Federal Bank Ltd

Global Scenario

Global growth slowed in 2011, but the world economy stayed on the path of slowrecovery, reducing the likelihood of a double dip recession. Performance of the majoradvanced economies has been a point of concern as the economic outlook of the Euro Areacontinues to be grim in the shadow of a protracted sovereign debt crisis. Euro Crisisremained as a dominant global factor and a source of volatility in asset and currencymarkets.

Signs of better than expected recovery is shaping up in the U.S indicate that modestrecovery will continue in FY 13.

Large scale liquidity infusions by the European Central Bank have significantly reducedthe stress in global financial markets. However, a sustainable solution to the Euro areadebt problem is yet to emerge. Recent developments, for example in Spain, indicate thatthe Euro area sovereign debt problem will continue to weigh on global economy.

Developing countries and economies in transition are expected to continue to stoke theengine of the world economy, growing on average by 5.6 % in 2012. Among BRICS countries,growth in China slowed from 10.4 % in 2010 to 9.3 % in 2011 and is projected to slowfurther to below 9 % in 2012-2013. Output growth in Brazil was already halved, to 3.7 %,in 2011 and is expected to cool further to a 2.7 % growth in 2012. The slowdown in growthwas relatively modest in Russia and South Africa.

Domestic Economic Scenario

While the rest of the world has been grappling with the after effects of the EuropeanDebt Crisis, the Indian Economy in 2011-12 has also seen a deceleration in growth.Quarterly growth rates have consistently fallen in 2011-12 since the global crisis of Rs.2008.

The GDP growth rate in India which stood at 7.7 % in Qi dropped significantly andreached a level at 5.3 % as on 31^st March 2012. This was mainly due todeceleration in Industrial Growth. The service sector has maintained its strongperformance during the fiscal year, proving it to be the most resilient sector of theeconomy.

During 2011-12 rupee came under strain towards the last week of August 2011 under theimpact of outflow of funds by FIIs and remained continuously under pressure till December2011. From a peak of Rs. 43.94 on 27th July 2011 rupee touched a low of Rs. 54.23 per USDon 15th December 2011. With the intervention of RBI in the Forex market and tightenedregulatory measures by narrowing open position limit and other measures, speculation wasdiscouraged in the Forex market.

Inflation

Last two years we have witnessed high rate of inflation. The headline WPI inflation,which remained above 9 % during April-November 2011, moderated to 6.89 % by end March2012. Inflation of Food articles continues to be high and inflation in protein items is indouble digits, reflecting persistent structural demand-supply imbalances in protein foods.

After consistently high levels of inflation around 9 to 10 % for more than twentymonths, the wholesale price index (WPI) dipped to a two year low of Rs. 6.55 % during themonth of January 2012. Primary articles inflation which was in double digits for over twoyears till October 2011, moderated to 8.5 % in November 2011 and further to 2.3 % inJanuary 2012 and has bounced back to 9.6 % as on March 2012.

Manufactured products inflation remained elevated throughout the fiscal year 12, albeitdeclining from 8.1 % in October 2011 to 6.5 % in January and further declining to 4.9 % inMarch 2012.

Fuel inflation on other hand moderated from over 15 % in November-December 2011 to 10.4% in March 2012 even as global crude oil prices had risen sharply. Non-Food manufacturedproducts inflation decelerated significantly from 8.4 % in November 2011 to 4.7 % in March2012, on the back of a slowing domestic demand and softening of global non oil commodityprices.

Monetary and Liquidity Conditions

Liquidity conditions worsened during 2011-12, which remained on deficit mode and RBIresorted to open market operations and lowered the CRR twice to 6.0 % to 5.50 % and againto 4.75 % which is a 125 basis point reduction. Interest rate hardened during the year2011-12 on account of persistent high inflation and increase in repo rates by RBI fivetimes during the fiscal year (Both Repo and reverse Repo rates were increased by 175bpsfrom 6.75 % to 8.50 % and from 5.75 % to 7.50 %).

The money supply during the fiscal year remained subdued at 13 %, lower than the RBI'sindicative level of Rs. 15.5 % on account of slowdown in deposits growth and currencygrowth. Additionally, structural changes and increase in agricultural productivity hashelped in containing the food articles inflation.

In the Equity front, the market turned bearish in 2011-12 and Sensex plummeted to 17404points as on 31 Mar 2012 from 19445 as on 31st March 2011, registering a decline of Rs.10.5 %. Rates in money market and G-Sec, market remained high due to tight liquiditysituation, high inflation, increase in policy rates by RBI and higher borrowings byGovernment. During the year call rates went up from around 6.5 % in April to about 9 %-9.5 % in March 2012 and the yield on benchmark 10 year government bonds also scaled upfrom 7.98 % as of March 31, 2011 to 8.57 % as of March 31, 2012.

Liquidity management remained a major challenge for Reserve Bank of India during thelast fiscal year. Beginning November 2011, the liquidity deficit went beyond the comfortlevel. To address the same RBI injected primary liquidity of around Rs. 1.3 trillionthrough open market operations and Rs. 0.8 trillion through reductions in cash reserveratio by 125 basis points.

The Banking Scenario

Indian Banking Sector remained more or less stable despite the turbulent globalenvironment on account of the Euro Crisis. During Q4 of Rs. 2011-12, deposit rates ofScheduled Commercial Banks remained mostly unchanged from their peak levels attained in H1of Rs. 2011-12. Lending rates marginally notched up and seem to have plateaued in H2 ofRs. 2011-12 in line with the peaking of the policy rate cycle. Despite tight liquidityconditions, successive policy rate hikes and high cost of funds for banks, the base rateremained sticky on account of slowdown in non-food credit growth during H2 of Rs. 2011-12.

During the year aggressive reforms were introduced by the Reserve Bank of India with aview to building robust and resilient financial system. More stringent capital andliquidity measures for commercial banks were implemented and steps were taken by RBI tobuild provision buffers. During the year RBI adopted new prudential compensation practicesfor commercial banks. Various institutional mechanisms and tools for monitoring risks wereadopted and put in place.

The deposit growth of the banking system remained robust upto December 2011, butsubsequently it lost pace. However with large deposit accretion during the last month ofthe fiscal year, deposits growth during 2011-12 stood at 17.4 % against 15.9 % during2010-11. Credit growth of Indian commercial banks during the fiscal year showed adecelerating trend from December 2010 on the back of elevated inflation, interest ratesand intensification of supply -side constraints. The fiscal year ended with bank creditgrowth of Rs. 19.3 % against 21.5 % growth during 2010-2011. The divergence between creditand deposit growth rates had narrowed during the first three quarters of FY 12, it widenedduring the fourth quarter due to sharper deceleration in deposit growth in Q4, FY 12.

Banks' lending to service sector grew by 14.7 % in 2011-12 compared with 23.9 % in2010-2011. Within the services, loans to companies offering financial services andcommercial real estate grew at the slowest. Credit to finance companies grew at 26.3 % in2011-12 after growing at a sizzling pace of around to 54 % the previous year. AlongsideRBI recently curbed banks' exposure to companies offering gold loans to 7.5 % from 10 %earlier.

