Annual Report - HDFC Bank - 2009-2010

HDFC BANK LIMITED

ANNUAL REPORT 2009-2010

DIRECTOR'S REPORT

To
The Members,

Your Directors have great pleasure in presenting the Sixteenth Annual
Report on the business and operations of your Bank together with the
audited accounts for the year ended March 31, 2010.

FINANCIAL PERFORMANCE

(Rs.in crores)
For the year ended

March 31, 2010 March 31, 2009

Deposits and Other Borrowings 180,320.1 151,975.2

Advances 125,830.6 98,883.0

Total Income 19,980.5 19,622.9

Profit before Depreciation
and Income Tax 4,683.5 3,659.2

Net Profit 2,948.7 2,245.0

Profit brought forward 3,455.6 2,574.6

Total Profit available for
Appropriation 6,404.3 4,819.6

Appropriations

Transfer to Statutory Reserve 737.2 561.2

Transfer to General Reserve 294.9 224.5

Transfer to Capital Reserve 199.5 93.9

Transfer from Investment
Fluctuation Reserve (1.5) (13.9)

Proposed Dividend 549.3 425.4

Tax Including Surcharge and
Education Cess on Dividend 91.2 72.3

Dividend (including tax/cess thereon)
pertaining to previous year paid
during the year 0.9 0.6

Balance carried over to Balance Sheet 4,532.8 3,455.6

- Change pursuant to reclassification

The Bank posted total income and net profit of Rs. 19,980.5 crores and
Rs.2,948.7 crores respectively for the financial year ended March 31, 2010
as against Rs. 19,622.9 crores and Rs. 2,245.0 crores respectively in the
previous year. Appropriations from net profit have been effected as per the
table given above.

DIVIDEND

Your Bank has had a consistent dividend policy that balances the dual
objectives of appropriately rewarding shareholders through dividends and
retaining capital, in order to maintain a healthy capital adequacy ratio to
support future growth. It has had a consistent track record of moderate but
steady increases in dividend declarations over its history with the
dividend payout ratio ranging between 20% and 25%. Consistent with this
policy, and in recognition of the Bank's overall performance during this
financial yearyour directors are pleased to recommend a dividend of Rs. 12
per share for the financial year ended March 31, 2010, as against Rs. 10
per share for the year ended March 31, 2009. This dividend shall be subject
to tax on dividend to be paid by the Bank.



AWARDS

As in the past years, awards and recognition were conferred on your Bank by
leading domestic and international organizations during the fiscal year
ended March 31, 2010. Some of them are:

* Asian Banker Excellence Awards 2009

- Best retail bank in India (4th year in a row)
- Excellence in automobile lending

* The Asset Triple A Awards

- Best cash management bank in India

* Euromoney Private Banking and Wealth Management poll 2010

- Best local bank in India (2nd year in a row)

- Best private banking services overall

* Financial Insights Innovation Awards 2010

- Innovation in branch operations

* Global Finance Award

- Best trade finance provider in India (2010)

* Business Today Best Employer Survey

- Listed in the top 10 best employers in the country

* Business World Best Bank Awards 2009

- Most tech-savvy bank

* Outlook Money NDTV Profit Awards 2009

- Best bank

* Forbes Asia

- Fab 50 companies in Asia-Pacific

* UTI MF-CNBC TV18 Financial Advisor Awards 2009

- Best performing bank'

* Wall Street Journal survey of Asia's best 200 companies 2009

- Rated amongst India's 10 most admired companies

- Rated 3rd in terms of Financial Reputation

* FE Best Bank Awards 2009

- Best in strength and soundness award

* Asia Money 2009 awards

- Best domestic bank in India

RATINGS

Instrument Rating Rating Comments
Agency
Fixed Deposit CARE AAA (FD) CARE(1) Represents instruments considered
Program to be 'of the best quality,
carrying negligible investment
risk:

tAAA (ind) FITCH(2) Indicates the strongest capacity
with a stable for timely payment of financial
outlook commitments relative to other
issuers or issues in the country.

Certificate PR1+ CARE Representing superior capacity for
of Deposit repayment of short term promissory
obligations

Long term CAREAAA CARE Represents instruments considered
unsecured to be 'of the best quality,
subordinated carrying negligible investment
(Tier11) risk'.
bonds

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

Tier CAREAAA CARE Represents instruments considered
Iperpetual to be 'of the best quality,
Bonds carrying negligible investment
risk'.

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

Upper CAREAAA CARE Represents instruments considered
Tier II Bonds to be 'of the best quality,
carrying negligible investment
risk:

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

(1) - CARE - Credit Analysis & Research Limited

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

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

ISSUANCE OF EQUITY SHARES AND WARRANTS

Post merger of the erstwhile Centurion Bank of Punjab with your Bank,
26,200,220 warrants convertible into an equivalent number of equity shares
were issued to HDFC Limited on a preferential basis at a rate of
Rs.1,530.13 each. This was done in order to enable the promoter group to
restore its shareholding percentage in the Bank to the pre-merger level in
line with shareholder and regulatory approvals. On November 30, 2009 the
said warrants were converted by HDFC Limited and consequently the Bank
issued them 26,200,220 equity shares.

During the year under review, 61.59 lac shares were allotted to the
employees of your Bank pursuant to the exercise of options under the
employee stock option scheme of the Bank. These include the shares allotted
under the employee stock option scheme of the erstwhile Centurion Bank of
Punjab.

EMPLOYEE STOCK OPTIONS

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

CAPITAL ADEQUACY RATIO

Your Bank's total Capital Adequacy Ratio (CAR) calculated in line with the
Basel II framework stood at 17.4%, well above the regulatory minimum of
9.0%. Of this, Tier I CAR was 13.3%.

