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Notes to Accounts of Dhanlaxmi Bank Ltd.

Mar 31, 2016

a) Treasury:

The treasury services segment primarily consists of interest earnings on investments portfolio of the bank, gain or losses on investment operations and earnings from foreign exchange business. The principal expenses of the segment consist of interest expense on funds borrowed and other expenses.

b) Corporate/Wholesale Banking

The Corporate/Wholesale Banking segment provides loans and other banking services to corporate segment identified on the basis of RBI guidelines. Revenues of this segment consist of interest earned on Loans made to corporate customers and charges/fees earned from other banking services. The principal expenses of the segment consist of interest expense on funds borrowed and other expenses.

c) Retail Banking:

The Retail banking segment provides loans and other banking services to non-corporate customers identified on the basis of RBI guidelines. Revenues of this segment consist of interest earned on Loans made to non-corporate customers and the charges/fees earned from other banking services. The principal expenses of the segment consist of interest expense on funds borrowed and other expenses.

d) Other Banking Operations:

This segment includes income from para banking activities such as debit card, third party product distribution and associated costs.

GEOGRAPHIC SEGMENT

The Bank operations are predominantly confined within one geographical segment (India) and accordingly this is considered as the only secondary segment.

3. CAPITAL ADEQUACY

The Bank is subject to the Basel-III Capital Regulations stipulated by Reserve Bank of India (RBI) effective from April 1, 2013. The transition to the Basel-III Capital Regulations is in a phased manner and during the transitional period the Bank is subject to the compliance with the regulatory limits and minima as prescribed under Basel-III Capital Regulation on an on-going basis. Basel-III Capital Regulations will be fully implemented as on March 31, 2019. As per the Reserve Bank of India (RBI) guidelines, the total regulatory capital consists of sum of the following:

1) Tier-1 Capital (Going Concern Capital*)

a. Common Equity Tier-1(CET-1)

b. Additional Tier-1

2) Tier-2 Capital (Gone Concern Capital**)

* From Regulatory perspective, Going Concern Capital is the Capital, which can absorb losses without triggering bankruptcy of the Bank.

4. DERIVATIVES

- Forward Rate Agreement (FRA) / Interest Rate Swaps (IRS)

The Bank enters into Forward Rate Agreement (FRA) and Interest Rate Swap (IRS) for balance sheet management and market making purpose. Forward Rate Agreement (FRA) and Interest Rate Swap (IRS) are such instruments which can provide effective hedge against

interest rate risks.

A Forward Rate Agreement (FRA) is a financial contract between two parties to exchange interest payments for a `notional principal’ amount on settlement date, for a specified period from start date to maturity date. Accordingly, on the settlement date, cash payments based on contract (fixed) and the settlement rate, are made by the parties to one another. The settlement rate is the agreed benchmark/ reference rate prevailing on the settlement date. The benchmark used in Forward Rate Agreement (FRA) contracts is London Inter-Bank Offered Rate (LIBOR).

An Interest Rate Swap (IRS) is a financial contract between two parties exchanging or swapping a stream of interest payments for a `notional principal’ amount on multiple occasions during a specified period. Such contracts generally involve exchange of a `fixed to floating’ or `floating to floating’ rates of interest. Accordingly, on each payment date - that occurs during the swap period - cash payments based on fixed/ floating and floating rates, are made by the parties to one another. The Bank deals in interest rate benchmarks like Mumbai Inter-Bank Offered Rate (MIBOR), Indian Government Securities Benchmark Rate (INBMK), Mumbai Inter Bank Forward Offer Rate (MIFOR) and LIBOR of various currencies.

These contracts are subject to the risks of changes in the market interest rates as well as the settlement risk with the counterparties. The following table sets for the details of Forward Rate Agreements (FRAs)/Interest Rate Swaps (IRSs):

5. OTHER ASSETS (SCHEDULE NO.: 11) & FIXED ASSETS (SCHEDULE NO.:10)

Reconciliation of rent advance/security deposit for premises occupied by branches/offices, etc. (as per Schedule No. 11) and physical verification of fixed assets (Schedule No. 10) are in progress. However a provision of Rs. 3.19 crore against Fixed Assets and Rs. 1.05 crore against Advances/Deposits were made to cover the possible impact of reconciliation in the profit and loss account.

6. Provision for the liability towards Pension/DA increase to Retired/VRS opted employees in the years 2000 to 2010 amounting to Rs. 89.56 crore has been created in the account based on the liability ascertained as per present annuity rates. This was included under other provision in the profit and loss account for the year ended March 31, 2016.

7. Disclosures on Remuneration

a. Information relating to the composition and mandate of the nomination & remuneration committee. Composition

The remuneration committee of the Board consists of four members of which one member from the Risk Management Committee of the Board facilitates effective governance of compensation.

The terms of reference of the nomination & remuneration committee are as follows:

1. Frame a policy describing the qualification, experience and other positive attributes for selection of executive/whole time directors including their age of retirement;

2. Formulate and put in place guiding principles to determine the qualities, qualifications, and the parameters to determine the ‘fit and proper’ criteria for appointment of independent Directors keeping in mind the diversity quotient the Bank’s Board shall maintain from time to time and subject to the applicable regulatory requirements;

3. Conduct the process of due diligence to determine the suitability of the person for appointment/continuing to hold appointment as Director on the Board, based on the specific criteria prescribed by Reserve Bank of India;

4. Filling in a timely manner vacancies on the Board of the company including the position of executive/whole time directors;

5. Selection of directors, key management personnel and persons to be appointed in senior management positions as defined by the Board and recommend to the Board for their appointment and removal thereof;

6. Formulate and recommend to the Board for its approval a policy relating to the remuneration for the directors, key managerial personnel and other employees from time to time to ensure that:

a) The level and composition of remuneration is reasonable and sufficient to attract, retain and motivate Directors of the quality required to run the Bank successfully:

b) Relationship of remuneration to performance is clear and meets appropriate performance benchmarks;

c) Remuneration to Directors, key managerial personnel and senior management involves a balance between fixed and

incentive pay reflecting short and long term performance objectives appropriate to the working of the company and its

goals;

7. Review the performance of individual Directors of the Bank on a yearly basis at the end of each financial year or at such periodicity as the Committee deem fit and recommend to the Board on the basis of such review, whether a director to be recommended for re-appointment or not;

8. Review the performance of the executive/whole time Directors of the Bank and fix suitable compensation packages in consideration of their performance, contributions, the general business environment in which the Bank operates and financial position of the Bank. The remuneration package may be a combination of fixed and performance based bonus/incentives for the period under review.

9. Review the performance of key managerial personnel and senior management persons on a periodical basis and fix their

remuneration packages in accordance with the policies approved by the Board, provided the period of gap between two such reviews shall not elapse fifteen months;

10. Ensure that at all times, the Board of the Bank has a fair combination of independent, non-executive and executive directors meeting the governance standards set by the Board and in compliance with regulatory requirements and listing agreements prevailing from time to time;

11. Ensure that the organization structure and flow of command meets the governance standard set for the internal management of the Bank;

12. Evaluate and put in place proper mechanism for refreshment trainings for Directors on relevant subject;

13. Evaluate and put in place a proper mechanism to ensure that the independence of independent directors are always maintained and to ensure that there are no situations which suggest the existence of circumstances resulting in the loss of independence of any directors of the Bank;

14. Put in place, subject to the provisions of applicable laws, policies and procedure for determining the retirement and re-appointment of independent and other Directors on the board of the Bank;

15. Ensure that at all times the sub committees of the Board is functioning and are constituted according to the regulatory requirement and governance policies of the Bank;

16. Oversee the overall governance standards and policies of the Bank and delegation of authorities to match with the best practices in relation to the size of the Bank and the level of its operations to protect the interest of all stake holders

a. Information relating to the design and structure of remuneration processes and the key features and objectives of remuneration policy.

The Bank has formed the compensation policy based on the Reserve Bank of India guidelines vide its Circular No. DBOD

No.BC.72/29.67.001/2011-12 dated 13-01-2012.

