the taxes/duties collected on behalf of several stategovernments the Bank also collected over Rs.1.71 lakh crore in the form of GST. Itcontinues to enjoy a pre-eminent position among the country's major stock and commodityexchanges in both Cash Management Services and Cash Settlement Services.

Your Bank has led the way in providing Digital Banking Services to not only its RetailCustomers but also to its wholesale banking customers. It was an early adopter of Digitaltechnology through the Corporate Net Banking Platform ENet.

HDFC Bank offers the entire gamut of financial services such as Payments CollectionTax Solutions Government Business Trade Finance Services Cash Management Solutions andCorporate Cards through its flagship platform besides seamlessly connecting its customersthrough API S2S (Server to Server) and Host to Host services.

Your Bank's pre-eminent position in the Wholesale Banking business has securedrecognition from Euromoney a leading global financial publication. The Euromoney TradeFinance Survey has ranked HDFC Bank No 1 in two categories: Best Service and Market Leaderin the Asian Bank category based on a poll of senior corporate and treasury professionals.

C) Treasury

The Treasury is the custodian of the Bank's cash/liquid assets and handles itsinvestments in securities foreign exchange and cash instruments. It manages the liquidityand interest rate risks on the balance sheet and is also responsible for meeting reserverequirements. The vertical also helps manage the treasury needs of customers and earns asubstantial part of its revenues through fee income generated from transactions customersundertake with the Bank while managing their foreign exchange and interest rate risks.

Revenue accrues from spreads on customer transactions based on trade and remittanceflows and demonstrated hedging needs. The Bank recorded revenue of Rs.1720.4 crore fromforeign exchange and derivative transactions in the year under review. While plain vanillaforex products were in demand across all customer segments the demand for derivativeproducts came mostly from large and emerging corporates.

As a part of prudent risk management the Bank enters into foreign exchange andderivative deals with counterparties after it has set up appropriate credit limits basedon its evaluation of the ability of the counterparty to meet its obligations. Where theBank enters into foreign currency derivative contracts not involving the Indian Rupee withits customers it typically lays them off in the inter-bank market on a matched basis. Forsuch foreign currency derivatives the Bank primarily carries the counterparty credit risk(where the customer has crystallised payables or mark-to-market losses) and may carry onlyresidual market risk if any. The Bank also deals in derivatives on its own accountincluding for the purpose of its own balance sheet risk management.

The Bank maintains a portfolio of Government Securities in line with regulatory normsgoverning the Statutory Liquidity Ratio (SLR). A significant portion of these SLRsecurities are held in the ‘Held-to-Maturity' (HTM) category while some are held inthe ‘Available for Sale' (AFS) category. The Bank is also a Primary Dealer forGovernment Securities. As a part of this business as well as otherwise the Bank holdsfixed income securities in the ‘Held for Trading' (HFT) category.

D) Partnering with the Government

You will be happy to know that your Bank has been closely working with the Governmentboth at the Central and State levels primarily in the following three areas:

1) Digitisation and Digital India

In an important development in the year ended March 31 2019 you will be happy to knowthat your bank picked up a 9.11 per cent in CSC e-Governance Services India Ltd for a cashconsideration of Rs.14.6 crore. This is a company constituted under the Companies Act byMeITY (Ministry of Electronics & Information Technology). CSCs managed by VillageLevel Entrepreneurs (VLEs) are the access points for delivery of essential public utilityservices social welfare schemes healthcare financial education and agricultureservices apart from a host of B2C services to citizens in rural and remote areas of thecountry. It is a pan-India network catering to regional geographic linguistic andcultural diversity of the country thus enabling the Government's mandate of a sociallyfinancially and digitally inclusive society. Your bank will use this network to offerretail products and banking services to the citizens across the country and furthercontribute to the Government's aim of digital India.

Further your bank:

a) has the second largest share of Direct tax collection and is working to provide thesolution on NEFT/RTGS bulk collection which will further increase the revenue collectionshare and is facilitating collections of various central government led levies like feespaid to State Pollution Control Boards

b) is enabling Direct Benefit Transfers under various Centrally Sponsored Schemes usingthe Public Financial Management System (PFMS) to more than 50000 beneficiaries

c) is integrated with GeM (Government e-Marketplace) to provide financial services tobuyers and sellers on this platform instituted to promote transparency

d) works with various government authorities to enable digitisation of payments andcollections e.g. collection of property taxes and water user charges at more than 100municipal authorities across India to support Government of India's Ease of Doing Businessinitiative

e) has been the first in the country to develop (e-Vittrapravaha) with the StateGovernment of Madhya Pradesh to provide an end-to-end solution for efficient health-carebudget and fund flow management

2) Customised Banking Solution for Government Employees

Your Bank has designed a banking package to suit the needs of government employees atthe state and central levels. The offering includes an overdraft secured by their salaryaccount complimentary insurance covers and fine pricing on loans.

3) Start-Up Fund and SmartUp Banking

Through its SmartUp Programme for Start-ups and Start-Up Fund your Bank is workingwith various state governments and incubators/accelerators to promote entrepreneurship.Memoranda of Understanding have already been signed with three state governments to enableexecution of varied aspects of their respective start-up policies. Your Bank also workswith 12 incubators certified by the Department of Science and Technology includingvarious Indian Institutes of Technology and Indian Institutes of Management to identifySocial Start-ups that require financial and advisory support.

E) Semi Urban and Rural:

The Semi Urban Rural markets have been a focus of your Bank's strategy. What changed inthe year under review has been the greater thrust as a part of the Semi Urban Rural (SURU)push. The rationale behind has been the rising income levels and aspirations of ruralcustomers leading to demand for better quality financial products and services. The Ruralgroups in every department of your bank work together to tap these opportunities.

Apart from meeting its statutory obligations under PSL HDFC Bank has been offering thewidest range of products on the asset side of the balance sheet like Auto 2-wheelersPersonal Gold Light Commercial Vehicle (LCV) Small Shopkeeper Loans in these markets.Now it plans to increase its coverage of villages and also deepen relationships in theexisting ones. An equally important aspect of this village penetration strategy is aninitiative which combines financial literacy with financial inclusion where customers ineach village would be educated about various products and services of HDFC Bank which canbest meet their financial requirements.

The Semi Urban and Rural push has been backed by its digital strategy. The Bank'soperations in these locations are explained below:

1) Agriculture and Allied Activities

Your Bank's credit to Agriculture & Allied activities stood at Rs.128809.32 croreon March 31 2019 representing an increase of nearly 14 per cent over Rs.113160.60 crorein the previous year. Over half of India's population depends on agriculture forlivelihood. The key to the Bank's success here has been its ability to tap theopportunities herein through the following:

• Wide product range

• Faster turnaround time

• Digital solutions

Our product range includes Pre and Post-Harvest Crop Loans Two-Wheeler Auto LoansLoans against Gold Jewellery amongst others. Consequently the Bank has established astrong footprint in the rural hinterland with its asset products. Apart from advising thefarmers on their financial needs your Bank is increasingly focusing onfacilitating/educating them on benefits of various government/regulatory schemes such ascrop insurance and interest subvention.

The Bank has also designed a range of crop and geography-specific products keeping inmind the harvest cycles and the local needs of farmers spread across diverse agro climaticzones.

Our products such as Post-Harvest Cash Credit and Warehouse Receipt Financing enablefaster cash flows to the farmer. Credit is also disbursed to allied agriculturalactivities such as Dairy Pisciculture and Sericulture.

Farmer centres or Kisan Dhan Vikas Kendras have been rolled out in PunjabMaharashtra Uttar Pradesh and Madhya Pradesh. At these centres farmers secureinformation on soil health mandi prices various government initiatives and expertadvice. These services are also available on the Bank's website in vernacular languages.The Bank also provides advisory on weather cropping and harvesting through SMS.

Digitising Milk Procurement

This is our effort to facilitate transparency in the milk procurement and paymentprocess. Under this initiative Multi-function Terminals (MFTs) popularly known asMilk-to-Money ATMs are deployed in dairy societies. The MFTs link the milk procurementsystem of the dairy society to the farmers' account to enable faster payments. MFTs havecash dispensers that function as standard ATMs. The transparency in the milk collectionprocess including the quality of milk benefits both farmers and society. Payments arecredited without the difficulties associated with the cash distribution process. What ismore this creates a credit history which can then be used as the basis for accessing bankcredit. Apart from Dairy and Cattle Loans customers gain access to all bank productsincluding digital offerings such as 10 Second Personal Loans Kisan Credit Card Bill Payand Missed Call Mobile Recharge. So far your Bank has digitised payments at over 1000milk co-operatives spread over 18 states and benefiting more than 4 lakh dairy farmers.The Bank facilitates instant realization of payments for over 1 lakh customers.

Substituting the Moneylender:

Loans against Gold Jewellery grew to over Rs.5900 crore from over Rs.5500 crore thepreceding year. Your Bank is slowly making inroads into a market traditionally dominatedby the unorganised sector and pawn brokers. The entry of organised players into the sectorhas increased both awareness and transparency. The Bank has been able to serve the sectionof people who would traditionally rely on the moneylender through faster turnaround times.

Social Initiatives in Farm Sector:

Farm yield and income are subject to the vagaries of the weather. Factors like soilhealth input quality (seeds and fertilizers) and availability of water and governmentpolicy also impact this. So do price realization and storage facilities. Your Bank haslaunched a variety of initiatives to ease the stress on farm income and rural households.

Over the last few years several parts of the country have been severely impacted bynatural calamities such as drought unseasonal rains hailstorms and floods. Withinregulatory guidelines the Bank has been providing relief to impacted farmers. It also hassystems designed to enable Direct Benefit Transfers in a time-bound manner. The Bank isalso exploring the use of remote sensing technologies and analytics to strengthen crop andfarm level assessment.

