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Andhra Bank.

BSE: 532418 Sector: Financials
NSE: ANDHRABANK ISIN Code: INE434A01013
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Andhra Bank. (ANDHRABANK) - Director Report

Company director report

Directors of your Bank are happy to present the Annual Report of the Bank together withthe audited Statement of Accounts and Auditors' Report for the financial year ended March31 2017.

1. MANAGEMENT'S DISCUSSION & ANALYSIS

1.1. MACRO ECONOMIC DEVELOPMENTS

The global economic activity recovered at a slower pace than expected during FY2016-17 barring few exceptions. The sluggish global growth has impacted the growth ofIndian Economy and consequent investment and credit demand. The ebullient rebound inagricultural activity on the back of normal monsoon and record food grains production haveboosted rural incomes and supported consumption. The Estimates of GVA that the CentralStatistics Office (CSO) released recently the growth rate of GVA at basic prices is at6.7 per cent for 2016-17 mainly because private final consumption expenditure hasaccelerated to 8.7%. In GVA terms Agricultural sector growth improved during FY 17 to4.4%; Industry registered a GVA growth of 6.7%. Meanwhile services sector growthmoderated to 7.2%. Going forward implementation of the Goods and Services Tax (GST) andthe measures taken in the Union Budget to boost the rural economy infrastructure microsmall and medium enterprises (MSMEs) and low cost housing should help revitalise domesticdemand.

1.2 Monetary and Liquidity Conditions

During the financial year 2016-17 Reserve Bank of India (RBI) maintained the stance ofmonetary policy as accommodative till its 6th bi-monthly monetary policy in which thestance was shifted to neutral. The demonetization exercise led to a surge in the liquidityin the system necessitating RBI to shift its policy stance. The Average CPI inflation ratehas come down to 3.8% during FY 2016-17 from 4.9% in FY 2015-16. RBI has cut repo rates by50 bps points between April 2016 and March 2017. The rates cuts were front loaded and theRBI has kept rates unchanged since October 2016 at 6.25%.

1.3 Balance of Payments and External Sector

The external position of India improved during the financial year 2016-17notwithstanding the slowdown in global demand. Indian exports to both advanced economiesand emerging economies have gained momentum during Q2 and Q3 for Financial year 2016-17.Imports have witnessed moderation during the first half of 2016-17 and picked up momentumin the second half of 2016-17. The current account deficit at 1.4% of GDP is at the samelevel of last year. While net FDI inflows at US$ 13.2 billion in second half ofHY2:2016-17 (October 2016 - January 2017) moderated from the level a year ago netportfolio flows turned positive in the fourth quarter. On a cumulative basis net FDIinflows however rose to US$ 33.9 billion in April-January 2016-17 as compared with US$31.6 billion a year ago suggesting India is becoming a preferred investment destination.There was an accretion to foreign exchange reserves taking their level to US$ 370 billionas on March 312017 equivalent to about 10 months of imports.

1.4 Equity Markets

During 2016-17 equity market remained volatile tracking domestic and globaldevelopments on BREXIT and US presidential results. However the equity markets regainedlost ground during Q4 with revived buying interest from FPIs and domestic investors. Thereis an increase in FPO offering in the current year as compared to last fiscal. Corporatesraised resources to the tune of Rs.7.60 Lakh Crore in FY 2016-17 as compared to Rs.5.82Lakh Crore in FY 2015-16. There is an increase in number of public issues from 95 in FY2015-16 to 121 in FY 2016-17 of which 106 were IPOs as compared to 74 of last year. Duringthe year the gains from secondary market have increased as compared to the last year. TheBSE SENSEX registered a return of 17% while NIFTY registered a return of 19% in FY2016-17.

1.5 Bond Markets

The 10-yr Benchmark yield further softened during FY 201617 the average yield softenedto 6.20% by Nov'16 from 7.8% in FY 15-16. However the yields on G-Secs started to hardentowards the year end tracking fed rate hike and shift in RBIs stance on Monetary frombeing accommodative to neutral. Yields rose to close to 7% by end of Mar'17. The fall inG-sec yields was supported by the surge in liquidity due to demonetization of SpecifiedBank Notes.

1.6 Trends in Banking Industry

The Banking business muted during the financial year 2016-17. Credit growth remainedmuted all through the year indicating the lack of strong credit demand in the economydespite the lowering of lending rates by banks. PSBs have reduced one Year MCLR by 50 to105 bps. The overall credit growth for the Financial year 2016-17 was 5.08% as compared to10.7% in 2015-16. However the deposits of the banking system witnessed a growth of 11.75%during 201617 as compared to 9.72% of the last financial year. The growth is mainly onaccount of surge in funds due to demonetization of Specified Bank Notes in November'16.

2. PERFORMANCE HIGHLIGHTS OF THE BANK

2.1 Business

For the financial year ended 31st March 2017 Andhra Bank's Business stood at Rs.339673crore recording an increase of Rs.29000 Crore from Rs.310673 Crore as on 31.03.2016 witha growth rate of 9.33% (y-o-y).

2.2 Deposits

Andhra Bank's Total Deposits stood at Rs.195441 Crore as on 31.03.2017 recording anincremental growth of Rs.21139 Crore (12.13%) over the previous year. The share of CASAdeposits (Current and Savings) in Total Deposits stood at 29.33%.

• Current Deposits stood at Rs.8660 Crore as on 31.03.2017 as compared to Rs.7541Crore as on 31.03.2016 registering a growth rate of 14.84%.

• Savings Bank Deposits increased to Rs.48655 Crore as on 31.03.2017 fromRs.37924 Crore as on 31.03.2016 growing at a rate of 28.3%.

• Term Deposits increased from Rs.128828 Crore as on 31.03.2016 to Rs.138124 Croreas on 31.03.2017 registering a growth rate of 7.22%.

2.3 Advances

Gross Bank Credit increased by 5.76% from Rs.136371 Crore as on 31.03.2016 to Rs.144232Crore as on 31.03.2017.

• Credit to Agriculture Sector (including RIDF & non priority) stood atRs.27573 Crore as on 31.03.2017 as against Rs.24679 Crore as on 31.03.2016 registering agrowth rate of 11.7%.

• Credit to Micro Small and Medium Enterprises (MSME) increased from Rs.23302Crore as on 31.03.2016 to Rs.27260 Crore as on 31.03.2017 registering a growth rate of17.0%.

2.4 Profitability

2.4.1 Total Income for the financial year 2016-17 increased by 5.9% from Rs.19199Crore during financial year 2015-16 to Rs.20336 Crore Non-Interest Income increased by47.6% to Rs.2308 Crore compared to Rs. 1564 Crore in the previous year. Operating Profitof the Bank increased to Rs.4388 Crore compared to Rs.3960 Crore in the previous yearregistering a growth rate of 10.8%. Net Profit stood at Rs.174 Crore for the financialyear 2016-17.

2.4.2 The Total Interest Income recorded a growth rate of 2.23% and increased fromRs.17635 Crore during 2015- 16 to Rs.18027 Crore during 2016-17. Of this Interest Incomefrom Advances grew by 0.97% from Rs.13467 Crore during 2015-16 to Rs.13598 Crore during

2016- 17. Interest Income from investments increased by 9.14% from Rs.3876 Crore during2015-16 and stood at Rs.4230 Crore during 2016-17.

2.4.3 Out of total Non Interest Income Fee Based Income for the financial yearended 31.03.2017 stood at Rs.214 Crore

2.4.4 Total Expenses during the financial year 2016-17 were Rs.15948 Crore againstRs.15239 Crore during the previous year. Of this Operating Expenses stood at Rs.3452Crore Establishment Expenditure as a percentage of Total Expenditure stood at 13.15% forthe financial year ended 31.03.2017.

Table 1: Highlights of Revenue Expenditure and Profitability

(Rs. in Crore)

2015-16 2016-17 Absolute Growth Percentage Growth
Total Interest Income 17634.67 18027.42 392.8 2.23%
Total Interest Expenditure 12313.71 12495.78 182.1 1.48%
Net Interest Income 5320.96 5531.64 210.7 3.96%
Other Income 1564.47 2308.31 743.8 47.55%
Profit on sale of Investments 230.97 764.34 533.4 230.93%
Core Other Income 1333.5 1543.96 210.5 15.78%
Operating Expenses 2925.43 3451.99 526.6 18.00%
Operating Profit 3960.00 4387.95 428 10.81%
Provisions and Contingencies 3420.16 4213.63 793.5 23.20%
Net Profit 539.84 174.32 -365.5 -67.71%

APPROPRIATIONS

The appropriations made out of Net Profit are shown in Table 2. An amount of Rs.43.60Crore was transferred to statutory reserves during 2016-17 and with this the statutoryreserves now stand at Rs.2795.51 Crore.

Table 2: Appropriations out of Net Profit

(Rs. in Crore)

2015-16 2016-17
Appropriation out of Net Profit 539.84 174.33
Balance brought forward 94.99 95.00
Transfer to Statutory Reserves 134.96 43.60
Transfer to Capital Reserve 36.80 129.20
Transfer to Revenue Reserves 126.64 0
Transfer to Special Reserve 200.00 95.00
Transfer to proposed Dividend (including Dividend Tax) 41.43 0
Profit carried over to Balance Sheet 95.00 1.53

2.5 KEY FINANCIAL RATIOS

The Banking Industry as a whole has been passing through a difficult phase and thebank has done well in key financial ratios in the present scenario. Net Interest Margin(NIM) stood at 3.07% compared to 3.18% in the previous year. Cost to Income Ratio stood at44.03% as compared to 42.49% for the previous year. Earnings per Share (EPS) stood at Rs.2.56 and Book Value per Share (BVPS) stood at Rs.153.84.