SUBSIDIARY COMPANIES

Your Bank has two subsidiaries, HDFC Securities Limited ('HSL') and HDB
Financial Services Limited ('HDBFS'). HSL is primarily in the business of
providing brokerage services through the internet and other channels. HDBFS
is a non-deposit taking non-bank finance company ('NBFC'J, for the
establishment of which the Bank received Reserve Bank of India ('RBI')
approval during the fiscal year ended March 31, 2008.

In terms of the approval granted by the Government of India, the provisions
contained under Section 212(1) of the Companies Act, 1956 shall not apply
in respect of the Bank's subsidiaries. Accordingly, a copy of the balance
sheet, profit and loss account, report of the Board of Directors and the
report of the Auditors of HSL and HDBFS have not been attached to the
accounts of the Bank for the year ended March 31, 2010.

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

MANAGEMENT'S DISCUSSIONS AND ANALYSIS

Macro-economic and Industry Developments

After witnessing a significant slowdown in the fiscal year ended March 31,
2009, the Indian economy bounced back impressively during the last
financial year. The inherently strong domestic consumption combined with
both the monetary and fiscal stimuli measures undertaken by the government
and other policy authorities over the past year helped the economy shrug
off the overhang of weak exports and global headwinds. GDP growth is
estimated to be around 7.2% for the fiscal year ended March 31, 2010 as
against 6.7% for the year ended March 31, 2009.

While a large share of growth in the last financial year could be
attributed to government spending, private consumption and investment also
picked up quite sharply, which put to rest any concerns on the
sustainability of the domestic recovery. While government spending was
likely to have grown by 8.2% last year, private consumption growth is
expected to have been at around 4.6% from a low of 1.7% exhibited in the
quarter ended June 30, 2009. Private investment growth is also expected to
have recovered to 5.2% from 4% a year ago.

In terms of the sectoral composition of growth, the industrial sector was
the clear driver of this recovery, growing by 10% in the last financial
year from 2.8% a year ago. While the revival in industrial growth was led
by a pick-up in consumer durables, other industrial sectors such as basic
goods, intermediate goods and more importantly capital goods also gathered
momentum, collectively pointing to the broad-basing of industrial recovery.

Service sector growth was dominated by community, social and personal
services reflecting increased government expenditure. However, private
services such as trade, transport and communication gathered pace and are
likely to keep the service sector growth strong through the next financial
year. Overall, service sector growth was estimated at 8.5% in the last
fiscal year as against 9.7% a year ago while private services are estimated
to have recovered from a growth rate of 8.4% in the year ended March 31,
2009 to 8.9% in the last fiscal year.

Perhaps the most visible dimension of the robustness of the ongoing
recovery was the fact that the economy successfully weathered a drought.
While the agricultural output is expected to have contracted by about 0.6%
last year, non-agricultural GDP is slated to have grown by 9% against 7.7%
a year ago. Much of this decoupling between the agricultural and industrial
growth was attributable to a more fundamental diversification of the rural
economy away from farming activities and the increasing role of small scale
industry in broadening the rural income base. Additionally, fiscal support
measures such as the National Rural Employment Guarantee Scheme (NREGS)
also played a crucial role in providing a safety net to small farmers and
agricultural workers.

Apart from fiscal stimulus efforts amounting to nearly 2% of GDP an
accommodative monetary policy stance also played an important role in
supporting economic recovery. Policy rates were eased by an average of 275-
400 basis points (one basis point = 0.01%) while average lending rates of
banks fell by close to 275 basis points since the onset of the crisis. Easy
monetary conditions meant that short-term rates fell sharply. After spiking
up to a high of 20% in October 2008, the overnight call money rates eased
to 3-4%, indicating very comfortable domestic liquidity conditions.
Monetary accommodation was especially important in helping the economy
absorb a hefty government borrowing program during the last fiscal year
which ensured that pressure on government bond yields remained muted.

Despite a decline in effective lending rates, system credit growth remained
subdued over the year with some signs of a pick-up in the growth rates in
the last quarter of the year. After reaching a system loan growth rate of
17% in the financial year ended March 31, 2009, credit growth plummeted to
10% in October 2009. Some recovery in this growth was witnessed on the back
of increased demand for term lending and project financing which resulted
in a pick up in credit growth to 16% as at March 2010. Infrastructure
funding was a leading area of credit demand, contributing close to 60% of
the incremental credit growth in the last financial year.

Inflation over the past year was largely driven by supply-side pressures on
account of the drought and hence substantially confined to agricultural
commodity prices. There were however emerging signs that inflation is
getting more broad-based with private demand playing a role in pushing up
prices of manufactured products. In February 2010 headline WPI inflation
moved 9.9% alongside a pick-up in manufactured goods inflation to 7.4% from
a low of -0.2% in July, 2009.

Both merchandise exports and imports recovered sharply at the end of the
third quarter of the last fiscal year after the record slide seen over the
two quarters prior to that. After falling sharply by 28% in the first half
of the fiscal year ended March 31, 2009, export orders increased by 13% at
the end of the third quarter of the last financial year and by 34.8% in
February 2010 driven by strong demand from both the Chinese and US
economies. Domestic imports also rose sharply over the last few months
driven by strong growth in the domestic industrial sector. In fact, the
sharp rebound in the industrial sector resulted in an increase in non-oil
imports, especially capital goods imports. More importantly, the rise in
oil prices in the latter half of the financial year ended March 31, 2010
pushed up the total imports bill. The trade deficit in the financial year
ended March 31, 2010 is estimated to have widened to USD 129 billion as
against USD 118 billion in the previous year.

