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Notes to Accounts of Karnataka Bank Ltd.

Mar 31, 2016

GENERAL

The Karnataka Bank Limited incorporated at Mangaluru in India is a publicly held Banking Company governed by the Banking Regulation Act, 1949 and is engaged in providing a wide range of banking & financial services involving retail ,corporate banking and para-banking activities in addition to treasury and foreign exchange business.

BASIS OF PREPARATION:

The accompanying financial statements have been prepared following the going concern concept, on historical cost basis and confirm to the Generally Accepted Accounting Principles, (GAAP) in India which encompasses applicable statutory provisions, regulatory norms prescribed by the Reserve Bank of India (RBI) from time to time, notified Accounting Standards (AS) issued under the Companies (Accounting Standards) Rules, 2006 to the extent applicable and current practices prevailing in the banking industry in India.

The preparation of the financial statements require management to make estimates and assumptions that affect the reported amounts of assets and liabilities including contingent liabilities as of the date of the financial statements and the reported income and expenses during the reported period. The Management believes that the estimates and assumptions used in the preparation of the financial statements are prudent and reasonable. Actual results could differ from these estimates. The differences, if any between estimates and actual will be dealt appropriately in future periods.

1.1.1. Employee Stock Options (ESOP)

The shareholders of the Bank had approved on 15.07.2006, grant of equity shares under Employee Stock Option scheme of the Bank framed in compliance with SEBI (Employee Stock Option Scheme & Employee Stock Purchase Scheme) Guidelines, 1999.

Under the scheme, the Bank had granted stock options to the eligible employees on various dates in the past, each option entitling for one share at an exercise price of Rs.50 per share (adjusted to Rs.46.20 per share post rights issue 2011). The options granted to employees had vested in a graded manner and these may be exercised by the employees within a specified period. Options vested but not exercised before the specified exercise period would lapse.

The Bank follows the intrinsic value method to account for its stock-based employee compensation plans. Compensation cost is measured by the excess, if any, of the fair market price of the underlying stock over the exercise price as determined under the option plan. The fair market price is the closing price on the stock exchange where there is highest trading volume on the working day immediately preceding the date of grant. Compensation cost has been absorbed.

1.2 Accounting Standard 17- Segment Reporting:

For the purpose of segment reporting in terms of AS 17 of ICAI and as prescribed in RBI guidelines, the business of the Bank has been classified into 4 segments i.e. (a) Treasury Operations (b) Corporate / Wholesale Banking (c) Retail Banking and (d) Other Banking Operations. Since the Bank does not have any overseas branch, reporting under geographic segment does not arise. Segment assets have been identified and segment liabilities have been allocated on the basis of segment assets.

1.3 Accounting Standard 28 - Impairment of Assets:

An assessment is made at each Balance Sheet date whether there is any indication that an asset is impaired. If any such indication exists, an estimate of the recoverable amount is made and impairment loss, if any, is provided for. As on March 31, 2016, there is no indication of impairment in connection with any asset.

2.1 Drawdown from Reserves:

The Bank has drawn a sum of Rs.3.84 Crore (Previous year NIL) from the Investment Reserve to meet the depreciation requirement on Investment as per extant RBI Guidelines.

2.2 Disclosure of Letters of Comfort (LoC)

The Bank issues Letters of Comfort on behalf of its various constituents against the credit limits sanctioned to them. In the opinion of the management, no significant financial impact and/or cumulative financial obligations have devolved during the year in respect of the LoC issued by the Bank and remaining outstanding as of 31st March 2016.

2.3 Provision Coverage Ratio (PCR):

The Bank''s provision coverage ratio as of March 31, 2016 is 48.39% (previous year 50.54%)

2.4 Overseas Assets, NPA and Revenue: Nil

2.5 Off- Balance Sheet SPV sponsored (which are required to be consolidated as per accounting norms):Nil

2.6 Disclosure of Remunerations:-

a) Qualitative disclosure: Remuneration Committee

The Nomination & Remuneration Committee (N&RC) consists only Independent Directors, two of them being the members of Integrated Risk Management Committee of the Board (IRMC) also.

Objectives of Compensation Policy

Compensation Policy aims to attract and retain the right candidates in the Bank. The policy is designed to support key business strategies and create a strong, performance-orientated environment besides providing reasonable remuneration commensurate with the growth of the Bank. It also ensures effective governance of compensation, alignment of compensation with prudent risk taking, effective supervisory oversight and stakeholder engagement. The Policy also aims at facilitating effective succession planning in the Bank.

The N&RC works in close coordination with the Integrated Risk Management Committee to ensure effective alignment of remuneration and risks.

Risk adjustments in remuneration

A wide variety of measures of credit, market and liquidity risks are used by bank in implementation of risk adjustment. The risk adjustment methods have both quantitative and judgmental elements. Compensation outcomes are symmetric with risk outcomes and compensation payouts are sensitive to the time horizon of the risk.

Performance linked variable compensation, deferral and forms

The performance-based remuneration motivates and rewards high performers who strengthen long-term customer relations, and generate income and shareholder value. The bank''s compensation policy stipulates that while designing the compensation package to WTD/CEO, it is ensured that there is a proper balance between fixed pay and variable pay. While fixing the Variable Pay, performance parameters under financial and non-financial areas of operations shall be assessed.

The variable pay shall not exceed 70% of the fixed pay in a year. The deterioration in the financial performance of the bank should generally lead to a contraction in the total amount of variable remuneration to be paid.

Further, where the variable pay constitutes a substantial portion of the fixed pay (i.e. 50% or more of the fixed pay), an appropriate portion of the variable pay, say 40% to 60% must be deferred for over a period. The Board/Nomination & Remuneration Committee may grant stock options under the Employees Stock Options Plan/Scheme as per Securities and Exchange Board of India (Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines, 1999, subject to the approval of Reserve Bank of India under Section 35B of the Banking Regulation Act, 1949. Such Stock Options will be excluded from the components of variable pay. In case variable pay payable is 50% or more, deferral arrangements of variable pay shall be applied. The deferral period should not be less than three years. Compensation payable under deferral arrangements should vest on a pro-rata basis at such rates as may be decided by the Board/RC. In the event of negative contributions of the Bank and/or the relevant line of business in any year, the deferred compensation is subject to malus/claw back arrangements. The variable pay could be in cash, or stock linked instruments or mix of both.

2.7 Un-hedged Foreign Currency Exposure:

The Bank has put in place a policy on Hedging of Foreign Currency Exposure which is a part of the Loan Policy which stipulates the guidelines on managing the risk arising out of the un-hedged foreign currency exposure in line with the extant RBI Guidelines. Further, the Bank has made a provision of Rs.13.20 crore (Previous year Rs. 12.81 crore) and has provided capital for the un-hedged foreign currency exposure of borrowal entities of Rs. 3.49 crore (previous year Rs.5.75 crore) in line with the extant RBI Guidelines.

2.8 Frauds :

The total number of frauds reported during the year is 21, amounting to Rs. 91.98 crore, is fully provided for in the current year.

Necessary system has been put in place to compute LCR and bank''s strategy would be to maintain LCR well above the regulatory minimum levels ahead of the stipulated timelines. The main driver of LCR is adequate HQLAs and Bank is maintaining LCR well above the minimum stipulated level of 70% in view of SLR investments in excess of statutory requirement and 10% of NDTL in the form of borrowing limit available through Marginal Standing Facility (MSF) and Facility to Avail Liquidity for Liquidity Coverage Ratio (FALLCR).The Bank has a diversified liability mix comprising of healthy Retail Deposits with its pan India presence and the dependency on wholesale funding is insignificant.

Bank''s Asset Liability Management Committee (ALCO) is empowered to monitor and form suitable strategies to maintain stipulated levels of LCR by channelizing funds to target good quality asset and liability profile to meet Bank''s profitability as well as liquidity requirements.

Funding strategies are formulated by the Treasury and Accounts Department (TAD) in accordance with ALCO guidance. The objective of the funding strategy is to achieve an optimal funding mix which is consistent with prudent liquidity, diversity of sources and servicing costs. Accordingly, TAD estimates daily liquidity requirement. With the help of structural liquidity statement prepared by bank, TAD evaluates current and future liquidity requirement and takes necessary action.

2.9 Strategic Debt Restructuring (SDR):

During the year, the Bank has been allotted 248264 no. of shares with a face value of Rs. 2 /- at the rate of Rs. 11.89 per share amounting to a book value of Rs. 0.30 Crores.

2.10 Operating Expenses stated in Schedule 16 to the Profit and Loss Account includes Rs. 4.90 Crore spent toward Corporate Social responsibility (CSR) Activities.

3 Reconciliation of Branch Adjustments and Balancing of Subsidiary Ledgers.

a) Balancing of Subsidiary Ledgers is completed in all branches/offices.

b) Reconciliation of branch adjustments/Inter Bank accounts has been completed up to 31st March 2016 and steps are being taken to give effect to consequential adjustments of pending items.

4 Investments:

The percentage of SLR investments under "Held to Maturity" category as on 31st March 2016 was 21.05% (Previous Year 22.33%) of the Net Demand and Time Liabilities of the bank, which is within the permissible limit as per RBI guidelines.

5. A sum of Rs. 791.82 crore (Previous year Rs. 605.62 crore) is outstanding on account of demands raised by the Income Tax Department in earlier years which have been paid under protest. No provision is considered necessary in respect of these demands, as the Bank has been advised that there are good chances of success in appeals/ considering favourable judicial pronouncements and/or appellate orders on identical issues for earlier assessment years.

6. In accordance with the RBI Circular DBR. No. BPBC.2/21.06.201/2015-16 dated 1st July 2015 on ''Basel III Capital Regulations'' and RBI Circular DBR.NO.BP.BC 80/21.06.201/2014-15 dated March 31, 2015 on ''Prudential Guidelines on Capital Adequacy and Liquidity Standards Amendments'', Banks are required to make Pillar III disclosures including Leverage Ratio and Liquidity Coverage Ratio under Basel III Framework. The Bank has made these disclosures which are available on its web site at the following link http://ktkbank.com/ktk/BaselDisclosures.jsp#. These disclosures have not been audited by the Statutory Central Auditors.

7. Previous year''s figures have been regrouped/rearranged/given in brackets wherever necessary and feasible to conform to the current year classifications.


Mar 31, 2015

BASIS OF PREPARATION AND SIGNIFICANT ACCOUNTING POLICIES ADOPTED IN PREPARING FINANCIAL STATEMENTS

GENERAL

The Karnataka Bank Limited incorporated at Mangaluru in India is a publicly held Banking Company governed by the Banking Regulation Act, 1949 and is engaged in providing a wide range of banking & financial services involving retail, corporate banking and para-banking activities in addition to treasury and foreign exchange business.

