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Notes to Accounts of Federal Bank Ltd.

Mar 31, 2017

1. Background

The Federal Bank Limited (''the Bank'') was incorporated in 1931 as Travancore Federal Bank Limited to cater to the banking needs of Travancore Province. It embarked on a phase of sustained growth under the leadership of Late K.P. Hormis. The Bank has a network of 1273 branches / offices in India and provides retail and corporate banking, para banking activities such as debit card, third party product distribution etc., treasury and foreign exchange business. The bank is governed by the Banking Regulation Act, 1949 and other applicable Acts / Regulations. The Bank''s shares are listed on BSE Limited and National Stock Exchange of India Limited. The GDRs issued by the Bank in 2006 have been listed on London Stock Exchange. The bank had set up an International Financial Service Centre (IFSC) Banking unit (IBU) in Gujarat International Finance Tec-City (GIFT City) in line with global financial centres of Singapore and Dubai. IBU at Gift city is equivalent to an Offshore Banking unit, for all regulatory purposes.

2. Basis of preparation

The financial statements have been prepared in accordance with requirements prescribed under the Third Schedule (Form A and Form B) of the Banking Regulation Act, 1949. The accounting and reporting policies of the bank used in the preparation of these financial statements conform to Generally Accepted Accounting Principles in India (“Indian GAAP”), the circulars and guidelines issued by the Reserve Bank of India (''RBI'') from time to time and the Accounting Standards prescribed under Section 133 of the Companies Act, 2013 (“the Act”) and the relevant provisions of the Act, as applicable and current practices prevailing within the banking industry in India. The Bank follows the historical cost convention and accrual method of accounting in the preparation of the financial statements, except in the case of interest income on Non- Performing Assets (NPAs) and loans under Scheme for Sustainable Structuring of Stressed Assets (S4A) and Strategic Debt restructuring (SDR) scheme of RBI where it is recognised upon realisation as per RBI guidelines. The accounting policies adopted in the preparation of financial statements are consistent with those followed in the previous year.

3. Use of estimates

The preparation of the financial statements in conformity with the generally accepted accounting principles requires the Management to make estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses and disclosure of contingent liabilities at the date of the financial statements. Actual results could differ from those estimates. The Management believes that the estimates used in the preparation of the financial statements are prudent and reasonable. Any revisions to the accounting estimates are recognised prospectively in the current and future periods.

4. Disclosures requirement as per RBI''s Master Circular on Disclosure in Financial Statements

Amounts in notes forming part of the financial statements for the year ended 31st March, 2017 are denominated in Rupees Crore to conform to extant RBI guidelines.

4.1. Capital Adequacy Ratio

The Bank computes Capital Adequacy Ratio as per Basel III Capital Regulations issued by RBI, which became applicable to the Bank with effect from April 1, 2013.

Under Basel III Capital Regulations, on an on-going basis, the Bank has to maintain a Minimum Total Capital (MTC) of 10.25% (Previous Year 9.625%) including Capital Conversion Buffer (CCB) at 1.25% (Previous Year 0.625%), of the total risk weighted assets (RWA). Out of the MTC, at least 6.75% (Previous Year 6.125%), shall be from Common Equity Tier 1 (CET1)capital and at least 8.25% (Previous Year 7.625%) from Tier 1 capital ,including 1.25% (Previous Year 0.625%) towards CCB. The capital adequacy ratio of the Bank is set out below:

4.2.1. a) Investments under HTM (excluding specified investments as per RBI norms) account for 19.78% (Previous year 20.72%) of demand and time liabilities as at the end of March 2017 as against permitted ceiling of 20.50% (Previous Year: 21.50%) stipulated by RBI.

b) In respect of securities held under HTM category premium of Rs.47.65Crore (Previous year: Rs.35.34 Crore) has been amortised during the year and debited under interest received on Government securities.

c) Profit on sale of securities from HTM category amounting to Rs.134.26Crore(Previous year:Rs.12.92 Crore) has been taken to Profit and Loss Account. During the year, the Bank had appropriated Rs.65.85Crore(Previous year Rs.6.34 Crore), [net of taxes and transfer to statutory reserve] to the Capital Reserve, being the gain on sale of HTM Investments in accordance with RBI guidelines.

d) During the year ended 31st March, 2017 the bank had withdrawn Rs.14.49Crore (Previous year: Rs.8.21 Crore) [net of applicable taxes and transfer to statutory reserve] from Investment Reserve Account on provision for depreciation on Investments, debited to Profit and Loss account.

4.2.2. Sale and transfers to/ from HTM Category

During the current year, the value of sales/transfers of securities to/from HTM category (excluding one-time transfer of securities and sales to RBI under OMO auctions) was within 5% of the book value of investments held in HTM category at the beginning of the year.

4.3. Derivatives

Disclosure in respect of Outstanding Interest Rate Swaps (IRS) and Forward Rate Agreement (FRA)

4.3.1. Disclosure on Risk exposure in Derivatives Qualitative disclosures:

(a) Structure and organization for management of risk in derivatives trading, the scope and nature of risk measurement, risk reporting and risk monitoring systems, policies for hedging and/or Mitigating risk and strategies and processes for monitoring the continuing effectiveness of Hedges/ mitigants:

Derivatives are financial instruments whose characteristics are derived from an underlying asset like interest rates, exchange rates or indices. The Bank undertakes over the counter and exchange traded derivative transactions for Balance Sheet management and also for proprietary trading/market making. Bank offers derivative products to the customers to enable them to hedge their exposure within the prevalent regulatory guidelines.

Proprietary trading includes Interest Rate Futures, Currency Futures and Rupee Interest Rate Swaps under different benchmarks (viz. MIBOR, MIFOR etc) in over the counter/exchange traded derivatives. The Bank also undertakes transactions in Long Term Forex Contracts (LTFX) for hedging its Balance Sheet and also offers them to its customers. These transactions expose the Bank to various risks primarily credit, market, operational, legal, and reputation. The Bank has adopted the following mechanism for managing risks arising out of the derivative transactions.

The derivative transactions are governed by the Investment, forex and derivative policy and market risk management policy of the Bank as well as by the extant RBI guidelines. Various operational/risk limits are set up and actual exposures are monitored vis-a-vis the limits allocated. These limits are set up taking into account market volatility, risk appetite, business strategy and management experience. Risk limits are in place for risk parameters viz. Value at Risk (VaR), Stop Loss, PVBP. Actual positions are monitored against these limits on a daily basis and breaches, if any, are reported promptly. Risk assessment of the portfolio is undertaken periodically.

The Treasury front office enters into derivative transaction with customers and interbank counterparties. The Bank has an independent back office and mid office as per regulatory guidelines. The MTM position of the derivative portfolio is monitored on a regular basis. The impact on derivative portfolio on account of the probable market movements are assessed on regular basis. The risk profile of the outstanding portfolio is reviewed by the Board at regular intervals. The current outstanding under the derivatives portfolio were executed for trading purposes.

(b) Accounting policy for recording hedge and non-hedge transactions, recognition of income, Premiums and discounts, valuation of outstanding contracts Bank deals in derivatives for hedging G-Sec or foreign currency assets/liabilities subject to the prevailing regulatory guidelines. Transactions for hedging and trading are recorded separately. For hedge transactions, the Bank identifies the hedged item (asset or liability) at the inception of the transaction itself. The effectiveness is ascertained at the time of inception of the hedge and periodically thereafter.

Transactions related to foreign exchange forward, Interest rate Future/IRS/Currency future are marked to market every month and the MTM is accounted in the books.

(c) Collateral Security

We have provided Sufficient Collateral Security to Central counter Parties and Exchanges wherever Applicable

As per market practice, no collateral security is insisted on for the contracts with counter parties like Banks/Primary Dealers (PDs) etc. For deals with Corporate Clients, appropriate collateral security/margin etc. is stipulated wherever considered necessary.

(d) Credit Risk Mitigation

Most of the deals have been contracted with Banks/ Major PDs and no default risk is anticipated on the deals with them.

- The notional principal amount of forward exchange contracts classified as Hedging and Trading outstanding as on March 31,2017 amounted to Rs.3003.98 Crore (Previous year Rs.1589.18 Crore) and Rs.13452.78 Crore (Previous year Rs.12652.94 Crore) respectively. For the hedging contract, at 31st March, 2017 the marked to market position was asset Rs.54.81 crores and liability of Rs.110.23 crores. For the trading contract, at 31st March, 2017 the marked to market position was asset Rs.360.06 crores and liability of Rs.292.43 crores (Previous year net MTM Rs.21.15 Crore). Credit exposure on forward exchange contracts at March 31, 2017 was Rs.893.33 Crore (Previous year Rs.227.76 Crore).

- The notional principal amounts of derivatives reflect the volume of transactions outstanding as at the Balance Sheet date and do not represent the amounts at risk.

- Interest rate derivative represents interest rate swaps.

- The bank has computed the maximum and minimum of PV01 for the year based on the balances as at the end of every month.

- In respect of derivative contracts, the bank evaluates the credit exposure arising there from, in line with RBI guidelines. Credit exposure has been computed using the current exposure method which is the sum of :

a) The current replacement cost (Marked to Market value including accruals of the contract) or zero whichever is higher.

b) The Potential Future Exposure (PFE) is a product of the notional principal amount of the contract and a factor that is based on the grid of credit conversion factor prescribed in RBI Guidelines, which is applied on the basis of the residual maturity and the type of contract.

4.4.1 Divergence in Asset classification and Provisioning for NPAs

The divergence observed by RBI for the Financial year 2015-16 in respect of the Bank''s asset classification and provisioning under the extant prudential norms on income recognition, asset classification and provisioning is insignificant and hence the disclosure as required under RBI Circular DBR.BP.BC.No.63/21.04.018/2016-17 dated April 18, 2017 on ''Divergence in the asset classification and provisioning'', is not required to be made.

4.5. Asset Liability Management

A maturity pattern of certain items of assets and liabilities at 31 March, 2017 and 31 March, 2016 is set out below:

4.6.1. During the year ended 31 March, 2017 and 31 March, 2016, the Bank''s credit exposure to single borrower and group borrowers was within the prudential exposure limits prescribed by RBI.

4.6.2 During the year ended 31March, 2017 and 31 March, 2016 there are no unsecured advances for which intangible securities such as charge over the rights, licences, authority etc. has been taken as collateral by the Bank.

5. Disclosure requirements as per Accounting Standards where RBI has issued guidelines in respect of disclosure items for ''Notes to Accounts''

5.1. Employee Benefits (AS 15)

a) Defined Contribution Plan Provident Fund

Employees, who have not opted for pension plan are eligible to get benefits from provident fund, which is a defined contribution plan. Aggregate contributions along with interest thereon are paid on retirement, death, incapacitation or termination of employment. Both the employee and the Bank contribute a specified percentage of the salary to the Federal Bank Employees ''Provident Fund. The Bank has no obligation other than the monthly contribution.

The Bank recognised Rs.0.47Crore (Previous Year: Rs.0.79 Crore) for provident fund contribution in the Profit and Loss Account.

New Pension Scheme

As per the industry level settlement dated 27th April, 2010, employees who joined the services of the Bank on or after 1st April, 2010 are not eligible for the existing pension scheme whereas they will be eligible for Defined Contributory Pension Scheme (DCPS) in line with the New Pension Scheme introduced for employees of Central Government. Employee shall contribute 10% of their Basic Pay and Dearness Allowance towards DCPS and the Bank will also make a matching contribution. There is no separate Provident Fund for employees joining on or after 01/04/2010.

The Bank recognized Rs.21.64 Crore (Previous year: Rs.18.95 Crore) for DCPS contribution in the Profit and Loss Account

b) Defined benefit plan Gratuity

The Bank provides for Gratuity, a defined benefit retirement plan (the “Gratuity Plan”) covering the eligible employees. The Gratuity Plan provides a lump sum payment to vested employees on retirement, death, incapacitation or termination of employment, of an amount based on the respective employees'' salary and the tenure of employment. Vesting occurs upon completion of five years of service as per Payment of Gratuity Act, 1972 and its amendment with effect from 24th May, 2010 or as per the provisions of the Federal Bank Employees'' Gratuity Trust Fund Rules / Bi-partite Award provisions. Liabilities with regard to the Gratuity Plan are determined by Actuarial valuation as on the Balance Sheet date, based upon which, the Bank contributes all the ascertained liabilities to the Federal Bank Employees'' Gratuity Trust Fund (the “Trust”). Trustees administer contributions made to the Trust and contributions are invested in specific investments as permitted by law.

Superannuation / Pension

The Bank provides for monthly pension, a defined benefit retirement plan (the “pension plan”) covering eligible employees. The pension plan provides a monthly pension after retirement of the employees till death and to the family after the death of the pensioner. The monthly pension is based on the respective employees'' salary and the tenure of employment. Vesting occurs upon completion of ten years of service. The Bank pays the monthly pension by purchasing annuities from Life Insurance Corporation of India (LIC). Liabilities with regard to the pension plan are determined by actuarial valuation as on the Balance Sheet date, based upon which, the Bank contributes all the ascertained liabilities to the Federal Bank (Employees'') Pension Fund (the “Trust”). Trustees administer contributions made to the Trust and contributions are invested in specific investments as permitted by law.

The following table as furnished by Actuary sets out the funded status of gratuity / pension plan and the amount recognized in the Bank''s financial statements as at March 31, 2017.

5.2. Segment Reporting (AS 17)

A. Business Segments

Business of the Bank is divided into four segments viz. Treasury, Corporate or Wholesale Banking, Retail Banking and other banking operations. The principal activities of these segments and income and expenses structure are as follows:

Treasury

Treasury operations include trading and investments in Government and corporate debt instruments, equity and mutual funds, derivative trading and foreign exchange operations on proprietary account and for customers.

The income of this segment primarily consists of earnings from the investment portfolio of the bank, gains and losses on trading operations. The principal expense of the segment consists of interest expense on funds borrowed/utilized and other allocated overheads.

Corporate/Wholesale Banking

This segment provides loans and other banking services to Corporate and other clients where value of individual exposure to the Clients exceeds Rs.5 Crore as defined by RBI. Revenue of this segment consists of interest and fees earned on loans to such customers and charges and fees earned from other banking services. Expenses of this segment primarily consist of interest expense on funds utilized and allocated overheads

Retail banking

Retail banking constitutes lending and other banking services to individuals/small business customers, other than corporate/wholesale banking customers, identified on the basis of RBI guidelines.

Revenue of this segment consists of interest earned on loans made to such customers and charges /fees carried from other banking services to them. The principal expenses of the segment consist of interest expenses on funds borrowed and other expenses.

Other Banking Operations

This segment includes para banking activities like third party product distribution and other banking transactions, not covered under any of the above segments. The income from such services and associated costs are disclosed in this segment.

The following table sets forth, for the periods indicated, the business segment results:

6.1. Draw Down from Reserves

The Bank has drawn down Rs.14.49 Crore from Investment Reserve Account (Previous Year Rs.8.21 crore) in accordance with the provisions of RBI guidelines on ''Prudential Norms for Classification, Valuation and Operation of Investment Portfolio by Banks''.

6.2. Letter of Comfort

The Bank has not issued any letters of comfort (LoC) on behalf of its subsidiaries during the year ended 31st March, 2017 and 31st March, 2016.

