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Notes to Accounts of Indian Overseas Bank

Mar 31, 2015

1. Reconciliation

Reconciliation of Inter Bank and Inter Branch transactions has been completed up to 31.3.2015 and steps for elimination of outstanding entries are in progress. The management does not anticipate any material consequential effect on reconciliation / elimination of outstanding entries.

2. Investments

2.2 SLR Securities (domestic) under "Held to Maturity" accounted for 22.26 % (previous Year 21.69%) of Bank''s Demand and Time liabilities as at the end of March 2015 as against ceiling of 23.50% stipulated by RBI.

2.3 In respect of Held to Maturity category of Investments, premium of Rs. 88.37 Crores was amortized during the year (previous year Rs. 81.26 Crores).

2.4 Securities of Face Value for Rs. 1050 Crores (previous year Rs. 1050 Crores) towards Settlement Guarantee Fund and securities for Rs. 9455 Crores (previous year Rs. 9455 Crores) towards collateral for borrowing under Collateralized Borrowing and Lending Obligations have been kept with Clearing Corporation Of India Limited. We have placed securities of face value Rs. 2500 Crores with RBI for intra- day borrowing. We have also placed Securities to the extent Rs. 10600 Crores with Reserve Bank of India for our borrowing under the LAF window. Besides, a sum of Rs. 15 Crores (previous year Rs. 15 Crores) has been lodged with CCIL towards default fund for Forex operations.

2.5 Shares under Investments in India in Regional Rural Banks is Rs. 222,04,18,450/- (previous year Rs. 222,04,18,450/-) including amount towards share capital Deposits.

2.6 The Bank sold Government Securities from HTM category during the year, both outright and under RBI''s Open Market Operations (OMO). The extent of sale by the Bank under OMO was Rs. 20.00 Crores (BV) and earned a profit of Rs. 0.11 Crores. The Bank has also sold Government Securities (other than OMO), to the extent of Rs. 1769.86 Crores (BV) (within 5%, prescribed limit of RBI) and booked a profit of Rs. 53.69 Crores.

3. Advances

3.1 The Classification for advances and provisions for possible loss has been made as per prudential norms issued by Reserve Bank of India.

3.2 Claims pending settlement and claims yet to be lodged with Guarantee Institutions identified by the branches have been considered for provisioning requirements on the basis that such claims are valid and recoverable.

3.3 In assessing the realisability of certain advances, the estimated value of security, Central Government guarantees etc. have been considered for the purpose of asset classification and income recognition.

3.4 The classification of advances, as certified by the Branch Managers have been incorporated, in respect of unaudited branches.

3.5 In terms of Reserve Bank of India Circular No. DBR No. BP BC. 79/21.04.048/2014-2015, dated March 30, 2015, the Bank has utilized Rs. 150.00 crores (22.79%) of floating provision/ countercyclical provisioning buffer of Rs. 658.22 crores held as on December 31, 2014 for meeting specific provisions for Non-performing Assets during the year ended March 31,2015.

4. Fixed Assets

4.1 During the year 2014-15, no revaluation was done for land and buildings in India.

4.2 Profit on Sale of Assets for Rs. 1.15 crore (previous year Rs. 1.87 crore), has been appropriated to Capital Reserve.

5. Rupee Interest Rate Swap

An amount of Rs. 0.99 Crores (previous year Rs. 2.33 Crores) is kept on deferred income on account of gains on termination of Rupee Interest Rate Swaps taken for hedging and would be recognized over the remaining contractual life of Swap or life of the Assets/Liabilities, whichever is earlier.

6. Capital and Reserves:

6.1 During the Financial Year 2014-15, Bank had issued Unsecured, Non-Convertible, Additional Tier - I, Basel III Compliant Perpetual Bonds to the extent of Rs. 1000 crore including green shoe option of Rs. 300 crore to augment additional Tier -I capital and overall capital of the Bank for further strengthening the capital adequacy required as per BASEL III norms. The Bond has a face value of Rs. 10 lac per Bond and carries a coupon of 10% per annum payable annually. The entire issue was fully subscribed by investors.

6.2 The Bank has not raised Tier II capital during the current year or in the previous year.

7. Taxes

7.1 Taking into consideration the decisions of Appellate Authorities, judicial pronouncements and the opinion of tax experts, no provision is considered necessary in respect of disputed and other demands of income tax aggregating Rs. 1031.31 crore (previous year Rs. 280.43 crore).

7.2 Tax expense for the year is Rs. 565.76 crore (Previous year Rs. 241.30 crore).

8. Unamortised Pension and Gratuity Liability

On the reopening of pension to employees of Public Sector Banks and enhancement of Gratuity limits, the Bank incurred a liability of Rs. 1005.21 crore in 2010-11. In terms of requirement of Accounting Standard (AS 15) "Employee Benefits", the entire amount of Rs. 1005.21 crore is required to be charged to Profit and Loss Account.

In terms of Reserve Bank of India circular No.DBOD. BPBC.80/21.04.018/2010-11, on Reopening of Pension Option to employees of Public Sector Banks and enhancement in Gratuity limits - Prudential Regulatory Treatment, dated 09.02.2011, Bank would amortize the amount of Rs. 1005.21 crore over a period of 5 years from 31.3.2011. Accordingly, Rs. 201.04 crore (previous year Rs. 201.04 crore) has been charged to Profit and Loss Account for the year 2014-15 and no balance amount has been carried over.

9. Information relating to vendors registered under Micro, Small and Medium Enterprises Development Act, 2006 and from whom goods and services have been procured by the Bank, is being ascertained.

ADDITIONAL DISCLOSURES

In accordance with the guidelines issued by Reserve Bank of India vide Master Circular dated 1.07.2014, the following additional disclosures are made:-

12.3 DISCLOSURES ON RISK EXPOSURE IN DERIVATIVES 12.3.1 Qualitative Disclosure Treasury (Foreign)

The Bank uses Interest Rate Swaps (IRS), Currency Swaps and Options for hedging purpose to mitigate interest rate risk and currency risk in banking book. The Bank also offers these products to corporate clients to enable them to manage their own currency and interest rate risk. Such transactions are entered only with Clients and Banks having agreements in place.

a) The Risk Management Policy of the Bank allows using of derivative products to hedge the risk in Interest/Exchange rates that arise on account of overseas borrowing/FCNR(B) portfolio/the asset liability mis-match, for funding overseas branches etc., and also to offer derivative products on back-to-back basis to customers.

b) The Bank has a system of evaluating the derivatives exposure separately and placing appropriate credit lines for execution of derivative transactions duly reckoning the Net Worth and security backing of individual clients.

c) The Bank has set in place appropriate control systems to assess the risks associated in using derivatives as hedge instruments and proper risk reporting systems are in place to monitor all aspects relating to derivative transactions. The Derivative transactions were undertaken only with the Banks and counter parties well within their respective exposure limit approved by appropriate credit sanctioning authorities for each counter party.

d) The Bank has set necessary limits in place for using derivatives and its position is continuously monitored.

e) The Bank has a system of continuous monitoring appraisal of resultant exposures across the administrative hierarchy for initiation of necessary follow up actions.

f) Derivatives are used by the Bank to hedge the Bank''s Balance sheet and offered to select corporate clients on back-to-back basis. In respect of hedge transactions the value and maturity of hedges have not exceeded that of the underlying exposures. In respect of back-to-back transactions the transactions with clients are fully matched with counter party Bank transactions and there is no uncovered exposure.

g) The Income from such derivatives are amortized and taken to profit and loss account on accrual basis over the life of the contract. In case of early termination of swaps undertaken for Balance Sheet Management, income on account of such gains would be recognized over the remaining contractual life of the swap or life of the assets/liabilities whichever is lower. In case of early termination of derivatives undertaken for customers on a back-to-back basis, income on account of such things will be recognized on termination.

h) All the hedge transactions are accounted on accrual basis. Valuations of the outstanding contracts are done on Mark to Market basis. The Bank has duly approved Risk Management and Accounting procedures for dealing in Derivatives.

i) The derivative transactions are conducted in accordance with the extant guidelines of Reserve Bank of India.

Treasury (Domestic)

The Bank uses Rupee Interest Rate Swaps (IRS) for hedging purpose to mitigate interest rate risk in Govt. Securities and to reduce the cost of Subordinated Debt and term deposits. In addition, the Bank also enters into rupee interest rate swaps for trading purposes as per the policy duly approved by the Board. Swap transactions are entered only with Banks having ISDA agreements in place.

a) The Bank has put in place an appropriate structure and organization for management of risk, which includes treasury department, Asset Liability Management Committee and Risk Management Committee of the Board.

b) Derivative transactions carry Market Risk (arising from adverse movement in interest rates), Credit risk (arising from probable counter party failure), Liquidity risk (arising from failure to meet funding requirements or execute the transaction at a reasonable price), Operational risk, Regulatory risk and Reputation risk. The Bank has laid down policies, set in place appropriate control systems to assess the risks associated in using derivatives and proper risk reporting and mitigation systems are in place to monitor all risks relating to derivative transactions. The IRS transactions were undertaken with only Banks as counter party and well within the exposure limit approved by the Board of Bank for each counter party.

c) Derivatives are used by the Bank for trading and hedging. The Bank has an approved policy in force for derivatives and has set necessary limits for the use of derivatives and the position is continuously monitored. The value and maturity of the hedges which are used only as back to back or to hedge Bank''s Balance Sheet has not exceeded that of the underlying exposure.

d) The accounting policy for derivatives has been drawn up in accordance with RBI guidelines, as disclosed in Schedule 17 - Significant Accounting Policies (Policy No.6)

DISCLOSURES IN TERMS OF ACCOUNTING STANDARDS

18.1 Accounting Standard 5 - Net Profit or Loss for the period, prior period items and changes in accounting policies

As permitted by RBI vide its circular No. DBR. No. BR BC. 79 / 21.04.048/2014-15 dated 30.03.2015 and also in pursuance to Bank''s Board approved policy, the Bank has utilized a sum of '' 150.00 crores from Floating provisions/ Counter Cyclical Provisioning Buffer towards Specific Provisions for Non Performing Assets.

18. 2 Accounting Standard 9 - Revenue Recognition

Revenue has been recognized as described in item No. 2 of Significant Accounting Policies - Schedule 17.

18. 3 Accounting Standard 15 - Employee Benefits

i) The Bank has adopted Accounting Standard 15 (Revised) "Employee Benefits" issued by the Institute of Chartered Accountants of India, with effect from 1st April 2007.

ADDITIONAL DISCLOSURES

Reserve Bank of India, Mumbai issues guidelines on Basel II Capital Adequacy Framework from time to time. In terms of the guidelines, the following disclosures are made as per the specified Formats under Pillar III requirement:

RISK MANAGEMENT

Risk taking is an integral part of the banking business. Banks assume various types of risks in its activities while providing different kinds of services based on its risk appetite. Each transaction that the Bank undertakes changes the risk profile of the Bank. In the normal course of business, a Bank is exposed to various risks including Credit Risk, Market Risk and Operational Risk. The objective of risk management is not to prohibit or prevent risk taking activity, but to ensure that the risks are consciously taken with full knowledge, clear purpose and understanding so that it can be measured and mitigated. With a view to managing such risks efficiently and strengthening its risk management systems, the Bank has put in place various risk management measures and practices which includes policies, tools, techniques, monitoring mechanism and management information systems (MIS).

The Bank, on a continuous basis, aims at enhancing and maximizing the shareholder values through achieving appropriate trade off between risks and returns. The Bank''s risk management objectives broadly cover proper identification, measurement, monitoring, control and mitigation of the risks with a view to enunciate the Bank''s overall risk philosophy. The risk management strategy adopted by the Bank is based on an understanding of risks and the level of risk appetite of the Bank. Bank''s risk appetite is demonstrated broadly through prescription of risk limits in various policies relating to risk management.

The Bank has set up appropriate risk management organization structure in the Bank. Risk Management Committee of the Board (RMCB), a sub-committee of the Board, is constituted which is responsible for management of credit risk, market risk, operational risk and other risks in the Bank. The Bank has also constituted internal risk management committees namely Credit Policy Committee (CPC) for the managing credit risk, Asset Liability Management Committee (ALCO) and ALCO Sub-committee for managing market risk, Operational Risk Management Committee for managing operational risk, Operational Risk management (Vigilance) Committee for managing fraud risk and Information Security Committee for managing Information security.

