Housing Development Finance Corporation

The directors are pleased to present the Thirty-first Annual Report of
 your Corporation with the audited accounts for the year ended March 31,
 2008.
 
 Financial Results
 
                                              For the           For the
                                           year ended        Year ended
                                       March 31, 2008    March 31, 2007
                                      (Rs. in crores)   (Rs. in crores)
 
 Profit before Tax and Exceptional Items     2,737.24          1,934.80
 Exceptional Items - Profit on 
 Sale of Investments -
 Subsidiaries & Associates                     636.26             32.98
 Profit before Tax                           3,373.50          1,967.78
 Provision for Tax                             935.00            395.00
 Provision for Fringe Benefit Tax                2.25              2.40
 Profit after Tax                            2,436.25          1,570.38
 Appropriations have been made as under:
 Special Reserve No. II                        355.00            466.00
 General Reserve                               999.47            368.17
 Additional Reserve (under Section 29C of the
 National Housing Bank Act, 1987)              245.00             80.00
 Shelter Assistance Reserve                      6.00              5.00
 Proposed Dividend (at Rs. 25 per share)       710.10            556.61
 Additional Tax on Dividend                    120.68             94.60
                                             2,436.25          1,570.38
 
 Dividend
 
 Your directors recommend payment of dividend for the year ended March
 31, 2008 of Rs. 25 per share as against Rs. 22 per share for the
 previous year.
 
 Preferential Allotment of Equity Shares
 
 In order to fund its growth, the shareholders of HDFC Bank Limited
 (HDFC Bank) had granted approval to raise equity of up to US$ 1 billion
 through inter alia American Depository Shares. HDFC, in order to retain
 its shareholding on the enhanced capital base of HDFC Bank, was
 required to invest further sums in the equity of HDFC Bank. HDFC
 Standard Life Insurance Company Limited (HDFC-SL) also has been
 increasing its capital base from time to time to fund its growth. HDFC
 therefore on a continuing basis, has to contribute its share of equity
 to fund the growth of its subsidiaries and associate companies and
 accordingly proposed a preferential offer of equity shares.
 
 Pursuant to your approval at the last Annual General Meeting (AGM), the
 Corporation completed the issue and allotment of 1,80,00,000 equity
 shares of Rs. 10 each on a preferential basis, at a price of Rs. 1,730
 per equity share, in accordance with Chapter XIII of the Securities and
 Exchange Board of India (Disclosure and Investor Protection)
 Guidelines, 2000. Of the said issue, 1,52,50,000 equity shares were
 subscribed by the Carlyle Group through CMP Asia Limited and the
 balance 27,50,000 equity shares were subscribed by Citigroup Strategic
 Holdings Mauritius Limited.
 
 Lending Operations
 
 Loan approvals during the year were Rs. 42,520 crores as compared to
 Rs. 33,332 crores in the previous year, representing a growth of 28%.
 Loan disbursements during the year were Rs. 32,875 crores as against
 Rs. 26,178 crores in the previous year, representing a growth of 26%.
 
 Cumulative loan approvals and disbursements as at March 31, 2008 were
 Rs. 1,88,284 crores and Rs. 1,52,156 crores respectively. This is in
 respect of over three million housing units.
 
 Individual loan business continued to be robust backed by strong
 demand, rising disposable incomes and continued fiscal incentives on
 housing loans. In value terms, individual loan approvals and
 disbursements registered a growth of 28% and 26% respectively over the
 previous year. The average size of individual loans stood at Rs. 14
 lacs.
 
 Purchase and Sell-Down of Loans
 
 During the year, the Corporation purchased individual loan portfolios
 from various originators amounting to Rs. 1,147 crores.  These loans
 were purchased after the Corporation undertook due diligence and
 cherry-picked the retail loan portfolios. The assignment of all right,
 title and interest, along with the underlying security of the purchased
 portfolios are in favour of the Corporation.
 
 The Corporation also sold a part of its loan portfolio amounting to Rs.
 550 crores. These loans have been assigned to the purchasers.  The
 Corporation, however, continues to hold the security of these loans on
 a pari passu basis with the purchaser.
 
 Mortgage-Backed Securities (MBS)
 
 During the year, the Corporation did not enter into any fresh
 securitisation transactions. The total MBS outstanding as at March 31,
 2008 stood at Rs. 2,071 crores. HDFC continues to service the loans
 sold under the MBS issues.  These issues carry a rating indicating the
 highest degree of safety. To date, loans aggregating to Rs. 3,610
 crores have been sold by the Corporation through the issue of MBS.
 
 Repayments
 
 During the year under review, Rs. 15,819 crores were received by way of
 scheduled repayment of principal through monthly instalments as well as
 redemptions ahead of schedule, as compared to Rs. 13,589 crores
 received last year.
 
 Loan Portfolio
 
 As at March 31, 2008, the loan book stood at Rs. 72,998 crores as
 against Rs. 56,512 crores in the previous year - an increase of 29%.
 
 The loan portfolio (including loans outstanding, deposits and
 investments in debentures for financing real estate related projects)
 as at March 31, 2008 amounted to Rs. 74,104 crores as against Rs.
 57,988 crores in the previous year, representing an increase of 28%.
 
 Foreign Currency Convertible Bonds (FCCB)
 
 In September 2005, the Corporation concluded the issue of US$ 500
 million zero coupon FCCB.  The bonds are convertible at any time into
 equity shares of the Corporation of the face value of Rs.10 each up to
 July 29, 2010 at the optioriof the holders, at Rs.1,399 per equity
 share, representing a conversion premium of 50% over the initial
 reference share price. The premium payable on redemption of the bonds
 is charged to the Securities Premium Account over the life of the
 bonds.
 
