HDFC Bank Limited (‘HDFC Bank’ or ‘the Bank’), incorporated in Mumbai, India is a publicly held banking company engaged in providing a range of banking and financial services including retail banking, wholesale banking and treasury operations. The Bank is governed by the Banking Regulation Act, 1949 and the Companies Act, 2013. The Bank has overseas branch operations in Bahrain, Hong Kong and Dubai. The financial accounting systems of the Bank are centralised and, therefore, accounting returns are not required to be submitted by branches of the Bank.
B BASIS OF PREPARATION
The financial statements have been prepared and presented under the historical cost convention and accrual basis of accounting, unless otherwise stated and are in accordance with Generally Accepted Accounting Principles in India (‘GAAP’), statutory requirements prescribed under the Banking Regulation Act, 1949, circulars and guidelines issued by the Reserve Bank of India (‘RBI’) from time to time, Accounting Standards (‘AS’) specified under Section 133 of the Companies Act, 2013, in so far as they apply to banks and current practices prevailing within the banking industry in India.
Use of estimates
The preparation of financial statements in conformity with GAAP requires the management to make estimates and assumptions considered in the reported amounts of assets and liabilities (including contingent liabilities) as of the date of the financial statements and the reported income and expenses for the reporting period. Management believes that the estimates used in the preparation of the financial statements are prudent and reasonable. Actual results could differ from these estimates. Any revision in the accounting estimates is recognised prospectively in the current and future periods.
Amounts in notes forming part of the financial statements for the year ended March 31, 2017 are denominated in rupee crore to conform to extant RBI guidelines.
1 Change in classification
Pursuant to RBI circular dated May 19, 2016, the Bank has, included its repurchase / reverse repurchase transactions under Liquidity Adjustment Facility (LAF) and Marginal Standing Facility (MSF) with RBI under ‘Borrowings from RBI’ / ‘Balances with RBI’, as the case may be. Hitherto, these transactions were netted from / included under ‘Investments’. Figures of the previous year have been regrouped / reclassified to conform to current year’s classification. The above change in classification has no impact on the profit of the Bank for the years ended March 31, 2017 and March 31, 2016.
2 Proposed dividend
The Board of Directors, at their meeting held on April 21, 2017 have proposed a dividend of Rs.11.00 per equity share aggregating Rs.3,392.71 crore, inclusive of tax on dividend. The proposal is subject to the approval of shareholders at the Annual General Meeting. In terms of revised Accounting Standard (AS) 4 ‘Contingencies and Events occurring after the Balance sheet date’ as notified by the Ministry of Corporate Affairs through amendments to Companies (Accounting Standards) Amendment Rules, 2016, the Bank has not appropriated proposed dividend from Statement of Profit and Loss for the year ended March 31, 2017. Accordingly, the proposed dividend and the tax thereon, under Appropriations in the Statement of Profit and Loss is lower by Rs.2,818.80 crore and Rs.573.91 crore respectively and the balance of Other Liabilities is lower by an equivalent amount as at March 31, 2017. However, the effect of the proposed dividend has been reckoned in determining capital funds in the computation of the capital adequacy ratio as at March 31, 2017.
3 Capital adequacy
The Bank’s capital to risk-weighted asset ratio (‘Capital Adequacy Ratio’) as at March 31, 2017 is calculated in accordance with the RBI’s guidelines on Basel III capital regulations (‘Basel III’). The phasing in of the minimum capital ratio requirement under Basel III is as follows:
The above minimum CET1, Tier I and Total capital ratio requirement includes capital conservation buffer. The Bank’s capital adequacy ratio computed under Basel III is given below:
The Bank has not raised any additional tier I and tier II capital during the years ended March 31, 2017 and March 31, 2016.
Subordinated debt (lower Tier II capital), upper Tier II capital and innovative perpetual debt instruments outstanding as at March 31, 2017 are Rs.10,402.00 crore (previous year: Rs.10,812.00 crore), Rs.2,780.00 crore (previous year: Rs.4,078.45 crore) and nil (previous year: Rs.200.00 crore) respectively.
In accordance with RBI guidelines, banks are required to make Pillar 3 disclosures under Basel III capital regulations. The Bank’s Pillar 3 disclosures are available on its website at the following link: http://www.hdfcbank.com/aboutus/basel_disclosures/default.htm. These Pillar 3 disclosures have not been subjected to audit or review by the statutory auditors.
During the year ended March 31, 2017, the Bank allotted 3,43,59,200 equity shares (previous year: 2,16,91,200 equity shares) aggregating to face value Rs.6.87 crore (previous year: Rs.4.34 crore) in respect of stock options exercised. Accordingly, share capital increased by Rs.6.87 crore (previous year: Rs.4.34 crore) and share premium increased by Rs.2,254.64 crore (previous year: Rs.1,218.56 crore).
4 Earnings per equity share
Basic and diluted earnings per equity share have been calculated based on the net profit after taxation of Rs.14,549.66 crore (previous year: Rs.12,296.23 crore) and the weighted average number of equity shares outstanding during the year of 2,54,43,33,609 (previous year: 2,51,74,29,120).
Basic earnings per equity share has been computed by dividing net profit for the year attributable to the equity shareholders by the weighted average number of equity shares outstanding for the year. Diluted earnings per equity share has been computed by dividing the net profit for the year attributable to the equity shareholders by the weighted average number of equity shares and dilutive potential equity shares outstanding during the year, except where the results are anti-dilutive. The dilutive impact is on account of stock options granted to employees by the Bank. There is no impact of dilution on the profits in the current year and previous year.
5 Reserves and Surplus Draw down from reserves Share Premium
The Bank has not undertaken any drawdown from reserves during the years ended March 31, 2017 and March 31, 2016. Statutory Reserve
The Bank has made an appropriation of Rs.3,637.41 crore (previous year: Rs.3,074.05 crore) out of profits for the year ended March 31, 2017 to Statutory Reserve pursuant to the requirements of Section 17 of the Banking Regulation Act, 1949 and RBI guidelines dated September 23, 2000.
During the year ended March 31, 2017, the Bank appropriated Rs.313.41 crore (previous year: Rs.222.15 crore), being the profit from sale of investments under HTM category and profit on sale of immovable properties, net of taxes and transfer to statutory reserve, from Profit and Loss Account to Capital Reserve Account.
