1 Advances Classification:
Advances are classified as performing and non-performing advances (''''NPAs'''') based on RBI guidelines and are stated net of bills rediscounted, specific provisions, interest in suspense for non-performing advances and claims received from Export Credit Guarantee Corporation, provisions for funded interest term loan and provisions in lieu of diminution in the fair value of restructured assets. Also, NPAs are classified into sub-standard, doubtful and loss assets as required by RBI guidelines. Interest on NPAs is transferred to an interest suspense account and not recognized in the Profit and Loss Account until received.
Amounts paid for acquiring non-performing assets from other banks and NBFCs are considered as advances. Actual collections received on such non-performing assets are compared with the cash flows estimated while purchasing the asset to ascertain over dues. If these overdoes are in excess of 90 days, then these assets are classified into sub-standard, doubtful or loss as required by the RBI guidelines on purchase of nonperforming assets.
The Bank transfers advances through inter-bank participation with and without risk. In accordance with the RBI guidelines, in the case of participation with risk, the aggregate amount of the participation issued by the Bank is reduced from advances and where the Bank is participating, the aggregate amount of the participation is classified under advances. In the case of participation without risk, the aggregate amount of participation issued by the Bank is classified under borrowings and where the Bank is participating, the aggregate amount of participation is shown as due from banks under advances.
Provision for NPAs comprising sub-standard, doubtful and loss assets is made in accordance with RBI guidelines. In addition, the Bank considers accelerated specific provisioning that is based on past experience, evaluation of security and other related factors. Specific loan loss provision in respect of non-performing advances are charged to the Profit and Loss Account. Any recoveries made by the Bank in case of NPAs written off are recognized in the Profit and Loss Account.
The Bank considers a restructured account as one where the Bank, for economic or legal reasons relating to the borrower''''s financial difficulty, grants to the borrower concessions that the Bank would not otherwise consider. Restructuring would normally involve modification of terms of the advance / securities, which would generally include, among others, alteration of repayment period / repayable amount / the amount of installments / rate of interest (due to reasons other than competitive reasons). Restructured accounts are classified as such by the Bank only upon approval and implementation of the restructuring package. Necessary provision for diminution in the fair value of a restructured account is made.
In accordance with RBI guidelines the Bank has provided general provision on standard assets including credit exposures computed as per the current marked to market values of interest rate and foreign exchange derivative contracts, and gold at levels stipulated by RBI from time to time - farm credit to agricultural activities and SME at 0.25%, commercial real estate at 1.00%, restructured standard advances at 5%, teaser rate housing loans at 2.00%, commercial real estate-residential housing at 0.75% and for other sectors at 0.40%. Additional 2% standard asset provision is done for overseas step-down subsidiaries of Indian corporate.
Further to provisions required as per the asset classification status, provisions are held for individual country exposure (except for home country) as per the RBI guidelines. Exposure is classified in the seven risk categories as mentioned in the Export Credit Guarantee Corporation of India Limited (''''ECGC'''') guidelines and provisioning is done for that country if the net funded exposure is one percent or more of the Bank''''s total assets based on the rates laid down by the RBI.
Provision for Unhedged Foreign Currency Exposure of borrowers is made as per the RBI guidelines.
2 Loss on Sale of Advances to Asset Reconstruction Company
Loss on sale of Advances sold to Asset Reconstruction Company are recognized immediately in the Profit and Loss Account.
The Bank enters into arrangements for sale of loans through Special Purpose Vehicles (SPVs). In most cases, post securitization, the Bank continues to service the loans transferred to the SPV. At times, the Bank also provides credit enhancement in the form of cash collaterals and / or by subordination of cash flows to Senior Pass Through Certificate (PTC) holders. In respect of credit enhancements provided or recourse obligations (projected delinquencies, future servicing etc.) accepted by the Bank, appropriate provision / disclosure is made at the time of sale in accordance with Accounting Standard 29, "Provisions, Contingent Liabilities and Contingent Assets".
In accordance with the RBI guidelines, the profit or premium on account of securitization of assets at the time of sale is computed as the difference between the sale consideration and the book value of the securitized asset amortized over the tenure of the securities issued. Loss on account of securitization on assets is recognized immediately to the Profit and Loss Account.
The Bank invests in PTCs of other SPVs which are accounted for at the deal value and are classified under Investments.
4 Fixed assets (Property, Plant & Equipment and Intangible) and depreciation / amortization
Property, Plant & Equipment and Intangible Assets have been stated at cost less accumulated depreciation and amortization and adjusted for impairment, if any. Cost includes cost of purchase inclusive of freight, duties, incidental expenses and all expenditure like site preparation, installation costs and professional fees incurred on the asset before it is ready to put to use. Subsequent expenditure incurred on assets put to use is capitalized only when it increases the future benefit / functioning capability from / of such assets. Gain or losses arising from the retirement or disposal of a Property Plant and Equipment / Intangible asset are determined as the difference between the net disposal proceeds and the carrying amount of assets and recognized as income or expense in the Profit and Loss Account. Profit on sale of premises, if any, is transferred to Capital Reserve as per the RBI guidelines.
Used assets purchased are depreciated over the residual useful life from the date of original purchase.
Items costing less than '''' 5,000 are fully depreciated in the year of purchase.
5 Cash and cash equivalents
Cash and cash equivalents include cash in hand, balances with Reserve Bank of India and Balances with Other Banks / institutions and money at Call and short Notice (including the effect of changes in exchange rates on cash and cash equivalents in foreign currency).
The Bank imports bullion including precious metal bars on a consignment basis for selling to its wholesale and retail customers. The difference between the sale price to customers and actual price quoted by supplier is reflected under other income.
The Bank also borrows and lends gold, which is treated as borrowings or lending as the case may be in accordance with the RBI guidelines and the interest paid or received is classified as interest expense or income and is accounted on an accrual basis.
