Punjab National Bank

Economic Environment

Echoing Indian economy’s renewed buoyancy, GDP growth rate is projected at 8.6% in2010-11 by CSO as compared to a growth rate of 8.0% in 2009-10. The economy has startedpursuing the pre crisis trajectory with the GDP projection for FY 2011-12 placed at 9.0%with an outside band of (+/-) 0.25%.

As per April 2011 World Economic Outlook of International Monetary Fund (IMF), globalGDP growth is projected at 4.4% in 2011, lower than 5.0% growth in 2010. Risks to theglobal growth remain in the form of weak sovereign balance sheets and frail real estatemarkets in the Euro Area, commodity prices and geopolitical uncertainty in advancedeconomies (projected growth: 2.4% in 2011). Though Emerging economies (EMEs) are expectedto grow by 6.5% in 2011, risks emanate from overheating pressures and rising asset prices.As per IMF, inflationary pressures may build up further and there is a need of tighteningof macroeconomic policies. IMF expects Indian economy to grow by 8.2% in 2011 as against10.4% in 2010.

The recovery of Indian economy has continued and the growth is quite broad based andspread across sectors. Helped by normal monsoon, agriculture sector is expected toregister a robust growth rate of 5.4% after experiencing stagnation at 0.4% growth duringlast year. Production of food grains is estimated at 236 million tonnes. Industrial growthas per Index of Industrial Production (IIP) registered a lower growth 7.8% duringApril-March 2011 (10.5% last year) due to lower growth in Manufacturing sector at 8.1 %(11.0%). Besides, Mining sector grew by a lower 5.9% (9.9%) and Electricity sectorregistered a decline in growth rate to 5.6% (6.0%) during the above period.

Services sector is expected to grow by 9.4%, marginally lower than 9.7% achieved duringlast fiscal, due to low growth rate of 5.7% in "Community, Social and Personalservices" that grew by a higher 11.8% during last fiscal due to government spendingand sixth pay commission recommendations. Growth rates in other segments have been higherwith "Trade, hotels, transport and communication" registering a robust growth of11% (9.7%), "Financing, insurance, real estate and business services" growing by10.6% (9.2%) and "construction" registering growth of 8% (7%). Reflecting soundfundamentals of the economy, domestic savings rate rose to 33.7% of GDP during 2009-10from 32.2% in previous year. Gross Investment rate also rose to 36.5% of GDP from 34.5%during the same period a year ago.

During 2010-11, exports grew to $ 246 billion from $ 178 billion last year registeringa YOY growth of 37.6%. During the period, Imports grew by 22% to $ 350 billion from $ 287billion last year. While oil imports grew by 12.4% to $ 88 billion, non-oil imports stoodat $ 217 billion, growing by 20.4%. The current account deficit (CAD) is estimated at 2.5%of GDP for the year 2010-11 lower than 2.8% for the year 2009-10.

Net capital flows at US $ 52.7 billion during April-December 2010-11 were higher ascompared to US $ 37.6 billion in corresponding period last year, primarily due toportfolio investments at US $ 30.1 billion (US $ 23.6 billion). Indian rupee got a newsymbol during the year and joined the club of few select currencies to have its own sign.Rupee stood at Rs 44.7 per US dollar as at end March 2011 showing an annual appreciationof 1.10%. India’s foreign exchange reserves crossed the US$ 300 billion mark andstood at US $ 310 billion as on April 22, 2011.

Fiscal consolidation continues to remain a priority and is being facilitated bybuoyancy in tax and disinvestment receipts and gains in telecom spectrum auctions. Fiscaldeficit for the current financial year is estimated at 4.8 % of GDP and Revenue deficithas been pegged at 3.5% as against 6.3% and 5.1% respectively during previous fiscal.

High level of inflation has been a cause of concern, leading to a high 8.98%year-on-year WPI inflation in March 2011. Reserve Bank in its Annual Policy 2011-12 hasestimated WPI inflation at 6% with an upward bias for the end March 2012. As indicated inthe policy, achievement of this objective will be helped by concerted policy actions andresource allocations to address domestic bottlenecks, particularly on the food andinfrastructure fronts.

Banking Developments

Indian banking industry has shown its resilience pre and post crisis and has withstoodthe test of time. Indian banks have continued to rise up in global rankings and some ofthem are expected to become top banks in next decade.

During 2010-11, to rein in inflationary expectations, Central bank raised cash reserveratio by 100 basis points (bps) to 6.0%, reverse repo rate by 300 bps to 6.25%, and therepo rate by 250 bps to 7.25%. There was a significant liquidity shortage in the system inthe wake of 3G/broadband wireless access auctions and IPOs of bigger public sectorundertakings. In order to facilitate better liquidity management, RBI extended twoliquidity easing measures, viz., additional liquidity support under the LiquidityAdjustment Facility (LAF) to Scheduled Commercial Banks (SCB) up to 1% of their Net Demandand Time Liabilities (NDTL) and the Second LAF (SLAF) on a daily basis up to May 6, 2011.

Money Supply growth at 15.9% at the end of March’2011 remained below the RBIprojection of 17%. This was due to lower growth in Aggregate deposits of SCBs at 15.8%against 17.1% registered last year. Non-food credit growth at 21.2% was higher than theRBI’s projection of 20% and last year growth of 17.1%.

Second Financial Stability Report was released by RBI in the end -December, 2010 thatassessed disparate elements of the financial sector from a systemic risk perspective. Asper the report, Indian financial sector remained stress-free notwithstanding sporadicvolatility, especially in equity and foreign exchange markets. The

Report points at some apparent soft spots like the widening current account deficitwhile capital flows being dominated by volatile components. Fiscal conditions are underpressure with persisting inflationary pressures along with tightened liquidity conditions.Apart from asset quality of banks, their asset-liability management position continues towarrant monitoring. Challenges continue in the form of regulatory gaps in the non-bankingfinancial sector, need for a robust macro prudential framework for identification ofsystemic risks and convergence with the emergent international reforms agenda.

Industry Structure

There were 163 SCBs in the country and 4 Non-SCBs in the Indian Banking System as atend March 2010. Out of 163 SCBs, there were 27 Public Sector Banks, 82 Regional RuralBanks, 32 foreign banks and 22 other SCBs.

PNB remained Number One amongst Nationalized Banks with more than 5100 branches spreadthroughout the length and breadth of country. PNB’s share in system’s depositand credit stood at 5.29 % and 5.44% respectively as on last Reporting Friday (LRF) ofMarch 2011.

1. BUSINESS

Bank’s domestic business stood at Rs.5,36,457 crore at the end of March’2011, registering an absolute increase of Rs. 1,11,863 crore and a growth of 26.3%. Afterincluding the business of foreign branches, Bank’s Global Business increased by 27.3% to Rs. 5,55,005 crore.

2. RESOURCE MOBILISATION

Bank’s total deposits amounted to Rs 3, 12,899 crore at the end of March’2011, showing an absolute accretion of Rs 63,569 crore and a growth of 25.5% over previousyear. The share of Bank’s deposits to total resources was 82.71% at the end of March2011, while the share of low cost deposits (current + savings) in total domestic depositswas over 39%.

3. CREDIT DEPLOYMENT & DELIVERY

The credit portfolio of the Bank showed a robust and steady growth during 2010-11. Netadvances of the Bank at the end of March’ 2011 stood at Rs. 2,42,107 crore, comparedto Rs. 1,86,601 crore at the end of March 2010, registering an increase of Rs. 55,506crore or 29.7%.

The loan portfolio of the Bank remains well diversified with yield on advancesimproving to 10.58% for the year ended March 2011 from 10.36% in the previous year.

To meet specific credit needs of corporate clients enjoying credit limits of Rs.25crore and above, the Bank has set up 11 Large Corporate Branches (LCBs) at Ahmedabad,Bangalore, Chandigarh Chennai, Delhi, Gurgoan, Hyderabad, Kolkata, Ludhiana, Mumbai andNoida. Besides, Bank has established 13 Mid Corporate Branches (MCBs) at Coimbatore,Delhi, Goa, Indore, Jaipur, Jalandhar, Kolkata, Kota, Lucknow, Mumbai, Nagpur, Pune andVadodara which exclusively cater to the credit needs of Mid-cap segment. During thecurrent year, one branch of Hissar Circle was identified to be upgraded as MCB.

