To the Members,
Your Directors take great pleasure in presenting the 22nd Annual Report on the business and operations of your Bank, together with the audited accounts for the year ended March 31, 2016.
It’s been a transformational year for your Bank in more ways than one. Led by a slew of digital innovations, many of them pioneering and several initiatives in rural India, your Bank was able to cement its position as a premier Bank across markets, from metros to the hinterland. The Bank’s singular endeavour to offer an agnostic customer experience across all its geographies has enabled it to garner not just substantial mindshare but also market share.
Your Bank has also contributed as a corporate citizen substantially through its Sustainable Livelihood Initiative, which skills those at the Bottom of the Pyramid and enables them to earn a livelihood by providing captial and in the process substituting usurious lending by the unorganized financial sector. Through its CSR programme, your Bank is helping create sustainable communities.
These initiatives helped the larger society bond better with the Bank. They were also instrumental in establishing your Bank as India’s Most Valuable Brand for the 2nd consecutive year in a study conducted by Millward Brown, a leading global research agency specializing in media and brand equity research and a part of communications group WPP.
While the Bank’s operations complemented by new initiatives during the year led to higher revenues and profitability, its traditional prudence ensured that it did not come at the cost of asset quality.
Your Bank has had a dividend policy that balances the dual objectives of appropriately rewarding shareholders through dividends and retaining capital in order to maintain a healthy capital adequacy ratio to support future growth. It has had a consistent track record of steady increase in dividend distribution over its history with the dividend pay-out ratio ranging between 20-25 per cent. Consistent with this policy and in recognition of the overall performance during this financial year, your Directors are pleased to recommend a dividend of Rs. 9.50 per equity share of Rs. 2 for the year ended March 31, 2016 as against Rs. 8 per equity share of Rs. 2 for the year ended March 31, 2015. This dividend shall be subject to tax on dividend to be paid by the Bank.
Issuance of Equity Shares
During the year under review, 2,16,91,200 equity shares were allotted to the employees of your Bank in respect of the equity stock options exercised under the Employee Stock Option schemes. As on March 31, 2016, the issued, subscribed and paid-up capital of your Bank stood at Rs. 5,056,373,034 comprising 2,52,81,86,517 equity shares of Rs. 2 each.
Employee Stock Options
The information pertaining to Employee Stock Options is given in ANNEXURE 1 to this report.
Capital Adequacy Ratio
Your Bank’s total Capital Adequacy Ratio (CAR) calculated in line with Basel III capital regulations stood at 15.5 per cent, well above the regulatory minimum of 9 per cent. Of this, Tier I CAR was 13.2 per cent.
Your Bank has two subsidiaries, HDB Financial Services Limited (‘HDBFS’) and HDFC Securities Limited (‘HSL’).
HDB Financial Services Limited
HDBFS is a non-deposit taking non-bank finance company (‘NBFC’). The customer segments being addressed by HDBFS are typically underserviced by larger commercial banks, and thus create a profitable niche for the company. Apart from lending to individuals, the company grants loans to micro, small and medium business enterprises. It also operates call centres for collection services to the Bank’s retail loan products.
During the year ended March 31, 2016, the company’s total income increased by 31 per cent to Rs. 3,302 crore as compared to Rs. 2,527.3 crore in the previous year. During the same period, the company’s net profit after tax grew by 52.9 per cent to Rs. 534.4 crore compared to Rs. 349.5 crore in the previous year.
HDBFS offers its loan and asset finance products through its branches and digital and assisted channels. It has 929 branches in 623 cities. As on March 31, 2016, your Bank held 97.1 per cent stake in HDBFS.
A Scheme of Amalgamation has been proposed for the amalgamation of Atlas Documentary Facilitators Company Private Limited and HBL Global Private Limited (associates of the Bank) with HDBFS. Necessary procedures have been initiated in this regard and are pending as on the date of this Report.
HDFC Securities Limited
HDFC Securities Limited (HSL) is among India’s largest retail broking firms and offers a large bouquet of financial services. As on March 31, 2016, your Bank continued to hold 97.9 per cent stake in HSL.
HSL increased its physical distribution network by a further 12 branches during the year, taking the total to 262 branches across 189 cities in the country. During the year under review, HSL’s total income amounted to Rs. 401.6 crore as against Rs. 417 crore in the previous year. During the same period, the net profit after tax was Rs. 133.3 crore compared to Rs. 165 crore in the previous year.
During the year under review, HSL won the prestigious IDC Insights Award 2015 for Excellence in Customer Experience in the BFSI category and the Digital Business Leader Award for Best CRM Implementation. It was adjudged runner up in the Best e-Brokerage category at the Outlook Money Awards 2015.
The annual reports of HDBFS and HSL are available on the website of the Bank. Shareholders who wish to have a copy of the annual accounts and detailed information on HDBFS and HSL may write to the Bank. These documents shall also be available for inspection by shareholders at the registered offices of the Bank, HDBFS and HSL.
MANAGEMENT DISCUSSION AND ANALYSIS
Macroeconomic and Industry Developments
India’s economy recorded a growth rate of 7.6 per cent in terms of real Gross Domestic Product (GDP) in 2015-16. This was the highest in five years despite the continued slowdown in global growth and two consecutive years of deficient monsoons in India. Inflation moderated, with the average level of Consumer Price Inflation declining to 5 per cent in 2015-16 from 6 per cent in 2014-15. Domestic manufacturing growth improved to a robust 9.5 per cent compared to 5.5 per cent in financial year 2014-15. It reflects stronger value addition due to subdued input prices, which was a result of the declining global commodity cycle. Foreign Direct Investment inflows (FDI) increased by 40 per cent in the April–December period of 2015 over the corresponding period of the previous year.
A range of supply side measures, including prudent food stock management, appropriate monetary policy action and subdued global commodity prices aided the decline in inflation. Meanwhile, initiatives such as ‘Make in India’, power sector reforms, the liberalization of FDI rules and higher government capital expenditure spending indicate an incipient revival in domestic investment activity.
Going forward, weakness in private investment cycle and asset quality strain in the banking sector could prevent a full-fledged recovery, though some improvement in the growth rate is quite likely. Risks on the external front continue to loom in the form of a wider emerging market slowdown, especially on account of China and the likely volatility in global financial markets.
The growth inflation mix should improve for 2016-17 as the Government is expected to undertake more structural reforms and the RBI is likely to be more accommodative in its monetary policy. Going by the Union Budget, the focus of fiscal policy in the coming year will be the revival of rural economy and sustained increase in capital expenditure. Besides, higher outlay on various social sector programmes and implementation of Seventh Central Pay Commission recommendations should boost consumption spending. Going forward, headline GDP growth should increase to 7.8 per cent in 2016-17 from 7.6 per cent in 2015-16.
Mission, Business Strategy and Approach to Business
Your Bank’s mission is to be a “World Class Indian Bank” benchmarking itself against international standards and best practices in terms of product offerings, technology, customer service levels, risk management, audit and compliance.
The objective is to continue building sound customer franchises across distinct businesses so as to be a preferred provider of banking services for its target retail and wholesale customer segments and to achieve a healthy growth in profitability, consistent with the Bank’s risk appetite.
Your Bank’s business philosophy is based on five core values: Customer Focus, Operational Excellence, Product Leadership, People and Sustainability. Based on these cornerstones, it is your Bank’s aim to meet the financial needs of customers while ensuring service of the highest quality.
Your Bank is committed to do this while ensuring the highest levels of ethical standards, professional integrity, corporate governance and regulatory compliance. The Bank understands and respects its fiduciary role and responsibility to all stakeholders and strives to meet their expectations. The cardinal principles of independence, accountability, responsibility, transparency, fair and timely disclosures serve as the basis of your Bank’s approach to corporate governance.
Your Bank believes that diversity and independence of the Board, transparent disclosures, shareholder communication and effective regulatory compliance are necessary for creating and sustaining shareholder value. Your Bank has infused these principles into all its activities.
Your Bank also has a well-documented Code of Ethics / Conduct which defines the high business responsibility and ethical standards to be adhered to while conducting the business of the Bank and mandates compliance with legal and regulatory requirements. All employees, including senior management have to affirm annually that they have adhered to the Code of Conduct rules.
Consistent with the mission and approach, your Bank’s business strategy emphasises the following:
• Increase market share subject to striking an optimal balance between risk and margin, in India's expanding banking and financial services industry
• Increase geographical reach
• Cross-sell broad financial product portfolio across customer base
• Continue investments in technology to support digital strategy
• Maintain strong asset quality through disciplined credit risk management
• Maintain a low cost of funds
• Integrating activities in community development, social responsibility and environmental responsibility with business practices and operations
The financial performance of your Bank during the year ended March 31, 2016 remained healthy with total net revenues (net interest income plus other income) increasing by 22.1 per cent to Rs. 38,343.2 crore from Rs. 31,392 crore in the previous financial year. Revenue growth was driven by an increase in both Net Interest Income and Other Income. Net Interest Income grew by 23.2 per cent due to acceleration in loan growth coupled with a Net Interest Margin (NIM) of 4.3 per cent for the year ended March 31, 2016.
Other Income grew 19.5 per cent over that of the previous year to Rs. 10,751.7 crore during the year ended March 31, 2016.