Lending to the agriculture sector including to the small and marginal farmers is aregulatory mandate as part of priority sector lending requirements. This has inherentcredit risks. Your bank has taken various initiatives to cope with the changingagri-lending trend. It has taken steps pertaining to delinquency management likeroot-cause analysis of critical locations close monitoring of delinquency prioritisationbased recovery strategy system automations. Further your bank is building upon segmentspecific approach like funding to horticulture clusters supply chain financeAgribusiness MSMEs and Dairy farmers. It also continues to engage closely with farmers tomitigate risks and protect portfolio quality. This is reinforced further by a focus on theliability business.

2) Micro Small and Medium Enterprises (MSME)

Advances to the MSME segment as on March 31 2019 stood at Rs.128976.48 crore asagainst Rs.89042.1 crore a year ago. Its advances to the Micro Enterprises alone stood atRs.55227.96 crore as on March 31 2019. The MSME sector serves as an important engine foreconomic growth and is one of the largest employers in the economy.

The year ended March 31 2019 has seen a steady shift towards digital transactionsowing to GST implementation the push by the Government and the advent/evolution ofincreasingly tech savvy entrepreneurs. Your Bank is leveraging this trend to create fastersolutions. In line with this the Bank has recently launched an analytics based creditappraisal tool by which a customer can get a sanction within 3 hours for loans rangingbetween Rs.11 Lakhs to Rs.5 crore. This is facilitated by submission of digital bankstatements and a combination of scores arrived by our analytical model.

For existing customers the SME portal continues to offer ad hoc approval and autoenhancement of loans.

On the trade side the focus has been on customer engagement for increasing penetrationof Trade on Net application. This as you are probably aware is a complete enterprisetrade solution for customers engaged in domestic as well as foreign trade enabling them toinitiate online requests and track them seamlessly resulting in reduced time and costs.

3) Taking Banking to the Unbanked

Your Bank is fully committed to taking banking to the remotest parts of the countrythrough the combination of an extensive physical network and a robust digital suite ofproducts and services. Today over 53 per cent of the Bank's outlets are located in ruraland semi-urban areas. The Bank also offers last mile access through mobile applicationssuch as BHIM UPI USSD Scan and Pay and RuPay enabled Micro-ATMs.

To bring more under-banked sections of the population into formal financial channelsyour Bank has opened over 24.1 lakh accounts under the Pradhan Mantri Jan Dhan Yojana(PMJDY) and enrolled 31.4 lakh customers in social security schemes since their inception.We now rank among the leading private sector banks in this regard. In the year underreview loans to the tune of Rs.7168.7 crore were extended under the Pradhan MantriMudra Yojana (PMMY) and nearly Rs.500.6 crore under the ‘Stand up India' schemeto Scheduled Caste Scheduled Tribe and women borrowers in the year under review.

4) Sustainable Livelihood Initiative

This is primarily a social initiative with elements of business. It entails skilltraining livelihood financing and creating market linkages. Further details are providedin page no 35.

INTERNATIONAL BUSINESS

As on March 31 2019 the Balance Sheet size of this business was US $4.8 billion.Advances constituted 3.02 per cent of the Bank's Gross Advances. The Total Income of theoverseas branches constituted 1.06 per cent of the Bank's Total Income for the year.Though the number is small what is significant is that your Bank is able to cater to alarge and growing Indian diaspora.

As you would know your Bank has overseas branches in Bahrain Hong Kong and the DubaiInternational Finance Centre (DIFC). These branches cater to the needs of our overseasclients both corporate and individual. They offer Banking Trade Finance and WealthManagement (primarily for non-resident individual customers). In addition the Bank hasRepresentative Offices in Abu Dhabi Dubai and Nairobi.

Your Bank also has a presence in International Financial Service Centre (IFSC) at GIFTCity in Gandhinagar Gujarat. This unit which opened about two years back is akin to aforeign branch. Customers can avail of products such as Trade Credits Foreign CurrencyTerm Loans including External Commercial Borrowings (ECB) and derivatives to hedge loans.

NON-BUSINESS OPERATIONS:

SOCIAL COMMITMENT

To reiterate your Bank's social philosophy: Businesses cannot succeed if thecommunities they operate in don't. To add to this the change must be holistic andsustainable. This has been the guiding spirit of the Bank's social initiatives sinceinception. This is explained further below.

Parivartan-A Step Towards Progress

Parivartan is your Bank's umbrella brand for all its social initiatives. Parivartanor ‘Change' as it means in English seeks to bring about change in the lives of peoplemaking them self-reliant and part of the national mainstream. Working largely throughcommunities Parivartan focuses on the following fundamental areas:

• Rural Development

• Skill Training and Livelihood Enhancement

• Promotion of Education

• Healthcare and Hygiene

• Financial Literacy and Inclusion

As noted before Sustainability is one of your Bank's core values. Your Bank's beliefis that businesses should support the communities in which they operate. We are happy toreport that your Bank through its several social initiatives (including SLI) has made adifference to the lives of over 5 crore Indians.

Rural Development

The Holistic Rural Development Programme (HRDP) is born out of the conviction that thenation will progress only when rural India grows. Over half the country's population livesin rural areas and is primarily dependent on agriculture for livelihood. Our efforts hereare focused in the areas of soil water and natural resource management and sanitationissues that affect rural India. These are often multi-pronged interventions. Soilconservation for instance will typically cover educating people about use of organicfertilisers. Water management will entail construction renovation and maintenance ofwater harvesting structures for improving surface and ground water availability. Likewiseeducating people on renewable energy often forms part of our natural resource managementefforts.

Spread over 17 states the programme covers over 3.6 lakh households across more than1100 villages. Over 26000 acres of arable land have been treated to enhance productivity

Promotion of Education

There is no better gift to humanity than education. Improving the quality of educationis a focus area under Parivartan. Your Bank's efforts in this area include teachertraining scholarships and career guidance. It also includes providing infrastructuresupport such as building toilets in schools and improving classrooms. At the communitylevel this entails educating people on the importance of Water Sanitation and Hygiene(WaSH) and creating awareness on issues related to road safety and healthy financialpractices.

The flagship programme here is Zero Investment Innovations for Education Initiatives(ZIIEI) which was launched at Jaipur Rajasthan in the previous year and gained momentumin the year under review. The ‘Teaching The Teacher' programme (3T) seeks totransform education in government schools across India. It is a unique programme which iscommitted to improving the skills of teachers which in turn benefits the pupils. Under3T more than 15 lakh teachers across 21 states/union territories have been trained byinviting ideas from them and implementing the selected ideas in schools to improve thequality of education. This programme has potentially benefited more than 1.6 crorestudents indirectly and is being executed jointly with a leading non-governmentalorganisation.

Skills Training and Livelihood Enhancement

Formal education remains a dream for lakhs of Indians. Your Bank under Skills Trainingand Livelihood Enhancement targets people in this section of society in rural India andimparts income generating skills primarily in agriculture and allied areas such as dairyand poultry. The objective is to help these people find jobs locally enhance theirhousehold income and prevent migration. The nationwide programme has benefited over100000 individuals (excluding those trained under the Sustainable Livelihood Initiativeor SLI which is explained in detail later). As a part of this more than 40000 youth havereceived placement- linked skill development training. Career counselling has beenprovided to young school students.

The flagship programme under Skills Training and Livelihood Enhancement is SLI.

Sustainable Livelihood Initiative

This initiative aims at ‘Creating Sustainable Communities'. It does so byempowering women and helping them break the vicious circle of poverty. Empowering womenwe believe means empowering families. Women form Self Help Groups (SHGs) or JointLiability Groups (JLGs). The women under the programme are given occupational skillstraining financial literacy and credit counselling and livelihood finance and marketlinkage. The Bank has a Board approved plan to cover 1 crore households against which 96.7lakh have been covered.

It's a unique programme with perhaps no parallel globally. What makes it so are thefollowing:

1) It's an all-women programme

2) It covers womenfolk across the length and breadth of a country as vast as India. Itis present in 27 states and over 400 districts

3) With 96.7 lakh women or households/3.87 crore lives (ie 96.7 X 4) being impactedpotentially this is one of the world's largest such programmes

4) Over 10000 dedicated passionate employees of the Bank constituting around 10 percent of the Bank's total workforce are running the programme

Healthcare and Hygiene

Your Bank's initiatives in the area of Healthcare and Hygiene focusing on both schoolsas well as the community have made a substantial difference to the lives of students inrural India.

At the heart of these programmes are community-led sanitation campaigns that promotehygienic conditions in rural areas through appropriate wastewater disposal. Theseinitiatives are supplemented by construction of toilets and provision of clean drinkingwater. Nearly 7000 school toilets and over 15000 home toilets have been constructed.

Your Bank also organises health camps nutrition programmes and vaccination drives.The flagship programme under this pillar is the Annual Blood Donation Drive. In the 12thedition in 2018 your Bank collected over 3 lakh units of blood in a single day which isnearly 42 per cent higher than the previous year. What started off as a small initiativein 2007 with the participation of just 4000 volunteers has now grown into a movement withover 3.5 lakh people from all walks of life participating in the last edition. Thisincluded those from colleges employees of private and public sector and the defenceestablishment. Nearly 4000 camps were held across 1100 cities in India.

Bank employees are central to this effort. In the year under review another landmarkwas reached: Over 1 million units of blood were collected cumulatively over a period of 12years.

Financial Literacy and Inclusion

Financial literacy is the first step towards real financial inclusion. Lakhs of peoplehave learnt about the fundamentals of savings investment and organised finance fromfinancial literacy camps conducted by the Bank at its banking outlets as well as financialliteracy centres across the country.

