Bank of Baroda

Economic Scenario in 2008-09

After witnessing a robust average growth of around 8.9% during 2003-04 through 2007-08,the Indian economy experienced a growth deceleration in 2008-09 primarily on account of asynchronized global slowdown. Emerging market economies including India suffered primarilydue to diminishing export demand and constrained external financing conditions. For India,the growth slowdown was more pronounced in the second half of 2008-09 triggered by abroad-based industrial slowdown and a contraction in exports for five consecutive monthsbeginning October 2008. The Reserve Bank of India (RBI) in its Annual Monetary Policy for2009-10 has projected India’s GDP growth for 2008-09 in the range of 6.5% to 6.7%.

At the sectoral level, the performance of agriculture sector during 2008-09 wassatisfactory. The Central Statistical Organisation (CSO) has projected agriculture andallied activities to grow by 2.6% in 2008-09. According to the Second Advance Estimates ofGDP, the total foodgrains production during 2008-09 would be around 227.9 million tonnesas against 230.8 million tonnes in 2007-08. Industrial sector, however, experienced a lossof growth momentum during 2008-09 with the year-on-year expansion being 2.4% as against8.5% in 2007-08. Similarly the core or infrastructure industries recorded a lower growthof 2.7% in their production during 2008-09 as compared to 5.9% during 2007-08. Within thecore sector, slowdown was more pronounced for steel and crude oil segments. The primarycontributor to industrial slowdown was a slowdown in investment and private consumptiondemand. The government consumption expenditure, however, remained buoyant on account offiscal stimulus measures and committed expenditure.

Corporate performance too remained subdued throughout the year, though the thirdquarter of 2008-09 was the worst in terms of both the sales turnover and profitability.After rising to nearly 13.0% (y-o-y) in August 2008, headline inflation (Wholesale PriceIndex) dropped to 0.26% as on March 28, 2009. With decreasing commodity prices and 6 weakerdomestic demand, inflationary environment is expected to remain benign in the coming sixmonths.

Hit by the slump in global demand, India’s merchandise exports ended the year2008-09 at U.S. $168.7 billion, up a modest 3.4% from U.S. $163 billion a year ago. Theimports too registered a limited growth of 14.3% (y-o-y). India’s trade deficit for2008-09 widened to U.S. $119.05 billion from U.S. $88.52 billion a year ago. The currentaccount deficit is projected at about 3.0% of GDP in 2008-09 primarily due to a markedlyhigher oil import bill (especially in the first six months of 2008-09). Indian economyalso suffered on account of the reduced inflow of the long and short-term debt andreversal of portfolio inflows during 2008-09. A positive development was, however,relative resilience of FDI inflows (US $27.38 billion in 2008-09) in the face of reversalof capital flows, reflecting the attractiveness of India as a long-term investmentdestination. While India’s foreign exchange reserves declined from a peak of $315billion in May 2008 to $252.33 billion at end-March, 2009 they remain adequate compared tothe country’s gross financing requirement and imports. Moreover, India’sexternal debt and debt sustainability indicators continue to remain at comfortable levelsand ensure external stability. As a result of the global crisis, the benchmark stockmarket index declined by over 38.0% in 2008-09 and the rupee depreciated 26.4% against theU.S. dollar. In early 2009-10, however, the rupee and the stock markets have stabilized toa great extent.

During the year 2008-09, the monetary policy stance of RBI (Reserve Bank of India)shifted from concerns related to inflation in the first half of 2008-09 to maintainingfinancial stability and arresting the growth moderation in the second half. The RBI’smeasures – including cutting policy rates, lowering the cash reserve ratio andstatutory liquidity ratio and easing controls on capital inflows – eased the domesticliquidity pressures that appeared in September and October and brought down inter-bankrates. Through the RBI’s policy actions, the cumulative primary liquidity potentiallyavailable to the financial system is almost 7.0% of GDP.

In response to the global crisis, the Government too launched three fiscal stimulus,which came on top of an already announced expanded safety-net programme for the ruralpoor, the farm loan waiver package and payout following the Sixth Pay Commission Report.The combined impact of these fiscal measures is around 3.0% of GDP.

Indian economy has to face several challenges, going forward, in the context of theongoing global financial crisis such as stepping up public and private investment demand,maintaining adequate liquidity in the system in view of higher government spending,preserving financial stability and benign interest rate environment, etc. Going forward,the fiscal and monetary stimulus initiated during 2008-09 combined with lower commodityprices would cushion the economic downturn by stabilizing domestic economic activity.Accordingly, with the assumption of normal monsoon, the RBI has placed real GDP growth at6.0% for 2009-10 and inflation (WPI) at 4.0% by end of fiscal 2010.

Performance of Indian Banking Sector in 2008-09

Indian banking industry faced many uncertainties during 2008-09 in the face of tightmarket liquidity in the global financial markets. The RBI’s prompt and relevantmeasures ensured adequate domestic and foreign liquidity to Indian banking industry sothat the flow of credit to productive sectors would not suffer much. Yet, on account ofthe severe global economic slowdown and its spillover effects on India, growth of bankcredit to commercial sector decelerated in 2008-09. Moreover, expansion in net foreignexchange assets of the Indian banking industry moderated to a large extent. Bank credit tothe commercial sector increased by 16.9% (y-o-y) in 2008-09 as against 21.0% a year ago.Non-food credit growth of commercial banks picked up in the first two quarters of 2008-09on account of a sizeable increase in credit to petroleum sector and also as a substitutionfor funds raised by the corpoates from non-banking and external sources. However, non-foodcredit growth for the year as a whole was 17.5% at end-March, 2009 as against 23.0% a yearago. The lower expansion of credit compared to deposit mobilization at 19.8% (y-o-y)resulted in a decline in incremental credit-deposit ratio (y-o-y) of scheduled commercialbanks (SCBs) to 64.4% at end-March 2009 as against 73.6% at end-March 2008. The RBI datashows that while the deceleration in bank credit was observed across the banking system,it was shaper for the private and foreign banks.

The SCBs’ investment in SLR securities as a per cent of their net demand and timeliabilities increased to 28.1% at end-March 2009 from 27.8% a year ago due to lower creditexpansion in 2008-09.

Data on sectoral deployment of credit of SCBs shows that during 2008-09, theincremental credit expansion was primarily led by infrastructure, petroleum, coal products& nuclear fuels, iron & steel, engineering, construction and chemical&chemical products industries. While the credit flows to small industries and personalborrowers moderated, those to agriculture sector posted an increase.

The Indian banks, in general, posted healthy financial results during 2008-09 comparedto their global peers despite challenging economic conditions. The outlook for Indianbanking industry remains positive in 2009-10 on the backdrop of its stricter prudentialregulation by the RBI, sound financial indicators and stable political regime.

Risk Management

Taking various types of financial risks is an integral part of the banking business.Bank of Baroda has a robust and integrated Risk Management system to ensure that the risksassumed by it are within the defined risk appetites and are adequately compensated. TheRisk Management Architecture in the Bank comprises Risk Management Structure, RiskManagement Polices and Risk Management Implementation and Monitoring Systems.

Risk Management Structure

The overall responsibility of setting the Bank’s risk appetite and effective riskmanagement rests with the Board and apex level management of the Bank. The Board hasconstituted a Sub Committee of the Board on ALM and Risk Management to assist the Board onfinancial risk related issues. The Bank has a full fledged Risk Management Departmentheaded by a General Manager and consisting of a team of qualified, trained and experiencedstaff members. The Bank has set up separate committees, as under, of Top Executives of theBank to supervise respective risk management functions. Asset Liability ManagementCommittee (ALCO) is basically responsible for the management of Market Risk and BalanceSheet Management. It has the delegated authority and responsibility of managing depositrates, lending rates, spreads, transfer pricing, etc in line with the guidelines ofReserve Bank of India.

Credit Policy Committee (CPC) has the responsibility and authority to formulate andimplement various enterprise-wide credit risk strategies including lending policies andalso to monitor Bank’s credit risk management functions on a regular basis.

Operational Risk Management Committee (ORMC) has the authority and responsibility ofmitigation of operational risk by creation and maintenance of an explicit operational riskmanagement process.

Risk Management Policy

The Bank has Board approved policies and procedures in place to measure, manage andmitigate various risks that the Bank is exposed to. In order to provide ready referenceand guidance to the various functionaries of the Risk Management System in the Bank, theBank has in place Asset Liability Management and Group Risk Policy, Domestic Loan Policy,Mid Office Policy, Off Balance Sheet Exposure Policy (domestic), Business ContinuityPlanning Policy, Pillar III Disclosure Policy, Stress Test Policy and Stress TestFramework, Operational Risk Management Policy, Internal Capital Adequacy AssessmentProcess (ICAAP), Credit Risk Mitigation and Collateral Management Policy duly approved bythe Board.

Risk Management Implementation and Monitoring System

In the financial services industry, the main risk exposures that the Bank faces areLiquidity Risk, Credit Risk, Market Risk and Operational Risk.

Liquidity Risk

Liquidity risk is the risk that the Bank either does not have the financial resourcesavailable to meet all its obligations and commitments as they fall due or has to accessthese resources at excessive cost. During the second and third quarters of 2008-09, Indianmarket in line with the global financial market, exhibited high level of volatilitycausing liquidity stress to the market participants. The Indian Government as well as theReserve Bank of India introduced various economic and monetary measures to injectliquidity into the financial system. As a result, the financial system exhibited a fairlevel of stability at the end of the year under review.

The Bank’s ALCO has the overall responsibility to monitor liquidity risk of theBank. The liquidity risk is measured by flow approach on a daily basis through StructuralLiquidity Gap reports and on a dynamic basis by Dynamic Gap reports on fortnightly basisfor the next three months. Under Stock Approach, the Bank has established a series of capson activities such as daily call lending, daily call borrowings, net short term borrowingsand net credit to customer deposit ratio and prime asset ratio, etc. The Asset LiabilityManagement (ALM) Cell, working in the Risk Management Department reviews the liquidityposition on a daily basis to ensure that the negative liquidity gap does not exceed thetolerance limit in the respective time buckets. Specialized Integrated Treasury Branch,Mumbai assesses the domestic liquidity in respect of all foreign currency exposures.

In respect of overseas operations, each territory assesses its currency wise liquidityposition at prescribed intervals. The funding requirements in case of contingencies arealso examined at regular intervals to keep the Bank ready to meet any crisis scenario. TheBank has managed its liquidity by prudent diversification of the deposit base, control onthe level of bulk deposit, and ready access to wholesale funds under normal marketconditions. The Bank has significant level of marketable securities, which can be sold,repoed, or used as collateral in case of need.

Credit Risk

Credit Risk is the risk that the counterparty to a financial transaction will fail todischarge an obligation resulting in a financial loss to the Bank. Credit risk managementprocesses involve identification, measurement, monitoring and control of credit exposures.In order to provide clarity to the operating functionaries, the Bank has various policiesin place such as Domestic Loan Policy, Off-Balance Sheet Exposure Policy, etc, wherein theBank has specified various prudential caps for credit risk exposures. The Bank alsoconducts industry studies to assess the risk prevalent in industries where the Bank hassizable exposure and also for identification of sunrise industries. The industry reportsare communicated to the operating functionaries to consider the same while lending tothese industries.

