Kotak Mahindra Bank Ltd

The economic environment in advanced economies indicated some pick-up in growth in thesecond half of FY2010. However, the pace of economic recovery remained uneven and thesustainability of the recovery process remained in doubt. The emerging market economies(EMEs) recovered ahead of the advanced economies. In India, economic growth recoveredsharply and matched the high growth phase of pre-Lehman era. This was also accompanied bya sharp pick-up in inflationary pressures, leading to the RBI adopting a graduatedwithdrawal of monetary stimulus.

GDP growth started to indicate recovery trends, starting in the Q4 FY2010, when it grewby 8.6% from 7.3% in Q3 FY2010. This recovery trend sustained and also strengthened in thefirst and second quarters of FY2011, averaging at 8.9%. The third quarter indicated someslowing trends in the GDP growth, mainly on account of a slowing industrial growth, downto 5.7% compared to 11.7% in the first quarter of FY2011. Manufacturing sector’sgrowth weakened sharply from 13% in the first quarter to 5.6% in the third quarter onaccount of a base effect from the previous year as well as due to cyclical slowdown onaccount of higher interest rates. Services sector growth also weakened in the thirdquarter of FY2011 to 8.7%, compared to an average of 9.5% in the first half. A furthersoftness of the GDP growth in the third quarter was prevented by a strong agriculturalsector’s performance at 8.9%, compared to an average growth of 3.5% in the firsthalf. On the expenditure side, private consumption demand has stayed strong, indicated byits share in GDP remaining steady at around 60% in the first three quarters of thefinancial year. However, the investment demand is seen to be softening recently. Theslowing investment trend is also indicated by the capital goods production trends in theIndex of Industrial Production.

The RBI achieved a non-disruptive normalization of monetary policy from 19th March 2010onwards, when the first 25 bps increase in the Repo and the Reverse Repo was announced bythe RBI. RBI adopted a calibrated tightening of the policy interest rates and liquidityconditions. The RBI used CRR as a liquidity tightening measure and increased it from 5% inApril 2009 to 6% at April 2010 end. The strategic and preferred shift towards a sustaineddeficit of liquidity in order to enhance monetary policy transmission was announced by theRBI in early July 2010. This was helped by the outflow of resources from the bankingsystem due to payment by telecom companies to the Government on account of 3G spectrumauction, as also by a sharp increase in the demand for currency on account of highinflation.

The Repo rate emerged as the operative policy rate for the tightening of monetarypolicy. The liquidity tightened significantly and was beyond Rs 1,00,000 crore oninstances. To bring down the severity of liquidity strain and ensure that the liquiditystress does not affect flow of credit to productive sectors of the economy, Reserve Bankof India (RBI) introduced a second LAF auction and reduced the mandatory requirement ofSLR to 24%. Further, banks were allowed to borrow from the RBI by maintaining a shortfallin the SLR requirement by a maximum of 1% of NDTL without having to pay a penal interest.

Despite the significant increase in the policy interest rates and also tight liquidityconditions, inflationary conditions have remained on the higher side. Headline WPIinflation had peaked at around 11% in April 2010. Due to the favourable base effect fromthe previous financial year and also some softening of the manufactured products pricepressures, due to the past monetary tightening, headline WPI inflation exhibited amoderating trend till around November 2010 when it was 8.1%. However, renewed pricepressures were seen from December onwards with the new drivers being fuel and non-fuelinternational commodity prices and demand-supply imbalances in some food items. As onMarch 2011, headline WPI was at 9.0%, with core inflation (inflation ex-food,-ex fuel)also firming up to 8.9%.

In the first half ofFY2011, the current account deficit (CAD) emerged as a significantpolicy concern. CAD aggregated to around US$30 bn in this period on the back of a wideningtrade gap and also a lower support from net invisibles. The enhanced risks arising out ofthe rising CAD were negated by robustness in the net capital flows, especially in thesecond quarter of FY2011 when FII flows surged to US$18.8 bn in a single quarter, comparedto US$3.5 bn in the first quarter of FY2011. There was also a change in the composition ofcapital flows, with large increase in portfolio flows replacing FDI flows. Some of theconcerns on the current account eased in the third quarter as the deficit fell to US$9.7bn from US$16.8 bn in the previous quarter. This improvement was driven by a narrowing ofthe trade deficit as exports picked up sharply to grow at 39.8% in the third quarter withthe improvement in the global demand. Further, invisible receipts were stronger than inthe recent past quarters. However, in the third quarter, capital account surplus waslower, with FII inflows once again reducing on account of a global risk aversion on theback of European peripheral sovereign debt worries. All this led to the Balance ofPayments surplus in the first three quarters of FY2011 to be restricted to USD$bn, almostunchanged from the first three quarters of the previous fiscal.

Consolidated Financial Performance

The financing businesses of the group, including the Bank have continued to grow on theback of the robust growth in the economy. However, the capital market businesses such asstock broking and mutual funds have seen their profits drop due to a combination offorces. Consolidated profit after tax grew 20% to Rs 1,567 crore. As on 31st March 2011,the Group has a distribution network of branches, franchisees, representative officesacross 528 cities and towns in India and offices in New York, London, California, Dubai,Abu Dhabi, Mauritius and Singapore. The group services around 8.8 mn customer accounts.

