20-F 1 d486922d20f.htm FORM 20-F Form 20-F
Table of Contents
falseFY0001144967Under local regulations, the Bank is required to transfer 25% of its profit after tax (per Indian GAAP) to a non-distributable statutory reserve and to meet certain other conditions in order to pay dividends without prior RBI approval.Effective April 1, 2020, the Bank adopted ASU2016-13 Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (see notes 2g, 2i, and 20).Net allowances for credit losses charged to expense does not include the recoveries against write-off cases amounting to Rs. 56,142.6 million (US$ 683.1 million). Recoveries from retail loans is Rs. 53,374.2 million and from wholesale loans is Rs. 2,768.4 million.Net allowances for credit losses charged to expense does not include the recoveries against write-off cases amounting to Rs.28,919.8 million (US$ 395.4 million). Recoveries from retail loans is Rs. 28,605.8 million and from wholesale loans is Rs. 314.0 million.Net allowances for credit losses charged to expense does not include the recoveries against write-off cases amounting to Rs. 36,181.4 million. Recoveries from retail loans is Rs. 35,385.3 million and from wholesale loans is Rs. 796.1 million.Includes crop-related agricultural loans with days past due less than 366 as they are not considered as non-performing of Rs. 34.2 billion.Loans up to 30 days past due are considered current. Includes crop-related agricultural loans with days past due less than 366 as they are not considered as non-performing of Rs. 31.8 billion.Others include equity securities with carrying value amounting to Rs. 14,736.7 million and Rs. 22,103.4 million as of March 31, 2022 and March 31, 2023, respectively. Equity securities include non-marketable equity securities carried at cost of Rs. 2,665.9 million and Rs. 2,640.8 million as of March 31, 2022 and March 31, 2023, respectively. Unrealized gain/(loss)recognized in non-interest revenue–other, net amount to Rs. (7,633.5) million and Rs. 7,160.1 million for the fiscal years ended March 31, 2022 and March 31, 2023, respectively.Includes securities sold under repurchase agreements amounting to Rs. 90,200.0 million with a stated interest rate of 4.0% per annum and Rs. 90,200.0 million (US$ 1097.5 million) with stated interest rate of 4.2% per annum for the fiscal years ended March 31, 2022 and March 31, 2023, respectively, under RBI long-term repo operation with a three-year maturity period.Variable rate — (1), Perpetual debt — (2) and Fixed rate — (2) represent foreign currency debt. Variable rate debt is typically indexed to LIBOR, SOFR, T-bill rates, Marginal cost of funds based lending rates (“MCLR”), among others.The scheduled maturities of long-term debt do not include perpetual bonds of Rs. 125,575.1 million (net of debt issuance cost).Weighted average assumptions used to determine both benefit obligations and net periodic benefit cost.Comprised of securities and cash collaterals. 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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
FORM
20-F
 
REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
 
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 2023
OR
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
                
to
                
OR
 
SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of event requiring this shell company report
Commission file number 001-15216
 
 
HDFC BANK LIMITED
(Exact name of Registrant as specified in its charter)
 
 
Not Applicable
(Translation of Registrant’s name into English)
India
(Jurisdiction of incorporation or organization)
HDFC Bank House, Senapati Bapat Marg, Lower Parel,
Mumbai 400013
, India
(Address of principal executive offices)
Name: Santosh Haldankar, Senior Vice President (Legal) and Company Secretary
Telephone:
91-22-3976-0711
Email: Santosh.Haldankar@hdfcbank.com
Office Address: HDFC Bank Ltd; Legal & Secretarial Dept; 2nd floor, Zenith House,
Opp. Race Course Gate No. 5 & 6, Keshavrao Khadye Marg,
Mahalaxmi (west), Mumbai 400 034, India.
(Name, telephone, email and/or facsimile number and address of company contact person)
 
 
Securities registered or to be registered pursuant to Section 12(b) of the Act:
 
Title of each class
 
Trading Symbol(s)
 
Name of each exchange on which registered
American Depositary Shares, each representing three Equity Shares, Par value Rs. 1.0 per share
 
HDB
 
The New York Stock Exchange
Securities registered or to be registered pursuant to Section 12(g) of the Act: Not Applicable
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: Not Applicable
 
 
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report:
Equity Shares, as of March 31, 2023                5,579,742,786
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ☒    No  ☐
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.    Yes  ☐    No  ☒
Note—Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files
).    Yes  ☒    No  ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated
filer, or an emerging growth company. See definition of “large accelerated filer”, “accelerated filer” and “emerging growth company” in
Rule 12b-2
of the Exchange Act:
Large accelerated filer  ☒                Accelerated
filer  ☐                Non-accelerated
filer  ☐                Emerging growth company  
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act.  ☐
† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.
Indicate by check mark whether the registrant has filed a report on the attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.  
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements.  ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to
§240.10D-1(b).  ☐
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
 
U.S. GAAP  ☒
  
            International Financial Reporting Standards as issued
            by the International Accounting Standards Board  ☐
   Other  ☐
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow:    Item 17  ☐    Item 18  ☐
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule
12b-2
 
of
the Exchange Act).    Yes  ☐    No  


Table of Contents

TABLE OF CONTENTS

 

EXCHANGE RATES AND CERTAIN DEFINED TERMS

     1  

FORWARD-LOOKING STATEMENTS

     2  

BUSINESS

     3  

RISK FACTORS

     35  

CERTAIN INFORMATION ABOUT OUR AMERICAN DEPOSITARY SHARES AND EQUITY SHARES

     67  

DESCRIPTION OF EQUITY SHARES

     68  

DESCRIPTION OF AMERICAN DEPOSITARY SHARES

     73  

DIVIDEND POLICY

     80  

SELECTED FINANCIAL AND OTHER DATA

     81  

SELECTED STATISTICAL INFORMATION

     84  

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     92  

MANAGEMENT

     119  

PRINCIPAL SHAREHOLDERS

     140  

RELATED PARTY TRANSACTIONS

     141  

TAXATION

     143  

SUPERVISION AND REGULATION

     149  

EXCHANGE CONTROLS

     190  

RESTRICTIONS ON FOREIGN OWNERSHIP OF INDIAN SECURITIES

     192  

ADDITIONAL INFORMATION

     196  

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

     197  

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM – INTERNAL CONTROLS OVER FINANCIAL REPORTING

     198  

FINANCIAL STATEMENTS

     F-1  

EXHIBIT INDEX

  

SIGNATURES

  

 

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CROSS REFERENCE SHEET

Form 20-F

 

   

Item Caption

  

Location

    

Part I

       
Item 1   Identity of Directors, Senior Management and Advisors   

Not Applicable

  
Item 2   Offer Statistics and Expected Timetable   

Not Applicable

  
Item 3   Key Information   

Exchange Rates and Certain Defined Terms

   1
    

Risk Factors

   35
    

Selected Financial and Other Data

   81
Item 4   Information on the Company   

Business

   3
    

Selected Statistical Information

   84
    

Management’s Discussion and Analysis of Financial Condition and Results of Operations

   92
    

Principal Shareholders

   140
    

Related Party Transactions

   141
    

Supervision and Regulation

   149
Item 5   Operating and Financial Review and Prospects   

Management’s Discussion and Analysis of Financial Condition and Results of Operations

   92
Item 6   Directors, Senior Management and Employees   

Business—Employees

   30
    

Management

   119
    

Principal Shareholders

   140
Item 7   Major Shareholders and Related Party Transactions   

Principal Shareholders

   140
    

Management—Loans to Members of Our Senior Management

   132
    

Related Party Transactions

   141
Item 8   Financial Information   

Report of Independent Registered Public Accounting Firms

   F-2
    

Consolidated Financial Statements and the Notes thereto

   F-5
    

Business—Legal Proceedings

   31
Item 9   The Offer and Listing   

Certain Information About Our American Depositary Share and Equity Shares

   67
    

Restrictions on Foreign Ownership of Indian Securities

   192
Item 10   Additional Information   

Management

   119
    

Description of Equity Shares

   68
    

Dividend Policy

   80
    

Taxation

   143
    

Supervision and Regulation

   149
    

Exchange Controls

   190
    

Restrictions on Foreign Ownership of Indian Securities

   192
    

Additional Information

   196

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Table of Contents

CROSS REFERENCE SHEET

 

   

Item Caption

  

Location

      
Item 11   Quantitative and Qualitative Disclosures About Market Risk   

Business—Risk Management

     22  
    

Selected Statistical Information

     84  
Item 12   Description of Securities Other than Equity Securities   

Not Applicable

  
Item 12D   ADSs fee disclosure   

Description of American Depositary Shares—Fees and Charges for Holders of American Depositary Shares

     76  

Part II

       
Item 13   Defaults, Dividend Arrearages and Delinquencies   

Not Applicable

  
Item 14   Material Modifications to the Rights of Security
Holders and Use of Proceeds
  

Not Applicable

  
Item 15   Controls and Procedures   

Management—Controls and Procedures

     133  
    

Management’s Report on Internal Control Over Financial Reporting

     197  
    

Report of Independent Registered Public Accounting Firm—Internal Controls Over Financial Reporting

     198  
Item 16A   Audit Committee Financial Expert   

Management—Audit Committee Financial Expert

     134  
Item 16B   Code of Ethics   

Management—Code of Ethics

     134  
Item 16C   Principal Accountant Fees and Services   

Management—Principal Accountant Fees and Services

     134  
Item 16D   Exemption from the Listing Standards for Audit Committees   

Not Applicable

  
Item 16E   Purchases of Equity Securities by the Issuer and Affiliated Purchasers   

Not Applicable

  
Item 16F   Changes in or disagreements with accountants   

Not Applicable

  
Item 16G   Significant Differences in Corporate Governance Practices   

Management—Compliance with NYSE Listing Standards on Corporate Governance

     135  
Item 16H   Mine Safety Disclosure   

Not Applicable

  
Item 16I   Disclosure Regarding Foreign Jurisdictions that Prevent Inspections   

Not Applicable

  

 

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Table of Contents

EXCHANGE RATES AND CERTAIN DEFINED TERMS

In this document, all references to “we”, “us”, “our”, “HDFC Bank” or “the Bank” shall mean HDFC Bank Limited or where the context requires also to its subsidiaries whose financials are consolidated for accounting purposes. References to the “U.S.” or “United States” are to the United States of America, its territories and its possessions. References to “India” are to the Republic of India. References to the “Companies Act” in the document mean the Indian Companies Act, 2013 and all rules and regulations issued thereunder. References to “$”, “US$”, “dollars” or “United States dollars” are to the legal currency of the United States and references to “Rs.”, “INR”, “rupees” or “Indian rupees” are to the legal currency of India.

Our financial statements are presented in Indian rupees and in some cases translated into United States dollars. The financial statements and all other financial data included in this report, except as otherwise noted, are prepared in accordance with United States generally accepted accounting principles, or U.S. GAAP. U.S. GAAP differs in certain material respects from accounting principles generally accepted in India, the requirements of India’s Banking Regulation Act and related regulations issued by the Reserve Bank of India (“RBI”) (collectively, “Indian GAAP”), which form the basis of our statutory general purpose financial statements in India. Principal differences applicable to our business include: determination of the allowance for credit losses, classification and valuation of investments, accounting for deferred income taxes, stock-based compensation, loan origination fees, derivative financial instruments, business combinations and the presentation format and disclosures of the financial statements and related notes. References to a particular “fiscal” are to our fiscal year ended March 31 of such year.

Fluctuations in the exchange rate between the Indian rupee and the United States dollar will affect the United States dollar equivalent of the Indian rupee price of the equity shares on the Indian stock exchanges and, as a result, will affect the market price of our American Depositary Shares (“ADSs”) in the United States. These fluctuations will also affect the conversion into United States dollars by the depositary of any cash dividends paid in Indian rupees on the equity shares represented by ADSs.

Investor expectations that reforms implemented by the government of India (the “Government of India” or the “Government”) will lead to an improvement in the long term growth outlook helped to improve the rupee’s performance, reducing the depreciation trend to 3.85 percent in fiscal year 2015. During fiscal year 2016, the rupee depreciated by 6.32 percent primarily reflecting global risk aversion and a strong United States dollar. However, in line with other emerging markets, which experienced currency appreciation in fiscal year 2017, the Indian rupee also appreciated by 2.1 percent against the United States dollar. This was mainly attributed to repricing of the Indian assets by international investors (driven by domestic economic and political stability) alongside the disappointment relating to the United States reform agenda. In fiscal year 2018, the rupee ranged between a high of Rs. 65.71 per US$ 1.00 and a low of Rs. 63.38 per US$ 1.00. Pressure developed in the last two quarters of fiscal year 2018 as oil prices rose and trade war risks escalated globally. In fiscal year 2019, while the rupee depreciated overall by 6.3 percent against the United States dollar, it ranged between a high of Rs. 74.4 per US$ 1.00 and a low of Rs. 64.85 per US$ 1.00. Rising oil prices and a slowdown in global trade volumes, as well as a risk aversion towards emerging market currencies (because of tariffs and trade war risks) have all affected the rupee negatively in fiscal year 2019. The rupee further depreciated in fiscal year 2020, amid weak global demand, low domestic economic growth and foreign portfolio investment outflows, as well as a result of foreign investors becoming more risk averse with respect to investments in India. In fiscal year 2020, the rupee ranged between a high of Rs. 76.37 per US$ 1.00 and a low of Rs. 68.40 per US$ 1.00. The rupee appreciated by 2.8 percent in fiscal year 2021, in part due to a weak dollar and robust foreign flows. In fiscal year 2021, the rupee traded in the range of 75.08-73.14 per US $1.00. With foreign capital outflows and geo-political risks, the rupee depreciated by 3.8 percent against the United States dollar in fiscal year 2022. In fiscal year 2022, the rupee ranged between a high of Rs. 77.07 per US$ 1.00 and a low of Rs. 72.37 per US$ 1.00. On account of a strong United States dollar and foreign institutional investors (“FII”) outflows, the rupee depreciated by 8.1 percent in fiscal year 2023.

Although we have translated selected Indian rupee amounts in this document into United States dollars for convenience, this does not mean that the Indian rupee amounts referred to could have been, or could be, converted to United States dollars at any particular rate, the rates stated above, or at all. Unless otherwise stated, all translations from Indian rupees to United States dollars are based on the noon buying rate in the City of New York for cable transfers in Indian rupees at US$ 1.00 = Rs. 82.19 on March 31, 2023. The Federal Reserve Bank of New York certifies this rate for customs purposes on each date the rate is given. The noon buying rate on June 16, 2023 was Rs. 81.89 per US$ 1.00.

 

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FORWARD-LOOKING STATEMENTS

We have included statements in this report which contain words or phrases such as “will”, “aim”, “will likely result”, “believe”, “expect”, “will continue”, “anticipate”, “estimate”, “intend”, “plan”, “contemplate”, “seek to”, “future”, “objective”, “goal”, “project”, “should”, “will pursue” and similar expressions or variations of these expressions, that are “forward-looking statements”. Actual results may differ materially from those suggested by the forward-looking statements due to certain risks or uncertainties associated with our expectations with respect to, but not limited to, our ability to implement our strategy successfully, the market acceptance of and demand for various banking services, the success of the Proposed Transaction (as defined below) and implementation of the Scheme with HDFC Limited (as defined below (1)), future levels of our non-performing/ impaired assets, our growth and expansion, the adequacy of our provision/allowance for credit and investment losses, technological changes, volatility in investment income, our ability to market new products, cash flow projections, the outcome of any legal, tax or regulatory proceedings in India and in other jurisdictions we are or become a party to, the future impact of new accounting standards, our ability to pay dividends, the impact of changes in banking regulations and other regulatory changes on us in India and other jurisdictions, our ability to roll over our short term funding sources and our exposure to market and operational risks. By their nature, certain of the market risk disclosures are only estimates and could be materially different from what may actually occur in the future. As a result, actual future gains, losses or impact on net income could materially differ from those that have been estimated.

In addition, other factors that could cause actual results to differ materially from those estimated by the forward-looking statements contained in this document include, but are not limited to: general economic and political conditions, instability or uncertainty in India and the other countries which have an impact on our business activities or investments caused by any factor, including terrorist attacks in India, the United States or elsewhere, anti-terrorist or other attacks by the United States, a United States-led coalition or any other country, tensions between India and Pakistan related to the Kashmir region or between India and China, military armament or social unrest in any part of India; the monetary and interest rate policies of the Government of India, natural calamities, pandemics, inflation, deflation, unanticipated turbulence in interest rates, foreign exchange rates, equity prices or other rates or prices; the performance of the financial markets in India and globally, changes in Indian and foreign laws and regulations, including tax, accounting and banking regulations, changes in competition and the pricing environment in India, and regional or general changes in asset valuations. For further discussion on the factors that could cause actual results to differ, see “Risk Factors”.