With reference to changes on the regulatory front during FY 12, interest rate onsavings deposits was initially raised from 3.50 % to 4.0 % and later it was de-regulated.Provisioning norms for N PA and restructured accounts were tightened. During the year RBIhad advised banks to reduce their exposure to debt oriented mutual funds, permitted banksto open branches in Tier-2 centres without prior license and modified regulations on microfinance and NBFC's

The Profit After Tax (PAT) of Indian Banks for the fourth quarter ended March 2012stood at Rs. 20,188 Cr increased by 14.62 % Q-o-Q and 51.23 % Y-o-Y. Private Sector bankshave relatively performed better than Public Sector Banks in terms of gaining market shareand have displayed strong bottom line numbers.

Going forward to FY 13, RBI has projected aggregate deposits of commercial banks togrow by 16 % and non- food credit by 17.0 % in line with the overall GDP growth of Rs. 7.3% and broad money supply growth of Rs. 15.0 %.

RBI has also instructed all banks in India to start the implementation of Basel IIInorms in a phased manner starting with the adoption of Capital adequacy norms by January2013. Migration to Basel III will ensure better capital standards & tighter liquiditynorms thereby absorb any shocks or systematic risk in the financial sector. Strict incomerecognition, asset classification and provisioning norms of RBI will ensure that bankshave quality assets in its portfolio. With increased levels of competition, banks henceare giving ample thrust on the key areas of quality of assets, risk return management,liquidity management, introducing innovative products, leveraging on technology andadopting HR practices in tune with changed economic scenario.

Review of Business Performance

Having achieved a size of Rs. 60,627 Cr plus in the Balance Sheet and total businessaround Rs. 86,693 Cr at the end of March 2012 with a growth rate of Rs. 15.64 % on a Y-o-Ybasis, The Bank is set for phenomenal growth through organic means and targets a totalbusiness size of over Rupees One Trillion by the end of March 2013. The financial strengthof your Bank is reflected in the Bank's net worth of Rs. 5,706.33 Cr at the end of March2012. Bank's Capital to Risk Weighted Assets Ratio (CRAR) stands at 16.64 % at the end ofMarch-2012 as per Basel II norms.

In FY 12, your bank posted strong net profit growth of Rs. 32.31 % Y-o-Y and achievedRs. 776.79 Cr. During the year the Bank's asset quality improved considerably with grossNPA ratio declining to 3.35 % and net NPA ratio declining (by 11.62 %) to 0.53 %.Slippages during FY 12 were reduced by Rs. 180.53 Cr to reach Rs. 695.31 Cr. Withincreased recovery efforts, recovery rate increased to 58.12 % in FY 12.

Advance and deposit portfolio of your Bank grew in tandem with the industry. There wasa sustained increase in Advances portfolio which grew by 18.16 % Y-o-Y to Rs. 37,755.99 Crand deposits grew by 13.77 % Y-o-Y to Rs. 48,937.12 Cr.

During the year your Bank strengthened its recovery mechanism by utilizing SARFESI Actand other tools more effectively. As a result of which the recoveries picked upsignificantly over the last few quarters, with a recovery rate of Rs. 58.12 %. The Bankhas strengthened its risk management systems and has now separated the two functions -credit appraisal and credit sourcing.

During the year total Income of the Bank grew by 33.31 % to reach Rs. 6,090.73 Cr. Withan impressive growth of Rs. 32.31 %, your Bank registered a Net Profit of Rs. 776.79 Cr onY-o-Y Basis. Return on average assets of your Bank improved from 1.34 % to 1.41 %.Earnings per Share improved to reach Rs. 45.41 from Rs. 34.32 from the previous fiscalyear.

The business per employee and profit per employee as on March 31, 2012 increased to Rs.10.11 Cr. and Rs. 9.11 L respectively from Rs. 9.23 Cr and Rs. 7.26 L as on 31 Mar 2011.The Cost to Income ratio increased to 39.40 % as on 31 Mar 2012 against 36.94 % as on 31Mar 2011.

The retail advances of the Bank constituted 27.37 % of the gross advances while SMEcontributed 26.98 %. The advance to priority sector of your Bank stood at Rs. 12,652.54 Cras on 31 Mar 2012. During the year Lending to Agriculture sector grew by 15.21 % and stoodat Rs. 4,318.74 Cr.

Corporate Lending

Corporate lending contributed a solid support to the loan portfolio of the Bank. Tofurther consolidate its position, the Bank has shifted its Large Corporate Department toMumbai, the center of Corporate Credit in India. This move aims to fortify the Bank'sfoothold in the Wholesale Banking market of the country.

As on 31 Mar 2012 Large Corporate advances constituted about 44 % of the total advanceportfolio. The business from this segment registered a growth rate of Rs. 23.15 % in thefinancial year ended March 31, 2012. The Bank provides comprehensive financial and riskmanagement solutions to clients generally with a turnover of over Rs. 500 Cr or with acredit requirement of Rs. 25 Cr and above.

The Bank aims to partner the growth of the small corporate sector and to be the mostpreferred banker for the mid corporate sector, while having a fair share in the largecorporate sector. Under Corporate Banking, the Bank offers financial solutions to variouscategories including large, mid and emerging Indian Corporate Groups, Public SectorEnterprises, Government Bodies, Multinational Companies and Financial Institutions. Bankoffers an array of banking products and services covering working capital, term finance,trade finance, specialized corporate finance products, structured finance, foreignexchange, syndication services and electronic banking requirements of corporate clients.The Bank is committed to provide innovative financial solutions by leveraging on superiorproduct delivery, knowledge-based advisory, industry benchmark service levels and a strongclient orientation.

New customer acquisition and relationship-strengthening constitute the two-prongedgrowth strategy. The Bank has endeavoured to identify prospective corporate clientele byanalysis of client data obtained from all credible sources. The Bank is trying to reachout to the prospective clients that match our parameters and policies. Emphasis has beenlaid to fine-tune the existing relationships and increase the fee-based income of the Bankby increasing Forex and Non Fund based business. With these objectives, the Bank has setup Corporate Consultancy and Business Development Division in Mumbai.

The Bank took an active interest in recruiting specialized officers from campuses andInstitute of Chartered Accountants of India (ICAI) for inducting fresh talents.

The loan policy of the Bank has put in place a matrix of industry exposure limits witha view to de-risking the portfolio through diversification. The Bank has also stipulatedminimum entry-level exposure criteria based on credit rating for taking large newexposures. Prudential ceilings are prescribed for exposure in long-term assets, unsecuredadvances etc. Apart from subjecting each credit exposure to robust risk analysis atseveral levels it is also vetted by a Credit Risk Vetting Committee consisting of seniorexecutives of the Bank. The exposures are periodically examined for signs of stress sothat early corrective actions can be initiated.

Micro, Small & Medium Enterprises

The focal thrust of Federal Bank has always been on the Small and medium enterprises /entrepreneurs and is built on the philosophy of sharing the trust and confidence withindustrialists, traders, businessmen and agriculturists.

Our SME portfolio continues to be the spark in the business engine of the Bank over theyears. During the past financial year, SME advances on a Y-o-Y basis increased to Rs.10,471.82 Cr and Current Accounts during the year increased to Rs. 2,484.42 Crrespectively. The total priority sector advance has grown by Rs. 1,551.63 Cr and reachedRs. 12,652.54 Cr as on 31 Mar 2012. The year also saw refinement in our Federal RentSecuritization and Premises Loan schemes. We introduced the new SME loan product Fed SMELAP, with simplified credit assessment procedures and flexibility in granting financeagainst the security of fixed assets. We have also tied up pan India with Tata Motors andAshok Leyland for financing their Commercial Vehicles.