6.3 The Provision coverage ratio of the bank as on 31 March, 2017, computed in terms of the RBI Guidelines was 72.67 % (Previous Year 72.05%).

6.4. Sponsored SPVs

The Bank has not sponsored any special purpose vehicle which is required to be consolidated in the consolidated financial statements as per accounting norms as at 31 March 2017 and 31 March 2016.

6.5 Disclosures on Remuneration

i) Qualitative disclosures

a) Information relating to the composition and mandate of the Nomination, Remuneration, Compensation and Ethics Committee (or Remuneration Committee in short):

The Remuneration Committee of the Board oversees the framing, review and implementation of the compensation policy of the Bank, on behalf of the Board. This committee works in coordination with Risk Management Committee of the Bank, in order to achieve effective alignment between risk and remuneration.As on 31 March, 2017, the remuneration committee of the Board comprises of the following Independent Directors:

- Sri.K M Chandrasekhar

- CA Nilesh Shivji Vikamsey

- Sri.Dilip Gena Sadarangani

The above committee of the Board functions with the following objectives:

a) To review the Compensation package for the MD and CEO and Executive Directors and recommend revisions for Board approval

b) To consider and approve issuance and allotment of ESOS shares to MD/EDs and employees of the Bank.

c) To develop and implement an effective compensation policy, as per RBI guidelines

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

The compensation payable to MD & CEO, EDs and Senior Executives is divided into fixed and variable components. The fixed compensation is determined based on the industry standards, the exposure, skill sets, talent and qualification attained by the official over his/her career span etc. Approval from RBI is obtained to decide fixed compensation for MD & CEO and EDs.

The variable compensation for MD & CEO and senior executives (Non - IBA package i.e. CGM and above) are determined based on Bank''s performance and Key Performance Areas (KPA) set for the official. KPAs contain targets on risk adjusted metrics such as Risk Adjusted Return on Capital (RAROC), Risk Adjusted Return on Risk Adjusted Capital (RARORAC), in addition to target on NPAs.

The objectives of the remuneration policy are four fold:

- To align compensation with prudent risk taken

- To drive sustainable performance in the Bank

- To ensure financial stability of the Bank; and

- To attract and retain talent

c) Description of the ways in which current and future risks are taken into account in the remuneration processes.

For the purpose of effectively aligning compensation structure with risk outcomes, the functionaries in the Bank are arranged under the following four categories

- MD & CEO / ED

- Senior Executives (Non IBA package)

- Senior Executives (On IBA package)

- Other members of staff (on IBA package)

Limit on variable pay

The variable compensation offered to an official would not exceed 70% of the total fixed compensation

Severance pay and guaranteed bonus

Severance pay (other than gratuity or terminal entitlements or as entitled by statute) is not paid to any official of the Bank Sign on bonus or joining bonus is limited to the first year and is paid only as Employee stock options

Hedging

No compensation scheme or insurance facility would be provided by the Bank to employees to hedge their compensation structure to offset the risk alignment mechanism (deferral pay and clawback arrangements) embedded in their compensation arrangement

Compensation Recovery policy

A claw back arrangement or a compensation recovery policy is provided, which will entail the Bank to recover proportionate amount of variable compensation paid to the above functionaries on account of an act or decision taken by the official which has brought forth a negative contribution to the bank at a prospective stage. The claw back arrangement would be valid for a period of three years from the date of payment of variable compensation.

Committees to mitigate risks caused by an individual decision

In order to further balance the impact of market or credit risks caused to the Bank by an individual decision taken by a senior level executive, MD & CEO or ED, the bank has constituted various committees to take decisions on various aspects:

- Credit limits are sanctioned by committees at different levels.

- Investment decisions of the Bank are taken and monitored by Investment committee and there is an upper limit in treasury dealings where individual decisions can be taken.

- Interest rates on asset and liability products for different buckets are decided and monitored by the Asset Liability Committee of the Board (ALCO). Banks'' exposure to liquidity risk are also monitored by ALCO.

Integrated Risk Management Department (IRMD)

In order to effectively govern the compensation structure, IRMD would assist the Remuneration Committee of the Board to monitor, review and control various risks and balance prudent risk taking with the compensation paid out to top executives and other employees.

Compensation of risk control staff

The total fixed and variable compensation paid out to the employees of IRMD are independent of business parameters and rendering of effective support to the Remuneration Committee of the Board. The variable compensation component (Performance Linked Incentive or PLI) will be subjected to a minimum and greater proportion of compensation will be fixed in nature to ensure autonomy and independence from business goals

d) Linkage of performance during a performance measurement period with levels of remuneration.

The Bank''s performance is charted based on the revenue point index / performance scorecard which takes into account various financial indicators like revenue earned, cost deployed, and profit earned, NPA position and other intangible factors like leadership and employee development. Variable pay is paid purely based on performance and is measured through Score cards for MD& CEO /EDs. The score card provides a mix of financial and non-financial, quantitative and qualitative metrics.

Compensation paid to Senior executives and other staff members on IBA package

The compensation paid to other officials that include Award staff, Officers coming under Scale I to III and Senior executives coming under Scale IV to VII is fixed based on the periodic industry level settlements with Indian Banks Association. The variable compensation paid to these functionaries is based on the Performance Linked incentive scheme which has been formulated on the basis of performance parameters set in Performance Management System

e) Bank''s policy on deferral and vesting of variable remuneration and criteria for adjusting deferred remuneration before vesting and after vesting.

Deferred compensation and Performance Linkage

In the event variable compensation paid to MD & CEO, ED and Senior Executives (Non-IBA) exceeds more than 50% of the fixed compensation for the year on account of high level of Bank''s performance, 60% of the variable pay so entitled to the official will be deferred for payment over a period of 3 years. The amount is parked in an escrow account and the payment will be made in the ratio of 20:30:50 over a period of three years, i.e.

- 20 % of the deferred compensation will be paid in the first year

- 30% of the deferred compensation in the second year; and

- 50 % of the deferred compensation in the third year

Clawback and deferral arrangements

The provisions of clawback and deferral arrangements are applicable to the referred functionaries and all employees in the event their variable compensation exceeds 50 % of their fixed emoluments

f) Description of the different forms of variable remuneration

Bank uses an optimum mix of cash, ESOPS and variable PLI to decide the compensation of employees in all categories. The distribution of ESOPS and variable PLI are higher in top levels and is linked with their performance measurements taken from Scorecards. This is done to align the compensation of senior staff with their performance, risk and responsibility taken in higher assignments. The Officers in Scale I-III as well as Award staff come under the purview of IBA package that is as per the Industry wide settlements. Variable compensation, ESOP, is linked with seniority in these levels.

6.6 Securitisation Transactions

The Bank has not done any securitisation transactions during the year ended 31 March, 2017 and 31 March, 2016.

6.7 Transfers to Depositor Education and Awareness Fund (DEAF)

In accordance with the guidelines issued by the RBI, the Bank transfers the amount to the credit of any account which has not been operated upon for a period of ten years or any deposit or any amount remaining unclaimed for more than ten years to the DEAF. Details of amounts transferred to DEAF are set out below:

6.8 Unhedged Foreign Currency Exposure

The Bank has in place a policy on managing credit risk arising out of unhedged foreign currency exposures of its borrowers. The objective of this policy is to maximize the hedging on foreign currency exposures of borrowers by reviewing their foreign currency exposures and encouraging them to hedge the unhedged portion. The policy framework also articulates the methodologies for ascertaining the amount of unhedged foreign currency exposures, estimating the extent of likely loss, estimating the riskiness of the unhedged position and making appropriate provisions and capital charge as per extant RBI guidelines. In line with the policy, assessment of unhedged foreign currency exposure is a part of credit appraisal while proposing limits or at the review stage. Further, the bank reviews the unhedged foreign currency exposure across its portfolio on a periodic basis. The Bank maintains incremental provisions and additional capital for the unhedged foreign currency exposures of its borrowers in line with the extant RBI guidelines. The Bank has maintained Rs.5.27 Crore (Previous year Rs.10.05 Crore) as provision and Rs.2.21 Crore (Previous year Rs.4.66 Crore) as additional capital for computation of capital adequacy Ratio on account of the unhedged foreign currency exposures of borrowers as at March 31, 2017.

7.1 A. Issue of Bonus Shares

During the year ended March 31, 2016 the Bank had issued Bonus Shares in the Ratio of 1:1 for Shares held as on the record date of July 9, 2015. Pursuant to the above 85,79,45,206 fully paid up Equity Shares had been allotted by the bank as bonus shares and One Global Depositary share (GDS) had been issued as bonus for every GDS held to the existing holders as on the record date. Consequently, as per the extant ESOS 2010 Scheme bonus options had been provided to the existing ESOS option holders and the exercise price had been adjusted accordingly. The earnings per share have been adjusted for Previous year in accordance with Accounting Standard 20, Earnings per share.

B. Subscribed and paid up capital includes:

(i) 16,590 shares of Rs.2/- each (Previous Year 16,590 shares of Rs.2/- each) issued for consideration other than cash.

(ii) 3,12,05,861 underlying equity shares of Rs.2/- each (Previous Year 2,80,49,968 equity shares of Rs.2/- each) held by custodian on behalf of holders of Global Depository Receipts (GDRs).

(iii) 50,98,570 ESOS shares of Rs.2/- per share (Previous Year 57,61,133 shares of Rs.2/- Per share) allotted under ESOS 2010.

(iv) 85,79,45,206 bonus shares were issued in the ratio of 1:1 during Financial Year 2015-16.

C.The following allotments are kept pending following orders from various courts

i) Allotment of 6,530 shares of Rs.2/- each (Previous year 6,530 shares of Rs.2/- each) pertaining to the Right issue of 1993 issued at premium of Rs.5/- per share

ii) 2,62,100 shares of Rs.2/- each (Previous year 2,62,100 shares of Rs.2/- per share) pertaining to the Rights issue of 1996 issued at a premium of Rs.28/- per Share

iii) 10,80,415 equity shares of Rs.2/- each (Previous year 10,80,415 shares of Rs.2/- per share), at a premium of Rs.48/- per share pertaining to Rights issue of 2007

Issue of certificates/credit in demat account in respect of the following Bonus issues are kept in abeyance consequent to injunction orders from various courts.

a) 4,09,170 shares of Rs.2/- each (Previous year 4,09,170 shares of Rs.2/- each) out of the Bonus issue of 2004 and

b) 6,15,755 bonus shares of Rs.2/- each (Previous year 6,15,755 bonus shares of Rs.2/- each), out of the Bonus issue of 2015.

D. Employee Stock Option Scheme (“ESOS”):

i) Shareholders of the bank had approved Employee Stock Option Scheme (ESOS) through postal ballot, the result of which was announced on December 24, 2010, enabling the Board and/or the “Compensation Committee” to grant such number of equity shares, including options, of the Bank not exceeding 5% of the aggregate number of paid up equity shares of the Bank, in line with the guidelines of SEBI. Pursuant thereto, the Compensation Committee of the bank granted the following options:

As per SEBI guidelines the accounting for ESOS can be done either under the ''Intrinsic value basis'' or ''Fair value basis''.The Compensation Committee in their meeting dated 10th May, 2012 decided to adopt ''Intrinsic value method'' for accounting of ESOS, in terms of the power vested on them as per the resolution of EGM dated 24 December, 2010.

The exercise price of the options granted is the same as the market price on the date prior to grant date and hence there is no intrinsic value for the options, which has to be amortized over the vesting period, other than 3,00,000 Options granted during the year at an exercise price lower than the Market price.

If “Fair Value Method” had been adopted based on “Black-Scholes pricing model” for pricing and accounting of options, net profit would be lower by Rs.9.12 Crore (Previous Year: Rs.19.83Crore)

The modified basic and diluted earnings per share for the year, had the Bank followed Fair Value Method of accounting for ESOS compensation cost would be Rs.4.78 and Rs.4.72 (Previous Year: Rs.2.65 and Rs.2.63) respectively,

ii) Dividend paid on shares issued on exercise of stock option

The Bank may allot shares between the Balance Sheet date and record date for the declaration of dividend pursuant to the exercise of any employee stock options. These shares will be eligible for full dividend for the year ended 31 March 2017, if approved at the ensuing Annual General Meeting.

iii) Dividend (Including tax/cess thereon) appropriation of Rs.0.02 Crore represent dividend for Financial Year 2015-16 on the shares issued under Employee Stock Options Scheme before the record date, as per shareholders'' approval.

E. Proposed Dividend and Tax on Proposed Dividend

In terms of revised Accounting Standard (AS) 4 “Contingencies and Events occurring after the Balance sheet date” as notified by the Ministry of Corporate affairs through amendments to Companies (Accounting Standards) Amendment Rules, 2016, the Bank has not appropriated proposed dividend (including tax) aggregating to Rs.186.75 Crore from the statement of Profit and loss account for the year ended March 31, 2017, also the same has not been shown as an Other Liabilities.

7.2. Operating Leases:

Lease payments for assets taken on operating lease are recognised as an expense in the Profit and Loss Account as per the lease terms. During the year an amount of Rs.131.49 Crore (Previous year: Rs.127.58 Crore) was charged to Profit and loss account.

7.3 Description of contingent liabilities:

a) Claims against the Bank not acknowledged as debts

These represent claims filed against the Bank in the normal course of business relating to various legal cases currently in progress. These also include demands raised by income tax and other statutory authorities and disputed by the Bank.

b) Liability on account of forward exchange and derivative contracts

The Bank enters into Forward exchange contracts on its own account and on behalf of its customers. Forward exchange contracts are commitments to buy or sell foreign currency at a future date at the contracted rate.

c) Guarantees given on behalf of constituents

As a part of its banking activities, the Bank issues guarantees on behalf of its customers to enhance their credit standing. Guarantees represent irrevocable assurances that the Bank will make payments in the event of the customer failing to fulfill its financial or performance obligations.

d) Acceptances, endorsements and other obligations

These include documentary credit issued by the Bank on behalf of its customers and bills drawn by the Bank''s customers that are accepted or endorsed by the Bank.

e) Other items for which the bank is contingently liable

Includes Capital commitments and amount transferred to RBI under the Depositor Education and Awareness Fund (DEAF)

Refer schedule 12 for amounts relating to contingent liability.

7.4 Provisioning Pertaining to Fraud Accounts

The Bank has reported 68cases (Previous year:65 cases) of fraud in the Financial year ended 31 March, 2017amounting to Rs.259.19 Crore (Previous Year: Rs.82.07 Crore) and has provided for the same in the books of account. Bank does not have any unamortised loss in this regard as of March 31, 2017.

7.5 Inter-bank participation with risk sharing

The aggregate amount of participation purchased by the Bank, shown as advances as per regulatory guidelines, outstanding as of March 31, 2017 was Rs.1981.27 Crore (Previous Year: Rs.1254.98).

The aggregate amount of the participation issued by the Bank, reduced from advances as per regulatory guidelines, outstanding as of March 31, 2017 was Rs.150.00 Crore(Previous Year: Rs.NIL).

7.6 Factoring Exposure

The factoring exposure of the Bank as on March 31, 2017 is Rs.1055.67 Crore (Previous Year: Rs.NIL)

7.7 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.