The Bank has made an appropriation of Rs.1,454.96 crore (previous year: Rs.1,229.62 crore) out of profits for the year ended March 31, 2017 to General Reserve.
Investment Reserve Account
During the year ended March 31, 2017, the Bank has appropriated Rs.4.29 crore (net) from Profit and Loss Account to Investment Reserve Account as per RBI guidelines. In the previous year, the Bank had transferred Rs.8.52 crore (net) from Investment Reserve Account to Profit and Loss Account as per RBI guidelines.
6 Dividend on shares allotted pursuant to exercise of stock options
The Bank may allot equity shares after the Balance Sheet date but before the book closure date pursuant to the exercise of any employee stock options. These equity shares will be eligible for full dividend for the year ended March 31, 2017, if approved at the ensuing Annual General Meeting.
7 Accounting for employee share based payments
The shareholders of the Bank approved grant of equity share options under Plan “C” in June 2005, Plan “D” in June 2007, Plan “E” in June 2010, Plan “F” in June 2013 and Plan “G” in July 2016. Under the terms of each of these Plans, the Bank may issue to its employees and Whole Time Directors, Equity Stock Options (‘ESOPs’) each of which is convertible into one equity share. All the plans were framed in accordance with the SEBI (Employee Stock Option Scheme & Employee Stock Purchase Scheme) Guidelines, 1999 as amended from time to time and as applicable at the time of grant. Accounting for the stock options has been in accordance with the SEBI (Share Based Employee Benefits) Regulations, 2014 to the extent applicable.
Plans C, D, E, F and G provide for the issuance of options at the recommendation of the Nomination & Remuneration Committee at the closing price on the working day immediately preceding the date when options are granted. This closing price is the closing price of the Bank’s equity share on an Indian stock exchange with the highest trading volume as of the working day preceding the date of grant.
Vesting conditions applicable to the options are at the discretion of the Nomination & Remuneration Committee. These options are exercisable on vesting, for a period as set forth by the Nomination & Remuneration Committee at the time of grant. The period in which options may be exercised cannot exceed five years. During the years ended March 31, 2017 and March 31, 2016, no modifications were made to the terms and conditions of ESOPs as approved by the Nomination & Remuneration Committee.
Fair value methodology
The fair value of options used to compute proforma net income and earnings per equity share have been estimated on the dates of each grant using the binomial option-pricing model. The Bank estimates the volatility based on the historical share prices. No stock options were granted during the year ended March 31, 2017 (previous year: 4,48,36,200). The various assumptions considered in the pricing model for the ESOPs granted during the year ended March 31, 2016 were:
8 Other liabilities
- The Bank held contingent provisions towards standard assets amounting to Rs.2,392.22 crore as at March 31, 2017 (previous year: Rs.2,001.21 crore). These are included under other liabilities.
- Provision for standard assets is made @ 0.25% for direct advances to agriculture and Small and Micro Enterprises (SMEs) sectors, @ 1% for advances to commercial real estate sector, @ 0.75% for advances to commercial real estate - residential housing sector, @ 5% on restructured standard advances, @ 2% until after one year from the date on which the rates are reset at higher rates for housing loans offered at a comparatively lower rate of interest in the first few years and @ 2% on all exposures to the wholly owned step down subsidiaries of the overseas subsidiaries of Indian companies, sanctioned / renewed after December 31, 2015.
- Provision towards standard advances under Strategic Debt Restructuring (SDR) scheme is made @ 15% till the outstanding loan / facilities in the account perform satisfactorily during the ‘specified period’ (as defined in the scheme) and @ 5% for accounts classified under special mention account “SMA-2” category, where the Bank under consortium / multiple banking arrangement has the largest Aggregate Exposure (AE) or second largest AE with aggregate exposure of Rs.1,000 million or above and Joint Lenders’ Forum (JLF) is not formed or the JLF fails to agree upon a common corrective action plan within the stipulated time frame.
- In accordance with regulatory guidelines and based on the information made available by its customers to the Bank, for exposures to customers who have not hedged their foreign currency exposures, provision for standard assets is made at levels ranging up to 0.80% depending on the likely loss the entities could incur on account of exchange rate movements.
- Provision for standard assets of overseas branches is made at higher of rates prescribed by the overseas regulator or RBI.
- For all other loans and advances including credit exposures computed as per the current marked to market values of interest rate and foreign exchange derivative contracts, provision for standard assets is made @ 0.40%.
- The Bank has presented gross unrealised gain on foreign exchange and derivative contracts under other assets and gross unrealised loss on foreign exchange and derivative contracts under other liabilities. Accordingly, other liabilities as at March 31, 2017 include unrealised loss on foreign exchange and derivative contracts of Rs.13,880.38 crore (previous year: Rs.7,524.88 crore).
9 Unhedged foreign currency exposure
- The Bank has in place a policy and process for managing currency induced credit risk. The credit appraisal memorandum prepared at the time of origination and review of a credit is required to discuss the exchange risk that the customer is exposed to from all sources, including trade related, foreign currency borrowings and external commercial borrowings. It could cover the natural hedge available to the customer as well as other hedging methods adopted by the customer to mitigate exchange risk. For foreign currency loans granted by the Bank beyond a defined threshold the customer will be encouraged to enter into appropriate risk hedging mechanisms with the Bank. Alternatively, the Bank will satisfy itself that the customer has the financial capacity to bear the exchange risk in the normal course of its business and / or has other mitigants to reduce the risk. On a monthly basis, the Bank reviews information on the unhedged portion of foreign currency exposures of customers, whose total foreign currency exposure with the Bank exceeds a defined threshold. Based on the monthly review, the Bank proposes suitable hedging techniques to the customer to contain the risk. A Board approved credit risk rating linked limit on unhedged foreign currency position of customers is applicable when extending credit facilities to a customer. The compliance with the limit is assessed by estimating the extent of drop in a customer’s annual EBID due to a potentially large adverse movement in exchange rate impacting the unhedged foreign currency exposure of the customer. Where a breach is observed in such a simulation, the customer is advised to reduce its unhedged exposure.
- In accordance with RBI guidelines, provisions held for standard assets and capital maintained (including capital conservation buffer) by the Bank as at March 31, 2017 in respect of the unhedged foreign currency exposure of customers was Rs.108.31 crore (previous year: Rs.114.84 crore) and Rs.396.86 crore (previous year: Rs.294.57 crore) respectively.
