Dear Stakeholders,

Your Directors take great pleasure in presenting the 25th Annual Report on the business and operations of your Bank, together with the audited accounts for the year ended March 31, 2019. A journey of a thousand miles begins with a single step. Ours began a quarter of a century back with the launch of the first branch in Mumbai on February 18, 1995. On the same day in 2019, your Bank entered its silver jubilee year by opening its 5,000th branch again at Mumbai. Along the way it has metamorphosed from a wholesale bank into one with an equally strong retail presence and is well underway in its journey of offering an omni channel customer experience. In the semi urban and rural areas, where your Bank has over half its banking outlets, it is acting as a change agent not only through its banking services but social initiatives as well under the umbrella brand Parivartan. As it enters its silver jubilee year, your Bank has impacted the lives of about 10 crore Indians directly or indirectly ie over 4.9 crore customers, the 5 crore plus people through its social initiatives and families of its over 1.9 lakh employees (including that of its two subsidiaries).

In the year ended March 31,2019 your Bank continued on this path. This came in an economic environment where the Indian economy stood out as an outlier despite facing various challenges both externally and internally. Externally, it was buffeted by volatile crude prices, rising interest rates in the developed world particularly in the US, heightened trade tensions and geopolitical uncertainties in some parts of the world. Internally, the economy was affected by serious concerns regarding the financial health of the NBFC sector, the continuing high NPA levels in the banking space, slowing consumption demand and some concerns on the fiscal side. Not to mention the uncertainty caused by the imminent general elections. The Indian economy however continued to be the fastest growing in the world thanks to the reforms of the past few years.

In the year under review, your Bank delivered a strong financial performance on the back 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. At Rs.48,243.2 crore, Net Interest Income rose by 20.3 per cent. Core Net Interest Margin remained stable at 4.3 per cent. Gross Non-Performing Assets (NPAs) at 1.36 per cent is among the lowest in the industry. This was largely due to the Bank's prudent credit evaluation of the targeted customer profile and having a diversified loan book spread across customer segments, products, and sectors plus managing risk-return decisions with discipline. Your Bank's Net Profit at Rs.21,078.1 crore went up by 20.5 per cent.

In addition, the year stood out for one of the largest fund raising in your Bank's history. It also continued to transform lives through Parivartan and securing recognition.

1) Fund Raising

Your Bank raised Rs.23,715.9 crore in the year under review. This comprises a preferential allotment to Housing Development Finance Corporation Ltd of Rs.8,500 crore, a Qualified Institutional Placement of Rs.2,775.0 crore and an ADR offering of $ 1,820 million (Rs.12,440.9 crore). Consequent to the above issuances, share capital increased by Rs.20.89 crore and share premium increased by Rs.23,568.7 crore. This is net of share issue expenses of Rs.126.3 crore. The issuances were made pursuant to the shareholder and regulatory approvals. This has resulted in a strengthening of its capital structure, increasing solvency and shoring up of its Capital Adequacy Ratio.

2) Parivartan

The Bank in the year under review has continued its journey of social commitment through Parivartan which means change. Your Bank firmly believes that businesses cannot prosper if the communities in which they operate don't. This is what has been inspiring its social initiatives. This change has been brought about principally by about 10 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, thus, enabling them to break out of the cycle of poverty. And through its ‘Teaching-The-Teacher' (3T) initiative which has potentially impacted 1.6 crore students as well as the Holistic Rural Development Programme which has already touched another possible 14.4 lakh people spread across more than 1,100 villages. We are also happy to report that in the year under review, your Bank has met the mandatory CSR expenditure 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 most valuable brand for the fourth year in a row in the BrandZ survey of Top 50 Most Valuable Indian Brands. HDFC Bank was also ranked No 1 in India by customers in the first edition of the ‘World's Best Banks' survey by Forbes magazine. The publication partnered with market research firm Statista to measure the best banks in 23 countries and customers were asked to rate banks on overall recommendation and satisfaction, as well as on the 5 key attributes 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 market opportunities and its strong positioning in each of its major franchises. And also make a greater contribution to bridge the divide between India and Bharat be it through its business or social initiatives. This, of course, would not have been possible without the contribution of our over 98,000 employees.

Mission and Strategic Focus

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

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

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

• Deliver superior experience and greater convenience to customers

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

• 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 ethical standards, professional integrity, corporate governance and regulatory compliance. This is articulated through a well-documented Code of Conduct that every employee has to affirm annually that he/she will abide by.

Summary of Financial Performance

Dividend

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

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

Consistent with this policy and in recognition of the overall performance during the year under review, your Directors are pleased to recommend a dividend of Rs.15 per equity share of Rs.2 as against Rs.13 per equity share in the previous year. As you are aware, this dividend will be subject to tax to be paid by the Bank. In terms of revised Accounting Standard (AS) 4 ‘Contingencies and Events occurring after the Balance Sheet Date' as notified by the Ministry of Corporate Affairs through amendments to Companies (Accounting Standards) Amendment Rules, 2016, the Bank has not appropriated proposed dividend from Profit and Loss Account for the year ended March 31,2019. However, the effect of the proposed dividend, including tax on dividend aggregating to Rs.4,924.64 crore, has been reckoned in determining capital funds in the computation of capital adequacy ratio as at March 31,2019.

Ratings

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 at Rs.5,446,613,220 comprising 272,33,06,610 equity shares of Rs.2 each. During the year under review, the Bank issued 3,90,96,817 equity shares to Housing Development Finance Corporation Limited on a preferential basis, 1,28,47,222 equity shares on a qualified institutions placement and 5,25,00,000 equity shares underlying 1,75,00,000 American Depository Receipts (ADRs). Further, 2,37,72,304 equity shares of face value of Rs.2 each were issued pursuant to exercise of Employee Stock Option (ESOP) by the Bank. The information 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 the sub-division of one equity share of the Bank having face value of Rs.2/- each into two equity shares of face value of Re. 1/- each and consequential alteration in the relevant clauses relating to capital of the Memorandum of Association of the Bank. The sub-division of equity shares as above is subject to the approval of the members at the ensuing Annual General Meeting of the Bank.

Further, the Bank had issued 1,14,30,383 underlying equity shares representing Global Depository 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 low trading/conversion volume in GDR, the Board of Directors of the Bank at its meeting held on April 20, 2019 has decided to terminate the GDR program. The requisite notice of termination is being issued to the custodian and the depository.

Capital Adequacy Ratio (CAR)

As on March 31,2019 your Bank's total CAR, calculated in line with Basel III capital regulations, stood at 17.1 per cent well above the regulatory minimum of 11.025 per cent including the Capital Conservation Buffer of 1.875 per cent. Of this, Tier I CAR was 15.8 per cent. The effect of the proposed dividend has been taken into account in computing these ratios.

Macroeconomic and Industry Developments

The Indian economy faced several headwinds both domestic and external for much of the year ended March 31,2019. Encouragingly, despite global headwinds like volatile oil prices, elevated trade tensions, geo-political uncertainties in some parts of the world and interest rate tightening cycle in some of the developed countries notably the US, the Indian economy stood out as an outlier in terms of growth with an estimated growth of 7 per cent in the year under review (as per the second advance estimates of the Central Statistics Office). The economy remains a high growth achiever and various policy reform measures over the past couple of years (such as Goods and Service Tax 2017, Insolvency and Bankruptcy Code 2016 and Bank recapitalization plan 2017) will help improve India's macro-economic stability considerably, going forward. Domestically, India faced issues related to financial health of the NBFC sector, high NPA levels in the banking space, slowing consumption demand and some concerns on the fiscal side. On the back of various measures to address the issue of bad loans in the banking sector, the NPA cycle is now looking to be bottoming out. As per the RBI's December 2018 Financial Stability Report, Gross Non-Performing Assets (GNPA) ratio of scheduled commercial banks declined from 11.5 per cent in March 2018 to 10.8 per cent in September 2018. The ratio is expected to have declined further to 10.3 per cent by March 2019. The Government along with the RBI has also taken several measures to infuse greater liquidity in the NBFC sector and plans to take measures to bring in stability in this sector.

