A BACKGROUND

HDFC Bank Limited (‘HDFC Bank’ or ‘the Bank’), incorporated in Mumbai, India is a publicly held banking company engaged in providing a range of banking and financial services including retail banking, wholesale banking and treasury operations. The Bank is governed by the Banking Regulation Act, 1949 and the Companies Act, 2013. The Bank has overseas branch operations in Bahrain, Hong Kong, Dubai and Offshore Banking Unit at International Financial Service Centre (IFSC), at GIFT City, Gandhinagar in Gujarat. The financial accounting systems of the Bank are centralised and, therefore, accounting returns are not required to be submitted by branches of the Bank.

B BASIS OF PREPARATION

The financial statements have been prepared and presented under the historical cost convention and accrual basis of accounting, unless otherwise stated and are in accordance with Generally Accepted Accounting Principles in India (‘GAAP’), statutory requirements prescribed under the Banking Regulation Act, 1949, circulars and guidelines issued by the Reserve Bank of India (‘RBI’) from time to time, Accounting Standards (‘AS’) specified under Section 133 of the Companies Act, 2013 read together with paragraph 7 of the Companies (Accounts) Rules, 2014 and the Companies (Accounting Standards) Amendment Rules, 2016, in so far as they apply to banks.

Use of estimates

The preparation of financial statements in conformity with GAAP requires the management to make estimates and necessary assumptions in the reported amounts of assets and liabilities (including contingent liabilities) as of the date of the financial statements and the reported income and expenses for the reporting period. Management believes that the estimates used in the preparation of the financial statements are prudent and reasonable. Actual results could differ from these estimates. Any revision in the accounting estimates is recognised prospectively in the current and future periods.

Amounts in notes forming part of the financial statements for the year ended March 31, 2019 are denominated in rupee crore to conform to extant RBI guidelines, except where stated otherwise.

1. Proposed dividend

The Board of Directors, at their meeting held on, April 20, 2019 have proposed a dividend of Rs. 15 per equity share (previous year: Rs. 13.00 per equity share) aggregating Rs. 4,924.64 crore (previous year: Rs. 4,067.07 crore) inclusive of tax on dividend. The proposal is subject to the approval of shareholders at the Annual General Meeting. In terms of the revised Accounting Standard (AS) 4 ‘Contingencies and Events Occurring After the Balance Sheet Date’, the Bank has not appropriated the proposed dividend from the Profit and Loss Account. However, the effect of the proposed dividend has been reckoned in determining capital funds in the computation of the capital adequacy ratios.

2. Capital adequacy

The Bank’s capital to risk-weighted assets ratio (‘Capital Adequacy Ratio’) as at March 31, 2019 is calculated in accordance with the RBI guidelines on Basel III capital regulations (‘Basel III’). The phasing-in of the minimum capital ratio requirement under Basel III is as follows:

The above minimum CET1, tier I and total capital ratio requirements include capital conservation buffer (CCB) and additional capital applicable to us as Domestic-Systemically Important Bank (D-SIB).

The Bank’s capital adequacy ratio computed under Basel III is given below:

During the year ended March 31, 2019, the Bank has not raised Additional Tier I and Tier II capital. During the previous year, the Bank had raised debt capital eligible for inclusion in Additional Tier I capital and Tier II capital under the Basel III capital regulations amounting to Rs. 8,000.00 crore and Rs. 2,000.00 crore respectively.

As on March 31, 2019, the Bank’s subordinated and perpetual debt capital instruments amounted to Rs. 10,232.00 crore (previous year: Rs. 13,107.00 crore) and Rs. 8,000.00 crore (previous year: Rs. 8,000.00 crore) respectively.

In accordance with RBI guidelines, banks are required to make Pillar 3 disclosures under the Basel III capital regulations. The Bank’s Pillar 3 disclosures are available on its website at the following link: http://www.hdfcbank.com/aboutus/basel_disclosures/default.htm. These Pillar 3 disclosures have not been subjected to audit or review by the statutory auditors.

Capital infusion

Pursuant to the shareholder and regulatory approvals, the Bank on July 17, 2018, made a preferential allotment of 3,90,96,817 equity shares to Housing Development Finance Corporation Limited at a price of Rs. 2,174.09 per equity share (including share premium of Rs. 2,172.09 per equity share), aggregating to Rs. 8,500.00 crore and on August 2, 2018, concluded a Qualified Institutional Placement (QIP) of 1,28,47,222 equity shares at a price of Rs. 2,160.00 per equity share aggregating to Rs. 2,775.00 crore and an American Depository Receipt (ADR) offering of 1,75,00,000 ADR (representing 5,25,00,000 equity shares) at a price of USD 104 per ADR, aggregating to USD 1,820.00 million (equivalent Rs.12,440.90 crore). Consequent to the above issuances, share capital increased by Rs. 20.89 crore and share premium increased by Rs. 23,568.72 crore, net of share issue expenses of Rs. 126.29 crore.

During the year ended March 31, 2019, the Bank allotted 2,37,72,304 equity shares (previous year: 3,25,44,550 equity shares) aggregating to face value Rs. 4.75 crore (previous year: Rs. 6.51 crore) in respect of stock options exercised. Accordingly, the share capital increased by Rs. 4.75 crore (previous year: Rs. 6.51 crore) and the share premium increased by Rs. 2,196.06 crore (previous year: Rs. 2,719.40 crore).

3. Earnings per equity share

Basic and diluted earnings per equity share of the Bank have been calculated based on the net profit after tax of Rs. 21,078.17 crore (previous year: Rs. 17,486.73 crore) and the weighted average number of equity shares outstanding during the year of 2,68,00,34,029 (previous year: 2,58,05,38,505).

Basic earnings per equity share of the Bank has been computed by dividing the net profit for the year attributable to the equity shareholders by the weighted average number of equity shares outstanding during the year. Diluted earnings per equity share has been computed by dividing the net profit for the year attributable to the equity shareholders by the weighted average number of equity shares and dilutive potential equity shares outstanding during the year, except where the results are anti-dilutive. The dilutive impact is on account of stock options granted to employees by the Bank. There is no impact of dilution on the profits in the current year and previous year.

4. Reserves and Surplus Statutory Reserve

The Bank has made an appropriation of Rs. 5,269.54 crore (previous year: Rs. 4,371.68 crore) out of profits for the year ended March 31, 2019 to the Statutory Reserve pursuant to the requirements of Section 17 of the Banking Regulation Act, 1949 and RBI guidelines dated September 23, 2000.

Capital Reserve

During the year ended March 31, 2019, the Bank appropriated Rs. 105.34 crore (previous year: Rs. 235.52 crore), being the profit from sale of investments under HTM category and profit on sale of immovable properties, net of taxes and transfer to statutory reserve, from the Profit and Loss Account to the Capital Reserve.

General Reserve

The Bank has made an appropriation of Rs. 2,107.82 crore (previous year: Rs. 1,748.67 crore) out of profits for the year ended March 31, 2019 to the General Reserve.

Investment Fluctuation Reserve

In accordance with RBI guidelines, banks are required to create an Investment Fluctuation Reserve (IFR) equivalent to 2% of their HFT and AFS investment portfolios, within a period of three years starting fiscal 2019. Accordingly, during the year ended March 31, 2019, the Bank has made an appropriation of Rs. 773.00 crore, to the Investment Fluctuation Reserve from the Profit and Loss Account.

Investment Reserve Account

During the year ended March 31, 2019, the net transfer between Investment Reserve Account and Profit and Loss Account was Nil (previous year: Rs. 44.20 crore (net) transferred by the Bank from the Investment Reserve Account to the Profit and Loss Account) as per the RBI guidelines.

Draw down from reserves Share Premium

The Bank has not undertaken any drawdown from share premium during the year ended March 31, 2019 except towards share issue expenses of Rs. 126.29 crore, incurred for the equity raised through the QIP and ADR offering, which have been adjusted against the share premium account in terms of section 52 of the Companies Act, 2013. There had been no drawdown from reserves during the year ended March 31, 2018.

5. Dividend on shares allotted pursuant to exercise of stock options

The Bank may allot equity shares after the Balance Sheet date but before the book closure date pursuant to the exercise of any employee stock options. These equity shares will be eligible for full dividend for the year ended March 31, 2019, if approved at the ensuing Annual General Meeting.

6. Accounting for employee share based payments

The shareholders of the Bank approved the grant of equity share options under Plan “C” in June 2005, Plan “D” in June 2007, Plan “E” in June 2010, Plan “F” in June 2013 and Plan “G” in July 2016. Under the terms of each of these Plans, the Bank may issue to its employees and Whole Time Directors, Equity Stock Options (‘ESOPs’) each of which is convertible into one equity share. All the plans were framed in accordance with the SEBI (Employee Stock Option Scheme & Employee Stock Purchase Scheme) Guidelines, 1999 as amended from time to time and as applicable at the time of the grant. The accounting for the stock options has been in accordance with the SEBI (Share Based Employee Benefits) Regulations, 2014 to the extent applicable.

