Your Directors have the pleasure in presenting the 94thAnnual Report of theBank together with the Audited Statement of Accounts for the year ended 31stMarch 2018 and the Auditors' Report.
Performance highlights for the reporting financial year are as under:
|Particulars ||As on/for the year ended 31.03.2018 ||As on/for the year ended 31.03.2017 |
|Deposits ||62871.29 ||56733.11 |
|Advances ||47251.75 ||36915.70 |
|Investments ||15444.45 ||20219.73 |
|Gross Income ||6378.09 ||5994.74 |
|Operating Profit ||1473.16 ||995.80 |
|Net Profit ||325.61 ||452.26 |
The total business turnover of the Bank crossed a milestone of Rs.100000 crore andstood at Rs.110123.04 crore as on 31st March 2018 registering a growth of17.59 per cent as against the turnover of Rs. 93648.81 crore as on 31st March2017. The total assets of the Bank increased from Rs. 64038.60 crore to Rs. 70373.68 crorerecording a growth of 9.89 per cent for the year 2017-18. The market share of the Bank inbusiness turnover has increased to 0.54 percent as compared to 0.51 percent as on 31stMarch 2017.
The total deposits of the Bank grew from Rs. 56733.11 crore as on 31st March2017 to Rs. 62871.29 crore as on 31st March 2018 registering a growth of10.82 per cent.
During the year low cost deposits of the Bank viz. Savings and Current AccountDeposits have shown growth of 6.83 per cent and constitute 27.99 per cent of the totaldeposits of the Bank. The market share of the Bank in deposits was 0.54 per cent asagainst 0.53 percent previous year.
The total advances grew from Rs. 36915.70 crore as on 31st March 2017 to Rs.47251.75 crore as on 31st March 2018 an increase of 28.00 per cent. The CreditDeposit Ratio increased from 65.07 percent to 75.16 percent reflecting robust creditgrowth. The priority sector advances increased from Rs. 17238.77 crore to Rs. 20594.27crore forming 52.83 percent of Adjusted Net Bank Credit (ANBC) and agricultural advancesincreased from Rs. 6582.77 crore to Rs. 6877.51 crore which together with eligibledeposit under Rural Infrastructure Development Fund (RIDF) constituted 17.64 percent ofANBC. Lending under various socio-economic schemes has shown satisfactory progress. Themarket share of the Bank in loans and advances was 0.56 percent ( Previous year 0.53percent).
Consequent to the improved CD Ratio the total investments declined from Rs. 20219.73crore as on 31st March 2017 to Rs. 15444.45 crore.
The increased CD Ratio increase in interest income etc. resulted in the improvedoperating results as reflected in the gross income. The gross income of the Bank for theyear ended 31st March 2018 stood at Rs. 6378.09 crore as against Rs. 5994.74crore showing a growth of 6.39 percent and the total expenditure (excluding provisions andcontingencies) stood at Rs. 4904.92 crore as gainst Rs. 4998.94 crore for the year ended31st March 2017 showing a decrease of 1.88 percent. The net interest incomewas Rs. 1857.64 crore showing a growth of 24.62 per cent over the previous year.
Your Bank earned an operating profit of Rs. 1473.16 crore for the year 2017-18 asagainst Rs. 995.80 crore for the previous year showing a growth of 47.94 per cent. The netprofit of the Bank reduced from Rs. 452.26 crore to Rs. 325.61 crore due to higherprovisioning requirements.
The net profit of Rs. 325.61 crore which along with a sum of Rs.137.14 crore broughtforward from the previous year aggregating to Rs. 462.75 crore is appropriated as under:
|Appropriation ||Rs. in crore |
|Transfer to Statutory Reserve ||82.00 |
|Transfer to Capital Reserve ||51.05 |
|Transfer to Revenue General and Special Reserves ||115.58 |
|Transfer from Investment Reserve ||-24.16 |
|Dividend of 2017 paid during the year 2018 ||113.04 |
|Tax on dividend paid as above ||23.01 |
|Balance carried over to Balance Sheet (including proposed Dividend and tax) ||102.23 |
|Total ||462.75 |
Having regard to the overall performance of the Bank the Board of Directors recommenda dividend of Rs. 3 per share i.e. 30 percent on the paid up capital (previous year 40 percent) for the reporting year. The dividend payout ratio for the year works out to 26.04percent as against last year's 24.99 percent. In accordance with the revised AccountingStandard (AS)-4 Rs.Contingencies and Events occurring after the Balance Sheet Datenotified by the MCA on March 30 2016 the proposed dividend including dividenddistribution tax amounting to Rs. 102.21 crore has not been shown as appropriation fromthe Profit for the year ended 31st March 2018.
EARNINGS PER SHARE/ BOOK VALUE
The earnings per share (basic) and the book value per share as on 31st March2018 stood at Rs. 11.52 and Rs. 191.44 respectively.
CAPITAL FUNDS AND CAPITAL ADEQUACY RATIO
The capital funds of your Bank increased from Rs. 5172.16 crore to Rs. 5414.25 croreregistering a growth of 4.68 per cent. The Capital Adequacy Ratio stood at 12.04 per centas on 31st March 2018 as per BASEL III norms (Previous year 13.30 per cent).The Bank has been consistently maintaining the Ratio well above the minimum of 10.875percent stipulated by the Reserve Bank of India. The market capitalization as on 31stMarch 2018 was Rs.3247.16 crore with a high of Rs. 5115.20 crore as on 2nd June2017 and a low of Rs. 3052.16 crore as on 12th March 2018.
NON-PERFORMING ASSETS AND PROVISION COVERAGE RATIO
Your Bank has been focussing on containing the non-performing assets through bettercredit monitoring as well as intensified efforts to recover the impaired assets. Howeverin view of the delinquencies in select sectors impact of RBI's revised framework onresolution of stressed assets etc. the Bank's Gross NPAs as on 31st March 2018has increased from Rs. 1581.59 crore (4.21 per cent) to Rs. 2376.07 crore by the year end(4.92 per cent). The net NPAs stood at Rs. 1400.51 crore (2.96 per cent) as against Rs.974.73 crore (2.64 per cent) as on 31st March 2017. Provision Coverage Ratio(PCR) marginally improved to 54.56 percent as on 31st March 2018 from 54.00 percent as on 31st March 2017.
Pursuant to the Guidelines issued by RBI on Accounting Standard 17 (Segment Reporting)the Bank has identified four business segments viz. Treasury Corporate/WholesaleBanking Retail Banking and Other Banking Operations for the year ended 31stMarch 2018 as under:
Treasury Operations: Bank has earned total revenue of Rs. 1404.18 crorefrom Treasury operations with a contribution of Rs. 267.76 crore to profit before tax andun-allocable expenditure.
Corporate/Wholesale Banking: The revenue earned by the Bank during theyear under report from this Segment was Rs. 2174.98 crore with a negative contribution ofRs. 306.05 crore to profit before tax and un-allocable expenditure.
Retail Banking: This Segment has earned revenue of Rs. 2367.95 crore witha contribution of Rs. 249.28 crore to profit before tax and un-allocable expenditure.
Other Banking Operations: This segment has generated revenues of Rs.332.57 crore with a contribution of Rs. 50.82 crore to profit before tax and un-allocableexpenditure.
During the year under report your Bank achieved a turnover of Rs. 14932.52 crore inforeign exchange business as against Rs. 14561.52 crore in the previous year. Theoutstanding advances to export sector stood at Rs. 1970.58 crore as on 31stMarch 2018.
CENTRALISED PAYMENT & RECONCILIATION CELL (CPRC)
To enable timely reconciliation of various transactions carried out through technologyenabled payment channels like NEFT RTGS IMPS UPI etc. a separate centralized cellnamely Centralised Payment and Reconciliation Cell (CPRC) has been set-up in the Bankwhich has improved the reconciliation and resolution of disputes if any in relation tothese transactions.
INVESTOR RELATION CELL
In view of the changed business dynamics shareholders' expectations and regulatory& reporting mechanism a regular connect with the shareholders is necessary. In thisregard with a view to disseminate corporate information on voluntary basis to theshareholders through email (wherever made available) about financial results majorevents articles about the Bank in the media etc. Bank has formed an "InvestorRelation Cell" in the month of July 2017.
IND AS' IMPLEMENTATION
As per the erstwhile roadmap given by Reserve Bank of India (RBI) vide circular datedFebruary 112017 transition to "Indian Accounting Standards (Ind AS)' in banks wereto commence from the accounting period beginning April 1 2018 onwards. However in itsRs.Statement on Developmental and Regulatory Policies' dated April 5 2018 the regulatorhas deferred the implementation of Ind AS for Scheduled Commercial Banks by one year i.e.from the accounting period beginning April 1 2019 and your Bank would proceed to carryout the strategy laid out by its Audit Committee of the Board for facilitating effectiveand successful implementation of Ind AS on the revised transition date in accordance withthe relevant guidelines.