BASIS OF PREPARATION:

The accompanying financial statements have been prepared following the going concern concept, on historical cost basis and confirm to the Generally Accepted Accounting Principles, (GAAP) in India which encompasses applicable statutory provisions, regulatory norms prescribed by the Reserve Bank of India (RBI) from time to time, notified Accounting Standards (AS) issued under the Companies (Accounting Standards) Rules, 2006 to the extent applicable and current practices prevailing in the banking industry in India.

The preparation of the financial statements require management to make estimates and assumptions that affect the reported amounts of assets and liabilities including contingent liabilities as of the date of the financial statements and the reported income and expenses during the reported period. The Management believes that the estimates and assumptions used in the preparation of the financial statements are prudent and reasonable. Actual results could differ from these estimates. The differences, if any between estimates and actual will be dealt appropriately in future periods.

1. Qualitative Disclosure:

Operations in the Treasury are segregated into three functional areas, namely Front office, Mid-office and Back-office, equipped with necessary infrastructure and trained officers, whose responsibilities are well defined.

The Integrated Treasury policy of the Bank clearly lays down the types of financial derivative instruments, scope of usages, approval process as also the limits like the open position limits, deal size limits and stop loss limits for trading in approved instruments.

The Mid Office is handled by Risk Management Department. Daily report is generated by Risk Management department for appraisal of the risk profile to the senior management for Asset and Liability management.

The Bank''s policy lays down that the transactions with the corporate clients are to be undertaken only after the inherent credit exposures are quantified and approved in terms of the approval process laid down in the Derivative Policy for customer appropriateness and suitability and necessary documents like ISDA agreements etc. are duly executed. The Bank adopts Current Exposure Method for monitoring the credit exposures. Besides, the Bank may also use financial derivative transactions for hedging it''s on or off Balance Sheet exposures.

The Integrated Treasury Policy of the Bank spells out the approval process for hedging the exposures. The hedge transactions are monitored on a regular basis and the notional profits or losses are calculated on MTM basis.

The hedged/non hedged transactions are recorded separately. The hedged transactions are accounted for on accrual basis.

In case of Option contracts, guidelines issued by FEDAI from time to time for recognition of income, premium and discount are being followed.

While sanctioning the limits, the competent authority may stipulate condition of obtaining collaterals/margin as deemed appropriate. The derivative limits are reviewed periodically along with other credit limits.

2. Details of Single Borrower Limit (SBL)/ Group Borrower Limits (GBL) exceeded by the Bank:

During the year ended 31st March 2015, the Bank has not exceeded the Individual / Group borrowers'' prudential exposure limits fixed by RBI

3. Unsecured Advances:

The Bank has not granted any finance against intangible securities such as charge over the rights, licences, authorisations, etc.

4. Penalties imposed by RBI:

No penalty has been imposed by Reserve Bank of India during the year (Previous year Rs. Nil)

5. Accounting Standards:

In compliance with the guidelines issued by the Reserve Bank of India regarding disclosure requirements the various Accounting Standards, following information is disclosed:

6. Accounting Standard 5 - Net Profit or Loss for the period, Prior period items and changes in accounting policies

There are no material prior period items.

For the preparation of these financial results, the Bank has followed the same accounting policies and generally accepted practices adopted for the preparation of audited financial statement for the year ended March 31, 2014 except for accounting of the depreciation on the fixed assets.

In the current year effective from April 1, 2014, the Bank has changed the accounting policy of charging of depreciation having regard to change in the estimated useful life of the assets, from Written Down Value (WDV) to Straight Line Method (SLM) in respect of all fixed assets other than computers, since computers were already being depreciated under SLM. The management believes that the afore stated changes better reflect the actual use of assets acquired and is in conformity with the Companies Act, 2013.

On account of this change in accounting policy, the Bank has in the current year reversed an amount of Rs. 50.10 crore representing the excess depreciation charge for the period up to March 31,2014. As a result of this change, the net profit for the current year is higher by Rs. 33.07 crore (net of taxes).

In accordance with the requirements of schedule II of the Companies Act, 2013 the Bank has charged Rs. 35.93 crore as depreciation to the Profit and Loss account of the current year reassessing the useful life of the fixed assets. The Depreciation on Banks property shown in schedule 16- Other Operating Expenses is after netting off Rs. 50.10 crore as detailed above.

7. Accounting Standard 9 - Revenue Recognition

Revenue is recognized as per accounting policy No.1 of Schedule 17 to the financial statements. Certain items of income are recognized on cash basis and such income are not material.

8. Accounting Standard 15 - Employee Benefits:

Various Benefits made available to the Employees are:

a) Pension: The Bank has a defined benefit plan under Pension Trust to cover employees who have joined employment upto 31st March 2010 and who have opted for Pension Scheme under the Pension & Group Schemes unit of LIC of India, provided they have completed 20 years of service. The benefits under this plan are based on last drawn salary and the tenure of employment. The Liability for the pension is determined and provided on the basis of actuarial valuation and is covered by purchase of annuity from LIC. The employees who have joined employment after 31stMarch 2010 are covered under contributory pension scheme.

b) Gratuity: In accordance with the applicable Indian Laws, the Bank provides for defined gratuity benefit retirement plan (''the Gratuity Plan'') covering eligible employees. This plan provides for a lump sum payment to the eligible employees on retirement, death, incapacitation or termination of employment of amounts that are based on the last drawn salary and tenure of employment. Liabilities with regard to the gratuity plan are determined by actuarial valuation and contributed to the gratuity fund trust. Trustees administer the contribution made to the trust and invest in specific designated securities as mandated by law, which generally comprise of Central and State Government Bonds and debt instruments of Government owned corporations.

c) Leave Encashment (PL): The Bank permits encashment of leave accumulated by employees. The liability for encashment of such leave is determined and provided on the basis of actuarial valuation.

d) Provident Fund: The Bank pays fixed contribution to Provident Fund at predetermined rates to a separate trust, which invests the funds in permitted securities. The contribution to the Fund is recognised as expense and is charged to the Profit and Loss account. The obligation of the Bank is limited to such contributions. As on 31st March 2015, there was no liability due and outstanding to the Fund by the Bank.

e) Other employee Benefits: Other than the employee benefits listed above, the Bank also gives certain other benefits to the employees, which include Medical aid, reimbursement of hospitalization expenses to the employees / their family members and compensated absence such as sick leave and casual leave etc. The Bank has made provision for such liabilities on an ad-hoc basis

f) The summarized position of Post-employment benefits and employee''s long term benefits are recognized in the financial statements as required in accordance with Accounting Standard - 15 and are as under:

g) A provision of Rs. 4.06 crore ( Previous year Rs. 3.66 crore) is held on account of other employee benefits like LFC

Encashment, Medical Aid, Hospitalisation Reimbursement, Sick Leave etc.

9. Employee Stock Options (ESOP)

The shareholders of the Bank had approved on 15.7.2006 grant of equity shares under employee stock option scheme of the Bank framed in compliance with SEBI (Employee Stock Option Scheme & Employee Stock Purchase Scheme) Guidelines, 1999.

Under the scheme, the Bank had granted stock options to the eligible employees on various dates in the past, each option entitling for one share at an exercise price of Rs. 50 per share (adjusted to Rs. 46.20 per share post rights issue 2011) The options granted to employees had vested in a graded manner and these may be exercised by the employees within a specified period. Options vested but not exercised before the specified exercise period would lapse. The Bank follows the intrinsic value method to account for its stock-based employee compensation plans. Compensation cost is measured by the excess, if any, of the fair market price of the underlying stock over the exercise price as determined under the option plan. The fair market price is the closing price on the stock exchange where there is highest trading volume on the working day immediately preceding the date of grant. Compensation cost has been absorbed.

10. Accounting Standard 17- Segment reporting:

For the purpose of segment reporting in terms of AS 17 of ICAI and as prescribed in RBI guidelines, the business of the Bank has been classified into 4 segments i.e. (a) Treasury operations (b) Corporate / Wholesale Banking (c) Retail Banking and (d) Other Banking Operations. Since the Bank does not have any overseas branch, reporting under geographic segment does not arise. Segment assets have been identified and segment liabilities have been allocated on the basis of segment assets.

11. Accounting Standard 18 - Related Party disclosures: There is no related party transaction other than remuneration paid to key management personnel, Sri P. Jayarama Bhat, Managing Director and Chief Executive Officer aggregating to Rs. 0.56 crore (previous year Rs. 0.53 crore).

12. Accounting Standard 28 - Impairment of Assets:

In the opinion of the management, there is no impairment of the fixed assets to any material extent as at 31st March 2015 requiring recognition in terms of Accounting Standard 28.

13. Drawdown from Reserves:

The Bank has not made any drawdown during the year from the Reserves. (During the previous year ended March 31, 2014 the Bank had created DTL of Rs. 27.01 crore on Special reserve for the period up to March 31, 2013 and had adjusted the same directly from the revenue reserve. In addition to the above, in line with the RBI guidelines, the Bank had drawn a sum of Rs. 11.48 crore from the Investment reserve account to meet the depreciation requirement on investment)

14. Disclosure of Letters of Comforts (LOC)

The Bank issues Letter of Comforts on behalf of its various constituents against the credit limits sanctioned to them. In the opinion of the management, no significant financial impact and/or cumulative financial obligations have devolved during the year in respect of the LOCs issued by the Bank and remaining outstanding as of 31st March 2015.

15. Provision Coverage Ratio (PCR):

The Bank''s provision coverage ratio as of March 31, 2015 is 50.54% (previous year 53.21%)

16. Overseas Assets, NPA and Revenue: Nil

17. Off- balance sheet SPV sponsored (which are required to be consolidated as per accounting norms):Nil

18. Un-amortised Pension and Gratuity Liabilities

As permitted by the Reserve Bank of India vide their letter DBOD. No. BP.BC. 15896/ 21.04.018/2010-11 dated 8th April 2011, the bank has during the year,debited to its Profit & Loss account a sum of Rs. 23.58 crore towards amortization of pension and Rs. 7.83 crore towards amortization of Gratuity on proportionate basis and the balance unamortized amount in Pension and Gratuity as on 31st March 2015 is Rs. NIL.

19. Disclosure of remunerations a) Qualitative disclosure:

Remuneration Committee

The Nomination & Remuneration Committee (N&RC) consists only Independent Directors, two of them being the members of Integrated Risk Management Committee of the Board (IRMC) also.

Objectives of Compensation Policy

Compensation Policy aims to attract and retain the right candidates in the Bank. The policy is designed to support key business strategies and create a strong, performance-orientated environment besides providing reasonable remuneration commensurate with the growth of the Bank. It also ensures effective governance of compensation, alignment of compensation with prudent risk taking, effective supervisory oversight and stakeholder engagement. The Policy also aims at facilitating effective succession planning in the Bank.

