Axis Bank Ltd

MACRO-ECONOMIC ENVIRONMENT:

Fiscal 2009-10 began with India's GDP growth slowing to 6.7 percent in 2008-09, downfrom an average of 9.5 percent in the previous three years. After a brief but sharpslowdown in the aftermath of the financial crisis that began in the developed economies,India was still able to recover to become the second fastest growing economy in the world.The combination of a stable and sound financial system, effective regulatory oversight anda prompt and appropriate policy stimulus response helped the economy withstand much of theadverse effects of the global slowdown. Secondly, strong demand for consumer goods, bothdurables and non-durables, has been a reason for the growth remaining relatively robust.The strong domestic demand is now also increasingly being augmented by improving externaltrade. The recovery could have been even swifter and broader had agricultural output notbeen adversely affected by deficit rainfall. The growth of the manufacturing sector morethan doubled, from 3.2% in 2008-09 to 8.9% in 2009-10. There has also been a recovery inthe growth of gross fixed capital formation, which had significantly declined in 2008-09.However, inflationary conditions in 2009-10, especially in the second half of the year,with double-digit food inflation remain an area of concern. The overall GDP growth for2009-10 is estimated at 7.2%.

The rebound notwithstanding, the slowdown in economic activity resulted in a lowergrowth of corporate capital expenditure and demand for bank credit, which fell from over26 percent in early August 2008 to a low of under 10 percent in November 2009. Anotherimpact of the slowdown was a deterioration in the quality of credit and the banking sectorwitnessed rising levels of delinquencies and restructured assets. There was thus a greaterdegree of prudence and caution in lending to sectors that appeared relatively vulnerable.On the other hand, slower demand for credit and the consequent ample liquidity led to thedeployment of funds for short durations in non-banking investment opportunities such asmutual funds and commercial paper. Despite these and other challenges, Indian banks havebeen able to maintain their profitability and given the adequate levels of capitalizationof a majority of the banks and comprehensive regulatory oversight, the risk of a bankingsector led volatility and instability appears remote.

Global credit and liquidity conditions have improved significantly in the second halfof 2009 and although it is unlikely that there will be policy tightening in developedcountries in the first half of 2010. We do expect a gradual contraction of policy inducedliquidity in the future as concerns relating to price pressures and asset bubbles replaceconcerns about growth. In India, the improvement in the prospects of a GDP growth of-8.5%in 2010-11, is likely to enhance savings and provide domestic liquidity at reasonable costto fund capex plans. External flows could also be an important source of liquidity in thesystem. It is expected, therefore, that fiscal 2011 will witness a return to more normalpatterns of funds deployment. Although the borrowing programmes of the Union and Stategovernments are likely to remain high in fiscal 2011, it is expected that domesticliquidity, although tighter than in fiscal 2010, is unlikely to be a constraint forcorporate borrowing.

OVERVIEW OF FINANCIAL AND BUSINESS PERFORMANCE:

The Bank continued to show robust growth in both business and financial performanceindicators during the year 2009-10 in the backdrop of the economic slowdown, by leveragingits basic strengths:the infrastructure created over the years, a well laid-out retailfranchise, a large number of corporate relationships and the pre-eminence enjoyed by it ina diverse set of businesses such as infrastructure and capital markets. The strongfinancial performance reported by the Bank is an assertion of the Bank's strategic focusand adherence to the basics of banking.

During the year, the Bank registered a strong growth in business volumes as well asprofits, with the net profit increasing by 38.51% to Rs. 2,514.53 crores from Rs. 1,815.36crores last year. During the year, total income of the Bank increased by 13.48% to Rs.15,583.30 crores, while operating revenue increased by 35.96% to Rs. 8,950.27 crores. Ason 31st March 2010, total assets of the Bank stood at Rs. 180,647.85 crores, increasing byRs.32,925.80 crores, or 22.29% over last year. While total deposits of the Bank increasedby 20.38% to Rs. 141,300.22 crores on 31st March 2010, total advances rose by 27.94% toRs. 104,343.12 crores. The Bank continued to enhance shareholder value with the dilutedearnings per share forth. year increasing to R9P: 64.31 from Rs. 50,27 last year. As on31st March 2010, the book value per share of the Bank increased to Rs. 395.99 from Rs.284.50 as on 31st March 2009.

CAPITAL MANAGEMENT:

The Bank strives to provide superior returns, while maintaining a solid capital base tosupport the risks associated with its diversified businesses. Its capital managementframework optimises the use of capital by ensuring its deployment to support businessgrowth in a manner which leads to a high return on equity.

The Bank's capital management approach is driven by the objective of maintaining astrong capital base, reflected through a strong Tier I capital adequacy ratio in order tosupport the execution of its growth plans and business strategies, while meeting theregulatory capital requirements at all times. The Bank seeks to optimise its cost ofcapital by proactively managing the mix of retained earnings, debt and selective capitalissues. During the year, the Bank continued to attract investor interest from domestic andforeign institutional investors, with perceptible increase in trading volumes and price.To strengthen its core capital, the Bank raised equity capital of Rs. 3,816.14 croresduring the year through simultaneous offerings in the form of a follow-on GlobalDepository Receipt (GDR) issue, a Qualified Institutional Placement (QIP) and apreferential allotment of equity shares to the promoters of the Bank. The Bank has alsoraised capital of Rs. 2,000 crores by way of subordinated bonds (unsecured redeemablenon-convertible debentures) qualifying as Tier II capital.