 As at March 31, 2008, the Corporation allotted 1,19,33,410 equity
 shares of Rs. 10 each pursuant to the conversion of the FCCB,
 representing 76.4% of the bonds.
 
 If the balance bonds are not converted within the above-mentioned
 conversion period, the remaining bondholders would have the right to
 redeem the outstanding bonds on September 27, 2010 at a yield to
 maturity of 4.62% per annum.
 
 Resource Mobilisation
 
 Subordinated Debt
 
 The Corporation did not issue any subordinated debt during the year. As
 at March 31, 2008, the Corporations outstanding subordinated debt
 stood at Rs. 1,375 crores.  The debt is subordinated to present and
 future senior indebtedness of the Corporation and has been assigned the
 highest rating by CRISIL and ICRA. Based on the balance term to
 maturity, as at March 31, 2008, Rs. 1,215 crores of the book value of
 subordinated debt is considered as Tier II under the guidelines issued
 by the National Housing Bank (NHB) for the purpose of capital adequacy
 computation.
 
 Non-Convertible Debentures (NCD)
 
 During the year, the Corporation issued NCDs amounting to Rs.16,245
 crores on a private placement basis. The Corporations NCD issues have
 been listed on the Wholesale Debt Market segment of the National Stock
 Exchange of India Limited (NSE). The Corporations NCDs have been
 assigned the highest rating of AAA by both CRISIL and ICRA.  As at
 March 31,2008, NCDs outstanding stood at Rs. 32,553 crores.
 
 Loans from Banks
 
 During the year, the Corporation raised loans amounting to Rs. 8,803
 crores from commercial banks, of which Rs. 3,867 crores were under the
 priority sector category of commercial banks. The Corporation further
 raised Rs. 2,860 crores from the banking sector as FCNR (B) loans.
 
 Refinance from NHB
 
 NHB has an internal rating mechanism for housing finance companies
 (HFCs) and the Corporation has been assigned the highest rating for its
 refinance schemes by NHB. During the year, the Corporation has drawn
 refinance amounting to Rs. 650 crores under NHBs Refinance Scheme to
 Housing Finance Companies, 2003.
 
 Deposits
 
 Despite strong competition from banks and mutual funds, growth in
 deposits continued during the financial year under review. As at March
 31,2008, outstanding deposits stood at Rs. 11,296 crores as against Rs.
 10,384 crores in the previous year. The depositor base stood at
 approximately 8 lac depositors.
 
 CRISIL and ICRA have for the thirteenth consecutive year, reaffirmed
 their AAA rating for HDFCs deposits. This rating represents highest
 safety as regards timely repayment of principal and interest.
 
 The support of the agents and their commitment to the Corporation has
 been instrumental in HDFCs deposit products continuing to be a
 preferred investment for households and trusts.
 
 Unclaimed Deposits
 
 As of March 31, 2008 public deposits amounting to Rs. 125.32 crores had
 not been claimed by 29,656 depositors. Since then, 4,646 depositors
 have claimed or renewed deposits of Rs. 23.97 crores. Depositors were
 intimated regarding the maturity of deposits with a request to either
 renew or claim their deposits.
 
 As per the provisions of Section 205C of the Companies Act, 1956,
 deposits remaining unclaimed for a period of seven years from the date
 they became due for payment have to be transferred to the Investor
 Education and Protection Fund (IEPF) established by the Central
 Government. Accordingly, during the year, an amount of Rs. 29.68 lacs
 has been transferred to the IEPF.
 
 KfW Lines/Grant
 
 During the year, HDFC approved 16 new schemes under the KfW
 Entwicklungsbank (KfW) lines in the area of low-income housing and
 micro-finance by way of financial intermediation to partner
 non-government organisations (NGOs) and micro-finance institutions
 across India. The ensuing projects are administered as group or
 individual loans designed for the economically .weaker sections (EWS)
 of society to improve their access to institutional credit. The total
 disbursements towards such schemes for the year under review stood at
 Rs. 22.06 crores.
 
 These schemes have been approved out of the third line from KfW, of
 Euro 15.3 million, and partly by way of redeployment of the
 micro-finance component of Euro 6 million, which stands fully utilised
 as at March 31,2008.  Against the cumulative loan approvals of Rs.
 79.56 crore, HDFC has disbursed Rs. 76.58 crores as at March 31, 2008.
 
 During the year, KfW has earmarked an amount of Euro 1.22 million
 arising from the fourth line of grant towards EWS housing schemes.
 
 Non-Performing Loans
 
 Gross non-performing loans defined as loans where the instalments are
 outstanding for more than 90 days as at March 31, 2008 amounted to Rs.
 621.01 crores. This is equivalent to 0.84% of the portfolio (as against
 0.92% in the previous year) comprising loans as well as debentures
 issued by corporates and corporate deposits placed for financing their
 real estate projects.
 
 Based on a six months overdue basis, the non- performing loans as at
 March 31, 2008 stood at 0.68% of the loan portfolio as against 0.77% in
 the previous year.
 
 In terms of the prudential norms as stipulated by NHB, the Corporation
 is required to carry a provision of Rs. 224.91 crores in respect of
 non-performing assets and general provision on outstanding standard
 non-housing loans.
 