The largest component of Other Income was fees and commissions, which increased by 17.8 per cent to Rs. 7,759 crore with the primary drivers being commissions on debit and credit cards, transactional charges, fees on deposit accounts, fees on retail assets and commission on distribution of mutual funds and insurance products. Foreign exchange and derivatives revenue was Rs. 1,227.7 crore, gain on revaluation and sale of investments was Rs. 731.8 crore and recoveries from written-off accounts were Rs. 808 crore in the year ended March 31, 2016.
Operating (Non-Interest) expenses increased to Rs. 16,979.7 crore for the year under review from Rs. 13,987.6 crore in the previous year. During the year, your Bank opened 506 new branches and 234 ATMs coupled with strong growth in retail asset and card products, which resulted in higher infrastructure and staffing expenses. Staff expenses also increased on account of annual wage revisions. Despite the addition to the infrastructure, your Bank maintained its Cost to Income ratio at 44.3 per cent for the year ended March 31, 2016, as against 44.6 per cent for the previous year.
Total Provisions and Contingencies were Rs. 2,725.6 crore for the year ended March 31, 2016 as compared to Rs. 2,075.8 crore during the previous year. Your Bank’s provisioning policies remain higher than regulatory requirements. The coverage ratio based on specific provisions alone excluding write-offs was around 70 per cent and including general and floating provisions was around 146 per cent as on March 31, 2016. Your Bank made General Provisions of Rs. 440 crore during the year ended March 31, 2016.
Your Bank’s Profit before Tax was Rs. 18,637.9 crore, an increase of 21.6 per cent over the year ended March 31, 2015.
After providing for Income Tax of Rs. 6,341.7 crore, the Net Profit for year ended March 31, 2016 was Rs. 12,296.2 crore, up 20.4 per cent over the year ended March 31, 2015. Return on Average Net worth was 18 per cent while the Basic Earnings per Share increased from Rs. 42.1 to Rs. 48.8 per equity share.
As on March 31, 2016, your Bank’s total balance sheet stood at Rs. 708,846 crore, an increase of 20 per cent over Rs. 590,503 crore in the previous year. Total Deposits increased by 21.2 per cent to Rs. 546,424 crore as on March 31, 2016 from Rs. 450,796 crore as on March 31, 2015.
Savings Account Deposits grew by 18.4 per cent to Rs. 147,886 crore while Current Account Deposits grew by 20.2 per cent to Rs. 88,425 crore as on March 31, 2016. The proportion of Current and Savings Deposits to total deposits was at 43 per cent as on March 31, 2016.
During the financial year under review, Net Advances grew by 27.1 per cent to Rs. 464,594 crore. The Bank had a market share of approximately 5.4 per cent and 5.8 per cent in total Domestic System Deposits and Advances respectively. Your Bank’s Credit Deposit (CD) Ratio was 85 per cent as on March 31, 2016.
Business Segments’ Update
Consistent with its past performance, your Bank has achieved healthy growth across various operating and financial parameters in the last financial year. This performance reflected the strength and diversity of three primary business franchises - retail banking, wholesale banking and treasury and of its disciplined approach to risk-reward management.
The growth in your Bank’s retail banking business was robust during the year ended March 31, 2016. Your Bank’s total Retail Deposits grew by 20.9 per cent to Rs. 436,383 crore in the year ended March 31, 2016, driven by Retail Term Deposits which grew faster at 23.4 per cent during the same period.
The Bank’s Retail Advances grew by 28.6 per cent to Rs. 248,319 crore during the year ended March 31, 2016 driven primarily by growth in Personal Loans, Auto Loans, Home Loans, and Credit Cards. Retail Advances include loans which fulfil the criteria of orientation, nature of product, granularity and low value of individual exposures for retail exposures as laid down by the Basel Committee.
The growth in Retail Advances has been primarily due to two factors. First is the extensive network of branches across the length and breadth of the country which allows the Bank to reach out to different customer segments. Second is the emphasis on innovation across multiple channels, which offers customers choice, convenience and a superior experience. Faster and more efficient platform deliveries across ATMs, Internet, Phones and Mobiles have been the cornerstone of the growth in Retail Advances. Focus on cutting edge analytics and Customer Relationship Management (CRM) has helped the Bank to understand the customers’ life cycle better and offer them products appropriate to their profile and needs. Further, analytics also allow the Bank to target potential customers in a cost effective manner. This enables your Bank to strengthen its relationship with existing customers, as well as forge new relationships. Focus on analytics and CRM also helps in understanding the risk profile of customers and helps improve fraud control and collections.
During the year under review, your Bank added 506 branches taking its physical distribution network to 4,520 branches in 2,587 cities / towns from 4,014 branches in 2,464 cities / towns as on March 31, 2015. Number of ATMs increased to 12,000 from 11,766 during the same period. The Bank’s focus on semi-urban and under-banked markets continued with 55 per cent of its branches in such areas. The Bank’s customer base has grown to 3.77 crore.
In order to provide its customers greater choice, flexibility and convenience, your Bank continued to make significant headway (investments) in its multichannel servicing strategy, offering its customers the use of ATMs, Internet, Phones and MobileBanking in addition to its expanded branch network to serve their banking needs. PhoneBanking services are available even for Non Resident Indian (NRI) customers across the globe.
The Bank continued its focus on existing customers for its credit cards portfolio, with over 75 per cent of new cards issued to this segment. As part of its strategy to drive usage of its credit cards, the Bank also has a significant presence in the ‘merchant acquiring’ business, with the total number of point-of-sale (POS) terminals installed crossing 2.8 lakh.
In addition to the aforementioned products, the Bank operates in the home loan business in conjunction with HDFC Limited. Under this arrangement, the Bank sells loans provided by HDFC Limited through its branches. HDFC Limited approves and disburses the loans, with the Bank receiving a sourcing fee for these loans. The Bank has the option to purchase up to 70 per cent of the fully disbursed home loans sourced under this arrangement either through the issue of mortgage backed pass through certificates (PTCs) or by a direct assignment of loans.
The balance is retained by HDFC Limited. A fee is paid to HDFC Limited for the administration and servicing of the loans. Your Bank originated, on an average, approximately Rs. 1,300 crore of home loans every month in the year under review. During the same period, the Bank purchased from HDFC Limited home loans worth Rs. 12,773 crore under the “loan assignment” route.
Your Bank also distributes Life Insurance, General Insurance and Mutual Fund products through its tie-ups with insurance companies and mutual fund houses. Third Party Distribution Income contributed approximately 14 per cent of total fee income for the year ended March 31, 2016, compared to 15 per cent of the total fee income for the previous year.
The Bank’s data warehouse, customer relationship management (CRM) and analytics solutions have helped it target existing and potential customers in a cost effective manner and offer them products appropriate to their profile and needs. Apart from reducing costs of acquisition, this has also helped in deepening customer relationships and greater efficiency in fraud control and collection activities resulting in lower credit losses. The Bank is committed to investing in advanced technology in this area which will provide a cutting edge to its product and service offerings.
Your Bank provides its corporate and institutional clients a wide range of commercial and transactional banking products, backed by high quality service and relationship management. The Bank’s Wholesale Banking business covers not only the top end of the corporate sector but also the Emerging Corporate Segment and SMEs. It has a number of business groups catering to various segments with a wide range of banking services covering their Working Capital, Term Finance, Trade Services, Cash Management, Investment Banking services, Foreign Exchange and Electronic Banking requirements.
Your Bank provides its customers’ access to both Working Capital and Term Financing. Working Capital Loans and Short Tenor Term Loans continued to account for a large share of its Wholesale Advances. During the year ended March 31, 2016, growth in the Wholesale Banking business continued to be driven by new customer acquisition and securing a higher share of the wallet of existing customers by cross-selling with a focus on optimizing yields and increasing product penetration.
Your Bank’s Financial Institutions and Government Business Group (FIG) offers commercial and transaction banking products to financial institutions, mutual funds, insurance companies, public sector undertakings, central and state government departments. The main focus for this segment remained the offering of various deposit and transaction banking products besides deepening these relationships by offering Funded, Non-Funded, Treasury and Foreign Exchange products. Your Bank is authorised to collect Direct Taxes. It made a total collection of nearly Rs. 1,90,000 crore during the year and was ranked second in terms of total collections made by any Bank. Your Bank is also authorised to collect Excise as well as Service Tax and collected over Rs. 97,000 crore, during the year. Governments of 13 States have authorised your Bank to collect State Taxes / Duties. These mandates enable a greater convenience to customers and help the exchequer in mobilizing resources in a seamless manner.
The Bank continues to be the market leader in cash settlement services for major stock and commodity exchanges in the country. Your Bank’s Investment Banking Group has established itself as a leading player in Debt Capital Markets and Project Finance. In recognition of the strong position enjoyed by the Bank in the Debt Capital Market, Bloomberg ranked it No. 2 amongst book runners in INR bonds for Calendar Year 2015.
