The Board of Directors has immense pleasure in presenting this 86th Annual Report of The Federal Bank Limited, along with the audited financial statements for the year ended 31 March, 2017.
Financial Results (Rs. In Crore)
Financial Parameters for the year ended
31 March 2017
31 March 2016
Net Interest Income
Fee and Other Income
Profit brought forward
Total Profit Available for appropriation
Transfer to Revenue Reserves
Transfer to Statutory Reserves
Transfer to Capital Reserves
Transfer to/(from) Investment Reserve Account
Transfer to Special Reserve
Provision for Dividend (Refer Note 1 below)
Provision for Dividend Tax (Refer Note 1 below)
Transfer to Share capital pursuant to issue of Bonus shares
Balance Carried over to Balance Sheet
Financial Position (as on)
Total Business (Deposits Advances)
Total Assets (Balance Sheet Size)
Return on Total Assets (%)
Return on Equity (%)
Earnings Per Share (Rs.)
Book value per share (Rs.)
Operating cost to Income (%)
Capital Adequacy Ratio (%) Basel (III)
1. The Bank has not appropriated proposed dividend (including tax) pursuant to change in Accounting Standard (AS) 4 “Contingencies and Events occurring after the Balance sheet date”.
2. Previous year figures have been regrouped / reclassified, where necessary to conform to current year''''s classification.
Highlights of performance
Growth in Business
During the year 2016-17, your bank has tried to bring in substantial and all-round improvement in various financial parameters. Total business of your Bank improved by 24.58%to reach at Rs.171000.84 Cr as on 31 March 2017. 23.36% growth in deposits and 26.25% growth in advances helped your bank to clock this number. Total deposits reached Rs.97664.57 Cr and advances reached Rs.73336.28Cr and on averages, deposit portfolio of your bank grew by 18.71% to reach Rs.86502.75Cr and advance portfolio grew by 22.31% to reach Rs.62787.70 Cr.
On the NR side, NRE deposits had a growth rate of 18.46% to reach Rs.36407.17 Cr and NRE Savings clocked a growth of 16.01% to reach Rs.10547.42 Cr. The total NR business of your bank stood at Rs.38577.93 Cr with a growth of 18.35%.
On CASA front, Savings deposit touched Rs.26397.67 Cr with 23.23% growth and Current deposits stood at Rs.5439.96 Cr with a growth of 27.02%. Your bank registered a healthy CASA growth of 23.86% to reach Rs.31837.63 Cr. CASA ratio of your bank stood at 32.60%.
The investment portfolio of your Bank has reached Rs.28196.09 Cr as on 31 March 2017. The average investment as on 31 March 2017 is Rs.25948.30 Cr.
The Operating Profit of your Bank increased by 35.20% to Rs.1924.93 Cr and Net Profit of your bank is up by 74.66% to Rs.830.79 Cr. Healthy increase in core income streams, improving asset quality has helped your bank to have a sharp rise in profitability. Net Interest Income improved by 21.73% to Rs.3052.65 Cr while the Non-Interest Income rose to Rs.1081.81 Cr, showing a rise of 33.85%.
Total income of your Bank during the fiscal year 2017 recorded 14.06 % growth to reach Rs.9759.20 Cr. Income from advances increased by 15.46% to reach Rs.6545.68 Cr. The yield on advances stood at 10.43% and the yield on Investments at 8.13 %. The Net Interest Margin for the fiscal year is at 3.31% as against 3.14%, in the previous year.
Return on Average Equity and Return on Average Total Assets stood at 9.89 % and 0.84% respectively. Earnings per Share (face value of Rs.2 each) of the Bank, as on 31 March 2017 was Rs.4.83. Book value per share had increased to Rs.51.37 during FY 17.
Higher revenue growth and better cost management resulted in Cost / Income Ratio improving to 53.44% in 2016-17 as against 57.06% last year. The total expenses of your bank increased by 9.84%,to reach at Rs.7834.27 Cr and by an increase of 7.33%, interest expenses increased to Rs.5624.74 Cr in FY 17.Operating Expenses of the Bank during the fiscal year grew to Rs.2209.53 Cr. The cost of deposits of the Bank has come down during the year. The cost of deposits of the Bank is 6.25% as on 31 March 2017. The Interest expenses as percentage to total income stood at 57.64%.
During the fiscal year the Bank''''s spread on advances (gross) increased to 4.18% and spread on investments (gross) stood at 1.88%. The Spread (net of provisions) on advance improved to3.53% from 3.02% of last year.
The Gross NPA of your Bank as on 31st March 2017 stood at Rs.1727.05 Cr. Gross NPA as a percentage to Gross Advances is 2.33% which is lower than 2.84% as at the end of FY16. The Net NPA stood at Rs.941.20 Cr and this as a percentage to Net Advances is 1.28%. The Provision Coverage Ratio (including technical writeoffs) stood at 71.75%.
Net worth & Capital Adequacy
The Net Worth of your Bank grew by 11.42% to Rs.8856.47 Cr as against Rs.7948.96 Cr in the previous year. Historically, your Bank has been strong on capital adequacy. CRAR of the Bank calculated in line with Basel III norms stood at 12.39% which is considerably higher than the 9% stipulated by RBI. Of this, Tier 1 CRAR is at 11.81%.
Your Bank continued its consistent performance during FY 2016-17 with the total Business of the Bank increasing by 24.58% to Rs.171000.84 Cr.
There is no change in the nature of business of the Bank for the year under review. Further information on the business overview and outlook and state of the affairs of the Bank is discussed in detail in the Management Discussion & Analysis.
Business per employee of your Bank during the period stood at Rs.14.66 Cr, an improvement of 21.88% for the year and the profit per employee of the Bank stood at Rs.7.12 Lakh during the fiscal.
The Bank has 1252 branches and 1667 ATMs as on 31st March 2017. The Bank also has its Representative Office at Abu Dhabi & Dubai and an IFSC Banking Unit (IBU) in Gujarat International Finance Tec-City (GIFT City).
