HDFC Bank

The Directors have great pleasure in presenting the of your Bank
 together with the audited accounts for the
 Fourteenth Annual Report on the business and operations year ended
 March 31, 2008.
 
 Financial Performance
 
                                                 (Rs. in crores)
                                               For the year ended
 
                                         March 31, 2008   March 31, 2007
 
 Deposits and Other Borrowings                105,247.5        71,113.3
 Advances                                      63,426.9        46,944.8
 Total Income                                  12,398.2         8,164.2*
 Profit before Depreciation and Tax             2,552.4         1,858.4
 Net Profit                                     1,590.2         1,141.5
 Profit brought forward                         1,932.0         1,455.0
 Total Profit available for Appropriation       3,522.2         2,596.5
 
 Appropriations
 
 Transfer to Statutory Reserve                    397.5           285.4
 Transfer to General Reserve                      159.0           114.1
 Transfer to Investment Reserve Account (net)      38.5             3.0
 Proposed Dividend                                301.3           223.6
 Tax including Surcharge and 
 Education Cess on Dividend .                      51.2            38.0
 Dividend paid for Prior Years                      0.1             0.4
 Balance carried over to Balance Sheet          2,574.6         1,932.0
 
 * Change pursuant to reclassification
 
 The Bank posted total income and net profit of Rs. 12,398.2 crores and
 Rs. 1,590.2 crores respectively for the financial year 2007-08 as
 against Rs. 8,164.2 crores and Rs. 1,141.5 crores respectively in the
 previous year. Appropriations from the net profit have been effected as
 per the table given above.
 
 Dividend
 
 Your Bank has had a consistent dividend policy of balancing the twin
 objectives of appropriately rewarding shareholders and retaining
 capital to maintain a healthy capital adequacy ratio to support future
 growth. It has had a consistent track record of moderate but steady
 increases in dividend declarations over the last so many years with the
 dividend payout ratio ranging between 20% and 25%. In line with this,
 and in recognition of the robust performance during 2007-08, your
 directors are pleased to recommend a dividend of 85% for the year ended
 March 31, 2008, as against 70% for the year ended March 31, 2007. This
 dividend shall be subject to tax on dividend to be paid by the Bank.
 
 Awards
 
 As in the past years, awards and recognition have been conferred on
 your Bank by leading domestic and international organizations during
 the fiscal 2007-08. Some of them are:
 
 - For the fifth consecutive year, your Bank has bagged the Business
 Todays Best Bank Award.
 
 - Outlook Money and NDTV Profits Best Bank in the private sector
 category.
 
 - Bombay Stock Exchange and Nasscom Foundations Business for Social
 Responsibility Award.
 
 -  Dun & Bradstreet - American Express Corporate Best Bank Award
 2007. There were 26 categories in all, including FMCG, Telecom and
 Software & IT.
 
 - The Financial Express-Ernst & Young Best Bank award in the Private
 Sector category - Your bank shared the top slot with another bank
 
 - The Asia Pacific HRM Congress in Mumbai - Your Bank bagged as many as
 ten awards including Organisation with innovative HR Practices.
 
 - Business Today Survey conducted by the Monitor Group Innovation Study
 - Your Bank is one of Indias most innovative 28 companies across ten
 major business sectors
 
 The Asian Banker Excellence in Retail Financial Service Awards-The
 Best Retail Bank in India
 
 Ratings
 
 The Bank has its deposit programs rated by two rating agencies - Credit
 Analysis & Research Limited (CARE) and Fitch Ratings India Private
 Limited. The Banks Fixed Deposit programme has been rated CARE AAA
 (FD) [Triple A] by CARE, which represents instruments considered to be
 of the best quality, carrying negligible investment risk.  CARE has
 also rated the banks Certificate of Deposit (CD) programme PR 1+
 which represents superior capacity for repayment of short term
 promissory obligations. Fitch Ratings India Pvt. Ltd. (100% subsidiary
 of Fitch Inc.) has assigned the tAAA (ind) rating to the Banks
 deposit programme, with the outlook on the rating as stable. This
 rating indicates highest credit quality where protection factors are
 very high.
 
 The Bank also has its long term unsecured, subordinated (Tier II) Bonds
 rated by CARE and Fitch Ratings India Private Limited and its Tier I
 perpetual Bonds and Upper Tier II Bonds rated by CARE and CRISIL Ltd.
 CARE has assigned the rating of CARE AAA for the subordinated Tier II
 Bonds while Fitch Ratings India Pvt. Ltd. has assigned the rating
 AAA(ind) with the outlook on the rating as stable. CARE has also
 assigned CARE AAA [Triple A] for the Banks Perpetual bond and Upper
 Tier II bond issues. CRISIL has assigned the rating AAA/Stable for
 the Banks perpetual Debt programme and Upper Tier II Bond issue. In
 each of the cases referred to above, the ratings awarded were the
 highest assigned by the rating agency for those instruments.
 
