The term Capital Budgeting refers to long term planning for proposed Capital outlays and their financing.  Thus it includes both rising of long term funds as well as their utilization.  It may this be defined as the firm's formal process for the acquisition and investment of capital.  It is the decision making process by which the firm evaluates the purchase of major fixed assets. 

It involves firm's decision to invest it current funds for addition, disposition, modification and replacement of long-term or fixed assets.  however, it should be noted that investment in current assets necessitated on account of investment in a fixed assets is as to be taken as a  capital budgeting decision. 

Capital Budgeting is a many-sided activity it includes searching for new and more profitable investment proposals, Investigating , Engineering and Marketing considerations to predict the consequences of accepting the investment and making economic analysis to determine the profit potential of each investment proposal.  Its basic feature can be summarized as follows. 

It has the potentiality of making large anticipated profits.

It involves high degree of risk.

It involve a relatively long-time period between the initial outlay and the anticipated return.

      On the basis of the above discussion it can be concluded that Capital Budgeting consists in planning the development of available capital for the purpose of maximizing the long term profitability.

Capital Budgeting is investment decision making as to whether a project is worth undertaking.  Capital Budgeting is basically concerned with the justification of capital expenditures.  Current expenditures are short-term and are completely written off in the same year the expenses occur. 


Capital Budging decision refers to assets that are in operations and yield a return over a period of time, usually exceeding one year. It is a long term investment decision involving huge capital expenditures. 

The main characteristics of a capital expenditure are that the expenditure is incurred at one point of time where as benefits of the expenditure are realized at different points of time in future. 

Capital Budgeting process involves planning, availability and controlling, allocation and expenditure of long term investment funds. 

The following are some of the examples of capital expenditure:

Cost of acquisition of permanent assets such as land and building plant and machinery, goodwill etc.

Cost of addition, expansion, improvement or alteration in the fixed assets.

Cost of replacement of permanent assets.

Research and development project costs etc., 


Capital Budgeting is the long term planning for making and financing proposed capital outlays 

-Charles T.Horngreen 

Capita Budgeting is concerned with planning and development of available capital for the purpose of maximizing the long term profitability of the concern. 


Capital Budgeting involves a current investment in which the benefits are expected to be received beyond one year in the future@.  It suggests that the investment in any asset with a file of less than a year falls into realm of working capital management, whereas ably asset with a like more than one year involves capital budgeting. 

-James C.Van Horne. 

Capital Budgeting involves the entire process of planning expenditures whose returns are expected to extend beyond one year. 

- Westone and Brigham 


Capital Budgeting are vital to an organization as they include the decisions as to:- 

Whether funds should be invested in the long term projects such as setting of an Industry, purchase of Plant & Machinery etc. 

To analyze the proposal for expansion or creating additional capacities. 

To decide the replacement of permanent asset such as Building & Equipment. 

To make financial analysis of various proposals regarding capital investment so as to choose the best out of many alternative proposals. 

Heavy investment in capital projects 

Long term implications for the firm 

Irreversible decisions and 

Complicated in the decision making. 


To understand the need of organization, to identify and in high quality capital projects.

To analyze the expansion of business by increasing production and quality by acquiring more fixed assets and the up to date machinery.

To evaluate the financial investments associated with the replacement of existing assets soar the purchase of new assets.

Budget serve has a ''Blue print'' of the desired plan of action. 

Budget helps in reduction of wastage and losses by revealing them in time for corrective action. 

Budget serves as the benchmark for the controlling on going operation. 

Budgeting facilitate centralized control with delegated authority and respectability. 




  • Interaction with the planning and development department employees.
  • Interaction with finance employees.


  • Capital budgeting manual of HDFC BANK
  • Accounting manuals of HDFC BANK
  • Broachers
  • House  magazines of unit
  • News of papers



Research methodology implies a systematic attempt by the researcher to obtain knowledge about subject understudy. This is systematic way to show the problem and it is important components of the study without which a research may not able obtain the facts and figures from employees.

The primary data needed for the project analysis has been collected through unstructured interviews and discussions conducted with the finance department. The secondary sources of data are annual reports, brochures, news papers and web sources 



This study will be based on both primary and secondary data. 


The data is collected directly from the organization people. It is an important data related to financial aspects of the company.

It is in the form of questionnaires, interviews and discussions with employees. 


Data which are not originally collected but rather obtained published or unpublished sources are known as secondary data.

Unpublished sources like magazines past research, reports company manuals and its reports for the year

The collected data is presented in table format. Investment decisions play a dominant role in setting the fame work for managerial decisions. 


  • The period of the study is limited.
  • Financial matters are sensitive in nature, the same could not acquire easily.
  • It may be due to restrictions imposed by management.
  • The sources of data are based on cash flows.
  • The study was conducted with the data available and analysis was made accordingly.
  • Due to the confidential matters of financial records, the data is not exposed so the study may not be detailed and full fledged.
  • Since the study is based on the financial data that are obtained from the company's financial statements, the limitations of financial statements shall be equally applicable.
  • Data is collected for five projects which is limited.
  • The study is confined to secondary data source and figures are taken from reports and suggestions of various accountants.

Capital budgeting is the planning process used to determine a firm��s expenditure on assets whose cash flows are expected to extend beyond one year such as machinery, equipments investments etc .It is the process of analyzing and selecting investment projects whose cash flows are expected to extend beyond one year such as research and development of the project 


    The process through which different projects are evaluated is known as capital budgeting

    Capital budgeting is defined ��as the firm��s formal process for the acquisition and investment of capital. It involves firm��s decisions to invest its current funds for addition, disposition, modification and replacement of fixed assets��.

    ��Capital budgeting is long term planning for making and financing proposed capital outlays��- Charles T Horn green

    ��Capital budgeting consists in planning development of available capital for the purpose of maximizing the long term profitability of the concern�� – Lynch

    The main features of capital budgeting are

  1. Potentially large anticipated benefits
  2. A relatively high degree of risk
  3. Relatively long time period between the initial outlay and the anticipated return.

- Ouster Young  



  • Capital budgeting offers effective control on cost of capital expenditure projects.
  • It helps the management to avoid over investment and under The success and failure of business mainly depends on how the available resources are being utilized.  
  • Main tool of financial management  
  • All types of capital budgeting decisions are exposed to risk and uncertainty.  
  • They are irreversible in nature.  
  • Capital rationing gives sufficient scope for the financial manager to evaluate different proposals and only viable project must be taken up for investments. 



Capital budgeting process involves the following

1. Project generation: Generating the proposals for investment is the first step.


to add new product to the product line,

Proposals to expand production capacity in existing lines

It is proposals to reduce the costs of the output of the existing products without altering the scale of operation.

Sales campaigning, trade fairs people in the industry, R and D institutes, conferences and seminars will offer wide variety of innovations on capital assets for investment.

2. Project Evaluation: it involves two steps

Estimation of benefits and costs: the benefits and costs are measured in terms of cash flows. The estimation of the cash inflows and cash outflows mainly depends on future uncertainties. The risk associated with each project must be carefully analyzed and sufficient provision must be made for covering the different types of risks.

Selection of appropriate criteria to judge the desirability of the project: It must be consistent with the firm��s objective of maximizing its market value. The technique of time value of money may come as a handy tool in evaluation such proposals.

3. Project Selection: No standard administrative procedure can be laid down for approving the investment proposal. The screening and selection procedures are different from firm to firm. 

4. Project Evaluation: Once the proposal for capital expenditure is finalized, it is the duty of the finance manager to explore the different alternatives available for acquiring the funds. He has to prepare capital budget. Sufficient care must be taken to reduce the average cost of funds. He has to prepare periodical reports and must seek prior permission from the top management. Systematic procedure should be developed to review the performance of projects during their lifetime and after completion.

The follow up, comparison of actual performance with original estimates not only ensures better forecasting but also helps in sharpening the techniques for improving future forecasts.

Factors influencing capital budgeting

Availability of funds

Structure of capital

Taxation policy

Government policy

Lending policies of financial institutions

Immediate need of the project


Capital return

Economical value of the project

Working capital

Accounting practice  

Capital budgeting (or investment appraisal) is the planning process used to determine whether an organization's long term investment such as new machinery, replacement machinery, new plants, new products, and research development projects are worth pursuing. It is budget for major capital, or investment, expenditures.