The fixed remuneration and other allowances including retirement benefits of all subordinates, clerical and officers up to

the rank of General Manager (Scale - VII) is governed by the industry level wage settlement under Indian Banks Association

pattern. In respect of officers above the cadre of General Manager, the fixed remuneration is fixed by Board/Committee.

Further, the compensation structure for the Whole-Time Directors/Managing Director and Chief Executive Officer of the Bank is subject to approval of Reserve Bank of India in terms of Section 35B of the Banking Regulation Act, 1949.

b. Human Resource Management department under the guidance of MD & CEO shall administer the compensation and the

benefit structure in line with the best suited practices and statutory requirements as applicable.

Qualitative Disclosure

The Bank measures and monitors the LCR in line with the Reserve Bank of India’s circular dated June 09, 2014 on “Basel III Framework on Liquidity Standards – Liquidity Coverage Ratio (LCR), Liquidity Risk Monitoring Tools and LCR Disclosure Standards” as amended for “Prudential Guidelines on Capital Adequacy and Liquidity Standards” dated March 31, 2015.

The LCR guidelines aim to ensure that a

bank maintains an adequate level of unencumbered High Quality Liquid Assets (HQLAs) that can be converted into cash to meet its liquidity needs for a 30 calendar day time horizon under a significantly severe liquidity stress scenario. At a minimum, the stock of liquid assets should enable the bank to survive until day 30 of the stress scenario, by which time it is assumed that appropriate corrective actions can be taken. Banks are required to maintain High Quality Liquid Assets of a minimum of 100% of its Net Cash Outflows by January 1, 2019. However, with a view to provide transition time, the guidelines mandate a minimum requirement of 60% w.e.f. January 01, 2015 and a step up of 10% every year to reach the minimum requirement of 100% by January 01, 2019. The adequacy in the LCR maintenance is an outcome of a conscious strategy of the Bank towards complying with LCR mandate ahead of the stipulated timeliness. The maintenance of LCR, both on end of period and on an average basis, has been on account of multiple factors viz, increases in excess SLR, existing eligibility in corporate bond investments, increase in retail deposits and increase in non callable deposits.

Unweighted values are calculated as outstanding balances maturing or callable within 30 days (for inflows and outflows) except where otherwise mentioned in the circular and LCR template. Weighted values are calculated after the application of respective haircuts (for HQLA) or inflow and outflow rates (for inflows and outflows). Board of Directors of the Bank has empowered ALCO (Top Management Executive Committee) to monitor and strategize the Balance Sheet profile of the Bank.

The Bank has been maintaining HQLA primarily in the form of SLR investments over and above mandatory requirement; Certificate of Deposits issued by Banks with rating A1 and above apart from regulatory dispensation allowed upto 7% of NDTL (additional 3% effective February 16) in the form of borrowing limit available through Marginal Standing Facility (MSF) and Facility to Avail Liquidity for Liquidity Coverage Ratio (FALLCR). Average LCR for the year ended March 31, 2016 is 176.95% (March 31, 2015: 177.37%), which is comfortably above RBI prescribed minimum requirement of 70%.

LCR for the quarter end March 31, 2015 had been computed based on the guidelines applicable at that point in time. Subsequently there have been amendments in the RBI guidelines w.e.f. April 2015. Hence, LCR computed based on 3 months average for March 15 is not comparable with those reported for the current financial year based on 12 months average.

16.. DUES TO MICRO AND SMALL ENTERPRISES

Under the Micro and Small Enterprises Development Act, 2006 which came into force from October 02, 2006, certain disclosures are required to be made relating to Micro and Small enterprises. On the basis of information and records available with the management and confirmation sought by the management from suppliers on their registration with the specified authority under the said Act, there have been no reported cases of delays in payments to micro and small enterprises or of interest payments due to delays in such payments.

17. SOFTWARE CAPITALIZED UNDER FIXED ASSETS

The Bank has capitalized software under Fixed Asset amounting to Rs. 0.68 crore and Rs. 0.69 crore during the financial year ended March 31, 2016 and March 31, 2015 respectively.

(Rs. in Crore)

18. DESCRIPTION OF CONTINGENT LIABILITIES

1. Claims against the Bank not acknowledged as debts

The Bank is a party to various legal proceedings in the normal course of business. The Bank does not expect the outcome of these proceedings to have a material adverse effect on the Bank’s financial conditions, results of operations or cash flows’

ti2. Liability on account of forward exchange and derivative contracts

The Bank enters into foreign exchange contracts, currency options, forward rate agreements, currency swaps and interest rate swaps with interbank participants and customers. Forward exchange contracts are commitments to buy or sell foreign currency at a future date at the contracted rate. Currency swaps are commitments to exchange cash flows by way of interest/principal in one currency against another, based on predetermined rates. Interest rate swaps are commitments to exchange fixed and floating interest rate cash flows. The notional amounts of financial instruments of such foreign exchange contracts and derivatives provide a basis for comparison with instruments recognized on the balance sheet but do not necessarily indicate the amounts of future cash flows involved or the current fair value of the instruments and, therefore, do not indicate the Bank’s exposure to credit or price risks. The derivative instruments become favorable (assets) or unfavorable (liabilities) as a result of fluctuations in market rates or prices relative to their terms. Hence the aggregate fair values of derivative financial assets and liabilities can fluctuate significantly.

3. Guarantees given on behalf of constituents, acceptances, endorsements and other obligations

As a part of its commercial banking activities the Bank issued documentary credit and guarantees on behalf of its customers.

Documentary credits such as letters of credit enhance the credit standing of the customers of the Bank. Guarantees generally represent irrevocable assurances that the Bank will make payments in the event of the customer failing to fulfill its financial or performance obligations.

4. Other items for which the Bank is contingently liable

– Value dated purchase of securities

– Disputed Tax

– Amount deposited with RBI under Depositor Education Awareness Fund

– Foreign Exchange Contracts (Tom & Spot) (Refer Schedule 12 for amounts relating to Contingent Liability)

19. PROVISION FOR LONG TERM CONTRACTS

The Bank has a process whereby periodically all long term contracts (including derivative contracts) are assessed for material foreseeable losses. At the year end, the Bank has reviewed and recorded adequate provision as required under any law / accounting standards for material foreseeable losses on such long term contracts (including derivative contracts) in the books of account and disclosed the same under the relevant notes in the financial statements. Previous year figures have been re-grouped/ re-classified wherever considered necessary to conform to current year’s classification.


Mar 31, 2015

BASIS OF PREPARATION

The Financial Statements have been prepared in accordance with the requirements prescribed under the "Third Schedule" of the Banking Regulation Act, 1949. The accounting and reporting policies used in the preparation of these financial statements conform in all material aspects to Generally Accepted Accounting Principles in India (Indian GAAP), the guidelines issued by Reserve Bank of India (RBI) from time to time, the Accounting Standards (AS) notified under Sec. 133 of the Companies Act, 2013 read with Rule 7 of the Companies (Accounts) Rules 2014 to the extent applicable and practices generally prevalent in the banking industry in India. The bank follows the accrual method of accounting and the historical cost convention except where otherwise stated. The Accounting policies adopted by the bank are consistent with the previous year except as disclosed otherwise.

USE OF ESTIMATES

The preparation of Financial Statements requires the management to make estimates and assumptions in the reported amounts of assets and liabilities (Including contingent liabilities) as of the date of the financial statements and the reported income and expenses during the reporting period. Management believes that the estimates and assumptions used in preparation of the financial statements are prudent and reasonable. Actual results could differ from these estimates.

1. DISCLOSURE OF LETTER OF COMFORTS (LOCs) ISSUED BY THE BANK During the year the Bank has not issued Letter of Comforts.

2. SEGMENT REPORTING (AS 17)

The Bank has recognized Business segments as primary reporting segment and Geographical segments as secondary segment in line with RBI guidelines on compliance with Accounting Standard 17.

I. Primary Segments: Business segments.

(a) Treasury Operations

(b) Corporate / Wholesale Banking

(c) Retail banking

(d) Other banking business operations

II. Secondary Segments: Geographical segments.

Since the Bank is having domestic operations only, no reporting does arise under this segment.