Your Bank has crossed the milestone of installation of Rs. 5000 plus POS Machineswithin a short span of time. We are also planning to introduce Wireless POS machines (GPRSenabled) which will be deployed in the coming year. The Payment Gateway services providedby the Bank were also well accepted among the business class. Bangalore Metro RailCorporation Limited has selected your Bank as their merchant Bank for automatic farecollection (AFC) for the 13 stations in reach 3, and to issue 2 in 1 combo travel cards.

We have signed MOU with LIC for NEFT payment accounts of LIC Divisional Offices and hasbeen successful in reaping in the benifits. Your Bank also have a strong CollectionManagement System and have entered into CMS arrangements with leading Corporate Firmsacross the country. We could start Cash Pick up Services pan India during the financialyear, which is expected to bring in substantial current account customers to our fold.

We also launched the following schemes during the year under report

• Fed Arogya - A Specific Current account scheme catering to the HealthSector.

• Fed-Chit - Exclusive current account catering to Chit Companies withtailor-made technological supplements (auto debits, customized net banking, E-Collectionetc.)

• Fed-Elite - A current account scheme empowering the field to cater to elitefresh clients with "Zero balance - Charge Free" current account.

• Visa Business Debit Cards: We have added a feather to suffice therequirements of our corporate customers by offering them Business debit cards.

• Fed + Amrita: A Health Portal for Amrita Institute of Medical Sciencesenabling card holders and our customers to book online for various services/payment ofin-patient bills etc. The Bank plans to have a complete health portal and associate withleading multi speciality hospitals across the nation in the ensuing year.

Retail Business

The Bank posted an impressive growth of Rs. 23.59 % in resident retail deposits duringthe reporting period. Retail deposits peaked at Rs. 41,279.19 Cr from the base level ofRs. 33,400.47 Cr. Resident Savings Deposits grew by 15 % and reached Rs. 6,263 Cr.

As part of extending personalized and customized services to HNI customers, Bank hasbeen providing Priority Banking Services across various branches. The premium servicechristened "FedSelect" is presently made available at select 70 branches and isbeing slated to cover another 30 branches by the end of this fiscal year. Our customerswill experience a different world of banking through these special banking lounges andcustomized service of dedicated customer relations personnel. We also offer Home Bankingservices in select locations under this facility.

The bank has also introduced a bouquet of Pre Paid Cards which includes Gift Card,International Travel card for our customers etc. We also launched Utsav Rewards, anattractive Debit Card Loyalty Rewards Programme to our customers so as to make theirshopping experience more delightful.

The Bank has always been pro-active in the sales of allied products and has given ahuge thrust by offering Systematic Investment Plan (SIP), which acts as a vehicle forwealth creation for our customers.

Focus was given in training our officials on Mutual Fund products, so that right schemecan be offered to the right customer from the best available proposition mix. We areselling life insurance products from our Life insurance associate IDBIFEDERAL LifeInsurance Co. Ltd.

A sizeable volume of Federal Pure Gold was sold through our select branches. The Bankalso offers Depository Services and e-trading facilities to our investor customers. Thedepository services are offered through 183 designated branches across the country. TheBank has an exclusive Depository Services Division at Kochi to support the depositoryservices offered by the Bank.

Fed- e-trade, a 3 in 1 online trading facility offered to customers in association withGeojit BNP Paribas provides customers the ease of trading in Capital Market from thecomfort of their homes. The Bank has a tie up with Bajaj Allianz General Insurance Companyfor distribution of General Insurance products across the Bank.

The Bank has launched various programmes as part of cross selling initiatives duringthe reporting period. Customized products and attractive offers were made to select groupof customers through this initiative. An elite personal loan scheme was launched targetingour good and loyal liability customers as a Pre-approved offer and a large number of ourcustomers made use of this facility. The Bank also ran campaigns targeting housing loancustomers with good repayment history by offering them Home plus loan products under thegreen channel in attractive terms and Federal Pure Gold with discounts.

The retail loan book of the Bank reached Rs. 10,623 Cr forming 28.13 % of the totaladvances of the Bank. Gold loan portfolio, which was one of the focus area of the Bankthis year, showed a quantum growth of Rs. 127 % (excluding Agriculture gold loan) to reacha figure of Rs. 2,432 Cr even in the backdrop of intense competition from privateplayers/NBFCs. Housing and Auto Loans also continued to be a focus area of growth. As on31 Mar 2012, there were 20233 Educational Loans outstanding with balances totaling to Rs.352 Cr. We have in place more refined norms in sanctioning of retail loans to improve theasset quality.

Agriculture & Financial Inclusion

The Bank has registered a Y-o-Y growth of Rs. 15.2 % in its Agricultural CreditPortfolio as on 31 Mar 2012 and reached a business figure of Rs. 4,318.74 Cr from the baseof Rs. 3,748.54 Cr.

As part of the growth plan in the Agri Business Sector, the Bank has adopted anaggressive marketing strategy for new customer acquisition and for establishing linkageswith major Agri Business Clients by deploying a force of agricultural credit specialistsfor sourcing of fresh proposals and servicing a multitude of customers.

Your Bank offers various Agri Business Products including Federal Kissan Credit Cards,Agricultural Cash Credits, Medium Term Loans, Long Term Loans etc. customized to suit therequirements of the farming community under plantation, horticulture, land development,irrigation, farm mechanization, construction of rural godowns, cold storage, green house,floriculture, allied activities like dairy, poultry, fishery, goat rearing, agroprocessing, finance to Agri-input dealers etc.

The Bank is committed in increasing its credit dispensation to the agricultural segmentand empowerment of the farming community through various initiatives including newproducts like Federal Green Plus Loan Scheme and Scheme for Financing Broiler Poultrywhich are already implemented. Launching of new innovative products like FinancingPrecision Farming, Poly House Cultivation, Financing Rubber Producers' Societies etc. arein progress.

The Bank has established co-financing tie up with National Bank for Agriculture andRural Development (NABARD) for co-financing under Agricultural Projects/Agro and foodprocessing, High-Tech Agriculture, rural development schemes, Agricultural MarketingInfrastructure, schemes for replanting of tea, modernization of tea factories etc.

Financial Inclusion - Information & Communication Technology Model

Federal Bank, as part of its mission to reach out to those who are deprived of bankingservice, has successfully implemented Biometric Smart Card and Micro ATM based FedJyothiproject in 61 villages through Business Correspondent services in Kerala and Maharashtra.

Award and Recognition

As a recognition for the speedy and successful implementation of FEDJYOTHI in 13allotted villages in Kerala, the Bank received the memento for Total Financial InclusionDeclaration of Kerala State from the Hon'ble Chief Minister, Shri. Oommen Chandy.

Meaningful Financial Inclusion

Federal Bank has also gone a step ahead in the field of Financial Inclusion with theimplementation of Meaningful Financial Inclusion programme in our model village Thuruthy,Vengoor West in Ernakulam district by way of extending micro credit, nurturing of SelfHelp Groups, formation of Farmers' Clubs and engaging in development programmes to augmentrural income and to ensure sustainable livelihood for the villagers through our GramaJeevan financial inclusion branch and Business Correspondents.

Financial Literacy and Credit Counselling Centers

The Bank has also set up 12 Federal Ashwas Financial Literacy and Credit CounsellingCenters with an aim to educate the public especially in the rural areas on intelligentborrowing and to save them from the debt trap by offering preventive/curative creditcounseling.

