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Notes to Accounts of Karnataka Bank Ltd.

Mar 31, 2023

a) Liquidity Coverage Ratio (LCR)

Bank is computing LCR on a daily basis in line with the RBI circular dated June 9, 2014 on "Basel III Framework on Liquidity Standards - Liquidity Coverage Ratio (LCR), Liquidity Risk Monitoring Tools and LCR Disclosure Standards". These guidelines ensure that banks maintain sufficient amount of High Quality Liquidity Assets (HQLAs) to survive 30 days stress scenario so that banks can take corrective measures within such period. These HQLAs have to be 100% of the net cash outflows w.e.f. January 1,2019.

Bank''s Asset Liability Management Committee (ALCO) is empowered to monitor and form suitable strategies to maintain stipulated levels of LCR by channelizing funds to target good quality asset and liability profile to meet Bank''s profitability as well as liquidity requirements. Funding strategies are formulated by the Finance and Accounts Department (FAD) in accordance with ALCO guidance. The objective of the funding strategy is to achieve an optimal funding mix which is consistent with prudent liquidity, diversity of sources and servicing costs. Accordingly, FAD estimates daily liquidity requirement. With the help of structural liquidity statement prepared by Bank, FAD evaluates current and future liquidity requirement and takes necessary action. Bank has consistently maintained LCR above 100% during FY 22-23 i.e., at levels higher than the required regulatory at minimum level on an ongoing basis.

b) Overseas assets, NPAs and Revenue -Nil (Previous Year - Nil)d) Particulars of resolution plan and restructuring

There are no Borrowers requiring additional provision in terms of Reserve Bank of India Circular DBR.No.BP. BC.45/21.04.048/2018-19 dated June 7, 2019.

During the year, there was no conversion of debt into equity on restructuring (Previous year Nil.)

e) Divergence in asset classification and provisioning:

No disclosure on divergence in asset classification and provisioning for NPAs is required with respect to the Risk based Supervision conducted by the Reserve Bank of India for the year ended 31st March 2022, based on conditions mentioned in the RBI Master Direction No. RBI/DOR/2021-22 /83 DOR.ACC.REC.No.45/21.04.018/2021-22 dated 30^th August 2021 (updated as on 11^th October 2022). (Previous year Nil.)

e) Factoring Exposure- The bank has no Factoring exposure as on 31.03.2023. (Previous Year- Nil)

f) Intra -group Exposure

There are no Intra Group exposures other than investment of '' 1.50 crore in wholly owned non-financial Subsidiary KBL Services Ltd. (Previous Year '' 1.00 crore)

g) Unhedged foreign currency exposure

The Bank has put in place a policy on Hedging of Foreign Currency Exposure which is a part of the Loan Policy which stipulates the guidelines on managing the risk arising out of the unhedged foreign currency exposure in line with the extant RBI guidelines. Further, the Bank has made a provision of '' 20.39 crore (Previous year '' 17.87 crore) and has provided capital for the unhedged foreign currency exposure of borrowal entities of ''2.73 crore (Previous year '' 4.46 crore) in line with the extant RBI guidelines.

h) Disclosure on amortisation of Expenditure on account of Enhancement in family pension of Employees of Banks:

The Bank had fully recognised the expenditure for enhancement of Family pension in the FY 2021-22.

Disclosure on Risk exposure in derivatives Qualitative Disclosure

The Bank has put in place Board approved Integrated Treasury Policy, Asset Liability Management (ALM) policy, Market Risk Management Policy and Fund Transfer Pricing Policy for effective management of market risk in the Bank. The objective of Integrated Treasury Policy is to assess and minimize risks associated with treasury operations by extensive use of various risk management tools. Broadly, it encompasses Policy prescriptions for managing systemic risk, credit risk, market risk, operational risk and liquidity risk in treasury operations.

For market risk arising out of various products in treasury and its business activities, the Bank has set regulatory/ internal limits and ensures the adherence thereof. Migration of ratings is tracked regularly. Limits for exposures to counter- parties, industries and countries are monitored and the risks are controlled through Stop Loss Limits, Overnight limit, Daylight limit, Aggregate Gap limit, Individual gap limit, Value at Risk (VaR) limit for Forex, Inter-Bank dealing and various investment limits. For the Market Risk Management the Bank has a Mid Office. The functions of Mid Office are handled by Risk Management Department.

The Board, RCMC & ALCO are overseeing the market risk management of the Bank, procedures thereof, implementing risk management guidelines issued by regulator, best risk management practices followed globally and ensures that internal parameters, procedures, practices/policies and risk management prudential limits are adhered to.

Liquidity risk of the Bank is assessed through daily gap analysis for maturity mismatch based on residual maturity in different time buckets as well as various liquidity ratios and management of the same is done within the prudential limits fixed thereon. Advance techniques such as Stress testing, simulation, sensitivity analysis etc. are conducted on regular intervals to draw the contingency funding plan under different liquidity scenarios.

Fund Transfer Pricing Policy which lays down methodology/assumptions on which profitability of the branches/ products/customers is measured and the FTP results are being used for effective decision making.

@ Credit exposure is calculated as per RBI Circular DBS.FID.No.C-12/01.02.00/2002- 03 dated 20-01-2003 on measurement of credit exposure of derivatives products and we have adopted current exposure method for calculating the same. According to the circular, on order to calculate the credit exposure equivalent of off balance sheet interest rate & exchange rate instruments under current exposure method, a bank would sum:

i. The total replacement cost (obtaining by marking by marking to marking) of all its contracts with positive value (i.e. when bank has to receive money from counterparty) and

ii. An Amount Potential future charges in credit exposure calculated on the basis of the notional principal amount of the contract multiplied by the credit conversion factor of 1% (applicable to contracts maturing less than one year) and 5% (contract maturing one year and above) according to residual maturity.

c) Credit default swaps

The Bank has not entered into any credit default swap. (Previous Year- Nil)

The RBI, vide its communication Ref: DBR.BP.BC.No.29/21.07.001/2018-19 dated 22nd March, 2019 has deferred implementation of Ind AS for all Scheduled Commercial Banks till further notice. However, going forward, in order to implement Indian Accounting Standards (Ind AS), The Bank has set up a Steering Committee head by the Managing Director to facilitate on continuous basis the process of smooth implementation of Ind AS in the Bank. Also, a sub-committee called IFRS Working Group is formed to work towards effectively implementing Ind AS in the Bank by having detailed discussions and deliberations on Ind AS Standards and related RBI Circulars. The RBI Discussion Paper on ECL was studied and deliberated by the IFRS Working Group and the responses for the Discussion Paper was shared with Reserve Bank of India on 28th February 2023.

Further, Bank has been submitting the proforma Ind AS financials to RBI every half year as per the RBI guidelines. Also, as a prudent measure, Bank is preparing Proforma Ind AS financials on quarterly basis and the estimated impact along with latest update on the Ind AS implementation in the Bank is placed to the Audit Committee of the Board.

15. Accounting Standards

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

a) Accounting Standard 5 - Net Profit or Loss for the period, Prior Period Items and Changes in Accounting Policies

There are no material prior period items.

In the preparation of these Financial Statements, the Bank has followed the same accounting policies and generally accepted accounting practices adopted for the preparation of the Audited Financial Statements for the year ended March 31, 2022.

b) Accounting Standard 9 - Revenue Recognition

Revenue is recognized on accrual basis as per Accounting Policy No. 1 of Schedule 17 to the financial statements. Certain items of income are recognized on cash basis and same is not material.

Depreciation on the book value of the building up to March 31,2023 is ''62.79 crore. Profit and Loss Account for the current financial year has been debited with additional depreciation charge of ''5.40 crore representing the incremental depreciation on the revalued amount.

d) Accounting Standard 15 - Employee Benefits

Various Benefits made available to the Employees

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

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

iii) Leave Encashment (PL): The Bank permits encashment of leave accumulated by the employees. The liability for encashment of such leave is determined and provided on the basis of actuarial valuation. For the current financial year, Bank has provided an amount of '' 13.40 crore (Previous year Rs 19.01 crore).

iv) Provident Fund: The Bank pays fixed contribution to Provident Fund at predetermined rates to a separate trust, which invests the funds in permitted securities. The contribution to the Fund is recognised as expense and is charged to the Profit and Loss Account. The obligation of the Bank is limited to such contributions. As on 31st March 2023, there was no liability due and outstanding to the Fund by the Bank.

v) Other Employee Benefits: Other than the benefits listed above, the Bank also gives certain other benefits to the employees, which include Medical Aid, Sick Leave, Casual Leave etc.,

For the purpose of segment reporting in terms of AS 17 of the Companies (Accounting Standards) Rules 2021 and as prescribed in the RBI guidelines, the business of the Bank has been classified into 4 segments i.e. (a) Treasury operations (b) Corporate/Wholesale Banking (c) Retail Banking (d) Other Banking Operations. Further as per the RBI circular DOR.AUT.REC.12/22.01.001/2022-23 dated April 07, 2022, on establishment of Digital Banking Unit (DBU) ''Digital Banking'' has been identified as a Sub-segment under Retail Banking. Since the Bank does not have any overseas branch, reporting under geographic segment does not arise. Segment assets have been identified and segment liabilities have been allocated on the basis of segment assets.

1. ^A In terms of Regulation 23(9) of the SEBI (LODR) Regulations, 2015 read with "Para 5 Accounting Standard 18 - Related Party Disclosures" of the RBI Master Direction on Financial Statements - Presentation and Disclosures dated August 30, 2021, "where the disclosures under the Accounting Standards are not aggregated disclosures in respect of any category of related party i.e., where there is only one entity in any category of related party, banks need not disclose any details pertaining to that related party other than the relationship with that related party."

