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Directors Report of Karnataka Bank Ltd.

Mar 31, 2017

The Directors have pleasure in presenting the Ninety Third Annual Report together with the Audited Statement of Accounts for the year ended 31st March 2017 and the Auditors’ Report.

PERFORMANCE HIGHLIGHTS

Your Directors are pleased to inform that during the year ended 31st March 2017, your Bank has been able to achieve satisfactory growth in all the areas of operation. Performance highlights for the financial year in the key financial areas are as under:

(Rs. in crore)

Particulars

As on / for the year ended 31.03.2017

As on / for the year ended 31.03.2016

Deposits

56733.11

50488.21

Advances

37003.65

33902.45

Investments

20219.73

16256.65

Gross Income

5994.74

5535.07

Operating Profit

995.80

854.53

Net Profit

452.26

415.29

The total business turnover of the Bank was Rs.93736.76 crore as on 31st March 2017, an increase of 11.07 per cent (Previous year Rs.84390.66 crore). The total assets of the Bank increased from Rs.56500.33 crore to Rs.64126.55 crore recording a growth of 13.50 per cent for the year 2016-17.

The total deposits of the Bank grew from Rs.50488.21 crore as on 31st March 2016, to Rs.56733.11 crore as on 31st March 2017, registering a growth of 12.37 per cent.

During the year, low cost deposits of the Bank, viz. Savings and Current Account Deposits have shown growth of 24.23 per cent and constitute 29.04 per cent of the total deposits of the Bank. The market share of the Bank in deposits was 0.53 per cent.

The total advances grew from Rs.33902.45 crore as on 31st March 2016 to Rs.37003.65 crore as on 31st March 2017, an increase of 9.15 per cent. The priority sector advances increased from Rs.16149.99 crore to Rs.17238.77 crore which, together with the Rural Infrastructure Development Fund (RIDF) exposure, formed 48.13 percent of Adjusted Net Bank Credit (ANBC) and agricultural advances increased from Rs.5836.74 crore to Rs.6582.77 crore which, together with eligible RIDF exposure, constituted 18.38 per cent of ANBC. Lending under various socio-economic schemes has shown satisfactory progress. The market share of the Bank in loans and advances was 0.48 per cent.

As on 31st March 2017 the total investments of the Bank stood at Rs.20219.73 crore, as against Rs.16256.65 crore as on 31st March 2016, showing an increase of 24.38 per cent.

OPERATIONAL PERFORMANCE

In the backdrop of subdued credit off take experienced by banks, the performance of your Bank can be considered satisfactory for the year ended 31st March 2017. The gross income of the Bank was Rs.5994.74 crore and total expenditure (excluding provisions and contingencies) was Rs.4998.94 crore. The net interest income was Rs.1490.62 crore, showing a growth of 14.41 per cent over previous year.

PROFIT

Your Bank earned an operating profit of Rs.995.80 crore for the year 2016-17 as against Rs.854.53 crore for the previous year showing a growth of 16.53 per cent. The net profit of the Bank increased from Rs.415.29 crore to an all time high of Rs.452.26 crore showing a growth of 8.90 per cent.

APPROPRIATIONS

The net profit of Rs.452.26 crore which along with a sum of Rs.0.03 crore brought forward from the previous year, aggregating to Rs.452.29 crore, is appropriated as under.

Appropriation

Rs. in crore

Transfer to Statutory Reserve

125.00

Transfer to Capital Reserve

112.80

Transfer to Revenue, General & Special Reserves

68.60

Transfer to Investment Reserve

8.75

Balance carried over to Balance Sheet (including proposed Dividend and tax)

137.14

Total

452.29

DIVIDEND

Having regard to the overall performance of the Bank, expanded capital base on account of the successful Rights issue in the ratio of 1:2 and also the positive outlook for the future, the Board of Directors recommended a dividend of Rs.4 per share i.e. 40 percent on the paid up capital (previous year 50 per cent) for the reporting year. The dividend payout ratio for the year works out to 24.99 percent as against last year''s 22.69 percent. In accordance with the revised Accounting Standard (AS)-4 ‘Contingencies and Events occurring after the Balance Sheet Date notified by the MCA on March 30, 2016, the proposed dividend including dividend tax amounting to Rs.136.05 crore has not been shown as appropriation from the Profit as of March 31, 2017.

EARNINGS PER SHARE/BOOK VALUE

The earnings per share (basic) and the book value per share as on 31st March 2017 stood at Rs.19.38 and Rs.177.12 respectively.

ISSUANCE OF EQUITY SHARES

During the year under report, with a view to augment common equity, your Bank issued 9,42,35,441 equity shares of Rs.10 each at a price of Rs.70 per share including the premium of Rs.60per equity share on Rights basis in the ratio of 1 (One) equity share for every 2 (Two) equity shares held aggregating Rs.659.65 crore as per SEBI (ICDR) Regulations, 2009. The issue was subscribed by 1.85 times. After keeping in abeyance 98,575 entitlements pertaining to equity shares kept under Suspense Account, Board of Directors allotted 9,41,36,866 equity shares on 08.12.2016. The Board of Directors wishes to place on record its appreciation for the confidence reposed by the shareholders of the Bank and thank them for their overwhelming response to the Rights Issue.

REVALUATION OF ASSETS

As permitted under the extant RBI Guidelines, your Bank has revalued its Land and building having existing book value of Rs.119.39 crore. Appreciation of Rs.423.53 crore arising out of such revaluation is accounted with corresponding credit to Revaluation Reserves and the appreciation is reckoned for Tier-1 Capital after applying discount of 55 per cent as permitted under Basel III guidelines.

CAPITAL FUNDS AND CAPITAL ADEQUACY RATIO

The capital funds of your Bank increased from Rs.4185.24 crore to Rs.5172.16 crore, registering a growth of 23.58 per cent. The Capital Adequacy Ratio stood at 13.30 per cent as on 31st March, 2017, as per BASEL III norms (Previous year 12.03 per cent). The capital funds of the bank increased during the year under report, due to the augmentation of common equity capital through Rights Issue (Rs.654.95 crore net of expenses) and revaluation of Land & Building resulting in revaluation reserves to the extent of Rs.190.59 crores after discounting etc. The Bank has been consistently maintaining the Ratio well above the minimum of 10.25 percent stipulated by the Reserve Bank of India. The market capitalization as on March 31, 2017 was Rs.3976.26 crore.

CREDIT RATING

ICRA Limited ("ICRA") and Credit Analysis and Research Limited, (“CARE”) who had rated the Unsecured Redeemable Non-Convertible Subordinated (Lower Tier-II) debt instruments issued during the earlier years aggregating Rs.600 crore have retained the rating “ICRA A” and “CARE A” respectively for the aforesaid instruments. The instruments with these rating are considered to have adequate/high degree of safety regarding timely servicing of financial obligations. Such instruments carry very low credit risk.

SUBORDINTED DEBT INSTRUMENTS

In order to augment capital under Tier II Capital structure, your Bank had issued subordinated debt instruments under four series namely, Series I (Rs.120.50 crore), Series II (Rs.29.50 crore), Series III (Rs.200.00 crore) and Series IV (Rs.250.00 crore) issued on 30.06.2007, 29.03.2008, 27.09.2008 and 17.11.2012 respectively, with each Series having a maturity tenure of 120 months from the date of issue.

Series I (Rs.120.50 crore) is due for redemption on 30.06.2017 (upon completion of 120 months from the date of issue) and your Bank has ensured timely interest payment on the said debt instruments since the year 2007 and will redeem the said debt instruments as per the scheduled timeline. The redemption value has already been factored into while considering the capital adequacy ratio (CAR) for the financial year 2016-17 and therefore is no impact on CAR post redemption.

FOREX BUSINESS

During the year under report, your Bank achieved a turnover of Rs.14561.52 crore in foreign exchange business as against Rs.14277.44 crore in the previous year. The outstanding advances to export sector stood at Rs.1631.02 crore as on March 31, 2017.

NON-PERFORMING ASSETS AND PROVISION COVERAGE RATIO

Your Bank has been focusing on containing the nonperforming assets through better credit monitoring as well as intensified efforts to recover the impaired assets. However, in view of the continuing slowdown in the economy and delinquencies in select sectors, the Bank''s Gross NPAs as on March 31, 2017 has increased from Rs.1180.40 crore (3.44 per cent) to Rs.1581.59 crore by the year end (4.21 per cent). The Net NPAs stood at Rs.974.73 crore (2.64 per cent) as against Rs.795.47 crore (2.35 per cent) as on 31st March 2016. However, Provision Coverage Ratio (PCR) improved to 54.00 percent as on March 31, 2017 from 48.39 per cent as on March 31, 2016.

SEGMENT REPORTING

Pursuant to the Guidelines issued by RBI on Accounting Standard 17 (Segment Reporting), the Bank has identified four business segments viz., Treasury, Corporate/Wholesale Banking, Retail Banking and Other Banking Operations for the year ended 31st March 2017 as under:

Treasury Operations

During the year ended 31st March 2017, your Bank has earned total revenue of Rs.1642.55 crore from Treasury operations with a contribution of Rs.442.87 crore to profit before tax and un-allocable expenditure.

Corporate / Wholesale Banking

The revenue earned by the Bank during the year under report from this Segment was Rs.1814.36 crore with a contribution of Rs.-56.12 crore to profit before tax and unallocable expenditure.

Retail Banking

During the year 2016-17, this Segment has earned revenue of Rs.2281.72 crore with a contribution of Rs.165.19 crore to profit before tax and un-allocable expenditure.

Other Banking Operations

During the year ended 31st March 2017, this segment has generated revenues of Rs.256.11 crore with a contribution of Rs.34.23 crore to profit before tax and unallocable expenditure.

MANAGEMENT DISCUSSION AND ANALYSIS

The financial year 2016-17 evidenced revelation both in the international and national scenarios. The international events included political changes in the Advanced Economies (AE), fluctuations in the crude oil prices, unsettled global political climate in some of the countries etc. Factoring the international developments, India also witnessed exchange rate fluctuations, sluggish growth leading to slower pace of exports, impact on consumer prices due to fluctuations in the oil prices etc.

In order to contain the rising incidence of fake notes and black money, on 08.11.2016 the Government of India withdrew legal tender of specified bank notes (SBNs) (i.e. denominations of Rs.500 and Rs.1000) issued by the Reserve Bank of India and subject to certain conditions, SBNs held by a person could have been exchanged at the branches of Reserve Bank of India, public sector banks, private sector banks etc., up to December 30, 2016. During the said period, Bank played a crucial role in making the Government action successful and impact of demonetization was transitional in nature and momentum across all sectors has started picking up since February 2017.

The headline inflation declined to lowest levels during November 2016-January 2017. Drop in the prices of vegetables and pulses leading to downward trend in the inflation was visible during immediate months of post demonetization. This was due to cash intensive transactions in the agri-commodities in the market.

However, remonetization started firming up in the month of January 2017 leading to firmer food and fuel prices which drove the overall inflation in the month of February i.e. Consumer Price inflation showed an upward trend and stood at 3.81 per cent in March 2017 as against 3.65 per cent in February 2017 as against 3.17 per cent in January 2017. Pace of remonetization, increase in oil prices are some of the reasons for upward trend in the CPI.

With the Central Statistical Office’ provisional estimates for 2016-17, real GVA growth for 2017-18 have been projected at 7.3 per cent. Growth in the services sector and industry and also implementation of uniform GST and other structural reforms, is expected to take the GVA rate to the expected level. Reserve Bank of India has revised the inflation to an average 4 per cent for the medium-term target of the FY 2017-18. Key upside risks to inflation on the domestic front includes uncertain monsoons, 7th Pay Commission impact, gap in government deficit led by states etc. besides, fluctuations in the international crude oil prices, volatility in the global financial markets, rise in international commodity prices etc.

DEVELOPMENTS IN THE BANKING SECTOR

The overall growth in bank deposits and credit during the year remained sluggish especially during the second half of the financial year 2016-17. Banks faced unexpected surge in the flow of cash into their vault due to demonetization move by the Government. The credit off take witnessed downward trend. Post January 2017, the remonetization started picking up, which resulted in credit growth again and improvement in the consumption.

Banking sector as such, credit expanded by 5.1 per cent while deposits grew by 11.8 per cent in the financial year 2016-17. Banking sector was embroiled in NPA issues which dissuaded growth of credit to industry. On the whole, the distressed assets is posing serious problems and the Central Government, Regulator & banks are making coordinated efforts to control the said menace.

In the recent past good number of Fin-tech companies, small finance banks, payment banks, start up companies etc have emerged in the Indian financial sector and your bank treats it as an opportunity for cooperation and collaboration in furthering the agenda of financial inclusion wherever necessary.

OPPORTUNITIES

Based on the prediction of normal monsoon, considering the pace of remonetization, the economic growth is projected at 7.3 per cent. The Government’s thrust on infrastructure development besides technological advancement in the manufacturing sector may open up avenues to Banks to finance these projects. The improved employment in the country, higher income levels etc. augur well for the long term sustainable growth of retail lending in the Indian market. Government’s inclusive growth agenda may also bring additional business to banks.

The biggest opportunity for the Indian banking system today is the Indian consumer. Demographic shifts in terms of income levels and cultural shifts in terms of lifestyle aspirations are changing the profile of the Indian consumer. This is regarded as key driver of economic growth going forward. The focus of Union Budget 2017-18 on reviving the rural economy and doubling rural income could support rural consumption demand more enduringly going forward which may ultimately lead to increased business opportunities for banks.

With an aim to promote digital payments and less-cash society, several initiatives are being taken by the Government of India. With the help of optimum utilization of technology and telecommunication system, ground-breaking methods are being encouraged for financial transactions such as Aadhar Enabled Payment Systems (AEPS), Unstructured Supplementary Service Data for feature phone based financial transactions (USSD), Mobile wallets, Unified Payments Interface (UPI) etc. and your Bank perceives ample opportunities to participate in the digital banking movement.

In order to consolidate the laws relating to insolvency resolution of corporate persons, partnership firms and individuals in a time bound manner, the Government of India notified the “Insolvency and Bankruptcy Code, 2016” (Code) on 28.05.2016. The code defines the institutional framework, operative guidelines, adjudicating procedures for time bound insolvency resolution process and liquidation. With the implementation of the Code, Indian lending system gets advantages in dealing with stressed assets.

OUTLOOK

With the technological advancement sweeping the banking industry leading to steady migration to digital banking, the operational landscape of Banks is likely to change for the better enhancing cost effectiveness and productivity. With the expected growth in the GDP and improvement in export momentum, coupled with the growing service industry, good monsoon etc., there are great opportunities for the banks to improve their business. However, the continued deterioration in assets quality is haunting the banks and your bank is hopeful of containing the NPAs through vigorous monitoring efforts. The recovery of NPAs is also expected to be aggressive. Further, ordinance to amend the Banking Regulation Act, 1949 promulgated by the Hon’ble President of India in the month of May 2017 is a positive move for the overall banking industry.

RISKS AND CONCERNS

In the normal course of business, banks are exposed to various risks, namely, Credit Risk, Market Risk and Operational Risk, besides other residual risks such as Liquidity Risk, Interest Rate Risk, Concentration Risk, Strategic Risk, Reputation Risk etc. With a view to efficiently manage such risks, your Bank has put in place various risk management systems and practices. In line with the guidelines issued by the Reserve Bank of India from time to time, your Bank continues to strengthen various risk management systems that include policies, tools, techniques, systems and other monitoring and forewarning mechanisms.

Your Bank aims at enhancing and maximizing the shareholder value by achieving appropriate trade-off between risks and returns. Your Bank''s risk management objectives broadly cover proper identification, assessment, measurement, monitoring, controlling, mitigation and reporting of the risks across various business segments of the Bank. The risk management strategy adopted by your Bank is based on a clear understanding of the risks and the level of risk appetite, which is dependent on the willingness of your Bank to take risks in the normal course of business. A Board level committee, viz., Integrated Risk Management Committee periodically reviews the risk profile, evaluates the overall risks faced by the Bank and develops policies and strategies for its effective management.

Various senior management committees such as Credit Policy Committee (CPC), Asset-Liability Management Committee (ALCO), Operational Risk Management Committee (ORMC) etc operate within the broad policy framework of the Bank to ensure and enhance the risk control and governance framework within the Bank.

The Risk Management Department at Head Office oversees the overall implementation of various risk management initiatives across the Bank.

In line with the guidelines issued by RBI, your Bank has implemented the New Capital Adequacy Framework and is Basel II compliant with effect from March 31, 2009, by adopting the basic approaches available under the guidelines. While complying with all the requirements of the basic approaches under Basel II, your Bank has taken the necessary steps to move over to Basel II Advanced Approaches as per the Road Map approved by the Bank''s Board in this regard. As a part of the Basel III, Pillar III -Market Disclosure requirement, your Bank has made a detailed Pillar III Disclosure, which is appended to this report as Annexure II. The Bank conforms to the Basel III guidelines from April 1, 2013 and has also assessed the future capital impacts.

In compliance with Basel guidelines, the Bank has put in place a policy document for Internal Capital Adequacy Assessment Process (ICAAP) to evaluate its capital adequacy relative to its risks. Stress testing framework for various stress scenarios is also put in place for better understanding of the likely impact of adverse market movements/events on the capital and earnings. The results of the ICAAP and Stress testing are reviewed periodically to assess the capital requirement for the projected business growth, keeping in view the risk appetite and risk profile of the Bank. A Board level committee, viz., Internal Capital Adequacy Assessment Committee (ICAAC), reviews the risk appetite, risk profile, business projections as well as capital assessment of your Bank at periodical intervals

To evaluate and review the performance of various business units/ products/ customers etc, your Bank has introduced a scientific Fund Transfer Pricing (FTP) and Customer Profitability Management System (CPMS) for better management of risk and return. FTP & CPMS enable the Bank to assess the profitability at various levels like branch, product, customers, accounts, regions etc. The system enables the Bank to perform various profitability related analysis and helps the Bank to make more business-focused decisions to increase the long-term profitability.

For continuous monitoring of customer induced transactions under various Alternate Delivery Channels (ADC) and Core Banking Solution (CBS), your Bank has implemented Enterprise Level Fraud Risk Management System (ELFRMS) in September 2016. This is an automated transaction monitoring system for detection of frauds in customer accounts. Based on a range of scenarios, various alerts triggered by the system are monitored by ELFRMS team from various risk and fraud angles. The system acts as a check on potential fraud incidents as a preventive measure and is intended to identify the potential fraudulent transactions covering various channels like internet banking, mobile banking, debit card, POS, CBS etc on real time basis, based on predefined probable fraud scenarios.

In line with guidelines issued by RBI, your Bank has nominated a Chief Information Security Officer (CISO), who is responsible for articulating and enforcing the policies that Bank uses to protect the information assets apart from coordinating security related issues in implementation of new systems under Information Technology in the Bank.

KBL VISION 2020

Your Bank has adopted the KBL Vision 2020, a five year business plan guiding the path of the Bank for achieving set goals. Bank’s Vision 2020 document reflects the aspirations of all the stakeholders for achieving various targets by taking advantage of emerging opportunities, upgrading IT infrastructure, strengthening audit, vigilance and risk management practices and compliance culture and taking steps to improve efficiency of people, processes and products by continuously evolving new strategies and policies and create value for its shareholders by optimally utilizing capital resources. As per the KBL Vision 2020 document, Bank’s total business turnover is projected to increase to Rs.1,80,000 crore with deposits of Rs.1,00,000 crore and advances of Rs.80,000 crore by March 2020 besides recording significant improvement in key financial parameters. Bank is moving progressively towards reaching above targets.

DISTRIBUTION NETWORK

During the year under report, your Bank opened 40 new branches in 9 States - one each in the States of Punjab and West Bengal, 2 each in the states of Andhra Pradesh, Delhi [U.T], Kerala and Tamil Nadu, 3 in Gujarat, 4 in Maharashtra and 23 in Karnataka. Out of these 40 branches, 10 branches [9 in the state of Karnataka and one in Kerala] have been opened in Unbanked Rural Centres under Financial Inclusion Initiatives of the Bank. Further, your Bank has added 117 ATM outlets at various locations during the year 2016-17. Your Bank has also 24X7 e-lobby/mini e-lobby facility at 110 locations. Bank also has 10,314 POS (Point of Sale) machines across India (Previous year 3123 POS machines).

As at 31st March 2017, your Bank had 2,148 Service Outlets i.e. 765 branches, 1,380 ATMs and 3 extension counters spread across 21 States and 2 Union Territories. Apart from the above, your Bank has 12 Regional Offices, an International Division, a Data Centre, a Customer Care Centre, 4 Service branches, 2 Currency Chests, 2 Central Processing Centres and 3 Asset Recovery Management branches.

Further, for better ambience and improved customer service, your Bank shifted 17 branches/offices to new premises during the year 2016-17.

CUSTOMER SERVICE

Every customer is important to us. Keeping this in mind, several customer-centric initiatives have been introduced by your Bank during the year under report. To improve customer service and to reduce waiting time of customers at branches, Bank has rolled out the Single Window Service concept on a trial basis at 20 branches during 2016-2017. The Single Window Service for non-cash transactions with Queue Management System (QMS) has helped in reducing the processing time at branches. Your Bank also introduced the New Pension Scheme (NPS) for the unorganized sector and facilitated investment to Sovereign Gold Bond Scheme-2016-17.