Assets under management (AUM) as at 31st March 2011 was over Rs 47,850 crore(approximately US$ 11 bn), comprising assets managed and advised by the Group. Of this,equity assets managed / advised by the Group were around Rs 21,126 crore. The AUM withKotak Mahindra Mutual Fund (Kotak Mutual) was over Rs 24,300 crore.

Awards and Recognitions

During the year the Bank won the following awards:

• The Bank was amongst the Top 25 "Best Employers in India 2011" byHewitt Associates and the only bank amongst the Top 25. The Bank received this award forthe third time in a row.

• Adjudged second in BFSI sector and 23rd overall in "India’s BestCompanies To Work For 2010" by a joint study of The Economic Times and Great Place toWork Institute, India.

• Awarded "Best Local Cash Management Bank" by Asiamoney 2010.

• Ranked No. 2 in India - companies with "Best Corporate GovernancePractices" - IR Global Rankings 2010.

• Awarded "The Ingenious 100" Award by IDG India’s CIO Magazine forStorage Virtualization.

• Ranked no. 1 in seventeen categories including range of investment products/advisory services – Euromoney.

• Awarded for Customer & Brand Loyalty in Banking Sector at 4th loyalty Summitamongst all leading private, foreign and PSU banks.

• Awarded "Best Call Centre Project" from Asian Banker for a solutionwhich integrates multiple contact centre across several locations that enhances agentproductivity.

• Kotak Bank won IBA technology awards for :

Best use of Technology in Training and e-learning Initiatives

Best Customer Initiative - CRM

As at 31st March 2011 the Bank has built a network of 321 full fledged branches spreadacross 182 locations and 710 ATMs.

Consolidated Financials

* income is net of sub-brokerage

^ normalised

Bank and Its Key Subsidiaries: Financial and operating performance Bank Highlights

The Bank along with its subsidiaries, offers a wide range of financial products andservices to its customers. The key businesses are commercial banking, investment banking,stock broking, car finance, asset management and life insurance.

The Bank has four broad business segments:

• Lending

• Retail liabilities and branch banking

• Corporate banking (including small and medium enterprises - SME)

• Treasury and investments

Profit before tax of the Bank for FY2011 was Rs 1187.70 crore as against Rs 811.10crore for FY2010. Profit after tax of the Bank was Rs 818.18 crore in FY2011 compared withRs 561.11 crore in FY2010. The break up of segmental results is as follows:

As per BASEL II, the capital adequacy ratio of the Bank as at 31st March 2011 was19.92% (31st March 2010 – 18.35%).

Tier I ratio was 17.98%. Advances of the Bank as at 31st March 2011, stood at Rs29,329.30 crore (Rs 20,775.05 crore as at 31st March 2010), showing a growth of 41%. As at31st March 2011, the net NPAs of the Bank excluding the acquired stressed assets were at0.50% of net advances (1.25% as at 31st March 2010). The net NPAs of the Bank includingacquired stressed assets were at 0.72% of net advances as at 31st March 2011 (1.73% as at31st March 2010).

As at 31st March 2011, the deposits of the Bank were Rs 29,260.97 crore (Rs 23,886.47crore as at 31st March 2010), showing a growth of 23%. As at 31st March 2011, depositscomprised of Rs 5,460.19 crore of current account deposits (Rs 4,992.13 crore as at 31stMarch 2010), Rs 3,330.33 crore of savings deposits (Rs 2,471.00 crore as at 31st March2010) and Rs 20,470.44 crore of term deposits (Rs 16,423.33 crore as at 31st March 2010).

Advances

The break up of the advances of the Bank is given below:

Lending

Commercial vehicles and Construction equipments

The growth momentum in commercial lending gathered pace over the year sustained byrobust growth in commercial vehicles (CV), construction equipments (CE) and tractors. Inthe industry, CV sales grew by 30%, CE by 25% and tractors by 15% during the year. Growthin the economy led to higher margins and cash flows resulting in improved collections andthus very low levels of non performing assets for the Bank. Working capital needs of thecustomers also increased.

Small commercial vehicles constituted as much as 42% of total CV sales, which issignificant considering that this segment opened up just five years back. Freight ratesremained firm during the year and on the back of recovering economy, dealer inventorylevels saw a sharp drop.

There was an upsurge in construction equipment sales in FY2011 and the industry grew by25%, triggered by infrastructure related investments. Implementation of infrastructureprojects picked up and the construction order books reached healthy levels. Demand forconstruction equipment was driven by Power, Roads, Mining, Real estate and Irrigationsegments. The growth rate is particularly good in larger equipments segment.

Agriculture Finance

The farm sector recorded a robust performance due to record output in some food as wellas non-food crops in FY2011. The recent estimates of agriculture output suggest that foodgrain production is expected to increase by about 8.1%, from 218.1 million tonnes inFY2011. Combined with this, increased rural prosperity arising out of governmentprogrammes, diversifying use of tractors, improved penetration of rural credit and labourshortage drove up tractor sales, which crossed five lakh units during FY2011.

Agriculture advances of the Bank showed an increase of 37% year on year keeping pacewith the advances growth of the Bank. This was achieved on the back of record food outputof the farm sector. The Bank continued to cross the targeted lending of 18% of the Bankadvances to the agriculture sector as required by the priority sector norms of RBI. Thesector has shown great buoyancy led by increasing prices of commodities.

Demand for agriculture advances continues to be robust. Portfolio delinquencies in thissector reached all time lows. The Bank increased its focus on the retail and SME segmentof the agriculture sector to increase the reach into the rural & semi-urban markets.The Bank also started dedicated agriculture advances oriented rural branches in line withits focus on increasing financial inclusion.