 Additional Capital
 
 In June 2007, the Bank allotted 1,35,82,000 equity shares of Rs. 10/-
 each at a premium of Rs. 1,013.49 per share on a preferential basis to
 Housing Development Finance Corporation Ltd. (HDFC) aggregating to Rs.
 1,390 crores. In July 2007, the Bank made a public offering of
 6,594,504 American Depositary Shares (ADS), each ADS representing three
 equity shares, at a price of $ 92.10 per ADS aggregating to of Rs.
 2,394 crores (net of underwriting discounts and commissions).
 
 During the year under review, 16.78 lacs shares were allotted to the
 employees of your Bank pursuant to the exercise of options under the
 Employee Stock Option Scheme of the Bank.
 
 Employee Stock Options
 
 The information pertaining to Employee Stock Options is given in an
 annexure to this report.
 
 Capital Adequacy Ratio
 
 Your Banks total Capital Adequacy Ratio (CAR) stood at a healthy
 13.6%, well above the regulatory minimum of 9.0%. Of this, Tier I CAR
 was 10.3%.
 
 Amalgamation of Centurion Bank of Punjab Limited with the Bank On March
 27, 2008, the shareholders of the Bank accorded their consent to a
 scheme of amalgamation of Centurion Bank of Punjab Limited with HDFC
 Bank Limited. The shareholders of the Bank approved the issuance of one
 equity share of Rs. 10/- each of HDFC Bank Limited for every twenty
 nine equity shares of Re. 1/- each held in Centurion Bank of Punjab
 Limited.  This is subject to receipt of approvals from the Reserve Bank
 of India, stock exchanges and other requisite statutory and regulatory
 authorities. The shareholders also accorded their consent to issue
 equity shares and/ or warrants convertible into equity shares at the
 rate of Rs. 1,530.13 each to HDFC and/or other promoter group companies
 on preferential basis, subject to final regulatory approvals in this
 regard. The Shareholders of the Bank have also approved an increase in
 the authorized capital from Rs. 450 crores to Rs. 550 crores.
 
 SUBSIDIARY COMPANIES
 
 In terms of the approval granted by the Government of India, the
 provisions contained under Section 212(1) of the Companies Act, 1956
 shall not apply in respect of the Banks subsidiaries namely, HDFC
 Securities Limited (HSL) and HDB Financial Services Limited (HDBFSL).
 Accordingly, a copy of the balance sheet, profit and loss account,
 report of the Board of Directors and Report of the Auditors of HSL and
 HDBFSL have not been attached to the accounts of the Bank for the year
 ended March 31, 2008.
 
 Investors who wish to have a copy of the annual accounts and detailed
 information on HSL and HDBFSL may write to the Bank for the same.
 Further, the said documents shall also be available for inspection by
 the investors at the registered offices of the Bank, HSL and HDBFSL.
 
 MANAGEMENTS DISCUSSIONS AND ANALYSIS
 
 Macro-economic and Industry Developments
 
 In the 25 years till 2007, the countrys real GDP grew on an average at
 6.2% per annum. In the last four years, however, GDP growth has been
 faster at 8.8% per annum.  The real GDP growth for 2007-08 is expected
 to have been between 8.7-8.9%. Investment expenditure, so crucial to
 economic growth, increased from 22.8% of GDP in FY02 to 35.9% in FY07.
 The domestic savings rate increased from 23.5% in FY02 to 34.8% in
 FY07.
 
 The services sector with a share of nearly 60% in Indias GDP and
 accounting for almost three-fourth in its overall growth, continues to
 be the key driver. The manufacturing sector has shown good growth too
 on the back of domestic and exportled demand. The countrys
 merchandise exports have grown by a healthy 21.6% in the April
 07-January 08 period as compared to 23.7% in the corresponding period
 of previous year.
 
 For most part of the year, liquidity in the banking system was volatile
 but largely in surplus due to strong capital flows and softening credit
 demand. The Reserve Bank of India (RBI) followed a tight monetary
 policy to check inflationary pressures arising to a large extent, out
 of hardening global energy and commodity prices. The RBI increased
 reserve requirements to suck out excess liquidity from the banking
 system directly and raised the Cash Reserve Ratio (CRR) by 150 basis
 points during the financial year ended March 31 2008.
 
 Deposit rates remained flat (7.50% to 9.00% p.a.) for most of the first
 half of the year, but rose by about 0.5% p.a.  across tenors in
 September 2007, primarily due to the onset of the busy credit season
 and tightening of monetary policy. Longer tenor yields, however fell by
 roughly 0.5% on the back of falling credit demand. The short tenor
 deposit rates, however, moved up by 0.25% in December 2007 but did not
 see the sharp spike that had been experienced in the March 2007
 quarter.
 
 The yield on the one-year government security (G-sec), which largely
 reflects the liquidity in the economy, fell by 15 basis points to 7.52%
 in first half of the financial year.  The 10-year G-sec yield dropped
 by about 40 basis points to 7.6% during the same period. However, high
 inflation numbers in March 2008, and market apprehensions of large debt
 issuance by the government pushed the yields up in the second fortnight
 of March 2008.
 
