HSBC Bank India's Annual Report

7/31/2019 HSBC Bank India's Annual Report

1/40june 25, 2011 vol xlvI nos 26 & 27 EPW Economic & Political Weekly132

The Hongkong and Shanghai Banking Corporation Limited India Branches

(Incorporated in Hong Kong SAR with limited liability)

AUDITORS REPORT ON THE FINANCIAL STATEMENTS

UNDER SECTION 30 OF THE BANKING REGULATION ACT, 1949

The Chief Executive Ofcer


1. We have audited the attached Balance Sheet of The Hongkong and Shanghai Banking Corporation Limited India Branches (theBank) as at 31 March 2011 and also the Prot and Loss Account and Cash Flow Statement for the year ended on that dateannexed thereto. These nancial statements are the responsibility of the Banks management. Our responsibility is to express anopinion on these nancial statements based on our audit.

2. We conducted our audit in accordance with auditing standards generally accepted in India. Those Standards require that we planand perform the audit to obtain reasonable assurance about whether the nancial statements are free of material misstatement. An

audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the nancial statements. An auditalso includes assessing the accounting principles used and signicant estimates made by management, as well as evaluating theoverall nancial statement presentation. We believe that our audit of the Bank provides a reasonable basis for our opinion.

3. The Balance Sheet and Prot and Loss Account are drawn up in conformity with Forms A and B (revised) of the Third Scheduleto the Banking Regulation Act, 1949, read with Section 211 of the Companies Act, 1956.

4. We report that:

a) We have obtained all the information and explanations, which to the best of our knowledge and belief were necessary forthe purposes of our audit and have found them to be satisfactory;

b) In our opinion, the transactions of the Bank which have come to our notice have been within its powers;c) The nancial accounting systems of the Bank are centralized and therefore, accounting returns for the purpose of preparing

nancial statements are not required to be submitted by the branches; we have visited 5 branches for the purpose of ouraudit;

d) In our opinion, proper books of account as required by law have been kept by the Bank so far as appears from ourexamination of those books.

e) The Balance Sheet, Prot and Loss Account and Cash Flow Statement dealt with by this report are in agreement with thebooks of account;

f) In our opinion, the Balance Sheet, Prot and Loss Account and Cash Flow Statement dealt with by this report comply withthe accounting standards referred to in sub-section (3C) of Section 211 of the Companies Act, 1956, read with guidelinesissued by the Reserve Bank of India insofar as they apply to the Bank;

5. In our opinion and to the best of our information and according to the explanations given to us, the said nancial statements givethe information required by the Companies Act, 1956 in the manner so required for banking companies, and give a true and fairview in conformity with the accounting principles generally accepted in India:

i. in case of the Balance Sheet, of the state of the affairs of the Bank as at 31 March 2011;

ii. in case of the Prot and Loss Account, of the prot for the year ended on that date; and

iii. in case of of Cash Flow Statement, of the cash ows for the year ended on that date.

For S.R. BATLIBOI & ASSOCIATES

Firm Registration Number: 101049W

Chartered Accountants

Sd/-per Amit Majmudar

PartnerMembership No.:36656

Place: MumbaiDate: 21 June 2011


2/40Economic & Political Weekly EPW june 25, 2011 vol xlvI nos 26 & 27 133



Prot and Loss Account for India Branchesfor the year ended 31 MarchBalance Sheet for India Branches as at 31 March

Schedules 2011 2010

Schedules 2011 2010

CAPITAL AND LIABILITIES

Capital 1 44,991,660 44,991,660

Reserves and surplus 2 91,883,062 76,360,692

Deposits 3 541,067,115 557,478,247

Borrowings 4 50,263,098 59,208,139

Other liabilities and provisions 5 183,279,813 166,297,148TOTAL 911,484,748 904,335,886

ASSETS

Cash and balances with

Reserve Bank of India 6 48,578,316 39,716,165

Balances with banks and

money at call and short notice 7 33,543,694 41,823,856

Investments 8 372,790,845 412,890,656

Advances 9 274,006,211 234,747,670

Fixed assets 10 8,744,309 8,928,756Other assets 11 173,821,373 166,228,783

TOTAL 911,484,748 904,335,886

Contingent liabilities 12 9,911,193,025 8,509,535,228

Bills for collection 93,972,841 89,817,220

Signicant accounting policies

and notes to accounts 18Schedules referred to herein form an integral part of the

balance sheet.

INCOME

Interest earned 13 51,949,586 51,658,815Other income 14 17,886,488 21,354,836

TOTAL 69,836,074 73,013,651

EXPENDITURE

Interest expended 15 18,591,228 19,146,572Operating expenses 16 21,909,495 19,501,215Provisions and contingencies 17 14,059,416 26,266,735

TOTAL 54,560,139 64,914,522

Net prot for the year 15,275,935 8,099,129Prot brought forward 15,468,006 9,264,515

TOTAL 30,743,941 17,363,644

APPROPRIATIONSTransfer to statutory reserve 3,818,984 2,024,782Transfer to (from)

investment reserve 297,636 (335,667)Transfer to specic reserve 213,348 206,523Transfer to Remittable Surplusretained in India for Capital toRisk-weighted Assets Ratio(CRAR) requirements 7,797,478 -Balance carried over tobalance sheet 18,616,495 15,468,006

TOTAL 30,743,941 17,363,644

Signicant accounting policies

and notes to accounts 18

Schedules referred to herein form an integral part of the

Prot And Loss Account.

As per our report attached.

For S.R. Batliboi & Associates For The Hongkong and Shanghai Banking Corporation Limited

Firm Registration number: 101049WChartered Accountants

Sd/- Sd/- Sd/-

per Amit Majmudar Richard Collie Stuart A. DavisPartner Chief Financial Ofcer Chief Executive Ofcer, India

Membership No.: 36656

Mumbai21 June 2011

(Currency: Indian rupees in thousands)(Currency: Indian rupees in thousands)





2011 2010

CASH FLOW FROM OPERATING ACTIVITIES

Net prot before taxes 27,407,719 15,099,673

Adjustments for:

Depreciation on xed assets 719,992 878,254

(Prot on revaluation of) provision for depreciation on investments (686,944) 2,418,385Provision for advances 2,273,030 16,369,500Other provisions 341,546 478,306Loss on sale of xed assets 2,052 10,033Positive revaluation of xed assets (18,399) (11,093)

30,038,996 35,243,058

Adjustments for:Decrease (increase) in investments (excluding Held to Maturity securities) 36,000,655 (105,860,841)(Increase) decrease in advances (41,531,571) 24,710,403Decrease in borrowings (8,945,041) (25,476,320)(Decrease) increase in deposits (16,411,132) 57,775,494(Increase) decrease in Other assets (6,396,799) 73,793,835Increase (Decrease) in Other liabilities and provisions 16,641,119 (83,795,403)

(20,642,769) (58,852,832)Direct taxes paid (13,327,575) (8,923,747)

Net cash used in operating activities (A) (3,931,348) (32,533,521)

CASH FLOW FROM INVESTING ACTIVITIES

Reduction in Held to Maturity securities 4,786,100 2,090,000Purchase of xed assets (278,522) (344,175)Proceeds from sale of xed assets 5,759 1,519

Net cash generated from investing activities (B) 4,513,337 1,747,344

Net increase (decrease) in cash and cash equivalents (A) + (B) 581,989 (30,786,177)

Cash and cash equivalents at 1 April 81,540,021 112,326,198

Cash and cash equivalents at 31 March 82,122,010 81,540,021

Note: Cash and cash equivalents comprise cash in hand and in ATMs, balances with Reserve Bank of India and balances with banks andmoney at call and short notice (refer schedule 6 and 7 of the balance sheet).

As per our report attached.

For S.R. Batliboi & Associates For The Hongkong and Shanghai Banking Corporation Limited Firm Registration number: 101049W

Chartered Accountants

Sd/- Sd/- Sd/- per Amit Majmudar Richard Collie Stuart A. Davis Partner Chief Financial Ofcer Chief Executive Ofcer, India

Membership No.: 36656

Mumbai21 June 2011

Cashow statement for India Branches for the year ended 31 March

(Currency: Indian rupees in thousands)





Schedules forming part of Balance Sheet of the India Branches as at 31 March

SCHEDULE 1 CAPITALI Amount of deposit kept with

the Reserve Bank of Indiaunder Section 11(2) (b) of theBanking Regulation Act, 1949. 15,913,356 13,933,356

II CapitalOpening Balance 44,991,660 44,991,660

44,991,660 44,991,660

SCHEDULE 2 RESERVESAND SURPLUSI Statutory Reserve

Opening balance 15,814,357 13,789,575Additions during the year 3,818,984 2,024,782

19,633,341 15,814,357

II Capital Reserves Surplus onsale of Immovable properties 1,066,566 1,066,566

1,066,566 1,066,566

III Capital ReservesOpening balance 13,261,565 14,563,715Less : Transfer to Remittable

Surplus retained in India forCapital to Risk-weightedAssets Ratio (CRAR)requirements (1,302,150)