Bank is actively involved in putting in place systems and procedures to comply with the recommendations of the Damodaran Committee on Customer Service, constituted by the Reserve Bank of India, to look into the banking services rendered to customers and the grievance redressal mechanism prevalent in banks. Your Bank has complied with all the recommendations made by the said Committee.

Being a member of the Banking Codes and Standards Board of India (BCSBI), your Bank adheres to standards of banking practices while dealing with individual customers and micro and small enterprises. BCSBI conducts survey of select branches of the member bank from time to time and provide its ‘Code Compliance Rating’ and your Bank is ranked 17th amongst 51 banks considered for the study during the year 2016-17.

DIGITAL BANKING

Bank has adopted the strategy of ‘Managing Channels instead of Managing Branches’ and is always pioneer in adopting technology driven delivery channels i.e., digital channels and bringing out innovations & value additions in its existing digital channels. The major digital initiatives taken by the Bank during the FY 2016-17 are:

- Introduction of “KBL POS Manager” Android mobile app for POS merchants to keep track of in-store transactions;

- Mobile Banking App “KBL mobile” to ensure instantaneous remittance;

- “KBL SMARTz” Android mobile App on Unified Payments Interface (UPI) platform of NPCI facilitating Interoperability, Push - Pull Payments & fund transfer through virtual address;

- Fincale e-Banking Application (FEBA) with a host of new features such as IMPS, bulk upload, online term deposit account opening, dashboard etc.

- RuPay International Platinum Debit Card for privileged customers of the Bank with enhanced withdrawal / purchase limit coupled with bundled offers

- Co-branded credit Card in collaboration with State Bank of India

Apart from the above, Bank has also introduced “KBL Loan Junction” for submission of online loan application. Besides, in order to promote entrepreneurship amongst SC/ST, women, schemes viz. “Start-up India”, “Stand-up India” were introduced. “KBL Contractor Mitra “; KBL Commodity pledge Loan were the other new Schemes initiated during the year. Your Bank will continue to put efforts in the direction of introducing products/services to cater to the needs of present and prospective customer base and to be a ‘one-stop-shop’ for all financial requirements.

PARA-BANKING ACTIVITIES

With an aim to provide diversified financial products and services and to maximize value addition to the customers, your Bank provides para-banking third party products such as Bancassurance, Mutual Funds, Online Trading etc and during the year under report, Bank has tied up with 5 institutions.

AWARDS AND RECOGNITIONS

Your Bank bagged the following awards during the year under report in recognition of its achievement under technology initiatives, social banking, export performance etc.

- ASSOCHAM Social Banking Excellence Awards 2016, under Small Banks category, received on 03-03-2017

1. Winner - Government Schemes.

2. Winner - Priority Sector Lending

3. Runner up - Agricultural Banking.

4. Runner up - Overall Best Social Bank.

- IBA - Banking Technology Awards 2017, under the following categories.

1. Winner - Best Financial Inclusion Initiatives (Small Bank category).

2. Runner up - Best use of Digital and Channels Technology (Small Bank Category).

- "Best MSME Bank Award 2016" under Private Sector, instituted by the Associated Chambers of Commerce & Industry of India (ASSOCHAM), New Delhi, received on 06-12-2016.

- FIEO - Southern Region Export Excellence Award : Best Financial Institution (Southern Region) for the support extended to Export Business, for the year 2013-14 under the Gold Category, instituted by Federation of Indian Export Organizations, received on 08-10-2016.

- Greentech Safety Award 2016 - GOLD AWARD, for significant achievements made in the field of safety and security, instituted by Greentech Foundation, received on 29-08-2016.

- "Certificate of Special Mention for use of Technology for Financial Inclusion among small banks" instituted by IDRBT, received on 18-07-2016.

- CFBP Jamnalal Bajaj Awards 2015 for Fair Business Practices - Certificate of Merit under the category "Service Enterprises - Large", received on 14-06-2016.

- Award of Excellence for Outstanding Performance in MSME Funding, instituted by Federation of Industry Trade & Services [FITS], received on 03-05-2016.

FINANCIAL INCLUSION

Financial Inclusion means making available the full range of banking services at an affordable cost to the people who do not have access to banking services. It mainly focuses on the section of society not having formal financial institutional support. Through the

Financial Inclusion Plan, Bank aims at ''connecting people'' with the Bank and not just opening accounts. This includes meeting the small credit needs of the rural public, giving them access to the payments system, providing remittance facility and life and health insurance. Efforts are being made to optimize the resources to achieve the goal of extending banking facilities to the unbanked areas/deprived sections.

All the branches of the Bank are under Core Banking Solution (CBS) and all the branches to be opened in future will also be under CBS. Out of 765 branches, Bank has 174 rural branches and all these branches are provided with CBS offering all banking facilities to the rural clientele in the gram panchayats or villages where these branches are located. All the rural branches are also acting as Financial Literacy Centers (FLCs) and imparting Banking literacy among the rural Populace.

In accordance with announcement of Prime Minister Jan Dhan Yojana (PMJDY) on August 15, 2014 revised Strategy & Guidelines of Department of Financial Services (DFS), Ministry of Finance, Govt. of India, has been considered for implementation of Financial Inclusion activity of the Bank. PMJDY takes in to account both rural sub service areas (SSAs) and urban wards for Financial Inclusion. Under the revised financial inclusion plan, in rural areas, Bank is allocated with 214 Gram Panchayats (GPs) for Financial Inclusion, covering 297 Sub service Areas (SSAs) consisting of 1039 villages in the states of Karnataka, Chattisgarh, Maharashtra and Andhra Pradesh and in urban areas, 313 wards are allocated in Karnataka and other States. The Gram Panchayats are being financially included through Brick and Mortar Branches and Business Correspondents (BC). Your Bank has been issuing RuPay PMJDY Debit Cards under the domestic card payment scheme launched by the National Payments Corporation of India (NPCI) and has also introduced Aadhaar Enabled Payments System (AEPS) at all BC locations of the Bank.

BRICK AND MORTAR BRANCHES:

As on March 31, 2017 Bank has covered 547 villages of 105 GPs through Brick & Mortar Branches.

BUSINESS CORRESPONDENT SERVICES (BC SERVICES):

Bank has entered into an agreement with M/s BASIX Sub-ki Transaction Ltd and M/s Integra Micro Systems Pvt. Ltd. to provide online transaction facility and as on March 31, 2017, 113 GPs with 141 SSAs covering 517 villages of Karnataka, Andhra Pradesh and Chhattisgarh States were covered under the above arrangement.

ULTRA SMALL BRANCHES (USBs):

As permitted by the Reserve Bank of India Bank had opened USBs where business correspondents (BCs) could conduct operations and thereby boost confidence of customers to use their financial services. As on 31st March 2017, your Bank has 37 USBs.

ELECTRONIC BENEFIT TRANSFER (EBT) - PILOT PROJECT OF GOVT. OF KARNATAKA:

Bank is participating in Govt. of Karnataka (GOK) EBT Pilot project for NREGA/SSP beneficiaries under - “One District - Many Bank Model” and is disbursing the payments under the above schemes to the beneficiaries using smart card and hand held machines at 5 Gram Panchayat locations in Chitradurga and Yadgir districts.

DIRECT BENEFIT TRANSFER (DBT):

Bank is actively participating in Direct Benefit Transfer (DBT) Programme of Govt. India, wherein, the Govt. would transfer benefits of various Schemes directly to the beneficiaries Aadhaar enabled bank accounts and also accounts seeded with LPG ID in case of transfer of subsidy for LPG. For this purpose, Bank has on boarded with NPCI for Aadhaar Payment Bridge System (APBS) under National Automated Clearing House (NACH). Revised DBTL was introduced on November 15, 2014 and launched throughout the country on January 1, 2015. Both the Aadhaar based and LPG ID based approaches are made available to customers across all branches of the Bank.

FINANCIAL LITERACY AND CREDIT COUNSELING CENTERS(FLCCS)

Bank has sponsored 5 FLCs at B.C Road, Tiptur, Hangal, Kundagol and Alur in a joint venture with M/s Jnana Jyothi Financial Literacy and Credit Counseling Trust, Manipal. During the financial year 5 FLCs sponsored by the Bank have conducted 1227 Financial Literacy campaigns and 50024 participants had been covered. In adherence to RBI guidelines all the rural branches of our Bank are also conducting financial literacy Camps.

SOCIAL SECURITY SCHEMES:

Three Social Security Schemes- Prime Minister Jeeven Jyothi Bima Yojana (PMJJBY), Prime Minister Suraksha Bima Yojana (PMSBY) and Atal Pension Yojana (APY) have been launched by Hon’ble prime Minister on 1st June 2015. All the branches of your Bank are actively involved in providing the above benefits of the schemes to the customers across the country.

1) PMJJBY provides life Insurance coverage of Rs.2,00,000/- by paying yearly premium of Rs.330/-. A person aged between 18 to 50 years holding account in a bank is eligible for the scheme. A total of 1,36,200 lives have been covered till 31.03.2017.

2) PMSBY provides Accidental insurance coverage of Rs.2,00,000 by paying yearly premium of Rs.12/-. A person aged between 18 to 70 years holding account in a Bank is eligible for the scheme. A total of 1,99,390 lives have been covered till 31.03.2017

3) APY : This scheme was launched by the Government of India on 9th May, 2015 to address the old age income security needs of the citizen in an affordable manner linked to auto debit facility from the bank''s savings account of the subscriber. Your Bank is actively participating in the scheme, with all branches being registered as Point of Presence-Service Provider (POP-SP) for APY. As on 31-32017 Bank has opened 23181 APY accounts.

PRIME MINISTER JAN DHAN YOJANA (PMJDY):

In accordance with announcement of Prime Minister Jan Dhan Yojana (PMJDY) on August 15, 2014, revised Strategy & Guidelines of Department of Financial Services (DFS), Ministry of Finance, Govt. of India, has been considered for implementation of Financial Inclusion activity of the Bank. PMJDY takes in to account both rural, semi urban, urban wards and metro for providing basic banking facilities to the unbanked populace. PMJDY also provides scope for RuPay debit card that is inclusive of Rs.1 lakh accidental insurance.

All the branches across the country have opened accounts under PMJDY and are issuing RuPay Debit Card under the domestic card payment scheme launched by the National Payments Corporation of India (NPCI).

A total of 25,10,929 accounts have been opened under PMJDY since 15.08.2014 till 31.03.2017, with outstanding balance of Rs.2545.80 crore. A total of 2,09,197 RuPay cards have been issued so far by the Bank.

AADHAAR ENABLED PAYMENT SYSTEM (AEPS):

The Bank has introduced AEPS transaction services offered by National Payments Corporation of India (NPCI) at all Business Correspondent (BC) locations of the Bank. Any bank customer having any type of SB account that is Aadhaar enabled can now transact at the BC point.

CORPORATE SOCIAL RESPONSIBILITY

Businesses play an important role in the growth of an economy. The growth of the economy becomes meaningful only when it translates to the welfare of the society. Towards this end, business establishments have to align their objectives in such a way that they also contribute to the development of the society with special concern for uplifting the marginalized sections of the society. The Corporate Social Responsibility initiatives of the Bank are designed to ensure that the Bank adds social, environmental and economic value in all its activities to make a positive, sustainable impact on both society and business. In this direction, your Bank has been responding well over the years through various social initiatives and has identified some core areas of intervention like healthcare, education/ livelihood enhancement, empowering women/ socially and economically disadvantaged, environmental sustainability/ green initiatives, protection of heritage/culture, promotion of sports, rural development etc. aimed at improving the overall development of the society. Further, to minimize the urban - rural divide, your Bank has been strengthening its rural orientation through initiatives aimed at imparting financial literacy and extending banking services to the people in rural unbanked areas, in a fair and transparent manner, at an affordable cost.

Further, pursuant to Section 135 of the Companies Act, 2013 read with Companies (Corporate Social Responsibility Policy) Rules, 2014, the Board has setup a Committee of Directors namely, ''Corporate Social Responsibility (CSR) Committee'' and has also put in place a Policy on Corporate Social Responsibility (CSR Policy) to undertake projects/programmes in pursuance to the above

Policy. The contents of the CSR Policy along with the report on amount spent on various projects/programmes during the financial year 2016-17 is detailed in Annexure VI to this report pursuant to Rule 8 of the Companies (Corporate Social Responsibility Policy) Rules, 2014

BUSINESS RESPONSIBILITY REPORTING:

In terms of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, your bank is one of the Top 500 listed entities based on the market capitalization as on March 31, 2016, and is required to report Business Responsibility Reporting describing the initiatives taken by the Bank from an environmental, social and governance perspective as per the format prescribed by SEBI which is enclosed as Annexure VIII.

INTERNAL CONTROL SYSTEMS, THEIR ADEQUACY AND COMPLIANCE

An effective and sound internal audit function provides independent assurance to the board of directors and senior management on the quality and effectiveness of Bank’s internal control, risk management and governance systems and processes, thus helping the board and the senior management in protecting the organization and its reputation.

Your Bank has put in place an effective and robust internal control apparatus, commensurate with its size, geographical spread and complexity of operations. At the apex level, guidance and direction on the control aspects is vested with the Audit Committee of the Board of Directors which takes an overall view on the internal control aspects and formulates all the related policy guidelines. The Bank has put in place an independent Compliance Department in charge of the entire compliance functions of the Bank.

Historically, the internal audit system in the Bank has been concentrating on transaction testing, testing of accuracy and reliability of accounting records and financial reports, integrity, reliability and timeliness of control reports and adherence to legal and regulatory requirements. With the implementation of Risk-Based Internal Audit (RBIA), greater emphasis is placed on the internal auditor''s role in mitigating various risks. While continuing with the traditional risk management and control methods involving transaction testing etc., the risk-based internal audit would, not only offer suggestions for mitigating current risks but also on potential future risks, thereby playing an important role in the risk management process of the Bank.

The risk assessment under RBIA would cover risks at various levels (corporate and branch; portfolio and individual transactions etc.) as also the processes in place to identify, measure, monitor and control the risks. The internal audit department is devising the RBIA risk assessment methodology, with the approval of the Board of Directors, keeping in view the size and complexity of the business undertaken by the Bank. The risk assessment process would include the identification of ''inherent business risks'' in the various activities undertaken by the Bank, and evaluate the effectiveness of the control systems for monitoring the inherent risks of the business activities (''Control Risk'') and then draw up a risk-matrix by taking into account both the factors viz., inherent business and control risks.

In pursuance of seeking periodic assurances on the adequacy and efficacy of internal control functions, the Bank causes periodic Regular Inspections and Information System (IS) Audit of all the branches and offices. Besides, your Bank also covers select branches under concurrent audit, the aggregate turnover of which account for over 64.03% of the gross bank credit and over 50.37% of aggregate deposits of the Bank. Short Inspection of all the branches which are not subjected to concurrent audit is also caused besides, concurrent audit of treasury functions (both domestic and forex), International Division, Forex designated offices, Central Processing Centre, Currency Chests, Information Systems audit of Data Centre and DR Site etc. Besides, the Bank has also been causing Stock and Credit audits of large borrowal accounts by external, professional audit firms in furtherance of effective credit administration. The Bank has also taken prompt action on the implementation of the RBI Guidelines on Information Security, Electronic Banking, Technology Risk Management and Cyber Frauds.

To appraise the effectiveness of management at different levels in accomplishing the assigned tasks towards achieving the overall corporate objectives, Management Audit is also introduced by your Bank for Departments at Head Office & Regional Offices.

Your Bank has put in place the policies and procedures for ensuring orderly and efficient conduct of its business, safeguarding of its assets, prevention and detection of frauds and errors, accuracy and completeness of the accounting records and timely preparation of reliable and transparent financial information. The Audit Committee of the Board periodically assesses the effectiveness of the internal financial controls and their adequacy and issues directions for its strengthening wherever found necessary.

Your Bank is in the process of automating the internal audit processes during the year 2017-18.

Considering the need for having a strong collection mechanism and to contain slippages of borrowal accounts into NPAs and improve asset quality, the Credit Monitoring Department at Head Office and Credit Monitoring teams at Regional Offices ensures adherence of post sanction compliance requirements and follow up of advance through effective control and communication mechanisms.

ECONOMIC AND STATISTICAL RESEARCH CELL

Under the ever-changing business environment and to stay ahead of times in terms of product and services offering, and pricing and positioning, your Bank has setup an ‘Economic & Statistical Research Cell’ at the Head Office to provide strategic inputs to the Management in devising policies and also suggestions to various business units in the matter of pricing, costing, product launching, positions etc.

CENTRALISED PAYMENT & RECONCILIATION CELL

To enable timely reconciliation of various transactions carried out through technology enabled payment channels like NEFT, RTGS, IMPS, UPI etc happening within the Bank and between banks and the settlement of these transactions between banks, a separate centralized cell is functioning at the Head Office.

RISK BASED SUPERVISION (RBS)

In view of the growing complexities in the processes, product offerings and systems & procedures in the Indian banking sector, pursuant to the recommendation of the High Level Steering Committee, Reserve Bank of India has shifted supervisory stance to risk-based approach called Supervisory Program for Assessment of Risk and Capital (SPARC) which is focusing on evaluating both present and future risks, identifying incipient problems and facilitating prompt intervention/ early corrective action etc. Your Bank has been included under the same and migrated to Risk Based Supervision since 31st March, 2015 and the system is working satisfactorily. A plan of action for monitoring various risks as advised by RBI has also been put in place.

COMPLIANCE FUNCTION

As an important element in Corporate Governance structure, the Bank has set up a robust Compliance department with sufficient independence to promote healthy compliance culture within the Bank. The compliance function in the Bank ensures strict observance of all statutory provisions, guidelines from RBI & other regulators, standards and codes prescribed by regulatory bodies besides Bank''s internal policies and fair practices code. Further, the compliance function includes interpretation/ dissemination of regulatory and statutory guidelines, observing proper standards of market conduct, managing conflicts of interest and treating customers fairly. The Bank''s compliance function assists the top management in managing the Compliance Risk effectively. The risk- based compliance programme of the bank, under the supervision of head of compliance department, ensures appropriate coverage across businesses and coordination among risk management functions besides verifying the level of compliance through ''Compliance Testing'' of branches. The Bank carries out an annual compliance risk assessment to identify and assess major compliance risks faced by it and takes steps to manage the risks effectively.

MANAGEMENT INFORMATION SYSTEM

The growth of Bank’s business, introduction of prudential norms and Basel requirements, increasing regulatory and internal reporting and the various business decision making requirements have necessitated the Bank to build a well-coordinated information transmission system. Management Information System makes available information for various requirements of branches/offices, top management, regulators and external agencies, Balance sheet reporting, Capital computation, Risk based supervision, Internal business reviews etc. The Bank has also implemented a Centralized Data Repository for Automatic Data Flow to RBI.

INFORMATION TECHNOLOGY

The Core Banking System (CBS) covers all the branches and offices of the Bank as on 31.03.2017. Alternate delivery Channels like ATM, Internet Banking, Mobile Banking, UPI App etc., have also been integrated with CBS. Disaster Recovery (DR) facilities for all the critical applications are established to ensure business continuity in the event of primary site failure. A three-way data replication aimed at zero data loss is also implemented for applications such as CBS, ATM, and Internet Banking.

The other technology enabled initiatives include the Asset Liability Management System (ALM), Central Data Repository (CDR), Lending Automation Processing Solution (LAPS) and Anti Money Laundering (AML) system, Mobile Banking, Integrated Treasury, Interactive Voice Response (IVR) System, Solutions for managing Market Risk and Operational Risk etc.

During the year under report, your Bank has undertaken several IT projects like setting up of new primary/secondary sites for SWIFT application, New switches for ATM and Card Management, Newer version of e-Banking platform, Live video streaming from Head Office to the entire bank workforce, Aadhar Enabled Payment System (AEPS), MicroATM management via FI (Financial Inclusion) Gateway, Alternative Network Lines for important business centres for ensuring business continuity, Introduction of Centralized Account Verification (CAVC) Process. Your Bank will continue to observe technological revolutions and take appropriate decision at the right time to provide premier banking services.

With a view to enhance security measures under digital banking, Enterprise Level Fraud Risk Management Solution has been implemented.

Further, in view of increased dependency on IT products and services and also increase in the volume of fraud/attacks observed in the industry, Bank has put in place a robust ‘Cyber Security Policy’ and also initiated steps to further strengthen its IT, Cyber, and Information Security systems by putting in place required hardware/software/appliances in line with the industry best practices.

HUMAN RESOURCES

The Banking industry across the country is now being exposed to various changes which have a direct impact on the existing systems and sphere of activities. The survival and prosperity of any industry depends upon the quality of its human resource and banking industry is not an exception to this. Accordingly, your Bank attributes the greatest importance to human resource development activities.