2. Bank has only one entity under Subsidiary and two Key Managerial Personnel, the definition of which, are drawn from the "Accounting Standard 18 - Related Party Disclosures" as required for disclosure under Regulation 23(9) of the SEBI LODR. In terms of the aforesaid RBI Master Direction, the Bank''s relationship with each of the parties is as under:

Key Managerial Personnel:

a) Mr. Mahabaleshwara MS, Managing Director & CEO of the Bank, who was the Whole Time Director upto 14th April 2023 on the Board of the Bank and his appointment is in accordance with the approval received from the RBI in terms of Banking Regulation Act, 1949.

b) Mr. Sekhar Rao, Managing Director & CEO (Interim) of the Bank, who is the Whole Time Director from 1st February 2023 on the Board of the Bank and his appointment is in accordance with the approval received from the RBI in terms of Banking Regulation Act, 1949.

Subsidiary:

KBL Services Ltd. is a Wholly Owned Non-Financial Subsidiary of the Bank in respect of which the approval of the

Reserve Bank of India has been obtained in terms of "Master Direction- Reserve Bank of India (Financial Services

provided by Banks) Directions, 2016".

17. Litigations and claims

A sum of ''1630.03 crore (Previous year '' 1222.43 crore) is outstanding on account of demands raised by the Income Tax Department in the earlier years, out of which an amount of ''956.13 Crore (Previous year '' 765.87 Crore) has been paid under protest by debit to Sundry Assets - Protested Tax Account and for the balance of ''673.90 crore (Previous year '' 456.56 Crore) stay from collection of demand has been granted.

In addition to the above, the Income Tax Department has gone on appeal on various issues wherein Appellate Authority has given decisions in favour of the Bank to the extent of '' 486.55 crore (Previous year '' 352.31 crore).

The Bank has also preferred appeal against certain service tax demands to the extent of ''193.15 crore (Previous year '' 193.15 crore) and paid pre deposit of '' 1.06 crore (Previous year '' 1.06 crore) by debit to Sundry Assets -Service Tax Paid under Protest.

The Bank has been advised by its Tax Consultants and Experts that there are good chances of success in these appeals, considering favorable judicial pronouncements and / or appellate orders on identical issues for earlier years. Hence, the Bank does not consider it necessary to make any provision or include the same under Schedule 12 - Contingent Liability, to the Balance sheet.

All pending litigations which may have an impact on its financial position have been estimated and provided for. In respect of other pending litigations, no provision is required since these pending litigations have no impact on its financial position.

18. Employee Stock Option

The shareholders of the Bank, on July 21,2018, have approved ''KBL Employee Stock Option Scheme-2018'' (ESOS-2018) with a total of 50,00,000 stock options available for grant each of which is convertible into one equity share. The scheme has been framed in accordance with SEBI (Share Based Employee Benefits) Regulations, 2014 as amended from time to time. Further, to give effect to the corporate action by way of Bonus issue in the ratio of 1:10, additional 1,07,147 options have been accounted and hence, the total available options under the scheme stand increased to 51,07,147 stock options.

The options granted under ESOS 2018 would vest after one year from the date of grant of such options in a graded manner over a period of three years (i.e. 40%, 30% & 30% respectively on completion of 1st, 2nd & 3rd year), as determined by the Nomination & Remuneration Committee (NRC), a committee of the Board of Directors, subject to continued employment with the Bank on the date of vesting.

During the year ended March 31, 2023, no modifications were made to the terms and conditions of ESOSs as approved by the NRC.

The Shareholders of the Bank on March 30, 2023 have approved ''KBL Employee Stock Option Scheme-2023'' (ESOS-2023) with a total of 15,00,000 Stock options available for grant each of which is convertible into one equity share catering partially towards the disbursal of share linked portion of variable pay as per RBI guidelines relating to compensation payable to MD & CEOs/Whole Time Directors/Material Risk Takers (MRTs) in banks vide DOR.Appt.BC.No.23/29.67.001/2019-20 dated November 4, 2019. The Scheme, which is in lieu of ESOS-2018, has been framed in accordance with Securities and Exchange Board of India (Share Based Employee Benefits & Sweat Equity) Regulations, 2021. The old Scheme ESOS 2018 will continue to be operative for the limited purpose of permitting exercise of already granted options.

The Options granted under ESOS 2023 would vest after one year from the date of grant of such options in a graded manner over a period of three years (i.e. 30%, 30% & 40% respectively on completion of 1st, 2nd & 3rd year), as determined by the Nomination & Remuneration Committee (NRC), a committee of the Board of Directors. During the year under report, there was no grant of options under ESOS 2023.

19. The Board of Directors of the Bank have proposed a dividend of '' 5.00 per Equity share of '' 10/- each for the year ended March 31st 2023 (Previous year '' 4.00 per Equity share of '' 10 each), subject to the approval of the members at the ensuing Annual General Meeting. In terms of Accounting Standard (AS) 4 Contingencies and Events occurring after the Balance sheet date, the Bank has not appropriated proposed dividend aggregating to '' 157.00 crore from the Profit and loss account for the year ended March 31st, 2023. However, the effect of the proposed dividend has been reckoned in determining capital funds in the computation of Capital adequacy ratio as on March 31st, 2023.

20. Reconciliation of Branch Adjustments and Balancing of Subsidiary Ledgers

i) Balancing of Subsidiary Ledgers is completed at all the Branches/ offices

ii) Reconciliation of Branch Adjustments/Interbank accounts has been completed up to 31st March 2023 and steps are being taken to give effect to consequential adjustments of pending items.

21. Disclosure under Rule 11(e) of the Companies (Audit & Auditors) Rules, 2014

The Bank, as part of its normal business, grants loans and advances (including loans against third party deposits or Non-Banking Finance Company or Real estate promoters / developers loan, other margins / security), makes investment, provides guarantees (including against margin / guarantees received from third parties / banks) to and accepts deposits and borrowings from its customers, other entities and persons. These transactions are part of Bank''s authorised normal business, which is conducted ensuring adherence to regulatory requirements.

In the course of the transactions carried out as described above

(a) No funds have been advanced or loaned or invested (either from borrowed funds or share premium or any other sources or kind of funds) by the Bank to or in any other person(s) or entity(ies), including foreign entities ("Intermediaries") with the understanding, whether recorded in writing or otherwise, that the Intermediary shall whether directly or indirectly lend or invest in other persons or entities identified by in any manner whatsoever by or on behalf of the Bank ("Ultimate Beneficiaries") or provide any guarantee, security or like on behalf of the Ultimate Beneficiaries.

(b) The Bank has not received any funds from any person(s) or entity(ies) including foreign entity(ies) ("Funding Party") with the understanding, whether recorded in writing or otherwise, that the Bank shall, whether, directly or indirectly, lend or invest in other persons or entities identified in any manner whatsoever by or on behalf of the Funding Party ("Ultimate Beneficiaries") or provide any guarantee, security or the like on behalf of the Ultimate Beneficiaries.

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

Mar 31, 2022

c) Disclosures on risk exposure in derivativesi) Qualitative disclosures

Operations in the Treasury are segregated into three functional areas, namely Front office, Mid-office and Back-office, equipped with necessary infrastructure and trained officers whose responsibilities are well defined. The Mid Office is handled by Risk Management Department. Daily report is generated by Risk Management department for appraisal of the risk profile to the senior management for Asset and Liability management. The Integrated Treasury policy of the Bank clearly lays down the types of financial derivative instruments, scope of usages, approval process as also the limits like the open position limits, deal size limits and stop loss limits for trading in approved instruments.

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

The Integrated Treasury Policy of the Bank spells out the approval process for hedging the exposures. The hedge transactions are monitored on a regular basis and the notional profits or losses are calculated on MTM basis. The hedged/ non hedged transactions are recorded separately. The hedged transactions are accounted for on accrual basis. In case of Option contracts, guidelines issued by FEDAI from time to time for recognition of income, premium and discount are being followed. While sanctioning the limits, the competent authority may stipulate condition of obtaining collaterals/ margin as deemed appropriate. The derivative limits are reviewed periodically along with other credit limits.

1. Performance year being FY2020-21 and the assessment of variable pay of '' 96 lakhs has been approved by the RBI and non-deferred remuneration has been recognized during the FY 2021-22.

2. Performance year being FY2019-20 and the assessment of variable pay is based on audited financial results for FY 201920 and recommended and paid (with prior approval of RBI wherever applicable) during FY2020-21.

3. The MD & CEO opted to forego variable pay entitlement for FY 2019-20 as part of Bank''s initiatives to curtail expenditure on account of challenges posed by COVID-19 pandemic.

4. The number of stock options will be arrived and eligible stock options shall be granted after obtaining approval of the shareholders for the new employee stock option scheme.

-since the amount of variable pay was less than '' 25 lakh, there was no deferral arrangement on cash component.

As per the RBI guidelines, Bank is in the process of implementing Indian Accounting Standards (Ind AS). Bank has set up a Steering Committee head by the Managing Director to facilitate on continuous basis the process of smooth implementation of Ind As in the Bank. Also, a sub-committee was formed to work towards effectively implementing Ind AS in the bank by having detailed discussions and deliberations on Ind AS Standards and related RBI Circulars.

Bank has been submitting the proforma Ind AS financials to RBI every half year as per the RBI guidelines.