13,261,565 13,261,565

IV Remittable Surplus retained inIndia for Capital toRisk-weighted Assets Ratio(CRAR) requirementsOpening balance 23,753,860 22,451,710Add : Transfer from prot and loss

account (see schedule 18note 5.1) 7,797,478

Add : Transfer from CapitalReserves 1,302,150

31,551,338 23,753,860

V Revaluation ReserveOpening balance 6,630,865 5,520,767

Revaluation of premises 246,435 1,110,0986,877,300 6,630,865

VI Investment ReserveOpening balance 335,667Transfer from (to) the Prot andLoss account 297,636 (335,667)

297,636

VII Specic Reserve(see schedule 18 note 5.5)Opening balance 365,473 158,950Additions during the year 213,348 206,523

578,821 365,473

VIII Balance in Prot andLoss Account 18,616,495 15,468,006

TOTAL(I+II+III+IV+V+VI+VII+VIII) 91,883,062 76,360,692

2011 2010 2011 2010

SCHEDULE 3 DEPOSITSA. I. Demand Deposits

i) From banks 1,246,610 1,254,052ii) From others 156,048,130 158,468,194

Total i) and ii) 157,294,740 159,722,246

II. Savings Bank Deposits 113,253,000 107,090,723

III. Term Depositsi) From banks 7,949,775 5,677,775ii) From others 262,569,600 284,987,503

Total i) and ii) 270,519,375 290,665,278

TOTAL (I+II+III) 541,067,115 557,478,247

B. I. Deposits of branchesin India 541,067,115 557,478,247

II. Deposits of branchesoutside India

TOTAL (I+II) 541,067,115 557,478,247

SCHEDULE 4 BORROWINGSI Borrowings in India

i) Reserve Bank of India 31,150,000 ii) Other banks 500,000iii) Other institutions

and agencies 9,225,942

Total i), ii) and iii) 31,150,000 9,725,942

II Borrowings outside India 19,113,098 49,482,197

TOTAL (I+II) 50,263,098 59,208,139

Secured borrowingsincluded in I & II above 31,000,000 5,725,942

SCHEDULE 5 OTHER

LIABILITIES AND PROVISIONSI Bills payable 7,439,075 3,498,130II Inter-ofce adjustments

Branches in India (net) III Interest accrued 7,007,652 6,042,655IV Provision towards standard

assets (See schedule 18 Note 5.6 (ai)) 4,994,109 4,753,871V Others (including provisions) 163,838,977 152,002,492

TOTAL (I+II+III+IV+V) 183,279,813 166,297,148

SCHEDULE 6 CASH ANDBALANCES WITHRESERVE BANK OF INDIAI Cash in hand and in ATMs

(including foreigncurrency notes) 1,060,490 1,178,593

II Balances with the Reserve Bankof Indiai) In current account 47,517,826 38,537,572ii) In other accounts

Total i) and ii) 47,517,826 38,537,572 TOTAL (I+II) 48,578,316 39,716,165






SCHEDULE 7 BALANCES WITH

BANKS AND MONEY AT CALL &

SHORT NOTICE

I In Indiai) Balances with banks

a) in current accounts 3,427,569 3,412,998b) in other deposit accounts 7,128,425 11,363,500

Total a) and b) 10,555,994 14,776,498ii) Money at call and short notice

a) with banks 9,684,610 1,600,000b) with other institutions 266,254 200,000

Total a) and b) 9,950,864 1,800,000

Total i) and ii) 20,506,858 16,576,498II Outside India

i) In current accounts 913,986 552,358ii) In other deposit accounts iii) Money at call and short notice 12,122,850 24,695,000

Total i), ii) and iii) 13,036,836 25,247,358

TOTAL (I+II) 33,543,694 41,823,856

SCHEDULE 8 INVESTMENTS

A. Investments in India in:i) Government securities 206,581,353 280,743,523ii) Other approved securities 10,000 20,000iii) Shares fully paid 121,103 91,203iv) Debentures and bonds 26,149,058 34,285,310v) Subsidiaries and/or joint

ventures fully paid 1 1 partly paid 499 499

vi) Others(CDs, SIDBI deposit, etc) 139,928,831 97,750,120

TOTAL i), ii), iii), iv), v) and vi) 372,790,845 412,890,656

B. Gross value of Investments in India 377,930,263 418,717,018Aggregate provision fordepreciation in India (5,139,418) (5,826,362)

NET VALUE OFINVESTMENTS IN INDIA 372,790,845 412,890,656

SCHEDULE 9 ADVANCESA. i) Bills purchased and

discounted # 24,638,524 27,635,010ii) Cash credits, overdrafts and

loans repayable on demand 131,243,262 115,822,257iii) Term loans 118,124,425 91,290,403

TOTAL i), ii) and iii) 274,006,211 234,747,670

B. i) Secured by tangible assets(including advances againstbook debt) 147,092,558 123,480,236

ii) Covered by Bank/Government guarantees 9,223,080 11,141,212

iii) Unsecured 117,690,573 100,126,222

TOTAL i), ii) and iii) 274,006,211 234,747,670

C. i) Priority sectors(including export nance) 96,042,661 82,142,975

ii) Public sector 171,912 100,760iii) Banks iv) Others 177,791,638 152,503,935

TOTAL i), ii), ii i) and iv) 274,006,211 234,747,670

# net of bills rediscountedamounting to Rs 0.6 (000)[previous year Rs 0.6 (000)]

SCHEDULE 10 FIXED ASSETS

I Premises (including leaseholdimprovements)(See Schedule 18note 5.2)Cost at 1 April (includingrevaluation) 9,176,065 7,898,210Additions during the year 78,073 157,777Revaluation of premisesduring the year 264,474 1,121,190Deductions during the year (785) (1,112)

9,517,827 9,176,065Depreciation to date (1,323,091) (1,108,230)

Net book value of Premises

(including leaseholdimprovements) 8,194,736 8,067,835

II Other Fixed Assets (including

furniture and xtures)Cost at 1 April 5,337,212 5,226,021Additions during the year 200,449 186,398Deductions during the year (238,940) (75,207)

5,298,721 5,337,212

Depreciation to date (4,749,148) (4,476,291) Net book value of Other

Fixed Assets (includingfurniture and xtures) 549,573 860,921

TOTAL (I+II) 8,744,309 8,928,756

SCHEDULE 11 OTHER ASSETS

I Inter-ofce adjustments Branchesin India (net)

II Interest accrued 4,223,931 4,922,567III Tax paid in advance/

tax deducted at source (net) 4,745,668 3,549,877IV Deferred tax (net) 6,365,034 7,416,318V Stationery and stamps 5,168 3,448VI Non-banking assets acquired

in satisfaction of claims VII Others 158,481,572 150,336,573

TOTAL(I+II+III+IV+V+VI+VII) 173,821,373 166,228,783

Schedules forming part of the Balance Sheet of India Branches as at 31 March

2011 2010 2011 2010






SCHEDULE 16 OPERATING EXPENSESI Payments to and provisions

for employees 8,743,863 8,222,979II Rent, taxes and lighting 1,276,615 1,430,058III Printing and stationery 135,643 165,327IV Advertisement and publicity 1,158,069 895,728V Depreciation on Banks

property 719,992 878,254VI Auditors fees and expenses 4,500 4,500VII Law charges 203,008 65,505VIII Postage, telegrams,

telephones, etc. 570,767 594,926IX Repairs and maintenance 430,372 406,088X Insurance 787,080 717,946XI Other expenditure

(See Schedule 18 note 5.6 (ae)) 7,879,586 6,119,904TOTAL (I+II+III+IV+V+VI+VII+VIII+IX+X+XI) 21,909,495 19,501,215

SCHEDULE 17PROVISIONSAND CONTINGENCIESI Provision for advances

(See Schedule 18 note 5.6(c)) 2,273,030 16,369,500II Other Provisions

(See Schedule 18 note 5.6(c)) 341,546 478,306III Taxation charge

- Cur rent tax expense 11,080,500 7,942,176- Deferred tax charge(benet) 1,051,284 (941,632)

12,131,784 7,000,544IV (Release) charge of provision

for depreciation oninvestments(See Schedule 18

note 5.6 (c) and (d)) (686,944) 2,418,385 TOTAL (I+II+III+IV) 14,059,416 26,266,735

SCHEDULE 12 CONTINGENT LIABILITIESI Claims against the bank not

acknowledged as debts(including tax matters) 3,357,697 2,601,885(See Schedule 18 Note 5.4)

II Liability for partly paidinvestments 500 500

III Liability on account ofoutstanding forward exchangeand derivative contracts

i) Forward contracts 2,373,890,362 1,720,866,759ii) Currency options 498,424,118 639,915,776iii) Derivative contracts 6,731,215,046 5,897,369,547

Total i), ii) and iii) 9,603,529,526 8,258,152,082

IV Guarantees givenon behalf ofconstituentsi) In India 74,941,027 77,440,849ii) Outside India 16,961,594 14,167,165

Total i) and ii) 91,902,621 91,608,014V Acceptances, endorsements

and other obligations 174,405,885 142,008,741

VI Bills rediscounted 1 1VII Other items for which

the bank is contingentlyliable 37,996,795 15,164,005

TOTAL

(I+II+III+IV+V+VI+VII) 9,911,193,025 8,509,535,228

Schedules forming part of the Prot and Loss Account of India Branches for the year ended 31 March