 The balance in the provision for contingencies account as at March 31,
 2008 stood at Rs. 470.30 crores, which is equivalent to 0.63% of the
 portfolio.
 
 The Securitisation and Reconstruction of Financial Assets and
 Enforcement of Security Interest Act, 2002 (SARFAESI) has proved to be
 a useful recovery tool and the Corporation has been able to
 successfully initiate recovery action under this Act in the case of
 wilful individual and corporate defaulters.
 
 Regulatory Guidelines/Amendments
 
 HDFC has complied with the Housing Finance Companies (NHB) Directions,
 2001 prescribed by NHB regarding accounting standards, prudential norms
 for asset classification, income recognition, provisioning, capital
 adequacy, concentration of credit, credit rating and capital market
 exposure other than on its investment in HDFC Bank. The Corporation has
 made a representation to NHB requesting for exemption of its
 investment, as a promoter in HDFC Bank from the capital market exposure
 limits.
 
 During the year under review, the risk weight for individual housing
 loans below Rs. 20 lacs was reduced from 75% to 50% while those above
 Rs. 20 lacs continued to carry a risk weight of 75%. The risk weight on
 commercial real estate loans is 150%.
 
 HDFCs capital adequacy ratio stood at 16.8% of the risk weighted
 assets, as against the minimum requirement of 12%. Tier I capital was
 14.6% against a minimum requirement of 6%.
 
 Know Your Customer (KYC) Guidelines, Anti Money Laundering (AML)
 Standards and Fair Practices Code
 
 NHB has issued comprehensive KYC and AML guidelines in the context of
 recommendations made by the Financial Action Task Force on Anti Money
 Laundering Standards and on Combating Financing of Terrorism Standards.
 In accordance with the guidelines set out by NHB, the Corporation has
 put in place a policy framework on KYC and AML measures, as approved by
 the Board of Directors. During the year, the Corporation has adhered to
 the KYC and AML guidelines and has complied with the requirements of
 monitoring and reporting cash/suspicious transactions.
 
 The Fair Practices Code framed by NHB seeks to promote good and fair
 practices by setting minimum standards in dealing with customers,
 increase transparency so customers have a better understanding of what
 they can reasonably expect of the services being offered, encourage
 market forces through competition to achieve higher operating
 standards, promote fair and cordial relationship between customers and
 the housing finance company and foster confidence in the housing
 finance system. During the year, the Corporation has adhered to the
 Fair Practices Code as approved by the Board of Directors.
 
 Risk Management Framework
 
 The Corporation has a Risk Management Framework, which lays the
 procedures for risk assessment and mitigation. The Risk Management
 Committee (RMC) of the Corporation comprises the Joint Managing
 Director as the chairperson and members include senior management
 heading key functions of the Corporation. The RMC reviews key risks
 associated with the business of the Corporation, its root causes and
 the efficacy of the measures in place to mitigate the same. The Board
 of Directors also reviews the procedures adopted by the Corporation to
 assess risks and their mitigation mechanisms.
 
 Marketing and Distribution
 
 In line with the ethos of the Corporation which is to reach out to its
 customers and set the highest possible service standards, HDFC has
 further reinforced its existing distribution network. The distribution
 network now spans 250 outlets, which include 52 offices of the
 Corporations wholly owned distribution company, HDFC Sales Private
 Limited (HSPL).  In addition, HDFC covers over 90 locations through
 outreach programmes. This marketing and distribution strength of HDFC
 caters to customers in over 2,400 locations across the country. HDFC
 also has an office in London and Dubai and service associates in
 Kuwait, Qatar, Sharjah, Abu Dhabi and Saudi Arabia - Al Khobar, Jeddah
 and Riyadh.
 
 Besides the existing office network, HDFCs sales force is augmented
 through distribution channels which include HSPL, HDFC Bank and third
 party direct selling associates (DSAs).  These channels only source
 loans, while HDFC continues to retain control over the credit, legal
 and technical appraisal, ensuring no compromise on the quality of loans
 disbursed.
 
 During the year, HDFC launched two major advertising campaigns. Asset
 Plus was launched primarily to create awareness about home equity
 loans. The second campaign was Empowerment, which highlights the fact
 that the Corporations employees are empowered to deploy all resources
 available to them to provide professional services to customers.
 
 In order to cater to various segments of- customers, having unique
 requirements and constraints, HDFC emphasised on thematic exhibitions
 and property fairs like the Budget Home Show at Ghaziabad and Kalyan,
 Emerging Nashik at Nashik, NRI Home Land offered in Coimbatore,
 Salem, Erode and Palakkad for non-resident Indians, amongst several
 others.
 
 Road shows were organised in Dubai, Singapore and London to showcase
 properties of leading Indian developers in various cities for NRIs
 based at these locations.
 
 Cross Selling and Distribution of Financial Products and Services
 
 HDFCs subsidiary companies have strong synergies with HDFC and hence
 efforts are channelled into cross selling so as to offer customers a
 wide range of financial products and services under the HDFC brand.
 
 HDFC is a Composite Corporate Agent for HDFC Standard Life Insurance
 Company Limited (HDFC-SL) and HDFC ERGO General Insurance Company
 Limited (HDFC-ERGO).
 
 International Housing Finance Initiatives
 
 HDFCs expertise in housing finance is well regarded and therefore a
 number of existing and new housing finance companies in various parts
 of the world are keen to tap HDFC for training, strategic input and
 technical assistance in housing finance.
 