Earnings Per Share (face value Rs.2/- each) of your Bank has improved from 2.77 to 4.83 during the year under review. Return on Equity during the year reached 9.89 % in the fiscal year ended 31 March 2017.
Continuing the Bank''''s policy of striking a fine balance between retained earnings and dividend distribution, the Board of Directors have recommended a dividend of 45% i.e. Rs.0.90 per Equity Share on face value of Rs.2/- each for the year 2016-17 (previous year 35% i. e Rs.0.70 per Equity Share) subject to the approval of the members in the ensuing Annual General Meeting. Protecting shareholders'''' value has always been a guiding philosophy of the Bank.
Appropriations (in 000)
Transfer to Revenue Reserve
Transfer to Statutory Reserve
Transfer to Capital Reserve
Transfer to/(from) Investment Reserve Account
Transfer to Special Reserve
Dividend (including tax/cess thereon) pertaining to previous year paid during the year
Tax on proposed dividend
Transfer to Share capital pursuant to issue of Bonus shares
Balance carried over to Balance Sheet
Note: 1. The proposed equity dividend (excluding dividend distribution tax) amounting to Rs.155.16 crore is not accounted as liabilities in fiscal 2017 in accordance with the revised AS 4 - ''''Contingencies and events occurring after the balance sheet date.
Material changes and commitment affecting financial position of the bank
There are no material changes affecting the financial position of the Bank which have occurred between the end of the financial year of the Bank to which the financial statements relate and the date of the report.
Significant and material orders passed by the regulators or courts or tribunals impacting the going concern status of the company and its future operations
There are no material orders passed by the regulators or courts or tribunals impacting the going concern status and company''''s operations in future;
Dividend Distribution Policy
In accordance with the Regulation 43A of Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015, the Bank has formulated a Dividend Distribution Policy and the same is annexed herewith as Annexure VIII. The Policy is hosted on the website of the Bank and can be viewed in the following link https://www.federalbank.co.in/ documents/10180/45777/Dividend Distribution Policy/1a3c7 d86-1d61-45c3-aa24-6ea421644de9
Being a Banking company, the disclosures required as per Rule 8(5)(v)&(vi) of the Companies (Accounts) Rules,2014, read with Section 73 and 74 of the Companies Act, 2013 are not applicable to your Bank.
Increase of Capital
In FY 2016-17,The Paid Up Capital of the Bank was increased by an amount of Rs.1,01,97,140 by allotment of 50,98,570 ESOS shares of Rs.2/- each. The Paid up Capital of the Bank as on 31 March 2017 is Rs.344,80,90,828 consisting of 172,40,45,414 equity shares of Rs.2/- each.
Investor Education and Protection Fund
As per the Companies Act 2013, dividend unclaimed for more than seven years from the date of declaration is to be transferred to Investor Education and Protection Fund. On 18 October 2016 the Bank had transferred Rs.6743545/- to the above Fund, being the unclaimed dividend for the year 2009.
Employee Stock Option Scheme (ESOS)
The Bank has instituted an Employee Stock Option Scheme, duly approved by the shareholders of the Bank to enable its employees including whole time Directors to participate in the future growth and financial success of the Bank. The Employee Stock Option Scheme is in accordance with the Securities and Exchange Board of India (Employee Stock Option and Employee Stock Purchase Scheme) Guidelines, 1999. The eligibility and number of options to be granted to an employee is determined on the basis of various parameters such as scale, designation, work performance, grades, period of service, annual fixed pay, Bank''''s performance and such other parameters as may be decided by the Compensation Committee from time to time in its sole discretion and is approved by the Board of Directors.
The Bank''''s shareholders had approved the scheme for issuance of stock options to employees including Whole Time Directors as on December 24, 2010.
The option conversion price was set to be the closing price on the day previous to the grant date. The compensation committee granted 3,47,20,200 options during the year 2011-12, 244,84,750 options during the year 2012-13, 260,94,250 options during the year 2013-14, 11156450 options during 2014-15, 10,25,000 options during the year 2015-16 and 9,65,000 options during the year 2016-17. The options granted which are non transferable, with vesting period of 1,2,3 & 4 years subject to standard vesting conditions, must be exercised within five years from the date of vesting. As on 31 March 2017, 13564404 options had been exercised and 7,18,02,986. options were in force.
Other statutory disclosures as required by the SEBI guidelines/ Securities and Exchange Board of India (Share Based Employee Benefits) Regulations, 2014 on ESOP are given in Annexure II to this report.
Corporate Social Responsibility
Corporate Social Responsibility (CSR) has been an inherited & inbuilt element of our fundamentals - right from the day the Bank was founded. Our founder''''s values & ethos based on trust got embedded in the Bank''''s policies & principles. CSR in Federal Bank began with the first act of cultivating banking habits in the agrarian society - to effectively utilize idle money for productive purposes.
Overview of some of the major CSR programs undertaken by the bank during FY 2016 - 17 are detailed in the Management Discussion and Analysis part of the Annual Report.
The amount to be spent by the Bank towards CSR for FY 2016-17 as per Section 135 of the Companies Act, 2013, comes to Rs.23.01 Crores. Amount spent by the Bank this year towards CSR was Rs.15.42 Crores. Through various projects which are already sanctioned, your Bank will be thoughtfully spending the CSR funds earmarked for the purpose. The ratio adopted was 80:20, wherein 80 % of the CSR funds will be utilized for long term sustainable projects and 20 % of the funds will be utilized to meet location specific requests. The Bank had also embarked on some major projects last year in the field of education, Youth engagement, skill development, support to differently abled etc. By choosing long term sustainable projects, Bank has taken an approach which brings steady and long lasting impact on society.
The details of the CSR activities of FY 2016-17 are mentioned in Annexure IV to this report.
