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HDFC Annual Report 2010

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HDFC Bank of Sri Lanka Annual Report 2010

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Contents

Corporate Information

NameHDFC Bank of Sri Lanka. ( Housing Development Finance Corporation Bank of Sri Lanka).

Registered and Head OfficeAddress P.O. Box 2085, Sir Chittampalam A Gardiner Mawatha, Colombo 02.Telephone : 2356800, 2446241, 2446239, 2447354, 2451462, 2446391 Fax : 2446392, 2356829, 2356827, 2432190Web Site : www.hdfc.lk E-mail : [email protected]

Legal FormA licensed specialized bank under the provisions of Housing Development Finance Corporation, Act No. 07 of 1997, amended by Act No. 15 of 2003.

Stock Market ListingThe ordinary shares of the Bank are listed in the Colombo Stock Exchange (CSE)

Board of DirectorsMrs. S. N. Wickramasinghe (Chairman)Mr. W. A. Terence FernandoMr. W.J. L Upali WijayaweeraMrs. K. W. Piyaseeli DayarathneDr. D. S. WijesingheMr. W.D.R. D. GoonaratneMrs. Chandanie WijayawardhanaMr. S. A. Jayantha SamaraweeraMr. A. M. Chandrasagara

Company SecretaryMrs. Dharshani De SilvaAttorney – at – Law & Notary Public,Company Secretary, Commissioner of Oaths.Tel. 2423362E-mail [email protected]

RegistrarsSSP Corporate Services (Pvt.) Limited 101, Inner Flower Road, Colombo 03.Tel. 2573894 Fax : 2573609E-mail : [email protected]

Year of Incorporation originally1984

Credit RatingThe Bank has been assigned BBB+ ( lka) by Fitch Ratings Lanka Ltd.,

BankersBank of Ceylon, Corporate Branch, Echelon Square, Colombo 01

Sampath BankNo.110, Sir James Pieris Mawatha, Colombo 02

People’s BankNo. 75, Sir Chittampalam A Gardiner Mawatha, Colombo 02.

Commercial Bank of Ceylon LimitedCommercial House, Union Place Branch, Colombo 02

Pan Asia Banking Corporation Ltd,Colombo Road, Gampaha

Corporate ManagementMr. Suresh Amerasekera - General manager /CEOMr. S. Dissanayake - DGM (Finance)Mr. D. Vidana Pathirana - AGM (Business Development & Marketing)Mr. W. M. A. Bandara - AGM (Information Technology)Mr. A. J. Atukorala - Chief Internal AuditorMr. S. A. Alahakoon - Head of CreditMr. L. Edirisinghe - Head of Human ResourcesMr. A. M. D. G. Abeyawardena - Head of TreasuryMr. M. Y. Piyasena - Senior Manager (Recoveries)

Board Integrated Risk Management CommitteeMrs. S. N. Wickramasinghe (Chairman of the Committee)Mrs. C. WijayawardhanaMr. A. M. ChandrasagaraDr. D. S. Wijesinghe

Board Nomination CommitteeMrs. S. N. Wickramasinghe (Chairman of the Committee)Mr. W. J. L. U. WijayaweeraMrs. K. W. P. Dayarathne

Board Audit CommitteeMr. A. M. Chandrasagara (The Chairman of the Committee)Mr. W. A. T. FernandoMrs. C. Wijayawardhana

Board HR and Remuneration CommitteeMrs. S. N. Wickramasinghe (Chairman of the Committee)Mr. W. J. L. U. WijayaweeraMrs. K. W. P. Dayarathne

Investor InformationDeputy General Manager (Finance)P.O. Box 2085, Sir Chittampalam A Gardiner Mawatha, Colombo 02.T.P 2356800, 2446241, 2446239. D/L 2451464, Fax 2356829E-mail [email protected]

AuditorsAuditor General - Department of Auditor General,Torrington Square, Colombo 07

Our Vision 2Our Mission 2Our Objectives 3Values 3What We Have Achieved in 2010 4What We Have Gained in 2010 5Event Calendar 6Our Products and Services 8Chairman’s Statement 10General Manager/ Chief Executive Officer’s Review 14Board of Directors 18Profiles of the Board of Directors 19Corporate Management 21Senior Management 24Regional Managers 26Managers 27Branch Managers 27HDFC Bank of Sri Lanka - Branch Locations 28Our Branch Network 29Management Discussion and Analysis 31Financial Review 41Risk Management 43Sustainability Report 53Assurance Report 98Global Reporting Initiative (GRI) Index 100Corporate Governance 109Attendance for Board Meetings – 2010 144Attendance for Board Sub Committee Meetings – 2010 145Statement of Internal Control 147

Financial ReportsReport of the Board of Directors 151Reports of the Board Sub Committees 156The Board of Director’s Responsibilities for Financial Reporting 161Auditor’s Report 162Consolidated Income Statement 164Consolidated Balance Sheet 165Consolidated Cash Flow Statement 166Consolidated Statement of Change in Equity 167Significant Accounting Polices 168Notes to the Financial Statement 171Maturity Analysis 180Statement of Value Added 181Capital Adequacy - Solo Basis 182Ten Year Statistical Summary 184Graphical Review 185Share Information 186Notice of the Annual General Meeting 189Notes 190Form of Proxy 191Corporate Information Inner Back Cover

tHe nAtion’S

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“Shelter is one of the basic requirements for a human being. It is almost as important as the food we eat and the clean

water we drink. A home is one’s castle, a source of pride and joy and synonymous with the idea of togetherness, peace and most importantly, family. Here at HDFC, we are committed to providing affordable housing to the entire country, regardless of caste or creed, championing the development that has been afforded to a liberated Sri Lanka. We believe that we are one

nation, one family and mother Lanka, our one home.“



Our VisionTo be the premier financial service institution for the purpose of enhancement of lifestyle of Sri Lanka.

Our MissionTo be a dominant player in the financial service sector by delivering innovative solutions to meet the needs of housing and construction sector with best in industry service excellence creating superior long-term shareholder value and contributing to economic development in Sri Lanka through an inspired team.

HDFC Annual Report 2010 3

ValuesThe foundation of our success story.

Transparency : being honest and candidly accountable.

Fairness : stakeholders viewing as winners.

Openness : respecting each other and showing genuine interest.

Our ObjectivesCustomer : to provide a caring customer service, anticipating solutions required by our customers and innovatively satisfying them beyond expectations.

Shareholders : to optimize return on shareholders’ funds.

Organisation : to commit ourselves to the highest standards in corporate and business ethics whilst maintaining financial stability and growth.

Employees : to motivate, develop, recognise and reward our employees.

Community : to be strongly committed to contribute to the national goal of providing shelter for all.

Industry : setting industry benchmarks of international standard in delivering customer value through out comprehensive product range and customer service in all our activities.

Ethics : maintaining the highest ethical standards of a leading corporate citizen.

Our deposit and savings customer base improved from 177,000 to 216,000 showing an improvement of 42%.

We granted 10,739 housing loans valued at LKR 3,069 Mn compared to 5,977 facilities in 2009 worth LKR 1,404 Mn. We enhanced customer access points from 25 branch to 28 branches and 11 ATMs to 225 ATMs with a Strategic alliance with Sampath Bank island wide.

We gave direct employment opportunities to 61 young men and women increasing the total staff to 425.

We achieved 18% decline in cost per employee while increasing the basic wage by 15%

Achieved yearly targets of becoming carbon neutral.

We invested over LKR 4 Mn for community sustenance.

Goals Ahead- Medium Term

2009 - Actual 2010 - Actual 2011 Budget 2013 - Goal

Return on equity (%) 3.3% 6.9% 15.7% 18.5%

Return on assets .39% .81% 1.80% 2%

Profit After Tax (Rs. Mn.) 56 135 318 500

Cost to income ratio (%) 63% 81% .80 % 43%

Customer deposits 6,115 7,975 10,000 17,500

Total Assets (Rs. Mn.) 14,301 15,927 19,031 30,000

Shareholder funds (Rs. Mn.) 1,721 1,809 2,196 2,700

No of branches 25 28 34 50

Staff Strength 364 425 450 500

ATM access 11 225 300 500

“We are along the path to sound and stable growth.”

What We Have Achieved in 2010

LKR 4 Mn.LKR 3,069 Mn.

for community sustenance.

for housing loans

4 HDFC Annual Report 2010


Financial Highlights

What We Have Gained in 2010

Bank

2010 2009 Change Rs.’000 Rs.’000 %

Results for the yearGross Income 2,250,286 2,268,698 (0.81)Profit before Taxation 291,090 168,494 72.76Provision for Taxation 155,749 112,043 39.01Profit after Taxation 135,341 56,450 139.75Revenue to the Governments 155,786 112,145 38.91

At the year endShareholders, Fund (Capital & Reserves) 1,848,658 1,721,196 7.41Deposits from Customers 7,702,928 6,114,802 25.97

Gross loans & Advance to Customers 13,143,944 12,111,772 8.52Total Assets 15,373,832 14,301,441 7.50

Information per Ordinary shareEarnings (Basic) (Rs.) 20.91 8.72 139.75Dividends (Rs.) 5.00 5.00 -Net Assets Value per Ordinary Share (Rs.) 285.68 265.99 7.41Market Value at the Year End (Rs.) 550.00 147.75 272.25

Financial RatiosReturn on Average shareholders’ Fund (%) 7.58 3.28 131.41Return on Average Assets (%) 0.91 0.39 131.97Price Earnings (Time) - Ordinary share 26.30 16.94 55.26Dividend Yield (%) 0.91 3.38 (73.14)Dividend Cover 4.18 1.74 139.75Share Holders Equity to Total Assets (%) 12.02 12.04 (0.09)Earning Yield Ratio (%) 3.80 5.90 (35.59)

Statutory RatiosLiquid Assets (%) 20.92% 21.19% (1.27)Capital Adequacy -Tier I (%) - Minimum Required 5% 21.09% 17.63% 19.65Tier II (%) - Minimum Required 10% 22.18% 18.66% 18.83

06 07 08 09 100

3,000

6,000

9,000

12,000

15,000

Rs. Mn.

Loan Advance & Deposits

Loans & AdvancesTotal Deposits

06 07 08 09 10(100)

0

100

200

300

400

Rs. Mn.

Profit growth

Profit (Rs. Mn) After TaxProfit (Rs. Mn) Before Tax

06 07 08 09 100

3,000

6,000

9,000

15,000

12,000

Rs. Mn.

Total Assets

06 07 08 09 100

500

1,000

1,500

2,500

2,000

Rs. Mn.

Gross Income

06 07 08 09 100

200

400

600

800

1,000

Rs. Mn.

Income Growth

Net Interest IncomeNon Interest Income

06 07 08 09 10(10)

(5)

0

5

10

15

%

Return on Assets & Equity

Return on Avg shareholders fundsReturn on Avg assets

Event Calendar

ATM sharing with Sampath Bank -18th February 2010

New Chairman Assuming Duties – 26th May 2010

Relocation of Awissawella Branch - 24th July 2010

Cycle Race sponsored by HDFC Bank - 28th April 2010

Vavuniya Opening Branch - 8th June 2010

Distribution of glasses among the eye patients- 13th August 2010

Eye Camp held at Manning Market - 6th May 2010

Relocation of Chilaw Branch - 14th June 2010

Habitat Day Walk - 4th October 2010


Relocation of Tangalle Branch – 25th October 2010

Thilna Tharu All Island Art Competition’s Exhibition - 18th November 2010

Relocation of Kegalle Branch - 08th December 2010

HDFC wins Golden MACO Award - 14th September 2010

Tree Planting Ceremony - 15th November 2010

CSR project at Buttala - 15th November 2010

HDFC Bank wins NBEA Award of NCCSL- 18th November 2010.

Colombo Branch opening after refurbishment- 23rd December 2010

Trincomalee Branch Opening - 30th December 2010

7HDFC Annual Report 2010

Our Products and Services

Situ SevanaHassle free customised home loan with value added services on preparation of loan documents, focused for Wider Income Group exceeding Rs.1million (with Tax relief ).

KedellaHome loan scheme for low and middle income families on primary mortgage of the property

Sirisara Home Loan.Home improvement loanA ‘home loan’ scheme for the existing customers on the remortgage of the property to purchase home accessories , home improvement , landscaping , curtaining etc.

Thilina Home LoanA mortgage loan for the parent / guardian of the Thilina Minor Account holder and up to 4 times of the balance in the Thilina savings Account on concessionary rates of interest.

Thilina RekawaranaIt’s a uniquely designed investment plan to guarantee children’s future financial security. Parents/ Guardians are offered several optional monthly deposit plans and the Bank agrees to give a guaranteed sum to the child upon reaching the age of 18 years.

Vishrama UdanaA fixed deposit scheme earning above market interest, focused exclusively for Senior Citizens for over 55 years of age.


Vishrama UdanaHassle free home loan for EPF members against EPF balance , HDFC provides a superior service by giving within one day.

Guru SevanaA customised loan scheme for government, teachers on personal guarantee and repayable in 5 Years.

PrathilabaA regular savings account with special benefits and cash withdrawals can be made 4 times a month and the same interest will be calculated. Customers can access their accounts 24 x 7 x 365 days of the year through more than 200 ATMs.

Dhana NidhanaHDFC ‘Dhana Nidahana’ Pass-through Investment Certificate is a long term investment plan spanning 7 – 14 years with a guaranteed return on investment at maturity.

ArumbuArumbu is a specially designed investment plan for Tamil speaking community of the country and offers same benefits as Thilina Rekawarana.

ẶshcharyaAscharya investment Certificates which was introduced in November 2010 availing an opportunity for every Sri Lankan to be a partner in making ‘Sri Lanka the emerging wonder in Asia’ while assuring a better future for themselves.

9HDFC Annual Report 2010

Chairman’s Statement

“I believe that you, as a shareholder, could take joy and be content in being a partner of a business which enables you to realise your financial, social and spiritual aspirations.”

Chairman



It is with great pleasure that I present to you the Annual Report and Audited Financial Statements of HDFC for the financial year 2010. I take this opportunity to thank the Board of Directors for their positive contribution in steering the Bank towards achieving its goals on a sustainable basis.

True value of your businessHousing finance cannot be compared to any other credit facility. It is an asset class, backed by long term house mortgages that generate long term returns. It is a tangible asset creator and wealth maximiser. Housing finance is an integral part of economic development as it boosts savings, investments and household wealth and results in a beneficial spill-over effect on the entire financial system. Each rupee invested in the housing sector triggers a multiplier increase in other sectors of the economy and indirectly impacts employment, fiscal returns and consumption. A decent house creates a harmonious environment for the physical health, education and well being of a family.

I believe that you, as a shareholder, could take joy and be content in being a partner of a business which enables you to realise your financial, social and spiritual aspirations. Need of the hourHuman settlement is a prime factor in assessing the physical quality of life and economic growth of a country. Over the last two decades there has been a surge in the National Housing Stock and homeownership in Sri Lanka, paving the way to a significant improvement in the quality of life of its people. The National Housing Stock rose from 3.9 Million to 4.9 Million recording a 26% YoY increase, with 78% of the households owning a radio, 70% a television and 75% having access to electricity facilities. Hence the development that has taken place in the housing industry has enabled Sri

Lanka to achieve several Millennium Development Goals (MDGs) at an early stage of its development process compared to high income countries. Sri Lanka has been successful in achieving MDGs in the areas of health and education and also made great strides in poverty alleviation, infant and maternal mortality and gender equality. Much of the development has been fuelled by the banking sector. Housing mortgage market has a significant presence in the financial sector of our economy. As per the information released by the Central Bank, the housing mortgage sector has grown to a staggering LKR 172 Billion accounting for 14% of total lendings of the banking sector in March 2010.

However, in today’s context it is pertinent to assess whether the housing finance industry including HDFC has contributed to a sustainable development in the housing industry and responded speedily to meet the aspirations of the nation.

Accelerated growthSri Lanka’s housing needs are significantly larger than the effective demand. The housing shortage in our country is estimated to be 350,000 units, with an annual increase of 100,000 units. Approximately one third of the existing units are semi permanent while 0.7% are slum dwellers. This clearly indicates that there is no congruence between the growth of the housing industry and the demographic transition. In this context, I believe that the banking industry has a great responsibility to be an active partner in addressing this pressing national need. As per my analysis, the main reasons for this gap are inadequate access to housing finance, high lending rates, low penetration of banks to the low income segment and the high cost of housing. Poor credit information also precludes low and middle income earners from having access to affordable housing. In order to accelerate the

HDFC Refocuses.growth of the housing industry of our country, we as bankers need to strike a balance between banking practices and the interest of the masses and align our strategies with the governments accelerated development road map.

Sustainable developmentCountries around the world wrestle with the challenge of sustainability; promoting development that is equitable and sustainable both socially and environmentally. Sustainability should be a core determinant of economic and social development that brings lasting social and economic benefits. The government’s vision for economic development laid down in the Mahinda Chinthana- ‘A 10 year development framework,’ aims to achieve an accelerated growth, with particular emphasis on achieving an equitable development, both among sectors and geographic regions. It also focuses on the need to balance the overriding objectives of economic growth and environmental conservation. Acting within the principles of economic, environmental and social sustainability will be a great challenge when meeting the Bank’s objective of promoting national housing stock and homeownership.

Mainstreaming national developmentThe housing finance industry has continued to assist the growth of the housing sector in Sri Lanka. However, the housing industry needs to broaden its spectrum to position itself as a poverty alleviator, employment generator, wealth creator and a social stabilizer.

Commercial banking sector has created a dynamic scenario in the housing finance market, offering several on the shelf financial products and options to expand the industry. However, it is pertinent to assess whether the dynamism has been focused to attain long term economic


gains rather than short term benefits. Although there has been a substantial improvement in housing conditions, lifestyles and quality of life of the people during the last two decades, in my assessment, the growth has not translated into a poverty reduction. This was in spite of the several concerted efforts made by the government to reduce concentration in Colombo and suburbs. These efforts needs to be further strengthened and supported.

As specialists in the industry, we need to evaluate the proportion of the population who have access to affordable housing finance. Sri Lanka’s effective demand for housing finance is largely generated by the high income population of the country who constitute two thirds of the country’s mortgage market. As per the industry analysis 30% of the population is outside the perimeters of affordable housing. For a majority, housing finance is a luxury and is rationed in favour of high income salaried employees and those who could offer land as collateral.

Our nation’s economic sustainability largely depends on improving the quality of life of the balance 70% of the population. Facilitating access to housing finance to this segment would prevent slum proliferation, promote savings, boost construction and generate employment. Thus HDFC could play a vital role in boosting an equitable economic growth and enabling households to build assets and improve their living conditions and thereby achieve poverty reduction.

While focusing on sustainable economic development, housing finance market should also focus on the sustainability of the industry. We could learn much from the subprime mortgage market crisis which hit the Western world. The ideal loan facility for a housing loan borrower is a facility which is simple and straightforward with monthly

installments that complement the repayment capacity of the borrower. Complex interest calculation, balloon payments or loans with exotic structures where interest is kept artificially low and then increased to high floating rates during times of volatility are not favorable to the housing industry.

At HDFC, we remain committed to our mandate of providing affordable housing to the low and middle income segment of our nation, whose well being justifies our existence. HDFC along with the other participants in the housing finance industry should prioritise the provision of affordable housing to the masses which would propel the sustainability of the industry.

Sustainable living and environmentThe process of house construction requires a large amount of capital, natural resources, earthmoving and management of substantial amount of solid waste. Homes are not just houses; but environments which project aspirations of individual families. A cluster of homes form neighborhoods and a cluster of neighborhoods form towns and cities. Thus the manner in which houses are planned, built and developed has an impact on the environment and ecosystem of the country

Affordability also plays a vital role in building a home. If the house is not cost effective, it would not offer cost saving technologies and will not suit the modern lifestyles of its dwellers.

HDFC re-focusesOver the last 25 years, HDFC has made a significant contribution to the economy of our nation as a Building Society, State Corporation and a Bank. HDFC has provided affordable housing financing solutions to the masses and gained wide acceptance from the low and middle

income segment of our society. Over the last two decades, HDFC has granted 80% of its facilities to the low and middle income segment which represent 70% of the country’s population.

Refocused strategies during the year, fostered HDFC to record the highest market capitalization of LKR2.7billion at the Colombo Stock Exchange, reflecting the confidence placed by the public and private investors in the bank. It also highlights the positive perception and trust placed by the public in HDFC as a sound institution with promising growth prospects, steered by a management team of high caliber and a strong Board of Directors.

Refocusing HDFC as a bank providing a speedy service, whilst balancing economic, social and environmental objectives and working actively alongside the governments initiatives in achieving the development goals laid out in Mahinda Chinthanaya was a challenging task, since assuming duties as chairman of HDFC.

Chairman’s Statement contd.

In accordance with my vision sus-tainability promotion and sustain-able development should be the core determinants of HDFC Bank, the kind of development that HDFC was created to foster.

Stakeholder engagementsAs mentioned earlier, our shareholders can take pride that HDFC listing recorded the highest market capitalisation in the CSE in 2010. During the period under review, HDFC recorded a 140% increase in profit after tax and 8% growth in total assets. The number of housing loans granted rose to 10739 families compared to 5977 families in 2009. The Savings fund, which was a strategic priority in 2010 , achieved a remarkable growth of 76% YoY to reach the LKR one billion benchmark.


We continued to remain committed to our valued customers, by expanding our loans and savings facilities. During the year, we increased our geographical presence by opening two branches in Vavniya and Trincomalee thus increasing our branch network to 28. We also continued to expand our customer reach using the network of 225 Automated Teller Machines with the strategic alliance entered with Sampath Bank PLC.

As a just and fair employer we recruited 61 young men and women during the year and made upward revisions to our emolument packages. Environmental and community policies were introduced during the year to cement our commitment to environmental and social accountability.

We achieved two awards during the year bringing together our performance and sustainability review. This year we have taken another step towards integrating financial and non-financial reporting aligned with GRI guidelines.

This commendable performance of HDFC is attributed to the favorable macroeconomic environment and strategic refocusing which took place midyear.

Macroeconomic environment and outlookYear 2010, will be remembered as the first fiscal year after terrorism was defeated and the proclamation of an end to a war that took its toll on the country’s physical and social fabric for nearly years. Sri Lanka is now enjoying the long awaited peace. South Asia‘s GDP has posted the second fastest pace of growth among the developing regions after East Asia and the Pacific. The peaceful environment , strong political stability and leadership coupled with the economic recovery of the South Asian Region enabled Sri Lanka to achieve a positive contribution from all sectors of

the economy and recorded a grow th rate of above 8%.

During the year under review, the annual average inflation and market interest rates registered single digits, creating a conducive environment for credit growth. Triggered by the positive outlook of the economy there was a healthy inflow of capital in terms of Foreign Direct Investments (FDIs). Supported by these developments, Sri Lanka is geared to achieve a high growth forecast during the next six years, thus creating a promising future for the housing market in Sri Lanka in the medium term.

I believe that the banking industry has a special role to play in transforming the benefits of these developments equally among the various income groups and in the geographical regions particularly in the North and East. While acknowledging this responsibility our current focus is to spread our service into a wider rural base to grow both our savings and lending portfolios. Our future strategy therefore will be based on a paradigm of capturing the non-inclusive financial sector through the mobile banking service enabling them access to formal housing finance. and innovative marketing tools.

At the same time we will strengthen our branch network, adding new customer centers and expand our ATMs presence throughout the island strategically.

Current backlog of the housing stock is substantially due to inadequate dwelling in the North and East. We see this as an opportunity in the North and East especially in the agriculture sector housing.

While we are poised to attract the right customers with tailor made products to suit the diverse customer segments located in different parts of the island, HDFC will have to face the challenge

of possible negative consequences due to the relaxation of parate execution rights adopted by the government since the loan amounts of the majority of our customers are below LKR 5Million.

AcknowledgementI wish to take this opportunity to extend my appreciation to His Excellency the President Mahinda Rajapakse for his support and vision which has taken Sri Lanka to new heights, Hon Wimal Weerawansa Minister of Construction, Engineering Services, Housing and Common Amenities for his constant encouragement, Secretary to the Treasury, Dr.P.B. Jayasundera, the Governor of the Central Bank of Sri Lanka, Mr. Ajith Nivard Cabraal and other regulators for their guidance and assistance extended to us.

I also wish to express my sincere appreciation to my fellow Directors for their unstinting support since their appointment. My strategy to strengthen the Bank’s Board of Directors with professionals has paid much dividends.

A special thank you to Mr Ajith Fernando who resigned from the Board on 1st January 2011, for his valuable support and contribution to the Bank during the past six and a half years.

I also take this opportunity to thank the General Manager/CEO, Corporate and Executive Management and all other members of the staff for their dedicated service.

Finally I wish to extend my deep appreciation to our valued shareholders, customers and business partners for the confidence and trust placed in us.

Mrs. Siromi WickramasingheChairman

HDFC Bank of Sri Lanka.

General Manager/Chief Executive Officer’s Review

The Bank continued to implement and embarked on several strategies and initiatives which enabled us to meet the desired objectives that we had set out to meet.

CEO/General Manager



Macro and micro economic conditions The year 2010 was a year of turnaround for Sri Lanka with the end of the ethnic conflict which ravaged the nation for 3 decades and the establishment of a strong political Government which paved the way for a stable economic growth. The Sri Lankan economy recovered strongly and moved onto a higher plateau of growth recording an impressive GDP growth of 7.8 percent during the first half of 2010. The restoration of peace, a strong macroeconomic environment, improved business confidence and the gradual recovery of the global economy from its economic recession triggered the above growth. Inflation continued to remain at a single digit throughout the year. The annual average rate of inflation, was 5.9 per cent in 2010 and was the second lowest annual average (end year) inflation rate recorded since 1999. The year-on-year inflation stood at 6.9 per cent in December 2010. The low inflation outlook enabled the Central Bank to relax its monetary policy resulting in lower interest rates in all market segments supporting the recovery of domestic economic activity. The exchange rate too remained stable throughout the year with the recovery of the external trade and increase in export earnings. Both exports and imports recovered rapidly during the first eight months of 2010. Increased remittances assisted to off-set the widening trade deficit partly. The Balance of Payments (BOP) recorded a surplus by mid October 2010, with higher foreign financial inflows, including disbursements under the IMF-Stand-By Arrangement (SBA) facility and proceeds from the third international sovereign bond issue in October 2010, thus raising the external reserves to the highest ever level recorded.

The above favorable economic conditions supported the country’s growth potential by paving the way to expand the investments made in all sectors of the economy including new growth areas. The end of the prolonged ethnic conflict and the improved macroeconomic environment presented Sri Lanka with a great opportunity to achieve a sustainable growth and development. The need for housing grew tremendously. In this context we remained committed to our primary mandate of providing housing finance for the citizens of our county and contributed positively to the Mahinda Chinthanaya development goals during the year.

Strategies implemented and outcomeThe bank continued to implement and embarked on several strategies and initiatives which enabled us to meet the desired objectives that we had set out to meet.

During the year we continued with our repositioning strategy aggressively to create more public awareness. In this context we continued to execute our image building and expansion strategy which was launched in 2009. We relocated five of our existing branches in Chilaw, Awissawella, Tangalle, Badulla, and Kegalle which were not in customer convenient locations to strategic locations, to enhance customer accessibility and convenience. Our main branch at the National Housing Development Authority too was refurbished to offer industry standard facilities to customers and staff while we also revamped and remodeled some of our other branches to improve their outlook and create a customer friendly ambiance. A conducive environment was created within the branches to motivate our staff to provide a proactive and excellent service to our customers.

HDFC was the first specialised bank in housing to move into the North and East during 2010 with the opening of two branches in Vavuniya and Trincomalee thus increasing our branch network to 28. As a result of the strategic alliance with Sampath Bank, we were able to expand our customer reach with the network of 225 ATMs spread across the country. This strategy was adopted to enhance our customer reach in a cost effective manner and obtain a better return from the capital simultaneously. Consequently, we were able to provide our customers with the added benefit of opening a savings account from any part of the county. This had a positive impact on our savings base which reached the LKR One Billion mark during 2010. We have the necessary infrastructure to further develop our savings base.

During the year we focused on upgrading our IT security standards especially of the Palm Top Banking operation which literally takes our banking to the doorstep of the customer.

We launched a new minor savings product named ‘Arambu’ (meaning flower bud) customised for the Tamil speaking population. This product was introduced as an investment plan for the children to bloom when they reach adulthood, identifying the vacuum in the market for this type of a product. We see an immense potential for this product in the North, East and the plantation sector of our county.

In order to stay ahead of competition we need to maintain a high standard of customer care. Since HDFC’s conversion from a state corporation to a licensed specialised bank 7 year ago, we had to create a paradigm shift in the mindset of our employees to be more customer oriented, productive, proactive and quality conscious. In this context we


continued to provide comprehensive training and development specifically in the area of customer care to our staff, thus increasing the training man hours by 130% during the year. We also formulated a career development and promotion plan to identify the hidden talents of our staff members and extend promotions. Approximately 72 employees were promoted during the year while we recruited 76 men and women from all provinces of Sri Lanka. Five area managers were appointed to strengthen the operations of the bank with each manager overseeing cluster of branches. This strategy was implemented to provide a speedy and proactive service to our customers.

In order to improve the efficiency of the bank, the Operations Division was strengthened to oversee and manage the operational risk factor. This strategy enabled us to minimise manual operations, eliminate non value adding processes and the quality of the operation manuals, and various operational guidelines of the Bank

The share price of HDFC stood at LKR 550 as at 31 December 2010. During the year HDFC achieved the highest recorded share price since its listing in the Colombo Stock Exchange (CSE). This is attributed to the enhanced investor confidence and boom in the CSE. The capital adequacy ratio which amounted to 21.09% in 2010, is almost double the industry norm. Our shareholders perceive that we have the capacity to double our portfolio without raising capital from the market which is an added advantage,

Remarkable performanceThe above strategies enabled The Bank to record a stable performance during the year, despite providing LKR 120 Million for our subsidiary, HDFC RED, the Bank recorded a Net Profit After Tax (NPAT) of LKR 133 Million recording a Year on Year (YoY) growth of 132 per cent. The profit was achieved despite a downward interest rate revision in advances. The net income escalated from LKR 634 Million to LKR 825 Million in 2010, recording an YoY increase of 30 percent. Favourable micro and macro economic conditions caused the cost of funds to declined sharply during the year. As a result we were able to improve our low cost funding base which grew From LKR 592 Million in 2009 to LKR 1,042 Million in the year under review. We also succeeded in bringing down the Non Performing Loan ratio net of EPF and provision to 9 per cent during the year, which is below the industry norm applicable to housing loan segment. Net NPL declined by 15 per cent YoY from LKR939 Million to LKR794 Million in the year under review. Consequent to the branch expansion and repositioning strategy, our deposit base increased by 26 percent YoY to reach LKR 7.7 Billion. The new advances grew by a staggering 118 per cent YoY; from LKR 1.4 Billion to LKR 3 Billion in 2010. The liquidity ratio of the Bank was managed to maintain a balance between the statutory requirement and profitability.

Recognition of our serviceIn recognition of HDFC’s performance during 2009, we were awarded the prestigious MACO Award, for the contribution made to the housing development in Sri Lanka. We were also the runner up for the National Business Excellence Award organised

by the National Chamber of Commerce of Sri Lanka for the specialised bank’s category. Further we were also presented with the ACCA Award for sustainability for small income category and for the first time entry.

Challenges aheadThe greatest challenge faced by HDFC is managing the interest rate risk. Being a long term lender, the bank is exposed to the interest rate risk when the long term advances are not matched with long term funds. In the absence of a long term money market, a dearth in long term funds exists. Even though we have succeeded in reducing the maturity gaps to a certain extent, further measures have to taken to stabilise our future profitability. In this context, we strive to achieve a sustainable growth by accessing long term funding lines to match the planned growth in advances. Another challenge for the bank is to offer more attractive fixed rates to increase the market share and utilise the available capital to provide attractive returns to the share holders. In order to minimise the impact of any adverse effect due to unfavorable macro and micro economic indicators, proper matching of assets and liabilities is crucial.

Strategic directionThough we have the capacity and the infrastructure to grow our advances aggressively, we will adopt a prudent approach in growing our loan portfolio. We aim to achieve a sustainable growth in our loan portfolio while managing the inherent interest rate risk. Our new corporate plan which was rolled out this year addresses this factor. We will also expand our lending to attract the middle and upper income segment without restricting ourselves to servicing

General Manager/Chief Executive officer’s Review contd.


the low and middle income segment of our country. We have the expertise to process a loan within a short time span of two weeks. We are confident that the expertise and competencies we have gained in the area of housing finance will give us a competitive edge in attracting the middle and high income segment of our country.

We will also increase our low cost fund base by developing new products and striving to improve the share holder returns while concentrating on internal processes to develop risk management techniques. We will also continue with our image building and expansion strategy which has enabled us to attract borrowers from all income groups of the country. We have strategised to increase our branch network to 50 within the next 3 years.

AppreciationI take this opportunity to extend my appreciation to the Governor of the Central Bank of Sri Lanka and the Ministry of Finance and Planning for their cooperation and guidance throughout the year. I also wish to thank the Chairman and the Board of Directors for their continuous support and encouragement. A special thank you to my team who gave their best at all times to produce these results.

Suresh AmerasekeraCEO/General Manager

HDFC Bank of Sri Lanka.

From left to right (Standing)Mrs. C. WijayawardhanaMr. W. D. R. D. GoonaratneDr. D. S. Wijesinghe Mr. A. M. ChandrasagaraMr. W. J. L. U. Wijayaweera

From left to right (Seated)Mr. S. A. J. SamaraweeraMrs. S. N. Wickramasinghe (Chairman)Mrs. K. W. P. DayarathneMr. W. A. T. Fernando

Board of Directors



Profiles of the Board of Directors

Mrs. S. N. WickramasingheChairman (Non – executive, Independent Director)

Mrs. Siromi Wickramasinghe was appointed as the Chairman of HDFC Bank in May 2010.

She held many senior managerial positions in various financial institutions including the post of DGM, Hatton National Bank PLC, GM /CEO, Lankaputhra Development Bank, Director Commercial Bank of Ceylon PLC, and Director Sri Lanka Banks’ Association (Guarantee) Ltd. She was also a Commission Member of the Securities and Exchange Commission of Sri Lanka (SEC) and the Chairman of Ceybank Asset Management (Pvt.) Ltd an associate company of Bank of Ceylon.

She is also an Attorney at Law of the Supreme Court of Sri Lanka and Commissioner of Oaths, and is a Fellow of the Chartered Management Institute U.K.

Mr. W. A. T. Fernando(Non – executive, Independent Director)

Mr. Ajith Fernando was appointed as a Director of the HDFC Bank in June 2004 and he had resigned from the Board in January 2011. He is a Fellow Member of the Chartered Institute of Management Accountants, United Kingdom and holds a MA in Financial Economics from the University of Colombo. He counts over 20 years experience in capital markets of Sri Lanka. In 2000 he founded Capital Alliance and is currently the group CEO of the Capital Alliance Group which includes Capital Alliance Ltd, a Primary Dealer for Government Securities, appointed by the Central Bank of Sri

Lanka and Capital Alliance Securities (Pvt.) Ltd, a trading member of the Colombo Stock Exchange. In addition he also serves on the boards of Ceylon Tea Brokers PLC and Senkadagala Finance Ltd in addition to many private companies. He is Deputy Chairman of the Financial Ombudsman’s office and a Director of the Lanka Financial Services Bureau.

Mr. W. J. L. U. Wijayaweera(Non – executive, Independent Director)

Mr. Upali Wijayaweera was appointed as a Director of the HDFC Bank in June 2006 and is also functioning as the Secretary to the Ministry of Labour and Labour Relations. He is a Director of National Institute of Occupational safety and Health, Srama Vasana Fund and National Institute of Labour Studies. He has been posted to the Sri Lanka Administrative Service in 1984. He has joined the Department of Labour in 1985 and has held several important posts; Assistant Commissioner of Labour, Senior Assistant Commissioner of Labour, Deputy Commissioner of Labour, Commissioner of Labour, Commissioner General of Labour. In 1997, he was posted as the Consular in the Sri Lankan Embassy in the State of Kuwait followed by the posting in the Sri Lankan Embassy in the Kingdom of Saudi Arabia as the Consular in 1999. In year 2000 he was appointed as the Commissioner of Labour Standards. He was also a director of National Child protection Authority. He holds a B.Com (special) Degree from University of Kelaniya and PGD in Public Administration from SLIDA (Sri Lanka).

Mrs. K. W. P. Dayarathne(Non – executive, Independent Director)

Mrs. Dayarathne was appointed as a Director of the HDFC Bank in June 2009 and also functions as the Additional Secretary of the Ministry of Construction, Engineering Services, Housing and Common Amenities. She belongs to the Sri Lanka Administrative Service and began her career as an Assistant Controller of the Department of Immigration and Emigration in 1985. She has served as an Assistant Director of the Department of Social Service, Assistant Commissioner and a Deputy Commissioner of the Department of Poor Relief, Deputy Commissioner of the Samurdhi Commissioner’s Department, Deputy Director of the Ministry of Youth Affairs, Senior Assistant Secretary of the Ministry of Housing Development and Senior Assistant Secretary of the Ministry of Housing and Constructions. She holds a B.Sc Public Administration (special) Degree from the University of Sri Jayewardenepura, Master in Public Management, PGD in Public Administration and MS.c in Public Administration in SLIDA (Sri Lanka) and PGD in Social Development from the University of Massy in New Zealand.

Dr. D. S. Wijesinghe (Non – executive, Independent Director)

Dr. Wijesinghe, former Deputy Governor of the Central Bank of Sri Lanka joined the Board on June 2010. He has more than 35 years experience in central banking particularly in monetary policy, exchange rate policy, operations of the Bank in financial markets and economic research. He was the Deputy Governor in charge of ‘Economic and Price Stability’, one of the two key objectives of the Bank. In his capacity


as the Deputy Governor, he served as the Chairman of the Monetary Policy Committee and member of Financial System Stability Committee. He was heavily involved in policy formulation and implementation and advising the Governor and the Monetary Board on the same.

During his tenure at the Central Bank, Dr. Wijesinghe held the posts of Asst. Governor in charge of Economic and Price Stability, Director of Domestic Operations Department; Additional Director of Centre for Banking Studies; Additional Director, Deputy Director and Senior Economist of the Department of Economic Research; Additional Director, Deputy Director and Assistant Director of the Department of Statistics; Research Economist of the South East Asian Central Banks’ (SEACEN) Research and Training Centre, Malaysia. He has several publications to his credit and has represented the Bank at several international seminars.

Dr. Wijesinghe is a graduate of the University of Colombo with BA (First class) and B Phil. (Second class) in Economics and had a brief tenure at the same University as an Asst. Lecturer in Economics. He had his graduate studies at the University of Warwick, UK. where he earned his PhD and MA in the same field of studies.

Mr. W. D. R. D. Goonaratne (Non – executive, Non Independent Director)

Mr. Raja Goonaratne was appointed as Director of the HDFC Bank in June 2010, and is an elected director of HDFC representing the National Housing Development Authority which is the major shareholder of the Bank. He is a senior lecturer in law in the academic

staff of the Department of Legal Studies, Faculty of Humanities and Social Sciences of the Open University of Sri Lanka. At present, he works as the National Housing Commissioner. He is academically qualified with LL.B (Hon) Colombo, LL. M (Monash Australia), Diploma in Forensic Medicine and also of he is professionally qualified as an Attorney-at-Law of Supreme Court of Sri Lanka. He is also a member of the Board of the National Housing Developer Authority.

Mrs. C. Wijayawardhana(Non – executive, Independent Director)

Mrs. Chandanie Wijewardhana holds a Bachelor of Arts (Hons.) Degree from the University of Ruhuna (1992) and Master of Arts in Development Studies from the Institute of Social Studies, the Netherlands (2000). She was appointed as a Director of the HDFC Bank in June 2010. Currently she is a Director in the Department of Fiscal Policy of the Ministry of Finance & Planning. She joined the Sri Lanka Planning Service as an Assistant Director in 1994 and has previously worked at the Department of National Planning for 10 years and at the Department of National Budget for 6 years. In addition to her duties at the Department of Fiscal Policy, she represents the Treasury on the Director Boards of National Housing Development Authority, Condominium Management Authority and Waters Edge Ltd. She was a Director of State Mortgage and Investment Bank.

Mr. S. A. J. Samaraweera(Non – executive, Non Independent Director)

Mr. Jayantha Samaraweera was appointed as a Director of the HDFC Bank in June 2010. Currently he is the Chairman of National Housing Development Authority, Board Director of Tea, Rubber & Coconut Estates Control of Fragmentation Board, Urban Settlement Development Authority and Urban Development Authority.

He was a member of Parliament of the Democratic Socialist Republic of Sri Lanka during years 2004 – 2010. In 1999 he was elected to the Western Provincial Council as a member.

Mr. Samaraweera holds a Diploma in Journalism from the University of Sri Jayawardenapura, Sri Lanka.

Mr. A. M. Chandrasagara(Non – executive, Independent Director)

Mr. A.M. Chandrasagara was appointed as a Director of HDFC Bank in June 2010 and functions as the Chairman of the Board Audit Committee. He is also a Director of CRIB. He has 40 years of experience in the People’s Bank in the fields of General Banking, Accounting, Finance, Inspection and Internal Auditing. He is a Fellow of the Institute of Bankers of Sri Lanka (FIBSL) and an Associate Member of the Institute of Chartered Accountants of Sri Lanka (ACASL). He holds a Diploma in Information Systems, Security, Control and Audit conducted by the Institute of Chartered Accountants of Sri Lanka and a Diploma in Accountancy.

Profiles of the Board of Directors contd.


Corporate Management

Suresh AmerasekeraGeneral Manager/CEO

S. DissanayakeDeputy General Manager (Finance)

D. V. Pathirana Assistant General Manager (Business Development & Marketing)

W. M. A. BandaraAssistant General Manager - Information Technology

A. J. AtukoralaChief Internal Auditor/Compliance Officer

S. A. AlahakoonHead of Credit

A. M. D. G. AbeyawardenaHead of Treasury

L. EdirisingheHead of Human Resourses

M. Y. PiyasenaSenior Manager (Recoveries)


acts as the Chief Operations Officer and the Credit Division, Recovery Division, Administration division, Technical & Premises Maintenance, Valuation Division and Branch Operations were under his supervision until end of the year

D. V. Pathirana Assistant General Manager (Business Development & Marketing)

Mr. D.V.Pathirana is an Associate Member of the Institute of Charted Accounts of Sri Lanka (ACA) and a Fellow a Member of the Institute of Certified Management Accountants of Sri Lanka (FCMA). He holds a Bachelor of Science (Special Public Administration) Degree from the University of Sri Jayawardanapura, He has over 25 years experience in the fields of Auditing, Accounting, Financing, Management, Management Accounting, Banking, Projects and Investment Promotion both in Sri Lanka and overseas. He is currently responsible for Business Development and Marketing.

W. M. A. BandaraAssistant General Manager - Information Technology

Mr.W.M.A.Bandara is the Assistant General Manager- Information Technology of the HDFC Bank. He holds a Bachelor of Science Degree from the University of Colombo followed by a Post Graduate Diploma in Information Technology from University of Stirling, Scotland. He has over 20 years of experience as an IT professional with over 5 years experience in senior managerial capacity. He has extensive experience in installing, configuring and maintaining a wide range of UNIX

based system, specialised in configuring and maintaining Informix Database, Network administrative activities and Project Management. He has attended key training course relevant IT industry at international organizations such as CICC-Japan and IBM-Malaysia. He had also worked in NEC Corporation in Japan for one year.

A. J. AtukoralaChief Internal Auditor/Compliance Officer

Mr. Atukorala joined the bank as the Chief Internal Auditor in July 2009. He was also appointed as the Compliance Officer from July 2010. He possesses extensive experience for more than 23 years in General and Information Systems auditing in both public and private sector banks. He is an Associate Member of Chartered Institute of Management Accountants, UK and a BSc graduate of University of Colombo. Also he holds the titles of the ‘Certified Information Systems Auditor’ and ‘Certified Information Security Manager’ awarded by the Information Systems Audit and Control Association , USA and is a Diploma holder in Computer Systems Design awarded by the National Institute of Business Management, Sri Lanka. Further he has multi-disciplinary exposure in both manufacturing and service industries.

S. A. AlahakoonHead of Credit

Mr. S.A. Alahakoon is a Senior Banker with over 32 years of experience. He holds a B.com (Special) Degree from the University of Sri jayawardanapura. He held many senior managerial positions in various financial institutions including the CEO/General Manager Global Trust

Suresh AmerasekeraGeneral Manager/CEO

Mr. Suresh Amerasekara a senior banker with nearly 30 years of experience in Commercial Banking has being appointed as the CEO/GM at HDFC Bank with effect from October 2008. He had his initial training from the Colombo branches of State Bank of India, Bank of America and Citi Bank He was attached to Seylan Bank as an Assistant General Manager in charge of Colombo suburban region with 15 Branches, till he joined HDFC Bank.

He holds a MBA (International) from Edith Cowan University, Perth, Australia. An Advanced Diploma in Management Accounting awarded by the Chartered Institute of Management Accountants UK. He also has completed a Postgraduate Certificate in Asset Liability Management from the Post Graduate Institute of Management.

S. DissanayakeDeputy General Manager (Finance)

Mr. S. Dissanayake is an Associate Member of the Institute of Chartered Accountants of Sri Lanka (ICASL). He holds a Bachelor of Science (special- Business Administration) degree, from the University of Sri Jayewardenepura. He counts more than 24 years experience in public and private sector where he headed the finance section of the state sector institutions for several years. He joined HDFC in December 1995 as Assistant General Manager (Finance) and has been heading the Finance division since the assumption of the new portfolio as Deputy General Manager (Finance) for over 10 years. In addition to the Head of Finance he

Corporate Management contd.


Financial Services Ltd, General Manager Abans Financial Services Limited, Asstant General Manager (Credit) L.B. Finance Ltd., Senior Manager Leasing/Finance, Manager, Sanasa Development Bank, has 17 years work experience in the people’s Bank. he is an Associate member of the Institute of Chartered Accountants of Sri Lanka & Associate Member of the Institute of Bankers of Sri Lanka.

L. EdirisingheHead of Human Resourses

Mr. Leslie Edirisinghe holds a B Sc Special Degree in Business Administration at the University of Sri Jayewardenepura and has obtained a national Diploma in Human Resource Management of the Institute of Personnel Management of Sri Lanka. He is also an Associate Member of the Institute of Personnel Management of Sri Lanka (AMIPM) and his main forte lies in Human Resource Management and Training and Development.

He has over two decades of professional career experience in Human Resource Management and Training and Development in both public and private sectors, locally and overseas.

A. M. D. G. AbeyawardenaHead of Treasury

Mr.A.M.D.G. Abeywardena possesses experience for more than 28 years of which nearly 21 years have been in Treasury Management. He has worked in Several Leading Commercial and Specialised Banks for 23 years of which 16 years in the Senior Managerial capacity. Before joining HDFC, he was attached to a leading Conglomerate in

the country as the Asst. Group Treasurer. He has attended several Key Training Programmes relevant to Treasury Management both locally and overseas.

M. Y. PiyasenaSenior Manager (Recoveries)

Mr.M.Y. Piyasena holds a Bachelor of Science (Business Administration) Special Degree with second upper merit division from University of Sri Jayawardenapura in 1981. He has over 27 years experience in the field of Auditing, Financial Management and Loan Recoveries. He Joint HDFC in 1998 as a Chief Internal Auditor and has being heading as a Chief Internal Auditor up to 2004. Presently, he is heading the Loan Recoveries Department in the capacity of Senior Manager (Recoveries).