Your Bank has executed a well thought out strategy of offering a full range of banking products under one roof to the commercial vehicle and infrastructure equipment market. It has, in a short span of time, established itself as one of the preferred and trusted brands in this segment with an enviable list of MoUs and Programmes with the leading commercial vehicles and Original Equipment Manufacturers (OEMs). Your Bank offers under one roof, Commercial Vehicle and Equipment Working Capital Loans, Bank Guarantee, Tax Payments, Cash Management Services and other banking services enabling it to cut down on transaction time and costs for customers.
Your Bank’s Cash Management Business (CMS) (including all outstation collection, disbursement and electronic fund transfer products across its various customer segments) registered volumes of over Rs. 39 lakh crore. The Bank is one of the front runners in making significant progress in web-enabling its CMS business. In line with the Bank’s overall drive towards digitization, it has further ensured a larger conversion of physical payments into electronic in the Cash Management Business.
The Bank has succeeded in leveraging its market position, expertise and technology to create a competitive advantage and build market share by offering customised solutions. From customised ERP integrations to high-end SAP certified solutions, the Bank has been a leading proponent of adopting innovative technology.
As part of the Bank’s on-going digital transformation, the Bank extended its “Trade on Net” offering on mobile. This product enables customers to avail of Remittances, Letters of Credit, and Guarantees through the net platform. It gained enormous acceptance with customers due to the savings and convenience it offers.
Your Bank currently has three overseas branches: a Wholesale Banking branch in Bahrain, a branch in Hong Kong and a branch at Dubai International Finance Centre (DIFC) in Dubai. The overseas branches offer multiple banking services including Treasury Products, Trade Finance and Loans to customers. The DIFC branch offers advisory services to High Net Worth Individuals and Corporates. Your Bank also has Representative Offices in Abu Dhabi and Nairobi which are engaged in promotional and marketing activities of the Bank’s brand name among the Non-Resident Indians. As of March 31, 2016, the combined balance sheet size of overseas branches was over $ 5 billion. Advances at overseas branches constituted close to 7 per cent of the Bank’s gross advances as on March 31, 2016. The total income of the overseas branches constituted over 1.5 per cent of the Bank’s total income for the year.
Your Bank mobilized $ 3.4 billion in special FCNR (B) deposits from NRI clients under RBI swap window in 2013. This was the highest among all Banks. NRI clients had availed of loans amounting to $ 1.8 billion from the Bahrain branch towards booking these deposits. As a major portion of these deposits was for a 3 year tenor, this would come up for maturity during September - November 2016.
The Treasury Group is responsible for compliance with reserve requirements and management of liquidity and interest rate risk on the Bank’s balance sheet. On the foreign exchange and derivatives front, revenues were driven primarily by spreads on customer transactions based on trade flows and customers’ demonstrated hedging needs. The year ended March 31, 2016 recorded Rs. 1,227.7 crore in revenues from foreign exchange and derivative transactions. These revenues were distributed across large and emerging corporates, business banking and retail customer segments for plain vanilla foreign exchange products and across primarily large and emerging corporate segments for derivatives. The Bank offers Indian Rupee and foreign exchange derivative products to its customers, who use them to hedge their market risks. The Bank enters into foreign exchange and derivative deals with counterparties after it has set up appropriate counterparty credit limits based on its evaluation of the ability of the counterparty to meet its obligations in the event of crystallization of the exposure. Appropriate credit covenants may be stipulated where required as trigger events to call for collaterals or terminate a transaction and contain the risk. Where the Bank enters into foreign currency derivative contracts, not involving the Indian Rupee, with its customers it lays them off in the inter- Bank market on a matched basis. For such foreign currency derivatives, the Bank primarily carries the counterparty credit risk (where the customer has crystallized payables or mark-to-market losses). The Bank also deals in derivatives on its own account, including for the purpose of its own balance sheet risk management.
Given the regulatory requirement of holding government securities to meet the Statutory Liquidity Ratio (SLR) requirement, your Bank maintains a portfolio of Government Securities. While a significant portion of these SLR securities are held in the “Held-to-Maturity” (HTM) category, some of these are held in the “Available for Sale” (AFS) category. The Bank is also a Primary Dealer for Government Securities. As a part of this business, as well as otherwise, the Bank holds fixed income securities in the ‘Held for Trading’ (HFT) category.
Technology is a key enabler and facilitator to the critical goals of your Bank allowing it to make systems and processes even more efficient. Since inception, your Bank continued to invest heavily in technology to provide better products and superior customer experience.
Your Bank continues to spread its electronically linked branch network with state-of-the-art IT enabled core banking platform to ensure customers have access to 24*7 banking services.
Your Bank now has a large branch network in rural India. There are infrastructure limitations in deep geography. Your Bank has taken steps to address these issues, so that the Bank can offer various products and seamless services to clients across the length and breadth of the country. Your Bank also implemented Desktop Virtualisation, a cloud technology solution, to ensure that your Bank is able to overcome limitations of telecom networks. Bandwidth acceleration and compression technology has been implemented to empower rural / semi urban branches to improve the speed of the telecommunication network. QuickBanking, a mobile app catering to the off-line Internet has been launched by your Bank.
Your Bank has a large presence in the transactional processing space in most products including RTGS, NEFT and other electronic payments, Retail Assets and Direct Banking.
Your Bank has made significant investments in technology re-engineering, system design and architecture and smart storage capacity. Your Bank maintains state-of-the-art IT Infrastructure, Products and Services to meet growing business needs. It’s imperative that these services are provided without any disruption. Your Bank has sophisticated architecture and well-rehearsed Disaster Recovery set-up, so as to ensure 99.5 per cent up-time of important applications.
These initiatives reaffirmed your Bank’s commitment to a significantly enhanced customer experience across all channels including Digital Banking.
Your Bank is glad to share that technology initiatives of your Bank have also been recognized in the form of many awards and accolades including from Institute for Development and Research in Banking Technology (IDRBT) and Indian Banks’ Association (IBA).
Your Bank has setup an effective governance framework to manage cyber security. A suitable organizational structure has been put in place to ensure that your Bank monitors various cyber security threats and minimizes them.
Your Bank conducts the cyber security threat assessment and mitigation requirements on a continuous basis and is committed to implement necessary improvements in an on-going manner.
The Bank has implemented various security initiatives to counter these:
• Regular Vulnerability Assessments and Penetration Tests are carried out to assess and remedy the vulnerabilities in applications and IT Infrastructure
• Anti-Phishing services have been subscribed to ensure that the phishing sites are shutdown in a timely manner.This ensures that customers are not lured to fraudulentsites
• Risk Engine and Transaction Monitoring systems are implemented to monitor suspicious transactions on Internet Banking, ATM and e-commerce channel
• To monitor cyber-attacks targeted at critical information assets, the Bank has setup 24*7 Cyber Security Command Centre
• Humans being the weakest link in Cyber Security, your Bank has been carrying out continuous awareness among employees and customers
• The critical websites of the Bank are scanned and monitored continuously for early detection of any malware
A testimony to the Bank’s crisis preparedness is that it has secured PCI DSS and ISO 27001 certification for its critical information assets. Its efforts have been further recognized through awards from IDRBT, Data Security Council of India-National Association of Software and Services Companies (NASSCOM) for various cyber security initiatives.
Service Quality Initiatives
A regular process of reviewing the service levels and capturing feedback from customers is undertaken for continuous improvement in product, processes and service levels.
This has gained even more criticality as the customer can now access the Bank’s services across traditional touch points like branches, ATMs as well as the digital ones like the Internet and Mobile. Thanks to the new digital products on offer from the Bank - constantly monitoring the customer experience, securing feedback and acting on it becomes even more imperative. Your Bank has therefore augmented the training and skill development mechanism to empower and equip employees to deliver improved quality of Customer Service, as well as put in place a more stringent grievance monitoring and redressal mechanism across different delivery channels. The effectiveness of these measures is reviewed periodically at different levels including the Board of Directors. All these initiatives have helped in consistent reduction in total number of customer complaints. It is also a testimony to the Bank’s strong and objective review mechanism. These are done by an independent cross functional team of senior staff to ensure unbiased resolution. In addition to the aforementioned measures, in compliance with Regulatory guidelines, your Bank has appointed a senior retired banker as Chief Customer Service Officer (Internal Ombudsman) who heads the review mechanism.
As a result of the continued focus on customer service, your Bank has received written appreciation from many of the Banking Ombudsmen appointed by Reserve Bank of India across locations such as Andhra Pradesh, Chhattisgarh, Goa, Gujarat, Haryana, Madhya Pradesh, Maharashtra, Punjab, Sikkim, Uttarakhand, Uttar Pradesh and West Bengal.
Risk Management and Portfolio Quality
Integral to its business, the Bank takes on various types of risk, the most important of which are credit risk, market risk, liquidity risk and operational risk. The identification, measurement, monitoring and management of risks remain a key focus area for the Bank. Sound risk management and balancing risk-reward trade-offs are critical to the Bank’s success. Business and revenue growth are therefore to be weighed in the context of the risks implicit in the Bank’s business strategy. The Board of Directors of your Bank endorses the risk strategy and approves the risk policies. The Risk Policy and Monitoring Committee of the Board supervises implementation of the risk strategy. It guides the development of policies, procedures and systems for managing risk. The committee periodically reviews risk level and direction, portfolio composition, status of impaired credits as well as limits for treasury operations.