3. Penalties levied by the Reserve Bank of India

The Penalty imposed by RBI during the year ended March 31, 2015 was Rs. 10,500/- (Previous Year Rs. 2,00,16,800/- )

4. OTHER ASSETS (SCHEDULE NO.: 11), BALANCE WITH BANKS AND MONEY AT CALL AND SHORT NOTICE (SCHEDULE NO.: 7) & FIXED ASSETS (SCHEDULE NO.: 10)

Reconciliation of rent advance/ security deposit for premises occupied by branches/ offices, etc. (as per Schedule No. 11), and physical verification of fixed assets (Schedule No. 10) is in progress. In the opinion of the management no material impact of reconciliation of accounts is anticipated.

5. The Bank had entered into an agreement with M/s Bajaj Allianz Life insurance Company Ltd. ( BALIC) for sale of products of BALIC on specified terms and conditions. BALIC issued a demand notice to the Bank claiming a penalty amount of 1511 lakhs (for 2011-12) and Rs. 2123 lakhs ( for 2012-13) totaling Rs. 3634 lakhs for non-achievement of targets along with interest at 12% per annum for delay in paying the amount beyond fifteen days. Further, BALIC informed the bank that targets for the Financial year 2013-2014 had not been met by the bank and a further penalty of Rs. 2664 lakhs had to be paid to BALIC by the bank in addition to the earlier penalty of 3634 lakhs Considering the initiatives taken by both the parties to renegotiate the terms and conditions of the agreement and as legally advised, the demand of penalty of Rs. 6298 lakhs is shown as contingent liability (Schedule No. 12)

6. Pending settlement of wage revision w.e.f. 1st November, 2012, an adhoc provision of Rs.3164 lakhs is held as on 31.03.2015 which includes Rs.1962 lakhs provided during the current year.

7. In terms of RBI circular DBR No. BP. BC 79/ 21.04.048/ 2014-15 dated March 30, 2015 Banks were permitted to utilise up to 50% countercyclical provision buffer/ floating provision held by them as on 31.12.2014 for making specific provisions for non- performing assets, as per the policy approved by their Board of Directors. Accordingly, the Bank has utilised an amount of Rs. 364 lakhs for making specific provisions for non-performing assets.

8. a) In terms of RBI guidelines contained in Circular DBR No.BP.BC.83/21.01.048/2014-15 dated 01-04-2015, banks are required to provide, in case of fraud, the entire amount due to the Bank over a period not exceeding four quarters commencing from the quarter in which the fraud has been detected. As a prudent measure, the Bank has provided the entire amount during the year, thereby; the loss reported by the Bank is overstated by Rs. 4944 Lakhs.

b) Though a special dispensation is given by RBI vide its Letter No. DBR No. BP 17661/21.04.048/ 2014-15 dated 20-05-2015 for providing the amount due to the Bank over a period of three quarters commencing from March, 2015 in respect of a borrowal account, the Bank, as a prudent measure, has provided for the entire amount during the year, thereby the loss reported by the Bank is overstated by Rs. 4524 Lakhs.

9. In respect of 259 employees who had opted for VRS in 2000 & 2004 and 424 retired employees, the Bank has not provided to the Pension Trust, funds required amounting to around Rs. 7938 lakhs for purchase of annuities for payment of pension/ increase in Dearness Allowance respectively. However, pension/ increase in dearness allowance is paid by the Bank by debiting Profit and Loss account.

10. Effective April 1, 2014 the Bank has changed the estimated useful life of certain fixed assets in line with the recommended useful life as per Part C of Schedule II to the Companies Act, 2013. On account of this change, the bank has reversed an amount of Rs. 901 lakhs during the year ended March 31, 2015, representing the excess depreciation charge and disclosed the same as an exceptional item. Except for this, there has been no change in the accounting policies followed during the quarter/ period ended 31st March, 2015 as compared to those followed in the preceding financial year ended 31st March, 2014. As a result of this change, the loss for the current financial year is decreased by Rs. 901 lakhs.

11. Disclosures on Remuneration

a. Information relating to the composition and mandate of the remuneration committee.

Composition

The remuneration committee of the Board consists of four members of which one member from the Risk Management Committee of the Board facilitates effective governance of compensation.

The rules and responsibilities of the remuneration committee are as follows;

- To oversee the framing, review and implementation of Bank's overall compensation and related policies on remunera- tion packages payable to all employees and the Whole Time Directors (WTDs)/ MD&CEO including perquisites, stock option scheme etc. with a view to attract, motivate and retain employees and review compensation level vis-à-vis other banks and the industry in general.

- The remuneration committee works in close coordination with the Risk Management Committee of the Bank in order to achieve effective alignment between remuneration and risks. The Committee also ensures that the cost income ratio of the Bank supports the remuneration package consistent with the maintenance of sound capital adequacy ratio.

- The committee also functions as the compensation committee as prescribed under the SEBI (Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines,1999 and is empowered to formulate detailed terms and conditions of the scheme, administer, supervise the same and to allot shares in compliance with the guidelines and other applicable laws.

- To conduct the annual review of the compensation policy.

- To fulfill such other powers and duties as may be delegated to it by the Board.

b. Information relating to the design and structure of remuneration processes and the key features and objectives of remuneration policy.

The Bank has formed the compensation policy based on the Reserve Bank of India guidelines vide its Circular No. DBOD No.BC.72/29.67.001/2011-12 dated 13-01-2012.

The fixed remuneration and other allowances including retirement benefits of all subordinates, clerical and officers up to the rank of General Manager (Scale- VII) is governed by the industry level wage settlement under Indian Banks Association pattern. In respect of officers above the cadre of General Manager, the fixed remuneration is fixed by Board/Committee.

Further, the compensation structure for the Whole-Time Directors/Managing Director and Chief Executive Officer of the Bank is subject to approval of Reserve Bank of India in terms of Section 35B of the Banking Regulation Act, 1949.

c. Human Resource Management department under the guidance of MD & CEO shall administer the compensation and the benefit structure in line with the best suited practices and statutory requirements as applicable.

d. The Bank has not identified any employee as risk taker for the purpose of variable pay under the compensation policy.

e. Employee Stock Option Scheme as may be framed by the Board from time to time in conformity with relevant statutory provisions and SEBI guidelines as applicable will be excluded from the components of variable pay.

f. Variable pay means the compensation as fixed by the Board on the recommendation of the committee which is base on the performance appraisal of the employee in that role, i.e. how well they accomplish their goals.

12. Credit Default Swaps

The Bank has not taken any Credit Default Swaps during the year and the balance outstanding as on 31.03.2015 is "NIL"

13. Intra-Group Exposures

Bank does not have any group entities.

14. Unhedged Foreign Currency Exposures

Based on the available data, available financial statements and declarations from the borrowers wherever received, the Bank has estimated the liability of Rs. 108 lakhs as at 31.03.2015 (Previous Year – Nil) on Unhedged Foreign Currency Exposure to their constituents in terms of RBI circular DBOD.No.DP.BC.85/21.06.200/2013-14 dated 15.01.2014. The entire estimated amount is fully provided for.

Qualitative Disclosure

The LCR standard aims to ensure that a bank maintains an adequate level of unencumbered HQLAs that can be converted into cash to meet its liquidity needs for a 30 calendar day time horizon under a significantly severe liquidity stress scenario specified by supervi- sors. At a minimum, the stock of liquid assets should enable the bank to survive until day 30 of the stress scenario, by which time it is assumed that appropriate corrective actions can be taken.

Stock of high quality liquid assets (HQLAs) LCR =

Total net cash outflows over the next 30 calendar days

The LCR requirement of banks would be minimum 60% for the calendar year 2015 i.e. with effect from January 1, 2015, and rise in equal steps to reach the minimum required level of 100% on January 1, 2019.