Capital budgeting is a process used to determine whether a firm��s proposed investments or projects are worth undertaking or not. The process of allocating budget for fixed investment opportunities is crucial because they are generally long lived and not easily reversed once they are made. So we can say that this is a strategic asset allocation process and management needs to use capital budgeting techniques to determine which project will yield more return over a period of time.

Capital budgeting is vital in marketing decisions. Decisions on investment which take time to mature have to be based on the returns which that investment will make. Unless the project is for social reasons only, if the investment is unprofitable in the long run, it is unwise to invest in it now.

Often, it would be good to know what the present value of the future investment is, or how long it will take to mature (give returns). It could be much more profitable putting the planned investment money in the bank and earning interest, or investing in an alternative project.

Typical investment decisions include the decision to build another grain silo, cotton gin or cold store or invest in a new distribution depot. At a lower level, marketers may wish to evaluate whether to spend more on advertising or increase the sales force, although it is difficult to measure the sales to advertising ratio.  



This chapter is intended to provide:

  • An understanding of the importance of capital budgeting in marketing decision making
  • An explanation of the different types of investment project
  • An introduction to the economic evaluation of investment proposals
  • The importance of the concept and calculation of net present value and internal rate of return in decision making
  • The advantages and disadvantages of the payback method as a technique for initial screening of two or more competing projects.


Capital budgeting is very obviously a vital activity in business. Vast sums of money can be easily wasted if the investment turns out to be wrong or uneconomic. The subject matter is difficult to grasp by nature of the topic covered and also because of the mathematical content involved. However, it seeks to build on the concept of the future value of money which may be spent now. It does this by examining the techniques of net present value, internal rate of return and annuities. The timing of cash flows is important in new investment decisions and so the chapter looks at this "payback" concept. One problem which plagues developing countries is "inflation rates" which can, in some cases, exceed 100% per annum. The chapter ends by showing how marketers can take this in to account.  


Capital budgeting versus current expenditures

A capital investment project can be distinguished from current expenditures by two features:

a) Such projects are relatively large

b) a significant period of time (more than one year) elapses between the investment outlay and the receipt of the benefits..

As a result, most medium-sized and large organizations have developed special procedures and methods for dealing with these decisions. A systematic approach to capital budgeting implies:

  1. The formulation of long-term goals
  2. The creative search for and identification of new investment opportunities
  3. Classification of projects and recognition of economically and/or statistically dependent proposals
  4. The estimation and forecasting of current and future cash flows
  5. A suitable administrative framework capable of transferring the required information to the decision level
  6. the controlling of expenditures and careful monitoring of crucial aspects of project execution
  7. a set of decision rules which can differentiate acceptable from unacceptable alternatives is required.


The classification of investment projects

a) By project size

    Small projects may be approved by departmental managers. More careful analysis and Board of Directors' approval is needed for large projects of, say, half a million dollars or more.

b) By type of benefit to the firm

    An increase in cash flow a decrease in risk an indirect benefit (showers for workers, etc).

c) By degree of dependence

Mutually exclusive projects (can execute project A or B, but not both) 
complementary projects: taking project A increases the cash flow of                                                                                                                                                                                          project substitute projects: taking project A decreases the cash flow of project B.

d) By degree of statistical dependence

Positive dependence,

Negative dependence,

Statistical independence. 


The economic evaluation of investment proposals

The analysis stipulates a decision rule for:

I) Accepting  
II) Rejecting investment projects


Recall that the interaction of lenders with borrowers sets an equilibrium rate of interest. Borrowing is only worthwhile if the return on the loan exceeds the cost of the borrowed funds. Lending is only worthwhile if the return is at least equal to that which can be obtained from alternative opportunities in the same risk class.

The interest rate received by the lender is made up of:

  1. The time value of money: the receipt of money is preferred sooner rather than later. Money can be used to earn more money. The earlier the money is received, the greater the potential for increasing wealth. Thus, to forego the use of money, you must get some compensation.
  2. The risk of the capital sum not being repaid. This uncertainty requires a premium as a hedge against the risk, hence the return must be commensurate with the risk being undertaken.
  3. Inflation: money may lose its purchasing power over time. The lender must be compensated for the declining spending / purchasing power of money. If the lender receives no compensation, he/she will be worse off when the loan is repaid than at the time of lending the money.

a) Future values/compound interest

Future value (FV) is the value in dollars at some point in the future of one or more investments.

FV consists of:

i)The original sum of money invested or 
ii) The return in the form of interest.

The general formula for computing Future Value is as follows:

FVn = Vo (l + r)n

Where Vo is the initial sum invested is the interest rate is the number of periods for which the investment is to receive interest.

Thus we can compute the future value of what Vo will accumulate to in n years when it is compounded annually at the same rate of r by using the above formula.

PV = FVn/(l + r)n 

Capital budgeting is a process used to determine whether a firm��s proposed investments or projects are worth undertaking or not. The process of allocating budget for fixed investment opportunities is crucial because they are generally long lived and not easily reversed once they are made. So we can say that this is a strategic asset allocation process and management needs to use capital budgeting techniques to determine which project will yield more return over a period of time.

The question arises why capital budgeting decisions are critical? The foremost importance is that the capital is a limited resource which is true of any form of capital, whether it is raised through debt or equity. The firms always face the constraint of capital rationing. This may result in the selection of less profitable investment proposals if the budget allocation and utilization is the primary consideration. So the management should make a careful decision whether a particular project is economically acceptable and within the specified limits of the investments to be made during a specified period of time.  In the case of more than one project, management must identify the combination of investment projects that will contribute to the value of the firm and profitability.  This, in essence, is the basis of capital budgeting


The need of capital budgeting can be emphasised taking into consideration the very nature of the capital expenditure such as heavy investment in capital projects, long-term implications for the firm, irreversible decisions and complicates of the decision making. Its importance can be illustrated well on the following other grounds:- 

  1. Indirect Forecast of Sales. The investment in fixed assets is related to future sales of the firm during the life time of the assets purchased. It shows the possibility of expanding the production facilities to cover additional sales shown in the sales budget. Any failure to make the sales forecast accurately would result in over investment or under investment in fixed assets and any erroneous forecast of asset needs may lead the firm to serious economic results.
  2. Comparative Study of Alternative Projects Capital budgeting makes a comparative study of the alternative projects for the replacement of assets which are wearing out or are in danger of becoming obsolete so as to make the best possible investment in the replacement of assets. For this purpose, the profitability of each project is estimated.
  3. Timing of Assets-Acquisition. Proper capital budgeting leads to proper timing of assets-acquisition and improvement in quality of assets purchased. It is due to ht nature of demand and supply of capital goods. The demand of capital goods does not arise until sales impinge on productive capacity and such situation occurs only intermittently. On the other hand, supply of capital goods with their availability is one of the functions of capital budgeting.
  4. Cash Forecast. Capital investment requires substantial funds which can only be arranged by making determined efforts to ensure their availability at the right time. Thus it facilitates cash forecast.
  5. Worth-Maximization of Shareholders. The impact of long-term capital investment decisions is far reaching. It protects the interests of the shareholders and of the enterprise because it avoids over-investment and under-investment in fixed assets. By selecting the most profitable projects, the management facilitates the wealth maximization of equity share-holders.
  6. Other Factors. The following other factors can also be considered for its significance:
  1. It assists in formulating a sound depreciation and assets replacement policy. 
  2. It may be useful n considering methods of coast reduction. A reduction campaign may necessitate the consideration of purchasing most up-to—date and modern equipment.
  3. The feasibility of replacing manual work by machinery may be seen from the capital forecast be comparing the manual cost an the capital cost.
  4. The capital cost of improving working conditions or safety can be obtained through capital expenditure forecasting.
  5. It facilitates the management in making of the long-term plans an assists in the formulation of general policy.
  6. It studies the impact of capital investment on the revenue expenditure of the firm such as depreciation, insure and there fixed assets.

The question arises why capital budgeting decisions are critical? The foremost importance is that the capital is a limited resource which is true of any form of capital, whether it is raised through debt or equity. The firms always face the constraint of capital rationing. This may result in the selection of less profitable investment proposals if the budget allocation and utilization is the primary consideration. So the management should make a careful decision whether a particular project is economically acceptable and within the specified limits of the investments to be made during a specified period of time. In the case of more than one project, management must identify the combination of investment projects that will contribute to the value of the firm and profitability. This, in essence, is the basis of capital budgeting.