The N&RC works in close coordination with the Integrated Risk Management Committee to ensure effective alignment of remuneration and risks.

Risk adjustments in remuneration

A wide variety of measures of credit, market and liquidity risks are used by bank in implementation of risk adjustment. The risk adjustment methods have both quantitative and judgmental elements. Compensation outcomes are symmetric with risk outcomes and compensation payouts are sensitive to the time horizon of the risk.

Performance linked variable compensation, deferral and forms

The performance-based remuneration motivates and rewards high performers who strengthen long-term customer relations, and generate income and shareholder value. The bank''s compensation policy stipulates that while designing the compensation package to WTD/CEO, it is ensured that there is a proper balance between fixed pay and variable pay. While fixing the Variable Pay performance parameters under financial and non-financial areas of operations shall be assessed.

The variable pay shall not exceed 70% of the fixed pay in a year. The deterioration in the financial performance of the bank should generally lead to a contraction in the total amount of variable remuneration to be paid.

Further, where the variable pay constitutes a substantial portion of the fixed pay (i.e. 50% or more of the fixed pay), an appropriate portion of the variable pay, say 40% to 60% must be deferred for over a period. The Board/Nomination & Remuneration Committee may grant stock options under the Employees Stock Options Plan/Scheme as per Securities and Exchange Board of India (Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines, 1999, subject to the approval of Reserve Bank of India under Section 35B of the Banking Regulation Act, 1949. Such Stock Options will be excluded from the components of variable pay. In case variable pay payable is 50% or more, deferral arrangements of variable pay shall be applied. The deferral period should not be less than three years. Compensation payable under deferral arrangements should vest on a pro-rata basis at such rates as may be decided by the Board/RC. In the event of negative contributions of the Bank and/or the relevant line of business in any year, the deferred compensation is subject to malus/claw back arrangements. The variable pay could be in cash, or stock linked instruments or mix of both.

20 Disclosure relating to Securitization:

The Bank has not sponsored any SPV''s for securitisation transactions

21. Credit Default Swap:

The Bank has not entered into any credit default swap.

22. Intra-Group Exposures:

The Bank does not have any Intra-group Companies under its management.

23. Un-hedged Foreign Currency Exposure:

The Bank has put in place the policy on Hedging of Foreign Currency Exposure which is a part of the Loan Policy which stipulates the guidelines on managing the risk arising out of the un-hedged foreign currency exposure in line with the extant RBI Guidelines. Further, the Bank is making necessary incremental provision to the extent of Rs. 12.81 crore and providing necessary capital for the un-hedged foreign currency exposure of borrowal entities to the extent of Rs. 5.75 crore in line with the extant RBI Guidelines.

Qualitative Disclosures:

Bank is computing LCR on a monthly basis in line with the RBI circular dated June 9, 2014 on "Basel III Framework on Liquidity Standards - Liquidity Coverage Ratio (LCR), Liquidity Risk Monitoring Tools and LCR Disclosure Standards". These guidelines ensure that banks maintain sufficient amount of High Quality Liquidity Assets (HQLA) to survive 30 days stress scenario so that banks can take corrective measures within such period. These HQLA have to be 100% of the net cash outflows with effect from January 1, 2019. To provide sufficient transition period, the guidelines require maintaining minimum 60% with effect from January 1, 2015 and step up of 10% every year to reach 100% by January 1, 2019.

Necessary system is in place to compute LCR and bank''s strategy would be to maintain LCR well above the regulatory minimum levels ahead of the stipulated timelines. The main driver of LCR is adequate HQLA and Bank is maintaining LCR well above the minimum stipulated level of 60% in view of SLR investments in excess of statutory requirement and 7% of NDTL in the form of borrowing limit available through Marginal Standing Facility (MSF) and Facility to Avail Liquidity for Liquidity Coverage Ratio (FALLCR). The bank has a diversified liability mix and comprises of healthy Retail Deposits with its pan India presence and the dependency on wholesale funding is insignificant.

Bank''s Asset Liability Management Committee (ALCO) is empowered to monitor and form suitable strategies to maintain stipulated levels of LCR by channelizing funds to target good quality asset and liability profile to meet Bank''s profitability as well as liquidity requirements

Funding strategies are formulated by the Treasury and Accounts Department (TAD) in accordance with ALCO guidance. The objective of the funding strategy is to achieve an optimal funding mix which is consistent with prudent liquidity, diversity of sources and servicing costs. Accordingly, TAD estimates daily liquidity requirement. With the help of structural liquidity statement prepared by Bank, TAD evaluates current and future liquidity requirement and takes necessary action.

24. Operating Expenses stated in Schedule 16 to the Profit and Loss Account includes Rs. 2.04 crore spent towards Corporate Social Responsibility (CSR) Activities.

25. Reconciliation of Branch Adjustments and Balancing of Subsidiary Ledgers.

a) Balancing of Subsidiary Ledgers are completed in all branches/offices.

b) Reconciliation of branch adjustments/Inter Bank accounts has been completed up to 31st March 2015 and steps are being taken to give effect to consequential adjustments of pending items.

26. Investments:

The percentage of SLR investments under "Held to Maturity" category as on 31st March 2015 was 22.33% (Previous Year 23.68%) of the Net Demand and Time Liabilities of the bank, which is within the permissible limit as per RBI guidelines.

27. A sum of Rs. 605.62 crore (Previous year Rs. 227.79 crore) is outstanding on account of demands raised by the Income Tax Department in earlier years which have been paid under protest. No provision is considered necessary in respect of these demands, as the Bank has been advised that there are good chances of success in appeals/ considering favourable judicial pronouncements and/or appellate orders on identical issues for earlier assessment years.

28. Pending finalization of wage revision effective November 1, 2012, the bank has made a provision of Rs. 25.85 crore during the current year on estimated basis. The cumulative provision held there on as on 31st March 2015 aggregates to Rs. 81.78 crore.

29. In accordance with the RBI circular DBOD. No. BPBC.2/21.06.201/2013-14 dated 01.07.2013, banks are required to make half yearly Pillar III disclosures under Basel III capital requirements with effect from 30th September, 2013.The disclosures have been made available on the banks web site at the following link http://ktkbank.com/ktk/BaselDisclosures.jsp#

20. Previous year''s figures have been regrouped/rearranged/given in brackets wherever necessary and feasible to conform to the current year classifications.


Mar 31, 2014

GENERAL:

The Karnataka Bank Limited incorporated at Mangalore in India is a publicly held Banking Company governed by the Banking Regulation Act,1949 and is engaged in providing a wide range of banking & financial services involving retail, corporate banking and para-banking activities in addition to treasury and foreign exchange business.

BASIS OF PREPARATION:

The accompanying financial statements have been prepared following the going concern concept, on historical cost basis and confirm to the Generally Accepted Accounting Principles, (GAAP) in India which encompasses applicable statutory provisions, regulatory norms prescribed by the Reserve Bank of India (RBI) from time to time, notified Accounting Standards (AS) issued under the Companies (Accounting Standards) Rules, 2006 to the extent applicable and current practices prevailing in the banking industry in India.

The preparation of the financial statements require management to make estimates and assumptions that affect the reported amounts of assets and liabilities including contingent liabilities as of the date of the financial statements and the reported income and expenses during the reported period. The Management believes that the estimates and assumptions used in the preparation of the financial statements are prudent and reasonable. Actual results could differ from these estimates. The differences, if any between estimates and actual will be dealt appropriately in future periods.

1.2.2. iii. Sale and transfers to/from HTM Category

Sale and transfers made during the financial year 2013-14 of securities to/from HTM Category exceeding 5% of the book value of investments held in HTM category in the beginning of the year is NIL.

1.3 Derivatives

1.3.1 Forward Rate Agreement/ Interest Rate Swap: Nil

1.3.2 Exchange Traded Interest Rate Derivatives: Nil

1.3.3 Disclosure on risk exposure in Derivative (i) Qualitative Disclosure:

Operations in the Treasury are segregated into three functional areas, namely Front office, Mid-office and Back- office, equipped with necessary infrastructure and trained officers, whose responsibilities are well defined. The Integrated Treasury policy of the Bank clearly lays down the types of financial derivative instruments, scope of usages, approval process as also the limits like the open position limits, deal size limits and stop loss limits for trading in approved instruments.

The Mid Office is handled by Risk Management Department. Daily report is generated by Risk Management department for appraisal of the risk profile to the senior management for Asset and Liability management. The Bank''s policy lays down that the transactions with the corporate clients are to be undertaken only after the inherent credit exposures are quantified and approved in terms of the approval process laid down in the Derivative Policy for customer appropriateness and suitability and necessary documents like ISDA agreements etc. are duly executed. The Bank adopts Current Exposure Method for monitoring the credit exposures. Besides, the Bank also uses financial derivative transactions for hedging it''s on or off Balance Sheet exposures.

The Integrated Treasury Policy of the Bank spells out the approval process for hedging the exposures. The hedge transactions are monitored on a regular basis and the notional profits or losses are calculated on MTM basis. The hedged/non hedged transactions are recorded separately. The hedged transactions are accounted for on accrual basis.

In case of Option contracts, guidelines issued by FEDAI from time to time for recognition of income, premium and discount are being followed.

While sanctioning the limits, the competent authority may stipulate condition of obtaining collaterals/margin as deemed appropriate. The derivative limits are reviewed periodically along with other credit limits.

1.4.4 Details of Non-performing Financial assets purchased/sold:

The Bank has not purchased/sold any Non Performing Assets to banks during the financial year 2013-14.

The net funded exposure of the bank in respect of foreign exchange transactions with each country is within 1% of the total assets of the Bank and hence no country risk provision is required as per extant RBI guidelines. Bank has used 7 categories of classifications followed by ECGC for the purpose of classification and making provision for country risk exposures.

1.7.4 Details of Single Borrower Limit (SBL)/ Group Borrower Limits (GBL) exceeded by the Bank:

During the year ended 31-03-2014, the Bank has not exceeded the Individual / Group borrowers'' prudential exposure limits fixed by RBI

1.7.5 Unsecured Advances:

The Bank has not granted any finance to projects against collaterals by way of intangible securities such as charge over the rights, licences, authorisations, etc.

1.8. Penalties imposed by RBI:

No penalty has been imposed by Reserve Bank of India during the year (Previous year Rs. Nil)

2. Accounting Standards:

In compliance with the guidelines issued by the Reserve Bank of India regarding disclosure requirements of the various Accounting Standards, following information is disclosed:

2.1 Accounting Standard 5 – Net Profit or Loss for the period, Prior period items and changes in accounting policies

Employees cost includes Rs.76.02 crore being the incremental cost on account of liabilities for superannuation Schemes in line with the Policy framed by the Board considering the guidelines issued by IBA in this regard. There are no material prior period items.