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

On an annual basis, GDP growth is expected to drop to 7 per cent in 2018-19 from 7.2 per cent in 2017-18. From the production side, the current slowdown is mainly on account of the agriculture sector (due to weak kharif season), which is expected to grow at a lower 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 in private consumption remains tepid, Government consumption is expected to sharply slow down to 8.9 per cent in the year ended March 31,2019 from a double digit growth of 15 per cent in the previous year. Going by the 2019-20 Interim Budget, the focus of fiscal policy in the coming year will be on revival of the rural economy (through schemes such as Pradhan Mantri Kisan Samman Nidhi), which is likely to partly boost consumption in the coming year. Overall adherence to fiscal discipline remains critical at this juncture so that productive expenditure is not pruned in a bid to meet the fiscal targets.

Encouragingly, investment revival remains on track in line with the trends in capacity utilization. For the last five quarters, investments growth (Gross Fixed Capital Formation) has averaged at 11.3 per cent much higher than the average of 7.78 per cent for private consumption. Construction activity also seems to be picking up pace with a 9.6 per cent growth in the third quarter of the year under review compared to 8 per cent growth registered in the previous year. The government's focus on low-cost housing and other key infrastructure projects awarded through the roads and highway ministry seems to be having a favorable impact on the construction sector and the positive momentum is likely to continue.

Overall, on the back of the assumption of a normal monsoon season, continued recovery in private investment, gradual traction in private consumption with support from Government-led spending, we expect the real GDP growth to come in at 7 to 7.2 per cent in the 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 under review as well, with the CPI falling to 1.97 per cent in January 2019 driven mainly by lower food inflation. Having averaged 4.3 per cent in the first half of 2018-19, inflation has eased down further in the second half (average close to 2.53 per cent during Oct-Mar 2018-19). However, unwinding of base effect and slight sequential uptick in food inflation led 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 3.4 per cent. Though headline inflation for FY20 is estimated to average higher at 3.7 per cent, 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 of possible rate cuts by the Reserve Bank of India. The RBI had cut the repo rate first in February 2019 and again in April 2019 in order to support the growth momentum in the economy. The Repo Rate now stands at 6 per cent and the monetary policy stance is now "neutral" as against "calibrated tightening" prior to the February policy.

Going forward, one of the major risks to the economy remains sharp increases in oil prices, which could adversely affect inflation, fiscal deficit and the current account deficit. Risks on the external front continue to loom on account of a possible slowdown in the global economy, elevated protectionist tendencies, Brexit related uncertainty in the UK 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 31,2019, remained healthy with Total Net Revenue (Net Interest Income Plus Other Income) rising by 19.1 per cent to Rs.65,869.1 crore from Rs.55,315.2 crore in the previous year. Revenue growth was driven by an increase in both Net Interest Income and Other Income. Net Interest Income grew by 20.3 per cent to Rs.48,243.2 crore due to acceleration in loan growth coupled with Core Net Interest Margin (CNIM) of 4.3 per cent.

Other Income grew by 15.8 per cent to Rs.17,625.9 crore. The largest component was Fees and Commissions, which increased by 21.2 per cent to Rs.13,805.5 crore. Foreign Exchange and Derivatives Revenue was Rs.1,720.4 crore, gain on revaluation and sale of investments was Rs.386.8 crore, and recoveries from written-off accounts were Rs.1,430.8 crore.

Operating (Non-Interest) Expenses rose to Rs.26,119.4 crore from Rs.22,690.4 crore. During the year, your Bank has set up 316 new Banking Outlets and 525 ATMs. This, along with strong growth in retail asset and card products, resulted in higher infrastructure and staffing expenses. Staff expenses also went up due to employee additions and annual wage revisions. Despite higher infrastructure expenses, the Cost to Income Ratio improved to 39.7 per cent from 41.0 per cent.

Total Provisions and Contingencies were Rs.7,550.1 crore as compared to Rs.5,927.5 crore the preceding year. Your Bank's provisioning policies remain more stringent than regulatory requirements.

The Coverage Ratio based on specific provisions alone excluding Write-offs was 71 per cent; including General and Floating provisions, it was 117 per cent. Your Bank made General Provisions of Rs.648.4 crore during the year. Your Bank's Gross Non-Performing Assets (GNPA) were at 1.36 per cent of Gross Advances, as against 1.30 per cent the preceding 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.32,199.6 crore. After providing for Income Tax of Rs.11,121.5 crore, Net Profit increased by 20.5 per cent to Rs.21,078.1 crore from Rs.17,486.8 crore. The Return on Average Net Worth was 16 per cent while the Basic 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.1,244,541 crore, an increase of 17 per cent over Rs.1,063,934 crore on March 31, 2018. Total Deposits rose by 17 per cent to Rs.923,141 crore from Rs.788,771 crore.

Savings Account Deposits grew by 11.1 per cent to Rs.248,700 crore while Current Account Deposits rose by 19.5 per cent to Rs.142,498 crore. Time Deposits stood at Rs.531,943 crore, representing an increase of 19.4 per cent. CASA Deposits accounted for 42.4 per cent of Total Deposits. Advances stood at Rs.819,401 crore, representing an increase of 24.5 per cent. The Bank's domestic loan portfolio of Rs.802,329 crore grew by 24.6 per cent over March 31, 2018. The Bank had a share of approximately 7.2 per cent in Total Domestic Deposits and 8.2 per cent in Total Domestic Advances.

BUSINESS OPERATIONS

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

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.709,085 crore from Rs.580,006 crore in the preceding year while Retail Advances rose by 15 per cent to Rs.432,687 crore from Rs.376,167 crore.

The Personal Loan Business surged to nearly Rs.93,000 crore on the back of strong product offering and speedy disbursal. Happy to report, it emerged as the key driver for the Retail Business in the year under review.

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

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

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

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

In Commercial Vehicles, your Bank was able to ward off intense competition and log robust 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 under review with 1.25 crore credit cards after becoming the first bank in the country to issue one crore credit cards last year. Existing customers accounted for around 80 per cent of the new cards issued.

The Payments Business not only acts as a catalyst for cashless transactions but also spurs consumption. With 2.69 crore debit cards, 1.25 crore credit cards and almost a million acceptance points (across all form factors), your Bank is among the largest facilitators of cashless payments in the country. The Bank's payments business has launched digital offerings such as PayZapp, Bharat QR Code, UPI, and SMS pay solutions. It has also pioneered path-breaking products such as the SmartHub app which facilitates cashless payments for small merchants and DigiPos, which enables traditional PoS machines to accept digital payments. Merchants and customers alike have found these solutions useful.

In the year under review, the Virtual Relationship Management (VRM) programmme gained substantial traction. Through this, relationship managers reach out to customers through remote 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 level plans has been well received since its launch.

As regards physical distribution network, the Bank also added 316 Banking Outlets during the year taking the total to 5,103 spread across 2,748 cities/towns. The share of semi-urban and rural outlets in the total network is 53 per cent, reflecting our continued focus on these markets. The number of ATMs also increased to 13,160 from 12,635.

The total number of customers your Bank catered to as on March 31,2019 was over 4.90 crore up from 4.36 crore in the previous year. The Bank as you are aware operates in the Home Loan Business in conjunction with HDFC Limited. As per this arrangement, the Bank sells HDFC Home Loans while HDFC Ltd approves and disburses them. The Bank receives sourcing fee for these loans and, as per the arrangement with HDFC Ltd, has the option to purchase up to 70 per cent of the fully disbursed loans either through the issue of mortgage backed Pass Through Certificates (PTCs) or by a direct assignment of loans. The balance is retained by HDFC Ltd. Your Bank originated, on an average, Rs.2,100 crore of Home Loans every month in the year under review and purchased Rs.23,982 crore as direct assignment of loans.

Third Party Products:

The Bank distributes Life Insurance, General Insurance and Mutual Funds, often referred to as Third-Party Products. Income from this business grew by 5 per cent to Rs.2,200 crore from Rs.2,091 crore crore and accounted for 16 per cent of Total Fee Income in the year ended March 31,2019 compared with 18 per cent in the preceding year.

