KARNATAKA BANK Notes to Accounts

Capital raised: Pursuant to the Right issue in the ratio of 1:2, the Bank has allotted 94136866 equity shares of Rs.10/- each during the current financial year at a premium of '''' 60/- per share aggregating to Rs. 658.96 crore.

*Includes Non-performing UDAY Bonds aggregating to Rs.149.69 crore.

#Includes Provision on Non-performing UDAY Bonds aggregating to Rs.22.45 crore.

1. iii. Sale and transfers to/from HTM Category

During the year, the Bank has sold Government Securities from Held to Maturity (HTM) category in excess of 5% of the book value of the investments held in HTM category at the beginning of the year. As on April 1, 2016 the book value of securities in HTM category stood at Rs.10670.38 crore. The 5 % of the same works out to Rs.533.52 crore. During the year, Bank sold securities of Rs. 3778.74 crore from the HTM Category. As on 31st March 2017, the book value of SLR investments held in HTM Category was Rs.11520.31 crore, which shows marked to market appreciation of Rs. 165.76 crore.

During the year, Bank has not resorted to any transfer of securities to / from HTM category.

2. Derivatives

3. Forward Rate Agreement/ Interest Rate Swap: Nil

4. Exchange Traded Interest Rate Derivatives: Nil

5. Disclosure on risk exposure in Derivatives

(i) Qualitative Disclosure:

Operations in the Treasury are segregated into three functional areas, namely Front office, Mid-office and Back-office, equipped with necessary infrastructure and trained officers whose responsibilities are well defined. The Mid Office is handled by Risk Management Department. Daily report is generated by Risk Management department for appraisal of the risk profile to the senior management for Asset and Liability management.

The Integrated Treasury policy of the Bank clearly lays down the types of financial derivative instruments, scope of usages, approval process as also the limits like the open position limits, deal size limits and stop loss limits for trading in approved instruments.

The Bank''''s policy lays down that the transactions with the corporate clients are to be undertaken only after the inherent credit exposures are quantified and approved in terms of the approval process laid down in the Derivative Policy for customer appropriateness and suitability and necessary documents like ISDA agreements etc. are duly executed. The Bank adopts Current Exposure Method for monitoring the credit exposures. Besides, the Bank may also use financial derivative transactions for hedging its on or off Balance Sheet exposures.

The Integrated Treasury Policy of the Bank spells out the approval process for hedging the exposures. The hedge transactions are monitored on a regular basis and the notional profits or losses are calculated on MTM basis. The hedged/non hedged transactions are recorded separately. The hedged transactions are accounted for on accrual basis. In case of Option contracts, guidelines issued by FEDAI from time to time for recognition of income, premium and discount are being followed. While sanctioning the limits, the competent authority may stipulate condition of obtaining collaterals/margin as deemed appropriate. The derivative limits are reviewed periodically along with other credit limits.

Note: Bank has not entered into any derivative instruments other than Forex Forward Contracts maturing within 13 months, for trading/hedging purposes either in foreign exchange or domestic treasury operations. Bank does not have any open position in the derivative instruments in trading book as on March 31, 2017.

In terms of RBI Circular DBR.No.BP.BC.94/21.04.048/2014-15 dated 21'''' May 2015, and DBR No. BRBC.102/21.04.048/2015-16 dated June 13, 2016, in respect of assets sold to SC/ RCs , the shortfall arrived at by deducting the sale consideration and the provision held as on the date of the sale from the outstanding amount, is to be amortized over eight / four quarters, respectively. Accordingly for the sales that were concluded in the current financial year 2016-17, the Bank has charged to the Profit and Loss account an amount of Rs.36.79 crore during the year ended March 31, 2017 on proportionate basis (previous year Rs.16.36 Crore ) and the balance carried over is Rs.57.32 crore (Previous Year Rs.58.72 crore).

The total unamortized amount of Rs.78.51 crore as on 31st March 2017, which includes unamortized portion of sales concluded in previous year 2015-16 of Rs.21.19 crore is debited to Revenue Reserves, as permitted by RBI vide No.dBr.No.BP.BC.102/21.04.048/2015-16 dated June 13, 2016. (Refer Note 3.3)

The net funded exposure of the Bank in respect of foreign exchange transactions with each country is within 1% of the total assets of the Bank and hence no country risk provision is required as per extant RBI guidelines. Bank has used 7 categories of classifications followed by ECGC for the purpose of classification and making provision for country risk exposures.