RBI, vide its communication Ref: DBR.BP.BC.No.29/21.07.001/2018-19 dated 22nd March, 2019 has deferred implementation of Ind AS for all Scheduled Commercial Banks till further notice.

h) Reserve Bank of India vide letter dated October 4, 2021 has permitted all member banks to Indian Bank''s Association covered under the 11^th Bipartite settlements to amortize the additional liability on account of revision in family pension over a period not exceeding five years beginning with the Financial year ended March 31,2022. The Bank has recognized the entire additional liability at '' 23.05 crore and charged the same to profit and loss account without opting for amortizing the same over a period of five years.

15. Accounting Standards

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

a) Accounting Standard 5 - Net Profit or Loss for the period, Prior Period Items and Changes in Accounting Policies

There are no material prior period items.

b) Accounting Standard 9 - Revenue Recognition

Revenue is recognized on accrual basis as per Accounting Policy No. 1 of Schedule 17 to the financial statements. Certain items of income are recognized on cash basis and same is not material.

Depreciation on the book value of the land & building up to March 31,2022 is '' 55.27 crore. Profit and Loss Account for the current financial year has been debited with additional depreciation charge of '' 4.79 crore representing the incremental depreciation on the revalued amount.

d) Accounting Standard 15 - Employee Benefits

Various Benefits made available to the Employees

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

iv) Provident Fund: The Bank pays fixed contribution to Provident Fund at predetermined rates to a separate trust, which invests the funds in permitted securities. The contribution to the Fund is recognised as expense and is charged to the Profit and Loss Account. The obligation of the Bank is limited to such contributions. As on 31st March 2022, there was no liability due and outstanding to the Fund by the Bank.

v) Other Employee Benefits: Other than the benefits listed above, the Bank also gives certain other benefits to the employees, which include Medical Aid, Sick Leave, Casual Leave etc.,

vi) The summarised position of post-employment benefits and employees'' long term benefits are recognized in the financial statements in accordance with Accounting Standard - 15 and are as under:

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

# computed based on fixed pay plus the non-deferred remuneration which has been recognized during the FY 2021-22

1. ^A In terms of Regulation 23(9) of the SEBI (LODR) Regulations, 2015 read with "Para 5 Accounting Standard 18 - Related

Party Disclosuresâ of the RBI Master Direction on Financial Statements - Presentation and Disclosures dated August 30, 2021, "where the disclosures under the Accounting Standards are not aggregated disclosures in respect of any category of related party i.e., where there is only one entity in any category of related party, banks need not disclose any details pertaining to that related party other than the relationship with that related party.â

2. Since Bank has only one entity in each category of Key Managerial Personnel and Subsidiary, the definition of which, are drawn from the "Accounting Standard 18 - Related Party Disclosuresâ as required for disclosure under Regulation 23(9) of the SEBI LODR. In terms of the aforesaid RBI Master Direction, the Bank''s relationship with each of the entities is as under:

a) Mr. Mahabaleshwara MS, Managing Director & CEO of the Bank, who is the sole Whole Time Director on the Board of the Bank and his appointment is in accordance with the approval received from the RBI in terms of Banking Regulation Act, 1949.

b) KBL Services Ltd. is a Wholly Owned Non-Financial Subsidiary of the Bank in respect of which the approval of the Reserve Bank of India has been obtained in terms of "Master Direction- Reserve Bank of India (Financial Services provided by Banks) Directions, 2016â.

17. With effect from Assessment year 2021-22, the Bank has opted for new regime of tax under section 115 BAA of Income tax Act 1961. Consequently, during the March 22 quarter, the Bank has re- measured its deferred Tax assets and deferred tax Liabilities and reversed the amount of '' 85.00 crores by debiting to the Profit and Loss Account.

18. Litigations and claims

A sum of '' 1222.43 crore (Previous year '' 708.38 crore) is outstanding on account of demands raised by the Income Tax Department in the earlier years which have been fully paid under protest by debit to Sundry Assets - Protested Tax Account. In addition to the above, the Income Tax Department has gone on appeal on various issues wherein Appellate Authority has given decisions in favour of the Bank to the extent of '' 352.31 crore.

The Bank has also preferred appeal against certain service tax demands to the extent of ''193.15 crore and paid pre deposit of '' 1.06 crore by debit to Sundry Assets - Service Tax Paid under Protest.

The Bank has been advised that there are good chances of success in these appeals, considering favorable judicial pronouncements and / or appellate orders on identical issues for earlier years. Hence, the Bank does not consider it necessary to make any provision or include the same under Schedule 12 - Contingent Liability, to the Balance sheet.

The Bank confirms that all pending litigations which may have an impact on its financial position have been estimated and provided for. In respect of other pending litigations, the Bank believes that no provision is required since these pending litigations have no impact on its financial position.

19. Employee Stock Option

During the year ended March 31,2022, no modifications were made to the terms and conditions of ESOSs as approved by the NRC.

On August 30, 2021, RBI issued a clarification on Guidelines on Compensation of Whole time Directors / Chief Executive officers/Material risk takers and Control Function staff advising banks that the share linked instruments are required to be fair valued on the date of grant using the Black-Scholes model. The fair value thus arrived should be recognized as an expense for all options granted after the accounting period ended March 31,2021, over the vesting period. Accordingly, bank has estimated the fair value of such stock based compensation on the date of grant using Black- Scholes model (as against intrinsic value method adopted earlier) and recognized the same as an expense over the vesting period, which does not have a material impact on the results for the quarter/year ended march 31,2022.

20. The Board of Directors have recommended a dividend of '' 4/- per share (40%) for the year ended 31^st March 2022 (previous year '' 1.8/- Per share (18%)), subject to the approval of the shareholders at the ensuing Annual General Meeting. In accordance with Accounting Standard (AS) 4 - Contingencies & Event occurring after the balance sheet date'', proposed dividend amounting to '' 124.47 crores (Previous year '' 55.96 Crores) has not been shown as an appropriation from the Profit as of March 31,2022 and consequently not reported under Other liabilities and Provisions as of March 31,2022. For computation of capital adequacy ratio as of March 31, 2022 Bank has adjusted the proposed dividend for determining capital funds

21. Reconciliation of Branch Adjustments and Balancing of Subsidiary Ledgers

i) Balancing of Subsidiary Ledgers is completed at all the Branches/ offices

ii) Reconciliation of Branch Adjustments/Interbank accounts has been completed up to 31^st March 2022 and steps are being taken to give effect to consequential adjustments of pending items.

22. Disclosure under Rule 11(e) of the Companies (Audit & Auditors) Rules, 2014

The Bank, as part of its normal business, grants loans and advances (including loans against third party deposits or NonBanking Finance Company or Real estate promoters / developers loan, other margins / security), makes investment, provides guarantees (including against margin / guarantees received from third parties / banks) to and accepts deposits and borrowings from its customers, other entities and persons. These transactions are part of Bank''s authorised normal business, which is conducted ensuring adherence to regulatory requirements.

In the course of the transactions carried out as described above

(a) No funds have been advanced or loaned or invested (either from borrowed funds or share premium or any other sources or kind of funds) by the Bank to or in any other person(s) or entity(ies), including foreign entities ("Intermediariesâ) with the understanding, whether recorded in writing or otherwise, that the Intermediary shall whether directly or indirectly lend or invest in other persons or entities identified by in any manner whatsoever or on behalf of the Bank ("Ultimate Beneficiariesâ) or provide any guarantee, security or like on behalf of the Ultimate Beneficiaries.

(b) The Bank has not received any funds from any person(s) or entity(ies) including foreign entity(ies) ("Funding Partyâ) with the understanding, whether recorded in writing or otherwise, that the Bank shall, whether, directly or indirectly, lend or invest in other persons or entities identified by or on behalf of the Funding Party ("Ultimate Beneficiariesâ) or provide any guarantee, security or the like on behalf of the Ultimate Beneficiaries.

23. Previous year''s figures have been regrouped/rearranged/given in brackets wherever necessary and feasible to conform to current years classification.

Mar 31, 2019

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

GENERAL

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

BASIS OF PREPARATION:

The accompanying Financial Statements have been prepared in accordance with requirements prescribed under the Third Schedule (Form A and Form B) of the Banking Regulation Act, 1949, following the going concern concept, on historical cost basis and accrual basis of accounting unless otherwise stated, conforming to the Generally Accepted Accounting Principles(GAAP) in India which encompasses applicable statutory provisions, regulatory norms prescribed by the Reserve Bank of India (RBI) from time to time, the accounting standards notified under section 133 of the Companies Act 2013, read together with paragraph 7 of the Companies (Accounts) Rules 2014 and Companies (Accounting Standards) Amendment Rules, 2016 to the extent applicable and practices generally prevalent in the Banking industry in India.

USE OF ESTIMATES

The preparation of the 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 reported period. The Management believes that the estimates and assumptions used in the preparation of the financial statements are prudent and reasonable. Actual results could differ from these estimates. The differences, if any between estimates and actual will be dealt appropriately in future periods. Any revision in the accounting estimates is recognised prospectively in the current and future periods.

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

There has been no transfer of securities to/from âHeld to Maturityâ (HTM) Category during the year.

1.2.2.iv. The percentage of SLR investments under âHeld to Maturityâ category as on 31^st March 2019 was 18.20% (Previous Year 18.86%) of the Net Demand and Time Liabilities of the bank, which is within the permissible limit as per RBI guidelines.

1.3 Derivatives

1.3.1 Forward Rate Agreement/ Interest Rate Swap: Nil

1.3.2 Exchange Traded Interest Rate Derivatives: Nil

1.3.3 Disclosure on risk exposure in Derivatives

(i) Qualitative Disclosure:

Operations in the Treasury are segregated into three functional areas, namely Front office, Mid-office and Backoffice, equipped with necessary infrastructure and trained officers whose responsibilities are well defined. The Mid Office is handled by Risk Management Department. Daily report is generated by Risk Management department for appraisal of the risk profile to the senior management for Asset and Liability management.

