hdfc annual report 2008

Standing Strong & Firm

Annual Report 2008

Standing Strong & FirmStanding Strong & Firm

Our VisionTo be the premier financial services institution for purposes of enhancement of lifestyles of Sri Lankans.

Our MissionTo be a dominant player in the financial services 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.

Our ObjectivesCustomersTo provide a caring customer service anticipating solutions required by our customers and innovatively satisfying them beyond expectations.

ShareholdersTo optimize return on shareholders’ funds.

OrganisationTo commit ourselves to the highest standards in corporate and business ethics whilst maintain-ing financial stability and growth.

EmployeesTo motivate develop recognize and reward our employees.

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

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

EthicsMaintaining the highest ethical standards worth of a leading corporate citizen.

Last year was an extremely challenging period for the Bank. We faced a tough operating environment. The challenges were tough and continued to be many; high borrowing costs, a drastic contraction of the housing market, upward inflationary pressures, and turmoil in the local and global financial markets to name a few.

Despite these external challenges we stand firm and strong, confident of the future. Our strong fundamentals, financial strength, and diversified business model makes a compelling case to endure shareholder value. We have a well-developed culture of financial discipline and astute capital and risk management system. We have the industry best capital adequacy ratio, a strong balance sheet and a loan portfolio tied to real, solid assets. The solid financial position together with the team of skilled and dedicated employees has enabled us to capitalise on strengths and help make prudent decisions. This affords us the strength we need in crisis times.

We are confident of the future. Our growing and diverse set of businesses solutions will enable diversifying the earnings base, improve bottom line performance, and empower more Sri Lankans to own a home.

Interest IncomeGrowth

14%

Loans & Advances

Rs.12,060Million

Gross Income

‘04 ‘05 ‘06 ‘07 ‘08

1,10

0 1,20

0 1,40

0 1,80

0 2,00

0

Rs.M

n

Standing Strong & FirmGazing to the future

‘06

Total Deposits

‘04 ‘05 ‘07 ‘08

1,10

0

1,50

0 2,50

0

5,00

0

5,05

0

Rs.M

n

Clients 142,500(2008)

Total Assets

‘04 ‘05 ‘06 ‘07 ‘08

7,50

0 8,25

0 10,0

00 13,0

00

13,5

00

Rs.M

n

Total Loan Volume

‘04 ‘05 ‘06 ‘07 ‘08

7,14

6 8,14

3 10,1

82

11,9

60 12,0

60

Rs.M

n

Contents

Financial Highlights 3

Chairman’s Review 4

Board of Directors 6

Chief Executive offi cer/General Manager’s Report 9

Corporate Management Team 11

Divisional Heads / Executive Management Team 12

CSR and Sustainability Report - 2008 13

Corporate Governance 26

Branch Managers 34

Product Portfolio of the Bank 36

Risk Management 37

Report of the Audit and Management Committee 38

Report of the Directors 39

Director’s Responsibilities for fi nancial Reporting 42

Report of the Board Sub Committees 43People Management 45

Financial Review 47

Financial Reports

Auditor’s Report 50

Consolidated Income Statement 52

Consolidated Balance Sheet 53

Consolidated Cash Flow Statement 54

Statement of Changes in Equity 55

Maturity Analysis as at 31st December 2008 56

Signifi cant Accounting Policies 57

Notes to the Financial Statements 60

Statement of Value Added 67

Ten Year Summary 68

Share Information 69

Capital Adequacy 70

Notice of Meeting 71

Notes 72Enclosed - Form of Proxy Inner Back Cover - Corporate Information

HDFC BankAnnual Report

3

Financial Highlights

Bank 2008 2007 Change

Rs.’000 Rs.’000 %

Results for the yearGross Income 1,974,387 1,741,342 13.38Profi t before Taxation (67,503) 93,122 (172.49)Provision for Taxation 24,596 72,048 (65.86)Profi t after Taxation (92,099) 21,074 (537.03)Revenue to the Governments 24,572 75,277 (67.36)At the year endShareholders, Fund ( Capital & Reserves ) 1,697,100 1,789,199 (5.15)Deposits from customers 4,975,998 4,934,616 0.84Gross loans & Advance to Customers 12,059,819 11,959,712 0.84Total Assets 14,181,119 13,481,783 5.19Information per Ordinary shareEarnings ( Basic ) ( Rs. ) (14.23) 3.26 (537.03)Dividends ( Rs. ) - 5.00 (100.00)Net Assets value per Ordinary share ( Rs. ) 262.26 276.49 (5.15)Market value at the year end ( Rs. ) 56.00 128.00 (56.25)Financial RatiosReturn on Average shareholders’ Fund ( % ) (5.28) 1.17 (549.99)Return on Average Assets ( % ) (0.67) 0.17 (482.11)Price Earnings ( Time ) - Ordinary share (3.93) 39.30 (110.01)Dividend Yield ( % ) - 3.91 (100.00)Dividend Cover - 0.65 (100.00)Share Holders Equity to Total Assets ( % ) 11.97 13.30 (10.02)Earning Yield Ratio ( % ) (25.42) 2.54 (1,098.92)Statutory RatiosLiquid Assets ( % ) 21.19% 22.96% (7.72)Capital Adequacy -Tier I ( % ) - Minimum Required 5 % 22.05% 31.08% (29.07)Tier II ( % ) - Minimum Required 10 % 23.12% 31.84% (27.39)

Gross Loans and Advances & Total Deposit

‘04 ‘05 ‘06 ‘07 ‘08

7,00

0

8,00

0

10,0

00

12,0

00

12,0

00

1,10

0

1,50

0 2,50

0 4,90

0

Loans & Advances Total Deposit

Rs.M

n 5,00

0

Gross Income

‘04 ‘05 ‘06 ‘07 ‘08

1,10

0 1,20

0 1,40

0 1,80

0 2,00

0

Rs.M

n

Total Assets

‘04 ‘05 ‘06 ‘07 ‘08

7,50

0 8,25

0 10,0

00 13,0

00

13,5

00

Rs.M

n

4


Chairman’s Review

I take pleasure in welcoming you to the twenty fourth Annual General Meeting of the Housing Development Finance Corporation Bank of Sri Lanka, widely known as the HDFC Bank, to present you the Annual Report themed ‘Standing Strong & Firm Gazing into the Future” and audited fi nancial statements along with a comprehensive review of the bank’s activities during the fi nancial year concluded December 31, 2008.

Sri Lankan EconomyOur economy has demonstrated its resilience by recording a real growth of 6 per cent in 2008 in the midst of unprecedented and unfavourable developments globally and domestically.

According to the Central Bank of Sri Lanka, during the fi rst part of the year, food and energy crises in the global economy was threatening the macroeconomic stability in Sri Lanka by way of sharply widening trade and current account defi cits, raising infl ation to the highest ever levels since 1980s and exerting pressures on fi scal balances due to tax exemptions arising from duty waivers granted in order to minimise the impact of high food and energy prices on domestic cost of living coupled with high defence expenditure and the cost of rehabilitation,

resettlement and reconstruction in the Eastern Province.

Housing DevelopmentDuring the Financial Year 2008, a considerable growth in the demand for housing increased as a result of the rising population, growing income levels, and urbanization due to development which is followed the change of lifestyle. Even though this growth pattern was highly visible, the Government involvement in developing new housing projects, was below the demand. As a result, the private sector has emerged as the major provider of houses for middle and high income people, while the Government continues to be involved in providing housing facilities for low and middle income households and specifi c groups where HDFC Bank plays a key role.

Despite the high potential in creating a win-win situation for lender as well as the borrower, high cost of funds have impacted heavily on the growth of housing sector. According to Central bank of Sri Lanka, refl ecting a cautious lending maintained by fi nancial institutions, the total bank credit granted for housing purposes grew at a lower rate of 7 per cent to Rs. 149 billion in 2008 where demand for new houses also declined considerably with the economic slowdown.


5

Chairman’s Review (Contd...)

Supporting the stateHDFC Bank happens to be one of the two licensed specialized fi nancial giants engaged in lending mainly to the low and middle income segments of the Sri Lankan society. With the state backing, we have been successful to uphold the Government’s ten year plan in par with ‘Mahinda Chinthana’ political manifesto which envisages a residency to every household based on population density, suitability of available lands, and a sustainable environment.

During the period in focus, HDFC Bank was successful in granting a considerable number of credit facilities for housing purposes especially to the state sector employees. Under this much appreciated scheme we have been successful in granting 1,601 families with necessary credit facilities in improving their living standards by building new houses or improving the existing.

Standing strongTaking a tactical decision to overcome this disparity, HDFC Bank was successful in formulating strategies which managed to mobilize funds at low rates. Taking few more steps we got the involvement of our great team of employees in helping the bank to access cheaper funds which was highly successful. Adding more to this, HDFC Bank also restructured and repositioned itself to cater to a wide spectrum of prospectors which include farmers, fi shermen, and market vendors.

As a result of the innovative information technological development and the much wanted aggressive marketing strategy HDFC Bank also introduced the Palmtop Banking to tap the enormous potential found at grass route levels in our society enabling them to bank with us.

Adding more to this as well as to develop core competencies of the HDFC Bank, we were able to re-shuffl e the senior management while employing a new General Manager/ Chief Executive Offi cer who is warmly accepted to the HDFC Bank family. The new General Manager/ Chief Executive Offi cer who is considered to be an asset to the institution was recruited in fi lling the vacancy created by the retirement of Mr. C.A. Sarathchadra who had very long successful years of service in this organisation. During his tenure he was able to take HDFC Bank to new heights; changing the bank to be a modern development bank from its old corporation style, listing at the Colombo Stock Exchange, and introducing a range of innovative products.

Gazing into the futureIn this scenario, the year 2009 is expected to experience a fl at growth. This has been confi rmed recently by the Central Bank of Sri Lanka predicting a growth rate of 4.5 per cent to 5 per cent forecasted for 2009. The main focus HDFC Bank for the Financial Year 2009 would be to change our selves from a traditional housing bank to a cost effective fund mobilizing

development Bank. In this operation we planned to tap communities that trust the state sector for its security and solidarity when it comes to investments.

We at HDFC Bank consistently focus on continuous development of our human resources and the creation of an environment, which is best-suited for employees through various activities. Our success has been built on the collective skills, knowledge and quality of our human capital. Continued focus on having remuneration clearly aligned with performance related objectives has demonstrated consistent and continuous improvement.

Development opportunities in North and East Northern and Eastern Provinces are enriched with a range of natural resources such as fertile agricultural lands, mineral ores, forests, scrublands, wet lands, beautiful beaches, the coastal shallow sea from Trincomalee to Mullaitivu enriched with a very high fi sh density in seas around the country and coral deposits. Government in its Budget 2009, has announced a comprehensive programme called ‘Vadakkin Wasantham’ covering all districts in the provinces. Accordingly, this programme primarily aims at resettlement of people and rehabilitation and reconstruction of economic infrastructure to restore livelihoods and basic needs such as water supply, sanitation, electricity, health and education facilities etc. and the creation of income generating activities in the province. The reconstruction of the rail track and highways connecting the North and the South and schools, hospitals, government offi ces and about 80,000 houses are envisaged in this plan, creating a wide opportunity for the Bank to expand its core business, while serving to the nations in a most essential time.

I would like to conclude my statement by extending my appreciation to His Excellency the President Mahinda Rajapakse for His Excellency’s fi rm support and lasting vision which helped taking Sri Lanka to new heights, Minister of State Revenue Finance Hon. Ranjith Siyambalapitiya, Secretary to Treasury Mr. S. Abeysinghe, Central Bank of Sri Lanka and its Governor Mr. Ajith Nivard Cabraal, General Manager/CEO, Mr. Suresh Amarasekera, and other members of the corporate and executive management team, and also like to thank the Board of Directors for placing their support. Finally, my sincere appreciation goes to all members of the staff of HDFC Bank for their dedicated service and to our shareholders for their loyalty towards HDFC Bank.

S.M.Yaseen Chairman

30.05.2009

6


Board of Directors

Seyad Mohamed Mohamed Yaseen Chairman

Mr. Yaseen is the Chairman of the HDFC Bank and was appointed to the Board in June 2004. He is also a Director of Ocean View Development Company; a joint venture between Urban Development Authority and National Housing Development Authority. He holds a LL.B from University of Colombo and is an Attorney–at–Law by profession with 17 years of active experience at Bar.

Wallaba Jayatissa Liyanage Upali WijayaweeraDirector

Mr. Wijeweera was appointed as Director of the HDFC Bank in February 2004 and is also functioning as the Commissioner General of Labour at the Department of Labour. He has joined the Department of Labour in 1985 and has held several important posts; Assistant Commissioner of Labour, Senior Assistant Commissioner of Labour, and Deputy Commissioner 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 holds a B.Com (special) from University of Kelaniya and PGD in Public Administration from SLIDA (Sri Lanka).

Ubaya Narayanage Jinasena Director

Mr. Jinasena was appointed as Director of HDFC Bank in June 2007. He began his career as an Accountant (Costing) in 1967 at the Ceylon Cement Corporation and has served as Assistant Finance Manager of Ceylon Shipping Corporation, Managing Director – State Graphite Corporation, Lecturer in Management Accountancy and Financial Analysis of Nangyang University - Singapore , Chief Consultant & Managing Partner – M/s. Consulanka Engineering, Financial and Management consultants (a multi disciplinary Consultancy Practice), Managing Consultant - Management Consultancy and Merchant Banking Division of the Bank of Ceylon, General Manager/Chief Consultant of Merchant Bank of Sri Lanka Ltd, Chairman - Consulanka Limited, Joint Managing Director – (Finance & Administration) – Quickshawa Group of Companies, Financial Consultant

S. M. M. Yaseen Chairman

W. J. L. U. Wijayaweera

DirectorW. A. T. Fernando

DirectorU. N. Jinasena

Director


7

Board of Directors (Contd...)

of Telecommunication Board of Sri Lanka, Group Financial Controller in Palm Resort Berhad, General Manager of one of the Group’s Subsidiary companies in Singapore, Chairman - Bogala Graphite Lanka Ltd (a listed Company), Chairman - Lanka Phosphates Limited, Managing Director - Lanka Glass Manufacturing Co. Limited, and Chief Executive Offi cer of Tri Star Apparel Exports (Pvt) Ltd. Currently he is the Financial and Investment Consultant advising many local and foreign companies, He holds a B.Com from the University of Ceylon followed by a MBA from Harriet–Watt University - UK. He is also a Fellow (FCMA) of Chartered Institute of Management Accountants - UK, Chartered Association of Certifi ed Accountants – UK & Certifi ed Public Accountant of the Institute of Certifi ed Public Accountants - Singapore, and Chartered Management Institute - UK. He further holds a Diploma in Accountancy from the Ceylon Technical College, PGD in Port Management and Administration from Germany. He is a registered Company Secretary and a Member of Business Recovery and Insolvency Practitioners’ Association of Sri Lanka.

Widanalage Ajith Terence FernandoDirector

Mr. Fernando was appointed as Director of HDFC Bank in June 2004. Currently he is a Director of Capital Alliance Limited, Ashthi Holdings (Pvt) Ltd, Capital Alliance Money Brokers (Pvt) Ltd, Capital Alliance Fund Management Ltd, Ceylon Tea Brokers Ltd, Lanka Call (Pvt) Ltd, ADZ Insurance Brokers (Pvt) Ltd., Lanka Financial Services Bureau Ltd, Anglo Ceylon Estates (Pvt) Ltd, Capital Alliance Holdings Limited, Capital Alliance Securities (Pvt) Ltd, The Financial Ombudsman Sri Lanka (Guarantee) Ltd. He is a Fellow of the Chartered Institute of Management Accountants UK and has a MA in Financial Economics from the University of Colombo.

Undugodage Nimalrathne Rodrigo

Director

Mr. Rodrigo was appointed as Director of HDFC Bank in June 2007 and retired from the Board in March 2009. He was one of the Additional Secretaries to the Ministry

P. Sumanapala

DirectorM. M. A. Kalam

DirectorU. N. Rodrigo

DirectorA. W. Dayananda Director

Mrs. D. De SilvaBoard Secretary

8


of Housing. He started his career in 1978, as an Assistant Superintendent of Police and continued his service up to 1983. Thereafter he served as Assistant Secretary, Assistant Government Agent, Provincial Secretary, Director of Janakala Centre, Senior Assistant Secretary, Director - Samurdhi & Lottery Fund, Chief Offi cer - Samurdhi & Public Security Fund, Director – Samurdhi Authority and Commissioner / Secretary of the Urban Council & Pradeshiya Sabhawa of Balangoda. He holds a B.A from University of Peradeniya followed by PGD in Public Administration from the Postgraduate Institute of Management – University of Sri Jayawardenapura.

Mohamed Musthafa Abul Kalam Director

Mr. Kalam was appointed as Director of HDFC Bank in June 2006. Currently he is the Chairman of Condominium Management Authority, a member of the All-Party Representative Committee (APRC) and also serves as an Advisory Board Member apart from being a Governing Council Member of the Eastern University of Sri Lanka (EUSL) since 2005 and an Ex-Member of the Board of Directors of the Sri Lanka Broadcasting Corporation (SLBC). He was the past Executive Director of the Ceylon Shipping Corporation from 1994 to 2001. He holds a LL.B from the University of Colombo followed by a PGD from World Maritime University, Sweden.

Pathirannehelaya SumanapalaDirector

Mr. Sumanapala was appointed as Director of HDFC Bank in January 2006. Currently he is a Director of the Department of National Planning in the Ministry of Finance in addition to the 26 years of experience gathered from public service. He started his career in 1979, as an Assistant Lecturer at the University of Peradeniya. In 1982 he joined the Department of National Planning as a Planning Offi cer and has been promoted as the Additional Director subsequently. He holds a B.A (Hons.) in Economics from the University of Peradeniya followed by a MA in Regional Development and Planning from Institute of Social Studies, in the Netherlands.

Alahapperuma Wijesinghe Dayananda Director

Mr. Dayananda was appointed as Director of HDFC Bank in June 2007. Currently he is the Vice Chairman and a Directors of Housing Development. He began his career in 1975 as a Graduate Teacher and thereafter joined Imperial Motors. In 1991 he went abroad and served as Manager at Yohira Shoji Corporation, Saitama Ken in Japan till December 2004. He holds a B.Ed (special) from the University of Ceylon followed by a Diploma in Social Studies.

Mohamed Ibrahim Mohamed Rafeek Director

Mr. Rafeek was appointed as Director of HDFC Bank in June 2006 and he was the Chairman of the National Housing Development Authority. Further, he served as a Consultant to the Ports Operations and as a Directors of Urban Development Authority (UDA), Palmyra Development Board, Real Estate Exchange (Pvt) Ltd and Ocean View Development Company Ltd. He was the past Vice Chairman of Sri Lanka Ports Authority (1994 – 2000) and the past Chairman of Rehabilitation Authority (2001 – 2002).

Mrs. Dharshni De SilvaBoard Secretary / Secretary of the Bank

Joined the HDFC in 1999 and appointed as the Board Sectary and the Secretary of the Bank in year 2005. She is an attorney at law by profession and she counts more than 15 years experience as a lawyer. She is a registered Company Secretary.

Board of Directors (Contd...)


9

CEO / General Manager’s Report

The year under review has been a period where unprecedented situations came up with many countries not excluding the emerging economies scrambling to weather the storm.

HDFC Bank, though not hit with the global recession but has faced a challenging period where we continued to invest in every aspect of our core businesses and setting in place the business models necessary to ensure the growth and sustainability of the main businesses, well into the future.

As such, we invested in operational excellence - creating management structures, operating processes and systems that will lead to enhanced effi ciency and competitiveness. We also invested in people, building up a line of succession and talent pool that will take the HDFC Bank forward in reaching its long-term goals while recognizing the Government policies despite the profi tability factor.

