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Notes to Accounts of Kotak Mahindra Bank Ltd.

Mar 31, 2017

1 Advances Classification:

Advances are classified as performing and non-performing advances (''NPAs'') based on RBI guidelines and are stated net of bills rediscounted, specific provisions, interest in suspense for non-performing advances and claims received from Export Credit Guarantee Corporation, provisions for funded interest term loan and provisions in lieu of diminution in the fair value of restructured assets. Also, NPAs are classified into sub-standard, doubtful and loss assets as required by RBI guidelines. Interest on NPAs is transferred to an interest suspense account and not recognized in the Profit and Loss Account until received.

Amounts paid for acquiring non-performing assets from other banks and NBFCs are considered as advances. Actual collections received on such non-performing assets are compared with the cash flows estimated while purchasing the asset to ascertain over dues. If these overdoes are in excess of 90 days, then these assets are classified into sub-standard, doubtful or loss as required by the RBI guidelines on purchase of nonperforming assets.

The Bank transfers advances through inter-bank participation with and without risk. In accordance with the RBI guidelines, in the case of participation with risk, the aggregate amount of the participation issued by the Bank is reduced from advances and where the Bank is participating, the aggregate amount of the participation is classified under advances. In the case of participation without risk, the aggregate amount of participation issued by the Bank is classified under borrowings and where the Bank is participating, the aggregate amount of participation is shown as due from banks under advances.

Provisioning:

Provision for NPAs comprising sub-standard, doubtful and loss assets is made in accordance with RBI guidelines. In addition, the Bank considers accelerated specific provisioning that is based on past experience, evaluation of security and other related factors. Specific loan loss provision in respect of non-performing advances are charged to the Profit and Loss Account. Any recoveries made by the Bank in case of NPAs written off are recognized in the Profit and Loss Account.

The Bank considers a restructured account as one where the Bank, for economic or legal reasons relating to the borrower''s financial difficulty, grants to the borrower concessions that the Bank would not otherwise consider. Restructuring would normally involve modification of terms of the advance / securities, which would generally include, among others, alteration of repayment period / repayable amount / the amount of installments / rate of interest (due to reasons other than competitive reasons). Restructured accounts are classified as such by the Bank only upon approval and implementation of the restructuring package. Necessary provision for diminution in the fair value of a restructured account is made.

In accordance with RBI guidelines the Bank has provided general provision on standard assets including credit exposures computed as per the current marked to market values of interest rate and foreign exchange derivative contracts, and gold at levels stipulated by RBI from time to time - farm credit to agricultural activities and SME at 0.25%, commercial real estate at 1.00%, restructured standard advances at 5%, teaser rate housing loans at 2.00%, commercial real estate-residential housing at 0.75% and for other sectors at 0.40%. Additional 2% standard asset provision is done for overseas step-down subsidiaries of Indian corporate.

Further to provisions required as per the asset classification status, provisions are held for individual country exposure (except for home country) as per the RBI guidelines. Exposure is classified in the seven risk categories as mentioned in the Export Credit Guarantee Corporation of India Limited (''ECGC'') guidelines and provisioning is done for that country if the net funded exposure is one percent or more of the Bank''s total assets based on the rates laid down by the RBI.

Provision for Unhedged Foreign Currency Exposure of borrowers is made as per the RBI guidelines.

2 Loss on Sale of Advances to Asset Reconstruction Company

Loss on sale of Advances sold to Asset Reconstruction Company are recognized immediately in the Profit and Loss Account.

3 Securitization

The Bank enters into arrangements for sale of loans through Special Purpose Vehicles (SPVs). In most cases, post securitization, the Bank continues to service the loans transferred to the SPV. At times, the Bank also provides credit enhancement in the form of cash collaterals and / or by subordination of cash flows to Senior Pass Through Certificate (PTC) holders. In respect of credit enhancements provided or recourse obligations (projected delinquencies, future servicing etc.) accepted by the Bank, appropriate provision / disclosure is made at the time of sale in accordance with Accounting Standard 29, "Provisions, Contingent Liabilities and Contingent Assets".

In accordance with the RBI guidelines, the profit or premium on account of securitization of assets at the time of sale is computed as the difference between the sale consideration and the book value of the securitized asset amortized over the tenure of the securities issued. Loss on account of securitization on assets is recognized immediately to the Profit and Loss Account.

The Bank invests in PTCs of other SPVs which are accounted for at the deal value and are classified under Investments.

4 Fixed assets (Property, Plant & Equipment and Intangible) and depreciation / amortization

Property, Plant & Equipment and Intangible Assets have been stated at cost less accumulated depreciation and amortization and adjusted for impairment, if any. Cost includes cost of purchase inclusive of freight, duties, incidental expenses and all expenditure like site preparation, installation costs and professional fees incurred on the asset before it is ready to put to use. Subsequent expenditure incurred on assets put to use is capitalized only when it increases the future benefit / functioning capability from / of such assets. Gain or losses arising from the retirement or disposal of a Property Plant and Equipment / Intangible asset are determined as the difference between the net disposal proceeds and the carrying amount of assets and recognized as income or expense in the Profit and Loss Account. Profit on sale of premises, if any, is transferred to Capital Reserve as per the RBI guidelines.

Used assets purchased are depreciated over the residual useful life from the date of original purchase.

Items costing less than '' 5,000 are fully depreciated in the year of purchase.

5 Cash and cash equivalents

Cash and cash equivalents include cash in hand, balances with Reserve Bank of India and Balances with Other Banks / institutions and money at Call and short Notice (including the effect of changes in exchange rates on cash and cash equivalents in foreign currency).

6 Bullion

The Bank imports bullion including precious metal bars on a consignment basis for selling to its wholesale and retail customers. The difference between the sale price to customers and actual price quoted by supplier is reflected under other income.

The Bank also borrows and lends gold, which is treated as borrowings or lending as the case may be in accordance with the RBI guidelines and the interest paid or received is classified as interest expense or income and is accounted on an accrual basis.

7 Revenue recognition

Interest income is recognized on accrual basis.

Interest income in respect of retail advances is accounted for by using the internal rate of return method to provide a constant periodic rate of return on the outstanding on the contract.

Interest income on investments in PTCs and loans bought out through the direct assignment route is recognized at their effective interest rate.

Interest income on discounted instruments is recognized over the tenure of the instruments so as to provide a constant periodic rate of return.

Service charges, fees and commission income are recognized when due except for guarantee commission and letter of credit which is recognized over the period of the guarantee / letter of credit. Syndication / arranger fee is recognized as income as per the terms of engagement.

Upon an asset becoming NPA the income accrued gets reversed, and is recognized only on realization, as per RBI guidelines. Penal interest is recognized as income on realization other than on running accounts where it is recognized when due.

Dividend income is accounted on an accrual basis when the Bank''s right to receive the dividend is established.

Gain on account of securitization of assets is amortized over the life of the securities issued in accordance with the guidelines issued by the RBI.

In respect of non-performing assets acquired from other Banks / FIs and NBFCs, collections in excess of the consideration paid at each asset level or portfolio level is treated as income in accordance with RBI guidelines and clarifications.

Fees received on sale of Priority Sector Lending Certificates is considered as Miscellaneous Income, while fees paid for purchase is expensed as other expenses in accordance with the guidelines issued by the RBI.

8 Employee benefits Defined Contribution Plan

Provident Fund

Contribution as required by the statute made to the government provident fund or to a fund set up by the Bank and administered by a board of trustees is debited to the Profit and Loss Account when an employee renders the related service. The Bank has no further obligations.

Superannuation Fund

The Bank makes contributions in respect of eligible employees, subject to a maximum of ''0.01 crore per employee per annum to a Fund administered by trustees and managed by life insurance companies. The Bank recognizes such contributions as an expense in the year when an employee renders the related service.

New Pension Scheme

The Bank contributes up to 10% of eligible employees'' salary per annum, to the New Pension Fund administered by a Pension Fund Regulatory and Development Authority (PFRDA) appointed pension fund manager. The Bank recognizes such contributions as an expense in the year when an employee renders the related service.

Defined Benefit Plan

Gratuity

The Bank provides for Gratuity, covering employees in accordance with the Payment of Gratuity Act, 1972, service regulations and service awards as the case may be. The Bank''s liability is actuarially determined (using Projected Unit Credit Method) at the Balance Sheet date. The Bank makes contribution to Gratuity Funds administered by trustees and managed by life insurance companies.

Pension Scheme

In respect of pension payable to certain erstwhile ING Vysya Bank Limited ("eIVBL") employees under Indian Banks'' Association ("IBA") structure, the Bank contributes 10% of basic salary to a pension fund and the balance amount is provided based on actuarial valuation conducted by an independent actuary as at the Balance Sheet date. The Pension Fund is administered by the board of trustees and managed by life insurance company. The present value of the Bank''s defined obligation is determined using the Projected Unit Credit Method as at the Balance Sheet date.

Employees covered by the pension plan are not eligible for employer''s contribution under the provident fund plan

The contribution made to the trust is recognized as planned assets. The defined benefit obligation recognized in the Balance Sheet represents the present value of the defined benefit obligation as reduced by the fair value of the plan assets.

Actuarial gains or losses in respect of all defined benefit plans are recognized immediately in the Profit and Loss Account in the year they are incurred.

Compensated Absences - Other Long-Term Employee Benefits

The Bank accrues the liability for compensated absences based on the actuarial valuation as at the Balance Sheet date conducted by an independent actuary which includes assumptions about demographics, early retirement, salary increases, interest rates and leave utilization. The net present value of the Banks'' obligation is determined using the Projected Unit Credit Method as at the Balance Sheet date. Actuarial gains / losses are recognized in the Profit and Loss Account in the year in which they arise.

Other Employee Benefits

As per the Bank''s policy, employees are eligible for an award after completion of a specified number of years of service with the Bank. The obligation is measured at the Balance Sheet date on the basis of an actuarial valuation using the Projected Unit Credit Method.

The undiscounted amount of short-term employee benefits expected to be paid in exchange for the services rendered by employees is recognized during the period when the employee renders the service. These benefits include performance incentives.

Employee share based payments

Equity-settled scheme:

The Employee Stock Option Schemes (ESOSs) of the Bank are in accordance with Securities and Exchange Board of India (Share Based Employee Benefits) Regulations, 2014. The Schemes provide for grant of options on equity shares to employees of the Bank and its Subsidiaries to acquire the equity shares of the Bank that vest in a cliff vesting or in a graded manner and that are to be exercised within a specified period.

In accordance with the Securities and Exchange Board of India (Share Based Employee Benefits) Regulations, 2014 and the Guidance Note on Accounting for Employee Share-based Payments, issued by The Institute of Chartered Accountants of India, the cost of equity-settled transactions is measured using the intrinsic value method. The intrinsic value being the excess, if any, of the fair market price of the share under ESOSs over the exercise price of the option is recognized as deferred employee compensation with a credit to Employee''s Stock Option (Grant) Outstanding account. The deferred employee compensation cost is amortized on a straight-line basis over the vesting period of the option. The cumulative expense recognized for equity-settled transactions at each reporting date until the vesting date reflects the extent to which the vesting period has expired and the number of equity instruments that are outstanding.

The options that do not vest because of failure to satisfy vesting condition are reversed by a credit to employee compensation expense, equal to the amortized portion of value of lapsed portion. In respect of the options which expire unexercised the balance standing to the credit of Employee''s Stock Option (Grant) Outstanding accounts is transferred to General Reserve. The fair market price is the latest available closing price, preceding the date of grant of the option, on the stock exchange on which the shares of the Bank are listed.

Where the terms of an equity-settled award are modified, the minimum expense recognized in ''Payments to and provision for employees'' is the expense as if the terms had not been modified. An additional expense is recognized for any modification which increases the total intrinsic value of the share-based payment arrangement, or is otherwise beneficial to the employee as premeasured as at the date of modification.

In respect of options granted to employees of subsidiaries, the Bank recovers the related compensation cost from the respective subsidiaries.

Cash-settled scheme:

The cost of cash-settled transactions (Stock Appreciation Rights - ["SARs"]) is measured initially using intrinsic value method at the grant date taking into account the terms and conditions upon which the instruments were granted. This intrinsic value is amortized on a straight-line basis over the vesting period with recognition of corresponding liability. This liability is premeasured at each Balance Sheet date up to and including the vesting date with changes in intrinsic value recognized in Profit and Loss Account in ''Payments to and provision for employees''.

The SARs that do not vest because of failure to satisfy vesting condition are reversed by a credit to employee compensation expense, equal to the amortized cost in respect of the lapsed portion.

9 Foreign currency transactions

Foreign currency monetary assets and monetary liabilities are translated as at the Balance Sheet date at rates notified by the Foreign Exchange Dealers'' Association of India (FEDAI) and the resultant gain or loss is accounted in the Profit and Loss Account.

Income and Expenditure items are translated at the rates of exchange prevailing on the date of the transactions except in respect of representative office (which are integral in nature) expenses, which are translated at monthly average exchange rates.

Outstanding forward exchange contracts (other than deposit and placement swaps) and spot contracts outstanding at the Balance Sheet date are revalued at rates notified by FEDAI for specified maturities and at the interpolated rates of interim maturities. In case of forward contracts of greater maturities where exchange rates are not notified by FEDAI, are revalued at the forward exchange rates implied by the swap curves in respective currencies. The resulting profits or losses are recognized in the Profit and Loss Account as per the regulations stipulated by the RBI / FEDAI.

Foreign exchange swaps "linked" to foreign currency deposits and placements are translated at the prevailing spot rate at the time of swap. The premium or discount on the swap arising out of the difference in the exchange rate of the swap date and the maturity date of the underlying forward contract is amortized over the period of the swap and the same is recognized in the Profit and Loss Account.

Contingent liabilities on account of foreign exchange contracts, letters of credit, bank guarantees and acceptances and endorsements outstanding as at the Balance Sheet date denominated in foreign currencies are translated at year-end rates notified by FEDAI.

The financial statements of IBU which are in the nature of non-integral overseas operations are translated on the following basis: (a) Income and expenses are converted at the average rate of exchange during the period and (b) All assets and liabilities are translated at closing rate as on Balance Sheet date. The exchange difference arising out of year end translation is debited or credited as "Foreign Currency Translation Reserve" forming part of "Reserves and Surplus".

10 Derivative transactions

Notional amounts of derivative transactions comprising of forwards, swaps, futures and options are disclosed as off Balance Sheet exposures. The Bank recognizes all derivative contracts (other than those designated as hedges) at fair value, on the date on which the derivative contracts are entered into and are re-measured at fair value as at the Balance Sheet or reporting date. Derivatives are classified as assets when the fair value is positive (positive marked to market) or as liabilities when the fair value is negative (negative marked to market). Changes in the fair value of derivatives other than those designated as hedges are recognized in the Profit and Loss Account.

Outstanding derivative transactions designated as "Hedges" are accounted in accordance with hedging instrument on an accrual basis over the life of the underlying instrument. Option premium paid or received is recognized in the Profit and Loss Account on expiry of the option. Option contracts are marked to market on every reporting date.