The Bank has implemented the Revised Framework of the International Convergence ofCapital Measurement and Capital Standards (or Basel II) in 2008. In terms of RBIguidelines for implementation of Basel II, capital charge for credit and market risk forthe financial year ended 31st March 2010 is required to be maintained at the higher of theprudential floor prescribed by Basel II and 80% of the level under Basel I. In terms ofregulatory guidelines on Basel II, the Bank has computed capital charge for operationalrisk under the Basic Indicator Approach and the capital charge for credit risk has beenestimated under the Standardized Approach. The Bank is well capitalized with the capitaladequacy ratio as at the end of the year at 15.80%, substantially above the benchmarkrequirement of 9% stipulated by Reserve Bank of India. Of this Tier I Capital AdequacyRatio was 11.18%, as against 9.26% a year earlier, while the Tier II Capital AdequacyRatio was 4.62%. The following table sets forth the risk-based capital, risk-weightedassets and capital adequacy ratios computed as on 31st March 2009 and 2010 in accordancewith the applicable RBI guidelines under Basel I and Basel II.

BUSINESS OVERVIEW:

An overview of various business segments along with the performance during 2009-10 andtheir future strategies is presented below:

RETAIL BANKING:

The Bank aims to increase its market-share in India's expanding financial servicesindustry through continued emphasis on building a strong retail franchise. The Bankremains committed to developing long-term strong relationships with its customers andensuring that they have access to high-quality service as well as the full suite offinancial solutions to help achieve their financial objectives. Growth strategies havefocused on building profitable relationships across various customer segments. In order toachieve the objective of becoming more customer-centric, rather than product-centric, theBank has restructured Retail Banking into two groups namely Mass and Mass Affluent, andAffluent segments. The Mass and Mass Affluent Segment owns, as the name indicates,mass-market customers, while the Affluent Segment owns clientele defined as affluent,comprising customers in the wealth and private banking space.

During the year, the Bank has succeeded in continuing the momentum of growth in retailliabilities with a special focus on the quality of acquisition. The Bank has acquired2,013,531 Savings Bank accounts during the current year compared to 2,316,887 accountslast year. However, the new Savings Bank acquisition has translated into an incrementalvalue of Rs.8,060 crores this year against Rs. 7,873 crores last year, evidencing that aparticular attention to the quality of the acquisition is critical. On 31st March 2010,Savings Bank deposits grew to Rs. 33,861.80 crores, an increase of Rs. 8,039.68 crores, or31.13% over last year. The Bank is committed to addressing the needs of the Mass Affluentsegment and also to take the Priority Banking offering to a larger set of customers andlocations. Towards that end, the Bank has set up 11 new Priority Lounges during the year,in 3 new centres in the country. in order to broad-base its deposit base, the Bank hassteadily increased its retail term deposits through the year. As on 31st March 2010,retail term deposits of the Bank were Rs. 21,276.81 crores, an increase of Rs. 4,598.12crores, or 27.57% over last year. The share of aggregate retail deposits, comprisingsavings bank and retail term deposits in total deposits increased to 39.02% on 31st March2010 from 36.21% last year.

Cross-sell continues to be an important strategic goal for the Bank. The retail base of12.5 million customers is being leveraged more effectively to increase cross-sellpenetration.

With improvement in the broader economy, demand for retail loans moved in a positivetrajectory, particularly from July 2009 on wards. At the end of the financial year, theretail assets portfolio was Rs. 20,822.90 crores, increasing by Rs. 4,771.12 crores, or29.72% over last year. The growth areas identified by the Bank were home and auto loans.

The Cards business of the Bank has grown steadily as an important and valuable adjunctto the deposit and loan businesses. It comprises three key products-debit cards, prepaidcards and credit cards. In addition, the Bank also has a large merchant-acquiring businessfacilitated by EDC terminals installed at merchant establishments throughout the country.The Bank is the fourth largest debit card issuer in the industry with a base of 147 lacdebit cards issued till 31st March 2010. With 14 variants designed for different customersegments, the debit card base has grown 23% year-on- year. The Bank was also the first tolaunch a Platinum Chip Debit Card in the country, which is presently offered exclusivelyto the Priority Banking customer segment. In the prepaid cards market, the Bank hasattained a leadership position offering a bouquet of products suited to a variety ofneeds:Rewards Cards-for disbursement of incentives and commissions, Payroll Cards-forlow-value salary payments, Gift Cards-a substitute for cash, gift vouchers and physicalgifts, Meal Cards-for disbursement of meal allowances, Annuity Cards -for annuity paymentsto customers of LIC of India and Remittance Cards-for disbursement of inward remittances.As on 31st March 2010, the Bank had issued more than 2 million pre-paid cards. The Bankalso issues travel currency cards-foreign currency denominated prepaid cards, positionedas a convenient alternative to travellers' cheques. It is issued in nine currencies. TheBank has also issued more than 550,000 credit cards since its launch in 2006 and todayoffers an entire range of retail and commercial cards. Since its launch of the innovativeSecured Credit Card, the Bank has become a market leader in the product with a card baseof 102,000, helping the Bank grow its credit card portfolio in difficult marketconditions. During the year, the Bank also launched the Signature Credit Card that offersbenefits like priority pass, concierge facilities, complimentary travel insurance andpremium brand offerings. A slew of measures have been taken to improve portfolio qualityand these include greater focus on higher income customer segments, portfoliorationalisation, tighter credit monitoring and a robust collection infrastructure. TheBank launched its merchant-acquiring business in December 2003, and in over six years, hasemerged as one of the largest acquirers in the country with an installed base of 1.60 lacpoint- of-sale terminals.