7 Revenue recognition
Interest income is recognized on accrual basis.
Interest income in respect of retail advances is accounted for by using the internal rate of return method to provide a constant periodic rate of return on the outstanding on the contract.
Interest income on investments in PTCs and loans bought out through the direct assignment route is recognized at their effective interest rate.
Interest income on discounted instruments is recognized over the tenure of the instruments so as to provide a constant periodic rate of return.
Service charges, fees and commission income are recognized when due except for guarantee commission and letter of credit which is recognized over the period of the guarantee / letter of credit. Syndication / arranger fee is recognized as income as per the terms of engagement.
Upon an asset becoming NPA the income accrued gets reversed, and is recognized only on realization, as per RBI guidelines. Penal interest is recognized as income on realization other than on running accounts where it is recognized when due.
Dividend income is accounted on an accrual basis when the Bank''''s right to receive the dividend is established.
Gain on account of securitization of assets is amortized over the life of the securities issued in accordance with the guidelines issued by the RBI.
In respect of non-performing assets acquired from other Banks / FIs and NBFCs, collections in excess of the consideration paid at each asset level or portfolio level is treated as income in accordance with RBI guidelines and clarifications.
Fees received on sale of Priority Sector Lending Certificates is considered as Miscellaneous Income, while fees paid for purchase is expensed as other expenses in accordance with the guidelines issued by the RBI.
8 Employee benefits Defined Contribution Plan
Contribution as required by the statute made to the government provident fund or to a fund set up by the Bank and administered by a board of trustees is debited to the Profit and Loss Account when an employee renders the related service. The Bank has no further obligations.
The Bank makes contributions in respect of eligible employees, subject to a maximum of ''''0.01 crore per employee per annum to a Fund administered by trustees and managed by life insurance companies. The Bank recognizes such contributions as an expense in the year when an employee renders the related service.
New Pension Scheme
The Bank contributes up to 10% of eligible employees'''' salary per annum, to the New Pension Fund administered by a Pension Fund Regulatory and Development Authority (PFRDA) appointed pension fund manager. The Bank recognizes such contributions as an expense in the year when an employee renders the related service.
Defined Benefit Plan
The Bank provides for Gratuity, covering employees in accordance with the Payment of Gratuity Act, 1972, service regulations and service awards as the case may be. The Bank''''s liability is actuarially determined (using Projected Unit Credit Method) at the Balance Sheet date. The Bank makes contribution to Gratuity Funds administered by trustees and managed by life insurance companies.
In respect of pension payable to certain erstwhile ING Vysya Bank Limited ("eIVBL") employees under Indian Banks'''' Association ("IBA") structure, the Bank contributes 10% of basic salary to a pension fund and the balance amount is provided based on actuarial valuation conducted by an independent actuary as at the Balance Sheet date. The Pension Fund is administered by the board of trustees and managed by life insurance company. The present value of the Bank''''s defined obligation is determined using the Projected Unit Credit Method as at the Balance Sheet date.
Employees covered by the pension plan are not eligible for employer''''s contribution under the provident fund plan
The contribution made to the trust is recognized as planned assets. The defined benefit obligation recognized in the Balance Sheet represents the present value of the defined benefit obligation as reduced by the fair value of the plan assets.
Actuarial gains or losses in respect of all defined benefit plans are recognized immediately in the Profit and Loss Account in the year they are incurred.
Compensated Absences - Other Long-Term Employee Benefits
The Bank accrues the liability for compensated absences based on the actuarial valuation as at the Balance Sheet date conducted by an independent actuary which includes assumptions about demographics, early retirement, salary increases, interest rates and leave utilization. The net present value of the Banks'''' obligation is determined using the Projected Unit Credit Method as at the Balance Sheet date. Actuarial gains / losses are recognized in the Profit and Loss Account in the year in which they arise.
Other Employee Benefits
As per the Bank''''s policy, employees are eligible for an award after completion of a specified number of years of service with the Bank. The obligation is measured at the Balance Sheet date on the basis of an actuarial valuation using the Projected Unit Credit Method.
The undiscounted amount of short-term employee benefits expected to be paid in exchange for the services rendered by employees is recognized during the period when the employee renders the service. These benefits include performance incentives.
Employee share based payments
The Employee Stock Option Schemes (ESOSs) of the Bank are in accordance with Securities and Exchange Board of India (Share Based Employee Benefits) Regulations, 2014. The Schemes provide for grant of options on equity shares to employees of the Bank and its Subsidiaries to acquire the equity shares of the Bank that vest in a cliff vesting or in a graded manner and that are to be exercised within a specified period.
In accordance with the Securities and Exchange Board of India (Share Based Employee Benefits) Regulations, 2014 and the Guidance Note on Accounting for Employee Share-based Payments, issued by The Institute of Chartered Accountants of India, the cost of equity-settled transactions is measured using the intrinsic value method. The intrinsic value being the excess, if any, of the fair market price of the share under ESOSs over the exercise price of the option is recognized as deferred employee compensation with a credit to Employee''''s Stock Option (Grant) Outstanding account. The deferred employee compensation cost is amortized on a straight-line basis over the vesting period of the option. The cumulative expense recognized for equity-settled transactions at each reporting date until the vesting date reflects the extent to which the vesting period has expired and the number of equity instruments that are outstanding.
The options that do not vest because of failure to satisfy vesting condition are reversed by a credit to employee compensation expense, equal to the amortized portion of value of lapsed portion. In respect of the options which expire unexercised the balance standing to the credit of Employee''''s Stock Option (Grant) Outstanding accounts is transferred to General Reserve. The fair market price is the latest available closing price, preceding the date of grant of the option, on the stock exchange on which the shares of the Bank are listed.
Where the terms of an equity-settled award are modified, the minimum expense recognized in ''''Payments to and provision for employees'''' is the expense as if the terms had not been modified. An additional expense is recognized for any modification which increases the total intrinsic value of the share-based payment arrangement, or is otherwise beneficial to the employee as premeasured as at the date of modification.