11Lease accounting

Leases where the less or effectively retains substantially all the risks and rewards of ownership of the leased term, are classified as operating leases. Operating lease payments are recognized as an expense in the Profit and Loss Account on a straight-line basis over the lease term.

12 Accounting for provisions, contingent liabilities and contingent assets

The Bank has assessed its obligations arising in the normal course of business, including pending litigations, proceedings pending with tax authorities and other contracts including derivative and long term contracts. In accordance with Accounting Standard - 29 on ''Provisions, Contingent Liabilities and Contingent Assets'', the Bank recognizes a provision for material foreseeable losses when it has a present obligation as a result of a past event and it is probable that an outflow of resources will be required to settle the obligation, in respect of which a reliable estimate can be made. Provisions are not discounted to its present value and are measured based on best estimate of the expenditure required to settle the obligation at the Balance Sheet date. These are reviewed at each Balance Sheet date and adjusted to reflect the current best estimates.

In cases where the available information indicates that the loss on the contingency is reasonably possible but the amount of loss cannot be reasonably estimated, a disclosure to this effect is made as contingent liabilities in the financial statements. The Bank does not expect the outcome of these contingencies to have a materially adverse effect on its financial results. Contingent assets are neither recognized nor disclosed in the financial statements.

13 Impairment

The carrying amounts of assets are reviewed at each Balance Sheet date if there is any indication of impairment based on internal / external factors. Impairment loss, if any, is provided in the Profit and Loss Account to the extent carrying amount of assets exceeds their estimated recoverable amount.

14 Taxes on income

The Income Tax expense comprises current tax and deferred tax. Current tax is measured at the amount expected to be paid in respect of taxable income for the year in accordance with the Income Tax Act, 1961. Deferred tax assets and liabilities are recognized for the future tax consequences of timing differences being the difference between the taxable income and the accounting income that originate in one period and are capable of reversal in one or more subsequent period.

Deferred tax assets on account of timing differences are recognized only to the extent there is reasonable certainty that sufficient future taxable income will be available against which such deferred tax assets can be realized. In case of carry forward losses and unabsorbed depreciation, under tax laws, the deferred tax assets are recognized only to the extent there is virtual certainty supported by convincing evidence that sufficient future taxable income will be available against which such deferred tax assets can be realized.

Deferred tax assets are reassessed at each reporting date, based upon the Management''s judgment as to whether realization is considered as reasonably certain.

Deferred tax assets and liabilities are measured using tax rates and tax laws that have been enacted or substantively enacted at the Balance Sheet date. Changes in deferred tax assets / liabilities on account of changes in enacted tax rates are given effect to in the Profit and Loss Account in the period of the change.

15 Earnings per share

Basic earnings per share are calculated by dividing the net profit or loss for the year attributable to equity shareholders (after deducting attributable taxes) by the weighted average number of equity shares outstanding during the year. The weighted average number of equity shares outstanding during the year is adjusted for events of bonus issue, bonus element in a rights issue to existing shareholders, and share split.

For the purpose of calculating diluted earnings per share, the net profit or loss for the year attributable to equity shareholders and the weighted average number of shares outstanding during the year are adjusted for the effects of all dilutive potential equity shares. Diluted earnings per share reflect the potential dilution that could occur if securities or other contracts to issue equity shares were exercised or converted during the year,

16 Share issue expenses

Share issue expenses are adjusted from Securities Premium Account as permitted by Section 52 of the Companies Act, 2013.

17 Credit cards reward points

The Bank estimates the liability for credit card reward points and cost per point using actuarial valuation conducted by an independent actuary, which includes assumptions such as mortality, redemption and spends.

18 Segment reporting

In accordance with guidelines issued by RBI vide DBOD.No.BP.BC.81/21.01.018/2006-07 dated 18th April, 2007 and Accounting Standard 17 (AS-17) on "Segment Reporting", the Banks'' business has been segregated into the following segments whose principal activities were as under:

Segment Principal activity

Treasury, BMU and Money market, forex market, derivatives, investments and primary dealership of government securities and Balance Corporate Centre Sheet Management Unit (BMU) responsible for Asset Liability Management and Corporate Centre which primarily comprises of support functions.

Corporate / Wholesale Whole sale borrowings and landings and other related services to the corporate sector which are not included under Banking retail banking.

Retail Banking Includes:

I Lending

Commercial vehicle finance, personal loans, home loans, agriculture finance, other loans / services and exposures which fulfill the four criteria'' for retail exposures laid down in Basel Committee on Banking Supervision document "International Convergence of Capital Measurement and Capital Standards : A Revised Framework".

II Branch Banking

Retail borrowings covering savings, current, term deposit accounts and Branch Banking network / services including distribution of financial products.

III Credit Cards

Receivables / loans relating to credit card business.

Other Banking business Any other business not classified above.

A transfer pricing mechanism has been established by Asset Liability Committee (ALCO) for allocation of interest cost to the above segments based on borrowing costs, maturity profile of assets / liabilities etc. and which is disclosed as part of segment revenue.

Segment revenues consist of earnings from external customers and inter-segment revenues based on a transfer pricing mechanism. Segment expenses consist of interest expenses including allocated operating expenses and provisions.

Segment results are net of segment revenues and segment expenses.

Segment assets include assets related to segments and exclude tax related assets. Segment liabilities include liabilities related to the segment excluding net worth, employees'' stock option (grants outstanding) and proposed dividend and dividend tax thereon.

Since the business operations of the Bank are primarily concentrated in India, the Bank is considered to operate only in the domestic segment.

* Being trading positions

Disclosures on risk exposures in derivatives:

Qualitative disclosures:

a) Structure and organization for management of risk in derivatives trading:

The Board of Directors, the Asset Liability Management Committee (ALCO), the Risk Management Committee (RMC), the Senior Management Committee for Derivatives and the Market Risk Management Department are entrusted with the management of risks in derivatives.

The philosophy and framework for the derivative business is laid out in the Board approved Investment and Derivative policies. The ALCO of the Bank is empowered to set the limit-framework for derivatives. It also reviews the market risk exposures of derivatives against the limits. The Risk Management Committee reviews all risks on a consolidated basis and also reviews Stress Testing.

The Senior Management Committee for Derivatives is responsible for reviewing and approving any new derivative products (within the regulatory framework provided by the RBI). The Board approved ''Customer Suitability and Appropriateness Policy for Derivatives'' provides guidelines for the assessment of Customer Suitability and the Appropriateness of products offered to these customers.

The monitoring and measurement of risk in derivatives is carried out by the Market Risk Management Department. The Market Risk Management Department is independent of the Treasury Front-Office & Back-Office and directly reports into the Group Chief Risk Officer.

b) Scope and nature of risk measurement, risk reporting and risk monitoring systems:

All significant risks of the derivative portfolio are monitored and measured daily. The Market Risk Management Department measures and reports Market Risk metrics like VaR, PV01, Option Greeks like Delta, Gamma, Vega, Theta, Rho etc. The Credit Risk from the derivatives portfolio is also measured daily.

The Market Risk Management Department monitors these exposures against the set limits and also reviews profitability on a daily basis. MIS is sent to ALCO on a periodic basis. Exception reports are also sent so that emerging risks are reviewed and managed on a timely basis. Stress testing is also performed on the Derivative portfolio. The Bank continuously invests in technology to enhance the Risk Management architecture.

c) Policies for hedging and / or mitigating risk and strategies and processes for monitoring the continuing effectiveness of hedges / mitigates:

The Board Approved ''Hedging Policy'' details the hedging strategies, hedging processes, accounting treatment, documentation requirements and effectiveness testing for hedges.

Hedges are monitored for effectiveness periodically, in accordance with the Board Approved Policy,

d) Accounting policy for recording hedge and non-hedge transactions; recognition of income, premiums and discounts; valuation of outstanding contracts; provisioning, collateral and credit risk mitigation:

Derivative transactions are segregated into trading or hedge transactions. Trading transactions outstanding as at the Balance Sheet dates are marked to market and the resulting profits or losses, are recorded in the Profit and Loss Account.

Derivative transactions designated as "Hedges" are accounted in accordance with hedging instruments on an accrual basis over the life of the underlying instrument.

Option premium paid / received is accounted for in the Profit and Loss Account on expiry of the option.

Pursuant to the RBI guidelines, any receivables as well positive Mark to Market (MTM) in respect of future receivable under derivative contracts comprising of crystallized receivables which remain overdue for more than 90 days are reversed through the Profit and Loss Account. The derivative limit sanctioned to clients is part of the overall limit sanctioned post credit appraisal. Collateral is accepted on a case to case basis considering the volatility of the price of the collateral and any increase in operational, legal and liquidity risk.

Currency interest rate swaps have been included under currency derivatives.

# Exdudes PV01 on options.

** MTM has been considered at product level.

* Retail assets portfolio purchased by the Bank has been considered as single portfolio.

** Represents outstanding balance of total non-performing financial assets purchased by the Bank at the Balance Sheet date. None of the non-performing financial assets purchased have been restructured during the year (previous year Nil).

There were no non-performing financial assets sold by the Bank during the current year (previous year Nil).

The Bank has not sold any financial assets to Securitization or Reconstruction Company for asset reconstruction (previous year Nil).

Definitions:

(A) Working funds is the monthly average of total assets as reported by the Bank''s Management to the RBI under Section 27 of the Banking Regulation Act, 1949.

(B) Operating profit = (Interest Income Other Income - Interest expenses - Operating expenses).

(C) Business is monthly average of net advances and deposits as reported to the RBI under section 27 of the Banking Regulation Act, 1949. Interbank deposits are excluded for the purposes of computation of this ratio.

(D) Productivity ratios are based on average number of employees.

19. Draw Down from Reserves:

In accordance with the RBI requirement on creation and utilization of Investment reserve in respect of HFT and AFS investments, reserve of '' 48.49 crore (previous year Rs, 41.52 crore) has been utilized during the year.

The above details are as furnished by the Management and relied upon by the auditors.

20. There are no outstanding letter of awareness / letter of comfort (previous year Nil).

21. DISCLOSURES ON REMUNERATION

A. Qualitative Disclosures:

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

The Nomination & Remuneration committee comprises of independent directors of the Bank. Key mandate of the Nomination

& Remuneration committee is to oversee the overall design and operation of the compensation policy of the Bank and work in coordination with the Risk Management Committee to achieve alignment between risks and remuneration.

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

Objective of Banks'' Compensation Policy is:

- To maintain fair, consistent and equitable compensation practices in alignment with Bank''s core values and strategic business goals;

- To ensure effective governance of compensation and alignment of compensation practices with prudent risk taking;

- To have mechanisms in place for effective supervisory oversight and Board engagement in compensation The remuneration process is aligned to the Bank''s Compensation Policy objectives.

c) Description of the ways in which current and future risks are taken into account in the remuneration processes. It should include the nature and type of the key measures used to take account of these risks:

In order to manage current and future risk and allow a fair amount of time to measure and review both quality and quantity of the delivered outcomes, a significant portion of senior and middle management compensation is variable. Further reasonable portion variable compensation is non- cash and deferred, over a period of 3 years or longer.

In addition, remuneration process provides for ''malus'' and ''clawback'' option to take care of any disciplinary issue or future drop in performance of individual/ business/ company,

d) Description of the ways in which the bank seeks to link performance during a performance measurement period with levels of remuneration:

Individual performances are assessed in line with business/ individual delivery of the Key Result Areas (KRAs), top priorities of business, budgets etc. KRAs of Line roles are linked to financials, people, service and process (Quality) parameters and KRAs of non-Line Roles have linkage to functional deliveries needed to achieve the top business priorities.

Further remuneration process is also linked to market salaries / job levels, business budgets and achievement of individual KRAs.

e) A discussion of the banks'' policy on deferral and vesting of variable remuneration and a discussion of the bank''s policy and criteria for adjusting deferred remuneration before vesting and after vesting:

A discussion on Policy on Deferral of Remuneration

Employees are classified into following three categories for the purpose of remuneration:

Category I: Whole Time Directors (WTD)/Chief Executive Officer (CEO)

Category II: Risk Control and Compliance Staff Category III: Other Categories of Staff

Following principles are applied for deferral / vesting of variable remuneration in accordance with RBI guidelines and Bank''s compensation policy:

Category I

a. Variable Pay will not exceed 70% of Fixed Pay,

b. The Cash component of the Variable Pay will not exceed 50% of the Fixed Pay,

c. If Variable Pay is higher than 50% of Fixed Pay, at least 40% of Variable Pay will be deferred over a period of 3 years, or longer, on a pro-rata basis.

The compensation will be approved by the Nomination and Remuneration committee and RBI

Category II

a. Variable Pay will not exceed 70% of Fixed Pay,

b. The Cash component of the Variable Pay will not exceed 50% of the Fixed Pay,

c. If Variable Pay is higher than 50% of Fixed Pay, at least 40% of Variable Pay will be deferred over a period of 3 years, or longer, on a pro-rata basis.

Category III

Variable Pay is payable as per approved schemes for incentive or Bonus:

i) The Cash component of the Variable Pay will not exceed 60% of the Fixed Pay,

ii) If Variable Pay is higher than 60% of Fixed Pay, at least 40% of Variable Pay will be deferred over a period of 3 years, or longer, on a pro-rata basis.

iii) However, if Variable Pay is less than or equal to Rs, 10 lakhs, management will have the discretion to pay the entire amount as cash.

For adjusting deferred remuneration before & after vesting:

Malus: Payment of all or part of amount of deferred variable pay can be prevented. This clause will be applicable in case of:

- Disciplinary Action (at the discretion of the Disciplinary Action Committee) and/ or

- Significant drop in performance of Individual/ Business/ Company (at the discretion of the Nomination & Remuneration Committee) and/ or

- Resignation of the staff prior to the payment date.

Clawback: Previously paid or already vested deferred variable pay can also be recovered under this clause.

This clause will be applicable in case of Disciplinary Action (at the discretion of the Disciplinary Action Committee and approval of the Nomination & Remuneration Committee)

f) Description of the different forms of variable remuneration (i.e. cash, shares, ESOPs and other forms) that the bank utilizes and the rationale for using these different forms:

The main forms of such variable remuneration include:

- Cash - this may be at intervals ranging from Monthly, Quarterly, Annual.

- Deferred Cash / Deferred Incentive Plan.

- Stock Appreciation Rights (SARs): These are structured, variable incentives, linked to Kotak Mahindra Bank Stock price, payable over a period of time

- ESOPasperSEBIguidelines.

The form of variable remuneration depends on the job level of individual, risk involved, the time horizon for review of quality and longevity of the assignments performed.

B. Quantitative Disclosures:

a) Number of meetings held by the Remuneration Committee during the financial year and remuneration paid to its members.

During year ended 31st March, 2017 3 meetings of Nomination and Remuneration committee was held. Each Member of the Nomination and Remuneration committee is paid a sitting fee of '' 40,000 per meeting.

b) Number of employees having received a variable remuneration award during the financial year.

Quantitative disclosure restricted to CEO, two Whole Time Directors and six Operating Management committee members as risk takers.

c) Number and total amount of sign-on awards made during the financial year.

Not Applicable

d) Details of guaranteed bonus, if any, paid as joining / sign on bonus.