Insurance

The open architecture adopted by the Bank for Insurance distribution with nine insurance providers was made more robust by leveraging more branches and increasing the product bouquet. Continuing with the digital focus, straight through process from prospect to proposal stage was introduced with real-time integration across all insurers. All product offerings by insurers were made available on NetBanking platform. Premium mobilization in Life Insurance for the year ended March 31, 2019 was Rs.4,233 crore a growth of 30 per cent over the previous year. This was against the backdrop of an overall industry growth of 10 per cent.

In the Non-Life space, the Bank has increased product offerings, opened new channels, and introduced easy Point of Sale Person Certification for distribution of General and Health Products. It has also introduced new digital platforms like STP, Upscaler Mobile App, and Insurance help-line for continuously improving knowledge levels of the staff as well as easing distribution in true open architecture model. These initiatives are the first of their kind in the industry. Overall General and Health Insurance Business grew by 29 per cent over the previous year with premium mobilization of Rs.2,273 crore. The industry grew by 13 per cent in the same period.

Mutual Funds

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

B) Wholesale Banking

This business focuses on institutional customers such as the Large and Emerging Corporates, SMEs and Government. Your Bank's offerings in this segment include Working Capital and Term Loans as well as Trade Credit, Cash Management, Supply Chain Financing, Foreign Exchange, and Investment Banking services. The Wholesale Banking business recorded a healthy 31.9 per cent growth. The Bank was able to expand its share of the customer wallet, primarily using sharper customisation, cross-selling and expanding into greater geographies. The Bank ended the year under review with a domestic loan book size of Rs.370,000 crore which constituted 46 per cent of the Bank's domestic advances as per Basel II classification.

Corporate Banking, which focuses on large, well-rated companies remained the biggest component of the Wholesale Banking book. The Bank selectively participated in several refinancing cases through the NCLT route of companies which have been acquired by promoters with a good track record.

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

The year under review has been the one that has seen the greater formalisation of the Micro, Small and Medium Enterprises (MSMEs) sector due to the adoption of the Goods and Service Tax platform by several Micro and Small Enterprises. The Bank's advances to MSMEs amounted to Rs 128, 976.5 crore as on March 31,2019.

The Investment Banking business cemented its prominent position in the Debt and Equity Capital Markets. For four consecutive years now, your Bank has been ranked 2nd in the Bloomberg rankings of Rupee Bond Book Runners. The Bank is actively assisting clients in equity fund raising and your Bank is ranked 9th in PRIME Database IPO League Tables for FY 18-19 for private sector issues.

In the Government business, the Bank sustained its focus on tax collections, collecting direct tax of over Rs.3.15 lakh crore and indirect tax of approximately Rs.36,000 crore during the year. In addition to the taxes/duties collected on behalf of several state governments, the Bank also collected over Rs.1.71 lakh crore in the form of GST. It continues to enjoy a pre-eminent position among the country's major stock and commodity exchanges in both Cash Management Services and Cash Settlement Services.

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

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

Your Bank's pre-eminent position in the Wholesale Banking business has secured recognition from Euromoney, a leading global financial publication. The Euromoney Trade Finance Survey has ranked HDFC Bank No 1 in two categories: Best Service and Market Leader in 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 its investments in securities, foreign exchange and cash instruments. It manages the liquidity and interest rate risks on the balance sheet and is also responsible for meeting reserve requirements. The vertical also helps manage the treasury needs of customers and earns a substantial part of its revenues through fee income generated from transactions customers undertake with the Bank while managing their foreign exchange and interest rate risks.

Revenue accrues from spreads on customer transactions based on trade and remittance flows and demonstrated hedging needs. The Bank recorded revenue of Rs.1,720.4 crore from foreign exchange and derivative transactions in the year under review. While plain vanilla forex products were in demand across all customer segments, the demand for derivative products came mostly from large and emerging corporates.

As a part of prudent risk management, the Bank enters into foreign exchange and derivative deals with counterparties after it has set up appropriate credit limits based on its evaluation of the ability of the counterparty to meet its obligations. Where the Bank enters into foreign currency derivative contracts not involving the Indian Rupee with its customers, it typically lays them off in the inter-bank market on a matched basis. For such 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 only residual market risk if any. The Bank also deals in derivatives on its own account, including for the purpose of its own balance sheet risk management.

The Bank maintains a portfolio of Government Securities, in line with regulatory norms governing the Statutory Liquidity Ratio (SLR). A significant portion of these SLR securities are held in the ‘Held-to-Maturity' (HTM) category, while some are held in the ‘Available for Sale' (AFS) category. The Bank is also a Primary Dealer for Government Securities. As a part of this business, as well as otherwise, the Bank holds fixed 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 Government both 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 know that your bank picked up a 9.11 per cent in CSC e-Governance Services India Ltd for a cash consideration of Rs.14.6 crore. This is a company constituted under the Companies Act by MeITY (Ministry of Electronics & Information Technology). CSCs, managed by Village Level Entrepreneurs (VLEs), are the access points for delivery of essential public utility services, social welfare schemes, healthcare, financial, education and agriculture services, apart from a host of B2C services to citizens in rural and remote areas of the country. It is a pan-India network catering to regional, geographic, linguistic and cultural diversity of the country thus enabling the Government's mandate of a socially, financially and digitally inclusive society. Your bank will use this network to offer retail products and banking services to the citizens across the country and further contribute 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 the solution on NEFT/RTGS bulk collection which will further increase the revenue collection share and is facilitating collections of various central government led levies like fees paid to State Pollution Control Boards

b) is enabling Direct Benefit Transfers under various Centrally Sponsored Schemes using the Public Financial Management System (PFMS) to more than 50,000 beneficiaries

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

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

e) has been the first in the country to develop (e-Vittrapravaha) with the State Government of Madhya Pradesh to provide an end-to-end solution for efficient health-care budget 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 at the state and central levels. The offering includes an overdraft secured by their salary account, 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 working with various state governments and incubators/accelerators to promote entrepreneurship. Memoranda of Understanding have already been signed with three state governments to enable execution of varied aspects of their respective start-up policies. Your Bank also works with 12 incubators certified by the Department of Science and Technology, including various Indian Institutes of Technology and Indian Institutes of Management, to identify Social 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 in the 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 rural customers leading to demand for better quality financial products and services. The Rural groups 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 the widest range of products on the asset side of the balance sheet like Auto, 2-wheelers, Personal, 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 the existing ones. An equally important aspect of this village penetration strategy is an initiative which combines financial literacy with financial inclusion where customers in each village would be educated about various products and services of HDFC Bank which can best meet their financial requirements.

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

1) Agriculture and Allied Activities

Your Bank's credit to Agriculture & Allied activities stood at Rs.128,809.32 crore on March 31, 2019, representing an increase of nearly 14 per cent over Rs.113,160.60 crore in the previous year. Over half of India's population depends on agriculture for livelihood. The key to the Bank's success here has been its ability to tap the opportunities 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 Loans, Loans against Gold Jewellery amongst others. Consequently, the Bank has established a strong footprint in the rural hinterland with its asset products. Apart from advising the farmers on their financial needs, your Bank is increasingly focusing on facilitating/educating them on benefits of various government/regulatory schemes such as crop insurance and interest subvention.

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

Our products such as Post-Harvest Cash Credit and Warehouse Receipt Financing enable faster cash flows to the farmer. Credit is also disbursed to allied agricultural activities such as Dairy, Pisciculture, and Sericulture.

Farmer centres or Kisan Dhan Vikas Kendras have been rolled out in Punjab, Maharashtra, Uttar Pradesh and Madhya Pradesh. At these centres, farmers secure information on soil health, mandi prices, various government initiatives and expert advice. 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 payment process. Under this initiative, Multi-function Terminals (MFTs), popularly known as Milk-to-Money ATMs, are deployed in dairy societies. The MFTs link the milk procurement system of the dairy society to the farmers' account to enable faster payments. MFTs have cash dispensers that function as standard ATMs. The transparency in the milk collection process, including the quality of milk, benefits both farmers and society. Payments are credited without the difficulties associated with the cash distribution process. What is more, this creates a credit history which can then be used as the basis for accessing bank credit. Apart from Dairy and Cattle Loans, customers gain access to all bank products including digital offerings such as 10 Second Personal Loans, Kisan Credit Card, Bill Pay, and Missed Call Mobile Recharge. So far your Bank has digitised payments at over 1,000 milk 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.5,900 crore from over Rs.5,500 crore the preceding year. Your Bank is slowly making inroads into a market traditionally dominated by the unorganised sector and pawn brokers. The entry of organised players into the sector has increased both awareness and transparency. The Bank has been able to serve the section of 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 soil health, input quality (seeds and fertilizers), and availability of water and government policy also impact this. So do price realization and storage facilities. Your Bank has launched 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 by natural calamities such as drought, unseasonal rains, hailstorms, and floods. Within regulatory guidelines, the Bank has been providing relief to impacted farmers. It also has systems designed to enable Direct Benefit Transfers in a time-bound manner. The Bank is also exploring the use of remote sensing technologies and analytics to strengthen crop and farm level assessment.