2.2 Accounting Standard 9 – Revenue Recognition:

Revenue is recognized as per accounting policy No. 3 of Schedule 17 to the financial statements. Certain items of income are recognized on cash basis and such income are not material.

2.3 Accounting Standard 15 – Employee Benefits:

2.3.1 Various Benefits made available to the Employees are:

a) Pension: The Bank has a defined benefit plan under Pension Trust to cover employees who have joined employment prior to 31st March 2010 and who have opted for Pension Scheme under the Pension & Group Schemes unit of LIC of India, provided they have completed 20 years of service. The benefits under this plan are based on last drawn salary and the tenure of employment. The Liability for the pension is determined and provided on the basis of actuarial valuation and is covered by purchase of annuity from LIC. The employees who have joined employment after 31st March 2010 are covered under contributory pension scheme.

b) Gratuity: In accordance with the applicable Indian Laws, the Bank provides for defined gratuity benefit retirement plan (''the gratuity Plan'') covering eligible employees. This plan provides for a lump sum payment to the eligible employees on retirement, death, incapacitation or termination of employment of amounts that are based on the last drawn salary and tenure of employment. Liabilities with regard to the gratuity plan are determined by actuarial valuation and contributed to the gratuity fund trust. Trustees administer the contribution made to the trust and invest in specific designated securities as mandated by law, which generally comprise of Central and State Government Bonds and debt instruments of Government owned corporations.

c) Leave Encashment (PL): The bank permits encashment of leave accumulated by employees. The liability for encashment of such leave is determined and provided on the basis of actuarial valuation.

d) Provident Fund: The Bank pays fixed contribution to Provident Fund at predetermined rates to a separate trust, which invests the funds in permitted securities. The contribution to the fund is recognised as expense and is charged to the profit and Loss account. The obligation of the Bank is limited to such contributions. As on 31st March 2014, there was no liability due and outstanding to the fund by the Bank.

e) Other employee Benefits: Other than the employee benefits listed above, the Bank also gives certain other benefits to the employees, which include Medical aid, reimbursement of hospitalization expenses to the employees / their family members and compensated absence such as sick leave and casual leave etc. The bank has made provision for such liabilities on an ad-hoc basis

f) The summarized position of Post-employment benefits and employee''s long term benefits are recognized in the financial statements as required in accordance with Accounting Standard – 15 and are as under:

2.3.2. Employee Stock Option (ESOP):

The shareholders of the Bank had approved on 15.7.2006 grant of equity shares under employee stock option scheme of the Bank framed in compliance with SEBI (Employee Stock Option Scheme & Employee Stock Purchase Scheme) Guidelines, 1999.

Under the scheme, the Bank had granted stock options to the eligible employees on various dates in the past each one option entitling for one share at an exercise price of Rs. 50 per share (adjusted to Rs. 46.20 per share post rights issue 2011) The options granted to employees had vested in a graded manner and these may be exercised by the employees within a specified period. Options vested but not exercised before the specified exercise period would lapse. The Bank follows the intrinsic value method to account for its stock-based employee compensation plans. Compensation cost is measured by the excess, if any, of the fair market price of the underlying stock over the exercise price as determined under the option plan. The fair market price is the closing price on the stock exchange where there is highest trading volume on the working day immediately preceding the date of grant. Compensation cost has already been amortized over the vesting period.

2.4 Accounting Standard 17 – Segment reporting:

For the purpose of segment reporting in terms of AS 17 of ICAI and as prescribed in RBI guidelines, the business of the Bank has been classified into 4 segments i.e.(a) Treasury operations (b) Corporate / Wholesale Banking (c) Retail Banking and (d) Other Banking Operations. Since the Bank does not have any overseas branch, reporting under geographic segment does not arise. Segment assets have been identified and segment liabilities have been allocated on the basis of segment assets.

2.8 Accounting Standard 28 – Impairment of Assets:

In the opinion of the management, there is no impairment of the fixed assets to any material extent as at 31st March 2014 requiring recognition in terms of Accounting Standard 28.

2.9 Accounting Standard 29 – Provision, Contingent liabilities and Contingent assets:

Movement in Provision for Contingencies:

(Rs. in crore)

Opening as on Provision made Provisions Closing as on Particulars 01-04-2013 during the year reversed/ 31-03-2014 adjusted

Provision for Conting- encies 18.08 Nil 6.24 11.84

3.3 Drawdown from Reserves:

A. Revenue Reserve:

During the year, the Bank, pursuant to RBI''s circular No DBOD. No. BP .BC. 77/21.04.018/2013-14 dated 20th December 2013, has created DTL of Rs.27.01 crore on Special Reserve for the period up to March 31, 2013 and has adjusted the same directly from the Revenue Reserve.

B. Investment Reserve:

In line with the RBI Guidelines, the bank has drawn a sum of Rs. 11.48 crore from the Investment Reserve account to meet the depreciation requirement on investment

3.5 Disclosure of Letters of Comforts (LOC):

The Bank issues Letter of Comforts on behalf of its various constituents against the credit limits sanctioned to them. In the opinion of the management, no significant financial impact and/or cumulative financial obligations have devolved, during the year in respect of the LOCs issued by the Bank and remaining outstanding as of 31st March 2014.

3.6 Provisioning Coverage Ratio (PCR):

The bank''s provision coverage ratio as of March 31, 2014 is 53.21%.( previous year 55.36%)

3.11 Overseas Assets, NPA and Revenue: Nil

3.12 Off- balance sheet SPVs sponsored (which are required to be consolidated as per accounting norms): Nil

3.13 Un-amortised Pension and Gratuity Liabilities:

As permitted by the Reserve Bank of India vide their letter DBOD. No. BP.BC. 15896/ 21.04.018/2010-11 dated 8th April 2011, the bank has during the year, debited to its Profit & Loss account a sum of Rs.23.58 crore towards amortization of pension and Rs. 7.83 crore towards amortization of Gratuity on proportionate basis and the balance unamortized amount of Rs. 23.59 crore and Rs. 7.82 crore towards Pension and gratuity respectively, will be dealt with as per the guidelines of the Reserve bank of India. Further, in this regard the Central Govt vide notification dated 15.01.2014 has exempted the Bank from the applicability of provisions of Section 15(1) of the B. R. Act dealing with restrictions on declaration of dividend for the year 2013-14.

3.14 Disclosure of remunerations : a) Qualitative disclosure:

Remuneration Committee:

The Remuneration Committee of the Board consists of independent Directors with two independent Director Members from Integrated Risk Management Committee.

Objectives of Compensation Policy:

Compensation Policy aims to attract and retain the right candidates in the Bank. The policy is designed to support key business strategies and create a strong, performance-orientated environment besides providing reasonable remuneration commensurate with the growth of the Bank. It also ensures effective governance of compensation, alignment of compensation with prudent risk taking, effective supervisory oversight and stakeholder engagement. The Policy also aims at facilitating effective succession planning in the Bank.

The Remuneration Committee of the Board works in close coordination with the Integrated Risk Management Committee of the Board to ensure effective alignment of remuneration and risks. Other qualitative disclosures are as under:

Risk adjustments in remuneration:

A wide variety of measures of credit, market and liquidity risks are used by bank in implementation of risk adjustment. The risk adjustment methods have both quantitative and judgmental elements. Compensation outcomes are symmetric with risk outcomes and compensation payouts are sensitive to the time horizon of the risk.

Performance linked variable compensation, deferral and forms:

The bank''s compensation policy stipulates that while fixing the Variable Pay performance parameters under financial and non-financial areas of operations are to be assessed and variable pay shall not exceed 70% of the fixed pay in a year. The variable pay could be in cash, or stock linked instruments or mix of both.

The deterioration in the financial performance of the bank should generally lead to a contraction in the total amount of variable remuneration paid.

Further, where the variable pay constitutes a substantial portion of the fixed pay (i.e. 50% or more of the fixed pay), an appropriate portion of the variable pay, say 40% to 60% must be deferred for over a period. The Board / RC / ESOP Committee may grant stock options under the Employees Stock Options Plan / Scheme as per Securities and Exchange Board of India (Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines, 1999, subject to the approval of Reserve Bank of India under Section 35B of the Banking Regulation Act, 1949. Such Stock Options will be excluded from the components of variable pay. In case variable pay payable is 50% or more, deferral arrangements of variable pay shall be applied. The deferral period should not be less than three years. Compensation payable under deferral arrangements should vest on a pro-rata basis at such rates as may be decided by the Board / RC. In the event of negative contributions of the Bank and / or the relevant line of business in any year, the deferred compensation is subject to malus / clawback arrangements.

3.15 Disclosure relating to Securitization: The bank has not sponsored any SPV''s for securitisation transactions

3.16 Credit Default Swap: The bank has not entered into any credit default swap.

4. Reconciliation of Branch Adjustments and Balancing of Subsidiary Ledgers.

a) Balancing of Subsidiary Ledgers are completed in all branches / offices.

b) Reconciliation of branch adjustments / Inter Bank accounts has been completed up to 31-03-2014 and steps are being taken to give effect to consequential adjustments of pending items.

5. Investments: In terms of RBI circular DBOD.BP.BC.NO.4/21.04.141/2013-14 dated August 23, 2013 on "Investment Portfolio of the Bank – Classification, valuation and Provisioning", the bank has transferred SLR Securities with the face value of Rs. 900.00 crore (book value of Rs.884.65 crore) held under "AFS" portfolio to "HTM" Portfolio and loss on such transfers amounting to Rs.16.77 crore has been recognized during the year.

The percentage of SLR investments under "Held to Maturity" category as on 31st March 2014 was 23.68% (Previous Year 20.05%) of the Net Demand and Time Liabilities of the bank, which is within the permissible limit as per RBI guidelines.

6. A sum of Rs. 227.79 crore (Previous year Rs. 140.26 crore) is outstanding on account of demands raised by the Income Tax Department in earlier years which have been paid under protest. No provision is considered necessary in respect of these demands, as the Bank has been advised that there are good chances of success in appeals / considering favourable judicial pronouncements and/or appellate orders on identical issues for earlier assessment years.

7. Pursuant to RBI guidelines on Utilization of Floating provisions / Counter Cyclical Provisioning buffer in terms of DBOD.No.BP.95/ 21.04.048/2013-14 dated Feb 7, 2014 and also in pursuance to the bank''s Board approved policy, the bank has utilised a sum of Rs. 3.46 crore from Counter Cyclical buffer account towards the requirements of specific provisions for NPA.

8. During the year, the Bank, pursuant to RBI''s circular No DBOD. No. BP .BC. 77/21.04.018/2013-14 dated 20th December 2013, has created DTL of Rs. 27.01 crore on Special Reserve for the period up to March 31, 2013 and has adjusted the same directly from the Revenue Reserve. Further, the Bank has created a DTL of Rs. 7.89 crore in respect of the amounts transferred to Special Reserve for the year ended March 31, 2014 by charging of the same to the Profit and Loss Account for the year.