Personal Finance and Mortgage Business

In the Home Finance business while there was strong growth in the first half of FY2011,the second half of the year saw stabilisation and slight drop in demand from customers.There was an increased focus on existing Bank customers and their contribution among thesecured asset products went up. Loan against Property, a strong product proposition,continues to see a great opportunity along with the high-ticket personal finance productssuited for the business community.

The Personal Finance business saw good growth. High-ticket products continued to be thefocus and were the biggest contributor to the overall volumes. The Personal Financebusiness also added new products to their existing bouquet of financial services for smallbusinessmen.

Corporate Banking

Corporate Banking is broadly focused at two business segments – mid-market andlarge corporate. The segmentation is done to cater to their unique need to have specificset of offerings and services.

Corporate banking serves a number of large business houses and also commands a goodpresence in the mid-market customer space. The strategy of building business with largecorporates has been to penetrate deeper with more products. The mid-market strategy wasclearly driven by targeted client acquisition and becoming one of the key bankers to thecorporate. The growth of the Corporate Bank franchise has been strengthened by utilizingthe opportunities through synergies in investment banking and other business verticals.The focus on above segments and these synergies resulted in the Corporate Banking divisionadding 250 customers during the year.

Branch Banking

The Bank added 72 branches, 179 off-site and 67 onsite ATMS during the financial yeartaking the total number of branches to 321, off-site ATMs to 403 and onsite ATMs to 307.

Total number of deposit accounts as at 31st March 2011 are around 16 lakh and a debitcard base of around 12 lakh.

Some of the key initiatives that the branch banking business undertook during the yearare summarized as under:

• Embarked on a project to promote financial inclusion by evolving new models foreffective outreach involving technology based solutions.

• Added two more commercial bank branches at Gurgaon and Pune to handle tradetransactions. This move is aimed at driving a substantial increase in the throughput ofthe system with a reduced turnaround time and improved customer service.

• Partnered with NRI Matters, a social media initiative, aimed at buildingconnectivity among the NRI community and trying to address all financial / tax relatedissues of Indian diaspora living outside India.

• Undertook a drive to bring down customer grievance / query resolution timelines. This concentrated effort yielded significant reduction not only in bringing downaverage turnaround time but also showed an improvement in the customer satisfaction index.

• Launched a set of products, including Credit Card, Home Loans and a remittanceplatform branded as Click2remit, aimed at enhancing "stickiness" of NRIcustomers which is one of the focus areas for the Bank.

• The expanded ATM network enhanced the brand presence apart from generatingadditional revenue.

• With an objective to bring maximum transparency in distribution of investmentproducts, a very elaborate sales process has been introduced. The process follows a matrixwhich cuts across size of transaction and category of products or profile of customer toensure appropriateness of the sale and / or selection of product.

• Risk containment unit was made operational which handles hindsighting oftransactions, analyses critical process deviations and appropriateness of employee /customer actions, ensures strict adherence to statutory / compliance guidelines andmaintains vigilance on the quality of KYC standards of new customers.

• Several initiatives were undertaken aimed at improving the knowledge quotient ofthe front line and supervisory staff at the branches. This was achieved through a rightmix of in-house and external trainers with training programs encompassing products andsoft skills development.

• The Bank was once again appointed as a primary financial advisor by OverseasIndian Facilitation Centre (OIFC). This provided us with an opportunity to partner withthe Government of India and Confederation of Indian Industry in presenting its productbouquet to NRI / PIOs community across the globe.

Treasury

Against the backdrop of the prevailing economic environment, the Bank’s treasuryresponded with a renewed focus on liquidity management and efforts towards bridging ofgaps in structural liquidity of the Bank. Efficient management of residual liquidityresulted in significant reduction in the cost of liabilities. The Balance Sheet ManagementUnit (BMU) was able to maintain all regulatory obligations like CRR and SLR.

The primary dealership desk was able to exceed all its bidding and success commitmentsmade to the RBI. In response to increasing and volatile interest rates, the Bank loweredthe churn period of its bond trading book. Shrinking of spreads of corporate bonds overthe G-Secs coupled with increased FII activity presented numerous opportunities in thecorporate bond market which the treasury was able to successfully capitalize on.

Responding to increasing domestic interest rates and some uncertainty in Europeanmarkets, currency markets, remained volatile. Given this volatility, trading operations inforeign exchange was measured and calibrated within the Bank’s risk appetite. Thefocus of the treasury continued to be on foreign exchange flow business. The Bank achieveda healthy growth in the number of transactions and volumes in the foreign exchangemerchant business.

Treasury, having reinforced its processes in the bullion business, saw a rise involumes and added new clients .

Treasury continued its increased focus on bond and loan syndication markets as part ofits Debt Capital Markets (DCM) business, with some success in international debt raisingfor its clients. The Bank continued its non-participation in the FX derivative market bothon proprietary account and client account pending further clarity on legal, regulatory,accounting and taxation fronts.

Correspondent Banking Division was started to build and leverage on relationships withoffshore banks for improving quality and international reach for its customers.

During the year, treasury also carried out up-gradation of technology platform andre-engineering of various treasury operating processes.

Treasury and Asset Liability Committee (ALCO) continued heightened vigil on liquidity,markets, counterparty and sovereign risks.

