Project Report

On
CORPORATE GOVERNANCE PRACTICES IN HDFC BANK
LEADING TO STATUS OF “NO NPA”

Submitted By
ROSHNI SINGH
Batch (2017 – 2019)

Under the Guidance Of

TAPAS MITRA

Submitted in Fulfilment of Requirement for Award Of

“Post-Graduation Diploma in Management”

Atharva Institute of Management Studies

Marve Road, Charkop Naka, Malad (West), Mumbai 400095

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DECLRATION
This Is to Certify That the Present Title as Corporate Governance Practices in HDFC Bank
Leading to Status of “No NPA” Is completed by Ms. Roshni Singh Student of PGDM
Finance of Atharva Institute of Management Studies, Mumbai as a Part of completion of
PGDM – Finance Year 2017 – 2019.

Prof. TAPAS MITRA

(Project Guide)

Dr. SUJATA PANDEY

(Director)

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STUDENT DECLARATION

I Ms, Roshni Singh student of Atharva Institute of Management Studies of PGDM 2017-2019
hereby declare that I have completed the project on Corporate Governance Practices in
HDFC Bank Leading to Status of “No NPA” in the academic year 2017-2018.
The information submitted is true & original to the best of my knowledge.

Roshni Singh

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Acknowledgement

I take this opportunity to express my sincere thanks to every person who guided me on
completing this project

The Project on ‘Corporate Governance Practices in HDFC Bank Leading to Status of “No
NPA” offered a great learning experience. During the Data collection, I was fortunate to have
interacted with people, who in their own capacities have encouraged and guided me.

I feel highly indebted towards my faculty guide Tapas Mitra his constant guidance and
help without which this project would not have been possible.

I thank my B-school, Atharva Institute of Management Studies for giving me this

opportunity to work so that I could put to practice, the theoretical knowledge that I imparted
from the PGDM course, and the entire CMC team at my B-school for providing support every
time and whenever needed during my Academic year.

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 Table of Contents

Serial no. Particulars Page no.

6
1. Executive summary
7
2. Objective of the study
7
3. Research methodology

4. HDFC Bank Background / Company profile 7 - 15

16 - 26
5. Corporate Governance of HDFC Bank
27 - 38
6. HDFC Bank Vs. ICICI Bank comparative Analysis
39
7. Findings
40
8. Recommendation
9. Conclusion 41

References 42

5
CORPORATE GOVERNANCE PRACTICES IN HDFC BANK LEADING
TO STATUS OF “NO NPA”

Executive summary
HDFC Bank was amongst the first to receive an ‘in-principle’ approval from the Reserve
Bank of India (RBI) to set up a bank in the private sector from Housing Development
Finance Corporation Limited (HDFC), in 1994 during the period of liberalisation of the
banking sector in India. HDFC India was incorporated in August 1994 in the name of ‘HDFC
Bank Limited’. HDFC India commenced operations as a Scheduled Commercial Bank in
January1995.
HDFC India deals in varieties of products like home loan, standard life insurance, mutual
fund, securities, credit cards, etc. HDFC has branch offices in all major cities in India like
Calcutta, Chennai, Delhi, Bangalore, Hyderabad, Ahmedabad apart from HDFC Mumbai.
BACKGROUND
The Housing Development Finance Corporation Limited (HDFC) was amongst the first to
receive an ‘in principle’ approval from the Reserve Bank of India (RBI) to set up a bank in
the private sector, as part of RBI’s liberalisation of the Indian Banking Industry in 1994. The
bank was incorporated in August 1994 in the name of 'HDFC Bank Limited', with its
registered office in Mumbai, India. HDFC Bank commenced operations as a Scheduled
Commercial Bank in January 1995.

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OBJECTIVE OF STUDY
1. To know the operation of bank in it lending and credit policy.
2. What steps are taken by bank to reduce NPA.
3. To find the difference in NPAs of ICICI Bank and HDFC Bank.
4. To study the NPAs ratios of ICICI Bank and HDFC Bank.

RESEARCH METHODOLOGY
The proposed research work will be explanatory and empirical research. It incorporates
different dimensions such as sources of data and data analysis. The proposed dissertation is
expected to take into consideration the secondary data available in several research articles

PROMOTER
HDFC is India’s premier housing finance company and enjoys an impeccable track record in
India as well as in international markets. Since its inception in 1977, the Corporation has
maintained a consistent and healthy growth in its operations to remain the market leader in
mortgages. Its outstanding loan portfolio covers well over a million dwelling units. HDFC
has developed significant expertise in retail mortgage loans to different market segments and
also has a large corporate client base for its housing related credit facilities. With its
experience in the financial markets, strong market reputation, large shareholder base and
unique consumer franchise, HDFC was ideally positioned to promote a bank in the Indian
environment.

BUSINESS FOCUS
HDFC Bank’s mission is to be a World Class Indian Bank. The objective is to build sound
customer franchises across distinct businesses so as to be the preferred provider of banking
services for target retail and wholesale customer segments, and to achieve healthy growth in
profitability, consistent with the bank’s risk appetite. The bank is committed to maintain the
highest level of ethical standards, professional integrity, corporate governance and regulatory

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compliance. HDFC Bank’s business philosophy is based on five core values: Operational
Excellence, Customer Focus, Product Leadership, People and Sustainability.

CAPITAL STRUCTURE
As on 31st March, 2017 the authorized share capital of the Bank is Rs. 650 crore. The paid-
up share capital of the Bank as on the said date is Rs512, 29, 90 (2562545717) equity shares
of Rs. 2/- each). The HDFC Group holds 21.67 % of the Bank's equity and about 18.87 % of
the equity is held by the ADS / GDR Depositories (in respect of the bank's American
Depository Shares (ADS) and Global Depository Receipts (GDR) Issues). 32.57 % of the
equity is held by Foreign Institutional Investors (FIIs) and the Bank has 4,41,457
shareholders.

