Oriental Bank of Commerce

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1 MACRO ECONOMIC SCENARIO

1.1 Gross Domestic Product

According to the advance estimates of the Central Statistical

Organization, the growth of real Gross Domestic Product (GDP) in 2009-10 is placed at7.2% at Rs.44,53,064 crore as against a growth of 6.7% during 2008-09. Relative share ofthe various economic activities in GDP is as follows: Agriculture, Forestry and Fishing(-)0.2%, Mining & Quarrying 8.7%, Manufacturing 8.9%, Electricity, Gas & WaterSupply 8.2%, Construction 6.5%, Trades, Hotels, Transport and Communication 8.3%,Financing, Insurance, Real estate & business services 9.9% and Community, Social &Personal services 8.2%. Further, estimated growth during 2010-11 in these sectors are5.0%, 7.5%, 8.9%, 8.0%, 9.0%, 9.0%, 10.0% and 7.0%, respectively.

1.2 Industrial Production

According to Quick Estimates of Index of Industrial Production (IIP) with base 1993-94for the period April-March 2009-10, the cumulative growth in General Index stands at 10.4%over the corresponding period of the previous year.

The cumulative growth during April-March 2009-10 over the corresponding period of2008-09 in the Mining, Manufacturing and Electricity sectors have been 9.7%,10.9% and 6.0%respectively, which moved the overall growth in the General Index to 10.4%.

In terms of industries, as many as fourteen (14) out of the seventeen (17) industrygroups have shown positive growth during the month of March 2010 as compared to thecorresponding month of the previous year. The industry group ‘Metal Products andParts, except Machinery and Equipment’ have shown the highest growth of 42.8%,followed by 40.1% in ‘Other Manufacturing Industries’ and 26.2% in ‘FoodProducts’.

On the other hand, the industry group ‘Jute and Other Vegetable Fibre Textiles(except cotton)’ have shown a negative growth of 9.6% followed by 5.4% in‘Textile Products (including Wearing Apparel)’ and 3.9% in ‘Wool, Silk andMan-made Fibre Textiles’.

As per Use-based classification, the Sectoral growth rates in March 2010 over March2009 are 10.1% in Basic goods, 27.4% in Capital goods and 12.7% in Intermediate goods. TheConsumer durables and Consumer non-durables have recorded growth of 32.0% and 3.3%respectively, with the overall growth in Consumer goods being 10.6%.

1.3 Six Core Industries

The Index of Six core industries having a combined weight of 26.7 per cent in the Indexof Industrial Production (IIP) with base 1993-94 stood at 257.4 (provisional) in March2010. During April-March 2009-10, six core industries registered a growth of 5.5%(provisional) as against 3% during the corresponding period of the previous year. TheCrude Oil production registered a growth of 0.5% (provisional) during April-March 2009-10compared to (-)1.8% during the same period of 2008-09. The Petroleum refinery productionregistered a growth of (-)0.4% (provisional) during April-March 2009-10 compared to 3.0%during the same period of 2008-09. Coal production grew by 7.9% (provisional) duringApril-March 2009-10 compared to an increase of 8.0% during the same period of 2008-09.Electricity generation grew by 6.5% (provisional) during April-March 2009-10 compared to2.7% during the same period of 2008-09. Cement Production grew by

10.5% (provisional) during April-March 2009-10 compared to an increase of 7.2% duringthe same period of 2008-09. Finished (carbon) Steel production grew by 4.9% (provisional)during April-March 2009-10 compared to an increase of 1.6% during the same period of2008-09.

1.4 Agriculture

India's foodgrain production for 2009-10 is estimated to 216.85 million tonnes (MT),significantly lower than the 233.38 MT estimated for 2008-09 because of the deficientrainfall and drought-like conditions in nearly half the districts of the country duringsouth-west monsoon last year. Due to the deficient and erratic distribution of rainfallduring the last monsoon, the production of Kharif crops, particularly of rice, coarsecereals and sugarcane had been affected adversely. Early trends indicated that theproduction would be better during the Rabi season, with the foodgrains production duringRabi 2009-10 expected to exceed last season's all-time high.

1.5 Foreign Trade

Cumulative value of exports for the period April 2009 to March 2010 was US $ 176574million (Rs.835264 crore) as against US $ 185295 million (Rs. 840754 crore) registering anegative growth of 4.7 percent in Dollar terms and 0.7 percent in Rupee terms over thesame period last year. As regards Imports, the Cumulative value for the period April 2009- March 2010 was

US $278681 million (Rs.1318188 crore) as against US $303696 million (Rs. 1374434 crore)registering a negative growth of 8.2 percent in Dollar terms and 4.1 percent in Rupeeterms over the same period last year. The trade deficit for April 2009- March 2010 wasestimated at US $102106 million which was lower than the deficit of US $118401 millionduring April 2008- March 2009.

Oil imports during April 2009- March 2010 were valued at US$ 85473 million which was8.7 percent lower than the oil imports of US $93667 million in the corresponding periodlast year. Non-oil imports during April 2009- March 2010 were valued at US$ 193208 millionwhich was 8.0 percent lower than the level of such imports valued at US$ 210029 million inApril 2008- March 2009.

1.6 Forex Reserves

Total Foreign exchange reserves as on April 02, 2010 was valued at USD 2,79,096 millionand recorded an increase of USD 23,936 million over end March 2009 level. Out of the totalreserves, foreign currency assets were valued at USD 2,54,730 million while gold reserveswere valued at USD 17,986 million.

1.7 Price Trend

The annual rate of inflation, based on monthly WPI, stood at 9.90% (Provisional) forthe financial year 2009-10 as compared to 1.20% in the corresponding period of theprevious year.

Inflation had remained in the negative zone for three months from June 2009 to August2009, primarily due to negative inflation in non-food articles like raw cotton, oilseeds;minerals like iron ore; fuel, power, light & lubricants like mineral oils, coal miningand electricity; manufactured products like edible oils man-made fibers, leather &leather products, fertilizers, metals and machinery & machine tools. The annualaverage inflation for 2009-10 was 3.74 per cent compared to 8.41 per cent during 2008-09.The official Wholesale Price Index for 'All Commodities' (Base: 1993-94 = 100) for themonth of March, 2010 stood at 250.8 (Provisional).

2. MONETARY AND BANKING TRENDS

2.1 Money Supply

Money supply (M3) increased by 16.8 percent (Rs.8,02,498 crore) in 2009-10 as comparedwith 18.9 percent (Rs.7,59,186 crore) in 2008-09. Bank credit to the commercial sectorincreased by 15.4 percent (Rs.4,65,931 crore) in 2009-10 as compared with increased of16.7 percent (Rs.4,31,828 crore) in the previous year. Net bank credit to Governmentrecorded an increase of Rs.3,41,209 crore with increase in bank’s investment ofRs.2,31,897 crore. The net foreign exchange assets of the Banking sector was declined byRs. 79,142 crore during 2009-10 as against the increase of Rs. 48,653 crore in 2008-09.