 

(1) 

Any forward-looking statements made in relation to the Scheme with HDFC Limited and the Proposed Transaction are merely predictions and therefore inherently subject to uncertainties and other factors and involve known and unknown risks that relate to the Scheme with HDFC Limited and the Proposed Transaction. The Scheme with HDFC Limited is not yet effective and in accordance with the provisions of the Scheme, the Scheme may be terminated and the Proposed Transaction may not be completed. Further, the implementation of the Scheme may fail to realize the anticipated benefits of the merger. For additional information about potential risks that relate to the Proposed Transaction and the Scheme with HDFC Limited that could affect our business and financial results, see “Risk Factors”.

 

2


Table of Contents

BUSINESS

Overview

We are a new generation private sector bank in India. Our goal is to be the preferred provider of financial services to our customers in India across metro, urban, semi-urban and rural markets. Our strategy is to provide a comprehensive range of financial products and services to our customers through multiple distribution channels, with what we believe are high-quality services, advanced technology platforms and superior execution.

We have three principal business activities: retail banking, wholesale banking and treasury operations. Our retail banking products include deposit products, loans including loans to small and medium enterprises, credit cards, debit cards, third-party mutual funds and insurance products, bill payment services, and other products and services. Under wholesale banking, we offer a wide range of commercial and transactional banking services, including working capital finance, trade services, transactional services and cash management. We are also a leading provider of structured solutions in India, which combine cash management services with vendor and distributor finance to facilitate supply chain management for our corporate customers. Our treasury operations manage our balance sheet including liquidity and interest rate risks thereon, and include customer-driven services such as advisory services related to foreign exchange and derivative transactions for corporate and institutional customers, supplemented by proprietary trading, including Indian Government securities. Further, our non-banking finance company (“NBFC”) subsidiary HDB Financial Services Limited (“HDBFSL”) offers a wide range of loans and asset finance products including mortgage loans, commercial vehicle loans, consumer loans and gold loans, as well as a range of business process outsourcing solutions. We provide our customers with brokerage accounts through our subsidiary HDFC Securities Limited (“HSL”), which we believe is one of the leading stock brokerage companies in India and which offers a suite of products and services across various asset classes, such as equity, gold and debt, and via multiple platforms, i.e., online, mobile, telephone and branches.

As a result of trade tensions and geo-political risks, global growth slowed to 2.8 percent in 2019 from 3.6 percent in 2018, according to IMF estimates. In 2020, growth declined by 2.8 percent, driven by the COVID-19 pandemic and related lockdowns and movement restrictions across the globe, which caused GDP to contract in major economies. With the availability of vaccines and policy support, the global economy started regaining strength in 2021, when, as per the International Monetary Fund (“IMF”), global growth stood at 6.3 percent. However, global recovery halted again in 2022 on account of the Russia-Ukraine crisis, the China slowdown, rising commodity prices, and elevated inflation. As per the IMF, global growth moderated to 3.4 percent in 2022. Looking ahead, growth outlooks appear less optimistic as global monetary tightening, the recent turmoil in the U.S. banking sector and moderation in global trade are likely to weigh on global growth in 2023. The IMF estimates global growth to moderate to 2.8 percent in 2023.

In fiscal year 2021, the COVID-19 pandemic adversely impacted India’s economic growth. The Government imposed a lockdown between March 25, 2020 and May 31, 2020. While this helped to control the spread of the pandemic during the first wave, it adversely impacted all sectors of the economy, with the consumption and services sectors worst affected. With improved mobility and policy measures, economic activity picked up in the second half of fiscal year 2021. GDP rebounded with 2.1 percent year on year growth in the second half of fiscal year 2021 as compared to a contraction of 14.4 percent in the first half of fiscal year 2021. For the full fiscal year 2021, India’s GDP declined by 5.8 percent in fiscal year 2021 compared to growth of 3.7 percent in the prior year.

However, the “second wave” of COVID-19 and related containment measures adversely affected the pace of recovery for the Indian economy during the first quarter of fiscal year 2022. On a quarter-by-quarter basis, India’s GDP declined by 16.3 percent in the first quarter of fiscal year 2022, although year-on-year growth stood at 21.6 percent, primarily due to support from a low base from the previous year. Economic activity started recovering from the second quarter of fiscal year 2022, but came under stress again in the second half of fiscal year 2022 as the Omicron variant started spreading. Overall, GDP growth stood at 9.1 percent in fiscal year 2022, against a decline of 5.8 percent in fiscal year 2021.

In the first quarter of fiscal year 2023, GDP growth in India rebounded sharply with support from the reopening of the economy. While year-on-year growth benefited from a low base, economic activity gained genuine traction during the first quarter. GDP growth stood at 13.2 percent year-on-year in the first quarter of fiscal year 2023. However, year-on-year GDP growth began to moderate from the second quarter, primarily due to a fading base effect. In addition, weak performance of the manufacturing sector and exports negatively impacted growth in part due to elevated input costs as the Russia-Ukraine war caused supply chain disruptions. In the third quarter of fiscal year 2023, GDP growth moderated to 4.5 percent from 6.2 percent in the second quarter. However, GDP growth recovered to 6.1 percent in the fourth quarter of fiscal year 2023. For the full fiscal year 2023, GDP growth stood at 7.2 percent.

Geo-political tensions and lingering supply side disruptions weighed on domestic retail inflation in fiscal year 2023. Consumer Price Index (“CPI”) inflation rose to 7.8 percent in April 2022 and stayed above the RBI’s upper tolerance limit of 6.0 percent for the most part of the fiscal year 2023. CPI inflation averaged at 6.7 percent in fiscal year 2023 compared to 5.5 percent in fiscal year 2022. More recently, headline CPI inflation eased to 4.7 percent in April 2023 and further to 4.25 percent in May. Going forward, domestic retail inflation is expected to average at 4.9 percent in fiscal year 2024, primarily due to the base effect and moderation in global commodity prices. However, weather-related disruptions (such as the possibility of El Niño or an uneven distribution of monsoon and heat waves) could challenge the overall inflation outlook.

In fiscal years 2022 and 2023, major central banks raised interest rates sharply as inflation rose to record levels. The U.S. Federal Reserve increased its policy rate by 500 basis points to 5.0-5.25 percent between March 2022 and May 2023, reaching the highest level since 2007. Similarly, the European Central Bank raised the policy rate by 400 basis points to 3.50 percent (deposit rate) and the Bank of England increased the policy rate by 440 basis points to 4.50 percent. In India, the RBI raised the policy rate cumulatively by 250 basis points to 6.50 percent, before choosing to keep rates unchanged at its April 2023 policy meeting.

 

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Table of Contents

Going forward, India’s GDP growth is likely to moderate in fiscal year 2024, primarily due to decreasing external demand as global growth slowdown is likely to adversely impact India’s export performance. Moreover, the contribution of private consumption to GDP growth is estimated to be lower than in previous years as high services inflation, labor market stress due to global recession and a possibility of weaker than normal monsoons and other weather-related risks for the agriculture sector could negatively affect consumer demand. However, the impact of these factors could be partially cushioned by Government’s capital spending plan worth Rs. 10 trillion, mainly focusing on roads and railways. On balance, GDP growth is expected at 6.0 percent in fiscal year 2024.

In response to the adverse impact of the COVID-19 pandemic and related disruptions, the Government sharply increased its spending in both fiscal year 2021 and fiscal year 2022. While the fiscal deficit was 9.2 percent in fiscal year 2021, it narrowed to 6.7 percent in fiscal year 2022. The Government increased its capital spending plan significantly in fiscal years 2023 and 2024 to support growth, while remaining on track for fiscal consolidation in fiscal year 2023 and targeting the fiscal deficit to be at 6.4 percent. For fiscal year 2024, the Government plans to spend Rs. 10 trillion, an increase of 37.3 percent compared to fiscal year 2023, as capital expenditure. Around 40 percent of total capital expenditure is planned to be spent on roads and railways. Despite the sharp increase in capital spending, the Government has targeted a lower fiscal deficit of 5.9 percent for fiscal year 2024.

Since commencing operations in January 1995, we have grown rapidly. As of March 31, 2023, we had 7,821 branches and 19,727 ATMs/Cash Deposit and Withdrawal Machines (“CDMs”) in 3,811 cities and towns and 82.8 million customers. In addition, we had 15,921 business correspondents, which were primarily manned by common service centers (“CSCs”). On account of the expansion in our geographical reach and the resultant increase in market penetration, our assets have grown from Rs. 21,113.7 billion as of March 31, 2022 to Rs. 25,755.6 billion as of March 31, 2023. Our net income has increased from Rs. 386.0 billion for fiscal year 2022 to Rs. 495.4 billion for fiscal year 2023. Our loans and deposits as of March 31, 2023 amounted to Rs. 17,052.9 billion and Rs. 18,826.6 billion, respectively. Across business cycles, we believe we have maintained a strong balance sheet and a low cost of funds. As of March 31, 2023, gross non-performing customer assets as a percentage of gross customer assets was 1.1 percent. Our net customer assets represented 93.3 percent of our deposits and our deposits represented 73.1 percent of our total liabilities and shareholders’ equity. The average non-interest-bearing current accounts and low-interest-bearing savings accounts represented 43.5 percent of average total deposits for the year ended March 31, 2023. These low-cost deposits and the cash float associated with our transactional services led to an average cost of funds (including equity) of 3.5 percent for fiscal year 2023. We had a return on equity (net income as a percentage of average total shareholders’ equity) of 16.8 percent for fiscal year 2022 and 18.7 percent for fiscal year 2023. As at March 31, 2023 we had a total capital adequacy ratio (calculated pursuant to RBI guidelines) of 19.30 percent. Our Common Equity Tier I (“CET-I”) ratio was 16.40 percent as at March 31, 2023.

About Our Bank

HDFC Bank Limited is a limited liability company that was incorporated in August 1994 under the laws of India and commenced operations as a scheduled commercial bank in January 1995. In 2000, we merged with Times Bank Limited and, in 2008, we acquired Centurion Bank of Punjab Limited (“CBoP”). We are part of the HDFC Group of companies established by our principal shareholder, Housing Development Finance Corporation Limited (“HDFC Limited”), a listed public limited company established under the laws of India. HDFC Limited is primarily engaged in financial services, including mortgages, property-related lending and deposit services. The subsidiaries and associated companies of HDFC Limited are also largely engaged in a range of financial services, including asset management, life insurance and general insurance. HDFC Limited and its subsidiaries (together, “HDFC Group”) owned 20.87 percent of our outstanding equity shares as of March 31, 2023 and our Chairperson and Managing Director are nominated by HDFC Limited and appointed with the approval of our shareholders and the RBI. See “Principal Shareholders.” See also “—Proposed Transaction.” We have no agreements with HDFC Limited or any of its group companies that restrict us from competing with them or that restrict HDFC Limited or any of its group companies from competing with our business. We currently distribute products of HDFC Limited and its group companies, such as home loans of HDFC Limited, life and general insurance products of HDFC Life Insurance Company Limited and HDFC ERGO General Insurance Company Limited, respectively, and mutual funds of HDFC Asset Management Company Limited.

We have two subsidiaries, HDBFSL and HSL, which are both incorporated in India. HDBFSL is a non-deposit-taking NBFC engaged primarily in the business of retail asset financing while HSL is primarily in the business of providing brokerage and other investment services. Effective April 1, 2018, the financial results of our subsidiary companies have been prepared in accordance with notified Indian Accounting Standards (April 1, 2017 being the transition date). HDBFSL’s total assets and shareholders’ equity as of March 31, 2023 were Rs. 700.5 billion and Rs. 114.4 billion, respectively. HDBFSL’s net income was Rs. 19.6 billion for fiscal year 2023. As of March 31, 2023, HDBFSL had 1,492 branches across 1,054 cities in India. HSL’s total assets and shareholders’ equity as of March 31, 2023 were Rs. 82.7 billion and Rs. 18.0 billion, respectively. HSL’s net income was Rs. 7.8 billion for fiscal year 2023.

Our principal corporate and registered office is located at HDFC Bank House, Senapati Bapat Marg, Lower Parel, Mumbai 400 013, India. Our telephone number is 91-22-6652-1000. Our agent in the United States for the 2001, 2005, 2007, 2015 and 2018 ADS offerings is Depositary Management Corporation, 570 Lexington Avenue, New York, NY 10022.

 

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Proposed Transaction

The Board of Directors at its meeting held on April 4, 2022 approved a composite scheme of amalgamation (the “Scheme”) for the amalgamation of: (i) HDFC Investments Limited and HDFC Holdings Limited, each a subsidiary of HDFC Limited, with and into HDFC Limited; and (ii) HDFC Limited with and into HDFC Bank (the “Proposed Transaction”). The share exchange ratio shall be 42 equity shares of HDFC Bank (each having a face value of Rs. 1) for every 25 equity shares of HDFC Limited (each having a face value of Rs. 2).

Following the Board meeting held on April 4, 2022, the parties to the Scheme filed a company scheme application with the National Company Law Tribunal, Mumbai Bench (“NCLT”). Pursuant to the order dated October 14, 2022 by the NCLT, a shareholders’ meetings of HDFC Bank and HDFC Limited were convened. The Scheme was approved by the requisite majority of shareholders on November 25, 2022. On receipt of such shareholders’ approval, the parties to the Scheme filed a joint company scheme petition before the NCLT seeking sanction of the Scheme. The NCLT, after hearing the parties to the Scheme, sanctioned the Scheme on March 17, 2023 (“NCLT Order”).

In accordance with Clause 42 of the Scheme, the effectiveness of the Scheme is inter alia subject to receipt of certain approvals and meeting various compliances under the applicable law and regulations. While the requisite approvals have been received by the parties, certain compliances are currently pending. The Scheme will be made effective shortly after completion of such compliances, including filing the NCLT Order with the Registrar of Companies, which is expected to occur on or about July 1, 2023.

We expect the Proposed Transaction to be strategically beneficial to both the Bank and HDFC Limited as it takes advantage of existing complementarities. Following the Proposed Transaction, we expect to grow our housing loan portfolio and enhance our existing customer base, benefiting from HDFC Limited’s technological capabilities to evaluate the credit worthiness of customers and its existing offices to market our products and services across India. The housing market environment has changed with recent laws bringing in greater transparency and price corrections lowering inventories. Home loan customers are typically retained for a longer time than our other retail customers. There is a sizeable customer base of HDFC Limited that presently does not do banking with us yet and to whom we can make our product and service offerings. HDFC Limited’s rural and affordable housing lending is expected to qualify as priority sector lending for us and can enable a higher flow of credit into priority sector lending, including agriculture. At the same time, we expect the combined entity resulting from the completion of the Proposed Transaction to benefit from our lower cost of funds and distribution. As the present regulatory environment is more conducive in terms of reduced reserve requirements of about 22.5 percent (compared to 26 percent previously), we expect acquiring liability customers and deposit mobilization to be a key focus area for us to fund future growth. In addition, we expect to reduce the proportion of our exposure to unsecured loans and benefit from a larger balance sheet and capital base, which would allow us to underwrite larger ticket loans and also enable a greater flow of credit into the Indian economy. More secured and long-tenure products are expected to strengthen the Bank’s robust asset portfolio mix. The Scheme also enlists certain rationales and benefits of the Proposed Transaction. Those expectations and anticipated benefits as well as the rationales mentioned in the Scheme are based on estimations and there is no assurance that they will materialize or materialize to the fullest extent as anticipated.

See also “Risk Factors—The implementation of the Scheme may fail to realize the anticipated benefits of the merger and will expose us to incremental regulatory requirements.”

Our Competitive Strengths

We attribute our growth and continuing success to the following competitive strengths:

We have a strong brand presence and extensive reach through a large distribution network

At HDFC Bank, we are focused on offering a comprehensive range of financial products and solutions tailored to meet the diverse needs of our customers. We are driven by our core values: customer focus, operational excellence, product leadership, sustainability and people. This has helped us grow and achieve our status as one of the largest private sector banks in India, while delivering value to our customers, stakeholders, the Government, employees and the community at large. We believe HDFC Bank is one of the most trusted and preferred bank brands in India. We have been acknowledged as “Best Bank in India” at the Euromoney Awards for Excellence 2022 and as the “Best Corporate Bank”, “Best Bank for SMEs” and “Best Bank for Diversity & Inclusion” at the Asia Money Best Bank Awards 2022. We have capitalized on our strong brand presence by establishing an extensive banking network throughout India, serving a broad range of customers in metro, urban, semi-urban and rural regions. As of March 31, 2023, we had 7,821 branches and 19,727 ATMs/CDMs in 3,811 cities and towns and over 82.8 million customers, and of our total branches, 52.0 percent were in the semi-urban and rural areas. In addition, we had 15,921 business correspondents, which were primarily manned by CSCs. Our extensive branch network is further complemented by our digital platforms, including internet banking, mobile banking, WhatsApp banking and phone banking solutions, to provide our customers with a lifestyle banking experience, which is categorized into seven categories: Pay, Save, Invest, Borrow, Shop, Trade and Insure. Our focus is on delivering a highly personalized multi-channel experience to our customers.