In this regard your Bank in consultation with M/s Ernst & Young (EY) hasconducted a diagnostic study on various disparities between current Accounting frameworkand Ind AS and ascertained various areas having an impact on measurement accounting anddisclosure of financial assets and liabilities and provisioning requirements. An ITDiagnostic Study was also conducted identifying robust changes in CBS and IT systems ofthe Bank to accommodate Ind AS. Further as stipulated by RBI your Bank has also dulysubmitted the Proforma Ind AS Financial statements for the half year ended September 302016 and for the quarter ended June 30 2017.
SUBORDINATED DEBT INSTRUMENTS
Bank had issued subordinated debt instruments [i.e. Unsecured Non-ConvertibleSubordinated (Lower Tier- II) Debt Instruments] as part of Tier II Capital Structure underfour series namely: Series I (Rs. 120.50 crore) Series II (Rs. 29.50 crore) Series III(Rs. 200.00 crore) and Series IV (Rs. 250.00 crore) which were issued on 30.06.200729.03.2008 27.09.2008 and 17.11.2012 respectively with each Series having a maturitytenure of 120 months from the date of issue. Your Bank has ensured payment of interest onthese debt instruments on a timely basis since the issue of respective debt instruments.Further during the reporting year Bank had issued Certificate of Deposits (CDs) indifferent tranches to meet the short term liquidity mismatch and the amount outstandingunder CDs as on 31st March 2018 stood at Rs. 2173 crore.
During the reporting year the Bonds issued under Series I ('120.50 crore) and SeriesII (Rs. 29.50 crore) were redeemed upon maturity on their respective due dates i.e.30.06.2017 and 29.03.2018 along with payment of interest for the broken period. Balanceamount of subordinated debt instruments with progressive discounting have been consideredfor capital adequacy ratio as per the RBI Guidelines.
ICRA Limited ("ICRA") and Credit Analysis and Research Limited("CARE") have been rating the aforesaid debt instruments over the past few yearsand during the reporting financial year these rating agencies have retained the rating at"ICRA A" and "CARE A" respectively. The instruments with these ratingare considered to have adequate/high degree of safety regarding timely servicing offinancial obligations. Such instruments carry very low credit risk.
In addition the ICRA has rated the CDs issued by the Bank and has assigned ICRA A1+.The instruments with this rating are considered to have very strong degree of safetyregarding timely payment of financial obligations. Such instruments carry lowest creditrisk. The modifier "+" reflect the comparative standing within the category.
DIVIDEND DISTRIBUTION POLICY
Your Bank has adopted a Policy on distribution of Dividend to the shareholders pursuantto the Regulation 43A of the SEBI (lOdR) Regulations 2015. Gist of the DividendDistribution Policy is as under:
Being a Banking entity Dividend Distribution Policy is guided by the RBICircular DBOD.No. BP.BC.8821.02.67/2004-05 dated May 5 2005 with regard to eligibilitycriteria for distribution of dividend.
Factors considered for recommendation of dividend include both internalfactors such as financial performance dividend payout trends tax implications corporateactions and external factors such as shareholders' expectations macro environment etc.
Factors considered for determining the quantum of dividend include financialperformance capital fund requirements to support future business growth having regard tothe dividend payout ratio prescribed under the aforesaid RBI Guidelines etc.
The Dividend Distribution Policy of the Bank is available in our Bank's website at https://kamatakabank.com/investor-portal/corporate-govemance.
In today's era although organisations in India operate in local jurisdictions thedeveloped countries' working culture and disclosure standards have been influencing overthe past few years and is shaping the internal processes and also external processes. Assuch reporting standards and disclosure requirements are being aligned to internationalstandards and efforts are being made both by (i) Indian Corporates (i.e. taking steps inthis regard on a voluntary basis) and (ii) Regulators (such as mCa RBI SEBi etc.) areconsidering progressive phase-wise initiatives in the reporting and disclosure standards.Some of the examples of internationally aligned reporting standards are introduction ofIFRS (i.e. IND AS) Integrated Reporting (IR) XBRL Reporting BASEL Standards etc.
Further the Securities and Exchange Board of India (SEBI) is working towards improvingthe disclosure standards of listed entities in India in consultation with the industrybodies and stock exchanges etc. and thus suggested the listed entities to introduce theconcept of "Integrated Reporting" (IR) based on the "InternationalIntegrated Reporting Council's (IIRC) Framework".
Your Bank being a listed entity an attempt is made to address the concepts introducedunder the IIRC Framework and going forward the reporting/disclosure standards will bealigned with the IIRC model with a view to implement comprehensive structure of reportingin the years to come. In this context IIRC Framework also provided a timeline of not morethan three years for the entities to realign their reporting standards in accordance withthe IR framework.
Further presentation of the Integrated Reporting (IR) is under nascent stages andtherefore your Directors opine that adoption of entire IIRC framework by the industry atlarge would require aligning reporting/disclosure in consonance with the Indian regulatorystandards wherein most of the financial and non-financial disclosures are already beingmade as per the formats prescribed by various Indian Regulators as stated above. Howeverthis is a transition phase for the overall listed entities' community. As regards theBank's IR a comparative table given below will provide details of disclosures that arebeing made over the past few years and the IR elements.
Your Bank is in the business of banking i.e. playing a fiduciary role in overallsocio-economic growth of the country by safeguarding the depositors' interest andproviding quality financial support to the enthusiasts who have been making an impact inthe society not only for their own profit but also providing employment to many needycitizens. The Bank in its 94 years of existence touched many lives through financialsupport social support financial inclusion and generation of employment etc. and thesuccess of its business model has been mainly by focusing on quality of service tostakeholders. As the decades pass by new technological revolutions are shaping the newage banking and Karnataka Bank has been adapting itself to the new processes and systemsto meet the expectations of the customers yet keeping intact the core values andidentity. To illustrate Karnataka Bank was one of the first few private sector banks toadopt core banking solution (CBS) in India. Further your Bank believes that conceptsthat have emerged in the recent times such as mobile based banking block-chain UnifiedPayment Interface fin-tech business etc. are only derivatives of the disruptivetechnologies and the future of banking across the globe is subject to adaption of newertechnologies by Banks and Karnataka Bank has been proactively initiating steps to adoptitself to innovative systems from time to time. In this direction a Transformation Planis being worked out at strategic level to assess suitable technologies and processes andsystems.