 During the year, senior executives of the Corporation were invited to
 Germany, Ghana, Indonesia, Kenya, Maldives, Mauritius, Pakistan,
 Rwanda, Turkey and Uganda for seminars, consultancy or training
 assignments in housing finance.
 
 In November 2007, the Corporation conducted an international training
 programme on Housing Finance Management at its training centre,
 Centre for Housing Finance, located at Lonavla, India. Participants
 from fourteen countries across Asia and Africa attended a week-long
 residential training programme. In addition, some participants attended
 a hands-on attachment programme at the Corporations offices. HDFC also
 conducted a dedicated programme on housing finance for a delegation of
 senior executives from Indonesia at its training centre. Delegates from
 Germany, Maldives, Russia and Saudi Arabia visited the Corporation to
 study its operations and review the Indian mortgage market.
 
 Shelter Assistance Reserve (SAR)
 
 The Shelter Assistance Reserve continued its function of participating
 in and supporting diverse and meaningful development projects across
 the country. The year under review saw a total of Rs. 5.43 crores being
 utilised towards accomplishing HDFCs social objectives through a
 variety of programmes initiated by local institutions, NGOs and trusts.
 
 During the year, HDFC contributed to the corpus of The National
 Association for the Blind, Childline India Foundation, The Research
 Society and The Shraddha Rehabilitation Foundation, among several
 others. Some of the developmental initiatives where HDFC also extended
 support include the Nanhi Kali Project for supporting the education of
 the girl child in Chhattisgarh, Concern India Foundation towards a
 medical services programme for senior citizens in Hyderabad, the Tata
 Institute of Social Sciences for an education initiative for tribal
 children in Thane and for a health-care and awareness programme in six
 slum clusters in New Delhi.
 
 Training and Human Resource Management
 
 HDFC has always maintained that its talent pool needs to be engaged in
 a process of continuous learning. Given the changing business
 environment, the challenge is to consistently revisit knowledge, skills
 and attitudes required for performance of specific roles.
 
 During the current year, besides the induction training for management
 trainees and new officers, specific programmes were designed for staff
 members in lending operations, accounts, recoveries, secretarial, legal
 and deposits. These training programmes are conducted by in-house
 facilitators.
 
 Other internally conducted programmes include executive development,
 managerial skills, mentoring and leadership programme conducted for
 employees heading service centre. Selling and negotiation skills
 programmes have also been offered to executives of HDFCs channel
 partners who originate loans for the Corporation.
 
 HDFC nominated staff members for external programmes on real estate,
 housing finance, valuation, risk management, treasury management,
 information technology, quality,, service management, leadership, brand
 management, accounting standards and taxation, micro-finance, corporate
 governance and corporate social responsibility.
 
 Awards and Recognitions
 
 During the year, some of the awards and recognitions received by the
 Corporation include:
 
 Best Indian company in the Financial Institutions/Non-Banking
 Financial Companies/ Financial Services category at the Dun &
 Bradstreet - American Express Corporate Awards, 2007.
 
 Best Investment Management in India at the EUROMONEY 2007 Real Estate
 Awards.
 
 Ranked amongst Indias top three best managed companies by FinanceAsia,
 2007.
 
 Ranked third amongst the Asian Banking and Finance Sector for Highest
 Return on Equity by Asiamoney.
 
 As regards the Corporations marketing initiatives, HDFC ranked amongst
 the top 10 most valued Indian brands by 4Ps Business & Marketing, 2007.
 In addition, the Corporation was awarded the Consumer
 Superbrandstatus.
 
 Subsidiary Companies
 
 In terms of Section 212(8) of the Companies Act, 1956, the Central
 Government has granted its approval, exempting the Corporation from the
 requirement of attaching to its annual report, the balance sheet,
 profit and loss account and the report of the directors and auditors
 thereon, in respect of all its thirteen subsidiary companies.
 Accordingly, a copy of the balance sheet, profit and loss account,
 report of the Board of Directors and Report of the Auditors of the
 following subsidiary companies of the Corporation - HDFC Developers
 Limited, HDFC Investments Limited, HDFC Holdings Limited, HDFC Asset
 Management Company Limited,, HDFC Trustee Company Limited, HDFC Realty
 Limited, HDFC Standard Life Insurance Company Limited, HDFC ERGO
 General Insurance Company Limited, GRUH Finance Limited, HDFC Sales
 Private Limited, HDFC Ventures Trustee Company Limited, HDFC Venture
 Capital Limited and HDFC Property Ventures Limited, have not been
 attached to the balance sheet of the Corporation for the financial year
 ended March 31, 2008.
 
 The Annual Report of the Corporation, the annual accounts and the
 related documents of the Corporations subsidiary companies are posted
 on the website of the Corporation, www.hdfc.com. Shareholders who wish
 to have a copy of the annual accounts and detailed information on any
 subsidiary company can download the same from the website or may write
 to the Corporation for the same. Further, the said documents shall be
 available for inspection by the shareholders at the registered office
 of the Corporation and at the office of the respective subsidiary
 company.
 
 The Corporation has not made any loans or advances in the nature of
 loans to any of its subsidiary or associate company or companies in
 which its directors are interested, other than in the ordinary course
 of business.
 
 Review of Key Subsidiary and Associate Companies
 
 HDFC Bank Limited (HDFC Bank)
 
 In light of the strong and continued growth of HDFC Bank and to meet
 the changing regulatory requirements, during the year, HDFC Bank
 enhanced its share capital through a preferential allotment to your
 Corporation aggregating Rs. 1,390 crores and through a public offering
 of American Depository Shares on the New York Stock Exchange
 aggregating to Rs. 2,393 crores.
 
