Macro-economic and Industry Developments
After witnessing a significant slowdown in the fiscal year ended March 31, 2009, theIndian economy bounced back impressively during the last financial year. The inherentlystrong domestic consumption combined with both the monetary and fiscal stimuli measuresundertaken by the government and other policy authorities over the past year helped theeconomy shrug off the overhang of weak exports and global headwinds. GDP growth isestimated to be around 7.2% for the fiscal year ended March 31, 2010 as against 6.7% forthe year ended March 31, 2009.
While a large share of growth in the last financial year could be attributed togovernment spending, private consumption and investment also picked up quite sharply,which put to rest any concerns on the sustainability of the domestic recovery. Whilegovernment spending was likely to have grown by 8.2% last year, private consumption growthis expected to have been at around 4.6 % from a low of 1.7% exhibited in the quarter endedJune 30, 2009. Private investment growth is also expected to have recovered to 5.2% from4% a year ago.
In terms of the sectoral composition of growth, the industrial sector was the cleardriver of this recovery, growing by 10% in the last financial year from 2.8% a year ago.While the revival in industrial growth was led by a pick-up in consumer durables, otherindustrial sectors such as basic goods, intermediate goods and more importantly capitalgoods also gathered momentum, collectively pointing to the broad-basing of industrialrecovery.
Service sector growth was dominated by community, social and personal servicesreflecting increased government expenditure. However, private services such as trade,transport and communication gathered pace and are likely to keep the service sector growthstrong through the next financial year. Overall, service sector growth was estimated at8.5% in the last fiscal year as against 9.7% a year ago while private services areestimated to have recovered from a growth rate of 8.4% in the year ended March 31, 2009 to8.9% in the last fiscal year.
Perhaps the most visible dimension of the robustness of the ongoing recovery was thefact that the economy successfully weathered a drought. While the agricultural output isexpected to have contracted by about 0.6% last year, non-agricultural GDP is slated tohave grown by 9% against 7.7% a year ago. Much of this decoupling between the agriculturaland industrial growth was attributable to a more fundamental diversification of the ruraleconomy away from farming activities and the increasing role of small scale industry inbroadening the rural income base. Additionally, fiscal support measures such as theNational Rural Employment Guarantee Scheme (NREGS) also played a crucial role in providinga safety net to small farmers and agricultural workers.
Apart from fiscal stimulus efforts amounting to nearly 2% of GDP, an accommodativemonetary policy stance also played an important role in supporting economic recovery.Policy rates were eased by an average of 275-400 basis points (one basis point = 0.01%)while average lending rates of banks fell by close to 275 basis points since the onset ofthe crisis. Easy monetary conditions meant that short-term rates fell sharply. Afterspiking up to a high of 20% in October 2008, the overnight call money rates eased to 3-4%,indicating very comfortable domestic liquidity conditions. Monetary accommodation wasespecially important in helping the economy absorb a hefty government borrowing programduring the last fiscal year which ensured that pressure on government bond yields remainedmuted.
Despite a decline in effective lending rates, system credit growth remained subduedover the year with some signs of a pick-up in the growth rates in the last quarter of theyear. After reaching a system loan growth rate of 17% in the financial year ended March31, 2009, credit growth plummeted to 10% in October 2009. Some recovery in this growth waswitnessed on the back of increased demand for term lending and project financing whichresulted in a pick up in credit growth to 16% as at March 2010. Infrastructure funding wasa leading area of credit demand, contributing close to 60% of the incremental creditgrowth in the last financial year.
Inflation over the past year was largely driven by supply-side pressures on account ofthe drought and hence substantially confined to agricultural commodity prices. There werehowever emerging signs that inflation is getting more broad-based with private demandplaying a role in pushing up prices of manufactured products. In February 2010 headlineWPI inflation moved 9.9% alongside a pick-up in manufactured goods inflation to 7.4% froma low of -0.2% in July, 2009.
Both merchandise exports and imports recovered sharply at the end of the third quarterof the last fiscal year after the record slide seen over the two quarters prior to that.After falling sharply by 28% in the first half of the fiscal year ended March 31, 2009,export orders increased by 13% at the end of the third quarter of the last financial yearand by 34.8% in February 2010 driven by strong demand from both the Chinese and USeconomies. Domestic imports also rose sharply over the last few months driven by stronggrowth in the domestic industrial sector. In fact, the sharp rebound in the industrialsector resulted in an increase in non-oil imports, especially capital goods imports. Moreimportantly, the rise in oil prices in the latter half of the financial year ended March31, 2010 pushed up the total imports bill. The trade deficit in the financial year endedMarch 31, 2010 is estimated to have widened to USD 129 billion as against USD 118 billionin the previous year.
Recent data released by the RBI shows that the net invisibles component (softwareexports, private transfers, etc.) came in much weaker than expectations in the first threequarters of the financial year ended March 31, 2010. While private transfers grew by arelatively sedate 12% in this period, a muted growth in software exports and a decline inbusiness services exports impacted net invisibles. Net invisibles were USD 59 billion ascompared to USD 70 billion seen in the same period during the previous year. Goingforward, although we do not expect the weakness in the net invisibles component topersist, we expect the current account deficit to widen driven primarily by thedeterioration in trade balance.
