HDFC Bank UT2

Summary of Proposed Investment

This Summary of Proposed Investment is prepared and distributed to the public in advance of the IFC Board of Directors’ consideration of the proposed transaction. Its purpose is to enhance the transparency of IFC’s activities, and this document should not be construed as presuming the outcome of the Board decision. Board dates are estimates only.

Project number	25444
Company name	HDFC Bank Limited
Country	India
Sector	Finance & Insurance
Environmental category	FI
Department	Global Financial Markets Group
Status	Active

Date SPI disclosed	September 5, 2006
Projected board date	October 5, 2006
Previous Events	Invested: November 21, 2006 Signed: November 20, 2006 Approved: October 5, 2006

Overview

Sponsor/Cost/Location

Development Impact

Contacts

Attachments

Project description

The project consists of a 15-year subordinated debt of $100 million to HDFC Bank Ltd. (HDFC Bank or the Bank), India’s second largest private commercial bank with 2.2% market share in terms of total banking sector assets. The project will support the Bank in augmenting its capital base to meet the enhanced capital requirements as per Basel II norms, as well as increase its market share. This long-term funding will also help improve the Bank’s maturity mismatch position.

HDFC Bank is a domestic AAA rated institution and has the strong backing of its parent - Housing Development Finance Corporation (HDFC) – a housing finance institution that IFC helped founded in 1978. HDFC Bank is listed on the Mumbai and National Stock Exchanges, as well as on the NY Stock exchange. It has built up a formidable brand name and franchise in a relatively short span of time and has outperformed most other banks, private sector or government-owned, by a significant margin. As of March 31, 2006, the Bank had total assets of $16.5 billion and net worth of $1.2 billion. Although HDFC Bank has been able to raise about $130 million equivalent Upper Tier II Capital (UT2) in the domestic bond market from April 1, 2006 till date, it has approached IFC for an additional investment as it is desirous of diversifying its funding sources and investor base.

The proposed investment, which qualifies as Upper Tier II Capital, will be structured as per the guidelines recently issued by the Reserve Bank of India (RBI) permitting banks to raise subordinated debt in foreign currency from foreign investors. This is a window of opportunity for IFC to play a key role in introducing and encouraging new, innovative banking products in India, and in developing the subordinated debt market.

Anticipated development impact of the project

The project is expected to have strong development impact by:

- Demonstration effect:

The investment will have a demonstration effect in introducing and encouraging new, innovative liability products such as UT2 and stimulating investor demand for the product.

- Strengthening the presence of the private sector banks in India:

The government-owned banks are still dominating the banking industry, and HDFC Bank and a few large private sector banks (such as ICICI Bank, Kotak Mahindra Bank and UTI Bank) are poised to take the lead position in the country’s banking industry. The project will support the consolidation and long-term growth strategy of HDFC Bank and improve its financial fundamentals by strengthening capital adequacy, diversifying funding sources and reducing maturity mismatch. It will facilitate this well-run private sector bank to overtake the state-owned banks, and set new a benchmark for the industry.

IFC's expected development contribution

IFC has several important roles and contributions in this project:

Addressing the funding needs of a top performing bank – IFC has quickly responded to HDFC Bank’s request for funding, which will help increase the Bank’s capitalization ratio and enable it to implement a more dynamic growth strategy.

Provide long-term financing, diversify funding sources, reduce maturity mismatch - This would be the first IFC UT2 transaction in India. The IFC subordinated long term financing will diversify the Bank’s funding base and reduce the asset/liability maturity mismatch.

Environmental and social issues - Category FI

This project has been classified as a Category FI project according to IFC’s Environmental and Social Review Procedure.

During appraisal, IFC will analyze the FI portfolio for types of transactions, size, tenor and industry sectors and determine the Applicable Requirements if any, based on an analysis of the potential Environmental and Social risks associated with the FI portfolio. The Applicable Requirements would include a combination of:

- the IFC FI Exclusion List(s) and/or;
- the applicable National Environmental and Social Laws and regulations, and/or
- the IFC Performance Standards.

IFC will also review, if required, the capacity of the FI to manage environmental and social risks and to establish and maintain the ESMS. IFC will suggest Supplemental Actions to address any gaps. Based on the review, the project will be required to:

- Develop an Environmental and Social Management System (ESMS), prior to disbursement that is satisfactory to IFC, to ensure that its investments/activities are in compliance with the Applicable Requirements,
- Identify responsible, qualified persons to manage and implement the ESMS,
- Commit to implement the ESMS and take action to remedy any gaps in ESMS implementation on an ongoing basis,
- Submit a periodic report to IFC as per a format to be provided by IFC.

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