This is a multi-pronged programme where literacy is imparted at branches throughbusiness units as well as through its NGO partners. The flagship scheme under this pillaris Digidhan.

Modelled on the Bank's financial literacy-on-wheels programme-Dhanchayat Digidhancriss-crosses the length and breadth of the country's hinterland explaining the benefitsof digital banking. The medium is through film and the location is often high-footfallpockets such as bazaars mandis and bus-stands.

The Bank is fully compliant with the requirements of the Companies Act 2013 havingspent Rs.443.8 crore on CSR and emerging as one of the highest spenders in this space inIndia.

The disclosures pertaining to CSR as required under Rule 8 of the Companies (Accounts)Rules 2014 have been given in ANNEXURE 2 to this report.

Environmental Sustainability

Maintaining a balance between natural capital and communities is now integral to ourfunctioning.

Towards this end our ATMs have gone paperless enabling a reduction of the carbonfootprint. The Bank has given this effort a further fillip by ensuring multi-channeldelivery through Net Banking Phone Banking and Mobile Banking. This results in lowercarbon emission not just from operations but also from reduced customer travel. Anothersource for reducing the environmental footprint is solar ATMs which use rechargeablelithium ion batteries that reduce power consumption.

BUSINESS ENABLERS

1) People Culture Integrity and Ethics

Your Bank considers nurturing and promoting a culture built on the foundation of ethicsand integrity as a fundamental principle. And ‘People' is one of your Bank's CoreValues. What this means is that your Bank hires people with not only the right skill setsbut also those who have similar values and can fit into its culture. Needless to say thereis no compromise when it comes to ethics. These values are reinforced further afteronboarding. Your Bank has an institutionalized and well-documented code of conduct whichevery employee has to affirm annually.

The five pillars of the People approach are:

Talent Acquisition: Acquiring the right talent isn't enough anymore in the currentfast paced digital environment. What is critical is recruiting scientifically anddeploying resources quickly. Keeping in mind the synergies needed to run a successfultalent acquisition process the entire function has been reconfigured. A hub and spokerecruitment model aided by centers of excellence leveraging new technology analytics andcapability building have been created.

Your Bank is leveraging Artificial Intelligence based recruitment tools to improve bothspeed and quality of hiring. This in conjunction with competency based assessments ensurea scientific merit based talent acquisition and selection process. Digital channels oftalent acquisition continue to remain a priority-such as social media hiring andleveraging job portals.

Career Management:

Your Bank's core career philosophy is that after hiring right a conducive environmentis created for employees to develop and grow. This is done through systematic investmentof time in career discussion with employees competency assessment and intensivefunctional and behavioral training through Gurukul-our in-house programme. The Bankalso facilitates inter-departmental job movements to employees to help them stay motivatedand engaged.

High Touch Employee Connect Programmes:

Your Bank conducts popular events at both local and national levels. While most ofthese events are open to employees some are meant for families as well. Some of thepopular events include Josh Unlimited-a pan India sports event; Hunar-a pan Indiain-house talent competition; Xpressions-a pan India in-house drawing competition;Corporate Photography contest and Wanderers-a one-day trek for employees and theirchildren. Events of these nature touch the lives of close to 60000 people across thecountry ensuring a vibrant workplace and building an emotional connect with theorganisation.

Training and Development:

Training plans for businesses are developed based on needs identified in consultationwith the business leaders. An extensive bouquet of training programmes are deliveredcovering on-boarding product and process training advanced programmes and behavioraltraining. The on-boarding training ensures that new employees are trained comprehensivelyand equipped with necessary know-how as well as functional and behavioral skills requiredfor the proper discharge of the role.

The product training and advanced programmes enable skill development and regularupgrading to build expertise. The training methodology has evolved to application basedtraining including simulations case studies and games. Leveraging technology many ofthe class room programmes are now being delivered online. The role-specific learning planensures effective use of blended learning method. In addition to this to ensure thatemployees are assisted on the job there is a help-line ‘Ask the Trainers' whichclarifies on relevant questions within 24 hours.

Rewards and Recognition:

Your Bank aims to reward performance as it is the key to keeping employees motivated aswell as being competitive in the market. It aims to do this while ensuring that there isno deviation from ethics regulatory guidelines and the principle of maintaining internalequity.

2) Digital 2.0

Your Bank has always been at the forefront of digital innovation in the industry be itATMs net banking or mobile banking. Now it has embarked on its Digital 2.0 journey.

The strategic objective of Digital 2.0 is to bring about a transformation for both theBank and customer. For your Bank it brings about cost efficiencies through automation andreduction in origination costs while simultaneously increasing revenue opportunity. Italso results in a faster time to market and optimization of customer's digital lifecycle.

For the customer this would mean an improved and hyper personal experience besides anability to buy bank products from physical/ digital channels alike and also having aconversation with it.

The key elements of the Digital 2.0 strategy are A) Reimagined Net and Mobile BankingExperience B) Digital Marketing Analytics and Digital Origination C) Digital InnovationsD) API E) Virtual Relationship Manager

A) Reimagined Net and Mobile Banking Experience:

If Digital 1.0 was all about giving the customer convenient access to digital channelsDigital 2.0 has all been about enriching and customising the experience. Take the newMobile Banking App for instance. It combines the user journeys that customers go throughwhen they use the app into simple categories such as Save Invest and Pay. It is a largestep towards intuitive and simplified banking. This has been built through extensivecustomer research and by partnering with world leading platform and design companies. TheApp did encounter teething problems leading it to be withdrawn for a while. Post relaunchit has been well received.

B) Digital Marketing: Deploying Big Data Analytics and Machine Learning:

Your Bank has been able to precisely cater to its customers' preferences contextneeds/wants on the digital channels. It is able to offer relevant and personalizedproducts/offers through their channel of preference. Through more intelligent digitalmarketing campaigns coupled with the ability to close/sell products digitally the Bankaims to step up the proportion of unassisted digital sourcing of products to totalsourcing over the next two to three years.

C) Digital Innovations: Building on the success of the last few years' your Bankhas been able to position itself in the forefront of innovation. One clear example of thishas been the creation of EVA India's first AI powered Chatbot. It engages in an intuitiveinteractive way with people' and responds to their queries 24*7 instantaneously. Bank onChat the other AI conversational offering allows customers to solve lifestyle needs byhelping them in booking transport and movie tickets by simple chat and pay options.

D) API: This is a software intermediary code which rests between the clientapplication/system and Bank system. This allows exchange of data between the Bank and thecustomer in a seamless and secure manner. Thus it enables expanding the eco system throughalliances and entering new markets. Through open innovation and API banking your Bank hasstarted enabling third party service providers to connect to the bank's pre identifiedinternal applications/services securely allowing it to offer its products/services ontheir properties extending the reach exponentially. Already some platform players havebeen onboarded through which customers can now get connected to the Bankbook/renew/liquidate Fixed Deposits and Recurring Deposits and apply for digitalproducts. This includes an initiative with CSC a digital India Initiative to takeAuto/Personal/2-wheeler/Business Loans to remote locations and thus champion the cause ofdigital inclusion. Similarly an initiative was taken to offer all eligible products to anew to bank customer at the time of on boarding and enabling in principle approval for thesame.

The Bank's efforts have been reinforced through external partnerships like Industryacademia interactions Accelerators Engagement Program Digital Innovation Summit andDigital Innovations Day program. Your Bank has already partnered with over 165 leadinginstitutions including the elite ones like The Indian Institutes of Management (AhmedabadBangalore and Lucknow) Indian Institute of Technology (Delhi) Wharton University andUniversity of Florida. It has also evaluated and worked with over 90 startups.

E) Virtual Relationship Manager:

Last but not least is the unique Virtual Relationship Manager programme. It is uniqueas it is the only digital channel with a human face/touch. It has the depth and skill asalso the agility to offer concierge services. The channel is a "bank within thebank" managing over six million customers. It provides connect with customers througha combination of technology and personalised conversations. The strength of the VirtualTeam is its robust training strategies which enables Virtual Relationship Managers toadopt individual personalized narratives leading to enhanced relationships and at the sametime helping increase the overall productivity for the Bank. Additionally the Bank'sLearning and Development Team has significantly contributed towards spearheadingLeadership Programmes for the supervisory force. In the future emerging technologies likeAI RPA IoT/ AR/ VR will be continually pursued across relationship banking digitalself-service branch banking risk marketing collections HR and be embedded seamlesslyin a process and experience which is simpler better faster and delightful for customers.

3) Information Technology

In the technology space your Bank is considered a leader. Both in terms of being ableto identify the right technology solutions for the business and deploying them in a timelymanner to create customer experience. The 10-second Personal Loan is a case in point.Missed Call Banking is another. These products were not only industry firsts but have alsogone on to become extremely popular with customers. Your Bank has gone further with theimplementation of an Open API based Service Oriented Architecture Middleware platform.This enables different systems to talk to each other and thus ensures a seamless flow ofinformation.

Another important development has been the Digital Application Platform (DAP) whichbrings together process digital technologies and lifecycle management efficiencies todeliver a better customer experience. This has seen a huge shift to digital channels be itapplying for loans credit cards or overdraft facilities. Linkages for this have beenestablished with search engines and fintechs.

This has been further supplemented with an assisted Savings Bank account opening App inthe branch which relationship managers use to open digital savings accounts.

4) Cyber Security

Your Bank has an effective framework in place to manage cyber security. The frameworkrides on 4 pillars viz:-Protect Detect Respond & Recover. The Chief InformationSecurity Officer (CISO) is the person who is responsible overall for ensuring effectiveinformation and cyber security programme in the bank. There is also a committee of theBoard which dedicatedly looks into cyber security issues and preparedness.