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

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

The Integrated Treasury Policy of the Bank spells out the approval process for hedging the exposures. The hedge transactions are monitored on a regular basis and the notional profits or losses are calculated on MTM basis. The hedged/non hedged transactions are recorded separately. The hedged transactions are accounted for on accrual basis. In case of Option contracts, guidelines issued by FEDAI from time to time for recognition of income, premium and discount are being followed. While sanctioning the limits, the competent authority may stipulate condition of obtaining collaterals/margin as deemed appropriate. The derivative limits are reviewed periodically along with other credit limits.

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

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

During the year ended 31^st March 2019, the Bank has not exceeded the Individual /Group borrowersâ prudential exposure limits fixed by RBI.

1.4.5 Unsecured Advances:

The Bank has granted advances against intangible securities such as charge over the rights, licences, authorisations, etc, and the outstanding balance as on March 31, 2019 is Rs.114.00 Crore (Previous year â Rs. 113.29 Crore)

1.5. Penalties imposed by RBI:

During the year Reserve Bank of India vide its letter No. EED.CO.SO/634/02.02.005/2018-19 dated February 25, 2019 has levied penalty of Rs.4.00 crore for delay in compliance with various directions on time bound implementation and strengthening of SWIFT operations. (Previous year Nil)

2. Accounting Standards:

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

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

There are no material prior period items.

2.2 Accounting Standard 9 - Revenue Recognition

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

2.3 Accounting Standard 10- Fixed Assets :

During the year ending March 31, 2017, as permitted by the Board, the Bank had revalued land & building owned by it. Appreciation of Rs.423.53 Crore arising out of such revaluation was accounted with corresponding credit to Revaluation Reserves. The details are as under:-

Depreciation on the book value of the land & building upto March 31, 2019 is Rs.34.61 Crores. The profit & loss account for the year 2016-17, 2017-18 and 2018-19 has been debited with additional depreciation charge of Rs.3.13 Crores, Rs.4.18 Crore and Rs. 4.10 Crore respectively representing the incremental depreciation on the revalued cost.

2.4. Accounting Standard 15 - Employee Benefits:

2.4.1 Various Benefits made available to the Employees are:-

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

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

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

d) Provident Fund: The Bank pays fixed contribution to Provident Fund at predetermined rates to a separate trust, which invests the funds in permitted securities. The contribution to the Fund is recognised as expense and is charged to the Profit and Loss account. The obligation of the Bank is limited to such contributions. As on 31^st March 2019, there was no liability due and outstanding to the Fund by the Bank.

e) Other employee Benefits: Other than the employee benefits listed above, the Bank also gives certain other benefits to the employees, which include Medical aid, sick leave and casual leave etc.

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

2.5 Accounting Standard 17 - Segment Reporting:

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

2.6 Accounting Standard 18 - Related Party Disclosures :

There is no related party transaction other than remuneration paid to key management personnel, Sri Mahabaleshwara M S, Managing Director and Chief Executive Officer, amounting to Rs.0.71 Crore ( Previous year Rs. 0.60 Crore).

Allotment of 119352 Equity shares (Previous year 119464) is kept in abeyance including 1800 equity shares (Previous Year 1800 Equity shares), where the entitlement matter is sub-judice. These shares have not been considered for EPS calculation, as the shares are not allotted.

2.9. Accounting Standard 28 - Impairment of Assets:

An assessment is made at each Balance sheet date whether there is any indication that an asset is impaired. If any such indication exists, an estimate of the recoverable amount is made and impairment loss, if any, is provided for. As on March 31, 2019 there is no indication of impairment of any asset.

3.1 Floating / Countercyclical Provisions:

The Bank does not hold any floating / countercyclical provision in the current year (Previous year- Nil)

3.2 Drawdown from Reserves:

During the year under review, there has been no draw down from the Reserves.

3.4 Disclosure of Letters of Comfort (LoC)

The Bank issues Letters of Comfort on behalf of its various constituents against the credit limits sanctioned to them. In the opinion of the Management, no significant financial impact and/or cumulative financial obligations have devolved during the year in respect of the LoCs issued by the Bank and remaining outstanding as of 31^stMarch 2019.

3.5 Provision Coverage Ratio (PCR):

The Bankâs provision coverage ratio as of March 31, 2019 is 58.45 % (previous year 54.56 %)

3.6 Overseas Assets, NPA and Revenue: Nil

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

3.8 Disclosure of Remunerations:

a) Qualitative disclosure:

Remuneration Committee

The Nomination & Remuneration Committee (NRC) consists of 4 Directors, three of them are Independent Directors and two being the members of Risk and Capital Management Committee of the Board (RCMC) also.

The mandate of the NRC include identification of persons who are qualified to become directors and who may be appointed in senior management in accordance with the criteria laid down and recommend to the Board for their appointment, fixing their compensation and/or removal, undertaking the due diligence of candidates before their appointment/re-appointment as directors, formulating the criteria for determining qualification, positive attributes and independence of a director, key managerial personnel and other employees, Formulation of criteria for evaluation of performance of independent directors and the board of directors etc. NRC also reviews Compensation Policy of the Bank, besides, administration of ESOP scheme.

Objectives of Compensation Policy

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

Risk adjustments in remuneration

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

Performance linked variable compensation, deferral and forms

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

The financial performance of the bank is factored while determining the amount of variable remuneration to be paid. The variable pay shall not exceed 45% of the fixed pay in a year. In terms of RBI extant guidelines, deferral arrangement for payment of variable pay is necessitated where such proposed variable pay exceeds substantial portion of the fixed pay, i.e. 50% or more. However, as the variable pay limit fixed by the Bank is less than 50% deferral arrangement does not arise. The Board/NRC may grant stock options under the Employees Stock Options Plan/Scheme as may be introduced by the Bank from time to time in terms of SEBI (Share Based Employee Benefits) Regulations, 2015, subject to the approval of Reserve Bank of India under Section 35B of the Banking Regulation Act, 1949. Such Stock Options will be excluded from the components of variable pay.

The variable pay could be in cash, or stock linked instruments or mix of both.

3.9 Disclosure relating to Securitization:

The Bank has not sponsored any SPVâs for securitisation transactions

3.10 Credit Default Swap:

The Bank has not entered into any credit default swap.

3.11 Intra-Group Exposures:

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

3.12 Un-hedged Foreign Currency Exposure:

The Bank has put in place a policy on Hedging of Foreign Currency Exposure which is a part of the Loan Policy which stipulates the guidelines on managing the risk arising out of the un-hedged foreign currency exposure in line with the extant RBI Guidelines. Further, the Bank has made a provision of Rs.15.30 crore (Previous year Rs.14.74 crore) and has provided capital for the un-hedged foreign currency exposure of borrowal entities of Rs.1.97 crore (previous year Rs.3.99 crore) in line with the extant RBI Guidelines.

3.13 Frauds:

The total number of frauds reported during the year is 84 amounting to Rs.122.94 Crore and is fully provided for in the current year.

Qualitative Disclosures on LCR:

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

Necessary system has been put in place to compute LCR and bankâs strategy would be to maintain LCR well above the regulatory minimum levels ahead of the stipulated timelines. The main driver of LCR is adequate HQLAs and Bank is maintaining LCR well above the minimum stipulated level of 100% in view of SLR investments in excess of statutory requirement and 15% of NDTL in the form of borrowing limit available through Marginal Standing Facility (MSF) and Facility to Avail Liquidity for Liquidity Coverage Ratio (FALLCR).The bank has a diversified liability mix comprising of healthy Retail Deposits with its pan India presence and the dependency on wholesale funding is insignificant.

The Bank during the three months ended March 31, 2019 maintained average HQLA (after haircut) of Rs.11842.58 crore (March 31, 2018 : Rs.8352.56 crore). HQLA primarily includes government securities in excess of minimum statutory liquidity ratio (SLR) , 2% of NDTL under âmarginal standing facility (MSF)â , 13% of NDTL under âfacility to avail liquidity for LCR (FALLCR)â , investments under Corporate bonds & commercial papers rate âAA- and aboveâ.

The weighted cash outflows are primarily driven by deposits from retail & small business customers, unsecured wholesale funding which includes non-operational deposits and unsecured debt. During the three months ended March 31, 2019, funding from âretail & small business customersâ and ânon-operational depositsâ contributed 59.54% & 24.82% to the total weighted cash outflows respectively. The other contingent funding obligations primarily include bank guarantees (BGs) and letters of credit (LCs) issued on behalf of the Bankâs clients.

The average LCR of the Bank for the three months ended March 31, 2019 was 215.48% (March 31, 2018: 132.07%). (Note: Increase in FALLCR from 9% to 13% of NDTL resulted increase in HQLAs, Hence LCR increased when compare with March 31, 2018 )

At March 31, 2019, top liability products/instruments and their percentage contribution to the total liabilities of the Bank were term deposits: 61.23%, savings account deposits: 19.28%, current account deposits: 5.00% and Certificate of Deposits: 1.03%. Top 20 depositors constituted 4.09% of total deposits of the Bank at March 31, 2019.

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

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

3.14 As on 31.03.2019, the Bankâs investment assets include acquisition of shares due to conversion of debt to equity during the restructuring process which is exempted from regulatory ceilings/restrictions on Capital Market exposures, investment in Para banking activities and intra-group exposure, to the tune of Rs.32.12 Crore of book value.(Previous year Rs.32.74 crore).