SCHEDULE 13 INTEREST EARNEDI Interest/discount on advances/

bills 24,095,058 26,448,318II Income on investments 27,243,643 24,477,206III Interest on balances with

Reserve Bank of India andother inter-bank funds 547,754 660,035

IV Others 63,131 73,256

TOTAL (I+II+III+IV) 51,949,586 51,658,815

SCHEDULE 14 OTHER INCOMEI Commission, exchange and

brokerage (net) 10,588,370 10,586,561II Loss on sale/maturity

of investments (net) (6,453,242) (928,430)III Loss on disposal of land,

buildings and other assets (net) (2,052) (10,033)IV Prot on exchange

transactions (net) 11,761,835 9,103,297V Miscellaneous income

[including income (losses) onderivative products] 1,991,577 2,603,441

TOTAL (I+II+III+IV+V) 17,886,488 21,354,836

SCHEDULE 15 INTEREST EXPENDEDI Interest on deposits 17,602,056 17,043,313II Interest on Reserve Bank of

India/inter-bank borrowings 899,545 1,991,047III Others (including interest paid

on subordinated debt) 89,627 112,212 TOTAL (I+II+III) 18,591,228 19,146,572

Schedules forming part of the Balance Sheet of India Branches as at 31 March

2011 2010 2011 2010


2011 2010 2011 2010






SCHEDULE 18 SIGNIFICANT ACCOUNTING POLICIES AND NOTES TO ACCOUNTS

1 Background

The nancial statements for the year ended 31 March 2011 comprise the accounts of the India Branches of The Hongkong andShanghai Banking Corporation Limited (the Bank), which is incorporated and registered in Hong Kong Special AdministrativeRegion (SAR). The Banks ultimate holding company is HSBC Holdings plc, which is incorporated in the United Kingdom.

2 Basis of preparation

The nancial statements are prepared and presented under the historical cost convention and accrual basis of accounting, exceptwhere otherwise stated, and in accordance with the generally accepted accounting principles and statutory provisions prescribedunder the Banking Regulation Act, 1949, circulars and guidelines issued by the Reserve Bank of India (RBI), AccountingStandards (AS) prescribed by the Companies (Accounting Standards) Rules, 2006 (as amended), to the extent applicable andcurrent practices prevailing within the banking industry in India.

3 Use of estimates

The preparation of the nancial statements, in conformity with generally accepted accounting principles, requires management tomake estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and disclosure ofcontingent liabilities as at the date of the nancial statements. Actual results could differ from those estimates. Any revision toaccounting estimates is recognised prospectively in current and future periods.

4 Signicant accounting policies

4.1 Investments

(a) Accounting and Classication

Investments are recognised using the value date basis of accounting. In compliance with RBI guidelines, all investments, which coverboth debt and equity securities, are categorised as Held for trading (HFT), Available-for-sale (AFS) or Held-to-maturity(HTM). However for the purpose of disclosure in the balance sheet, investments are classied as disclosed in Schedule 8 (Investments).

(b) Valuation (Other than securities held under the Primary Dealership (PD) department

Investments categorised under AFS and HFT categories are marked-to-market on a monthly basis. Net depreciation, if any, in anyclassication mentioned in Schedule 8 (Investments) is recognised in the prot and loss account. The net appreciation if any,under each classication is ignored, except to the extent of depreciation previously provided. The book value of individual

securities is not changed consequent to periodic valuation of investments.The mark-to-market value of investments classied as HFT and AFS is determined using Yield to Maturity (YTM) rate / pricesas notied by Fixed Income Money Market and Derivatives Association (FIMMDA) jointly with Primary Dealers Association ofIndia (PDAI).

Investments classied under the HTM category are carr ied at their acquisition cost and any premium on acquisition is amortised ona straight line basis over the remaining period to maturity. Where in the opinion of management, a diminution, other than temporaryin the value of investments classied under HTM has taken place, suitable provisions are made.

Treasury Bills, Commercial Paper, Certicates of Deposit and Zero Coupon Bonds being discounted instruments, are valued atcarrying cost.

(c) Transfer between categories

Transfer of investments between categories is accounted in accordance with RBI guidelines. As per master circular DBOD No. BPBC 18/21.04.141/2010-11, from 1 July 2010 shifting among categories of investments is accounted as follows:

a) Investments classied as AFS/HFT are transferred to HTM category at lower of book value (weighted average) or market value;

b) Investments classied as HTM are transferred to AFS/HFT category as follows: Investments originally placed in HTM at a discount, are transferred to AFS/HFT category at the acquisition price/book value

(weighted average); Investments originally placed in HTM at a premium, are transferred to AFS/HFT category at the amortised cost (weighted average);

c) Investments classied as AFS/HFT are transferred to HFT/AFS category at book value (weighted average) and the provisions forthe accumulated depreciation, if any, held is transferred to the provisions for depreciation against HFT/AFS.

(d) Accounting for repos / reverse repos (including liquidity adjustment facility)

Repurchase (repos) and reverse repurchase (reverse repos) transactions are accounted for as collateralized borrowing and lendingrespectively with an agreement to repurchase on agreed terms in accordance with RBI guidelines vide master circularIDMD/4135/11.08.43/2009-10 dated 23 March 2010. The difference between the clean price of the rst leg and the clean price of thesecond leg is recognised as interest income/expense over the period of the transaction in the prot and loss account.

(e) Valuation of securities held under the Primary Dealership department (PD)

Stock of government dated securities is valued at lower of weighted average cost and market value. Treasury bills are valued at thelower of carrying cost and market value. Market price of Government securities and Treasury bills is sourced from the prices

published by the Fixed Income Money Market and Derivatives Association of India (FIMMDA) jointly with Primary DealersAssociation of India (PDAI). Investments in PD books are marked-to-market on a daily basis.

Schedules forming part of the Financial Statements of India Branches for the year ended 31 March 2011





4 Signicant accounting policies (Continued)

4.2 Advances

Advances are stated net of provisions and interest in suspense.

Non performing advances are identied by periodic appraisals of the portfolio by management or in accordance with RBIguidelines, whichever is earlier.

Specic provisions are made on a case by case basis based on managements assessment of the degree of impairment of the advances(including mortgage loans but excluding other homogeneous retail loans), subject to the minimum provisioning levels prescribedby the RBI. Where there is no longer any realistic prospect of recovery, the outstanding advance is written off.

Subject to the minimum provisioning levels prescribed by the RBI, provision on homogeneous loans relating to retail business(excluding mortgage loans) are assessed on a portfolio basis using the historical loss and/or net ow method.

General provision is made in line with the existing RBI guidelines and included in Schedule 5 (Other Liabilities and Provisions).

The sale of non performing advances is accounted for in accordance with the RBI guidelines on Purchase/Sale of Non PerformingAssets, wherein if the sale of non-performing advances is for a value higher than the Net Book Value (NBV) of the loans, the excess,if any, is not recognised as prots but is held back to meet the shortfall/loss on account of sale of other non performing advances andclassied as additional standard asset provision. In case of a sale at a value lower than NBV, the shortfall is recognised in the prot andloss account in the year of sale after setting off any earlier provision held back on sale of other non performing advances.

4.3 Transactions involving foreign exchange

Transactions denominated in foreign currencies are recorded at the rates prevailing on the date of the transactions. Exchangedifferences arising on foreign currency transactions settled during the period are recognised in the prot and loss account of theperiod. Monetary assets and liabilities denominated in foreign currencies as at the balance sheet date are restated at the closingrates notied by Foreign Exchange Dealers Association of India (FEDAI) and resultant exchange differences are recognised inthe prot and loss account. Outstanding spot and forward exchange contracts are revalued based on the period end exchange ratesnotied by FEDAI. The forward exchange contracts are present valued using appropriate discount rates and the resultant gains orlosses are recognised in the prot and loss account.

Contingent liabilities denominated in foreign cur rencies are disclosed at closing rates of exchange notied by FEDAI.

4.4 Derivative nancial instruments

Derivatives in the form of forwards, swaps and option transactions are undertaken by the Bank in the foreign exchange and interestrate markets.

Accounting for these instruments is dependent upon whether the transactions are undertaken for trading or hedging purposes.Trading transactions include transactions undertaken for market making, to service customer needs and for proprietary purposes.Hedging transactions are entered into as part of the Banks risk management strategy relating to the Banks assets, liabilities,positions or cash ows.

Trading transactions are marked-to-market on a daily basis and the unrealized losses or gains are recognised into the prot and lossaccount as Other Income. Currency Options are marked-to-market using market values after considering the premium received orpaid. The prot or loss on revaluation is recorded in the Prot and Loss account and is included in Other assets or Other Liabilities.Accordingly, premium received and paid is recognised in the Prot and Loss account upon expiry or exercise of the options.

Derivatives designated as a hedge are accounted for in line with the accounting of the underlying asset or liability. Where theunderlying asset or liability is accounted for on an accrual basis the derivative is also accounted for on accrual basis. Where thedesignated asset or liability is carried at lower of cost or market value in the nancial statements the derivatives are marked-to-market with the result ing gain or loss recorded as an adjustment to the market value of the designated asset or liability.