Even though the current account deficit increased, the total balance of paymentsposition remained comfortably placed as capital flows were fairly strong as compared tothose in the prior year. Strong portfolio inflows due to the improvement in global riskappetite were the major contributors to the strong balance of payments position. Goingforward, we expect the balance of payments position to remain in surplus this year as fundflows continue to remain strong.
The Indian equity markets rallied sharply during the last financial year due to thegeneral improvement in global risk appetite. Global investors went from pricing in asevere recession to expecting a sharp rebound in the global economy and in the processpushed most equity markets higher. India ranked amongst the fastest growing economies inthe world and benefited immensely during this phase.
(Sources: Ministry of Finance, RBI, CSO, Ministry of Commerce)
Macroeconomic Risks and concerns
While the economic recovery currently underway seems quite well entrenched, the risksto growth going ahead stem from concerns on the sustainability of this recovery. Risinginflationary pressures and a pick up in manufactured goods inflation in particular, pose arisk to the revival in domestic consumption. Further, with growth gathering momentum andthe return of leverage into the economy, monetary policy responses are likely to play afar more crucial role in shaping growth dynamics. The risk is that persistent inflationarypressures may drive the central bank to tighten interest rates to a level that couldconstrain future growth. There are some offsets though, with job prospects looking up andpersonal disposable income likely to remain strong, household balance sheets are likely tobe robust enough to absorb rising prices and interest rates. In view of the above factors,a reversal of the recovery in domestic consumption demand seems unlikely.
The economic recovery that was buoyed by a pick-up in domestic consumption is likely tobe taken forward by a pick-up in investment. Early signs of rising capacity utilizationindicate that private capital expenditure could well gather pace over this financial year.However, given the interest sensitive nature of capital formation there is a risk thatrising interest rates may impinge on private investment initiatives.
While adequate capital provisioning and stringent prudential regulations largelyshielded the domestic banking system from the global crisis, some cyclical deteriorationin asset quality remains a concern. There is some evidence, both formal and anecdotal thatcredit quality in both the retail and wholesale portfolios of banks has deteriorated.There is also some concern that a portion of the loans that banks were allowed torestructure given the sharp cyclical deterioration in the economy may remain impaired andwill add to the stock of non-performing loans. Recent stress tests have revealed howeverthat the banking system as a whole remains robust enough to withstand a sharp increase inasset quality slippages.
While the fundamentals of the Indian economy remain strong, the domestic equity marketsand for that matter fund flows into the domestic financial system are dependent on thedevelopments in the global economy and general risk appetite to a large extent. Anyadverse changes therefore in the global economic or financial environment could have anegative impact on the domestic markets and the availability of foreign funds. In thisregard, we see a few risks on the global front that could adversely impact the domesticmarkets.
Though the global economy has recovered at a much faster pace than expected, thecurrent recovery is still at a nascent stage and concerns still remain that the globaleconomy could possibly witness a W shaped recovery pattern. Much of theincrease in demand witnessed in developed economies was driven by temporary factors suchas strong fiscal stimuli. The effects of fiscal stimulus measures are likely to eventuallyfade resulting in lower growth rates, especially if private demand does not recover at arapid pace. Weaker than anticipated recovery in the global economy could result in anotherbout of risk aversion in the global markets sometime during the second half of thisfinancial year which in turn could have an impact on domestic equity markets.
The other risk stems from the prospect of tighter global monetary policy during themiddle of calendar year 2010. While the U.S. Federal Reserve may not hike its operationalfed funds rate any time soon, it seems to be giving indications that it could wind downits quantitative easing program. We expect the U.S. Federal Reserve to slowly startdraining USD liquidity from the financial system starting sometime around September 2010.As this happens, global equity markets (including Indian equity markets) could correct asinvestors price in the prospect of a reduction in liquidity in the global financialsystem.
Lastly, the prospect of a sovereign default in a major economy could periodically weighon market risk appetite over the course of the next six to eight months. Strong fiscalstimuli provided by most of the major developed economies last year has resulted in asharp build up of total sovereign debt. Thus, markets are likely to get a little anxiousover the ability of the major governments to fund this deficit, which will act as astumbling block for market risk appetite in the medium term.
The Indian economy is likely to continue to outperform its global counterparts in theyear ahead, growing by around 8% against an average world output growth of 3.9%.Investment and capacity expansion will be a crucial link in driving the recovery forward;buoyant domestic demand should help it absorb headwinds from rising interest rates andinflation. With private capex and infrastructure spending likely to gather ground, notonly will the ongoing recovery sustain into the next financial year but will alsotranslate into greater buoyancy in credit growth and stronger growth prospects for thebanking sector in general. Focus on investment in the next fiscal year is likely to renderIndia an attractive market that is well positioned to take advantage of both structuraland cyclical gains while its strong domestic base is likely to limit the impact ofexternal stress on growth dynamics and returns.