Not Applicable

e) Details of severance pay, in addition to accrued benefits, if any.

Nil (previous year Nil)

f) Total amount of outstanding deferred remuneration, split into cash, shares and share-linked instruments and other forms

Cash - Nil (previous year Nil)

Outstanding SARs as at 31st March, 2017 - 96,004 rights (previous year 128,696 rights)

Outstanding ESOPs as at 31st March, 2017 - 878,448 equity shares (previous year 891,694 equity shares)

g) Total amount of deferred remuneration paid out in the financial year.

Payment towards SARs during year ended 31st March, 2017 Rs, 5.29 crore (previous year Rs, 6.29 crore)

h) Breakdown of amount of remuneration awards for the financial year to show fixed and variable, deferred and no deferred.

Total fixed salary for the year ended 31st March, 2017 - Rs, 16.28 crore (previous year Rs, 18.75 crore)

Deferred Variable Pay*

SARs - 54,220 rights (previous year 35,370 rights)

ESOPs - 494,060 equity shares (previous year 145,660 equity shares)

Non Deferred variable pay* Rs, 3.99 crore (previous year Rs, 4.02 crore)

* Details relating to variable pay pertains to remuneration awards for the financial year 2015-16 awarded during current financial year. Remuneration award for the year ended 31st March, 2017 are yet to be reviewed and approved by the remuneration committee

i) Total amount of outstanding deferred remuneration and retained remuneration exposed to ex post explicit and / or implicit adjustments. - Nil (Previous year Nil)

j) Total amount of reductions during the financial year due to ex- post explicit adjustments. - Nil (Previous year Nil)

k) Total amount of reductions during the financial year due to ex- post implicit adjustments. - Nil (Previous year Nil)

22. Unhedged Foreign Currency Exposure of borrowers:

The bank recognises the importance of the risk of adverse fluctuation of foreign exchange rates on the profitability and financial position of borrowers who are exposed to currency risk. Currency induced credit risk refers to the risk of inability of borrowers to service their debt obligations due to adverse movement in the exchange rates and corresponding increase/decrease in their book values of trade payables, loan payables, trade receivables, etc. thereby exposing the Bank to risk of default by the borrower. In this regard, the Bank had put in place requisite policies & processes for monitoring and mitigation of currency induced credit risk of borrowers. These include the following:

(a) Currency risk of borrowers on account of un-hedged foreign currency exposures ("UFCE") is duly considered and analysed in credit appraisal notes.

(b) Periodic monitoring of un-hedged foreign currency exposures of borrowers.

(c) Risk classification of borrowers having un-hedged foreign currency exposures, into Low / Medium / High, as per internal norms, based on likely loss / EBID ratio. Likely loss means the potential loss which can be caused over a one year horizon by adverse movement of exchange rates.

(e) In case of borrowers exposed to currency risk where declarations for foreign currency payables/ receivables (UFCE declarations) are not submitted, provision for currency induced credit risk is made as per RBI stipulated rates mentioned below:

- 10 bps in cases where limits with banking system are less than Rs, 25 crore;

- 80 bps in cases where limits with banking system are Rs, 25 crore or more.

(f) Further, where annual certification from statutory auditors of UFCE data is not submitted, such borrowers are treated as UFCE declaration not submitted cases and provision is computed as per point (e) above.

(g) Borrowers where the credit exposure is only Letter of Credit Bills Discounting, Fixed Deposit backed, Bank Guarantee / Standby Letter of Credit backed are exempted from the above requirements. Exposures on other Banks and Public Financial Institutions like SIDBI, EXIM Bank, NABARD, NHB are also exempted from the above requirements.

(h) Management of foreign exchange risk is considered as a parameter for internal risk rating of borrowers.

Provision held for currency induced credit risk as at 31st March, 2017 is Rs, 50.54 crore. (Previous year Rs, 60.00 crore). Incremental Risk weighted Assets value considered for the purpose of CRAR calculation in respect of currency induced credit risk as at 31st March, 2017 is Rs, 2,156.04 crore (Previous year Rs, 1,863.65 crore).

23. b) Qualitative disclosure around LCR

The Reserve Bank of India has prescribed monitoring of sufficiency of Bank''s liquid assets using Basel III - Liquidity Coverage Ratio (LCR). The LCR is aimed at measuring and promoting short-term resilience of Banks to potential liquidity disruptions by ensuring maintenance of sufficient high quality liquid assets (HQLAs) to survive an acute stress scenario lasting for 30 days.

The LCR requirement has been introduced in a phased manner with banks required to maintain minimum LCR of 60% till Dec 2015 and the 70% from Jan 2016 onwards. The requirement will be increasing by 10% annually to 100% by Jan 2019. LCR requirement is currently at 80% effective Jan 2017.

The ratio comprises of high quality liquid assets (HQLAs) as numerator and net cash outflows in 30 days as denominator. HQLA has been divided into two parts i.e. Level 1 HQLA which comprises of primarily cash, excess CRR, SLR securities in excess of minimum SLR requirement and a portion of mandatory SLR as permitted by RBI (under MSF and FALLCR) and Level 2 HQLA which comprises of investments in highly rated non-financial corporate bonds and listed equity investments considered at prescribed haircuts. Cash outflows are calculated by multiplying the outstanding balances of various categories or types of liabilities by the outflow run-off rates and cash inflows are calculated by multiplying the outstanding balances of various categories of contractual receivables by the rates at which they are expected to flow in.

The Bank has implemented the LCR framework and has consistently maintained LCR well above the regulatory threshold. The average LCR for the quarter ended 31st March, 2017 was 88.66% which is above the regulatory limit of 80%. For the quarter ended 31st March, 2017 Level 1 HQLA stood at 97.23% (Rs,28,819 crs.) of the total HQLA.

LCR is expected to bring in more funding stability due to severe run-off factors on wholesale funding but at the same time it has increased the liquidity cost due to maintenance of high quality liquid assets. Apart from LCR, Bank uses various stock liquidity indicators to measure and monitor the liquidity risk in terms of funding stability, concentration risk, dependence on market borrowings, liquidity transformation, etc. The Bank maintains a diversified source of funding in terms of depositor concentration, lender concentration as well as instrument concentration. This is evident through low depositor and lender concentration with top 20 depositors contributing 9.6% of Bank''s total deposits and top 10 lenders contributing 6.8% of Bank''s total liabilities.

Asset Liability Committee (ALCO) of the Bank is the primary governing body for Liquidity Risk Management supported by Balance Sheet Management Unit (BMU), Risk Management Department (RMD), Finance and ALCO Support Group. BMU is the central repository of funds within the Bank and is vested with the responsibility of managing liquidity risk within the risk appetite of the Bank. Bank has incorporated Basel III Liquidity Standards - LCR and NSFR as part of its risk appetite statement for liquidity risk.

24. Frauds

The Bank has reported 126 cases (Previous year 114 cases) of fraud during the financial year ended 31st March 2017 amounting to Rs, 111.54 crore (Previous year Rs, 44.94 crore). The Bank has recovered / expensed off / provided the entire amount where necessary,

25. Disclosure of Specified Bank Notes (SBNs)

As per the clarification from RBI, the provisions of the MCA Notification dated 30th March 2017 requiring companies to disclose details of the SBNs held and transacted during the notified period is not applicable to banks.

Segmental Information is provided as per the MIS available for internal reporting purposes, which includes certain estimates and assumptions. The methodology adopted in compiling and reporting the above information has been relied upon by the auditors.

3. Lease Discloures:

a. The Bank has taken various premises and equipment under operating lease. The lease payments recognized in the Profit and Loss Account are Rs, 430.81 crore (previous year Rs, 403.26 crore). The sub-lease income recognized in the Profit and Loss Account is Rs, 5.95 crore (previous year Rs, 7.13 crore).

b. The future minimum lease payments under non-cancellable operating lease - not later than one year is Rs, 366.42 crore (previous year Rs, 360.14 crore), later than one year but not later than five years is Rs, 1,160.15 crore (previous year Rs, 1,056.90 crore) and later than five years Rs, 1,003.01 crore (previous year Rs, 899.84 crore).

The lease terms include renewal option after expiry of primary lease period. There are no restrictions imposed by lease arrangements. There are escalation clauses in the lease agreements.

26. Related Party Disclosures:

A. Parties where control exists: Nature of relationship Related Party

Subsidiary Companies Kotak Mahindra Prime Limited

Kotak Securities Limited

Kotak Mahindra Capital Company Limited

Kotak Mahindra Old Mutual Life Insurance Limited

Kotak Mahindra Investments Limited

Kotak Mahindra Asset Management Company Limited

Kotak Mahindra Trustee Company Limited

Kotak Mahindra (International) Limited

Kotak Mahindra (UK) Limited

Kotak Mahindra Inc.

Kotak Investment Advisors Limited Kotak Mahindra Trusteeship Services Limited

Kotak Infrastructure Debt Fund Limited (formerly known as Kotak Forex Brokerage Limited)

Kotak Mahindra Pension Fund Limited

Kotak Mahindra Financial Services Limited

Kotak Mahindra Asset Management (Singapore) Pte. Ltd.

Kotak Mahindra General Insurance Company Limited

IVY Product Intermediaries Limited (formerly known as ING Vysya Financial Services Limited)

B. Other Related Parties:

Nature of Relationship_Related Party_

Individual having significant influence Mr. Uday S. Kotak along with relatives and enterprises in which he has beneficial interest holds over the enterprise 32.02% of the equity share capital of Kotak Mahindra Bank Limited as on 31st March, 2017

Associates / Others ACE Derivatives and Commodity Exchange Limited.

Infina Finance Private Limited

Matrix Business Services India Private Limited

Phoenix ARC Private Limited

Kotak Education Foundation

ING Vysya Foundation

Key Management Personnel (KMP) Mr. Uday S. Kotak, Executive Vice Chairman and Managing Director

Mr. C Jayaram, Joint Managing Director (upto 30 April 2016)

Mr. Dipak Gupta, Joint Managing Director Enterprises over which KMP / relatives Aero Agencies Limited of KMP have control / significant Kotak and Company Private Limited influence Komaf Financial Services Private Limited

Asian Machinery & Equipment Private Limited.

Insurekot Sports Private Limited Kotak Trustee Company Private Limited Cumulus Trading Company Private Limited Palko Properties Private Limited Kotak Chemicals Limited

Kotak Ginning & Pressing Industries Private Limited Kotak Commodities Services Private Limited Harisiddha Trading and Finance Private Limited Puma Properties Private Limited Business Standard Private Limited Business Standard Online Private Limited Allied Auto Accessories Private Limited Uday S Kotak HUF Suresh A Kotak HUF USK Benefit Trust II Relatives of KMP Ms. Pallavi Kotak

Mr. Suresh Kotak Ms. Indira Kotak Mr. Jay Kotak Mr. Dhawal Kotak Ms. Aarti Chandaria Ms. Anita Gupta Ms. Urmila Gupta Mr. Arnav Gupta Mr. Parthav Gupta Mr. Prabhat Gupta Ms. Jyoti Banga

Ms. Usha Jayaram (upto 30 April 2016)

Mr. K. Madhavan Kutty (upto 30 April 2016)

Mr. Vivek Menon (upto 30 April 2016)

Ms. Nayantara Menon Mehta (upto 30 April 2016)

27. EMPLOYEE SHARE BASED PAYMENTS:

At the General Meetings, the shareholders of the Bank had unanimously passed Special Resolutions on 28th July 2000, 26th July 2004, 26th July 2005, 5th July 2007, 21st August 2007 and 29th June 2015, to grant options to the eligible employees of the Bank and its subsidiary and associate companies. Pursuant to these resolutions, the following Employees Stock Option Schemes had been formulated and adopted:

(a) Kotak Mahindra Equity Option Scheme 2001-02;

(b) Kotak Mahindra Equity Option Scheme 2002-03;

(c) Kotak Mahindra Equity Option Scheme 2005;

(d) Kotak Mahindra Equity Option Scheme 2007; and

(e) Kotak Mahindra Equity Option Scheme 2015

Consequent to the above, the Bank has granted stock options to the employees of the Group. The Bank under its various plan / schemes, has granted in aggregate 144,210,124 options (including options issued in exchange on amalgamation) as on 31st March, 2017 (Previous year 140,327,654).

Further, pursuant to the Scheme of Amalgamation of ING Vysya Bank Limited with the Bank, the Bank has renamed and adopted the ESOP Schemes of the eIVBL, as given below:

(a) Kotak Mahindra Bank Ltd. (IVBL) Employees Stock Option Scheme 2005;

(b) Kotak Mahindra Bank Ltd. (IVBL) Employees Stock Option Scheme 2007;

(c) Kotak Mahindra Bank Ltd. (IVBL) Employee Stock Option Scheme 2010; and

(d) Kotak Mahindra Bank Ltd. (IVBL) Employees Stock Option Scheme 2013

In aggregate 8,663,925 options are outstanding as on 31st March, 2017 under the aforesaid adopted schemes.

The expected volatility was determined based on historical volatility data and the Bank expects the volatility of its share price may reduce as it matures. The measure of volatility used in the Black-Scholes options pricing model is the annualised standard deviation of the continuously compounded rates of return on the stock over a period of time. For calculating volatility, the daily volatility of the stock prices on the National Stock Exchange, over a period prior to the date of grant, corresponding with the expected life of the options has been considered.

The above information has been prepared by the Bank and relied upon by the auditors.

Effect of the employee share-based payment plans on the Profit and Loss Account and on the financial position:

Had the Bank recorded the compensation cost computed on the basis of Fair Valuation method instead of intrinsic value method, employee compensation cost would have been higher by Rs, 33.21 crore (Previous year Rs, 93.52 crore) and the profit after tax would have been lower by Rs, 21.72 crore (Previous year Rs, 61.16 crore). Consequently the basic and diluted EPS would have been Rs, 18.45 (Previous year Rs, 11.09) and Rs, 18.43 (Previous year Rs, 11.07) respectively.

The above number of ESOPs / SARs, exercise price, fair value and share price have been adjusted for bonus shares - one share for every share allotted on 10th July, 2015. The effect of the bonus share has been given in computation for the previous periods.

In computing the above information, certain estimates and assumptions have been made by the Management which have been relied upon by the auditors.

28. Corporate Social Responsibility (CSR)

As per the provisions of the Section 135 of the Companies Act, 2013 the Bank is required to contribute Rs, 54.92 crore. The Bank has contributed Rs, 13.03 crore to the Kotak Education Foundation and Rs, 4.30 crore to other CSR initiatives in the current financial year. The Bank has also adopted a strong CSR policy, charting out its plan to invest in society and its own future. The Bank is building its CSR capabilities on a sustainable basis and is committed to gradually increase its CSR spend in the coming years.

29. Tier II Bonds

a) Lower Tier II Bonds outstanding as at 31st March, 2017 Rs, 858.80 crore (previous year Rs, 969.70 crore).