The Bank has adopted various credit rating models to measure the level of credit riskin a specific loan transaction. The Bank uses a robust rating model developed to measurecredit risk for majority of the business loans (non personal loans). The rating model hasthe capacity to estimate probability of default (PD), Loss Given Default (LGD) andunexpected losses in a specific loan asset.

Apart from estimating PD and LGD, the credit rating model will also help the Bank inseveral other ways as under.

To migrate to Rating Based Approaches of computation of Risk Weighted Assets

To price a specific credit facility considering the inherent credit risk.

To measure and assess the overall credit risk and to evolve a desired profile of creditrisk. Apart from assessing credit risk at the counterparty level, the Bank has appropriateprocesses and systems to assess credit risk at portfolio level. The Bank undertakesportfolio reviews at regular intervals to improve the quality of the portfolio or tomitigate the adverse impact of concentration of exposures to certain borrowers, sectors orindustries.

Market Risk

Market risk is the exposure to adverse price movements of financial instruments arisingas a result of changes in market variables such as interest rates, exchange rates andother asset prices. The objective of market risk management is to avoid excessive exposureof the Bank’s earnings and equity to loss and to reduce the Bank’s exposure tothe volatility inherent in financial instruments such as securities, foreign exchangecontracts, equity and derivative instruments, as well as balance sheet or structuralpositions. The primary risk that arises for the Bank as a financial intermediary isinterest rate risk due to the Bank’s asset-liabilities management activities. Othermarket related risks to which the Bank is exposed are foreign exchange risk on foreigncurrency positions, liquidity, or funding risk, and price risk on trading portfolios.

The Bank has clearly articulated policies to control and monitor its treasuryfunctions. The Bank also has an asset liability management policy to address the marketrisk. These policies comprise management practices, procedures, prudential risk limits,review mechanisms and reporting systems. These policies are revised periodically in linewith changes in financial and market conditions.

The Interest rate risk is measured through interest rate sensitivity gap reports andEarning at Risk. Furthermore, the Bank calculates duration, modified duration, Value atRisk for its investment portfolio consisting of fixed income securities, equities andforex positions on monthly basis. The Bank monitors the short-term Interest rate risk byNII (Net Interest Income) perspective and long-term interest rate risk by EVE (EconomicValue of Equity) perspective. The Value at Risk for the treasury positions is calculatedfor 10 days holding period at 99% confidence level. The stress testing of fixed interestinvestment portfolio through sensitivity analysis and equities through scenario analysisis regularly conducted. Based on the RBI directions, the Bank is also estimating theEconomic Value of Equity impact on a quarterly basis.

Operational Risk

Operational risk is the risk of loss on account of inadequate or failed internalprocess, people and systems or external factors. As stated above, the ORMC has theauthority and responsibility of monitoring the operational risk of the Bank. The Bankmonitors operational risk by reviewing whether its internal systems and procedures areduly complied with. The Bank collects and analyses loss and near miss data on operationalrisk based on different parameters on a half yearly basis and, wherever necessary,corrective steps are taken.

Bank’s Compliance with BASEL II

The Bank has one of the largest overseas presence amongst the Indian banks and hasimplemented the Basel-II Guidelines from 31st March 2008. In keeping with the guidelinesof the RBI, the Bank has adopted Standardized Approach for Credit Risk, Basic IndicatorApproach for Operational Risk, and Standardized Duration Approach for Market Risk forcomputing the capital adequacy ratio. The Bank has, therefore, been computing the Capitalto Risk Weighted Assets Ratio (CRAR) on parallel basis under Basel-I and Basel-IIGuidelines. The Bank is also providing additional capital towards Operational Risk underBasel II guidelines. The CRAR of the Bank is summarized as under.

The RBI has laid down time schedule for implementation of the advanced approaches ofcomputation of credit risk, market risk and operational risk under the Basel II framework.The Bank is equipped to migrate to advanced approaches and will proceed as per the RBIdirections in due course. In compliance with the Pillar 2 guidelines of the Reserve Bankof India under Basel II framework, the Bank formulated its Policy of Internal CapitalAssessment Process (ICAAP) to assess internal capital in relation to various risks theBank is exposed to. Stress Testing and scenario analysis are used to assess the financialand management capability of the Bank to continue to operate effectively under exceptionalbut plausible conditions. Such conditions may arise from economic, legal, political,environmental and social factors. The Bank has a Board approved Stress Testing Policydescribing various techniques used to gauge their potential vulnerability and Bank’scapacity to sustain such vulnerability.

The Bank conducted its ICAAP tests as on 30.09.2008 and 31.03.2009 along with thestress test as per the ICAAP Policy of the Bank. The disclosure under Pillar 3 of marketdiscipline guidelines of the RBI has been done as on 30.09.2008 and 31.03.2009. Theyear-end disclosure as on 31.03.2009 is part of the Annual Report and is displayed on theBank’s web site. The half-yearly disclosure as on 30.09.2008 has also been displayedon the Bank’s web site.

Credit Monitoring Function

Credit monitoring on a continuous basis is one of the most important tools for ensuringquality of advance assets. The Bank has the system of monthly monitoring of the advanceaccounts at various levels to prevent asset quality slippages and to take timelycorrective steps to improve the quality of credit portfolio.

A separate department for Credit Monitoring function at the corporate level, headed bya General Manager, and one at the Regional/Zonal level, started functioning sinceSeptember 2008. The Slippage Prevention Task Force formed at all Zonal/Regional offices interms of the Bank’s Domestic Loan Policy was activated for the purpose of arrestingslippage and also for initiating necessary restructuring in potential sick accounts at anearly stage in conformity with the laid down norms and guidelines. The Bank placed specialfocus on sharpening of the credit monitoring process for improving the asset quality,identifying areas of concern/branches requiring special attention, working out strategiesand ensuring their implementation in a time bound manner. The primary objectives of theCredit Monitoring Department at the corporate level are fixed as under:

• Identification of weakness/Potential default/incipient sickness in the loanaccounts at an early stage;

• Initiation of suitable and timely corrective actions for preventing impairmentin credit quality, whenever signals are noticed in any account, e.g. decline in creditrating, delay in meeting liabilities in LC/Guarantee and delay in servicing of interest/installments etc;

• Prevention of slippage in the Asset Classification and relegation in CreditRatings through vigorous follow up;

• Identification of suitable cases for restructuring/ rescheduling/rephasement aswell as further financing in deserving and genuine cases with matching contribution fromthe borrower;

• Taking necessary steps/regular follow up, for review of accounts and complianceof terms and conditions, thereby improving the quality of Bank’s credit portfolio;

• Endeavoring for upward migration of Credit Ratings.

Restructuring of Advance Accounts

As a part of the Bank’s policy to help genuine borrowers facing slow down, theBank has restructured certain loan accounts at the request of its borrowers in sync withthe RBI guidelines during 2008-09. The details of these accounts are as follows:

Restructuring of Advance Accounts (Domestic) – 2008-09

Besides, in the International Operations, the Bank, during the course of the year2008-09, undertook restructuring of 30 borrowal accounts involving an overall outstandingbalance of Rs 366.15 crore. The Bank also initiated follow up actions for ensuringexpeditious review of accounts, compliance of terms and conditions, up-gradation in creditrating etc. in high value advance accounts for improving the asset quality of Bank’scredit portfolio.

Economic Intelligence Unit

At the Corporate Office of the Bank, a specialized Economic Intelligence Unit supportsthe Top Management in critical areas like Business Strategy Formulation, InvestorRelations and Credit and Market Risk Management. The Unit regularly provides the TopManagement and the Bank’s various operational units a periodic outlook on key macrovariables like industrial and infrastructural growth, inflation, interest rates, stockmovement, credit deployment & resource mobilization of the banking industry, liquidityand exchange rates. The Unit also provides a full-fledged support to the Bank’sAsset-Liability Management function.

By providing better understanding of macroeconomic aspects, corporate sector, healthand financial sector policies, this department supports the Bank’s efforts in tappingbusiness opportunities and swiftly responding to market dynamics.

Internal Control Systems

The Bank has a well-established Central Inspection and Audit Division that examines theadherence to systems, policies and procedures of the Bank. The guidelines received onvarious issues of internal control from the RBI, Government of India, Board and AuditCommittee of the Board have become part of the Internal Control System for better riskmanagement. The Central Inspection and Audit Division through ten zonal inspection centrescarries out inspection of branches/offices as per the periodicity decided by the AuditCommittee of Board and examines adherence to such systems of internal control and riskmanagement (including various aspects such as KYC/AML etc.) The Regular Branch InspectionReport is the most comprehensive feedback to the Management about the degree of complianceof the Bank’s norms at the operational level and, hence, the most important tool forexercising control. The compliance is monitored through Rectification Certificate.

All the branches are covered under the Risk Based Internal Audit. Assessment of levelof risk and its directions is as per risk matrix prescribed by Reserve Bank of India whichhelps the Management in identifying areas of high risk requiring attention on prioritybasis. Position of the risk categorization of the branches is reviewed by Audit Committeeof the Board on quarterly basis.

Besides Regular Inspection of Branches, various other inspections are also carried outin Bank such as Inspection of Subsidiaries, Associates, Functional Departments atCorporate, Head Office, Training Centres, Administrative Offices [Overseas Branches areinspected through Bank’s Internal Auditors posted at those centres] and theManagement Audit of the Controlling Offices of the Bank, its Subsidiaries and RegionalRural Banks (RRBs).

In 2008-09, 2,374 Regular Branch inspections of the domestic branches were carried outby the Inspecting Officers attached to various Zonal Inspection Centres across thecountry. Around 447 inspections of overseas branches by the Internal Auditors postedoverseas, besides Management audits were also carried out in UK operations, Gulf Countriesand Fiji during the year 2008-09. The Concurrent Audit of the Bank covered 508 branchesincluding Specialized Integrated Treasury Branch, which handles funds and investmentmanagement and FOREX dealing operations of the Bank.

Central Inspection & Audit Division oversees the credit risk management through theCredit Audit. It covers large borrowal accounts – both fund based and non fund basedas per direction of RBI. This lending review mechanism enables timely checks so as toavoid accounts getting slipped into non-performing and generates early warning signals.During the year 2008-09, 2020 large accounts were subjected to credit audit covering63.54% of the outstanding advances.

All the reports during the current year of the eligible accounts for credit audit havebeen attended to and closed after compliance/necessary directions to the concerned Zones.Concurrent Audit covers more than 63% of total business of the Bank besides 100% businessof FOREX dealing and domestic investments.

Central Inspection & Audit Division compiles Risk Profile Templates on quarterlybasis as per the direction of RBI. As per Risk Profile Templates of the RBI, theBank’s overall risk level is LOW and direction is STABLE.

Central Inspection & Audit Division through its IS Audit Cell conducts IS Audit ofselect branches. It also undertakes "Data Migration Audit" of branches shiftingto Core Banking Solutions (CBS) platform from the legacy system.