The Bank also focuses on distribution of third party products, with a special thrust onmutual funds and Bancassurance. While the general insurance industry continued to beaffected by de-tariffing in certain insurance products, the distribution of these productsgenerated a premium of over Rs. 130 crores in the financial year registering a growth of28%, with an emphasis on need-based product offerings across the Bank's branches.Similarly, the Bank has been engaged in a successful referral partnership for thedistribution of life insurance products, with a collection of-Rs. 390 crores of annualpremium in 2009-10.

The Bank is a leading distributor of mutual funds in the country, adding 90,000 newcustomers in 2009-10. During the year, the Bank set a milestone with a collection of Rs.714 crores in the NFO of Axis Equity launched by the Axis Mutual Fund. Of the 92,000applications collected in the NFO of Axis Equity, 77% was from retail investors investingless than Rs. 50,000 each, which reflects the Bank's ability to generate interest amongsmall retail investors in investment opportunities.

The Bank offers Demat services from more than 750 branches across the country andpresently has more than 2 lac accounts. Axis Bank offers 'Online Trading Services' inalliance with Geojit BNP Paribas, facilitating seamless stock-trading through electroniclinkages of trading, bank and demat accounts with high-security online features. Duringthe year,-47,000 customers have subscribed to the Bank's online trading account, the totaltraded volume in which was more than Rs. 8,000 crores.

Axis Bank Wealth, launched in 2008-09, is a comprehensive value proposition aimed attaking care of the financial needs of clients, which include their investment and businessneeds, besides normal banking facilities. The Bank is able to provide expertise to assistcustomers to protect and grow their wealth from a long-term perspective. Presently, theproposition is being offered at select centres across India and the total assets undermanagement of over 1,800 clients of Axis Bank Wealth are over Rs. 2,200 crores.

In September 2009, Axis Bank launched the private banking business in the domesticmarket, christened 'Privee' to cater to highly affluent individuals and families offeringthem unique investment opportunities. Axis Bank Privee offers sophisticated investment andadvisory services to clients who entrust the Bank with Assets under Management (AUM) ofmore than Rs. 5 crores. It has been rolled out across six cities in India in 2009-10 andfollows a team-based approach for managing client relationships.

CORPORATE BANKING:

The Bank's Corporate Banking franchise aims to provide a wide array of products acrossseveral customer segments, including credit, trade finance, structured finance andsyndication services for debt and equity. Since each corporate engagement also offersopportunities on the retail side of the business, products anchored in the Retail SBUsalso form a part of the corporate marketing effort. New customer acquisition andrelationship- deepening constitute the two-pronged strategy for growth. In order toleverage growth opportunities offered by India's infrastructure sector, a separateinfrastructure business group has been established within the corporate banking group.

As per Planning Commission estimates, infrastructure spending in India which was at alevel of 5% of the GDP in 2006-07 rose to 5.75% in 2007-08 and the target level for the11th Five Year Plan (2007-12) is to achieve infrastructure investment of 9.00% of GDP. Thedampening of equity markets following the global financial crisis acted as deceleratorsform obilizing resources for the infrastructure sectors in FY 2009, However capital flowsto the sector have steadily improved thereafter. The economic downturn has reaffirmed theneed for higher infrastructure spending for sustained growth of the economy and thequantum of spending of approximately USD 500 billion envisaged during the 11th Five YearPlan is expected to double to USD 1 trillion in the next five year plan (2012-17).

The Bank has continued to retain its leadership position in the infrastructure debtmarket and syndicated an aggregate amount of Rs. 27,000 crores byway of Rupee and Foreigncurrency loans during 2009-10. Euromoney Project Finance (Deals of the Year 2009) hasconferred several awards in the area of infrastructure financing to the Bank. Theseinclude categories such as 'Road Deal of the Year', 'Indian Rail Deal of the Year' and'Indian PPP Deal of the Year'.

CORPORATE CREDIT:

During the year, corporate credit, including lending to large and mid- corporates andto infrastructure, grew to Rs. 52,503.53 crores, increasing by Rs. 11,292.63 crores, or27.40% over last year. This includes the lending out of the Bank's overseas branches atRs. 12,285.40 crores (equivalent to USD 2.74 billion).

The Bank's approach to credit in the large corporate and infrastructure segments issectoral, allowing for an efficacious mining of opportunities in each sector as well asimproved evaluation of sector-specific risks. The credit policy of the Bank has put inplace a matrix of industry exposure limits with a view to de-risking of the portfoliothrough diversification. In keeping with this strategy, the highest exposure to any sectorwas 17.50% of the Bank's total lending (10.65% previous year). The practice of internaland external rating continues to be undertaken on an ongoing basis. The entire corporatecredit portfolio is internally rated with 74.42% of the ratings accorded being A andabove. 74.13% of the portfolio has been externally rated till the end of the year. Themid-corporate group is an important business segment of the Bank, with a credit book ofRs.11,466.55 crores on 31st March 2010, increasing by Rs. 2,485.87 crores, or 27.68% overlast year. This includes advances at overseas branches of Rs. 931.11 crores (equivalent toUSD 207 million), comprising mainly credit extended to Indian corporates.

The mid-corporate segment has maintained its asset-quality and controlled delinquenciesthrough constant and close monitoring. Besides widening the customer base of themid-corporate segment and adopting a careful assessment of acceptable risk-returntradeoffs, the focus of the segment has been to deepen existing client relationships byactively cross-selling a wide range of products and services, based on detailedclient-wise account plans, thereby increasing the Bank's share in the aggregate businesslevel of the customer.

