BASEL-II DISCLOSURES AS ON 31.03.2011

BASEL II DISCLOSURES – YEAR ENDED 31ST MARCH 2011

Table DF 1 – SCOPE OF APPLICATION

Table DF 2 – CAPITAL STRUCTURE

Qualitative disclosures

TERMS & CONDITIONS OF LOWER TIER II CAPITAL:

The Bank has issued Lower Tier II Bonds by way of Subordinated Debts in the form of Promissory Notes at Coupon payable annually / semi-annually. These bonds have been issued after getting them duly rated by the Domestic Rating Agencies. All the outstanding Bonds except issued under series VI & VII are listed at the National Stock Exchange Ltd. Mumbai. The other important features of these bonds are :

The bonds have a tenor ranging from 91 months to 127 months from date of the issue.

The instruments are fully paid up, unsecured and subordinated to the claims of other creditors, free of restrictive clauses and not redeemable at the initiative of the holder or without the consent of the RBI.

The instruments are subjected to progressive discounting @ 20% per year over the last five years of their tenor. Such discounted amounts are not included in Tier – II Capital for Capital Adequacy purposes.

The claims of the investors in these instruments shall rank superior to the claims of investors in instruments eligible for inclusion in Tier I Capital and subordinate to the claims of all other creditors.

Subordinated debt instruments shall be limited to 50% of Tier I capital of the Bank and these instruments, together with other components of Tier II Capital shall not exceed 100% of Tier I Capital.

The Bank has not issued any upper Tier II capital and innovative instruments that qualify for inclusion in Tier I capital.

(` / Crores)

Table DF 3 - CAPITAL ADEQUACY

Qualitative disclosures

Bank is already geared up to adopt global best practices while implementing risk management stipulations that are in conformity with the Basel II framework.

Comprehensive risk management architecture is in place to address various issues concerning Basel II. A quarterly review is carried out to assess the capital need of the Bank, keeping in view the anticipated growth in Risk Weighted Assets, Market Risk and Operational Risk.

Capital requirements for credit risk:

Capital requirements for market risk: Standardised duration approach

Capital requirements for operational risk:

Total and Tier 1 capital ratio for the Bank:

Prudential Floor on the Capital Required

Table DF 4 - CREDIT RISK : GENERAL DISCLOSURES

Qualitative Disclosures

A. DEFINITIONS OF PAST DUE AND IMPAIRED:

The Bank follows the basic prudential guidelines issued by the RBI on classification of Non-Performing Asset (NPA) as under :

a) Interest and / or instalment of principal remain overdue for a period of more than 90 days in respect of a term loan.

b) The account remains ‘out of order’ if the outstanding balance remains continuously in excess of sanctioned limit / DP for more than 90 days and / or there are no credits continuously for 90 days as on the date of Balance Sheet or credits are not enough to cover the interest debited during the same period, in respect of Overdraft/Cash Credit (OD/CC).

c) The bill remains overdue for a period of more than 90 days in the case of bills purchased and discounted.

d) The instalment of principal or interest thereon remains overdue for two crop seasons for short duration crops

e) The instalment of principal or interest thereon remains overdue for one crop season for long duration crops.

f) The amount of liquidity facility remains outstanding for more than 90 days, in respect of a securitisation transaction undertaken in terms of guidelines on securitisation dated February 1, 2006

g) In respect of derivative transactions, the overdue receivables representing positive mark-to-market value of a derivative contract, if these remains unpaid for a period of 90 days from the specified due date for repayment.

Here, `Overdue’ mean any amount due to the Bank under any credit facility, if it is not paid on the due date fixed by the Bank. Where the interest charged during any quarter is not serviced fully within 90 days from the end of the quarter, the account is classified as Non-performing asset and ceases to generate income for the bank.

Besides above, Bank also follows the guidelines issued by RBI in respect of classification of assets under a) Restructured accounts, b) Project under implementation involving time overrun, c) Post shipment Suppliers’ Credit. d) Export Project Finance, e) Take over Finance, f) Govt. guaranteed Advance, g) Advance under Rehabilitation approved by BFIR / TLI, h) Advances under Debt Waiver & Debt Relief Scheme 2009, i) Sale of Financial Assets to Securitisation Company /Reconstruction Company, j) Purchase/ Sale of Non-Performing Financial Assets, k) Up-gradation of accounts, l) Accounts regularized near about the Balance Sheet date etc.