- Other investments as at the Balance Sheet date include commercial paper amounting to Rs.24,494.53 crore (previous year: Rs.25,431.18 crore).
- Investments include securities of Face Value (F V) aggregating Rs.1,520.00 crore (previous year: FV Rs.1,520.00 crore) which are kept as margin for clearing of securities, of FV Rs.24,488.31 crore (previous year: FV Rs.13,729.30 crore) which are kept as margin for Collateralised Borrowing and Lending Obligation (CBLO) and of FV aggregating Rs.100.00 crore (previous year: FV Rs.56.00 crore) which are kept as margin for Forex Forward segment - Default Fund with the Clearing Corporation of India Limited (CCIL).
- Investments include securities of FV aggregating Rs.16.00 crore (previous year: FV Rs.16.00 crore) which are kept as margin with National Securities Clearing Corporation of India Limited (NSCCIL), of FV aggregating Rs.13.00 crore (previous year: FV Rs.13.00 crore) which are kept as margin with Metropolitan Clearing Corporation of India Limited and of FV aggregating Rs.5.00 crore (previous year: Rs.1.00 crore) which are kept as margin with Indian Clearing Corporation Limited in the BSE currency derivatives segment.
- Investments having FV aggregating Rs.42,730.27 crore (previous year: FV Rs.35,937.22 crore) are kept as margin towards Real Time Gross Settlement (RTGS) and those having FV aggregating Rs.41,473.92 crore (previous year: Rs.13,091.46 crore) are kept as margin towards repo transactions with the RBI.
- Investments of FV aggregating Rs.11.05 crore (previous year: FV Rs.10.05 crore) are kept as margin for Forex Settlement Default Fund, of FV aggregating Rs.75.40 crore (previous year: Rs.85.40 crore) are kept as Cash Margin, of FV aggregating Rs.65.00 crore (previous year: nil) are kept as margin for Securities Segment Default Fund, of FV aggregating Rs.25.00 crore (previous year: nil) are kept as margin for CBLO Segment Default Fund and of FV aggregating Rs.41.00 crore (previous year: Rs.11.00 crore) are kept as margin for Rupee Derivatives Guaranteed Settlement Default Fund with CCIL.
- The Bank has made investments in certain companies wherein it holds more than 25% of the equity shares of those companies. Such investments do not fall within the definition of a joint venture as per AS-27, Financial Reporting of Interest in Joint Ventures and the said accounting standard is thus not applicable. However, pursuant to RBI guidelines, the Bank has classified and disclosed these investments as joint ventures.
- During the year ended March 31, 2017, the aggregate book value of investment sold from, and transferred to I from, HTM category was in excess of 5% of the book value of investments held in HTM category at the beginning of the year. The market value of investments (excluding investments in subsidiaries / joint ventures and Non SLR bonds) under HTM category as at March 31, 2017 was Rs.128,886.02 crore and was higher than the book value thereof as at that date. In accordance with the RBI guidelines, sale from, and transfer to / from, HTM category excludes the:
- one-time transfer of the securities permitted to be undertaken by banks at the beginning of the accounting year with approval of the Board of Directors;
- sales to the RBI under pre-announced open market operation auctions; and
- repurchase of Government securities by Government of India from banks.
- sale of securities or transfer to AFS / HFT consequent to the reduction of ceiling on SLR securities under HTM at the beginning of January, July and September 2016, in addition to the shifting permitted at the beginning of the accounting year, i.e, April 2016.
Overview of business and processes
Derivatives are financial instruments whose characteristics are derived from underlying assets, or from interest and exchange rates or indices. These include forwards, swaps, futures and options. The notional amounts of financial instruments such as foreign exchange contracts and derivatives provide a basis for comparison with instruments recognised on the Balance Sheet but do not necessarily indicate the amounts of future cash flows involved or the current fair value of the instruments and, therefore, do not indicate the Bank’s exposure to credit or price risks. The following sections outline the nature and terms of the derivative transactions generally undertaken by the Bank.
Interest rate contracts
Forward rate agreements give the buyer the ability to determine the underlying rate of interest for a specified period commencing on a specified future date (the settlement date). There is no exchange of principal and settlement is effected on the settlement date. The settlement amount is the difference between the contracted rate and the market rate prevailing on the settlement date.
Interest rate swaps involve the exchange of interest obligations with the counterparty for a specified period without exchanging the underlying (or notional) principal.
Interest rate caps and floors give the buyer the ability to fix the maximum or minimum rate of interest. The writer of the contract pays the amount by which the market rate exceeds or is less than the cap rate or the floor rate respectively. A combination of interest rate caps and floors is known as an interest rate collar.
Interest rate futures are standardised interest rate derivative contracts traded on a recognised stock exchange to buy or sell a notional security or any other interest bearing instrument or an index of such instruments or interest rates at a specified future date, at a price determined at the time of the contract.
Exchange rate contracts
Forward foreign exchange contracts are agreements to buy or sell fixed amounts of currency at agreed rates of exchange on future date. These instruments are carried at fair value, determined based on either FEDAI rates or market quotations.
Cross currency swaps are agreements to exchange principal amounts denominated in different currencies. Cross currency swaps may also involve the exchange of interest payments on one specified currency for interest payments in another specified currency for a specified period.
Currency options give the buyer, on payment of a premium, the right but not an obligation, to buy or sell specified amounts of currency at agreed rates of exchange on or before a specified future date. Option premia paid or received is recorded in Statement of Profit and Loss for rupee options at the expiry of the option and for foreign currency options on the trade date.
Currency futures contract is a standardised contract traded on an exchange, to buy or sell a certain underlying asset or an instrument at a certain date in the future, at a specified price. The underlying instrument of a currency future contract is the rate of exchange between one unit of foreign currency and the INR.
The Bank’s derivative transactions relate to sales and trading activities. Sale activities include the structuring and marketing of derivatives to customers to enable them to hedge their market risks (both interest rate and exchange risks), within the framework of regulations as applicable from time to time. The Bank deals in derivatives on its own account (trading activity) principally for the purpose of generating a profit from short term fluctuations in price or yields. The Bank also deals in derivatives to hedge the risk embedded in some of its Balance Sheet assets or liabilities.
Constituents involved in derivative business
The Treasury front-office enters into derivative transactions with customers and inter-bank counterparties. The Bank has an independent back-office and mid-office as per regulatory guidelines. The Bank has a credit and market risk department that assesses various counterparty risk and market risk limits, within the risk architecture and processes of the Bank.