Gross Non-Performing Assets to Gross Advances stood at 12.25% and Net Non-PerformingAssets to Net Advances stood at 7.57% for the financial year ended 31.03.2017.

Table 3: Key Financial Ratios

Parameter 31.03.2016 31.03.2017
Yield on Advances (%) 10.71 9.77
Cost of Deposits (%) 7.18 6.43
Net Interest Margin (%) 3.18 3.07
Yield on Funds (%) 9.25 8.38
Cost of Funds (%) 6.46 5.81
Cost-to-income Ratio (%) 42.49 44.03
CRAR - Basel III (%) 11.58 12.38
Return on Assets (%) 0.28 0.08
Earnings Per Share (Rs.) 8.60 2.56
Book Value Per Share (Rs.) 150.68 153.84
Net NPA (%) 4.61 7.57
Gross NPAs (%) 8.39 12.25

2.6 CAPITAL & NET WORTH

(Rs. in Crore)
Parameter 31.03.2016 31.03.2017
Equity Capital 681 681
Reserves Surplus 9623 10730
Networth of the Bank (Tangible) 10264 10479

2.7 CAPITAL ADEQUACY

As per the guidelines issued by Reserve Bank of India the start date forimplementation of Basel III guidelines in India is with effect from April 1 2013.Accordingly the Bank has been assessing its Capital Adequacy as per Basel IIIprescriptions.

The total Capital Funds of the Bank are at Rs.19196.33 Crore as on March 31 2017 andthe Capital Adequacy Ratio at 12.38% is above the required RBI prescribed norm of 10.25%.

The Bank has put in place an "Internal Capital Adequacy Assessment Process"(ICAAP) for assessing the adequacy of Capital levels keeping in view the expected increasein business levels and enhanced Capital requirements in the Basel III regime. Theassessment process also includes a framework for inclusion of Pillar-II risks underBasel-III guidelines such as Credit concentration risk interest rate risk in the bankingbook liquidity risk etc.

Table 4: CRAR Position

(Rs. in Crore)

31st March 2017 (Basel III)
CET1 7.69%
AT1 1.48%
Total Tier-I 9.17%
Tier-II 3.21%
Total CRAR 12.38%

3. BUSINESS REVIEW

Total Business (Total Deposits plus Gross Bank Credit) of the Bank registered a growthrate of 9.33% up from Rs.310673 Crore as on 31.03.2016 to Rs.339673 Crore as on31.03.2017.

3.1 Aggregate Deposits

Aggregate Deposits (excluding inter-bank deposits) went up from Rs.174233 Crore as on31.03.2016 to Rs.195381 Crore as on 31.03.2017 registering a growth rate of 12.14%.Aggregate Deposits comprised of current deposits of Rs.8602 Crore savings deposits ofRs.48655 Crore and term deposits of Rs.138124 Crore

Table 5: Category-wise classification of Aggregate Deposits

(Rs. in Crore)

Sl. No. Type of Deposits Amount 31.03.2017 Percentage of Aggregate Deposits
1 Current Deposits 8602 4.40%
2 Savings Bank Deposits 48655 24.91%
3 CASA (Total of 1 + 2) 57257 29.31%
4 Term Deposits 138124 70.69%
5 TOTAL (3 + 4) 195381 100.00%

Area-wise distribution of Aggregate Deposits (excluding inter-bank deposits) as on31.03.2017 is set forth in the following Table.

Table 6: Area-wise classification of Aggregate Deposits

(Rs. in Crore)

Sl. No. Category of Branches Amount 31.03.2017

% to total

1 Rural 12640.28 6.47%
2 Semi-Urban 26898.22 13.77%
3 Urban 39849.50 20.40%
4 Metro 115992.87 59.37%
5 TOTAL (1+2+3+4) 195380.37 100.00%

3.2 Gross Bank Credit

During the Financial Year ended 31.03.2017 Bank registered a growth rate of 5.76% inGross Bank Credit over the previous year adding Rs.7861 Crore during the year to reachRs.144232 Crore as compared to Rs.136371 Crore for the Financial Year ended 31.03.2016.

Table 7: Classification of Advances portfolio

(Rs. in Crore)

Category 31.03.2016 31.03.2017 Variance
1. Food Credit 1878 1059 -819
2. Non-Food Credit (2.1 to 2.4) 134493 143173 8680
2.1 Agricultural Advances 24679 27573 2894
2.2 Advances to MSME Sector 23302 27260 3958
2.3 Retail Credit (incl. DLs) 24428 27541 3113
2.4 Large Industries & Other Advances 62084 60799 -1285
GROSS BANK CREDIT (1+2) 136371 144232 7861
Of which Lending to Priority sector 54545 61690 7145

3.2.1 Priority Sector Lending

Priority Sector advances of the Bank stood at Rs.61689.71 Crore (including Rs.1642.74Cr under RIDF and other funds) as at the end of March 2017 registering a y-o-y growth of13.10% with an absolute increase of Rs.7144.34 Crore Priority sector lending net of PSLCis Rs.59505.71 Crore which recorded 43.49% of ANBC as against statutory norm of 40%. Bankhas made net sale of Rs.2184 Crore under PSLC General/SF-MF and earned premium/commissionof Rs.36.19Crore

Table 8: Priority Sector Lending

(Rs. in Crore)

Category 2016 -17
1.Priority Sector Advances (2 to 7) 61689.71
2.Agriculture-Priority (2.1 + 2.2) 26643.33
2.1 Agriculture Loans-Priority 25194.56
2.2 Eligible Investments (RIDF) 1448.77
3.Micro Small and Medium Enterprises 25030.53
4.Educational Loans 1605.61
5.Housing Loans (includes IndirectFinance& Investment in NHB) 8346.48
5.1 Eligible Investment in NHB 119.18
S.Social Infrastructure 1616.00
/".Renewal energy and others 47.60
Priority Sector Advances (net of PSLC) 59505.71
I. Priority Sector Advances (% to ANBC) 43.49
Agriculture-Priority (net of PSLC) 25443.33
II. Agriculture Advances (% to ANBC) 18.60
III.Small& Marginal Farmers (% to ANBC) 9.20
IV. Direct Lending to Non-Corporate farmers (% to ANBC) 13.28
V NPA under Agriculture as on 31.03.2017 (% to Gross Agril advances) 4.20

Credit to Agriculture-Priority

Agricultural advances (Agri-Priority) of the bank stood at Rs.26643 Crore at the end ofMarch 2017 registering a growth rate of 10.64% (y-o-y). The absolute increase overMarch 2016 is Rs.2563 Crore. Agri. Priority advances (after net sale of PSLC SF/MF ofRs.1200 Crore) are at Rs.25443 Crore which constitutes 18.60% of ANBC under agricultureadvances as on 31.03.2017 as against the statutory norm of 18%.

Lending to Small & Marginal Farmers

Total credit extended to Small & Marginal Farmers as on

31.03.2017 was Rs.12582 Crore (after net sale of Rs.1200 Crore under PSLC SF/MF) i.e.9.20% of ANBC as against the statutory norm of 8%.

Direct Lending to Non-Corporate farmers

As against the statutory norm of 11.70% of ANBC to direct lending to non-Corporatefarmers for the FY 2016-17 bank has reached 13.28% i.e. Rs.18170 Crore

Lending to Self Help Groups

Bank has extended financial assistance to 231359 self help groups with total exposureof Rs.5309 Crore as on 31.03.2017.

Credit to Weaker Sections

Advances to Weaker sections stood at Rs.15164 Crore at the end of March 2017 (after netsale of Rs.1200 Crore under PSLC SF/MF). Bank surpassed the target of 10% of ANBC toweaker section by achieving 11.08% of ANBC as on 31.03.2017

Credit to Minorities

Total credit extended to minority communities as on 31.03.2017 was at Rs.5292 Crorei.e. 8.89 % of Priority Sector advances as against norm of 15%.

Credit to Women

Total credit extended to women beneficiaries as on

31.03.2017 was at Rs.18396 Crore i.e. 13.49 % of Net Bank Credit as against norm of5%.

Andhra Bank Rural Development Trust

Andhra Bank Rural Development Trust is running 14 Rural Self Employment TrainingInstitutes in Andhra Pradesh(9) Telangana (2) Odisha(2) & Kerala (1) states andimparting need based training for capacity building/entrepreneurial development anddissemination of knowledge to farmers SHG women Rural unemployed youth and artisans.

Since inception 159615 candidates have been trained through 5456 programs by theInstitutes and around 65.80% of the trained candidates are engaged in gainful ventures.During the year the institutes imparted training to 10688 candidates through 407programs.

All our eleven RSETIs (3 RSETIs were recently opened) have been awarded with highestrating "AA" by Ministry of Rural Development Government of India for the year2015-16.