During the current year and previous year the Bank had not issued lower Tier II bonds. In accordance with the RBI requirements lower Tier II bonds of Rs, 383.64 crore (previous year Rs, 524.71 crore) are not considered as Tier II capital for the purposes of capital adequacy computation under Basel III guidelines.

b) Upper Tier II Bonds outstanding as at 31st March, 2017 are Rs, 348.28 crore (previous year Rs, 806.31 crore) of which bonds issued outside India are Rs, 212.28 crore (previous year Rs, 670.31 crore).

During the current and previous year, the Bank did not issue upper Tier II bonds.

c) Interest Expended-Others (Schedule 15(III)) includes interest on subordinated debt (Lower and Upper Tier II) Rs, 116.19 crore (previous year Rs, 125.97 crore).

30. The Bank has received few intimations from "suppliers" regarding their status under the Micro, Small and Medium Enterprises Development Act, 2006 and there is no outstanding against those suppliers as on 31st March, 2017, hence disclosures, if any, relating to amounts unpaid as at the yearend together with interest paid / payable as required under the said Act have not been given. The above is based on information available with the Bank and relied upon by the Auditors.

31. Figures for the previous year have been regrouped / reclassified wherever necessary to conform to current years, presentation.


Mar 31, 2016

Since the business operations of the Bank are primarily concentrated in India, the Bank is considered to operate only in the domestic segment.

A. Merger of ING Vysya Bank Limited

The Board of Directors of Kotak and the Board of Directors of ING Vysya Bank Ltd. ("eIVBL") at their respective meetings held on 20th November, 2014 approved an amalgamation of eIVBL with Kotak. Subsequently, the shareholders of Kotak and eIVBL have approved the scheme of amalgamation at their respective Extra Ordinary General Meetings held on 7th January, 2015. The amalgamation was approved by the Reserve Bank of India (the "RBI") under subsection (4) of Section 44A of the Banking Regulation Act, 1949 and the Competition Commission of India. The amalgamation is effective from the day beginning 1st April, 2015. While both the entities are banking companies which are licensed by the RBI under the Banking Regulation Act, 1949, Kotak is a company incorporated under the Companies Act, 1956, and eIVBL is a company incorporated under Mysore Companies Regulation, 1917.

As per the Scheme, upon its coming into effect from the appointed date i.e. 1st April, 2015, the entire undertaking of eIVBL including all its assets, liabilities and reserves and surplus stood transferred/ deemed to be transferred to and vest in Kotak. Further, in consideration of the transfer of and vesting of the undertaking of eIVBL, 725 equity shares of Kotak of the face value of Rs, 5/- each fully paid-up was issued to shareholders of eIVBL for every 1,000 equity shares of the face value of Rs,10/- each of eIVBL held by them on the record date i.e. 17th April, 2015. Accordingly 13,92,05,159 equity shares of Rs,5/- each of Kotak were allotted at par to the shareholders of ING Vysya vide board resolution dated 21st April, 2015. The excess of the paid up value of equity shares of eIVBL over the paid up value of equity shares issued as consideration amounting to Rs,122.40 crore has been transferred to Amalgamation Reserve as per the Scheme of Amalgamation.

The amalgamation has been accounted using the pooling of interest method under Accounting Standard 14 (AS14), "Accounting for amalgamation" and the principles laid down in Part VII – paragraph 19 of the approved Scheme of Amalgamation.

The assets, liabilities and reserves and surplus of eIVBL were recorded by Bank at their carrying amounts as on 1st April, 2015 except for adjustments which were made to bring uniformity of accounting policies as required under AS14. The impact of these adjustments was Rs,189.95 crore which has been adjusted in the balance of Profit and Loss Account. Timing differences, if any, arising on these adjustments have been accounted with corresponding adjustment to Deferred Tax Asset. Further, with respect to revaluation of fixed assets, the revaluation reserve amounting to Rs,101.37 crore held by eIVBL was reversed and the Gross Block of Fixed Assets were credited back with Rs,101.37 crores. The accumulated depreciation on such reserve amounting to Rs,11.15 crore was also reversed in Gross Block of Fixed Assets. Certain other reclassifcations of items were carried out to ensure consistency in presentation.

The results for the year ended 31st March, 2016 are not comparable with that of the corresponding period of the previous year.

* Includes securities with face Value of Rs, 2,288.05 crore (previous year Rs, 1,905.24 crore) pledged and encumbered for availment of fund transfer facility, clearing facility, margin requirements and with RBI for LAF.

- excludes RIDF deposits, as classifed under other assets

* Being trading positions

Disclosures on risk exposures in derivatives: Qualitative disclosures:

a) Structure and organization for management of risk in derivatives trading:

The Board of Directors, the Asset Liability Management Committee (ALCO), the Risk Management Committee (RMC), the Senior Management Committee for Derivatives and the Market Risk Management Department are entrusted with the management of risks in derivatives.

The philosophy and framework for the derivative business is laid out in the Board approved Investment and Derivative policies. The ALCO of the Bank is empowered to set the limit-framework for derivatives. It also reviews the market risk exposures of derivatives against the limits. The Risk Management Committee reviews all risks on a consolidated basis and also reviews Stress Testing.

The Senior Management Committee for Derivatives is responsible for reviewing and approving any new derivative products (within the regulatory framework provided by the RBI). The Board approved ''Customer Suitability and Appropriateness Policy for Derivatives'' provides guidelines for the assessment of Customer Suitability and the Appropriateness of products offered to these customers.

The monitoring and measurement of risk in derivatives is carried out by the Market Risk Management Department. The Market Risk Management Department is independent of the Treasury Front-Office & Back-Office and directly reports into the Group Chief Risk Officer.

b) Scope and nature of risk measurement, risk reporting and risk monitoring systems:

All significant risks of the derivative portfolio are monitored and measured daily. The Market Risk Management Department measures and reports Market Risk metrics like VaR, PV01, Option Greeks like Delta, Gamma, Vega, Theta, Rho etc. The Credit Risk from the derivatives portfolio is also measured daily.

The Market Risk Management Department monitors these exposures against the set limits and also reviews Profitability on a daily basis. MIS is sent to ALCO on a periodic basis. Exception reports are also sent so that emerging risks are reviewed and managed on a timely basis. Stress testing is also performed on the Derivative portfolio. The Bank continuously invests in technology to enhance the Risk Management architecture.

c) Policies for hedging and / or mitigating risk and strategies and processes for monitoring the continuing effectiveness of hedges / mitigants:

The Board Approved ''Hedging Policy'' details the hedging strategies, hedging processes, accounting treatment, documentation requirements and effectiveness testing for hedges.

Hedges are monitored for effectiveness periodically, in accordance with the Board Approved Policy.

d) Accounting policy for recording hedge and non-hedge transactions; recognition of income, premiums and discounts; valuation of outstanding contracts; provisioning, collateral and credit risk mitigation:

Derivative transactions are segregated into trading or hedge transactions. Trading transactions outstanding as at the Balance Sheet dates are marked to market and the resulting Profits or losses, are recorded in the Profit and Loss Account.

Derivative transactions designated as "Hedges" are accounted in accordance with hedging instruments on an accrual basis over the life of the underlying instrument.

Option premium paid / received is accounted for in the Profit and Loss Account on expiry of the option.

Pursuant to the RBI guidelines, any receivables as well positive Mark to Market (MTM) in respect of future receivable under derivative contracts comprising of crystallised receivables which remain overdue for more than 90 days are reversed through the Profit and Loss Account. The derivative limit sanctioned to clients is part of the overall limit sanctioned post credit appraisal. Collateral is accepted on a case to case basis considering the volatility of the price of the collateral and any increase in operational, legal and liquidity risk.

Currency interest rate swaps have been included under currency derivatives.

# Excludes PV01 on options.

** MTM has been considered at product level.

1. During the year Nil penalty (previous year Rs, 0.10 crore) had been imposed by the Reserve Bank of India in terms of the Section 47A(1) read with Section 46(4)(i) of the Banking Regulation Act, 1949 for non-compliance of certain RBI instructions.

2. There are no Off-Balance Sheet SPVs sponsored (which are required to be consolidated as per accounting norms) (previous year Nil).

** Exposures represents credit, derivatives and investment exposure as prescribed in Master Circular on Exposure Norms DBR.No.Dir.BC. 12/13.03.00/2015-16 dated 1st July, 2015.

The Bank has compiled the data for the purpose of this disclosure (from its internal MIS system and has been furnished by the management) which has been relied upon by the auditors.

3. During the year ended 31st March, 2016 and year ended 31st March, 2015 the Bank has not exceeded the prudential exposure limits as laid down by RBI guidelines for the Single Borrower Limit (SBL)/ Group Borrower Limit (GBL).

The above details are as furnished by the Management and relied upon by the auditors.

4. There are no outstanding letter of awareness (previous year Nil).

5. DISCLOSURES ON REMUNERATION

A. Qualitative Disclosures:

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

The Nomination & Remuneration committee comprises of independent directors of the Bank. Key mandate of the Nomination & Remuneration committee is to oversee the overall design and operation of the compensation policy of the Bank and work in coordination with the Risk Management Committee to achieve alignment between risks and remuneration.

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

Objective of Bank''s Compensation Policy is:

- To maintain fair, consistent and equitable compensation practices in alignment with Bank''s core values and strategic business goals;

- To ensure effective governance of compensation and alignment of compensation practices with prudent risk taking;

- To have mechanisms in place for effective supervisory oversight and Board engagement in compensation.

The remuneration process is aligned to the Bank''s Compensation Policy objectives.

c) Description of the ways in which current and future risks are taken into account in the remuneration processes. It should include the nature and type of the key measures used to take account of these risks:

In order to manage current and future risk and allow a fair amount of time to measure and review both quality and quantity of the delivered outcomes, a significant portion of senior and middle management compensation is variable. Further reasonable portion variable compensation is non-cash and deferred, over a period of 3 years or longer.

In addition, remuneration process provides for ''malus'' and ''clawback'' option to take care of any disciplinary issue or future drop in performance of individual/ business/ company.

d) Description of the ways in which the bank seeks to link performance during a performance measurement period with levels of remuneration:

Individual performances are assessed in line with business/ individual delivery of the Key Result Areas (KRAs), top priorities of business, budgets etc. KRAs of Line roles are linked to financials, people, service and process (Quality) parameters and KRAs of non-Line Roles have linkage to functional deliveries needed to achieve the top business priorities.

Further remuneration process is also linked to market salaries / job levels, business budgets and achievement of individual KRAs.

e) A discussion of the bank''s policy on deferral and vesting of variable remuneration and a discussion of the bank''s policy and criteria for adjusting deferred remuneration before vesting and after vesting:

A discussion on Policy on Deferral of Remuneration

Employees are classifed into following three categories for the purpose of remuneration:

Category I: Whole Time Directors (WTD)/Chief Executive Officer (CEO)

Category II: Risk Control and Compliance Staff

Category III: Other Categories of Staff

Following principles are applied for deferral / vesting of variable remuneration in accordance with RBI guidelines and Bank''s compensation policy:

Category I

a. Variable Pay will not exceed 70% of Fixed Pay.

b. The Cash component of the Variable Pay will not exceed 50% of the Fixed Pay.

c. If Variable Pay is higher than 50% of Fixed Pay, at least 40% of Variable Pay will be deferred over a period of 3 years, or longer, on a pro-rata basis.

The compensation will be approved by the Nomination and Remuneration committee and RBI.

Category II

a. Variable Pay will not exceed 70% of Fixed Pay.

b. The Cash component of the Variable Pay will not exceed 50% of the Fixed Pay.

c. If Variable Pay is higher than 50% of Fixed Pay, at least 40% of Variable Pay will be deferred over a period of 3 years, or longer, on a pro-rata basis.

Category III

Variable Pay is payable as per approved schemes for incentive or Bonus:

i) The Cash component of the Variable Pay will not exceed 60% of the Fixed Pay.

ii) If Variable Pay is higher than 60% of Fixed Pay, at least 40% of Variable Pay will be deferred over a period of 3 years, or longer, on a pro-rata basis.

iii) However, if Variable Pay is less than or equal to Rs, 10 lakhs, management will have the discretion to pay the entire amount as cash.

For adjusting deferred remuneration before & after vesting:

Malus: Payment of all or part of amount of deferred variable pay can be prevented. This clause will be applicable in case of:

- Disciplinary Action (at the discretion of the Disciplinary Action Committee) and/ or

- Significant drop in performance of Individual/ Business/ Company (at the discretion of the Nomination & Remuneration Committee) and/ or

- Resignation of the staff prior to the payment date.

Clawback: Previously paid or already vested deferred variable pay can also be recovered under this clause.

This clause will be applicable in case of Disciplinary Action (at the discretion of the Disciplinary Action Committee and approval of the Nomination & Remuneration Committee).

f) Description of the different forms of variable remuneration (i.e. cash, shares, ESOPs and other forms) that the bank utilizes and the rationale for using these different forms:

The main forms of such variable remuneration include:

- Cash – this may be at intervals ranging from Monthly, Quarterly, Annual.

- Deferred Cash / Deferred Incentive Plan.

- Stock Appreciation Rights (SARs): These are structured, variable incentives, linked to Kotak Mahindra Bank Stock price, payable over a period of time.

- ESOP as per SEBI guidelines.

The form of variable remuneration depends on the job level of individual, risk involved, the time horizon for review of quality and longevity of the assignments performed.

B. Quantitative Disclosures:

a) Number of meetings held by the Remuneration Committee during the financial year and remuneration paid to its members.

During year ended 31st March, 2016 fve meetings of Nomination and Remuneration Committee was held. Each Member of the Nomination and Remuneration Committee is paid a sitting fee of Rs, 30,000 per meeting.

b) Number of employees having received a variable remuneration award during the financial year.

Quantitative disclosure restricted to CEO, two Whole Time Directors and six Operating Management committee members as risk takers.

c) Number and total amount of sign-on awards made during the financial year.

Nil (previous year Nil)

d) Details of guaranteed bonus, if any, paid as joining / sign on bonus.

Nil (previous year Nil)

e) Details of severance pay, in addition to accrued benefits, if any.

Nil (previous year Nil)

f) Total amount of outstanding deferred remuneration, split into cash, shares and share-linked instruments and other forms.

Cash – Nil

Outstanding SARs as at 31st March, 2016 – 128,696 rights (previous year 100,614 rights)

Outstanding ESOPs as at 31st March, 2016 – 891,694 equity shares (previous year 644,816 equity shares)

g) Total amount of deferred remuneration paid out in the financial year.

Payment towards SARs during year ended 31st March, 2016 Rs, 6.29 crore (previous year Rs, 7.86 crore)

h) Breakdown of amount of remuneration awards for the financial year to show fixed and variable, deferred and non- deferred.

Total fixed salary for the year ended 31st March, 2016 - Rs, 18.75 crore (previous year Rs, 17.12 crore)

Deferred Variable Pay*

SARs – 35,370 rights (previous year 44,290 rights)

ESOPs – 145,660 equity shares (previous year 207,850 equity shares)

Non Deferred variable pay* Rs, 4.02 crore (previous year Rs, 3.43 crore)

* Details relating to variable pay pertains to remuneration awards for the financial year 2014-15 awarded during current financial year. Remuneration award for the year ended 31st March, 2016 are yet to be reviewed and approved by the remuneration committee.

