Notes to Accounts of Federal Bank Ltd.
Mar 31, 2023
1.2.1. C. Additional Details on Investments:
a) Investments under SLR HTM as at March 31, 2023 account for 18.82% (previous year 16.78%) of demand and time liabilities, as against permitted ceiling of 23.00% (Previous Year :22.00%) stipulated by RBI.
b) In respect of securities held under HTM category premium of '' 174.46 Crore (previous year: '' 169.22 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 '' 19.90 Crore (previous year: '' 150.95 Crore) has been taken to Profit and Loss Account. This includes Profit on sale / redemption on maturity of investments amounting to '' 0.20 Lakhs (previous year: '' 49 Lakhs). During the year the Bank had appropriated '' 11.11 Crore (previous year '' 84.26 Crore) [net of taxes and transfer to statutory reserve] to the Capital Reserve being the gain on sale / redemption of HTM Investments in accordance with RBI guidelines. (Also Refer Note 1.2.4)
d) As per Master Direction - Classification, Valuation and Operation of Investment Portfolio of Commercial Banks (Directions), 2021, Investment fluctuation reserve (IFR) is to be created with an amount not less than lower of net profit on sale of investments during the year or net profit for the year less mandatory appropriations until the amount of IFR is at least 2 percent of the HFT and AFS portfolio on a continuing basis.
As on March 31,2023 the Bank is maintaining an IFR of '' 190.69 Crore (previous year: '' 189.72 Crore) and considered it as part of Tier II capital for capital adequacy purposes.
1.3.3. Disclosure on Risk exposure in Derivatives Qualitative disclosures:
(a) Structure and organisation 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 parameter''s 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, Non Deliverable Forwards 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), Net loss, deal size and Price Value of a Basis Point (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. Interest rate contracts
Interest rate swaps involve the exchange of interest obligations with the counterparty for a specified period without exchanging the underlying (or notional) principal.
Interest rate futures are standardised interest rate derivative contracts traded on a recognised stock exchange to buy or sell a notional security or any other interest bearing instrument or an index of such instruments or interest rates at a specified future date at a price determined at the time of the contract.
Cross currency swaps are agreements to exchange principal amounts denominated in different currencies. Cross currency swaps may also involve the exchange of interest payments on one specified currency for interest payments in another specified currency for a specified period.
Currency options (including Exchange Traded Currency Option) give the buyer on payment of a premium, the right but not an obligation to buy or sell specified amounts of currency at agreed rates of exchange on or before a specified future date.
Currency futures contract is a standardised contract traded on an exchange, to buy or sell a certain underlying currency at a certain date in the future at a specified price. The contract specifies the rate of exchange between one unit of currency with another.
Non-Deliverable Derivative Contracts
Non Deliverable Forwards are foreign exchange derivative contract involving the Rupee, entered into with a person resident outside India and which is settled without involving delivery of the Rupee.
(b) Accounting policy for recording hedge and non-hedge transactions, recognition of income, Premiums and discounts, valuation of outstanding contracts and provisioning
Bank deals in derivatives for hedging Domestic 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 futures are marked to market daily and the MTM is accounted in the books.
(c) collateral Security
Bank has provided sufficient collateral to Central counter parties and Exchanges wherever applicable. As per market practice no collateral is insisted on for the contracts with counter parties like Banks/Primary Dealers (PDs) etc. but if a CSA (Credit Support Annexure) is signed then collateral is insisted as per the terms of CSA agreement. For deals with Corporate Clients appropriate collateral security/margin etc. is stipulated wherever considered necessary as per the CSA Agreement.
(d) credit Risk Mitigation
In the Interbank Space, the Bank deals with other major banks and the default risk is perceived as low in this segment. Wherever the CSA (Credit Support Annexure) is signed the collateral is insisted as per the terms of the CSA agreement. This risk is managed under the limit framework laid down by the policy on Sovereign and Counterparty Bank Limits. Exposure against clients is mitigated by collecting proper collateral securities/margin as envisaged by the credit sanctioning team as per the CSA.
⢠The notional principal amount of forward exchange contracts classified as Hedging and Trading outstanding as on March 31, 2023 amounted to '' 2,642.54 Crore (previous year '' 3,564.10 Crore) and '' 17,709.42 Crore (previous year '' 5,860.17 Crore) respectively. For the hedging contracts, as at March 31, 2023 the marked to market position was asset of '' 19.29 Crore and liability of '' 22.85 Crore (previous year asset '' 10.64 Crore and liability of '' 120.61 Crore). For the trading contract, as at March 31,2023 the marked to market position was asset of '' 447.28 Crore and liability of '' 108.06 Crore (previous year asset '' 431.75 Crore and liability of '' 52.60 Crore). Credit exposure on forward exchange contracts classified as Hedging and Trading as at March 31, 2023 amounted to '' 70.49 Crore (previous year '' 79.21 Crore) and '' 841.83 Crore (previous year '' 675.97 Crore) respectively. 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 daily balances for Interest rate Derivatives and Currency Derivatives. During the previous year, maximum and minimum of PV01 was computed based on daily balances for Interest rate Derivatives and month end balances for Currency Derivatives.
⢠In respect of derivative contracts, the Bank evaluates the credit exposure arising therefrom, 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.
b) Qualitative Disclosure As at March 31, 2023
The Bank adheres to RBI guidelines on Liquidity Coverage Ratio, Liquidity Risk Monitoring Tools and the LCR Disclosure Standards pursuant to the Basel III Framework on Liquidity Standards that are applicable to banks in India with effect from January 01,2015. The regulatory threshold is embedded into the Risk Appetite Statement of the Bank and hence maintenance of LCR is subject to periodic review of Risk Management Committee/Board. The Bank computes the LCR and reports the same to the Asset Liability Management Committee (ALCO) every month for review as well as to the Risk Management Committee of the Board. 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. LCR is computed daily from January 01, 2017 and in accordance with regulatory prescriptions, the LCR disclosures contain data on simple average of
daily observations over a period of 90 days. Bank has not computed LCR separately for any foreign currency since the aggregate liabilities denominated in any foreign currency doesn''t amount to 5% or more of the Bank''s total liabilities. Bank has consistently maintained LCR above the prescribed regulatory minimum.
On average, 97% 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 Marginal Standing Facility (MSF) and Facility to Avail Liquidity for Liquidity Coverage Ratio (FALLCR) as per RBI guidelines from time to time, constitutes Level 1
HQLA. Level 2 assets maintained by the Bank comprises of (a) marketable securities representing 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 Standardised Approach for credit risk and that are not issued by a bank/financial institution/NBFC or any of its affiliated entities and (b) Corporate bonds and commercial papers, 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 shall 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, 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 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 to ensure that the liquidity position is well within the Risk Appetite set by the Board of Directors.
The Bank adheres to RBI guidelines on Liquidity Coverage Ratio, Liquidity Risk Monitoring Tools and the LCR Disclosure Standards pursuant to the Basel III Framework on Liquidity Standards that are applicable to banks in India with effect from January 01,2015. The regulatory threshold is embedded into the Risk Appetite Statement of the Bank and hence maintenance of LCR is subject to periodic review of Risk Management Committee/Board. The Bank computes the LCR and reports the same to the Asset Liability Management Committee (ALCO) every month as well as to the Risk Management Committee of the Board. 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. LCR is computed on a daily basis from January 01, 2017 and in accordance with regulatory prescriptions. The LCR disclosures contain data on simple average of daily observations for the days in each quarter. Bank computes LCR of the IFSC Banking Unit at GIFT City on a standalone basis as per the extant guidelines. Bank is not computing LCR separately for any foreign currency since the aggregate liabilities denominated in any foreign currency doesn''t amount to 5% or more of the Bank''s total liabilities. Bank has consistently maintained LCR above the prescribed regulatory minimum of 100% during the fiscal.
On an average, 96% 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 Marginal Standing Facility (MSF) and Facility to Avail Liquidity for Liquidity Coverage Ratio (FALLCR) as per RBI guidelines from time to time, constitutes Level 1 HQLA. Level 2 assets maintained by the Bank comprises of (a) marketable securities representing 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 Standardised Approach for credit risk and that are not issued by a bank/financial institution/NBFC or any of its affiliated entities and (b) Corporate bonds and commercial papers, 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 shall provide the Bank with adequate and timely liquidity.
Bank has a well-diversified funding portfolio. Retail deposits, considered as stable deposits from a liquidity perspective is the major funding source of the Bank, 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 to ensure that the liquidity position is well within the Risk Appetite set by the Board of Directors.
1.5.3 Net Stable Funding Ratio (NSFR)Qualitative Disclosure
Net Stable Funding Ratio (NSFR) is introduced by Basel Committee on Banking Supervision (BCBS) in order to ensure that banks maintain a stable funding profile in relation to the composition of their assets, liabilities and off-balance sheet activities. NSFR limits overreliance on short-term wholesale funding and promotes funding their activities with longer term stable sources indicating funding stability.
NSFR is defined as the amount of available stable funding relative to the amount of required stable funding. âAvailable
stable funding" is defined as the portion of capital and liabilities expected to be reliable over the time horizon considered by the NSFR, which extends to one year. The amount of stable funding required (âRequired stable funding") of the Bank is a function of the liquidity characteristics and residual maturities of the various assets as well as the off-balance sheet (OBS) exposures of the Bank.
As per the RBI Guideline, Bank is required to maintain a minimum NSFR of 100% on an ongoing basis effective from October
01,2021.
The Available Stable funding primarily consists of Regulatory capital, Deposits from Retail Customers, Small business entities, Non-Financial and financial corporates and Borrowings. Whereas the Required Stable Funding comprises of mainly Advances and Investments.
1.6.4. During the years ended March 31, 2023 and March 31, 2022, the Bank''s credit exposure to single borrower and group borrowers was within the prudential exposure limits prescribed by RBI.
1.6.5 Unsecured Advances: During the years ended March 31, 2023 and March 31, 2022 there are no unsecured advances for which intangible securities such as charge over the rights, licences, authority etc. have been taken as collateral by the Bank.
1.6.6 Factoring exposure: The factoring exposure of the Bank as on March 31,2023 is '' 1,020.44 Crore (previous year: '' 729.40 Crore)
1.6.7 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 maximise 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 '' 73.78 Crore (previous year '' 18.19 Crore) as provision and '' 100.89 Crore (previous year '' 19.56 Crore) as additional capital for computation of capital adequacy ratio on account of the unhedged foreign currency exposures of borrowers.
1.8. SECURITISATION TRANSACTIONS
The Bank has not done any securitisation transactions during the year ended March 31,2023 and March 31,2022.
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 March 31,2023 and March 31,2022.
1.10. TRANSFERS TO DEPOSITOR EDUCATION AND AWARENESS (DEA) FUND
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 DEA Fund. Details of amounts transferred to / reimbursed by DEA Fund are set out below:
1.13. DISCLOSURES ON REMUNERATION
i) Qualitative disclosures
a) Information relating to the composition and mandate of the Nomination, Remuneration, Ethics and compensation committee (or Remuneration committee in short):
The Nomination, Remuneration, Ethics and Compensation Committee of the Board oversees the framing, review and implementation of the compensation policy of the Bank, on behalf of the Board. As per the code of corporate governance and code of conduct for the Board of Directors and management, the Committee shall consist of only Non-Executive Directors and the minimum number of members shall be three. At least half of the members attending the meeting of the Remuneration Committee shall be Independent Directors, of which one shall be a member of the Risk Management Committee of the Board.
As on March 31, 2023, the remuneration committee of the Board comprises of the following Independent Directors:
- Mr. A P Hota (Chairman)
- Mr. C Balagopal
- Mr. Siddhartha Sengupta
- Mr. Manoj Fadnis (wef. February 14, 2023)
Out of the above, Mr. Siddhartha Sengupta is also a member of the Risk Management Committee of the Board.