6. Details of Single Borrower Limit (SBL)/ Group Borrower Limits (GBL) exceeded by the Bank:

During the year ended 31st March 2017, the Bank has not exceeded the Individual / Group borrowers'''' prudential exposure limits fixed by RBI

7. Unsecured Advances:

The Bank has not granted any finance against intangible securities such as charge over the rights, licenses, authorizations, etc.

8. Penalties imposed by RBI:

No penalty has been imposed by Reserve Bank of India during the year (Previous year - Nil)

9. Accounting Standards:

In compliance with the guidelines issued by the Reserve Bank of India regarding disclosure requirements of the various Accounting Standards, following information is disclosed:

10. Accounting Standard 5 - Net Profit or Loss for the period, Prior period items and changes in accounting policies

There are no material prior period items.

For the preparation of these Financial Results, the Bank has followed the same accounting policies and generally accepted practices adopted for the preparation of Audited Financial Statements for the year ended March 31, 2016.

11. Accounting Standard 9 - Revenue Recognition

Revenue is recognized as per accounting policy No.1 of Schedule 17 to the financial statements. Certain items of income are recognized on cash basis and such income are not material.

12. Accounting Standard 10- Fixed Assets :

Depreciation on the original cost of the land & building for the current year is Rs.19.39 crore. The current year profit & loss account has been debited with additional depreciation charge of Rs.4.09 crore, representing the incremental depreciation on the revalued cost.

13. Accounting Standard 15 - Employee Benefits:

14. 1 Various Benefits made available to the Employees are:-

a) Pension: The Bank has a defined benefit plan under Pension T rust to cover employees who have joined employment up to 31st March 2010 and who have opted for Pension Scheme under the Pension & Group Schemes unit of LIC of India, provided they have completed 20 years of service. The benefits under this plan are based on last drawn salary and the tenure of employment. The liability for the pension is determined and provided on the basis of actuarial valuation and is covered by purchase of annuity from LIC. The employees who have joined employment after 31stMarch 2010 are covered under contributory pension scheme.

b) Gratuity: In accordance with the applicable Indian Laws, the Bank provides for defined gratuity benefit retirement plan (''''the Gratuity Plan'''') covering eligible employees. This plan provides for a lump sum payment to the eligible employees on retirement, death, incapacitation or termination of employment of amounts that are based on the last drawn salary and tenure of employment. Liabilities with regard to the gratuity plan are determined by actuarial valuation and contributed to the gratuity fund trust. Trustees administer the contribution made to the trust and invest in specific designated securities as mandated by law, which generally comprise of Central and State Government Bonds and debt instruments of Government owned corporations.

c) Leave Encashment (PL): The Bank permits encashment of leave accumulated by employees. The liability for encashment of such leave is determined and provided on the basis of actuarial valuation.

d) Provident Fund: The Bank pays fixed contribution to Provident Fund at predetermined rates to a separate trust, which invests the funds in permitted securities. The contribution to the Fund is recognized as expense and is charged to the Profit and Loss account. The obligation of the Bank is limited to such contributions. As on 31st March 2017, there was no liability due and outstanding to the Fund by the Bank.

e) Other employee Benefits: Other than the employee benefits listed above, the Bank also gives certain other benefits to the employees, which include Medical aid, sick leave and casual leave etc.

f) The summarized position of Post-employment benefits and employee''''s long term benefits are recognized in the financial statements as required in accordance with Accounting Standard - 15 and are as under:

15. Employee Stock Options (ESOP)

The shareholders of the Bank had approved on 15.07.2006, grant of equity shares under Employee Stock Option Scheme of the Bank framed in compliance with SEBI Regulations.

Under the scheme, the Bank had granted stock options to the eligible employees on various dates in the past, each option entitling for one share at an exercise price of Rs.50 per share, adjusted to Rs.46.20 per share post rights issue 2011.The options granted to employees vested in a graded manner and exercised by the employees within the specified period. Options vested but not exercised before the specified exercise period would lapse.

The Bank followed the intrinsic value method to account for its stock-based employee compensation plans. Compensation cost is measured by the excess, if any, of the fair market price of the underlying stock over the exercise price as determined under the option plan. The fair market price is the closing price on the stock exchange where there is highest trading volume on the working day immediately preceding the date of grant. Compensation cost has been absorbed.

