III. Contingent assets are not recognized in the financial Statements.
1. Net Profit
The Net Profit in the Profit & Loss account is after:-
a) Provision for depreciation on investments.
b) Provision for Taxation.
c) Provision on loan losses.
d) Provision on Standard Assets.
e) Provision for Non-Performing investments.
f) Provision for other usual & necessary items.
 Earning Per Share
The Bank reports basic and diluted Earnings Per Share in accordance with AS 20. Basic Earnings Per Share is computed by dividing the net profit after tax by the weighted average number of equity shares outstanding for the Year.
SCHEDULE 18 - NOTES ON ACCOUNTS 1. Investments:
The percentage of investments under “Held to Maturity” category - SLR as on 31.03.2017 was 20.41% of Demand and Time Liability of the Bank (Previous year 20.60%), which is within the permissible limit as per RBI guidelines.
3 Inter-Branch Transactions:
The matching and setting of entries under Interbank/office transactions are carried out by the system itself based on Core Banking Solutions (CBS) for the whole of the Bank through Inter Office Adjustment account.
Premises include certain properties capitalized at original cost of Rs,56.62 Crore (Previous year Rs,55.46 Crore) as they have been put to use though conveyance of title deeds is still to be completed.
5 Disclosure on risk exposure in derivatives:
I Qualitative Disclosure
The Credit Risk Management Policy approved by the Board of Directors, on the use of Derivative Instruments to hedge / trade is in place.
A. The Investment Portfolio of the Bank consists of assets with interest streams such as fixed interest rate, zero coupon and floating interest rates and is subject to interest rate risk.
Capital of the Bank:
The Bank has issued Tier I and Tier II bonds hedged for interest rate swap which do not have exit option. The policy permits hedging the interest rate risk on this liability as well.
Bank has been permitted to undertake derivative trades like IRS and FRAs for the purpose of hedging the interest rate risk in the investment portfolio (only plain vanilla transactions permitted) and also for market making. Such derivative trades like IRS and FRAs are undertaken by bank for hedging foreign currency liabilities also. Options and Swaps are also undertaken on behalf of clients on back to back basis.
However during the year the bank has neither undertaken derivative trades in IRS under investment portfolio nor any trading swaps / FRAs.
B. The risk management policies and major control limits like stop loss limits, counterparty exposure limits, PV01, etc. approved by the Board of Directors are in place. These risk limits are monitored and reviewed regularly. MIS / Reports are submitted periodically to Risk Management Committee. The effectiveness of hedging by way of outstanding derivative deals are monitored in relation to the underlying asset / liability on fortnightly basis.
C. Accounting Policy:
- Accrual on account of interest expenses / income on the IRS are accounted and recognized as expenses / income.
- Hedge effectiveness of the outstanding derivatives deals are monitored in relation to the fair value of the Swap and underlying asset / liability. Bank has used the FIMMDA pricing method ie relevant G sec yield plus corporate bonds spread for arriving at the fair value of the underlying assets / liability. If the Hedge is not effective, hedge swaps is accounted as trading swaps. If swap is terminated before maturity, the MTM loss / gain and accruals till such dates are accounted as expense / income under interest paid / received on IRS.
- Trading swaps are marked to market at frequent intervals and changes are recorded in the income statements.
- Accrual on account of interest expenses / income on the IRS are accounted and recognized as expenses / income.
- Gains or losses on termination of swaps are recorded as immediate income or expenses under the above head.
6. Details of Single Borrower Limit (SGL) / Group Borrower Limit (GBL) exceeded by the Bank:
The Bank has not exceeded the prudential credit exposure limits prescribed for group accounts and single borrower engaged in infrastructure projects or for oil companies.
(As Compiled and Certified by Management and relied upon by Auditors)
8. Amount of Provisions made for Income Tax during the year:
9. Disclosure of Penalties imposed by RBI:
During the financial year 2016-17, there is penalty of Rs,2.00 Crore in terms of Section 47 (A) (1) (c) read with section 46 (4) (i) of the Banking Regulation Act, 1949 on non - compliance of certain guidelines of the Reserve Bank of India instructions.
Financial Intelligence Unit, India (FIU-IND) has imposed a penalty of Rs,3.00 lakh under Section 12 (Rule 2, 3, 5 & 7) & 13 (2) of PML Act, 2002 for failure of internal mechanism of the bank in detecting and reporting attempted suspicious transactions.
10. Accounting Standards:
In compliance with the guidelines issued by the RBI regarding disclosure requirements of the various Accounting Standards issued by Institute of Chartered Accountants of India (ICAI), the following information is disclosed:
11. Accounting Standard 5 - Net Profit / Loss for the period, prior period items and changes in accounting policies:
12. There are no material prior period items
13. Accounting Standard 15 - Employee Benefits:
The actuarial assumptions in respect of gratuity, pension and privilege leave, for determining the present value of obligations and contributions of the bank, have been made by fixing various parameters for
- Salary escalation by taking into account inflation, seniority, promotion and other factors mentioned in Accounting Standard 15(Revised) issued by ICAI.
- Attrition rate by reference to past experience and expected future experience and includes all types of withdrawals other than death but including those due to disability.