The Nomination, Remuneration, Ethics and Compensation Committee of the Board functions with the following mandate, in respect of matters related to remuneration:
i. To oversee the framing, review and implementation of an effective Compensation Policy, as per RBI Guidelines.
ii. To review the compensation package for the MD & CEO and Executive Directors and recommend revisions for Board approval.
iii. To consider and approve issuance and allotment of shares under ESOS to MD & CEO /EDs and employees of the Bank.
iv. Work in coordination with the Risk Management Committee of the Bank, to achieve effective alignment between risk and remuneration.
b) Information relating to the design and structure of remuneration processes and the key features and objectives of remuneration policy.
The Bank has formulated and adopted a comprehensive compensation policy covering all the employees and the policy is reviewed on an annual basis. The policy covers all aspects of the compensation structure such as fixed pay, variable compensation, perquisites, performance bonus, guaranteed bonus (joining/sign-on bonus), severance package, share-linked instruments e.g. Employee Stock Option Scheme (ESOS), pension, gratuity, etc., taking into account the Guidelines issued by Reserve Bank of India from time to time.
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.
The compensation paid to the chief Executive Officer (cEO) / whole Time Directors (wTDs) /Material Risk Takers (MRTs) is divided into two components:
1. Fixed Pay and Perquisites: The fixed compensation is determined based on the relevant factors such as industry standards, the exposure, skill sets, talent and qualification attained by the official over his/her career span and adherence to statutory requirements. All the fixed items of compensation, including the perquisites, will be treated as part of fixed pay. Perquisites that are reimbursable would also be included in the fixed pay so long as there are monetary ceilings on these reimbursements. Contributions towards superannuation/retiral benefits will also be treated as part of fixed pay.
2. Variable compensation: The variable compensation for Whole Time Directors, Managing Director & Chief Executive Officer and Material Risk Takers is fixed based on organisational performance (both business-unit and firm-wide) and KPAs set for the official. The organisation''s performance is charted based on Performance Scorecard which takes into account various financial indicators like revenue earned, cost incurred, profit earned, NPA position and other intangible factors like leadership and employee development. The Scorecard provides a mix of Financial and Non-Financial, Quantitative and Qualitative Metrics. Additionally, serious supervisory observations (if any) are also factored. The variable pay is paid in the form of share-linked instruments, or a mix of cash and share-linked instruments.
Risk, control and compliance Staff: Members of staff engaged in financial and risk control, including internal audit, are compensated in a manner that is independent of the business areas they oversee and commensurate with their key role in the Bank. The total fixed and variable compensation paid out to the employees in the Risk Control and
Compliance Function is decided independent of business parameters. The mix of fixed and variable compensation for control function personnel is weighted in favour of fixed compensation, to ensure autonomy and independence from business goals.
Grander Compensation Package to Executives in Level IV and above: The Compensation package applicable to Executives in Level IV and above are governed under the provisions of Grander Compensation Package, a performance linked pay structure implemented in the Bank with effect from May 01, 2017. Annual Increment under the âGrander Compensation Package" will depend on the annual performance rating of the Executive concerned. compensation paid to Employees on IBA Package: The compensation paid to Award Staff and Officers coming under Scale I to III is fixed based on the periodic industry level settlements with Indian Banks'' Association. The present scale of pay and other service conditions applicable to employees, whose compensation package is governed under IBA package is as per provisions of 11th Bipartite Settlement/ Joint note dated November 11, 2020.
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 three categories:
1. MD & CEO/Whole Time Directors/ Material Risk Takers (MRTs)
2. Risk Control and Compliance Staff
3. Other Categories of Staff
In order to manage current and future risk and allow a fair amount of time to measure and review both quality and quantity of the delivered outcomes, the Bank maintains proper balance between fixed pay and variable pay. A significant portion (i.e. at least 50 per cent) of total compensation payable to MD & CEO, Whole Time Directors and Material Risk Takers (MRTs) is variable.
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'' exposures to liquidity risk are also monitored by ALCO.
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 claw back arrangements) embedded in their compensation arrangement. Appropriate compliance arrangements have been established to ensure that employees do not insure or hedge their compensation structure.
committee of Management for reviewing the linkage of Risk Based Performance with Remuneration (ED Level committee): The ED Level Committee, comprising of ED and Heads of Risk Division and HR Department would assist the Nomination and Remuneration Committee of the Board to monitor, review and control various risks and to balance prudent risk taking with the compensation paid out to top Executives, WTDs and other employees.
d) linkage of performance during a performance measurement period with levels of remuneration.
The Bank''s performance is charted based on 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 Scorecard for MD & CEO / EDs. The scorecard provides a mix of financial and non-financial, quantitative and qualitative metrics.
The compensation package applicable to Executives in Level IV to VII was earlier fixed and governed based on the periodical industry level settlements under IBA pattern. To make the Compensation Structure market driven and competitive, a new performance-based compensation package called âGrander Compensation Package" has been introduced for Executives in Level IV (Associate Vice President / Assistant Vice President) and above with effect from May 01,2017.
The compensation paid to other officials that include Award Staff, Officers coming under Scale I to III is fixed based on the periodic industry level settlements with Indian Banks Association.
e) Bank''s policy on deferral and vesting of variable remuneration and criteria for adjusting deferred remuneration before vesting and after vesting.
MD & cEO, whole Time Directors and Material Risk Takers (MRTs).
Deferral of Variable Pay: For MD & CEO, Whole Time Directors and Material Risk Takers (MRTs) deferral arrangements would invariably exist for the variable pay, regardless of the quantum of pay. For such executives of the Bank, a minimum of 60% of the total variable pay must invariably be under deferral arrangements. Further, if cash component is part of variable pay, at least 50% of the cash bonus would also be deferred. However, in cases where the cash component of variable pay is under '' 0.25 Crore, deferral requirements would not be necessary.
Period of Deferral Arrangement: The deferral period would be minimum of three years. This would be applicable to both the cash and non-cash components of the variable pay.
Vesting: Deferred remuneration would either vest fully at the end of the deferral period or be spread out over the course of the deferral period, subject to the following conditions:
⢠The first such vesting will be not before one year from the commencement of the deferral period.
⢠The vesting will be no faster than on a pro rata basis.
⢠Vesting will not take place more frequently than on a yearly basis.
Risk control and compliance Staff
At least 25% of the total compensation would be variable and the total variable pay will be limited to a maximum of
100% of the fixed pay (for the relative performance measurement period). Deferral arrangements would invariably exist for the variable pay, if the Variable Pay exceeds 75% of the fixed pay. In such cases a minimum of 60% of the total variable pay must invariably be under deferral arrangements. Further, if cash component is part of variable pay, at least 50% of the cash bonus would also be deferred. However, in cases where the cash component of variable pay is under '' 0.25 Crore, deferral requirements would not be necessary.
Other categories of Staff
The variable pay would be in the form of cash, share-linked instruments, or a mix of both cash and share-linked instruments. The total variable pay will be limited to a maximum of 300% of the fixed pay (for the relative performance measurement period). Deferral arrangements would invariably exist for the variable pay, if the Variable Pay exceeds 200% of the fixed pay. In such cases a minimum of 60% of the total variable pay must invariably be under deferral arrangements. Further, if cash component is part of variable pay, at least 50% of the cash bonus would also be deferred. However, in cases where the cash component of variable pay is under '' 0.25 Crore, deferral requirements would not be necessary.
The variable compensation is covered under Malus / Claw back arrangements in case of all categories of employees. In the event of subdued or negative contributions of the Bank and/or the relevant line of business in any year, the deferred compensation will be subjected to:
⢠Malus arrangement wherein Bank shall withhold vesting of all or part of the amount of deferred remuneration.
⢠Claw back arrangement wherein the employees shall be liable to return previously paid or vested remuneration to the Bank. The deferred compensation, if any, paid to such functionaries shall be subject to Claw back arrangements, which will entail the Bank to recover proportionate amount of variable compensation from such 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 malus and claw back provisions would cover the deferral and retention periods. If an Official covered under these provisions is responsible for any act or omission or non-compliance of regulatory guidelines resulting in a penalty being imposed by any Regulators or engages in a detrimental conduct, the Bank would be entailed to recover proportionate amount of variable compensation from such functionaries within 48 months from the date of payment/vesting of variable compensation. The Bank has put in place appropriate modalities, performance thresholds and detailed framework to cover the trigger points with or invoking malus/claw back, taking into account relevant statutory and regulatory stipulations, as applicable.
f) Description of the different forms of variable remuneration
The variable pay is in the form of share-linked instruments, or a mix of cash and share-linked instruments. The Bank uses an optimum and proper mix of cash (Performance Linked Incentive/Ex- Gratia) and share-linked instruments (Stock Options) to decide the compensation of employees in all categories.
The distribution of Stock Options and variable Performance Linked Incentives 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.
1.14.6. Implementation of IFRS converged Indian Accounting Standards (Ind AS)
The Ministry of Corporate Affairs (MCA), Government of India notified the Companies (Indian Accounting Standards) Rules, 2015 on February 16, 2015. Further, a press release dated January 18, 2016, was issued by the MCA outlining the roadmap for implementation of IFRS converged Ind AS for banks. This roadmap required banks to prepare Ind AS based standalone & consolidated financial statements for the accounting periods beginning April 01, 2018 onwards, with comparatives for the periods ending March 31, 2018 or thereafter. RBI, through its notification dated February 11, 2016, required all scheduled commercial banks to comply with Ind AS for financial statements from the stated periods and also stated that early adoption of Ind AS is not permitted.
The implementation of Ind AS by banks requires certain legislative amendments to make the format of financial statements, prescribed in the Third Schedule to Banking Regulation Act, 1949, compatible with accounts under Ind AS. Considering the amendments needed to the Banking Regulation Act, 1949, as well as the level of preparedness of several banks, RBI, through its Statement on Developmental and Regulatory Policies dated April 05, 2018, had deferred the implementation of Ind AS by a year.
The legislative amendments recommended by the Reserve Bank are under consideration of the Government of India. Accordingly, RBI through its notification dated March 22, 2019 deferred the implementation of Ind AS till further notice. Even though RBI has deferred the implementation, the Bank is gearing itself to bring the necessary systems and processes in place to facilitate the Proforma submission to RBI and seamless transition to Ind AS. With respect to the various instructions from the Ministry of Corporate Affairs and Reserve Bank of India (RBI), the actions taken by the Bank are summarised as follows:
⢠A steering committee was formed by MD & CEO with ED as its Chairman with members from all cross-functional departments. The Committee oversees the progress of Ind AS implementation in the Bank and provides guidance on critical aspects of the implementation such as Ind AS technical requirements, systems and processes, business impact, people and project management.
⢠The implementation of IT solution procured to automate the computation of Expected Credit Losses (ECL), Effective Interest Rate, Fair valuation and other accounting changes required under Ind AS is completed and Bank is generating extracts from the system on a half yearly basis.
⢠The Bank is now in the process of implementing the other assessed changes required in existing IT architecture and other processes to enable smooth transition to Ind AS.
⢠The Bank is continuing to submit the quarterly progress report on the status of Ind AS implementation to the Audit Committee of the Board.
⢠The Bank is submitting half yearly Proforma Ind AS financial statements to the RBI within the stipulated timeline.
⢠Training to the employees is imparted in a phased manner.
The key impact areas during the implementation of Ind AS for the Bank include effective interest rate accounting, fair valuation inputs, methodologies and assumptions, specific valuation considerations in many instruments, expected credit losses, employee stock options and implementation of technology systems.
1.14.8. Amortisation of expenditure on account of enhancement in family pension of employees of banks
As part of the 11th Bipartite Settlement/ Joint note dated November 11,2020 between the banks and the workmen, among other aspects, it was agreed that family pension shall be payable at the uniform rate of 30% of the Pay of the deceased employee and that there shall be no ceiling on family pension, subject to the approval of Government of India.