2.2.1 Aggregate Deposits of Scheduled Commercial Banks

Aggregate Deposits of SCBs increased by 17.4 percent

(Rs.6,54,798 crore) during 2009-10 as compared with 20.0 percent (Rs.6,26,838 crore) inthe previous year. Demand deposits recorded a growth during 2009-10 at 22.2 percent (Rs.1,16,053 crore) as against the negative growth of (-) 0.8 percent (Rs. 1,225 crore) during2008-09. Time deposits shown a moderate growth of 16.2 percent during 2009-10 as againstthe higher growth of 23.9 percent in the previous year. In addition to the mobilization ofdeposits, the banking sector’s lendable resources were augmented substantially bycapital raised through innovative capital instruments during 2009-10.

2.2.2 Bank Credit of Scheduled Commercial banks

Non-food credit extended by the Scheduled Commercial banks (SCBs) increased by 16.7percent (Rs.4,64,849 crore) to reach a level of Rs. 32,40,399 crore as compared withgrowth of 17.5 percent (Rs.4,13,636 crore) in the previous year. The incremental non-foodcredit- deposits ratio for the banking system increased to 70.9 percent during 2009-10from 64.4 percent in 2008-09. Food-Credit of SCBs increased by Rs. 2,278 crore in 2009-10as against an increase of Rs. 1,812 crore in 2008-09.

2.2.3 Investments of Scheduled Commercial Banks

Total SLR investment of Scheduled Commercial Banks stood at Rs. 13,82,684 crore showinga growth of 18.5 percent during 2009-10 as against the growth of 20.0 percent during2008-09. Investment in Government Securities stood at Rs. 13,75,704 crore whereas otherapproved securities was to the tune of Rs. 6,980 crore. The Investment-Deposit ratio ofthe SCBs as at end March 2010 stood at 30.82 percent as against 30.43 percent as at endMarch 2009.

Accommodation provided by the SCBs to the commercial sector in the form of Investmentin commercial Paper / Shares / Debentures / Bonds etc amounted to Rs. 1,16,021 crore inMarch 2010, a y-o-y increase of Rs. 11,248 crore over March 2009 level of Rs. 1,04,773crore.

3. RISK MANAGEMENT

The Bank has put in place requisite Risk Management Systems which are reviewed andupdated periodically in the light of guidelines received from Reserve Bank of India andother regulatory bodies from time to time. The Supervisory Committee of Directors on RiskManagement (Board Level Committee) oversees the overall Risk Management functioning of theBank.

Further, Executive level committees such as Asset Liability Management Committee (ALCO)for Market Risk, Credit Risk

Management Committee for credit risk and Operational Risk Management Committee foroperational risk have also been constituted in the Bank, which meet at regular intervalsto supervise and monitor the progress on an ongoing basis.

3.1 Implementation of Basel II

The bank is Basel II compliant in terms of the New Capital Adequacy Frameworkguidelines issued by the Reserve Bank of India. The bank’s CRAR as on 31.03.2010 was12.54% under Basel II, (out of which Tier I CRAR was 9.28%) as against minimum regulatoryrequirement of 9%. The bank is now gearing itself to adopt the advanced approaches in duecourse of time under different risks as per RBI guidelines.

The credit risk management policy and loan policy of the bank articulate policies,processes and prudential limits covering exposure levels for individual borrowers / groupexposure, industry wise exposure, limits on exposure to sensitive sectors, pricingpolicies, lending specifications, thrust and restricted areas of lending etc. Risk BasedSupervision (RBS) has been fine tuned for risk profiling of branches through a scientificrisk based internal audit (RBIA) system. The Loan Review Mechanism, functioningindependent of the Credit department and Risk Management

Department, reviews and monitors large credit exposures of the

Bank on periodic basis. Training of the staff of risk management department forupgrading their skills is undertaken both internally as well as through reputed traininginstitutions.

4. RISK BASED INTERNAL AUDIT

The Bank implemented Risk Based Internal Audit (RBIA) in a phased manner, starting fromMarch 2004. The Risk Based

Internal Audit Policy and the Audit format(s) were revised in sync with revisedguidelines of RBI and experience gained by the Bank in due course. The Bank has fullymigrated to Risk

Based Internal Audit w.e.f. 01-10-2006 on the revised policy format(s). Risk BasedInternal Audit (RBIA) of 1385 Branches was conducted during the year 2009-2010.

5. ASSET LIABILITY MANAGEMENT

The bank has constituted the Asset Liability Management

Committee (ALCO) in terms of RBI guidelines, which meets at regular intervals to reviewthe interest rates scenarios, maturity profile of deposits / advances, liquidity positionand management of Net Interest Margin etc. The ALM policy sets out the parameters forMarket Risk and Liquidity Risk Management. This policy is reviewed annually in line withthe latest market conditions and is duly approved by the Board of Directors. The committeeon Asset Liability Management of the bank (ALCO) manages and supervises the Market Risk bysetting and reviewing liquidity and interest risk limits, reviewing the profitability andCRAR (Capital to Risk weighted Assets Ratio) position, reviewing of the rates of intereston deposit/advances, adherence to various risk limits fixed and impact of external factorson the Bank’s Balance Sheet and determining business strategy in the light ofprevailing liquidity position in the market with a view to optimizing profits.

6. CREDIT RISK MANAGEMENT

The Credit Risk Management Process forms an integral part of overall Risk Management ofthe bank & monitors the credit risk on continuous basis. The concentration of risks isregulated through fixing, monitoring and reviewing of the credit exposure limits in termsof single borrower exposure, Group exposure, exposure to sensitive sectors (including realestate and capital market), laying down thrust, restricted and prohibited areas oflending, industry exposure, Substantial exposure and inter-bank exposure. Industry studiesare conducted on an on-going basis. The bank has constituted Credit Risk ManagementCommittee (CRMC) which reviews the policies, procedures and systems relating to creditadministration and monitoring at periodic intervals. The Bank has put in place 10 creditrating models for covering the entire range of advances, including Infrastructure,Greenfield project, Real Estate etc. These models (Developed by our Risk ManagementConsultants Ms. IMaCS, a fully owned subsidiary of ICRA) are more robust and scientific.The credit exposure required to be covered through approved external rating agenciesspecified by RBI is covered to the extent of 71% and 50% of the rating is AAA to A,reflecting high credit quality of the Bank.

7. OPERATIONAL RISK MANAGEMENT

The bank has established an Operational Risk Management Committee (ORMC) which meets onregular basis to review the matters related to operational risk. The Operational RiskManagement Policy of the bank outlines the structure and framework for measuring,monitoring and controlling operational risk in the bank. The data/ information relating toloss events and key risk indicators are being compiled for assessing risk areas.