We provide a wide range of products and high-quality service to our clients in order to meet their banking needs

Whether in retail banking, wholesale banking or treasury operations, we consider ourselves a “one-stop-shop” for our customers’ banking needs. We consider our high-quality service offerings to be a vital component of our business and believe in pursuing excellence in execution through multiple internal initiatives focused on continuous improvement. This pursuit of high-quality service and operational execution directly supports our ability to offer a wide range of banking products.

 

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Our retail banking products include deposit products, retail loans (such as vehicle and personal loans), and other products and services, such as private banking, depositary accounts, foreign exchange services, distribution of third-party products (such as insurance and mutual funds), bill payments and sale of gold and silver bullion. In addition, we are the largest credit card issuer in India with 17.5 million cards outstanding as of March 31, 2023. With respect to wholesale banking, we offer a wide range of commercial and transactional banking services to businesses and organizations of all sizes. Our services include working capital finance, term lending, project finance, trade services, supply chain financing, transactional services and cash management, as well as other services. Our product offerings include documentary credits and bank guarantees, foreign exchange and derivative products, investment banking services and corporate deposit products and services such as custodial and clearing bank services and correspondent banking. We have made significant inroads into the banking consortia of a number of leading Indian corporates including multinationals. We believe our large scale and low cost of funding enable us to pursue high-quality wholesale financing opportunities competitively and at an advantage compared to our peers. We collect taxes for the Government and are bankers to companies in respect of issuances of equity shares and bonds to the public. Our NBFC subsidiary HDBFSL offers loan and asset finance products including tractor loans, consumer loans and gold loans, as well as business process outsourcing solutions such as form processing, document verification, contact center management and other front- and back-office services.

We are able to provide this wide range of products across our physical and digital network, meaning we can provide our targeted rural customers with banking products and services similar to those provided to our urban customers, which we believe gives us a competitive advantage. Our wide range of products and focus on superior service and execution also create multiple cross-selling opportunities for us and, we believe, promote customer retention.

We have achieved robust and consistent financial performance while maintaining a healthy asset quality during our growth

On account of our superior operational execution, broad range of products, expansion in our geographical reach and the resulting increase in market penetration through our extensive branch network, our assets have grown from Rs. 21,113.7 billion as of March 31, 2022 to Rs. 25,755.6 billion as of March 31, 2023. Our net interest margin was 4.3 percent in fiscal year 2022 and 4.4 percent in fiscal year 2023. Our current and savings account deposits as a percentage of our total deposits were 44.4 percent as of March 31, 2023, and we believe this strong current and savings account profile has enabled us to tap into a low-cost funding base. In addition to the significant growth in our assets and net revenue, we remain focused on maintaining a healthy asset quality. We continue to have low levels of non-performing customer assets as compared to the average levels in the Indian banking industry. Our gross non-performing customer assets as a percentage of total customer assets was 1.1 percent as of March 31, 2023. Our net income has increased from Rs. 386.0 billion for fiscal year 2022 to Rs. 495.4 billion for fiscal year 2023. Net income as a percentage of average total shareholders’ equity was 16.8 percent in fiscal year 2022 and 18.7 percent in fiscal year 2023 and net income as a percentage of average total assets was 2.1 percent in fiscal year 2022 and 2.2 percent in fiscal year 2023. We believe the combination of strong net income growth, robust deposit-taking, a low cost of funds and prudent risk management has enabled us to generate attractive returns on capital.

We have an advanced technology platform

We have taken significant strides towards building a technology-focused ecosystem by creating seamless digital experiences for our customers. Our technology transformation agenda is central to delivering “always-on” secure services, backed by resilient technology systems. We have started reaping the benefits from Project Future Ready with various products launches consolidating our growth further. See “—Our Business Strategy—Project Future Ready.” We remain committed to leading the charge to innovate and progress on the tech and digital revolution which has been witnessed in India post-COVID-19. We are focusing on building new competencies through our factory approach under Digital Solutions Factory, Enterprise Factory.

Digital Solutions & Factory: Visioned to bring in greater working synergies between our Digital Factory & Business Solutions Group unit, this unified construct is responsible for building and reimagining experiences and journeys for HDFC bank products and services for our existing and potential customers.

Enterprise Factory: This unit is the bridge between the core IT systems and the cloud-native experience that are being designed through the digital factory. This unit is also responsible for end-to-end architecture of all our applications.

Our factory approach has empowered new products and services with a reimagination of services and journeys for our customers. Strategic partnerships with FinTechs have contributed to introducing cutting edge technologies to the banking landscape and have enabled us to further strengthen our leadership in the industry.

We have an experienced management team

Our experienced management team is led by Mr. Sashidhar Jagdishan, who has been with our Bank since 1996 and who was appointed Managing Director and Chief Executive Officer of the Bank in October 2020. Formerly our Chief Financial Officer, Mr. Jagdishan was appointed as Change Agent in 2019. He was additionally responsible for legal and secretarial, human resources, corporate communication, infrastructure, administration and corporate social responsibility functions. Effective April 2023, Mr. Kaizad Bharucha, our former Executive Director, was appointed as Deputy Managing Director and Mr. Bhavesh Zaveri was appointed as Executive Director. See also “Management.”

 

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Our leadership team brings together a diversity of talent and a wealth of experience. Many of the members of our management have had a long tenure with us, which gives us a deep bench of experienced managers. They have substantial experience in banking or other industries and share our common vision of excellence in execution. Having a management team with such breadth and depth of experience is well suited to leverage the competitive strengths we have already developed across our large, diverse and growing branch network as well as allowing our management team to focus on creating new opportunities for our business. As the world becomes increasingly digital, our management team intends to steer the Bank to leadership in this emerging domain with innovative products and services. See also “Management.”

Our Business Strategy

Our business strategy emphasizes the following elements:

Project Future Ready

In fiscal year 2022, we launched “Project Future Ready”, which focuses on developing best-in-class products and services. As part of Project Future Ready, we have launched a multitude of products over fiscal year 2023, delivering neo-banking experiences to our customers while making banking simple, easy and highly secure. Key launches include the following:

 

   

PayZapp 2.0: The modernized payments app, which launched in March 2023, offers a seamless and intuitive user interface with enhanced security. PayZapp 2.0 also brings about several quality-of-life improvements compared to its predecessor and provides new-age functionalities such as limit management, auto-linkage of HDFC Bank cards, enhanced onboarding experience and detailed account statements.

 

   

Smart Hub Vyapar: The one-stop business and banking solution has been designed and developed to serve the business needs of micro, small and medium enterprises (“MSMEs”) and is continuously enhanced with new use cases bundled as part of various rollouts. The app allows instant, digital and paperless merchant onboarding for the Bank’s customers, accepts interoperable payments across multiple payment modes, and enables remote payments. Merchants can also avail banking services such as opening fixed deposits and quick access to pre-approved loans and credit cards. Additionally, the app has a marketing tool that enables merchants to broadcast their offers through social media to existing and potential customers.

 

   

HDFC Bank One (Customer Experience Hub): This conversational bot is built on artificial intelligence (“AI”) and machine learning (“ML”) and has transformed our contact centers into a consolidated central platform. It has been rolled out pan-India covering contact centers including inbound phone banking, interactive voice response (“IVR”) self-service, virtual relationship management teams and tele-sales. With the launch of HDFC Bank One we have witnessed significant improvements in our customer engagements owed to the omni-channel experience being provided across WhatsApp chat banking, SMS banking, IVR self-service and agent-assisted banking.

 

   

Xpress Car Loans (“XCL”): XCL, which is the first of its kind end-to-end digital lending journey platform in India, facilitates instant and hassle-free car loan disbursals to existing as well as new-to-bank customers. It has been well received particularly by customers with average monthly disbursements crossing a fifth of the total disbursements. The platform will be further enhanced by engaging with leading car dealerships and manufacturers to offer seamless loan disbursals and purchase experiences across India.

 

   

Cattle Finance: Our Dairy Cattle Finance App is our one-touch solution developed to support dairy farmers by providing them with a single platform for the end-to-end digital processing of loan applications. As the platform combines everything from the customer’s onboarding to the disbursement of the loan under one umbrella, the turnaround time can be reduced significantly, thereby enhancing the customer experience.

Increase our market share of India’s expanding banking and financial services industry

In addition to benefiting from the overall growth in India’s economy and financial services industry, we believe we can increase our market share by continuing to focus on our competitive strengths, including our strong brand, our diverse product offering and our extensive banking outlet and ATM networks, to increase our market penetration. We believe we can expand our market share by focusing on developing our digital offerings to target mass markets across India. We believe digital offerings will position us well to capitalize on growth in India’s banking and financial services sector, arising from India’s emerging middle class and growing number of bankable households. Our key indigenous digital products such as XCL, 10 Second Personal loans, digital loan against shares, and digital loan against mutual funds, among others, enable not only our existing customers but also new bank customers to avail loans in a seamless manner. These initiatives address the needs of the growing population of digital savvy customers. We believe we can also capture an increased market share by expanding our branch footprint, particularly by focusing on rural and semi-urban areas. As of March 31, 2023, we had 7,821 branches and 19,727 ATMs/CDMs in 3,811 cities and towns. In addition, we had 15,921 business correspondents, which were primarily manned by CSCs. In line with the Bank’s core value of product leadership, the bank has significantly enhanced its process of managing the retail distribution franchise and its expansion by developing a scientific approach and using a “Distribution Planning Tool”. This data science tool combines data sources, including geo-spatial data on urbanization levels in India, credit bureau information on the presence of financial companies in an area and various internal data sources with a front-end data visualization solution. The Distribution Planning Tool has enabled the Bank to merge data-based insights with on-the-ground intelligence to take informed decisions on the expansion of distribution points (branches, ATMs/CDMs and business correspondents) at locations which carry high business potential across the country. We expect this approach to help optimize our expansion and increase our market share and profitability.

 

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Continue our investments in technology to support our digital strategy

As we continuously improve and modernize our core banking applications and information technology infrastructure, we have reinforced our technology and innovation know-how by undertaking key initiatives such as:

 

   

Data Centre Migration: We have successfully migrated our primary data center to state-of-the-art facilities in Mumbai and Bengaluru. Our comprehensive planning of the 12+ month program helped achieve a seamless migration of all production and testing environment applications.

 

   

Cloud strategy: We have progressed on our hybrid cloud strategy with the successful implementation of a common landing zone with leading cloud service providers. This enables us to create a secure and streamlined environment for all cloud deployments in the future and furthers ’our agenda of implementing agile and modern software development practices in the transformation journey.

 

   

TradeFlow: The application TradeFlow is built entirely on the cloud and employs various automations integrating more than 15 applications. It has entirely transformed our trade finance solution by building a centralized state-of-the-art platform, providing improved reliability and usability for end-users. With features such as dynamic reports, an informative dashboard and a single view of all dependencies as well as its ability to integrate with various trade finance peripheral applications, TradeFlow proves to be a one-stop application for all our trade users.

 

   

Revamping Corporate Net Banking: Corporate Banking eXchange (“CBX”) is our unified corporate banking portal specifically designed to cater to the net-banking needs of corporates. Having the capability to transact and process via both mobile and the internet portal, this system handles more than 87,000 active domains. 99 percent of our customers have already been migrated to CBX and the remaining are being onboarded. The new portal offers a superior experience with modern features such as customized narration, enhanced authorization levels and a contextual help dashboard providing superior customer convenience.

 

   

Unified payment interface (“UPI”): With a 70 percent year-on-year growth, our UPI continued improving both in terms of value and volumes in fiscal year 2023. With the successful implementation of the Active-Active architecture of the UPI (data is replicated to a ready-to-go secondary site which is in constant synchronization with the primary site), we are able to process records from the NPCI disaster recovery (“DR”) and NPCI primary recovery (“PR”) sites simultaneously. We plan to enhance our UPI further, viz. through the introduction of UPI Lite, which facilitates low-value transactions in offline mode through on-device wallets, enabling users to make transactions even when they do not have access to the internet.

 

   

FynDNA Governor Solution: Governor Solution is our recently developed adaptive rate limiter for monitoring UPI transactions, which is deployed between the source and destination system (whether cloud or on-premises). It plays a key role in intelligently managing and controlling the exchange of transactions basis the health of the destination system. The monitoring mechanism of Governor solution enables detailed performance analytics of the destination system, facilitating the early detection of any irregularities and preventing performance deterioration.

Cross-sell our broad financial product portfolio across our customer base

We are able to offer our complete suite of financial products across our branch network, including in rural locations. By matching our broad customer base with our ability to offer our complete suite of products to both rural and urban customers across retail banking, wholesale banking and treasury product lines, we believe that we can continue to generate organic growth by cross-selling different products by proactively offering our customers complementary products as their relationships with us develop and their financial needs grow and evolve.

Maintain strong asset quality through disciplined credit risk management

We have maintained high-quality loan and investment portfolios through careful targeting of our customer base, and by putting in place what we believe are comprehensive risk assessment processes and diligent risk monitoring and remediation procedures. Our gross non-performing customer assets as a percentage of gross customer assets was 1.1 percent as of March 31, 2023. We believe we can maintain strong asset quality appropriate to the loan portfolio composition while achieving growth.

Maintain a low cost of funds

We believe we can maintain a relatively low-cost funding base as compared to our competitors, by leveraging our strengths and expanding our base of retail savings and current deposits and increasing the free float generated by transaction services, such as cash management and stock exchange clearing. Our non-interest-bearing current and low-interest-bearing savings account deposits were 44.4 percent of our total deposits as of March 31, 2023. Our average cost of funds (including equity) was 3.1 percent in fiscal year 2022 and 3.5 percent in fiscal year 2023.

 

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Embed ESG principles within our wider business strategy

We include environmental, social and governance (“ESG”) factors in our business strategy, including in the design of our products and services and the implementation of our processes and policies. Our ESG strategy, which seeks to create value for all stakeholders, focuses on climate change, community and society, along with certain practices related to customers and suppliers, lending, procurement and governance. We have a board-level Corporate Social Responsibility and ESG Committee with oversight of our sustainability and climate change initiatives, and the Board has approved an ESG policy framework to identify and mitigate the Bank’s climate change-related risks. In fiscal year 2022, we committed to become carbon neutral with respect to direct emissions from our operations by fiscal year 2032 and are putting in place an implementation framework to achieve carbon neutrality, including continuing our investments in renewable energy and energy efficiency projects to lower our carbon footprint. Other initiatives to reduce ESG risks include initiatives in digital banking, contributions to tree planting targets, green building, managing greenhouse gas emissions through various initiatives, including those to reduce fuel consumption by our corporate fleet and paper consumption across the Bank, the use of renewable energy and a reduction in energy consumption.

With increasing focus on formalizing climate change risk management and enhancing related disclosures, some stakeholders are also placing more emphasis on financial institutions’ actions and investment decisions in respect of ESG matters. We continue to monitor the impacts of climate change risks on our business, including as the result of regulatory developments, changing market practices and the transition to a low carbon economy, and to accelerate the development of our climate risk management capabilities. Developments in data collection and assessment methodologies are expected to continue to help improve and enhance our measurement and reporting of climate change risks and financed emissions. We are exploring frameworks to model and assess climate risks. We also continue our efforts to acquire granular data and test tools for climate risk assessments and to adopt suitable methodologies to analyze exposures under different climate scenarios through suitable partnerships—including exploring options to collaborate with data providers.

Evaluation of environmental and social risk is also an integral part of our overall credit appraisal and approval process. Recently, we have upgraded the SEMS framework and replaced it with an ESG & Climate Change (“ESG CC”) assessment framework to enable a more comprehensive assessment of ESG and climate change issues. The ESG CC assessment framework necessitates an assessment of environmental, health, social, safety and climate change risks in addition to other risks as part of the overall credit appraisal process. In particular, wholesale borrowers with a direct customer risk greater than Rs. 500 million across facilities are subject to ESG CC assessment. In addition, we are increasingly emphasizing green financing solutions and tailoring the Bank’s portfolio towards climate-sensitive financing and companies with appropriate risk assessment systems and processes.

COVID-19 Pandemic

On March 11, 2020, the COVID-19 outbreak was declared a pandemic by the World Health Organization (“WHO”). Governments and companies introduced a variety of measures to contain the spread of the virus. We also took measures and implemented remote working arrangements for the majority of our workforce, provision of appropriate masks and hand sanitizers for at-risk employees, use of physical distancing measures, periodic disinfection and fumigation of operational bank locations and the establishment of a specific COVID-19 employee helpline. As a result of remote working, we have strengthened our cybersecurity measures, including implementing two-factor authentication, increasing employee awareness of unusual activity and ensuring IT support is available 24 hours per day. We also implemented additional measures to enable customers to complete their banking activity remotely where possible. We believe that our capital and liquidity positions remain strong leading to robust processes, coordination and communication within our business units and a high level of customer service and care.