 Some signs of moderation in growth became apparent in 2007-08. Retail
 consumer borrowing and spending slowed down in the second half of
 2006-07 in the wake of the monetary tightening. This has impacted
 sectors like automobiles and consumer durables where consumer credit
 has played a key role in driving demand. Rise in interest rates has
 also taken its toll on demand for housing and the growth of the real
 estate sector. Non-food credit clocked a 22% growth in the last
 fortnight of February 2008 as against 28.9% in the last week of March
 2007. However, downward revisions (of 50 basis points on an average) in
 lending rates in the March 2008 by a number of banks could reverse this
 trend at least partially.
 
 On the foreign trade side, though overall exports showed an accelerated
 growth during the last year, a number of sectors such as textiles,
 handicrafts, and leather products saw growth moderating. The rupee
 appreciated sharply over the last year (by as much as 11%), which was
 largely responsible for the deceleration in exports. The prospect of a
 slowdown in the global economy has increased the risk of a prolonged
 slowdown in exports.
 
 Imports however remained robust in 2007-08, growing almost 30% in the
 first three quarters of the year (as against 22% for the corresponding
 period last year) on the back of higher global prices of oil and
 food.This widened the trade deficit to USD 67 billion in April-January
 FY08 from USD 45 billion in the corresponding period of previous year.
 Despite the increase in the trade deficit, overall, balance of payments
 was comfortable due to large capital inflows (comprising mainly foreign
 direct investment, portfolio inflows and external borrowings). Foreign
 exchange reserves grew by 7 billion during the year.
 
 Indian equity markets gained sharply in the first nine-months of
 2007-08. However, as the global financial crisis deepened, benchmark
 indices fell sharply in the last quarter. Markets are likely to track
 the global financial markets and remain volatile in 2008-09 although
 the Indian economic fundamentals still remain strong and attractive in
 absolute terms. Diminished risk appetite among investors could
 adversely impact capital inflows into emerging markets like India.
 
 (Sources: Ministry of Finance, RBI, CSO)
 
 Industry structure and development
 
 Indian banks faced a new set of challenges brought about by changes in
 both the international and domestic environment. International credit
 markets tightened considerably on the back of rising defaults and
 foreclosures in the US mortgage market and the resultant risk aversion.
 Its impact was first felt in the mortgage-linked securities and the
 inter-bank money markets. A number of large US and European banks
 reported large loan losses and write- downs. The contagion effects
 subsequently spread to other asset classes including emerging markets
 bonds and equities. The expectation is that the turmoil in the
 financial sector will spill over to the real estate sector. Growth in
 the G-7 economies, particularly the US is expected to be lower in 2008
 and this is likely to impinge on growth in other economies, including
 India.
 
 The Indian economy appeared to have entered a phase of moderation in
 2007-08.The Central Statistical Organisation (CSO) has estimated a
 decline in the growth rate of Indias Gross Domestic Product (GDP) to
 8.7% in 2007-08 from 9.6% in 2006-07. The growth in credit off-take
 from scheduled commercial banks (measured year on year) has fallen to
 21.9% in the last fortnight of February 2008 from 28.2% in the first
 half of April 2007.
 
 Risks and concerns
 
 While Indian banks have limited direct exposure to the international
 markets for mortgage linked securities, they are unlikely to be
 completely insulated from the turmoil in the global financial markets.
 Reduced availability of global finance through external commercial
 borrowings on the back of rising risk aversion in the global markets
 could affect domestic growth, particularly investments in capacity
 expansion.This in turn could have some impact on demand for domestic
 credit.
 
 Lower capital inflows could also impact domestic liquidity, which has
 largely been a function of external capital inflows for most of 2007-08
 with the ratio of net foreign exchange assets to reserve money
 consistently exceeding 100%.
 
 The initial moderation in bank credit growth rates in 2007- 08 seems to
 have been largely confined to the retail segment (housing, consumer
 durables and auto loans). It is possible that the moderation in growth
 in 2008-09 could be more broad-based, affecting both retail and certain
 wholesale segments, due to trends in consumption and capital formation.
 This has obvious implications for the credit portfolio of the banking
 system. A low 2.1 % growth in the capital goods component of the
 index of industrial production (IIP) for January 2008 seems to indicate
 a further decline in investment demand going forward which could affect
 overall credit growth for the banking system, particularly in term
 loans and project finance.
 
 Rising global commodity prices created inflationary pressures for most
 of 2007-08. A benign base-effect and the suppression in the petroleum
 product prices kept headline wholesale price inflation in a comfort
 zone for the first three quarters of the year. However, given the focus
 on managing underlying price pressures rather than headline inflation,
 monetary policy showed no signs of easing in 2007-08.Thus banks
 operated in an environment where the central bank did not allow any
 surplus liquidity in the system, resulting in interest rates remaining
 firm.
 
 Despite the prospect of a slowdown in the global economy, commodity
 price pressures, particularly those in food and mineral oils, show
 little sign of abating. As the base-effect wears off, headline
 inflation is likely to ramp up to well over 7%. So, inflation concerns
 are likely to influence monetary policy stance going forward and the
 prospect of an economic slowdown need not entail immediate monetary
 easing. Thus, the operating environment of banks in 2008- 09 could be a
 combination of slower credit growth and some upward bias in interest
 rates.
 
 Opportunities
 
 The-financial system in India has witnessed considerably less turmoil
 and volatility than that in advanced economies.
 