Lending to the agriculture sector, including to the small and marginal farmers is a regulatory mandate as part of priority sector lending requirements. This has inherent credit risks. Your bank has taken various initiatives to cope with the changing agri-lending trend. It has taken steps pertaining to delinquency management like root-cause analysis of critical locations, close monitoring of delinquency, prioritisation based recovery strategy, system automations. Further, your bank is building upon segment specific approach like funding to horticulture clusters, supply chain finance, Agribusiness, MSMEs and Dairy farmers. It also continues to engage closely with farmers to mitigate risks and protect portfolio quality. This is reinforced further by a focus on the liability business.

2) Micro, Small and Medium Enterprises (MSME)

Advances to the MSME segment as on March 31, 2019 stood at Rs.128,976.48 crore as against Rs.89,042.1 crore a year ago. Its advances to the Micro Enterprises alone stood at Rs.55,227.96 crore as on March 31, 2019. The MSME sector serves as an important engine for economic growth and is one of the largest employers in the economy.

The year ended March 31, 2019 has seen a steady shift towards digital transactions owing to GST implementation, the push by the Government and the advent/evolution of increasingly tech savvy entrepreneurs. Your Bank is leveraging this trend to create faster solutions. In line with this, the Bank has recently launched an analytics based credit appraisal tool by which a customer can get a sanction within 3 hours for loans ranging between Rs.11 Lakhs to Rs.5 crore. This is facilitated by submission of digital bank statements and a combination of scores arrived by our analytical model.

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

On the trade side, the focus has been on customer engagement for increasing penetration of Trade on Net application. This, as you are probably aware is a complete enterprise trade solution for customers engaged in domestic as well as foreign trade enabling them to initiate 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 country through the combination of an extensive physical network and a robust digital suite of products and services. Today, over 53 per cent of the Bank's outlets are located in rural and semi-urban areas. The Bank also offers last mile access through mobile applications such as BHIM, UPI, USSD, Scan and Pay, and RuPay enabled Micro-ATMs.

To bring more under-banked sections of the population into formal financial channels, your 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 under review, loans to the tune of Rs.7,168.7 crore were extended under the Pradhan Mantri Mudra Yojana (PMMY) and nearly Rs.500.6 crore under the ‘Stand up India' scheme to 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 skill training, livelihood financing, and creating market linkages. Further details are provided in 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 the overseas 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 a large and growing Indian diaspora.

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

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

SOCIAL COMMITMENT

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

Parivartan-A Step Towards Progress

Parivartan is your Bank's umbrella brand for all its social initiatives. Parivartan or ‘Change' as it means in English seeks to bring about change in the lives of people making them self-reliant and part of the national mainstream. Working largely through communities, 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 belief is that businesses should support the communities in which they operate. We are happy to report that your Bank, through its several social initiatives (including SLI) has made a difference to the lives of over 5 crore Indians.

Rural Development

The Holistic Rural Development Programme (HRDP) is born out of the conviction that the nation will progress only when rural India grows. Over half the country's population lives in rural areas and is primarily dependent on agriculture for livelihood. Our efforts here are focused in the areas of soil, water and natural resource management and sanitation, issues that affect rural India. These are often multi-pronged interventions. Soil conservation for instance will typically cover educating people about use of organic fertilisers. Water management will entail construction, renovation and maintenance of water harvesting structures for improving surface and ground water availability. Likewise educating people on renewable energy often forms part of our natural resource management efforts.

Spread over 17 states, the programme covers over 3.6 lakh households across more than 1,100 villages. Over 26,000 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 education is a focus area under Parivartan. Your Bank's efforts in this area include teacher training, scholarships and career guidance. It also includes providing infrastructure support, such as building toilets in schools and improving classrooms. At the community level, this entails educating people on the importance of Water, Sanitation and Hygiene (WaSH) and creating awareness on issues related to road safety and healthy financial practices.

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

Skills Training and Livelihood Enhancement

Formal education remains a dream for lakhs of Indians. Your Bank under Skills Training and Livelihood Enhancement targets people in this section of society in rural India and imparts income generating skills, primarily in agriculture and allied areas such as dairy and poultry. The objective is to help these people find jobs locally, enhance their household income, and prevent migration. The nationwide programme has benefited over 1,00,000 individuals (excluding those trained under the Sustainable Livelihood Initiative or SLI which is explained in detail later). As a part of this, more than 40,000 youth have received placement- linked skill development training. Career counselling has been provided 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 by empowering women and helping them break the vicious circle of poverty. Empowering women, we believe, means empowering families. Women form Self Help Groups (SHGs) or Joint Liability Groups (JLGs). The women under the programme are given occupational skills training, financial literacy, and credit counselling and livelihood finance and market linkage. The Bank has a Board approved plan to cover 1 crore households against which 96.7 lakh have been covered.

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

1) It's an all-women programme

2) It covers womenfolk across the length and breadth of a country as vast as India. It is 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 impacted potentially, this is one of the world's largest such programmes

4) Over 10,000 dedicated, passionate employees of the Bank constituting around 10 per cent 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 schools as well as the community, have made a substantial difference to the lives of students in rural India.

At the heart of these programmes are community-led sanitation campaigns that promote hygienic conditions in rural areas through appropriate wastewater disposal. These initiatives are supplemented by construction of toilets and provision of clean drinking water. Nearly 7,000 school toilets and over 15,000 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 12th edition in 2018, your Bank collected over 3 lakh units of blood in a single day which is nearly 42 per cent higher than the previous year. What started off as a small initiative in 2007 with the participation of just 4,000 volunteers has now grown into a movement with over 3.5 lakh people from all walks of life participating in the last edition. This included those from colleges, employees of private and public sector, and the defence establishment. Nearly 4,000 camps were held across 1,100 cities in India.

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

Financial Literacy and Inclusion

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

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

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

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

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 our functioning.

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

1) People, Culture, Integrity and Ethics

Your Bank considers nurturing and promoting a culture built on the foundation of ethics and integrity as a fundamental principle. And ‘People' is one of your Bank's Core Values. What this means is that your Bank hires people with not only the right skill sets but also those who have similar values and can fit into its culture. Needless to say there is no compromise when it comes to ethics. These values are reinforced further after onboarding. Your Bank has an institutionalized and well-documented code of conduct, which every 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 current fast paced digital environment. What is critical is recruiting scientifically and deploying resources quickly. Keeping in mind the synergies needed to run a successful talent acquisition process, the entire function has been reconfigured. A hub and spoke recruitment model, aided by centers of excellence leveraging new technology, analytics and capability building have been created.

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

Career Management:

Your Bank's core career philosophy is that after hiring right a conducive environment is created for employees to develop and grow. This is done through systematic investment of time in career discussion with employees, competency assessment and intensive functional and behavioral training through Gurukul-our in-house programme. The Bank also facilitates inter-departmental job movements to employees to help them stay motivated and engaged.

High Touch Employee Connect Programmes:

Your Bank conducts popular events at both local and national levels. While most of these events are open to employees, some are meant for families as well. Some of the popular events include Josh Unlimited-a pan India sports event; Hunar-a pan India in-house talent competition; Xpressions-a pan India in-house drawing competition; Corporate Photography contest and Wanderers-a one-day trek for employees and their children. Events of these nature touch the lives of close to 60,000 people across the country ensuring a vibrant workplace and building an emotional connect with the organisation.