Recent data released by the RBI shows that the net invisibles component
(software exports, private transfers, etc.) came in much weaker than
expectations in the first three quarters of the financial year ended March
31, 2010. While private transfers grew by a relatively sedate 12% in this
period, a muted growth in software exports and a decline in business
services exports impacted net invisibles. Net invisibles were USD 59
billion as compared to USD 70 billion seen in the same period during the
previous year. Going forward, although we do not expect the weakness in the
net invisibles component to persist, we expect the current account deficit
to widen driven primarily by the deterioration in trade balance.

Even though the current account deficit increased, the total balance of
payments position remained comfortably placed as capital flows were fairly
strong as compared to those in the prior year. Strong portfolio inflows due
to the improvement in global risk appetite were the major contributors to
the strong balance of payments position. Going forward, we expect the
balance of payments position to remain in surplus this year as fund flows
continue to remain strong.

The Indian equity markets rallied sharply during the last financial year
due to the general improvement in global risk appetite. Global investors
went from pricing in a severe recession to expecting a sharp rebound in the
global economy and in the process pushed most equity markets higher. India
ranked amongst the fastest growing economies in the world and benefited
immensely during this phase.

(Sources: Ministry of Finance, RBI, CSO, Ministry of Commerce)

Macroeconomic Risks and concerns

While the economic recovery currently underway seems quite well entrenched,
the risks to growth going ahead stem from concerns on the sustainability of
this recovery. Rising inflationary pressures and a pick up in manufactured
goods inflation in particular, pose a risk to the revival in domestic
consumption. Further, with growth gathering momentum and the return of
leverage into the economy, monetary policy responses are likely to play
afar more crucial role in shaping growth dynamics. The risk is that
persistent inflationary pressures may drive the central bank to tighten
interest rates to a level that could constrain future growth. There are
some offsets though, with job prospects looking up and personal disposable
income likely to remain strong, household balance sheets are likely to be
robust enough to absorb rising prices and interest rates. In view of the
above factors, a reversal of the recovery in domestic consumption demand
seems unlikely.

The economic recovery that was buoyed by a pick-up in domestic consumption
is likely to be taken forward by a pick-up in investment. Early signs of
rising capacity utilization indicate that private capital expenditure could
well gather pace over this financial year. However, given the interest
sensitive nature of capital formation there is a risk that rising interest
rates may impinge on private investment initiatives.

While adequate capital provisioning and stringent prudential regulations
largely shielded the domestic banking system from the global crisis, some
cyclical deterioration in asset quality remains a concern. There is some
evidence, both formal and anecdotal that credit quality in both the retail
and wholesale portfolios of banks has deteriorated. There is also some
concern that a portion of the loans that banks were allowed to restructure
given the sharp cyclical deterioration in the economy may remain impaired
and will add to the stock of non-performing loans. Recent stress tests have
revealed howeverthatthe banking system as a whole remains robust enough to
withstand a sharp increase in asset quality slippages.

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

Though the global economy has recovered at a much faster pace than
expected, the current recovery is still at a nascent stage and concerns
still remain that the global economy could possibly witness a 'W' shaped
recovery pattern. Much of the increase in demand witnessed in developed
economies was driven by temporary factors such as strong fiscal stimuli.
The effects of fiscal stimulus measures are likely to eventually fade
resulting in lower growth rates, especially if private demand does not
recover at a rapid pace. Weaker than anticipated recovery in the global
economy could result in another bout of risk aversion in the global markets
sometime during the second half of this financial yearwhich in turn could
have an impact on domestic equity markets.

The other risk stems from the prospect of tighter global monetary policy
during the middle of calendar year 2010. While the U.S. Federal Reserve may
not hike its operational fed funds rate any time soon, it seems to be
giving indications that it could wind down its quantitative easing program.
We expect the U.S. Federal Reserve to slowly start draining USD liquidity
from the financial system starting sometime around September 2010. As this
happens, global equity markets (including Indian equity markets) could
correct as investors price in the prospect of a reduction in liquidity in
the global financial system.

Lastly, the prospect of a sovereign default in a major economy could
periodically weigh on market risk appetite over the course of the next six
to eight months. Strong fiscal stimuli provided by most of the major
developed economies last year has resulted in a sharp build up of total
sovereign debt. Thus, markets are likely to get a little anxious over the
ability of the major governments to fund this deficit, which will act as a
stumbling block for market risk appetite in the medium term.

Outlook

The Indian economy is likely to continue to outperform its global
counterparts in the year ahead, growing by around 8% against an average
world output growth of 3.9%. Investment and capacity expansion will be a
crucial link in driving the recovery forward; buoyant domestic demand
should help it absorb headwinds from rising interest rates and inflation.
With private capex and infrastructure spending likely to gather ground, not
only will the ongoing recovery sustain into the next financial year but
will also translate into greater buoyancy in credit growth and stronger
growth prospects for the banking sector in general. Focus on investment in
the next fiscal year is likely to render India an attractive market that is
well positioned to take advantage of both structural and cyclical gains
while its strong domestic base is likely to limit the impact of external
stress on growth dynamics and returns.

Mission and Business Strategy

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

The Bank's business strategy emphasizes the following:

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

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

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

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

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

* Focus on healthy earnings growth with low volatility.

Financial Performance:

The financial performance during the fiscal year ended March 31, 2010
remained healthy with total net revenues (net interest income plus other
income) increasing by 14% to Rs. 12,194.2 crores from Rs. 10,711.8 crores
in the previous financial year. Revenue growth was driven both by an
increase in net interest income and other income. Net interest income grew
by 13% primarily due to an increase in the average balance sheet size and
an increase in full year net interest margins by 13 basis points to 4.3%.