Your Bank deputes its employees to various training and development programmes to upgrade their skills and competencies and contribute towards the growth of the Bank. The Bank has a well-established Staff Training College having state of the art infrastructure facilities and expertise in conducting training programmes. Besides, Officers requiring specialized training are being deputed to various programmes conducted at Southern India Banks’ Staff Training College, Bangalore, National Institute of Bank Management, Pune, Reserve Bank’s College of Agricultural Banking, Pune, Institute for Development and Research in Banking Technology, Hyderabad etc. During the year 2016-17, the Bank has deputed the employees to various trainings/workshops/ conferences to update/improve their knowledge. There were 1517, 378 and 192 nominations to various programmes in the category of Officers, Clerks and Substaff respectively during the year under report.

As on 31st March 2017, Bank had 7982 employees. The Business per employee (excluding interbank deposits) has improved from Rs.10.83 crore as on 31st March 2016 to Rs.11.74 crore as on 31st March 2017. Further, your Bank has maintained cordial industrial relations.

Your Bank has put in place an institutional mechanism for protection of women employees at the workplace and adopted a policy pursuant to Section 22 of the Sexual Harassment of Women at Workplace (Prevention, Prohibition and Redressal) Act, 2013, providing for protection of women employees against the sexual harassment of women at the workplace and redressal of such complaints. The details of the complaints under the above Policy for the year under report are as under:

Number of complaints pending as at the beginning of the financial year

NIL

Number of complaints filed during the financial year

NIL

Number of complaints pending as on end of the financial year

NIL

VIGIL MECHANISM

The Bank has implemented the Protected Disclosure Policy (Whistle Blower Policy) since the year 2007 intended to promote participation of employees at all levels and detection of corruption, misuse of Office, criminal offences, suspected /actual fraud, failure to comply with the rules and regulations prescribed by the Bank and any events /acts detrimental to the interest of the Bank, depositors and the public resulting in financial loss/operational risk, loss of reputation etc. Further, the mechanism adopted by the Bank encourages the Whistle Blower to report genuine concerns or grievances and provides for adequate safeguards against victimization of Whistle Blower who avails such mechanism and also provides for direct access to the Chairman of the Audit Committee, in exceptional cases. The Vigil mechanism is reviewed periodically. The details of Whistle Blower Policy is posted in our website and available at the link www.karnatakabank.com /ktk/ Protected Disclosure.jsp

EMPLOYEE STOCK OPTION SCHEME (ESOP)

Your Bank had implemented Employee Stock Option Scheme (ESOS 2006) and during the year under report, a total of 13,060 equity shares were allotted to the employees under the scheme. Out of the total 15,00,000 stock options granted, 12,09,834 options were exercised and the balance 2,90,166 options lapsed due to non-exercise of the options vested in the employees. The employee stock option scheme had exercise period of 5 years from the date of last vesting date and accordingly, the scheme has come to an end on 19.10.2016, upon completion of 5 years period. Disclosure in respect of Employee Stock Options Scheme pursuant to SEBI Regulation/ guidelines is given in Annexure I to this report.

‘IND AS’ IMPLEMENTATION

As per the roadmap given by Reserve Bank of India (RBI), transition to "Ind AS" in banks will commence from the accounting period beginning April 1, 2018 onwards.

STRATEGY FOR ‘IND AS’ IMPLEMENTATION IN THE BANK:

In order to facilitate effective Ind AS implementation in your bank, the Audit Committee of the Board has laid out the strategy for convergence and implementation of Ind AS in the Bank, which includes -

a) Diagnostic study to find out the differences between the current accounting framework and Ind AS framework.

b) Evaluating business impact on profitability, budgeting, taxation, Capital planning and Capital adequacy

c) Identifying issues having significant impact on information systems including Information technology (IT) Systems.

d) Developing/ strengthening Data capturing systems for Data analytics and Data Mining

e) Analyse impairment issues, revaluation of assets, documentation and disclosure requirements.

f) Explore the possibilities of availing the services of external resource persons/ firms in connection with implementation of Ind AS

Your Bank has set up a Steering Committee headed by the Managing Director, to facilitate the Ind AS implementation process in the Bank. M/s Ernst & Young have been appointed to provide assurance services for Ind AS implementation, to carry out diagnostic study and to provide consultancy in the preparation and submission of Proforma Ind AS Financial statements to RBI beginning from half year ended September 30, 2016, onwards. In this regard, your bank has duly submitted the Proforma Ind AS Financial statements for the half year ended September 30, 2016, after obtaining the approval of the Audit Committee of the Board. Further, your Bank would proceed to carry out the strategy laid out by its Audit Committee of the Board, for facilitating effective and successful implementation of Ind AS on the transition date in accordance with the relevant guidelines.

DIVIDEND DISTRIBUTION POLICY

During the year under report, your Bank has adopted a Policy on distribution of Dividend to the shareholders pursuant to the Regulation 43A of the SEBI (LODR) Regulations, 2015. Gist of the Dividend Distribution Policy is as under:

- Being a Banking entity, Dividend Distribution Policy is guided by the RBI Circular DBOD.No.BP.BC.88 21.02.67/2004-05 dated May 5, 2005 with regard to eligibility criteria for distribution of dividend.

- Factors considered for recommendation of dividend include both internal factors such as financial performance, dividend payout trends, tax implications, corporation actions and external factors such as shareholders expectations, macro environment.

- Factors considered for determining the quantum of dividend include financial performance, capital fund requirements to support future business growth, having regard to the dividend payout ratio prescribed under the aforesaid RBI Guidelines.

The Dividend Distribution Policy of the Bank is hosted on our Bank''s website.

DIRECTORS AND CHANGES IN THE BOARD

As on March 31, 2017, your Bank had a total of eight Directors, including a woman director. All of them, except Mr.D Surendra Kumar, Additional Director and Mr. P Jayarama Bhat, Managing Director and CEO, are Independent Directors. The details of the criteria for appointment and remuneration of Directors are provided in the report on Corporate Governance forming part of this report. During the year under report, five directors retired from their office as under:

Sl.

No.

Name of the Director

Designation

Remarks

Mr. T R Chandrasekaran

Independent

Director

Retired on 09.06.2016 upon attainment of upper age limit of 70 years as per RBI Guidelines.

2

Mr. S V Manjunath

Independent

Director

Retired on 24.10.2016 upon completion of 8 years in office in terms of Selection 10A (2A) of Banking Regulation Act, 1949

3

Mr. D. Harshendra Kumar

Independent

Director

Retired on 24.10.2016 upon completion of 8 years in office in terms of Selection 10A (2A) of Banking Regulation Act, 1949

4

Dr. H. Ramamohan

Independent

Director

Retired on 24.10.2016 upon completion of 8 years in office in terms of Selection 10A(2A) of Banking Regulation Act, 1949

5

Mr. Ananthakrishna

Part Time

Non-Executive

Chairman

(Independent

Director)

Retired on 26.10.2016 upon attainment of upper age limit of 70 years as per RBI Guidelines.

The Board places on record its appreciation for the valuable contributions and the guidance given by the above directors during their tenure in Office.

During the year under report, Mr. D Surendra Kumar, was appointed on the Board as an Additional Director w.e.f. 29.12.2016 and as per Section 161 of the Companies Act, 2013 he would hold office upto the date of ensuing Annual General Meeting. Bank has received necessary notices under Section 160 of the Companies Act, 2013 proposing his candidature for appointment as Independent Director of the Bank and having regard to his vast experience, rich knowledge and expertise, your Directors recommend his appointment. A brief resume of Mr. D Surendra Kumar is furnished in the notice of the Annual General Meeting.

Upon attainment of upper age limit of 70 years of age, Mr. Ananthakrishna retired from office of the Part-time Non-Executive Chairman on 26.10.2016 as per extant guidelines of Reserve Bank of India. Thereafter the position of Chairman was vacant and Mr. P Jayarama Bhat resigned from his position as Managing Director & CEO and the Board of Directors at its meeting held on April 12, 2017 has, after inducting him as Additional Director on the Board, appointed him as Part time Non Executive Chairman (who assumed charge on 12.04.2017) pursuant to the approval received from the Reserve Bank of India vide their letter DBR Appt.No.12034/08.40.001/2016-17 dated April 10, 2017 in accordance with Section 10B (1A)(i) of the Banking Regulation Act, 1949.

In terms of Section 161 of the Companies Act, 2013, Mr. P Jayarama Bhat has been appointed as an Additional Director and would hold office up to the date of ensuing Annual General Meeting. Considering his experience, knowledge and expertise, and the contribution made during his tenure as MD & CEO of the Bank, your Directors recommend for approval of his appointment as a Director of the Bank. A brief resume and remuneration payable to Mr. P Jayarama Bhat is furnished in the notice of the Annual General Meeting.

MANAGING DIRECTOR AND CHIEF EXECUTIVE OFFICER (MD & CEO)

Consequent to the appointment of Mr. P Jayarama Bhat as the Non-Executive Chairman, position of Managing Director & CEO of the Bank was vacant and the Board at its meeting held on April 12, 2017 appointed Mr. Mahabaleshwara M S as Managing Director & CEO of the Bank pursuant to the approval received from the Reserve Bank of India vide their letter DBR Appt. No.11838/08.40.001/2016-17 dated April 05, 2017 in accordance with Section 35B of the Banking Regulation Act, 1949, inducting him as an Additional Director on the Board.

Considering his experience, knowledge and expertise, your Directors recommend for approval of his appointment as Managing Director & CEO of the Bank. A brief resume and remuneration payable to Mr. Mahabaleshwara M S is furnished in the notice of the Annual General Meeting.

INDEPENDENT AND NON-EXECUTIVE DIRECTORS

Pursuant to the provisions of Section 149(6) of the Companies Act, 2013, your Bank has received necessary declarations from all the non-executive directors confirming that they meet the criteria of independence for Independent Directors. Mr. D Surendra Kumar, Additional Director has also furnished similar declaration and subject to his appointment at the ensuing Annual General Meeting, he also meets the criteria of independence.

PERFORMANCE EVALUATION OF THE BOARD

Your Board of Directors has laid down criteria for performance evaluation of Directors, Chairman, MD & CEO, Committees of the Board and Board as a whole and also the evaluation process for the same. The statement indicating the manner in which formal annual evaluation of the Directors, the Board and Committees of the Board etc., are given in detail in the report on Corporate Governance, which forms part of this Annual Report. In pursuance to the above, Independent Directors in their separate meeting held on March 27, 2017 have reviewed and evaluated the performance of Board as a whole and the Managing Director and CEO.

Further, the Board also reviewed the performance of committees of the Board and that of individual Independent Directors at its meeting held on March 27, 2017.

CONTRACTS OR ARRANGEMENTS WITH RELATED PARTIES

All related party transactions that were entered into during the financial year were in the ordinary course of the business of the Bank and were on arm’s length basis. There were no materially significant related party transactions entered into by the Bank with Directors, Key Managerial Personnel or other persons which may have a potential conflict with the interest of the Bank. As such disclosure in Form AOC-2 is not applicable. The policy on dealing with Related Party Transactions as approved by the Audit Committee/Board has been placed in the website of the Bank.

DIRECTORS'' RESPONSIBILITY STATEMENT

In accordance with Section 134(3)©, 134(5) of the Companies Act, 2013 read with Rule 8 of the Companies (Accounts) Rule, 2014, your Directors state that:

(a) in the preparation of the annual accounts, the applicable accounting standards have been followed along with proper explanation relating to material departures;

(b) the directors have selected such accounting policies and applied them consistently and made judgments and estimates that are reasonable and prudent so as to give a true and fair view of the state of affairs of the Bank as at the end of financial year March 31, 2017 and profit and loss for that period.

(c) the directors have taken proper and sufficient care for the maintenance of adequate accounting records in accordance with the provisions of the Companies Act, 2013 for safeguarding the assets of the Bank and for preventing and detecting fraud and other irregularities.

(d) the directors have prepared the annual accounts on a going concern basis.

(e) the directors have laid down the internal financial controls followed by the Bank and that such internal financial controls are adequate and are operating effectively.

(f) the directors have devised proper systems to ensure compliance with the provisions of all applicable laws and that such systems were adequate and operating effectively.

STATUTORY DISCLOSURES

The disclosures under sub-section (3) of Section 134 of the Companies Act, 2013 read with Rule 8 (3) of the Companies (Accounts) Rules, 2014 are furnished below:

a) Conservation of Energy and technology absorption: Considering the nature of the Bank''s business, the provisions of Section 134(3)(m) of the Companies Act, 2013 relating to conservation of energy and technology absorption are not applicable to your Bank. The Bank has, however, used information technology in its operations extensively.

b) Foreign Exchange Earnings and outgo: During the year ended March 31, 2017, the Bank has earned Rs.21.98 crore and spent Rs.1.72 crore in foreign currency.

c) There were no significant and material orders passed by the regulators or courts or tribunals impacting the going concern status and Bank''s operations in future.

d) Internal Financial Control Systems and their adequacy: Your Bank has laid down standards, processes and structure facilitating the implementation of internal financial control across Bank and ensure that same are adequate and operating effectively.

e) Key Managerial Personnel: Mr. P Jayarama Bhat, MD & CEO, Mr. Chandrashekar Rao B, CFO and Mr. Y V Balachandra, Company Secretary of the Bank were the Key Managerial Personnel of the Bank as on March 31, 2017 as per the provisions of the Companies Act, 2013. None of the Key Managerial Personnel has resigned during the year under report.

f) Remuneration of directors: Disclosures pursuant to Section 197(12) of the Companies Act, 2013 read with Rule 5 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014 are given in Annexure VII to this report.

g) During the financial year 2016-17, there was no employee who was in receipt of remuneration requiring disclosure as per the limits prescribed under Section 197 of the Companies Act, 2013 read with Rule 5 of The Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014.

EXTRACT OF THE ANNUAL RETURN

Pursuant to Section 92(3) of the Companies Act, 2013 read with Rule 12(1) of the Companies (Management and Administration) Rules, 2014, an extract of the Annual Return of the Bank as on March 31, 2017 is annexed (Annexure IV).

NUMBER OF BOARD MEETINGS

During the year under report the Board met 17 times and the details thereof are provided in the report on Corporate Governance forming part of this report.

COMMITTEES OF THE BOARD

The Bank has 12 Committees which were constituted to comply with the requirements of relevant provisions of the applicable laws and for operational efficiency. Details of the meetings of the Board and the Committees, their composition, terms of reference, powers, roles etc are furnished in the report on Corporate Governance forming part of this report.

CORPORATE GOVERNANCE

Your Bank is committed to follow the best practices of corporate governance to protect the interests of all the stakeholders of the Bank, viz. shareholders, depositors and other customers, employees and the society in general and maintain transparency at all levels. A detailed report on corporate governance practices is given as Annexure III to this report.

AUDITORS

a. Statutory Auditors

M/s. Kamath & Rau, Chartered Accountants, Mangaluru and M/s. Abarna & Ananthan, Chartered Accountants, Bengaluru would retire as joint Statutory Central Auditors of the Bank at the ensuing Annual General Meeting after completing the term of fourth year and third year respectively. Board of Directors propose to the members the appointment of M/s. R.K. Kumar & Co, Chartered Accountants, Chennai, in place of retiring auditor M/s Kamath & Rau, Chartered Accountants who will be completing 4 years and will be rested for two years, jointly with M/s. Abarna & Ananthan, Chartered Accountants, Bengaluru for the first and the fourth year term respectively. The Bank has received consent from the above auditors and necessary confirmation from them that they are not disqualified to be appointed as auditors of the Bank pursuant to the provisions of the Companies Act, 2013 and the Rules made there under.

b. Secretarial Auditor and Secretarial Audit Report

Pursuant to Section 204 of the Companies Act, 2013 and the rules there under, your Bank had appointed M/s.Ullas Kumar Melinamogaru, Practising Company Secretary, Mangaluru as Secretarial Auditors to conduct the Secretarial Audit for the year ended March 31, 2017. The audit report from the Secretarial Auditor is annexed to this report as Annexure V.

ACKNOWLEDGEMENTS

Your Directors would like to place on record their sincere gratitude to the Reserve Bank of India, other government and regulatory authorities, financial institutions and correspondent banks for their continued guidance and support. Your Directors also place on record their gratitude to the Bank''s shareholders, depositors and other customers for their continued support, patronage and goodwill. Your Directors express their deep sense of appreciation to all the staff members, for their contribution in your Bank''s quest for sustained growth and profitability and look forward to their continued contribution in scaling greater heights.

FOR AND ON BEHALF OF THE BOARD OF DIRECTORS

PLACE : HUBBALLI SD/-

DATE : JUNE 17, 2017 P JAYARAMA BHA

CHAIRMAN


Mar 31, 2016

The Directors have pleasure in presenting the Ninety Second Annual Report together with the Audited Statement of Accounts for the year ended 31st March, 2016 and the Auditors'' Report.

PERFORMANCE HIGHLIGHTS

Your Directors are pleased to inform that during the year under report, your Bank has been able to achieve satisfactory growth in all the areas of operation. Performance highlights for the financial year in the key financial areas are as under: -

(Rs. in crore)

Particulars As on / for the As on / for the year ended year ended 31.03.2016 31.03.2015

Deposits 50488.21 46008.61

Advances 33902.45 31679.99

Investments 16256.65 14031.67

Gross Income 5535.07 5205.41

Operating Profit 854.53 773.38

Net Profit 415.29 451.45

The total business turnover of the Bank was Rs.84390.66 crore as on 31st March 2016, an increase of 8.63 percent over the preceding year. The total assets of the Bank increased from Rs.51836.60 crore to Rs.56500.33 crore recording a growth of 8.99 percent for the year 2015-16.

The total deposits of the Bank grew from Rs.46008.61 crore as on 31st March 2015 to Rs.50488.21 crore as on 31st March 2016, registering a growth of 9.74 percent.

During the year, low cost deposits of the Bank, viz. Savings and Current Account Deposits have shown growth of 15.58 percent and constitute 26.26 percent of the total deposits of the Bank. The market share of the Bank in deposits was 0.527 percent.

The total advances grew from Rs.31679.99 crore as on 31st March 2015 to Rs.33902.45 crore as on 31st March 2016, an increase of 7.02 percent. The priority sector advances increased from Rs.14344.96 crore to Rs.16152.56 crore which, together with the Rural Infrastructure Development Fund (RIDF) exposure, formed 47.57 percent of Adjusted Net Bank Credit (ANBC) and agricultural advances increased from Rs.5145.55 crore to Rs.5838.07 crore which, together with eligible RIDF exposure, constituted 17.19 percent of ANBC. Lending under various socio-economic schemes has shown satisfactory progress. The market share of the Bank in loans and advances was 0.497 per cent.

As on 31st March 2016, the total investments of the Bank stood at Rs.16256.65 crore as against Rs.14031.67 crore as on 31st March 2015, an increase of 15.85 percent.

OPERATIONAL PERFORMANCE

In the backdrop of continued stress on the assets quality and the subdued credit off take during the year ended 31st March, 2016, the performance of your Bank can be considered satisfactory. The gross income of the Bank was Rs.5535.07 crore and total expenditure (excluding provisions and contingencies) was Rs.4680.54 crore. The net interest income was Rs.1302.87 crore.

PROFIT

Your Bank earned an operating profit of Rs. 854.53 crore for the year 2015-16 as against Rs.773.38 crore for the previous year showing a growth of 10.49 percent. The net profit of the Bank decreased from Rs.451.45 crore to Rs.415.29 crore on account of the increase in provision for loan loss.

APPROPRIATIONS

The net profit of Rs.415.29 crore which along with a sum of Rs. 0.40 crore brought forward from the previous year, aggregating Rs.415.69 crore, is appropriated as under. The corresponding figure for the previous year was Rs. 451.61 crore.

Appropriation Rs. in crore

Transfer to Statutory Reserve 230.00

Transfer to Capital Reserve 8.85

Transfer to Revenue, General & Special Reserves 67.24

Transfer to Investment Reserve (3.84)

Transfer to Proposed Dividend (including tax) 113.41

Balance carried to Balance Sheet 0.03

Total 415.69

DIVIDEND

Having regard to the overall performance of the Bank and the positive outlook for the future, the Board of Directors recommended a dividend of Rs.5 per share i.e. 50 percent on the paid up capital (previous year 50 per cent) for the reporting year. The dividend payout ratio for the year works out to 22 .69 percent.

EARNINGS PER SHARE/BOOK VALUE

The earnings per share (basic) and the book value per share as on 31st March 2016 stood at Rs.22.04 and Rs. 195.83 respectively.

CAPITAL FUNDS AND CAPITAL ADEQUACY RATIO

During the year under report, the capital funds of your Bank increased from Rs.3973.18 crore to Rs. 4185.24 crore, registering a growth of 5.34 percent. The Capital Adequacy Ratio stood at 12.03 percent as on 31st March 2016, as per BASEL III norms (Previous year 12.41 percent). The Bank has been consistently maintaining the Ratio well above the minimum of 9.625 percent stipulated by the Reserve Bank of India. The market capitalisation as on March 31, 2016 was Rs. 1934.50 crore.

FOREX BUSINESS

During the year under report, your Bank achieved a turnover of Rs.14277.44 crore in foreign exchange business as against Rs.15005.22 crore in the previous year. The outstanding advances to export sector stood at Rs. 1633.95 crore as on March 31, 2016.