The Board of Directors oversees the enterprise wide risk management functions of the Bank. A separate Risk Management Committee of the Board supervises the risk management functions, thereby bringing in a top to down focus on risk management. Integrated Risk Management Department co-ordinates and administers the risk management functions in the Bank. The Department has three dedicated divisions for managing Credit risk, Market risk and Operational risk. Dedicated teams within the Divisions are responsible for assessment, monitoring and reporting of risks across the Bank. The Bank has established an independent Mid Office as a part of Market Risk Division to monitor the Treasury activities. Business Continuity Plans & Information Security Plans also form part of risk management functions in the Bank. Risk Management policies are approved by Board of Directors, and reviewed from time to time. Executive level risk management committees, such as Credit Risk Management Committee, Asset Liability Management Committee, Operational Risk Management Committee, Business Continuity Management Committee and Information Security Committee regularly assess the functional efficiency of the Bank in risk management and refine the policies & processes. Responsibility for identification, measurement and controlling of risk in various spheres of activities of the Bank is vested with a Senior Executive designated as Chief Risk Officer, who reports directly to the Managing Director & CEO. All material risks of the Bank emerging in the course of its business are identified, assessed and monitored. In our opinion presently there are no material risks which threaten the current functioning of the Bank.
Internal control systems and their adequacy
The Bank has through the years developed and stabilized an effective internal control system calibrated to the risk appetite of the Bank and aligned to the scale, size and complexity of its operations. The scope and authority of the internal audit function is defined in the Audit Policy of the Bank, duly approved and recommended by the Audit Committee of the Board, approved and adopted by the Board. In order to help Bank achieve its mission of adopting the best professional practices prevailing in the industry, while framing the policy, substantial inputs are taken from - Model Audit Manual on Internal & Concurrent Audit Systems in Public Sector Banks, ''''The internal audit function in banks'''' published by Basel Committee on Banking Supervision, RBI guidance note on Risk Based Internal Audit. At the enterprise level, the Inspection and Audit Department, on a continuous basis, assesses and monitors the effectiveness of the control systems and its adequacy to meet the growing complexities. The audit function essentially validates the compliance of Bank''''s processes and operations with regulatory guidelines, accounting procedures and Bank''''s own internal rules and instructions. A department level committee called the ''''Learning Committee'''' meets on periodical intervals to discuss newly published Internal Circulars and RBI guidelines and notes the changes to be incorporated in the yearly review of Audit & Inspection Policy / Manual which ensures that Audit is dynamic. The Bank has a robust system towards escalating the audit findings to appropriate levels in the hierarchy of Management and discussions in various committees towards suggesting corrective action and its follow up. The Bank in compliance of the requirements of Section 138 of the Companies Act 2013, has designated the Head of Inspection and Audit Department as Internal Auditor. Audit being an independent function, the Internal Auditor is reporting to the Audit Committee of the Board of Directors (ACB). The Bank has various types of audit which inter-alia include Risk Based Internal Audit, Concurrent Audit and Management Audit. The Risk Based Internal Audit provides for Risk Rating of Branches. Serious findings and observations of all types are presented to Inspection Review Committee of Executives (IRCE) and reviewed by the Audit Committee of the Board. Other findings are discussed and analyzed by a department level committee called the ''''Inspection Department Review Committee'''' (IDRC) and its observations, are placed before IRCE.
The Internal Audit function provides independent assurance to the Board of Directors and Senior Management on the quality and effectiveness of the bank''''s internal control, risk management and governance systems and processes, thereby helping the Board and Senior Management protect the bank and its reputation.
Vigil Mechanism/Whistle Blower Policy
Bank has a comprehensive ''''Fraud Risk Management Policy'''' and ''''Whistle Blower Policy'''' which are reviewed and updated from time to time. The Fraud Risk Management Policy covers the control systems and monitoring, surveillance and oversight mechanism for fraud prevention and control aimed at managing the risk of loss on account of frauds. Vigilance Department of the Bank has the twin roles of investigation of fraud and prevention of frauds. Preventive measures taken for enhancing the awareness of fraud risk and for promoting a culture of compliance among the employees include preventive vigilance workshops, preventive vigilance audits, circulation of modus operandi of frauds occurred in banking industry etc. Bank is also promoting customer awareness on frauds especially cyber frauds through different communication channels, as an effective tool in prevention of frauds. The ''''Whistle Blower Policy'''' of the Bank is named as ''''Protected Disclosure Scheme'''' as per the guidelines of RBI. The Protected Disclosure Scheme'''' is available in Bank''''s website and Bank''''s intranet site. As per the Scheme, directors and employees of the Bank, customers, stakeholders, non governmental organizations (NGO) and members of general public can lodge complaints/disclosures under the scheme. The complaints/disclosures under the scheme would cover the areas such as corruption, misuse of office, criminal offences, suspected/ actual fraud, failure to comply with existing rules and regulations, acts resulting in financial loss/operational risk, loss of reputation etc detrimental to the interest of the Bank, the depositors and the public. No personnel have been denied access for giving any information as envisaged in the Protected Disclosure Scheme. Website link to Bank''''s Whistle Blower Policy/Vigil Mechanism is http://www.federalbank.co.in/documents/10180/45777/ Whistle Blower policy/558aea51-1335-4546-9c9a-28c5030377a1
Subsidiary of the Bank
As on 31 March 2017, the Bank has one unlisted fully-owned subsidiary named Fedbank Financial Services Limited. Fedbank Financial Services Limited is a diversified Non-Deposit-Taking & Systemically Important (ND-SI) NBFC offering multiple loan products such as Loan against Property (LAP), Structured Finance and Loan against pledge of Gold ornaments. It also distributes loan products of The Federal Bank Limited The total loan portfolio of Fedbank Financial Services Limited as on 31 March 2017 is Rs.962 Crores as against Rs.611 Crores as on 31 March 2016. The Profit After Tax of the company for the year ended 31 March 2017 increased to Rs.22.53 Crores from Rs.12.25 Crores for the year ended 31 March 2016.
Joint Venture in Life Insurance Business
The Bank''''s Joint Venture Life Insurance Company, in association with IDBI Bank Limited and Fortis Insurance International N.V. (now Aegeas), namely IDBI Federal Life Insurance Company Limited (erstwhile IDBI Fortis Life Insurance Company Limited), commenced operations in March 2008. Currently the Bank has a total stake of Rs.208 Cr in the equity of the company holding 26 % of the equity capital. The total premium collected by IDBI Federal Life Insurance Company Limited during the period ended 31 March 2017 is Rs.1,565 Crore.