- Provision towards sick leave has been made in the books of account on the basis of Actuarial valuation.
14 Accounting Standard-18 - Related Party Disclosures: Names of Related parties and their relationship with the Bank - Parent - Canara Bank
15. Key Management Personnel -
i) Shri. Rakesh Sharma, Managing Director & Chief Executive Officer
ii) Shri. Harideesh Kumar B, Executive Director
iii) Shri. Dinabandhu Mohapatra, Executive Director
iv) Smt P V Bharathi, Executive Director (From 15.09.2016)
v) Sri Pradyuman Singh Rawat (Till 31.05.2016)
16. Parent -
i) Canara Bank
16. Subsidiaries -
i) Canbank Financial Services Ltd.
ii) Canbank Venture Capital Fund Ltd.
iii) Canbank Factors Ltd.
iv) Canara Robecco Asset Management Company Ltd.
v) Canbank Computer Services Ltd.
vi) Canara Bank Securities Ltd. (formerly GILT Securities Trading Corpn. Ltd)
vii) Canara HSBC Oriental Bank of Commerce Life Insurance Company Ltd
viii) Canara Bank (Tanzania) Ltd.
17. Joint Ventures -
i) Commercial Indo Bank LLC., Moscow (formerly Commercial Bank of India LLC., Moscow )
18. Associates -
i) Canfin Homes Ltd.
ii) Commonwealth Trust (India) Ltd.
iii) Regional Rural Banks sponsored by the Bank
a) Pragati Krishna Gramin Bank (Erstwhile Pragati Gramin Bank)
b) Kerala Gramin Bank
(Erstwhile South Malabar Gramin Bank)
19. Disclosure about transactions with Key Management Personnel is as under -
i) Remuneration to Key Management Personnel Rs, 0.99 Crore (Previous Year: Rs,0.68 Crore)
In terms of paragraph 5 of AS 18, transactions in the nature of Banker-Customer relationship including those with Key Management Personnel and relatives of Key Management Personnel have not been disclosed.
(As compiled and certified by the management and relied upon by the auditors.)
20. Accounting Standard-20 - Earnings Per Share:
Basic and diluted earnings per equity share are computed in accordance with Accounting Standard 20, “Earnings per Share”.
21.Accounting Standard - 22 - Accounting for Taxes on Income:
The Bank has recognized Deferred Tax Assets / Liabilities (DTA / DTL) and has accounted for the Net Deferred Tax as on 31.03.2017 as under:
All customer complaints pertaining to Automated Teller Machine (ATM) cards are included. All the ATM complaints pertain to Acquiry issues.
22. Issuance of Letter of Comfort:
Bank has issued 3571 No. of Letters of Comfort to the tune of Rs, 34677.55 Crore during the financial year. The cumulative outstanding position of 1506 No. of LOC as on 31.03.2017 is Rs, 8787.41 Crore. Apart from this, Bank has also issued Letter of Comfort to the following regulators during previous years:
The Bank has not issued any LOC favoring host country regulators during the financial year 2016-17.
LOCs / Undertaking / Guarantee issued in the past:
- China Banking Regulatory Commission, China (on behalf of our Shanghai Branch) - vide order dated 29.03.2008
- Central Bank of the UAE (on behalf of our Representative office, Sharjah) - Vide order dated 04.06.2009
- Central Bank of Bahrain (on behalf of our Manama branch, Bahrain) - Vide order dated 15.01.2010 and
- South African Reserve Bank (on behalf of our Johannesburg branch, South Africa) - Vide order dated 19.11.2011
Bank has so far not issued any LOC / undertaking on behalf of the subsidiaries or Joint Ventures (JVs), hence, the financial impact on issue of LOC / undertaking by the Bank does not exist.
With regard to branches the assets and liabilities of overseas branches are merged with the domestic operation and a consolidated Balance Sheet is drawn for the Bank as a whole. The total liability of overseas branches forms part of the liabilities of the Banks annual balance sheet.
Hence, there is no additional financial impact of LOCs issued on behalf of branches. In respect of representative Office, there are no commercial operations undertaken and hence no financial impacts of LOC issued to host country regulator.
As at 31st March 2017, there is no financial impact of LOCs issued favoring the overseas Regulators for our Bank since the same are issued on behalf of branches and Representative offices. In terms of RBI guidelines, we propose to disclose the details of LOCs issued by the Bank so far and “NIL” financial impact on account of such LOCs, under “Notes to Accounts” in the Balance Sheet as at March 2017.
23 Provision Coverage Ratio is 55.62% as on 31.03.2017 (Previous Year 50.11%):
24. Reserve Bank of India vide its communication Number DBOD.No.BP.BC. 85/21.06.200/2013-14 dated January 15, 2014 advised the Bank to provide incremental provision and capital with regard to bank''''s exposure to entities with unhedged foreign currency exposures. Accordingly for the financial year 2016-17 bank is holding a provision of Rs,32.92 Crore (Rs,37.69 Crore) towards unhedged foreign currency exposure. Further Bank is also holding a capital of Rs,143.85 Crore (Rs,118.21 Crore) as on 31.03.2017 towards the risk on unhedged foreign currency exposure.