In respect of options granted to employees of subsidiaries, the Bank recovers the related compensation cost from the respective subsidiaries.
The cost of cash-settled transactions (Stock Appreciation Rights - ["SARs"]) is measured initially using intrinsic value method at the grant date taking into account the terms and conditions upon which the instruments were granted. This intrinsic value is amortized on a straight-line basis over the vesting period with recognition of corresponding liability. This liability is premeasured at each Balance Sheet date up to and including the vesting date with changes in intrinsic value recognized in Profit and Loss Account in ''''Payments to and provision for employees''''.
The SARs that do not vest because of failure to satisfy vesting condition are reversed by a credit to employee compensation expense, equal to the amortized cost in respect of the lapsed portion.
9 Foreign currency transactions
Foreign currency monetary assets and monetary liabilities are translated as at the Balance Sheet date at rates notified by the Foreign Exchange Dealers'''' Association of India (FEDAI) and the resultant gain or loss is accounted in the Profit and Loss Account.
Income and Expenditure items are translated at the rates of exchange prevailing on the date of the transactions except in respect of representative office (which are integral in nature) expenses, which are translated at monthly average exchange rates.
Outstanding forward exchange contracts (other than deposit and placement swaps) and spot contracts outstanding at the Balance Sheet date are revalued at rates notified by FEDAI for specified maturities and at the interpolated rates of interim maturities. In case of forward contracts of greater maturities where exchange rates are not notified by FEDAI, are revalued at the forward exchange rates implied by the swap curves in respective currencies. The resulting profits or losses are recognized in the Profit and Loss Account as per the regulations stipulated by the RBI / FEDAI.
Foreign exchange swaps "linked" to foreign currency deposits and placements are translated at the prevailing spot rate at the time of swap. The premium or discount on the swap arising out of the difference in the exchange rate of the swap date and the maturity date of the underlying forward contract is amortized over the period of the swap and the same is recognized in the Profit and Loss Account.
Contingent liabilities on account of foreign exchange contracts, letters of credit, bank guarantees and acceptances and endorsements outstanding as at the Balance Sheet date denominated in foreign currencies are translated at year-end rates notified by FEDAI.
The financial statements of IBU which are in the nature of non-integral overseas operations are translated on the following basis: (a) Income and expenses are converted at the average rate of exchange during the period and (b) All assets and liabilities are translated at closing rate as on Balance Sheet date. The exchange difference arising out of year end translation is debited or credited as "Foreign Currency Translation Reserve" forming part of "Reserves and Surplus".
10 Derivative transactions
Notional amounts of derivative transactions comprising of forwards, swaps, futures and options are disclosed as off Balance Sheet exposures. The Bank recognizes all derivative contracts (other than those designated as hedges) at fair value, on the date on which the derivative contracts are entered into and are re-measured at fair value as at the Balance Sheet or reporting date. Derivatives are classified as assets when the fair value is positive (positive marked to market) or as liabilities when the fair value is negative (negative marked to market). Changes in the fair value of derivatives other than those designated as hedges are recognized in the Profit and Loss Account.
Outstanding derivative transactions designated as "Hedges" are accounted in accordance with hedging instrument on an accrual basis over the life of the underlying instrument. Option premium paid or received is recognized in the Profit and Loss Account on expiry of the option. Option contracts are marked to market on every reporting date.
Leases where the less or effectively retains substantially all the risks and rewards of ownership of the leased term, are classified as operating leases. Operating lease payments are recognized as an expense in the Profit and Loss Account on a straight-line basis over the lease term.
12 Accounting for provisions, contingent liabilities and contingent assets
The Bank has assessed its obligations arising in the normal course of business, including pending litigations, proceedings pending with tax authorities and other contracts including derivative and long term contracts. In accordance with Accounting Standard - 29 on ''''Provisions, Contingent Liabilities and Contingent Assets'''', the Bank recognizes a provision for material foreseeable losses when it has a present obligation as a result of a past event and it is probable that an outflow of resources will be required to settle the obligation, in respect of which a reliable estimate can be made. Provisions are not discounted to its present value and are measured based on best estimate of the expenditure required to settle the obligation at the Balance Sheet date. These are reviewed at each Balance Sheet date and adjusted to reflect the current best estimates.
In cases where the available information indicates that the loss on the contingency is reasonably possible but the amount of loss cannot be reasonably estimated, a disclosure to this effect is made as contingent liabilities in the financial statements. The Bank does not expect the outcome of these contingencies to have a materially adverse effect on its financial results. Contingent assets are neither recognized nor disclosed in the financial statements.
The carrying amounts of assets are reviewed at each Balance Sheet date if there is any indication of impairment based on internal / external factors. Impairment loss, if any, is provided in the Profit and Loss Account to the extent carrying amount of assets exceeds their estimated recoverable amount.
14 Taxes on income
The Income Tax expense comprises current tax and deferred tax. Current tax is measured at the amount expected to be paid in respect of taxable income for the year in accordance with the Income Tax Act, 1961. Deferred tax assets and liabilities are recognized for the future tax consequences of timing differences being the difference between the taxable income and the accounting income that originate in one period and are capable of reversal in one or more subsequent period.
Deferred tax assets on account of timing differences are recognized only to the extent there is reasonable certainty that sufficient future taxable income will be available against which such deferred tax assets can be realized. In case of carry forward losses and unabsorbed depreciation, under tax laws, the deferred tax assets are recognized only to the extent there is virtual certainty supported by convincing evidence that sufficient future taxable income will be available against which such deferred tax assets can be realized.
Deferred tax assets are reassessed at each reporting date, based upon the Management''''s judgment as to whether realization is considered as reasonably certain.