The Bank has also joined External Data Pooling company named as Credit and OperationalRisk Loss Data Exchange (CORDEX) initiated by IBA. The Bank lays due emphasis onidentifying risk prone areas and taking suitable remedial steps by streamlining /reviewing systems and procedures, imparting training so as to guard against suchincidents. In this respect, guidelines received from Government of India and Reserve Bankof India are also kept in view while making any change in the policy / manual.

8. INDUSTRIAL RELATIONS:

Industrial Relations in the Bank continued to remain cordial and harmonious. The Bankcontinued to follow the principle of Participative Management and collective bargaining.As a result of cordial and harmonious industrial relations, the Bank has been able to showimproved performance year after year. The grievance redressal mechanism in the Bank isquite effective.

The grievances of the employees, if any are promptly resolved through mutual andbilateral discussions in the regularly held industrial relations meetings.

9. INTERNAL CONTROL SYSTEM

The Bank has 12 Regional Inspectorates at different locations to oversee the working ofBranches and to ensure that the internal control systems are strengthened to bring thedesired improvement and give timely feedback to the Top Management to take immediatecorrective steps. Risk Based Internal Audit (RBIA) of Branches is conducted every year byinternal inspectors. The Income and Expenditure Audit of all the Branches (other thanbranches under Concurrent Audit) was also got conducted from Chartered Accountants forcalendar year 2009. In conformity with

RBI directives, Concurrent Audit of the Branches is also being conducted by reputedChartered Accountants covering 69% of the Deposit and 82% of Advances and 74% as per totalworking as on 31-03-2010. A total number of 345 branches and 20 other offices includingservices Branches, Depository Service Cell and certain select Departments of Head officeare under Concurrent Audit as on 31-03-2010.

9.1 CUSTOMER COMPLAINTS:

9.2 AWARDS PASSED BY THE BANKING OMBUDSMAN

10. LOAN REVIEW MECHANISM

Loan Review Mechanism (LRM), which was started in our Bank in the year 2004, has provedto be an effective tool for constantly evaluating the quality of loan book and to bringabout qualitative improvement in credit administration. The findings of the review arediscussed by the loan review team with the Branch Managers and corrective action for allis initiated immediately to rectify them within the stipulated time period. During thefinancial year 2009-10, the LRM teams conducted review of 555

Large Borrowal accounts with a total exposure amounting to Rs. 34,298 crore covering142 branches.

11. VIGILANCE MACHINERY

The Vigilance set up of the Bank is under the overall supervision of the ChiefVigilance Officer of the rank of General Manager and comprises full- department at HeadOffice and 16 Vigilance Officers posted in the field (at selected Regional Headquarters)functioning directly under the control of the Chief Vigilance Officer.

As per guidelines of Central Vigilance Commission, the Bank is taking measures forsubstantial improvement in all areas of vigilance i.e. preventive, detective and punitive.The systems & procedure of the Bank are reviewed periodically and initiatives aretaken to further strengthen the same.

As a preventive vigilance measure, the Vigilance Officers conduct Surprise Inspectionof branches mainly directed towards adherence to Systems & Procedure with specialfocus on fraud prone areas. The deviations observed are brought to the notice of theconcerned authorities for taking corrective measures in time.

During the year 2009-10, Surprise Inspection of 176 branches and extension counters wasconducted. In order to make the staff more vigilant and ensure their participation in thevigilance functions, Vigilance Committees have been formed at branches having more than 15employees and at specialised branches. Similarly, Regional Vigilance Committees have beenconstituted at Regional Offices to deliberate on the observations of branch levelVigilance Committee meetings and review their functioning. The Vigilance Department atHead

Office oversees the functioning of these committees through feedback received from theRegional Heads and the Vigilance Officers posted in the field.

As per the directions of Central Vigilance Commission, ‘Vigilance AwarenessWeek’ was observed at all the offices of the Bank with emphasis on "effectivelyimplementing preventive techniques in vigilance administration which includestransparency, accountability, fair-play, objectivity and timely response in dealing withmatters relating to public administration" and also to synchronise all systems &processes for deliverance of services through use of latest technology. Accordingly,meetings were organised with customers/public and they were informed of the IT initiativestaken by the Bank to improve the quality of the services, giving details of the productsand services offered by the bank and redressal of the grievances of customers, if any, andmaking them aware of their Rights & Responsibilities.

With a view to improve the investigating skills of the Vigilance officers, they wereexposed to various training programmes organised by reputed institutions. In-housetraining programmes significance were also organised on the matters of from the vigilanceadministration point of view.

The Vigilance Department maintains liaison with Central Vigilance Commission andCentral Bureau of Investigation and also co-ordinates with various departments within theBank to ensure efficacy of vigilance administration.

12. SYSTEMS & PROCEDURES

The review of existing systems & procedures is an integral part of Bank’sfunctioning. Fast changing banking scene and partial shift of banking from brick &mortar model to click banking has necessitated many changes in the way we work. More over,with the 100% migration to CBS platform the existing systems & procedures needconstant review. Further, with advancement of technology new products/services are beingoffered by the banks. The O&M cell is monitoring the Query & Suggestions receivedfrom the constituents on the website of the bank. The cell gives prompt response to thequeries received and ensures providing of instant solutions to the problems faced by thecustomers of the Bank.

13.1 Core Banking Solution (CBS) and Wide Area Network

Leveraging its IT capability of 100% CBS Network of 1508 branches and 52 extensioncounters offering an array of IT products viz. Internet Banking, Electronic Remittancefacilities through RTGS/ NEFT, Online Education Loan, e-Shoppe, e-Taxes, Online Trading ofShares, SMS Alerts, Proton Debit Cards, Cash Mate Cards for Students, Ready Kits andMobile Banking, the Bank has successfully upgraded its IT Infrastructure to support itsincreasing Business and to further improve overall functionality of the various services,during the current financial year.

The CBS software has been customized to generate large number of Statutory andStatistical Returns thereby ensuring correct generation of the information at CorporateLevel on instantaneous basis. To strengthen the Bank's commitment towards uninterruptedservice to its customers, it has built a robust Corporate Network using Leased lines andVSATs with highest level uptime.

13.2 DR Setup

Bank has implemented 3-way DR architecture through Primary Data Centre at IDC-II,DAKC,Vashi, New Mumbai, Near Line Site at its IDC-I and Disaster Recovery Site at GreaterKailash, New Delhi for Zero Data Loss for CBS.The data is synchronously replicated fromPDC to NLS and is asynchronously replicated from NLS to DRS. This ensures that in case ofmajor problem at PDC, complete data of CBS can be made available at DRS within theshortest possible time. The infrastructure at DR site, has also been upgraded during thecurrent financial year.