 During the year, net advances of HDFC Bank grew by 35% to Rs. 63,427
 crores. This was driven by a growth of 39% in retail advances and an
 increase of 30% in wholesale advances.  Expansion in the distribution
 network was stepped up with the number of branches (including extension
 counters) increasing from 684 (in 320 cities) to 761 (in 327 cities).
 
 For the year ended March 31,2008, HDFC Bank reported a profit after tax
 of Rs. 1,590 crores as against Rs. 1,142 crores in the previous year,
 representing an increase of 39%. HDFC Bank recommended a dividend of
 85% as against 70% in the previous year.
 
 HDFC and HDFC Bank continue to maintain an arms length relationship in
 accordance with the regulatory framework. Both organisations, however,
 capitalise on the strong synergies through a system of referrals,
 special arrangements and cross selling in order to effectively provide
 a wide range of products and services under the HDFC brand name.
 
 As at March 31, 2008, HDFC together with its wholly owned subsidiaries,
 HDFC Investments Limited and HDFC Holdings Limited holds 23.27% of the
 equity share capital of HDFC Bank.
 
 The shareholders of HDFC Bank have approved the Scheme of Amalgamation
 of Centurion Bank of Punjab Limited (CBoP) with HDFC Bank, subject to
 the receipt of the requisite approvals of the authorities. The share
 swap ratio is one equity share of Rs. 10 each of HDFC Bank for every
 twenty-nine equity shares of Re. 1 each of CBoP.
 
 In the event of the amalgamation, for HDFC as a promoter to retain its
 present shareholding of 23.27% on the enhanced capital base of HDFC
 Bank, the shareholders of HDFC Bank at the EGM approved the issue of
 equity shares and/or convertible instruments such as warrants
 convertible into equity shares at a price of Rs. 1,530.13 per equity
 share, for cash, on a preferential allotment basis in accordance with
 Chapter XIII of the SEBI (Disclosure & Investor Protection) Guidelines,
 2000, to the Corporation and/or any of its wholly owned subsidiary
 companies.
 
 HDFC Standard Life Insurance Company Limited (HDFC-SL)
 
 During the year, the Corporation and Standard Life Assurance Co. plc
 (SLAC) realigned their shareholding in HDFC-SL with HDFC selling 7.15%
 of the equity of HDFC-SL to Standard Life (Mauritius Holdings) 2006
 Limited at a price based on a pre-agreed basis. The Corporation
 realised a profit of Rs. 120.94 crores on the sale of this investment.
 Standard Life (Mauritius Holdings) 2006 Limited now holds 26% of the
 equity capital of HDFC-SL, which is the maximum allowed under the
 present regulations. SLAC and HDFC have also agreed that any future
 sale of shares by HDFC to Standard Life (Mauritius Holdings) 2006
 Limited, if and when permitted by law would be at a fair value.
 
 Gross premium income of HDFC-SL for the year ended March 31,2008 stood
 at Rs. 4,859 crores as compared to Rs. 2,856 crores in the previous
 year - a growth of 70%. The cumulative sum assured in respect of
 policies issued increased to Rs. 87,439 crores from Rs. 67,193 crores
 last year.
 
 The company has a portfolio of 20 retail products and 5 group products
 covering saving, investment, protection and retirement needs of the
 customers, along with five optional rider benefits.
 
 HDFC-SL covers over 450 cities and towns in India through its 572
 distribution points in the country with over 1,45,000 financial
 consultants appointed by the company. HDFC- SL also has 379 corporate
 agents and other sales intermediaries including banks for distribution
 of insurance products.
 
 HDFC-SL has reported a loss of Rs. 243.51 crores for the year ended
 March 31, 2008. Like most life insurance companies in the initial
 phase, HDFC-SL has reported losses. This is essentially due to the
 accounting norms applicable to insurance companies wherein the
 commission expenses are charged upfront in the year in which they are
 incurred while the corresponding income is recognised over the entire
 life of the policies issued. The mismatch between expenses and income
 has the effect of magnifying the initial losses of HDFC-SL,
 
 HDFC holds 72.56% of the equity share capital in HDFC-SL.
 
 HDFC Asset Management Company Limited (HDFC-AMC)
 
 During the year under review, HDFC increased its stake in HDFC-AMC by
 acquiring 9.90% from Standard Life Investment Limited (SLI), the
 investment arm of SLAC for an aggregate consideration of Rs. 181.91
 crores. Your Corporation and SLI remain co-sponsors of HDFC Mutual
 Fund.
 
 As at March 31, 2008, HDFC-AMC managed 34 debt and equity oriented
 schemes of HDFC Mutual Fund. The total assets under management as at
 March 31, 2008 stood at Rs. 62,747 aores, (which is inclusive of Rs.
 16,537 crores of assets under discretionary portfolio
 management/advisory services), as compared to Rs. 36,421 crores in the
 previous year. The number of investor accounts increased to over 30
 lacs as at March 31,2008 as compared to 21 lacs in the previous year.
 
 As at March 31,2008, HDFC-AMC has points of acceptances in 135
 locations across the country.
 
 For the year ended March 31,2008, HDFC-AMC reported a profit after tax
 of Rs. 117.74 crores as against Rs. 67.54 crores in the previous year,
 representing a growth of 74%. HDFC-AMC recommended a final dividend of
 150% as against a total dividend of 100% in the previous year.
 
 HDFC holds 60% of the equity share capital of HDFC-AMC.
 