Plans C, D, E, F and G provide for the issuance of options at the recommendation of the Nomination and Remuneration Committee of the Board (‘NRC’) at the closing price on the working day immediately preceding the date when options are granted. This closing price is the closing price of the Bank’s equity share on an Indian stock exchange with the highest trading volume as of the working day preceding the date of grant.

The vesting conditions applicable to the options are at the discretion of the NRC. These options are exercisable on vesting, for a period as set forth by the NRC at the time of grant. The period in which the options may be exercised cannot exceed five years from date of expiry of vesting period. During the years ended March 31, 2019 and March 31, 2018, no modifications were made to the terms and conditions of ESOPs as approved by the NRC.

The fair value of options used to compute the proforma net profit and earnings per equity share have been estimated on the dates of each grant using the binomial option-pricing model. The Bank estimates the volatility based on the historical prices of its equity shares. The Bank granted 1,98,95,000 options during the year ended March 31, 2019 (previous year: 1,68,82,050). The various assumptions considered in the pricing model for the ESOPs granted during the year ended March 31, 2019 are:

7. Other liabilities

- The Bank held provisions towards standard assets amounting to Rs. 3,639.66 crore as at March 31, 2019 (previous year: Rs. 2,989.62 crore). These are included under other liabilities.

- Provision for standard assets is made @ 0.25% for direct advances to agriculture and Small and Micro Enterprises (SMEs) sectors, @ 1% for advances to commercial real estate sector, @ 0.75% for advances to commercial real estate - residential housing sector, @ 5% on restructured standard advances, @ 2% until after one year from the date on which the rates are reset at higher rates for housing loans offered at a comparatively lower rate of interest in the first few years and @ 2% on all exposures to the wholly owned step down subsidiaries of the overseas subsidiaries of Indian companies, sanctioned / renewed after December 31, 2015.

- Provision is maintained at rates higher than the regulatory minimum, on standard advances based on evaluation of the risk and stress in various sectors as per the policy approved by the Board of the Bank.

- In accordance with regulatory guidelines and based on the information made available by its customers to the Bank, for exposures to customers who have not hedged their foreign currency exposures, provision for standard assets is made at levels ranging up to 0.80% depending on the likely loss the entities could incur on account of exchange rate movements.

- Provision for standard assets of overseas branches is made at higher of rates prescribed by the overseas regulator or RBI.

- Pursuant to a recent RBI guideline issued in January 2019, additional 5% provision is maintained in respect of Micro, Small and Medium Enterprises (MSME) sector standards accounts which have got restructured.

- For all other loans and advances including credit exposures computed as per the current marked to market values of interest rate and foreign exchange derivative contracts, provision for standard assets is made @ 0.40%.

- In accordance with RBI guidelines, an additional provision is made @ 3% on the incremental exposure to the “Specified Borrowers” (except NBFCs / HFCs) beyond normally permitted lending limit (‘NPLL’) as defined by RBI.

- Other liabilities include contingent provisions of Rs. 800.10 crore as at March 31, 2019 (previous year: Rs. 401.11 crore) in respect of advances.

- The Bank has presented gross unrealised gain on foreign exchange and derivative contracts under other assets and gross unrealised loss on foreign exchange and derivative contracts under other liabilities. Accordingly, other liabilities as at March 31, 2019 include unrealised loss on foreign exchange and derivative contracts of Rs. 12,772.60 crore (previous year: Rs. 5,093.04 crore).

8. Unhedged foreign currency exposure

The Bank has in place a policy and process for managing currency induced credit risk. The credit appraisal memorandum prepared at the time of origination and review of a credit facility is required to discuss the exchange risk that the customer is exposed to from all sources, including trade related, foreign currency borrowings and external commercial borrowings. It could cover the natural hedge available to the customer as well as other hedging methods adopted by the customer to mitigate exchange risk. For foreign currency loans granted by the Bank beyond a defined threshold the customer is encouraged to enter into appropriate risk hedging mechanisms with the Bank. Alternatively, the Bank satisfies itself that the customer has the financial capacity to bear the exchange risk in the normal course of its business and / or has other mitigants to reduce the risk. On a monthly basis, the Bank reviews information on the unhedged portion of foreign currency exposures of customers, whose total foreign currency exposure with the Bank exceeds a defined threshold. Based on the monthly review, the Bank proposes suitable hedging techniques to the customer to contain the risk. A Board approved credit risk rating linked limit on unhedged foreign currency position of customers is applicable when extending credit facilities to a customer. The compliance with the limit is assessed by estimating the extent of drop in a customer’s annual Earnings Before Interest and Depreciation (‘EBID’) due to a potentially large adverse movement in exchange rate impacting the unhedged foreign currency exposure of the customer. Where a breach is observed in such a simulation, the customer is advised to reduce its unhedged exposure.

In accordance with RBI guidelines, as at March 31, 2019 the Bank holds standard asset provisions of Rs. 203.48 crore (previous year: Rs. 180.30 crore) and maintains capital (including CCB & D-SIB) of Rs. 959.77 crore (previous year: Rs. 723.08 crore) in respect of the unhedged foreign currency exposure of its customers.

- Triparty repo / reverse repo transactions are repo / reverse repo transactions where a triparty agent acts as an intermediary between the two parties to the repo / reverse repo to facilitate services such as collateral selection, payment and settlement and custody and management during the life of the transaction. The details of triparty repo / reverse repo transactions undertaken by the Bank during the year ended March 31, 2019 (previous year: Nil) are given below. Amount of funds borrowed or lent have been reckoned for the purpose of the below table.

- Other investments as at the Balance Sheet date include commercial paper amounting to Rs. 2,510.01 crore (previous year: Rs. 3,357.99 crore).

- The Reserve Bank of India, vide its circulars dated April 2, 2018 and June 15, 2018 respectively granted banks an option to spread provisioning for mark to market losses on investments held in AFS and HFT for the quarters ended December 31, 2017, March 31, 2018 and June 30, 2018. The circular states that the provisioning for each of these quarters may be spread equally over up to four quarters, commencing with the quarter in which the loss was incurred. The Bank has recognised the entire net mark to market loss on investments in the quarter in which the mark to market losses were incurred and has not amortised the same as provided in the above mention circulars.

- During the years ended March 31, 2019 and March 31,2018, there has been no sale from, and transfer to / from, the HTM category in excess of 5% of the book value of investments held in the HTM category at the beginning of the year.

In accordance with the RBI guidelines, sales from, and transfers to / from, HTM category exclude the following from the 5% cap:

- one-time transfer of securities permitted to be undertaken by banks at the beginning of the accounting year with approval of the Board of Directors;

- sales to the RBI under pre-announced open market operation auctions;

- repurchase of Government securities by Government of India from banks.

- additional shifting of securities explicitly permitted by the RBI from time to time; and

- direct sales from HTM for bringing down SLR holdings in the HTM category.

* Qualitative disclosures on risk exposure in derivatives

Overview of business and processes

Derivatives are financial instruments whose characteristics are derived from underlying assets, or from interest rates, exchange rates or indices. These include forwards, swaps, futures and options. The notional amounts of financial instruments such as foreign exchange contracts and derivatives provide a basis for comparison with the instruments recognised on the Balance Sheet but do not necessarily indicate the amounts of future cash flows involved or the current fair value of the instruments and, therefore, do not indicate the Bank’s exposure to credit or price risks. The following sections outline the nature and terms of the derivative transactions generally undertaken by the Bank.

Interest rate contracts

Forward rate agreements give the buyer the ability to determine the underlying rate of interest for a specified period commencing on a specified future date (the settlement date). There is no exchange of principal and settlement is effected on the settlement date. The settlement amount is the difference between the contracted rate and the market rate prevailing on the settlement date.

Interest rate swaps involve the exchange of interest obligations with the counterparty for a specified period without exchanging the underlying (or notional) principal.

Interest rate caps and floors give the buyer the ability to fix the maximum or minimum rate of interest. The writer of the contract pays the amount by which the market rate exceeds or is less than the cap rate or the floor rate respectively. A combination of interest rate caps and floors can create structures such as interest rate collar, cap spreads and floor spreads.

Interest rate futures are standardised interest rate derivative contracts traded on a recognised stock exchange to buy or sell a notional security or any other interest bearing instrument or an index of such instruments or interest rates at a specified future date, at a price determined at the time of the contract.