The Bank has spent of 1.34 %of its average net profit for the last three financial years as part of its CSR activities for the year ended March 31, 2017. As a responsible Bank, it has approached the mandatory requirements of CSR spend positively by utilising the reporting year to lay a foundation on which to build and scale future projects and partnerships. The Bank is currently in the process of evaluating strategic avenues for CSR expenditure in order to deliver maximum impact. In the years to come, the Bank will further strengthen its processes as per requirement.

7.8 Investor education and protection fund

There has been no delay in transferring amounts, required to be transferred to the Investor Education and Protection Fund by the Bank.

7.9 Disclosure on Specified Bank Notes:

The Bank believes that the MCA notification G.S.R. 308(E) dated March 30, 2017 regarding holdings as well as dealings in Specified Bank Notes during the period from 8th November, 2016 to 30th December, 2016 is not applicable to banking companies.

7.10 Small and Micro Industries

Under the Micro, Small and Medium Enterprises Development Act, 2006 which came into force from 2ndOctober, 2006, certain disclosures are required to be made relating to Micro, Small and Medium enterprises. 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. The above is based on the information available with the Bank which has been relied upon by the auditors.

7.11 The figures for the year ended March 31, 2016 were audited by previous statutory auditors.

7.12 Figures for the previous year have been regrouped and reclassified, wherever necessary to conform to current year''s presentation.


Mar 31, 2015

1 Background

The Federal Bank Limited (''the Bank'') was incorporated in 1931 as Travancore Federal Bank Limited to cater to the banking needs of Travancore Province. It embarked on a phase of sustained growth under the leadership of Late K.P. Hormis. The Bank has a network of 1277 branches / offices in India and provides retail and corpo- rate banking, para banking activities such as debit card, third party product distribution etc., treasury and foreign exchange business. The bank is governed by the Banking Regulation Act, 1949 and other applicable Acts/ Regulations. The Bank''s shares are listed in the Bombay Stock Exchange Limited and National Stock Exchange of India Limited. The GDRs issued by the Bank in 2006 have been listed in the London Stock Exchange.

2. Basis of preparation

The financial statements have been prepared in accordance with requirements prescribed under the Third Schedule (Form A and Form B) of the Banking Regulation Act, 1949. The Bank follows accrual method of accounting and historical cost convention in the preparation of the financial statements and it conforms to the Generally Accepted Accounting Principles in India ("Indian GAAP"), the circulars and guidelines issued by the Reserve Bank of India (''RBI'') from time to time and the Accounting Stand- ards specified under Section 133 of the Companies Act, 2013, read with Rule 7 of the Companies (Accounts) Rules, 2014 and the relevant provisions of the Companies Act, 2013 ("the 2013 Act")/ Companies Act, 1 956 ("the 1956 Act"), as applicable and current practices prevailing within the banking industry in India. The accounting policies adopted in the preparation of financial statements are consistent with those followed in the previous year except for the change in the accounting policy for depreciation as more fully described in Note 2.8 of Schedule 1 8.

3. Use of estimates

The preparation of the financial statements in conformity with the generally accepted accounting principles requires the Man- agement to make estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses and disclosure of contingent liabilities at the date of the financial statements. Actual results could differ from those estimates. The Management believes that the estimates used in the preparation of the financial statements are prudent and reasonable. Any revi- sions to the accounting estimates are recognised prospectively in the current and future periods.

4. Disclosures as per RBI''s Master Circular on Disclosure in Financial Statements

Amounts in Notes forming part of the financial statements for the year ended 31st March, 2015 are denominated in Rupees Crore to conform to extant RBI guidelines.

5. a) Investments under HTM (excluding specified investments as per RBI norms) account for 22.23% (Previous Year: 24.1 7%) of demand and time liabilities as at the end of March 201 5 as against permitted ceiling of 25% stipulated by RBI.

b) In respect of securities held under HTM category premium of Rs. 32.11 Crore (Previous Year: Rs. 29.69 Crore) has been amortised during the year and debited under interest received on Government securities.

c) Profit on sale of securities from HTM category amounting to Rs. 57.80 Crore (Previous Year: Rs. 36.26 Crore) has been taken to Profit and Loss Account. During the year, the Bank had appropriated Rs. 28.62 Crore (Previous Year: Rs. 1 7.95Crore), net of taxes and transfer to statutory reserve to the Capital Reserve, being the gain on sale of HTM Investments in accordance with RBI guidelines.

d) The bank had transferred Rs. 46.28 Crore (Previous Year Rs. Nil) (Net of applicable taxes and transfer to statutory reserve) towards Investment Reserve Account on provision for depreciation on Investments credited to Profit and Loss account.

6. Sale and transfers to/ from HTM Category

During the current year, the value of sales/transfers of securities to/from HTM category (excluding one-time transfer of securities and sales to RBI under OMO auctions) was within 5% of the book value of investments held in HTM category at the beginning of the year.

7. Derivatives

Disclosure in respect of Outstanding Interest Rate Swaps (IRS) and Forward Rate Agreement (FRA)

8. Disclosure on Risk exposure in Derivatives a) Qualitative Disclosures

Structure, organization, scope and nature of management of risk in derivatives etc.

The Treasury Department is organised into three functional areas, i.e., front office, mid office and back office under the charge of Deputy General Manager and Assistant General Manger with overall supervision and control by President - Treasury. Derivative deals are gen- erally executed for market making. Although fresh derivative products are not undertaken, the outstanding position of earlier years is managed by the back office.

The risk in the derivatives is monitored regularly by assessing marked to market position (MTM) of the entire portfolio and the impact on account of the probable market movements. Various risk limits have been put in place under different segments of the derivatives, as approved by Board. The risk profile of the outstanding portfolio is reviewed by the Board at regular intervals. The current outstanding under the derivatives portfolio were executed for trading purposes.

Accounting:

Board Approved Accounting Policies as per RBI guidelines have been adopted. The swaps are marked to market every month and the MTM losses in the basket are accounted in the books while MTM profits are ignored.

Collateral Security:

As per market practice, no collateral security is insisted on for the contracts with counter parties like Banks/Primary Dealers (PDs) etc. For deals with Corporate Clients, appropriate collateral security/margin etc. is stipulated wherever considered necessary.

Credit Risk Mitigation:

Most of the deals have been contracted with Banks/ Major PDs and no default risk is anticipated on the deals with them. No derivative contracts are done for other clients as of now.

9. Draw Down from Reserves

The Bank has not made any draw down from reserves during the year.

In accordance with Reserve Bank of India circular DBOD.No.BP.BC.77/21.04.018/ 2013-14 dated 20 December 2013, the Bank has provided deferred tax liability in respect of special reserve created under Section 36 (1) (viii) of the Income Tax Act 1 961 for the period upto 31 March 201 3 amounting to Rs.53.96 Crore by drawing down the balance from Revenue Reserve during the previous year.

10. Letter of Comfort

The Bank has not issued any letters of comfort (LoC) on behalf of its subsidiaries.

11. Sponsored SPVs

The Bank has not sponsored any special purpose vehicle which is required to be consolidated in the consolidated financial statements as per accounting norms.

12. Details of Overseas Assets, NPAs and Revenue - Nil

13. Securitisation Transactions

The Bank has not done any securitisation transactions during the year ended 31 March, 201 5 and 31 March, 2014.

14. Disclosures on Remuneration (i) Qualitative disclosures

a) Information relating to the composition and mandate of the Nomination, Remuneration, Compensation and Ethics Committee (or Remuneration Committee in short):

The Remuneration Committee of the Board oversees the framing, review and implementation of the compensation policy of the Bank, on behalf of the Board.

This committee works in coordination with Risk Management Committee of the Bank, in order to achieve effective alignment between risk and remuneration.

As on 31 March, 201 5, the remuneration committee of the Board comprises of the following Independent Directors:

* Shri Nilesh S Vikamsey - Chairman

* Prof. Abraham Koshy

* Shri Sudhir M Joshi

The above committee of the Board functions with the following objectives:

a) To review the Compensation package for the MD and CEO and Executive Director and recommend revisions for Board approval

b) To consider and approve issuance and allotment of ESOS shares to MD/ED and employees of the Bank.

c) To develop and implement an effective compensation policy, as per RBI guidelines

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

The compensation payable to MD & CEO, ED and Senior Executives is divided into fixed and variable components. The fixed compensa- tion is determined based on the industry standards, the exposure, skill sets, talent and qualification attained by the official over his/her career span etc. Approval from RBI is obtained to decide fixed compensation for MD & CEO and ED.

The variable compensation for MD & CEO and senior executives (Non - IBA package i.e. CGM and above) are determined based on Bank''s performance and Key Performance Areas (KPA) set for the official. KPAs contain targets on risk adjusted metrics such as Risk Adjusted Return on Capital (RAROC), Risk Adjusted Return on Risk Adjusted Capital (RARORAC), in addition to target on NPAs.

The objectives of the remuneration policy are four fold:

* To align compensation with prudent risk taken

* To drive sustainable performance in the organization

* To ensure financial stability of the organization; and

* To attract and retain talent

c) Description of the ways in which current and future risks are taken into account in the remuneration processes.

For the purpose of effectively aligning compensation structure with risk outcomes, the functionaries in the Bank are arranged under the following four categories

MD & CEO / ED

Senior Executives (Non IBA package)

Senior Executives (On IBA package)

Other members of staff (on IBA package)

Limit on variable pay

The variable compensation offered to an official would not exceed 70% of the total fixed compensation Severance pay and guaranteed bonus

Severance pay (other than gratuity or terminal entitlements or as entitled by statute) is not paid to any official of the organization. Sign on bonus or joining bonus is limited to the first year and is paid only as Employee stock options.

Hedging

No compensation scheme or insurance facility would be provided by the Bank to employees to hedge their compensation structure to offset the risk alignment mechanism (deferral pay and clawback arrangements) embedded in their compensation arrangement.

Compensation Recovery policy

A claw back arrangement or a compensation recovery policy is provided, which will entail the Bank to recover proportionate amount of variable compensation paid to the above functionaries on account of an act or decision taken by the official which has brought forth a negative contribution to the bank at a prospective stage. The claw back arrangement would be valid for a period of three years from the date of payment of variable compensation.

Committees to mitigate risks caused by an individual decision

In order to further balance the impact of market or credit risks caused to the organization by an individual decision taken by a senior level executive, MD & CEO or ED, the bank has constituted various committees to take decisions on various aspects.

Credit limits are sanctioned by committees at different levels.

Investment decisions of the Bank are taken and monitored by Investment committee and there is an upper limit in treasury dealings where individual decisions can be taken.

Interest rates on asset and liability products for different buckets are decided and monitored by the Asset Liability Committee of the Board (ALCO). Banks'' exposure to liquidity risk are also monitored by ALCO.

Integrated Risk Management Department (IRMD)

In order to effectively govern the compensation structure,IRMD would assist the Remuneration Committee of the Board to monitor, review and control various risks and balance prudent risk taking with the compensation paid out to top executives and other employees.

Compensation of risk control staff

The total fixed and variable compensation paid out to the employees of IRMD are independent of business parameters and rendering of effective support to the Remuneration Committee of the Board. The variable compensation component (Performance Linked Incen- tive or PLI) will be subjected to a minimum and greater proportion of compensation will be fixed in nature to ensure autonomy and independence from business goals.

d) Linkage of performance during a performance measurement period with levels of remuneration.

The Bank''s performance is charted based on the revenue point index / performance scorecard which takes into account various financial indica- tors like revenue earned, cost deployed, profit earned, NPA position and other intangible factors like leadership and employee development. Variable pay is paid purely based on performance and is measured through Score cards for MD& CEO / EDs. The score card provides a mix of financial and non-financial, quantitative and qualitative metrics.

Compensation paid to Senior executives and other staff members on IBA package

The compensation paid to other officials that include Award staff, Officers coming under Scale I to III and Senior executives coming under Scale IV to VII is fixed based on the periodic industry level settlements with Indian Banks Association. The variable compensation paid to these functionaries is based on the Performance Linked incentive scheme which has been formulated on the basis of perform- ance parameters set in Performance Management System

e) Bank''s policy on deferral and vesting of variable remuneration and criteria for adjusting deferred remuneration before vesting and after vesting.

Deferred compensation and Performance Linkage

In the event variable compensation paid to MD & CEO, ED and Senior Executives (Non-IBA) exceeds more than 50% of the fixed compensation for the year on account of high level of Bank''s performance, 60% of the variable pay so entitled to the official will be deferred for payment over a period of 3 years. The amount is parked in an escrow account and the payment will be made in the ratio of 20:30:50 over a period of three years, i.e.

* 20 % of the deferred compensation will be paid in the first year

* 30% of the deferred compensation in the second year; and

* 50 % of the deferred compensation in the third year

Clawback and deferral arrangements

The provisions of clawback and deferral arrangements are applicable to the referred functionaries and all employees in the event their variable compensation exceeds 50 % of their fixed emoluments

f) Description of the different forms of variable remuneration

Bank uses an optimum mix of cash, ESOPS and variable PLI to decide the compensation of employees in all categories. The distribution of ESOPS and variable PLI are higher in top levels and is linked with their performance measurements taken from Scorecards. This is done to align the compensation of senior staff with their performance, risk and responsibility taken in higher assignments. The Officers in Scale I-III as well as Award staff come under the purview of IBA package that is as per the Industry wide settlements. Variable compensation, ESOP, is linked with seniority in these levels

15. Unhedged Foreign Currency Exposure

The Bank has in place a policy on managing credit risk arising out of unhedged foreign currency exposures of its borrowers. The objective of this policy is to maximize the hedging on foreign currency exposures of borrowers by reviewing their foreign currency exposures and encouraging them to hedge the unhedged portion. The policy framework also articulates the methodologies for ascertaining the amount of unhedged foreign currency exposures, estimating the extent of likely loss, estimating the riskiness of the unhedged position and making appropriate provisions and capital charge as per extant RBI guidelines. In line with the policy, assessment of unhedged foreign currency exposure is a part of credit appraisal while proposing limits or at the review stage. Further, the bank reviews the unhedged foreign currency exposure across its portfolio on a periodic basis. The Bank maintains incremental provisions and additional capital for the unhedged foreign currency exposures of its borrowers in line with the extant RBI guidelines. The Bank has maintained Rs. 8.45 Crore as provision and Rs. 9.49 Crore as additional capital for computation of capital adequacy Ratio on account of the unhedged foreign currency exposures of borrowers as at March 31, 201 5.

Qualitative Disclosure

The Bank measures and monitors the LCR in line with the Reserve Bank of India''s circular dated June 9, 2014 on "Basel III Framework on Liquidity Standards - Liquidity Coverage ratio (LCR), Liquidity Risk Monitoring Tools and LCR Disclosure Standards". Liquidity Coverage Ratio (LCR) promotes short-term resilience of banks to potential liquidity disruptions by ensuring that they have sufficient high quality liquid assets (HQLAs) to survive an acute stress scenario lasting for 30 days. Bank has computed LCR on a monthly basis and has main- tained LCR well above the regulatory minimum during the quarter. Bank could consistently maintain LCR above 100% during the quarter. Bank has not computed LCR for any foreign currency exposure since the aggregate liabilities denominated in any foreign currency doesn''t amount to 5 percent or more of the Bank''s total liabilities.