Financial Literacy and Credit Counseling Centres

Bank has established Jana Chetana Financial Literacy and Credit Counseling Trust andrunning 10 Financial Literacy Centres in all Lead Districts. These centers are promotingfinancial literacy activities through campaign mode and providing service relatedextension services. All our Rural Branches and RSETIs are organizing Financial LiteracyCamps in the villages by utilizing the services of local artists/ magicians and organizingKala Jataras.

3.3 Credit to MSME Sector

Performance under MSE & MSME

(Rs. in Crore)

31.03.16

31.03.17 Post Audit- After TWO

%of achieve ment to target

Growth (March 16- March 17)

Actuals Target Achiev ement Amount % of growth
Micro 6273.19 10823.40 9701.53 89.63% 3428.34 54.65%
Micro & Small En terprises 17746.68 22550.00 20717.27 91.87% 2970.59 16.73%
Total MSME 23277.77 29600.00 27260.10 92.09% 3982.33 17.10%

• Registered a y-o-y growth of 17.10%.

• During the current year 110261 MUDRA loans are sanctioned and an amount ofRs.1611.77 crore is disbursed. Achieved 64.47% of target.

• During the year Bank sanctioned 2035 loans under Stand Up India a limit ofRs.345.32 crore

• Three SME Expresses were opened during the financial year 2016-17. Total 11 SMEExpresses are functioning at various Centres like at Chennai Mumbai Ahmedabad PuneCoimbatore Visakhapatnam Guntur Bangalore Vijayawada Nellore and Hyderabad.

• SME Expresses were strengthened and delegated with higher powers for speedydisposal of loan applications

• Our performance under CGTMSE scheme is as under;

Year No of A/cs Amount C Crores)
31.03.15 13212 543.59
31.03.16 23427 740.31
31.03.17 28329 980.20

NEW INITIATIVES:

We have taken the following initiatives during the year to streamline the lending toMSE sector

• To promote digital transactions and to encourage MSEs to move towards cashlesstransactions from cash based transactions 30% of the digital portion of projectedturnover is sought to be taken instead of 20% while assessing Working Capital limits toMSE units under turnover method for limits up to Rs.6.00 crores.

• Guidelines under Standby Term Loan were relaxed to MSME borrowers irrespectiveof credit rating to the extent of 20% of the Fund Based limits subject to a cap of Rs.1.00crore for acquiring additional machinery.

• Sanctioning authorities are advised to consider fixing a separate additionalworking capital limit for MSEs up to 20% of the regular working capital limit at the timeof sanction/renewal of working capital limit specifically for meeting the temporary risein working capital requirements.

• Entered into Memorandurm of Understanding (MOU) with Ministry of Textiles tofinance Weavers under PMMY and new scheme had been launched in the name of "AB-Weaver Mudra".

3.4 Retail Lending:

• Bank's Retail Credit portfolio stood at Rs.27541 Crore as on 31.03.2017 asagainst Rs..24429 Crore as on 31.03.2016 with year on year growth of Rs.3112 Crore. Thesegment has registered a growth of 12.74% on y-o-y basis including deposit loans andcredit card.

• Housing loan portfolio has increased from Rs.11811 Crore as on 31.03.2016 toRs.13870 Crore as on 31.03.2017 with an absolute growth of Rs.2059 Crore registering agrowth rate of 17.43% on y-o-y basis.

• Vehicle loan portfolio has increased from Rs.1046 Crore as on 31.03.2016 toRs.1337 Crore as on 31.03.2017 with an absolute growth of Rs.291 Crore registering agrowth rate of 27.83% on y-o-y basis.

• Education loan portfolio has increased from Rs.2234 Crore as on 31.03.2016 toRs.2469 Crore as on 31.03.2017 with an absolute growth of Rs.234 Crore registering agrowth rate of 10.49% on y-o-y basis.

• Property loan (Loan against property) Portfolio has increased from Rs.1027Crores as on 31.03.2016 to Rs.2692 Crore as on 31.03.2017 with an absolute growth ofRs.1666 Crore registering a growth of 162% on y-o-y basis.

• Bank has waived processing charges on Housing Loans and Vehicle Loans during thefinancial year to have an edge in the market competition.

3.5 Advances - Industry wise Exposure

Bank has loan exposure to various sectors like Power Housing Loans NBFCs Iron &Steel Textiles etc. Exposure to top 10 industries constitutes 49% of gross bank creditas on 31.03.2017 signifying a diversified loan portfolio.

Table 9: Industry wise Exposure of Advances

(Rs. in Crore)

Sl. No. Industry Ceilings as % of Total Advances of previous Quarter Actual Fund based exposure as on 31.03.2017 Exposure as % of Total Advances of Previous Quarter i.e. 31.12.2016
1 Power 22.00% 14335.77 10.09%
2 Housing Loans 15.00% 15990.10 11.25%
3 NBFC 10.00% 9534.18 6.71%
4 Iron & Steel 10.00% 7618.65 5.36%
5 Textiles 9.00% 6555.10 4.61%
6 Construction & Contractors 10.00% 5121.08 3.60%
7 Commercial Real Estates 7.00% 3527.34 2.48%
8 Rice Mills 6.00% 3650.18 2.57%
9 Engineering (Heavy & Light) 5.00% 2287.25 1.61%
10 Drugs & Pharmaceuticals 5.00% 2311.07 1.63%
Total 70930.72

3.6 Area-wise position of Gross Bank Credit

The population group wise distribution of Credit as on 31.03.2017 is as under:

Table 10: Gross Bank Credit-Population Group Wise as on 31.03.2017

Sl. No. Category Amount % to total
1 Rural 14841 10.29%
2 Semi-Urban 20800 14.42%
3 Urban 27922 19.36%
4 Metro 80669 55.93%
5 TOTAL 144232 100.00%

4. INVESTMENTS

In terms of RBI guidelines the Bank is required to invest in SLR securities to theextent of 20.50% of NDTL. Bank's investment decisions are based on risk-return trade-offand bank is scrupulously following the regulatory and internal guidelines. Statutoryprescriptions relating to Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) arecomplied with and being monitored on a continuous basis. Risk Management in treasuryoperations has been strengthened further by undertaking stress testing and back testing ofthe investment portfolio at quarterly intervals besides daily monitoring of Duration andValue-at-Risk (VaR). External rating migration of the bonds and debentures portfolio isalso being monitored on quarterly basis.

As on 31.03.2017 the Investments (net of depreciation) increased by 10.83% and stoodat Rs.59697.49 Crore up from Rs.53864.19 Crore as on 31.03.2016. SLR maintained as on31.03.2017 was Rs.63458.96 Crore which constituted 31.08% of Net Demand and TimeLiabilities (NDTL). Interest income from investments increased from Rs.3875.86 Crore in2015-16 to Rs.4354.89 Crore in 2016-17. Profit on sale of investments stood at Rs.764.62Crore during 2016-17 while it was Rs.230.55 Crore during 2015-16.

Table 11: Classification of Investments

( in Crore)

2015-16 2016-17 Var (%)
1. Government Securities 49671.88 55870.79 12.48
2. Other Approved Securities 0.00 0.00 0.00
3. Shares 312.52 545.48 74.54
4. Debentures & Bonds 2027.17 1967.41 -2.95
5. Subsidiaries and/or Joint Ventures 361.79 361.79 0.00
6. Others 1490.83 952.02 -36.14
TOTAL (1 to 6) 53864.19 59697.49 10.83

4.1 Strategic Investments

4.1.1 Joint Venture Insurance

Our Bank is having Joint venture in insurance with Bank of Baroda and Legal and GeneralPlc of UK named "India First Life Insurance Co. Ltd". Our stake in the ventureis 30% while Bank of Baroda holds 44% and Legal and General Plc holds 26% stake. Ourinvestment in the life insurance venture is Rs.187.50 Crore

4.1.2 Banking subsidiary in Malaysia

The Bank along with Bank of Baroda and Indian Overseas Bank has entered into a tie upfor setting up a banking subsidiary in Malaysia. The Bank's stake in the venture is 25%amounting to RM 82.50 Million (book value Rs.143.28 Crore) in a total subscribed capitalof RM 330 Million (approximately Rs. 483.25 Crore @ 1 RM = Rs.14.6440 as on 31.03.2017).

The joint venture viz. INDIA INTERNATIONAL BANK (MALAYSIA) BHD commenced business on11.07.2012.

4.2 Treasury & Forex Business

The Bank is an Rs.Authorised Dealer' to deal in foreign exchange business through 56designated B category branches of the Bank. The Bank has speed remittance arrangementswith two Exchange Houses based in Gulf.

Systems have been put in place for management of country risk exchange risk and otherforeign exchange risks. The country risk exposures for single country risk limit andaggregate risk limits for the group of countries under each risk category are fixed andare being monitored on daily basis.

During the year 2016-17 the Bank recorded a merchant turnover of Rs.34820.31 Crore inForex. The bank achieved Inter-Bank turnover of Rs.576024.16 Crore as on 31.03.2017compared to Rs.494560.91 Crore as on 31.03.2016. Export finance of the Bank stood atRs.4176.17 Crore as on 31.03.2017.

5. CREDIT CARD BUSINESS

Our Bank is a Pioneer in Credit Card Business both as Issuer and Acquirer (MerchantBusiness) since 1981. At present our card base is 168393 cards.

• The Turnover of Credit Cards has increased from Rs.686.98 Crore for the yearended March'16 to Rs.834.42 Crore for the year ended March' 17 showing a growth rate of21.46% for the year ending March Rs.17.