The pandemic and its aftermath present both challenges and opportunities for the Indian banking system. For example, opportunities in the healthcare sector are likely to continue growing, as the management of the pandemic underscores the need to expand capacity in this area. Growth in the healthcare sector also has a positive impact on the pharmaceuticals and medical equipment segments. To strengthen the manufacturing segment, the Government announced the Production Linked Incentive Scheme in March 2020. In the fiscal year 2022 budget, Rs. 1.9 trillion were allocated to the scheme for five years, with a focus to boost production in textiles, electronics, pharmaceuticals and 10 other segments. Additionally, the Government plans to increase its capital spending to Rs. 10.0 trillion for fiscal year 2024 from Rs. 5 trillion in fiscal year 2023. This may lead to increased demand for ancillary products in the infrastructure segment, as well as the crowding-in of private capital expenditure.

The Government has also allocated considerable funding (Rs. 100.0 billion) to formalize the micro-food processing segment through technical and infrastructure support and the implementation of safety and quality standards. The micro-segment is likely to grow in “clusters” and to offer increased credit opportunities for banks, particularly through the micro-finance and the self-help group (“SHG”) channels.

Loans to MSMEs increased sharply in fiscal year 2022 and 2023, primarily due to the Government’s Emergency Credit Line Guarantee Scheme. The Government had increased the cover of this scheme by Rs. 500 billion to Rs. 5 trillion in February 2022. While the sovereign back-stop makes lending to this segment viable in the near term, the effort to strengthen and scale up MSMEs could create high-quality borrowers in the process.

 

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As the Indian economy began to recover from COVID-19 pandemic-related disruptions, bank credit growth accelerated to 15 percent in March 2023 from 8.6 percent in March 2022. This acceleration in bank credit growth was broadly based in fiscal year 2023, with major segments, such as loans to MSME, retail, agriculture and allied sectors, experiencing double digit growth.

For fiscal year 2024, the Government plans to increase its capital spending by 37.3 percent to Rs. 10 trillion. This could increase investments in ancillary segments such as steel, cement and pipes, some of which have already seen improved capacity utilization, with the potential of private capital expenditures increasing further going forward beyond 2024.

The Government also announced a revamped credit guarantee scheme for the MSME sector in the budget for 2023-2024. The scheme has allocated funds of Rs. 90 billion and is expected to enable additional collateral-free guaranteed credit of Rs. 2 trillion. Moreover, the Government has increased the agriculture credit target by 11 percent to Rs. 20 trillion for fiscal year 2024. These measures could support credit growth in the agriculture sector and industry segment.

Lastly, an anticipated shift in global value chains away from China, in order to reduce concentration risk, as well as in response to a shifting geo-political landscape, presents India with unique opportunities. India could gain global market share across sectors including more traditional sectors, such as textiles, furniture and basic chemicals, as well as more technologically advanced sectors, such as mobile phone handsets, pharmaceuticals and auto components.

However, challenges still remain. Factoring in the possibility of a global slowdown, GDP growth is expected to moderate to 6.0 percent in fiscal year 2024. While Government capital spending could crowd-in private investments in some segments (e.g., cement and steel), overall private capital expenditure growth is likely to be muted, due to a likely slowdown in private consumption and external demand, global uncertainty and recessionary risks. In addition, rising costs of capital due to domestic and global monetary tightening could weigh on investments and credit demand. Lastly, the possibility of rising urban unemployment, which is often a corollary of a slowdown in economic growth, remains a risk for the demand for retail lending.

Our Principal Business Activities

Our principal business activities consist of retail banking, wholesale banking and treasury operations. The following table sets forth our total revenues-net, comprising of net interest revenue after provision for credit losses and non-interest revenue-net attributable to each area for the last three fiscal years:

 

     Years ended March 31,  
     2021     2022     2023  
                             
     (in millions, except percentages)  

Retail banking

     Rs.567,389.2        72.5     Rs.640,670.1        71.8     Rs.808,952.1      US$ 9,842.4        71.5

Wholesale banking

     198,576.0        25.4     235,811.3        26.4     305,947.4        3,722.3        27.1

Treasury operations

     16,463.6        2.1     15,952.8        1.8     16,261.7        197.9        1.4

Net revenue

     Rs.782,428.8        100.0     Rs.892,434.2        100.0     Rs.1,131,161.2      US$ 13,762.6        100.0

Retail Banking

Overview

We consider ourselves a one-stop shop for the financial needs of our customers. We provide a comprehensive range of financial products including deposit products, loans, credit cards, debit cards, payment wallets, third-party mutual funds and insurance products, bill payment services and other services. Our retail banking loan products include loans to small and medium enterprises for commercial vehicles, construction equipment and other business purposes. We group these loans as part of our retail banking business considering, among other things, the customer profile, the nature of the product, the differing risks and returns, the market segment, our organization structure and our internal business reporting mechanism. Such grouping ensures optimal utilization and deployment of specialized resources in our retail banking business. We also have specific products designed for lower-income individuals through our Sustainable Livelihood Initiative. Through this initiative, we reach out to the un-banked and under-banked segments of the Indian population in rural areas. We actively market our services through our banking outlets and alternate sales channels, as well as through our relationships with automobile dealers and corporate clients. We follow a multi-channel strategy to reach out to our customers bringing to them choice, convenience and what we believe to be a superior experience. Innovation has been the springboard of growth in this segment and so has a strong focus on analytics and customer relationship management, which we believe has helped us to understand our customers better and offer tailor-made solutions. We further believe that these factors lead to better customer engagement.

As of March 31, 2023, we had 7,821 branches and 19,727 ATMs/CDMs in 3,811 cities and towns. In addition, we had 15,921 business correspondents, which were primarily manned by CSCs. We also provide telephone, internet and mobile banking to our customers. We plan to continue to expand our banking outlet and ATM network as well as our other distribution channels, subject to regulatory guidelines/approvals.

 

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Retail Loans and Other Asset Products

We offer a wide range of retail loans, including loans for the purchase of automobiles, personal loans, retail business banking loans, loans for the purchase of commercial vehicles and construction equipment finance, two-wheeler loans, credit cards and loans against securities. Our retail loans, of which 28.9 percent were unsecured, constituted 66.1 percent of our gross loans as of March 31, 2023. Apart from our banking outlets, we use our ATMs, telephone banking, internet banking and mobile banking to promote our loan products. We perform our own credit analysis of the borrowers and the value of the collateral if the loan is secured. See “—Risk Management—Credit Risk—Retail Credit Risk.” We also buy mortgage and other asset-backed securities and invest in retail loan portfolios through assignments. In addition to taking collateral, in most cases, we obtain debit instructions/post-dated cheques covering repayments at the time a retail loan is made. It is a criminal offense in India to issue a bad cheque. Our unsecured personal loans, which are not supported by any collateral, are a greater credit risk for us than our secured loan portfolio. We may be unable to collect in part or at all on an unsecured personal loan in the event of non-payment by the borrower. Accordingly, personal loans are granted at a higher contracted interest rate since they carry a higher credit risk as compared to secured loans. See also “Risk Factors—Our unsecured loan portfolio is not supported by any collateral that could help ensure repayment of the loan, and in the event of non-payment by a borrower of one of these loans, we may be unable to collect the unpaid balance.”

The following table shows the gross book value and percentage share of our retail credit products:

 

     At March 31, 2023  
     Value (in millions)      % of Total Value  

Retail Assets:

        

Auto loans

   Rs. 1,221,097.6      US$ 14,857.0        10.6  

Personal loans/Credit cards

     2,782,828.5        33,858.5        24.2  

Retail business banking

     3,378,625.2        41,107.5        29.4  

Commercial vehicle and construction equipment finance

     1,285,887.8        15,645.3        11.2  

Housing loans

     1,020,901.6        12,421.2        8.8  

Other retail loans

     1,817,239.6        22,110.2        15.8  

Total retail loans

   Rs. 11,506,580.3      US$ 139,999.7        100.0  

Auto Loans

We offer loans at fixed interest rates for financing of new and used car purchases, including electric vehicles, which have gained significant popularity in recent years. In addition to our general promotional efforts, we specifically market our offerings at various customer touch points such as authorized original equipment manufacturers, dealer showrooms and outlets, authorized direct sales agents and our banking outlets, as well as actively cross-selling these products through other lending businesses of the Bank. We also market our products through outbound and inbound calls with customers, as well as through the bank’s digital touch points. Having established our presence in this business over the last two decades we believe we have consistently been a market leader and are well-equipped to serve the entire automobile ecosystem, including original equipment manufacturers, dealers and end-customers.

Personal Loans and Credit Cards

We offer unsecured loans at fixed rates to salaried individuals, self-employed professionals, small businesses and individual businessmen.

We offer credit cards on VISA, MasterCard, Diners Club and RuPay platforms under the classification of corporate cards, business cards, co-brand cards, premium retail cards and super premium retail cards. We had approximately 16.5 million and 17.5 million cards outstanding (i.e., total credit cards in circulation) as of March 31, 2022 and March 31, 2023, respectively.

We offer Easy EMI (equated monthly installments) through credit cards, debit cards and consumer loans. Easy EMI is available at no extra cost across multiple product categories, including offline and online channels under multiple brands.

Our efforts in the payments business are continuously focused on meeting customers’ specific requirements in the most accessible and relevant manner, while simplifying transactions.

In the recent past, we have experienced outages in our internet banking, mobile banking and payment utilities, including an outage in our internet banking and payment system in November 2020 due to a power failure in the primary data center. In response to these outages, the RBI issued an order on December 2, 2020 (the “December 2020 Order”), advising us to temporarily stop (a) all launches of the digital business- generating activities under our planned Digital 2.0 program and other proposed business-generating IT applications and (b) the sourcing of new credit card customers. In addition, the RBI appointed a third-party auditor to conduct an audit of the Bank’s systems. After completion of that audit, our progress against regulatory commitments resulted in the partial lifting of the restrictions imposed by the December 2020 Order in August 2021, followed by the full removal of the embargo on the Digital 2.0 program in March 2022. See also “Risk FactorsA failure, inadequacy or security breach in our information technology and telecommunication systems may adversely affect our business, results of operations or financial condition.”

 

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We have adopted preventive measures to strengthen our IT infrastructure and mitigate the risks of outages. Some of the key initiatives undertaken include the migration of core data centers in Bengaluru and Mumbai to state-of-the-art facilities which has reinforced our capability to switchover in less than 45 minutes when needed. The facilities have significantly enhanced our already resilient backbone by providing the Bank with a scalable and reliable infrastructure.

The Hot DR mechanism empowers our Active-Active architecture and further improves the availability and resilience of our applications. With this mechanism in place, data is replicated to a ready-to-go secondary site which is in constant synchronization with the primary site and allows for a seamless failover to the secondary site.

As part of our Hybrid-Cloud strategy we have successfully implemented an industry-first common landing zone across leading cloud service providers (“CSPs”). This creates a secure and streamlined environment for all cloud deployments in the future by leveraging the scalability of cloud systems as needed. It facilitates distribution of workload across multiple CSPs by seamlessly switching between providers, which allows for an uninterrupted service. This streamlined environment also enhances our operations and management practices by providing a unified view of cloud resources which enable centralized governance, monitoring and tracking.

The capacity for UPIs has been tripled, net banking and mobile banking capacity has been doubled to manage 90,000 users concurrently. This has been a significant step as most of our customers now rely on our digital channels for banking needs. DR drills have been completed for all critical payment systems and upgrades in network and security have been carried out. In addition, we have intensified our DR drills for critical applications and intend to further strengthen our DR processes and capabilities through (a) a focus on reducing Recovery Time Objective (“RTO”) for key applications to 40-60 minutes, which has been completed for critical applications as planned, (b) deep automation to improve configuration drift management between primary and DR sites, (c) enrichment of existing automation tools for DR to cover all scenarios and further reduce RTO time, and (d) refactoring key applications into an “Active-Active” always available design.

Retail Business Banking

We address the borrowing needs of the community of small businessmen primarily located within the servicing range of our banking outlets by offering facilities such as credit lines, term loans for expansion or addition of facilities and discounting of receivables. We classify these business banking loans as a retail product. Such lending is typically secured with current assets as well as immovable property and fixed assets in some cases. We also offer letters of credit, guarantees and other basic trade finance products, foreign exchange and cash management services to such businesses.

Commercial Vehicles and Construction Equipment Finance

We have a strong market presence in the commercial vehicle and construction equipment financing businesses. We offer a wide range of banking products across the country which can be customized to the individual needs of our customers.

We provide secured financing for a full range of commercial vehicles and construction equipment along with working capital, trade advances, bank guarantees, and transaction banking products and services, among others, both traditional and digital, to companies active in the infrastructure, logistics and transportation industries. In addition to funding domestic assets, we also extend financing for imported assets for which we open foreign letters of credit and offer treasury services, including forex and forward exchange covers. We have an excellent relationship with most leading original equipment manufacturers, together with whom we collaborate to promote and market financing options.

Housing Loans

We provide home loans through an arrangement with our principal shareholder HDFC Limited. Under this arrangement, we source loans for HDFC Limited through our distribution channels. HDFC Limited approves and disburses the loans, which are kept on their books, and we receive a sourcing fee for these loans. We have a right, but not an obligation, to purchase up to 70 percent of the home loans sourced under this arrangement through either the issue of mortgage-backed pass through certificates (“PTCs”) or a direct assignment of the loans. The balance is retained by HDFC Limited.

Other Retail Loans

Two-Wheeler Loans

We offer loans for financing the purchase of mopeds, scooters and motorcycles, including electric vehicles, which have gained significant popularity in recent years. We market this product in ways similar to our marketing of automobile loans.

 

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Loans Against Securities

We offer loans against equity shares, mutual fund units, bonds and other securities that are on our approved list. We limit our loans against equity shares to Rs. 2.0 million per retail customer in line with regulatory guidelines and limit the amount of our total exposure secured by particular securities. We lend only against shares in book-entry (dematerialized) form, which ensures that we obtain perfected and first-priority security interests. The minimum margin for lending against shares is prescribed by the RBI. The collateral value of the security for these loans is dependent on the quoted price of the security.

Loan Assignments

We purchase loan portfolios, generally in India, from other banks, financial institutions and financial companies, which are similar to asset-backed securities, except that such loans are not represented by PTCs. Some of these loans also qualify toward our directed lending obligations.

Kisan Gold Card

Under the Kisan Gold Card (“KGC”) scheme, funds are extended to farmers in accordance with the RBI’s Kisan Credit Card scheme which is aimed at financing agricultural and related credit requirements. The KGC is a credit facility of a specified amount, which is offered to farmers to finance certain requirements, including the production of crops, post-harvest repair and maintenance expenses, miscellaneous consumption needs, and allied agricultural activities, such as, among others, animal husbandry (dairy and poultry) and fisheries. In addition to loans for recurring needs, long-term investment loans are granted for purposes including the purchase of farm machinery, establishing logistical facilities and land development activities, such as the digging of tube wells, installation of irrigation sprinklers, construction of post-harvest management infrastructure and community farming assets like storage facilities, packaging, assaying and sorting grading units, primary processing centers, and sheds for animals.

Depending on the requirements, various types of facilities are extended under the scheme. These include cash credit, overdrafts, term loans, farm development loans and drop line overdraft limits. The amount of cash credit funding is based on the farmer’s cropping pattern, the amount of land used and the scale of finance for specific crops. With respect to working capital for allied activities (e.g., cattle rearing, poultry, fishery), funding is based on the scale of finance and the number of units or acreage, while for term loans it is based on the unit cost of assets proposed to be financed. These facilities are extended to farmers based on the crop grown, harvest cycle and geography/region.

Through our knowledge of rural customers’ preferences, we have established a strong footprint in rural areas and we are able to impact the lives of thousands of rural people making banking accessible to areas which lack formal sources of financial services, including credit. Our focus in rural markets is not only to increase credit uptake, but also to strengthen relationships with rural customers by empowering them. In addition to advising farmers on their financial needs, we are increasingly focusing on educating them on the benefits of various governmental and regulatory schemes, such as crop insurance, interest subvention and agriculture infrastructure.

We also aim to cater to other financial needs of rural customers through appropriate banking products.

Loans Against Gold Jewelry

We offer loans against gold jewelry to all customer segments, including women, small and marginal farmers and MSME customers. Such loans are typically offered with different repayment modes, with repayment either at monthly intervals or at maturity. Collateral value is dependent on the market price of the gold and therefore these loans also have margin requirements in the event of a decrease in the value of the gold. Customers may avail themselves of an additional loan in case of an increase in the value of the gold. Loans against gold jewelry are also extended to existing customers of the bank in order to cater to their additional funding needs.

We also offer loans which primarily include loans/overdrafts against time deposits, health care equipment financing loans, tractor loans and loans to self-help groups.