4.5 Securitisation

The Bank enters into securitisation transactions wherein corporate/retail loans are sold to a Special Purpose Vehicle (SPV).These securitisation transactions are accounted for in accordance with the RBI guidelines on Securitisation of Standard Assetsand other relevant guidelines/ notications issued by the RBI from time to time.

Securitised assets are derecognised upon sale if the Bank surrenders control over the contractual rights that comprise the nancialasset. In respect of credit enhancements provided or recourse obligations accepted by the Bank, appropriate provision / disclosureis made at the time of sale in accordance with AS 29 Provisions, contingent liabilities and contingent assets.

Gains on securitizations, being the excess of the consideration received over book value of the assets and provisions towardsexpected costs including servicing costs and expected delinquencies are amort ised over the life of the securities issued by the SPV.

Losses are recognised immediately.Sales and transfers that do not meet the criteria for surrender of control are accounted for as secured borrowings.


SCHEDULE 18 SIGNIFICANT ACCOUNTING POLICIES AND NOTES TO ACCOUNTS (Continued)






4.6 Income recognition

Interest income is recognised in the prot and loss account as it accrues, except in the case of interest on non-performing advances.

Interest on non-performing advances is credited to a suspense account, which is netted in the balance sheet against the relevantbalances and recognised in the prot and loss account when received.

Commission on guarantees and letters of credit are recognised over the life of the instrument. Annual fees on credit cards arerecognised on a billing basis. All other commission and fee income are recognised on accrual basis.

4.7 Employee benets

The accounting policy followed by the Bank in respect of its Employee Benet Schemes is set out below:

(a) Provident fund

The Bank contributes to recognised provident funds, which are dened contr ibution schemes. The contributions are accounted foron an accrual basis and recognised in the prot and loss account.

(b) GratuityThe Bank provides for gratuity liabil ity, which is a dened benet scheme, based on an actuarial valuation using the projected unitcredit method at the balance sheet date carried out by an independent actuary.

(c) Pension

The Bank has a pension scheme, which is a dened benet plan for employees who joined prior to 31 March 2002. Employees joiningafter 31 March 2002 up to introduction of new salary terms in 2004 are covered under a pension scheme, which is a dened contributionplan. For staff opting for new salary terms, the pension benets have been frozen based on the salary and service on the date ofconversion. In respect of employees covered under the dened benet plan, the Bank provides for the pension liability based on anactuarial valuation using the projected unit credit method at the balance sheet date carried out by an independent actuary. In respect ofother employees, the contributions are accounted for on an accrual basis and recognised in the prot and loss account.

(d) Compensated absences

The Bank provides for its compensated absences liability based on an actuarial valuation at the balance sheet date conducted by anindependent actuary.

(e) Actuarial gains/losses

Actuarial gains/losses are immediately taken to the prot and loss account.

(f ) Employee share-based payments

The eligible employees of the Bank have been granted options/awards of equity shares of the ultimate holding company HSBCHoldings Plc. As per the schemes, these options/awards vest in a graded manner over an average period of one to ve years. Duringthe year the Bank has included these costs under Payments to and provisions for employees as compensation cost.

4.8 Fixed assets

Fixed assets are stated at acquisition cost less accumulated depreciation, with the exception of premises, which are revaluedannually. The surplus arising on revaluation and decit to the extent related to a previous increase on revaluation is transferred tothe Revaluation Reserve account. The revaluation of properties is done in line with RBI guidelines.

Fixed assets individually costing less than Rs 25,000 are expensed in the year of purchase. Depreciation is provided on a straightline basis over the estimated useful life of the asset. The rates of depreciation are higher than those prescribed under Schedule XIVto the Companies Act, 1956. The rates applied by the Bank on different categories of xed assets are as follows:

Category of Asset Rate per annum

Freehold land Premises 2%Leasehold improvements Over 5 years or remaining period of lease whichever is lowerComputers / softwares 33.33%Other xed assets 20%

Depreciation attributable to revaluation is recouped from Revaluation Reserve.

The Bank assesses at each balance sheet date whether there is any indication that an asset may be impaired and provides forimpairment loss, if any, in the prot and loss account.

4.9 Accounting for leases

Assets taken on lease are accounted for in accordance with provisions of Accounting Standard 19-Leases. Lease payments underoperating leases are recognised as an expense in the statement of prot and loss account on a straight line basis over the lease term.








4.10 Taxes on income

Taxation charge comprises the current tax provision and the net change in the deferred tax asset and liability during the year.

Current tax provision represents the estimated income-tax liability determined in accordance with the provisions of the Income

Tax Act, 1961 and the rules framed there under.

The Bank accounts for deferred taxes in accordance with the provisions of AS 22 Accounting for Taxes on Income. Deferredtaxation is provided on timing differences between the accounting and tax treatment of income and expenditure. Deferred taxassets are recognised only if there is reasonable certainty that they will be realized in the future. However, where there areunabsorbed depreciation or carry forward losses, deferred tax assets are recognised only if it is virtually certain that these assetswill be realized. Deferred tax assets are reviewed for appropriateness of their carrying value at each balance sheet date. Deferredtax liabilities are generally recognised for all taxable temporary differences. Deferred tax assets and liabilities are measured using

the tax rates that have been enacted or substantively enacted by the balance sheet date.

4.11 Provision for reward points on credit cards

The Bank has a policy of awarding reward points for credit card spends by customers. Provision for such reward points is made on

the basis of behavioural analysis of utilization trends.

4.12 Provisions and contingent liabili ties

The Bank creates a provision when there is a present obligation as a result of a past event that probably requires an outow ofresources and a reliable estimate can be made of the amount of the obligation. A disclosure for contingent liability is made whenthere is a possible obligation or a present obligation that may but probably will not require an outow of resources embodyingeconomic benet. When there is a possible obligation or a present obligation in respect of which the likelihood of outow of

resources is remote, no provision or disclosure is made.

Provisions are reviewed at each balance sheet date and adjusted to reect the current best estimate. If it is no longer probable that an

outow of resources would be required to settle the obligation, the provision is reversed.

Contingent assets are not recognised in the nancial statements. However, contingent assets are assessed continually and if it isvirtually certain that an inow of economic benets will arise, the asset and related income are recognised in the period in which

the change occurs.

5 Notes to accounts

5.1 Capitalisation of Prot

In accordance with Head Ofce approval and in line with the RBI requirements in this regard, the Bank had appropriated Rs. 7,798million (Previous year: Nil) of prots after tax made in the previous nancial years to Remittable Surplus retained in India for

Capital to Risk-weighted Assets Ratio (CRAR) requirements.

5.2 Fixed assets

During the year, the Bank revalued its properties in accordance with the applicable RBI guidelines. For property valued aboveRs. 500 million the valuation was obtained from two independent valuers. The Bank revalued its owned freehold premises upwards

by Rs. 264 million (Previous year Rs. 1,121 million) based on an independent professional valuation.

Certain premises valued at Rs. 6,260 million (Previous year Rs. 5,709 million) acquired under a Scheme of Arrangement are held inthe name of HSBC Agency (India) Private Limited, a wholly owned subsidiary, for the benet of the Bank. Accordingly, these

premises have been treated as assets of the Bank.

The prot on sale of properties, if any, and the balance in the revaluation reserve with respect to these properties are transferred to

the Capital Reserves.

5.3 Other assets

The Bank holds a valid Bankers Receipt for 110,760 Canstock Units (Previous year 110,760 units) of face value Rs 100/- each whichwere not physically delivered by the counterparty pending settlement of a dispute. In February 1996, the Bank led a suit against

the counterparty to recover the amount covered by the said Bankers receipt with interest.

In terms of the interim order of the Honourable High Court of Mumbai, the counter party deposited on 7 August 1998 an amount ofRs 20 million with the Honourable High Court, who in turn deposited the amount in a xed deposit with a nationalized bank,

pending nal decision of the Court.

With respect to the above, the bank deposited Rs. 555 million with the Honourable Supreme Court in FY 2004-05. This amount was

charged to the prot and loss account in the aforesaid year.







5 Notes to accounts (Continued)

5.4 Taxation

Tax liabilities in respect of Mercantile Bank Limited taken over by the Bank relating to the assessment years 1974-75 to 1983-84and those in respect of the Bank for the assessment years 1984-85 to 1991-92 and 1996-97 are pending nal outcome of the taxassessments/appeals led by the Bank/Tax Authorities. In respect of assessment years 1992-93 to 2007-2008 and TDS assessmentyear 2005-2006 to 2011-12 tax matters are in appeal. The contingent liability on this account is approximately Rs. 2,406 million

(Previous year Rs. 2,268 million).

Similarly, in respect of the Indian operations of the HSBC Bank Middle East, which were taken over by the Bank, the tax mattersfor assessment years 1991-92 to 2000-2001 are in appeal. The contingent liability on this account is approximately Rs.157 million(Previous year Rs. 157 million). Management considers that adequate provision has been made for tax liabilities relating to the

above assessment years.