To manage credit risk, the Bank has a comprehensive centralized risk management function, independent from the operations and business units of the Bank. Distinct policies, processes and systems are in place for the retail and wholesale lending businesses. In the retail loan businesses, the credit cycle is managed through appropriate front-end credit, operational and collection processes. For each product, programmes defining customer segments, underwriting standards and security structure are specified to ensure consistency of credit buying patterns. Given the granularity of individual exposures, retail credit risk is monitored largely on a portfolio basis, across various products and customer segments. For wholesale credit exposures, management of credit risk is done through target market definition, appropriate credit approval processes, ongoing post-disbursement monitoring and remedial management procedures. Overall portfolio diversification, prudential ceilings across various dimensions (individual/ borrower group, industry, credit risk rating grades, and country), product mix, security structures and periodic as well as proactive reviews facilitate risk mitigation and management.
The asset quality of the Indian banking industry came under severe pressure during the year due to broader macroeconomic factors as well as issues specific to certain sectors in the economy. The banking industry on a collective basis saw a sharp spike in non-performing assets as also flexible structuring of loans under the RBI framework. Your Bank did not witness any significant deterioration in overall asset quality and continues to maintain the highest standards of governance in respect of recognition and provisioning of non-performing loans.
During the year ended March 31, 2016, your Bank’s ratio of gross non-performing assets (NPAs) to gross advances was 0.9 per cent. Net non-performing assets (gross non-performing assets less specific loan loss provisions) were 0.3 per cent of net advances as of March 31, 2016. Total restructured assets (including applications under process for restructuring) were 0.1 per cent of gross advances as of March 31, 2016. The specific loan loss provisions that the Bank has made for its non-performing assets continue to be more conservative than the regulatory requirements. In addition, the Bank has made general provisions for standard assets which are as per the regulatory prescription. The coverage ratio taking into account specific, general and floating provisions was 146 per cent as of March 31, 2016.
A dedicated team within the risk management function is responsible for assessment, monitoring and reporting of operational risk exposures across the Bank. A Board approved Operational Risk Management Framework has been put in place. A bottom up risk control self-assessment process identifies high risk areas so that the Bank can initiate timely remedial measures. Key Operational Risk Indicators are employed to alert the Bank on impending problems in a timely manner to ensure risk mitigation actions. Material operational risk losses are examined thoroughly to identify areas of risk exposures and gaps in controls on the basis of which appropriate risk mitigating actions are initiated.
Market Risk in the trading portfolio of your Bank has been adequately managed through a well-defined Board approved market risk policy and stringent trading risk limits such as positions limits, gap limits, tenor restrictions, sensitivity limits viz. PV01, Modified Duration and Option Greeks, Value-at-Risk (VaR) limit and Stop Loss Trigger Level (SLTL). The Bank also has an approved investment policy which is adhered to while investing or trading. Additionally, the Bank has a Board approved stress testing policy and framework which encompasses the market risk stress test scenarios and simulations so that stress losses can be measured and adequate control measures can be initiated.
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. Interest rate risk is the risk where changes in market interest rates affect the Bank’s earnings through changes in its net interest income (NII) and the market value of equity through changes in the economic value of its interest rate sensitive assets, liabilities and off-balance sheet positions. The policy framework for liquidity and interest rate risk management is established in the Bank’s ALM policy which is guided by regulatory instructions. Your Bank has established various Board approved limits viz., maturity gap limits and limits on stock ratios for liquidity risk and limits on income impact and market value impact for interest rate risk. Your Bank’s Asset Liability Committee (ALCO) is responsible for adherence to liquidity risk and interest rate risk limits. Additionally, your Bank has a comprehensive Board approved stress testing programme covering liquidity and interest rate risk which is aligned with the regulatory guidelines. The Liquidity Coverage Ratio (LCR) is a global minimum standard for Bank liquidity. The ratio aims to ensure that a bank has an adequate stock of unencumbered High - Quality Liquid Assets (HQLA) that can be converted into cash easily and immediately to meet its liquidity needs for a 30 calendar day liquidity stress scenario. In June 2014, RBI released Basel III Framework on Liquidity Standards - Liquidity Coverage Ratio (LCR), Liquidity Risk Monitoring Tools and LCR Disclosure Standards. Based on the guidelines, LCR became effective on January 1, 2015. The minimum requirement for the ratio was 70 per cent on January 1, 2016, increasing in equal annual increments to reach 100 per cent on January 1, 2019. As per the prevailing guidelines, your Bank’s monthly average LCR, for the quarter ended March 31, 2016 was 80 per cent.
In accordance with RBI’s guidelines, the Bank is currently on the Standardized Approach for Credit Risk, the Basic Indicator Approach for Operational Risk and the Standardized Approach for Market Risk. Parallely, the Bank is progressing with its initiatives for migrating to the advanced approaches for these risks. The framework of the advanced approaches is in harmony with the Bank’s objective of adopting best practices in risk management.
The Bank has a structured management framework in the Internal Capital Adequacy Assessment Process (ICAAP) for the identification and evaluation of the significance of all risks that the Bank faces, which may have a material adverse impact on its business and financial position. The Bank considers the following as material risks it is exposed to in the course of its business and therefore, factors these while assessing / planning capital:
• Credit Risk, including Residual Risks
• Credit Concentration Risk
• Market Risk
• Business Risk
• Operational Risk
• Strategic Risk
• Interest Rate Risk in the Banking Book
• Compliance Risk
• Liquidity Risk
• Reputation Risk
• Intraday Risk
• Model Risk
• Technology Risk
• Counterparty Credit Risk
• Group Risk (covering HDB Financial Services Ltd and HDFC Securities Ltd)
The Bank has a Board approved Stress Testing Policy and Framework which forms an integral part of the Bank’s ICAAP. Stress Testing involves the use of various techniques to assess the Bank’s potential vulnerability to extreme but plausible stressed business conditions. The changes in the levels of various risks and the changes in the on and off balance sheet positions of the Bank are assessed under assumed stress scenarios and sensitivity factors. Typically, these relate, inter alia, to the impact on the Bank’s profitability and capital adequacy.
Internal Controls, Audit and Compliance
Your Bank has Internal Audit and Compliance functions which are responsible for independently evaluating the adequacy of all internal controls and ensuring operating and business units adhere to internal processes and procedures as well as to regulatory and legal requirements. The audit function also proactively recommends improvements in operational processes and service quality. To mitigate operational risks, the Bank has put in place extensive internal controls including audit trails, appropriate segregation of front and back office operations, post transaction monitoring processes at the back end to ensure independent checks and balances, adherence to the laid down policies and procedures of the Bank and to all applicable regulatory guidelines. The internal audit function also carries out management self-assessment of adequacy of the Bank’s internal financial controls and operating effectiveness of such controls in terms of Sarbanes Oxley (SOX) Act and Companies Act, 2013. Your Bank has always adhered to the highest standards of compliance and governance and has put in place controls and an appropriate structure to ensure this. To ensure independence, the internal audit function has a reporting line to the Chairman of the Audit Committee of the Board and only a dotted line reporting to the Managing Director. The Audit Committee of the Board also reviews the performance of the audit and compliance functions and reviews the effectiveness of controls and compliance with regulatory guidelines.
Corporate Social Responsibility - Building Sustainable Communities
Building sustainable communities especially in rural India is a core CSR objective of the Bank. Your Bank has identified Integrated Rural Development as a vehicle for socio-economic change and community building. This encompasses Education, Sanitation, Skill Development and Livelihood Creation. Within these broad areas, particular focus is to impart financial literacy / inclusion and sanitation. The recipients of these interventions are primarily women from the marginal sections of society.
The Integrated Rural Development Programme (IRDP) is spread across diverse geographies ranging from the arid regions of Marathwada in Maharashtra to the wet lands of Meghalaya.
In the endeavour to create sustainable livelihood, the Bank promotes activities that are economically empowering while keeping in mind the socio-economic context and the ecology of the region. These include providing assistance to villages in soil and water conservation, water management, construction, renovation and maintenance of water harvesting structures for improving surface and ground water availability, in partnership with the Village Development Committees. Soil and water conservation work has been initiated in 550 acres of land (covering over 140 farmer families) with 65 acres brought under irrigation for the first time and 45 acres brought under assured irrigation. In one such intervention in Madhya Pradesh, the development of a cluster of seven villages situated in Mandla district has been undertaken. This region is home to a significant tribal population, which is largely cut off from mainstream development.
Similar programmes are in progress at Maharashtra and Chhattisgarh. Raigarh in Maharashtra is a case in point, where ESR (Elevated Storage Reservoir) has been provided which ensures that every house has a water connection. Your Bank has also installed solar street lights which benefit the entire community especially women / girls as they face difficulties in venturing out after sunset.
Since economic and social empowerment are the end objective of the development interventions, the Bank’s CSR efforts are reinforced by its direct intervention on financial inclusion and literacy, thereby creating economically sustainable communities. The disclosures as required under Rule 8 of the Companies Act (Accounts) Rules, 2014 have been given at ANNEXURE 2 to this report.
