Dhanlaxmi Bank Ltd

Report of the Board of Directors

Your Directors have pleasure in presenting the Bank's 84th Annual Report along with theAudited Balance Sheet and Profit and Loss account for the year ended 31.03.2011,

Performance Highlights

The salient features of the Bank's performance for the year 2010-11 are:

• 5 branches and 179 ATMs were opened taking the customer outlets to 734 as on31st March 2011.

• Total deposits rose from Rs 7,098.48 crore to Rs 12,529.63 crore, an increase ofRs 5,431.15 crore at a growth rate of 76.51 %.

• CASA balances increased from Rs 1,551.54 crore to Rs 2,869.21 crore, an increaseof Rs 1,317.67 crore at a growth rate of 84.93 %,

• Total advances increased from Rs 5,056.49 crore to Rs 9,121.62 crore, anincrease of Rs 4,065.13 crore at a growth rate of 80.39 %,

• Total business rose from Rs 12,154.97 crore to Rs 21,651.25 crore at a growthrate of 78.13%. This is much higher vis-a-vis the business growth of the banking industryat 18.33 %.

• Credit Deposit Ratio increased from 71.23 % as on 31.03.2010 to 72.80 % as on31.03.11.

• Priority Sector Advances as a percentage to Net Bank Credit was 50.90 % as atthe end of March 2011 as against the RBI benchmark of 40 %.

• Agricultural outstandings as a percentage to Net Bank Credit was 18.30 % as atthe end of March 2011 as against the RBI prescription of 18 %.

• Weaker Section Advances as a percentage to Net Bank Credit was 16.15 % as at theend of March 2011 as against the RBI norm of 10 %.

• Gross NPA ratio declined from 1.54 % to 0.74 % and Net NPA percentage came downfrom 0.84 % to 0.30 %.

• Provision Coverage Ratio increased from 47.95 % to 60.50 %.

Dividend

The Board has recommended a dividend of 5 % to the shareholders subject to the approvalof the Reserve Bank of India.

Capital and Reserves

The Bank's Capital and Reserves increased from Rs 440.08 crore as on 31.03.2010 to Rs844.64 crore as on 31.03.2011. The Capital Adequacy Ratio as per Basel I was 10.81 % as on31.03.2011 as against 12.47% as on 31.03.10. Under Basel II, it was 11.80 % as on 31.03.11as against 12.99 % as on 31.03.10. The benchmark prescribed by RBI is 9 %.

Strengthening the Capital Base

The Bank has successfully raised Rs 380.73 crore through a Qualified InstitutionalPlacement (QIP) in July 2010 by placing 2,10,00,000 Equity Shares of face value Rs. 10(Equity Shares) at Rs 181.30 per Equity Share, including a premium of Rs 171.30. Themarket capitalisation of the Bank as at 31.03.11 stood at Rs 965.01 crore.

Branch Expansion

During the year, 5 new branches were opened at Vasai, Andheri & Prabhadevi inMumbai, Jodhpur in Rajasthan and Bareilly in UP, taking the number of branches from 270 ason 31.03.10 to 275 as on 31.03.11. The number of ATMs increased from 280 to 459 during theyear. Consequently, the Bank's customer outlets rose from 550 as on 31.03.10 to 734 as on31.03.11. The top 5 States where the Bank has presence are (number of customer outletsgiven in brackets) Kerala (317), Tamilnadu (114), Maharashtra (78), Andhra Pradesh (54)and Karnataka (53).

Deposits

The total deposits of the Bank increased from Rs 7098.48 crore as on 31.03.2010 to Rs12,529.63 crore as on 31.03.2011, recording an increase of Rs 5,431.15 crore at a rate of76.51 %. This level of growth is the highest in the Bank's history. It compares veryfavourably with the growth of the banking industry at 15.8 %. The Bank laid considerableemphasis during the year on mobilization of low cost funds on account of which CASAbalances increased from Rs 1,551.54 crore as on 31.03.2010 to Rs 2,869.21 crore as on31.03.2011, showing an increase of Rs 1,317.67 crore at 84.93 %. The emphasis on CASAenabled the Bank to reduce the average cost of deposits from 6.80 % in 2009-10 to 6.51 %in 2010-11. CASA as a percentage to total deposits increased from 21.86 % as on 31.03.10to 22.90 % as on 31.03.11. The Bank launched a number of incentive based campaigns duringthe year for employees as well as customers for strengthening its resources base withspecial reference to CASA accounts. The number of deposit accounts increased from 11.41lacs as on 31.03.10 to 13.20 lacs as on 31.03.11.