Exchange rate contracts

Forward foreign exchange contracts are agreements to buy or sell fixed amounts of currency at agreed rates of exchange on future date. These instruments are carried at fair value, determined based on either FEDAI rates or market quotations.

Cross currency swaps are agreements to exchange principal amounts denominated in different currencies. Cross currency swaps may also involve the exchange of interest payments on one specified currency for interest payments in another specified currency for a specified period.

Currency options (including Exchange Traded Currency Option) give the buyer, on payment of a premium, 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.

Currency futures contract is a standardised contract traded on an exchange, to buy or sell a certain underlying asset or an instrument at a certain date in the future, at a specified price. The underlying instrument of a currency future contract is the rate of exchange between one unit of foreign currency and the INR.

The Bank’s derivative transactions relate to sales and trading activities. Sale activities include the structuring and marketing of derivatives to customers to enable them to hedge their market risks (both interest rate and exchange risks), within the framework of regulations as applicable from time to time. The Bank deals in derivatives on its own account (trading activity) principally for the purpose of generating a profit from short term fluctuations in price yields or implied volatility. The Bank also deals in derivatives to hedge the risk embedded in some of its Balance Sheet assets or liabilities.

Constituents involved in derivative business

The Treasury front-office enters into derivative transactions with customers and inter-bank counterparties. The Bank has an independent back-office and mid-office as per regulatory guidelines. The Bank has a credit and market risk department that assesses various counterparty risk and market risk limits, within the risk architecture and processes of the Bank.

Derivative policy

The Bank has in place a policy which covers various aspects that apply to the functioning of the derivative business. The derivative business is administered by various market risk limits such as position limits, tenor limits, sensitivity limits, GAP limit, scenario based profit and loss limit for option portfolio, stop loss triggers and value-at-risk limits that are recommended by the Risk Policy and Monitoring Committee (‘RPMC’) to the Board of Directors for approval. All methodologies used to assess market and credit risks for derivative transactions are specified by the credit and market risk units. Limits are monitored on a daily basis by the midoffice.

The Bank has implemented a Board approved policy on Customer Suitability & Appropriateness to ensure that derivative transactions entered into are appropriate and suitable to the customer’s nature of business / operations. Before entering into a derivative deal with a customer, the Bank scores the customer on various risk parameters and based on the overall score level it determines the kind of product that best suits its risk appetite and the customer’s requirements.

Classification of derivatives book

The derivative book is classified into trading and hedging book. Classification of the derivative book is made on the basis of the definitions of the trading and hedging books specified in the RBI guidelines. The trading book is managed within the trading limits approved by the RPMC and the Board of Directors.

Hedging policy

For derivative contracts designated as hedging instruments, the Bank documents, at inception of the hedge, the relationship between the hedging instrument and the hedged item, the risk management objective for undertaking the hedge and the methods used to assess the hedge effectiveness. Hedge effectiveness is ascertained at the time of inception of the hedge and periodically thereafter. Hedge effectiveness is measured by the degree to which changes in the fair value or cash flows of the hedged item that are attributable to a hedged risk are offset by changes in the fair value or cash flows of the hedging instrument.

The hedging book consists of transactions to hedge Balance Sheet assets or liabilities. The tenor of hedging instrument may be less than or equal to the tenor of underlying hedged asset or liability. Derivative contracts designated as hedges in an effective hedge relationship, are not marked to market unless their underlying asset or liability is marked to market. In respect of derivative contracts that are marked to market, changes in the market value are recognised in the Profit and Loss Account in the relevant period. Gain or losses arising from hedge ineffectiveness, if any, is recognised in the Profit and Loss Account. Foreign exchange forward contracts not intended for trading, that are entered into to establish the amount of reporting currency required or available at the settlement date of a transaction, and are outstanding at the Balance Sheet date, are effectively valued at the closing spot rate. The premia or discount arising at the inception of such forward exchange contract is amortised as expense or income over the life of the contract.

* Provisioning, collateral and credit risk mitigation

The Bank enters into derivative transactions with counter parties based on their business ranking and financial position. The Bank sets up appropriate limits upon evaluating the ability of the counterparty to honour its obligations in the event of crystallisation of the exposure. Appropriate credit covenants are stipulated where required, as trigger events to call for collaterals or terminate a transaction and contain the risk.

The Bank, at the minimum, conforms to the RBI guidelines with regard to provisioning requirements. Overdue receivables representing crystallised positive mark-to-market value of a derivative contract are transferred to the account of the borrower and treated as non-performing assets, if these remain unpaid for 90 days or more. Full provision is made for the entire amount of overdue and future receivables relating to positive marked to market value of non-performing derivative contracts.

- As at March 31, 2019, the notional principal amount of outstanding foreign exchange contracts classified as hedging and trading amounted to Rs. 6,569.73 crore (previous year: Rs. 14,070.60 crore) and Rs. 549,616.22 crore (previous year: Rs. 420,396.97 crore) respectively.

- The notional principal amounts of derivatives reflect the volume of transactions outstanding as at the Balance Sheet date and do not represent the amounts at risk.

- For the purpose of this disclosure, currency derivatives include currency options purchased and sold and cross currency swaps.

- Interest rate derivatives include interest rate swaps, forward rate agreements and interest rate caps and floors.

- The Bank has computed the maximum and minimum of PV01 for the year based on the balances as at the end of every month.

- In respect of derivative contracts, the Bank evaluates the credit exposure arising therefrom, in line with RBI guidelines. Credit exposure has been computed using the current exposure method which is the sum of:

(a) the current replacement cost (marked to market value including accruals) of the contract or zero whichever is higher; and

(b) the Potential Future Exposure (PFE) is a product of the notional principal amount of the contract and a factor that is based on the grid of credit conversion factors prescribed in RBI guidelines, which is applied on the basis of the residual maturity and the type of contract.

* Technical or prudential write-offs

Technical or prudential write-offs refer to the amount of non-performing assets which are outstanding in the books of the branches, but have been written-off (fully or partially) at the head office level. The financial accounting systems of the Bank are integrated and there are no write-offs done by the Bank which remain outstanding in the books of the branches. Movement in the stock of technically or prudentially written-off accounts is given below:

* Floating provisions

Floating provision of Rs. 1,451.28 crore (previous year: Rs. 1,451.28 crore) have been included under “Other Liabilities”. Movement in floating provision is given below:

Floating provisions have been utilised as per the Board approved policy for contingencies under extraordinary circumstances and for making specific provision for impaired accounts in accordance with the RBI guidelines / directives.

* Divergence in the asset classification and provisioning

There was no divergence observed by the RBI for the year ended March 31, 2018 in respect of the Bank’s assets classification and provisioning under the extant prudential norms on Income Recognition, Asset Classification and Provisioning (IRACP).

The impact of changes in classification and provisioning arising out of the RBI’s supervisory process for the year ended March 31, 2017 was fully given effect to in the audited financial statements for the year ended March 31, 2018.

* During the years ended March 31, 2019 and March 31, 2018, no non-performing financial assets were purchased by the Bank.

* Securitised assets as per books of SPVs sponsored by the Bank:

There are no SPVs sponsored by the Bank as at March 31, 2019 and as at March 31, 2018.

9. Details of exposures to real estate and capital market sectors, risk category-wise country exposures, factoring exposures, single / group borrower exposures, unsecured advances and concentration of deposits, advances, exposures and NPAs

* Details of exposure to real estate sector

Exposure is higher of limits sanctioned or the amounts outstanding as at the year end.

* Details of factoring exposure

The factoring exposure of the Bank as at March 31, 2019 is Rs. 3,214.40 crore (previous year: Rs. 2,334.53 crore).

* Details of Single Borrower Limit (SGL) / Group Borrower Limit (GBL) exceeded by the Bank

The RBI has prescribed single and group borrower exposure limits linked to a bank’s capital funds. These limits can be enhanced by a further 5 percent thereof with the approval of the Board of Directors of the Bank. During the year ended March 31, 2019 and March 31, 2018 the Bank was within the limits prescribed by the RBI.

* Unsecured advances

Advances for which intangible collaterals such as rights, licenses, authority, trademarks, patents, etc. are charged in favour of the Bank in respect of projects financed by the Bank, are reckoned as unsecured advances under Schedule 9 of the Balance Sheet in line with extant RBI guidelines. There are no such advances outstanding as at March 31, 2019 (previous year: Nil).

* Inter-bank Participation with risk sharing

The aggregate amount of participation issued by the Bank and reduced from advances as per regulatory guidelines as at March 31, 2019 was Rs. 30,734.43 crore (previous year: Rs. 24,454.84 crore).