Table on comparative statement with respect to IR and Bank's disclosures that are beingmade:
|IR Framework's content elements ||Reporting provided in this Annual Report |
|Eight Content Elements : || |
|1. Organizational overview and external environment || |
|2. Governance || |
|3. Business model || |
|4. Risks and opportunities || |
|5. Strategy and resource allocation || |
|6. Performance || |
|7. Outlook || |
|8. Basis of preparation and presentation || |
|1. Organizational overview and external environment ||Karnataka Bank is in the business of banking. |
|What does the organization do and what are the circumstances under which it operates? Ownership ||With a view to uphold the best corporate governance practices Founders of this Bank carefully designed the business model wherein Bank does not have any promoter and only the best professionalism prevails. In the Indian scenario this model is now being adopted by many companies. Back in the era of 1920s nonpromoter concept was used to ensure there is no conflict of interest at the helm of leadership. Bank's Board/ Management has been ensuring handing over of the stewardship to the team of persons who possess required caliber. Healthy sustenance of the Bank has always been kept in mind while defining succession planning at the top levels. Your Bank's shares are held by the public at large and shareholding pattern as on March 31 2018 has been provided under Annexure III. |
|Operating Structure principal activities and markets competitive landscape and market positioning. ||Your Bank operates through Rs.Branch Banking Model' and also Rs.Digital Banking Model' and follows three tier administrative structure comprising of Head Office at the apex level Regional Offices at the administrative level and Branches as business centers. Its principal activities include acceptance of deposits and lending for earning interest and fees. Karnataka Bank operates in various states in India and the details are provided under "Distribution Network" Section provided as part of this Directors' Report. |
|External environment ||Details on external environment regulatory changes and their impact on the banking industry as well the bank besides risks and the opportunities are detailed under "Management Discussion Analysis (MDA)" Section which is provided as part of this Directors' Report. |
|2. Governance How does the organization's governance structure support its ability to create value in the short medium and long term. Specific processes used to make strategic decisions. ||Your Bank being regulated entity adheres to the norms prescribed under Banking Regulation Act 1949 wherein guidance on constitution of the Board of the banks has been narrated. Accordingly constitution of the Board of Directors of the Bank conforms to the provisions of Section 10B of the Banking Regulation Act 1949 Section 149 of the Companies Act 2013 and SEBI LODR. The Board consists of eminent persons drawn from specialized fields such as Banking Finance Accountancy Law Agriculture and Rural Economy Cooperation and SSI Information Technology etc. |
| ||The progress of the Bank is being reported to the Board/Board level Committees on a periodical basis and the Directors provide feedback to the Management for further improvement in the operations of the Bank. Further Board of Directors has also formed sub-committees to take advantage of the skills and expertise of directors concerned. Terms of reference and number of meetings held etc. are provided under "Corporate Governance Report" (Annexure II) |
| ||Further Bank's Corporate Governance Report is prepared in line with the extant regulations of the SEBI (Listing Obligations and Disclosure Requirements) Regulations 2015 [SEBI LODR']. |
| ||Further the Management also has many committees of executives for the day-to-day management and to implement new initiatives. |
|3. Business Model What is the organization's business model. (Inputs Business activities Outputs Outcomes) ||A detailed diagram provided in subsequent page provides an insight on Bank's business model. |
|4. Risks and Opportunities What are the specific risks and opportunities that affect the organization's ability to create value over the short medium and long term and how is the organization dealing with them etc. ||Details have been provided under MDA. |
|5. Strategy and Resource allocation ||As detailed above your Bank has been taking initiatives to adopt itself to changing scenarios to meet the expectations of the stakeholders. In this directions your Bank defines corporate goals on an annual basis and the performance is reviewed on a periodical basis. |
|Where does the organization want to go and how does it intend to get there? ||However technological advancements are impacting all industries across the globe and Bank has time and again initiated steps to transform itself through business process re-engineering or through transformation plan after carefully studying the pros and cons of such advancements. Accordingly with a view to reposition the Bank as 'Relevant and Significant Bank' a transformation project has been launched during the reporting financial year partnering with Boston Consulting Group (BCG). A brief about the strategies included under transformation project adopted by the Bank has been detailed under "Transformation Project" Section under this Directors' Report. |
|6. Performance To what extent has the organization achieved its strategic objectives for the period and what are its outcomes in terms of effects on the capitals ||Both financial and non-financial performance achieved by the Bank during the reporting period has been detailed under this Directors' Report along with its impact on capital. |
|7. Outlook What challenges and uncertainties is the organization likely to encounter in pursuing its strategy and what are the potential implications for its business model and future performance ||Outlook of the banking industry changes in the socio-economic conditions changes in the regulatory environment and their impact on business model and future performance etc. have been detailed under MDA. |
|8. Basis of preparation and presentation How does the organization determine what matters to include in the integrated report and how are such matters quantified or evaluated ||As aforesaid the concept of IR is in the nascent stages in Indian reporting structure however most of the content elements provided under the IR Framework have already been reported under various formats as desired by various regulators such as RBI MCA SEBI etc. and Bank will continue to adhere to the standards of reporting as per the expectations of the regulators by pooling the best resources. |
|Financial Capital ||Human Capital ||Manufactured Capital ||Socio-Relationship Capital |
| Deposits from public || Karnataka Bank has 8185 employees who have been regularly updating their skills to provide best in the class banking services. || The Bank's b u s i n e s s i s operated through branch-banking a n d d i g i t a l banking channels i n cl u d i ng ATM s Internet Banking Mobile Banking POS e-Lobbies etc. || Bank has been making efforts over the years by contributing to society through its financial inclusion branches. Bank has touched 547 villages of 106 Gram Panchayats through "Brick and Mortar" Branch approach as on March 312018. |
| Raising funds in the form of equity debt etc. Internal own funds (i.e. Reserves and Share Premium Account). || || The Bank has 800 branches spread across 22 states and 2 Union Territories as on March 312018. || The Bank also provides assistance through its C o r p o r a t e S o c i a l Responsibility (CSR) Programme and details of its contribution made during the year are provided under Annexure V. |
|Further details h a v e b e e n provided at the beginning of the Directors' Report. ||Further details have been provided under this Directors' Report. ||Further details h a v e b e e n provided under this Directors' Report. ||Further details have been provided under this Directors' Report. |
Banking is a service oriented technology based industry and utilization of naturalresources plays only a supportive role to the main activity.
2. Business Activities
By engaging various capital forms Bank deploys its funds by lending andinvesting.
In this process Bank also sells third party products such as BancassuranceMutual Funds etc.
By employing various forms of capitals and deployment of funds Bank earnsinterest/commission in funded and non-funded exposures by retaining a margin betweenborrowing rates and lending rates.
Bank earns commissions processing fees profit on sale of investments etc.
4. Outcomes and 5. Value creation
Business turnover operating profit interest income Bank's operating profitetc. are outcomes of the process.
In its 94 years of existence Bank has played a pivotal role in many lives byproviding timely servicing of interest to depositors lending to borrowers at competitiverates creating employment distributing dividend on a consistent basis to theshareholders and besides value creation by way of increase in market capitalisation.
Contributing to society through its Financial Inclusion and CSR Programmes andenabling the weaker section to improve their standard of living.
MANAGEMENT DISCUSSION AND ANALYSIS REPORT
During the year 2017-18 global economic growth is estimated to have reached 3.7% asignificant acceleration compared to growth of 3.2% in 2016 and the highest growth ratesince 2011. At the global level growth is expected at 3.9% in 2018. However economicprospects remain vulnerable to changes in the trade policy a sudden deterioration inglobal financial conditions and rising geopolitical tensions. Further higher interestrates in the US and any changes in the trade treaties generally lead to outflow of foreignfunds from emerging markets. Global inflation is also likely to rise in 2018.
Against the back drop of turbulent international economic scenario the Indianfinancial system showed resilience amidst stressed balance sheets in Banking andCorporate Entities. A cyclical economic recovery has taken hold as the effects ofdemonetization and the GST receded. This trend is seen extending into FY19 with growthbenefiting from higher public capital spending and recovering private business sentiment.Incoming economic data remains largely encouraging which may improve the GDP growth inthe coming fiscal. International Monetary Fund (IMF) in its latest World EconomicOutlook has estimated India to grow at 7.4 per cent in 2018.
Consumer Price Inflation (CPI) stood at 4.28% in Mar'18 compared to 3.89 % in theprevious year showing an increasing trend. However the Wholesale Price Inflation (WPI)eased from 5.17% as on March 2017 to 2.47% as of March 2018. In FY18 the Index ofIndustrial Production (IIP) grew by 4.3% lower than 4.6% growth recorded in the previousyear. It is the highest growth recorded in the past 6 years barring FY17. Electronicspharma and automobiles continue to be the main drivers of growth during the last financialyear.
In view of various factors such as global crude oil prices fiscal slippagesignificant rise in households' inflation expectations HRA revisions by various stategovernments revision in the MSP formula for kharif crops and IMD forecast of normalmonsoon RBI has increased the policy repo rate under the LAF by 25 bps to 6.25% after 4years in its second bi-monthly Monetary Policy statement 2018-19. The medium-term targetfor headline inflation is kept at 4% on a durable basis.
DEVELOPMENTS IN THE BANKING SECTOR
The financial year 2017-18 was yet another challenging year for Indian banks with slowdeposit growth and slow but improved credit growth continued stress on asset qualitylarge scale frauds high provisioning costs and compliance with stringent regulatoryrequirements etc. However access to banking system has improved over the years due topersistent government efforts to promote banking- technology and to promote expansion inunbanked and under-banked areas. Also some of Payment Banks Small Financial BanksPayment apps Fintech/Startup Companies etc. have started offering innovativefinancial/payment products and your Bank treats it as an opportunity for co-operation andcollaboration wherever necessary in furthering the agenda of financial inclusion.
Domestic financial market segments have been mainly driven by idiosyncratic factorsbarring phases of overwhelming global spillovers that impacted equity and forex marketsintermittently. Excess liquidity which had persisted for a few months followingdemonetization turned into deficit towards close of the year. Bond markets haveexperienced some drying up of liquidity as yields rose amidst concerns about inflation andthe fiscal situation. The credit market which was overcast with risk aversion anddisintermediation has exhibited a steady improvement in recent months with credit growthbeing in double digits since December 2017. Sizeable investments by mutual funds intoequity displaced the hitherto dominant position of foreign investors.
In the banking sector as such credit expanded by 10.3 per cent while deposits grew by6.7 per cent in the financial year 2017-18. Banking sector was embroiled in NPA issues anda large number of frauds which dissuaded growth of credit to industry. On the wholedistressed assets are posing serious problems and the Central Government Regulator andBanks are making coordinated efforts to overcome the said menace.
Besides the Government of India has made an attempt to streamline the process ofresolution of NPA and stressed assets by amending the Insolvency and Bankruptcy Code(IBC) which is emerging as a good tool in the hands of lenders. Further RBI has alsomade an attempt to rationalize the system of treating the stressed assets through itscircular viz. "Resolution of Stressed Assets - Revised Framework" dated February12 2018.