On an average, 90% of the HQLA maintained by the Bank comprises of Level 1 assets which is the most liquid asset category. Cash in hand, excess CRR and SLR, G- Sec within mandatory SLR requirement permitted by RBI under MSF (presently 2% of NDTL) and facility to avail liquidity ratio (5% of NDTL) constitutes Level 1 HQLA. Level 2 Assets maintained by the Bank comprises of marketable securities rep- resenting claims on or claims guaranteed by sovereigns, Public Sector Entities (PSEs) or multilateral development banks that are assigned a 20% risk weight under the Basel III Standardized Approach for credit risk and that are not issued by a bank/financial institution/NBFC or any of its affiliated entities and Corporate bonds, not issued by a bank/financial institution/NBFC or any of its affiliated entities, which have been rated AA- or above by an Eligible Credit Rating Agency. HQLA is also well diversified across various instruments and liquid asset types and should provide the Bank with adequate and timely liquidity.

Bank has a well diversified funding portfolio. Retail deposits, considered as stable from a liquidity perspective is the major funding source of the Bank and it forms around 76.50% of the Bank''s total liabilities. Wholesale deposits and Inter- bank deposits constitutes only about 9% of the liabilities, indicating lower dependence of the Bank on wholesale funds.

The liquidity risk management in the Bank is guided by the ALM Policy. Asset Liability Management Committee (ALCO) is the executive level committee responsible for ALM process in the Bank. Bank''s liquidity management is actively done by the Treasury department as per the directions of ALCO. Integrated Risk Management Department actively monitors the liquidity position of the Bank and apprises ALCO on a continuous basis to initiate appropriate actions such that the Liquidity position is well within the Risk Appetite set by the Board of Directors.

16 A. Subscribed and paid up capital includes:

(i) 16,590 shares of Rs.2/- each (Previous Year 1 6,590 shares of Rs. 2/- each) issued for consideration other than cash

(ii) 1,66,66,588 underlying equity shares of Rs.2/- each (Previous Year 2,1 0,25,590 of Rs.2/- each) held by custodian on behalf of holders of Global Depository Receipts (GDRs)

(iii) 14,14,692 ESOS shares of Rs.2/- per share (Previous Year 74,280 shares of Rs.2/- per share) allotted under ESOS 201 0.

B. Allotment of 6530 shares of Rs.2/- each (Previous year 6,530 shares of Rs.2/- each pertaining to the Right issue of 1993 issued at premium of Rs.25/- per share and 2,62,1 00 shares of Rs.2/- each (Previous year 2,62,1 00 shares of Rs.2/- per share) pertaining to the Rights issue of 1996 issued at a premium of Rs.140/- per Share and 1 0,80,41 5 equity shares of Rs.2/- each (previous year 1 0,83,41 5 shares of Rs.2/- per share, at a premium of Rs.240/- per share) pertaining to Rights issue of 2007 are kept pending following orders from various courts.

Issue of certificates/credit in demat account in respect of 4,11,940 shares of Rs.2/- each (previous year 4,12,940 shares of Rs.2/- each) out of the Bonus issue of 2004 are kept in abeyance consequent to injuction orders from various courts.

17.Segment Reporting (AS 17)

Business of the Bank is divided into four segments viz. Treasury, Corporate or Wholesale Banking, Retail Banking and other banking op- erations. The principal activities of these segments and income and expenses structure are as follows:

Treasury

Treasury operations include trading and investments in Government and corporate debt instruments, equity and mutual funds, derivative trading and foreign exchange operations on proprietary account and for customers.

The income of this segment primarily consists of earnings from the investment portfolio of the bank, gains and losses on trading op- erations. The principal expense of the segment consists of interest expense on funds borrowed/utilized and other allocated overheads.

Corporate/Wholesale Banking:

This segment provides loans and other banking services to Corporate and other clients where value of individual exposure to the Clients exceeds Rs.5 Crore as defined by RBI. Revenue of this segment consists of interest and fees earned on loans to such customers and charges and fees earned from other banking services. Expenses of this segment primarily consist of interest expense on funds utilized and al- located overheads

Retail banking:

Retail banking constitutes lending and other banking services to individuals/small business customers, other than corporate/wholesale banking customers, identified on the basis of RBI guidelines.

Revenue of this segment consists of interest earned on loans made to such customers and charges /fees carried from other banking services to them. The principal expenses of the segment consist of interest expenses on funds borrowed and other expenses.

Other Banking Operations

This segment includes parabanking activities like third party product distribution and other banking transactions, not covered under any of the above segments. The income from such services and associated costs are disclosed in this segment.

During the year 1 995-96, the appreciation of Rs.9.65 Crore in the value of land and buildings consequent upon revaluation by approved valuers was credited to Revaluation Reserve. There has been no revaluation of assets during this year.

a) Defined Contribution Plan

Provident Fund

Employees, who have not opted for pension plan are eligible to get benefits from provident fund, which is a defined contribution plan. Aggregate contributions along with interest thereon are paid on retirement, death, incapacitation or termination of employment. Both the employee and the Bank contribute a specified percentage of the salary to the Federal Bank Employees'' Provident Fund. The Bank has no obligation other than the monthly contribution.

The Bank recognized Rs. 0.30 Crore (Previous year: Rs. 0.34 Crore) for provident fund contribution in the Profit and Loss Account New Pension Scheme

As per the industry level settlement dated 27/04/201 0, employees who joined the services of the Bank on or after 01/04/201 0 are not eligible for the existing pension scheme whereas they will be eligible for Defined Contributory Pension. Scheme (DCPS) in line with the New Pension Scheme introduced for employees of Central Government. Employee shall contribute 10% of their Basic Pay and Dearness Allowance towards DCPS and the Bank will also make a matching contribution. There is no separate Provident Fund for employees joining on or after 01/04/201 0.

The Bank recognized Rs. 13.34 Crore (Previous year: Rs. 9.41 Crore) for DCPS contribution in the Profit and Loss Account.

b) Defined benefit plan

Gratuity

The Bank provides for Gratuity, a defined benefit retirement plan (the "Gratuity Plan") covering the eligible employees. The Gratuity Plan provides a lumpsum payment to vested employees on retirement, death, incapacitation or termination of employment, of an amount based on the respective employees'' salary and the tenure of employment. Vesting occurs upon completion of five years of service as per Payment of Gratuity Act, 1972 and its amendment with effect from 24.05.201 0 or as per the provisions of the Federal Bank Employees'' Gratuity Trust Fund Rules / Bi-partite Award provisions. Liabilities with regard to the Gratuity Plan are determined by Actuarial valua- tion as on the Balance Sheet date, based upon which, the Bank contributes all the ascertained liabilities to the Federal Bank Employees'' Gratuity Trust Fund (the "Trust"). Trustees administer contributions made to the Trust and contributions are invested in specific invest- ments as permitted by law.

Superannuation / Pension

The Bank provides for monthly pension, a defined benefit retirement plan (the "pension plan") covering eligible employees. The pension plan provides a monthly pension after retirement of the employees till death and to the family after the death of the pensioner. The monthly pension is based on the respective employees'' salary and the tenure of employment. Vesting occurs upon completion of ten years of service. The Bank pays the monthly pension by purchasing annuities from Life Insurance Corporation of India (LIC). Liabilities with regard to the pension plan are determined by actuarial valuation as on the Balance Sheet date, based upon which, the Bank contributes all the ascertained liabilities to the Federal Bank (Employees'') Pension Fund (the "Trust"). Trustees administer contributions made to the Trust and contributions are invested in specific investments as permitted by law.

The following table as furnished by Actuary sets out the funded status of gratuity / pension plan and the amount recognized in the Bank''s financial statements as at March 31, 201 5.

18. The net liability arising on exercise of second option for Pension by employees (other than separated / retired employees) ac- tuarially determined during Financial Year 2010-11 at Rs.168.43 Crore is amortised equally over a period of five years pursuant to the exemption from the application of the provisions of the Accounting Standard (AS) 15, Employee Benefits, granted by the Reserve Bank of India and made applicable to the Bank vide letter no. DBOD No.BP.BC.1 5896 / 21.04.01 8 / 201 0-11 dated April 8, 2011. Accord- ingly, an amount of Rs.33.68 Crore (Previous Year: Rs. 33.68 Crore), being proportionate amount is charged to Profit and Loss Account for the year

19. Description of contingent liabilities:

a) Claims against the Bank not acknowledged as debts

These represent claims filed against the Bank in the normal course of business relating to various legal cases currently in progress. These also include demands raised by income tax and other statutory authorities and disputed by the Bank.

b) Liability on account of forward exchange and derivative contracts

The Bank enters into foreign exchange contracts, (currency swaps, Forward exchange contracts and currency futures) on its own account and forward exchange contracts for 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 two currencies, based on ruling spot rates. Interest rate swaps are commitments to exchange fixed and floating interest rate cash flows. Currency Futures contract is a standardized, exchange-traded contract, to buy or sell a certain underlying currency at a certain date in the future, at a specified price.

c) Guarantees given on behalf of constituents

As a part of its banking activities, the Bank issues guarantees on behalf of its customers to enhance their credit standing. Guarantees represent irrevocable assurances that the Bank will make payments in the event of the customer failing to fulfill its financial or perform- ance obligations..

d) Acceptances, endorsements and other obligations

These include documentary credit issued by the Bank on behalf of its customers and bills drawn by the Bank''s customers that are accepted or endorsed by the Bank.

e) Other items for which the bank is contingently liable

Includes capital commitments and amount transferred to RBI under the Depositor Education and Awareness Fund (DEAF)

Refer schedule 1 2 for amounts relating to contingent liability.

20. 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.

21. Small and Micro Industries

Under the Micro, Small and Medium Enterprises Development Act, 2006 which came into force from 2ndOctober, 2006, certain disclo- sures are required to be made relating to Micro, Small and Medium enterprises. 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. The above is based on the information available with the Bank which has been relied upon by the auditors.

22. previous year have been regrouped and reclassified, wherever necessary to conform to current year''s presentation.


Mar 31, 2014

1. Background

The Federal Bank Limited (''the Bank'') was incorporated in 1931 as Travancore Federal Bank Limited to cater to the banking needs of Travancore Province by a small group of local citizens. It embarked on a phase of sustained growth under the leadership of Late K.P. Hormis. The Bank has a network of1203branches / offces in India and provides retail and corporate banking, para banking activities such as debit card, third party product distribution, in addition to treasury and foreign exchange business. The bank is governed by Banking Regulation Act, 1949 and other applicable Acts/ Regulations.The Bank''s shares are listed in the Bombay Stock Exchange Limited, National Stock Exchange of India Limited and Cochin Stock ExchangeLimited. The GDRs issued by the Bank in 2006 have been listed in the London Stock Exchange.

2. Basis of preparation

The fnancial statements have been prepared and presented under the historical cost convention on the accrual basis of accounting, and comply with the generally accepted accounting principles, statutory requirements prescribed under the Banking Regulation Act, 1949, the circulars and guidelines issued by the Reserve Bank of India (''RBI'') from time to time and the Accounting Standards notifed under Section 211(3C) of the Companies Act, 1956 ("the 1956 Act") (which con- tinue to be applicable in respect of Section 133 of the Companies Act, 2013 ("the 2013 Act") in terms of General Circular 15/2013 dated 13thSeptember, 2013 of the Ministry of Corporate Affairs) and the relevant provisions of the 1956 Act/ 2013Act, as applicable and current practices prevailing within the banking industry in India.

3. Use of estimates

The preparation of the fnancial statements in conformity with the generally accepted accounting principles requires the Management to make estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses and disclosure of contingent liabilities at the date of the fnancial statements. Actual results could differ from those estimates.The Management believes that the estimates used in the preparation of the fnancial statements are prudent and reasonable. Any revisions to the accounting estimates are recognised prospectively in the current and future periods.

4.1. Draw Down from Reserves

In accordance with Reserve Bank of India circular DBOD.No.BP.BC.77/21.01.018/2013-14 dated 20 December 2013, the Bank has provided deferred tax liability in respect of special reserve created under Sec 36 (1) (viii) of the Income Tax Act 1961 for the period upto 31 March 2013 amounting to Rs.53.96 Crore by drawing down the balance from Revenue Reserve.

The Bank has not made any draw down from reserves during the previous year.

4.2. Letter of Comfort

The Bank has not issued any letters of comfort (LoC) on behalf of its subsidiaries.

4.3. The Bank has not sponsored any special purpose vehicle which is required to be consolidated in the consolidated fnancial statements as per accounting norms.

4.4. Details of Overseas Assets, NPAs and Revenue - Nil

4.5 Securitisation Trsansactions

The Bank has not done any securitisation transactions during the year ended 31 March, 2014 and 31 March, 2013.

4.6 Disclosures on Remuneration

(i) Qualitative disclosures

a) Information relating to the composition and mandate of the Remuneration Committee:

The Remuneration Committee of the Board oversees the framing, review and implementation of the compensation policy of the Bank, on behalf of the Board. This committee works in coordination with Risk Management Committee of the Bank, in order to achieve effective alignment between risk and remuneration.

As on 31 March, 2014, the remuneration committee of the Board comprises of the following Independent Directors:

-Prof. Abraham Koshy – Chairman

- Shri Nilesh S Vikamsey

- Dr. M. Y. Khan

The above committee of the Board functions with the following objectives

a) To review the Compensation package for the MD and CEO and Executive Directors and recommend revisions for Board approval

b) To consider and approve issuance and allotment of ESOS shares to MD/ED and employees of the Bank.

c) To develop and implement an effective compensation policy, as per RBI guidelines

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

The compensation payable to MD & CEO, ED and Senior Executives is divided into fxed and variable components. The fxed compensation is determined based on the industry standards, the exposure, skill sets, talent and qualifcation attained by the offcial over his/her career span etc. Approval from RBI is obtained to decide fxed compensation for MD & CEO and ED. The variable compensation for MD & CEO and senior executives (Non – IBA package ie. CGM and above) are determined based on Bank''s performance and Key Performance Areas (KPA) set for the offcial. KPAs contain targets on risk adjusted metrics such as Risk Adjusted Return on Capital (RAROC), Risk Adjusted Return on Risk Adjusted Capital (RARORAC), in addition to target on NPAs. The objectives of the remuneration policy are four fold:

- To align compensation with prudent risk taken

- To drive sustainable performance in the organization

- To ensure fnancial stability of the organization; and

- To attract and retain talent

c) Description of the ways in which current and future risks are taken into account in the remuneration processes.