Mission and Business Strategy
Your Banks mission is to be "a World Class Indian Bank", benchmarkingitself against international standards and best practices in terms of product offerings,technology, service levels, risk management and audit & compliance. The objective isto continue building sound customer franchises across distinct businesses so as to be apreferred provider of banking services for target retail and wholesale customer segments,and to achieve a healthy growth in profitability, consistent with the Banks riskappetite. Your Bank is committed to do this while ensuring the highest levels of ethicalstandards, professional integrity, corporate governance and regulatory compliance.
The Banks business strategy emphasizes the following:
Increase its market share in Indias expanding banking and financialservices industry by following a disciplined growth strategy focusing on balancing qualityand volume growth while delivering high quality customer service;
Leverage its technology platform and open scaleable systems to deliver moreproducts to more customers and to control operating costs;
Maintain high standards for asset quality through disciplined credit riskmanagement;
Develop innovative products and services that attract its targeted customers andaddress inefficiencies in the Indian financial sector;
Continue to develop products and services that reduce its cost of funds; and
Focus on healthy earnings growth with low volatility.
The financial performance during the fiscal year ended March 31, 2010 remained healthywith total net revenues (net interest income plus other income) increasing by 14% to Rs.12,194.2 crores from Rs. 10,711.8 crores in the previous financial year. Revenue growthwas driven both by an increase in net interest income and other income. Net interestincome grew by 13% primarily due to an increase in the average balance sheet size and anincrease in full year net interest margins by 13 basis points to 4.3%.
Other income registered a growth of 15.7% over that in the previous year to Rs. 3,807.6crores in the financial year ended March 31, 2010. This growth was driven primarily by anincrease in fees and commissions earned and income from foreign exchange and derivativesoffset in part by lower bond gains than those in the previous financial year. In thefiscal year ended March 31, 2010, commission income increased by 15.2% to Rs. 2,830.6crores with the main drivers being fees on debit and credit cards, transactional charges& fees on deposit accounts and processing fees on retail assets. Commissions from thedistribution of third party insurance & mutual funds remained one of the majorcomponents of fees and commissions. Whilst the regulatory changes restricted thecommissions payable to banks by mutual funds, the same was offset by higher distributionvolumes. The Bank made a profit on the sale / revaluation of investments of Rs. 345.1crores during the year, almost 10% lower than that in the previous year as yields startedmoving up since the third quarter of the financial year ended March 31, 2010. Foreignexchange and derivatives revenues grew from Rs. 440.5 crores in the previous financialyear to Rs. 623.2 crores in the fiscal year ended March 31, 2010.
Operating (non-interest) expenses grew at a much lower pace than net revenues andincreased from Rs. 5,532.8 crores in the previous financial year to Rs. 5,764.5 crores inthe year under consideration. During the year your Bank opened over 300 new branches whichresulted in higher infrastructure and staffing expenses. Due to the efforts of your Bankin areas of cost management and on improving overall productivity, coupled with revenuesynergies with the network of the erstwhile Centurion Bank of Punjab, the ratio ofoperating cost to net revenues improved to 47.3%, from 51.7% in the previous year.
Loan loss provisions for non-performing assets and provisions for standard assetsincreased from Rs. 1,726.3 crores to Rs. 1,938.9 crores due to higher NPA formationsduring the first half of the financial year ended March 31, 2010. The incremental NPAformations subsequently came down in the second half of the year. The Banksprovisioning policies for specific loan loss provisions remained higher than regulatoryrequirements. The NPA coverage ratio based on specific provisions was at 74.8% as on March31, 2010. The Bank also provided Rs. 201 crores towards floating provisions, contingentprovisions for tax, legal and other contingencies. The Reserve Bank of India had reducedthe general provisioning requirements for certain asset classes in May 2008, this reducedthe requirements for general provisions for the Banks loan book. Your Bank did notwrite back any of these provisions and continued to maintain the general provisions thatwere already created. As a result of the above, the requirement for general assetsprovisions was lower than what the Bank held on its books as on March 31, 2010 and theBank did not have to may any additional general provisions for the increase in its loanbook.
Net profit increased by 31% from Rs. 2,245.0 crores in the previous financial year toRs. 2,948.7 crores in the year ended March 31, 2010. Return on average net worth was16.8%. The Banks basic earning per share increased from Rs. 52.9 to Rs. 67.6 perequity share.
As at March 31, 2010, the Banks total balance sheet increased by 21% to Rs.222,459 crores as against Rs. 183,271 crores as at March 31, 2009. Total Depositsincreased 17% from Rs. 142,812 crores as on March 31, 2009 to Rs. 167,404 crores as onMarch 31, 2010. With Savings account deposits at Rs. 49,877 crores and current accountdeposits at Rs. 37,227 crores, demand (CASA) deposits were around 52% of total deposits ason March 31, 2010 higher than 44% at the end of the previous year. During the financialyear ended March 31, 2010, gross advances grew by 27% to Rs. 127,262 crores. This wasdriven by a growth of 41% in wholesale advances to Rs. 54,991 crores, and an increase of18% in retail advances to Rs. 72,271 crores. The growth in advances of the Bank have beensignificantly higher than the system credit growth which was approximately 17%.