Retail Deposit Products

Retail deposits provide us with a low-cost, stable funding base and have been a key focus area for us since commencing operations. Retail deposits represented approximately 82.8 percent of our total deposits as of March 31, 2023. The following chart shows the book value of our retail deposits by our various deposit products:

 

     At March 31, 2023  
     Value (in millions)      % of total  

Savings

   Rs. 5,553,877.1      US$ 67,573.6        35.6  

Current

     1,839,451.0        22,380.5        11.8  

Time

     8,189,541.1        99,641.6        52.6  

Total

   Rs. 15,582,869.2      US$ 189,595.7        100.0  

 

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Our retail account holders have access to the benefits of a wide range of direct banking services, including debit and ATM cards, access to internet, phone banking and mobile banking services, access to our growing branch and ATM network, access to our other distribution channels and eligibility for utility bill payments and other services. Our retail deposit products include the following:

 

   

Savings accounts, which are demand deposits, primarily for individuals and trusts.

 

   

Current accounts, which are non-interest-bearing accounts designed primarily for business customers. Customers have a choice to select from a wide range of product offerings which are differentiated by basis minimum average quarterly account balance requirements and the nature of the transactions.

 

   

Time deposits, which pay a fixed return over a predetermined time period.

As of March 31, 2023, 26 percent of our retail deposit customers (managed base) contributed 78 percent of our retail deposits.

We also offer special value-added accounts, which offer our customers added value and convenience. These include a time deposit account that allows for automatic transfers from a time deposit account to a savings account, as well as a time deposit account with an overdraft facility.

Other Retail Services and Products

Debit Cards

We had approximately 43.0 million and 50.7 million debit cards outstanding as of March 31, 2022 and March 31, 2023, respectively. The cards can be used at ATMs, point-of-sale terminals and payment gateways in India and in other countries across the world.

Merchant Acquiring

We provide offline and online acceptance solutions to small, medium and large enterprises for payment acceptance across all form factors like credit and debit cards (Visa/MasterCard/Diners Club/RuPay cards), UPI, multi bank equated monthly instalments (“EMI”), multi bank internet banking and wallets. We had approximately 4.4 million acceptance points as of March 31, 2023.

Individual Depositary Accounts

We provide depositary accounts to individual retail customers for holding debt and equity instruments. Securities traded on the Indian exchanges are generally not held through a broker’s account or in a street name. Instead, an individual has his or her own account with a depositary participant. Depositary participants, including us, provide services through the major depositaries established by the two major stock exchanges. Depositary participants record ownership details and effect transfers in book-entry form on behalf of the buyers and sellers of securities. We provide a complete package of services, including account opening, registration of transfers and other transactions and information reporting.

Mutual Fund Sales

We are a registered distributor with the Association of Mutual Funds in India (“AMFI”). We engage in distributing mutual fund products to our customers through our staff, who are AMFI certified. We offer units of most large and reputable mutual fund houses in India to our customers. We distribute mutual fund products primarily through our banking outlets and our wealth relationship managers. We receive trail income on the new business as well as on the existing assets under management.

Insurance

HDFC Bank is registered as a corporate agent for the solicitation of life, general and health insurance and agriculture insurance business under regulations prescribed by the Insurance Regulatory and Development Authority of India. Currently, we have arrangements with three life insurance companies, namely HDFC Life Insurance Company Limited, Tata AIA Life Insurance Company Limited and Aditya Birla Sun Life Insurance Company Limited, three general insurance companies, namely HDFC ERGO General Insurance Company Limited, Bajaj Allianz General Insurance Company Limited and ICICI Lombard General Insurance Company Limited and two health insurance companies, namely Aditya Birla Health Insurance Company Limited, Niva Bupa Health Insurance Company Limited and one agriculture insurance company named Agriculture Insurance Company of India Ltd (business is yet to commence with our Bank). We earn commissions on new premium collected as well as trail income in subsequent years in certain cases while the policy is still in force. Our commission income for fiscal year 2023 included fees of Rs. 18,993.1 million in respect of life insurance business and Rs. 2,757.0 million in respect of non-life insurance business.

 

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Bill Payment Services

We are a part of the Bharat Bill Payment System network and offer our customers bill payment services for all utility companies, including water, electricity, gas, telephone, direct-to-home, mobile recharge, Fastag, LPG cylinder, cable television, housing society, and internet service providers, financial products such as insurance and mutual funds as well as rent payment. We also offer Smartpay (auto pay functionality) for all these bills. We believe this is a valuable convenience that we offer our customers. We offer these services to customers through multiple distribution channels: internet banking, mobile banking and phone banking.

Corporate Salary Accounts

We offer Corporate salary accounts to employees of corporate and government entities, enabling employees’ salaries to be credited by the entity directly or via the Bank. A salary account is a type of savings account with no minimum balance requirement in lieu of regular salary credits. Benefits, including a premium debit card and complimentary personal accident cover are provided, amongst others. We also offer salary accounts tailored for employees of the defense and government sector. As of March 31, 2023, these accounts constituted 27.7 percent of our savings deposits by value.

Non-Resident Indian Services

Non-resident Indians (“NRIs”) are an important target market segment for us given their relative affluence and strong ties with family members in India. Our private and premium banking programs in India are also extended to NRI clients. Relationship managers in India facilitate the banking and investment transactions of our NRI clients. Through our overseas branch in Bahrain, we offer deposits, bonds, equity, mutual funds, treasury and structured products offered by third parties to our NRI clients. We also have referral arrangements with product/service providers for NRI clients. Our non-resident deposits amounted to Rs. 1,186.0 billion as of March 31, 2022 and Rs. 1,431.0 billion as of March 31, 2023.

Retail Foreign Exchange

We purchase foreign currency from and sell foreign currency to retail customers in the form of cash, traveler’s cheques, demand drafts, foreign exchange cards and other remittances. We also carry out foreign currency cheque collections.

Customers and Marketing

We identify and target distinct market customer segments for our retail financial services. Customers are at the core of all marketing initiatives of the Bank, and we rely on digital and analytics to improve their experience. Digital marketing relies on advanced analytics to identify and offer the right product and services to each customer based on their specific needs. Our investments in AI platforms help understand customer behavior and preferences in depth and deliver contextual personalized interventions at scale. We use modern marketing tools to reach customers at their preferred channels and provide frictionless digital journeys that allow customers to consume our financial products and services with minimum physical interface. We execute digital marketing plans at scale and in tandem with traditional marketing channels to provide our customers quick and easy access to all our financial solutions, including loans, deposits and payment solutions.

The “Infinite Smiles” program helps us establish customer-centric actions through improvements in products, services, processes and policies, and enables us to measure customer loyalty through a closed-loop customer feedback system. The insights we receive help us implement changes to further improve customer experiences and strengthen their loyalty.

We also have programs that target other specific segments of the retail market. For example, under our private and premium banking programs, the relationship managers distribute mutual funds and insurance products and provide incidental advice related to these products. Customers interested in alternate products (such as fixed income, private equity, alternate investment funds and structures) or services such as succession planning, tax planning, trust formation and will writing are referred directly to product/service providers where we have referral arrangements. Customers seeking investment advice on alternate products are referred to HSL (a registered investment adviser regulated by SEBI (Investment Advisers) Regulations 2013), where a team of certified investment advisers provide this service. In addition, we participate in the distribution of government bonds and have referral tie-ups with other corporates for customers desirous of availing their products and services that synergize with our businesses. Our commission income included income from marketing and distribution of Rs. 38,662.9 million for fiscal year 2023 and Rs. 30,590.5 million for fiscal year 2022, which comprised income for displaying publicity materials at our branches/ATMs, commissions on mutual funds, pension and other investment/saving products and sourcing and referral income.

We continue to be strongly committed to financial inclusion programs that extend banking services to underserved populations. Our Sustainable Livelihood Initiative caters to lower-income individuals to finance their economic activity, and also provides skills training, livelihood financing, credit counseling and market linkages in terms of access to, or contacts in, their local markets. Through these initiatives, we aim to reach the unbanked and underbanked segments of the Indian populations and to empower vulnerable and economically weaker sections of the society.

 

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Wholesale Banking

Overview

We provide our corporate and institutional clients with a wide range of commercial banking products and transactional services.

Our principal commercial banking products include a range of financing products, documentary credits (primarily letters of credit) and bank guarantees, foreign exchange and derivative products, investment banking services and corporate deposit products. Our financing products include loans, overdrafts, bill discounting and credit substitutes, such as commercial paper, debentures, preference shares and other funded products. Our foreign exchange and derivatives products assist corporations in managing their currency and interest rate exposures.

In terms of commercial banking products, our customers include companies that are part of private sector business houses, public sector enterprises and multinational corporations, as well as small and mid-sized businesses. Our customers also include suppliers and distributors of corporations to whom we provide credit facilities and with whom we thereby establish relationships as part of a supply chain initiative for both our commercial banking products and transactional services. We aim to provide our corporate customers with high-quality customized service. We have relationship managers who focus on particular clients and who work with teams that specialize in providing specific products and services, such as cash management and treasury advisory services.

Loans to small and medium enterprises, which are generally loans for commercial vehicles, construction equipment and business purposes, are included as part of our retail banking business. We group these loans as part of our retail banking business considering, among other things, the customer profile, the nature of the product, the differing risks and returns, our organization structure and our internal business reporting mechanism. Such grouping ensures optimal utilization and deployment of specialized resources in our retail banking business.

Our principal transactional services include cash management services, capital markets transactional services and correspondent banking services. We provide physical and electronic payment and collection mechanisms to a range of corporations, financial institutions and Government entities. Our capital markets transactional services include custodial services for mutual funds and clearing bank services for the major Indian stock exchanges and commodity exchanges. In addition, we provide correspondent banking services, including cash management services and funds transfers, to foreign banks and co-operative banks.

Commercial Banking Products

Commercial Loan Products and Credit Substitutes

Our principal financing products are working capital facilities and term loans. Working capital facilities primarily consist of cash credit facilities and bill discounting. Cash credit facilities are revolving credits provided to our customers that are secured by working capital such as inventory and accounts receivable. Bill discounting consists of short term loans which are secured by bills of exchange that have been accepted by our customers or drawn on another bank. In many cases, we provide a package of working capital financing that may consist of loans and a cash credit facility as well as documentary credits or bank guarantees. Term loans consist of short term loans and medium term loans which are typically loans of up to five years in duration. Over 90.0 percent of our loans are denominated in rupees with the balance being denominated in various foreign currencies, principally the U.S. dollar.

We also purchase credit substitutes, which typically comprise commercial paper and debentures issued by the same customers with whom we have a lending relationship in our wholesale banking business. Investment decisions for credit substitute securities are subject to the same credit approval processes as loans, and we bear the same customer risk as we do for loans extended to these customers. Additionally, the yield and maturity terms are generally directly negotiated by us with the issuer.

The following table sets forth the asset allocation of our commercial loans and financing products by asset type. For accounting purposes, we classify commercial paper and debentures as credit substitutes (which, in turn, are classified as investments).

 

     As of March 31,  
     2021      2022      2023      2023  
                             
     (in millions)  

Gross commercial loans

   Rs. 4,214,885.3      Rs. 5,099,009.3      Rs. 5,911,512.1      US$ 71,925.0  

Credit substitutes:

           

Commercial paper

   Rs. 9,804.1      Rs. 1,468.2      Rs.      US$  

Non-convertible debentures

     537,472.8        581,551.5        503,187.6        6,122.3  

Preferred shares

            0.5        0.2        0.0  

Total credit substitutes

   Rs. 547,276.9      Rs. 583,020.2      Rs. 5,03,187.8      US $ 6,122.3  

Gross commercial loans plus credit substitutes

   Rs. 4,762,162.2      Rs. 5,682,029.5      Rs. 6,414,699.9      US $ 78,047.3  

 

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Whilst we generally lend on a cash flow basis, we also require collateral from a large number of our borrowers. As of March 31, 2023, approximately 57.0 percent of the aggregate principal amount of our gross wholesale loans was secured by collateral and Rs. 2,542.7 billion in aggregate principal amount of loans were unsecured. However, collateral securing each individual loan may not be adequate in relation to the value of the loan. All borrowers must meet our internal credit assessment procedures, regardless of whether the loan is secured. See “—Risk Management—Credit Risk—Wholesale Credit Risk.”

We price our loans based on a combination of our own cost of funds, market rates, tenor of the loan, our rating of the customer and the overall revenues from the customer and with reference to the applicable benchmark. An individual loan is priced on a fixed or floating rate and the pricing is based on a margin that depends on, among other factors, the credit assessment of the borrower. We are required to follow the system requirements related to the interest rate on advances, issued by the RBI from time to time, while pricing our loans. For a detailed discussion of these requirements, see “Supervision and Regulation—Regulations Relating to Making Loans.”

The RBI requires banks to lend to specific sectors of the economy. For a detailed discussion of these requirements, see “Supervision and Regulation—Directed Lending.”

Bill Collection, Documentary Credits and Bank Guarantees

We provide bill collection, documentary credit facilities and bank guarantees for our corporate customers. Documentary credits and bank guarantees are typically provided on an ongoing basis. The following table sets forth, for the periods indicated, the value of transactions processed with respect to our bill collection, documentary credits and bank guarantees:

 

     As of March 31,  
     2021      2022      2023      2023  
                 
            (in millions)         

Bill collection

   Rs. 5,863,622.6      Rs. 8,826,470.0      Rs. 11,526,616.0      US$ 140,243.5  

Documentary credits

     1,410,029.3        2,543,661.3        2,766,993.2        33,665.8  

Bank guarantees

     420,229.2        455,008.5        610,568.0        7,428.7  

Total

   Rs. 7,693,881.1      Rs. 11,825,139.8      Rs. 14,904,177.2      US$ 181,338.0  

Bill collection: We provide bill collection services for our corporate clients in which we collect bills on behalf of a corporate client from the bank of our client’s customer (i.e., import bill collection). Under the import bill collection system, we receive instructions from overseas banks, deal with necessary documents and effect remittances on behalf of our clients. We also provide export collection, where we receive documents from our corporate clients and send such documents to the overseas bank for collection. Once the export collection is realized, we credit our corporate clients’ accounts with the relevant amount.

Documentary credits: We issue documentary credit facilities on behalf of our customers for trade financing, sourcing of raw materials and capital equipment purchases.

Bank guarantees: We provide bank guarantees on behalf of our customers to guarantee their payment or performance obligations. A part of our guarantee portfolio consists of margin guarantees to brokers issued in favor of stock exchanges.

Foreign Exchange and Derivatives

Our foreign exchange and derivative product offering to our customers covers a range of products, including foreign exchange and interest rate transactions and hedging solutions, such as spot and forward foreign exchange contracts, forward rate agreements, currency swaps, currency options and interest rate derivatives. These transactions enable our customers to transfer, modify or reduce their foreign exchange and interest rate risks. A specified group of relationship managers from our treasury front office works on such product offerings in line with the customers’ risk and other requirements and within the framework of our Suitability and Appropriateness policy.

Forward exchange contracts are commitments to buy or sell fixed amounts of currency at a future date at the contracted rate. Currency swaps are commitments to exchange cash flows by way of interest in one currency against another and exchange of principal amounts at maturity based on predetermined rates. Rupee interest rate swaps are commitments to exchange fixed and floating rate cash flows in rupees without exchanging the notional principal. A forward rate agreement gives the buyer the ability to determine the underlying rate of interest for a specified period commencing on a specified future date (the settlement date) when the settlement amount is determined, being the difference between the contracted rate and the market rate on the settlement date. The underlying rate of interest could be an interest rate curve, interest rate index or bond yield. Currency options give the buyer the right, but not an obligation, to buy or sell specified amounts of currency at agreed rates of exchange on or before a specified future date.

 

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We enter into forward exchange contracts, currency options, forward rate agreements, currency swaps and rupee interest rate swaps in the inter-bank market, broadly to support our customers’ requirements and, to a limited extent, for our own account. The following table presents the aggregate notional principal amounts of our outstanding foreign exchange and derivative contracts with our customers as of March 31, 2021, 2022 and 2023, together with the fair values on each reporting date.

 

     As of March 31,  
     2021      2022     2023      2023  
     Notional      Fair Value      Notional      Fair Value     Notional      Fair Value      Notional      Fair Value  
                                 
     (in millions)  

Interest rate swaps and forward rate agreements

   Rs. 1,684,294.2      Rs. 785.5      Rs. 3,163,571.7      Rs. 2,253.9     Rs. 3,325,893.2      Rs. 6,032.8      US$ 40,465.9      US$ 73.4  

Forward exchange contracts, currency swaps, currency options

   Rs. 1,490,543.6      Rs. 4,275.8      Rs. 1,892,709.0      Rs. (12,243.4   Rs. 1,786,811.9      Rs. 5,327.2      US$ 21,740.0      US$ 64.8  

Investment Banking

Our Investment Banking Group offers services in the debt and equity capital markets. The group has arranged project financing for clients across various sectors including telecommunication and road infrastructure, healthcare, energy, real estate, data centers and cement. The group advised on aggregate issuances of over Rs. 991.6 billion worth of rupee-denominated corporate bonds across public sector undertakings, financial institutions and our corporate clients, becoming the second-largest corporate bond arranger in the market for fiscal year 2023. In the equity capital markets business, the group concluded one initial public offering and one share buyback and in the advisory business, the group concluded four mergers and acquisition transactions across retail, manufacturing industry and energy sectors. In the advisory business, we advise clients from a variety of sectors, including infrastructure, retail, new economy, digital, financial services and manufacturing industry.