For the purpose of effectively aligning compensation structure with risk outcomes, the functionaries in the Bank are arranged under the following four categories:

MD & CEO / ED

Senior Executives (Non IBA package)

Senior Executives (On IBA package)

Other members of staff (On IBA package)

Limit on variable pay

The variable compensation offered to an offcial would not exceed 70% of the total fxed compensation

Severance pay and guaranteed bonus

Severance pay (other than gratuity or terminal entitlements or as entitled by statute) is not paid to any offcial of the organization

Sign on bonus or joining bonus is limited to the frst year and is paid only as Employee stock options Hedging

No compensation scheme or insurance facility would be provided by the Bank to employees to hedge their compensation structure to offset the risk alignment mechanism (deferral pay and clawback arrangements) embedded in their compensation arrangement

Compensation Recovery policy

A claw back arrangement or a compensation recovery policy is provided, which will entail the Bank to recover proportionate amount of variable compensation paid to the above functionaries on account of an act or decision taken by the offcial which has brought forth a negative contribution to the bank at a prospective stage. The claw back arrangement would be valid for a period of three years from the date of payment of variable compensation

Committees to mitigate risks caused by an individual decision

In order to further balance the impact of market or credit risks caused to the organization by an individual decision taken by a senior level executive, MD & CEO or ED, the bank has constituted various committees to take decisions on various aspects.

Credit limits are sanctioned by committees at different levels.

Investment decisions of the Bank are taken and monitored by Investment committee and there is an upper limit in treasury dealings where individual decisions can be taken.

Interest rates on asset and liability products for different buckets are decided and monitored by the Asset Liability Committee of the Board (ALCO). Banks'' exposure to liquidity risk are also monitored by ALCO.

Integrated Risk Management Department (IRMD)

In order to effectively govern the compensation structure,IRMD would assist the Remuneration Committee of the Board to monitor, review and control various risks and balance prudent risk taking with the compensation paid out to top executives and other employees

Compensation of risk control staff

The total fxed and variable compensation paid out to the employees of IRMD is independent of business parameters and rendering of effective support to the Remuneration Committee of the Board. The variable compensation component (Performance Linked Incentive or PLI) will be subjected to a minimum and greater proportion of compensation will be fxed in nature to ensure autonomy and independence from business goals.

d) Linkage of performance during a performance measurement period with levels of remuneration.

The Bank''s performance is charted based on the revenue point index / performance scorecard which takes into account various fnancial indicators like revenue earned, cost deployed, proft earned, NPA position and other intangible factors like leadership and employee development. Variable pay is paid purely based on performance and is measured through Score cards for MD& CEO / EDs. The score card provides a mix of fnancial and non-fnancial, quantitative and qualitative metrics.

Compensation paid to Senior executives and other staff members on IBA package

The compensation paid to other offcials that include Award staff, Offcers coming under Scale I to III and Senior executives from Scorecards. This is done to align the compensation of senior staff with their performance, risk and responsibility taken in higher assignments. The Offcers in Scale I-III as well as Award staff come under the purview of IBA package that is as per the Industry wide settlements. Variable compensation, ESOP is linked with seniority in these levels. coming under Scale IV to VII is fxed based on the periodic industry level settlements with Indian Banks Association. The variable compensation paid to these functionaries is based on the Performance Linked incentive scheme which has been formulated on the basis of performance parameters set in Performance Management System

e) Bank''s policy on deferral and vesting of variable remuneration and criteria for adjusting deferred remuneration before vesting and after vesting.

Deferred compensation and Performance Linkage

In the event variable compensation paid to MD & CEO, ED and Senior Executives (Non-IBA) exceeds more than 50% of the fxed compensation for the year on account of high level of Bank''s performance, 60% of the variable pay so entitled to the offcial will be deferred for payment over a period of 3 years. The amount is parked in an escrow account and the payment will be made in the ratio of 20:30:50 over a period of three years, i.e.,

- 20 % of the deferred compensation will be paid in the frst year

- 30% of the deferred compensation in the second year; and

- 50 % of the deferred compensation in the third year

Clawback and deferral arrangements

The provisions of clawback and deferral arrangements are applicable to the referred functionaries and all employees in the event their variable compensation exceeds 50 % of their fxed emoluments

f) Description of the different forms of variable remuneration

Bank uses an optimum mix of cash, ESOPS and variable PLI to decide the compensation of employees in all categories. The distribution of ESOPS and variable PLI are higher in top levels and is linked with their performance measurements taken from Scorecards. This is done to align the compensation of senior staff with their performance, risk and responsibility taken in higher assignments. The Offcers in Scale I-III as well as Award staff come under the purview of IBA package that is as per the Industry wide settlements. Variable compensation, ESOP is linked with seniority in these levels.

5.1 A. Subscribed and paid up capital includes:

(i) 16590 shares of Rs.2/- each (Previous year 3318 shares of Rs.10/-) issued for consideration other than cash

(ii) 21025590 underlying equity shares of Rs.2/- each per share (previous year 3371338 of Rs.10/- each) held by custodian on behalf of holders of Global Depository Receipts (GDRs)

(iii) 74280 ESOS shares of Rs.2/- per share (previous year 11631 shares of Rs.10) allottedunder ESOS 2010.

B. Allotment of 6530 shares of Rs.2/- each (Previous year 1306 shares of Rs.10/ each pertaining to the Right issue of 1993 issued at premium of Rs.25/- per share and 2,62,100 shares of Rs.2/- each (Previous year 52,420 shares of Rs.10/- per share) pertaining to the Rights issue of 1996 issued at a premium of Rs.140/- per Share and 10,83,415 equity shares of Rs.2/- each (previous year 2,16,683 shares of Rs.10/ per share, at a premium of Rs.240/- per share pertaining to Rights issue of 2007 are kept pending following orders from various courts.

Issue of certifcates/credit in demat account in respect of 412,940 shares of Rs.2/- each (previous year 82,788 shares of Rs.10/- each) out of the Bonus issue of 2004 are kept in abeyance consequent to injuction orders from various courts.

As per SEBI guidelines the accounting for ESOS can be done either under the ''Intrinsic value basis'' or ''Fair value basis''.

The Compensation Committee in their meeting dated10/05/2012 decided to adopt ''Intrinsic value method'' for accounting of ESOS, in terms of the power vested on them as per the resolution of EGM dated 24 December 2010

The exercise price of the options granted is the same as the market price on the date prior to grant date and hence there is no intrinsic value for the options, which has to be amortized over the vesting period. If "Fair Value Method" had been adopted based on"Black-Scholes pricing model" for pricing and accounting of options, net proft would be lower by Rs.20.03Crore(Previous Year: Rs.12.73 Crore)

The modifed basic and diluted earnings per share for the year, had the company followed Fair Value Method of account- ing for ESOS compensation cost would be Rs.9.57and Rs.9.51(Previous Year:Rs.9.65 and Rs.9.62) respectively.

ii) Dividend paid on shares issued on exercise of stock option

The Bank may allot shares between the Balance Sheet date and record date for the declaration of dividend pursuant to the exercise of any employee stock options. These shares will be eligible for full dividend for the year ended 31 March 2014, if approved at the ensuing Annual General Meeting. Dividend relating to these shares has not been recorded in the current year.

5.2. Segment Reporting (AS 17)

Business of the Bank is divided into four segments viz. Treasury, Corporate or Wholesale Banking, Retail Banking and other banking operations. The principal activities of these segments and income and expenses structure are as follows:

Treasury

Treasury operations include trading and investments in Government and corporate debt instruments, equity and mutual funds, derivative trading and foreign exchange operations on proprietary account and for customers. The income of this segment primarily consists of earnings from the investment portfolio of the bank, gains and losses on trading operations. The principal expense of the segment consists of interest expense on funds borrowed/utilizedand other allocated overheads.

Corporate/Wholesale Banking:

This segment provides loans and other banking services to Corporate and other clients where value of individual exposure to the Clients exceeds Rs.5 Crore as defned by RBI. Revenue of this segment consists of interest and fees earned on loans to such customers and charges and fees earned from other banking services. Expenses of this segment primarily consist of interest expense on funds utilized and allocated overheads

Retail banking:

Retail banking constitutes lending and other banking services to individuals/small business customers, other than corpo- rate/wholesale banking customers, identifed on the basis of RBI guidelines.

Revenue of this segment consists of interest earned on loans made to such customers and charges /fees carried from other banking services to them. The principal expenses of the segment consist of interest expenses on funds borrowed and other expenses.

Other Banking Operations

This segment includes parabanking activities like third party product distribution and other banking transactions, not cov- ered under any of the above segments. The income from such services and associated costs are disclosed in this segment.

5.3 Revaluation of Fixed Assets

During the year 1995-96, the appreciation of Rs.9.65 Crore in the value of land and buildings consequent upon re- valuation by approved valuers was credited to Revaluation Reserve. Depreciation for the year on the net addition to value on such revaluation of assets at Rs.0.20Crore (Previous year:Rs.0.21Crore) has been transferred fromRevaluation Reserve to Proft and Loss Account. There has been no revaluation of assets during this year.

5.4. Employee Benefits

a) Defned Contribution Plan

Provident Fund

Employees, who have not opted for pension plan are eligible to get benefts from provident fund, which is a defned contribution plan. Aggregate contributions along with interest thereon are paid on retirement, death, incapacitation or termination of employment. Both the employee and the Bank contribute a specifed percentage of the salary to the Fed- eral Bank Employees''Provident Fund. The Bank has no obligation other than the monthly contribution. The Bank recognized Rs.0.34Crore(Previous year:Rs.0.37Crore) for provident fund contribution in the Proft and Loss Account.

New Pension Scheme

As per the industry level settlement dated 27/04/2010, employees who joined the services of the Bank are not eligible for the existing pension scheme whereas they will be eligible for Defned Contributory Pension Scheme (DCPS) in line with the New Pension Scheme introduced for employees of Central Government. Employee shall contribute 10% of their Basic Pay and Dearness Allowance towards DCPS and the Bank will also make a matching contribution. There is no separate Provident Fund for employees joining on or after 01/04/2010. The Bank recognized Rs.9.41 Crore (Previous year: Rs.5.69Crore) for DCPS contribution in the Proft and Loss Account.

b) Defined benefit plan Gratuity

The Bank provides for Gratuity, a defned beneft retirement plan (the "Gratuity Plan") covering the eligible employees. The Gratuity Plan provides a lumpsum payment to vested employees on retirement, death, incapacitation or termination of employment, of an amount based on the respective employees'' salary and the tenure of employment. Vesting oc- curs upon completion of fve years of service as per Payment of Gratuity Act, 1972 and its amendment with effect from 24.05.2010 or as per the provisions of the Federal Bank Employees'' Gratuity Trust Fund Rules / Bi-partite Award provisions. Liabilities with regard to the Gratuity Plan are determined by Actuarial valuation as on the Balance Sheet date, based upon which, the Bank contributes all the ascertained liabilities to the Federal Bank Employees'' Gratuity Trust Fund (the "Trust"). Trustees administer contributions made to the Trust and contributions are invested in specifc investments as permitted by law.

Superannuation / Pension

The Bank provides for monthly pension, a defned beneft retirement plan (the "pension plan") covering eligible employ- ees. The pension plan provides a monthly pension after retirement of the employees till death and to the family after the death of the pensioner. The monthly pension is based on the respective employees'' salary and the tenure of employment. Vesting occurs upon completion of ten years of service. The Bank pays the monthly pension by purchasing annuities from Life Insurance Corporation of India (LIC). Liabilities with regard to the pension plan are determined by actuarial valua- tion as on the Balance Sheet date, based upon which, the Bank contributes all the ascertained liabilities to the Federal Bank (Employees'') Pension Fund (the "Trust"). Trustees administer contributions made to the Trust and contributions are invested in specifc investments as permitted by law.

The following table as furnished by Actuary sets out the funded status of gratuity / pension plan and the amount recog- nized in the Bank''s fnancial statements as at March 31, 2014.

5.5. Description of contingent liabilities:

a)Claims against the Bank not acknowledged as debts

These represent claims fled against the Bank in the normal course of business relating to various legal cases currently in progress. These also include demands raised by income tax and other statutory authorities and disputed by the Bank. b)Liability on account of forward exchange and derivative contracts

The Bank enters into foreign exchange contracts, (currencyswaps, Forward exchange contracts and currency futures) on its own account and forward exchange contracts for 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 fows by way of interest/principal in two currencies, based on ruling spot rates. Interest rate swaps are com- mitments to exchange fxed and foating interest rate cash fows. Currency Futures contract is a standardized, exchange- traded contract, to buy or sell a certain underlying currency at a certain date in the future, at a specifed price.

c) Guarantees given on behalf of constituents

As a part of its banking activities, the Bank issues guarantees on behalf of its customers to enhance their credit standing. Guarantees represent irrevocable assurances that the Bank will make payments in the event of the customer failing tofulfll its fnancial or performance obligations.

d) Acceptances, endorsements and other obligations

These include documentary credit issued by the Bank on behalf of its customers and bills drawn by the Bank''s customers that are accepted or endorsed by the Bank.

e) Other items

Other items represent stock of gold on consignment basis.

5.6 Small and Micro Industries

Under the Micro, Small and Medium Enterprises Development Act, 2006 which came into force from 2ndOctober, 2006, certain disclosures are required to be made relating to Micro, Small and Medium enterprises. 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. The above is based on the information available with the Bank which has been relied upon by the auditors.

5.7 Figures for the previous year have been regrouped and reclassifed, wherever necessary to conform to current year''s presentation.


Mar 31, 2013

1 Background

The Federal Bank Limited (''the Bank'') was incorporated in 1931 as Travancore Federal Bank Limited to cater to the banking needs of Travancore province by a small group of local citizens. It embarked on a phase of sustained growth under the leadership of Late K.p. Hormis. The Bank has a network of 1131 branches / offices in India and provides retail and corporate banking, para banking activities such as debit card, third party product distribution, in addition to treasury and foreign exchange business. The bank is governed by Banking Regulation Act, 1949 and other applicable Acts/ Regulations. The Bank''s shares are listed in the Bombay Stock Exchange Limited, Cochin Stock Exchange Limited and National Stock Exchange of India Limited. The GDRs issued by the Bank in 2006 have been listed on the London Stock exchange.

2. Basis of preparation

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

3. Use of estimates

The preparation of the financial statements in conformity with the generally accepted accounting principles requires the Management to make estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses and disclosure of contingent liabilities at the date of the financial statements. Actual results could differ from those estimates. The Management believes that the estimates used in the preparation of the financial statements are prudent and reasonable. Any revisions to the accounting estimates are recognised prospectively in the current and future periods.

4.1.1. a) Investments under HTM (excluding specified investments as per RBI norms) account for 23.84% (previous year 24.95%) of demand and time liabilities as at the end of March 2013 as against permitted ceiling of 25% stipulated by RBI.

b) In respect of securities held under HTM category premium of Rs.22.10 Crore (previous year : Rs.22.13 Crore) has been amortised during the year and debited under interest received on Government securities.

c) Profit on sale of securities from HTM category amounting to Rs.45.30 Crore (previous year : Rs.10.66 Crore) has been taken to Profit and Loss Account. During the year, the Bank has appropriated Rs. 22.95 Crore (previous year Rs. 5.40 Crore), net of taxes, to the Capital Reserve, being the gain on sale of HTM investments in accordance with RBI guidelines.

4.2.1. Disclosure on Risk exposure in Derivatives

a) Qualitative Disclosures

Structure, organization, scope and nature of management of risk in derivatives etc.

The Treasury Department is organised into three functional areas, ie, front office, mid office and back office under the charge of Assistant General Managers with overall supervision and control by President - Treasury. Derivative deals are generally executed for market making. Although fresh derivative deals are not undertaken, the outstanding position of earlier years is managed by the back office.