Consolidated Financial Statements
In accordance with the provisions of Section 129(3) of the Companies Act, 2013 read with Rule 8 of Companies (Accounts) Rules, 2014, the Bank has prepared its consolidated financial statement including its subsidiary, Fedbank Financial Services Limited which is forming part of this report. The financial position and performance of its subsidiary/ Associate is given in the statement containing salient features of the financial statements of the subsidiaries/Associate Companies/Joint Venture, (Given as Annexure VII) which forms part of the consolidated financial statements.
In accordance with third proviso to Section 136(1) of the Companies Act, 2013, the Annual Report of the Bank, containing therein its standalone and the consolidated financial statements has been hosted on its website www.federalbank.co.in. Further, as per fourth proviso to the said section, the audited annual accounts of the said subsidiary company of the Bank have also been hosted on the Bank''''s website www.federalbank.co.in. The said documents have been hosted on the website of the subsidiary company of the Bank also, in compliance with the said section. The documents/details available on the Bank''''s website (www. federalbank.co.in) will also be available for inspection by any Member at its Registered Office. Further, pursuant to the provisions of Accounting Standard (''''AS'''') 21, Consolidated Financial Statements notified under Section 133 of the Companies Act, 2013, read together with Rule 7 of the Companies (Accounts) Rules, 2014 issued by the Ministry of Corporate Affairs, the Consolidated Financial Statements of the Bank along with its subsidiary for the year ended March 31, 2017 forms part of the Annual Report.
Corporate governance is essentially a set of standards, systems, and procedures aimed at effective, honest, transparent, and responsible management of a company within the applicable statutory and regulatory structures. This Code represents a set of desirable, corporate governance practices to be adopted by the Bank. The Code takes into account the relevant statutory and SEBI/stock exchange listing requirements and Reserve Bank of India (RBI) directives and other guidelines under the Companies Act 2013. The efficacy of the Code lies in how well it is put into practice. In adopting the Code, the stress is its substance and spirit rather than on its form.
Good corporate governance practices help support and strengthen corporate actions aimed at achieving the corporate objective. The Bank''''s principle corporate objective, like that of any corporate business entity, is to perpetuate its business while protecting and enhancing, over the long term, the value of the investments of its shareholders in the Bank. A copy of the Code of Conduct for the Board of Directors and Management is available on Bank''''s website.
Board of Directors
The composition of the Board of Directors is governed by the Banking Regulation Act, 1949, the Companies Act,201 3, SEBI (Listing Obligations and Disclosure Requirements) Regulations,2015 (“Listing Agreement”) and the Code of Corporate Governance adopted by the Bank. The Board comprises of ten Directors as on the date of this report, with rich experience and specialized knowledge in various areas of relevance to the Bank, including banking, accountancy, MSME, finance, small scale industry, agriculture, strategic planning, risk management and information technology.
During FY 2016-17 RBI approval was obtained vide letter No.DBR Appt No.1374/08.38..001/2016-17 dated 28th July, 2016 for reappointment of Mr. Shyam Srinivasan MD & CEO of the Bank for a further period of 3 years w.e.f 23rd September 2016 till 22nd September 2016. Mr. Ganesh Sankaran was appointed as Executive Director on the Board of the Bank, for a period of two years w.e.f 04th July 2016,for which RBI approval was obtained vide its letter no. DBR. Appt No.163/08.38.001/2016-17 dated 04th July 2016 and as such Mr. Ganesh Sankaran took charge as Executive Director of the Bank w.e.f 04th July 2016 after getting the RBI approval.
The first term of appointment of the Independent Directors of the Bank (Mr. Nilesh Vikamsey, Mr. K M Chandrasekhar, Mr. Dilip Sadarangani, Mr. Harish Engineer, Ms. Grace Koshie and Ms. Shubhalakshmi Panse) ends on 17th July 2017. The Bank has proposed their reappointment as Independent Directors in this AGM.
The detailed profile of all the directors recommended for appointment/ re-appointment in this AGM are mentioned in the Notice of Annual General Meeting for the benefit of shareholders as required under law.
In the previous year AGM held on 11th August 2016, three Additional Directors were regularized as Directors with the shareholders approval. Mr. C Balagopal as Non-Executive Independent Director, Mr. Ashutosh Khajuria and Mr. Ganesh Sankaran as Executive Directors.
During the year Mr. K M Chandrasekhar took charge as the Chairman of the Bank w.e.f 01st March 2017 on the stepping down of Mr. Nilesh Vikamsey as Chairman for which RBI approval was obtained vide letter DBR.Appt.No.1062/08.38.001/2016-17 dated March 07, 2017.
Mr. Sudhir M Joshi, Independent Director of the Bank retired as Director from the Board of the Bank w.e.f 28th February 2017 on attaining seventy years of age, as per the regulatory requirements. The Board places on record their appreciation for the commendable contribution made by Mr. Sudhir M Joshi, as Independent Director during his tenure in the Bank.
Excluding the MD & CEO, Executive Director & Chief Financial Officer, Mr. Ashutosh Khajuria and Executive Director, Mr. Ganesh Sankaran, all other members of the Board are Non-Executive and Independent Directors. Necessary declarations were obtained from the Independent Directors as required under the RBI Regulations, SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 and Companies Act. The remuneration and other benefits paid to MD & CEO of the Bank and Executive Directors during the year are disclosed in Annexure I to this Report and in Corporate Governance Report. The Non Executive Independent Directors, except Chairman of the Board , are paid only sitting fees for attending every meeting of the Board/ Committees of the Board within the limits as prescribed under the Companies Act, 2013. The Chairman of the Board (Mr. Nilesh S Vikamsey, upto 28th February 2017 and Mr. K M Chandrasekhar from 01st March 2017 ) are paid sitting fee for attending Board / Committee meetings and in addition to it an amount of Rs.1.25 lakhs per month(Rs.15,00,000/- per annum) as remuneration, as approved by the Board and RBI. The Bank has framed a Comprehensive Compensation Policy for Non-Executive Directors of the Bank(Other than Part Time Chairman) which is detailed in the heading Policy on Remuneration to Non-Executive Directors/Independent Directors. Mr. Ashutosh Khajuria, Executive Director & Chief Financial Officer of the Bank is liable to retire at this AGM in compliance with Section 152 of Companies Act, 2013, as required under the regulations regarding retirement of directors by rotation. The detailed profile of Mr. Ashutosh Khajuria, recommended for re-appointment in this AGM is mentioned in the Notice for the Annual General Meeting of the Bank.