The shares are listed on the Bombay Stock Exchange Limited and The National Stock
Exchange of India Limited. The Bank's American Depository Shares (ADS) are listed on the
New York Stock Exchange (NYSE) under the symbol 'HDB' and the Bank's Global
Depository Receipts (GDRs) are listed on Luxembourg Stock Exchange under ISIN No
US40415F2002.

AMALGAMATION OF TIMES BANK & CENTURION BANK OF PUNJAB WITH

HDFC BANK
On May 23, 2008, the amalgamation of Centurion Bank of Punjab with HDFC Bank was
formally approved by Reserve Bank of India to complete the statutory and regulatory
approval process. The amalgamation added significant value to HDFC Bank in terms of
increased branch network, geographic reach, and customer base, and a bigger pool of skilled
manpower.

In a milestone transaction in the Indian banking industry, Times Bank Limited (another new
private sector bank promoted by Bennett, Coleman & Co. / Times Group) was merged with
HDFC Bank Ltd., effective February 26, 2000. This was the first merger of two private
banks in the New Generation Private Sector Banks. As per the scheme of amalgamation
approved by the shareholders of both banks and the Reserve Bank of India, shareholders of
Times Bank received 1 share of HDFC Bank for every 5.75 shares of Times Bank.

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DISTRIBUTION NETWORK
HDFC Bank is headquartered in Mumbai. As of March 31, 2015, the Bank’s distribution
network was at 4,014 branches in 2,464 cities.All branches are linked on an online real-time
basis. Customers across India are also serviced through multiple delivery channels such as
Phone Banking, Net Banking, Mobile Banking and SMS based banking. The Bank’s
expansion plans take into account the need to have a presence in all major industrial and
commercial centres, where its corporate customers are located, as well as the need to build a
strong retail customer base for both deposits and loan products. Being a clearing / settlement
bank to various leading stock exchanges, the Bank has branches in centres where the NSE
BSE have a strong and active member base.

The Bank also has a network of 11,766 ATMs across India. HDFC Bank’s ATM network
can be accessed by all domestic and international Visa / MasterCard, Visa Electron /
Maestro, Plus / Cirrus and American Express Credit / Charge cardholders.

MANAGEMENT
Mrs. Shyamala Gopinath holds a Master’s Degree in Commerce and is a CAIIB. Mrs.
Gopinath has 39 years of experience in financial sector policy formulation in different
capacities at RBI. As Deputy Governor of RBI for seven years and member of the Board.
Mrs. Gopinath had been guiding and influencing the national policies in the diverse areas of
financial sector regulation and supervision, development and regulation of financial markets,
capital account management, management of government borrowings, forex reserves
management and payment and settlement systems.
The Managing Director, Mr. Aditya Puri, has been a professional banker for over 25 years
and before joining HDFC Bank in 1994 was heading Citibank's operations in Malaysia.

The Bank's Board of Directors is composed of eminent individuals with a wealth of

experience in public policy, administration, industry and commercial banking. Senior
executives representing HDFC are also on the Board.

Senior banking professionals with substantial experience in India and abroad head various
businesses and functions and report to the Managing Director. Given the professional

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expertise of the management team and the overall focus on recruiting and retaining the best
talent in the industry, the bank believes that its people are a significant competitive strength.

TECHNOLOGY
HDFC Bank operates in a highly automated environment in terms of information technology
and communication systems. All the bank’s branches have online connectivity, which
enables the bank to offer speedy funds transfer facilities to its customers. Multi-branch
access is also provided to retail customers through the branch network and Automated Teller
Machines (ATMs).
The Bank has made substantial efforts and investments in acquiring the best technology
available internationally, to build the infrastructure for a world class bank. In terms of core
banking software, the Corporate Banking business is supported by Flexcube, while the Retail
Banking business by Finware, both from i-flex Solutions Ltd. The systems are open,
scaleable and web-enabled.
The Bank has prioritised its engagement in technology and the internet as one of its key
goals and has already made significant progress in web-enabling its core businesses. In each
of its businesses, the Bank has succeeded in leveraging its market position, expertise and
technology to create a competitive advantage and build market share.

BUSINESS PROFILE
HDFC Bank caters to a wide range of banking services covering commercial and investment
banking on the wholesale side and transactional / branch banking on the retail side. The bank
has three key business segments:
Wholesale Banking
The Bank’s target market is primarily large, blue-chip manufacturing companies in the
Indian corporate sector and to a lesser extent, small & mid-sized corporates and agri-based
businesses. For these customers, the Bank provides a wide range of commercial and
transactional banking services, including working capital finance, trade services,
transactional services, cash management, etc. The bank is also a leading provider of
structured solutions, which combine cash management services with vendor and distributor
finance for facilitating superior supply chain management for its corporate customers. Based
on its superior product delivery / service levels and strong customer orientation, the Bank has
made significant inroads into the banking consortia of a number of leading Indian corporates