13.3 ATMs

During this financial year, Bank has deployed 135 additional ATMs out of which 28 ATMsdeployed at Metro locations, 41 ATMs deployed at Urban locations, 48 ATMs at Semi-Urbanlocations and 18 ATMs at Rural Areas. Thus, as on March 2010, Bank's ATM network stands at980 ATMs, which includes 704 Onsite ATMs, 270 Offsite and 6 mobile ATMs. The ATM cards ofthe Bank are accepted across more than 52000 ATMs deployed in the country. As of now totalCardbase of ATM-cum-Debit card is 18.43 lacs and about 70% of eligible cash transactionsare happening through the ATMs for the Bank as a whole. In order to issue ATM card to thecustomers immediately at the time of opening accounts, the 'Ready Kit' system has been putin place through which ATM Card, ATM PIN is made available to the customers immediately atthe time of opening of account.

13.4 Internet Banking

During the year under reference, the Bank has launched facility to deposit Indirect Taxonline through both Retail and Corporate Internet Banking customers. Additional featuressuch as Online NEFT/

RTGS, e-Commerce, Online Trading of shares etc. have also been made available throughInternet Banking. Within this year, Bank's

Internet Banking for Retail customers has seen 50% increases in daily hits. During thefinancial year, 77000 new customers have been registered for Internet Banking, taking thetotal base to 2.75 lacs. The average daily hits has also increased to 21000 per day.

13.5 Electronic Payment System

All the branches of the Bank offer Inter-Bank remittances through

RTGS and NEFT which uses secured channel of SFMS managed by IDRBT. Internet Bankingsubscribers of Bank are encouraged to use online facility of NEFT for inter-bankremittances.

The above Electronic Payment System has witnessed many fold increase in transactions onyear to year basis. RTGS and NEFT transactions have reached a cumulative figure of 7.92lacs and 2.58 lacs respectively for the year ended March 2010 showing an increase of 243%and 276% respectively on year to year basis. 54% of the Domestic remittances from our Bankare presently being routed through Electronic Payment Systems only.

13.6 Corporate Website

Bank has totally revamped its Corporate Website by making it more interactive andinformative. The look and feel has been enhanced keeping in view the Corporate identityand value added interfaces like NSE Market Tracker, NSE Foreign Exchange Tracker, BSESensex, NSE Nifty, S&P CNX etc. have been incorporated in the site. The website hasalso been secured by implementing SSL encryption from VeriSign.

Bank has also implemented Online Customer Complaint system on its Corporate website forprompt disposal of complaints. Customers are also encouraged to give suggestions and raisequeries through Bank's corporate website.

13.7 SMS Banking

The Bank received an overwhelming response for SMS Banking Alert Service and it isbeing widely accepted by the customers. It is an effective tool to monitor transactionsand prevent Cyber crime.

As on March 2010, there are about 5.35 lacs registered customers and about 52 lacs SMSmessages are being sent per month.

13.8 Mobile Banking

During the year, the Bank added one more Delivery Channel for the customers andlaunched Mobile Banking Services on its foundation day i.e. on 19th February 2010. As ofnow, the customer can avail services like, Account Balance information, viewing last 10transactions, Inter-Bank and Intra-Bank Fund Transfer, Branch Locator and ATM Locator.

13.9 IT Security

Bank has put in place state of the art security equipments and monitoring tools at itsPrimary and Secondary Data Centres. The security events are monitored on 24x7x365 basis.During the year, Bank has also obtained ISO-27001 Certification for the Primary DataCentre, DR Site, Nearline Site and for the related processes at Department of InformationTechnology, Head Office thereby achieving highest security standards for InformationSecurity Management System (ISMS).

All the transactions / information flows from branches to Data

Centres are secured by way of implementing IPSec at Router level and installing VPNConcentrator at Data Centres.

Bank's Corporate Web Portal https://obcindia.co.in and Internet

Banking Application https://obconline.co.in are secured through internationallyaccepted VeriSign SSL certification, thereby bringing in security comfort for users of theBank's websites.

Bank has also been guarding its customers through Internet Banking as well as Corporatewebsite against any possible Phishing and social engineering attacks. Bank's staff hasalso been advised to educate customers on such kind of attacks. Separate session onInformation Security is incorporated in all trainings held across all the Training Centresof the Bank.

13.10 IT Projects under implementation:

The Following major IT Projects of the Bank are presently under implementation:-

• Mobile Banking Services are being popularized for enhanced usage.

• SFMS for non-financial transactions is being popularized.

• Deployment of Real Time MIS System and Dash Board through D2K TechnologiesLtd.

• Document Management system is being expanded to cover more departments atHead Office.

• Major modules of HRMS package have been implemented in the Bank. Othermodules are also being implemented in phased manner.

• Proposal Tracking System for Credit proposal is being implemented whichshall also be available to the public through Internet.

13.11 Staff Education

Bank has taken strong initiatives to train its staff on various aspects of Bankingincluding training on latest IT Products. Regular Training Programmes are being conductedat Bank’s Training colleges and at other reputed institutes. Officials areextensively trained on latest IT Products to further promote these services. Bank hasprepared comprehensive CD containing information on IT Based products and services of theBank which is being used by Regional Offices and branches for making presentations duringthe Customers’ Meet. Seminars were organized at large number of Regional Offices oncorrection and completion of MIS data and also for handling of the advanced CBS featuressuch as Loans, NPAs, etc.

All IT Specialist Officials of the Bank were exposed to contemporary technologiesincluding Business Intelligence, Data Warehousing during the year under reference.

14. THREATS

The global economy continues to recover amidst ongoing policy support and improvingfinancial market conditions. The recovery process is led by Emerging Market Economies(EMEs), especially those in Asia, as growth remains weak in advanced economies.

The global economy continues to face several challenges such as high levels ofunemployment, fiscal constraints etc. Core measures of inflation in major advancedeconomies are still moderating as the output gap persists and unemployment remains high.In contrast, inflation in EMEs, especially in Asia, has been rising. This is puttingpressure on operations in banking sector. Growth in monetary and credit aggregates during2009-10 remained broadly in line with the projections set out in of monetary policy.Non-food bank credit expanded steadily during the second half of the year. The overallprofitability indicators of the banking sector have been maintained during the year 2009-

10. Improving interest margins compensated for a decline in the non-interest revenuesand rise in credit costs. Some downward pressure on overall profitability expected nextyear due to rise in credit provisions and adverse impact of likely rise in bond yields.The NPA level of the industry has risen in the current year leading to some deteriorationin the reported asset quality. The Reserve

Bank of India has calibrated the monetary policy response in

India since October 2009 as per India’s specific macroeconomic conditions. Thispolicy instilled confidence in market participants, mitigated the adverse impact of theglobal financial crisis on the economy and ensured that the economy started recoveringahead of most other economies. However, in view of the rising food inflationary andthe risk of it impinging expectations, the Reserve Bank began the process of exit from theexpansionary monetary policy beginning October 2009. Despite the increase of 25 basispoints each in the repo rate and the reverse repo rate in mid-March 2010, the real policyrates are still negative. RBI in its monetary policy statement 2010 has ensured tomaintain balance in absorbing liquidity and availability of credit to both the Governmentand the private sector.