Institutional Tie-ups with Schools

Understanding that education and literacy are imperative for effective FinancialInclusion, the Bank has conducted workshops in over 120 Higher Secondary Schools acrossKerala for the benefit of more than 40,000 students.

Adoption of Schools

The Bank has taken the initiative to distribute refurbished computers to the studentsin various schools. The Bank has also adopted 10 tribal schools in Wayanad & Idukkidistricts to provide basic education to the tribal children in remote and far flung areas.

Growth in Advance with Quality

The Bank has initiated various measures to maintain asset quality and streamlined N PArecovery management process, particularly in view of the deteriorating asset qualityconcerns of the banking industry in general.

Concerted efforts have been made for recovery/up gradation of accounts which wererecently slipped as N PA. Thrust was given for monitoring and timely follow-up of accountswhich had shown symptoms of stress, recovery measures under SARFAESI Act and settlementsthrough compromise were adopted and services of Recovery Agents /NPA Resolution Agentswere availed of, wherever found necessary, for augmenting NPA recovery.

As a result of the aggressive measures adopted by the Bank, against the gross NPA ofRs. 3.49 % and Net NPA of Rs. 0.60 % as on 31 Mar 2011, gross NPAs could be brought downto 3.35 % and net NPA to 0.53 % as on 31 Mar 2012.

As on 31 Mar 2012, the Bank held a total provision of Rs. 1,055.33 Cr for NPAs,including a floating provision of Rs. 179.52 Cr. The total provision coverage for NPAs ason 31 Mar 2012 has been 81.13 %.

NRI Business

During the fiscal year 2012, NRI business of the Bank registered a growth of Rs. 35.09% reaching a level of Rs. 11,184 Cr from a base of Rs. 8,279 Cr. The low cost SBNREportfolio grew by 27 %. We were the first Bank to respond to deregulation of interestrates on NRE fixed deposits and our NRE fixed deposit portfolio grew by 91 % during FY 12.Millionaire FSF, a recurring deposit product launched by the Bank was well accepted by ourNRI patrons. Our representative office and vibrant team abroad are acting as Banks gatewayto Gulf Co-operation Council, offering our service and support to our NRI customersabroad. The overseas team was further strengthened during the previous FY and the presentstrength is 35. As a part of our strategy to focus beyond Kerala, experienced businessdevelopment managers are posted in major Zones. Extending better banking convenience toour NRI customers through virtual and online banking is our immediate goal.

International Banking and Cross Border Remittances

We have a strong presence in inbound cross border remittance business. Out of the 93exchange houses from Gulf Co-operation Council (GCC), Hong Kong and Singapore having RupeeDrawing Arrangement with Indian banks, we have got remittance tie ups with 60. In additionto this we have got inward remittance tie up with Western Union, Xpress Money, VISA MoneyTransfer, Remit2India as well as Cash Payout arrangements (Fed e Cash) with Banks inSaudi.

Out of the USD 63.60 billion inflow into India during the year 2011-12, our share comesto 7.09 %. We have handled 40 Lakh inward remittances during the year with an inflow ofRs. 23,000 Cr.

We have a state of the art remittance engine FedFast Plus through which money can beremitted to the beneficiaries' accounts with us in seconds and with other banks In Indiaat hourly intervals as per the NEFT clearance schedule.

The Bank won the international ACI Excellence Awards 2012 in the PaymentsTransformation category for two of the projects, VISA Fast Funds using VISA debit cardsand Bank's Aadhaar (UID) based Authentication for Payments.

Foreign Exchange Business

The Bank undertakes all types of foreign exchange business. As on 31 Mar 2012, the Bankhad two 'A' Category branches and seventy six (76) 'B' Category branches for handling theforeign exchange business. Swift connectivity has been extended at the designated branchesto facilitate faster and reliable communication with major banks all over the world.

Export credit facilities are provided both in rupee and in foreign currency forpre-shipment activities and post-shipment fund requirement of the exporters. The Bankextends export credit facilities to exporters of cashew, seafood, garments, minerals,coir, spices, other food products, leather, rubber, pharmaceutical products, gems,jewellery and other items.

Import credit facilities are extended for import of goods including chemicals, timber,raw cashew nuts, paper and electronic goods. The Bank arranges Buyer's Credit for itsimport customers from various overseas banks.

The Bank conducted regular one-to-one meetings with exporters/importers to strengthenthe relationship and assess the business position and credit requirements. Updates onForeign Exchange Markets movements are sent to the clients regularly.

The Bank is giving thrust to the development of the Foreign Exchange business and isendeavouring to improve the skills of the operating personnel through meetings,interactions and training programs. This enables the officials of designated branches toimprove their efficiency substantially. Simultaneously, the Bank is trying to centralizeselected Foreign Exchange functions at Head Office to improve efficiency and effectivenessof the designated branches dealing in Foreign Exchange. Foreign Exchange Cell at theBank's Treasury has already initiated a programme to codify the relevant RBI/FEDAIinstructions for the conduct of the Foreign Exchange business, in the form of mastercirculars.

Integrated Treasury Operations

The Bank's integrated Treasury Operations involve maintenance of Statutory Reserverequirements, Balance Sheet Management, trading in Money Market, Bonds and Debentures,Equity and Foreign Exchange. The Bank has established dedicated and full-fledged dealingdesks for various segments like Foreign Exchange business, Merchant Trading, CurrencyFutures, Money Market, Government Securities, Bonds and Debentures, Certificate ofDeposits, Commercial Paper, Interest Rate Swaps and Equity at its dealing room in Mumbai.To encash the trading opportunities in Certificate of Deposit and Commercial Papers, aseparate trading desk has been established under Money Market.

The Bank has commenced trading actively in Currency Futures in all approved Exchanges.The strength has been augmented by providing adequate personnel at trading desks to encashthe trading opportunities. The Bank has revamped the Interest Rate Swaps (IRS) desk whichundertakes activity of trading on IRS for proprietary dealings and balance sheet hedgingpurposes. During the fiscal year 2012, the Bank held interactive sessions with itsexport/import clients. A separate Marketing Team has been formed at Treasury Departmentfor marketing of various Treasury Products.

The Bank raises resources in bulk through Certificates of Deposit, for which the Bankenjoys the highest rating of A1+ by CRISIL. The Bank has installed various tradingplatforms like Reuters, D2, FX Clear, BARX, AUTOBAHN, 360T and COMMERZ in the dealing roomfor a better and streamlined trading activity in foreign exchange business.

The Bank is represented on FIMMDA board by virtue of Head - Treasury being one of thetwelve Directors of FIMMDA. The Bank has been re-nominated as a Managing Committee memberof FEDAI in FY 2012.

Integrated Risk Management

The primary responsibility of laying down risk parameters and establishing anintegrated risk management framework and control system rests with the Board of DirectofRs. A Board level committee, viz. the Risk Management Committee (RMC) oversees managementof Credit, Market and Operational risks. Three separate Executive level committees, viz.the Credit Risk Management Committee (CRMC), Asset Liability Management Committee (ALCO)and Operational Risk Management Committee (ORMC) ensure effective management of credit,market and operational risks respectively.

Integrated Risk Management Department (IRMD) of the Bank is headed by a Deputy GeneralManager. Credit, Market and Operational risk management are functionally assigned to threeseparate cells under IRMD.