The Bank conducted training programmes of its Inspecting Officers attached to ZonalInspection Centres on Information Security Audit, Data Migration Audit and Risk BasedInternal Audit during the year. Similar programmes were also conducted for the ConcurrentAuditors for their updation. The agenda placed before Audit Committee of the Board forreview includes total audit function of the Bank. The compliance of direction of AuditCommittee of the Board is monitored through Action Taken Report (ATR) system. Thecompliance of direction received from the RBI and Government of India are placed beforethe Audit Committee of the Board for review.

Operations and Services

Customer-centric Initiatives

During the year 2008-09, the Bank introduced new account opening form for individualand non-individual for all deposit accounts and uniform pay-in-slip for customers’convenience. The Bank also developed Guidance Note & Information  Booklet forcustomers’ convenience to increase awareness amongst customers.

The Bank implemented the directives of the Ministry of Finance, not to levy penalty tothe Senior Citizens for not maintaining the minimum balance for the first time when thebalance in their account goes below minimum balance requirement stipulated by the Bank.The Policy on Settlement of Claims in the account of the missing persons too wasformulated and implemented in the Bank during 2008-09.

Compliance

The Bank adopted the standards set by the "Banking Codes and Standards Board ofIndia" for widespread awareness about the code amongst the customers and its staff.The Bank arranged to provide BCSBI code to each customer. This was also put up on theBank's website. The branches have started providing a copy of the Guidance Note onDeposits and Advances to the customers in the pamphlet form, while opening the newaccount.

Customer Service Committees

(i) Customer Service Committee of the Board

The Bank has a sub-committee of Board for Customer Service. The Committee has thefollowing members as on 31.03.2009:

The functions of the sub-committee of Board include suggesting and implementinginnovative measures for enhancing the quality of customer service and improving the levelof satisfaction for all the categories of clientele, at all times. The Committee also–

i. Oversees the functioning of the Standing Committee on Procedure and PerformanceAudit on Public Services and also the compliance with the recommendation of the StandingCommittee on Customer Services.

ii. Reviews the status of the Awards remaining unimplemented for more than 3 monthsfrom the date of Awards and also the deficiencies in providing Banking services asobserved by the Banking Ombudsman. iii. Reviews the status of the number of deceasedclaims remaining pending / outstanding for settlement beyond 15 days pertaining todeceased depositors/locker hirers/ depositor of safe custody articles.

The details of the attendance of the meeting of 'Customer Service Committee of theBoard' held on 21.05.2008, 11.10.2008 and 26.03.2009 during the year-ended 31.03.2009 areas follows.

(ii) Standing Committee on Customer Service

Besides the Directors’ Sub Committee, the Bank has a Standing Committee onProcedures and Performance Audit on Customer Services (as per the RBI guidelines) whichhas four General Managers of the Bank and three other eminent public personalities asmembers. The Committee is chaired by the Executive Director of the Bank.

This Committee is set up to focus on the inadequacy in banking services available tocommon people and looking into the need to (i) benchmark the current level of service,(ii) review the progress periodically, (iii) enhance the timeliness and quality, (iv)rationalize the processes taking into account technological developments, and (v) suggestappropriate incentives to facilitate change on an ongoing basis.

Know Your Customer (KYC) and Anti-Money Laundering (AML) Measures

The KYC-AML Policy of the Bank duly approved by the Board of Directors in terms ofPrevention of Money Laundering Act, 2002 (PMLA) and Guidelines of RBI and IndianBank’s Association is in place. The said Policy, which is the foundation ofBank’s implementation of KYC standards and AML Measures, was revised in March 2009,based upon the Master Circular of the RBI on the subject.

The major highlights of KYC-AML implementation across the Bank constitutes -

• Generation of Cash Transaction Reports (CTR) electronically for submission toFinancial Intelligence Unit (FIU), through the Computer System.

• Implementation of AML Solution for generating system based alerts.

• System-based detection and submission of Suspicious Transaction Reports (STR) tothe Financial Intelligence Unit (FIU)

• System based Risk Categorization (from AML Measure) of Bank’s customersevery half year.

• Filing of Counterfeit Currency Reports (CCRs) to FIU-IND, New Delhi.

The full KYC compliance entails Staff Education as well as Customer Education for whichthe following measures are taken by the Bank.

• A comprehensive list of KYC documents is uploaded on the Bank’s website(www.bankofbaroda.com) for the benefit of customers.

• A KYC page is created at the Bank’s INTRANET for posting reference materialon KYC education.

• Regular Training Sessions are conducted on KYC-AML at the Bank’s Trainingestablishments.

• Training is being arranged for the Bank’s Senior Officials/Executives atRBI, IBA and National Institute of Bank Management (NIBM).

• Sustaned efforts are made to create expertise at the Bank’s Head Office forcorporate oversight and also KYC Audit of branches.

Vigilance

The Bank, being a financial institution, has a special responsibility to the generalpublic, to ensure safety of the hard earned money deposited/ invested by them. Bank ofBaroda, over the years, has earned reputation that is synonymous with safety. Alertness,vigilance, due diligence and personal integrity are the traits of the Bank’semployees. The Bank has over a period of time evolved systems and procedures, which havestood the test of time. However, new and sophisticated types of frauds are beingperpetrated by the miscreants taking advantage of the technology driven banking.

To thwart such attempts, ongoing review of system and upgradation of the skills of ourstaff members are undertaken. As a result, there has been a sharp decrease in the amountinvolved in frauds reported during the year 2008-09 despite a quantum jump in the volumeof business. It is noteworthy that with the extraordinary alertness and vigil displayed bythe operating staff, 60 attempts of defrauding the Bank by unscrupulous elements werethwarted during the year 2008-09, which saved our Bank from substantial monetary losses.

To bring about greater transparency in the procurement and tendering processes of theBank, "notice" inviting tenders/details of tenders awarded by the Bank and"summary" of tenders/ contracts concluded are put on the Bank's website forwidest possible publicity. The Bank has also implemented the on-line application andtracking status thereof in respect of housing and educational loans. With a view tointroduce better security into the systems and to reassure the customers that they bank ina safe environment, the Vigilance machinery of the Bank is performing its roleeffectively.

Business Performance

Given below are the details of the Bank’s major achievements on business frontduring 2008-09

Resource Mobilisation & Asset Expansion

The share of Bank’s deposits in total resources stood at 84.60% as of 31st March2009. The total deposits grew from Rs 1,52,034.13 crore to Rs 1,92,396.95 crore,reflecting a growth of 26.55% over the previous year. Of this, Savings Bank Deposits– an important constituent of low cost deposits grew by 18.76% - from Rs 35,776.38crore to Rs 42,487.28 crore. The share of low cost deposits (Current & Savings) inTotal Global Deposits was at 29.59% and in Domestic Deposits at 34.87%. The bankingindustry as a whole witnessed a movement from low cost deposits to term deposits duringthe year, in view of sharp increase in the interest rates offered on term deposits during2008-09.

The Bank’s Global Advances expanded by 34.94% during 2008-09 led by 29.32%expansion in domestic advances and 56.3% expansion in overseas advances. It may be notedthat expansion in overseas advances also factors in the impact of currency depreciation(of the order of 26.9% against the US dollar) during 2008-09.

Composition of Funds – Global

Global Advances

Wholesale Banking

Within India, the Wholesale Banking Business has emerged as one of the most competitivebusiness segments due to aggressive role being played by large private and foreign banksduring the recent years. Considering the fact that half of our Bank’s lendingbusiness is generated from wholesale banking, the Bank has proactively adopted strategiesfrom time to time to penetrate into this segment with a different kind of business model,service standards, faster response and better accessibility.

Within the Bank, the wholesale banking branches for large and mid corporates were setup separately to cater to the needs of the corporate world and are yielding desiredresults. With a view to improve and widen the clientele base, ‘Fast Track’ deskwas set up to attend to fresh proposals exclusively to expedite the sanction process andit is operating with good success rate. During the year 2008-09, fresh proposals withadvances aggregating Rs 16,000 crore were sanctioned and we can proudly say that around25-30 new customers/groups were added into the Bank’s fold.

Furthermore, with a view to ensure better administration, monitoring and control andalso for facilitating active involvement of Zonal Heads to canvass new business, theBank’s CFS (Corporate Financial Service) Branches are advised to report to theirrespective Zonal Heads. Initiatives are also taken by the Bank’s executives atCorporate Office by visiting the CFS Branches/Zones periodically to support the team atthe field to canvass new business and to facilitate faster credit decisions.

Considering the importance of higher skill requirement in the fast changingenvironment, effective steps are being taken to groom a talent pool in the area of creditthrough extensive in-house training and by nominating them to external trainingestablishments.

Retail Business

The Retail Business continued to be the thrust area for achieving business growthduring the year 2008-09. For achieving sustained growth on both liabilities and assetside, the Bank initiated various customer centric measures besides launching specialproducts. The Bank’s overall Retail Credit stood at Rs 19,627.55 crore as at the endof March 2009, registering the growth of Rs 2,735.23 crore over the previous year. Theprime objective of the Bank during the period was to maintain or improve the quality ofassets and to build a healthy retail loan portfolio. Therefore, the emphasis was laid onBaroda Car Loan and Mortgage Based Products viz. Baroda Home Loan, Baroda Traders Loan andBaroda Advance Against Property. In our quest to bring youth into the Bank’s fold,the thrust was also placed on Baroda Education Loan during the year.

The Bank’s Home Loans increased by Rs 983.67 crore during the year, registeringthe growth of 13.51% over March, 2008. The Advance Against Mortgages, Education Loans andCar Loans achieved a spectacular growth of 31.47%, 32.67% and 51.24% respectively duringthe year ended March 2009. It has always been the endeavour of our Bank to review thenorms and features of all existing products on an ongoing basis and modify, whereverrequired, to suit the changing needs of the customers. The new products have also beenlaunched during the year to cater to the needs of different segments of society as well asour clientele.

New Retail Products

The Bank launched the following new loan products during the year 2008-09.

1. Loan for Earnest Money Deposit: An asset product for booking of house /flat or plot

2. Baroda Additional Assured Advance to NRIs: This facility was already available toResident Indians, which has now been extended to non-resident Indians (NRIs) also.

3. Baroda Bachat Mitra: An overdraft facility in Savings Bank accounts against thesecurity of the pledge of FDRs.

4. Baroda Car Loan to HNIs/Corporates: A Car Loan product with maximum limit of Rs 100lakh for High Networth Individuals (HNIs)/Corporates for use of vehicle exclusively by theDirectors /Executives of the company.

5. Baroda Advance Against Gold Ornaments/Jewelry/ Gold Coins (launched on pilot basis)for meeting business/ personal expenses of the individuals.

6. Special Home Loans package has been introduced with certain concessions and freelife insurance cover to the borrowers.

Product Modification

1. Margin norms in Home Loans have been modified with a view to control thedelinquencies in Home loans and other mortgaged based loans and zones/regions were advisedto discourage deviation from the set guidelines.

2. The eligibility for availing Additional Assured Advance (AAA) has been increasedfrom three times to five times during the entire tenure of a Housing Loan.

3. Realignment of Retail Loan products by reducing it to nine major products from thehitherto 26 products.

Campaigns Organized

1. A "Retail Loan Festival Campaign" was launched from 1 October 2008 to 9November 2008 and the concessions of 0.25% in interest rate and 100% waiver ofDocumentation and Processing charges were allowed on Housing Loans and Car Loans. Thefresh business of Rs 347.67 crore was mobilized (including the business of Rs 126.63 croreunder the Car Loans) during the campaign period.