The same was approved by Government of India vide letter dated August 25, 2021 and accordingly, family pension for the employees covered under the 11th Bipartite Settlement/ Joint Note dated November 11, 2020 was revised. Based on the request from Indian Banks association, Reserve Bank of India vide letter dated October 04, 2021 had permitted the banks either to fully recognise the liability for enhancement of family pension as per the applicable accounting standards or amortise over a period not exceeding five years beginning with the financial year ending March 31, 2022, subject to a minimum of 1/5th of the total amount involved being expensed every year.
The Bank has opted to fully recognise and provide the liability for enhancement of family pension as per the applicable accounting standards. Accordingly, during the financial year ended March 31,2022, the Bank has recognised and provided the entire estimated additional liability amounting to '' 177.32 Crore for enhancement of family pension. There is no unamortised expenditure outstanding as on March 31,2022 for enhancement of family pension.
2.1. 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 Trust. The Bank has no obligation other than the monthly contribution.
The Bank recognised '' 0.65 Crore (previous Year: '' 0.65 Crore) for provident fund contribution in the Profit and Loss Account. National Pension System
As per the industry level settlement dated April 27, 2010, a Defined Contributory Pension Scheme (DCPS) in line with the National Pension System (introduced for employees of Central Government) was implemented and employees who are covered under National Pension System are not eligible for the existing pension scheme. Employee shall contribute 10% of their Basic Pay and Dearness Allowance towards DCPS and the Bank shall contribute 14% of the Basic Pay and Dearness Allowance towards DCPS. There is no separate Provident Fund for employees covered under National Pension System. The Bank recognised '' 83.04 Crore (previous year: '' 77.82 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 âGratuity 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 4 years and 240 days of service as per Payment of Gratuity Act, 1972 and its amendment with effect from March 29, 2018 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 âTrust"). 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 âpension 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. 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 Trust (the âTrust"). 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 recognised in the Bank''s Financial Statements for the years indicated:
The estimates of future salary increase considered in actuarial valuation take account of inflation, seniority, promotion and other relevant factors.
The expected rate of return on plan assets is based on the average long-term rate of return expected on investments of the Fund during the estimated term of the obligations.
As the contribution expected to be paid to the defined benefit plans during the annual period beginning after the balance sheet date is based on various internal / external factors, a best estimate of the contribution is not determinable.
The above information except otherwise stated is as certified by the actuary and relied upon by the auditors.
(c) Leave Encashment/ Sick Leave / Leave Travel Concession / Unavailed Casual Leave
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 unutilised 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 unutilised entitlement that has accumulated at the balance sheet date based on actuarial valuations.
A sum of '' 86.76 Crore (previous year '' 111.94 Crore) has been provided towards the above liabilities in accordance with AS 15 based on actuarial valuation.
2.2. 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 Securities 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 in the form of interest from the investment portfolio of the Bank, gains, losses, margins and fee/charges on trading and foreign exchange operations. The principal expense of the segment consists of interest expense on funds borrowed/utilised and other allocated overheads. Provisions allocated to the segment consist of diminution in the value of non-performing portfolio of the segment.
Corporate/Wholesale Banking:
The segment consists of lending of funds, acceptance of deposits and other banking services to corporates, trusts, partnership firms, statutory bodies which are not considered under retail banking segment.
Revenue of this segment consists of interest earned, charges /fees from loans and other banking services rendered to such customers. The principal expenses of the segment consist of interest expenses on funds utilised and other expenses allocated as per the methodology approved by the board of the Bank. Provisions allocated to the segment include the loan loss provision and standard asset provision created for the portfolio under the segment.
Retail banking:
Retail banking constitutes lending of funds, acceptance of deposits and other banking services to any legal person including small business customers, on the basis of the status of the borrower, nature of the product, granularity of the exposure and quantum thereof.
Revenue of this segment consists of interest earned, charges /fees from loans and other banking services rendered to such customers. The principal expenses of the segment consist of interest expenses on funds utilised and other expenses allocated as per the methodology approved by the board of the Bank. Provisions allocated to the segment includes the loan loss provision and standard asset provision created for the portfolio under the segment.
As per the RBI Circular DOR.AUT.REC.12/22.01.001/2022-23 dated April 07, 2022 on establishment of Digital Banking
Unit (DBU), for the purpose of disclosure under ''Accounting Standard 17 - Segment Reporting'', ''Digital Banking'' has been identified as a sub-segment of the existing ''Retail Banking'' segment by Reserve Bank of India (RBI). The DBU of the Bank commenced operations during the quarter ended December 31,2022 and accordingly the Bank has disclosed the business involving digital banking products acquired by DBU, together with existing digital banking products under the Digital Banking segment.
Other Banking Operations
This segment includes banking operations, not covered under any of the above segments such as para banking operations. The income from such services and associated costs are disclosed in this segment.
All items that are reckoned at enterprise level and cannot be allocated to reportable segments are included in unallocated portion. These mainly includes provision for tax (net of advance tax), deferred tax asset/liability, fixed assets, cash and balances in other bank current accounts, etc. Unallocated segment revenue consists of profit on sale of fixed assets, notice pay on resignation of employees etc.
The following table sets forth, for the years indicated, the business segment results:
B. Geographical Segment Information
The Business operations of the Bank are largely concentrated in India and for purpose of Segment reporting, the Bank considered to operate only in domestic segment, though the Bank has its operation in International Financial Services Centre (IFSC) Banking Unit in Gujarat International Finance Tec-City (GIFT City). The business conducted from the same is considered as a part of Indian operations.
Segment information is provided as per the MIS available for internal reporting purposes, which include certain estimates/ assumptions. The methodology adopted in compiling and reporting the above information has been relied upon by the auditors.
3. OTHER DISCLOSURES3.1. EARNINGS PER SHARE (AS 20)
Basic and diluted earnings per equity share of the Bank have been computed in accordance with AS 20 - Earnings Per Share. Basic earnings per equity share has been computed by dividing net profit for the period attributable to equity shareholders by the weighted average number of equity shares outstanding during the year. Diluted earnings per equity share has been computed by dividing the net profit for the period attributable to equity shareholders by the weighted average number of shares outstanding during the period adjusted for the effect of all dilutive potential equity shares outstanding during the period. The dilutive impact is on account of stock options granted to employees by the Bank.
A. Equity Issue
During the year, the Bank has allotted 13,637,270 (previous year 1,547,231) equity shares consequent to exercise of ESOS vested. Accordingly, the share capital increased by '' 2.73 Crore (previous year '' 0.31 Crore) and Reserves (share premium) increased by '' 92.40 Crore (previous year '' 9.08 Crore).
During the year, the share capital of the Bank increased by '' 0.35 Lakhs (previous year Nil) and Reserves (share premium) increased by '' 8.40 Lakhs (previous year Nil) consequent to allotment of 17,500 shares pertaining to Rights issue of 2007, which were kept in abeyance following Orders from Courts.
Further, the share capital of the Bank increased by '' 0.04 Lakhs (previous year Nil) and Reserves (share premium) increased by '' 0.53 Lakhs (previous year Nil) consequent to receipt of calls in arrears pertaining to 2,500 shares.
During the previous year, Bank had issued 104,846,394 equity shares of '' 2 each for cash pursuant to a preferential allotment at '' 87.39 per share aggregating to '' 916.25 Crore (including share premium). This resulted in an increase of '' 20.97 Crore in Share Capital and '' 894.77 Crore (net of share issue expenses '' 0.51 Crore) in Reserves (share premium) of the Bank.
B. Subscribed and paid up capital includes:
(i) 16,590 equity shares of '' 2/- each (previous year 16,590 equity shares of '' 2/- each) issued for consideration other than cash.
(ii) 25,361,023 underlying equity shares of '' 2/- each (previous year 28,361,023 equity shares of '' 2/- each) held by custodian on behalf of holders of Global Depository Receipts (GDRs).
c. The following allotments are kept pending following Orders from various courts:
(i) Allotment of 6,530 equity shares of '' 2/- each (previous year 6,530 equity shares of '' 2/- each) pertaining to the Rights issue of 1993 issued at a premium of '' 5/- per share.
(ii) 262,100 equity shares of '' 2/- each (previous year 262,100 equity shares of '' 2/- each) pertaining to the Rights issue of 1996 issued at a premium of '' 28/- per share.
(iii) 1,056,665 equity shares of '' 2/- each (previous year 1,074,165 equity shares of '' 2/- each) at a premium of '' 48/-per share pertaining to Rights issue of 2007.
Listing of shares and credit in demat account in respect of the following Bonus issues are kept in abeyance consequent to injunction orders from various Courts.
(i) 396,670 equity shares of '' 2/- each (previous year 406,670 equity shares of '' 2/- each) out of the Bonus issue of 2004 and
(ii) 597,005 equity shares of '' 2/- each (previous year 612,005 equity shares of '' 2/- each) out of the Bonus issue of 2015.
Listing of shares and subsequent credit in demat account of shareholders concerned respect of 10,000 equity shares out of the Bonus issue of 2004 and 15,000 equity shares out of the Bonus issue of 2015 which were kept in abeyance were executed on receipt of order from court during FY 2022-23.
D. Employee Stock Option Scheme (ESOS)
(i) Employee Stock Option Scheme 2010 (ESOS 2010)
Shareholders of the Bank had approved Employee Stock Option Scheme 2010 (ESOS 2010) through postal ballot, the
result of which was announced on December 24, 2010, enabling the Board and/or the âCompensation Committee" to grant such number of equity shares, including options, of
Mar 31, 2022
1. DISCLOSURE REQUIREMENTS AS PER RBI''S MASTER DIRECTION ON FINANCIAL STATEMENTS - PRESENTATION AND DISCLOSURES
Amounts in notes forming part of the financial statements for the year ended March 31,2022 are denominated in Rupees Crore to conform to extant RBI guidelines except where stated otherwise.
1.1. A. Capital To Risk-Weighted Assets Ratio (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 01, 2013.
Under Basel III Capital Regulations, on an on-going basis, the Bank has to maintain a Minimum Total Capital (MTC) of 11.50 % (previous year 10.875 %) including Capital Conservation Buffer (CCB) at 2.50 % (previous year 1.875%), of the total risk weighted assets (RWA). Out of the MTC, at least 8.00% (previous year 7.375%), shall be from Common Equity Tier 1 (CET1) capital and at least 9.50 % (previous Year 8.875%) from Tier 1 capital, including 2.50 % (previous year 1.875%) towards CCB.
# Capital Infusion: During the year, the Bank has issued 104,846,394 (previous year Nil) equity shares of '' 2 each for cash pursuant to a preferential allotment at '' 87.39 per share aggregating to '' 916.25 Crore (including share premium). This resulted in an increase of '' 20.97 Crore in Share Capital and '' 894.77 Crore (net of share issue expenses '' 0.51 Crore) in Reserves (share premium) of the bank. The funds mobilised from raising equity were utilised for general business purposes.
Further the Bank has allotted during the year 1,547,231 (previous year 3,488,176) equity shares consequent to exercise of ESOS vested. Accordingly, the share capital increased by '' 0.31 Crore (previous year ''0.70 Crore) and Reserves (share premium) increased by '' 9.08 Crore (previous year ''13.10 Crore).
During the year ended March 31, 2021 the Bank has not raised debt instruments eligible for Tier-1/Tier-2 capital.
During the year ended March 31, 2022 and March 31, 2021 the Bank has not redeemed debt instruments eligible for Tier-1/ Tier-2 capital.
In accordance with RBI Guidelines banks are required to make Pillar 3 disclosures under Basel III capital regulations. The Bank has made these disclosures which are available on its website at the following link: https:Zwww.federalbank.co.in/regulatory-disclosures. The Pillar 3 disclosures have not been subjected to audit.
1.1. B. Draw down from Reserves
The Bank has not drawn down any amount from any reserves during the years ended March 31,2022 and March 31,2021.