3.15 Operating Expenses stated in Schedule 16 to the Profit and Loss Account includes Rs.5.97 crore (Previous year Rs. 6.97 crore) spent toward Corporate Social responsibility (CSR) Activities.

3.16 In terms of the RBI Circular DBR.BP.BC.No. 32/21.04.018/2018-19 dated April 1, 2019, there are no divergences in asset classification and provisioning consequent to RBIâs annual supervisory process i.e neither

a) the additional provisioning for NPAs addressed by RBI exceeds 10% of the reported profit before provisions and contingencies for the reference period and, b) the additional Gross NPAs identified by RBI exceed 15% of the published incremental gross NPAs for the reference period.

3.17 The Board of Directors has recommended a dividend of Rs.3.50 per share (35.00%) for the year ended 31^st March 2019 [previous year Rs.3 Per share (30%)], subject to approval of the shareholders at the ensuing Annual General Meeting.

In accordance with revised Accounting Standards (AS) 4-âContingencies & Events occurring after the balance sheet dateâ notified by the MCA on March 30, 2016, the proposed dividend including corporate dividend tax amounting to Rs.119.24 crore (Previous year Rs.102.21 crore) has not been shown as an appropriation from the Profit as of March 31, 2019 and consequently not reported under Other liabilities and Provisions as of March 31, 2019. For computation of capital adequacy ratio as of March 31, 2019 Bank has adjusted the proposed dividend for determining capital funds.

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

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

b) Reconciliation of branch adjustments/Inter Bank accounts has been completed up to 31^st March 2019 and steps are being taken to give effect to consequential adjustments of pending items.

5. (i) A sum of Rs. 426.99 crore (Previous year Rs. 552.01 crore) is outstanding on account of demands raised by the Income Tax Department in earlier years which have been paid under protest. No provision is considered necessary in respect of these demands, as the Bank has been advised that there are good chances of success in appeals/ considering favourable judicial pronouncements and/or appellate orders on identical issues for earlier assessment years.

(ii) The Bank confirms that all pending litigations which may have an impact on its financial position have been estimated and provided for. In respect of other pending litigations, the Bank believes that no provision is required since these pending litigations have no impact on its financial position.

6. In accordance with the RBI Circular DBR. No. BPBC.2/21.06.201/2017-18 dated 1^st July 2015 on âBasel III Capital Regulationsâ and RBI Circular DBR.NO.BP.BC 80/21.06.201/2014-15 dated March 31, 2015 on âPrudential Guidelines on Capital Adequacy and Liquidity Standards Amendmentsâ, Banks are required to make Pillar III disclosures including Leverage Ratio and Liquidity Coverage Ratio under Basel III Framework. The Bank has made these disclosures which are available on its web site at the following link http://ktkbank.com/ktk/BaselDisclosures.jsp#. These disclosures have not been audited by the Statutory Central Auditors.

7. Notes to Accounts on ESOP

The shareholders of the Bank, on July 21, 2018, have approved âKBL Employee Stock Option Scheme-2018â (ESOS-2018) with a total of 50,00,000 stock options available for grant each of which is convertible into one equity share. The scheme has been framed in accordance with SEBI (Share Based Employee Benefits) Regulations, 2014 as amended from time to time. Bank has followed Intrinsic Value method for accounting the stock options in accordance with the aforesaid SEBI Regulations. As per the scheme, the exercise price per option shall be the closing price per equity share of the Bank on the date of the grant.

The options granted under ESOS 2018 would vest after one year from the date of grant of such options in a graded manner over a period of three years (i.e. 40%, 30% & 30% respectively on completion of 1^st, 2^nd & 3^rd year), as determined by the Nomination & Remuneration Committee (NRC), a committee of the Board of Directors, subject to continued employment with the Bank on the date of vesting.

During the year ended March 31, 2019, no modifications were made to the terms and conditions of ESOPs as approved by the NRC.

Since, the Bank has followed intrinsic value method, the fair value of options used to compute the net profit and earnings per equity share has been estimated on the dates of each grant using the Black Scholess Formula. The Bank estimates the volatility based on the historical prices of its equity shares and expected life of options. The Bank granted 8,90,175 options during the year ended March 31, 2019 (previous year: Nil). The various assumptions considered in the pricing model for the ESOPs granted during the year ended March 31, 2019 are:

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

Mar 31, 2018

GENERAL

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

BASIS OF PREPARATION :

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

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

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

During the period under review, the opening balance of investment in HTM category stood at Rs.11523.93 Crore of Book value. As per the regulatory guidelines bank can sell from HTM securities up to 5% of the book value of the investment held in HTM category which works out to Rs.576.20 Crore for FY 2017-18 without any disclosure.

During the FY 17-18 total sale from HTM stands at Rs.2584.73 Crore (Including permitted sale of 5% and OMO sale).Thus the Bank has sold Rs.1857.74 Crore ( excluding OMO) in excess of 5% of the book value of investment held in HTM category. Bank has also sold Non SLR Uday Bonds amounting to Rs.9.56 Crore of Book Value from HTM category. Further the closing position as on 31.03.2018 in SLR HTM category stands at Rs.11776.62 Crore with a market value of Rs.11469.32 Crore having a depreciation of Rs.307.30 Crore. The closing position as on 31.03.2018 in Non SLR HTM category stands at Rs.342.42 Crore with a Market Value of Rs.360.03 Crore having an appreciation of Rs.17.61 Crore. The total closing position of HTM category stands at Rs.12119.04 Crore with a market value of Rs.11829.35 Crore having an depreciation of Rs.289.69 Crore.

1.1.1.iv. The percentage of SLR investments under âHeld to Maturityâ category as on 31^st March 2018 was 18.86% (Previous Year 19.93%) of the Net Demand and Time Liabilities of the Bank, which is within the permissible limit as per RBI guidelines.

1.2 Derivatives

1.2.1 Forward Rate Agreement/ Interest Rate Swap: Nil

1.2.2 Exchange Traded Interest Rate Derivatives: Nil

1.2.3 Disclosure on risk exposure in Derivatives

(i) Qualitative Disclosure:

The Integrated Treasury Policy of the Bank spells out the approval process for hedging the exposures. The hedge transactions are monitored on a regular basis and the notional profits or losses are calculated on MTM basis. The hedged/non hedged transactions are recorded separately. The hedged transactions are accounted for on accrual basis. In case of Option contracts, guidelines issued by FEDAI from time to time for recognition of income, premium and discount are being followed. While sanctioning the limits, the competent authority may stipulate condition of obtaining collaterals/margin as deemed appropriate. The derivative limits are reviewed periodically along with other credit limits.

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

During the year ended 31^st March 2018, the Bank has not exceeded the Individual /Group borrowersâ prudential exposure limits fixed by RBI.

1.3.2 Unsecured Advances:

The Bank has granted advances against intangible securities such as charge over the rights, licences, authorisations, etc, and the outstanding balance as on March 31, 2018 is Rs.113.29 Crore (Previous year- Nil)

1.4. Penalties imposed by RBI:

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

2. Accounting Standards:

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

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

There are no material prior period items.

For the preparation of these Financial Results, the bank has followed the same accounting policies and generally accepted practices adopted for the preparation of Audited Financial Statements for the year ended March 31, 2017, except for the treatment of depreciation on revalued portion of fixed assets pursuant to Accounting Standard-10 (Revised 2016) on Property, Plant & Equipment whereof depreciation of Rs.7.31 Crore on the revalued portion of fixed assets has been transferred from Revaluation Reserve to Revenue Reserves.

2.2 Accounting Standard 9 - Revenue Recognition

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

2.3 Accounting Standard 10- Fixed Assets:

During the previous year ending March 31, 2017 , as permitted by the Board, the Bank had revalued land & building owned by it. Appreciation of Rs.423.53 Crore arising out of such revaluation was accounted with corresponding credit to Revaluation Reserves for the year ended March 31, 2018. The details are as under :- (â in crore)

Depreciation on the book value of the land & building up to March 31, 2018 is Rs.29.43 Crore. The profit & loss account for the year 2016-17 and 2017-18 has been debited with additional depreciation charge of Rs.3.13 Crore, and Rs.4.18 Crore respectively representing the incremental depreciation on the revalued cost.

2.4. Accounting Standard 15-Employee Benefits:

2.4.1 Various Benefits made available to the Employees are:-

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

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

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

d) Provident Fund: The Bank pays fixed contribution to Provident Fund at predetermined rates to a separate trust, which invests the funds in permitted securities. The contribution to the Fund is recognised as expense and is charged to the Profit and Loss account. The obligation of the Bank is limited to such contributions. As on 31^st March 2018, there was no liability due and outstanding to the Fund by the Bank.

e) Other employee Benefits: Other than the employee benefits listed above, the Bank also gives certain other benefits to the employees, which include Medical aid, sick leave and casual leave etc.

2.5 Accounting Standard 17 - Segment Reporting:

2.6 Accounting Standard 18 - Related Party Disclosures:

There is no related party transaction other than remuneration paid to key management personnel, Sri Jayarama Bhat P, Managing Director and Chief Executive Officer from 01.04.2017 to 11.04.2017 amounting to Rs.0.16 crore (Previous Year Rs.0.79 crore) and Sri Mahabaleshwara M S, Managing Director and Chief Executive Officer, from 14.04.2017 to 31.03.2018 amounting to Rs.0.60 crore ( Previous year - Nil).

2.7 Accounting Standard 20 - Earnings per Share:

Basic and diluted earnings per equity share computed in accordance with AS 20 - Earnings per Share are as under:

Allotment of 96836 Equity shares (Previous year 98575) is kept in abeyance and held in Demat Suspense Account. In respect of 1800 equity shares (Previous Year 1800 Equity shares), the entitlement matter is sub-judice and is yet to be allotted. These shares have not been considered for EPS calculation, as the shares are not allotted.