10
including multinationals, companies from the domestic business houses and prime public
sector companies. It is recognised as a leading provider of cash management and
transactional banking solutions to corporate customers, mutual funds, stock exchange
members and banks.
Treasury
Within this business, the bank has three main product areas - Foreign Exchange and
Derivatives, Local Currency Money Market & Debt Securities, and Equities. With the
liberalisation of the financial markets in India, corporates need more sophisticated risk
management information, advice and product structures. These and fine pricing on various
treasury products are provided through the bank’s Treasury team. To comply with statutory
reserve requirements, the bank is required to hold 25% of its deposits in government
securities. The Treasury business is responsible for managing the returns and market risk on
this investment portfolio.
Retail Banking
The objective of the Retail Bank is to provide its target market customers a full range of
financial products and banking services, giving the customer a one-stop window for all
his/her banking requirements. The products are backed by world-class service and delivered
to customers through the growing branch network, as well as through alternative delivery
channels like ATMs, Phone Banking, NetBanking and Mobile Banking.
The HDFC Bank Preferred program for high net worth individuals, the HDFC Bank Plus and
the Investment Advisory Services programs have been designed keeping in mind needs of
customers who seek distinct financial solutions, information and advice on various
investment avenues. The Bank also has a wide array of retail loan products including Auto
Loans, Loans against marketable securities, Personal Loans and Loans for Two-wheelers. It
is also a leading provider of Depository Participant (DP) services for retail customers,
providing customers the facility to hold their investments in electronic form.
HDFC Bank was the first bank in India to launch an International Debit Card in association
with VISA (VISA Electron) and issues the MasterCard Maestro debit card as well. The Bank
launched its credit card business in late 2001. By March 2015, the bank had a total card base
(debit and credit cards) of over 25 million. The Bank is also one of the leading players in the
“merchant acquiring” business with over 235,000 Point-of-sale (POS) terminals for debit /
credit cards acceptance at merchant establishments. The Bank is well positioned as a leader

11
in various net based B2C opportunities including a wide range of internet banking services
for Fixed Deposits, Loans, Bill Payments, etc.

RATINGS / AWARDS
Credit Rating
HDFC Bank has its deposit programmes rated by two rating agencies - Credit Analysis &
Research Limited. (CARE) and Fitch Ratings India Private Limited. The bank's Fixed
Deposit programme has been rated 'CARE AAA (FD)' [Triple A] by CARE, which
represents instruments considered to be "of the best quality, carrying negligible investment
risk".
CARE has also rated the bank's Certificate of Deposit (CD) programme "PR 1+" which
represents "superior capacity for repayment of short term promissory obligations". Fitch
Ratings India Pvt. Ltd. (100% subsidiary of Fitch Inc.) has assigned the "tAAA (ind)" rating
to the bank's deposit programme, with the outlook on the rating as "stable". This rating
indicates "highest credit quality" where "protection factors are very high".
HDFC Bank also has its long term unsecured, subordinated (Tier II) Bonds of Rs.4 billion
rated by CARE and Fitch Ratings India Private Limited. CARE has assigned the rating of
"CARE AAA" for the Tier II Bonds while Fitch Ratings India Pvt. Ltd. has assigned the
rating "AAA (ind)" with the outlook on the rating as "stable". In each of the cases referred to
above, the ratings awarded were the highest assigned by the rating agency for those
instruments.

Corporate Governance Rating:

The bank was one of the first four companies, which subjected itself to a Corporate
Governance and Value Creation (GVC) rating by the rating agency, The Credit Rating
Information Services of India Limited (CRISIL). The rating provides an independent
assessment of an entity's current performance and an expectation on its "balanced value
creation and corporate governance practices" in future. The bank was assigned a 'CRISIL
GVC Level 1' rating in January 2007 which indicates that the bank's capability with respect
to wealth creation for all its stakeholders while adopting sound corporate governance
practices is the highest

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Awards and Accolades :
HDFC Bank began operations in 1995 with a simple mission: to be a "World-class Indian
Bank". We realized that only a single-minded focus on product quality and service
excellence would help us get there. Today, we are proud to say that we are well on our way
towards that goal.

Over the years, the Bank has received recognition and awards from several leading
organizations and publications, both domestic and international

Historical background – HDFC BANK

The Housing Development Finmce Corporation Ltd WFC) was among the
first to receive an 'in-principl approval from the Reserve Bank of India (RBI) to set up a bank
in the private sector as part of the RBI's liberalization of the Indian Banking Industry in 1994.
The bank was incorporated in August 1994 as 'HDFC Bank Ltd.', and it commenced its
operations as a scheduled commercial bank in January 1 995. The bank's aim is to build sound
customer franchises across distined
businesses so as to be the preferred provider of banking services in the segments that
the bank opmates in and to achieve healthy growth in profitability, consistent with the bank's
risk appetite.
Philosophy of the bank
The HDFC Bank's business philosophy is based on four core values: > Operational Excellence
> Customer Focus Product Leadership and People.
HDFC Bank's vision
is to be a customer-driven, best managed enterprise that enjoys market leadership in providing
housing related finance.
Mission
HDFC Bank's mission is to be a World-Class Indian Bank. The objective is to build sound
customer franchises across distinct businesses so as to be the preferred provider of banking
services for target retail and wholesale customer segments, and to achieve healthy growth in
profitability, consistent with the bank's risk appetite. The bank is committed to maintain the
highest level of ethical standards, professional integrity, corporate governance and regulatory
compliance.
Branch Network
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HDFC Bank is headquartered in Murnbai. The bank at present has an enviable network of 4,787
branches spread in 1,454 cities across India. All branches are linked on an online real-
time.basis. Customers in over 500 locations are also serviced through telephone banlung. The
bank's expansion plans aim at having a presence in all major industrial and commercial centers
where its corporate customers are located as well as building a strong retail customer base for
both deposits and loan products. Being a clearinglsettlement bank to various leading
stock exchanges, the bank has branches in the centers where the NSE/BSE has a strong and
active member base. The bank also .has 12,635 networked ATMs across these cities.
Financial services
The HDFC Bank's business philosophy is based on four core values: Operational Excellence,
Customer Focus, Product Leadership and People. But like much of Indian industry, the HDFC's
financial' services industry also is working with one hand tied behind its back. In spite of
successive Finance Ministers being at the vanguard of reform, the truth is that the bank's
financial services sector is heavily "protected" by the RBI and the government. The bulk of the
banking sector is still in the government's hands and a debt market may in government
securities.
It is this "protection" by the Reserve Bank and government that will shape the future of India's
private sector banks and financial institutions. With different arms of the government
regulating the different businesses, HDFC has to function as a housing finance company
(NHB), as a life insurer (IRDA), as an asset manager (SEBI) and as a bank (RBI), and the
management has to satis@ the varying requirements of each of the regulators, including their
requirements as to the capital structure. The management's options are, thus, severely
constricted