1.2.1. C. Additional Details on Investments:
a) Investments under HTM (excluding specified investments as per RBI norms) account for 16.78% (previous year 19.38%) of demand and time liabilities as at the end of March 31, 2022 as against permitted ceiling of 22.00% (previous year 22.00%) stipulated by RBI.
b) In respect of securities held under HTM category premium of '' 169.22 Crore (previous year: '' 142.19 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 '' 150.95 Crore (previous year: '' 273.07 Crore) has been taken to Profit and Loss Account. This includes Profit on redemption on maturity of investments amounting to '' 0.49 Crore (previous year : ''0.97 Crore). During the year the Bank had appropriated '' 84.26 Crore (previous year '' 152.39 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. (Also Refer Note 1.2.4)
d) As per RBI circular DBR.No.BP.BC.102/21.04.048/2017-18 dated April 02, 2018 Investment fluctuation reserve (IFR)
is to be created with an amount not less than lower of net profit on sale of investments during the year or net profit for the year less mandatory appropriations until the amount of IFR is at least 2 percent of the HFT and AFS portfolio on a continuing basis.
As on March 31, 2022 the bank is maintaining an IFR of '' 189.72 Crore (previous year: '' 189.72 Crore) as against the minimum requirement of '' 177.57 Crore (previous year: '' 112.10 Crore) and considered it as part of Tier II capital for capital adequacy purposes.
1.3.1. B) The bank had dealt in exchange traded currency futures during the financial year ended March 31,2022 and March 31,2021. As at March 31,2022 and March 31, 2021 the open contracts on the exchange was Nil.
1.3.2. B) Credit default swaps: The bank has not undertaken any transactions in Credit Default Swaps (CDS) during the year ended
March 31,2022 and March 31, 2021.
1.3.3. 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, Non Deliverable Forwards 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), Net loss, deal size and 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.
Interest rate contracts
Interest rate swaps involve the exchange of interest obligations with the counterparty for a specified period without exchanging the underlying (or notional) principal.
Interest rate futures are standardised interest rate derivative contracts traded on a recognised stock exchange to buy or sell a notional security or any other interest bearing instrument or an index of such instruments or interest rates at a specified future date at a price determined at the time of the contract.
Exchange rate contracts
Cross currency swaps are agreements to exchange principal amounts denominated in different currencies. Cross currency swaps may also involve the exchange of interest payments on one specified currency for interest payments in another specified currency for a specified period.
Currency options (including Exchange Traded Currency Option) give the buyer on payment of a premium the right but not an obligation to buy or sell specified amounts of currency at agreed rates of exchange on or before a specified future date.
Currency futures contract is a standardised contract traded on an exchange to buy or sell a certain underlying currency at a certain date in the future at a specified price. The contract specifies the rate of exchange between one unit of currency with another.
Non Deliverable Derivative Contracts
Non Deliverable Forwards are foreign exchange derivative contract involving the Rupee, entered into with a person resident outside India and which is settled without involving delivery of the Rupee.
(b) Accounting policy for recording hedge and non-hedge transactions, recognition of income, Premiums and discounts, valuation of outstanding contracts and provisioning
Bank deals in derivatives for hedging Domestic 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 futures are marked to market daily and the MTM is accounted in the books.
(c) Collateral Security
Bank has provided Sufficient Collateral to Central counter Parties and Exchanges wherever applicable. As per market practice no collateral is insisted on for the contracts with counter parties like Banks/Primary Dealers (PDs) etc. but if a CSA (Credit Support Annexure) is signed then collateral is insisted as per the terms of CSA agreement. For deals with Corporate Clients appropriate collateral security/margin etc. is stipulated wherever considered necessary as per the CSA Agreement.
(d) Credit Risk Mitigation
In the Interbank Space the Bank deals with other major banks and the default risk is perceived as low in this segment. Wherever the CSA (Credit Support Annexure) is signed the collateral is insisted as per the terms of the CSA agreement. This risk is managed under the limit framework laid down by the policy on Sovereign and Counterparty Bank Limits. Exposure against clients is mitigated by collecting proper collateral securities / margin as envisaged by the credit sanctioning team as per the CSA.
⢠The notional principal amount of forward exchange contracts classified as Hedging and Trading outstanding as on March 31, 2022 amounted to '' 3,564.10 Crore (previous year '' 5,205.84 Crore) and '' 5,860.17 Crore (previous year '' 5,163.85 Crore) respectively. For the hedging contracts, as at March 31, 2022 the marked to market position was asset '' 10.64 Crore and liability of '' 120.61 Crore (previous year asset '' 38.38 Crore and liability of '' 116.43 Crore). For the trading contract, as at March 31, 2022 the marked to market position was asset '' 431.75 Crore and liability of '' 52.60 Crore (previous year asset '' 260.86 Crore and liability of '' 39.00 Crore). Credit exposure on forward exchange contracts classified as Hedging and Trading at March 31, 2022 amounted to '' 79.21 Crore (previous year '' 140.36 Crore) and '' 675.97 Crore (previous year '' 542.63 Crore) respectively. 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 daily balances for Interest rate Derivatives and Currency Derivatives. During the previous year, maximum and minimum of PV01 was computed based on daily balances for Interest rate Derivatives and month end balances for Currency Derivatives.
⢠I n respect of derivative contracts, the bank evaluates the credit exposure arising therefrom, 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.
1.4.3. Details of Overseas Assets, NPAs and Revenue
During the year ended March 31, 2016 the Bank had commenced its operation, pursuant to RBI approval, in International Financial Services Centre (IFSC) Banking Unit (IBU) in Gujarat International Finance Tec City (GIFT City) and the business transaction from the same is considered as a Foreign branch for most Regulatory purpose as per para 2.2 of Annex I of RBI Circular DBR.IBD.BC 14570/23.13.004/2014-15 dated April 01, 2015. Apart from the said IBU, the bank does not have any overseas branch as on March 31,2022 and March 31,2021. Details of Assets, NPAs and Revenue of IBU are given below:
1.4.4. Divergence in Asset classification and Provisioning for NPAs
The divergence observed by RBI for the financial years 2020-21 and 2019-20 in respect of the Bank''s asset classification and provisioning under the extant prudential norms on income recognition, asset classification and provisioning is below the regulatory requirement for disclosure and hence the disclosure as required under RBI Master Direction on ''Financial Statements-Presentation and Disclosures'' on ''Divergence in the asset classification and provisioning, is not required to be made.
1.4.5. In accordance with the RBI Cir. No. DOR.STR.REC.11/21.04.048/2021-22 dated May 05, 2021 on âResolution Framework â 2.0: Resolution of Covid â 19 related stress of Individuals and Small Business", the number of borrower accounts where modifications were sanctioned and implemented and the aggregate exposure to such borrowers are as under:
iii) During the years ended March 31, 2022 and March 31, 2021, the bank has not acquired any stressed loans and not transferred any loan not in default / Special Mention Accounts (SMA).
iv) During the year ended March 31,2022 and March 31,2021, the bank has not invested in Security Receipts (SR) issued by Asset Reconstruction Companies (ARC) in respect of stressed loans transferred to ARCs.
Qualitative Disclosure
The Bank adheres to RBI guidelines on Liquidity Coverage Ratio, Liquidity Risk Monitoring Tools and the LCR Disclosure
Standards pursuant to the Basel III Framework on Liquidity Standards that are applicable to banks in India with effect from January 01,2015. The regulatory threshold is embedded into the Risk Appetite Statement of the Bank and hence maintenance of LCR is subject to periodic review of Risk Management Committee/Board. The Bank computes the LCR and reports the same to the Asset Liability Committee (ALCO) every month as well as to the Risk Management Committee of the Board. 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. LCR is computed on a daily basis from January 01,2017 and in accordance with regulatory prescriptions. The LCR disclosures contain data on simple average of daily observations for the days in each quarter. Bank computes LCR of the IFSC Banking Unit at GIFT City on a standalone basis as per the extant guidelines. Bank is not computing LCR separately for any foreign currency since the aggregate liabilities denominated in any foreign currency doesn''t amount to 5% or more of the Bank''s total liabilities. Bank has consistently maintained LCR above the prescribed regulatory minimum of 100% during the fiscal.
On an average, 96% 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 Marginal Standing Facility (MSF) and Facility to Avail Liquidity for Liquidity Coverage Ratio (FALLCR) as per RBI guidelines from time to time,
constitutes Level 1 HQLA. Level 2 assets maintained by the Bank comprises of (a) marketable securities representing 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 (b) Corporate bonds and commercial papers, 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 shall provide the Bank with adequate and timely liquidity.
Bank has a well-diversified funding portfolio. Retail deposits, considered as stable deposits from a liquidity perspective is the major funding source of the Bank, indicating lower dependence of the Bank on wholesale funds.
The liquidity risk management in the Bank is guided by the ALM Policy. Asset Liability 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 to ensure that the liquidity position is well within the Risk Appetite set by the Board of Directors.
Net Stable Funding Ratio (NSFR)
Qualitative Disclosure
Net Stable Funding Ratio (NSFR) is introduced by Basel Committee on Banking Supervision (BCBS) in order to ensure that banks maintain a stable funding profile in relation to the composition of their assets, liabilities and off-balance sheet activities. NSFR limits overreliance on short-term wholesale funding and promotes funding their activities with longer term stable sources indicating funding stability.
NSFR is defined as the amount of available stable funding relative to the amount of required stable funding. âAvailable stable
funding" is defined as the portion of capital and liabilities expected to be reliable over the time horizon considered by the NSFR, which extends to one year. The amount of stable funding required (âRequired stable funding") of the Bank is a function of the liquidity characteristics and residual maturities of the various assets as well as the off-balance sheet (OBS) exposures of the Bank.
As per the RBI Guideline, Bank is required to maintain a minimum NSFR of 100% on an ongoing basis effective from
October 01,2021.
The Available Stable funding primarily consists of Regulatory capital, Deposits from Retail Customers, Small business entities, Non-Financial and financial corporates and Borrowings. Whereas the Required Stable Funding comprises of mainly Advances and Investments.
During the year ended March 31, 2022 and March 31, 2021, the Bank''s credit exposure to single borrower and group borrowers was within the prudential exposure limits prescribed by RBI.
Unsecured Advances: During the year ended March 31, 2022 and March 31, 2021 there are no unsecured advances for which intangible securities such as charge over the rights, licences, authority etc. have been taken as collateral by the Bank.
Factoring exposure: The factoring exposure of the Bank as on March 31,2022 is '' 729.40 Crore (previous Year: '' 512.88 Crore)
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 '' 18.19 Crore (previous year '' 15.90 Crore) as provision and '' 19.56 Crore (previous year '' 21.06 Crore) as additional capital for computation of capital adequacy ratio on account of the unhedged foreign currency exposures of borrowers.
The Bank has not done any securitisation transactions during the year ended March 31, 2022 and March 31,2021. 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 March 31,2022 and March 31, 2021.
Transfers to Depositor Education and Awareness (DEA) Fund
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 DEA Fund. Details of amounts transferred to / reimbursed by DEA Fund are set out below:
i) Qualitative disclosures
a) Information relating to the composition and mandate of the Nomination and Remuneration 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. The Committee comprise of three or more Non-Executive Directors, out of which not less than one-half would be Independent Directors and would include at least one member from Risk Management Committee of the Board.
As on March 31, 2022, the remuneration committee of the Board comprises of the following Independent Directors:
⢠Mr. A P Hota (Chairman)
⢠Mr. C Balagopal
⢠Mr. Siddhartha Sengupta
Out of the above, Mr. Siddhartha Sengupta is also a member of Risk Management Committee of the Board.
The Remuneration Committee of the Board functions with the following mandate, in respect of matters related to remuneration:
i. To oversee the framing, review and implementation of an effective Compensation Policy, as per RBI Guidelines.
ii. To review the compensation package for the MD & CEO and Executive Directors and recommend revisions for Board approval.
iii. To consider and approve issuance and allotment of shares under ESOS to MD & CEO /EDs and employees of the Bank.
iv. Work in coordination with Risk Management Committee of the Bank, in order to achieve effective alignment
between risk and remuneration.
b) Information relating to the design and structure of remuneration processes and the key features and objectives of
remuneration policy.