2. Under the Savings Bank segment, two Savings Deposit Campaigns were organized. Thefirst campaign was organized from 9 June 2008 to 2 August, 2008 during which the totalsavings deposits of Rs 2,212 crore were mobilized against the target of Rs 1,500 crore.Similarly, during the second campaign organized from 2 February 2009 to 31 March 2009, thetotal deposit of Rs 2,195 crore was mobilized against the set target of Rs 2,000 Crore.

Structural Changes

1. In order to strengthen the Retail Credit Delivery System, the Bank opened eight newUrban Retail Loan Factories (URLFs) at Powai Mumbai, Agra, Bareilly, Bhopal, Nagpur,Ernakulam, Jodhpur, and Noida during the year 2008-09 thus raising the total URLFs to 23.

2. Gen-Next Branches: The concept of Gen-Next branches for focusing the youth segmentwas launched during 2007-08 and two Gen-next branches were opened during 2007-08. Threemore Gen-next branches have been opened during the year 2008-09, taking the total to fiveGen-Next branches. These Branches are equipped with modern gadgets, ambience and all otherfacilities, which a youth requires in today’s modern era.

Other Initiatives

1. With a view to control the delinquencies in Home Loans and other Mortgage-basedLoans, measures have been taken with regard to the eligibility and margin norms and theZones/ Regions have been advised to discourage deviations from extant guidelines.

2. For boosting up Auto Loan portfolio, the memorandums of understanding (MoUs) havebeen signed with number of car manufacturing companies viz. Maruti Suzuki India Ltd, TataMotors Ltd, Hyundai Motors India Ltd and Mahindra & Mahindra Ltd. during the year2008-09.

3. The "Tie-up" arrangements have been made with M/s Kotak Mahindra OldMutual Life Insurance Ltd for providing Life Insurance Cover to Education Loan borrowersand Home Loan borrowers sanctioned under a special package.

4. The sale of Gold Coins was launched as a new initiative during the year 2007-08 toaugment non-fund based income. During the year 2008-09, total income of Rs 4.55 Crore hasbeen generated by Sale of Gold Coins through 354 Point of sales (POS).

5. The online Home Loan application facility has been made available with tracking ofstatus of the application from 20 July, 2008.

Wealth Management Services

The Bank as a part of its customer centric measures initiated Wealth ManagementServices to provide its High Net Worth (HNI) and affluent customers a total financialsolution at one place since June 2004. Under Wealth Management Services, the Bankpresently provides through the network of its branches various three party products inLife Insurance, Non Life Insurance including Health Insurance, Mutual Funds & EquityTrading under tie-up arrangements through different partners. The tie-up partners in theseproducts are HDFC Standard Life Insurance Co. Ltd. in Life Insurance, National InsuranceCompany Ltd. in General Insurance, India Infoline Ltd. in e-trading and six leading AssetManagement Companies including our joint venture Baroda Pioneer Asset Management Co. Ltd.in Mutual Fund products.

The Bank has also established ‘Baroda Gold Lounge’ in 13 select strategicallylocated branches which are distinct dedicated spaces to provide par excellence investmentadvisory services to HNI customers of the Bank. The initiatives of the Bank under theWealth Management Services have been encouragingly contributing to non-interest income ofthe Bank.

SME Business

In India, the SME (small & medium enterprises) sector is the biggest provider ofemployment next to Agriculture. The official statistics shows that SMEs constitute 95.0%of total industrial units and contribute 40.0% to total industrial output. Theymanufacture more than 8,000 products in various sectors like pharmaceuticals, garments,textiles, auto ancillary, jewellery and software. The contribution of services sectorwithin the SME segment is quite significant; especially IT enabled services, hospitalityservices, tourism, couriering, transportation, etc. SMEs are playing a vital role in thejob creation process.

The Bank has always been a forerunner in the development of small-scale enterprises andhas formulated liberal and comprehensive SME Loan Policy for its SME customers.Furthermore, to give a focused attention to emerging SMEs in India, the Bank has beenconsidering other commercial units also with a turnover up to Rs 100 crore at par with theSMEs.

To promote the growth of SME Sector, the Bank has launched a special and novel deliverymodel, viz. SME Loan Factory, which is presently functioning in 34 centres of the Bank andis well accepted in the market. The SME Loan Factory is an innovative model forstreamlining processes and for timely sanctions of SME loan proposals. The model comprisesof the Central Processing Cell for speedy appraisal and sanctioning of proposals withinthe stipulated deadline.

A team of Relationship Managers stationed at different branches of the Bank spread overmicro segments of the city reaches out to customers to facilitate completion ofpre-sanction formalities in a hassle free manner. The Relationship Managers would also bemarketing, not only various SME products of the Bank, but also other products and servicesincluding the Third Party products like Life Insurance, Mutual Funds, Equity Trading, etc.The above model operates on an assembly-line principle with simplified processes usinglatest technology and in-house, skilled and trained man-power. Out of 34 SME LoanFactories as on 31.3.2009, seven SME Loan Factories have been established during the year.The Bank has SME Loan Factories at all major business centres across the country, viz.Agra, Ahmedabad, Bangalore, Baroda, Bhilwara, Bhubhaneshwar, Bulsar, Chennai, Coimbatore,Dehradun, two factories in Delhi, Hyderabad, Indore, Jaipur, Jamshedpur, Jamnagar,Jodhpur, Kanpur, Kolhapur, Kolkata, Lucknow, Ludhaina, three factories in Mumbai, Nagpur,Nashik, Noida, Pune, Rajkot, Raipur, Surat, Vishakhapatnam.

These SME Loan Factories sanctioned loans aggregating Rs 8,508 crore during the yearended March, 2009 as against Rs 5,956 crore in the previous year. The Bank has planned toestablish six more SME Loan Factories during the year 2009-10.

SME Credit Growth

Total outstanding in SME Sector works out to Rs 14,662 crore as on 31.3.2009 as per theregulatory definition. Growth in the Bank’s lending to the SME sector during the lastthree years is as follows.

New Initiatives in the SME Business in 2008-09

The Bank entered into MOU with some of the vehicle manufacturers for financing theirdealers/road transport operators desirous of purchasing their vehicles.

It entered into MOU with CGTMSE for extending collateral free loans up to Rs 100 lacsunder Risk Sharing Facility scheme launched by CGTMSE.

It also entered into MOU with Ministry of MSME for financing under the scheme, viz.Trade Related Entrepreneurship Assistance and Development (TREAD) for economic empowermentof women.

It introduced seven new customer centric area specific products to suit the localcluster needs.

It organized awareness programmes for SME borrowers to enlighten them about variousproducts, services and precautionary steps to be taken in view of global financial crisis.

It took proactive steps by announcing various measures to assist the borrowers understress due to global recession.

It organised Management Development Programme with Institute of Business Management ofrepute for familiarizing the SME customers with current trends in business areas.

The Bank took up sponsoring of SME Page in all editions of Economic Times, which isexpected to give popularity to various products designed for SME Sector and boost our SMEbusiness.

Rural and Agricultural Lending

The Bank is also a frontrunner in the area of Priority Sector and Agriculture lending,harnessing the vast potential of the rural market through its wide network of 1,100 ruralbranches and 649 semi-urban branches. The Bank has opened 30 new branches in rural andsemi-urban areas during the year 2008-09. The Bank is the convener of State LevelBanker’s Committee (SLBC) in UP and Rajasthan. The Bank has Lead Bank Responsibilityin 44 districts in the states of Gujarat (12), Rajasthan (12), Uttar Pradesh (14),Uttaranchal (2), Madhya Pradesh (2) and Bihar (2). The Bank has sponsored five RegionalRural Banks (RRBs) in various states with a branch network of 1,201 branches and totalbusiness of more than Rs 14,000 crore as of March 2009.

Performance of Priority Sector Lending in 2008-09

Priority Sector Advances of the Bank surged from Rs 31,681 crore as at the end-March2008 to Rs 39,239.08 crore as at the end-March 2009 and formed 46.43% of the Adjusted NetBank Credit (ANBC) against the mandated target of 40%. The Agriculture Advances of theBank recorded a growth of 28.0% over the previous year and rose to Rs 16,964 crore as atend-March 2009.

Under its flagship agriculture loan product "Baroda Kisan Credit Card", theBank issued as many as 1,78,442 Credit Cards during 2008-09 to provide credit to farmers.The Bank has financed as many as 2,11,948 new farmers during the year 2008-09. As a partof its microfinance initiatives, the Bank credit linked 19,120 Self Help Groups with anamount of Rs 17 crore during 2008-09, thereby taking the total number of SHGs creditlinked to 90,731 amounting to Rs 606 crore.

Business and Social Initiatives

The Bank introduced various initiatives/strategies during 2008-09 to harness theemerging opportunities for rural and agricultural lending as follows.

To augment the agricultural advances, the Bank conducted special campaigns viz. Kharifcampaign for Crop Loans and Investment Credit Campaign disbursing Rs 1,364.77 crore and Rs855.58 crore respectively.

The Bank organized 2,702 Village Level Credit Camps and disbursed Rs 1,708.86 crore to1,42,351 borrowers during 2008-09. The Bank has identified 350 Thrust Branches acrossIndia to enhance Agriculture lending which constituted 32% of total agricultural lendingas at end-March 2009. The Bank formulated various area-specific schemes tailor-made to theneeds of local requirements, particularly where there is a concentration of industrieslike Rice Mills, Cold storages, Poultry units, etc. The suitable concessions in rate ofinterest, charges were allowed under these schemes to garner maximum business outsmartingcompetition. As many as 18 area-specific schemes were formulated to increase theagricultural lending. Towards effective use of technology in rural & agriculturallending, the Bank has introduced IT enabled smart card based technology for financialinclusion. At present, the smart card based financial inclusion is being implemented atRaibareli and Sultanpur districts of Uttar Pradesh on pilot basis. So far 18,000 smartcards have been issued. Currently, Bank has 262 ATMs in Rural and Semi-urban areas and 225rural branches and 525 semi-urban branches are under Core Banking Solution. The Bankco-sponsored the "Bhimthadi Jatra", a state level exhibition for women SHGproducts, held at Pune in November 2008, which was inaugurated by Hon’ble Minister ofAgriculture, Shri. Sharad Pawar. In all, 1,359 SHGs exhibited their products and generatedsales revenue of Rs 288 lacs during the exibition. Around 50 SHGs of our Bank from thestate of Maharashtra participated in the exhibition.

The Bank has adopted Dungarpur district (Rajasthan) which is primarily a tribaldistrict and one of the most backward districts in the country, for total integrated ruraldevelopment and 100% financial inclusion towards its Corporate Social Responsibility. Theproject was launched on 1st October 2007. The Bank has already achieved 100% financialinclusion in Dungarpur district. So far credit of Rs 21.81 crore to 10,720 borrowers isdisbursed for Dairy Development, Cultivation of High Value Crops, Vegetable cultivation,etc. Various other developmental activities like training, scholarships to girl studentsetc. are also being done under the project.