Corporate Governance practices by HDFC Bank

The Bank believes in adopting and adhering to the best recognised corporate governance
practices and continuously benchmarking itself against each such practice. The Bank
understands and respects its fiduciary role and responsibility to shareholders and strives hard
to meet their expectations. The Bank believes that best board practices, transparent disclosures
and shareholder empowerment are necessary for creating shareholder value.
The Bank has infused the philosophy of corporate governance into all its activities. The
philosophy on corporate governance is an important tool for shareholder protection and
maximization of their long term values. The cardinal principles such as independence,

14
accountability, responsibility, transparency, fair and timely disclosures, credibility, etc. serve
as the means for implementing the philosophy of corporate governance in letter and spirit.
This Code of Ethics / Conduct intends to ensure adherence to the highest business and ethical
standards while conducting the business of the Bank and compliance with the legal and
regulatory requirements, including compliance of Section 406 of the Sarbanes-Oxley Act of
2002 and the rules and regulations framed there under by the Securities and Exchange
Commission of USA and other statutory and regulatory authority in India and US.

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A COMPARATIVE STUDY OF NPA IN ICICI BANK AND HDFC BANK
Introduction to NPA The three letters “NPA” Strike terror in banking sector and business circle
today. NPA is short form of “Non-Performing Asset”. The dreaded NPA rule says simply this:
when interest or other due to a bank remains unpaid for more than 90 days, the entire bank loan
automatically turns a non performing asset. The recovery of loan has always been problem for
banks and financial institution. To come out of these first we need to think is it possible to
avoid NPA, no cannot be then left is to look after the factor responsible for it and managing
those factors. A Non-performing asset (NPA) is defined as a credit facility in respect of which
the interest and/or installment of principal has remained ‘past due’ for a specified period of
time. With a view to moving towards international best practices and to ensure greater
transparency, it has been decided to adopt the ‘90 days’ overdue’ norm for identification of
NPAs, from the year ending March 31, 2004. Accordingly, with effect from March 31, 2004,
a non-performing asset (NPA) shall be a loan or an advance where;
 Interest and/or installment of principal remain overdue for a period of more than 90
days in respect of a term loan,
 The account remains ‘out of order’ for a period of more than 90 days, in respect of an
Overdraft/Cash Credit (OD/CC),
 The bill remains overdue for a period of more than 90 days in the case of bills
purchased and discounted,
 Interest and/or installment of principal remains overdue for two harvest seasons but
for a period not exceeding two half years in the case of an advance granted for
agricultural purposes, and
 Any amount to be received remains overdue for a period of more than 90 days in
respect of other accounts.

As per Reserve Bank of India’s guidelines, income on loans is to be recognised on receipt basis
(as against accrual basis) and if it has not been received for a specified period, the same asset
is to be treated as non-performing. The basis for doing so is given below:
1. Term Loan: Term Loan account will be treated as NPA if interest or instalment of principal
is in arrears for any two quarters out of four quarters, though the default may not be
continuously for two quarters during the year. The default may be considered by applying the
concept of past due i.e. if not paid within 30 days from the due date

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2. Cash Credit and Overdrafts: A cash credit or overdraft account will be treated as NPA if the
account remains out of order for a period of two quarters. An account should be treated as “out
of order” if the outstanding balance remains continuously in excess of the sanctioned
limit/drawing power. In case where the principal operating account is less than the sanctioned
limit/drawing power but there are no credits continuously for six months as on the date of
balance sheet or credit are not enough to cover the interest debited during the same period,
these accounts should also be treated as “out of order”.
3. Bills purchased and discounted: The bills purchased/discounted account should be treated
as NPA if the bill remains overdue and unpaid for a period of two quarters.
4. Other Accounts: Any other credit facility should be treated as NPA if any amount to be
received in respect of that facility remains past due for a period of two quarters. An amount
should be considered past due, when it remains outstanding for 30 days beyond the due date.

Reasons for an Account Becoming NPA –

There are number of reasons for an account becoming an NPA for banks, it can be classified
into internal factors and external factors
Internal Factors

not completed in time.
 Poor recovery of receivables.
 Excess capacities created on non-economic costs.
 In-ability of the corporate to raise capital through the issue of equity or other
debt instrument from capital markets.
 Business failures.
 Diversion of funds for expansion\modernization\setting up new projects\ helping
or promoting sister concerns.
 Willful defaults, siphoning of funds, fraud, disputes, management disputes,
misappropriation etc.
 Deficiencies on the part of the banks viz. in credit appraisal, monitoring and follow-
ups, delaying settlement of payments\ subsidiaries by government bodies etc.,

External Factors
 Sluggish legal system –

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 Long legal tangles
 Changes that had taken place in labour laws
 Lack of sincere effort.
 Scarcity of raw material, power and other resources.
 Industrial recession.
 Shortage of raw material, raw material\input price escalation, power shortage,
industrial recession, excess capacity, natural calamities like floods, accidents.
 Failures, non-payment over dues in other countries, recession in other countries,
externalization problems, adverse exchange rates etc.
 Government policies like excise duty changes, Import duty changes etc.

Factors for Rise In NPAs

The banking sector has been facing the serious problems of the rising NPAs. But the
problem of NPAs is more in public sector banks when compared to private sector banks
and foreign banks. The NPAs in PSB are growing due to external as well as internal
factors.