Composition of Audit Committee
The Audit Committee consists of three Non Executive, Independent Directors, chaired by Ms. Grace Koshie, a Non-Executive Independent Director. The Committee was re-constituted once in the financial year 2016-17. The members of the Committee are Ms. Grace Koshie, Mr. Nilesh S Vikamsey and Ms. Shubhalakshmi Panse who are Non-Executive Independent Directors.
The constitution of the Committee is in compliance with the regulatory requirements. The terms of reference of the Audit Committee incorporated in the Bank''''s Code of Corporate Governance, are in accordance with the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, Companies Act, 2013 and RBI guidelines, which are detailed in Corporate Governance section of this report.
In terms of the definition of Independence of Director as prescribed under SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 and Section 149(6) of Companies Act, 2013 and based on the confirmation / disclosures received from the Directors, the following Directors are Independent Directors of the Bank as on the date of this report:
1. Mr. K M Chandrasekhar (DIN- 06466854)
2. Mr. Nilesh S Vikamsey (DIN- 00031213)
3. Mr.Dilip G Sadarangani (DIN- 06610897)
4. Mr. Harish H Engineer (DIN- 01843009)
5. Ms. Grace Elizabeth Koshie (DIN- 06765216)
6. Ms. Shubhalakshmi Panse (DIN- 02599310)
7. Mr. C Balagopal (DIN- 00430938)
During the year a meeting of Independent Directors was conducted on 31 March 2017 to evaluate the performance of Board as a whole, evaluation of Non-Independent Directors and Chairman of the Board and assess the flow of information. The meeting was attended by all the Independent Directors of the Bank.
In terms of the provisions of Section 149 of the Companies Act, 2013 and Clause 17(1 )(a) of the SEBI(Listing Obligations and Disclosure Requirements), Regulations 2015(L0DR Regulations) a company shall have at least one Woman Director on the Board of the company. Your Bank has Ms. Grace Elizabeth Koshie and Ms. Shubhalakshmi Panse as Directors on the Board of the Bank.
Bank''''s policy on directors'''' appointment and remuneration including criteria for determining qualifications, positive attributes, independence of a director and other matters provided under sub-section (3) of section 178;
a) Qualifications, Experience and Knowledge
1. The Board should bring to their tasks a balanced mix of knowledge, skills, experience, and judgment relevant to the Bank''''s policies, operations, and needs. Not less than fifty-one percent of the total number of Directors shall be persons having special knowledge, skills, or valuable experience in one or more fields, such as banking, finance, management, economics, law, accountancy, agriculture and rural economics, cooperative movement, trade, industry, infrastructure, engineering, and technology. At least two Directors shall be persons having special knowledge or practical experience in agriculture and rural economy, cooperation, or small-scale industry. The Bank shall ensure to include in its Board need based representation of skills such as marketing, technology & systems, risk management, strategic planning, treasury operations, credit recovery etc.
2. The directors should be able to devote sufficient time and attention to the discharge of their duties to the Bank.
3. The directors shall preferably be in the range of 35-70 years
b) Disqualification/Conflicts of interest
1. The Bank''''s Directors shall be subject to the disqualifications/ prohibitions contained in the Companies Act 2013 and the Banking Regulation Act 1949 with respect to directorship of companies in general or banking companies in particular.
2. A Director shall not be a director of any other company, or partner or proprietor of a firm, where such directorship, partnership, or proprietorship involves or is likely to involve actual or potential conflicts of interest as a Director of the Bank. A Director shall promptly inform the Board/committee of any actual or potential conflicts of interest with respect to any matter that may come up for the consideration of the Board or of any committee of which he is a member, and shall refrain from participating in a discussion on the matter.
c) Suggested criteria for determining attributes of a director as required to be specified under Companies Act, 2013 include
1. integrity in personal and professional dealings.
2. wisdom and ability to take appropriate decisions.
3. ability to read and understand financial statements
4. ability to deal with others with a sense of responsibility, firmness, and cooperation.
5. refrain from any action that would lead to loss of his independence.
d) Suggested criteria for determining Independence of a director
The criteria of independence of a director are determined based on the conditions specified in Section 149 (6) of the Companies Act, 2013 and SEBI-LODR Regulations, 2015.
The independent director shall at the first meeting of the Board in which he participates as a director and thereafter at the first meeting of the Board in every financial year or whenever there is any change in the circumstances which may affect his status as an independent director, give a declaration that he meets the criteria of independence.
The terms and conditions of appointment of Independent Director is disclosed on the website of the Bank and a web link thereto is : https://www.federalbank.co.in/documents/10180//63602//Terms and conditions of Appointment of Independent Directo rs/4e33ba77-1cc5-42b4-aa02-ab4b84a62324
Policy on remuneration to Non-Executive Directors/ Independent Directors
The Policy of the Bank for the payment of remuneration to Non-Executive Directors/Independent Directors of the Bank is explained in the Comprehensive Compensation Policy for Non Executive Directors/Independent Directors (other than Part Time Chairman), as approved by the Board of Directors and is disclosed on the website of the Bank and a web link thereto is: http://www. federalbank.co.in/shareholder-information As required under Banking Regulation Act, 1949 prior approval of RBI is required, to give remuneration to Non-Executive Part Time Chairman of the Board.