Following are the capital budgeting techniques:

  1. Traditional methods
    1. Payback period
    2. Accounting rate of return method
  2. Discounted cash flow methods
  1. Net present value method
  1. Profitability index method
  2. Internal rate of return


It refers to the period in which the project will generate the necessary cash to recover the initial investment.

It does not take the effect of time value of money.

It emphasizes more on annual cash inflows, economic life of the project and original investment.

The selection of the project is based on the earning capacity of a project.

It involves simple calculation, selection or rejection of the project can be made easily, results obtained are more reliable, best method for evaluating high risk projects.



                                    NEXT CCFAT 



  1. Calculation is simple and easy.
  2. It gives an indication of liquidity.
  3. In broader sense, it deals with risk too the shorter pay back period will be less risky as compared to project with longer pay back period, as the inflows which rise further in the future will be less certain and hence more risky.


  1. It is based on principle of rule of thumb,
  2. Does not recognize importance of time value of money,
  3. Does not consider profitability of economic life of project,
  4. Does not recognize pattern of cash flows,
  5. Does not reflect all the relevant dimensions of profitability.



IT considers the earnings of the project of the economic life. This method is based on conventional accounting concepts. The rate of return is expressed as percentage of the earnings of the investment in a particular project. This method has been introduced to overcome the disadvantage of pay back period. The profit under this method is calculated as profit after depreciation and tax of the entire life of the project. 

This method of ARR is not commonly accepted in assessing the profitability of capital expenditure. Because the method does to consider the heavy cash inflow during the project period as the earnings with be averaged. The cash flow advantage derived by adopting different kinds of depreciation is also not considered in this method.

The annual rate of return uses accrual-based net income to calculate a project's expected profitability. The annual rate of return is compared to the company's required rate of return. If the annual rate of return is greater than the required rate of return, the project may be accepted. The higher the rate of return, the higher the project would be ranked.

The annual rate of return is a percentage calculated by dividing the expected annual net income by the average investment. Average investment is usually calculated by adding the beginning and ending project book values and dividing by two

Accept or Reject Criterion:

Under the method, all project, having Accounting Rate of return higher than the minimum rate establishment by management will be considered and those having ARR less than the pre-determined rate.

This method ranks a Project as number one, if it has highest ARR, and lowest rank is assigned to the project with the lowest ARR.  


                                          ----------------------------------    * 100

                                                  AVERAGE INVESTMENT 


  1. It is very simple to understand and use.
  2. This method takes into account saving over the entire economic life of the project. Therefore, it provides a better means of comparison of project than the pay back period.
  3. This method through the concept of net earnings ensures a compensation of expected profitability of the projects and
  4. It can readily be calculated by using the accounting data.


1. It ignores time value of money.

2. It does not consider the length of life of the projects.

3. It is not consistent with the firm & objective of maximizing the market value of shares.

4. It ignores the fact that the profits earned can be reinvested. -  


Time adjusted technique is an improvement over pay back method and ARR. An investment is essentially out flow of funds aiming at fair percentage of return in future. The presence of time as a factor in investment is fundamental for the purpose of evaluating investment. Time is a crucial factor, because, the real value of money fluctuates over a period of time. A rupee received today has more value than a rupee received tomorrow. In evaluating investment projects it is important to consider the timing of returns on investment. Discounted cash flow technique takes into account both the interest factor and the return after the payback period.  

Discounted cash flow technique involves the following steps:

  • Calculation of cash inflow and out flows over the entire life of the asset.
  • Discounting the cash flows by a discount factor
  • Aggregating the discounted cash inflows and comparing the total so obtained with the discounted out flows.


It recognizes the impact of time value of money. It is considered as the best method of evaluating the capital investment proposal.

Considering the time value of money is important when evaluating projects with different costs, different cash flows, and different service lives. Discounted cash flow techniques, such as the net present value method, consider the timing and amount of cash flows. To use the net present value method, you will need to know the cash inflows, the cash outflows, and the company's required rate of return on its investments. The required rate of return becomes the discount rate used in the net present value calculation. For the following examples, it is assumed that cash flows are received at the end of the period. 

The Net Present Value technique involves discounting net cash flows for a project, then subtracting net investment from the discounted net cash flows. The result is called the Net Present Value(NPV). If the net present value is positive, adopting the project would add to the value of the company. Whether the company chooses to do that will depend on their selection strategies. If they pick all projects that add to the value of the company they would choose all projects with positive net present values, even if that value is just $1. On the other hand, if they have limited resources, they will rank the projects and pick those with the highest NPV's. 

Accept or Reject Criteria:

1. For a single project, take it if and only if its NPV is positive.

2. For many independent projects, take all those with positive NPV.

    3. For mutually exclusive projects, take the one with positive and highest NPV.

It is widely used in practice. The cash inflow to be received at different period of time will be discounted at a particular discount rate. The present values of the cash inflow are compared with the original investment. The difference between the two will be used for accept or reject criteria. If the different yields (+) positive value, the proposal is selected for investment. If the difference shows (-) negative values, it will be rejected.

NPV=�� CFn/(l +K)n  - Co

CFn= Cash flows for each year

Co=initial investment

K=Discount rate

n= life of the project


  1. It recognizes the time value of money.
  2. It considers the cash inflow of the entire project.
  3. It estimates the present value of their cash inflows by using a discount rate equal to the cost of capital.
  4. It is consistent with the objective of maximizing the wealth of owners.


  1. It is very difficult to find and understand the concept of cost of capital
  2. It may not give reliable answers when dealing with alternative projects under the conditions of unequal lives of project.
  3. It requires the predetermination of the required rate of return which may give NPV wrong results.
  4. It ignores the difference in initial outflows, size of the different proposals etc. While evaluating mutually exclusive projects.


It is that rate at which the sum of discounted cash inflows equals the sum of discounted cash outflows. It is the rate at which the net present value of the investment is zero.

It is the rate of discount which reduces the NPV of an investment to zero. It is called internal rate because it depends mainly on the outlay and proceeds associated with the project and not on any rate determined outside the investment.



For independent projects: Accept a project if its IRR is greater

than some fixed IRR, the threshold rate.

For mutually exclusive projects: Among the projects having

IRR��s greater than IRR, accept one with the highest IRR 

IRR = LOWER RATE + Inflows at lower rate- investment


                          Inflows at lower rate – inflow at higher rate



  1. It consider the time value of money
  2. Calculation of cost of capital is not a prerequisite for adopting IRR
  3. IRR attempts to find the maximum rate of interest at which funds invested in the project could be repaid out of the cash inflows arising from the project.
  4. It is not in conflict with the concept of maximizing the welfare of the equity shareholders.
  5. It considers cash inflows throughout the life of the project.
  6. IRR is based on the cash flows rater than accounting profit.


  1. Computation of IRR is tedious and difficult to understand
  2. It is very complicated trail and error procedure. 
  3. Both NPV and IRR assume that the cash inflows can be reinvested at the discounting rate in the new projects. However, reinvestment of funds at the cut off rate is more appropriate than at the IRR.
  4. IT may give results inconsistent with NPV method. This is especially true in case of mutually exclusive project.
  5. Since, the IRR is a scaled measure. It tends to be biased towards small projects. When are much more likely to yield high percentage return over the larger project


The payback measures the length of time it takes a company to recover in cash its initial investment. This concept can also be explained as the length of time it takes the project to generate cash equal to the investment and pay the company back. It is calculated by dividing the capital investment by the net annual cash flow. If the net annual cash flow is not expected to be the same, the average of the net annual cash flows may be used.


CFn= Total Cash flows

Co=Initial investment 


  1. It recognizes the time value of money.
  2. It consistent with the share holders value maximization principal.
  3. It requires calculation of cash flow and estimate of discount rate.




  • For independent projects: Accept all projects with PI greater than one (this is identical to the NPV rule)
  • For mutually exclusive projects: Among the projects with PI greater than one, accept the one with the highest PI.