Policies to manage currency induced credit risk with regard to Unhedged Foreign Currency Exposure:
In respect of borrower entities having foreign currency exposure Bank is computing Unhedged Foreign Currency Exposure (UFCE); Annual Earnings before interest and Depreciation (EBID); expected loss in case of movement in USD-INR exchange rate using annualized volatilities. Expected loss on account of exchange rate movements is expressed as a percentage of EBID i.e likely loss/ EBID percentage. As a prudential measure Bank is holding incremental capital and made incremental provisioning (over and above the extant standard assets provisioning) on the total credit exposure to such entities at the specified rates.
Qualitative disclosure around LCR
Liquidity Coverage Ratio (LCR) standard is introduced to tests the liquidity resilience of the Bank, for a minimum stress period of 30 days. The standard ensures, the Bank maintains adequate stock of unencumbered high-quality liquid assets (HOLA) that can be converted into cash to meet liquidity needs (net cash-out flows). The LCR is defined as:
Stock of high quality liquid assets (HOLAs)
Total net cash outflows over the next 30 calendar days
The minimum LCR requirement for the calendar year 2016 was 70 per cent and is stepped up to 80 per cent for the calendar year 2017. LCR requirement will be further, stepped up 10 per cent annually to reach 100 per cent by 1st January 2019.
HOLA comprises Level 1(0% hair-cut), Level 2A (15% hair-cut) and Level 2B assets (50% hair-cut). Level 1 assets comprising of cash, excess CRR, excess SLR securities, government securities to the extent allowed by RBI under Marginal Standing Facility (MSF) [presently 2 per cent of the Bank''''s NDTL] and Facility to Avail Liquidity for Liquidity Coverage Ratio (FALLCR) [presently 9 per cent of the Bank''''s NDTL].
Level 2A assets comprises of sovereign guaranteed marketable securities, corporate bonds or commercial papers which are rated AA and more are issued other than by financial institutions. Level 2B assets include investments in common equity shares included in NSE CNX Nifty and/or S&P BSE Sensex indices.
Expected net cash outflows under stress are the weighted sum of outflows minus inflows in the next 30 days. Funding from retail and small business customers carries lower run-off factor as compared to wholesale funding.
The prime drivers of the LCR are the level of surplus SLR held by the Bank and the proportion of retail and wholesale funding source.
Weighted Level 1 assets of the Bank constitutes around 95 per cent of the total HOLA, and the remaining 5 per cent comprises of Level 2A and Level 2B assets. Excess SLR securities (part of level 1 assets) forms around 30 per cent of the total HOLA.
Over the period the Bank reduced dependency on the wholesale deposits including certificate of deposits by increasing the share of retail (individual) deposits including CASA. The share of retail deposits to total domestic deposits increased from 48 per cent (March 2016) to 56 per cent (March 2017). The increased share of retail deposits marks the stability in the funding profile of the Bank, reducing the liquidity outflows under stress.
Under wholesale category, the Bank has separate deposits product with no premature withdrawal option (non-callable) to limit any funds outflows over the next 30 days.
During the FY 2016-17, the LCR of the Bank remained above the minimum requirement on all observed counts. The LCR moved up year on year from average of 84.92% (FY2015-16) to 110.02% (FY 2016-17). This was contributed on account of increased share of retail deposits (reducing the cash outflows), more realizable inflows within 30 days and higher HOLA.
Ouarter on quarter, the LCR (3 months average) of the Bank increased from 91.33% (June''''16) to 99.74% (September''''16) and to 115.42% (December''''16).
For the quarter ending March 2017, the Bank has commenced the computation of the LCR on a daily basis. The LCR at 134.25% for quarter ending March 2017 is based on the daily average, covering 70 data points.
The LCR shows marked increase in December 2016 and March 2017 quarter, mainly on account of increase in retail deposits with withdrawal of Specified Bank Notes (SBNs) by the Government of India w.e.f., 9th November 2016.
The impact of derivative exposure, potential collateral calls and currency mismatch on the LCR of the Bank remained insignificant.
Bank''''s wholly owned banking subsidiary “Canara Bank Tanzania Ltd.” started its operation in May 2016, and is consolidated for disclosure of consolidated LCR.
25. Fresh Issue of Equity Share Capital:
During the year Bank had issued and allotted Equity Shares to the following parties:
During the financial year 2016-17, pursuant to exercise of Rights Issue option, the Bank has allotted 1,83,00,000 equity shares to the Shareholders and 3,59,99,105 equity shares to Government of India of face value of Rs,10/- each at a premium of Rs,197 per equity share for a total consideration of Rs,1123.99 crores. With this the equity share capital of the bank has gone up to Rs,597.29 Crore (as on 31.03.2017) from Rs,542.99 Crore (as on 31.03.2016)
26. During the year the Bank has made certain modifications in the additional provisioning for non-performing advances by dispensing with additional provisioning for category II of doubtful advances. Consequently the Bank is holding such additional provision of Rs, 500 Crore (previous year Rs, 1486 Crore) for non-performing advances over and above the minimum provision prescribed under IRAC norms of RBI.