In the year under review the Bank enhanced its cyber security protocol by enhancingdata protection and cyber defence measures. The Bank also widened coverage of SecurityIncident and Event Management (SIEM) which provides a comprehensive and centralised viewof the security scenario of IT infrastructure. Deception Technology Solution was deployedto detect analyse and defend against advanced attacks often in real-time. In the case ofyour Bank it also covers emails and endpoints besides the network.

Firewalls were upgraded to Next Generation with deep packet inspection (DPI) ability.DPI analyses ‘packets' which are nothing but parcels of digital informationtransmitted across the web in a formatted piece of structured data. Protection againstmalware ransomware and denial of service attacks have been strengthened further.

Regular tests to assess the vulnerability of the IT infrastructure and applications andremedy where necessary are routine. As are anti-phishing services that help in shuttingdown phishing sites and protecting the customers from fraud. Risk engine and transactionmonitoring systems monitor suspicious transactions on Internet Banking ATM and e-commercechannels.

The Bank has PCI DSS 3.0 and ISO 27001 certifications. PCI DSS is a proprietaryinformation security standard for organisations that handle credit card information andtransactions. It is meant to increase controls around cardholder data to reduce fraud. Inlayman's terms the certification is an assurance that your Bank's card customers enjoy avery high level of safety while transacting with it. The ISO 27001 certification pertainsto best practices with respect to information security. On building awareness your bankhas a regular programme for both employees and customers. All the board members of thebank have been imparted training on cyber security and this year the bank has won 3awards on best implementation of cyber security including one on spreading cyber securityawareness.

5) Service Quality Initiatives and Grievance Redressal

Customer Focus is one of the five core values of your Bank. Your Bank has adopted aholistic approach for improving customer experience across multiple channels especiallysince it has various lines of businesses. In a highly competitive environment ensuringproduct quality and service delivery is vital for business growth. The Bank seeks toachieve this by regularly reviewing service levels and capturing feedback from customers.Moreover the Bank has constituted three committees at different levels to monitorcustomer service viz. Branch Level Customer Service Committees (BLCSCs) StandingCommittee on Customer Service and Customer Service Committee of the Board.

While the Bank has various touch points for the customers such as branch managedprogram and phone banking it has further enhanced the customer experience through aVirtual Relationship Manager (VRM). All this ensures that customers have an omni channelexperience for any of their financial needs across various touch points. Your Bank has putrobust processes in place to regularly monitor and measure quality of service levels notonly at various touch points but also at a product and process level by Quality InsuranceGroup.

As part of its continuous efforts to enhance quality of service regular service qualityreviews including mystery shopping are carried out for various products/ channels byfollowing through on a structured calendar of reviews. Such reviews cover key serviceparameters like adherence of benchmark TAT complaints reduction and transactionsmonitoring to ensure meeting the committed service levels along with process enhancements.The effectiveness is reviewed periodically at different levels including the CustomerService Committee of the Board.

Your Bank has provided multiple channels to its customers to share feedback on itsservices as well as register their grievances. It has a Grievance Redressal Policy dulyapproved by its Board available in the public domain for ready reference of thecustomers.

Your Bank is at the forefront of developing innovative financial solutions and digitalplatforms. This coupled with concerted efforts at creating awareness among customers hasled to an increase in the use of its digital channels as well as customer loyalty. Keepingthe customer's interest as the primary focus your Bank has formulated a Board ApprovedCustomer Protection Policy thereby limiting liability of customers in case ofunauthorised electronic banking transactions and thus increasing a secure feeling amongcustomers. During the year bank has conducted 39 customer awareness sessions touchingover 7300 customers.

This multi-pronged approach has resulted in continuous improvement in servicestandards as well as customer satisfaction.

RISK ARCHITECTURE

I. Risk Management and Portfolio Quality

The key risks that the Bank is exposed to in the course of its business are CreditRisk Market Risk Liquidity Risk and Operational Risk. These risks not only have abearing on the Bank's financial strength and operations but also its reputation. Keepingthis in mind your Bank has in place a Board approved Risk Strategy and Policies whoseimplementation is supervised by the Board's Risk Policy and Monitoring Committee (RPMC).The committee periodically reviews risk levels and direction portfolio compositionstatus of impaired credits and limits for treasury operations.

The hallmark of the Bank's Risk Management function is it is independent of thebusiness sourcing unit with the convergence only at the CEO level.

The gamut of risks faced by the Bank which are dimensioned and managed include:

• Credit Risk including Residual Risks

• Credit Concentration Risk

• Market Risk

• Business Risk

• Operational Risk

• Strategic Risk

• Interest Rate Risk in the Banking Book

• Compliance Risk

• Liquidity Risk

• Reputation Risk

• Intraday Risk

• Model Risk

• Technology Risk

• Counterparty Credit Risk

• Outsourcing Risk

Credit Risk

Credit Risk is defined as the possibility of losses associated with diminution in thecredit quality of borrowers or counterparties. Losses stem from outright default orreduction in portfolio value. Your Bank has a distinct credit risk architecture policiesprocedures and systems for managing credit risk in both its retail and wholesalebusinesses. Wholesale lending is managed on an individual as well as portfolio basis. Bycontrast retail lending given the granularity of individual exposures is managedlargely on a portfolio basis across various products and customer segments. For bothcategories there are robust front-end and back-end systems in place to ensure creditquality and minimise loss from default. The factors considered while sanctioning retailloans include income demographics previous credit history of the borrower and the tenorof the loan. In wholesale loans credit risk is managed by capping exposures on the basisof borrower group industry credit rating grades and country amongst others. This isbacked by portfolio diversification stringent credit approval processes and periodicpost-disbursement monitoring and remedial measures. Your Bank has been able to ensurestrong asset quality through volatile times in the lending environment by stringentlyadhering to prudent norms and institutionalized processes.

As on March 31 2019 your Bank's ratio of Gross Non-Performing Assets (GNPAs) to GrossAdvances was 1.36 per cent. Net NonPerforming Assets (Gross Non-Performing Assets LessSpecific Loan Loss provisions) was 0.4 per cent of Net Advances. Total restructured assetswere 0.04 per cent of Gross Advances

The Bank has a conservative and prudent policy for specific provisions on NPAs. Itsprovision for NPAs is more than the minimum regulatory requirements while adhering toregulatory norms for the provision of Standard Assets.

Digital Lending and Credit Risk

Driven by rapid advances in technology digitisation is increasingly becoming a keydifferentiator for customer retention and service delivery in the banking sector. Digitallending enables customers to secure loans at the click of a button in a matter of minutesif not seconds. However there are also attendant risks associated with it and your Bankhas put in place appropriate checks and balances to manage these risks. Such loans aresanctioned primarily to the Bank's pre-existing customers. Often they are customersacross multiple products and so the Bank is familiar with their credit history and riskprofile. This makes it possible to evaluate and decide on their fresh requirements almostinstantly. Besides most of the credit checks and scores used by the Bank in traditionalprocess underwriting are replicated in digital loans. Finally the Bank has an independentmodel validation unit that minutely assesses the models used to generate the credit scoresfor such loans. These models are monitored reviewed periodically back-tested andcorrective action is taken whenever needed.

Market Risk

Market Risk arises largely from the Bank's statutory reserve management and tradingactivity in interest rates equity and currencies market. These risks are managed througha well-defined Board approved Investment Policy and Market Risk Policy that caps risk indifferent trading desks or various securities through trading risk limits/triggers. Therisk measures include position limits gap limits tenor restrictions sensitivity limitsnamely PV01 Modified Duration of Hold to Maturity Portfolio and Option GreeksValue-at-Risk (VaR) Limit Stop Loss Trigger Level (SLTL) Potential Loss Trigger Level(PLTL) and are monitored on end-of-day basis. In addition forex open positions andinterest rate sensitivity limits are computed and monitored on an intraday basis. This issupplemented by a Board approved stress testing policy and framework that simulatesvarious market risk scenarios to measure losses and initiate remedial measures. The marketrisk capital charge of your Bank is computed on daily basis using the StandardisedMeasurement Method applying the regulatory factors.

Liquidity Risk

Liquidity Risk is the risk that a bank may not be able to meet its short term financialobligations due to an asset-liability mismatch or interest rate fluctuations.

Your Bank's framework for liquidity and interest rate risk management is spelt out inits Asset Liability Management Policy that is implemented monitored and periodicallyreviewed by the Asset Liability Committee (ALCO). As a part of this process the Bank hasestablished various Board approved limits to mitigate both liquidity and interest risks.While the maturity gap and stock ratio limits help manage liquidity risk the net interestincome and market value impacts help mitigate interest rate risk. This is reinforced by acomprehensive Board approved stress testing programme covering both liquidity and interestrate risk. Your Bank conducts various studies to assess the behavioral pattern ofnon-contractual assets and liabilities and embedded options available to customers whichare used while managing maturity gaps. Further your Bank also has necessary framework inplace to manage intraday liquidity risk.

The Liquidity Coverage Ratio (LCR) a global standard is used to measure a bank'sliquidity position. LCR seeks to ensure that the Bank has an adequate stock ofunencumbered High-Quality Liquid Assets (HQLA) that can be converted into cash easily andimmediately to meet its liquidity needs under a 30-day calendar liquidity stress scenario.Based on Basel III norms RBI has mandated a minimum LCR of 100 per cent from January 12019 and your Bank's LCR stood at 117.66 per cent on a consolidated basis for the yearended March 31 2019.

RBI has also mandated minimum Net Stable Funding Ratio (NSFR) of 100 per cent witheffect from 1st April 2020. NSFR seeks to ensure that the Bank maintains a stable fundingprofile in relation to the composition of its assets and off balance sheet activities. Asa prudent risk management practice your Bank has been monitoring this ratio and is thusadequately prepared to meet the RBI mandated requirements.