TREASURY:

The Bank has an integrated Treasury, covering both domestic and global markets, whichmanages the Bank's funds across geographies. During the year, the Bank posted a vigorousgrowth in both customer-based and proprietary Treasury business. In foreign exchangeBusiness, the Bank has increased its presence in the inter-bank markets and despite thecompetitive environment, grew the customer morex (merchant) business during 2009-10 by 36%year-on-year. The Bank offers products in the bullion business and in the Currency Futuressegment (it became a member on the NSE and the MCX in the Currency Futures segment).

The Bank has played a key role in the sovereign debt markets during the year and bookedtrading gains from the government securities folio of Rs.302.63 crores against Rs. 217.35crores last year. During the year, the Bank became a member of the NSE on the InterestFace Futures segment and used the Interest Rate Swap market for proprietary trading aswell as for hedging its balance sheet risks.

The Bank enlarged its business with financial institutions during the year raisingforeign currency resources to support customer trade Business across the borders andincreasing trade finance activity. The Bank also participated actively inrisk-participation business as with several reputed international banks. The Bank hasastringent process of setting up interbank exposure limits and a strong controling processto react quickly to changing markets and economic conditions.

Debt Capital Market and Equity Trading:

The Bank continued to maintain its leadership position in the domestic debt market andhas syndicated an aggregate amount of around; 59.077 crores through the private placementof bonds and debentures. Prime database has ranked the Bank as the number arranger forprivate placement of bonds and debentures till December 2009. Bloomberg has also rankedthe Bank as number 1 in India. Domestic Bond League Table for the calendar year 2009 andfor the quarter ended 31st March 2010. Asia Money has rated the Bank as Less Domestic DebtHouse in India for the year 2009.

The Bank maintains an investment of proprietary trading portfolio incorporate bonds andequities. As on 31st March 2010,the Bank's investment incorporate bonds, equities andothers was Rs. 21,778.94 crores against Rs.18,607.48 crores last year.

BUSINESS BANKING:

Business Banking initiatives have consistently focused on procuring low- cost funds byoffering a range of current account products and cash management solutions across allbusiness segments covering corporates, institutions, central and state governmentministries and undertakings, as well as small and retail business customers. Thecross-selling of transactional banking products have also succeeded in enlarging thecustomer base and growing current account balances. Thus, sourcing of current accounts isone of the key enablers for the growth of the balance sheet. As on 31st March 2010,current account balances for the Bank stood at Rs. 32,167.74 crores, against Rs. 24,821.61crores on 31st March 2009, rising 29.60% over the year. On a daily average basis, currentaccount balances grew from Rs. 14,658.35 crores on 31st March 2009 to Rs. 18,321.75 croreson 31st March 2010, thus increasing 24.99% over the year.

With the intent of providing business clients greater flexibility in meeting theirtransactional banking requirements, the Bank has made significant improvements in itsalternate banking channel using mobile and internet banking. Cash Management Services(CMS) also leveraged the network and reach to provide a wide range of customizedcollection and payments solutions. Strong correspondent bank alliances similarly offercorporate clients a very wide geographical coverage. The network and technology basedsolutions have helped the Bank handle bulk-payment mandates for dividends, interestpayments, redemptions and refunds. The Bank has designed several facilities for itscorporate clientele using its technology platform. One such facility is the Power Accesssolution which provides seamless integration between Bank's core banking system, thepayment modules and the corporate client's ERP Systems. The Bank has established a strongpresence with companies raising equity funds, by offering its services as bankers to theIssue.

The Bank acts as an agency bank for government business offering banking services tovarious Central Government ministries/departments and other State Governments/UnionTerritories. Currently, the Bank accepts income/other direct taxes through 214 authorisedbranches at 137 locations and central excise and service taxes though 56 authorisedbranches at 13 locations. The Bank also handles disbursement of civil pension through 218authorised branches and defence pension through 151 authorised branches. Additionally, theBank provides collection and payment services to four Central Governmentministries/departments and eight State Governments/Union Territories. During the year, theBank received approval from the Government of Sikkim for handling collection of salestaxin the state.

The Bank also strengthened its association with the e-Governance initiatives of variousstate governments in India aimed at providing better delivery of citizen/ businessservices. During the year, the Bank received approvals from governments of Chhattisgarhand Orissa towards appointment as the nodal bank for their 'e-Procurement Projects'.

The Bank is associated with Government of Andhra Pradesh for implementing ElectronicBenefit Transfer (EBT) Projects, a new line of business for handling disbursementsrelating to various Govt. Benefit Schemes through Smart Cards under an IT EnabledFinancial Inclusion Model in four districts. During the year, the Bank extended itsassociation to three more state governments for implementing similar EBT Projects invarious districts (two in Chhattisgarh and one each in Haryana and Karnataka). As a resultof these business initiatives, the total government business throughput during the yearwas Rs. 71,039 crores against Rs. 60,869 crores in the previous year.

CAPITAL MARKETS:

During the year, the Capital Markets SBU was restructured with the debt capital marketbusiness (hitherto a part of the capital markets) carved into a separate vertical. As aresult, the Bank's Capital Markets SBU comprises equity capital markets (ECM) business,mergers and acquisitions and private equity syndication. There is thus a separate andclear focus on the equity capital markets involving the various facets of its businesses.The turmoil in the global financial markets in the early part of the year adverselyaffected deal flow as equity investors stayed away from the markets and companies putexpansion plans on hold. With improvement in the global capital markets, there was animprovement in the ECM activity in the second half of the financial year.