27. Our Bank has sold 47,200 units under Priority Sector Lending Certificates (PSLCs) to the tune of Rs,11,800 Crore under Agriculture and Small and Marginal Farmers category as at March 2017.
28 During Financial Year 2017, the Bank has offloaded 13.45% of shares held in M/s Canfin Homes Ltd., one of our Associates and realised a profit of Rs,703.91 Crore.
29. Figures of the previous year have been regrouped / rearranged / reclassified wherever necessary.
TABLE DF - 30.: CAPITAL ADEQUACY
(i) Qualitative Disclosures In Capital Planning process the Bank reviews:
- Current capital requirement of the Bank
- The targeted and sustainable capital in terms of business strategy and risk appetite.
Capital need and capital optimization are monitored periodically by the Capital Planning Committee comprising Top Executives. Further the committee is being monitored at Board level, with members of the Board in the committee comprising of Managing Director & CEO, Executive Directors and two independent Directors. Capital requirement is projected quarterly considering the expected growth in advances, investments and investments in Subsidiaries / Joint Ventures, etc. Committee takes into consideration various options available for capital augmentation in tune with business growth and realignment of Capital structure, duly undertaking the scenario analysis for capital optimization in tune with its long term goals enumerated in ICAAP and Vision documents of the Bank.
Though the bank has implemented the Standardized Approach of credit risk, Bank has sent Letter of Intent (LOI) dated 30.09.2012 to RBI for adoption of Internal Rating Based (IRB) Approach for computation of capital charge for Credit Risk.
Major Initiatives taken for implementation of IRB approach are as under:
- Bank has put in place a methodology for computation of PD and LGD for Corporate Assets and Retail Assets.
- Mapping of internal grades with that of external rating agencies grades: Bank has mapped its internal rating grades with that of external rating agencies grades. This exercise will help to know the status of rating quality.
TABLE DF - 31: CREDIT RISK: GENERAL DISCLOSURES
(i) Qualitative Disclosures
Bank''''s policy governs all credit risk related aspects. CRM Policy outlines the principles, standards and approach for credit risk management at the Bank. It establishes systems, procedures, controls and measures to actively manage the credit risks, optimize resources and protect the bank against adverse credit situations. The Delegation of Power for approval of credit limits is approved by Board of Directors.
The Bank''''s policies assume moderate risk appetite and healthy balance between risk and return. The primary risk management goals are to maximize value for shareholders within acceptable parameters and adequately addressing the requirements of regulatory authorities, depositors and other stakeholders. The guiding principles in risk management of the Bank comprise of Compliance with regulatory and legal requirements, achieving a balance between risk and return, ensuring independence of risk functions, and aligning risk management and business objectives. The Credit Risk Management process of the Bank is driven by a strong organizational culture and sound operating procedures, involving corporate values, attitudes, competencies, employment of business intelligence tools, internal control culture, effective internal reporting and contingency planning.
The overall objectives of Bank''''s Credit Risk Management are to:
- Ensure credit growth, both qualitatively and quantitatively that would be sect orally balanced, diversified with optimum dispersal of risk and also strive towards credit growth with usage of capital efficiently.
- Ensure adherence to regulatory prudential norms on exposures and portfolios.
- Adequately pricing various risks in the credit exposure.
- Form part of an integrated system of risk management encompassing identification, measurement, monitoring and control.
Strategies and processes:
In order to realize the above objectives of Credit Risk Management, the Bank prescribes various methods for Credit Risk identification, measurement, grading and aggregation techniques, monitoring and reporting, risk control / mitigation techniques and management of problem loans / credits. The Bank has also defined target markets, risk acceptance criteria, credit approval authorities, and guidelines on credit origination/ maintenance procedures.
The strategies are framed keeping in view various measures for Credit Risk Mitigation, which includes identification of thrust areas and target markets, fixing of exposure ceiling based on regulatory guidelines and risk appetite of the Bank, Minimizing Concentration Risk, and pricing based on rating.
Bank from time to time would identify the potential and productive sectors for lending, based on the performance of the segments and demands of the economy. The Bank restricts its exposures in sectors which do not have growth potentials, based on the Bank''''s evaluation of industries / sectors based on the prevailing economic scenario prospects, etc.
The operational processes and systems of the Bank relating to credit are framed on sound Credit Risk Management Principles and are subjected to periodical review.
The Bank has comprehensive credit risk identification processes as part of due diligence on credit proposals.
The structure and organization of the Credit Risk Management Function: Credit Risk Management Structure in the Bank is as under:-
i. Board of Directors
ii. Risk Management Committee of the Board (RMCB)
iii. Credit Risk Management Committee (CRMC)
iv. Model Review Technical Working Group (MRTWG)
v. General Manager-Risk Management Wing, H.O (Group Chief Risk Officer)
vi. Deputy General Manager (I&II), Risk Management Wing
vii. Credit Risk Management Department comprising of Credit Policy Section, Credit Analysis Cell and Credit Risk Management Section. The Credit Risk Management Section has three functional powers) are withdrawn and the committee approach for credit approval has been put in place. The Bank has in place specialized branches viz. Centralized Processing Units (CPUs), Retail Asset Hubs (RAHs) and SME Sulabhs at select cities to ease credit dispensation turnaround time and ensure specialized attention.