Senior Management

Mrs. W. W. D. S. C. PereraManager - Legal

Mrs. H. S. GunathilakeManager - Business Development & Marketing

Mrs. K. T. D. D. De SilvaCompany Secretary

Mr. C. R. P. BalasooriyaManager - Treasury

Mr. H. A. AnuraAccountant - Finance

Mrs. W. N. D. BothejuAccountant - Payment


Mr. M. S. Mohamed RilaManager - Technical

Mr. I. NishanthaManager - Project & Credit Administration

Mrs. C. P. K. HewageManger - Human Resource

Mr. P. S. PitawelaManager - Administration

Mr. W. M. ChandrasenaManager - Valuation


Regional Managers

Mr. R. M. SugathapalaArea Manager - Badulla

Mr. K.WijesiriArea Manager - Chilaw

Mrs. R. R. GunewardenaArea Manager - Colombo

Mr. H. M. ThilakarathneArea Manager - Kegalle

Mr. N. C. RanjithArea Manager - Galle


A. M. NeelachndraData Base Administrator

Mrs. L. A. S. C. AriyaratnaManager Business Development

K. R. M. A. BandaraManager - Internal Audit

Manager - PropertyMs. G. L. Pandigama

G. D. K. H. PereraManager - Mobile Banking

Mrs. K. H. D. PriyankaManager - Public Relations & Publicity

Mr. B W M C KumarasiriRathnapura

Mr. E. D. D. SampathHyde Park

Mr. G. W. A. N. KalindaTangalle

Mr. L. S. B. RatnayakeNuwara Eliya

Mr. M. L. R. KumaraGalle

Mr. N. M. JayawardenaPiliyandala

Mr. R. A. J. N. RanasingheJa Ela

Mr. T. B. KarunabanduGampaha

Mr. T. KandiahBatticaloa

Mr. W. D. K. SenewirathneKurunegala

Mr. W. GunasingheHomagama

Mr. T. Jegadeepan Vauvniya

Mr. K. D. RuwansiriBadulla

Mr. N. S. MeegastennaAwissawella

Mr. S. H. K. GamageAnuradhapura

Mr. W. B. RajasingheEmbilipitiya

Mrs. N. A. A. N. S. NissankaKandy

Mrs. D. T. A. JayasingheHorana

Ms. K. W. Y. IndiraMatara

Ms. L. GunethilakeColombo

Ms. M. G. D. P. SenevirathneAmpara

Ms. S. A. K. AbeykoonKegalle

Ms. J. SamanthaNugegoda

Mr. H.M.U. SamaraweeraChilaw Mr. D.K.P. De SilvaKalutara Ms. J.A.L.K. JayalathTrincomalee

Mr. I.K. DawatangaMatale

Mr. K.M.S.W. BandaraMonaragala

Managers Branch Managers


HDFC Bank of Sri Lanka Branch Network

Vavuniya

Northern

North Central

Central

Uva

Southern

Sabaragamuwa

Western

EasternNorth

Western

Trincomalee

Anuradhapura

MataleKandy

BatticaloaChilawKurunegala

ColomboHyde-park

Gampaha

Badulla

Ampara

Monaragala

TangalleMataraGalle

Jaela

Embilipitiya

RatnapuraKegalleAwissawella

HomagamaKaluthara

Horana

Piliyandala

Nuwara Eliya

Nugegoda


Our Branch Network

Colombo P.O. Box 2085Sir Chittampalam A GardinerMawatha, Colombo 2.

Nugegoda1st Floor Railway StationNugegoda

Hyde Park CornerNo. 63, Hide Park CornerColombo 02 Kandy NHDA BuildingYatinuwara VeediyaKandy

Kegalle 1st Floor , Royal Shopping ComplexMain Street, Kegalle

Matale26 1/1, City Plaza Building,Main Street, Matale Kalutara 13, Gnanodaya MwKalutara South Gampaha101/1, Colombo RoadGampaha Matara 9, HGPM BuildingKotuwegoda, Matara GalleNo 4, Sri Dewamiththa Mawatha Galle

Batticaloa58/1.Baily Road,Batticaloa

TrincomaleeN.C. RoadTrincomalee Badulla 71 / 1 LGNew Passara RoadBadulla

Chilaw 2nd Floor, Sky Line BuildingColombo RoadChilaw

Ratnapura No. 51 1/1Main StreetRatnapura

Tangalle 150, Matara road,Tangalle

Ja-Ela No 38/1,Old Negambo Road,Main Street, Ja’ Ela KurunegalaNo 12/B, 1st FloorDambulla RoadKurunegala

Anuradhapura No 396/14 , Court PlaceBandaranayaka MawathaAnuradhapura

VavuniyaNo. 68, Station RoadVavuniya

MonaragalaNo 310/AKachcheriya JunctionWellavaya Road,Monaragala

HomagamaNo 94, 1st Floor,High-level RoadHomagama

Nuwara - Eliya No.72, Park RoadNuwara - Eliya Ampara Uhana Road Ampara Avissawella90/B, 1st Floor,Yatiyantota Road, Awissawella Horana No.231, Panadura Road,Horana

Piliyandala No.21,Vidyala Mawatha,Piliyandala

Embilipitiya No. 93 B, Malwatta Building New Town Road,Embilipitiya


“ Responding to the changing landscape”


Management Discussion and Analysis

Business and operating environment. Corporate Profile.HDFC was originally established as a Building Society in 1984 and converted to a Public Corporation under the provision of Housing Development Finance Corporation Act No 07 of 1997 and obtained the status of a Licensed Specialised Bank (LSB) under the Housing Development Finance Corporation amended Act No. 15 of 2003. HDFC marked its 26th year in 2010 since incorporation as a Building Society and seventh milestone as a licensed specialised bank. The year 2010 also marked the completion of five years since listing at the Colombo Stock Exchange(CSE).

The Government of Sri Lanka holds approximately 51% of HDFC, largely through the National Housing Development Authority, which is a State Corporation tasked with formulating and implementing the state’s overall housing policy. The Bank Board of Directors are representatives of various governmental institutions and ministries, several of which are involved in housing and development. Three directors represent the private investors.

Business Overview.Over this period HDFC has achieved a steady growth in assets, shareholders’ funds and profitability while sustaining internal processes , capacities and strength. Bank also has gained wide recognition from the society as a leading player in housing finance particularly in the low and middle income market and as an award winning responsible corporate citizen.

Corporate Milestones

1984 Incorporated as a Building Society

2000 Converted to a public corporation.

2003 Obtained the status of a Licensed Specialised Bank

2004 Winner – NCCSL Business Excellence Award – Financial Service Sector.

2005 Listed at Colombo Stock Exchange.

2005 Winner- NCCSL Business Excellence Award – Financial Service Sector.

2006 Runner up- NCCSL Business Excellence Award – Financial Service Sector

2007 HDFC ranked as 14th best brand among the 20 largest state enterprises.

2010 Runner up- NCCSL Business Excellence Award – Financial Service Sector

2010 Winner- ACCA Sustainability Reporting Award 2010- Small scale Category.

2010 Winner- ACCA Sustainability Reporting Award 2010- First time entry group.

2010 Winner – Golden Maco Award 2010.

During the year whilst achieving substantial improvement in financial performance and growth the Bank was also able to win prestigious social awards as tabulated in the corporate milestones. HDFC was able to record a substantial improvement in the volume and value of its market share in the low and middle income housing finance

market and also savings and deposit markets with innovative products , services and processes.

With these achievements we believe that our corporation has taken robust steps ahead with the direction of the strategic vision and mission to be the premier financial service institution for the purpose of enhancement of lifestyles of Sri Lanka and to be a dominant player in the financial service sector by delivering innovative solutions to meet the needs of housing.

Highlights - 2010

Profit after tax. LKR -M 135

Shareholders’ fund LKR -M 1,848

Total Assets LKR -M 15,373

Branches 28

Staff 425

ATM access 225

Total customer base 346,243

HDFC, in our daily operation we respect our values and also paid particular emphasis to quantify and communicate our performance towards the interest of the different important stakeholders groups annually through the Sustainability Report prepared in compliance with the globally accepted guidelines of GRI.

Macro Economic Environment.The housing and housing finance industry largely depends on locally and globally sourced raw materials and savings, hence inherently sensitive to global and domestic macroeconomic environment and changes in related policies. Thus in the process of evaluating the Bank performance, it is to be emphasized in particular the existing and projected economic outlook and to


the variables such as inflation, interest and fiscal policies etc

Economic Analysis.World economy is expected to record an approximate growth of 4.8% in accordance with IMF world economic outlook report , October 2010. Economic recovery continued to strengthen worldwide but the strong growth in emerging and developing countries anchored world economic growth while advanced economies indicated a moderate but sustained recovery. Emerging and developing economies are expected to grow by 7.1 per cent strongly supported by China and India while advanced economies are projected to expand at 2.7 per cent in 2010. Developing Asia is expecting higher price levels in 2011 alongside its robust economic recovery. This regional economies would effect very positive influence on the Sri Lanka economic in medium term.

Domestic Economy.The Sri Lankan economy rebound was aided by the post-war confidence, expansionary fiscal policy, declining interest rates and a large inflow of foreign capital as global financial markets thawed. The economic growth reached approximately 8 per cent during the year 2010 more than double 2009’s 3.5% GDP growth rate, triggered by the growth in key sectors of the economy according to the Central Bank (CBSL). From 2003 to 2008, the country experienced impressive average annual GDP growth of 6.3%. In the first nine months in 2010, the Agriculture sector grew by 7.2 per cent, mainly driven by the higher growth in production of paddy, tea and minor export crops and better performance in the fisheries sector. The Industry sector grew by 8.0 per cent with improved performance in mining and quarrying, manufacturing,

gas, electricity, water, and construction sectors. The Services sector recorded a growth of 7.8 per cent in the first half of 2010, supported by higher contribution from domestic and foreign trade, transportation, tourism and financial services.

Inflation, Fiscal Policies and Interest Rate. The continued absence of significant upward demand management policies, improved domestic supply conditions and supportive fiscal policies enabled to maintain inflation at subdued levels which was 6.6 per cent in October 2010. The favourable outlook for inflation enabled the Central Bank to ease its monetary policy stance by reducing the Repurchase rate and the Reverse Repurchase rate, by 25 basis points each, in July 2010. The Reverse Repurchase rate was reduced by a further 50 basis points in August with the aim of further supporting the recovery of domestic economic activity. The fiscal situation improved significantly as reflected in the rise in government revenue supported by the recovery of international trade and expansion in domestic economic activity.

In the face of significant improvement in inflows, the exchange rate policy continued to focus on maintaining stability in the Sri Lankan Rupee. This overall stability of the monitory system is influenced by overall liquidity in the banking system, distribution of liquidity among banks created a favorable environment to a moderate interest rate encouraging credit growth. Mortgage loans which were priced above 16% per annum and being currently priced at moderate rates below 15%, favouring for the expansion of the mortgage market in the medium term.

Housing and Housing Finance Industry.-Impacts, Trends, Challenges and Opportunities.According to the Ministry of Housing overall shortage of housing is approximately 650,000 units. Including the North and East that has been untapped for nearly three decades, this shortage would be much higher than this estimate. Other than this existing backlog, natural growth is estimated to be between 50,000 to 75,000 units. Also a substantial percentage of existing units are substandard and requires improvements or rehabilitation as well as better public services. This gap indicates that effective demand, has been much lesser than housing needs as it is determined by the ability and willingness of households to pay for a home. In consideration of mortgage finance market this is an ever increasing opportunity and should commit to the nascent development of the market as a means to increase housing investment to levels necessary to close the gap between the housing need and the housing stock.

According to a publication on Housing Finance in South Asia by The World Bank, the size of the Sri Lanka’s housing finance sector is 6 per cent of GDP, much lower than the world average of 30%, but highest in the region is a clear indication of the vacuum of demand in the mortgage market..

Housing Cost and Affordability.Housing finance market which is mainly driven by the commercial bank sector has grown from LKR 142 Billion in March 2007 to LKR 172.5 Billion by March 2010 reflecting an annual average growth of 7% even in the challenging economic environment. However commercial banks’ advances into housing sector as a percentage of

Management Discussion and Analysis contd.


total lending has declined from 16.1% to 13.8% over the same period. In the second half of the year , with favourable change of the macro economic environment dividend by peace and faster recovery of the south Asian region, banking sector geared more on the housing industry with more dynamic products in shelves.

labour 19% , cement 27% , thus cost of housing has become unaffordable for many, particularly to the low and middle income segment.

Sri Lanka populations growth is about 1% per annum whereas the country’s urban population is growing at threefold higher rate than the country average, making urban housing the mostly affected challenge. Other than the cost of construction , high cost of lands has further mounted pressure on urban housing. This has resulted dissemination of slumps , encroachment of valuable government properties also increasing urban poverty. Drastic decline of greater Colombo housing approval index, from 132.7 in 2007 to 74 in 2009 is a clear indication of this pressure. Particularly, approval index of middle income housing units, in sizes of 1000 -2000.sq:fts has declined 140.7 to 76 over the same period. The government has initiated several programs to develop underutilized valuable urban properties to provide up market urban housing and affordable housing for the middle income segments. The government also plans to build social housing schemes to accommodate encroachers of those lands while clearing for development. Following this market opportunity HDFC granted 20% of its facilities in Colombo district in 2010.

The commercial banking sector that has invested only 14% of their advance portfolio in housing sector strategically focuses more dynamic products with adjustable interest rates , flexible and over 20 years repayment terms making facilities more affordable to customers in the challenging environment. Thus, as per the CBSL information, over the period of three years ended 31st March 2010, share of the short term housing loans has declined from 13.37% to 5.8% while long – term loan market increased from 60.3% to 67.4%.

Cost Effective and Sustainable Housing.Sri Lanka’s housing industry also is experiencing a transformating into more cost effective, resources efficiency and sustainable design and building focusing on affordability in construction and maintenance.. As per the CBSL statistics, housing approval index of above 2000 Sq:ft houses in greater Colombo has recorded a remarkable decline from 207 in 2007 to 112 in 2010.

Weak Accessibility.Commercial banking sector that caters mainly to the wider and upper middle income groups with more dynamic products and services, represents the largest share of the country’s effective demand for housing finance. Lower middle and low income groups that accounts 70 of the population represents only 30 of the effective demand and often face the challenge of inadequate collaterals, regular income and income documents in obtaining formal housing loan facilities. HDFC Bank that focuses above 70% of its facilities to this segments, strives to enhance accessibility and affordability with new customised

This spark is also lined with the government policy focus on agriculture and infrastructure development as the priority sectors for reaching the target of USD 4,000/ per capital income envisaged by the country in 2015.. Housing and infrastructure development generates multiple economic impacts in other sectors and creates enabling environment to boost the rate of growth. Inadequacy of infrastructure has been one of the reasons that the country is not fully realising the dividend of peace. Meanwhile, factors , such as high cost of finance, construction material , lands and labour also substantially precluded the envisaged expansion of the industry. As per the CBSL statistics , cost of construction has increased more than 20% since 2007 with an annual average of around 6.5%. Building material that registered substantial price increase since 2007 includes timber 17% , skilled

0

1,000,000

1,600,000

Rs. Billion

Quarter

Banking Sector total advances and Housing Finance

800,000

1,400,000

600,000

1,200,000

400,000

200,000

2005

Jun

2005

Dec

2006

Jun

2006

Dec

2007

Jun

2007

Dec

2008

Jun

2009

Mar

2009

Sep

2010

Mar

0

1,000,000

1,400,000

Rs. Billion

Quarter

Short -term and Loan Term Housing Finance

800,000

600,000

1,200,000

400,000

200,000

2005

Jun

2005

Dec

2006

Jun

2006

Dec

2007

Jun

2007

Dec

2008

Jun

2009

Mar

2009

Sep

2010

Mar

Short-term loans

Long-term loans


products and services. HDFC mobile banking service, which is operation since 2007 has opened doors for many unprivileged families for formal housing finance.

Poor Governance.Poor emphasise in governance is one of the main issues that stakeholders in the housing finance industry should address. Real estate forms perhaps the largest assets class in any country and is also the largest source of wealth for families. Therefore, it requires high level of governance in planning , designing, approval and construction etc to protect the rights of residents. Mortgage lenders who invest over 75% of the cost of construction for over 10 years, also do not possess a warranty as to quality of property. This has largely precluded new cost effective and sustainable construction technologies penetrating local market, which have been successful in other countries. These are the fundamental issues which will ensure long term sustainability of the industry rather than short-term gains.

Most of the condominium projects in Colombo have not obtained necessary approvals from required statutory bodies and this has prevented buyers from seeking credit from financial institutions due to lack of legal title. This also restricted the multiple effects of funds which otherwise would have occurred by investing these funds in purchasing apartments , in other economic sectors.

Another area that needs more regulation is upfront payment sought by the developers even before plans are approved. Advertising and sale of projects prior to finalising plans and building approvals is not only unfair to the public also prevent the growth of the sector in the long run.

Operational Review.Banking Industry and HDFC.As per the CBSL, banking sector accounting for 52 per cent of the financial system’s total assets. The number of banks decreased from 36 to 31 comprising 22 licensed commercial banks (LCBs) and 9 licensed specialised banks (LSBs) including HDFC, due to the merging of the business of the five regional banks. The banking sector had remained stable in 2010 and key indicators of financial soundness have improved or maintained at healthy levels. Total assets base of the sector has increased from LKR 2,942 Billion to LKR 3362 Billion from September 2009 to September 2010. In the first nine months, the customer outreach has expanded with 29 branches and 34 other outlets, thus increasing the total number of banking outlets in the country to nearly 6,000. In addition, there were 1,972 ATMs in operation by end September 2010.

Market Share.As per the calculation based on the CBSL information , HDFC share in the total assets market of the Banking sector is 0.45% as at September 2010 and that of LSBs market was 2.71% as indicated in the following table.

HDFC Market share in total assets - September 2010

Market-Rs B

HDFC Rs B

HDFC –Share

Total banking Sector

3,362 15.3 0.45%

LSBs 553 15.3 2.71%

State owned LSBs

470 15.3 3.19%

Composition of Assets. HDFC’s the main income generating assets housing loan portfolio represents 83% of the total assets as against 54% in the industry. Big players in the industry maintain high percentage of short and medium term investments with above average returns. In the case of HDFC, investment opportunities available are highly restricted because of the statutory limitations enforced by the Act. However we strive to enhance investment portfolio within the statutory scope, thus abled record 10% in 2010 as against 6% in 2008.

Composition of Assets

Industry HDFC

Loans & Advances

54% 83%

Investments 32% 10%

Other 14% 7%

As per CBSL records


Loans & Advances

Investments

Other

Composition of Assets - Industry

14%54%

32%


Composition of Liabilities.HDFC maintains a healthy capital fund ratio 12% compared to the industry average of 8.5%. There is a decline in borrowings and steps would be taken to reduce this further to match with the industry norms, while managing the maturity gaps. However, as shown in the following analysis, deposits has continued to be the main source of funding in the banking sector accounting for 74% of total liabilities. HDFC has financed 50% of its liabilities from time deposits and savings. Meanwhile, in terms of deposit types, time deposits has accounted for the major portion of 55% of the total deposit based in the industry, whereas at HDFC 86% of deposits represented by time deposits. We strategically strive to reduce this to 75% by the year 2012 and also change the deposit mix to reduce the cost of funds.

Assets and Liability Growth.Total assets based of the banking sector recorded a year on year growth of 14.3 % September 2009 to 2010 , in comparison to the lower growth of 8.8% in 2009. This is mainly attributable to the significant year on year growth of 25.7 per cent in investments including investments in subsidiaries and associates which accounted for around 32% of the total banking sector assets by end September 2010. Over the same period HDFC recorded a 13.2% growth in investment which is mainly because of held to maturity investment in government securities. HDFC has recorded a 1.5% growth in the loans and advances as against the 12.9% growth in the industry. The slow growth was mainly due to the risk management strategies followed up to June 2010. Meanwhile investment in short-term income generating assets and property, plant and equipments has increased by 4.5% as against the negative growth of 1.6% in the industry.

Assets Growth September 2009 - 2010

Industry%

HDFC%

Loans and Advances 12.9 1.5

Investments 25.7 13.2

Others -1.6 4.2

Total Assets 14.3 5.4

Based on CBSL records.

Deposits, savings and time deposits, continued to be the main source of funding in the banking sector accounting for 74% of total liabilities. During the period September 2009 to September 2010 HDFC has recorded an impressive 26.8% growth of deposits as against the industry average growth rate of 12.5%. Deposits growth at HDFC is mainly attributable to the growth in savings

Loan & Advances

Investment

Other

Composition of Assets- HDFC

7%

83%

10%

Capital Fund

Borrowings

Deposits

OtherOther

Composition of Liabilities - Industry

5% 9%

13%

73%

Capital Fund

Borrowings

Deposits

Other

Composition of Liabilities - HDFC

7% 12%

31%

50%


that has recorded an impressive growth of 76% in 2010. While the industry has recorded a healthy 15.9% growth of capital fund HDFC has been able to maintain only 4.7 % growth. Over the period of September 2009 to September 2010 HDFC has been able to reduce borrowings and other liabilities 12.8 % and 13.3% respectively whereas the industry’s dependence on borrowed funds and other liabilities as enhanced substantially from 22.6% and 16% respectively. Declined borrowings and increase of capital fund at HDFC has entirely been funded by the increased time deposits, savings and profit.

Liability Growth September 2009 - 2010

Industry HDFC

% %

Capital Funds 15.9 4.7

Deposits 12.5 26.8

Borrowings 22.6 -12.8

Others 16 -13.3

Total Liabilities 14.3 5.4

Based on CBSL records.

Soundness Indicators - Industry and HDFC.As per the CBSL statistics , financial soundness review indicators of LSBs sector and HDFC as at September 2010, are tabulated in the following schedule for comparative information. HDFC Bank’s tier 1 and total capital adequacy ratios are comfortably above the regulator minimum of 5% and 10% respectively. This is due to the Bank’s relatively high capital fund and the low risk-weights assigned to housing loans backed by mortgages over residential properties and EPF balances.

Bank’s gross non-performing loans (NPL) ratio in total loan portfolio is fairly higher than the average of LSB sector, and is largely attributable to the week economic environment during the early part of the year. The Bank’s total gross NPL ratio is 23% (30th September 2010), due to the high level of non-performing in loans granted against EPF balance. This is in turn due to willful defaults by borrowers who use this loan products as a mechanism for drawing down their provident fund balance prematurely and arrears is reimbursed by the Central Bank. Although the NPL ratio stood at a high 23%, the NPL ratio excluding EPF – backed loans (as they are reimbursable) clocked in at 14.25% as at 30th September 2010.

Licensed Specialized Banks - Soundness Indicators as at 30th September 2010

Industry HDFC StatutoryMinimum Sep-08 Sep-09 Sep-10

Capital Adequacy Ratio – Tier 1 Capital Ratio

25.6 23.6 23.8 16.25 5

Capital Adequacy Ratio – Total Capital .

21 22 22.1 17.24 10

Gross NPL as a % Total Loans. 8.9 10.4 9.9 23.09 *

Return on Assets -Before Tax. 7.1 2.4 4.1 0.9

Return on Equity (After Tax) 6.9 15.1 32 7.4

Liquidity Ratio 61.9 71.1 73.6 22.23 20

* Gross NPL ratio excluding EPF is 14.25%. Industry information is based on CBSL reports. Net NPL excluding EPF as at 31/12/2010 is 9%, below the housing finance industry average

HDFC maintains statutory liquid assets ratio comfortably above the minimum requirement of 20%. In general, a surplus liquidity position was recorded in the market throughout the year 2010. As per the CBSL reports an analysis of the composition of the liquid assets of banks as at September 2010 indicated that about 78 per cent of the liquid assets

comprised of investments in Treasury Bonds (36 per cent), Treasury Bills and Government Securities (32 per cent) and investment in Sri Lanka Development Bonds (10 per cent). In these circumstances, the overall liquidity ratio of the banking industry was well above the stipulated minimum requirement.

New directions during 2010.The growing complexity and interconnectedness of systems, financial products, information technology solutions Central Bank issued several new directions to strengthen management process of operational risk and Corporate Governance for Licensed Specialised Banks. HDFC has promptly

complied with these directions and the level of compliance is reported under the Corporate Governance section of the Annual Report.

Challenges in Maintaining Industry standards.HDFC is the only bank in the LSBs sector, its scope of operation is restricted



to housing finance. Thus opportunities available to other banks in the sector in managing growth, profitability and risk are not equally available to HDFC. With these inherent restrictions, managing HDFC to the industry norms is a challenge. Comparison of HDFC performance with the Licensed Specialised Bank sector is realistic only with reasonable adjustments to sector averages.

Business Operation and Developments.Market Environment and quality of service.While the year saw an extremely competitive banking environment come into play for housing finance with more dynamic products offered by the commercial bank sector given impressive choices to work with, underpinned the favourable economic and finance market conditions. Mortgage interest rates offered by the big players were more attractive. Nevertheless , HDFC Bank held its own position in the low and middle income market , due to the social license that has been gained over the years as the affordable home loan provider.

During the two new branches were opened in Vauniya and Trincomalee. This year the focus has been in streamlining our processes and infusion of more customer conveniences into our operation. Our concerted efforts in amering and enticing more customers into HDFC portfolio saw considerable results with our deposits portfolio. Average loan processing period reduced substantially. Processing period of EPF loans was further reduced to one working day becoming the most efficient player in the industry. Improved customer satisfaction index and reaffirmation of ISO 2001: 2000 quality certification.

Strategic priorities.Accelerated growth of lending, deposits mobilisation , management of non-performing loans (NPL) , IT development, mobile banking, HR development , capacity building, Risk Management and inculcating sustainability practices were the strategic priorities in 2010.

Strategic Priorities and Achievements

Actual Budget Variance

Priority 2007 2008 2009 2010 2010 2010

Loan Value LKR M 2,622 1,418 1,404 3,069 3,500 (431)

No of Loans 9,561 5,559 5,977 10,739 8,000 2,739

Deposits LKR M 4,934 4,975 6,114 7,703 7,975 (272)

NPL Value LKR M 2,460 2,501 2,743 2,840 2500 (340)

Gross NPL ratio % 17 22 23 22 14 (8)

No of Mobile Customers 1201 5,630 38,289 59,689 50,000 9,689

No of Branches 21 21 26 28 32 (40

No of staff 286 289 384 425 435 (10)

Accelerated growth of lending.Favorable macroeconomic, political and low interest environment created a conductive environment enabling HDFC to record a robust growth of lending from LKR 1,404 million in 2009 to LKR 3,069 Million in 2010 reflecting a yearly increase of 118% while the number of loans grew by 80 per cent YoY to 10,442 loans. Whereas the industry has grown only 2% over the year up to 30th June 2010. Most of the branches achieved their lending targets.

Security wise the portfolio mix was enhanced by concentrating loans against property mortgages, EPF balances , cash margin and guarantor schemes. State sector and North Central Provinces high percentage of advances were against EPF balances because of the problem

of ownership of properties. Majority of house repair, up grading and furniture loans too granted against EPF balance. Provincial average size of loans s calculated as follows.

Average size of loans 2010. - Provincial

Western 350,000

Central 190,000

Southern 320,000

N-Eastern 200,000

Uwa 210,000

North-Central 210,000

Sabaragamuwa 240,000

N-Western 340,000

Bank 290,000

Although the loan volume exceeded the annual target of 8,000 loan , disbursements fell below the target by LKR 431 million. The loan advance expects to grow by 40 per cent in 2011.


Savings and Deposits Mobilisation.Long term, low cost risk pooled fund base is essential for sustainable growth of the Bank by addressing the challenges of maturity mismatch and interest margin.

HDFC commenced aggressive promotion of deposits in 2007 and during the year 2010, Bank achieved a growth of 51% in savings fund because of the branch wise promotional strategies followed particularly through the mobile banking operation ( Palm Top). Over the same period minor savings has grown by 97%. Although the deposit growth outperformed the industry average, it was below the target for the year by LKR 272 million.

Savings growth

2007 2008 2009 2010

Minor savings LKR.M 12.7 20.4 39.3 77.5

General savings LKR M 126.4 347.8 652.3 964.5

Total savings LKR M 139.1 368.1 691.6 1,042.0

Time Deposits LKR M 4,795.5 4,607.7 5,423.1 6,660.9

Total Deposits LKR M 4,934.6 4,975.9 6,114..7 7,702.9

NPL Management.Given the non-conductive economic climate and aggressive loan expansion , the Bank’s NPLs increased from LKR 2,743 Million as at 31 December 2009 to LKR 2,840 Million as at end of December 2010. It should be noted that NPLs from EPF loans accounted for a bulk of this; these loans are backed by the EPF contributions of the borrowers. Although, capital of NPL was increased , Bank was able to manage gross NPL ratio from 22.65% to 21.61% and net NPL ratio from 19.3% to 21.01% with initiatives to enhance assets quality. NPL ratio , excluding EPF declined to 9% , which is below the industry average applicable to the housing finance sector. However, the Bank’s NPL ratio is also a reflective of HDFC’s target

IT Development.In 2010, HDFC recorded several achievements through developments of information technology (IT) which took place under the IT strategic plan. The strategic alliance with Sampath Bank which expanded our customer reach through 225 new ATMs was a significant achievement in 2010 through IT innovations.

Mobile Banking Operation.Our mobile banking operation ( palm top) which was introduced in 2007, further strengthened in 2010 by recruiting 23 new operators to the group. The operation was expanded to all branches including Vauniya and Trinco, and successful, as a strategy to promote savings, customer reach and brand building. During the year 2010, over 21,000 new customers were captured reflecting a YOY growth 56% while customer reach and brand promotion improved 96% and 111% respectively as estimated.

New Products and ServicesDuring the year HDFC introduced an attractive minor’s savings plan named ‘ARUMBU’ targeting the Tamil speaking community in the North, East and the Plantation Sector. Another general investment plan named ‘Ashcharya’ with attractive returns for the customers seeking reasonably attractive returns was launched during the year.

market, i.e low and middle income customers. Meanwhile, HDFC ‘s loan loss provisioning levels remained low compared to the industry, as all NPLs are backed by home mortgages. Furthermore, the Bank is also not required to provide for non-performing EPF loans as they are backed by the Central Bank. Going forward, HDFC expects improve NPL ratio to 5% in 2011, underpinned by the Bank’s concerted recovery efforts and quality of loans.

07 08 09 100

600

800

1,000

1,200

Rs. Milion

Savings Growth

200

400

Minor savings

General savings

Total savings



Developer Financing.Real estate developers who play a significant role in the housing industry faces the challenge of easy access to project financing. With the strengthened regulatory framework rooms which were available to accepts preconstruction advances is scaring. HDFC as a policy, does not encourage developers to mobilize presales advances without compliance with the planning approval requirements of relevant authorities to strengthen the sustainability of the industry. Particularly in the apartment industry, we encourage developers to obtain provisional condominium plan approval from the Condominium Management Authority. Therefore, there is a need to figure out the modus operandi for financing arrangements for builders and developers through the formal banking system that is viable, acceptable, and sustainable. At present, there is little external bank financing for property

development. In this regard, HDFC plans to strengthen the project finance operation to penetrate this lucrative market ,also as a strategy of managing assets and liability maturity gap.

Human ResourcesDuring the year the staff strength of HDFC was increased to 425, from 364 in 2009. The workforce is mainly concentrated in the Western Province as 32 per cent of the total staff is based in the Head Office in Colombo. In an effort to promote an equitable regional staff distribution HDFC reduced the work force in the Western Province from 64 per cent in 2008 to 57 per cent in 2009 while 50 per cent of the new recruitments in 2010 were mainly from the North- Central and Northern Provinces.

Further, HDFC reduced the average cost per employee from LKR 57,371 in 2009 to LKR 47,266 in 2010, while maintaining a substantial increase in the average basic salary, mainly as a result of new recruitments. Employee turnover declined from 4.67 per cent in 2009 to 2.58 per cent in 2010 while the staff happiness index improved from 68 per cent to 88 percent in 2010. Recognising the team’s needs to be geared for the challenges ahead, a knowledge gaining culture was inclucate into the everyday operations of the Bank. The number of training hours given to the sales staff and junior executives increased substantially by 147 per cent in 2010 compared to 2009.

From the inception HDFC has employed a high percentage of women in the organisation which amounted to 46 per cent in 2009. The recruitments during 2010 have changed this composition to 45 per cent. In 2009, 99 per cent of

the workforce comprised of Sinhalese which was a constraint for sustainable regional expansion of the Bank. This representation was reduced to 93% with new recruitments to facilitate opening branches in Northern and Eastern regions .

Going forward, the Bank has taken several steps to improve, work life balance, welfare and productivity of the staff as explained in the Sustainability report.,

Capacity BuildingDuring the year under review, the bank entered the Northern Province with the opening of the Vavunia branch in June and Eastern Province with the opening of the Trincomalee branch in December. With these two branches the network increased to 28. The bank expanded its ATM network by entering into a strategic alliance with Sampath bank for providing greater accessibility to its customers. This strategy was adopted as a cost effective measure to improve customer service simultaneously aiming to obtain better return from the capital. This strategy has given the customers’ access to 225 ATMs spread across the country. At the same time the bank expanded its palm top operators to 81 to fulfill the growing demand for convenient banking.

Meanwhile staff strength increased to 425 by appointing 61 new members while concentrating geographical and age wise diversity. The Bank appointed an experienced and qualified officer as the Head of HR to strengthen the human resources to meet the challenges of HR in a competitive market. Meanwhile, Head of Credit position which was vacant for more than 3 years was filled with a qualified and experienced officer in the capacity of an Assistant General

06 07 08 09 100

100

200

300

500

400

Staff Growth


Manager. Five Senior Managers were promoted as regional managers to strengthen the supervision of branches and their productivity. Further , average computer usage capacity increased from 69% to 71%.

The bank continued its reposition strategy by relocating 5 branches in Chilaw, Avisawella, Tangalle, Badulla, and Kegalle. Furthermore the main branch at the National Housing Development Authority was refurbished to offer industry standard facilities to customers as well as the staff. The Bank has already planned to relocate Homagama, Gampaha, Kurunegala and Matale branches in the first half of 2011.

Loan Processing time and quality of service.The loan application process usually takes three to four weeks, in the industry. HDFC has achieved significant improvement in loan processing. We have managed to reduce average mortgage loan processing time to one week and EPF loan to one day. Regular staff training on customer care, awareness in processes, regulations and procedures, regular reengineering of processes has contributed to this improvement.

We are committed to our quality policy, and drastic improvement in customer satisfaction index, from 48% in 2008 to 80% in 2010 is a clear indication of our commitment to satisfy customers beyond heir expectation in home and lifestyle need. During the year, our ISO 9001-2000 quality certification was reaffirmed by the Sri Lanka Institution of Standards (SLIS).

Sustainability Development and Reporting.During the year , HDFC paid a priority to align sustainability practices with the core business and internal activities of the bank. Several strategies were taken to develop internal indexes to monitor and manage economic, social and environmental impacts of the housing, housing finance and internal operation of the Bank inculcating sustainability habits among the staff and community. Society paid dividends for our effort of promoting these ethical practices and appreciated with two awards at prestigious ACCA sustainability reporting awards 2010.

Future Outlook Being a long term lender the Bank is exposed to the interest rate and liquidity risk, if long term assets are not matched appropriately with long term funding. Considering the weakness of long term money market the funding is always a challenge for a long term lender. Although, the Bank has taken measures to reduce the maturity gaps to a certain extent, further improvement needs to be taken to stabilize the future profitability. Keeping in this mind HDFC will strive to achieve a sustainable growth by having long term funding lines to match the planned growth in advances.

The planned image building and the expansion of the branch network has paved the way to attract borrowers from all income groups in the country. The Bank has already developed the infrastructure required to expand and aggressively promote the low cost fund base and thereby reduce the cost of funds by changing the composition of


the deposit base. The strategies adopted by the Bank has paid dividends to improve the savings base by 51% to exceed the one billion mark and the same time increasing the savings base to 14% of the total deposit base from 10% in 2009. Our target is to increase this to 25% in 2011and to 40% by 2013. The Bank has also strategise to expand the branch network to 50 within next 3 years.

HDFC has a role to play in, implementation of the government’s 1 million housing program “ JANASEVANA- housing for all” , which has focused mainly to the pressure of low and middle income housing need of the country. This is about 30% of the house holds who have willingness and affordability for low cost housing but fails to access formal housing finance, due to lack of income documents, adequate collaterals, lack of banking and savings habits and high cost of construction etc. We strive to deepen our service to this segment, by capturing them as valued customers through the mobile banking operation.

New Head of Credit together with the Regional Managers appointed during the year , will be working with the branch managers to enhance the performance of the branches and achieve the set targets for the regions/branches.. This would also quicken the decision making process to benefit the customers.

In the short term, HDFC will develop new products to increase the low cost fund base, strive to improve the share holder returns and concentrate on internal processes for better risk management.


Non Interest IncomeHDFC recorded a non interest income of LKR 85 Million for the financial year 2010 reflecting an YoY increased of 63% compared to LKR 52 Million in 2009. This is largely attributed to the increase in loan processing, valuation, technical and legal fees consequent to the substantial increase in the number of loans granted in 2010. The loan approvals amounted to 10,739 in 2010, compared to 5,977 in 2009.

Financial Review

The Performance of the Banking Industry was extremely progressive in 2010, underpinned by enhanced political stability, improved investor confidence and a stable macroeconomic environment. The financial system retained its liquidity consequent to the decline in the interest rates which was largely driven by increased capital inflows, with the easing of monetary policy and moderate inflationary pressure.

In the backdrop of the favorable market conditions, HDFC Bank achieved a remarkable performance in 2010, as reflected by the key performance indicators such as profitability, assets growth, capital adequacy, liquidity and quality of asset.

Interest Income and ProfitabilityHDFC Bank recorded a profit after tax of LKR 135 million reflecting a YoY increase of 140%. This was largely due to a sharp declined in the cost of funds coupled with accelerated lending which took place in the second half of the year as reflected by the gross interest margin of 38% as against 29% in 2009. Further, the Bank changed the composition of its fund base by increasing the share

Operating ExpensesOperating expenses, excluding the loan loss provision, increased by 16.59% during the year, fuelled by the rise in staff cost and premises equipment and establishment expenses. The rise in staff cost is attributed to new recruitments while the opening of two new branches and the refurbishment and relocation of six existing branches caused establishment and operating cost of the Bank to soar during the year.

The specific provision for non performing assets increased by LKR 72 Million in 2010 primarily as a result of

Operating Summary 2006 -2010

Year 2010 2009 2008 2007 2006

Interest Income 2164 2216 1941 1695 1203

Interest Ex -1339 -1582 -1602 -1246 -699

Net Interest Income 825 634 339 449 504

Non Interest Income 85 52 33 45 82

Net income 910 686 372 494 586

Non Interest Expenses 619 518 439 401 277

Operating profit before tax 291 168 -67 93 309

Profit After Tax 135 56 -92 21 172

of savings deposits which resulted in a reduction of the Bank’s cost of funds.

HDFC reduced its interest rates twice during the year, keeping in line with the market rates. The revisions were made in adherence to the Government’s fiscal policy changes made from time to time during the year. The negative effects of the downward revision in the interest rates were partly set off by accelerated lending, increased savings, and the general decline of cost of funds.

06 07 08 09 100

10,000

20,000

30,000

40,000

50,000

60,000

80,000

70,000

90,000

Rs. Mn

Non interest Income 2006 -2010

06 07 08 09 100

5,000

10,000

15,000

20,000

25,000

30,000

35,000

45,000

Rs. Mn

Gross Interest Margin 2006 -2010


the LKR 123 Million provision made against the LKR 243 Millin loan granted to HDFC Real Estate Development (Pvt) Ltd. The Bank has provided full coverage for the risk exposure of the particular loan with this provision.

DepositsThe deposit base of the Bank, reached LKR7,702 Billion and constituted 50% of the total assets base by end 2010. The increase during the year was 26%, amounting to LKR 1587 Million over the previous year. Savings fund amounted to 13.5% of the total deposit base and recorded a YoY growth of 76% during the year. For the first time in the history of HDFC, the saving base surpassed the one billion rupee mark and reached to LKR1042 Million. The balance 86.5% of the deposit base consisted of term deposits which increased by 20% YoY to reach LKR6,660 Million in 2010.

Assets GrowthHDFC’s total assets value increased by 7% to LKR 15.37 Billion compared to LKR 14.30 Billion in 2009. Despite the negative growth of 2% recorded last year, the housing loan portfolio grew by 8.5% during 2010. Consequent to the aggressive promotional strategies implemented during the latter part of the year, the home loan granted increased to LKR3, 069 Millions compared to LKR 1,400 Million in 2009. To ensure high quality of the asset base, the loan portfolio was strategically diversified against collaterals such as property mortgages, EPF balance, personal guarantees and cash backed securities.The investments in government securities and commercial papers rose by LKR 266 Million in 2010, reflecting an increase of 21% YoY.

Shareholders’ Fund.Shareholders’ fund grew by 7% during the financial year, primarily due to retained profits. The fund based grew from LKR 1, 721 Million in 2009 to LKR 1,848 Million in 2010. HDFC declared a dividend of LKR 5 per share, which will amount to a total dividend payout of LKR32 Million.

Return on Average Assets (ROAA)Return on average assets in 2010 increased to 0.91% from 0.39% in 2009, while the return on average equity grew to 7.58% from 3.28% in 2009.

Statutory RatiosCapital AdequacyThe Capital adequacy ratio of HDFC is well above the statutory level stipulated by the Central Bank. Tier 1 and Tier 11 ratios were 21.09% and 22.18% respectively, while the statutory minimum levels were 5% and 10% respectively. Tier 1 and Tier 11 ratios for 2009, were 17.63% and 18.66% respectively.

Liquidity RatioHDFC maintained a healthy liquidity ratio above the statutory requirement of 20%, throughout the year. Liquid assets are maintained in the form of deposits in commercial banks, treasury bills, treasury bonds and commercial papers.

Future FocusAs the only specialised Housing Finance Bank, in the country, HDFC plays a vital role in facilitating human settlement, in the post conflict development scenario through the provision of affordable housing finance. HDFC plans to extend over LKR 4,800 million home loans to approximately 15, 000 borrowers in 2011.

06 07 08 09 100

10,000

20,000

30,000

40,000

50,000

60,000

70,000

Rs. Mn

Operating Expenses 2006 -2010

06 07 08 09 100

1,000

2,000

3,000

4,000

5,000

6,000

7,000

Rs. Mn

Growth of Deposits 2006 -2010

06 07 08 09 100

2,500

5,000

7,500

10,000

15,000

17,500

12,500

20,000

Total Assets

Rs. Bn

Growth of Total Assets 2006 -2010

Financial Review contd.


HDFC’s Risk ProfileRisk is an integral component of any business, especially in the banking industry. Risk can be defined as “the occurrence or the probability of occurrence of an event which could impair corporate earnings or cash flows over short/medium/long-term horizon.” Corporate earnings or cash flows have a bearing, on the wealth of the shareholders, through the valuation of a corporation. Being a long term lender where long term advances are funded by short term funds and the diversity of the market and geographical regions in which the Bank operates in, the implementation of an efficient risk management structure is a critical undertaking for HDFC. Housing sector is an important facet in the social economic development of a country and is an area of priority in the Government’s policy formulation. Thus HDFC’s risk profile includes the Bank’s sensitivity to changes in policies, and is given continuous strategic focus. The impact of unforeseen changes in the macro economic conditions and environment such as the global financial crisis, tsunami, flood etc, are another areas of focus in HDFC’s risk management. HDFC emphasies on being compliant with the regulatory requirements of the Central Bank of Sri Lanka to ensure the sustainability of the banking industry and Bank.

Objectives of Risk ManagementOverall objectives of the Bank’s risk management are:● to contribute to the development of

the Bank’s business by optimising the overall risk-adjusted profitability

● to guarantee Bank’s sustainability as a going concern, through the implementation of a high quality

infrastructure for risk measurement and monitoring

● to ensure HDFC functions as a responsible corporate citizen in compliance with applicable laws , regulations and external codes of best practices

● to contribute to the sustainability of the banking industry

Challenges in Managing RiskIn the process of risk management, HDFC faces the following challenges which are not confronted by the competitors in the industry:

1. Scope of the business operation of HDFC Bank is restricted to the powers constituted by the HDFC Act No 07 of 1997 and amended Act No 15 of 2003. However in the process of mobilising market funds, it is inevitable that bank has to face an equal competition with other Banks. Thus product and service diversification as an important strategy of risk management, is a challenge.

2. The core business of HDFC is entirely focused to assist people in achieving one of the basic needs; housing. This is a pressing issue for a majority of the population. Thus maintaining affordability and accessibility of service to masses should be the paramount phenomenon in our business. Balancing this philanthropy with open market competition is a crucial challenge in the risk management process at HDFC.

3. Housing loans should be inarguably long term and reasonably priced to be affordable to the customers.

However funds available in the market always look for short-term destinations with high return. Therefore managing these interest of borrowers and depositors is a significant challenge for HDFC.

Our Precautionary Approach on Risk ManagementRisk Identification and GroupingIn defining the Bank’s overall risk appetite, the management takes into consideration various factors including:● The risk/reward structure of the

bank’s activities

● Sensitivity of earnings to diverse economic scenarios and market conditions

● Macro-economic risks in emerging markets

● Risk from unforeseen events such as natural disasters, flood , tsunami etc

● Ensuring earning streams by maintaining a well-balanced portfolio

Housing Finance Industry is exposed to a multitude of risks, broadly classified as credit, market, operational, legal/compliance, and reputational risk. The details are given below:

Credit Risk: risk of loss, arising from a borrower’s or counterparty’s inability to meet its obligations in accordance with the agreed terms. Credit risk would further increase by concentration risk which is the risk arising from inadequate portfolio diversification and sovereign risk; through Government’s reluctance or delay in meeting its dues or obligations.

Risk Management


Market Risk: risk of loss arising due to market volatility and change in inflation and market prices of foreign exchange, equity, commodity prices and interest rates. This also includes the liquidity risk which is the risk of bank’s inability to meet its financial obligations and commitments as they fall due, owing to the inability to liquidate assets, obtain adequate funding or inability to offset specific exposures without significantly lowering market prices resulting in a market disruption.

Operational Risks: (including legal, accounting, environmental and reputational risks) Risk of loss arising due to failure of internal processes, procedures, compliance requirements or corporate governance practices which result in human error or fraud. Operational risk also includes the potential loss arising from a major failure in IT systems and both natural and man-made disasters.

Reputation/Strategic Risk: Potential damage to the Bank through deterioration of its reputation or standing due to a negative publicity about the Bank’s business practices, whether true or not, would result in a decline in the customer base, unexpected withdrawals of deposits, costly litigations or deterioration of income. This could arise out of poor management decisions, strategic planning and dissatisfied stakeholders.

Legal/Compliance Risk: the risk arising from potential enforceable contracts, lawsuits, adverse judgments or non compliance with statutory or regulatory requirements that could disrupt or otherwise negatively affect the operations of the Bank.

Prudential Measures Introduced by Central BankCentral Bank of Sri Lanka introduced several prudent measures to strengthen the risk management and resilience of banking system. These includes,

● Specific provisioning requirement,

● Mandatory Corporate Governance requirements,

● General Provisioning requirements,

● Revised single borrower limits,

● Guidelines integrated Risk Management.

● Central Bank Regulatory Compliance,

In addition to the above compliance requirements, the Central Bank requires Banks to migrate to Basel 11 adequacy framework applying a standard approach for market, credit and operational risk from January 2008. HDFC Bank’s risk management framework was further strengthened through compliance with these regulatory requirements.

External Codes/Initiatives of best practicesHDFC also respects externally developed economic, environmental and social charters, principles and other initiatives, which are directly or indirectly relevant to the core business or operations of the Bank. As a precautionary approach for economic, environmental and social risk controls/management, these codes, initiatives or best practices are used as points of reference in developing internal policies and new products

and services of the Bank. HDFC Bank has also taken membership in several, economic, environmental and social organisations, and therefore is compelled to comply with their policies, best practices, ethics, membership rules etc . Voluntary compliance has won HDFC the reputation of being a responsible corporate citizen in the housing finance industry while mitigating environmental, social and economic risk factors over the last 25 years. The charters and initiatives used by HDFC as points of references and the organisations with which regular interactions are maintained are enumerated in the Sustainability Report under HDFC’s sustainability approach.

Statutory Protections Against InsolvencyHDFC Act, Banking Act and the Companies Act has provided several protective measures to HDFC against possible insolvency. As per the Banking Act, HDFC should transfer 5% of the profit after tax to the statutory reserve fund before declaration of dividends. In accordance with the Section 25 of the HDFC Act No 07 of 1997, HDFC should transfer an additional amount not exceeding 10% of the profit after tax, after transferring for the statutory reserve as aforesaid, to a special reserve fund, before declaration of dividends for any financial year. However, the Act does not prohibit the Bank from voluntarily transferring a higher percentage of its profit to the special Reserve Fund. As per the section 57 of the Companies Act No 07 of 2007, Bank is to conduct a sound Solvency Test, to ensure that HDFC has adequate capacity to pay its debts in the normal course of business after the proposed dividend is paid. These provisions have provided a sound statutory safeguard for the sustainable growth of HDFC Bank.

Risk Management contd.


Risk management governance, control and organisationThe HDFC Bank’s risk management governance is based on:

● strong managerial involvement, throughout the entire organisation from the Board of Directors cascading down to operational management teams

● a tight framework of internal procedures and guidelines

● continuous supervision by an independent body in monitoring risks, enforcing rules and introducing procedures

Board Sub CommitteesThe Board sub-committees escalate the identified risks to the Board for necessary action.