Subsidiaries Highlights

Kotak Mahindra Prime Limited

Kotak Mahindra Prime Limited (KMP) is primarily into car financing which includesfinancing of retail customers of passenger cars, multi-utility vehicles and inventory andterm funding to car dealers. In addition to car finance, KMP also carries out otherlending activities which includes loan against securities, securitization / assignment ofloans, corporate loans and developer funding.

The passenger car market in India grew by 32% in FY2011 as compared to a growth of 25%in FY2010. Total sales of cars and multi utility vehicles crossed 24.6 lakh units inFY2011 versus 18.6 lakh units in FY2010.

KMP’s gross advances grew by 34% to Rs 11,208 crore in FY2011 from Rs 8,379 crorein FY2010.

KMP continued to focus on maintaining margins in the retail car finance business, feebased income, controlling costs and credit losses, while improving its positioning in thecar finance market by scaling up business. KMP has been a part of the car finance industryfor more than 20 years. Over this period, it has carved out a niche for itself and isconsidered a leader in the industry. KMP’s strong relationship with key stake holdersin the industry viz. manufacturers, dealers and customers have helped its growth. Otherlending activities have also contributed positively towards the company’s growth.

Financial Highlights

Kotak Securities Limited

The Sensex closed at 19,445 at the end of FY2011 (17,528 at the end of FY2010) with ahigh of 21,108 and a low of 15,960. Benchmark NIFTY closed at 5,249 and 5,833 respectivelywith a high of 6,338 and a low of 4,786. There was a significant change in the averagedaily volumes (ADV) year on year. ADV for cash segment reduced to Rs 18,630 crore inFY2011 from Rs 22,784 crore in FY2010. ADV for derivative segment increased to Rs 1,16,437crore from Rs 72,938 crore during same period. The year saw a significant skew in themarket volumes towards derivatives.

The year saw a significant skew in the market volumes towards derivatives. Thebrokerage rates in the cash segment are higher than the derivative segment. Change in thismix is a key reason for lower brokerage income during the year.

Second quarter of the financial year saw a surge of FII investments in the secondarymarkets with the investor confidence levels perceived to be high. KS continued tooutperform other syndicate members in IPO and QIP offerings notching a higher marketshare. KS research continued to be recognized for its in-depth high quality financialmodeling, width of stock coverage and valuable investment insights.

Awards and Recognitions

KS received the following awards during the financial year:

• Institutional Equities was named as the ‘Best Electronic Broker’ atTradeTech India Awards 2011

• Awarded Best Broker in India by Finance Asia – 2010, for the 2nd year in arow

• Voted as the Best Local Brokerage firm by Asiamoney Brokers Poll for 2010, forthe 5th year in a row

Financial Highlights

Kotak Mahindra Capital Company Limited

Kotak Mahindra Capital Company (KMCC) primarily operates as a full-service InvestmentBank and is also a trading cum clearing member of the National Stock Exchange on all threesegments viz. Cash, F&O and WDM.

Buoyancy in the capital markets led to domestic fund raising of Rs 80,300 crore throughIPOs, FPOs Debt Offerings and QIPs. KMCC topped the league tables for public offers (IPOs,FPOs and Debt Offerings).

Success of earlier large M&As led to increased cross-border M&A this yearcombined with equally large domestic M&A activity. During the year, the Company madeconsiderable progress in deepening relationships with it alliance partners in keygeographies and this will play a crucial role in business in the years ahead.

In capital markets, KMCC was the lead manager to twelve out of the twenty six Initial /Follow on Public Equity Offerings (above Rs 250 crore) accounting for ~62% of the totalmoney raised in these Offerings. The Company has helped companies raise over Rs 35,000crore in the domestic markets during FY2011. (Source: Prime Database). KMCC was ranked No.1 in Domestic Public Offerings League Table for FY2011 by Prime Database.

Some of the key deals that were concluded by the Company during the year include:

Awards and Recognitions

During the current year KMCC won the following awards:

• Best Investment Bank in India by FinanceAsia, 2010 - for the fifth year in a row

• Best Domestic Equity House by Asiamoney, 2010 - for the third consecutive year

• Best Equity House in India by FinanceAsia, 2010

• Best Bank for Equity Finance in India in the Euromoney Real Estate Poll, 2010

Financial Highlights:

Kotak Mahindra Old Mutual Life Insurance

Kotak Mahindra Old Mutual Life Insurance (Kotak Life Insurance) is a 74:26 jointventure partnership between Kotak Mahindra Group and Old Mutual Plc, an internationalsavings, wealth management and Insurance company based in UK.

Kotak Life Insurance is in the business of life insurance, deferred annuity andproviding employee benefit products to its individual and group clientele. The company hasdeveloped a multi-channel distribution network to cater to its customers and marketsthrough tied, alternate, group and direct marketing channels on a pan-India basis.

The Indian life insurance industry underwent a transformation in 2010-11. The new ULIPregulations that came into force in September of the year changed the face of lifeinsurance business with customer centricity and efficiency becoming the industry’snew buzzwords. These will continue to be the defining factors for developments in the newyear, but at a much accelerated pace. New regulations have significantly enhanced theappeal of insurance products. Enhancing efficiencies and thereby productivity of deliverychannels is the central challenge for insurance companies in the new regulatoryenvironment. A significant proportion of life insurance is still sold through individualagents. Managing this channel effectively will be the key to ensuring persistency. In thenew environment, focus of insurers has shifted from large-scale expansion to sustainedvalue creation and efficient use of capital. Special emphasis is now placed on costmanagement.