The Bank has put in place the following policies for risk management, approved by theBoard of Directors:

1. Integrated Risk Management Policy

2. Credit Risk Management Policy

3. Asset Liability Management Policy

4. Operational Risk Management Policy

5. Stress Testing Policy

6. Business Continuity Plan Policy

7. Policy on Internal Capital Adequacy Assessment Process (ICAAP)

8. Disclosure Policy and

9. Loan Policy

The Bank has established an independent on site Mid-Office in Treasury Department,reporting directly to the Head of IRMD. The Mid-Office scrutinizes the treasury deals andtransactions from the point of view of market risk management.

Compliance with Basel II framework

As per the prudential guidelines issued by Reserve Bank of India, the Bank has migratedfrom Basel I norms to Basel II norms as on 31 Mar 2009 and Capital Adequacy Ratio underthe New Capital Adequacy Framework (NCAF) is being computed on a quarterly basis.

In tune with regulatory guidelines on Pillar I of Basel II norms, Bank has computedcapital charge for credit risk as per the Standardized Approach, for market risk as perthe Standardized Duration Method and for operational risk as per the Basic IndicatorApproach. Under Pillar II, your Bank is assessing the level of inherent risks and relatedcapital requirements on a quarterly basis using a well defined Internal Capital AdequacyAssessment Process approved by the Board. Additional disclosures under Pillar III of BaselII are also complied with. The Bank is progressing with initiatives in meeting therequirements for adoption of the advanced approaches for credit, market and operationalrisk under Basel II. External consultants have been appointed for guiding the Bank throughthe process of migration to advanced approaches. The Bank has also procured the necessarytechnological platform for migration to advanced approaches. The framework of the advancedapproaches is in tune with the Bank's objective of adopting best practices in riskmanagement.

Capital Adequacy Ratio

Bank's Capital Adequacy Ratio as on 31 Mar 2012 under Basel II norms is 16.64 % withTier I CRAR of Rs. 15.86 %, as against the minimum level of Rs. 9 % prescribed by ReserveBank of India. Bank's comfortable capital adequacy position under Basel II norms offers agood cushion for further expansion and growth in asset portfolio.

Capital Management Framework

The philosophy of Bank's risk management framework is to 'take risks by choice and notby chance', set prudential limits for parameters for various types of risks based onregulatory stipulations and internal risk appetite, monitor operations within the setlimits and ensure that returns match the risks taken. Capital management philosophy of theBank is to operate with an optimum level of capital in relation to its internal riskprofile and extant regulatory guidelines, that permits utilization of the existing andemerging market opportunities and ensure optimum level of returns on an on-going basis.

The Bank conducts ICAAP process every year as stipulated by RBI. ICAAP is aimed toensure that the Bank maintains capital commensurate to its risk profile, and improves uponits risk management systems and framework on an on-going basis. It involves a realisticassessment of level of risks inherent in the business operations of the Bank and settingaside capital adequate to cover all such risks. The ICAAP policy covers all material risksinvolved in the business operations of the Bank and establishes an organizationalframework with delineated hierarchical responsibilities. The assessment considers theoperational presence, activities, processes, complexity of products and overall riskprofile of the Bank, including that of the wholly owned subsidiary. The sufficiency ofPillar I capital charge is assessed in relation to the risk profile of the Bank.Monitoring of the level of all material risks also forms part of ICAAP. In short, ICAAP isintegrated into the management and decision making process in true letter and spirit andis reflected in the processes and business operations of the Bank.

Credit Underwriting

Rapid expansion of the credit portfolio brings in its wake various structural issuesthat need to be addressed promptly so as to maintain effective credit dispensationarchitecture. In view of this, Bank has adopted the Credit Hub mechanism to centralizecredit processing and sanctions. The credit hub mechanism is introduced with the objectiveof business expansion, selection of quality of assets and exercising greater diligence incredit approval. Under this system, branches are acting as sourcing points for the creditfacilities, whereas assessment, processing and preparation of documents are being done byCredit hubs which ensure highly qualitative asset creation. Loan origination process ismade online in IT platform leveraging the technology. All the above improvements help thebranches to concentrate more on sourcing and post credit follow up. Regional Credit Hubsare functioning in 18 centres and are reporting to the National Credit Hub in CorporateOffice. Committee approach is being followed in credit sanction. Separate delegation hasbeen given for Corporate Office Committees and Regional Credit Hub Committees for creditsanction. Powers beyond the delegated powers of Regional Credit Hubs are vested withCorporate Office Committees and Board of Directors are having powers beyond the delegationof Corporate Office Committees.

With the various initiatives that the Bank has taken in credit underwriting, it hasbeen successful in driving enhanced customer service delivery and minimizing inherentrisks.

Business Continuity Plan

In terms of the Business Continuity Plan Policy approved by the Board, BusinessContinuity Plan (BCP) Committees have been formed in Head Office, Zonal Offices andBranches. A Contingency Management Team (Task Force) has been formed at Head Office,functioning as a Central Crisis Management Team for ensuring business continuity.

Information Security

The Bank has an Information Systems security team functioning at Head Office. The teamis in charge of creation and maintenance of security policies and plans. The team isresponsible for the formulation and periodic review of Information systems securitypolicies as well as creating the Information security awareness among staff and customersof the Bank. As per the RBI circular dated 29^th April, 2011, on 'Working Groupon Information Security, Electronic Banking, Technology Risk Management and Cyber Frauds -Implementation of Recommendations', the Bank has taken various steps towards complyingwith the requirements outlined.

Legal and Business Compliance

The Bank has a full fledged Legal department comprising of legal officers who arecapable of rendering professional service and expert legal advice on various issuesassociated with the Organization. The Bank has embarked on stringent measures to attainthe objective of a complaint free bank in order to mitigate the reputation risk. With aview to impart awareness on latest developments /amendments in various laws/ statutes, aBiennial Conference of Legal Officers of the Bank was conducted. Various legal luminariessuch as Justice Thottathil B Radhakrishnan, Mr. Abraham Mathew, Director, Judicial Academyetc. enlightened the audience on various topics.

Compliance Cell attached to Legal Department had been monitoring and supervising thecompliance functions of the Bank. A separate and independent Compliance Division has beenset up with a view to further strengthen the compliance functions and to ensure effectivemonitoring/co-ordination of the compliance functions in our Bank. The Compliance Divisionis headed by an Asst. General Manager who is reporting to Chief Compliance Officer.

Leveraging Operations & Processes

Your Bank has always been in the forefront in rolling out new technology, systems andprocesses. Leveraging on better processes and procedures has lead to enhanced operationalefficiency and service delivery. During the year we concentrated on improving theproductivity flow through automation, focussed on reducing the turnaround time andultimately enhanced customer service.

This year the Bank has won the KMA Excellence Award-2011 for Innovative CostManagement measures implemented.

In order to ensure data quality and KYC compliance in its true spirit the Bank hasimplemented image based centralized account opening for Saving Bank accounts. On anaverage accounts are opened within a TAT of Rs. 12 hours.

The Bank centralized the following activities with a view to have more operationalconvenience, control and quality of data:

• Opening of Import LC, scrutiny of import bills and payment of Import Bills underLC.

• Centralization of ATM management by taking over works related to our outsourcedoff-site ATMs from 41 Nodal branches, pan India.