2.8 Accounting Standard 22 - Accounting for taxes on Income:

The Bank has accounted for taxes on income in compliance with Accounting Standard 22. The major components of Deferred Tax Assets and Liabilities recognised are as under :-

2.9. Accounting Standard 28 - Impairment of Assets :

An assessment is made at each Balance sheet date whether there is any indication that an asset is impaired. If any such indication exists, an estimate of the recoverable amount is made and impairment loss, if any, is provided for. As on March 31, 2018 there is no indication of impairment of any asset.

2.10 Accounting Standard 29 - Provision, Contingent liabilities and Contingent assets :

3.1 Floating /Countercyclical Provisions:

The Bank does not hold any floating/ countercyclical provision in the current year (Previous year- Nil)

3.2 Drawdown from Reserves:

During the year under review, there has been no drawdown from the Reserves.

3.3 Disclosure of Letters of Comfort (LOC)

The Bank issues Letters of Comfort on behalf of its various constituents against the credit limits sanctioned to them. In the opinion of the Management, no significant financial impact and/or cumulative financial obligations have devolved during the year in respect of the LOCs issued by the Bank and remaining outstanding as of 31^st March 2018.

3.4 Provision Coverage Ratio (PCR) :

The Bankâs provision coverage ratio as of March 31, 2018 is 54.56 % (previous year 54.00 %)

3.5 Overseas Assets, NPA and Revenue: Nil

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

3.7 Disclosure of Remunerations:

a) Qualitative disclosure:

Remuneration Committee

The Nomination & Remuneration Committee (NRC) consists of 4 Directors, three of them are Independent Directors and two being the members of Integrated Risk Management Committee of the Board (IRMC) also.

Objectives of Compensation Policy

Risk adjustments in remuneration

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

Performance linked variable compensation, deferral and forms

The financial performance of the bank is factored while determining the amount of variable remuneration to be paid. The variable pay shall not exceed 45% of the fixed pay in a year. In terms of RBI extant guidelines, deferral arrangement for payment of variable pay is necessitated where such proposed variable pay exceeds substantial portion of the fixed pay, i.e. 50% or more. However, as the variable pay limit fixed by the Bank is less than 50% deferral arrangement does not arise. The Board/NRC may grant stock options under the Employees Stock Options Plan/Scheme as may be introduced by the Bank from time to time in terms of SEBI(Share Based Employee Benefits) Regulations, 2015, subject to the approval of Reserve Bank of India under Section 35B of the Banking Regulation Act, 1949. Such Stock Options will be excluded from the components of variable pay.

The variable pay could be in cash, or stock linked instruments or mix of both.

3.8 Disclosure relating to Securitization:

The Bank has not sponsored any SPVâs for securitisation transactions

3.9 Credit Default Swap:

The Bank has not entered into any credit default swap.

3.10 Intra-Group Exposures:

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

3.11 Transfers to Depositor Education and Awareness Fund (DEA Fund) :

3.12 Un-hedged Foreign Currency Exposure:

The Bank has put in place a policy on Hedging of Foreign Currency Exposure which is a part of the Loan Policy which stipulates the guidelines on managing the risk arising out of the un-hedged foreign currency exposure in line with the extant RBI Guidelines. Further, the Bank has made a provision of Rs.14.74 crore (Previous year Rs.13.25 Crore) and has provided capital for the un-hedged foreign currency exposure of borrowal entities of Rs.3.99 crore (previous year Rs.3.90 Crore) in line with the extant RBI Guidelines.

3.13 Frauds:

The total number of frauds reported during the year is 21 amounting to Rs.214.58 Crore and is fully provided for in the current year.

Qualitative Disclosures on LCR :

Necessary system has been put in place to compute LCR and Bankâs strategy would be to maintain LCR well above the regulatory minimum levels ahead of the stipulated timelines. The main driver of LCR is adequate HQLAs and Bank is maintaining LCR well above the minimum stipulated level of 90% in view of SLR investments in excess of statutory requirement and 11% of NDTL in the form of borrowing limit available through Marginal Standing Facility (MSF) and Facility to Avail Liquidity for Liquidity Coverage Ratio (FALLCR). The Bank has a diversified liability mix comprising of healthy Retail Deposits with its pan India presence and the dependency on wholesale funding is insignificant.

The Bank during the three months ended March 31, 2018 maintained average HQLA (after haircut) of â. 8352.56 Crore (March 31, 2017: Rs.10459.05 Crore). HQLA primarily includes government securities in excess of minimum statutory liquidity ratio (SLR) , 2% of NDTL underâmarginal standing facility (MSF)â, 9% of NDTL under âfacility to avail liquidity for LCR (FALLCR)â , investments under Corporate bonds & commercial papers rate âAA- and aboveâ.

The weighted cash outflows are primarily driven by deposits from retail & small business customers, unsecured wholesale funding which includes non-operational deposits and unsecured debt. During the three months ended March 31, 2018, funding from âretail & small business customersâ and ânon-operational depositsâ contributed 8.87% & 36.42% to the total weighted cash outflows respectively. The other contingent funding obligations primarily include bank guarantees (BGs) and letters of credit (LCs) issued on behalf of the Bankâs clients.

The average LCR of the Bank for the three months ended March 31, 2018 was 132.07% (March 31, 2017: 133.10%).

At March 31, 2018, top liability products/instruments and their percentage contribution to the total liabilities of the Bank were term deposits: 61.23%, savings account deposits: 19.50%, current account deposits:5.50% and Certificate of Deposits 3.09%. Top 20 depositors constituted 5.93% of total deposits of the Bank at March 31, 2018.

3.14 Revised Framework for Resolution of Stressed assets:

The Reserve Bank of India vide its Circular dated February 12, 2018, issued a revised framework for resolution of stressed assets, which superseded the existing guidelines on SDR, S4A etc, with immediate effect. Accordingly the Bank has revoked the stand-still benefits for accounts where any of these schemes had been invoked but not yet implemented and classified them as per the extant RBI Guidelines on Income recognition and asset classification, as given here below :-

3.14.1 As on 31.03.2018, the Bankâs investment assets include acquisition of shares due to conversion of debt to equity during the restructuring process which is exempted from regulatory ceilings/restrictions on Capital Market exposures, investment in Para banking activities and intra-group exposure, to the tune of Rs.32.74 crore of book value.

3.15 Operating Expenses stated in Schedule 16 to the Profit and Loss Account includes Rs.6.97 crore (Previous year Rs.6.18 crore) spent towards Corporate Social responsibility (CSR) Activities.

3.16 In terms of the RBI Circular DBR.BP.BC.No. 63/21.04.018/2016-17 dated 18^th April 2017, banks are required to disclose the divergences in asset classification and provisioning consequent to RBIâs annual supervisory process in their notes to accounts wherever either a) the additional provisioning requirements assessed by RBI exceed 15% of the published net profits after tax for the reference period or, b) the additional Gross NPAs identified by RBI exceed 15% of the published incremental gross NPAs for the reference period, or both. Accordingly, divergence in Asset Classification and Provisioning for NPAs in compliance to Risk Assessment Report (RAR) of RBI for the Financial Year 2016-17 is reported as under-

(Resultant impact of the RBI divergence has been duly considered and given effect to as of 31.03.2018)

3.17 The Board of Directors has recommended a dividend of Rs.3 per share (30 %) for the year ended 31^st March 2018 (previous year Rs.4 Per share (40%)), subject to approval of the shareholders at the ensuing Annual General Meeting. In accordance with revised Accounting Standards (AS) 4-âContingencies & Events occurring after the balance sheet dateâ notified by the MCA on March 30, 2016, the proposed dividend including corporate dividend tax amounting to Rs.102.21 crore (Previous year Rs.136.05 crore) has not been shown as an appropriation from the Profit as of March 31, 2018 and consequently not reported under Other liabilities and Provisions as of March 31, 2018. For computation of capital adequacy ratio as of March 31, 2018 Bank has adjusted the proposed dividend for determining capital funds.

4 Reconciliation of Branch Adjustments and Balancing of Subsidiary Ledgers.

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

b) Reconciliation of branch adjustments/Inter Bank accounts has been completed up to 31^st March 2018 and steps are being taken to give effect to consequential adjustments of pending items.

5. (i) A sum of Rs.552.01 crore (Previous year Rs.791.31 crore) is outstanding on account of demands raised by the Income Tax Department in earlier years which have been paid under protest. No provision is considered necessary in respect of these demands, as the Bank has been advised that there are good chances of success in appeals/ considering favourable judicial pronouncements and/or appellate orders on identical issues for earlier assessment years.

6. In accordance with the RBI Circular DBR. No. BPBC.2/21.06.201/2016-17 dated 1^st July 2015 on âBasel III Capital Regulationsâ and RBI Circular DBR.NO.BP.BC 80/21.06.201/2014-15 dated March 31, 2015 on âPrudential Guidelines on Capital Adequacy and Liquidity Standards Amendmentsâ, Banks are required to make Pillar III disclosures including Leverage Ratio and Liquidity Coverage Ratio under Basel III Framework. The Bank has made these disclosures which are available on its web site at the following link http://ktkbank.com/ktk/BaselDisclosures.jsp#. These disclosures have not been audited by the Statutory Central Auditors.

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

Mar 31, 2017

Capital raised: Pursuant to the Right issue in the ratio of 1:2, the Bank has allotted 94136866 equity shares of Rs.10/- each during the current financial year at a premium of '' 60/- per share aggregating to Rs. 658.96 crore.