NON-PERFORMING ASSETS AND PROVISION COVERAGE RATIO

Your Bank has been focusing on containing the non- performing assets through better credit monitoring as well as intensified efforts to recover the impaired assets. However, in view of the continuing slow down in the economy and delinquencies in select sectors, the Bank''s Gross NPAs as on March 31, 2016 have increased from Rs.944.21 crore (2.95 percent) to Rs. 1180.40 crore by the year end (3.44 percent). The Net NPAs stood at Rs.795.47 crore (2.35 percent) as against Rs. 623.55 crore (1.98 percent) as on 31st March 2015. The Provision Coverage Ratio (PCR) computed in accordance with the RBI guidelines works out to 48.39 percent as on March 31, 2016 (Previous year 50.54 percent).

CREDIT RATING

ICRA Limited and Credit Analysis and Research Limited, ("CARE") who had rated the Unsecured Redeemable Non-Convertible Subordinated (Lower Tier-II) debt instruments issued during the earlier years aggregating Rs. 600 crore have retained the rating "ICRA A" and "CARE A" respectively for the aforesaid instruments. The instruments with these ratings are considered to have adequate/high degree of safety regarding timely servicing of financial obligations. Such instruments carry very low credit risk.

DISTRIBUTION NETWORK

During the year under report, your Bank has opened 50 new branches in 9 States – one each in the States of Andhra Pradesh, Chattisgarh, Haryana , Kerala and Chandigarh (U.T.), 34 in Karnataka, three in Maharashtra, four in Tamilnadu, two each in Uttar Pradesh and West Bengal. Out of the 34 new branches opened in Karnataka, 13 are in Unbanked Rural Centres under Financial Inclusion Initiatives of the Bank. Your Bank has opened two more Regional Offices at Udupi & Tumakuru during the year under report. Further, your Bank has added 275 ATM outlets at various locations during the year 2015-16. Your Bank has also 24X7 e-lobby facility at 25 locations.

As at 31st March 2016, your Bank had 2,003 Service Outlets i.e. 725 branches, 1,275 ATMs and 3 extension counters spread across 21 States and 2 Union Territories. Apart from the above, your Bank has 12 Regional Offices, an International Division, a Data Centre, a Customer Care Centre, 4 Service branches, 2 Currency Chests, 2 Central Processing Centres and 3 Asset Recovery management branches.

Further, for better ambience and improved customer service, your Bank shifted 15 branches/offices to new premises during the year 2015-16.

EMPLOYEES STOCK OPTION SCHEME

During the year under report, a total of 9266 equity shares have been allotted to the employees of your Bank, pursuant to the exercise of options vested under the Employees Stock Option Scheme of the Bank. Disclosure in respect of Employee Stock Options Scheme pursuant to SEBI (Employees Stock Options Scheme and Employees Stock Purchase Scheme) Guidelines, 1999 is given in Annexure II to this report.

DIRECTORS

As on March 31, 2016, your Bank had a total of twelve Directors, including a woman director. All of them, except Messrs U R Bhat and Keshav K Desai, Additional Directors and Mr. P Jayarama Bhat, Managing Director and CEO, are Independent Directors. The details of the criteria for appointment and remuneration of Directors are provided in the report on Corporate Governance forming part of this report.

INDEPENDENT AND NON-EXECUTIVE DIRECTORS

Pursuant to the provisions of Section 149(6) of the Companies Act, 2013, your Bank has received necessary declarations from all the non-executive directors confirming that they meet the criteria of independence for Independent Directors. Two Additional Directors have also furnished similar declarations and subject to their approval of their appointment at the ensuing Annual General Meeting, they also meet the criteria of independence for Independent Directors.

MANAGING DIRECTOR AND CHIEF EXECUTIVE OFFICER (MD & CEO)

Mr. P Jayarama Bhat, MD & CEO of the Bank has been re-appointed by the Board for a further period of three years effective from July 14, 2015 as approved by the Reserve Bank of India vide their letter DBR.Appt. No. 18976/08.40.001/2014-15 dated June 15, 2015 and the members of the Bank at the Annual General Meeting held on July 16, 2015.

OTHER CHANGES IN THE BOARD

The Board of Directors has appointed Mr. U R Bhat, Mumbai a well known investment advisor and Mr. Keshav K Desai an entrepreneur from Hubballi as Additional Directors on February 19, 2016 and as per Section 161 of the Companies Act, 2013 they would hold office upto the date of ensuing Annual General Meeting. Bank has received necessary notices under Section 160 of the Companies Act, 2013 proposing their candidature for appointment as Independent Directors of the Bank at the ensuing Annual General Meeting. Having regard to their vast experience, rich knowledge and expertise, your Directors recommend their appointment. A brief resume and other details of the above Directors are furnished in the notice of the Annual General Meeting.

NUMBER OF BOARD MEETINGS

During the year under report the Board had met 13 times and the details thereof are provided in the report on Corporate Governance forming part of this report.

COMMITTEES OF THE BOARD

The Bank has 12 Committees which were constituted to comply with the requirements of relevant provisions of the applicable laws and for operational efficiency.

Details of the meetings of the Board and the Committees, their composition, terms of reference, powers, roles etc are furnished in the report on Corporate Governance forming part of this report.

CORPORATE GOVERNANCE

Your Bank is committed to follow the best practices of corporate governance to protect the interests of all the stakeholders of the Bank, viz. shareholders, depositors, other customers, employees and the society in general and maintain transparency at all levels. A detailed report on corporate governance practices is given as Annexure IV to this report.

EXTRACT OF THE ANNUAL RETURN

Pursuant to Section 92(3) of the Companies Act, 2013 read with Rule 12(1) of the Companies (Management and Administration) Rules, 2014, an extract of the Annual Return of the Bank as on March 31, 2016 is annexed (Annexure V).

PERFORMANCE EVALUATION OF THE BOARD

Your Board of Directors has laid down criteria for performance evaluation of Directors, Chairman, MD & CEO, Committees of the Board and Board as a whole and also the evaluation process for the same. The statement indicating the manner in which formal annual evaluation of the Directors, the Board and Committees of the Board etc., are given in detail in the report on Corporate Governance, which forms part of this Annual Report. In pursuance to the above, Independent Directors in their separate meeting held on March 18, 2016 have reviewed and evaluated the performance of Board as a whole, Chairman of the Board and the Managing Director and CEO.

Further, the Board also reviewed the performance of committees of the Board and that of individual Independent Directors at its Meeting held on March 18, 2016.

DIRECTORS'' RESPONSIBILITY STATEMENT

In accordance with Section 134(3)(c), 134(5) of the Companies Act, 2013 read with Rule 8 of the Companies (Accounts) Rule, 2014, your Directors state that:

(a) in the preparation of the annual accounts, the applicable accounting standards have been followed along with proper explanation relating to material departures;

(b) the directors have selected such accounting policies and applied them consistently and made judgments and estimates that are reasonable and prudent so as to give a true and fair view of the state of affairs of the Bank as at the end of financial year March 31, 2016 and profit and loss account for that period.

(c) the directors have taken proper and sufficient care for the maintenance of adequate accounting records in accordance with the provisions of the Companies Act, 2013 for safeguarding the assets of the Bank and for preventing and detecting fraud and other irregularities.

(d) the directors have prepared the annual accounts on a going concern basis.

(e) the directors have laid down the internal financial controls followed by the Bank and that such internal financial controls are adequate and are operating effectively.

(f) the directors have devised proper systems to ensure compliance with the provisions of all applicable laws and that such systems were adequate and operating effectively.

Management Discussion and Analysis

The Management Discussion and Analysis Report for the year under review pursuant to Regulation 34(3) read with Schedule V of the SEBI(Listing Obligations and Disclosure Requirements) Regulations 2015 is presented in a separate section forming part of this report.

WHISTLE BLOWER POLICY

The Bank has implemented the Protected Disclosure Policy (Whistle Blower Policy) since the year 2007 intended to promote participation of employees at all levels and detection of corruption, misuse of Office, criminal offences, suspected /actual fraud, failure to comply with the rules and regulations prescribed by the Bank and any events /acts detrimental to the interest of the Bank, depositors and the public resulting in financial loss/operational risk, loss of reputation etc.

Further, the mechanism adopted by the Bank encourages the Whistle Blower to report genuine concerns or grievances and provides for adequate safeguards against victimization of Whistle Blower who avails such mechanism and also provides for direct access to the Chairman of the Audit Committee, in exceptional cases. There was no occasion when an employee was denied access to the Audit Committee for reporting any events under the aforesaid policy. The functioning of the Vigil mechanism is reviewed by the Audit Committee periodically. The details of Whistle Blower Policy is posted in our website and available at the link: www.karnatakabank.com/ktk/Protected Disclosure.jsp

CONTRACTS OR ARRANGEMENTS WITH RELATED PARTIES

All related party transactions that were entered into during the financial year were in the ordinary course of the business of the Bank and were on arm''s length basis. There were no materially significant related party transactions entered into by the Bank with Directors, Key Managerial Personnel or other persons which may have a potential conflict with the interest of the Bank. As such disclosure in Form AOC-2 is not applicable.

The policy on dealing with Related Party Transactions as approved by the Audit Committee / Board has been placed in the website of the Bank.

STATUTORY DISCLOSURES

The disclosures under sub-section (3) of Section 134 of the Companies Act, 2013 read with Rule 8 (3) of the Companies (Accounts) Rules, 2014 are furnished below:

a) Conservation of Energy and technology absorption

Considering the nature of the Bank''s business, the provisions of Section 134(3)(m) of the Companies Act, 2013 relating to conservation of energy and technology absorption are not applicable to your Bank. The Bank has, however, used information technology in its operations extensively.

b) Foreign Exchange Earnings and outgo: During the year ended March 31, 2016, the Bank has earned Rs.53.69 crore and spent Rs.17.24 crore in foreign currency.

c) There were no significant and material orders passed by the regulators or courts or tribunals impacting the going concern status and BankRs.s operations in future.

d) Internal Financial Control Systems and their adequacy: Your Bank has laid down standards, processes and structure facilitating the implement- ation of internal financial control across Bank and ensure that same are adequate and operating effectively.

e) Key Managerial Personnel: Mr. P Jayarama Bhat, MD & CEO, Mr. Raghurama, CFO and Mr. Y V Balachandra, Company Secretary of the Bank were the Key Managerial Personnel of the Bank as on March 31, 2016 as per the provisions of the Companies Act, 2013. None of the Key Managerial Personnel has resigned. However, the Board has designated Mr. Chandrashekar Rao B as CFO in place of Mr. Raghurama w.e.f. April 23, 2016.

f) Remuneration of directors: Disclosures pursuant to Section 197(12) of the Companies Act, 2013 read with Rule 5 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014 are given in Annexure VIII to this report.

g) Employees who are in receipt of remuneration exceeding rupees sixty lakhs etc.: Statement showing the particulars of employees who were in receipt of remuneration during the year 2015-16 requiring disclosure under Rule 5(2) of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014 is annexed.

AUDITORS

a. Statutory Auditors

M/s. Kamath & Rau, Chartered Accountants, Karangalpady, Mangaluru-575003 and M/s. Abarna & Ananthan, Chartered Accountants, # 521, 3rd Main, 6th Block, 2nd Phase, BSK 3rd Stage, Bengaluru-560085 would retire as joint Statutory Central Auditors of the Bank at the ensuing Annual Meeting of the members of the Bank and are eligible for re-appointment subject to the approval of Reserve Bank of India. The Bank has received consent from the above auditors and necessary confirmation from them that they are not disqualified to be appointed as auditors of the Bank pursuant to the provisions of the Companies Act, 2013 and the Rules made thereunder. Accordingly having regard to the provisions of the Companies Act, 2013, extant guidelines of Reserve Bank of India and as approved by the Reserve Bank of India, the Board of Directors of the Bank has recommended the re-appointment of aforesaid auditors.

b. Secretarial Auditor and Secretarial Audit Report

Pursuant to Section 204 of the Companies Act, 2013 and the rules thereunder, your Bank had appointed M/s. Ullas Kumar Melinamogaru, Practising Company Secretary, Mangaluru as Secretarial Auditors to conduct the Secretarial Audit for the year ended March 31, 2016. The audit report from the Secretarial Auditor is annexed to this report as Annexure VI.

CORPORATE SOCIAL RESPONSIBILITY

Businesses are an integral part of society and play a critical role in the sustenance and improvement of a healthy ecosystem, in fostering social inclusiveness and equity and in upholding the ethical practices and good governance. It is believed that integrating social, environmental and ethical responsibilities into governance of business ensures long term successes, competencies and sustainability. With this in mind, your Bank continues to fulfil its various social responsibilities. The Corporate Social Responsibility initiatives of the Bank are designed to ensure that the Bank adds social, environmental and economic value in all its activities to make a positive, sustainable impact on both society and business. In this direction, your Bank has been responding well over the years through various social initiatives and has identified some core areas of intervention like healthcare, education/ livelihood enhancement, empowering women/socially and economically disadvantaged, environmental sustainability/green initiatives, protection of heritage/ culture, promotion of sports, rural development etc. aimed at improving the overall development of the society. The Bank firmly believes that being an integral part of society, it is the inclusive growth of society which contributes ultimately to the growth of the Bank and in this direction, your Bank has been strengthening its rural orientation through initiatives aimed at imparting financial literacy and extending banking services to the people in rural unbanked areas, in a fair and transparent manner, at an affordable cost. Towards this end, your Bank had opened 13 branches in unbanked rural centres during the financial year 2015-16 as part of its financial inclusion initiative, thus taking the total Financial Inclusion branches to 92.

Further, pursuant to Section 135 of the Companies Act, 2013 read with Companies (Corporate Social Responsibility Policy) Rules, 2014, the Board has setup a Committee of Directors namely, ''Corporate Social Responsibility (CSR) Committee'' and has also put in place a Policy on Corporate Social Responsibility (CSR Policy) to undertake projects/programmes in pursuance to the above Policy. The contents of the CSR Policy along with the report on amount spent on various projects/programmes during the financial year 2015-16 is detailed in Annexure VII to this report pursuant to Rule 8 of the Companies (Corporate Social Responsibility Policy) Rules, 2014.

CUSTOMER SERVICE

The customer has always been the focal point of our initiatives. We have been endeavoring to empower our customers by rolling out innovative products and services through optimal use of technology without compromising on the quality of service rendered across the counter and without losing sight of the safety and security aspects. During the year 2015-16, your Bank has introduced several technology based new products and solutions such as KBL mPassBook & KBL ApnaApp (two tailor made mobile Apps), KBL Direct Pay (Mobile Recharge/Utility Bill Payment Interface), Online Account Opening Facility and facility of e-Filing of Income Tax Return in association with M/s Clear Tax.

In pursuit of enhancing customer convenience, the Bank has introduced ''Online Account Opening'' portal, which facilitates the customers to open an account Online. The process is quicker and easier to open an account through Online Account opening process from any where and any time at customers convenience.

Your Bank is actively involved in putting in place systems and procedures to comply with the recommendations of the Damodaran Committee on Customer Service, constituted by the Reserve Bank of India, to look into the banking services rendered to customers and the grievance redressal mechanism prevalent in banks. In this direction, the Bank has introduced the Online Customer Grievance Redressal System to ensure quick and speedy redressal of complaints of the customers in order to provide hassle free banking experience. Through this system, the customer can lodge a complaint and track the status of the complaint online, through the Bank''s website. Most of the recommendations made by the said Committee have been complied with and the remaining few which require up-gradation of the Bank''s Core Banking Solution are being pursued for early compliance.

Facility of Online application system and credit proposal tracking system for Micro, Small and Medium Enterprises (MSME) has also been put in place under which entrepreneurs/applicants can submit applications Online for credit facility from any branch of their choice and track the status of such applications besides tracking the status of their applications submitted directly at branches.

Your Bank has also established a special purpose vertical called IT enabled Business Solution Cell i.e "IT Bus Cell" which shall identify/provide/enable IT based solutions to the business and other units of the Bank by conceiving/conceptualizing new products, services and processes ultimately to enhance the customers satisfaction and their experience with the product / services offered by the Bank.

FINANCIAL INCLUSION

Financial Inclusion means making available the full range of banking services at an affordable cost to the people who do not have access to banking services. It mainly focuses on the section of society not having formal financial institutional support. Through the Financial Inclusion Plan, Bank aims at ''connecting people'' with the Bank and not just opening accounts. This includes meeting the small credit needs of the rural public, giving them access to the payments system, providing remittance facility and life and health insurance. Efforts are being made to optimize the resources to achieve the goal of extending banking facilities to the unbanked areas/deprived sections.

All the branches of the Bank are under Core Banking Solution (CBS) and all the branches to be opened in future will also be under CBS. Out of 725 branches, Bank has 163 rural branches and all these branches are provided with CBS offering all banking facilities to the rural clientele in the gram panchayats or villages where these branches are located. All the rural branches are also acting as Financial Literacy Centers (FLCs) and imparting Banking literacy among the rural Populace.

In accordance with announcement of Prime Minister Jan Dhan Yojana (PMJDY) on August 15, 2014 revised Strategy & Guidelines of Department of Financial Services (DFS), Ministry of Finance, Govt. of India, has been considered for implementation of Financial Inclusion activity of the Bank. PMJDY takes in to account both rural sub service areas (SSAs) and urban wards for Financial Inclusion. Under the revised financial inclusion plan, in rural areas, Bank is allocated with 214 Gram Panchayats (GPs) for Financial Inclusion, covering 297 Sub service Areas (SSAs) consisting of 1039 villages in the states of Karnataka, Chattisgarh Maharashtra and Andhra Pradesh and in urban areas 313 wards are allocated in Karnataka and other States. The Gram Panchayats are being financially included through Brick and Mortar Branches and Business Correspondents (BC). Your Bank has been issuing RuPay PMJDY Debit Cards under the domestic card payment scheme launch by the National Payments Corporation of India (NPCI).

Brick and Mortar Branches:

As on March 31, 2016 Bank has covered 547 villages of 102 GPs through Brick & Mortar Branches.

Business Correspondent Services (BC Services):

Bank has entered into an agreement with M/s BASIX Sub-ki Transaction Ltd and M/s Integra Micro Systems Pvt. Ltd. to provide online transaction facility and as on March 31, 2016, 121 GPs with 149 SSAs covering 561 villages of Karnataka, Andhra Pradesh and

Chhattisgarh States were covered under the above arrangement.

Ultra Small Branches (USBs):

As permitted by the Reserve Bank of India Bank had opened USBs where business correspondents (BCs) could conduct operations and thereby boost confidence of customers to use their financial services. As on 31st March 2016, your Bank has 37 USBs.

Electronic Benefit Transfer (EBT) - Pilot Project of Govt. of Karnataka:

Bank is participating in Govt. of Karnataka (GOK) EBT Pilot project for NREGA/SSP beneficiaries under - "One District - Many Bank Model" and is disbursing the payments under the above schemes to the beneficiaries using smart card and hand held machines at 5 Gram Panchayat locations in Chitradurga and Yadgir districts.

Direct Benefit Transfer (DBT):

Bank is actively participating in Direct Benefit Transfer (DBT) Programme of Govt. India, wherein, the Govt. would transfer benefits of various Schemes directly to the beneficiaries Aadhaar enabled bank accounts and also accounts seeded with LPG ID in case of transfer of subsidy for LPG. For this purpose, Bank has on boarded with NPCI for Aadhaar Payment Bridge System (APBS) under National Automated Clearing House (NACH). Revised DBTL was introduced on November 15, 2014 and launched throughout the country on January 1, 2015. Both the Aadhaar based and LPG ID based approaches are made available to customers across all branches of the Bank.

Financial Literacy and Credit Counseling Centers (FLCCs)

Bank has sponsored 5 FLCs at B.C Road, Tiptur, Hangal, Kundagol and Alur in a joint venture with M/s Jnana Jyothi Financial Literacy and Credit Counseling Trust, Manipal. During the financial year 5 FLCs sponsored by the Bank have conducted 1321 Financial Literacy campaigns and 58161 participants had been covered. In adherence to RBI guidelines all the rural branches of your Bank are also conducting financial literacy Camps.

SOCIAL SECURITY SCHEMES:

Three Social Security Schemes- Prime Minister Jeeven Jyothi Bima Yojana (PMJJBY), Prime Minister Suraksha Bima Yojana (PMSBY) and Atal Pension Yojana (APY) have been launched by Hon''ble Prime Minister on 1st June 2015. All the branches of your Bank are actively providing the above schemes to the customers across the country.

1) PMJJBY provides Insurance coverage of Rs.2,00,000/- by paying yearly premium of Rs.330/-. A person aged between 18 to 50 years holding account in a bank is eligible for the scheme. A total of 1,42,647 lives have been covered till 31.03.2016.

2) PMSBY provides Accidental insurance coverage of Rs.2,00,000 by paying year premium of Rs.12/-. A person aged between 18 to 70 years holding account in a Bank is eligible for the scheme. A total of 2,07,053 lives have been covered till 31.03.2016

3) APY : This scheme was launched by the Government of India on 9th May, 2015 to address the old age income security needs of the citizen in an affordable manner linked to auto debit facility from the bankRs.s savings account of the subscriber. Your Bank is actively participating in the scheme, with all branches being registered as Point of Presence - Service Provider (POP-SP) for APY.''