6. Unhedged Foreign Currency Exposure of borrowers:

The bank recognises the importance of the risk of adverse fuctuation of foreign exchange rates on the Profitability and financial position of borrowers who are exposed to currency risk. Currency induced credit risk refers to the risk of inability of borrowers to service their debt obligations due to adverse movement in the exchange rates and corresponding increase / decrease in their book values of trade payables, loan payables, trade receivables, etc. thereby exposing the Bank to risk of default by the borrower. In this regard, the Bank had put in place requisite policies & processes for monitoring and mitigation of currency induced credit risk of borrowers. These include the following:

(a) Currency risk of borrowers on account of un-hedged foreign currency exposures ("UFCE") is duly considered and analysed in credit appraisal notes.

(b) Periodic monitoring of un-hedged foreign currency exposures of borrowers.

(c) Risk classifcation of borrowers having un-hedged foreign currency exposures, into Low / Medium / High, as per internal norms, based on likely loss / EBID ratio. Likely loss means the potential loss which can be caused over a one year horizon by adverse movement of exchange rates.

i) Total amount of outstanding deferred remuneration and retained remuneration exposed to ex-post explicit and / or implicit adjustments. – Nil

j) Total amount of reductions during the financial year due to ex- post explicit adjustments. – Nil

k) Total amount of reductions during the financial year due to ex- post implicit adjustments. – Nil

(e) In case of borrowers exposed to currency risk where declarations for foreign currency payables/ receivables (UFCE declarations) are not submitted, provision for currency induced credit risk is made as per RBI stipulated rates mentioned below:

l 10 bps in cases where limits with banking system are less than Rs, 25 crore; l 80 bps in cases where limits with banking system are Rs, 25 crore or more.

(f) Further, where annual certifcation from statutory auditors of UFCE data is not submitted, such borrowers are treated as UFCE declaration not submitted cases and provision is computed as per point (e) above.

(g) Borrowers where the credit exposure is only Letter of Credit, Bills Discounting, Fixed Deposit backed, Bank Guarantee / Standby Letter of Credit backed are exempted from the above requirements. Exposures on other Banks and Public Financial Institutions like SIDBI, EXIM Bank, NABARD, NHB are also exempted from the above requirements.

(h) Management of foreign exchange risk is considered as a parameter for internal risk rating of borrowers.

Provision held for currency induced credit risk as at 31st March, 2016 is Rs, 60.00 crore. (Previous year Rs, 17.82 crore). Incremental Risk weighted assets value considered for the purpose of CRAR calculation in respect of currency induced credit risk as at 31st March, 2016 is Rs, 1,863.65 crore (Previous year Rs, 357.17 crore).

Note: LCR for the quarter end March 2015 had been computed based on the guidelines applicable at that point in time. Subsequently there have been amendments in RBI guidelines w.e.f. April 2015. Hence, the previous year end numbers are not comparable with current financial year.

7. b) Qualitative disclosure around LCR

The Reserve Bank of India has prescribed monitoring of suffciency of Bank''s liquid assets using Basel III – Liquidity Coverage Ratio (LCR). The LCR is aimed at measuring and promoting short-term resilience of Banks to potential liquidity disruptions by ensuring maintenance of suffcient high quality liquid assets (HQLAs) to survive an acute stress scenario lasting for 30 days.

The LCR requirement has been introduced in a phased manner with banks required to maintain minimum LCR of 60% till Dec 2015 and 70% from Jan 2016 onwards. The requirement will be increasing by 10% annually to 100% by Jan 2019.

The ratio comprises of high quality liquid assets (HQLAs) as numerator and net cash outfows in 30 days as denominator. HQLA has been divided into two parts i.e. Level 1 HQLA which comprises primarily of cash, excess CRR, SLR securities in excess of minimum SLR requirement and a portion of mandatory SLR as permitted by RBI (under MSF and FALLCR) and Level 2 HQLA which comprises of investments in highly rated non-financial corporate bonds and listed equity investments considered at prescribed haircuts. Cash outfows are calculated by multiplying the outstanding balances of various categories or types of liabilities by the outfow run-off rates and cash infows are calculated by multiplying the outstanding balances of various categories of contractual receivables by the rates at which they are expected to fow in.

The Bank has implemented the LCR framework and has consistently maintained LCR well above the regulatory threshold. The average LCR for the quarter ended 31st March, 2016 was 77.75% which is above the regulatory limit of 70%. For the quarter ended 31st March, 2016 Level 1 HQLA stood at 88.38% (24,625 crs) of the total HQLA.

LCR is expected to bring in more funding stability due to severe run-off factors on wholesale funding but at the same time it has increased the liquidity cost due to maintenance of high quality liquid assets. Apart from LCR, Bank uses various stock liquidity indicators to measure and monitor the liquidity risk in terms of funding stability, concentration risk, dependence on market borrowings, liquidity transformation, etc. The Bank maintains a diversifed source of funding in terms of depositor concentration, lender concentration as well as instrument concentration. This is evident through low depositor and lender concentration with top 20 depositors contributing 11.9% of Bank''s total deposits and top 10 lenders contributing 7.2% of Bank''s total liabilities.

Asset Liability Committee (ALCO) of the Bank is the primary governing body for Liquidity Risk Management supported by Balance Sheet Management Unit (BMU), Risk Management Department (RMD), Finance and ALCO Support Group. BMU is the central repository of funds within the Bank and is vested with the responsibility of managing liquidity risk within the risk appetite of the Bank. Bank has incorporated Basel III Liquidity Standards - LCR and NSFR as part of its risk appetite statement for liquidity risk.

8. Frauds

The Bank has reported 114 cases of fraud during the financial year ended 31st March 2016 amounting to Rs,44.94 crore. The Bank has recovered / expensed off / provided the entire amount where necessary.

Following the approval of the shareholders at the annual general meeting on 29th June, 2015, a committee of the Board of Directors at the meeting held on 10th July, 2015, allotted bonus shares in the ratio of one equity share for every equity share held. In accordance with Accounting Standard 20 (AS20), Earnings Per Share issued by the Institute of Chartered Accountants of India (ICAI), the earnings per share for the previous year ended 31st March, 2015 have been reworked, as if the bonus shares were in existence during the said period.

Segmental Information is provided as per the MIS available for internal reporting purposes, which includes certain estimates and assumptions. The methodology adopted in compiling and reporting the above information has been relied upon by the auditors.

9. Lease Discloures:

a. The Bank has taken various premises and equipment under operating lease. The lease payments recognised in the Profit and Loss Account are Rs, 403.26 crore (previous year Rs, 266.41 crore). The sub-lease income recognised in the Profit and Loss Account is Rs, 7.13 crore (previous year Rs, 6.65 crore).

b. The future minimum lease payments under non-cancellable operating lease – not later than one year is Rs, 360.14 crore (previous year Rs, 242.99 crore), later than one year but not later than fve years is Rs, 1,056.90 crore (previous year Rs, 722.54 crore) and later than fve years Rs, 899.84 crore (previous year Rs, 674.31 crore).

The lease terms include renewal option after expiry of primary lease period. There are no restrictions imposed by lease arrangements. There are escalation clauses in the lease agreements.

* The closing provision is based on the actuarial valuation of accumulated credit card account reward points. This amount will be utilised towards redemption of the credit card accounts reward points.

10. Related Party Disclosures :

A. Parties where control exists:

Nature of relationship Related Party

Subsidiary Companies Kotak Mahindra Prime Limited

Kotak Securities Limited Kotak Mahindra Capital Company Limited Kotak Mahindra Old Mutual Life Insurance Limited Kotak Mahindra Investments Limited Kotak Mahindra Asset Management Company Limited Kotak Mahindra Trustee Company Limited Kotak Mahindra (International) Limited Kotak Mahindra (UK) Limited Kotak Mahindra Inc. Kotak Investment Advisors Limited Kotak Mahindra Trusteeship Services Limited Kotak Forex Brokerage Limited Kotak Mahindra Pension Fund Limited Kotak Mahindra Financial Services Limited Kotak Mahindra Asset Management (Singapore) Pte. Ltd.

Kotak Mahindra General Insurance Company Limited (Incorporated on 20th Dec, 2014) IVY Product Intermediaries Limited (formerly known as ING Vysya Financial Services Limited)

B. Other Related Parties:

Nature of Relationship Related Party

Individual having Significant Mr. Uday S. Kotak along with relatives and enterprises in which he has Beneficial interest holds

Infuence over the enterprise 33.64% of the equity share capital of Kotak Mahindra Bank Limited as on 31st March, 2016

Associates / Others ACE Derivatives and Commodity Exchange Limited

Infna Finance Private Limited

Matrix Business Services India Private Limited

Phoenix ARC Private Limited

Kotak Education Foundation

ING Vysya Foundation Key Management Personnel Mr. Uday S. Kotak, Executive Vice Chairman and Managing Director

(KMP) Mr. C Jayaram, Joint Managing Director

Mr. Dipak Gupta, Joint Managing Director Enterprises over which KMP / Aero Agencies Limited relatives of KMP have control / Kotak & Company Private Limited Significant Infuence Komaf Financial Services Limited

Asian Machinery & Equipment Private Limited

Insurekot Sports Private Limited

Kotak Trustee Company Private Limited

Cumulus Trading Company Private Limited

Palko Properties Private Limited

Kotak Chemicals Limited

Kotak Ginning & Pressing Industries Limited

Kotak Commodity Services Limited

Harisiddha Trading and Finance Private Limited

Puma Properties Private Limited

Business Standard Private Limited

Business Standard Online Limited (From 27th March, 2015)

Allied Auto Accessories Private Limited

Uday S Kotak HUF

Suresh A Kotak HUF

USK Benefit Trust II Relatives of Key Management Ms. Pallavi Kotak Personnel Mr. Suresh Kotak

Ms. Indira Kotak

Mr. Jay Kotak

Mr. Dhawal Kotak

Ms. Aarti Chandaria

Ms. Anita Gupta

Ms. Urmila Gupta

Mr. Arnav Gupta

Mr. Parthav Gupta

Mr. Prabhat Gupta

Ms. Jyoti Banga

Ms. Usha Jayaram

Mr. K. Madhavan Kutty

Mr. Vivek Menon

Ms. Nayantara Menon Mehta

Note: Figures in brackets represent previous year''s figures.

11. EMPLOYEE SHARE BASED PAYMENTS:

At the General Meetings, the shareholders of the Bank had unanimously passed Special Resolutions on 28th July 2000, 26th July 2004, 26th July 2005, 5th July 2007, 21st August 2007 and 29th June 2015, to grant options to the eligible employees of the Bank and its subsidiary and associate companies. Pursuant to these resolutions, the following Employees Stock Option Schemes had been formulated and adopted:

(a) Kotak Mahindra Equity Option Scheme 2001-02;

(b) Kotak Mahindra Equity Option Scheme 2002-03;

(c) Kotak Mahindra Equity Option Scheme 2005;

(d) Kotak Mahindra Equity Option Scheme 2007; and

(e) Kotak Mahindra Equity Option Scheme 2015.

Consequent to the above, the Bank has granted stock options to the employees of the Group. The Bank under its various plan / schemes, has granted in aggregate 140,327,654 options (including options issued in exchange on amalgamation) as on 31st March, 2016 (Previous year 124,798,000). In aggregate 8,757,098 options are outstanding as on 31st March, 2016 under the aforesaid schemes.

Further, pursuant to the Scheme of Amalgamation of ING Vysya Bank Limited with the Bank, the Bank has renamed and adopted the ESOP Schemes of the eIVBL, as given below:

- Kotak Mahindra Bank Ltd. (IVBL) Employees Stock Option Scheme 2005;

- Kotak Mahindra Bank Ltd. (IVBL) Employees Stock Option Scheme 2007;

- Kotak Mahindra Bank Ltd. (IVBL) Employee Stock Option Scheme 2010; and

- Kotak Mahindra Bank Ltd. (IVBL) Employees Stock Option Scheme 2013.

* Pursuant to the Scheme of Amalgamation of eIVBL with the Bank, the options granted under each of the above schemes and outstanding as on 1st April, 2015 have been exchanged for equivalent options of the Bank. The number of option and the exercise price have been adjusted to refect the swap ratio. The said ESOP Schemes were adopted and approved by the Board of Directors of the Bank at its meeting held on 3rd April, 2015. The Scheme provided for accelerated vesting of options and all the aforesaid stock options are exercisable within a period of 5 years from the date of vesting.

The expected volatility was determined based on historical volatility data and the Bank expects the volatility of its share price may reduce as it matures. The measure of volatility used in the Black-Scholes options pricing model is the annualised standard deviation of the continuously compounded rates of return on the stock over a period of time. For calculating volatility, the daily volatility of the stock prices on the National Stock Exchange, over a period prior to the date of grant, corresponding with the expected life of the options has been considered.

The above information has been prepared by the Bank and relied upon by the auditors.

Effect of the employee share-based payment plans on the Profit and Loss Account and on the financial position:

Fair value of employee stock options

The fair value of the equity-settled and cash-settled options is estimated on the date of grant using Black-Scholes options pricing model taking into account the terms and conditions upon which the options were granted. The fair value of the cash-settled options is remeasured at each Balance Sheet date. The following table lists the inputs to the model used for equity-settled and cash-settled options:

Had the Bank recorded the compensation cost computed on the basis of Fair Valuation method instead of intrinsic value method, employee compensation cost would have been higher by Rs, 93.52 crore (Previous year Rs, 23.70 crore) and the Profit after tax would have been lower by Rs, 61.16 crore (Previous year Rs, 15.65 crore). Consequently the basic and diluted EPS would have been Rs, 11.09 (Previous year Rs, 12.00) and Rs, 11.07 (Previous year Rs, 11.97) respectively.

The above number of ESOPs / SARs, exercise price, fair value and share price have been adjusted for bonus shares - one share for every share allotted on 10th July, 2015. The effect of the bonus share has been given in computation for the previous periods.

In computing the above information, certain estimates and assumptions have been made by the Management which have been relied upon by the auditors.

ii. Gratuity

The gratuity plan provides a lumpsum payment to vested employees at retirement or on termination of employment based on respective employee''s salary and years of employment with the Bank subject to a maximum of Rs, 0.10 crore. There is no ceiling on gratuity payable to directors and certain categories of employees subject to service regulations and service awards.

The estimates of future salary increases, considered in actuarial valuation, take account of inflation, seniority, promotion and other relevant factors.

Expected rate of return on plan assets is based on expectation of the average long term rate of return expected on investments of the fund during the estimated term of the obligations.

The Bank expects to contribute Rs, 36.36 crore to gratuity fund in financial year 2016 -17. The above information is as certifed by the actuary and relied upon by the auditors.

iii. Pension

Pension liability relates to employees of eIVBL which was merged with the Bank, hence there are no corresponding figures for the previous year.

12. Tier II Bonds

a) Lower Tier II Bonds outstanding as at 31st March, 2016 Rs, 969.70 crore (previous year Rs, 482.00 crore).