Advances

Total advances of the Bank increased from Rs 5,056.49 crore as on 31.03.2010 to Rs9,121.62 crore as on 31.03.2011, an increase of Rs 4,065.13 crore at a growth rate of80.39 %. This level of credit growth is the highest ever for the Bank and compareenviously with that of the growth of the banking industry at 21.55 %. During the year, theCredit Deposit Ratio rose from 71.23 % to 72.80 %. The number of borrowal accountsincreased from 2.09 lacs as on 31.03.10 to 2.29 lacs as on 31.03.11.

Market Share

The total business of the Bank increased by 78.13 % during 2010 - 11 with depositsclocking 76.51 % and advances recording 80.39 %. This level of growth resulted in a sharpincrease in the Bank's market share on an all India basis. The market share of the Bank indeposits increased from 0.153 % to 0.225 % during the period 26.03.10 - 25.03.11 while themarket share in advances rose from 0.153 % to 0.223% during the same period. The followingtable portrays the Bank's business growth vis-a-vis the industry during the year.

Priority Sector Advances

The Bank continued its endeavours during the year in assisting the growth of theproductive sectors of the economy. Priority Sector Advances increased from Rs 1,409.28crore as on 31.03.2010 to Rs 2,585.86 crore as on 31.03.2011, recording a growth of 83.49%. The priority sector ratio as on 31.03.2011 was 50.90 %, well above the RBI benchmark of40 %. The Bank also surpassed the RBI norm of 18 % in respect of agricultural credit byrecording 18.30 % as on 31.03.2011. Agricultural outstandings increased from Rs 765.16crore as on 31.03.10 to Rs 922.27 crore as on 31.03.11, an increase of Rs 115.17 crore at20.53 %. Weaker Section advances as on 31.03.11 stood at Rs 814.29 crore as against Rs477.14 crore on 31.03.10. Weaker Section Advances outstandings as a % of Net Bank Creditwas 16.15 % as on 31.03.11 vis-a-vis the RBI benchmark of 10 %.

'No Frill' Accounts

The number of 'No Frill' SB accounts opened by the Bank as part of our financialinclusion endeavours increased from 1,00,010 as on 31.03.10 to 1,09,711 as on 31.03.11.The outstanding balances under this head as on 31.03.11 were Rs 26.05 crore which worksout to Rs 2,374 per account even though 'no frills' accounts can be opened and operatedwith zero balance.

Profitability

The Bank's net profit for the year ended March 31, 2011 stood at Rs 26.06 crore,against Rs 23.30 crore for the year ended March 31, 2010. The relatively subdued rise innet profit is attributable to expenditure incurred in creating additional capacitiesduring 2010-11 in the form of additional manpower, physical infrastructure and technologyupgradation. The expenditure on such additional capacity creation translated itself intoproductive gains with the Bank recording its highest ever growth in business of 78.13 %during 2010-11. The business per employee too rose sharply from Rs 3.70 crore as on31.03.10 to Rs 5.08 crore as on 31.03.2011.

Non-Performing Assets

Focussed measures were taken during the year to reduce the level of existingnon-performing assets, as well as preventing fresh accretion of NPAs. This becamenecessary in the context of rapid asset expansion during the year. The percentage of grossNPAs to gross advances declined from 1.54 % to 0.74 % during the year, while the net NPAratio fell encouragingly from 0.84 % to the lowest ever level of 0.30 % during the period.The total cash recoveries, including upgradation and recoveries in written-off accounts,during the year was to Rs 59.30 crore (Rs 44.86 crore in 2009-10) surpassing the annualtarget by a margin of Rs 19.30 crore. The Provision Coverage Ratio also increased sharplyfrom 47.95 % in 2009-10 to 60.50 % in 2010-11.

The Bank could achieve a record recovery during the year through a set of measures,viz., action under SARFAESI Act, litigation, settlement through negotiation etc. Thehealth of the borrowal accounts was continuously monitored with a view to constantlyimproving the asset quality and to facilitate faster recycling of funds.

Customer Service

The Bank attaches the highest importance to the quality of service rendered across itsbranches / offices. It has taken a series of measures during the year through deploymentof technology and otherwise for significantly enhancing service quality.