Prime Minister Jan Dhan Yojana (PMJDY):

In accordance with announcement of Prime Minister Jan Dhan Yojana (PMJDY) on August 15, 2014 revised Strategy & Guidelines of Department of Financial Services (DFS), Ministry of Finance, Govt. of India, has been considered for implementation of Financial Inclusion activity of the Bank. PMJDY takes in to account both rural semi urban, urban wards and metro for providing basic banking facilities to the unbanked populace. PMJDY also provides scope for RuPay debit card that is inclusive of Rs.1 Lakh accidental insurance.

All the branches across the country have opened accounts under PMJDY and are issuing RuPay Debit Card under the domestic card payment scheme launched by the National Payments Corporation of India (NPCI).

A total of 15,60,754 accounts have been opened under PMJDY since 15.08.2014 till 31.03.2016, with outstanding balance of Rs.1,266.42 crore. A total of 1,06,247 RuPay cards have been issued so far by the Bank.

KBL VISION 2020

During the financial year ended March 31, 2016, the Bank has unveiled its long term Vision document - KBL Vision 2020 reflecting the aspirations of all the stakeholders for achieving various targets taking advantage of emerging opportunities, upgrading IT infrastructure, strengthening audit, vigilance and risk management practices and compliance culture and taking steps to improve efficiency of people, processes and products by continuously evolving new strategies and policies and create value for our shareholders by optimally utilizing capital resources. As per the KBL Vision 2020 document, BankRs.s total business turnover is projected to increase in a progressive manner to touch Rs.1,80,000 crore with deposits of Rs.1,00,000 crore and advances of Rs.80,000 crore by March 2020.

AWARDS AND RECOGNITIONS

Your Bank bagged the following awards during the year under report in recognition of its achievement under technology initiatives, social banking, export performance etc.

- IBA Banking Technology Award 2014-15, Runner up in the category of Best Risk and Fraud Management Initiative, amongst Small Banks.

- ASSOCHAM Social Banking Excellece Awards 2015, under the following categories:

- Winner - Urban Banking [Small Bank] Category.

- Winner-Agricultural Banking [Small Bank] Category

- Runner Up - Participation in government schemes [Small Bank] category

- Runner Up - Overall Best Social Bank[ Small Bank] category

- MSME Banking Excellence Awards 2015 [Runner Up] for Eco -Technology "Emerging Banks", instituted by CIMSME [Chamber of Indian Micro Small & Medium Enterprises].

- Banking Technology Excellence Award - "Best Bank for Evangelising Technology Adoption" among Small Banks for the year 2014-15, instituted by IDRBT.

- "Export Excellence award for MSME" by the Federation of Indian Export Organisations - Western Region.

- "STP AWARD" from Bank of New York, Mellon in recognition to the improved payment formatting and straight - Through Processing success rate.

- "Outstanding Performance in MSME Funding" by the Federation of Industry, Trade and Services (FITS).

Further UKAS, Management Systems, a UK based accreditation certifying body has renewed ISO 27001:2013 certificate for our three IT set-ups viz. Data Centre, Near Line Site and Head Office-IT Department including Disaster Recovery Site.

Further, your Bank has been awarded with ''Sanman Patra'' by the Central Excise & Service Tax Commissionerate, Mangaluru, for compliance to service tax provisions, at the Central Excise Day 2016.

ACKNOWLEDGEMENTS

Your Directors would like to place on record their sincere gratitude to the Reserve Bank of India, other government and regulatory authorities, financial institutions and correspondent banks for their continued guidance and support. Your Directors also place on record their gratitude to the Bank''s shareholders, depositors and other customers for their continued support, patronage and goodwill. Your Directors express their deep sense of appreciation to all the staff members, for their contribution in your Bank''s quest for sustained growth and profitability and look forward to their continued contribution in scaling greater heights.

For and on behalf of the Board of Directors

Place: Bengaluru Sd/-

Ananthakrishna

Date : June 21, 2016 Chairman


Mar 31, 2014

Dear Members.

The Directors have pleasure in presenting the Ninetieth Annual Report together with the Audited Statement of Accounts for the year ended 31s'' March 2014 and the Auditors'' Report.

PERFORMANCE HIGHLIGHTS

Your Directors are pleased to inform that during the year under report, your Bank has been able to achieve satisfactory growth in its business, Performance highlights for the financial year in the key financial are3sareasunder:-

(Rs.in Crore)

Particulars As on/for the As on/for the year ended year ended 31.03.2014 31.03.2013

Deposits 40582.83 36056.22

Advances 28345.49 25207.68

Investments 15226.78 13432.48

Grosslncome 4694.41 4161.93

Operating Profit 687.05 635.34

Net Profit 311.03 348.08

The total business turnover of the Bank was Rs.68928.32 crore as on 31 st March 2014, an increase of 12.51 percent over the preceding year. The total assets of the Bank increased from Rs. 41526.38 crore to Rs.47028.80 crore recording a growth of 13.25 percent fortheyear2013-14.

The total deposits of the Bank grew from Rs.36056.22 crore as on 3V''1 March, 2013 to Rs.40582.83 crore as on 31 st March 2014, registering a growth of 12.55 percent, During the year, low cost deposits of the Bank, viz. Savings and Current Account Deposits, have shown a growth of 14.75 percent and constitute 25.40 percent of the total deposits of the Bank. The market share of the Bank in deposits was 0.51 percent.

The total advances grew from Rs.25207.68 crore as on 31 st March, 2013 to 728345.49 crore as on 31 st March, 2014,3P increase of 12.45 percent. The priority sector advances increased from 79362.62 crore to 710882.20 crore which together with RIDF exposure formed 46.91 percent of Adjusted Net Bank Credit (ANBC) and agricultural advances increased from 73715.24 crore to Rs.4141.16 crore which together with eligible RIDF exposure constituted 17.29 percent of ANBC. Lending under various socio-economic schemes has shown satisfactory progress. The market share of the Bank in loans and advances was 0.45 percent.

As on 31 st March, 2014 the total investments of the Bank stood atRs.15226.78croreas against Rs.13432.48 crore as on 31 st March 2013, an increase of 13.36 percent.

OPERATIONAL PERFORMANCE

In the competitive and challenging business environment, the overall performance of your Bank during the year 2013-14 was fairly satisfactory. The gross income of the Bank was 74694.41 crore and total expenditure (excluding provisions and contingencies) was 74007.36 crore. The net interest income was 71056.07 crore.

PROFIT

Your Bank earned an operating profit of 7687.05 crore for the year 2013-14 as against 7635.34 crore for the previous year showing a growth of 8.14 percent. However the net profit of the Bank decreased from 7348.08 crore to 7311.03 crore on account of higher provisioning needs.

APPROPRIATIONS

The net profit of 7311.03 crore which along with a sum of 70.09 Crore brought forward from the previous year, aggregating 7311.12 crore, is appropriated as under. The corresponding figure for the previous year was 7348.11 Crore

Appropriation Rs in Crore

Transfer to Statutory Reserve 147.00

Transferto Revenue, General &

Special Reserves 87.22

Transferto Investment Reserve (11.48)

Transferto Proposed Dividend

(including tax) 88.22

Balance carried to Balance Sheet 0.16

Total 311.12

DIVIDEND

Having regard to the overall performance of the Bank and the positive outlook for the future, the Board of Directors recommended a dividend of 74 per share (i.e. 40 percent on the paid up capital same as the previous year) for the reporting year. The dividend payout ratio forthe year works out to 24.25 percent.

EARNING PER SHARE/BOOK VALUE

The earnings per share (basic) and the book value per share as on 3V March, 2014 stood at 716.51 and 7162 respectively.

NET OWNED FUNDS AND CAPITAL ADEQUACY RATIO

During the year under report, the net owned funds of your Bank increased from 72857.08 crore to 73052.20 crore, registering a growth of 6.83 percent. The Capital Adequacy Ratio stood at 13.30 percent as on

March 31, 2014, as per BASEL II norms (Previous year 13.22 percent) and 13.20 percent as per BASEL III norms. The Bank has been consistently maintaining the Ratio well above the minimum of 9 percent stipulated by the Reserve Bank of India. The market capitalisation asonMarch31,2014wasRs.22D9.14crore.

FOREX BUSINESS

During the year under report, your Bank achieved a turnover of Rs.12840.55 crore in foreign exchange business as against Rs.10083.26 crore in the previous year. The outstanding advances to export sector stood at Rs.1671.01 crore as on March 31,2014.

NON-PERFORMING ASSETS AND PROVISION COVERAGE RATIO

Your Bank has been focusing on containing the non- performing assets through better credit monitoring as well as intensified efforts to recover the impaired assets. However, in view of continuing slow down in the economy and delinquencies in select sectors, the Bank''s, Gross NPAs as on March 31, 2014 has increased from Rs.638.86 crore (2.51 percent) to Rs.835.93 crore (2.92 percent) by the year end. The Net NPAs stood at Rs.538.04 crore (1.91 percent) as against Rs.377.75 crore (1.51 percent) as on 31 st March 2013. The Provision Coverage Ratio (PCR) computed in accordance with the RBI guidelines works out to 53.21 percent as on March 31, 2014 (Previous year 55.36 percent).

CREDIT RATING

ICRA Limited and Credit Analysis and Research Limited, ("CARE") who had rated the Unsecured Redeemable Non-Convertible Subordinated (Lower Tier-ll) debt instruments issued during the earlier years have retained the rating "ICRA A" and "CARE A" respectively. The instruments with these rating are considered to have adequate / high degree of safety regarding timely servicing of financial obligations. Such instruments carry very low credit risk.

DISTRIBUTION NETWORK

During the year under report, your Bank has opened 50 new branches in 11 States viz. two each in Andhra Pradesh and Rajasthan, one each in Assam, Goa, Gujarat, Maharashtra, Uttar3khand, West Bengal, 34 in Karnataka, three in Kerala and three in Tamil Nadu. Out of 34 new branches opened in Karnataka, 13 are in unbanked rural centres under financial inclusion initiatives of the Bank. Further, as per the direction of Govt, of India, your Bank has opened 17 Ultra Small Branches in the villages where Brick & Mortar Branches are not viable. Further, your Bank has added 196 ATM outlets at various locations during theyear2D13Rs.14.

As at March 31, 2014, your Bank had 1,304 Service Outlets i.e. 600 branches (which include two Corporate Finance branches at Fort, Mumbai & New Deihi-Connaught Place, ten Agricultural Development branches, 160 specialised MSME Branches and 60 Financial Inclusion Branches), four Extension Counters & 700 ATMs spread across 21 States and two Union Territories. Apart from the above, your bank has 10 Regional Offices, an International Division, a Data Centre, a Customer Care Centre, five Service branches, two Currency Chests, two Central Processing Centres and three Asset Recovery Management Branches.

Further, for better ambience and improved customer service, your Bank shifted 26 branches/offices to new premises during the year 2013-14.

EMPLOYEES STOCK OPTION SCHEME

A total of 69062 equity shares were allotted to the emptoyees of your Bank, pursuant to the exercise of options vested under the Employees Stock Option Scheme of the Bank. Disclosure in respect of Employee Stock Option Scheme pursuant to SEBI (Employees Stock Option Scheme and Employees Stock Purchase Scheme) Guidelines 1999 is given in Annexure I to this report.

DIRECTORS

Mr Sitarama Murty M, retired as a Director of the Bank upon attaining the upper age of 70 years on 18.12.2013 as per the extant guidelines of RBI. Messrs R VShastri and URBhat completed their term of eight years in Office and retired from the Office as Directors of the Bank on 27,01.2014, The Board places on record its appreciation of the active involvement and useful contribution made by the above directors.

Further, the Board has appointed Mrs Usha Ganesh (IAS Retd), former member of Karnataka Administrative Tribunal, Bangalore and Mr Rammohan Rao Belle, former Managing Director and CEO of SB1 General Insurance Company Ltd, as additional directors on 31.07.2013 and 21.10.2013 respectively.

Even though one third of the total number of directors were liable to retire by rotation at the Annual General Meeting under erstwhile Section 256 of the Companies Act, 1956, with the coming into force the provisions of Section 149 and 152 of the Companies Act, 2013 relating to appointment and retirement of directors by rotation at every Annual General Meeting w. e. f April 1,2014, your Bank has received necessary declarations from all the directors other than whole- time director as required under Section 149(6} of the Companies Act, 2013. The Board, after having taken into consideration the declarations and other information is of the opinion that all the directors of the Bank other than whole time director are ''Independent Directors'' and therefore are not liable to retire by rotation under Section 152 of the Companies Act, 2013. It is proposed to reappoint them for a term as required under Section 149(10) of the Act having regard to the provisions of the Banking Regulation Act, 1949 and the extant guidelines at the ensuing Annual General Meeting.

The brief resume and other details relating to the above directors who are to be re-appointed are furnished in the notice of the Annual General Meeting (AGM).

CORPORATE GOVERNANCE

Your Bank is committed to follow the best practices of corporate governance to protect the interests of all the stakeholders of the Bank, viz. shareholders, depositors, other customers, employees and the society in general and maintain transparency at all levels. A detailed report on corporate governance practices is given as Annexure III to this report.

DIRECTORS'' RESPONSIBILITY REPORT

As per Section 217(2AA) of Companies (Amendment) Act, 2000, your Directors report that:

i. The accounts for the year 2013-14 were prepared by following the accounting standards in so far as they apply to banks.

ii. Accounting policies adopted and applied consistently by the Bank are in tune with the RBI guidelines issued from time to time. Reasonable prudent judgments and estimates have been made in the accounts, so as to give a true and fair view of the state of affairs of the Bank and of the profit of the Bank for the financial year ended 31 stMarch,2014.

iii. The Bank had taken proper and sufficient care for maintaining adequate records in accordance with the provisions of the Companies Act 1956, in so far as they apply to banks,

iv. The annual accounts for the year ended 31s! March, 2014 have been prepared on a "Going Concern" basis.

STATUTORY DISCLOSURES

Considering the nature of the Bank''s business, the provisions of Section 217(1)(e) of the Companies Act, 1956 relating to conservation of energy and technology absorption do not apply to your Bank. The Bank has, however, used information technology extensively in its operations.

There were no employees who were in receipt of remuneration during the year ended March 31, 2014 requiring disclosure under section 217(2A) of the Companies Act, 1956 read with Companies (Particulars of Employees) Rules, 1975.

SOCIAL INITIATIVES

Businesses are an integral part of society and play a critical role in the sustenance and improvement of a healthy ecosystem, in fostering social inclusiveness and equity and in upholding the ethical practices and good governance. It is believed that integrating social, environmental and ethical responsibilities into governance of business ensures long term successes, competencies and sustainability. With this in mind your Bank continues to fulfil its various social responsibilities. The Corporate Social Responsibility initiatives of the bank are designed to ensure that the bank adds social, environmental and economic value in all its activities to make a positive, sustainable impact on both society and business. In this direction, your bank has been responding well over the years through various initiatives like participation in social, cultural, educational, environment awareness activities etc., aimed at improving the social values, promotion of cultural heritage, knowledge, standard of living and the quality of life of the people and the environment at large. The Bank firmly believes that being an integral part of society, it is the inclusive growth of society which contributes ultimately to the growth of the Bank and in this direction, your Bank has been strengthening its rural orientation through initiatives aimed at imparting financial literacy and extending banking services to the people in rural unbanked areas, in a fair and transparent manner, at an affordable cost. Towards this end, your Bank had opened 13 branches in unbanked rural centres during the FY 2013-14 as part of its financial inclusion initiative, thus taking the total Financial Inclusion branches to 60. Your Bank had also opened 17 Ultra Small Branches, thus taking the total number of such branches to 41 as on March 31,2014.

CUSTOMER SERVICE

The customer has always been the focal point of our initiatives. We have been endeavouring to empower our customers by rolling out innovalive products and services through optimal use of technology without compromising on the quality of service rendered across the counter and without losing sight of the safety and security aspects. In this direction, the Bank is actively involved in putting in place systems and procedures to comply with the recommendations of the Damodaran Committee on Customer Service, constituted by the Reserve Bank of India, to look into the banking services rendered to customers and the grievance redressal mechanism prevalent in banks. Most of the recommendations made by the said Committee have been complied with 3nd the remaining few which require up-gradation of the Bank''s Core Banking Solution are being pursued for early compliance.

FINANCIAL INCLUSION

Financial inclusion means making available the full range of banking services at an affordable cost to the people who do not have access to banking services. It mainly focuses on the section of society not having formal financial institutional support. Through the Financial Inclusion Plan, Bank aims at ''connecting people'' with the Bank and not just opening accounts. This includes meeting the small credit needs of the rural public, giving them access to the payments system, providing remittance facility and life and health insurance. Efforts are being made to optimize the resources to achieve the goal of extending banking facilities to the un-banked areas f deprived sections.

All the branches of the Bank are under Core Banking Solution (CBS) and all the branches to be opened in future will also be under CBS. Out of 600 branches, Bank has 108 Rural branches and all these branches are provided with CBS offering all banking facilities to

the rural clientele in the gram panchayats or villages where these branches are located. All the rural branches are acting as financial literacy centers (FLCs) and imparting Banking literacy among the rural Populace.

In accordance with revised Strategy & Guidelines of Department of Financial Services (DFS), Ministry of Finance, Govt, of India, financial inclusion plan of the Bank has been revised. Under the revised financial inclusion plan, Bank has been allocated with 207 Gram Panchayats consisting of 1002 villages with a population of about 10,31,000 as per 2001 census, in Karnataka, Andhra Pradesh & Chhattisgarh states. The Gram Panchayats are being financially included through Brick and Mortar Branches and Business Correspondents (BC),

Brick and Mortar Branches

As on March 31, 2014 bank has covered 465 villages of 94 GPs through Brick & Mortar Branches. 10 Branches were opened during financial year 2013-14.

Business Correspondent Services {BC Services):

Bank has entered in to an agreement with M/s BASIX Sub-k (Transaction Ltd and M/s Integra Micro Systems Pvt. Ltd. to provide online transaction facility and as on March 31, 2014 113 GPs with 537 villages of Karnataka, Andhra Pradesh and Chhattisgarh states were covered under the above arrangement. Total coverage through BC Model stood at 92 GPs covering 512 villages as on March31,2014.

Ultra Small Branches |USBs|

During the financial year, the Bank opened 17 Ultra Small Branches, talcing the count of USBs to 41 as on March 31, 2014 (after accounting for upgradation of two USBs into regular Branches during the Financial Year 2013-14).

Electronic Benefit Transfer (EBT) - Pilot Project of Govt, of Karnataka

Bank is participating in Govt, of Karnataka (GOK) EBT

Pilot project for NREGA/SSP beneficiaries under -

"One District - Many Bank Model" and has started disbursing the payments under the above schemes to The beneficiaries using smart card and hand held machines at 5 Gram Panchayat locations in Chitradurga, Bella ry and Yadgir districts.

Direct Benefit Transfer (DBTI

Bank is actively participating in Direct Benefit Transfer (DBT) Programme of Govt. India, wherein, the Govt. would transfer benefits of various Schemes directly to the beneficiaries Aadhaar enabled bank accounts. For this purpose, Bank has on boarded with NPCI for Aadhaar Payment Bridge System (APBS) under National Automated Clearing House (NACH). DBT for LPG is now implemented in 284 districts and out of this, Bank has its presence in 103 Districts with 447 branches,

Financial Literacy and Credit Counseling Centers

(FLCCs)

Bank has sponsored two FLCCs at BC Road and Kundagol in Karnataka State. During the financial year FLCCs sponsored by the Bank has conducted 212 Financial Literacy campaigns and 11763 participants had been covered. In adherence to RBI guidelines all the rural branches of our Bank are conducting financial literacy Camps.

AWARDS AND RECOGNITIONS

Your Bank bagged the following awards during the year under report in recognition of its achievement under customer relations, risk management, HR, technology initiatives as well as for social banking and lending for export promotion.

1. The Sunday Standard Best Bankers'' Awards 2013:

0 Best Banker award for customer orientation amongst private sector banks.

ii) Best Banker award for customer friendliness in midsized bank category

iii) Best Banker for HR amongst private sector banks.

2. IDRBTawards:

i) Best Bank award among small banks for managing IT risk

ii) Best Bank award among small banks for use of IT in business innovation

3. IBA Banking awards:

Second runner up in the category of the best customer management initiative amongst private sector banks.

4. ASSOCHAM social banking excellence awards 2013:

i) Runner-up of ASSOCHAM social banking excellence awards 2013 under the private sector banks category.

5. Southern region export excellence award 2012-13 from Federation of Indian Export

Organisation (FIEO)

6. BFSI best bank (private sector} award,

Further IMQA, a leading assessment, verification and certification body accredited to the United Kingdom Accreditation Service (UKAS) has renewed ISO 27001:2005 certificate for our three IT set-ups viz. Data Centre, Near Line Site and Head Office - IT Department including Disaster Recovery Site.

ACKNOWLEDGEMENTS

Your Directors would like to place on record their sincere gratitude to the Reserve Bank of India, other government and regulatory authorities, financial institutions and correspondent banks for their continued guidance and support. Your directors also place on record their gratitude to the Bank''s shareholders, depositors and other customers for their continued support, patronage and goodwill. Your directors express their deep sense of appreciation to a!l the staff members, for their contribution in your Bank''s quest for sustained growth and profitability and look forward to their continued contribution in scaling greater heights,

For and on behalf of the Board of Directors

Place: Bangalore Ananthakrishna

Date : 07.06.2014 Chairman


Mar 31, 2013

The Directors have pleasure in presenting the Eighty Ninth Annual Report together with the Audited Statement of Accounts for the year ended, 31st March 2013 and the Auditors'' Report.