Closure of the Scheme:

Out of 15,00,000 stock options granted to the eligible employees under the scheme 12,09,834 options have been exercised and the balance 2,90,166 options had lapsed. As approved by the Board, the scheme was closed and the balance available in the Outstanding Stock Options Account amounting to Rs.2.81 crore is transferred to General Reserve Account as per the applicable guidelines.

16. Accounting Standard 17 - Segment Reporting:

For the purpose of segment reporting in terms of AS 17 of ICAI and as prescribed in RBI guidelines, the business of the Bank has been classified into 4 segments i.e.(a) Treasury operations (b) Corporate / Wholesale Banking (c) Retail Banking and (d) Other Banking Operations. Since the Bank does not have any overseas branch, reporting under geographic segment does not arise. Segment assets have been identified and segment liabilities have been allocated on the basis of segment assets.

17. Accounting Standard 18 - Related Party Disclosures: There is no related party transaction other than remuneration paid to key management personnel, Sri P Jayarama Bhat, Managing Director and Chief Executive Officer, aggregating to Rs. 0.79 crore (Previous Year '''' 0.73 crore).

18. Accounting Standard 20 - Earnings per Share: Basic and diluted earnings per equity share computed in accordance with AS 20 - Earnings per Share are as under:

The EPS for the current year and previous year have been restated, factoring in the Rights Issue made during the year.

Allotment of 98575 Equity shares (Previous year Nil) is kept in abeyance and held in Demat Suspense Account. In respect of 1800 equity shares (Previous Year 1800 Equity shares), the entitlement matter is sub-judice and is yet to be allotted. These shares have not been considered for EPS calculation, as the shares are not allotted.

19. Accounting Standard 22 - Accounting for Taxes on Income:

The Bank has accounted for taxes on income in compliance with Accounting Standard 22. The major components of Deferred Tax Assets and Liabilities recognized are as under:-

During the current year 2016-17, pursuant to press release dated July 6, 2016 issued by the Ministry of Finance, the Bank has reversed the deferred tax liability amounting to Rs.111.25 crore created in the previous year 2015-16 on account of Income Computation and Disclosure Standards (ICDS).

20. Accounting Standard 28 - Impairment of Assets:

An assessment is made at each Balance sheet date whether there is any indication that an asset is impaired. If any such indication exists, an estimate of the recoverable amount is made and impairment loss, if any, is provided for. As on March 31, 2017 there is no indication of impairment in connection with any asset.

21. Accounting Standard 29 - Provision, Contingent liabilities and Contingent assets:

22. Floating /Countercyclical Provisions:

The Bank does not hold any floating/ countercyclical provision in the current year (Previous year- Nil)

23. Drawdown from Reserves:

During the year, a sum of Rs.78.51 crore (Previous year Nil) being the unamortized amount of loss on sale of advances to Asset Reconstruction companies has been debited to Revenue reserves, as per permitted by RBI vide No.DBR.NO.BP.BC.102/21.04.048/2015-16 dated June 13, 2016. Refer Note No 1.4.3.

24. Disclosure of Letters of Comfort (LoC)

The Bank issues Letters of Comfort on behalf of its various constituents against the credit limits sanctioned to them. In the opinion of the Management, no significant financial impact and/or cumulative financial obligations have devolved during the year in respect of the LoCs issued by the Bank and remaining outstanding as of 31st March 2017.

25. Overseas Assets, NPA and Revenue: Nil

26. Off- Balance Sheet SPV sponsored (which are required to be consolidated as per accounting norms):Nil

27. Disclosure of Remunerations:-

a) Qualitative disclosure:

Remuneration Committee

The Nomination & Remuneration Committee (N&RC) consists of only Independent Directors, two of them being the members of Integrated Risk Management Committee of the Board (IRMC) also.

Objectives of Compensation Policy

Compensation Policy aims to attract and retain the right candidates in the Bank. The policy is designed to support key business strategies and create a strong, performance-orientated environment besides providing reasonable remuneration commensurate with the growth of the Bank. It also ensures effective governance of compensation, alignment of compensation with prudent risk taking, effective supervisory oversight and stakeholder engagement. The Policy also aims at facilitating effective succession planning in the Bank.

The N&RC works in close coordination with the Integrated Risk Management Committee to ensure effective alignment of remuneration and risks.