Union Budget of 2018-19 has given emphasis on agriculture and rural developmenthealthcare to under privileged education MSME and infrastructure in order to set thetone for future growth. Besides Government's Policy initiatives are focused on building astrong stable and resilient financial system and thrust on institutional farm creditetc. which are expected to support Bank's credit growth. Further Government's plans toonboard Banks and corporates on TReDS [Trade Electronic Receivable Discounting System]platform. TReDS is an institutional mechanism for facilitating the financing of tradereceivables of MSMEs through multiple financiers and will enable discounting ofinvoices/bills of exchange of MSME sellers against large corporates.
The India Meteorological Department (IMD) has predicted normal monsoon this year with a"very less probability" for 2018 to be a drought year. Normal rainfall boostsfarm production which in turn increases rural demand and helps the overall economy.Further Government's thrust on infrastructure development besides technologicaladvancement in the manufacturing and MSME sectors may open up avenues to Banks to financethese projects. The improved employment in the country higher income levels introductionof Rs.Housing For All' scheme etc. augur well for the long term sustainable growth ofretail lending in the Indian market. Government's inclusive growth agenda may also bringadditional business to banks.
Economic activity is expected to gather pace in 2018-19 benefiting from a conducivedomestic and global environment. First the teething troubles relating to implementationof the GST are receding. Second credit off-take has improved in the recent period and isbecoming increasingly broad-based which portends well for the manufacturing sector andnew investment activity. Third large resource mobilization from the primary market couldstrengthen investment activity further in the period ahead. Fourth the process ofrecapitalization of public sector banks and resolution of distressed assets under theInsolvency and Bankruptcy Code (IBC) may improve the business and investment environment.Fifth global trade growth has accelerated which is expected to encourage exports. Sixththe thrust on rural and infrastructure sectors in the Union Budget could rejuvenate ruraldemand.
RISK AND CONCERNS
In the normal course of business banks are exposed to various risks namely CreditRisk Market Risk and Operational Risk besides other residual risks such as LiquidityRisk Interest Rate Risk Concentration Risk Strategic Risk Reputation Risk etc. With aview to efficiently manage such risks your Bank has put in place various risk managementsystems and practices. In line with the guidelines issued by the Reserve Bank of Indiafrom time to time your Bank continues to strengthen various risk management systems thatinclude policies tools techniques systems and other monitoring and forewarningmechanisms.
Your Bank aims at enhancing and maximizing the shareholder value by achievingappropriate trade-off between risks and returns. Your Bank's risk management objectivesbroadly cover proper identification assessment measurement monitoring controllingmitigation and reporting of the risks across various business segments of the Bank. Therisk management strategy adopted by your Bank is based on a clear understanding of therisks and level of risk appetite which is dependent on the willingness of your Bank totake risks in the normal course of business. A Board level committee viz. IntegratedRisk Management Committee periodically reviews the risk profile evaluates the overallrisk faced by the Bank and develops policies and strategies for its effective management.
Various senior management committees such as Credit Policy Committee (CPC)Asset-Liability Management Committee (ALCO) Operational Risk Management Committee (ORMc)etc operate within the broad policy framework of the Bank to ensure and enhance the riskcontrol and governance framework within the Bank.
The Risk Management Department at Head Office oversees the overall implementation ofvarious risk management initiatives across the Bank.
In line with the guidelines issued by RBI your Bank has taken the necessary steps tomove over to Basel II Advanced Approaches as per the Road Map approved by the Bank's Boardin this regard. As a part of the Basel III Pillar III-Market Disclosure requirement yourBank has made a detailed disclosure which is appended to this report as Annexure I. TheBank conforms to the Basel III guidelines from April 12013.
In compliance with Basel guidelines the Bank has put in place a policy document forInternal Capital Adequacy Assessment Process (ICAAP) to evaluate its capital adequacyrelative to its risks. Stress testing framework for various stress scenarios is also putin place for better understanding of the likely impact of adverse market movements/eventson the capital and earnings. The results of the ICAAP and Stress testing are reviewedperiodically to assess the capital requirement for the projected business growth keepingin view the risk appetite and risk profile of the Bank. A Board level Committee viz.Internal Capital Adequacy Assessment Committee (ICAAC) reviews the risk appetite riskprofile business projections as well as capital assessments of your Bank at periodicalintervals To evaluate and review the performance of various businessunits/products/customers etc. your Bank has introduced Fund Transfer Pricing (FTP) andCustomer Profitability Management Systems (CPMS) for better management of risk and return.FTP and CPMS enable the Bank to assess the profitability at various levels like branchproduct customers accounts regions etc. The system enables the Bank to perform variousprofitability related analyses and helps the Bank to make more business-focused decisionsto increase the long-term profitability.
For continuous monitoring of customer induced transactions under various AlternateDelivery Channels (ADC) and Core Banking Solution (CBS) your Bank has implementedEnterprise Level Fraud Risk Management System (ELFRMS) in September 2016. This is anautomated transaction monitoring system which based on a range of scenarios triggersvarious alerts for carrying out analysis from various risks and fraud angles. The systemacts as a check on potential fraud incidents as a preventive measure and is intended toidentify the potential fraudulent transactions covering various channels like internetbanking mobile banking debit card POS CBS etc. on real time basis based on predefinedprobable fraud scenarios.
In line with guidelines issued by RBI your Bank has nominated a Chief InformationSecurity Officer (CISO) who is responsible for articulating and enforcing the policiesthat Bank uses to protect the information assets apart from coordinating security relatedissues in implementation of new systems under Information Technology in the Bank.
Your Bank has been complying with the RBI/other regulatory instructions relating tocyber security threat advisories and during the reporting year Bank has participated inCyber Security Drills conducted by IDRBT and RBI-CSITE with a view to strengthen itsinternal cyber resilience system.
TRANSFORMATION PROJECT-'PROJECT VIKAAS'
Being a time-tested Bank and in its endeavor to continue to be a "Relevant andSignificant Bank" your Bank has initiated a transformation project namely -Rs.Project Vikaas' to meet the growth aspirations by focusing on people and driven bytechnology.
The transformation exercise is mainly focusing on (a) growth with improved salesproductivity and designing new products (b) cost optimization with process automation anddigitization as well as NPA management (c) profitability boosters with pricingoptimization and focus on fee income and (d) shareholder value enhancement throughinvestor engagement communication and corporate branding. Human resources digital and ITtransformation are identified as the main enablers for transformation by focusing on theentire ecosystem of the Bank.
Your Bank has parterned with Boston Consultancy Group (BCG) a leading globalmanagement consulting firm and world's leading advisor on business strategy. BCG has theexperience of guiding business transformation of more than 750 large as well mid-sizedorganisations.
Towards this direction Bank has formed an internal core team consisting of executivesto implement and monitor the progress of the transformation milestones and fortnightlymeetings are held to ensure that the actions taken are in the desired direction withquarterly briefing to the Board. Project Vikaas is a long term plan and expected to play amajor role in realizing aspirational goals culminating in emergence of new KBL coincidingwith the celebration of centenary year of the Bank in 2024.
During the year under report your Bank has opened 36 new branches in 11 states - oneeach in the states of Punjab Tamil Nadu Rajasthan Delhi and Sikkim 2 each in thestates of Kerala West Bengal Andhra Pradesh and Telangana 4 in Maharashtra and 19 inKarnataka. Out of these 36 branches 8 branches have been opened in unbanked rural centresunder financial inclusion initiatives of the Bank.
As at 31st March 2018 your Bank has 800 banking outlets and 2 extensioncounters spread across 22 States and 2 Union Territories. Apart from the above your Bankhas 12 Regional offices an International Division a Data Centre a Customer Care Centre4 Service branches 2 Currency Chests 2 Central Processing Centre's and 5 Asset RecoveryManagement branches. Further New Delhi - Kalkaji branch has been merged with New Delhi -Chittaranjan Park branch.
Further for better ambience and improved customer service your Bank has shifted 21branches/offices to new premises during the year 2017-18.
Every customer is important to us. Keeping this in mind several customer-centricinitiatives have been introduced by your Bank during the year under report.
Bank has rolled out the Single Window Service concept at 44 branches during theFinancial Year 2017-18 thus extending this facility to 64 branches as on March 31st2018.
Further the Government has amended the "Prevention of Money Laundering(Maintenance of Records) Rules 2005" with effect from June 1 2017 to facilitatelinking of Aadhaar to bank accounts. Aadhaar (Enrolment and Update) Regulations 2016 hasbeen amended to enable all the scheduled commercial Banks to act as Registrars forcarrying out Enrolment and Updation Service inside the premises of bank branches and banksare directed to have such enrolment centres in minimum of 10% of their branches. As suchyour bank has identified 80 centers for facilitating aadhaar enrolment.
Bank is actively involved in putting in place system and procedures on banking servicesrendered to customers as per the guidelines received from RBI IBA and BCSBI from time totime.