9. Pending finalization of wage revision effective November 1, 2012, the bank has made a provision of Rs. 33.43 crore during the current year on estimated basis. The cumulative provision held there on as on 31.03.2014 aggregates to Rs. 55.93 crore.

10. The Bank has recognized the Income Tax Liability of Rs. 143.60 crore on its Book Profits in terms of section 115JB of the Income Tax Act. Out of this a sum of Rs. 135.31 crore being MAT credit entitlement under section 115 JAA of the Income Tax act, 1961 has been recognized and treated as an Asset.

11. In terms of RBI circular DBOD. No. BPBC.88/21.06.201/2012-13 dated 28.03.2013 banks have been advised to disclose the capital Adequacy Ratio computed under Basel III regulations from the quarter ended June 2013. Accordingly; corresponding details for the previous year / periods are not furnished.

12. In accordance with the RBI circular DBOD. No. BPBC.2/21.06.201/ 2013-14 dated 01.07.2013, banks are required to make half yearly Pillar III disclosures under Basel III capital requirements with effect from 30th September, 2013.The disclosures have been made available on the banks web site at the following link http://ktkbank.com/ktk/BaselDisclosures.jsp#)

13. Previous year''s figures have been regrouped / rearranged / given in brackets wherever necessary and feasible to conform to the current year classifications.


Mar 31, 2013

1.1.1 Disclosure in risk exposure in Derivative

(i) Qualitative Disclosure:

Operations in the Treasury are segregated into three functional areas, namely: Front-office, Mid-office and Back-office, equipped with necessary infrastructure and trained officers, whose responsibilities are well defined.

The Integrated Treasury policy of the Bank clearly lays down the types of financial derivative instruments, scope of usages, approval process as also the limits like the open position limits, deal size limits and stop loss limits for trading in approved instruments.

The Mid Office is handled by Risk Management Department. Daily report is generated by Risk Management department for appraisal of the risk profile to the senior management for Asset and Liability management.

The Bank''s policy lays down that the transactions with the corporate clients are to be undertaken only after the inherent credit exposures are quantified and approved in terms of the approval process laid down in the Derivative Policy for customer appropriateness and suitability and necessary documents like ISDA agreements etc. are duly executed. The Bank adopts Current Exposure Method for monitoring the credit exposures. Besides, the Bank also uses financial derivative transactions for hedging it''s on or off Balance Sheet exposures.

The Integrated Treasury Policy of the Bank spells out the approval process for hedging the exposures. The hedge transactions are monitored on a regular basis and the notional profits or losses are calculated on MTM basis.

The hedged/non hedged transactions are recorded separately. The hedged transactions are accounted for on accrual basis.

In case of Option contracts, guidelines issued by FEDAI from time to time for recognition of income, premium and discount are being followed.

While sanctioning the limits, the competent authority may stipulate condition of obtaining collaterals/margin as deemed appropriate. The derivative limits are reviewed periodically along with other credit limits.

1.2.1 Details of Single Borrower Limit (SBL)/ Group Borrower Limits (GBL) exceeded by the Bank:

During the year ended 31-03-2013, the Bank has not exceeded the Individual/Group borrowers'' exposure ceiling fixed by RBI.

1.2.2 Unsecured Advances: The Bank has not granted any finance to projects against collaterals by way of intangible securities such as charge over the rights, licenses, authorizations, etc.

1.3.1 Penalties imposed by RBI: No penalty has been imposed by Reserve Bank of India during the year (Previous year Rs. 5.00 lakhs)

2. Accounting Standards: In compliance with the guidelines issued by the Reserve Bank of India regarding disclosure requirements of the various Accounting Standards, following information is disclosed:

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

There are no material prior period items.

2.2 Accounting Standard 9 - Revenue Recognition

Revenue is recognized as per accounting policy No. 3 of Schedule 17 to the financial statements. Certain items of income are recognized on cash basis and such income are not material.

2.3 Accounting Standard 15 - Employee Benefits:

2.3.1 Various Benefits made available to the Employees are:-

a) Pension: The Bank has a defined benefit plan under Pension Trust to cover employees who have joined employment prior to 31st March 2010 and who have opted for Pension Scheme under the Pension & Group Schemes unit of LIC of India, provided they have completed 20 years of service. The benefits under this plan are based on last drawn salary and the tenure of employment. The Liability for the pension is determined and provided on the basis of actuarial valuation and is covered by purchase of annuity from LIC. The employees who have joined employment after 31st March 2010 are covered under contributory pension scheme.

b) Gratuity: In accordance with the applicable Indian Laws, the Bank provides for defined gratuity benefit retirement plan (''the gratuity Plan'') covering eligible employees. This plan provides for a lump sum payment to the eligible employees on retirement, death, incapacitation or termination of employment of amounts that are based on the last drawn salary and tenure of employment. Liabilities with regard to the gratuity plan are determined by actuarial valuation and contributed to the gratuity fund trust. Trustees administer the contribution made to the trust and invest in specific designated securities as mandated by law, which generally comprise of Central and State Government Bonds and debt instruments of Government owned corporations.

c) Leave Encashment (PL): The bank permits encashment of leave accumulated by employees. The liability for encashment of such leave is determined and provided on the basis of actuarial valuation.

d) Provident Fund: The Bank pays fixed contribution to Provident Fund at predetermined rates to a separate trust, which invests the funds in permitted securities. The contribution to the fund is recognized as expense and is charged to the Profit and Loss account. The obligation of the Bank is limited to such contributions. As on 31st March 2013, there was no liability due and outstanding to the fund by the Bank.

e) Other employee Benefits: Other than the employee benefits listed above, the Bank also gives certain other benefits to the employees, which include Medical aid, reimbursement of hospitalization expenses to the employees / their family members and compensated absence such as sick leave and casual leave etc. The bank has made provision for such liabilities on an ad-hoc basis.

f) The summarized position of Roost-employment benefits and employee''s long term benefits are recognized in the financial statements as required in accordance with Accounting Standard - 15 and are as under:

g) On account of other employee benefits like LFC Encashment, Medical Aid, Hospitalization Reimbursement, Sick Leave etc, a provision of Rs. 3.41 crore (Previous Year Rs. 3.38 crore) is held.

2.3.2. Employee Stock Option (ESOP)

The shareholders of the Bank had approved the Employee Stock Option Scheme (ESOS) at the Annual General Meeting held on 15.7.2006 for grant to eligible employees'' up to 15,00,000 stock options in aggregate. Accordingly stock options were granted to the eligible employees at an exercise price of Rs. 50/- per share. As per the Scheme, the stock options granted would vest in a graded manner i.e 40% after the first year, 30% in the second year and the remaining 30% before the end of the third year from the date of grant. The vested options, subject to other conditions, were exercisable within a period of 5 years from the respective dates of vesting. Pursuant to exercise of the options vested in the employees, 59,020 equity shares have been allotted during the year

2.4 Accounting Standard 17 - Segment reporting:

For the purpose of segment reporting in terms of AS 17 of ICAI and as prescribed in RBI guidelines, the business of the Bank has been classified into 4 segments i.e.(a) Treasury operations (b) Corporate / Wholesale Banking (c) Retail Banking and (d) Other Banking Operations. Since the Bank does not have any overseas branch, reporting under geographic segment does not arise. Segment assets have been identified and segment liabilities have been allocated on the basis of segment assets.

2.5 Accounting Standard 28 - Impairment of Assets:

In the opinion of the management, there is no impairment of the fixed assets to any material extent as at 31st March 2013 requiring recognition in terms of Accounting Standard 28.

3.1 Drawdown from Reserves: The bank has not made any draw down during the year from the Reserves.

3.2 Complaints / unimplemented Awards of Banking Ombudsman:

3.3 Disclosure of Letters of Comforts (LOC): The Bank issues Letter of Comforts on behalf of its various constituents against the credit limits sanctioned to them. In the opinion of the management, no significant financial impact and/or cumulative financial obligations have devolved under the LOCs issued by the Bank in the past or during the current year and remaining outstanding as of 31st March 2013.

3.4 As permitted by the Reserve Bank of India vide their letter DBOD. No. BRBC. 15896/ 21.04.018/2010-11 dated 8th April 2011, the bank has during the year, debited to its Profit & Loss account a sum of Rs. 23.58 crore towards amortization of pension and Rs. 7.83 crore towards amortization of Gratuity on proportionate basis and the balance unamortized amount of Rs. 47.17 crore and Rs. 15.65 crore towards Tension and gratuity respectively, will be dealt with as per the guidelines of the Reserve bank of India. Further, in this regard the Central Govt vide notification dated 11.05.2011 has exempted the Bank from the applicability of provisions of Section 15(1) of the B. R. Act dealing with restrictions on declaration of dividend for the years 2010-11, 2011-12 and 2012-13.

3.5 Disclosure of remunerations

a)Qualitative disclosure:

Remuneration Committee: The Remuneration Committee of the Board consists of majority of independent Directors including two independent Director Member from Integrated Risk Management Committee.

Objectives of Compensation Policy: Compensation Rollick aims to attract and retain the right candidates in the Bank. The policy is designed to support key business strategies and create a strong, performance-orientated environment besides providing reasonable remuneration commensurate with the growth of the Bank. It also ensures effective governance of compensation, alignment of compensation with prudent risk taking, effective supervisory oversight and stakeholder engagement. The Policy also aims at facilitating effective succession planning in the Bank.

The Remuneration Committee of the Board works in close coordination with the Integrated Risk Management Committee of the Board to ensure effective alignment of remuneration and risks. Other qualitative disclosures are as under:

Risk adjustments in remuneration: A wide variety of measures of credit, market and liquidity risks are used by the bank in implementation of risk adjustment. The risk adjustment methods have both quantitative and judgmental elements. Compensation outcomes are symmetric with risk outcomes and compensation payouts are sensitive to the time horizon of the risk.

Performance linked variable compensation, deferral and forms :The bank''s compensation policy stipulates that while fixing the Variable Ray, performance parameters under financial and non-financial areas of operations are to be assessed and variable pay shall not exceed 70% of the fixed pay in a year. The variable pay could be in cash, or stock linked instruments or mix of both. The deterioration in the financial performance of the bank should generally lead to a contraction in the total amount of variable remuneration paid.