High Quality Liquid Assets (HQLAs)

Assets are considered to be high quality liquid assets if they can be easily and immediately converted into cash at little or no loss of value. There are two categories of assets which can be included in the stock of HQLAs, viz. Level 1 and Level 2 assets.

Level 1 assets of banks would comprise of the following and these assets can be included in the stock of liquid assets without any limit as also without applying any haircut:

i. Cash including cash reserves in excess of required CRR.

ii. Government securities in excess of the minimum SLR requirement.

iii. Within the mandatory SLR requirement, Government securities to the extent allowed by RBI, under Marginal Standing Facility (MSF).

iv. Marketable securities issued or guaranteed by foreign sovereigns satisfying all the following conditions:

(a) assigned a 0% risk weight under the Basel II standardized approach for credit risk;

(b) Traded in large, deep and active repo or cash markets characterised by a low level of concentration; and proven record as a reliable source of liquidity in the markets (repo or sale) even during stressed market conditions.

(c) not issued by a bank/financial institution/NBFC or any of its affiliated entities.

Level 2 assets are sub-divided into Level 2A and Level 2B assets on the basis of their price-volatility. Assets to be included in each cat- egory are those that the bank is holding on the first day of the stress period. Level 2 assets (comprising Level 2A assets and Level 2B assets) can be included in the stock of liquid assets, subject to the requirement that they comprise not more than 40% of the overall stock of HQLAs after haircuts (minimum 15% for Level 2A & minimum 50% for Level 2B) have been applied. Further, Level 2B assets should comprise not more than 15% of the total stock of HQLA. They must also be included within the overall Level 2 assets.

Total net cash outflows

The total net cash outflows is defined as the total expected cash outflows minus total expected cash inflows for the subsequent 30 calendar days. Total expected cash outflows are calculated by multiplying the outstanding balances of various categories or types of liabilities and off-balance sheet commitments by the rates at which they are expected to run off or be drawn down. Total expected cash inflows are calculated by multiplying the outstanding balances of various categories of contractual receivables by the rates at which they are expected to flow in up to an aggregate cap of 75% of total expected cash outflows.

15. Previous year figures have been re-grouped/ re-classified wherever considered necessary to conform to current year's classifica- tion.


Mar 31, 2014

1. OTHER ASSETS (SCHEDULE NO: 11) & OTHER LIABILITIES (SCHEDULE NO :5)

Reconciliation of rent advance /security deposit for premises occupied by branches/ offices, etc (as per Schedule No 11), exchange fuctuations (as per Schedule No.5) and physical verifcation of fixed assets (Schedule No 10) is in progress. In the opinion of the management no material impact of reconciliation of accounts is anticipated.

2. The Bank had entered into an agreement with M/S Bajaj Allianz Life insurance Company Ltd.(BALIC) for sale of products of BALIC on specified terms and conditions. BALIC issued a demand notice to the Bank claiming a penalty amount of 1511 lakhs (for 2011-12) and Rs. 2123 lakhs (for 2012-13) totaling Rs. 3634 lakhs for non-achievement of targets along with interest at 12% per annum for delay in paying the amount beyond ffteen days. Considering the initiatives taken by both the parties to renegotiate the terms and conditions of the agreement and as legally advised, the demand of penalty of Rs. 3634 lakhs is shown as contingent liability (Schedule No. 12)

3. The Bank had entered into a deal with M/s Shriram City Union Finance Ltd. (SCUF) for the buyout of retail loans portfolio including SME Advances for a purchase consideration of Rs. 35071 lakhs and SCUF was appointed as the collection and service agent for the Bank. SCUF prepaid the outstanding amount of certain loans in violation of the agreement and when the matter was taken up with SCUF, they defaulted subsequent monthly pay outs. The Bank approached the security trustee for appropriating the fixed deposits with Canara Bank. Aggrieved by this, SCUF obtained an injunction order from the Hon. High Court of Madras. The matter was reported to the Reserve Bank of India. The account has been classified by the Bank as a non-performing asset.

4. Pending settlement of wage revision w.e.f. 1st November 2012, an adhoc provision of Rs. 1202 lakhs is made during the current year.

5. In terms of RBI circular DBOD No. B P. 95/ 21.04.048/ 2013-14 dated February 7, 2014 Banks were permitted to utilise up to 33% countercyclical provision buffer/ foating provision held by them as on 31.03.2013 for making Specific provisions for non-performing assets, as per the policy approved by their Board of Directors. Accordingly, the Bank has utlised an amount of Rs. 875 lakhs for making Specific provisions for non-performing assets.

6. In terms of RBI circular DBOD.BP.BC.No.41/21.04.141/2013-14 dated August 23, 2013 on "Investment portfolio of banks - Classifcation, Valuation and Provisioning", the Bank has opted to amortise the depreciation on the Available for Sale (AFS) and Held for Trading (HFT) portfolios on each of the valuation dates in the current financial year ie 2013-14 in equal installments. The Bank had amortised such depreciation during the quarters ended September and December 2013. During the quarter and year ended 31st March 2014, depreciation in respect of AFS and HFT portfolio has been recognised in full.


Mar 31, 2013

BACKGROUND

Dhanlaxmi Bank Limited was incorporated in November 1927 at Thrissur, in Kerala by a group of ambitious entrepreneurs. Dhanlaxmi Bank is a publicly held banking company engaged in providing a wide range of banking and financial services including commercial banking and treasury operations. Dhanlaxmi Bank is a banking company governed by The Banking Regulation Act, 1949. It became a scheduled commercial bank since 1977.

BASIS OF PREPARATION OF FINANCIAL STATEMENTS

The financial statements have been prepared and presented under the historical cost convention and accrual basis of accounting, unless otherwise stated and in compliance with generally accepted accounting principles, statutory requirements prescribed under the Banking Regulation Act, 1949, circulars and guidelines issued by the Reserve Bank of India (''RBI'') from time to time, Accounting Standards (''AS'') issued by the Institute of Chartered Accountants of India (''ICAI'') and notified by the Companies Accounting Standard Rules, 2006 to the extent applicable and incompliance of the current practices prevailing within the banking industry in India.

The preparation of financial statements requires the management to make estimates and assumptions considered in the reported amounts of assets and liabilities (including contingent liabilities) as of the date of the financial statements and the reported income and expense for the reporting period. Management believes that the estimates used in the preparation of the financial statements are prudent and reasonable. Future results may differ from these estimates. Any revision in the accounting estimates is recognized prospectively in the current and future period.

1. No penalty has been imposed during the year 2012-13 by RBI.

2. DISCLOSURE OF LETTER OF COMFORTS (LOCs) ISSUED BY THE BANK

The Bank has not issued any Letter of Comfort during the year 2012-13.

3. ESOP SCHEME

On May 11, 2010, 20,000 options were issued at an exercise price of Rs. 144.70 to new joinees in addition to 3,979,225 options granted on 6 August 2009 to employees under two different plans at a uniform option price of Rs. 118.35. Out of the above, 20,149 shares were exercised during 2010-11 and 570 shares are exercised in 2011-12 year and none of the employees were exercised the options during the current year (2012-13). All the options granted to the employees under the first plan (''Existing Employees'') and second plan (Joining employees) were fully vested as on 31-03-2013.

4. SEGMENT REPORTING (AS 17)

The Bank has recognized Business segments as primary reporting segment and Geographical segments as secondary segment in line with RBI guidelines on compliance with Accounting Standard 17.

I. Primary Segments: Business segments.

a) Treasury Operations

b) Corporate / Wholesale Banking

c) Retail banking

d) Other banking business operations

II. Secondary Segments: Geographical segments.

Since the Bank is having domestic operations only, no reporting does arise under this segment.

5. DRAW DOWN OF RESERVES

The bank has not undertaken any draw down of reserves during the year.

6. OTHER ASSETS (SCHEDULE NO. 11) AND OTHER LIABILITIES (SCHEDULE NO. 5)

The reconciliation of entries in other assets and liabilities are in progress. The impact if any on the accounts are not ascertainable now, as the work is in progress. The management is of the opinion that the overall impact, if any, on the accounts may not be significant and is not ascertainable at this stage.