Training and Development:

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

The product training and advanced programmes enable skill development and, regular upgrading to build expertise. The training methodology has evolved to application based training including simulations, case studies, and games. Leveraging technology, many of the class room programmes are now being delivered online. The role-specific learning plan ensures effective use of blended learning method. In addition to this to ensure that employees are assisted on the job, there is a help-line ‘Ask the Trainers' which clarifies on relevant questions within 24 hours.

Rewards and Recognition:

Your Bank aims to reward performance as it is the key to keeping employees motivated as well as being competitive in the market. It aims to do this while ensuring that there is no deviation from ethics, regulatory guidelines and the principle of maintaining internal equity.

2) Digital 2.0

Your Bank has always been at the forefront of digital innovation in the industry be it ATMs, 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 the Bank and customer. For your Bank it brings about cost efficiencies through automation and reduction in origination costs while simultaneously increasing revenue opportunity. It also 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 an ability to buy bank products from physical/ digital channels alike and also having a conversation with it.

The key elements of the Digital 2.0 strategy are A) Reimagined Net and Mobile Banking Experience B) Digital Marketing, Analytics and Digital Origination C) Digital Innovations D) 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 channels, Digital 2.0 has all been about enriching and customising the experience. Take the new Mobile Banking App for instance. It combines the user journeys that customers go through when they use the app into simple categories such as Save, Invest and Pay. It is a large step towards intuitive and simplified banking. This has been built through extensive customer research and by partnering with world leading platform and design companies. The App did encounter teething problems leading it to be withdrawn for a while. Post relaunch it 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, context, needs/wants on the digital channels. It is able to offer relevant and personalized products/offers through their channel of preference. Through more intelligent digital marketing campaigns coupled with the ability to close/sell products digitally, the Bank aims to step up the proportion of unassisted digital sourcing of products to total sourcing over the next two to three years.

C) Digital Innovations: Building on the success of the last few years' your Bank has been able to position itself in the forefront of innovation. One clear example of this has been the creation of EVA India's first AI powered Chatbot. It engages in an intuitive, interactive way with people' and responds to their queries 24*7 instantaneously. Bank on Chat, the other AI conversational offering allows customers to solve lifestyle needs by helping 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 client application/system and Bank system. This allows exchange of data between the Bank and the customer in a seamless and secure manner. Thus it enables expanding the eco system through alliances and entering new markets. Through open innovation and API banking your Bank has started enabling third party service providers to connect to the bank's pre identified internal applications/services securely allowing it to offer its products/services on their properties extending the reach exponentially. Already some platform players have been onboarded through which customers can now get connected to the Bank, book/renew/liquidate Fixed Deposits, and Recurring Deposits and apply for digital products. This includes an initiative with CSC, a digital India Initiative to take Auto/Personal/2-wheeler/Business Loans to remote locations and thus champion the cause of digital inclusion. Similarly, an initiative was taken to offer all eligible products to a new to bank customer at the time of on boarding and enabling in principle approval for the same.

The Bank's efforts have been reinforced through external partnerships like Industry academia interactions, Accelerators Engagement Program, Digital Innovation Summit and Digital Innovations Day program. Your Bank has already partnered with over 165 leading institutions including the elite ones like The Indian Institutes of Management (Ahmedabad, Bangalore, and Lucknow), Indian Institute of Technology (Delhi), Wharton University and University 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 unique as it is the only digital channel with a human face/touch. It has the depth and skill, as also the agility to offer concierge services. The channel is a "bank within the bank" managing over six million customers. It provides connect with customers through a combination of technology and personalised conversations. The strength of the Virtual Team is its robust training strategies which enables Virtual Relationship Managers to adopt individual personalized narratives leading to enhanced relationships and at the same time helping increase the overall productivity for the Bank. Additionally, the Bank's Learning and Development Team has significantly contributed towards spearheading Leadership Programmes for the supervisory force. In the future, emerging technologies like AI, RPA IoT/ AR/ VR will be continually pursued across relationship banking, digital self-service, branch banking, risk, marketing, collections, HR and be embedded seamlessly in 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 able to identify the right technology solutions for the business and deploying them in a timely manner 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 also gone on to become extremely popular with customers. Your Bank has gone further with the implementation 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 of information.

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

This has been further supplemented with an assisted Savings Bank account opening App in the 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 framework rides on 4 pillars viz:-Protect, Detect, Respond & Recover. The Chief Information Security Officer (CISO) is the person who is responsible overall for ensuring effective information and cyber security programme in the bank. There is also a committee of the Board which dedicatedly looks into cyber security issues and preparedness.

In the year under review, the Bank enhanced its cyber security protocol by enhancing data protection and cyber defence measures. The Bank also widened coverage of Security Incident and Event Management (SIEM), which provides a comprehensive and centralised view of the security scenario of IT infrastructure. Deception Technology Solution was deployed to detect, analyse and defend against advanced attacks often in real-time. In the case of your 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 information transmitted across the web in a formatted piece of structured data. Protection against malware, ransomware and denial of service attacks have been strengthened further.

Regular tests to assess the vulnerability of the IT infrastructure and applications and remedy where necessary are routine. As are anti-phishing services that help in shutting down phishing sites and protecting the customers from fraud. Risk engine and transaction monitoring systems monitor suspicious transactions on Internet Banking, ATM and e-commerce channels.

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

5) Service Quality Initiatives and Grievance Redressal

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

While the Bank has various touch points for the customers such as branch, managed program and phone banking, it has further enhanced the customer experience through a Virtual Relationship Manager (VRM). All this ensures that customers have an omni channel experience for any of their financial needs across various touch points. Your Bank has put robust processes in place to regularly monitor and measure quality of service levels not only at various touch points but also at a product and process level by Quality Insurance Group.

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

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

Your Bank is at the forefront of developing innovative financial solutions and digital platforms. This, coupled with concerted efforts at creating awareness among customers, has led to an increase in the use of its digital channels as well as customer loyalty. Keeping the customer's interest as the primary focus, your Bank has formulated a Board Approved Customer Protection Policy, thereby limiting liability of customers in case of unauthorised electronic banking transactions and thus increasing a secure feeling among customers. During the year, bank has conducted 39 customer awareness sessions touching over 7,300 customers.

This multi-pronged approach, has resulted in continuous improvement in service standards as well as customer satisfaction.

I. Risk Management and Portfolio Quality

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

The hallmark of the Bank's Risk Management function is, it is independent of the business 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 the credit quality of borrowers or counterparties. Losses stem from outright default or reduction in portfolio value. Your Bank has a distinct credit risk architecture, policies, procedures and systems for managing credit risk in both its retail and wholesale businesses. Wholesale lending is managed on an individual as well as portfolio basis. By contrast, retail lending, given the granularity of individual exposures, is managed largely on a portfolio basis across various products and customer segments. For both categories there are robust front-end and back-end systems in place to ensure credit quality and minimise loss from default. The factors considered while sanctioning retail loans include income, demographics, previous credit history of the borrower and the tenor of the loan. In wholesale loans, credit risk is managed by capping exposures on the basis of borrower group, industry, credit rating grades and country amongst others. This is backed by portfolio diversification, stringent credit approval processes and periodic post-disbursement monitoring and remedial measures. Your Bank has been able to ensure strong asset quality through volatile times in the lending environment by stringently adhering to prudent norms and institutionalized processes.

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

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

Digital Lending and Credit Risk

Driven by rapid advances in technology, digitisation is increasingly becoming a key differentiator for customer retention and service delivery in the banking sector. Digital lending enables customers to secure loans at the click of a button in a matter of minutes, if not seconds. However, there are also attendant risks associated with it and your Bank has put in place appropriate checks and balances to manage these risks. Such loans are sanctioned primarily to the Bank's pre-existing customers. Often, they are customers across multiple products and so the Bank is familiar with their credit history and risk profile. This makes it possible to evaluate and decide on their fresh requirements almost instantly. Besides, most of the credit checks and scores used by the Bank in traditional process underwriting are replicated in digital loans. Finally, the Bank has an independent model validation unit that minutely assesses the models used to generate the credit scores for such loans. These models are monitored, reviewed periodically, back-tested and corrective action is taken whenever needed.