• Deployed low cost advanced Cash Dispensing machines in selected Branches toreduce counter rush.

• We have centralized the process of rephasement of EMI of retail loans andsending intimation to borrowers regarding change in EMI/interest rate.

During the year we expanded our centralised clearing operations to more MICR centres inMumbai, Chennai, Bangalore and Pune and also introduced the process of ECS debitorigination at all centres.

We initiated the process of centralization of archival of old records at outsourcedlocations to help branches to save space and improve the ambience of the office. Theentire process will be extended to all the identified branches in a phased manner.

With a view to have more value addition to our net banking and to add customerconvenience; the following features have been introduced in FedNet, our internet bankingfacility.

• Online FedNet Password resetting facility implemented on 02.12.2011.

• An added security feature, Two factor authentication (2FA) has been implementedin Internet Banking, which will boost the customer confidence for increased use of our netbanking facility.

• Mobile Recharging facility, DTH Recharge and Data Card Recharge directly throughFedNet were introduced.

• Instant Inter-bank Payment Service (IMPS) through FedNet launched on 20.03.2012.

• Online Term Deposit opening for Resident/Non-Resident customers.

Business Effectiveness Through Technology

Federal Bank is a pioneer among banks in India in the area of using technology toleverage its operations and was among the first bank in India to computerize all itsbranches. Federal Bank offers its customers, a variety of services such as Internetbanking, Mobile banking, on-line bill payment, on-line fee collection, depositoryservices, online e trade services, Cash Management Services, merchant banking services,RTGS / NEFT facility, IMPS, EFEE (school fee management) etc. as part of its strategy inenhancing the convenience to its customers. Federal Bank has 5000 + Point of Sale (PoS)deployed at various merchant locations. A 24 hour Toll free Helpline ensures that thecustomers are taken care of round the clock.

• Two Factor Authentication (2FA) for Internet Banking Transactions

2FA will ensure more security for our internet banking customers. Customers will bebenefitted with more security and he/she can choose from various available options.

• Bangalore Metro Rail Corporation (BMRCL)

The Bank has won the bid floated by BMRCL as a Merchant Acquirer Bank. The Bank will bedeploying Point of Sale terminals at Bangalore Metro stations for issuing tickets, will beintegrating POS machines with Ticket Vending Machines and also will be issuing NFC(contactless) COMBO cards which can be used as travel cards and Debit / Prepaid Cards.

• Gift & Travel Cards

The Bank has launched its prepaid card variants - Gift Cards and Travel Cards. GiftCard titled 'FeDelight' is issued in association with MasterCard. Bank's foreign currencydenominated 'Cash Passport' Travel card is issued in three currencies viz. USD, GBP andEuro.

ACI Excellence Awards 2012

The Bank has won the international ACI Excellence Awards 2012 in the PaymentsTransformation category for two its projects - VISA Fast Funds use VISA debit cards andBank's Aadhaar (UID) based Authentication for Payments.

Customer Relation Management

A full-fledged CRM application was rolled out during the last financial year with acomprehensive 360 degree view of the customer and analyse the relationship with the Bankuniformly across the various touch points like branches, contact center and officialsstationed at the overseas representative office of the Bank. CRM integration will offereach customer an added advantage of availing uniform services through multiplechannels/locations that were hitherto restricted to the base branch.

SAS -Data Flux solution, a Data cleansing tool has also been procured to help the Bankdevelop and execute an end to end data management strategy. The Bank is planning to set upa data governance unit to manage and correct the customer related data and to assignunique customer identification number making use of the de duplication facility.

Online Account Opening for NRIs

Bank is providing the facility for Online account Opening for our NRI customers at ourWebsite. Customers can key in required details online, take a printout and send it alongwith the mandatory documents to our NRI division to get the account opened.

Mobile Banking

Considering the high penetration of mobile phones in the country, Bank has takenvarious initiatives in popularizing mobile banking through numerous awareness campaigns.The Bank is currently providing various facilities like balance enquiries, accountstatement and transaction services through its mobile banking platform - Fed Mobile.

The Bank has an active alliance with National Payment Corporation of India (NPCI) inenabling Interbank Mobile Payment Service (IMPS) and is the first mover in introducingthis facility through Internet Banking. Mobile Banking is also extended to making merchantpayments like mobile top ups and ticket booking. The Bank is poised to provide nativeapplications for all popular Smart phones, which will take the convenience of mobilebanking to the next level.

Internet Banking

Bank's Internet Banking platform - FEDNet is already popular among its retail andcorporate customers. After considering various customer needs and requirements, we havefurther enhanced in its security, convenience and scalability.

The Bank also enhanced customer convenience by adding more arrangements for e-commerce,and integration of mobile and DTH top up directly from FEDNet. The system was also scaledup to handle more number of concurrent transactions with faster response times.

Contact Centre

Each contact centre agent undergoes rigorous training in products, services and softskills for about 4-6 weeks before formally starting to interact with customers. Feedbackfrom branch managers, marketing team and customers are ploughed back to reshape theattitude of contact centre to infuse better customer experience. Quality assurance team atcontact centre ensures that agent interaction with customers is on the expected lines.

Payment Gateway

Federal Bank's Payment Gateway facility - 'Fed-e-Gate', is an e-commerce service thatenables online websites with shopping / purchase facility to accept payments from theircustomers on the internet in a secured manner using credit/debit cards. Our paymentgateway is capable of accepting all Visa and MasterCard branded debit / credit cardsincluding Maestro cards. Transaction processing through 'Fed-e-Gate' is secured by 128-bitSSL encryption which enable our Customers to confidently use their Credit / Debit cardsonline. Fed-e-Gate is compliant with Payment Card Industry Data Security Standard(PCI-DSS) Version 1.2.

Human Resources

At Federal Bank we value human resource as the concrete pillar in its success andgrowth. Your bank is very particular on the welfare front of its employees and has beenoffering competitive perks and benefits in the Industry.

Human Capital Composition

a) Of the total human capital engaged by the Bank, 46 % comprised of graduates and morethan 16 % are post graduates.

b) Other Professionals include Engineers/ Chartered accountants / Cost Accountants/PhD's etc.

c) During the year the Average Age of Employees of your Bank has reduced to 40 yearsfrom 41 years as compared to the previous year.

Staff Composition

The year also saw the formation of an Internal Talent Management Wing, to develop,monitor and nurture talent within the Bank. Specialized teams like HR Transformation team,Performance and analytics team were constituted to revamp the HR strategies and toundertake various checks and measures to ascertain the impact of HR strategies down theline.

Organizational Restructuring

With the increasing competition and the rising customer demand, the organizationalstructure was redesigned. In the new 'GO-TO-MARKET' structure, 13 regional offices wererestructured to 8 Zonal offices and 31 regions with the view that a Regional Head withcontrollable number of Branches under him in geographical proximity can bring in betterresults. The reporting of Rs. 18 Regional Credit Hubs were re-assigned to the NationalCredit Hub head, under the administrative control of respective Zonal Heads.

Delegation of HR functions

The HR spread was further extended into the 8 Zones and HR specialists were placed ateach Zone so as to delegate the various HR functions and to have a direct impact down theline. Disciplinary functions were also delegated through the adoption of the progressivestaff accountability policy.

a) Recruitment:

During the year we conducted a Pan India Recruitment through diverse channels includingCampus recruitment and had a strategic focus on localizing the talents with an addedthrust on linguistic and business skills in the States of Tamil Nadu, Karnataka, Punjab,Gujarat and Maharashtra.