A full fledged Risk Management department is functioning at the Bank''s Central Office, independent of the business departments for implementing best risk management systems and practices in the Bank. A Chief Risk Officer in the rank of General Manager of the Bank is in charge of the department who is responsible for overall supervision on risk management in the Bank and is the convenor for all the internal risk management committees. The Mid-Office in Risk Management and Credit Support Services Dept., in particular, and other functional departments / branches in general also carry out the risk management functions and monitor the adherence/ compliance to policies, risk limit framework and internal approvals. Risk Managers have been placed at Regional Offices. Apart from coordinating with Risk Management Department, Central Office for submission of various MIS, they participate in Regional Level Credit Approval Committee.

The basic approach to manage risk more effectively lies with controlling the risk at the point of its origination. The Bank had implemented the New Capital Adequacy Framework (Basel-II) with effect from 31.3.2008 and is in compliance with the framework, in line with the guidelines issued by the RBI from time to time. Basel III guidelines have been introduced from 01.04.2013, and Bank is maintaining capital as per the guidelines. The Basel-II Framework is based on three mutually reinforcing pillars. While the first pillar of the revised framework addresses the minimum capital requirement for credit, market and operational risks, the second pillar of supervisory review process ensures that the Bank has adequate capital to address all the risks in their business commensurate with Bank''s risk profile and control environment. As per RBI''s requirement, the Bank has put in place a Board approved Policy on Internal Capital Adequacy Assessment Process (ICAAP) to address second pillar requirements. This policy aims at assessing all material risks to which the Bank is exposed over and above the regulatory prescriptions under the first pillar risks, and ensuring adequate capital structure to meet the requirements on an ongoing basis.

The Bank has formulated a "Stress Testing framework" to assess the potential vulnerability of the organization to exceptional but plausible events in line with the guidelines issued by RBI on 2nd December 2013. Stress testing and scenario analysis, particularly in respect of the Bank''s material risk exposure, enable identification of potential risks inherent in a portfolio at times of economic recession and accordingly take suitable proactive steps to address the same. In accordance with the policy prescriptions, the Bank carries out various stress tests on Bank''s balance sheet periodically and specific portfolios and places the reports to ALCO / RMCB / Board.

Board approved Business Continuity Plan and Disaster Recovery plan is in place. The 3 way data centers have been implemented to facilitate Zero data loss, Multiple MPLS-VPN high bandwidth connections at all 3 data Centres and Central, Dual connectivity from different alternate service/alternate providers and alternate media for branches have been established. Firewall and Intrusion detection systems have been implemented. Information System Security Department has been established to monitor and analyse the information security incidents to take corrective steps while IS Audit section takes care of the periodical Information Systems Audit of the Bank''s department and branches.. The Bank has fine tuned the information security systems in accordance with RBI guidelines. Regular DR drills are being conducted every quarter. To ensure Network security, periodical Vulnerability assessment and Penetration testing exercise are conducted by external experts.

The Bank is also in the process of upgrading its risk management systems and procedure for migrating to the advanced approaches envisaged under Basel II framework.

Reserve Bank of India has issued final guidelines on Liquidity Risk Management effective from March 2013. The guideline covers preparation and submission of consolidated Bank operations including domestic operations and overseas operations separately at various frequencies. The Bank has put in place system and procedure in place in this regard in compliance with the RBI guidelines.

Reserve Bank of India has issued guidelines on implementation of Basel III capital regulations in India to be implemented in phased manner effective from April 1,2013 with Banks disclosing

Basel III capital ratios from the quarter ending June 30, 2013. The Bank is complying with the same.

The third pillar of Basel-II framework refers to market discipline. The purpose of market discipline is to complement the minimum capital requirements detailed under Pillar 1 and the supervisory review process detailed under Pillar 2. In this context and as guided by RBI a set of disclosure (both qualitative and quantitative) are published in DF 1 to 11 (annexed) with regard to risk management in the Bank, which will enable market participants to assess key pieces of information on the (a) scope of application (DF-1), (b) Capital Adequacy (DF-2), (c) Credit

Risk: General Disclosures for all Banks (DF-3), (d) Credit Risk: Disclosures for Portfolios subject to the Standardised Approach (DF-4), (e) Credit Risk Mitigation: Disclosures for Standardised Approaches (DF-5), (f) Securitisation Exposures: Disclosure for Standardised Approach (DF-6), (g) Market Risk in Trading Book (DF-7), (h) Operational Risk (DF-8), (i) Interest Rate Risk in the Banking Book (IRRBB) (DF-9), (j) General Disclosure for Exposures Related to Counter Party Credit Risk (DF-10) and (k) Composition of Capital (DF-11). This would also provide necessary information to the market participants to evaluate the performance of the Bank in various parameters.

f. Any restrictions or impediments on transfer of funds or regulatory capital within the Banking Group: Not applicable

Table DF - 2: Capital Adequacy Qualitative disclosures:

Banks in India implemented capital adequacy measures in April 1992 based on the capital adequacy framework (Basel-I) issued by the Basel Committee on Banking Supervision (BCBS) and the guidelines issued by Reserve Bank of India (RBI) from time to time. Such a measure was taken in order to strengthen the capital base of Banks and at the same time to make it compliant with the international best practices in the matter of maintaining capital adequacy. Initially the Basel framework addressed the capital for credit risk, which was subsequently amended to include capital for market risk. In line with the guidelines issued by the RBI the Bank was compliant with the relevant guidelines.

Subsequently, the BCBS released the "International Convergence of Capital Measurement and Capital Standards: A Revised Framework" on June 26, 2004. The Revised Framework was updated in November 2005 to include trading activities and the treatment of double default effects and a comprehensive version of the framework was issued in June 2006. Based on these guidelines and to have consistency and to be in harmony with international standards, the RBI has issued guidelines on 27th April 2007 and subsequent amendments on implementation of the New Capital Adequacy (Basel-II) Framework from time to time.

In line with the RBI guidelines, the Bank had migrated to the revised (Basel-II) framework from 31.3.2008 and continues to be compliant with the requirements of Basel-II framework.

Basel-II Framework provides a range of options for determining the capital requirements for credit risk, market risk and operational risk. The Framework allows Banks and supervisors to select approaches that are most appropriate for their operations and financial markets. In accordance with the RBI''s requirements, the Bank has adopted Standardised Approach (SA) for credit risk, Standardised Measurement Method (SMM) for market risks and Basic Indicator Approach (BIA) for Operational Risk to compute capital. The Bank is maintaining capital for Credit, Market and Operational Risk in line with the RBI guidelines in this regard.

The Bank has computed capital for market risk and operational risk as per the prescribed guidelines at the Bank''s Central Office, based on the relevant data. In computation of capital for Credit risk under Standardized Approach, the Bank has relied upon the borrower-wise data captured from each individual branch besides portfolios held at Central Office of the Bank. In all loan types, the credit risk capital computation is done on borrower basis or facility type basis as per the segmentation advised in the RBI guidelines. For this purpose, the Bank has developed in-house software, which enables computation of capital for credit risk of the advances portfolio of the branches and generation of the requisite reports at the Branch level, Regional Office level and Central Office level through CBS System. Necessary training is imparted to the field staff periodically on various aspects of capital computation and close interactions held with the coordinators at Regional Offices, to ensure accuracy and adequacy of data in capital computation.

Banks generally use a number of techniques to mitigate the credit risk to which they are exposed. The Bank has also used the Credit Risk Mitigation in computation of capital for credit risk in order to get capital relief. A well articulated policy on Collateral

Management and Credit Risk Mitigation duly approved by the Bank''s Board is put in place. The Bank has followed the RBI guidelines in force to arrive at the credit risk mitigation, risk weighted assets, eligible capital and Capital to Risk Weighted Assets Ratio (CRAR).

RBI has prescribed that Banks are required to maintain a minimum total capital (MTC) of 9% of total risk weighted assets (RWAs) i.e. capital to risk weighted assets (CRAR). The framework issued by RBI prescribes maintenance of a minimum Tier-1 CRAR of 7% with a minimum CET 1 of 5.5%. Total Capital (Tier 1 Capital plus Tier 2 Capital) must be at least 9% of RWAs on an ongoing basis. Thus, within the minimum CRAR of 9%, Tier 2 capital can be admitted maximum up to 2%.

The Bank has put in place a policy on Internal Capital Adequacy Assessment Process (ICAAP) and the framework in consideration of the relevant risk factors of the Bank as a measure towards adequacy of capital available to meet the residual risk as part of Pillar 2 requirements of the revised framework commensurate with the Bank''s overall risk profile. In framing the policy the Bank has taken into consideration the requirements prescribed by the RBI in their guidelines and Bank''s risk appetite.

As regards the adequacy of capital to support the future activities, the Bank draws assessment of capital requirements periodically taking into account future growth of business. The surplus CRAR maintained by the Bank acts as a buffer to support the future activities. Moreover, the headroom available to the Bank in the Tier-1 and Tier-2 capital components provides additional capital support to meet the future needs. Thereby, the capital risk of the Bank is adequately addressed. Government of India, which is the major share holder in the Bank, has been subscribing fresh capital to augment capital adequacy. In future, the Bank shall take suitable steps to augment the capital by retention of earnings and through infusion of fresh capital from the market depending upon the market conditions in order to meet the Basel III requirements.

As part of Basel III framework RBI has introduced Leverage Ratio concept. The leverage ratio is the ratio of Tier-1 capital (Common Equity Additional Tier I) and total exposure (as defined under Basel III). The leverage ratio has to be maintained on a quarterly basis. The basis for calculation at the end of each quarter is "based on the definition of capital (the capital measure) and total exposure (the exposure measure). Banks operating in India are required to make disclosure of the leverage ratio on quarterly basis and its components from April 1,2015 on a quarterly basis as per the templates given. First disclosure required to be made for the quarter ending June 30, 2015.

RBI has issued guidelines on two minimum standards viz. Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR) for funding liquidity. The LCR promotes short term resilience of Banks to potential liquidity disruptions by ensuring that Bank have sufficient high quality liquid assets (HQLA) to survive an acute stress scenario lasting for 30 days. The NSFR promotes resilience over longer term time horizons by requiring Banks to fund their activities with more stable sources of funding on an ongoing basis. The LCR and NSFR requirement would be binding on Banks from January 1,2015 and January 1, 2018 respectively. With a view to provide transition time for Banks, the requirement would be minimum of 60% for the calendar year 2015 i.e with effect from January 1,2015 and rise in equal steps to reach the minimum required level of 100% on January 1, 2019 as per the time line given below:

Table DF-3

CREDIT RISK: GENERAL DISCLOSURES FOR ALL BANKS Qualitative disclosures:

Credit Risk is the possibility of losses associated with diminution in the credit quality of borrowers or counter parties. In a Bank''s portfolio, Credit Risk arises mostly from lending and investment activities of the Bank if a borrower / counterparty is unable to meet its financial obligations to the lender/investor. It emanates from changes in the credit quality/worthiness of the borrowers or counter parties. Credit risk also includes counterparty risk and country risk.

Credit rating and Appraisal Process:

The Bank manages its credit risk through continuous measuring and monitoring of risks at obligor (borrower) and portfolio level. The Bank has a robust internal credit rating framework and well- established standardized credit appraisal / approval process. Credit rating is a facilitating process that enables the Bank to assess the inherent merits and demerits of a proposal. It is a decision enabling tool that helps the Bank to take a view on acceptability or otherwise of any credit proposal.

The rating models factor quantitative and qualitative attributes relating to Risk components such as Industry Risk, Business Risk, Management Risk, Financial Risk, Project risk (where applicable) and Facility Risk etc. The data on industry risk is regularly updated based on market conditions.

Credit rating as a concept has been well internalized within the Bank. As a measure of robust credit risk management process, the Bank has implemented a tiered system for validation of credit ratings at specified levels which is independent of credit departments, in order to draw unbiased rating for borrowers necessary for moving to advanced approaches. In respect of proposals falling under powers of Bank''s Central Office, the validations of ratings are done at Risk Management Dept. The advantage of credit rating is that it enables to rank different proposals based on risk and do meaningful comparisons.