 Given this scenario, domestic corporates are more likely to turn to
 local sources of funding. Cyclical slowdown is unlikely to impact
 segments of the economy such as agriculture where a structural shift is
 under way. The rural economy has been the greater focus of government
 policy in recent years, and significant opportunities lie for banks
 here where the penetration of credit and financial products is still
 relatively low.
 
 The central and state governments appear to be driving an ambitious
 programme in the infrastructure sectors.The eleventh five year plan
 (2007-2012) envisages an investment of USD 500 billion, with
 approximately USD 80 billion envisaged for 2008-09 alone. This presents
 a major opportunity for banks and financial institutions to finance
 these investments.
 
 Although growth in retail credit has moderated in the last year, the
 low penetration levels of retail credit (estimated at less than 12% of
 GDP), the shift in demographics towards a higher proportion of younger
 working population, the changing attitudes towards borrowings, higher
 income levels amongst the growing middle class, and the large pent-up
 demand for housing, cars etc., all augur well for the long-term,
 sustainable growth of retail lending in the Indian market.
 
 Outlook
 
 The Indian economy seems likely to see some moderation in growth rates
 in 2008-09 relative to 2007-08. It is still likely to experience
 healthy growth in absolute terms and will probably remain one of the
 fastest growing economies in the world. Nonetheless, with a lower GDP
 growth coupled with tighter liquidity conditions (as RBI tackles
 concerns on inflation) and stable or slightly higher interest rates,
 system credit growth is likely to be lower than in 2007-08.  Downward
 pressures on economic growth may not immediately translate into an
 expansionary monetary policy, given the continued risks of inflation
 from global energy and commodity prices. Thus, slightly slower credit
 growth could coexist with firm, if not rising, interest rates.  Given
 Indias strong macro-economic fundamentals, however, structural drivers
 will continue to support growth which is a positive for banks as well.
 
 Mission and Business Strategy
 
 Our mission is to be a World Class Indian Bank, benchmarking
 ourselves against international standards and best practices in terms
 of product offerings, technology, service levels, risk management and
 audit & compliance.  The objective is to build sound customer
 franchises across distinct businesses so as to be a preferred provider
 of banking services for target retail and wholesale customer segments,
 and to achieve a healthy growth in profitability, consistent with the
 Banks risk appetite. We are committed to do this while ensuring the
 highest levels of ethical standards, professional integrity, corporate
 governance and regulatory compliance.
 
 Our business strategy emphasizes the following:
 
 - Increase our market share in Indias expanding banking and financial
 services industry by following a disciplined growth strategy focusing
 on balancing quality and volume growth while delivering high quality
 customer service;
 
 - Leverage our technology platform and open scaleable systems to
 deliver more products to more customers and to control operating costs;
 
 - Maintain high standards for asset quality through disciplined credit
 risk management;
 
 - Develop innovative products and services that attract our targeted
 customers and address inefficiencies in the Indian financial sector;
 
 - Continue to develop products and services that reduce our cost of
 funds; and
 
 - Focus on healthy earnings growth with low volatility.  Financial
 Performance
 
 The financial performance during the fiscal year 2007- 08 remained
 healthy with total net revenues (net interest income plus other income)
 increasing by 50.7% to Rs.  7,511.0 crores from Rs.4,984.7 crores in
 2006-07. The revenue growth was driven principally by an increase in
 net interest income. Net interest income grew by 50.7% primarily due to
 increase in the average balance sheet size by 39.8% and an increase in
 net interest margin from 4.0% to around 4.4%. The key driver in volumes
 was growth in advances. Margin expansion was contributed by increase in
 yields across all products partially offset by increase in time deposit
 costs.
 
 The other income (non-interest revenue) increased by 50.6% to Rs.
 2,283.2 crores primarily due to fees and commissions, profit/(loss) on
 revaluation / sale of investment and income from foreign exchange and
 derivatives income. In 2007-08, commission income increased by 32.7% to
 Rs. 1,714.5 crores with the main drivers being commission from
 distribution of third party mutual funds and insurance, fees on
 debit/credit cards, transactional charges/fees on deposit accounts,
 processing fees of retail assets and cards, and fees from trade
 products. The Bank earned a profit on sale / revaluation of investments
 of Rs. 241.8 crores during the year. Foreign exchange and derivatives
 revenues grew from Rs. 280.3 crores to Rs. 319.8 crores which largely
 related to customer transactions. Of this, 80% of the revenues came
 from plain vanilla foreign exchange transactions.
 
 Operating (non-interest) expenses increased from Rs.  2,420.8 crores in
 2006-07 to Rs. 3,745.6 crores in 2007- 08, due to higher infrastructure
 and staffing expenses in relation to the expansion in the branch
 network, (including branches which were in the process of being set up
 and would be commissioned in the June 2008 quarter) and growth in the
 retail loan and credit card businesses. Operating cost to net revenues
 increased to 49.9%, from 48.6% in the corresponding year. Staff
 expenses accounted for 34.7% of non-interest expenses in 2007-08 as
 against 32.1% in 2006-07, due to an increase in staff strength and
 increase in average salary levels. A large portion of the increase has
 been in the direct sales infrastructure which stepped the pace of
 liability and card account acquisitions substantially during the year.
 Loan loss provisions and provision for standard assets increased from
 Rs. 861.0 crores to Rs. 1,216.0 crores in 2007-08 which was broadly in
 line with the increase in retail loans and the product mix across
 various loan products. The Bank also provided Rs. 264.4 -crores as
 contingent provisions for tax, legal and other contingencies.
 