● Risk Management Committee The Risk Management Committee is

chaired by the Chairman of the Bank and meets at least once a quarter. The mandate of the Committee is to define the risk management framework, review changes in risks and salient features of the Bank’s portfolio and decide on any strategic changes of the bank.

● The Audit Committee Within the Board of Directors, the

Audit Committee plays a crucial role in assessing the quality of internal controls of the Bank. In particular, the Audit Committee is empowered to examine the adequacy and effectiveness of the internal control systems, review financial statements, assess compliance with regulatory requirements and decide the contents of the internal audit reports.

Management CommitteesThe Management Committee coordinate different business processes and their risk owners. ● Assets and Liability Committee

(ALCO)Asset and Liability Committee (ALCO) meets once a month to monitor, control and set guidelines in managing market and liquidity risks.

● Credit CommitteeThe Committee comprises of the General Manager, Deputy General Manager (Finance), Assistant General Manager (Business Development & Marketing) and Senior Manager (Recoveries). The Committee has been delegated

with authority limits to approve credit facilities within its purview and make recommendations to the Board of Directors when facilities exceed the delegated authority limit. The Committee also issues guidelines on credit evaluations, administration and recovery processes with the objective of mitigating credit risk.

Business Processes and Risk owners● Finance DivisionFinance Division is responsible for managing the interest rate risk and liquidity risk, implementing the Bank’s long-term financing strategy and managing capital requirements and equity structure of the bank.The Division is also responsible for assessing and managing other types of risks such as strategic, and business risks, validating the methods used to analyse and measure risks and provide advice to business divisions.

● Treasury DivisionThe Treasury Division is responsible for monitoring and analysing Bank’s credit portfolio into various segments based on sectors and maturity etc. The division also monitors the market indicators, daily and makes decisions to maximize profits and maintain optimal liquidity positions to meet customer demands, redemptions and capital requirements even under adverse market conditions.

● Operational DivisionOver the recent years, the Bank has developed management tools, process and implemented the necessary infrastructure to optimise the management of the operational risk inherent to the bank. The Operations Division is responsible for identifying, assessing, measuring, monitoring, managing and reporting the operational risks to the management.

Inte

rnal

Aud

it

Board

SubCommittees

Management Committees

Business Process and Risk Owners

Risk Management Framework of the Bank

The Board of DirectorsThe Board of Directors defines the Bank’s strategic direction and supervises the risk control procedures. In particular, the Board determines the required infrastructure to implement a sound and adequate risk management system in the bank and also, monitors the risk exposure of its activities. Presentations are made on a regular basis by the General Management to the Board of Directors on key aspects and significant changes to the Bank’s risk management strategy.


Managing Concentration on 10 top DepositorsDiversifying the deposits fund is vital to mitigate the liquidity risk that could arise from unexpected withdrawal of deposits. The Bank was heavily dependent on the ten large corporate customers, who constituted 61% of the deposit base of the bank as at 31st December 2009. By the end of 2010, HDFC succeeded in reducing the exposure to 47%, through efficient management of the concentration risk.

Spread and Growth of SavingsSavings funds are vital to HDFC as it provides an attractive low cost and long term fund base to provide affordable housing finance. The saving fund base which constituted 10% of total deposits in 2009 was increased to 14% by the end of 2010, reflecting an annual growth of 76%. The spread of the saving fund was enhanced by the addition of over 38,000 new customers reflecting a YoY increase of 23%.

● Internal Audit Function. Internal Audit function provides assurance to the management by undertaking independent assessments on the effectiveness of the risk management activities of the bank. Risk Management – Strategic Priorities and Achievements -2010Considering the negative effects of the global financial crisis and consequent macroeconomic changes experienced by the financial market, HDFC emphasised on managing the risks of the following areas in 2010:

Strategic Priority Target Achievement - 2010

Reducing Maturity Gap (one year cumulative)

30% within 3 years Reduced to 56.6%

Minimising Concentration Risk of the top 10 depositors

Minimise dependency Reduced dependency from 61% to 47%

Enhancing Savings fund base Enhance spread and growth Enhanced the proportion of savings deposits funds from 10% to 14% and achieved YoY growth of 76%

Diversifying of loan portfolio Limiting sector wise exposure Achieved significant enhancement of portfolio spread/diversity as detailed below.

Promoting sustainability development and reporting practices

To be complied with GRI reporting framework

Sustainability Report was aligned with GRI index, to a substantial extent

Management of Maturity GapLiquidity management is a crucial factor in the Housing Finance industry due to the difficulty of sourcing long term low cost funds from the market. Home loans with a tenure of over 10 years are generally financed by short-term funds, exposing the Bank to maturity Risk. Therefore, continuous analysis and management of the Maturity Gap is a critical undertaking for the Bank. During the year, the Bank achieved a substantial improvement in Maturity Gap management.


LIG

LIG

WIG

Income Group wise Distribution of Loan

54%

18%

28%

Service

Agriculture

Other

Industries

Sector wise spread of loans

70%

7%

23%

0%


Diversity of Loan PortfolioHDFC strives to enhance the diversity of the loan portfolio based on geographic regions, income groups, income sources, collaterals and sectors, on a continues basis as a priority to mitigate concentration risk. Out of the total value of loans approved during the year, 54% was extended to the high income group while the balance 46% was granted to the low and middle income group. Value of loans granted against EPF balance was LKR 1,564 Million amounting to 51% of loans approved in 2010, while 29% was granted against property mortgages and 31% against other securities. The value of loans extended to service sector accounted to 70% while 23% was granted to the industrial sector in 2010.

Up to3 Mth

5 Ys >3 to5Ys

1 to 3 Ys

3 to 12 Mth

0

2,000

4,000

6,000

8,000

Rs. Mn.

Maturity Analysis

Assets

Liabilities

Western

Central

Southern

Eastern

Wayamba

North-Central

Uva

Sabaragamuwa

Nothern

Geographical Distribution of Advances

46.5%

11.0%7.5%

2.7%

10.3%

3.2%

3.9%

14.3%0.5%


Risk Analysis and Mitigating strategies in placeRisk Category Risk Description Risk Rating Controls in Place to Mitigate

Credit Risk

1. Risk of default Risk of losses arising from the inability of the customer/guarantor or other counterparties to meet loan commitment

Significant 1. Standardised credit evaluation.2. Took minimum two guarantors for guarantor

loans. 3. Compulsory mortgage insurance cover.4. Compliance with CRIB requirements.5. Maintained average size of loan below LKR

1 Miilion, encouraging smaller loans by charging comparatively low interest, to enhance the loan spread.

6. Structured Recovery Department and policy and procedures.

2. Credit Concentration Risk

Risk arising due to inadequate diversity of loan portfolio based on income group, sector, industry, geography, product, type of collaterals etc.

Significant 1. Credit Policy and maximum credit exposure limits.

2. Compliance with guidelines of CBSL on single borrower limits.

3. Portfolio monitoring and management with particular attention to sector, scheme, income group, provincial and security wise diversity.

4. Strategic profit management through Budgetary controls.

3. Sovereign Risk Risk of delaying payment of loan obligations as a borrower or guarantor of home loan commitments by the government

Marginal 1. Compliance with directives and guidelines of General Treasury.

Market Risk

1. Liquidity Risk Risk arising from inability to meet maturity liabilities of deposits, savings or contractual obligations as they fall due.

Significant 1. Assets and Liability Committee (ALCO) that ensure managing Maturity Gap and Net Interest Margin.

2. Management of liabilities with adequate mix of deposits, savings and contractual liabilities.

3. Aggressively promoting risk pooled fund base (savings & deposit) to enhance value and spread.

4. Maintain adequate Loan to Deposit ratio.5. Maintain Statutory Liquid Assets Ratio on or

above the Central Bank’s Direction.

2. Interest Rate Risk

Possible adverse effects on net interest margin and advances due to interest rate changes in finance market.

Significant 1. Regular Maturity Gap analysis and management.2. Ensure prompt re-pricing of loans.3. Aggressively promoting Minor Savings and long

term funds.4. Promoting institutional loan scheme with

refinance funding.



Risk Category Risk Description Risk Rating Controls in Place to Mitigate

3. Risk of Climate Change

Possible adverse effects on loan repayments and enforcement of collaterals due to natural disasters such as flood, tsunami, drought etc.

Marginal 1. Geographical diversification of portfolio.2. Efficient portfolio management.3. Inculcating sustainability development practices.4. Acceptance of alternative collaterals .

Operational Risk

1. Processing or Behavior Risk

Problems with products or services due to failed internal controls, IT system, employee integrity, errors and mistakes, negligence, accident, fraud or other weakness in operating system

Significant 1. Compliance review of transactions, new products and procedures.

2. Continuous training on system and procedures.3. Interdepartmental internal controls.4. Business continuity plan.

2. System Risk Risk of financial losses due to failure to deploy and maintain adequate IT system, frequent shutdowns, malfunction, hacking and disruptions and failure of development with the requirements of competitive market developments and delivery channels.

Significant 1. Structured IT division headed by an experienced and qualified AGM.

2. Regular developments in line with regulatory compliances and market developments following a Board approved IT strategic plan.

3. IT policies.4. IT steering committee.

3. Human Resources Risk

Risk arising from failure to recruit , develop or retain employees with the appropriate skills and knowledge, in appropriate time and manage employee relation,

Significant 1. HR policies and procedures.2. Collective agreement with Trade Union.3. Regular capacity maximising through training

and development, rewards and recognition ,work life balancing etc.

4. Risk of Inadequate Risk Control & Management

Inadequate design or performance of the existing risk management framework, risk identification and risk management planning etc.

Significant 1. Internal Audit.2. Review by Board Risk Management committee.

5. Environmental and Social Risk

Loss or damages caused by community , ethnic issue and unusual climate conditions, Tsunami, flood, drought etc.

Marginal 1. Insurance.2. Business Continuity Plan.

6. Geopolitical Risk Possibility of financial loss or damage caused by political issues, poor quality of internal infrastructure, cultural differences, misunderstanding etc.

Marginal 1. Training and Development.2. Regular engagements with stakeholders.3. CSR and Environmental Policy.4. Sustainability development and reporting.

7. Risk involves with Management Information.

Inadequate, inaccurate, incomplete or untimely MIS to support the management in decisions making process.

Significant 1. System audit and developments undertaken by Internal Audit.

2. Reconciliation and day to day balancing process.3. Information Security Policy.4. Regular system generated MIS for management

review.


Risk Category Risk Description Risk Rating Controls in Place to Mitigate

8. Health and Safety Risk

Health and safety risk of staff and customers and public.

Marginal 1. Environmental Policy.2. Labor practice and decent work.3. Life and fire Insurance.4. Staff health plan.5. Business continuity Plan.

9. Risk of lacking Corporate Governance

Incompetence of Directors to fulfill their personal statutory obligations in controlling Bank.

Marginal. 1. Governance policies and procedures.2. Compliance and risk management functions.3. Company Secretarial function.

10. Risk of Criminal and Illicit Act

Possibility of financial or reputation risk due to fraud, theft, gross or willful negligence, sabotage, vandalism etc.

Marginal 1. Training.2. Insurance.3. Physical security service.

11. Ethics risk Unethical business practices, including those of business partners, racial and religious discrimination, child labor, environmental issue , pollution etc.

Marginal 1. Policies and procedures.2. Development of Sustainability practices and

reporting.3. Compliance review.4. Customer and staff satisfaction surveys.5. Voluntary compliance with external codes of

ethics, best practices etc.

Reputational Risk

1. Reputational Risk

Negative effects on public and customer opinion and market reputation

Marginal 1. Regular training on customer care.2. Business policies and procedures.3. Stakeholder engagement policy.4. Independent yearly rating from Fitch Rating

Lanka Ltd.

2. CSR Risk Risk to brand reputation from inadequate/lack of Corporate Social Responsibility practices.

Marginal 1. CSR Policy.2. CSR and Sustainability Executive Committees.3. Compliance with GRI guideline in sustainability

reporting.

Compliance Risk

1. Legal and regulatory compliance Risk

Risk arising from non compliance with statutory and regulatory requirements.

Significant 1. Compliance officer who review adherence to regulatory requirements and report quarterly to Board Audit Committee, CBSL and CSE.

2. Existing of Separate legal department with 15 qualified lawyers headed by the Legal Manager.

3. Qualified Company secretary.4. Policies and procedures.5. Finance division headed by a qualified Chartered

accountant as a DGM.



Risk Management Initiatives -2010Credit Risk Recruited an experienced professional as Head of Credit for better management of credit risk.

Reorganised the management structure by appointing five Area Managers in order to strengthen the credit evaluation, follow up and recovery processes.

Functionalities were added in the IT system to monitor credit risks efficiently and compute credit risks accurately.

Fully provided for the Subsidiary exposure

Recovery drive was undertaken with the participation of all the staff of the Bank to bring down the NPL position.

Market Risk Performed sensitivity analysis to assess the impact on profits due to changing market conditions.

Identified gaps and measured the re-pricing risk of Bank’s assets & liabilities in order to assess the impact from interest rate changes.

Liquidity Risk

Reduced the maturity mismatch to a greater extent by adopting appropriate funding and lending strategies

Broaden the Palmtop Banking operations and commenced using Sampath Bank’s ATM network to facilitate attraction of less volatile savings deposits

Maintained standby facilities over LKR 2 billion.

Liquid Asset Ratio was maintained over 20% throughout the year.

Diversified and broad based the funding sources

Operational Risk

Network security was strengthened to ensure the continuity of business operations.

Automated all accounting records to ensure accuracy and consistency.

Introduced procedural changes and revised documentation to prevent certain legal risks.

Strengthened the relationship with the Trade Union.

The staff was given continuous training on operational procedures.

Compliance Risk

Board of Directors and Senior Management participated in a number of training programs on Risk Management and Compliance.

Actions initiated to appoint a Chief Risk Officer.

Improved the data quality of CRIB reporting to a greater extent which was recognized by CRIB by awarding ‘A’ rating to HDFC.

Loans to Agriculture sector was increased to comply with CBSL targets.

Independent verifications were performed on CBSL & SEC compliance requirements.


“Financial inclusion, opening doors for housing finance”


Approximately 50 per cent of the house holds who have the ability and willingness to purchase a low cost house, is precluded from formal housing finance due to the challenge of income evaluation, adequate collaterals, savings habit , high cost of finance, and emerging issues in the growing urbanisation environment in Sri Lanka.

HDFC considers it an opportunity and are committed to serve the upliftment of this section of our people, whose silent contribution is invaluable for the development of the nation.

Sustainability Report


Reporting PeriodThis sustainability report attempts to offer an integrated view of the HDFC’s commitment and performance on economic, environmental and social aspects of the Bank’s operations for the period 1st January 2010 to 31st December 2010. This is our fourth attempt in sustainability reporting. The first comprehensive sustainability review was published in 2006 and thereafter, each year we have strived to improve our analysis and be more inclusive in our approach to our stakeholders. The most recent report was published in June 2010, covering the performance of financial year 2009. On a yearly basis we attempt to demonstrate our commitment to sustainability as an integral part of the Annual Report.

Sustainability Reporting Framework and GuidelinesThis review is based on the Global Reporting Initiative (GRI) Reporting Framework which is the generally accepted guideline for sustainability reporting. The report has been reinforced with G-3 sustainability indicators which define the contents, quality and the boundaries as outlined by the GRI Reporting Principles.

Defining Report BoundaryMateriality: As outlined in the GRI guidelines, the Bank acknowledges the importance of the materiality concept, in the process of reporting the sustainability performance. Materiality is defined in relation to the financial performance, balance sheet values and impact on the stakeholders’ interest. Thus the report outlines economic, environmental and social performance that would substantially influence the assessment and decisions of our stakeholders.

Stakeholder Inclusiveness: The Bank recognises that it is compelled to define strategic and key stakeholder groups to ensure materiality in engagement and reporting. Therefore, the Government, the economy, customers, suppliers, employees, environment and community are recognised as key stakeholders.

Sustainability Content: The report attempts to offer an integrated view of the company’s performance from the triple bottom line precept of economic, social and environmental facets, where stakeholders from employees to community, customers to valued business partners, shareholders to the nation at large become a part of the HDFC journey. Our primary sustainable development platform is in housing, and we strive to drive our core business to contribute towards the United Nations Millennium Development Goals. The report attempts to present an integrated analysis of both positive and negative performances of the Bank in a manner, our stakeholders are able to gain a comprehensive view of our policies, interactions and processes. The report also enables us to critically look at ourselves, analyse the gaps and attempt to bridge them for a more holistic approach to sustainability.

Comparative Information: Sustainability Report for the financial year 2009 has been formatted with reference, but not strictly adhering to the guidelines of the GRI. However, this report strictly conforms to the requirement of the Global Reporting Initiative. The report presents key performance indicators with comparative information for the last two years and includes a summary of sustainable indices which we have developed to monitor our performance in relation to diverse stakeholder interests.

Specific Limitations and Reporting on the SubsidiaryHDFC is a service providing organization; hence some of the GRI indicators are not applicable. The report is not extended to cover the operation of its subsidiary. (There were no trans-actions in the Subsidiary during the reporting period.)

Data measurement and Standards Disclosure.Information pertaining to economic, social and environmental performance has been extracted from the audited financial statements while other internal information has been obtained from the Bank.

Independent Assurance.HDFC as a policy recognises the im-portance of obtaining an independent assurance on the Sustainability Report from a competent professional firm. Accordingly, the Bank appointed M/S BDO partners as independent assurer to the sustainability Report of 2010, whose assurance report is enclosed in Pages 98 and 99 of the annual report.

Contact Persons for Editorial InformationMr.D. Vidana PathiranaAssistant General Manager(Business Development & Marketing) E-mail: [email protected] Tel: 4717864 Fax: 2423364.

Mrs. H.S.GunathilakeManager(Business Development & Marketing) E-mail: [email protected] Tel: 2543096 Fax: 2423364

About this Report

Sustainability Report contd.


Ecosystems and natural resources are critical to achieve sustainable development of a country. Development of human settlements, especially the construction of towns and cities continues to pose a negative impact on the environment and bio-system. With towns and cities made up of homes and communities, the impact on eco systems due to congestion, increasing waste and also unmanaged use of natural resources can be devastating, leaving little hope for future generations. Today the whole world is fighting against the negative consequences of unsustainable development such as climate change, increasing prevalence of natural disasters, scarcity of resources and loss of biodiversity. As a responsible corporate citizen, HDFC strongly believes that current pricing should take adequate consideration of these externalities, without transferring them to future generations and do our utmost to achieve an equitable development in our country through housing finance.

Sustainability to HDFC means promoting housing development finance in an equitable and sustainable milieu, where the interests of our stakeholders are fulfilled both in a social and an environmental context. It is a concept that gives the Bank a framework that enables the development of the nation at large through sustainable sheltering and poverty reduction, while assisting in managing climate change. At HDFC, we believe, the pursuit of sustainability poses both a challenge and an opportunity for the Bank. To take advantage of this opportunity, we must

craft new business strategies, processes, products and practices that integrate our heightened awareness of environment concerns and social well being. We emphasise that sustainable construction, built on strong principles and best practices must be inculcated into construction of housing, while ensuring equality and affordability remains as core objectives.

The emphasis on sustainability gave us the opportunity to make a series of commitments, as profiled in the

The sustainability Report, which integrates sustainability as a core value and a point of reference for our operational and corporate structure.

In 2010, we worked consistently to meet those commitments. The Board of Directors approved a policy framework for community engagement while in tandem, appointed a CSR steering committee to identify, plan and implement CSR projects. Several programmes were developed among our team to improve awareness on saving natural resources and reducing emissions, while effectively engaging with other stakeholders such as the Government, customers, investors, employees, suppliers and community.

For the second consecutive year two community awareness programmes were launched to promote sustainable city planning and environmental protection in collaboration with the UN Habitat Sri Lanka Office and the Ministry of Education. During the

last twelve months we have achieved a commendable improvement on efficiency in managing our carbon footprint and in the volume and regional and sectoral distribution of housing finance. Tremendous improvement in customer satisfaction was recorded due to the continuous efforts carried out to enhance customer reach and service excellence.

Our nation is marching towards a robust economic growth after a 30 year civil war. We strongly believe that corporates must be more aware of its responsibility and thereby be accountable and responsible to convert this growth in to an equitable development. Our plans for the year ahead therefore, will be on strengthening sustainable business practices, in conjunction with minimising the impact of our core business on challenging issues of global climate change, waste and energy usage through an open dialog with all our stakeholders.

Suresh AmerasekeraCEO/General Manager

Message from the CEO

“Many Small people, in many small places, doing many small things will alter the face of the world“African proverb.


What Sustainability means to HDFCOur primary business objective is assisting people to own a decent house by providing affordable housing finance, the foundation upon which our economic and social sustainability ethos has been constructed. Housing not only provides physical shelter but also has significant impact on the lives of the dwellers in terms of skill enhancement, education, health, income generation, security, self confidence and human dignity. In a social context it reduces domestic violence and addresses many other social issues. More broadly, housing finance development therefore plays a crucial role in boosting economic growth and reducing poverty, improving living conditions and empowering low and middle income groups.

However, housing begins with construction which involves the input of a large amount of capital, energy, water, other natural resources and making of substantial amounts of solid and liquid waste. It permeates an adverse impact on the environment and prevalent eco-systems if resources are not managed properly. At HDFC we believe that sustainable housing practices could mitigate the negative impact of housing on the environment while delivering long lasting economic and social benefits.

We believe that sustainability should be a core focus of our business. Hence we strive to promote a culture where the end result of the house must be the fruition of sustainable construction, which delivers long lasting economic, environmental and social benefits to our stakeholders. Therefore, for HDFC sustainability management means minimizing ecological and social risks and thereby seising economic

impact, opportunities and ensuring the Bank's continued growth. At the same time, we want to be a role model and contribute to an economically stable, ecologically responsible and socially fair development of our society. Therefore, we strive to ensure that our business fundamentals are within the principles of sustainability while achieving HDFC’s overriding objective of expanding national housing stock and home ownership.

Sustainability Development and Strategic FocusDevelopment of the broad based sustainability Policy framework is in process. The Bank is committed to implement an integrated sustainability management approach that combines sustainability and business strategies in the best possible way. HDFC’s strategic focus for 2010 - 2013 covers the following 7 key areas to which we will continue to gear our sustainability development.

● Economic prosperity- accelerated growth with more socio economic focus

● Resource efficiency- cut costs and save resources.

● Emission Control- focus on strategies, products, services and relationships that transit to a low carbon society

● Going mainstream - making sustainability a core dialog of the staff and customers

● People & places - working together to support our community

● Solid foundations - sustainable business practices through governance & risk management

● Speaking out - advocating on behalf of sustainable business practices and continuous communication with key stakeholders

Sustainability GovernanceOur Corporate Governance structure is discussed in detail under the Corporate Governance section of this annual report. HDFC recognizes that in-house sustainability as well as the sustainability in general should be a core determinant of the housing finance operation. For this purpose, the Bank has appointed Sustainability and CSR Steering Committees, comprising of Board nominated members from the Corporate and Senior Management. These committees create a forum to discuss the importance of aligning business strategies with sustainability development practices. The committee is also responsible for policy development, planning, steering and controlling all sustainability activities and reporting to the Board. The Board along with the committees and senior management reviews the performance and compliance periodically. Bank also appoints executive/operational committees project wise where necessary to implement sustainability related activities and CSR projects.

Sustainability Steering Committee

CEO/ General Manager

DGM (Finance)

AGM (Business Development & Marketing)

Manger (Business Development & Marketing)

One member from Internal Audit

Manager Human Resource

One representative from Trade Union


Our Sustainability Approach


Precautionary Approach and Risk ManagementWe believe sustainability management is an important precautionary approach to economic, social and environmental risk management. HDFC applies the precautionary principles mainly from two angles:

● Compliance Review with the applicable laws and regulatory requirements

● Operational Policies and Procedures

Compliance Review with Applicable Laws and Regulations: A specially appointed compliance officer reviews operational compliance with the HDFC Act under which HDFC Bank is established. HDFC also adheres to the requirements of the Finance Act, directions issued by the Central Bank of Sri Lanka(CBSL), listing Rules of the Colombo Stock Exchange (CSE), and the code of best governance practices issued jointly by the CSE and the Institute of Chartered Accountants of Sri Lanka. Level of compliance is periodically reported to the relevant regulatory authorities and to the stakeholders through the annual report.

Operational Policies and Procedures: The Bank regularly develops reviews and adheres to operational policies and procedures in the day to day operations. These policies are developed on the basis of past experience and in line with the industry and environmental standards with the prime objectives of managing Operational Risk, Market Risk, Environmental and Social Risk, which influence the growth and sustainability of the Bank. The policies are formulated by the senior management/ management

committees and approved by the Board of Directors, and reviewed in conjunction with current developments. During the year 2010, social and community participation policy was approved and formulated and the human resources and staff promotion policies were reviewed.

Association to External Voluntary Codes, Principles and InitiativesAn organisation cannot achieve sustainability by mere compliance with statutory requirements and internal policies; it should also respect social ethics and codes of conduct. Numerous scientific studies have proved a statistical correlation between a company’s social and environmental performance and its financial success. HDFC voluntarily adheres to the principles , initiatives and codes of conduct of the banking and housing industries, standards of the national and international institutions and comply with several areas of social responsibility, including labor, health, safety, and environmental aspects thus indicting its commitment to respecting codes of best practices. HDFC also recognizes the Sri Lankan and International Accounting standards, Guidelines of Global Reporting Initiatives (GRI), Universal Declaration of Human Rights (UDHR), Standards and initiatives of the Ministry of Finance, Ministry of Housing Construction and Common Amenities, Urban Development Authority, Local Authorities, Road Development Authority (RDA) and The Central Environment Authority etc. HDFC is also mindful of its responsibility towards the Achievement of the Millennium Development Goals of Sri Lanka by the year 2015. These standards, initiatives and principles are used as points of reference in preparing the

internal policies, codes of conduct and operational targets of the Bank.

Associations with OrganizationsCompanies that constantly interact with society produce opportunities. We actively participate, contribute and share our knowledge with a number of organisations and initiatives, a selection of which is shown below:

Central Bank of Sri Lanka

Institute of Bankers of Sri Lanka

Association of Professional Bankers of Sri Lanka

The Ministry of Housing and Construction

General Treasury/ The Ministry of Finance and Planning

Colombo Stock Exchange

The National Chamber of Commerce

Ceylon Chamber of Commerce

Federation of Chambers of Commerce

Fitch Rating Lanka Ltd

Credit Information Bureau

Housing Development Authority

Urban Development Authority

Association of Development Finance Institutions Asia Pacific.

UN Habitat Sri Lanka

Basis of recognising important stakeholder groups and engagementStatutory and financial obligations and equitable partnership are the basic principles of identification used by HDFC in selecting the stakeholders with whom it engages. The prime stakeholder, the Bank is statutorily


obliged to engage with, is the Government; who is the founder of the Bank by an Act of Parliament and the major shareholder. The secondary priority of the bank is its financial and statutory obligation to the shareholders / investors who ensures the existence of the Bank. HDFC also maintains an equitable partnership with other stakeholders who directly and indirectly


Our Sustainability Approach contd.

interact and are influenced by the bank’s operations.

HDFC recognises the conflicting interest of each stakeholder group and strives to maintain an open and straightforward communication on its sustainability strategy , significant impacts, challenges, opportunities and the Bank’s performance, achievements , to their

reasonable expectations with our regular reports on this field.

This exchange with our stakeholders provides us with valuable feedback on our activities, plans and strategies. Our stakeholders provide us with important assessments concerning opportunities and risks in our business and we are convinced that these close cooperation offers all parties added values.

“I really surprised when i was informed by HDFC bank that a loan of Rs. 1.5 Mn. was approved to buy a land to construct a house for a person like me, who runs a pavement business at Bastian Road, Colombo.”

Dr. Asoka I. KamaladasaLoan Customer

High-end Market

G. Thushara SamanthaPalmtop Customer

Low-end Market


Stakeholder Group and their GoalsOur Commitment

Stakeholder Goal

Government Improve quality of life of people through enhancing national housing stock and homeownership

● Assisting people to construct, own and upgrade homes or meet ancillary needs by providing affordable housing finance under the power vested by the Act and in conjunction with the national housing policy, with particular focus on the low and middle income groups and promotion of equitable human settlement.

Economic prosperity ● Maximising direct value creation to the economy ● Assisting to minimise development disparities through promoting equal

access to housing finance and resource mobilisation - sector and regional basis and through enabling employment generation

● Contributing to economic empowerment through inculcating banking habits, financial literacy and inclusion

● Contributing to the government’s special development initiatives -national and regional, through promoting housing finance and inculcating Banking habits

Shareholders Sustainable growth and enhance shareholder value

● Managing business to deliver consistent growth and satisfactory return● Implementing an efficient risk management, internal control system and good

governance practices● Complying with all statutory and regulatory requirements

Protect and facilitate the rights and ensure fairness and transparency

● Ensuring adequate and timely communication● Providing a balanced, comprehendible assessment of the state of affairs of the

Bank, its performance, and prospects

Customers Provide viable financial solution to satisfy housing needs in a convenient manner.

● Maintaining affordability of our service to masses with special focus on low and middle income groups

● Extending flexible and customised solutions collating customers need, level and pattern of income and available collaterals

● Enhancing accessibility to our services equally to all segments in the society in all districts and provinces

Satisfaction ● Continuous improvement of the quality of our services and processes with proven technology and innovations to delight our customers

● Regular assessment of customer satisfaction and follow up

Suppliers Ensure rights and fairness ● Implementation of a procurement procedure with internal controls and make decisions based on market information in an transparent and fair manner for all qualified and registered suppliers

● Ensuring and respecting their rights through timely payments and long lasting relationships

Environment Promote Sustainable Housing

● Promoting compliance with environmental and development regulations● Promoting the importance of sustainable housing and living – resource

efficient affordable construction and maintenance

Manage Carbon footprint ● Minimising emission from direct business and staff transport● Saving electricity, fuel and water.● Reducing paper consumption and thereby saving trees, bio-system and

climate

Key Stakeholder Groups and Our Commitment


Stakeholder Group and their GoalsOur Commitment

Stakeholder Goal

Employees Rewarding career and job security

● Maintaining an efficient staff performance through performance reviews, remunerations, benefits, rewards, recognition and regular surveys on staff satisfaction

● Maintaining smooth relationships through open and honest dialogue between employees, trade union and management and respecting human rights

● Maximising capacity through encouraging further education, conducting training and development, providing job enrichment and career progression opportunities

● Maintaining diversity and providing equal opportunity

Healthy work life balance ● Maintaining a balance between personal and professional life by ensuring health and safety, encouraging extracurricular and recreational activities

Community Long lasting relationship ● Striving to improve quality of life by facilitating accessibility to clean water and healthcare

● Supporting needy children in education and sports ● Interacting with community organisations to improve the well being of the

people● Providing assistance in the event of natural disasters● Empowering through inculcating banking habits and proliferating savings


Key Stakeholder Groups and Our Commitment contd.

Team Sprite


Strategic Priorities Strategic Action Achievement

Gov

ernm

ent

Accelerate lending

Promoting financial inclusion

Agricultural sector housing

No of loan compared to 2009 , increased by 4,762 +79%Loan value compared to 2009, increased by LKR 1,665 Million +118%Palm Top customers YoY increased by 238%Palm Top operated account balance YoY grown by 239%No of loans granted to customers in the agricultural sector * 1,507Value of loans granted to customers in the agricultural sector * 231

Shar

ehol

ders

Profitability.

Risk management.

Market capitalisation

Return on average assets increased by 132%Return on equity increased by 131%Profit after Tax increased by 139%Gross Non Performing Loan Ratio (NPL) ReducedMaturity Gaps ReducedReduce dependence of 10 largest depositors- reduced from 61% to 47%Enhance composition of savings fund base. Improved from 10% to 14%Share price YOY increased by 272%

Cus

tom

er

Enhancing customer reach

Enhance customer base

Satisfaction

No of branches increased by 2 new customer centers- YoY increased 8%No. of ATM access increased to 225 reflecting a growth of 1945%No of Mobil Bankers increased to 81 persons, YoY increase 35%Loan customers increased by 10739 ,YoY growth in customers 9%No. of deposits customers increased by 460, YoY growth 7%Loan portfolio increased LKR 927M, YoY growth 8%No of savings customers increased by38,504 reflecting a growth of 22%

Strategic Priorities and Achievements 2010

Empowering through financial inclusion Empowering through financial inclusion


Strategic Priorities Strategic Action Achievement

Envi

ronm

ent

Minimise fuel consumption

Minimize electricity consumption

Reduce paper consumption

Fuel consumed per LKR 1 Million loan approved reduced by 55%Fuel consumed per loan approved reduced by 45%Electricity per Sq:ft occupied Units ( no comparative figures available) 13Electricity per head reduced by 4%Paper consumed per LKR 1 Million loan approved reduced 18%Paper consumed per loan approved increased by 1%

Empl

oyee

Strengthening

Capacity maximising

Satisfaction

Total staff increased by 61 employees , YoY growth 17%Created regional managers positions by promoting seniors managers 5 positionsAppointed head of HR and Credit 2 positionsTraining man days YoY increased 141%Training man days per head increased by 100%Overall satisfaction index improved 29%

Com

mun

ity

Promoting education, clean water, health care and financial inclusion

Investment on promoting education LKR 2,108,000 benefited 13,879 persons

Investment on promoting health LKR 315,400 and benefited 525 personsInvestment on promoting financial inclusion LKR 830,000 and benefited

580 persons

Strategic Priorities and Achievements 2010 contd.


Empowering through financial inclusion Empowering through financial inclusion


Our ApproachThe primary objective of HDFC Bank, as constituted by the Act of Parliament under which the Bank is incorporated, is to provide financial facilities to construct, own, upgrade homes or provide ancillary needs. Our approach to economic responsibility is directed through these broad based corporate objectives set out by the government who is our principal stakeholder. Access to safe and healthy shelter is essential to a person's physical, psychological, social and economic well-being. The right to adequate housing is a basic human right and is emphasised in the Universal Declaration of Human Rights and the International Covenant on Economic, Social and Cultural Rights. Decent housing therefore, is one of the several dimensions used to assess the physical quality of life and economic growth of a country, in meeting the United Nations Millennium Development Goals (MDGs). The country is marching towards achieving these MDGs by year 2015. HDFC recognises this national responsibility and is fully committed in its capacity to achieve Millennium Development Goals, through promoting equitable housing finance. In this context, our strategic approach on economic performance is demonstrated in the following directions.

● Direct economic value creation● Promote equitable human settlement

through enhancing the national housing stock and homeownership with special focus on the less privileged groups.

● Contribute to economic empowerment through instilling Banking habits and financial inclusion

● Assist to minimise development disparities

● Contribute to the government’s special development initiatives- national and regional

Our economic responsibility is directed by the above policies and statutory directives upon which we have established our social license over the last 25 year as a leading player in the affordable housing finance market in the country.

Policies & GovernanceOur core economic responsibility is constituted by the Housing Development Finance Corporation Act No. 07 of 1997, amended by Act No. 15 of 2003. Activities of HDFC Bank are further directed by the economic directives issued by the General Treasury and the Central Bank of Sri Lanka in line

with the Government Housing Policy and national and regional development initiatives. Internal policy guidelines are developed and approved by the Board of Directors. Management of operational risk and the above policies are executed by the several management committees. As the founder and the principal shareholder we recognise our accountability to the Government. The annual financial statements are submitted to the parliament on an yearly basis, in three languages. HDFC Act and other important policies could be browsed at our website on www.hdfc.lk.

Economic PerformanceDirect Economic Value CreationDuring the year HDFC Bank has created an economic value addition of LKR 2,250 Million. This value has been distributed among the suppliers, employees, Government and shareholders while LKR 241.68 Million was retained by the Bank to strengthen its sustainability. We have contributed LKR 155.78 Million to the Government as direct and indirect taxes in 2010.

Stakeholder Engagements

Highlight 2010

Our Strategic Priorities• Accelerate Lending• Enhance Customer reach• Promotion of Savings and Financial Inclusion• Agricultural Sector Housing

+ 80% No of loans

+ 119% Value of Loans

+ 78% New Construction Loans

Economic Responsibility



In Managing Human SettlementOther than the direct economic value creation from the business operations, we assess that the indirect impact of HDFC’s core business is significant in the context of socio economic development of the country. Housing requires large quantities of resources including labour and substantial capital infusions. Hence, while creating dwellings, housing also acts as an employment generator, poverty alleviator, wealth creator and most importantly a social stabiliser. An active system of housing finance provides real economic benefits and positively affects savings, investment and household wealth. It provides an investment option for long term funds in the economy as an alternative to investment in treasury bonds. Each Rupee invested in housing sector catalyses multiple economic activities in other sectors of the economy. Housing finance development boosts equitable economic growth, reduce poverty, improve living conditions and strengthen communities. In this context, HDFC is a vibrant contributor to the management of human settlements around the country since its inception two and half decades ago.

Aggregate ServiceHDFC has assisted over 130,000 families to obtain homeownerships, improve existing dwellings and acquire household equipments and accessories The total value of the facilities granted since year 2000 is over LKR 23.5 Billion, while over 90% of these advances were extended to the low and middle income groups making their dream of owning a house a reality.

Promoting Home OwnershipDuring 2010 HDFC recorded a robust increase in lending activities registering an impressive growth of 80% in loan volume and 119% increase in the value of loans granted. In 2010, we extended 10,739 facilities, totaling LKR3, 069Million, compared to 5,977 loans granted in 2009 to the tune of LKR 1,404 Million. These facilities were extended for house construction, purchasing, redeeming of housing loan obtained at high interest rates, renovations, repairs and extensions to existing structures and purchasing of household accessories etc. We estimate that, these facilities have assisted over 10, 000 families and over 45,000 people to fulfill their need of shelter.

Enhancing National Housing StockDuring the year under review, HDFC contributed to increase Sri Lanka’s national housing stock by approximately 9,000 new houses. HDFC financed approximately LKR 2.3 Billion of the construction value of these houses, with LKR 177 Million being extended to purchase constructed dwellings and LKR 559 Million for other housing related financial commitments.

Assisting to Minimize Development DisparitiesPrioritized Services to the Low and Middle Income SegmentsHDFC’s primary objective has always been to serve the lower and middle income groups to meet their needs of housing finance and allied services. With the majority of the population in Sri Lanka coming under these income categories, there’s a significant lack of supply to meet the demand for housing. 55 per cent of the rural population and 8 per cent of the urban population live below the poverty line and on average,

06 07 08 09 100

5

10

15

25

20

Rs. Mn.

Aggregate Service - Value of Loans

06 07 08 09 100

30,000

60,000

90,000

150,000

120,000

Rs.

Aggregate Service - No of Loans.

Stakeholder Engagements contd.

To Goods & Services Providers

To Employees

To the Government

To the Shareholders (Dividends)

Retaining (Depreciation, Loan Loss

Provision, Retained Profit)

Economic Value Distribution 2010

69%

7%

14%

1%9%


15 per cent of the total population survive below the universal poverty line, with an income that’s totally insufficient to meet the cost of housing (Sri Lanka Poverty Assessment 2007, World Bank). Majority of the people belonging to this category has to contend with restricted access to credit facilities offered by commercial banks or financial institutions due to inadequate collateral, proof of income and lack of financial inclusion.

During the year, more than 71 per cent of the approved facilities were granted to low and middle income group who represented 46 percent of the value of loans approved. Out of approved facilities, 37 percent of the loans were less than LKR 200,000. Loans between LKR 200,000 and LKR 500,000 accounted for 34 per cent. The increase in average size of our loan from LKR 235,000 in 2009 to LKR 285,000 in 2010, reflects our broadened view of our social responsibility toward serving the needy groups of the country.

Provincial Distribution of ServiceIncreasing urbanisation has seen the burgeoning of urban dwellers, rising sharply at 3 per cent per annum. This trend is significantly reflected in the western province due to the large number of immigrant families which has triggered land and construction labour prices within the province to rise to unaffordable proportions. Given these emerging trends, in 2010 HDFC granted a total of 4504 loans representing 42 per cent in volume and 51 per cent in value respectively. Of these, 71 per cent of the loans were granted to the middle income group, with loans for new constructions representing 86 per cent, home purchases 5.5 per cent and other housing related loans 9 per cent.

Of the total disbursements, 8 per cent was disbursed in the southern province while 12 per cent was disbursed in the central province. The balance disbursements were made in the Wayamba, North Central, Sabaragamuwa, Eastern and Northern provinces. The, Bank opened two branches in Vavuniya and Trincomalee to contribute to the post war development in the North and East. It is

pertinent to mention that 37 per cent of our disbursements were made to the low income group which has resulted in a considerable improvement in the living standards of the segment. District wise disbursements of serviceWith the price of land and housing spiraling upwards in the Colombo district and an increasing population in the district finding it a challenge to meet their housing needs, HDFC concentrated on disbursing 29 per cent of the loan value and 21 per cent of the loan volume, to the Colombo district. HDFC has an all island branch network of 28 with presence in every district. The second highest disbursement was made in the Gampaha district and special programme launched in the Districts of Vavuniya and Trincomalee for lending and resource mobilization.

Employment Generation and Poverty AlleviationWhile our team has 425 members within its permanent cadre, we are proud to be the enabler in generating approximately 10,266 indirect employment opportunities around the country as a result of construction related activities initiated by our housing loans. These opportunities are generated in carpentry, masonry and other related activities. (Estimates based on the statistics of the CBSL).

The construction industry is a primary employment generator and according to the Central Bank of Sri Lanka has created a total of 562,000 job opportunities island wide representing 7.4 per cent of the total employment market in 2009. Total advances granted to the housing industry by commercial banks stood at LKR167.8 Billion. HDFC contributed LKR 3.069 Billion for personal housing needs in over nine provinces.

LIG

LIG

WIG

Service to Needy Group

30%

37%

34%

Western

Central

Southern

Eastern

Wayamba

North-Central

Uva

Sabaragamuwa

Nothern

Provincial Distribution of Services

46.5%

11.0%7.5%

2.7%

10.3%

3.2%

3.9%

14.3%0.5%


Empowering through Financial InclusionFinancial Literacy and InclusionIn Sri Lanka, the housing need is significantly larger than the effective demand, due to inadequate access to housing finance. In order to synchronize the effective demand with the actual housing need, it is essential to improve the accessibility of housing finance to low and middle income group. Majority in this segment qualifies to obtain a mortgage loan but is restricted due to inaccessibility. The common hindrances in extending formal banking facilities to this segment are the lack of financial literacy, banking habits, adequate collaterals and proof of income. Financial literacy is becoming increasingly important to the long-term wellbeing of individuals and the communities. Financial inclusion aims to address the lack of access to appropriate low-cost, fair and safe financial services from mainstream providers. Often they are the most vulnerable members of our community who are most at risk of financial exclusion. HDFC experiences that a substantial percentage of this unbanked community loses their wealth by being associated with informal financers for their housing and day today finance needs.

HDFC uses its resources and expertise to inculcate banking habits, skills and confidence in this community thus enabling them to access formal housing finance. It is a pleasure to mention that a majority of our customers are from this category that constitute 71 per cent of the total customer base of HDFC in 2010. Of the low and middle income group 37% of the customers were from the communities with minimal or zero financial literacy or banking habits.

Mobile Banking OperationAs a strategic approach, HDFC initiated its mobile banking operation (Palm Top) to capture this unbanked segment to formal banking system and promote banking and savings habits among them. The operation was initiated in 2007 and is currently operating successfully throughout the branch network with over 81 Palm Top machines and

operators. Our promotional assistants, daily visit approximately 15,000 customers island wide, majority of whom are pavement hawkers, boutique/shop keepers, daily waged laborers etc whose income is not permanent. For over 80 per cent of these customers, the average daily deposit is less that LKR 250 per day. It was the very first time that most of these customers were exposed to formal banking channels through our Mobile Bankers. Majority of laborers in the Colombo Manning Market and Central Fish Market became our valued customers. With these operations we aim to create wealth for this segment and provide documentary proof of income for consideration of formal loan facilities. We also encourage them to save part of their daily wage



for retirement and the future well being of their children. For this purpose we educated them to invest monthly LKR 100 – 500 in an attractive children saving plan which assures financial safety for their children.

We have understood the value of this community in the development process of our nation even though their service is not counted in the formal economy. In

2010, over 20,810 new customers were added to HDFC from this segment with an average monthly increase of 1,735 customers. We have launched a special lifestyle development loan for them, secured on a group guarantee scheme.

We have learned that over 60% of this customer group is from urban sector and has less saving habits, but earning substantial income to meet the cost of low income housing , unspoiled, scare to credit and god pay masters. They do not posses retirement plans and strive to create wealth for the next generation. Servicing this group would result significant improvement in their socio economic lives by reducing urban poverty, domestic crimes and improve children’s education, health etc.

HDFC Mobile Bankers


Contributing to Development InitiativesHDFC is committed to contribute to the Government’s national and regional special development initiatives, by providing affordable housing finance and other ancillary services. Under the directions of the Government, HDFC paid special attention on promoting housing finance to the Agriculture sector and in the Monaragala District, during the year.

Monaragala Development ProjectThe Integrated Rural Development Project initiated by the Government, in conjunction with the ‘Dayatakirula’ National Exhibition, was scheduled to be held in Monaragala, in February 2011. HDFC launched a micro loan scheme to finance house repairs and upgrades. Loans were evaluated at the convenience of the customer at mobile public service centers organised under this development project. The Bank launched a special program to promote savings and banking facilities and undertook a project to upgrade a primary School in Buththala and constructing two new buildings.



Agricultural Sector HousingRural infrastructure and agriculture are considered important sectors in the development policy formulation process. Therefore HDFC paid special emphasis on extending loan facilities to the community in the agricultural sector.

Sector wise distribution of facilities

Sector LKR-M %

Services 2,140 70%

Industrial 693 23%

Agricultural 231 7%

Other 5 0%

Total 3,069 100%



Promoting financial inclusion Promoting financial inclusion


Key Performance Indicators - Economic Responsibility

2010 2009 2008

Economic Value Creation LKR-M % LKR-M % LHR-M %

Interest Income 2,164.98 96 2,216.37 98 1,941.00 98

Other Income 85.3 4 52.33 2 33.08 2

Total Value Created 2,250.28 100 2,268.70 100 1,974.00 100

Economic Value Distribution

To Goods & Services Providers 1,505.9 69 1,722.09 76 1,737.00 94

To Employees 314.57 18 277.15 12 236.69 13

To the Government 155.78 7 112.14 5 24.40 1

To the Shareholders ( Dividends) 32.35 1 32.35 1 -

Retaining ( Depreciation, Loan Loss Provision, Retained Profit) 241.68 8 124.97 6 -24.00 -9

Total Value Distribution 2,250.28 100 2,268.70 100 1,974.00 100

Contribution to National Housing Stock and Home Ownership

Cumulative No of Loans up to 31/12/10. 129,935 119,196 113,219

Cumulative Value of Loans up to 31/12/10 LKR- M 23,570 20,500 19,278

No of families assisted for house construction during the year 8,993 5,197 4,449

No of families assisted for other housing purposes during the year 1,746 780 1,110

No of families assisted to own a house during the year 10,739 5,977 5,559

Value of the Loans Granted during the year LKR-M 3,069 1,404 1,418

Average size of Loans Granted during the year LKR-M 0.285 0.235 0.255

Assisting to Minimise Development Disparities

Servicing to needy group. Loan % Loans % Loans %

Low Income Group (LIG) 3,930 37 2,600 44 2,345 42

Middle Income Group (MIG) 3,610 34 1,838 31 1,863 34

Wider Income Group (WIG) 3,199 30 1,539 26 1,351 24

Sector wise Distribution of Service - No of Loans

Service Sector 6,924 64

Agriculture 1,507 14 No comparative information available

Industrial 2,300 21

Other 8 1


2010 2009 2008

LKR-M % LKR-M % LHR-M %

Provincial Distribution of Service -No of Loans

Western 4,504 42 2418 40 2339 44

Central 1,997 19 1285 21 991 19

Southern 780 7 456 8 384 7

North- Eastern 464 4 153 3 159 3

Uva 643 6 434 7 385 7

North- Central 500 5 224 4 260 5

Sabaragamuwa 828 8 663 1 487 9

North – Western 966 9 344 6 279 5

Northern 57 1 0 0 0 0

Total Loans 10,739 100 5,977 100 5,284 100

Services Provided out of Colombo

% of loan granted out of Colombo District 8,537 79 4,762 80 3,870 74

% of loan granted out of Western Province 6,239 58 3,559 60 2,945 56

% of loan granted out of Colombo and Gampaha District 7,223 62 4,042 54 3,225 43

Employment Generation and Poverty Ellviation

Direct employments 425 364 289

Indirect employments 10,266 4,845 5,118

Promoting Financial Literacy and Inclusion

Cumulative No of Mobile Banking Customers.(MBC) 41,568 20,750 12,360

No of MBCs Promoted During the Year 20,818 7,990 4,850

MBCs with Avg Daily Deposit is Less than Rs 250/ 29,439 18,600 6,560


Key Performance Indicators - Economic Responsibility contd.