FY2011 saw major changes in the company’s product portfolio. The ULIP basketunderwent complete overhaul to meet the new regulatory norms, which came into effect from1st September 2010. There was also renewed focus on non-ULIPS to increase their share inthe overall product mix. During the year, the Company launched six new ULIPs conforming tonew norms and discontinued with the old ULIPs. The non-ULIP offering was bolstered alongwith the launch of e-Insurance portal through which a customer can buy life insuranceonline.

Awards and Recognitions

• Awarded the prestigious Enterprise Driving Growth and Excellence (EDGE) throughIT Award, for the successful implementation of Kotak Rewards and Incentive System in 2010.

• The company has initiated the zero paper initiative by implementing the firstphase of email alerts to the customers. This ensures that basic alerts like renewalreminders, premium receipts etc are sent to customers on their registered email ids. Apartfrom being environmentally friendlier, this mode is also fast and efficient.

• The company has also implemented the Channel Partner Portal to cater to theinformation needs alternate channel partners. This initiative is expected to significantlyenhance efficiencies and service experience for Alternate Channel partners.

Financial highlights

Operating expense ratio reduced to 19% in FY2011 as against 20% in FY2010. ConservationRatio was maintained at 70%. Total assets under management grew by 28% to Rs 8,592 crore.The Company achieved 317% growth in coverage of social lives.

KLI has over 38,269 life advisors with significant efforts being directed towards theirtraining and thus enhancing their effectiveness. KLI has 25 corporate agents and 129empanelled brokers. KLI operates from 202 branches in 152 cities.

Kotak Mahindra Asset Management Company Limited (KMAMC),

Kotak Mahindra Trustee Company Limited (KMTC)

Kotak Mahindra Asset Management Company Limited (KMAMC) is the asset manager of KotakMahindra Mutual Fund (KMMF) and Kotak Mahindra Trustee Company (KMTC) is the trusteecompany.

Total AUM (Assets Under Management) of the industry fell from Rs 6,13,979 crore inMarch 2010 to Rs 5,92,250 crore in March 2011, a fall of 3.54% in FY2011. During the sameperiod, AUM with Kotak Mahindra Mutual fund increased by 1.59% i.e. from Rs 24,071 crorein March 2010 to Rs 24,455 crore in March 2011.

Number of folios as on 31st March 2011 was over 9 lakh. KMAMC has a presence in 79cities and 84 branches.

In terms of performance of the funds managed by KMAMC, short duration debt schemes ofthe fund performed well. During the year, Kotak Flexi Debt, Kotak Liquid InstitutionalPremium Plan & Kotak Gilt were awarded 5 Star ranking over three years by ValueResearch. Also, Kotak Flexi Debt & Kotak Floater Long Term have been ranked 7 star andhave been awarded the Gold Award for ‘Best Performance’ in the category of‘Open Ended Ultra Short Term-IP’ and ‘Open Ended Floating Rate Fund’respectively for one year period ending 31st December 2010. Kotak Bond Regular has beenawarded most Consistent Performer (based on the annual performance of the past 10 years)in the NDTV Profit Mutual Fund Awards 2010.

The distribution is trying to realign its business models with the new paradigmintroduced with the abolition of entry loads in FY2010. The industry on its part isundertaking all India investor awareness programs in a standard format. A total of 5,817programs were done pan India covering about 340,383 Investors, while Kotak Mahindra AssetManagement Company has undertaken about 653 investor meets covering about 19,862investors.

Financial Highlights

Continued focus on fund performance, investor awareness, innovative products andfranchise building in terms of geographical expansion, penetration and distributor tie upswould be the key drivers of growth during FY2012.

Kotak Mahindra Pension Fund Limited

Kotak Mahindra Pension Fund Limited has been appointed as a Pension Fund Manager (PFM)by the Pension Fund Regulatory and Development Authority ("PFRDA"), on 30thApril 2009 for managing the funds under New Pension System (NPS), as per the terms of theInvestment Management Agreement

The Company manages seven schemes, and the combined assets under management on 31stMarch 2011 were Rs 3.30 crore. PFRDA has introduced new scheme "NPS LITE" topromote small savings specifically targeting the weaker and economically disadvantagedsections of the society.

The pension business is currently at a nascent stage of operations and considering thisfact and the low rates of management fees, the company has made a net loss of Rs 0.63crore in FY2011.

International Subsidiaries

The Bank has overseas subsidiaries with offices in Mauritius, London, Dubai, Abu Dhabi,Singapore, New York & California.

The international subsidiaries were mainly engaged in investment advisory andinvestment management of funds, Equity & Debt Trading, management of GDR/FCCBissuances, broker and broker dealer activities and investments. A new subsidiary namelyKotak Mahindra Financial Services Ltd (KMFSL) was set up in November 2009. KMFSL wasestablished under the aegis of the Dubai International Financial Centre (DIFC). Postsetting up of KMFSL, the international subsidiaries are now providing wealth advisoryservices also to high networth individuals outside India through six locations includingUAE and UK. KMFSL has now forged alliances with a number of international asset managersand banks to offer best-in-class products across asset classes, currencies andgeographies.

Assets managed/ advised by the international subsidiaries closed the year at US$ 1,904million (2010: US$ 1,568 million).