The Bank follows a well-defined multi layered discretionary power structure for sanction of loans and advances. Approval Grid has been constituted at all levels covering Exceptionally Large branch / RO / CO for recommending fresh/enhancement proposal to appropriate sanctioning authorities. Specific Sanctioning Powers have been delegated to Branch Managers. In addition to the Management Committee of the Board (MCB), the Bank has constituted three committees such as (a) Credit Approval Committee (CAC) headed by MD & CEO, (b) Head Office Level Credit Approval Committee headed by Executive Director (HLCCED) and (c) Head Office Level Credit Approval Committee headed by senior most General Manager (HLCCGM) with delegated powers to consider sanction of credit proposals falling under Central Office powers at different levels. Further, Zonal Level Credit Committees (ZLCC) headed by the Zonal Head and Regional Level Credit Committees (RLCC) headed by the Regional Head have also been formed at all Zonal Offices and Regional Offices with suitable delegated power for sanction of credit proposals. Consequently, no Executives beyond Branch Heads exercise any discretionary powers for sanction of credit proposals at individual level.

The new products introduced by Bank are examined by the head office level risk management committee depending upon the type of risks involved in the new product / process before being placed to RMCB/Board for approval.

Credit Risk Management Policies

The Bank has put in place a well-structured loan policy and credit risk management policy duly approved by Board. The policy document defines organizational structure, role and responsibilities and processes whereby the Credit Risk carried by the Bank can be identified, quantified and managed within the framework that the Bank considers consistent with its mandate and risk tolerance. Credit risk is monitored by the Bank on a Bank-wide basis and compliance with the risk limits approved by Board / RMCB is ensured. The CPC takes into account the risk tolerance level of the Bank and accordingly handles the issues relating to Safety, Liquidity, Prudential Norms and Exposure limits.

The Bank has taken earnest steps to put in place best credit risk management practices in the Bank. In addition to Loan Policy and Credit Risk Management Policy, the Bank has also framed Funds and Investment Policy, Counter Party Risk Management Policy and Country Risk Management Policy etc., which forms integral part of monitoring of credit risk in the Bank. Besides, the Bank has implemented a policy on collateral management and credit risk mitigation which lays down the details of securities (both prime and collateral) normally accepted by the Bank and administration of such securities to protect the interest of the Bank. Presently, some select securities act as mitigation against credit risk (in capital computation), to which the Bank is exposed.

Credit Monitoring/Loan Review/Credit Audit

The Credit Monitoring Department monitors the quality of Credit portfolio, identifies problems and takes steps to correct deficiencies. The objective of the department is to minimize slippage of performing accounts to NPA category and also to comply with the laid down norms and guidelines. The department is also micro monitoring the accounts by segmentation and follow up the accounts on a daily basis to minimize slippages. Furthermore, the accounts are also monitored at different levels of authority depending upon the size of the exposure.

All standard borrowal accounts with credit exposure of Rs.1 crore and above are reviewed under Loan Review Mechanism, which is essentially an off-site audit mechanism. The credit audit is carried out in terms of Guidance Note on Credit Risk issued by Reserve Bank of India and the Credit Risk Management Policy of the Bank.

The credit audit covers all borrowal accounts with total exposure of Rs. 5 crore and above sanctioned by any authority. This is an ongoing exercise which helps the Bank to identify deficiencies and early warning signals of sickness/weakness in borrowal accounts. Essentially this is an onsite audit mechanism to prevent deterioration in the quality of advances thereby protecting the interest of the Bank. The Bank also maintains surveillance on the accounts with working capital exposure of Rs. 1.00 Cr and above by calling for Continuous Surveillance statements.

Classification of restructured accounts:

The Bank has followed the prudential guidelines issued by the RBI in respect of classification and provisioning for restructured accounts from time to time.

CREDIT RISK: DISCLOSURES FOR PORTFOLIOS SUBJECT TO THE STANDARDISED APPROACH

Qualitative disclosures:

General Principle:

In accordance with the RBI guidelines, the Bank has adopted Basel II Capital Adequacy Framework for computation of capital for credit risk. In computation of capital, the Bank has assigned risk weight to different asset classes as prescribed by the RBI from time to time.

In computation of capital for Credit risk under Standardised Approach, individual exposures are captured. Where the exposures are fully secured such as Jewel Loans, Loans against Term deposits/approved insurance policies etc, these loans are fully netted against available credit risk mitigants (CRM), as the mitigation higher than the exposure is available after applying the applicable hair cut due to higher margin prescription.

External Credit Ratings:

Ratings of borrowers by External Credit Rating Agencies (ECRA) assume importance in the light of Guidelines for implementation of the Basel II Capital Adequacy Framework. Exposures on Corporates / Public Sector Enterprises/ Primary Dealers are assigned with risk weights based on available external ratings. For this purpose, the Reserve Bank of India has permitted Banks to use the ratings of six domestic ECRAs viz. Credit Analysis and Research Ltd (CARE), CRISIL Ltd, FITCH India (renamed as India Ratings) and ICRA Ltd, Brickworks Rating Services India Ltd and Small and Medium Enterprises Rating Agency Ltd (SMERA)

In consideration of the above, the Bank has decided to accept the ratings assigned by all these ECRAs for capital relief purpose. The RBI has provided for mapping public issue ratings on to comparable assets into banking book. However, this particular provision has not been taken into account in Credit Risk Capital Computation.

The Bank uses only solicited external ratings for capital computation purpose. Borrowers at their option can approach any one or more of the above ECRAs for their rating. External ratings assigned fresh or reviewed during the previous 15 months are reckoned for capital computation by the Bank. Wherever a borrower possesses more than one rating from ECRAs the guidelines prescribed by the RBI are followed as regards to assignment of risk weight for computation of capital.

Internal Credit Rating:

The Bank has a well structured internal credit rating mechanism to evaluate the credit risk associated with a borrower and accordingly the systems are in place for taking credit decision as regards the acceptability of proposals and level of exposures and pricing. The Bank has prescribed entry level rating in case of new accounts. Accounts with ratings below the entry level can be considered only by higher authorities as per the delegated powers prescribed.

Presently, the internal ratings cannot be used for application of risk weight under Standardised Approach of capital computation. The Bank takes into consideration the borrower''s loan exposure credit ratings assigned by the approved ECRAs while computing the capital for credit risk as on 31.3.2015 under corporate and PSE segments.

In case of investment in particular issues of Corporates / PSEs, the issue specific rating of the approved ECRAs are reckoned and accordingly the risk weights have been applied after a corresponding mapping to rating scale provided in RBI guidelines.

For the purpose of capital computation of overseas exposures, ratings assigned by the international rating agencies namely Fitch, Moody''s and Standard & Poor''s are used as per RBI guidelines.

As regards the coverage of exposures in India by external ratings as relevant for capital computation under Standardised Approach, the process needs to be popularized among the borrowers so as to take the benefit of capital relief available for better-rated customers. The borrowers need to consider the external rating as an opportunity for their business development, which would take some time.

CREDIT RISK MITIGATION: DISCLOSURES FOR

STANDARDISED APPROACHES

Qualitative disclosures:

Policy on Credit Risk Mitigation:

In line with the regulatory requirements, the Bank has put in place a well-articulated policy on collateral management and credit risk mitigation techniques duly approved by the Bank''s Board. The Policy lays down the type of securities normally accepted by the Bank for lending and administration/ monitoring of such securities in order to safeguard /protect the interest of the Bank so as to minimize the risk associated with it.

The main types of securities (both prime and collateral) accepted by the Bank includes Bank''s own deposits, Gold/ Ornaments, Kisan Vikas Patras, Shares and debentures, Central and State Govt. securities, Life Insurance Policies, Mutual Fund units, Immovable Properties, Plant and Machinery, Goods and Merchandise, Documents of Title to Goods, Book debts, Vehicles and other moveable assets etc. The Bank has also framed a well- defined policy on valuation of immovable properties and Plant and Machineries duly approved by Board.

Credit Risk Mitigation under Standardised Approach:

(a) Eligible Financial Collaterals:

As advised by RBI, the Bank has adopted the comprehensive approach relating to credit risk mitigation under Standardised Approach, which allows fuller offset of securities (prime and collateral) against exposures, by effectively reducing the exposure amount by the value ascribed to the securities. Thus the eligible financial collaterals are fully made use of to reduce the credit exposure in computation of credit risk capital. In doing so, in line with RBI guidelines, the Bank has recognized specific securities viz (a) cash/Bank deposits (b) gold/ornaments (c) life insurance policies (d) kisan vikas patras (after a lock in period of 2 1h years).

(b) On Balance Sheet Nettings:

As per Bank''s policy on utilization of the credit risk mitigation techniques and collateral management, on-balance sheet netting has been reckoned to the extent of deposits available against loans/advances of the borrower (maximum to the extent of exposure), where Bank has legally enforceable netting arrangements involving specific lien with proof of documentation as prescribed by RBI. In such cases, the capital computation is done on the basis of net credit exposure.

(c) Eligible Guarantees:

Other approved form of credit risk mitigation is availability of "Eligible Guarantees", in computation of credit risk capital, types of guarantees recognized as mitigation, in line with RBI guidelines are (a) Central Government (0%) (b) State Government (20%), (c) CGTMSE (0%) (d) ECGC (20%) (e) Banks in the form of Bills Purchased/discounted under Letters of Credit (both domestic and foreign Banks as per guidelines).

The Bank has ensured compliance of legal certainty as prescribed by the RBI in the matter of credit risk mitigation.

Concentration risk in credit risk mitigation:

Policies and process are in place indicating the type of mitigants the Bank use for capital computation under the Standardised approach. All types of securities (financial collaterals) eligible for mitigation are easily realizable financial securities. As such, the Bank doesn''t envisage any concentration risk in credit risk mitigation used and presently no limit/ceiling has been prescribed for the quantum of each type of collateral under credit risk mitigation.

Market Risk in Trading Book:

Qualitative disclosure:

Market Risk:

Market Risk is defined as the possibility of loss to a Bank in on & off-balance sheet position caused by changes/movements in market variables such as interest rate, foreign currency exchange rate, equity prices and commodity prices. Bank''s exposure to market risk arises from domestic investments (interest related instruments and equities) in trading book (Both AFS and HFT categories), the Foreign Exchange positions (including open position, if any, in precious metals) and trading related derivatives. The objective of the market risk management is to minimize the impact of losses on earnings and erosion of equity capital arising from market risk.

Policies for management of market risk:

The Bank has put in place Board approved Market Risk Management Policy and Asset Liability Management (ALM) policy for effective management of market risk in the Bank. Other policies which also deal with market risk management are Funds Management and Investment Policy, Derivative Policy, Risk

Management Policy for forex operations and Stress testing policy. The market risk management policy lays down well defined organization structure for market risk management functions and processes whereby the market risks carried by the Bank are identified, measured, monitored and controlled within the ALM framework, consistent with the Bank''s risk tolerance. The policies set various risk limits for effective management of market risk and ensuring that the operations are in line with Bank''s expectation of return to market risk through proper Asset Liability Management. The policies also deal with the reporting framework for effective monitoring of market risk.

The ALM policy specifically deals with liquidity risk management and interest rate risk management framework. As envisaged in the policy, liquidity risk is managed through GAP analysis based on residual maturity/behavioral pattern of assets and liabilities on daily basis based on best available information data coverage as prescribed by RBI. The liquidity risk through Structural Liquidity statement was hither too reported to RBI for domestic operation while the same was managed separately at each overseas center and placed to ALCO for control purpose in the past. However as per recent RBI circular, w.e.f March 2013 onwards the liquidity risk is to be computed and submitted to RBI in rupee and foreign currency for domestic operations, overseas centers and consolidated for Bank operations at various frequencies.

The Bank has put in place mechanism of short-term dynamic liquidity management and contingent funding plan. Prudential (tolerance) limits are prescribed for different residual maturity time buckets for efficient asset liability management. Liquidity profile of the Bank is evaluated through various liquidity ratios. The Bank has also drawn various contingent measures to deal with any kind of stress on liquidity position. Bank ensures adequate liquidity management by Domestic Treasury through systematic and stable funds planning.

Interest rate risk is managed through use of GAP analysis of rate sensitive assets and liabilities and monitored through prudential (tolerance) limits prescribed for global operations. The Bank estimates earnings at risk for domestic operations and modified duration gap for global operations periodically for assessing the impact on Net Interest Income and Economic Value of Equity with a view to optimize shareholder value.

The Asset-Liability Management Committee (ALCO) / Board monitors adherence to prudential limits fixed by the Bank and determines the strategy in the light of the market conditions (current and expected) as articulated in the ALM policy. The mid- office monitors adherence to the prudential limits on a continuous basis. ALCO subcommittee which meets twice a week analyze the liquidity position, decide on price for bulk deposits and assess contingency funding requirement which is reported to ALCO in the subsequent meeting.