Banking in India

Banking in India originated in the last decades of the 18th century. The oldest bank in existence in India is the State Bank of India, a government-owned bank that traces its origins back to June 1806 and that is the largest commercial bank in the country. Central banking is the responsibility of the Reserve Bank of India, which in 1935 formally took over these responsibilities from the then Imperial Bank of India, relegating it to commercial banking functions. After India's independence in 1947, the Reserve Bank was nationalized and given broader powers. In 1969 the government nationalized the 14 largest commercial banks; the government nationalized the six next largest in 1980.

Currently, India has 96 scheduled commercial banks (SCBs) - 27 public sector banks (that is with the Government of India holding a stake), 31 private banks (these do not have government stake; they may be publicly listed and traded on stock exchanges) and 38 foreign banks. They have a combined network of over 53,000 branches and 17,000 ATMs. According to a report by ICRA Limited, a rating agency, the public sector banks hold over 75 percent of total assets of the banking industry, with the private and foreign banks holding 18.2% and 6.5% respectively


Early history

Banking in India originated in the last decades of the 18th century. The first banks were The General Bank of India which started in 1786, and the Bank of Hindustan, both of which are now defunct. The oldest bank in existence in India is the State Bank of India, which originated in the Bank of Calcutta in June 1806, which almost immediately became the Bank of Bengal. This was one of the three presidency banks, the other two being the Bank of Bombay and the Bank of Madras, all three of which were established under charters from the British East India Company. For many years the Presidency banks acted as quasi-central banks, as did their successors. The three banks merged in 1921 to form the Imperial Bank of India, which, upon India's independence, became the State Bank of India.

Indian merchants in Calcutta established the Union Bank in 1839, but it failed in 1848 as a consequence of the economic crisis of 1848-49. The Allahabad Bank, established in 1865 and still functioning today, is the oldest Joint Stock bank in India. It was not the first though. That honor belongs to the Bank of Upper India, which was established in 1863, and which survived until 1913, when it failed, with some of its assets and liabilities being transferred to the Alliance Bank of Simla.

When the American Civil War stopped the supply of cotton to Lancashire from the Confederate States, promoters opened banks to finance trading in Indian cotton. With large exposure to speculative ventures, most of the banks opened in India during that period failed. The depositors lost money and lost interest in keeping deposits with banks. Subsequently, banking in India remained the exclusive domain of Europeans for next several decades until the beginning of the 20th century.

Foreign banks too started to arrive, particularly in Calcutta, in the 1860s. The Comptoire d'Escompte de Paris opened a branch in Calcutta in 1860, and another in Bombay in 1862; branches in Madras and Pondichery, then a French colony, followed. HSBC established itself in Bengal in 1869. Calcutta was the most active trading port in India, mainly due to the trade of the British Empire, and so became a banking center. 

The Bank of Bengal, which later became the State Bank of India.

The first entirely Indian joint stock bank was the Oudh Commercial Bank, established in 1881 in Faizabad. It failed in 1958. The next was the Punjab National Bank, established in Lahore in 1895, which has survived to the present and is now one of the largest banks in India.

Around the turn of the 20th Century, the Indian economy was passing through a relative period of stability. Around five decades had elapsed since the Indian Mutiny, and the social, industrial and other infrastructure had improved. Indians had established small banks, most of which served particular ethnic and religious communities.

The presidency banks dominated banking in India but there were also some exchange banks and a number of Indian joint stock banks. All these banks operated in different segments of the economy. The exchange banks, mostly owned by Europeans, concentrated on financing foreign trade. Indian joint stock banks were generally under capitalized and lacked the experience and maturity to compete with the presidency and exchange banks. This segmentation let Lord Curzon to observe, "In respect of banking it seems we are behind the times. We are like some old fashioned sailing ship, divided by solid wooden bulkheads into separate and cumbersome compartments."

The period between 1906 and 1911, saw the establishment of banks inspired by the Swadeshi movement. The Swadeshi movement inspired local businessmen and political figures to found banks of and for the Indian community. A number of banks established then have survived to the present such as Bank of India, Corporation Bank, Indian Bank, Bank of Baroda, Canara Bank and Central Bank of India.

The fervour of Swadeshi movement lead to establishing of many private banks in Dakshina Kannada and Udupi district which were unified earlier and known by the name South Canara ( South Kanara ) district. Four nationalised banks started in this district and also a leading private sector bank. Hence undivided Dakshina Kannada district is known as "Cradle of Indian Banking".


The partition of India in 1947 adversely impacted the economies of Punjab and West Bengal, paralyzing banking activities for months. India��s independence marked the end of a regime of the Laissez-faire for the Indian banking. The government of India initiated measures to play an active role in the economic life of the nation, and the industrial policy resolution adopted by the government in 1948envisaged a mixed economy. This resulted in to greater involvement of the state in different segments of the economy including banking and finance. The major steps to regulate banking included: 

The reserve bank of India, India��s central banking authority, was nationalized on January 1st 1949 under the terms of the Reserve Bank of India (transfer to public Ownership ) Act, 1948 (RBI, 2005b) 

In 1949, the banking regulation act was enacted which empowered the Reserve Bank of India (RBI) ��to regulate, control and inspect the banks in India.�� 

The banking regulation act also provided that no new bank or branch of an existing bank could be opened without a license from the RBI, and no two banks could have common directors. 


Banks nationalization in India: Newspaper Clipping, Times of India, July 20, 1969Despite the provisions, control and regulations of Reserve bank of India, banks in India expect the State Bank if India or SBI, continued to be owned and operated by private persons. By the 1960s, The Indian banking industry had become an important tool to facilitate the development of the Indian economy. At the same time, it had emerged as a large employer, and a debate had ensued about the nationalization of the banking industry. Indira Gandhi, the prime Minister of India, expressed the intention of the government of India in the annual conference of the All India  Congress meeting in a paper entitled ��stray thoughts on banking nationalization.�� The meeting received the paper with enthusiasm.                                                                                                                                                                                                                                                                                                                                          

            Thereafter, her move was swift and sudden. The Government of India issued an ordinance and nationalized the 14 largest commercial banks with effect from the midnight of July 19, 1969. Jayaprkash Narayan, a national leader of India, described the step as a ��masterstroke of political sagacity.�� Within two weeks of the issue of the ordinance, the parliament passed the Banking Companies Bill, and it received the presidential approval on 9 August 1969. 

            A second dose of nationalization of 6 more commercial banks followed in 1980. The stated reason for the nationalization was to give the government more control of credit delivery. With the second dose of nationalization, the government of India controlled around 91% of the banking business of India. Later on, in the 1993, the government merged New Bank of India with Punjab National Bank. It was the only merger between nationalized banks and resulted in the reduction of the number of nationalized banks from 20 to 19. After this, until the 1990s, the nationalized banks grew at a pace of around 4%, closer to the average growth rate of Indian economy. 


           In the early 1990s, the then Narsimha Rao government embarked on a policy of liberalization, licensing a small number of private banks. These came to be known as New Generation tech-savvy banks, and included Global Trust Bank (the first of such new generation banks to be set up), which later amalgamated with Oriental Bank of Commerce, Axis Bank (earlier as the UTI Bank), ICICI Bank and HDFC Bank. This move, along with the rapid growth in the economy of India, revitalized the banking sector in India, which has seen rapid growth with strong contribution from all the three sectors of banks, namely, government banks, private banks, foreign banks. 

           The next stage for the Indian banking has been set up with the proposed relaxation in the norms for Foreign Direct Investment, where all Foreign Investors in banks may be given voting rights which could exceed the present cap of 10%, at present it has gone up to 74% with some restrictions. 

           The new policy shook the Banking sector in India completely. Bankers, till this time, were used to the 4-6-4 method (Borrow at 4%; Lend at 6%; Go to home at 4%) of functioning. The new wave ushered in a modern outlook and tech-savvy methods of working for traditional banks. All this led to the retail boom in India. People not just demanded more from their banks but also received more. 

           Currently (2007), banking in India is generally fairly mature in terms of supply, product range and reach-even though reach in rural India still remains a challenge for the private sector and foreign banks. In terms of quality of assets and capital adequacy, Indian banks are considered to have clean strong and transparent balance sheets relative to other banks in comparable economies in its region. The reserve Bank of India is an autonomous body, with minimal pressure from the government. The stated policy of Bank on the Indian Rupee is to manage volatility but without any fixed exchange rate-and this has mostly been true. 