B. CREDIT RISK MANAGEMENT AND OBJECTIVES:

To effectively identify, assess, measure, and manage the credit risk exposure of the Bank, with a view to contain it within desired limits in relation to the risk appetite of the Bank and commensurate with the availability of Capital. In doing so, the Bank's Credit Risk philosophy aims at minimising risk and maintaining it within the levels which shall ensure safety of the Bank's financial resources, including stakeholders' equity and, at the same time, also ensure a steady and healthy financial growth.

STRATEGIC POLICY OF THE BANK - CREDIT RISK:

The Bank has a comprehensive and well defined Loan Policy which covers various aspects of strategic planning. The loan policy of the Bank is reviewed from time to time, depending on requirements of the changes in loan portfolio and general economic and market scenario. The loan policy is also subjected to a comprehensive review by the Board at least once a year. The loan policy of the Bank addresses, among other things:

Exposure ceilings and prudential caps in different industry segments and borrower categories.

Pricing based on risk profile linked to credit ratings and/or retail segments.

Guidelines relating to procedures and systems for appraisal, sanction, and monitoring of loans and modes of dispensation of credit.

Credit Rating framework.

Inspection mechanism and compliance of regulatory and policy guidelines.

CREDIT RISK MANAGEMENT ARCHITECTURE:

The organizational structure of the Bank for Credit Risk Management function has the Board of Directors at the Apex level that has the overall oversight of management of risks. The Risk Management Committee (RMC) which is the sub-committee of the Board headed by the Chairman & Managing Director devises the policy and strategy for integrated risk management including credit risk.

At the operational level, the Credit Risk Management Committee (CRMC) manages the credit risk. The main function includes implementation of credit risk management policies approved by the Board, monitoring credit risk on a bank wide basis, recommending to the board for its approval all policies relating to credit risk management, prudential limits on credit exposures, portfolio management, loan products etc. There is a structured and standardized credit approval process including a comprehensive credit appraisal procedure. In order to assess the credit risk associated with any financing proposal, the Bank assesses a variety of risks relating to the borrower and the relevant industry.

The Risk Management Department (RMD) headed by the Chief General Manger, measures, controls and manages credit risk on bank wide basis within the limits set by the Board and enforces compliance with risk parameters set by Board/RMC/CRMC. The RMD is duly supported by Credit Risk Management Cell, Market Risk Management Cell (ALM) and Operations Risk Management Cell.

The Inspection Department headed by a General Manager, monitors the quality of loan portfolio, identifies problems and takes steps to correct deficiencies. Loan review / credit audit is undertaken by the Credit Audit function.

TOOLS USED FOR CREDIT RISK MANAGEMENT / MITIGATION

Credit Approving Authority – Delegation of Powers. The Bank has a well-defined scheme of delegation of powers with a multi-tier risk based approving system, which is reviewed periodically and revised as and when necessary to meet the compulsions of business environment.

Prudential Limits on various aspects of credit / investment like Single / Group borrower limits for various types of borrowers are in place.

Risk Rating/Pricing - The bank has introduced rating models for various segments, which serve as a single point indicator of diverse risk factors of a counter party and support credit and pricing decisions.

Credit Audit/Loan review mechanism is an effective tool for constantly evaluating the quality of loan book and to bring about qualitative improvements in credit administration

Portfolio Management - to start with, the bank has introduced a simple portfolio-monitoring framework. Going forward the bank will be graduating to a more sophisticated Portfolio Management model.

RISK MEASUREMENT

At present Credit Risk is assessed through Risk rating at the individual level and through Risk Weighting of the assets at the portfolio level and capital is maintained based on Risk Weights.

Total gross credit risk exposures

Geographic distribution of exposures

INDUSTRY TYPE DISTRIBUTION OF EXPOSURES

RESIDUAL CONTRACTUAL MATURITY BREAKDOWN OF ASSETS

Amount of NPAs (Gross)

Net NPAs

NPA Ratios

Movement of NPAs (Gross)

Movement of Provisions for NPAs

Amount of Non-Performing Investments

Amount of provisions held for non-performing investments

Movement of provisions for depreciation on investments

Table DF 5 - CREDIT RISK: DISCLOSURES FOR PORTFOLIOS SUBJECT TO THE STANDARDISED APPROACH

Qualitative Disclosures

The Bank has approved using the general rating of the following credit rating agencies for risk weighting under the standardized approach for CRAR calculations CRISIL, ICRA, Fitch India, and CARE for domestic claims and S&P, FITCH and Moody’s for claims on non-resident corporates, foreign banks and foreign sovereigns.