PNB is the designated Nodal Bank under Technology Upgradation Fund Scheme (TUFS) of theMinistry of Textiles, Govt. of India. For speedier processing of claims under TUFS, adedicated cell at the corporate office facilitates distribution of subsidy to eligibletextile units. The Bank has 823 accounts in SSI and Non-SSI category along with 715 SSIaccounts covered under 15% credit linked capital subsidy (CLCS) scheme for TUFS. Duringthe Year 2010-11, Bank disbursed Rs. 162.60 crore to eligible textile units under TUFS.

i. LOAN SYNDICATION

During the year, the Bank broad based its loan syndication activity by establishingdedicated Syndication Cells at Mumbai and Chennai to function as extended arms of Headoffice. The Cells facilitated achievement of financial closure of number of projects andnew clients were acquired during the year. Bank also has a dedicated Technical Cell whichundertakes Project appraisal and Techno Economic Viability (TEV) studies. These studiesare for internal use and also for sharing with participating banks as part of syndicationassignments.

During the year 2010-11, Bank gave approvals for Appraisal/ Syndicating debtaggregating Rs 33,514 crore, generating Fee Income of Rs 147.26 Crore. The sectors whereapprovals for syndication were given included infrastructure projects in power, roads andports, sugar, real estate, logistics, steel, textiles etc. Out of this, income amountingto Rs 55.10 crore has been booked during the financial year while the remaining incomeshall be booked based on confirmation and completion of mandates.

ii. RETAIL CREDIT

During the year under review, in order to improve credit flows and to cater to theneeds of various segments of the society, Bank realigned and improved its variousproducts/ offerings and made them more customer friendly. During the year, Bank convertedits Retail Hubs to Retail Asset Branches (RABs), resulting in faster delivery of retailcredit and higher level of customer satisfaction. Presently, 73 RABs are functioningsuccessfully. Going forward, Bank intends to increase the number of Retail Asset Branches.Value addition to Housing and Education Loan Schemes have been ensured through tie uparrangements with TATA AIG and Kotak Mahindra Old Mutual Life Insurance Ltd. (KLI)offering life insurance cover to borrowers.

The focus on expansion of the retail loan book resulted in yoy growth of retail creditby 23% to Rs.23, 621 crore at the end of March’ 2011 from Rs.19,214 crore in previousyear. Core Retail portfolio comprising Housing, Vehicle, Education, Personal, Pensioner,Gold, Mortgage and Reverse Mortgage loans increased to Rs.20,129 crore from Rs.16,369crore, registering a yoy growth of 23%.

Education and Housing loans have been the thrust areas which received Bank’sfocused attention. Education Loans grew by 24% to Rs.2820 crore at the end of March’2011 from Rs.2272 crore last year. Housing loans witnessed growth of 24% to Rs.11, 816crore from Rs.9538 crore during previous year.

In order to give fillip to Retail loans, from time to time, Bank introduces specialoffers for its customers. In August 2010, Bank launched Festival Bonanza Offer for Housing& Car Loan customers whereby relaxations in interest rates, margin and processing/documentation fee, etc. were extended. In February 2011, Bank again launched anothercustomer friendly offer - Basant Bonanza - offering concession in processingfees/documentation charges under Housing Loan Scheme. Customized offers targeting specialcustomer segments like insurance agents, doctors and defence personnel were also launchedduring the year. Some of the other initiatives taken to boost the retail portfolio includesigning of MoU with Army Authorities for opening of salary accounts of Army Personnelunder PNB Rakshak Scheme, introduction of PNB Shikshak scheme for teachers, giving specialtreatment to our high networth (HNI) customers, PNB Bal Vikas scheme exclusively forchildren, etc. Further, steps have been taken to decongest the branches to optimizetechnology use, especially with the help of Business Correspondents in Metro/Urban areas.

The Bank is leveraging on the strong technology backbone for improving customer servicethrough the system of online loan applications for housing, education, vehicle andpersonal loans. Branches have been equipped with Retail Loan Appraisal-cum-ApprovalSoftware (Lending Automation Processing System - LAPS) for speedy processing of loanapplications and faster service to retail customers.

iii. PRIORITY SECTOR

Credit under Priority Sector (PS) increased to Rs 75,652 crore at the end of March2011, registering a growth of 18.63%. With ratio of PS advances to Adjusted Net BankCredit (ANBC) at 40.67%, Bank continued to surpass the National Goal of 40%.

(As on Last Reporting Friday of March 2011)

Note: Figures in the brackets are %age to ANBC and are calculated based on LastReporting Friday data.

Credit to Agriculture

Credit to Agriculture sector grew by 17.4% to Rs 35,462 crore at the end of March 2011from Rs. 30,207 crore at end March 2010.

The ratio of Agriculture Advances to ANBC at 19.30% was higher than the prescribedNational Goal of 18%. Direct Agriculture Advances of Bank rose to Rs 27,398 crore in March2011 showing a growth of 16.07% over March 2010. Bank issued 3.57 lakh Kisan Credit Cards(KCCs) during 2010-11, taking the cumulative number of KCCs issued to 36.16 lakh. Further,Bank disbursed Rs 6530 crore during 2010-11 to 5.54 lakh new farmers under SpecialAgricultural Credit Plan.

During the year, Bank took various initiatives to accelerate flow of credit toagriculture sector. Under KCC Scheme, Loan application form and agreement have beensimplified for limit up to Rs. 1 lakh. Further, limit for Cash disbursement of investmentcredit has been enhanced from Rs 3 lakh to Rs 5 lakh. PNB Kisan ATM Card has been launchedfor KCC account holders to facilitate easy credit disbursement. While finance againstpledge of commodities kept in Covered and Plinth (CAP) storage in open compound waspermitted, relaxation in rate of interest for financing to food and agro processing unitsand cold storages has been extended in 28 Circles. The Dairy Vikas Card scheme to providecomposite loan to dairy farmers was extended throughout the country. Relaxations weregiven in rate of interest for activities like construction and running of coldstorages/warehouses/rural godowns and financing against pledge of warehouse receiptsissued by approved Collateral Managers for loans above Rs 10 lakh. Further, short termproduction credit upto Rs 3 lakh was provided to farmers at 7% interest with a 1.5%subvention support from Govt of India/RBI.

Micro Credit

Bank continued its efforts to promote micro finance through formation and creditlinkage of Self Help Groups (SHGs). At end of March 2011, the number of credit linked SHGsregistered a 10.23% increased to 1,65,355 SHGs with an amount of Rs 1254 Crore. Thecumulative number of SHGs that had been deposit-linked rose to 1,97,731 from 1,78,166(growth of 10.98%). Bank has credit linked 1,11,944 women SHGs and Saving linked 1,29,513women SHGs.

In order to boost microcredit, relaxations were approved for financing of SHGssponsored by different agencies. Further, modified scheme of "Micro Credit- SHGs- NonGovt Sponsored Scheme" was approved for financing of SHGs promoted by Bihar RuralLivelihoods Promotion Society (JEEVIKA).

Credit to Weaker Sections & SC/ST

Credit to weaker sections increased to Rs 18,365 crore at the end of March’ 2011,registering a growth of 16.39%. Ratio of weaker section advances to ANBC at 10.13%continued to be higher than the National Goal of 10 %. Credit to SC/ST beneficiariesamounted to Rs 3453 crore in 2010-11 as against Rs 3396 crore in 2009-10.

Credit to Women beneficiaries

Credit extended to women beneficiaries rose by Rs 1370 crore to Rs 9218 crore, at theend of March 2011 and as a percent to ANBC stood at 5.08%, higher than the National Goalof 5%. A separate Women Cell at corporate office closely monitors various lending schemesaimed at women beneficiaries and modifications in the schemes are brought about whereverrequired.