As per the Policy during FY 2016-17, Non- Executive Independent Directors of the Bank are paid only sitting fee for attending Board/Committees meetings and reimbursement of expenses for participation in Board/Committee meetings other than Non- Executive Part Time Chairman, who is paid remuneration in addition to sitting fee for attending Board/Committees meetings and reimbursement of expenses for participation in Board/Committee meetings, with the approval of RBI.
Policy on remuneration to MD & CEO, Executive Director, Key Managerial Personnel and other employees
The Compensation / Remuneration Policy of the Bank as approved by the Board contains the policy for payment of remuneration to Executive Directors including MD & CEO, Key Managerial Personnel and for the employees of the Bank.
As per the guidelines given by RBI, Compensation/Remuneration Policy has been designed with the following Core Principles:
1. Effective governance of compensation.
2. Alignment of compensation with prudent risk taking.
3. Effective supervisory oversight and stakeholder engagement.
Compensation of Managing Director & CEO, Whole Time Directors and senior Executives
The compensation paid out to the referred functionaries is divided into two components:
1. The fixed compensation is to be determined based on the industry standards, the exposure, skill sets, talent and qualification attained by the official over his/her career span. (Approval from RBI to be taken as per section 35B of the Banking Regulation Act while deciding the fixed and variable compensation part for Managing Director & CEO and Whole Time Directors)
2. The variable compensation for Managing Director & CEO and senior Executives (Non - IBA package) to be fixed based on organizational performance and KPAs set for the official. The organization''''s performance is charted based on the performance scorecard which takes into account various financial indicators like revenue earned, cost deployed, profit earned, NPA position and other intangible factors like leadership and employee development. Variable pay is paid purely based on performance and is measured through score cards for Managing Director & CEO /WTDs. The score card provides a mix of financial and non financial, quantitative and qualitative metrics. KPAs to contain targets on risk adjusted metrics such as RAROC, RARORAC, in addition to target on NPAs.
Compensation paid to Senior Executives and other staff members on IBA package
The compensation paid to other officials that include Award Staff, Officers coming under Scale I to III and Senior Executives coming under Scale IV to VII is fixed based on the periodic industry level settlements with Indian Banks'''' Association. The variable compensation paid to functionaries is based on the Performance Linked Incentive Scheme, which has been formulated on the basis of performance parameters set in Performance Management System. The scale of pay and other service conditions applicable to employees, whose compensation package is governed under IBA package has been revised consequent to the 10th Bipartite Settlement.
Policy on Board Diversity
Policy on Board Diversity of the Bank mainly depends on the qualifications for appointment of Directors of the Bank as contained in the Banking Regulation Act, 1949 and satisfying the Fit and Proper Criteria for directors as per the regulatory requirement of RBI.
The Bank continuously seeks to enhance the effectiveness of its Board and to maintain the highest standards of corporate governance and recognizes and embraces the benefits of diversity in the boardroom. Diversity is ensured through consideration of a number of factors, including but not limited to skills, regional and industry experience, background and other qualities. In forming its perspective on diversity, the Bank also take into account factors based on its own business model and specific needs from time to time.
Board Diversity enhances the quality of performance of the Board ;usher in independence in the performance of the Board; eradicate the gender bias in the Board; achieves sustainable and balanced performance and development ;support the attainment of strategic objectives & also ensures compliance of applicable law/s and good corporate practices.
The Nomination Committee has the responsibility for leading the process for Board appointments and for identifying and nominating, for approval by the Board, candidates for appointment to the Board. The benefits of diversity continue to influence succession planning and continue to be the key criteria for the search and nomination of directors to the Board.
Board appointments will be based on merit and candidates will be considered against objective criteria, having due regard for the benefits of diversity on the Board, including gender. While making Board appointments, the requirement as per the Companies Act,2013 for appointment of atleast one woman director on the Board of the Bank will also be considered.
Key Managerial Personnel who were appointed or have resigned during the year
In compliance with Section 203 of the Companies Act, 2013, no Key Managerial Personnel have been appointed or have resigned during FY 2017.
Management Discussion and Analysis
The Management Discussion and Analysis Report for the year under review as stipulated under the listing agreement with the stock exchanges in India is presented in a separate section forming part of this Annual Report.
Loans, guarantees or investments in securities
Pursuant to Section 186 (11) of the Companies Act, 2013, the provisions of Section 186 of Companies Act, 2013, except subsection (1), do not apply to a loan made, guarantee given or security provided by a banking company in the ordinary course of business. The particulars of investments made by the Bank are disclosed in Schedule 8 of the Financial Statements as per the applicable provisions of Banking Regulation Act, 1949.
Internal Complaints Committees
Bank had constituted Internal Complaints Committees, as per letter and spirit contained in the provisions of “The Sexual Harassment of Women at Workplace (Prevention, Prohibition and Redressal) Act, 2013”, at 9 Zones and Head Office to prevent and redress the complaints relating to sexual harassment and to organize workshops/ awareness programs to empower women employees while handling cases relating to sexual harassment. Workshops/ awareness programs regarding women empowerment were conducted at various locations pan India. The data with regard to the redressal of complaints by the Internal Complaints Committees is as follows:
a) No. of complaints received for the year FY2017: 0
b) No. of complaints disposed of during FY 2017 : 0
c) No. of cases pending for more than 90 days : Nil
d) Nature of action taken by the employer/ District Officer: NA
Pursuant to the provisions of the Companies Act, 2013 and Regulation 17(10) and other applicable regulations of the Listing Regulations, the Board has carried out an annual performance evaluation of its own performance and of the directors individually, as well as the evaluation of the working of its various Committees for the year under consideration.
The evaluation process was initiated by putting in place, a structured questionnaire after taking into consideration inputs received from the Directors, covering various aspects of the Board''''s functioning, such as adequacy of the composition of the Board and its Committees, Board culture, execution and performance of specific duties, obligations and governance.
Thereafter a separate exercise was carried out to evaluate the performance of individual Directors, including the Chairman of the Board, who were evaluated on specified parameters. The performance evaluation of the Independent Directors was carried out by the entire Board, other than the Independent Director concerned. The performance evaluation of the Chairman and the Non Independent Directors were carried out by the Independent Directors. The Nomination, Remuneration, Ethics and Compensation Committee carried out the performance evaluation of all the Directors of the Bank. The Directors expressed their overall satisfaction with the evaluation process.