Performance Analysis

Your bank continued its consistent growth paradigm in a diffi cult milieu as mentioned above and have managed to record a total income of Rs. 1,974 million against Rs. 1,741 million in the previous year, which is an increase of 11.8 per cent.

However, interest income being reported as Rs. 1,941 million during the period in focus, interest expenses reaching high as Rs. 1,602 million has stifl ed the net interest income at Rs. 339 million. During the Financial Year 2008, reported net interest income was Rs. 339.24 which is a decline of Rs. 149.75 against Rs. 448.99 reported in Financial Year 2007. Meanwhile, the none interest expenses consisted with personnel costs, provision for staff retirement benefi ts, premises, equipment and establishment expenses, operating expenses, and provision for loan losses reaching a total of 439.8 million in Financial Year 2008 reported an increase of Rs. 38.2 million against Rs. 401.6 in previous year which has helped reducing the operating profi ts on ordinary activities before taxation to report a loss of Rs. 68 million.

Even though the HDFC Bank has reported a loss during the Financial Year 2008, its performance has been reported to have increased on a marginal note. The value of housing loans and advances have increased to Rs. 11,915 million against Rs. 11,869 million which is an increase of Rs. 46 million. Adding more to the growth side, the total assets increased by Rs. 697 million to reach Rs. 14,179 million in 2008 against Rs. 13,482

10


CEO / General Manager’s Report (Contd...)

million in the previous year. Therefore, the earnings per share have reduced to a negative Rs. 14.59 during the Financial Year 2008 against Rs. 3.26 in Financial Year 2007. Government monetary policy

Central Bank of Sri Lanka continued its tight monetary policy stance in 2008 by resorting to a more direct approach of curtailing market liquidity under its strategy of conducting monetary operations within the monetary targeting policy framework.

Under this strategy, a greater focus was placed on the more stringent quantitative controls on reserve money thereby allowing market interest rates to adjust upward. In 2008, the quarterly targets for reserve money were based on quarterly averages of daily reserve money, unlike the strategy pursued in 2007, where targets were set in terms of end-quarter levels of reserve money. This new framework ensured greater discipline in the movements of reserve money as the stock as at a given point of time could include transitory components as well.

CBSL kept its policy interest rates unchanged during 2008 as it relied more on quantity control strategies through which market interest rates were allowed to adjust upward. Accordingly, the Repurchase rate and the Reverse Repurchase rate of the Central Bank remained at 10.50 per cent and 12 per cent, respectively. The Penal rate, introduced in November 2007, at which commercial banks and primary dealers were allowed access to the reverse repurchase window when they exhausted their quota at the Reverse Repurchase rate, also remained unchanged at 19 per cent throughout 2008. The upward adjustments in market interest rates through tight monetary policy helped contain the excessive expansion in credit as expected. With the decline in infl ation during the second half of the year, real interest rates in many market segments turned positive.

Industry Impact

The construction sector was impacted by these developments in the money market and thereon the housing fi nance market. HDFC’s core business is to assist the housing needs of the middle and low income sectors, and their affordability took a beating from the high cost of housing credit, residential properties and high infl ation.

The housing fi nance market was affected by high interest rates that prevailed in 2008. Refl ecting a cautious lending maintained by fi nancial institutions, the total bank credit granted for housing purposes grew at a lower rate of 7 per cent to Rs. 149 billion in 2008. With the economic slowdown,

the demand for new houses also declined considerably.

Once civil disturbances are minimized as expected by the Government, Sri Lanka would again be attractive for foreign investments in particular, and the country’s capital inadequacy would be partly solved and foreign debt reduced. This will help improve stability in money markets, rate of infl ation, interest rates and the overall economy from grassroots up to industries. This would also help HDFC, amongst others, to recover from this current situation of negative interest spread.

Digital Revolution

HDFC adopted modern technology to keep abreast with growth and to best serve its constantly growing customers; without compromising on recurrent expenditure. Our investments in information technology have facilitated to expand the market base to grass root level by using a hand held electronic devise to provide a fl exible mode of banking.

Through this measure HDFC is adding the country’s informal fi nancial segment into the formal banking sector thanks to wider reach and personalized solutions.

We hope to expand our branch network and improve delivery channels. We have already commenced installing ATM machines and discussing with a commercial bank with a Island wide coverage with ATMs to achieve this objective. We are also planning to improve the awareness of the bank and utilize our palm top banking to offer wide range of facilities to the existing customers. Furthermore, we are looking at avenues to improve fee based income.

I wish to take this opportunity to express my gratitude to the Chairman Mr. S.M.M. Yaseen and other Directors of the Bank for their dedication, co-operation and guidance. I am also thankful to the corporate and executive management team and the employees without whose commitment; skills and expertise the Bank would not have been able to achieve the results it did in 2008. We are grateful to the shareholders of the Bank who have always been a source of inspiration to the Board of Directors and the staff, and we expect their guidance in the discharge of our duties and responsibilities in the future too.

S. M. AMERASEKERA Chief Executive Offi cer/General Manager

30.05.2009


11

Corporate Management Team

S. M. AMERASEKERA Chief Executive Offi cer/General Manager

Mr. Suresh Amerasekera is a senior banker with nearly 30 years of experience in commercial banking and was appointed as the Chief Executive Offi cer/ General Manager at HDFC Bank with effect from 02nd October 2008.

He has obtained his initial training from the Colombo branch of State Bank of India, Bank of America, and Citi Bank and was also attached to a leading private commercial bank in Sri Lanka as an Assistant General Manager.

He holds a Master of Business Administration (International) from Edith Cowan University, Australia and an Advanced Diploma in Management Accounting awarded by the Chartered Institute of Management Accountants UK.

S. DISSANAYAKEDeputy General Manager (Finance)

Mr. S. Dissanayake is an Associate Member of the Insti-tute of Chartered Accountants of Sri Lanka (ICASL). He holds a Bachelor of Science (special - Business Administra-tion) degree, from the University of Sri Jayewardenepura. He counts more than 20 years experience in public and private sector where he headed the fi nance 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 division since the assumption of the new portfolio as Deputy General Manager (Finance) for over seven years.

D.V. PATHIRANAAssistant General Manager (Project Finance & Treasury Management)

MR. D. V. Pathrana is an Associate Member of the Institute of Charted Accountants of Sri Lanka (ACA) and a Fellow a Member of the Institute of Certifi ed 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 20 years experience in fi eld of Auditing, Financing, Management, Management Accounting, projects and Investment Promotion both in Sri Lanka and overseas.

In his current capacity, responsible for Treasury Operation, Fund Mobilization, Projects & Corporate Finance and Business Development.

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; confi guring and maintaining a wide range of UNIX based system, specialized in confi guring and maintaining Informix Database, Network administrative activities and Project Management. He has attended key training courses 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.

12


Divisional Heads / Executive Management Team

1. Mr. M. Y. Piyasena Senior Manager (Recoveries)

2. Mrs. W. W. D. S.C. Perera Manager (Legal)

3. Ms. H.H.Gunathilake. Manager (Fund Mobilization& Project)

4. Ms. De Silva Bank/Board Secretary

5. Mr. C. R. P. Balasooriya Accountant/Manager (Savings & Fund Mobilization)

6. Mr. H. A. Anura Accountantnt (Finance)

7. Mr. L. H. Nihal Senior Manager(HRM & HRD)

8. Mrs. P. R. Gunawardena Manager(Credit)

9. Mrs. W. N. D. Botheju Accountant (Payment)

10. Mr. P. S. Pitawala Manager (Administration)

11. Mr. W. M. Chandrasena Manager (Valuation)

12. Mr. M. S. M. Rila Manager (Technical & Premises Maintenance)

13. Mr. I. Nishantha Manager(Loan Administration)

14. Mr. K. R. M. A. Bandara Manager (Audit)

15. Mrs. P. L. A. S. I. Cooray Manager (Operations)

1 2 3 4 5 6 7 8

9 10 11 12 13 14 15


13

CSR & Sustainability Report - 2008

We keep striving to deliver beyond expectations, for the benefit of

our Customers and Shareholders, the well being of the Community,

Industry and Prosperity of National Economy

“”

IntroductionHDFC 2008 Sustainability Report attempts to offer an integrated view of the Company’s performance, considered from its national, economic, social and environmental aspects. This year we sought to be more closely aligned with the reporting principles of international bodies that guide sustainable reporting. All aspects of the sustainability of our operations are fully reported with common challenge in the housing fi nance industry. This report will be developed constantly with more comparative information and reinforced in line with the principals of the Global Reporting Initiative (GRI).

Our Commitment to SustainabilityCore business of HDFC Bank is an ethical investment which is to be focused and managed in a socially responsible manner. We create value to the economy by facilitating fi nancing the most costly basic need the

achievement of which causes signifi cant economic, social and environmental infl uences. Therefore, HDFC Bank emphasise our responsibility of conducting the operation more equitable and sustainable manner both socially and environmentally.

HDFC Bank believes that it can play a signifi cant role in shaping the future of the nation by addressing the need of decent housing. HDFC has always being mindful of its social responsibility and embedded principles of sustainable development and empowerment, in our daily business practices. We create wealth for our shareholders; contribute towards sustainable prosperity of our nation and build long lasting relationship with our customers and other stakeholders.

We at HDFC Bank know that the way the Company is perceived by society is because of our commitment for the less privileged group in the country. We have prioritized

14


CSR & Sustainability Report (Contd...)

fi nancing the housing of needy group which has signifi cant impact of catalyzing economic growth, reducing poverty. Achieving a decent house creates economically, socially and environmentally empowerment. Therefore these factors make up part of our social license to achieve and maintenance of our market leadership in low and middle income groups.

Sustainability ReviewThe scope of this report encompasses performance from January to December 2008. HDFC Bank recognizes three dimensions of sustainability; Economic sustainability, Social sustainability and Environmental sustainability. Our performance in 2008 is presented in these three key perspectives that refl ect our contribution towards sustainable development of the national economy.

Under the Economic Sustainability the report review our contribution towards value creation in the national economy, management of human settlement, promotion of national housing stock, empowerment of needy group, employment generation, customer satisfaction; internal processes and capacity building.

The report also reviews the importance of long lasting relationships between the bank’s and society in the building of a common future. Our efforts for community development and empowerment are reviewed under the Section of Social Sustainability.

HDFC recognizes the growing importance of integration the assurance of environmental protection in housing construction and day to day operation by facilitating implementation of sustainable development regulations and sustainable use of natural resources. Our commitment for this area is evaluated under the heading of Environment Sustainability. The report also emphasizes Challenges, Future outlook and recognition.

Contribution Towards Economic Sustainability

Our Performance in the National Economy

Value Creation

Value Distribution

(Rs M) 2008 2007 2006 2005

To Goods & Service Providers 1,756.06 1,361.01 806.39 683.78To Employees 240.83 235.65 159.04 145.28To the Government 26.91 75.26 140.91 103.82To the Shareholders ( Dividends) - 32.35 64.71 30.61Retention for Internal Development (162.38) (17.59) 114.58 93.73 1,861.42 1,686.68 1,285.63 1,057.22

CONTRIBUTION TOWARDS ECONOMIC

SUSTAINABILITY

CONTRIBUTION TOWARDS SOCIAL SUSTAINABILITY

CONTRIBUTION TOWARDS

ENVIRONMENTAL SUSTAINABILITY

PROMOTION SUSTAINABLE LIVING

Sustainable Resources Utilization

OUR PERFORMANCE IN THE NATIONAL

ECONOMY

EducationalDevelopment

Economic Value Creation

Managing Human Settlement

Promotion of Home Ownerships

Empowerment and Poverty Alleviation

PROMOTION SUSTAINABILITY

IN-HOUSE

Customer Satisfaction

Empowerment and Poverty Alleviation

Capacity Building and Enhancement

Health Development

SUSTAINABILITYREVIEW


15


In Managing Human Settlement The construction of houses requires enormous amount of material, labour, energy, water and create large amount of waste. Therefore construction involves signifi cant amount of capital , thus the mission of housing , is not only a construction of dwelling units broadly it is an employment generator poverty alleviator, a social stabilizer , a wealth creator and most importantly an attractive creator of human settlement.

Decent housing is considered as one of the several dimensions which are used for assessment of physical quality of life and economic growth of a country to meet the Millennium Development Goals (MDGs). With a per capita gross domestic product of USD 1,355 Sri Lanka is on track to meet a number of the Millennium Development Goals. The scale of development in Sri Lanka is on par with middle income countries in terms of universal primary school enrollment, gender parity in primary and secondary enrollment, and universal provision of reproductive health services. In the same time housing conditions too have substantially improved relative to early 1980s, in particular with respect to housing materials and access to electricity, safe water and sanitation facilities etc.

Apart from the natural growth of housing demand, rapid urbanization and a changing socio-economic scenario, the demand for housing has grown explosively in the last two decades, which encompass a provision of large amount of national income for housing. An active system of housing fi nance provides real economic benefi ts 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.

In turn, each Rupee invested in the housing sector; catalyze multiple economic activities in other sectors, exerting indirect positive impact on employment, fi scal returns, and consumption. Housing fi nance enables households to accumulate assets that can collateralize for their other investment needs, thus stimulating more economic activities. Housing fi nance development boost equitable economic growth and reduces poverty by improving living conditions, empowering the low and middle income earning population, and strengthening communities. Aggregate ServiceThe aggregate number of loans granted as at reporting date reaches 113,219 and has granted more than Rs.19 billion worth of loans since 2000. Out of these advances more than 90 per cent of facilities have been extended for low and middle income groups whose level of aspirations is very high in achieving a home for settlement.

Aggregate Service

2008 2007 2006 2005

Aggregate Loan Volume 113,219 107,660 98,099 84,410Aggregate Loan Volume- Rs M 19,278 17,860 15,237 11,761

Towards National Housing Stock - 2008 In 2008, company granted 5,559 facilities with total value of Rs 1.418 billion compared to 9,561 loans granted in 2007 for the value of Rs 2,623 billion and theses facilities have been extended on house construction, purchasing, purchasing & construction, redemption of housing loans obtained from other sources, renovations, repairs, extensions etc.

To Goods and Services ProvidersTo Employees

To the Government

To the Share Holders (Direct)

Retention for Internal Development

Value Creation 2007

To Goods and Services ProvidersTo Employees

To the Government

To the Share Holders (Direct)

for the National Development

Value Creation 2008

Aggregate Service

Aggregate Loan Volume Aggregate Loan Volume - Rs M

Rs.M

n

‘05 ‘06 ‘07 ‘08

84,4

10 98,0

99 107,

660

113,

219

11,7

61

15,2

37

17,8

80

19,2

78

16



2008 2007 2006 No. of Loans % No. of Loans % No. of Loans %

Low Income Group –LIG 2,345 42% 5,005 52% 9,570 70%Middle Income Group-MIG 1,863 34% 2,945 31% 2,951 22%Wider Income Group-WIG 1,351 24% 1,611 17% 1,168 8% 5,559 100% 9,561 100% 13,689 100%

During the year, under review, HDFC Bank has assisted to enhance the national housing stock approximately by 4,449 new houses, with aggregate construction value of Rs. 1.47 billion. Out of this construction value HDFC Bank has fi nanced approximately for Rs. 914 million. Rs. 344 million has been extended to purchase constructed houses and dwelling units and another Rs. 160 million to meet various housing related other fi nancial commitments and house hold accessories.

By these operations HDFC assisted for 5559 families island wide to own their own dwelling settlement , and over 22,250 people to fulfi ll their pressing need of housing.

Prioritized Service for the Needy GroupMajority of the population who falls under this income category has restricted access to credit facilities offered by the commercial banks or fi nancial institutions. The Low Income Group segment of the market in general does not posses adequate documents to prove income and often encounters problems with collateral offered. In general advancing and managing of loans in this segment is to be exercised on a corporate approach rather than a management approaches exercised in typical lending. HDFC has been successful in servicing this sector due to it’s integrated approach with allied services such as legal, technical & valuation which the borrowers of this category have little or no knowledge.

During the year, more than 76 per cent of the approved loans have been granted to low & middle income groups. Around 42 per cent of approved loans are less than Rs. 200,000. Loans between Rs. 200,000 – Rs. 500,000h are accounted as 34 per cent. In 2007 and 2006, HDFC Bank has focused more than 80 per cent and 90 per cent facilities respectively towards this segment of the market.

In Promotion of Home Ownership

Provincial Distribution of ServiceDue to ever increasing urbanization, the urban population is rising sharply at a 3 per cent per annum. This trend is signifi cantly refl ected in the Western province, mainly because of daily rising number of immigrant families. In the Western province land prices, rate of construction labour has been increasing sharply making housing unaffordable for many. The demand for individual housing and plots are mainly created by fi xed income earning MIG families and income from foreign employments

In consideration of these developments in the market, during the fi nancial year 2008, HDFC Bank specially emphasized the Western Province. Value of loans granted in the Western Province was Rs. 872 million which represents 61 per cent of the value of loans granted during the year. Out of these loans 80 per cent is extended for the MIG families. Loans for new construction represent 70 per cent, house purchasing 15 per cent and other housing related matters 15 per cent.

11 per cent of loans were extended in the Central Province and another 9 per cent in the North Western Province. The rest of the facilities were extended to the Low & Middle income earners in Eastern, North Central, Sabaragamuwa and Uva Provinces. Large volume of LIG loans which have been granted in these areas have resulted considerable impact on living standards of the people.

LIG42 %

MIG34 %

WIG24 %

Sector Wise Distribution of Loans - 2008

LIG52 %

MIG34 %

WIG24 %

Sector Wise Distribution of Loans - 2007


17


Provincial distribution of Service -2008

Province 2008 2007 2006 2005

No of No of No of No of

Loan Loan Loan Loan

Western 2442 4274 5,131 3,488Central 991 1266 1,361 771Southern 384 926 1,378 642Eastern 159 391 531 194Wayamba 471 1150 1,143 673North-Central 260 504 1,122 316Uva 385 657 1,520 602Sabaragamuwa 192 505 1,503 587 5559 9,561 13,689 7,273

District wise Distribution of ServiceBecause of high growth of population and ever increasing land value, housing has become a tremendous issue in the district of Colombo particularly.

During the year under consideration HDFC Bank has extended average 26 per cent of the loan portfolio in the Colombo district which represents 43 per cent value of loans. The second highest numbers of loans were extended in the Gamapaha District.

Customized ServiceDuring the year 2008, HDFC Bank granted 4,531 loans worth of Rs. 891 million to EPF members. That account 30 per cent of the total loans extended to the EPF member during the year by housing banks. EPF loans accounts almost 38 per cent of the volume and 23 per cent of the value of loans extended during the year by the HDFC Bank.

General mortgage loans are accounted to 18 per cent of the volume of the loans extended during the year. During the year 313 home loans were granted to the exiting mortgage customers who were in need of fi nance, for purchasing furniture, electricity and house hold items. Amount of these loans reaches Rs. 122 million.

Personal guarantor loans were granted to customers, whose application were not supported with tangible collaterals and inadequate proof to support income. Number of loans granted under guaranteed loans 785 and value Rs. 113 million.

Under Gurusevana Loans Scheme, HDFC Bank has granted 889 loans to the government teachers that represent 16 per cent of the loans extended during the year. This encompasses identifi cation of housing needs among the different of customers, particularly in the Government and corporate sector middle and lower income group employees who need housing facilities at affordable rates and also having the capacity to obtain housing loans.