Credit to Minority communities

Bank’s credit to minority communities has increased to Rs 11,392 crore at the endof March’ 2011 showing a growth of 18.96% from Rs 9576 crore as on March’ 2010.It constituted 15.06% of Priority Sector advances, higher than the target stipulated underPrime Minister’s 15 point programme for the welfare of Minorities.

Micro, Small & Medium Enterprises

The Micro, Small and Medium Enterprises (MSME) sector plays an important role ineconomic development through their contribution to GDP, exports and employment generationin manufacturing and service sector. At the end of March 2011, credit to MSME sector stoodat Rs 45,296 crore registering growth of 29.3% over March 2010 and constituting 20.2% oftotal credit. Advances to Micro Enterprises grew at 44.8% to reach a level of Rs 14,370crore.

Bank has implemented recommendations of High Level Task Force constituted byHon’ble Prime Minister to address the issues of Micro, Small & Medium Enterprises(MSME) Sector. Against the envisaged growth of 20% as on March 2011, the outstanding Microand Small Enterprises (MSE) advances grew by 25.5% to Rs 35,032 crore. Share of MicroEnterprises in MSE lending stood at 51.5% against the envisaged share of 50% while annualgrowth in Micro Enterprises was more than 15% as against the target of 10%. For objectiveand speedier appraisal of loan proposals, Bank has developed and launched SME CreditScoring Model for loans upto Rs 50 lakh in all the branches.

a. Collateral free Lending

Bank leveraged Credit Guarantee Scheme of Micro & Small Enterprises (CGTMSE) forproviding Collateral free/ guarantee free loans upto Rs. 100 lakh. During 2010-11, 26,210cases were covered under the scheme involving credit outlay of Rs 1,428 crore

b. Other initiatives

A combo product for working capital requirement upto Rs 10 lakh was launched withconcession in rate of interest and current account. Bank also launched a new scheme foradvances to Tour & Travel operators. Bank has adopted the cluster based lendingapproach to meet the requirements of the MSME under which Bank has adopted 41 clustersincluding two Artisans Clusters. For providing better customer care and transparency inservices, Bank has adopted the Code of Bank’s Commitment to Micro and SmallEnterprises prescribed by the Banking Codes and Standards Board of India, Mumbai.

Bank has identified MSME focus branches in addition to already existing SpecialisedMSME branches. As on date there are 523 such branches (59 specialised SME branches &464 MSME focus branches). Apart from extending 1.00% concessions on chargeable InterestRate to Micro Enterprises for loans up to Rs. 25 lakh, higher Loaning Powers have beenvested to Branch Managers for directly disposing proposals at Branch Level for financingmicro enterprises under CGTSME. Bank is also pro-actively participating in various schemesof Government of India like Prime Minster Employment Generation Programme etc.

c. Recognition

The CGTMSE conferred 2nd award for excellence in performance for obtaining CreditGuarantee Cover under CGTMSE up to the year 2010. The Khadi & Village IndustryCommission, Ministry of MSME, Government of India conferred National Award for Excellencein Lending to Khadi & Village Industries in North Zone.

iv. FINANCIAL INCLUSION

Financial inclusion has been priority area for the Bank not only for compliance withthe directives of the Government of India but also as a business proposition. Thus, Bankhas decided to extend the foot prints of the Bank to the hitherto unbanked areas and takeas many customers as possible on board.

Status of Financial Inclusion (As on March 31, 2011)

a. Technology Based Financial Inclusion

The Technology based FI programme was implemented in 39 different remote areas in thecountry thereby covering 3355 villages through 894 Business Correspondent (BC) Agents.Extensive use of technology leveraging the Core Banking Solution has been made forproviding banking services in these villages. Bank has been able to extend its reach to awider area by use of technology.

Bank has been allocated 4683 villages with population in excess of 2000 for providingbanking services by March 2012. Of these, 2186 villages have already been covered andBC Agents have been deployed. Over 10 lac enrollments have been done. The remainingvillages shall be covered by end of March 2012.

b. Training to Business Correspondents

Business Correspondent is the face of the Bank in the village and his conduct has adirect bearing on the reputation of the Bank. Elaborate training in banking and softskills is provided to BCs immediately after appointment. A pool of trainers has beencreated in the Bank with help from the Indian Institute of Bank and Finance, Mumbai whichis used for providing training to the BCs. PNB’s Central Staff College/Zonal TrainingCentres/Regional Staff Colleges have conducted 11 such programmes and trained 247 persons(LDMs, faculty members of training colleges, Agricultural officers, persons from RSETIs,etc.) who are used as faculty for further training to BCs.

c. Outreach Programme of RBI

As a part of Outreach programme of RBI, PNB was given the responsibility of providingbanking services to Village Kulharia (Koilwar Development Block in Bhojpur District,Bihar), Village Amarut (Gaya District, Bihar), Nalanda & Jehanabad Districts in Bihar,Village Mastabad (Dist. Alwar), CO: Bharatpur and Village Malikpur, Dist. Sikar.Resultantly, the Bank has been providing smart card/GCC/KCC/OD facility to at least onemember of the households in these villages. A follow up programme pursuant to inclusion ofthe village Amarut in Gaya District of Bihar was organized by RBI in Bihar.

d. Credit Driven Functional Financial Inclusion Projects

Over 18000 beneficiaries belonging to the under-privileged category of the society havebeen identified and provided financial assistance. Rickshaw Pullers, Weavers, Villagelevel entrepreneurs managing Common Service Centers, Vegetable sellers, Milk producers,Construction workers, Contract workers, Self Help Groups etc. have been provided withassistance over Rs. 53 crore.

e. Banking KIOSKs

30 Banking KIOSKs have been set up in District Gaya (Bihar), Rohtak (Haryana) andBulandshahar (UP) for providing banking services through ICT based BC model.

f. Registrar for Unique Identification Authority of India (UIDAI)

Bank has been acting as Registrar to the UIDAI for enrollments for issue of UniqueIdentification Numbers to the residents by the UIDAI. The work on UIDAI enrollment wouldbe started soon in the District of ALWAR in Rajasthan.

i. A new product for ICT based FI customers was developed for catering to therequirement of remittance of funds of the migrant labourers in big cities. This newproduct when implemented, will facilitate transfer of funds between :

a. FI accounts

b. FI account and CBS account (in PNB)

c. FI account and CBS account (other banks)

ii. In built overdraft: The FI account carries an in built overdraft of Rs 500/-.Overdraft up to Rs.2500/- is available with prior approval of the Branch Manager.

h. Financial Literacy and Credit Counseling Centres (FLCC)

The Financial Literacy and Credit Counseling Centres have been set up to impartfinancial education and provide face to face counseling on financial issues related tobanking, viz., deposits, opening of No frill Accounts, preventive and curative creditcounseling, etc. Bank has Lead Bank responsibility in 57 districts where we have FLCCsalong with one in Delhi, taking the total number to 58. During the year 2010-11, 86,645number of enquiries were made in these FLCCs and 73,856 persons attended the seminarsconducted by them.

v. ASSET QUALITY

Ratio of Gross NPAs to Gross Advances of the Bank stood at 1.79% at the end ofMarch’ 2011, while the ratio of Net NPAs to Net Advances was 0.85%. In case of allNon-Performing Assets (NPAs), account-specific resolution strategies were implemented andprogress was monitored regularly. While thrust was given to upgrade NPAs to performingcategory, enforcement action under SARFAESI Act was initiated in eligible cases.Compromise/ negotiated settlement was adopted as another strategy to tackle NPAs.

Based on experience gained and regulatory guidelines, Bank’s ‘Policy onRecovery of Loans & NPA Management’ was fine tuned. Special recovery campaigns(Rin Mukti Shivirs) were launched at various locations where Senior Authorities fromCircle Office/Head Office and FGMs participated for on-the-spot decisions for resolutionof accounts i.e., One Time Settlement (OTS)/ Upgradation, etc. Bank has set up specializedbranches known as Asset Recovery Management Branches (ARMBs) and specialized cells knownas Special Asset Recovery Cells (SARCs) which function exclusively for resolving NPAs.Presently, 17 ARMBs and 50 SARCs are functioning. The Bank also took the following steps:

• Special OTS Policy was formulated for Agriculture Debt Relief Accounts forresolution of NPAs under Agriculture Debt Relief Accounts. This special scheme has proveduseful in providing relief to borrowers under this segment.