PERFORMANCE HIGHLIGHTS

Your Directors are pleased to inform that during the year under report, your Bank has been able to achieve satisfactory growth in Its business. Performance highlights for the financial year in the key financial Areas areas under

(Rs.in Crore) Particulars As on/for the As on / for the year ended year ended 31,03,2013 31.03.2012

Deposits 36055.33 31508.32

Advances 25207,53 0720.70

Invest mints 134324 12041.23

Gross Income 41.33 3447.27

Operating Profit 35.34 510.21

Net Pruitt 345.05 246.07

The total business turnover of the Bank was Rs.61263.90 crore easy on 31st March 2013, an increase of 17.07 parent over the preceding year. The total assets of the Bank increased team Rs.36321.57 crore to Rs.41526.38 crorO recording a growth (Of 14.33 percent for the year 2012-13.

The total deposits of the Bank gnu from Rs. 31605.32 crore as on 31st March, 2012 to Rs. 30055.22 crore as on 31st March 2013, registering a growth of 14.07 percent [During Ihe year, low cost deposits of the Bank, viz, Savings and Currant Account Deposits, have shown growth of 15.71 percent. The market share of the Bank In deposits was 0.52 percent as against 0.51 percent last year.

The total advances grew from Rs. 20720. crore as on 31st March, 2012 to Rs.2520 /.SB crore as on 31 st March. 2013, an increase of 21.65 percent. The priority sector ad van necks increased from Rs.7570.27 re to Rs.9362.52 crore forming 45.19 percent of ANBC as against 40 percent stipulated by RBI and agricultural advances increased from Rs. 556.35 crore to Rs.3715.24 crore Rs.16.47 percent of ANBC as against stipulated 15 percent, lending under various socio-economic schemes has shoo Win sat is-actor tog rasps. The market share of the Bank in loans and advances remained at 0.43 percent.

As on 31st March, 2013 the total investments of the Bank stood at Rs. 13432.48 crore as against Rs.12841.23 crore as on 31st March 2012, an increase of 4.60 percent.

0PERATIONAL PERFORMANCE

In the competitive and challenging business environment, the overall parlor née of you'' Bank during the year 3013-13 was satisfactory. The gross income of this Bank was Rs. 4161.93 crons and total expenditure {excluding provisions and contingencies) was Rs. 3526.59 crore. The net interest income was Rs. 903.73 crore.

PROFIT

Your Hank earned an overhang profit of f 535.34 crore lord tint year 20 t203 as against T 510.21 crore for the previous year showing a growth 0f Rs.4,53 percent The net profit of the Bank Increased from Rs. 246.07 crore to Rs.348.08 crons.

APPROPRIATIONS

The net profit of Rs. 340.08 crore which along with a sum of Rs.0.09 crore brought forward from the previous yeast, aggregating Rs.343.11 crore, appropriated as under. The corresponding figure for the previous year was. 10 Crore

Appropriation Rs.In Crore

Transfar to Statutory Raserve 160.00

Transter to Capital Reserve 3.25

Tfsnsfer to Revenue, Genera

Specie I Reserves 85.11

Transfer to Invastmenl Reserve 11.47

Transferto Proposed Dividend (including tax) Be, is Balance carried to Balance Sheet 0.09

TOtal 348.11

DIVIDEND

Having regard to the overall performance of the Bank and the positive outlook for the future, the Board of Directors recommended a dividend or 40 percent for the reporting year. The dividend payout ratio for the year works out to 21.66 percent.

EARNINGS PER SHARE/BOOK VALUE

The earnings per share (basic) and the book value of the shares as on 31st March, 2013 stood at Rs. 18.48 and Rs. 151.70 respectively.

NET OWNED FUNDS AND CAPITAL ADECUACV RATIO

In order to augment its Capital funds, during the year under report your Bank has raised Rs.250 crore by way of issue of Unsecured Redeemable Non-Convertible Subordinated (lower Tier-II) debt instruments redeem noblest the end of 10 years on private placement basis lacing The aggregate of such funds raised to Rs. 600 crore. During the year under review, the net owned funds of your Bank increased from Rs. 2598.21 crore to Rs. 2857.08 crore, registering a growth of 9.96 percent, The Capital Adequacy Ratio stood at 13.22 percent as on 31-03-2013, as per BASEL II norms (Previous year 12.84 percent). Tha Bank has been consistently maintaining the Ratio well above the ininlrnum of 9 patent stipulated by the Reserve Bank of India. The markets capitalisation as on March 31,201A was Rs.2462.59 Crore

FOREX BUSINESS

During the year under report, your Bank achieved a turnover of Rs. 10083.26 crors in foreign exchange business as against Rs.9243.71 crors tha previous year. The out standing ad vanes to export set tor snood at Rs. 1702.09 crore as on 31-03-2013.

NON PERFORMING ASSETS AND PROVISION COVERAGE RATIO

Your Dank has been focusing on containing the non- performing assets through better credit mentoring as well as intensified efforts to recover The impaired assets Ranch''s. Cross Nash''s on 31st March, 13 had decreased from f 6B4.72 crore (3.27 percent) to Rs.638.88 crore by the year end (2.51 percent). The Net NPAs stood at Rs.377.75 crors (1.51 percent) as against Rs. 435.20 crore (2.11 percent) as on 31st March 2012. The Provision Coverage Fabio (PCR) computed in accordance with the RBI guidelines works out to 55.36 portent as On March 31. 2013 (Previous year 47.18 percent).

CREDIT RATING

The credit rating agency. ICRA Ltd. (ICRA) has accorded ''A1 ''rating to the Banks Certificate of Deposit Programmed. The rating symbol, indicates tha highest degree of safety for timely payment of principal and interest.

The Unsecured Redeemable Non-Converti&ie Subordinated (lower Tier-H) debt issued during the year have teen rated (pronounced A) by JCRA Limited ("ICRA"} and ''CARE A''(s ingle A) by Credit Analysis and Research Limited, ("CARE"). The above rating agencies have also retained the fating "tsar A'' and "CARE A" respective I; assigned to the subordinated debt instruments of crore issued by the Bank during the earlier years. The instruments with these rating are considered to have adequate/high degree of safety regarding timely servicing or financial obligations. Such DISTRIBUTION NETWORK

During the year under report, your Ban has opened 47 new branches in 1 Rs.slates i.e three in Andhra Pradesh

one in Delhi, one in Goo. three in Haryana, one in Jharkhand, 32 in Karnataka one in Getafe. one in Madyapradesh, one in Maharashtra, one m Odessa. one n laminate and one in West Bengal Out to 32 new branches opened in Karnataka, lore Branches opened under the financial inclusion phi Further, as per the direction of Goal. of India (GOI), your Sank has opened £6 Ultra Small Branches in the villages where Brick & Mortar Branches are not viable, in addition (o these branches, your Bank also opened an Extension counter at feta Group of Educational Institution. l. Bangalore. Further, your Bank added 152 ATM outlets at various locations during the yea* £012-13.

As at 31st March, £01 S. your Dank had 1.056 Service Outlets I.e. 550 branches {which include one Corporate Finance branch at Fort Mumbai, an Agricultural [development Branch at Chick magi a lure, 160 specialized MSME branches, IB financial Inclusion branches] Four extension counters and 504 ATMs, five service branches, two currency chests, three asset recovery management branches, 10 Regional Offices, an Division, a Data Centre, a Customer Care Centre, and two Central Processing Centers spread across 20 States and two Union Territories. Further, for better ambience and improved customer service, your Bank had shifted 21 to new premises du ring 2012-13.

EMPLOYE STOCK OPTION SCHEM 6

A total of 59020 equity shares wore allotted to though employees of your Bank, pursuant to the exercise of options vested under the Employee Stock Option Scheme of the Bank. Disclosure In respect of Employee Stock Option Scheme pursuant to SEDI (Employee Stock Option Scheme and Employee Snick Purchase Scheme} Guidelines tS99 is given in Annexure I to this report.

DIRECTORS

Messrs U R Bhat. Bitarama Marty m arid S V Maniunath are retiring by rotation and are eligible for re- appointmarrt at I he forthcoming Annual General Meeting Mr S R Hate, ret irked as Director of the Bhnk upon attaining the upper age limit of years was Rs. 02.07,2012 as per the extant guidelines of RBI . The Board places on record Its appreciation of the active involvement and useful contribution made Mr S R Hedge during his tenure a Director of the Bank

Further, the Board has appoiniad Mr Ashok Haranahalli, Senior Advocate, Bangalore (former Advocate General - Government of Karnataka} as an Additional Director under Section the Companies Act, 1956. The brief resume and other details regaling to the directors who are to he re- appointed are furnished in the notice of the Annual General Meeting

CORPOHATB governance

Your Bank is committed to following the best practices of Corporate governance to protect the interests of ell the stakeholders old the Bank, vii. shareholders, depositors, other customers. employees and the society in general and maintains transparency at all levels. A detailed report on corporate governance practices & given as Annexure ill to this report.

DIRECTORS'' RESPONSIBILITY REPORT

As per Section ai7(2AA) to Companies (Amendment) Act. £000, your Directors report that:

r. The accounts for the year 2012-13 were prepared by following the accounting standards in so far as they apply to banks.

il. Accounting pedicles adopted and applied consistently by Bank are in tune with the RBI guidelines issued from time to time. Reasonable prudent judgments and estimates have been made m the accounts, so as to give a true and fair view to the state orate iris of the Bank and of the profit opt the Bank for the financial year ended 31st March, 2013.

LI. The Bank had taken proper and sufficient care for maintaining adequate records m accordance with the provisions opt the Companies Act 195C. in so tar a* they apply to banks.

iv. The annual accounts for the year ended 31st March, 2013 have been prepared on a "Going Concern'' basis.

STATUTORY DISCLOSURES

Considering the nature the Bank''s business, the provisions old Section 217(1) (e) of the Companies Act. 1relating to conservation of energy and technology absorption do not apply to your Bank. The Bank has. however, used information tech no logy extensively in its operations.

There were no employees who ware In receipt of remuneration during the year ended March 31, 2D13 requiring disclosure under Section 2l7(2A) of the Com panics Act. 195G read with Companies (Pa reticule airs of Employees) Rules, 1975.

SOCIAL INITI ATIVES

Businesses ere an integral part of society and have a critique active role in the sustenance and improvement of a healthy ecosystem in fostering social inclusive nests rib aqua and u pho Id el hi™ I practices and good governance. It is believed that integrating social, environ mental and ethical responsibilities into governance of business ensures long term successes, competencies and sustainability. With this in mind your Bank continues to engage in accepting various social responsibilities. The Corporate Social Responsibility initiatives the Hank are designed to ensure Bank adds social environmental and economic mail its activities to make a positive. sustainable impact on both society and business. In this direction the Bank has been responding well over the years through various initiatives like participation in social, cultural.

educational activities etc., aimed at improving the knowledge, standard of lowing and he quality of life of the people and society. The Bank firmly believes that being an integral part of society, it Is the inclusive growth of society which contributes ultimately to the growth of If Bank.

FINANCIAL INCLUSION

Financial Inclusion means making available the full range of banking services an affordable cost to the people who do not have access to banking services. It mainly focuses on the section of society not having formal financial institutional support, Through the Financial Inclusion Phan, Bank arms at ''connecting people'' With the Bank and not just opening accounts This includes meeting the small credit needs of the rural public, giving them access the payments, providing remittance facility and life and health insurance, Efforts arc being made (a optimize the resources to achieve the goal extending banking facilities to the un-ban rived sections.

All the branches of the Bank are under Core Banking Solution (CSS) and all the branches to be opened in future will also be under CBS. Out of 5SQ branches, Bank has 108 Rural branches and all these branches are provided with offering all banking facilities la the rural clientele in the Gram or villages Where are located. the rum I branches are acting as financial literacy centers (fl-Cs) and imparting Banking literacy among the rural Populace

Summary of activities undertaken by the Bank under Financial Inclusion Initiatives a re as under

1) Financial Literacy and Credit Counseling

The Ban first F LOC Center opened in B ,C Road. Banta. Karnataka for the financial year 201l conducted 17E financial literacy campaigns covering 55 visages The second FLCC Center was opened at Dharma District, Karnataka on 16.03.£013, in association with JnanaJyolhi F LCC Trust Mani pal. guidelines all the rural branches of your Bank are conducting financial literacy camps In the financial year 2013-14, the Bank is planning to open four {additional FLCC Centers in Karnataka State In association worth Janna Mythoi, Mani pal.

2) Karnatake Farmers Resource Center (KFRC)

The Bank ig one of the trustees of the Karnataka farmers Resource Center

The Bank has contributed 50lakh towards capital expenditure/corpus of KFPC, 3) Electronic Benefit Tan (EBT) - Pilot Project of Govt, of Karnataka:-

The Bonk is Participating in Govt, of Karnataka (GOK) EBT Plot project for NREGA/SSP beneficiaries under - "One District -Many Bank Model'' with tie up arrangement with M''s Integra Micrcsysle/ns for technology as we as for providing seen/ice Payments under EBT have commenced in five Gram Panchayath locations in Chitradunga, Bellary and Daygirl districts. During the financial year 201 £-13. the Bank has disbursed an amount of Rs. £0.04 laths under NREGA/5SP payments scheme by using smart card and hand held machines

4) Revised Strategy and Guidelines for Financial Inclusion Plan

In tune with the revised Strategy & Guidelines of Department of Financial (DFS), Ministry of Finance, GO I. the; Finn ion Plan of the Bank has been revised . Under the revised Plan. 207 Gram consisting of 1002 villages with a (octal population old about 10,31,000 as per census naps been allocated to The Bank in Karnataka, Andhra Pradesh & Chhattisgarh states. Gram Panchayats ( 40s villages with a total population of about 5,23,099 as per 2001 census) are covered by brick and mortar branches. These branches wilt be responsible for all financial inclusion activities. During the financial year, the Bank has opened 10 small branches across the country in rhe remaining Gram Panchayals consisting of 591 villages with an approximate population of &, 11,059 as per Z001 census, banking services will be provided through Business Correspondent Model with Ultra Small Branches (USBs). As on date the Bank has o pond 2 S USBs in Tucker, Mysore, Darwin (Karnataka agate) and Ananlhpur Districts (Andhra Pradesh State). The remaining locations will he covered by 31.12.2013.

5} Direct Boniest "transfer:

The Bank is actively participating in Direct Benefit Transfer (DST) programmed of Golf wherein, benefits under various schemes will be transferred directly to beneficiaries of ''Adhere'' enabled bank accounts. For this purpose, the Bank has already on boarded with Nepal for Adhere Payment Bridge System (APBS) under National Automated Clearing House (NACH). In the directing more than lakh accounts had been seeded with Adhere number, out of which, 40.000 accounts had been enabled as ''Adhere Edna bled Accounts''

AWAROS A N D RE COGNIT10 N S

Bank bagged the following awards during the year unite re|jort in recognition of its technology initiatives, operational excel e one and I nests:

1) I BA Banking Tech no logy Awards 5011 Adjudged as Hoe Second Runner Up for the Best Finance Inclusion Initiatives under the category of Private Sector Banks.

2) I BA Banking Technology Awards SG11 Adjudged as the Second Runner Up for the Best Risk Management and Security Initiatives under I he category of Private Sector Banks.

3) NFS- Operational Excellence Awards 20i£: Special Jury Award for Excellent Performance in Key Parameters in respect of ATMs and Switch con nested to N FS ATM network.

4} ''Best Banker in Customer Friend Irises-Runner Up'' award in the Midsized: Banks'' category at the ''Sunday Standard Finn 201 £ Best Bankers'' awards instituted by the New Indian Express Group.

Further, your Bank has received ISO 27001:2005 certificate tor three IT set-ups . Data Centre, Near Line Site and Head Office -IT Department including Disaster Recovery Site from NQA, a leading assessment, verification and certification body accredited to the United Kingdom Accreditation Service Lukas)

ACKNOWLEDGEMENTS

Your Directors would like to place on record their sincere gratitude to the RBi. other government and regulatory authorities, financial institutions and correspondent banks for their continued guidance and support. Your directors also place on record their gratitude to the Bank''s shareholders, depositors and other Customers tor their continued support, paranoia and goodwill. Your directors express their deep sense of appreciation to the employees, tor their contribution In your Banks quest for sustained growth and profitability arid look forward to their continued confab untie in scaling greater heights

For and on behalf of he Board of Directors

Place; Mangalore Ananlhakr Istina

Date : May 15th, 2013 Chairman


Mar 31, 2012

The Directors have pleasure in presenting the Eighty Eighth Annual Report together with the Audited Statement of Accounts for the year ended, 31st March 2012, and the Auditors' Report.

PERFORMANCE HIGHLIGHTS

Your Directors are pleased to inform that during the year under report, your Bank has been able to achieve three important milestones viz. (1) the turnover of your Bank crossed Rs. 50,000 crore (2) number of branches crossed 500 and (3) the client base has increased to over 50 lakh. Performance highlights for the financial year in the key financial areas are as under:

(Rs. in Crores)

Particulars As on / for the As on / for the year ended year ended 31.03.2012 31.03.2011

Deposits 31608.32 27336.45

Advances 20720.70 17348.07

Investments 12841.23 11506.34

Gross Income 3447.27 2662.60

Operating Profit 510.21 355.29

Net Profit 246.07 204.61

The total business turnover of the Bank was Rs. 52329.02 crore as on 31st March 2012, an increase of 17.11 per cent over the preceding year. The total assets of the Bank increased from Rs. 31693.01 crore to Rs. 36321.57 crore recording a growth of 14.60 percent for the year 2011-12.

The total deposits of the Bank grew from Rs. 27336.45 crore as on 31st March, 2011 to Rs. 31608.32 crore as on 31st March 2012, registering a growth of 15.63 per cent. During the year, low cost deposits of the Bank, viz. Savings and Current Account Deposits, have shown growth of 14.12 per cent due to the various measures undertaken by the Bank. The market share of the Bank in deposits was 0.51 percent.

The total advances grew from Rs. 17348.07 crore as on 31st March, 2011 to Rs. 20720.70 crore as on 31st March, 2012, an increase of 19.44 per cent. While agricultural advances increased from Rs. 2031.23 crore to Rs. 2586.36 crore, the priority sector advances increased from Rs. 6238.36 crore to Rs. 7570.27 crore. Lending under various socio-economic schemes has shown satisfactory progress. The market share of the Bank in loans and advances was 0.43 per cent.

As on 31st March, 2012 the total investments of the Bank stood atRs. 12841.23 crore as against Rs. 11506.34 crore as on 31st March 2011, an increase of 11.60 per cent.

OPERATIONAL PERFORMANCE

Under the competitive and challenging business environment, the overall performance of your Bank during the year 2011-12 was satisfactory. The gross income of the Bank was Rs. 3447.27 crore and total expenditure (excluding provisions and contingencies) was Rs. 2937.06 crore. The net interest income was Rs. 744 crore.

PROFIT

Your Bank earned an operating profit of Rs. 510.21 crore for the year 2011-12 as against Rs. 355.29 crore for the previous year showing a growth of 43.60 per cent. The net profit of the Bank increased from Rs. 204.61 crore to Rs. 246.07 crore.

APPROPRIATIONS

The net profit of Rs. 246.07 crore which along with a sum of Rs. 0.03 Crore brought forward from the previous year aggregating Rs. 246.10 crore, is appropriated as under The corresponding figure for the previous year was Rs. 204.63 crore

Appropriation Rs. in Crore

Transfer to Statutory Reserve 110.00 Transfer to Revenue, General &

Special Reserves 59.48

Transfer to Investment Reserve Account 0

Transfer to Proposed Dividend (including tax) 76.59

Balance carried to Balance Sheet 0.03

Total 246.10

DIVIDEND

Having regard to the overall performance of the Bank and the positive outlook for the future, the Board of Directors recommended a dividend of 35 per cent for the reporting year. The dividend payout ratio for the year works out to 26.78 percent.

EARNING PER SHARE/BOOKVALUE

The earnings per share (basic) and the book value of the share as on 31st March, 2012 stood at Rs. 13.07 and Rs. 137.99 respectively.

NET OWNED FUNDS AND CAPITAL ADEQUACY RATIO

During the year under review the net owned funds of your Bank increased from Rs. 2429.09 crore to Rs. 2598.21 crore, registering a growth of 6.96 per cent. The Capital Adequacy Ratio stood at 12.84 per cent as per BASEL II norms (Previous year 13.33 per cent). The Bank has been consistently maintaining the Ratio well above the minimum of 9 per cent stipulated by the Reserve Bank of India. The market capitalisation as on March 31, 2012 was Rs. 1800.94 crore.

FOREX BUSINESS

During the year under report, your Bank achieved a turnover of Rs.9243.71 crore in foreign exchange business as against Rs. 9006.19 crore in the previous year. The advances to export sector stood at Rs. 1454.41 crore.