Customized Service Customer 2008 2007 2006 2005

General Customers 1,028 2,291 3,082 2,436EPF Members 2,110 3,336 4,531 2,979Government Teachers 889 1,294 3,097 1,348Farmers - - - -Doctors 57 3 5 2Government Employees Low Interest 16 464 856 348Local government 25 36 420 -Existing Customers (Home Loan) 313 400 207 -AHF - 54Personal Guaranteed Customers 785 1,550 1,072 -Other 336 187 419 109 5,559 9,561 13,689 7,276

Provincial Distribution of Service - 2008

Western

Central

Southern

Eastern

Wayamba

North - Central

Uva

Sabaragamuwa

Provincial Distribution of Service - 2007

Western

Central

Southern

Eastern

Wayamba

North - Central

Uva

Sabaragamuwa

District Wise Distribution of Service 2008

Rs.M

n

Colo

mbo

1,40

0

Gam

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Kalu

tara

Kan

dy

Mat

ale

Nuw

ara

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Gall

e

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ara

Ham

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para

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Puta

lam

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Mon

agra

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Ratn

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600

225 40

0

200 40

0

200

100

100

100

80 150

150 22

5

225

150 22

5

200

18



Segregation of LoansDuring the year the HDFC Bank granted 4,449 loans for new house construction and 513 loans for purchasing constructed houses. For repairs and renovation 246 loan were extended.

Comparative Figures

Purpose 2008 2007 2006 No of Loans Rs (M) No of Loans Rs (M) No of Loans Rs (M)Construction 4,449 914.45 7,643 1,768.79 11755 2875Purchase 513 344.22 1,137 700.26 1340 521Renovation/repair 246 18.94 338 25.71 340 21Redemption 39 19.26 52 19.32 42 13Home Loan 312 121.33 391 108.83 207 46 5,559 1,418.19 9,561 2,622.91 13689 3476

Costomized Srvice 2008

Doctors

Government Employees Low inte

Local Government

Existing Customers Home Lone

AHF

Personel Guranteed Customers

Others

ConstructionPurchase

Renovation / Repair

Redemption

Home Lone

2008

ConstructionPurchase

Renovation / Repair

Redemption

Home Lone

2007

Empowerment and Poverty AlleviationHousing fi nance development boots equitable economic growth and reduce poverty by improving living conditions, and empowering less privileged needy groups. Active system of housing fi nance provides key economic benefi ts and positively affects savings, investment, and household wealth. In turn, investment in housing sector, catalyze multiple economic effects in other sectors, exerting an indirect employments, fi scal return, and

Helping for education

Helping for education

consumption. Housing also infl uence peoples aspiration. Decent house affects children education, health, family unity, cultural values etc.


19


Employment GenerationAs at the end of the reporting period permanent carder was 298 employees. Meanwhile as per our estimates HDFC Bank has generated approximately 2,750 indirect employment opportunities countrywide in the area of related services such a carpentry and masonry activities.

Furthermore, the number of induced job opportunities created from house construction and related economic activities such as transport, sand mining, bricks & tile manufacturing , quarrying etc, HDFC Bank has contributed for approximately 12,750 job opportunities in 2008.

Construction industry being one of the main providers of employment has created approximately 527,000 job opportunities countrywide representing 7.4 per cent of the total employment market in 2008. Total advances in 2006, from the Banking System accounted Rs. 146 billion to the construction industry, out of which HDFC Bank contributed for Rs 1.4 billion for resident housing over nine provinces. Promoting Sustainability in-HouseImproved operational qualities, staff training and development, capacity enhancements and upgrading catalyze productivity, earning power and effi cient utilization of resources which would economize operation resulting economic benefi ts to customers, shareholders and stakeholders.

Customer SatisfactionISO 2009 Certifi cationSince 2006, HDFC Bank has been improving operational effi ciency, with a broad based Quality Policy. Quality objectives and targets have been set for the Bank and individual service department and branches. Quality Manual, prepared by a professional quality survey is in place since November 2006 as the master guide in line with requirements of ISO 2009 quality standards. In October 2008 the Bank was awarded with ISO 2009 certifi cation for international quality standards for entire banking operation.

Our Quality PolicyHDFC Bank shall constantly strive to innovate and deliver total fi nancial solutions to satisfy customers beyond their expectations in their home and lifestyle needs.

This shall be driven by;

Caring customer service ; Anticipating Requirements and Delivering Proactive solutions.

ISO 9001:2000 International Standard based quality Management System.

Enhancing potential of our staff through motivation, development and recognition.

State of the Art Information Technology and Communication Systems.

Continuous improvement, in our internal processes to add value to our customers.

Internal Customer SatisfactionQuality objectives and targets are set in all service departments to improve inter-department operational quality improvement as the internal customer satisfaction. Periodic internal customer satisfaction survey is conducted by a quality audit committee appointed from the members of the staff in all levels of organization.

The process is planned to study and identify operational bottlenecks, duplications and suggest corrective measures with a quality monitoring and audit techniques. The process also target to improve offi ce keeping system and documentation fl ow with a common internal standards.

External Customer Satisfaction

Customer satisfaction survey questioner was sent to 6,500 customers representing all branches and market segments out of them 1,600 have responded with their comments

•

•

•

•

•

Receiving ISO Certifi cate

20



and suggestions. Information is being analyzed, in order to decide on customer satisfaction index. The index which was established in 2007 will be used as the benchmark for future development of customer satisfaction.

Human Resource Development & Productivity

Meeting the Challenge

These challenges were made more acute, in uplifting attitude and productivity, in the context of a post conversion scenario, with HR playing the role of a key partner in the task of aligning human resources and business strategies. We record with gratitude, that 70 per cent of staff has adjusted for the need of the environment that has partly driven by the improved economy and high careers expectation. In general HDFC is proud of having dedicated and committed human resource.

Work Force

Work Force 2008 2007 2006 2005

A- Corporate Management 9 9 5 5B- Snr & Executive Management 11 11 6 8D- Executives 92 95 98 103E- Non Executive 177 171 181 160Total 289 286 290 276

Profi le

On average, our employees are 39 years old; have worked at HDFC Bank for an average of 11 years; 52 per cent are women. Out of employees 58 per cent are professionally qualifi ed in Law, Banking, Accounting and Finance and 17 per cent are graduates. Average gross salary, Rs. 42,696 is far with employees of other state banks.

Employee Profi le

2008 2007 2006

Average Gross Salary 42,696 39,943 30535Average Basic Wage 17861 17643 17450Average Age ( Years) 39 39 38Average Service Period 11 11 11Average Absenteeism Average Medical Consultation 22728 30104 18322Percentage of women 52% 52% 52%Percentage of Graduate 17% 17% 17%Percentage of Professionals ( Including Banking) 34% 34% 34%Percentage of employeescovered by Collective Agreement 98% 98% 98%Percentage of employee with disabilities. 0.07% 0.07% 0.07%Turnover Index 1.70% 1.70% 1.70%

Productivity

Employee Productivity. 2008 2007 2006

Income per employee ( Rs 000) 6.830 6.088 4.495Added Value per employee(Rs 000) 6.441 5.897 4.449No of Loans per Employee 19 34 46

HDFC has achieved a constant growth of employee productivity since obtaining banking status. In 2008 productivity index was declined in terms of volume of loan because of slow down operation infl uenced by

A - Corporate ManagementB - Snr & Executive Management

D - Executives

E - Non Executive

Work Force

Staff Average Age 2008

Age

Corp

orat

e M

anag

emen

t51

45

41 38

Seni

or

Man

agem

ent

Juni

or

Man

agem

ent

Oth

er S

taff

Staff Average Service2008

Year

s

Corp

orat

e M

anag

emen

t7

11

14 12

Seni

or

Man

agem

ent

Juni

or

Man

agem

ent

Oth

er S

taff


21


challenging macroeconomic environment prevailed in 2007 and 2008. Our employees’ corporative productivity in terms of value addition, is far above the service sector employee productivity of Rs. 329,700.

Professional training and development HDFC endowers create a multi-disciplinary work force through providing local and foreign training and offers fi nancial assistance to employees in all level of the organization to obtain recognized professional education in their fi eld of operation especially in Banking and Computers.

Training Offered in Specialized Fields

No. of employee Field of knowledge Training man Days2 Tax Applications for Government Institutes 41 Funds Investment and Optimizing Return 11 Impact of Environmental Regulations. 16 Corporate Planning & Budgeting 61 On Ombudsman Scheme 17 Building Construction. 74 Legal aspects relating to collateral 42 Internal Controls & Audit 23 Liquidity Management 313 Ms Offi ce Application. 1333 Recovery Development 832 Introduction of saving Instruments 1653 Effective utilization of system.. 27283 Positive tomorrow. 86 Palm Top Operation and Savings. 6450 Total 411

Unitized through collective agreement

Collective agreement which was signed in 2006 is a major breakthrough in this direction and the agreement is effective till 2008. There is only one trade union was operating in the bank and almost 98 per cent of the staff is members of this union.

Motivation through Sharing Ownership

Five per cent of shares of the HDFC Bank were allocated the employees at the IPO through an organized Employee

Share Ownership Program (ESOP). Under the ESOP 5 per cent of the shareholding was issued to the staff at a price, on the basis of period of service and grade. HDFC Bank’s ESOP is the fi rst initiative among the state banks towards the employee share ownership. By doing this the Bank believed that the sense of ownership would enhance dedication stewardship of employees

Employee welfare

Staff welfare is also highly considered by the bank as a deciding factor in creating a healthy environment. Medical Scheme, Death Donation, insurance are some of them. During the year Rs. 8.7 million has been spent for employee health plan.

Chairman addressing the ISO Certifi cate Awarding Ceremony

Branch Opening at Awissawella

22



Motivation through ParticipationDuring the year staff participated in several volunteer marketing and saving promotions with the palm top unit of the Bank.

Motivation through SocietiesThere are more active Sport Club and Welfare Association established by the employees. Annual events are organized regular basis with full participation of all staff members.

Service RecognitionHDFC as a custom specially appreciate the service of the staff at their retirement and maintains a long lasting relation ship with them.

Capacity Development and UpgradingUpgrading Work EnvironmentInterior refurbishment plan at head offi ce building is underway to create a better working condition for employees.

Branch Net WorkHDFC has fully pledge offi ce network of 21 branches and service centers providing services in all provinces except in the Northern Province. All branches are linked with

IT system access and equipped with in-house technical, legal and valuation professionals to provide a one stop service for our customers.

Branch network expansion and upgrading program is being implemented to provide better service to customers and working environment to the staff, while enhancing the image of the Bank. During the years Galle branch was relocated with better infrastructure and parking facilities etc. In August, 2007 we opened a Customer Service center at Awisswella.

Other than the upgrading, a program is being implemented to increase the number of branches in a scheduled manner.

Capacity Upgrading IT SystemWe invest considerable amount of capital in upgrading and developing our IT system to a state –of -the art Uni Bank operation during the year , that has put us way ahead among other housing banks. During the year we launched HDFC - ATM at head offi ce branch and intend to invest more on ATM and eCommerce application during this year.

ISO Certifi cation for BranchesPresentation of Awards - Annual Cricket Tournament

Palm Top Team


23


Contribution towards Social SustainabilityWe are mindful that we must conduct our business in a manner that reinforces our position as a respected member of the community and participate in community activities which make positive contribution to uplift the social and economic wellbeing of the communities we interact with, while at the same time optimizing our strategic objectives. Our Social participation is mainly concentrated on Training & Education, Religious Activities, Health and Event Participation.

Training and Education:During the year we offered training opportunities in our bank’s environment for 26 students and undergraduates with various educational backgrounds.

Opened 500 minor savings accounts to the children of less privileged group in Awissawella I in partnership with Ranjith Siyabalapitiya Foundation.

Contribution towards Environmental SustainabilityEnvironmental and social sustainability begins at home. HDFC emphasizes that its core business and day today operation has signifi cant impact to the environment. Environmental protection is to be emphasized as an integral part of the development process and any breakdown in the environmental stability would have serious impact on the country bio system. HDFC contributes environmental sustainability by improved in-house operation and encouraging sustainable living and environment.

•

•

New Year Opening

Relocation of Galle Branch 2008

Contribution from the Sports Club to War Heros

Addressing Environmental Sustainability

Encouraging Sustainable

Developments & Living

Sustainable Utilization of Resources

Assisting children with educational materials

24



Encouraging Sustainable Living and Environment.Housing Construction requires enormous amount of energy, water and create large amount of solid and quid waste and homes are not just houses, they are environments which refl ects the aspirations of individual families. Clusters of homes form neighborhoods and clusters of neighborhoods form towns and cities. Therefore, where and how they are built affects ecosystems and environment in countless ways. And buildings themselves create new indoor environments that could presents environmental; problems and challenges.

As the environmental impact of condominium buildings and housing schemes become more apparent, a growing fi eld called sustainable design is leading the way to reduce that negative impact. Sustainable development approach is the key contributor to mitigating of the negative impacts of developments and creating healthier and more resource effi cient construction, renovation, operation, maintenance and demolition.

HDFC as a policy we encourage our customers to emphasizes sustainable developments approaches and understanding of the vast potential of integrating environmental solutions into their housing and construction decision-making. The customers are always encouraged to emphasis the following two areas in making a housing decision, house planning & designing.

Environmental and Social Sustainabilityis to be incorporated into the design to reduce electricity, save water, energy and managing waste and waste water. We at HDFC Bank insist the customers to comply with the rules and regulations of local authorities, regulatory bodies such as Central Environmental Authority, Condominium Management Authority, Urban Development Authority, Lowland Development Authority, Institute of Construction Training and Development. We also encourage obtaining services of professional bodies such as Sri Lanka Institute of Architects, Institute of Quantity Surveyors etc. All constructions and lands developments are ensured that they are complied with requirements of local authorities for provisioning of adequate open spaces, roads, street lines, building lines etc.

•

Approvals Promoted for Sustainable Developments 2008 2007

Building Approvals 4560 7653Site Approvals 5463 9452Condominium Management Authority Approvals 2 1

By ensuring compliance with above requirements HDFC exercises it’s commitments to Social and environmental well being, safety of life, reduce crime and improve the harmonious living.

Economic sustainability Economic sustainability; is an important feature. The home is designed to save you money when you build or buy it and make you money if or when you sell it. It avoids the need for major renovations at a later date and reduces the long-term cost of energy consumption, water consumption, and maintenance. Affordability is a major factor in the building of any sustainable home. We maintain 40 per cent of disposable income as the affordable level of housing cost which minimize stress of servicing home fi nancing. Province wise average size of loans granted refl ects our commitment of maintaining economic sustainability and affordability of loans.

Provincial Average Size of a Loan

2008 2007

Western 338,100 362,357Central 152,220 177,877Southern 226,261 253,444Eastern 129,179 133,857Wayamba 263,048 261,337North-Central 171,619 156,906Uva 122,766 154,520Sabaragamuwa 212,867 217,567

In driving the HDFC towards its objectivity we have been mindful of the requirement of balancing environmental needs with human needs. Our technical staff assesses the environmental impact of each housing loan proposal and educates the clients to meet the environmental regulations of the country. Loan mobilization strictly followed the compliance with the regulatory requirements.

•


25


ChallengesRapid development of the housing industry and housing fi nance sector are challenged by certain impediments which inhibits its growth. Absence of long-term low cost funds is the main challenge facing by the housing fi nance institutions in the country. The need of governance is another issue that stakeholders in the industry should address with priority. Real-estate forms perhaps the largest asset class of on any country and is the largest source of wealth for families, and the nation so, it need a high sense of governance. It is therefore need immediate consideration, in this environment of abnormal pricing, competition, accountability, transparency, warranty and residents rights etc. These are the fundamentals which will ensure long-term sustainability of the industry. In addition to the above, sharp rise in land prices, high cost of major building materials and the lack of skilled labour also restrain the growth of the housing sector.

HDFC is mindful of above threats, and believe that continues research and development of new fi nancial instruments, loan products and continues improvement in technology and operational effi ciency would mitigate these threats to a substantial extent.

Future OutlookWe initiated expansion of relationship channel with our customers during 2009 through more ATMs and e-commerce facilities and with implementation of new features designed to simplifi ed the loan approval and disbursement procedure. HDFC also enhancing branch network improving accessibility of public savings and loan products. New fi nancial instruments and loan products are in research level to raise long term matching funds and affordability of home fi nance.

26


Corporate Governance

Corporate Governance

Corporate Governance constitutes part of the entire accountability of the bank, and requires a balance between accountability and assurance against value creation and performance.

Initially Corporate governance practices were categorized as set of process which covers customs, policies, and relevant laws applicable to the industry for the smooth functioning of the entity.

Gradually the Corporate Governance practices, adopted by the HDFC were developed and presently playing a very vital role, in building the public confi dence and trust among the shareholders and other stake holders assuring a transparent, fair and ethical way of managing the operations of the Bank with in the legal frame work.

At HDFC, Corporate Governance policy is periodically reviewed by the Board of Directors, to ensure the strict compliance of these rules.

Presently Corporate Governance practices covers issues such as Board structures and roles, and executive management, business governance and focuses on strategy and value creation, enabling the Board to:

make strategic decisions,understand its appetite for risk and the key drives of performance andidentify key principles of decision-making.

Compliance Statement

(1). The Central Bank of Sri Lanka, in year 2007 issued a mandatory code of Corporate Governance for Licensed Specialized Banks. And also the Colombo Stock Exchange jointly with the Institute of Charted Accountants of Sri Lanka (ICASL) issued Corporate Governance rules, under the name of Code of Best Practice on Corporate Governance.

(2). The HDFC Bank being a licensed specialized bank listed in the Colombo Stock Exchange, seriously considered to adopt both policies, to the extent that these rules are not inconsistent with or contravene with the HDFC Act No.07 of 1997 and amendment Act No 15 of 2003.

(3). In this annual report, the relevant details will be discussed pertaining to the current practice of the Bank in this area.

••

•

Role of the Board

The Board is responsible for the administration of the Bank by promoting and managing the affairs of the Bank, effi ciently and effectively.

Further the Board of Directors bears full responsibility for good governance practices, which helps the Bank to achieve its strategic objectives, with in the regulatory frame work.

1. The Board of Directors

1.1 Corporate Governance Rule – Qualifi ed and suitable Board of Directors, and Composition/Performance of the Board

Level of Compliance

1.1.1 The Board of the HDFC headed by an effective Board comprising of professionals, in Accounting Management, Law, Administration and Business, with the relevant skills, experience and knowledge to direct, lead and control the Bank.

The profi les of the Directors are given on page 6 to 8 of the Annual Report.

1.1.2 As the HDFC was incorporated by an Act of Parliament; HDFC Act No. 07 of 1997 amended by Act No 15 of 2003, the composition of the Board comprise of Non-executive Directors, only.

During the period under review there were 09 Non-executive Directors

Those Non-executive Directors were appointed to the Board under three categories, such as

(i) Ex-offi cio Directors representing the Secretary to the Treasury and Ministry of Housing.

(ii) Nominated Directors, representing the Ministry of fi nance, Labour and Minister of Housing.

(iii) Shareholding Directors.

Complied with SEC & ICASL – A 1, CBSL Rule 3(2), CBSL Rule 3 (3) to the extent above mentioned.


27

Corporate Governance (Contd...)

1.2 Corporate Governance Rules - Regular Board Meetings, should be held

Level of Compliance

During the year 21 Board meetings were held, and relevant arrangements are in place to enable all the Directors to include matters and proposals in the agenda for regular Board meetings, where such matters and proposals relate to the promotion of business and the management of risks of the Bank, and relevant suffi cient notice being given for the Directors to attend the Board Meetings.

In addition to the Board meetings that there are regular meetings of the Board appointed Sub committees, such as,

Recovery Sub CommitteeHuman Resource Sub Committee Remuneration Sub Committee Asset and Liability Committee Audit & Management CommitteeNomination Committee

Complied with SEC & ICASL – A 1.1, CBSL Rule 3(1)

1.3 Corporate Governance Rules- The Respon-sibilities of the Board

Level of Compliance

1.3.1 The Board of Directors of the Bank, are ensuring the formation and implementation of a sound business strategy.

1.3.2 Approving the overall business strategy, Risk Policy, Risk Management procedures and mechanism with measurable goals, identifying the principal risk factors and taking the responsibility for implementation of appropriate system to manage the risk, prudently.