7. Previous year figures have been re-grouped/ re-classified wherever considered necessary to conform to current year''s classification.


Mar 31, 2012

Background

Dhanlaxmi Bank Limited was incorporated in November 1927 at Thrissur, in Kerala by a group of ambitious entrepreneurs. Dhanlaxmi Bank is a publicly held banking company engaged in providing a wide range of banking and financial services including commercial banking and treasury operations. Dhanlaxmi bank is a banking company governed by The Banking Regulation Act, 1949. It became a scheduled commercial bank since 1977.

Basis of preparation of financial statements

The financial statements have been prepared and presented under the historical cost convention and accrual basis of accounting, unless otherwise stated and in compliance with generally accepted accounting principles, statutory requirements prescribed under the Banking Regulation Act, 1949, circulars and guidelines issued by the Reserve Bank of India ('RBI') from time to time, Accounting Standards ('AS') issued by the Institute of Chartered Accountants of India ('ICAI') and notified by the Companies Accounting Standard Rules, 2006 to the extent applicable and in compliance of the current practices prevailing within the banking industry in India.

The preparation of financial statements requires the management to make estimates and assumptions considered in the reported amounts of assets and liabilities (including contingent liabilities) as of the date of the financial statements and the reported income and expense for the reporting period. Management believes that the estimates used in the preparation of the financial statements are prudent and reasonable. Future results may differ from these estimates. Any revision in the accounting estimates is recognized prospectively in the current and future period.

Disclosures on risk exposure in derivatives Qualitative Disclosure

Bank discusses its risk management policies pertaining to derivatives with particular reference to the extent to which derivatives are used, the associated risks and business purposes served. The discussion includes:

a) the structure and organization for management of risk in derivatives trading;

b) the scope and nature of risk measurement, risk reporting and risk monitoring systems;

c) policies for hedging and/or mitigating risk and strategies and processes for monitoring the continuing effectiveness of hedges / mitigants; and

d) accounting policy for recording hedge and non-hedge transactions; recognition of income, premiums and discounts; valuation of outstanding contracts; provisioning, collateral and credit risk mitigation.

1. Asset Quality

i. Claim pertaining to debt relief arising till December 31, 2009 was Rs.15.16 Lakhs which was shown as receivable from Government of India under Agricultural Debt Relief Scheme 2008, which was received from RBI during 2010-11. Additional claim amount of Rs.2.20 Lakhs pertaining to the extended period of Debt Relief Scheme from January 1, 2010 to June 30, 2010 (which was clubbed under head advances) was also received from RBI during 2011-12 and receivable from RBI in this regard is Rs. Nil.

2. ESOP Scheme

On May 11, 2010, 20,000 options were issued at an exercise price of Rs.144.70 to new joinees in addition to 3,979,225 options granted on 6 August, 2009 to employees under two different plans at a uniform option price of Rs.118.35. Out of the above, 20,149 shares were exercised during the previous year and 570 shares were exercised during the current year. Options granted to the employees under the first plan ('Existing Employees') shall vest at the rate of 30%, 30% and 40% on each successive anniversary of the grant date. Options granted to the employees under the second plan ('Joining Employees') shall vest after completion of 12 months from the date of grant. Further, all the option granted to Joining Employees' under the scheme shall be subject to a lock in period of twenty four months from date of vesting of options under this scheme.

3. Exercise period will commence from the date of vesting of option and will end on 10 years from the date of grant of options or 10 years from the date of vesting of Option, whichever is later.

Note:

a) The compensation Committee has granted a total of 3,999,225 options convertible into 3,999,225 Equity shares which represent 6.24% of the paid up share capital of the Bank. The fair market value one day before the date of grant is Rs.118.35 which is also the exercise price of the option.

b) The Bank accounts for 'Employee Share Based Payments' using the fair value method.

Note:

Consequent on the reopening of the pension option and enhancement of the gratuity limit following the amendments to Payment of Gratuity Act 1972, RBI has allowed amortisation of the additional expenses over a period of five years beginning with the financial year ending March 31, 2011 subject to a minimum of 1/5th of the total amount involved every year. Out of the total liability of Rs.2,554 lakhs arising on account of above mentioned amendments, Rs.511 lakhs has been charged to the Profit and Loss Account in the current year and the balance unrecognised portion shall be amortised with in next three years.

4. Segment Reporting (AS 17)

The Bank has recognized Business segments as primary reporting segment and Geographical segments as secondary segment in line with RBI guidelines on compliance with Accounting Standard 17.

I. Primary Segments: Business segments.

a) Treasury Operations

b) Corporate / Wholesale Banking

c) Retail banking

d) Other banking business operations

II. Secondary Segments: Geographical segments.

Since the Bank is having domestic operations only, no reporting does arise under this segment.

5. Draw Down of Reserves

The bank has not undertaken any draw down of reserves during the year except expenses incurred towards increasing of Authorised share capital, which have been adjusted against the Share Premium Account.

6. Impact of Change in Accounting Policy

Till the previous year, income from bills discounting was recognized upfront except where the tenure exceeds one year. However, during the year, the Bank has changed its method of recognizing income, wherein the income is apportioned to the profit and loss account on a daily basis to the extent it relates to the year and the balance amount in subsequent periods. Had the Bank had followed the earlier accounting policy, income for the year would have been higher by Rs.205 Lakhs and the Loss for the Year would have been lower by the like amount.

7. Previous year figures are regrouped wherever necessary.


Mar 31, 2011

1. Capital commitments Rs. 249 Lakhs (Previous Year - Rs. 774 Lakhs).

2. Derivatives

The bank uses forward exchange contract to hedge against its foreign currency exposures relating to the underlying transaction and firm commitments. The bank has not entered into any derivative instruments for trading/speculative purposes either in foreign exchange or domestic treasury operations.

3. Asset quality

i) In terms of Agricultural Debt Waiver and Debt Relief Scheme 2008, framed by the Government of India, the bank had received Rs. 313 Lakhs from RBI on account of loans to small and marginal farmers out of the amount eligible for debt waiver of Rs. 435 Lakhs during FY 2010. The balance amount of Rs. 122 Lakhs had been shown as receivables and clubbed under the head "Advances" as on March 31, 2010. The amount of Rs. 122 Lakhs was also received from RBI during 2010-11 and hence receivable from RBI in this regard as at March 31, 2011 is Rs. Nil.

The position with reference to Agricultural Debt Relief Scheme is as under:

Claim pertaining, to Debt Relief Scheme arising till December 31, 2009 of Rs. 16 Lakhs, which was pending receipt" from Government of India, was subsequently received from Reserve Bank of India during 2010-11.

Additional claim amount of Rs. 2.20 Lakhs pertaining to the extended period of the Debt Relief Scheme from January 1,2010 to June 30, 2010 is due from Government of India under Agricultural Debt Relief Scheme 2008 (clubbed under head advances)

4. Details of single borrower limit, group borrower limit exceeded by the bank

The bank has not exceeded single borrower limit or group borrower limit during the year.

5. No penalty has been imposed during the year 2010-11 by RBI.

6. Disclosure of letter of comforts (Iocs) issued by the bank

The Bank has not issued any Letter of Comfort during the year ended March 31, 2011.

7. Employee stock option plan

On May 11, 2010, 20,000 options were issued at an exercise price of Rs. 144.70 to new joiners in addition to 3,979,225 options granted on August 6, 2009 to employees under two different plans at a uniform option price of Rs. 118.35. Out of the above, 20,149 shares were exercised during the current year. Options granted to the employees under the first plan (Existing Employees - "ESOP") shall vest at the rate of 30%, 30% and 40% on each successive anniversary of the grant date. Options granted to the employees under the second plan (Joining Employees - "JESOP") shall vest after completion of 12 month Rs. from the date of grant. Further, all the option granted to Joining Employees under the scheme shall be subject to a lock in period of twenty four months from date of vesting of options under this scheme.