NON-PERFORMING ASSETS AND PROVISION COVERAGE RATIO

Your Bank has been focusing on containing the non- performing assets through better credit monitoring as well as intensified efforts to recover the impaired assets. Bank's Gross NPAs as on 31st March, 2012 have decreased from Rs.702.17 Crore (3.97percent) to Rs. 684.72 crore (3.27 percent) by the year end. The Net NPAs stood at Rs. 435.20 (2.11 per cent) as against Rs. 280.34 crore (1.62per cent) as on 31st March 2011. The Provision Coverage Ratio (PCR) computed in accordance with the RBI guidelines works out to 47.18% as on March 31,2012 (Previous year 60.08%).

CREDIT RATING

The credit rating agency ICRA Ltd. (ICRA) has accorded 'A1 ' rating to the Bank's Certificate of Deposit Programme. The rating symbol, 'A1 ' indicates highest degree of safety for timely payment of principal and interest.

Further, ICRA has revised the rating from ICRA A to "ICRA A" (pronounced ICRA A) and Credit Analysis & Research Limited (CARE) has re-affirmed "CARE A (Single a Plus) ratings, (indicating adequate degree of safety regarding timely servicing of financial obligations. Such instruments carry low credit risk), in respect of Rs. 350 crore raised by the Bank during the previous years, byway of Unsecured Redeemable Non-Convertible Subordinated (lower Tier-II) debt instruments. Your Bank would continue its efforts in improving upon the above Ratings.

DISTRIBUTION NETWORK

During the year under report, your Bank opened its 500th branch at Shirur in Karnataka State on 29.03.2012. A total 25 new branches were opened viz at Tanuku, Karimnagar Miryalguda and L B Nagar in Andra Pradesh, Toranagallu Siddalingapura, Yellapur, Bangalore- Rajarajeshwarinagar Siruguppa, Bangalore – Metropolitan Magistrate Court, Kunigal, T Narsipura, Kairangala, Horanadu, Kampli, Sira, Shirur, Yadgir, Indi, Nippani in Karnataka, Gwalior, in Madhyapradesh, Rourkela in Orissa, Chennai- Velachery in Tamilnadu, Baruipur and Memari in West Bengal. Further, your Bank added 85 ATM outlets at various locations during theyear2011-12.

As at 31 March, 2012, your Bank had 503 branches (including one Corporate Finance branch at Fort Mumbai and Agricultural Development branch at Chick magalore), 352 ATM outlets, 10 Regional Offices, an International Division, a Data Centre, a Customer Care Centre, 5 Service branches, 2 Currency Chests, 3 Extension Counters, 2 Central Processing Centers and 3 Asset Recovery management branches spread across 20 States and 2 Union Territories. Further, for better ambience and improved customer service, your Bank shifted 27 branches/officestonewpremises,duringtheyear2011-12.

EMPLOYEES STOCKOPTION SCHEME

A total of 93468 equity shares were allotted to the employees of your Bank, pursuant to the exercise of options vested under the Employees Stock Option Scheme of the Bank. Disclosure in respect of Employee Stock Options Scheme pursuant to SEBI (Employees Stock Options Scheme and Employees Stock Purchase Scheme) Guidelines 1999 is given in Annexure I to this report.

DIRECTORS

Messrs Ananthakrishna, D. Harshendra Kumar and Dr. H. Ramamohan are retiring by rotation and are eligible for re-appointment at the forth coming Annual General Meeting. Their brief resume and other details are furnished in the notice of the meeting.

CORPORATE GOVERNANCE

Your Bank is committed to following the best practices of corporate governance to protect the interests of all the stakeholders of the Bank, viz. shareholders, depositors, customers and employees and the society in general and maintains transparency at all levels. A detailed report on corporate governance practices is given as Annexure III to this Report.

DIRECTORS' RESPONSIBILITY REPORT

As per Section 217(2AA) of Companies (Amendment) Act, 2000, your Directors report that:

i. The Accounts for the year 2011-12 were prepared by following the Accounting Standards in so far as they apply to banks.

ii. Accounting policies adopted and applied consistently by the Bank are in tune with the RBI guidelines issued from time to time. Reasonable prudent judgments and estimates have been made in the accounts, so as to give a true and fair view of the state of affairs of the Bank and of the profit of the Bank for the financial year ended 31st March 2012.

iii. The Bank had taken proper and sufficient care for maintaining adequate records in accordance with the provisions of the Companies Act 1956, in so far as they apply to banks.

iv. The annual accounts for the year ended 31st March 2012 have been prepared on a "Going Concern" basis.

STATUTORY DISCLOSURES

Considering the nature of the Bank's business, the provisions of Section 217(1) (e) of the Companies Act, 1956 relating to conservation of energy and technology absorption do not apply to your Bank. The Bank has, however, used information technology extensively in its operations.

There were no employees who were in receipt of remuneration during the year ended March 31, 2012 requiring disclosure under section 217(2A) of the Companies Act, 1956 read with Companies (Particulars of Employees) Rules, 1975.

SOCIAL INITIATIVES

Businesses are an integral part of society and have a critical active role in the sustenance and improvement of a healthy ecosystem in fostering social inclusiveness and equity and to uphold the ethical practices and good governance. It is believed that integrating social, environmental and ethical responsibilities into governance of business ensures long term successes, competencies and sustainability With this in mind your Bank continues to engage in accepting various social responsibilities. The Corporate Social Responsibility initiatives of the bank are designed to ensure that the bank adds social, environmental and economic value in all its activities to make a positive, sustainable impact on both society and business. In this direction the bank has been responding well over the years through various initiatives like participation in social, cultural, educational activities etc., aimed at improving the knowledge, standard of living and the quality of life of the people and society The Bank firmly believes that being an integral part of society, it is the inclusive growth of society which contributes ultimately to the growth of the Bank.

FINANCIAL INCLUSION

Financial Inclusion is making available the full range of banking services at an affordable cost to the people who do not have access to Banking Services. It mainly focuses on the section of society not having formal financial institutional support.

Your Bank has taken up implementation of Financial Inclusion in 80 villages across Karnataka, Chattisgarah and Andhra Pradesh by utilizing appropriate information and Communication Technology (ICT) based model using Business Correspondents Model in 69 villages and "Brick and Mortar" branch models in 11 villages, for extending banking services in every village having a population of over 2000. Your bank has opened its first Financial Inclusion Branch at Kairangala and the second on eat Horanadu.

With a view to spread awareness on financial services available from banks to the members of general public and to spread financial education and financial literacyto the common man at the remotest Village in the service area of the Bank, your Bank has implemented the mobile van model of Financial Inclusion Resource Center (FIRC) and has covered about 854 service area villages by 31.03.2012. Further, to educate the people in rural and urban areas regarding various financial products and services available from the financial sector, to provide financial counseling services regarding responsible borrowing and debt counseling and restructuring, your Bank has opened its first Financial Literacy Credit Counseling Center (FLCC) at B. C Road, Bantwal by joining hands with Syndicate Bank and Vijaya Bank, as an institutional sponsorer.

Further your Bank is a Trustee of the Karnataka Farmers Resource Center (KFRC) set up by State Level Bankers Committee (SLBC), Karnataka at Bagalkot, Karnataka. It serves as a resource center and provides bridging services to the farmers to develop the managerial capacity of farmers. It also coordinates the services of various service providers to provide training, consultancy: counseling and reference services.

Your Bank is also participating in the pilot project of the Govt. of Karnataka for Bio-Metric Smart Card based payment system (Electronic Benefit Transfer) for National Rural Employment Guarantee Scheme (NREGS) and Social Security Pension (SSP) beneficiaries covering Chitradurga, Yadgir and Bellary Districts in Karnataka.

ACKNOWLEDGEMENTS

Your Directors would like to place on record their sincere gratitude to the Reserve Bank of India, other government and regulatory authorities, financial institutions and correspondent banks for their continued guidance and support. Your Directors also place on record their gratitude to the Bank's shareholders, depositors and other customers for their continued support, patronage and goodwill. Your Directors express their deep sense of appreciation to the employees, for their contribution in your Bank's quest for sustained growth and profitability and look forward to their continued contribution in scaling greater heights.

For and on behalf of the Board of Directors

Place: Mangalore Ananthakrishna

Date : 18.05.2012 Chairman


Mar 31, 2011

The Directors have pleasure in presenting the Eighty Seventh Annual Report, the Audited Balance Sheet as at 31st March 2011 and the Profit & Loss Account for the year ended, 31st March 2011, along with the Auditors Report.

PERFORMANCE HIGHLIGHTS

Performance highlights for the financial year in the key financial areas are as under: -

(Rs. in crore)

Particulars As on /for the As on / for the year ended year ended 31.03.2011 31.03.2010

Deposits 27336.45 23730.65

Advances 17348.07 14435.68

Investments 11506.34 9992.05

Gross Income 2662.60 2354.68

Operating Profit 355.29 260.84 Net Profit 204.61 167.12

The total business turnover of the Bank was Rs. 44684.52 crore as on 31st March 2011, an increase of 17.08 per cent over the preceding year. The total assets of the Bank increased from Rs. 27021.57 crore to Rs. 31693.01 crore recording a growth of 17.29 percent for the year 2010-11.

The total deposits of the Bank grew from Rs. 23730.65 crore as on 31st March, 2010 to Rs. 27336.45 crore as on 31st March 2011, registering a growth of 15.19 per cent. During the year, low cost deposits of the Bank, viz Savings and Current Account Deposits, have shown an impressive growth of 23.23 per cent due to the various measures undertaken by the Bank. The market share of the Bank in deposits was 0.53 per cent.

The total advances grew from Rs. 14435.68 crore as on 31st March, 2010 to Rs. 17348.07 crore as on 31st March, 2011, an increase of 20.17 per cent. While agricultural advances increased from Rs. 1609.16 crore to Rs. 1961.14 crore, the priority sector advances increased from Rs. 5252.96 crore to Rs. 6238.36 crore. Lending under various socio-economic schemes has shown satisfactory progress. The market share of the Bank in loans and advances was 0.44 per cent.

As on 31st March, 2011 the total investments of the Bank stood at Rs. 11506.34 crore as against Rs. 9992.05 crore as on 31st March 2010, an increase of 15.15 per cent.

OPERATIONAL PERFORMANCE

Under the competitive and challenging business environment, the overall performance of Your Bank during the year 2010-11 was satisfactory. The gross income of the Bank was Rs. 2662.60 crore and total expenditure (excluding provisions and contingencies) was Rs. 2307.32 crore. The net interest income was Rs. 612.48 crore.

PROFIT

Your Bank earned an operating profit of Rs. 355.29 crore for the year 2010-11 as against Rs. 260.84 crore for the previous year showing a growth of 36.21 per cent. The net profit of the Bank increased from Rs. 167.12 crore to Rs. 204.61 crore.

APPROPRIATIONS

The net profit of Rs. 204.61 crore which along with a sum of Rs. 0.02 Crore brought forward from the previous year, aggregating Rs. 204.63 crore, is appropriated as under. The corresponding figure for the previous year was Rs. 167.15 crore.

Appropriation Rs. in Crore

Transfer to Statutory Reserve 100.00

Transfer to Revenue, General & 46.40 Special Reserves

Transfer to Investment Reserve -7.20 Account

Transfer to Proposed Dividend 65.41 (including tax)

Balance carried to Balance Sheet 0.02

Total 204.63

DIVIDEND

Having regard to the overall performance of the Bank and the positive outlook for the future, the Board of Directors recommended a dividend of 30 per cent for the reporting year. The dividend payout ratio for the year works out to 27.59 per cent.

EARNING PER SHARE/BOOK VALUE

The earnings per share (basic) and the book value of the share as on 31st March, 2011 stood at Rs. 15.20 and Rs. 129.08 respectively.

ISSUANCE OF FRESH EQUITY SHARES

During the year under report your Bank issued 5,37,69,935 equity shares of Rs. 10 each at a price of Rs. 85 per share including a premium of Rs. 75 per equity share on Rights basis in the ratio of Two equity shares for every

Five equity shares held, aggregating Rs. 457.04 crore as permissible under SEBI (ICDR) Regulations, 2009. The issue has been over subscribed by 1.53 times. After keeping in abeyance entitlements to the extent of 1320 shares, as the entitlements were sub judice, the Board has allotted 5,37,68,615 equity shares on 31.3.2011. The Board of Directors places on record its appreciation for the confidence reposed by the share holders of the Bank and thanks them for their response to the Rights issue. Further 4,45,715 equity shares were allotted to the employees of your Bank, pursuant to the exercise of options vested under the Employees Stock Option Scheme of the Bank. The issuance of equity shares has helped the Bank to improve its capital funds and the Capital Adequacy Ratio as on March 31, 2011.

NET OWNED FUNDS AND CAPITAL ADEQUACY RATIO

During the year under review the net owned funds of your Bank increased from Rs. 1832.75 crore to Rs. 2429.09 crore, registering a growth of 32.54 per cent. The Capital Adequacy Ratio stood at 13.33 per cent as per BASEL II norms (Previous year 12.37 per cent). The Bank has been consistently maintaining the Ratio well above the minimum of 9 per cent stipulated by the Reserve Bank of India. The market capitalisation as on March 31, 2011 was Rs. 2022 crore.

FOREX BUSINESS

During the year under report, your Bank achieved a turnover of Rs. 9006.19 crore in foreign exchange business as against Rs. 8605.93 crore in the previous year. The advances to export sector increased from Rs. 1369.12 crore to Rs. 1502.04 crore.

NON-PERFORMING ASSETS

Your Bank has been focusing on containing the non- performing assets through better credit monitoring as well as intensified efforts to recover the impaired assets. However in view of delinquencies in select sectors, the Banks, Gross NPAs as on 31st March, 2011 have increased from Rs. 549.64 crore (3.73 per cent) to Rs. 702.17 crore by the year end (3.97 per cent). The Net NPAs stood at Rs. 280.34 (1.62 per cent) as against Rs. 188.61 crore (1.31 per cent) as on 31st March 2010.

CREDIT RATING

The credit rating agency, ICRA Ltd. (ICRA) has accorded ‘A1+ rating to the Banks Certificate of Deposit Programme. The rating symbol, ‘A1+ indicates highest degree of safety for timely payment of principal and interest.

Further, ICRA and Credit Analysis & Research Limited (CARE) have re-affirmed LA+ (pronounced L A plus) and “CARE A + (Single A Plus) ratings assigned respectively

indicating adequate credit quality to Rs. 350 crore raised by the Bank during the previous years, by way of Unsecured Redeemable Non-Convertible Subordinated (lower Tier-II) debt instruments.

DISTRIBUTION NETWORK

Your Bank opened its ninth Regional Office in Hyderabad on 30th April, 2010 for operational convenience. During the year under report, your Bank opened 14 new branches at Arsikere – Hoysaleshwara College Campus, Kadur, Bangalore - Varthur, Bangalore - Raghuvanahalli, Uppinangady, Mudhol, Bangalore - City Civil Court, Bangalore - Herohalli and Sindagi in Karnataka, Jajpur Road and Angul in Orissa, Mumbai – Dadar (W), New Delhi- Vikaspuri, Amtala in West Bengal. Further, your Bank added 50 ATM outlets at various locations during the year 2010-11.

As at 31 March, 2011, your Bank had 478 branches, 267 ATM outlets, 9 Regional Offices, an International Division, a Data Centre, a Customer Care Centre, 5 Service Branches, 2 Currency Chests, 4 Extension Counters, 2 Central Processing Centers and 3 Asset Recovery management branches spread across 20 States and 2 Union Territories. Further, for better ambience and improved customer service, your Bank shifted 11 branches/offices to new premises, during the year 2010-11.

EMPLOYEES STOCK OPTION SCHEME

The information pertaining to Employees Stock Options is given in Annexure I to this report.



DIRECTORS

During the year under report, some changes have taken place in the Board of Directors. Mr. M Bheema Bhat completed the term of 8 years and ceased to be a director w.e.f. September 28, 2010. The Board places on record its appreciation of the active involvement and useful contribution made by Mr M Bheema Bhat. The Board has appointed Mr T R Chandrasekaran, a Chartered Accountant, Chennai as an Additional Director w.e.f. October 15, 2010. The Board welcomes the new Director and seeks his guidance.

CORPORATE GOVERNANCE

Your Bank is committed to following the best practices of corporate governance to protect the interest of all the stakeholders of the Bank, viz. shareholders, depositors, customers and employees and the society in general and maintains transparency at all levels. A detailed report on corporate governance practices is given as Annexure III to this Report.

DIRECTORS RESPONSIBILITY REPORT

As per Section 217(2AA) of Companies (Amendment) Act, 2000, your Directors report that:

i. The Accounts for the year 2010-11 were prepared by following the Accounting Standards in so far as they apply to banks.

ii. Accounting policies adopted and applied consistently by the Bank are in tune with the RBI guidelines issued from time to time. Reasonable prudent judgments and estimates have been made in the accounts, so as to give a true and fair view of the state of affairs of the Bank and of the profit of the Bank for the financial year ended 31st March 2011.

iii. The Bank had taken proper and sufficient care for

maintaining adequate records in accordance with the provisions of the Companies Act 1956, in so far as they apply to banks.

iv. The annual accounts for the year ended 31st March 2011 have been prepared on a “Going Concern” basis.

STATUTORY DISCLOSURES

Considering the nature of the Banks business, the provisions of Section 217(1) (e) of the Companies Act, 1956 relating to conservation of energy and technology absorption do not apply to your Bank. The Bank has, however, used information technology extensively in its operations.

There were no employees who were in receipt of remuneration during the year ended March 31, 2011 requiring disclosure under section 217(2A) of the Companies Act, 1956 read with Companies (Particulars of Employees) Rules, 1975.

SOCIAL INITIATIVES

As a responsible corporate citizen, your Bank has been responding well over the years through certain initiatives like participation in social, cultural, educational activities aimed at improving the quality of life of the people and society. Your Bank believes firmly that being an integral part of the society, it is the all-round growth of the society which contributes ultimately to the growth of the Bank.

FINANCIAL INCLUSION

Financial inclusion is the availability of the full range of banking services at an affordable cost to disadvantaged and low-income groups. It mainly focuses on the poor who do not have formal financial institutional support for getting them out of the clutches of local money lenders. The RBI has simplified the KYC (Know your customer) norms for opening a ‘No frills account. Your Bank has been allocated 81 villages across various states to extend the outreach to the remote corners of the country, by utilizing appropriate Information & Communication Technology (ICT) based model including either by using Business Correspondents Model or “Brick and Mortar” branch models, for extending banking services in every village having a population of over 2000.

With a view to spread awareness on financial services available from banks to the members of general public and spread financial education and financial literacy to the common man at the remotest village in the service area of the Bank, your Bank is implementing the Financial Inclusion Resource Center (FIRC) - Mobile Van model covering about 909 service area villages by 31.03.2012.

Your Bank has launched the first two mobile van FIRC units in Hassan and Chikmagalur Districts on 31.03.2011 in order to cover the 330 service area village of bank branches in these districts. Further, in order to educate the people in rural and urban areas regarding various financial products and services available from the formal financial sector, to provide financial counseling services regarding responsible borrowing and debt counseling and restructuring, your Bank has joined hands with other banks in setting up of Financial Literacy and Credit Counseling Centers (FLCCs).

Further, your Bank has joined as a Trustee of the Karnataka Farmers Resource Center (KFRC) set up by State Level Bankers Committee (SLBC), Karnataka at Bagalkot, Karnataka, to serve as a resource centre for providing bridging services to the farmers to develop managerial capacity of farmers, coordinating the services of various service providers to provide training, consultancy, counseling and reference services.

Your Bank is also participating in the pilot project of the Govt. of Karnataka for Bio-Metric Smart Card based payment system (Electronic Benefit Transfer) for National Rural Employment Guarantee Scheme (NREGS) and Social Security Pension (SSP) beneficiaries, covering Bellary, Chitradurga, Yadgir and Gulbarga Districts in Karnataka. Your Bank is also taking part in the national level awareness campaign on Financial Inclusion - ‘SWABHIMAN targeting people covered under the Financial Inclusion Action Plan, by way of print and electronic media.

ACKNOWLEDGEMENTS

Your Directors would like to place on record their sincere gratitude to the Reserve Bank of India, other government and regulatory authorities, financial institutions and correspondent banks for their continued guidance and support. Your directors also place on record their gratitude to the Banks shareholders, depositors and other customers for their continued support, patronage and goodwill. Your directors express their deep sense of appreciation to the employees, for their contribution in your Banks quest for sustained growth and profitability and look forward to their continued contribution in scaling greater heights.



For and on behalf of the Board of Directors

Ananthakrishna Chairman

Place: Mangalore Date: 23rd May, 2011


Mar 31, 2010

The Directors have pleasure in presenting the Eighty Sixth Annual Report, the Audited Balance Sheet as at 31st March 2010 and the Profit & Loss Account for the year ended, 31st March 2010, along with the Auditors Report.