• The Division has made a Net profit of Rs.25.17 Crore in the current reviewperiod ended March'17 as against Rs.9.14 Cr in the previous year ended March'16.

6.MERCHANT BANKING SERVICES

A Shareholders and Investor Relation Section is functioning as a part of the Division.The Bank has received 6 complaints and 3884 requests during the Financial Year 2016-17.All the complaints and requests have been redressed by the Bank.

During the year we have raised the following bonds to augment the overall capitalresources of the Bank for strengthening the Capital Adequacy as per Basel III capitalrequirements and for enhancing the long term resources.

Additional Tier I Bonds 10.99% Rs. 900 Crore
Tier II Bonds 8.65% Rs.1000 Crore

Rating of Debt Bonds and Certificate of Deposits borrowings of the Bank:

The Bank is availing the services of M/s. CARE Ratings India Limited M/s.BrickworkRatings Pvt. Limited M/s.India Ratings & Research Pvt. Ltd and M/s.CRISIL Limited forrating of the Debt Bonds and CD Issues of the Bank.

Holding of General Meetings:

The 16th Annual General Meeting of shareholders of the Bank was held on 20.07.2016 andwe obtained shareholders' approval for adoption of annual accounts of the Bank for thefinancial year ended 31.03.2016 declaration of dividend on equity shares for the FY2015-16 and special resolution on raising of capital through Qualified InstitutionalPlacement Follow-on Public Offer etc.

Application Supported by Blocked Amount (ASBA):

SEBI vide Notification dated 10.11.2015 has mandated that all the investors applyingin a public issue shall use only Application Supported by Blocked Amount (ASBA) facilityfor making payment. ASBA facility was enabled on August 24th 2009 through our bank. As onMarch 31st 2017 all branches (2908) of the Bank across pan India were enabled to acceptASBA applications. We have also extended the facility through our Net Banking Channelwhere customers can bid online hassle free.

7. BANCASSURANCE & FEE-BASED PRODUCTS

The Bank has been constantly focusing on augmenting noninterest income throughdiversification of income streams by taking up marketing of life and non-life insuranceproducts Mutual fund products Depository Services Direct taxes Commercial taxesMunicipal taxes Utility payments Payment gateway services Auto-Debit facilities etc.

7.1 Insurance

The Bank along with Bank of Baroda and Legal & General Group Plc of UK has formed ajoint venture life insurance company named India First Life Insurance Co Ltd and it wasformally launched in the month of March 2010.

During the financial year 2016-17 total New Business premium (including Retail andGroup business) of Rs.140.62 Crore was mobilized. Renewal premium of Rs.149.48 Crore wascollected up to 31.03.2017. Bank earned commission of Rs.23.07 Crore from sale of LifeInsurance Policies.

The Bank has a tie up with M/s United India Insurance Co Ltd for General Insurance andHealth Insurance. During the FY 2016-17 the bank has tied up with M/s Reliance GeneralInsurance Co Ltd. for General Insurance and has also tied up with M/s Cigna TTK InsuranceCo Ltd for Health Insurance.

During the year the Bank has mobilized the premium of Rs.122.62 Crore and earned acommission of Rs.14.81 Crore under General Insurance and health insurance.

7.2 Mutual Fund Business

The Bank is having tie-up with Mutual Fund companies namely UTI Mutual Fund SBIMutual Fund Principal Mutual Fund Tata Mutual Fund Sundaram Mutual Fund RelianceMutual Fund Birla Sun Life Mutual Fund Fidelity Mutual Fund Kotak Mutual Fund LICMutual Fund and Baroda Pioneer Mutual Fund.

7.3 Depository Services

Bank is offering Depository Services to the public under the brand name of "ABDemat". The Bank is a Depository Participant (DP) with Central Depository Services(India) Limited (CDSL) as well as with National Securities Depository Limited (NSDL).

During year 2016-17 our Bank tied up with M/s Geojit BNP Paribas for three in oneDemat Account.

8. IT INITIATIVES

1. Private Cloud implementation:

Bank has implemented private cloud at Bank's Data Centre. So far 38 virtual machinesare allotted for various projects.

2. Financial Inclusion (FI) Gateway replacement:

The new FI gateway is implemented and NPCI certification completed for AEPS on us /offus transactions and moved to production on 22.11.2016.

After migration to new FI gateway Bank has taken up AePDS project. At present around11000 AePDS terminals are in operation and around 11 lakhs AePDS transactions per day arehappening during the first week of every month.

3. Call Centre Outsourcing:

Bank has outsourced Call Centre operation. The new Call Centre is operational fromAugust 2016.

4. IMPS through Internet Banking:

This feature is enabled for both Retail and Corporate Internet Banking customers whichallows customers to remit funds to other bank beneficiaries instantly and 24*7.

5. Techprocess Atom & Zaakpay Payment Gateways :

In addition to the existing Payment Gateways Bank has integrated payment gateways ofservice providers like Techprocess Atom & Zaakpay for carrying out different types ofbill payments online.

6. Atal Pension Yojana (APY) Registration through Internet Banking:

Bank has introduced a new facility to domestic Indian resident and NRI customers toenroll and enquire for Rs.Atal Pension Yojana' scheme through Internet Banking.

7.Self sign up on Internet Banking:

Customer can register for Internet Banking facility online using debit card PIN &OTP. The user will be created instantly and he/she can set the internet banking passwordsonline.

8. Self sign up on Mobile Banking:

Customer can download and install the Mobile Banking App (mPAY) from Google Play/AppleiStores and use "Sign Up" option to register.

9. Green Pin:

Bank has implemented Green PIN for Debit Cards. An option is provided to customers togenerate the PIN for Debit Cards themselves in ATM after entering the OTP received intheir registered mobile number.

10. Selfie Account Opening:

Selfie account opening app wherein prospective customers can take a selfie and submitrequest for new account opening by scanning Aadhar QR code and taking a scan of PAN card.

11. Unified Payment Interface (UPI):

Launched UPI App that enables linking of multiple bank accounts into a single mobileApp and request money from anyone using the Virtual Payment Address.

12. Mobile Number seeding through Micro ATMs and Kiosk Outlets:

Seeding of mobile number to Customer Master through Micro ATMs and Kiosk Outlets wasenabled. For mobile seeding two approaches were followed for authentication (1) AadhaarNumber with Biometric and (2) Debit/ATM Cards with PIN. In both cases vendor will takeinput from the customer and seeding request will be sent to Bank. After successfulvalidations of all parameters mobile number will be updated in Customer Master.

13. AB Subh Yatra - Holiday Saving Plan:

Necessary customisation was built in Internet Banking for enabling Ab Subh Yatraholiday saving plan. This holiday saving plan is provided in association with M/s ThomasCook India Limited to enable our customers to avail their Holiday Packages.

14. AB eVyapar - Merchant Payment App:

AB eVyapar App is developed for Aadhaar enabled payments to merchant by customers. ThisApp is now available in Android platform.

15. Pradhan Mantri Garib Kalyan Deposit Scheme (PMGKD) :

New scheme PMGKD has been introduced to deposit the undisclosed income in terms of RBIguidelines. A new menu has been customized to capture the depositor details to accept thedeposits under PMGKD scheme.

16. Aadhaar Seeding through SMS:

An APP has been developed to accept the request for Aadhaar Seeding through SMS mode.

17. CBS web integration with TRACES:

A new MENU has been customized in Finacle providing access to branches to login toTRACES. The process will simplify the authentication mechanism for filing correction ofstatements and download of TDS certificates Consolidated files etc.

9. NETWORK EXPANSION

During the Financial Year 2016-17 Bank opened 105 Branches and added 293 ATMs/ BNAs/CRs with this as on

31.03.2017 Bank had 6875 Delivery Channels consisting of 2908 Branches 4 ExtensionCounters 34 Satellite Offices and 3929 ATMs including BNAs/CRs spread over 26 States and3 Union Territories. The Bank has 47 Specialized Branches catering to the needs of thespecific segments of clientele. The Bank also has two Representative (overseas) Offices atDubai (U.A.E) (opened in May 2006) and New Jersey (U.S.A) (opened in November 2008).

Table 13: Population Group Wise classification of Branches

Sl. No. Category Number % to total
1 Rural 745 25.62
2 Semi-Urban 770 26.48
3 Urban 664 22.83
4 Metro 729 25.07
TOTAL 2908 100

As on 31.03.2017 the Bank had 47 Specialized Branches as detailed hereunder:

Table 14: Specialized Branches

S. No. Category of Specialized Branches No. of Brs.
1 Specialized SME Branches 18
2 Specialized Agricultural Finance Branches 2
3 Specialized Agri - Hitech Branches 6
4 Specialized Housing Finance Branches 4
5 Specialized Personnel Banking Branches 4
6 Specialized NRI Branches 3
7 Corporate Finance Branches 2
8 Auto-Tech Finance Branch 1
9 Overseas Branch 1
10 Asset Recovery Management Branches 5
11 SmallB' Branch 1
TOTAL 47

9.1 Presence in Minority-Dominated Districts

At the end of 31.03.2017 we are having 335 branches in Minority dominated Districts. Ofthe Bank's total network across the country the percentage of Branches in minoritydominated Districts stood at 11.50% as on 31.03.2017.