15. OPPORTUNITIES

As at end-March 2010, the bank has crossed a milestone of total business of Rs.2,00,000crore and has set a target of growth of more than 20% in total business with a growth of30% in CASA by March 2011. The bank has pan-India presence with 1508 branches & 54extension counters. Bank plans to open more than 150 new branches in the year of 2010-11.The number of ATMs stands at 980 consisting of 704 on-site, 276 off-site (Inclusive of 6mobile & 2 Bio-metric ATMs). During the current year, the

Bank has also launched Mobile Banking services in addition to the SMS Alert BasedBanking which is already being enjoyed by more than 5.35 lakh customers of our Bank.During the year, the Bank introduced e-payment of Indirect Taxes that includes

Customs and Excise Duty and Service Tax. The Bank has also obtained ISO-27001certification for Data Centres at Delhi & Mumbai. During the first full year of theoperations of the joint venture company ‘Canara HSBC Oriental Bank of Commerce Life

Insurance Company Ltd’, the Bank marketed over 38000 policies with first premiumcollection of Rs. 121.60 crore. 2162 villages have been adopted by the Bank till 31stMarch 2010 and plans to adopt 1000 more villages during the year 2010-11. During the year,

Bank opened 2.60 lakh No Frill Accounts and plans to mobilize 3.64 lakh fresh no-frillaccounts in 2010-11. During the year 2009-10, Bank recruited 1291 personnel includingspecialist officers.

16. OUTLOOK

In India, economic recovery, which began around the second quarter of 2009-10, hassince shown sustained improvement. Industrial recovery has become more broad-based and isexpected to take firmer hold on the back of rising domestic and external demand. Under theassumption of a normal monsoon and sustained good performance of the industry and servicessectors, for policy purposes, the Reserve Bank projects real GDP growth for 2010-11 at 8.0per cent with an upside bias.

On balance, keeping in view domestic demand-supply balance and the global trend incommodity prices, the baseline projection for WPI inflation for March 2011 is placed at5.5 per cent. Money supply (M3) growth for 2010-11 is placed at 17.0 per cent. On thefront of Banking system, RBI mandating banks to switch over to the system of Base Ratefrom July 1, 2010 to facilitate better pricing of loans, enhance transparency in lendingrates and improve the assessment of monetary policy transmission.

1. SCOPE OF APPLICATION

1.1. Oriental Bank of Commerce is a Public Sector Bank having no subsidiary.

1.2. Oriental Bank of Commerce signed a Memorandum of Understanding with Canara Bankand HSBC Insurance

(Asia Pacific) Holdings Ltd. in March 2007 for setting up Joint Venture in LifeInsurance. The Joint Venture Company got registered with Registrar of Companies as CanaraHSBC Oriental Bank of Commerce Life Insurance Company Ltd in September 2007. The Companyhas started its operation in June 2008.

The shareholding pattern of the Company is as given below.

OBC’s investment in the above is risk weighted for accounting and regulatorypurpose.

1.2.1.Capitalization Details:

Total Authorized Capital of the company is Rs. 750 Crore out of which paid up capitalis Rs.500 Crore (50.00 Crore shares of Rs.10 each) and Rs.125.00 Crore is the amount ofpremium paid by HSBC Insurance (Asia-Pacific) Holdings Ltd. The Company has collectedtotal premium of Rs 641.00 Crore during the end of financial year 31st March 2010, out ofwhich Oriental Bank has collected as premium Rs 121.60 Crore. Gross Income of OrientalBank from the Insurance Operation during Financial Year 2009-10 is Rs 37.10 Crore.

2. CAPITAL STRUCTURE

2.1. Summary information on main terms and conditions / features of capital instruments

RBI’s capital adequacy norms classify capital funds into Tier-1 and Tier-2capital. Tier-1 capital includes paid-up equity capital, statutory reserves, otherdisclosed free reserves, capital reserves and innovative perpetual debt instruments(Tier-1 bonds) eligible for inclusion in Tier-1 capital that comply with requirementspecified by RBI. Elements of Tier-2 capital include revaluation reserve, generalprovision and loss reserve, upper Tier-2 instruments (upper Tier-2 bonds) and subordinatedebt instruments (lower Tier-2 bonds) eligible for inclusion in Tier-2 capital. Bank hasissued debt instruments that form a part of Tier-1 and Tier-2 capital. The terms andconditions applicable for these instruments comply with the stipulated regulatoryrequirements.

Tier-1 bonds are non-cumulative and perpetual in nature with a call option (with RBIapproval) after 10 years. Tier-1 bonds may also have a step-up clause on interest paymentranging up to 100 bps after 10 years. Upper Tier-2 bonds are cumulative and have anoriginal minimum maturity of 15 years and may be issued with call option (with RBIapproval) after 10 years. Upper Tier-2 debt instruments may have one time step-up clauseon interest payment up to 100 bps after 10 years. The lower Tier-2 bonds are cumulativeand have an original minimum maturity of 5 years.

The total amount raised by the Bank through Tier I Bonds shall not exceed 15% of thetotal Tier I capital of the Bank as on March 31 of the previous financial year. Upper TierII instruments along with other components of Tier II capital, shall not exceed100% ofTier I capital at any time. Subordinated debt instruments (Lower Tier II) will be limitedto 50% of Tier I capital of the Bank.

2.2. Tier-1 capital as on March, 31 2010

*Rs 300 Crore raised during Financial Year 2009-10 2.3. Tier- II Capital as on March 312010

2.4. Debt capital instruments eligible for inclusion in Tier-II capital

2.5. Total eligible capital as on 31.03.2010

3. CAPITAL ADEQUACY

3.1. Capital assessment

The Bank is subjected to the capital adequacy guidelines stipulated by RBI, which arebased on the framework of the Basel Committee on Banking Supervision. As per the capitaladequacy guidelines, the Bank is required to maintain a minimum ratio of total capital torisk weighted assets (CRAR) of 9.0% on an ongoing basis. The bank has evolved well laiddown Board approved Internal Capital Adequacy Assessment Process (ICAAP) framework.Assessment and review of Bank’s capital requirements are carried out at periodicalintervals. In line with RBI guidelines Bank has adopted following approaches forimplementation of New Capital Adequacy Framework Basel II. Standardised Approach forCredit Risk Standardised Duration Approach for Market Risk Basic Indicator Approach forOperational Risk

Capital requirements for various risk areas (March 31, 2010)

4. CREDIT RISk

4.1. Credit risk management policy and processes

Management of credit risk in the Bank is governed by a Board-approved Credit RiskManagement Policy and Recovery Policy. The Credit Risk Management Policy and RecoveryPolicy of the Bank have been prepared The Bank is exposed to credit risk in its lendingoperations. Credit risk is the risk of loss that may occur from the failure of anycounterparty to abide by the terms and conditions of any financial contract with the Bank,principally the failure to make required payments. The broad objectives are to meet thefollowing goals:

• Adhere to the guidelines / policies enunciated by RBI and other regulatoryauthorities.