 Net profit increased by 39.3% from Rs. 1,141.5 crores in 2006-07 to
 Rs.1,590.2 crores in 2007-08. Return on average net worth was lower at
 16.1% as against the previous year of 19.4% due to expansion of
 networth as a result of infusion of over Rs. 3,800 crores of capital
 during the year. The Banks basic earning per share increased from
 Rs.36.3 to Rs.46.2 per equity share.
 
 During 2007-08, the Banks total balance sheet size increased by 46.0%
 to Rs. 133,177 crores. Total Deposits increased from Rs. 68,298 crores
 (as of March 31, 2007) to Rs. 100,769 crores (as of March 31, 2008).
 With Savings account deposits at Rs. 26,154 crores and current account
 deposits at Rs. 28,760 crores, demand (CASA) deposits were around 54.5%
 of total deposits as of March 31, 2008. During 2007-08, gross advances
 grew by 35.8 % to Rs. 67,582 crores. This was driven by a growth of
 38.8% in retail advances to Rs. 39,316 crores, and an increase of 31.8%
 in wholesale advances to Rs.28,266 crores.
 
 Business Segment Update:
 
 As in the past, this year too the bank has been able to achieve healthy
 growth across various operating and financial parameters. This
 performance reflects the strength and diversity of the banks three
 primary business franchises - retail banking, wholesale banking and
 treasury, and of its disciplined approach to risk - reward management.
 
 The retail banking business continued its growth in 2007- 08. In this
 business, your Bank has positioned itself as a one-stop shop financial
 services provider, catering primarily to the middle class, mass
 affluent and high networth customers. Your Banks range of retail
 financial products and services is fairly exhaustive and includes
 deposit products of virtually all types, loans, credit cards, debit
 cards, depository (custody services), investment advisory, bill
 payments and several transactional services. Apart from its own
 products, your Bank sells third party financial products like mutual
 funds and insurance too. To provide its customers greater flexibility
 and convenience as well as to reduce servicing costs, the bank has
 invested in multiple channels - branches, ATMs, phone banking, internet
 banking and mobile banking. The success of the
 
 Banks multi-channel strategy is evidenced in the fact that almost 83%
 of customer initiated transactions are serviced through the non-branch
 channels. Your Banks data warehouse and Customer Relationship
 Management (CRM) solutions have helped it target existing and potential
 customers more effectively and cost effectively and offer them products
 appropriate to their profile and needs.  Reduced costs of acquisition
 apart, this has also led to deepening of customer relationships and
 lower credit losses.
 
 Your Banks total customer base increased to over 11.6 million. On the
 distribution side, your Bank added 77 new branches during the year to
 take the total to 761 branches (across 327 cities) as of March 2008
 from 684 branches (in 316 cities) in March 2007. 372 new ATMs were also
 added during 2007-08 taking the size of the ATM network from 1605 to
 1977. Your Banks focus on semi-urban and under-banked markets
 continued, with 58% of the Banks branches now outside the top nine
 Indian cities. Savings account deposits, which reflect the strength of
 the retail liability franchise, grew by 33.5% to Rs 26,154 crores in
 2007-08. The retail gross loan portfolio grew 38.8% to Rs 39,316 crores
 during the year.
 
 In credit cards, your Bank continued with its strategy of focusing on
 quality customer acquisitions and improving processes to reduce cycle
 times and bringing in cost efficiencies. Your Bank had 3.8 million
 cards in force as at March 2008. It has a significant presence in the
 merchant acquiring business also with the total number of point-of-
 sale (POS) terminals installed at over 61,000. On housing loans, your
 Bank continued originating home loans under its arrangement with
 Housing Development Finance Corporation with monthly home loan
 origination crossing Rs.550 crores (sanctions) by March 2008. During
 the year, the Bank did not exercise its option to take any part of the
 70% of its HDFC home loan origination that it has the right to take
 back on its books as AAA mortgage backed securities.
 
 The wholesale banking business too registered a robust growth in
 2007-08. In this business, the Bank provides its corporate and
 institutional clients a wide range of commercial and transactional
 banking products, backed by high quality service and relationship
 management. 
 
 Banks commercial banking business covers not only the top end of the
 corporate sector but also the emerging corporate segments and other
 small and medium enterprises (SMEs). The Bank now has four business
 groups catering to various SME customers with a wide range of banking
 services covering their working capital and term finance, trade
 services, cash management, foreign exchange and electronic banking
 requirements.
 