The Bank has formulated and adopted a comprehensive compensation policy covering all the employees and the policy is reviewed on an annual basis. The policy covers all aspects of the compensation structure such as fixed pay, variable compensation, perquisites, performance bonus, guaranteed bonus (joining/sign-on bonus), severance package, share-linked instruments e.g. Employee Stock Option Scheme (ESOS), pension, gratuity, etc., taking into account the Guidelines issued by Reserve Bank of India from time to time.
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
The compensation paid to the Chief Executive Officer (CEO) / Whole Time Directors (WTDs) /Material Risk Takers (MRTs) is divided into two components:
1. Fixed Pay and Perquisites: The fixed compensation is determined based on the relevant factors such as industry standards, the exposure, skill sets, talent and qualification attained by the official over his/her career span and adherence to statutory requirements. All the fixed items of compensation, including the perquisites, will be treated as part of fixed pay. Perquisites that are reimbursable would also be included in the fixed pay so long as there are monetary ceilings on these reimbursements. Contributions towards superannuation/retiral benefits will also be treated as part of fixed pay.
2. Variable Compensation: The variable compensation for Whole Time Directors, Managing Director & Chief Executive Officer and Material Risk Takers is fixed based on organizational performance (both business-unit and firm-wide) and KPAs set for the official. The organization''s performance is charted based on 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. The Scorecard provides a mix of Financial and Non-Financial, Quantitative and Qualitative Metrics. Additionally, serious supervisory observations (if any) are also factored. The variable pay is paid in the form of share-linked instruments, or a mix of cash and share-linked instruments.
Risk, Control and Compliance Staff: Members of staff engaged in financial and risk control, including internal audit, are compensated in a manner that is independent of the business areas they oversee and commensurate with their key role in the bank. The total fixed and variable compensation paid out to the employees in the Risk Control and Compliance
Function is decided independent of business parameters. The mix of fixed and variable compensation for control function personnel is weighted in favour of fixed compensation, to ensure autonomy and independence from business goals.
Grander Compensation Package to Executives in Level IV and above: The Compensation package applicable to Executives in Level IV and above are governed under the provisions of Grander Compensation Package, a performance linked pay structure implemented in the Bank with effect from May 01, 2017. Annual Increment under the âGrander Compensation Package" will depend on the annual performance rating of the Executive concerned.
Compensation paid to Employees on IBA Package: The compensation paid to Award Staff and Officers coming under Scale I to III is fixed based on the periodic industry level settlements with Indian Banks'' Association. The present scale of pay and other service conditions applicable to employees, whose compensation package is governed under IBA package is as per provisions of 11th Bipartite Settlement/ Joint note dated November 11,2020.
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 three categories:
1. MD & CEO/Whole Time Directors/ Material Risk Takers (MRTs)
2. Risk Control and Compliance Staff
3. Other Categories of Staff
I n order to manage current and future risk and allow a fair amount of time to measure and review both quality and quantity of the delivered outcomes, the Bank maintains proper balance between fixed pay and variable pay. A significant portion (i.e. at least 50 per cent) of total compensation payable to MD & CEO, Whole Time Directors and Material Risk Takers (MRTs) is variable.
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'' exposures to liquidity risk are also monitored by ALCO.
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 claw back arrangements) embedded in their compensation arrangement. Appropriate compliance arrangements have been established to ensure that employees do not insure or hedge their compensation structure.
Committee of Management for reviewing the linkage of Risk Based Performance with Remuneration (ED Level Committee): The ED Level Committee, comprising of ED and Heads of Risk Division and HR Department would assist the Nomination and Remuneration Committee of the Board to monitor, review and control various risks and to balance prudent risk taking with the compensation paid out to top Executives, WTDs and other employees.
d) Linkage of performance during a performance measurement period with levels of remuneration.
The Bank''s performance is charted based on 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 Scorecard for MD & CEO / EDs. The scorecard provides a mix of financial and non-financial, quantitative and qualitative metrics.
The compensation package applicable to Executives in Level IV to VII was earlier fixed and governed based on the periodical industry level settlements under IBA pattern. To make the Compensation Structure market driven and competitive, a new performance-based compensation package called âGrander Compensation Package" has been introduced for Executives in Level IV (Associate Vice President / Assistant Vice President) and above with effect from May 01,2017.
The compensation paid to other officials that include Award Staff, Officers coming under Scale I to III is fixed based on the periodic industry level settlements with Indian Banks Association.
e) Bank''s policy on deferral and vesting of variable remuneration and criteria for adjusting deferred remuneration before vesting and after vesting.
MD & CEO, Whole Time Directors and Material Risk Takers (MRTs).
Deferral of Variable Pay: For MD & CEO, Whole Time Directors and Material Risk Takers (MRTs) deferral arrangements would invariably exist for the variable pay, regardless of the quantum of pay. For such executives of the bank, a minimum of 60% of the total variable pay must invariably be under deferral arrangements. Further, if cash component is part of variable pay, at least 50% of the cash bonus would also be deferred. However, in cases where the cash component of variable pay is under '' 0.25 Crore, deferral requirements would not be necessary.
Period of Deferral Arrangement: The deferral period would be minimum of three years. This would be applicable to both the cash and non-cash components of the variable pay.
Vesting: Deferred remuneration would either vest fully at the end of the deferral period or be spread out over the course of the deferral period, subject to the following conditions:
⢠The first such vesting will be not before one year from the commencement of the deferral period.
⢠The vesting will be no faster than on a pro rata basis.
⢠Vesting will not take place more frequently than on a yearly basis.
In case of deferred compensation (cash component), the payment will be made as per the Schedule mentioned below.
Risk Control and Compliance Staff
At least 25% of the total compensation would be variable and the total variable pay will be limited to a maximum of 100%
of the fixed pay (for the relative performance measurement period). Deferral arrangements would invariably exist for the variable pay, if the Variable Pay exceeds 75% of the fixed pay. In such cases a minimum of 60% of the total variable pay must invariably be under deferral arrangements. Further, if cash component is part of variable pay, at least 50% of the cash bonus would also be deferred. However, in cases where the cash component of variable pay is under '' 0.25 Crore, deferral requirements would not be necessary.
The variable pay would be in the form of cash, share-linked instruments, or a mix of both cash and share-linked instruments. The total variable pay will be limited to a maximum of 300% of the fixed pay (for the relative performance measurement period). Deferral arrangements would invariably exist for the variable pay, if the Variable Pay exceeds 200% of the fixed pay. In such cases a minimum of 60% of the total variable pay must invariably be under deferral arrangements. Further, if cash component is part of variable pay, at least 50% of the cash bonus would also be deferred. However, in cases where the cash component of variable pay is under '' 0.25 Crore, deferral requirements would not be necessary.
The variable compensation is covered under Malus / Claw back arrangements in case of all categories of employees. In the event of subdued or negative contributions of the bank and/or the relevant line of business in any year, the deferred compensation will be subjected to:
⢠Malus arrangement wherein Bank shall withhold vesting of all or part of the amount of deferred remuneration.
⢠Claw back arrangement wherein the employees shall be liable to return previously paid or vested remuneration to the bank. The deferred compensation, if any, paid to such functionaries shall be subject to Claw back arrangements, which will entail the Bank to recover proportionate amount of variable compensation from such 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 malus and claw back provisions would cover the deferral and retention periods. If an Official covered under these provisions is responsible for any act or omission or non-compliance of regulatory guidelines resulting in a penalty being imposed by any Regulators or engages in a detrimental conduct, the Bank would be entailed to recover proportionate amount of variable compensation from such functionaries within 48 months from the date of payment/vesting of variable compensation. The Bank has put in place appropriate modalities, performance thresholds and detailed framework to cover the trigger points with or invoking malus/claw back, taking into account relevant statutory and regulatory stipulations, as applicable.
f) Description of the different forms of variable remuneration
The variable pay is in the form of share-linked instruments, or a mix of cash and share-linked instruments. The Bank uses an optimum and proper mix of cash (Performance Linked Incentive/Ex- Gratia) and share-linked instruments (Stock Options) to decide the compensation of employees in all categories.
The distribution of Stock Options and variable Performance Linked Incentives 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.
1.14.6. Implementation of IFRS converged Indian Accounting Standards (Ind AS)
The Ministry of Corporate Affairs (MCA), Government of India notified the Companies (Indian Accounting Standards) Rules, 2015 on February 16, 2015. Further, a press release dated January 18, 2016, was issued by the MCA outlining the roadmap for implementation of IFRS converged Ind AS for banks. This roadmap required banks to prepare Ind AS based standalone & consolidated financial statements for the accounting periods beginning April 01, 2018 onwards, with comparatives for the periods ending March 31, 2018 or thereafter. RBI, through its notification dated February 11, 2016, required all scheduled commercial banks to comply with Ind AS for financial statements from the stated periods and also stated that early adoption of Ind AS is not permitted.
The implementation of Ind AS by banks requires certain legislative amendments to make the format of financial statements, prescribed in the Third Schedule to Banking Regulation Act, 1949, compatible with accounts under Ind AS. Considering the amendments needed to the Banking Regulation Act, 1949, as well as the level of preparedness of several banks, RBI, through its Statement on Developmental and Regulatory Policies dated April 05, 2018, had deferred the implementation of Ind AS by a year.
The legislative amendments recommended by the Reserve Bank are under consideration of the Government of India. Accordingly, RBI through its notification dated March 22, 2019 deferred the implementation of Ind AS till further notice.
Even though RBI has deferred the implementation, the Bank is gearing itself to bring the necessary systems and processes in place to facilitate the Proforma submission to RBI and seamless transition to Ind AS. With respect to the various instructions from the Ministry of Corporate Affairs and Reserve Bank of India (RBI), the actions taken by the Bank are summarized as follows:
⢠A steering committee was formed by MD & CEO with ED as its Chairman with members from all cross-functional departments. The Committee oversees the progress of Ind AS implementation in the Bank and provides guidance on critical aspects of the implementation such as Ind AS technical requirements, systems and processes, business impact, people and project management.
⢠The implementation of IT solution procured to automate the computation of Expected Credit Losses (ECL), Effective Interest Rate, Fair valuation and other accounting changes required under Ind AS is completed and Bank is generating extracts from the system on a half yearly basis.
⢠The Bank is now in the process of implementing the other assessed changes required in existing IT architecture and other processes to enable smooth transition to Ind AS.
⢠The Bank is continuing to submit the quarterly progress report on the status of Ind AS implementation to the Audit Committee of the Board.
⢠The Bank is submitting half yearly Proforma Ind AS financial statements to the RBI within the stipulated timeline.
⢠Training to the employees is imparted in a phased manner.
The key impact areas during the implementation of Ind AS for the Bank include effective interest rate accounting, fair valuation inputs, methodologies and assumptions, specific valuation considerations in many instruments, expected credit losses, employee stock options and implementation of technology systems.
1.14.8. Amortisation of expenditure on account of enhancement in family pension of employees of banks
As part of the 11th Bipartite Settlement/ Joint Note dated November 11, 2020 between the banks and the workmen, among other aspects, it was agreed that family pension shall be payable at the uniform rate of 30% of the Pay of the deceased employee and that there shall be no ceiling on family pension, subject to the approval of Government of India.
The same was approved by Government of India vide letter dated August 25, 2021 and accordingly, family pension for the employees covered under the 11th Bipartite Settlement/ Joint Note dated November 11,2020 was revised. Based on the request from Indian Banks Association, Reserve Bank of India vide letter dated October 04, 2021 had permitted the banks either to fully recognise the liability for enhancement of family pension as per the applicable accounting standard or amortize over a period not exceeding five years beginning with the financial year ending March 31,2022, subject to a minimum of 1/5th of the total amount involved being expensed every year.
The bank has opted to fully recognise and provide the liability for enhancement of family pension as per the applicable accounting standards. Accordingly, during the financial year ended March 31, 2022, the bank has recognised and provided the entire estimated additional liability amounting to '' 177.32 crore for enhancement of family pension. There is no unamortised expenditure outstanding as on March 31,2022 for enhancement of family pension.