Deferred tax assets and liabilities are measured using tax rates and tax laws that have been enacted or substantively enacted at the Balance Sheet date. Changes in deferred tax assets / liabilities on account of changes in enacted tax rates are given effect to in the Profit and Loss Account in the period of the change.
15 Earnings per share
Basic earnings per share are calculated by dividing the net profit or loss for the year attributable to equity shareholders (after deducting attributable taxes) by the weighted average number of equity shares outstanding during the year. The weighted average number of equity shares outstanding during the year is adjusted for events of bonus issue, bonus element in a rights issue to existing shareholders, and share split.
For the purpose of calculating diluted earnings per share, the net profit or loss for the year attributable to equity shareholders and the weighted average number of shares outstanding during the year are adjusted for the effects of all dilutive potential equity shares. Diluted earnings per share reflect the potential dilution that could occur if securities or other contracts to issue equity shares were exercised or converted during the year,
16 Share issue expenses
Share issue expenses are adjusted from Securities Premium Account as permitted by Section 52 of the Companies Act, 2013.
17 Credit cards reward points
The Bank estimates the liability for credit card reward points and cost per point using actuarial valuation conducted by an independent actuary, which includes assumptions such as mortality, redemption and spends.
18 Segment reporting
In accordance with guidelines issued by RBI vide DBOD.No.BP.BC.81/21.01.018/2006-07 dated 18th April, 2007 and Accounting Standard 17 (AS-17) on "Segment Reporting", the Banks'''' business has been segregated into the following segments whose principal activities were as under:
Segment Principal activity
Treasury, BMU and Money market, forex market, derivatives, investments and primary dealership of government securities and Balance Corporate Centre Sheet Management Unit (BMU) responsible for Asset Liability Management and Corporate Centre which primarily comprises of support functions.
Corporate / Wholesale Whole sale borrowings and landings and other related services to the corporate sector which are not included under Banking retail banking.
Retail Banking Includes:
Commercial vehicle finance, personal loans, home loans, agriculture finance, other loans / services and exposures which fulfill the four criteria'''' for retail exposures laid down in Basel Committee on Banking Supervision document "International Convergence of Capital Measurement and Capital Standards : A Revised Framework".
II Branch Banking
Retail borrowings covering savings, current, term deposit accounts and Branch Banking network / services including distribution of financial products.
III Credit Cards
Receivables / loans relating to credit card business.
Other Banking business Any other business not classified above.
A transfer pricing mechanism has been established by Asset Liability Committee (ALCO) for allocation of interest cost to the above segments based on borrowing costs, maturity profile of assets / liabilities etc. and which is disclosed as part of segment revenue.
Segment revenues consist of earnings from external customers and inter-segment revenues based on a transfer pricing mechanism. Segment expenses consist of interest expenses including allocated operating expenses and provisions.
Segment results are net of segment revenues and segment expenses.
Segment assets include assets related to segments and exclude tax related assets. Segment liabilities include liabilities related to the segment excluding net worth, employees'''' stock option (grants outstanding) and proposed dividend and dividend tax thereon.
Since the business operations of the Bank are primarily concentrated in India, the Bank is considered to operate only in the domestic segment.
* Being trading positions
Disclosures on risk exposures in derivatives:
a) Structure and organization for management of risk in derivatives trading:
The Board of Directors, the Asset Liability Management Committee (ALCO), the Risk Management Committee (RMC), the Senior Management Committee for Derivatives and the Market Risk Management Department are entrusted with the management of risks in derivatives.
The philosophy and framework for the derivative business is laid out in the Board approved Investment and Derivative policies. The ALCO of the Bank is empowered to set the limit-framework for derivatives. It also reviews the market risk exposures of derivatives against the limits. The Risk Management Committee reviews all risks on a consolidated basis and also reviews Stress Testing.
The Senior Management Committee for Derivatives is responsible for reviewing and approving any new derivative products (within the regulatory framework provided by the RBI). The Board approved ''''Customer Suitability and Appropriateness Policy for Derivatives'''' provides guidelines for the assessment of Customer Suitability and the Appropriateness of products offered to these customers.
The monitoring and measurement of risk in derivatives is carried out by the Market Risk Management Department. The Market Risk Management Department is independent of the Treasury Front-Office & Back-Office and directly reports into the Group Chief Risk Officer.
b) Scope and nature of risk measurement, risk reporting and risk monitoring systems:
All significant risks of the derivative portfolio are monitored and measured daily. The Market Risk Management Department measures and reports Market Risk metrics like VaR, PV01, Option Greeks like Delta, Gamma, Vega, Theta, Rho etc. The Credit Risk from the derivatives portfolio is also measured daily.
The Market Risk Management Department monitors these exposures against the set limits and also reviews profitability on a daily basis. MIS is sent to ALCO on a periodic basis. Exception reports are also sent so that emerging risks are reviewed and managed on a timely basis. Stress testing is also performed on the Derivative portfolio. The Bank continuously invests in technology to enhance the Risk Management architecture.
c) Policies for hedging and / or mitigating risk and strategies and processes for monitoring the continuing effectiveness of hedges / mitigates:
The Board Approved ''''Hedging Policy'''' details the hedging strategies, hedging processes, accounting treatment, documentation requirements and effectiveness testing for hedges.
Hedges are monitored for effectiveness periodically, in accordance with the Board Approved Policy,
d) Accounting policy for recording hedge and non-hedge transactions; recognition of income, premiums and discounts; valuation of outstanding contracts; provisioning, collateral and credit risk mitigation:
Derivative transactions are segregated into trading or hedge transactions. Trading transactions outstanding as at the Balance Sheet dates are marked to market and the resulting profits or losses, are recorded in the Profit and Loss Account.
Derivative transactions designated as "Hedges" are accounted in accordance with hedging instruments on an accrual basis over the life of the underlying instrument.
Option premium paid / received is accounted for in the Profit and Loss Account on expiry of the option.