Market Risk

Market Risk arises largely from the Bank's statutory reserve management and trading activity in interest rates, equity and currencies market. These risks are managed through a well-defined Board approved Investment Policy and Market Risk Policy that caps risk in different trading desks or various securities through trading risk limits/triggers. The risk measures include position limits, gap limits, tenor restrictions, sensitivity limits, namely, PV01, Modified Duration of Hold to Maturity Portfolio and Option Greeks, Value-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 and interest rate sensitivity limits are computed and monitored on an intraday basis. This is supplemented by a Board approved stress testing policy and framework that simulates various market risk scenarios to measure losses and initiate remedial measures. The market risk capital charge of your Bank is computed on daily basis using the Standardised Measurement Method applying the regulatory factors.

Liquidity Risk

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

Your Bank's framework for liquidity and interest rate risk management is spelt out in its Asset Liability Management Policy that is implemented, monitored and periodically reviewed by the Asset Liability Committee (ALCO). As a part of this process, the Bank has established 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 interest income and market value impacts help mitigate interest rate risk. This is reinforced by a comprehensive Board approved stress testing programme covering both liquidity and interest rate risk. Your Bank conducts various studies to assess the behavioral pattern of non-contractual assets and liabilities and embedded options available to customers, which are used while managing maturity gaps. Further, your Bank also has necessary framework in place to manage intraday liquidity risk.

The Liquidity Coverage Ratio (LCR), a global standard, is used to measure a bank's liquidity position. LCR seeks to ensure that the Bank has an adequate stock of unencumbered High-Quality Liquid Assets (HQLA) that can be converted into cash easily and immediately to meet its liquidity needs 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 1, 2019 and your Bank's LCR stood at 117.66 per cent on a consolidated basis for the year ended March 31, 2019.

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

Operational Risk

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

a. Framework and Process

To manage operational risks, the Bank has in place a comprehensive and operational risk management framework, whose implementation is supervised by the Operational Risk Management Committee (ORMC) and reviewed by the RPMC of the Board. An independent Operational Risk Management Department (ORMD) implements the framework. Under the framework, the Bank has three lines of defence. The first layer of protection is provided by the Business line (including support and operations) management. These managers are primarily responsible for not only managing operational risk on a daily basis, but also for maintaining strict internal controls, designing and implementing internal control-related policies and procedures. The second line of defence is the ORMD, which develops and implements policies, procedures, tools and techniques to assess and monitor the adequacy and effectiveness of the Bank's internal controls.

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

b. Internal Control

Your Bank has implemented sound internal control practices across all processes, units and functions. The Bank has well laid down policies and processes for management of its day-to-day activities. The Bank follows established, well-designed controls, which include traditional four eye principles, effective separation of functions, segregation of duties, call back processes, reconciliation, exception reporting and periodic MIS. Specialised risk 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 latest technologies to support various operations. This throws up operational risks such as business disruption, risks related to information assets, data security, integrity, reliability and availability amongst others. The Bank has put in place a governance framework, information security practices and business continuity plan to mitigate information technology related risks. An independent assurance team within Internal Audit provides assurance on the management of information technology related risks. The Bank has a robust Business Continuity and Disaster Recovery plan that is periodically tested to ensure that it can meet any operational contingencies. There is an independent

Information Security Group that addresses information security related risks. A well-documented Board approved information security policy is put in place. In addition, employees mandatorily, and periodically undergo information security training and sensitisation exercises.

d. Fraud Monitoring and Control

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

Compliance Risk

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

ICAAP

The Bank has a structured management framework in the Internal Capital Adequacy Assessment Process (ICAAP) to identify, assess and manage all risks that may have a material adverse impact on its business/financial position/capital adequacy. The ICAAP framework is guided by the Bank's Board approved ICAAP Policy. Additionally, the Board approved Stress Testing Policy and Framework entails the use of various techniques to assess 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 assessed under such assumed scenarios using sensitivity factors that generally relate to their impact on profitability and capital adequacy.

Group Risk

Your Bank has two subsidiaries, HDB Financial Services Limited and HDFC Securities Limited. The Board of each subsidiary is responsible for managing their respective risks (Credit Risk, Market Risk, Operational Risk, Liquidity Risk, Reputation Risk). The ICAAP at the subsidiaries is overseen within the Bank's ICAAP framework. Stress testing for the group as a whole is carried out by integrating the stress tests of the subsidiaries. Similarly, capital adequacy projections are formulated for the group after incorporating the 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, had issued a roadmap for implementation of Indian Accounting Standards (IND-AS) for scheduled commercial banks, insurers/insurance companies and non-banking financial companies. This roadmap required these institutions to prepare IND-AS based financial statements for the accounting periods beginning from April 1, 2018 onwards with comparatives for the periods beginning April 1, 2017 and thereafter. The Reserve Bank of India (RBI), vide its circular dated February 11, 2016 required all scheduled commercial banks to comply with IND-AS for financial statements for the periods stated above. The RBI did not permit banks to adopt IND-AS earlier than the timelines stated above. The said guidelines also state that RBI shall issue necessary instructions/ guidance/clarifications on the relevant aspects for implementation of IND-AS as and when required.

The implementation of IND-AS by banks requires certain legislative changes in the format of financial statements to comply with disclosures required by IND-AS. The change in format requires an amendment to the third schedule of the Banking Regulation Act, 1949 to 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 RBI vide its Statement on Developmental and Regulatory Policies dated April 5, 2018 had deferred the implementation of IND-AS by one year by when the necessary legislative amendments were expected. The legislative amendments recommended by the RBI are under consideration of the Government of India. Accordingly, the RBI, vide its circular dated March 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 way the Bank prepares and presents its financial statements. The areas that are expected to have significant accounting impact on the application of IND-AS are summarised below:

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

2) Interest will be recognised in the income statement using the effective interest method, whereby the coupon, fees net of transaction costs and all other premiums or discounts 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 be recognised as staff expense in the income statement over the vesting period of the stock options.

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

Stage 1: 12 Months ECL

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

Stage 3: Lifetime ECL-Credit Impaired

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

5) Accounting impact on the application of IND-AS at the transition date shall be recognised 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 recognition and measurement principles of IND-AS as specified under Section 133 of the Companies Act, 2013, 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 and transition to IND-AS, based on the updated regulations and accounting standards/ guidance and business strategy at the date of actual transition, could differ from those reported in the fit-for-consolidation information.

III. Internal Controls, Audit and Compliance

The Bank has put in place extensive internal controls and processes to mitigate operational risks, including centralised operations and ‘segregation of duty' between the front office, mid-office and back office. The front-office units usually act as customer touch-points and sales and service outlets. The entire processing, accounting and settlement of transactions is carried out by the back-office in the bank's Core Banking System. The policy framework, definition and monitoring of limits is carried out by various mid-office and risk management functions. The credit sanctioning and debt management units are also segregated and do not have any sales and operations responsibilities.

The Bank has set up various executive-level committees, having participation from various business and control functions, that are designed to review and oversee matters pertaining to capital, assets and liabilities, business practices and customer service, operational risk, information security, business continuity planning and internal risk-based supervision amongst others. The control functions set standards and lay down policies and procedures by which the business functions manage risks including compliance with applicable laws, compliance with regulatory guidelines, adherence to operational controls and relevant standards of conduct.

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

The Bank has various Preventive controls viz, (a) Limited and need-based access to systems by users (b) Dual custody over cash and near-cash items (c) Segregation of duty in processing of transactions vis-a-vis creation of user IDs (d) Segregation of duty in processing 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 the earmarking of line/limit (fund as well as non-fund based) assigned to the customer (h) STP processes between Core Banking System and payment interface systems for transmission of messages (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 log reports) by an independent person i.e. to ascertain that entries in the Core-Banking System/messages in payment interface systems are based on valid/authorised transactions and 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 the Nostro credits and debits (External or Internal) regularly to avoid/identify any unreconciled/unmatched entries passing through the system (e) Reconciliation of all Suspense 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 independently evaluating the adequacy and effectiveness of all internal controls, risk management, governance systems and processes and is manned by appropriately qualified personnel.

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

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

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

To ensure independence, the Internal Audit function has a reporting line to the Chairman of the Audit Committee of the Board and a dotted line reporting to the Managing Director.