1.3.3 Reviewing the adequacy and integrity of the Banks internal control systems and Management information systems.

1.3.4 Identifying and designate key management personnel, as defi ned in the International Accounting standards, who are in a position to: (i) signifi cantly infl uence policy; (ii) direct activities; and (iii) exercise control over business activities, operations and risk management.

••••••

1.3.5 Defi ning the arrears of authority and key responsibilities for the Board of Directors themselves and for the key management personals.

1.3.6 Ensuring that there is appropriate oversight of the affairs of the Bank by key management personnel that is consistent with Board policy.

1.3.7 Periodically assess the effectiveness of the Board of Directors own governance practice.

1.3.8 Ensuring that the bank has an appropriate succession plan for key management personnel;

1.3.9 Ensuring all stakeholder interests are considered in corporate decisions.

1.3.10 Ensuring that the Company’s values and standards are set with emphasis on adopting appropriate accounting policies and fostering compliance with fi nancial regulations, and fulfi lling such other Board functions as are vital, given the scale, nature and complexity of the business concerned.

Complied with SEC & ICASL 1.2 & 1.5, CBSL Rule 3(1)

1.4 Corporate Governance Rules - Access to independent professional advice

Level of Compliance

When the Board of Directors required independent professional advice, necessary advice from independent professionals, can be obtained. The Bank bears the cost for those services.

Complied with SEC & ICASL – A 1.3, CBSL Rule 3(1)

1.5 Corporate Governance Rules - Dedication of adequate time and effort by the Board and Board Committees

Level of Compliance

The Board of Directors dedicates adequate time and effort to the matters of the Board, and to ensure that the duties and responsibilities owed by the Board are satisfactorily discharge by the Board.

Complied with SEC & ICASL – A 1.6, CBSL Rule 3 (6)

28



1.6 Corporate Governance Rules - Training for Directors

Level of Compliance

Continuous training being provided to the Directors by sending them to the seminars, conferences which are in relation to general aspect of directorship and matters specifi c to the banking industry.


1.7 Corporate Governance Rules - Annual self assessment by the Board

Level of Compliance

The annual self assessment of the Board is carried out by the Chairman.

Complied with SEC & ICASL 9

1.8 Corporate Governance Rules - Company Secretary/ Board Secretary

Level of Compliance

The Company secretary is an Attorney-at- Law by profession and is responsible to the Board in ensuring that the Board procedures are followed and that applicable rules and regulations are complied with, according to the HDFC Act & other related legislative Acts & directions relevant and issued to banks & listed companies, from time of time.

The Board Secretary maintains minutes of the Board meetings and Board Sub Committee Meetings with suffi cient details.


2. Chairman & CEO

2.1 Corporate Governance Rules - Division of responsibilities of the Chairman and General Manager / CEO

Level of Compliance

The functions of the Chairman and General Manager/CEO are clearly separated, and there is no material relationship between the Chairman and CEO.

Complied with SEC & ICASL – A 2, CBSL Rule 3(5)

3. Chairman’s Role

3.1 Corporate Governance Rules - Role of the Chairman

Level of Compliance

The Chairman of the Bank is a Non-executive Independent Director

The Chairman is responsible for facilitating the effective discharge of Board functions, preserving good Corporate Governance Practices. The Board proceedings are conducted in a proper manner, according to the agenda and all the Directors are encouraged to make an effective contribution for the benefi t of the Bank. The Board is in complete control of the Banks affairs and alert to risk factors and its obligations.

Complied with SEC & ICASL – A 3, CBSL Rule 3(5)

4. Financial Acumen

4.1 Corporate Governance Rules - Availability of suffi cient fi nancial acumen and knowledge with in the Bank to offer guidance on matters of fi nance

Level of Compliance

The General Manager/CEO of the Bank holds a MBA (International) from Edith Cowan University Perth Australia followed by an Advanced Diploma in Management Accounting awarded by the Chartered Institute of Management Accountants UK. He also has completed a Postgraduate Certifi cate in Asset Liability Management from the Post Graduate Institute of Management.

In addition, the Deputy General Manager fi nance who is the Offi cer in Charge of the fi nance department of the Bank is an Associate Member of the Institute of Charted accountants of Sri Lanka (ICASL).

Further, two members of Director Board are having necessary fi nancial qualifi cations and experience to offer the relevant guidance on matters of fi nance.

This is in addition to strength of several accounting professionals working in the Bank, in various departments having relevant fi nancial knowledge and experience.

SEC & ICASL – A 4 Adopted


29

4.2 Corporate Governance Rules - Executive review, succession planning and culture

Level of Compliance

The Board approves the appointment of the General Manager/CEO. The Human Resource Committee marks the necessary recommendations to the Board pertaining to the promotion scheme/succession plan of other key management positions. Further the Nomination Committee monitors and review the succession plan of the Bank, and the Remuneration/Committee determine the basis for revising remuneration benefi ts and other payments of performance based incentives, relating to the CEO & other key management personals of the Bank.

The Nomination Committee/Remuneration Committee comprise of 03 Non executive/independent directors Mr. S.M.M. Yaseen (The Chairman), Mr. P. Sumanapala Representative Treasury/Finance Ministry, Mr. W.J.L.U. Wijeyaweera the Commissioner General of Labour.

Complied with CBSL Rule 3(6)

5. Appointments to the Board and Board Sub Committees.

5.1 Corporate Governance Rules – Nomination Committee

Level of Compliance

The Nomination Committee of the Bank is comprised of the above mentioned 03 directors. GM/CEO attends these meetings by invitation.

The Nomination Committee is responsible for implementation of the procedure for selection of CEO/ GM, appointment of directors, continuous review of the composition of the Board.

Complied with SEC & ICASL –A7, CBSL 3(6)

5.2 Corporate Governance Rules – Directors appointments

Level of Compliance

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 as well as continuing directorships are reviewed by the Nomination Committee. The Nomination Committee will examine the facts and circumstance applicable for the relevant period and make relevant recommendations to the Board, pertaining to the new appointments.

Complied with CBSL Rule 3(2) & 3(6) to the extent above mentioned.

More details pertaining to the Board Sub Committes, were given on page 43 of the Annual Report.

5.3 Corporate Governance Rules - Disclosure of details of new Directors to shareholder

Level of Compliance

Details of new Directors are disclosed to the shareholders on their appointment. Notice on appointment of new Directors is given to the Director of Bank Supervision, CBSL.

Complied with SEC & ICASL – A7.3

6. Re- election

6.1 Corporate Governance Rules – Re election of Directors

Level of Compliance

According to the HDFC Act, No 07 of 1997 and amendment Act No 15 of 2003 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-offi cio directors and nominated directors are also appointed to the Board for a fi xed 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 Acts.

Complied with SEC & ICASL- A 8, CBSL 3(2) to the extant above mentioned

7. Appraisal of Board performance

7.1 Corporate Governance Rules - Appraisal Board Performance

Level of Compliance

The performance of the Board and its


30


committees being evaluated by the Board annually to ensure that the Board responsibilities are satisfactorily discharged.

Complied with SEC & ICASL – A 9

8. Appraisal of the General Manager / CEO

8.1 Corporate Governance Rules - Appraisal of the General Manager / CEO

Level of Compliance

The performance of the General Manager/ Chief Executive Offi cer being reviewed in every fi nancial year by the Board against fi nancial and non fi nancial targets fi xed by the Board in line with the short, medium and long term Objectives of the Bank, to ascertain whether the targets set by the Board have been achieved, and in a case of failure to ascertain whether it is reasonable according to the prevailing market conditions.

Complied with SEC & ICASL – A 11

9. Directors’ Remuneration

9.1 Corporate Governance Rules - Human Resources / Remuneration committee

Level of Compliance

The remuneration Committee comprises of the following three Non- executive/independent Directors.

Mr. S.M.M. Yaseen –Non-executive Director/ independent Chairman

Mr.W.J.L.U.Wijeyaweera-Non-executive/ independent Director

Mr.P. Sumanapala – Non-executive/independent Director

Mr. S. Amaresekara GM/CEO (by invitation only)

The remuneration Committee is responsible for assisting the Board with regard to remuneration policy for the Corporate Management.

Complied with SEC & ICASL – B 1 CBSL Rule 3(6)

9.2 Corporate Governance Rules - Level and make up of the Remuneration

Level of Compliance

The remuneration package of the GM /CEO is structured to link rewards to corporate and individual performance. Non-executive Directors receive only nominal fee/ allowance as disclosed in this Annual Report.

Complied with SEC & ICASL – B 2

9.3 Corporate Governance Rules - Disclosure of Remuneration

Level of Compliance

The details of the total remuneration/emoluments of the directors are disclosed on page 59 of the Annual Report.

Complied with SEC & ICASL – B 3, CBSL Rule 3(8)

10. Relationship with shareholders

10.1 Corporate Governance Rules - Constructive use of the Annual General Meeting (AGM)

Level of Compliance

The Board appreciates the participation of shareholders and considers that the effective mode of communication between the management of the Bank and the shareholder are the Annual Report and AGM. Therefore, on the information provided to the Shareholders through the annual report is considered as an opportunity given to the Shareholders to raise relevant questions pertaining to the business of the Bank, either verbally or in writing.

Complied with SEC & ICASL – C 1, CBSL Rule 3(1)

10.2 Corporate Governance Rules - Circularisation of Notice of the AGM

Level of Compliance

The Annual Report including fi nancial statements and the notice of the meeting are sent to shareholders at least 15 working days prior to the date of the AGM.

Complied with SEC & ICASL – C 1.4.

10.3 Corporate Governance Rules - Major transactions



31

Level of Compliance

During 2008 there were no major transactions which materially affected the Bank’s net asset base.

Transactions, if any which materially affect the net assets of HDFC that factor will be disclosed in the quarterly/annual fi nancial statements.

Complied with SEC & ICASL – C 2

11. Accountability and Audit

11.1 Corporate Governance Rules - Financial Reporting Statutory and Regulatory Reporting

Level of Compliance

The Bank has reported a balance and fair assessment of its fi nancial position for the year ended 31st December and at the end of each quarter.

In the preparation/ and in presentation of quarterly and annual fi nancial statements, the Bank had prepared and presented its fi nancial Reports in conformity with Sri Lanka accounting Standards, Sri Lanka Accounting and Auditing standards Act No 15 of 1995, 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 SEC and the, Central Bank under Banking Act No 30 of 1988.

The fi nancial statements for the year ended 31st December 2008 and for the quarters ended have been published in news papers, in all three languages.

The external Auditor of the HDFC Bank is the Auditor General.

Complied with SEC & ICASL – D 1, SEC & ICASL – D 1.1, CBSL Rule 3(8)

11.2 Corporate Governance Rules - Directors’ report in the Annual Report

Level of Compliance

The Director’s Report is given on page 39 to 41 of this Annual Report.

Complied with SEC & ICASL – D 1.2

11.3 Corporate Governance Rules - Declaration by the Board that the Business is a going concern

Level of Compliance

This is given on the Directors’ Reports on page 41 of the Annual Report.

Complied with SEC & ICASL - D 1.2

11.4 Corporate Governance Rules - Statement of Directors’ on their responsibility on the preparation and presentation of fi nancial statements.

Level of Compliance

The Statement of Directors’ Responsibility for Financial Reporting is given on page 42 of the Annual Report.

Complied with SEC & ICASL - D 1.3

11.5 Corporate Governance Rules - Summoning an EGM notify shareholders if net assets fall bellow one half of the shareholder’s funds.

Level of Compliance

Holding an EGM is highly remote. However, if there is any necessity, an EGM will be called for and shareholders will be notifi ed.


12. Internal Control

12.1 Corporate Governance Rules - Maintaining a sound system of internal control and risk management.

Level of Compliance

The Board is ultimately responsible for the Bank’s system of internal controls and for reviewing their effectiveness. These systems support in managing the risk of the Bank’s business and ensure that the fi nancial information on which business decisions are made and which is published is reliable, and also ensure that the Bank’s assets are safeguarded.

The system of internal controls designed to manage the risk of failure to achieve business objectives. Internal controls are aimed at providing reasonable and not absolute assurance against material misstatement or loss.


32


The Board of Directors are satisfi ed with the effectiveness of the system of internal controls.

A detailed Risk Management Report is given on pages 37 of the Annual Report.

Complied with SEC & ICASL – D 2

12.2 Corporate Governance Rules - Reviewing the effectiveness of the Internal Control System

Level of Compliance

The Audit Committee monitors and reviews the effectiveness of the Bank’s internal audit function and the internal control system. The Audit Committee’s report on the effectiveness of the internal control system is reviewed by the Board annually.

Complied with SEC & ICASL – D 2.1, CBSL 3(8)

13. Audit Committee and Auditor

13.1 Corporate Governance Rules -Composition and Terms & Conditions of the Audit Committee

Level of Compliance

The Audit Committee of the Bank is comprised of three Non-Executive/ Independent Directors, the Chief Internal Auditor functions as the secretary to the Audit and Management Committee. Audit Committee report is given in page 38 of this Report

Complied with SEC & ICASL D-3.1

13.2 Corporate Governance Rules - Review of external Audit Function and relationship with External Auditor

Level of Compliance

The relevant details pertaining to the above is discussed in the Audit and Management Committee report.

Complied with SEC & ICASL D-3.2

13.3 Corporate Governance Rules - Review of Internal Audit Function

Level of Compliance

The relevant details pertaining to the above

is discussed in the Audit and Management Committee report.


13.4 Corporate Governance Rules - Confl ict of Interest

Level of Compliance

The Directors exercise their independent judgment on issues of strategy, policy, resources and standards of conduct, and take necessary steps to avoid any confl icts of interest that may arise from any transaction of the Bank, with any person who shall be considers as a related party (according to defi nition of Banking Act aforesaid).

All related party transactions are disclosed on pages 66 of the Annual Report.

Complied with SEC & ICASL, CBSL Rule 3(1) and CBSL Rule 3(7)

13.5 Corporate Governance Rules - Code of Business Conduct and Ethics

Level of Compliance

This will be adopted in year 2009.

To be complied with SEC & ICASL – D 4

13.6 Corporate Governance Rules - Confi dential Information

Level of Compliance

The HDFC considers that ensuring the confi dentiality of customer information is very vital. The Bank has adopted a policy that prevents the disclosure of confi dential customer information outside the Bank.


14. Shareholders

14.1 Corporate Governance Rules - Institutional Shareholders

Level of Compliance

Instructional shareholders are encouraged to use of their votes.

Further they are encouraged to ensure their voting intentions are translated into practice.

Complied with SEC & ICASL – E 1



33

Relevant Discloses, as per the Colombo Stock exchange directions on Corporate Governance.

Board of Directors

The HDFC confi rms that,

i. The Director Board of the HDFC Bank consists of the correct Number of non-executive directors in accordance with the Rule 6.1 (a) of the CSE listing rules.

ii. The Director Board of the HDFC Bank consists of the corrected number of independent non-executive directors, in accordance with Rule 6.2 (a).

iii. Mr. S. M. M. Yaseen , Mr. W. A. T. Fernando, Mr. W. J. L. U. Wijeyaweera, Mr. P. Sumanapala, Mr. M. M. Abul Kalam, Mr. Nimal Rodrigo, Mr. U.N. Jinasana, submitted their declarations stating as Non- executive / Independent directors and Mr. M. I. M. Rafeek, Mr. A. W. Dayananda submitted their declarations stating as non- executive / non Independent directors, in accordance with Rule 6.2 (b) of the CSE Listing Rules. (As they are being the directors appointed by N.H.D.A, the major shareholder having a signifi cant shareholding at HDFC)

Note : According to the HDFC Act aforesaid, the Board consist of non-executive Directors, only.

Remuneration Committee

HDFC Confi rms that,

iv. The Remuneration Committee consists of the correct number of Independent non-executive directors, in accordance with Rules 6.5(a)

v. A separate Remuneration Committee was formed as the Remuneration Committee in accorance with Rule 6.5(a) consisting with Mr. S. M. M. Yaseen , Mr. W. J. L. U. Wijeyaweera, Mr. P. Sumanapala

vi. Mr. S. M. M. Yaseen (a Non-Executive Director) was appointed as Chairman of the Committee by the Board of Directors in accordance with (Rules 6.5(a)

vii. The functions of the Committee are as follows

Defermination of

• Remunaration packges applicable to Chief Executive Offi cer and other Corporate Management Members of the Bank.

Audit Committee

The HDFC confi rms that,

viii. Audit committee of the HDFC Bank consists of the correct number of independent non-executive directors, in accordance with Rules 6.6(a) by appointing 3 non-executive/ independent directors namely Mr. Sumanapala, Mr. Ajith Fernando, and Mr. Nimal Rodrigo to the Audit Committee.

ix. A separate Audit Committee was formed by the Board in accordance with CSE Rules.

x. Mr. Sumanapala, a Non-executive /Independent Director of the Board was appointed as the Chairman of the Committee, in accordance with Rules 6.6(a)

xi. Mr. W.A.T. Fernando, Non-executive /Independent Director is a member of a recognized professional accounting body (Rule 6.6(a)), appointed to the aforesaid committee in accordance with Rule 6.6(a), full fi ling, the requirement that 01 member of the committee should be a member of a recognized professional body.

xii. The HDFC Bank, being a Bank under the Finance Ministry, the Audit Committee is attending to functions mentioned in fi nance circular No1A1/ 2000/1, In addition the committee is engaged with the following functions, in accordance with Rule 6.6(b) of the aforesaid Rules and CBSL Rule 3(6).

• Oversight of the preparation, and adequacy of disclosures in the fi nancial statement, in accordance with Sri Lanka Accounting Standards

• Oversight of the company’s compliance with fi nancial reporting requirements, information requirements of the Companies Act and other relevant fi nancial reporting related regulations and requirements

• Oversight over the processes to ensure that the Company internal controls and Risk Management are adequate, to meet the requirements of the Sri Lanka Auditing Standards

• Assessment of the independence and performance of the Company’s external auditors

xiii. The General Manager /CEO, and the DGM (Finance) attending to all committee meetings.


34


Branch Managers

Mr. H. M. A. S. HerathKegalle

Mr. N. C. RanjithGalle

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

Mr. H. M. Thilakaratne Matale

Mr. T. KandiahBatticaloa

Mr. W. D. K. SeneviratneKurunegala

Mr. R. M. SugathapalaBadulla

Mr. P. V. R. T. WijerathnaAvissawella

Mr. W. Gunasinghe Homagama

Mr. G. W. A. N. KalindaTangalle

Mr. T. B. KarunabanduGampaha

Mr. K. Wijesiri Chilaw


35

Mr. N. M. JaywardenaPiliyandala

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

Mr. K. D. Ruwansiri Monaragala

Ms. K. W. Y. IndiraMatara

Mrs. D. T. A. JayasingheHorana

Ms. L. GunathilakaColombo

Mr. G. D. K. H. PereraAnuradhapura

Mr. M. L. R. KumaraKalutara

Mr. B. W. M. C.KumarasireiRathnepura

Mr. U. P. A. M. S. PassaperumaNuwara-Eliya

Ms. M. G. D. P. SeneviratneAmpara

Branch Managers (Contd...)