2. DISCLOSURE REQUIREMENTS AS PER ACCOUNTING STANDARDS WHERE RBI HAS ISSUED GUIDELINES IN RESPECT OF DISCLOSURE ITEMS FOR ''NOTES TO ACCOUNTS''
2.1. 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 Trust. The Bank has no obligation other than the monthly contribution.
The Bank recognised '' 0.65 Crore (previous Year: '' 0.88 Crore) for provident fund contribution in the Profit and Loss Account.
As per the industry level settlement dated April 27, 2010, a Defined Contributory Pension Scheme (DCPS) in line with the New Pension Scheme (introduced for employees of Central Government) was implemented and employees who are covered under New Pension Scheme are not eligible for the existing pension scheme. Employee shall contribute 10% of their Basic Pay and Dearness Allowance towards DCPS and the Bank shall contribute 14%* of the Basic Pay and Dearness Allowance towards DCPS. There is no separate Provident Fund for employees covered under New Pension Scheme.
The Bank recognised '' 77.82 Crore (previous year: '' 45.79 Crore) for DCPS contribution in the Profit and Loss Account.
* As per the provisions of 11th Bipartite Settlement/ Joint Note dated November 11,2020 it was recommended to increase the Employers Contribution to NPS from 10% to 14%, subjected to approval of Central Government. IBA wide Circular No HR&IR/MBR/XIBPS/10409 dated October 11, 2021 to the member banks which are parties of Joint Note has conveyed
the NOC of Ministry of Finance, Department of Financial Services to enhance the rate of employers'' contribution under the National Pension System from the existing 10% of Pay plus DA to 14%, for the employees covered under NPS effective from November 11,2020.
b) Defined benefit plan Gratuity
The Bank provides for Gratuity, a defined benefit retirement plan (the âGratuity 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 May 24, 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 âTrust"). Trustees administer contributions made to the Trust and contributions are invested in specific investments as permitted by law.
The Bank provides for monthly pension, a defined benefit retirement plan (the âpension 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. 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 Trust (the âTrust"). Trustees administer contributions made to the Trust and contributions are invested in specific investments as permitted by law.
The estimates of future salary increase considered in actuarial valuation take account of inflation, seniority, promotion and other relevant factors.
The expected rate of return on plan assets is based on the average long-term rate of return expected on investments of the Fund during the estimated term of the obligations.
As the contribution expected to be paid to the defined benefit plans during the annual period beginning after the balance sheet date is based on various internal / external factors, a best estimate of the contribution is not determinable.
The above information except otherwise stated is as certified by the actuary and relied upon by the auditors.
(c) Leave Encashment/ Sick Leave / Leave Travel Concession / Unavailed Casual Leave
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 unutilised entitlement that has accumulated at the balance sheet date based on actuarial valuations.
A sum of '' 111.94 Crore (previous year '' 55.69 Crore) has been provided towards the above liabilities in accordance with AS 15 based on actuarial valuation.
The discount rate is based on the prevailing market yields of Government of India securities as at the Balance Sheet date for the estimated term of the obligations.
The estimate of future salary increases considered, takes into account the inflation, seniority, promotion, increments and other relevant factors.
The above information is as certified by the actuary and relied upon by the auditors.
2.2. 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 operations include trading and investments in Government Securities 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 in the form of interest from the investment portfolio of the Bank, gains, losses, margins and fee/charges on trading and foreign exchange operations. The principal expense of the segment consists of interest expense on funds borrowed/utilized and other allocated overheads. Provisions allocated to the segment consist of diminution in the value of non performing portfolio of the segment.
The segment consists of lending of funds, acceptance of deposits and other banking services to corporates, trusts, partnership firms, statutory bodies which are not considered under retail banking segment.
Revenue of this segment consists of interest earned, charges /fees from loans and other banking services rendered to such customers. The principal expenses of the segment consist of interest expenses on funds utilized and other expenses allocated as per the methodology approved by the board of the Bank. Provisions allocated to the segment include the loan loss provision and standard asset provision created for the portfolio under the segment.
Retail banking constitutes lending of funds, acceptance of deposits and other banking services to any legal person including small business customers, on the basis of the status of the borrower, nature of the product, granularity of the exposure and quantum thereof.
Revenue of this segment consists of interest earned, charges /fees from loans and other banking services rendered to such customers. The principal expenses of the segment consist of interest expenses on funds utilized and other expenses allocated as per the methodology approved by the board of the bank. Provisions allocated to the segment includes the loan loss provision and standard asset provision created for the portfolio under the segment.
This segment includes banking operations, not covered under any of the above segments such as para banking operations. The income from such services and associated costs are disclosed in this segment.
All items that are reckoned at enterprise level and cannot be allocated to reportable segments are included in unallocated portion. These mainly includes provision for tax (net of advance tax), deferred tax asset/liability, fixed assets, cash and balances in other bank current accounts, etc. Unallocated segment revenue consists of profit on sale of fixed assets, notice pay on resignation of employees etc.
B. Geographical Segment Information
The Business operations of the Bank are largely concentrated in India and for purpose of Segment reporting, the Bank is considered to operate only in domestic segment, though the bank has its operation in International Financial Services Centre (IFSC) Banking Unit in Gujarat International Finance Tec-City (GIFT City). The business conducted from the same is considered as a part of Indian operations.
Segment information is provided as per the MIS available for internal reporting purposes, which include certain estimates/ assumptions. The methodology adopted in compiling and reporting the above information has been relied upon by the auditors.
Figures in bracket indicate maximum balance outstanding during the year based on comparison of the total outstanding balances at each month end.
In accordance with RBI guidelines, details pertaining to the related party transactions have not been provided where there is only one related party in a category.
Figures in bracket indicate maximum balance outstanding during the year based on comparison of the total outstanding balances at each month end.
In accordance with RBI guidelines, details pertaining to the related party transactions have not been provided where there is only one related party in a category.
3. OTHER DISCLOSURES 3.1. Earnings per share (AS 20)
Basic and diluted earnings per equity share are computed in accordance with AS 20 - Earnings Per Share. Basic earnings per equity share is computed by dividing net profit for the period attributable to equity shareholders by the weighted average number of equity shares outstanding during the year. Diluted earnings per equity share is computed by dividing the net profit for the period attributable to equity shareholders by the weighted average number of shares outstanding during the period adjusted for the effects of all dilutive potential equity shares.
A. Equity Issue
During the year, the Bank has issued 104,846,394 (previous year Nil) equity shares of '' 2/- each for cash pursuant to a preferential allotment at '' 87.39 per share aggregating to '' 916.25 Crore (including share premium). This resulted in an increase of '' 20.97 Crore in Share Capital and '' 894.77 Crore (net of share issue expenses '' 0.51 Crore) in Reserves (share premium) of the Bank. The funds mobilised from raising equity were utilised for general business purposes.
Further the Bank has allotted during the year 1,547,231 (previous year 3,488,176) equity shares consequent to exercise of ESOS vested. Accordingly, the Share Capital increased by '' 0.31 Crore (previous year ''0.70 Crore) and Reserves (share premium) increased by '' 9.08 Crore (previous year ''13.10 Crore).
B. Subscribed and paid up capital includes:
(i) 16,590 equity shares of '' 2/- each (previous year 16,590 equity shares of '' 2/- each) issued for consideration other than cash.
(ii) 28,361,023 underlying equity shares of '' 2/- each (previous year 29,232,891 equity shares of '' 2/- each) held by custodian on behalf of holders of Global Depository Receipts (GDRs).
C. The following allotments are kept pending following Orders from various Courts:
(i) Allotment of 6,530 equity shares of '' 2/- each (previous year 6,530 equity shares of '' 2/- each) pertaining to the Rights issue of 1993 issued at a premium of '' 5/- per share
(ii) 262,100 equity shares of '' 2/- each (previous year 262,100 equity shares of '' 2/- each) pertaining to the Rights issue of 1996 issued at a premium of '' 28/- per share
(iii) 1,074,165 equity shares of '' 2/- each (previous year 1,074,165 equity shares of '' 2/- each) at a premium of '' 48/- per share pertaining to Rights issue of 2007
I ssue of certificates/credit in demat account in respect of the following Bonus issues are kept in abeyance consequent to injunction orders from various Courts.
(i) 406,670 equity shares of '' 2/- each (previous year 406,670 equity shares of '' 2/- each) out of the Bonus issue of 2004 and
(ii) 612,005 equity shares of '' 2/- each (previous year 612,005 equity shares of '' 2/- each) out of the Bonus issue of 2015.