           With the growth in the Indian economy expected to be strong for quite some time-especially in its services sector-the demand for banking services, especially retail banking, mortgages and investment services are expected to be strong. One may also expect M&As, takeovers, and asset sales. 

            In March 2006, the Reserve Bank of India allowed Wardurg Pincus to increase its stake in Kotak Mahindra Bank (a private sector bank) to 10%. This is the first time an investor has been allowed to hold more than 5% in a private sector bank since the RBI announced norms in 2005 that any stake exceeding 5% in the private sector banks would need to be vetted by them.

In recent years critics have charged that the non-government owned banks are too aggressive in their loan recovery efforts in connection with housing, vehicle and personal loans. There are press reports that the bank��s loan recovery efforts have driven defaulting borrowers to suicide.



    The Reserve Bank of India


          The Reserve Bank of India (RBI) is the central banking system of India and controls the monetary policy of the rupee as well as US$3000.21 billion (2010) of currency reserves. The institution was    established on 1st April 1935 during the British Raj in accordance with  the provisions of the Reserve Bank of India Act, 1934 and plays an important strategy of the government. It is a member of Asian Clearing Union. 



          The central bank was founded in 1935 to respond to economic troubles after the first world war. The Reserve Bank of India  was set up on the recommendation of the  Hilton Young Commission. The commission submitted is report in the year 1926, though the bank was not set up for another nine years. The preamble of the Reserve Bank of India describes the basic functions of Reserve Bank as to regulate the issue of bank notes, to keep reserve with a view to securing monetary stability in India and generally to operate the currency and credit system in the best interests of the country. The Central Office of the reserve Bank was initially established in Kolkata, Bengal, but was permanently moved to Mumbai in 1937.The Reserve Bank continued to act as the central bank for Myanmar till Japanese occupation of Burma and later up to April 1947, though Burma seceded from the Indian Union in 1937. After partition, the Reserve Bank served as the central bank for Pakistan until June 1948 when the State bank of Pakistan commenced operations. Though originally set up as a shareholders bank, the RBI has been fully owned by the government of India since its nationalization in 1949. 


          Between 1950 and 1960, the Indian government developed a centrally planned economic policy and focused on the agricultural sector. The administration nationalized commercial banks and established, based on the Banking Companies Act, 1949 (later called Banking Regulation Act) a central bank regulation as part of the RBI. Furthermore, the central bank was ordered to support the economic plan with loans. 


          As a result of bank crashes, the reserve bank was requested to establish and monitor a deposit insurance system. It should restore the trust in the national bank system and was initialized on 7 December 1961. The Indian government founded funds to promote the economy and used the slogan Developing Banking. The Gandhi administration and their successors restructured the national bank market and nationalized a lot of institute. As a result, the RBI had to play the central part of control and support of this public banking sector.  


          Between 1969 and 1980, the Indian government nationalized 20 banks. The regulation of the economy and especially the financial sector was reinforced by the Gandhi administration and their successors in the 1970s and 1980s. The central bank became the central player and increased its policies for a lot of tasks like interests, reserve ratio and visible deposits. The measures aimed at better economic development and had a huge effect on the company policy of the institutes. The banks lent money in selected sector, like agri-business and small trade companies. 

          The branch was forced to establish two new offices in the country for every newly established office in a town. The oil crises in 1973 resulted in increasing inflation, and the RBI restricted monetary policy to reduce the effects. 


          A lot of committees analysed the Indian economy between1985 and 1991. Their results had an effect on RBI. The board for Industrial and Financial Reconstruction, the Indira Gandhi Institute of Development Research and the Security & Exchange Board of India investigated the national economy as a whole, and the security and exchange board proposed better methods for more effective markets and the protection of investor interests. The Indian financial market was a leading example for so-called ��financial repression�� (Mackinnon and Shaw). The Discount and Finance House of India began its operations on the monetary market in April 1988; the National Housing Bank, founded in July 1988, was forced to invest in the property market and a new financial law improved the versatility of direct deposit by more security measures and liberalization. 


          The national economy came down in July 1991 and the Indian rupee was devalued. The currency lost 18% relative to the US dollar, and the Narsimahmam Committee advised restructuring the financial sector by a temporal reduced reserve ratio as well as the statutory liquidity ratio. New guidelines were published in 1993 to establish a private banking sector. This turning point should reinforce the market and was often called neo-liberal The central bank deregulated bank interest and some sectors of the financial market like the trust and property markets. This first phase was a success and the central government forced a diversity liberalization to diversify owner structures in 1988.

          The National Stock Exchange of India took the trade on June 1994 and the RBI allowed nationalized banks in July to interact with the capital market to reinforce their capital base. The central bank founded a subsidiary company the Bharatiya Reserve Bank Note Mudram Limited-in February 1995 to produce banknotes. 


          The Foreign Exchange Management Act from 1999 came into force in June 2000. It should improve the foreign exchange market, international investment in India and transactions. The RBI promoted the development of the financial market in last years, allowed online banking in 2001 and established a new payment system in 2004-2005 (National Electronic Fund Transfer). The Security printing & Minting Corporation of India Ltd., a merger of nine institutions, was founded in 2006 and produces banknotes and coins.The national economy s growth rate came down to 5.8% in the last quarter of 2008 – 2009  and the central bank promotes the economic development. 


    Central Board of Directors:

          The Central Board of Directors is the main committee of the central bank and has not more than 20 members. The government of the republic appoints the directors for a four year term. 

    Central Board of Directors Name Position:

    Duvvuri Subbarao Governor

    Shyamala Gopinath Deputy Governor

    K.C.Chakrabarty Deputy Governor.

    Subir Gokram Deput Governer.

    Y.H.Malgam Regional of the west.

    Suresh D.Tendulkar Regional of the east.

    U.R.Rao Regional of the north.

    Laksmi Chand Regional of the south.

    H.P.Ranian Lawyer Supreme Court of India.

    Ashok S.Ganguly Chairman Firstsource Solution Limited.

    Azim Premji Chairman WIPRO Limited.

    Kumar Mangalam Birla Chairman Aditya Birla Group of Companies.

    Shashi Rajagopalan Advisor.

    Suresh Neotia former Chairman Ambuja Cement co..

    A.Vaidyanathan Economist, professor Madras Inst.

    Man Mohan Sharma Chemist, Professor Mumbai University.

    D.Jayavarthanavelu Chairman Lakshmi Machine Works Limited.

    Sanjay Labroo CEO Asahi India Glass Ltd.

    Sunanda Padmanabham Government representative.

    Ashok Chawla Government representative.


          The central bank had 22 governors since 04.01.1935. The regular term of office is a four-year period, appointed by the national administration. 

    Supportive bodies:

          The reserve bank of India has four regional representations: North in New Delhi, south in Chennai, East in Kolkata, and west in Mumbai. The representations are formed by five members, appointed for four years by central government and serve – beside the advice of central Board of Directors – as a forum for regional banks and to deal with delegated tasks from the central board. The institution has 22 regional offices. 

    The board of Financial Supervision (BFS), formed in November 1994, serves as a CCBD committee to control the financial institutions. It has four members, appointed for two years, and takes measures to strength the role of statutory auditors in the financial sector, external monitoring and internal controlling systems.

    The Tarapore committee was setup by the Reserve Bank of India under the chairmanship of former RBI deputy governor S S Tarapore to ��lay the road map�� to capital account convertibility. The five-member committee recommended a three-year time frame for complete convertibility by 1999-2000.

    On July 1st 2006, in an attempt to enhance the quality of customer service and strengthen the grievance redressal mechanism, the Reserve Bank of India constituted a new department – customer service Department (CSD). 

    Offices and branches:

          The Reserve bank of India has branch offices at most state capitals and at a few major cities in India [total of 18 places] – viz, Ahmedabad, Bangalore, Bhopal, Bhubaneswar, Chennai, Delhi, Guwahati, Hyderabad, Jaipur, Jammu, Kanpur, Kolkata, Lucknow, Mumbai, Nagpur, Patna, and Thiruvananthapuram. Besides it has sub-offices at Dehradun, Gangtok, Kochi, Panaji, Raipur, Ranchi, Shimla and Srinagar. 