To enhance the control measures, a separate Credit Administration and Monitoring Wing is in place to undertake exclusive loan review, monitoring problem accounts, credit audit, etc. This ensures greater thrust on post sanction monitoring of loans and strengthen administering the various tools available under the Banks'''' policies on loan review mechanism.
For effective loan review, the Bank has the following in place:
- Pre-release Audit System for compliance to sanction terms and conditions, abstention of stipulated collateral securities ensuring perfection of securities before disbursement etc.
- Credit Audit System to identify, analyze instances of non-compliance and rectification for all types of credit facilities sanctioned with credit limit of Rs,5 crore.
- Review of loan sanctioned by each sanctioning authority by the next higher authority.
- Mid Term Review of borrowable accounts beyond a certain level of exposure.
- Monitoring of Special Mention Accounts (SMA) at various levels. Formation of a Joint Lenders'''' Forum (JLF) and formulation of Corrective Action Plan (CAP) in the case of consortium/JLA accounts, for early rectification or restructuring
- Monitoring tools like Credit Monitoring Format (web-based), Quarterly Information Systems, Half Yearly Operation Systems, Stock Audits etc.
- Credit Monitoring Officers at branches in charge of monitoring functions.
- A framework has been developed outlining a corrective action plan that will incentivize early identification of problem account, timely restructuring of accounts which are considered to be viable and taking prompt steps by lenders for recovery or sale thereby revitalizing the distressed accounts in the Bank.
- Bank has also put in place the scheme for Strategic Debt Restructuring (SDR) and Scheme for Sustainable Structuring of Stressed Asset (S4A) facilitate the resolution of eligible accounts. The Framework for Strategic Debt Restructuring (SDR) has put in place to address the issue of higher stake of promoters in reviving stressed accounts and enhance the bank''''s capabilities to initiate change of ownership, where necessary, in case agreed critical conditions and viability milestones are achieved by the promoter. The S4A envisages determination of the sustainable debt level for a stressed borrower, and bifurcation of the outstanding debt into sustainable debt and equity / quasi-equity instruments which are expected to provide upside to the bank when the borrower turns around. The scheme is implemented in transparent manner, as per the guidelines of the RBI & IBA.
Definition and classification of Non-Performing Assets (NPAs):
The Bank classifies its advances (loans and credit substitutes in the nature of an advance) into performing and non-performing loans in accordance with the extant RBI guidelines. A non-performing asset (NPA) is a loan or an advance where:
- Interest and / or installment of principal remain overdue for a period of more than 90 days in respect of a Term Loan.
- The account remains ''''out of order'''' in respect of an Overdraft/Cash Credit (OD/CC). An account should be treated as ''''out of order'''' if the outstanding balance remains continuously in excess of the sanctioned limit/drawing power for 90 days. In cases where the outstanding balance in the principal operating account is less than the sanctioned limit/drawing power, but there are no credits continuously for 90 days as on the date of Balance Sheet or credits are not enough to cover the interest debited during the same period.
- The bill remains overdue for a period of more than 90 days in the case of Bills Purchased and Discounted.
- The installment of principal or interest thereon remains overdue for two crop seasons for short duration crops, and for one crop season for long duration crops.
- The amount of liquidity facility remains outstanding for more than 90 days, in respect of securitization transaction undertaken in terms of guidelines on securitization dated February 1, 2006.
- In respect of derivative transactions, the overdue receivables representing positive mark-to-market value of a derivative contracts, if these remain unpaid for a period of 90 days from the specified due date for payment.
Any amount due to Bank under any credit facility is ''''overdue'''' if it is not paid on the due date fixed by the Bank. Assets classification has been made borrower-wise and not facility-wise. In other words, when a particular facility of a borrower has become non-performing, all the facilities granted by the Bank to the borrower will be classified as NPA.
Irrespective of record of recovery, the bank identifies a borrower account as a NPA even if it does not meet any of the above mention criteria, where:
- Loan availed by a borrower are repeatedly restructured unless otherwise permitted by regulations;
- Loans availed by a borrowers are classified as fraud;
- Project does not commence commercial operations within the timelines permitted under the RBI guidelines in respect of loans extended to a borrower for the purpose of implementing a project; and
- Any security in nature of debenture/bonds/equity shares issued by a borrower and held by the Bank is classified as non-performing investment.
For loans held at the overseas branches, identification of NPA is based on the home country regulations (RBI Guidelines) or the host country regulations (overseas branch regulator''''s guidelines), whichever is more stringent.
Further, NPA are classified into sub-standard, doubtful and loss assets based on the criteria stipulated by RBI. A sub-standard asset is one, which has remained a NPA for a period less than or equal to twelve month. An asset is classified as doubtful if it has remained in the sub-standard category for more than 12 months. A loss asset is one where loss has been identified by the Bank or internal or external auditors or during RBI inspection but the amount has not been written off fully.
TABLE DF - 32: CREDIT RISK: DISCLOSURES FOR PORTFOLIOS SUBJECT TO THE STANDARDIZED APPROACH
(i) Qualitative Disclosures (a) FOR PORTFOLIOS UNDER THE STANDARDIZED APPROACH:
- The Bank has recognized following credit rating agencies for the purpose of rating of an exposure & assigning risk weights for computation of capital charge under standardized approach.