External Factors
Ineffective Recovery Tribunal- the Govt. has set of numbers of recovery tribunals,
which works for recovery of loans and advances. Due to their negligence and
ineffectiveness in their work the bank suffers the consequence of non-recover, their by
reducing their profitability and liquidity.
Wilful Defaults- There is borrowers who are able to pay back loans but are
intentionally withdrawing it. These groups of people should be identified and proper
measures should be taken in order to get back the money extended to them as advances
and loans.
Natural Calamities- This is the measure factor, which is creating alarming rise in NPAs
of the PSBs. every now and then India is hit by major natural calamities thus making
the borrowers unable to pay back there loans. Thus the bank has to make large amount
of provisions in order to compensate those loans, hence end up the fiscal with a reduced
profit. Mainly ours farmers depends on rain fall for cropping. Due to irregularities of
rain fall the farmers are not to achieve the production level thus they are not repaying
the loans.

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Industrial Sickness- Improper project handling , ineffective management , lack of
adequate resources , lack of advance technology , day to day changing govt. Policies
give birth to industrial sickness. Hence the banks that finance those industries
ultimately end up with a low recovery of their loans reducing their profit and liquidity.
Lack of Demand- Entrepreneurs in India could not foresee their product demand and
starts production which ultimately piles up their product thus making them unable to
pay back the money they borrow to operate these activities. The banks recover the
amount by selling of their assets, which covers a minimum label. Thus the banks record
the non-recovered part as NPAs and have to make provision for it.
Change on Govt. Policies- With every new govt. banking sector gets new policies for
its operation. Thus it has to cope with the changing principles and policies for the
regulation of the rising of NPAs. The fallout of handloom sector is continuing as most
of the weavers Co-operative societies have become defunct largely due to withdrawal
of state patronage. The rehabilitation plan worked out by the Central government to
revive the handloom sector has not yet been implemented. So the over dues due to the
handloom sectors are becoming NPAs.
Internal Factors -Defective Lending Process- There are three cardinal principles of
bank lending that has been followed by the commercial banks since long

Principles of safety:-
By safety it means that the borrower is in a position to repay the loan both principal
and interest. The repayment of loan depends upon the borrowers:
a. Capacity to pay
b. Willingness to pay Capacity to pay depends upon:
1. Tangible assets
2. Success in business Willingness to pay depends on:
1. Character2. Honest3. Reputation of borrower
The banker should, therefore take utmost care in ensuring that the enterprise or
business for which a loan is sought is a sound one and the borrower is capable of
carrying it out successfully. He should be a person of integrity and good character.
Inappropriate Technology-
Due to inappropriate technology and management information system, market driven
decisions on real time basis cannot be taken. Proper MIS and financial accounting

19
 system is not implemented in the banks, which leads to poor credit collection, thus
NPA. All the branches of the bank should be computerized.

Improper SWOT Analysis- The improper strength, weakness, opportunity and threat
analysis is another reason for rise in NPAs. While providing unsecured advances the
banks depend more on the honesty, integrity, and financial soundness and credit
worthiness of the borrower.
 Banks should consider the borrowers own capital investment.
 It should collect credit information of the borrowers From bankers.
 Enquiry from market/segment of trade, industry, business.
 From external credit rating agencies.
 Analyze the balance sheet. True picture of business will be revealed on analysis of
profit/loss a/c and balance sheet.
Purpose of the loan
When bankers give loan, he should analyze the purpose of the loan. To ensure safety and
liquidity, banks should grant loan for productive purpose only. Bank should analyze the
profitability, viability, long term acceptability of the project while financing.
Poor Credit Appraisal System- Poor credit appraisal is another factor for the rise in NPAs.
Due to poor credit appraisal the bank gives advances to those who are not able to repay it
back. They should use good credit appraisal to decrease the NPAs.
Managerial Deficiencies- The banker should always select the borrower very carefully and
should take tangible assets as security to safe guard its interests. When accepting securities
banks should consider the
1. Marketability
2. Acceptability
3. Safety
4. Transferability.
The banker should follow the principle of diversification of risk based on the famous
maxim “do not keep all the eggs in one basket”; it means that the banker should not grant
advances to a few big farms only or to concentrate them in few industries or in a few cities.
If a new big customer meets misfortune or certain traders or industries affected adversely,
the overall position of the bank will not be affected.

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 Absence of Regular Industrial Visit- The irregularities in spot visit also increases the
NPAs.
Absence of regularly visit of bank officials to the customer point decreases the collection
of interest and principals on the loan. The NPAs due to willful defaulters can be collected
by regular visits.
Re Loaning Process- Non remittance of recoveries to higher financing agencies and re
loaning of the same have already affected the smooth operation of the credit cycle. Due to
re loaning to the defaulters and CCBs and PACs, the NPAs of OSCB is increasing day by
day.

RBI GUIDELINES ON INCOME RECOGNITION (INTEREST INCOME ON

NPA’s)

Income Recognition: Income from Non-Performing Assets should not recognize on

accrual basis but should be booked as income only when it is actually received. Therefore
interest should not be charged and taken into income account till the account become standard
asset.

21
  Interest charged to be stopped
 Provision to be made

Over Due: Any amount due to the Bank under any credit facility is “Over due” if it is not paid
on the due date fixed by the Bank.

Out of Order: An account should be treated as “out of order”

 If the outstanding balance remains continuously in excess of the sanctioned limit/
drawing power.
 In cases where the outstanding balance in the principal operating account is less than
the sanctioned limit/ drawing power, but there are no credits continuously for 90 days
as on the date of Bank’s Balance Sheet or Where are credits are not enough to cover
the interest debited during the same period.

A Non -Performing Asset shall be an advance where:

Term Loan: Interest and/ or installment of principal remain “over due” for a period of more
than 90 days.

Cash Credit/ Over Draft: If the account remains out of order for a period more than 90 days.