Wholesale Deposit Products

As of March 31, 2023, we had wholesale deposits aggregating to Rs. 3,243.8 billion, which represented 17.2 percent of our total deposits. We offer both non-interest-bearing current accounts and time deposits. We are permitted to vary the interest rates on our wholesale deposits based on the size of the deposit (for deposits greater than Rs. 20.0 million), provided the rates booked on a day are the same for all customers of that deposit size for that maturity. See “Selected Statistical Information” for further information about our total deposits.

Transactional Services

Cash Management Services

We believe that the Indian market is one of the most promising Cash Management Services (“CMS”) markets. However, it is also marked by some distinctive characteristics and challenges such as a vast geography, a large number of small business-intensive towns, a large unorganized sector in various business supply chains, and infrastructural limitations for accessibility to many parts of the country. Over the years, such challenges have made it a daunting task for CMS providers in the country to uncover the business potential and extend suitable services and product solutions to the business community.

We are a technology-driven bank and have been providing digital CMS solutions to our customers from diverse industry segments. We believe that we have been consistently aligning our product and services strategy to meet our customers’ needs. This, we believe, has helped us to keep ahead of competitors and retain a satisfied customer base that is growing by the year.

We offer traditional and new age digital banking products and experience an increasing demand for digital banking services. While we believe that we have been one of the leading banks in the traditional CMS market, we believe that we have also been able to forge a similar position in the new age CMS market, i.e., digital cash management, and we also believe that we have aligned our product offering with changing and dynamic customer needs. Currently, approximately 97 percent of our transactions are done on the electronic platform.

Today, we believe that we are a leading service provider of digital banking products with a large share of business across customer segments. We have, thus, been able to reduce our transaction costs while maintaining our fees and float levels.

 

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Clearing Bank Services for Stock and Commodity Exchanges

We are a clearing bank for the cash and derivatives (“F&O”) segment, currency derivatives, commodity derivatives, securities lending and borrowing and other segments for the National Stock Exchange of India Limited (“NSE”), the BSE Limited, the Multi Commodity Exchange (“MCX”), National Commodity and Derivatives Exchange Limited (“NCDEX”), the Indian Energy Exchange (“IEX”), the Indian Gas Exchange (“IGX”) and Power Exchange India Limited (“PXI”) as well as the three exchanges set up in Gujarat International Finance Tec-City (“GIFT City”): NSE International Limited, the India International Exchange (“INX”) and India International Bullion Exchange IFSC Limited (“IIBX”).

As a clearing bank, we provide the exchanges/clearing corporations with a means for collecting and making payments as part of settlement obligations to investors through registered brokers and custodians. In addition to benefiting from the current account balances that help reduce our overall cost of funds, we also earn interest, transaction fees and commissions by offering various fund-based and non-fund-based facilities and transactional services to the stock brokers and clearing members.

Custodial Services

We are registered as a custodian with India’s securities market regulator, the Securities and Exchange Board of India (“SEBI”). As custodians, we provide custody services to domestic and foreign investors that include domestic mutual funds, portfolio managers, insurance companies, alternative investment funds and Foreign Portfolio Investors (“FPIs”). These services include safekeeping of securities, trade settlement, collection of dividends and interest payments on securities, fund accounting services and derivatives clearing services (including currency derivatives and interest rate futures). We are also registered as a designated depository participant (“DDP”) with SEBI to grant registration to foreign investors for portfolio investments in India as FPIs.

Our international banking unit, HDFC Bank-IBU, is registered as custodian at the GIFT International Financial Services Centre (“GIFT IFSC”) with the International Financial Services Centres Authority (“IFSCA”) and provides custody services to clients. Our IBU also acts as custodian for the NSE International Financial Services Centre (“NSE IFSC”) receipts issued against the underlying U.S. securities listed on NYSE or NASDAQ and admitted by the NSE IFSC exchange in GIFT City.

Correspondent Banking Services

We act as a correspondent bank for co-operative banks, foreign banks and certain private banks. We provide cash management services, funds transfer services, such as letters of credit, foreign exchange transactions and foreign cheque collection. We earn revenue on a fee-for-service basis and benefit from the cash float, which reduces our overall cost of funds.

We are well-positioned to offer this service to co-operative banks, foreign banks and select private banks in light of the structure of the Indian banking industry and our position within it. Cooperative banks are generally restricted to a particular state and foreign banks/some private banks have limited branch networks. The customers of these banks frequently need services in other areas of the country where their own banks do not operate. Because of our technology platforms, our geographical reach and the electronic connectivity of our branch network, we can provide these banks with the ability to provide such services to their customers.

Tax Collections and Distribution of Welfare Schemes

We have been appointed by the Government of India to collect direct taxes. In fiscal year 2022 and 2023, we collected Rs. 4,089 billion and Rs. 4,991 billion, respectively, of direct taxes for the Government of India. We are also appointed to collect Goods and Services Tax (“GST”) and other indirect taxes in India. In fiscal years 2022 and 2023 we collected Rs. 2,247 billion and Rs. 3,450 billion, respectively, of such indirect taxes for the Government of India and relevant state Governments. We earn a fee from the Government of India for each tax collection and benefit from the cash float.

We are also involved with distributing funds for the welfare programs to various Government entities, and the end beneficiaries. We have distributed funds aggregating to Rs. 6,500 billion for Government of India schemes through our accounts. We earn float income from the large deposits garnered for distribution across the various tiers of Government ranging from the state to local governments and the end beneficiaries. Participation in such programs also enables us to target acquisition of deposit accounts of end beneficiaries in semi-urban and rural areas. We hope to expand our range of transactional services by providing more services to Government entities.

Treasury

Overview

Our treasury group manages our balance sheet, including our maintenance of reserve requirements and the management of market and liquidity risk. Our treasury group also provides advice and execution services to our corporate and institutional customers with respect to their foreign exchange and derivatives transactions. In addition, our treasury group seeks to optimize profits from our proprietary trading, which is principally concentrated on Indian Government securities.

 

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Our client-based activities consist primarily of advising corporate and institutional customers and transacting spot and forward foreign exchange contracts and derivatives. Our primary customers are multinational corporations, large and medium sized domestic corporations, financial institutions, banks and public sector undertakings. We also advise and enter into foreign exchange contracts with some small companies and NRIs.

The following describes our activities in the foreign exchange and derivatives markets, domestic money markets and the debt securities desk and equities market. See also “—Risk Management” for a discussion of our management of market risk.

Foreign Exchange and Derivatives

Our treasury operations primarily include liquidity management and managing the interest rate risks in our investment portfolio along with limited proprietary trading.

Our treasury operations also include foreign exchange and derivative product offerings to our customers covering a range of products, including foreign exchange and interest rate transactions and hedging solutions, such as spot and forward exchange contracts, forward rate agreements and derivatives. Whilst “plain vanilla” products are offered to all customer segments, derivative products are offered mostly to our wholesale customers in accordance with the RBI guidelines. A specified group of relationship managers from our treasury front office works on such product offerings in line with the customers’ risk and other requirements and within the framework of our Suitability and Appropriateness policy.

We also enter into derivative contracts not denominated in rupees. Typically, the market risks arising out of such products are economically hedged in the interbank market. We also operate under a capped risk exposure to each interbank counterparty. In order to manage residual risks and for overall balance sheet management, we also undertake limited proprietary trading transactions, subject to limits approved by our board of directors (the “Board”).

The following table sets out the aggregate notional principal amounts of our outstanding foreign exchange and derivative inter-bank contracts as of March 31, 2021, 2022 and 2023, together with the fair values on each reporting date:

 

     As of March 31,  
     2021     2022      2023      2023  
     Notional      Fair Value     Notional      Fair Value      Notional      Fair Value      Notional      Fair Value  
                                 
     (In millions)  

Interest rate swaps and forward rate agreements

   Rs. 1,492,003.7      Rs. (2,256.4)     Rs. 2,029,651.4      Rs. 225.1      Rs. 2,788,819.0      Rs. (205.0)      US$ 33,931.4      US$ (2.5

Forward exchange contracts, currency swaps, currency options

   Rs. 3,913,667.3      Rs. (278.2   Rs. 5,402,291.4      Rs. 15,147.5      Rs. 7,895,164.9      Rs. 11,810.9      US$ 96,059.9      US$ 143.7  

Domestic Money Market and Debt Securities Desk

Our principal activity in the domestic money market and debt securities market is to ensure that we comply with our reserve requirements including Liquidity Coverage Ratio (“LCR”). These consist of a cash reserve ratio, which we meet by maintaining balances with the RBI, and a statutory liquidity ratio, which we meet by purchasing Indian Government securities. See also “Supervision and Regulation—Legal Reserve Requirements.” The Bank meets the LCR requirement by maintaining an adequate level of high-quality liquid assets, mainly government securities above its mandated statutory requirements. See also “Supervision and Regulation—Regulations on Asset Liability Management.” Our local currency desk primarily trades Indian Government securities for our own account. We also participate in the inter-bank call deposit market and engage in limited trading of other debt instruments.

 

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Equities Market

We trade a limited amount of equities of Indian companies for our own account as part of the equity trading portfolio of our treasury operations, which are specified in the approved list of equity universe that is reviewed at least on a quarterly basis or on a need-based basis as mandated in the Bank’s internal policy. As of March 31, 2023, we had an internal aggregate approved limit of Rs. 1,500 million for proprietary equity trading, which included Rs. 750 million (defined as a sub-limit of the aggregate approved limit) for primary purchases of equity investments for proprietary trading and Rs. 300 million (defined as a sub-limit of the aggregate approved limit) for investment in equity mutual funds for proprietary trading with requisite approvals. We set limits on the amount invested in any individual company as well as a stop-loss trigger level and a value-at-risk limit for the proprietary equity trading portfolio. Our exposure as of March 31, 2023 was within these limits.

In addition, we had long term and strategic investments in equities and equity-linked instruments within the board-approved quantum for such investments. All such investments are carried out after review and approval of the proposal by the investment committee and the board, if applicable.

Distribution Channels

We deliver our products and services through a variety of distribution channels, including banking outlets, direct sales agents, ATMs, phone banking, internet banking, mobile banking, SMS-based banking and WhatsApp banking.

Banking Outlets

Our banking outlets are comprised of branches and business correspondents. As of March 31, 2023, we had a total of 7,821 branches covering 3,811 cities and towns. In addition, we had 15,921 business correspondents, which were primarily manned by CSCs. The CSCs are instrumental in increasing our penetration in deeper geographies. Our comprehensive distribution network spanning the length and breadth of the country enables us to serve customers better while actively participating in India’s inclusive development agenda.

All of our banking outlets are electronically linked so that our customers can access their accounts from any banking outlet regardless of where they have their accounts. We offer various banking services to our customers through our arrangements with correspondent banks and exchange houses in overseas locations.

As part of its banking outlet licensing conditions, the RBI requires that at least 25.00 percent of all incremental banking outlets added during the year be located in unbanked rural centers/left wing extremism (“LWE”) affected districts / north eastern states and Sikkim. During fiscal year 2023, 286 of our banking outlets (including banking outlets manned by the CSCs) were in unbanked rural centers, LWE-affected districts, northeastern states and Sikkim. With the objective of liberalizing and rationalizing the branch licensing process, the RBI granted general permission, effective from October 2013, to banks like us to open banking outlets in Tier 1 to Tier 6 centers, subject to a requirement to report to the RBI and other prescribed conditions. In May 2017, the RBI further liberalized the branch authorization policy. See “Supervision and Regulation—Regulations Relating to the Opening of Banking Outlets.”

We have overseas banking outlets in Bahrain, Hong Kong and the Dubai International Finance Centre (“DIFC”). These banking outlets cater to the needs of our overseas clients, both corporate and individual. They offer banking, trade finance and wealth management (primarily to non-resident individual customers). In addition, we have representative offices in Abu Dhabi, Dubai and Nairobi. We also have a presence in the International Financial Service Centre Banking Unit at the GIFT City in Gandhinagar, Gujarat. This unit operates in a similar fashion to our foreign banking outlets and customers are able to purchase products such as trade credits and foreign currency term loans, including external commercial borrowings and derivatives to hedge loans. Our unit in GIFT City is regulated and supervised by the RBI.

Automated Teller Machines

As of March 31, 2023, we had 19,727 ATMs/CDMs, of which 10,301 were located at our banking outlets or extension counters and 9,426 were located off-site.

All our ATMs are equipped with a voice-guided system and a Braille keypad for the visually challenged. Customers can use our ATMs for a variety of functions, including withdrawing cash, monitoring bank balances, mobile recharge/top-up, and cardless cash withdrawals. Customers can access their accounts from any of the HDFC Bank ATMs or non-HDFC Bank ATMs. ATM cards issued by American Express or other banks in the Rupay, Visa, MasterCard, Maestro, JCB, UPI, Cirrus, Citrus or Discover Financial Services networks can be used in our ATMs and we receive a fee for each transaction. Our debit cards issued with respective networks (Rupay/VISA/MasterCard) can be used at ATMs of other banks for which we pay the acquiring bank a fee. Our customers can use our CDMs for a variety of functions, including cash deposits, cash withdrawals and monitoring bank balances.

 

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Phone Banking

We provide phone banking services to our customers in 3,811 cities and towns as at March 31, 2023. Customers can access their accounts over the phone through our 24-hour automated voice response system and can conduct balance and transaction inquiries, order cheque books and order stop payments of cheques. In certain cities, we also have staff available during select hours to assist customers who want to speak directly to one of our telephone bankers. In select cities, customers can also engage in financial transactions such as opening deposits.

Mobile Banking

Our mobile banking application intends to create a harmonious balance between traditional banking and digital evolution. Its intuitive and feature-rich design allows customers to easily access and manage their accounts, including transferring funds (via the national electronic funds transfer (“NEFT”)), making immediate payments using the UPI as well as managing bills and investments. Our mobile banking application is designed to meet evolving customer needs and technological advancements. Its customer-centric verbiage enhances the user experience and simplifies navigation, evolving in line with the needs and expectations of our customers. To provide enhanced security, a “runtime application self-protection” feature has been added which protects the mobile app against advanced security threats like screen sharing and remote access, thereby ensuring a safe and secure banking experience for our customers.

Internet Banking

Our internet banking facility provides customers with a convenient and safe way to manage their banking needs from the comfort of their home or office. With 24/7 access, users can perform almost all banking transactions online while being assured of the highest levels of security standards. Our internet banking platform offers a comprehensive range of services, including viewing balances and statements, transferring funds, paying bills, opening term and recurring deposit accounts, recharging mobile and direct to home recharges, ordering cheque books and even online shopping. This wide range of features allows our customers to enjoy a seamless and hassle-free banking experience providing a comprehensive, safe and convenient solution for all banking needs.

Payment Wallets

PayZapp aims to make digital payments safe. PayZapp provides a comprehensive solution for all payment, banking and financial requirements for our internal and external customers. It offers a platform for making different types of payments, including grocery, food delivery, shopping, mobile and direct-to-home recharges, rent payments, FASTag recharge and utility bills. Using PayZapp, customers can also apply for a credit card or a personal loan, send money to others and transfer money to a bank account.

Risk Management

Risk is inherent in our business and sound risk management is critical to our success. The major types of risk we face are credit risk, market risk, operational risk, liquidity risk, interest rate risk and IT and digital risk. We have developed and implemented comprehensive policies and procedures to identify, assess, monitor and manage our risk.

Credit Risk

Credit risk is defined as the possibility of losses associated with diminution in the credit quality of borrowers or counterparties. In a bank’s portfolio, losses stem from outright default due to the inability or unwillingness of a customer or counterparty to meet commitments in relation to lending, trading, settlement and other financial transactions. Alternatively, losses result from a reduction in portfolio value arising from actual or perceived deterioration in credit quality. Credit risk typically results from a bank’s dealings with an individual, corporate, bank, financial institution or a sovereign. The Board of Directors of the Bank is responsible for managing the comprehensive risks faced by the Bank, including credit risk. The Board endorses the credit risk strategy and approves the credit risk policies of the Bank. The Bank’s Risk Policy & Monitoring Committee (“RPMC”), which is a Board-level committee, supports the Board by supervising the implementation of the credit risk strategy. It guides the development of policies, procedures and systems for managing credit risk. The RPMC ensures that these policies are adequate and appropriate to changing business conditions, the structure and needs of the Bank and the risk appetite of the Bank. It periodically reviews the portfolio composition and the status of impaired credits.