          The bank has also two training colleges for its officers, viz Reserve bank Staff College at Chennai and College of Agricultural Banking at pune. There are also four Zonal Training Centres at Belapur, Chennai, Kolkata and New Delhi. 

    Main functions:

          Reserve Bank of India regional office, Delhi entrance with the Yakshini sculpture depicting ��Prosperity through agriculture��

    The RBI Regional Office in Delhi 

          The RBI Regional Office in Kolkata Monetary authority The RBI is the main monetary authority of the country and beside that the central banks acts as the bank of the national and state government. It formulates implements and monitors the monitory policy as well as it has to ensure an adequate flow of credit to productive sectors. The national economy depends on the public sector and the central bank promotes an expansive monetary policy to push the private sector since the finance market reforms of the 1990s. 

          The institution is also the regulator and supervisor of the financial system and prescribes broad parameters of banking operations within which the country banking and financial system protect depositor interest and provide cost-effective banking services to the public. The Banking Ombudsman Scheme has been formulated by RBI for effective addressing of complaints by bank customers. The RBI controls the monitory supply, monitors economic indicators like the gross domestic product and has to decide the design of the rupee banknotes as well as coins. 

    Manager of exchange control:

          The central bank manages to reach the goals of the Foreign Exchange Management Act, 1999. Objective: to facilitate external trade and payment and promote orderly development and maintenance of foreign exchange market in India. 

    Issuer of currency:

          The bank issues and exchange or destroys currency and coins not fit for circulation. The objectives are giving the public adequate supply of currency of good quality and to provide loans to commercial banks to maintain or improve the GDP. The basic objectives of RBI are to issue bank notes, to maintain the currency and credit system of the country to utilize it in its best advantage, and to maintain the economic structure of the country so that it can achieve the objective of price  stability as well as economic development, because both objectives are diverse in themselves. 

    Developmental role:

          The central bank has to perform a wide range of promotional functions to support national objectives and industries.The RBI faces a lot of inter- sector and local inflation-related problems. Some of these problems are results of the dominant part of public sector 

    Related functions:

          The RBI is also a banker to the government and performs merchant banking function for the central and the state governments. It also acts as their banker. The National Housing Bank (NHB) was established in 1988 to promote private real estate acquisition the institution maintains banking accounts of all scheduled banks, too. 

          There is now an international consensus about the need to focus the tasks of a central bank upon central banking. RBI is far out of touch with such a principle, owing to the sprawling mandate described above. The recent financial turmoil world – over, has however, vindicated the reserve Bank s role in maintaining financial stability in India.

    RBI has various tools to control which are listed below: 

    (a) Bank Rate: RBI lends to the commercial banks through its discount window to help the banks meet depositer��s demands and reserve requirements. The interest rate the RBI charges the bank for this purpose is called bank rate.if the RBI wants to increase the liquidity and money supply in the market,it will decrease the bank rate and if it wants to reduce the liquidity and money supply in the system, it will increase the bank rate. 

    (b) Cash Reserve Requirement (CRR): Every commercial bank has to keep certain minimum cash reserves with RBI. RBI can vary this rate between 3% and 15%. RBI uses this tool to increase or decrease the reserve requirement depending on whether it wants to affect a decrease or an increase in the money supply. An increase in CRR will make it mandatory on the part of the banks to hold a large proportion of their deposits in the form of deposits with RBI. This will reduce the size of their deposits and they will lend less. This will in turn decrease the money supply. 

    (C) Statutory Liquidity Requirements (SLR): Apart from the CRR, banks are required to maintain liquid asset in form of gold, cash and approved securities. RBI has stepped up liquidity requirements for two reasons:- Higher  liquidity ratio forces commercial banks to maintain a larger proportion of their resources in liquid form and thus reduces their capacity to grant loans and advances – thus it in an anti- inflationary impact. A higher liquidity ratio diverts the bank funds from loans and advances to investment in government and approved securities. 

    In well developed economies, central banks use open market operations – buying and selling of eligible securities by central bank in money market- to influence the volume of cash reserves with commercial banks and thus influence the volume of loans and advances they can make to the commercial and industrial sectors. In the open money market government securities are traded at market related rates of interest. The RBI is resorting more to open market operations in the more recent years.

    Generally RBI uses three kinds of selective credit control:

  1. Minimum margins for lending against specific securities.
  2. Ceiling on the amounts of credit for certain purpose.
  3. Discriminatory rate of interest charged on certain types of advances.

    Direct credit controls in India are of three types: 

  1. Part of the interest rate structure i.e on small savings and provident funds, are administratively set.
  2. Banks are mandatorily required to keep 25% of their deposits in form of government securities.
  3. Banks are required to lend to priority sectors to the extent of 40% of their advances

                         PROFILE OF THE HDFC BANK 

  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 the RBI's liberalization 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.




                              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, a strong market reputation, large shareholder base and unique consumer franchise, HDFC was ideally positioned to promote a bank in the Indian environment.

As on 31st December, 2009 the authorized share capital of the Bank is Rs. 550 crore. The paid-up capital as on said date is Rs. 455,23,65,640/- (45,52,36,564 equity shares of Rs. 10/- each). The HDFC Group holds 23.87 % of the Bank's equity and about 16.94 % of the equity is held by the ADS Depository (in respect of the bank's American Depository Shares (ADS) Issue). 27.46 % of the equity is held by Foreign Institutional Investors (FIIs) and the Bank has about 4,58,683 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.

Mr. Jagdish Capoor took over as the bank's Chairman in July 2001. Prior to this, Mr. Capoor was Deputy Governor of the RBI


      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 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.                   


Mr. Jagdish Capoor, Chairman

Mr. Keki Mistry

Mrs. Renu Karnad

Mr. Arvind Pande

Mr. Ashim Samanta

Mr. Chander Mohan Vasudev

Mr. Gautam Divan

Dr. Pandit Palande

Mr. Aditya Puri, Managing Director

Mr. Harish Engineer, Executive Director

Mr. Paresh Sukthankar, Executive Director

Mr. Vineet Jain (upto 27.12.2008) 


HDFC Bank House,

Senapati Bapat Marg,

Lower Parel,

Website: www.hdfcbank.com 

HDFC Bank offers a wide range of commercial and transactional banking services and treasury products to wholesale and retail customers. The bank has three key business segments 


Distribution Network


HDFC Bank is headquartered in Mumbai. As on December 31, 2009, the Bank has a network of 1725 branches in 771 cities across India. All branches are linked on an online real-time basis. Customers in over 500 locations are also serviced through Telephone 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 3898 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


Wholesale Banking Services

The Bank's target market ranges from large, blue-chip manufacturing companies in the Indian corporate to 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 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.


Retail Banking Services

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 2009, the bank had a total card base (debit and credit cards) of over 13 million. The Bank is also one of the leading players in the ��merchant acquiring�� business with over 70,000 Point-of-sale (POS) terminals for debit / credit cards acceptance at merchant establishments. The Bank is well positioned as a leader in various net based B2C opportunities including a wide range of internet banking services for Fixed Deposits, Loans, Bill Payments, etc. 



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.. 

credit rating

The Bank has its deposit programs 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 "AAA (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". 

The Bank also has its long term unsecured, subordinated (Tier II) Bonds rated by CARE and Fitch Ratings India Private Limited and its Tier I perpetual Bonds and Upper Tier II Bonds rated by CARE and CRISIL Ltd. CARE has assigned the rating of "CARE AAA" for the subordinated Tier II Bonds while Fitch Ratings India Pvt. Ltd. has assigned the rating "AAA (ind)" with the outlook on the rating as "stable". CARE has also assigned "CARE AAA [Triple A]" for the Banks Perpetual bond and Upper Tier II bond issues. CRISIL has assigned the rating "AAA / Stable" for the Bank's Perpetual Debt programme and Upper Tier II Bond issue. In each of the cases referred to above, the ratings awarded were the highest assigned by the rating agency for those instruments. 