DIGITAL BANKING INITIATIVES
Bank has adopted the strategy of Rs.Managing channels instead of Managing Branches' andhas been pioneer in adapting technology driven delivery channels i.e. digital channelsand bringing out innovations and value additions in its existing digital channels. Themajor digital initiatives taken by the bank during the FY 2017-18 are:
Introduction of "KBL Image Debit Card" a personalised image debitcard.
Introduction of Cash Recyclers to use a single machine for Deposit/Withdrawal ofcash.
Stepping into social Media Channels by opening Bank's official pages inFaceBook Twitter Instagram & YouTube.
Revamping of Bank's Corporate Website to enhance the features and keep thecustomers engaged.
Integration of KBL Locator to enable tracking of Bank branches/ATMs throughBank's Corporate Website and Mobile Banking Applications.
Introduction of Debit Card Blocking facility Domestic/International usageSwitch On/Off and Card limit setting through IVR Internet Banking and Mobile Banking.
Enhancement in Internet Banking UI/UX.
Enhancement in KBL Mobile Banking with features of Online FixedDeposits/Recurring Deposits Opening AADHAAR Seeding Online Debit Card Blocking services.
Bharat Bill Payment System (BBPS) - is an integrated bill payment system whichwill offer interoperable online bill payment service to customers.
KBL-eCOLLECT which enables institutions to collect fees online.
Launching of Fixed Asset Management System - To manage and automate the variousFixed Assets of the Bank at Treasury and Accounts Department.
Automation of Inspection & Audit Process.
Besides Bank will continue to put efforts in the direction of introducingproducts/services to cater to the needs of present and prospective customers base and tobe a Rs.one-stop-shop' for all financial requirements.
PARA BANKING ACTIVITIES
With an aim to provide diversified financial products and services to maximize valueadded services to the customers Bank provides Para-Banking third party products such asLife Insurance General Insurance Mutual Funds etc. Bank has tied up with LIC of IndiaPNB MetLife India Insurance Co. Ltd. Universal Sompo General Insurance Co. Ltd. BajajAllianz General Insurance Co. Ltd. for distribution of insurance products and with variousMutual Fund houses for selling unites of Mutual Funds. Also the NPS facility(NationalPension Scheme) is extended to all 800 branches.
AWARDS AND RECOGNITIONS
Your Bank has bagged following awards during the year under report in recognition ofits achievement under technology initiatives social banking export performance etc.
IBA- Banking Technology Awards 2018 under the Small Bank Category.
[a] Runner up - Technology Bank of the Year.
[b] Runner up - Best use of Digital and Channels Technology.
[c] Runner up - Best Payment Initiatives.
ASSOCHAM Social Banking Excellence Award 2017 under the category "OverallBest Social Bank for Small Bank Class".
ET NOW BFSI (Banking Financial Services and Insurance) Awards 2018 under thecategories Rs.Bank with more Rural Branch expansion' and Rs.Bank with leading FinancialInclusion initiatives'.
Award for achieving 100% Branch activation of the social security scheme AtalPension Yojana in the Rs.Atal Pension Yojana People First Campaign - Uttar Pradesh'organized by Pension Fund Regulatory Development Authority (PFRDA).
'Best Financial Services and Foreign Exchange Earner in Southern Region' awardfor the year 201617 under GOLD Category instituted by FIEO (Federation of Indian ExportOrganisations).
ASSOCHAM India - SMEs Excellence Award 2017 for rendering Excellent Service inSME Sector under Private Sector category instituted by ASSOCHAM India.
Appreciation certificate "Impactful Financial Inclusion through Innovationsand Process" for the bank's contribution in the Financial Inclusion space institutedjointly by Union Bank of India and CNBC Tv18.
Atal Pension Yojana - Golden Trophy" under Private Bank Category in theChallengers Gold' campaign for the Atal Pension Yojana Social Security Scheme conductedby PFRDA.
Best Bank Award among Small Banks for use of Technology for Financial Inclusioninstituted by IDRBT.
Winner in Rs.Atal Pension Yojana - Brand Ambassador Trophy' contest for theAtal Pension Yojana - Social Security Scheme conducted by PFRDA.
ISO 9001: 2015 Certification: bagged by Staff Training College Mangaluru forcompliance to quality management standards instituted by TVE Certification Services Pvt.Ltd. Trichy.
Atal Pension Yojana Award: Winner under other private sector banks category inthe Atal Pension Yojana campaign conducted by PFRDA and bagged Rs.Indian Pension League[IPL]-Become the Best of the Best trophy.
STP Award 2016: 2nd Prize in recognition of Bank's outstanding paymentformatting and straight through rate instituted by Bank of New York Mellon.
MSME Banking Excellence Awards 2016 under the category - CSR Initiatives andBusiness Responsibility Award- Runner Up-(Emerging Category) instituted by Chamber ofIndian Micro Small and Medium Enterprises.
Financial Inclusion means making available the full range of banking services at anaffordable cost to the people who do not have access to banking services. It mainlyfocuses on the section of society not having formal financial institutional support.Through the Financial Inclusion Plan Bank aims at Rs.connecting people' with the Bank andnot just opening accounts. This includes meeting the small credit needs of the ruralpublic giving them access to the payments system providing remittance facility and lifeand health insurance. Efforts are being made to optimize the resources to achieve the goalof extending banking facilities to the un-banked areas/deprived sections.
Your Bank has 171 branches located in the rural areas and offer banking facilities tothe rural clientele in the gram panchayats or villages where these branches are located.All the rural branches are also acting as Financial Literacy Centers (FLCs) and impartingbanking literacy among the rural populace.
In accordance with announcement of Prime Minister Jan Dhan Yojana (PMJDY) on August 152014 revised Strategy and Guidelines of Department of Financial Services (DFS) Ministryof Finance Govt. of India are considered for implementation of Financial Inclusionactivities in the Bank. PMJDY takes in to account both rural sub service areas (SSAs) andurban wards for Financial Inclusion. Under the revised financial inclusion plan in ruralareas Bank is allocated with 214 Gram Panchayats (GPs) for Financial Inclusion covering297 Sub service Areas (SSAs) consisting of 1039 villages in the states of KarnatakaChattisgarh Maharashtra and Andhra Pradesh and in urban areas 313 wards are allocated inKarnataka and other states. The Gram Panchayats are covered under Brick and Mortar Branchapproach and Business Correspondents (BC) Model. Your Bank has been issuing RuPay PMJDYDebit Cards under the domestic card payment scheme launched by the National PaymentsCorporation of India (NPCI) and has also introduced Aadhaar Enabled Payments System (AEPS)at all BC locations of the Bank.
BRICK AND MORTAR BRANCHES
As on 31st March 2018 Bank has covered 547 villages of 106 GPs through Brick& Mortar Branches.
BUSINESS CORRESPONDENT SERVICES (BC SERVICES)
Your Bank has entered into an agreement with M/s BASIX Sub-ki Transaction Ltd and M/sIntegra Micro Systems Pvt. Ltd. to provide online transaction facility and as on 31stMarch 2018 113 GPs with 141 SSAs covering 517 villages of Karnataka Andhra Pradesh andChattisgarh States were covered under the above arrangement.
ULTRA SMALL BRANCHES (USBs)
As permitted by the Reserve Bank of India your Bank had opened USBs where businesscorrespondents (BCs) could conduct operations and thereby boost confidence of customers touse their financial services. As on 31st March 2018 your Bank has 35 USBs.
ELECTRONIC BENEFIT TRANSFER (EBT) - PILOT PROJECT OF GOVT. OF KARNATAKA
Your Bank is participating in Govt. of Karnataka (GOK) EBT Pilot project for NREGA/SSPbeneficiaries under -"One District - Many Bank Model" and is disbursing thepayments under the above schemes to the beneficiaries using smart card and hand heldmachines at 5 Gram Panchayat locations in Chitradurga and Yadgiri districts in KarnatakaState.
DIRECT BENEFIT TRANSFER (DBT)
Your Bank is actively participating in Direct Benefit Transfer (DBT) Programme of Govt.Of India wherein the Govt. would transfer benefits of various Schemes directly to thebeneficiaries Aadhaar enabled bank accounts and also accounts seeded with LPG ID in caseof transfer of subsidy for LPG. For this purpose Bank has on boarded with NPCI forAadhaar Payment Bridge System (APBS) under National Automated Clearing House (NACH).Revised DBTL was introduced on November 15 2014 and launched throughout the country onJanuary 12015.
FINANCIAL LITERACY AND CREDIT COUNSELLING CENTER (FLCCS)
Your Bank has sponsored 5 FLCs at B.C Road Tiptur Hangal Kundagol and Alur in ajoint venture with M/s Jnana Jyothi Financial Literacy and Credit Counseling TrustManipal. During the financial year 5 FLCs sponsored by the Bank have conducted 1680Financial Literacy campaigns and 64129 participants had been covered. In adherence to RBIguidelines all the rural branches of our Bank are also conducting financial literacyCamps.