Further, where the variable pay constitutes a substantial portion of the fixed pay (ie 50% or more of the fixed pay), an appropriate portion of the variable pay, say 40% to 60% must be deferred for over a period. The Board/RC/ESOR Committee may grant stock Options under the Employees Stock Options Rlan/Scheme as per Securities and Exchange Board of India (Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines, 1999, subject to the approval of Reserve Bank of India under Section 35 B of the Banking Regulation Act, 1949. Such Stock Options will be excluded from the components of variable pay. In case variable pay payable is 50% or more, deferral arrangements of variable pay shall be applied. The deferral period should not be less than three years. Compensation payable under deferral arrangements should vest on a pro rata basis at such rates as may be decided by the Board/RC. In the event of negative contributions of the Bank and/or the relevant line of business in any year, the deferred compensation is subject to males/claw back arrangements.

Note: The above disclosure is effective from FY2012-13. Hence the comparative figures for the year have not been given.

4. Reconciliation of Branch Adjustments and Balancing of Subsidiary Ledgers.

a) Balancing of Subsidiary Ledgers are completed in all branches/offices.

b) Reconciliation of branch adjustments/Inter Bank accounts has been completed up to 31-03-2013 and steps are being taken to give effect to consequential adjustments of pending items.

5. Investments: The percentage of SLR investments under "Held to Maturity" category as on 31st March 2013 was 20.05% (Previous Year 22.33%) of the Net Demand and Time Liabilities of the bank, which is within the permissible limit as per RBI guidelines.

6. Tax demands under appeal: A sum of Rs. 140.26 crore (Previous year Rs. 85.66 crore) is outstanding on account of demands raised by the Income Tax Department in earlier years which have been paid under protest. No provision is considered necessary in respect of these demands, as the Bank has been advised that there are good chances of success in appeals/ considering favourable judicial pronouncements and/or appellate orders on identical issues for earlier assessment years.

7. Premises include building in possession and occupation of the Bank pending execution of title deeds and/or Co-operative Societies yet to be formed amounting to Rs.0.22 crore ( Previous year Rs. 0.22 crore)

8. Previous year''s figures have been regrouped/rearranged/given in brackets wherever necessary and feasible to conform to the current year classifications.


Mar 31, 2012

1.1.1 Disclosure in risk exposure in Derivative

(i) Qualitative Disclosure: Operations in the Treasury are segregated into three functional areas, namely.- Front- office, Mid-office and Back-office, equipped with necessary infrastructure and trained officers, whose responsibilities are well defined.

The Integrated Treasury policy of the Bank clearly lays down the types of financial derivative instruments, scope of usages, approval process as also the limits like the open position limits, deal size limits and stop loss limits for trading in approved instruments.

The Mid Office is handled by Risk Management Department. Daily report is generated by Risk Management department for appraisal of the risk profile to the senior management for Asset and Liability management.

The Bank's policy lays down that the transactions with the corporate clients are to be undertaken only after the inherent credit exposures are quantified and approved in terms of the approval process laid down in the Derivative Policy for customer appropriateness and suitability and necessary documents like ISDA agreements etc. are duly executed. The Bank adopts Current Exposure Method for monitoring the credit exposures. Besides, the Bank also uses financial derivative transactions for hedging it's on or off Balance Sheet exposures.

The Integrated Treasury Policy of the Bank spells out the approval process for hedging the exposures. The hedge transactions are monitored on a regular basis and the notional profits or losses are calculated on MTM basis.

The hedged/non hedged transactions are recorded separately. The hedged transactions are accounted for on accrual basis.

In case of Option contracts, guidelines issued by FEDAI from time to time for recognition of income, premium and discount are being followed.

While sanctioning the limits, the competent authority may stipulate condition of obtaining collaterals / margin as deemed appropriate. The derivative limits are reviewed periodically along with other credit limits.

The customer related derivative transactions for notional principal at market rate of Rs. 82.89 crore (PY Rs. 162.07 crores) are covered with counter party banks, on back- to- back basis for identical amount and tenure and the Bank does not have any market risk.

The net funded exposure of the bank in respect of foreign exchange transactions with each country is within 1% of the total assets of the Bank and hence no country risk provision is required as per extant RBI guidelines.

1.2.1 Details of Single Borrower Limit (SBL)/ Group Borrower Limits (GBL) exceeded by the Bank: During the year ended 31-03-2012, the Bank has not exceeded the Individual / Group borrowers' exposure ceiling fixed by RBI.

1.2.2 Unsecured Advances: The Bank has not granted any finance to projects against collaterals byway of intangible securities such as charge over the rights, licences, authorisations, etc.

1.3.1 Penalties imposed by RBI:

Reserve Bank of India imposed a penalty of Rs. 5.00 lakhs on the bank during the year for failure to carry out proper due diligence on user appropriateness and suitability of derivative products and failure to document their pricing, periodical valuation and quantifying of financial risks.

2. Accounting Standards:

In compliance with the guidelines issued by the Reserve Bank of India regarding disclosure requirements of the various Accounting Standards, following information is disclosed:

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

There are no material prior period items.

2.2 Accounting Standard 9- Revenue Recognition

Revenue is recognized as per accounting policy No. 3 of Schedule 17 to the financial statements. Certain items of income are recognized on cash basis and such income are not material.

2.3 Accounting Standard 15 - Employee Benefits:

2.3.1 Various Benefits made available to the Employees are:

a) Pension: The Bank has a defined benefit plan under Pension Trust to cover employees who have joined employment prior to 31st March 2010 and who have opted for Pension Scheme under the Pension & Group Schemes unit of LIC of India, provided they have completed 20 years of service. The benefits under this plan are based on last drawn salary and the tenure of employment. The Liability for the pension is determined and provided on the basis of actuarial valuation and is covered by purchase of annuity from LIC. The employees who have joined employment after 31st March 2010 are covered under contributory pension scheme.

b) Gratuity: In accordance with the applicable Indian Laws, the Bank provides for defined gratuity benefit retirement plan ('the gratuity Plan') covering eligible employees. This plan provides for a lump sum payment to the eligible employees on retirement, death, incapacitation or termination of employment of amounts that are based on the last drawn salary and tenure of employment. Liabilities with regard to the gratuity plan are determined by actuarial valuation and contributed to the gratuity fund trust. Trustees administer the contribution made to the trust and invest in specific designated securities as mandated by law, which generally comprise of Central and State Government Bonds and debt instruments of Government owned corporations.

c) Leave Encashment (PL): The bank permits encashment of leave accumulated by employees. The liability for encashment of such leave is determined and provided on the basis of actuarial valuation.

d) Provident Fund: The Bank pays fixed contribution to Provident Fund at predetermined rates to a separate trust, which invests the funds in permitted securities. The contribution to the fund is recognised as expense and is charged to the profit and Loss account. The obligation of the Bank is limited to such contributions. As on 31st March 2012, there was no liability due and outstanding to the fund by the Bank.

e) Other employee Benefits: Other than the employee benefits listed above, the Bankal so gives certain other benefits to the employees, which include Medical aid, reimbursement of hospitalization expenses to the employees/their family members and compensated absence such as sick leave and casual leave etc. The bank has made provision for such liabilities on an ad-hoc basis

f) The summarized position of Post-employment benefits and employee's long term benefits are recognized in the financial statements as required in accordance with Accounting Standard-15 and are as under:

g) On account of other employee benefits like LFC Encashment, Medical Aid, Hospitalisation Reimbursement, Sick Leave etc, a provision of Rs.3.38crores (Previous Year Rs.3.05crores) is held.

2.3.2. Employee Stock Options (ESOP)

The shareholders of the Bank had approved the Employees Stock Options Scheme (ESOS) at the Annual General Meeting held on 15.7.2006 for grant to eligible employees' up to 15,00,000 stock options in aggregate. Accordingly stock options were granted to the eligible employees at an exercise price of Rs. 50/- per share. As per the Scheme, the stock options granted would vest in a graded manner i.e 40% after the first year, 30% in the second year and the remaining 30% before the end of the third year from the date of grant. The vested options, subject to other conditions, were exercisable within a period of 5 years from the respective dates of vesting. During the year ended March 31, 2012 the Bank has provided a sum of Rs. 0.21 crore as employee compensation cost being the proportionate accounting value in respect of stock options.

2.4 Accounting Standard 17 - Segment reporting:

For the purpose of segment reporting in terms of AS 17 of ICAI and as prescribed in RBI guidelines, the business of the Bank has been classified into 4 segments i.e.(a) Treasury operations (b) Corporate/Wholesale Banking (c) Retail Banking and (d) Other Banking Operations. Since the Bank does not have any overseas branch, reporting under geographic segment does not arise. Segment assets have been identified and segment liabilities have been allocated on the basis of segment assets.

2.5 Accounting Standard 28 - Impairment of Assets:

In the opinion of the management, there is no impairment of the fixed assets to any material extent as at 31st March 2012 requiring recognition in terms of Accounting Standard 28.

3.1 Disclosure of Letters of Comforts (LOC): The Bank issues Letter of Comforts on behalf of its various constituents against the credit limits sanctioned to them. In the opinion of the management, no significant financial impact and / or cumulative financial obligations have been assessed under LOCs issued by the Bank in the past or during the current year and remaining outstanding as of 31 st March 2012.

3.2 As permitted by the Reserve Bank of India vide their letter DBOD. No. BPBC. 15896/21.04.018/2010-11 dated 8th April 2011, the bank has during the year, debited its Profit & Loss account a sum of Rs. 23.58 crore towards pension and Rs. 7.83 crore towards Gratuity on proportionate basis and the balance of Rs. 70.75 crore and Rs. 23.48 crore towards Pension and gratuity respectively, will be dealt with as per the guidelines of the Reserve bank of India. Further, in this regard the Central Govt vide notification dated 11.05.2011 has exempted the Bank from the applicability of provisions of Section 15(1) of the B.R. Act dealing with restrictions on declaration of dividend for the years 2010-11,2011-12 and 2012-13.

4. Reconciliation of Branch Adjustments and Balancing of Subsidiary Ledgers: a) Balancing of Subsidiary Ledgers are completed in all branches/offices. b) Reconciliation of branch adjustments/Inter Bank accounts has been completed up to 31 -03-2012 and steps are being taken to give effect to consequential adjustments of pending items.

5. Investments: The percentage of SLR investments under" Held to Maturity" category as on 31st March 2012 was 22.33% (Previous Year 19.48%) of the Net Demand and Time Liabilities of the bank, which Is within the permissible limit as per RBI guidelines.

6. Tax demands under appeal: A sum of Rs. 85.66 crore (Previous yearRs. 47.34 crore) is outstanding on account of demands raised by the Income Tax Department in earlier years which have been paid under protest. No provision is considered necessary in respect of these demands, as the Bank has been advised that there are good chances of success in appeals/ considering favourable appellate orders on identical issues for earlier assessment years.

Provision for income tax for the year has been made after due consideration of decisions of appellate authorities and advice of counsels.

7. Premises include building in possession and occupation of the Bank pending execution of title deeds and/or Co-operative Societies yet to be formed amounting to Rs. 0.22 crore (Previous year Rs. 0.22 crore).