*Includes Non-performing UDAY Bonds aggregating to Rs.149.69 crore.

#Includes Provision on Non-performing UDAY Bonds aggregating to Rs.22.45 crore.

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

During the year, the Bank has sold Government Securities from Held to Maturity (HTM) category in excess of 5% of the book value of the investments held in HTM category at the beginning of the year. As on April 1, 2016 the book value of securities in HTM category stood at Rs.10670.38 crore. The 5 % of the same works out to Rs.533.52 crore. During the year, Bank sold securities of Rs. 3778.74 crore from the HTM Category. As on 31^st March 2017, the book value of SLR investments held in HTM Category was Rs.11520.31 crore, which shows marked to market appreciation of Rs. 165.76 crore.

During the year, Bank has not resorted to any transfer of securities to / from HTM category.

2. Derivatives

3. Forward Rate Agreement/ Interest Rate Swap: Nil

4. Exchange Traded Interest Rate Derivatives: Nil

5. Disclosure on risk exposure in Derivatives

(i) Qualitative Disclosure:

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

The Integrated Treasury Policy of the Bank spells out the approval process for hedging the exposures. The hedge transactions are monitored on a regular basis and the notional profits or losses are calculated on MTM basis. The hedged/non hedged transactions are recorded separately. The hedged transactions are accounted for on accrual basis. In case of Option contracts, guidelines issued by FEDAI from time to time for recognition of income, premium and discount are being followed. While sanctioning the limits, the competent authority may stipulate condition of obtaining collaterals/margin as deemed appropriate. The derivative limits are reviewed periodically along with other credit limits.

Note: Bank has not entered into any derivative instruments other than Forex Forward Contracts maturing within 13 months, for trading/hedging purposes either in foreign exchange or domestic treasury operations. Bank does not have any open position in the derivative instruments in trading book as on March 31, 2017.

In terms of RBI Circular DBR.No.BP.BC.94/21.04.048/2014-15 dated 21'' May 2015, and DBR No. BRBC.102/21.04.048/2015-16 dated June 13, 2016, in respect of assets sold to SC/ RCs , the shortfall arrived at by deducting the sale consideration and the provision held as on the date of the sale from the outstanding amount, is to be amortized over eight / four quarters, respectively. Accordingly for the sales that were concluded in the current financial year 2016-17, the Bank has charged to the Profit and Loss account an amount of Rs.36.79 crore during the year ended March 31, 2017 on proportionate basis (previous year Rs.16.36 Crore ) and the balance carried over is Rs.57.32 crore (Previous Year Rs.58.72 crore).

The total unamortized amount of Rs.78.51 crore as on 31st March 2017, which includes unamortized portion of sales concluded in previous year 2015-16 of Rs.21.19 crore is debited to Revenue Reserves, as permitted by RBI vide No.dBr.No.BP.BC.102/21.04.048/2015-16 dated June 13, 2016. (Refer Note 3.3)

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

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

During the year ended 31^st March 2017, the Bank has not exceeded the Individual / Group borrowers'' prudential exposure limits fixed by RBI

7. Unsecured Advances:

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

8. Penalties imposed by RBI:

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

9. Accounting Standards:

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

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

There are no material prior period items.

For the preparation of these Financial Results, the Bank has followed the same accounting policies and generally accepted practices adopted for the preparation of Audited Financial Statements for the year ended March 31, 2016.

11. Accounting Standard 9 - Revenue Recognition

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

12. Accounting Standard 10- Fixed Assets :

Depreciation on the original cost of the land & building for the current year is Rs.19.39 crore. The current year profit & loss account has been debited with additional depreciation charge of Rs.4.09 crore, representing the incremental depreciation on the revalued cost.

13. Accounting Standard 15 - Employee Benefits:

14. 1 Various Benefits made available to the Employees are:-

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

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

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

d) Provident Fund: The Bank pays fixed contribution to Provident Fund at predetermined rates to a separate trust, which invests the funds in permitted securities. The contribution to the Fund is recognized as expense and is charged to the Profit and Loss account. The obligation of the Bank is limited to such contributions. As on 31^st March 2017, there was no liability due and outstanding to the Fund by the Bank.

e) Other employee Benefits: Other than the employee benefits listed above, the Bank also gives certain other benefits to the employees, which include Medical aid, sick leave and casual leave etc.

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

15. Employee Stock Options (ESOP)

The shareholders of the Bank had approved on 15.07.2006, grant of equity shares under Employee Stock Option Scheme of the Bank framed in compliance with SEBI Regulations.

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

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

Closure of the Scheme:

Out of 15,00,000 stock options granted to the eligible employees under the scheme 12,09,834 options have been exercised and the balance 2,90,166 options had lapsed. As approved by the Board, the scheme was closed and the balance available in the Outstanding Stock Options Account amounting to Rs.2.81 crore is transferred to General Reserve Account as per the applicable guidelines.

16. Accounting Standard 17 - Segment Reporting:

17. Accounting Standard 18 - Related Party Disclosures: There is no related party transaction other than remuneration paid to key management personnel, Sri P Jayarama Bhat, Managing Director and Chief Executive Officer, aggregating to Rs. 0.79 crore (Previous Year '' 0.73 crore).

18. Accounting Standard 20 - Earnings per Share: Basic and diluted earnings per equity share computed in accordance with AS 20 - Earnings per Share are as under:

The EPS for the current year and previous year have been restated, factoring in the Rights Issue made during the year.

Allotment of 98575 Equity shares (Previous year Nil) is kept in abeyance and held in Demat Suspense Account. In respect of 1800 equity shares (Previous Year 1800 Equity shares), the entitlement matter is sub-judice and is yet to be allotted. These shares have not been considered for EPS calculation, as the shares are not allotted.

19. Accounting Standard 22 - Accounting for Taxes on Income:

The Bank has accounted for taxes on income in compliance with Accounting Standard 22. The major components of Deferred Tax Assets and Liabilities recognized are as under:-

During the current year 2016-17, pursuant to press release dated July 6, 2016 issued by the Ministry of Finance, the Bank has reversed the deferred tax liability amounting to Rs.111.25 crore created in the previous year 2015-16 on account of Income Computation and Disclosure Standards (ICDS).

20. Accounting Standard 28 - Impairment of Assets:

An assessment is made at each Balance sheet date whether there is any indication that an asset is impaired. If any such indication exists, an estimate of the recoverable amount is made and impairment loss, if any, is provided for. As on March 31, 2017 there is no indication of impairment in connection with any asset.

21. Accounting Standard 29 - Provision, Contingent liabilities and Contingent assets:

22. Floating /Countercyclical Provisions:

The Bank does not hold any floating/ countercyclical provision in the current year (Previous year- Nil)

23. Drawdown from Reserves:

During the year, a sum of Rs.78.51 crore (Previous year Nil) being the unamortized amount of loss on sale of advances to Asset Reconstruction companies has been debited to Revenue reserves, as per permitted by RBI vide No.DBR.NO.BP.BC.102/21.04.048/2015-16 dated June 13, 2016. Refer Note No 1.4.3.

24. Disclosure of Letters of Comfort (LoC)

25. Overseas Assets, NPA and Revenue: Nil

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

27. Disclosure of Remunerations:-

a) Qualitative disclosure:

Remuneration Committee

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

Objectives of Compensation Policy

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

Risk adjustments in remuneration

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

Performance linked variable compensation, deferral and forms

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

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

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

28. Disclosure relating to Securitization:

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

29. Credit Default Swap:

The Bank has not entered into any credit default swap.

30. Intra-Group Exposures:

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

31. Un-hedged Foreign Currency Exposure:

The Bank has put in place a policy on Hedging of Foreign Currency Exposure which is a part of the Loan Policy which stipulates the guidelines on managing the risk arising out of the un-hedged foreign currency exposure in line with the extant RBI Guidelines. Further, the Bank has made a provision of Rs.13.25 crore (Previous year Rs.13.20 crore) and has provided capital for the un-hedged foreign currency exposure of borrowal entities of Rs.3.90 crore (previous year Rs.3.49 crore) in line with the extant RBI Guidelines.

32. Frauds :

The total number of frauds reported during the year is 29 amounting to Rs.28.70 crore and is fully provided for in the current year.

Note: LCR data for March 2016 to December 2016 have been computed as the simple average of monthly observations over the quarter. For the quarter ended March 31, 2017, the same has been computed based on simple average of daily observations.

Qualitative Disclosures on LCR:

Necessary system has been put in place to compute LCR and Bank''s strategy would be to maintain LCR well above the regulatory minimum levels ahead of the stipulated time lines. The main driver of LCR is adequate HQL As and Bank is maintaining LCR well above the minimum stipulated level of 80% in view of SLR investments in excess of statutory requirement and 11% of NDTL in the form of borrowing limit available through Marginal Standing Facility (MSF) and Facility to Avail Liquidity for Liquidity Coverage Ratio (FALLCR). The Bank has a diversified liability mix comprising of healthy Retail Deposits with its pan India presence and the dependency on wholesale funding is insignificant.

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

33. Operating Expenses stated in Schedule 16 to the Profit and Loss Account includes Rs.6.18 crore (Previous year Rs.4.90 crore) spent towards Corporate Social responsibility (CSR) Activities.

34. The additional provisioning requirement due to divergence observed by RBI for the financial year 2015-16 in respect of Bank''s asset classification and provisioning under extant prudential norms on Income Recognition, Asset Classification and Provisioning (IRACP), is within the limit of 15%. Hence, no disclosure is required to be made under DBR.BP.BC.No.63/21.04.018/2016-17 dated April 18, 2017.