The risk in the derivatives is monitored regularly by assessing marked to market position (MTM) of the entire portfolio and the impact on account of the probable market movements. Various risk limits have been put in place under different segments of the derivatives, as approved by Board. The risk profile of the outstanding portfolio is reviewed by the Board at regular intervals. The current outstanding under the derivatives portfolio were executed for trading purposes.

Accounting:

Board Approved Accounting Policies as per RBI guidelines have been adopted. The swaps are marked to market every month and the MTM losses in the basket are accounted in the books while MTM profits are ignored.

Collateral Security:

As per market practice, no collateral security is insisted on for the contracts with counter parties like Banks/Primary Dealers (PDs) etc. For deals with Corporate Clients, appropriate collateral security/margin etc. are stipulated wherever considered necessary.

Credit Risk Mitigation:

Most of the deals have been contracted with Banks/ Major PDs and no default risk is anticipated on the deals with them. No derivative contracts are done for other clients as of now.

4.3.1 During the year ended 31 March, 2013, the Bank''s credit exposure to single borrower and group borrowers was within the prudential exposure limits prescribed by RBI.

4.4. Penalty levied by RBI on account of bouncing of SGL sale transaction Rs. 0.68 lakhs (Previous Year Nil); Date of payment 27 July, 2012.

4.5.Draw Down from Reserves

The Bank has not made any draw down of reserves during the year.

4.6.Letter of Comfort

The Bank has not issued any letters of comfort (LoC) on behalf of its subsidiaries.

4.7. The Bank has not sponsored any special purpose vehicle which is required to be consolidated in the consolidated financial statements as per accounting norms.

4.8. Details of Overseas Assets, NPAs and Revenue - Nil

4.9. Disclosures on Remuneration

(i) Qualitative disclosures

a) Information relating to the composition and mandate of the Remuneration Committee:

Composition

The remuneration committee of the Board consists of three members of which one member from Risk Management committee of the Board will facilitate effective governance of compensation.

Function and mandate

The remuneration committee of the Board would oversee framing, review and implementation of the compensation policy on behalf of the Board with the assistance of Integrated Risk Management department (IRMD).

Process

The remuneration committee with the assistance of IRMD will closely co-ordinate with the Risk committee of the Board to review the compensation practices every year and to decide instances for invoking clawback agreements. The committee will study the business and industry environment, analyze and categorize the risks into immediate and long term and stream line the components of the compensation plan like proportion of the total variable compensation to be paid to Managing Director & Chief Executive Officer (MD & CEO), Executive Directors (ED) and Senior Executives to ensure financial stability of the Bank.

The committee would also analyze various factors to ascertain whether cost/ income ratio supports the remuneration package provided to MD & CEO, ED''s and Senior Executives, consistent with maintenance of sound capital adequacy ratio.

Authority to invoke clawback arrangement

The remuneration committee of the Board have the authority to ascertain whether the decision taken by the MD & CEO, ED and Senior Executives (Non-IBA) have brought forth a negative contribution to the Bank. The committee will be vested with the powers to invoke the clawback arrangement or compensation recovery within a period of three years from the date of payment of variable compensation.

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

The compensation payable to MD & CEO, ED and Senior Executives is divided into fixed and variable components. The fixed compensation is determined based on the industry standards, the exposure, skill sets, talent and qualification attained by the official over his/her career span etc. Approval from RBI is obtained to decide fixed compensation for MD & CEO and ED.

The variable compensation for MD & CEO and senior executives (Non - IBA package ie. CGM and above) are determined based on Bank''s performance and Key Performance Areas (KPA) set for the official. KPAs contain targets on risk adjusted metrics such as Risk Adjusted Return on Capital (RAROC), Risk Adjusted Return on Risk Adjusted Capital (RARORAC), in addition to target on NPAs.

The objectives of the remuneration policy are four fold:

- To align compensation with prudent risk taken

- To drive sustainable performance in the organization

- To ensure financial stability of the organization; and

- To attract and retain talent

c) Description of the ways in which current and future risks are taken into account in the remuneration processes. For the purpose of effectively aligning compensation structure with risk outcomes, the functionaries in the Bank are arranged under the following four categories

1) MD & CEO / ED

2) Senior Executives (Non IBA package)

3) Senior Executives (On IBA package)

4) Other members of staff (on IBA package)

Compensation Recovery policy

A claw back arrangement or a compensation recovery policy is provided, which will entail the Bank to recover proportionate amount of variable compensation paid to the above functionaries on account of an act or decision taken by the official which has brought forth a negative contribution to the bank at a prospective stage. The claw back arrangement would be valid for a period of three years from the date of payment of variable compensation. Limit on variable pay

The variable compensation offered to an official would not exceed 70% of the total fixed compensation Severance pay and guaranteed bonus

Severance pay (other than gratuity or terminal entitlements or as entitled by statute) is not paid to any official of the organization

Sign on bonus or joining bonus is limited to the first year and is paid only as Employee stock options Hedging

No compensation scheme or insurance facility would be provided by the Bank to employees to hedge their compensation structure to offset the risk alignment mechanism (deferral pay and clawback arrangements) embedded in their compensation arrangement Committees to mitigate risks caused by an individual decision

In order to further balance the impact of market or credit risks caused to the organization by an individual decision taken by a senior level executive, MD & CEO or a ED, the bank has constituted various committees to take decisions on various aspects

Credit limits are sanctioned by committee at different levels.

Investment decisions of the Bank are taken and monitored by Investment committee and there is an upper limit in treasury dealings where individual decisions can be taken.

Interest rates on Asset and liability products for different buckets are decided and monitored by the Asset Liability Committee of the Board (ALCO). Banks'' exposure to liquidity risk are also monitored by ALCO.

Integrated Risk Management Department (IRMD)

In order to effectively govern the compensation structure, IRMD would assist the Remuneration Committee of the Board to monitor, review and control various risks and balance prudent risk taking with the compensation paid out to top executives and other employees Compensation of risk control staff

The total fixed and variable compensation paid out to the employees of IRMD is independent of business parameters and rendering of effective support to the Remuneration Committee of the Board. The variable compensation component (Performance Linked Incentive or PLI) will be subjected to a minimum and greater proportion of compensation will be fixed in nature to ensure autonomy and independence from business goals

d) Linkage of performance during a performance measurement period with levels of remuneration.

The Bank''s performance is charted based on the revenue point index / performance scorecard which takes into account various financial indicators like revenue earned, cost deployed, profit earned, NPA position and other intangible factors like leadership and employee development. Variable pay is paid purely based on performance and is measured through Score cards for MD& CEO / EDs. The score card provides a mix of financial and non- financial, quantitative and qualitative metrics.

Compensation paid to Senior executives and other staff members on IBA package

The compensation paid to other officials that include Award staff, Officers coming under Scale I to III and Senior executives coming under Scale IV to VII is fixed based on the periodic industry level settlements with Indian Bank Association. The variable compensation paid to these functionaries is based on the Performance Linked incentive scheme which has been formulated on the basis of performance parameters set in Performance Management System

e) Bank''s policy on deferral and vesting of variable remuneration and criteria for adjusting deferred remuneration before vesting and after vesting.

Deferred compensation and Performance Linkage

In the event variable compensation paid to MD & CEO, ED and Senior Executives (Non-IBA) exceeds more than 50% of the fixed compensation for the year on account of high level of Bank''s performance, 60% of the variable pay so entitled to the official will be deferred for payment over a period of 3 years. The amount is parked in an escrow account and the payment will be made in the ratio of 20:30:50 over a period of three years, i.e.,

- 20 % of the deferred compensation will be paid in the first year

- 30% of the deferred compensation in the second year; and

- 50 % of the deferred compensation in the third year Clawback and deferral arrangements

The provisions of clawback and deferral arrangements are applicable to the referred functionaries and all employees in the event their variable compensation exceeds 50 % of their fixed emoluments

f) Description of the different forms of variable remuneration

Bank uses an optimum mix of cash, ESOPS and variable PLI to decide the compensation of employees in all categories. The distribution of ESOPS and variable PLI are higher in top levels and is linked with their performance measurements taken from Scorecards. This is done to align the compensation of senior staff with their performance, risk and responsibility taken in higher assignments. The Officers in Scale I-III as well as Award staff come under the purview of IBA package that is as per the Industry wide settlements. Variable compensation, ESOP is linked with seniority in these levels

5.1. Revaluation of Fixed Assets

During the year 1995-96, the appreciation of Rs. 9.65 Crore in the value of land and buildings consequent upon revaluation by approved valuers was credited to Revaluation Reserve. Depreciation for the year on the net addition to value on such revaluation of assets at Rs. 0.21 Crore (Previous year: Rs. 0.22 Crore) has been transferred from Revaluation Reserve to Profit and Loss Account. There has been no revaluation of assets during this year.

5.2. Employee Benefits

a) Defined Contribution Plan Provident Fund

Employees, who have not opted for pension plan are eligible to get benefits from provident fund, which is a defined contribution plan. Aggregate contributions along with interest thereon are paid on retirement, death, incapacitation or termination of employment. Both the employee and the Bank contribute a specified percentage of the salary to the Federal Bank Employees'' Provident Fund. The Bank has no obligation other than the monthly contribution.

The Bank recognized Rs.0.37 Crore (Previous year: Rs.0.41 Crore) for provident fund contribution in the Profit and Loss Account

New Pension Scheme

As per the industry level settlement dated 27/04/2010, employees who joined the services of the Bank are not eligible for the existing pension scheme whereas they will be eligible for Defined Contributory Pension Scheme (DCPS) in line with the New Pension Scheme introduced for employees of Central Government. Employee shall contribute 10% of their Pay and Dearness Allowance towards DCPS and the Bank will also make a matching contribution. There is no separate Provident Fund for employees joining on or after 01/04/2010.

The Bank recognized Rs. 5.69 Crore (Previous year: Rs. 2.94 Crore) for DCPS contribution in the Profit and Loss Account

b) Defined benefit plan

Gratuity

The Bank provides for Gratuity, a defined benefit retirement plan (the "Gratuity Plan") covering the eligible employees. The Gratuity Plan provides a lumpsum payment to vested employees on retirement, death, incapacitation or termination of employment, of an amount based on the respective employees'' salary and the tenure of employment. Vesting occurs upon completion of five years of service as per Payment of Gratuity Act, 1972 and its amendment with effect from 24.05.2010 or as per the provisions of the Federal Bank Employees'' Gratuity Trust Fund Rules / Bi-partite Award provisions. Liabilities with regard to the Gratuity Plan are determined by Actuarial valuation as on the Balance Sheet date, based upon which, the Bank contributes all the ascertained liabilities to the Federal Bank Employees'' Gratuity Trust Fund (the "Trust"). Trustees administer contributions made to the Trust and contributions are invested in specific investments as permitted by law.

Superannuation / Pension

The Bank provides for monthly pension, a defined benefit retirement plan (the "pension plan") covering eligible employees. The pension plan provides a monthly pension after retirement of the employees till death and to the family after the death of the pensioner. The monthly pension is based on the respective employees'' salary and the tenure of employment. Vesting occurs upon completion of ten years of service. The Bank pays the monthly pension by purchasing annuities from Life Insurance Corporation of India (LIC). Liabilities with regard to the pension plan are determined by actuarial valuation as on the Balance Sheet date, based upon which, the Bank contributes all the ascertained liabilities to the Federal Bank (Employees'') Pension Fund (the "Trust"). Trustees administer contributions made to the Trust and contributions are invested in specific investments as permitted by law.

The following table as furnished by Actuary sets out the funded status of gratuity / pension plan and the amount recognized in the Bank''s financial statements as at March 31, 2013.

5.3. The net liability arising on exercise of second option for Pension by employees (other than separated / retired employees) actuarially determined during Financial Year 2010-11 at Rs. 168.43 Crore is amortised equally over a period of five years pursuant to the exemption from the application of the provisions of the Accounting Standard (AS) 15, Employee Benefits, granted by the Reserve Bank of India and made applicable to the Bank vide letter no. DBOD No.BP.BC.15896 / 21.04.018 / 2010-11 dated April 8, 2011. Accordingly, an amount of Rs. 33.68 Crore (Previous Year: Rs. 33.68 Crore), being proportionate amount is charged to Profit and Loss Account for the year and the balance unamortised pension liability of Rs. 67.36 Crore (Previous Year: Rs. 101.04 Crore) is to be amortised over the next two years.

5.4. Description of contingent liabilities:

a) Claims against the Bank not acknowledged as debts

These represent claims filed against the Bank in the normal course of business relating to various legal cases currently in progress. These also include demands raised by income tax and other statutory authorities and disputed by the Bank.

b) Liability on account of forward exchange and derivative contracts

The Bank enters into foreign exchange contracts, currency swaps, Forward exchange contracts and currency futures on its own account. Bank enters into Forward exchange contracts for 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 two currencies, based on ruling spot rates. Interest rate swaps are commitments to exchange fixed and floating interest rate cash flows. Currency Futures contract is a standardized, exchange-traded contract, to buy or sell a certain underlying currency at a certain date in the future, at a specified price.

c) Guarantees given on behalf of constituents

As a part of its banking activities, the Bank issues guarantees on behalf of its customers to enhance their credit standing. Guarantees represent irrevocable assurances that the Bank will make payments in the event of the customer failing to fulfill its financial or performance obligations.

d) Acceptances, endorsements and other obligations

These include documentary credit issued by the Bank on behalf of its customers and bills drawn by the Bank''s customers that are accepted or endorsed by the Bank.

e) Other items

Other items represent stock of gold on consignment basis.

5.5.Small and Micro Industries

Under the Micro, Small and Medium Enterprises Development Act, 2006 which came into force from 2 October, 2006, certain disclosures are required to be made relating to Micro, Small and Medium enterprises. 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. The above is based on the information available with the Bank which has been relied upon by the auditors.

5.6. Figures of previous year were audited by Joint Central Statutory Auditors other than current Joint Central Statutory Auditors "Deloitte Haskins & Sells and M P Chitale & Co." Figures for the previous year have been regrouped and reclassified, where necessary to conform to current year''s presentation.


Mar 31, 2012

1. Reconciliation

The reconciliation of outstanding entries in inter branch/office transactions as on 31st March 2012 has been substantially completed and the effect, if any, of pending entries will not be material.

2. The net liability arising on exercise of second option for Pension by employees (other than separated/ retired employees) actuarially determined during FY 2010-11 at Rs 168.43cr and 1/5th of the said liability amounting to Rs 33.71cr. was charged to the Profit and Loss Account during last FY and balance unamortized amount of Rs.134.72 crore was carried forward to be amortised equally over the succeeding four years, as per approval of RBI (vide letter no.DBOD.No.BP.BC.15896/21.04.018/2010-11 dated 08.04.2011). Accordingly, an amount of Rs33.68 crore , being proportionate amount is charged to Profit and Loss during the year. The balance outstanding as unamortized is Rs 101.04 crore

3.1 Investments

3.1.1 a) Investments under HTM (excluding specified investments as per RBI norms) account for 24.95% (previous year 21.01%) of demand and time liabilities as at the end of March 2012 as against permitted ceiling of 25% stipulated by RBI.

b) In respect of securities held under HTM category premium of Rs 22.13 crore (previous year Rs 21.90 crore) has been amortised during the year and debited under interest received on Government securities.

c) Profit on sale of securities from HTM category amounting to Rs10.66 crore (previous year Rs Nil crore) has been taken to Profit and Loss Account and a sum of Rs 5.40 crore (previous year Rs Nil crore) being net of taxes and transfer to statutory reserve of such profit, appropriated to Capital Reserve.