The Bank has in place a policy which covers various aspects that apply to the functioning of the derivative business. The derivative business is administered by various market risk limits such as position limits, tenor limits, sensitivity limits, GAP limit, scenario based profit and loss limit for option portfolio and value-at-risk limits that are recommended by the Risk Policy and Monitoring Committee (‘RPMC’) to the Board of Directors for approval. All methodologies used to assess market and credit risks for derivative transactions are specified by the credit and market risk unit. Limits are monitored on a daily basis by the mid-office.
The Bank has implemented a Board approved policy on Customer Suitability & Appropriateness to ensure that derivative transactions entered into are appropriate and suitable to the customer’s nature of business / operations. Before entering into a derivative deal with a customer, the Bank scores the customer on various risk parameters and based on the overall score level it determines the kind of product that best suits its risk appetite and the customer’s requirements.
Classification of derivatives book
The derivative book is classified into trading and hedging book. Classification of the derivative book is made on the basis of the definitions of the trading and hedging books specified in the RBI guidelines. The trading book is managed within the trading limits approved by the RPMC and the Board of Directors.
For derivative contracts designated as hedge, the Bank documents, at inception, the relationship between the hedging instrument and the hedged item, the risk management objective for undertaking the hedge and the methods used to assess the hedge effectiveness. Hedge effectiveness is ascertained at the time of inception of the hedge and periodically thereafter. Hedge effectiveness is measured by the degree to which changes in the fair value or cash flows of the hedged item that are attributable to a hedged risk are offset by changes in the fair value or cash flows of the hedging instrument.
The hedging book consists of transactions to hedge Balance Sheet assets or liabilities. The tenor of hedging instrument may be less than or equal to the tenor of underlying hedged asset or liability. Derivative contracts designated as hedges are not marked to market unless their underlying asset or liability is marked to market. In respect of derivative contracts that are marked to market, changes in the market value are recognised in the Statement of Profit and Loss in the relevant period. Gain or losses arising from hedge ineffectiveness, if any, is recognised in the Statement of Profit and Loss. Foreign exchange forward contracts not intended for trading, that are entered into to establish the amount of reporting currency required or available at the settlement date of a transaction, and are outstanding at the Balance Sheet date, are effectively valued at the closing spot rate. The premia or discount arising at the inception of such forward exchange contract is amortised as expense or income over the life of the contract.
* Provisioning, collateral and credit risk mitigation
The Bank enters into derivative transactions with counter parties based on their business ranking and financial position. The Bank sets up appropriate limits upon evaluating the ability of the counterparty to honour its obligations in the event of crystallisation of the exposure. Appropriate credit covenants are stipulated where required as trigger events to call for collaterals or terminate a transaction and contain the risk.
The Bank, at the minimum, conforms to the RBI guidelines with regard to provisioning requirements. Overdue receivables representing crystallised positive mark-to-market value of a derivative contract are transferred to the account of the borrower and treated as non-performing assets, if these remain unpaid for 90 days or more. Full provision is made for the entire amount of overdue and future receivables relating to positive marked to market value of non-performing derivative contracts.
- The notional principal amount of foreign exchange contracts classified as hedging and trading outstanding as at March 31, 2017 amounted to Rs.6,302.40 crore (previous year: Rs.23,182.85 crore) and Rs.463,627.74 crore (previous year: Rs.505,892.93 crore) respectively.
- The notional principal amounts of derivatives reflect the volume of transactions outstanding as at the Balance Sheet date and do not represent the amounts at risk.
- For the purpose of this disclosure, currency derivatives include currency options purchased and sold and cross currency interest rate swaps.
- Interest rate derivatives include interest rate swaps, forward rate agreements and interest rate caps.
- The Bank has computed the maximum and minimum of PV01 for the year based on the balances as at the end of every month.
- In respect of derivative contracts, the Bank evaluates the credit exposure arising there from, in line with RBI guidelines. Credit exposure has been computed using the current exposure method which is the sum of:
(a) the current replacement cost (marked to market value including accruals) of the contract or zero whichever is higher; and
(b) the Potential Future Exposure (PFE) is a product of the notional principal amount of the contract and a factor that is based on the grid of credit conversion factors prescribed in RBI guidelines, which is applied on the basis of the residual maturity and the type of contract.
*The RBI, vide its circulars dated November 21, 2016 and December 28, 2016, had given banks, in respect of certain eligible working capital accounts and loans of Rs.1 crore or less, an additional 60 / 90 days for reckoning days past due for classification as NPAs. Eligible accounts which were more than 90 days overdue as at March 31, 2017 have been classified as non-performing as at that date without the Bank availing of the said dispensation. These accounts otherwise would have been classified as NPAs subsequent to March 31, 2017.
- Technical or prudential write-offs
Technical or prudential write-offs refer to the amount of non-performing assets which are outstanding in the books of the branches, but have been written-off (fully or partially) at the head office level. The financial accounting systems of the Bank are integrated and there are no write-offs done by the Bank which remain outstanding in the books of the branches.
* Floating provisions
Floating provision of Rs.1,248.01 crore (previous year: Rs.1,335.64 crore) have been included under “Other Liabilities”.
Floating provisions have been utilised as per the Board approved policy for contingencies under extraordinary circumstances and for making specific provision for impaired accounts in accordance with the RBI guidelines / directives.
* Divergence in the asset classification and provisioning
There was no divergence observed by the RBI for the financial year 2015-16 in respect of the Bank’s asset classification and provisioning under the extant prudential norms on Income Recognition, Asset Classification and Provisioning (IRACP).
- During the years ended March 31, 2017 and March 31, 2016, no non-performing financial assets were sold, excluding those sold to SC / RC.
- During the years ended March 31, 2017 and March 31, 2016, no non-performing financial assets were purchased by the Bank.
- Securitised assets as per books of SPVs sponsored by the Bank:
There are no SPVs sponsored by the Bank as at March 31, 2017 and as at March 31, 2016.
- Accounts under the Scheme for Sustainable Structuring of Stressed Assets (S4A), as on March 31, 2017: Nil
- Disclosure on Stressed Assets
(i) Disclosures on Flexible Structuring of Existing Loans
* approval from Independent Evaluation Committee (IEC) is awaited.