The ratings of all these agencies are being used for all exposures subjected to rating for risk weighting purposes under the standardized approach for CRAR calculations under Basel-II as defined by RBI.

The process used to transfer public issue ratings on to comparable assets in the banking book is as per regulatory requirements of RBI. The public ratings published by the rating agencies on their website are used for this purpose. Only, ratings which are in force as per monthly bulletin of the concerned rating agency and which have been reviewed at least once during the previous 15 months are used.

For all the exposures on a particular counterparty, bank uses the rating of only one agency, even though these exposures are rated by more than one with exception being where each of the exposures is rated by only one of the approved rating agencies.

To be eligible for risk-weighting purposes, it is ensured that the external credit assessment takes into account and reflects the entire amount of credit risk exposure the bank has with regard to all payments owed to it i.e., both principal and interest. External assessments for one entity within a corporate group is not used to risk weight other entities within the same group.

For assets that have contractual maturity less than or equal to one year, short term ratings are used while for other assets, long term ratings are used. For Cash Credit exposures long term ratings are taken.

Where an issuer has a long-term exposure with an external long term rating that warrants a risk weight of 150%, all unrated claims on the same counterparty, whether short-term or long-term, also receive a 150% risk weight, except incases where credit risk mitigation techniques are used for such claims. Similar is the case with short-term rating.

The long-term ratings assigned by the approved rating agencies are directly mapped to the risk weights under the Standardised Approach for long-term exposures. On the contrary, the unrated short-term claim on counter-party attracts a risk weight of at least one level higher than the risk weight applicable to the rated short-term claim on that counter-party.

Issue-specific short-term ratings are used to derive risk weights for claims arising from the rated facility against banks and a corporate's short-term rating is not used to support a risk weight for an unrated long-term claim.

If there are two ratings accorded by eligible credit rating agencies, which map into different risk weights, the higher risk weight is applied. If there are three or more ratings accorded by eligible credit rating agencies with different risk weights, the ratings corresponding to the two lowest risk weights are referred to and the higher of those two risk weights are applied, i.e., the second lowest risk weight.

The RW of the investment claim is based on specific rating by a chosen credit rating agency, where the claim is not an investment in a specific assessed issue:

the rating applicable to the specific debt (where the rating maps into a risk weight lower than that which applies to an unrated claim) is applied to the bank’s un-assessed claim only if this claim ranks pari passu or senior to the specific rated debt in all respects and the maturity of the un-assessed claim is not later than the maturity of the rated claim, except where the rated claim is a short term obligation.

if either the issuer or single issue has been assigned a rating which maps into a risk weight equal to or higher than that which applies to unrated claims, an unrated claim on the same counterparty, is assigned the same risk weight as is applicable to the rated exposure, if this claim ranks pari passu or junior to the rated exposure in all respects.

Exposure amounts after risk mitigation subject to the standardized approach

Table DF 6 - CREDIT RISK MITIGATION: DISCLOSURES FOR STANDARDISED APPROACHES

Qualitative Disclosures

Credit Risk Mitigation is a proactive management tool designed to enhance revenue growth, while protecting an entity's earnings from loss. Banks employ various methods and techniques to reduce the impact of the credit risks they are exposed to in their daily operations. Some of the credit risk mitigation techniques are permitted to be used by the supervisor for reducing the capital charge after adjustment for value, currency mismatch and maturity mismatch. Various Credit Risk Mitigants (CRM) recognized under the New Capital Adequacy Framework (Basel II) are as follows:

------ Collateralised transactions

------ On-balance-sheet-netting

------ Guarantees

Eligible financial collateral:

All collaterals are not recognised as credit risk mitigants under the Standardised Approach. The following are the financial collaterals recognized:

(i) Cash and Deposits including deposits in foreign currency.

(ii) Gold: benchmarked to 99.99% purity.