I) Performance Evaluation of Non-Independent Directors (MD & CEO and Executive Director)
Criteria for Evaluation include:
i) Achievements of performance against targets set ii) Appraises the Board regarding the organization''''s financial position and operational budget so as to enable the Board to make informed financial decisions iii) Provides Leadership in developing strategies and organizational plans with the management and the Board of Directors iv) Ensures that the Board is kept informed about all issues concerning the Bank v) Media interaction and ability to project positive image of the Company vi) Effectively pursue the performance goals in relation to mission and objective of the organization vii) Motivating employees, providing assistance & directions viii) Supervising & Safeguard of confidential information ix) Establishment of internal control processes, monitoring policies and encouraging suggestions x) Cultivates effective Relationship with Industry Forums, Community and business leaders, Regulatory Bodies and Public Officials.
i) Attendance of MD & CEO and EDs at the Board and Committee meetings was good; ii) They present financial reports to the Board on a regular basis and submits an annual budget for Board review, revision and approval; iii) They regularly appraise the Board on the organization''''s financial position and operational budgets that aids the Board to make informed financial decisions; iv) The Executives constantly endeavor to enhance internal control processes, monitor execution of policies and are very receptive to suggestions. v) The MD & CEO has adequate qualities of leadership in developing strategy & execution for achieving them vi) The MD & CEO and EDs adequately endeavor to Implement Board decisions and are very strong in media interactions and have put in efforts in building and reinforcing the Brand and Image of the Bank. vii) MD & CEO demonstrates his commitment to the Organisation goals, is ethical, motivates & guides employees for better performance. viii) His personal rapport and good relationship with industry forums / regulatory bodies, etc are highlights and testimony of the respect and prominence of Federal Bank in the Indian banking landscape.
II) Performance Evaluation of Independent Directors including Chairman Criteria for evaluation include:
i) Attendance at the Board and Committee meetings ii) Study of agenda papers in depth prior to meeting and active participation at the meeting iii) Contributes to discussions on strategy as opposed to focus only on agenda iv) Participate constructively and actively in the Committees of the Board in which they are chairpersons or Members v) Exercises his/her skills and diligence with due and reasonable care and brings an independent judgement to the Board vi) The Director remains abreast of developments affecting the company and external environment in which it operates independent of his being appraised at meetings vii) Knowledge and Competency: a) How the person fares across different competencies as identified for effective functioning of the entity and the Board b) Whether the person has sufficient understanding and knowledge of the entity and the sector in which it operates viii) Whether the person demonstrates highest level of integrity, including conflict of interest disclosures, maintenance of confidentiality, etc
The evaluation done, brought out the fact that good attendance of Independent Directors was there in the Board and committee meetings. They are knowledgeable, ethical and bring their respective expertise in the deliberations and make valuable contributions. They have adequate understanding of their role and responsibilities as Independent directors. The Independent Directors also demonstrates highest level of integrity, including conflict of interest disclosures and maintenance of confidentiality. It was also noted that the Independent Directors exercises his/ her skills and diligence with due and reasonable care and brings an independent judgement to the Board and also the Directors remains abreast of developments affecting the company and external environment in which it operates.
III) Performance Evaluation of Board and Committees
A. Criteria for Evaluation of Board include:
If Board is of appropriate size and has the appropriate balance and diversity of background, business experience, industry knowledge, skills and expertise in areas vital to the Bank''''s success, representing sectors laid down by the regulators, given its current and future position ii) New Board members participate in an orientation program to educate them on the organization, their responsibilities, and the organization''''s activities, the Board encourages a culture that promotes candid communication iii) The Board oversees management''''s procedures for enforcing the organization''''s code of conduct, Action Taken Reports on the discussion/directions of the Board are submitted at regular intervals to the Board iv) The Board oversees risk management through inputs from the Risk Management Committee v) The Board considers the quality and appropriateness of financial reporting, including the transparency of disclosures vi) The Board ensures compliance with the relevant provisions of the Companies Act and other regulatory provisions as applicable to the Bank vii) The Board oversees the compliance processes viii) The Board views the organization''''s performance from the competitive perspective - industry and peers performance, industry trends and budget analysis and with reference to areas where significant differences are apparent etc. ix) The Board ensures compliance with the relevant provisions of the Companies Act and other regulatory provisions as applicable to the Company.
x) The Board has defined an effective Code of Conduct for the Board and Senior Management.
xi) Whether the Board monitors and manages potential conflicts of interest of management, members of the board of directors and shareholders, including misuse of corporate assets and abuse in related party transactions
B. Criteria for Evaluation of Committees include:
i) The Committee''''s Terms of Reference and composition is reviewed annually and is found to be constituting of Directors representing sectors laid down by the regulator and continue to be appropriate
ii) Committee meetings are organized properly in number, timing and location iii) The Committee allocates the right amount of time for its work etc iv) The Committee is effective in carrying out its mandate v) Whether adequate independence of the Committee is ensured from the Board vi) Whether the Committee has fulfilled its functions as assigned by the Board and laws as may be applicable
Evaluation Outcome of Board/Committees
i) The structure and composition of the Board is appropriate with adequate number of Directors and a good balance of diverse professional backgrounds, business experience, industry knowledge, skills and expertise in areas vital to the Bank''''s success in it''''s current and future position; ii) The proportion of independent to non-independent directors is good; iii) The Board demonstrates integrity, credibility, trustworthiness, active and effective participation at Board & Committee meetings which are held at reasonable and regular intervals; iv) The Board and Committee processes and procedures are good with different committees reviewing different functional areas of the Bank''''s operations. v) The Board and its Committees also reviews Bank''''s performance, risk management, financial reporting, compliances, technology, operations with adequate frequency of meetings etc.