The Retail Credit Risk Management and Wholesale Credit Risk Management, which function within the Risk Management Group under the Chief Risk Officer (“CRO”), run the credit risk management centrally in the Bank. The risk management function is clearly demarcated and independent from the operations, credit and business functions of the Bank.

 

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Retail Credit Risk

Retail lending, given the granularity of individual exposures and diversity in borrower profiles, is managed largely on a portfolio basis across various products and customer segments. There are robust front-end and back-end systems in place to ensure credit quality and to minimize losses from defaults. The Retail Credit Risk team is responsible for establishing the risk appetite, ensuring adherence to the risk appetite limits approved by the Board, reviewing underwriting parameters as well as reviewing and monitoring the key risk indicators of the retail and SME portfolios of the Bank. It is also responsible for conducting product review, stress testing, formulating key risk indicators and portfolio analysis and distribution trends.

Retail Lending Master Policy (“RLMP”) and SME – Credit Policies & Procedures Manual (“SME – CPPM”) are the governance frameworks for managing credit risk in the retail and SME portfolios.

Wholesale Credit Risk

The wholesale credit risk team is primarily responsible for implementing the wholesale credit risk strategy approved by the Board, developing procedures and systems for managing credit risk, periodically monitoring the overall portfolio quality, concentrations and risk-mitigating actions and conducting stress testing to ensure that portfolio composition and quality are within the Bank’s risk appetite.

The Bank’s Credit Policies & Procedure Manual (the “Credit Policies”) are central in controlling credit risk in various activities and products. The Credit Policies articulate our credit risk strategy and thereby the approach for credit origination, approval and maintenance. Each credit proposal is evaluated by the business units against the credit standards prescribed in our Credit Policies. They are then subjected to a greater degree of credit analysis based on product type and customer profile by credit specialists in the Wholesale Credit Group headed by the Chief Credit Officer.

There is a framework for independent review and approval of credit ratings by specifically designated rating approvers in the ratings unit, which sits within the Credit Risk function independent of both the business and underwriting teams. The internal ratings team assigns internal ratings to corporate borrowers of the Bank on an internal ten grade scale using various models which score the borrowers on various quantitative and qualitative risk parameters related to business risk, financial risk, management risk and industry risk. The Credit Risk team is also responsible for generation and dissemination of early warning signals (“EWS”) as well as for putting in place the governance structure to review, monitor and report the adherence of the EWS framework to our senior executive level Fraud Monitoring Group (“FMG”). As part of the Internal Capital Adequacy Assessment Process (“ICAAP”), the Bank has established a risk indicator-based framework for assessing the level of risk in the wholesale portfolio. This assessment is discussed in the Senior Management ICAAP Review Committee on a quarterly basis.

To ensure adequate diversification of risk, concentration limits have been set up in terms of:

 

  (a)

Borrower/business group: Based on the RBI guidelines on the Large Exposure Framework (“LEF”), exposure ceilings are established for exposures to single borrowers, borrower groups, NBFCs, connected NBFC groups or a group of connected counterparties, which include an NBFC in the group. See also “Supervision and Regulation—Large Exposures Framework.”

 

  (b)

Industry: We have established ceilings on aggregate exposure to an industry. For this purpose, advances and investments as well as non-fund-based exposures are aggregated. Retail advances are exempt from this exposure limit.

 

  (c)

Risk grading: In addition to the exposure ceilings described above, we have set quantitative ceilings on aggregate funded and non-funded exposure (excluding retail assets) specific to each risk rating category at the portfolio level.

The Bank follows RBI guidelines with regard to restrictions on loans and advances to the companies with common directors. In addition, the RBI requires that we direct a portion of our lending to certain specified sectors (“Priority Sector Lending” or “PSL”). See also “Supervision and Regulation—Directed Lending.”

Information Technology and Digital Risk

The Bank operates in a highly automated environment in terms of information technology and communication systems. The Bank makes extensive use of technology to deliver its services and products to clients and manage its operations both effectively and efficiently. This dependence on technology exposes the Bank to technology risk emanating from failure of technology or failure to adopt new technologies and hence losing business to competition. We have taken, and continue taking, various measures to identify, assess and effectively manage such risks.

The Bank has set up an independent IT and Digital Risk Management function within the Risk Management Group under the Chief Risk Officer (“CRO”). This IT and Digital Risk Management function caters to risk assessment of technology solutions and applications, business continuity management (“BCM”), risk controls self-assessment (“RCSA”), and other areas. The function has also defined the Board-approved IT & Digital Third-Party Risk Management Policy (“IT-TPRM Policy”).

 

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The Bank’s technology risk management encompasses the following:

 

   

A three lines of defense model is based on roles and responsibilities articulated in the IT-TPRM Policy.

 

   

The IT governance framework assesses various process-related risks which are covered in the Bank’s IT policies and procedures.

 

   

The IT Strategy Committee of the Board assesses IT strategy risk and the alignment of IT strategy and business strategy as detailed in the Bank’s IT Framework Procedure.

 

   

The Apex IT Steering Committee assesses the project-specific risks and IT continuity-related risks.

 

   

Risks related to the IT system capacity are assessed in accordance with the IT Capacity Management Policy and Procedure.

 

   

Vendor risk is assessed in accordance with the IT Supplier Management, IT Contract Management and IT Outsourcing Policies and procedures.

As part of the ICAAP framework, the Bank assesses the overall level and direction of IT risks on the basis of key risk indicators pertaining to IT systems availability, DR/business continuity planning (“BCP”) drills, software coding errors, changes in data records (changes to financial and non-financial data), unsuccessful releases, budget, capacity management, change management, physical/environmental security of data centers, end point security, firewall security, human resources, interface security, IT projects, obsolescence management, open audit observations, patch management, supplier risk management, user access management and vulnerability management. The assessment is reviewed by the ICAAP Review Committee on a quarterly basis.

Credit Management

The Credit Group, under the Chief Credit Officer (“CCO”), consists of the Retail Credit Group and the Wholesale Credit Group. The CCO reports directly to the Managing Director and is responsible for leading and overseeing the implementation of the overall credit strategy and the management of the retail and wholesale credit portfolios of the Bank. The credit underwriting and portfolio management under the retail and wholesale credit functions are aligned with the Board-approved credit appetite thereby maintaining credit quality of the portfolio. The Credit Group is not assigned any business target. No official in the Retail Credit Group or Wholesale Credit Group has any business responsibility or association, thereby assuring compliance to the four pillars, namely, independence (total independence and freedom to operate without any influence which may compromise risk acceptance), knowledge base (specialization and experience over a period of time), absence of conflict of interest (absolute separation from any business targets or responsibilities, ensuring the quality of risk management) and regulatory compliance (ensuring continuous operation within a low-risk environment).

Retail Credit

We offer a range of retail products, such as auto loans, personal loans, credit cards, mortgage loans, two-wheeler loans, loans against securities and commercial vehicle loans. Our retail credit programs and approval processes are designed to accommodate the high volumes of relatively homogeneous, small-value transactions in retail loans. There are product programs for each of these products, which define the target markets, credit philosophy and process, detailed underwriting criteria for evaluating individual credits, exception reporting systems and individual loan exposure caps.

For individual customers to be eligible for a loan, minimum credit parameters, so defined, are to be met for each product. Any deviation needs to be approved at the designated levels. The product parameters have been selected based on the perceived risk characteristics specific to the product. The quantitative parameters considered include income, residence stability and the nature of the employment/business, while the qualitative parameters include accessibility and profile. Our credit and product programs are based on a statistical analysis of our own experience and industry data, in combination with the judgment of our senior officers.

The retail credit team manages credit in retail assets and has the following constituents:

 

  (a)

Retail Credit Strategy and Control Unit: This unit drives credit portfolio management centrally for retail assets. It is responsible for formulating credit product programs and evaluating proposals for the launch of new products and entering into new geographies. The unit also conducts periodic reviews that cover our portfolio management information system, credit management information system and post-approval reviews. The credit program teams conduct detailed studies on portfolio performance in each customer segment.

 

  (b)

Retail Underwriting: This unit is primarily responsible for approving credit exposures and ensuring portfolio composition and quality. It ensures implementation of all policies and procedures, as applicable.

 

  (c)

Credit Intelligence and Control: This unit is responsible for the sampling of documents to ensure prospective borrowers with fraudulent intent are prevented from availing themselves of loans. It initiates, among other things, market reference checks to avoid a recurrence of fraud and financial losses.

 

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  (d)

Retail Collections Unit: This unit is responsible for the remedial management of problem exposures in retail assets. It uses specific strategies for various segments and products for remedial management.

We mine data on our borrower account behavior as well as static data regularly to monitor the portfolio performance of each product segment, and use these as inputs in revising our product programs, target market definitions and credit assessment criteria to meet our twin objectives of combining volume growth and preservation of asset quality.

Our vehicle loans, loan against gold, mortgage loan and loan against securities are generally secured on the asset financed. If the customer fails to pay, we would, as applicable, liquidate collateral and/or set off accounts. In most cases, we obtain direct debit instructions or post-dated cheques from the customer. It is a criminal offense in India to issue a bad cheque.

Wholesale Credit

For our wholesale banking products, we target leading private businesses and public-sector enterprises in the country, as well as subsidiaries of multinational corporations. We consider the credit risk of our counterparties comprehensively. Accordingly, our credit policies and procedures apply not only to credit exposures but also to credit substitutes and contingent exposures.

The Wholesale Credit Group is primarily responsible for implementing the credit strategy approved by the Board, developing procedures and systems for managing credit originated by the wholesale business groups, carrying out an independent assessment of credit, approving individual credit appetite by specifically appointed credit approvers as well as monitoring and ensuring portfolio composition and quality.

Based on what we believe is an adequately comprehensive credit assessment, credit appetite is set on individual counterparties. This appetite takes into account the overall potential risk on the counterparty, be it on balance sheet or off-balance sheet, across the banking book and the trading book, including foreign exchange and derivatives exposures. This appetite is reviewed in detail at annual or more frequent intervals.

We primarily make our credit decisions on a cash flow basis. We also obtain security for a significant portion of credit facilities extended by us as a second potential remedy. This can take the form of a floating charge on the movable assets of the borrower or a (first or residual) charge on the fixed assets and properties owned by the borrower. We may also require guarantees and letters of support from the flagship companies of the group in cases where facilities are granted based on our comfort level or relationship with the parent company.

We do not extend credit on the judgment of one officer alone. Our credit approval process is based on a three-tier approval system that combines credit approval authorities and discretionary powers. The required three approvals are provided by credit approvers who derive their authority from their credit skills and experience. The level for approval of a credit varies depending upon the grading of the borrower, the quantum of facilities required and whether we have been dealing with the customer by providing credit facilities in the past. As such, initial approvals would typically require a higher level of approval for a borrower with the same grading and for sanctioning the same facility.

We have a process for regular monitoring of all accounts at several levels. These include periodic calls on the customer, plant visits, credit reviews and monitoring of secondary data. These are designed to detect any early warning signals of deterioration in credit quality so that we can take timely corrective action.

SME Credit

In order to manage credit in SME assets, the “wholesale credit-SME function” draws from the wholesale and retail credit functions. The SME policy and strategy is broadly aligned with the wholesale credit function with suitable amendments to make it appropriate for SME customers. It incorporates certain procedures and systems for managing credit, which have been taken from the retail credit function.

Market Risk

Market risk refers to the potential loss on account of adverse changes in market variables or other risk factors which affect the value of financial instruments that we hold. The financial instruments may include investment in money market instruments, debt securities (such as gilts, bonds and PTCs), equities, foreign exchange products and derivative instruments (both linear and non-linear products).

 

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The market variables which affect the valuation of these instruments typically include interest rates, credit spreads, equity prices, net asset values (“NAVs”), foreign exchange rates, implied volatilities (including the foreign exchange volatility surface, cap/floor volatility and volatility smiles), exchange derivative prices, and bullion prices. Any change in the relevant market risk variable has an adverse or favorable impact on the valuation depending on the direction of the change and the type of position held (long or short). While the positions are taken with a view to earn from the upside potential, there is always a possibility of downside risk. Thus, the Bank must constantly review the positions to ensure that the risk on account of such positions is within our overall risk appetite. The risk appetite for trading risk is set through a pre-approved treasury limits package as well as through specific trading limits and trigger levels for a few product programs. In addition, the Bank’s risk limits with respect to interbank counterparties are guided by the interbank counterparty exposure limit while the Bank’s Asset Liability Management (“ALM”) limits prescribe the appetite for liquidity risk and interest rate risk in the banking book (“IRRBB”). The process for monitoring and reviewing risk exposure is outlined in the various risk policies.

The market risk department formulates procedures for risk valuation for market risk measures, assesses market risk factors impacting the trading portfolio and recommends various market risk controls/mitigants relating to limits and trigger levels for the treasury (including investment banking portfolios for primary undertaking and distribution) and non-treasury positions. The treasury mid-office is responsible for monitoring and reporting market risks arising from the trading desks and also carries out rate scans of the deals. The market data cell in the mid-office maintains market data, performs market data scans to check market data sanctity and verifies the rates submitted by the treasury front office for polling various benchmarks.

Our Board has delegated the responsibility for risk management of the balance sheet on an ongoing basis to the Asset Liability Committee (“ALCO”). This committee, which is chaired by the Managing Director and includes the heads of the business groups, generally meets fortnightly. The ALCO reviews the product pricing for deposits and assets as well as the maturity profile and mix of our assets and liabilities. It articulates the interest rate view and decides on future business strategy with respect to interest rates. It reviews and sets funding policy, and also reviews developments in the markets and the economy and their impact on the balance sheet and business along with a review of the trading levels. Moreover, it reviews the utilization of liquidity and interest rate risk limits set by the Board and decides on the inter-segment transfer pricing policy.

The financial control department is responsible for collecting data, preparing regulatory and analytical reports and monitoring whether the interest rate and other policies and limits established by the ALCO are being observed. The Balance Sheet Management desk, which is part of the treasury group, also assists in implementing our asset liability strategy and in providing information to the ALCO.

Policies and Procedures—Trading and Asset Liability Management Risks

The following sections briefly describe our policies and procedures with respect to trading risk (price risk) and ALM risk (interest rate risk in the banking book and liquidity risk).

I. Trading Risk

Trading risk is the risk arising from price fluctuations due to market factors, such as changes in interest rates, equity prices, NAVs, bullion prices, exchange rates, exchange derivative prices and the variations in their implied volatilities in respect of the trading portfolio held by the Bank. The trading portfolio includes holdings in the held-for-trading and available-for-sale portfolios, as per RBI guidelines and consists of positions in bonds, securities, currencies, interest rate swaps, forward rate agreements, interest rate options, cross-currency interest rate swaps and currency options.

The trading risk is managed by establishing a sound process for price validation and by setting various limits or trigger levels, such as value at risk limits, stop-loss trigger levels, price value per basis point (PV01) limits, option Greek limits and position limits, namely, intraday and net overnight forex open position. Additional controls such as order size and outstanding exposure limits are prescribed, wherever applicable, based on case-by-case review. Moreover, measures such as investment limits and deal size thresholds are prescribed as part of the investment policy for managing outstanding investment or trading positions.

The trading limits/trigger levels are reviewed by the market risk department and presented to the RPMC for its recommendation to the Board for approval. The limits/trigger levels are reviewed annually or more frequently (depending on market conditions) or upon introduction of new products.

The market risk policy sets the framework for market risk monitoring and includes the non-standard product policy which stipulates requirements for case-specific evaluation of risk exposure in respect of non-standard products (that is, products which are not part of the standard product list decided by treasury and the market risk department). Additionally, limits have been assigned to restrict the aggregate exposure in non-standard positions. Further, the stress testing policy prescribes the stress scenarios that are applied on the outstanding trading positions to recognize and analyze the impact of the stress conditions on the trading portfolio. Stress tests are based on historical scenarios as well as on sensitivity factors, such as an assessment based on hypothetical/judgmental scenarios, and include topical scenarios based on evolving risk themes.

 

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Models applied to trading products are governed by the Bank’s board-approved independent model validation policy. The market data of major interest rate curves, captured in the valuation systems, are compared against an independent market data source on a month-end basis for accurate valuation in accordance with the independent model validation policy of the Bank. Simultaneously, valuations of forex, derivatives and structured products in treasury systems are compared with valuations from the respective counterparty bank (with whom the Bank has a credit support annex (“CSA”) agreement) every month by the treasury analytics team along with validation of valuations from the Bank’s external independent model validator on an annual and an ad-hoc basis. The Valuation Committee is apprised of the results in its quarterly meetings. Further, internal independent validation of valuations of forex, derivative, bond and money market instrument is conducted monthly by the treasury analytics team.

An independent Model Validation Unit (“MVU”) has been set-up by the Bank in line with global best practices on model validation. The MVU shall, in a phased manner, take over the periodic validation activity of the risk models from the Treasury Analytics department. Going forward, MVU is expected to conduct a review of the risk models and the risk parameters that have been proposed by the Bank’s Market Risk department. The MVU is also expected to be responsible for the validation of the valuation models that are being proposed by the Treasury Analytics department.