D. Employee Stock Option Scheme (ESOS)
(i) Emplo yee Stock Option Scheme 2010 (ESOS 2010)
Shareholders of the Bank had approved Employee Stock Option Scheme 2010 (ESOS 2010) through postal ballot, the
Mar 31, 2019
4.1. Earnings per Share (''EPS'') Particulars March 31, 2019 March 31, 2018 Weighted average number of equity shares used in computation of basic earnings per share (in 000''s) 1,980,208 1,902,184 Weighted average number of equity shares used in computation of diluted earnings per share (in 000''s) 1,992,628 1,926,275 Nominal Value of share (in Rs) 2 2 Basic earnings per share (in Rs) 6.28 4.62 Diluted earnings per share ( in Rs) 6.24 4.56 Earnings used in the computation of basic and diluted earnings per share Rs in ''000) 12,438,883 8,788,458 4.2 A. Equity Issue During the year ended March 31, 2019, the Bank has allotted 12,905,764 equity shares consequent to exercise of ESOS which resulted in an increase of Rs 2.58 Crore in Share Capital and Rs 52.79 Crore in Share premium account. THE FEDERAL BANK LIMITED SCHEDULE 18: NOTES ON ACCOUNTS FORMING PART OF THE FINANCIAL STATEMENTS FOR THE YEAR ENDED MARCH 31, 2019 (CONTD...) During the year ended March 31, 2018, the Bank has issued 21 5,517,241 equity shares of ? 2 each for cash pursuant to a Qualified Institution Placement (QIP) as per the relevant provisions of SEBI (Listing Obligations and Disclosure Requirements) Regulations at Rs 116.00 per share aggregating to Rs 2,500.00 Crore (including share premium). This resulted in an increase of Rs 43.10 Crore in Share Capital and Rs 2,420.78 Crore (net of issue expenses) in Share premium account. Further during the year ended March 31, 2018 the Bank had allotted 32,577,034 equity shares consequent to exercise of ESOS and 4,750 equity shares pertaining to Rights issue of 2007, which resulted in an increase of Rs 6.52 Crore in Share Capital and Rs 129.03 Crore in Share premium account. B. Subscribed and paid up capital includes: (i) 16,590 shares of Rs 21- each (Previous Year 16,590 shares of Rs 21- each) issued for consideration other than cash. (ii) 29,273,675 underlying equity shares of Rs 2/- each (Previous Year 32,925,590 equity shares of Rs 2/- each) held by custodian on behalf of holders of Global Depository Receipts (GDRs). 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) 262,100 shares of Rs 2/- each (Previous year 262,100 shares of Rs 2/- per share) pertaining to the Rights issue of 1996 issued at a premium of Rs 28/- per Share (iii) 1,075,665 equity shares of Rs 2/- each (Previous year 1,075,665 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) 407,670 shares of Rs 21- each (Previous year 407,670 shares of Rs 21- each) out of the Bonus issue of 2004 and b) 613,505 bonus shares of Rs 21- each (Previous year 613,505 bonus shares of Rs 21- each), out of the Bonus issue of 201 5. D. Employee Stock Option Scheme ("ESOS"): (i) Employee Stock Option Scheme 2010 (ESOS 2010) Shareholders of the bank had approved Employee Stock Option Scheme 2010 (ESOS 2010) 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: Number of Options March 31, 2019 March 31, 2018 Outstanding at the beginning of the year 38,476,532 71,802,986 Surrendered during the year - - Granted during the year - 100,000 Exercised during the year 12,903,339 32,577,034 Forfeited/lapsed during the year 1,425,680 849,420 Outstanding at the end of the year 24,147,513 38,476,532 Options exercisable 23,640,013 35,889,722 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 May 10, 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 December 24, 2010. In accordance with the SEBI Guidelines and the guidance note on "Accounting for Employee Share based payments" issued by the ICAI, the March 31, 2019 March 31, 2018 Outstanding at the beginning of the year 15,770,539 Surrendered during the year - - Granted during the year 37,231,307 22,318,348 Exercised during the year 2,425 - Forfeited/lapsed during the year 2,663,140 6,547,809 Outstanding at the end of the year 50,336,281 15,770,539 Options exercisable 7,766,862 - As per SEBI guidelines the accounting for ESOS can be done either under the ''Intrinsic value basis'' or ''Fair value basis''. As per the approval of shareholders, the Bank has adopted ''Intrinsic value method'' for accounting of ESOS. In accordance with the SEBI Guidelines and the guidance note on "Accounting for Employee Share based payments" issued by the ICAI, the excess, if any, of the market price of the share preceding the date of grant of the option under ESOS over the exercise price of the option is amortised on a straight line basis over the vesting period. iii) Effect of Fair value method of accounting ESOP: 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 70.36 Crore (Previous Year: Rs 25.79 Crore). 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 5.93 and Rs 5.80 (Previous Year: Rs 4.48 and Rs 4.43) respectively. E. Proposed Dividend and Tax on Proposed Dividend In terms of revised Accounting Standard (AS) 4 "Contingencies and Events occurring after 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 335.03 Crore from the Profit and loss account for the year ended March 31, 2019, also the same has not been shown as an Other Liabilities. (Schedule 5). However, the effect of the proposed dividend has been reckoned in determining capital funds in the computation of the capital adequacy ratios. 4.3. Fixed Assets: A) Fixed Assets as per Schedule 10 include Intangible Assets relating to Software and System Development Expenditure which are as follows: Particulars March 31, 2019 March 31, 2018 Gross Block At the beginning of the year 205.50 174.01 Additions during the year 43.25 34.36 Deductions/ Adjustments during the year 2.87 At the end of the year 248.75 205.50 Rs in Crore) excess, if any, of the market price of the share preceding the date of grant of the option under ESOS over the exercise price of the option is amortised on a straight line basis over the vesting period. ii) Employee Stock Option Scheme 2017 (ESOS 2017) Shareholders of the bank had approved The Federal Bank Limited Employee Stock Option Scheme 2017 (ESOS 2017) AGM held on July 14, 2017, as a Special Resolution, 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 followinq options: Number or Options Particulars March 31, 2019 March 31, 2018 Depreciation / Amortisation At the beginning of the year 153.37 120.27 Charge for the year 37.13 35.97 Deductions /Adjustments during the year 2.87 Depreciation to date 190.50 153.37 Net Block 58.25 52.13 B) 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 valuer was credited to Revaluation Reserve. There has been no revaluation of assets during the year ended March 31, 2019 and March 31, 2018. 4.4. 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 1 54.67 Crore (Previous year: Rs 143.17 Crore) was charged to Profit and loss account. 4.5 Provisions and Contingencies a) Movement in provision for non-credit related* frauds included under other liabilities: (Rs in Crore) March 31, 2019 March 31, 2018 Opening balance at the beginning of the year 4.71 4.05 Additions during the year 0.31 1.97 Reductions during the year 0.56 1.31 Balance at the end of the year 4.46 4.71 * Provision for credit related frauds included in Provision for Bad and doubtful debts. March 31, 2019 March 31, 2018 Opening provision at the beginning of the year 4.60 4.08 Provision made during the year 15.61 10.25 Reductions during the year 15.02 9.73 Closing provision at the end of the year * 5.19 4.60 * The closing provision is based on the actuarial valuation of accumulated debit card reward points. This amount will be utilized towards redemption of the debit card reward points. March 31, 2019 March 31, 2018 Opening provision at the beginning of the year 34.33 60.06 Provision made during the year 4.28 14.92 Reductions during the year 9.58 40.65 Closing provision at the end of the year 29.03 34.33 b) Movement in provision for debit card reward points: (Rs in Crore) c) Movement in provision for other continaencies: 4.7 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 presently enters into foreign exchange contracts and interest rate swaps with interbank Counterparties and Customers. Forward exchange contracts are commitments to buy or sell foreign currency at a future date at the contracted rate. Interest rate swaps are commitments to exchange fixed and floating interest rate cash flows in the same currency based on fixed rates or benchmark reference. The notional amounts of such foreign exchange contracts and derivatives provide a basis for comparison with instruments recognized on the balance sheet but do not necessarily indicate the amounts of future cash flows involved or the current fair value of the instruments and, therefore, do not indicate the Bank''s exposure to credit or price risks. The fluctuation of market rates and prices cause fluctuations in the value of these contracts and the contracted exposure become favorable (assets) or unfavorable (liabilities). The aggregate fair values of derivative financial assets and liabilities can fluctuate significantly as the aggregate contractual or notional amount of derivative financial instruments on hand can vary and the market rate fluctuations can decide the extent to which instruments are favorable or unfavorable. 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 (DBA) Fund. (Refer schedule 12 for amounts relating to contingent liability.) Particulars March 31, 2019 March 31,2018 No. of frauds reported during the year 96 44 Amount involved in fraud (Rs in crore) 175.60 5.34 Amount involved in fraud net of recoveries/write offs/unrealised interest as at the end of the year (Rs in crore) 35.82 3.56 Provision made during the year (Rs in crore) 35.82 3.56 Amount of unamortised provision debited from "other reserves" as at the end of the year (Rs in crore) - - 4.6 Amount of Provisions made for income-tax during the year (Rs in Crore) Particulars March 31, 2019 Year ended March 31, 2018 Provision for Income tax a) Current tax 687.64 461.03 b) Deferred tax (24.28) 3.98 Total 663.36 465.01 4.8 Provisioning Pertaining to Fraud Accounts 4.9 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, 2019 was Rs 2,672.22 Crore (Previous Year: Rs 1,444.50 Crore). The aggregate amount of the participation issued by the Bank, reduced from advances as per regulatory guidelines, outstanding as of March 31, 2019 was Rs 973.73 Crore. (Previous Year: Rs Nil). 4.10 Factoring Exposure The factoring exposure of the Bank as on March 31, 2019 is Rs 409.03 Crore (Previous Year: Rs 805.63 Crore) 4.11 Priority Sector Lending Certificates (PSLC) As per RBI Circular FIDO.CO.PIan.BC.23/04.09.01/2015-16 dated April 7, 2016 the PSLCs purchased and sold is given below: (Rs in Crore) Particulars March 31, 2019 March 31, 2018 Purchased (Face value) Sold (Face value) Purchased (Face value) Sold (Face value) PSLC-Agriculture - - - - PSLC-SF/MF - - - - PSLC- Micro Enterprises PSLC- General 3,750 4.12 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 1.52 % of its average net profit for the last three financial years as part of its CSR activities for the year ended March 31, 2019. As a responsible Bank, it has approached the mandatory requirements of CSR spend positively by utilizing 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. 4.14 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. Particulars March 31, 2019 Year ended March 31, 2018 Amount required to be spent 22.47 23.65 Amount spent during the year 17.04 14.02 4.13 Corporate Social Responsibility (CSR) (Rs in Crore) 4.15 Small and Micro Industries Under the Micro, Small and Medium Enterprises Development Act, 2006 which came into force from October 2, 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. 4.16 Figures for the previous year have been regrouped and reclassified, wherever necessary to conform to current year''s presentation. For and on behalf of the Board of Directors Krishna kumar K Girish Kumar Ganapathy Ashutosh Khajuria Shyam Srinivasan Senior Vice President Company Secretary Executive Director & CFO Managing Director & CEO (DIN:051 54975) (DIN:02274773) Dilip G Sadarangani Chairman (DIN:06610897) As per our report of even date Directors: For B S R & Co. LLP For M. M. Nissim & Co. Nilesh S Vikamsey (DIN : 00031213) Chartered Accountants Chartered Accountants Grace Elizabeth Koshie (DIN : 06765216) Firm''s Reg. No: 101248W/W-100022 Firm''s Registration No: 107122W Shubhalakshmi Panse (DIN : 02599310) C Balagopal (DIN : 00430938) A P Hota (DIN : 02593219) Akeel Master Sanjay Khemani K Balakrishnan (DIN : 00034031) Partner Partner Membership No. 046768 Membership No. 044577 Place: Mumbai Date : May 4, 2019
Mar 31, 2018
1. 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 March 31, 2018 are denominated in Rupees Crore to conform to extant RBi guidelines.
1.1. 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 10.875 % (Previous Year 10.25 %) including Capital Conversion Buffer (CCB) at 1.875% (Previous Year 1.25%), of the total risk weighted assets (RWA). Out of the MTC, at least 7.375% (Previous Year 6.75%), shall be from Common Equity Tier 1 (CET1) capital and at least 8.875% (Previous Year 8.25%) from Tier 1 capital, including 1.875% (Previous Year 1.25%) towards CCB.
*Adjusted for proposed dividend of '' 1 per share (Previous year: '' 0.90 per share) and applicable taxes.
in accordance with RBi Guidelines, banks are required to make Pillar 3 disclosures under Basel iii capital regulations. The Bank has made these disclosures which are available on its website at the following link: http://www.federalbank.co.in/regulatory-disclosures. The Pillar
3 disclosures have not been subjected to audit.
Movement in provisions held towards depreciation on investments have been reckoned on a yearly basis
1.2.2. a) Investments under HTM (excluding specified investments as per RBI norms) account for 19.33% (Previous year 19.78%) of demand and time liabilities as at the end of March 2018 as against permitted ceiling of 19.50 % (Previous Year: 20.50%) stipulated by RBi.
b) in respect of securities held under HTM category premium of '' 58.21 Crore (Previous year: '' 47.65 Crore) has been amortized during the year and debited under interest received on Government securities.
c) Profit on sale of securities from HTM category amounting to Rs, 54.71 Crore (Previous year: Rs, 134.26 Crore) has been taken to Profit and Loss Account. During the year, the Bank had appropriated Rs, 26.83 Crore (Previous year Rs, 65.85 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, 2018 the bank had withdrawn Rs, 23.57 Crore (Previous year: Rs, 14.49 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.
e) RBi circular DBR.No.BP.BC.102/21.04.048/2017-18 dated April 2, 2018 grants banks an option to spread provisioning for
mark to market losses on investments held in AFS and HFT for the quarters ended December 31, 2017 and March 31, 2018. The circular states that the provisioning for each of these quarters may be spread equally over up to four quarters, commencing with the quarter in which the loss was incurred. The Bank has recognized the entire mark to market loss on investments in the respective quarters and has not availed the said option.
The bank has not undertaken any transactions in Credit Default Swaps (CDS) during the year ended March 31, 2018 and March 31,
2017.
1.3.3. 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.
* excludes forward exchange contract.
- The notional principal amount of forward exchange contracts classified as Hedging and Trading outstanding as on March 31, 2018 amounted to Rs, 4,364.45 Crore (Previous year Rs, 3,003.98 Crore) and Rs, 13,967.17 Crore (Previous year Rs, 13,452.78 Crore) respectively. For the hedging contract, as at March 31, 2018 the marked to market position was asset Rs, 53.26crores and liability of Rs, 111.07crores (Previous year asset Rs, 54.81 crores and liability of Rs, 110.23 crores). For the trading contract, as at March 31, 2018 the marked to market position was asset Rs, 245.60crores and liability of Rs, 193.18crores (Previous year asset Rs, 360.06 crores and liability of Rs, 292.43 crores). Credit exposure on forward exchange contracts at March 31, 2018 was Rs, 718.51 Crore (Previous year Rs, 893.33 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 therefrom, 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.