The Customer Service Committee of the Board, comprising of 6 Directors, monitors theimplementation of customer service measures periodically. Customer Service Committeescomprising of Bank personnel as well as our constituents have been formed at the apexlevel and at Branches for monitoring service quality and bringing about improvements inthis area on an ongoing basis. The Bank is a member of the Banking Codes and StandardsBoard of India (BCSBI) and is actively implementing the Code of Commitment to Customers asalso the Code for Micro and Small Enterprises formulated by the BCSBI. In addition tointroduction of a number of products and services, two key developments in this arearelate to the upgradation of the software to the latest version for widening the range ofservices to the customers and establishment of a 24x7 Phone Banking Call Centre atBangalore as an outsourced model to cater to customer needs across the country.

The following important products and services were introduced during the year for thebenefit of the customers:

• Salary Multiplier account

• Special Savings account for educational institutions & Co-operativeSocieties

• Premium Current account

• USDhan2India

• Instapay

• Mobile Banking

• Bill payment module on internet banking

• Internet banking kiosks

• Gift Cards

• Credit Cards

• Money Transfer Service Scheme (MTSS)

In addition to the above, there were value adds in a number of existing products inline with the Bank's customer centric outlook.

The Bank took several measures during the year to technologically upgrade its grievanceredressal mechanism with a view to accelerating the speed and enhancing the quality ofresponse to customer complaints especially in an era of rapid growth.

The position of customer complaints during 2010-11 is as under:

No of complaints received: 246 No of complaints resolved: 247 No of complaints pending:11 (as on 31.03.11)

The above pending complaints were closed subsequently.

Investor Education and Protection Fund

During the year, the Bank had transferred the unclaimed, unpaid dividend for the year2002-03, an amount of Rs 10,91,890/- to the Investor Education and Protection Fund (IEPF)constituted under Section 205C of the Companies Act, 1956.

Listing on Stock Exchanges

The Equity shares of the Bank are listed on the Bombay Stock Exchange Ltd., NationalStock Exchange Ltd., and Cochin Stock Exchange Ltd. The Bank confirms that it has paid thelisting fees to all the Stock Exchanges for the year 2010-11.

Conservation of energy

All efforts are being made to reduce energy consumption to the maximum extent possible.

Technology Absorption

Being a Banking Company, the required technology is deployed keeping in view the natureof activities.

Foreign Exchange Earnings and Outgo

Being an authorised dealer in Foreign Exchange, all possible measures are taken by theBank to increase foreign exchange earnings.

The Companies (Disclosure of Particulars in respect of Board of Directors) Rules,1968

"The statement containing particulars of employees as required under Section217(2A) of the Companies Act, 1956 and the rules there under, is given in an Annexureappended hereto and forms part of this report. In terms of Section 219(1) (iv) of the Act,the Report and Accounts are being sent to the shareholders excluding the aforesaidAnnexure. Any shareholder interested in obtaining a copy of the Annexure may write to theCompany Secretary at the Registered Office of the Bank."

Directors' responsibility statement

The Directors confirm that in the preparation of the annual accounts for the year ended31 March 2011:

• the applicable accounting standards have been followed along with properexplanation relating to material departures, if any;

• the accounting policies, framed in accordance with the guidelines of the ReserveBank of India, were applied consistently;

• reasonable and prudent judgment and estimates were made wherever required so asto present a true and fair view of the state of affairs of the Bank as at the end of thefinancial year and the profit of the Bank for the year ended 31st March 2011;

• proper and sufficient care was taken for the maintenance of adequate accountingrecords in accordance with the provisions of applicable laws governing Banks in India;

• the accounts have been prepared on a 'going concern' basis: and

• that proper systems are in place to ensure compliance of all laws applicable tothe Bank.

Changes in the Board

There was no change in the composition of the Board during the year. All theNon-Executive Directors of the Bank have certified that apart from receiving theDirector's remuneration / sitting fees, they have not entered into any material pecuniaryrelationship or transactions with the Bank, its promoters, its Directors, its seniormanagement, which may affect the independence of their directorship.

All Directors except Managing Director and CEO are Non-Executive Independent Directors.

Acknowledgements

The Board happily places on record its gratitude to:

• The Government of India, the Reserve Bank of India, State Governments,Securities and Exchange Board of India and other regulatory bodies for their continuedassistance and guidance.

• The customers, shareholders, other stakeholders and well wishers for theirvalued patronage.

• The officers and staff for their active involvement and contribution to theBank's growth and development.