We added 958 new heads to our rolls in FY 12. A new online recruitment window "JobPortal" was launched this year which will help us to source experienced talents intoour Bank

b) Performance Management System (FedPMS)

Your Bank has deployed an enhanced and effective Performance Management System to trackthe talent pool in our Bank and thereby design strategies to foster growth and performanceof each of the employees.

c) Employee and Industrial Relations

The industrial relations climate during the year was mostly peaceful and confrontingsituations were successfully managed through constructive measures. The year also saw therevamping of the staff accountability policy of the Bank where clear demarcations weredrawn in terms of intentional and non intentional violations in order to develop aprogressive discipline orientation in the Bank.

d) Fed-e-HRM & Auto Push facility

This year we brought in more automation in the internal HR systems; resulting in thespeedy dispensation of various HR functions.

e) Elixir - Our Unique Mentoring Program

A refined mentoring program was launched to groom and develop the young inductees aswell as Probationary Officers into the new culture. The program is intended to mould andguide the young talents along the right trajectory and to ensure a smooth cross over intothe new environment. Online module for mentoring has been launched and this will enablefree flow of communication between mentor and mentee.

f) SANGAM - Multi generation Engagement Model

The Bank also charted and implemented various engagement programs with a focus onstrengthening relationships between team members. During the year we launched"SANGAM" an event to showcase the hidden and cultural talents among theemployees and their families and make each of the members understand the Federal Cultureand spirit.

g) Recognition Programs

A reward and recognition system was started in the Bank to motivate performance. Longterm and short term recognition programs were designed to cater to the differentrecognition needs of the employees. Various recognition programs were also rolled out torecognize and reward individual and collective performance which includes;

i) Federal Ambassador - Through this unique program we aimed to motivate the levelsof customer service at customer interface points at branches / regions and the resultswere published online.

ii) Federal Elite Trophy - This award is meant for the best performing businessUnit.

iii) Federal Falcon - This award will be given to the best unit supportingbusiness.

Vi) Appreciation Forum - This forum has been designed to give real timeappreciation to an individual for a job well done. The forum has been already launched andhas become an instant hit among the Federals.

Enhancement in Staff welfare and allowances

During the year Bank has substantially increased various allowances and benefits to itsstaff, and continues to be one among the best in the Industry.

Training and Development

On the training front, we introduced innovations and refined the pedagogy. Pedagogy wasre-oriented into experimental in nature with live case studies and group presentations bythe participants;

• Fed Campus - Online Quizzes for the Employees of the Bank in different cadreswas a significant initiative in enhancing the knowledge level of Employees. We conducted36 online Quizzes and on an average 238 Employee participated in one quiz.

• During the Fiscal year 12, the Bank conducted 94 training programmes covering3,016 personnel. In addition we also nominated 408 personnel for 147 programmes at outsideinstitutions.

• The learning programmes could be broadly classified into; Programmes impartingskill in orienting the new entrants with the culture, ethos, values etc. about the Bankand a hassle free induction on the new entrants into the Bank and programs impartingtechnology skills including FINACLE and technology • SPARK - A programme conductedfor Senior Management team of the Bank and ICE (Ideate for Excellence in Customer Service)was three major initiatives on the learning front. We also launched a platform titled"FLAIR" to promote creativity and talents of the Bank's employees.

Best Employer Award

"We received the "Best Employer Award" in the bankingsector from Indira group of institutes, Pune, a reputed educational institute. The awardwas conferred on us for generating employment in spite of adverse global and economiccircumstances.

Employee Stock Option Scheme (ESOS)

In the FY 12, Bank introduced Employees Stock Option Scheme (ESOS 2010) for theemployees of the Bank as long term incentive linked to performance. Accordingly optionswere granted to all permanent employees of the Bank as on 8th April 2011. The optionsgranted will start vesting this year according to the vesting conditions which have beenset.

Marketing Initiatives

Marketing Department in the Bank was created with a view to streamline operations inthe following area:

a) Branding & Standardization

b) Advertising

c) Public/ Media Relations

The Department has successfully added the visibility of the 'Federal Bank' brand.

Your Bank went for a major network expansion during the last fiscal year and keepingpace with the geographic expansion, the branding and visibility of the Bank reached thenook and corner of the country. In order to match steps with the changing world, the Bankushered in a change in terms of branding and positioning of the 'Federal Bank' brand. Thewelcome screens at ATMs were also changed and the screens carried messages in regionallanguages, based on the locations of the ATMs.

Internal and External Branding

The Bank used every opportunity to generate mileage and could reap significant benefitsduring the concurrent launch of Rs. 66 branches and 100 branches during the year. A senseof pride and ownership was instilled in every 'Federal' with the help of internalmarketing collaterals.

Cross Selling and Marketing Initiatives

The Bank used 'Search Engine Marketing' and 'Search Engine Optimization' to generatecustomer leads. The leads were followed up by the sales team of the Bank spread across thecountry and beyond and the leads were converted into sales. The CRM tool deployed by theBank was used to track the leads.

Exploring Social Marketing

The year also marked the entry of the Bank in 'Social Media Marketing' space andstarted leveraging the marketing prowess of various social media sites that are popularamongst the youth of the country. The current year should see a significant ramp up interms of additions of customers on the Bank's social pages and should help the Bank haveits ears to the ground and use the platform for constant interaction with the users -present and potential.

Customer Grievance

Statistics of the complaints received during the financial year ended 31 Mar 2012

Vigilance

The Bank has put in place an effective vigilance mechanism to safeguard the Bank andits customers from fraud risk. We have formulated a comprehensive Fraud Risk ManagementPolicy and Whistle Blower Policy which is reviewed and updated from time to time, in linewith RBI instructions. The vigilance function includes a thorough investigation of fraudsincluding attempted frauds and pursuing of various preventive measures, such as preventivevigilance audits, vigilance workshops etc. to promote compliance culture and enhance theawareness of fraud risk among employees for its effective management. We are promotingcustomer awareness on frauds, especially cyber frauds as an effective tool in preventingfrauds.

KYC And Anti-Money Laundering

The KYC-AML Cell of your Bank has taken sufficient steps for the strict compliance ofthe "Know Your Customer" and "Anti Money Laundering" (KYC/AML)guidelines by maintaining a comprehensive policy framework and updating it in tune withthe guidelines issued by Reserve Bank of India from time to time. The KYC policy of theBank incorporates customer acceptance policy, identification procedures, monitoringtransactions and risk management. We have centrally installed Anti Money Launderingsoftware to ensure the regulatory compliance. The monitoring of transactions against arange of risk variables forms an integral part of the KYC compliance mandate. The alertsgenerated in the software on the basis of pre-defined benchmarks and scenarios help us tomonitor the daily transactions enabling to identify any suspicious transactions undertakenby money launderers and financiers of terrorism.

Inspection & Audit

The Bank has a well established Inspection & Audit Department ensuring adherence tosystems, policies and procedures of the Bank. Guidelines received from regulators likeReserve Bank of India, Government of India etc. and those from the Board of Directors,Audit Committee of the Board and Inspection Review Committee on various issues of controlhave become part of the Internal Control System for better compliance at all levels.