Bills: Overdue for a period of more than 90 days.

Other accounts: Any amount to be received remains overdue for a period of more than 90 days.
Short duration crops: If the installment of principal or interest there on remains overdue for
two crop seasons.
Long duration crops: If installment of principal or interest there on remains overdue for One
Crop season. An account would be classified as NPA only if the interest charged during any
quarter is not serviced fully within 90 days from the end of the quarter.

HDFC Bank, one of most valued banks globally and the cleanest among Indian banks when it
comes to non-performing assets (NPAs), has seen an “unhappy secret”,

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While most banks are battling a high amount of bad loans from largely around 4-5 percent to
as high as 25 percent, HDFC Bank, country’s second largest private lender, has maintained
the gross NPA ratio at 1.26 percent of its total loan book size.
The Aditya Puri-led bank also has a price-to-book value ratio at 5.2 percent, the value it gives
to its investors in the stock market.
a report by independent analyst Hemindra Hazari, who said in the his analysis, “It is now
clear that the unnamed and disputed corporate non-performing asset (NPA) in HDFC Bank
Limited [2QFY2018 results was Jindal Steel & Power Ltd (JSPL)]…A letter from the bank to
JSPL makes clear, however, that the account was irregular and overdue but probably within
the 90-day grace period as on end September 2017. What is even more curious is that JSPL,
which was having difficulty servicing its bank debt, is now borrowing high-cost funds from a
non-bank finance company (NBFC) to settle its overdue with banks."
HDFC Bank did not respond, at the time of publishing this article, to queries sent by seeking
clarification on the exposure to JSPL.
Jindal Steel had net debt of Rs 44,000 (USD 6.8 billion) at the end of September 2017.
According to Bloomberg, HDFC Bank should acknowledge the "divergence" between its
self-reported and RBI-assessed NPAs. But doing so would also mean admitting that those
soured loans, net of provisions, were 95 percent more than disclosed in the full-year accounts.
Such a divergence in asset classification of NPA accounts emerged in two other banks - Axis
Bank at Rs 5,633 crore and Yes Bank at Rs 6,355 crore.
So far, HDFC Bank has not disclosed the quantum of the exposure but stated that it has made
a provision of Rs 700 crore, adequate as per the RBI’s norms for NPAs.
Without mentioning the word “divergence, a day after it announced the second quarter
results, HDFC Bank in a statement said, “With specific reference to the part pertaining to the
project loan account which underwent flexible structuring as approved by the Joint Lenders
Forum and for which the Bank had made contingent provisions. The Bank has received
communication from the regulator advising it to classify the said account as a non-performing
asset. The same has been duly complied with.”
The Bloomberg report said, “If the corporate account exposure exceeds Rs 8.84 billion or Rs
884 crore (i.e. 15 percent of the bank’s announced
FY17 gross NPAs), the bank will be in the embarrassing position of having to disclose the
divergence in the RBI format. Such a divergence was not expected from India’s largest bank
by market capitalization, a bank that trades at 5.2x price to book value.”

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The Bloomberg report also acknowledges if questions would be raised about the RBI. “The
RBI can't arbitrarily force some lenders to appear less than truthful, while sparing others the
humiliation of a mea culpa.”
Earlier, speaking to Moneycontrol, former RBI deputy governor SS Mundra has said,
“Sometimes, it is quite possible that NPAs may be recognised in one bank and not in another.
At times, when the RBI is inspecting, the availability of information is slightly better than the
bank auditors and also the timeline is better.
“So, there are also interpretational issues. However, this should account for a limited
difference. There may be genuine reasons that some parties (banks or auditors) may not be
clear. Now that two cycles are over, the bank Board, auditors must pick these up and engage
into discussions with the management and RBI. I would prefer more engagement than judge
that as a misconduct on the part of auditors,” he added.
With the stakes this high, the RBI needs to crack the whip of asset classification with a steady
hand -- one that treats creditors fairly and borrowers correctly. Meanwhile, HDFC Bank must
present a more accurate picture of its soured loans. After all, bad things can happen even to
great banks, the report added.

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HDFC Bank said that more than half of the increase in bad loans was from its agriculture
portfolio, adding that announcement of farm loan waivers impacted recoveries in this
segment. Graphic: Subrata Jana

HDFC Bank’s impeccable asset quality gets a farm loan waiver

HDFC Bank's gross NPA ratio climbed to 1.24% for the June quarter from 1.05% in the
previous quarter, thanks to the farm loan waivers announced by a handful of states
HDFC Bank Ltd, otherwise immune to the bad loan problem plaguing its peers, saw its gross
non-performing assets (NPAs) ratio rise to the highest in seven years thanks to the farm loan
waivers announced by a handful of states.
India’s most valuable lender’s gross NPA ratio climbed to 1.24% for the June quarter from
1.05% in the previous quarter and 1.04% in the corresponding quarter a year ago. On an
absolute basis, bad loans stood at Rs7,242 crore, a 23% rise in just one quarter. More than
half of the increase in bad loans was from its agriculture portfolio, the bank said, adding that
announcement of farm loan waivers impacted recoveries in this segment.
HDFC Bank’s management didn’t forcefully dispel concerns over agriculture loans in the
coming quarters. Deputy managing director Paresh Sukthankar indicated that the portfolio
will have to be monitored as loan waivers are being finalized in many states. It is obvious that

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the lender is seeing more stress emanating from this corner of its loan book. However,
Sukthankar assured that the stress is limited to only the farm portfolio and its exposure to the
microfinance segment has shown no signs of weakening further. Recall that in the previous
quarter, many banks including HDFC Bank had indicated stress on this portfolio arising out
of demonetization.
The fact that HDFC Bank saw a deterioration in its agriculture loans is proof enough that
farm loan waivers will worsen the already colossal bad loan problem for banks. This is a
distressing sign for public sector banks, many of which would be detailing their quarterly
results soon.
For HDFC Bank, the rest of its metrics continued to be promising.
Despite provisions rising sharply owing to the farm loan stress, the bank reported a 20.7%
rise in its profit after tax, which is higher than the growth it reported in the previous quarter.
The lender’s loan growth remained unscathed and even improved to an enviable 23.4%, led
by both corporate and retail loan growth. As a result, its core income grew at a healthy pace
of 20%.
Since HDFC Bank met all expectations on profit metrics, it is no surprise that the stock ended
nearly 2% up on the bourses. The rise in bad loans is seen as a blip in an otherwise
impeccable loan book.