Pursuant to the RBI guidelines, any receivables as well positive Mark to Market (MTM) in respect of future receivable under derivative contracts comprising of crystallized receivables which remain overdue for more than 90 days are reversed through the Profit and Loss Account. The derivative limit sanctioned to clients is part of the overall limit sanctioned post credit appraisal. Collateral is accepted on a case to case basis considering the volatility of the price of the collateral and any increase in operational, legal and liquidity risk.
Currency interest rate swaps have been included under currency derivatives.
# Exdudes PV01 on options.
** MTM has been considered at product level.
* Retail assets portfolio purchased by the Bank has been considered as single portfolio.
** Represents outstanding balance of total non-performing financial assets purchased by the Bank at the Balance Sheet date. None of the non-performing financial assets purchased have been restructured during the year (previous year Nil).
There were no non-performing financial assets sold by the Bank during the current year (previous year Nil).
The Bank has not sold any financial assets to Securitization or Reconstruction Company for asset reconstruction (previous year Nil).
(A) Working funds is the monthly average of total assets as reported by the Bank''''s Management to the RBI under Section 27 of the Banking Regulation Act, 1949.
(B) Operating profit = (Interest Income Other Income - Interest expenses - Operating expenses).
(C) Business is monthly average of net advances and deposits as reported to the RBI under section 27 of the Banking Regulation Act, 1949. Interbank deposits are excluded for the purposes of computation of this ratio.
(D) Productivity ratios are based on average number of employees.
19. Draw Down from Reserves:
In accordance with the RBI requirement on creation and utilization of Investment reserve in respect of HFT and AFS investments, reserve of '''' 48.49 crore (previous year Rs, 41.52 crore) has been utilized during the year.
The above details are as furnished by the Management and relied upon by the auditors.
20. There are no outstanding letter of awareness / letter of comfort (previous year Nil).
21. DISCLOSURES ON REMUNERATION
A. Qualitative Disclosures:
a) Information relating to the composition and mandate of the Remuneration Committee:
The Nomination & Remuneration committee comprises of independent directors of the Bank. Key mandate of the Nomination
& Remuneration committee is to oversee the overall design and operation of the compensation policy of the Bank and work in coordination with the Risk Management Committee to achieve alignment between risks and remuneration.
b) Information relating to the design and structure of remuneration processes and the key features and objectives of remuneration policy:
Objective of Banks'''' Compensation Policy is:
- To maintain fair, consistent and equitable compensation practices in alignment with Bank''''s core values and strategic business goals;
- To ensure effective governance of compensation and alignment of compensation practices with prudent risk taking;
- To have mechanisms in place for effective supervisory oversight and Board engagement in compensation The remuneration process is aligned to the Bank''''s Compensation Policy objectives.
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:
In order to manage current and future risk and allow a fair amount of time to measure and review both quality and quantity of the delivered outcomes, a significant portion of senior and middle management compensation is variable. Further reasonable portion variable compensation is non- cash and deferred, over a period of 3 years or longer.
In addition, remuneration process provides for ''''malus'''' and ''''clawback'''' option to take care of any disciplinary issue or future drop in performance of individual/ business/ company,
d) Description of the ways in which the bank seeks to link performance during a performance measurement period with levels of remuneration:
Individual performances are assessed in line with business/ individual delivery of the Key Result Areas (KRAs), top priorities of business, budgets etc. KRAs of Line roles are linked to financials, people, service and process (Quality) parameters and KRAs of non-Line Roles have linkage to functional deliveries needed to achieve the top business priorities.
Further remuneration process is also linked to market salaries / job levels, business budgets and achievement of individual KRAs.
e) A discussion of the banks'''' 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:
A discussion on Policy on Deferral of Remuneration
Employees are classified into following three categories for the purpose of remuneration:
Category I: Whole Time Directors (WTD)/Chief Executive Officer (CEO)
Category II: Risk Control and Compliance Staff Category III: Other Categories of Staff
Following principles are applied for deferral / vesting of variable remuneration in accordance with RBI guidelines and Bank''''s compensation policy:
a. Variable Pay will not exceed 70% of Fixed Pay,
b. The Cash component of the Variable Pay will not exceed 50% of the Fixed Pay,
c. If Variable Pay is higher than 50% of Fixed Pay, at least 40% of Variable Pay will be deferred over a period of 3 years, or longer, on a pro-rata basis.
The compensation will be approved by the Nomination and Remuneration committee and RBI
a. Variable Pay will not exceed 70% of Fixed Pay,
b. The Cash component of the Variable Pay will not exceed 50% of the Fixed Pay,
c. If Variable Pay is higher than 50% of Fixed Pay, at least 40% of Variable Pay will be deferred over a period of 3 years, or longer, on a pro-rata basis.
Variable Pay is payable as per approved schemes for incentive or Bonus:
i) The Cash component of the Variable Pay will not exceed 60% of the Fixed Pay,
ii) If Variable Pay is higher than 60% of Fixed Pay, at least 40% of Variable Pay will be deferred over a period of 3 years, or longer, on a pro-rata basis.
iii) However, if Variable Pay is less than or equal to Rs, 10 lakhs, management will have the discretion to pay the entire amount as cash.
For adjusting deferred remuneration before & after vesting:
Malus: Payment of all or part of amount of deferred variable pay can be prevented. This clause will be applicable in case of:
- Disciplinary Action (at the discretion of the Disciplinary Action Committee) and/ or
- Significant drop in performance of Individual/ Business/ Company (at the discretion of the Nomination & Remuneration Committee) and/ or
- Resignation of the staff prior to the payment date.
Clawback: Previously paid or already vested deferred variable pay can also be recovered under this clause.