Our ApproachThe investment commitment displayed continually by our shareholders has always added impetus to our macro vision of providing affordable housing finance. Accordingly, we have strived to balance corporate objectives and shareholder interests, and ensured consistent long term returns to our shareholders while respecting their rights. We have responded to the social, economic and environmental issues inherent in our business. While creating wealth for our shareholders remains a priority in the triple bottom line reporting concept, we also remain cognisant that by creating a sustainable organisation that’s driven on the three platforms of economic, social and environmental sustainability, our shareholders in turn will be proud to claim ownership in a respected entity steeped in values, ethics and principles.

Shareholding StructureOur primary shareholding is with the National Housing Development Authority with the minority stakes held by both individuals and institutions with Perpetual Capital (Pvt) Ltd and Lanka Orix Leasing Company PLC holding 14.03 per cent and 13.19 per cent of the shareholding respectively as at 31st December 2010. We are also proud to be the first state bank in Sri Lanka to have

instituted an Employee Share Ownership Programme, which divested 5 per cent of the Bank’s ownership to the staff.

During the year institutional investors have displayed a strong discretion in investing in HDFC shares, thus increasing the institutional share holder base from 74 per cent in 2009 to 91 per cent in 2010. Simultaneously, the stake of the top 20 shareholders also grew from 57 per cent to 89 per cent during the year, reflecting the confidence placed by strategic investors in the Bank.

Shareholder Structure

Shareholding

2010 2009 2008

Individual 10.1% 25.6% 21.3%

Institutional 90.9% 74.4% 78.7%

Resident 99.8% 99.7% 99.6%

Non resident 00.2% 00.3% 00.4%

Top 20 89.5% 57.5% 74.7

Shareholders 2,118 3,572 3,697

Financial PerformanceHDFC recorded a consolidated profit after tax of LKR 135.42 Million compared to LKR 56.45 Million in 2009 recording an YoY rise of 140%. The return on

shareholder funds was 7.59 per cent in 2010 reflecting an YoY increase of 131% compared to 3.28 per cent in 2009. The commendable performance of the bank has enhanced the shareholder confidence as reflected by the highest recorded share price since its listing in the CSE. The table given below indicates the returns we have presented to our shareholders during the last six years. Returns to Shareholders

Year SharePrice Rs

Shareholders’Fund Rs M.

2005 191 1,642.87

2006 174 1,800.48

2007 128 1,789.19

2008 56 1,697.10

2009 147 1,721.19

2020 550 1,848.66

DividendsThe Board of Directors has recommended a dividend of LKR 5 per share for approval by the shareholders at the AGM. The dividend payout from 2010 profit will amount to LKR 32 Million.

Shareholders Responsibility

Our Strategic Priorities• Bottom line and shareholder fund.• Risk management and governance.• Market capitalization.

Highlight 2010

+ 140% Profit After Tax YOY

+ 7% Shareholders’ Fund YOY

+ 272% Share Price


Social RecognitionsNational Business Excellence Award 2010- First Runner-up , Financial Service Sector, organised by the National Chamber of Commerce of Sri Lanka (NCCSL) in consideration of HDFC’s overall performance and the contribution made to the socio economic development of the countryACCA Sustainability Report Award 2010- Small Scale Category winner for economic, environmental and social impact reportingACCA Sustainability Reporting Award 2010- winner of the First Time Reporter on economic, environmental and social impactHDFC Bank, was awarded the Golden Maco Award 2010, at the Maco Awards organized by Mass Communicators Association of Sri Lanka


Shareholders Responsibility contd.


Customer ResponsibilityOur ApproachWe recognise that our responsibility extends beyond the bottom line, to deliver value to our customers and business partners with whom we interact. We strive to exceed expectations of the customers by providing customised products and services. We emphasise that,

● Affordability, ● Flexibility-customized solutions, ● Accessibility-customer reach,● Efficient IT based processes,● Customer satisfaction,

are as the main facets of our customer responsibility. Since 2006 we have been improving our operational efficiency, by broad basing the quality of objectives and targets of our service departments and branches. We are an ISO certified entity and one of the first in the industry to obtain quality certification for the entire operations. This emphasizes our commitment to maintaining quality standards on customer service tenets and principles which form the backbone in creating a sustainable organisation.

Customer – Policy and GovernanceOur customer responsibility is governed by Board and management committees within several policies approved by the Board, namely the credit policy, recovery policy, IT policy, information security policy, quality policy, and code of ethics. Our customer approach is also governed by regulatory and economic directives issued by the Central Bank of Sri Lanka and in conjunction with the Government housing and economic policies. We strive to be a fair partner in housing finance by respecting customers’ rights in the process of loan evaluation, processing, approving, contracting granting and recoveries.

Our Quality PolicyHDFC Bank shall constantly strive to innovate and delivers total financial solution to satisfy customers beyond their expectation in their home and lifestyle needs. This will be driven by;● Caring customer service, anticipating

requirements and delivering proactive solution.

● ISO 9001-2000 based quality management system and enhancing potential of our staff through motivation, development and recognition.

● Caring customer service, anticipating requirements and delivering proactive solution.

● State of the art Information Technology and Communication Systems.

● Continuous improvement, based on effective measures and efficient processes.

Performance on Customer ResponsibilityAffordability Our mission is “to be a dominant player in the financial service sector by delivering innovative solutions to meet the needs of housing and construction sector” which holistically encompasses domestic, social, cultural and economic facets for a sustainable development, which in turn permeates prosperity and value creation for the nation at large. Our loans therefore aim to convert an aspiration into a reality, making impossibility - a possibility. A house is a fundamental need, achieving which require a large amount of capital that cannot be invested within a short period from average income of a household. We experienced that for a majority of the population, a house is the only life time savings. Our philosophy is that, a mere brick and mortar structure of

Customer and Supplier Responsibility

Our Strategic Priorities.• Enhance customer reach• Enhance customer base• Customer Satisfaction

Highlight 2010

+ 23% Savings Customers YOY

+ 7% Deposit Customers YOY

+ 9% Loan Customers YOY


a house is not a harmonious place of living. For a house to become a home, it should be sustainable and affordable to households, when it is built and maintained using resources efficiently to the economy and environment. We presume that housing costing up to 40% of disposable income is affordable for any household. Therefore we are committed to maintain the monthly cost of our facilities within this benchmark, through customised solutions and innovative products and services.

We revised the interest rates of many loans that had been given when the market rates were at its peak and maintained the interest on new facilities at the best possible rates. Loans targeted for the low income segment was kept at the lowest using a specific pricing

strategy. Tenure of loan which was curtailed as a risk management strategy during turbulent market situations was extended to 15 years and above. Processing cost was reduced in many loan categories. Mobilisation of savings contributed to reduce cost of funds as a strategy of making facilities more affordable.

Customised SolutionsHDFC’s service tenets are built upon delivering customised solutions via service excellence. With a view to encouraging sustainable development of the industry and in creating an affordable housing culture, it is imperative that HDFC maintains a product portfolio that encompasses the diverse mix of customers that we possess. Our customers have a common

objective of owning a home, however, the criteria to be eligible for a facility differs from customer to customer. Therefore, products and services are developed and facilities are delivered collating a customer’s individual requirements, levels and patterns of income, economic activity and available collateral etc. These facilities are extended for physical development of houses such as construction, renovation, extension and purchase of built houses. Our services have been further extended to enable customers to purchase household appliances, furniture, fittings, amenities and accessories. HDFC has also formulated savings, deposit and investment plans tailor-made to suite different customer groups. We identified a dearth in project finance facilities for real estate developers and

CUSTOMIZING SERVICES

Customizing of Loan FacilitiesDeposits/Savings Plans

Customer Need Loan Products

● Construction ● Kedella ● Thilina

● Purchase of a house/flat ● Shrama Udana ● Thilina Rakawarana

● Purchase and construction ● Guru Sevana ● Prethilaba

● Redemption existing high interest loans ● Sirisara ● Vishrama Udana

● Extension and reconstruction ● Thilina Home Loan ● HDFC Dana Nidhana

● Renovation, repairs/improvements ● HDFC Home Loan. ● HDFC Fixed Deposits

● Purchase of residential lands ● Farmer’s Loan Scheme ● HDFC Mobile Savings

● Purchase of electrical fittings ● Teacher’s Loan Scheme ● Arumbu Minor Savings Plan

● Purchase of household accessories ● Project Loans

● Development loans

Customized Collaterals

● Property mortgages

● EPF backed loans

● Guarantor loans

● Group Guarantor loans

● Cash backed guarantee loans


Customer and Supplier Responsibility contd.


we have established a dedicated project loan division to extend facilities to this segment.

During the year 9,252 facilities were offered for new house construction recording an YoY increase of 78 per cent. Further, 588 facilities were granted for house purchasing while 899 facilities were given for redemption of debts and house hold equipments. The number of facilities offered to EPF members doubled this year to 6,163 facilities as against 3,314 offered in 2009.

Accessibility and Customer ServiceContinuous improvement to customer service is imperative to achieve customer satisfaction. This includes continuous development and upgrading of delivery channels, operational capacity, introducing innovative products and services while motivating our team by providing a conducive environment to work.

Customer Reach and Branch NetworkImproving accessibility of our service is a crucial factor in enhancing customer relationships. We recognise that all citizens have an equal right to access our service. Hence HDFC strives to expand our reach in all districts and provinces via fully fledged branches and service centers. We have made our service more accessible island wide via Mobile Banking Units and ATM networks.

During the year we enhanced our geographical presence in the north and the east by opening two branches in Vavniya and Trincomalee. Branch relocation and refurbishment program which was initiated in 2007, continued successfully during the year. Chillaw, Badulla, Tangalle, Kegalle and Ja-Ela branches were relocated in customer convenient locations with improved facilities. Our main branch in Colombo and the Monoragala branch were fully refurbished with contemporary designs and better facilities. Accessibility to our service was increased from 11 ATMs in 2009 to 225 ATMs as a result of strategic alliance signed with Sampath Bank PLC. Number of Mobile Banking units were increased from 55 machines to 81 machines during the year. With the

objective of expanding our geographical presence and customer service, HDFC appointed five regional managers with overall responsibility of regional business development.

Customer Care TrainingDuring the year providing staff development on customer-care was made a strategic priority. Several indoor and outdoor training programs were conducted using professional trainers. The Mobile Banking team participated in two special customer oriented training programs which bore favorable results through increase in the savings customer base during the year.

New Product and ServicesDuring the year HDFC introduced an attractive minor’s savings plan named ‘Arumbu’ targeting the Tamil speaking community in the north, east and the plantation sector. Another general investment plan named ‘Ashcharya’ with attractive returns for the customers seeking reasonably attractive returns was launched during the year. HDFC also initiated to sign a strategic alliance with Mobitel with the intention of increasing fee based income by providing value added services to the customers.

Chillaw Branch Relocation

General Mortgaged Customers

EPF Members

Government Teachers

Existing Customers (Home Loan)

Other

Customer wise distribution of service

4.10%

24.70%

10.20%

57.40%

3.60%

Construction

Purchase

Renovation/repair

Redemption

Home Loan

Purpose wise distribution of Products 2010

5%5%1%3%

86%


Initiatives to enhance capacity, customer reach and service - 2010

Customer Reach and capacity

Strategy Objectives Achievements

Opening two new branches Enhance geographical presence and customer reach in the North East regions

7% growth in Total Assets

Expansion of mobile banking service to capture non banking community and increase per capita savings

Improve customer reach by providing service at customer door step with special focus on savings

Increased customer base, deposits and savings portfolio by 51%.

Enhancing ATM network Enhance delivery channels Increased customer base and deposits

Appointment of Regional Managers

Improve efficiency of operations and expansion of service utilisation

Increased overall growth, profitability and customer reach

Customer care – training Improve quality of service and customer satisfaction

Growth in loans, savings and deposits and Satisfaction

Regular branch wise promotion Expanding customer base Enhanced loans, savings and deposits portfolio

New Products and Services

Initiative Description & Objective Targets & Achievements

Arumbu Minor Savings Plan. A unique, minor’s savings plan designed to mobilise low cost long term funds for financing housing loan portfolio. The product is targeted for children under 12 years with special focus on Tamil speaking community

Improved savings base and result to be consolidated in 2011

Ascharya Investment Certificates General Investment Plan to mobilise medium term funds. Bank guarantees an attractive return at maturity

Enhance deposit fund. Result to be consolidated in 2011

IT DevelopmentsOur user friendly IT initiatives are a hallmark of HDFC IT developments. These developments take place on a continuous basis in conjunction with the competitive market requirements and internal management needs as per the




IT Strategic Plan. Integration of Mobitel and HDFC IT systems for providing TOP UP solutions for pre-paid Mobitel customers and bill collection facilities for post-paid Mobitel customers and the strategic alliance with Sampath Bank which expanded our customer reach through ATMs were significant IT innovations which took place in 2010.

Customer Satisfaction Survey results

Survey Criteria 2010 2009 2008

Sample size 4,000 6,000 6,000

Responded 518 1490 2,540

Response - Excellent

40% 3% 3%

- Good 35% 36% 29%

- Fair 5% 35% 36%

- Unsatisfactory 0% 23% 30%

- Poor 0% 1% 3%

Overall Rating 80% 53% 46%

Supplier ResponsibilityOur ApproachGiven our business and operational profile, HDFC’s interaction with suppliers is limited. Even for that limited portfolio, we strive to be a strategic partner in their interaction with the Bank. We have therefore implemented a comprehensive system that’s built on the tenets of transparency and accountability, where controls and monitoring are built in, to ensure that suppliers are treated with meritocracy.

HDFC makes a conscious effort to source suppliers from the vicinity of branches, especially for work related to maintenance and repairs. We allocate resources mainly for stationery expenses. We are committed to ensure that our relationships are with service providers who are registered with HDFC having scrutinised their financial and past records.

Customer Satisfaction Considering the positive customer response and increase in our customer base it can be construed that HDFC is placed among the best service providers in the housing finance industry. Some of our branches have the expertise to process a housing loan facility to the EPF members within a day. Our goal is to promote this expertise in all our branches. The annual survey on customer perception enabled us to improve our customer service by simplifying procedures and offering tailor-made products whilst providing continuous training on customer care, which in turn has improved our overall customer satisfaction ratio from 53per cent in 2009 to 80 per cent in 2010.

Practices and GovernanceStandard procurement procedures and ethical practices such as supplier segregation, tender and quotations and evaluation systems are in place. Different committees are vested with responsibilities such as the Tender Boards and the technical evaluation committees based on diversity in the value of supplies. HDFC also follows a high level of transparency and control in tender and procurement procedures. Price negotiations are conducted by a designated team depending on the contract value. HDFC thus has not had any major supplier complaints in the last two years. We have maintained a high level of supplier satisfaction with timely payments, communication and by respecting their human rights by offering equal opportunities for equally qualified partners.

Services

Industrial

Agricultural

Other

Sector Distribution of Sieves 2010.

8% 0%

23%

69%


Key Performance Indicators – Customer Responsibility2010 2009 2008

Purpose wise Service No of Loans % No of Loans % No of Loans %

Construction 9,252 86.2% 5,197 86.7% 4,449 80.0%

Purchase 588 5.5% 350 5.8% 513 9.2%

Renovation/repair 486 4.5% 52 0.9% 246 4.4%

Redemption 67 0.6% 166 2.8% 39 0.7%

Home loan 346 3.2% 212 3.5% 312 5.6%

10,739 100.0% 5,997 100.0% 5,559 100.0%

Customer wise distribution of service

General mortgaged loans 1,100 10.2% 692 11.5% 1,028 18.5%

EPF members 6,163 57.4% 3,134 52.3% 2,110 38.0%

Government teachers 387 3.6% 368 6.1% 889 16.0%

Existing customers (Home Loan) 2,648 24.7% 1,240 20.7% 1,196 21.5%

Other 441 4.1% 563 9.4% 336 6.0%

10,739 100.0% 5,997 100.0% 5,559 100.0%

Customer Reach and Capacity Building

Permanent work force 425 364 289

No of Mobile Bankers 81 58 24

No of Branches 28 26 21

No of ATMs access 225 10 4

No of PCs/staff 71% 69% 63%




Environmental Responsibility

Our ApproachThe Bank’s commitment to environment sustainability includes an effort to minimize the environmental impact of its loan facilities by promoting sustainable housing and being sustainable in its daily operations.

Sustainable Housing: HDFC is mindful that, our core business of facilitating human settlement has a significant indirect impact on the eco system and climate change. Housing is a fundamental need of a human being as it is the place of dwelling we call a home. Over the years we have transformed our focus from housing finance to home finance. Our philosophy is that for a house to become a home it should:

● Be affordable and resource efficient: House construction and maintenance requires a substantial amount of natural resources and energy such as soil, wood, cement, water, electricity and gas etc. Hence it involves a large amount of capital and emits a substantial amount of waste. We believe that housing construction and maintenance should be affordable to the households and resources should be utilised efficiently.

● Create a decent indoor and outdoor environment: House is the immediate environment of a family and exerts influence on children’s education, health, domestic peace and reflects the quality of life and aspirations of the household. In the process of demographic transition, clusters of homes form neighborhood and clusters of neighborhoods form towns and cities. We believe that sustainable planning and construction create a decent indoor and outdoor environment for the well being of the family.

Operating Sustainably: We consume a large amount of natural resources such as electricity, water and fuel etc and therefore we are committed to manage the consumption of these resources and minimise carbon footprints.

In driving HDFC towards its objectives, we have been mindful of our responsibility to balance environmental needs with human needs and respects human rights. Corporate goals should not exert an adverse impact on the culture, biodiversity and overall uniqueness of our country. In this context HDFC has complied strictly

with the environmental regulations, promoted energy conservation and efficiency, educated customers and promoted sustainable management of natural resources. By focusing on these environmental challenges HDFC also strives to be an active partner to the government in achieving Millennium Development Goals of the county and ensuring environmental sustainability by year 2015.

Environmental Policy and GovernanceIn 2010, the bank approved the Environment Safeguard Policy, which strengthened the Bank’s mandate to set more rigorous standards for lending operation, manage own carbon footprint, resource utilisation and supply chain management. The policy is implemented and followed up by the sustainability executive and credit committees. Programs are being formulated to enhance knowledge and awareness of the staff on environmental aspects of the business operation. The Policy is available at our website www.hdfc.lk for stakeholder reference.

Our Strategic Priorities.• Reduce electricity consumption• Minimise fuel consumption• Reduce paper

Our Carbon Footprint

836,488 kwh Electricity consumed

25,952 Ltr Fuel consumed

273,921 km Business travel

3,261 kg Paper recycled


Environmental PerformanceCompliance with Environmental and Development RegulationsGathering our pool of knowledge and experience, it is apparent that regulatory complied designs and construction always minimise the negative impact of development and promote more resource efficient construction. Hence for construction loans, we ensure that all plans are formulated by adequately qualified planners and approved, while for all mortgage loans, relevant authority approval for allocation of infrastructure such as road ways, smooth flow of water, assurance of uninterrupted power supply, solid waste disposal and rain water drainage must be obtained. Project loans must comply with the regulation of the all the relevant regulatory bodies such as the UDA, CMC, RDA, LLRB, local authorities, the Condominium Management Authority and/or the Central Environmental Authority. The level of compliance with these regulations are as follows

Managing Carbon FootprintIn the process of implementing the Environmental Policy, in 2010, the Bank identified that fuel consumption caused by business and staff travel, consumption of electricity, water and paper as the main areas of focus in managing the Bank’s carbon footprint. Internal indices were further developed to monitor Green House Gas Emission and targets were set to quantify carbon

Compliance with Development Regulation 2010 2009 2008

Approved plans / total construction loans 100% 100% 96%

Approved plan/ total of EPF construction loans 97% 97% 93%

Approved site plan/ total mortgage loans 100% 100% 100%

Local authority complaints / total construction loans Nil Nil Nil

Environmental dispute / total construction loans Nil Nil Nil

● Contracting an efficient courier services for delivering documents and materials

● Authorising branches to hire vehicles locally for business travel

● Deploying regional staff for branch promotions without using staff from head office or other regions

The above initiatives will encourage efficient utilisation of fuel and thereby cost savings would cascade to the Bank’s bottom line, while encouraging the management of emissions judiciously.

Staff Transport and Emission controlIn addition, the Bank is committed to reducing average travel per employee per day from home to office and vice versa. The average travel per employee per day is 75 kilometers in 2010, compared to 52 Kilometers in 2009. This increase is mainly due to new recruitments who were deployed in the North and East. The index will be monitored to reduce the average traveling to a substantial level in 2011. As shown in the following travel index 61 per cent of our staff travels more than 15Kilometers per day. Our goal is to minimize the percentage of employees who travel more than 50 Kilometers per day from 18per cent to 0per cent within the next two years. Accordingly recruitments and transfers will be made based on this travel index. These initiatives will undoubtedly have the following benefits:

● Reduce emissions generated by public and private vehicles influenced by our operations

● Save energy, time and money which eventually permeate the economy to its advantage


Environmental Responsibility contd.

dioxide (CO2) emission in the entire operation of the Bank in 2011.

Business Travel and Fuel consumptionIncrease in CO2 emission is a serious concern in Sri Lanka, especially in urban and industrialised areas. Whilst consuming a substantial amount of fuel and causing a threat to the supply of natural resource, the transport sector is responsible for the highest percentage of CO2 emissions. In order to strengthen our efforts in minimising carbon emissions, we further developed the internal indicators established in 2009 to monitor and control carbon emissions emanating from business and staff travel. The Bank also focused on reducing vehicle running mileage by developing an index to monitor the mileage per LKR 1 Million loans approved. During the year Bank’s fleet of vehicles has run 273,921 kilometers and consumed 25,952 liters of diesel and petrol for business purposes. This

translates into ratio of 8.46 Ltr of fuel per LKR 1 Million loans approved and mileage of 89 Kilometers per LKR 1 Million loans approved. During the year the following initiatives were taken to reduce carbon emissions further:

● Disposing vehicles used for over five years and replacing them with cost and fuel efficient new vehicles


● Improve staff efficiency and productivity

● Geographical spread of employees

Daily Travel index scheduleTravel-Km Employees Composition0 < 15 160 39%15.01 < 25 80 19%25.01 < 35 54 13%35.01 < 50 41 10%50.01 < 70 26 6%70.01 < 90 18 4%90.01 < 33 8% 412 100%

Electricity and Water ConsumptionInternal indices were established to monitor efficiency in consumption of water and electricity. Installation of energy efficient lighting systems and air conditioners in all branches in conjunction with the refurbishment program enabled the bank to conserve electricity consumption per head further, from 2062 units in 2009 to 1986 units in 2010. During the year Bank has taken a step to calculate average electricity

consumption per Sq.ft of building occupied by the Bank which amounted to 13 units in 2010. Bank was also able to reduce water consumption per head from 17 liters to 15 liters in 2010.

Paper ConsumptionWaste Management and management of paper consumption were prioritized this year. An internal index was formulated to monitor paper consumption per LKR 1Million loans approved. In 2009, loan disbursements were made by releasing funds directly to customer savings accounts instead of issuing cheques. Interdepartmental communications were made via emails and intra net whenever possible thus reducing the use of memos. We are also seeking avenues to simplify loan approval process to minimize documentations. These efforts have enabled the bank to reduce average photocopy paper consumption per LKR 1Million loan approved, from 176 to 148 during the year. There has been considerable savings on print cartridges, maintenance of equipment and the time spent on distribution, handling and filing of documents as well. Going forward, we will continue to improve this ratio further.

Sustainable Procumbent and Waste ManagementThe Bank is committed to procure recycled products whenever possible within reasonable cost boundaries. While the Bank follows a standard procurement procedure for stationery, in compliance with the Bank’s environmental policy, this year we promoted procurement of photocopy paper manufactured under the international paper principles; paper produced from planted and renewable forest with environmental responsibility, and brought paper consumption under the 3G concept of reduce, reuse and recycle.

During the year, HDFC provided 3,261kg of waste papers to Neptune Papers (Pvt) Ltd, for recycling purpose. Company has confirmed that our waste management has saved 55 trees, 103,634 liters of Water, 13,044 Kwh of electricity, 5,723 liters of oil and 9 cubic meters of land fill.

Conservation of BiodiversityEnvironmental sustainability means managing and protecting our natural resources to make them available for future generations. In Sri Lanka, the natural forest cover has decreased substantially from 80 per cent in 1881 to 24 per cent in 1990 while it has further decreased further by 6.6per cent from 1990 to 2001. HDFC believes that deforestation has been greatly influenced by the human settlements and recognises its responsibility to safe guard the natural forest. In this context HDFC planted 500 trees, around the play ground of Suboda School , Buttala in line with the Government’s 1,100,000 trees program in November 2010.

Promoting Sustainable Housing and LivingHDFC Environmental Policy specifies that every employee should comprehend the importance of incorporating environmental consideration in their daily business activities whenever appropriate. We also encourage employees to reflect their commitment to the environment by supporting

0 < 15

15.01< 25

25.01< 35

35.01< 50

50.01 < 70

70.01 < 90

90.01 <

Staff Travel distance

39%

19%

13%

10%

6%4%

8%


Key Performance Indicators - Environmental Responsibility2010 2009

Save Electricity, Water and reduce EmissionElectricity consumption Units 836,488 750,659Electricity consumption - Units per employee 1986 2062Electricity consumption per Sq:ft occupied (comparative figures not available 2009)

13 -

Water consumption Ltr 6,331 6,218Water consumption Ltr- Per employee. 15 17Paper Consumption- Save Trees, Resources and Reduce EmissionNo of paper purchased-Pkts 900 500

Weight of Photocopy paper purchased- Kgs 2,375 1,275No of photocopy papers consumed per LKR 1M loan approved

146 178

Waste paper disposed for recycling-Kgs 3,261 2,345Recycling of disposed papers have saved - Tree 55 - Water- Liters 103,634 - Electricity- Kwh 13,044 - Oil – Liters 5,723 - Land fill- cubic Meters 9 - Business Travels, Energy Consumption and Emission ControlsDiesel and petrol Ltr consumption 25,952 26,405No of Km run by Bank's vehicles 273,921 214,466Vehicle mileage per approved loan value LKR 1M 89 153Fuel Ltr (petrol & diesel) per LKR 1M loan approved. 8 18Fuel Ltr per loan approved 2.4 4.4Staff Transport, Energy Consumption and Emission ControlsTotal travelling per day-km 31,115 19,508Avg traveling per employee per day (Home-office-home) - Head Office- Km

76 54

Avg traveling per employee per day (home-office-home) - Branch-Km

75 50

Avg traveling per employee per day (home-office-home) - Bank-Km

75 52

staff driven volunteer programs for promoting in-house greening and educating local communities to improve their environment. HDFC as a leader in housing finance industry believe that youth and children of Sri Lanka must be made aware of the need for these practices to be imbued now for future benefit.

To commemorate the World Habitat Day, the Bank organised a city walk, on the theme of “Better City Better Life.” The two kilometer walk with placards and banners ended up at Galle face Green with over 200 participants from the head office, pupils of Colombo Grammar School, Battaramulla, and officers of UN Habitat Sri Lanka office. The objective of the walk was to promote awareness on the importance of maintaining a conducive city environment which is healthy and clean, built around regulations and compliance and devoid of unauthorized constructions which takes its toll on the environment and communities.

The event was highly recognised by environmentalist and city developers and our message was conveyed to city folk.


Environmental Responsibility contd.


Social Responsibility - Sustaining Our Team

Our ApproachHDFC expects our employees to actively endorse and support our corporate values. Simultaneously, we promote diversity, equal opportunity and creativity of our staff by creating an environment they could train and develop to their full potential. We endeavor to maintain a high standard of occupational health and safety and maintain a cordial labour relationship with the objective of creating a motivating and healthy environment to retain their services and expertise for a longer period.

Since HDFC was converted from a State Corporation to a Licensed Specialised Bank, developing human capital to reach the high standards maintained within the competitive banking environment has been a challenge. A complete transformation stemming from attitudinal change, increasing productivity, emphasis on quality and aligning vision and mission to customer service tenets and business strategies became increasing priorities and areas that needed rapid and inclusive training and development. Comprehensive orientation programs that were

conducted on regular basis has resulted 80 per cent of the staff adjusting themselves to meet the new challenges and setting themselves goals aligned to our vision to create a sustainable business growth. As depicted in the profile indicators below, the average age of our staff is above the industry average which is a valuable wealth to our organisation as there is a high potential for development in line with the standards of the competitive banking environment.

Team Profile 2010 2009 2008 2007

No of Staff 425 364 289 286

Percentage of Women 45% 46% 52% 52%

Percentage of Graduate 19% 21% 17% 17%

Percentage of Professionals (Including Banking) 45% 41% 34% 34%

Average Age (Years) 36 37 39 39

Average Service Period (Years) 8.8 9.64 11 11

Average Absenteeism 8.40% 10.60% - -

Average Medical Consultation - LKR 47,024 40,228 22,728 30,104

Percentage of employees covered by Collective Agreement 98% 98% 98% 98%

Turnover Index 2.58% 4.67% 1.70% 1.70%

Average Gross Salary - LKR 47,266 57,371 42,696 39,943

Average Basic Wage - LKR 18,266 15,849 17861 17643

Strategic Priorities• Strengthening • Capacity maximising• Satisfaction

Highlight 2010

+ 17% Staff Strength

+ 14% Benefits and emoluments

+ 29% Satisfaction YoY up


HR Practices and GovernanceHDFC is an equal opportunity employer as discrimination based on religion, caste, gender or any other profile is not in our mandate of HR recruitment and development. We also ensure that we follow the ILO declaration on fundamental principles which aim to achieve both economic growth and equity through a combination of social and economic goals. HDFC also follow other relevant human resources standards and regulations very stringently. HDFC refers the Establishment Code for all labour related matters where internal policies and rules are not available. We do not condone child or underage labour nor do we exercise any gender biasness within our organization. Recruitment is based on transparent procedures such as newspaper advertisements, written tests and interviews. Recruitment decisions are based on qualifications, merit and capabilities. Priority is given to internal candidates when filling vacancies. We encourage geographically diversified and multiethnic participation and recognise the right of unionisation.

All material HR matters are referred to the Board HR subcommittee. New recruitments and promotions are effected based on the carder plan approved under the Corporate Plan of the Bank.

Performance Review and Follow upA staff appraisal system has been formulated to recommend annual salary increments and identify employee attitudes and training and development needs. Separate appraisal systems are in place for the following categories.

i) Managerial & Heads of Divisionsii) Executives, Clerical & Allied Gradesiii) Office Assistants & Drivers

Annual appraisals are conducted for the entire staff of the Bank. Employee feedback and results of the staff satisfaction survey enable the Bank to identify specific training and development needs. Branch wise loan targets, recoveries and fund mobilisation are some the categories used in performance appraisal. Fund mobilisation targets were given to all the staff members with the objective of creating a competitive environment for skill management and development of human capital.

Training and AwarenessStaff Satisfaction Survey is considered as the key strategy used to identify staff attitudes, training and development needs. 348 employees responded to the survey conducted in 2010, representing 82 per cent of the total staff of the Bank. The results of the survey are highlighted below:

Results of the staff satisfaction survey 2010 2009 % of Yes % of Yes

Are you happy with your job? 88% 68%Are you satisfied with your work load? 75% 74%Do you believe the work load is equally distributed? 49% 45%Are the leaders positive role models? 78% 69%Supervisor keep you well informed what is happening ? 79% 67%Are your views and contribution valued? 77% 75%Receive appropriate recognition for your contribution? 55% 56%Does your salary match your responsibility? 53% 59%Satisfied with your understanding of the bank’s goal? 70% 68%You recommend your friends to work for HDFC? 79% 75%

Even though the results showcase that an average of 88 per cent are happy with their job, while 79 per cent claims HDFC employee relations are more than satisfactory and would recommend it as a preferred workplace, we do realise that some areas of gap do exist. These include recognition for contribution at 77 per cent and being sufficiently remunerated at 53 per cent both of which have deteriorated compared to 2009. We are now in the process of addressing these issues through the introduction of a performance related rewards and recognition system with local and overseas training and career development opportunities. HDFC also plans to implement an incentive culture which would add more scope to individual capabilities while promoting a team working culture within the organisation.


Social Responsibility - Sustaining Our Team contd.


Decent Work PerformanceTeam Strength and Provincial DistributionDuring the year the staff strength was increased to 425, from 364 in 2009.Majority of the new recruits were absorbed into the sales team. This was in line with Bank’s strategy that 60 percent of the staff should comprise the sales team in order to accelerate credit growth and savings mobilisation. The new recruits were mainly school leavers recruited on contract basis and absorbed to the permanent carder based on their performance. HDFC conducts regular training and orientation programs to improve performance of the staff and provide a satisfactory career development.

Our workforce is mainly concentrated in the Western province as the 32 per cent of the total staff is based in the head office in Colombo. In an effort to promote an equitable regional staff distribution HDFC reduced the work force in the Western province from 64 per cent in 2008 to 58 per cent in 2010 while 50 per cent of the new recruitments in 2010 were mainly from the north - Central and Northern provinces.

Team Remuneration, Benefits and TurnoverAs indicated in the summary o team profile HDFC has reduced the average cost per employee from LKR 57,371 in 2009 to LKR 47,266 in 2010, while maintaining a substantial increased in the average basic salary, mainly as a result of new recruitments. Average remuneration of HDFC is in par with other state banks. Consequent to the collective agreement salary revision and the cost of new recruitments, the staff

emoluments increased by LKR 38 Million in 2010 compared to LKR 267 Million in 2009. Apart from the basic salary and emoluments HDFC offers the following benefits to the permanent carder:

● Employee Share Ownership Program (ESOP)

● Comprehensive medical scheme

● Death donation and funeral assistance scheme

● Special loan scheme for housing, furniture and other housing related matters

● Vehicles loans at a special interest rate

● A distress loan scheme

● Two months bonus per annum

● Special risk allowance for cashiers

● Holiday bungalow facilities owned by the Bank

These benefits have a substantial influence on the employee turnover which has declined from 4.67 per cent in 2009 to 2.58 per cent in 2010.A noteworthy decline from 4.4 per cent to 2.17 per cent in staff turnover was recorded in the category of Banking Assistants which was a significant improvement during the year. Further staff happiness index as improved from 68 per cent to 88 percent in 2010.

Western

Central

Southern

Eastern

Wayamba

North-Central

Uva

Sabaragamuwa

Northern

Provincial Distribution of Our Team

58%

3%

8%

9%

6%

4%8%

3%


Senior Management

Junior Management

Other Staff

Team by Employment Type & Contract

716

166

236

06 07 08 09 100

100

200

300

500

400

Improving Team Strength

1%


Key Performance Indicators - Decent Work Performance2010 % 2009 % 2008 %

Team by employment type & contractCorporate Management 7 2% 8 2% 9 3%Senior Management 16 4% 13 4% 11 4%Junior Management 166 39% 1 69 46% 92 32%Other Staff 236 56% 174 48% 177 61%Total 425 100% 364 100% 289 100%New Appointments Corporate Management 0 1 1% 0 Senior Management 0 0 0 Junior Management 1 2% 0 0 Other 59 98% 75 99% 3 100%Total 60 100% 76 100% 3 100%Turnover Corporate Management -% 0 0% 0 0% - Senior Management - % 1 0% 0.27 0% - Junior Management - % 1 23% 0 0% - Other - % 9 2% 16 4% - Bank Average - % 22 3% 4.67 5% 3%Provincial Distribution of our teamWestern 246 58% 216 59% 185 64%Central 37 9% 36 10% 24 8%Southern 36 8% 31 9% 21 7%Eastern 12 3% 9 2% 8 3%Wayamba 25 6% 22 6% 16 6%North-Central 13 3% 7 2% 5 2%Uva 18 4% 13 4% 9 3%Sabaragamuwa 33 8% 30 8% 21 7%Northern 5 1% 0 0% 0 0%Total 425 100% 364 100% 289 100%Team Emoluments : LKR –M Salaries 206 66% 180 65% 160 66%Overtime 7 2% 2 1% 8 3%Bonus 35 11% 29 11% 25 10%Staff Medical 14 4% 12 4% 9 4%Encasement of leave 8 3% 6 2% 6 2%Contribution to defined benefits plans - Gratuity

15 5% 21 8% 12 5%

- EPF 23 7% 21 7% 18 7% - ETF 6 2% 5 2% 4 2%Total Rs M 314 100% 276 100% 242 100%

Contributions to Defined Benefits PlansAs per the Employee Provident Fund Act and Employee Trust Fund Act , HDFC is statutorily liable to contribute a sum equal to 12% and 3% of monthly gross salary to the Employee Provident Fund (EPF) and Employee Trust Fund (ETF) respectively to fulfill obligation of the Bank as the employer for the well - being of the employees at their retirements. Employees’ contribution to the EPF is 8 per cent of the monthly salary. Further HDFC also liable to make a statutory provision, a sum equal to 50% of the salary to a gratuity fund under the Gratuity Act No 12 of 1983 to provide further retirement benefits to the employees. During the year the Bank has paid LKR 29 Million EPF and ETF contributions and made a provision of LKR 15 Million to employee gratuity fund.



06 07 08 09 100

100

200

300

400

Team Emoluments


Labour Relation and Human RightsFreedom of association and collective bargaining is a human right of the workers in an organisation, as defined by the UN Universal Declarations of Human Rights and ILO conventions. Collective bargaining is a forum of stakeholder engagement that helps to build institutional framework and is seen by many as contributing to a stable society. HDFC approach to industrial relations spans beyond the collective bargaining mechanism. HDFC recognizes Ceylon Bank Employee’s Union (CBEU), comprising almost 98% of our staff across all executive grades, as a consultative and supportive group that articulate a forum for improved communication , grievance handling and, career counseling. Collective Agreement is available at the corporate web site www.hdfc.lk for public reference.

HDFC maintains an organisational practice of ensuring timely discussion of significant operational changes such as transfers, promotion, disciplinary actions etc with employees and representatives of Trade Union (TU). For this purpose, one month notice is given as a practice where practicable to help to minimise any adverse impacts from operating changes on employees. Nevertheless it is not defined in the collective agreement.

Collective Agreement was renewed during the period and compensations and other benefits of employees were renegotiated and enhanced. Board nominated Management Committee, namely Staff Relation Committee, comprising of five members from the Corporate Management was appointed for improving effective and timely engagement with the TU and staff grievances handling.

There are 4 litigations filed by ex-employees and existing employees against the Bank on grounds of human rights against discrimination. Staff Relation Committee appointed in 2010, was delegated with the responsibility of engaging with staff and the TU to make recommendation to the management to minimize reoccurrence of such staff grievances and ensure a smooth relationship.

Staff participation at TU activitiesThe Bank encourages voluntary and active involvement of our staff in in-house and industrial TU activities. The Bank congratulated Mr. Kesara Kottegodage, the president of the HDFC branch of Ceylon Bank Employees Union (CBEU), when he was elected as the Vice President of the CBEU ( parent body) one of the largest trade union in the country.

Work life balancePromoting WellbeingWe offer our employees a variety of facilities and benefits to enable them to maintain a healthy work life balance and thereby reduce stress levels and be more work oriented. Creating a healthy work life balance is imperative to improve productivity and commitment of the staff. HDFC Staff Health Plan was an important initiative taken by the Bank to achieve this balance, apart from the numerous welfare initiatives including concessionary housing, vehicle and distress loans, insurance and death donations. The percentage of workforce represented by the staff health plan is 67.30 per cent and majority of them participate voluntarily in organising health and safety programs.

Apart from the Health Plan , HDFC implements a range of health and safety measures to maintain a hasard free office environment. Some of these initiatives include, promoting healthy housekeeping practices, providing cashiers and managers risk allowance and a difficult area allowance. Health facilities under the Health Plan and other benefits are covered by the collective agreement. Apart from the measures above, the following initiatives were taken by us in 2010 to maintain health and safety:

Key Performance Indicators - Labour relation and Human Right cases 2010 2009 2008

No of Staff 425 364 289

CEBU membership 419 355 282

Membership % 98% 98% 98%

Employee benefiting from full freedom of association % 100 100 100

No of pending HR cases against the Bank 4


● Implementation of Business Continuity Plan to address emergency situations

● To facilitate a healthy and a safe environment, five branches were relocated and two branch were fully refurbished

● Arrangement were made to provide safe drinking water and standard lighting systems to all branches

● All female members of the staff at Head Office participated in a health education program.

● Security was provided to branches with ATM facilities for the first time

● Educational seminar on currency notes was organised for all promotional assistants to minimise risk of accepting counterfeit notes.

● A Chemical treatment campaign was conducted in the head office for Dengue prevention and all branches were encouraged to follow suit.

● The HDFC Community Policy approved by the Board in 2010, acknowledges Bank’s commitment to sponsor a needy person for a medical, sports or educational need and encourages voluntary staff participation.

These initiatives demonstrate HDFC’s commitment to health and safety and theses strategies has enabled us to maintain zero-accidents, zero occupational diseases and lost days and also achieve a sharp decline in absenteeism and average medical claims. Cultural and Sport EventsHDFC encourages the staff to develop cultural and sporting talents as it creates camaraderie and promotes a sense of team spirit among our employees. The

Buddhist society of HDFC conducts a Pirith and an almsgiving ceremony in the head office annually with financial contribution from the Bank and staff members. This year the ceremony was conducted in March with the participation of a large number of staff and the former Chairman and CEO/General Managers as special guests. The Buddhist and Christian societies celebrated Wesak and Christmas by organising a Bhakthi Gee ceremony and participating in Christmas carols organized by NHDA respectively.

During the year, HDFC Bank Cricket team participated in several six-a-side matches organised by the Central Bank and People’s Bank.

Capacity MaximizingTraining and DevelopmentGiven the challenges we experienced due to the Bank’s profile conversion and the fact that we were now within the orbit of a competitive banking environment, training and development became a vital tool for our sustainability as a bank and a business. Recognising that our team needs to be geared for the challenges ahead, it became imperative that a knowledge gaining culture is imbued into the everyday operations of the Bank.

With the objectives of developing knowledge that support the continuity of our staff and assisting them to successful career retirement, we have initiated several programs as mentioned below.

● Granting interest free loans for professional examinations

● Reimbursement of course fees for examination passed and qualifications gathered while in employment

● Encouraging all new recruits to obtain a banking qualification within a specified period

● Financing industry training and workshops

Key Performance Indicators - Occupational Health & Safety 2010 2009 2008Staff covered by the health plan 67.00% 69.00% 70.00%Average medical claimed per employee– LKR 47,024 40,228 22728Occupational injury 0 0 0No of occupational diseases 0 0 0No of lost day rate 0 0 0

Absenteeism rate 8.40% 10.60% 10.80%Fatality 1 1 0



Staff Covered by Health Plan

67%33%

Covered

Not Covered


● Continuous in-house and external training and orientation programs

● Special programs to improve English and Tamil literacy

● Special recognition is given in the staff promotion policy for obtaining additional banking qualifications after joining the bank

As depicted in the table below, we significantly increased the number of training hours given to the sales staff and junior executives. Total training hours in 2010 increased by 147 per cent compared to 2009. Special Training on Customer CareIn response to the training needs identified through customer and staff satisfaction surveys and individual performance appraisals a special three day training and orientation program

was conducted on customer care for our staff at all levels. Since conversion into a licensed specialised bank, the business environment we have to compete in has become increasingly competitive. In this context we have identified specific training needs for our staff especially

Key Performance Indicators - Capacity Maximizing2010 % 2009 % 2008 %

Training Type - Training man daysInternal 1,474 98% 505 83% 305 75%External 19 1% 101 17% 101 25%Foreign 10 1% 3 0% 2 0%Key Performance Indicators - DiversityTotal Days 1,503 609 408 Average training days per employee 4 2 1 Strengthening with Professionally QualificationNo. Staff registered for banking exam 65 15% 54 15% 26 9%No of staff completed banking exam 5 1% 5 1% 2 1%No of lawyers qualified 16 4% 16 4% 16 6%No of accountants qualified/partly qualified 50 12% 49 13% 48 17%No of IT qualified/partly qualified 33 8% 33 9% 32 11%No of degree qualified 82 19% 77 21% 51 18%Other 174 41% 130 36% 114 39%Total 425 364 289

in the areas of customer care, customer rights, industry practices, banking law, governance, anti-corruption, risk management, development regulations, organizational policies and procedures etc. with a focus on customer orientation.

Further EducationThe conductive strategies implemented in the recent years have resulted in a significant qualitative improvement in our workforce. The numbers registered with the Institute of Bankers for professional banking examinations and banking qualified increased to 16 per cent in 2010 compared to 10 per cent in 2009. The percentage of graduates qualified in the areas of commerce, accounting, economics, arts, geography and valuation amounted to 19 per cent of the workforce. These developments have substantially strengthened the sustainability of the Bank.

No. Staff registered for banking exam

No of staff completed banking exam

No of lawyers qualified

No of accountants qualified/partly qualified

No of IT qualified/partly qualified

No of degree qualified

Other

Staff Capacity Maximizing

8%

19%

12%

41%

1%4%

15%


Diversity and Equal OpportunityThe extent of employee diversity based on gender, age group, service period and ethnicity within an organisation is imperative for the stability of the human capital. HDFC is an equal opportunity employer, paying a uniform remuneration for men and women for work of equal value. From the inception we have employed a high percentage of women in our organisation which amounted to 46 per cent in 2009. During 2010, we strategically recruited more males to strengthen our sales team and thereby reduced the percentage of women in our workforce to 45 per cent by the year end.

The average service period of above five years indicates the level of stability and average age of 36 reflects a high potential

for development. In 2009, 99 per cent of our workface comprised of Sinhalese which was identified as a constraint for sustainable regional expansion of the Bank. In order to expand the ethnic diversity in 2010, we made a conscious effort to recruited staff from minority groups which enabled us to dilute the majority representation from 99 per cent to 93 per cent by the year end.



Male

Female

Male & Female Participation

55%45%


Senior Management

Junior Management

Other Staff

Bank

Diversity - By Age (years)

28%

23%

20%

17%

13%

Key Performance Indicators - Diversity and Equal Opportunity2010 2009 2008

Diversity- by Gender Participation M F.M M F.M M F.MCorporate Management 7 0 8 0 0 Senior Management 9 7 7 6 Junior Management 72 98 71 98 Other Staff 143 89 112 62 Total 231 194 198 166 139 150Gender 55% 45% 54% 46% 48% 52%Diversity - By Age ( years) Corporate Management 50 49 51 Senior Management 41 43 46 Junior Management 31 32 41 Other Staff 23 23 38 Bank 36 37 39 Diversity- by average service (years)Corporate Management 5 4 46 Senior Management 13 12 11 Junior Management 13 13 13 Other Staff 4 9 12 Average Bank 9 10 11 Diversity- by Ethnic GroupSinhalese 401 93% 357 99% Tamil 14 4% 4 1% Moor 10 2% 3 0% Total 425 100% 364 100%


Our ApproachThe community is an important Stakeholder of HDFC. The ethos of our bank is focused on sustaining the community given that our core business is fulfilling a primary need of the community which is shelter. Over the past two and half decades we have made a significant contribution to improve the physical quality of life of the low and middle income segment of our nation by facilitating affordable housing finance in order to fulfill their dream of owning a home which itself creates a sustainable environment for them to built their future upon. We also acknowledge our responsibility to involve ourselves with the community which enables us to build deep relationships with customers and promote the reputation and image of the bank. Investment in the community is most effective when is built on a foundation of mutual benefit and a long term partnership.

Policy and GovernanceOur community investment policy focuses mainly on the following six strategic directives;

● Sustainable housing and living

● Financial inclusion

● Clean water and health

● Education and Sports

● Donation and sponsorships

● Volunteerism on disaster management

HDFC Community policy is available at www.hdfc.lk for public reference. During the year Bank has invested over LKR 4.492 Million in the process of policy implementation representing 2% of cash earnings before tax.