Business Segments Update:
Consistent with its performance in the past, in the last financial year, your Bank hasachieved healthy growth across various operating and financial parameters. Thisperformance reflected the strength and diversity of the Banks three primary businessfranchises retail banking, wholesale banking and treasury, and of its disciplinedapproach to risk-reward management.
The Bank caters to various customer segments with a wide range of products andservices. Your Bank is a one stop shop financial services provider of various depositproducts, of retail loans (auto loans, personal loans, commercial vehicle loans,mortgages, business banking etc.), credit cards, debit cards, depository (custodyservices), investment advisory, bill payments and several transactional services. Apartfrom its own products, the Bank sells third party financial products like mutual funds andinsurance.
The growth in your Banks retail banking business was robust during the financialyear ended March 31, 2010. The Banks total retail deposits grew by over 14% to Rs.113,527 crores in the financial year ended March 31, 2010, driven by retail savingsbalances which grew much faster at 44% during the same period. The Banks retailassets grew by 18% to Rs. 72,271 crores during the financial year ended March 31, 2010driven primarily by a growth in auto loans, mortgages, business banking and commercialvehicle loans.
This year your Bank expanded its distribution network from 1,412 branches in 528cities as on March 31, 2009 to 1,725 branches in 779 cities on March 31, 2010. TheBanks ATMs increased from 3,295 to 4,232 during the same period. Your Banksbranch network is deeply entrenched across the country with significant density in areasconducive to the growth of its businesses. The Banks focus on semi-urban andunder-banked markets continued, with 68% of the Banks branches now outside the topnine Indian cities. The Banks customer base grew in line with the growth in itsnetwork and increased product penetration initiatives, this currently stands at over 19million customers. The average savings balance per account which is a good indicator ofthe strength of the Banks retail liability franchise grew over 30%. The Bankcontinues to provide unique products and services with customer centricity a keyobjective.
In order to provide its customers increased choices, flexibility and convenience theBank continued to make significant headway in its multi channel servicing strategy. YourBank offered its customers the use of ATMs, internet, phone and mobile banking in additionto its expanded branch network to serve their banking needs.
The increase in the Banks debit card base this year coupled with a growth in itsATM network translated to an increase in ATM transactions by 26%. The Bank also madestrong inroads in its internet banking channel with around 21% of its registered customersnow using net banking facilities for their banking requirements. Your bank now offersphone banking in 778 locations in addition to giving its customers the convenience ofaccessing their bank accounts over their mobile phones. The success of the Banksmulti-channel strategy is evidenced in the fact that almost 80% of customer initiatedtransactions are serviced through the non-branch channels.
Your Bank continued to grow at a healthy pace in almost all the retail loan productsthat it offers and further consolidated its position amongst the top retail lenders inIndia. The Bank grew its retail asset portfolio in a well balanced manner focusing on bothreturns as well as risk. While the Banks auto finance business remained a keybusiness driver for its retail asset portfolio, other retail loan products exhibitedrobust growth rates and asset quality.
The Bank continued its focus on internal customers for its credit cards portfolio.Overall credit cards remained a profitable business for your Bank with over 4 millioncards in force as at March 2010. As part of its strategy to drive usage of its creditcards the Bank also has a significant presence in the "merchant acquiring"business with the total number of point-of-sale (POS) terminals installed at over 90,000.
In addition to the above products the Bank does home loans in conjunction with HDFCLimited, under this arrangement the Bank sells loans provided by HDFC Limited. HDFCLimited approves and disburses the loans, which are booked in their books, the Bank ispaid a sourcing fee for these loans. HDFC Limited offers your Bank upto 70% of the fullydisbursed home loans sourced under this arrangement through either the issue of mortgagebacked pass through certificates (PTCs) or by a direct assignment of loans; the balance isretained by HDFC Limited. Both the PTCs or the loans thus assigned are credit enhanced byHDFC Limited upto a AAA level. The Bank purchases these loans at the underlying home loanyields less a fee paid to HDFC Limited for the administration and servicing of the loans.Your Bank originated approximately an average Rs. 500 crores of mortgages every month inthe financial year ended March 31, 2010, a significant increase from the Rs. 400 croresper month that the Bank originated in the previous year. During the year the bank alsopurchased from HDFC Ltd. under the "loan assignment" route approximately Rs4,870 crores of AAA credit enhanced home loans which qualified as priority sectoradvances.
Your Bank also distributes life & general insurance and mutual fund productsthrough its tie-ups with insurance companies and mutual fund houses. The income from thesebusinesses continued to demonstrate robust growth largely due to an expanded branchnetwork and the increased penetration of the Banks managed portfolio despite thefact that during the year there were regulatory changes which in some cases impacted thecommission paid by the manufacturers of these products to the Bank. The success in thedistribution of the above products has been demonstrated with the growth in theBanks fee income.