# refinancing proposed at the end of 8 years.
(ii) Disclosures on Strategic Debt Restructuring Scheme (accounts which are currently under the stand-still period)
*of which Rs.32.87 crore of loans where conversion to equity has taken place.
(iii) Change in Ownership outside SDR Scheme (accounts which are currently under the stand-still period): Nil
(iv) Change in Ownership of Projects Under Implementation (accounts which are currently under the stand-still period): Nil
10 Details of exposures to real estate and capital market sectors, risk category-wise country exposures, factoring exposures, single / group borrower exposures, unsecured advances and concentration of deposits, advances, exposures and NPAs
* Details of exposure to real estate sector
* Details of factoring exposure
The factoring exposure of the Bank as at March 31, 2017 is Rs.2,036.11 crore (previous year: Rs.3,515.98 crore).
* Details of Single Borrower Limit (SGL), Group Borrower Limit (GBL) exceeded by the Bank
The RBI has prescribed single and group borrower exposure limits linked to a Bank’s capital funds and such limits can be enhanced by a further 5 percent thereof with the approval of the Board of Directors of the Bank. During the year ended March 31, 2017 and March 31, 2016 the Bank was within the limits prescribed by the RBI.
* Unsecured advances
Advances for which intangible collaterals such as rights, licenses, authority etc. are charged in favour of the Bank in respect of projects financed by the Bank, are reckoned as unsecured advances under Schedule 9 of the Balance Sheet in line with extant RBI guidelines. There are no such advances outstanding as at March 31, 2017 (previous year: Nil).
* Inter-bank Participation with risk sharing
The aggregate amount of participation issued by the Bank and reduced from advances as per regulatory guidelines as at March 31, 2017 was Rs.7,500.00 crore (previous year: Rs.6,450.00 crore).
11 Provisions, contingent liabilities and contingent assets
Given below is the movement in provisions and a brief description of the nature of contingent liabilities recognised by the Bank.
12 Business ratios / information
Definitions of certain items in Business ratios / information:
1. Working funds is the daily average of total assets during the year.
2. Operating profit is net profit for the year before provisions and contingencies and profit / (loss) on sale of building and other assets (net).
3. ”Business” is the total of average of net advances and deposits (net of inter-bank deposits).
4. Productivity ratios are based on average employee numbers.
5. Gross advances are net of bills rediscounted and interest in suspense.
6. Net NPAs are non-performing assets net of interest in suspense, specific provisions, ECGC claims received, provisions for funded interest term loans classified as NPAs and provisions in lieu of diminution in the fair value of restructured assets classified as NPAs.
7. Net advances are equivalent to gross advances net of specific loan loss provisions, ECGC claims received, provision for funded interest term loans classified as NPA and provisions in lieu of diminution in the fair value of restructured assets.
8. Provision coverage ratio does not include assets written off.
13 Interest income
Interest income under the sub-head Income from Investments includes dividend received during the year ended March 31, 2017 on units of mutual funds, equity and preference shares amounting to Rs.256.64 crore (previous year: Rs.182.03 crore).
14 Earnings from standard assets securitised-out
There are no Special Purpose Vehicles (‘SPV’s) sponsored by the Bank for securitisation transactions. During the years ended March 31, 2017 and March 31, 2016, there were no standard assets securitised-out by the Bank.
Form and quantum of services and liquidity provided by way of credit enhancement
The Bank has provided credit and liquidity enhancements in the form of cash collaterals / guarantees / subordination of cash flows etc., to the senior Pass Through Certificates (‘PTC’s) as well as at loan assignment transactions. The RBI issued addendum guidelines on securitisation of standard assets vide its circular dated May 7, 2012. Accordingly, the Bank does not provide liquidity or credit enhancements on the direct assignment transactions undertaken subsequent to these guidelines. The total value of credit enhancement outstanding in the books as at March 31, 2017 was Rs.224.31 crore (previous year: Rs.225.65 crore) and outstanding servicing liability was Rs.0.07 crore (previous year: Rs.0.10 crore).
15 Other income
* Commission, exchange and brokerage income
- Commission, exchange and brokerage income is net of correspondent bank charges.
- Commission income for the year ended March 31, 2017 includes fees of Rs.798.35 crore (previous year: Rs.661.75 crore) in respect of life insurance business and Rs.157.58 crore (previous year: Rs.156.13 crore) in respect of general insurance business.
* Miscellaneous income
Miscellaneous income includes recoveries from written-off accounts amounting to Rs.864.31 crore (previous year: Rs.807.99 crore).
16 Other expenditure
Other expenditure includes commission paid to sales agents amounting to Rs.1,906.80 crore (previous year: Rs.1,671.88 crore), exceeding 1% of the total income of the Bank.
The guidance note on AS-15, Employee Benefits, states that employer established provident funds, where interest is guaranteed are to be considered as defined benefit plans and the liability has to be valued. The Institute of Actuaries of India (IAI) has issued a guidance note on valuation of interest rate guarantees on exempt provident funds. The actuary has accordingly valued the same and the Bank held a provision of Nil as at March 31, 2017 (previous year: Nil), towards the present value of the guaranteed interest benefit obligation. The actuary has followed deterministic approach as prescribed by the guidance note.
17 Disclosures on remuneration Qualitative Disclosures
A. Information relating to the bodies that oversee remuneration Name and composition
The Board of Directors of the Bank has constituted the Nomination and Remuneration Committee (hereinafter, the ‘NRC’) for overseeing and governing the compensation policies of the Bank. The NRC is comprised of four independent directors and is chaired by the Board of Directors of the Bank. Further, two members of the NRC are also members of the Risk Policy and Monitoring Committee (hereinafter, the ‘RPMC’) of the Board.
The NRC is comprised of the Chairperson, Mrs. Shyamala Gopinath, Mr. A N Roy, Mr. Partho Datta and Mr. Bobby Parikh. Further, Mrs. Shyamala Gopinath and Mr. Partho Dutta are also members of the RPMC. Mr. Bobby Parikh is the chairperson of the NRC.
Mandate of the NRC
The primary mandate of the NRC is to oversee the implementation of compensation policies of the Bank.
The NRC periodically reviews the overall compensation policy of the Bank with a view to attract, retain and motivate employees. In this capacity it is required to review and approve the design of the total compensation framework, including compensation strategy programs and plans, on behalf of the Board of Directors. The compensation structure and pay revision for Whole Time Directors is also approved by the NRC. The NRC co-ordinates with the RPMC to ensure that compensation is aligned with prudent risk taking.