Skill Development and Livelihood
The livelihood initiatives of the Bank centre around providing training and capacity development to youth and women from sections of society that have no access to formal education. The support programmes are aimed at providing competencybased, skill-oriented technical and vocational training. With various combinations of initiatives based on agriculture and allied businesses, your Bank has supported more than 4,000 households, trained more than 500 youth on different trades enabling them to be entrepreneurs. Another 600 have been trained to become employable. In 2015-16 alone, the Bank trained over 85,000 people through the Sustainable Livelihood Initiative.
In 2015-16, your Bank initiated a pilot programme in skill development: The National University Students Skill Development Programme in association with the Tata Institute of Social Sciences which focuses on increasing employability of university students by imparting knowledge and skills that make them job ready. The students are trained and certified in vocational skills in addition to their university graduate degree. There is also a need to ensure that a minimum 80 per cent of the students secure jobs on completion of graduation. About 4,200 students have undergone such training.
Your Bank has also initiated entrepreneurship and youth skills development programme in the villages around Bilaspur and Ponsara in Chhattisgarh which provide training in the fields of IT enabled Skills (ITeS), Industrial Electrician and Agriculture.
Education is the key to initiating change. Keeping this in mind, programmes are structured to ensure that the children are provided with basic infrastructure to create a conducive learning environment to acquire quality education. Continuing with its mission to provide clean sanitation in schools, your Bank has covered over 850 such institutions in more than 500 villages across Chhattisgarh, Gujarat, Haryana, Maharashtra, Madhya Pradesh, Meghalaya, Punjab and Rajasthan. In addition to construction of toilets, the Bank has tied up with over 10 NGO partners to implement a behavioural change programme which is oriented towards hygiene. The School Management Committee is encouraged to take ownership of maintaining the units. The interventions under WASH (Water Sanitation and Hygiene) have also addressed the need for clean drinking water in schools.
In addition to this, 30,000 students have benefited from an on-going programme of financial literacy, offered with a partner NGO in 300 schools of Chhattisgarh and Bihar. Some other key initiatives under education are teachers training, learning camps and career guidance programmes. In one such programme, your Bank has undertaken the challenging task of implementing an innovative programme ‘Zero Investment Innovation in Education Initiative’ across schools in Uttar Pradesh to encourage low cost innovation. The first phase has seen over 2 lakh teachers oriented on this concept with over 1 lakh innovative ideas submitted. Twenty five shortlisted ideas will be recognized and implemented across the state run schools in Uttar Pradesh.
Maintaining a balance between the natural capital and communities is now integral to the Bank’s functioning. Towards this end, Bank’s ATMs have gone paperless, enabling reduction of carbon footprint. The Bank has given this effort a further fillip by ensuring multichannel delivery through NetBanking, PhoneBanking and MobileBanking. This reduces carbon emission from operations as well as on account of reduced customer travel requirements. Another source for reducing the environmental footprint is solar ATMs. These use rechargeable Lithium Ion batteries that bring down the consumption of power generated using conventional sources.
Blood Donation Campaign
The ninth year of Blood Donation campaign witnessed unprecedented participation with more than 1.75 lakh individuals contributing nearly 1.5 lakh units of blood. The campaign recorded highest participation in terms of number of cities, number of camps and number of colleges in the year under review. Apart from branch and college level camps, the Bank also tied up with Corporate and Defence establishments to organize camps on their premises, thus increasing the reach and spread of this social campaign.
It is well accepted that increased financial inclusion leads to enhanced GDP growth. The potential in India is especially enormous as 40 per cent of the country’s total population does not have access to formal banking services. Your Bank’s financial inclusion initiatives are integrated across its various businesses and product groups.
Your Bank is committed to furthering financial inclusion under the Pradhan Mantri Jan Dhan Yojana (PMJDY) and social security schemes. In line with the Government’s philosophy of “Digital India” it has implemented customer friendly technology solutions to make basic banking available to the common man through Aadhaar and Rupay Card enabled micro-ATMs (compliant to Unique Identification Authority of India) at every Bank Mitra or Business Correspondent location.
Complementing the Government’s efforts, your Bank has aggressively advocated and pursued the “J-A-M” (Jandhan, Aadhaar, Mobile) trinity to ensure a holistic coverage of customers and easy access through digital channels as well as Aadhaar seeding to ensure Government benefits reach the end-customer. The Bank has opened 15.8 lakh PMJDY accounts since the launch of the scheme.
Prior to the launch of PMJDY, the Bank had been mobilising Basic Banking Savings Deposit Accounts (BBSDA) with the specific objective of providing customers a platform to inculcate savings habit. The Bank periodically tracks the behaviour in these accounts to ensure that the accounts opened are active. The total number of BBSDA was 73.8 lakh (including those opened under PMJDY umbrella) as on March 31, 2016 as against 49.35 lakh as on March 31, 2015.
The Government launched social security schemes in May 2015 with an objective of providing risk cover at minimal cost. The Bank offers all three schemes i.e. Pradhan Mantri Jeevan Jyoti Bima Yojana (PMJJBY), Pradhan Mantri Suraksha Bima Yojana (PMSBY) and Atal Pension Yojana (APY) through its branches, business correspondents and digital channels.
The Bank is among the leading Private Sector Banks in PMJJBY and PMSBY and is a leader in APY, enrolling a total of 24.5 lakh customers in these three social security schemes.
As on March 31, 2016, your Bank has brought over one crore households into the banking fold, which were hitherto excluded from basic banking services. Of these, over 55 lakh households are in over 5,000 villages with a population less than 2,000. These have been largely excluded from the formal banking sector.
Your Bank firmly believes that financial literacy is the first step towards financial inclusion. In order to educate people who do not have access to formal banking channels and bring them within this fold, various training programmes for customers and even intermediaries like Business Correspondents have been put in place.
Dhanchayat and Other Financial Literacy Initiatives
In the period under review, your Bank rolled out its programme “Dhanchayat: Financial Literacy on Wheels”. Dhanchayat is an educational film to raise awareness on the perils of unorganised finance and how the malpractices associated with it hurt the dignity of the individual. Launched under the aegis of Swachch Banking - the Bank’s CSR initiative for rural India, HDFC Bankbranded Dhanchayat video vans travelled to villages to educate the rural populace. The initiative covered nearly 4,900 villages thus benefiting nearly 10 lakh people.
Your Bank regularly undertakes training programmes on credit counselling and inculcating the savings habit. Besides, it also provides information on asset creation, insurance, and income generation programmes. During the year almost over 1.4 lakh financial awareness programmes covering over 22 lakh households were conducted.
As on the year ended March 31, 2016, your Bank had 1,025 branches in rural areas and 1,439 branches in semi urban areas.
Agriculture and Allied Activities
A large portion of India’s un-banked population relies on agriculture as its main source of livelihood. It is imperative that banks replace the traditional unorganized money lending channels by providing transparent credit to farmers through various methods, while simultaneously enabling income generating activities.
Your Bank provides various loans to farmers through its suite of specifically designed products such as the Kisan Gold Card, Tractor and Cattle Loans. In addition, the Bank offers post-harvest cash credit, warehouse receipt financing and bill discounting facilities to Mandi (markets for grain and other agricultural produce) participants and farmers. These facilities enable the Mandi participants to make timely payments to farmers. The Bank carries out this business through branches that are located in close proximity to Mandis. For the year ended March 31, 2016, the Bank’s credit to agriculture and allied activities was about Rs. 65,250 crore as against approximately Rs. 49,085 crore in the previous year.
The Bank targets specific sectors to capture supply chain of certain crops from the production to the sales stages. On the basis of these cash flows, your Bank is able to finance specific needs of the farmers. This model has currently been implemented with sugar, fruit, vegetable, and tea crops, as well as dairy farmers. The initiative currently underway with dairy farmers includes the appointment of dairy societies as business correspondents, through whom the Bank opens accounts of individual farmers attached to these societies. The societies route payments through these accounts.
A number of retail credit products such as two-wheeler loans, car loans, mortgages that are consumption products in urban centres are also means of income generation for rural consumers. Apart from loans directly linked to agriculture, your Bank is one of the few to offer many other credit products under one roof to aid financial betterment in rural locations. Your Bank has extended provision of its retail loans to large segments of the rural population, where the end use of the products acquired (by availing Bank loans) is used for income generating activities. For example, loans for tractors, commercial vehicles, two wheelers supplement the farmer’s income by improving productivity and reducing expenses.
The use of appropriate technology is necessary to bring about efficiency in the agri-value chain, reducing the time taken between delivery of produce by the farmer to his final payment. One such innovative technology initiative is the Milk-to-Money for dairy supply chain. Under the initiative, your Bank has deployed Multifunction Terminals (MFTs), also known as Milk-to-Money ATMs, in dairy societies at the villages. The MFTs link to the milk procurement system of the dairy society to facilitate payment of milk proceeds into farmers’ accounts on payment day. The entire process is done by the society without any intervention by the Bank at the front-end. MFTs have cash dispensers that function as standard ATMs enabling the farmer to withdraw the amount from his account immediately. The transparency in the milk collection process benefits both farmers and the society as they get payments quickly without the hassle of cash distribution. Based on the payment data, the Bank is able to lend to the farmers which improves the collection of the society and ultimately milk production.