Other income registered a growth of 15.7% over that in the previous year to
Rs. 3,807.6 crores in the financial year ended March 31, 2010. This growth
was driven primarily by an increase in fees and commissions earned and
income from foreign exchange and derivatives offset in part by lower bond
gains than those in the previous financial year. In the fiscal year ended
March 31, 2010, commission income increased by 15.2% to Rs. 2,830.6 crores
with the main drivers being fees on debit and credit cards, transactional
charges & fees on deposit accounts and processing fees on retail assets.
Commissions from the distribution of third party insurance & mutual funds
remained one of the major components of fees and commissions. Whilst the
regulatory changes restricted the commissions payable to banks by mutual
funds, the same was offset by higher distribution volumes. The Bank made a
profit on the sale / revaluation of investments of Rs. 345.1 crores during
the year, almost 10% lower than that in the previous year as yields started
moving up since the third quarter of the financial year ended March 31,
2010. Foreign exchange and derivatives revenues grew from Rs. 440.5 crores
in the previous financial year to Rs. 623.2 crores in the fiscal year ended
March 31, 2010.

Operating (non-interest) expenses grew at a much lower pace than net
revenues and increased from Rs. 5,532.8 crores in the previous financial
year to Rs. 5,764.5 crores in the year under consideration. During the year
your Bank opened over 300 new branches which resulted in higher
infrastructure and staffing expenses. Due to the efforts of your Bank in
areas of cost management and on improving overall productivity, coupled
with revenue synergies with the network of the erstwhile Centurion Bank of
Punjab, the ratio of operating cost to net revenues improved to 47.3%, from
51.7% in the previous year.

Loan loss provisions for non-performing assets and provisions for standard
assets increased from Rs. 1,726.3 crores to Rs. 1,938.9 crores due to
higher NPA formations during the first half of the financial year ended
March 31, 2010. The incremental NPA formations subsequently came down in
the second half of the year. The Bank's provisioning policies for specific
loan loss provisions remained higher than regulatory requirements. The NPA
coverage ratio based on specific provisions was at 74.8% as on March 31,
2010. The Bank also provided Rs. 201 crores towards floating provisions,
contingent provisions for tax, legal and other contingencies. The Reserve
Bank of India had reduced the general provisioning requirements for certain
asset classes in May 2008, this reduced the requirements for general
provisions for the Bank's loan book. Your Bank did not write back any of
these provisions and continued to maintain the general provisions that were
already created. As a result of the above, the requirement for general
assets provisions was lower than what the Bank held on its books as on
March 31, 2010 and the Bank did not have to may any additional general
provisions for the increase in its loan book.

Net profit increased by 31% from Rs. 2,245.0 crores in the previous
financial year to Rs. 2,948.7 crores in the year ended March 31, 2010.
Return on average net worth was 16.8%. The Bank's basic earning per share
increased from Rs. 52.9 to Rs. 67.6 per equity share.

As at March 31, 2010, the Bank's total balance sheet increased by 21% to
Rs. 222,459 crores as against Rs. 183,271 crores as at March 31, 2009.
Total Deposits increased 17% from Rs. 142,812 crores as on March 31, 2009
to Rs. 167,404 crores as on March 31, 2010. With Savings account deposits
at Rs. 49,877 crores and current account deposits at Rs. 37,227 crores,
demand (CASA) deposits were around 52% of total deposits as on March 31,
2010 higher than 44% at the end of the previous year. During the financial
year ended March 31, 2010, gross advances grew by 27% to Rs. 127,262
crores. This was driven by a growth of 41% in wholesale advances to
Rs.54,991 crores, and an increase of 18% in retail advances to Rs. 72,271
crores. The growth in advances of the Bank have been significantly higher
than the system credit growth which was approximately 17%.

Business Segments' Update:

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

Retail Banking

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

The growth in your Bank's retail banking business was robust during the
financial year ended March 31, 2010. The Bank's total retail deposits grew
by over 14% to Rs. 113,527 crores in the financial year ended March 31,
2010, driven by retail savings balances which grew much faster at 44%
during the same period. The Bank's retail assets grew by 18% to Rs. 72,271
crores during the financial year ended March 31, 2010 driven primarily by a
growth in auto loans, mortgages, business banking and commercial vehicle
loans.

Branch Banking

This year your Bank expanded its distribution network - from 1,412 branches
in 528 cities as on March 31, 2009 to 1,725 branches in 779 cities on March
31, 2010. The Bank's ATMs increased from 3,295 to 4,232 during the same
period. Your Bank's branch network is deeply entrenched across the country
with significant density in areas conducive to the growth of its
businesses. The Bank's focus on semi-urban and underbanked markets
continued, with 68% of the Bank's branches now outside the top nine Indian
cities. The Bank's customer base grew in line with the growth in its
network and increased product penetration initiatives, this currently
stands at over 19 million customers. The average savings balance per
account which is a good indicator of the strength of the Bank's retail
liability franchise grew over 30%. The Bank continues to provide unique
products and services with customer centricity a key objective.

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

The increase in the Bank's debit card base this year coupled with a growth
in its ATM network translated to an increase in ATM transactions by 26%.
The Bank also made strong inroads in its internet banking channel with
around 21% of its registered customers now using net banking facilities for
their banking requirements. Your bank now offers phone banking in 778
locations in addition to giving its customers the convenience of accessing
their bank accounts over their mobile phones. The success of the Bank's
multi-channel strategy is evidenced in the fact that almost 80% of customer
initiated transactions are serviced through the non-branch channels.

Retail Assets

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

The Bank continued its focus on internal customers for its credit cards
portfolio. Overall credit cards remained a profitable business for your
Bank with over 4 million cards in force as at March 2010. As part of its
strategy to drive usage of its credit cards the Bank also has a significant
presence in the 'merchant acquiring' business with the total number of
point-of-sale (POS) terminals installed at over 90,000.