 HDFC ERGO General Insurance Company Limited (HDFC-ERGO)
 
 In May 2007, HDFC acquired the entire 26% shareholding of Chubb Global
 Financial Services Corporation, USA in HDFC Chubb General Insurance
 Company Limited and consequently, the company became a 100% subsidiary
 of HDFC. The company was renamed HDFC General Insurance Company
 Limited.
 
 In October 2007, HDFC and ERGO International AG (ERGO), the primary
 insurance entity of Munich Re Group (Germany) entered into a joint
 venture, whereby HDFC sold a 26% equity stake of the company to ERGO,
 realising a profit of Rs. 202.07 crores. As a result of this new joint
 venture, the company is now called HDFC ERGO General Insurance Company
 Limited.
 
 During the year, the Corporation subscribed to the rights issue of
 HDFC-ERGO amounting to Rs. 18.5 crores.
 
 HDFC-ERGO offers motor insurance, commercial insurance, home insurance,
 group and retail accident and travel insurance and specialty insurance
 products.
 
 Gross Written Premium for the year stood at Rs. 239.69 crores. While
 motor insurance accounts for a major share in the overall business, the
 company continues to diversify its business mix in favour of other
 products.
 
 HDFC-ERGO distributes its products through its 28 branches across India
 and has an active agency and broker network. The company also continues
 to leverage on HDFCs distribution capability to drive retail sales
 growth.
 
 During the year, the company made a loss of Rs. 17 crores. The loss for
 the year under review was primarily on account of a reduction in the
 premium rates due to de-tariffing and share of loss in Indian Third
 Party Motor Pool.
 
 HDFC holds 74% of the equity share capital of HDFC-ERGO.
 
 HDFC Property Funds
 
 HDFC Venture Capital Limited (HVCL) is the investment manager to HDFC
 Property Fund, a registered venture capital fund with the Securities
 and Exchange Board of India (SEBI).
 
 HDFC Property Fund currently has two schemes. The first scheme is HDFC
 India Real Estate Fund (HI-REF), with a corpus of Rs. 1,000 crores,
 which has been fully invested. The scheme has made investments in
 unlisted equity and equity-linked instruments of companies engaged in
 real estate activities such as large mixed developments, IT parks,
 residential projects and commercial offices.  During the year, HI-REF
 also successfully divested from one of the investments.
 
 The second scheme, HDFC IT Corridor Fund has a corpus of Rs. 446.40
 crores. This scheme has disbursed the entire corpus in rental income
 yielding commercial properties in major cities in India.
 
 During the year, HVCL made a profit after tax of Rs. 12.46 crores as
 compared to Rs. 11.35 crores in the previous year.
 
 HDFC holds 80.5% of the equity share capital of HVCL.
 
 HDFC Property Ventures Limited provides investment advisory services to
 overseas asset management companies (AMCs)/entities. Such AMCs/entities
 in turn manage and advise offshore private equity funds, having funds
 under management in excess of USD 800 million.
 
 HDFC holds 100% of the equity share capital of HDFC Property Ventures
 Limited.
 
 GRUH Finance Limited (GRUH)
 
 GRUH is a housing finance company with operations primarily in the
 states of Gujarat and Maharashtra and is now expanding its network to
 other states like Kamataka, Madhya Pradesh, Rajasthan and Chhatisgarh.
 
 During the year, GRUH disbursed loans amounting to Rs. 632.29 crores as
 against Rs. 474.21 crores in the previous year, representing a growth
 of 33%.
 
 For the year ended March 31, 2008, GRUH reported a profit after tax of
 Rs. 42.34 crores as compared to Rs. 29.61 crores in the previous year -
 an increase of 43%. The company recommended a dividend of 40% as
 compared to 30% in the previous year.
 
 HDFCs holding in GRUH currently stands at 61.5%.
 
 HDFC Sales Private Limited (HSPL)
 
 Home Loan Services India Private Limited was renamed as HDFC Sales
 Private Limited (HSPL) in order for customers to be able to identify
 with the HDFC brand. HSPL continues to strengthen the Corporations
 marketing and sales efforts by providing a dedicated sales force to
 sell home loans and other financial products.
 
 HSPL has a presence in 52 locations. During the period under review,
 HSPL sourced loans accounting for 40% of individual loans disbursed by
 HDFC.
 
 HSPL is a wholly owned subsidiary of HDFC.
 
 Particulars of Employees
 
 HDFC had 1,445 employees as of March 31, 2008 (previous year 1,388).
 During the year, 24 employees employed throughout the year and 1
 employee employed for part of the year were in receipt of remuneration
 of Rs. 24 lacs or more per annum.
 
 In accordance with the provisions of Section 217(2A) of the Companies
 Act, 1956 and the rules framed thereunder, the names and other
 particulars of employees are set out in the annex to the Directors
 Report. In terms of the provisions of Section 219(1)(b)(iv) of the
 Companies Act, 1956, the Directors Report is being sent to all the
 shareholders of the Corporation excluding the annex. Any shareholder
 interested in obtaining a copy of the said annex may write to the
 company secretary at the registered office of the Corporation.
 
 Employees Stock Option Scheme (ESOS)
 
 Presently, stock options granted to the employees operate under three
 schemes, namely ESOS-02, ESOS-05 and ESOS-07.
 