Domestic Credit Rating Agencies:
- Brickwork Ratings India Private Limited (Brickwork)
- Credit Analysis & Research Limited (CARE)
- CRISIL Limited
- ICRA Limited,
- India Ratings and Research Private Limited (Formerly FITCH India)
- SMERA Ratings Limited
International Credit Rating Agencies:
- Standard & Poor
Types of exposure for which each agency is used:
All the above agencies are recognized for rating all types of exposures.
A description of the process used to transfer public issue ratings onto comparable assets in the banking books:
- The Bank uses only publicly available solicited ratings that are valid and reviewed by the recognized External Credit Rating Agencies, referred as External Credit Assessment Institutions (ECAI).
- Bank uses Bank Loan Rating for risk weighting the borrower''''s exposures. Where Issuer Rating is available, the Bank uses such ratings unless the bank loan is specifically rated.
- The Bank does not simultaneously use the rating of one ECAI for one exposure and that of another ECAI for another exposure of the same borrower, unless the respective exposures are rated by only one of the chosen ECAIs. Further, the Bank does not use rating assigned to a particular entity within a corporate group to risk weight other entities within the same group.
- Running limits such as Cash Credit are treated as long term exposures and accordingly, long term ratings are used for assigning risk weights for such exposures.
- While mapping / applying the ratings assigned by the ECAIs, the Bank is guided by regulatory guidelines/ Bank''''s Board approved Policy.
- Where exposures / borrowers have multiple ratings from the chosen ECAIs, the Bank has adopted the following procedure for risk weight calculations:
o If there are two ratings accorded by chosen ECAIs, which map into different risk weights, the higher risk weight is applied.
o If there are three or more ratings accorded by the chosen ECAIs which map into different risk weights, the ratings corresponding to the lowest
2 ratings are referred to and higher of those two risk weights is applied.
TABLE DF - 33: CREDIT RISK MITIGATION - DISCLOSURES FOR STANDARDIZED APPROACHES
(i) Qualitative disclosures
Policies and processes for collateral valuation and management: The Bank is having a Board approved collateral management policy which lays down the process, objectives, accepted types of collaterals and the framework including suitable management information system for effective collateral management. The Collaterals and guarantees properly taken and managed that would serve to:
- mitigate the risk by providing secondary source of repayment in the event of borrower''''s default on a credit facility due to inadequacy in expected cash flow or not;
- gain control on the source of repayment in the event of default;
- provide early warning of a borrower''''s deteriorating repayment ability; and
- Optimize risk weighted assets and to address Residual Risks adequately.
Bank uses a number of techniques to mitigate the credit risks to which they are exposed. The revised approach allows banks in India to adopt the Comprehensive Approach (under both the Standardized and IRB approaches) which allows fuller offset of collateral against exposures by effectively reducing the exposure amount by the value ascribed to the collateral. Under this approach, banks, which take eligible financial collateral, are allowed to reduce their credit exposure to the counterparty when calculating their capital requirements by taking into account the risk mitigating effect of the collateral.
Collateral Management process and practices of the Bank cover the entire activities comprising security and protection of collateral value, validity of collaterals and guarantees, and valuation / periodical inspection.
Valuation: Both the Fixed and the Current Assets obtained to secure the loans granted by the Bank are subjected to valuation by valuers empanelled by the Bank. Monetary limits of the accounts, asset classification of the borrower, which is to be subjected to valuation, periodicity of valuation, are prescribed in the Bank''''s policy guidelines. Bank reviews the guidelines on valuation periodically.
Description of the main types of collateral taken by the Bank: The collateral commonly used by the Bank as risk mitigates comprises of Financial Collaterals (i.e. Cash, Bank deposits, Life Insurance policies, NSC, KVP, Government securities issued directly / by postal departments, equity shares of limited companies other than the Bank and approved by the Bank, debentures, units of mutual funds, debt securities etc.), different categories of moveable assets and immoveable assets / properties etc. However, for the purpose of computation of capital required under Standardized Approach, certain specific financial collaterals have been recognized as eligible collateral.
Main types of Guarantor counterparty and their creditworthiness: Bank obtains / accepts guarantees of sovereign, sovereign entities (including BIS, IMF, European Central Bank and European community as well as Multilateral Development Banks, ECGC and CGTMSE). Besides this, Bank also obtains Personal or Corporate guarantee having adequate net worth, as an additional comfort for mitigation of credit risk which can be translated into a direct claim on the guarantor, and are unconditional and irrevocable. The Creditworthiness of the guarantor is normally not linked to or affected by the borrower''''s financial position. The Bank also accepts guarantee given by State / Central Government as a security comfort. Such Guarantees remain continually effective until the facility covered is fully repaid or settled or released.
Credit Risk Mitigation recognized by the Bank for the purpose of reducing capital requirement under New Capital Adequacy Framework (Basel II Norms): The Bank has recognized Cash, Bank''''s own Deposits, Gold & Gold Jewellery as Credit Risk Mitigations for the purpose of reducing capital requirement under the New Capital Adequacy Framework (Basel III Norms).