The Bank is a SEBI-registered Category I Merchant Banker and has been fairly active inadvising Indian companies to raise equity through IPOs, FPOs, QIPs and Rights issues. TheBank has built strong relationships with Indian companies, becoming an effective bridgebetween such corporates and domestic and international institutional investors. During2009-10, the Bank advised over 10 companies in raising Rs. 5,288 crores from internationaland domestic equity investors. The M&A advisory focuses on domestic and cross-borderbuy and sell mandates for Indian clients. The Private Equity business works with theBank's mid-cap and SME clients and advises them in raising capital from private equityinvestors.

The improved economic situation has had a beneficial effect on the financial markets.The Capital Markets SBU has taken various initiatives to improve origination efforts bypartnering closely with the Bank's relationship teams to mine existing corporaterelationships.

LENDING TO MICRO, SMALL AND MEDIUM ENTERPRISES, AGRICULTURE AND MICRO FINANCE:

The Micro, Small and Medium Enterprises (MSME) segment is a key target area of businessfor the Bank. MSMEs play a vital role in the development of the economy and generation ofemployment through the diversity of businesses that such enterprises are engaged in, theentrepreneurial talent that has built the businesses and their geographical dispersion.Banks are able to participate in both fund and non-fund based credit limits,diversification of risk and cross-selling. Importantly, banks can also fulfill theirpriority sector obligations by lending to MSME. The Bank has set up 25 SME Centres tofocus on lending to this sector.

The Bank continued to focus on agriculture lending and build on its cluster-basedapproach. Nine Agriculture Business Centres manage retail agriculture, corporateagriculture and commodity business (i.e. financing against warehouse receipts). The focusof different agri-business segments, through different teams and a wide range of products,has helped in business growth in each of these segments.

The retail agricultural model consists of 56 agriculture clusters, which are placed inareas best suited for retail agriculture business. The Bank undertakes retail agriculturelending through 246 branches, which are the contact points for the clientele in thissegment. The Bank has client- specific relationship manager/credit analyst teams withsectoral expertise, to drive the corporate agriculture business.

Under the warehouse receipt financing scheme, agricultural commodities stored inwarehouses are financed all over the country through the network of branches working underthe overall supervision of our eleven Commodity Business Centres. Bank finance has beenextended to farmers, joint liability groups, traders, food processors, aggregators etc.During the year, agriculture advances grew by 40.36% to Rs. 11,534.04 crones, constituting12.54% of the Bank's domestic advances. As on the last Friday of March 2010, the directagriculture lending was 10.14% of the adjusted net bank credit of the Bank.

The poor and vulnerable sections of society face a dearth in banking and financialservices in India. Over the past decade, micro finance has played an important role infilling this gap and Micro Finance Institutions (MFI) are uniquely positioned to providefinancial services to a clientele poorer and more vulnerable than traditional bankclientele. The Bank has supported MFIs over several years and as on 31st March 2010, theBank has financed 87 institutions and has extended assistance through them to 20 lac suchpoor and marginalized people. The Bank has also extended credit aggregating Rs.0.33 croresunder the Differential Interest Rate scheme to very poor people in four states. The Bankcontinued its strategy of extending loans under various government sponsored schemes.

Financial Inclusion:

Despite considerable economic progress and pursuit of explicit developmental goals overthe years, India has amongst the world's least- penetrated banking systems. This unbankedpopulation in both rural and urban areas, which presently utilizes informal channels(including a significant dependence on non-institutional sources for credit) represents avast, untapped market for banks. Tapping this fragmented market, however, is a challengewhich our existing brick-and-mortar banking model alone cannot overcome. While the Bankpresently offers a no-frills account for the unbanked and participates in ElectronicBenefit Transfer projects of several state governments, it seeks to comprehensivelyimplement the Financial Inclusion plan through both the brick-and-mortar model as well asa branchless Information and Communication Technology or ICT-driven model, using businessfacilitators and business correspondents to provide the last-mile connect with customersin unbanked areas.

INTERNATIONAL BANKING:

The International Banking strategy of the Bank revolves around leveraging its relationswith corporates in India while providing banking solutions at overseas centres. Theproduct offerings at overseas centres cover a wide spectrum of businesses involving retailbanking, wealth management, corporate banking and treasury solutions.

The Bank's international presence spans the major financial hubs in Asia with branchesat Singapore, Hong Kong and DIFC, Dubai, and representative offices at Shanghai and Dubai,besides strategic alliances with banks and exchange houses in the Gulf Co-operationCouncil (GCC) countries. While branches at Singapore, Hong Kong and DIFC-Dubai enable theBank to partner with Indian corporates doing business globally, the Dubai RepresentativeOffice and the arrangement with GCC based banks and exchange houses provide access to theNRI population. The Shanghai Representative Office apart from providing presence in thekey market of China fulfills the regulatory requirement of establishing a branch in courseof time to enhance the ability of the Bank to tap business opportunities emanating fromthat region.

The Bank consciously focused op consolidation of its overseas balance sheet withoptimum use of resources at the cost of growth. As of 31st March 2010, the total assetssize at the three foreign branches was USD 3.10 billion.

RISK MANAGEMENT:

Banking is the business of managing risks and the role of risk management is to balancethe trade-off between risk and return. It entails the identification, measurement andmanagement of risks across the various businesses and effective utilization of capital.Risk is managed through a framework of policies and principles approved by the Board ofDirectors and supported by an independent risk function that ensures the Bank operateswithin its risk appetite. The risk management function attempts to anticipatevulnerabilities at the transaction level or at the portfolio level, as appropriate,through quantitative or qualitative examination of the embedded risks. The Bank continuesto focus on refining and improving its risk measurement systems.