SOCIAL SECURITY SCHEMES
Three Social Security Schemes-Prime Minister Jeevan Jyothi Bima Yojana (PMJJBY) PrimeMinister Suraksha Bima Yojana (PMSBY) and Atal Pension Yojana (APY) have been launched byHon'ble Prime Minister on 1st June 2015. All the branches of your Bank areactively involved in providing schemes to the customers across the country.
1. PMJJBY provides life insurance coverage of Rs. 200000/- by paying yearly premium ofRs. 330/-. A person aged between 18 to 50 years holding account in a Bank is eligible forthe scheme. A total of 149185 lives have been covered till 31.03.2018.
2. PMSBY provides Accidental insurance coverage of Rs. 200000 by paying yearly premiumof Rs. 12/-. A person aged between 18 to 70 years holding account in a Bank is eligiblefor the scheme. A total of 217339 lives have been covered till 31.03.2018.
3. APY: This scheme was launched by the Government of India on 9th May 2015 to addressthe old age income security needs of the citizen in an affordable manner linked to autodebit facility from the bank's savings account of the subscriber. Your Bank is activelyparticipating in the scheme with all branches being registered as Point of Presence-Service Provider (POP-Sp) for APY. As on 31.03.2018 Bank has opened 45947 APY accounts.
PRIME MINISTER JAN DHAN YOJANA (PMJDY)
In accordance with announcements of Prime Minister Jan Dhan Yojana (PMJDY) on August15 2014 revised Strategy and Guidelines of Department of Financial Services (DFS)Ministry of Finance Govt. of India has been considered for implementation of FinancialInclusion activity of the Bank. PMJDY takes in to account both rural semi urban urbanwards and metro for providing basic banking facilities to the unbanked populace. PMJDYalso provides scope for RuPay debit card that is inclusive of Rs. 1 lakh accidentalinsurance.
All the branches across the country have opened accounts under PMJDY and are issuingRuPay Debit Card under the domestic card payment scheme launched by the National PaymentCorporation of India (NPCI).
During the year under report 214076 PMJDY accounts have been opened with anoutstanding balance of Rs. 44.30 crore.
AADHAAR ENABLED PAYMENT SYSTEM (AEPS)
Your Bank has introduced AEPS transaction services offered by National PaymentsCorporation of India (NPCI) at all Business Correspondent (BC) locations of the Bank.Bank's customer having any type of SB account that is Aadhaar enabled can now transact atthe BC point.
CORPORATE SOCIAL RESPONSIBILITY
Businesses play an important role in the growth of an economy. The growth of theeconomy becomes meaningful only when the economic output generated contributes to theoverall welfare of the society. Towards this end business establishments have to embedsustainability into the core of their business operations to create shared value forbusiness and society. The Corporate Social Responsibility initiatives of the Bank aredesigned to make a positive impact on a wide range of areas of social life likehealthcare education/ livelihood enhancement empowering women/ socially and economicallydisadvantaged environmental sustainability/ green initiatives protection of heritage/culture promotion of sports rural development etc. aimed at promoting the overalldevelopment of the society. Further to minimize the urban - rural divide your Bank hasbeen strengthening its rural orientation through initiatives aimed at imparting financialliteracy and extending banking services to the people in rural unbanked areas in a fairand transparent manner at an affordable cost.
Further pursuant to Section 135 of the Companies Act 2013 read with Companies(Corporate Social Responsibility Policy) Rules 2014 the Board has set-up a Committee ofDirectors namely Rs.Corporate Social Responsibility (CSR) Committee' and has also put inplace a Policy on Corporate Social Responsibility (CSR Policy) to undertakeprojects/programmes in pursuance to the above Policy. The contents of the CSR Policy alongwith the report on amount spent on various projects/ programmes during the financial year2017-18 is detailed in Annexure V to this report pursuant to Rule 8 of the Companies(Corporate Social Responsibility Policy) Rules 2014.
INTERNAL CONTROL SYSTEMS THEIR ADEQUACY AND COMPLIANCE
An effective and sound internal audit function provides independent assurance to theBoard of Directors and Senior Management on the quality and effectiveness of Bank'sinternal control risk management and governance systems and processes thus helping theBoard and the Senior Management in protecting the organization and its reputation.
Your Bank has put in place an effective and robust internal control apparatuscommensurate with its size geographical spread and complexity of operations. At the apexlevel guidance and direction on the control aspects is vested with the Audit Committee ofthe Board of Directors which takes an overall view on the internal control aspects andformulates all the related policy guidelines. The Bank has put in place an independentCompliance Department in charge of the entire compliance functions of the Bank.
Historically the internal audit system in the Bank has been concentrating ontransaction testing testing of accuracy and reliability of accounting records andfinancial reports integrity reliability and timeliness of control reports and adherenceto legal and regulatory requirements. With the implementation of Risk- Based InternalAudit (RBIA) greater emphasis is placed on the internal auditor's role in mitigatingvarious risks. While continuing with the traditional risk management and control methodsinvolving transaction testing etc. the risk-based internal audit would not only offersuggestions for mitigating current risk but also on potential future risk thereby playingan important role in the risk management process of the Bank.
The risk assessment under RBIA would cover risks at various levels (corporate andbranch; portfolio and individual transactions etc.) as also the processes in place toidentify measure monitor and control the risks. The internal audit department isdevising the RBIA risk assessment methodology with the approval of the Board ofDirectors keeping in view the size and complexity of the business undertaken by the Bank.The risk assessment process would include the identification of Rs.inherent business risk'in the various activities undertaken by the Bank and evaluate the effectiveness of thecontrol systems for monitoring the inherent risks of the business activities(Control Risk') and then draw up a risk-matrix by taking into account both thefactors viz. inherent business and control risks.
With a view to seek periodic assurances on the adequacy and efficacy of internalcontrol functions the Bank causes periodic Regular Inspections and Information System(IS) Audit of all the branches and offices. Besides your Bank also covers select branchesunder concurrent audit the aggregate turnover of which account for over 65.76% of thegross bank credit and over 50.10% of aggregate deposits of the Bank. Short Inspection ofall the branches which are not subjected to concurrent audit is also caused besidesconcurrent audit of treasury functions (both domestic and forex) International DivisionForex designated offices Central Processing Centre Currency Chests Monthly IS audit ofData Centre and quarterly IS audit of DR Site by CERT-In empanelled external securityauditing firm monthly external Integrated Audit of Customer Care Centre besides handlingother regular Internal Audits by CISA qualified and ISO 27001 Lead Auditors etc. Duringthe current financial year it is proposed to bring the SWIFT messaging system andRegional Loan Processing Centre (RLPC) under the purview of concurrent audit.
Besides the Bank has also been causing Stock and Credit audits of large borrowalaccounts by external professional audit firms in furtherance of effective creditadministration. The Bank has also taken prompt action on the implementation of the RBIGuidelines on Information Security e-Banking Technology Risk Management and CyberFrauds.
To apprise the effectiveness of management at different levels in accomplishing theassigned tasks towards achieving the overall corporate objectives Management Audit isalso introduced by your Bank for Departments at Head Office and Regional Offices.
Your Bank has put in place the policies and procedures for ensuring an orderly andefficient conduct of its business safeguarding of its assets prevention and detection offrauds and errors accuracy and completeness of the accounting records and timelypreparation of reliable and transparent financial information. The Audit Committee of theBoard periodically assesses the effectiveness of the internal financial controls and theiradequacy and issues directions for its strengthening wherever found necessary.
Your bank has automated audit process of Risk Based Internal Audit (RBIA) with effectfrom 11.12.2017.
Considering the need for having a strong collection mechanism and to contain slippagesof borrowal accounts into NPAs and improve asset quality the Credit Monitoring Departmentat Head Office and Credit Monitoring Teams at Regional Offices ensure adherence ofpost-sanction compliance requirements and follow-up of advance through effective controland communication mechanisms.
RISK BASED SUPERVISION (RBS)
In view of the growing complexities in the processes product offerings and systems andprocedures in the Indian banking sector pursuant to the recommendation of the High LevelSteering Committee Reserve Bank of India has shifted supervisory stance to risk-basedapproach called Supervisory Program for Assessment of Risk and Capital (SPARC) which isfocusing on evaluating both present and future risks identifying incipient problems andfacilitating prompt intervention/ early corrective action etc. Your Bank has been includedunder the same and migrated to Risk Based Supervision since 31st March 2015and the system is working satisfactorily. A plan of action for monitoring various risks asadvised by RBI has also been put in place.