Information about risk concentration within the mitigation taken: The Bank has already initiated steps for putting in place a data warehouse for a robust Management Information System (MIS) to facilitate management of Credit Risk and evaluation of effectiveness of collateral management including risk concentrations of collaterals.
The guidelines to banks on securitization of standard assets contain:
- The provisions relating to securitization of assets.
- Stipulations regarding transfer of standard assets through direct assignment of cash flows.
The bank''''s existing policy guidelines deals with purchase of pools from an originator (Bank/NBFC/FI). Purchase of assets through Direct Assignment of cash flows from originating NBFCs/Banks/FIs shall be only from those rated ''''AA'''' and above. The Bank shall purchase a portfolio or a part of portfolio of standard assets under Housing Loan; Loans Against Property and MSME sanctioned at floating rates only.
Policy sets out requirements like restrictions on purchase of loans; constitution of eligible borrowers in the pool; standards for due diligence - KYC compliance, requirements to be complied with prior to disbursement in respect of borrowers in the purchased pool of assets; due diligence of the originator, Stress testing; credit monitoring.
Bank can purchase loans from other banks/FIs/NBFCs in India only if the seller has explicitly disclosed to the bank that it will adhere to the Minimum Retention Requirement on an ongoing basis and disclosed the adherence to the Minimum holding period criteria as prescribed in the policy.
The bank monitors the purchase transactions on an ongoing basis at certain intervals and takes appropriate action wherever required. The general prescription laid down in the Master policy on Credit Risk Management with regard to loan review mechanism and monitoring is applicable to securitization transactions.
The exposure to the originator shall be within the prudential exposure ceilings stipulated by the Bank.
TABLE DF - 34: MARKET RISK IN TRADING BOOK
(i) Qualitative disclosures
Strategies and processes: The overall objective of market risk management is to create shareholder value by improving the Bank''''s competitive advantage and reducing loss from all types of market risk loss events.
- While overall leadership and control of the Risk Management framework is provided by Risk Management Wing, the business units are empowered to set strategy for taking risks and manage the risks.
- All issues or limit violations of a pre-determined severity (materiality, frequency, nature) are escalated to the Risk Management Wing where the actions to address them are determined by the appropriate authorities. The business units are responsible for implementing the decision taken.
The process aims to:
- Establish a pro-active market risk management culture to cover market risk activities.
- Comply with all relevant legislation and regulatory requirements relating to Market Risk.
- Develop consistent qualities in evolving policies & procedures relating to identification, measurement, management, monitoring, controlling and reviewing of Market Risk.
- Establish limit structure and triggers for various kinds of market risk factors.
- Establish efficient monitoring mechanism by setting up a strong reporting system.
- Adopt independent and regular evaluation of the market risk measures.
The structure and organization of the relevant Risk Management function: Market Risk Management structure of the Bank is as under-
- Board of Directors
- Risk Management Committee of the Board
- Market Risk Management Committee (MRMC)
- General Manager - RM Wing (Group Chief Risk Officer) - Head Office
- Market Risk Management Department, Risk Management Wing, HO
o Integrated Mid Office
o Mid Office - Integrated Treasury
The scope and nature of risk reporting and / or measurement systems:
- The Bank has put in place various exposure limits for market risk management such as Overnight limit, Intraday limit, Aggregate Gap limit, Stop Loss limit, VaR limit, Broker Turnover limit, Capital Market Exposure limit, Product-wise Exposure limit, Issuer-wise Exposure limit, etc.
- A risk reporting system is in place for monitoring the risk limits across different levels of the Bank from trading desk to the Board level.
- The rates used for marking to market for risk management or accounting purposes are independently verified.
- The reports are used to monitor performance and risk, manage business activities in accordance with the Bank''''s strategy.
- The reporting system ensures timelines, reasonable accuracy with automation, highlight portfolio risk concentrations, and include written commentary.
- The detailed risk reports enhance the decision-making process.
- Dealing room activities are centralized, and system is in place to monitor the various risk limits.
- The reporting formats & the frequency are periodically reviewed to ensure that they suffice for risk monitoring, measuring and mitigation requirements of the Bank.
Policies for hedging and / or mitigating risk and strategies and processes for monitoring the continuing effectiveness of hedges / mitigates: Various Board approved policies viz., Policy for Market Risk (Including Country risk management and Counterparty Bank risk management), Investment Policy and Policy for Forex dealing & Trading Operations are put in place for Market risk management. Policy for Market Risk provides the framework for risk assessment, identification and measurement and mitigation, risk limits & triggers, risk monitoring and reporting.
The Bank has developed an internal model for country risk rating based on various parameters like GDP growth, inflation, trade balance etc for risk categorization of the countries to allocate limit for taking exposure to various countries.
The Bank has in place a scoring model for categorization of foreign banks. The various exposure limits are set based on the points secured by the counterparty banks as per the scoring matrix.
TABLE DF - 35: OPERATIONAL RISK
(i) Qualitative Disclosures
Strategies and processes: The Operational Risk Management process of the Bank is driven by a strong organizational culture and sound operating procedures, involving corporate values, attitudes, competencies, internal control culture, effective internal reporting and contingency planning. Policies are put in place for effective management of Operational Risk in the Bank.