Operational Risk

This is the risk of loss resulting from inadequate or failed internal processes peopleand systems or from external events. Given below is a detailed explanation under fourdifferent heads: Framework and Process Internal Control Information Technology andSecurity Practices and Fraud Monitoring and Control.

a. Framework and Process

To manage operational risks the Bank has in place a comprehensive and operational riskmanagement framework whose implementation is supervised by the Operational RiskManagement Committee (ORMC) and reviewed by the RPMC of the Board. An independentOperational Risk Management Department (ORMD) implements the framework. Under theframework the Bank has three lines of defence. The first layer of protection is providedby the Business line (including support and operations) management. These managers areprimarily responsible for not only managing operational risk on a daily basis but alsofor maintaining strict internal controls designing and implementing internalcontrol-related policies and procedures. The second line of defence is the ORMD whichdevelops and implements policies procedures tools and techniques to assess and monitorthe adequacy and effectiveness of the Bank's internal controls.

Internal Audit is the last line of defence. The team reviews the effectiveness ofgovernance risk management and internal controls within the Bank.

b. Internal Control

Your Bank has implemented sound internal control practices across all processes unitsand functions. The Bank has well laid down policies and processes for management of itsday-to-day activities. The Bank follows established well-designed controls which includetraditional four eye principles effective separation of functions segregation of dutiescall back processes reconciliation exception reporting and periodic MIS. Specialisedrisk control units function in risk prone products/functions to minimise operational risk.Controls are tested as part of the SOX control testing framework.

c. Information Technology and Security Practices

The Bank operates in a highly automated environment and makes use of the latesttechnologies to support various operations. This throws up operational risks such asbusiness disruption risks related to information assets data security integrityreliability and availability amongst others. The Bank has put in place a governanceframework information security practices and business continuity plan to mitigateinformation technology related risks. An independent assurance team within Internal Auditprovides assurance on the management of information technology related risks. The Bank hasa robust Business Continuity and Disaster Recovery plan that is periodically tested toensure that it can meet any operational contingencies. There is an independent

Information Security Group that addresses information security related risks. Awell-documented Board approved information security policy is put in place. In additionemployees mandatorily and periodically undergo information security training andsensitisation exercises.

d. Fraud Monitoring and Control

The Bank has put in place a whistle blower policy and a central vigilance teamoversees implementation of fraud prevention measures. Frauds are investigated to identifythe root cause and relevant corrective steps are taken to prevent recurrence. Fraudprevention committees at the senior management and Board level also deliberate on materialfraud events and initiate preventive action. Periodic reports are submitted to the Boardand senior management committees.

Compliance Risk

Compliance Risk is defined as the risk of impairment of your Bank's integrity leadingto damage to its reputation legal or regulatory sanctions or financial loss as a resultof a failure (or perceived failure) to comply with applicable laws regulations andstandards. The Bank has a Compliance Policy to ensure highest standards of compliance. Adedicated team of subject matter experts in the Compliance Department works with businessand operations teams to ensure active compliance risk management and monitoring. The teamalso provides advisory services on regulatory matters. The focus is on identifying andreducing risk by rigorously testing products and also putting in place robust internalpolicies. Products that adhere to regulatory norms are tested after rollout andshortcomings if any are fully addressed till the product stabilises on its own. Internalpolicies are reviewed and updated periodically as per agreed frequency or based on marketaction or regulatory guidelines/action. The compliance team also seeks regular feedback onregulatory compliance from product business and operation teams throughself-certifications and monitoring.

ICAAP

The Bank has a structured management framework in the Internal Capital AdequacyAssessment Process (ICAAP) to identify assess and manage all risks that may have amaterial adverse impact on its business/financial position/capital adequacy. The ICAAPframework is guided by the Bank's Board approved ICAAP Policy. Additionally the Boardapproved Stress Testing Policy and Framework entails the use of various techniques toassess potential vulnerability to extreme but plausible stressed business conditions.Changes in the Bank's risk levels and in the on/off balance sheet positions are assessedunder such assumed scenarios using sensitivity factors that generally relate to theirimpact on profitability and capital adequacy.

Group Risk

Your Bank has two subsidiaries HDB Financial Services Limited and HDFC SecuritiesLimited. The Board of each subsidiary is responsible for managing their respective risks(Credit Risk Market Risk Operational Risk Liquidity Risk Reputation Risk). The ICAAPat the subsidiaries is overseen within the Bank's ICAAP framework. Stress testing for thegroup as a whole is carried out by integrating the stress tests of the subsidiaries.Similarly capital adequacy projections are formulated for the group after incorporatingthe business/capital plans of the subsidiaries.

II. Implementation of Indian Accounting Standards (IND-AS)

The Ministry of Corporate Affairs in its press release dated January 18 2016 hadissued a roadmap for implementation of Indian Accounting Standards (IND-AS) for scheduledcommercial banks insurers/insurance companies and non-banking financial companies. Thisroadmap required these institutions to prepare IND-AS based financial statements for theaccounting periods beginning from April 1 2018 onwards with comparatives for the periodsbeginning April 1 2017 and thereafter. The Reserve Bank of India (RBI) vide its circulardated February 11 2016 required all scheduled commercial banks to comply with IND-AS forfinancial statements for the periods stated above. The RBI did not permit banks to adoptIND-AS earlier than the timelines stated above. The said guidelines also state that RBIshall issue necessary instructions/ guidance/clarifications on the relevant aspects forimplementation of IND-AS as and when required.

The implementation of IND-AS by banks requires certain legislative changes in theformat of financial statements to comply with disclosures required by IND-AS. The changein format requires an amendment to the third schedule of the Banking Regulation Act 1949to make it compatible with the presentation of financial statements under IND-AS.Considering the amendments needed to the Banking

Regulation Act 1949 as well as the level of preparedness of several banks the RBIvide its Statement on Developmental and Regulatory Policies dated April 5 2018 haddeferred the implementation of IND-AS by one year by when the necessary legislativeamendments were expected. The legislative amendments recommended by the RBI are underconsideration of the Government of India. Accordingly the RBI vide its circular datedMarch 22 2019 deferred the implementation of IND-AS till further notice.

The implementation of IND-AS is expected to result in significant changes to the waythe Bank prepares and presents its financial statements. The areas that are expected tohave significant accounting impact on the application of IND-AS are summarised below:

1) Financial assets (which include advances and investments) shall be classified underamortised cost fair value through other comprehensive income (a component of Reserves andSurplus) or fair value through profit/loss categories on the basis of the nature of thecash flows and the intention of holding the financial assets.

2) Interest will be recognised in the income statement using the effective interestmethod whereby the coupon fees net of transaction costs and all other premiums ordiscounts will be amortised over the life of the financial instrument.

3) Stock options will be required to be fair valued on the date of grant and berecognised as staff expense in the income statement over the vesting period of the stockoptions.

4) The impairment requirements of IND-AS 109 Financial Instruments are based on anExpected Credit Loss (ECL) model that replaces the incurred loss model under the extantframework. The Bank will be generally required to recognize either a 12-Month or LifetimeECL depending on whether there has been a significant increase in credit risk sinceinitial recognition. IND-AS 109 will change the Bank's current methodology for calculatingthe provision for Standard Assets and non-performing assets (NPAs). The Bank will berequired to apply a three-stage approach to measure ECL on financial instruments accountedfor at amortised cost or fair value through other comprehensive income. Financial assetswill migrate through the following three stages based on the changes in credit qualitysince initial recognition:

Stage 1: 12 Months ECL

For exposures which have not been assessed as credit-impaired or where there has notbeen a significant increase in credit risk since initial recognition the portion of theECL associated with the probability of default events occurring within the next twelvemonths will need to be recognised.

Stage 2: Lifetime ECL-Not Credit Impaired

For credit exposures where there has been a significant increase in credit risk sinceinitial recognition but are not credit-impaired a lifetime ECL will need to berecognised.

Stage 3: Lifetime ECL-Credit Impaired

Financial assets will be assessed as credit impaired when one or more events having adetrimental impact on the estimated future cash flows of that asset have occurred. Forfinancial assets that have become credit impaired a lifetime ECL will need to berecognised. Interest revenue will be recognised at the original effective interest rateapplied on the gross carrying amount for assets falling under stages 1 and 2 and onwritten down amount for the assets falling under stage 3.

5) Accounting impact on the application of IND-AS at the transition date shall berecognised in Equity (Reserves and Surplus).

The Bank being an associate of Housing Development Finance Corporation Limited (the‘Corporation') is required to submit its consolidated financial information(‘fit-for-consolidation information') prepared in accordance with the recognitionand measurement principles of IND-AS as specified under Section 133 of the Companies Act2013 to the Corporation for the purposes of the consolidated financial statements/results of the Corporation. The results of the Bank upon its first time adoption of andtransition to IND-AS based on the updated regulations and accounting standards/ guidanceand business strategy at the date of actual transition could differ from those reportedin the fit-for-consolidation information.

III. Internal Controls Audit and Compliance

The Bank has put in place extensive internal controls and processes to mitigateoperational risks including centralised operations and ‘segregation of duty' betweenthe front office mid-office and back office. The front-office units usually act ascustomer touch-points and sales and service outlets. The entire processing accounting andsettlement of transactions is carried out by the back-office in the bank's Core BankingSystem. The policy framework definition and monitoring of limits is carried out byvarious mid-office and risk management functions. The credit sanctioning and debtmanagement units are also segregated and do not have any sales and operationsresponsibilities.