(Previous year figures are given in brackets)

** excluding investments in shares Rs 193.42 crore (previous year Rs 162.56 crore)

*** excluding investments in pass through certificates Rs 0.17 crore (previous year Rs 1.80 crore)

3.2 Sale and transfers to/ from HTM Category

The value of sales/transfers to / from HTM category is less than 5 per cent of the book value of investments held in HTM category at the beginning of the year,

3.3.1 Disclosure on Risk exposure in Derivatives Qualitative Disclosures Structure, organization, scope and nature of management of risk in derivatives etc

The organizational structure consists of Treasury Department which is segregated into three functional areas, ie, front office, mid office and back office. Derivative deals are executed for hedging and market making.

The risk in the derivatives is monitored by regularly assessing Marked to Market Position (MTM) of the entire portfolio and the impact on account of the probable market movements. Various risk limits have been put in place under different segments of the derivatives, as approved by Board. The risk profile of the outstanding portfolio is reviewed by Board at regular intervals. For own balance sheet management, hedging policies are devised to mitigate risks, lower borrowing costs and enhance yields. The current outstanding under the derivatives portfolio were executed for trading and hedging.

Accounting:

Board Approved Accounting Policies as per RBI guidelines have been adopted. The hedge swaps are accounted for like a hedge of the asset or liability. The hedge swaps are accounted on accrual basis except where swaps for hedging marked to market asset/liability. Such hedge swaps are marked to market on a monthly basis and the gain/losses are recorded as an adjustment to the designated asset/liability. The Non hedge swaps are marked to market every month and the MTM losses in the basket are accounted in the books while MTM profits are ignored.

Collateral Security:

As per market practice, no collateral security is insisted on for the contracts with counter parties like Banks/ PDs etc. For deals with Corporate Clients, appropriate collateral security/margin etc. are stipulated wherever considered necessary.

Credit Risk Mitigation:

Most of the deals have been contracted with Banks/ Major PDs and no default risk is anticipated on the deals with them. In the case of deals with corporate clients, the outstanding positions are closely monitored for the default risks and appropriate measures are initiated.

*Includes Rs 5.26 Crores being 1/8 th of the total amount of sacrifice of Rs 42.05 crores provided in respect of one account for the current quarter and the balance amount of Rs 36.79 crores will be provided over succeeding 7 quarters as permitted by RBI vide letter dated 15.03.2012.

3.5.1 Country Risk (As compiled by the Management)

The net funded exposure of the Bank in respect of foreign exchange transactions with each country is within 1% of the total assets of the Bank and hence no provision is required to be made in respect of country risk as per the RBI circular DBOD.BP.BC.96/21.04.103/2003-04 dated 17 June 2004.

3.5.2 Details of Overseas Assets, NPAs and Revenue Nil

3.5.3 Off balance Sheet SPV sponsored

Nil

4. Fixed Assets

i. During the year 1995-96, the appreciation of Rs9.65 crore in the value of land and buildings consequent upon revaluation by approved valuers was credited to Capital Reserve. Depreciation for the year on the net addition to value on such revaluation of assets atRs0.22 crore (previous year Rs0.23 crore) has been transferred from Capital Reserve to Profit & Loss Account. There has been no revaluation of assets during this year.

ii. Land and premises include flats Rs0.37 crore (previous year Rs0.37 crore), written down value Rs0.18 crore (previous year Rs0.19 crore), taken possession of and being used by the Bank, for which documentation/ registration formalities are to be completed.

5. Employee Stock Option Scheme ("ESOS"):

Shareholders of the bank has approved Employee Stock Option Scheme (ESOS) through postal ballot, the result of which was announced on Dec, 24, 2010, enabling the Board and/or the "Compensation Committee"

As per SEBI guidelines the accounting for ESOS can be done either under the ' Intrinsic value basis' or ' Fair value basis'.

The Compensation Committee in their meeting dated10/05/2012 decided to adopt ' Intrinsic value method ' for accounting of ESOS, in terms of the power vested on them as per the resolution of EGM dated 24 December 2010

The exercise price of the options granted is the same as the market price on the date prior to grant date and hence there is no intrinsic value for the options, which has to be amortized over the vesting period.

If "Fair Value Method" had been adopted based on "Black-Scholes pricing model" for pricing and accounting of options, net profit would be lower by Rs1972.46 lacs.

The impact on Basic and Diluted Earnings per share for the year, had the company followed Fair Value Method of accounting for ESOS compensation cost is Rs 44.26 and Rs 44.16 respectively.

6 Disclosure in terms of Accounting Standard

6.1 There is no material prior period income/expenditure requiring disclosure under AS 5 'Net Profit or Loss for the Period, Prior period items and changes in Accounting policies issued by the Institute of Chartered Accountants of India.

6.2 Employee Benefits (AS 15)

a) Defined Contribution Plan

Provident Fund

Employees who have not opted for pension plan are eligible to get benefits from provident fund, which is a defined contribution plan. Aggregate contributions along with interest thereon are paid on retirement, death, incapacitation or termination of employment. Both the employee and the Bank contribute a specified percentage of the salary to the Federal Bank Employees' Provident Fund. The Bank has no obligation other than the monthly contribution.

The Bank recognized Rs41.17 lakhs (Previous year Rs 15.84 Cr) for provident fund contribution in the Profit and Loss account

New Pension Scheme

As per the industry level settlement dated 27/04/2010, employees who joined the services of the Bank are not eligible for the existing pension scheme where as they will be eligible for Defined Contributory Pension Scheme in line with the New Pension Scheme introduced for employees of Central Govt. Employee shall contribute 10% of their Pay and Dearness Allowance towards defined contributory Pension Scheme and the Bank will also make a matching contribution. There is no separate Provident Fund for employees joining on or after 01/04/2010.

(b) Defined benefit plan

1) Gratuity

The Bank provides for Gratuity, a defined benefit retirement plan (the "Gratuity Plan") covering the eligible employees. The Gratuity Plan provides a lumpsum payment to vested employees on retirement, death, incapacitation or termination of employment, of an amount based on the respective employees' salary and the tenure of employment. Vesting occurs upon completion of five years of service as per Payment of Gratuity Act, 1972 and its amendment with effect from 24.05.2010 or as per the provisions of the Federal Bank Employees' Gratuity Trust Fund Rules / Bi-partite Award provisions. Liabilities with regard to the Gratuity Plan are determined by Actuarial valuation as on the Balance Sheet date, based upon which, the Bank contributes all the ascertained liabilities to the Federal Bank Employees' Gratuity Trust Fund (the "Trust"). Trustees administer contributions made to the Trust and contributions are invested in specific investments as permitted by law.

2) Superannuation / Pension

The Bank provides for monthly pension, a defined benefit retirement plan (the "pension plan") covering eligible employees. The pension plan provides a monthly pension after retirement of the employees till death and to the family after the death of the pensioner. The monthly pension is based on the respective employees' salary and the tenure of employment. Vesting occurs upon completion of ten years of service. The Bank pays the monthly pension by purchasing annuities from Life Insurance Corporation of India (LIC). Liabilities with regard to the pension plan are determined by actuarial valuation as on the Balance Sheet date, based upon which, the Bank contributes all the ascertained liabilities to the Federal Bank (Employees') Pension Fund (the "Trust"). Trustees administer contributions made to the Trust and contributions are invested in specific investments as permitted by law.

The following table as furnished by Actuary sets out the funded status of gratuity / pension plan and the amount recognized in the Bank's financial statements as at March 31, 2012.

(c) Leave encashment

The employees of the Bank are entitled to compensated absence. The employees can carry forward a portion of the unutilised accrued compensated absence and utilise it in future periods or receive cash compensation at retirement or termination of employment for the unutilized accrued compensated absence for a maximum of 240 days. The Bank records an obligation for compensated absences in the period in which the employee renders the services that increase this entitlement. The Bank measures the expected cost of compensated absence as the additional amount that the Bank expects to pay as a result of the unused entitlement that has accumulated at the balance sheet date based on actuarial valuations.

(d) Sick Leave / Leave Travel Concession / Unavailed Casual Leave

A sum of Rs 24.64 crore (Previous year Rs 22.10 crore) has been provided towards the above liabilities in accordance with AS 15 (Revised) based on actuarial valuation.

Note: In accordance with the RBI Guidelines on Compliance with the Accounting Standards by the Banks, the details of transactions with associate/joint venture and subsidiary company have not been disclosed since there is only one entity in the respective category of the related party.

6.3 Taxation (AS 22)

i The disputed amount of income tax demand as on 31.03.2012 amounts to Rs610.32 crore. In the opinion of the Bank no provision is considered necessary in respect of the above disputed demand in view of various judicial decisions and the same has been disclosed as contingent liability.

ii The Bank has accounted for income tax in compliance with ICAI's Accounting Standard 22. Accordingly, timing differences resulting in deferred tax assets and deferred tax liabilities are recognized. The major components of deferred tax liabilities and assets as on 31 March 2012 are shown below:

7.1.1 Provision coverage ratio

Provision coverage ratio as per RBI guidelines as on 31 March 2012 stood at 88.85 %

7.1.2 Amount of advances for which intangible securities such as charge over rights, licences, authority etc has been taken as collateral security and the value of such collateral security: Nil

7.1.3 There are no dues to micro and small enterprises as at 31st March 2012. This disclosure is based on the records available with the Bank.

7.1.4 The Bank has not issued any letters of comforts coming within the Prudential Norms for Issuance of Letters of Comforts by banks regarding their subsidiaries (DBOD.No. BP.BC.65/21.04.009/2007-08 dated March 4, 2008).

4.1.5 The Bank has not made any draw down of reserves during the year.

7.2 Previous year's figures have been regrouped and recast wherever necessary.


Mar 31, 2011

1. Reconciliation

The reconciliation of outstanding entries in inter branch/office transactions as on 31st March 2011 has been substantially completed and the efect, if any, of pending entries will not be material.

2. During the year the accounting policy, hitherto followed by the Bank up to the year ended 31.03.2010, of not providing for depreciation on assets sold/disposed of during the year except for vehicles, has been changed by providing depreciation on all the assets sold/disposed of during the year for the period up to the date of sale. The change as above does not have any impact on the Profit for the year.

3. The net liability arising on exercise of second option for Pension by employees (other than separated/retired employees) actuarially determined at Rs. 168.43cr is fully reckoned and disclosed as liability in the Balance Sheet, and 1/5th of the said liability amounting to Rs. 33.71 cr. is charged to the Profit and Loss Account of the year and balance unamortized amount of Rs. 134.72 cr is carried forward to be amortised equally over the succeeding four years, as per approval of RBI (vide letter no.DBOD.No.BP. BC.15896/21.04.018/2010-11 dated 08.04.2011). The amounts relating to separated/retired employees have been fully charged to the Profit and Loss Account.

In terms of the requirements of the Accounting Standard (AS) 15, Employee benefits, the entire amount of Rs. 168.43 crore is required to be charged to the Profit and Loss Account. Had such an approval circular not been issued by the RBI, the Profit of the bank would have been lower by Rs. 134.72 crore pursuant to application of the requirements of AS 15.

4. The provision made for Dividend recommended

for the year ended March 31 2011 is subject to the notifcation of exemption by Government of India u/s 53 read with Section 15 of the Banking Regulation Act 1949, which is being sought for.

5.2 Investments

5.2.1 a) Investments under HTM (excluding specifed investments as per RBI norms) account for 21.01% (previous year 22.76%) of demand and time liabilities as at the end of March 2011 as against permitted ceiling of 25% stipulated by RBI.

b) In respect of securities held under HTM category premium of Rs. 21.90 crore (previous year Rs. 23.93 crore) has been amortised during the year and debited under interest received on government securities.

c) Profit on sale of securities from HTM category amounting to Rs. Nil crore (previous year Rs. 16.58 crore) has been taken to Profit and Loss Account and a sum of Rs. Nil crore (previous year Rs. 8.20 crore) being net of taxes and transfer to statutory reserve of such Profit, appropriated to Capital Reserve.

5.3.3 Disclosure on Risk exposure in Derivatives Qualitative Disclosures

Structure, organization, scope and nature of management of risk in derivatives etc.

The organizational structure consists of Treasury Department which is segregated into three functional areas, ie, front ofce, mid ofce and back ofce. Derivative deals are executed for hedging and market making.

The risk in the derivatives is monitored by regularly assessing Marked to Market Position (MTM) of the entire portfolio and the impact on account of the probable market movements. Various risk limits have been put in place under diferent segments of the derivatives, as approved by Board. The risk profle of the outstanding portfolio is reviewed by Board at regular intervals. For own balance sheet management, hedging policies are devised to mitigate risks, lower borrowing costs and enhance yields. The current outstanding under the derivatives portfolio were executed for trading only.

Accounting:

Board Approved Accounting Policies as per RBI guidelines have been adopted. The hedge swaps are accounted for like a hedge of the asset or liability. The hedge swaps are accounted on accrual basis except where swaps for hedging marked to market asset/liability. Such hedge swaps are marked to market on a monthly basis and the gain/losses are recorded as an adjustment to the designated asset/liability. The Non hedge swaps are marked to market every month and the MTM losses in the basket are accounted in the books while MTM Profits are ignored.

Collateral Security:

As per market practice, no collateral security is insisted on for the contracts with counter parties like Banks/ PDs etc. For deals with Corporate Clients, appropriate collateral security/margin etc. are stipulated wherever considered necessary.

Credit Risk Mitigation:

Most of the deals have been contracted with Banks/ Major PDs and no default risk is anticipated on the deals with them. In the case of deals with corporate clients, the outstanding positions are closely monitored for the default risks and appropriate measures are initiated.

5.7.3 Country Risk (As compiled by the Management)

The net funded exposure of the Bank in respect of foreign exchange transactions with each country is within 1% of the total assets of the Bank and hence no provision is required to be made in respect of country risk as per the RBI circular DBOD.BP.BC.96/21.04.103/2003-04 dated 17 June 2004.

5.7.7 Details of Overseas Assets, NPAs and Revenue

Nil

5.7.8 Of balance Sheet SPV sponsored

Nil

6. Fixed Assets

i) During the year 1995-96, the appreciation of Rs. 9.65 crore in the value of land and buildings consequent upon revaluation by approved valuers was credited to Capital Reserve. Depreciation for the year on the net addition to value on such revaluation of assets at Rs. 0.23 crore (previous year Rs. 0.24 crore) has been transferred from Capital Reserve to Profit & Loss Account. There has been no revaluation of assets during this year.

ii) Land and premises include fats Rs. 0.37 crore (previous year Rs. 0.37 crore), written down value Rs. 0.19 crore (previous year Rs. 0.21 crore), taken possession of and being used by the Bank, for which documentation/ registration formalities are to be completed.

iii) Safe & Furniture includes cost of software relating to Core Banking solution of Rs. 15.26 crore (Previous year Rs. 15.26 crore) with written down value of Rs.Nil crore (previous year Rs. 1.68 crore)

7. The bank had implemented the Agricultural Debt Waiver and Debt Relief scheme 2008 notifed by the Government of India. The claim made under the debt waiver has been fully received and the balance amount receivable from Government in respect of the debts subjected to debt relief Rs. 2.03 crore is included under Other Assets (Schedule 11) as per RBI circular.