The structure and organization of the relevant risk management function: The Operational Risk Management Structure in the Bank is as under:
- Board of Directors
- Risk Management Committee of the Board (RMCB)
- Operational Risk Management Committee (ORMC)
- Head / General Manager - Risk Management / Group Chief Risk Officer
- Operational Risk Management Department (ORMD), HO
- Executives at Circles overseeing Risk Management Section.
- Risk Management Sections at Circles.
The scope and nature of risk reporting and/or measurement systems: The Risk reporting consists of operational risk loss incidents/events occurred in branches/offices relating to people, process, technology and external events. The data collected from different sources are used for analyzing the root cause/gaps in the system and thereby improve/strengthen the laid down system and procedures. The loss incidents are also incorporated in loss data base which shall be used for computing Operational Risk Capital Charge on migrating to Advanced Measurement Approach (AMA).
Policies for hedging and/or mitigating risk and strategies and processes for monitoring the continuing effectiveness of hedges/mitigates: Bank has put in place policies for management of Operational Risk management. The policy framework contains various aspects of Operational risk management such as identification, management, monitoring & mitigation of Operational risk areas.
In order to address risks involved in Outsourcing of activities, bank has put in place policies for management of Outsourcing Risk.
Operational Risk capital assessment: The Bank has adopted Basic Indicator Approach for calculating capital charge for Operational Risk.
Bank intends to migrate to the Advanced Measurement Approach (“AMA”).
The capital requirement for Operational Risk under Basic Indicator Approach is '''' 25,798.51 Millions.
TABLE DF - 36: INTEREST RATE RISK IN THE BANKING BOOK (IRRBB)
(i) Qualitative Disclosures
Interest Rate Risk in Banking Book (IRRBB)
Interest Rate Risk in Banking Book (IRRBB) refers to the current or prospective risk to the bank''''s capital and earnings arising from adverse movements in interest rates. With change in interest rates the underlying value of Bank''''s assets, liabilities and off-balance sheet items also gets altered and so its economic value.
Changes in interest rates also affect a bank''''s earnings or net interest income (NII) in the short term - on account of re-pricing gaps between its rate sensitive assets and rate sensitive liabilities. Three main types of interest rate risk include:
(a) Gap risk arises from the term structure of banking book instrument and the extent of re-pricing gap between rate sensitive assets (RSA) and rate sensitive liabilities (RSL).
(b) Basis risk - the impact of relative changes in interest rates for RSA and RSL that have similar re-pricing but are linked to different interest rate curve.
(c) Option risk in the Bank mainly arises from explicit or embedded options in a bank''''s assets, liabilities and/or off-balance sheet items, where the bank or its customer can alter the level and timing of their cash flows.
The Board of Directors approves the broad business strategy and overall policies governing the IRRBB. It is responsible for setting appropriate limits, adequate systems and standards for measuring.
Monitoring and management of IRRBB is delegated to the Asset Liability Management Committee (ALCO) and is responsible for adherence to the policies and business strategy as per the risk limit articulated in terms of both earnings and economic value by the Board of Directors. Basing on the likely interest rate movement, the ALCO decides on the business mix, strategy to manage and control the risk by taking early remedial actions.
Strategies and Processes
The Bank strives to match the re-pricing gap between its rate sensitive assets and rate sensitive liabilities including off-balance sheet items across significant currencies. Interest rate risk in banking book is measured and monitored using Traditional Gap Analysis (TGA) and the Duration Gap Analysis (DGA) to Bank''''s global position on a monthly basis.
Using TGA approach, the re-pricing gaps between RSA and RSL are measured and monitored across different time bands. The re-pricing gap may impact Bank''''s earning for adverse rate movement in the short term up to one year. It is assessed by giving parallel rate shocks and is monitored against the set tolerance limit termed Earning at Risk.
Under DGA approach, the change in the value of Bank''''s assets less liability for a given interest rate shock is assessed using modified duration approach. The extent of the gap between modified duration of RSA and RSL gives the prospective change in the value of assets less liability to the net-worth of the Bank termed as change in Market Value of Equity (MVE). MVE under IRRBB is measured and monitored against the set limit.
(ii) Quantitative Disclosures
EARNINGS AT RISK
The following table presents the impact on net interest income of the Bank for an assumed parallel shift of 100 bps in interest rate up to one year across currencies as at 31.03.2017:
ECONOMIC VALUE OF EQUITY
The table reveals the impact on Economic Value of Equity for an assumed rate shock of 200 bps on the Banking Book as at 31.03.2017
TABLE DF - 37: GENERAL DISCLOSURE FOR EXPOSURES RELATED TO COUNTERPARTY CREDIT RISK
(i) Qualitative Disclosures
Bank''''s policy on Counterparty Credit Risk Management sets out the standards and guidelines for Counterparty Credit Risk Management at the Bank. Through this policy the bank shall establish its standards and guidelines for identification of CCR in market traded instruments covering various components and relevant sources of risks. This addresses Pre-settlement Risk, Settlement Risk and Wrong Way Risk.