During the current year and previous year the Bank had not issued lower Tier II bonds. In accordance with the RBI requirements lower Tier II bonds of Rs, 524.71 crore (previous year Rs, 220.44 crore) are not considered as Tier II capital for the purposes of capital adequacy computation under Basel III guidelines.

b) Upper Tier II Bonds outstanding as at 31st March, 2016 are Rs, 806.31 crore (previous year Rs, 417.25 crore) of which bonds issued outside India are Rs, 670.31 crore (previous year Rs, 281.25 crore).

During the current and previous year, the Bank did not issue upper Tier II bonds.

c) Interest Expended-Others (Schedule 15(III)) includes interest on subordinated debt (Lower and Upper Tier II) Rs, 125.97 crore (previous year Rs, 62.88 crore).

13. Description of Contingent Liabilities:

Sr. Contingent Liability* Brief Description

No.

1. Claims not acknowledged as debts This includes liability on account of income tax, sales tax, lease tax demands, property tax

demands and legal cases fled against the Bank.

The Bank is a party to various legal proceedings in the normal course of business. The Bank does not expect the outcome of these proceedings to have a material adverse effect on the Bank''s financial conditions, result of operations or cash fows. In respect of appeals fled by the Income Tax department with higher authorities, where the matter was settled in favour of the Bank at the first appellate stage, and where in view of the Management, it gives rise to an item of timing difference, no contingent liability is envisaged by the Bank.

2. Liability on account of outstanding The Bank enters into foreign exchange contracts with inter Bank participants on its own forward exchange contracts account and for customers. Forward exchange contracts are commitments to buy or sell

foreign currency at a future date at the contracted rate.

3. Guarantees on behalf of As a part of its Banking activities, the Bank issues guarantees on behalf of its customers. constituents Guarantees generally represent irrevocable assurances that the Bank will make payments

in the event of customer failing to fulfll its financial or performance obligations.

4. Acceptances, endorsements and These includes:

other obligations

- Documentary credit such as letters of obligations, enhance the credit standing of

the customers of the Bank.

- Bills re-discounted by the Bank and cash collateral provided by the Bank on assets which have been securitised.

- Underwriting commitments in respect of Debt Syndication.

5. Other items for which the Bank is These include:

contingently liable

- Liabilities in respect of interest rate swaps, currency swaps, forward rate

agreements, futures and options contracts. The Bank enters into these transactions

with inter Bank participants on its own account and for customers. Currency

Swaps are commitments to exchange cash fows by way of interest/principal in

one currency against another, based on predetermined rates. Interest rate swaps are commitments to exchange fixed and foating interest rate cash fows. The notional amounts that are recorded as contingent liabilities are amounts used as a benchmark for the calculation of interest component of the contracts.

- Liability in respect of Capital commitments relating to fixed assets and undrawn commitments in respect of investments.

14. The Bank has received few intimations from "suppliers" regarding their status under the Micro, Small and Medium Enterprises Development Act, 2006 and there is no outstanding against those suppliers as on 31st March, 2016, hence disclosures, if any, relating to amounts unpaid as at the year end together with interest paid / payable as required under the said Act have not been given. The above is based on information available with the Bank and relied upon by the Auditors.

15. Figures for the previous year have been regrouped / reclassifed wherever necessary to conform to current years'' presentation. The previous year comparative numbers were audited by a frm of Chartered Accountants other than S. R. Batliboi & Co. LLP.


Mar 31, 2015

A BACKGROUND

In February 2003, Kotak Mahindra Finance Limited was given a license to carry out banking business by the Reserve Bank of India ("RBI"). It was the first NBFC Company in India to be converted into a Bank. Kotak Mahindra Bank Limited ("Kotak Mahindra Bank" or "the Bank") provides a full suite of banking services to its customers encompassing Retail Banking, Treasury and Corporate Banking in India and also has a representative office in Dubai.

B BASIS OF PREPERATION

The financial statements have been prepared in accordance with statutory requirements prescribed under the Banking Regulation Act, 1949. The accounting and reporting policies of Kotak Mahindra Bank used in the preparation of these financial statements is the accrual method of accounting and historical cost convention and it conforms with Generally Accepted Accounting Principles in India ("Indian GAAP"), the Accounting Standards specified under section 133 of the Companies Act, 2013 read with Rule 7 of the Companies (Accounts) Rules, 2014 and other relevant provisions of the Companies Act, 2013 ("the 2013 Act") / Companies Act, 1956 ("the 1956 Act"), in so far as they apply to banks and the guidelines issued by the Reserve Bank of India ("RBI").

Use of estimates

The preparation of financial statements requires the Management to make estimates and assumptions considered in 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 reporting period. The Bank''s Management believes that the estimates used in preparation of the financial statements are prudent and reasonable. Actual results could differ from these estimates. Any revision to the accounting estimates is recognised prospectively in the current and future periods.

2. Credit default swaps:

The Bank has not entered into any Credit Default Swap transactions.

3. The Provision Coverage Ratio (PCR) of the Bank after considering technical write-off is 56.80% as at 31st March, 2015 (previous year: 55.50%).

4. There are no unsecured advances for which intangible security such as charge over the rights, licenses, authority, etc. are accepted as collateral by the Bank.

As per extant RBI guidelines, the country exposure of the Bank is categorised into various risk categories listed in following table. Since the country exposure (net) of the Bank in respect of any country does not exceed 1% of the total funded assets, no provision is required to be maintained on country exposure as on 31st March, 2015 (Nil provision for the year ended 31st March, 2014).

5. During the year ended 31st March, 2015 and year ended 31st March, 2014 the Bank has not exceeded the prudential exposure limits as laid down by RBI guidelines for the Single Borrower Limit (SBL) / Group Borrower Limit (GBL).

6. During the year penalty of Rs. 0.10 crore (previous year Rs. 1.501 crore) had been imposed by the Reserve Bank of India in terms of the Section 47A(1) read with Section 46(4)(i) of the Banking Regulation Act, 1949 for non-compliance of certain RBI instructions.

7. There are no Off-Balance Sheet SPVs sponsored (which are required to be consolidated as per accounting norms).

8. Draw Down from Reserves:

In accordance with the RBI requirement on creation and utilisation of Investment reserve in respect of HFT and AFS investments, reserve of Rs. 86.65 crore is created during the year (previous year Rs. 41.10 crore had been utilised).

Further in accordance with the RBI requirement on creation and utilisation of reserves, no reserve has been utilised in the current year and in the previous year except for below.

For the previous year ended 31st March, 2014, in accordance with RBI communication RBI/2013-14/412 DBOD. No.BP.BC.77/21.04.018/2013- 14 dated 20th December, 2013 on "Deferred Tax Liability (DTL) on Special Reserve created under Section 36(1) (viii) of the Income Tax Act, 1961", the Bank had reduced Rs. 31.18 crore from general reserves of the previous year towards DTL on special reserves created till year ended 31st March, 2013.

9. The Bank has issued letters of awareness on behalf of a wholly owned, non-banking finance subsidiary in respect of its borrowings made or proposed to be made. These letters are in nature of factual statements or confirmation of facts and do not create any financial obligation or impact on the Bank. During the year, the Bank has not issued letters of awareness (previous year Nil). As at 31st March, 2015 cumulative value of outstanding letters of awareness aggregate to Rs. Nil (previous year Rs. 650 crore).

10. DISCLOSURES ON REMUNERATION:

A. Qualitative Disclosures:

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

The Nomination & Remuneration Committee comprises of independent directors of the Bank. Key mandate of the Nomination & Remuneration Committee is to oversee the overall design and operation of the compensation policy of the Bank and work in coordination with the Risk Management Committee to achieve alignment between risks and remuneration.

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

Objective of Bank''s Compensation Policy is to:

- To maintain fair, consistent and equitable compensation practices in alignment with Bank''s core values and strategic business goals;

- To ensure effective governance of compensation and alignment of compensation practices with prudent risk taking;

- To have mechanisms in place for effective supervisory oversight and Board engagement in compensation.

The remuneration process is aligned to the Bank''s Compensation Policy objectives.

c) Description of the ways in which current and future risks are taken into account in the remuneration processes. It should include the nature and type of the key measures used to take account of these risks:

In order to manage current and future risk and allow a fair amount of time to measure and review both quality and quantity of the delivered outcomes, a significant portion of senior and middle management compensation is variable. Further reasonable portion variable compensation is non-cash and deferred, over a period of 3 to 4 years.

In addition, remuneration process provides for ''malus'' and ''clawback'' option to take care of any disciplinary issue or future drop in performance of individual / business / company.

d) Description of the ways in which the Bank seeks to link performance during a performance measurement period with levels of remuneration:

Individual performances are assessed in line with business / individual delivery of the Key Result Areas (KRAs), top priorities of business, budgets etc. KRAs of Line roles are linked to financials, people, service and process (Quality) parameters and KRAs of non-Line Roles have linkage to functional deliveries needed to achieve the top business priorities.

Further remuneration process is also linked to Market salaries / job levels, business budgets and achievement of individual KRAs.

e) A discussion of the Bank''s policy on deferral and vesting of variable remuneration and a discussion of the Bank''s policy and criteria for adjusting deferred remuneration before vesting and after vesting:

A discussion on Policy on Deferral of Remuneration

Employees are classified into following three categories for the purpose of remuneration:

Category I: Whole Time Directors (WTD) / Chief Executive Officer (CEO)

Category II: Risk Control and Compliance Staff Category III: Other Categories of Staff

Following principles are applied for deferral / vesting of variable remuneration in accordance with RBI guidelines and Bank''s compensation policy:

Category I and II

a. Variable Pay will not exceed 70% of Fixed Pay.

b. The Cash component of the Variable Pay will not exceed 50% of the Fixed Pay.

c. If Variable Pay is higher than 50% of Fixed Pay, at least 40% of Variable Pay will be deferred over a period of 3 years, or longer, on a pro-rata basis.

Variable Pay is payable as per approved schemes for incentive or Bonus:

i) The Cash component of the Variable Pay will not exceed 60% of the Fixed Pay.

ii) If Variable Pay is higher than 60% of Fixed Pay, at least 40% of Variable Pay will be deferred over a period of 3 years, or longer, on a pro-rata basis.

iii) However, if Variable Pay is less than or equal to Rs. 10 lakhs, management will have the discretion to pay the entire amount as cash.

For adjusting deferred remuneration before & after vesting :

Malus: Payment of all or part of amount of deferred Variable Pay can be prevented. This clause will be applicable in case of:

- Disciplinary Action (at the discretion of the Disciplinary Action Committee) and / or

- Significant drop in performance of Individual / Business / Company (at the discretion of the Nomination & Remuneration Committee)

- Resignation of the staff prior to the payment date.

Clawback: Previously paid or already vested deferred Variable Pay can also be recovered under this clause.

This clause will be applicable in case of Disciplinary Action (at the discretion of the Disciplinary Action Committee and approval of the Nomination & Remuneration Committee).

f) Description of the different forms of variable remuneration (i.e. cash, shares, ESOPs and other forms) that the Bank utilizes and the rationale for using these different forms:

The main forms of such variable remuneration include:

- Cash - this may be at intervals ranging from Monthly, Quarterly, Annual.

- Deferred Cash / Deferred Incentive Plan.

- Stock Appreciation Rights (SARs) - These are structured, variable incentives, linked to Kotak Mahindra Bank Stock price, payable over a period of time.

- ESOPs as per SEBI guidelines.

The form of variable remuneration depends on the job level of individual, risk involved, the time horizon for review of quality and longevity of the assignments performed.

B. Quantitative Disclosures:

a) Number of meetings held by the Remuneration Committee during the financial year and remuneration paid to its members.

During year ended 31st March, 2015 4 meetings of Nomination & Remuneration Committee was held. Each Member of the Nomination & Remuneration Committee is paid a sitting fee of Rs. 30,000 per meeting.

b) Number of employees having received a variable remuneration award during the financial year.

Quantitative disclosure restricted to CEO, two Whole Time Directors and six Operating Management Committee members as risk takers.

c) Number and total amount of sign-on awards made during the financial year.

Nil (previous year Nil)

d) Details of guaranteed bonus, if any, paid as joining / sign-on bonus.

Nil (previous year Nil)

e) Details of severance pay, in addition to accrued benefits, if any.

Nil (previous year Nil)

f) Total amount of outstanding deferred remuneration, split into cash, shares and share-linked instruments and other forms.

Outstanding SARs as at 31st March, 2015 - 100,614 rights (previous year 123,917 rights)

Outstanding ESOPs as at 31st March, 2015 - 644,816 equity shares (previous year 744,118 equity shares)

g) Total amount of deferred remuneration paid out in the financial year.

Payment towards SARs during year ended 31st March, 2015Rs.7.86 crore (previous year Rs. 2.63 crore)

h) Breakdown of amount of remuneration awards for the financial year to show fixed and variable, deferred and non-deferred. Total fixed salary for the year ended 31st March, 2015 Rs. 17.12 crore (previous year Rs. 14.71 crore)

Deferred Variable Pay*

SARs - 44,290 rights (previous year 44,692 rights)

ESOPs - 207,850 equity shares (previous year 279,600 equity shares)

Non Deferred variable pay* Rs. 3.44 crore (previous year Rs. 3.43 crore)

* Details relating to variable pay pertains to remuneration awards for the financial year 2013-14 awarded during current financial year. Remuneration award for the year ended 31st March, 2015 are yet to be reviewed and approved by the Remuneration Committee.

11. Unhedged Foreign Currency Exposure of borrowers:

The Bank recognises the importance of the risk of adverse fluctuation of foreign exchange rates on the profitability and financial position of borrowers who are exposed to currency risk. Currency induced credit risk refers to the risk of inability of borrowers to service their debt obligations due to adverse movement in the exchange rates and corresponding increase / decrease in their book values of trade payables, loan payables, trade receivables, etc. thereby exposing the Bank to risk of default by the customer. In this regard, the Bank had put in place requisite policies & processes for monitoring and mitigation of currency induced credit risk of borrowers. These include the following:

(a) Currency risk of borrowers on account of un-hedged foreign currency exposures ("UFCE") is duly considered and analysed in credit appraisal notes.

(b) Periodic monitoring of un-hedged foreign currency exposures of borrowers.

(c) Risk classification of borrowers having un-hedged foreign currency exposures, into Low / Medium / High, as per internal norms, based on likely loss / EBID ratio. Likely loss means the potential loss which can be caused over a one year horizon by adverse movement of exchange rates.

(d) Incremental provisioning (over and above provision applicable for standard assets) is made in the Bank''s Profit and Loss Account, on borrower counterparties having UFCE, depending on the likely loss / EBID ratio, in line with stipulations of RBI. Incremental capital is maintained in respect of borrower counterparties in the highest risk category, in line with stipulations of RBI. These requirements are given below.

(e) In case of borrowers exposed to currency risk where declarations for foreign currency payables / receivables are not submitted, provision for currency induced credit risk is made as per RBI stipulated rates as below:

- 10 bps in cases where limits with banking system are less than Rs. 25 crore;

- 80 bps in cases where limits with banking system are Rs. 25 crore or more.

(f) Management of foreign exchange risk is considered as a parameter for internal risk rating of borrowers.