• Continuing "Prayaas" staff Incentive Scheme for associating staffmembers in recovery efforts in non-performing advances and in written-off accounts.

• Engagement of Resolution Agents including ARCs and honorably retired bankofficials on commission basis.

• New ARMBs have been opened at five different centres for focused attention inresolution of NPAs particularly in category of Rs.10 lac and above. Drawing accountspecific strategic plan, comprehensive review of ARMBs and steps for their revamp havebeen initiated.

• Recovery Campaign was celebrated during the period 15.07.2010 to 15.08.2010 forrecovery in written-off accounts, through which Rs 27.25 crore was recovered.

• The year 2010-11 was designated as "Year of NPA Resolution throughOTS" for faster resolution of NPAs and OTS in 66284 accounts was approved.

• For seizures and sale of vehicles of defaulter borrowers, Board approved theprocedure for repossession and sale of security including Tractors.

• Delegated powers were revised for sanction, filing/defending in the name ofBank, monetary suits, application to tribunals, reference to arbitration, recoveryproceedings, appeal, etc.

• Special campaign to hold Lok Adalats was launched at district level in 18Circles during the period 20.11.2010 to 20.12.2010 for resolution of NPA accountsinvolving amount upto Rs.10 lac.

Accounts with aggregate outstanding of Rs 409.96 crore were upgraded to"Standard" category. Total cash recoveries in NPA accounts amounted to Rs1170.01 crore during the year. Through well defined recovery policy, 66,573 NPAs amountingto Rs 893.76 crore were resolved through negotiated settlements. Besides, 3 NPAs amountingto Rs 7.93 crore have been resolved through sale to ARCs / other banks / NBFCs as per RBIguidelines. During the year 2010-11, Bank recovered Rs 513.34 crore out of the accountsearlier written-off.

a. Industrial Rehabilitation

Bank continued its efforts towards rehabilitation of potentially viable sick units toprovide the much needed relief to industrial sector by debt restructuring. Bank has beenassigned the role of ‘Operating Agency’ of BIFR in number of accounts. During2010-11, Draft Rehabilitation Scheme (DRS) was formulated by the bank as ‘OperatingAgency’ of BIFR in 4 accounts. Bank implemented rehabilitation package in 3 casessanctioned by BIFR during 2010-11.

b. Corporate Debt Restructuring (CDR)

To ensure timely restructuring of debt of viable borrowers availing credit facilitiesunder consortium/multiple banking, a transparent mechanism is available under CDR system.During the year 2010-11, 8 accounts with outstanding of Rs 410 crore were restructuredthrough the CDR mechanism. Out of the 8 restructured accounts, PNB has been assigned therole of Monitoring Institution in 5 accounts.

c. Debt Restructuring Mechanism for Small & Medium Enterprises

Bank has adopted Debt Restructuring Mechanism for Small & Medium Enterprises (DRMfor SMEs) on the lines of CDR since 2005-06. Under this, timely restructuring of SMEsfacing genuine problems is ensured. During the year under review, Bank restructured 224accounts with aggregate outstanding of Rs 459 crore.

d. Restructuring – Others

Bank has also put in place a transparent mechanism for restructuring of debts ofpotentially viable units, which are facing temporary problems due to factors beyond theircontrol and those which cannot be covered under BIFR/CDR/DRM for SMEs. During the year2010-11, 577 accounts involving Rs 2349 crore were restructured/rescheduled under thiscategory.

4. FOCUS ON SUSTAINABILITY

The risk management philosophy and policy of the Bank is an embodiment of theBank’s approach to understand, measure and manage risks and aims at ensuring growthof healthy asset portfolio. This would entail adopting leadership approach in products andsegments well understood by the Bank and having pre-determined risk standards of moderateto low risk level, taking limited exposure in high risk areas, striking a balance betweenthe risk and return and also striving towards improving market share to maximizeshareholder value.

a. Credit Risk

The Bank has robust credit risk framework and has placed credit risk rating models oncentral server based system ‘PNB TRAC’, which provides scientific basis forassessing credit risk rating of a client. The Bank has added a new credit risk ratingmodel for ‘Advance against Lease Rentals’ exposures. Periodic validationexercises of the rating models are undertaken and rating migration and default rateanalysis are carried out to test robustness of rating models. The output of the ratingmodels is used in the decision making of the Bank viz., sanction, pricing and monitoringof loan portfolio. The Bank has set a benchmarked portfolio distribution in terms of LowRisk, Medium Risk & High Risk Categories and the actual portfolio is monitored onquarterly basis and the same is placed before the Risk Management Committee (RMC) of theBoard. Taking a step further, the Bank has developed and placed on central server creditscoring models in respect of retail banking and SME sector advances. These processes havehelped the Bank to ensure efficient service delivery, uniformity in approach andfacilitate storage of data and analysis thereof. Scoring model for farm sector loans hasalso been developed.

b. Market Risk

The Bank has in place a well defined organizational structure for market riskmanagement functions, which looks into the process of overall management of market riskviz. interest rate risk, foreign exchange risk, liquidity risk and implementsmethodologies for measuring and monitoring the same. Tools like stress testing, duration,modified duration, VaR etc are being used in managing risks in treasury operations.

Asset liability management of the Bank is done on proactive basis to manage anyeventuality. Although liquidity position in the system remained tight during the year, theBank managed to tide over the situation through proactive liquidity management throughvarious prescribed tools like Repo, Reverse Repo etc. With Core Banking Solution (CBS)covering entire branch network, the Asset Liability Management in respect of all assetsand liabilities is being done on daily basis. Moreover, fixing BPLR/Base rate and interestrates in respect of assets and liabilities products is done on scientific basis. The Bankhas moved from BPLR to Base Rate System for pricing of fresh loans/renewal of existingloans with effect from 1st July 2010.

c. Operational Risk

Bank has established organizational structure for operational risk management functionswhich looks into the process of overall management of operational risk. Under theoperational risk management framework and ORM Policy, Bank is identifying, measuring,monitoring and controlling/ mitigating operational risks by analyzing historical lossdata, Risk and Control Self Assessment Surveys (RCSAs), Key Risk Indicators (KRIs) andScenario Analysis. Bank has also introduced an online OpRisk Solution under Enterprisewide Data Warehouse Project and placed it on central server to take care of variousaspects of data capturing and management information system at various levels.

d. New Capital Adequacy Framework

The Bank has migrated to New Capital Adequacy Framework (NCAF), popularly known asBasel II w.e.f March 2008. The approaches prescribed by the regulatory authorities viz.,Standardized Approach under Credit Risk and Basic Indicator Approach under OperationalRisk have been implemented. The Bank has adopted Standard Duration Approach for MarketRisk. As per RBI guidelines, relevant policies such as Policy for Internal CapitalAdequacy Assessment Process (ICAAP), Disclosure Policy, Credit Risk Mitigation &Collateral Management Policy and Policy on Stress testing have been approved by the Boardand since been implemented. Bank is working towards adoption of advanced approach tomanage different risks and the estimation of various risk elements is already in progress.Bank has already applied to RBI for migration to "Standardised Approach" underOperational Risk.

5. INTERNATIONAL BUSINESS

Bank’s total forex turnover from exports, imports and remittances amounted to Rs1, 20,526 crore in FY 2011, registering a growth of 17.34% over previous year. Exportcredit outstanding stood at Rs 11,074 crore at the end of March 2011 against Rs 8,294crore at end March 2010, registering a growth of over 34%.

The Bank has 175 branches authorized to handle foreign exchange business (including twoForeign Exchange Offices) which are provided with the SWIFT connectivity. Over 520 banksworldwide have been approved to facilitate trade transactions of our clients. Besides,Bank has set up 11 specialized International Banking Branches (IBBs) at important centresfor dedicated service to exporter/importer clients. An International Service Branch and aCentralized Back Office for Trade Finance at Delhi, have also been set up to handle allforeign inward remittances and expeditious processing of export/import documents. Tofacilitate International travel, Bank has launched "World Travel Card" which isa prepaid card denominated in USD, GBP and EURO.