The Bank has adopted 101 villages (101 "Baroda Centenary Year Villages") fortotal integrated development spread over three years and 100% financial inclusion. TheBank has also provided social infrastructure like solar lamps, bus stand shelters, handpumps, community halls etc. in 55 villages by giving grant of Rs 45.84 lacs. The Bank hasallocated Rs 2 crore for this purpose.

Baroda Grameen Paramarsh Kendra (BGPK) - an initiative undertaken by the Bank to helpthe rural community by providing Credit Counseling, financial literacy and other serviceslike information on the prices of agricultural produces, scientific farming, etc. The Bankhas established 52 BGPKs as on 31.03.2009. With four additional Baroda Swarojgar VikasSansthan (BSVS) centers opened during 2008-09, the total number of BSVS has gone up to 16.The BSVS in Raebareli and Ajmer are exclusively meant for women entrepreneurs. The BSVSare the institutes for training the youth and imparting knowledge and skills required fortaking up self-employment ventures. During 2008-09, 8,274 youth beneficiaries have beentrained out of which 4,762 have established self-employment ventures. Out of the total21,039 beneficiaries trained by these centers so far, 11,569 have established theirself-employment ventures. The Bank has initiated various measures to achieve FinancialInclusion. The Bank had adopted 500 villages for 100% Financial Inclusion, and this hasalready been achieved in all 500 villages. The Bank has also achieved 100% financialinclusion in 12 of its lead districts i.e. Dungarpur (Rajasthan), Pratapgarh, Raibarely,Fathepur, Rampur, Sultanpur (U.P.) Nainital, Udamsinghnagar Districts (Uttarakhand,) Dang,Dohad Panchmahal districts (Gujarat) and Shivher (Bihar). Besides, the Bank has achieved100% financial inclusion in 10,000 villages in various districts identified by State LevelBankers Committee (SLBC).

The Business Facilitators Model too has been implemented across the country toaccelerate financial inclusion of the excluded segment as well as to augment agriculturalportfolio. Business Facilitators will mainly canvass loan applications for the Bank forwhich the Bank will pay them compensation. Individuals including retired Bank andGovernment staff, NGOs, Farmers clubs and SHGs are engaged as agents to improve ouroutreach in the rural and semi-urban areas. The Bank has so far engaged 49 businessfacilitators.

The Bank also signed MoUs with CmF (Centre for Microfinance) to focus on skillupgradation for Micro Finance activities for rural and agricultural business and formationof quality Farmers Clubs, Self Help Groups and providing special training to them throughthe CmF.

Performance of RRBs sponsored by the Bank

The Bank has Sponsored five RRBs (Regional Rural Banks) as under.

Baroda Uttar Pradesh Gramin Bank, Head Office:

Raebareli.

Baroda Rajasthan Gramin Bank, Head Office: Ajmer.

Baroda Gujarat Gramin Bank, Head Office: Bharuch.

Nainital-Almora Kshetriya Gramin Bank, Head Office:

Haldwani.

Jhabua-Dhar Kshetriya Gramin Bank, Head Office:

Jhabua.

The aggregate business of these five RRBs rose to Rs 14,278.28 crore as of end-March,2009 from Rs 11,999.70 crore as at end-March, 2008, registering a growth of 18.99%(y-o-y).

These five RRBs together posted a net profit of Rs 103.32 crore during 2008-09 asagainst Rs 49.99 crore earned during 2007-08. The "Net Worth" and the"Reserves and Surplus" of all these RRBs together improved from Rs 325.22 croreat end-March, 2008 to Rs 490.19 crore as at end-March, 2009 and from Rs 208.69 crore as atend-March, 2008 to Rs 272.35 crore as at end-March, 2009 respectively.

International Business

The year 2008-09 was a difficult period for overseas business growth with worseningglobal environment on account of the economic meltdown and the resultant liquidity crunch.While registering growth, the challenge was to maintain liquidity, improve quality ofassets, maintain healthy growth in profits and control the delinquencies. However, evenduring this turbulent period, the Bank could maintain the growth momentum and registerimpressive growth in all the operational parameters. This was possible on account of thevast experience of working in different economies around the World, good asset-liabilitymanagement and the Bank’s sound business practices. Also, the internationaloperations were not impacted much by the liquidity crisis given the Bank’s limiteddependence on short-term resources.

All the centres of the Bank are well capitalized and have broad based depositor basefor raising resources. The customer base of the Bank comprises not only of IndianCorporates, Non Resident Indians and Persons of Indian Origin but also the local ethnicpopulation of countries where it is operating. However, the crisis did impact the growthof Syndicated Loans as Indian Corporates moderated their overseas ‘Merger&Acquisition’ activities and capacity expansion plans. During the year 2008-09,the Bank strengthened its international operations by posting additional experienced staffto overseas branches. The additional staff was primarily posted in the marketing, IT andrisk management divisions of the overseas territories. The local staff of overseasbranches was also provided in-house training and sent to external institutions fordevelopment of skills. The Bank continued with its overseas expansion plans during theyear and opened four new branches/offices (including that of its Subsidiaries).The stepswere initiated for opening of branches at various other centers, which are at differentstages of approval. During this year, the Bank also initiated ‘TargetedPublicity’ through print and electronic media for enhancing visibility and canvassingbusiness.

Business & Profit Performance

During the year 2008-09, the Total Business (Deposits + Advances) of the Bank’soverseas branches registered a growth of 46.23%. The Customer Deposits increased by56.03%, Total Deposits by 38.68% and Advances increased by 56.22%. The InternationalOperations contributed 22.55% to Bank’s global business as on 31.03.2009. As statedearlier, the growth numbers in international business expansion partly reflect the impactof currency depreciation.

Total Assets

Total assets of international operations increased from Rs 37,511 crore to Rs 51,165crore registering a growth of 36.40% over the previous year.

Net Profit

The Net Profit of International Operations during the year increased by 23.17% (y-o-y).This is in spite of the huge requirement of provisioning due to ‘Mark to Market’of Investments. The Bank does not have exposure to sub-prime assets. Also, its exposure toDerivatives is only by way of investments in ‘Credit Linked Notes’ (CLNs) ofIndian Corporates of repute and where it is confident of the underlying credit quality.The investments have been ‘Marked to Market’ based on Issuers/Traders Quotes, asimpact was felt on valuation as markets were quoting two way quotes at wide variance. Theprovisioning made by the Bank in the current year is on account of a decline in presentvalue and is likely to get reversed on maturity of the investments. The contribution ofinternational operations to the Bank’s global Net Profit moderated to 18.86% in2008-09.

Asset Quality

The Bank did not venture into complex CDOs (Collateralised Debt Obligations) andparticipated in CLNs (Credit-linked Notes) in a very modest way and that too of IndianCorporates and was, therefore, not impacted severely by the current crisis. The Bankfurther strengthened monitoring of assets for containing slippages and intensified therecovery efforts in NPA accounts and was able to bring down the ratio of Gross NPAs toTotal Advances in its international operations during 2008-09. The Gross NPAs came down to0.51% of total advances as against 0.55% during the previous year. The Net NPAs weremaintained at almost zero level.

International Presence

The Bank’s international presence covers 25 countries through its 74branches/offices:

In addition to the above, the Bank’s associate in Zambia has 11 branches.

Overseas Expansion

During the year 2008-09, the Bank opened four new branches/ offices, viz. Branch atGuangzhou (China), Electronic Banking Unit at Musaffah (UAE) and branches of theSubsidiaries at Kawempe (Uganda) and Nakuru (Kenya).

Future Plans

The Bank has ambitious plans for further increasing the branch network to takeadvantage of canvassing business from different geographies around the world and serve theIndian Corporates/PIOs/NRIs spread around the world. The applications filed with homecountry regulators for opening of branches in Russia, Canada, New Zealand, Australia,Qatar and Mozambique are under process. The Bank also has plans to further expand itsbranch network in UAE, Oman, UK, USA, Trinidad & Tobago, Uganda, Kenya, etc. to takeadvantage of the emerging opportunities. Opening of branches at Malaysia, Suriname, Yemen,Kuwait, Saudi Arabia, Maldives, etc., is also under process.

Syndication Center

The Bank has Global Syndication Centers at London and Dubai, which are supported byInternational Merchant Banking Cell (IMBC) - at International Division, Mumbai. Thesefocus on the business of Syndicated Loans and CLNs. The Offshore Banking Unit in Singaporeis also quite active in canvassing this business and the Bank has plans to set up GlobalSyndication Centre in the country to take advantage of the emerging opportunities.

Products and Services in Overseas Business

With the implementation of Core Banking Solution at all the overseas centres except NewYork and Brussels, the strategy was to take maximum advantage of the‘State-of-the-Art Technology’ and provide Products and Services to customers,which are comparable with those offered by other International Banks. With theavailability of the system the Bank launched various new products and services andenhanced the features of existing schemes to make these in line with the center-specificschemes.

Technology Upgradation in Overseas Business

The Bank has taken various technology initiatives to better serve its overseascustomers. These are as follows.

- Implementation of Global Treasury Project at UK, UAE, Bahamas and Bahrain.

- Launching of view based e-banking at UAE, Oman, Fiji, Mauritius, Seychelles,Botswanaand Tanzania. For other centres the process is underway.

- Additional ATMs have been installed to provide round the clock services to customers.Installation of Full functional ATMs in UAE is under process.

- Rapid Funds2 India, an on-line Remittance product, has been introduced at almost allthe overseas centres.

- Payment Messaging Solution introduced at Mauritius, Seychelles, South Africa,Botswana and Kenya.

- AML ERASE and Online List Match Solutions implemented in -14- overseas territoriesand all the -7- overseas subsidiaries.

Bank’s NRI Business

In order to serve the expatriate Indian population and also canvass business for itsIndian branches, the Bank took various steps for further improving its products andservices. The motto was to provide ‘low cost and fast remittance’ services tothe customers. Besides popularizing online RTGS/NEFT remittance facility, the Bank offersservices close to their doorsteps through mobile vans, visits to Indian dominatedlocalities, extension of working hours suitable to the working population etc. The RapidFunds 2 India was extended to new centres and, in addition, the Bank launchedClickFunds2India at U.K. To further extend its reach, the Bank has tied up with ExchangeHouses for remittances. It is already made operational with seven Exchange Houses and theprocess is underway for increasing it.

Risk Management in Overseas Business

Risk management architecture in the financial sector has assumed greater significancein view of the increasing volumes and complexities of financial transactions. The globalfinancial crisis too underscores the need for sound risk management, effective internalcontrols and strong corporate governance in financial institutions. In order to complywith BASEL II requirements and integration of data of all the overseas territories as alsoto comply with the Regulatory Norms on Credit Deployment, Asset Quality, Provisioning andcomputation of Risk Weighted Assets, the Bank plans to implement the ASCROM (AssetClassification & Credit Monitoring) System in all its overseas territories in a phasedmanner. The Solution will be customised as per the territory-specific requirements tocompute Risk Weighted Asset (RWA) as per the Host and Home country norms and to generateGlobal RWA master summary as per the Bank's Policy. The introduction of ‘ASCROM’will be helpful for other MIS purposes and Credit Monitoring.