10. Interest income

Interest income under the sub-head Income from Investments includes dividend on units of mutual funds and equity and preference shares received during the year ended March 31, 2019 amounting to Rs. 408.27 crore (previous year: Rs. 160.59 crore).

11. Earnings from standard assets securitised-out

There are no Special Purpose Vehicles (‘SPV’s) sponsored by the Bank for securitisation transactions. During the years ended March 31, 2019 and March 31, 2018, there were no standard assets securitised-out by the Bank.

Form and quantum of services and liquidity provided by way of credit enhancement

The Bank has provided credit and liquidity enhancements in the form of cash collaterals / guarantees / subordination of cash flows etc., to the senior Pass Through Certificates (‘PTC’s) as well as in loan assignment transactions. The RBI issued addendum guidelines on securitisation of standard assets vide its circular dated May 7, 2012. Accordingly, the Bank does not provide liquidity or credit enhancements on the direct assignment transactions undertaken subsequent to these guidelines. The total value of credit enhancement outstanding in the books as at March 31, 2019 was Rs. 223.25 crore (previous year: Rs. 223.25 crore) and outstanding servicing liability was Rs. 0.03 crore (previous year: Rs. 0.05 crore).

12. Other income

* Commission, exchange and brokerage income

- Commission, exchange and brokerage income is net of correspondent bank charges.

- Commission income for the year ended March 31, 2019 includes fees of Rs. 1,473.37 crore (previous year: Rs. 1,192.34 crore) in respect of life insurance business, of which Rs. 554.82 crore (previous year: Rs. 406.77 crore) is for displaying publicity materials at the Bank’s branches / ATMs and Rs. 222.68 crore (previous year: Rs. 203.43 crore) is in respect of general insurance and health insurance business.

* Miscellaneous income

Miscellaneous income includes recoveries from written-off accounts amounting to Rs. 1,430.81 crore (previous year: Rs. 1,093.84 crore).

13. Other expenditure

Other expenditure includes commission paid to sales agents amounting to Rs. 2,805.61 crore (previous year: Rs. 2,427.96 crore), exceeding 1% of the total income of the Bank.

14. Provisions and contingencies

The break-up of provisions and contingencies included in the Profit and Loss Account is given below:

The estimates of future salary increases, considered in actuarial valuation, take account of inflation, seniority, promotion and other relevant factors.

Expected rate of return on investments is determined based on the assessment made by the Bank at the beginning of the year with regard to its existing portfolio. Major categories of plan assets as a percentage of fair value of total plan assets as of March 31, 2019 are given below:

Provident fund

The guidance note on AS-15, Employee Benefits, states that employer established provident funds, where interest is guaranteed are to be considered as defined benefit plans and the liability has to be valued. The Institute of Actuaries of India (‘IAI’) has issued a guidance note on valuation of interest rate guarantees on exempt provident funds. The actuary has accordingly valued the same and the Bank held a provision of Nil as at March 31, 2019 (previous year: Nil), towards the present value of the guaranteed interest benefit obligation. The actuary has followed the deterministic approach as prescribed by the guidance note.

The Bank does not have any unfunded defined benefit plan. The Bank contributed Rs. 247.95 crore (previous year: Rs. 222.84 crore) to the provident fund, Rs. 3.27crore (previous year: Rs. 2.76 crore) to the National Pension Scheme and Rs. 103.41 crore (previous year: Rs. 67.68 crore) to the superannuation plan.

Compensated absences

The actuarial liability of compensated absences of accumulated privileged and sick leaves of the employees of the Bank is given below:

The estimates of future salary increases, considered in actuarial valuation, take account of inflation, seniority, promotion and other relevant factors.

15. Disclosures on remuneration Qualitative Disclosures

A. Information relating to the bodies that oversee remuneration Name and composition

The Board of Directors of the Bank has constituted the Nomination and Remuneration Committee (hereinafter, the ‘NRC’) for overseeing and governing the compensation policies of the Bank. The NRC is comprised of four non-executive directors as of March 31, 2019. Further, two members of the NRC are also members of the Risk Policy and Monitoring Committee (hereinafter, the ‘RPMC’) of the Board.

The NRC is comprised of Mrs. Shyamala Gopinath, Mr. Sanjiv Sachar, Mr. Sandeep Parekh and Mr. M.D. Ranganath. Further, Mrs. Shyamala Gopinath and Mr. M.D. Ranganath are also members of the RPMC. Mr. Sanjiv Sachar is the chairperson of the NRC. During the year ended March 31, 2019, Mr. Bobby Parikh and Mr. Partho Datta ceased to be a members of the NRC pursuant to their cessation as directors of the Bank on completing their term of 8 continuous years as permitted under Banking Regulation Act 1949.

Mandate of the NRC

The primary mandate of the NRC is to oversee the implementation of compensation policies of the Bank. The NRC periodically reviews the overall compensation policy of the Bank with a view to attract, retain and motivate employees. In this capacity it is required to review and approve the design of the total compensation framework, including compensation strategy programs and plans, on behalf of the Board of Directors. The compensation structure and pay revision for Whole Time Directors is also approved by the NRC. The NRC co-ordinates with the RPMC to ensure that compensation is aligned with prudent risk taking.

External Consultants

AON: As commissioned by the NRC, the Bank employed the services of AON in the area of compensation market benchmarking and executive compensation.

Cedar Consulting: The Bank employed the services of Cedar Consulting to review and recommend key scorecard measures for the Whole Time Directors.

Scope of the Bank’s Remuneration Policy

The Remuneration Policy of the Bank includes within its scope all business lines, all permanent staff in its domestic as well as international offices. Further the principles articulated in the compensation policy are universal, however in the event there are any statutory provisions in overseas locations the same take precedence over the remuneration policy of the Bank.

All permanent employees of the Bank except those covered under the long term wage agreement are covered by the said compensation policy. The number of employees covered under the compensation policy was 97,805 as at March 31, 2019 (previous year: 87,983).

B. Information relating to the design and structure of remuneration processes and the key features and objectives of remuneration policy

I. Key Features and Objectives of Remuneration Policy

The Bank’s Compensation / Remuneration Policy (the ‘Policy’) is aligned to business strategy, market dynamics, internal characteristics and complexities within the Bank. The ultimate objective of the Policy is to provide a fair and transparent structure that helps in acquiring and retaining the talent pool critical to build competitive advantage and brand equity. The Policy has been designed basis the principles for sound compensation practices in accordance with regulatory requirements and provides a framework to create, modify and maintain appropriate compensation programs and processes with adequate supervision and control.

The Bank’s performance management system provides a sound basis for assessing employee performance holistically. The Bank’s compensation framework is aligned with the performance management system and differentiates pay appropriately amongst its employees based on degree of contribution, skill and availability of talent owing to competitive market forces by taking into account factors such as role, skills, competencies, experience and grade / seniority.

The NRC reviews the following critical principles enunciated in the policy and ensures that:

(a) the compensation is adjusted for all types of prudent risk taking;

(b) compensation outcomes are symmetric with risk outcomes;

(c) compensation payouts are sensitive to the time horizon of risk; and

(d) the mix of cash, equity and other forms of compensation are aligned with risk.

II. Design and Structure of Remuneration

a) Fixed Pay

The NRC ensures that the fixed component of the compensation is reasonable, taking into account all relevant factors including industry practice.

Elements of Fixed Pay

The fixed pay component of the Bank’s compensation structure typically consists of elements such as base salary, allowances, perquisites, retirement and other employee benefits. Perquisites extended are in the nature of company car, hard furnishing, company leased accommodation, club membership and such other benefits or allowances in lieu of such perquisites / benefits. Retirement benefits include contributions to provident fund, superannuation fund (for certain job bands), national pension scheme and gratuity. The Whole Time Directors of the Bank are entitled to other post-retirement benefits such as car and medical facilities, in accordance with specified terms of employment as per the policy of the Bank, subject to RBI approval. The Bank also provides pension to certain employees of the erstwhile Lord Krishna Bank (‘eLKB’) under the Indian Banks’ Association (‘IBA’) structure.

Determinants of Fixed Pay

The fixed pay is primarily determined by taking into account factors such as the job size, performance, experience, location, market competitiveness of pay and is designed to meet the following key objectives of:

(a) fair compensation given the role complexity and size;

(b) fair compensation given the individual’s skill, competence, experience and market pay position;

(c) sufficient contribution to post retirement benefits; and

(d) compliance with all statutory obligations.