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

The Bank has a comprehensive Know Your Customer, Anti Money Laundering (AML) and Combating Financing of Terrorism (CFT) policy (based on the RBI guidelines/provisions of the Prevention of Money Laundering Act, 2002) incorporating the key elements of Customer Acceptance Policy, Customer Identification Procedures, Risk Management and Monitoring of Transactions. 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 and sustainable KYC AML and CFT Compliance Programme. The adherence to the guidelines prescribed in the policy is monitored by the Bank at various stages of the customer lifecycle. Your Bank has robust controls in place to ensure adherence to the KYC guidelines at the time of account opening. The Bank also has a continuous review process in the form of transaction monitoring including a dedicated AML CFT monitoring team, which carries out extensive transaction reviews for identification of suspicious patterns/trends which act as an early warning signal for the Bank to carry out enhanced due diligence and appropriate action thereafter. The status of adherence to the KYC, AML and CFT guidelines is also placed before the Audit Committee of the Board for their review at quarterly intervals.

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

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

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

IV. Responsible Financing

Your Bank is committed to Responsible Financing and refrains from funding projects that have an adverse impact on Environment, Health and Safety (EHS). EHS is an integral part of the bank's overall credit risk assessment and monitoring process. Every project funded has to pass the Bank's muster in terms of the EHS risk it entails, potential impact and mitigation 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 have to 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 of the LIE's assessment report are then discussed with the client to ensure compliance.

The LIE regularly monitors such projects during the construction period through site visits and reports progress which includes status of approvals and relief and rehabilitation measures undertaken. Your Bank officials also conduct independent site inspections from time to time to ensure that the project is progressing to the Bank's satisfaction.

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

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

The RM records outstanding EHS issues if any and follows them up with the client for prompt resolution. The Bank levies default interest in case of deviations and, thus, ensures compliance with the agreed EHS norms. If there are significant deviations that could affect the viability of the project, the Bank reserves the right to either reduce its exposure or recall the loan.

V. Integrated Reporting (IR)

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

Subsidiary Companies

Your Bank has two subsidiaries, HDB Financial Services Limited (HDBFSL) and HDFC Securities Limited (HSL). HDBFSL is a leading NBFC that caters primarily to segments not covered by the Bank while HSL is among India's largest retail broking firms. The financial results of the subsidiaries have been prepared in accordance with notified Indian Accounting Standards (‘Ind-AS') with effect from April 1, 2018 (April 1, 2017 being the transition date). Accordingly, the financial results for the comparative reporting period 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.3,378.8 crore for the year ended March 31, 2019, from Rs.2,882.2 crore in the previous year. This resulted in a Net Profit rise of 23.6 per cent to Rs.1,153.2 crore from Rs.933 crore. Net NPA levels stood at 1.12 per cent on March 31, 2019.

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

Compelling Product Offering

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

With a seamless distribution channel and a committed workforce, HDBFS brings in convenience to customers.

Focus on Phygital: Physical cum Digital

With its ever-growing network of 1,350 branches across 961 cities/towns, HDBFS is reaching out to customers spread across the country. Over 85 per cent of its branches are outside the top 25 cities of India. This means that a branch and customer relationship manager are never too far from the customer.

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

This would not have been possible without a committed workforce of over 93,000. The quest for growth has also been balanced by a robust risk management framework which has enabled net NPA levels of about 1 per cent (among the lowest in the industry) and strong credit ratings. HDBFSL's long-term debt is rated AAA/stable by CARE & CRISIL and its short-term debt is rated A1+ by CARE & CRISIL, indicating the highest degree of safety regarding 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 as forms processing, documents verification, finance and accounting services and correspondence management. HDBFS also delivers front office services such as contact centre 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 of financial services. In the year under review, HSL had 7 lakh transacting customers, the third highest number of active (transacting) customers among all broking houses.

The focus on digitisation continued but the percentage of customers accessing HSL's services digitally decreased to 68 per cent from 70 per cent in the previous year. The percentage 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 on digital offerings, HSL consolidated its existing branches to end with 278 branches across 165 cities/towns at the end of the year.

The company's performance must be seen in the context of the overall macroeconomic scenario. While the capital market indices did grow on a year on year basis the gains were not as significant as in the previous year. Globally this was due to the Federal Reserve's interest rate hikes, volatile oil prices and the US-China trade war. Domestic factors that impeded capital market performance were the NBFC crisis and a potential India-Pakistan conflict towards the end of the year.

In the year under review, HSL also won many industry accolades. Special mention must be made of the Digital Excellence Awards for Conversational Investing which it won in the Economic Times BFSI Innovation Tribe Awards 2018 and in the Digital Excellence Awards 2018. HSL was also judged as India's Most Ethical Company in Financial Services by World CSR Congress. It also won the Most Attractive Brand in the category of Retail Broking awarded by Trust Research Advisory (TRA). In the Outlook Money Awards 2018, HSL was the runner 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 may write to HDFC Bank. These documents will also be available for inspection by shareholders at the registered offices of the Bank and its two subsidiaries.

Number of Meetings of the Board, attendance, meetings and constitution of various Committees

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

Extract of Annual Return

Pursuant to Section 134 (2) (a) and Section 92 (3) of the Companies Act, 2013, the extract of the Annual Return in the prescribed format (MGT-9) is annexed as ANNEXURE 3 to this Report. Further, the Annual Return of the Bank in the prescribed Form MGT-7 is available 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 Central Government 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, 2013, the Board of Directors hereby state that:

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

• 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, 2019 and of the profit of the Bank for the year ended on that date

• We have taken proper and sufficient care for the maintenance of adequate accounting records in accordance with the provisions of the Companies Act, 2013, for safeguarding the assets of the Bank and for preventing and detecting fraud and other irregularities

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

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

• We have devised proper systems to ensure compliance with the provisions of all applicable 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 from time to time.

Auditors

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

During the year ended March 31,2019, fees paid to the Statutory Auditors (S.R. Batliboi & Co. LLP) and its network firms are as follows:

*includes fees classified under share issue expenses, towards certification and other attest 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 the Bank's subsidiaries is concerned, during the year under review, there have been no strategic downstream investments made by Bank in its subsidiaries. Accordingly, the Bank has 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), as prescribed in Form AOC-2 under Rule 8 (2) of the Companies (Accounts) Rules, 2014 is enclosed as ANNEXURE 4.

Particulars of Loans, Guarantees or Investments

Pursuant to Section 186 (11) of the Companies Act, 2013, the provisions of Section 186 of Companies Act, 2013, except sub-section (1), do not apply to a loan made, guarantee given or security provided or any investment made by a banking company in the ordinary course of business. The particulars of investments made by the Bank are disclosed in Schedule 8 of the Financial Statements as per the applicable provisions of Banking Regulation 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 the Companies (Accounts) Rules, 2014 the performance and financial position of the Bank's subsidiaries and associates are enclosed as ANNEXURE 5 to this report. There were no entities which became or ceased to be the Bank's subsidiaries, associates or joint ventures during the year.

Whistle Blower Policy/Vigil Mechanism

The Bank encourages an open and transparent system of working and dealing amongst its stakeholders. While the Bank's "Code of Conduct & Ethics Policy" directs employees to uphold company values and conduct business with integrity and highest ethical standards, the Bank has also adopted a "Whistle Blower Policy" which encourages its employees and various stakeholders to bring to the notice of the Bank any issue involving compromise/ violation of ethical norms, legal or regulatory provisions, actual or suspected fraud etc., without any fear of reprisal, discrimination, harassment or victimization of any kind. All such concerns/ complaints are received by the Chief of Internal Vigilance of the Bank and/or by the Whistle Blower Committee through a dedicated email ID or by way of letters etc. All such complaints are enquired into by the appropriate authority within the Bank while ensuring confidentiality of the identity of such complainants. On the basis of their investigation, if the allegations are proved be correct, then the Competent Authority shall recommend to the appropriate Disciplinary Authority to take suitable action against the responsible official and required corrective measures in consultation with the concerned stakeholders. The decision of the Whistle Blower Committee is final and binding on all. Preventive measures or any other action considered necessary is also taken forward by the Competent Authority.