 During financial year 2007-08, growth in the wholesale banking business
 continued to be driven by new customer acquisition and higher
 cross-sell with a focus on optimizing yields and increasing product
 penetration. Your Banks cash management and vendor & distributor
 finance products continued to be an important contributor to growth in
 the corporate banking business. Your Bank further consolidated its
 position as a leading player in the cash management business (covering
 all outstation collection, disbursement and electronic fund transfer
 products across the Banks various customer segments) with volumes
 growing to over Rs. 24 trillion an increase of more than 80% over the
 volumes in FY 2006-07. Your Bank also strengthened its market
 leadership in cash settlement services for major stock exchanges and
 commodity exchanges in the country. Yet again, your Bank met the
 overall priority sector lending requirement of 40% of net bank credit
 and improved its performance in certain sub- limits where it fell short
 of the requirements.
 
 Your Bank also achieved healthy growth in its agriculture and
 micro-finance portfolios. With products including the Kisan Gold Card,
 rural supply chain initiatives and commodity finance the Bank is well
 positioned to meet its customers requirements across the entire
 agriculture financing cycle.
 
 Your Banks experience with its hub and spoke model for rural markets
 has been positive so far. Through this route, your Bank has targeted
 potential outreach locations within a certain radius of its semi-urban
 and rural branches, distributing a set of products that includes
 savings accounts, fixed deposits, two-wheeler and auto loans, kisan
 card crop loans, tractor loans and warehouse receipt loans.  The Bank
 has also rolled out special rural fixed deposit and savings account
 products.The specially designed rural savings account includes features
 such as mobile banking, net banking, instant alerts and payable-at-par
 cheque books. The Bank also has specialised Agri Desks at certain
 branches across the country which works as a single point contact for
 farmers.
 
 The Bank has relationships with 110 micro finance institutions and has
 extended credit facilities, whereby 1.61 million households have been
 beneficiaries of financial inclusion. In addition, the Bank under the
 direct SHG linkage programme, has credit-linked and financed over
 32,000 Self-Help Groups with roughly half a million households
 benefiting from this.
 
 The treasury group manages the Banks balance sheet and is responsible
 for compliance with reserve requirements and management of liquidity
 and interest rate risk. On the foreign exchange and derivatives front,
 revenues are driven primarily by spreads on customer transactions based
 on trade flows and customers hedging needs. During 2007- 08, revenues
 from foreign exchange and derivative transactions grew by 14.1% to Rs.
 319.8 crores where the revenues were distributed across large
 corporate, emerging corporate, business banking and retail customer
 segments for plain vanilla forex products and across primarily large
 corporate 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 forex 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. In the event of any
 customer default, the Bank, at the minimum, conforms to the Reserve
 Bank of India guidelines with regard to provisioning requirements for
 non-performing assets. On a conservative basis, the Bank may make
 incremental provisions based on its assessment of impairment of the
 credit. Where the Bank enters into foreign currency derivative
 contracts with its customers it lays them off in the inter-bank market
 on a matched basis. For such foreign currency derivatives, the Bank
 does not have any open positions or assume any market risks but carries
 only the counterparty credit risk (where the customer has crystallized
 or mark-to-market losses). The Bank also deals in Indian rupee
 derivatives on its own account including for the purpose of its own
 balance sheet risk management.  The Bank recognizes changes in the
 market value of all rupee derivative instruments (other than those
 designated as hedges) in the profit and loss account in the period of
 change. Rupee derivative contracts classified as hedge are recorded on
 an accrual basis.
 
 Given the regulatory requirement of holding government securities to
 meet the statutory liquidity ratio (SLR) requirement, your Bank has to
 necessarily maintain a large portfolio of government securities. While
 a significant portion of these SLR securities are held in the
 Held-to-Maturity (HTM) category, to the extent some of these are held
 in the Available for Sale (AFS) category, this enables the Bank to
 realise gains in a declining interest rate environment and exposes the
 Bank to losses or depreciation in value of investments when yields
 rise.
 
 Service Quality Initiatives
 
 Your Bank continued to seek and drive process improvement in all
 spheres of business through structured Quality Projects using Lean
 Sigma Project Management Methodology. Over 1,000 projects were executed
 during the year that resulted in substantial Cost and Turn Around Times
 reduction, and productivity and process efficiency improvement.
 
 Service Quality initiatives were refined to capture and improve upon
 real customer experiences at various touch- points. New elements were
 added and renewed improvement schemes installed to provide customer
 delight. Your Bank launched a Service Quality improvement drive for
 some of the key support departments as well.  Customer feedback was
 taken into account to introduce new services using technology to ensure
 customer convenience, secured transactions and, reduced cost of
 transactions.
 
 Your Bank plans to use this platform to drive systemic changes and
 process re-engineering using technology, Lean Six Sigma tool-kit, 5 S
 and other business excellence initiatives to further enhance customer
 experience and value to business.
 
 Risk Management & Portfolio Quality
 
 Taking on various types of risk is integral to the banking business.
 Sound risk management and balancing risk- reward trade-offs are
 therefore critical to a banks success.  Business and revenue growth
 have therefore to be weighed in the context of the risks implicit in
 the Banks business strategy. Of the various types of risks the Bank is
 exposed to, the most important are credit risk, market risk (which
 includes liquidity risk and price risk) and operational risk.  The
 identification, measurement, monitoring and management of risks remain
 a key focus area for the Bank.  For credit risk, distinct policies and
 processes are in place for the retail and wholesale businesses. In
 retail loan businesses, the credit cycle is managed through appropriate
 front-end credit, operational and collection processes. For each
 product, programs defining customer segments, underwriting standards,
 security structure etc., are specified to ensure consistency of credit
 buying patterns. Given the granularity of individual exposures, retail
 credit risk is managed 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 and reviews also facilitate mitigation and management.
 