• Be the preferred bank for corporate, government, small and mediumenterprises, rural/micro banking, agriculture and retail customers.

• Maintain cordial business relationship with all customers by servicing theirneeds promptly and efficiently.

• risk Build a diversified based lending and active churning of the portfolio.

• Optimise risk return profile with adequate exit options.

The policy covers corporate, small and medium enterprise, retail, rural/agriculture andinvestment related exposures. There is a structured and standardized credit approvalprocess including a comprehensive credit appraisal procedure. In order to assess thecredit risk associated with any financing proposal, the Bank assesses a variety of risksrelating to the borrower and the relevant industry. The Bank evaluates borrower risk byconsidering:

• The financial position of the borrower by analyzing the financialstatements, its past financial performance, its financial flexibility in terms of abilityto raise capital and its cash flow adequacy.

• The borrower’s relative market position and operating efficiency

• The quality of management by analysing their track record and conduct ofaccount.

• Certain industry characteristics, such as the importance of the industry tothe economy, its growth outlook, cyclicality and government policies relating to theindustry.

• The competitiveness of the industry and

• Certain industry financials, including return on capital employed, operatingmargins and earnings stability.

Credit Approval Authorities:

The Board of Directors has delegated the authority to the Management Committee of theBoard, Chairman & Managing Director, Executive Directors, General Managers at HeadOffice. Also at Regional Office level, various Field Functionaries i.e. Regional Head,Second man at the Region and the Branch Incumbents have also been delegated discretionarypowers for sanction of various types of credit facilities to various segments ofborrowers. The delegation of structure has been designed to ensure that the transactionswith higher exposure and level of risk are put up to the corresponding higherforum/committee for approval.

Following guidelines of Credit Risk Management Policy duly approved by the Board ofDirectors are being adopted for the purpose of screening of the proposals qualitatively soas to ensure healthy credit portfolio of the Bank

1. Credit Risk Management Department is set up at Head Office and Credit RiskManagement Cell at all the Regional Offices of the Bank. The function of Risk ManagementDepartment is independent of processing/ appraisal/ sanction of the proposal.

2. Credit Approval Grids for different functionaries at Head Office and Regionaloffices of the Bank are set up in accordance with the Credit Risk management Policy of the

Bank. The senior executives of the Bank are members of the Credit Approval Grid.

3. The presence of the members from Risk Management Department and Credit Department ismandatory for quorum of the meeting of the Grid.

4. Rating of all the accounts availing credit facility (except staff Loan and loanagainst Bank’s own Fixed Deposits) , Small & Medium Enterprises (SME), Retailcredit including Housing Loan is done on the basis of internally adopted credit ratingmodels developed through our risk management consultants.

5. The Proposal is placed before the Credit Approval Grid by the credit department forqualitatively screening and recommendations along with the views of the members of theGrid to the sanctioning authority.

The objective of this framework is to ensure healthy credit portfolio of the Bank byfollowing the set principles of Risk Management. The analysis of the composition of thecredit portfolio (Rating wise/ Industry wise) is placed to the Supervisory Committee ofDirectors on Risk Management (SCDRM) on half yearly basis along with the migration ofrating of borrowers.

Bank complies with the norms on exposure stipulated by RBI for both single borrower aswell as borrower group at the consolidated level. Limits have been set up by the RiskManagement Department as a percentage of the Bank's consolidated capital funds and areregularly monitored. The Bank has also stipulated internally various exposure limits(including substantial exposure) to industries, sensitive sectors and for the borrowersbased on their constitution.

Definition and classification of non-performing assets (NPA)

The Bank classifies its advances (loans and debentures in the nature of an advance)into performing and non-performing loans (NPL) in accordance with the extant RBIguidelines.

An NPA is defined as a loan or an advance where:

I. Interest and/ or instalment of principal remains overdue for more than 90 days inrespect of a term loan. Any amount due to the bank under any credit facility is‘overdue’ if it is not paid on the due date fixed by the

II. The account remains ‘out of order’ in respect of an overdraft/ cashcredit (OD/CC) facility continuously for 90 days. An account is treated as ‘out oforder’ if:

• The outstanding balance remains continuously in excess of the sanctionedlimit/drawing power

• Where the outstanding balance in the principal operating account is lessthan the sanctioned limit/ drawing power, but there are no credits continuously for 90days as on the date of the balance sheet or, credits in the account are not enough tocover the interest debited during the accounting period

• Drawings have been permitted in the account for a continuous period of 90days based on drawing power computed on the basis of stock statements that are more thanthree months old even though the unit may be working or the borrower’s financialposition is satisfactory

• The regular/ad-hoc credit limits have not been reviewed/ renewed within 180days from the due date/ date of ad hoc sanction.

III. A bill purchased/discounted by the Bank remains overdue for a period of more than90 days.

IV. Interest and/or instalment of principal in respect of an agricultural loan remainoverdue for two crop seasons for short duration crops and one crop season for longduration crops.

Further, NPAs are classified into sub-standard, doubtful and loss assets based on thecriteria stipulated by RBI. A sub-standard asset is one, which has remained NPA for aperiod less than or equal to 12 months. An asset is classified as doubtful if it hasremained in the sub-standard category for 12 months. A loss asset is one where loss hasbeen identified by the Bank or its internal or external auditors or during RBI inspectionbut the amount has not been written off fully.

4.2 Total Gross Credit Risk Exposure (March 31, 2010)

*Non Fund based facility includes Bank Guarantee (BG) and Letter of Credit (LC).

4.3 Risk Weighted Assets based on credit risk exposure (March 31, 2010)

Credit exposure includes exposure towards term loans; working capital facilities (i.e.funded facilities like cash credit, demand loan, temporary limits and non-fundedfacilities like letter of credit, co-acceptances, financial guarantee, performanceguarantee and investment in Banking Book etc.). The above excludes investments, which arecovered under Market Risk.

4.4 Geographic distribution of credit exposures (March 31, 2010)

4.5 Industry-wise distribution of exposures (Mar 31st 2010)

4.6 Residual contractual maturity break-down of assets

The maturity pattern of assets as on 31st March 2010 is detailed in the table below.