5.5 Specic Reserve

This Reserve is created and maintained in accordance with the provisions of Section 36(1)(viii) of the Income-tax Act, 1961 and istax deductible subject to limits prescribed therein. Any amount subsequently withdrawn there from, if at all, is liable to income tax

in the year in which withdrawn.

5.6 Statutory disclosures

(a) Capital adequacy ratio

The capital adequacy ratio of the Bank, calculated under the RBI guidelines is set out below:

(Rs 000)

As at 31 March 2011 As at 31 March 2010(Basel II) (Basel II)

Tier 1 capital 104,105,669 91,439,216

Tier 2 capital 8,352,763 7,705,285Total capital 112,458,432 99,144,501

Total risk weighted assets & contingents 623,725,759 549,930,324

Capital ratiosTier 1 capital 16.69% 16.63%Tier 2 capital 1.34% 1.40%

Total capital 18.03% 18.03%

Amount of subordinated debt raised as Tier II capital(see note 5.6 ac) - -

Capital adequacy for the current year has been calculated based on the Guidelines on the implementation of the New CapitalAdequacy Framework (Basel II), issued vide circular DBOD.No.BP.BC.15 / 21.06.001 / 2010-11 dated 01 July 2010.

(b) Business ratios/information

The details relating to business ratios are given below::

For the year ended For the year ended31 March 2011 31 March 2010

Interest income as percentage to working funds1 5.46% 5.61%Non-interest income as percentage to working funds1 1.88% 2.32%Operating prots as percentage to working funds1 3.08% 3.73%Return on assets2 1.68% 0.88%Business (deposits plus advances) per employee (Rs 000) 122,170 113,552Net prot per employee (Rs 000) 2,320 1,173

1 Working funds to be reckoned as average of total assets (excluding accumulated losses, if any) as reported to Reserve Bank of

India in Form X under Section 27 of the Banking Regulation Act, 1949, during the 12 months of the nancial year.2 Return on Assets would be with reference to average working funds (i.e. total of assets excluding accumulated losses, if any).








5.6 Statutory disclosures (Continued)

(c) Provisions and Contingencies

(Rs 000)


(Release) charge of provision for depreciation on investment (686,944) 2,418,385Provision towards NPA (including write-offs net of write backs) 2,261,985 16,428,787Provision towards standard assets - -Provision towards country risk 11,045 (59,287)Provision towards current tax expense 11,080,500 7,942,176

Provision towards deferred tax charge (benet) 1,051,284 (941,632)Other Provisions and Contingencies (refer note 5.12):Provision towards income tax relating to prior years under appeal 132,000 -Provision towards bonus points 171,152 140,349Provision towards off balance sheet exposures 30,554 337,132Provision towards claims under litigation 7,840 825

Total 14,059,416 26,266,735

(d) Investments (Rs 000)

As at 31 March 2011 As at 31 March 2010

(1) Value of investments(i) Gross value of investments 377,930,263 418,717,018

(a) In India 377,930,263 418,717,018

(b) Outside India - -(ii) Provision for depreciation (5,139,418) (5,826,362)

(a) In India (5,139,418) (5,826,362)(b) Outside India - -

(iii) Net value of investments 372,790,845 412,890,656(a) In India 372,790,845 412,890,656(b) Outside India - -

(2) Movement of provisions held towards depreciation on investments(i) Opening balance 5,826,362 3,407,977(ii) Add : Provision made during the year - 2,418,385(iii) Less : Write back of excess provision during the year (686,944) -

(iv) Closing balance 5,139,418 5,826,362

(e) Issuer wise composition of non SLR investments

(Rs 000)As at 31 March 2011

No. Issuer Amount Extent of Extent of Extent of Extent ofPrivate Below Unrated Unlisted

Placement * Investment Securities SecuritiesGrade

Securities(1) (2) (3) (4) # (5) # (6) # (7) #

(i) Public Sector Undertakings 10,324,288 451,000 - 1,000 1,000(ii) Financial Institutions 10,640,950 7,779,697 - - -(iii) Banks 124,494,273 71,232,897 - - -

(iv) Private Corporate 20,883,102 11,616,046 - 120,103 120,103 (v) Subsidiaries/ Joint Ventures 500 500 - 500 500 (vi) Others - - - - -

(vii) Provision held towards depreciation (143,621)Total 166,199,492 91,080,140 - 121,603 121,603

Schedules forming part of the Financial Statements of India Branches for the year ended 31 March 2011SCHEDULE 18 SIGNIFICANT ACCOUNTING POLICIES AND NOTES TO ACCOUNTS (Continued)







(e) Issuer wise composition of non SLR investments (Continued)

(Rs 000)

As at 31 March 2010

No. Issuer Amount Extent of Extent of Below Extent of Extent ofPrivate Investment Unrated Unlisted

Placement * Grade Securities SecuritiesSecurities

(1) (2) (3) (4) # (5) # (6) # (7) #

(i) Public Sector Undertakings 12,007,259 5,469,728 - 1,000 1,000

(ii) Financial Inst itutions 34,717,870 32,686,778 - 4,786,100 4,786,100(iii) Banks 84,513,088 84,513,088 - - -(iv) Private Corporate 1,040,203 1,040,203 - 91,203 91,203(v) Subsidiaries/ Joint Ventures 500 500 - 500 500(vi) Others - - - - -(vii) Provision held towards depreciation (151,787)

Total 132,127,133 123,710,297 - 4,878,803 4,878,803

* The classication is based on the actual issue and not on the basis of secondary market purchases.# Amounts reported under columns (4), (5), (6) and (7) above are not mutually exclusive.

(f ) Non-performing non-SLR investmentsThe non-performing investments as at 31 March 2011 are Rs. 4 (Previous year Rs. 3). This represents 3 equity share investmentsand 1 preference share investments which have each being written down to Re. 1.

(g) Repo transactions (in face value terms) (Rs 000)

Minimum Maximum Daily Average OutstandingOutstanding Outstanding Outstanding as at

During the During the During the 31 March 2011Year 2010-11 Year 2010-11 Year 2010-2011

Securities sold under repos

i. Government securities 1,050,000 42,390,000 4,803,192 32,550,000ii. Corporate debt securities - - - -

Securities purchased under reverse reposi. Government securities 500,000 123,517,200 22,492,015 -ii. Corporate debt securities - - - -

(Rs 000)

Minimum Maximum Daily Average OutstandingOutstanding Outstanding Outstanding as at

During the During the During the 31 March 2010Year 2009-10 Year 2009-10 Year 2009-10

Securities sold under reposi. Government securities 295,000 30,150,000 7,917,493 5,250,000ii. Corporate debt securities - - - -

Securities purchased under reverse reposi. Government securities 1,050,000 209,475,000 128,640,233 23,370,000ii. Corporate debt securities - - - -

Notes:

1 The above gures also include LAF/Repo transactions undertaken with the RBI.2. Minimum outstanding during the year excludes days with Nil outstandings.








(h) Movements in NPAs (Rs 000)

For the Year March 2011 For the Year March 2010 Gross NPA Provision Net NPA Gross NPA Provision Net NPA

(a) Opening Balance 16,832,926 11,401,585 5,431,341 13,161,444 9,251,100 3,910,344(b) Additions during the period 2,775,803 2,806,743 (30,940) 23,977,351 7,391,103 16,586,248(c) Reductions during the period (9,653,425) (6,740,456) (2,912,969) (20,305,869) (5,240,618) (15,065,251)

(d) Closing Balance 9,955,304 7,467,872 2,487,432 16,832,926 11,401,585 5,431,341

Provision includes specic provisions on non-homogeneous loans and provisions created on portfolio basis using the historical lossand/or net ow method for homogeneous loans relating to retail business.

(i) Non-Performing Advances (NPA)

The percentage of net NPA to net advances is 0.91% as at 31 March 2011 (Previous year 2.31%).

(j) Provision coverage ratio

The provision coverage ratio computed in accordance with RBI circular no DBOD.No.BP.BC. 64 /21.04.048/2009-10 dated 01December 2009 is 75.01% as at 31 March 2011 (Previous year 67.73%).

(k) Movement of Gross NPAs (Rs 000)


Gross NPAs as on 1st April 16,832,926 13,161,444Additions (fresh NPAs during the year) 2,775,803 23,977,351

Sub-total (A) 19,608,729 37,138,795Less:(i) Upgradations (1,714,817) (658,397)(ii) Recoveries (excluding recoveries made f rom upgraded accounts) (2,678,918) (4,732,151)(iii) Write-offs (5,259,690) (14,915,321)

Sub-total (B) (9,653,425) (20,305,869)

Gross NPAs as on 31st March (A-B) 9,955,304 16,832,926

As per RBI circular no DBOD.No.BP.BC. 46 /21.04.048/2009-10 dated 24 September 2009, Interest in Suspense has been deductedfrom gross NPAs for the year ended 31 March 2011.

(l) Floating ProvisionThe Bank does not have a policy of making oating provisions.