 The Risk Monitoring Committee of the Board monitors the Banks risk
 management policies and procedures, vets treasury risk limits before
 they are considered by the Board, and reviews portfolio composition and
 impaired credits.  From an industry concentration perspective, as of
 March 31, 2008, the following table gives industry wise classification
 of the loans and investments outstanding (excluding SLR investments,
 equity shares, Bank certificate of deposits and mutual fund units).
 
                                                            (Rs.Crores)
 
                                             Funded          % to total
                                            exposure           exposure
 
 Automobiles and Auto Ancillaries              5,203              7.0% 
 Transportation                                5,144              6.9%
 Trade                                         4,111              5.5%
 Banks and Financial Institutions              3,152              4.2%
 Other Financial Intermediaries                2,644              3.6%
 Food Processing                               1,695              2.3%
 Metals and Metal Products                     1,560              2.1%
 Engineering                                   1,487              2.0%
 Other industries  2 % each of loans and 
 investments outstanding (43 industries)      16,235             21.8%
 Retail-Except where otherwise classified     33,130             44.6%
 Total                                        74,361            100.0%
 
 Note: Classification of exposure to real estate sector under Exposures
 in Sensitive Sectors (as disclosed in Notes to the Financial
 Statements) is as per the RBI guidelines. This includes not only
 exposure to borrowers in the real estate industry but also exposures to
 borrowers in other industries, where the exposures are primarily
 secured by real estate and investment in home finance institutions and
 securitisation.
 
 As of March 31, 2008, the Banks ratio of gross nonperforming assets
 (NPAs) to total customer assets was 1.29%. Net non-performing assets
 (gross non-performing assets less specific loan loss provisions,
 interest in suspense and ECGC claims received) were 0.42% of customer
 assets as of March 31, 2008. The specific loan loss provisions that the
 Bank has made for its non- performing assets continue to be more
 conservative than the regulatory requirement. The Basel Committee on
 Banking Supervision (BCBS) released the International Convergence of
 Capital Measurement & Capital Standards in June 2004, providing the New
 Framework for Capital Adequacy (Basel II). Pursuant to this Accord,
 Reserve Bank of India came out with its final guidelines in April 2007.
 In terms of these guidelines, Indian banks having operational presence
 outside India are required to migrate to the selected approaches
 (Standardised Approach for credit risk and Basic Indicator Approach for
 operational risk) with effect from March 31, 2008. All other scheduled
 commercial banks are required to migrate to these approaches no later
 than March 31, 2009. The Bank is in preparedness to adopt the above
 approaches as per the final guidelines issued in April 2007. Meanwhile,
 Reserve Bank of India has published its amendments to the final
 guidelines in March 2008. The Bank has examined these amendments and is
 in the process of reconfiguring its systems and processes to account
 for these changes.  While the Bank, to begin with, will migrate to the
 above approaches defined in the Reserve Bank of India guidelines, the
 initiatives undertaken are geared towards enabling the Bank comply with
 the standards set out for the more advanced capital approaches under
 Basel II. These initiatives include augmentation of the risk management
 systems in terms of architecture, capabilities, technology, etc., in
 areas such as ratings systems, borrower segmentation, exposure
 consolidation, risk mapping, risk estimation, capital computation, etc.
 The Bank has been investing appropriately in augmenting its risk
 management systems and capabilities. The implementation of the Basel II
 framework is in harmony with the Banks objective of adopting
 international best practices in risk management.
 
 INTERNAL AUDIT & COMPLIANCE
 
 The Bank has Internal Audit & 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 pro-actively recommends
 improvements in operational processes and service quality. To ensure
 independence, the Audit department has a reporting line to the Chairman
 of the Board of Directors and the Audit & Compliance Committee of the
 Board and only indirectly to the Managing Director. To mitigate
 operational risks, the Bank has put in place extensive internal
 controls including restricted access to the Banks computer systems,
 appropriate segregation of front and back office operations and strong
 audit trails.  The Audit & Compliance Committee of the Board also
 reviews the performance of the Audit & Compliance functions and reviews
 the effectiveness of controls and compliance with regulatory
 guidelines.
 
 SOCIAL INITIATIVES
 
 In keeping with the HDFC Group philosophy, your Bank has always
 believed in making a difference to society at large. As a responsible
 corporate citizen, it has been your Banks vision to empower the
 community through socio- economic development of underprivileged and
 weaker sections of society. During 2007-08 your Bank further
 intensified its efforts in this direction. Most of the Banks social
 activities revolve around educational initiatives (including school
 adoption projects, educational sponsorships of girl children, primary
 education to first generation learners etc.) and initiatives in the
 field of livelihood training and support. In the latter area, the Bank
 has been working with NGOs in providing non-formal vocational and
 technical education programs as well as skill up gradation courses to
 enable sustainable employment and income generation for economically
 weaker sections.  To further integrate some of its Corporate Social
 Responsibility (CSR) initiatives with its banking operations, the Bank
 has started outsourcing some non-core back office operations to certain
 small semi-urban locations.  This creates jobs for the local educated
 youth in those towns with obvious gains for the families (as the youth
 is gainfully employed without having to relocate to distant cities) and
 also gives a boost to the local economy in those locations.
 