The year was a difficult one with many India dedicated funds seeing net outflow offunds. However, in this environment the overseas subsidiaries introduced a number ofequity funds into the markets, including an Indian equity fund of funds investing in bestof breed Indian funds and an Indian consumption fund investing in companies likely tobenefit from the growth in consumption in India. During the year the overseas subsidiariesalso saw the launch of a US open ended fund investing in Indian equities. They also raisedUS$ 250 million in debt funds investing into India.

Hardening of US interest rates and range-bound performance of Indian capital marketsduring the year had an adverse impact on income from proprietary investments comprising offixed income and India centric investments.

Financial highlights

Kotak Investment Advisors Limited

Kotak Investment Advisors Limited (KIAL) is the investment manager / advisor forprivate equity and realty funds.

The aggregate alternate assets managed /advised by KIAL as at 31st March 2011 wasaround Rs 5,031 crore (US$ 1.12 billion). The Company manages five domestic funds andadvises three offshore funds.

(a) India Growth Fund

India Growth Fund (IGF) was set up as a unit scheme of Kotak SEAF India Fund withinvestors from select institutional and high net worth investors, from both India andabroad, on a private placement basis. IGF has made 15 investments across diversifiedsectors such as logistics, technology services, retail, media and entertainment,engineering, bio-technology, textiles, aviation, telecom and power infrastructure andfinancial exchanges.

During the year IGF divested fully from two investments and partly exited from oneother investment.

(b) Kotak India Venture Fund I

Kotak India Venture Fund I (KIVF-I) is a domestic fund with the objective of makinginvestments primarily in companies operating in Biotechnology and Life Sciences sector.The Fund has made three investments till date. During the year KIVF-I divested fully fromone investment.

(c) Kotak India Growth Fund II

Kotak India Growth Fund II is aimed at investing in mid sized corporates with a growthorientation. KIGF-II has made six investments till date.

(a) Kotak Mahindra Realty Fund

The primary objective of KMRF is to invest in and provide finance to real estate sectorand allied services sectors in India with an intention to generate long-term capitalappreciation. Kotak India Real Estate Fund-I (KIREF-I) has been set up as a unit scheme ofKMRF. KIREF-I had fully committed its capital in eleven investments, of which it has tilldate exited fully from three investments and partially from two investments.

Kotak India Real Estate Fund - I has returned 100% capital to its investors, becomingthe first Indian real estate fund to do so.

(b) Kotak Alternate Opportunities (India) Fund

Kotak Alternate Opportunities (India) Fund (KAOIF) was set up with an objective ofinvesting in the securities of companies operating in real estate, infrastructure andallied services sectors in India with an intention to provide long-term capitalappreciation to its investors. KAOIF has till date made eighteen investments in adiversified portfolio. It has fully divested from one investment and partly divested fromfive investments.

Financial Highlights:

Technology

This year, technology initiated new and enhanced channels to bring 24 X 7 availabilityto the customers. Kotak Securities initiated the use of a KIOSK to offer product andcustomer information. Kotak Life Insurance launched an online sales portal as well as apartner portal for the use of alternate channel partners. In the Bank, mobile to mobilepayments (IMPS) was launched.

The Bank has enhanced its technology foundation through a planned core banking upgrade.Service oriented architecture was introduced with the use of a world class product forsystem integration.

To ensure robust procedures and un-interrupted services, technology continued toemphasize on process improvement. The data center was recertified as ISO 27001 compliantand the Six Sigma framework was adopted for technology operations.

During the year, the focus was also on system upgradation for continuous improvement incustomer experience. The excellence of the CRM and Call Center which were rolled outacross the Kotak Group, was recognized by awards from the Indian Banking Association andAsian Banker’s Technology Summit respectively.

Risk Management

The Bank has an established enterprise wide risk management process to ensure that ithas effective systems and controls in place to identify, measure, monitor and manage risksarising in various businesses.

The Bank’s risk management process is the responsibility of the Board ofDirectors. Various committees are specifically entrusted with execution responsibilitiesfor risk management. The Management Committee provides overall risk management supervisionfor the Group as a whole. Committees that form part of Risk Governance include AuditCommittee (ACB), ALCO, Credit Committee, Risk Management Committee (RMC) etc.

A formal update on operational matters is provided to the Board periodically. Reportson adequacy of the Bank’s regulatory capital are also provided on a regular basis.

Appropriate action is taken where risks are identified which fall outside theBank’s approved risk appetite or where the need for remedial action is required inrespect of identified weaknesses in the Bank’s mitigating controls. Specific risksapplicable to the Bank inlude credit, market, interest rates, liquidity and operationalrisk.

Credit Risk

The Bank has devised its credit policy to create an enabling framework for ensuringsmooth & timely flow of credit to the Bank’s customers while ensuring prudentcredit growth – both quantitatively and qualitatively.

The Bank has comprehensive policies covering credit risk in all its lending businesses.These policies articulate the Bank’s position regarding risk measurement, reporting,monitoring and mitigation alongwith laying down the parameters/norms for taking creditexposure.

The Bank’s credit process is divided into three stages - pre-sanction, sanctionand post -sanction.

At the pre-sanction stage, the independent credit function within respective businessesconduct credit appraisal, check compliance with lending policy and place the proposal tothe appropriate sanctioning authority for approval.

Credit Rating is an integral part of the credit lending decision. The Bank has aninternal credit rating model that assigns obligor ratings & facility ratings. Inaccordance with credit policies, the ratings are subject to an annual review.