The Bank has set up various executive-level committees having participation fromvarious business and control functions that are designed to review and oversee matterspertaining to capital assets and liabilities business practices and customer serviceoperational risk information security business continuity planning and internalrisk-based supervision amongst others. The control functions set standards and lay downpolicies and procedures by which the business functions manage risks including compliancewith applicable laws compliance with regulatory guidelines adherence to operationalcontrols and relevant standards of conduct.

At the ground-level the Bank has a mix of preventive and detective controlsimplemented through systems and processes ensuring a robust framework in the Bank toenable correct and complete accounting identification of outliers (if any) by theManagement on a timely basis for corrective action and mitigating operational risks.

The Bank has various Preventive controls viz (a) Limited and need-based access tosystems by users (b) Dual custody over cash and near-cash items (c) Segregation of duty inprocessing of transactions vis-a-vis creation of user IDs (d) Segregation of duty inprocessing of transactions vis-a-vis monitoring and review of transactions/reconciliation(e) Four eye-principle (maker-checker control) for processing of transactions (f)Stringent password policy (g) Booking of transactions in Core Banking System mandates theearmarking of line/limit (fund as well as non-fund based) assigned to the customer (h) STPprocesses between Core Banking System and payment interface systems for transmission ofmessages (i) Additional authorisation leg in payment interface systems in applicable cases(j) Audit logs directly extracted from systems (k) Empowerment grid.

The Bank also has detective controls in place viz (a) Periodic review of user IDs (b)Post transaction monitoring at the back-end by way of call back process (through daily logreports) by an independent person i.e. to ascertain that entries in the Core-BankingSystem/messages in payment interface systems are based on valid/authorised transactionsand customer requests (c) Daily tally of cash and near-cash items at end of day (d)Reconciliation of Nostro accounts (by an independent team) to ascertain and match-off theNostro credits and debits (External or Internal) regularly to avoid/identify anyunreconciled/unmatched entries passing through the system (e) Reconciliation of allSuspense Accounts and establishment of responsibility in case of outstandings (f)Independent and surprise checks periodically by supervisors.

Your Bank has an Internal Audit Department which is responsible for independentlyevaluating the adequacy and effectiveness of all internal controls risk managementgovernance systems and processes and is manned by appropriately qualified personnel.

This department adopts a risk based audit approach and carries out audits acrossvarious businesses ie Retail Wholesale and Treasury (for India and Overseas books) auditof Operations units Management Audits Information Security Audit Revenue Audit andConcurrent Audit in order to independently evaluate the adequacy and effectiveness ofinternal controls on an ongoing basis and pro-actively recommending enhancements thereof.The Internal Audit Department during the course of audit also ascertains the extent ofadherence to regulatory guidelines legal requirements and operational processes andprovides timely feedback to the Management for corrective action. A strong oversight onthe operations is also kept through off-site monitoring.

The Internal Audit Department also independently reviews the Bank's implementation ofInternal Rating Based (IRB) approach for calculation of capital charge for Credit Riskthe appropriateness of Bank's Internal Capital Adequacy Assessment Process (ICAAP) aswell as evaluates the quality and comprehensiveness of the Bank's disaster recovery andbusiness continuity plans and also carries out Management self-assessment of adequacy ofthe Bank's internal financial controls and operating effectiveness of such controls interms of Sarbanes Oxley (SOX) Act and Companies Act 2013.

Any new product/process introduced in the Bank is reviewed by Compliance function inorder to ensure adherence to regulatory guidelines and also by Internal Audit from theperspective of existence of internal controls. The Audit function also pro-activelyrecommends improvements in operational processes and service quality wherever deemed fit.

To ensure independence the Internal Audit function has a reporting line to theChairman of the Audit Committee of the Board and a dotted line reporting to the ManagingDirector.

The Compliance function independently tracks reviews and ensures compliance withregulatory guidelines and promotes a compliance culture in the Bank.

The Bank has a comprehensive Know Your Customer Anti Money Laundering (AML) andCombating Financing of Terrorism (CFT) policy (based on the RBI guidelines/provisions ofthe Prevention of Money Laundering Act 2002) incorporating the key elements of CustomerAcceptance Policy Customer Identification Procedures Risk Management and Monitoring ofTransactions. The policy is subjected an annual review and is duly approved by the Board.

The Bank has taken significant measures in developing and enhancing an effective andsustainable KYC AML and CFT Compliance Programme. The adherence to the guidelinesprescribed in the policy is monitored by the Bank at various stages of the customerlifecycle. Your Bank has robust controls in place to ensure adherence to the KYCguidelines at the time of account opening. The Bank also has a continuous review processin the form of transaction monitoring including a dedicated AML CFT monitoring team whichcarries out extensive transaction reviews for identification of suspicious patterns/trendswhich act as an early warning signal for the Bank to carry out enhanced due diligence andappropriate action thereafter. The status of adherence to the KYC AML and CFT guidelinesis also placed before the Audit Committee of the Board for their review at quarterlyintervals.

The Audit team and the Compliance team undergo regular training both in-house andexternal on a continuous basis in order to equip them with the necessary know-how andexpertise to carry out the function.

The Audit Committee of the Board reviews the effectiveness of controls compliance withregulatory guidelines as also the performance of the Audit and Compliance functions in theBank and provides direction wherever deemed fit.

Your Bank has always adhered to the highest standards of compliance and has put inplace appropriate controls and risk measurement and risk management tools in order toensure a robust compliance and governance structure.

IV. Responsible Financing

Your Bank is committed to Responsible Financing and refrains from funding projects thathave an adverse impact on Environment Health and Safety (EHS). EHS is an integral part ofthe bank's overall credit risk assessment and monitoring process. Every project funded hasto pass the Bank's muster in terms of the EHS risk it entails potential impact andmitigation measures in place or proposed.

The key aspects of the assessment process are:

For all loans exceeding Rs.10 crore in amount and five years in tenure borrowers haveto submit a declaration of compliance with EHS norms.

In select large-ticket projects the Bank appoints a Lender's Independent Engineer(LIE) who conducts due diligence across several parameters including EHS. The findings ofthe LIE's assessment report are then discussed with the client to ensure compliance.

The LIE regularly monitors such projects during the construction period through sitevisits and reports progress which includes status of approvals and relief andrehabilitation measures undertaken. Your Bank officials also conduct independent siteinspections from time to time to ensure that the project is progressing to the Bank'ssatisfaction.

After the project becomes operational the borrower has to submit an annual declarationof compliance with various national laws including those related to EHS. This is alsofollowed up by onsite visits of bank executives.

The Bank deals with the client primarily through its Relationship Manager (RM). The RMhas to report compliance with EHS norms in the Credit Assessment Memorandum (CAM) both atthe time of initial sanction and during the annual review process. Such certification isbased on information/disclosures provided by the borrower at the time of initial appraisaland during periodic review of the facilities.

The RM records outstanding EHS issues if any and follows them up with the client forprompt resolution. The Bank levies default interest in case of deviations and thusensures compliance with the agreed EHS norms. If there are significant deviations thatcould affect the viability of the project the Bank reserves the right to either reduceits exposure or recall the loan.

V. Integrated Reporting (IR)

The Bank has taken a step forward in the Integrated Reporting Journey that it embarkedupon last year. It will create an Integrated Report based on the principles enunciated bythe International Integrated Reporting Council which will be hosted on the website of theBank.

Subsidiary Companies

Your Bank has two subsidiaries HDB Financial Services Limited (HDBFSL) and HDFCSecurities Limited (HSL). HDBFSL is a leading NBFC that caters primarily to segments notcovered by the Bank while HSL is among India's largest retail broking firms. The financialresults of the subsidiaries have been prepared in accordance with notified IndianAccounting Standards (‘Ind-AS') with effect from April 1 2018 (April 1 2017 beingthe transition date). Accordingly the financial results for the comparative reportingperiod have also been prepared in accordance therewith.

The detailed financial performance of the companies is given below.

1) HDB Financial Services Limited

HDBFSL's Net Interest Income grew 17.2 per cent to Rs.3378.8 crore for the year endedMarch 31 2019 from Rs.2882.2 crore in the previous year. This resulted in a Net Profitrise of 23.6 per cent to Rs.1153.2 crore from Rs.933 crore. Net NPA levels stood at 1.12per cent on March 31 2019.

The company is a leading NBFC that caters to the growing needs of an aspirationalIndia serving both Retail and Small and Medium Commercial Clients. It has a wide range offinancial solutions that help customers meet their growing financial needs.

The Enablers:

Compelling Product Offering

HDBFSL brings in a compelling product offering leading to customer convenience. Itoffers financial services at one place be it secured/unsecured loans investments orinsurance. The company offers instant loan approvals for consumer loans with intelligentweb application forms as well as personalised credit appraisal for large business loans.

With a seamless distribution channel and a committed workforce HDBFS brings inconvenience to customers.

Focus on Phygital: Physical cum Digital

With its ever-growing network of 1350 branches across 961 cities/towns HDBFS isreaching out to customers spread across the country. Over 85 per cent of its branches areoutside the top 25 cities of India. This means that a branch and customer relationshipmanager are never too far from the customer.

By leveraging digitization it offers financial solutions to individuals. For instancethey can access their loan account through the website www.hdbfs.com.The self-servicemobile application and customer service portal "HDB On-The-Go" aims to bringaccount management at a customer's fingertips. All this means that financial borrowing isnow an effortless experience for customers.

This would not have been possible without a committed workforce of over 93000. Thequest for growth has also been balanced by a robust risk management framework which hasenabled net NPA levels of about 1 per cent (among the lowest in the industry) and strongcredit ratings. HDBFSL's long-term debt is rated AAA/stable by CARE & CRISIL and itsshort-term debt is rated A1+ by CARE & CRISIL indicating the highest degree of safetyregarding timely servicing of financial obligations.