The Bank employed the services of the following consulting firms in the area of compensation and benefits and human resources.
AON: The Bank employed the services of AON in the area of compensation market benchmarking and executive compensation. AON, apart from being a globally reputed consulting firm, has the longest running year on year banking study in India and was found to be the most appropriate by the NRC.
Ernst and Young: The Bank employed the services of Ernst and Young to review the compensation policy of the Bank in light of the best in class practices in the banking industry.
Scope of the Bank’s Remuneration Policy:
The Remuneration Policy of the Bank includes within its scope all business lines, all permanent staff in its domestic as well as international offices. Further the principles articulated in the compensation policy are universal, however in the event there are any statutory provisions in overseas locations the same shall take precedence over the remuneration policy of the Bank.
All permanent employees of the Bank except those covered under the long term wage agreement are covered by the said compensation policy. The number of employees covered under the compensation policy was 84,041as at March 31, 2017 (previous year: 87,263).
B. Information relating to the design and structure of remuneration processes and the key features and objectives of remuneration policy
I. Key Features and Objectives of Remuneration Policy
The Bank’s Compensation Policy (the ‘Policy’) is aligned to business strategy, market dynamics, internal characteristics and complexities within the Bank. The ultimate objective of the Policy is to provide a fair and transparent structure that helps in acquiring and retaining the talent pool critical to build competitive advantage and brand equity. The Policy has been designed basis the principles for sound compensation practices in accordance with regulatory requirements and provides a framework to create, modify and maintain appropriate compensation programs and processes with adequate supervision and control.
The Bank’s performance management system provides a sound basis for assessing employee performance holistically. The Bank’s compensation framework is aligned with the performance management system and differentiates pay appropriately amongst its employees based on degree of contribution, skill and availability of talent owing to competitive market forces by taking into account factors such as role, skills, competencies, experience and grade / seniority.
The NRC reviews the following critical principles enunciated in the policy and ensures that:
(a) the compensation is adjusted for all types of prudent risk taking;
(b) compensation outcomes are symmetric with risk outcomes;
(c) compensation payouts are sensitive to the time horizon of risk; and
(d) the mix of cash, equity and other forms of compensation are aligned with risk.
II. Design and Structure of Remuneration
a) Fixed Pay
The NRC ensures that the fixed component of the compensation is reasonable, taking into account all relevant factors including industry practice.
Elements of Fixed Pay
The fixed pay component of the Bank’s compensation structure typically consists of elements such as base salary, allowances, perquisites, retirement and other employee benefits. Perquisites extended are in the nature of company car, hard furnishing, company leased accommodation, club membership and such other benefits or allowances in lieu of such perquisites / benefits. Retirement benefits include contributions to provident fund, superannuation fund (for certain job bands) and gratuity. The Whole Time Directors of the Bank are entitled to other post-retirement benefits such as car and medical facilities, in accordance with specified terms of employment as per the policy of the Bank, subject to RBI approval. The Bank also provides pension to certain employees of the erstwhile Lord Krishna Bank (eLKB) under the Indian Banks’ Association (‘IBA’) structure.
Determinants of Fixed Pay
The fixed pay is primarily determined by taking into account factors such as the job size, performance, experience, location, market competitiveness of pay and is designed to meet the following key objectives of:
(a) fair compensation given the role complexity and size;
(b) fair compensation given the individual’s skill, competence, experience and market pay position;
(c) sufficient contribution to post retirement benefits; and
(d) compliance with all statutory obligations.
For Whole Time Directors additional dimensions such as prominence of leadership among industry leaders, consistency of the Bank’s performance over the years on key parameters such as profitability, growth and asset quality in relation to its own past performance and that of its peer banks would be considered. The quantum of fixed pay for Whole Time Directors is approved by the NRC as well as the Board and is subject to the approval of the RBI.
b) Variable Pay
The performance management system forms the basis for variable pay allocation of the Bank. The Bank ensures that the performance management system is comprehensive and considers both, quantitative and qualitative performance measures.
Whole Time Directors
The bonus for Whole Time Directors will not exceed 70% of the fixed pay in a year, thereby ensuring that there is a balance between the fixed and variable pays. The variable pay for Whole Time Directors is approved by the NRC as well as the Board and is subject to the approval of the RBI. The variable pay component is paid out subject to the following conditions:
- Where the variable pay constitutes 50% or more of the fixed pay, a portion of the same would be deferred as per the schedule mentioned in the table below:
- The Bank has devised appropriate malus and claw back clauses as a risk mitigant for any negative contributions of the Bank and / or relevant line of business in any year. Under the malus clause the incumbent foregoes the vesting of the deferred variable pay in full or in part. Under the claw back clause the incumbent is obligated to return all the tranches of payout received of bonus amounts pertaining to the relevant performance year. The deferred bonus is paid out post review and approval by the NRC.
Employees other than Whole Time Directors
The Bank has formulated the following variable pay plans:
- Annual bonus plan
The quantum of variable payout is a function of the performance of the Bank, performance of the business unit, performance of the individual employee, job band of the employee and the functional category. Basis these key determinants and due adjustment for risk alignment, a payout matrix for variable pay is developed. Market trends for specific businesses / functions along with inputs from compensation surveys may also be used in finalising the payout.
Bonus pools are designed to meet specific business needs therefore resulting in differentiation in both the quantum and the method of payout across functions. Typically higher levels of responsibility receive a higher proportion of variable pay vis-a-vis fixed pay. The Bank ensures that the time horizon for risk is assessed and the deferment period, if any, for bonus is set accordingly. Employees on the annual bonus plan are not part of performance-linked plans. The following is taken into account while administering the annual bonus:
- In the event the proportion of variable pay to fixed pay is substantially high (variable pay exceeding 50% of fixed pay), the Bank may devise an appropriate deferment schedule after taking into consideration the nature of risk, time horizon of risk, and the materiality of risk.
- In cases of deferment of variable pay the Bank makes an assessment prior to the due date for payment of the deferred portion for any negative contribution. The criteria for negative contribution are decided basis pre-defined financial benchmarks. The Bank has in place appropriate methods for prevention of vesting of deferred variable pay or any part thereof, on account of negative contribution. The Bank also has in place claw back arrangements in relation to amounts already paid in the eventuality of a negative contribution.