Operational Risk Qualitative disclosures:

Operational Risk is the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. Operational risk includes legal risk but excludes strategic and reputation risk.

Policies on Management of Operational risk:

The Bank has framed operational risk management policy duly approved by the Board. Other policies adopted by the Board which deal with management of operational risk are (a) Information Systems security policy (b) forex risk management policy (c) Policy document on know your customer (KYC) and Anti-Money Laundering (AML) procedures (d) Business Continuity and Disaster Recovery Plan (BC-DRP) (e) compliance policy and (f) policy on outsourcing of Financial Services.

The operational risk management policy adopted by the Bank outlines organization structure and detailed processes for management of operational risk. The basic objective of the policy is to closely integrate operational risk management processes of the Bank by clearly assigning roles for effectively identifying, assessing, monitoring and controlling or mitigating operational risk and by timely reporting of operational risk exposures including material operational losses. Operational risks in the Bank are managed through comprehensive and well-articulated internal control framework.

The Bank has got embodied in its Book of Instructions well-defined systems and procedures for various operations. The Bank has issued detailed guidelines for handling computerized operations and a system of EDP audit is in place to ensure adherence to the laid down systems and procedures. The Bank has clear guidelines as to the role functions of various levels of employees. A training system with provision for giving specialized training in credit /forex and other functional areas is in place. Conduct rules and service regulations for all the employees are also in place.

Various internal and external audit systems are in place to ensure that laid down systems and procedures are followed and timely actions are initiated for rectifying the deficiencies.

The Bank has put in place Compliance Policy duly approved by Board. In terms of the RBI guidelines on compliance functions in Banks, the Bank has established separate "Compliance Department" in C.O. independent of business group. Compliance officers are designated in each branch /department/office to monitor the level of compliance. The methodologies and system have been devised and put in place for assessment of level of compliance. Reporting systems on compliance function have been devised and put in place.

In line with the final guidelines issued by RBI, our Bank is adopting the Basic Indicator Approach for computing capital for operational risk. As per the guidelines the Banks must hold capital for operational risk equal to 15% of positive average annual gross income over the previous three years as defined by RBI

Table DF -9 Interest rate risk on the Banking Book: Qualitative disclosures:

Interest rate risk is the risk where changes in the market interest rates might affect a Bank''s financial condition. Changes in interest rates may affect both the current earnings (earnings perspective) as also the net worth of the Bank (economic value perspective). The risk from earnings perspective can be measured as impact on the Net Interest Income (NII) or Net Interest Margin. Similarly the risk from economic value perspective can be measured as drop in Economic Value of Equity.

The Bank identifies the risks associated with the changing interest rates on its on-balance sheet and off-balance sheet exposures in the Banking book from a short term (Earnings perspective) and long term Economic Value Perspective. The impact on income (Earnings Perspective) for domestic operations is measured through use of GAP analysis by applying notional rate shock ranging from 25bps to 200bps as prescribed in the Bank''s ALM Policy over one year horizon. Prudential limits have been prescribed for such impacts as a percentage of Net Interest Income of the Bank and in absolute terms and the same is monitored periodically. For the calculation of impacts on earnings, the Traditional GAP Analysis for domestic operation is taken from the Rate Sensitivity Statement and based on the remaining period from the mid point of a particular bucket the impact for change in interest rate up to 200 bps is arrived at. The same is reported to Board and ALCO periodically along with the Rate Sensitivity Statement. The limits are fixed on the basis of previous year''s Net Interest Income (NII) duly approved by Board.

The Bank has adopted traditional GAP analysis combined with duration GAP analysis for assessing the impact (as a percentage) on the Economic Value of Equity (Economic Value Perspective) on global operations by applying a notional interest rate shock of 200 bps over a time horizon of one year. For the purpose a limit of ( /-) 1.00% for modified duration gap is prescribed in the Bank''s ALM policy and the position is monitored periodically.

The Bank calculates Duration GAP and the impact on Economic Value of Equity on a monthly basis. Assets and liabilities are grouped as per rate sensitivity statement and bucket-wise modified duration is computed for these groups of Assets and Liabilities using common maturity, coupon and yield parameters. Wherever possible, the Modified Duraton is calculated on individual item wise. In case of non maturity deposits, the Bank has conducted behavioural studies as prescribed by RBI to have a realistic assessment of the interest rate sensitivity.

The Bank is computing the interest rate risk position in each currency applying the Duration Gap Analysis (DGA) and Traditional GAP Analysis (TGA) to the Rate Sensitive Assets (RSA)/ Rate Sensitive Liabilities (RSL) items in that currency, where either the assets, or liabilities are 5 per cent or more of the total of either the Bank''s global assets or global liabilities. . The interest rate risk positions in all other residual currencies are computed separately on an aggregate basis.

The quarterly returns are submitted within 21 days from the end of the quarter and monthly returns within 15 days from the end of the month to RBI as per guidelines.


Mar 31, 2014

1. Reconciliation

Reconciliation of Inter Bank and Inter Branch transactions has been completed up to 31.3.2014 and steps for elimination of outstanding entries are in progress. The management does not anticipate any material consequential effect on reconciliation / elimination of outstanding entries.

2. Investments

2.1 In accordance with the Reserve Bank of India (RBI) guidelines, the Investments Portfolio of the Bank (domestic) has been classified into three categories, as given below: -

2.2 SLR Securities under "Held to Maturity" accounted for 21.69% (previous year 22.92%) of Bank''s Demand and Time liabilities as at the end of March 2014, as against the ceiling of 24.50% stipulated by RBI.

2.3 In respect of Held to Maturity category of Investments, premium of Rs.81.26 crore was amortised during the year (Previous year Rs.57.52 crore).

2.4 Securities of face value for Rs.1050 crores (previous year Rs.450 crore) towards Settlement Guarantee Fund and securities for Rs.9455 crore (previous year Rs.8455 crore) towards collateral for borrowing under Collateralised Borrowing and Lending Obligations have been kept with Clearing Corporation of India Limited. We have placed securities of face value Rs.3000 crore with RBI for intraday borrowing. We have also placed securities to the extent of Rs.10350 crore (including MSF of Rs.4342 crores) with Reserve Bank of India for our borrowing under the LAF window. Besides, a sum of Rs.15 crore (previous year Rs.15 crore) have been lodged with CCIL towards Default Fund for forex operations.

2.5 Shares under Investments in India in Regional Rural Banks is Rs. 222.04 crore (Previous year Rs.222.04 crore) includes amount towards share capital Deposits.

2.6 The Bank sold Government Securities from HTM category during the year, both outright and under RBI''s Open Market Operations (OMO). The total notified amount of buy back was Rs.81000 crore (previous year Rs. 138000 crore). The extent of sale by the Bank was Rs.2987.03 crore (previous year Rs.4430 crore), book value (BV) and earned a profit of Rs.120.62 crore (previous year Rs.34.55 crore).

2.7 On the settlement date of 15.04.2013 there was a SGL bouncing, due to technical reasons, attracting default charges of 0.03 crores from CCIL (without any monetary penalty by RBI).

3. Advances

3.1 The Classification for advances and provisions for possible loss has been made as per prudential norms issued by Reserve Bank of India.

3.2 Claims pending settlement and claims yet to be lodged with Guarantee Institutions identified by the branches have been considered for provisioning requirements on the basis that such claims are valid and recoverable.

3.3 In assessing the realisability of certain advances, the estimated value of security, Central Government guarantees etc. have been considered for the purpose of asset classification and income recognition.

3.4 The classification of advances, as certified by the Branch Managers have been incorporated, in respect of unaudited branches.

3.5 In terms of Reserve Bank of India Circular No. DBOD No. BP.95/21.04.048/2013-14 dt. February 7, 2014, the Bank has utilized Rs. 324.20 crores (33%) of floating provision/ countercyclical provisioning buffer of Rs.988.42 Crore held as on March 31, 2013, for meeting specific provisions for Non-performing Assets during the year ended March 31, 2014.

4. Fixed Assets

4.1 During the year 2013-14, land and buildings in India, were revalued through approved valuers and Rs.844.94 crore added to the carrying value of assets on account of such revaluation.

4.2 Profit on Sale of Assets for Rs.1.87 crore (previous year Rs.0.82 crore), has been appropriated to Capital Reserve.

5. Rupee Interest Rate Swap

An amount of Rs.2.33 crore (previous year Rs.3.83 crore) is held kept on deferred income on account of gains on termination of Rupee Interest Rate Swaps taken for hedging and would be recognized over the remaining contractual life of swap or life of the assets/liabilities, whichever is earlier.

6. Capital and Reserves:

6.1 During the Financial Year 2013-14, Bank has issued 22,97,53,015 Equity Shares, of face value Rs.10/- each, at the rate of Rs.52.23 per equity share (including premium of Rs. 42.23 per equity share) aggregating to Rs.1199,99,99,973.45 (Rupees one thousand one Hundred and ninety nine crore ninety nine lac ninety nine thousand nine hundred and seventy three and paise forty five only) on 18.12.2013 to Government of India on Preferential Basis and 8,15,00,000 Equity shares, of face value Rs.10/- each, at the rate of Rs.48.84 per equity share (including premium of Rs.38.84 per equity share) aggregating to Rs.398,04,60,000 (Rupees three hundred and ninety eight crore four lac sixty thousand only)on 10.03.2014 to Life Insurance Corporation of India on Preferential Basis. Hence, the Paid-up Capital of the bank has increased from Rs.924.10 crore to Rs.1235.35 crore and Government of India''s shareholding has increased from Rs.681.96 crore (73.80%) to Rs. 911.71 crore (73.80%), retaining their holding level at 73.80% as on 31.03.2014.

6.2 The Bank has not raised Tier II capital during the current year or in the previous year.

6.3 The Bank has created a deferred tax liability for Rs 175.72 crore, by debiting general reserve, during the current financial year, on special reserve created under section 36(1)(viii) of Income tax Act, 1961 in compliance with RBI circular DBOD No BP.BC.72/21.04.018/2013-14 dated 20.03.2014.

7. Taxes

7.1 Taking into consideration the decisions of Appellate Authorities, judicial pronouncements and the opinion of tax experts, no provision is considered necessary in respect of disputed and other demands of income tax aggregating Rs.280.43 crore (previous year Rs.1208.42 crore).

7.2 Tax expense for the year is Rs.241.30 crore (Previous year Rs. 180.25 crore).

8. Unamortised Pension and Gratuity Liability

On the reopening of pension to employees of Public Sector Banks and enhancement of Gratuity limits, the Bank incurred a liability of Rs. 1005.21 crore in 2010-11. In terms of requirement of Accounting Standard (AS 15) "Employee Benefits", the entire amount of Rs.1005.21 crore is required to be charged to Profit and Loss Account.

In terms of Reserve Bank of India circular No.DBOD. BP.BC.80/21.04.018/2010-11, on Reopening of Pension Option to employees of Public Sector Banks and enhancement in Gratuity limits - Prudential Regulatory Treatment, dated 09.02.2011, Bank would amortise the amount of Rs.1005.21 crore over a period of 5 years from 31.3.2011. Accordingly, Rs.201.04 crore (previous year Rs.201.04 crore) has been charged to Profit and Loss Account for the year 2013-14 and the balance amount of Rs.201.05 crore has been carried over. Had the RBI not issued such a circular, the Revenue Reserves of the Bank would have been lower by Rs.201.05 crore pursuant to application of the requirements of AS-15.

9. Information relating to vendors registered under Micro, Small and Medium Enterprises Development Act, 2006 and from whom goods and services have been procured by the Bank, is being ascertained.