 ESOS-02 and ESOS-05
 
 During the year, no options were granted under ESOS-02 and ESOS-05. The
 options were granted under ESOS-02 on October 17, 2002 and ESOS-05 on
 October 25, 2005, in accordance with the pricing formula approved by
 you i.e. under ESOS-02 at the average of the closing price of the
 shares as quoted on the Bombay Stock Exchange Limited, during the
 period of one month preceding the date of grant and under ESOS-05 at
 the latest available closing price of the share at the National Stock
 Exchange of India Limited, prior to the date of the meeting of the
 Compensation Committee at which the options are granted. During the
 year 35,79,414 options were vested under ESOS-05. The number of options
 exercised during the year aggregated to 8,961 under ESOS-02 and
 10,89,007 under ESOS-05 and the money realised due to exercise of the
 options was Rs. 99.69 crores. Consequently, 10,97,968 equity shares of
 Rs. 10 each have been allotted to the concerned employees.
 
 During the year, 43,653 options have lapsed under ESOS-05. Options
 lapsed under ESOS- 02 and ESOS-05 up to September 11, 2007, were
 granted afresh under ESOS-07. Options in force as on March 31,2008
 stood at 20,145 under ESOS-02 and 31,07,714 under ESOS-05.  During the
 financial year under review, there has been no variation in the terms
 of the options granted earlier.
 
 ESOS-07
 
 At the thirtieth AGM held on June 27, 2007, you had approved the issue
 of 50,60,000 stock options representing 50,60,000 equity shares of Rs.
 10 each to the employees and directors of the Corporation. The
 Compensation Committee of the Corporation at its meeting held on
 September 12, 2007, granted the said options along with 2,09,525
 options lapsed under ESOS-02 and 1,87,310 options lapsed under ESOS-05,
 aggregating to 54,56,835 stock options, at an exercise price of Rs.
 2,149 per option. The said price was determined in accordance with the
 pricing formula approved by you i.e. at the latest available closing
 price of the share at the National Stock Exchange of India Limited,
 prior to the date of the meeting of the Compensation Committee at which
 the options are granted. The options granted under ESOS-07 will vest
 over a period of 1 to 3 years from the date of grant, depending upon
 the option grantee completing a continuous service of three years with
 the Corporation.  The options are exercisable over a period of five
 years from the date of respective vesting.  None of the options granted
 under ESOS-07 have vested during the year (and consequently, no options
 have been exercised). Under ESOS-07, as at March 31, 2008, 73,854
 options have lapsed and 53,82,981 options are in force. Under ESOS-07,
 11,87,000 options have been granted to 65 senior management employees,
 then in the grades of deputy general manager, general manager and
 senior general manager. The minimum number of options granted to any of
 these employees was 8,000.
 
 The following employees were granted options in excess of 5% of the
 total grant: Mr. Deepak S. Parekh - Chairman was granted 4,00,000
 options (7.33%) and Mr. Keki M. Mistry - Vice Chairman & Managing
 Director and Ms. Renu Sud Karnad - Joint Managing Director were each
 granted 3,00,000 options (5.50% each). These options were granted at
 Rs. 2,149 per option and in the aggregate represented 0.37% of the
 total issued and paid up share capital of the Corporation as on the
 date of the grant.
 
 No employee was granted options equal to or in excess of 1% of the
 total issued and paid up share capital of the Corporation as on the
 date of grant. There has been no variation made- during the year in the
 terms of the options granted earlier.
 
 Listed below are disclosures in accordance with the SEBI (Employee
 Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines,
 1999, as amended, in respect of options granted after June 30, 2003,
 i.e. under ESOS-05 and ESOS-07:
 
 Since options were granted at the market price, the intrinsic value of
 the option is nil.  Consequently the accounting value of the option
 (compensation cost) was also nil.  However, if the fair value of the
 options using the Black-Scholes model was used, considering the
 assumptions as of the date of grants, the compensation cost would have
 been Rs. 67.37 crores (gross Rs. 102.07 crores), the profit after tax
 would have been lesser by Rs. 67.37 crores and basic and diluted EPS
 would have been Rs. 87.37 and Rs. 82.91 respectively.
 
 The key assumptions used in Black-Scholes model for calculating the
 fair value under ESOS-07, as on the date of grant, are (a) risk- free
 interest rate: 7.70% (b) expected life: up to 2 years (c) expected
 volatility of share price: 19% and (d) expected growth in dividend:
 20%.  The market price of the equity share on the date of grant ranged
 from Rs. 2,125 to Rs. 2,170.
 
 All the options under ESOS-07 were granted at an exercise price of Rs.
 2,149 per option and hence the weighted average exercise price is Rs.
 2,149 per option. The weighted average fair value of the option granted
 under ESOS-07 (using the Black-Scholes model) works out to Rs. 307.28.
 
 The diluted earnings per share (EPS) is Rs. 85.28 against a basic EPS
 of Rs. 89.86.
 
 Unclaimed Dividend
 
 As at March 31, 2008, dividend amounting to Rs. 5.58 crores has not
 been claimed by shareholders of the Corporation. The Corporation has
 been intimating the shareholders to lodge their claim for dividend from
 time to time.
 
 In accordance with the current regulations, unclaimed dividend
 amounting to Rs. 18.17 lacs for the financial year 1999-00 (second
 interim dividend) was transferred to the IEPF on July 14, 2007.
 Unclaimed dividend amounting to Rs. 22.98 lacs in respect of the
 financial year 2000-01 is due for transfer in August 2008. In terms of
 Section 205C of the Companies Act, 1956, no claim would lie against the
 Corporation or the said Fund after the said transfers.
 