The Banks data warehouse, Customer Relationship Management (CRM) and analyticssolutions have helped it target existing and potential customers more effectively and costeffectively and offer them products appropriate to their profile and needs. Reduced costsof acquisition apart, this has also led to deepening of customer relationships and greaterefficiency in fraud control and collections resulting in lower credit losses.
The Bank provides its corporate and institutional clients a wide range of commercialand transactional banking products, backed by high quality service and relationshipmanagement. The Banks commercial banking business covers not only the top end of thecorporate sector but also the emerging corporate segment and some small and mediumenterprises (SMEs). The Bank has a number of business groups catering to various segmentsof its wholesale banking customers with a wide range of banking services covering theirworking capital, term finance, trade services, cash management, foreign exchange andelectronic banking requirements.
This business registered a healthy growth in the financial year ended March 31, 2010.The Banks wholesale deposits grew by around 24%, while wholesale advances showed astrong growth of over 40% both of which were significantly faster than the growth in thesystem during the same period. Your Bank provides its customers both working capital andterm financing. The Bank witnessed an increase in the proportion of its term lending eventhough working capital loans retained a large share of its wholesale advances. While theduration of the Banks term loans largely remained small to medium term, the Bank didwitness an increase in its longer duration term loans, and project lending, includingloans to the infrastructure segment.
During the financial year ended March 31, 2010, growth in the wholesale bankingbusiness continued to be driven by new customer acquisition and higher cross-sell with afocus on optimizing yields and increasing product penetration. Your Banks cashmanagement and vendor & distributor (supply chain) finance products continued to be animportant contributor to growth in the corporate banking business. Your Bank furtherconsolidated its position as a leading player in the cash management business (coveringall outstation collection, disbursement and electronic fund transfer products across theBanks various customer segments) with volumes growing to over Rs. 25 trillion. TheBank also strengthened its market leadership in cash settlement services for major stockexchanges and commodity exchanges in the country. The Bank met the overall priority sectorlending requirement of 40% of net bank credit.
The Banks financial institutions and government business group (FIG) offerscommercial and transaction banking products to financial institutions, mutual funds,public sector undertakings, central and state government departments. The main focus forthis segment remained offering various deposit and transaction banking products to thissegment besides deepening these relationships by offering funded, non-funded treasury andforeign exchange products.
The Bank has a wholesale banking branch in Bahrain and two representative offices inUAE and Kenya. The branch offers the Banks suite of banking services includingtreasury and trade finance products to its corporate clients. This branch has built up anasset book over USD 400 million since its opening in October 2008. The Bank offers wealthmanagement products, remittance facilities and markets deposits to the Non-resident Indiancommunity from its representative offices.
The treasury group is responsible for compliance with reserve requirements andmanagement of liquidity and interest rate risk on the Banks balance sheet. On theforeign exchange and derivatives front, revenues are driven primarily by spreads oncustomer transactions based on trade flows and customers hedging needs. During thefinancial year ended March 31, 2010, revenues from foreign exchange and derivativetransactions grew by 41.5% to Rs. 623 crores. These revenues were distributed across largecorporate, emerging corporate, business banking and retail customer segments for plainvanilla foreign exchange products and across primarily large corporate and emergingcorporate segments for derivatives. The Bank offers Indian rupee and foreign exchangederivative products to its customers, who use them to hedge their market risks. The Bankenters into foreign exchange and derivative deals with counterparties after it has set upappropriate counterparty credit limits based on its evaluation of the ability of thecounterparty to meet its obligations in the event of crystallization of the exposure.Appropriate credit covenants may be stipulated where required as trigger events to callfor collaterals or terminate a transaction and contain the risk. Where the Bank entersinto foreign currency derivative contracts with its customers it lays them off in theinter-bank market on a matched basis. For such foreign currency derivatives, the Bank doesnot have any open positions or assume any market risks but carries only the counterpartycredit risk (where the customer has crystallized payables or mark-to-market losses). TheBank also deals in Indian rupee derivatives on its own account including for the purposeof its own balance sheet risk management. The Bank recognizes changes in the market valueof all rupee derivative instruments (other than those designated as hedges) in the profitand loss account in the period of change. Rupee derivative contracts classified as hedgeare recorded on an accrual basis.
Given the regulatory requirement of holding government securities to meet the statutoryliquidity ratio (SLR) requirement, your Bank maintains a portfolio of governmentsecurities. While a significant portion of these SLR securities are held in the"Held-to-Maturity (HTM) category, some of these are held in the "Availablefor Sale" (AFS) category. In the first two quarters of the last year the Bankrealized gains on its bond portfolio partly offset by the losses made in the second andthird quarters of the financial year ended March 31, 2010.
Since its inception, your Bank has made substantial investments in its technologyplatform and systems, built multiple distribution channels, including an electronicallylinked branch network, automated telephone banking, internet banking and banking throughmobile phones, to offer its customers convenient access to various products.
The Bank has templatized credit underwriting through automated customer datade-duplication and real-time scoring in its loan origination process. Having enhanced itscross selling and up-selling capabilities through data mining and analytical customerrelationship management solutions, the Banks technology enables it to have a 360 0view of its customers. Your Bank employs event detection technology based customermessaging and has deployed an enterprise wide data warehousing solution as a back bone toits business intelligence system.