In order to centralize opening of NRI accounts by any of the Bank’s branches inIndia and for offering speedy services like issuance of pass book, cheque book, ATM cumDebit cards, Internet Banking Services, etc, a Back Office (E-bay) has been set up atDelhi. Exchange bureaus at important tourist centres for encashment of foreign currencynotes/travellers cheques by foreign tourists/NRIs etc has also been set up. Bank hasentered into Rupee Drawing Arrangements (RDA) with 29 Exchange Houses in Gulf countriesand one in Singapore to facilitate remittances from NRIs. In addition, the Bank has webbased remittance arrangements under Money Transfer Service Scheme (MTSS) through XpressMoney, Money Gram, Buy India online, Ezremit and Western Union.

6. TREASURY OPERATIONS

The Bank’s investment portfolio rose to Rs 95,513 crore at the end of March’2011 from Rs 78,058 crore last year. During the period, income from Investments was Rs5698 crore against Rs 4577 crore last year. The Bank had meticulously complied withstatutory prescriptions relating to CRR and SLR, in compliance under section 19(2) ofBanking Regulation Act 1949 and prudential norms prescribed by RBI relating to treasuryoperations.

7. BUSINESS DIVERSIFICATION

Mutual Fund: Bank is distributing and marketing Mutual Fund products of UTI AMC& Principal PNB AMC. During FY 2010-11, Bank earned brokerage to the tune of Rs.2.19crore.

Gold Coin Business: Under the Gold Coin Scheme, the Bank is presently selling goldcoins of 2 gm, 5 gm, 8 gm, 10 gm & 20 gm through branches. During the year 2010-11,Bank sold 30,325 gold coins weighing 206 Kg as against 16,542 coins weighing 103 Kg during2009-10. Bank’s earning from sale of Gold Coins during 2010-11 stood at Rs 2.25 croreas against Rs.1.38 crore earned during 2009-10.

Insurance Business: Under tie-up with Oriental Insurance Company Ltd for non-lifeinsurance, premium collection during FY 2010-11 amounted to Rs.72.30 crore from 3.06 lacpolicies and Bank earned revenue of Rs.6.43 crore. Similarly, under tie-up with LIC ofIndia in respect of life-insurance business, the premium collections amounted to Rs.113.91crore from 47,159 policies referred by the Bank which earned revenue of Rs.6.77 crore.

Depository Services: Bank is having a client base of 63,280 demat accounts. TheBank earned an income of Rs. 95.17 lac in 2010-11 as against Rs. 91 lac in 2009-10 byproviding depository services.

On line trading facility: Out of a client base of 15,931 online trading accounts,Bank’s earnings increased to Rs.55.76 lac in 2010-11 against Rs. 35.58 lac duringlast year.

Merchant Banking: As a Category – I Merchant Banker, the Bank handled 14assignments as "Banker to the Issue" and 90 assignments of dividendpayment/Interest payment etc. during the financial year 2010-11. The Bank is registeredwith SEBI as Self Certified Syndicate Bank (SCSB) and its select branches are offering thefacility of submitting applications in public issue (IPO/FPO/ Right issue) through theApplication Supported by Blocked Account (ASBA) process. The Bank is offering thisfacility online too.

India factoring and Finance Solutions Pvt Ltd: PNB has formed a Joint Venture withFIMBank (Malta), a Non Banking Finance Company (NBFC), for offering products of factoring,forfeiting and other trade finance solutions to Indian Corporates particularly from SMEsegment. PNB has invested Rs. 30 crore, accounting for 30% stake in the Joint Venture. TheJoint Venture "India factoring and Finance Solutions Pvt Ltd" started itscommercial operations w.e.f 12.01.2011 from Delhi, Mumbai & Chennai.

Cash Management Services & PayFee: Cash Management Services or the CMS facilityis offered to Corporates for efficient fund management. This product has been structuredwith flexible features for meeting the specific needs of the user-client. CMS facility isoffered to educational institutions through ‘PayFee’. 54 customers have optedfor CMS services, while more than 295 educational institutes have availed PayFee service.

Door step Banking: Under the facility of Door Step Banking, cash is picked up fromthe premises of the customer. Door step banking is currently being provided to about 400customers and has helped in garnering Current Account business.

DD Drawing Arrangement: Bank has also entered into DD Drawing arrangements withseveral foreign Banks, under which, apart from the revenue income from commissions earned,the Bank also enjoys substantial float in current account.

Credit Card: Credit Card was launched by the Bank in February 2009. Keeping in viewthe need of corporate clients, Bank launched Corporate Credit Card with Individualliability in November 2009. During the year, soft launch of Corporate Credit Card withCorporate Liability was made and currently over 78,000 Credit Cards have been issued.

Merchant Acquiring Business: Bank has also entered into Merchant Acquiring Businesswhich targets existing CA/CC customers, hotels, petrol pumps, educational institutions,corporate, etc. As on date over 2400 POS terminals have been installed and 8 InternetPayment Gateways have been integrated.

8. TRANSACTION BANKING

Transaction Banking Division, set up to harness the benefits of computerization,formulates products and services and makes the same available for the use of customers.Effectively, it works towards providing customer convenience embodying the true spirit of‘Anytime Anywhere Banking’. The focus of the Bank is on migrating customers from"Branch Based Banking" to "Alternate Delivery Channels" such as ATMs,Internet Banking, Mobile Banking, Call Centre etc. to de-congest branches and createadditional capacity within existing infrastructure for customer acquisition and servicingexisting customers.

Back Office Operations

Transaction Banking Division has introduced the system of Centralised Solutions, toimprove the efficiency of service being provided as well as to release the pressure frombranches. Towards this end, the following activities have been centralized:

a. Opening of Back Offices to look after the processes of inward outward and outstationclearing of cheques

b. Issuance of personalized cheque books

c. Issuance of statement of accounts

d. Centralised document storage

Bank is shortly introducing the Enterprise Document Management System (EDMS) foropening of accounts at branches, and putting up innovative cheque drop boxes which wouldautomatically record and update the details of the cheques received.

9. GOVERNMENT BUSINESS

During the year, all authorized branches handling PPF business were made live on GBMmodule in the CBS system. E-payment system for collection of Commercial Taxes (Sales/VAT)has been made "live" in the states of Bihar, Maharashtra, Himachal Pradesh,Chhattisgarh, Delhi and Orissa. Further, Bank is in the process of implementing e-stamping of documents in the 6 states i.e. Karnataka, Gujarat, Delhi, Maharashtra, Assamand Tamil Nadu. Extending the coverage of technology, provision of Direct tax paymentfacility through ATMs is nearing completion. Bank has plans to set up centralized PensionProcessing Centres to disburse all types of pensions.

10. BRANCH & OFFICE NETWORK

Total Number of Branches at the end of March’ 2011 rose to 5189. The BranchNetwork comprises 2047 Rural, 1154 Semi Urban, 1111 Urban and 877 Metropolitan branches.During the review period 210 domestic branches were opened. With 5189 branches, including28 Extension Counters, the Bank has the largest network amongst the nationalized banks. Aspart of customer segmentation, Bank has opened specialized Branches that include 6 MicroFinance branches, 59 SME branches, 11 International Banking Branches, 17 Asset RecoveryManagement Branches, 13 Mid Corporate Branches, 11 Large Corporate Branches, 73 RetailAsset Branches, 11 Agriculture Finance Branches, 3 high-tech agriculture branches, 1Capital Market Services Branch and 1 International Service Branch. Besides, 41 BackOffices, 2 Special Foreign Exchange Offices, 17 Special MICR Centres, 41 Service (RegionalClearing Centre) centres, 4 Financial Inclusion Service Centres, 3 Centralised DraftPayable Centres, 1 Central Clearing Service Centre and 1 Depository Back Office areestablished to reduce delivery time and improve response time.