Audits and Inspections are carried out in the Bank as per the Board approved AuditPolicy. All the branches are covered under Risk Based Internal Audit (RBIA). This is beingconducted by the Bank's own inspection team. The assessment of level of risk and itsdirection is done as per the Risk Matrix prescribed by the Reserve Bank of India whichhelps the Management in identifying areas of high risk requiring attention on prioritybasis. The position of the risk categorization of the branches is reviewed by the AuditCommittee of the Board on a quarterly basis.

As of Rs. 31 Mar 2012, 195 branches, Treasury Department, International BankingDepartment (IBD), DP Division and Gold Sale business of RBD were subjected to ConcurrentAudit covering 65.91 % of the total business of the Bank (57.18 % of deposits and 75.57 %of advances), as against the minimum requirement of Rs. 50 % of deposits and advancesseparately, stipulated by RBI.

The Department also covers the Credit Audit function as part of Loan Review Mechanism,which examines compliance with sanction and post-sanction processes / procedures laid downby the Bank from time to time, as per the RBI guidelines. The objectives of Credit Auditare as follows.

• I mprovement in the quality of credit.

• Review of sanction process and compliance status of large loans.

• Feedback on regulatory compliance.

• Independent review of Credit Risk Assessment.

• Pick up early warning signals and suggest remedial measures.

• Recommend corrective action to improve credit quality, credit administration andcredit skills of staff, etc.

The Information Systems Audit is also conducted as per the IS Audit Policy approved bythe Board of Directof Rs. During the FY 12, 444 branches and key HO Departments likeTreasury and IT Department (Data Center) were subjected to IS Audit. A few of them weredone by our own CISA qualified inspecting officers and the remaining by external auditfirms.

Various other inspections are also carried out in the Bank such as Management Audit ofZonal offices including Credit Hubs, Credit Monitoring Cells and HO Departments, ForexAudit, Gold Loans Audit, Revenue Audit, Registration Authority Audit, VulnerabilityAnalysis & Penetration Testing, Quarterly concurrent basis certification of InternetPayment Intermediaries' Accounts etc. During FY 12, all audits required to be done as perthe approved Audit Plan were completed. Under Risk Based Internal Audits (RBIA), 535audits were completed as against 505 targeted. All the Regional Credit Hubs and NationalCredit Hubs were subjected to Management Audit twice during the year. Six Fedfina RetailCredit Hubs were also subjected to Management Audit. Management Audits of Zonal officeswere completed in 2 eligible cases. Management Audits of Rs. 18 HO Departments/Divisionswere also conducted. Forex Audit was done in all the targeted 60 branches. Revenue Auditwas covered in all the 339 targeted branches. Gold Loan Audit was conducted in 336branches as against a target of Rs. 325 branches. Credit Audit was completed in 170 largeborrowal accounts.

The Bank has an in-house fully automated Audit Management System which covers allaudits with dedicated servers, systems and databases which are managed under secureenvironments and by adequately trained personnel. This has contributed in a major way tothe Bank going green, by doing away with paper reports shuttling back and forth.

As a new initiative, the Bank is gradually moving towards more Centralization of Auditworks. Revenue Audit which was previously done visiting branches has now been changed intoOff-site Audit without requiring a visit at the audited branch. Document Management System(DMS) has been introduced for scanning, saving and archiving loan documents and otherrelated papers so that they can be viewed and verified centrally and this has beensuccessfully implemented in 58 branches and is in the process of implementation in otherbranches too. A regular off-site surveillance system has also been set up at Inspection& Audit Department for monitoring exceptional transactions and irregularities in theconduct of business at branches. With these steps, Bank has been able to improve thequality of compliance at various units and also reduce the cost of audits.

Report on Corporate Social Responsibility through Sustainable Development

A Policy on Corporate Social Responsibility (CSR) was adopted and a CSR CELL was formedduring the year. States of Kerala, Tamil Nadu, Gujarat and Maharashtra are selected asareas for CSR activities for the time being. The policy lays emphasis and extends help andsupport to the following focus areas

• Education

• Medical Treatment (Health care)

• Support to Agricultural infrastructure Project.

The Bank encompasses a Triple Bottom Line approach (Social dimensional features,economic features, environmental features) in its CSR initiatives.

The Bank has always been in the forefront to support socially beneficial initiatives ofresponsible organisations. A few activities the Bank associated with, during the FY 2012are:

• As a commitment to the greener planet, we planted 66 saplings at Mookkannoor,the birth place of our Founder Shri. K. P. Hormis, on our 66th Founders Day - 18^thOctober 2011.

• A Call center managed by differently-abled people was inaugurated on 8^thNovember 2011 by Dr. C Rangarajan, Chairman of Prime Minister's Economic Advisory Council.The interiors of our 'Call Center' have been meticulously designed to inspire theexecutives working there.

• During the year 2011, the Bank Sponsored the Haemophilia Department at MAGJHospital Kerala. In a joint venture with the People's Council for Social Justice, a Melawas organized for exhibition and sale of products made by physically challenged people.The Mela aimed at providing an exposure to their products and extending them a dignifiedand independent life.

• Sponsored an Ambulance for St. John's Health Service, Trivandrum for the use ofpatients suffering from HIV/AIDS.

• The Bank extended Support in building -'Deivdan Centre', an old age home for thefinancially downtrodden group of women.

• The Bank sponsored project 'Sparkle' a month long intensive finishing programmefor 30 new Financially Deserving Teacher Graduates.

• The Bank extended support in building 'Animation and Renewal Centre' underSanthome Charitable Trust of Kalyan, Mumbai. The center is used for conducting residentialprogrammes for the Trust's focus & Target group including SHGs, NGOs, CBOs, andChildren Groups.

• The Bank generously contributed to the Collector's Corpus Fund for Endosulfanvictims at Kasargod, Kerala in 2011.

• The Bank extended financial support for the building project for Jyothis- aDevelopmental Training School for children having cerebral palsy.

• The Bank offered financial support to the Kerala Blind School Society to build avisually challenged friendly hostel at Kizhmad, Aluva.

• The Bank supported financially in setting up a Vocational Training Centre forrehabilitating patients with Cerebral Palsy and other disabilities at the AdarshCharitable Trust at Kureekad, Vyttila.

Fedbank Hormis Memorial Foundation

Federal Bank has instituted a public charitable trust by name Fedbank Hormis MemorialFoundation in 1996 to perpetuate the fond memory of late Shri. K. P. Hormis, the Founderof the Bank. The Trust is striving hard to inculcate better knowledge and awareness in thefield of banking through training programmes, focused seminars, awards and so on. Theactivities include:

• Scholarship to Economically Backward students

Fedbank Hormis Memorial Foundation has been granting scholarships to economicallybackward professional college students. From the year 2011, it has been decided toincrease the number of scholarships from 25 to 50.

• Commemorative Lecture Series

The 12^th Commemorative Lecture organised by Hormis Memorial Foundation wasconducted on 8^th November 2011. This year Dr. C. Rangarajan, Chairman ofthe Prime Minister's Economic Advisory Council delivered the commemorative lecture on theTopic "The Indian Economy - Prospects and Constraints".

The Bank was honoured with two Global awards on the CSR front - Award for 'BestCorporate social responsibility Practice Overall' and 'Golden Peacock Award' for CorporateSocial Responsibility for the year. These awards are the reflection of Bank's initiativesto treat the society as an integral stakeholder and is a testimony of the various stepstaken by the Bank as a responsible Corporate Citizen in the fields of healthcare andeducation development.