During the year the Bank has introduced faster ATMs which enabled the customer a fasterservicing experience by reducing the customer clicks by 40%, through the use of advancedtechnology on its ATMs, a first in the Indian market. Implementation of a risk managementengine for internet transactions has reduced the phishing and man in the middle attackssignificantly since October 2008. The bank has also implemented a digital certificatesbased security engine for corporate internet banking customers. Credit and debit cardsusage of the Banks customers is secured by powerful proactive risk managertechnology solutions which does rules based SMS alerts as well as prompts customer servicerepresentatives to call the customer on detecting abnormal usage behavior. This preventsfrauds and minimizes losses to customers, if the card has been stolen and yet to be hotlisted.
Sophisticated automated switch-over and switch-back solutions power the Banksdisaster recovery management strategy for key core banking solutions in its data center,improving availability of your Banks services to its customers.
With the various initiatives that your Bank has taken using technology, it has beensuccessful in driving the development of innovative product features, reducing operatingcosts, enhancing customer service delivery and minimizing inherent risks.
Service Quality Initiatives
Your Bank continued to improve customer service in various spheres of its businessthrough service quality initiatives and quality projects using lean Sigma Tool-kit, 5S andother business excellence initiatives. Over 2,000 projects were executed during the yearthat resulted in demonstrable process efficiency improvements, enhanced productivity,improved turn around times, cost reduction all of which ultimately led to an improvementin customer service.
The Bank has integrated its customer complaints management processes with the existingservice quality initiatives to achieve greater synergies towards driving serviceexcellence. Service quality initiatives include the audit of services as well as mysteryshopping at various touch points to capture feedback on customer experiences. Your Bankhas also implemented the same for key support departments. Improvements are worked onidentified areas to further enhance customer experiences. The Bank has also integratedservice quality objectives with the business objectives of the Bank, to bring about theclubbed results of Customer Delight and improved profitability. New elementswere added and improvement schemes were installed using technology to ensure customerconvenience, security of transactions and reduced transaction costs.
The Bank plans to use this platform to drive systemic changes and processre-engineering using technology to further enhance customer experience and business value.
Risk Management & Portfolio Quality
Taking on various types of risk is integral to the banking business. Sound riskmanagement and balancing risk-reward trade-offs are critical to a banks success.Business and revenue growth have therefore to be weighed in the context of the risksimplicit in the Banks business strategy. Of the various types of risks your Bank isexposed to, the most important are credit risk, market risk (which includes liquidity riskand price risk) and operational risk. The identification, measurement, monitoring andmanagement of risks accordingly remain a key focus area for the Bank. For credit risk,distinct policies and processes are in place for the retail and wholesale businesses. Inretail loan businesses, the credit cycle is managed through appropriate front-end credit,operational and collection processes. For each product, programs defining customersegments, underwriting standards, security structure etc., are specified to ensureconsistency of credit buying patterns. Given the granularity of individual exposures,retail credit risk is managed largely on a portfolio basis, across various products andcustomer segments. During the financial year ended March 31, 2009 the Bank obtained an ISO9001:2008 certification of its retail asset underwriting. Last year, the firstsurveillance audit was conducted at key locations and the unit was recommended forcontinuation of the certification. For wholesale credit exposures, management of creditrisk is done through target market definition, appropriate credit approval processes,ongoing post-disbursement monitoring and remedial management procedures. Overall portfoliodiversification and reviews also facilitate mitigation and management.
The Risk Monitoring Committee of the Board monitors the Banks risk managementpolicies and procedures, vets treasury risk limits before they are considered by theBoard, and reviews portfolio composition and impaired credits.
As of March 31, 2010, the Banks ratio of gross non-performing assets (NPAs) togross advances was 1.43%. Net non-performing assets (gross non-performing assets lessspecific loan loss provisions, floating provision, interest in suspense, Export CreditGuarantee Corporation (ECGC) claims received and provision in lieu of diminution in thefair value of restricted assets) were 0.31% of customer assets as of March 31, 2010. Thespecific loan loss provisions that the Bank has made for its non-performing assetscontinue to be more conservative than the regulatory requirement.
In accordance with the guidelines issued by the Reserve Bank of India on Basel II, yourBank migrated to the standardized approach for Credit Risk and the Basic Indicatorapproach for operational risk in the financial year ended March 31, 2009. Through theyear, your Bank has been continuing work on various initiatives which would enable it tocomply with the standards laid out for the more advanced capital approaches under BaselII. While the core systems which support such initiatives are more or less in place, theBank has been working towards testing the results and fine-tuning such systems andplugging the gaps to meet the operational requirements for the advanced approaches. Thisis a long process, which requires not only having the quantitative inputs in place, butalso a strong culture of risk management and awareness in the Bank, which rely on theseinputs for decision making. The Bank has made reasonable progress in this regard. Theimplementation of the Basel II framework is in harmony with the Banks objective ofadopting best practices in risk management.