10. QUALITATIVE ASPECTS:

10.1 Risk Management

The Bank had a comprehensive "Integrated Risk Management Policy" for themanagement of Credit risk Market risk and Operational risk as per the guidancenotes/guidelines issued by the Reserve Bank of India. As a part of moving to advancedapproach and as a part of the integrated risk management solution the policy has beendivided into the following policies.

i. Credit Risk Rating Policy

ii. Model Risk Policy

iii. Credit Risk Data Management Policy

iv. Credit Risk Management Policy

v. Credit Risk Mitigation and Collateral Management Policy

vi. Loan Recovery & NPA Management Policy

vii. Risk Based Pricing and Performance Management Policy.

viii. Operational Risk Management Policy

ix. Market Risk Management Policy

x. Asset Liability Management Policy

xi. New Product Approval Poloicy

xii. Integrated Risk Management Policy

Apart from the above the following policies are also framed by the department:

1. Stress Testing Policy

2. ICAAP Policy

3. Disclosure Policy

4. Policy on Hedging of foreign currency exposures of the borrowers.

5. Outsourcing Policy

All the policies shall be reviewed annually.

10.1.1 Credit Risk

• Credit Risk Management Committee is responsible for implementation of the Creditpolicies approved by the Board and RMC.

• The Bank has a well-defined Rs.Loan Policy' duly approved by the Boardprescribing standards for presentation of credit proposals financial covenants ratingstandards and benchmarks delegation of credit approving powers prudential limits onlarge credit exposures asset concentrations standards for loan collateral portfoliomanagement loan review mechanism risk concentrations risk monitoring and evaluationpricing of loans provisioning regulatory/legal compliance etc.

• Bank also is having in place the Credit Risk Management Policy Credit RiskMitigation & Collateral Management Policy Credit Risk Rating Policy Loan Recoveryand NPA Management Policy.

• The Bank has in place comprehensive risk rating system for various categories ofexposures. Bank has established a Rating cell for assigning internal ratings for allexposures of Rs 5 Crore and above. The Rating cell vets the internal rating given by thebranch/Zonal office/Circle Office and assigns final rating.

• The Rating cell ensures comprehensive rating coverage integrity of ratingprocess and proper data maintenance.

• The Bank utilizes industry reports from CRISIL and the industry risk scoreservice from CRISIL Research.

10.1.2 Market Risk

Market risk implies possibility of loss arising out of adverse movements of marketdetermined rates and prices. The objective of market risk management is to avoid excessiveexposure of Bank's earnings and equity to such losses and to reduce Bank's exposure to thevolatility inherent in financial instruments such as securities foreign exchangecontracts equity and derivative instruments as well as balance sheet or structuralpositions. The Bank has in place a well-defined Rs.Market Risk Management Policy' and anorganizational structure for market risk management functions. The Bank manages marketrisk through Rs.Asset-Liability Management (ALM) policy and Rs.Investments/Forex policy'.

A high level Executive Committee viz. Asset-liability Committee (ALCO) oversees the ALMin the Bank and deliberates on liquidity and interest rate scenario in the market anddecides upon the pricing of various products. ALCO regularly monitors the identificationmeasurement monitoring and mitigation of market risk in liquidity interest rates equityand forex areas.

The Rs.liquidity risk' is measured and managed through Rs.gap analysis' for maturitymismatches based on residual maturity. For assets and liabilities which are ofnon-maturity nature Bank is conducting behavioural studies and factoring the observationsin the gap analysis. The behavioural study findings are subjected to back-testing and arevalidated regularly. Prudential limits are fixed for net gaps and also for cumulative gapup to one year and these limits are measured and monitored regularly. Liquidity profile ofthe Bank is also measured regularly through various liquidity ratios and monitoring of thesame is done with the help of prudential limits fixed thereon.

The interest rate risk' is monitored on a regular basis through Rs.Maturity gapanalysis' and Duration gap analysis'. Tolerance limits have been fixed for impact on NetInterest Income (NII) due to adverse changes in interest rates. To measure the impact ofinterest rate changes on Bank's equity duration gap analysis is done and prudential limitis set for modified duration of equity. Modified duration of equity is within theprudential limits set for this purpose. VaR and duration analysis are used for measuringmarket risk including treasury operations. The Interest Rate Risk in Banking Book (IRRBB)is also being assessed on a monthly basis.

Other market related risks to which any bank is exposed are foreign exchange risk onforeign currency positions liquidity or funding risk and price risk on tradingportfolios. The Bank has clearly articulated policies to control and monitor its treasuryfunctions. These policies comprise management practices procedures prudential risklimits review mechanisms and reporting systems. These policies are revised regularly atfixed intervals in line with the changes in financial and market conditions.

10.1.3 Operational Risk

Management of Operational Risk is a part of the Rs.Integrated Risk Management Policy'and the Bank has a focused attention for management of the Operational Risk in the lightof the Reserve Bank of India guidelines.

Operational Risk Management

Cell is responsible for coordinating all the operational risk management activities ofthe bank and these include building an understanding of the risk profile implementingtools related to operational risk management and working towards the goals of improvedcontrols and lower risk. Operational Risk Management Committee [ORMC] ensuresimplementation and compliance of the Operational Risk policies and reports to theBoard/Risk Management Committee [RMC].

The Bank has been computing capital charge for Operational risk by adopting Rs.BasicIndicator Approach' (BIA) as stipulated by the RBI.

10.1.4 Approaches followed for computation of Capital to Risk Weighted Assets Ratio(CRAR)

As per RBI guidelines all Commercial Banks in India shall follow the StandardisedApproach for Credit risk Standardized Duration Approach for Market risk and BasicIndicator Approach for Operational risk under the Rs.New Capital Adequacy Framework".

Credit Risk: Bank at present is following the Standardized Approach for estimationof capital requirements for Credit Risk which also includes the HTM portfolio ofInvestments. Bank is gearing itself to move over to Advanced approaches for Credit risk.In this regard Bank has developed a Credit Risk Rating Model (CRRM) with the consultancyassistance of National Institute of Bank Management (NIBM) Pune. This model is furtherstrengthened internally by making it a WAN (Wide Area Network) based CRRM model so that itis accessible from any of the locations of the bank. This model is capable of providingtransition matrices and default probabilities (Probability of default) and would help theBank in moving over to the Advanced Approaches in future.

Market Risk: Bank is using the Standardized Duration method for computing capitalcharge for Market risk (investments in HFT and AFS categories) as per RBI guidelines.

Operational Risk: Bank is providing capital for Operational risk as per the BasicIndicator Approach (BIA).

10.1.5 Preparation for moving over to Advanced Approaches

Bank is in the process of migrating to Advanced Approaches through implementation of anIntegrated Risk Management Solution.

10.1.6 Bank's compliance to RBI guidelines on Basel requirements:

Pillar - I (Minimum Capital requirements)

RBI has introduced in its Basel III guidelines the following enhanced capitalrequirements and has also prescribed transitional arrangements to conform to theserequirements in a phased manner by March 312019.

Regulatory Capital As% to RWAs
(i) Minimum Common Equity Tier 1 ratio 5.5
(ii) Capital conservation buffer (comprised of Common Equity) 2.5
(iii) Minimum Common Equity Tier 1 ratio plus capital conservation buffer[(i)+(ii)] 8.0
(iv) Additional Tier 1 Capital 1.5
(v) Minimum Tier 1 capital ratio [(i)+(iv)] 7.0
(vi) Tier 2 capital 2.0
(viii) Minimum Total Capital Ratio (MTC) [(v)+(vi)] 9.0
(viii) Minimum Total Capital Ratio plus capital conservation buffer [(vii)+(ii)] 11.5

The Bank is calculating its Capital Adequacy in accordance with Basel II & BaselIII guidelines. The Bank's Capital Adequacy at present is in conformity with thetransitional arrangements for Basel III as prescribed by RBI. However to meet the growingbusiness requirements the Bank may have to supplement its Capital funds especially byincreasing Common equity in future.

Pillar - II (Supervisory Review & Evaluation Process)

In compliance with the Pillar-II guidelines of the RBI under Basel III framework theBank has formulated a Policy of Internal Capital Adequacy Assessment Process (ICAAP) toassess internal capital in relation to various risks that it is exposed to. Stress Testingand scenario analysis are used to assess the financial and management capability of theBank to continue to operate effectively under exceptional but plausible conditions. Thebank is calculating the Concentration risk on a quarterly basis to assess the portfoliolevel risks based on sectoral geographical and borrower wise concentration. Bank is usingstatistical parameters like Herfindahl-Hirshman Index (HHI) Gini Coefficient andRosenbluth Index for determining the Credit Concentration Risk. The Bank has a Boardapproved Stress Testing Policy describing the various techniques used to gauge itspotential vulnerability and also its capacity to sustain such vulnerability.

Pillar - III (Market Discipline)

The Bank has a Disclosure Policy as per the disclosure requirements contained in thecircular issued by the Reserve Bank of India on the implementation of the Basel IIICapital Regulations. The guidelines therein are adhered to and compliance is reported tothe Competent Authorities. Pillar- III (Market discipline) of Basel III aims to encourageMarket discipline by developing a set of disclosure requirements which allows marketparticipants to assess key pieces of information on the scope of application capitalrisk exposures risk assessment processes and hence the capital adequacy of the Bank. ThePillar-III Disclosures are published on a quarterly and half yearly basis on the Bank'swebsite plus a year-end disclosure as on March of every year. The Pillar-III year-enddisclosures are also published in the Bank's Annual Report apart from being available onthe Bank's website.