- Performance-linked Plans (PLPs)
PLPs are formulated for sales personnel who are given sales targets but have limited impact on risk since credit decisions are exercised independent of the sales function. All PLP payouts are based on a balanced scorecard framework and are subject to achievement of individual targets enumerated in the respective scorecards of the employees. A portion of the PLP payouts is deferred till the end of the year to provide for any unforeseen performance risks.
Review of Remuneration Policy of the Bank during the past year:
The Compensation Policy of the Bank was reviewed by the NRC during the year and there were no material changes.
c) Guaranteed Bonus
Guaranteed Bonuses may not be consistent with sound risk management or pay for performance principles of the Bank and therefore do not form an integral part of the general compensation practice.
For critical hiring for some select strategic roles, the Bank may consider granting of a sign-on bonus as a prudent way to avoid loading the entire cost of attraction into the fixed component of the compensation which could have a long term cost implication for the Bank. For such hiring, the sign-on bonus is generally decided by taking into account appropriate risk factors and market conditions.
For hiring at levels of Whole Time Directors / Managing Director a sign-on bonus, if any, is limited to the first year only and is in the form of Employee Stock Options.
d) Employee Stock Option Plan (‘ESOP’s)
The Bank considers ESOPs as a vehicle to create a balance between short term rewards and long term sustainable value creation. ESOPs play a key role in the attraction and retention of key talent. The Bank grants equity share options to its Whole Time Directors and other employees above a certain grade. All plans for grant of options are framed in accordance with the SEBI guidelines, 1999 as amended from time to time and are approved by the shareholders of the Bank. These plans provide for the grant of options post approval by the NRC.
The grant of options is reviewed and approved by the NRC. The NRC grants options after considering parameters such as the incumbent’s grade and performance rating, and such other appropriate relevant factors as may be deemed appropriate by the NRC. Equity share options granted to the Whole Time Directors are subject to the approval of the NRC, the Board and the RBI. With effect from April 1, 2017, the Bank has amended its policy for grant of ESOPs. Under this policy, ESOPs granted to eligible employees vest over three tranches spread over a period of 39 months vis-a-vis 36 months for the earlier grants. The first tranche will vest after fifteen months from the date of grant vis-a-vis twelve months for earlier grants. Vesting for all ESOPs granted subsequent to April 1, 2017 shall be based on the assessment of performance of the employee at the time of vesting.
e) Severance Pay
The Bank does not grant severance pay other than accrued benefits (such as gratuity, pension) except in cases where it is mandated by any statute.
The Bank does not provide any facility or fund or permit its Whole Time Directors and employees to insure or hedge their compensation structure to offset the risk alignment effects embedded in their compensation arrangement.
g) Statutory Bonus
Some section of employees are also paid statutory bonus as per the Payment of Bonus Act (1965) as amended from time to time.
III. Remuneration Processes Fitment at the time of Hire
Pay scales of the Bank are set basis the job size, experience, location and the academic and professional credentials of the incumbent.
The compensation of new hires is in line with the existing pay ranges and consistent with the compensation levels of the existing employees of the Bank at similar profiles. The pay ranges are subject to change basis market trends and the Bank’s talent management priorities. While the Bank believes in the internal equity and parity as a key determinant of pay it does acknowledge the external competitive pressures of the talent market. Accordingly, there could be certain key profiles with critical competencies which may be hired at a premium and treated as an exception to the overall pay philosophy. Any deviation from the defined pay ranges is treated as a hiring exception requiring approval with appropriate justification.
Increment / Pay Revision
It is the endeavor of the Bank to ensure external competitiveness as well as internal equity without diluting the overall focus on optimising cost. In order to enhance our external competitiveness the Bank participates in an annual salary survey of the banking sector to understand key market trends as well as get insights on relative market pay position compared to peers. The Bank endeavors to ensure that most employees progress to the median of the market in terms of fixed pay over time. This coupled with key internal data indicators like performance score, job family, experience, job grade and salary budget form the basis of decision making on revisions in fixed pay.
Increments in fixed pay for majority of the employee population are generally undertaken effective April 1 every year. However promotions, confirmations and change in job dimensions could also lead to a change in the fixed pay during other times of the year.
The Bank also makes salary corrections and adjustments during the year for those employees whose compensation is found to be below the market pay and who have a good performance track record. However such pay revisions are done on an exception basis.
Risk, Control and Compliance Staff
The Bank has separated the Risk, Control and Compliance functions from the Business functions in order to create a strong culture of checks and balances thereby ensuring good asset quality and to eliminate any possible conflict of interest between revenue generation and risk management and control. Accordingly, the overall variable pay as well as the annual salary increment of the employees in the Risk, Control and Compliance functions is based on their performance, functional objectives and goals. The Bank ensures that the mix of fixed to variable compensation for these functions is weighted in favour of fixed compensation.
C. Description of the ways in which current and future risks are taken into account in the remuneration processes. It should include the nature and type of the key measures used to take account of these risks
The Bank takes into account various types of risks in its remuneration processes. The Bank follows a comprehensive framework that includes within its ambit the key dimensions of remuneration such as fixed pay, variable pay and long term incentives (i.e. Employee Stock Options).
Fixed pay: The Bank conducts a comprehensive market benchmarking study to ensure that employees are competitively positioned in terms of fixed pay. The Bank follows a robust salary review process wherein revisions in fixed compensation are based on performance. The Bank also makes salary adjustments taking into consideration pay positioning of employees vis-a-vis market reference points. Through this approach the Bank endeavors to ensure that the talent risk due to attrition is mitigated as much as possible. Fixed Pay could be revised downwards as well in the event of certain proven cases of misconduct by an employee.
Variable pay: The Bank has distinct types of variable pay plans as given below:
(a) Quarterly / monthly performance-linked pay (PLP) plans:
All quarterly / monthly PLP plans are based on the principle of balanced scorecard framework that includes within its ambit both quantitative and qualitative factors including key strategic objectives that ensure future competitive advantage for the Bank. PLP plans, by design, have deterrents that play a role of moderating payouts based on the non-fulfillment of established quantitative / qualitative risk factors. Deterrents also include risks arising out of non-compliance, mis-sell etc. Further, a portion of all payouts under the PLP plans is deferred till the end of the year to provide for any unforeseen performance risks.