1.4.5 Divergence in Asset classification and Provisioning for NPAs
The divergence observed by RBI for the Financial year 2016-17 in respect of the Bank''s asset classification and provisioning under the extant prudential norms on income recognition, asset classification and provisioning is below the regulatory requirement for disclosure 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.
@ Represents balance as on 31-03-2016
2 Amount reported here represents outstanding as on March 31, 2017.
3 Accounts which were not attracting higher provisioning and/or additional risk weight at the beginning of the financial year.
4 Other Facility include investment in Bond/Debentures amounting to Rs, 216.04 Crore.
5 There are no SME cases which have been restructured during the year ended March 31, 2017.
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, 0.48 Crore (Previous Year: Rs, 0.47 Crore) for provident fund contribution in the Profit and Loss Account.
New Pension Scheme
As per the industry level settlement dated April 27, 2010, employees who joined the services of the Bank on or after April 01, 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 April 01, 2010.
The Bank recognized Rs, 25.34 Crore (Previous year: Rs, 21.64 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 May 24, 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, 2018.
The estimates of future salary increases considered in actuarial valuation take account of inflation, seniority, promotion and other relevant factors.
The expected rate of return on plan assets is based on the average long-term rate of return expected on investments of the Fund during the estimated term of the obligations.
As the contribution expected to be paid to the defined benefit plans during the annual period beginning after the balance sheet date is based on various internal / external factors, a best estimate of the contribution is not determinable.
(c) Leave Encashment/Sick Leave / Leave Travel Concession / Unavailed Casual Leave
The employees of the Bank are entitled to compensated absence. The employees can carry forward a portion of the unutilized 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.
A sum of Rs, 15.17 Crore has been reversed to profit and loss account due to reduction of the above liabilities in accordance with AS 15 based on actuarial valuation. During the Previous year as sum of Rs, 24.64 Crore was charged to profit and loss account due to increase in the liabilities.
The discount rate is based on the prevailing market yields of Government of India securities as at the Balance Sheet date for the estimated term of the obligations.
The estimate of future salary increases considered, takes into account the inflation, seniority, promotion, increments and other relevant factors. The above information is as certified by the actuary and relied upon by the auditors.
2.2. 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 parabanking activities like third party product distribution and otherbanking 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:
Geographical Segment Information
The Business operations of the Bank are largely concentrated in India and for purpose of Segmental reporting, the bank considered to operate only in domestic segment, though the bank has its operation in international Finance Service Centre (iFSC) Banking Unit in Gujarat international Finance Tec-city (GiFT). The business conducted from the same is considered as a part of Indian operations. Segment information is provided as per the MiS available for internal reporting purposes, which include certain estimates/ assumptions. The methodology adopted in compiling and reporting the above information has been relied upon by the auditors.
2.3. Related Party Disclosures (AS 18)
a) Details of Related Parties:
Name of the Party Nature of Relationship
iDBi Federal Life insurance Company Limited Associate
FedBank Financial Services Limited Subsidiary
Sri. Shyam Srinivasan, Managing Director & CEO Key Management Personnel
Sri. Ashutosh Khajuria, Executive Director & CFO Key Management Personnel
Sri Ganesh Sankaran, Executive Director (From 04-07-2016) Key Management Personnel
FedBank Hormis Memorial Foundation Entity in which KMPs can exercise significant influence in accordance with RBi guidelines, details pertaining to the related party transactions, have not been provided where there is only one related party
Note: Exposure is computed as per the definition of Credit and Investment Exposure in RBI Master Circular on Exposure Norms DBOD. No. Dir.BC.12/13.03.00/ 2015-16 dated July 1, 2015.
The bank has compiled the data for the purpose of disclosure in Note No. 3.8.1 to 3.8.3 from its internal MiS system and has been furnished by the management, which has been relied upon by the auditors.
3.12. 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 March 31, 2018 and March 31, 2017.
3.13 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 March 31, 2018, the remuneration committee of the Board comprises of the following independent Directors:
- Mr. Dilip G Sadarangani
- Mr. Nilesh Shivji Vikamsey
- Ms. Grace Koshie
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. ED, CCO, CFO etc 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-Grander Compensation Package)
- Executives (On Grander Compensation 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 claw back 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 actor 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.
Committee 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 committee''s to take decisions on various aspects:
- Credit limits are sanctioned by committee''s 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 is fixed based on the periodic industry level settlements with Indian Banks Association. The compensation package applicable to Executives in Level 4 to 7 was fixed and governed based on the periodical industry level settlements under iBA pattern. To make the Compensation Structure market driven and competitive, a new performance based compensation package called "Grander Compensation Package" has been introduced for Executives in Level 4 (Assistant Vice President) and above with effect from 01.05.2017.
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
Claw back and deferral arrangements
The provisions of claw back 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.
3.17 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 unheeded 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, 5.26 Crore (Previous year Rs, 5.27 Crore) as provision and Rs, 4.39 Crore (Previous year Rs, 2.21 Crore) as additional capital for computation of capital adequacy ratio on account of the unhedged foreign currency exposures of borrowers as at March 31, 2018.
3.18 Liquidity Coverage Ratio (LCR)
a) Quantitative Disclosure
The following table sets forth, the daily average of unweighted and weighted values for all the quarters in FY 2017-18
computed LCR separately for any foreign currency since the aggregate liabilities denominated in any foreign currency doesn''t amount to 5 percent or more of the Bank''s total liabilities. Bank has consistently maintained LCR above 100% during Fiscal 2018, as against the regulatory minimum of 80% (till December 2017)/ 90% (from January 2018).
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 (9% of NDTL) constitutes Level 1 HQLA. Level 2 Assets maintained by the Bank comprises of (a) marketable securities representing 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 institu-tion/NBFC or any of its affiliated entities and (b) Corporate bonds, not issued by a bank/financial institution/NBFC or any of its affiliated entities, which have been rated BBB- 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, 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 to ensure that the liquidity position is well within the Risk Appetite set by the Board of Directors.
4.2 A. Equity Issue
During the year ended March 31, 2018, the Bank has issued 215,517,241 equity shares of '' 2 each for cash pursuant to a Qualified Institution Placement (QiP) as per the relevant provisions of SEBi (Listing Obligations and Disclosure Requirements) Regulations at '' 116.00 per share aggregating to '' 2,500.00 Crore (including share premium). This resulted in an increase of '' 43.10 Crore in Share Capital and '' 2,420.78Crore (net of issue expenses) in Share premium account.
Further the Bank allotted during the year 32,577,034 equity shares consequent to exercise of ESOS and 4,750 equity shares pertaining to Rights issue of 2007, which resultedin an increase of Rs, 6.52 Crore in Share Capital and Rs, 129.03 Crore in Share premium account.
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) 32,925,590 underlying equity shares of Rs, 2/- each (Previous Year 31,205,861 equity shares of Rs, 2/- each) held by custodian on behalf of holders of Global Depository Receipts (GDRs).
(iii) 32,577,034 ESOS shares of Rs, 2/- per share (Previous Year 5,098,570 shares of Rs, 2/- Per share) allotted under ESOS 2010.
(iv) 857,945,206 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) 262,100 shares of Rs, 2/- each (Previous year 262,100 shares of Rs, 2/- per share) pertaining to the Rights issue of 1996 issued at a premium of Rs, 28/- per Share
(iii) 1,075,665 equity shares of Rs, 2/- each (Previous year 1,080,415 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) 409,170 shares of Rs, 2/- each (Previous year 409,170 shares of Rs, 2/- each) out of the Bonus issue of 2004 and
b) 613,505 bonus shares of Rs, 2/- each (Previous year 615,755 bonus shares of Rs, 2/- each), out of the Bonus issue of 2015.
D. Employee Stock Option Scheme ("ESOS"):
(i) Employee Stock Option Scheme 2010 (ESOS 2010)
Shareholders of the bank had approved Employee Stock Option Scheme 2010 (ESOS 2010) 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:
* ESOS granted on May 20, 2017 with vesting period of 1,2,3 and 4 years. Exercise period of 5 years and exercise price of Rs, 112.35 per share.
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 May 10, 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 December 24, 2010.
in accordance with the SEBi Guidelines and the guidance note on "Accounting for Employee Share based payments" issued by the iCAi, the excess, if any, of the market price of the share preceding the date of grant of the option under ESOS over the exercise price of the option is amortized on a straight line basis over the vesting period.
ii) Employee Stock Option Scheme 2017 (ESOS 2017)
Shareholders of the bank had approved The Federal Bank Limited Employee Stock Option Scheme 2017 (ESOS 2017) AGM held on July
14, 2017, as a Special Resolution, 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''. As per the approval of shareholders, the Bank has adopted ''intrinsic value method'' for accounting of ESOS.
in accordance with the SEBi Guidelines and the guidance note on "Accounting for Employee Share based payments" issued by the iCAi, the excess, if any, of the market price of the share preceding the date of grant of the option under ESOS over the exercise price of the option is amortized on a straight line basis over the vesting period.
iii) Effect of Fair value method of accounting ESOP:
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, 25.79 Crore (Previous Year: Rs, 9.12 Crore). 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, 4.48 and Rs, 4.43 (Previous Year: Rs, 4.78 and Rs, 4.72) respectively
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, 237.75 Crore from the Profit and loss account for the year ended March 31, 2018, also the same has not been shown as an Other Liabilities. (Schedule 5)
4.7 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 presently enters into foreign exchange contracts and interest rate swaps with interbank Counterparties and Customers. Forward exchange contracts are commitments to buy or sell foreign currency at a future date at the contracted rate. interest rate swaps are commitments to exchange fixed and floating interest rate cash flows in the same currency based on fixed rates or benchmark reference. The notional amounts of such foreign exchange contracts and derivatives provide a basis for comparison with instruments recognized on the balance sheet but do not necessarily indicate the amounts of future cash flows involved or the current fair value of the instruments and, therefore, do not indicate the Bank''s exposure to credit or price risks. The fluctuation of market rates and prices cause fluctuations in the value of these contracts and the contracted exposure become favorable (assets) or unfavorable (liabilities). The aggregate fair values of derivative financial assets and liabilities can fluctuate significantly as the aggregate contractual or notional amount of derivative financial instruments on hand can vary and the market rate fluctuations can decide the extent to which instruments are favorable or unfavorable.
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 liableincludes Capital commitments and amount transferred to RBi under the Depositor Education and Awareness Fund (DEAF).
(Refer schedule 12 for amounts relating to contingent liability.)
4.8 Provisioning Pertaining to Fraud Accounts
The Bank has reported 44 cases (Previous year: 68 cases) of fraud in the Financial year ended March 31, 2018 amounting to Rs, 5.34 Crore (Previous Year: Rs, 259.19 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, 2018.
4.9 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, 2018 was Rs, 1,444.50 Crore (Previous Year: Rs, 1,981.27).
The aggregate amount of the participation issued by the Bank, reduced from advances as per regulatory guidelines, outstanding as of March 31, 2018 was Rs, Nil. (Previous Year: Rs, 150.00 Crore).
4.10 Factoring Exposure
The factoring exposure of the Bank as on March 31, 2018 is Rs, 805.63 Crore (Previous Year: Rs, 1,055.67 Crore)
4.12 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 1.19 % of its average net profit for the last three financial years as part of its CSR activities for the year ended March 31, 2018. 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.
4.14 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.
4.15 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 November 08, 2016 to December 30, 2016 is not applicable to banking companies.
4.16 Small and Micro Industries
Under the Micro, Small and Medium Enterprises Development Act, 2006 which came into force from October 02, 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.
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 (âIndian GAAPâ), 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 (âthe Actâ) 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 âGratuity Planâ) 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 âTrustâ). 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 âpension planâ) 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 âTrustâ). 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 (âESOSâ):
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 âCompensation Committeeâ 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 âFair Value Methodâ had been adopted based on âBlack-Scholes pricing modelâ 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 âContingencies and Events occurring after the Balance sheet dateâ 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
ÃGratuity PlanÃ) 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 ÃTrustÃ). 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 Ãpension planÃ) 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 ÃTrustÃ). 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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