This clause will be applicable in case of Disciplinary Action (at the discretion of the Disciplinary Action Committee and approval of the Nomination & Remuneration Committee)
f) Description of the different forms of variable remuneration (i.e. cash, shares, ESOPs and other forms) that the bank utilizes and the rationale for using these different forms:
The main forms of such variable remuneration include:
- Cash - this may be at intervals ranging from Monthly, Quarterly, Annual.
- Deferred Cash / Deferred Incentive Plan.
- Stock Appreciation Rights (SARs): These are structured, variable incentives, linked to Kotak Mahindra Bank Stock price, payable over a period of time
The form of variable remuneration depends on the job level of individual, risk involved, the time horizon for review of quality and longevity of the assignments performed.
B. Quantitative Disclosures:
a) Number of meetings held by the Remuneration Committee during the financial year and remuneration paid to its members.
During year ended 31st March, 2017 3 meetings of Nomination and Remuneration committee was held. Each Member of the Nomination and Remuneration committee is paid a sitting fee of '''' 40,000 per meeting.
b) Number of employees having received a variable remuneration award during the financial year.
Quantitative disclosure restricted to CEO, two Whole Time Directors and six Operating Management committee members as risk takers.
c) Number and total amount of sign-on awards made during the financial year.
d) Details of guaranteed bonus, if any, paid as joining / sign on bonus.
e) Details of severance pay, in addition to accrued benefits, if any.
Nil (previous year Nil)
f) Total amount of outstanding deferred remuneration, split into cash, shares and share-linked instruments and other forms
Cash - Nil (previous year Nil)
Outstanding SARs as at 31st March, 2017 - 96,004 rights (previous year 128,696 rights)
Outstanding ESOPs as at 31st March, 2017 - 878,448 equity shares (previous year 891,694 equity shares)
g) Total amount of deferred remuneration paid out in the financial year.
Payment towards SARs during year ended 31st March, 2017 Rs, 5.29 crore (previous year Rs, 6.29 crore)
h) Breakdown of amount of remuneration awards for the financial year to show fixed and variable, deferred and no deferred.
Total fixed salary for the year ended 31st March, 2017 - Rs, 16.28 crore (previous year Rs, 18.75 crore)
Deferred Variable Pay*
SARs - 54,220 rights (previous year 35,370 rights)
ESOPs - 494,060 equity shares (previous year 145,660 equity shares)
Non Deferred variable pay* Rs, 3.99 crore (previous year Rs, 4.02 crore)
* Details relating to variable pay pertains to remuneration awards for the financial year 2015-16 awarded during current financial year. Remuneration award for the year ended 31st March, 2017 are yet to be reviewed and approved by the remuneration committee
i) Total amount of outstanding deferred remuneration and retained remuneration exposed to ex post explicit and / or implicit adjustments. - Nil (Previous year Nil)
j) Total amount of reductions during the financial year due to ex- post explicit adjustments. - Nil (Previous year Nil)
k) Total amount of reductions during the financial year due to ex- post implicit adjustments. - Nil (Previous year Nil)
22. Unhedged Foreign Currency Exposure of borrowers:
The bank recognises the importance of the risk of adverse fluctuation of foreign exchange rates on the profitability and financial position of borrowers who are exposed to currency risk. Currency induced credit risk refers to the risk of inability of borrowers to service their debt obligations due to adverse movement in the exchange rates and corresponding increase/decrease in their book values of trade payables, loan payables, trade receivables, etc. thereby exposing the Bank to risk of default by the borrower. In this regard, the Bank had put in place requisite policies & processes for monitoring and mitigation of currency induced credit risk of borrowers. These include the following:
(a) Currency risk of borrowers on account of un-hedged foreign currency exposures ("UFCE") is duly considered and analysed in credit appraisal notes.
(b) Periodic monitoring of un-hedged foreign currency exposures of borrowers.
(c) Risk classification of borrowers having un-hedged foreign currency exposures, into Low / Medium / High, as per internal norms, based on likely loss / EBID ratio. Likely loss means the potential loss which can be caused over a one year horizon by adverse movement of exchange rates.
(e) In case of borrowers exposed to currency risk where declarations for foreign currency payables/ receivables (UFCE declarations) are not submitted, provision for currency induced credit risk is made as per RBI stipulated rates mentioned below:
- 10 bps in cases where limits with banking system are less than Rs, 25 crore;
- 80 bps in cases where limits with banking system are Rs, 25 crore or more.
(f) Further, where annual certification from statutory auditors of UFCE data is not submitted, such borrowers are treated as UFCE declaration not submitted cases and provision is computed as per point (e) above.
(g) Borrowers where the credit exposure is only Letter of Credit Bills Discounting, Fixed Deposit backed, Bank Guarantee / Standby Letter of Credit backed are exempted from the above requirements. Exposures on other Banks and Public Financial Institutions like SIDBI, EXIM Bank, NABARD, NHB are also exempted from the above requirements.
(h) Management of foreign exchange risk is considered as a parameter for internal risk rating of borrowers.
Provision held for currency induced credit risk as at 31st March, 2017 is Rs, 50.54 crore. (Previous year Rs, 60.00 crore). Incremental Risk weighted Assets value considered for the purpose of CRAR calculation in respect of currency induced credit risk as at 31st March, 2017 is Rs, 2,156.04 crore (Previous year Rs, 1,863.65 crore).
23. b) Qualitative disclosure around LCR
The Reserve Bank of India has prescribed monitoring of sufficiency of Bank''''s liquid assets using Basel III - Liquidity Coverage Ratio (LCR). The LCR is aimed at measuring and promoting short-term resilience of Banks to potential liquidity disruptions by ensuring maintenance of sufficient high quality liquid assets (HQLAs) to survive an acute stress scenario lasting for 30 days.
The LCR requirement has been introduced in a phased manner with banks required to maintain minimum LCR of 60% till Dec 2015 and the 70% from Jan 2016 onwards. The requirement will be increasing by 10% annually to 100% by Jan 2019. LCR requirement is currently at 80% effective Jan 2017.