(b) Annual bonus plan:
The Bank takes into consideration the fact that a portion of the Bank’s profits are directly attributable to various types of risks the Bank is exposed to such as credit risk, market risk, operational risk and other quantifiable risks.
The framework developed by the Bank in order to arrive at the quantum of bonus pool is based on the performance of the Bank and profitability. The annual bonus is distributed based on business unit and individual performance. The business unit performance is based on factors such as growth in revenue, growth in profit, cost to income ratio and achievement vis-a-vis plans and key objectives. Bonus pay out for an individual employee in a particular grade is linked to the performance rating of the employee and subject to meeting the Bank’s standards of ethical conduct.
The Bank has devised appropriate malus and claw back clauses as a risk mitigant for any negative contributions of the Bank and / or relevant line of business in any year for Whole Time Directors. Under the malus clause the incumbent foregoes the vesting of the deferred variable pay in full or in part. Under the claw back clause the incumbent is obligated to return all the tranches of payout received of bonus amounts pertaining to the reference performance year. The deferred bonus is paid out post review and approval by the NRC.
The bonus for Whole Time Directors is capped at 70% of the fixed pay in a year. The variable pay for Whole Time Directors is approved by the NRC as well as the Board of Directors of the Bank and is subject to the approval of the RBI.
The variable pay component is paid out subject to the following conditions:
Where the variable pay constitutes 50% or more of the fixed pay, a portion of the same would be deferred as per the schedule mentioned in the table below:
(c) Long term incentives (employee stock options):
The Bank also grants employee stock options to employees in certain job bands. The grant is based on performance rating of the individual.
D. Description of the ways in which the Bank seeks to link performance during a performance measurement period with levels of remuneration
The Bank has a very comprehensive multi-dimensional performance measurement metrics that takes into consideration multiple factors that include qualitative as well as quantitative factors. The following are the key performance measurement metrics for the Bank. These also form part of the key metrics for the measurement of the performance of Whole Time Directors and impact the final remuneration:
A. Business Growth - This includes growth in advances and deposits;
B. Profitability - This includes growth in profit after tax;
C. Asset Quality - Gross NPA, Net NPA and % of Restructured assets to net advances;
D. Financial Soundness - Capital Adequacy Ratio Position and Tier I capital;
E. Shareholder value creation - Return on equity; and
F. Financial Inclusion - Growth in number of households covered, growth in the value of loans disbursed under this category and achievement against priority sector lending targets.
Most of the above parameters are evaluated in two steps:
A. Achievement against the plans of the Bank; and
B. Achievement against the performance of peers.
Apart from the factors related to business growth there is also a key qualitative factor such as regulatory compliance. Compliance is the key qualitative factor that acts as the moderator in the entire organisation evaluation process. A low score on compliance can significantly moderate the other performance measures and depending on severity may even nullify their impact.
While the above parameters form the core evaluation parameters for the Bank each of the business units are measured on the following from a remuneration standpoint:
A. Increase in plan over the previous year;
B. Actual growth in revenue over previous year;
C. Growth in net revenue (%);
D. Achievement of net revenue against plan (%);
E. Actual profit before tax;
F. Growth in profit before tax compared to the previous year;
G. Current cost to income; and
H. Improvement in cost to income over the previous year.
Apart from the above the business units are also measured against certain key business objectives that are qualitative in nature.
The process by which levels of remuneration in the Bank are aligned to the performance of the Bank, business unit and individual employees is articulated below.
At the conclusion of every financial year the Bank reviews the fixed pay portion of the compensation structure basis merit-based increments and market corrections. These are based on a combination of performance rating, job band and the functional category of the individual employee. For a given job band, the merit increment is directly related to the performance rating. The Bank strives to ensure that most employees progress to the median of the market in terms of fixed pay over time. All other things remaining equal, the correction percentage is directly related to the performance rating of the individual.
Basis the performance of the business unit, individual performance and role, the Bank has formulated the following variable pay plans:
* Annual Bonus Plan
The Bank’s annual bonus is computed as a percentage of the gross salary for every job band. The bonus multiple is based on performance of the business unit (based on the parameters above), performance rating, job band and the functional category of the individual employee. The business performance level determines the multiplier for the bonus. All other things remaining equal, for a given job band, the bonus is directly related to the performance rating. The proportion of variable pay to fixed pay increases with job band. Employees on the annual bonus plan are not part of the PLPs.
- Performance-linked Plans (PLPs)
The Bank has formulated PLPs for its sales personnel who are given sales targets basis a balanced scorecard methodology. All PLP payouts are subject to the achievement of individual targets enumerated in the respective scorecards of the employees and moderated by qualitative parameters. A portion of the PLP payouts is deferred till the end of the year to provide for any unforeseen performance risks. All PLP plans are based on balanced scorecard framework.
E. Description of the ways in which the Bank seeks to adjust remuneration to take account of the longer term performance
A discussion of the Bank’s policy on deferral and vesting of variable remuneration and a discussion of the Bank’s policy and criteria for adjusting deferred remuneration before vesting and after vesting
Whole Time Directors
The bonus for Whole Time Directors does not exceed 70% of the fixed pay in a year, thereby ensuring that there is a balance between the fixed and variable pay. The variable pay for Whole Time Directors is approved by the NRC as well as the Board and is subject to the approval of the RBI. The variable pay component is paid out subject to the following conditions:
- Where the variable pay constitutes 50% or more of the fixed pay, an appropriate portion thereof is deferred and vests as per the schedule mentioned in the table below:
- The Bank has devised appropriate malus and claw back clauses as a risk mitigant for any negative contributions of the Bank and / or relevant line of business in any year.
- Malus clause
Under the malus clause the incumbent foregoes the vesting of the deferred variable pay in full or in part. In the event there is a deterioration in specific performance criteria (such as criteria relating to profit or asset quality) that are laid down by the NRC, then the NRC would review the deterioration in the performance taking into consideration the macroeconomic environment as well as internal performance indicators and accordingly decide whether any part of the deferred tranche pertaining to that financial year merits a withdrawal. The deferred bonus is paid out post review and approval by the NRC.
- Claw back clause
Under the claw back clause the incumbent is obligated to return all the tranches of payout received of bonus amounts pertaining to the relevant performance year. In the event there is any act attributable to the concerned Whole Time Director / Managing Director resulting in an incident of willful and deliberate misinterpretation / misreporting of financial performance (inflating t