Based on independent credit risk assessment, appropriate credit decisions are taken bythe sanctioning authorities. The Bank has a tiered credit sanction process where creditapprovals are reported to the next higher level.

Subsequent to sanction, the Credit Administration team processes documentation, on thecompletion of which, credit operations team disburses credit.

Borrower accounts are subject to ongoing monitoring to check for compliance withsanction terms, credit covenants and financial health of the obligors. This provides theBank with key inputs in credit portfolio management.

The Bank has the desired readiness to leverage its internal credit rating systems andmigrate to advanced internal rating-based approaches for maintaining capital under theBasel II guidelines.

Market Risk

Market Risk is the risk that earnings or capital will be adversely affected by changesin the level or volatility of market variables such as interest rates, foreign exchangerates, credit spreads, commodity and equity prices.

Market risk taking activity is centralized with treasury and is subject to limitsacross products and the risk factors.

The ALCO and RMC of the Bank guide the market risk management department to managerisks arising out of the market movements.

The Bank controls market risks through a combination of limits & early warningsignals approved by ALCO and RMC.

The independent market risk management department monitors market risk exposuresagainst approved limits on a daily basis, and takes appropriate measures for promptcorrective action.

Interest Rate Risk on the Banking book

Interest rate risk on the Banking book arises from two sources:

• Interest bearing securities held as part of non trading activities

• Timing difference between re-pricing of loans and deposits

The Bank manages interest rate risk through a Funds Transfer Pricing mechanism, bytransferring interest rate risk from business units to centralized treasury. As a policy,no interest rate risk is retained within any business other than treasury.

The Bank assesses interest rate risk in the banking book from two different butcomplementary perspectives, namely the earnings perspective and the economic valueperspective. The Bank uses gap analysis to evaluate the impact of shifts in interest rateson net interest income. The duration approach is used to determine the sensitivity of theeconomic value of the Bank to changes in interest rates.

Liquidity Risk

Liquidity risk is the risk that the Bank is unable to meet its obligations when theyfall due. Liquidity risk has the potential to constrain growth through depletion ofresources available for lending and investment.

Treasury is responsible for managing liquidity under the liquidity risk managementframework and the contingency liquidity plan approved by ALCO and the Board.

Stress testing and scenario analysis are incorporated in the liquidity risk managementstructure. The Bank follows a scenario based approach towards liquidity stress testing,wherein historical and hypothetical scenarios are employed to evaluate the impact ofstress on the liquidity position of the Bank.

The Basel Committee of Banking Supervisors (BCBS) issued its final Basel III guidelinesin December 2010. These guidelines include a ratio for short term liquidity {the LiquidityCoverage Ratio (LCR)} and a longer term liquidity measure {the Net Stable Funding Ratio(NSFR)}

Proactively, the Bank has incorporated these metrics as part of its risk appetite andmonitors performance against these on a regular basis.

Operational Risk

The Bank has an established operational risk management function whose purpose is todevelop, implement and maintain the Bank’s operational risk strategy and framework tomitigate the risk of losses from inadequate or failed internal processes, people andsystems, or from external events.

To achieve this, the Bank has established a suitable operational risk managementgovernance structure and framework of processes to:

• Ensure an appropriate understanding and awareness of operational risk at alllevels in the Bank;

• Effectively anticipate operational risks and implement appropriate mitigation inline with the Bank’s operational risk appetite;

• Effectively manage operational risk events to minimise their recurrence; and

• Implement the Bank’s operational risk capital strategy to ensure the Bankis adequately capitalized for operational risk requirements.

The Bank’s regulatory capital requirements for operational risk are calculatedaccording to the Basic Indicator Approach (BIA) under which gross income is regarded as aproxy for the operational risk exposure. The capital charge for operational risk iscalculated based upon average gross income for the preceding three years.

Capital Adequacy and Basel II

Capital adequacy,the regulatory capital expresses how much capital a bank, must have inrelation to the size of its risk taking, expressed in the form of risk weighted assets.

The Bank’s high level of capital adequacy ratio provides its stakeholders,reassurance against unexpected losses.

In accordance with the RBI guidelines on new capital adequacy framework (under Basel IInorms), the Bank adopts the standardized approach for credit risk, basic indicatorapproach for operational risk and standardised duration approach for market risk.

ICAAP

The ICAAP is an assessment of all significant risks (Pillar II), other than Pillar 1risks, to which the Bank is exposed. The ICAAP framework helps the Bank perform acomprehensive assessment of the risks faced and relates capital adequacy to these risks.

The Bank has methodologies that help in capital allocation towards quantifiable PillarII risks viz credit concentration, underestimation of credit risk and interest rate riskon the banking book (IRRBB). The Bank does not provide capital for liquidity risk, underPillar II, but factors liquidity risk as part of its stress testing. The Bank is of theview that its strong capital position helps it in maintaining a robust liquidity profile.

During the year, the Bank prepared its annual ICAAP outcome that was approved by theBoard and was submitted to the regulator. Based on the ICAAP outcome, the Bank was wellcapitalized to cover Pillar I & Pillar II risks.

Stress Testing

Stress testing is a key element of the ICAAP and an important tool for analyzing theBank’s risk profile. The objective of stress testing is to assess how businessesperform under stress conditions. Stress tests also form part of the capital planningprocess. The Bank supplements capital adequacy computation by performing stress tests,guided by a comprehensive Board approved stress testing policy. The approved stress testscenarios provide for severe shocks to various risk parameters and assess their impact onprofit and loss and capital. Stress test results are placed before the management and theBoard. After considering the results of the stress tests and key sensitivities, capitaladequacy position of the Bank is considered adequate.