(iii) Securities issued by Central and State Governments

(iv) Kisan Vikas Patra and National Savings Certificates

(v) Life insurance policies

(vi) Debt securities -Rated subject to conditions.

(vii) Debt securities not rated issued by banks subject to conditions

(viii) Units of mutual funds subject to conditions

There are certain additional standards for availing capital relief for collateralized transactions, which have direct bearing on the management of collaterals, and these aspects are taken into account during Collateral Management.

On-balance-sheet-netting

On-balance sheet netting is confined to loans/advances (treated as exposure) and deposits (treated as collateral), where Bank has legally enforceable netting arrangements, involving specific lien with proof of documentation and which are managed on a net basis.

Guarantees Where guarantees are direct, explicit, irrevocable and unconditional, bank takes account of such credit protection in calculating capital requirements. The range of eligible guarantors / counter guarantors include:

(i) Sovereigns, sovereign entities (including BIS, IMF, European Central Bank and European Community as well as certain specified MDBs, ECGC and CGTSME), banks and primary dealers with a lower risk weight than the counterparty;

(ii) Other entities rated AA or better.

The Bank accepts all types of collaterals against exposures. However, for Basel-II norms, the eligible collaterals are considered and given appropriate treatment before they are set-off against exposures. The bank has a well laid-out Credit Risk Mitigation & Collateral management Policy and also guidelines for valuation of collaterals. The Bank also takes cognizance of eligible guarantees and substitution of rating of guarantor(s) in cases where these are better than that of the counter-party. Besides, for purposes of credit protection, Central Govt., State Govt., ECGC and CGFT coverages are also taken into account to apply appropriate risk weights.

 

Table DF 7- SECURITISATION: DISCLOSURE FOR STANDARDISED APPROACH

Qualitative Disclosures

There is no separate policy of the Bank on securitization of Standard Assets. Bank has not sold out any standard credit portfolio under securitization to any other entities.

Assignment of Standard Pool Assets- ` 172.73 crore

Table DF 8 - MARKET RISK IN TRADING BOOK

Qualitative disclosures

Market risk is defined as the risk of potential losses that the bank may incur due to adverse movements in market prices. The market risk positions subject to capital charge requirement are:

Interest Rate Risk pertaining to Interest Rate related instruments in trading book.

Price risk pertaining equities in trading book.

To manage the risk, the Bank has laid down various limits such as stop loss limits etc. Violations of pre-determined limits are reported to Risk Management Department where actions to address them are determined by the appropriate authorities.

Bank has put in place a proper system for calculating capital charge on Market Risk on Trading portfolio as per RBI guidelines, viz., Standardised Duration Approach. The capital charge thus calculated is converted into Risk Weighted assets. The aggregated Risk weighted Assets for Credit Risk and Market Risk are taken into consideration for arriving at the CRAR.

Table DF 9 - OPERATIONAL RISK

Qualitative disclosures

The Bank has formulated Policies on “Operational Risk Management’ and the “Business Continuity Plan & Disaster Recovery Management”. These policies are being reviewed by the Board of the Bank on annual basis. Bank is in process of collecting “Loss Data’.

As per the policy on Operational Risk, the Operational Risk Management Committee (ORMC) has been set up which is head by the Executive Director. Regular meetings of the ORMC are convened at least on quarterly basis. Inspection Deptt of the bank undertakes onsite “Risk Based Internal Audit” (RBIA) of the branches. Credit Proposals / Limits beyond ` 3 Crores are subjected to Regular Credit Audit also.

Inspection, Reconciliation and Vigilance Departments are reporting matters relating to Housekeeping, Reconciliation and Frauds etc. periodically to ACB. Regulatory reporting with regard to Operational Risk and Business Continuity Plan is made timely & regularly. Bank is presently following ‘Basic Indicator Approach” for calculating Capital Charge on Operational Risk. However, the bank is preparing to move to advance approaches of calculating capital charge for Operational Risk.

Table DF 10 -INTEREST RATE RISK IN THE BANKING BOOK (IRRBB)

Qualitative Disclosures

The interest rate risk is measured and monitored through by conducting various stress tests. The immediate impact of the changes in the interest rates is analysed under this approach. A parallel shift in yield curve from 25 bps to 100 bps is assumed for fixed income securities to arrive at the impact.