10.1.7 In addition to the above RBI has introduced several other measures ofleverage and liquidity standards viz.

• A minimum Leverage Ratio of 4.5% to curb the excessive leverage of a bank'sbalance sheet; and • Liquidity standards by way of two ratios viz. Liquidity CoverageRatio (LCR) and Net Stable Funding Ratio (NSFR).

The LCR requires a bank to hold sufficient high-quality liquid assets to cover itstotal stressed net cash outflows over 30 days. The NSFR requires a bank to hold sufficientamount of stable funds to meet the requirement of stable funding over a one-year period ofextended stress.

The Bank is regularly calculating and monitoring the Liquidity ratios taking asreference the RBI guidelines issued for LCR and draft guidelines issued for NSFR. The Bankis also calculating and monitoring the Leverage ratio on a quarterly basis.

10.2 Management of Asset Quality

Gross NPAs of the Bank stood at Rs.17670 Crore as on 31.03.2017. Gross NPAs as apercentage to Gross Advances stood at 12.25% while Net NPAs as a percentage to NetAdvances stood at 7.57%. The Provision Coverage of NPAs as on 31.03.2016 was 51.03%.

Total reduction in NPA accounts amounted to Rs.3184 Crore.

Table 15: Position of Non-Performing Assets

(Rs. in Crore)

2015-16 2016-17
Gross NPAs at the beginning of the year 6876.54 11443.63
Additions during the year 6332.04 9410.34
Reduction during the year 1764.95 3183.99
Gross NPAs at the end the year 11443.63 17669.98
Net NPAs 6035.65 10354.81

The segment-wise distribution of NPAs as on 31.03.2017 is as under:

Table 16: Segment-wise Non-Performing Assets

(Rs. in Crore)

Segment Amount NPA % to ADV*
I. Agriculture 1156.88 4.20%
II. MSME 2703.06 9.92%
III. Retail Credit 458.26 1.66%
IV. Large & Mid Corporate 13351.78 21.58%
Total 17669.98 12.25%

*NPA% to Advances indicates NPA to Advances of that segment. Provisions held underdifferent classes of NPAs are as under:

Table 17: Provisions held for Non-Performing Assets (Excluding floating Provisions ofRs. 13 Crore)

(Rs. in Crore)

Nature of Asset Outstanding Provision Held
Sub-Standard Assets 6611.17 1154.18
Doubtful Assets 10999.78 6088.96
Loss Assets 59.03 59.03
Total 17669.98 7302.17

10.2.1 Restructuring mechanism

During FY 2016-17 9 accounts with outstanding amount of Rs.1283.22 Crore wererestructured in terms of the restructuring packages. The total balances in restructuredaccounts as at the end of March 2017 stood at Rs.7691.75 Crore in 96 accounts.

10.2.2 Lending Practices

The Bank had framed well defined Loan Policy Guidelines with the approval of the Board.These guidelines are reviewed by the Board at periodical intervals based on Reserve Bankof India guidelines Annual Bi-monthly Policy Statement of Reserve Bank of Indiacompetitive environment prevailing among the banks for accelerated credit growthenvisaged in certain business segments marketing & development of new products andtaking into account the feedback received from the field level functionaries creditdepartments at Head Office.

Credit Committees have been constituted in the Bank at Head Office Circle Office andZonal Office levels for exercising sanctions of credit proposals and suitable sanctioningpowers have been delegated to these committees in terms of directions of Ministry ofFinance. Further based on feedback received from field level functionaries the delegatedpowers of various sanctioning authorities are reviewed and revised to reduce turnaroundtime in the sanction of credit proposals. The loan review mechanism is furtherstrengthened in the Bank ensuring review of sanctions made by all functionaries by thenext higher committees/competent authorities as the case may be.

10.2.3 Techno Economic Viability (TEV) Cell

The Bank has a Techno Economic Viability (TEV) Cell which is independent of the CreditProcessing & Sanctioning Departments. The Cell undertakes preparation of ProjectInformation Memorandum (PIM) conducting Techno Economic Viability (TEV) study and DebtArrangement (Loan Syndication) for Corporate clients. The Cell has earned a Fee basedincome of Rs.120.89 lakhs during the Financial Year 2016-17 (Previous Financial Year wasRs.68.33 lakhs).

10.3 Management Information System

Bank has developed a robust Management Information System which captures data essentialfor vital functions such as risk management and planning and which serves as an effectivetool for the Top Management in decision making. This has facilitated quick decisionmaking. The Bank is in a position to analyse performance in major parameters even on a dayto day basis using the information system available. Leveraging on the CBS platform of theBank the MIS has facilitated speedy decision making and its implementation.

10.4 Inspection & Audit

Opened three more new Zonal inspectorates at Bhubaneshwar Mumbai and Vijayawada duringthe year. Thus the system of Monitoring Internal Audits through Zonal Inspectorates isstrengthened.

As per audit plan 2016-2017 and basing on the Risk profile 2003 branches are subjectedto audit. Apart from this the new branches opened between the period April 2016 toSeptember 2016 were also subjected to inspection.

Upgraded Risk Based Internal Audit (RBIA) module and added the templates prescribed byRBI.

During 2016-17 concurrent audit has been made online - RBCA module and training hasbeen imparted to all concurrent auditors by conducting auditors meet at all Zonal Offices.

IS Audit: Concurrent Audit for IS audit of Data Centre has been initiated by theBank during the year for better monitoring of procedures and controls. Monitoring ofoutsourced activities and third party services has been undertaken in the financial year2016-17 as per the regulatory guidelines.

Off Site Monitoring Cell (OSM Cell) formed based on the report submitted by ShriBasanth Seth generates the reports of high value/critical transactions happened atbranches on previous day scrutinize them and sensitize the controlling offices/Branchesfor taking corrective action wherever deficiencies are noticed in following the laid downsystems and procedures. Keeping in view the operational risks involved in variouscritical/important transactions few alerts are being sent by OSM cell to the concernedZonal Office also for adding their confirmation through OSM online system.

10.5 Compliance Policy

The Bank has in place a comprehensive Compliance Policy. An executive of the Bank inthe rank of Deputy General Manager has been appointed as the Rs.Chief Compliance Officer'.As per the Policy adopted by the Bank suitable organizational structure has been laiddown defining the roles and responsibilities for Compliance Officers of variousdepartments at Head Office Zonal Offices and Branches. Compliance of statutory andregulatory guidelines is the scope of operation of the compliance function in the Bank.Suitable reporting system is put in place to ensure effective implementation of CompliancePolicy in the bank.

10.6 Legal SARFAESI Act:

1. During this Financial Year i.e. from 01.04.2016 to 31.03.2017 152 secured assetswere sold and an amount of Rs.62.50 Crore was recovered by selling the secured assetsunder SARFAESI Proceedings.

2. Total recovery effected by the bank during the Financial Year 2016-17 under SARFAESIProceedings is Rs.280.24 Crore ( inclusive of sale of assets up- gradations and partrecoveries ).

Lok Adalats:

3. Recovered an amount of Rs.84.25 lakhs in 331 accounts during the Financial Year2016-17.

RTI Act:

4. 1018 Requests and 157 Appeals were received under RTI Act during the Financial year2016-17.

5. All the Requests and Appeals were disposed off on time.

10.7 Customer Service

• As a part of Customer Centric Initiatives we have started holding SegmentSpecific Customer Meets apart from the general Customer Meets are held.

10.8 Human Resources Management

During the year several guidelines received from the Government of India on variousH.R. matters were incorporated in HR Policy.

To augment the existing manpower and bridge the skill gaps in areas like CreditInformation Technology Forex Risk Management Treasury etc. and to meet the demands ofexpansion 195 Specialist Officers 522 general officers and 999 clerks were inductedduring the year.

Bank also ensured career progression by considering promotions in each grade as per themanpower and recruitment plan for the year.

Industrial Relations

Industrial Relations are cordial in the Bank. Quarterly meetings were held with therepresentatives of the recognized Officers' Federation and the Award Employees' Union.Apart from this meetings were also held at Zonal level to sort out the local issues tobetter the working conditions as well as customer service.

Training:

Bank has an Apex College with state-of-the art training infrastructure located in thecoveted IT hub of the Financial District in Hyderabad. In addition to Apex College Bankhas Staff Training College at Visakhapatnam to cater to the training needs of employeesworking in Orissa West Bengal States and Coastal Districts of Andhra Pradesh.

To improve the core capabilities of employees various training programmes on creditleadership development and Product Awareness & Soft Skill development were conductedbesides induction & refresher programmes for newly inducted employees.

In Financial Year 2016-17 338 in house training programmes/work shops were conductedcovering 9048 employees. In addition to this 474 officers were trained in externaltrainings conducted at NIBM RBI/CAB/ BIRD IDBRDT & FEDAI.

To have an International exposure and to equip themselves with the accomplishments inthe Global Financial Markets 11 officers were sent to external programmes conductedabroad.

Succession Planning:

Bank has created a talent pool in various grades and these officers are groomed byproviding intensive training programmes on various fronts to occupy the top key posts inthe years to come.