The ratio comprises of high quality liquid assets (HQLAs) as numerator and net cash outflows in 30 days as denominator. HQLA has been divided into two parts i.e. Level 1 HQLA which comprises of primarily cash, excess CRR, SLR securities in excess of minimum SLR requirement and a portion of mandatory SLR as permitted by RBI (under MSF and FALLCR) and Level 2 HQLA which comprises of investments in highly rated non-financial corporate bonds and listed equity investments considered at prescribed haircuts. Cash outflows are calculated by multiplying the outstanding balances of various categories or types of liabilities by the outflow run-off rates and cash inflows are calculated by multiplying the outstanding balances of various categories of contractual receivables by the rates at which they are expected to flow in.
The Bank has implemented the LCR framework and has consistently maintained LCR well above the regulatory threshold. The average LCR for the quarter ended 31st March, 2017 was 88.66% which is above the regulatory limit of 80%. For the quarter ended 31st March, 2017 Level 1 HQLA stood at 97.23% (Rs,28,819 crs.) of the total HQLA.
LCR is expected to bring in more funding stability due to severe run-off factors on wholesale funding but at the same time it has increased the liquidity cost due to maintenance of high quality liquid assets. Apart from LCR, Bank uses various stock liquidity indicators to measure and monitor the liquidity risk in terms of funding stability, concentration risk, dependence on market borrowings, liquidity transformation, etc. The Bank maintains a diversified source of funding in terms of depositor concentration, lender concentration as well as instrument concentration. This is evident through low depositor and lender concentration with top 20 depositors contributing 9.6% of Bank''''s total deposits and top 10 lenders contributing 6.8% of Bank''''s total liabilities.
Asset Liability Committee (ALCO) of the Bank is the primary governing body for Liquidity Risk Management supported by Balance Sheet Management Unit (BMU), Risk Management Department (RMD), Finance and ALCO Support Group. BMU is the central repository of funds within the Bank and is vested with the responsibility of managing liquidity risk within the risk appetite of the Bank. Bank has incorporated Basel III Liquidity Standards - LCR and NSFR as part of its risk appetite statement for liquidity risk.
The Bank has reported 126 cases (Previous year 114 cases) of fraud during the financial year ended 31st March 2017 amounting to Rs, 111.54 crore (Previous year Rs, 44.94 crore). The Bank has recovered / expensed off / provided the entire amount where necessary,
25. Disclosure of Specified Bank Notes (SBNs)
As per the clarification from RBI, the provisions of the MCA Notification dated 30th March 2017 requiring companies to disclose details of the SBNs held and transacted during the notified period is not applicable to banks.
Segmental Information is provided as per the MIS available for internal reporting purposes, which includes certain estimates and assumptions. The methodology adopted in compiling and reporting the above information has been relied upon by the auditors.
3. Lease Discloures:
a. The Bank has taken various premises and equipment under operating lease. The lease payments recognized in the Profit and Loss Account are Rs, 430.81 crore (previous year Rs, 403.26 crore). The sub-lease income recognized in the Profit and Loss Account is Rs, 5.95 crore (previous year Rs, 7.13 crore).
b. The future minimum lease payments under non-cancellable operating lease - not later than one year is Rs, 366.42 crore (previous year Rs, 360.14 crore), later than one year but not later than five years is Rs, 1,160.15 crore (previous year Rs, 1,056.90 crore) and later than five years Rs, 1,003.01 crore (previous year Rs, 899.84 crore).
The lease terms include renewal option after expiry of primary lease period. There are no restrictions imposed by lease arrangements. There are escalation clauses in the lease agreements.
26. Related Party Disclosures:
A. Parties where control exists: Nature of relationship Related Party
Subsidiary Companies Kotak Mahindra Prime Limited
Kotak Securities Limited
Kotak Mahindra Capital Company Limited
Kotak Mahindra Old Mutual Life Insurance Limited
Kotak Mahindra Investments Limited
Kotak Mahindra Asset Management Company Limited
Kotak Mahindra Trustee Company Limited
Kotak Mahindra (International) Limited
Kotak Mahindra (UK) Limited
Kotak Mahindra Inc.
Kotak Investment Advisors Limited Kotak Mahindra Trusteeship Services Limited
Kotak Infrastructure Debt Fund Limited (formerly known as Kotak Forex Brokerage Limited)
Kotak Mahindra Pension Fund Limited
Kotak Mahindra Financial Services Limited
Kotak Mahindra Asset Management (Singapore) Pte. Ltd.
Kotak Mahindra General Insurance Company Limited
IVY Product Intermediaries Limited (formerly known as ING Vysya Financial Services Limited)
B. Other Related Parties:
Nature of Relationship_Related Party_
Individual having significant influence Mr. Uday S. Kotak along with relatives and enterprises in which he has beneficial interest holds over the enterprise 32.02% of the equity share capital of Kotak Mahindra Bank Limited as on 31st March, 2017
Associates / Others ACE Derivatives and Commodity Exchange Limited.
Infina Finance Private Limited
Matrix Business Services India Private Limited
Phoenix ARC Private Limited
Kotak Education Foundation
ING Vysya Foundation
Key Management Personnel (KMP) Mr. Uday S. Kotak, Executive Vice Chairman and Managing Director
Mr. C Jayaram, Joint Managing Director (upto 30 April 2016)
Mr. Dipak Gupta, Joint Managing Director Enterprises over which KMP / relatives Aero Agencies Limited of KMP have control / significant Kotak and Company Private Limited influence Komaf Financial Services Private Limited
Asian Machinery & Equipment Private Limited.