Regulatory Compliance in Overseas Business

The Bank always strictly follows the home country regulations and ensures that there isno violation on this account. The Bank has built up a reputation of being aregulatory-compliant bank and a good corporate citizen in all its overseas operations.

Treasury Operations

The financial year 2008-09 experienced huge volatility in financial markets acrossvarious asset classes. The financial crisis in the form of spiral effect of sub primecollapse resulted into further large write-downs by the world’s major banks. Therewas a liquidity crisis in the corporate bond markets across the Globe, as the investorsbecame more risk averse. Concerted steps had been taken by many developed and developingcountries in the form of not only increased funding limits but directly infusing capitalinto banks to safeguard the financial systems from total collapse. The Rate Cuts havebecome a norm among Central Banks to restore confidence. The Indian Bond markets sawyields moving up sharply during the first half year on concerns over rising inflationtriggered by spike in oil prices. During the period April to August 2008, inflationcontinued to move upward and touched the high of 12.63% mainly due to high crude oil andcommodity prices. The RBI also remained hawkish and raised the key rates to calm inflationexpectations. The bond yields reacted to the same and the 10-year benchmark yield touched9.54% in the month of July 2008 from 7.93% as on 31st March 2008. The interest rate showedsigns of moderating during the months of October-November 2008, when inflation startedcoming down as a result of the softening of global crude oil prices and the RBI’smonetary easing.

However, during the second half the F.Y. 2009, the markets remained volatile. Fears ofthe impending recession in the US due to the sub prime crisis led to Fed slashing itsbenchmark rate. The cut in fed rates and monetary easing by RBI brought a rally in thebonds market and the yields softened sharply.

The RBI cut its repo rate from 9.00% in September 2008 to 4.75% on 21st April 2009. The10-year yield moved down from 8.63% in September 2008 to 5.31% in December 2008. However,yields could not sustain at the lower levels for longer period on additional borrowing inthe last quarter and record-borrowing programme for the year 2009-10. It closed at 7.01%on 31st March 2009. The inflation for the week ended 28th March 2009 was 0.26%. The RBIcontinued to actively manage the borrowing programme through its open market operations.

The corporate bond markets saw the spread widening vis--vis the comparable governmentsecurities. In order to protect the portfolio, the Bank shifted SLR securities from AFS toHTM at the start of the year. However, looking to the overall economic strengths of Indiaand having doubts about the sustainability of high interest rates for a longer term, theBank’s Treasury Division started accumulating long-term Government securities whenyield on these bonds were ranging 9.25% to 9.50%. The aggressive accumulation was achievedby replacing T-bills, some short tenor securities and also by increasing the size andduration of the portfolio. The Bank also received fixed on OIS and INBMK.

The above strategy resulted into huge profits when yields started coming down. Theaccumulated long dated Government bonds fetched us maximum return during the short span oftime. In addition, these profits could be generated without sacrificing the yield onexisting portfolio. To further encash the opportunity of lower interest rates, theTreasury Division reduced duration of the portfolio by selling long-term bonds and paidfixed on OIS and INBMK. Besides, the Treasury Division continued to actively encash thearbitrage opportunities available between Money market, CBLO, G-sec and resourcesgenerated through USD/INR swaps.

The Equity Market witnessed high volatility and downward trend during the year. Thebenchmark Sensex, which was 15,644 on 31st March 2008, moved sharply downward and toucheda low of 7,697 levels on 27th October 2008 on the concern of global economic recession.The financial stimulus packages announced by the US and European Governments to containthe economic recession started showing positive impact on global economy and in turn,impacted positively the global equity market. Indian market also showed recovery andSensex closed at 9,708 levels on 31st March 2009. The operation at the Equity Desk of theBank remained subdued. However, active operation has started after the stability of themarket and we now expect to earn substantial income through prudent market operations.

In the foreign exchange market, Indian rupee depreciated by 26.44% against US Dollarduring the year. It moved from Rs 40.12 per USD to Rs 50.73 per USD mainly on account ofhuge outflows of foreign capital during the year. It oscillated between a low of Rs 39.97and a high of Rs 52.18 against US Dollar. The Bank’s integrated Treasury continued tobe a prominent market maker in USD/INR, EUR/USD & GBP/USD. The Forex market remainedvery volatile, during the year, due to spiral effect of sub prime crisis across allFinancial Centres.

The Bank’s Foreign Exchange Dealing Room has been able to encash the volatilityand earned good profit for the Bank. State-of-the-Art Dealing Room of the Bank at Mumbaihandles the entire gamut of foreign exchange transactions and derivative products. Theadvanced technology environment is being leveraged by the Bank to offer a variety ofproducts to its clients by way of hedging instruments such as Interest Rate Swaps,Currency Swaps and Options. Through the Automated Dealing System, the Bank quotes autogenerated real time foreign exchange rates to its customers at all authorized branches inIndia, thereby, providing them the feel of the real time market.

As part of its business reengineering, the Bank is in the process of implementingGlobal Treasury Solution across main money centers. It has been already implementedsuccessfully in London, Dubai, Bahrain & Bahamas. The rollout for other centers is inprogress. When implemented, the Bank will have better Global Risk Management set-up andcan achieve optimum deployment of resources.

The Bank has set up an active Derivative desk at its Treasury Branch, which offerscustomized products to meet the requirement of corporates in hedging their interest rateand currency risks.

A full-fledged Mid-office in Treasury Division monitors and manages various exposuresand limits fixed by the Board of Directors on real time basis, using advanced technology.The Risk Management Tool such as Value at Risk (VaR) is used to measure the Market risk onall portfolios. Furthermore, the back testing of VaR number is conducted on daily basis toconfirm the veracity of the forecasted values. The Stress Testing of all portfolios isalso done to complement the VaR analysis.

Corporate Social Responsibility (CSR)

The Bank has always believed in making a difference to society at large. As aresponsible corporate citizen, it has been its vision to empower the community throughsocio-economic development of underprivileged and weaker sections. During the year2008-09, the Bank further intensified its efforts in this direction. Most of theBank’s social activities are linked to rural masses, i.e., adoption of 101 villagesacross India for their all-around development and providing financial assistance fordevelopment of infrastructure facilities like setting up village libraries, community halland solar lighting systems in villages. The Bank has also established Swarozgar VikasSansthan for imparting training to unemployed youth, free of cost for gainful selfemployment and entrepreneurship skill development which help them improve their familyeconomic status and also gives a boost to the local economy in those locations. The Bankhas established 52 Baroda Gramin Paramarsh

Kendra for providing credit counseling and financial literacy for rural masses acrosscountry. The Bank coordinates its CSR activities with its Micro-finance and Self-HelpGroup (SHG) financing. The Bank has developed relationships with 91,536 SHG and hasextended credit facilities of Rs 636.00 crore through SHGs, whereby million of householdshave been beneficiaries of financial inclusion. The Bank has also adopted DungarpurDistrict in Rajasthan for total integrated rural development and 100% financial inclusionas described in the earlier section.

The Bank has adopted the best management practices towards its social responsibilitiesand contribution to the society for abatement of Green House Gas emission by financingprojects, which use renewal energy sources as main feedstock i.e. windmill, hydel power,bagasse based power projects, solar etc. which are entitled for carbon credits.

Asset Quality Management

The Bank delivered a stellar performance in asset quality management in 2008-09 despitea severe industrial slowdown witnessed in the second half of the year. Through wellcoordinated and sustained efforts, the Bank’s Global Gross NPA level was brought downfrom 1.84% to 1.27% and the Net NPA level from 0.47% to 0.31% in the course of one year.It is worth reporting that not only the Gross NPA and Net NPA were brought down inpercentage terms but were also reduced in absolute terms to Rs 1,842.92 crore and Rs451.15 crore as at end-March, 2009 from the opening portfolio of Rs 1,981.38 crore and Rs493.55 crore respectively.

During the year 2008-09, the Asset Quality further improved with the rise in the shareof standard advances from 98.16% at the end of the previous year to the present level of98.73% as per the table given below.

The Bank’s NPA coverage ratio reached a comfortable level of 75.52%.The slippageswere reduced and contained at 0.95% of the Opening Standard Advances of the year asagainst 1.21% during 2007-08.

The aggressive and focused efforts in Recovery and NPA Management could result in therecovery of Rs 567.19 crore in NPA. Moreover, accounts worth Rs 168.20 crore were upgradedduring this relatively challenging year.

It is pertinent to note that the "Recovery" in the Prudentially Written Offaccounts amounted to Rs 263.15 crore during the current year, which added to theBank’s bottomline (profits) directly.

Other recovery measures undertaken by the Bank during 2008-09 included launching of"SANKALP" recovery scheme on 21.11.2008, with a focused approach for recovery insmall advance accounts with an outstanding up to Rs 10.00 lacs and the Bank could recoverRs 63.09 crore by way of this campaign.

Technology Environment

The Bank had embarked on an IT enabled Business Transformation Project in 2005-06 toreposition itself in an intensely competitive banking environment. The Project envisaged ahost of applications to be implemented in the Bank over a five-year period ending March2010, which would help the Bank to transform itself into a customer-centric organizationand reduce the cost of its services. To support the Integrated Business Transformationproject, the Bank set up its own State-of-the-Art Data Centre on 10th December 2005conforming to Uptime Institute Tier-3 standard. The Bank also established a 1:1 DisasterRecovery Site taking into account international requirements of 500 km distance anddifferent seismic zone.

Technology Progress in 2008-09

• Core Banking Solution: As of 31st March 2009, 1,922 branches and 28 ExtensionCounters in India are on CBS. This covers more than 1000 centers in 34 states/unionterritories and approximately 94% of Bank’s domestic business. Additionally, 43branches in 12 overseas countries and 23 branches in 7 overseas subsidiaries are onFinacle CBS. The overseas branches on CBS account for about 79% of total overseasbusiness.

• Wide Area Network: The implementation of CBS and other centralized applicationsrequires a robust Wide Area Network (WAN) with adequate redundancy built in at everylayer. Bank has connected more than 2300 branches/offices on its wide area network with anassured uptime of more than 99.9%.

• Internet Banking: The Bank has launched full-fledged transaction-enabledInternet Banking in India, for both Retail and Corporate customers. Through this platform,customers have the facility to pay both Direct and Indirect Taxes online, make payment ofutility bills and also book rail tickets. Customers can transfer funds from one account toanother account within the Bank. Customers can also avail of the services for inter-banktransfer of funds through Internet Banking using NEFT /RTGS. Corporates also havethe facility of direct salary uploads. The internet banking customers in India are alsoprovided SMS alerts facility. Internet Banking has also been launched in 7 overseasterritories, viz., Botswana, Fiji, Mauritius, UAE, Oman, Seychelles and Tanzania.

• Phone Banking: The Bank has recently launched one more delivery channel, PhoneBanking facility, for our customers. This facility enables customers to get Bank’sproducts information, enquire balances in their account, status of cheques, orderstatement of account through fax or e-mail etc.

• RTGS/NEFT: All CBS branches of the Bank are enabled for inter bank remittancesthrough RTGS and NEFT. RTGS and NEFT has also been interfaced with our internet bankingportal. This will give our customers the facility of making inter bank money transfersonline using internet banking.