ADDITIONAL DISCLOSURES

In accordance with the guidelines issued by Reserve Bank of India vide Master Circular dated 01.07.2013, the following additional disclosures are made:-

10.DISCLOSURES ON RISK EXPOSURE IN DERIVATIVES

10.1 Qualitative Disclosure

Treasury (Foreign)

The Bank uses Interest Rate Swaps (IRS), Currency Swaps and Options for hedging purpose to mitigate interest rate risk and currency risk in banking book. The Bank also offers these products to corporate clients to enable them to manage their own currency and interest rate risk. Such transactions are entered only with Clients and Banks having agreements in place.

a) The Risk Management Policy of the Bank allows using of derivative products to hedge the risk in Interest/ Exchange rates that arise on account of overseas borrowing/FCNR(B) portfolio/the asset liability mis- match, for funding overseas branches etc., and also to offer derivative products on back- to- back basis to customers.

b) The Bank has a system of evaluating the derivatives exposures separately and placing appropriate credit lines for execution of derivative transactions duly reckoning the Net Worth and security backing of individual clients.

c) The Bank has set in place appropriate control systems to assess the risks associated in using derivatives as hedge instruments and proper risk reporting systems are in place to monitor all aspects relating to derivative transactions. The Derivative transactions were undertaken only with banks and counterparties well within their respective exposure limit approved by appropriate credit sanctioning authorities for each counter party.

d) The Bank has set necessary limits in place for using derivatives and its position is continuously monitored.

e) The Bank has a system of continuous monitoring and appraisal of resultant exposures across the administrative hierarchy for initiation of necessary follow up actions.

f) Derivatives are used by the Bank to hedge the Bank''s Balance sheet and offered to select corporate clients on back-to-back basis. In respect of hedge transactions the value and maturity of hedges has not exceeded that of the underlying exposure. In respect of back-to- back transactions the transactions with clients are fully matched with counter party Bank transactions and there is no uncovered exposure.

g) The income from such derivatives are amortized and taken to Profit and Loss Account on accrual basis over the life of the contract. In case of early termination of swaps undertaken for Balance Sheet management, income on account of such gains would be recognized over the remaining contractual life of the swap or life of the assets/liabilities whichever is lower. In case of early termination of derivatives undertaken for customers on a back- to- back basis, income on account of such things will be recognized on termination.

h) All the hedge transactions are accounted on accrual basis. Valuations of the outstanding contracts are done on Mark to Market basis. The Bank has duly approved Risk Management and Accounting procedures for dealing in Derivatives.

i) The derivative transactions are conducted in accordance with the extant guidelines of Reserve Bank of India.

Treasury (Domestic)

The Bank uses Rupee Interest Rate Swaps (IRS) for hedging purpose to mitigate interest rate risk in Govt. Securities and to reduce the cost of Subordinated Debt and term deposits. In addition, the Bank also enters into rupee interest rate swaps for trading purposes as per the policy duly approved by the Board. Swap transactions are entered only with Banks having ISDA agreements in place.

a) The Bank has put in place an appropriate structure and organization for management of risk, which includes Treasury Department, Asset Liability Management Committee and Risk Management Committee of the Board.

b) Derivative transactions carry Market Risk (arising from adverse movement in interest rates), Credit risk (arising from probable counter party failure), Liquidity risk (arising from failure to meet funding requirements or execute the transaction at a reasonable price), Operational risk, Regulatory risk and Reputation risk. The Bank has laid down policies, set in place appropriate control systems to assess the risks associated in using derivatives and proper risk reporting and mitigation systems are in place to monitor all risks relating to derivative transactions. The IRS transactions were undertaken with only Banks as counter party and well within the exposure limit approved by the Board of Bank for each counter party.

c) Derivatives are used by the Bank for trading and hedging. The Bank has an approved policy in force for derivatives and has set necessary limits for the use of derivatives and the position is continuously monitored. The value and maturity of the hedges which are used only as back to back or to hedge Bank''s Balance Sheet has not exceeded that of the underlying exposure.

d) The accounting policy for derivatives has been drawn up in accordance with RBI guidelines, as disclosed in Schedule 17 - Significant Accounting Policies (Policy No.6)

11. DISCLOSURES IN TERMS OF ACCOUNTING STANDARDS

11.1 Accounting Standard 5 - Net Profit or Loss for the period, prior period items and changes in accounting policies

As permitted by RBI vide its circular No. DBOD.BP.95/21.04.048./2013/14 Dt. 07.02.2014 and also in pursuance to Bank''s Board approved policy, the Bank has utilized a sum of Rs.324.20 crores from Floating provisions/ Counter Cyclical Provisioning Buffer towards Specific Provisions for Non Performing Assets.

11.2 Accounting Standard 9 - Revenue Recognition

Revenue has been recognized as described in item No. 2 of Significant Accounting Policies - Schedule 17.

11.3 Accounting Standard 15 - Employee Benefits

i) The Bank has adopted Accounting Standard 15 (Revised) "Employee Benefits" issued by the Institute of Chartered Accountants of India, with effect from 1 st April 2007.

ii) The summarized position of Post-employment benefits and long term employee benefits recognized in the Profit & Loss Account and Balance Sheet as required in accordance with the Accounting Standard-15 (Revised) are as under:

The estimates of future salary increases, considered in actuarial valuation, take into account actual return on plan assets, inflation, seniority, promotion and other relevant factors, such as supply and demand in employee market.

In respect of overseas branches, disclosures if any, required for Employee Benefit Schemes are not made in the absence of information.

(b) The financial assumptions considered for the calculations are as under:-

Discount Rate: - The discount rate has been chosen by reference to market yield on Government bonds as on the date of valuation. (Balance sheet dated 31.03.2014)

Expected Rate of Return: In case of Pension the expected rate of return is taken on the basis of yield on Government bonds. In case of gratuity, the actual return has been taken.

Salary Increase: On the basis of past data.

(c) Bank''s best estimate expected to be paid in the next Financial Year for Gratuity is Rs.165 crore.

11.4 Accounting Standard 17 - Segment Reporting

The Bank has adopted Reserve Bank of India''s revised guidelines issued in April 2007 on Segment Reporting in terms of which the reportable segments have been divided into Treasury, Corporate/Wholesale Banking, Retail Banking and Other Banking Operations.

11.5 Accounting Standard 21 - Consolidated Financial Statements (CFS)

As there is no subsidiary, no consolidated financial statement is considered necessary.

11.6 Accounting Standard 23 - Accounting for Investments in Associates in Consolidated Financial Statements

As there is no subsidiary, no consolidated financial statement is considered necessary.

11.7 Accounting Standard 26 - Intangible Assets

The application software in use in the Bank has been developed in-house and has evolved over a period of time. Hence, the costs of software is essentially part of Bank''s operational expenses like wages etc. and as such are charged to the respective heads of expenditure in the Profit and Loss Account.

11.8 Accounting Standard 27 - Financial Reporting of Interests in Joint Ventures

Our Bank (with 35% share) has floated a Joint Venture at Malaysia along with Bank of Baroda (40%) and Andhra Bank (25%). Bank Negara, the Central Bank of Malaysia, issued the license to the Joint Venture on 16.04.2010. The Joint Venture was incorporated at Malaysia on 13.08.2010 by name INDIA INTERNATIONAL BANK (MALAYSIA) BHD (IIBM). IIBM has an Authorised Capital of MYR 500 Mio. The Joint Venture''s Assigned Capital is MYR 320 Mio. Our Bank''s share in the Assigned up Capital is 35% - MYR112.000 Mio.

As on 31.03.2014, Bank has paid Rs.193.20 crore towards 11200000 shares of MYR 10 each aggregating to MYR 112.00 Mio. The Joint Venture has commenced operations on 11.07.2012.

11.9 Accounting Standard 28 - Impairment of Assets

Fixed Assets owned by the Bank are treated as ''Corporate Assets'' and are not ''Cash Generating Units'' as defined by AS28 issued by ICAI. In the opinion of the Management, there is no impairment of any of the Fixed Assets of the Bank.

11.10 Accounting Standard 29 - Provision for Contingent Liabilities and Contingent Assets:

The guidelines issued by the Institute of Chartered Accountants of India in this respect have been incorporated at the appropriate places.

12 Additional Disclosures

12.1 Concentration of Deposits, Advances, Exposures and NPAs

12.2 Provisions and Contingencies - Break-up (Rs.. In Crore)

Break up of ''Provisions and Contingencies'' shown under the head Expenditure in Profit and Loss Account

2013-14 2012-13

Provisions for depreciation on Investment 453.53 175.10

Provision towards NPA 2210.80 2198.82

Provision towards Standard Assets 246.13 259.18

Provision made towards Income Tax (including Deferred Tax & Wealth Tax) 241.30 180.25

Other Provision and Contingencies 243.74 436.43

Total 3395.50 3249.78

During the year 2009-10, the Bank has issued a Letter of Comfort (LOC) undertaking to maintain a minimum CRAR of 12% in respect of Bangkok branch and to arrange to convert retained earnings to capital funds and/ or infuse further capital in order to restore the CRAR to a minimum of 12% subject to approval from RBI.

In the worst case scenario of the entire textile exposure of the branch becoming NPA, we may have to make additional provision to the extent of THB 311.613 mio being unsecured portion of standard textile advances. If this contingency arises, there would be no additional capital to be remitted as existing reserves are adequate to cover the unsecured amount.

During the year 2010-11, the Bank has issued a letter of comfort favoring Bank Negara Malaysia. The Bank in association with other JV partners will provide support to India International Bank (Malaysia) Bhd in funding, business and other matters as and when required and ensure that it complies with the requirements of the Malaysian Laws, Regulations and Policies in the conduct of its business operations and management.

The financial impact for the letter of undertaking issued to Bank Negara Malaysia is remittance of our share of 35% of the paid up capital of MYR 320 mio ie. MYR 112.000 mio. Our Bank has remitted INR 193,20,10,398/- towards the capital of MYR 112.000 mio.

12.03 Disclosures relating to Securitisation NIL

12.04 Credit Default Swaps (CDS) NIL 20 Comparative Figures

Previous year''s figures have been regrouped / rearranged wherever necessary.


Mar 31, 2012

1. Reconciliation

Reconciliation of Inter Bank and Inter Branch transactions has been completed up to 31.3.2012 and steps for elimination of outstanding entries are in progress. Since the outstanding entries are insignificant, the management does not anticipate any material consequential effect.

2. Investments

2.1 In accordance with the Reserve Bank of India (RBI) guidelines, the Investments Portfolio of the Bank (domestic) has been classified into three categories, as given below: -

2.2 SLR Securities under "Held to Maturity" accounted for 22.54% (previous year 20.95%) of Bank's Demand and Time liabilities as at the end of March 2012, as against the ceiling of 25% stipulated by RBI.

2.3 In respect of Held to Maturity category of Investments, premium of Rs.52.53 crore was amortised during the year (Previous year Rs.53.00 crore).

2.4 Securities of face value for Rs.300 crore (previous year Rs.200 crore) towards Settlement Guarantee Fund and securities of face value for Rs.8455 crore (previous year Rs.5855 crore) towards collateral for borrowing under Collateralised Borrowing and Lending Obligations have been kept with Clearing Corporation of India Limited. Securities of face value Rs.3150 crore were placed with RBI for intraday borrowing. Besides, a sum of Rs.15.00 crore (previous year Rs.1.80 crore) have been lodged with NSCCL towards Currency Derivatives Segment and Rs.10.00 crore (previous year Rs.5.00 crore) with CCIL towards Default Fund for forex operations and Rs.1.17 crore (previous year Rs.1.17 crore) with Indian Clearing Corporation Limited towards Currency Derivatives Segment.

2.5 Shares under Investments in India in Schedule 8 includes Rs.36,24,07,080/- (Previous year Rs.21,89,07,080/-) being advance towards share capital in Regional Rural Banks pending allotment of shares.

2.6 Under the Open Market Operations(OMO) scheme of buy back of Government Securities announced by the RBI, Bank sold investments of book value of Rs 1763.48 crore under HTM category and earned a profit of Rs 18.45 crore.

3. Advances

3.1 The Classification for advances and provisions for possible loss has been made as per prudential norms issued by Reserve Bank of India.

3.2 Claims pending settlement and claims yet to be lodged with Guarantee Institutions identified by the branches have been considered for provisioning requirements on the basis that such claims are valid and recoverable.

3.3 In assessing the realisability of certain advances, the estimated value of security, Central Government guarantees etc. have been considered for the purpose of asset classification and income recognition.

3.4 The classification of advances, as certified by the Branch Managers have been incorporated, in respect of unaudited branches.

3.5 In compliance with RBI guidelines, Bank maintained a Counter Cyclical Provisioning Buffer of Rs.614.06 crore as at 31.3.2012, against required provisioning buffer of Rs.811.06 crore. RBI has permitted the Bank to build-up the balance buffer requirement of Rs.197 crore by 31.03.2013.

4. Fixed Assets

4.1 During the year 2008-09, certain land and buildings in India, were revalued through approved valuers and Rs.1123.55 crore added to the carrying value of assets on account of such revaluation.