The main risks faced by the Bank are credit risk, market risk, operational risk andliquidity risk. The Bank's risk management processes are guided by well-defined policiesappropriate for the various risk categories, independent risk oversight and periodicalmonitoring through the sub- committees of the Board. The Board sets the overall riskappetite and philosophy for the Bank. The Risk Management Committee, which is a sub-committee of the Board, reviews various aspects of risk arising from the businessesundertaken by the Bank. The Committee of Directors and the Audit Committee of the Boardsupervises certain functions and operations of the Bank, which ultimately enhances therisk and control governance framework within the Bank. Various senior management creditand investment committees: Credit Risk Management Committee (CRMC), Asset-LiabilityCommittee (ALCO) and Operational Risk Management Committee (ORMC) operate within the broadpolicy framework of the Bank.

Credit Risk:

Credit risk arises from all transactions that give rise to actual, contingent orpotential claims against any counterparty, borrower or obligor. The emphasis is placed,both on evaluation and containment of risk at the individual exposures and analysis of theportfolio behaviour. The Bank has a structured and standardized credit approval process,which includes a well-established procedure of comprehensive credit appraisal. Everyextension of credit or material change to a credit facility to any counterparty requirescredit approval at the appropriate authority level. Internal risk rating remains thefoundation of the credit assessment process, which provides integrity, and objectivity tothe process. The internal rating along with the size of the exposure determines the levelof sanctioning authority required to extend or materially change the terms of credit andthe monitoring frequency applicable to the exposure in line with the policies approved bythe Board. Credit exposures may arise from direct lending, off-balance sheet products suchas bank guarantees, letters of credits and derivative transactions in the trading book,and from the holdings of debt securities in the trading or banking book. Both credit andmarket risk expertise are combined to manage risk arising out of traded credit productssuch as bonds, credit derivatives and market related off- balance sheet transactions.

The Bank continuously monitors portfolio concentrations by borrower, groups, industryand geography, where applicable. Portfolio level delinquency matrices are tracked atfrequent intervals. The rating-wise portfolio distribution gives an indication ofportfolio quality as well as the possible impact under stress conditions. The RiskManagement Committee of the Board periodically reviews the impact of the stress scenariosresulting in rating downgrades, or drop in asset values in case of secured exposures onthe portfolio. The portfolio level risk analytics provide insight into the capitalallocation required to absorb unexpected losses at a defined confidence level.

Market Risk:

Market risk is the risk to the Bank's earnings and capital due to changes in the marketlevel of interest rates, prices of securities, foreign exchange and equities, as well asthe volatilities of those changes. The Bank is exposed to market risk through its tradingactivities, which are carried out both for customers and on a proprietary basis. The Bankadopts a comprehensive approach to market risk management for its trading, investment andasset/liability portfolios. For market risk management, the Bank uses both non-statisticalmeasures like position, gaps and sensitivities (duration, PVBP, option greeks) andstatistical measures like Value at Risk (VaR), supplemented by Stress Tests and ScenarioAnalysis.

The Bank uses Historical Simulation and its variants for computing VaR for its tradingportfolio. VaR is calculated at a 99% confidence level for a one-day holding period. TheVaR models for different portfolios are back- tested at regular intervals and the resultsare used to maintain and improve the efficacy of the model. The VaR measure issupplemented by a series of stress tests and sensitivity analysis that estimates thelikely behaviour of a portfolio under extreme but plausible conditions and its impact onearnings and capital.

Liquidity Risk:

Liquidity Risk is defined as the current and prospective risk to earnings or capitalarising from a bank's inability to meet its current or future obligations on the due date.The Bank's ALM policy defines the gap limits for its structural liquidity position. Theliquidity profile of the Bank is analyzed on a static basis by tracking all cash inflowsand outflows in the maturity ladder based on the expected occurrence of cash flows. Theliquidity profile of the Bank is also estimated on a dynamic basis by considering thegrowth in deposits and loans, investment obligations, etc. for a short-term period ofthree months.

The Bank's ability to meet its obligations and fund itself in a crisis scenario iscritical and accordingly, liquidity stress tests are conducted finder different scenariosat periodical intervals to assess the impact on liquidity to withstand stressedconditions. The liquidity positions of overseas branches are managed in line with theBank's internal policies and host country regulations. Such positions are also-reviewedcentrally by the Bank's ALCO along with domestic positions.

Operational Risk:

To manage the operational risk in an effective, efficient and proactive manner, theBank has an Operational Risk Management (ORM) Policy, which is reviewed annually by theRisk Management Committee of the Board (RMC). In addition to the ORM policy, operationalRisk management framework, loss data collection methodology, risk and controlself-assessment framework, key risk indicators framework and roles and responsibilities ofoperational risk management function are approved by the RMC. The Bank has an OperationalRisk Management Committee (ORMC), which oversees the implementation of the aforesaidframework/policies. In terms of the ORM policy/framework, the Risk Department identifies,assesses, monitors and mitigates/controls the risk to an acceptable level. New products,processes and services introduced by the Bank are subject to rigorous risk review andsign-off process by the Product Management Committee where all relevant risk areidentified and assessed by the departments, independent of the risk-taking unit(product/process/service owner). Similarly, changes proposed in the existingproduct/processes/services are also subject to review by -he Change Management Committee.Outsourcing arrangements are examined and approved by the Outsourcing Committee. The ITSecurity Committee of the Bank provides directions for mitigating the operational risk ininformation systems. As per the directions of the ORMC, a sub- committee (Sub-ORMC) hasbeen constituted wherein the operational risk issues are discussed in detail. The Bank hasput in place a Business Continuity Plan (BCP) for all the critical applications.