For Whole Time Directors additional dimensions such as prominence of leadership among industry leaders, consistency of the Bank’s performance over the years on key parameters such as profitability, growth and asset quality in relation to its own past performance and that of its peer banks would be considered. The quantum of fixed pay for Whole Time Directors is approved by the NRC as well as the Board and is subject to the approval of the RBI.

b) Variable Pay

The performance management system forms the basis for variable pay allocation of the Bank. The Bank ensures that the performance management system is comprehensive and considers both, quantitative and qualitative performance measures.

Whole Time Directors

The bonus for Whole Time Directors does not exceed 70% of the fixed pay in a year, thereby ensuring that there is a balance between the fixed and variable pays. The variable pay for Whole Time Directors is approved by the NRC as well as the Board and is subject to the approval of the RBI. The variable pay component is paid out subject to the following conditions:

- Where the variable pay constitutes 50% or more of the fixed pay, a portion of the same would be deferred as per the schedule mentioned in the table below:

- The Bank has devised appropriate malus and claw back clauses as a risk mitigant for any negative contributions of the Bank and / or relevant line of business in any year. Under the malus clause the incumbent foregoes the payout of the deferred variable pay in full or in part. Under the claw back clause the incumbent is obligated to return all the tranches of payout received of bonus amounts pertaining to the relevant performance year. The deferred bonus is paid out post review and approval by the NRC.

Employees other than Whole Time Directors

The Bank has formulated the following variable pay plans:

- Annual bonus plan

The quantum of variable payout is a function of the performance of the Bank, performance of the business unit, performance of the individual employee, job band of the employee and the functional category. Basis these key determinants and due adjustment for risk alignment, a payout matrix for variable pay is developed. Market trends for specific businesses / functions along with inputs from compensation surveys may also be used in finalising the payout.

Bonus pools are designed to meet specific business needs therefore resulting in differentiation in both the quantum and the method of payout across functions. Typically higher levels of responsibility receive a higher proportion of variable pay vis-a-vis fixed pay. The Bank ensures that the time horizon for risk is assessed and the deferment period, if any, for bonus is set accordingly. The following is taken into account while administering the annual bonus:

- In the event the proportion of variable pay to fixed pay is substantially high (variable pay exceeding 50% of fixed pay) for employees in certain grades, the Bank has devised the following deferment schedule after taking into consideration the nature of risk, time horizon of risk, and the materiality of risk.

- In cases of deferment of variable pay the Bank makes an assessment prior to the due date for payment of the deferred portion for any negative contribution. The criteria for negative contribution are decided basis pre-defined financial benchmarks. The Bank has in place appropriate methods for prevention of vesting of deferred variable pay or any part thereof, on account of negative contribution. The Bank also has in place claw back arrangements in relation to amounts already paid in the eventuality of a negative contribution.

- Performance-linked Plans (PLPs)

PLPs are formulated for sales personnel who are given sales targets but have limited impact on risk since credit decisions are exercised independent of the sales function. All PLP payouts are based on a balanced scorecard framework which factors not just quantitative, but also qualitative measures, such as quality of business sourced, customer complaints etc., and are subject to achievement of individual targets enumerated in the respective scorecards of the employees. A portion of the PLP payouts is deferred till the end of the year to provide for any unforeseen performance risks. Any employee who is on the PLP is excluded from the bonus plan.

Review of Remuneration Policy of the Bank

The Compensation Policy of the Bank was reviewed by the NRC during the year ended March 31, 2019 and the following material changes were incorporated therein:

- The Bank has amended its policy for grant of ESOPs. Under this policy, ESOPs granted to eligible employees vest over four tranches spread over a period of 48 months vis-a-vis 39 months for the earlier grants.

- The Bank has introduced a policy under which it may consider granting ESOPs for certain employees in select strategic roles at the time of hiring.

- The Bank has introduced a policy under which it may consider granting performance bonus to critical hires based on their performance rating at confirmation.

c) Guaranteed Bonus

Guaranteed bonuses may not be consistent with sound risk management or pay for performance principles of the Bank and therefore do not form an integral part of the general compensation practice.

For critical hiring for some select strategic roles, the Bank may consider granting of bonus based on performance rating upon confirmation as a prudent way to avoid loading the entire cost of attraction into the fixed component of the compensation which could have a long term cost implication for the Bank. For such hiring, the said bonus is generally decided by taking into account appropriate risk factors and market conditions.

For hiring at levels of Whole Time Directors / Managing Director and certain employees in select strategic roles, a sign-on bonus, if any, is limited to the first year only and is in the form of Employee Stock Options.

d) Employee Stock Option Plan (‘ESOP’s)

The Bank considers ESOPs as a vehicle to create a balance between short term rewards and long term sustainable value creation. ESOPs play a key role in the attraction and retention of key talent. The Bank grants equity share options to its Whole Time Directors and other employees above a certain grade. All plans for grant of options are framed in accordance with the SEBI guidelines, 1999 as amended from time to time and are approved by the shareholders of the Bank. These plans provide for the grant of options post approval by the NRC.

The grant of options is reviewed and approved by the NRC. The NRC grants options after considering parameters such as the incumbent’s grade and performance rating, and such other factors as may be deemed appropriate by the NRC. Equity share options granted to the Whole Time Directors are subject to the approval of the NRC, the Board and the RBI. With effect from April 1, 2018, the Bank has amended its policy for grant of ESOPs. Under this policy, ESOPs granted to eligible employees vest over four tranches spread over a period of 48 months. Vesting for all ESOPs granted subsequent to April 1, 2017 is based on the assessment of performance of the employee at the time of vesting.

e) Severance Pay

The Bank does not grant severance pay other than accrued benefits (such as gratuity, pension) except in cases where it is mandated by any statute.

f) Hedging

The Bank does not provide any facility or fund or permit its Whole Time Directors and employees to insure or hedge their compensation structure to offset the risk alignment effects embedded in their compensation arrangement.

g) Statutory Bonus

Some section of employees are also paid statutory bonus as per the Payment of Bonus Act (1965) as amended from time to time.

III. Remuneration Processes

Fitment at the time of Hire

Pay scales of the Bank are set basis the job size, experience, location and the academic and professional credentials of the incumbent.

The compensation of new hires is in line with the existing pay ranges and consistent with the compensation levels of the existing employees of the Bank at similar profiles. The pay ranges are subject to change basis market trends and the Bank’s talent management priorities. While the Bank believes in the internal equity and parity as a key determinant of pay it does acknowledge the external competitive pressures of the talent market. Accordingly, there could be certain key profiles with critical competencies which may be hired at a premium and treated as an exception to the overall pay philosophy. Any deviation from the defined pay ranges is treated as a hiring exception requiring approval with appropriate justification.

Increment / Pay Revision

It is the endeavor of the Bank to ensure external competitiveness as well as internal equity without diluting the overall focus on optimising cost. In order to enhance our external competitiveness the Bank participates in an annual salary survey of the banking sector to understand key market trends as well as get insights on relative market pay position compared to peers.

-The Bank endeavors to ensure that most employees progress to the median of the market in terms of fixed pay over time.

This coupled with key internal data indicators like performance score, job family, experience, job grade and salary budget form the basis of decision making on revisions in fixed pay.

Increments in fixed pay for majority of the employee population are generally undertaken once in every year. However promotions, confirmations and change in job dimensions could also lead to a change in the fixed pay during other times of the year.

The Bank also makes salary corrections and adjustments during the year for those employees whose compensation is found to be below the market pay and who have a good performance track record. However such pay revisions are done on an exception basis.

Risk, Control and Compliance Staff

The Bank has separated the Risk, Control and Compliance functions from the Business functions in order to create a strong culture of checks and balances thereby ensuring good asset quality and to eliminate any possible conflict of interest between revenue generation and risk management and control. Accordingly, the overall variable pay as well as the annual salary increment of the employees in the Risk, Control and Compliance functions is based on their performance, functional objectives and goals. The Bank ensures that the mix of fixed to variable compensation for these functions is weighted in favour of fixed compensation.

C. Description of the ways in which current and future risks are taken into account in the remuneration processes. It should include the nature and type of the key measures used to take account of these risks

The Bank takes into account various types of risks in its remuneration processes. The Bank follows a comprehensive framework that includes within its ambit the key dimensions of remuneration such as fixed pay, variable pay and long term incentives (i.e. Employee Stock Options).

Fixed pay: The Bank conducts a comprehensive market benchmarking study to ensure that employees are competitively positioned in terms of fixed pay. The Bank follows a robust salary review process wherein revisions in fixed compensation are based on performance. The Bank also makes salary adjustments taking into consideration pay positioning of employees vis-a-vis market reference points. Through this approach the Bank endeavors to ensure that the talent risk due to attrition is mitigated as much as possible. Fixed pay could be revised downwards as well in the event of certain proven cases of misconduct by an employee.