Risk adjustments in remuneration

A wide variety of measures of credit, market and liquidity risks are used by Bank in implementation of risk adjustment. The risk adjustment methods have both quantitative and judgmental elements. Compensation outcomes are symmetric with risk outcomes and compensation payouts are sensitive to the time horizon of the risk.

Performance linked variable compensation, deferral and forms

The performance-based remuneration motivates and rewards high performers who strengthen long-term customer relations, and generate income and shareholder value. The Bank''''s compensation policy stipulates that while designing the compensation package to WTD/CEO, it is ensured that there is a proper balance between fixed pay and variable pay. While fixing the Variable Pay, performance parameters under financial and non-financial areas of operations are assessed.

The variable pay shall not exceed 70% of the fixed pay in a year. The deterioration in the financial performance of the Bank should generally lead to a contraction in the total amount of variable remuneration to be paid.

Further, where the variable pay constitutes a substantial portion of the fixed pay (i.e. 50% or more of the fixed pay), an appropriate portion of the variable pay, say 40% to 60% must be deferred over a period. The Board/ N &RC may grant stock options under the Employees Stock Options Plan/Scheme as per Securities and Exchange Board of India Guidelines/ Regulations, subject to the approval of Reserve Bank of India under Section 35B of the Banking Regulation Act, 1949. Such Stock Options will be excluded from the components of variable pay. In case variable pay payable is 50% or more, deferral arrangements of variable pay shall be applied. The deferral period should not be less than three years. Compensation payable under deferral arrangements should vest on a pro-rata basis at such rates as may be decided by the Board/ N&RC. In the event of negative contributions of the Bank and/or the relevant line of business in any year, the deferred compensation is subject to malus/claw back arrangements. The variable pay could be in cash, or stock linked instruments or mix of both.

28. Disclosure relating to Securitization:

The Bank has not sponsored any SPV''''s for securitization transactions

29. Credit Default Swap:

The Bank has not entered into any credit default swap.

30. Intra-Group Exposures:

The Bank does not have any Intra-group Companies under its management.

31. Un-hedged Foreign Currency Exposure:

The Bank has put in place a policy on Hedging of Foreign Currency Exposure which is a part of the Loan Policy which stipulates the guidelines on managing the risk arising out of the un-hedged foreign currency exposure in line with the extant RBI Guidelines. Further, the Bank has made a provision of Rs.13.25 crore (Previous year Rs.13.20 crore) and has provided capital for the un-hedged foreign currency exposure of borrowal entities of Rs.3.90 crore (previous year Rs.3.49 crore) in line with the extant RBI Guidelines.

32. Frauds :

The total number of frauds reported during the year is 29 amounting to Rs.28.70 crore and is fully provided for in the current year.

Note: LCR data for March 2016 to December 2016 have been computed as the simple average of monthly observations over the quarter. For the quarter ended March 31, 2017, the same has been computed based on simple average of daily observations.

Qualitative Disclosures on LCR:

Bank is computing LCR on a daily basis in line with the RBI circular dated June 9 , 2014 on “Basel III Framework on Liquidity Standards - Liquidity Coverage Ratio(LCR), Liquidity Risk Monitoring Tools and LCR Disclosure Standards”. These guidelines ensure that banks maintain sufficient amount of High Quality Liquidity Assets (HQLAs) to survive 30 days stress scenario so that banks can take corrective measures within such period. These HQLAs have to be 100% of the net cash outflows w.e.f January 1, 2019. To provide sufficient transition period, the guidelines require maintaining minimum 60% w.e.f January 1, 2015 and step up of 10% every year to reach 100% by January 1, 2019.

Necessary system has been put in place to compute LCR and Bank''''s strategy would be to maintain LCR well above the regulatory minimum levels ahead of the stipulated time lines. The main driver of LCR is adequate HQL As and Bank is maintaining LCR well above the minimum stipulated level of 80% in view of SLR investments in excess of statutory requirement and 11% of NDTL in the form of borrowing limit available through Marginal Standing Facility (MSF) and Facility to Avail Liquidity for Liquidity Coverage Ratio (FALLCR). The Bank has a diversified liability mix comprising of healthy Retail Deposits with its pan India presence and the dependency on wholesale funding is insignificant.

Bank''''s Asset Liability Management Committee (ALCO) is empowered to monitor and form suitable strategies to maintain stipulated levels of LCR by channelizing funds to target good quality asset and liability profile to meet Bank''''s profitability as well as liquidity requirements.