NPA RATIOS

8,606.97

5,885.66

4,392.83
3,438.38
2,989.28
2,601.02
1,843.99
820.03 896.28 1,320.37

2014 2015 2016 2017 2018

Gross NPA NET NPA

26
HDFC BANK vs ICICI BANK - Comparison Results

HDFC BANK
With 4.2% share of India's total non-food credit disbursements in FY12, HDFC Bank is the
second largest private sector bank in the country (after ICICI Bank) in terms of asset size. The
bank has tripled its share from 1.2% of total non-food credit in FY02 to 4.2% in FY12. Retail
assets constituted 51.3% of advances in FY12. Its group companies, HDFC Standard Life
(insurance), HDFC AMC (mutual funds) and HDFC Securities (equities) add scalability to the
bank's offerings.

ICICI BANK
Despite being the second largest bank in the country after SBI in terms of asset size, ICICI
Bank lost its share of the banking sector's advances from 10.2% in FY07 to 8% in FY12. At
the end of March 2012, the bank had assets of over Rs 4.8 trillion and a franchise of over 9,000
ATMs and 2,750 branches spread across the country. Retail assets constituted 34% of advances
in FY12 as against 65% in FY07. The bank is focusing on loan origination in the large
corporate, SME and agrie segments and on non-fund based products and services. Besides the
bank itself being the market leader across retail loan portfolios, its subsidiaries ICICI Life
Insurance, ICICI General Insurance and ICICI AMC are leaders in their respective businesses.

ICICI Bank began its retail banking venture in mid-1999. By January 2000, it had moved on
to introducing home loans, car loans, personal loans and credit cards. Realising the need for a
bigger retail deposit base, the bank started building a branch and an ATM network. The
acquisition of Bank of Madura in March 2001 added 263 branches, many of them in cities
where ICICI Bank did not have a presence.
The merger of the erstwhile financial institution ICICI Limited with the bank in April 2002,
gave it a ready-made corporate clientele. The flip side was that ICICI Bank had Rs 10,000 crore
(Rs 100 billion) of restructured assets for which it had to make provisions.

On the other hand, HDFC Bank kick started its operations in 1995 with a focus on corporate
banking, targeting the top-end of the market. Reminisces Paresh Sukthankar, head, credit and
market risk, HDFC Bank, "Although the asset yields may

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have been lower, we were able to cross-sell products so that the overall returns were better. We
may have grown slower than our peers, but the risks were lower."

HDFC Bank ventured into retail lending in 1998, a year before ICICI Bank. But in products
like credit cards, it was slow to get off the mark. For instance, its credit cards were launched
only two years ago.

By then ICICI Bank had been present in the credit card business for nearly three years. Says
Sukthankar, "We believe that a sales cycle is not completed till the asset comes back to us. So
we were not aggressive in those products where we perceived the risks were higher."

However, HDFC Bank was handicapped because it could not sell home loans (because its
parent HDFC was in the business), though it has been originating them in the past one-and-a-
half years. For ICICI Bank, home loans are 46 per cent of its retail assets.

A banking consultant observes that ICICI Bank is far more aggressive. Though ICICI
executives do not admit it, industry sources observe that ICICI's pricing has been far more
competitive, which probably brought it more customers.

According to some industry experts, growth for ICICI Bank may have come at the cost of
quality. ICICI Bank denies this.

Says Kalpana Morparia, deputy managing director, ICICI Bank, "If your screening is not
tight, it will show up in the very first year of the loan. Our provisioning is very strict, so any
defaults would show up in the non-performing loans (NPLs). Our home loan NPLs are just
0.25 per cent, while for car loans they are 0.45 per cent."

The numbers tell the story. ICICI Bank's retail deposits are nudging Rs 60,000 crore (Rs 600
billion) and in FY05, it grew its deposits by 47 per cent compared with the industry deposit
growth of 14 per cent.

HDFC Bank's retail deposits are about Rs 23,000 crore (Rs 230 billion). Even in home loans,
ICICI Bank commands 30 per cent of the market, having eaten into housing finance pioneer,
HDFC's share.

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Even in the number of customers ICICI Bank leads by a distance (See table: Share of the
wallet). Nearly 14 million customers bank with ICICI Bank, while the number for HDFC
Bank is less than half (6.4 million).

ICICI Bank has issued 3 million credit cards -- that is more than twice the number of HDFC
Bank's credit card users. However, industry observers point out that ICICI Bank's effective
users for credit cards may not be high.