8. Disclosure in terms of Accounting Standard

8.1 There is no material prior period income/expenditure requiring disclosure under AS 5 'Net Profit or Loss for the Period, Prior period items and changes in Accounting policies issued by the Institute of Chartered Accountants of India.

8.2 Employee benefits (AS 15)

a) Defned Contribution Plan

Provident Fund

Eligible employees (employees not opted for pension plan) receive benefits from a provident fund, which is a defned contribution plan. Aggregate contributions along with interest thereon are paid at retirement, death, incapacitation or termination of employment. Both the employee and the Bank make monthly contributions to the Federal Bank Employees' Provident Fund equal to a specifed percentage of the covered employees' salary. The Bank has no other obligation than the monthly contribution.

The Bank recognized Rs. 15.84 Crore (Previous year Rs. 6.44 Crore) for provident fund contribution in the Profit and Loss account.

New Pension Scheme

As per the industry wise settlement dated 27.04.2010, the employees joined the service of the bank on or after 01.04.2010 are not eligible for the existing pension scheme. They will be eligible for Defned Contributory Pension Scheme on the lines of new pension scheme introduced for employees of Central Govt. with efect from 01.01.2004. Employee shall contribute 10% of Pay and Dearness Allowance towards defned contributory Pension Scheme and Bank shall make a matching contribution in respect of these employees. There shall be no separate Provident Fund for employees joining on or after 01/04/2010. The full details of the Scheme and its working are yet to be received from IBA.

(b) Defned benefit plan

1) Gratuity

The Bank provides for gratuity, a defned benefit retirement plan (the “Gratuity Plan”) covering eligible employee. The Gratuity Plan provides a lump sum payment to vested employees at retirement, death, incapacitation or termination of employment, of an amount based on the respective employees' salary and the tenure of employment. Vesting occurs upon completion of fve years of service as per Payment of Gratuity Act, 1972 and amendment with efect from 24.05.2010 or as per the provisions of the Federal Bank Employees' Gratuity Trust Fund Rules/Award. Liabilities with regard to the Gratuity Plan are determined by actuarial valuation as of the Balance Sheet date, based upon which, the company contributes all the ascertained liabilities to the Federal Bank Employees' Gratuity Trust Fund (the “Trust”). Trustees administer contributions made to the Trust and contributions are invested in specifc investments as permitted by law.

2) Superannuation / Pension

The Bank provides for monthly pension, a defned benefit retirement plan (the “pension plan”) covering eligible employees. The pension plan provides a monthly pension after retirement of the employees till death and to the family after the death of the pensioner. The monthly pension is based on the respective employees' salary and the tenure of employment. Vesting occurs upon completion of ten years of service. The bank pays the monthly pension by purchasing annuities from Life Insurance Corporation of India (LIC). Liabilities with regard to the pension plan are determined by actuarial valuation as of the Balance Sheet date, based upon which, the company contributes all the ascertained liabilities to the Federal Bank (Employees') Pension Fund (the “Trust”). Trustees administer contributions made to the Trust and contributions are invested in specifc investments as permitted by law.

Consequent to the industry level settlement dated 27.04.2010, Bank has implemented Second option for pension in line with the settlement. Accordingly 2701 existing employees, 341 retired employees and 35 family pension benefciaries exercised second option for pension. The Employer's Contribution to Provident Fund in respect of these employees has been transferred to the Federal Bank (employees') Pension Fund by the Bank.

The following table as furnished by actuary sets out the funded status of gratuity / pension plan and the amounts recognized in the Bank's financial statements as at March 31, 2011.

(c) Leave encashment

The employees of the Bank are entitled to compensated absence. The employees can carry forward a portion of the unutilised accrued compensated absence and utilise it in future periods or receive cash compensation at retirement or termination of employment for the unutilized accrued compensated absence for a maximum of 240 days. The Bank records an obligation for compensated absences in the period in which the employee renders the services that increase this entitlement. The Bank measures the expected cost of compensated absence as the additional amount that the Bank expects to pay as a result of the unused entitlement that has accumulated at the balance sheet date based on actuarial valuations.

(d) Sick Leave / Leave Travel Concession / Unavailed Casual Leave.

A sum of Rs. 22.10 crore (Previous year Rs. 20.91 crore) has been provided towards the above liabilities in accordance with AS 15 (Revised) based on actuarial valuation.

8.6 Taxation (AS 22)

i. The disputed amount of income tax demand as on 31.03.2011 amounts to Rs. 564.55 crore. In the opinion of the Bank no provision is considered necessary in respect of the above disputed demand in view of various judicial decisions and the same has been disclosed as contingent liability.

9. Additional Disclosures:

9.1 Provisions and Contingencies debited in Profit and Loss Account during the year:

(Rs. crore)

For the year ended / As at 31 March 2011 31 March 2010

i) Provision towards NPAs (net) 488.85 413.11

ii) Provision for Investments 11.13 -97.74

iii) Provision for Standard Assets 14.35 0.20

iv) Provision for Taxation:

Current Tax 316.26 361.50

Deferred tax -1.53 33.50

Fringe benefit tax - -

v) Provision towards P/V sacrifice on restructuring, other 11.11 89.73 contingencies etc

Total 840.17 800.30

9.4.2 Provision coverage ratio

Provision coverage ratio as on 31 March 2011 stood at 82.06%

9.4.3 Amount of advances for which intangible securities such as charge over rights, licences, authority etc. has been taken as collateral security and the value of such collateral security

Total amount of advances for which intangible securities such as charge over the rights, licenses, authority, etc. has been taken: Rs.100 crore

The estimated value of such intangible collateral security : Rs. 295.43crore

9.4.4 There are no dues to micro and small enterprises as at 31 March 2011. This disclosure is based on the records available with the Bank.

9.4.5 The Bank has not issued any letters of comforts coming within the Prudential Norms for Issuance of Letters of Comforts by banks regarding their subsidiaries (DBOD.No. BP.BC.65/21.04.009/2007-08 dated March 4, 2008).

9.4.6 The Bank has not made any draw down of reserves during the year.

9.5 Previous year's fgures have been regrouped and recast wherever necessary.


Mar 31, 2010

1. Reconciliation

The reconciliation of outstanding entries in inter branch/office transactions as on 31st March 2010 has been substantially completed and the effect, if any, of pending entries will not be material.

2.2 Investments

2.2.1a) Investments under HTM (excluding specified investments as per RBI norms) account for 22.76% of demand and time liabilities as at the end of March 2010 as against permitted ceiling of 25% stipulated by RBI.

b) In respect of securities held under HTM category premium of Rs.23.93 crore (previous year Rs. 17.35 crore) has been amortised during the year and debited under interest received on government securities.

c) Profit on sale of securities from HTM category amounting to Rs. 16.58 crore (previous year Rs.60.08 crore) has been taken to Profit and Loss Account and a sum of Rs.8.20 crore (previous year Rs.29.75 crore) being net of taxes and transferto statutory reserve of such profit, appropriated to Capital Reserve.

2.3.3 Disclosure on Risk exposure in Derivatives Qualitative Disclosures

Structure, organization, scope and nature of management of risk in derivatives etc

The organizational structure consists of Treasury Department which is segregated into three functional areas, ie, front office, mid office and back office. Derivative deals are executed for hedging and market making.

The risk in the derivatives is monitored by regularly assessing Marked to Market Position (MTM) of the entire portfolio and the impact on account of the probable market movements. Various risk limits have been put in place under different segments of the derivatives, as approved by Board, he risk profile of the outstanding portfolio is reviewed by Board at regular intervals. For own balance sheet management, hedging policies are devised to mitigate risks; lower borrowing costs and enhance yields. The current outstanding under the derivatives portfolio were executed for trading only.

Accounting:

Board Approved Accounting Policies as per RBI guidelines have been adopted. The hedge swaps are accounted for like a hedge of the asset or liability. The hedge swaps are accounted on accrual basis except where swaps for hedging marked to market asset/liability. Such hedge swaps are marked to market on a monthly basis and the gain/losses are recorded as an adjustment to the designated asset/liability. The Non hedge swaps are marked to market every month and the MTM losses in the basket are accounted in the books while MTM profits are ignored.

Collateral Security:

As per market practice, no collateral security is insisted on for the contracts with counter parties like Banks/PDs etc. For deals with Corporate Clients, appropriate collateral security/margin etc. are stipulated wherever considered necessary.

Credit Risk Mitigation:

Most of the deals have been contracted with Banks/ Major PDs and no default risk is anticipated on the deals with them. In the case of deals with corporate clients, the outstanding positions are closely monitored for the default risks and appropriate measures are initiated.

2.7.4 Details of Overseas Assets, NPAs and Revenue

Nil

2.7.5 Off balance Sheet SPV sponsored

Nil

2.7.6 Country Risk (As compiled by the Management)

The net funded exposure of the Bank in respect of foreign exchange transactions with each country is within 1% of the total assets of the Bank and hence no provision is required to be made in respect of country risk as per the RBI circular DBOD.BP.BC.96/21.04.103/2003-04 dated 17 June 2004.

2.7.7 Details of Single Borrower limit (SGL), Group Borrower Limit (GBL) where the bank has exceeded the prudential exposure during the year. Nil

2.8.2 Details of penalties imposed by RBI under the provision of Section 46 (4) of BR Act, 1949 Nil

3. Fixed Assets

i. During the year 1995-96, the appreciation of Rs 9.65 crore in the value of land and buildings consequent upon revaluation by approved valuers was credited to Capital Reserve. Depreciation for the year on the net addition to value on such revaluation of assets at Rs 0.24 crore (previous year Rs 0.26 crore) has been transferred from Capital Reserve to Profit & Loss Account. There has been no revaluation of assets during this year.

ii. Land and premises include flats Rs.0.37 crore (previous year Rs.0.37 crore), written down value Rs. 0.21 crore (previous year Rs.0.21 crore), taken possession of and being used by the Bank, for which documentation/registration formalities are to be completed.

iii. Safe & Furniture includes cost of software relating to Core Banking solution of Rs.l 5.26 crore (Previous year Rs.l 5.26 crore) with written down value of Rsl. 68 crore (previous year Rs.6.04 crore)

4. Pending finalisation of wage agreement a provision of Rs.60.00 crore (previous year Rs 61 crore) has been made towards the revision in employee costs and other benefits on the basis of the estimate of the management. Impact of exercisable pension option is not ascertainable as at the close of the financial year.

5. The Bank has implemented Agricultural Debt waiver and Debt Relief Scheme 2008 notified by the Government of India. In accordance with the scheme a final claim of Rs.l05.70 crores has been preferred with RBI, against which the Bank has received the 3 installments amounting to Rs.68.44 crores and the balance amount due is included under advances. Further an amount of Rs. 18.80 crore has been subjected to debt relief receivable from Government included under other assets.

6. Disclosure in terms of Accounting Standard

6.1 There is no material prior period income/expenditure requiring disclosure under AS 5 Net Profit or Loss for the Period, Prior period items and changes in Accounting policies issued by the Institute of Chartered Accountants of India.

6.2 Employee Benefits (AS 15)

(a) Defined Contribution Plan

Provident Fund

Eligible employees (employees not opted for pension plan) receive benefits from a provident fund, which is a defined contribution plan. Aggregate contributions along with interest thereon are paid at retirement, death, incapacitation or termination of employment. Both the employee and the Bank make monthly contributions to the Federal Bank Employees Provident Fund equal to a specified percentage of the covered employees salary. The Bank has no other obligation than the monthly contribution.

The Bank recognized Rs.6.44 Crore (Previous year Rs.6.99Crore) for provident fund contribution in the Profit and Loss account.

(b) Defined benefit plan

1) Gratuity

The Bank provides for gratuity, a defined benefit retirement plan (the "Gratuity Plan") covering eligible employee. The Gratuity Plan provides a lump sum payment to vested employees at retirement, death, incapacitation or termination of employment, of an amount based on the respective employees salary and the tenure of employment. Vesting occurs upon completion of five years of service as per Payment of Gratuity Act, 1972 or as per the provisions of the Federal Bank Employees Gratuity Trust Fund Rules/Award. Liabilities with regard to the Gratuity Plan are determined by actuarial valuation as of the Balance Sheet date, based upon which, the company contributes all the ascertained liabilities to the Federal Bank Employees Gratuity Trust Fund (the "Trust"). Trustees administer contributions made to the Trust and contributions are invested in specific investments as permitted by law.

2) Superannuation / Pension

The Bank provides for monthly pension, a defined benefit retirement plan (the "pension plan") covering eligible employees. The pension plan provides a monthly pension after retirement of the employees till death and to the family after the death of the pensioner. The monthly pension is based on the respective employees salary and the tenure of employment. Vesting occurs upon completion of ten years of service. The bank pays the monthly pension by purchasing annuities from Life Insurance Corporation of India (LIC). Liabilities with regard to the pension plan are determined by actuarial valuation as of the Balance Sheet date, based upon which, the company contributes all the ascertained liabilities to the Federal Bank (Employees) Pension Fund (the "Trust"). Trustees administer contributions made to the Trust and contributions are invested in specific investments as permitted by law.

6.4 Related Party Disclosures

The following are the significant transactions with related parties during the year ended 31 March 2010

Name of the Party Nature of Relationship

IDBI Fortis Life Insurance Company Limited Associate/Joint Venture

Fed Bank Financial Services Limited Subsidiary

Shri. M Venugopalan Key Management Personnel

Shri. K S Harshan Key Management Personnel

Shri. P R Kalyanaraman Key Management Personnel

6.6 Taxation (AS 22)

i. Other Assets include Rs. 95.11 crore (previous Year Rs 0.34 crore) paid/adjusted towards disputed income tax demand aggregating to Rs. 298.77 crore. In the opinion of the Bank no provision is considered necessary in respect of the above disputed demand in view of various judicial decisions and the same has been disclosed as contingent liability.

ii. The Bank has accounted for income tax in compliance with ICAIs Accounting Standard 22. Accordingly, timing differences resulting in deferred tax assets and deferred tax liabilities are recognised. The major components of deferred tax liabilities and assets as on 31 March 2010 are shown below:

7.4.1 There are no dues to micro and smali enterprises as at 31 March 2010. This disclosure is based on the records available with the Bank.

7.4.2 The Bank has not issued any letters of comforts coming within the Prudential Norms for Issuance of Letters of Comforts by banks regarding their subsidiaries (DBOD.No. BP.BC.65/21.04.009/2007-08 dated March 4, 2008).

7.4.3 The Bank has not made any draw down of reserves during the year.

7.4.5 Provision coverage ratio

Provision coverage ratio as on 31 March 2010 stood at 91.82%

7.4.6 Amount of advances for which intangible securities such as charge over rights, licences, authority etc has been taken as collateral security and the value of such collateral security

Nil

7.5 Previous years figures have been regrouped and recast wherever necessary.

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