The idea of introducing "Premium Customer Lounge" at select branches is aimedat providing superior customer experience to our premium customers. The Premium CustomerLounges are a means of ensuring that our Premium customers are extended exclusive serviceswithout disrupting our services to other customers of the Bank. A dedicated RelationshipOfficer will attend to these HNI customers for providing personalized services andbusiness development the moment they enter our branch.

International Presence

In pursuit of the objective of international expansion, Bank has opened one branch eachat Kabul and Dubai, two branches at Hong Kong and an Off Shore Banking Unit at Mumbai. Inaddition to the above, Bank has Representative offices at Almaty, Dubai, Shanghai andOslo, a wholly owned subsidiary in UK with 7 branches and a subsidiary each in Kazakhstan& Bhutan, (Druk PNB Bank Ltd.) and joint venture with Everest Bank Ltd. Nepal. Duringthe year, Bank acquired majority equity stake of 63.64% in Dana Bank of Kazakhstan.

Bank is in the process of opening a Representative Office in Sydney, Australia forwhich permission from the Australian regulator has already been received. Further, settingup a 100% subsidiary in Canada has been taken up for which approval from the regulator isawaited.

11. INFORMATION TECHNOLOGY

Financial sector in general and banking industry in particular have undergonetransformation due to induction of Information Technology (IT). PNB has been in theforefront in use of technology.

a. Implementation of Core Banking Solution(CBS)

Core Banking Solution (CBS) is offered at all the branches of the Bank providingflexibility and convenience to all customers. The branch is effectively integrated withalternative channels of service delivery viz., ATMs, Internet Banking Services, mobilebanking, etc. Core Banking Solution is built on robust and scalable platform throughstate-of-art Network Operating Centre (NOC), dual network connection at all branches andautomated Business Continuity Plan (BCP). It is integrated with NEFT, RTGS and SWIFTpayment networks. The CBS setup handles approximately 4 million transactions per day. Highavailability of services (99.9%) is ensured with adequate redundancy at every layer of thesetup.

b. CBS in Regional Rural Banks

With 100% CBS at PNB, Bank rolled out CBS at all its six sponsored Regional Rural Banks(RRBs) thereby extending the coverage of benefits of technology to the rural population.100% implementation of CBS in all 1450 plus branches/offices of six RRBs was completedmuch ahead of the deadline.

c. CBS at overseas locations

Banks’ data centre and Disaster Recovery Site (DRS) offers hosted services for alloverseas ventures, including Joint Ventures and subsidiaries. The data centre managesoperations of 13 entities with ‘In House’ resources as against outsourced modelthereby reducing the operational costs considerably and affording complete control overoperations.

d. Alternate Delivery Channels

Transactions through Alternative Delivery Channels (ADC) have registered considerablegrowth during the past year. Currently, more than 28% of the total transactions in theBank are undertaken through ADC which includes ATM / Debit Card / RTGS / NEFT etc.

e. Internet Banking Services

Bank’s internet banking services offer a complete e-bouquet of banking andfinancial services. With over 11 lac retail and around 2 lac corporate Internet Bankingusers, PNB’s Internet Banking is witnessing a steady shift of customers for transferof funds, inter-bank remittances and payments towards various services. The channel wasextended for collection of VAT/ State Taxes for the states of U.P, Bihar, Maharashtra, HP,Delhi, Orissa and Chhattisgarh during the year. By collaborating very actively in all thee-initiatives of Govt. of India as well as several state Governments, Bank has positioneditself as a leading e-service provider. The effectiveness of the channel is enhanced withthe utility payment facility for all the popular service providers.

f. SMS Alert Services and Mobile Banking Services

SMS Alert facility is being availed by over 21 lac customers through generation of SMSAlerts on identified financial transactions undertaken through branches and deliverychannels (POS, ATM, Internet Banking & Mobile Banking). The SMS Alerts are being sentfor certain non-financial activities as well. The channel was leveraged for providinginformation on Bank’s products and services over SMS under the SMS Pull Mechanism.

The Bank launched its Mobile Banking services in February 2010. Utilizing thisplatform, a customer can undertake banking transactions through their Mobile handsets. Theextension of mobile payments has added value to the channel as the users can also makepayments of utility bills/services using their mobile phones, besides effecting transferof funds to third party accounts.

g. ATM Services

In order to provide greater convenience to customers, more than 1450 ATMs have beeninstalled during the year, taking the total count of ATMs of the Bank to 5050. Apart fromthe facility of cash withdrawals, balance enquiry, mini statement and PIN change,Bank’s ATMs offer other value added services to the cardholders like Transfer, BillPayments, mobile registration for generation of SMS alerts etc. Some additional featureslike payment of Income Tax through PNB ATMs are also extended to our customers.Transactions through ATMs showed a growth of 36% during the year 2010-11.

h. ATM/Debit Cards

In order to provide greater flexibility and convenience to customers, the Bank hasissued more than 13 million ATM/ Debit Cards till date. Bank has introduced new freebenefits for PNB Debit Cards holders in the form of free accidental death insurance uptoRs. 2 lacs, and redeemable Reward Points on usage of Debit Cards at POS outlets or fore-commerce transactions.

i. Real Time Gross Settlement System (RTGS) and National Electronic Fund Transfer(NEFT)

The facility of RTGS and NEFT is being provided in all branches of the Bank and alsofacilitated through Internet Banking channel. Internet banking customers can remit fundsjust by click of a button without any bank/branch intervention to any RTGS/NEFT enabledbranch of other banks in India.

j. New IT based Products/Services

Bank has been launching new products/services with special focus on various customersegments. During the year, Bank introduced various products and services, some of whichinclude:

• World Travel Card as a pre paid card in 3 currency denominations for personsintending to travel abroad.

• Pre paid Gift Card (PNB Uphaar).

• Kisan Credit Card – enabled for ATM.

• Introduction of Passbook facility to FI Customers.

• Value added services at ATMs under NFS network.

• VAT collection through internet banking channel

• Inward remittances with Western Money union, Money Gram etc.

• Web portal for State governments enabling them to monitor funds deployment atstate / district / panchayat level.

k. Enterprise wide Data Warehouse

PNB is the first nationalized Bank to implement an Enterprise-wide Data Warehouse tointegrate data from multiple source systems and provide Business Intelligence and decisionsupport system. It also serves as a source of data feed for Anti-Money Laundering, riskmanagement and Customer Relationship Management system.

IT Security

• Business Continuity Plan (BCP)

In the present scenario where all the branches are under Centralized Network,connectivity is an important concern. Though precautions have been taken to take care ofconnectivity outage by providing dual connectivity to each branch, yet chances of outagecannot be ruled out completely. Bank has well defined Business Continuity Plan (BCP) toprovide uninterrupted customer Service in case of any exigency in the branches.

• Information Security

The Bank has taken adequate steps to strengthen anti-phishing mechanism and monitoringprocess thereof to prevent online frauds. To monitor information security events acrossBank’s network, a world class Security Operations Centre (SOC) has been establishedbeing first of its kind to be set up by any Indian Bank. The facility is being utilizedfor analysis and monitoring of various threats emanating from both within the network aswell as from outside the network in a very proactive manner.

• ISO 27001

Bank’s Critical Infrastructure Data Centre, Network Operation Centre &Disaster Recovery Data Site are ISO 27001 certified. All the policies are aligned withbest practices and are ISO 27001 standards compliant.

• Internet Monitoring/Website Monitoring

3 Daily malware monitoring of the official websites.

3 To safeguard the interests of our internet banking customers, Anti- Phishing, AntiPharming and anti -Trojan services are being availed.

3 To secure the interests of Internet banking customers, ‘Site to userfunctionality of transaction Monitoring solution (IBS Shield)’ has been implemented.

• Recognition

In recognition of technology initiatives, the Bank won various awards during the year.These include PC Quest Best IT Implementation Award 2010 for CBS, SKOCH Award 2010 for"Computerization of RRBs", SKOCH Financial Inclusion Award 2010, National Awardson e-Governance 2010-11, best IT initiative Gold award under the category ‘Innovativeuse of ICT by PSUs for Customer’s Benefit’ and ‘Best Technology Bank ofthe year’ Award by Indian Bank’s Association.