INTERNAL AUDIT & COMPLIANCE
The Bank has Internal Audit & Compliance functions which are responsible forindependently evaluating the adequacy of all internal controls and ensuring operating andbusiness units adhere to internal processes and procedures as well as to regulatory andlegal requirements. The audit function also pro-actively recommends improvements inoperational processes and service quality. To ensure independence, the Audit departmenthas a reporting line to the Chairman of the Board of Directors and the Audit &Compliance Committee of the Board and only indirectly to the Managing Director. Tomitigate operational risks, the Bank has put in place extensive internal controlsincluding restricted access to the Banks computer systems, appropriate segregationof front and back office operations and strong audit trails. The Audit & ComplianceCommittee of the Board also reviews the performance of the Audit & Compliancefunctions and reviews the effectiveness of controls and compliance with regulatoryguidelines.
CORPORATE SOCIAL RESPONSIBILITY
Your Bank is a socially responsible corporate citizen committed to deliver a positiveimpact across social, economic and environmental parameters. The Bank acknowledges itsresponsibility on the manner that its activities influence its consumers, employees, andstake holders, as well as the environment. Your Bank strives to proactively encouragecommunity growth and development thereby contributing in building a sustainaible future.
Your Banks CSR initiatives range across the spectrum of purely operational andfinancial parameters at one end to social and altruistic at the other. Together, theseelements go towards fulfilling its CSR objectives.
The Bank seeks to achieve its corporate and social objectives by focusing on thefollowing strategic areas
Your Bank is aware of its role of an influencer towards the environment, which isembodied in its approach to Carbon Emission Reduction. The Bank demonstrates thiscommitment to contribute positively to the environment and sustainable development bycalculating its carbon footprint and preparing a carbon management plan to reduce it. Inaddition, in order to create awareness amongst employees on climate change and the need toreduce and recycle, various drives to conserve the environment including tree plantationare organized on a regular basis.
The Banks employees are encouraged to volunteer time and skills through theCorporate Volunteering Program. This year your Banks employees haveengaged in activities such as academic support classes, held English speaking courses andhelped in organizing special events in order to celebrate festivals with theunderprivileged. Additionally the Bank has facilitated employee donations to charities oftheir choice through Give India, a donation platform that enables individualsto support social causes by donating to over 200 charities that have been screened fortransparency and credibility. The bank makes a donation matching the amounts donated byits employees on a monthly basis.
As a responsible Corporate Citizen your Bank strives for community empowerment throughsocio-economic development of underprivileged and marginalized sections of society. TheBank partners with NGOs across India to support educational initiatives and livelihoodtraining programs.
In the year ended March 31, 2010 the Bank supported a variety of educational programsranging from educational sponsorships for girls, adoption of state-run schools, running ofacademic support classes and reading classes. The Bank also supports projects that provideskills training to school dropouts, youth, women and other disadvantaged groups. TheBanks social development programs have so far touched the lives of over 73,000children and 700 women and youth.
Over the last few years, your Bank has been working on a number of initiatives topromote Financial Inclusion across identified sections of rural, under-banked andun-banked consumers. These initiatives target segments of the population that have limitedor no access to the formal banking system for their basic banking and credit requirements,by building a robust and sustainable model that provides relevant services and viable andtimely credit that ultimately result in the economic upliftment of its customers. TheBanks financial inclusion initiatives have been integrated across its various businesses,across product groups. Over the next five years your Bank will endeavor to bring 10million households currently excluded from basic banking services under the fold of thisprogram.
The Bank has approximately 33% of its branches in rural and underbanked locations. Inthese branches the Bank offers products and services such as savings, current, fixed &recurring deposits, loans, ATM facilities, investment products such as mutual funds andinsurance, electronic funds transfers, drafts & remittances, etc. The Bank alsoleverages these branches as hubs for other inclusion initiatives such as direct linkagesto self help groups and joint liability groups, bank on wheels, point of sale (POS)terminals and information technology enabled kiosks, and other information &communication technology (ICT) backed initiatives in these locations.
A number of retail credit products such as two-wheeler loans, car loans, mortgages etc.are typically consumption products in urban centers. These however are means of incomegeneration for of rural consumers. We believe that apart from agricultural loans, thereare many other credit products that the Bank can use to aid financial betterment in rurallocations. The Bank has extended provision of its retail loans to large segments of therural population where the end use of the products acquired (by availing our loans) areused for income generating activities. For example, loans for tractors, commercialvehicles, etc. supplement the farmers income by improving productivity and reducingexpenses.
No Frills Savings Accounts
A savings account is the opening requirement for the provision of other bankingservices; the account promotes the habit of saving, provides a security, and inculcatesconfidence among the target segment in the banking sector.
The Bank provides No Frills savings accounts through all its branches as astepping stone towards financial inclusion. These accounts are offered only to customerswho do not have any other bank account (are un-banked) and who are either beneficiaries ofa government welfare scheme or have annual incomes less than a defined threshold(constitute the bottom of the economic pyramid). Apart from the basic no frills savingsaccount your Bank also offers these segments other accounts such as no frills salaryaccounts and limited KYC accounts.