In addition to the above products the Bank does home loans in conjunction
with HDFC Limited, under this arrangement the Bank sells loans provided by
HDFC Limited. HDFC Limited approves and disburses the loans, which are
booked in their books, the Bank is paid a sourcing fee for these loans.
HDFC Limited offers your Bank upto 70% of the fully disbursed home loans
sourced under this arrangement through either the issue of mortgage backed
pass through certificates (PTCs) or by a direct assignment of loans; the
balance is retained by HDFC Limited. Both the PTCs or the loans thus
assigned are credit enhanced by HDFC Limited upto a AAA level. The Bank
purchases these loans at the underlying home loan yields less a fee paid to
HDFC Limited for the administration and servicing of the loans. Your Bank
originated approximately an average Rs. 500 crores of mortgages every month
in the financial year ended March 31, 2010, a significant increase from the
Rs. 400 crores per month that the Bank originated in the previous year.
During the year the bank also purchased from HDFC Ltd. under the 'loan
assignment' route approximately Rs 4,870 crores of AAA credit enhanced home
loans which qualified as priority sector advances.

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

The Bank's data warehouse, Customer Relationship Management (CRM) and
analytics solutions have helped it target existing and potential customers
more effectively and cost effectively and offer them products appropriate
to their profile and needs. Reduced costs of acquisition apart, this has
also led to deepening of customer relationships and greater efficiency in
fraud control and collections resulting in lower credit losses.

Wholesale Banking

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

This business registered a healthy growth in the financial year ended March
31, 2010. The Bank's wholesale deposits grew by around 24%, while wholesale
advances showed a strong growth of over 40% both of which were
significantly faster than the growth in the system during the same period.
Your Bank provides its customers both working capital and term financing.
The Bank witnessed an increase in the proportion of its term lending even
though working capital loans retained a large share of its wholesale
advances. While the duration of the Bank's term loans largely remained
small to medium term, the Bank did witness an increase in its longer
duration term loans, and project lending, including loans to the
infrastructure segment.

During the financial year ended March 31, 2010, growth in the wholesale
banking business continued to be driven by new customer acquisition and
higher cross-sell with a focus on optimizing yields and increasing product
penetration. Your Bank's cash management and vendor & distributor (supply
chain) finance products continued to be an important contributor to growth
in the corporate banking business. Your Bank further consolidated its
position as a leading player in the cash management business (covering all
outstation collection, disbursement and electronic fund transfer products
across the Bank's various customer segments) with volumes growing to over
Rs. 25 trillion. The Bank also strengthened its market leadership in cash
settlement services for major stock exchanges and commodity exchanges in
the country. The Bank met the overall priority sector lending requirement
of 40% of net bank credit:

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

International Operations

The Bank has a wholesale banking branch in Bahrain and two representative
offices in UAE and Kenya. The branch offers the Bank's suite of banking
services including treasury and trade finance products to its corporate
clients. This branch has built up an asset book over USD 400 million since
its opening in October 2008. The Bank offers wealth management products,
remittance facilities and markets deposits to the Non-resident Indian
community from its representative offices.

Treasury

The treasury group is responsible for compliance with reserve requirements
and management of liquidity and interest rate risk on the Bank's balance
sheet. On the foreign exchange and derivatives front, revenues are driven
primarily by spreads on customer transactions based on trade flows and
customers' hedging needs. During the financial year ended March 31, 2010,
revenues from foreign exchange and derivative transactions grew by 41.5% to
Rs. 623 crores. These revenues were distributed across large corporate,
emerging corporate, business banking and retail customer segments for plain
vanilla foreign exchange products and across primarily large corporate and
emerging corporate segments for derivatives. The Bank offers Indian rupee
and foreign exchange derivative products to its customers, who use them to
hedge their market risks. The Bank enters into foreign exchange and
derivative deals with counterparties after it has set up appropriate
counterparty credit limits based on its evaluation of the ability of the

counterparty to meet its obligations in the event of crystallization of the
exposure. Appropriate credit covenants may be stipulated where required as
trigger events to call for collaterals or terminate a transaction and
contain the risk. Where the Bank enters into foreign currency derivative
contracts with its customers it lays them off in the inter-bank market on a
matched basis. For such foreign currency derivatives, the Bank does not
have any open positions or assume any market risks but carries only the
counterparty credit risk (where the customer has crystallized payables or
mark-to-market losses). The Bank also deals in Indian rupee derivatives on
its own account including for the purpose of its own balance sheet risk
management. The Bank recognizes changes in the market value of all rupee
derivative instruments (other than those designated as hedges) in the
profit and loss account in the period of change. Rupee derivative contracts
classified as hedge are recorded on an accrual basis.

Given the regulatory requirement of holding government securities to meet
the statutory liquidity ratio (SLR) requirement, your Bank maintains a
portfolio of government securities. While a significant portion of these
SLR securities are held in the 'Held-to-Maturity' (HTM) category, some of
these are held in the 'Available for Sale' (AFS) category. In the first two
quarters of the last year the Bank realized gains on its bond portfolio
partly offset by the losses made in the second and third quarters of the
financial year ended March 31, 2010.

Information Technology

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

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

During the year the Bank has introduced faster ATMs which enabled the
customer a faster servicing experience by reducing the customer clicks by
40%, through the use of advanced technology on its ATMs, a first in the
Indian market. Implementation of a risk management engine for internet
transactions has reduced the phishing and man in the middle attacks
significantly since October 2008. The bank has also implemented a digital
certificates based security engine for corporate internet banking
customers. Credit and debit cards usage of the Bank's customers is secured
by powerful proactive risk manager technology solutions which does rules
based SMS alerts as well as prompts customer service representatives to
call the customer on detecting abnormal usage behavior. This prevents
frauds and minimizes losses to customers, if the card has been stolen and
yet to be hot listed.

