Corporate Philosophy in Treasury Management of HDFC Bank

HDFC bank has three mains product areas - Foreign Exchange and Derivatives, Local Currency
Money Market & Debt Securities, and Equities. To comply with statutory reserve requirements,
the bank is required to hold 25% of its deposits in government securities. HDFC bank held
treasury team to be responsible for managing the returns and market risk on this investment
portfolio.

Robust IT systems and effective risk management are the two aspects that are of high concern to
ban’s treasury team. For HDFC bank , automation is a critical factor in treasury operations
and had implemented the treasury systems ETreasury from TCS, and Derivative system from
Misys. . The core foreign exchange activities have now been fully automated. Updating and
scaling up of the existing technology infrastructure is something inherent in the bank’s policies
and activities. HDFC bank believe that automated systems could tremendous improve in the effi
ciency level of the organization. It changes the entire work process and cuts down duplication of
work. TCS BANCS Treasury is an integrated treasury management and accounting system that
seamlessly incorporates Web-based front, middle and back office functions. The solution
supports Straight Through Processing (STP) to ensure automatic deal capture, processing and
messaging activities.

HDFC Bank selected TCS BANCS Treasury based on its comprehensive functionality, highly
flexible technology and the TCS iQMS(TM) implementation methodology. With this
implementation, HDFC Bank

Risk management is an important role in treasury team of HDFC bank as market risk are high in
the treasury operations. The bank is automating the risk management processes in order to make
it more robust as it is very computation intensive. The treasury team has developed their own
methodologies and each and every aspect of the system is validated by the users. The bank put
their own set of guidelinesto officers at various level functioning in the treasury. Decision
making is at several levels in the treasury of HDFC bank and it is related to numbers and an
individual may have a ceiling within which he is free to take a decision. There is a constant and
continuous process of monitoring and ‘stop-loss’ limits are put at various levels. An officer at a
higher level can always intervene and correct a wrong decision taken by an offi cer at a lower
level. This way, there is absolute control on the entire process of decision making.
With these processes and control mechanisms, The bank is able to minimize the losses. And
these processes and control mechanism do not allow one person to manipulate the System.

the salient aspects of the risk management framework are (i) delegation of power at each
level, (ii) stop-loss process, (iii) reporting system, (iv) limits for individuals and (v) VaR model

ALM IN HDFC BANK:

We fund core customer assets, consisting of loans and credit substitutes, with core customer
liabilities, consisting principally of deposits. We also borrow in the inter-bank market and use
such borrowings principally for funding certain short-term assets and for managing short-term
maturity mismatches. Most of our liabilities and assets are short and medium term.

We maintain a substantial portfolio of liquid, high-quality Indian government securities. We

prepare regular maturity gap analyses to review our liquidity position, and must submit a
monthly analysis to the RBI.

We measure our exposure to fluctuations in interest rates primarily by way of a gap

analysis. We classify all rate sensitive assets and liabilities into various time period categories
according to contracted residual maturities or anticipated repricing dates, whichever is earlier.
The difference in the amount of assets and liabilities maturing or being repriced in any time
period category gives us an indication of the extent to which we are exposed to the risk of
potential changes in the margins on new or repriced assets and liabilities. We place limits on the
gap between the assets and liabilities that may be reset in any particular period.

Our Asset Liability Committee addresses the two principal aspects of our asset liability
management program as follows:

First, the Asset Liability Committee monitors the liquidity gap and, at the corporate level,
recommends appropriate financing or asset deployment strategies depending on whether the gap
is a net asset position or a net liability position, respectively. Operationally, in the short-term, our
Treasury Group implements these recommendations through transactions in the money market.

Second, the Asset Liability Committee monitors our interest rate gap and, at the corporate
level, recommends repricing of our asset or liability portfolios. Operationally, in the short-term,
our Treasury Group implements these recommendations by entering into transactions in the
money market and interest rate swaps market.

In the longer term, our wholesale banking and retail banking groups implement these
recommendations through changes in the interest rates offered by us for different time period
categories to either attract or discourage deposits and loans in those time period categories.

HDFC fund core customer assets, consisting of loans and credit substitutes, with core
customer liabilities, consisting principally of deposits. HDFC also borrow in the inter-bank
market and use such borrowings principally for funding certain short-term assets and for
managing short-term maturity mismatches. Most of our liabilities and assets are short and
medium term.

HDFC maintain a substantial portfolio of liquid, high-quality Indian government securities.

HDFC prepare regular maturity gap analyses to review our liquidity position, and must submit a
monthly analysis to the RBI.

HDFC measure exposure to fluctuations in interest rates primarily by way of a gap

analysis. HDFC classify all rate sensitive assets and liabilities into various time period categories
according to contracted residual maturities or anticipated repricing dates, whichever is earlier.
The difference in the amount of assets and liabilities maturing or being repriced in any time
period category gives us an indication of the extent to which we are exposed to the risk of
potential changes in the margins on new or repriced assets and liabilities. We place limits on the
gap between the assets and liabilities that may be reset in any particular period.

HDFC Asset Liability Committee addresses the two principal aspects of our asset liability
management program as follows:
 First, the Asset Liability Committee monitors the liquidity gap and, at the corporate level,
recommends appropriate financing or asset deployment strategies depending on whether the gap
is a net asset position or a net liability position, respectively. Operationally, in the short-term, our
Treasury Group implements these recommendations through transactions in the money market.

Second, the Asset Liability Committee monitors interest rate gap and, at the corporate
level, recommends repricing of our asset or liability portfolios. Operationally, in the short-term,
our Treasury Group implements these recommendations by entering into transactions in the
money market and interest rate swaps market.

In the longer term, wholesale banking and retail banking groups implement these
recommendations through changes in the interest rates offered by us for different time period
categories to either attract or discourage deposits and loans in those time period categories.

See “Selected Statistical Information” for information on our asset-liability gap and the
sensitivity of our assets and liabilities to changes in interest rates.

The major issues that treasury head of HDFC bank Encountered while managing treasury are:

1 .The biggest challenge is finding the right kind of people and retaining them. The most
important thing for a person coming as a trader is aptitude and for the sales people, aptitude an
experience. After they get into the activities, it is a major task to retain them.

2. The next major challenge is risk management. As treasury handles money and in large
quantities risk management assumes a critical role. The traders have to perform under stressful
conditions and there are no models or support systems for them in normal conditions to fall back
on.

3. The third factor is the need to be continuously improving and enhancing the product offerings.
Mission of treasury head is to project his treasury as a better and more efficient treasury.
4 . To introduce regular mathematical sensitive analysis to contain risks