PERFORMANCE HIGHLIGHTS

Performance highlights for the financial year in the key financial areas are as under: -

(Rs. in crore)

Particulars As on /for the As on / for the

year ended year ended 31.03.2010 31.03.2009

Deposits 23730.65 20333.29 Advances 14435.68 11810.05

Investments 9992.05 8961.49

Gross Income 2354.68 2270.55

Operating Profit 260.84 480.21

Net Profit 167.12 266.70

The total business turnover of the Bank touched Rs.38166.33 crore, an increase of 18.74 percent over the preceding year. The total assets of the Bank increased from Rs.22857.81 crore to Rs.27035.15 crore recording a growth of 18.28 percent for the year 2009-10

The total deposits of the Bank grew from Rs. 20333.29 crore as on 31st March 2009 to Rs. 23730.65 crore as on 31st March 2010, registering a growth of 16.71 percent. During the year, low cost deposits of the Bank viz Savings and Current Account Deposits have shown an impressive growth of 36 percent due to the various measures undertaken by the Bank.

The total advances grew from Rs.11810.05 crore as on 31st March 2009 to Rs.14435.68 crore as on 31st March 2010, an increase of 22.23 percent. While agricultural advances increased from Rs.993.36 crore to Rs.1609.16 crore, the priority sector advances increased from Rs.4372.16 crore to Rs.5252.96 crore. The lending under various socio-economic schemes has shown satisfactory progress. The priority sector advances stand at 45.80 percent and agricultural advances stand at 11.97 percent as at end March 2010.

The total investments of the Bank as on 31st March 2010 stood at Rs.9992.05 crore as against Rs.8961.49 crore as on 31st March 2009, an increase of 11.50 percent.

OPERATIONAL PERFORMANCE

Your Directors report that under the tough business environment in which your Bank operated, the overall financial performance during the year 2009-10 has been satisfactory. The gross income of the Bank was Rs.2354.68 crore and total expenditure (excluding provisions and contingencies) was Rs. 2093.84 crore for the year-ended 31st March 2010. The net interest income for the year ended 31st March 2010 was Rs. 335.63 crore.

PROFIT

Your Bank earned an operating profit of Rs.260.84 crore for the year 2009-10 as against Rs.480.21 crore for the previous year. The net profit of the Bank decreased from Rs.266.70 crore to Rs. 167.12 Crore.

APPROPRIATIONS

The net profit of Rs.167.12 Crore which along with a sum of Rs. 0.03 Crore brought forward from the previous year aggregating Rs.167.15 Crore is appropriated as under. The corresponding figure for the previous year was Rs.266.80 Crore.

Appropriation Rs. in Crore

Transfer to Statutory Reserve 88.00

Transfer to Revenue, General 16.38 & Special Reserves

Transfer to Proposed Dividend 62.75 (including tax)

Balance carried to Balance Sheet 0.02

Total 167.15

DIVIDEND

Keeping in mind the overall performance of the Bank and the positive outlook for the future, the Board of Directors recommended a dividend of 40 percent for the reporting year. The dividend payout ratio for the year stands higher at 32.09 percent as compared to 27.35 percent in the previous year.

EARNING PER SHARE/BOOK VALUE

The earning per share (basic) and the book value of the share stood at Rs.13.50 and Rs.136.80 respectively as on 31st March 2010.

ISSUANCE OF EQUITY SHARES

During the year under report your Bank issued and allotted 12115564 equity shares at a price of Rs. 132.75 per share including premium of Rs. 122.75 per share to Qualified Institutional Buyers under Qualified Institutions Placements (QIP) as per SEBI (ICDR) Regulations, 2009. The issue has enabled your Bank to augument its long term capital requirement and improve the CRAR. Further 285880 equity shares were allotted to the employees of your Bank pursuant to the exercise of options vested under the Employees Stock Option Scheme of the Bank.

NET OWNED FUNDS AND CAPITAL ADEQUACY RATIO

The net owned funds of your Bank increased from Rs.1567.03 crore to Rs 1832.75 crore, registering a growth of 16.96 percent. The capital adequacy ratio stood at 12.37 percent as per BASEL II norms (Previous year 13.48 percent). The Bank has been consistently maintaining Capital Adequacy Ratio well above the minimum of 9 percent stipulated by the Reserve Bank of India.

FOREX BUSINESS

During the year under report, your Bank achieved a turnover of Rs 8605.93 crore in foreign exchange business as against Rs. 7850.65 crore in the previous year. The advances to export sector increased from Rs.1277.42 crore to Rs.1369.12 Crore.

NON-PERFORMING ASSETS

Your Bank has been focusing on containing the non- performing assets through better credit monitoring as well as intensified drive for the recovery of the impaired assets. However in view of global recession and delinquencies in select sectors the Banks, Gross NPAs as on 31st March 2010 have increased to Rs.549.64 crore (3.73 percent) as against Rs.443.20 crore (3.66 percent). The Net NPAs stood at Rs.188.61 crore (1.31 percent) as against Rs. 116.10 crore (0.98 percent) as on 31st March 2009.

CREDIT RATING

The credit rating agency, ICRA Ltd. (ICRA) has accorded ‘A1+ rating to the Banks Certificate of Deposit Programme. The rating symbol, ‘A1+ indicates highest degree of safety for timely payment of principal and interest.

Further, ICRA and Credit Analysis & Research Limited (CARE) have re-affirmed LA+ (pronounced L A plus)

and “CARE A + (Single A Plus) ratings assigned respectively indicating adequate credit quality to Rs. 350 crore raised by the Bank during the previous years, by way of Unsecured Redeemable Non-Convertible Subordinated (lower Tier-II) debt instruments.

DISTRIBUTION NETWORK

During the year under report, your Bank opened 17 branches in Patna, Kanakapura, Tambaram, Vellore, Dhanbad, Kolkata - Bhowanipore, Naganathapura, Gundlupet, New Delhi - Ashokvihar, Ujjain, Ghaziabad, Kancheepuram, Chennai - Annanagar (West), Brahmapur, Serillingampally, Durg and Rajarhat - Kolkata.

Further, your Bank added 46 ATM outlets at various locations during the year 2009-10. As at 31st March 2010, we had 464 branches, 217 ATM outlets, 8 Regional Offices, one International Division, one Data Centre, one Customer Care Centre, 5 Service branches, 2 Currency Chests, 6 Extension Counters and two Central processing centers, spread across 20 states and 2 Union Territories. Further, for better ambience and improved customer service, we shifted 16 branches/offices to new premises, during the year 2009-10.

EMPLOYEES STOCK OPTION SCHEME

The information pertaining to Employees Stock Options is given in Annexure I to this report.

MANAGEMENT DISCUSSION AND ANALYSIS

Macro- economic and Industry Developments The advance estimates of the Central Statistical Organisation (CSO) released in February 2010 have placed the real GDP growth for 2009-10 at 7.2 percent. The Final real GDP growth for 2009-10 may settle between 7.2 and 7.5 percent. The decline in agricultural and allied activities GDP for the year 2009-10 is expected to be much smaller at (-) 0.2 percent as per CSO advance estimates.

Industrial output which was affected by the cyclical slowdown and international commodity price shocks in 2007-08 and the global recession in 2008-09 recovered substantially in 2009-10. The index of industrial production (IIP) registered double digit growth at 10.4 percent during the year 2009-10 over the corresponding period of the previous year.

Headline inflation, as measured by year-on-year variations in the wholesale price index (WPI), accelerated from 0.5 percent in September 2009 to 9.9 percent in March 2010. Inflation, based on year-on-year variation in consumer

price indices (CPIs), was in the range of 14.9 percent – 16.9 percent in January/February 2010. The higher level of consumer price inflation in the recent months, as compared to WPI inflation, could be attributed to higher prices of food articles which have higher weight in CPIs.

During 2009-10, the Indian rupee generally exhibited strengthening trend against the US dollar on the back of capital inflows and positive growth outlook, although marked by intermittent depreciation pressures. Reflecting the easing of supply conditions in the market led by capital inflows, forward premia generally exhibited declining trend during 2009-10, with sporadic hardening on account of underlying demand conditions. The Rupee/US dollar exchange rate which was Rs. 50.72 per dollar at end-March 2009 appreciated to Rs. 44.89 per dollar as on March 31, 2010. The Indian Rupee had appreciated by 11.49 per cent against the US dollar in the year ended March 31, 2010 over its level in the previous year. Further the Rupee appreciated against the pound sterling by 6.21 per cent and EURO by 9.73 percent during the above period.

The stronger signs of global recovery taking hold led to reduction in risks in the international markets, which also favorably impacted the domestic equity markets during the major part of 2009-10. Reduction in risk perception towards EMEs along with continuance of low policy rates in the advanced economies for the extended periods, led to revival in capital flows to India, which in turn contributed to significant gains by the equity markets.

With the recovery seen in the global economy, Indias external sector witnessed further improvement, as reflected in the turnaround in exports, buoyancy in capital inflows and further accretion to the countrys foreign exchange reserves. During 2009-10, foreign exchange reserves increased by US$ 27.1 billion to reach US$ 279.1 billion as at end-March 2010 as against US$ 252.00 billion as at end-March 2009.

Development in the Banking space

During the year 2009-10, the aggregate deposits of the scheduled commercial banks (SCBs) increased by 17.1 percent (Rs. 702514 crore) as compared with 18.80 percent (Rs. 646627 crore) in the previous year. Time deposits recorded growth of 16.2 per cent (year on year) at end-March 2010 as compared to 22.6 percent a year ago, while demand deposits grew by 22.8 percent.

During the financial year 2009-10, credit flow from scheduled commercial banks moderated to 16.70 per cent as compared with 17.30 percent during the previous year. Food credit of SCBs increased by Rs.2278 crore in

2009-10 as compared to Rs.1812 crore in the previous year. Non-food credit extended by the scheduled commercial banks (SCBs) increased by 16.9 percent (Rs. 462571 crore) as compared to 17.50 percent (Rs. 406287 crore) in the previous year.

Commercial banks investment in government and other approved securities increased by 18.51 percent (Rs.216273 crore) during 2009-10 compared to the previous years increase of 20.0 percent (Rs.194031 crore) Investment in non-SLR securities grew by 12.8 percent (Rs.26597 crore) as against the increase of 24.2 percent (Rs.41344 crore) in the previous year.

Opportunities

The fast paced recovery in the Indian economy on the back of global economic recovery is expected to take India on a robust growth path. There has been a revival in investment and private consumption demand. Indian exports have recorded impressive growth in November and December 2009 and thereafter the indications have been encouraging. The favorable capital market conditions with improvement in capital flows and business sentiments are also encouraging and the manufacturing sector has been showing buoyancy in recent months. The Governments thrust on infrastructure development may also open up avenues to Banks to finance these projects. The Policy prounouncement by the RBI, re- opening the ECB route for corporates to raise funds will help boost up Investment. The improved employment situation in the country, higher income levels etc augur well for the long term sustainable growth of retail lending in the Indian market. Governments inclusive growth agenda may also bring additional business to Banks in rural and semi urban areas.

Outlook

Though the increasing inflation is worrisome, the policy measures initiated by the Government and the Regulator is likely to rien in the inflation and the economic growth may remain strong in the coming years. However, surfacing of the recent economic crisis in Greece and other European counties may over shadow the global economic recovery which may have its effect on our economic growth also. Your Bank would like to position itself to seize the available opportunities and improve the business. Your Bank having networked all its branches with its core banking solution, is looking to leverage its technology to offer various new and sophisticated products and services.

BUSINESS GOALS FOR THE CURRENT YEAR

In the light of better outlook for industrial growth, your Bank has envisaged to achieve a total business turnover of Rs.45000 crore, comprising of deposits of Rs.27500 crore and advances of Rs.17500 crore for the year ending 31st March 2011. In this direction the Bank has opened

its 9th Regional Office at Hyderabad in April 2010. Your Bank is confident of achieving the same through better customer services and operational efficiency. Besides, the Bank has plans to increase its total number of business units to 780, by increasing the total number of branches to 480 and own ATM network to 300 by March 2011.

SEGMENT REPORTING

Pursuant to the Guidelines issued by RBI on Accounting Standard 17 (Segment Reporting) the Bank has identified four business segments viz., Treasury, Corporate/ Wholesale banking, Retail Banking and Other Banking Operations for the year ended 31st March 2010.

Treasury Operations

Treasury operations include the entire investment portfolio i.e. dealing in government and other securities, money market operations and Foreign Exchange operations.

During the year-ended 31st March 2010, your Bank has earned total revenue of Rs.808.29 crore from Treasury operations with a net result of Rs. (-) 77.68 crore.

Corporate / Wholesale Banking

Wholesale Banking includes all advances, not included under Retail Banking. The revenue earned by the Bank during year under this Segment was Rs.661.29 crore with contribution of Rs. (-) 51.35 crore. Retail Banking

Retail Banking includes exposure which fulfills the following FOUR criteria:

a. Orientation criterion - The total annual turnover is less then Rs.50 crore i.e. the average turnover of the last three years in case of existing entities and projected turnover in case of new entities.

b. Product Criterion - The exposure taking the form of revolving credits and lines of credit (including overdrafts), term loans and leases and small business facilities and commitments.

c. Granularity criterion - Aggregate exposure to one counterpart does not exceed 0.20percent of the overall retail portfolio.

d. Low value of individual exposure - The maximum aggregate exposure up to Rs.5 crore

During the year 2009-10, this Segment has earned revenue of Rs. 839.41 crore and a net result of Rs. 303.14 crore (+ve).

Other Banking Operations

Other Banking Operations include the remaining business done by the Bank i.e. distribution of insurance and mutual fund products, Demat services, online shopping, railway ticket booking, locker facilities etc.

During the year-ended 31st March 2010, this segment has generated revenue of Rs. 45.69 crore and a net result of Rs. 37.88 crore (+ve).

RISKS AND CONCERNS

Risk is inherent in all kinds of business activities and is an integral part of the banking business. In normal course of business, a bank is exposed to various risks namely Credit Risk, Market Risk and Operational Risk besides other residual risks such as Liquidity Risk, Concentration Risk, Strategic Risk, Reputation Risk etc. With a view to efficiently manage such risks, your Bank has put in place various risk management systems and practices. In line with the guidelines issued by the Reserve Bank of India from time to time, we continue to strengthen our various risk management systems that includes policies, tools, techniques, monitoring mechanisms etc.

Your Bank aims at enhancing and maximizing the shareholder values by achieving appropriate tradeoff between risks and returns. Your Banks risk management objective broadly covers proper identification, measurement, monitoring / control and mitigation of the risks with a view to enunciating the banks overall risk philosophy. The risk management strategy adopted by your Bank is based on clear understanding of risks and the level of risk appetite dependent upon the willingness to take on risks in normal course of business. A Board level Integrated Risk Management Committee of your Bank periodically reviews the risk profile, evaluates the overall risks faced by the Bank, and develops policies and strategies for their effective management.

In line with the guidelines issued by the RBI, your Bank has implemented New Capital Adequacy Framework and is Basel II compliant with effect from March 31, 2009. The Basel II framework, as referred, is based on three mutually reinforcing pillars. While the first Pillar of the revised framework addresses minimum capital requirement for credit, market and operational risk, the second pillar (supervisory review process) intends to ensure that the banks have adequate capital to address all the risks in their business commensurate with banks risk profile and control environment. 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 regard, the Basel II Pillar III Disclosure is annexed to this report as Annexure II.

INTERNAL CONTROL SYSTEMS

Your Bank has put in place well articulated internal control measures commensurate with the size of the Bank and complexity of operations. A separate Compliance Department has also been set up. The Audit Committee of the Board of Directors supervises the internal audit and compliance functions. The system of regular inspection, short inspection and EDP Audit (IS Audit) of all the branches / offices, Concurrent IS Audit of Data Center and concurrent audit of select branches, Treasury Department and International Division, etc., form part of the internal control mechanism. Besides, your Bank has been ensuring stock audit and credit audit of large borrowal accounts by professional audit firms to further strengthen the credit administration. As mandated by the Reserve Bank of India, Risk-based Internal Audit system has already stabilized in the Bank and all the branches have been subjected to such Audit. The Bank has introduced on line marking of NPAs with effect from 30th September 2009 and has also initiated steps for offsite monitoring of all the borrowal accounts with limits above Rs. 25 lakh.

HUMAN RESOURCE DEVELOPMENT

The survival and prosperity of any industry depends upon the quality of its human resource and this is true even for service oriented Banking Industry. Human Resource Development is a key responsibility area for your bank too. Your Bank takes special care to ensure the growth of each individual employee in every aspect. Employees are sent for various training and development programmes to upgrade their skills and competencies so that they grow as an individual and contribute towards the growth of the Bank. Your Bank has its own Staff Training College, with state of the art infrastructure facilities and expert faculty members to impart training to the staff members. The Officers are also being deputed to various training programmes conducted at Southern India Banks Training College Bangalore, National Institute of Bank Management, Pune, College of Agriculture Banking, Pune, and Institute for Development and Research in Banking Technology, Hyderabad, State Bank Staff College, Hyderabad etc., wherever specialized training is found necessary. In addition, Executives / Senior Managers are also deputed to premier institutions. During the year 2009-10, 1752 Officers, 1260 clerks and 65 Sub-staffs were given training under various disciplines to update / improve the knowledge.

Your Bank enjoys excellent industrial relations and there is an atmosphere of peace and harmony in the Bank. This has helped in maintaining a pleasant work environment

enabling the employees to perform better. The performance of individual employees is recognized and rewarded by promotions, appreciations etc. Further, the Employee Stock Option Scheme has also been introduced in the Bank which provides for grant of stock options depending upon the performance of the employees. This has greatly motivated the employees to reach greater heights of performance. The number of employees in the Bank stood at 5244 as on 31st March 2010. The business per employee (excluding inter-bank deposits) has improved from Rs.6.49 crore as on 31st March 2009 to Rs. 7.27 crore as on 31st March 2010.

DIRECTORS

During the year under report, some changes in the Board of Directors have taken place. Mr Ananthakrishna former Chairman and CEO of the Bank retired on July 12, 2009. He has been appointed as the Part time Non- Executive Chairman of the Bank w.e.f. July 13, 2009 and Mr. P. Jayarama Bhat, former Chief General Manager of the Bank, has been appointed as the Managing Director, who assumed charge on July 14, 2009. These appointments were made with the approval of the Reserve Bank of India. The Board of Directors places on record its appreciation and gratitude to Mr Ananthakrishna for the contribution made by him to the overall development of the Bank during his tenure as Chairman & CEO of the Bank and looks forward for his continued guidance.

CORPORATE GOVERNANCE

Your Bank is committed to following the best practices of corporate governance to protect the interest of all the stakeholders of the Bank, viz shareholders, depositors, customers and employees and society at large and maintains transparency at all levels. A detailed report on corporate governance practices is given in Annexure III to this Report.

DIRECTORS RESPONSIBILITY REPORT

As per Section 217(2AA) of Companies (Amendment)

Act, 2000, your Directors report that:

i. The Accounts for the year 2009-10 were prepared by following the Accounting Standards in so far as they apply to banks.

ii. Accounting policies adopted and applied consistently by the Bank are in tune with the RBI guidelines issued from time to time. Reasonable prudent judgments and estimates have been made in the accounts, so as to give a true and fair view of the state of affairs of the Bank and of the profit of the Bank for the financial year ended 31st March 2010.

iii. The Bank had taken proper and sufficient care for maintaining adequate records in accordance with the provisions of the Companies Act 1956 in so far as they apply to banks.

iv. The annual accounts for the year ended 31st March 2010 have been prepared on a “Going Concern” basis.

STATUTORY DISCLOSURES

Considering the nature of the Banks business, the provisions of Section 217(1) (e) of the Companies Act, 1956 relating to conservation of energy and technology absorption do not apply to your Bank. The Bank has, however, used information technology extensively in its operations.

The information required under section 217(2A) of the Companies Act, 1956 read with Companies (Particulars of Employees) Rules, 1975 is attached to this report as Annexure IV.

SOCIAL INITIATIVES

As a responsible corporate citizen, your Bank has been responding well over the years through certain initiatives like participation in social, cultural, educational activities aimed at improving the living standard of the people at large. As a gesture of its concern and commitment to the society, your Bank donated generously to the flood relief fund of the Government of Karnataka when the unprecedented havoc caused by the fury of nature struck certain parts of north Karnataka last year. Your Bank has also sponsored events like medical check- up, de-addiction programmes, mass marriages etc intended for the benefit of the society at large. Your Bank believes firmly that being an integral part of the society, it is the all-round growth of the society which contributes ultimately to the growth of the Bank. Further with the objective of providing basic banking services to vast sections of underprivileged and low- income groups who tend to be excluded from the banking system your Bank has put in place a “Financial Inclusion Plan” during the year. This plan envisages widening the reach of banking services to the remote and rural areas by making use of modern information technology and managerial capabilities of business correspondents.

ACKNOWLEDGEMENTS

Yo ur Directors would like to place on record their sincere gratitude to the Reserve Bank of India, other government and regulatory authorities, financial institutions, correspondent banks for their continued guidance and support. Your directors also place on record their gratitude to the Banks shareholders, depositors and customers for their continued support, patronage and goodwill. Your directors express their deep sense of appreciation to the employees, who have continued to display outstanding professionalism and commitment in your Banks quest for sustained growth and profitability and look forward to their continued contribution in scaling greater heights.

For and on behalf of the Board of Directors

Place : Mangalore Ananthakrishna

Date : 17.05.2010 Chairman

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