 Particulars Regarding Conservation of Energy, Technology Absorption and
 Foreign Exchange Earnings and Outgo
 
 The particulars regarding foreign exchange earnings and expenditure
 appear as Item No.  13 in the Notes to the Accounts. Since HDFC does
 not own any manufacturing facility the other particulars relating to
 conservation of energy and technology absorption as stipulated in the
 Companies (Disclosure of
 
 Particulars in the Report of the Board of Directors) Rules, 1988 are
 not applicable.
 
 Directors
 
 Dr. Vijay L. Kelkar, appointed as a special director of the Corporation
 in terms of Articles 125 and 126 of the Articles of Association of the
 Corporation resigned with effect from December 31, 2007, pursuant to
 his appointment as chairman of the Thirteenth Finance Commission,
 Government of India.  The Board of Directors places on record its
 appreciation for the contribution made by Dr. Vijay L. Kelkar during
 his tenure as a director of the Corporation.
 
 Dr. J. J. Irani was appointed as a special director of the Corporation
 in terms of Articles 125 and 126 of the Articles of Association of the
 Corporation with effect from January 18,2008.
 
 The Board of Directors appointed Dr. Bimal Jalan as an additional
 director of the Corporation with effect from April 30, 2008.  Pursuant
 to the provisions of Section 260 of the Companies Act, 1956, Dr. Bimal
 Jalan would hold office as a director of the Corporation up to the date
 of ensuing AGM. The Corporation has received a notice from a member
 under Section 257 of the Companies Act, 1956, signifying his intention
 to propose the candidature of Dr. Bimal Jalan as a director of the
 Corporation, along with a deposit of Rs. 500 as required under the said
 Act.
 
 The Board of Directors at its meeting held on October 29, 2007,
 re-designated Mr. Keki M.  Mistry as the Vice Chairman & Managing
 Director and Ms. Renu Sud Karnad as the Joint Managing Director of the
 Corporation, with effect from the said date, without effecting any
 changes in the terms and conditions of their appointments, including
 remuneration.
 
 The Board of Directors at its meeting held on April 30, 2008
 re-appointed Ms. Renu Sud Karnad as the whole time director of the
 Corporation (designated as Joint Managing Director) for a period of 5
 years with effect from May 3, 2008, subject to shareholders approval
 at the ensuing AGM.
 
 In accordance with the provisions of the Companies Act, 1956 and the
 Articles of Association of the Corporation, Mr. D. M.  Satwalekar, Mr.
 D. N. Ghosh and Dr. Ram S.  Tarneja are liable to retire by rotation at
 the ensuing AGM. They are eligible for re-appointment.
 
 Necessary resolutions for the appointment/ re-appointment of the
 aforesaid directors have been included in the notice convening the
 ensuing AGM.
 
 None of the directors of the Corporation are disqualified from being
 appointed as directors as specified in terms of Section 274 (1)(g) of
 the Companies Act, 1956.
 
 Auditors
 
 Messrs Deloitte Haskins & Sells, Chartered Accountants, statutory
 auditors of the Corporation and the branch auditors to audit the
 accounts at the Corporations branches in India and office in London,
 hold office until the conclusion of the ensuing AGM and are eligible
 for re-appointment.
 
 The Corporation has also received a confirmation from Messrs Deloitte
 Haskins & Sells to the effect that their appointment, if made, would be
 within the limits prescribed under Section 224(1 B) of the Companies
 Act, 1956.
 
 Messrs Pannell Kerr Forster, Chartered Accountants, was appointed as
 the branch auditors to audit the accounts of the Corporations branch
 office in Dubai. Their term expires at the end of the ensuing AGM and
 they are eligible for re-appointment. 
 
 Directors Responsibility Statement
 
 In accordance with the provisions of Section 217(2AA) of the Companies
 Act, 1956 and based on the information provided by the management, your
 directors state that:
 
 i. In the preparation of annual accounts, the applicable accounting
 standards have been followed;
 
 ii. Accounting policies selected were applied consistently. Reasonable
 and prudent judgements and estimates were made so as to give a true and
 fair view of the state of affairs of the Corporation as at the end of
 March 31, 2008 and of the profit of the Corporation for the year ended
 on that date;
 
 iii. Proper and sufficient care has been taken for the maintenance of
 adequate accounting records in accordance with the provisions of the
 Companies Act, 1956 for safeguarding the assets of the Corporation and
 for preventing and detecting frauds and other irregularities;
 
 iv. The annual accounts of the Corporation have been prepared on a
 going concern basis.
 
 Management Discussion and Analysis Report
 
 In accordance with Clause 49 of the listing agreements, the Management
 Discussion and Analysis Report forms a part of this report.
 
 Acknowledgements
 
 The Corporation would like to acknowledge all its stakeholders and is
 grateful for the support received from shareholders, borrowers,
 depositors, key partners and banks. The directors appreciate the
 continued guidance received from various regulatory authorities
 including NHB, RBI, SEBI, Ministry of Corporate Affairs, Registrar of
 Companies, Maharashtra, the Stock Exchanges and the Depositories.
 
 The directors recognise and appreciate the sincere hard work, loyalty
 and efforts of the employees of the Corporation whose professionalism
 has ensured excellent all-round performance, despite the challenging
 environment. The employees remain the Corporations most valuable
 assets and their work has enabled the Corporation to continue to be at
 the forefront of the financial services sector.
 
                                    On behalf of the Board of Directors
 
 MUMBAI                                                DEEPAK S. PAREKH
 April 30, 2008                                                Chairman