Provision held for currency induced credit risk as at 31st March, 2015 is Rs. 17.82 crore. Incremental Risk weighted assets value considered for the purpose of CRAR calculation in respect of currency induced credit risk is Rs. 357.17 crore.

The Reserve Bank of India has prescribed monitoring of sufficiency of Bank''s liquid assets using Basel III - Liquidity Coverage Ratio (LCR). The LCR is aimed at measuring and promoting short-term resilience of banks to potential liquidity disruptions by ensuring maintenance of sufficient high quality liquid assets (HQLAs) to survive net cash outflows over next 30 days under stress conditions.

The LCR requirement has been introduced in a phased manner with banks required to maintain minimum LCR of 60% from January 2015 onwards and the requirement increasing by 10% annually to 100% by January 2019.

The Bank has implemented the LCR framework and has consistently maintained LCR well above the regulatory threshold of 60%. The average LCR for the quarter ended 31st March, 2015 was 69.42%. Level 1 HQLA stood at 94.3% (Rs. 12,491 crore) of the total HQLA of Rs. 13,251 crore. This covered the net cash outflow of Rs. 19,087 crore as detailed in the table above.

Apart from LCR, the Bank uses various stock liquidity indicators to measure and monitor the liquidity risk in terms of funding stability, concentration risk, dependence on market borrowings, liquidity transformation, etc. The Bank maintains a diversified source of funding in terms of depositor concentration, lender concentration as well as instrument concentration. This is evident through low depositors and lenders concentration with top 20 depositors contributing 14.5% of the Bank''s total deposits and top 10 lenders contributing 8.1% of the Bank''s total liabilities.

Asset Liability Committee (ALCO) of the Bank is the primary governing body for Liquidity Risk Management supported by Balance Sheet Management Unit (BMU), Risk Management Department (RMD), Finance and ALCO Support Group. BMU is the central repository of funds within the Bank and is vested with the responsibility of managing liquidity risk within the risk appetite of the Bank. The Bank has incorporated Basel III Liquidity Standards - LCR and NSFR as part of its risk appetite statement for liquidity risk.

B. OTHER DISCLOSURES:

1. The Board of Directors of Kotak Mahindra Bank Ltd ("Kotak") and the Board of Directors of ING Vysya Bank Ltd ("ING Vysya") at their respective meetings held on 20th November, 2014 have approved an amalgamation of ING Vysya with Kotak in the ratio of 725 shares of Kotak for every 1,000 shares of ING Vysya. Subsequently, the shareholders of Kotak and ING Vysya have approved the scheme of amalgamation at their respective Extra Ordinary General Meetings held on 7th January, 2015. The amalgamation is approved by the Reserve Bank of India (the "RBI") under the Banking Regulation Act and the Competition Commission of India. The amalgamation is effective from 1st April, 2015.

a. The Bank has taken various premises and equipment under operating lease. The lease payments recognised in the Profit and Loss Account are Rs. 266.41 crore (previous year Rs. 209.62 crore). The sub-lease income recognised in the Profit and Loss Account is Rs. 6.65 crore (previous year Rs. 7.03 crore).

b. The future minimum lease payments under non cancellable operating lease - not later than one year is Rs. 242.99 crore (previous year Rs. 198.87 crore), later than one year but not later than five years is Rs. 722.54 crore (previous year Rs. 811.69 crore) and later than five years Rs. 674.31 crore (previous year Rs. 443.26 crore).

The lease terms include renewal option after expiry of primary lease period. There are no restrictions imposed by lease arrangements. There are escalation clauses in the lease agreements.

5. Deferred Taxes :

"Others" in Other Assets (Schedule 11 (VI)) includes deferred tax asset (net) of Rs. 69.28 crore (previous year Rs. 140.23 crore). The components of the same are as follows :

At the General Meetings of the Bank, the shareholders had unanimously passed Special Resolutions on 28th July, 2000, 26th July, 2004, 26th July, 2005, 5th July, 2007 and 21st August, 2007, to grant options to the eligible employees of the Bank and its subsidiaries. Pursuant to these resolutions, the following four Employees Stock Option Schemes had been formulated and adopted:

a) Kotak Mahindra Equity Option Scheme 2001-02;

b) Kotak Mahindra Equity Option Scheme 2002-03;

c) Kotak Mahindra Equity Option Scheme 2005; and

d) Kotak Mahindra Equity Option Scheme 2007.

Consequent to the above, the Bank has granted stock options to the employees of the Bank and its subsidiaries. The Bank under its various plan / schemes, has granted in aggregate 62,399,000 options as on 31st March, 2015 (previous year 61,348,520).

Stock appreciation rights

The management has approved the grant of stock appreciation rights (SARs) to eligible employees as and when deemed fit. The SARs are settled in cash and vest on the respective due dates in a graded manner as per the terms and conditions of grant. The contractual life of the SARs outstanding range from 1.14 to 3.65 years.

Equity-settled options

The Bank has granted options to its employees vide various employee stock option schemes. During the year ended 31st March, 2015, the following schemes were in operation:

Stock Options granted

The fair value of the equity-settled and cash-settled options is estimated on the date of grant using Black-Scholes options pricing model taking into account the terms and conditions upon which the options were granted. The fair value of the cash-settled options is remeasured at the each reporting date. The following table lists the inputs to the model used for equity-settled and cash-settled options:

The expected volatility was determined based on historical volatility data and the Bank expects the volatility of its share price to reduce as it matures. The measure of volatility used in the Black-Scholes options pricing model is the annualised standard deviation of the continuously compounded rates of return on the stock over a period of time. For calculating volatility, the daily volatility of the stock prices on the National Stock Exchange, over a period prior to the date of grant, corresponding with the expected life of the options has been considered.

The above information has been prepared by the Bank and relied upon by the auditors.

Had the Bank recorded the compensation cost computed on the basis of Fair Valuation method instead of intrinsic value method, employee compensation cost would have been higher by Rs. 23.70 crore (previous year Rs. 22.19 crore) and the profit after tax would have been lower by Rs. 15.65 crore (previous year Rs. 14.65 crore). Consequently the basic and diluted EPS would have been Rs. 23.99 (previous year Rs. 19.43) and Rs. 23.94 (previous year Rs. 19.40) respectively.

In computing the above information, certain estimates and assumptions have been made by the Management which have been relied upon by the auditors.

11. Employee Benefits:

i. The Bank has recognised the following amounts in the Profit and Loss Account towards contributions to Provident Fund and Other Funds:

ii. The Bank provides for gratuity, a defined benefit retirement plan covering all employees. The plan provides a lump sum payment to vested employees at retirement or on termination of employment based on the respective employee''s salary and the years of employment with the Bank subject to maximum of Rs. 0.10 crore. There is no ceiling on gratuity payable to Directors.

The gratuity benefit is provided to the employees of the Bank through a fund administered by a Board of Trustees and managed by its life insurance subsidiary. The Bank is responsible for settling the gratuity obligation through contributions to the fund. The plan is fully funded.

13. Corporate Social Responsibility (CSR):

As per the provisions of the Section 135 of the Companies Act, 2013 the Bank is required to contribute Rs. 39.20 crore. The Bank has contributed Rs. 5.63 crore to the Kotak Education Foundation and Rs. 6.34 crore to other CSR initiatives in the current financial year. The Bank has also adopted a strong CSR policy, charting out its plan to invest in society and its own future. The Bank is building its CSR capabilities on a sustainable basis and is committed to gradually increase its CSR spend in the coming years.

14. Tier II Bonds:

a) Lower Tier II Bonds outstanding as at 31st March, 2015Rs.482.00 crore (previous year Rs. 482.00 crore).

During the current year and previous year the Bank had not issued lower Tier II bonds. In accordance with the RBI requirements lower Tier II bonds of Rs. 369.25 crore (previous year Rs. 281.91 crore) are not considered as Tier II capital for the purposes of capital adequacy computation under Basel III guidelines.

b) Upper Tier II Bonds outstanding as at 31st March, 2015 are Rs. 417.25 crore (previous year Rs. 405.62 crore) of which bonds issued outside India are Rs. 281.25 crore (previous year Rs. 269.62 crore).

During the current and previous year, the Bank did not issue upper Tier II bonds.

c) Interest Expended-Others (Schedule 15(III)) includes interest on subordinated debt (Lower and Upper Tier II) Rs. 62.88 crore (previous year Rs. 63.57 crore).

16. Description of Contingent Liabilities:

1. Claims not acknowledged as debts

This includes liability on account of income tax, sales tax, lease tax demands, property tax demands and legal cases filed against the Bank.

The Bank is a party to various legal proceedings in the normal course of business. The Bank does not expect the outcome of these proceedings to have a material adverse effect on the Bank''s financial conditions, result of operations or cash flows. In respect of appeals filed by the Income Tax department with higher authorities, where the matter was settled in favour of the Bank at the first appellate stage, and where in view of the Management, it gives rise to an item of timing difference, no contingent liability is envisaged by the Bank.

2. Liability on account of outstanding forward exchange contracts

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

3. Guarantees on behalf of constituents in India

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

4. Acceptances, endorsements and other obligations

These includes:

- Documentary credit such as letters of obligations, enhance the credit standing of the customers of the Bank.

- Bills re-discounted by the Bank and cash collateral provided by the Bank on assets which have been securitised.

- Underwriting commitments in respect of Debt Syndication.

5. Other items for which the Bank is contingently liable

These include:

- Liabilities in respect of interest rate swaps, currency swaps, forward rate agreements and options contracts. The Bank enters into these transactions with inter bank participants on its own account and for customers. Currency Swaps are commitments to exchange cash flows by way of interest / principal in one currency against another, based on predetermined rates. Interest rate swaps are commitments to exchange fixed and floating interest rate cash flows. The notional amounts that are recorded as contingent liabilities are amounts used as a benchmark for the calculation of interest component of the contracts.

- Liability in respect of Capital commitments relating to fixed assets and undrawn commitments in respect of investments.

* Also refer Schedule 12 - Contingent Liability

17. The Bank has received few intimations from "suppliers" regarding their status under the Micro, Small and Medium Enterprises Development Act, 2006 and there is no outstanding against those suppliers as on 31st March, 2015, hence disclosures, if any, relating to amounts unpaid as at the year end together with interest paid / payable as required under the said Act have not been given. The above is based on information available with the Bank and relied upon by the Auditors.

18. Figures for the previous year have been regrouped / reclassified wherever necessary to conform to current year''s presentation.


Mar 31, 2012

Cash-settled scheme:

The cost of cash-settled transactions (stock appreciation rights) is measured initially using intrinsic value method at the grant date taking into account the terms and conditions upon which the instruments were granted. This intrinsic value is amortised on a straight- line basis over the vesting period with a recognition of corresponding liability. This liability is remeasured at each Balance Sheet date up to and including the settlement date with changes in intrinsic value recognised in Profit and Loss Account in 'Payments to and provision for employees'.

A. Disclosures on risk exposures in derivatives:

Qualitative disclosures:

a) Structure and organization for management of risk in derivatives trading:

The management of risk in derivatives trading is carried out by the market risk department which is independent of the Treasury and directly reports into the Group Head-Risk of the Bank. The philosophy and framework for the derivative business is laid out in the Board approved Investment and Derivative policies. These policies are actioned upon by the ALCO. The ALCO sets various limits and reviews various exceptions to them.

Apart from ALCO, the New Product Committee is responsible for approving any new derivative products. The Board approved Customer Appropriateness and Suitability Policy gives guidance to assess customers and the suitability of products offered to the customer

b) Scope and nature of risk measurement, risk reporting and risk monitoring systems:

The risk department is responsible for measuring, monitoring and mitigating risk arising from Derivative transactions. Various risk metrics like volatility, interest rate sensitivity, price sensitivity, open position and counterparty exposure are monitored daily.

Schedules forming part of the Balance Sheet and Profit and Loss Account (Contd.)

The Risk Management function undertakes the following activities:

- monitors daily derivative operations against the set limits.

- reviews daily profitability and activity reports for derivative operations at various levels.

- reports Management Information System to the ALCO on a periodic basis as well as exception reporting.

c) Policies for hedging and / or mitigating risk and strategies and processes for monitoring the continuing effectiveness of hedges / mitigants:

The Bank enters into derivative transactions for trading and hedging purposes. The Balance Sheet Management Unit of the Bank obtains approvals from the ALCO for hedging depending on the market conditions and Balance Sheet positions.

These hedges are monitored for its hedge effectiveness periodically having regard to the terms of the hedging instrument and the underlying hedged risk.

d) Accounting policy for recording hedge and non-hedge transactions; recognition of income, premiums and discounts; valuation of outstanding contracts; provisioning, collateral and credit risk mitigation:

Derivative transactions are segregated into trading or hedge transactions. Trading transactions outstanding as at the Balance Sheet dates are marked to market and the resulting profits or losses, are recorded in the Profit and Loss Account.

Derivative transactions designated as "Hedges" are accounted in accordance with hedging instruments on an accrual basis over the life of the underlying instrument.

Option premium paid / received is accounted for in the Profit and Loss Account on expiry of the option.

Provisioning on derivative receivables is made in accordance with RBI guidelines. The derivative limit sanctioned to clients is part of the overall limit sanctioned post credit appraisal. Collateral is accepted on a case to case basis considering the volatility of the price of the collateral and any increase in operational, legal and liquidity risk.

1. The Provision Coverage Ratio (PCR) of the Bank after considering technical write-off is 70.14% as at 31st March, 2012 (previous year: 70.14%).

Note:

The amount in above table represents loans outstanding at the time of restructuring.

Outstanding Restructured loans (net of provisions) as at 31st March, 2012 are Rs 30.20 crores (previous year Rs 66.70 crores). Sacrifice amount represents provision made for diminution in fair value of the loan based on assessment at Balance Sheet date.

2. There are no unsecured loans for which intangible security such as charge over the rights, licenses, authority, etc. are accepted as collateral by the bank.

3. Draw Down from Reserves:

In accordance with the RBI requirement on creation and utilisation of reserves, no reserve has been utilised in the current year (previous year Rs 26.83 crores has been utilised from Investment allowance reserve-net of taxes and applicable transfer to statutory reserves).

4. Lease Discloures:

a. The Bank has taken various premises and equipment under operating lease. The lease payments recognised in the Profit and Loss Account are Rs 137.82 crores (previous year Rs 115.73 crores). The sub-lease income recognised in the Profit and Loss Account is Rs 6.50 crores (previous year Rs 5.97 crores).

b. The future minimum lease payments under non cancellable operating lease - not later than one year is Rs 118.34 crores (previous year Rs 111.59 crores), later than one year but not later than five years is Rs 495.62 crores (previous year Rs 356.45 crores) and later than five years Rs 121.87 crores (previous year Rs 138.00 crores).

The lease terms include renewal option after expiry of primary lease period. There are no restrictions imposed by lease arrangements. There are escalation clauses in the lease agreements.