The Bank’s MFT footprint now encompasses Gujarat, Maharashtra, Punjab and Rajasthan with over 800 Milk-to-Money ATMs and Micro ATMs, servicing about 2.5 lakh farmers. These centres also enable rural customers to receive the direct benefit transfers from the Government in the same account. Apart from dairy and cattle loans, customers gain access to all bank products such as Vehicle Loans, 10 Second Personal Loans and Kisan Credit Card. The farmers also avail other digital facilities such as Bill Pay, Missed Call Banking and Mobile Recharge. They are also enabled to transact digitally with local merchants using products like PayZapp. This also provides a transacting point for other customers in the village, thus creating a complete rural ecosystem.
Loans against Gold Jewellery
Loans against gold jewellery have traditionally been an important source of credit, dominated by the unorganized sector and pawn brokers. Banks and other organized institutions have expanded their product suite and reach to offer gold loans.
The entry of such players has resulted in increased awareness, and at the same time provided greater transparency, substituting the money lenders. The availability of the asset and the ease of securing a loan has made this a convenient and viable credit option. For the year ended March 31, 2016, loans against gold jewellery stood at over Rs. 4,500 crore as against above Rs. 4,000 crore as on March 31, 2015.
Small and Micro Enterprises
The Micro, Small and Medium Enterprises (MSME) segment is a vital component of the Indian economy. It contributes 45 per cent to the country’s total manufacturing output and 30 per cent to exports. Your Bank has been a very active participant in this segment and in order to engage better with businesses of different sizes, the Bank has created specialized verticals. It offers complete banking solutions to micro, small and medium scale enterprises across industry segments including manufacturing, retailing, wholesale, trading and services. The entire suite of financial products including Cash Credit, Overdrafts, Term Loans, Bill Discounting, Export Packing Credit, Letter of Credit, Bank Guarantees, Cash Management Services and other structured products are available to these customers.
To drive the growth in MSME segment, your Bank organized outreach programmes for SME customers. The programmes were also used to create awareness among customers about the new digital offerings of the Bank to improve efficiencies.
In the year 2015-16, your Bank conducted 27 loan meets across 17 cities including Guntur, Guwahati, Kanpur, Kutch, Lucknow, Nagpur, Vijayawada, and Visakhapatnam.
The Bank’s advances to Micro, Small and Medium Enterprises has grown by 35.8 per cent in the year ended March 31, 2016 to touch more than Rs. 74,500 crore from close to Rs. 55,000 crore for the year ended March 31, 2015. The Bank exceeded the overall priority sector lending requirement of net Bank credit.
Sustainable Livelihood Initiative (SLI)
SLI is a board mandated programme to financially include and uplift one crore households at the Bottom of the Pyramid through a holistic approach to empowering people and making a difference to their lives. It entails occupational training, financial literacy, credit counselling, livelihood finance, and market linkages.
Over the last six years, your Bank has accelerated its direct linkage programme to people at the Bottom of the Pyramid through Self-Help Groups and Joint Liability Groups. The Bank engages with women in villages to conduct financial literacy and credit counselling programmes, form groups, and then funds these groups for income generating activities. This enables the delivery of viable credit to the rural poor in a sustainable manner and at the same time inculcates saving and banking habits. As on March 31, 2016, your Bank has covered approximately over 55 lakh households in villages spread over 360 districts in more than 25 states including Assam, Bihar, Chhattisgarh, Meghalaya, Madhya Pradesh, Odisha, Rajasthan, Sikkim, Tripura, Uttar Pradesh and Uttarakhand.
In keeping with your Bank’s commitment to this initiative, SLI has about 6,900 dedicated employees, who are trained to identify and cater to diverse customer needs. They recognize that villages are not homogeneous, but have their unique socio-economic and cultural characteristics. This leads to formulation of village specific strategies for customer acquisition and retention. Given the profile of the clientele, the transactions are often low in value but high in volume.
In keeping with the Bank’s “GoDigital” focus, it has leveraged technology to reduce transaction costs and enhanced ease of doing business. The “GoDigital” drive has resulted in reduced response time in processing customer requests. Lengthy forms have been shortened for greater convenience to customers. These initiatives have reduced turnaround time for customers by as much as 30 per cent. e-KYC and Credit bureau check without PAN have addressed the issue of data validation to a great extent. Transaction based on mobile Apps / platforms to move villages towards cashless economies are in the offing.
The success of the SLI programme has been validated by various awards and recognitions. One such accolade has come from National Bank for Agriculture and Rural Development. In its annual publication, ‘The Status of Microfinance in India 2014-15’ the status of micro finance initiatives in the country is illustrated and gives a glimpse of interventions by various banks across geographies. The publication serves as a reference point for people in policy making functions, researchers and others involved in developmental finance.
A special mention commending the SLI programme of the bank has been made in the publication. It recognizes that the SLI model of HDFC Bank may be studied for adoption by other Banks. It is interesting to note that SLI is a relatively new model that has been in operation since 2010.
Innovation is now embedded in the DNA of HDFC Bank. Employees are encouraged across functions to continuously come up with new ideas and act as digital evangelists.
Innovation in the Bank has been driven by digitization, the building block for which was laid two decades ago by investing in technology. Digitization has been a theme for the Bank in the last two years and it gained substantial momentum in the year under review. The Bank is happy to share that it has a Digital Innovation team, perhaps the only such group in the Indian banking context, to scout for and experiment with technology both contemporary and even futuristic.
Your Bank hosted a Digital Innovation Summit in March 2016 to tap into emerging technological trends that are shaping the financial technology space. We are happy to report that five companies have been chosen as potential partners in its journey. These companies have been drawn from the domains of Artificial Intelligence, Marketing, Mobile Payments, Quality Assurance and Biometric Payments.
Some of the major digital innovations introduced this year are:
Innovations in Retail Business
• PayZapp with SmartBuy: A comprehensive, convenient and secure payment solution which allows customers to link their cards once and then pay through one click. Smart Buy within PayZapp brings the best deals and discounts offered by merchant partners exclusively for HDFC Bank customers. PayZapp offers the unique combination of the convenience of 1-click payments and security. PayZapp for business allows merchants to bill their customers and receive payments instantly over the mobile, thereby making it easier for them to collect cash remotely and expand their business.
• 10 second Personal Loan: A pre-approved instant loan on NetBanking which is offered to select customers and is disbursed within 10 seconds of applying.
• ZipDrive: An instant auto loan approval, which allows customers to generate an online approval with reference number, walk into a dealership and drive out with the car of their choice. This approval, valid for 30 days, enables the dealer to request HDFC Bank for the already pre-approved loan sanctioned to the customer.
• Virtual Relationship Manager: Offered to High Net Worth customers by invitation, this is a 24*7 access to a relationship manager through a safe and secure video interface on the mobile banking app.
• Chillr: Your Bank’s partner app, which allows customers to send and receive money using phone book contacts. The app also allows customers to recharge mobiles, DTH, data cards and make merchant payments.
• Design Your Own Loan Against Securities (LAS): This combines the power of a loan and a bank account. LAS can be availed against securities ranging from equity to mutual funds to Kisan Vikas Patra. What’s more, customers can design the loan on the basis of these securities.
• Loans on ATMs: Your Bank offers 10 second personal loans on ATMs. Various consumer loans and top-up of existing loans to customers through ATMs will also be made available in the future.
• Missed Called Recharge: A simple and innovative way of recharging pre-paid mobile phones. It requires one-time activation of the service. The mobile number gets recharged for the selected amount, every time the customer gives a missed call to a particular number.
• MobileBanking Liteapp: A mobile banking app, offering several basic transactions in Hindi and English targeted at semi-urban as well as rural customers. This app caters to the off-line internet customers.
Innovations in Wholesale Business
• Trade on Net and E Net on Mobile for corporate customers: For cash management, trade finance, treasury and supply chain services, dynamic digital platforms like ‘Enet’ and ‘Trade on Net’ offer value additions at every stage of the financial value chain. With Trade Finance Mobile, the services are now accessible anytime, anywhere, allowing customers to authorize transactions on-the-go with OTPbased security.
People are a core value of the Bank and they constitute Human Capital. Your Bank firmly believes that a well-trained and motivated workforce is critical to achieving its strategic goals. The Bank’s HR strategy is closely allied to its business strategy as enunciated in the section on ‘Mission, Business Strategy and Approach to Business’.
The five broad pillars of HDFC Bank’s People strategy are:
• Resourcing and Staffing: In an industry where agility in talent acquisition and deployment is key to geographic expansion and growth, your Bank has leveraged online recruitment along with other channels like job ready model to develop reach and quality of hires. It has created a strong leadership pipeline across levels by identifying the right talent internally and grooming them for challenging roles.
This has resulted in an 85,000 plus strong work force that is well motivated, and trained to deliver value to the customer.
• Career Management: Your Bank’s talent management processes create opportunities for employees to develop and grow. The systematic investment of time in career discussion with employees, competency assessment, and intensive functional and behavioural training through the Gurukul programmes sends a strong message of the Bank’s commitment to employees on career progression.
• Employee Engagement: The Bank has nurtured an enabling performance culture in line with its vision to be a “World Class Indian Bank”. The performance management system aligns organization goals with key objectives for each business which drives individuals to strive for excellence.