Variable pay: The Bank has distinct types of variable pay plans as given below:

(a) Quarterly / monthly performance-linked pay (PLP) plans:

All quarterly / monthly PLP plans are based on the principle of balanced scorecard framework that includes within its ambit both quantitative and qualitative factors including key strategic objectives that ensure future competitive advantage for the Bank. PLP plans, by design, have deterrents that play a role of moderating payouts based on the non-fulfillment of established quantitative / qualitative risk factors. Deterrents also include risks arising out of non-compliance, mis-sell etc. Further, a portion of all payouts under the PLP plans is deferred till the end of the year to provide for any unforeseen performance risks.

(b) Annual bonus plan:

The Bank takes into consideration the fact that a portion of the Bank’s profits are directly attributable to various types of risks the Bank is exposed to such as credit risk, market risk, operational risk and other quantifiable risks.

The framework developed by the Bank in order to arrive at the quantum of bonus pool is based on the performance of the Bank and profitability. The annual bonus is distributed based on business unit and individual performance. The business unit performance is based on factors such as growth in revenue, growth in profit, cost to income ratio and achievement vis-a-vis plans and key objectives. Bonus pay out for an individual employee in a particular grade is linked to the performance rating of the employee and subject to meeting the Bank’s standards of ethical conduct.

The Bank has devised appropriate malus and claw back clauses as a risk mitigant for any negative contributions of the Bank and / or relevant line of business in any year for Whole Time Directors. Under the malus clause the incumbent foregoes the vesting of the deferred variable pay in full or in part. Under the claw back clause the incumbent is obligated to return all the tranches of bonus payout pertaining to the reference performance year. The deferred bonus is paid out post review and approval by the NRC.

The bonus for Whole Time Directors is capped at 70% of the fixed pay in a year. The variable pay for Whole Time Directors is approved by the NRC as well as the Board of Directors of the Bank and is subject to the approval of the RBI.

The variable pay component for Whole Time Directors and employees in certain grades is paid out subject to the following conditions:

Where the variable pay constitutes 50% or more of the fixed pay, a portion of the same would be deferred as per the schedule mentioned in the table below:

(c) Long term incentives (employee stock options):

The Bank also grants employee stock options to employees in certain job bands. The grant is based on performance rating of the individual.

D. Description of the ways in which the Bank seeks to link performance during a performance measurement period with levels of remuneration

The Bank has a very comprehensive multi-dimensional performance measurement metrics that takes into consideration multiple factors that include qualitative as well as quantitative factors. The following are the key performance measurement metrics for the Bank. These also form part of the key metrics for the measurement of the performance of Whole Time Directors and impact the final remuneration:

a) Business Growth - This includes growth in advances and deposits;

b) Profitability - This includes growth in profit after tax;

c) Asset Quality - Gross NPA, Net NPA and % of Restructured assets to net advances;

d) Financial Soundness - Capital Adequacy Ratio Position and Tier I capital;

e) Shareholder value creation - Return on equity; and

f) Financial Inclusion - Growth in number of households covered, growth in the value of loans disbursed under this category and achievement against priority sector lending targets.

Most of the above parameters are evaluated in two steps:

A. Achievement against the plans of the Bank; and

B. Achievement against the performance of peers.

Apart from the factors related to business growth there is also a key qualitative factor such as regulatory compliance. Compliance is the key qualitative factor that acts as the moderator in the entire organisation evaluation process. A low score on compliance can significantly moderate the other performance measures and depending on severity may even nullify their impact.

While the above parameters form the core evaluation parameters for the Bank each of the business units are measured on the following from a remuneration standpoint:

a) Increase in plan over the previous year;

b) Actual growth in revenue over previous year;

c) Growth in net revenue (%);

d) Achievement of net revenue against plan (%);

e) Actual profit before tax;

f) Growth in profit before tax compared to the previous year;

g) Improvement in cost to income over the previous year; and

h) Achievement of key strategic initiatives.

Apart from the above the business units are also measured against certain key business objectives that are qualitative in nature.

The process by which levels of remuneration in the Bank are aligned to the performance of the Bank, business unit and individual employees is articulated below:

Fixed Pay

The Bank reviews the fixed pay portion of the compensation structure basis merit-based increments and market corrections. These are based on a combination of performance rating, job band and the functional category of the individual employee. For a given job band, the merit increment is directly related to the performance rating. The Bank strives to ensure that most employees progress to the median of the market in terms of fixed pay over time. All other things remaining equal, the correction percentage is directly related to the performance rating of the individual.

Variable Pay

Basis the performance of the business unit, individual performance and role, the Bank has formulated the following variable pay plans:

* Annual Bonus Plan

The Bank’s annual bonus is computed as a percentage of the gross salary for every job band. The bonus multiple is based on performance of the business unit (based on the parameters above), performance rating, job band and the functional category of the individual employee. The business performance level determines the multiplier for the bonus. All other things remaining equal, for a given job band, the bonus is directly related to the performance rating. The proportion of variable pay to fixed pay increases with job band. Employees on the annual bonus plan are not part of the PLPs.

- Performance-linked Plans (PLPs)

The Bank has formulated PLPs for its sales personnel who are given sales targets basis a balanced scorecard methodology. All PLP payouts are subject to the achievement of individual targets enumerated in the respective scorecards of the employees and moderated by qualitative parameters. A portion of the PLP payouts is deferred till the end of the year to provide for any unforeseen performance risks. All PLP plans are based on balanced scorecard framework.

E. Description of the ways in which the Bank seeks to adjust remuneration to take account of the longer term performance

A discussion of the Bank’s policy on deferral and vesting of variable remuneration and a discussion of the Bank’s policy and criteria for adjusting deferred remuneration before vesting and after vesting:

Whole Time Directors

The bonus for Whole Time Directors does not exceed 70% of the fixed pay in a year, thereby ensuring that there is a balance between the fixed and variable pay. The variable pay for Whole Time Directors is approved by the NRC as well as the Board and is subject to the approval of the RBI. The variable pay component is paid out subject to the following conditions:

- Where the variable pay constitutes 50% or more of the fixed pay, an appropriate portion thereof is deferred and vests as per the schedule mentioned in the table below:

- The Bank has devised appropriate malus and claw back clauses as a risk mitigant for any negative contributions of the Bank and / or relevant line of business in any year.

- Malus clause

Under the malus clause the incumbent foregoes the vesting of the deferred variable pay in full or in part. In the event there is a deterioration in specific performance criteria (such as criteria relating to profit or asset quality) that are laid down by the NRC, then the NRC would review the deterioration in the performance taking into consideration the macroeconomic environment as well as internal performance indicators and accordingly decide whether any part of the deferred tranche pertaining to that financial year merits a withdrawal. The deferred bonus is paid out post review and approval by the NRC.

- Claw back clause

Under the claw back clause the incumbent is obligated to return all the tranches of payout received of bonus amounts pertaining to the relevant performance year. In the event there is any act attributable to the concerned Whole Time Director / Managing Director resulting in an incident of willful and deliberate misinterpretation / misreporting of financial performance (inflating the financials) of the Bank, for a financial year, which comes to light in the subsequent three years, the incumbent is obligated to return all the tranches of bonus payout received pertaining to the relevant performance year.

The specific criteria on the applicability of malus and claw back arrangements are reviewed by the NRC annually.

Employees other than Whole Time Directors

The Bank has formulated the following variable pay plans:

* Annual bonus plan

The quantum of variable payout is a function of the performance of the Bank, performance of the individual employee, job band of the employee and the functional category. Basis these key determinants and due adjustment for risk alignment, a payout matrix for variable pay is developed. Market trends for specific businesses / functions along with inputs from compensation surveys may also be used in finalising the payout.

Bonus pools are designed to meet specific business needs therefore resulting in differentiation in both the quantum and the method of payout across functions. Typically higher levels of responsibility receive a higher proportion of variable pay vis-a-vis fixed pay. The Bank ensures that the time horizon for risk is assessed and the deferment period, if any, for bonus is set accordingly. Employees on the annual bonus plan are not part of the PLPs.

The following is taken into account while administering the annual bonus:

- In the event the proportion of variable pay to fixed pay is substantially high (typically variable pay exceeding 50% of fixed pay), for employees in certain grade the Bank has devised the following deferment schedule after taking into consideration the nature of risk, time horizon of risk and the materiality of risk.

- In cases of deferment of variable pay the Bank makes an assessment prior to the due date for payment of the deferred portion for any negative contribution. The criteria for negative contribution are decided basis pre-defined financial benchmarks. The Bank has in place appropriate methods for prevention of vesting of deferred variable pay or any part thereof, on account of negative contribution. The Bank also has in place claw back arrangements in relation to amounts already paid in the eventuality of a negative contribution.