Notes:

a) The Compensation Committee has granted a total of 3,999,225 options convertible into 3,999,225 Equity Shares which represents 6.24% of the paid up share capital of the Bank. The fair market value one day before the date of grant is Rs. 118.35 which is also the exercise price of the Option.

b) The Bank accounts for Employee Share Based Payments using the fair value method.

8. Employee benefits (Accounting Standard -15)

The summarized position of various defined benefits recognized in the profit and loss account and balance sheet along with the funded status are as under:

F. Actuarial assumptions

Note :-

Consequent on the reopening of the pension option and enhancement of the gratuity limit following the amendments to payment of gratuity act 1972, RBI has allowed amortization of the additional expenses over a period of five years beginning with the financial year ending March 31, 2011 subject to a minimum of 1/5th of the total amount involved every year. Out of the total liability of 25.54 crores arising on account of above mentioned amendments, Rs. 5.11 crores has been charged to the Profit and Loss account in the current year and the balance unrecognized portion shall be amortized with in next four years

9. Segment reporting (AS-17)

The Bank has recognized Business segments as primary reporting segment and Geographical segments as secondary segment in line with RBI guidelines on compliance with Accounting Standard 17.

I. Primary Segments: Business segments.

a) Treasury Operations

b) Corporate/Wholesale Banking

c) Retail banking

d) Other banking business operations

II. Secondary Segments: Geographical segments.

Since the Bank is having domestic operations only, no reporting does arise under this segment.

10. Particulars of related party transactions (AS-18)

Particulars March 31,2011 March 31, 2010

a) Key Management personnel Mr. Amitabh Chaturvedi, Mr. Amitabh Chaturvedi,

b) Nature of transaction: Managing Director and Chief Managing Director and Chief Remuneration (including Executive Officer Executive Officer perquisites) Rs. 5,371,000 Rs. 3,600,000

11. Miscellaneous income under schedule 14 includes Rs. 3,000 Lakhs being Commitment Fee received from M/s. Bajaj Allianz Life Insurance Company with whom the Bank has entered into agency agreement for life and general insurance. (Previous Year Rs. 2,700 Lakhs)

12. The declaration of dividend is subject to RBI approval.

13. Previous Years figures are regrouped/rearranged wherever necessary to conform to current years classification.


Mar 31, 2010

1. Capital commitments Rs. 7, 74 Lakhs.

2. Commission from insurance business is accounted on accrual basis which hitherto was accounted on cash basis. Had the Bank accounted commission on cash basis, profit (net of tax) for the year would have been lower by Rs. 84 Lakhs.

3. (a) Provisions and Contingencies

in Lakhs

Particulars 31.03.2010 31.03.2009

Provision for depreciation on Investments 67 (94)

Provision towards Standard Assets 7,42 52

Provision towards NPA (including write off) 3,01 2,19

Provision towards Non Performing Investments (58) (1,13)

Provision towards Security Receipts - 4,95

Provision towards Income Tax, Wealth Tax, FBT etc. 5,12 22,62

Deferred Tax Asset/Liability (68) (41)

Provision for diminution in value of Restructured Accounts 42 65

Floating Provision for NPA (Advances) - 2,00

Total 15,38 30,45

1Mb DHANALAKSHMI BANK LIMMbU

4. Derivatives

The bank uses forward exchange contract to hedge against its foreign currency exposures relating to the underlying transaction and firm commitments. The bank has not entered into any derivative instruments for trading /speculative purposes either in Foreign Exchange or domestic treasury operations.

5. Asset quality

i) In terms of Agricultural Debt Waiver and Debt Relief Scheme 2008, framed by the Government of India, the bank has received Rs.313 lakhs from RBI on account of loans to small and marginal farmers out of the amount eligible for debt waiver of Rs.435 lakhs. The balance amount of Rs.122 lakhs has been shown as receivables and clubbed under the head "Advances".

The position with reference to Agricultural Debt Relief Scheme is as under:

Claim pertaining to Debt Relief arising till December 31,2009 is Rs.16 lakhs which is shown as Receivable from Government of India under Agricultural Debt Relief Scheme 2008(which can be clubbed under the head "advances"). Government of India has subsequently extended the scheme upto June 30, 2010.

6. Details of single borrower limit, group borrower limit exceeded by the bank

The bank has not exceeded single borrower limit or group borrower limit during the year

7. No penalty has been imposed during the year 2009-10 by RBI.

8. Disclosure of letter of comforts (locs) issued by the bank

The Bank has not issued any Letter of Comfort during the year ended 31 March, 2010.

9. ESOP Scheme

On August 6, 2009, the Bank granted 3,979,225 options to employees under two different plans at a uniform option price of Rs. 118.35. Options granted to the employees under the first plan (‘Existing Employees’) shall vest at the rate of 30%, 30% and 40% on each suc- cessive anniversary of the grant date. Options granted to the employees under the second plan (‘Joining Employees’) shall vest after completion of 12 months from the date of grant. Further, all the option granted to ‘Joining Employees’ under the scheme shall be subject to a lock in period of twenty four months from date of vesting of options under this scheme.

As the closing quoted market price of share one day prior to the date of grant is sone as the exercse tions is NIL; accordingly no stock based compensation arose on thesegrant is

10. Segment reporting (AS-17)

The Bank has recognized Business segments as primary reporting segment and Geographical segments as secondary segment in line with RBI guidelines on compliance with Accounting Standard 17.

I. Primary Segments: Business segments.

a) Treasury Operations

b) Corporate / Wholesale Banking

c) Retail banking

d) Other banking business operations

II. Secondary Segments: Geographical segments.

Since the Bank is having domestic operations only no reporting does arise under this segment.

11. Miscellaneous income in schedule 14 includes Rs. 2700 lakhs being Commitment Fee received from M/s. Bajaj Allianz towards Life and General Insurance with whom the Bank has entered into agency agreement for life and general insurance. (Previous Year 2300 Lakhs)

12The declaration of divid d is subject to RBI approval.

13. Previous Years figures are regrouped/rearranged wherever necessary to conform to current years classification.j

c) & d) Since the Bank does not have any subsidiaries there are no quantitative disclosures.

Qualitative disclosures:

a) Summary

Tier I capital of the Bank includes Equity Share Capital (64115600 equity shares of Rs.10 each fully paid up), Reserves& Surpluses comprising of Statutory Reserves, Capital Reserves, Share Premium and balance in Profit and Loss account.

Tier II Capital includes Revaluation Reserve, Special Reserves, Standard Asset Provisions and Tier II Bonds. During the year, the Bank has is- sued Unsecured Redeemable Subordinated Non-Convertible Lower Tier - II Bonds in the nature of Promissory Notes ("Bonds”) amounting to Rs. 150 crores with a tenor of 5 years 9 months.

Qualitative disclosures:

(a) General : -

Definitions of past due and impaired (for accounting purposes)

The Bank has adopted the definition of the past due and impaired (for accounting purposes) as defined by the Regulator for income recognition and asset classification norms. As per the prudential norms applied for income recognition, asset classification and pro- visioning, the bank considers following categories of loans and advances as non-performing assets, wherein:

- Interests and/or instalment of principal remain overdue for a period of more than 90 days in respect of a Term loan.

- The account remains out of order in respect of an overdraft/cash credit (OD/CC)

- The bill remains overdue for a period of more than 90 days in the case of bills purchased and discounted.

- In case of agricultural advances, interest and/or instalment of principal remains overdue for 2 crop seasons (in respect of short duration crops) & 1 crop season (in respect of long duration crops)

- Any amount receivable that remains overdue for a period of more than 90 days in respect of other accounts.

- Interest charged during any quarter is not serviced fully within 90 days from the end of the quarter

Strategies and Processes for Credit Risk Management

The Bank has put in place a comprehensive Credit Policy which is reviewed and revised periodically. The Credit Risk Management Policy forms part of the Credit Policy. The main objectives of the Credit Policy are: -

- Maintain quality of loan assets.

- Ensure reasonable return on the assets.

- Ensure an acceptable risk profile.

- Achieve proper sectoral/geographical distribution of assets

- Compliance with regulatory norms in respect of exposure caps pricing, IRAC guidelines targeted credit etc.