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

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

Service Quality Initiatives

Your Bank continued to improve customer service in various spheres of its
business through service quality initiatives and quality projects using
lean Sigma Tool-kit, 5S and other business excellence initiatives. Over
2,000 projects were executed during the year that resulted in demonstrable
process efficiency improvements, enhanced productivity, improved turn
around times, cost reduction all of which ultimately led to an improvement
in customer service.

The Bank has integrated its customer complaints management processes with
the existing service quality initiatives to achieve greater synergies
towards driving service excellence. Service quality initiatives include the
audit of services as well as mystery shopping at various touch points to
capture feedback on customer experiences. Your Bank has also implemented
the same for key support departments. Improvements are worked on identified
areas to further enhance customer experiences. The Bank has also integrated
service quality objectives with the business objectives of the Bank, to
bring about the clubbed results of 'Customer Delight' and improved
profitability. New elements were added and improvement schemes were
installed using technology to ensure customer convenience, security of
transactions and reduced transaction costs.

The Bank plans to use this platform to drive systemic changes and process
re-engineering using technology to further enhance customer experience and
business value.

Risk Management & Portfolio Quality

Taking on various types of risk is integral to the banking business. Sound
risk management and balancing risk-reward trade-offs are critical to a
bank's success. Business and revenue growth have therefore to be weighed in
the context of the risks implicit in the Bank's business strategy. Of the
various types of risks your Bank is exposed to, the most important are
credit risk, market risk (which includes liquidity risk and price risk) and
operational risk. The identification, measurement, monitoring and
management of risks accordingly remain a key focus area for the Bank. For
credit risk, distinct policies and processes are in place for the retail
and wholesale businesses. In retail loan businesses, the credit cycle is
managed through appropriate front-end credit, operational and collection
processes. For each product, programs defining customer segments,
underwriting standards, security structure etc., are specified to ensure
consistency of credit buying patterns. Given the granularity of individual
exposures, retail credit risk is managed largely on a portfolio basis,
across various products and customer segments. During the financial year
ended March 31, 2009 the Bank obtained an ISO 9001:2008 certification of
its retail asset underwriting. Last year, the first surveillance audit was
conducted at key locations and the unit was recommended for continuation of
the certification. For wholesale credit exposures, management of credit
risk is done through target market definition, appropriate credit approval
processes, ongoing post-disbursement monitoring and remedial management
procedures. Overall portfolio diversification and reviews also facilitate
mitigation and management.

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

As of March 31, 2010, the Bank's ratio of gross non-performing assets
(NPAs) to gross advances was 1.43%. Net non-performing assets (gross non-
performing assets less specific loan loss provisions, floating provision,
interest in suspense, Export Credit Guarantee Corporation (ECGC) claims
received and provision in lieu of diminution in the fair value of
restricted assets) were 0.31% of customer assets as of March 31, 2010. The
specific loan loss provisions that the Bank has made for its non-performing
assets continue to be more conservative than the regulatory requirement.

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

INTERNAL AUDIT & COMPLIANCE

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

CORPORATE SOCIAL RESPONSIBILITY

Your Bank is a socially responsible corporate citizen committed to deliver
a positive impact across social, economic and environmental parameters. The
Bank acknowledges its responsibility on the manner that its activities
influence its consumers, employees, and stake holders, as well as the
environment. Your Bank strives to proactively encourage community growth
and development thereby contributing in building a sustainaible future.

Your Bank's CSR initiatives range across the spectrum of purely operational
and financial parameters at one end to social and altruistic at the other.
Together, these elements go towards fulfilling its CSR objectives.

The Bank seeks to achieve its corporate and social objectives by focusing
on the following strategic areas

* Environmental Responsibility
* Employee Engagement
* Community Initiatives

Environmental Responsibility

Your Bank is aware of its role of an influencer towards the environment,
which is embodied in its approach to Carbon Emission Reduction. The Bank
demonstrates this commitment to contribute positively to the environment
and sustainable development by calculating its carbon footprint and
preparing a carbon management plan to reduce it. In addition, in order to
create awareness amongst employees on climate change and the need to reduce
and recycle, various drives to conserve the environment including tree
plantation are organized on a regular basis.

Employee Engagement

The Bank's employees are encouraged to volunteer time and skills through
the 'Corporate Volunteering Program: This year your Bank's employees have
engaged in activities such as academic support classes, held English
speaking courses and helped in organizing special events in order to
celebrate festivals with the underprivileged. Additionally the Bank has
facilitated employee donations to charities of their choice through'Give
India; a donation platform that enables individuals to support social
causes by donating to over 200 charities that have been screened for
transparency and credibility. The bank makes a donation matching the
amounts donated by its employees on a monthly basis.

Community Initiatives

As a responsible Corporate Citizen your Bank strives for community
empowerment through socio-economic development of underprivileged and
marginalized sections of society. The Bank partners with NGOs across India
to support educational initiatives and livelihood training programs.

In the year ended March 31, 2010 the Bank supported a variety of
educational programs ranging from educational sponsorships for girls,
adoption of state-run schools, running of academic support classes and
reading classes. The Bank also supports projects that provide skills
training to school dropouts, youth, women and other disadvantaged groups.
The Bank's social development programs have so far touched the lives of
over 73,000 children and 700 women and youth.

FINANCIAL INCLUSION

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

Rural Initiative

The Bank has approximately 33% of its branches in rural and underbanked
locations. In these branches the Bank offers products and services such as
savings, current, fixed & recurring deposits, loans, ATM facilities,
investment products such as mutual funds and insurance, electronic funds
transfers, drafts & remittances, etc. The Bank also leverages these
branches as hubs for other inclusion initiatives such as direct linkages to
self help groups and joint liability groups, bank on wheels, point of sale
(POS) terminals and information technology enabled kiosks, and other
information & communication technology (ICT) backed initiatives in these
locations.