Lending to self help groups and Microfinance Institutions
Your Bank has been working with various self help groups in order to cover a widerconsumer base than through its own branch network. The groups that the Bank partners workwith the objective of providing credit for income generation activities, (often byproviding training, vocational guidance, and marketing support to their members).Leveraging their distribution, credit expertise and on-ground knowledge, the Bank fundsthese groups who in turn lend to the end consumer. Till date the Bank has lent to over45,000 self help groups covering approximately
7 lakh households supporting their income generation activities. The Bank works withthese groups either by appointing business correspondents or through its own branchnetwork. To this effect the Bank has opened 27 branches catering exclusively to thistarget segment.
The Bank also extends loans to Microfinance Institutions for on-lending to financiallyexcluded households or in many cases to them through self help groups. This program iscurrently spread across the country covering 18 states with tie-ups with 110 accreditedmicrofinance institutions. The above institutions typically face challenges in the areasof funding, credit underwriting and scaling up of operations. The Bank brings in thenecessary expertise related to these areas and enters into a symbiotic arrangement thatbenefits all parties involved. As on March 31, 2010 with a micro lending book of over Rs.1,400 crores the Banks micro lending initiative has reached approximately 2 millionhouseholds.
Agriculture and Allied Activities
A large portion of Indias un-banked population relies on agriculture as theirmain source of livelihood. We believe provision of credit to marginal farmers throughvarious methods that your Bank has employed replaces the traditional money lendingchannel, while at the same time providing income generating activities. The Bank providesvarious loans to farmers through its suite of specifically designed products such as theKisan Gold Card, tractor, cattle loans etc. In addition the Bank offers post-harvest cashcredit, warehouse receipt financing and bill discounting facilities to mandi (markets forgrain and other agricultural produce) participants and farmers. These facilities enablethe mandi participants to make timely payments to farmers. The Bank carries out thisbusiness through approximately 200 branches that are located in close proximity to mandis.
The Bank targets specific sectors to capture supply chain of certain crops from theproduction stage to the sales stage. On the basis of these cashflows, your Bank is able tofinance specific needs of the farmers. This is further supported by using businesscorrespondents closer to their respective locations and helping them to create a savingsand banking habit. This model has currently been implemented with dairy and sugarcanefarmers.
The initiative currently underway includes the appointment of milk societies as BCs,through whom the Bank opens accounts of individual farmers attached to these societies.The societies route all payments to the farmers through this account.
Small and Micro Enterprises
One of the means to financial inclusion is by supporting small and micro enterpriseswhich in turn provide employment opportunities to the financially excluded. Thoughindirect, we believe this model may in many instances be more effective than providingsubsidies that are often unsustainable, or never reach the intended beneficiary.
The Bank offers complete banking solutions to micro, small and medium scale enterprisesacross industry segments including manufacturers, retailers, wholesalers / traders andservices. The entire suite of financial products including cash credit, overdrafts, termloans, bills discounting, export packing credit, letter of credit, bank guarantees, cashmanagement services and other structured products are made available to these customers.
Promoting Financial Awareness
In addition to providing various products and services to the financially excluded,that Bank believes that imparting education and training to these target segments isequally essential to ensure transparency and create awareness. To this effect the Bank hasput in place various training programs, these are conducted by Bank staff in locallanguages and cover not only the customers but also various intermediaries such as theBanks business correspondents. Through these programs the Bank provides creditcounseling and information on parameters like savings habit, better utilization ofsavings, features of savings products, credit utilization, asset creation, insurance,income generation program etc.
The total number of employees of your bank were 51,888 as of March 31, 2010. The Bankcontinued to focus on training its employees, both on-the-job as well as through trainingprograms conducted by internal and external faculty. The Bank has consistently believedthat broader employee ownership of its shares has a positive impact on its performance andemployee motivation.
HDFC Bank lists people as one of its stated core values. The Bank believesin empowering its employees and constantly takes various measures to achieve this.
The information required under Section 217(2A) of the Companies Act, 1956 and the rulesmade there under, are given in the annexure appended hereto and forms part of this report.In terms of section 219(1)(iv) of the Act, the Report and Accounts are being sent to theshareholders excluding the aforesaid annexure. Any shareholder interested in obtaining acopy of the said annexure may write to the Company Secretary at the Registered Office ofthe Bank. The Bank had 51,888 employees as on March 31, 2010. 630 employees employedthroughout the year were in receipt of remuneration of Rs. 24 lacs per annum and 35employees employed for part of the year were in receipt of remuneration of more than Rs. 2lacs per month.
The provisions of Section 217(1)(e) of the Act relating to conservation of energy andtechnology absorption do not apply to your Bank. The Bank has, however, used informationtechnology extensively in its operations.
The report on the Corporate Governance is annexed herewith and forms part of thisreport.
The Ministry of Corporate Affairs has issued "Corporate Governance VoluntaryGuidelines" in December 2009. While these guidelines are recommendatory in nature,the Bank has adopted most of these guidelines as detailed in the Corporate GovernanceReport. The Bank will examine the possibilities of adopting the remaining guidelines in anappropriate manner.