8. Previous year's figures have been regrouped/rearranged/given in brackets wherever necessary and feasible to conform to the current year classifications.


Mar 31, 2011

1. Disclosures as per RBI requirement:

1.3.3 Disclosure in risk exposure in Derivative

(i) Qualitative Disclosure: Operations in the Treasury are segregated into three functional areas, namely. Front-office, Mid-office and Back-office, equipped with necessary infrastructure and trained officers, whose responsibilities are well defined.

The Integrated Treasury policy of the Bank clearly lays down the types of financial derivative instruments, scope of usages, approval process as also the limits like the open position limits, deal size limits and stop loss limits for trading in approved instruments.

The Mid Office is handled by Risk Management Department. Daily report is submitted to Risk Management Department, which, in turn appraises the risks profile to the senior management on the assets and liability management.

The Bank ensures that the transactions with the corporate clients are undertaken only after the inherent credit exposures are quantified and approved in terms of the approval process laid down in the Derivative Policy for customer appropriateness and suitability and necessary documents like ISDA agreements etc. are duly executed. The Bank has adopted Current Exposure Method for monitoring the credit exposures.

The Bank also uses financial derivative transactions for hedging its on or off Balance Sheet exposures. The Integrated Treasury Policy of the Bank spells out the approval process for hedging the exposures. The hedge transactions are monitored on a regular basis and the notional profits or losses are calculated on MTM basis.

The hedged/non hedged transactions are recorded separately. The hedged transactions are accounted for on accrual basis.

In case of Option contracts, guidelines issued by FEDAI from time to time for recognition of income, premium and discount are being followed.

While sanctioning the limits, the competent authority may stipulate condition of obtaining collaterals/margin as deemed appropriate. The derivative limits are reviewed periodically along with other credit limits.

The customer related derivative transactions for notional value (at market rate) of Rs. 162.07 crore are covered with counter party banks, on back- to- back basis for identical amount and tenure and the Bank does not have any market risk.

1.7.3 Risk category-wise Country Exposure:

The net funded exposure of the bank in respect of foreign exchange transactions with each country is within 1% of the total assets of the Bank and hence no country risk provision is required as per extant RBI guidelines.

1.7.4 Details of Single Borrower Limit (SBL)/ Group Borrower Limits (GBL) exceeded by the Bank: During the year ended 31-03-2011, the Bank has not exceeded the Individual /Group borrowers exposure ceiling fixed by RBI.

1.7.5 Unsecured Advances: The Bank has not granted any finance to projects against collaterals by way of intangible securities such as charge over the rights, licences, authorisations, etc.

1.8 Miscellaneous

1.8.2. Penalties imposed by RBI: No Penalty was imposed by the Reserve Bank of India during the year.

2. Accounting Standards:

In compliance with the guidelines issued by the Reserve Bank of India regarding disclosure requirements of the various Accounting Standards, following information is disclosed:

2.1 Accounting Standard 5 – Net Profit or Loss for the period, Prior period items and changes in accounting policy

There is no material prior period items.

The Bank has changed its estimate with effect from October 1, 2010 relating to charging of provisions for Non- performing advances at rates higher than that prescribed by the Reserve Bank of India to the rates prescribed under the prudential norms of Reserve bank of India from time to time. Due to this change, the net profit after tax for the year is higher by Rs. 26.36 crore.

2.2 Accounting Standard 9 – Revenue Recognition

Income recognised on cash basis is neither material nor require disclosure

2.3 Accounting Standard 15 – Employee Benefits:

2.3.1 Various Benefits made available to the Employees are:-

a) Pension: The Bank has defined benefit plan under Pension Trust to employees who have opted for Pension Scheme under the Pension & Group Schemes unit of LIC of India, by purchasing annuity for optees separated after completion of 20 years of service. The Benefits under this plan are based on last drawn salary and the tenure of employment. The Liability for the pension is determined and provided on the basis of actuarial valuation.

b) Gratuity: In accordance with the applicable Indian Laws, the Bank provides for defined gratuity benefit retirement plan (‘the Gratuity Plan) covering eligible employees. This plan provides for a lumpsum payment to the eligible employees on retirement, death, incapacitation or termination of employment of amounts that are based on the last drawn salary and tenure of employment. Liabilities with regard to the gratuity plan are determined by actuarial valuation and contributed to the gratuity fund trust. Trustees administer the contribution made to the trust and invest in specific designated securities as mandated by law, which generally comprise of Central and State Government Bonds and debt instruments of Government owned corporations.

c) Leave Encashment (PL): The bank permits encashment of leave accumulated by employees on retirement, resignation and during the course of service. The liability of encashment of such leave is determined and provided on the basis of actuarial valuation performed by an independent actuary at the balance sheet date.

d) Provident Fund: The Bank pays fixed contribution to Provident Fund at predetermined rates to a separate trust, which invests the funds in permitted securities. The contribution to the fund is recognised as expense and is charged to the profit and Loss account. The obligation of the Bank is limited to such contributions. As on 31st March 2011, there was no liability due and outstanding to the fund by the Bank.

e) Other Long term Employee Benefits: Other than the employees benefits listed above, the Bank also gives certain long term benefits to the employees, which include Medical aid, reimbursement of hospitalization expenses to the employees / their family members, compensated absence such as sick leave and casual leave etc. The bank has made provision for such liabilities on an ad-hoc basis

g) On account of other long term employees benefits like LFC Encashment, Medical Aid, Hospitalisation Reimbursement, Sick Leave etc .provision of Rs. 3.05 crore is held.

2.3.2 In terms of the requirement of the Accounting Standard 15 – Employee Benefits, the entire amount of Rs. 190.71 crore (towards pension of Rs. 151.59 crore and Gratuity of Rs. 39.12 crore) on account of re-opening of pension option and enhancement in gratuity limit is required to be charged to Profit and Loss Account. However, in accordance with the permission accorded by the Reserve Bank of India vide their letter DBOD. No. BP.BC. 15896/ 21.04.018/2010-11 dated 8th April 2011, the bank has debited the profit and Loss account a sum of Rs. 57.26 crore including entire liability towards retired employees on account of pension and Rs. 7.82 crore on account of Gratuity liability. The balance unamortized amount of Rs. 94.33 crore towards pension and Rs. 31.30 crore towards gratuity will be dealt with as per guidelines of the Reserve Bank of India

2.3.3. Employee Stock Options (ESOP)

The shareholders of the Bank have approved the Employees Stock Options Scheme (ESOS) at the Annual General Meeting held on 15.7.2006 for grant to eligible employees up to 1500000 stock options in aggregate. Accordingly stock options have been granted to the eligible employees at an exercise price of Rs. 50 per share. As per the Scheme the stock options granted would vest in a graded manner i.e 40% after the first year, 30% in the second year and the remaining 30% before the end of the third year from the date of grant. The vested options, subject to other conditions, are exercisable within a period of 5 years from the respective dates of vesting. During the year ended March 31, 2011 the Bank has provided a sum of Rs. 1.23 crore as employee compensation cost being the proportionate accounting value in respect of stock options.

2.4 Accounting Standard 17 – Segment reporting:

For the purpose of segment reporting in terms of AS 17 of ICAI and as prescribed in RBI guidelines, the business of the Bank has been classified into 4 segments i.e.(a) Treasury operations (b) Corporate / Wholesale Banking (c) Retail Banking and (d) Other Banking Operations. Since the Bank does not have any overseas branch, reporting under geographic segment does not arise. Segment assets have been identified and segment liabilities have been allocated on the basis of segment assets.

Part B - Geographic Segments: There is only one segment i.e. Domestic segment

2.5 Accounting Standard 18 – Related Party disclosures:

There is no related party transaction other than remuneration paid to Mr P Jayarama Bhat as Managing Director and Chief Executive Officer from 01.04.2010 onwards, a sum of Rs. 32,40,000/- (previous year Rs. 23,16,774/- from 13.07.2009 to 31.03.2010) as remuneration and contribution to Provident Fund, etc.

4,120 Equity shares (previous year 2,800 Equity shares) allotment of which is in abeyance due to restraint orders received and matter being sub-judice. The same has not been considered for EPS calculation.

2.8 Accounting Standard 28 – Impairment of Assets: In the opinion of the management, there is no impairment of the fixed assets to any material extent as at 31st March 2011 requiring recognition in terms of Accounting Standard 28.

2.9 Accounting Standard 29 – Provision, Contingent liabilities and Contingent assets: Movement in Provision for Contingencies: ( Rs. in crore)

Particulars Opening as on Provision made Provision Closing as on 01-04-2010 during the year reversed/ 31-03-2011 adjusted

Provision for 5.34 0.20 Nil 5.54 Contingencies

3.3 Drawdown from Reserves:

A sum of Rs. 7.20 crore has been transferred from Investment Reserve Account net of Statutory Reserves and tax to the Profit and Loss Appropriation account as per Reserve Bank of India guidelines.

3.5 Disclosure of Letters of Comforts (LOC): The Bank issues Letter of Comforts on behalf of its various constituents against the credit limits sanctioned to them. In the opinion of the management, no significant financial impact and/or cumulative financial obligations have been assessed under LOCs issued by the Bank in the past or during the current year and remaining outstanding as of 31st March 2011.

3.6 Provisioning Coverage Ratio (PCR): The banks provision coverage ratio as of March 31, 2011 is 60.08 %.

4. Reconciliation of Branch Adjustments and Balancing of Subsidiary Ledgers:

a) Balancing of Subsidiary Ledgers are completed in all branches/offices. b) Reconciliation of branch adjustments/ Inter Bank accounts has been completed up to 31-03-2011 and steps are being taken to give effect to consequential adjustments of pending items.

5. Investments: The percentage of investments under “Held to Maturity” category – SLR as on 31st March 2011 was 19.48% of the Net Demand and Time Liabilities of the bank (Previous Year 23.90%), which is within the permissible limit as per RBI guidelines.

6. Rights Issue: During the year, pursuant to the Rights issue in the ratio of 2:5, the bank allotted 5,37,68,615 Equity shares of Rs. 10/- each at a premium of Rs. 75/- per share aggregating to Rs. 457.03 crore. In accordance with the provisions of section 78(2)(c) of the Companys Act 1956 and as provided under the Letter of Offer dated February 18, 2011 the expenses incurred in this connection, aggregating to Rs. 3.15 crore have been charged off to the share premium account.

7. Tax demands under appeal: A sum of Rs. 47.34 crore (Previous year Rs. 101.76 crore) is outstanding on account of demands raised by the Income Tax Department in earlier years which have been paid under protest. No provision is considered necessary in respect of these demands, as the Bank has been advised that there are good chances of success in appeals/ considering favourable appellate orders on identical issues for earlier assessment years. Provision for income tax for the year has been made after due consideration of decisions of appellate authorities and advice of counsels.