36


Product Profile of the Bank

KEDELLA The housing loan scheme for low and middle income families with low rates and hassle free documentation

SHRAMA UDANA Yet another special housing loan scheme for EPF holders A special speedy loan product

SITU SEVANA Value added hassle free home loan

GURU SEVANA A speedy and fl exible loan product for Government Teachers

SIRISARA An additional special ‘Home Loan’ for existing customers

THILINA HOME LOANA loan up to 4 times the savings balance

THILINA Children’s Savings Account which offers benefi ts in terms of gifts and interest

PRATHILABA A super savings product which offers the most attractive rate of interest

VISHRAMA UDANAA value added fi xed deposit scheme designed exclusively for the senior citizens

HDFC DHANA NIDHANA A revolutionary fi nancial product offering the highest guaranteed return over periods ranging from 7 to 15 years


37

Risk Management

Objectives of Risk Management and Integrated Risk Management of the HDFC Bank

Manage risks at an acceptable level and reject unacceptable risks are the main objectives of risk management of the HDFC Bank. The bank has taken several steps to strengthen Risk Management and Governance.

Risk Management strengthened by the appointment of members of the Risk Management committee by the Board of Directors in terms of the Banking Act.

During the year under review the role of Risk Management Committee is to assess all risks faced by the HDFC Bank through applicable risk indicators and management information.

The committee had advised prompt and corrective actions to mitigate the effects of specifi c risks. The Committee submits regular risk assessments to the Board seeking its views concurrence of specifi c directions.

The banking industry, like any other fi nancial service industry, is exposed to a multitude of risks, which could broadly be classifi ed into credit, market, operational liquidity, legal/ compliance and reputation /strategic risks.

Credit Risk

Credit Risk is the risk that borrower is unable to meet its fi nancial obligation to the lender in accordance with agreed terms and conditions. The bank has standard credit approval process including well establish credit appraisal. The effectiveness of the credit risk management framework is validated through various compliance and monitoring process.

The functions of the credit committee of the bank are to promote high quality credit decisions and maintain strong credit portfolio to mitigate the credit risk. The Credit Committee comprises senior management of the Bank and General Manager/ Chief Executive Offi cer.

Market Risk

Market risk is the risk of a fi nancial institutions loss resulting from adverse movement in market rate or price including interest rates and equity prices.

Market risk manages by the Assets and Liabilities Committee (ALCO), comprising senior management of the bank. The ALCO meets monthly or whenever necessary. Its decisions are reviewed by the Board. Staff of Treasury Division is managing and processing the treasury transactions. Depending on the daily

fund, position and complies with regulatory reporting requirements and ALCO guideline/decisions.

Operational Risk

Operational Risk is the risk of direct or indirect loss resulting from inadequate or failed internal process, people and system or from external events. The Bank is implementing appropriate procedures and guidelines which are in place to ensure that risks arising from day to day operational activities are controlled. All identifi ed risks are regularly reviewed and major changes being evaluated and taking corrective action where ever necessary.

Liquidity Risk

Liquidity risk is a potential loss to an institution, arising either from its inability to meet its obligations or to fund increase in assets as they fall due without incurring unacceptable costs or loss. The Liquidity Risk also comes under purview and management of ALCO of the Bank. The HDFC Bank had always been to maintain an optimum liquidity position substantially above the minimum liquid assts-to-liability ratio specifi ed by the Central Bank of Sri Lanka.

Compliance Risk

The Compliance Offi cer of the Bank is responsible for regulatory compliance, of the bank and for designing of a compliance programme to meet compliance frame work into its business operations. Customer risk profi ling is conducted as per guidelines issued by Financial Intelligence Unit of Central Bank on regular basis.

Managing Risk at HDFC Bank and Plans for 2009 on wards

The Bank has taken further effort to strengthened Risk Management under the guidance of Risk Management Committee.

The Risk Management committee closely monitors the rapid changes in the economy and relevant market conditions in order to guide business and functional management at all levels for managing loan portfolios, procedure and development and management strategies.

The HDFC Bank is currently improving its systems and existing rules for closely monitoring the regulatory requirement.

38


Report of the Audit and Management Committee

01 Constitution of the Audit and Management Committee

The Audit and Management Committee consists of three independent Non-Executive Directors of the Board. The Director who represents the General Treasury acts as the Chairman of the Committee. During the fi nancial year ended 31st December 2008 the following Board members were in the Audit and Management Committee.

• Mr. P. Sumanapla (Chairman of the Committee)

• Mr. W.A.T.Fernando

• Mr. Nimal Rodrigo

The General Manager/ Chief Executive Offi cer, Deputy General Manager (Finance), Deputy General Manager (Marketing), and Chief Operation Offi cer attend the Committee meeting by invitation. Chief Internal Auditor functions as the Secretary to the Committee. A representative of the Auditor General’s Department attends the meetings as an External Auditor.

02 The Functions of the Audit and Management Committee

The function of the Audit and Management Committee is to review and monitor the internal audit functions of the HDFC Bank with a view to facilitate the achievement of the set objectives.

During the year under review, the Committee concentrated on the following areas.

a. Review and implementing of internal controls and recommending the modifi cations when necessary

b. Review and approving of an Internal Audit Plan

c. Monitoring the functions of the Internal Auditor

d. Review and comparison of quarterly performance of the HDFC Bank with budget

e. Periodic review of the matters raised by the Internal Auditor

f. Ensuring safe and effective functioning of the HDFC Bank aligned with legal and regulatory requirements including the Banking Act No. 30 of 1988 and amendments as well as Securities and Exchange Commission regulations

g. Ensuring the application of the Sri Lanka Accounting Standards and Central Bank guidelines

h. Review the relevent matters raised by the Auditor General in the report in terms of section 14 (2) (c) of Finance Act No. 38 of 1971 for the year 2008.

03 Internal Audit Division

During the year under review, Internal Audit Plan was implemented by the Internal Audit Division of the HDFC Bank under the guidance of the Audit and Management Committee. In addition to the normal functions of the Internal Audit Division, special investigations were carried out as and when required by the Audit and Management Committee, Board of Directors, Chairman and the Chief Executive Offi cer of the HDFC Bank.

Further, the Internal Audit Division conducted System Audit to eliminate ineffi cient procedures, improve the internal control/ internal check and minimize the possible frauds and errors.

04 Meetings

In accordance with the guidelines of the General Treasury Circular Number IAI/2000/I and directions of the Banking Act No. 30 of 1988 and its amendments Audit and Management Committee of the HDFC Bank held its meetings on a quarterly basis.

During the fi nancial year ended 31st December 2008, four Audit and Management Committee meetings were held and recommended remedial actions were taken by the management to rectify the identifi ed defi ciencies and issues. Further the minutes of these Audit and Management Committee were forwarded to the Board of Directors for information and further action if necessary.

P. SumanapalaChairman

Audit and Management Committee


39

The Report of the Directors

GENERAL

The Directors have pleasure in presenting their Annual Report for the fi nancial year ended 31st December 2008 to the members together with the audited fi nancial statement of the HDFC Bank for that year which were accepted and approved by the Board of Directors. The Report also includes relevant disclosures required to be made under the listing Rules of the Colombo Stock Exchange. Housing Development Finance Corporation Bank of Sri Lanka, (herein after 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 Colombo Stock Exchange in November 2003. PRINCIPAL ACTIVITIES

During the year under review, fi nancing for housing and housing development projects, continued as the principle activity of the HDFC Bank without any signifi cant changes made to the nature of principal activities.

REVIEW OF BUSINESS

The Chairman’s review on page 04 and the General Manager/Chief Executive Offi cer’s report on page 09 provide an overall assessment of the fi nancial performance and fi nancial position of the HDFC Bank. The aforesaid reports describe the affairs of the HDFC Bank and important events that had taken place during the year reviewed, forming an essential part of the Directors Report.

FUTURE DEVELOPMENT

An over view of future development is given in the Chairman’s Review on page 05 and the Chief Executive Offi cer’s Report on page 10.

SYSTEM OF INTERNAL CONTROLS

The Board of Directors has put in place an effective and comprehensive system of internal controls covering fi nancial operations, compliance and risk management which are required to carry on the business of banking prudently.

VISION, MISSION AND OBJECTIVE

The HDFC Bank’s vision, mission and objectives are given in this report. The business activities of the HDFC Bank are conducted with the highest level of ethical standards and good corporate governance in achieving its Vision and Mission.

RISK MANAGEMENT

Specifi c steps taken by the HDFC Bank in managing both banking and non-banking risks associated with the bank are detailed on page 37 of this Report.

PROFITABILITY

The bank recorded a loss of Rs. 67,502,560 pre taxes.The details compared with the previous year are as given below:

Bank Group 2008 2007 2008 2007 Rs. Mn Rs. Mn Rs. Mn Rs. Mn

Operating Profi t on ordinary activities before Vat (67.50) 93.12 (207.70) 30.47VAT on fi nancial services 26.88 45.98 26.88 45.98Provision for taxation (2.28) 26.06 (1.66) 26.06Profi t on ordinary Activities after tax (92.10) 21.07 (233) 41.58Retained profi t / (accumulated losses) b/f 743.10 755.42 675.71 750.69Profi t available for appropriation 651 776.5 442.80 709.12 Appropriation First & Final Dividend proposed - 32.35 - 32.35Transfer to Reserve Funds - 1.05 - 1.05Retained Profi t carried forward 651 743.09 442.80 675.71

40


The Report of the Directors (Contd...)

PROPERTY, PLANT AND EQUIPMENTCapital expenditure on property, plant and equipment amount to Rs. 574.29 million details, of which are given in note 20 of the fi nancial statement.

RESERVESThe total reserves of the HDFC Bank stood at Rs. 735.01 million as at December 31st 2008, details of which is given in note 26 of the fi nancial statement.

DIRECTORSThe Board of Directors of HDFC Bank consists of nine Directors having wide experience and exposure in fi nancial, administration and legal sectors.

The profi les of the Directors are given on page 06 of this report.

The following were the Directors of the HDFC Bank during the year.

The following were the Directors of the HDFC (RED) during the year.

Mr. S. M. M. Yaseen - The Chairman of the HDFC BankMr. Sunil Kannangara - Director of the HDFC BankMr. M. I. M. Rafeek - Director of the HDFC BankMr. L. P. Andrahennadi - Director of the HDFC BankMr. C. A. Srathchandra - The General Manager/ CEO of the HDFC Bank (former GM of HDFC. Retired from the Board of the subsidiary)Mr. S. M. Amerasekera - The General Manager/ CEO of the HDFC Bank

APPOINTMENTS AND RESIGNATIONSDuring the period under review, Mr. K. D. Ranasinghe resigned from the Board. (in April 2008.)

DIRECTOR’S RESPONSIBILITY FOR FINAN-CIAL REPORTINGDirectors are responsible for the preparation of the Financial Statement of the HDFC Bank, to refl ect a true and fair view of the Bank’s affairs. The Directors are of the view that the Financial Statement have been prepared in conformity with requirements of the Sri Lanka Accounting Standards, Banking Act No. 30 of 1988 (and its amendments) Accounting and Auditing standards Act No. 15 of 1975 and the listing rules of the Colombo Stock Exchange and HDFC Act No 7 of 1997 (amendment Act No 03 of 2003) and the Corporate Governance code, issued to Licensed Specialized Bank.

Mr. S. M. M. Yaseen - Chairman (Non-executive / independent)Mr. W. A. T. Fernando - Director (Non-executive / independent)Mr. W. J. L. U. Wijeyaweera - Director (Non-executive / independent)Mr. P. Sumanapala - Director (Non-executive / independent)Mr. M. M. Abul Kalam - Director (Non-executive / independent)Mr. U. N. Jinasena - Director (Non-executive / independent)Mr. Nimal Rodrigo - Director (Non-executive / independent) Mr. A. W. Dayananda - Director(Non-executive/ Non independentMr. M. I. M. Rafeek - Director(Non-executive)/Non independent }As they represent the

major share holder


41

The Report of the Directors (Contd...)

As at As at 01/01/2008 31/12/2008

Mr. S. M. M. Yaseen - Chairman 1,000 -

Mr. W. A. T. Fernando - Director - - Mr. W. J. L. U. Wijeyaweera - Director 300 300 Mr. P. Sumanapala - Director - -

Mr. M. I. M. Rafeek - Director - -

Mr. M. M. Abul Kalam - Director - -

Mr. U. N. Jinasena - Director 200 200

Mr. Nimal Rodrigo - Director - -

Mr. A. W. Dayananda - Director - -

DIRECTORS’ INTEREST IN ORDINARY SHARES

Directors’ shareholdings have not changed subsequently from the date of the Balance sheet up to 29th of May 2009 being one month prior to the date of Notice of the Annual General Meeting.

DIRECTORS’ INTERESTS IN CONTRACTSNo Directors has any material interest in any transaction or proposed contract involving HDFC Bank of Sri Lanka other than those disclosed in Note 27 of the Accounts on page 66 of this Report.

BOARD SUB COMMITTEESThe board while assuring the overall responsibility and accountability in the administration and the management of the HDFC Bank has taken necessary steps to appoint Board Sub Committees, such as Audit and management committee, Human Resource committee, Assests and Liability committee, Remunaration committee, Nomination committee and Interagrated Risk Management committee. The Report of the Board Sub Committees were given on page 43 of the Annual Report.

ENVIRONMENTAL PROTECTIONThe HDFC Bank has not engaged in any activity, which has a direct impact on the environment. Specifi c measures taken to protect the environment are given in the CSR Report.

STATUTORY PAYMENTSThe Directors, to the best of their knowledge and belief,

are satisfi ed that all statutory payments due to the Government and in relation to the employees have been made on time.

CONTRIBUTIONS MADE TOWARDS CHARITYThe Bank has contributed a sum of Rs. 23,800.00 towards charity.

EVENTS AFTER THE BALANCE SHEET DATEThere have not been any material events that occurred subsequent to the balance sheet date. Those require adjustments to the Financial Statements other than those disclosed if any,

are mentioned in notes to the Financial Statements.

GOING CONCERNThe Board of Directors are satisfi ed that the HDFC Bank has adequate resources to continue its operations in the foreseeable future. Accordingly, the fi nancial statements are prepared based on the going concern concept.

APPOINTMENT OF AUDITORSThe Auditor General continues to be the Auditors of the bank as stipulated in the HDFC Act No. 07 of 1997.

CORPORATE GOVERNANCE (CSE LISTING RULES, BANKING ACT DIRECTIONS) The Colombo Stock Exchange (CSE) and Monitory Board have separately issued corporate governance rules, applicable for listed entities and for Licensed Specialized Banks. The HDFC being a listed Licensed Specialized Bank specifi c measures taken in this regard are elaborated on page 26 to 33 of this Report.

NOTICE OF THE MEETING Notice of the meeting in respect of the 24th Annual General Meeting of the HDFC Bank is given on page 71.

By order of the board

K. T. Dharshani De SilvaThe Secretary of the Bank2009 Colombo.

42


Director’s Responsibilities For Financial Reporting

The Auditor’s Report sets out the respective responsibilities of the Directors and Auditors relating to the fi nancial statements and this statement provides additional information.

The Directors are required by relevant statutory provisions to prepare fi nancial statements for each fi nancial year which give a true and fair view of the state of affairs of the Bank and its subsidiary for that period. Necessary statutory provisions are in HDFC Act No. 7 of 1997 and amendment Act No. 15 of 2003, read in conjunction with Banking Act No. 30 of 1988 and amendments thereto. The fi nancial statement of the Bank and its subsidiary gives a true and fair view of

01. The state of affairs of the Bank and its subsidiary as at balance sheet date, and

02. The profi t or loss of the Bank and its subsidiary for the fi nancial year ended on the balance sheet date.

The Directors are satisfi ed that the Bank and Group have the required resources to continue in operation for the foreseeable future and therefore, these fi nancial statements are prepared on a going concern basis.

The Directors consider that, these fi nancial 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 Directors have a responsibility to ensure that the Bank and its subsidiary are maintaining suffi cient accounting policies to ensure the accuracy and reliability of fi nancial statements. The Directors have a general responsibility to take reasonable steps to safeguard the assets of the Bank.

In discharging this responsibility, the Directors have instituted a system of internal fi nancial controls and a system for monitoring its effectiveness. The system of controls provide reasonable assurance of safeguarding (not absolute) of Bank’s assets, maintenance of proper accounting records and the reliability of fi nancial information.

By Order of the Board

K. T. Dharshani De SilvaThe Secretary to the Board / Bank

1st of June 2009


43

Report of the Board Sub Committees

Board Human Resource and Remuneration Committee ReportThe Human Resource and Remuneration Committee comprise of 03 members all of whom are non-executive independent Directors. The Chairman of the Committee is Mr. S. M. M. Yaseen. Mr. P. Sumanapala and Mr. W. J. L. U. Wijayaweera are the other two members of the aforesaid Committee. The appointments to the above Committee are made by the Board.

Mandate of the aforesaid Committee The Committee is responsible for the following.

(a) Implementation a Remuneration policy relating to Chief Executive Offi cer and other key management personal of the Bank.

(b) Setting up goals and targets for the Directors, CEO and other key management person.

(c) Evaluating the performance of CEO and other key management personal against the set targets and goals periodically and determined the base for revising remuneration benefi ts 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 Meetings

During the year under review the Committee held 07 meetings and all the three Directors were participated for all the meetings.

The General Manager / CEO is attending the meetings by invitation.

Nomination CommitteeThe Nomination Committee comprise of 03 members all of whom are non-executive independent Directors. The Chairman of the Committee is Mr. S. M. M. Yaseen. Mr. P. Sumanapala and Mr. W. J. L. U. Wijayaweera are the other two members of the aforesaid Committee. The appointments to the above Committee are made by the Board.


(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 a criteria, such as qualifi cations, experience and key attributes required for eligibility to be consider for appointment or promotion to the post of CEO and the key management position.

(d) Ensuring the Directors, CEO and key management personal are fi t and proper persons to hold offi ce as specifi ed 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 MeetingsThis Committee was appointed by the Board recently. Therefore most of the subjects mentioned above were attended by the Board it self, during the year under review.

Integrated Risk Management CommitteeThe Integrated Risk Management Committee comprise of 05 members, including 4 non-eccutive independent directors namely Mr. S. M. M. Yaseen (The Chairman of the Committee) Mr. P. Sumanapala, Mr. W. J. L. U. Wijayaweera, Mr. U. N. Jinasena and Mr. Suresh Amerasekara. The appointments to the above Committee are made by the Board.


(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.

44


(b) Reviewing the adequacy and effectiveness of all management level committees.

(c) Taking the prompt corrective action to mitigate the effects of specifi c 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 offi cers responsible for failure to identify specifi c 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 offi cer who shall carryout the compliance functions and report to the Committee, periodically.

Integrated Risk Management Committee MeetingsThis Committee was appointed by the Board recently. Therefore, most of the subjects mentioned above were attended by the Board it self, during the year under review. In addition to the above relevant more information given under the Risk Management Report of the Annual Report on Page 37.

Recovery Sub Committee

The Recovery Sub Committee comprise of 03 members, including 3 non-executive directors namely Mr. A. W. Dayananda (The Chairman of the Committee), Mr. W. J. L. U. Wijayaweera, Mr. N. Rodrigo the appointments to the above Committee are made by the Board.

Mandate of the aforesaid Committee The Committee is responsible for taking appropriate decision pertaining to HDFC acquired properties.

Recovery Sub Committee MeetingsDuring the year under review the Committee held 05 meetings.

The General Manager / CEO, Deputy General Manager (Finance) and Senior Manager (Recoveries) are attending the meetings by invitation.

In year 2009, the Chairman of the Board was appointed as the Chairman of this Committee and presently Mr. S. M.

M. Yaseen is the Chairman of the aforesaid Committee.

In addition Audit and Management Committee plays a very vital role in the Bank taking all the relevant actions in accordance with the guidelines of the General Treasury Circular No. IAI/2000/I. The relevant report is given separately, on Page No. 38 of this Annual Report.

S. M. M. Yaseen K. T. Dharshani De Silva The Chairman The Secretary Bank/Board

Report 0f the Board Sub Committees (Contd...)