The Bank has defined segment wise exposure limits industry wise exposure caps individual and group borrower wise exposure caps. The operational processes and systems of the Bank relating to credit are built on sound credit risk management principles and are subjected to periodical review In order to improve the quality of appraisals and to ensure accelerated response to customers, particularly in respect of high value credits relationships and appraisal functions are segregated between the concerned branch and the core credit groups at zonal / central offices. Bank has revised many of its existing systems, procedures and structures with respect to Credit Approval Process, Credit Rating, Prudential Limits, Documentation, Credit Monitoring and Review Mechanism.

Bank has a Credit Monitoring Policy and a Recovery Policy, which are reviewed from time to time. Bank has system in place for identification of credit weaknesses well in advance. A Loan Review Mechanism for constantly evaluating the quality of loan book, by way of review of sanctions made, renewal process submission of monitoring reports, credit related MIS, is in place. The Bank has a Credit Mid Office Group which would take care of the security creation and account management and a Credit Monitoring & Review Department which would

Structure and Organization of the Risk Management function in the Bank

The Bank has a Credit Risk Management Committee in place with representation from Risk, Credit Sanction & Monitoring, Business Heads, Policy & Research and the Committee is headed by the Managing Director & CEO of the Bank. CRMC discusses on adherence to pruden- tial limits set, recommends to Board, policies on rating standards and benchmarks and monitors credit risk on a bank wide basis

Scope and Nature of Risk Reporting and/or Measurement Systems

The Bank has developed a comprehensive risk rating system that serves as a single point indicator of diverse risk factors of counterparty and for taking credit decisions in a consistent manner. Risk Rating system is made applicable for loan accounts with total limits of Rs.2 lakhs and above. Bank uses different rating models for different types of exposures. The Integrated Risk Management Group of the Bank validates the ratings of all exposures of Rs. 25 lakhs and above. The Group carries out an independent analysis of the various risks attached to the credit proposals including industry analysis. Bank also conducts migration analysis of the credit portfolio. Bank evaluates the asset quality by tracking the delinquencies and migration of borrower from one rating scale to another in various industry, business segment etc. Credit facilities are sanctioned at various levels in accordance with the delegation approved by the Board. The Bank has in place the following hierarchical sanctioning powers delegated for credit sanction and administration:

- Branch Heads

- Zonal Credit Head

- Zonal Office Credit Committee (ZCC)

- Central Office Credit Committee (CCC)

- Management Committee of Directors (MC/ Board)

Representatives from Integrated Risk Management Group forms part of the core team of various ZCCs and the CCC. The bank has imple- mented a fully automated software solution to get system support for calculation of Risk Weighted Assets for CRAR computation and gen- erate various credit related reports for review of exposure and monitoring, and conducting analysis of credit portfolio from various angles

Policies for hedging and/or mitigating risk and strategies and processes for monitoring the continuing effectiveness of hedges/miti- gants

The Bank has put in place a Board approved policy on Credit Risk Mitigation techniques and collateral management, covering the credit risk mitigation techniques used by the Bank for both risk management and capital computation purposes. Apart from the Basel defined collateral, the Bank ensures securities by way of inventories, Book Debts, plant & machineries, Land& Buildings and other moveable/im- movable assets/properties. The Bank also accepts personal/corporate guarantee as an additional comfort for credit risk mitigation. The securities are subjected to proper valuation as prescribed in the Credit Policy of the Bank.

Bank has laid down detailed guidelines on documentation to ensure legal certainty of Banks charge on collateral

The Bank has an exclusive set up for Credit monitoring functions in order to have greater thrust on post sanction monitoring of loans and strengthen administering the various tools available under the Banks policies on loan review mechanism. For effective loan review, the Bank has the following in place: -

- On site monitoring tools like Inspection of assets/ books/ stock of the borrower, stock audit, operations in the account, payment of

Credit Audit system to identify analyse instances of non-compliance and rectifieation

- Recording of loan sanctioned by each sanctioning authority by the next higher authority

(a) For Portfolios under the standardized approach

1 Names of credit rating agencies used

Domestic Rating Agencies: CRISIL, CARE, FITCH, ICRA. International Credit rating agencies: Standard and poor, Moody’s , FITCH

2 Changes if any, since prior period disclosure in the identified rating agencies and reasons for the same.

No change

3 Types of exposure for which each agency is used

All the above identified Rating Agency rating are used for various types of exposures as follows

:

(i) For Exposure with a contractual maturity of less than or equal to one year (except Cash Credit, Overdraft and other Revolving Credits), Short-Term Rating given by ECAIs will be applicable

(ii) For Domestic Cash Credit, Overdrafts and other Revolving Credits (irrespective of the pe- riod ) and/or Term Loan exposures of over one year, Long-Term Rating will be applicable.

(iii) For Overseas exposures, irrespective of the contractual maturity, Long-Term Rating given by IRAs will be applicable.

(iv) Rating assigned to one particular entity within a corporate group cannot be used to risk weight other entities within the same group.

4 Description of the process used to transfer public issue rating on to comparable assets in the banking book.

Long-term Issue Specific (our own exposures or other issuance of debt by the same bor- rower-constituent/counter-party) Ratings or Issuer (borrower-constituent/counter-party) Ratings can be applied to other unrated exposures of the same borrower-constituent/ counterparty in the following cases:

(i) If the Issue Specific Rating or Issuer Rating maps to Risk Weight equal to or higher than the unrated exposures, any other unrated exposure on the same counter-party will be as- signed the same Risk Weight, if the exposure ranks paripassu or junior to the rated exposure in all aspects

(ii) In cases where the borrower-constituent/counter-party has issued a debt (which is not a borrowing from our Bank), the rating given to that debt may be applied to Banks unrated exposures if the Banks exposure ranks pari-passu or senior to the specific rated debt in all respects and the maturity of unrated Banks exposure is not later than Maturity of rated debt.

A description of the main types of collateral taken by the Bank.

Collateral used by the Bank as risk mitigants for capital computation under Standardized Approach comprise eligible financial collaterals namely: -

- Cash and fixed deposits of the counterparty with the Bank.

- Gold: value arrived at after notionally converting these to 99.99% purity.

- Securities issued by Central and State Governments.

- Kisan Vikas Patra and National Savings Certificates.

- Life Insurance Policies restricted to their surrender value.

- Debt securities rated by an approved Rating Agency.

- Unrated debt securities issued by banks, listed in Stock Exchange.

- Units of Mutual Funds.

Bank has no practice of on balance sheet netting for credit risk mitigation.

The main types of guarantor counterparty and their creditworthiness

Bank accepts guarantees of individuals or corporates of adequate networth, as an additional comfort for mitigation of credit risk which can be translated into a direct claim on the guarantor and are unconditional and irrevocable.

Main types of guarantor counterparty as per RBI guidelines are: -

- Sovereigns (Central/ State Governments)

- Sovereign entities like ECGC, CGTSI

- Other entities rated AA (-) and above. The Guarantees has to be issued by entities with a lower risk weight than the counterparty.

Concentration on account of collateral is also relevant in the case of land & building. However as land and building is not recognized as eligible collateral under Basel II, its value is not reduced from the amount of exposure in the process of computation of capital charge. It is used only in the case of housing loan to individuals and non-performing assets to determine the appropriate risk weight. As such, there is no concentration risk on account of nature of collaterals.

Quantitative Disclosures:

For the disclosed Credit Risk portfolio under the Standardised Approach, the total

Exposure that is covered by:

(i) Eligible Financial Collateral : Rs. 968.25 crores

(ii) Other eligible Collateral (after Hair Cuts) : Rs. Nil

DF Table 7- Securitisation - standardized approach:

Qualitative Disclosures:

- Bank has not securitized any of its standard assets till date. However the Bank has sold Non-performing assets, either written off or otherwise. The Bank has outstanding investment of Rs.8.18 crores in 10 % IFMR Trust A2 series Pass Through Certificates of M/s. Equita Micro Finance India Pvt. Ltd. The same is rated by CRISIL. The PTCs is subjected to market risk capital charge and is primarily made

- Bank will not assume any credit, operational or legal risk post sale of NP As the effect of sale of the figarfact asset well be that the asset . is taken off from the books of the Bank and after the sale there is no known liability devolving on the bank.