• Online Money Transfer Service: An online money transfer service - RapidFunds2India – has been enabled in our branches of UAE, Oman, UK, Mauritius,Seychelles, Botswana, HongKong, Fiji, Ghana, Kenya, Guyana, South Africa, Tanzania, Ugandaand Trinidad & Tobago. NRI’s in these territories can avail of this service whichfacilitates almost instant credit to the beneficiary’s accounts in any CBS branch inIndia. Where they maintain accounts with other banks, same day or next day credit isfacilitated through RTGS / NEFT.

• Cash Management Services: Corporate Cash Management has been launched inDecember 2008 in Mumbai. This service enables our corporate customers to manage theirfunds efficiently through bulk payment services, local/out-station fund collection (paperbased or electronic) and liquidity through fund pooling facility.

• Base 24 ATM Switch has been implemented for all domestic ATMs and for ATMs in 5overseas territories. This new ATM Switch will ensure scalability to handle more ATMs andtransactions. Currently, 1179 domestic ATMs and 36 ATMs in five overseas territories areoperational..

• Retail Depository Services are made available to our customers from 275branches. With a centralized depository application, branches are now equipped to providedepository services for both NSDL as well as CDSL. Depository customers can now avail ofthese services from any of the 275 designated branches. The services will be extended tocover all CBS branches of the Bank.

• Global Treasury: Global Treasury has been implemented in UK, Bahamas, UAE andBahrain and Singapore. Hongkong and India Global Treasury implementation planned inensuing year.

• Payment Messaging: The Bank has implemented Payment Messaging Solution in fiveoverseas territories. Payment Messaging Solution (PMS) is a SWIFT messaging platform forautomated flow of messages from CBS. This facilitates Straight Through Processing (STP) ofSWIFT messages generated from CBS, and also goes through AML check. Bank proposes toimplement PMS in all territories, including domestic branches authorised for dealing inforex transactions.

• City Back Offices: Centralization of back office functions at the branches hasbeen implemented to relieve the operational staff at the branches from the load ofcumbersome back-office functions and focus on sales and services. 19 Service Branches and48 Main Offices are functioning on the City Back Office model. These offices handle theentire clearing and collection functions of all branches in the city.

• Regional Back Office: The first Regional Back Office at Baroda hascommenced operations for the process of centralized account opening. The RBOs will caterto a cluster of 350 – 400 branches for back office activities, such as, accountopening, signature scanning, cheque book issue, statement printing, FDR renewals, TDScertificates and some part of MIS.

• Anti Money Laundering: To meet regulatory requirements, AML system hasalready been implemented in India and 14 overseas territories, viz., Oman, UAE, Fiji,Mauritius, Seychelles, Tanzania, Bahamas, Kenya, Uganda, Guyana, Hongkong, Botswana, U.K.,S. Africa.

• Help Desks: 24x7x365 Global Help Desk is functioning at the Data Centre.Bank has also set up Local Help Desks (LHDs) at all Zonal Centers manned by Bank’strained officers to handle day-to-day operational issues and these LHDs function from 8 amto 10 pm. All branches are connected to Global Help Desk and Local Help Desks by VOIPphones.

• IS Security: A robust Information Security Management System has been put inplace to protect the technology against security threat. Bank has implemented acentralized anti-virus program. Bank has also in place a comprehensive IT Security policyand associated procedures for various areas of IT security such as password policy, accesscontrol policy etc.

• HRnes: The Bank has successfully implemented the Human Resource Networking forEmployees Service with the main objective of creating a central database of its employeesfor facilitating decision-making, promotion and selection exercise as also for automatingother HR process. Employees are provided with the functionality of self-service.

• Centralized Payroll for employees has been implemented for all domestic officesin India rendering efficiency and accuracy.

• Training: The Bank’s training establishments have trained nearly 15000employees on CBS modules and other technology applications. Refresher courses are alsoconducted on week-ends covering specific Finacle modules and other applications.

• Disaster Recovery and Business Continuity: To ensure Business Continuity at alltimes Bank has implemented a state-of-the-art Data Centre and also a Disaster

• Recovery site. Drills are conducted at regular intervals and operationstransferred to the DR site seamlessly to ensure continuity of operations at all times

Future Plans on Technology Front

• Core Banking Solution and other applications will be extended to cover allbranches and offices in India and abroad.

• The Bank’s Internet Payment Gateway with 3D secure will be launched during2009-10.

• Four more Regional Back Offices are expected to be operational in Jaipur,Lucknow, Bhopal and Coimbatore.

• Single integrated Global Treasury covering India as well as overseas centreswill be completed.

• SWIFT operations across the globe will be centralized by hosting a SWIFT globalhub in India. Under this process, the individual SWIFT infrastructure in each overseasterritory will be dismantled and entire SWIFT operations across territories will beconducted through the global hub.

• As part of the Document Imaging and Workflow automation Project, Bank will beimplementing Loan Processing module, which will enable the Retail Loan Factories to tracksales lead and also track the progress of processing of proposals, right up to sanctionand disbursal of the loans.

• Several other Projects like Customer Relationship Management, Online Trading,Data Warehouse, Knowledge Management, Centralized Sourcing and Procurement System,Activity Based Performance Management and Balanced Score Card and Centralised PensionProcessing Cell will also be enabled during 2009-10.

The implementation of IT enabled Business Transformation Project provides the customera wide choice of delivery channels, convenience banking and a basket of products to suithis requirement. The Bank’s ultimate objective is to reorient itself as a highlytechnology enabled Bank and Bank of first choice for its customers in order to emerge as aleader in the global market place on every single parameter including technology.

Human Resources

In an environment where technology, business models are being replicated and a levelplaying field is created, people factor and the organization culture become the keydifferentiator in achieving business excellence. The Bank, foreseeing this emergingscenario conceptualized and initiated numerous HR interventions. It primarily involvedaligning Human Resources with the Business Transformation demands at Corporate and locallevels in different areas like hiring, performance management, and talent identificationand employee engagement. Technology up gradation in HR is also a major development in theyear.

HRnes (Human Resources network for employees’ services & Employee PayrollSystem HRnes (Human Resources network for employees’ services), the web-enabledenterprise wide HR solution was launched on 26.11.2007 and it was rolled out across thecountry during the year. Further, additional employee-friendly functionalities were addedto enable the employees to submit online applications for request transfer, grievanceredressal, promotions, selection, asset-liability statement, income tax declaration, etc.Payroll has been implemented in all branches/ offices in India enabling automaticcalculation and credit of salary in the Accounts of employees, PF and loan deductions,etc. This has significantly contributed in reduction of cost, improvement in efficiency inHR administration and convenience to the employees.

Leadership Development – Project LEAP

Post-2009 technology environment, competitive compulsions, entry of foreign banks,M&A will all tend to change the course of banking necessitating new breed of leadersat different levels. Managing and leading a financial services organization in such anenvironment would be a new challenge for future leaders.

Further, one of the key drivers for market leadership will be the Bank’s internalleadership. It is in response to this that the Project LEAP (Leadership enhancement andappreciation process) was conceived and launched aimed to groom our executives inleadership and capability building. Three hundred Executives are being groomed inLeadership in a phased manner. The rigorous process involves:

• Identifying a competency framework for future leaders in the Bank.

• Administration of psychometric instruments and 360 degree feedback for eachidentified executive for building on their strength and working in the areas wheredevelopment is needed.

• Classroom orientation & Action Learning Projects.

• Succession Planning.

Talent Identification and grooming through KHOJ

KHOJ initially was initiated as an in-house talent identification and developmentexercise in 2005. An element of self development and career planning is built into thesystem as this is a voluntary exercise where aspiring employees apply for selection forgrooming in various areas they perceive as their areas of strength in our operations.Encouraged by the huge response to the initiative, KHOJ exercise has been repeated in 2006and in 2007. Candidates selected under KHOJ are groomed, placed in the area of operationof their choice. As part of their development many are identified as change champions inmany of the new initiatives. Mentors are assigned for facilitating their grooming.Exclusive Conclaves of KHOJ selectees were organized.

In order to make the KHOJ selectees a vibrant and visible group, due weightage is givento their contribution in career progression, rewards, special assignments, etc.

Career Progression

To meet the Bank’s growth requirements and to fulfil the aspirations of employees,avenues for career progression has been numerous. Special efforts have been made tomaintain relatively younger employees manning key positions. Keeping this in view thefollowing numbers of employees were promoted to higher grade/scale during the year:

Recruitment

The Bank has been consistently meeting the requirement of employees in variousgrade/scale with the requisite competencies in order to meet the changing business profileand processes and also to replenish employees retiring from Bank’s service.Therefore, Bank recruited -76- Officers from campuses of various Business Schools duringthe year. The Bank is in the process of recruiting -2000- Clerical staff, -750- DROs,-200- Agriculture Officers, and -382- specialist officers in various grade/scales and theprocess is expected to be concluded by June, 2009. Further, Bank has selected -200-students from the campus of reputed Business Schools, including IIMs, MDI, XLRI, IITs,XIMB, NIMS, SP Jain, Jamanlal Bajaj, IISWBM, etc., who would be joining the Bank by June,2009.

Training

To keep up with the fast changing business scenario, product profile, processes,customer preferences, numerous technology applications and compliance & regulatoryrequirements, training has become a centre-stage activity. The Bank conducted 342 trainingprograms in the area of CBS covering 6234 employees during the year. To provideappropriate thrust in the area of Credit and Risk management, 193 programmes wereconducted covering 3590 employees. Further, 256 training programmes were conducted inother functional areas covering 4595 employees during the year. The resources of externalTraining Institutions and Business Schools were tapped for training employees in thefunctional areas where in-house expertise was not available. 741 Officers and Executivesattended training programmes in specialized areas at various external TrainingInstitutions and reputed Business Schools. Also 20 Officers/ Executives attended trainingoverseas.

Employee Conclaves

Corporate vision and strategies to yield results need to reach and getinstitutionalized at the operational unit levels. The very nature of widespread&distributed pattern of our operating units pose challenges for smooth percolation andwe need to have conscious, focused, planned localized interventions for the corporatevision and strategies to reach effectively and get translated to business results. As oneof the interventions to address these challenges Employee Conclaves were organized atdifferent centers for cluster of branches covering all staff members of such branches.Conclaves were also organized for specific segment of employees like lady employees, DROs,Campus recruitees, etc. This facilitates brain storming, jointly thought-out actionprocesses and ownership of the plans chalked out. This initiative has also achieved moreinvolvement at all levels, generating excitement, awareness and passion for performance.The response of employee to Conclaves organized in all the Zones have been highlyencouraging generating tremendous enthusiasm, involvement and positive energy.

HR Policies

The Bank’s belief in "Employees First" has ensured "CustomerFirst" philosophy that pervades business action across more than 3000 branches/offices of the Bank in 25 countries. The service conditions of the employees in variouscadres were codified. However, there are certain critical areas of concern to theemployees and also for the Bank where policy intervention would enhance businessperformance and level of satisfaction of employees. Therefore, transparent policies havebeen framed in the critical areas of Performance Management system and Transfer ofofficers, which would facilitate better performance and employee satisfaction. Further,existing policies are being reviewed and where not in existence, being framed, in theareas of recruitment, promotion, career development of specialist officers, overseasselection, etc.