POs on-boarding process:

In view of the introduction of this new PO on boarding process bank has reduced theprobation period of the Probationary Officers from the 2 years to 1 year.

MOU with Manipal Academy

As done in previous years our Bank has entered into an MOU with Manipal Universityduring the year for hiring job- ready Officers and selected 150 candidates for undergoingone year PGDBF course. Upon completion of the course they will be inducted into the bank.

Discontinuation of Interview Process:

As per the directions of Government of India Bank has discontinued the interviewprocess in recruitment of Clerks Subordinate Staff and Part Time Sweepers.

Staff Strength as on 31.03.2017:

Category Strength % to total
Officers 10967 56.59
Clerks 5604 28.92
Sub Staff * 2809 14.49
Total 19380 100.00

*Excluding Part Time Sweepers.

SC/ST/OBC Profile:

Our Bank has been implementing reservation policy for SCs and STs as per Government ofIndia guidelines. The representation of SCs and STs is 4150 and 1645 respectively in totalwork force of 20981 working in the Bank as on 31st March 2017. Out of total 10967officers 1953 belong to SC category and 921 belong ST category.

Our Bank has been implementing reservation policy for Other Backward Classes (OBCs)with effect from 08.09.1993 as per Government of India guidelines. The representation ofOBCs is 5429 in the total work force of 20981 working in the Bank as on 31st March 2017.

Differently Abled Persons:

Our Bank is providing 3% of total vacancies arising in Officer Clerical andSubordinate staff cadre in a year. The 3% posts are distributed amongst 3 categories ofPersons who are differently abled i.e. Blindness or low vision (B/LV)- 1%; HearingImpairment (HI)- 1%; Loco Motor disability or cerebral palsy (Lm)-1%. The representationof Persons with Disabilities is 550 (2.62%) in total workforce of 20981 as on 31st March2017.

11. OFFICIAL LANGUAGE

• Rajbhasha Link in AB Staff Portal has been revamped. Besides Rs.RajbhashaMission' Banking Terminology Administrative Phraseology Rajbhasha Margdarshika variousformats Important Circulars other related information Hindi House Magazine MonthlyHindi e-bulletin and Hindi Workshop material has also been kept in our Portal.

• Use of Hindi in our Tirupati Bangalore N. Delhi Meerut and Kochi Z.Os.wasappreciated by Ministry of Home Affairs.

• Our Bank won total 49 prizes in various Hindi Competitions conducted under theaegis of TOLIC.

• Head Office was awarded First Prize in Use of Hindi in Hyderabad by Ministry ofHome Affairs.

12. VIGILANCE

• Preventive Vigilance Inspection has been conducted in 2625 branches to ensureimplementation of extant guidelines. Reports were reviewed by the department and necessaryinstructions have been issued to the branches for compliance.

• Vigilance Department observed "Vigilance Awareness Week" from 31stOctober to 5th November 2016 as per the directions of Central Vigilance Commission. Thetheme for the Week was "Public participation in promoting Integrity and eradicatingCorruption". As part of the Vigilance Awareness Week Andhra Bank organized a meetingof Bankers which was well attended

by all the Bankers and also students of school/colleges along with theirparents/teachers at Vijayawada on 4th November 2016 and Hon'ble Central VigilanceCommissioner Shri K V Choudary graced the occasion.

• Bank has conducted more than 2500 programmes to create awareness among thepublic about ill effects of corruption and promoting integrity. Bank has conducted 2055Awareness Gram Sabhas covering 1899 Gram Panchayats across the country where more than60000 citizens have participated. 103 Essay Writing/Elocution/ Debate competitions wereorganized in schools and colleges 231 Melas and 55 Choupals/Meetings with 7176participants were organized to give wide publicity to propagate the message/theme ofVigilance Awareness Week. Two Grievances Redressal Camps were also organized at zonaloffices.

• "Mass Integrity Pledge" a concept envisaged by Central VigilanceCommission was also taken up by the Vigilance Department.

• Quarterly News Bulletin "SAVDHAN" is being published for updating thestaff with latest information on frauds and measures to safeguard themselves as well asBank. A special Vigilance Bulletin was issued on the occasion of Vigilance Awareness Week2016.

• Vigilance Department received special Corporate Vigilance Excellence Award2016-17 from Institute of Public Enterprise Hyderabad.

13.LEAD BANK SCHEME

Andhra Bank is the Convener Bank for State Level Bankers' Committee Andhra Pradeshsince 1984. Consequent to reorganization of AP into Telangana & Residual AndhraPradesh w.e.f 2nd June 2014 responsibility of Convenership of SLBC of residual APcontinued to be with Andhra Bank.

Andhra Bank is having Lead Bank responsibilities in fifteen districts viz. SrikakulamEast Godavari West Godavari Guntur in Andhra Pradesh Ganjam Gajapathi districts inOdisha Siddipet Sircilla Rajanna Jagtial Peddapally Mancherial WanapartyNagarkurnool Jogulamba Gadwal and Warangal rural in Telangana State. Bank is dischargingthe responsibilities in implementation of Lead Bank Scheme. So far 198 SLBC meetings havebeen organized including 15 SLBC Meetings in the reorganized state of Andhra Pradesh.During the current year SLBC has conducted 37 meetings of different nature. Besides thesemeetings the Convener SLBC has participated in various meetings and Video Conferencesthat are being organized by Government of India Government of Andhra Pradesh RBI NABARDand various other Organizations on different subjects.

The State Credit Plan for 2016-17 was launched by the Hon'ble Chief Minister of AndhraPradesh on 09.06.2016. Special SLBC Meeting on Demonetization & Relief Measures inDrought Affected Areas was conducted on 21.11.2016 at Vijayawada. SLBC has taken proactiverole in formulating & organizing the following committees as requested by GoAP.

• Financing to Agriculture and Tenant Farmers

• MSME

• Integration of Welfare schemes with Bank finance

APSLBC CALL CENTRE: SLBC has established a Call Centre namely Rs. APSLBC CALLCENTRE' on behalf of all Banks in the state with toll free telephone Number i.e.18004258525 & 18004251525 exclusively for MUDRA operating from Vijayawada from01.02.2017.

Website: An exclusive website is set up for SLBC of Andhra Pradesh with URLwww.slbcap.nic.in for the information of all the stake holders and general public. Thewebsite is being updated at regular intervals with the latest data and information.

14. FINANCIAL INCLUSION

Pradhan Mantri Jan Dhan Yojana (PMJDY):

• Bank has successfully implemented PMJDY and as on 31.03.2017 24.23 lakhaccounts have been opened as against 21.78 lakhs during previous year.

• Total deposits of Rs.326.33 Crore have been mobilized vis-a-vis Rs.212.91 croresduring 2015-'16 with an average balance of Rs.1346.57 as against Rs.977.51 the previousyear.

• Zero balance accounts stood at 19.73% (20.84% as on 31.03.2016) as against theindustry average of 20.80%.

Aadhaar Seeding:

• In order to pass on the DBT benefits directly into the beneficiaries accountsDepartment of Financial Services has advised to take up Aadhaar Seeding.

• Accordingly Bank has achieved 72.73% of seeding in active PMJDY accounts.

Over Draft Facility under PMJDY:

• The last mile of PMJDY is the financial channel by extending the overdraft tothe needy. About 167578 customers are eligible for Over Draft and bank have sanctionedOver Draft to 47124 customers.

• 14127 customers availed over draft to the extent of Rs.187.67 lacs.

• Our Bank is the pioneer in introducing OD facility through ATMs and Micro ATMs.

Pradhan Mantri Jeevan Jyothi Bima Yojana (PMJBY):

• PMJBY offers Rs. 2 lakh life insurance cover at a premium of Rs.330 per annum.Bank account holders in the age 18 to 50 years are eligible to avail this facility. Thelife risk cover will get terminated after 55 years. Mobilized 7.12 lakh accounts andsettled 2816 claims.

• Insurance Co. is settling the claims within 72 hours after receipt of completeset of documents.

Pradhan Mantri Suraksha Bima Yojana (PMSBY):

• PMSBY offers Rs.2 lakh accidental death cum disability insurance coverage forpeople who fall in the age group of 18-70 years at Rs.12 premium. Our bank enrolled 67.50lakh customers upto 31.03.2017.

Atal Pension Yojana (APY):

As on 31.03.2017 bank has enrolled about 1.39 lakh accounts under APY during theFinancial Year.

• Bank was adjudged by PFRDA as the best performing bank among PSBs during the FY2016 - Rs.17.

• Our Chakkan Branch in Maharashtra enrolled 2096 subscribers during the FinancialYear 2016-'17 the highest amongst all Bank branches in both Public and Private sectors.

• Our Sultanabad branch in Telangana State enrolled 846 APY subscribers during theFreedom for Life Campaign held by PFRDA. And the branch was awarded for being the topperduring the campaign.

Activation of Bank Mitras:

• Bank has appointed 1777 Bank Mitras covering all allotted Sub Service Areas.Presently about 1518 bank mitras are actively doing transactions as against 1476 Bankmitras during previous year.

• All Bank Mitras are provided with interoperable devices which are capable oftaking up Rupay transactions and AEPS transactions.