45

People Management

As Human Resources in the Bank are very vital in create value creation, the Human Resources Management has been transformed to concentration on the following areas:

Strategic HRMTransformational ManagementInfrastructure ManagementEmployees Productivity Management

HR Development

Development is a shared responsibility and employees as their part should posses the drive and initiative to take advantage of the available learning and development opportunities. Employees are encouraged to develop their contribution both on the context of their particular job roles and the processes they work for. The new training & development programmes, the Bank has provided have improved professionalism of the staff.

It has been carried out Employees Competence Analysis and level of credibility of the employees the following techniques have been applied to enhance productivity and job satisfaction of the employees.Re – Location of employees

Job RotationJob EnlargementJob Enrichment

Development of Knowledge Sharing Circles

The Knowledge Sharing Circles (KSC) were formed within the Bank to enhance individual knowledge and values thereby improving their contribution towards the corporate and social goals. Furthermore an e-Information Sharing Mechanism (ISM) has been introduced to share new knowledge acquired among the employees themselves.

The three main employee Associations have been formed and they interact and build a spirit of cooperation and commonality of purpose for which they have been established.

••••

•••

Ceylon Bank Employees’ UnionWelfare & Death Donation SocietyHDFC Bank Sports Club

The Employees Productivity Ratios

The HDFC Bank continuously focuses on the employees’ productivity and on the employees’ value. The following indicators provide evidence for same.

Item 2008 2007 2006 2005 2004

Staff 289 288 286 290 276Income per employee(Rs ‘000) 6717 6046 4,495 3,641 3,431Assets per employee(Rs ‘000) 49069 46720 37,400 30,460 26,723

Year No of Total Value of Value of

Employees Human Human

Resources Resources

per employee

(Rs ‘000) (Rs ‘000)

2008 289 1313152 4544

2007 288 1218473 4231 2006 286 1138045 3979 2005 290 671393 2315 2004 276 632673 2292

Human Resources Accounting

The Lev & Schwartz model has been used to compute the value of the Bank’s human resource as at December 31, .

The Human Resource Valuation is based on the following assumptions:

All the existing employees will continue in employment up to retirement.

Employee remuneration includes all direct and indirect benefi ts earned by them.

Annual increment is granted at 3% p.a. on average.

•••

•

•

•

•

46


Staff Strength - 2008

As at 31st December

Management Level / Year 2008 2007 2006 2005 2004

A - Corporate Management 7 7 6 5 5B - Snr. & Exe. Management 8 11 6 6 8C - Executives 97 104 97 98 103D - Non Executives 177 166 177 181 160Total 289 288 286 290 276

Valu

es

‘04 ‘05 ‘06 ‘07 ‘08

2,75

0

4,00

0 4,25

0

4,50

0

2,25

0

Age Analysis

Nos

18-26 27-35 36-44 45-53 54-62

11

98

110

57

13

People Management (Contd...)

Year


47

Financial Review

1. Review of Operating Results

1.1 Interest Income

The interest income increased to Rs.1941 million in 2008 from 1695 million in 2007. It shows an increase of 14.5% during the year against the previous year. Increase in the interest income of the bank has been continued due to annual growth of the loan portfolio and increase in lending rates in the market.

Interest income Rs. Million 2008 2007

Loans and advances 1,836 1,622

Treasury Bills, Bonds and

Other placements 105 73

1,941 1,695

There is a signifi cant increase in income from government securities and other placements which is mainly due to increase in quantum of investment and increase in rate of interest.

Interest Expense

Past two years of 2007 and 2008 had become very crucial for fi nancial sector due to rapid increase in cost of funds and almost all the fi nancial institutions have been affected by these unexpected increases.

Interest expenses increased to Rs.1602 million in the year 2008 compared to the year 2007 which was Rs.1246 million showing an increase of 28.5% over the previous year.

Interest expense from deposit increased to Rs.842 million in 2008 compared to Rs.655 million in 2007. The increase is 28.5% over the previous year. As there was no signifi cant increase in deposit base, this increase is mainly due to the increase in interest rates in the money market.

Other interest expense from debentures and borrowings are also increased due to this general increase in the market for the year 2008. It was recorded Rs.760 million in 2008 compared to Rs.591 million in 2007. It was increased by Rs.169 million showing 28.5% increase. However the corresponding liability has increased only by Rs.500 million.

Interest expense Rs. Million

2008 2007

Capital Cost Capital Cost

Deposits 4976 842 4934 655

Other borrowings 6641 760 6092 591

11617 1602 11026 1246

Staff Cost

Personnel cost has increased by 6% from Rs.192 million in 2007 to Rs.204 million in 2008. This is mainly due to granting annual salary increments of all staff and a few new recruitments.

Other Over-head Expenses

Premises equipment and establishment expenses have increased by 30% in 2008 compared to 2007 due to the new offi ce facilities obtained and general cost increase in the market. Operation expenses also increased from Rs.72 million in 2007 to Rs.82 million in 2008 by 12% due to general price increase.

Provision for Loan losses

Provision for loan losses increased from Rs.43 million to Rs.54 million. It shows 25% increase in 2008 compared to 2007. Out of this Rs.54 million, Rs.38 million is for general provision. General Provision is made for performing loans as per

Interest Income

Rs.M

n

‘04 ‘05 ‘06 ‘07 ‘08

908 1,

024

1,20

3 1,69

6 1,94

1

Rs.M

n

‘05 ‘06 ‘07 ‘08

9.88 9.

40 12.9

1 14.5

5

48


instructions given by the CBSL. Rs.16 million is for special provision for default customers. Action has been taken to strengthen the recovery division and expedite the recovery actions for default customers.

Net Financial Result

The net fi nancial result of the bank is negative by Rs.92 million in 2008 compared to Rs.21 million profi t in 2007. The loss is mainly due to the increase in cost of funds in the money market during 2007 and 2008.

The following interest income to interest expense ratios clearly shows this increase in interest expense compared to interest income.

Rs. Million 2005 2006 2007 2008

Interest income 1024 1203 1695 1941

Interest expense 568 699 1246 1602

Ratio 55% 58% 73% 82%

Rs.M

n

‘05 ‘06 ‘07 ‘08

1,00

0 1,20

0

1,70

0 1,90

01,

600

500 70

0

1,20

0

Interest Expenses

Interest Income

Financial Review (Contd...)

Six Months Interest Rate Movement

‘05 ‘06 ‘07 ‘08 ‘09

10.1

0 12.1

5

17.5

7

17.5

9

19.6

1

Rate

%

AWPLR

14.6

9

10.3

5

16.1

6

18.2

8

TB Rate

Financial Reports

Auditors’ Report 50

Consolidated Income Statement 52

Consolidated Balance Sheet 53

Consolidated Cash Flow Statement 54

Statement of Change in Equity 55

Maturity Analysis 56

Signifi cant Accounting Polices 57

Notes to the Financial Statement 60

Statement of Value Added 67

Ten Year Summary 68

Share Information 69

Capital Adequacy 70

50


Auditors’ Report

EF/G/HDFC/2008 08

The audit of the accompanying fi nancial statements of Housing Development Finance Corporation Bank of Sri Lanka (“Bank”) and the consolidated fi nancial statements of the Bank, and its Subsidiary as at 31 December 2008, which comprise the Balance Sheet as at that date, and the Income Statement, Statement of Changes in Equity and Cash Flow Statement for the year then ended, and a summary of signifi cant accounting policies and other explanatory notes thereto (Nos.1 to 30 ) to the fi nancial statements was carried out under my direction in pursuance of provisions in Article 154(1) of the Constitution of the Democratic Socialist Republic of Sri Lanka read in conjunction with Section 13(1) of the Finance Act No.38 of 1971 and Section 26(2) of the Housing Development Finance Corporation of Sri Lanka Act No. 7 of 1997. The fi nancial statements of the Subsidiary was audited by a fi rm of Chartered Accountants in public practice appointed by the members of the Subsidiary.

Responsibility of the Management for the Financial Statements

Management is responsible for preparation and fair presentation of these fi nancial statements in accordance with Sri Lanka Accounting Standards. This responsibility includes: designing, implementing and maintaining internal controls relevant to the preparation and fair presentation of fi nancial statements that are free from material misstatements, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances.

Scope of Audit and Basis of Opinion

My responsibility is to express an opinion on these fi nancial statements based on my audit. Audit opinion

comments and fi ndings in this report are based on review of the fi nancial statements presented to audit and substantive tests of samples of transactions. The scope and extent of such review and tests were such as to enable as wide an audit coverage as possible within the limitations of staff, other resources and time available to me. The audit was carried out in accordance with Sri Lanka Auditing Standards to obtain reasonable assurance as to whether the fi nancial statements are free from material misstatements. The audit includes the examination on a test basis of evidence supporting the amounts and disclosures in fi nancial statements and assessment of accounting principles used and signifi cant estimates made by the management in the preparation of fi nancial statements as well as evaluating their overall presentation. I have obtained suffi cient information and explanations which to the best of my knowledge and belief were necessary for the purpose of my audit. I therefore believe that my audit provides a reasonable basis for my opinion. Sub Sections (3) and (4) of the Section 13 of the Finance Act No.38 of 1971 give discretionary power to the Auditor General to determine the scope and extent of the Audit.

Opinion

So far as appears from my examination and to the best of information and according to the explanations given to me, I am of opinion that the Housing Development Finance Corporation Bank of Sri Lanka had had maintained proper accounting records for the year ended 31 December 2008, and the fi nancial statements have been prepared in accordance with Sri Lanka Accounting Standards, give a true and fair view of the state of affairs of the Bank as at 31 December 2008 and the fi nancial results of its operation and cash fl ows for the year then ended

Report of the Auditor General


51

Auditors’ Report (Contd...)

In my opinion, the consolidated fi nancial statements, give a true and fair view of the state of affairs as at 31 December 2008 and the profi t and cash fl ows for the year then ended, in accordance with Sri Lanka Accounting Standards, of the Bank, and its subsidiary dealt with thereby, so far as concerns the share holders of the Bank.

Emphasis of Matters

Without qualifying my opinion I draw attention to the following matters. The Bank could not provide 5 per cent statutory provisions due to negative fi nancial results for the year ended 31 December 2008. The fi nancial statements of the subsidiary of the Bank also showed a declining situation in operational, fi nancial and liquidity and these factors raise substantial doubt that the subsidiary will be able to continue as a going concern for foreseeable future.

Report on Other Legal and Regulatory Requirements

These fi nancial statements had been presented relevant information required by the Banking Act, No.30 of 1988.

Report to Parliament

My report to Parliament in pursuance of provisions in Article 154 (6) of the Constitution will be tabled in due course.

S.SwarnajothiAuditor General

52


Consolidated Income Statement

For the Year ended 31st December 2008 Bank Group

Notes 2008 2007 2008 2007 Rs. Rs. Rs. Rs.

Income 01 1,974,386,859 1,741,342,366 1,861,428,758 1,686,686,896Interest income 02 1,941,301,977 1,695,601,051 1,828,343,876 1,617,173,470Interest expenses 03 (1,602,061,836) (1,246,608,726) (1,586,834,993) (1,231,394,233)Net interest income 339,240,141 448,992,325 241,508,883 385,779,237Non Interest income 04 33,084,882 45,741,315 33,084,882 69,513,426 372,325,023 494,733,640 274,593,765 455,292,663Less :Non Interest expenses

Personnel costs 05 204,198,012 192,234,404 206,295,691 193,652,081 Provision for staff retirement benefi t 06 33,959,567 42,995,345 34,161,008 43,205,378 Premises equipment & establishment expenses 07 65,469,651 50,479,783 66,050,472 50,653,056 Operating expenses 08 81,798,044 72,926,049 121,382,992 94,334,604 Provision for loan losses 09 54,402,309 42,975,991 54,402,309 42,975,991 439,827,583 401,611,572 482,292,472 424,821,100Operating Profi t on Ordinary activities before Tax (67,502,560) 93,122,068 (207,698,707) 30,471,553Less : VAT on fi nancial services 10 26,877,176 45,984,586 26,877,176 45,984,586Operating Profi t on Ordinary

activities before Corporate Tax (94,379,736) 47,137,482 (234,575,883) (15,513,033)Less: Provision for taxation 11 (2,281,226) 26,063,585 (1,658,019) 26,063,585Profi t on ordinary activities after tax (92,098,510) 21,073,897 (232,917,864) (41,576,618)Retained profi t / (Accumulated losses) b/f 743,091,963 755,426,870 675,714,437 750,699,859Profi t available for appropriation 650,993,453 776,500,767 442,796,573 709,123,241Appropriations Transfer to reserve funds - 1,053,695 - 1,053,695Dividends 12 - 32,355,110 - 32,355,110Retained profi t carried forward 650,993,453 743,091,963 442,796,573 675,714,436Earnings per share Rs. 13 (14.23) 3.26 (35.99) (6.43)Dividend per ordinary share Rs. 0.00 5.00 0.00 5.00


53

Consolidated Balance Sheet

As at 31st December 2008 Bank Group

Notes 2008 2007 2008 2007 Rs. Rs. Rs. Rs.

Assets Cash & short term funds 14 224,047,842 671,217,684 224,050,753 679,843,829 Investment in Government securities & Others 15 867,150,434 608,457,794 867,150,434 608,457,794 Loans & advances 16 11,914,638,638 11,868,933,403 11,914,638,638 11,518,933,403 Interest receivable 17 61,323,278 52,293,073 61,323,278 42,074,901 Taxation Recoverable 23 46,381,972 26,531,644 48,684,151 26,531,644 Housing Project 18 - - 182,247,929 564,460,797Investment in Subsidiaries 25,000,000 25,000,000

Other assets 19 371,303,164 118,677,792 137,021,888 150,166,220 Property , plant & equipment 20 671,273,815 110,671,132 571,656,881 111,633,625 Total Assets 14,181,119,143 13,481,782,522 14,006,773,953 13,702,102,213 Liabilities Deposits from customers 21 4,975,997,765 4,934,616,454 4,975,997,765 4,934,616,454 Borrowings 22 6,641,524,851 6,092,299,268 6,641,788,503 6,342,299,268 Other liabilities 24 866,496,142 665,667,904 900,084,179 703,365,121 Total Liabilities 12,484,018,758 11,692,583,627 12,517,870,447 11,980,280,844 Shareholders’ fund Stated capital 25 962,088,646 962,088,646 962,088,646 962,088,646 Reserves 26 735,011,739 827,110,249 526,814,859 759,732,723 1,697,100,385 1,789,198,895 1,488,903,505 1,721,821,369 Total Liabilities & Shareholders’ Fund 14,181,119,143 13,481,782,522 14,006,773,953 13,702,102,213 Net assets value per ordinary share Rs. 262.26 276.49 230.09 266.08

The Accounting policies on pages 57 to 59 and Notes on pages 60 to 66 from an integral part of these Financial Statements. The Board of Directors are responsible for the preparation and presentation of these Financial Statmements.These Financial statements were approved by the Board of Directors and signed on their behalf,

M.M.Yaseen P.Sumanapala Suresh Amerasekera S.Dissanayake Chairman Director CEO/General Manager DGM ( Finance )

54


Consolidated Cash Flow Statement

For the period ended 31 st December 2008 Bank Group

2008 2007 2008 2007 Rs. Rs. Rs. Rs.Cash fl ows from operating activitiesInterest received 1,932,271,771 1,664,563,715 1,819,313,670 1,596,232,967Interest payments (1,432,714,615) (1,202,261,850) (1,449,113,301) (1,205,705,338)Receipt from other operating activities 33,084,882 44,044,533 33,084,882 44,044,533Cash payments to employees & suppliers (279,208,699) (257,098,312) (281,306,378) (258,799,022)Payments on other operating activities (103,605,436) (133,717,969) (115,384,925) (135,115,570)Operating profi t before changes in operating assets 149,827,903 115,530,118 6,593,948 40,657,569(Increase)/Decrease in operating assets :Funds advanced to customers (100,107,543) (1,605,254,319) (450,107,543) (1,605,254,319)Housing Project - - 376,067,146 (113,456,782)HDFC RED Loan - (172,700,000) - - Other short-term securities - - - -Other Assets (252,625,372) (31,344,141) 10,832,827 (48,539,802) (352,732,915) (1,809,298,460) (63,207,570) (1,767,250,903)Increase / ( Decrease ) in operating liabilitiesDeposits from customers 41,381,310 2,457,935,076 41,381,310 2,457,935,076Negotiable certifi cates of deposits - -Others 51,785,779 44,815,218 46,785,779 36,810,912 93,167,089 2,502,750,294 88,167,089 2,494,745,988Net cash from operating activities before income tax (109,737,923) 808,981,951 31,553,467 768,152,655Income Tax & Deemed Dividend Tax Paid (21,316,385) (67,149,004) (21,930,357) (67,149,004)Net cash from operating activities (131,054,308) 741,832,947 9,623,110 701,003,651Cash fl ows from investing activities(Purchase)/Sale of Investment Securities - - - -Investment in Subsidiaries - - - -Purchase of property, plant and equipments (574,293,366) (36,766,575) (473,857,671) (37,094,987)Disposal of Mortoe Vehicles - 1,696,782 - 1,696,782Net cash from Investing activities (574,293,366) (35,069,793) (473,857,671) (35,398,205)Cash fl ows from Financing activitiesRedemption of Contribution towards Share Capital - - - -Repayment of Borrowings (2,013,942,090) (1,509,935,129) (2,263,942,090) (1,510,424,560)Proceeds from Borrowings 2,563,167,674 1,795,060,837 2,563,431,326 1,845,060,837Dividends paid (32,355,110) (64,710,220) (32,355,110) (64,710,220)Net cash from fi nancing activities 516,870,473 220,415,488 267,134,125 269,926,057Net increase in cash & cash equivalents (188,477,201) 927,178,642 (197,100,436) 935,531,500Cash & cash equivalents at beginning of the period 1,279,675,477 352,496,835 1,288,301,622 352,770,122Cash & cash equivalents at the end of the period 1,091,198,276 1,279,675,477 1,091,201,187 1,288,301,622Reconciliation of cash and cash equivalents

Cash & short term funds 224,047,842 671,217,684 224,050,753 679,843,829Government of Sri Lanka treasury bills 867,150,434 608,457,794 867,150,434 608,457,794Borrowings from Banks - - 1,091,198,276 1,279,675,477 1,091,201,187 1,288,301,622


55

Consolidated Statement of Change in Equity

For the year ended 31st December 2008

Bank No of Share Share Revaluation Statutory Special Profi t & Total

Share Capital Premium Reserve Reserve Reserves Loss

Fund Accounts

Rs.(‘000) Rs.(‘000) Rs.(‘000) Rs.(‘000) Rs.(‘000) Rs.(‘000) Rs.(‘000)

Balance as at 01.01.2007 6,471,022 647,102 314,986 43,768 35,746 3,451 755,427 1,800,480Net Profi t for the period - - - - - - 21,074 21,074Prior year adjustments - - - - - - - -Surplus on RevaluationDividend proposed - - - - - - (32,355) (32,355)Issue/(Redemption) of Shares - - - - - - - -Transfer to Loan Term Loan - - - - - - - -Transfer to Special Reserve Fund - - - - 1,054 - (1,054) -Balance as at 31.12.2007 6,471,022 647,102 314,986 43,768 36,800 3,451 743,092 1,789,199Balance as at 01.01.2008 6,471,022 647,102 314,986 43,768 36,800 3,451 743,092 1,789,199Net Profi t for the period - - - - - - (92,099) (92,099)Dividend proposed - - - - - - - -Surplus on Revaluation - - - - - - - -Surplus on Revaluation - - - - - - - -Issue/(Redemption) of Shares - - - - - - - -Transfer to Special Reserve Fund - - - - - - - -Balance as at 31-12-2008 6,471,022 647,102 314,986 43,768 36,800 3,451 650,993 1,697,100