8. Premises: Premises include buildings in possession and occupation of the Bank pending execution of title deeds and/or Co-operative Societies yet to be formed amounting to Rs. 0.22 crore (Previous year Rs. 0.22 crore)

9. Previous years figures have been regrouped/rearranged/given in brackets wherever necessary and feasible to conform to the current year classifications.


Mar 31, 2010

1. Reconciliation of Branch Adjustments and Balancing of Subsidiary Ledgers.

a) Reconciliation of branch adjustments/Inter Bank accounts has been completed upto 31-03-2010 and steps are being taken to give effect to consequential adjustments of pending items.

b) Balancing of Subsidiary Ledgers are completed in all branches/offices.

2. Net profit or Loss for the period, Prior period items and changes in Accounting policies (Accounting Standard 5); There are no significant prior period items which are required to be disclosed as per RBI guidelines. However during the year, the Bank has made some changes in Accounting Policies as detailed below:

Recoveries made in Non-Performing advances are appropriated towards the principal, interest and charges in their order of demand instead of first appropriating the same towards the principal and the balance towards interest as followed in previous years. Due to this change, the profit (net) for the year is higher by Rs 4.97 crore.

3. Share Issue Expenses

During the year, the Bank issued equity shares under Qualified Institutional Placement. The entire expenses including amount paid to Lead Merchant Bankers have been deducted from the share premium collected on the issue as per the provisions of section 78(2) (c) of The Companys Act 1956..

4. Employee Benefits –Accounting Standard 15 Various Benefits made available to the Employees are:- a) Pension: The Bank has defined benefit plan under Pension Trust to employees who have opted for Pension Scheme under the Pension & Group Schemes unit of LIC of India, by purchasing annuity for optants separated after completion of 20 years of service. The Benefits under this plan are based on last drawn salary and the tenure of employment. The Liability for the pension is determined and provided on the basis of actuarial valuation.

b) Gratuity: In accordance with the applicable Indian Laws, the Bank provides for defined gratuity benefit retirement plan (‘the gratuity Plan) covering eligible employees. This plan provides for a lumpsum payment to the eligible employees on retirement, death, incapacitation or termination of employment of amounts that are based on the last drawn salary and tenure of employment. Liabilities with regard to the gratuity plan are determined by actuarial valuation and contributed to the gratuity fund trust. Trustees administer the contribution made to the trust and invest in specific designated securities as mandated by law, which generally comprise of Central and State government bonds and debt instruments of government owned corporations.

c) Leave Encashment (PL): The bank permits encashment of leave accumulated by employees on retirement, resignation and during the course of service. The liability of encashment of such leave is determined and provided on the basis of actuarial valuation performed by an independent actuary at the balance sheet date.

d) Provident Fund: The Bank pays fixed contribution to Provident Fund at predetermined rates to a separate trust, which invests the funds in permitted securities. The contribution to the fund is recognised as expense and is charged to the profit and Loss account. The obligation of the Bank is limited to such contributions. As on 31st March 2010, there was no liability due and outstanding to the fund by the Bank.

e) Other Long term Employee Benefits: Other than the employees benefits listed above, the Bank also gives certain long term benefits to the employees which include Medical aid, reimbursement of hospitalization expenses to the employees / their family members, compensated absence such as sick leave and casual leave etc. The bank has made provision for such liabilities on an adhoc basis.

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

5. Segment reporting (Accounting Standard 17).

For the purpose of segment reporting in terms of AS 17 of ICAI and as prescribed in RBI guidelines, the business of the Bank has been classified into 4 segments i.e.(a) Treasury operations (b) Corporate / Wholesale Banking (c) Retail Banking and (d) Other Banking Operations. Since the Bank does not have any overseas branch, reporting under geographic segment does not arise. Segment assets have been identified and segment liabilities have been allocated on the basis of segment assets.

6. Related Party Disclosure (Accounting Standard 18):

There is no related party transaction other than remuneration paid to Sri Ananthakrishna as Chairman and Chief Executive Officer upto 12.07.2009, a sum of Rs 9,14,516/- (Previous year Rs 32,40,000) and Sri P Jayarama Bhat as Managing Director and Chief Executive Officer from 13.07.2009, a sum of Rs. 23,16,774/- ( previous year Rs nil) as remuneration and contribution to Provident Fund etc. Sri Ananthakrishna, non executive chairman has forgone the payment of Rs 1 lakh per month effective from July 13, 2009 and the same has been accepted by the Board.

The Net profit for the year has been used as the numerator and the weighted average number of equity shares as denominator in calculating the earning per share.

(b) 2800 equity shares (previous year 2800 equity shares) allotment of which is in abeyance, being sub judice.

7. Accounting for Taxes on Income - (Accounting Standard 22)

The Bank has accounted for taxes on income in compliance with Accounting Standard 22 issued by the ICAI. Accordingly, deferred tax assets and liabilities are recognised. The major components of deferred tax are as under: -

8. Impairment of Assets (Accounting Standard 28)

Fixed Assets possessed by the bank are treated as "Corporate Assets" and are not "Cash Generating Units" as defined by AS – 28 issued by the Institute of Chartered Accountants of India (ICAI). In the opinion of the management, there is no impairment of the fixed assets of the Bank.

9. Provisions, Contingent Liabilities and Contingent Assets (Accounting Standard 29)

a) Movement of provisions for liabilities* (Rs. in crore)

Particulars Legal cases /contingencies **

Balance as at 1st April 2009 15.41 Provided during the year 7.75

Amounts used during the year 11.25

Reversed during the year 0.00

Balance as at 31st March 2010 11.91

Timing of outflow/uncertainties Outflow on settlement / crystallization

* excluding provisions for others.

** Including towards customary practices

b) Contingent Liabilities of Schedule 12

Liabilities at Sl. No. (I) to (V) are dependent upon, the outcome of Court / arbitration / out of court settlement, disposal of appeals, the amount being called up, terms of contractual obligations, devolvement and raising of demand by concerned parties, respectively. Reimbursement is expected except in item no (I).

c) Contingent Assets:- Nil

10. ADDITIONAL DISCLOSURE:

In terms of RBI guidelines, the following additional disclosures have been made:

11. Disclosure on Risk Exposures in Derivatives

(i) Qualitative Disclosure:

Operations in the Treasury are segregated into three functional areas, namely Front office, Mid office and Back office, equipped with necessary infrastructure and trained officers, whose responsibilities are well defined.

The Integrated Treasury policy of the Bank clearly lays down the types of financial derivative instruments, scope of usages, approval process as also the limits like the open position limits, deal size limits and stop loss limits for trading in approved instruments.

The Mid Office is handled by Risk Management Department. Daily report is submitted to Risk Management department, which, in turn appraises the risks profile to the senior management on the assets and liability management.

The Bank ensures that the transactions with the corporate clients are undertaken only after the inherent credit exposures are quantified and approved in terms of the approval process laid down in the Derivative Policy for customer appropriateness and suitability and necessary documents like ISDA agreements etc. are duly executed. The Bank has adopted Current Exposure Method for monitoring the credit exposures.

The Bank also uses financial derivative transactions for hedging its on or off Balance Sheet exposures. The Integrated Treasury Policy of the Bank spells out the approval process for hedging the exposures. The hedge transactions are monitored on a regular basis and the notional profits or losses are calculated on MTM basis. PV01 and VaR on these deals are reported to the ALCO every month.

The hedged/non hedged transactions are recorded separately. The hedged transactions are accounted for on accrual basis.

In case of Option contracts, guidelines issued by FEDAI from time to time for recognition of income, premium and discount are being followed.

While sanctioning the limits, the competent authority may stipulate condition of obtaining collaterals/margin as deemed appropriate. The derivative limits are reviewed periodically along with other credit limits.

The customer related derivative transactions for notional value (at market rate) of Rs 187.01 crore are covered with counter party banks, on back- to- back basis for identical amount and tenure and the Bank does not have any market risk.

12. Employee Stock Option (ESOP):

The shareholders of the Bank have approved the Employees Stock Options Scheme (ESOS) at the Annual General Meeting held on 15.7.2006 for grant to eligible employees upto 1500000 stock options in aggregate. Accordingly stock options have been granted to the eligible employees at an exercise price of Rs 50 per share. As per the Scheme the stock options granted would vest in a graded manner i.e 40percent after the first year, 30percent in the second year and the remaining 30percent before the end of the third year from the date of grant. The vested options, subject to other conditions, are exercisable within a period of 5 years from the respective dates of vesting. During the year ended March 31, 2010 the Bank has provided a sum of Rs 38261525 as employee compensation cost being the proportionate accounting value in respect of stock options.

13. Government of India has notified “Agricultural Debt Waiver and Debt Relief Scheme 2008” for giving debt waiver to marginal and small farmers and relief to other farmers who have availed direct agricultural loans. The claim for agricultural debt waiver amounting to Rs 23.13 crore lodged by the Bank subject to certification by statutory auditors of the Bank, Rs 14.98 crore being 65 percent of the amount claimed has been reimbursed by the RBI during the year ending 31st March 2010.

14. In respect of investment under ‘Held to Maturity ‘category as stated in the significant accounting policy No 4 the excess of acquisition cost over the face value of the security amortised during the year amounting to Rs 28.86 crore (previous year Rs 11.95 crore) has been netted off from interest on investments and shown under ‘Income from Investments in Profit and Loss account in terms of RBI direction. During the year with the intention to strengthen the trading portfolio, the Bank has shifted securities amounting to Rs 1639.91 crore from ‘Held to Maturity to Available for Sale category at book value or market value whichever is lower and a sum of Rs. NIL has been charged to provision for depreciation on investments. (previous year securities amounting to Rs 420.76 crore has been shifted from ‘Held to Maturity to Available for Sale category and securities amounting to Rs 634.44 crore have been shifted from ‘Available for Sale to ‘Held to maturity category by charging a sum of Rs 28.95 crore to provision for depreciation on investments).

15 (a) Tax demands under appeal: A sum of Rs 47.34 crore (Previous year Rs 101.76 crore) is outstanding on account of demands raised by the Income Tax Department in earlier years which have been paid under protest. No provision is considered necessary in respect of these demands, as the Bank has been advised that there are good chances of success in appeals/ considering favourable appellate orders on identical issues for earlier assessment years.

(b) Provision for income tax for the year has been made after due consideration of decisions of appellate authorities and advice of counsels.

16. Premises include buildings in possession and occupation of the Bank pending execution of title deeds and/or Co-operative Societies yet to be formed amounting to Rs.0.22 crore (Previous year Rs.0.22 crore)

17. Draw down from Reserves : The Bank has not made any draw down during the year from the Reserves.

18. Previous years figures have been regrouped/rearranged/given in brackets wherever necessary and feasible to conform to the current year classifications.