(m) Lending to sensitive sectorsExposure to real estate

(Rs 000)

Category As at 31 March 2011 As at 31 March 2010

A Direct exposure 82,580,737 69,871,461(i) Residential mortgages

Lendings fully secured by mortgages on residential propertythat is or will be occupied by the borrower or that is rented * 55,088,206 46,785,031- Of which individual housing loans eligible for inclusion inpriority sector advances 8,874,846 10,643,560

(ii) Commercial real estate 27,492,531 23,086,430(iii) Investments in Mortgage Backed Securities (MBS) and

other securitised exposures a. Residential - -b. Commercial Real estate - -

B Indirect exposure 20,785,811 37,993,229Fund based and non-funded based exposures on National HousingBank (NHB) and Housing Finance Companies 20,785,811 37,993,229Others - -

Total exposure to real estate sector (A+B) 103,366,548 107,864,690

* Includes undrawn limits of Rs. 12,536 million (Previous year Rs. 6,041 million) pertaining to mortgages on residential property.









(m) Lending to sensitive sectors (Continued)

Exposure to capital market (Rs. 000)


i. direct investment in equity shares, convertible bonds, convertibledebentures and units of equity-oriented mutual funds the corpusof which is not exclusively invested in corporate debt; 1,200 31,201

ii. advances against shares/bonds/ debentures or other securitiesor on clean basis to individuals for investment in shares(including IPOs/ESOPs), convertible bonds, convertible debentures,

and units of equity-oriented mutual funds; 99,996 857,982iii. advances for any other purposes where shares or convertible bonds

or convertible debentures or units of equity oriented mutual fundsare taken as primary security - -

iv. advances for any other purposes to the extent secured by thecollateral security of shares or convertible bonds or convertibledebentures or units of equity oriented mutual funds i.e. where theprimary security other than shares/convertible bonds/convertibledebentures/units of equity oriented mutual funds does not fullycover the advances; - -

v. secured and unsecured advances to stockbrokers and guaranteesissued on behalf of stockbrokers and market makers; 10,245,499 8,633,011

vi. loans sanctioned to corporates against the security of shares /bonds/debentures or other securities or on clean basis for meeting

promoters contribution to the equity of new companies in anticipationof raising resources; - -

vii. bridge loans to companies against expected equity ows/issues; - -viii. underwriting commitments taken up by the banks in respect of primary

issue of shares or convertible bonds or convertible debentures or unitsof equity oriented mutual funds; - -

ix. nancing to stockbrokers for margin trading; - -x. all exposures to Venture Capital Funds (both registered and unregistered) - -xi. Others 1,510,859 2,054,928

Total Exposure to Capital Market (i to xi) 11,857,554 11,577,122

(n) Restructured accounts

A) Particulars of accounts restructuredFor the year ended 31 March 2011 (Rs 000)

CDR Mechanism SME Debt Others *Restructuring

No. of Borrowers - 1 15,865Standard advances Amount outstanding - 221 449,089restructured Sacrice (diminution in the fair value) - - 16,953

No. of Borrowers - 1 163Sub standard Amount outstanding - 764 138,148advances restructured Sacrice (diminution in the fair value) - - 420

No. of Borrowers - - 148Doubtful advances Amount outstanding - - 4,912restructured Sacrice (diminution in the fair value) - - 239

No. of Borrowers - 2 16,176TOTAL Amount outstanding - 985 592,149

Sacrice (diminution in the fair value) - - 17,612

* Others include 16,175 retail loan accounts with total amount outstanding Rs. 463 million and 1 corporate loan accounts with totalamount outstanding Rs. 130 million.









(n) Restructured accounts (Continued)

For the year ended 31 March 2010 (Rs 000)

CDR Mechanism SME Debt Others *Restructuring

No. of Borrowers - 3 45,958Standard advances Amount outstanding - 1,945 4,535,960restructured Sacrice (diminution in the fair value) - - 75,858

No. of Borrowers - 11 134

Sub standard Amount outstanding - 7,624 13,652advances restructured Sacrice (diminution in the fair value) - - 839

No. of Borrowers - 10 31Doubtful advances Amount outstanding - 3,150 2,952restructured Sacrice (diminution in the fair value) - - 224

No. of Borrowers - 24 46,123TOTAL Amount outstanding - 12,719 4,552,564

Sacrice (diminution in the fair value) - - 76,921

* Others include 46,116 retail loan accounts with total amount outstanding Rs. 1,821 million and 7 corporate loan accounts withtotal amount outstanding Rs. 2,732 million.

B) There are no customers (Previous year: 3 customers) whose applications are under process and there are no amounts proposed(Previous year: Rs. 1,524 million) to be restructured.

(o) Country risk

Provision for country risk exposure in line with RBI guidelines is as follows: (Rs 000)

Classication Exposure as at Provision held as at Exposure as at Provision held as at 31 March 2011* 31 March 2011 31 March 2010* 31 March 2010

Insignicant 218,487,903 72,254 191,895,490 65,040Low 32,848,962 33,393 28,228,118 29,563Moderate 1,420,394 - 1,422,195 -High 237,953 - 99,118 -Very high 289,537 - 208,588 -Restricted 4,519 - - -Off-credit - - 60,994 -

Total 253,289,268 105,647 221,914,503 94,603

The above provision has been classied as Standard Asset provision in Schedule 5.

* Exposures are computed on Gross basis.

(p) Disclosure on Single Borrower Limits (SBL)/Group Borrower Limits (GBL)

The RBI has prescribed credit exposure limits for banks in respect of their lending to single/group borrowers. The exposure limitsprescribed are 15% of the capital funds of banks in case of single borrowers (SBL) and 40% of the capital funds of banks in case ofgroup borrowers (GBL). In case of infrastructure projects, an additional exposure of up to 5% / 10% of capital funds is allowed forSBL / GBL respectively. SBL can also be increased by a further 5% of capital funds with the permission of the Executive Committee(EXCO) and provided the borrower consents to the Bank making appropriate disclosures in the Banks statutory accounts.

SBL has been raised to 25% of capital funds in respect of Oil Companies who have been issued Oil Bonds (which do not have SLRstatus) by the Government of India.

The Banks credit exposures to single/ group borrowers are within the aforesaid limits except in certain cases where the limits wereexceeded during the year for which the Bank had relevant approval from the EXCO. The following customers were sanctioned an

additional 5% limit. Single Borrowers: Aircel Limited, Reliance Industries Limited and Wipro Limited








(q) Concentration of Deposits (Rs 000)


Total Deposits of twenty largest depositors 92,941,738 112,304,767Percentage of Deposits of twenty largest depositors toTotal Deposits of the bank 17.47% 20.40%

* Deposits exclude deposits from banks.

(r) Concentration of Advances

(Rs 000)


Total Advances of twenty largest borrowers 224,599,691 202,248,561Percentage of Advances of twenty largest borrowers toTotal Advances of the bank 20.57% 20.19%

(s) Concentration of Exposures (Rs 000)


Total Exposure of twenty largest borrowers/ customers 233,640,250 216,703,065Percentage of Exposures of twenty largest borrowers/ customers toTotal Exposure of the bank on borrowers/ customers 20.61% 20.88%

(t) Concentration of NPAs

Total exposure to top four NPA accounts is Rs. 3,145 million (Previous year Rs. 4,609 million). The exposure is computed on agross basis.

(u) Sector-wise NPAs

(Rs 000)

Sector Percentage of Gross NPAs to Gross

Advances in that sector


Agriculture & allied activities 0% 0%Industry (Micro & Small, Medium and Large) 2.88% 4.38%Services 3.06% 6.49%Personal Loans 5.74% 18.36%

Notes: Classication into sectors as above has been done based on the banks internal norms.(v) Securitisation of standard assets

For year ended For year ended

31 March 2011 31 March 2010

Total number of loan assets securitised - 4Total book value of loan assets securitised (Rs 000) - 7,500,596Sale consideration received for the securitised assets (Rs 000) - 7,563,849Gain on sale on account of securitisation (Rs 000) - 63,253Gain on securitisation recognised in Income Statement (Rs 000) 28,478 194,156The unamortized gain as at 31 March (Rs 000) 7,724 36,202Form and quantum (outstanding value) of services provided by way

of Credit Enhancement as at 31 March (Rs 000) 40,025 40,025

Note: The gain on securitisation represents the difference between the sale consideration and the book value, and for one deal thepresent value of the excess interest strip retained by the Bank.









(w) Financial assets sold to Securitisation Companies (SC) / Reconstruct ion Companies (RC) for Asset Reconstruction

For year ended For year ended 31 March 2011 31 March 2010

Number of accounts 51 -Aggregate value (net of provisions) of accounts sold to SC/RC (Rs 000) 202,791 -Aggregate consideration (Rs 000) 431,984 -Additional consideration realized in respect of accounts transferredin earlier years (Rs 000) - -Aggregate gain/ loss over net book value (Rs 000) 229,193 -

(x) Purchase/Sale of NPAs

There has been no purchase of NPAs during the year ended 31 March 2011 (Previous year Rs. Nil).

Details of NPAs sold during the year ended 31 March 2011 are provided in Note 5.6 (w).

(y) Off Balance Sheet SPVs

The bank has not sponsored any off-balance sheet SPVs.