Funding strategies are formulated by the Treasury and Accounts Department (TAD) in accordance with ALCO guidance. The objective of the funding strategy is to achieve an optimal funding mix which is consistent with prudent liquidity, diversity of sources and servicing costs. Accordingly, TAD estimates daily liquidity requirement. With the help of structural liquidity statement prepared by Bank, TAD evaluates current and future liquidity requirement and takes necessary action.

33. Operating Expenses stated in Schedule 16 to the Profit and Loss Account includes Rs.6.18 crore (Previous year Rs.4.90 crore) spent towards Corporate Social responsibility (CSR) Activities.

34. The additional provisioning requirement due to divergence observed by RBI for the financial year 2015-16 in respect of Bank''''s asset classification and provisioning under extant prudential norms on Income Recognition, Asset Classification and Provisioning (IRACP), is within the limit of 15%. Hence, no disclosure is required to be made under DBR.BP.BC.No.63/21.04.018/2016-17 dated April 18, 2017.

35. The Board of Directors has recommended a dividend of Rs. 4 per share (40 %) for the year ended 31stMarch 2017 (previous year '''' 5 Per share (50 %)), subject to approval of the shareholders at the ensuing Annual General Meeting. In accordance with revised Accounting Standards (AS) 4-''''Contingencies & Events occurring after the balance sheet date'''' notified by the MCA on March 30, 2016, the proposed dividend including corporate dividend tax amounting to Rs.136.05 crore has not been shown as an appropriation from the Profit as of March 31, 2017 and consequently not reported under Other liabilities and Provisions as of March 31, 2017. For computation of capital adequacy ratio as of March 31, 2017 Bank has adjusted the proposed dividend for determining capital funds.

36. Reconciliation of Branch Adjustments and Balancing of Subsidiary Ledgers.

a) Balancing of Subsidiary Ledgers is completed in all branches/offices.

b) Reconciliation of branch adjustments/Inter Bank accounts has been completed up to 31st March 2017 and steps are being taken to give effect to consequential adjustments of pending items.

37. The percentage of SLR investments under “Held to Maturity” category as on 31st March 2017 was 19.93% (Previous Year 21.05%) of the Net Demand and Time Liabilities of the Bank, which is within the permissible limit as per RBI guidelines.

38. (i) A sum of Rs. 791.31 crore (Previous year Rs.791.82 crore) is outstanding on account of demands raised by the Income Tax Department in earlier years which have been paid under protest. No provision is considered necessary in respect of these demands, as the Bank has been advised that there are good chances of success in appeals/ considering favourable judicial pronouncements and/or appellate orders on identical issues for earlier assessment years.

(ii) The Bank confirms that all pending litigations which may have an impact on its financial position have been estimated and provided for. In respect of other pending litigations, the Bank believes that no provision is required since these pending litigations have no impact on its financial position.

39. In accordance with the RBI Circular DBR. No. BPBC.2/21.06.201/2015-16 dated 1st July 2015 on ''''Basel III Capital Regulations'''' and RBI Circular DBR.NO.BP.BC 80/21.06.201/2014-15 dated March 31, 2015 on ''''Prudential Guidelines on Capital Adequacy and Liquidity Standards Amendments'''', Banks are required to make Pillar III disclosures including Leverage Ratio and Liquidity Coverage Ratio under Basel III Framework.

The Bank has made these disclosures which are available on its web site at the following link http://ktkbank.com/ktk/BaselDisclosures.jsp#. These disclosures have not been audited by the Statutory Central Auditors

40. Previous year''''s figures have been regrouped/rearranged/given in brackets wherever necessary and feasible to conform to the current year''''s classifications.

CIN: U67190WB2003PTC096617. Trading in Commodities is done through our Group Company Dynamic Commodities Pvt. Ltd. The company is also engaged in Proprietory Trading apart from Client Business.

Disclaimer: There is no guarantee of profits or no exceptions from losses. The investment advice provided are solely the personal views of the research team. You are advised to rely on your own judgment while making investment / Trading decisions. Past performance is not an indicator of future returns. Investment is subject to market risks. You should read and understand the Risk Disclosure Documents before trading/Investing.

Disclosure: We, Dynamic Equities Private Limited are also engaged in Proprietory Trading apart from Client Business. In case of any complaints/grievances, clients may write to us at compliance@dynamiclevels.com

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