- Sale will not be backed by any commitment or credit support in the nature of credit enhancement or liquidity support.

Qualitative Disclosures:

(a) General : -

Strategies and processes

Market Risk management functions of the Bank are guided by various policies like Integrated Treasury Policy and Asset Liability Manage- ment Policy. Bank has an independent Mid-Office for market risk management functions like monitoring of adherence to set limits, inde- pendent valuation and reporting of activities. Mid-Office reports to Head of Integrated Risk Management Group. The Asset Liability Com- mittee is responsible for establishing market risk management and asset liability management in the Bank, procedures thereof, monitoring adherence to prudential limits, interest rate risk management etc. The overall objective of market risk management is to create shareholder value by improving the bank’s competitive advantage and reducing loss from all types of market risk loss events.

Scope and nature of risk reporting/ measurement systems

The Bank has put in place regulatory/ internal limits for various products and business activities relating to trading book. Various exposure limits for market risk management such as overnight limit, Va R limit, Daylight limit, Aggregate Gap limit, Investment limits etc. are in place. The reporting system ensures timelines, reasonable accuracy with automation, highlight portfolio risk concentrations and include written analysis. The reporting formats and frequency are periodically reviewed to ensure that they suffice for risk monitoring, measuring and miti- gation requirements of the Bank. Bank also subjects non-slr investments to credit rating.

Policies for hedging/ mitigating risk and strategies and processes for monitoring the continuing effectiveness of hedges/ mitigants:

Board approved policies viz. Integrated Treasury Policy and Asset Liability Management Policy provides the framework for risk assessment, identification, measurement and mitigation, risk limits and triggers, risk monitoring and reporting.

Liquidity risk of the Bank is assessed through Statement of Structural Liquidity on static basis and statement of Short-term Dynamic Liquidity on dynamic basis. Structural Liquidity position is assessed on daily basis and dynamic liquidity position is assessed on a fortnightly basis. Interest Rate risk is analysed from earning perspective using Traditional Gap Analysis on a fortnightly basis and economic value perspective using Duration Gap Analysis on a quarterly basis. Stress tests are conducted at quarterly intervals to assess the impact of various contingen- cies on the capital of the Bank.

The portfolio covered by Standardized Duration approach for computation of market risk capital charge are investment portfolio held under HFT and AFS, Gold and Forex Open positions.

Strategies and processes: - Bank has put in place a framework for Operational Risk Management with a well-defined Operational Risk Management (ORM) Policy The ORM Committee at the executive level oversees bank-wide implementation of Board approved policies and process in this regard. The Committee meets at least once in a quarter All new products and processes of the Bank are risk vetted from the view point of operational risk, before implementation. The Bank is conducting Risk Control Self Assessment (RCSA) in critical busi- ness as well as Centralised activities. Risk Based Internal Audit is in place in all the Branches. The Bank has put in place important policies like Information System Security Know Your Customer & Anti Money Laundering, Fraud Risk Management, Business Continuity and Disaster Recovery Management.

Scope and nature of risk reporting/measurement systems: -

The risk reporting consists of operational risk loss incidents/ events occurred in branches/ offices relating to people, process, technology and external events. The bank has implemented a software solution which is a modular Operational risk management solution which satis- fies end-to-end operational risk management requirements (quantitative and qualitative). The Loss Data Methodology document which describes the approach for collection of Loss Data was adopted, which will enable the Bank to eventually ease the transition to Advanced Measurement Approach.

Policies for hedging and/or mitigating risk and strategies and processes for monitoring the continuing effectiveness of hedges/miti- gants:

Internal control mechanism is in place to control and minimize the operational risks. Bank is using insurance for mitigating operational risk. The various Board approved policies viz., Operational Risk Management Policy Outsourcing Policy Compliance Policy Internal Inspection & Audit Policy, Internet Banking Security Policy; Information Systems Security Policy and Business continuity Plans addresses issues pertaining to Operational Risk Management.

Operational Risk capital assessment:

The Bank has adopted Basic Indicator Approach for calculating capital charge for Operational Risk, as stipulated by the Reserve Bank of India. Bank has initiated steps to move on to the Advances Measurement Approach in due course.

Table DF 10 - Interest rate risk in the Banking Book (IRRBB):

Qualitative Disclosures:

Strategies and processes

The Bank has put in place a comprehensive market risk management framework to address market risks. The Asset Liability Management Policy prescribes various methodologies like Earnings at Risk to assess the impact of interest rate change on the Net Interest Income of the Bank and Duration Gap Analysis to assess the impact of interest rate risk in the Banking Book. The framework for managing interest rate risk in the Banking Book under Pillar II of Basel II is put in place by the ICAAP Policy The Bank calculates the impact on the Market Value of Equity by Duration Gap Analysis quarterly.

Scope and nature of risk reporting/ measurement systems

Interest rate risk in the Banking Book is measured and Modified Duration of Equity is evaluated on a quarterly basis. The likely drop in Market Value of Equity for a 200 bps change in interest rates is computed. Earnings at Risk based on Traditional Gap Analysis are calculated on a fortnightly basis and adherence to tolerance limits set in this regard is monitored and reported to ALCO. Stress tests are conducted to assess the impact of interest rate risk under different stress scenarios on earnings of the Bank.

Policies for hedging/ mitigating risk and strategies and processes for monitoring the continuing effectiveness of hedges/mitigants

Bank has operationalised mitigating/hedging measures prescribed by Integrated Treasury Policy, ALM Policy and Stress Testing Policy. The strategy adopted by ALCO for mitigating the risk is by clearly articulating the acceptable levels of exposure to specific risk types (interest rate, liquidity etc). The process for mitigating the risk is initiated by altering the mix of asset and liability composition, change in interest rates etc.

Brief description of the approach used for computation of interest rate risk and nature of IRRBB

The interest rate risk in Banking Book is computed through Duration Gap Analysis. The various assumptions used are as follows: -

- Items such as capital, reserves & surplus, bills payable, inter-office adjustment, provisions are treated as non-rate sensitive

- Similarly items such as cash, current account, fixed assets are considered to be non rate sensitive.

- The midpoint of each time bucket is considered as the proxy for the maturity of all assets and liabilities in that time bucket.

- The Bank uses market yields and coupons for various instruments and they are mapped to the same set of products for respective maturities.

- The frequency of coupon payment is assumed to be annual.

- The basis for interest calculation for each time bucket is assumed to be ‘actual/actual’.

- The Bank has also carried out studies to adopt Economic Value Approach for its additional capital calculation under Pillar II. Under this approach, the Banks interest rate risk is indicated by comparing the weighted average duration of assets (DA) with the weighted average duration of liabilities (DL) to arrive at the duration of the gap (equity). As with GAP analysis the sign and magnitude of DGAP provides the impact of interest rate changes on the Economic Value of Equity (EVE).

- Modified Durations of each category of assets and liabilities are computed for all the time buckets using the maturity date, coupon, yield, frequency and basis for interest calculation.

The Bank is computing market value of equity based on Duration Gap Analysis.

For a 200 bps rate shock, the drop in equity value as on 31.03.2010 19.27%

Prudential floor limit for minimum capital requirements:

The guidelines for implementation of the New capital adequacy framework issued by RBI, stipulates higher of the following amounts as minimum capital required to be maintained by the bank.

(a) Minimum capital as per Basel II norms for Credit, Market and Operational risks.

(b) Minimum capital as per Basel I norms for Credit and market risks.

The minimum capital required to be maintained by the Bank as on 31.03.2010 as per Basel I norms is Rs. 4,41,06lakhs and as per Basel II norms is Rs. 4,23,46 lakhs.

Capital (Tier I and Tier II) maintained by the Bank as on 31.03.2010 is Rs. 6,11, 22 lakhs, which is above the prudential floor limit.

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