Nonetheless, they concede that even with a discounted customer base, the numbers will still
be strong. Even in businesses like online trading where the risks are relatively low, ICICI
Bank commands a two-thirds market share

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FINDINGS
 As score for Assurance is at second place after responsiveness, so the customers of
HDFC bank are very confident and feel safe while transacting with the bank. Moreover
the employees of the bank have proved to be trustworthy. Employees are also educated
enough to answer all the questions.
 The score of Tangibility dimension of service quality of HDFC bank is the lowest. The
service quality factor tangible is defined by whether the physical facilities and materials
associated with the service are visually appealing at the bank. These are all factors that
customers notice before or upon entering the bank.
 Customer expectations regarding visual appealing of HDFC is very high. From my
study I found that Physical facilities and modern looking equipment are not sufficient
in HDFC bank. Respondents were uncertain about the neat appearance of the reception
desk employees. So they should work on that and try to fulfill the gap.
 According to my findings, the score of Empathy is not satisfactory but not
unsatisfactory also. HDFC bank is unable to give individual attention to its customers
and is unable to understand specific needs of its customers. But still bank has taken
steps to satisfy its customers by keeping operating hours convenient to its customers
and keeping their interest best at heart.
 In HDFC bank, the score of Responsiveness is highest so they are focusing on prompt
service, employees are willing to help the customers and say the exact time when the
services will be performed. Employees at bank give their customers first preference and
are always ready to help them. Overall HDFC bank‟ s responsiveness dimension of
service quality is the highest.
 According to the customer perception, HDFC bank is highly responsive. Customers
are assured while transacting with the bank. The reliability dimension is lower than the
first to dimension. They feel that the bank is unable to give them individual attention
and its equipment’s are not modern and sufficient for the bank.
 There is not much gap between all the dimensions, this shows that HDFC BANK is a
better service provider in all the dimensions i.e. reliability, assurance, tangibility,
responsiveness and empathy. As a result of which, the customers are satisfied with the
service offered by HDFC bank.

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RECOMMENDATIONS

 Reliability is an obvious place to start. Customers of the bank want to know their
resources are safe and within trustworthy institutions. A way to ensure this peace of
mind would be to take steps to ensure bank employees are well trained, so each bank
associate is able to offer complete and comprehensive information at all times.
Consistent policies combined with a knowledgeable staff will foster a high degree of
institutional cohesion and reliability.
 Responsiveness, again when associated with a well-trained staff and timely answers to
service-related questions, would make significant inroads into causing HDFC bank be
regarded as responsive. Staff should be encouraged to present relevant options to
banking customers in a manner that does not resemble salesmanship so much as a desire
to serve.
 Intangibles please customers just as much as tangibles in the banking industry. People
tend to visit the same branch of a bank over and over again. Usually, this is a location
close to their home or their work place. It is natural that customers become comfortable
and habituated to these branch banks, for the same reason they develop familiarity with
a neighborhood supermarket or convenience store. It makes sense that bank employees
would be encouraged to learn to recognize these regular customers, learn their names,
and begin to identify their basic service requirements.
 Learning to understand customers‟ needs will allow bank associates to offer enhanced
services, perhaps lowering customers‟ banking costs and increasing their investment
potential. This could also open up the possibility of increased profits for banks, for
when perceived as more service and customer oriented, they will, in effect, become a
useful and pleasant way to “shop.”
 Keeping the bank with up-to-date technologically are important factors. Modern
equipment’s, new improved technology should be replaced with the old ones. If the
staff inside is pleasant and well-informed, in an aesthetically pleasing environment,
then customer satisfaction will be high.

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CONCLUSION
Good Governance is becoming a source of competitive advantage among economies for
attracting international capital. Responsibility, Transparency, Fairness and Accountability are
the four vital pillars for strong Corporate Governance. Corporate Governance helps in
establishing a system where a director is showered with duties and responsibilities of the affairs
of the Company. This study presents Corporate Governance disclosure practices in five Indian
Private Sector Banks listed in BSE Top 100 (HDFC Bank, ICICI Bank, Kotak Mahindra Bank,
Axis Bank, Yes Bank) . From the interpretation and Analysis of criterion table it is observed
that in this research alternative hypothesis has been proved that BSE listed Private Sectors
Banks (Selected Banks) show compliance with Corporate Governance standard and disclose
practices mentioned in Clause 49 of Listing Agreement and provisions in Companies Act 2013.
This research found that the degree of Corporate Governance compliance is fairly good in all
sampled banks. All selected banks fulfilled the mandatory requirements in all sub-indices of
the Clause 49. The Bank believes in adopting and adhering to the best standards of corporate
governance to all the stakeholders. The Bank’s philosophy on corporate governance enshrines
the goal of achieving the highest levels of transparency, accountability and equity in all spheres
of its operations and in all its dealing with the shareholders, employees, the government and
other parties. The Bank understands and respects its fiduciary role and responsibility to
shareholders. But HDFC Bank gained highest score in all selected banks. Banks have complied
with all the applicable mandatory requirements of the Code of Corporate Governance as
prescribed under the SEBI Listing Agreement. Whether all selected banks followed Corporate
Governance Disclosure Practices as per Clause 49, But to improve market condition and
financial system of the bank and also to remove corruption and avoid scams, Bank should be
followed Corporate Governance in more efficient manner and SEBI should be taken action for
any Non Compliances by Banks

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REFERENCE
Websites -
1. http://www.hdfc.com/
2. http://www.moneycontrol.com/india/stockpricequote/finance-
housing/housingdevelopmentfinancecorporation/HDF
3. http://www.business-standard.com/company/h-d-f-c-230/information/company-
history
4. http://www.managementparadise.com/bhaterirana1985/documents/20966/customer-
buying-behaviour-with-a-focus-on-market-segmentation-in-hdfc/
5. www.moneycontrol.com/news-topic/icici/
6. https://www.icici.co.in/
7. https://www.equitymaster.com/stock-research/compare/HDBK-ICBK/Compare-
HDFC-BANK-ICICI-BANK

Annual report -

1. https://www.hdfcbank.com/aboutus/cg/annual_reports.htm
2. http://www.moneycontrol.com/annual-report/hdfcbank/directors-report/HDF01
3. https://www.hdfc.com/investor-relations
4. https://www.icicibank.com/aboutus/annual.page
5. http://www.moneycontrol.com/annual-report/icicibank/directors-report/ICI02

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