12. HUMAN RESOURCES MANAGEMENT

To give due attention to the macro-level and strategic HR issues, a new HR Organizationstructure was established. This was done by carving out the routine administrativefunctions and delegating them to a separate Personnel Administration Division(PAD), thusenabling the Human Resources Development Division(HRDD) to focus on strategic thinkingnecessary for meeting HR challenges. PAD looks after administration / implementationissues such as Payroll, Transfer / Postings, Promotions, Disciplinary Action, IndustrialRelations etc while HRDD deals with the broader HR Policy framework, manpower planning anddevelopment & welfare issues. Bank has constituted a Sub-Committee on HR comprising ofsome of the Top Management executives for deliberating on various HR issues and forpiloting organization-wide HR interventions.

The Bank recognizes its employees as the most vital and valuable asset. Total number ofemployees including those in the subsidiaries at the end of March’ 2011 was 57,020(56,928 as at March 31, 2010). Women employees constituted nearly 16% of the totalworkforce.

Cadre-Wise Staff Strength

Recruitment strategy

During the year, Bank initiated recruitment process including campus recruitment frominstitutes through which 1335 Officers in various Grades/Scales were recruited. Out ofthese, 945 were Specialist Officers in various streams such as Marketing, Law, HRD, etc.Further, 1178 Clerical staff and 1062 Subordinate staff were inducted during the year.

Talent Retention

The attrition rate during the year was negligible at 0.83% (0.31% for the previousyear). This low attrition rate has been due to continuous investment in learning anddevelopment programs for employees, creating an enabling work environment, staff welfaremeasures and performance-linked incentives.

Career Path

The Bank has been implementing changes in the Promotion Policy from time to time toprovide fast-track career growth opportunities to employees.

Technology-based HRMS

Human Resources Management System (HRMS) or ‘PNB Parivaar’ – APeopleSoft package containing an exhaustive database of all the employees, has enabled theBank to effectively utilize technology for implementing all employee related tasks such ascompensation, staff welfare benefits, various reimbursements, transfer/ postings, terminalbenefits, leave rules etc. HRMS was also utilized by employees to exercise their optionfor pension as well as for centralized credit of pension to retired employees.

Industrial Relations

Industrial relations in the Bank continued to be cordial. Various meetings were heldbetween the Bank Management and the representatives of the majority Officers’Association / Workmen Union during the year.

Reservation Policy

The Bank follows the reservation policies for SCs, STs and OBCs as prescribed byGovernment of India from time to time.

Strength of SC/ST/OBC Employee

Staff Welfare

During the year, the Bank implemented many Staff Welfare Schemes with an objective tomeet the aspirations of the employees. Significant among them was the Scheme for paymentof financial assistance to the employees having mentally retarded children. The limits forInterest-free Festival Advance facility being offered to the employees were increasedsubstantially.

Bank recognized efforts made by our staff towards excelling in areas of their personalinterest. Bank is proud of the glorious achievement of Shri Basanta Kumar Singha Roy,posted at CO; Kolkata, who scaled the highest peak in the world, Mount Everest in hismaiden attempt by hoisting PNB's flag. Similarly, Mr Satish Khanwalkar, posted at CO:Indore and a direct disciple of Pandit Vishwa Mohan Bhatt, was invited to play Mohan Veenaon PNB's 117th Foundation day celebrations and was felicitated by the Top Management.

PNB Samadhaan

The Scheme offers an opportunity to an employee to represent case of any work-relatedgrievance directly before the Chairman & Managing Director of the Bank. During theyear under review, 37 cases under the Scheme were suitably resolved.

Team 2020

A ‘2020 Program’ has been initiated for grooming officers in SeniorManagement who are due to retire after 2020 so that they can assume leadership roles inthe Bank.

Training Activities

The Training system of the Bank endeavours to enrich Knowledge, Skill and Attitude(KSA) of staff at all levels in line with the organizational objective. Bank has a threetier training set up comprising of Central Staff College (CSC) at Delhi at apex levelcatering to training needs of Top / Senior / Middle Management Grade officers, threeRegional Staff Colleges (RSCs) located at Belapur-Navi Mumbai, Lucknow and Panchkulacatering to training needs of Middle / Junior Management officers as well as workman staffand seven Zonal Training Centres (ZTCs) at Dehradun, New Delhi, Jaipur, Kolkata,Kozhikode, Ludhiana and Patna looking after the training needs of Junior Management Gradeofficers & Workman Staff. IT Training Centre located at Faridabad caters to thetraining needs of officers exclusively in the areas of Information Technology.

In addition, PNB IIT, an autonomous Institute has also been established by the Bank atLucknow, which conducts advanced IT courses and Special training programmes on IT / CBSfor the employees of the Bank as well as other Financial Institutions.

Bank also imparts training to its officers in different Grades in specialized areasthrough outside training institutions of repute both in India & abroad viz. IIMAhemedabad, IIM Lucknow, NIBM Pune, CAB (RBI) Pune, ASCI Hyderabad, MDI Gurgaon, KelloggSchool of Management USA, APRACA Manila etc. During the year, the training activities inthe Bank focused on areas like credit, agriculture, SME & Micro credit, foreignexchange, information technology, NPA management, risk management & soft skilldevelopment etc.

Training Policy of the Bank envisages a training reach of 50% of employees every year.During 2010-11, Bank imparted 1,34,913 man days training to 44,713 employees throughin-house training institutions. In addition, 1550 officers attended specialized trainingsat reputed outside Institutes in India and abroad. Bank is also encouraging utilization ofthe trained staff as agents of knowledge dissemination through the concept of "Eachone to teach one".

In recognition of its efforts in training, Bank was awarded ‘Golden Peacock Awardfor Training’ by Institute of Directors (IOD) for the year 2011. Bankalso received the 6th BML Munjal Award for Excellence in Learning & KnowledgeDevelopment-2010 by Hero Mindmine Institute.

E-learning

Training system of the Bank makes extensive use of technology for facilitatingknowledge dissemination to its employees. Bank has created an exclusive Knowledge Centrewebsite, comprising e-circulars of all HO Divisions, which is a knowledge repository oflatest banking and economic updates. Bank has also launched an exclusive e-learningplatform i.e. ‘PNB Gyan uday’, which is accessible 24 X 7 to all theemployees across the country and abroad. In the interactive model of learning, topics onvarious areas viz. Credit, Foreign Exchange, Retail Banking, CBS/IT, Soft Skills,Marketing, Risk Management, Resolution of NPAs etc. are provided.

13. MANAGEMENT INFORMATION SYSTEM

Management Information System Division (MISD) was set up with the objective ofcentralisation of MIS. To achieve this objective, Enterprise-wide Data Warehouse (EDW),had been implemented. EDW set up has facilitated ready access to data required forRegulatory/Statutory reporting as well as for analytical purposes. So far EDW hascustomised 345 returns pertaining to sixteen HO Divisions. LADDER (Loans and Advances DataDesk for Evaluation & Reports) System, comprising of BASEL & CIBIL modules, withmonthly data updation periodicity, is also being implemented for creating data base ofloan accounts, generation of credit related MIS & retrieval of credit relatedinformation, asset classification and provisions computation in respect of NPAs, etc.

14. CUSTOMER CARE

PNB is committed to provide the best customer care and is using its technology platformfor ensuring consistent customer experience. The Bank has a well-defined GrievanceRedressal Policy, reviewed annually, emphasizing on quick redressal of complaintspreferably within 24 hours. This policy has a special consideration for Pensioners andSenior Citizens. Alternate delivery channels i.e. ATM/Debit Card, Credit Card, InternetBanking Services, etc. based on adoption of technology as solutions are being popularized.In bigger branches ‘May I Help You’ Counters have been provided. CallCentre is working on 24*7 basis handling more than 80, 000 calls per day. Trainingprogrammes are being conducted for bringing ‘attitudinal changes’. Onlocation training programmes are also being conducted for up skilling of employees.Every month, a theme is being conveyed from HO to all the branches for educatingthe staff in a meeting called on single day on PAN India basis. Also two customerrepresentatives are made members of Circle Level Customer Service Committees who are beinginvited to attend quarterly meetings on a regular basis for better connect between thefield and corporate office.