Group

For the year ended 31st December 2008 No of State Share Revaluation Statutory Special Profi t & Total

Share Capital Premium Reserve Reserve Reserves Loss

Fund Accounts

Rs.(‘000) Rs.(‘000) Rs.(‘000) Rs.(‘000) Rs.(‘000) Rs.(‘000) Rs.(‘000)

Balance as at 01.01.2007 6,471,022 647,102 314,986 43,768 35,746 3,451 750,700 1,795,753Net Profi t for the period - - - - - - (41,577) 41,577)Prior year adjustments - - - - - - - -Surplus on RevaluationDividend proposed - - - - - - (32,355) (32,355) Issue/(Redemption) of Shares Transfer to Loan Term Loan Transfer to Special Reserve Fund - - - - 1054 - (1,054) -Balance as at 31.12.2007 6,471,022 647,102 314,986 43,768 36,800 3,451 675,714 1,721,821Balance as at 01.01.2008 6,471,022 647,102 314,986 43,768 36,800 3,451 675,714 1,721,821Net Profi t for the period - - - - - - (232,918) (232,918)Dividend proposed - - - - - - - -Surplus on Revaluation - - - - - - - -Surplus on Revaluation - - - - - - - -Issue/(Redemption) of Shares - - - - - - - -Transfer to Loan Term Loan - - - - - - - -Transfer to Special Reserve Fund - - - - - - -Balance as at 31-12-2008 6,471,022 647,102 314,986 43,768 36,800 3,451 442,796 1,488,903

56


Maturity Analysis as at 31st December 2008

as at 31st December 2008 ( Rs.000’)

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,

Assets or Liability Up to 3 to 12 1 to 3 3 to 5 More than Total

3 Months Months Years Years 5 Years

Assets

Cash 13,314 - - - - 13,314Due from Banks 515,734 - - - - 515,734 Investments 312,942 156,304 92,904 - 25,000 587,150Loans & Advances 312,262 828,771 2,238,110 1,834,056 6,762,763 11,975,962Fixed Assets - - - - 671,274 671,274 Other Assets 21,337 107,555 80,216 75,859 132,717 417,685Total Assets 1,175,590 1,092,629 2,411,231 1,909,915 7,591,754 14,181,119

Liabilities

Total Capital Fund - - - - 1,697,100 1,697,100Deposits 2,595,422 1,987,742 41,659 126,602 224,573 4,975,998Borrowings 1,044,467 681,242 1,351,726 602,284 2,961,806 6,641,525Other Liabilities 166,786 339,247 53,887 26,944 279,632 866,496Total Liabilities 3,806,675 3,008,231 1,447,271 755,830 5,163,111 14,181,119

Maturity Gap (2,631,086) (1,915,602) 963,960 1,154,085 2,428,643 -

Cumulative Gap (2,631,086) (4,546,688) (3,582,728) (2,428,643) - -


57

Significant Accounting Policies

GENERAL

HDFC Bank of Sri Lanka 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 fi nancial assistances related to housing purposes and real estate business. HDFC bank’s head offi ce is located at NHDA secretarial Colombo-02 Sri Lanka.

1. ACCOUNTING CONVENTION

The 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 infl ationary factors affecting these accounts. The fi nancial 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 fi gures have been re-arranged wherever necessary to conform to the current presentation.

2. BASIS OF CONSOLIDATION

The group fi nancial statements comprise the Bank’s fi nancial 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 Subsidiaries

Subsidiaries are those enterprises controlled by the Bank. Control exists when the Bank has the power, directly or indirectly to govern the fi nancial and operating policies of the enterprise so as to obtain benefi ts from its activities. The fi nancial statements of the subsidiary are included in the consolidated fi nancial statements from the date that control effectively commences until the date that control effectively ceases. The fi nancial statements of the Bank and its subsidiary are combined on line- by- line basis. The consolidated accounts are prepared to a common fi nancial year end of 31st December,

2.1.1 Intra group balances and intra group transactions are eliminate in full in the consolidated fi nancial statements in order to eliminate the intra group profi ts.

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 ASSETS

3.1 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 Losses

Specifi c 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 ICAS and the directions issued by the Central Bank of Sri Lanka.

3.1.2 Security – property Mortgage

Period Outstanding Classifi cation Provision made net of 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 provision made for the loans granted against the EPF & cash deposit Balances.

3.2 Acquired Properties for Sale

Properties 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 in the Balance Sheet. The values of the acquired properties are included in the capital outstanding amount of the loan balances.

3.2.1 General Provision

Bank has maintained at 0.1% per quarter on performance and overdue loan and advances portfolio commencing the fourth quarter 2006, as per a Direction from the Central Bank of Sri Lanka, which requires that a general provision up

58


Significant Accounting Policies (Contd...)

to 1% on total performing and overdue loans and advances portfolio be made on or before the end of the fi st quarter 2009.

3.2.2 Provision for Losses on acquired property

The Bank has provided 100% Specifi c provision for capital outstanding amount of acquired properties, which were acquired by the Bank fi ve (5) years prior to the balance sheet date even if the value of security covers the full or part of interest and capital outstanding.

3.3 Treasury Bills & Bonds

Investment in treasury bills and Bonds are stated at cost.

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 specifi ed in (b) below.

b. Depreciation is provided at the following rates on a straight-line basis over the estimated lives of different types of assets.

Offi ce 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

Full annual depreciation is provided on the assets purchased and used during the year and no depreciation is provided in for the year of disposal. Depreciation is not provided for on freehold land.

3.5 Valuation of housing project

Cost of real estate properties in work in progress stage comprise cost of purchase of land, cost of developments including infrastructure facilities and other cost incurred prior to bringing such properties its saleable condition including borrowing cost capitalized in line with the recognition criteria under the allowed alternative treatment of Sri Lanka accounting standards No. 20 - borrowing costs.

4 LIABILITIES AND PROVISIONS

Retirement Benefi ts

1.4.1.1 Gratuity

Provision 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 deferred 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. Defi ned Contribution Plans – EPF & ETF

All employees are eligible and covered by Employees’ Provident Fund and Employees Trust Fund contributions in line with the respective statutes

5 REVENUE RECOGNITION

5.1. Interest Income

Interest 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 Income

Over due interest for late payment of loans installments are recognized as income on the cash basis.

5.3 Interest Income from Other Sources

Interest on treasury bills/Bonds and commercial paper is recognized proportionately over the period of instrument.

5.4 Other Income

Other incomes are recognized on the cash basis.

5.5 Revenue Recognition on Real Estate Project

Profi t 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 unit

The ownership of the properties will be transferred once the sales proceeds are collected in full.


59

6 EXPENSES

1.6.1 Interest Expenses

Interest Expenses are recognized on an accrual basis,

1.6.2 Other Expenses

All expenditures incurred in operations and in maintaining the Properties, Plants and Equipments in a state of effi ciency are charged to Income statement in arriving at the profi t or loss for the year.

7. Taxation

7.1 Income Tax

The provision for income tax is based on the elements of income and expenditure as reported in the fi nancial statements and computed in accordance with the provisions of the Inland Revenue Act

HDFC Real Estate Development Ltd has entered into an agreement with the Board of Investment of Sri Lanka under section 17 of BOI Law No 4 of 1978 under which the profi t and income of the company is exempted from income tax for the period of fi ve years of assessment subject to the following criteria.

1) Initial investment committed to the project within twelve months to be not less than US $ 500.000

2) Minimum of 25 apartments to be constructed within a maximum of four locations.

7.2 Deferred Taxation

Deferred 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 fi nancial statements is included in the provision for deferred taxation at current rate of taxation.

8 CASH FLOW STATEMENTS

The cash fl ow statement has been prepared by using the “Direct Method” of preparing cash fl ows 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 FUND

The 5% Statutory provision for the reserve fund was not made due to negative profi t made during the year under review .

Significant Accounting Policies (Contd...)

60


Notes to the Financial Statement

Bank Group

2008 2007 2008 2007 Rs. Rs. Rs. Rs.

01 Income

Gross income 1,974,386,859 1,741,342,366 1,861,428,758 1,686,686,896 Net Income 1,974,386,859 1,741,342,366 1,861,428,758 1,686,686,896 Interest income ( Note 02) 1,941,301,977 1,695,601,051 1,828,343,876 1,617,173,470 Other income ( Note 04 ) 33,084,882 45,741,315 33,084,882 69,513,426 1,974,386,859 1,741,342,366 1,861,428,758 1,686,686,896

02 Interest Income

Loans & advances 1,836,148,037 1,622,338,384 1,723,174,487 1,543,910,803 Treasury bills ,Bonds & other banks’ placements 105,153,940 73,262,667 105,169,389 73,262,667 Other interest income - - - - 1,941,301,977 1,695,601,051 1,828,343,876 1,617,173,470

03 Interest Expenses

Long- Term borrowing 530,049,072 462,588,085 514,822,228 447,373,592 Dedenture 99,361,400 78,245,415 99,361,400 78,245,415 Deposits 842,287,631 655,343,123 842,287,631 655,343,123 Short term borrowing 130,363,733 50,432,103 130,363,733 50,432,103 1,602,061,836 1,246,608,726 1,586,834,993 1,231,394,233

04 Non interest Income

Dividend income 5,000 5,000 5,000 5,000 Fee and commissions income 20,581,163 36,402,692 20,581,163 36,402,692 Net trading income of HDFC RED - - 23,622,111 Other 12,498,719 9,333,624 12,498,719 9,483,624 33,084,882 45,741,315 33,084,882 69,513,426

05 Personnel Cost

Salaries 160,095,242 154,586,580 162,192,921 156,004,257 Overtime 2,713,228 2,903,129 2,713,228 2,903,129 Bonus 25,037,926 21,843,208 25,037,926 21,843,208 Staff welfare 1,469,403 1,456,947 1,469,403 1,456,947 Staff medical 8,668,690 6,508,399 8,668,690 6,508,399 Encashment of annual leave 6,213,523 4,936,142 6,213,523 4,936,142 204,198,012 192,234,404 206,295,691 193,652,081

06 Provision for Staff Retirement Benefi t

Gratuity provision 11,794,519 22,875,243 11,794,519 22,875,243 EPF & ETF 22,165,047 20,120,102 22,366,488 20,330,135 33,959,567 42,995,345 34,161,008 43,205,378


61

Notes to the Financial Statement (Contd...)

Bank Group

2008 2007 2008 2007 Rs. Rs. Rs. Rs.

07 Premises Equipment & Establishment Expenses Electricity & Water 7,538,894 5,099,417 7,705,923 5,144,334 Telephone Charges 10,698,414 9,022,306 10,717,199 9,022,306 Computer maintenance 2,932,980 4,020,132 2,932,980 4,020,132 Rent 24,381,554 16,814,866 24,632,829 16,814,866 Repairs & Maintenance 6,227,127 4,611,934 6,227,127 4,614,259 51,778,968 39,568,655 52,216,057 39,615,897 Depreciations Building Offi ce Equipments 2,081,780 2,278,950 2,139,179 2,404,981 Furniture & Fittings 1,521,015 1,050,182 1,607,348 1,050,182 Plant & Machinery 561,245 561,245 Motor Vehicles 3,982,574 3,996,306 3,982,574 3,996,306 Tools 366 366 366 366 Automated Teller Machine 1,336,893 - 1,336,893 - Computer Equipments 4,206,809 3,585,325 4,206,809 3,585,325 13,690,683 10,911,127 13,834,415 11,037,158 Grand Total 65,469,651 50,479,783 66,050,472 50,653,056

08 Other operating expenses include the followings Operating expenses include the followings Chairman’s emoluments 1,322,500 420,000 1,322,500 420,000 Directors’ emoluments 378,000 192,500 463,000 745,500 Auditors’ remuneration 132,000 132,000 224,000 192,000 Business Dev.& Advertising 22,449,707 11,295,305 22,796,567 11,295,305 Legal expenses 83,100 61,736 101,100 61,736 Professional charges 2,274,828 5,735,712 2,274,828 5,735,712 Others 55,157,910 55,088,796 94,200,998 75,884,351 81,798,044 72,926,049 121,382,992 94,334,604

09 Provision for loan losses General Provisions 37,874,852 34,428,764 37,874,852 34,428,764 Special Provisions 16,527,457 8,547,226 16,527,457 8,547,226 54,402,309 42,975,991 54,402,309 42,975,991

10 VAT on fi nancial services 26,877,176 45,984,586 26,877,176 45,984,586 26,877,176 45,984,586 26,877,176 45,984,586

11 Taxation on Profi ts on Ordinary Activities

Current year income tax - 30,855,239 623,207 30,855,239 Transfer to / from Differed taxation - (3,616,334) - (3,616,334) ( Over ) / Under provision in previous year (2,281,226) (1,175,320) (2,281,226) (1,175,320) (2,281,226) 26,063,585 (1,658,019) 26,063,585

62



Bank Group

2008 2007 2008 2007 Rs. Rs. Rs. Rs.

11.1 Reconciliation of Effective Tax Rate

Accounting Profi t (94,379,736) 47,137,483 (234,575,883) (15,513,032) Add :disallowable expenses 63,611,032 128,616,194 63,928,194 128,616,194 Less : Capital Allowance & Gratuity paid 3,653,931 (21,477,483) 3,855,297 21,477,483 Adjusted Profi t before tax (34,422,636) 154,276,194 (174,502,986) 91,625,679 Income tax - 30,855,239 623,207 30,855,239 Effective tax rate 0.00% 65.46% (0.27%) (198.90%)

11.2 Relationship between Tax Expense

and Accounting income

Profi t before tax as per the income statement (94,379,736) 47,137,483 (234,575,883) (15,513,032) Provision for Gratuity 11,794,519 22,875,243 11,794,519 22,875,243 Gratuity Payment (3,653,931) (3,512,681) (3,653,931) (3,512,681) Loan loss provision -General - - - - Book Depreciations 13,690,683 10,911,127 13,834,415 10,911,127 Capital Allowance (13,238,220) (9,417,577) (13,439,586) (9,417,577) Donations 23,800 221,595 23,800 221,595 Vat Financial Services 26,877,176 45,984,586 26,877,176 45,984,586 Advertisment 50% 11,224,853 5,647,652 11,398,283 5,647,652 Taxable Income (47,660,856) 119,847,429 (187,741,207) 57,196,915 Tax @ 20% - 30,855,239 623,207 30,855,239 Under (Over ) Provision (2,281,226) (1,175,320) (2,281,226) (1,175,320) Less : Deffered Tax Adjustments - (3,616,334) - (3,616,334) Provision for income Tax (2,281,226) 26,063,585 (1,658,019) 26,063,585

12 Dividends

Net Dividends - 29,119,599 - 29,119,599 Tax Deduction at source - 3,235,511 - 3,235,511 Gross Dividends - 32,355,110 - 32,355,110

13 Earnings Per Share

Basic earnings per share is calculated by dividing the net profi t after tax by the average number of ordinary shares. Annualised net profi t after tax (92,098,510) 21,073,898 (232,917,864) (41,576,617) Weighted Average number of ordinary shares 6,471,022 6,471,022 6,471,022 6,471,022 Basic earnings per share ( Rs. ) (14.23) 3.26 (35.99) (6.43)

14 Cash and short term funds

Cash in hand and balances with banks 170,367,065 602,619,421 170,369,976 611,245,566 Money at call and short notice 53,680,778 68,598,262 53,680,778 68,598,262 224,047,842 671,217,684 224,050,753 679,843,829


63


Bank Group

2008 2007 2008 2007 Rs. Rs. Rs. Rs.15 Investment in Government Securities & others Treasury bonds/ Treasury Bill /Fixed deposits 562,150,435 608,457,794 562,150,435 608,457,794 Treasury bills under repurchase agreement 305,000,000 - 305,000,000 - Other investments - - - - 867,150,434 608,457,794 867,150,434 608,457,794

16 Loans & Advances Housing loans secured by primary mortgage over residential properties 7,358,572,974 7,209,272,201 7,358,572,974 7,209,272,200 Housing loans against EPF. 3,061,673,963 2,967,072,898 3,061,673,963 2,967,072,898 Housing loans on Guarantors & Others 1,161,141,966 1,033,284,988 1,161,141,966 1,033,284,988 Staff loans 273,956,548 185,164,855 273,956,548 185,164,855 Acquired properties 66,909,863 65,647,715 66,909,863 65,647,715 HDFC RED Loan - 350,000,000 - - Loan to NHDA 203,060 278,111 203,060 278,111 Project Loan/Block Loans 137,360,896 148,990,960 137,360,896 148,990,960 12,059,819,271 11,959,711,728 12,059,819,271 11,609,711,728 Less : Loan loss provision - General 80,548,594 42,673,742 80,548,594 42,673,742 - Special 64,632,039 48,104,583 64,632,039 48,104,583 11,914,638,638 11,868,933,403 11,914,638,638 11,518,933,403 I. Movements in the Provisions for Loan Losses General Provision Balance Brought forward 42,673,742 8,244,978 42,673,742 8,244,978 Additional provision/(Reversal) made 37,874,852 34,428,764 37,874,852 34,428,764 Balance carry forward 80,548,594 42,673,742 80,548,594 42,673,742 Special Provision Balance Brought forward 48,104,583 39,557,356 48,104,583 39,557,356 Additional provision/(Reversal) made 16,527,457 8,547,226 16,527,457 8,547,226 Balance carry forward 64,632,039 48,104,583 64,632,039 48,104,583 ii. Non performing assets including loans and advances Loans and advances 2,500,408,762 2,099,202,638 2,500,408,762 2,099,202,638 Less : Loan loss provision - General 80,548,594 42,673,742 80,548,594 42,673,742 - Special 64,632,039 48,104,583 64,632,039 48,104,583 2,355,228,128 2,008,424,313 2,355,228,128 2,008,424,313

17 Interest Receivable Interest receivable 340,368,994 259,219,159 340,368,994 249,000,987 Less : Interest in Suspense (279,045,716) (206,926,086) (279,045,716) (206,926,086) 61,323,278 52,293,073 61,323,278 42,074,901 I. Movements in the Provisions for Interest in Suspense Balance brought forward 206,926,086 223,904,963 206,926,086 223,904,963 Interest suspensed / (Recovered ) 72,119,630 (16,978,877) 72,119,630 (16,978,877) Balance carry forward 279,045,716 206,926,086 279,045,716 206,926,086

64



Bank Group

2008 2007 2008 2007 Rs. Rs. Rs. Rs.18 Housing Projects Avissawella Project - - 170,217,424 124,278,410 Kotikawatte project Ampara Project - - 10,829,283 10,829,283 BMC Project - 362,170,083 Wellawatta Project - - - 65,981,799 Edmontin Rd project - - 1,201,222 1,201,222 - - 182,247,929 564,460,79719 Other Assets Stationery stock 4,798,067 4,472,156 4,798,067 4,472,156 Deposits and prepayments 21,846,428 2,769,100 21,846,428 2,769,100 Others 344,658,670 111,436,537 110,377,394 142,924,965 371,303,164 118,677,792 137,021,888 150,166,220

Bank Group

Leasehold Equipments Motor 2008 2007 2008 2007 Lqnds & and Vehicles Rs. Rs. Rs. Rs. Buildings Furniture 20 Property , Plant & Equipments Cost/Valuations Balance at the begin. of the period 62,000,000 88,619,315 31,903,668 182,522,983 147,818,383 183,605,607 148,506,175 Additions for the period 549,740,000 24,553,366 - 574,293,366 36,766,575 473,857,671 37,185,007 Revaluation - - Less :-Disposal during the period - (2,061,975) - (2,085,575) Balance at the end of the period 611,740,000 113,172,681 31,903,668 756,816,349 182,522,983 657,463,278 183,605,607 Accumulated Depreciations Balance at the begin. of the period 50,471,058 21,380,793 71,851,851 63,002,699 71,971,982 63,008,599 Additions for the period 9,708,109 3,982,574 13,690,683 10,911,127 13,834,415 11,037,158 Less :-Disposal during the period - (2,061,975) - (2,073,775) Balance at the end of the period 60,179,166 25,363,368 85,542,534 71,851,851 85,806,397 71,971,982 Net book value as at 31/12/2008 611,740,000 52,993,515 6,540,300 671,273,815 110,671,132 571,656,881 111,633,625