INFORMATION TECHNOLOGY:

Technology is one of the key enablers for business and IT has enabled a scalable,robust and function-rich platform to deliver business value for the customers. A strategyof offering increasing functionalities to customers across channels like ATM, net banking,mobile banking has been supported by IT by providing a secured and efficient platform. TheBank has consistently remained amongst the top performing banks in terms of value andaccuracy of undertaking government transactions.

Mobile financial services introduced by the Bank have the potential to transform notonly the way consumers interact with the Bank, but also to radically change the way theypay for goods and services and exchange money with other individual consumers. Thefeatures include balance inquiry, mini statements, funds transfer, bill payments andrequests for PIN and cheque book. The Bank has implemented Net Secure, a Two-FactorAuthentication system to provide added security to online banking transactions, whichmakes fund transfers completely safe and secure.

The Bank has taken various initiatives towards green IT by using technology in wayssupporting the environment for instance disposing IT assets in an eco-friendly way,recycling wherever possible, going for virtualization, small footprint equipment likeblade servers, small factor desktops, investing in less power-consuming equipment, movingto LCD monitors from traditional CRT monitors etc. Another major step in this direction issending password-protected e-statements to registered customers to reduce the use ofpaper. The statement covers all the accounts of the customer. This facility is also madeavailable in net banking for downloading depending on customer requirement, At present itis available in English and Hindi. There are plans to extend to other Indian languages.

The Bank has built its own Tier-III Data Center at Bangalore and has moved its ITbusiness continuity operations to this new state-of-the-art Data Center, which has thecapability to support future expansion of business.

OPERATIONS:

The business model of the Bank, as it has evolved over the years, now requires theseparation of production and distribution functions within the Bank, with transactionprocessing and customer databases (the production technology) becoming increasinglycentralised and product sales and customer handling (the distribution technology) beingthe primary function at the branches. The business process re-engineering has helpedreduce transaction costs and besides introducing smoothness in operations. To bring aboutgreater precision in the management of operations in both the retail and corporate side ofthe Bank's businesses, some changes in organisational design were introduced during theyear.

Retail Ranking Operations:

Given the importance of providing both seamless service to retail clientele and alsoensuring secure, compliant systems, the Retail Banking Operations (RBO) department hasbeen formed. During the year, some of the initiatives undertaken were intended to improvethe operational efficiency of branches. Monitoring and control functions were alsoreinforced for risk containment and regulatory compliance. For instance, the monitoring ofimplementation of Know Your Customer (KYC) guidelines for new accounts has been made morestringent. Concurrent auditors were appointed at 19 Scan Hubs to make the account openingprocess robust and compliant. Regional Support Centres were setup for distributingcustomer kits, thereby reducing costs and increasing productivity and efficiency. Theaccount-opening process was further streamlined by introducing warehousing of forms across19 centres in the country. Based upon customer feedback, key processes have been analyzedand corrective measures where needed to improve operational efficiency and turnaround timehave been initiated. The RBO worked in close co-ordination with the Service Qualitydepartment to enhance customer experience at branches.

Wholesale Ranking Operation:

As a part of the overall organizational re-design, Wholesale Banking Operations (WBO)Group was formed by hiving-off all units performing operations for the corporate segmentcustomers and consolidated under a unified control. The WBO group focus is to developefficient and best of class transaction processing capability with a thoroughunderstanding of client-needs. Its goal is to deliver banking outputs to wholesale bankingclients through efficient deployment of skilled manpower and appropriate technologies. Thegroup comprises five verticals - Corporate Banking Operations Department (CBO), TreasuryOperations (TO), Trade Finance Center (TFC), Centralized Collections and Payments Hub(CCPH) and Channel Finance Hub (CFH).

Corporate Banking Operations (CBO) involves delivery, control, monitoring andadministration of credit facilities and processing of domestic trade finance transactionsof large and mid-corporates, and SME customers while ensuring compliance with regulatoryguidelines and systems and procedures of the Bank in the conduct of credit operations.Treasury Operations (TO) involves the settlement and accounting of treasury-relatedtransactions. The Trade Finance Centre handles remittances and trade finance transactionsprocessing on behalf of distribution channels dealing in trade finance and foreignexchange. Centralised Collections and Payments Hub (CCPH) handles payments and collectionsand the Channel Finance Hub (CFH) processes disbursals and arranges MIS for advances underChannel Financing.

COMPLIANCE:

In accordance with the Bank's Compliance Policy and as per the directives issued byReserve Bank of India, the Compliance department plays a crucial role in implementing thecompliance functions in the Bank. The instructions/guidelines issued by the regulatoryauthorities during the year were disseminated throughout the Bank in order to ensure thatthe business/functional units operate within the boundaries set by the regulator. All newproducts and processes launched during the year were subjected to vetting from thecompliance standpoint in accordance with the Bank's Compliance Policy, which is based uponthe rules, laws and standards of regulatory as well as non-regulatory bodies. The Bank hasintroduced a mechanism for monitoring and identification of suspicious transactions andtransaction-patterns, in accordance with international best practices, enablingpre-emptive action and also facilitating the reporting to the Financial IntelligenceUnit-India mandated by the Prevention of Money Laundering Act, 2002. As an ongoingexercise, Compliance is engaged in enhancing the skill-sets of the operating staff on'Know Your Customer' and 'Anti-Money Laundering' norms through specialised training.

The Bank oversees the primary aspect of vigilance and has a zero tolerance policy forfraud, corruption and financial irregularity. It encourages 'whistle blowing' as a matterof corporate culture.