Insurekot Sports Private Limited Kotak Trustee Company Private Limited Cumulus Trading Company Private Limited Palko Properties Private Limited Kotak Chemicals Limited
Kotak Ginning & Pressing Industries Private Limited Kotak Commodities Services Private Limited Harisiddha Trading and Finance Private Limited Puma Properties Private Limited Business Standard Private Limited Business Standard Online Private Limited Allied Auto Accessories Private Limited Uday S Kotak HUF Suresh A Kotak HUF USK Benefit Trust II Relatives of KMP Ms. Pallavi Kotak
Mr. Suresh Kotak Ms. Indira Kotak Mr. Jay Kotak Mr. Dhawal Kotak Ms. Aarti Chandaria Ms. Anita Gupta Ms. Urmila Gupta Mr. Arnav Gupta Mr. Parthav Gupta Mr. Prabhat Gupta Ms. Jyoti Banga
Ms. Usha Jayaram (upto 30 April 2016)
Mr. K. Madhavan Kutty (upto 30 April 2016)
Mr. Vivek Menon (upto 30 April 2016)
Ms. Nayantara Menon Mehta (upto 30 April 2016)
27. EMPLOYEE SHARE BASED PAYMENTS:
At the General Meetings, the shareholders of the Bank had unanimously passed Special Resolutions on 28th July 2000, 26th July 2004, 26th July 2005, 5th July 2007, 21st August 2007 and 29th June 2015, to grant options to the eligible employees of the Bank and its subsidiary and associate companies. Pursuant to these resolutions, the following Employees Stock Option Schemes had been formulated and adopted:
(a) Kotak Mahindra Equity Option Scheme 2001-02;
(b) Kotak Mahindra Equity Option Scheme 2002-03;
(c) Kotak Mahindra Equity Option Scheme 2005;
(d) Kotak Mahindra Equity Option Scheme 2007; and
(e) Kotak Mahindra Equity Option Scheme 2015
Consequent to the above, the Bank has granted stock options to the employees of the Group. The Bank under its various plan / schemes, has granted in aggregate 144,210,124 options (including options issued in exchange on amalgamation) as on 31st March, 2017 (Previous year 140,327,654).
Further, pursuant to the Scheme of Amalgamation of ING Vysya Bank Limited with the Bank, the Bank has renamed and adopted the ESOP Schemes of the eIVBL, as given below:
(a) Kotak Mahindra Bank Ltd. (IVBL) Employees Stock Option Scheme 2005;
(b) Kotak Mahindra Bank Ltd. (IVBL) Employees Stock Option Scheme 2007;
(c) Kotak Mahindra Bank Ltd. (IVBL) Employee Stock Option Scheme 2010; and
(d) Kotak Mahindra Bank Ltd. (IVBL) Employees Stock Option Scheme 2013
In aggregate 8,663,925 options are outstanding as on 31st March, 2017 under the aforesaid adopted schemes.
The expected volatility was determined based on historical volatility data and the Bank expects the volatility of its share price may reduce as it matures. The measure of volatility used in the Black-Scholes options pricing model is the annualised standard deviation of the continuously compounded rates of return on the stock over a period of time. For calculating volatility, the daily volatility of the stock prices on the National Stock Exchange, over a period prior to the date of grant, corresponding with the expected life of the options has been considered.
The above information has been prepared by the Bank and relied upon by the auditors.
Effect of the employee share-based payment plans on the Profit and Loss Account and on the financial position:
Had the Bank recorded the compensation cost computed on the basis of Fair Valuation method instead of intrinsic value method, employee compensation cost would have been higher by Rs, 33.21 crore (Previous year Rs, 93.52 crore) and the profit after tax would have been lower by Rs, 21.72 crore (Previous year Rs, 61.16 crore). Consequently the basic and diluted EPS would have been Rs, 18.45 (Previous year Rs, 11.09) and Rs, 18.43 (Previous year Rs, 11.07) respectively.
The above number of ESOPs / SARs, exercise price, fair value and share price have been adjusted for bonus shares - one share for every share allotted on 10th July, 2015. The effect of the bonus share has been given in computation for the previous periods.
In computing the above information, certain estimates and assumptions have been made by the Management which have been relied upon by the auditors.
28. Corporate Social Responsibility (CSR)
As per the provisions of the Section 135 of the Companies Act, 2013 the Bank is required to contribute Rs, 54.92 crore. The Bank has contributed Rs, 13.03 crore to the Kotak Education Foundation and Rs, 4.30 crore to other CSR initiatives in the current financial year. The Bank has also adopted a strong CSR policy, charting out its plan to invest in society and its own future. The Bank is building its CSR capabilities on a sustainable basis and is committed to gradually increase its CSR spend in the coming years.
29. Tier II Bonds
a) Lower Tier II Bonds outstanding as at 31st March, 2017 Rs, 858.80 crore (previous year Rs, 969.70 crore).
During the current year and previous year the Bank had not issued lower Tier II bonds. In accordance with the RBI requirements lower Tier II bonds of Rs, 383.64 crore (previous year Rs, 524.71 crore) are not considered as Tier II capital for the purposes of capital adequacy computation under Basel III guidelines.
b) Upper Tier II Bonds outstanding as at 31st March, 2017 are Rs, 348.28 crore (previous year Rs, 806.31 crore) of which bonds issued outside India are Rs, 212.28 crore (previous year Rs, 670.31 crore).
During the current and previous year, the Bank did not issue upper Tier II bonds.
c) Interest Expended-Others (Schedule 15(III)) includes interest on subordinated debt (Lower and Upper Tier II) Rs, 116.19 crore (previous year Rs, 125.97 crore).
30. The Bank has received few intimations from "suppliers" regarding their status under the Micro, Small and Medium Enterprises Development Act, 2006 and there is no outstanding against those suppliers as on 31st March, 2017, hence disclosures, if any, relating to amounts unpaid as at the yearend together with interest paid / payable as required under the said Act have not been given. The above is based on information available with the Bank and relied upon by the Auditors.
31. Figures for the previous year have been regrouped / reclassified wherever necessary to conform to current years, presentation.