As an important element in Corporate Governance structure the Bank has formed a robustCompliance Department with sufficient independence to promote healthy compliance culturewithin the Bank. The compliance function in the Bank ensures strict observance of allstatutory provisions guidelines from RBI and other Regulators standards and codesprescribed by BCSBI Bank's internal policies and fair practices code. Further thecompliance function includes interpretation/ dissemination of regulatory and statutoryguidelines observing proper standards of market conduct. The Bank's compliance functionassists the Top Management in managing the Compliance Risk effectively. The risk-basedcompliance programme of the Bank under the supervision of head of compliance departmentensures appropriate coverage across businesses and co-ordination among risk managementfunctions besides verifying the level of compliance through Rs.Compliance Testing' ofbranches. The Bank carries out an annual compliance risk assessment to identify and assessmajor compliance risks faced by it and takes steps to manage the risks effectively.
MANAGEMENT INFORMATION SYSTEM
The growth of Bank's business introduction of prudential norms Basel requirementsincreasing regulatory and internal reporting and the various business decision makingrequirements have necessitated the Bank to build a well-coordinated informationtransmission system. Management Information System of the Bank (MIS) provides informationto branches/offices top management regulators and external agencies financialreporting capital computation Risk Based Supervision (RBS) internal business reviewsetc. The Bank has also implemented a Centralized Data Repository for Automatic Data Flowto RBI.
The Core Banking System (CBS) covers all the branches and offices of the Bank as on31.03.2018. Further Alternate Delivery Channels like ATM Internet Banking MobileBanking UPI App etc. have also been integrated with CBS. Disaster Recovery (DR)facilities for all the critical applications are established to ensure business continuityin the event of primary site failure. A three-way data replication aimed at zero data lossis also implemented for applications such as CBS ATM and Internet Banking.
The other technology enabled initiatives include the Asset Liability Management System(ALM) Central Data Repository (CDr) Lending Automation Processing Solution (LAPS) andAnti Money Laundering (AML) system Enterprise Level Fraud Risk Management System(ELFRMS)for real time monitoring of Alternate Delivery Channel and CBS transactions MobileBanking Unified Payment Interphase (UPI) Application Integrated Treasury InteractiveVoice Response (IVR) System Solutions for managing Market Risk and Operational Risk etc.
During the year under report your Bank has undertaken several IT projects like Aadhaarlinking to Bank account through ATM Mobile and SMS revamped Corporate WebsiteAlternative Network Lines for important business centre's for ensuring businesscontinuity Goods and Services Tax (GST) and FATCA implementation Aadhaar Enabled PaymentSystem(AEPS) Image Based Debit Card etc. In order to upgrade the IT infrastructure Bankhas also taken up the replacement of more than 3000 Computers. Bank has also taken upe-Waste management to ensure safe disposal of hazardous electronic waste like usedcomputers servers printers etc.
Your Bank will continue to observe technological revolutions and take appropriatedecision at the right time to provide premier banking services and also continue to be atech-savvy Bank.
Further in view of increased dependency on IT products and services and also increasein the volume of fraud/ attacks observed in the industry Bank has put in place a robustRs.Cyber Security Policy' and also initiated steps to further strengthen its IT Cyberand Information Security systems by putting in place required hardware/ software/appliances in line with the industry best practices.
The Banking industry across the country is now being exposed to various changes whichhave a direct impact on the existing systems and sphere of activities. The survival andprosperity of any industry depends upon the quality of its human resource and bankingindustry is not an exception to this. Human Resource Development is the process ofincreasing the capacity of human resources through the development and thus adds value toindividuals teams and the organization as a human system. Accordingly your Bankattributes the greatest importance to employee satisfaction andhuman resource developmentactivities.
Your Bank deputes its employees to various training and development programmes toupgrade their skills and competencies and contribute towards the growth of the Bank. TheBank has a well-established Staff Training College having state of the art infrastructurefacilities and expertise in conducting training programmes. Besides Officers requiringspecialized training are being deputed to various programmes conducted at Indian Instituteof Management (IIM) at Bengaluru and Ahmedabad Centre for Advanced Financial Research andLearning (CAFRAL) at Mumbai National Institute of Bank Management (NIBM) at Pune ReserveBank's College of Agricultural Banking (CAB) at Pune Institute for Development andResearch in Banking Technology (IDRBT) at Hyderabad Foreign Exchange Dealers Associationof India (FEDAI) at Mumbai BQ Academy at Mumbai Southern India Banks' Staff TrainingCollege (SIBSTC) at Bengaluru Indian Institute of Banking and Finance (IIBF) at MumbaiBankers Institute of Rural Development (BIRD) at Mangaluru etc. During the year 2017-18the Bank has deputed the employees to various trainings/workshops/conferences toupdate/improve their knowledge and skills. There were 2543 641 and 94 nominations tovarious programmes in the category of Officers Clerks and Sub-staff respectively covering40% of the total staff strength during the year under report. Apart from traditionalmethods of training your Bank has implemented eLearning module which enables the staffmembers to acquire knowledge on the subjects at a convenient location through easylearning techniques without the necessity of attending classroom training.
Capacity Building' is the process which involves development and strengtheningthe skills instincts abilities processes and resources of the organization. Your Bankhas put in place Capacity Building Policy under which the specialized areas such asTreasury Operations Risk Management Credit Management Accounting Human ResourceManagement and Information Technology have been identified as the key areas for whichacquiring of certificate course from the institutions approved by RBI have been mademandatory.
As on 31st March 2018 Bank had 8185 employees. The Business per employee(excluding inter-bank deposits) has improved from Rs. 11.74 crore as on 31stMarch 2017 to Rs. 13.44 crore as on 31st March 2018. Further your Bank hasmaintained cordial industrial relations and employee discipline.
Your Bank has put in place an institutional mechanism for protection of women employeesat the workplace and adopted a policy pursuant to Section 22 of the Sexual Harassment ofWomen at Workplace (Prevention Prohibition and Redressal) Act 2013 providing forprotection of women employees against the sexual harassment of women at the workplace andredressal of such complaints. The details of the complaints under the above Policy for theyear under report are as under:
|Number of complaints pending as at the beginning of the financial year ||NIL |
|Number of complaints filed during the financial year ||NIL |
|Number of complaints pending as on end of the financial year ||NIL |
The Bank has implemented the Protected Disclosure Policy (Whistle Blower Policy) sincethe year 2007 intended to promote participation of employees at all levels and detectionof corruption misuse of Office criminal offences suspected/actual fraud failure tocomply with the rules and regulations prescribed by the Banks and any events/ actsdetrimental to the interest of the Bank depositories and the public resulting infinancial loss/operational risk loss of reputation etc. Further the mechanism adopted bythe Bank encourages the Whistle Blower to report genuine concerns or grievances andprovides for adequate safeguards against victimization of Whistle Blower who avails suchmechanism and also provides for direct access to the Chief of Internal Vigilance (CIV) ingeneral and Chairman of the Audit Committee in exceptional cases. The Vigil mechanism isreviewed periodically. The details of Whistle Blower Policy is posted in our website andavailable at the link https://kamatakabank.com/sites/default/files/2017-09/PoNcy%20on%20Disclosure%20Scheme.pdf
DIRECTORS AND CHANGES IN THE BOARD
As on 31st March 2018 your Bank had a total of ten Directors including twowoman directors. All of them except Mr. P Jayarama Bhat Part-Time Non-ExecutiveChairman Mr. Mahabaleshwara M S Managing Director and CEO and Mrs. Mythily RameshAdditional Director are Independent Directors. The details of the criteria forappointment and remuneration of Directors are provided in the report on CorporateGovernance under Annexure II.
The Board of Directors at its meeting held on April 12 2017 appointed Mr. P JayaramaBhat as Part time Non-Executive Chairman (who assumed charge on 12.04.2017) pursuant tothe approval received from the Reserve Bank of India vide their letter DBRAppt.No.12034/08.40.001/2017-18 dated April 10 2017 in accordance with Section 10B(1A)(i) of the Banking Regulation Act 1949 after being inducted as an AdditionalDirector. Subsequently at the 93rd Annual General Meeting of the Bank he wasappointed as Non-Executive Non Independent Director of the Bank liable to retire byrotation. Being eligible for reappointment Mr. P Jayarama Bhat has offered himself forreappointment.
Considering his experience knowledge and expertise and the contribution made duringhis tenure as Non-executive Chairman of the Bank your Directors recommend for approval ofhis re-appointment as a Director of the Bank who is liable to retire by rotation at theensuing 94th Annual General Meeting and being eligible offers himself forre-appointment. A brief resume of Mr. P Jayarama Bhat is furnished in the notice of theAnnual General Meeting.
During the year under report Mrs. Mythily Ramesh was appointed on the Board as anAdditional Director w.e.f.14.03.2018 and as per Section 161 of the Companies Act 2013 andshe would hold office upto the date of ensuing Annual General Meeting. Further the Bankhas received necessary notice from a member under Section 160 of the Companies Act 2013proposing her candidature for appointment as an Independent Director of the Bank andhaving regard to her vast experience rich knowledge and expertise your Directorsrecommend her appointment as an Independent Director. A brief resume of Mrs. MythilyRamesh is furnished in the notice of the Annual General Meeting.