Our community participation responsibilities are governed by the CSR steering Committee headed by the Chief Executive Officer/ General Manager represented by DGM (Finance), AGM (Business Development & Marketing), AGM (IT), Manager Technical, Manager Treasury and a representative of the Trade Union. CSR projects and activities are proposed, identified, screened and evaluated based on social cost benefits and is submitted for Board approval. Project implementation is assigned to

Social Responsibility - Sustaining Community

Community Policy at a glance

The Bank recognises that it has an inbound responsibility for sustainable development of the industry, and improvement of physical quality of lives of people, hence committed;

1. to promote innovative housing technologies that are economical to the common man and equitable to the country and environment

2. to focus on providing banking facilities to non banking communities and proliferate banking and saving habits among them

3. to enhance accessibility to clean water and healthcare

4. to contribute and participate in the society to achieve the goal of Universal Primary Education by the year 2015.

5. to participate in promotion of sports in schools and society

6. to donate and sponsor community organisations and individuals for medical, sports, education and in times of natural disasters. Also ensure that all donations and sponsorships are properly recorded, accounted and disclosed and encourage voluntary staff participation

Highlight 2010

+ 55% Investment in Community


the CSR Project Committee represented by a member from each functional department. The outcome of each project is reported to the Board on the completion of a project.

Community PerformancePromoting Sustainable Living and Financial InclusionTHILINA THARU Art CompetitionFor the second consecutive year we organized an island wide art competition to commemorate UN Habitat day 2010, jointly with the UN Habitat Sri Lanka office and the aesthetic division of the Ministry of Education. The competition was launched under the theme “Better City better Life” in conjunction with the UN Habitat theme 2010. The program is opened to children from grade one grade twelve and organized annually with the objectives of:

a. Promoting environmental education and sustainable living

b. Promoting aesthetic talent of children c. Inculcating savings habits among our

future generation.

The competition was opened from 1st July to 30th October and 13,879 paintings were submitted from schools and preschools island wide. There was a high level of participation from the children of North and East which was commended by all stakeholders. Awards and certificates were distributed at a ceremony held at the John de Silva Art Center where 176 students from all provinces participated. Total project investment was Rs 2.108 Million. Please refer www.hdfc.lk for more details of the project.

Recognising differently able childrenTwo students from Yasodara Vidyalaya, Colombo, were awarded with gifts and certificates under a special category for differently abled children.

Thilina Tharu winners- national level

Part of the gathering at the Thilina Tharu ceremony

Children performing at the Thilina Tharu ceremony

Recognising talent of differently able children

Participation for the Thilina Tharu Competition

2010 2009North Central 86 117Eastern 807 671Northern 406 106Southern 1,302 1,788Uva 649 102Central 2,728 1,492North Western 1,520 188Sabaragamuwa 1,831 1,654Western 4,552 5,513Total 13,879 11,631

Children Savings with Bank’s Sponsorships To inculcate savings habits among school children, HDFC launched a “THILINA” minor savings accounts in schools and preschools with an initial deposit of LKR


Social Responsibility - Sustaining Community contd.

North Central

Eastern

Northern

Southern

Uva

Central

North Western

Sabaragamuwa

Western

Thilina Participation 2010

6%3%

9%

5%

20%11%

13%

1%33%


100/= from the Bank. This was conducted in all districts via the branches. We invested LKR 530,600 on this program in 2010.

THILINA Certificates for Displaced ChildrenTo commemorate the opening of HDFC Vavuniya Branch, the Bank extended an investment certificate named THILINA Rakawarana to 50 deserving children in the north and east. Our initial investment was LKR 300,000/- and we guaranteed a return of LKR 950,000/ on maturity to these children upon reaching the age of eighteen.

Promoting Clean Water and HealthHDFC Eye CampPoor eye health is a key health issue faced by a majority of Sri Lankans. Due to negligence and lack of knowledge many are facing this issue especially among the low income segment of our country. Recognising the importance of eye health in promoting the sustainability of this segment, we organised an eye camp at the Manning Market in Colombo in commemoration of World Health Day 2010. The camp was organised for the daily waged shop assistants and labourers with the cooperation of the traders’ welfare associations in Manning Market. More than 525 blue collar workers who obtained the services of the camp in the Manning Market are our valued customers who use our Palm Top banking facility for daily deposits. Majority of them participated for a vision care program for the first time and the summary of the outcome of the eye camp is given below:

No of beneficiaries and testing results No of headspersons attended the camp 525persons needed eye glasses 235 45%persons needed near vision correction 125 53%persons needed single vision wear 16 7%persons needed Bifocal for distance. 41 17%persons needed Bifocal for constant use 53 23%persons needed reading Glasses 125persons needed custom made spectacles 110

Bank granted customised glasses for all needy participants and total cost invested on this project was LKR 315,406.

Promoting EducationSuboda Primary School Development Project, BuththalaSuboda Vidyalaya is a school situated in Buththala, facing Kathragama road, providing education up to grade 10. There are approximately 100 students who have undergone many hardships due to lack of adequate building space, study material, library facilities, sports, sanitary and water facilities. The lack of teachers and the threat of wild elephants were the other issues faced by the school. When we initiated this project the school was virtually neglected with a steady decline in the number of students majority of whom were from the low income families.

HDFC sports club selected to rehabilitate Suboda Vidyalaya as a CSR project and Board approval was obtained to implement the program in conjunction with the Monaragala Integrated Rural Development Project organized under the Dayata Kirula exhibition scheduled to be held in February 2011 in Monaragala. An estimated cost of LKR 3.5million is being spent to develop and rehabilitate the school. Refurbishing

Foundation laying Buttala Suboda School development Project

of existing buildings, construction of new buildings, repairing the existing sanitary and water facilities, promoting commercial cultivation and putting up a bio fence for protection from wild elephants are some of the activities undertaken by the project. Apart from that 500 teak plants were also planted around the school premises. This is a project funded by the Bank and staff with substantial assistance from villages by volunteer labour and materials. During the year Bank has spent Rs 500,000/- towards this project The program is scheduled to be completed by February 2011. Pleases refer our web site www.hdfc.lk for more details of the program.


Key performance indicators - Community InvestmentsEvent 2010

Amount - Rs. As % of PBT

Promoting sustainable housing & living 665,000 0.23%

Promoting financial inclusion 830,600 0.29%

Promoting clean water and health 315,400 0.11%

Promoting educational, cultural and sport activities 2,108,000 0.72%

Donation and sponsorships 535,000 0.18%

Staff voluntarism (paid hours) 38,500 0.01%

Bank contribution towards social well-being 4,492,500 1.54%

Staff voluntarism towards social well-being

Total

Assisting Schools with Study MaterialsThis project was initiated last year to assist rural children of less privileged families with educational materials. During the year, we distributed school bags and books to 85 children in Butthala at a cost of LKR 40,000.

Donation and SponsorshipsDuring the year, Bank has spent LKR 1.3 Million as donation and sponsorships for social events organised in various organizations, societies and schools, for the wellbeing of the society and the industry. Some of the significant donations and sponsorships are as follows:

● Sponsorship of the Samurdhi Staff welfare societies - LKR 102,000

● Sponsorship of the ‘Thunkal Dakma’ Fund raising program - LKR 335,000

● Dayata Kirula national exhibition - LKR 305,000.

Staff VoluntarismHDFC encourages voluntary staff participation in community projects and in the event of natural disasters. Voluntary participation in community projects is imbued to HDFC employees, by creating a platform for them to actively participate in CSR projects and community development and social activities initiated by the CSR Committee and the Sport Club. Our staff donated generously towards supporting their fellow members in need of financial assistance due to hospitalisation, housing, education, and flood etc. During the year staff has donated over LKR 1.6 million for this purpose.



Community Investment 2010as a Percentage of PBT

Promoting sustainable housing & living


Promoting clean water and health

Promoting educational,

cultural and sport activities

Donation and sponsorships

Staff voluntarism ( paid hours)

0.11%

0.72%

0.18%0.01%

0.29%

0.23%


Impacts and challenges in maintaining the triple bottom lineIt must be noted that economic, social and environmental sustainability is inextricably linked and in order to create a sustainable organisation, all three facets must be in place. In general, the housing and housing finance industries are challenged via numerous impediments with a housing finance institution like ours in particular, facing more threats than regular banking institutions. The impediments detailed below do have a significant impact on our bottom line and poses immense challenges to maintaining a sustainable milieu for a going business concern. It is these challenges and other constantly emerging threats that has spurred HDFC to be pragmatic in our view for the future.

Challenge Our strategies to overcome

Housing finance in general should be long-term and low cost to make it affordable to an average income household. The difficulty in sourcing long-term matching funds is a challenge in developing economies such as Sri Lanka.

● Strive to increase risk pooled savings and deposit funds by enhancing customer reach and with new savings and deposits products

● Arrangement of long-term borrowings from other banks and financial institutions through secondary mortgage market operations

● Efficient portfolio management in both assets and liabilities● Efficient assets and liability and financial risk management operation

Housing finance should be long term in nature. But prediction of long-term macro economic variables is a significant challenge in emerging economies like Sri Lanka.

● Maintain adjustable interest policy● Maintain a diversified portfolio● Be vigilant on market behavior● Be regulatory complied and sound● Efficient portfolio management in both assets and liabilities● Efficient asset and liability and financial risk management operations

Above 75% of our customers are from the low and middle income group with poor financial literacy, inadequate collaterals and lack of documentation of proof of income for credit evaluations.

● Expansion of mobile baking operation to promote financial inclusion● Acceptance of alternative securities● Exercising a more corporate approach in credit evaluation● Diversification of lending based on income ● Providing ancillary services such as technical, valuation and legal services● Close monitoring and follow-up

The need for governance as real estate forms one of the largest asset bases of the country and is prone to artificial pricing, unhealthy competition, lack of accountability long term vision and transparency

● Establish an in-house valuation , technical and legal department● Comply with the regulation of local authorities and other regulatory bodies ● Be compliant with industry standards and good governance practices● Regular credit review and customer relations● Be compliant with external codes and best practices in finance and construction

industries

Growth in the housing sector is constrained due to artificial rise in land prices, high wages in the construction industry, high cost of building materials and lack of skilled labour

● Maintain affordability of finance● Promote low cost affordable housing technologies● Promote awareness on sustainable construction and living● Promote geographical diversity in lending● Knowledge based products and services

Maintaining affordability and accessibility of service to masses with open market competition

● Efficient risk management● Research and development on new customised products and services● Improve quality of service and customer satisfaction● Development of staff through training and customer orientation● Promote financial inclusion and enhance accessibility for housing finance


Commitment to focused engagements - 2010Commitments made in 2009 Status

● The branch network will be added to with ten more customer service centers, primarily in the North and East

In progress

● The strategic Sampath Bank ATM tie up, which was scheduled for completion in 2010 to ensure that our ATM network will be accessible islandwide, encompassing a total of 225.

Achieved

● IT processes and systems are being enhanced for seamless connectivity and efficiency, especially in loan approval and disbursements.

Partly achieved and in progress.

● More ethnic diversity will be seen within the team and a policy to recruit staff proportionately from all ethnic groups is being established

Partly achieved and in progress

● New financial instruments, currently being researched, will be introduced to raise long term matching funds, in addition to structured debt instruments as an attractive investment option

Partly achieved and in progress.

● Investing heavily on the overall improvement of the operational quality of the Bank and in upping the customer service tenets via surveys, mystery customers and indices

In progress.

Focused Engagements - 2011Stakeholder Focused Engagements

Gov

ernm

ent

Maximize direct economic value creation

Enhance value and number of housing loans with especial focus on low and middle income groups

Focus on expanding banking services in the north and east

Actively participate in government’s special regional development projects

Enhance lending to customers from agriculture and agricultural industries

Enhance strategies to attract unbanked community and empower them through savings and housing loans

Shar

ehol

ders

Timely and regular publication of quarterly financial results and Annual Report 2011

Reconstruction of corporate website to communicate wider range of corporate information including economic, environmental and social performance

Enhance profitability and shareholders fund with efficient portfolio management

Strengthen strategies for risk management

Maintain above the industry average growth

Enhance brand and corporate image

Cus

tom

er

Enhance customer reach by opening five new branches and through ATMs

Diversify the product rage with new customized loan, savings and deposit products

Enhance mobile banking operation with 30 new operators to provide customer convenient and friendly service

Introduce new value added services at customer convenience

Introduce code of ethics and customer relations




Stakeholder Focused Engagements

Envi

ronm

ent

Implement a branch wise competition to promote efficient utilisation of energy and resources

Initiate to quantify GHG emission and manage own carbon footprint

Initiate to introduce green products, green operations and cost effective housing technologies

Strive to inculcate sustainable living and construction practices

Implement ‘one tree for one loan’ project to improve and protect biodiversity

Strive to reduce indirect energy consumption from staff transport

Empl

oyee

Continue with career development and training with special focus on foreign training

Introduction of a unique branch performance appraisal system which encompass career training, development, rewarding star performers

Review HR policies

Appointment of the head of HR- recruit a highly capable qualified and experienced professional able to face challenges of development and expansion

Expansion of field sales through new recruitments for Palm Top operations

More ethnic and geographical diversity within the staff

Com

mun

ity

Complete school development project at Monaragala in February 2011

Implement Computer literacy center project already approved by the Board to promote IT education

Investment on promoting education by assisting schools

Continue with Thilina Tharu Children’s Art exhibition in 2011

Continue with the community awareness program on sustainable living in conjunction with the world Habitat day 2011


Independent Assurance Report in Relation to the Sustainability Report – 2010 Introduction and Scope of the EngagementThe management of HDFC Bank (“Bank”) engaged us to provide an independent assurance on the following elements of the Sustainability Report 2010 (“the Report”).

● Reasonable assurance on the information on financial performance as specified on page 69 of the Report.

● Limited assurance on key performance indicators and other information presented in the Report.

Responsibility of the Management on the ReportThe Management of the bank is responsible for the preparation and presentation of the Report in accordance with the Bank’s sustainability practices and policies which are derived from Global Reporting Initiatives (GRI-G3) Sustainability Reporting Guidelines. These responsibilities include among other things, identification of stakeholders and material issues, determining the sustainable performance criteria for reporting and establishing appropriate processes and internal control systems to measure and report the sustainability performance criteria.

Assurance Report

Our ResponsibilityOur responsibility is to perform a reasonable and limited assurance engagement and express conclusions based on the work performed in accordance with Sri Lanka Standard on Assurance Engagements (SLSAE 3000): ‘Assurance Engagements other than Audits or Reviews of Historical Financial Information’, issued by the Institute of Chartered Accountants of Sri Lanka (“ICASL”).

Reasonable assurance is a high level of assurance. However, reasonable assurance is not an absolute level of assurance because there are inherent limitations of assurance engagement.

A limited assurance engagement is substantially less in scope than a reasonable assurance engagement and consequently does not enable to obtain assurance that we would become aware of all significant matters that might be identified in a reasonable assurance engagement.

This Report is made solely to the Bank in accordance with our engagement letter dated January 24, 2011. We disclaim any assumption of responsibility for any reliance on this Report to any person other than the Bank or for any purpose other than that for which it was prepared. In conducting our

engagement, we have complied with the independence requirements of the Code of Ethics for professional Accountants issued by the ICASL.

Assurance Procedures Carried OutFinancial InformationWe reconciled the information on financial performance as reported on page 69 of the Report with the audited financial statements of the Bank for the years ended December 31, 2009 and 2010.

Key Performance IndicatorsWe reviewed the reliability of the data/information on Key Performance Indicators for the year ended December 31, 2010 based on reviews of:

● the systems used to generate, aggregate and report these information;

● the information reported by the relevant business units to corporate level;

● the information validation processes at corporate and business level;

● the information trends in discussions with management and

● the calculation performed by the Bank on a sample basis through recalculation.


Other InformationWe planned and performed following assurance procedures on other information presented in the Report:

● Inquiring relevant Bank’s personnel to understand the process for collection, analysis, aggregation and presentation of information in the Report.

● Reviewing the system used to generate, aggregate and report the information in the Report.

● Interviewing the senior management and relevant staff at corporate level and selected business unit level and obtained the evidence concerning sustainability strategy and policies for material issues and implementation of those across operation of the Bank.

● Reviewing and validating the information contained in the Report.

● Reading the information presented in the Report to determine whether that information is in line with our overall knowledge of, and experience with, sustainability performance of the Bank.

ConclusionBased on the procedures performed, as described above, we conclude that:

● The information on financial performance as specified on page 69 of the Report is properly derived from the audited financial Statements of the Bank for the years ended December 31, 2009 and 2010.

● Nothing has come to our attention that causes us to believe that key performance indicators and other information presented in the Report are not presented, in all material respects, in accordance with the Bank’s sustainability practices and policies which are derived from GRI (G3) Sustainability Reporting Guidelines.

Chartered AccountantsMarch 23, 2011Colombo


The Global Reporting Initiative (GRI) G3 reporting framework, has been used as a guide in the preparation of the Sustainability Report 2010. This index provides a comprehensive listing of the GRI Indicators reported by HDFC Bank, including the financial service sector supplement on social and environmental performance.

Indicators that have been addressed within the Sustainability Report are marked as SR and indicators that have been addressed within the Annual Report are marked as AR in the index reporting section of the GRI index schedule.

On the basis of the reported indicators, disclosure of approaches on sustainable business practices and independent assurance HDFC Bank assessed its Sustainability Report 2010 as a B+ level report.

Global Reporting Initiative (GRI) Index

C C+ B B+ A A+

Mandatory Self declared

Optional Third party checked. ü

GRI checked

GRI Index - 2010

PROFILE

Index Reporting Section in AR and SR Page

1 Strategy & Analysis

1.1 Chairman and CEO’s comments AR- Chairman’s statement.AR- Chairman’s statement on Governance AR- CEO’s Review Statement.SR- CEO’s Sustainability Statement

11 - 13 109 - 110 15 - 1755

1.2 Description of key impacts, risks and opportunities

AR- Chairman’s statement.AR- CEO’s Review Statement.AR- Management Discussing and AnalysisSR- Key Impacts and Challenges SR- Sustainability Approach.AR- Risk Management Report

11 - 1315 - 1731 - 409556 - 5843 - 51

2 Organizational profile

2.1 Name of the organization AR- Corporate Information - Inner Back Cover 192

2.2 Primary brands, products, and services AR- Products and Services.SR- Customer Responsibility.

8 - 973 - 76

2.3 Operational structure of the organisation AR- Corporate Information - Inner Back CoverAR- Corporate Governance

192110

2.4 Location of the organisation’s headquarters AR- Corporate Information - Inner Back Cover 192

2.5 Countries where the organisation is active Sri Lanka. -

2.6 Nature of ownership and legal form AR- Corporate Information - Inner Back CoverAR- Ten year summary - Profile

192184


2.7 Markets SR- Economic ResponsibilitySR- Customer Responsibility

63 - 7073 - 78

2.8 Scale of reporting organisation AR- Ten year summary - Profile 184

2.9 Significant changes during the period None -

2.10 Awards received during the period SR- Awards and Recognitions 72

3 Report Parameters

Report Profile

3.1 Reporting period SR- Reporting period 54

3.2 Date of most recent previous report SR- Reporting period 54

3.3 Reporting cycle 12 months Period -

3.4 Contact persons for queries on the report SR- Editorial information 54

Report Scope and Boundaries

3.5 Process for defining report content SR- Reporting framework and guide lines 54

3.6 Boundary of the report SR- Defining report boundaryAR- Accounting Policies

54168 - 170

3.7 Limitations on the scope or boundary of the report SR- Defining report boundarySR- Specific limitations

5454

3.8 Basis for reporting on subsidiaries SR- Specific limitations 54

3.9 Data measurement /calculation techniques SR- Data measurement 54

3.10 Comparability with previous reports SR- Defining report boundary 54

3.11 Significant changes from previous reporting None -

GRI Content Index

3.12 GRI Compliance Index SR- GRI Index 100 - 107

Assurance

3.13 External assurance SR- Independent Assurance.SR- Assurance Report

5498 - 99

4 Governance, Commitments & Engagement

4.1 Governance structure of the organisation AR- Corporate GovernanceSR- Sustainability Governance.SR- Precautionary Approach and Risk Mgt.

1105657

4.2 Chairman of the Board AR- Chairman’s StatementAR- Corporate Governance.AR- Chairman’s Statement on Governance.

11 - 13110109

4.3 Highest governance body AR- Corporate Governance 109 - 143

4.4 Methods for shareholders and employees to propose recommendations to the Board

SR- Labour relations and HRAR- Corporate Governance -13

87109 - 143


4.5 Remuneration of senior executives AR- Corporate Governance 134 - 137

4.6 Proceses for avoiding conflicts of interests of the Board

AR- Corporate Governance,AR- Directors’ interests

131179

4.7 Processes for determining the competence of Board members

AR- Corporate Governance 111 - 125

4.8 Mission, values, code of conduct, etc. AR-Mission and Vision 2 - 3

4.9 Monitoring of the sustainability work by the Board

SR- Sustainability Governance.AR- Corporate Governance

56109 - 146

4.10 Processes of evaluating the performance of the Board Commitments to External Initiatives

AR- Corporate Governance 133 - 134

4.11 Application of the precautionary principle AR- Risk Management report.SR- Precautionary approach and risk mgt.

43 - 5157

4.12 Compliance to external voluntary codes, principles or other initiatives

SR- Association to external codes and initiativesSR- Environmental PerformanceAR- Risk Management report

578043 - 44

4.13 Membership in organisations SR- Association with organisationsAR- Risk Management Report

5743 - 44

4.14 List of stakeholder groups SR- Key stakeholder groups and commitments 59 - 60

4.15 Basis for identification and selection of important stakeholders.

SR- Basis of recognizing stakeholders and engagement with them. 57

4.16 Approach to stakeholder engagements. SR- Key Stakeholders groups and CommitmentsSR- Our approach – on each stakeholder group

59 - 6063, 71, 79, 83, 91,

4.17 Key topics and concerns raised through dialogue with stakeholders.

AR- Management discussionSR- Key stakeholders groups and commitments

31 - 4259 - 60

ECONOMIC PERFORMANCE INDICATORS

Disclosure of Management Approach SR- Our Approach , Policy and Governance 63

EC1 Direct economic value and distribution SR- Direct economic value creation.SR- Key performance indicators- economic

63 - 6469 - 70

EC2 Risks to the organisation due to climate change AR- Risk Management and mitigating strategies in place- Market risk

44,48 - 49

EC3 Coverage of the organisation’s defined benefit plan and obligations

SR- Contribution to defined benefits plan SR- Key performance indicators- decent work

8686

EC4 Financial assistance received from the Government

None -

EC5 Standard entry level wage compared to local minimum wage

Not reported -

EC6 Purchases from local suppliers SR- Supplier responsibility 77

Global Reporting Initiative (GRI) Index contd.


EC7 Recruitment of senior management from the local community

Not reported -

EC8 Investment on infrastructure and services provided to the public

SR- Community participationSR- Key performance indicators - community investment

91-9494

EC9 Significant indirect economic impact from operations

SR- Economic responsibilitySR- Key performance indicators- economic

63-6869, 70

ENVIRONMENTAL PERFORMANCE INDICATORS

Disclosure of Management Approach SR-Our Approach, Policy and Governance 79

Material

EN1 Materials used by weight or volume SR-Paper consumption , key performance indicators 82, 81

EN2 Recycled input materials SR- Sustainable procurement and waste managementSR- Key performance indicators - environment

81 82

Energy

EN3 Direct energy consumption SR- Business Travels and fuel consumption.SR- Key performance indicators - environment

80, 8182

EN4 Indirect energy consumption SR- Staff transport and emission controlsSR- Key performance indicators - environment

80, 8182

EN5 Energy saved due to conservation and efficiency improvement

SR- Managing carbon footprint.SR- Key performance indicators - environment

80, 8182

EN6 Initiatives to provide energy-efficient or renewable energy based products and services and consequent reduction in energy requirements

SR- Managing carbon footprintSR- Promoting sustainable housing.SR- Key performance indicators - environment

80, 818182

EN7 Initiatives to reduce indirect energy consumption and reduction achieved

SR- Managing carbon footprint.SR- Key performance indicators - environment

80, 8182

Water

EN8 Total water withdrawal SR- Electricity and water consumptionSR- Key performance indicators - environment

8182

Emission, Effluents and Waste

EN16 Direct and indirect greenhouse gas emissions SR- Managing Carbon Footprint. SR- Key performance indicators - environment

80, 8182

EN17 Other relevant indirect greenhouse gas emissions Not quantified. -

EN18 Initiatives to reduce greenhouse gas emissions SR- Managing carbon footprint SR- Key performance indicators - environment

80, 8182

EN22 Total weight of waste discharged by type and disposal method

SR- Paper consumptionSR- Procurement and waste managementSR- Key performance indicators - environment

818182

EN23 Total number and volume of significant spills Not applicable -


Products & Services

EN26 Actions to reduce environmental impact of products and services

SR- Compliance with environmental and development regulationsSR- Promoting sustainable housing and livingSR- Key performance indicators - environment

808182

EN27 Products sold and use of recyclable packaging materials

Not Applicable -

Compliance

EN28 Fines for non-compliance with applicable environmental laws

No violation or fines paid by the Bank -

Transport

EN29 Environmental impact from transport SR- Business travels and fuel consumption.SR- Staff travel and emission controls.SR- Key performance indicators - environment

8080, 8182

EN30 Total environmental protection expenditure Not quantified -

SOCIAL PERFORMANCE INDICATORS

Labour Practices and Decent work

Management approach SR- Our approach, HR Practices and governanceSR- Training awareness

83, 8484

LA1 Breakdown of total workforce SR- Decent work performanceSR- Key performance indicators - decent work

8586

LA2 Employee turnover SR Team remuneration, benefits and turnoverSR- Key performance indicators - decent work

8586

LA3 Benefits provided to employees SR Team remuneration, benefits and turnoverSR- Key performance indicators - decent work

8586

Labour/Management relations

LA4 Collective agreements covered by employees SR- Labour relations and human rightsSR- Key performance Indicators - labour relation

8787

LA5 Minimum notice period(s) regarding operational changes

SR- Labour relations and human rights 87

Occupational Health & Safety

LA6 Total workforce represented in health and safety committees

SR- Work life balanceSR- Key performance indicators - occupational health

8788

LA7 Rates of injury, occupational diseases, lost days SR- Work life balanceSR- Key performance indicators - occupational health

8788

LA8 Programs to assist workforce regarding serious diseases


8788

LA9 Health and safety topics covered in union agreements


8788



Training & Education

LA10 Average hours of training per year per employee SR- Training and awarenessSR- Capacity maximising SR- Key performance indicators - capacity max

848889

LA11 Management of lifelong learning SR- Capacity maximisingSR- Key performance indicators - capacity max

8889

LA12 Per centage of employees receiving regular performance reviews

SR- Performance review and follow up 84

Diversity and Equal Opportunities

LA13 Composition and diversity of workforce SR- Diversity and equal opportunitySR- Key performance indicators - decent workSR- Key performance indicators - diversity

909690

LA14 Basic salary ratio of men to women SR- Diversity and equal opportunitySR- Key performance indicators - diversity

9090

HUMAN RIGHTS

Management approach SR- Our approach – customer, shareholder, suppliers, employees, environment

63, 71, 73, 79, 83, 84

HR1 Consideration for human rights on investments SR- Our Approach – customer 73

HR2 Human rights in the supplier chain SR- Our Approach – supplier 77

HR3 Training and education in human rights SR- Capacity maximising SR- Key performance indicators - capacity max

8889

Non- Discrimination

HR4 Total number of incidents of discrimination and actions taken

SR- Labour relation and human rightsSR- Key Performance Indicator - Labour Relation & HR

8787

Freedom of association and collective bargaining

HR5 FOA may be at a significant risk and actions taken SR- Labour relation and human rights 87

Child, Forced and Compulsory Labour

HR6 Operations with risk of incidents of child labour SR- HR practice and governance 84

HR7 Incidents of forced or compulsory labour and actions taken

SR- HR practice and governance 84

Security Practices & Indigenous Rights

HR8 Security personnel trained on human rights Coordinate with head of security -

HR9 Violations involving rights of indigenous persons Not Applicable -

SOCIETY

Management Approach SR - Our approach, policy and governance - EconomySR - Our approach, policy and governance - Community

63, 64

91, 92


Community

SO1 Impact of operations on communities SR- Community responsibility SR- Economic responsibility

91 - 9463 - 70

Corruption

SO2 Business units analyzed for risk related to corruption

AR- Risk ManagementSR- Precautionary approach and management

43 - 5157

SO3 Training on anti-corruption policies and procedures

SR- Capacity maximising 88 - 89

SO4 Actions taken in response to incidents of corruption No reported incidents -

Public Policy

SO5 Participation in public policy development and lobbying

Not Reported -

SO6 Total value of financial contributions to political parties, etc.

None -

Ant- Competitive Behavior

SO7 Total number of legal actions for anti-competitive behavior

No reported incidents -

Compliance

SO8 Monetary value of fines for non-compliance with laws None -

PRODUCT RESPONSIBILITY

Management Approach SR- Our approach - Customer Responsibility 73

PR2 Non-compliance with regulations Not applicable -

PR3 Type of products and service information Not applicable -

PR4 Non-compliance with regulations on information Not applicable -

PR5 Practices related to customer satisfaction SR- Customer SatisfactionSR- HDFC Quality Policy

7773

PR6 Programs on adherence to laws, standards and voluntary codes for marketing communications

Not reported -

PR7 Non-compliance with regulations and marketing No reported incidents -

PR8 Breach of customer privacy None -

PR9 Monetary value of fines for non-compliance None -

FINANCIAL SERVICE SECTOR SUPPLEMENT.

Specific Disclosure on Management Approach

FS1 Policies with specific environmental and social components applied to business lines

SR- Environmental policySR- Community policy.SR- Stakeholder communication policy.SR- HDFC quality policy

799159 - 6073



FS2 Procedures for assessing and screening environmental and social risks in business lines

SR- Stakeholder engagement 63 - 94

FS3 Processes for monitoring environmental and social requirements

SR- Compliance with environmental and development regulations.SR- Stakeholder engagement.SR- Environmental key performance indicators.

8063 - 9482

FS4 Process(es) for improving staff competency to implement environmental and social policies

SR- Capacity maximising 88

FS5 Interactions with clients/investors/ business partners on environmental and social risks and opportunities

SR- Environmental responsibilitySR- Environmental key performance indicators.

79 - 8282

FS6 Analysis of the portfolio based on region and size SR- Economic responsibilitySR- Key performance indicators - Economic.SR- Customer responsibility SR- Key performance indicators - Customer.

63 - 7069, 7073 - 7878

FS7 Monetary value of products and services designed to deliver a specific social benefit for each business line analysed based on purpose

SR- Economic responsibilitySR- Customer responsibility SR- Community responsibility

63 - 7073 - 7891 - 94

FS8 Monetary value of products and services designed to deliver a specific environmental benefit

SR- Environmental responsibility 79 - 82

FS9 Coverage and frequency of audits to assess implementation of environmental and social policies

Annual audit of CBSL and, ISO and regular monitoring by the compliance department on policy implementation

122, 144, 56, 57

FS 11 Percentage of assets subject to positive and negative environmental or social screening

Not reported -

FS12 Voting policy(ies) applied on environmental or social issues for shareholders with voting rights

None -

FS13 Access points to less populated or economically disadvantaged areas

SR- Economic responsibilitySR- Customer responsibility

63 - 7073 - 78

FS14 Initiatives to improve access to financial services for people who do not have access to formal banking channels

SR- Economic responsibilitySR- Customer responsibility

63 - 7073 - 78

Indicator Protocol Specific Commentaries

EC1 SR- Sustaining communitySR- Key performance indicators - community invest

91 - 9494

EN16 SR- Managing carbon footprintSR- Key performance indicators

80, 8282

HR1 The functions of loan processing, approval, contracting, disbursement, follow up and recoveries are conducted with due respect to human rights

73 - 74


“The ethical foundation and regulatory framework”


Chairman’s Statement on Corporate Governance. No bank can function as an ethical corporate citizen without the trust of it’s shareholders and other stakeholders. It is the most valuable capital that a bank possesses and must be protected at all costs. Creating this trust requires not only just a great deal of time, but also transparency, fairness and openness above all. Only companies that base their work on a secure ethical foundation have the power to build up this trust and to prove it again and again, every day, over decades if not centuries. HDFC Bank has rested these values for over 25 years on such a firm foundation which provides a solid basis for its success.

Core Values.At HDFC our customers place their asset with the trust and knowledge that they have found the right Bank. Building this trust is impossible without conviction and modes of behavior anchored with values such as transparency, fairness and openness.

Transparency means being honestly and candidly accountable to customers, employees, shareholders and other important stakeholder groups in every situation. While this is easy when times are good, it is equally difficult when bad news has to be conveyed. But those who succeed in stating clearly how things are , without excuses and without gloss, even in difficult times, have laid a substantial foundation for trust.

Trust is impossible without fairness. It is the basis of any long-term business relationships and is conditional upon both parties viewing themselves as winners. At HDFC, we attach great importance to customer satisfaction and all efforts are taken to ensure that they are treated fairly in the course of the day-to day business.

At the end of the day, openness is one of the foundation upon which HDFC values are built. This includes openness

towards other human beings and treating them with respect and with genuine interest. It is necessary to learn from them and to better understand them and their views. Openness is also an attitude of mind which has become more necessary today to operate successfully than ever before. That is because new problems are emerging , and new ways of looking at things have become essential in many fields. This applies both to customers as well as to the employees of the Bank.

Governance Approach.Corporate Governance at HDFC refers to this firm foundation which cements with the laws of governing the formation and operations of the Bank, internal policies and procedures and the management structure. Corporate Governance structure stipulates the relations and the distribution of rights and responsibilities, principally among four groups of participants; the Board of Directors, Management, Employees and the Shareholders.

HDFC’s Corporate Governance structure also adheres to regulatory requirements, and accepted external codes of best practices , ethical and industry standards.

The Board of Directors is committed to continuous review and improvement of the governance practices that respects corporate values and maintains the highest standard of integrity and professionalism in a changing environment.

Corporate Governance Framework.HDFC was incorporated by an Act of Parliament namely the HDFC Act No. 07 of 1997 and converted to a License Specialised Bank in terms of amendment Act No. 15 of 2003. In the year 2005 the Bank was listed at the Colombo Stock Exchange. HDFC is the only bank under the purview of the Ministry of Finance, listed at the Colombo Stock Exchange.

This corporate background warranted HDFC Bank to comply with several statutory, regulatory and social codes of best practices. This Corporate Governance report enumerates the level of Bank’s compliance with the following laws and social codes of best practices during the year 2010.

(I) HDFC Act

(II) Corporate Governance directives issued by the Central Bank of Sri Lanka, and compliance with relevant laws under the Banking Act.

(III) Code of Best Practices on Corporate Governance issued jointly by the Institute of Charted Accountants and Securities & Exchange Commission of Sri Lanka.

(IV) Compliance with the continuing listing requirements under section 7.10 of the listing rules issued by the Colombo Stock Exchange.

In this direction the Board of Directors ensure that the activities of the Bank are at all times conducted in a manner that respects it values and maintain the highest ethical standards and in the best interest of all stakeholder groups with the guidance and assistance from the Board sub Committees and the Corporate Management team.

The external auditors of the Bank, the Auditor General have performed procedures setout in Sri Lanka Related Services Practice Statement 4400 (SLSRS 4400) on the compliance requirements of Corporate Governance directives issued by the Central Bank of Sri Lanka and assisted us to strengthen our ethical foundation and regulatory framework.

Mrs. S. N. Wickramasinghe Chairman 14th of January 2011 Colombo Sri Lanka

Corporate Governance


Our Governance Approach. The Central Bank of Sri Lanka in December 2007, issued a Corporate Governance Directions for Licensed Specialised Banks in Sri Lanka, which the Board of Directors of HDFC Bank has formally adopted. Section one of our Corporate Governance report covers the level of compliance with the Banking Act Direction No.11 of 2007 and subsequent amendments thereto on Corporate Governance for Licensed Specialised Banks in Sri Lanka issued by the Central Bank.

The Licensed Specialised Banks were granted a total exemption from the

requirement to comply with section 7.10 (Corporate Governance) of the continuing listing requirements under the CSE listing rules subject to discourser of rule 7.10(c) of CSE with effect from 01st of January 2010 as the Central Bank of Sri Lanka too has issued directions with regard to Corporate Governance practices of Licensed Specialised Banks.

As such the HDFC Bank complied with the Corporate Governance rules applicable to the banking sector as mandated under the Central Bank directions and voluntarily complies with Code of Best Practice on Corporate Governance issued jointly by the Securities and Exchange Commission of

Sri Lanka and the Institute of Chartered Accountants of Sri Lanka in year 2008.

Section two of our Corporate Governance report covers the level of compliance with the Code of Best Practice on Corporate Governance issued jointly by the Securities and Exchange Commission of Sri Lanka and the Institute of Charted Accountants of Sri Lanka in year 2008.

Section three of our Corporate Governance report covers the level of compliance with the continuing listing requirements under section 7.10 of the listing rules issued by the Colombo Stock Exchange.

Audit Committee

Board of Directors (Chairman and

8 Non-Executive Directors)

Integrated Risk Committee

Human Resource & Remuneration Committee

Corporate Management and Senior Management

Recovery Sub Committee

General Manager / CEO

Nomination Committee

Management Committees

Corporate Governance Framework

Assets & Liabilities Committee

Credit Committee Debts Settlement Committee

Staff Grievance Committee

IT Steering Committee

Tender / Purchasing / Evaluation Committees

Corporate Governance contd.


HDFC Banks compliance statement with the provisions of the Banking Act Direction No. 11 of 2007 and subsequent amendments there to, of the Central Bank of Sri Lanka on Corporate Governance for Licensed Specialised Bank in Sri Lanka. Rules of Corporate Governance shall be complied by all licensed specialized banks in Sri Lanka and such compliance shall be as provided for in Direction 3(g)(i).

Guideline Compliance Status

3. (1) The Responsibilities of the Board

Board Function

3. (1) (i) The Board shall strengthen the safety and soundness of the bank by ensuring the implementation of the following:

a) Approve and oversee the Bank’s strategic objectives and corporate values and ensure that these are communicated throughout the bank.

Complied with.The HDFC Bank has already commenced formulating a suitable Strategic plan and a Corporate plan for next three years as the existing plans will be expired at the end of 2011. The vision and the mission of the HDFC Bank will be strengthening further to achieve the corporate objectives under the novel plans.

b) Approve the overall business strategy of the Bank, including the overall risk policy and risk management procedures and mechanisms with measurable goals.

Complied with.Risk Management area will be strengthened further by appointing a Risk Management officer to manage this area in a more professional and prudent manner.c) Identify the principal risks and ensure implementation

of appropriate systems to manage the risks prudently.

d) Approve implementation of a policy of communication with all stakeholders, including depositors, creditors, share-holders and borrowers.

Complied with.The bank’s sustainability development policy was developed including a relevant policy framework to cover this area

e) Review the adequacy and the integrity of the bank’s internal control systems and management information systems.

Complied with.The Board has in place an on-going process for identifying, evaluating, monitoring and managing significant risks that may affect the achievement of business objectives. Please refer the Board of Director’s statement on internal controls, on page 147.

f) Identify and designate key management personnel, as defined in the International Accounting Standards, who are in a position to: (i) significantly influence policy; (ii) direct activities; and (iii) exercise control over business activities, operations and risk management.

Complied with.The Board has properly identified and designated key management personal as defined in the international accounting standards and further defined their areas of authority and the key responsibilities in line with our business plan and corporate objectives.


Section One



g) Define the areas of authority and key responsibilities for the Board of Directors themselves and for the key management personnel.

Complied with. The Board has defined the areas of authorities and responsibilities relevant to the Board of Directors, Board Sub Committees and Key Management personnel. An authority matrix was developed for this purpose and adopted by the Board, which will be reviewed and updated periodically, in line with the requirements of the HDFC Bank.

For further details please refer the comment made to item No ( f) above.

h) Ensure that there is appropriate oversight of the affairs of the Bank by key management personnel, that is consistent with Board policy.

Complied with.The Board policy is communicated to the management continuously by the Board, and the Chairman conducts meetings with the Corporate and Senior Management, in order to ensure that the affairs of the Bank is consistent with the Board Policy.

i) Periodically assess the effectiveness of the Board Directors’ own governance practices, including: (i) the selection, nomination and election of directors and key management personnel; (ii) the management of conflicts of interests; and (iii) the determination of weaknesses and implementation of changes where necessary.

Complied with.The Bank has a special evaluation criteria for assessing the effectiveness of the Board of Directors own governance practices and the Board takes necessary measures to improve the relevant are as identified by the Board.

j) Ensure that the bank has an appropriate succession plan for key management personnel.

During the period under review, the HDFC Bank has initiated developing a Succession Plan and a Policy for the Key Management personal, and will be completed in 2011

k) Meet regularly, on a needs basis, with the key management personnel to review policies, establish communication lines and monitor progress towards corporate objectives.

Complied with.The Board review and revised the policies of the HDFC Bank with the assistance of the Corporate and Senior Management (during the period under review) and in process of the monitoring the progress.

l) Understand the regulatory environment and ensure that the bank maintains an effective relationship with regulators.

Complied with.The HDFC Bank being a License Specialized Bank listed in the Colombo Stock Exchange, it is directly under the regulatory authority of the Central Bank and the Securities and Exchange Commission. Further the HDFC Bank is under the authority of Ministry of Finance and Planning. The Board of Directors of the HDFC Bank has taken necessary measures to maintain an effective relationship with the aforesaid regulatory authorities.




m) Exercise due diligence in the hiring and oversight of external auditors.

Complied with.In terms of sec 26 of HDFC Act, the accounts of the HDFC Bank to be audited by a qualified auditor annually appointed at a share holder meeting. Provided that, so long as the majority of the issued shares of the Bank are held by the Government, the accounts of the Bank to be audited by the Auditor General. In terms of the above section, presently the auditor of the bank is the Auditor General of Sri Lanka.

3. (1) (ii) The Board shall appoint the Chairman and the Chief Executive Officer and define and approve the functions and responsibilities of the Chairman and the Chief Executive Officer in line with Direction 3(5) of CBSL.

Complied with.The position of the Chairman and GM/CEO are separately defined in sec 05 and sec 14 of the HDFC Act. The General Manager / Chief Executive Officer of the Bank is a full time officer accountable and answerable to the Chairman and to the Board of Directors. Presently, Mrs. S. N. Wickramasinghe is the Chairman and Mr. Suresh M. Amerasekera is the GM / CEO of the Bank.

Board Meetings

3. (1) (iii) The Board shall meet regularly and Board meetings shall be held at least twelve times a year at approximately monthly intervals. Obtaining the Board’s consent through the circulation of written resolutions/papers shall be avoided as far as possible.

Complied with.During the period under review the Board met regularly having 12 Board meetings (with the correct quorum) with active participation of majority of Directors entitled to be present. Obtaining the board’s consent through the circulation of written resolutions / papers were avoided as far as possible. If a written resolution was adopted by the Board, through circulation, due to urgency or on any acceptable reason, relevant resolution was always submitted to the immediate following Board meeting to ensure transparency.

3. (1) (iv) That arrangements shall in place to enable all Directors to include matters and proposals in the agenda for regular Board meetings.

Complied with.

3. (1) (v) That notice of at least 7 days is given of a regular Board meetings. For all other Board meetings, reasonable notice may be given.

Complied with.The regular Board meetings and committee meetings are fixed annually and the relevant date calendar was distributed among the Directors. Thereafter, separate individual notices were being given to each Director complying with regulatory requirements.



3. (1) (vi) That a Director who has not attended at least two-thirds of the meetings in the period of 12 months immediately preceding or has not attended the immediately preceding three consecutive meetings held, shall cease to be a Director. Participation at the Directors’ meetings through an alternate Director shall, however, be acceptable as attendance.

The Board has noted this requirement. In absence of provisions in the HDFC Act for appointment of alternate Directors strict compliance is practically unwaranted.Please refer the Board meeting attendance schedule of Board of Directors.

3. (1) (vii) Shall appoint a Company Secretary whose satisfied the provisions of section 43 of Banking Act No. 30 of 1988, whose primary responsibilities shall be to handle the secretarial services to the board and shareholder meetings and to carry out other functions specified in the statutes and other regulations.

Complied with.The Company Secretary is an Attorney-at-Law with relevant required qualifications and experience and the Company Secretary is primarily responsible for handling the secretarial functions to the Board and shareholder meetings and to carryout other functions specified in the statutes and other regulations.

3. (1) (viii) All Directors shall have access to advice and services of the company secretary with a view to ensuring that Board procedures and all applicable rules and regulations are follows.

Complied with.Please refer the comments made to item No. 3(1)(vii) and 3(1)(ix)

3. (1) (ix) The Company Secretary shall maintain the minutes of Board meetings and such minutes shall be open for inspection of any reasonable time on reasonable notice by any Director.

Complied with.The Company Secretary is responsible to the Board in ensuring that the Board procedures are followed correctly and that applicable rules and regulations are complied with, according to the HDFC Act & other related legislative Acts & directions applicable to HDFC Bank, from time of time.

The Board Secretary maintains minutes of the Board meetings and Board Sub Committee Meetings with necessary information and sufficient details.

3. (1) (x) Minutes of Board meetings shall be recorded in sufficient details as required under the Banking Act directions on Corporate Governance.

Complied with.All deliberations taken place at the Board meetings, relevant reports considered by the Directors and the views of the Key Management personel are being recorded, fulfilling the Banking Act directions, which are relevant for preparation of the minutes of the Board meetings.

3. (1) (xi) There shall be a procedure to enable Directors, upon reasonable request, to seek independent professional advice in appropriate circumstances, at the Bank’s expense. The Board shall resolve to provide separate independent professional advice to directors to assist the relevant Director or Directors to discharge his/ her/ their duties to the Bank.

Complied with.If the Board of Directors required independent professional advice, the Bank bears the cost and the Directors are allowed to obtain independent professional advice, on case by case basis.




3. (1) (xii) Directors shall avoid conflicts of interests, or the appearance of conflicts of interest, in their activities with, and commitments to, other organisations or related parties. If a Director has a conflict of interest in a matter to be considered by the Board, which the Board has determined to be material, the matter should be dealt with at a Board meeting, where independent Non-executive Directors [refer to Direction 3(2)(iv) of these Directions] who have no material interest in the transaction, are present. Further, a director shall abstain from voting on any board resolution in relation to which he/she or any of his/her close relation or a concern, in which a Director has substantial interest, is interested and he/she shall not be counted in the quorum for the relevant agenda item at the Board meeting.

Complied.The Directors exercise their independent judgment on issues of strategy, policy, resources and standards of conduct, and take necessary steps to avoid any conflicts of interest that may arise from any transaction of the Bank, with any person who shall be considers as a related party.

3. (1) (xiii) The Board shall have a formal schedule of matters specifically reserved to it for decision to ensure that the direction and control of the Bank is firmly under its authority.

Complied withThe Board has specifically reserved to it the relevant matters which are necessary for the Board to have a proper control of the HDFC Bank, under the authority of the Board. The authority matrix was developed by the Bank complying with the above requirement.

3. (1) (xiv) The Board shall, if it considers that the Bank is, or is likely to be, unable to meet its obligations or is about to become insolvent or is about to suspend payments due to depositors and other creditors, forthwith inform the Director of Bank Supervision of the situation of the bank prior to taking any decision or action.

Not arisen yet.

3. (1) (xv) The Board shall, ensure that the bank shall capitalised at levels as required by the Monetary Board in terms of the capital adequacy ratio and other prudential grounds.

Complied with.Please refer page No. 182 for capital adequacy as at 31/12/2010.

3. (1) (xvi) Shall publish in the bank’s Annual Report, an annual Corporate Governance report setting out the compliance with Direction 3 of these Directions.

Complied with.The Corporate Governance Report of this Annual Report was prepared and published, complying with this requirement.

3. (1) (xvii) The Board shall adopt a scheme of self-assessment to be undertaken by each Director annually, and maintain records of such assessments.

Complied with.The Board has conducted a self assessment process during the period under review by each Director of the HDFC Bank.



3. (2) The Board’s Composition

3. (2) (i) The number of Directors on the Board shall not be less than 7 and not more than 13.

Complied with.(a) The appointments to the Board were made in

accordance with HDFC Act No. 07 of 1997 amended by Act No 15 of 2003, under following three categories.

(i) Ex-officio Directors representing the Secretary to the Treasury and Ministry of Housing.

(ii) Nominated Directors, representing the Ministry of Finance, Labour and Minister of Housing.

(iii) Shareholding Directors

(b) During the period under review there were two Director Boards, hereinafter referred to as the present Director Board and the former Director Board.