- Performance-linked Plans (PLPs)

PLPs are formulated for sales personnel who are given sales targets but have limited impact on risk since credit decisions are exercised independent of the sales function. All PLP payouts are subject to the achievement of individual targets enumerated in the respective scorecards of the employees. A portion of the PLP payouts is deferred till the end of the year to provide for any unforeseen performance risks.

F. Description of the different forms of variable remuneration (i.e. cash, shares, ESOPs and other forms) that the Bank utilises and the rationale for using these different forms

The Bank recognises the importance of variable pay in reinforcing a pay for performance culture. Variable pay stimulates employees to stretch their abilities to exceed expectations.

* Annual bonus plan

These are paid to reward performance for a given financial year. This covers all employees and excludes employees receiving PLP payouts. This is based on performance of the business unit, performance rating, job band and functional category of the individual. For higher job bands the proportion of variable pay to total compensation tends to be higher.

- Performance-linked Plans (PLPs)

These are paid to frontline sales staff for the achievement of specific sales targets but have limited impact on risk as credit decisions are exercised independent of the sales function. Further, it has been the endeavor of the Bank to ensure that the objectives set are based on the principles of a balanced scorecard that takes into account quantitative and qualitative measures rather than just the achievement of financial numbers. Further all PLPs have inherent risk adjustment mechanisms manifested in the form of deterrents. All PLP payouts are subject to the achievement of parameters, both qualitative and quantitative enumerated in the respective scorecards of the employees. A portion of the PLP payouts is deferred till the end of the year to provide for any unforeseen performance risks.

* Employee stock option plan

This is to reward for contribution of employees in creating a long term, sustainable earnings and enhancing shareholder value.

Only employees in a certain job band and with a specific performance rating are eligible for stock options. Performance is the key criteria for granting stock options.

Quantitative disclosures

The quantitative disclosures cover the Bank’s Whole Time Directors and Key Risk Takers. Key Risk Takers are individuals who can materially set, commit or control significant amounts of the Bank’s resources, and / or exert significant influence over its risk profile. The Bank’s Key Risk Takers include Whole Time Directors, Group Heads, Business Heads directly reporting to the Managing Director and select roles in the Bank’s Treasury and Investment Banking functions.

16. Segment reporting Business segments

Business segments have been identified and reported taking into account, the target customer profile, the nature of products and services, the differing risks and returns, the organisation structure, the internal business reporting system and the guidelines prescribed by RBI. The Bank operates in the following segments:

a) Treasury

The treasury segment primarily consists of net interest earnings from the Bank’s investment portfolio, money market borrowing and lending, gains or losses on investment operations and on account of trading in foreign exchange and derivative contracts.

b) Retail banking

The retail banking segment serves retail customers through the Bank’s branch network and other channels. This segment raises deposits from customers and provides loans and other services to customers with the help of specialist product groups. Exposures are classified under retail banking taking into account the status of the borrower (orientation criterion), the nature of product, granularity of the exposure and the quantum thereof.

Revenues of the retail banking segment are derived from interest earned on retail loans, interest earned from other segments for surplus funds placed with those segments, subvention received from dealers and manufacturers, fees from services rendered, foreign exchange earnings on retail products etc. Expenses of this segment primarily comprise interest expense on deposits, commission paid to retail assets sales agents, infrastructure and premises expenses for operating the branch network and other delivery channels, personnel costs, other direct overheads and allocated expenses of specialist product groups, processing units and support groups.

c) Wholesale banking

The wholesale banking segment provides loans, non-fund facilities and transaction services to large corporates, emerging corporates, public sector units, government bodies, financial institutions and medium scale enterprises. Revenues of the wholesale banking segment consist of interest earned on loans made to customers, interest / fees earned on the cash float arising from transaction services, earnings from trade services and other non-fund facilities and also earnings from foreign exchange and derivative transactions on behalf of customers. The principal expenses of the segment consist of interest expense on funds borrowed from external sources and other internal segments, premises expenses, personnel costs, other direct overheads and allocated expenses of delivery channels, specialist product groups, processing units and support groups.

d) Other banking business

This segment includes income from parabanking activities such as credit cards, debit cards, third party product distribution, primary dealership business and the associated costs.

e) Unallocated

All items which are reckoned at an enterprise level are classified under this segment. This includes capital and reserves, debt classified as Tier I or Tier II capital and other unallocable assets and liabilities such as deferred tax, prepaid expenses, etc.

Segment revenue includes earnings from external customers plus earnings from funds transferred to other segments. Segment result includes revenue less interest expense less operating expense and provisions, if any, for that segment. Segment-wise income and expenses include certain allocations. Interest income is charged by a segment that provides funding to another segment, based on yields benchmarked to an internally approved yield curve or at a certain agreed transfer price rate. Transaction charges are levied by the retail banking segment to the wholesale banking segment for the use by its customers of the retail banking segment’s branch network or other delivery channels. Segment capital employed represents the net assets in that segment.

Geographic segments

The geographic segments of the Bank are categorised as domestic operations and foreign operations. Domestic operations comprise branches in India and foreign operations comprise branches outside India.

Qualitative disclosure on LCR

The Liquidity Coverage Ratio (LCR) is one of the Basel Committee’s key reforms to develop a more resilient banking sector. The objective of the LCR is to promote the short-term resilience of the liquidity risk profile of banks. It does this by ensuring that banks have an adequate stock of unencumbered High-Quality Liquid Assets (HQLA) that can be converted easily and immediately into cash to meet their liquidity needs for a 30 calendar day liquidity stress scenario. The LCR is expected to improve the banking sector’s ability to absorb shocks arising from financial and economic stress, whatever the source, thus reducing the risk of spillover from the financial sector to the real economy.

The Liquidity Risk Management of the Bank is governed by the Asset Liability Management (ALM) Policy approved by the Board. The Asset Liability Committee (‘ALCO’) is a decision-making unit responsible for implementing the liquidity and interest rate risk management strategy of the Bank in line with its risk management objectives and ensures adherence to the risk tolerance / limits set by the Board. In order to determine cash outflows, the Bank segregates its deposits into various customer segments, viz Retail (which include deposits from individuals), Small Business Customers (those with deposits under Rs. 5 crore), and Wholesale (which would cover all residual deposits). Within Wholesale, deposits that are attributable to clearing, custody and cash management services are classified as Operational Deposits. Other contractual funding, including a portion of other liabilities which are expected to run down in a 30 day time frame are included in the cash outflows. These classifications, based on extant regulatory guidelines, are part of the Bank’s LCR framework, and are also submitted to the RBI.

The LCR is calculated by dividing a Bank’s stock of HQLA by its total net cash outflows over a 30-day stress period. The guidelines for LCR were effective January 1, 2015, with then minimum requirement at 60% which rose in equal annual steps to reach 100% on January 1, 2019. This graduated approach was designed to ensure that the LCR could be introduced without material disruption to the orderly strengthening of banking systems or the ongoing financing of economic activity. The present requirement, as on March 31, 2019 is 100%.

In the Indian context, the run-off factors for the stressed scenarios are prescribed by the RBI, for various categories of liabilities (viz., deposits, unsecured and secured wholesale borrowings), undrawn commitments, derivative-related exposures and offset with inflows emanating from assets maturing within the same time period. Given below is a table of run-off factors and the average LCR maintained by the Bank quarter-wise over the past two years:

The average LCR for the quarter ended March 31, 2019 was at 117.28% as against 105.16% for the quarter ended March 31, 2018, and well above the present prescribed minimum requirement of 100%. The average HQLA for the quarter ended March 31, 2019 was Rs. 202,599.15 crore, as against was Rs. 159,124.53 crore for the quarter ended March 31, 2018. During the same period the composition of government securities and treasury bills in the HQLA increased from 87% to 91%.

For the quarter ended March 31, 2019, derivative exposures (net of cash inflows) / collateral requirements and undrawn commitments constituted just about 0.5% and 3.4% respectively of average cash outflow, in line with earlier periods. The Bank has consistently maintained a robust funding profile with a significant portion of funding through deposits. As of March 31, 2019, the top 20 depositors comprised of 6.1% of total deposits.