4.2 Rs.1.18 crore (previous year Rs.0.51 crore), being profit on sale of assets is appropriated to Capital Reserve.

5. Rupee Interest Rate Swap

An amount of Rs.5.92 crore (previous year Rs.2.33 crore) is held in deferred income on account of gains on termination of Rupee Interest Rate Swaps taken for hedging and would be recognized over the remaining contractual life of swap or life of the assets/liabilities, whichever is earlier.

6. Capital and Reserves:

6.1 During the financial year, in March 2012, Bank raised equity share capital of Rs.1743.63 crore (previous year Rs.1054 crore) including share premium of Rs.1565.38 crore (previous year Rs.980.05 crore) by way of preferential allotment of 3,09,37,467 equity shares (previous year Nil) to LIC of India and its various schemes and 14,73,11,388 equity shares (previous year 7,39,49,343 equity shares) to Government of India, aggregating to 17,82,48,855 equity shares at a premium of Rs.87.82 per equity share. Pursuant to the above the shareholding of the Government of India has increased from 65.87 % to 69.62%.

6.2 The Bank has not raised Tier II capital during the year (previous year Rs.1967 crore).

7. Taxes

7.1 Taking into consideration the decisions of Appellate Authorities, judicial pronouncements and the opinion of tax experts, no provision is considered necessary in respect of disputed and other demands of income tax aggregating Rs.592.32 crore (previous year Rs.566.68 crore).

7.2 Tax expense for the year is Rs.247.58 crore after reversal of excess provision to the extent of Rs.234.12 crore pertaining to earlier years.

8. Shree Suvarna Sahakari Bank Ltd

The balance of Rs.82.18 crore (previous year Rs.82.17 crore) out of aggregate deficit of Rs.246.52 crore representing excess of liabilities over the specific assets of Shree Suvarna Sahakari Bank Ltd., Pune taken over in 2009-10, is charged to Profit and Loss Account for the year, as permitted by the RBI.

9. Pension and Gratuity Liability

On the reopening of pension to employees of Public Sector Banks and enhancement of Gratuity limits, the Bank incurred a liability of Rs.1005.21 crore in 2010-11. In terms of requirement of Accounting Standard (AS 15) Employee Benefits, the entire amount of Rs.1005.21 crore is required to be charged to Profit and Loss Account. In terms of Reserve Bank of India circular No.DBOD.BP.BC.80/21.04.018/2010-11, on Reopening of Pension Option to employees of Public Sector Banks and enhancement in Gratuity limits - Prudential Regulatory Treatment, dated 09.02.2011, Bank would amortise the amount of Rs.1005.21 crore over a period of 5 years from 31.3.2011. Accordingly, Rs.201.04 crore (previous year Rs.201.04 crore) has been charged to Profit and Loss Account for the year 2011-12 and the balance amount of Rs.603.13 crore has been carried over. Had the RBI not issued such a circular, the Revenue Reserves of the Bank would have been lower by Rs.603.13 crore pursuant to application of the requirements of AS-15.

10. Information relating to vendors registered under Micro, Small and Medium Enterprises Development Act, 2006 and from whom goods and services have been procured by the Bank, is being ascertained.

ADDITIONAL DISCLOSURES

In accordance with the guidelines issued by Reserve Bank of India vide Master Circular dated 1.7.2011, the following additional disclosures are made:-

11.1 DISCLOSURES ON RISK EXPOSURE IN DERIVATIVES

11.1.1 Qualitative Disclosure Treasury (Foreign)

The Bank uses Interest Rate Swaps (IRS), Currency Swaps and Options for hedging purpose to mitigate interest rate risk and currency risk in banking book. The Bank also offers these products to corporate clients to enable them to manage their own currency and interest rate risk. Such transactions are entered only with Clients and Banks having agreements in place.

a) The Risk Management Policy of the Bank allows using of derivative products to hedge the risk in Interest/ Exchange rates that arise on account of overseas borrowing/ FCNR(B) portfolio/ the asset liability mis-match, for funding overseas branches etc., and also to offer derivative products on back- to- back basis to customers.

b) The Bank has a system of evaluating the derivatives exposures separately and placing appropriate credit lines for execution of derivative transactions duly reckoning the Net Worth and security backing of individual clients.

c) The Bank has set in place appropriate control systems to assess the risks associated in using derivatives as hedge instruments and proper risk reporting systems are in place to monitor all aspects relating to derivative transactions. The Derivative transactions were undertaken only with banks and counterparties well within their respective exposure limit approved by appropriate credit sanctioning authorities for each counter party.

d) The Bank has set necessary limits in place for using derivatives and its position is continuously monitored.

e) The Bank has a system of continuous monitoring and appraisal of resultant exposures across the administrative hierarchy for initiation of necessary follow up actions.

f) Derivatives are used by the Bank to hedge the Bank's Balance sheet and offered to select corporate clients on back-to-back basis. In respect of hedge transactions the value and maturity of hedges has not exceeded that of the underlying exposure. In respect of back-to-back transactions the transactions with clients are fully matched with counter party Bank transactions and there is no uncovered exposure.

g) The income from such derivatives are amortized and taken to Profit and Loss Account on accrual basis over the life of the contract. In case of early termination of swaps undertaken for Balance Sheet management, income on account of such gains would be recognized over the remaining contractual life of the swap or life of the assets / liabilities whichever is lower. In case of early termination of derivatives undertaken for customers on a back- to- back basis, income on account of such things will be recognized on termination.

h) All the hedge transactions are accounted on accrual basis. Valuations of the outstanding contracts are done on Mark to Market basis. The Bank has duly approved Risk Management and Accounting procedures for dealing in Derivatives.

i) The derivative transactions are conducted in accordance with the extant guidelines of Reserve Bank of India.

Treasury (Domestic)

The Bank uses Rupee Interest Rate Swaps (IRS) for hedging purpose to mitigate interest rate risk in Govt. Securities and to reduce the cost of Subordinated Debt and term deposits. In addition, the Bank also enters into rupee interest rate swaps for trading purposes as per the policy duly approved by the Board. Swap transactions are entered only with Banks having ISDA agreements in place.

a) The Bank has put in place an appropriate structure and organization for management of risk, which includes treasury department, Asset Liability Management Committee and Risk Management Committee of the Board.

b) Derivative transactions carry Market Risk (arising from adverse movement in interest rates), Credit risk (arising from probable counter party failure), Liquidity risk (arising from failure to meet funding requirements or execute the transaction at a reasonable price), Operational risk, Regulatory risk and Reputation risk. The Bank has laid down policies, set in place appropriate control systems to assess the risks associated in using derivatives and proper risk reporting and mitigation systems are in place to monitor all risks relating to derivative transactions. The IRS transactions were undertaken with only Banks as counter party and well within the exposure limit approved by the Board of Bank for each counter party.

c) Derivatives are used by the Bank for trading and hedging. The Bank has an approved policy in force for derivatives and has set necessary limits for the use of derivatives and the position is continuously monitored. The value and maturity of the hedges which are used only as back to back or to hedge Bank's Balance Sheet has not exceeded that of the underlying exposure.

d) The accounting policy for derivatives has been drawn up in accordance with RBI guidelines, as disclosed in Schedule 17 - Significant Accounting Policies (Policy, No.6)

DISCLOSURES IN TERMS OF ACCOUNTING STANDARDS

12.1 Accounting Standard 9 - Revenue Recognition

Revenue has been recognized as described in Item No. 2 of Significant Accounting Policies - Schedule 17.

12.2 Accounting Standard 15 - Employee Benefits

12.2.1

i) The Bank has adopted Accounting Standard 15 (Revised) "Employees Benefits" issued by the Institute of Chartered Accountants of India, with effect from 1st April 2007.

ii) The balance of unrecognised Transitional Liability on account of Employee Pension amounted to Rs.89 Crore has been charged to Profit & Loss Account of the current year ended 31.3.2012.

iii) The summarized position of Post-employment benefits and long term employee benefits recognized in the Profit & Loss Account and Balance Sheet as required in accordance with Accounting Standard-15 (Revised) are as under:

The estimates of future salary increases, considered in actuarial valuation, take into account actual return on plan assets, inflation, seniority, promotion and other relevant factors, such as supply and demand in employee market.

In respect of overseas branches, disclosures if any, required for Employee Benefit Schemes are not made in the absence of information.

(b) The financial assumptions considered for the calculations are as under:-

Discount Rate: - The discount rate has been chosen by reference to market yield on Government bonds as on the date of valuation. (Balance sheet date 31.3.2012)

Expected Rate of Return: In case of Pension the expected rate of return is taken on the basis of yield on Government bonds. In case of gratuity, the actual return has been taken.

Salary Increase: On the basis of past data.

(c) Bank's best estimate of gratuity expected to be paid in the next Financial Year is Rs.120 crore.

12.2.2 Sick Leave

Provision of Rs.119 crore made for Sick Leave in earlier years is not considered necessary under AS 15 - Employee Benefits, since no encashment is involved. Hence, such provision for Rs.38 crore has been written back to Profit and Loss Account, besides credit of Rs.53.47 crore to other Revenue Reserves and Rs.27.53 crore to Deferred Tax Liability Account

12.3 Accounting Standard 17 - Segment Reporting

The Bank has adopted Reserve Bank of India's revised guidelines issued in April 2007 on Segment Reporting in terms of which the reportable segments have been divided into Treasury, Corporate/Wholesale Banking, Retail Banking and Other Banking Operations. (Rs. In Crore)

12.4 Accounting Standard 21 - Consolidated Financial Statements (CFS)

As there is no subsidiary, no consolidated financial statement is considered necessary.

12.5 Accounting Standard 22: Accounting for Taxes on Income

The Bank has accounted for Deferred Tax Liability of Rs.330.16 crore during the year (Previous year Rs.101.09 crore). The Bank has outstanding net Deferred Tax Liability of Rs.628.96 crore (Previous year Rs.270.61 crore). The breakup of deferred tax assets and liabilities into major items is given below: Rs. In Crore

12.6 Accounting Standard 26 - Intangible Assets

The application software in use in the Bank has been developed in-house and has evolved over a period of time. Hence, the costs of software is essentially part of Bank's operational expenses like wages etc. and as such are charged to the respective heads of expenditure in the Profit and Loss Account.

12.7 Accounting Standard 27 - Financial Reporting of Interests in Joint Ventures

Bank has signed a Joint Venture with Bank of Baroda and Andhra Bank to open a Bank in Malaysia. Bank Negara, the Central Bank of Malaysia, has issued the license to the Joint Venture on 16.04.2010. The Joint Venture has been incorporated at Malaysia on 13.08.2010 in the name of INDIA INTERNATIONAL BANK (MALAYSIA) BHD, with an Authorised Capital of MYR500 Mio and Assigned Capital as on 31.3.2012 is MYR310 Mio. Our Bank's share in Paid- up Capital is 35% - MYR108.50 Mio. As on 31.3.2012, Bank has paid Rs.12.96 crore towards 819035 shares of MYR10 each aggregating to MYR8190350. The Joint Venture is expected to commence operations shortly.

12.8 Accounting Standard 28 - Impairment of Assets

Fixed Assets owned by the Bank are treated as 'Corporate Assets' and are not 'Cash Generating Units' as defined by AS28 issued by ICAI. In the opinion of the Management, there is no impairment of any of the Fixed Assets of the Bank.

12.9 Accounting Standard 29 - Provision for Contingent Liabilities and Contingent Assets:

The guidelines issued by the Institute of Chartered Accountant of India in this respect have been incorporated at the appropriate places.

13.1 Off Balance Sheet SPVs sponsored (which are required to be consolidated as per Accounting norms)

14 Comparative Figures

Previous year's figures have been regrouped / rearranged wherever necessary.


Mar 31, 2011

1. Reconciliation

Reconciliation of inter-bank and inter-branch transactions has been completed up to 31st March 2011, Steps for elimination of outstanding entries are in progress. Since the outstanding entries to be eliminated are insignificant, no material consequential effect is anticipated.

2. Investments

2.2 SLR Securities under "Held to Maturity" accounted for 20.95% (previous year 22.39%) of banks Demand and Time liabilities as at the end of March 2011, as against the ceiling of 25% stipulated by RBI.

2.3 In respect of Held to Maturity category of Investments, premium of Rs.53.00 crore was amortised during the year (Previous year Rs.114.47 crore).