A number of retail credit products such as two-wheeler loans, car loans,
mortgages etc. are typically consumption products in urban centers. These
however are means of income generation for of rural consumers. We believe
that apart from agricultural loans, there are many other credit products
that the Bank can use to aid financial betterment in rural locations. The
Bank has extended provision of its retail loans to large segments of the
rural population where the end use of the products acquired (by availing
our loans) are used for income generating activities. For example, loans
for tractors, commercial vehicles, etc. supplement the farmer's income by
improving productivity and reducing expenses.

No Frills Savings Accounts

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

The Bank provides 'No Frills' savings accounts through all its branches as
a stepping stone towards financial inclusion. These accounts are offered
only to customers who do not have any other bank account (are un-banked)
and who are either beneficiaries of a government welfare scheme or have
annual incomes less than a defined threshold (constitute the bottom of the
economic pyramid). Apart from the basic no frills savings account your Bank
also offers these segments other accounts such as no frills salary accounts
and limited KYC accounts.

Lending to self help groups and Microfinance Institutions

Your Bank has been working with various self help groups in order to cover
a wider consumer base than through its own branch network. The groups that
the Bank partners work with the objective of providing credit for income
generation activities, (often by providing training, vocational guidance,
and marketing support to their members). Leveraging their distribution,
credit expertise and on-ground knowledge, the Bank funds these groups who
in turn lend to the end consumer. Till date the Bank has lent to over
45,000 self help groups covering approximately 7 lakh households supporting
their income generation activities. The Bank works with these groups either
by appointing business correspondents or through its own branch network. To
this effect the Bank has opened 27 branches catering exclusively to this
target segment.

The Bank also extends loans to Microfinance Institutions for on-lending to
financially excluded households or in many cases to them through self help
groups. This program is currently spread across the country covering 18
states with tie-ups with 110 accredited microfinance institutions. The
above institutions typically face challenges in the areas of funding,
credit underwriting and scaling up of operations. The Bank brings in the
necessary expertise related to these areas and enters into a symbiotic
arrangement that benefits all parties involved. As on March 31, 2010 with a
micro lending book of over Rs. 1,400 crores the Bank's micro lending
initiative has reached approximately 2 million households.

Agriculture and Allied Activities

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

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

The initiative currently underway includes the appointment of milk
societies as BCs, through whom the Bank opens accounts of individual
farmers attached to these societies. The societies route all payments to
the farmers through this account.

Small and Micro Enterprises

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

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

Promoting Financial Awareness

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

HUMAN RESOURCES

The total number of employees of your bank were 51,888 as of March 31,
2010. The Bank continued to focus on training its employees, both on-the-
job as well as through training programs conducted by internal and external
faculty. The Bank has consistently believed that broader employee ownership
of its shares has a positive impact on its performance and employee
motivation.

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

STATUTORY DISCLOSURES

The information required under Section 217(2A) of the Companies Act, 1956
and the rules made there under, are given in the annexure appended hereto
and forms part of this report. In terms of section 219(1)(iv) of the Act,
the Report and Accounts are being sent to the shareholders excluding the
aforesaid annexure. Any shareholder interested in obtaining a copy of the
said annexure may write to the Company Secretary at the Registered Office
of the Bank. The Bank had 51,888 employees as on March 31, 2010. 630
employees employed throughout the year were in receipt of remuneration of
Rs. 24 lacs per annum and 35 employees employed for part of the year were
in receipt of remuneration of more than Rs. 2 lacs per month.

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

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

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

RESPONSIBILITY STATEMENT

The Board of Directors hereby state that

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

ii) We have selected such accounting policies and applied them consistently
and made judgments and estimates that are reasonable and prudent so as to
give a true and fair view of the state of affairs of the Bank as on March
31, 2010 and of the profit of the Bank for the year ended on that date;

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

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

DIRECTORS

Mr. C.M. Vasudev and Dr. Pandit Palande will retire by rotation at the
ensuing Annual General Meeting and are eligible for re-appointment.

The Board at its meeting held on 15th January 2010 re-appointed Mr. Aditya
Puri as Managing Director of the Bank for a period of 3 years from 1st
April 2010 to 31st March 2013 subject to the approval of the shareholders
at the ensuing Annual General Meeting and the Reserve Bank of India. The
Reserve Bank of India has since approved the re-appointment of Mr. Puri as
Managing Director and the terms of re-appointment are being placed before
the shareholders for approval at the ensuing Annual General Meeting.

The Board at its meeting held on 24th April 2010 also approved the re-
appointment of Mr. Harish Engineer and Mr. Paresh Sukthankar as Executive
Directors for further periods from the expiry of their current terms
subject to the approval of the shareholders at the ensuing Annual General
Meeting and the Reserve Bank of India.

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

AUDITORS

M/s. Haribhakti & Co., Chartered Accountants have been the Statutory
Auditors of your Bank since 2006. As per the regulations of the Reserve
Bank of India, the same auditors cannot be re-appointed for a period beyond
four years. It is proposed to appoint M/s. BSR & Co., Chartered Accountants
as the new Statutory Auditors of the Bank, subject to the approval of the
members and the Reserve Bank of India. Your Directors place on record their
sincere appreciation of the professional services rendered by
M/s.Haribhakti & Co., as Statutory Auditors of the Bank.