5. EMPLOYEE SHARE BASED PAYMENTS: At the General Meetings of the holding company, Kotak Mahindra Bank Limited, the shareholders of the Bank had unanimously passed Special Resolutions on 28th July, 2000, 26th July, 2004, 26th July, 2005, 5th July, 2007 and 21st August, 2007, to grant options to the eligible employees of the Bank and its subsidiaries companies. Pursuant to these resolutions, the following four Employees Stock Option Schemes had been formulated and adopted:

a) Kotak Mahindra Equity Option Scheme 2001-02

b) Kotak Mahindra Equity Option Scheme 2002-03

c) Kotak Mahindra Equity Option Scheme 2005 and

d) Kotak Mahindra Equity Option Scheme 2007

Consequent to the above, the Bank has granted stock options to the employees of the Bank and its subsidiaries. The Bank under its various plan / schemes, has granted in aggregate 5,72,75,810 options as on 31st March, 2012 (previous year 5,40,24,680).

Stock appreciation rights

The management has approved the grant of stock appreciation rights (SARs) to eligible employees as and when deemed fit. The SARs are settled in cash and vest on the respective due dates in a graded manner as per the terms and conditions of grant. The contractual life of the SARs range from 0.72 to 4.36 years.

Had the Bank recorded the compensation cost computed on the basis of Fair Valuation method instead of intrinsic value method, employee compensation cost would have been higher by Rs 27.39 crores (previous year Rs 23.25 crores) and the profit after tax would have been lower by Rs 18.50 crores (previous year Rs 15.52 crores). Consequently the basic and diluted EPS would have been Rs 14.44 (previous year Rs 11.13) and Rs 14.36 (previous year Rs 11.07) respectively.

In respect of employee stock options granted to employees of the subsidiaries, the Bank recovers the related compensation cost from the respective subsidiaries, except in respect of employee stock options granted to the managing director of one subsidiary of the Bank, where the Bank has not recovered the related compensation cost aggregating Rs Nil (previous year Rs 0.45 crores) from the subsidiary in the current year.

In computing the above information, certain estimates and assumptions have been made by the Management which have been relied upon by the auditors.

ii. In accordance with law, the Bank provides for gratuity, a defined benefit retirement plan covering all employees. The plan provides a lump sum payment to vested employees at retirement or termination of employment based on the respective employee's salary and the years of employment with the Bank subject to maximum of Rs 0.10 crores

The gratuity benefit is provided to the employees through a fund administered by a Board of Trustees and managed by Kotak Mahindra Old Mutual Life Insurance Limited. The Bank is responsible for settling the gratuity obligation through contributions to the fund. The plan is fully funded.

6. The Bank receives deposits from customers as part of margin requirements in respect of its professional clearing member (PCM) business with National Securities Clearing Corporation Ltd (NSCCL). Correspondingly, the Bank is required to maintain margins / deposits with NSCCL. For the said purpose of placing margins / deposits, the Bank has issued its own Fixed Deposit receipts amounting to Rs 414.91 crores (previous year Rs 582.85 crores) in favour of NSCCL which have not been included in "Term Deposits from Others" [Schedule 3 (III) (ii)].

7. Tier II Bonds

a) Lower Tier II Bonds outstanding as at 31st March 2012 Rs 610.70 crores (previous year Rs 465.70 crores).

During the year, the Bank had issued lower Tier II bonds of Rs 150 crores (previous year Nil). In accordance with the RBI requirements lower Tier II bonds of Rs 162.06 crores (previous year Rs 113.48 crores) are not considered as Tier II capital for the purposes of capital adequacy computation.

b) Upper Tier II Bonds outstanding as at 31st March, 2012 Rs 364.94 crores (previous year Rs 336.68 crores) of which bonds issued outside India Rs 228.94 crores (previous year Rs 200.68 crores).

During the year, the Bank did not raise upper Tier II bonds (previous year Nil).

c) Interest Expended-Others (Schedule 15(III)) includes interest on subordinated debt (Lower and Upper Tier II) Rs 72.72 crores (previous year Rs 57.49 crores).

8. The Bank has received few intimation from "suppliers" regarding their status under the Micro, Small and Medium Enterprises Development Act, 2006 and there is no outstanding against those suppliers as on 31st March, 2012, hence disclosures, if any, relating to amounts unpaid as at the year end together with interest paid / payable as required under the said Act have not been given.

9. Figures of previous year were audited by a firm of Chartered Accountants other than current statutory auditors 'S.B. Billimoria & Co'. Figures for the previous year have been regrouped / reclassified wherever necessary to conform to current years' presentation.


Mar 31, 2010

A. Disclosures As Laid Down By RBI Circulara :

1. capital Adequacy Ratio:

With effect from 31st March, 2009, the Bank is subject to the new capital adequacy norms (Basel II) stipulated by the Reserve Bank of India (‘RBI).

6. Derivatives:

c. Disclosures on risk exposures in derivatives: Qualitative disclosures:

(a) Structure and organization for management of risk in derivatives trading:

The Derivative policy defnes the framework for carrying out the derivative business and lays down the policies and processes adopted to measure, monitor and report risk arising from derivative transactions

The ALCO is responsible for implementing the derivative policy. To effect this, the ALCO

- determines appropriate limits for different derivative products within broad policy framework

- reviews the limit breaches and take appropriate actions

The Bank has ‘Customer Appropriateness Policy which is used to classify the clients depending on their understanding of the derivative products. Further the Bank also has New Product Committee that is responsible for approving any new derivative structure and also for deciding to which category of clients the product can be offered

(b) Scope and nature of risk measurement, risk reporting and risk monitoring systems:

The Risk department of the Bank is responsible for measuring, reporting and monitoring risk arising from Derivative transactions and functions independently of the Treasury. The risk management methods generally applied are quantitative like counter party limits, deal sizes, overnight, PVBP and stop-loss limits

The Risk Management function undertakes the following activities:-

- monitors daily derivative operations against the set out policies and limits

- reviews daily dealers Profitability and activity reports for derivative operations

- reports MIS to the ALCO on a periodic basis as well as exception reporting

- approves non-vanilla derivative deals for proprietary business

(c) Policies for hedging and / or mitigating risk and strategies and processes for monitoring the continuing effectiveness of hedges / mitigants:

The Bank enters into derivative transactions for trading and hedging purposes. The Balance Sheet Management Unit of the Bank obtains approvals from the Asset Liability Management Committee ("ALCO") for hedging on a case to case basis depending on the market conditions and Balance Sheet positions

These hedges are monitored for its hedge effectiveness periodically having regard to the terms of the hedging instrument and the underlying hedged risk.

(d) Accounting policy for recording hedge and non-hedge transactions; recognition of income, premiums and discounts; valuation of outstanding contracts; provisioning, collateral and credit risk mitigation

Derivative transactions are segregated into trading or hedge transactions. Trading transactions outstanding as at the Balance Sheet dates are marked to market and the resulting Profits or losses, are recorded in the Profit and Loss Account.

Derivative transactions designated as "Hedges" are accounted on an accrual basis over the life of the transaction.

Option premium paid / received is accounted for in the Profit and Loss Account on expiry of the option.

Provisioning on derivative receivables is made in accordance with RBI guidelines. The derivative limit sanctioned to clients is part of the overall limit sanctioned post credit appraisal. Collateral is accepted on a case to case basis considering the volatility of the price of the collateral and any increase in operational, legal and liquidity risk.

8. The Provision Coverage Ratio (PCR) of the Bank after considering Technical Write-off is 58.34% as at 31st March, 2010.

15. Under Unsecured Loans, amount of advances for which intangible security such as charge over the rights, licenses, authority, etc. are accepted as collateral is Nil.

25. No penalties or strictures have been imposed on the Bank during the year by the RBI.

26. There are no Off-Balance Sheet SPVs sponsored (which are required to be consolidated as per accounting norms).

6. Related Party Disclosures:

A. Parties where control exists: nature of relationship

Individual having control over the enterprise

Related Party

Uday S. Kotak along with relatives and enterprises in which he has benefcial interest holds 48.21% of the equity share capital of Kotak Mahindra Bank Limited as on 31st March, 2010

Subsidiary Companies

Kotak Mahindra Prime Limited

Kotak Securities Limited

Kotak Mahindra Capital Company Limited

Kotak Mahindra Old Mutual Life Insurance Limited

Kotak Mahindra Investments Limited

Kotak Mahindra Asset Management Company Limited

Kotak Mahindra Trustee Company Limited

Kotak Mahindra (International) Limited

Kotak Mahindra (UK) Limited

Kotak Mahindra Inc.

Global Investment Opportunities Fund Limited

Kotak Investment Advisors Limited

Kotak Mahindra Trusteeship Services Limited

Kotak Forex Brokerage Limited

Kotak Mahindra Pension Fund Limited

Kotak Mahindra Financial Services Limited

B. other Related Parties: nature of relationship

Associates

Related Party

Business Standard Limited (Upto 16th June, 2009)

Ahmedabad Commodity Exchange Ltd. (Effective 4th August, 2009)

Kotak Mahindra Asset Reconstruction Company Limited

Infna Finance Private Limited

Matrix Business Services India Private Limited

Phoenix ARC Private Limited

Regency Hospitals Limited (Upto 30th March, 2010)

Key Management Personnel

Mr. Uday S. Kotak, Executive Vice Chairman and Managing Director Mr. C Jayaram, Executive Director Mr. Dipak Gupta, Executive Director

Enterprise over which Key Management Personnel have signifcant Infuence

Aero Agencies Limited Kotak & Company Limited Komaf Financial Services Limited

Relatives of Key Management Personnel

Ms. Pallavi Kotak Mr. Suresh Kotak Ms. Indira Kotak Mr. Jay Kotak Mr. Dhawal Kotak Ms. Aarti Chandaria Ms. Anita Gupta Ms. Urmila Gupta

7. ESOPS :

At the General Meetings of the holding company, Kotak Mahindra Bank Limited, the shareholders of the Bank had unanimously passed Special Resolution on 28th July, 2000, 26th July, 2004, 26th July, 2005, 5th July, 2007 and 21st August, 2007, to grant options to the eligible Employees of the Bank and its subsidiaries companies. Pursuant to these resolutions, the following four Employees Stock Option Schemes had been formulated and adopted:

(a) Kotak Mahindra Equity Option Scheme 2001-02

(b) Kotak Mahindra Equity Option Scheme 2002-03

(c) Kotak Mahindra Equity Option Scheme 2005

(d) Kotak Mahindra Equity Option Scheme 2007

Consequent to the above, the Bank has granted stock options to the employees of the Bank and its subsidiaries. The Bank under its various plan / schemes, has granted in aggregate 2,46,37,720 options as on 31st March, 2010 (Previous Year 2,44,84,700).

Stock appreciation rights

The Bank has also granted stock appreciation rights (SARs) to select employees which can be settled in cash. These options will vest on the respective due dates in a graded manner as per the terms and conditions of grant. The contractual life of the SARs range from 0.34 to 4.36 years. During the year the Bank has granted 1,32,650 SARs. The number of SARs outstanding as on 31st March, 2010 are 1,32,650. The intrinsic value of SARs is measured at the grant date taking into account terms and conditions upon which the instruments were granted.

10. The Bank has agreed with International Finance Corporation ("IFC") in a loan agreement dated 8th November, 2004 that it shall (i) not create or permit to exist any lien over and above what was existing prior to the Bank converting into a scheduled commercial Bank (ii) request IFCs consent before granting any lien which is not pre-authorised, should the RBI allow the Bank to grant liens and (iii) grant in favour of IFC a similar lien which shall rank pari passu with the lien created in case it creates any such lien which is not a pre-authorized lien.

15. Bank has not issued any letters of comforts during the year. There were no outstanding letter of comforts at the year end (Previous Year Nil).

16. The Bank receives deposits from customers as part of margin requirements in respect of its professional clearing member (PCM) business with National Securities Clearing Corporation Ltd (NSCCL). Correspondingly, the Bank is required to maintain margins / deposits with NSCCL. For the said purpose of placing margins / deposits, the Bank has issued its own Fixed Deposit receipts amounting to Rs. 591.41 crores (Previous Year Rs. 844.61 crores) in favour of NSCCL which have not been included in "Term Deposits from Others" [Schedule 3 (III) (ii) ] .

17. Tier Bonds

(a) Lower Tier II Bonds outstanding as at 31st March, 2010 Rs. 465.70 crores (Previous Year Rs. 465.70 crores).

During the year, the Bank did not raise lower Tier II bonds (Previous Year Nil). In accordance with the RBI requirements lower Tier II bonds of Rs. 65.48 crores (Previous Year Rs. 38.74 crores) are not considered as Tier II capital for the purposes of capital adequacy computation.

(b) Upper Tier II Bonds outstanding as at 31st March, 2010 Rs. 338.05 crores (Previous Year Rs. 364.24 crores) of which bonds issued outside India Rs. 202.05 crores (Previous Year Rs. 228.24 crores).

During the year, the Bank did not raise upper Tier II bonds. (Previous Year Nil)

(c) Interest Expended-Others (Schedule 15(III)) includes interest on subordinated debt (Lower and Upper Tier II) Rs. 58.10 crores (Previous Year Rs. 64.78 crores).

18. Description of contingent Liabilities:

Sl. Contingent Liability* Brief Description no.

1. Claims not acknowledged as debts This includes liability on account of income tax, interest tax, sales tax and lease tax demands and legal cases fled against the Bank.

The Bank is a party to various legal proceedings in the normal course of business. The Bank does not expect the outcome of these proceedings to have a material adverse effect on the Banks financial conditions, result of operations or cash fows. Against the above Rs.19.00 crores have been paid, which shall be refunded to the Bank, if the outcome of the legal proceedings will be in the favour of the Bank.

2. Liability on account of outstanding forward exchange contracts The Bank enters into foreign exchange contracts with inter Bank participants on its own account and for customers. Forward exchange contracts are commitments to buy or sell foreign currency at a future date at the CONTRACTED RATE.

3. Guarantees on behalf of const ituents in India As a part of its Banking activities, the Bank issues guarantees on behalf of its customers. Guarantees generally represent irrevocable assurances that the Bank will make payments in the event of customer failing to fulfll its financial or performance obligations.

4. Acceptances, endorsements and other obligations These includes:

- Documentary credit such as letters of obligations, enhance the credit standing of the customers of the Bank.

- Bills re-discounted by the Bank and cash collateral provided by the Bank on assets which have been securitised.

5. Other items for which the Bank is contingently liable These includes:

- Liabilities in respect of interest rate swaps, currency swaps, forward rate agreements and options contracts. The Bank enters into these transactions with inter Bank participants on its own account and for customers. Currency Swaps are commitments to exchange cash fows by way of interest / principal in one currency against another, based on predetermined rates. Interest rate swaps are commitments to exchange fxed and foating interest rate cash fows. The notional amounts that are recorded as contingent liabilities are amounts used as a benchmark for the calculation of interest component of the contracts.

- Liability in respect of Capital commitments relating to fxed assets. This also includes undrawn commitments in respect of investments.

19. The Bank has not received any intimation from "suppliers" regarding their status under the Micro, Small and Medium Enterprises Development Act, 2006 and hence disclosures, if any, relating to amounts unpaid as at the year end together with interest paid / payable as required under the said Act have not been given.

20. Figures for the previous year have been regrouped / reclassifed wherever necessary to conform to current years presentation.

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