(z) Disclosure on interest rate swaps and forward rate agreements (FRA) (Rs 000)

No. Items As at 31 March 2011 As at 31 March 2010

(i) The notional principal of swap agreements (including FRAs) 6,149,098,932 5,460,361,168(ii) Losses which would be incurred if counterpar ties failed to

fulll their obligations under the agreements 62,093,342 49,153,831(iii) Collateral required by the bank upon entering into swaps - -(iv) Concentration of credit risk arising from the swaps

- maximum single industry exposure with banks (Previous year with banks) 89% 92%(v) The fair value of the swap book (including FRAs) (5,907,050 ) (9,034,559)

Note: The above includes MTMs on hedging swaps.

The nature and terms of interest rate swaps outstanding are set out below:

As at 31 March 2011 As at 31 March 2010 Nature Terms No. Notional principal No. Notional principal (Rs 000) (Rs 000)

Trading swaps Receive oating pay oating 33 76,223,239 26 91,744,514Trading swaps Receive oating pay xed 5,301 3,117,664,405 4,087 2,708,189,225Trading swaps Receive xed pay oating 5,211 2,916,961,288 4,099 2,579,873,954Hedging swaps Receive oating pay xed 64 38,250,000 116 49,000,000

The nature and terms of forward rate agreements outstanding are set out below:


Nature Terms No. Notional principal No. Notional principal(Rs 000) (Rs 000)

Trading swaps Receive oating pay xed - - 3 12,347,500Trading swaps Receive xed pay oating - - 6 19,205,975

(aa) Risk exposure in derivatives

Qualitative disclosure

Limit utilizations are monitored against approved limits provided by the Chief Executive Ofcer (CEO) to the dealers. The above ismonitored daily by the Banks treasury middle ofce through system reports and advised to senior management as appropriate.

Market Risk Limits are set using a combination of risk measurement techniques, including position limits, sensitivity limits(Present Value of a Basis Points), as well as Value at Risk (VAR) limits at a portfolio level. Similarly, option risks are controlledthrough full revaluation limits in conjunction with limits on the underlying variables that determine each options value.

Derivative instruments are subject to both market risk and credit risk. Market risk is the risk that movements in foreign exchange

rates, interest rates and credit spreads result in prots or losses to the Bank. Credit risk for a derivative is the replacement cost of anycontract with a positive mark-to-market gain and an estimate of the potential future change in value, reecting the volatilities affectingthe contract. Credit risk on contracts having a negative mark-to-market value is restricted to the potential future change in value.









(aa) Risk exposure in derivatives (continued)

Qualitative disclosure (continued)

The Bank enters into derivative deals within limits set up for each counterparty. These limits are set based on the Banks credit riskassessment for the counterparty which inter alia considers the ability of the counterparty to honour its obligations in the event ofcrystallization of the exposure. Appropriate facility covenants are stipulated where required, dening trigger events that give theBank the right to call for collateral or terminate a transaction to contain the risk.

The accounting policy for derivative nancial instruments is set out in schedule 18 note 4.4. Further, the Bank conforms to the RBIguidelines on provisioning.

Outstanding trading derivative contracts are valued at market rates. Market values for derivatives are determined by reference to

independently sourced rates, using valuation models, which typically utilize discounted cashow techniques to derive the market value.

Hedging Policy

The Bank bases its hedging decisions on an ALCO approved hedging policy and the hedging activity is executed by a Balance SheetManagement team which is also responsible for the management of the banking book liquidity, funding and interest rate risks.

The Bank typically uses micro fair value hedges to de-risk xed rate banking book risks as there are not many oating benchmark based risks.The bank allows only external derivatives for hedging. It also allows partial term hedging of underlyings. Each hedge is documented on day 1.

The Bank has strict controls on the infrastructure required to support hedge accounting. The Bank has an instruction manual onhedging activities among other things and compliance is monitored on a running basis.

The effectiveness tests are done at inception of a hedge as well as on an ongoing basis. The Bank internally considers a prospective90%-110% effectiveness result to be highly effective. All prospective tests have to fall in this range else the Bank considers potentialre-designation of the hedge. On a retrospective basis the Bank applies the 80%-125% criteria for recognizing effectiveness. Hedgeineffectiveness is automatically calculated by the Banks system.

The accounting policy for derivative nancial instruments used for hedging is set out in schedule 18 note 4.4.

Quantitative disclosure (Rs 000)

As at 31 March 2011 As at 31 March 2010 Sr. No. Particular Currency Interest Rate Currency Interest Rate Derivatives Derivatives Derivatives Derivatives

1 Derivatives (Notional Principal Amount)a) for hedging - 38,250,000 - 49,000,000b) for trading 3,423,558,301 6,141,721,226 2,770,851,500 5,438,300,582

2 Marked-to-Market Position

a) Asset (+) 81,916,441 62,451,519 82,877,971 49,392,537b) Liability (-) 71,690,845 68,192,207 66,784,552 58,255,506

3 Credit Exposure # 201,042,801 116,982,722 174,228,530 96,389,794

4 Likely impact of one percentage point change

in interest rate (100*PV01)a) on hedging derivatives - 364,636 - 385,945b) on trading derivatives 3,868,572 3,738,262 3,267,960 3,026,704

5 Maximum and Minimum of 100*PV01

observed during the yeara) on hedging

Maximum - 439,543 - ##717,044Minimum - 265,043 - ##385,945

b) on tradingMaximum 4,295,345 4,086,861 3,777,281 3,635,910Minimum 3,243,638 2,832,437 2,881,732 2,949,033

#The credit exposure is computed based on the current exposure method specied in the RBI Basel II norms.## Computed based on month end outstanding.Currency derivatives include Forwards, Currency Options and Currency Swaps.

Interest rate derivatives include Forward Rate Agreements, Interest Rate Options and Interest Rate Swaps.Note: The above includes MTMs on hedging swaps which are reported in Schedule 8 Investments.









(ab) Exchange traded interest rate derivatives

(Rs. 000)

No. Particulars 31 March 2011 31 March 2010

(i) Notional principal amount of exchange traded interest rate derivativesundertaken during the year (instrument-wise)a) 10 year notional coupon bearing sovereign bond coupon rate 7% 103,600* -

(ii) Notional principal amount of exchange traded interest ratederivatives outstanding - -

(iii) Notional principal amount of exchange traded interest rate derivativesoutstanding and not highly effective N/A N/A

(iv) Mark-to-market value of exchange traded interest rate derivatives outstandingand not highly effective N/A N/A

* Includes both purchase and sale.

(ac) Subordinated debtThere was no subordinated debt that was outstanding at any point of time during the year ended 31 March 2011.(Previous year: Subordinated debt amounting to INR 2,000 million raised in 1999 matured and was repaid in August 2009).

(ad) Penalties imposed by RBIRBI imposed a penalty of Rs. 10 thousand vide order dated 01 July 2010 under section 11(3) of the Foreign Exchange ManagementAct, 1999 during the year ended 31 March 2011 (Previous year: Nil). The Bank paid the penalty to RBI on 14 July 2010.RBI imposed a penalty of Rs.500 thousand vide order dated 26 April 2011 under section 47A(1)(b) read with section 46(4) of the

Banking Regulation Act, 1949. The Bank paid the penalty to RBI on 4 May 2011.(ae) Operating Expenses other expenditure

Other expenditure includes the following:(Rs 000)

For the year For the year ended 31 March 2011 ended 31 March 2010

Head ofce costs allocated 1,377,973 983,724Services contracted out 2,314,199 2,025,970Repossession fees 962,727 1,317,222

(af) Micro, Small and Medium Enterprises

Under the Micro, Small and Medium Enterprises Development Act, 2006 (MSMED) which came into force from 2 October 2006,the following disclosure is made based on the information and records available with the management in respect of the Micro,Small and Medium Enterprises who have registered with the competent authorities:

31 March 2011 31 March 2010

Principal amount remaining unpaid to any supplier as at the year end 23 -Interest due thereon - -Amount of interest paid by the Company in terms of section 16 of theMSMED, along with the amount of the payment made to the supplierbeyond the appointed day during the accounting year - -Amount of interest due and payable for the period of delay in makingpayment (which have been paid but beyond the appointed day duringthe year) but without adding the interest specied under the MSMED act - -Amount of interest accrued and remaining unpaid at the end of theaccounting year - -Amount of further interest remaining due and payable even in thesucceeding years, until such date when the interest dues as above are actuallypaid to the small enterprises, under Section 23 of the MSMED act - -









(ag) Bancassurance income

During the year, the Bank earned an amount of Rs. 3,239 million towards bancassurance income.