Awards and Achievements - Banking Services


Global Finance Award Best Trade Finance Provider in India for 2010
2 Banking Technology Awards 2009 1) Best Risk Management Initiative and 2) Best Use of Business Intelligence.
SPJIMR Marketing Impact Awards (SMIA) 2010 2nd Prize
Business Today Best Employer Surve Listed in top 10 Best Employers in the country

Business India Businessman of the Year Award for 2009. Mr. Aditya Puri, MD, HDFC Bank
Businessworld Best Bank Awards 2009 Most Tech-savvy Bank
Outlook Money NDTV Profit Awards 2009 Best Bank
Forbes Asia Fab 50 Companies in Asia Pacific
GQ India's Man of the Year (Business) Mr. Aditya Puri, MD, HDFC Bank
UTI MF-CNBC TV18 Financial Advisor Awards 2009 Best Performing Bank
Business Standard Best Banker Award Mr. Aditya Puri, MD, HDFC Bank
Fe Best Bank Awards 2009 - Best Innovator of the year award for    our MD Mr. Aditya Puri  
- Second Best Private Bank in India  
- Best in Strength and Soundness    Award
Euromoney Awards 2009 Best Bank in India
Economic Times Brand Equity & Nielsen Research annual survey 2009 Most Trusted Brand - Runner Up
Asia Money 2009 Awards Best Domestic Bank in India
IBA Banking Technology Awards 2009 Best IT Governance Award - Runner up
Global Finance Award Best Trade Finance Bank in India for 2009
IDRBT Banking Technology Excellence Award 2008 Best IT Governance and Value Delivery
Asian Banker Excellence in Retail Financial Services Asian Banker Best Retail Bank in India Award 2009





YEAR/ PBDT 1 2 3 4 5 6 7 8 9 10 TOTAL
PROJECT 1 1020 1520 1520 1620 1720 1520 1650 1520 1210 1310 14610
PROJECT 2 3060 4560 4560 4860 5160 4560 4950 4560 3630 3930 43830
PROJECT 3 306 456 456 486 516 456 495 456 363 393 4383
PROJECT 4 1122 1672 1672 1782 1892 1672 1815 1672 1331 1441 16071
PROJECT 4 91.8 136.8 136.8 145.8 154.8 136.8 148.5 136.8 108.9 117.9 1314.9

Depreciation as per the profit and loss account   15% SLM 

Depreciation as per the income tax act   35%          15%  w.d.v

Year 1 Year 2   onwards

Tax rate  33% 

Present value factor     13%

Calculate  NPV,IRR,PI,ROI.PBP 










1 1020 1794 -774 -225 -519 1794 1275 1275
2 1520 500 1020 337 683 500 1183 2458
3 1520 425 1095 361 734 425 1159 3617
4 1620 361 1259 415 844 361 1205 4822
5 1720 307 1413 466 947 307 1254 6076
6 1520 261 1259 415 844 261 1105 7181
7 1650 222 1428 471 957 222 1179 8360
8 1520 188 1332 440 892 188 1080 9440
9 1210 160 1050 347 703 160 863 10303
10 1310 136 1174 387 787 136 923 11226
TOTAL 14610 4354 10256 3384 6872 4354 11226  
1 1275 .88496 1128 .83333 1062 1275
2 1183 .78315 926 .69444 822 2458
3 1159 .69305 803 .57870 671 3617
4 1205 .61332 739 .48225 581 4822
5 1254 .54276 681 .40188 504 6076
6 1105 .48032 531 .33490 370 7181
7 1179 .42506 501 .27908 329 8360
8 1080 .37616 406 .33257 359 9440
9 863 .33288 287 .19381 167 10303
10 923 .29459 272 .16151 149 11226
TOTAL     6274   4564  

Present value cash inflow =6274 

Present value cash outflow=5125 


Net present value = cash inflow – cash outflow

                  6274 – 5125

NPV @ 13% =1149 


P.I   = Total present value of cash inflow / total investment  

       =6274 / 5125 

      =1.22 Times 


IRR = LOWER RATE + Inflows at lower rate- investment


                          Inflows at lower rate – inflow at higher rate 

      =  13 +  6274 – 5125


            6274 – 4564 

      = 13 + 4.7 

      =17.7%  OR 18% 


Pay back period = based period + investment – CCFAT


                         Next CCFAT 

         = 4 + 303



               =  4 + .2 

               = 4.2 Months 


Return on investment  =  Average cash inflow * 100


                                 Average investment 

Average cash inflow = 11226/10  =  1122.6 

Average investment   =  5125/ 2     = 2526.5 

ROI   =  1122.9/2526.5 * 100 

                  = 43.8% OR 44% 










1 3060 3588 -528 -174 -354 3588 3234 3234
2 4560 999 3561 1174 2386 999 3385 6619
3 4560 849 3711 1225 2486 848 3335 9954
4 4860 722 4138 1366 2772 722 3494 13448
5 5160 614 4546 1500 3046 614 3660 17108
6 4560 522 4038 1333 2705 522 3227 20335
7 4950 443 4507 1487 3020 443 3463 23798
8 4560 377 4183 1380 2803 377 3180 26978
9 3630 320 3310 1092 2218 320 2538 29516
10 3930 272 3658 1207 2451 272 2723 32239
TOTAL 43830 8706 35124 11591 23533 8706 32239  
1 3234 .88496 2862 .78740 2546 3234
2 3385 .78315 2651 .62000 2099 6619
3 3335 .69305 2311 .48810 1628 9954
4 3494 .61332 2143 .38440 1343 13448
5 3660 .54276 1987 .30268 1108 17108
6 3227 .48032 1550 .24991 806 20335
7 3463 .42506 1472 .19834 687 23798
8 3180 .37616 1196 .15741 501 26978
9 2538 .33288 842 .12493 317 29516
10 2723 .29459 802 .09915 270 32239
TOTAL 32239   17819   11305  

Present value cash inflow =17819 

Present value cash outflow=10250 


Net present value = cash inflow – cash outflow

                 = 17819 - 10250 

NPV @ 13% =7569 


P.I   = Total present value of cash inflow / total investment  


      =1.74 Times 


IRR = LOWER RATE + inflows at lower rate- investment


                         inflows at lower rate – inflow at higher rate 

      =  13 +  17819 - 10250


            6274 – 4564 

      = 13 + 15.1 



Pay back period = based period + investment – CCFAT


                         Next CCFAT 

         = 3 + 296



               =  3 + .08 

               = 3.1 Months 


Return on investment  =  Average cash inflow * 100


                                 Average investment 

Average cash inflow = 32239/10  =  3223.9 

Average investment   =  10250/ 2     = 5125 

ROI   =  3223..9/5125 * 100 

                  = 62.9% OR 63% 










1 306 1444 -1138 -376 -762 306 682 682
2 456 402 54 18 36 456 438 1120
3 456 342 114 38 76 456 418 1538
4 486 291 195 64 131 486 422 1960
5 516 247 269 89 180 516 427 2387
6 456 210 246 81 165 456 375 2762
7 495 178 317 105 212 495 390 3152
8 456 152 304 100 204 456 356 3508
9 363 129 234 77 157 363 286 3794
10 393 110 283 93 190 393 300 4094
TOTAL 4383 3505 878 289 589 4383 4094  
1 682 .88496 604 .90909 620 682
2 438 .78315 343 .82654 362 1120
3 418 .69305 290 .75131 314 1538
4 422 .61332 259 .68301 288 1960
5 427 .54276 232 .62092 265 2387
6 375 .48032 180 .56447 212 2762
7 390 .42506 166 .51361 200 3152
8 356 .37616 134 .46651 166 3508
9 286 .33288 95 .42410 121 3794
10 300 .29459 88 .35009 105 4094
TOTAL 4094   2391   2653  

Present value cash inflow =2391 

Present value cash outflow=4125 


Net present value = cash inflow – cash outflow


       =2391 - 4125 

NPV @ 13% = - 1734 


P.I   = Total present value of cash inflow / total investment  


      =.58 Times 


IRR = LOWER RATE + Inflows at lower rate- investment


                         Inflows at lower rate – inflow at higher rate 

As a sum of pre-discounted cash inflow is less then cost of investment there can��t be IRR OR IRR < 0 


Pay back period = based period + Investment – CCFAT


                         Next CCFAT 

Total investment has not been realised by cash inflow, so there is no pay back period. 