2.4 Securities of face value of Rs.200 crores (previous year Rs.100 crores) towards Settlement Guarantee Fund and securities for Rs.5855 crore crores (previous year Rs.4855 crore) towards collateral for borrowing under Collateralised Borrowing and Lending Obligations have been kept with Clearing Corporation of India Ltd. Besides, a sum of Rs.1.80 crore (previous year NIL) has been lodged with NSCCL towards Currency Derivatives Segment, Rs.5.00 crore (previous year NIL) with CCIL towards Default Fund for

forex operations, Rs.1.17 crore (previous year NIL) with Indian Clearing Corporation Ltd., towards Currency Derivatives Segment.

2.5 Shares under Investments in Schedule 8 includes Rs.21,89,07,080/- (Previous year Rs.21,89,07,080/-) being advance towards share capital in Regional Rural Banks pending allotment of shares.

3. Advances

3.1 The Classification for advances and provisions for possible loss has been made as per prudential norms issued by Reserve Bank of India.

3.2 Claims pending settlement and claims yet to be lodged with Guarantee Institutions identified by the branches have been considered for provisioning requirements on the basis that such claims are valid and recoverable.

3.3 In assessing the realisability of certain advances, the estimated value of security, Central Government guarantees etc. have been considered for the purpose of asset classification and income recognition.

3.4 The classification of advances, as certified by the Branch Managers have been incorporated, in respect of unaudited branches.

3.5 The Bank has a floating provision of Rs.171.36 crores (Previous Year Rs.171.36 crores) in respect of Gross Non- performing Advances over and above the minimum provision prescribed by RBI with a view to strengthening the financial stability of the Bank.

4. Fixed Assets

4.1 During the year 2008-09, the bank has revalued its premises (land and buildings) other than those at overseas branches and added an amount of Rs. 1123.55 crores to the existing carrying value of assets. The revaluation has been done by approved valuers.

4.2 A sum of Rs.0.51 crore (previous year Rs.1.61 crore) being profit on sale of Fixed Assets during the year has been appropriated to Capital Reserve as on 31.03.2011.

5. Rupee Interest Rate Swap:

An amount of Rs.2.33 crore (previous year Rs.4.69 crore) is kept in deferred income on account of gains on termination of Rupee Interest Rate Swaps taken for hedging and would be recognized over the remaining contractual life of swap or life of the assets/liabilities, whichever is earlier.

6. Capital and Reserves:

6.1 The bank had during the year raised equity share capital of Rs.1054 crore including share premium of Rs.980.05 crore by way of preferential allotment of 7,39,49,343 equity shares to Government of India on 24.3.2011. Pursuant to the above the share holding of Government of India has increased from 61.23% to 65.87%.

6.2 During the year, the Bank has raised Tier II capital amounting to Rs. 1967.00 crore (previous year Rs. 800.00 Crore) by issue of Lower/Upper Tier II bonds.

7. Taxes

Taking into consideration the decisions of Appellate Authorities, judicial pronouncements and the opinion of tax experts, no provision has been considered necessary in respect of disputed and other demands of income tax amounting to Rs.566.68 crore (previous year Rs. 406.92 crore)

8. Agricultural Debt Waiver and Debt Relief Scheme 2008

8.1 In terms of Agricultural Debt Waiver and Debt Relief Scheme 2008, framed by the Government of India, the Bank has received Rs.581.58 crore from Reserve Bank of India on account of loans to small and marginal farmers, out of the amount eligible for debt waiver of Rs.676 crore.

8.2 The balance amount due from the Government of India under the above scheme amounting to Rs.94.42 crore is shown as Claim Receivable from Government of India for ADW&DRS 2008 and included under advances in Schedule 9 as per Reserve Bank of India circular.

9. Shree Suvarna Sahakari Bank Ltd

During the year 2009-10, the Bank has taken over specific assets and liabilities of M/s. Shree Suvarna Sahakari Bank Ltd., Pune (which was under moratorium), with effect from the close of business on 19.05.2009 with the approval of RBI and other authorities.The deficit representing excess of liabilities over assets taken over as on the said date amounting to Rs.246.52 crore has to be absorbed over a period of three years, as permitted by Reserve Bank of India. The Bank has absorbed the deficit, amounting to Rs.164.34 crore (Rs.82.17 crore during the year 2009-10 and Rs.82.17 crore during the year 2010-11). The balance of deficit amounting to Rs.82.18 crore will be absorbed before 31.03.2012.

10. Pension and Gratuity Liability

During the year, the bank reopened the pension option for such of its employees who had not opted for the Pension Scheme earlier. As a result of exercise of this option by 11571 employees, the bank had incurred a liability of Rs.758.65 crore. Further, during the year, the limit of Gratuity payable to the employees of the bank was also enhanced pursuant to the amendment to the Payment of Gratuity Act, 1972. As a result the Gratuity liability of the bank has increased by Rs.246.56 crore.

In terms of the requirements of the Accounting Standard (AS-15).Employee Benefits, the entire amount of Rs.1005.21 crore is required to be charged to the Profit and Loss account. However, the Reserve Bank of India has issued a circular No.DBOD.BP.BC.80/21.04.018/ 2010-11, on Reopening of Pension Option to employees of Public Sector Banks and enhancement in Gratuity limits - Prudential

Regulatory Treatment, dated 09.02.2011. In accordance with the provisions of the said Circular, the bank would amortise the amount of Rs.1005.21 crore over a period of 5 years. Accordingly, Rs.201.04 crore (representing one-fifth of Rs.1005.21 crore) has been charged to the Profit and Loss Account. In terms of the requirements of the aforesaid, RBI Circular, the balance amount carried forward, i.e., Rs.804.17 crore does not include any employees relating to separated / retired employees. Had such a circular not been issued by the RBI, the profit of the bank would have been lower by Rs.804.17 crore pursuant to application of the requirements of AS-15.

* Due to issuance of 7,39,49,343 equity shares to Government of India on preferential allotment.

3.3 DISCLOSURES ON RISK EXPOSURE IN DERIVATIVES

3.3.1 Qualitative Disclosure

Treasury (Foreign)

The Bank uses Interest Rate Swaps (IRS), Currency Swaps and Options for hedging purpose to mitigate interest rate risk and currency risk in banking book. The Bank also offers these products to corporate clients to enable them to manage their own currency and interest rate risk. Such transactions are entered only with Clients and Banks having agreements in place.

a) The Risk Management Policies of the Bank allows using of derivative products to hedge the risk in Interest / Exchange rates that arise on account of overseas borrowing / FCNR (B) portfolio / the asset liability mis-match, for funding overseas branches etc., and also to offer derivative products on back-to-back basis to customers.

b) The Bank has a system of evaluating the derivatives exposures separately and placing appropriate credit lines for execution of derivative transactions duly reckoning the Net Worth and security backing of individual clients.

c) The Bank has set in place appropriate control systems to assess the risks associated in using derivatives as hedge instruments and proper risk reporting systems are in place to monitor all aspects relating to derivative transactions. The derivative transactions were undertaken only with banks and counterparties well within their respective exposure limit approved by

appropriate credit sanctioning authorities for each counter party.

d) The Bank has set necessary limits in place for using derivatives and its position is continuously monitored.

e) The Bank has a system of continuous monitoring and appraisal of resultant exposures across the administrative hierarchy for initiation of necessary follow up actions.

f) Derivatives are used by the Bank to hedge the Banks Balance Sheet and offered to select corporate clients on back-to-back basis. In respect of hedge transactions the value and maturity of hedges has not exceeded that of the underlying exposure. In respect of back-to- back transactions the transactions with clients are fully matched with counter party bank transactions and there is no uncovered exposure.

g) The income from such derivatives are amortised and taken to Profit and Loss Account on accrual basis over the life of the contract. In case of early termination of swaps undertaken for Balance Sheet management, income on account of such gains would be recognised over the remaining contractual life of the swap or life of the assets / liabilities whichever is lower. In case of early termination of derivatives undertaken for customers on a back-to-back basis, income on account of such things will be recognised on termination.

h) All the hedge transactions have been accounted on accrual basis. Valuations of the outstanding contracts are done on Mark to Market basis. The Bank has duly approved Risk Management and Accounting procedures for dealing in derivatives.

i) The derivative transactions are conducted in accordance with the guidelines of Reserve Bank of India.

Treasury (Domestic)

The Bank uses the Rupee Interest Rate Swaps (IRS) for hedging purpose to mitigate interest rate risk in Govt. Securities and to reduce the

cost of Subordinated Debt and term deposits. In addition, the bank also enters into rupee interest rate swaps for trading purposes as per the policy duly approved by the Board. Swap transactions are entered only with Banks having ISDA agreements in place.

a) The Bank has put in place an appropriate structure and organization for management of risk which includes Treasury Department, Asset Liability Management Committee and Risk Management Committee of the Board.

b) Derivative transactions carry Market Risk (arising from adverse movement in interest rates), credit risk (arising from probable counter party failure), liquidity risk (arising from failure to meet funding requirements or execute the transaction at a reasonable price), operational risk, regulatory risk and reputation risk. The Bank has laid down policies, set in place appropriate control systems to assess the risks associated in using derivatives and proper risk reporting and mitigation systems are in place to monitor all risks relating to derivative transactions. The IRS transactions were undertaken with only Banks as counter party and well within the exposure limit approved by the Board of the Bank for each counter party.

c) Derivatives are used by the Bank for trading and hedging. The bank has an approved policy in force for derivatives and has set necessary limits for the use of derivatives and the position is continuously monitored. The value and maturity of the hedges which are used only as back to back or to hedge banks Balance Sheet has not exceeded that of the underlying exposure.

d) The Accounting Policy for derivatives has been drawn up in accordance with RBI guidelines, as disclosed in Schedule 17 - Significant Accounting Policies (Policy No.6).

4.1.2 Provision Coverage Ratio

The Provision Coverage Ratio (PCR) computed as per the RBI guidelines stood at 70.45% as on 31.03.2011.

4.4 Details of non-performing financial assets purchased/sold from other banks

7.4 Details of Single Borrower Limit (SBL), Group Borrower Limit (GBL) exceeded by the bank:

As per RBI guidelines and terms of Loan Policy Document of our Bank for 2011, the permissible level of Single Borrower exposure ceiling is Rs. 1758.15 crore (15% of Capital funds) and Rs.4688.40 crore for Group Borrower limit (40% of Capital funds). SBL and GBL in case of overseas branches was enhanced to USD 40 Mio and USD 60 Mio respectively with effect from 11.12.2010.

# Limits to the captioned borrower was enhanced to USD 40 Mio vide MCB sanction of 10.2.2011 and this sanction is within the revised SBL of USD 40 Mio.

8. MISCELLANEOUS

8.2 Disclosure of Penalties imposed by RBI

NIL

During the year 2009-10, the Bank has issued a Letter of Comfort (LOC) undertaking to maintain a minimum CRAR of 12% in respect of Bangkok branch.

During the year 2010-11, the bank has issued a letter of comfort favoring Bank Negara Malaysia. The Bank in association with other JV partners will provide support to India International Bank (Malaysia) Bhd in funding, business and other matters as and when required and ensure that it complies with the requirements of the Malaysian laws, regulations and policies in the conduct of its business operations and management.

*Fees/Remuneration received in respect of the Bancassurance Business undertaken by the Bank.

9. DISCLOSURES IN TERMS OF ACCOUNTING STANDARDS

9.1 Accounting Standard 15 - Employee Benefits

i) The Bank had adopted Accounting Standard 15 (Revised) "Employees Benefits" issued by the Institute of Chartered Accountants of India, with effect from 1st April 2007.

* The un-funded net liability in Pension and Gratuity Funds, are to be amortised over a period of next 4 years.

* The information for experience adjustments for the previous year are not available.

The estimates of future salary increases, considered in actuarial valuation, take into account actual return on plan assets, inflation, seniority, promotion and other relevant factors, such as supply and demand in employee market.

In respect of overseas branches, disclosures if any, required for Employee Benefit Schemes are not made in the absence of information.

(b) The financial assumptions considered for the calculations are as under:

Discount Rate: The discount rate has been chosen by reference to market yield on government bonds as on the date of valuation. (Balance sheet date 31.03.2011)

Expected Rate of Return: In case of Pension and Leave Encashment, the expected rate of return is taken on the basis of yield on government bonds. In case of gratuity, the actual return has been taken.

Salary Increase: On the basis of past data.

(c) Banks best estimate expected to be paid in next Financial Year for Gratuity is Rs.90 crore (Previous year - NIL).

(d) The contribution on account of Defined Contribution Scheme - Provident Fund Rs.780.65 crore (previous year Rs.716.16 crore), out of which an amount of Rs.763.08 crore has been transferred to Pension Fund from PF Fund on account of II option of pension.