Compliance

An independent and comprehensive compliance structure addresses the Bank’scompliance and reputation risk. All key subsidiaries of the Bank have an independentcompliance function. Compliance officials across the group interact on various issuesincluding the best practices followed by the respective companies.

The compliance framework, approved by the Board, broadly sets out the compliance riskmanagement processes and tools to be used by businesses, management and complianceofficers for managing its compliance risks. Apart from the Bank’s complianceframework, each of the subsidiary companies has its own compliance manual.

The compliance function is responsible for all aspects of compliance across the Bank.There are dedicated resources deployed to focus on areas like regulatory reporting, AMLand compliance monitoring.

The compliance team provides compliance assistance and support to management andmanages and supervises the compliance framework.

Compliance division works with business units to develop procedures to implement therequirements of the various regulations and policies. It also works closely with othersupport functions including the legal department and outside counsel.

The Bank uses the knowledge management tools for monitoring new and changes in existingregulations. The Bank also looks at regulatory websites and participates in industryworking groups that discuss evolving regulatory requirements. In-house compliancenewsletter keeps the employees abreast of the key regulatory updates affecting thebusinesses of the Bank and its subsidiaries. Compliance also disseminates the changes inthe regulations by way of compliance alerts to all the employees. Training on compliancematters is imparted to employees on an ongoing basis both online and classroom. Thecompliance department keeps the management / Board informed about important compliancerelated matters through monthly, quarterly and annual compliance reviews.

Internal controls

The Bank’s internal audit department assesses business and control risks of allbranches and businesses to formulate a risk-based internal audit plan, as recommended bythe RBI. The audit process followed is as below:

An annual risk-based internal audit plan is drawn up on the basis of risk profiling ofBank’s branches and businesses/ departments which is approved by the audit committee.

The audit plan is prioritised based on areas which pose a higher risk to the Bank andsuch areas and branches are targeted for more frequent audits. The Internal Audit policyincludes the risk assessment methodology which provides for coverage of all auditableareas once in three years.

After assessing the overall risk of a branch or business or department, the Bank takescorrective measures to minimize the risk. Senior officers also assess and evaluate themitigating measures taken by the branch during their visits.

Post issue of audit reports there is a detailed process for monitoring of progress onimplementation of action plans.

Status of resolution tracking as well as pending issues is reported to seniormanagement on a regular basis and a formal report on pending issues is issued once everyhalf-year.

Human Resources

As on 31st March 2011, the Bank and its subsidiaries employed around 20,500 employeesat various locations in India and abroad. The Bank was adjudged amongst Top 25 in"India’s Best Companies to Work For in 2010" by The Great Places to WorkInstitute and continues to be amongst Top 25 Best Employers in India consistently from2007 till date as adjudged by the AON Hewitt Best Employers Survey.

While the Bank and its subsidiaries continued to focus on various initiatives toprovide the best employment experience to the employees, new and innovative products andprocesses were introduced to further enhance both quality and productivity of our humancapital. Substantial investments were made in training and developing employees acrosslevels to improve productivity, service quality, personal effectiveness and supervisorycapability. Structured leadership development programs and customized courses inassociation with leading academic institutions were also rolled out to groom futureleaders and build a talent pool that has depth in knowledge and competence.

The best in class talent management practices and HR processes have enabled theorganization to build a cadre of highly committed and engaged employees who consistentlyexcel in delivering our customer value proposition.

Opportunities and Threats

Opportunities

• Being part of the India’s growth story

• Utilise the emerging opportunity of getting the wallet share of the burgeoningmiddle class

• Utilise technology to provide solutions to customers

• Increase distribution strength Threats

• Volatile environment

• Fiscal deficit

• Inflation

• Increasing interest rates

• Competition

• Rising crude prices and commodity prices Outlook

Kotak Mahindra Group’s results for the financial year demonstrate the strongfundamental growth in the India story. However, concerns remain on inflation, risingprices of commodities including crude and current account deficit. The Group believes thatthe economic scenario offers immense opportunities for it to grow in scale and reachcoupled with value creation.

Safe harbour

This document contains certain forward-looking statements based on current expectationsof Kotak Mahindra management. Actual results may vary significantly from theforward-looking statements contained in this document due to various risks anduncertainties. These risks and uncertainties include the effect of economic and politicalconditions in India and outside India, volatility in interest rates and in the securitiesmarket, new regulations and Government policies that may impact the businesses of KotakMahindra Group as well as its ability to implement the strategy. Kotak Mahindra does notundertake to update these statements.

This document does not constitute an offer or recommendation to buy or sell anysecurities of Kotak Mahindra Bank or any of its subsidiaries and associate companies. Thisdocument also does not constitute an offer or recommendation to buy or sell any financialproducts offered by Kotak Mahindra, including but not limited to units of its mutual fundand life insurance policies.

All investments in mutual funds and securities are subject to market risks and the NAVof the schemes may go up or down depending upon the factors and forces affecting thesecurities market. The performance of the sponsor, Kotak Mahindra Bank Limited, has nobearing on the expected performance of Kotak Mahindra Mutual Fund or any schemes thereunder.

Figures for the previous year have been regrouped wherever necessary to conform tocurrent year’s presentation.