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

Statement on Declaration by Independent Directors

Mrs. Shyamala Gopinath, Mr. Malay Patel, Mr. Umesh Chandra Sarangi are the Independent Directors whereas Mr. Sanjiv Sachar, Mr. M. D. Ranganath and Mr. Sandeep Parekh are the Additional Independent Directors on the Board of the Bank as on March 31, 2019. All the Independent Directors and Additional Independent Directors have given their respective declarations under Section 149 (6) and (7) of the Companies Act, 2013 and the Rules made thereunder. In the opinion of the Board, the Independent Directors fulfil the conditions relating to their status as Independent Directors as specified in Section 149 of the Companies 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 for evaluation 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 for the evaluation of the Board, its Committees and the individual members of the Board (including the Chairperson), designed in accordance with the said framework and covering various aspects of the performance of the Board and its Committees, including composition and quality, roles and responsibilities, processes and functioning, adherence to Code of Conduct and Ethics and best practices in Corporate Governance was sent out to the Directors. The responses received to the questionnaires on evaluation of the Board and its Committees were placed before the meeting of the Independent Directors for consideration. The assessment of the Independent Directors on the performance of the Board and its Committees was subsequently discussed by the Board at its meeting.

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

The declarations from the Directors other than members of the NRC are placed before the NRC and the declarations of the members of the NRC are placed before the Board. Assessment on whether the Directors fulfil the said criteria is made by the NRC and the Board on an annual basis. In addition, the framework/policy approved by the NRC provides for a performance evaluation of the Non-Independent Directors by the Independent Directors on key personal and professional attributes. In addition to the above parameters, the Board also evaluates fulfillment of the independence criteria as specified in SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 by the Independent Directors of the Bank and their independence from the management. Such performance evaluation has been duly completed as above. As Mr. Sandeep Parekh and Mr. M. D. Ranganath were recently appointed as Additional Independent Directors on the Board of the Bank with effect from January 19, 2019 and January 31,2019 respectively, they abstained from participating in the 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 for Directors of the Bank. The Policy lays down the criteria for identification of persons who are qualified and ‘fit and proper' to become Directors on the Board- such as academic qualifications, competence, track record, integrity, etc. which shall be considered by the NRC while recommending appointment of Directors. The Policy is available on the website of the 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 Senior Management is governed by the Compensation Policy of the Bank. The same is available at the web-link https://www.hdfcbank.com/assets/pdf/Compensation-Policy.pdf. The Compensation Policy of the Bank, duly reviewed and recommended by the NRC has been articulated in line with the relevant Reserve Bank of India guidelines.

Your Bank's Compensation Policy is aimed to attract, retain, reward and motivate talented individuals critical for achieving strategic goals and long term success. The Compensation Policy is aligned to business strategy, market dynamics, internal characteristics and complexities within the Bank. The ultimate objective is to provide a fair and transparent structure that helps the Bank to retain and acquire the talent pool critical to building competitive advantage and brand equity.

Your Bank's approach is to have a pay for performance culture based on the belief that the Performance Management System provides a sound basis for assessing performance holistically. The compensation system should also take into account factors such as roles, skills/competencies, experience and grade/seniority to differentiate pay appropriately on the basis of contribution, skill and availability of talent on account of competitive market forces. The details of the Compensation Policy are also included in Schedule 18 Notes forming part of the Accounts-Note no. 24. Non-Executive Directors are paid remuneration by way of sitting fees for attending meetings of the Board and its Committees, which are determined by the Board based on applicable regulatory prescriptions.

Further, expenses incurred by them for attending meetings of the Board and Committees are reimbursed at actuals. Pursuant to the relevant RBI guidelines and approval of the shareholders, each of the Non-Executive Directors, other than the Chairperson, are paid profit-related commission of Rs.1,000,000 (Rupees Ten Lakh Only) per annum.

Mr. Aditya Puri is the Non-Executive Chairman of HDB Financial Services Limited, subsidiary 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's subsidiaries as on March 31, 2019.

Succession Planning

The Bank's Nomination and Remuneration Committee (NRC) also oversees matters of succession 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, the Board will identify a successor and work to ensure that this is done in a manner that will allow appropriate time for an effective transition of responsibilities. Towards this end, the Nomination & Remuneration Committee of the Board will constitute a Search Committee 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 by any regulators or courts or tribunals against the Bank impacting the going-concern status and Bank's operations in future.

Directors and Key Managerial Personnel

In compliance with Section 152 of the Companies Act, 2013, Mr. Srikanth Nadhamuni will retire by rotation at the ensuing Annual General Meeting and is eligible for re-appointment.

During the year, Mr. Partho Datta and Mr. Bobby Parikh ceased to be Directors of the Bank from close of business hours on September 29, 2018 and January 26, 2019 respectively, on completing the maximum permitted tenure of eight years as per Banking Regulation Act, 1949. Your Directors place on record their sincere appreciation for the contribution made by Mr. Partho Datta and Mr. Bobby Parikh during their tenure with the Bank and wishes them well in their future endeavors.

Mr. Paresh Sukthankar, Deputy Managing Director, tendered his resignation from the Board of the Bank on August 10, 2018 which came into effect from November 8, 2018. The Board places on record their sincere appreciation for the contribution made by Mr. Paresh Sukthankar 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 as Additional Independent Directors on the Board of the Bank with effect from July 21, 2018, January 19, 2019 and January 31, 2019 respectively, subject to the approval of the shareholders.

The brief resume/details regarding the Directors proposed to be appointed/re-appointed as above is furnished in the report on Corporate Governance. There have been no changes in the 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 of Managerial Personnel) Rules, 2014 is given in ANNEXURE 6 and ANNEXURE 7 to this report.

(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 in order to save energy and support go-green initiative

• Installation of energy capacitors at high consumption offices to control the power 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 electrical equipment

• Reduction of contract demand at Kanjurmarg Hub,

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

• Provision of LED lamps at branches and offices

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

Monitoring and energy saving initiative for 100 branches resulting in power saving of over 10 per cent. The Bank won an award in National Energy Efficiency Circle Competition 2017-Winner Best Energy Efficient Case study held by CII in May 2017. Considering the benefits accrued, it further extended the monitoring programme to an additional 500 branches 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 evaluates innovative technology with multiple fintech partners. It has launched a formal Consumer Durable Loans portfolio and product with on-line real-time Digital API based collaboration with third party and fintech application sourcing platforms. Your Bank is leveraging API based Service Oriented Architecture and Middleware for enabling digital initiatives and empowering relationship managers at branches with digital products and services platforms. Your Bank has also begun using robotics and artificial intelligence in digital commerce, corporate supply chain and payment settlement systems to reduce time to market and turnaround time.

(C) Foreign Exchange Earnings and Outgo

During the year, the total foreign exchange earned by the Bank was Rs.1,720.4 crores (on account of net gains arising on all exchange/derivative transactions) and the total foreign exchange outgo was Rs.2,130.5 crores towards the operating and capital expenditure requirements.

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 Secretarial Auditors of the Bank for the financial year 2018-19. The report of the Secretarial Auditors is enclosed as ANNEXURE 8 to this Report. There are no observations/qualifications/comments in the Report of the Secretarial Auditor.

Corporate Governance

In compliance with Regulation 34 and other applicable provisions of the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015, a separate report on Corporate Governance along with a certificate of compliance from 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 Social Responsibility Activities and Initiatives in the format adopted by companies in India as per the guidelines of the Securities and Exchange Board of India in this regard is available on its web site www.hdfcbank.com

Information under the Sexual Harassment of Women at Workplace (Prevention, Prohibition and 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 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.'

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, rising interest rates, and domestic uncertainties due to the impending general elections in India and slowing consumption demand, India remained the world's fastest growing economy. Your Bank which grew faster than the system in the year under review is well poised to tap the opportunities of what is still an under penetrated market by leveraging its strong balance sheet and franchise.

As always, your Bank will continue to be judicious. It will continue to leverage its distribution strength and digital platforms to offer a similar experience to customers across urban, semi-urban and rural India.

Needless to say, the Bank will continue to focus on its five core values, namely, Customer Focus, Operational Excellence, Product Leadership, People and Sustainability. Its commitment to the highest possible standards of corporate governance remains unwavering even as it embarks on the next stage of its evolution to continue delivering sustainable growth to all its stakeholders.