Return on investment  =  Average cash inflow * 100


                                 Average investment 

Average cash inflow = 4094/10  =  409.4 

Average investment   =  4125/ 2     = 2062.5 

ROI   =  409.4/2062.5 * 100 

                  = 19.8% OR 20% 











1 1122 2844 -1722 -568 -1154 2844 1690 1690
2 1672 792 880 290 590 792 1382 3072
3 1672 673 999 330 69 673 1342 4414
4 1782 572 1210 399 811 572 1383 5797
5 1892 487 1405 464 941 487 1428 7225
6 1672 414 1258 415 843 414 1257 8482
7 1815 351 1464 483 981 351 1332 9814
8 1672 299 1373 453 920 299 1219 11033
9 1331 254 1077 355 722 254 976 12009
10 1441 216 1225 404 821 216 1037 13046
TOTAL 16071 6902 9169 3025 6144 6902 13046  
1 1690 .88496 1496 .90090 1523 1690
2 1382 .78315 1082 .81162 1122 3072
3 1342 .69305 930 .73179 982 4414
4 1383 .61332 848 .65873 911 5797
5 1428 .54276 775 .59345 847 7225
6 1257 .48032 604 .53467 672 8482
7 1332 .42506 566 .48166 642 9814
8 1219 .37616 459 .43393 529 11033
9 976 .33288 325 .39092 382 12009
10 1037 .29459 305 .35218 365 13046
TOTAL 13046          

Present value cash inflow =7390 

Present value cash outflow=8125


Net present value = cash inflow – cash outflow


                = 7390 – 8125 

NPV @ 13% = - 735 


P.I   = Total present value of cash inflow / total investment  


      =.091 Times 


IRR = LOWER RATE + Inflows at lower rate- investment


                         Inflows at lower rate – inflow at higher rate

      = 11 + 7390 – 8125


            7975 - 7390 

      = 11 – 0.51 



Pay back period = based period + investment – CCFAT


                     Next CCFAT 

         = 5 + 8125 - 7225



               = 5 + .7 

              = 5.7 Months 


Return on investment  =  Average cash inflow * 100


                        Average investment 

Average cash inflow = 13046/10 = 1304.6 

Average investment   =  8125/ 2     = 4062.5 

ROI   =  1304.6/4062.5 * 100 

                  = 32% 










1 91.8 672 -580.2 191.5 388.7 672 283.3 283.3
2 136.8 187 -50.2 -16.6 -33.6 187 153.4 436.7
3 136.8 159 -22.2 -7.3 -14.9 159 144.1 580.8
4 145.8 135 10.8 3.6 7.2 135 142.2 723
5 154.8 115 39.8 131.1 26.7 115 141.7 864.7
6 136.8 98 38.8 12.8 26.0 98 124.0 988.7
7 148.5 83 65.5 21.6 43.9 83 126.9 1115.6
8 136.8 71 65.8 21.7 44.1 71 115.1 1230.7
9 108.9 60 48.9 16.1 32.8 60 92.8 1323.5
10 117.9 51 66.9 22.1 44.8 51 95.8 1419.3
TOTAL 1314.9 1631 -316.1 -104.4 -211.7 1631 1419.3  
1 283.3 .88496 251 .90090 257 283.3
2 153.4 .78315 120 .82654 127 436.7
3 144.1 .69305 100 .75131 108 580.8
4 142.2 .61332 87 .68301 97 723
5 141.7 .54276 77 .62092 88 864.7
6 124.0 .48032 60 .56447 70 988.7
7 126.9 .42506 54 .51361 65 1115.6
8 115.1 .37616 43 .46651 54 1230.7
9 92.8 .33288 31 .42410 39 1323.5
10 95.8 .29459 28 .35009 37 1419.3
TOTAL 1419.3   851   942  

Present value cash inflow =851 

Present value cash outflow=1920 


Net present value = cash inflow – cash outflow


              = 851 - 1920 

    NPV @ 13% =1069 


    P.I   = Total present value of cash inflow / total investment  


          =0.44 Times 


    IRR = LOWER RATE + Inflows at lower rate- investment


                             Inflows at lower rate – inflow at higher rate 

    As a sum of pre-discounted cash inflow is less then cost of investment there can��t be IRR OR IRR < 0 


    Pay back period = based period + investment – CCFAT


                         Next CCFAT 

    Total investment has not been realised by cash inflow, so there is no pay back period 


    Return on investment  =  Average cash inflow * 100


                            Average investment 

    Average cash inflow = 1419.3/10  =  141.93 

    Average investment   =  1920/ 2     = 960 

    ROI   =  141.93/960 * 100 

                      = 14.78% OR 15% 



    The study concerned with the capital budgeting with reference to HDFC BANK, the date is collected, organised analysed and interpreted. HDFC BANK has a good organisation culture, excellent working environment and a very precio9us asset that is highly dedicate, hardworking well qualified efficient and knowledgeable workforce. 

      The following findings are obtained from the analysis of data 

    • The first project ie., generation is the unequal cash flows for 10 years, the initial investment is Rs 5,125 lakhs.
      1. NPV and IRP are positive for the proposal.  Then the required rate of return 17.7% 
      2. The profitability index is 1.22 times >1
      3. The return of investment is 43.8 %.
    • The second project ie., generation is the unequal cash flows for 10 years. The initial investment is Rs 10,250 lakhs 
      1. The discounted PBP is 3.1 years, the investment will recover in 3 years and 1 month 
      2. NPV and IRR are positive for the proposal then the required rate of return 28 %
      3. The profitability index is 1.74 times.
      4. The return of investment is 62.9 %
    • The third project ie., generation is the unequal cash flows for 10 years. The initial investment is Rs 4125 lakhs 
      1. Total investment has not been realised by the cash inflow.  So there is no pay back period (PBP). 
      2. NPV and IRR are negative for the proposal as a sum of pre-discounted cash inflow is less than cost of investment there can��t be IRR (or)IRR<0.
      3. The profitability index is 0.58 times, it is not good.
      4. The return of investment is 19.8 %.
    • The fourth project ie., generate is the unequal cash flows for 10 years.  The initial investment is Rs:8125 lakhs. 
      1. The discounted PBP is 5.7 years.  The investment will recover in 5 years and 7 months. 
      2. NPV and IRR are negative for the proposal then th required rate of return 10.4%.
      3. The profitability index is 0.9 times, it is not good sign.
      4. The return of investment is 32 %.
    • The fifth project ie., generation is the unequal cash flows for 10 years. The initial investment is Rs 1920 lakhs 
      1. Total investment has not been realised by the cash inflow.  So there is no pay back period (PBP). 
      2. NPV and IRR are negative for the proposal as a sum of pre-discounted cash inflow is less than cost of investment there can��t be IRR (or)IRR<0.
      3. The profitability index is 0.44 times, it is not good.
      4. The return of investment is 14.78 %



    • First project in all contexts PBP of 4.2 years, NPV, IRR, ROI and PI are positive as its return are positive sign therefore the project is accepted. 
    • Second project in all contexts PBP of 3.1 years, NPV, IRR, ROI and PI are indicating of positive sign therefore the project is accepted. 
    • Third project NPV and IRR are negative for the proposal as a sum of pre discounted cash inflow is less than cost of investment there can��t  be IRR (or) IRR <0.  Total investment has not been realised by the cash inflow, so there no PBP.  The P> I is 0.58 times, it is not a good, ROI is 20%, it indicating values so the project is required. 
    • Fourth project NPV is negative sign and IRR is 10.4%, PI is 0.9 times this is not good sign, PBP is 5.7 months, ROI is 32% the project if may increase the NPV may get profits so the project is accepted. 
    • Fifth project NPV and IRR are negative for the proposal as a sum of pre discounted cash inflow is less than cost of investment there can��t  be IRR (or) IRR <0.  Total investment has not been realised by the cash inflow, so there no PBP.  The P> I is 0.44 times, it is not a good, ROI is 15 %, it indicating values so the project is required. 


    • Gupta Shahi K & Sharma, R.K. Financial Management; theory and practice 3rd  edition 2001, Kalyani Publishers. 
    • Khan M.Y. & Jain P.K; Text, problems and cases 4th edition, 2004.
    • I.M. Pandey: Financial Management 9th edition 2005 Vikas Publishing House Private Limited.
    • Prasanna Chandra: Financial Management: Theor4y and Practise 5th edition 2001.                  




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