In addition, your Bank strives to strengthen its connect with employees and has created employee engagement events, conducted both at local and national levels.
o Josh Unlimited: Pan-India Sports event conducted in 26 cities
o Stepathlon: Almost 2500 employees participated in the employee wellness initiative
o Hunar: In-house Talent competition conducted in 9 cities
o Corporate Online Library: Inculcates reading habit. Almost 1.5 lakh books made available
o Kwiz Kat: National Banking Quiz with participation by 200 teams
In addition to the aforementioned programmes, employees can participate in the “HDFC Bank Voice Hunt Contest” in association with Shankar Mahadevan Academy and “STILLS” which is an inter-corporate photography contest.
The Bank encourages employees to participate in community and social work. Through your Bank’s “Employee Payroll Giving” programme, employees can choose to donate a certain amount from their salary each month for specific causes.
The other flagship programmes are the Blood Donation Drive and the Bank’s volunteering programme which involves employees imparting financial literacy as well as relief efforts like the J&K flood relief.
“HDFC Bank Cares” is an initiative to address healthcare needs of employees. Activities under this programme include Health mailers, Doctor on Call, Health check-up camps and Health Talks by experts. The Bank runs an on-site crèche at Kanjurmarg, Mumbai.
These initiatives help create a connect among employees and also helps them forge an emotional bond with the organization. Further, a strong feedback mechanism helps shape the programmes and aligns them with people’s expectations and organization policies.
• Training and Development: Training plans are developed based on analysis of training needs done in consultation with various businesses. An extensive bouquet of training programmes are delivered covering on-boarding, product and process training, advanced programmes and behavioural training. The on-boarding training ensures that new employees are trained comprehensively and equipped with necessary know-how, as well as functional and behavioural skills required for the role. The product training and advanced programmes enable skill development, regular updates and build expertise in staff. The training methodology has evolved to application based training to include simulations, case studies and games. Today, over 100 courses can be availed on e-learning platforms.
• Rewards: Merit is the driving force in the organization. The distinctive part of the milieu of rewards both financial and non-financial is the objectivity and transparency with which it is done. This fair and equitable approach encourages staff to give off their best. The compensation policy ensures that remuneration is not only competitive but also includes wealth creation opportunities through long term rewards like ESOPs. The Bank has a comprehensive compensation policy that has been articulated in line with the Reserve Bank of India’s guidelines. The “Star Awards” is an institutionalized recognition programme that periodically recognizes performers. The “Tejaswini Awards” is a special category to recognize women achievers.
Other Statutory Disclosures
Board and Board Committees
The details of Board meetings held during the year, attendance of Directors at the meetings and constitution of various Committees of the Board are included separately in the Corporate Governance Report.
Extract of Annual Return
Pursuant to section 92 (3) of the Companies Act, 2013 and Rule 12 (1) of the Companies (Management and Administration) Rules, 2014, the extract of the Annual Return is annexed as ANNEXURE 3.
Directors’ Responsibility Statement
Pursuant to Section 134 (3)(c) read with Section 134 (5) of the Companies Act, 2013, the Board of Directors hereby state that:
• In the preparation of the annual accounts, the applicable accounting standards have been followed along with proper explanation relating to material departures, if any
• We have selected such accounting policies and applied them consistently and made judgements and estimates that are reasonable and prudent so as to give a true and fair view of the state of affairs of the Bank as on March 31, 2016 and of the profit of the Bank for the year ended on that date
• We have taken proper and sufficient care for the maintenance of adequate accounting records in accordance with the provisions of the Companies Act, 2013 for safeguarding the assets of the Bank and for preventing and detecting fraud and other irregularities
• We have prepared the annual accounts on a going concern basis
• We have laid down internal financial controls to be followed by the Bank and that such internal financial controls are adequate and were operating effectively
• We have devised proper systems to ensure compliance with the provisions of all applicable laws and that such systems were adequate and were operating effectively
The Auditors, M/s. Deloitte Haskins & Sells, Chartered Accountants, will retire at the conclusion of the forthcoming Annual General Meeting and are eligible for re-appointment. Members are requested to consider their re-appointment for financial year 2016-17 on an annual remuneration of Rs. 1,90,00,000 (previous year Rs. 1,10,00,000 and additional fees, proposed for ratification by the members, of Rs. 40,00,000 for reporting on internal financial controls for financial year 2015-16) plus service taxes as applicable, which has been approved by the Audit Committee of the Board.
Disclosure under Foreign Exchange Management Act, 1999
The Bank is in compliance with the Foreign Exchange Management Act, 1999 (“FEMA”) provisions with respect to downstream investments made in its subsidiaries. Further the Bank has obtianed a certificate from its statutory auditors certifying that the Bank is in compliance with the FEMA provisions with respect to the downstream investments made in its subsidiaries during the year.
Related Party Transactions
The details of transactions entered into with related parties are enclosed as ANNEXURE 4 to this report.
Particulars of Loans, Guarantees or Investments
Pursuant to Section 186 (11) of the Companies Act, 2013, the provisions of Section 186 of Companies Act, 2013, except sub-section (1), do not apply to a loan made, guarantee given or security provided by a banking company in the ordinary course of business. Further, in terms of the Companies (Removal of Difficulties) Order, 2015, nothing in Section 186 except sub section (1) shall apply to any acquisition made by a banking company in the ordinary course of business. The particulars of investments made by the Bank are disclosed in Schedule 8 of the Financial Statements as per the applicable provisions of Banking Regulation Act, 1949.
Financial Statements of Subsidiaries and Associates
In terms of Section 134 of the Companies Act, 2013 and read with Rule 8(1) of the Companies (Accounts) Rules, 2014 the performance and financial position of the Bank’s subsidiaries and associates are enclosed as ANNEXURE 5 to this report. There were no entities which became or ceased to be the Bank’s subsidiaries, associates or joint ventures during the year.
Whistle Blower Policy / Vigil Mechanism
The Bank has adopted a Whistle Blower Policy pursuant to which employees of the Bank can raise their concerns relating to fraud, malpractice or any other activity or event which is against the interest of the Bank or society as a whole. Details of complaints received and the action taken are reviewed by the Audit Committee. The functioning of the Whistle Blower mechanism is reviewed by the Audit Committee from time to time. None of the Bank’s personnel have been denied access to the Audit Committee.
Declaration by Independent Directors
Mrs. Shyamala Gopinath, Mr. Partho Datta, Mr. Bobby Parikh, Mr. A. N. Roy and Mr. Malay Patel are Independent Directors on the Board of the Bank as on March 31, 2016. All the Independent Directors have given their respective declarations under Section 149 (6) and (7) of the Companies Act, 2013 and the Rules made thereunder. In the opinion of the Board, the Independent Directors fulfil the conditions relating to their status as Independent Directors as specified in Section 149 of the Companies Act, 2013 and the Rules made thereunder.
Board Performance Evaluation
The Nomination and Remuneration Committee (NRC) has approved a framework / policy for evaluation of the Board, Committees of the Board and the individual members of the Board. The said framework / policy was duly reviewed during the year. A questionnaire for the evaluation of the Board and its Committees, designed in accordance with the said framework and covering various aspects of the performance of the Board and its Committees, including composition and quality, roles and responsibilities, processes and functioning, adherence to Code of Conduct and Ethics and best practices in Corporate Governance was sent out to the directors. The responses received to the questionnaires on evaluation of the Board and its Committees were placed before the meeting of the Independent Directors for consideration. The assessment of the Independent Directors on the performance of the Board and its Committees was subsequently discussed by the Board at its meeting.
Your Bank has in place a process wherein declarations are obtained from the directors regarding fulfilment of the “fit and proper” criteria in accordance with the guidelines of the Reserve Bank of India. The declarations from the Directors other than members of the NRC are placed before the NRC and the declarations of the members of the NRC are placed before the Board. Assessment on whether the Directors fulfil the said criteria is made by the NRC and the Board on an annual basis. In addition, the framework / policy approved by the NRC provides for a performance evaluation of the Non-Independent Directors by the Independent Directors on key personal and professional attributes and a similar performance evaluation of the Independent Directors by the Board, excluding the Director being evaluated. Such performance evaluation has been duly completed as above.
Policy on Appointment and Remuneration of Directors and Key Managerial Personnel
The Nomination and Remuneration Committee (NRC) recommends the appointment of Directors to the Board. The NRC identifies persons who are qualified to become Directors on the Board and evaluates criteria such as academic qualifications, previous experience, track record and integrity of the persons identified before recommending their appointment to the Board.
The remuneration of whole time Directors is governed by the compensation policy of the Bank. The compensation policy of the Bank, duly reviewed and recommended by the NRC has been articulated in line with the Reserve Bank of India guidelines.
Your Bank’s compensation policy is aimed to attract, retain, reward and motivate talented individuals critical for achieving strategic goals and long term success. Compensation policy is aligned to business strategy, market dynamics, internal characteristics and complexities within the Bank. The ultimate objective is to provide a fair and transparent structure that helps the Bank to retain and acquire the talent pool critical to building competitive advantage and brand equity.
Your Bank’s approach is to have a pay for performance culture based on the belief that the performance management system provides a sound basis for assessing performance holistically.