IV) Assessment of flow of information
Criteria for Evaluation include:
The agenda and related information are circulated in advance of meetings to allow board members sufficient time to study and understand the information, Information on the annual operating plans and budgets and other updates are provided to the Board; Updates on operating results of the Bank is furnished to the Board, periodically, etc. Update on the compliance with the regulatory, statutory or listing requirements are placed before the Board.
The flow of information to the Board and its committees is generally good.
Evaluation of Senior Management Personnel in the Bank
The compensation paid out to KMP is divided into two components . The fixed compensation is to be determined based on the industry standards, the exposure, skill sets, talent and qualification attained by the official over his/her career span.
The variable compensation to Senior Executives (Non - IBA package) to be fixed based on organizational performance and KPAs set for the official. The organization''''s performance is charted based on the Revenue Point Index / Performance Scorecard which takes into account various financial indicators like revenue earned, cost deployed, profit earned, NPA position and other intangible factors like leadership and employee development. Variable pay are paid purely based on performance. Key Performance Indicators (KPAs) to contain targets on Risk Adjusted Metrics such as RAROC, RARORAC, in addition to target on NPAs. An ED level Committee has been constituted for reviewing the linkage of risk based performance with remuneration, for employees above Level 5. The Committee with the assistance of Risk Department & HR will study the business and industry environment, analyze and categorize the risks into immediate and long term and streamline the components of the compensation plan like proportion of the total variable compensation to be paid to Senior Employees so as to ensure financial stability of the organization. These committees would also analyze various factors to ascertain whether cost/ income ratio supports the remuneration package provided to Senior Executives and other officials consistent with maintenance of sound capital adequacy ratio.
During the year eleven Board meetings were convened and held, the details of which are given in the Corporate Governance Report. The intervening gap between the meetings was within the period prescribed under the Companies Act, 2013 and also as per the Listing Regulations.
Related Party Transactions
All related party transactions that were entered during the financial year were in the ordinary course of the business of the Bank and were on arm''''s length basis. There were no materially significant related party transactions entered by the Bank with Related parties which may have a potential conflict with the interest of the Bank. All Related Party Transactions were placed before the Audit Committee of the Board for approval. Prior omnibus approval for transactions which are of repetitive nature is obtained from the Audit Committee and accordingly the required disclosures are made to the Committee on quarterly basis in terms of the approval of the Committee.
The policy on materiality of Related Party Transactions and also on dealing with Related Party Transactions as approved by the Audit Committee and the Board of Directors is uploaded on the website of the Bank and the link for the same is http://www.federalbank. co.in/our-commitments
Since all related party transactions entered into by the Bank were in the ordinary course of business and were on an arm''''s length basis, disclosures as per Form AOC-2 is not applicable to the Bank. There were also no material contracts or arrangement or transactions at arm''''s length basis during the period.
Business Responsibility Report
As stipulated in the Listing Regulations the Business Responsibility Report describing the initiatives taken by the Bank from environmental, social and governance perspective forms part of the Annual Report. Business Responsibility Report as stipulated under Regulation 34 of the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015 has been hosted on the website of the Bank (https:// www.federalbank.co.in/shareholder-information) Any Member interested in obtaining a physical copy of the same may write to the Company Secretary at the Registered Office of the Bank.
Technology and digital updates and measures taken in IT governance, Information security, IT audit, IT operations, IT services outsourcing
Technology and Digital updates:
During the financial year under review, your Bank focused extensively on Digital Banking. In line with the nation''''s drive towards Digital India, the Bank introduced a range of innovative products in the Digital Banking arena. A few examples are:
a) BYOM or Be Your Own Master
Federal Bank BYOM is a step towards redefining the way of retail lending in banking. Through BYOM a customer can avail a personal loan anytime, anywhere, available 24*7. Through this product customer gets the loan amount credited to his/ her operative account instantly within seconds. This facility neither requires a customer to visit a branch nor does require signature on any documents. BYOM is a web application that can be accessed on a computer or tablet or mobile device.
We have seen tremendous response to the product within hours of the launch of the product. The offers are given to the customer periodically during festive seasons. The product has been widely accepted by our customers, which has resulted in an incremental growth of this portfolio. Considering the immense potential the product offers, we look forward to utilize the platform to include more customers. The engine is capable of processing other retail loans, online consumer finance and can also integrate with online web/ mobile applications, making it versatile.
Federal Bank associated with a Fintech startup company 4TiGO for developing a UBER type technology platform for trucks. 4TiGO developed a mobile platform which is expected to transform the industrial logistics ecosystem for greater efficiency and effectiveness by creating a networked community of fleet owners, Transport agents, brokers, truckers and transport companies.
Now Agents, Consigner, Consignees, Fleet owners can become the part of a mobile network and people can online book their shipments and pay when the shipment reaches the destination.
The app handles the complete dynamics of transport and your Bank is providing the technology for 4TiGO to handle the complex end to end financial transactions.
c) UPI and Merchant Services
Unified Payments Interface (UPI) is a system that powers multiple bank accounts into a single mobile application (of any participating bank), merging several banking features, seamless fund routing & merchant payments into one hood. It also caters to the “Peer to Peer” collect request which can be scheduled and paid as per requirement and convenience.
With the above context in mind, NPCI conducted a pilot launch with a few member banks. The pilot launch was on 11th April 2016 by Dr. Raghuram G Rajan, Governor, RBI at Mumbai. Banks have started to upload their UPI enabled Apps on Google Play store from 25th August, 2016 onwards.
Your Bank is proud to become one among the banks which piloted a UPI PSP app as per the mandates of NPCI so be a part of the historical UPI network, which is supposed to change the whole concept of payment in the country. India is the only country with such a unique inter-operable payment technology which can help billions of Indians to connect to a common payment network called UPI. LOTZA is available for download in Playstore.
Federal Bank''''s Lotza UPI Merchant services were launched by the Bank to support merchants go digital by connecting to the UPI platform. Lotza scan and pay, which is one among the Lotza UPI merchant services, helps small merchants to accept payments from any UPI based mobile app like BHIM or Lotza by just scanning the QR code displayed at the shop. The shopkeeper gets an instant SMS confirmation, once payment is received. For larger merchants