(c) The present Director Board was appointed under the Chairmanship of Mrs. S. N. Wickramasighe and former Director Board was appointed under the Chairmanship of Mr. S. M. M. Yaseen.

(d) The Chairman of the previous Board and all government nominated Directors / representative Directors of Government Institutions were resigned from the Board in accordance with directions issued to all Director Boards by the Ministry of Finance and Planning in May 2010.

(e) Thereafter, during the period under review the present Director Board was appointed as aforesaid and consisting with 9 Directors as given below.01. Mrs. S. N. Wickramasighe (Chairman) was

appointed in May 201002. Mr. W. J. L. U. Wijayaweera was re-appointed in

June 2010.03. Mr. W. A. T. Fernando was re-appointed in June

2010.04. Mrs. K. W. P. Dayarathne was re-appointed in

June 2010.05. Dr. D. S. Wijesinghe was appointed in June 2010.06. Mrs. C. Wijayawardhane was appointed in June

2010.




07. Mr. A. M. Chandrasagara was appointed in June 2010.

08. Mr. S. A. J. Samaraweera was appointed in June 2010.

09. Mr. W. D. R. D. Goonarathne was appointed in June 2010.

(e) Former Director Board consisted of following 8 Directors, as given below.01. Mr. S. M. M. Yaseen (Chairman) was resigned in

May 2010.

02. Mr. W. J. L. U. Wijayaweera was resigned in May 2010 (Re-appointed again).

03. Mr. P. Sumanapala was resigned in May 2010.

04. Mr. W. A. T. Fernando was retired in June 2010 (Re-elected again).

05. Mr. M. M. Abul Kalam was resigned in May 2010.

06. Mr. A. W. Dayananda was resigned in May 2010.

07. Mrs. K. W. P. Dayarathne was resigned in May 2010. (Re-appointed again).

08. Mr. S. Kannangara was resigned in June 2010.

3. (2) (ii) (A) The total period of service of a Director other than a Director who holds the position of Chief Executive Officer shall not exceed 9 years.

Complied with.Mr. W. A. T. Fernando and Mr. W. J. L. U. Wijayaweera are the most senior Directors of the Board. Mr. W. A. T. Fernando has completed his 06th year and Mr. W. J. L. U. Wijayaweera has completed his 04th year, as at 31/12/2010, as a member of the Board. As such all the Directors of the present Board have a service period less than 9 years, complying with the requirements.



3. (2) (iii) An employee of a Bank may be appointed, elected or nominated as a Director of the Bank (executive directors)

N/AAccording to section 4(2)(b) of HDFC Act aforesaid, a person shall be disqualified from being nominated, appointed or elected as a Director or continuing in office as a Director, if he / she becomes an officer or servant of the Bank.

Therefore, the Board of the HDFC Bank comprises only with Non-executive Directors.

3. (2) (iv) The Board shall have at least three independent non-executive directors or one third of the total number of directors, whichever is higher.

Complied with.During the period under review, the Board of the HDFC Bank consisted with the correct number of independent Non-executive Directors, as mandated by CBSL direction, as given below.

(a) Out of the 9 Directors in the present Director Board, 7 Directors were considered as Independent and two Directors were considered as Non- Independent.

(b) Following Directors are Independent / Non-Executive Directors of the present Director Board.01. Mrs. S. N. Wickramasighe (Chairman)02. Mr. W. J. L. U. Wijayaweera03. Mr. W. A. T. Fernando04. Mrs. K. W. P. Dayarathne05. Dr. D. S. Wijesinghe06. Mrs. C. Wijayawardhane07. Mr. A. M. Chandrasagara

(c) Mr. S. A. J. Samaraweera and Mr. W. D. R. D. Goonarathne are the representative Directors of NHDA, the major shareholder of the Bank and, they are considered as Non-Executive / Non Independent Directors of the Board.

(d) Under the Chairmanship of Mr. S. M. M. Yaseen there were 8 Directors, which 7 were independent. Mr. A. W. Dayananda considered as the Non-Executive / Non Independent Director as he was the representative Director of NHDA.

(e) The profiles of the present Director Board is given on page 19 to 20 of the Annual Report.




3. (2) (v) In the event an alternate Director is appointed to represent an independent Director, the person so appointed shall also meet the criteria that applies to the Independent Director.

Complied with.There were no appointments during the period under review for appointment of alternate Directors to represent Independent Directors.

3. (2) (vi) Non-executive Directors shall be persons with credible track records and/or have necessary skills and experience to bring an independent judgment to bear on issues of strategy, performance and resources.

Complied with.The relevant details of the Directors are given under the Director’s profile of the Annual Report, on page 19 to 20.

3. (2) (vii) A meeting of the Board shall not be duly constituted, although the number of Directors required to constitute the quorum at such meeting is present, unless more than one half of the number of Directors present at such meeting are Non-Executive Directors. This sub-direction shall be applicable from 01st January 2010 onwards.

Complied with.The Board of HDFC Bank consists only with Non-Executive Directors, as aforesaid.

3. (2) (viii) The independent Non-Executive Directors shall be expressly identified as such in all corporate communications that disclose the names of Directors of the Bank. The Bank shall disclose the composition of the Board, by category of Directors, including the names of the chairman, executive directors, Non-executive Directors and Independent Non-Executive Directors in the annual Corporate Governance report.

Complied with.The relevant details of the Directors are given under the Director’s profile of the annual report.

3. (2) (ix) There shall be a formal, considered and transparent procedure for the appointment of new Directors to the Board. There shall also be procedures in place for the orderly succession of appointments to the Board.

Complied with.The Director Board of the HDFC Bank consists with Ex-officio Directors, Nominated Directors and Shareholding directors. The representatives of relevant ministries defined in the HDFC Act and the representative of the minister of housing are appointed to the board as Ex-officio Directors and Nominated Directors. The Shareholding Directors are appointed to the Board with the recommendations of the Board nomination committee on the final approval of the Director Board and finally at a shareholder meeting.

3. (2) (x) All Directors appointed to fill a casual vacancy shall be subject to election by shareholders at the first general meeting after their appointment.

Complied with.There were no appointments during the period under review to fill casual vacancies of the Board.

3. (2) (xi) If a Director resigns or is removed from office, the Board shall: (a) announce the Director’s resignation or removal and the reasons for such removal or resignation including but not limited to information relating to the relevant Director’s disagreement with the Bank, if any; and (b) issue a statement confirming whether or not there are any matters that need to be brought to the attention of shareholders.

Complied with.Relevant details pertaining to resignations are disclosed to the shareholders by way of public announcements, through the colombo Stock Exchange. In addition relevant and resignations are disclosed to the Central Bank.



3. (2) (xii) A director or an employee of a bank shall not be appointed, elected or nominated as a director of another Bank.

Complied with.No director or an employee of another bank has been appointed as a director of HDFC.

3. (3) Criteria to Assess the Fitness and Propriety of Directors(In addition to provision of section 42 read with section 76H of the Banking Act, No. 30 of 1988 the criteria set out below shall apply to determine the fitness and propriety of a person who serves or whishes to serve as a Director of a bank.)

3. (3) (i) The age of a person who serves as Director shall not exceed 70 years.

Complied with.All the directors of HDFC Bank were under the age of 70, as at 31st of December 2010.

01. Mrs. S. N. Wickramasinghe (Chairman) (Age - 58)02. Dr. D. S. Wijesinghe (Age 61)03. Mrs. C. Wijayawardhane (Age - 45)04. Mr. A. M. Chandrasagara (Age – 61)05. Mr. S. A. J. Samaraweera (Age – 43) 06. Mr. W. D. R. D. Goonarathne (Age – 46)07. Mrs. K. W. P. Dayarathne (Age – 53)08. Mr. W. A. T. Fernando (Age – 47)09. Mr. W. J. L. U. Wijayaweera (Age – 53)

3(3)(ii) A person shall not hold office as a Director of more than 20 companies/entities/institutions inclusive of subsidiaries or associate companies of the bank of such 20 companies / entities / institutions, not more than 10 companies shall be those classified as Specified Business Entities in terms of the Sri Lanka Accounting and Auditing Standards Act, No. 15 of 1995.

Complied with.

3. (4) Management Functions Delegated by The Board

3. (4) (i) The Directors shall carefully study and clearly understand the delegation arrangements are in place.

Complied with.

3. (4) (ii) The Board shall not delegate any matters to a Board Committee, Chief Executive Officer, Executive Directors or key management personnel, to an extent that such delegation would significantly hinder or reduce the ability of the Board as a whole to discharge its functions.

Complied with.The relevant necessary authority levels which were delegated by the Board to the Management / or specific Committees were defined in the Board approved delegated authority policy.

However, this delegation arrangement has not hindered or reduces the ability of the Board as a whole to discharge its function.

3. (4) (iii) The Board shall review the delegation processes in place on a periodic basis to ensure that they remain relevant to the needs of the bank.

Complied with.The Board periodically takes steps to review the aforesaid delegation processes, in order to ensure that they remain relevant to the needs of the bank.




3. (5) The Chairman and Chief Executive Officer

3. (5) (i) The roles of Chairman and Chief Executive Officer shall be separate and shall not be performed by the same individual.

Complied with.The position of the Chairman and GM/CEO are separately defined in HDFC Act.

3. (5) (ii) The Chairman shall be a Non-executive Director and preferably an independent director as well.

Complied with.The Chairman is an independent Non-Executive Director

3. (5) (iii) The Board shall disclose in its Corporate Governance report, the identity of the Chairman and the Chief Executive Officer and the nature of any relationship [including financial, business, family or other material/relevant relationship(s)], if any, between the Chairman and the Chief Executive officer and the relationships among members of the Board.

Complied with.There is no any material relationship [including financial, business, family or other material/relevant relationship(s)], between the Chairman and the General Manager / Chief Executive Officer and the relationships among members of the Board. The Chairman leads and manages the work of the Board to ensure that it operates effectively and fully discharges its legal and regulatory responsibilities.

3. (5) (iv) The Chairman shall: (a) provide leadership to the Board; (b) ensure that the Board works effectively and discharges its responsibilities; and (c) ensure that all key and appropriate issues are discussed by the Board in a timely manner.

Complied with.The chairman is providing effective leadership in formulating Board strategies ensuring that Board functions are discharge in effective manner addressing all key and appropriate issues. The Board procedures were setup to discuss and to take appropriate action by the Board in a timely manner ensuring the best interest of the Bank.

3. (5) (v) The Chairman shall be primarily responsible for drawing up and approving the agenda for each Board meeting, taking into account where appropriate, any matters proposed by the other Directors for inclusion in the agenda. The Chairman may delegate the drawing up of the agenda to the Company Secretary.

Complied with.The agenda for the Board meetings are initially prepared by the Company Secretary and finalised by the Chairman.

3. (5) (vi) The Chairman shall ensure that all Directors are properly briefed on issues arising at Board meetings and also ensure that Directors receive adequate information in a timely manner.

Complied with.The Board papers are prepared by the respective heads of the each department and submitted to the Board with the recommendation of the respective head of department and GM/CEO. The Bank ensures that Directors receive relevant board papers and necessary information in a timely manner.

3. (5) (vii) The Chairman shall encourage all Directors to make a full and active contribution to the Board’s affairs and take the lead to ensure that the Board acts in the best interests of the Bank.

Complied with.The Chairman acts in a manner to ensure that the Board acts in the best interests of the organisation.

3. (5) (viii) The Chairman shall facilitate the effective contribution of non-executive directors in particular and ensure constructive relations between executive and non-executive directors.

Complied with.The Chairman facilitates the effective contribution of all directors although there are no such Executive Directors in the board of HDFC.



3. (5) (ix) The Chairman, shall not engage in activities involving direct supervision of key management personnel or any other executive duties whatsoever.

Complied with.The Chairman is not assigning any executive duties or involved with direct supervision of key management personnel.

3. (5) (x) The Chairman shall ensure that appropriate steps are taken to maintain effective communication with shareholders and that the views of shareholders are communicated to the Board.

Complied with.(a) The Board appreciates the participation of

shareholders for the Annual General Meeting as HDFC uses the forum of the AGM to allow shareholders the opportunity to pose relevant questions pertaining to the business of the Bank, either verbally or in writing.

(b) All relevant information is provided to shareholders through the annual report and wherever necessary, using relevant circulars.

3. (5) (xi) The Chief Executive Officer shall function as the apex executive-in-charge of the day-to-day management of the Bank’s operations and business.

Complied with.

3. (6) Board Appointed Committees

3. (6) (i) Each Bank shall have at least four Board committees as defined in CBSL Directions 3(6)(ii), 3(6)(iii), 3(6)(iv) and 3(6)(v) Each committee shall report directly to the Board. All committees shall appoint a secretary to arrange the meetings and maintain minutes, records, etc., under the supervision of the Chairman of the committee. The Board shall present a report of the performance on each committee, on their duties and roles at the annual general meeting.

Complied with.The following sub committees were appointed by the Board as per the central bank directions.

(i) Board Nomination Committee(ii) Board Audit Committee(iii) Board Human Resource and Remuneration

Committee(iv) Board Recovery Sub Committee(v) Board Integrated Risk Management Committee.

Board Audit Committee

3. (6) (ii) The relevant responsibilities related to Board audit committee, is separately defined under 3(6)(ii) of the directions.

Complied with.The Audit Committee of HDFC Bank comprised of the following Directors.

01. Mr. A. M. Chandrasagara (Chairman of the Committee)

02. Mr. W. A. T. Fernando03. Mrs. C. WijayawardhanePlease refer the Board Audit Committee report on page 156 of this Annual Report for further details.




Board Human Resource and Remuneration Committee

3. (6) (iii) The relevant responsibilities related to Board Human Resource and Remuneration Committee, is separately defined under 3(6)(iii) of the directions.

Complied with.The Human Resource and Remuneration Committee of HDFC Bank comprised of the following Directors.

01. Mrs. S. N. Wickramasinghe (Chairman of the Committee)

02. Mr. W. J. L. U. Wijayaweera03. Mrs. K. W. P. Dayarathne

Please refer the Board Human Resource and Remuneration Committee on page 157 Report for further details.

Board Nomination Committee

3. (6) (iv) The relevant responsibilities related to Board Nomination Committee, is separately defined under 3(6)(iv) of the directions.

Complied with.The Nomination Committee of HDFC Bank comprised of the following Directors.


02. Mr. W. J. L. U. Wijayaweera03. Mrs. K. W. P. Dayarathne

Please refer the Board Nomination Committee report on page 158 of this Annual Report for further details.

Board Integrated Risk Management Committee

3. (6) (v) The relevant responsibilities related to Board Integrated Risk Management Committee, is separately defined under 3(6)(v) of the directions.

Complied with.The Integrated Risk Management Committee of HDFC Bank comprised of the following Directors.


02. Mrs. C. Wijayawardhane03. Mr. A. M. Chandrasagara04. Dr. D. S. WijesinghePlease refer the Risk Management report on page 159 of this Annual Report for further details.



3. (7) RELATED PARTY TRANSACTIONS

3. (7) (i) The Board shall take the necessary steps to avoid any conflicts of interest that may arise from any transaction (defined under 3(7)(ii) of the directions) of the Bank with any person, and particularly with the following categories of persons who shall be considered as “related parties” for the purposes of this Direction:

a) Any of the Bank’s subsidiary companies;

b) Any of the Bank’s associate companies;

c) Any of the Directors of the Bank;

d) Any of the Bank’s key management personnel;

e) A close relation of any of the Bank’s Directors or key management personnel;

f) A shareholder owning a material interest in the Bank;

g) A concern in which any of the Bank’s Directors or a close relation of any of the Bank’s Directors or any of its material shareholders has a substantial interest.

Complied with.The Directors exercise their independent judgment on issues of strategy, policy resources and standards of conduct, instituting necessary steps to avoid any conflicts of interest that may arise from any transactions pertaining to HDFC, with any person who shall be considered a related party (according to definition of Banking Act.)

Transactions carried out with related parties in the normal course of business are disclosed in note 30 of the financial statements on page No. 179.

3. (7) (iii) The Board shall ensure that the Bank does not engage in transactions with related parties as defined in Direction 3(7)(i) above, in a manner that would grant such parties “more favourable treatment” than that accorded to other constituents of the bank carrying on the same business.

Complied with.

3. (7) (iv) A Bank shall not grant any accommodation to any of its Directors or to a close relation of such Director unless such accommodation is sanctioned at a meeting of its Board of Directors, with not less than two-thirds of the number of Directors other than the Director concerned, voting in favour of such accommodation. This accommodation shall be secured by such security as may from time to time be determined by the Monetary Board as well.

Complied with.

3. (7) (v) a) Where any accommodation has been granted by a Bank to a person or a close relation of a person or to any concern in which the person has a substantial interest, and such person is subsequently appointed as a director of the bank, steps shall be taken by the bank to obtain the necessary security as may be approved for that purpose by the Monetary Board, within one year from the date of appointment of the person as a director.

Not arisen yet.




b) Where such security is not provided by the period as provided in Direction 3(7)(v)(a) above, the Bank shall take steps to recover any amount due on account of any accommodation, together with interest, if any, within the period specified at the time of the grant of accommodation or at the expiry of a period of eighteen months from the date of appointment of such Director, whichever is earlier.

Not arisen yet.

c) Any Director who fails to comply with the above sub-directions shall be deemed to have vacated the office of director and the Bank shall disclose such fact to the public.

Not arisen yet.

d) This sub-direction, however, shall not apply to a Director who at the time of the grant of the accommodation was an employee of the Bank and the accommodation was granted under a scheme applicable to all employees of such Bank.

Not arisen yet.

3. (7) (vi) A Bank shall not grant any accommodation or ‘more favourable treatment’ relating to the waiver of fees and/or commissions to any employee or a close relation of such employee or to any concern in which the employee or close relation has a substantial interest other than on the basis of a scheme applicable to the employees of such bank or when secured by security as may be approved by the Monetary Board in respect of accommodation granted as per Direction 3(7)(v) above.

Complied with.

3. (7) (vii) No accommodation granted by a bank under Direction 3(7)(v) and 3(7)(vi) above, nor any part of such accommodation, nor any interest due thereon shall be remitted without the prior approval of the Monetary Board and any remission without such approval shall be void and of no effect.

Complied with.

3. (8) Disclosures

3. (8) (i) The board shall ensure that:

(a) Annual audited financial statements and quarterly financial statements are prepared and published in accordance with the formats prescribed by the supervisory and regulatory authorities and applicable accounting standards, and

Complied with.

(b) Such statements are published in the newspapers in an abridged form, in Sinhala, Tamil and English.

Complied with.




3. (8) (ii) The board shall ensure that the minimum disclosures are made in the Annual Report:

a) A statement to the effect that the annual audited financial statements have been prepared in line with applicable accounting standards and regulatory requirements, inclusive of specific disclosures.

Complied with.Compliance Statement pertaining to applicable accounting standards and regulatory requirements has been reported in the Directors Responsibility Statement for Financial Reporting and is given on page 161 of the Annual Report.

b) A report by the Board on the Bank’s internal control mechanism that confirms that the financial reporting system has been designed to provide reasonable assurance regarding the reliability of financial reporting, and that the preparation of financial statements for external purposes has been done in accordance with relevant accounting principles and regulatory requirements.

Complied with.Board of Directors confirmation pertaining to the effectiveness of the Internal Control Systems over the Reporting Financial Systems and compliance to accounting principals and regulatory requirement are given on page 147 of the Annual Report.

c) The external auditor’s certification on the effectiveness of the internal control mechanism referred to in Direction 3(8)(ii)(b) above, in respect of any statements prepared or published after 31 December 2008.

Complied with.

d) Details of Directors, including names, fitness and propriety, transactions with the Bank and the total of fees/remuneration paid by the bank.

Complied with.

e) Total net accommodation as defined in 3(7)(iii) granted to each category of related parties. The net accommodation granted to each category of related parties shall also be disclosed as a percentage of the bank’s regulatory capital.

Complied with.Please refer Note 30 of the Financial Statements given on page 178 of the Annual Report

f) The aggregate values of remuneration paid by the bank to its key management personnel and the aggregate values of the transactions of the Bank with its key management personnel, set out by broad categories such as remuneration paid, accommodation granted and deposits or investments made in the bank.

Complied with.Please refer Note 15 of the Financial Statements given on page 174 of the Annual Report

g) The external auditor’s certification of the compliance with these Directions in the annual corporate governance reports published after 01 January 2010.

Complied with.

h) A report setting out details of the compliance with prudential requirements, regulations, laws and internal controls and measures taken to rectify any material non-compliances

Complied with.Please refer the Report of the Directors, Statement on the Board of director’s responsibility for financial reporting and statement on internal controls published on pages 151 to 155, 161 and 147 respectively , of this Annual Report



i) A statement of the regulatory and supervisory concerns on lapses in the Bank’s Risk Management, or non-compliance with these Directions that have been pointed out by the Director of Bank Supervision, if so directed by the Monetary Board to be disclosed to the public, together with the measures taken by the bank to address such concerns.

Not arisen yet


HDFC Banks compliance statement with the Code of Best Practice on Corporate Governance (hereinafter referred to as the code) issued by the Securities and Exchange Commission of Sri Lanka and the Institute of Chartered Accountants of Sri Lanka.

Corporate Governance principles SCE & ICASL code reference

Compliance Status

A. DIRECTORS

A.1 The BoardIt is required under the code, that every public company to be headed by an effective Board, Complying with that rule, the Director Board of the HDFC Bank consists with well qualified and, experienced professionals such as accounting professionals, legal professionals, senior public servants, and retired high officials of the state and private sector commercial banks and the Central Bank. They possess the relevant skills and experience and knowledge to give the leadership to the strategic intend of the bank. All Directors are Non-executive Directors.

1. Meeting A 1.1 Complied. Please refer status of compliance for 3(1)(iii) of CBSL Rules.

2. Board responsibilities A 1.2 Complied.The Board of Directors discharges their responsibilities taking a collective responsibility for the success of the bank including the following.• ensuring the formulation and implementation of a sound

business strategy;• ensuring that the Chief Executive Officer (CEO) and

management team possess the skills, experience and knowledge to implement the strategy;

• ensuring the adoption of an effective CEO and senior management succession strategy;

• ensuring effective systems to secure integrity of information, internal controls and risk management;

• ensuring compliance with laws, regulations and ethical standards;

• ensuring all stakeholder interests are considered in corporate decisions;

• ensuring that the company’s values and standards are set with emphasis on adopting appropriate accounting policies and fostering compliance with financial regulations; and

• fulfilling such other Board functions as are vital, given the scale, nature and complexity of the business concerned.

3. Access to independent professional advice

A 1.3 Complied. Please refer status of compliance for 3(1)(xi) of CBSL Rules.



Section Two



Compliance Status

4. Board Secretary A 1.4 Complied.

The Company Secretary is an Attorney-at-Law with relevant required qualifications and experience.

All Directors have access to advice and services of the Company Secretary with a view to ensuring that Board procedures and all applicable rules and regulations are followed.

5. Independent judgment A 1.5 Complied.The Directors exercise their independent judgment on issues of strategy, policy, resources and standards of conduct, and take necessary steps to avoid any conflicts of interest that may arise from any transaction of the bank, with any person who shall be considered as a related party.

6. Dedication of adequate time and effort by the Board and Board Committee

A 1.6 Complied.The Board dedicates adequate time for Board Meetings, while scheduling regular Board meetings well in advance. In addition to the Board meetings, relevant Board Sub Committee meetings are also held regularly, complying with the regulatory requirement and needs of the Bank.

7. Training for new Directors A 1.7 Complied.The Board recognized capacity building is important for the Directors, as they have to update and enhance their knowledge to carry out their duties as directors in a diversifying environment. If and when required, directors propose participation for special training and skill enhancement programs and the HDFC also make arrangements to send Directors for such programs. From time to time, Corporate Management also makes presentations to the Board on industry related matters.

A.2 Chairman & Chief Executive OfficerThere are two key tasks for the HDFC Bank, namely conducting of the business and facilitating executive responsibility for management of the banks’ business. For this purpose it is required under the code to have a clear division of responsibilities which will ensure a balance of power and authority, as such that no one individual has unfettered powers of decision.

Facilitating this, the relevant roles of the Chairman and General Manager / Chief Executive Offer are separately defined in the HDFC Act.

8. Division of responsibilities of the Chairman GM/CEO

A 2.1 Complied.The functions of the Chairman and GM/CEO are clearly separated, and two individuals were appointed for the respective posts.



Compliance Status

A.3 Chairman’s RoleThe Chairman’s main role can be considered as to give leadership in preserving good Corporate Governance culture within the bank, as while discharging board functions effectively, as the person responsible for running the Board.

9.Role of the Chairman A 3.1 Complied.The Chairman is a Non-Executive Director. The Chairman’s role includes the following, and relevant measures are being taken for the best interest of the HDFC Bank while ensuring the following.

effective participation of all Directors are secured;• All Directors are encouraged to make an effective contribution,

within their respective capabilities, for the benefit of the HDFC Bank;

• A balance of power between all Directors are being maintained;• The views of all the Directors on issues under consideration are

ascertained• The Board is in complete control of the Bank’s affairs and alert

to its obligations to all shareholders and other stakeholders.

A.4 Financial AcumenIt is required under the code, the Board to ensure the availability with in the organization of sufficient financial acumen and knowledge to offer guidance on matters on finance.

10. Availability of sufficient financial acumen and knowledge

A 4 Complied.There are two members in the Board with relevant financial qualifications and fellow memberships as accounting professionals. In addition 04 members of the corporate management team possess sufficient financial acumen and knowledge to offer guidance to the HDFC Bank on matters of finance.

Further, finance department of the bank and other relevant departments are equipped with several accounting professionals to give the assistance to the corporate management and the board, on financial and related issues.

A.5 Board BalanceIt is required under the code, to have a balance of Executive and Non - executive Directors of the Board and as such that no individual or small group of individuals can dominate the Board’s decision- taking.

11. Presence of a strong independent element on the Board

A 5.1 Complied.According to the HDFC Act the Director Board of the bank consists only with Non-executive Directors. However, the Board is always mindful to have proper balance of power, when performing Board functions.




Compliance Status

12. Independent Directors A 5.2A 5.3

Complied.7 out of 9 Non-executive Directors of the present Director Board are independent as defined in the code. Please refer Board of Director’s profiles for further details.

13. Signed declaration of independence by the Non-executive Directors

A 5.4 Complied.All Non-executive Directors of the HDFC made written declarations as to the independency criteria setout by the Bank.

14. Determination of independence of the Directors by the Board

A 5.5 Complied.The Board has determined that the Independency of Directors upon submission of the declarations by the Non-executive Directors as to the independency of them, as a fair representation. Independent Non-executive Directors of the Board are as follows.

01. Mrs. S. N. Wickramasighe (Chairman)02. Mr. W. J. L. U. Wijayaweera03. Mr. W. A. T. Fernando04. Mrs. K. W. P. Dayarathne05. Dr. D. S. Wijesinghe06. Mrs. C. Wijayawardhane07. Mr. A. M. Chandrasagara

15. Senior Independent Director A 5.6 N/AAppointment of Senior Independent Director does not arise as the roles of Chairman and GM/ CEO are separated, and perform by two individuals.

16. Confidential discussion with the Senior Independent Director

A 5.7 N/A

17. Meeting of Non-executive Directors A 5.8 Complied.Chairman meets with the Non-Executive Directors without the presence of the GM/ CEO on a need basis.

18. Recording of concerns in Board Minutes

A 5.9 Complied.

A.6 Supply of InformationIt is required under the code, to provide timely information in a form and of a quality appropriate to enable the Board to discharge its duties, and the HDFC complied with the requirement.

In addition the Directors make further inquires where necessary. All the Directors are properly briefed on issued arising at the Board Meetings by the Chairman.

19. Information to the Board by the management

A 6.1 Complied.Please refer status of compliance for 3(5)(vi) of CBSL Rules.



Compliance Status

20. Adequate time for Board meeting A 6.2 Complied.The regular Board Meetings and Committee Meetings are fixed annually and the relevant date calendar distributed among the Directors. Thereafter, separate individual notices are being given to each Director on time, complying with regulatory requirements.

A.7 Appointment to the BoardIt is required under the code to have formal and transparent procedure for the appointment of new Directors to the Board. The HDFC Bank complied with the aforesaid requirement. The nomination committee of the bank has introduced a policy and a procedure for appointment of Shareholding directors to the Board.

21. Nomination Committee A 7.1 Complied.Nomination Committee of HDFC Bank comprised of the following Directors.01. Mrs. S. N. Wickramasinghe (Chairman of the Committee)02. Mr. W. J. L. U. Wijayaweera03. Mrs. K. W. P. Dayarathne

Please refer the Board Nomination Committee report on page No. 158 of this Annual Report, for further details.

22. Assessment of Board composition A 7.2 Complied.The Director Board of the HDFC Bank consists only with non-executive directors, including Ex-Officio Directors, Nominated Directors and Shareholding Directors. The representatives of relevant ministries defined in the HDFC Act and the representative of the minister of housing were appointed to the Board as Ex-Officio Directors and Nominated Directors. The Shareholding Directors were appointed to the Board with the recommendations of the Board Nomination Committee on the final approval of the Director Board and finally at a Shareholder Meeting.

The Nomination Committee carryout continues review of the composition of the Board, which includes identifying, evaluating and making necessary recommendations for appointments to the Board.

23. Disclosure of details of new Directors to shareholders

A 7.3 Complied.Relevant necessary details of new Directors were disclosed to the Shareholders by way of public announcements. Further, the relevant details with the profiles of each Director are published in the Annual Report. In addition relevant appointments are disclosed to the Central Bank and the Colombo Stock Exchange, complying with regulatory requirements.




Compliance Status

A.8 Re- electionIt is required under the code, for the Directors to submit themselves for re-election at regular intervals and at least once in every three years time.

24. Appointment of Non- executive Directors

A 8.1 Complied.All new appointments to the Director Board should be in accordance with the HDFC Act No. 07 of 1997 and amendment Act No. 15 of 2003. Accordingly, Ex-Officio Director appointments and Nominated Director appointments were made through the Ministry of Finance, complying with the provisions of the HDFC Act. Continuing directorships of the share holding directors are reviewed by the Nomination Committee, periodically. The Nomination Committee will examine the facts and circumstance applicable for the relevant period and make relevant recommendations pertaining to the new appointments, to the Board.

25. Election of Directors by the shareholders

A 8.2 According to the HDFC Act aforesaid, each shareholding Director retires by rotation once in every three years and required to stand for re-election by the shareholders at the Annual General Meeting. Further that ex-officio directors and nominated directors are also appointed to the Board for a fixed term period and they are also subject to re-appointment on completion of the member ship period on the Director Board and subject to re-appointment in accordance with the aforesaid HDFC Act.

A.9 Appraisal of Board performanceIt is required under the code, for the Board to annually appraise their own performance in order to ensure that Board responsibilities are satisfactorily discharged.

26. Appraisal of Board performance A 9.1 Complied.The performance of the Board is evaluated by the Chairman, with the assistance extended by other members of the Board. The sub committees, except for the Audit Committee implemented a self assessment process each year to ensure efficacy and efficiency, in order to facilitate continuous improvement.

The Audit Committee is evaluated by the Chairman of the Audit Committee who utilizes the assessments from Committee Members, the GM/CEO, Head of Finance, Head of Internal Audit an External Auditor as is required by international best practices.

27. Annual self evaluation of the Board and its Committees

A 9.2 Complied.Please refer comments mentioned under A 9.1, above.

28. Disclosure of the appraisal of Board and Board Sub Committee performance

A 9.3 Complied.Please refer comments mentioned under A 9.1, above.



Compliance Status

A.10 Disclosure of information in respect of DirectorsIt is required that Shareholders should be kept advised of relevant details in respect of each Director for the benefit of Shareholders.

29. Details in respect of Directors A 10.1 Complied.The relevant details of the directors are given under the director’s profile of the annual report, on page No. 19.

A.11 Appraisal of the GM/ CEOIt is required under the code, to assess the performance of the CEO, at least annually.

30. Financial targets for GM/ CEO A 11.1 Complied.The financial targets for the GM / CEO are set at the commencement of every year by the Board, which are in line with medium and long term objectives of the bank.

31. Evaluation of the performance of the GM/CEO

A 11.2 Complied.The GM/CEO is responsible for discharging day to day operational matters of the bank by giving the leadership and guidance to achieve the financial and non-financial targets fix by the Board for the respective year.

The Board has adopted on going performance evaluation process of the GM/CEO during year against the targets set out at the commencement of financial year.

B. DIRECTORS REMUNERATION

B. 1 Remuneration ProceduresIt is required under the code, to establish a formal and transparent procedure for developing a policy on executive remuneration and for fixing the remuneration packages of individual Directors. No Director should be involved in deciding his/her own remuneration.

32. Remuneration / Human Resources Committee

B 1.1 Complied.The Human Resource and Remuneration Committee is responsible for assisting the Board with regard to the remuneration policy.

33. Composition of the Remuneration Committee

B 1.2 Complied.The Human Resource and Remuneration Committee of the HDFC Bank comprised of the following 3 Non- Executive Independent Directors.

01. Mrs. S. N. Wickramasinghe (Chairman of the Committee)02. Mr. W. J. L. U. Wijayaweera03. Mrs. K. W. P. DayarathnePlease refer the board HR and Remuneration Committee report of this Annual Report, on page No. 157 for further details.




Compliance Status

34. Remuneration of the Non-executive Directors

B 1.4 N/AThe Board of the HDFC Bank comprises only with Non-executive Directors and they are not entitle for any remuneration package other than participation fees for the Board Meetings / Committee Meetings / Interview Boards.

The Chairman is entitle for the monthly allowance applicable for Chairmen of all state sector institutions.

35. Consultation of the Chairman and access to professional advice

B 1.5 Complied.External professional advice is sought, on need basis.

B.2 Level and make-up of the RemunerationIt is required under the code that the levels of remuneration of both Executive and Non-executive Directors should be sufficient to attract and retain the Directors needed to run the bank successfully. A proportion of Executive Directors’ remuneration should be structured to link rewards to corporate and individual performance.

36. Level and make-up of the remuneration of both Executive and Non-executive Directors

B 2.1 N/APlease refer comments for B 1.4.

37. Comparison of remuneration with other companies


38. Comparison of remuneration with other companies in the group


39. Performance related payment to Executive and Non-executive Directors


40. Executive share option for Directors B 2.5 N/APlease refer comments for B 1.4.

41. Designing the Executive Directors remuneration


42. Early termination benefits of Directors B 2.7 N/APlease refer comments for B 1.4.

43. Early termination benefits of Directors (not included in the initial contract)


44. level of remuneration of the Non-Executive Directors




Compliance Status

B. 3 Disclosure of RemunerationIt is required under the code, to contain a Statement of Remuneration Policy of the Bank and details of remuneration of the Board as a whole in the Annual Report.

The HDFC Bank being a Bank under the Ministry of Finance, the Remuneration Policy of the Bank is preliminarily based on the collective agreements of other State sector Banks. In terms of Sec 15 of the HDFC Act, the Board may from time to time fix and vary the salaries and allowances of such officers of the HDFC Bank, taking into consideration the salaries and allowances payable to other State owned banking institutions engaged in similar objectives and operations.

45. Disclosure of remuneration B 3.1 Complied.The details of the total remuneration/ emoluments of the directors are disclosed in Note 08 of the Financial Statements on page 172 of the Annual Report. The remuneration policy of the bank is given in the report of the Human Resource and Remuneration Committee.

C. RELATIONS WITH SHAREHOLDERS

C.1 Constructive use of the Annual General Meeting and conduct of General Meetings.It is required under the code, to use the AGM to communicate with shareholders and should encourage their participation.

46. Use of proxy votes C 1.1 Complied.The Bank has a method of recording all proxy votes and proxy votes lodged by the shareholders on each resolution.

47. Separate resolution for all separate issues

C 1.2 Complied.HDFC propose a separate resolution at the AGM on each substantially separate issue, giving shareholders the opportunity vote on each such resolution.

48. Availability of all Board Sub Committee Chairman at the AGM

C 1.3 Complied.

49. Adequate notice of the AGM C 1.4 Complied.The Annual Report including financial statements and the Notice of the Meeting are circulated to shareholders at least 15 working days prior to the date of the AGM.

50. Procedures of voting at General Meeting

C 1.5 Complied.

C.2 Major transactionsFurther to compliance with the requirements under the Companies Act, Directors should disclose to shareholders all proposed corporate transactions, which if entered into, would materially alter/vary the bank’s net assets base or in the case of a bank with subsidiaries, the consolidated group net asset base.

51. Major transactions C 2.1 Complied.During 2010 there were no major transactions as defined by section 185 of Companies Act No. 07 of 2007 which materially affected the HDFC’s net asset base.

Transactions, if any which materially affect the net assets of HDFC are factored in and disclosed in the quarterly / annual financial statements.




Compliance Status

D. AUDIT AND ACCOUNTABILITY

D. 1 Financial Reporting.It is required under the code, to present a balanced and understandable assessment of the banks, financial position, performance and prospects.

52. Statutory and regulatory reporting D 1.1 Complied.HDFC reports a balanced and fair assessment of its financial position for the year ended 31st December and at the end of each quarter of 2010.

In preparation and presentation of quarterly and annual financial statements, HDFC prepares and presents Financial Reports in conformity with Sri Lanka Accounting Standards, Sri Lanka Accounting and Auditing standards Act No 15 of 1995, the Banking Act No. 30 of 1988 and amendments there to. In addition the Bank has complied with the reporting requirements prescribed by the regulatory authorities such as the Securities and Exchange Commission and the Central Bank under Banking Act No 30 of 1988.

The financial statements for the year ended 31st December 2010 and for the respective quarters ended have been published in newspapers in all three languages.

53. Directors’ Report in the Annual Report D 1.2 Complied.The Director’s Report is given on page 151 to 155 of this Annual Report.

54. Statement of Directors’ responsibility for the Financial Statement

D 1.3 Complied.The Statement of Directors’ Responsibility for Financial Reporting is given on page 161 of the Annual Report.

55. Management Discussions and Analysis D 1.4 Complied.The Report is given on page 31 of the Annual Report.

56. Declaration by the Board that the business as a going concern

D 1.5 Complied.This is given on the Directors’ Reports on page 151 of the Annual Report.

57. Summoning an EGM to notify serious loss of capital

D 1.6 N/A.

D.2 Internal ControlIt is the required under the code, to maintain a sound system of internal control to safeguard shareholders’ investments and the bank’s assets.



Compliance Status

58. Annual evaluation of the internal control system

D 2.1 Complied.The Board is responsible for establishing and maintaining a sound system of internal control, while monitoring and reviewing their effectiveness continuously. Through such and effective internal control system HDFC manages business risks expose to the industry and ensure the reliability of the financial information on which business decisions are made. The Board of Directors of the bank are satisfied with the effectiveness of internal control systems.

Please refer the Board’s statement on internal control systems published on page 147 of this Annual Report.

59. Need for internal audit function D 2.2 Complied.The Bank has separate internal audit department to carry out relevant auditing functions, independently. The Chief internal Auditor functions as the head of the particular department and reports and responsible directly to the Chairman and the Board Audit Committee.

D. 3 Audit CommitteeIt is required under the code, to have a formal and transparent arrangements for selecting and applying accounting policies, financial reporting and internal control principles and maintaining an appropriate relationship with the bank’s external Auditors. The HDFC Bank complied with the said requirements.

60. Composition and terms & conditions of the Audit Committee

D 3.1 Complied.The Audit Committee of the Bank comprises three Non-executive/Independent Directors while the Chief Internal Auditor functions as the Secretary to the Audit Committee.

61. Duties of the Audit Committee D 3.2 Complied.HDFC’s External Auditor is the Auditor General. He is bound by law to display independence, objectivity and efficacy in ensuring the audit process takes into account all relevant regulatory requirements.

The relevant details pertaining to the above is discussed in the Audit Committee report.

62. Terms and reference of the Audit Committee

D 3.3 Complied.The Audit Committee has a Committee charter including relevant terms of reference of the said Committee. The Chief Internal Auditor functions as the head of the Internal Audit Department and submits relevant necessary reports to the Audit Committee as mandated under the Audit charter.

For further details please refer the Report of Audit Committee, on page 156




Compliance Status

63. Disclosures of the Audit Committee D 3.4 Complied.The Audit Committee of the HDFC Bank comprised of the following 3 Non- Executive Independent Directors.Mr. A. M. Chandrasagara ( the Chairman of the Committee)(ii) Mr. W. A. T. Fernando(iii) Mrs. C. Wijewardane

The relevant details pertaining to the above is discussed in the Audit Committee report.

D. 4 Code of business conduct & ethicsIt is required under the code to adopt a Code of Business Conduct & Ethics for directors and members of the senior management team and must promptly disclose any waivers of the Code for directors or others.

64. Code of business conduct and ethics D 4.1 Drafting of the relevant code of business conduct and ethics for Directors and employees of the bank by introducing a corporate culture with in the bank, covering the relevant areas, such as conflict of interest, corporate opportunities, confidentiality of information, protecting and using of the banks assets, fair dealing was already commenced under the banks sustainability development process, and will be completed in 2011.

However, those areas were already covered under different policies adopted by the Bank and these polices will be compiled as a separate policy, under the sustainability development program.

HDFC being a Licensed Specialised Bank, maintaining a high confidentiality about its customers and other stakeholders. Therefore, HDFC has adopted a policy that prevents the disclosure of confidential customer information to any external party.

65. Affirmation of the code of conduct & ethics

D 4.2 As mentioned above in D 4.1.

E. INSTITUTIONAL SHAREHOLDERS

E.1 Shareholding votingInstitutional shareholders are required to make considered use of their votes and should be encouraged to ensure their voting intentions are translated into practice.

66. Institutional Shareholders E 1.1 Complied.Institutional shareholders are encouraged to use of their votes.

Further they are encouraged to translate their voting exercise and also seek independent advice on investing or divesting decisions

E.2 Evaluation of Corporate Governance initiativesWhen evaluating banks’ governance arrangements, particularly those relating to Board structure and composition, institutional investors are encouraged to give due weight to all relevant factors drawn to their attention.



Compliance Status

F. OTHER INVESTORS

F.1 investing / Divesting decisionIndividual shareholders, investing directly in shares of companies are encouraged to carry out adequate analysis or seek independent advice in investing or divesting decisions.

F.2 Shareholder VotingIt is required under the code that Individual shareholders to be encouraged to participate in General Meetings of companies and exercise their voting rights.

67. Individual Shareholder Voting F 2.1 Individual shareholders are encouraged to participate and exercise their voting rights at General Meetings.



Corporate GovernanceHDFC Banks compliance statement with the continuing Listing requirements under section 7.10 on Corporate Governance Rules for listed companies issued by the Colombo Stock Exchange.

Corporate Governance Principles SCE & ICASL Code Reference

Compliance Status

Disclosures regarding the Board of Directors

(i) The correct number of Non-executive Directors

7.10.1 (a) to (c) Complied.The HDFC confirms that,

The Board of Directors of HDFC Bank comprises with the mandated number of Non-executive Directors in accordance with Rule 7.10.1 (a) of the CSE Listing rules.

(ii) The correct number of Independent Non-executive Directors

7.10.2 (a) Complied.The Board of Directors of HDFC consists of the correct number of Independent Non-executive directors in accordance with Rule 7.10.2 (a).

(iiii) Directors Annual Declaration of his / her independence or Non- independence to the Board of Directors

7.10.2 (b) Complied.Mrs. S. N. Wickramasighe (Chairman), Mr. W. J. L. U. Wijayaweera, Mr. W. A. T. Fernando, Mrs. K. W. P. Dayarathne, Dr. D. S. Wijesinghe, Mrs. C. Wijayawardhane and Mr. A. M. Chandrasagara submitted their declarations as Non - Executive / Independent Directors.

Mr. S. A. J. Samaraweera and Mr. W. D. R. D. Goonarathne submitted their declarations as Non-executive / Non-Independent Directors, as they were appointed to the Board representing N.H.D.A, the major shareholder of the HDFC Bank having a significant shareholding of HDFC Bank.

All Non-executive Directors have submitted their confirmations on independence in accordance with the criteria set by the Bank, which is in line with the regulatory requirements. Rule 7.10.2 (b) of the CSE Listing Rules.

Note : According to the HDFC Act No. 07 of 1997 amended by Act No. 15 of 2003, the Director Board comprises only with Non-executive Directors.

(iv) Annual determination of the Board as to the independency or non-independency of the Directors.

7.10.3 (a) Complied.

(v) The qualifications not met by the Directors

7.10.3 (b) N/ACircumstances did not arise for the Board to specify a Director as independent beyond the criteria set by CSE, as the Board has adequate number of Independent Directors.

Section Three




Compliance Status

(vi) Brief resume of each Director 7.10.3 (c) Complied.Please refer Directors profiles.

Disclosures relating Remuneration & the Remuneration Committee

(vii) The correct number of Independent Non-executive Directors in the Remuneration Committee

7.10.5 (a) Complied.HDFC Confirms that,

the Remuneration Committee comprises the correct number of Independent Non-executive directors in accordance with Rules 7.10.5 (a)

(viii) Separate Remuneration Committee 7.10.5 (a) Complied.A separate Remuneration Committee for the HDFC Bank was formed.

Note : The HDFC Bank Remuneration Committee was named as Human Resource and Remuneration Committee. In addition to the CSE Listing Rules this Committee complies with the requirements of Corporate Governance Rules of Central Bank of Sri Lanka.

(ix) Names of the Directors in the Remuneration Committee

7.10.5 (c) Complied.The Committee comprises of three Non-Executive Independent Directors, namely Mrs. S. N. Wickramasighe (Chairman), Mr. W. J. L. U. Wijayaweera and Mrs. K. W. P. Dayarathne

(x) Functions of the Remuneration Committee

7.10.5 (b) Complied.One of the core function of the Committee can be considered as recommending a suitable remuneration packages applicable to the CEO/GM and other Corporate Management Members of HDFC.

(xi) Chairman of the Remuneration Committee

7.10.5.(a) Complied.Mrs. S. N. Wickramasighe (a Non-executive Director) was appointed as the Chairman of the Committee by the Board of Directors in accordance with (Rules 7.10.5(a))

(xii) Remuneration Policy 7.10.5 (c) Complied.The HDFC Bank being a Bank under the Ministry of Finance, the Remuneration Policy of the Bank is preliminarily based on the collective agreements of other State Sector Banks. In terms of Sec 15 of the HDFC Act, the Board may from time to time fix and vary the salaries and allowances of such officers of the HDFC Bank, taking into consideration the salaries and allowances payable to other State owned banking institutions engaged in similar objectives and operations



Compliance Status

(xiii) Aggregate Remuneration paid to the Executive and Non-executive Directors (including cash and all non-cash benefits)

7.10.5 (c) Complied.Please refer the note No.08 of the Financial Statements, given on page 172 of this Annual Report.

Contents under the Audit Committee Report

(xiv) The correct number of Independent Non-executive Directors

7.10.6 (a) Complied.HDFC confirms that,

Audit committee of HDFC comprises with the correct number of Independent Non-executive Directors in accordance with Rule 7.10.6(a).

(xv) Separate Audit Committee 7.10.6 (a) and 7.10.6 (c)

Complied.A separate Audit Committee for the HDFC Bank was formed.

(xvi) Names of the Directors in the Audit Committee

7.10.6 (c) The Audit committee comprises of three Non-executive / Independent Directors namely, Mr. A. M. Chandrasagara (Chairman), Mr. W. A. T. Fernando and Mrs. C. Wijayawardhane.

(xvii) Functions of the Audit Committee 7.10.6 (b) Complied.In addition HDFC Bank, being a License Specialised Bank functioning under the Ministry of Finance, the Audit Committee engages with the functions mandated under Rule 3(6) of the CBSL and Finance Circular No 1A1/ 2000/1.

(xviii) Chairman of the Audit Committee 7.10.6.(a) and 7.10.6 (c)

Complied.Mr. A. M. Chandrasagara (a Non-Executive Independent Director) was appointed as the Chairman of the Committee by the Board of Directors in accordance with (Rules 7.10.6(a) and 7.10.6.(c))

(xix) Chairman’s qualifications 7.10.6 (a) and 7.10.6 (c)

Complied.Please refer the Chairman’s profile, given under Directors profiles.

(xx) Attendance of CEO and CFO for the Audit Committee Meetings

7.10.6 (a) and 7.10.6 (c)

Complied.The GM/CEO and DGM (Finance) attended to Committee meetings.

(xxi) External Auditors independency 7.10.6 (c) N/A.The External Auditor of the Bank is the Auditor General of Sri Lanka.