BPO Services

Another revenue stream for the company has been Business Process Outsourcing (BPO)solutions to HDFC Bank. The BPO services division delivers back-office services such asforms processing documents verification finance and accounting services andcorrespondence management. HDBFS also delivers front office services such as contactcentre management outbound marketing and collection services.

As on March 31 2019 HDFC Bank held 95.5 per cent stake in the company.

2) HDFC Securities Limited

HSL's Total Income was Rs.782.1 crore as against Rs.800.1 crore in the previous year.Net Profit was Rs.329.8 crore as against Rs.344.7 crore.

The company has a customer base of 21.4 lakh to whom it offers a large bouquet offinancial services. In the year under review HSL had 7 lakh transacting customers thethird highest number of active (transacting) customers among all broking houses.

The focus on digitisation continued but the percentage of customers accessing HSL'sservices digitally decreased to 68 per cent from 70 per cent in the previous year. Thepercentage accessing it through the mobile app increased to 37 per cent from 33 per cent.

In a conscious effort to rationalize the distribution network with greater emphasis ondigital offerings HSL consolidated its existing branches to end with 278 branches across165 cities/towns at the end of the year.

The company's performance must be seen in the context of the overall macroeconomicscenario. While the capital market indices did grow on a year on year basis the gains werenot as significant as in the previous year. Globally this was due to the Federal Reserve'sinterest rate hikes volatile oil prices and the US-China trade war. Domestic factors thatimpeded capital market performance were the NBFC crisis and a potential India-Pakistanconflict towards the end of the year.

In the year under review HSL also won many industry accolades. Special mention must bemade of the Digital Excellence Awards for Conversational Investing which it won in theEconomic Times BFSI Innovation Tribe Awards 2018 and in the Digital Excellence Awards2018. HSL was also judged as India's Most Ethical Company in Financial Services by WorldCSR Congress. It also won the Most Attractive Brand in the category of Retail Brokingawarded by Trust Research Advisory (TRA). In the Outlook Money Awards 2018 HSL was therunner up in the Best Retail Broker category.

As on March 31 2019 your Bank held 97.3 per cent stake in HSL.

The annual reports of HDBFSL and HSL are available on the website of the Bank (www.hdfcbank.com).Shareholders who wish to have a copy of the annual accounts and detailed information maywrite to HDFC Bank. These documents will also be available for inspection by shareholdersat the registered offices of the Bank and its two subsidiaries.

Other Statutory Disclosures

Number of Meetings of the Board attendance meetings and constitution of variousCommittees

The details of Board meetings held during the year attendance of Directors at themeetings and constitution of various Committees of the Board are included separately inthe Corporate Governance Report.

Extract of Annual Return

Pursuant to Section 134 (2) (a) and Section 92 (3) of the Companies Act 2013 theextract of the Annual Return in the prescribed format (MGT-9) is annexed as ANNEXURE 3 tothis Report. Further the Annual Return of the Bank in the prescribed Form MGT-7 isavailable on the website of the Bank at the link www.hdfcbank.com

Requirement for maintenance of cost records:

The Bank is not required to maintain cost records as specified by the CentralGovernment under section 148(1) of the Companies Act 2013

Directors' Responsibility Statement

Pursuant to Section 134 (3) (c) read with Section 134 (5) of the Companies Act 2013the Board of Directors hereby state that:

• In the preparation of the annual accounts the applicable accounting standardshave been followed along with proper explanation relating to material departures if any

• We have selected such accounting policies and applied them consistently and madejudgments and estimates that are reasonable and prudent so as to give a true and fair viewof the state of affairs of the Bank as on March 31 2019 and of the profit of the Bank forthe year ended on that date

• We have taken proper and sufficient care for the maintenance of adequateaccounting records in accordance with the provisions of the Companies Act 2013 forsafeguarding the assets of the Bank and for preventing and detecting fraud and otherirregularities

• We have prepared the annual accounts on a going concern basis

• We have laid down internal financial controls to be followed by the Bank andensure that such infernal financial controls were adequate and operating effectively

• We have devised proper systems to ensure compliance with the provisions of allapplicable laws and that such systems were adequate and were operating effectively.

Compliance with Secretarial Standards

The Bank is in compliance with all applicable Secretarial Standards as notified fromtime to time.

Auditors

The Bank's current Statutory Auditors are S. R. Batliboi & Co. LLP CharteredAccountants. S. R. Batliboi & Co. LLP were appointed as Statutory Auditor at theprevious AGM of the Bank to hold office till the conclusion of the ensuing AGM. It is nowproposed to appoint S. R. Batliboi & Co. LLP Chartered Accountants as StatutoryAuditor of the Bank for period of three years with effect from the conclusion of theensuing AGM such that their total appointment does not exceed 4 years which is themaximum permissible term as per Reserve Bank of India at such fees as detailed in theNotice of the 25th AGM of the Bank.

During the year ended March 312019 fees paid to the Statutory Auditors (S.R. Batliboi& Co. LLP) and its network firms are as follows:

(Rs. in crores)
Fees (including taxes) HDFC Bank to Statutory Auditors HDFC Bank to network firms of Statutory Auditors Subsidiaries of HDFC Bank to Statutory Auditors and its network firms
Statutory Audit 2.50 - -
Certification & other attest services* 1.30 - -
Non-audit services - - -
Outlays and Taxes* 0.49 - -
Total 4.29 - -

*includes fees classified under share issue expenses towards certification and otherattest services in respect of capital raised during the year.

Disclosure under Foreign Exchange Management Act 1999

As far as FEMA compliances in relation to strategic downstream investments in theBank's subsidiaries is concerned during the year under review there have been nostrategic downstream investments made by Bank in its subsidiaries. Accordingly the Bankhas obtained a certificate from its statutory auditors to this effect.

Related Party Transactions

Particulars of transactions with related parties referred to in Section 188 (1) asprescribed in Form AOC-2 under Rule 8 (2) of the Companies (Accounts) Rules 2014 isenclosed as ANNEXURE 4.

Particulars of Loans Guarantees or Investments

Pursuant to Section 186 (11) of the Companies Act 2013 the provisions of Section 186of Companies Act 2013 except sub-section (1) do not apply to a loan made guaranteegiven or security provided or any investment made by a banking company in the ordinarycourse of business. The particulars of investments made by the Bank are disclosed inSchedule 8 of the Financial Statements as per the applicable provisions of BankingRegulation Act 1949.

Financial Statements of Subsidiaries and Associates

In terms of Section 134 of the Companies Act 2013 and read with Rule 8 (1) of theCompanies (Accounts) Rules 2014 the performance and financial position of the Bank'ssubsidiaries and associates are enclosed as ANNEXURE 5 to this report. There wereno entities which became or ceased to be the Bank's subsidiaries associates or jointventures during the year.

Whistle Blower Policy/Vigil Mechanism

The Bank encourages an open and transparent system of working and dealing amongst itsstakeholders. While the Bank's "Code of Conduct & Ethics Policy" directsemployees to uphold company values and conduct business with integrity and highest ethicalstandards the Bank has also adopted a "Whistle Blower Policy" which encouragesits employees and various stakeholders to bring to the notice of the Bank any issueinvolving compromise/ violation of ethical norms legal or regulatory provisions actualor suspected fraud etc. without any fear of reprisal discrimination harassment orvictimization of any kind. All such concerns/ complaints are received by the Chief ofInternal Vigilance of the Bank and/or by the Whistle Blower Committee through a dedicatedemail ID or by way of letters etc. All such complaints are enquired into by theappropriate authority within the Bank while ensuring confidentiality of the identity ofsuch complainants. On the basis of their investigation if the allegations are proved becorrect then the Competent Authority shall recommend to the appropriate DisciplinaryAuthority to take suitable action against the responsible official and required correctivemeasures in consultation with the concerned stakeholders. The decision of the WhistleBlower Committee is final and binding on all. Preventive measures or any other actionconsidered necessary is also taken forward by the Competent Authority.

Details of Whistle Blower complaints received and subsequent action taken and thefunctioning of the Whistle Blower mechanism are reviewed periodically by the AuditCommittee of the Board. During the Financial year 2018-19 a total of 56 such complaintswere received and taken up for investigation which has resulted in certain staff actionsin 15 cases post investigation.

Statement on Declaration by Independent Directors

Mrs. Shyamala Gopinath Mr. Malay Patel Mr. Umesh Chandra Sarangi are the IndependentDirectors whereas Mr. Sanjiv Sachar Mr. M. D. Ranganath and Mr. Sandeep Parekh are theAdditional Independent Directors on the Board of the Bank as on March 31 2019. All theIndependent Directors and Additional Independent Directors have given their respectivedeclarations under Section 149 (6) and (7) of the Companies Act 2013 and the Rules madethereunder. In the opinion of the Board the Independent Directors fulfil the conditionsrelating to their status as Independent Directors as specified in Section 149 of theCompanies Act 2013 and the Rules made thereunder and are independent of the management.

Board Performance Evaluation

The Nomination and Remuneration Committee (NRC) has approved a framework/policy forevaluation of the Board Committees of the Board and the individual members of the Board(including the Chairperson) which is reviewed annually by the NRC. A questionnaire forthe evaluation of the Board its Committees and the individual members of the Board(including the Chairperson) designed in accordance with the said framework and coveringvarious aspects of the performance of the Board and its Committees including compositionand quality roles and responsibilities processes and functioning adherence to Code ofConduct and Ethics and best practices in Corporate Governance was sent out to theDirectors. The responses received to the questionnaires on evaluation of the Board and itsCommittees were placed before the meeting of the Independent Directors for consideration.The assessment of the Independent Directors on the performance of the Board and itsCommittees was subsequently discussed by the Board at its meeting.

Your Bank has in place a process wherein declarations are obtained from the Directorsregarding fulfilment of the ‘fit and proper' criteria in accordance with RBIguidelines.