(Rs 000)

Nature of Income For the year ended For the year ended

31 March 2011 31 March 2010

For selling life insurance products 895,578 1,219,128

For selling non life insurance products 54,247 70,191For selling Mutual fund products 2,289,290 2,208,434

Others 11 -

Total 3,239,126 3,497,753

(ah) PD Disclosure

The Bank merged the Primary Dealership business with itself effective from 28 August 2006. The Bank has maintained the

minimum stipulated balance of Rs 100 crores of Government Securities required to be maintained in the Banks PD book on an

ongoing basis. Further, the Bank PD has met the bidding commitments as per the required norms issued by RBI. The details of the

bidding commitment and bids tendered and accepted are set out below:

(Rs crores)

For the year ended 31 March 2011

Dated Government State Government Treasury Bills

securities securities

Annual bidding commitment 11,725 Not Applicable 15,800

Bids tendered 21,270 25 52,787

Bids accepted 8,903 - 15,655

Success ratio Not Applicable Not Applicable 99.08%

Success ratio required as per RBI guidelines Not Applicable Not Applicable 40.00%

(Rs crores)

For the year ended 31 March 2010

Dated Government State Government Treasury Bills

securities securities

Annual bidding commitment 17,775 Not Applicable 19,000Bids tendered 24,772 754 54,550

Bids accepted 11,053 49 17,588

Success ratio Not Applicable Not Applicable 92.57%

Success ratio required as per RBI guidelines Not Applicable Not Applicable 40.00%

(ai) Provision towards Standard Assets

(Rs 000)

31 March 2011 31 March 2010

Provision towards standard assets 4,407,815 4,407,815

Provision towards country risk (Refer note 5.6 (o)) 105,648 94,603

Accumulated surplus arising on sale of NPA 480,646 251,453

Total 4,994,109 4,753,871









(aj) Maturity pattern

Management has made certain estimates and assumptions in respect of behavioural maturities of non-term assets and liabilitiesand trading securities while compiling their maturity prole which is consistent with the Banks reporting to the RBI which havebeen relied upon by the auditors.

As at 31 March 2011(Rs 000)

Day 1 2 to 8 to 15-28 29 days to Over 3 Over 6 Over Over Over Total7 days 14 days days 3 months months to months to 1 year to 3 years to 5 years

6 months 12 months 3 years 5 years

Loans andadvances 51,629,224 11,962,769 14,338,148 25,936,791 63,481,543 30,348,244 10,266,716 30,358,700 13,667,591 22,016,485 274,006,211

Investment

Securities - 3,244,984 6,589,858 19,510,862 73,946,107 70,376,799 83,991,463 65,090,664 37,331,350 12,708,758 372,790,845

Deposits 23,606,836 55,807,655 33,020,782 40,019,884 54,372,828 34,476,745 76,744,307 15,690,124 207,325,706 2,248 541,067,115

Borrowings 6,162,710 31,150,000 - - 9,703,872 3,246,516 - - - - 50,263,098

Foreign Currency

Assets 8,846,002 14,795,144 7,320,913 10,547,185 23,670,089 25,491,055 5,679,571 34,247,865 14,277,674 11,366,450 156,241,948

Foreign Currency

Liabilities 9,241,627 4,769,726 2,923,729 3,058,199 28,142,535 25,947,022 29,742,971 19,771,984 27,941,337 7,617,905 159,157,035

As at 31 March 2010(Rs 000)

Day 1 2 to 8 to 15-28 29 days to Over 3 Over 6 Over Over Over Total

7 days 14 days days 3 months months to months to 1 year to 3 years to 5 years

6 months 12 months 3 years 5 yearsLoans and

advances 3,374,440 10,564,352 5,375,624 18,799,457 42,221,556 38,003,897 12,693,442 29,380,377 46,301,168 28,033,357 234,747,670

Investment

Securities - - 3,445,270 18,972,827 98,259,042 60,790,606 74,096,799 86,624,697 41,967,979 28,733,436 412,890,656

Deposits 19,224,943 75,296,988 19,537,872 43,142,973 69,913,393 40,403,226 61,289,229 18,350,059 210,317,699 1,865 557,478,247

Borrowings 2,337,197 26,430,942 2,245,000 17,960,000 8,235,000 - 2,000,000 - - - 59,208,139

Foreign Currency

Assets 3,278,384 26,622,272 1,031,581 4,759,802 23,820,604 29,220,793 5,421,999 24,667,105 18,840,190 9,701,330 147,364,060

Foreign Currency

Liabilities 5,152,211 25,383,617 4,237,242 20,358,244 36,632,578 19,200,438 32,059,484 19,175,981 25,139,242 7,367,219 194,706,256

(ak) Overseas Assets, NPAs and Revenue

As the bank is a branch of a foreign bank, this disclosure is not considered applicable.

5.7 Employee benets

a) Summary (Rs 000)

For the year ended For the year ended 31 March 2011 31 March 2010 Gratuity Pension Gratuity Pension

Dened benet obligation 767,047 1,479,128 702,062 1,345,757Fair value of plan assets 703,576 1,512,918 553,242 1,440,081

Decit/(surplus) 63,471 (33,790) 148,820 (94,324)Effect of limit on plan surplus - - - -Unrecognised Past service Costs (60,307) - (95,657) -

Net decit/(surplus) 3,164 (33,790) 53,163 (94,324)

The pension liability includes a liability in respect of the unfunded plan of Rs. 365 million (previous year Rs. 393 million).

The majority of the plan assets are invested in government securities, corporate bonds and special deposit schemes.








5.7 Employee benets (Continued)

b) Changes in present value of dened benet obligations

(Rs 000)


Opening balance 702,062 1,345,757 472,923 1,170,858Current service cost 105,741 37,687 74,759 25,849Interest cost 53,417 106,197 35,046 88,505Past service cost - - 187,621 34,825

Benets paid (90,054) (79,052) (35,559) (71,517)Actuarial(gain)/ loss recognised during the year (4,119) 68,539 (32,728) 97,237

Closing Balance 767,047 1,479,128 702,062 1,345,757

c) Changes in the fair value of plan assets (Rs 000)


Opening balance 553,242 1,440,081 435,829 1,413,667Expected return on plan assets 48,421 113,668 34,122 98,848Contributions by the bank 194,102 - 125,094 -Benets paid (90,053) (38,471) (35,559) (42,891)Actuarial gain/(loss) recognised during the year (2,136) (2,360) (6,244) (29,543)

Closing Balance 703,576 1,512,918 553,242 1,440,081

Actual return on plan assets 46,285 111,308 27,878 69,305

The bank expects to contribute Rs. 67,772 (000) to the gratuity plan assets for the annual period ending on 31 March 2012.

d) Total expense recognised in the prot and loss account in schedule 16 (I) (Rs 000)


Current service cost 105,741 37,687 74,759 25,849Interest cost 53,417 106,197 35,046 88,505Past Service Cost 35,350 - 91,964 34,825Expected return on plan assets (48,421) (113,668) (34,122) (98,848)

Effect of limit on plan surplus - - - (258,653)Net actuarial (gain)/loss recognised during the year (1,984) 70,899 (26,484) 126,780

144,103 101,115 141,163 (81,542)

e) Key assumptions


Salary Escalation # 5% - 12% 5% - 12% 5% - 16% 5% - 16%Discount rate 8.2% 8.2% /8.5%$ 8.13% 8.13%Expected rate of return on plan assets 8.00% 8.00% 8.00% 8.00%Attrition rate 1% - 15% 1% - 15% 1% - 15% 1% - 15%

# Salary escalation rate varies based on the category of employees, their salary terms and future period of employment. Further, the

estimates of future salary increases, considered in actuarial valuation, take into consideration ination, seniority, promotion andother relevant factors such as supply and demand in the employment market.$ 8.5% for unfunded pension schemes.









5.7 Employee benets (Continued)

\f) Experience adjustments (Rs 000)

For the year ended 31 March

2011 2010 2009 2008 Gratuity

Dened benet obligation 767,047 702,062 472,923 397,976Fair value of plan assets 703,576 553,242 435,829 356,515Unrecognised Past service Costs (60,307) (95,657) - -

Net decit/(surplus) 3,164 53,163 37,094 41,461

Experience gain/(loss) on plan liabilities 18,066 65,112 - 49,382Experience gain/(loss) on plan assets (2,136) (6,244) - 7,863

PensionDened benet obligation 1,479,128 1,345,757 1,170,858 1,063,126Fair value of plan assets 1,512,918 1,440,081 1,413,667 1,355,593Effect of limit on plan surplus

- - 258,653 123,509

Net decit/(surplus) (33,790) (94,324) 15,844 (168,958)

Experience gain/(loss) on plan liabilities (88,713) 34,685 - 41,850Experience gain/(loss) on plan assets (2,360) (29,543) - (3,706)

g) Dened contribution plan

The bank has recognised an amount of Rs. 376 million as an expense for the dened contribution plan towards provident fundcontribution (previous year Rs. 395 million).

5.8 Segment Reporting

Segment Description

In line with the RBI guidelines, the Bank has identied Treasury, Retail Banking, Corporate Banking, and Other BankingBusiness as the primary reporting segments.

Treasury undertakes trading operations, derivatives trading and foreign exchange operations, on the proprietary account and forcustomers. Principal expenses of this segment comprise interest on market borrowings, personnel costs and other direct overheadsand allocated expenses.

Retail Banking includes personal banking business of the Bank. Personal banking segment services retail customers and offersPersonal banking products. This segment included exposures, which fulll the four criteria of orientation, product, granularity andlow value of individual exposures for retail exposures as detailed in the RBI guidelines for Segment Reporting. Credit cardoperations and home loans are also included in retail operations as they fulll the four criteria set out in the RBI circular.

Corporate Banking caters to the Corporate and Institutional customers. This segment includes all advances to trusts, partnershiprms, companies and statutory bodies, which are not included under Reta

HSBC Bank India's Annual Report

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