35. The Board of Directors has recommended a dividend of Rs. 4 per share (40 %) for the year ended 31^stMarch 2017 (previous year '' 5 Per share (50 %)), subject to approval of the shareholders at the ensuing Annual General Meeting. In accordance with revised Accounting Standards (AS) 4-''Contingencies & Events occurring after the balance sheet date'' notified by the MCA on March 30, 2016, the proposed dividend including corporate dividend tax amounting to Rs.136.05 crore has not been shown as an appropriation from the Profit as of March 31, 2017 and consequently not reported under Other liabilities and Provisions as of March 31, 2017. For computation of capital adequacy ratio as of March 31, 2017 Bank has adjusted the proposed dividend for determining capital funds.

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

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

b) Reconciliation of branch adjustments/Inter Bank accounts has been completed up to 31^st March 2017 and steps are being taken to give effect to consequential adjustments of pending items.

37. The percentage of SLR investments under âHeld to Maturityâ category as on 31^st March 2017 was 19.93% (Previous Year 21.05%) of the Net Demand and Time Liabilities of the Bank, which is within the permissible limit as per RBI guidelines.

38. (i) A sum of Rs. 791.31 crore (Previous year Rs.791.82 crore) is outstanding on account of demands raised by the Income Tax Department in earlier years which have been paid under protest. No provision is considered necessary in respect of these demands, as the Bank has been advised that there are good chances of success in appeals/ considering favourable judicial pronouncements and/or appellate orders on identical issues for earlier assessment years.

39. In accordance with the RBI Circular DBR. No. BPBC.2/21.06.201/2015-16 dated 1^st July 2015 on ''Basel III Capital Regulations'' and RBI Circular DBR.NO.BP.BC 80/21.06.201/2014-15 dated March 31, 2015 on ''Prudential Guidelines on Capital Adequacy and Liquidity Standards Amendments'', Banks are required to make Pillar III disclosures including Leverage Ratio and Liquidity Coverage Ratio under Basel III Framework.

The Bank has made these disclosures which are available on its web site at the following link http://ktkbank.com/ktk/BaselDisclosures.jsp#. These disclosures have not been audited by the Statutory Central Auditors

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

Mar 31, 2016

GENERAL

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

BASIS OF PREPARATION:

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

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

1.1.1. Employee Stock Options (ESOP)

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

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

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

1.2 Accounting Standard 17- Segment Reporting:

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

1.3 Accounting Standard 28 - Impairment of Assets:

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

2.1 Drawdown from Reserves:

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

2.2 Disclosure of Letters of Comfort (LoC)

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

2.3 Provision Coverage Ratio (PCR):

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

2.4 Overseas Assets, NPA and Revenue: Nil

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

2.6 Disclosure of Remunerations:-

a) Qualitative disclosure: Remuneration Committee

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

Objectives of Compensation Policy

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

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

Risk adjustments in remuneration

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

Performance linked variable compensation, deferral and forms

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

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

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

2.7 Un-hedged Foreign Currency Exposure:

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

2.8 Frauds :

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

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

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

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

2.9 Strategic Debt Restructuring (SDR):

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

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

3 Reconciliation of Branch Adjustments and Balancing of Subsidiary Ledgers.

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

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

4 Investments:

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

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

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

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

Mar 31, 2015

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

GENERAL

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

BASIS OF PREPARATION:

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

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

1. Qualitative Disclosure:

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

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

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

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

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

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

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

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

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

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

3. Unsecured Advances:

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

4. Penalties imposed by RBI:

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

5. Accounting Standards:

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

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

There are no material prior period items.

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

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

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

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

7. Accounting Standard 9 - Revenue Recognition

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

8. Accounting Standard 15 - Employee Benefits:

Various Benefits made available to the Employees are:

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

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

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

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

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

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

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

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

9. Employee Stock Options (ESOP)

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

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

10. Accounting Standard 17- Segment reporting:

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

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

12. Accounting Standard 28 - Impairment of Assets:

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

13. Drawdown from Reserves:

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

14. Disclosure of Letters of Comforts (LOC)

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

15. Provision Coverage Ratio (PCR):

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

16. Overseas Assets, NPA and Revenue: Nil

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

18. Un-amortised Pension and Gratuity Liabilities

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

19. Disclosure of remunerations a) Qualitative disclosure:

Remuneration Committee

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

Objectives of Compensation Policy

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

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

Risk adjustments in remuneration

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

Performance linked variable compensation, deferral and forms

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

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

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

20 Disclosure relating to Securitization:

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

21. Credit Default Swap:

The Bank has not entered into any credit default swap.

22. Intra-Group Exposures:

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

23. Un-hedged Foreign Currency Exposure:

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

Qualitative Disclosures:

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

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

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

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

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

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

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

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

26. Investments:

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

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

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

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

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

Mar 31, 2014

GENERAL:

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

BASIS OF PREPARATION:

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

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

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

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

1.3 Derivatives

1.3.1 Forward Rate Agreement/ Interest Rate Swap: Nil

1.3.2 Exchange Traded Interest Rate Derivatives: Nil

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

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

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

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

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

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

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

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

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

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

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

1.7.5 Unsecured Advances:

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

1.8. Penalties imposed by RBI:

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

2. Accounting Standards:

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

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

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

2.2 Accounting Standard 9 Â Revenue Recognition:

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

2.3 Accounting Standard 15 Â Employee Benefits:

2.3.1 Various Benefits made available to the Employees are:

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

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

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

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

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

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

2.3.2. Employee Stock Option (ESOP):

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

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

2.4 Accounting Standard 17 Â Segment reporting:

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

2.8 Accounting Standard 28 Â Impairment of Assets:

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

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

Movement in Provision for Contingencies:

(Rs. in crore)

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

Provision for Conting- encies 18.08 Nil 6.24 11.84

3.3 Drawdown from Reserves:

A. Revenue Reserve:

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

B. Investment Reserve:

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

3.5 Disclosure of Letters of Comforts (LOC):

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

3.6 Provisioning Coverage Ratio (PCR):

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

3.11 Overseas Assets, NPA and Revenue: Nil

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

3.13 Un-amortised Pension and Gratuity Liabilities:

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

3.14 Disclosure of remunerations : a) Qualitative disclosure:

Remuneration Committee:

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

Objectives of Compensation Policy:

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

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

Risk adjustments in remuneration:

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

Performance linked variable compensation, deferral and forms:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Mar 31, 2013

1.1.1 Disclosure in risk exposure in Derivative

(i) Qualitative Disclosure:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

There are no material prior period items.

2.2 Accounting Standard 9 - Revenue Recognition

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

2.3 Accounting Standard 15 - Employee Benefits:

2.3.1 Various Benefits made available to the Employees are:-

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

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

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

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

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

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

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

2.3.2. Employee Stock Option (ESOP)

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

2.4 Accounting Standard 17 - Segment reporting:

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

2.5 Accounting Standard 28 - Impairment of Assets:

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

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

3.2 Complaints / unimplemented Awards of Banking Ombudsman:

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

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

3.5 Disclosure of remunerations

a)Qualitative disclosure:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Mar 31, 2012

1.1.1 Disclosure in risk exposure in Derivative

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

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

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

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

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

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

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

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

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

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

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

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

1.3.1 Penalties imposed by RBI:

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

2. Accounting Standards:

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

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

There are no material prior period items.

2.2 Accounting Standard 9- Revenue Recognition

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

2.3 Accounting Standard 15 - Employee Benefits:

2.3.1 Various Benefits made available to the Employees are:

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

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

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

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

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

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

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

2.3.2. Employee Stock Options (ESOP)

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

2.4 Accounting Standard 17 - Segment reporting:

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

2.5 Accounting Standard 28 - Impairment of Assets:

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

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

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

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

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

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

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

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

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

Mar 31, 2011

1. Disclosures as per RBI requirement:

1.3.3 Disclosure in risk exposure in Derivative

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

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

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

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

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

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

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

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

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

1.7.3 Risk category-wise Country Exposure:

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

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

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

1.8 Miscellaneous

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

2. Accounting Standards:

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

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

There is no material prior period items.

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

2.2 Accounting Standard 9 Ã Revenue Recognition

Income recognised on cash basis is neither material nor require disclosure

2.3 Accounting Standard 15 Ã Employee Benefits:

2.3.1 Various Benefits made available to the Employees are:-

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

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

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

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

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

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

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

2.3.3. Employee Stock Options (ESOP)

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

2.4 Accounting Standard 17 Ã Segment reporting:

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

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

2.5 Accounting Standard 18 Ã Related Party disclosures:

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

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

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

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

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

Provision for 5.34 0.20 Nil 5.54 Contingencies

3.3 Drawdown from Reserves:

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

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

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

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

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

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

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

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

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

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

Mar 31, 2010

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

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

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

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

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

3. Share Issue Expenses

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

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

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

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

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

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

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

5. Segment reporting (Accounting Standard 17).

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

6. Related Party Disclosure (Accounting Standard 18):

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

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

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

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

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

8. Impairment of Assets (Accounting Standard 28)

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

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

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

Particulars Legal cases /contingencies **

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

Amounts used during the year 11.25

Reversed during the year 0.00

Balance as at 31st March 2010 11.91

Timing of outflow/uncertainties Outflow on settlement / crystallization

* excluding provisions for others.

** Including towards customary practices

b) Contingent Liabilities of Schedule 12

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

c) Contingent Assets:- Nil

10. ADDITIONAL DISCLOSURE:

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

11. Disclosure on Risk Exposures in Derivatives

(i) Qualitative Disclosure:

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

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

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

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

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

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

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

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

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

12. Employee Stock Option (ESOP):

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

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

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

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

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

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

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

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

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