4.7 Amount of non-performing Assets (NPAs as on Mar 31, 2010)

Rupees in crore

* After deduction of floating provisions of Rs 72 crore

1. Gross NPA ratio is computed as a ratio of Gross NPAs to Gross Advances.

2. Net NPA ratio is computed as a ratio of Net NPAs to Net

Advances.

4.8 Movement of NPA

4.9 Movement of provisions for NPA

4.10 Amount of non-performing investments (NPI) in securities, other than Governmentand other approved securities

4.11 Movement of provision for depreciation on investment

5. CREDIT RISk: PORTFOLIOS SUBJECT TO THE STANDARDISED APPROACH

5.1 External ratings

The Basel II guidelines require banks to use ratings assigned by specified ExternalCredit Assessment Agencies (ECAIs) namely CRISIL, CARE, ICRA & Fitch (India) fordomestic counterparties and Standard & Poor’s, Moody’s and Fitch for foreigncounterparties. There is no change in banks policy for utilisation of RBI approved ECAIs.The rating is used for both fund based and Non-fund based exposure.

All the above identified Rating Agencies' ratings are used for various types ofexposures as follows:

(i) For Exposure with a contract maturity of less than or equal to one year (exceptCash Credit, Overdraft and other Revolving Credits) , Short -Term Rating given by ECAIswill be applicable.

(ii) For Domestic Cash Credit, Overdrafts and other Revolving Credits (irrespective ofthe period) and (or Term Loan exposures of over one year, Long Term Rating will beapplicable.

(iii) For Overseas exposures, irrespective of the contractual maturity, Long TermRating given by International Rating Agencies will be applicable.

(iv) Rating assigned to one particular entity within a corporate group cannot be usedto risk weight other entities within the same group.

The Bank also uses an internal rating mechanism for rating its clients with theassistance of specialised agency acting as Bank's consultants to ensure that the model isin line with market participants. However, the Bank uses external ratings for the purposesof computing the risk weights as per the new capital adequacy framework.

5.2 Credit exposures by risk weights

The table below discloses the amount of the Bank’s Total Gross outstanding forcredit exposures (including Investments and Non Fund outstanding also) in three major riskbuckets

Includes credit exposures and excludes investment & derivative exposurescovered in market risk.

6 CREDIT RISk MITIGATION

Policies and Processes for, and an indication of the extent to which the Bank makes useof, on and off- balance sheet netting:

Bank uses the on-balance sheet netting as the Credit Risk

Mitigation (CRM) technique of the same borrower as the right of set off is with theBank. For that bank creates the general lien on the collateral (Bank Deposits) and takesthe undertaking from the borrower to use the right of set off, which is legallyenforceable document for the Bank.

Credit risk mitigation and collateralised management policy

Bank has Board approved policy on Credit Risk Mitigation (CRM) Techniques &Collateral Management, which covers guidelines for selection of collaterals, risk incollaterals, valuation and inspection of collaterals, eligible financial collaterals,guarantees and RBI stipulated haircuts.

The Bank defines collateral as the assets or rights provided to the Bank by theborrower or a third party in order to secure a credit facility. The Bank would have therights of secured creditor in respect of the assets/ contracts offered as security for theobligations of the borrower/ obligor.

Collateral valuation and management:

As stipulated by the RBI guidelines, the Bank uses the comprehensive approach forcollateral valuation. Under this approach, the Bank reduces its credit exposure tocounterparty when calculating its capital requirements to the extent of risk mitigationprovided by the eligible financial collateral as specified in the Basel II guidelines. Inline with Basel II guidelines, the Bank adjusts the value of any collateral received toadjust for possible future fluctuations in the value of the collateral in line with therequirements specified by RBI guidelines. These adjustments, also referred to as‘haircuts’, to produce volatility-adjusted amounts for collateral, are reducedfrom the exposure to compute the capital charge based on the applicable risk weights.

For retail products, the security to be taken is defined in the product policy for therespective products. Housing loans and other retail loans are secured by the security ofthe property/ asset being financed. The valuation of the properties is carried out by anapproved valuation agency. The Bank also offers products, which are primarily based oncollateral such as shares, specified securities, warehoused commodities and goldjewellery. These products are offered in line with the approved product notes, which alsodeal with types of collateral, valuation and margining.

The Bank extends unsecured facilities to high rated clients and for certain productssuch as derivatives, personal loans etc. The limits structure with respect to unsecuredfacilities has been approved by the Board of Directors.

The decision on the type and quantum of collateral for each transaction is taken by thecredit approving authority as per the credit approval authorisation approved by the Boardof Directors. For facilities provided as per approved product policies (retail products,loan against shares etc.), collateral is taken in line with the policy.

Types of eligible financial collateral

The Bank recognizes only specified types of financial collateral to be eligible forproviding capital relief in line with Basel II guidelines towards credit risk mitigation.This includes cash (deposited with the Bank), gold (including bullion and jewellery,subject to collateralized jewellery being benchmarked to 99.99% purity), securities issuedby Central and State Governments, Indira Vikas Patra, Kisan Vikas Patra, National SavingsCertificates, life insurance policies with a declared surrender value issued by aninsurance company which is regulated by the insurance sector regulator, certain debtsecurities rated by a recognized credit rating agency, mutual fund units where daily NetAsset Value (NAV) is available in public domain and the mutual fund is limited toinvesting in the instruments listed above and guarantees from certain specified entities.In addition to the financial collateral bank also accepts guarantee from differentcounterparties to mitigate the risk like guarantee from Government, Corporate and

Individuals.

Bank also accepts non-financial collateral i.e. Stock, book debts, mortgage ofresidential property & commercial property and plant and machinery.

Information about (market or credit) risk concentrations within the mitigation taken

Credit concentration risk

Credit concentration risk arises mainly on account of concentration of exposures undervarious categories viz. industry, products, geography, underlying collateral nature,single/group borrower exposures etc. Within corporate portfolio, as a prudential measureaimed at better risk management and avoidance of concentration of risks, the RBI hasprescribed regulatory limits on banks’ maximum exposure to single borrowers and groupborrowers. In order to restrict the concentration risk arising out of longer tenureexposure within the prudential limits set by RBI, the Board of Directors of the Bank hasapproved prescribed sub limits for the maximum exposure the Bank can have to a borrowergroup. Within the various limits are stipulated in the credit policy to addressconcentration risk. Limits have been stipulated on single borrower, group, industry,longer tenure exposure to a group.

General

1. Credit approving authority, prudential exposure limits, industry exposure limits,credit risk rating system, risk based pricing and loan review mechanisms are theinstruments used by the bank for credit risk management. Credit Risk is measured throughdispersion of risk through segmental exposure limits to various industries and sectors,prudential exposure and substantial exposure ceilings and risk mitigation by obtainingcollateral and guarantees.

2. The CBS coverage of 100% provides comfort in central monitoring of credit risk.

The capital requirements for credit risk under standardised approach @ 9% is Rs.6813.78crore.