17. Related party disclosures

As per AS-18, Related Party Disclosure, the Bank’s related parties are disclosed below:

Promoter

Housing Development Finance Corporation Limited

Subsidiaries

HDFC Securities Limited

HDB Financial Services Limited

Welfare trust of the Bank

HDB Employees Welfare Trust

Key management personnel

Aditya Puri, Managing Director

Paresh Sukthankar, Deputy Managing Director (ceased to be related party effective November 8, 2018)

Kaizad Bharucha, Executive Director Relatives of key management personnel

Anita Puri, Amit Puri, Amrita Puri, Adishwar Puri, Aarti Sood, Havovi Bharucha, Huzaan Bharucha, Danesh Bharucha, Daraius Bharucha. Entities in which key management personnel are interested

Salisbury Investments Private Limited and Akuri by Puri

The following ceased to be related party effective November 8, 2018:

Tanaksh Innovations Private Limited, Sangeeta Sukthankar, Dattatraya Sukthankar, Shubhada Sukthankar, Akshay Sukthankar, Ankita Sukthankar, Madhavi Lad.

In accordance with paragraph 5 of AS-18, the Bank has not disclosed certain transactions with relatives and interested entities of key management personnel as they are in the nature of banker-customer relationship.

The significant transactions between the Bank and related parties for year ended March 31, 2019 are given below. A specific related party transaction is disclosed as a significant related party transaction wherever it exceeds 10% of all related party transactions in that category:

- Interest paid: HDB Financial Services Limited Rs. 4.56 crore (previous year: Rs. 2.47 crore); Housing Development Finance Corporation Limited Rs. 5.49 crore (previous year: Rs. 5.96 crore).

- Interest received: HDB Financial Services Limited Rs. 294.50 crore (previous year: Rs. 136.61 crore), HDFC Limited Rs. 35.20 crore (previous year: Rs. 13.28 crore).

- Rendering of services: Housing Development Finance Corporation Limited Rs. 282.97 crore (previous year: Rs. 264.27 crore).

- Receiving of services: HDB Financial Services Limited Rs. 1,916.90 crore (previous year: Rs. 1,759.67 crore); Housing Development Finance Corporation Limited Rs. 486.95 crore (previous year: Rs. 405.17 crore).

- Dividend paid: Housing Development Finance Corporation Limited Rs. 511.17 crore (previous year: Rs. 432.53 crore).

- Dividend received: HDB Financial Services Limited Rs. 52.54 crore (previous year: Rs. 112.59 crore); HDFC Securities Limited Rs. 151.90 crore (previous year: Rs. 129.06 crore).

The Bank being an authorised dealer, deals in foreign exchange and derivative transactions with parties which include its promoter. The foreign exchange and derivative transactions are undertaken in line with the RBI guidelines. The notional principal amount of foreign exchange and derivative contracts transacted with the promoter that were outstanding as on March 31, 2019 is Rs. 5,865.50 crore (previous year: Rs. 5,972.14 crore). The contingent credit exposure pertaining to these contracts computed in line with the extant RBI guidelines on exposure norms was Rs. 79.12 crore (previous year: Rs. 80.76 crore).

During the year ended March 31, 2019, the Bank purchased debt securities from Housing Development Finance Corporation Limited Rs. 685.00 crore (previous year: Rs. 2,105.00 crore) and from HDB Financial Services Limited Rs. 2,180.58 crore (previous year: Rs. 1,885.00 crore) issued by these entities.

During the year ended March 31, 2019, the Bank made investment of Rs. 963.22 crore (previous year: Nil) in pass through certificates in respect of assets securitised out by HDB Financial Services Limited for which the outstanding as on March 31, 2019 was Rs. 878.20 crore. During the year ended March 31, 2019, the Bank paid rent of Rs. 0.66 crore (previous year: Rs. 0.66 crore) to party related to the Bank’s key management personnel in relation to residential accommodation. As at March 31, 2019, the security deposit outstanding was Rs. 3.50 crore (previous year: Rs. 3.50 crore).

The deposit outstanding from HDB Employees Welfare Trust as at March 31, 2019 was Rs. 37.19 crore (previous year: Rs. 49.26 crore). The Bank also paid interest on deposit from HDB Employees Welfare Trust aggregating to Rs. 3.00 crore (previous year: Rs. 3.21 crore).

- Figures in bracket indicate maximum balance outstanding during the year based on comparison of the total outstanding balances at each quarter-end.

- Remuneration paid excludes value of employee stookoptlons exercised during the year.

- Bonus and retlral benefits for keymanagerlal personnel are accrued as a part of an overall pool and are not allocated against the key managerial personnel. These will be paid based on approval from RBI. As of March 31, 2018, approved unpaid deferred bonus in respect of earlier years was Rs. 2.80 crore.

18. Leases

Operating leases primarily comprise office premises, staff residences and Automated Teller Machines (‘ATM’s), which are renewable at the option of the Bank. The details of maturity profile of future operating lease payments are given below:

The Bank has sub-leased certain of its properties taken on lease.

The terms of renewal and escalation clauses are those normally prevalent in similar agreements. There are no undue restrictions or onerous clauses in the agreements.

19. Penalties levied by the RBI

During the year ended March 31, 2019, RBI has imposed a penalty of Rs. 0.20 crore (previous year: Nil) for non-compliance with various directions issued by RBI on Know Your Customer (KYC) / Anti-Money Laundering (AML) standards.

20. Disclosure for customer complaints / unimplemented awards of Banking Ombudsman

* Customer complaints

(A) Customer complaints other than ATM transaction disputes

(B) ATM transaction disputes relating to the Bank’s customers on the Bank’s ATMs

(C) ATM transaction disputes relating to the Bank’s customers on other banks’ ATMs

* Top areas of customer complaints

The average number of customer complaints per branch, including ATM transaction disputes, was 6.9 per month during the year ended March 31, 2019 (previous year: 4.7 per month). For the year ended March 31, 2019, retail liability segment accounted for 80.37% of the total complaints (previous year: 76.46%), followed by credit cards at 14.56% of the total complaints (previous year: 17.14%), retail assets at 4.50% of the total complaints (previous year: 5.57%), while other segments accounted for 0.57% of total complaints (previous year: 0.83%). The top 10 areas of customer complaints for the year ended March 31, 2019, including ATM transaction disputes, aggregated 318,540 complaints (previous year: 2,03,045 complaints) and accounted for 79.96% of total complaints (previous year: 76.09%). The top 5 areas of customer complaints on which the Bank is working towards root cause remediation are - unauthorized usage through debit card online, cash not dispensed or less cash dispensed in the Bank’s ATMs, Transaction dispute related - credit cards, Sales related - credit cards and Unauthorized usage through debit card done at Other Bank ATMs. The above is based on the information available with the Bank which has been relied upon by the auditors.

21. Disclosure of Letters of Comfort (LoC) issued by the Bank

The Bank has not issued any Letter of Comfort during the years ended March 31, 2019 and March 31, 2018.

22. Small and micro industries

Under the Micro, Small and Medium Enterprises Development Act, 2006 which came into force from October 2, 2006, certain disclosures are required to be made relating to Micro, Small and Medium enterprises. There have been no reported cases of delays in payments to micro and small enterprises or of interest payments due to delays in such payments during the years ended March 31, 2019 and March 31, 2018. The above is based on the information available with the Bank which has been relied upon by the auditors.

23. Off-Balance Sheet SPVs

There are no Off-Balance Sheet SPVs sponsored by the Bank, which need to be consolidated as per accounting norms.

24. Credit default swaps

The Bank has not transacted in credit default swaps during the year ended March 31, 2019 (previous year: Nil).

25. Corporate social responsibility

Operating expenses include Rs. 443.77 crore (previous year: Rs. 374.54 crore) for the year ended March 31, 2019 towards Corporate Social Responsibility (CSR), in accordance with Companies Act, 2013.

The Bank has spent 2.02% (previous year: 2.04%) of its average net profit for the last three financial years as part of its CSR for the year ended March 31, 2019. As a responsible bank, it has approached the mandatory requirements of CSR spends positively by laying a foundation on which it would build and scale future projects and partnerships. The Bank continues to evaluate strategic avenues for CSR expenditure in order to deliver maximum impact. In the years to come, the Bank will further strengthen its processes as per requirement.

26. Investor education and protection fund

There has been no delay in transferring amounts, required to be transferred to the Investor Education and Protection Fund by the Bank during the years ended March 31, 2019 and March 31, 2018.

27. Disclosure on remuneration to Non-Executive Directors

Remuneration by way of sitting fees to the Non-Executive Directors for attending meetings of the Board and its committees during the year ended March 31, 2019 amounted to Rs. 1.62 crore (previous year: Rs. 1.58 crore).

Further, in accordance with RBI guidelines, profit related commission to all Non-Executive Directors other than the Chairperson for the year ended March 31, 2019 amounted to Rs. 0.90 crore (previous year: Rs. 0.80 crore).

28. Comparative figures

Figures for the previous year have been regrouped and reclassified wherever necessary to conform to the current year’s presentation. The previous year comparative numbers were audited by a firm of Chartered Accountants other than S.R. Batliboi & Co. LLP.