Staff Strength

Composition of Scheduled Castes and Scheduled Tribes in the Employee Strength

Marketing

During the year 2008-09, brand "Baroda" continued to excel in providingworld-class service to its customers across the globe. Throughout the year, regular salescampaigns were organized to promote various products of the Bank especially

Current Account, Saving Account, and other retail business. Special drives wereundertaken to promote technology enabled services i.e. debit card, internet banking,online remittances, payment of online taxes, utility bills etc. during the year.

The Bank continued its focus on promotion of popular products and schemes as well asconcepts such as "Home Loan Factory", and "SME Loan Factory" throughsustained coverage in print, out-of-home media and industry presentations etc. The Bankstarted a separate page on SME in Economic Times to promote customized products andservices for SME business segment. The page titled ‘Bank of Baroda presents SMEFactory’ will be published on weekly basis. It is envisaged that this initiative willposition the Bank as a major lender for SME.

One of the major communication campaigns conducted during the year was ‘ShukriyaSau Salon Kaa’ to express Bank’s gratitude to all stakeholders for 100 years ofrelationship with them. Another major communication campaign of the year was ‘BarodaNext’. The campaign aimed at positioning Bank’s technology-based services withhuman-touch. The year 2008-09 also witnessed the culmination of year-long centenarycelebrations of the bank. In recognition of the Bank’s efforts to increase thebusiness across the globe, the Bank was awarded "Leading Public Sector Bank" in"Global Business Development" category by Dun & Bradstreet Banking Awardsand MIDAS Awards, New York for Marketing Effectiveness. The Bank bagged

"Silver Trophy" award for its corporate film and Quarterly Economic Reviewfrom the Association of Business Communicators of India (ABCI) during the year. Incontinuation of the Bank’s efforts to establish its branches as sales &servicecenter, the Bank plans to set up ‘City Sales Office’, an additional marketingchannel to reinforce the efforts of branches for business development, across 50 centersthroughout the country, shortly. With effective communication and strategic marketinginitiatives, the Bank enhanced its global image of being ‘India’s InternationalBank’.

Premises Re-Engineering & Ambience Enhancement

The following construction and other activities were initiated by the Bank during theyear 2008-09.

The following construction projects are in progress and are expected to be completedwithin the reasonable time limit.

1. Corporate Center at C-34 , Bandra Kurla complex, Mumbai

2. Administrative building at Gomtinagar, Lucknow

3. Administrative building at Jamshedpur, Jharkhand.

4. Building for Branch at Rajpipla.

5. Commercial-cum- Residential complex at Ghod Dod Road, Surat.

6. VKI, Jaipur.

7. Pant Nagar, SIDCUL.

8. Construction of Bank of Baroda Centenary year (2007-2008) Sir Sayajirao Nagar Grihaat Baroda for handing over to the Vadodara Municipal Corporation as an appreciation to thecity of Baroda on completion of 100 years of Bank of Baroda.

The construction projects at Mylapore and Alwerpet at Chennai, East of Kailash andJanakpuri at New Delhi are in the final stages of issuing tenders etc. It is theBank’s endeavour to make use of all the landed property purchased by the Bank to putto use by constructing either commercial or residential premises. The construction projectcompleted during the year and are in use/operation As regards this, one building,which was earlier occupied by the sub-staff has now been converted into Studio type flatsfor officers at Bhandup, Mumbai.

Refurbishment

Subsequent to the implementation of the CBS at Branches, the Bank has made it a pointto ensure that maximum number of branches are put under refurbishment, up gradation, facelifting, redesigning and improved ambience for facilitating convenient banking tocustomers. During the year, 290 branches were refurbished. The Bank has also initiatedsteps for standardization of the interior of branches and offices. Under the BusinessProcess Re-engineering, the Bank has initiated steps to establish Regional Back Offices(RBO) and City Back Offices (CBO) at different centers of the country. The RBOs at Jaipurand Baroda have already been furnished as per the requirement and are ready for operation.

Two MICR Centers at Bhavnagar and Jamnagar have been refurbished and functionalizedduring the year.

Increased use of IT to improve efficiency of the department The department isextensively increasing the use of IT in its day to day functioning to improve efficiency.The contracts are being finalised through e-tendering process.

Other Activity

As a part of the Bank’s conscious efforts to reduce rental burden, continuedefforts are being made to ensure optimum use of existing premises. As a result, the Bankcould surrender as much as 86,786 sq.ft. leased area during the period under review(2008-2009). It is the policy of the Bank to go for surrender of Maximum area in eachyear.

Branch Network: Brick and Mortar Distribution Channels Closer to the Customer (31stMarch 2009):

Domestic Subsidiaries and Associate

The performance of "Subsidiaries & the Associate Bank" of the Bank during2008-09 was good except for that of the BOBCARDS Ltd., which incurred a loss of Rs 11.42crore due to stringent application of the IRAC Norms (Prudential Norms on IncomeRecognition, Asset Classification & Provisioning). The Baroda Pioneer Asset ManagementCo. Ltd. too incurred a loss of Rs 6.12 crore primarily due to higher establishmentexpenses.

However, development plans are in progress for all the subsidiaries of the Bank. Aturnaround strategy is being carved out for the BOB Capitals Ltd., which would soon see acommencement of stock broking operations. For BOBCARDS Ltd., active handholding with theParent Bank is under implementation with a thrust on NPA recovery and consolidation of itsoperations.

Implementation of Official Language Policy

During the year under review, the Bank made significant progress in promoting andpropagating the use of Official Language and ensured compliance of various other statutoryrequirements besides recommendations of Parliamentary Committee on Official Language. TheBank could achieve all major targets set by the Government of India. In recognition of theBank's outstanding performance, the Bank was appreciated at various levels and awardedwith prestigious Indira Gandhi Rajbhasha Shield on all India level for the thirdconsecutive year and thus created a history by making a hat trick.

The Bank’s Chairman & Managing Director Shri M.D. Mallya, received the awardat the hands of Her Excellency Smt. Pratibha Patil, President of India on 14th September,2008 at Vigyan Bhavan, New Delhi. The Town Official Language Implementation Committeesfunctioning at Jaipur and Baroda under the convenorship of the Bank have discharged theirresponsibilities excellently and provided suitable guidance to the member Banks. Thesecommittees were awarded first and second prizes respectively for their outstandingperformance/ functioning, besides, our Zonal office, Pune, Jaipur & Bhopal andRegional office, Goa were also awarded by the respective Regional Official LanguageImplementation offices, Ministry of Home affairs for implementation of Official LanguagePolicy of Government of India in their area of operations. During the year, the Bank hasstarted training programme for Unicode multilingual package for their employees with theview to promote use of Hindi in day-to-day banking.

The Third Sub-committee of Parliament on Official Language visited Zonal office, NewDelhi, branch office Mandapam (Rameshwaram), Haridwar and Ahmednagar, R.O. Goa and R.O.Udaipur of the Bank and appreciated the efforts/work done by the Bank in Official LanguageImplementation. The Bank's in house Hindi magazine "Akshayyam" was awarded 4thprize by RBI under Hindi magazine category. Besides, the Bank’s House Journal"BOBMAITRI" was awarded by ABCI, Mumbai under bilingual House Journalcompetition.

Board of Directors

Shri M.D.Mallya, was appointed by the Central Government as Whole time Directordesignated as Chairman and Managing Director w.e.f. 07th May 2008, under section 9(3) (a)of the Banking Companies (Acquisition & Transfer of Undertakings) Act, 1970.

Shri Rajiv Kumar Bakshi, was appointed by the Central Government as Whole time Directordesignated as Executive Director w.e.f. 06th November 2008, under section 9(3) (a) of theBanking Companies (Acquisition & Transfer of Undertakings) Act, 1970, vice ShriS.C.Gupta who ceased to be a Director on his appointment as Chairman and Managing Directorof United Bank of India.

Shri Amitabh Verma, IAS was nominated by the Central Government as a Director w.e.f.10th June 2008, under section 9(3) (b) of the Banking Companies (Acquisition &Transferof Undertakings) Act, 1970 representing the Central Government vice Shri G.C. Chaturvedi,IAS who ceased to be a Director on the nomination of Shri Verma.

Smt. Masarrat Shahid nominated by the Central Government under section 9(3) (h) of theBanking Companies (Acquisition & Transfer of Undertakings) Act, 1970, ceased to be aDirector w.e.f 14.09.2008 on completion of her tenure.

Shri Maulin A. Vaishnav nominated by the Central Government under section 9(3) (h) ofthe Banking Companies (Acquisition & Transfer of Undertakings) Act, 1970, ceased to bea Director w.e.f. 28.11.2008 upon his resignation.

Dr. Dharmendra Bhandari, Shri Manesh P Mehta and Dr. Deepak B. Phatak representingshareholders other than Central Government, elected as Directors under section 9(3) (i) ofthe Banking Companies (Acquisition & Transfer of Undertakings) Act, 1970, ceased to beDirectors w.e.f. 15.11.2008, on completion of their tenure.

Dr. Dharmendra Bhandari, Dr. Deepak B. Phatak and Shri Maulin A. Vaishnav were electedas Directors from amongst Shareholders other than Central Government under section 9(3)(i) of the Banking Companies (Acquisition & Transfer of Undertakings) Act, 1970. Theelections were held at the Extra Ordinary General Meeting of the Shareholders of the Bankheld on 23.12.2008 and they assumed office w.e.f. 24.12.2008 for a period of three yearstill 23.12.2011.

Directors’ Responsibility Statement

The Directors confirm that in the preparation of the annual accounts for the year endedMarch 31, 2009:

The applicable accounting standards have been followed along with proper explanationrelating to material departures, if any;

The accounting policies framed in accordance with the guidelines of the Reserve Bank ofIndia, were consistently applied.

Reasonable and prudent judgment and estimates were made so as to give true and fairview of the state of affairs of the Bank at the end of financial year and of the profit ofthe Bank for the year ended on March 31, 2009;

Proper and sufficient care was taken for the maintenance of adequate accounting recordsin accordance with the provisions of the applicable laws governing banks in India; and

The accounts have been prepared on a going concern basis.

Acknowledgement

The Bank has taken during 2008-09 a number of initiatives on business, technology,marketing and HR fronts. Successful translation of these initiatives into actual businessand earnings growth has been primarily due to the employees of the Bank, who through theirpassionate work helped the Bank emerge as a leading PSU bank. We are grateful to ourpeople for their continued commitment and dedication towards the Bank. Our customers havealways supported us in all our initiatives. If in the process of technological andbusiness transformation, a few of our customers have been inconvenienced, they have bornethe same with patience and equanimity. We are grateful to our customers for theircontinued patronage and encouragement.

Our shareholders have been our Key Partners in progress. We are grateful to them fortheir support and also for the "confidence" that they have placed in us. TheBoard of Directors of the Bank places on record its appreciation for the continued supportand patronage received from its customers, shareholders and well-wishers in India andabroad.

The Board is also indebted to the Government of India, RBI, SEBI, other regulatoryauthorities, various financial institutions, banks and correspondents in India and abroadfor their unwavering and valuable support and guidance to the Bank from time to time.

For and on behalf of the Board of Directors,

M. D. Mallya

Chairman and Managing Director

Mumbai

26 May, 2009