The declarations from the Directors other than members of the NRC are placed before theNRC and the declarations of the members of the NRC are placed before the Board. Assessmenton whether the Directors fulfil the said criteria is made by the NRC and the Board on anannual basis. In addition the framework/policy approved by the NRC provides for aperformance evaluation of the Non-Independent Directors by the Independent Directors onkey personal and professional attributes. In addition to the above parameters the Boardalso evaluates fulfillment of the independence criteria as specified in SEBI (ListingObligations and Disclosure Requirements) Regulations 2015 by the Independent Directors ofthe Bank and their independence from the management. Such performance evaluation has beenduly completed as above. As Mr. Sandeep Parekh and Mr. M. D. Ranganath were recentlyappointed as Additional Independent Directors on the Board of the Bank with effect fromJanuary 19 2019 and January 312019 respectively they abstained from participating inthe above Board Performance Evaluation process.

Policy on Appointment and Remuneration of Directors and Key Managerial Personnel

Your Bank has in place a Policy for appointment and ‘fit and proper' criteria forDirectors of the Bank. The Policy lays down the criteria for identification of persons whoare qualified and ‘fit and proper' to become Directors on the Board- such as academicqualifications competence track record integrity etc. which shall be considered by theNRC while recommending appointment of Directors. The Policy is available on the website ofthe Bank at the link https://www.hdfcbank.com/assets/pdf/Policy-for-appointment-and-fit-proper-criteria-for-directors.pdf

The remuneration of Whole Time Directors Key Managerial Personnel and SeniorManagement is governed by the Compensation Policy of the Bank. The same is available atthe web-link https://www.hdfcbank.com/assets/pdf/Compensation-Policy.pdf. TheCompensation Policy of the Bank duly reviewed and recommended by the NRC has beenarticulated in line with the relevant Reserve Bank of India guidelines.

Your Bank's Compensation Policy is aimed to attract retain reward and motivatetalented individuals critical for achieving strategic goals and long term success. TheCompensation Policy is aligned to business strategy market dynamics internalcharacteristics and complexities within the Bank. The ultimate objective is to provide afair and transparent structure that helps the Bank to retain and acquire the talent poolcritical to building competitive advantage and brand equity.

Your Bank's approach is to have a pay for performance culture based on the belief thatthe Performance Management System provides a sound basis for assessing performanceholistically. The compensation system should also take into account factors such as rolesskills/competencies experience and grade/seniority to differentiate pay appropriately onthe basis of contribution skill and availability of talent on account of competitivemarket forces. The details of the Compensation Policy are also included in Schedule 18Notes forming part of the Accounts-Note no. 24. Non-Executive Directors are paidremuneration by way of sitting fees for attending meetings of the Board and itsCommittees which are determined by the Board based on applicable regulatoryprescriptions.

Further expenses incurred by them for attending meetings of the Board and Committeesare reimbursed at actuals. Pursuant to the relevant RBI guidelines and approval of theshareholders each of the Non-Executive Directors other than the Chairperson are paidprofit-related commission of Rs.1000000 (Rupees Ten Lakh Only) per annum.

Mr. Aditya Puri is the Non-Executive Chairman of HDB Financial Services Limitedsubsidiary of the Bank. Mr. Puri does not receive any remuneration from the subsidiary.None of the Directors of your Bank other than Mr. Puri is a director of the Bank'ssubsidiaries as on March 31 2019.

Succession Planning

The Bank's Nomination and Remuneration Committee (NRC) also oversees matters ofsuccession planning of its Directors Senior Management and Key executives of the Bank.With respect to the tenure of the current Managing Director ending in October 2020 theBoard will identify a successor and work to ensure that this is done in a manner that willallow appropriate time for an effective transition of responsibilities. Towards this endthe Nomination & Remuneration Committee of the Board will constitute a SearchCommittee to undertake a global search of both internal and external candidates.

Significant and Material Orders Passed By Regulators

During the year under review there were no significant and material Orders passed byany regulators or courts or tribunals against the Bank impacting the going-concern statusand Bank's operations in future.

Directors and Key Managerial Personnel

In compliance with Section 152 of the Companies Act 2013 Mr. Srikanth Nadhamuni willretire by rotation at the ensuing Annual General Meeting and is eligible forre-appointment.

During the year Mr. Partho Datta and Mr. Bobby Parikh ceased to be Directors of theBank from close of business hours on September 29 2018 and January 26 2019 respectivelyon completing the maximum permitted tenure of eight years as per Banking Regulation Act1949. Your Directors place on record their sincere appreciation for the contribution madeby Mr. Partho Datta and Mr. Bobby Parikh during their tenure with the Bank and wishes themwell in their future endeavors.

Mr. Paresh Sukthankar Deputy Managing Director tendered his resignation from theBoard of the Bank on August 10 2018 which came into effect from November 8 2018. TheBoard places on record their sincere appreciation for the contribution made by Mr. PareshSukthankar during his tenure with the Bank and wishes him well in his future endeavors.

Mr. Sanjiv Sachar Mr. Sandeep Parekh and Mr. M. D. Ranganath were appointed asAdditional Independent Directors on the Board of the Bank with effect from July 21 2018January 19 2019 and January 31 2019 respectively subject to the approval of theshareholders.

The brief resume/details regarding the Directors proposed to be appointed/re-appointedas above is furnished in the report on Corporate Governance. There have been no changes inthe Directors and Key Managerial Personnel of the Bank other than the above.

Particulars of Employees

The information in terms of Rule 5 of the Companies (Appointment and Remuneration ofManagerial Personnel) Rules 2014 is given in ANNEXURE 6 and ANNEXURE 7 tothis report.

Conservation of Energy Technology Absorption Foreign Exchange Earnings and Outgo

(A) Conservation of Energy

Your Bank has undertaken several initiatives in this area such as:

• Installation of green locks and AC controllers in air conditioning machines inorder to save energy and support go-green initiative

• Installation of energy capacitors at high consumption offices to control thepower factor and to reduce energy consumption

• All main signboards in branches switched off post 10 p.m.

• Put controls on usage of lifts ACs common passage lights and other electricalequipment

• Reduction of contract demand at Kanjurmarg Hub

• Replacement of CFL Lamps with LED fixtures at Kanjurmarg Hub/WBO/FortMumbai/Bank House Indore

• Provision of LED lamps at branches and offices

• Provision of solar panels for captive power generation at our offices in Puneand Bhubaneswar Noida (Sector 4)

Monitoring and energy saving initiative for 100 branches resulting in power saving ofover 10 per cent. The Bank won an award in National Energy Efficiency Circle Competition2017-Winner Best Energy Efficient Case study held by CII in May 2017. Considering thebenefits accrued it further extended the monitoring programme to an additional 500branches across the country and the results have shown power savings over 10%.

(B) Technology Absorption

Your Bank has been at the forefront of using technology absorption and evaluatesinnovative technology with multiple fintech partners. It has launched a formal ConsumerDurable Loans portfolio and product with on-line real-time Digital API based collaborationwith third party and fintech application sourcing platforms. Your Bank is leveraging APIbased Service Oriented Architecture and Middleware for enabling digital initiatives andempowering relationship managers at branches with digital products and services platforms.Your Bank has also begun using robotics and artificial intelligence in digital commercecorporate supply chain and payment settlement systems to reduce time to market andturnaround time.

(C) Foreign Exchange Earnings and Outgo

During the year the total foreign exchange earned by the Bank was Rs.1720.4 crores(on account of net gains arising on all exchange/derivative transactions) and the totalforeign exchange outgo was Rs.2130.5 crores towards the operating and capital expenditurerequirements.

Secretarial Audit

In terms of Section 204 of the Companies Act 2013 and the Rules made thereunder M/s.BNP & Associates Practicing Company Secretaries had been appointed as SecretarialAuditors of the Bank for the financial year 2018-19. The report of the SecretarialAuditors is enclosed as ANNEXURE 8 to this Report. There are noobservations/qualifications/comments in the Report of the Secretarial Auditor.

Corporate Governance

In compliance with Regulation 34 and other applicable provisions of the Securities andExchange Board of India (Listing Obligations and Disclosure Requirements) Regulations2015 a separate report on Corporate Governance along with a certificate of compliancefrom the Secretarial Auditors forms an integral part of this Report.

Business Responsibility Report

The Bank's Business Responsibility Report containing a report on its Corporate SocialResponsibility Activities and Initiatives in the format adopted by companies in India asper the guidelines of the Securities and Exchange Board of India in this regard isavailable on its web site www.hdfcbank.com

Information under the Sexual Harassment of Women at Workplace (Prevention Prohibitionand Redressal) Act 2013

The relevant information is included in the Corporate Governance Report

Acknowledgement

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

Conclusion

It has been a challenging year for the Indian economy externally as well as internally.The good news is that despite the challenges of volatile oil prices trade wars risinginterest rates and domestic uncertainties due to the impending general elections in Indiaand slowing consumption demand India remained the world's fastest growing economy. YourBank which grew faster than the system in the year under review is well poised to tap theopportunities of what is still an under penetrated market by leveraging its strong balancesheet and franchise.

As always your Bank will continue to be judicious. It will continue to leverage itsdistribution strength and digital platforms to offer a similar experience to customersacross urban semi-urban and rural India.

Needless to say the Bank will continue to focus on its five core values namelyCustomer Focus Operational Excellence Product Leadership People and Sustainability. Itscommitment to the highest possible standards of corporate governance remains unwaveringeven as it embarks on the next stage of its evolution to continue delivering sustainablegrowth to all its stakeholders.

On behalf of the Board of Directors
Mrs. Shyamala Gopinath
Chairperson
Mumbai May 22 2019