Bank Group

2008 2007 2008 2007 Rs. Rs. Rs. Rs.21 Deposits from customers Savings deposits 368,155,131 138,101,332 368,155,131 138,101,332 Fixed deposits 4,602,147,352 4,629,910,203 4,602,147,352 4,629,910,203 Others 5,695,281 166,604,919 5,695,281 166,604,919 4,975,997,765 4,934,616,454 4,975,997,765 4,934,616,45422 Borrowings Debentures ( 22.1 ) 835,000,000 835,000,000 835,000,000 835,000,000 Government of Sri Lanka 1,220,174,006 1,351,705,796 1,220,174,006 1,351,705,796 GOSL Loans under Foreign Credit Lines 542,775,087 802,309,197 542,775,087 802,309,197 Borrowing from the market 1,763,737,045 1,085,118,896 1,763,737,045 1,335,118,896 Re-fi nance borrowings 1,192,122,055 865,283,752 1,192,122,055 865,283,752 Dhananidana 801,497,340 24,561,348 801,497,340 24,561,348 Bank overdraft 179,455,254 691,169,656 179,718,906 691,169,656 Borrowings Against Gov Securities 106,764,065 437,150,623 106,764,065 437,150,623 6,641,524,851 6,092,299,268 6,641,788,503 6,342,299,268 Due Within One year 1,725,709,086 2,096,585,489 1,725,972,738 2,346,585,489 1-5 years 1,954,009,965 2,163,264,625 1,954,009,965 2,163,264,625 After fi ve years 2,961,805,800 1,832,449,154 2,961,805,800 1,832,449,154 6,641,524,851 6,092,299,268 6,641,788,503 6,342,299,268


65


22.1 Debenture CategoriesAllotment Date Maturity Interest Frequency Interest Rate Bank

Date Payable 2008 2007

Fixed Rate :

January 2005 January 2009 Semi - Annully 11.75% 50,000,000 50,000,000January 2005 January 2009 Semi - Annully 11.75% 50,000,000 50,000,000January 2005 January 2009 Semi - Annully 11.75% 25,000,000 25,000,000May 2006 May 2010 Semi - Annully 13.00% 10,000,000 10,000,000May 2006 May 2010 Semi - Annully 13.00% 40,000,000 40,000,000April 2006 June 2011 Semi - Annully 13.00% 25,000,000 25,000,000December 2005 December 2015 Annually 2.50% 85,000,000 85,000,000December 2005 December 2010 Annually 2.50% 55,000,000 55,000,000December 2005 December 2020 Annually 2.50% 110,000,000 110,000,000 450,000,000 450,000,000Floating Rate :

December 2005 December 2009 Semi - Annully 6 MonthWATB Rate+ 1.85% (Cap 15% ) 100,000,000 100,000,000June 2006 June 2010 Semi - Annully 6 MonthWATB Rate+1.85% (Cap 15%) 75,000,000 75,000,000June 2006 June 2010 Semi - Annully 6 MonthWATB Rate+1.85% (Cap 15%) 10,000,000 10,000,000June 2007 April 2010 Semi - Annully WAGTB + 1.75% 200,000,000 200,000,000 385,000,000 385,000,000Grand Total 835,000,000 835,000,000

Bank Group

2008 2007 2008 2007 Rs. Rs. Rs. Rs.23 Provision for taxation and deemed dividend tax

Taxation - current (34,987,223) (11,389,612) (37,289,402) (11,389,612) VAT Payable (1,857,313) (4,426,660) (1,857,313) (4,426,660) Debit, WHT and Paye tax 1,499,344 321,407 1,499,344 321,407 Deferred tax (11,036,779) (11,036,779) (11,036,779) (11,036,779) (46,381,972) (26,531,644) (48,684,151) (26,531,644)

24 Other Liabilities

Provision for gratuity ( 24.1 ) 72,390,629 64,250,041 72,390,629 64,250,041 Accrued expenditure 479,172,819 305,915,838 479,172,819 305,915,838 Dividend Payable 19,350 32,374,460 19,350 32,374,460 Others 314,913,344 263,127,565 348,501,381 300,824,782 866,496,142 665,667,904 900,084,179 703,365,12124.1. Provision for Gratuity

Balance brought forward 64,250,041 44,887,479 64,250,041 44,887,479 Provisions made during the year 11,794,519 22,875,243 11,794,519 22,875,243 Payments made during the year (3,653,931) (3,512,681) (3,653,931) (3,512,681) Balance carry forward 72,390,629 64,250,041 72,390,629 64,250,041

66



Bank Group

2008 2007 2008 2007 Rs. Rs. Rs. Rs.25 Share Capital

Authorized 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) Paid Up Capital 647,102,200 647,102,200 647,102,200 647,102,200 ( 6,471,022 ordinary shares of Rs. 100/- each ) Share Premium 314,986,446 314,986,446 314,986,446 314,986,446 962,088,646 962,088,646 962,088,646 962,088,64626 Reserves

Statutory reserve fund 36,799,251 36,799,251 36,799,251 36,799,251 Special reserve 3,451,125 3,451,125 3,451,125 3,451,125 Revaluation Reserve 43,767,910 43,767,910 43,767,910 43,767,910 Other reserves 650,993,453 743,091,963 442,796,573 675,714,437 735,011,739 827,110,249 526,814,859 759,732,723

27. Directors Interests in Contracts with the bank

None 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 28 of the Accounts. .

28. Related Party Transactions

I. Mr S.M.M Yaseen being a member of the Corporate Management and the Chairman of the Bank held the position of Chairman of the HDFC Real Estate Development Ltd, as well.

II. Mr. Suresh Amarasekera succeeded the posts of CEO/General Manager of the bank and the Managing Director of HDFC Real Estate Development Ltd., held by Mr. C A Sarathchandra with the cessation of his service with the bank, on retirement basis with effect from 30th June 2008.

III. Mr M.I M Rafeek who is a Director of the Bank held the offi ce of Director of the HDFC Real Estate Development Ltd, too.

IV. The bank has contributed Rs.25 million towards the capital of Real Estate Development Ltd. Further, the bank has granted Rs.234.3 million to HDFC Real Estate Ltd through inter-company current account at HDFC Bank.

V. HEAD OFFICE PREMISES

The Bank occupied in premises of National Housing Development Authority (NHDA) for which a rent of Rs.17.4 Million is paid, annually. In addition, the offi ce maintenance, renovation and modernization costs are borne by the Bank. Mr.M.J.M Rafeek being a Director of HDFC bank is the present Chairman of NHDA, too.

29. 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 fi nancial statements.

30. Assets Pledged:

The assets pledged as security for credit facilities obtained are as follows:

Type of facility Amount of facility Nature of security Value of security Balance as at 31/12/2008 Rs.Mn Rs.Mn Rs.Mn.

Securitization IV 506.0 Housing Loans receivable 750.00 136.7

Securitization V 200.0 Housing Loans receivable 249.50 87.50

Long term loan(BOC) 500.00 Part of Loan portfolio 650.00 312.5

Long term loan(NSB) 200.00 Part of Loan portfolio 250.00 50.0

Over draft (Sampath Bank) 100.00 Part of Loan portfolio 150.00 95.4

Over draft (People’s Bank) 100.00 Part of Loanportfolio 150.00


67

Statement of Value Added

For the period ended 31st December 2008 BANK GROUP

% 2008 % 2007 % 2008 % 2007

Interest Income 1,941,301,977 1,695,601,051 1,828,343,876 1,617,173,470Other Income 33,084,882 45,741,315 33,084,882 69,513,426Gross Income 1,974,386,859 1,741,342,366 1,861,428,758 1,686,686,896Cost Of Service 1,735,662,743 1,355,874,129 1,760,457,937 1,362,115,433Total Value Additions 236,442,890 385,468,237 100,970,821 324,571,463

Value Distributed

To Employees

(Remuneration & Benefi ts ) 100.7 238,157,579 61.0 235,229,749 238.1 240,456,699 72.9 236,857,459 - - - To Government - - - Income Tax (1.0) (2,281,226) 6.8 26,063,585 (1.6) (1,658,019) 8.1 26,063,585Value Added Tax 11.4 26,877,176 11.9 45,984,586 26.6 26,877,176 14.2 45,984,586Debit Tax (0.0) (23,894) 0.8 3,229,301 (0.0) (23,894) 1.0 3,229,301 10.4 19.5 25 23.3 To Share Holders ( Dividend ) - - 8.4 32,355,110 - - 10.0 32,355,110 - - - Retained in the Business - - - Retained Profi t (39.9) (94,379,736) (2.9) (11,281,213) (230.7) (232,917,864) (22.8) (73,931,728)Depreciation 5.8 13,690,683 2.8 10,911,127 13.7 13,834,415 3.4 11,037,158Loan Loss Provision 23.0 54,402,309 11.1 42,975,991 53.9 54,402,309 13.3 42,975,991Total Value Distribution 100.0 236,442,890 100.0 385,468,237 100.0 100,970,821 100.0 324,571,463

68


Operating Results (Rs.Mn) 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 Income StatementsTotal Income 1,974 1,741 1,285 1,056 947 830 654 479 420 456Profi t Before Tax (68) 93 308 217 235 254 174 189 142 117Income Tax & Finance VAT 25 72 136 100 53 56 32 64 40 35Profi t After Tax (92) 21 172 117 183 198 142 125 102 82

Balance Sheet

Assets

Current Assets 1,570 1,477 462 623 216 228 193 81 66 219Housing Loans 11,915 11,869 10,133 8,100 7,118 5,826 4,750 3,591 2,894 2,574Property & Equipment 671 111 85 85 42 33 53 36 30 17Investment in Subsidiaries 25 25 25 25 - - - - - - 14,181 13,482 10,705 8,833 7,376 6,087 4,996 3,708 2,990 2,810

Liabilities

Long Term Liabilities 6,329 4,935 5,286 5,017 4,363 4,107 3,499 2,256 1,817 1,847Short Term Liabilities 312 1,133 1,090 633 846 761 641 677 560 397Long Term Funds & Deposits 4,976 4,959 2,501 1,536 1,140 312 41 41 39 37Other Liabilities 866 666 28 5 14 22 12 11 13 10Shareholders’ Funds 1,697 1,789 1,800 1,642 1,013 885 803 723 561 519 14,181 13,482 10,705 8,833 7,376 6,087 4,996 3,708 2,990 2,810

Performance Indicators

Earnings Per Share (Rs.) (14.23) 3.26 27.39 26.71 44.39 48.03 34.35 34.51 28.16 135.26Net Assets Value Per Share (Rs.) 262.26 276.49 278.16 268.19 245.72 214.68 194.78 199.59 154.87 860.52Return on Average Assets (%) (0.67) 0.17 1.77 1.44 2.72 3.57 3.26 3.73 3.52 3.03Return on Equity % (5.28) 1.17 9.61 7.13 18.07 22.37 17.68 17.29 18.18 15.80

Ten Years Summary


69

Share Information

Name Of Shareholder No. of Shares Percentage (%)

1 National Housing Development Authority 3,218,000 49.732 Legalinc Trustee Services Private Ltd. 348,522 5.393 DPMC Financial Services (Pvt) Ltd. Account No 01 203,700 3.154 Seylan Bank Ltd. / Jayantha Dewage 100,000 1.555 Phoenix Ventures Ltd. 58,000 0.906 Capital Alliance Holdings Ltd. 112,000 1.737 Miss N.T.M.S Cooray 100,500 1.558 Bank of Ceylon 90,900 1.409 Indra Traders (Pvt) Ltd. 50,000 0.7710 Timex (Garments) Ltd. 50,000 0.7711 Mr.Y.S.H.I.K Silva 50,000 0.7712 Associated Electrical Corporation Ltd. 125,000 1.9313 DPMC Financial Services (Pvt) Ltd. Account No 02 63,800 0.9914 Lanka Orix Leasing Company Ltd. 67,200 1.0415 Commercial Bank of Ceylon A/C No. 02 38,000 0.5916 DFCC Bank A/C No. 01 37,400 0.5817 Dr. C.P.D.W Mathew 34,100 0.5318 Miss M.P.R. Cooray 30,000 0.4619 Building Materials Corporation Ltd. 30,000 0.4620 Common Amenities Board. 30,000 0.46 Total 4,837,122 74.75

As per Rule No 8.7 ( h ) of the Colombo Stack Exchange, percentage of public holding as at December 31.2008 was 50.25% ( 49.90 % as at December 31.2007 )

Market Value Per Share - Highest Rs.135.00 - Lowest Rs.54.00 Equity - Earning per Share - Net Asset per Share

The market price per share as at 31st December 2008, as quoted by Colombo Stock Exchange was Rs.56.00.

Ordinary ShareholdersAs at 31-12-2008

Distribution and Composition of Shareholders.

Resident Non Resident Total Shareholders No of No Of % No of No Of % No of No Of %

Share Shares Share Shares Share Shares holders holders holders 1 - 1,000 3,460 617,541 9.54 8 1,200 0.02 3,468 618,741 9.56 1,001 - 5,000 163 342,159 5.29 4 12,400 0.19 167 354,559 5.48 5,001 - 10,000 23 157,200 2.43 1 10,000 0.15 24 167,200 2.58 10,001 - 50,000 40 842,900 13.03 0 0 0.00 40 842,900 13.03 50,001 - 100,000 5 379,900 5.87 0 0 0.00 5 379,900 5.87 100,001 - 500,000 5 889,722 13.75 0 0 0.00 5 889,722 13.75 500,001 - 1,000,000 0 0 0.00 0 0 0.00 0 0 0.00 1,000,001 and over 1 3,218,000 49.73 0 0 0.00 1 3,218,000 49.73 Total 3,697 6,447,422 99.64 13 23,600 0.36 3,710 6,471,022 100.00

December 31,2008 December 31,2007 No of % No Of % No of % No Of % Shareholders Shares Shareholders Shares Individuals 3533 95.23 1,376,760 21.28 3,776 95.07 1,422,270 21.98 Institution 177 4.77 5,094,262 78.72 196 4.93 5,048,752 78.02 Total 3710 100.00 6,471,022 100.00 3,972 100.00 6,471,022 100.00

{Notes to the Financial Statement

70


Capital Adequacy

As at 31st December

Computation of Risk - Weighted Assets

Assets Balance Risk Weight Risk Weighted Rs,000’ % Balance

1 Cash- Local Currency 13,314 0% 2 Sri Lanka Govt Treasury Bills & Bonds 562,150 0% 3 Other Securities guaranteed by the Sri Lanka Government 4 Loan & Advances 4.1 Housing loans secured by primary mortgage over residential properties 6,477,895 50% 3,238,947 Housing loans against EPF. 3,074,594 0% Cash Margin Loan 94,575 0% Housing loans on Guarantors & others 1,065,941 100% 1,065,941

4.2 Non Performing Assets4.2.1 Primary mortgage over residential properties Specifi c provisions are less than 20% 883,100 100% 883,100 Specifi c provisions are more than 20% 148,826 50% 74,4134.2.2 Housing loans on Guarantors & others Specifi c provisions are less than 20% 118,253 150% 177,380 Specifi c provisions are more than 20% 51,455 100% 51,4555 Due From local Commercial Banks including development fi nancial institute 515,734 20% 103,1476 Fixed Assets 671,274 100% 671,2747 Other Assets 504,008 100% 504,008 Total Risk Weighted Assets 14,181,119 6,769,665 Total Risk-weighted amount for Operational risk 729,990 Total risk-weighted amount 7,499,655 Computation of Capital Tier 1 : Core Capital8 Paid up Ordinary Shares 647,1029 Share Premium 314,98610 Statutory Reserve Fund 36,79911 Retained Profi ts 743,09212 General & Other Reserves 3,45113 Current Year audited Profi t (92,099) Total Tier 1 Capital 1,653,332 Tier 2 Supplementary Capital Revaluation Reserve ( as approved by CBSL ) - General Provision 80,549 Total Tier 2 Capital 1,733,881 Capital Adequacy Ratio

Tier I ( Min Required Ratio 5% ) Tier 2 ( Min Required Ratio 10% )

Ratio 22.05% Ratio 23.12% Core Capital 1,653,332 Capital Base 1,733,881 Risk Weighted assets 7,499,655 Risk Weighted assets 7,499,655


71

Notice is hereby given that the 24th Annual General Meeting of the Housing Development Finance Corporation Bank of Sri Lanka will be held at The National Chamber of Commerce on 30/6/2009 at 10.30 a.m at No 450 D.R. Wijewardena Mawatha, Colombo- 10 for the following purposes.

1. The Chairman’s Address

2. To receive and consider and adopt the Report of the Directors and the Audited Accounts of the bank for the year ended 31st December 2008 together with the Report of the Auditor thereon.

3. To appoint two share holding directors.

4. To appoint Auditors and authorize the Board of Directors to determine their remuneration.

5. To transact any other business of which due notice shall be given.

BY ORDER OF THE BOARDMrs. K. T. D. D. De SilvaThe SecretaryHDFC Bank

Colombo30 of May 2009

Notice of the Meeting

72


Notes


73

I/We…………………………………………………………………………………..………………..………………of

…..………………….........………………………………………………………………………………………………….Being a member / members of Housing Development Finance Corporation Bank of Sri Lanka herby appoint.

1. Mr. ……………………………………… 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 30th June at10.30 a.m and at any adjournment thereof, and at every poll which any be taken in consequence thereof.

Singed this ………..… day of ……………………..………. 2009.

Signature : ……………………….....................

Note : A proxy need not also be a member

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 on or before 10.30 a.m on 28th of June 2008

Form of Proxy

74


Instructions for completion

01. To be valid this form must be fi lled, 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 corporation, the form of proxy must be either under its common seal or under the hand of an offi cer 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.

Corporate InformationName : The Housing Development Finance Corporation Bank of Sri Lanka.

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

Year of Incorporation as a Building Society : 1984

Registered Office : Address : P.O. Box 2085, Sir Chittampalam A Gardiner Mawatha, Colombo 02.Telephone : 2446241, 2446239, 2447354, 2447314Fax : 2446392Web Site : www.hdfc.lkE-mail : [email protected]

Company Secretary : Mrs. Dharshani De Silva Attorney – at – Law & Notary Public, Company Secretary, Commissioner of Oaths.

Address : P.O. Box 2085, Sir Chittampalam A Gardiner Mawatha, Colombo 02.Telephone : Direct No. 2423362, 2446241, 2446239, 2447354, 2447314E – Mail : [email protected]

Registrars : SSP Corporate Services (Pvt.) Limited Address : 101, Inner Flower Road, Colombo 03. Telephone : 2573894Fax : 2573609E-Mail : [email protected]

Auditors : Auditor General – Department of Auditor General Torrington Square, Colombo 07.

Consultant Lawyers : Attorney General’s Department Hulftsdort, Colombo 12.

Bankers : Bank of Ceylon Corporate Branch, Echelon Square, Colombo 01.

Sampath Bank No.110, Sir James Pieris Mawatha, Colombo 02. People’s Bank No. 75, Sir Chittampalam A Gardiner Mawatha, Colombo 02.

Commercial Bank of Ceylon Limited Commercial House, Union Place Branch, Colombo 02.

Pan Asia Banking Corporation Ltd, Colombo Road, Gampaha

Hatton National Bank Head Office, Darley Road, Colombo 10.

hdfc annual report 2008

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