Names Directorship Status Number of Meetings held

-2010

Number of Meeting Entitled

Number of Meetings

participated

Mrs. S. N. Wickramasinghe Non - executive / Independent (Chairman)

12 08 08

Mr. W.A.T. Fernando Non - executive / Independent Director

12 12 09

Mr. W. J. L. U. Wijayaweera Non - executive / Independent Director

12 12 08

Mrs. K. W. P. Dayarathne Non - executive / Independent Director

12 12 11

Mrs. C. Wijayawardhana Non - executive / Independent Director

12 08 05

Dr. D. S. Wijesinghe Non - executive / Independent Director

12 07 06

Mr. S. A. J. Samaraweera Non - executive / Non - independent Director

12 07 04

Mr. W. D. R.D. Goonarathne Non - executive / Non -independent Director

12 07 05

Mr. A. M. Chandrasagara Non - executive / Independent Director

12 07 07

Mr. S. M. M. Yaseen Non-executive / Independent (Former Chairman)

12 04 04

Mr. P. Sumanapala Non - executive / Independent Director (Former)

12 04 04

Mr. M. M. Abul Kalam Non - executive / Independent Director (Former)

12 04 04

Mr. A. W. Dayananda Non - executive / Non Independent Director (Former)

12 04 03

Mr. Sunil Kannangara Non - executive / Independent Director (Former)

12 04 01

Attendance for Board Meetings – 2010


Human Resource and Remuneration Committee Meetings

Names Directorship Status Number of Meetings held – 2010

Number of Meetings Entitled

Number of Meetings participated

Mrs. S.N.Wickramasinghe Non- executive / Independent (Present Chairman)

04 02 02

Mr. W.J.L.U.Wijayaweera Non- executive / Independent Director

04 04 04

Mrs. K.W.P.Dayarathne Non- executive / Independent Director

04 02 02

Mr. S.M.M.Yaseen Non- executive/Independent (Previous Chairman)

04 02 02

Mr. P. Sumanapala Non- executive/Independent Director

04 02 02

Nomination Committee Meetings

Names Directorship Status Number of Meetings held

– 2010


Number of Meetings

participated

Mr. S.M.M.Yaseen Non- executive / Independent (Previous Chairman)

01 01 01

Mr. W.J.L.U.Wijayaweera Non- executive / Independent Director

01 01 01

Mr. P. Sumanapala Non- executive/Independent Director

01 01 01

Integrated Risk Management Committee Meetings

Names Directorship Status Number of Meetings held –

2010


Number of Meetings

participated

Mrs. S.N. Wickramasinghe Non- executive / Independent (Chairman)

01 01 01

Mrs. C. Wijayawardhana Non- executive/Independent Director

01 01 00

Mr. A.M. Chandrasagara Non- executive/Independent Director

01 01 01

Dr. D.S. Wijesinghe Non- executive/Independent Director

01 01 00

Attendance for Board Sub Committee Meetings – 2010


Recovery Sub Committee Meetings




Mrs. S. N. Wickramasinghe Non- executive / Independent (Present Chairman)

04 03 03

Mr. W. J. L. U. Wijayaweera Non- executive/Independent Director

04 04 04

Mrs. K. W. P. Dayarathne Non- executive/Independent Director

04 04 03

Mr. S. A. J. Samaraweera Non- executive/ Non independent Director

04 03 -

Mr. W. D. R. D. Goonarathne Non- executive/ Non independent Director

04 03 03

Mr. S. M. M. Yaseen Non- executive/Independent (Previous Chairman)

04 01 01

Mr. A. W. Dayananda Non- executive/ Non independent Director

04 01 -

Audit Committee Meetings




Mr. A. M. Chandrasagara Non- executive / Independent (Present Chairman)

06 05 05

Mr. W. A. T. Fernando Non- executive/Independent Director (Previous Chairman)

06 06 05

Mrs. P. Sumanapla Non- executive/Independent Director

06 01 01

Mrs. C. Wijewardhana Non- executive/ Independent Director

06 05 04

Attendance for Board Sub Committee Meetings – 2010 contd.


Statement of Internal Control

ResponsibilityThe Board of Directors (Board) is responsible for internal control in HDFC Bank and for reviewing its effectiveness. Processes have been designed for safeguarding assets against unauthorized use or disposition; for maintaining proper accounting records; and for the reliability and usefulness of financial information used within the business or for publication. Such processes are designed to manage rather than eliminate the risk of failure to achieve business objectives and can only provide reasonable and not absolute assurance against material misstatement, errors, losses or fraud.

Internal Control System:HDFC Bank’s key internal control processes include the following:

● Board of Directors has appointed sub committees to ensure the effectiveness of internal control mechanism of the Bank. Appointment of corporate management headed by CEO/GM has enabled to delegate the authority from Board to other layers. The management assists the Board in the implementation of the Board’s policies and procedures on risk management and control.

● Systems and procedures are in place to identify, control and report on the major risks including credit, market and operational risk. Exposure to these risks is monitored by Board Integrated Risk Management Committee (BIRMC). The Corporate Management assists the Board in the implementation of policies advocated at the BIRMC. The BIRMC also takes corrective action to mitigate the effects of specific risks, where risks are at levels beyond the prudent limits decided by the Committee.

● The Board Audit Committee monitors the overall effectiveness of the system of internal control and reports regularly to the Board of Directors. The key processes used by the Committee include: regular business and operational risk assessments; regular reports from the heads of key risk management functions including Internal Audit and Compliance; review and follow up on internal audit reports; external audit reports; prudential reviews; and regulatory reports. The Board Audit Committee keeps under review the status of key risk areas which impact the Bank and considers whether the mitigating actions put in place are appropriate.

● The Bank’s financial reporting process for preparing the annual accounts is controlled using documented accounting policies developed based on Sri Lanka Accounting Standards and reporting formats and guidelines issued by Central Bank of Sri Lanka.

Annual ReviewThe Board has identified the importance of review of design and the effectiveness of the bank’s system of internal control over financial reporting in accordance with the guidelines issued by the ICASL and has already performed the following as a part of annual review.

● Documentation of internal controls for significant processes by considering the ICASL illustrative guidance in relation to compliance with CBSL direction. However, due to time constraints, full scale walkthroughs of such controls was not performed. The process of finalization of such testing is in progress.

● Considered the matters discussed at the audit committee meetings related to the internal control weaknesses pertaining to above processes. It also considered the following up actions taken by internal auditors.

With reference to the guidelines issued by the ICASL on the Directors’ Statement on Internal Control, the Board has realized that there are additional procedures to be followed as part of the review of design and the effectiveness of the bank’s system of internal control over financial reporting. The audit committee has already discussed regarding applying a formal process in this regard and that is to be implemented in year 2011. The following steps have been considered for further strengthening the process.

● Completion of documentation and further strengthening the documentation standards to comply with the best practices.

● Performing much more structured control testing to ensure that the implementation of particular controls were in effect throughout the year and significant deficiencies have been discussed and addressed at the Board. If there are weaknesses/additional risks identified by the internal auditors/audit committee those have to be properly addressed by providing additional controls with adequate follow-up procedures.

ConfirmationSubject to the above areas identified for further strengthening of the processes, to the best of our knowledge confirms that the system of internal control is sound and has been designed to provide reasonable assurance regarding the reliability of financial reporting and the


preparation of financial statements for external purpose in accordance with applicable accounting standards and regulatory requirements.

Statement by External Auditors:The external auditors have reviewed the above Directors’ Statement on Internal Control included in the annual report of the Bank for the year ended 31 December 2010 and reported to the Board that nothing has come to their attention that causes them to believe that the statement is inconsistent with their understanding of the process adopted by the Board in the review of the design and effectiveness of the internal control system of the Bank.

Suresh AmerasekeraChief Executive Officer

A M Chandrasagara Chairman – Audit Committee

Mrs. S. N. WickramasingheChairman

Statement of Internal Control contd.


Financial calendarFinancial statements 2009/2010First quarter released on - 14th May 2010Second quarter released on - 15th August 2010Third quarter released on - 15th November 2010Fourth quarter released on - 15th February 2011

financial reports

Financial InformationReport of the Board of Directors 151Reports of the Board Sub Committees 156The Board of Director’s Responsibilities for Financial Reporting 161Auditor’s Report 162Consolidated Income Statement 164Consolidated Balance Sheet 165Consolidated Cash Flow Statement 166Consolidated Statement of Change in Equity 167Significant Accounting Polices 168Notes to the Financial Statement 171Maturity Analysis 180Statement of Value Added 181Capital Adequacy - Solo Basis 182Ten Year Statistical Summary 184Graphical Review 185Share Information 186



Report of the Board of Directors

1. GeneralThe Board of Directors of the HDFC Bank have pleasure in presenting to the members the Annual Report for the financial year 2010 together with the audited Financial Statements and Audit Report thereon of the Housing Development Finance Corporation Bank (HDFC BANK) and consolidated Financial Statement for the group for the relevant year.

Housing Development Finance Corporation Bank of Sri Lanka, (hereinafter referred to as the HDFC Bank) is a licensed specialized bank incorporated in Sri Lanka under the provisions of Housing Development Finance Corporation Act No. 07 of 1997. The said Act was amended by Act No.15 of 2003, by which the HDFC Bank is empowered to engage in banking business as a licensed specialized bank. The HDFC Bank was quoted in the Colombo Stock Exchange in year 2005.

2. Principal ActivitiesThe principal activities of the Bank and the Group, (including HDFC Real Estate Limited) were generally continued to be financing for housing and housing development projects. There have been no significant changes during the financial year under review in the nature of the principal activities of HDFC Bank and the group.

3. Review of BusinessThe General Manager/Chief Executive Officer’s Review contained on pages 14 to 17 and the Financial Review contained on pages 41 to 42 provide an overall assessment of the Bank’s financial position, performance, state of affairs and significant events taken place during the financial year. These Reports form an integral part of the Directors’ Report.

4. Vision, Mission and Corporate ConductThe Bank’s Vision and Mission were aligned with the Corporate Plan, and is given on page No. 02 to 03 of this Report. The operations of the Bank are conducted effectively with the highest level of ethical standards in achieving its Vision and Mission.

5. Future DevelopmentsThe Bank intends to diversify the loan and deposit products to capture un-reached banking communities, enabling them to access housing finance by introducing customer oriented low cost products and services. An overview of future development is given on the General Manager/ Chief Executive Officer’s Review on pages 14 to 17 and on Management Discussion and Analysis on page No. 31 to 40 of this Annual Report.

6. Financial StatementsThe Financial Statements of the Group and the Bank were duly signed and certified by the Chief Financial Officer and the General Manager / CEO and approved by the Chairman and a Director of the HDFC Bank and are given on pages 164 to 167 of this Annual Report.

7. Significant Accounting PoliciesThe significant accounting policies adopted in preparation of Financial Statements and the impact of the changes in Sri Lanka Accounting Standards during the year are given on pages 168 to 170 of the Annual Report.

8. Auditors’ ReportThe Auditor General of Sri Lanka is the auditor of HDFC Bank. The audit is performed on the Consolidated Financial Statement of HDFC Bank for the year ended 31st of December 2010 and the relevant Auditors Report is contained on page 162 and 163 of the Annual Report.

9. Going ConcernThe Board of Directors are satisfied that HDFC Bank has adequate resources to continue its operations in the foreseeable future. Accordingly, the Financial Statements are prepared based on the going concern concept.

10. IncomeThe income of the Bank for the year ended 31 December 2010 was LKR. 2,250 million. An analysis of the income is given in Notes 02 and 04 to the Financial Statements.

11. Profit and AppropriationThe profit before income tax of the Bank for the year ended 31st December 2010 was LKR. 189 million and the profit after tax for the year ended 31st December 2010 was LKR. 135.30 million.

The details of profit of the HDFC Bank, and the group are given in the table below:

For the year ended 31 December.

Bank Group2010

Rs. Mn.2009

Rs. Mn.2010

Rs. Mn.2009

Rs. Mn.Operating profit on ordinary activities before VAT

291.10 168.49 402.48 220.13

VAT on financial services 102.18 77.42 102.18 77.42Provision for taxation 53.57 34.62 53.61 34.62Profit on ordinary activities after tax

135.34 56.45 246.69 108.10


For the year ended 31 December.

Bank Group2010

Rs. Mn.2009

Rs. Mn.2010

Rs. Mn.2009

Rs. Mn.Retained profit /(accumulated losses) b/f

666.62 651.00 510.06 442.80

Profit available for appropriation

801.96 707.44 756.75 550.90

Appropriation First & Final Dividend proposed

32.35 32.35 32.35 32.35

Transfer to Reserve Funds

20.30 8.47 20.30 8.47

Retained Profit carried forward

749.31 666.62 704.10 510.10

12. ReservesThe Bank’s total Reserves as at 31 December 2010 amounting to LKR. 1849 million. The details are given on Note 27 and 28 of the Financial Statements.

13. DonationsDuring the year the Bank made donations amounting to LKR. 547,100.00

14. Statutory PaymentsThe Board of Directors are satisfied that all statutory payments in relation to the Government, other regulatory institutions and employees have been paid up to date, to the best of their knowledge and belief.

15. Provision for TaxationIncome tax for 2010 has been provided at 20% on the taxable income arising from the operations of the Bank and has been disclosed in Note 11 to the Financial Statements on page 173 of this Annual Report.

16. DividendsThe Directors recommended a dividend payment (final) of Rs. 5/- Per share for the year 2010.

The Board of Directors was satisfied that the Bank would meet the solvency test as per the provisions of the Companies Act No. 07 of 2007, immediately after the payment of the proposed final dividend with the approval of the shareholders at the AGM. The Board obtained a certificate of solvency from the auditors in respect of the above mentioned dividend payment. The Board provided the statement of solvency to the Auditor General and obtained the certificate of solvency, in respect of final dividend payment confirming to the statutory provision.

17. Property, Plant and Equipment, Leasehold Property

Capital expenditure on property, plant and equipment amounts to LKR. 78.41 million, the details of which are given in Note 22 of the Financial Statements.

Details of leasehold properties are given on Note 22 of the Financial Statements on page 176.

18. Market Value of Freehold PropertiesDetails of the market value of freehold properties are given on Note 22 of the Financial Statements on page 176.

19. Events After the Balance Sheet DateThere have been no material events occurring after the Balance sheet date that would require adjustments or disclosure in the financial statements.

20. Stated CapitalThe stated capital of the Bank as at 31st of December 2010 was LKR 962,088,646/-, consisting of 6,471,022 ordinary shares.

21. Share InformationDetails of share related information (earnings, dividends, net assets and market value per share) are given on page 186 of this Annual Report.

All shareholders have been treated equitably in accordance with the original terms issued to them.

22. Issue of Shares and DebenturesNo shares or debentures were issued by the bank during the year under review.

23. Equitable Treatment to all StakeholdersWhile appreciating the contribution of all stakeholders, towards the progress of HDFC Bank has made all endeavors to ensure equitable treatment to all our shareholders.

24. The Board of DirectorsThe Director Board of the HDFC Bank consists of well qualified and, experienced professionals in the fields of banking accounting, law and also includes senior public servants, retired senior officials of the state and private sector commercial banks and the Central Bank of Sri Lanka. They possess the relevant skills and experience to provide leadership to steer the Bank in the strategic direction.

Report of the Board of Directors contd.


During the period under review there were two Director Boards, hereinafter referred to as the Present Director Board and the former Director Board.

The Present Board of Directors were appointed under the chairmanship of Mrs. S. N. Wickramasighe and the former Board of Directors served under the chairmanship of Mr. S. M. M. Yaseen, up to mid May 2010. (All nominated directors have resigned from the Former Board in accordance with directions issued to all institutions under the Ministry of Finance and Planning in May 2010 following the General Elections and the appointment of the new Cabinet of Ministers)

Consequently, the Present Board of Directors was appointed as aforesaid. Given below are the Directors of the Bank as at 31st of December 2010.

01. Mrs. S. N. Wickramasinghe (Chairman) appointed in May 2010 - Non-executive/ independent

02. Mr. W. J. L. U. Wijayaweera appointed in June 2010 - Non-executive/ independent

03. Mr. W. A. T. Fernando appointed in June 2010 - Non-executive/ independent

04. Mrs. K. W. P. Dayarathne appointed in June 2010 - Non-executive/ independent

05. Dr. D. S. Wijesinghe appointed in June 2010 - Non-executive/ independent

06. Mrs. C. Wijayawardhane appointed in June 2010 - Non-executive/ independent

07. Mr. A. M. Chandrasagara appointed in June 2010 - Non-executive/ independent

08. Mr. S. A. J. Samaraweera appointed in June 2010 - Non-executive/ Non-independent

09. Mr. W. D. R. D. Goonarathne appointed in June 2010 - Non-executive/ Non-independent

Former Director Board comprised of Mr. S. M. M. Yaseen (Chairman), Mr. W. J. L. U. Wijayaweera, Mr. P. Sumanapala, Mr. W. A. T. Fernando, Mr. M. M. Abul Kalam, Mr. A. W. Dayananda, Mrs. K. W. P. Dayarathne and Mr. S. Kannangara.

Resignations / retirement from the Board of HDFC Bank during the period under review01. Mr. S. M. M. Yaseen - with effect from May 201002. Mr. P. Sumanapala - with effect from May 201003. Mr. M. M. Abul Kalam - with effect from May 201004. Mr. A.W. Dayananda - with effect from May 201005. Mr. Sunil Kannangara - with effect from June 2010

06. Mr. W. A. T. Fernando - with effect from June 201007. Mrs. K. W. P. Dayarathne - with effect from May 201008. Mr. W. J. L. U. Wijayaweera - with effect from May 2010

Appointments and re-appointments to the Board01. Mrs. S. N. Wickramasinghe (Chairman)

- new appointment (with effect from 21/05/2010)02. Dr. D. S. Wijesinghe

- new appointment (with effect from 30/06/2010)03. Mrs. C. Wijayawardhane

- new appointment (with effect from 02/06/2010)04. Mr. A. M. Chandrasagara

- new appointment (with effect from 30/06/2010)05. Mr. S. A. J. Samaraweera

- new appointment (with effect from 30/06/2010) 06. Mr. W. D. R. D. Goonarathne

- new appointment (with effect from 30/06/2010)07. Mrs. K. W. P. Dayarathne

- re-appointment (with effect from 03/06/2010)08. Mr. W. A. T. Fernando

- re-appointment (with effect from 30/06/2010)09. Mr. W. J. L. U. Wijayaweera

- re-appointment (with effect from 03/06/2010)

The qualifications and the experience of the Directors

The qualifications and the experience of the Directors are given in the Board of Directors profile on pages 19 to 20 of this Annual Report.

The following were the Directors of the HDFC (RED) during the financial year, under review.

01. Mr. Sunil Kannangara02. Mr. L. P. Andrahennadi03. Mr. M. I. M. Rafeeek04. Mr. S. M. Amerasekera

25. BOARD SUB COMMITTEESThe Board while ensuring the overall responsibility and accountability in the administration and the management of HDFC Bank has taken necessary measures to appoint relevant Board sub Committees, such as Audit Committee, Human Resource and Remuneration Committee, Nomination Committee and Integrated Risk Management Committee. The relevant reports of the Board Sub Committees are given on pages 156 to 160 of the Annual Report.


26. Directors MeetingDuring the period under review Board of Directors held 12 Board Meetings. The attendance of Directors at these meetings is given on page 144. In addition there were Board Sub Committee Meetings, the details of which are given separately with the reports of Board Sub Committees, on pages 145 to 146 of this Annual Report.

27. Director’ Responsibility for Financial ReportingThe Directors are responsible for the preparation of financial statements of the Bank in such manner that it will reflect a true and fair view of the state of affairs of the HDFC Bank. The statement of Directors’ responsibility for Financial Reporting is given on page 161 which forms an integral part of the Annual Report of the Board of Directors.

28. Entries in the Interest RegisterThe HDFC Bank is regularly maintaining the Interest Register in accordance with the companies Act. The Directors have made declarations as required and the related entries were made in the interest register during the year under review.

29. Directors’ Interest in ShareholdingDirectors shareholdings are as follows:

31/12/2010 01/01/2010

Mrs. S. N. Wickramasinghe (Chairman)

1000 Nil

Mr. W.A.T.Fernando Nil NilMr. W.J.L.U.Wijayaweera 300 300Mrs. K.W.P.Dayarathna Nil NilMrs. C. Wijayawardhana Nil NilDr. D. S. Wijesighe 100 NilMr. A. M. Chandrasagara 800 NilMr. W. D. R. D.Goonarathne Nil NilMr. S. A. J. Samaraweera Nil Nil

30. Directors’ Interests in Contracts and Proposed Contracts

Directors had no direct or indirect interest in any contract or proposed contract entered by the HDFC Bank during the year ended 31 December 2010. Further information is given on page 179 of this Annual Report.

The Directors disclosed their interest (if any) to ensure that they would refrain from voting on issues they have an interest in.

31. Directors’ Interests in DebenturesThere were no debentures registered in the name of any director as at the beginning and at the end of the year.

32. Related Party TransactionsRelated party transactions were given in Note 30 of the financial statement of this Annual Report, on page 179.

33. Directors’ RemunerationDirectors’ remuneration, for the financial year ended 31 December 2010 is given on Note 08 to the financial statement on page 172.

34. Employee Share Option PlanThe Employee Share Ownership Plan was introduced by the Bank at the time of the Initial Public Offering (IPO), with the approval of the shareholders. The total number of shares issued to the Trustee under the above category was 348,522 shares and the above shares were allocated among the beneficiaries. The above mentioned Share Trust was set up by the Bank acquiring 5% of the voting ordinary shares.

35. Environmental ProtectionThe Directors, to the best of their knowledge and belief, are satisfied that the Bank has not engaged in any activities, which have caused adverse effects on the environment and has complied with the relevant environmental regulations. In addition, the Board has adopted an environmental policy in year 2009 and the implementation of the aforesaid policy commenced in year 2010, the relevant details are given in the sustainability report on pages 53 to 97 of the Annual Report.

36. Risk Management and System of Internal ControlsA continuous process is in place to identify, evaluate and manage the risk exposure of the HDFC Bank while an effective and comprehensive system of internal controls are in place to safeguard the assets of the Bank, to ensure continuity of the bank in an orderly manner by detecting and preventing frauds and irregularities (if any) as far as possible and securing the accuracy and reliability of all records of the Bank.

Report of the Board of Directors contd.


The Board Audit Committee reviews the internal control process of the Bank on a regular basis and the committee forwards necessary recommendations directly to the Board to ensure that the Bank has a comprehensive Internal Control Framework, in place for smooth functioning of its operations.

More details are given in Board Audit Committee Report on page 156, Risk management report given on page 159 and Board statement on Internal Controls on page 147.

37. Corporate GovernanceA statement of compliance, pertaining to Corporate Governance practices of the Bank are set out in pages 109 to 143 of this Annual Report, and a summary is given below.

The Central Bank of Sri Lanka in December 2007, issued a mandatory code of corporate governance for licensed specialized banks in Sri Lanka, which the Board of Directors of HDFC Bank has officially adopted.

The Board of Directors of the Colombo Stock Exchange has granted a total exemption to the licensed specialized banks from the requirement of complying with section 7.10 (corporate governance) of the continuing listing requirements under the CSE listing rules subject to disclosure of rule 7.10(c) of CSE with effect from 01st of January 2010 and the Central Bank of Sri Lanka too has issued directions with regard to corporate governance practices of licensed specialized banks.

As such the HDFC Bank complied with the corporate governance rules applicable to the banking sector as mandated by the Central Bank directions and voluntarily complies with Code of Best Practices on corporate governance issued jointly by the Securities and Exchange Commission of Sri Lanka and the Institute of Chartered Accountants of Sri Lanka in the year 2008.

In addition, the HDFC Bank complied with the continuing listing requirements under section 7.10 of the listing rules issued by the Colombo Stock Exchange.

38. Compliance With Applicable Laws And Regulations

There has been no direct or indirect violation of laws or regulations in any jurisdiction which the Bank is Bound to disclose nor has there been any irregularities involving management of employees that could have been a material financial effect.

39. Appointment Of AuditorsThe Auditor General continues to be the Auditor of the bank as stipulated in the HDFC Act No.07 of 1997, (amended by Act No. 15 of 2003)

40. Auditors Remuneration And Interest In Contract With The Bank

The Auditors were paid Rs. 722,113 for the year ended 31st of December, 2010 as audit fees by the Bank. The auditors do not have any other relationship or interest in contracts with the Bank or the Group.

41. Audit CommitteeThe composition of the Audit Committee and their report is given on page 156 of this Annual Report.

42. Notice of MeetingThe 26th Annual General Meeting of the Bank will be held at 10.00 a.m. on 9th of May 2011 at Grand Oriental Hotel, No. 02, York Street, Colombo 01, Sri Lanka.

The Notice of the meeting is given on page 189 of the Annual Report.

By order of the Board


Dharshani De SilvaCompany Secretary


Reports of the Board Sub Committees

The Board Audit Committee (BAC) functioned under the charter and the terms of reference adopted by the Board of Directors for its operation.

The Board Audit Committee comprised of three (03) independent directors and the Chairman of the Audit Committee is a member of the Institute of Chartered Accountants of Sri Lanka. The committee held six (06) meetings during the year 2010 to review the progress of Internal Audit function, adequacy, efficiency and effectiveness of controls to manage risks paying special attention to the followings.

● Determining the scope and plan for the Internal Audit function.

● Reviewing and evaluating the system of Internal Controls and the management of Business Risks.

● Reviewing the External Audit and Internal Audit Processes, Reports, External Auditors management letters and management responses.

● Reviewing the financial reporting process and procedures in place for monitoring compliance with Laws, regulations in particular Central Bank guidelines, standards, financial reporting requirements etc.

● Reviewing with senior officers of other functions to identify key accounting and control issues and resolve those with the primary objectives of establishing an adequate control environment and ensuring financial statements that provide a true and fair view of the financial results of the Bank.

● Reviewing the adequacy of staff and their training and development for the proper functioning.

● Adding value to the business by early correction of deficiencies identified during the course of audit and ensuring regular follow-up actions on audit findings through the Internal Audit Department.

The committee took initiatives to further strengthen the Internal Audit Department by recruiting 3 experienced staff during year 2010.

We wish to place on record our appreciations of the valuable comments and observations made in the reports of the Auditor General.

A M ChandrasagaraChairmanBoard Audit Committee

Audit Committee Report


Composition of the Human Resource and Remuneration CommitteeThe Human Resource and Remuneration Committee comprises of three non-executive independent Directors namely, Mrs. S. N. Wickramasinghe, Mr. W. J. L. U. Wijayaweera and Mrs. K. W. P. Dayarathne.

Mrs. S. N. Wickramasinghe was appointed as the Chairman of the Committee, immediately after her appointment to the Board.

Prior to her appointment, Mr. S. M. M. Yaseen was the Chairman of the Committee, until his resignation from the Board in May 2010.

Under the Chairmanship of Mr. S. M. M. Yaseen, the Committee consisted of three non-executive independent Directors, namely Mr. W. J. L. U. Wijayaweera and Mr. P. Sumanapala.

Mr. P. Sumanapala also resigned from the Board and the Committee with effect from May 2010.

The appointment to the above Committee is made by the Board, and the Committee is responsible and report directly to the Board of Directors.

Human Resource and Remuneration Policy of the BankWe consider our Human Resources as the most valuable asset of our organization, which can be utilized to obtain the maximum productivity for the betterment of our organization. The Committee makes the relevant recommendations based on the above scenario and is always mindful to select the best option, to improve the quality and the standards of our employees and motivate them to achieve the desired levels of performance. We apply equal opportunity approach, without any discrimination, and encourage all employees of the Bank to enhance their knowledge and performance and achieve their career goals and employee benefits.

The core-responsibilities and duties of the Human Resource and Remuneration Committee

The Committee is empowered to recommend to the Board of Directors any matter related to Human Resource Management of the Bank and during the period under review the Committee has taken necessary measures to strengthen the relevant area by paying a special attention to the following.

(a) Implementation of a Remuneration policy relating to Chief Executive Officer and other key management personal of the Bank.

(b) Setting up goals and targets for the Directors, CEO and other key management persons.

(c) Evaluating the performance of CEO and other key management personal against the set targets and goals periodically and determine the basis for revising remuneration benefits and other payments of performance base incentives.

(d) Making necessary recommendation to the Board pertaining to the salary revisions, Prerequisites, Recruitments, Cadre Determination, Promotions / Change of Designation / Creation of new Posts or positions / Placements / Cadre and Cadre Budget, Training and attending to overseas Seminars by the Staff Members of the Bank.

Human Resource and Remuneration Committee MeetingsDuring the year under review the Committee held 04 meetings and all Directors who were members of the Committee participated the relevant meetings. The attendances of the Directors are given at the end of this report. The General Manager / CEO attended the meetings by invitation, except in relation to matters connected to his position. The members of the Corporate Management team were invited for participation at the Committee meetings as and when required by the committee.


Mrs. Dharshani De SilvaCompany Secretary

Board Human Resource and Remuneration Committee Report


Composition of the Nomination CommitteeThe Nomination Committee comprises of three non-executive independent Directors namely, Mrs. S. N. Wickramasinghe, Mr. W. J. L. U. Wijayaweera and Mrs. K. W. P. Dayarathne.



Under the Chairmanship of Mr. S. M. M. Yaseen, the Committee consisted of three non-executive independent Directors, namely Mr. W. J. L. U. Wijayaweera and Mr. P. Sumanapala.

Mr. P. Sumanapala also resigned from the Board and the Committee with effect from May 2010.

The appointments to the above Committee is made by the Board, and the Committee is responsible and report directly to the Board of Directors.

The core-responsibilities and duties of the Nomination CommitteeDuring the period under review the Committee has taken necessary measures to strengthen the relevant area by paying a special attention to the following.

(a) Implementation of a procedure for selection / appointment of new Directors, CEO and key management personal.

(b) Making necessary recommendations for re-election of Directors taking into account the performance and the contribution made by the Director concerned towards the overall discharge of the Boards responsibilities.

(c) Setting up criteria, such as qualifications, experience and key attributes required for eligibility to be considered for appointment or promotion to the post of CEO and the key management position.

(d) Ensuring the Directors, CEO and key management personal are fit and proper persons to hold office as specified in the criteria given in the Central Bank directions and as setout in the relevant statutes.

(e) Making necessary recommendation from time to time pertaining to the requirements of additional/new expertise and succession arrangements for retiring Directors and key management personals.

Nomination Committee MeetingsDuring the year under review the Committee held 01 committee meeting.



Nomination Committee

Reports of the Board Sub Committees contd.


Composition of the Risk Management CommitteeThe Integrated Risk Management Committee comprises of 04 members all of whom are non-executive independent directors namely Mrs. S. N. Wickramasinghe (The Chairman of the Committee), Mrs. C. Wijayawardhana, Mr. A. M. Chandrasagara and Dr. D. S. Wijesinghe. The appointments to the above Committee are made by the Board.

The core-responsibilities and duties of the Integrated Risk Management Committee

During the period under review the Committee has taken necessary measures to strengthen the relevant area by paying a special attention to the following.

(a) Assessing of all risk, ie. Credit, Market, Liquidity, Operational and Strategic Risk through appropriate risk indicators and management information received, by the Committee, periodically.

(b) Reviewing the adequacy and effectiveness of all management level committees.

(c) Taking the prompt corrective action to mitigate the effects of specific risk in the case, such risks are at levels beyond the prudent level decided by the committee, on the basis of the Banks policies and regulatory and according to supervisory requirements.

(d) Taking appropriate action against the officers responsible for failure to identify specific risk and take necessary corrective action as recommended by the Committee and or directed by the Director of Bank Supervision.

(e) Establishing a compliance function to assess the Banks compliance on all areas of business operations by appointing a compliance officer who shall carryout the compliance functions and report to the Committee, periodically.

Integrated Risk Management Committee MeetingsDuring the year under review the Committee held 01 committee meeting. However, most of the subject mentioned above were attended by the Board itself, during the year under review. In addition to the above more information were given under the Risk Management Report of this Annual Report.



Integrated Risk Management Committee


Composition of the Recovery Sub CommitteeThe Recovery Sub Committee comprises of three non-executive independent Directors namely, Mrs. S. N. Wickramasinghe, Mr. W. J. L. U. Wijayaweera and Mrs. K. W. P. Dayarathne and two non-executive non-independent Directors namely, Mr. S.A.J. Samaraweera and Mr. W.D.R.D. Goonarathne.



Under the Chairmanship of Mr. S. M. M. Yaseen, the Committee consisted of three non-executive independent Directors, namely Mr. W. J. L. U. Wijayaweera and Mrs. K. W. P. Dayarathne and Mr. A. W. Dayananda non-executive non-independent Director.

Mr. A. W. Dayananda also resigned from the Board and the Committee with effect from May 2010.

The appointment to the above Committee is made by the Board, and the Committee is responsible and report directly to the Board of Directors.

The core-responsibilities and duties of the Recovery Sub CommitteeThe Committee is responsible for taking appropriate decision pertaining to HDFC acquired properties.

Recovery Sub Committee

Reports of the Board Sub Committees contd.

Recovery Sub Committee MeetingsDuring the year under review the Committee held 04 meetings. The General Manager / CEO, Deputy General Manager (Finance) and Senior Manager (Recoveries) are attending the meetings by invitation.




The Board of Directors of the HDFC Bank are responsible for ensuring that the Bank maintains proper books of accounts of all the transitions and prepares financial statements for each financial year which give a true and fair view of the state of affairs of the Bank and its subsidiary for that period. Accordingly, the Board of Directors oversees the management responsibilities for financial reporting through their regular Board meetings and also through the Audit Committee.

The Auditor’s Report sets out the respective responsibilities of the Directors and Auditors relating to the financial statements and this statement provides additional information.

The Board of Directors are satisfied that the HDFC Bank and the Group have the required resources to continue in operation for the foreseeable future and therefore, these financial statements are prepared on a going concern basis.

The Board of Directors consider that, these financial statements have been prepared using appropriate accounting policies, consistently applied, and supported by reasonable and prudent judgment and estimates and in compliance with Sri Lanka Accounting Standards. Any change to accounting policies and reasons for such change, is disclosed in the “Notes to the Financial Statements”.

The Board of Directors has a responsibility to ensure that the HDFC Bank and its subsidiary are maintaining sufficient accounting policies to ensure the accuracy and reliability of financial statements. The Directors have a general responsibility to take reasonable steps to safeguard the assets of the HDFC Bank.

In discharging this responsibility, the Board of Directors has instituted effective and comprehensive systems of internal financial control. This comprises internal checks, internal audit and the whole system of financial and other controls required to carry on business of banking in an orderly manner, safeguarding its assets and secure as far as practicable the accuracy and reliability of the records.

The Board of Directors consider that they adopted appropriate accounting policies on a consistent basis and supported by reasonable and prudent judgment in preparing financial statements for the year 2010, which is published in this Annual Report.

The HDFC Banks financial statement for the year ended 31st of December 2010 prepared and presented in this annual report in conformity with the requirements of Sri Lanka Accounting standard, the Banking Act No. 30 of 1988, amendments there to and HDFC Act No. 07 of 1997 amended by Act No. 15 of 2003.

The financial statement for the year 2010 reflects a true and fair view of the state of affairs of the HDFC Bank and the group as at the date.

By Order of the Board


Dharshani De SilvaCompany Secretary

The Board of Director’s Responsibilities for Financial Reporting


Auditor’s Report



Bank Group

For the year ended 31st December Notes 2010 2009 2010 2009 Rs. Rs. Rs. Rs.

Income 01 2,250,285,534 2,268,697,932 2,239,380,272 2,268,787,492

Interest income 02 2,164,980,599 2,216,371,783 2,164,980,599 2,216,461,343Interest expenses 03 (1,339,354,916) (1,582,107,422) (1,339,189,916) (1,582,107,422)Net interest income 825,625,683 634,264,361 825,790,683 634,353,921

Non Interest income 04 85,304,935 52,326,149 74,399,673 52,326,149Net income 910,930,618 686,590,510 900,190,356 686,680,070

Less :Non Interest expensesPersonnel costs 05 271,032,361 230,240,411 271,032,361 231,130,411Provision for staff retirement benefit 06 43,534,101 46,913,170 43,534,101 46,979,320Premises equipment & establishment expenses 07 102,417,623 79,359,588 102,592,711 79,860,711Operating expenses 08 95,960,949 82,630,762 96,963,743 84,761,256Provision for loan losses 09 106,895,284 53,952,870 (16,415,788) 23,819,846Provision for Fall in value of Dealing & Investment securities - 25,000,000 - - 619,840,319 518,096,801 497,707,129 466,551,544

Operating Profit on Ordinary activities before Tax 291,090,299 168,493,709 402,483,228 220,128,526

Less : VAT on financial services 10 102,183,159 77,425,100 102,183,159 77,425,100Operating Profit on Ordinary activities before Corporate Tax 188,907,140 91,068,609 300,300,068 142,703,426

Less: Provision for taxation 11 53,566,201 34,618,210 53,610,164 34,618,210

Profit for the Year 135,340,939 56,450,399 246,689,905 108,085,216

Earnings per share 12 20.91 8.72 38.12 16.70Dividend per Share (Rs.) *5.00 5.00 *5.00 5.00

* Proposed dividend ,which is to be approved at the Annual General Meeting.

Consolidated Income Statement


Bank Group

As at 31st December 2010 2009 2010 2009 Notes Rs. Rs. Rs. Rs.

AssetsCash & Short term funds 13 84,272,236 163,188,742 84,272,695 163,189,988Investment in Government Securities & others 14 1,512,767,857 1,246,621,852 1,512,767,857 1,246,621,852Loans & advances 15 12,839,824,833 11,912,783,350 12,749,824,830 11,702,258,784Interest receivable 16 54,434,061 73,625,645 54,434,061 73,625,645Taxation recoverable 17 3,720,559 24,898,653 6,031,973 27,210,067Investment securities 18 30,600 - 30,600 -Housing projects 19 - - 188,534,005 182,367,356Investment in subsidiaries 20 - - - -Other assets 21 123,115,329 159,662,517 123,115,329 159,662,517Property, plant & equipment 22 755,666,901 720,659,833 655,761,447 620,898,639Total assets 15,373,832,375 14,301,440,592 15,374,772,796 14,175,834,849

LiabilitiesDeposits from customers 23 7,702,928,102 6,114,802,194 7,701,263,102 6,113,302,194Borrowings 24 4,781,006,769 5,150,223,956 4,781,006,769 5,150,229,719Taxation payable 25 - - 4,918,351 4,884,390Other liabilities 26 1,041,239,119 1,315,218,767 1,084,139,287 1,342,784,935Total Liabilities 13,525,173,990 12,580,244,917 13,571,327,509 12,611,201,238

Shareholders’ fundShare capital 27 962,088,646 962,088,646 962,088,646 962,088,646Reserves 28 886,569,740 759,107,029 841,356,641 602,544,965 1,848,658,386 1,721,195,675 1,803,445,287 1,564,633,611

Total Liabilities & Shareholders’ Fund 15,373,832,375 14,301,440,592 15,374,772,796 14,175,834,849

Net assets value per ordinary share Rs. 285.68 265.99 278.70 241.79

The Significant Accounting policies and Notes on pages 168 to 179 from an integral part of these Financial Statements.These financial statements have been prepared in accordance with the Sri Lanka accounting standards.

S. Dissanayake Suresh AmerasekeraDGM (Finance) CEO/General Manager

The Board of Directors are responsible for the preparation and presentation of these Financial Statements. These Financial statements were approved by the Board of Directors and signed on their behalf,

Ms. S N Wickramasinghe A M ChandrasagaraChairperson Director

15/02/2011Colombo

Consolidated Balance Sheet


Bank Group

For the year ended 31st December Rs. Rs. Rs. Rs. 2010 2009 2010 2009

Cash flows from operating activitiesInterest received 2,184,172,183 2,204,069,416 2,184,172,183 2,204,158,975Interest payments (1,490,839,784) (1,251,110,758) (1,490,674,784) (1,251,911,100)Receipt from other operating activities 85,299,935 43,050,216 85,299,935 43,050,216Cash payments to employees & suppliers (379,413,862) (310,402,267) (379,413,862) (311,358,417)Payments on other operating activities (199,549,014) (143,606,655) (199,560,843) (145,293,671)Operating profit before changes in operating assets 199,669,458 541,999,952 199,822,629 538,646,003

(Increase)/Decrease in operating assetsFunds Recovered from customers 1,895,824,198 2,018,765,196 1,895,824,198 2,018,765,196Funds advanced to customers (2,925,210,203) (1,830,060,230) (2,925,210,203) (1,830,060,230)Housing Project - - (17,071,911) (119,427)Subsidiary - HDFC RED Loan (2,786,509) (6,376,314) - -Other Assets 36,478,225 (22,819,523) 36,478,225 (22,819,523) (995,694,289) 159,509,129 (1,009,979,691) 165,766,016Increase / (Decrease) in operating liabilitiesDeposits from customers 1,588,125,908 1,138,804,429 1,587,960,908 1,137,304,429Others (96,372,376) 60,470,412 (82,070,169) 59,323,698 1,491,753,532 1,199,274,841 1,505,890,739 1,196,628,127Net cash from operating activities before income tax 695,728,701 1,900,783,922 695,733,677 1,901,040,146Income Tax & Deemed Dividend Tax Paid (29,012,868) (28,864,098) (29,012,868) (28,864,098)Net cash from operating activities 666,715,833 1,871,919,824 666,720,809 1,872,176,048

Cash flows from investing activitiesDividends received 5,000 16,000 5,000 16,000(Purchase)/Sale of Investment Securities 94,061,196 (94,091,796) 94,061,196 (94,091,796)Purchase of property, plant and equipment (78,407,472) (71,282,995) (78,407,472) (71,282,995)Disposal of property, plant and equipment 573,484 9,259,934 573,484 9,259,934Net cash from Investing activities 16,232,209 (156,098,857) 16,232,209 (156,098,857)

Cash flows from Financing activitiesRepayment of Borrowings (1,052,077,646) (3,019,238,177) (1,052,083,409) (3,019,496,066)Proceeds from Borrowings 682,860,459 1,527,937,282 682,860,459 1,527,937,282Dividends paid (32,409,560) 450 (32,409,560) 450Net cash from financing activities (401,626,748) (1,491,300,445) (401,632,511) (1,491,558,334)

Net increase in cash & cash equivalents 281,321,295 224,520,522 281,320,508 224,518,857Cash & cash equivalents at beginning of the period 1,315,718,798 1,091,198,277 1,315,720,044 1,091,201,188Cash & cash equivalents at the end of the period 1,597,040,092 1,315,718,798 1,597,040,551 1,315,720,045

Reconciliation of cash and cash equivalentsCash & short term funds 84,272,236 163,188,742 84,272,695 163,189,989Government of Sri Lanka treasury bills 1,512,767,857 1,152,530,056 1,512,767,857 1,152,530,056 1,597,040,092 1,315,718,798 1,597,040,551 1,315,720,045

Consolidated Cash Flow Statement


For the year ended 31st December

No of Share Share General Revaluation Statutory Special Profit & Total Share Capital Premium Reserve Reserve Reserve Reserves Loss Fund Accounts

BankBalance as at 01.01.2009 6,471,022 647,102,200 314,986,446 - 43,767,910 36,799,251 3,451,125 650,993,453 1,697,100,385Net Profit for the period - - - - - - - 56,450,399 56,450,399Dividend proposed - - - - - - - (32,355,110) (32,355,110)Surplus on Revaluation - - - - - - - - -Issue/(Redemption) of Shares - - - - - - - - -Transfer to Reserve - 5,645,040 - 2,822,520 (8,467,560) -Balance as at 31-12-2009 6,471,022 647,102,200 314,986,446 5,645,040 43,767,910 39,621,771 3,451,125 666,621,182 1,721,195,675Balance as at 01.01.2010 6,471,022 647,102,200 314,986,446 5,645,040 43,767,910 39,621,771 3,451,125 666,621,182 1,721,195,675Net Profit for the period 135,340,939 135,340,939Surplus on Revaluation - - - - (7,878,228) - - (7,878,228)Dividend proposed - - - - - - - - -Issue/(Redemption) of Shares - - - - - - - - -Transfer to Reserve 13,534,094 6,767,047 (20,301,141) -

Balance as at 31-12-2010 6,471,022 647,102,200 314,986,446 19,179,134 35,889,682 46,388,818 3,451,125 781,660,980 1,848,658,387

GroupConsolidated Statement of Change in EquityBalance as at 01.01.2009 6,471,022 647,102,200 314,986,446 - 43,767,910 36,799,251 3,451,125 442,796,573 1,488,903,505Net Profit for the period - - - - - - - 108,085,216 108,085,216Dividend proposed - - - - - - - (32,355,110) (32,355,110)Issue/(Redemption) of Shares - - - - - - - - -Transfer to Reserve - - - 5,645,040 - 2,822,520 - (8,467,560) -Balance as at 31-12-2009 6,471,022 647,102,200 314,986,446 5,645,040 43,767,910 39,621,771 3,451,125 510,059,119 1,564,633,610Balance as at 01.01.2010 6,471,022 647,102,200 314,986,446 5,645,040 43,767,910 39,621,771 3,451,125 510,059,119 1,564,633,610Net Profit for the period - - - - - - - 246,689,905 246,689,905Dividend proposed - - - - - - - - -Surplus on Revaluation - - - - (7,878,228) - - - (7,878,228)Dividend proposed - - - - - - - - -Issue/(Redemption) of SharesTransfer to Reserve - - - 13,534,094 - 6,767,047 - (20,301,141) -

Balance as at 31-12-2010 6,471,022 647,102,200 314,986,446 19,179,134 35,889,682 46,388,818 3,451,125 736,447,882 1,803,445,287

Consolidated Statement of Change in Equity


Significant Accounting Polices

GENERAL HDFC Bank of Sri Lanka has been incorporated in Sri Lanka as a Building Society in 1984 under section 11 of the National Housing Act of 1956. Subsequently converted to a corporation under the Housing development Finance Corporation of Sri Lanka Act.No.7 Of 1997 and obtained the status of a specialized bank under Housing Development Finance Corporation of Sri Lanka (Amendment) Act No 15of 2003. The principal business activities of HDFC Bank and the group during the year were granting loans and other forms of financial assistances related to housing purposes and real estate business. HDFC bank’s head office is located at NHDA secretarial Colombo-02 Sri Lanka.

1. ACCOUNTING CONVENTIONThe Balance Sheet, Income Statement, Statement of Changes in Equity and Cash Flow Statement are prepared in conformity with generally accepted accounting principles and the accounting standards laid down by the Institute of Chartered Accountants of Sri Lanka applied consistently on a historical cost basis, with no adjustments being made for inflationary factors affecting these accounts. The financial statements are presented in Sri Lanka Rupees, rounded to the nearest Rupees.

1.1. Format of Accounts and Prior Year Figures.Financial statements are presented in accordance with the format of accounts prescribed by the Central Bank of Sri Lanka and previous year’s figures have been re-arranged wherever necessary to conform to the current presentation.

2. BASIS OF CONSOLIDATIONThe group financial statements comprise the Bank’s financial statements consolidated with that of its fully owned subsidiary of HDFC Real Estate Development Ltd in term of Sri Lanka Accounting Standard No 26, Accounting for investment in Subsidiaries. The accounting policies have been consistently applied by Bank and it’s Subsidiary.

2.1 SubsidiariesSubsidiaries are those enterprises controlled by the Bank. Control exists when the Bank has the power, directly or indirectly to govern the financial and operating policies of the enterprise so as to obtain benefits from its activities. The financial statements of the subsidiary are included in the consolidated financial statements from the date that control effectively commences until the date that control effectively ceases. The financial statements of the Bank and its subsidiary

are combined on line- by- line basis. The consolidated accounts are prepared to a common financial year end of 31st December,

2.1.1 Intra group balances and intra group transactions are eliminated in full in the consolidated financial statements in order to eliminate the intra group profits.

2.1.2 The interest incurred in mobilizing fund recognized at the weighted average cost of interest applicable for relevant fund for the Bank and relevant projects are capitalized.

3. VALUATION OF ASSETS3.1 Loans and Advance to Customers:Loans and Advances to customers are stated in the balance sheet net of provisions for possible loan losses, and net of interest which is not accrued to revenue .3.1.1 Provision for loan LossesSpecific Provision for possible loan losses are made on base of a continuous review of all advance to customers, in accordance with the applicable accounting standards laid down by the ICASL and the directions issued by the Central Bank of Sri Lanka.