INTERNAL AUDIT:

The Bank's Internal Audit function undertakes a comprehensive risk-based audit ofbranches, Retail Asset Centres (RAC), Service Branches and Credit Management Centres(CIVIC) to assess efficacy and adequacy of internal controls. It also undertakesinternal-cum-management audit of the Bank's Central Office departments. During the year,Information System (IS) audits were conducted in respect of 117 software applications,Network, Data Centre and Business Continuity Centre. To ensure independence, the InternalAudit function has a reporting line to the Audit Committee of the Board (ACB), whichoversees its performance and reviews the effectiveness of the operational and regulatorycontrols laid down by the Bank and RBI.

In all, 641 branches/Service Branches, 47 RACs, 10 CMCs, 17 CBO branches, 3 overseasbranches and 2 Representative offices, 36 Central Office departments and back-offices weresubjected to internal audit during the year covering 88% of the Bank's total business.Further, 34 branches, 8 CMCs, 22 RACs and 10 Central office departments are placed underconcurrent audit.

During the year, Internal Audit department undertook various initiatives such asadoption of elaborate Internal Audit Charter, which reflects internal audit mission,objectives, nature and scope, its independence, accountability, responsibility,expectations and reporting structure; rolling out a Self-Audit model aimed at ushering animproved compliance culture. Internal Audit department has upgraded its process standardsby adopting ISO 2000-2008 Standards successfully. Its processes and systems have also beenevaluated by an independent Chartered Accountants' firm of international repute.

CORPORATE SOCIAL RESPONSIBILITY (CSR):

As an integral part of society, the Bank is aware of its corporate socialresponsibilities and has been engaged in community and social investments. For thispurpose, the Bank has set up a Trust - the Axis Bank Foundation, to channel itsphilanthropic initiatives. The Axis Bank Foundation has committed itself to participate invarious socially relevant endeavours with a special focus on education for thespecial/underprivileged children. The Trustees of the Foundation have focused on educationfor underprivileged children and :these are largely supported by programme grants in orderthat the projects become replicable. The Bank has decided to contribute up to one percentof its net profit annually to the Foundation under its CSR initiative. During the year,the Foundation partnered with twelve more NGOs, taking the partnership to a total of 42NGOs, for educating underprivileged children and special children all over India. TheFoundation has committed grants for projects running upto three years. Eight hundred andfifty nine education centres, evolving 12 States are covered by the Foundation programmes.55,452 children are covered under the programmes that include 27,899 girls and 27,553boys. The projects supported by the Foundation involves imparting quality education forthe underprivileged child (with a special focus on the girl child), focusing on earlychildhood programmes for 2-6 year olds, focusing on projects that encourage 'InclusiveEducation' for physically challenged children, teacher training programmes that result incompetencies to -each pre-primary and primary school children and supporting vocationaltraining centres in slum areas to imparting training to School dropouts.

The Axis Bank Foundation will also play an important role under the Bank's FinancialInclusion initiative. It is proposed that literacy campaigns will be launched by the Bankin all regions where financial inclusion is undertaken where the objective of the Bankwill be to Impart financial awareness. It will also undertake various other initiativessuch as healthcare, vocational training and other community development programmes likeafforestation and rain-water harvesting in these areas.

HUMAN RESOURCES:

The Human Resources (HR) agenda of the Bank aims to create a team of empoweredemployees oriented to realization of the Bank's Vision. During the year, the key HR issuesthat were addressed related to learning and skill development, management of performance,ensuring an enhanced work- life balance and attrition management.

The employee engagement initiatives focused on providing opportunities to staff to seekaspirational roles through internal job postings and periodic job rotations, making thecompensation structure more competitive, streamlining the performance-linked rewards andincentives, and generally sending a clear message of meritocracy.

The Bank has also built training infrastructure, which seeks to upgrade skill levelsacross grades and functions through a combination of in-house and external programmes. Theflagship in-house programmes include the Induction Programme for new entrants and Creditand Foreign Exchange Programmes for building up a pool of specialists in the respectivedomains. External Programmes encompass value-added programmes on Team Building andLeadership, Organizational Development, Management Development Programmes, PeopleManagement Programmes, all conducted by premier institutes like the IIMs, AdministrativeStaff College of India (ASCI) and ISB Hyderabad. Senior functionaries have also beendeputed overseas to attend specialized programmes intended to keep them updated ondevelopments in the world economy.

The Bank also has a comprehensive e-learning module conceptualized and developedin-house and administered through the intranet. Keeping pace with the growth in thediversity of products on the one hand and manpower on the other, the training man-dayshave increased from 57,317 last year to 65,378 during the year, registering a growth of14%.

The Bank's Performance Management System, where recognition is directly related toperformance, has been further streamlined during the year with a view to encouragingdialogue on performance and developmental feedback between the appraisee and appraiser.Competency clusters were defined for employees at different levels of the hierarchy topromote desired behaviour and to facilitate an objective assessment. Sessions wereconducted across the Bank to educate supervisors on the revised process. This apart, a360- degree feedback process has been used for the first time as a part of leadershipdevelopment process in the Bank.

On the talent acquisition front, the Bank has emerged as a strong employer brand in thefinancial services sector and especially on the campuses of the premier business schoolsof the country. The strength of the workforce at the year-end was 21,640 as compared to20,624 in the previous year. We believe some of the other significant contributory factorsfor the emergence of the Axis Bank brand as a major player are a young workforce with anaverage age of 29 years, the Bank's policy of espousing the cause of affirmative action bybeing an equal opportunity employer and participation in various social initiatives likeTeach for India.

Through the fulfillment of its HR agenda, the Bank will continue to strive 66% towardsrealisation of the ultimate goal of being the preferred financial service providerexcelling in customer delivery through insight, empowered employees and smart use oftechnology.