9.2 Accounting Standard 17- Segment Reporting

The bank has adopted Reserve Bank of Indias revised guidelines issued in April 2007 on Segment Reporting in terms of which the reportable segments have been divided into Treasury, Corporate/Wholesale Banking, Retail Banking and Other Banking Operations.

9.3 Accounting Standard 18- Related Party Disclosures

Names of the related parties and their relationship with the bank

1 Parent Indian Overseas Bank

2 Associates Pandyan Grama Bank

Neelachal Gamya Bank

3. Subsidiaries None

4. Jointly controlled entity India International Bank (Malaysia) Bhd.

*Remuneration includes salary & allowances, salary arrears, performance incentives, leave encashment arrears and gratuity arrears.

9.5 Accounting Standard 21 - Consolidated Financial Statements (CFS)

As there is no subsidiary, no consolidated financial statement is considered necessary.

9.7 Accounting Standard 26 - Intangible Assets

The application software in use in the bank has been developed in-house and has evolved over a period of time. Hence, the costs of software is essentially part of Banks operational expenses like wages etc. and as such are charged to the respective heads of expenditure in the Profit and Loss Account.

9.8 Accounting Standard 27 - Financial Reporting of Interests in Joint Ventures

Bank has signed a Joint Venture with Bank of Baroda and Andhra Bank to open a bank in Malaysia. Bank Negara, the Central Bank of Malaysia, has issued the licence to the Joint Venture on 16.04.2010. The Joint Venture has been incorporated at Malaysia on 13.08.2010 in the name of INDIA INTERNATIONAL BANK (MALAYSIA) BHD, with a total capital of MYR 300 Mio, Our bank share is 35% - MYR 105 Mio. Our bank has so far subscribed to 14035 shares of MYR 10 each towards preliminary expenses of the Joint Venture aggregating to MYR140350 (INR0.21 crore). The Joint Venture is expected to commence operations shortly.

9.9 Accounting Standard 28 - Impairment of Assets

Fixed Assets owned by the Bank are treated as Corporate Assets and are not Cash Generating Units as defined by AS28 issued by ICAI. In the opinion of the Management, there is no impairment of any of the Fixed Assets of the Bank.

9.10 Accounting Standard 29 - Provision for Contingent Liabilities and Contingent Assets:

The guidelines issued by the Institute of Chartered Accountants of India in this respect have been incorporated at the appropriate places.

10 Concentration of Deposits, Advances, Exposures and NPAs

11 Comparative Figures:

Previous years figures have been regrouped / rearranged wherever necessary.


Mar 31, 2010

1. Reconciliation

Reconciliation of inter-bank and inter-branch transactions has been completed up to 31s March 2010. Steps for elimination of outstanding entries are in progress. Since the outstanding entries to be eliminated are insignificant, no material consequential effect is anticipated.

2.2 SLR Securities under "Held to Maturity" accounted for 22.39% of banks Demand and Time liabilities as at the end of March 2010, which is within the ceiling of 25% stipulated by RBI.

2.3 In respect of Held to Maturity category of Investments, premium of Rs.114.47 crores was amortised during the year (Previous year Rs.222.61 crores).

2.4 Securities of face value of Rs.100 crores (previous year Rs.100 crores) towards Settlement Guarantee Fund and securities for Rs. 4855 crores (previous year Rs.2200 crores) towards collateral for borrowing under Collateralised Borrowing and Lending Obligations have been kept with Clearing Corporation of India Ltd.

2.5 Shares under Investments in Schedule 8 includes Rs.21,89,07,080/- (Previous year Rs.21,89,07,080/-) being advance towards share capital in Regional Rural Banks pending allotment of shares.

3. Advances

3.1 The Classification for advances and provisions for possible Loss has been made as per prudential norms issued by Reserve Bank of India.

3.2 Claims pending settlement and claims yet to be lodged with Guarantee Institutions identified by the branches have been considered for provisioning requirements on the basis that such claims are valid and recoverable.

3.3 In assessing the realisability of certain advances, the estimated value of security, Central Government guarantees and subsequent conduct/ recoveries have been considered for the purpose of asset classification and income recognition.

3.4 The classification of advances, as certified by the Branch Managers have been incorporated, in respect of unaudited branches.

3.5 The Bank has a floating provision of Rs. 171.36 Crores (Previous Year Rs.171.36 Crores) in respect of Gross Non-performing Advances over and above the minimum provision prescribed by RBI with a view to strengthening the financial stability of the Bank.

4. Fixed Assets

4.1 During the year 2008-09, the bank has revalued its premises (land and buildings) other than those at overseas branches and added an amount of Rs. 1123.55 crores to the existing carrying value of assets. The revaluation has been done by approved valuers.

4.2 Pending completion of certain legal and other formalities, title deeds have not been executed / registered in favour of the Bank in respect of one premises amounting to Rs. 4.16 crores (previous year six properties - Rs.8.35 crores).

4.3 A sum of Rs.1.61 crores being profit on sale of Fixed Assets during the year has been appropriated to Capital Reserve as on 31.03.2010.

5. Rupee Interest Rate Swap:

An amount of Rs.4.69crores (previous year Rs.8.83 crores) is kept in deferred income on account of gains on termination of Rupee interest Rate swaps taken for hedging and would be recognized over the remaining contractual life of swap or life of the assets/ liabilities, whichever is earlier.

6. Capital and Reserves:

6.1 During the year, the Bank has raised Tier II Capital amounting to Rs.800.00 Crores (previous year Rs.955.30 Crores) by issue of Lower / Upper Tier II Bonds.

6.2 The Bank also raised Rs.300 Crores (Previous Year Nil) by way of Perpetual Bonds eligible for inclusion as Tier I Capital.

7. Taxes

Taking into consideration the decisions of Appellate Authorities, judicial pronouncements and the opinion of tax experts, no provision has been considered necessary in respect of disputed and other demands of income tax amounting to Rs.406.92 crores (previous year Rs.639.15 crores)

8. Salaries

The bank holds a provision of Rs.406 Crores as at 31.03.2010 towards arrears of salaries for the period from November 2007 to March 2010 on an estimated basis. Provision made during the year on this account is Rs.202 crores (including Rs.34 Crores relating to previous year).

9. Profit and Loss Account

The profit for the year includes an amount of Rs 4.89 Crores, representing amount transferred from Blocked Nostro Accounts as per RBI directives. The amount has been appropriated to Other Revenue Reserves.

10. Agricultural Debt Waiver and Debt Relief Scheme 2008

10.1 In terms of Agricultural Debt Waiver and Debt Relief Scheme 2008, framed by the Government of India, the Bank has received Rs. 371.97 crores towards 1st and 2nd installment from Reserve Bank of India on account of loans to small and marginal farmers, out of the amount eligible for debt waiver of Rs.580.88 crores.

10.2The balance amount due from the Government of India under the above scheme amounting to Rs.208.91 crores is shown as Claim Receivable from Government of India for ADW&DRS 2008 and included under advances in Schedule 9 as per Reserve Bank of India circular.

11 Shree Suvarna Sahakari Bank Ltd

During the current financial year, the Bank has taken over specific assets and liabilities of M/s. Shree Suvarna Sahakari Bank Ltd., Pune (which was under moratorium), with effect from the close of business on 19.05.2009 with the approval of RBI and other authorities. The deficit representing excess of liabilities over assets taken over as on the said date amounting to Rs.246.52 crore has to be absorbed over a period of three years, as permitted by Reserve Bank of India. The Bank has absorbed one-third of the deficit, amounting to Rs.82.17 crores during the current year. The balance of deficit amounting to Rs. 164.35 crore will be absorbed before 31.03.2012.

12 DISCLOSURES ON RISK EXPOSURE IN DERIVATIVES

12.1 Qualitative Disclosure

Treasury (Foreign)

The Bank uses Interest Rate Swaps (IRS), Currency Swaps and Options for hedging purpose to mitigate interest rate risk and currency risk in banking book. The Bank also offers these products to corporate clients to enable them to manage their own currency and interest rate risk. Such transactions are entered only with Clients and Banks having agreements in place.

a) The Risk Management Policies of the Bank allows using of derivative products to hedge the risk in Interest / Exchange rates that arise on account of overseas borrowing / FCNR (B) portfolio / the asset liability mis-match, for funding overseas branches etc., and also to offer derivative products on back-to-back basis to customers.

b) The Bank has a system of evaluating the derivatives exposures separately and placing appropriate credit lines for execution of derivative transactions duly reckoning the Net Worth and security backing of individual clients.

c) The Bank has set in place appropriate control systems to assess the risks associated in using derivatives as hedge instruments and proper risk reporting systems are in place to monitor all aspects relating to derivative transactions. The Derivative transactions were undertaken only with counterparties well within the exposure limit approved by appropriate credit sanctioning authorities for each counter party.

d) The Bank has set necessary limits in place for using derivatives and its position is continuously monitored.

e) The Bank has a system of continuous monitoring and appraisal of resultant exposures across the administrative hierarchy for initiation of necessary follow up actions.

f) Derivatives are used by the Bank to hedge the Banks Balance Sheet and offered to select corporate clients on back-to-back basis. In respect of hedge transactions the value and maturity of hedges has not exceeded that of the underlying exposure. In respect of back-to-back transactions the transactions with clients are fully matched with counter party bank transactions and there is no uncovered exposure.

g) The income from such derivatives are amortised and taken to Profit and Loss Account on accrual basis over the life of the contract. In case of early termination of swaps undertaken for Balance Sheet management, income on account of such gains would be recognised over the remaining contractual life of the swap or life of the assets / liabilities whichever is lower. In case of early termination of derivatives undertaken for customers on a back-to-back basis, income on account of such things will be recognised on termination.

h) All the hedge transactions have been accounted on accrual basis. Valuations of the outstanding contracts are done on Mark to Market basis. The Bank has duly approved Risk Management and Accounting procedures for dealing in Derivatives.

i) The derivative transactions are conducted in accordance with the guidelines of Reserve Bank of India.

Treasury (Domestic)

The Bank uses the Rupee Interest Rate Swaps (IRS) for hedging purpose to mitigate interest rate risk in Govt. Securities and to reduce the cost of Subordinated Debt and term deposits. In addition, the bank also enters into rupee interest rate swaps for trading purposes as per the policy duly approved by the Board. Swap transactions are entered only with Banks having ISDA agreements in place.

a) The Bank has put in place an appropriate structure and organization for management of risk which includes Treasury Department, Asset Liability Management Committee and Risk Management Committee of the Board.

b) Derivative transactions carry Market Risk (arising from adverse movement in interest rates), credit risk (arising from probable counter party failure), liquidity risk (arising from failure to meet funding requirements or execute the transaction at a reasonable price), operational risk, regulatory risk and reputation risk. The Bank has laid down policies, set in place appropriate control systems to assess the risks associated in using derivatives and proper risk reporting and mitigation systems are in place to monitor all risks relating to derivative transactions. The IRS transactions were undertaken with only Banks as counter party and well within the exposure limit approved by the Board of the Bank for each counter party.

c) Derivatives are used by the Bank for trading and hedging. The bank has an approved policy in force for derivatives and has set necessary limits for the use of derivatives and the position is continuously monitored. The value and maturity of the hedges which are used only as back to back or to hedge banks Balance Sheet has not exceeded that of the underlying exposure.

d) The Accounting Policy for derivatives has been drawn up in accordance with RBI guidelines, as disclosed in Schedule 17 - Significant Accounting Policies (Policy No.8).

13 Provision Coverage Ratio

The Provision Coverage Ratio (PCR) computed as per the RBI guidelines stood at 53.97% as on 31.03.2010.

13.1 Accounting Standard 15 - Employee Benefits

i) The Bank had adopted Accounting Standard 15 (Revised) "Employees Benefits" issued by the Institute of Chartered Accountants of India, with effect from 1sApril 2007.

ii) The balance of unrecognised Transitional Liability on account of Employee Pension amounted to Rs.267 Crores (previous year Rs.356 Crores) at the beginning of this year. A sum of Rs. 89 Crores (previous year Rs. 89 Crores) has been charged to Profit & Loss Account of the current year ended 31.03.2010. The balance Unrecognized Liability of Rs.178 crores (previous year Rs.267 crores) is being carried forward to be charged off in the next two years

iii) The summarized position of Post- employment benefits and long term employee benefits recognized in the Profit & Loss Account and Balance Sheet as required in accordance with Accounting Standard-15 (Revised) are as under:



 
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