ACKNOWLEDGEMENT

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

On behalf of the Board of Directors

Jagdish Capoor
Mumbai, April 24, 2010 Chairman

Annexure to Directors' Report for the year ended March 31, 2010

EMPLOYEES' STOCKOPTIONS

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

Scheme(s) Exercise Options Options Options
Price (Rs.) Granted Vested Exercised
& Shares
Allotted*

ESOP IV 358.60 - - 97,300
ESOP V 366.30 - - 66,100
ESOP VI 362.90 - - 39,200
ESOP VII 630.60 - - 1,104,400
ESOP VIII 994.85 - 1,143,400 640,300
ESOP IX 994.85 - 942,800 793,900
ESOP X 1,098.70 - 286,500 114,800
ESOP XI 1,098.70 - 621,500 308,100
ESOP XII 1,098.70 - 2,889,500 1,553,600
ESOP XIII 1,126.45 - 626,500 59,000
ESOP XIV 1,446.10 5,414,750 - -
ESOP XV 1,704.80 1,853,500 - -
eCBoP Key ESOP 116.00 - - 57,254
eCBoP 2004 - Scheme 1 565.50 - - 2,571
eCBoP 2004 - Scheme 2 442.25 - - 29,690
eCBoP 2004 - Scheme 3 442.25 - - 12,850
eCBoP 2004 - Scheme 4 442.25 - - 20,793
eCBoP 2004 - Scheme 5 536.50 - - 289,591
eCBoP 2004 - Scheme 6 536.50 - 36,031 41,280
eCBoP 2004 - Scheme 7 593.05 - 191,535 250,562
eCBoP 2004 - Scheme 8 859.85 - 104,326 106,444
eCBoP 2007 - Scheme 1 1,162.90 - 611,217 497,341
eCBoP 2007 - Scheme 2 1,258.60 - 181,139 73,867
Total 7,268,250 7,634,448 6,158,943

Scheme(s) Options Options Total Options
Forfeited Lapsed in Force as
on March 31,
2010

ESOP IV - 5,000 100,000
ESOP V - - 33,600
ESOP VI - - 46,000
ESOP VII - - 1,291,200
ESOP VIII 37,100 - 1,858,500
ESOP IX 7,600 - 1,497,500
ESOP X - - 470,200
ESOP XI - - 968,900
ESOP XII 6,100 - 4,341,400
ESOP XIII - - 1,194,000
ESOP XIV 69,000 - 5,345,750
ESOP XV 38,250 - 1,815,250
eCBoP Key ESOP - - 64,816
eCBoP 2004 - Scheme 1 - - 1,428
eCBoP 2004 - Scheme 2 - - 14,541
eCBoP 2004 - Scheme 3 - - 2,519
eCBoP 2004 - Scheme 4 - - 4,810
eCBoP 2004 - Scheme 5 - - 102,210
eCBoP 2004 - Scheme 6 - - 15,120
eCBoP 2004 - Scheme 7 3,592 - 139,887
eCBoP 2004 - Scheme 8 6,247 - 112,128
eCBoP 2007 - Scheme 1 11,431 - 776,630
eCBoP 2007 - Scheme 2 12,934 - 309,691

Total 192,254 5,000 20,506,080

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

Other details are as under

Money realized by exercise of options:

The Bank received Rs. 6,16 lacs towards share capital and Rs. 549,81 lacs
towards share premium on account of 6,158,943 stock options exercised and
allotted during the year under review.

Pricing Formula for ESOS XIV and XV:

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

Details of options granted to: Name Options Granted

i. Directors & Senior managerial Anil Jaggia 34,000
personnel

ii. Other employee who receives a grant in any one year of option
amounting to 5% or more of option granted during that year:

None

iii. Identified employees who were granted option, during any one year,
equal to or exceeding 1% of the issued capital (excluding outstanding
warrants and conversions) of the company at the time of grant:

None

Variation of terms of Options:

None

Diluted Earnings Per Share (EPS) pursuant to issue of shares on exercise of
option calculated in accordance with Accounting Standard (AS) - 20
(Earnings Per Share):

The Diluted EPS of the Bank calculated after considering the effect of
potential equity shares arising on account of exercise of options is
Rs.66.87

Where the company has calculated the employee compensation cost using the
intrinsic value of the stock options, the difference between the employee
compensation cost so computed and the employee compensation cost that shall
have been recognized if it had used the fair value of the options, shall be
disclosed. The impact of this difference on profits and on EPS of the
company shall also be disclosed:

Had the Bank followed fair value method for accounting the stock option
compensation expense would have been higher by Rs. 249.4 crores.
Consequently profit after tax would have been lower by Rs. 164.6 crores and
the basic EPS of the Bank would have been Rs. 63.79 per share (lower by
Rs.3.77 per share) and the Diluted EPS would have been Rs. 63.14 per share
(lower by Rs. 3.73 per share)

Weighted-average exercise prices and weighted-average fair values of
options shall be disclosed separately for options whose exercise price
either equals or exceeds or is less than the market price of the stock
options:

The weighted average price of the stock options exercised is Rs. 902.70 and
the weighted average fair value is Rs. 360.92

A description of the method and significant assumptions used during the
year to estimate the fair values of options, at the time of grant including
the following weighted-average information:

The Securities Exchange Board of India (SEBI) has prescribed two methods to
account for stock grants; (i) the intrinsic value method; (ii) the fair
value method. The Bank adopts the intrinsic value method to account for the
stock options it grants to the employees. The Bank also calculates the fair
value of options at the time of grant, using internally developed and
tested model with the following assumptions:

i. Risk-free interest rate, : 4.8% to 7.7%

ii. Expected life, : 1-5 years

iii. Expected volatility, : 44.68% to 49.86%


iv. Expected dividends, and : 0.6% to 0.7%


v. The price of the underlying share : The per share market price was
in market at the time of option grant Rs. 1446.10 at the time of grant
of options under ESOS XIV and
Rs. 1704.80 at the time of grant

of options under ESOS XV.