3.1.2 Security – property Mortgage

Period Classification Provision made net of Outstanding realizable value of Security (As per Central Bank directions) 6 - 12 months Substandard 20% 12- 18 Months Doubtful 50%18 Months and over Loss 100%

3.1.3 EPF & Cash Margin Loans No Special provision made for the loans granted against the EPF & cash deposit Balances.

3.2 Acquired Properties for SaleProperties mortgaged by HDFC Bank are auctioned if the customers default and the properties which are not disposed at such auctions are recognized as acquired properties and capital outstanding of loans with relevant to the acquired properties are presented under the loans & advances.


3.2.1 General Provision Bank has maintained at 0.9% as general provision as per a direction from the Central Bank of Sri Lanka on all performing and overdue loan portfolio excluding special scheme loans. 3.2.2 Provision for Losses on acquired property

The Bank had been a policy of providing 100% specific loan loss provision for the acquired properties which were over 5years .This year the policy was changed to the CBSL direction.

3.2.3 Provision for investmentThe full provision has been made for investment in share capital of HDFC RED on which dividends or interest has not been received for the last 3 consecutive years. As per SLAS 33.

3.3 Treasury Bills & BondsInvestment in treasury bills and Bonds are stated at cost plus interest receivable (Excluding Treasury bond coupon interest)

3.4 Property & Equipment. a. Fixed Assets are recorded at cost or at valuation

together with any directly attributable cost of bringing the assets to working condition. The property and equipments are stated at cost less accumulated depreciation, which is provided for on the basis specified in (b) below. No fresh valuations called during the year under review.

b. Depreciation is provided at the following rates on a straight-line basis over the estimated lives of different types of assets.

Buildings 6 2/3% per annum Office Equipment 12.50% per annum Furniture & Fittings 10.00% per annum Motor Vehicles & Bicycles 20.00% per annum Plant and Machinery 25.00% per annum Tools & Equipment 12.50% per annum Computer Equipment & ATM 12.50% per annum Computer software -Foreign 25.00% per annum

Total annual depreciation is provided on the assets which are purchased and used for the year and no depreciation is provided for the year of disposal. Depreciation is not provided for the freehold lands.

3.5 Valuation of housing projects.Cost of real estate properties in work in progress stage comprise of cost of purchase of land ,cost of developments including infrastructure facilities and other cost including prior to bringing such properties for its saleable condition including borrowing cost capitalized in line with the recognition criteria under the allowed alternative treatment of Sri Lanka accounting standard No 20- Borrowing costs. The housing projects have been shown at the market value or cost which ever lower.

4 LIABILITIES AND PROVISIONS Retirement Benefits1.4.1.1. GratuityProvision is made in the Accounts for retirement gratuities payable under the Payment of Gratuities Act No.12 of 1983 for employees from the time of joining the bank. The item is grouped under other liabilities in the Balance Sheet.

No separate fund is maintained and no actuarial valuation has been carried out for the purpose.

1.4.1.2. Defined Contribution Plans – EPF & ETFAll employees are eligible and covered by Employees’ Provident Fund and Employees Trust Fund contributions in line with the respective statutes.

5. REVENUE RECOGNITION5.1. Interest IncomeInterest income is recognized on an accrual basis. Interest ceases to be taken to revenue when interest or principal is in arrears for (3) months. And thereafter such income is recognized on a cash basis.

5.2 Over due Interest IncomeOver due interest for late payment of loan installment is recognized on an accrual basis on performing loans .Such income is recognized on a cash basis for the non performing loans.

5.3 Interest Income from Other SourcesInterest on treasury bills/Bonds and commercial paper is recognized proportionately over the period of instrument.

5.4 Other IncomeOther incomes are recognized on the cash basis.


5.5 Revenue Recognition on Real Estate ProjectProfit on real estate projects would be recognized after the accomplishment of one or more of the following criteria.(a) Signing of the Sales Agreement(b) Acceptance of the down payment of 25% or more(c) Completion of 80% of the construction of each unitThe ownership of the properties will be transferred once the sales proceeds are collected in full.

6 EXPENSES1.6.1 Interest Expenses Interest Expenses are recognized on an accrual basis,

1.6.2 Other ExpensesAll expenditures incurred in operations and in maintaining the Properties, Plants and Equipments in a state of efficiency are charged to Income statement in arriving at the profit or loss for the year.

7. TAXATION7.1 Income TaxThe provision for income tax is based on the elements of income and expenditure as reported in the financial statements and computed in accordance with the provisions of the Inland Revenue Act

7.2 Deferred TaxationDeferred taxation is provided on the liability method. The tax effect of timing differences which occur where items are allowed for income tax purposes in a period different from that when they are recognized in financial statements is included in the provision for deferred taxation at current rate of taxation.

8. CASH FLOW STATEMENTSThe cash flow statement has been prepared by using the “Direct Method” of preparing cash flows in accordance with the Sri Lanka Accounting Standard No 9 on cash Flow Statements. Cash and Cash equivalents comprise of cash balance and Short-term funds and placements.

9 STATUTORY RESERVE FUND5% of the net profit after tax is transferred to the Statutory Reserve fund.

Significant Accounting Polices contd.


Bank Group

2010 2009 2010 2009 Rs. Rs. Rs. Rs.

01. IncomeInterest income (Note 02) 2,164,980,599 2,216,371,783 2,164,980,599 2,216,461,342Other income (Note 04) 85,304,935 52,326,149 74,399,673 52,326,149Total income 2,250,285,534 2,268,697,932 2,239,380,272 2,268,787,491

02. Interest IncomeLoans & advances 1,971,071,127 2,011,306,286 1,971,071,127 2,011,306,286Treasury bills ,Bonds & other banks’ placements 193,909,472 205,065,497 193,909,472 205,155,057 2,164,980,599 2,216,371,783 2,164,980,599 2,216,461,343

03. Interest ExpensesLong- Term borrowing 534,684,623 595,035,307 534,684,623 595,035,307Debenture 30,872,148 73,860,013 30,872,148 73,860,013Deposits 773,798,145 907,573,409 773,633,145 907,573,409Short term borrowing 5,638,693 - 5,638,693 1,339,354,916 1,582,107,422 1,339,189,916 1,582,107,422

04. Non interest IncomeDividend income 5,000 16,000 5,000 16,000Fee and commissions income 74,974,858 35,129,705 74,974,858 35,129,705Impairment of Housing project - - (10,905,262) -Other 10,325,077 17,180,444 10,325,077 17,180,444 85,304,935 52,326,149 74,399,673 52,326,149

05. Personnel CostSalaries 206,275,779 180,365,706 206,275,779 181,255,706Overtime 7,089,920 2,120,198 7,089,920 2,120,198Bonus 33,809,173 29,240,096 33,809,173 29,240,096Staff medical 14,218,218 12,234,456 14,218,218 12,234,456Encashment of annual leave 7,972,149 6,279,956 7,972,149 6,279,956Incentive Payments 1,667,123 - 1,667,123 - 271,032,361 230,240,411 271,032,361 231,130,411

The total remuneration paid to the bank’s key management during the year is Rs 12.8 Mns.

Notes to the Financial Statement


Bank Group

2010 2009 2010 2009 Rs. Rs. Rs. Rs.

06. Provision for Staff Retirement BenefitGratuity provision 14,699,258 20,980,988 14,699,258 21,047,138EPF & ETF 28,834,843 25,932,181 28,834,843 25,932,181 43,534,101 46,913,170 43,534,101 46,979,320

07. Premises Equipment & Establishment Expenses

Electricity & Water 12,599,018 11,630,694 12,629,845 11,721,362Telephone Charges 14,330,521 12,412,704 14,330,521 12,438,549Computer maintenance 6,688,201 2,871,696 6,688,201 2,871,696Rent 34,906,665 28,221,040 34,906,665 28,461,390Repairs & Maintenance 2,099,484 2,326,477 2,099,484 2,326,477 70,623,890 57,462,611 70,654,717 57,819,475DepreciationsBuilding 407,136 217,753 407,136 217,753Office Equipment 5,426,643 3,444,874 5,484,570 3,502,801Furniture & Fittings 6,199,920 3,885,606 6,286,254 3,971,938Plant & Machinery 1,468,461 889,622 1,468,461 889,622Motor Vehicles 5,040,997 4,824,900 5,040,997 4,824,900Tools - 366 - 366Automated Teller Machine 2,541,870 1,504,225 2,541,870 1,504,225Computer S/W - Foreign 3,906,782 - 3,906,782 -Computer Equipment 6,801,925 7,129,631 6,801,925 7,129,631 31,793,734 21,896,977 31,937,994 22,041,236 102,417,623 79,359,588 102,592,711 79,860,711

08. Operating expenses include the followings

Chairman’s emoluments 510,667 720,000 510,667 720,000Directors’ emoluments 563,000 318,000 563,000 318,000Auditors’ remuneration 211,312 675,762 340,528 874,808Donations 547,100 - 547,100 -Business Dev.& Advertising 18,560,548 14,774,034 18,607,657 14,774,034Legal expenses 285,431 425,637 285,431 425,637Professional charges 2,441,320 2,240,379 2,441,320 2,240,379Others Operating Expenses 72,841,571 63,476,950 73,668,040 65,408,398 95,960,949 82,630,762 96,963,743 84,761,256

Notes to the Financial Statement contd.


Bank Group

2010 2009 2010 2009 Rs. Rs. Rs. Rs.

09. Provision for loan lossesGeneral Provisions (4,823,847) 13,926,195 (4,823,847) 13,926,195Specific Provisions 111,719,131 40,026,675 (11,591,941) 9,893,651 106,895,284 53,952,870 (16,415,788) 23,819,846

Due to the change of accounting policy for specific loan loss provision on aquared properties, there was a gain of Rs.17 Mn which was adjusted to profit year 2010.

10. VAT on financial Services 102,183,159 77,425,100 102,183,159 77,425,100 102,183,159 77,425,100 102,183,159 77,425,100

11. Taxation on Profits on Ordinary ActivitiesCurrent year income tax 56,155,585 38,258,202 56,199,548 38,258,202Transfer to / from Differed taxation (374,684) (5,498,622) (374,684) (5,498,622)(Over) / Under provision in previous year (2,214,700) 1,858,630 (2,214,700) 1,858,630 53,566,201 34,618,210 53,610,164 34,618,210

11.1 Reconciliation of Effective Tax RateAccounting Profit 188,907,140 91,068,609 300,300,068 142,703,426Add :disallowable expenses 155,138,935 218,004,781 155,340,567 218,149,470Less : Capital Allowance , Gratuity paid;Input VAT 67,417,579 27,113,874 67,561,840 27,315,506Adjusted Profit before tax 276,628,496 281,959,515 388,078,795 333,537,390Income tax 53,566,201 34,618,210 53,610,164 34,618,210Effective tax rate 28.36% 38.01% 17.85% 24.26%

11.2 Relationship between Tax Expense and Accounting income

Profit before tax as per the income statement 291,090,299 168,493,709 402,483,228 220,128,526Add : disallowable expenses 57,779,623 50,300,143 57,923,884 50,444,702Less : Capital Allowance & Tax excepted Income (72,241,426) (27,502,841) (72,443,057) (27,657,100)Taxable Income 276,628,496 191,291,011 387,964,054 242,916,128Tax @ 20% 55,325,699 38,258,202 55,369,662 38,258,202Social Responsibility levy @ 1.5% 829,885 - 829,885 -Under (Over ) Provision (2,214,700) 1,858,630 (2,214,700) 1,858,630Less : Deffered Tax Adjustments (374,684) (5,498,622) (374,684) (5,498,622)Provision for income Tax 53,566,201 34,618,210 53,610,164 34,618,210



Bank Group

2010 2009 2010 2009 Rs. Rs. Rs. Rs.

12. Earnings Per ShareBasic earnings per share is calculated by dividing the net profit after tax by the average number of ordinary shares.Net profit after tax 135,340,939 56,450,399 246,689,905 108,085,216Weighted Average number of ordinary shares 6,471,022 6,471,022 6,471,022 6,471,022Basic earnings per share (Rs.) 20.91 8.72 38.12 16.70

13. Cash and short term fundsCash in hand and balances with banks 84,272,236 102,637,941 84,272,695 102,639,187Money at call and short notice - 60,550,801 - 60,550,801 84,272,236 163,188,742 84,272,695 163,189,988

14. Investment in Government Securities & others

Treasury bonds/ Treasury Bill /Fixed deposits - 567,157,715 - 567,157,715Treasury bills under repurchase agreement 1,173,934,598 275,372,341 1,173,934,598 275,372,341Other investments 338,833,259 310,000,000 338,833,259 310,000,000Investment in commercial Papers 94,091,796 - 94,091,796 1,512,767,857 1,246,621,852 1,512,767,857 1,246,621,852

15. Loans & AdvancesHousing loans secured by primary mortgage over residential properties 6,745,717,227 6,964,495,640 6,745,717,227 6,964,495,640Housing loans against EPF. 4,332,516,006 3,287,967,780 4,332,516,006 3,287,967,780Housing loans on Guarantors & Others 958,569,934 983,786,701 958,569,934 983,786,701Staff loans 274,137,479 257,383,220 274,137,479 257,383,220Acquired properties 56,627,423 65,428,620 56,627,423 65,428,620Loan to NHDA 42,744 164,525 42,744 164,525HDFC RED Loan 243,444,099 240,657,590 - -Refinance Fund - Agri. Sector Loan 317,000,000 - 317,000,000 -Project Loan/Block Loans 215,889,498 311,887,820 215,889,498 311,887,820 13,143,944,410 12,111,771,896 12,900,500,311 11,871,114,306Less : Loan loss provision - General 89,650,943 94,474,789 89,650,943 94,474,789 - Specific 214,468,634 104,513,757 61,024,538 74,380,733 12,839,824,833 11,912,783,350 12,749,824,830 11,702,258,784

** The aggregate value of the accommodation granted to bank’s key management personal for their housing is Rs. 9 Mns.


Bank Group

2010 2009 2010 2009 Rs. Rs. Rs. Rs.

15. Loans & Advances contd.i. Movements in the Provisions for Loan LossesGeneral ProvisionBalance Brought forward 94,474,789 80,548,594 94,474,789 80,548,594Additional provision/(Reversal) made (4,823,846) 13,926,195 (4,823,846) 13,926,195Balance carry forward 89,650,943 94,474,789 89,650,943 94,474,789

Specific ProvisionBalance Brought forward1 104,513,757 64,632,040 74,380,733 64,632,040Additional provision/(Reversal) made1 109,954,877 39,881,717 (13,356,195) 9,748,693Balance carry forward 214,468,634 104,513,757 61,024,538 74,380,733

ii. Non performing assets including loans and advancesLoans and advances 2,840,383,217 2,743,314,572 2,596,939,118 2,502,656,982Less : Loan loss provision -General 89,650,943 94,474,789 89,650,943 94,474,789Specific 214,468,634 104,513,757 61,024,538 74,380,733 2,536,263,640 2,544,326,026 2,446,263,637 2,333,801,460

16. Interest ReceivableInterest receivable 386,172,979 403,888,798 386,172,979 403,888,798Less : Interest in Suspense (331,738,918) (330,263,153) (331,738,918) (330,263,153) 54,434,061 73,625,645 54,434,061 73,625,645

i. Movements in the Provisions for Interest in SuspenseBalance brought forward 330,263,153 279,045,716 330,263,153 279,045,716Interest suspensed - Addition 401,820,421 426,743,899 401,820,421 426,743,899Recovered 400,344,656 375,526,462 400,344,656 375,526,462Balance carry forward 331,738,918 330,263,153 331,738,918 330,263,153

17. Provision for taxation and deemed dividend tax

Taxation - current (1,480,321) 23,734,489 831,093 26,045,903VAT Payable (8,988,265) (12,446,627) (8,988,265) (12,446,627)Debit, WHT and Paye tax (2,717,381) (2,924,611) (2,717,381) (2,924,611)Deferred tax 16,906,527 16,535,402 16,906,527 16,535,402 3,720,559 24,898,653 6,031,973 27,210,067



Bank Group

2010 2009 2010 2009 Rs. Rs. Rs. Rs.

18. Investment SecuritiesCredit Information Bureau of Sri Lanka 30,600 - 30,600 - 30,600 - 30,600 -

19. Investment in SubsidiariesHDFC Real Estate Development Ltd. 25,000,000 - 25,000,000 -Less : Provision for investment (25,000,000) - (25,000,000) -

20. Housing ProjectsAvissawella Project - - 176,500,000 170,336,851Ampara Project - - 10,832,783 10,829,283Edmontin Rd project - - 1,201,222 1,201,222 - - 188,534,005 182,367,356

21. Other AssetsStationery stock 5,883,175 4,568,353 5,883,175 4,568,353Deposits and prepayments 31,353,409 22,310,415 31,353,409 22,310,415Others 85,878,744 132,783,749 85,878,744 132,783,749 123,115,329 159,662,517 123,115,329 159,662,517

22 Property , Plant & Equipments Bank Group

Freehold Leasehold Equipments Motor 2010 2009 2010 2009Cost/Valuations Lands Lands and Vehicles Rs. Rs. Rs. Rs. & Building Furniture

Balance at the begin. of the period 549,740,000 65,266,621 165,868,382 37,964,407 818,839,410 756,816,349 719,486,339 657,463,278 Additions for the period - 2,840,187 75,567,284 - 78,407,472 71,282,995 77,743,805 71,282,995 Revaluation - (7,878,228) - - (7,878,228) - (7,878,228) -Less :-Disposal during the period - - 17,423,632 3,741,778 21,165,409 9,259,934 20,501,743 9,259,934 Balance at the end of the period 549,740,000 60,228,580 224,012,035 34,222,630 868,203,245 818,839,410 768,850,174 719,486,339 Accumulated Depreciations Balance at the begin. of the period - - 75,154,571 23,025,007 98,179,578 85,542,534 98,587,700 85,806,397 Additions for the period - 3,688,911 26,345,601 5,040,997 35,075,508 21,896,977 35,002,770 22,041,236 Less :-Disposal during the period - - 16,760,865 3,957,878 20,718,742 9,259,934 20,501,743 9,259,934 Balance at the end of the period - 3,688,911 84,739,307 24,108,127 112,536,344 98,179,577 113,088,727 98,587,700 Net book value as at 31-12-2010 549,740,000 56,539,670 139,272,728 10,114,503 755,666,901 720,659,833 655,761,447 620,898,639

** The freehold lands have not been revalued during the year.


Bank Group

2010 2009 2010 2009 Rs. Rs. Rs. Rs.

23. Deposits from customersSavings deposits 1,042,180,827 591,618,222 1,042,180,827 591,618,222Fixed deposits 6,659,585,274 5,521,433,154 6,657,920,274 5,519,933,154Others 1,162,000 1,750,818 1,162,000 1,750,818 7,702,928,102 6,114,802,194 7,701,263,102 6,113,302,194

24. BorrowingsDebentures 24.1 395,000,000 610,000,000 395,000,000 610,000,000Government of Sri Lanka 977,938,838 1,095,505,474 977,938,838 1,095,505,474GOSL Loans under Foreign Credit Lines 261,444,425 412,898,145 261,444,425 412,898,145Borrowing from the market 773,347,499 635,816,570 773,347,499 635,816,570Re-finance borrowings 1,163,230,064 1,165,272,372 1,163,230,064 1,165,272,372Dhananidana Certificate 1,151,874,326 814,008,769 1,151,874,326 814,008,769Bank overdraft 58,171,616 416,722,626 58,171,616 416,728,390 4,781,006,769 5,150,223,956 4,781,006,769 5,150,229,719

Due Within One year 1,303,652,945 1,048,703,656 1,303,652,945 1,048,709,4191-5 years 2,134,087,501 1,727,718,910 2,134,087,501 1,727,718,910After five years 1,343,266,323 2,373,801,391 1,343,266,323 2,373,801,391 4,781,006,769 5,150,223,956 4,781,006,769 5,150,229,719

24.1 Debenture CategoriesAllotment Date Maturity Date Interest Payable Interest Rate Bank Frequency 2010 2009

Fixed Rate:May 2006 May 2010 Semi - Annually 13.00% 10,000,000May 2006 May 2010 Semi - Annually 13.00% 40,000,000April 2006 April 2010 Semi - Annually 13.00% 25,000,000December 2005 December 2015 Annually 2.50% 85,000,000 85,000,000December 2005 December 2010 Annually 2.50% 55,000,000December 2005 December 2020 Annually 2.50% 110,000,000 110,000,000 195,000,000 325,000,000

June 2006 June 2010 Semi - Annually 6 Month WATB Rate+ 75,000,000 1.85% (Cap 15%)June 2006 June 2010 Semi - Annually 6 Month WATB Rate+ 10,000,000 1.85% (Cap 15%)June 2007 June 2011 Semi - Annually WAGTB + 1.75% 200,000,000 200,000,000 200,000,000 285,000,000 395,000,000 610,000,000



Bank Group

2010 2009 2010 2009 Rs. Rs. Rs. Rs.

25. Provision for taxation and deemed dividend tax

Taxation - current - - 53,197 9,235ESC Payable 4,865,154 4,875,155 - - 4,918,351 4,884,390

26. Other LiabilitiesProvision for gratuity (26.1) 102,707,663 91,045,684 102,707,663 91,045,684Accrued expenditure 659,588,663 816,448,354 659,590,663 816,448,354Dividend Payable (34,650) 32,374,910 (34,650) 32,374,910Other Creditors 278,977,444 375,349,819 321,875,612 402,915,987 1,041,239,119 1,315,218,767 1,084,139,287 1,342,784,935

26.1 Provision for GratuityBalance brought forward 91,045,684 72,390,629 91,045,684 72,390,629Provisions made during the year 14,699,258 20,980,988 14,699,258 20,980,988Payments made during the year (3,037,279) (2,325,933) (3,037,279) (2,325,933)Balance carry forward 102,707,663 91,045,684 102,707,663 91,045,684

27. Share CapitalAuthorized capital 2,000,000,000 2,000,000,000 2,000,000,000 2,000,000,000(20,000,000 ordinary shares of Rs. 100/- each)State Capital 962,088,646 962,088,646 962,088,646 962,088,646(6,471,022 ordinary shares of Rs. 100/- each)

28. ReservesStatutory reserve fund 46,388,818 39,621,771 46,388,818 39,621,771General Reserve 19,179,134 5,645,040 19,179,134 5,645,040Special reserve 3,451,125 3,451,125 3,451,125 3,451,125Revaluation Reserve 35,889,682 43,767,910 35,889,682 43,767,910Other reserves 781,660,981 666,621,183 736,447,883 510,059,119 886,569,740 759,107,029 841,356,641 602,544,965


29. Directors Interests in Contracts with the bankNone of the Directors possess any material interest on any transaction or proposed contract involving HDFC Bank of Sri Lanka except for the disclosures in Note 30 of the Accounts. .

30. Related Party Transactions Name Related Party Office Holding Transaction Nature of Transactions % Regulatory

Capital

Mr. Suresh Amarasekara (GM/CEO)

HDFC RED Ltd. Managing Director

Rs. 2.8 Mn AccommodationGranted for housing project of Rs. 243 Mn as at 31 Dec. 2010

13.41%

Mr. Suil Kannagar - Director HDFC - Resinged on 21st June 2010

Director

Mr. S A J Samaraweera Director HDFC

National HousingDevelopmentAuthority

Chirman 01. Rs. 17.6 Mn

01. Rent paid for Head office Building02. Interest paid for borrowing of Rs. 100Mn

Mr. WDRD Goonarathne Director HDFC

Director 02. Rs. 12.5 Mn

31. The events occurring after the balance sheet date:

There has been no material event after the balance sheet date, that requires adjustments or disclosure in the financial statements.

32. Assets Pledged:The assets pledged as security for credit facilities obtained are as follows:

Type of Amount of Nature of Value of Balance facility facility security security as at 31/12/2010 Rs. Mn. Rs. Mn. Rs.Mn. (1) Overdraft 100.00 Part of Loan portfolio 150.00 18.60 (Sampath Bank)

(2) Overdraft 100.00 Part of Loan portfolio 150.00 0.00 (People’s Bank)


An analysis of the interest bearing assets and liabilities based on the remaining period at the Balance sheet date to the respective contractual maturity date is as follows,

As at 31st December 2010 (Rs.000’) Up to 3 to 12 1 to 3 3 to 5 More than Total 3 Months Months Years Years 5 Years

AssetsCash 51,728 - - - - 51,728Due from Banks 474,377 - - - - 474,377Investments 1,070,935 - - - 31 1,070,965Loans & Advances 858,790 1,201,603 2,493,207 2,308,074 6,032,584 12,894,259Fixed Assets 755,667 755,667Other Assets 20,272 58,416 20,877 5,186 22,085 126,836Total Assets 2,476,101 1,260,019 2,514,085 2,313,260 6,810,367 15,373,832

LiabilitiesTotal Capital Fund - - - - 1,848,658 1,848,658Deposits 3,405,673 3,260,305 663,300 146,182 227,468 7,702,928Borrowings 109,137 1,194,516 1,606,480 527,608 1,343,266 4,781,007Other Liabilities 463,680 175,415 263,134 28,944 110,066 1,041,239Total Liabilities 3,978,491 4,630,235 2,532,914 702,733 3,529,459 15,373,832

Maturity Analysis

0

2,000

4,000

6,000

8,000

Rs. Mn.

Maturity Analysis

Assets

Liabilities

Up to3 Mth

3 to 12 Mth

1 to 3 Ys

3 to5Ys

5 Ys >


For the period ended 31st December Bank Group

% 2010 % 2009 % 2010 % 2009

Interest Income 2,164,980,599 2,216,371,783 2,164,980,599 2,216,461,342Other Income 85,304,935 52,326,149 74,399,673 52,326,149Gross Income 2,250,285,534 2,268,697,932 2,239,380,272 2,268,787,491Cost of Service 1,505,903,459 1,722,099,139 1,506,772,080 1,724,586,497Total Value Additions 744,382,075 546,598,793 732,608,192 544,200,995

Value DistributedTo Employees(Remuneration & Benefits) 42.3 314,566,462 50.7 277,153,581 42.9 314,566,462 51.1 278,109,731

To GovernmentIncome Tax 7.2 53,566,201 6.3 34,618,210 7.3 53,610,164 6.4 34,618,210Value Added Tax 13.7 102,183,159 14.2 77,425,100 13.9 102,183,159 14.2 77,425,100Debit Tax 0.0 36,296 0.0 101,656 0.0 36,296 0.0 101,656 20.9 20.5 21.3 20.6To Share Holders (Dividend) 4.3 32,355,110 5.9 32,355,110 4.4 32,355,110 5.9 32,355,110

Retained in the BusinessRetained Profit 13.8 102,985,829 4.4 24,095,289 29.3 214,334,795 13.9 75,730,106Depreciation 4.3 31,793,734 4.0 21,896,977 4.4 31,937,994 4.1 22,041,236Loan Loss Provision 14.4 106,895,284 14.4 78,952,870 (2.2) (16,415,788) 4.4 23,819,846Total Value Distribution 100.0 744,382,075 100.0 546,598,793 100.0 732,608,192 100.0 544,200,995

Statement of Value Added

To Employees

To Government

To Share Holders (Dividend)

Retained Profit

Value Distributed 2010

42%14%

21%

4%


Capital Adequacy - Solo Basis

Capital Base

2010 2009 As at 31st December (Rs.000’) (Rs.000’)

Core Capital (Tier 1)Paid-up Ordinary Shares/Common Stock/Assigned Capital 647,102 647,102Share Premium 314,986 314,986Statutory Reserve Fund 46,389 39,622Published Retained Profits/(Accumulated Losses) 781,661 666,621General and Other Reserves 22,630 9,096Sub Total 1,812,769 1,677,428

Deductions/Adjustments-Tier 1Net deferred tax assets 16,907 16,535Advances granted to employees of the bank for the purchase of shares of the bank under a share ownership plan 49,839 49,839Total Core Capital (Tier 1) 1,746,024 1,611,054General Provisions 89,651 94,475Total Tier 2 Capital 1,835,674 1,705,529

Risk adjusted capital ratios Tier 1 (Eligible Tier 1 capital / Total risk adjusted balances) * 21.09% 17.63%Tier 11(Capital base / Total risk adjusted balances) ** 22.18% 18.66%

* Statutory minimum 5% ** Statutory minimum 10%


Risk Adjusted On - Balance Sheet Exposure - Rs.000’

Risk Risk Adjusted Balance Weights BalanceAs at 31st December 2010 2009 (%) 2010 2009

ExposuresCash - Local Currency 51,728 40,215 0%Sri Lanka Government Treasury Bills & Bonds 1,070,935 595,503 0%Central Bank of Sri Lanka 322,639Claims on Public Sector Entities (PSEs) 31 100% 31

Loan & AdvancesClaims Secured by Residential PropertyClaims that qualify for regulatory capital purposes 3,015,542 2,312,331 50% 1,507,771 1,156,166Claims that not qualify for regulatory capital purposes 3,628,783 4,558,893 100% 3,628,783 4,558,893Housing loans against EPF 4,408,820 3,311,908 0%Cash Margin Loan 278,331 214,102 0%Retail claims that qualify for regulatory capital purposes 624,105 705,363 75% 468,079 529,022

Non Performing AssetsPast Due Residential Mortgage LoansSpecific provisions are more than 20% 14,702 3,410 50% 7,351 1,705Specific provisions are less than 20% 606,286 696,800 100% 606,286 696,800

Housing loans on Guarantors & othersSpecific provisions are more than 20% 109,208 20,241 100% 109,208 20,241Specific provisions are less than 20% 25,332 257,835 150% 37,998 386,753

Due From local Commercial Banks (AAA to BBB-) 474,377 708,346 20% 94,875 141,669Claims on Financial Institutions/Primary Dealers/ Finance Companies (A+ to BBB)- 100,543 50% 50,272

Fixed Assets 755,667 720,660 100% 755,667 720,660Other Assets 76,997 99,927 100% 76,997 99,927Total Risk Weighted Assets 15,463,483 14,346,077 7,293,046 8,362,107Total risk adjusted balance for operational risk 984,923 776,825Total risk adjusted balances (credit risk, market risk, operational risk) 8,277,969 9,138,932


Year ended 31st December (Rs. Mn.) 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Operating ResultsIncome 449 631 830 947 1,056 1,286 1,741 1,974 2,269 2,250Interest income 429 620 797 908 1,024 1,203 1,696 1,941 2,216 2,165Interest expense 190 326 401 444 568 699 1,247 1,602 1,582 1,339Other income 20 11 33 39 32 82 46 33 52 85Operating expenses 94 131 168 197 253 272 359 385 439 513Provision for loss 64 7 14 17 5 43 54 79 107Profit before tax 189 174 254 291 217 309 93 (67) 168 291Income Tax & Finance VAT 64 32 56 109 101 136 72 25 112 156Profit after taxation 125 142 198 183 117 172 21 (92) 56 135

Liabilities and Shareholders’ FundsCustomer deposits 195 115 312 1,140 1,537 2,501 4,935 4,976 6,115 7,703Borrowings 2,256 3,289 4,107 4,314 4,966 5,783 6,092 6,641 5,150 4,781Other liabilities 534 789 783 909 688 621 666 867 1,315 1,041Shareholders’ funds 723 803 885 1,013 1,643 1,800 1,789 1,697 1,721 1,849Total 3,708 4,996 6,087 7,376 8,834 10,705 13,482 14,181 14,301 15,374

AssetsLoans and advances 3,563 4,766 5,826 7,119 8,100 10,134 11,869 12,149 11,913 12,840Cash, short term funds and statutory 36 104 85 173 561 352 1280 1091 1410 1,597Property, plant and equipment 20 29 33 42 85 85 111 671 721 756Other assets 89 97 143 42 88 134 222 270 257 181Total 3,708 4,996 6,087 7,376 8,834 10,705 13,482 14,181 14,301 15,374

RatiosReturn on average shareholders funds (%) 19.5% 18.61% 23.46% 19.28% 8.81% 9.99% 1.17% -5.28% 3.28% 7.58%Income growth (%) 19.7% 40.5% 31.5% 14.1% 11.5% 21.8% 35.4% 13.4% 14.9% -0.8%Return on average assets(%) 3.73% 3.26% 3.57% 2.72% 1.44% 1.76% 0.17% -0.67% 0.39% 0.91%Advance to deposits and borrowings (%) 68.8% 71.4% 75.8% 76.6% 80.3% 81.7% 92.9% 95.6% 94.6% 97.2%Property, plant and equipment toShareholders funds (%) 2.8% 3.6% 3.7% 4.1% 5.2% 4.7% 6.2% 39.5% 41.9% 40.9%Total assets to shareholders funds (times) 5.13 6.22 6.88 7.28 5.38 5.95 7.54 8.36 8.31 8.32

Share InformationMarket Value per Share (Rs.)High (Rs.) - - - - 401.00 235.25 192.00 135.00 191.75 600.00Lower (Rs.) - - - - 165.00 153.00 125.75 54.00 49.50 135.00Close (Rs.) - - - - 191.00 174.75 128.00 56.00 147.75 550.00Earnings per Share (Rs.) 34.51 34.35 48.03 44.39 26.71 27.39 3.26 (14.23) 8.72 20.91Price Earnings Ratio - - 3.64 4.39 7.15 6.38 39.26 (3.94) 16.94 26.30Net Assets per Share (Rs.) ** 199.59 194.78 214.68 245.68 268.19 278.16 276.49 262.26 265.99 285.68

ProfileOwnership - Government % - - - - 56 51 51 51 51 51 - Private % - - - - 44 49 49 49 49 49No of employees 274 277 278 276 290 300 286 289 364 425No of branches 19 20 20 20 20 20 21 21 26 28No of ATM (Access) - - - - - - - 4 10 225

Ten Year Statistical Summary


100601 02 03 04 05 07 08 090

3,000

6,000

9,000

12,000

15,000

Rs. Mn.

Advances Vs Funding

Advances

Deposits

Deposits & Borrowings

0601 02 03 04 05 07 08 09 10(150)

(100)

(50)

50

0

150

100

250

200

Rs. Mn.

Profitability

Profit After Taxation

Tax

0601 02 03 04 05 07 08 09 100

100

300

200

400

500

%

Balance Sheet Growth

Total Assets

Loans and advances

Shareholders’ funds

0601 02 03 04 05 07 08 09 100

100

200

300

400

500

600

Rs.

Share Value and Price

Net Assets per Share

Market Value per Share

Graphical Review


Share Information

As at 31-12-2010Distribution and Composition of Shareholders (As per rule No. 7.6(X) of the Colombo Stock Exchange)

December 31,2010

Resident Non Resident Total

Shareholders No of Share

holders

No of Shares

% No of Share

holders

No of Shares

% No of Share

holders

No. of Shares

%

1 - 1,000 1,986 334,986 5.18 12 2,501 0.04 1,998 337,487 5.22

1,001 - 10,000 93 290,144 4.48 3 5,400 0.08 96 295,544 4.56

10,001 - 100,000 20 509,700 7.88 0 0 0.00 20 509,700 7.88

100,001 - 1000,000 3 2,110,291 32.61 0 0 0.00 3 2,110,291 32.61

Over 1,000,000 1 3,218,000 49.73 0 0 0.00 1 3,218,000 49.73

Total 2,103 6,463,121 99.88 15 7,901 0.12 2,118 6,471,022 100.00

December 31,2009

Resident Non Resident Total

Shareholders No of Share

holders

No of Shares

% No of Share

holders

No of Shares

% No of Share

holders

No. of Shares

%

1 - 1,000 3,279 630,747 9.75 13 4201 0.06 3292 634,948 9.81

1,001 - 10,000 227 634,152 9.80 3 15,100 0.23 230 649,252 10.03

10,001 - 100,000 45 1,156,000 17.86 0 0 0.00 45 1,156,000 17.86

100,001 - 1000,000 4 812,822 12.56 0 0 0.00 4 812,822 12.56

Over 1,000,000 1 3,218,000 49.73 0 0 0.00 1 3,218,000 49.73

Total 3556 6,451,721 99.71 16 19,301 0.29 3572 6,471,022 100.00

Composition of Shareholders (As per rule No. 7.6(X) of the Colombo Stock Exchange)

December 31,2010 December 31,2009

No of Share holders

% No of Shares

% No of Share holders

% No of Shares

%

Individuals 2,001 94.48 655,276 10.13 3,412 95.52 1,662,219 25.69

Institution 117 5.52 5,815,746 89.87 160 4.48 4,808,803 74.31

Total 2,118 100.00 6,471,022 100.00 3,572 100.00 6,471,022 100.00


Twenty Five Largest Shareholders (As per rule No. 7.6(III) of the Colombo Stock Exchange)

Name Of Shareholder No. of Shares 2010

Percentage (%)2010

No. of Shares 2009

Percentage (%) 2009

1 National Housing Development Authority 3,218,000 49.73 3,218,000 49.73

2 Perpetual Capital (Pvt.) Limited 908,000 14.03 - -

3 Lanka Orix Leasing Company PLC 853,769 13.19 - -

4 Legalinc Trustee Services Private Ltd. 348,522 5.39 348,522 5.39

5 Seylan Bank Ltd. / Jayantha Dewage 79,700 1.23 100,000 1.55

6 Mr. D. Soysa 51,000 0.79 - -

7 DFCC Vardhana Bank Ltd./Mr. Chandaka Haren Ranil De Soysa

49,900 0.77 - -

8 Pan Asia Banking Corporation PLC / Mr. A. Sithampalm

39,000 0.60 - -

9 Sithlanka (Pvt) Ltd 30,500 0.47 - -

10 Urban Development Authority 30,000 0.46 30,000 0.46

11 Common Amenities Board 30,000 0.46 30,000 0.46

12 Mr. K. C. Vignarajah 24,000 0.37 - -

13 Aruna Enterprises (Pvt.) Ltd 22,100 0.34 - -

14 Mr.Seenivassagam 20,000 0.31 - -

15 Seylan Bank PLC/Liyanage Saliya Ignatious Perera 19,700 0.30 - -

16 Associated Newspapers of Ceylon Ltd 18,000 0.28 - -

17 Dr. Somadasa 15,200 0.23 - -

18 National Water Supply & Drainage Board 12,000 0.19 - -

19 Colombo Commercial Company (Engineering) Ltd 12,000 0.19 - -

20 Road Development Authority 12,000 0.19 - -

21 State Engineering Corporation 12,000 0.19 - -

22. Mr. Munasinghe 11,300 0.17 - -

23. Carson Cumberbatch PLC 11,000 0.17 - -

24. Mr. Rasan Mohamed 10,300 0.16 - -

25. Mr. Eheliyagoda 10,000 0.15 - -

Total 5,847,991 90.37 3,726,522 57.59


Market Prices (As per rule No. 7.6(XI) of the Colombo Stock Exchange)

2010 Rs.

2009 Rs.

Highest 600.00 191.75

Lowest 135.00 49.50

Year end 550.00 147.75

Information on Ratios (As per rule No. 7.6(XI) of the Colombo Stock Exchange)

2010 2009

Dividend per share (Rs.) 5.00 (proposed) 5.00

Dividend pay out ratio (%) 24.99 % 57.32%

Net Assets value per share (Rs.) 284.78% 265.99%

Earning per Share (Rs.) 20.91% 8.72%

The Board of Directors of the Bank has recommended a final divided of Rs. 5/- per share, for the year ended 31st December 2010 for approval by the shareholders at the 26th Annual General meeting of the HDFC Bank.

Directors and General Manager /CEO Shareholding (as at 31st of December)

2010 2009

Mrs. S. N. Wickramasinghe (Chairman) 1000 NilMr. W.A.T.Fernando Nil NilMr. W.J.L.U.Wijayaweera 300 300Mrs. K.W.P.Dayarathna Nil NilMrs. C. Wijayawardhana Nil NilDr. D. S. Wijesighe 100 NilMr. A. M. Chandrasagara 800 NilMr. W. D. R. D.Goomarathne Nil NilMr. S. A. J. Samaraweera Nil NilMr. S. M. Amerasekara (GM/CEO) Nil Nil

The percentage of public holding as at December 31.2010 was 23.01% (50.21%as at December 31, 2009 )

Share Information contd.


Notice of the Annual General Meeting

Notice is hereby given that the twenty sixth (26th) Annual General Meeting of the Housing Development Finance Corporation Bank of Sri Lanka is convened on Monday the ninth (09th) day of May 2011 at the Grand Oriental Hotel at No 02, York Street, Colombo 01, Sri Lanka, at 10.00 a. m. in the forenoon when the following Ordinary and Special Business will be transacted.

Ordinary Business 1. To read the notice convening the meeting

2. To receive and consider and adopt the Annual Report of the Bank and the Audited Accounts of the bank for the year ended 31st December 2010 together with the Report of the Auditor thereon.

3. To declare a dividend of Rupees Five (Rs. 5/-) per share as recommended by the Board of Directors of the HDFC Bank.

4. To appoint two Shareholding Directors.

5. To re-appoint the Auditor General of Sri Lanka, as Auditor of the HDFC Bank and authorize the Board of Directors to determine and approve their remuneration.

6. To transact any other business of which due notice shall be given.

Special BusinessSubject to the approval of the Central Bank, to consider and to pass a special resolution, in order to incorporate the following two paragraphs to the existing Rules of the HDFC Bank, which shall read as;

42 (c). Joint ShareholdingThe HDFC Bank shall not register more than three persons as joint holders (including the principal holder) of any shares (except in the case of executors).

148. Compliance with RulesNotwithstanding anything to the contrary contained in the Rules of the HDFC Bank, so long as the Bank is listed on the Colombo Stock Exchange, the Bank shall comply with the Rules of the Colombo Stock Exchange and the Central Depository system, which shall be in force from time to time.

By Order of the Board

Dharshani De SilvaCompany SecretaryHDFC BankColombo

23rd of March 2011


Notes


Form of Proxy

FORM OF PROXY

I/We………………………………………………………………………………..……………..……………..………………..…………………

of ………………………………………………………..……………..……………..…………………………………………………………….Being a member / members of Housing Development Finance Corporation Bank of Sri Lanka herby appoint.

1. Mr./Ms. ……………………………………………… of ……………………………………………. whom failing





As my/our proxy to vote for me /us on my / our behalf at the Annual General Meeting of the Bank to be held on 9th of May 2011 at 10.00 a.m. and at any adjournment thereof, and at every poll which any be taken in consequence thereof.

Singed this ……….……………….… day of ……………………………..………. 2011.

Signature

Note : 1. A shareholder entitled to attend, or attend and vote at the meeting is entitled to appoint a proxy holder to attend, or attend

and vote as the case may be, in his / her stead and a shareholder who is entitled only to attend and speak at the meeting is entitled to appoint a proxy holder to attend and speak on his / her behalf.

2. A proxy holder need not be a shareholder of the Bank.

3. The form of proxy should be returned to The Secretary “Housing Development Finance Corporation Bank”, P. O. Box 2085, Sir Chittampalam A Gardiner Mawatha, Colombo 02, not less than 48 hours before the time appointed for holding the meeting.


Instructions for completion

01. To be valid this form must be filled, signed and deposited with the Secretary, HDFC Bank, P.O. Box 2085, Sir Chittampalam A Gardiner Mawatha, Colombo 02, not less than 48 hours before the time appointed for holding the meeting.

02. The form of proxy must be singed by the appointer or by Attorney duly authorized in writing.

03. In the case of a company or corporation or an incorporated body the form of proxy must be either under its common seal or under the hand of an officer or Attorney duly authorized.

04. In the case of joint holder, only one needs sign. The Votes of the senior holder who renders a vote will only be counted.

05. If you wish to appoint any person other than the chairman as your proxy, please insert the relevant details at 1 to 5.

Form of Proxy contd.

Contents

Corporate Information

NameHDFC Bank of Sri Lanka. ( Housing Development Finance Corporation Bank of Sri Lanka).

Registered and Head OfficeAddress P.O. Box 2085, Sir Chittampalam A Gardiner Mawatha, Colombo 02.Telephone : 2356800, 2446241, 2446239, 2447354, 2451462, 2446391 Fax : 2446392, 2356829, 2356827, 2432190Web Site : www.hdfc.lk E-mail : [email protected]

Legal FormA licensed specialized bank under the provisions of Housing Development Finance Corporation, Act No. 07 of 1997, amended by Act No. 15 of 2003.

Stock Market ListingThe ordinary shares of the Bank are listed in the Colombo Stock Exchange (CSE)

Board of DirectorsMrs. S. N. Wickramasinghe (Chairman)Mr. W. A. Terence FernandoMr. W.J. L Upali WijayaweeraMrs. K. W. Piyaseeli DayarathneDr. D. S. WijesingheMr. W.D.R. D. GoonaratneMrs. Chandanie WijayawardhanaMr. S. A. Jayantha SamaraweeraMr. A. M. Chandrasagara

Company SecretaryMrs. Dharshani De SilvaAttorney – at – Law & Notary Public,Company Secretary, Commissioner of Oaths.Tel. 2423362E-mail [email protected]

RegistrarsSSP Corporate Services (Pvt.) Limited 101, Inner Flower Road, Colombo 03.Tel. 2573894 Fax : 2573609E-mail : [email protected]

Year of Incorporation originally1984

Credit RatingThe Bank has been assigned BBB+ ( lka) by Fitch Ratings Lanka Ltd.,

BankersBank of Ceylon, Corporate Branch, Echelon Square, Colombo 01

Sampath BankNo.110, Sir James Pieris Mawatha, Colombo 02

People’s BankNo. 75, Sir Chittampalam A Gardiner Mawatha, Colombo 02.

Commercial Bank of Ceylon LimitedCommercial House, Union Place Branch, Colombo 02

Pan Asia Banking Corporation Ltd,Colombo Road, Gampaha

Corporate ManagementMr. Suresh Amerasekera - General manager /CEOMr. S. Dissanayake - DGM (Finance)Mr. D. Vidana Pathirana - AGM (Business Development & Marketing)Mr. W. M. A. Bandara - AGM (Information Technology)Mr. A. J. Atukorala - Chief Internal AuditorMr. S. A. Alahakoon - Head of CreditMr. L. Edirisinghe - Head of Human ResourcesMr. A. M. D. G. Abeyawardena - Head of TreasuryMr. M. Y. Piyasena - Senior Manager (Recoveries)

Board Integrated Risk Management CommitteeMrs. S. N. Wickramasinghe (Chairman of the Committee)Mrs. C. WijayawardhanaMr. A. M. ChandrasagaraDr. D. S. Wijesinghe

Board Nomination CommitteeMrs. S. N. Wickramasinghe (Chairman of the Committee)Mr. W. J. L. U. WijayaweeraMrs. K. W. P. Dayarathne

Board Audit CommitteeMr. A. M. Chandrasagara (The Chairman of the Committee)Mr. W. A. T. FernandoMrs. C. Wijayawardhana

Board HR and Remuneration CommitteeMrs. S. N. Wickramasinghe (Chairman of the Committee)Mr. W. J. L. U. WijayaweeraMrs. K. W. P. Dayarathne

Investor InformationDeputy General Manager (Finance)P.O. Box 2085, Sir Chittampalam A Gardiner Mawatha, Colombo 02.T.P 2356800, 2446241, 2446239. D/L 2451464, Fax 2356829E-mail [email protected]

AuditorsAuditor General - Department of Auditor General,Torrington Square, Colombo 07

Our Vision 2Our Mission 2Our Objectives 3Values 3What We Have Achieved in 2010 4What We Have Gained in 2010 5Event Calendar 6Our Products and Services 8Chairman’s Statement 10General Manager/ Chief Executive Officer’s Review 14Board of Directors 18Profiles of the Board of Directors 19Corporate Management 21Senior Management 24Regional Managers 26Managers 27Branch Managers 27HDFC Bank of Sri Lanka - Branch Locations 28Our Branch Network 29Management Discussion and Analysis 31Financial Review 41Risk Management 43Sustainability Report 53Assurance Report 98Global Reporting Initiative (GRI) Index 100Corporate Governance 109Attendance for Board Meetings – 2010 144Attendance for Board Sub Committee Meetings – 2010 145Statement of Internal Control 147

Financial ReportsReport of the Board of Directors 151Reports of the Board Sub Committees 156The Board of Director’s Responsibilities for Financial Reporting 161Auditor’s Report 162Consolidated Income Statement 164Consolidated Balance Sheet 165Consolidated Cash Flow Statement 166Consolidated Statement of Change in Equity 167Significant Accounting Polices 168Notes to the Financial Statement 171Maturity Analysis 180Statement of Value Added 181Capital Adequacy - Solo Basis 182Ten Year Statistical Summary 184Graphical Review 185Share Information 186Notice of the Annual General Meeting 189Notes 190Form of Proxy 191Corporate Information Inner Back Cover

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HDFC Bank of Sri LankaAnnual Report 2010

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