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Notes to Accounts of Kotak Mahindra Bank Ltd.

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.

 
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