The compensation system should also take into account factors like roles, skills / competencies, experience and grade / seniority to differentiate pay appropriately on the basis of contribution, skill and availability of talent on account of competitive market forces. The details of the compensation policy are also included in Schedule 18 - Notes forming part of the Accounts - Note no. 24.
Non-Executive Directors are paid remuneration by way of sitting fees for attending meetings of the Board and its Committees, which are determined by the Board based on applicable regulatory prescriptions. Non-Executive Directors are also reimbursed expenses incurred by them for attending meetings of the Board and its Committees at actuals. The remuneration payable to the Non-Executive Directors and Independent Directors is governed by the provisions of the Banking Regulation Act, 1949, RBI guidelines issued from time to time and the provisions of the Companies Act, 2013 and related rules to the extent it is not inconsistent with the provisions of the Banking Regulation Act, 1949 and RBI guidelines. The Companies Act, 2013, the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, and dynamic business environment have placed more onerous responsibilities on the Non-Executive Directors, particularly the Independent Directors. These require the Directors to play a more pro-active role, along with greater involvement in Board’s decision making process. In order to enable the Bank to attract and retain professional directors, it is essential that such Directors are appropriately compensated. In terms of the guidelines issued by RBI for compensation of Non-Executive Directors of private sector banks dated June 1, 2015, the Board has, subject to the approval of the members at the ensuing Annual General Meeting of the Bank, approved payment of profit-related commission to its non-executive directors, other than the Chairperson, not exceeding Rs. 10,00,000/- (Rupees Ten Lakh only) per annum for each Non-Executive Director.
None of the Directors of your Bank other than Mr. Kaizad Bharucha is a director of the Bank’s subsidiaries as on March 31, 2016. Mr. Bharucha is paid sitting fees by the subsidiary for attending meetings of the Board and Committees of the subsidiary. During the year, Mr. Bharucha was paid sitting fees of Rs. 4,50,000 by the subsidiary. Mr. Bharucha has not received any commission from the subsidiary.
The Board of Directors of HDB Financial Services Limited, the Bank’s subsidiary, has appointed Mr. Aditya Puri as the Non-Executive Chairman on the Board of their company with effect from May 1, 2016.
Significant and Material Orders Passed By Regulators
During the year under review no significant or material Orders were passed by any regulators or courts or tribunals against the Bank other than those disclosed separately in the financial statements and in the Corporate Governance Report.
Directors and Key Managerial Personnel
Mrs. Renu Karnad and Mr. Keki Mistry will retire by rotation at the ensuing Annual General Meeting of the Bank and are eligible for re-appointment. During the year, Dr. Pandit Palande ceased to be a Director on the Bank from the close of business hours on April 23, 2015, on completing the maximum permitted tenure of eight years as per Banking Regulation Act, 1949. Your Directors wish to place on record their sincere appreciation of the contribution made by Dr. Palande during his tenure with the Bank.
Mr. Umesh Chandra Sarangi was appointed as Additional Director with effect from March 1, 2016 to hold office till the conclusion of the ensuing Annual General Meeting. Mr. Sarangi has been appointed as a director having specialized knowledge and practical experience in agriculture and rural economy as per the provisions of Section 10-A (2)(a) of the Banking Regulation Act, 1949. In terms of Section 149 of the Companies Act, 2013, it is proposed to appoint Mr. Sarangi as an Independent Director for a tenure of five (5) years, determined in accordance with the applicable provisions of the Banking Regulation Act, 1949 and the guidelines of RBI in this regard. The Bank has received a notice from a member proposing the candidature of Mr. Sarangi as Director of the Bank at the ensuing Annual General Meeting.
The brief resume / details regarding the Directors proposed to be appointed / re-appointed as above are furnished in the report on Corporate Governance. There have been no changes in the Directors and Key Managerial Personnel of the Bank other than the above.
Familiarization Programme for Independent Directors
The various programmes undertaken for familiarizing Independent Directors with the functions and procedures of the Bank are disclosed in the Corporate Governance Report.
Particulars of Employees
The information in terms of Rule 5 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014 is given in the ANNEXURE 6 to this report.
The Bank had 87,555 employees as on March 31, 2016. There were 311 employees employed throughout the year who were in receipt of remuneration of more than Rs. 60 lakh per annum and 23 employees employed for part of the year who were in receipt of remuneration of more than Rs. 5 lakh per month. The details of such employees in terms of Rule 5 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014 are appended separately and form part of this report. The Report and Accounts are being sent to the shareholders excluding these particulars and any shareholder interested in obtaining the said details may write to the Company Secretary at the Registered Office of the Bank.
Conservation Of Energy, Technology Absorption, Foreign Exchange Earnings and Outgo
(A) Conservation of Energy
Your Bank has undertaken several initiatives in this area such as:
• Replacing obsolete server infrastructure with servers with virtualization thus saving on Data Centre power and cooling
• Installing energy capacitors at its high consumption offices to reduce energy consumption
• Installing energy saving electrical devices for saving energy and supporting go-green initiative. (Device in ACs)
• Advocated switching off lights and ACs when not required, turning off PCs when not in use (post 10 PM through remote control) setting higher temperatures on ACs to reduce consumption
• All main Sign Boards in Branches switched off during the night post 10 pm
• Put controls on usage of Lifts, ACs, Common Passage lights and other electrical equipment
(B) Technology Absorption
Your Bank has been at the forefront of technology absorption. Technology has continued to provide business and customers with state-of-the-art products and services. Through adoption of carefully evaluated technology solutions, the Bank has been able to offer an enhanced customer experience at optimal costs. This is made possible by using advanced analytics to create a 360 degree view of all 3.7 crore customers. The analytics engine uses machine learning to analyse structured and unstructured data - transactional, behavioural, demographics, system logs, click streams, bureau data and more - for insights. This helps in offering relevant recommendations using a mix of advanced algorithms, behavioural micro-segments, real time action and event triggers built on the backbone of cutting edge big data technologies. These recommendations are served via personalised campaigns, delivered through an Omni channel approach.
The Bank’s Technology Absorption is illustrated further by:
• Successfully migrating to MPLS technology
• Making Internet facing infrastructure and applications IPV6 compliant
• Implementing cutting edge P2P payment solution in partnership with relevant industry players
• Implementing straight through processing, using SOA (services oriented architecture) enabled bio-metric authorization for 30 minutes Vehicle Loan Approval
• Implementing a Risk Intelligence Management System for Retail Assets to enable monitoring from loan pre-disbursement to repayment / closure
• Embarking on a programme of Implementation of RBI guidelines on Information Security, Electronic Banking, Technology Risk Management and Cyber Frauds
• Strengthening technology infrastructure to ensure uninterrupted service to customers
The expenditure incurred on Research and Development
Being in the Financial Services Space, your Bank evaluates innovative technology solutions that are readily available or near-ready for deployment and broadly fit its business requirements. Solutions that are commercially viable are then tested in collaboration with the relevant technology partners. Once proven, the technology solutions are then procured and commissioned for active business use.
(C) Foreign Exchange Earnings and Outgo
During the year the total foreign exchange earned by the Bank was Rs. 1,227.7 crore (on account of net gains arising on all exchange / derivative transactions) and the total foreign exchange outgo was about Rs. 151.12 crore towards the operating and capital expenditure requirements.
In terms of Section 204 of the Companies Act, 2013 and the Rules made there under, M/s. BNP & Associates, Practising Company Secretaries have been appointed as Secretarial Auditors of the Bank for the financial year 2015-16. The report of the Secretarial Auditors is enclosed as ANNEXURE 7 to this Report. The observations in the said report are self-explanatory and no further comments / explanations are called for.
In compliance with Regulation 34 and other applicable provisions of the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015, a separate report on Corporate Governance along with a certificate of compliance from the Secretarial Auditors, forms an integral part of this Report.
Business Responsibility Report
The Bank’s Business Responsibility Report containing a report on its Corporate Social Responsibility Activities and Initiatives in the format adopted by companies in India as per the guidelines of the Securities and Exchange Board of India in this regard is available on its website www.hdfcbank.com.
Information under the Sexual Harassment of Women at Workplace (Prevention, Prohibition and Redressal) Act, 2013
The relevant information is included in Section E - Principle 3 of the Business Responsibility Report for 2015-16.
Your Directors would like to place on record their gratitude for all the guidance and co-operation received from the Reserve Bank of India and other government and regulatory agencies. Your Directors would also like to take this opportunity to express their appreciation for the hard work and dedicated efforts put in by the Bank’s employees and look forward to their continued contribution in building a “World Class Indian Bank.”
Your Bank believes that the Indian economy is expected to grow faster in 2016-17. The Bank is well positioned to continue to grow faster than the banking system both in retail and wholesale segments. A good monsoon holds the key to accelerated GDP growth and consequently to that of the banking industry. Over the next couple of years, the Bank will leverage on its distribution strength and digital platforms especially in the rural and semi-urban parts of the country for a more sustained growth. Your Bank will continue its focus on five core values of Customer Focus, Operational Excellence, Product Leadership, People and Sustainability. Needless to say, your Bank will continue to operate with the strongest possible commitment to Corporate Governance. All of this will help the Bank on its onward growth journey and help create long term shareholder value.
On behalf of the Board of Directors
Mrs. Shyamala Gopinath
Mumbai, May 19, 2016