7. SECURITISATION: DISCLOSURE FOR STANDARDIzED APPROACH

Bank does not have any Securitisation Exposure.

8. MARkET RISk IN TRADING BOOk

8.1 Market risk management policy Risk management policies

In trading book Bank holds HFT and AFS portfolio of Investment.

The rest of Assets i.e. Investment under HTM and Advances are treated as banking book.

Strategies and processes

Under Market Risk Management Liquidity risk, Interest rate risk , Foreign exchange riskand equity risk are monitored. Bank is not currently trading in commodities.

Liquidity Risk

Gap analysis is followed for monitoring liquidity risk on fortnightly basis.jPrudential limit based on RBI guidelines for the short- term buckets are monitored.Besides prudential limits are in place for market borrowing Daily and average callborrowing Inter Bank Liabilities, Purchased funds etc. High value bulk deposits aremonitored on daily basis by the investment committee. Short- term dynamic liquiditystatement is prepared on a fortnightly basis to assess the liquidity position, which takesinto account the business growth. A contingency funding plan is in place to meet theemergencies. The plan is tested on a quarterly basis. Stress Testing is also done on aquarterly basis to assess possible loss to Bank if there is any liquidity crisis and iffunds are to be raised from the market to meet the contingencies.

Interest Rate Risk

Gap analysis is used to assess the impact on the Net Interest Income of the bank forthe next 12 months and till the next financial year. The Bank also uses duration gapanalysis.

Prudential limits have been fixed for duration of liabilities. Bank’s investmentsportfolio is monitored on basis of duration analysis.

VaR methodology is followed for dated securities under SLR and Non SLR (domestic).Prudential limits for VaR have been fixed and daily monitoring is being done and reportedto Top Management. Stress Testing is done to assess the impact on Economic Value of Equityby infusing a shock of change in market rate upto 200 basis points.

Foreign Exchange Risk

The Bank has fixed maximum daylight and overnight exposure for foreign exchangeexposure in various currencies. Also, stop loss limit, take profit limit and single deallimits are in place for monitoring the forex operations of the dealers.

Equity Price Risk.

The bank’s domestic investment policy has fixed stop loss limits for equitydealers. Daily reporting to Top Management on the transactions and profit is done.

Structure and Organisation of Market Risk Management function:

Risk Management is a Board driven function supported by three levels-

(i) Risk Management Committee of the Board for overseeing and issuing directions,wherever necessary / approving Risk Management Policies etc.,

(ii) Asset Liability Management Committee (ALCO) who consider policy issues and

(iii) Risk Management Cell providing support at the ground level.

Scope and nature of risk reporting and / or measurement systems:

In respect of domestic business the guidelines stipulated by RBI for managing MarketRisk is followed such as Preparation of Interest Rate Sensitivity statement on a weeklybasis Duration analysis of investments in the Trading book on a daily basis VaRcalculation of trading book investments on a daily basis excepting the equity portfolioconducting stress test for liquidity risk / market risk on a quarterly basis. Durationanalysis of domestic balance sheet and impact on the Economic Value of Equity on aquarterly basis. Interest Rate sensitivity is reviewed at regular internals by ALCO at thecorporate level Various prudential measures have been put in respect of market borrowingand lending in conformity with RBI guidelines for monitoring liquidity risk. StructuralLiquidity statement is prepared on weekly basis and Short Term Dynamic Liquidity statementon a fortnightly basis and reported to ALCO. The results of the Quarterly study on StressTesting and Impact on Economic Value of Equity is reported to ALCO. Trading book positionDuration and VaR is reported daily to Top Management.

Policies for hedging and / or mitigating risk

Detailed policies are operational for Investment management, Asset Liability Managementand Market Risk Management, which deal in detail the various strategies and processes formonitoring

Market Risk.

8.2 Quantitative disclosures

9. OPERATIONALRIS k

a. The Bank is following Basic Indicator Approach and providing for requisite capitalunder parallel run as per RBI guidelines.

b. The Operational Risk Management Committee meets at regular intervals wherein theincidents exposing the Bank to Operational risk are deliberated at length and suitablesteps are initiated to check recurrence of such events.

c. The Bank is also deliberating on Risk Profiling Templates required in terms of RBIguidelines in the Operational Risk

Management Committee.

d. Besides adopting Basic Indicator Approach, Bank has collected data pertaining toloss events for past four years and data is being mapped into eight business lines as perRBI guidelines. Further, the exercise with regard to recording income under variousbusiness lines for calculation of capital required for Operational Risk has been initiatedthrough CBS system.

e. The Bank is already collaborating with IBA in a venture "Credit and OperationalRisk Loss Data Exchange (CORDEX)" as one of the promoters for collecting loss dataand framing models for measuring operational risk and formulating models for computingcapital charge.

9.2 Qualitative disclosures

The Bank assesses and identifies operational risks inherent in all the materialproducts, processes and systems under different Lines of Business on ongoing basis. Allnew products, activities and systems are being routed through Credit Risk Management

Committee (CRMC) / Operational Risk Management Committee (ORMC).

Fraud and related reporting is done to Audit Committee of Board. Operational Risk isquantified through Basic Indicator Approach. Bank adopts best practices in operationalrisk management, like segregation of duties, trainings, clear laid down procedures etc.

10.1 Qualitative Disclosures

The general qualitative disclosure requirement, including the nature of IRRBB and keyassumptions, including assumptions regarding loan prepayments and behaviour ofnon-maturity deposits, and frequency of IRRBB measurement:

Interest Rate Risk in banking book is calculated on quarterly basis.

Banking book includes all advances and investments held in Held to Maturity (HTM)portfolio. The strategies & processes/ structure & organization/ scope and natureof risk reporting/ policies etc are the same as reported under point 8.1

The methodology and key assumptions made in the IRRBB measurement are as follows

• Based on method suggested by RBI

Based on Weekly information from networked branches on the residual maturity of theadvances and the deposits covering 100% of bank’s business, Interest Rate Sensitivitystatement is prepared with various time buckets, having regard to the rate sensitivity aswell as residual maturity of different assets and liabilities.

• The duration for each asset and liability is arrived at taking the midpointof each time bucket as the maturity date and the average yield as coupon and taking themarket rate for discounting purpose. For investments, the actual duration is taken, asdata is available with full particulars.

• Using the above, Modified duration of liabilities and assets for each bucketis calculated and the impact on their value for a change in interest rate by 1% isreckoned by adding up, the net position is arrived at to determine as to whether therewill be a positive increase in the value or otherwise.

10.2 Quantitative Disclosures

The increase (decline) in earnings and economic value (or relevant measure used bymanagement) for upward and downward rate shocks according to management’s method formeasuring

IRRBB,

INTEREST RATE IN BANkING BOOk