MANAGING DIRECTOR AND CHIEF EXECUTIVE OFFICER (MD & CEO)
The Board at its meeting held on April 12 2017 appointed Mr. Mahabaleshwara M S asManaging Director and CEO of the Bank for a period of three years w.e.f. April 15 2017i.e. from the date of taking charge pursuant to the approval received from the ReserveBank of India vide their letter DBR Appt.No.11838/08040.001/2017-18 dated April 05 2017in accordance with Section 35B of the Banking Regulation Act 1949 after inducting him asan Additional Director on the Board.
INDEPENDENT AND NON-EXECUTIVE DIRECTORS
Pursuant to the provisions of Section149(6) of the Companies Act 2013 your Bank hasreceived necessary declarations from all the Non-Executive Directors except Mr. PJayarama Bhat confirming that they meet the criteria of independence for IndependentDirectors. Mrs. Mythily Ramesh has also furnished similar declaration and subject to herappointment at the ensuing Annual General Meeting she also meets the criteria ofindependence.
PERFORMANCE EVALUATION OF THE BOARD
Your Board of Directors has laid down criteria for performance evaluation of DirectorsChairman MD & CEO Committees of the Board and Board as a whole and also theevaluation process for the same. The statement indicating the manner in which formalannual evaluation of the Directors the Board and Committees of the Board etc. are givenin detail in the report on Corporate Governance which forms part of this Annual Report.In pursuance to the above NRC of the Board and Independent Directors in their separatemeetings held on March 14 2018 have reviewed and evaluated the performance of Board as awhole and the Managing Director and CEO.
Further the Board has also reviewed the performance of committees of the Board andthat of individual Independent Directors at its meeting held on March 14 2018.
CONTRTACTS OR ARRANGEMENTS WITH RELATED PARTIES
All related party transactions that were entered into during the financial year were inthe ordinary course of the business of the Bank and were on arm's length basis. There wereno materially significant related party transactions entered into by the Bank withDirectors Key Managerial Personnel or other persons which may have a potential conflictwith the interest of the Bank. As such disclosure in Form AOC-2 is not applicable. Thepolicy on dealing with Related Party Transactions as approved by the Audit Committee/Board has been placed in the website of the Bank.
DIRECTORS' RESPONSIBILITY STATEMENT
In accordance with Section 134(3)(C) 134(5) of the Companies Act 2013 read with Rule8 of the Companies (Accounts) Rule 2014 your Directors state that:
a) In the preparation of the annual accounts the applicable accounting standards havebeen followed along with proper explanation relating to material departures;
b) The Directors have selected such accounting policies and applied them consistentlyand made judgements and estimates that are reasonable and prudent so as to give a true andfair view of the state of affairs of the Bank as at the end of financial year 31stMarch 2018 and profit and loss for that period.
c) The Directors have taken proper and sufficient care for the maintenance of adequateaccounting records in accordance with the provisions of the Companies Act 2013 forsafeguarding the assets of the Bank and for preventing and detecting fraud and otherirregularities.
d) The Directors have prepared the annual accounts on a going concern basis.
e) The Directors have laid down the internal financial controls followed by the Bankand that such internal financial controls are adequate and are operating effectively.
f) The Directors have devised proper systems to ensure compliance with the provision ofall applicable laws and that such systems were adequate and operating effectively.
The disclosures under sub-section (3) of Section 134 of the Companies (Accounts) Rules2014 are furnished below:
a) Conservation of energy and technology absorption: Considering the nature of theBank's business the provisions of Section 134(3)(m) of the Companies Act 2013 relatingto conservation of energy and technology absorption are not applicable to your Bank. TheBank has however used information technology in its operations extensively.
b) Foreign exchange earnings and outgo: During the year ended 31st March2018 the Bank has earned Rs. 25.40crore and spent Rs. 1.15crore in foreign currency.
c) There were no significant and material orders passed by the regulators or courts oftribunals impacting the going concern status and Bank's operations in future.
d) Internal financial control systems and their adequacy: Your Bank has laid downstandards processes and structure facilitating the implementation of internal financialcontrol across Bank and ensure that same are adequate and operating effectively.
e) Key Managerial Personnel: Mr. Mahabaleshwara M S MD & CEO Mr. Y VBalachandra CFO and Mr. Prasanna Patil Company Secretary of the Bank were the KeyManagerial Personnel of the Bank as on 31st March 2018 as per the provisions ofthe Companies Act 2013. None of the Key Managerial Personnel has resigned during the yearunder report.
f) Remuneration of Directors: Disclosure pursuant to Section 197 (12) of theCompanies Act 2013 read with Rule 5 of the Companies (Appointment and Remuneration ofManagerial Personnel) Rules 2014 are given in Annexure VI to this report.
g) During the financial year 2017-18 there was no employee who was in receipt ofremuneration requiring disclosure as per the limits prescribed under Section 197 of theCompanies Act 2013 read with Rule 5 of The Companies (Appointment and Remuneration ofManagerial Personnel) Rules 2014.
EXTRACT OF THE ANNUAL RETURN
Pursuant to Section 92(3) of the Companies Act 2013 read with Rule 12(1) of theCompanies (Management and Administration) Rules 2014 an extract of the Annual Return ofthe Bank as on 31st March 2018 is annexed (Annexure III).
NUMBER OF BOARD MEETINGS
During the year under report the Board met 17 times and the details thereof areprovided in the report on Corporate Governance.
COMMITTEES OF THE BOARD
The Bank had 13 Committees which were constituted to comply with the requirements ofrelevant provisions of the applicable laws and for operational efficiency. Details of themeetings of the Board and the Committees their composition terms of reference powersroles etc are furnished in the report on Corporate Governance forming part of this report
Your Bank is committed to follow the best practice of corporate governance to protectthe interest of all the stakeholders of the Bank viz. shareholders depositors and othercustomers employees and the society in general and maintain transparency at all levels. Adetailed report on corporate governance practices is given as Annexure II to this report.
a. Statutory Auditors
At the 93rd Annual General Meeting of the shareholders M/s. Abarna &Ananthan Chartered Accountants Bengaluru and M/s. R K Kumar & Co CharteredAccountants Bengaluru were appointed as Statutory Central Auditors of the Bank to holdoffice upto the ensuing 94th Annual General Meeting. Since M/s. Abarna &Ananthan (Firm Registration No. 000003S) Chartered Accountants Bengaluru one of theretiring statutory central auditors will be completing their four years of statutorycentral audit of the Bank their firm is subject to resting for a period of six years.
M/s. R K Kumar & Co (Firm Registration No.001595S) Chartered AccountantsChennai the other joint statutory auditor will be completing the period of one year atthe conclusion of the ensuing Annual General Meeting. The firm was appointed at the 93rdAnnual General Meeting held on July 17 2017 after completion of resting period of twoyears as per then applicable RBI extant guidelines. Currently the resting periodprescribed by the RBI is six years and as the firm had completed resting period of 3 yearsbefore their current term beginning from 2017-18 M/s. R. K. Kumar & Co firm is nowsubject to resting for a period six years from the conclusion of the ensuing 94thAnnual General Meeting.
Hence Board of Directors propose to the members the appointment of M/s ManoharChowdhry & Associates (Firm Registration No.001997S) Chartered Accountants NewNo.27 Subramaniam Street Abiramapuram Chennai-600018 and M/s Badari Madhusudhan &Srinivasan (Firm Registration No.005389S) Chartered Accountants No. 132 II FloorKantha Court Lalbagh Road Bengaluru-560027 jointly as Statutory Central Auditors of theBank to hold office upto the conclusion of 95th Annual General Meeting.Pursuant to Section 30(1A) of the Banking Regulation Act 1949 approval from Reserve Bankof India has been obtained for the above appointments. The Bank has received consent fromthe above auditors and necessary confirmation from them that they are not disqualified tobe appointed as auditors of the Bank pursuant to the provisions of the Companies Act 2013and the Rules made thereunder.
b. Secretarial Auditor and Secretarial Audit Report
Pursuant to Section 204 of the Companies Act 2013 and the rules thereunder your Bankhad appointed M/s.Gopalakrishnaraj H H & Associates Practising Company SecretaryBengaluru as Secretarial Auditors to conduct the Secretarial Audit for the year ended 31stMarch 2018. The audit report from the Secretarial Auditor is annexed to this report asAnnexure IV.
Your Directors would like to place on record their sincere gratitude to the ReserveBank of India other government and regulatory authorities financial institutions andcorrespondent banks for their continued guidance and support. Your Directors also place onrecord their gratitude to the Bank's shareholders depositors and other customers fortheir continued support patronage and goodwill. Your Directors express their deep senseof appreciation to all the staff members for their contribution in your Bank's quest forsustained growth and profitability and look forward to their continued contribution inscaling greater heights.
For and on behalf of the Board of Directors
P Jayarama Bhat
Date: June 18 2018.