 Where relevant, the Bank coordinates its CSR activities with its
 microfinance and self - help group (SHG) financing.  The Bank has
 relationships with 110 micro finance institutions and has extended
 credit facilities, whereby 1.61 million households have been
 beneficiaries of financial inclusion. In this regard, your Bank has
 also appointed around 150 NGOs across the country as business
 correspondents (BCs) to provide SHG - Bank linkage to help tribals,
 physically challenged, beggars, etc. to earn a livelihood and join the
 mainstream. The Bank under the direct SHG linkage programme, has credit
 linked over 32,000 SHGs and thereby roughly another half a million
 households have been brought under Financial Inclusion.
 
 Employees are a key part of your Banks social initiatives and are
 encouraged to participate in these activities, contributing their time
 and skills. The Bank also administers a payroll-giving programme
 whereby employees offer deductions from their salary to donate for
 specified charities or social causes of their choice and the Bank
 contributes an equivalent amount.
 
 HUMAN RESOURCES
 
 The Banks staffing-needs continued to increase during the year
 particularly in the retail banking and SME businesses in line with the
 business growth. Total number of employees increased from 21,477 as of
 March 31,2007 to 37,836 as of March 31, 2008. The Bank continues to
 focus on training its employees on a continuing basis, both on the job
 and through training programs conducted by internal and external
 faculty. The Bank has consistently believed that broader employee
 ownership of its shares has a positive impact on its performance and
 employee motivation. The Banks employee stock option scheme so far
 covers around 6,535 employees.
 
 STATUTORY DISCLOSURES
 
 The information required under Section 217(2A) of the Companies Act,
 1956 and the rules made there under, are given in the annexure appended
 hereto and forms part of this report. In terms of section 219(1 )(iv)
 of the Act, the Report and Accounts are being sent to the shareholders
 excluding the aforesaid annexure. Any shareholder interested in
 obtaining a copy of the said annexure may write to the Company
 Secretary at the Registered Office of the Bank. The Bank had 37,836
 employees as on March 31, 2008. Three hundred twenty six employees
 employed throughout the year were in receipt of remuneration of more
 than Rs. 24.0 lacs per annum and fifty employees employed for part of
 the year were in receipt of remuneration of more than Rs. 2.0 lacs per
 month.
 
 The provisions of Section 217(1)(e) of the Act relating to conservation
 of energy and technology absorption do not apply to your Bank. The Bank
 has, however, used information technology extensively in its
 operations.
 
 The report on the Corporate Governance is annexed herewith and forms
 part of this report.
 
 RESPONSIBILITY STATEMENT
 
 The Board of Directors hereby state that
 
 i) in the preparation of the annual accounts, the applicable accounting
 standards have been followed along with proper explanation relating to
 material departures;
 
 ii) we have selected such accounting policies and applied them
 consistently and made judgments and estimates that are reasonable and
 prudent so as to give a true and fair view of the state of affairs of
 the Bank as on March 31, 2008 and of the profit of the Bank for the
 year ended on that date;
 
 iii) we have taken proper and sufficient care for the maintenance of
 adequate accounting records in accordance with the provisions of the
 Companies Act, 1956 for safeguarding the assets of the Bank and for
 preventing and detecting frauds and other irregularities;
 
 iv) we have prepared the annual accounts on a going concern basis.
 
 DIRECTORS
 
 Mr. Keki Mistry, Mrs. Renu Karnad and Mr. Vineet Jain will retire by
 rotation at the ensuing Annual General Meeting and are eligible for
 re-appointment.
 
 The Board at its meeting held on October 12, 2007, appointed Mr. Harish
 Engineer and Mr. Paresh Sukthankar as Additional Directors as well as
 Executive Directors of the Bank subject to the approval of the
 shareholders and the Reserve Bank of India. The Bank sought the
 approval of shareholders by way of postal ballot for the appointment of
 Mr. Engineer and Mr. Sukthankar as Executive Directors of the Bank. As
 per the scrutinizers report, both the ordinary resolutions were
 approved by the shareholders with the requisite majority effective
 December 10, 2007.
 
 The brief resume/details relating to Directors who are to be
 appointed/re-appointed are furnished in the report on Corporate
 Governance.
 
 AUDITORS
 
 The Auditors M/s. Haribhakti & Co., 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 on remuneration to be decided by the Audit and
 Compliance Committee of the Board.
 
 ACKNOWLEDGEMENT
 
 Your Directors would like to place on record their gratitude for all
 the guidance and co-operation received from the Reserve Bank of India
 and other government and regulatory agencies. Your Directors would also
 like to take this opportunity to express their appreciation for the
 hard work and dedicated efforts put in by the Banks employees and look
 forward to their continued contribution in building a World Class
 Indian Bank.
 
                                    On behalf of the Board of Directors
 
                                                 Jagdish Capoor
                                                       Chairman
 
 Mumbai, April 24,2008