II. Asset Liability Management

The ALM risk management process consists of management of liquidity risk and IRRBB. Liquidity risk is the risk that the Bank may not be able to fund increases in assets or meet obligations as they fall due without incurring unacceptable losses. IRRBB refers to the potential adverse financial impact on the Bank’s banking book from changes in interest rates. The banking book is comprised of assets and liabilities that are incurred to create a steady income flow or to fulfill statutory obligations. Such assets and liabilities are generally held to maturity. The Bank carries various assets, liabilities and off-balance sheet items across markets, maturities and benchmarks, exposing itself to risks from changing interest rates. The Bank’s objective is to maintain liquidity risk and IRRBB within certain tolerance limits. The ALM limits are reviewed by the market risk department and presented to the RPMC for its recommendation to the Board for approval. The limits are reviewed at least annually.

Structure and Organization

The ALM risk management process of the Bank operates in the following hierarchical manner:

Board of Directors

The Board has the overall responsibility for the management of liquidity and interest rate risk. The Board decides the strategy, policies and procedures of the Bank to manage liquidity and interest rate risk, including setting the Bank’s risk tolerance and limits.

Risk Policy and Monitoring Committee of the Board

The RPMC is a Board-level committee, which supports the Board by supervising the implementation of risk strategy. It guides the development of policies, procedures and systems for managing risk. It ensures that these are adequate and appropriate to changing business conditions, the structure and needs of the Bank and the risk appetite of the Bank. It ensures that frameworks are established for assessing and managing liquidity and interest rate risks faced by the Bank. The RPMC meets at least once every quarter. The RPMC’s role includes, inter alia:

 

  1.

to review and recommend for Board approval the liquidity and interest rate risk policies and behavioral studies or any other amendment thereto; and

 

  2.

to ratify excess utilization of Board-approved limits except where delegated to the ALCO.

Asset Liability Committee

The ALCO is the decision-making unit responsible for ensuring adherence to the risk tolerance and limits set by the Board, as well as implementing the Bank’s liquidity and interest rate risk management strategy in line with the Bank’s risk management objectives and risk tolerance. The ALCO is also responsible for balance sheet planning from a risk-return perspective, including strategic management of interest rate and liquidity risks. The detailed roles of the ALCO are mentioned in the Bank’s ALM Policy. These roles include, but are not limited to, the following:

 

   

product pricing for deposits and customer advances;

 

   

deciding the desired maturity profile and mix of incremental assets and liabilities as well as investments in debt and liquid mutual funds;

 

   

articulating the Bank’s interest rate view and deciding on its future business strategy;

 

   

reviewing and articulating funding strategy and deciding on source and mix of liabilities or sale of assets;

 

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ensuring adherence to the liquidity and interest rate risk limits set by the Board and ratification of utilization, wherever applicable;

 

   

reviewing ALM stress test results and ensuring that a well-documented contingency funding plan is in place;

 

   

deciding on the transfer pricing policy of the Bank and considering liquidity costs and benefits as an integral part of the Bank’s strategic planning;

 

   

regularly reporting to the Board on the ALM risk profile of the Bank through ALCO minutes; and

 

   

overall responsibility for monitoring the Bank’s Liquidity Coverage Ratio (“LCR”) and Net Stable Funding Ratio (“NSFR”.)

ALM Support Group

The ALM support group is responsible for analyzing, monitoring and reporting the relevant risk profiles to senior management and relevant committees. The ALM support group comprises the balance sheet management desk (Treasury), the market risk department, the treasury mid-office and financial control.

Risk Measurement Systems and Reporting

Liquidity Risk

Liquidity risk is measured using the flow approach and the stock approach. The flow approach involves comprehensive tracking of cash flow mismatches, whereas the stock approach involves the measurement of critical ratios in respect of liquidity risk.

For measuring and managing net funding requirements, the use of a maturity ladder and calculation of cumulative surplus or deficit of funds at selected maturity dates has been adopted as a standard tool. The time buckets for classification of assets and liabilities for the purposes of this statement is as per the RBI’s prescribed guidelines.

Stock approach involves measurement of certain critical ratios in respect of liquidity risk. Based on the RBI guidelines, a set of liquidity ratios under stock approach is monitored on a periodic basis.

In addition, the Bank is required to maintain a LCR and a NSFR. The minimum regulatory LCR has been stipulated at 100 percent from April 1, 2021, and the minimum regulatory requirement for NSFR at 100 percent has been introduced in October 2021. Analysis of liquidity risk also involves examining how funding requirements are likely to be affected under crisis scenarios. The Bank has a Board-approved liquidity stress test policy and framework guided by regulatory instructions. The Bank has an extensive intraday liquidity risk management framework for monitoring intraday positions during the day.

Interest Rate Risk in Banking Book

Interest rate risk is the risk where changes in market interest rates affect a bank’s financial position. Changes in interest rates impact a bank’s earnings through changes in its net interest income (“NII”). Changes in interest rates also impact a bank’s market value of equity (“MVE”) or net worth through changes in the economic value of its rate-sensitive assets, liabilities and off-balance sheet positions. The interest rate risk, when viewed from these two perspectives, is known as “earnings perspective” and “economic value perspective”, respectively.

The Bank measures and controls IRRBB using both the earnings perspective (measured using the traditional gap analysis method) and the economic value perspective (measured using the duration gap analysis method) as detailed below. These methods involve grouping of rate-sensitive assets (“RSA”) and rate-sensitive liabilities (“RSL”), including off-balance sheet items, based on the maturity or repricing dates. The Bank classifies an asset or liability as rate sensitive or non-rate sensitive in line with the RBI guidelines, as amended, from time to time.

A significant portion of non-maturing deposits are grouped in the “over 1 year to 3 year” category. Non-rate-sensitive liabilities and assets primarily comprise capital, reserves and surplus, other liabilities, cash and balances with the RBI, current account balances with banks, fixed assets and other assets.

The banking book is represented by excluding the trading book (i.e., on and off-balance sheet items) from the total book.

 

   

Earnings Perspective (impact on net interest income)

The traditional gap analysis (“TGA”) method measures the level of a bank’s exposure to interest rate risk in terms of sensitivity of its NII to interest rate movements over a one-year horizon. It involves bucketing of all RSA, RSL and off-balance sheet items maturing or getting repriced in the next year and computing changes of income under 200 basis points upward and downward parallel rate shocks over a year’s horizon.

 

   

Economic Value Perspective (impact on market value of equity)

 

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While the earnings perspective calculates the short term impact of the rate changes, the Economic Value Perspective calculates the long term impact on the MVE of the Bank through changes in the economic value of its rate-sensitive assets, liabilities and off-balance sheet positions. The Economic Value Perspective is measured using the duration gap analysis method (“DGA”). DGA involves computing the modified duration gap between RSA and RSL and thereby the Duration of Equity (“DoE”). The DoE is a measure of sensitivity of MVE to changes in interest rates. Using the DoE, the Bank estimates the change in MVE under 200 basis points upward and downward parallel rate shocks. The assumptions for coupons and yields used in the duration gap analysis stem from the RBI guidelines.

Operational Risk Management

Operational risk is the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events and includes risk of loss as a result of legal risk. The Bank has put in place Board-approved governance and organizational structure with clearly defined roles and responsibilities to mitigate operational risk arising from the Bank’s business and operations.

Organizational Structure for Managing Operational Risk

The Board is primarily responsible for ensuring effective management of the operational risks of the Bank. The Board sets the overall strategy and direction for operational risk management (“ORM”) within the Bank. The responsibilities towards effective implementation of operational risk management have been given to RPMC of the Bank. The RPMC is also responsible for developing a strong ORM culture and sense of responsibility at every level in the organization. The operational risk management committee (“ORMC”), which is chaired by the Chief Risk Officer and consists of senior management functionaries, oversees the implementation of the operational risk management policy approved by the Board. An independent operational risk management department (“ORMD”) is responsible for implementation of the framework across the Bank. The operational risk management policy stipulates the roles and responsibilities of employees, business units, operations and support functions in managing operational risk.

Risk Measurement and Monitoring

The Bank’s organizational structure for managing operational risk consists of the following three lines of defense:

 

   

Business, operations, support and other functions: These functions are primarily responsible for the implementation of sound risk management practices (including cost-benefit analyses) in the day-to-day operations and any resulting impact of operational risk losses in their units. Specifically, these functions are responsible for developing risk mitigation strategies for their units and the first line of defense against operational risk;

 

   

ORMD: The ORMD is responsible for implementing the operational risk management framework across the Bank. The department designs and develops tools required for implementing the framework, including policies and processes, and guidelines towards implementation and is also responsible for the maintenance of the framework. The ORMD represents the second line of defense against operational risk; and

 

   

Internal audit department: The internal audit department is the third line of defense in mitigating operational risk exposures. It evaluates the adequacy and effectiveness of the internal control systems and procedures in the risk management functions, as well as across the various business and support units of the Bank.

The Bank applies a number of risk management techniques to effectively manage operational risks. These techniques include:

 

   

risk control self-assessment to identify high-risk areas and let the Bank initiate timely remedial measures. This assessment is conducted annually to update senior management about the risk level across the Bank;

 

   

key risk indicators that are derived from various factors to provide an early warning of, or to monitor, the increasing risk or control failures in an activity. As these indicators are quantifiable, they can be measured continuously to identify trends in values;

 

   

operational risk loss management including the process of recognizing, recording and mitigating operational losses. Units or functions are required to report every operational risk loss event in a timely manner to the ORMD;

 

   

operational risk scenario analysis carried out annually to assess the impact of such risks based on hypothetical severe loss situations. The Bank uses this information for risk management purposes and any possible financial impact; and

 

   

periodic reporting on risk assessment and monitoring to the first line as well as to senior management to enable them to take timely action.

Capital Requirement

The Bank currently follows the basic indicator approach for computing operational risk capital charge. BCBS published a document titled “Basel III: Finalizing post-crisis reforms” in December 2017, containing details of the standardized approach for estimating a minimum operational risk capital charge, which would replace all the existing methods for computation of operational risk capital. While the new guidelines have not yet been finalized, the RBI has released draft guidelines on the new standardized approach. The Bank will implement the revised approach once the RBI guidelines are notified.

 

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Competition

We face intense competition in all our principal lines of business. Our primary competitors are large public sector banks, other private sector banks, foreign banks and in some product areas, NBFCs. In addition, new entrants into the financial services industry, including companies in the financial technology sector, may further intensify competition in the business environments, especially in the digital business environment, in which we operate. In the last decade, the RBI issued guidelines for the entry of new banks in the private sector, licensing of payment banks and small finance banks in the private sector and “on-tap” licensing of universal banks in the private sector (moving from the previous “stop and go” licensing approach to a continuous or “on-tap” licensing regime). See “Supervision and Regulation—Entry of new banks in the private sector.” Since the introduction of the new rules, new banks, payment banks and small finance banks have been established and are operational pursuant to prescribed guidelines, which has increased competition in the markets in which we operate.

Within the public sector banking space, in August 2019, the Government implemented consolidated measures, announcing the merger of 10 public sector banks into four bigger banks. This led to a reduction in the number of public sector banks in the country. The consolidation became effective in April 2020.

Retail Banking

In retail banking, our principal competitors are large public sector banks, which have much larger deposit bases and branch networks than ours, other new generation private sector banks, old generation private sector banks, foreign banks and NBFCs in the case of retail loan products. The retail deposit share of foreign banks is small in comparison to the public sector banks. However, some foreign banks have a significant presence among NRIs and also compete for non-branch-based products. India’s digital payments market is dominated by the Government’s United Payment Interface, which continues to bring innovation to the industry, and other digital wallet platforms and online payment systems, offering contactless, in-app or online transactions. The Bank’s payment app, PayZapp, is the dominant mobile app amongst banks in India in the wallet space, with users across bank and non-bank customers for payments across offline and online merchants. In order to meet the competition’s offering, the Bank has recently transformed the existing app and launched PayZapp on a more robust platform with easy-to-use features and a multitude of payment options for its customers, including enabling credit card payments for merchants via UPI. See “—Our Business Strategy—Project Future Ready.”

Wholesale Banking

Our principal competitors in wholesale banking are public and new private sector banks as well as foreign banks. The large public sector banks have traditionally been market leaders in commercial lending. Foreign banks have focused primarily on serving the needs of multinational companies and Indian corporations with cross-border financing requirements, including trade and transactional services and foreign exchange products and derivatives, while the large public sector banks have extensive branch networks and large local currency funding capabilities.

Treasury

For our customer business in foreign exchange and derivative products, we compete principally with private sector banks, foreign banks and public sector banks in non-metro locations.

Employees

We had 173,222 employees as of March 31, 2023. Most of our employees are located in India. We consider our relationship with our employees to be positive. Further to our acquisition of CBoP in 2008, several employees of CBoP continue to be part of a labor union. These employees represent less than 1 percent of our total employee strength.

Our compensation structure has fixed as well as variable pay components. Our variable pay plans comprise periodic performance linked pay (“PLP”), annual performance linked bonus, employee stock option plans and restricted stock unit plans.

In addition to basic compensation, employees are eligible to participate in our provident fund and other employee benefit plans. The provident fund, to which both we and our employees contribute, is a savings scheme required by Government regulation under which the fund is required to pay to employees a minimum annual return, as declared by the provident fund authorities. If such return is not generated internally by the fund, we are liable for the difference. Our provident fund has generated sufficient funds internally to meet the annual return requirement since inception of the fund. We have also set up a superannuation fund to which we contribute defined amounts. Employees above certain seniority levels are given a choice to contribute to the national pension scheme. We also contribute specified amounts to a pension fund in respect of certain of our former CBoP employees. In addition, we contribute specified amounts to a gratuity fund set up pursuant to Indian statutory requirements.

Our learning and development team focuses on delivering leading and cutting-edge learning offerings to help our employees develop the skills that are necessary for purpose and growth. The team designs offerings based on the learning need analysis, and an appropriate delivery mode is selected to ensure learning effectiveness and an optimal learning experience. Both internal and external faculty is involved in facilitating these offerings, which are delivered through live instructor-led classroom and/or virtual sessions, self-paced learning, case studies, simulations, role plays, videos and activities or a combination of the foregoing.

 

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Properties

Our registered office and corporate headquarters is located at HDFC Bank House, Senapati Bapat Marg, Lower Parel, Mumbai 400 013. In addition to the corporate office, we have administrative offices in most of the metros and some other major cities in India.

As of March 31, 2023, we had a network consisting of 7,821 branches and 19,727 ATMs/CDMs, including 9,426 at non-branch locations. In addition, we had 15,921 business correspondents, which were primarily manned by CSCs. These facilities are located throughout India with the exception of three banking outlets which are located in Bahrain, Hong Kong and Dubai. We also have representative offices in the United Arab Emirates and Kenya. We set up and commenced business in an International Financial Service Centre Banking Unit at the Gujarat International Finance Tec-City in June 2017. This branch is treated as an overseas branch.

Intellectual Property

We utilize a number of different forms of intellectual property in our business including our HDFC Bank brand and the names of the various products we provide to our customers. We believe that we currently own, have licensed or otherwise possess the rights to use all intellectual property and other proprietary rights, including all trademarks, domain names, copyrights, patents and trade secrets used in our business.

Legal Proceedings

We are involved in a number of legal proceedings in the ordinary course of our business, including certain spurious or vexatious proceedings with significant financial claims present on the face of the complaint, but we believe that such spurious or vexatious proceedings lack any merit, based on the historical dismissal of similar claims.

A securities class action lawsuit, that had been filed against the Bank and certain of its current and former directors and officers in the United States District Court for the Eastern District of New York was dismissed on June 7, 2023 with prejudice, whereby the plaintiffs cannot refile the same claim before the Court. See “Risk Factors—Our business and financial results could be impacted materially by adverse results in legal proceedings.”

 

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Risk Factor Summary

 

1.

Economic and Political Risks

 

   

A slowdown in economic growth in India would cause us to experience slower growth in our asset portfolio and deterioration in the quality of our assets.

 

   

Our business is particularly vulnerable to interest rate risk, and volatility in interest rates could adversely affect our net interest margin, the value of our fixed income portfolio, our treasury income and our financial performance.

 

   

Financial and political instability in other countries may cause increased volatility in the Indian financial market.

 

   

Our and our customers’ exposure to fluctuations in foreign currency exchange rates could adversely affect our operating results.

 

   

We may not adequately assess, monitor and manage risks inherent in our business, and any failure to manage risks could adversely affect our business, financial position or results of operations.

 

   

In order to support and grow our business, we must maintain a minimum capital adequacy ratio, and a lack of access to the capital markets may prevent us from maintaining an adequate ratio.

 

   

We rely on third parties, including service providers, overseas correspondent banks and other Indian banks, who may not perform their obligations satisfactorily or in compliance with the law.

 

2.