• Andhra Bank stands 1st among all Banks in conducting AEPS transactions afterimplementation of cashless Aadhaar Enabled Public Distribution System (AEPDS) in the Stateof Andhra Pradesh.

Aadhaar Enabled Public Distribution System (AEPDS):

• Bank has successfully implemented AEPDS in four districts of Andhra Pradeshapart from Krishna District as pilot.

• On an average Bank is taking up around 30.00 lakh AEPDS transacations which isthe highest in the industry.

Technological Developments in FI:

• Opening of accounts through e-KYC by capturing bio metrics of the customers andmapping the same with UIDAI.

• Enabling of AEPS Offus & Onus transactions

• Enabling of Rupay Onus & Offus transactions

• Enabling of Social Security Schemes enrolments through PoS device.

• Enabling of APY enrolments through PoS device.

• Availing of Over Draft at all Bank Mitra locations.

• Aadhaar and Mobile Seeding in all PoS devices.

• Remittance facility at all Bank Mitra locations.

15. SUBSIDIARIES & REGIONAL RURAL BANKS

The Bank has one Subsidiary namely Andhra Bank Financial Services Limited (ABFSL)which is wholly-owned by the Bank. The Company has earned a profit of Rs.173.37 lacsbefore Income Tax and a net profit of Rs.116.99 lacs after tax during the year ending31-03-2017 with this the negative net worth of the company has been brought down fromRs.812.46 lacs to Rs.695.47 Lacs as on 31.03.2017 Bank has one sponsored Regional RuralBank namely Chaitanya Godavari Grameena Bank located in Guntur (Andhra Pradesh) coveringthe districts Guntur East Godavari and West Godavari with 192 branches. As on 31.03.2017the total business stood at Rs.6336.39 Crore and Net profit after Tax is Rs.55.17 Crore.Percentage of Gross NPA to Average Advances is 1.30.

16. SECURITY ARRANGEMENTS

High priority was accorded to up-grade security arrangements at branches currencychests and ATMs. 2877 branches and 2510 ATMs were brought under CCTV surveillance.Installation of CCTV system in remaining branches and ATMs is in progress. ImprovedIntegrated Burglar Alarm System was installed in 1753 vulnerable branches. This is aninnovative system which is capable of protecting and notifying criminal attempts ofvarious natures perpetrated against branches. The branches connected with the IIBAS arefurther monitored 24 X 7 at Head Office through Central Monitoring Station (CAMS).E-surveillance is installed in 2125 ATMs which enables centralized monitoring of securityof ATMs 24x7. Technology is being used to enhance security measures and minimize crimerate against the Bank.

17. NRI CELL

The NRI Cell was set up with a view to serve as an effective channel of communicationbetween the Bank and its NRI Clientele thereby increasing NRE Deposits. The Cell supportsand guides Representative Offices in Dubai & USA thereby ensuring betterment inCustomer Service.

NRI Cell provides useful information related to Banking & Foreign Exchange to NRIsthrough NRI Bulletin (AB Connect) every month. At present nearly 30260 NRI Customers (bothexisting and prospective) are being connected and accessing the information provided inthe NRI Bulletin (AB Connect). Total NRI business of the Bank increased from Rs.2504 Croreas on 31.03.2016 to Rs.3163 Crore as on 31.03.2017 i.e. a growth rate of 26.31%. Thetotal Deposits under NRE segment comprising of SBNRE TD NRE and FCNR (B) Depositsincreased from Rs..2340 Crore as on 31.03.2016 to Rs.2862 Crore as on 31.03.2017registering an annual growth rate of 22.31%.

18. BRANDING AND COMMUNICATIONS

The Department has undertaken publicity & branding during the financial year toderive good mileage and visibility for the Bank. Some of the major publicity activitiesinclude

1) acquiring naming rights at City Bus Port Vijayawada AP with our Branding

2) utilization of Ad Space at Rajiv Gandhi International Airport

Hyderabad for publicity on our products & services

3) full train branding on 5 train rakes (80 coaches) of Narayanadri/Falaknuma Expresseswhich ply between Tirupati Secunderabad & Howrah - .

4) broadcast of audio jingles through FM Radio on Rs.Retail Rythm & Mega VehicleLoan Carnival' the campaigns for marketing of our retail products - in multiple languagesacross pan India during festive season

5) advertisement through Sri Venkateswara Bhakti Channel (SVBC) during live programmesof Srivari Brahmotsavams

6) sponsorship of Rs.Hyd 10 K Run' organised by Freedom 10K Run at Hyderabad - as imagebuilding activity

7) sponsorship of 99th Annual Conference of Indian Economic Association conducted atTirupati

8) sponsorship of Partnership Summit (CII) held at Visakhpatnam and

9) Putting up of Bank's Stall at All India Industrial Exhibition at Hyderbad which runfor 45 days apart from several others.

19. CORPORATE SOCIAL RESPONSIBILITY

The Bank sanctioned an amount of Rs. 3.19 crores to different institutions/trustsduring the financial year and gained substantial mileage for the Bank. Notable CSRactivities of the bank include Donation to CM Relief Fund with an amount of Rs.50 lakheach for Govt of Telangana & Andhra Pradesh Donation of Rs.25 lakhs to Rs.HarithaHaram' project initiated by Govt of Telangana and made Rs.10 lakhs contribution toNational Sports Development Fund. The other major CSR activities are donations tocharitable trusts orphanages municipalities etc. for undertaking social measures suchas distribution of wheel chairs to physically handicapped/supply of compostingequipment/purchase of ambulances vans etc.

20. BANK'S WEB SITE

The Bank maintains its website www.andhrabank.in in three languages viz. EnglishHindi and Telugu for providing information about the Bank its services and productsoffered. The Bank has made its WCAG (Web Content Accessibility Guidelines) websiteaccessible to Rs.visually impaired persons' as per Government of India guidelines.

The Bank being the Convener of State Level Bankers' Committee Andhra Pradeshmaintains separate website www.slbcap.nic.in. This website communicates all theproceedings of SLBC Meetings State Government directives instructions to Bankers andpublic.

The Bank follows meticulously CERT-In (Indian Computer Emergency Response Team)guidelines issued from time to time in maintaining Bank's Website securely.

21. AWARDS AND REWARDS

• Our Bank has received two prestigious awards from IDRBT in July 2016:-

• Best Bank for Managing IT Eco System among mid-size banks and

• Best Bank for Digital Banking among mid-size banks

• Andhra Bank has been awarded as Best Performing Bank amongst all Public SectorBanks for excellent performance in enrolment of Atal Pension Yojana (APY) Accounts.

• Andhra Bank was given National Payment Excellence Award 2016 (Runner up) byNpCi' for excellent performance under Rupay Card in midsize category.

• Andhra Bank achieves two Banking Technology Awards of IBA - Awarded winner inRs.Best Financial inclusion initiatives under midsize banks and Rs.Best IT Risk and CyberSecurity Initiatives (Runner Up) under midsize bank category'.

22. Indian Accounting Standards (Ind AS) - Progress

Bank shall comply with the Indian Accounting Standards (Ind AS) for financialstatements for accounting periods beginning from 1st April 2018 onwards with comparativesfor the period ending 31st March 2018 and thereafter subject to the guidelines of ReserveBank of India.

In order to facilitate smooth transition to the application of Ind AS Bank is in theprocess of identifying the changes required to be made in the IT system and other policiesto comply with Ind AS.

23. CHANGES IN THE BOARD DURING THE YEAR

The following changes took place in the Composition of the Board during the FY 2016-17:

• Tenure of Shri K.Thamaraiselvan Director came to an end on 24.11.2016.

• Tenure of Dr. Naina Sharma Director came to an end on 11.12.2016

• Tenure of Shri Amit Goel Director came to an end on 17.02.2017

Board wishes to place on record its appreciation of services rendered by the abovemembers of the Board during their tenure.

24. DIRECTORS' RESPONSIBILITY STATEMENT

The Board of Directors hereby states that

• The applicable accounting standards have been followed in the preparation of theannual accounts and proper explanations have been furnished relating to materialdepartures.

• Accounting policies have been selected and applied consistently reasonable andprudent judgments and estimates have been made so as to give a true and fair view of thestate of affairs of the Bank as at 31.03.2017 and of the profit and loss of the Bank forthe financial year ended on 31.03.2017.

• Proper and sufficient care has been taken for the maintenance of adequateaccounting records in accordance with the relevant regulatory provisions for safeguardingthe assets of the Bank and for preventing and detecting fraud and other irregularities.

• The annual accounts have been prepared on a going concern basis.

• Internal Financial controls to be followed by the Bank have been laid down andsuch internal financial controls are adequate and are operating effectively.

• Proper systems have been devised to ensure compliance with the provisions of allapplicable laws and such systems are adequate and operating effectively.

25. ACKNOWLEDGEMENT

Andhra Bank is grateful to the Government of India RBI SEBI NABARD and otherauthorities/agencies Financial Institutions and Correspondent Banks for their valuablesupport and guidance. The Directors also express their deep sense of appreciation to allthe staff members of the Bank for their dedicated service outstanding professionalism andcommitment towards Bank's vision for a sustainable growth. Finally the Directors wish tosincerely thank all the customers shareholders and other stakeholders for their valuablesupport.

For and on behalf of the Board
Place : Hyderabad (Suresh N Patel)
Date :20.05.2017 Managing Director & CEO