• Officers are being sent from HO/Circles in Delhi & NCR for Mystery Shoppingas Decoy customers to check the level of customer service in branches. Corrective actionis taken on the issues brought to light.

• Our Bank is a member of ‘Banking Code and Standards Boards of India’which has set minimum standards of banking practice for the Bank to follow while dealingwith individual customers.

• Bank has a Customer Compensation Policy to compensate customers for the lossessuffered by them due to deficiency in Customer Service.

• Meetings of Customer Service Committee of the Board and Standing Committee onCustomer Service are being held on quarterly basis broadly to evaluate the nature andsource of complaints. Minutes of the meetings are placed to Board. Committees also suggestcertain preventive steps/measures to reduce the inflow of complaints.

• Board discusses the quality of Customer Service in the Bank on half yearly basisand gives directions for improvement of Customer Service.

Customer Complaints

15. STRATEGIC PLANNING & BUSINESS PROCESS RE-ENGINEERING

Strategic Planning & Business Process Re-engineering Division has been set up withan objective to carry out overall strategic planning of the Bank and to leverage theadvantages of CBS and manage change through BPR Initiatives involving people, processesand technology. Bank is in the process of introducing Relationship Managers to attractpremium customers, and facility of privilege lounge for High Net worth individualcustomers in Exceptionally Large Branches (ELBs) and Very Large Branches (VLBs) havingadequate space and proper ambience.

a. Credit Audit & Review

Credit Audit & Review is undertaken as part of Loan Review Mechanism (LRM) toexamine compliance with extant sanction and post-sanction processes/procedures laid downby the Bank from time to time. During 2010-11, credit audit was conducted in ‘B’& above risk rated standard accounts with exposure of Rs.10 crore & above and weak(‘C’ & ‘D’ risk rated) standard accounts with exposure of Rs.3crore & above. Further, 5% of accounts (selected on random basis) with exposurebetween Rs. 5 crore and Rs. 10 crore and outstanding balance of Rs. 3 crore and above werealso subjected to Credit Audit.

As against RBI requirement of at least 30 to 40% of credit portfolio to be reviewedevery year, during 2010-11 credit audit covered 69.25% of Bank’s credit portfolio(Fund based and Non Fund based).

b. Internal Control

The main objective of Internal Audit System is to bring effectiveness in the internalcontrol system, which has become more crucial in conducting banking business in the fastchanging scenario. Inspection & Audit Division (IAD) at apex level with its extendedarms of Zonal Audit Offices and a team of Internal/External Auditors at field level laysemphasis on identification, measurement, monitoring and mitigation of risks in day to dayoperations at branches of the Bank. To achieve these objectives, various types of auditsare conducted viz, Risk Based Internal Audit (Onsite & Offsite), Revenue Audit,Information System (IS) Audit, Credit Audit, Snap Audit, Segment Audit, Compliance Audit,etc. As on 31st March 2011, 806 branches/offices were under concurrent audit. The coverageof branches and business through concurrent audit is in line with RBI guidelines.

All the branches were subjected to Risk Based Internal Audit (RBIA) except newly openedbranches, where inspection was not due during current year. The Bank branches have beencategorized as Low Risk (1233), Medium Risk (3612) and High Risk (13), while no branch hasbeen categorized either in "Very High Risk" or "Extremely High Risk"category, as on 31.12.2010. Computerization of Risk Based Internal Audit (RBIA) &Revenue Audit through application software named as e-RBIA, which supports onlinepreparation, submission, processing, compliance, follow up and closure of Audit Reports.Initially, e-RBIA has been implemented in all the Concurrent Audit Branches. A Cyber Crimereporting Cell has also been established at IAD to oversee and help in recovery of theamount transferred to different ‘Mule accounts’ (i.e. beneficiary accounts wherefraudulent amount has been credited through Internet Banking channel).

c. Know Your Customer(KYC)/Anti Money Laundering

The Bank strictly follows KYC and AML guidelines issued by RBI from time to time andonly KYC compliant customers are accepted by the Bank. For identifying the transactions ofsuspicious nature, monitoring of customers’ transactions is done on a day to daybasis for which Bank has installed sophisticated AML software. The software is a part ofBank’s EDW (Enterprise-wide Data Warehouse) project for generating alerts ontransactions of unusual nature.

The reports like Cash Transaction Reports (CTRs), Counterfeit Currency Reports (CCRs)and Suspicious Transaction Reports (STRs) are periodically sent to Financial IntelligenceUnit–India (FIU-IND).

d. Management Audit

In accordance with the Risk Based Management Audit Policy and Annual Audit Plan2010-11, the regular audit of all 65 Circle Offices, 12 Zonal Audit Offices, 6 Trainingestablishments, 3 Regional Rural Banks, both Subsidiaries of the Bank in India and 5 FieldGeneral Manager’s Offices and 1 Head office Division was conducted.

e. Compliance Division

Board has appointed a Chief Compliance Officer in the rank of a General Manager for afixed term. In pursuance to the compliance Policy of the Bank, Divisional ComplianceOfficers, Circle Compliance Officers, Branch Compliance officers, Compliance officers ateach training centers, ZAOs, Foreign Branches, subsidiaries etc. have been designated inall Divisions of HO, Circle offices, branches and other offices. Further, compliancefunctions have been identified for all HO Divisions/ Circles/Branches and reporting linehas also been established at various levels for compliance in accordance with theguidelines of RBI. Compliance testing/mapping review on various products of the Bank isbeing carried out on a regular basis.

f. Vigilance

Bank continued its emphasis on vigilance matters to ensure that vigilance cases areidentified quickly and disciplinary action in accordance with Central Vigilance Commission(CVC) guidelines is completed in time. In order to strengthen the vigilance mechanism andalso to improve the preventive vigilance measures, Vigilance Officers in the rank of ChiefManagers have been posted at all the 12 Zonal Audit Offices of the Bank to exclusivelymonitor the vigilance function of cluster of Circles. Regular training was given toofficers & staff to update their skills in the area of vigilance administration.

17. RIGHT TO INFORMATION ACT

The Right to Information Act has been implemented by the Bank. The relevant informationas per the Right to Information Act has been posted on the Bank’s website(www.pnbindia.in). During 2010-11, the Bank received 12493 applications, of which 8119applicants were provided information while 330 applicants were not eligible and 4044applications were exempted under the provision of the Act.

18. IMPLEMENTATION OF OFFICIAL LANGUAGE POLICY

Bank has always been leading in the area of implementation of Official Language and hasachieved most of the targets in all parameters fixed by Govt. of India, Ministry of HomeAffairs, Deptt. of Official Language for the financial year 2010-11. On 14th September,2009 i.e. on the occasion of Hindi Divas, Bank launched bilingualisation of "CoreBanking" and on 14^th September, 2010, Bank has completed the work. Inrecognition of the use of Hindi, Bank has been awarded several prizes including IndiraGandhi Rajbhasha Shield of Govt. of India, RBI Rajbhasha Shield and other State/Regionallevel prizes of Ministry of Home Affairs. The third sub-committee of Committee ofParliament on Official Language has appreciated the efforts made by the Bank forprogressive use of Hindi.

a. PNB HOUSING FINANCE LIMITED

During the year, the Company achieved overall 57% growth in fresh business anddisbursed loans to the tune of Rs.1267 crore. The main focus of fresh business wasindividual housing loans (total disbursements Rs.971 crore), a growth of 71 % overprevious year.

During 2010-11, the Company earned a total income of Rs.364 crore, a growth of 15% overprevious year. Operating expenditure during the year increased by 20% at Rs. 258 crores.During 2010-11, the Company earned Operating Profit of Rs. 106 crore (Rs. 100 crore),Profit before tax of Rs. 97 crore (Rs. 94 crore) and Profit after Tax of Rs. 69 crore (Rs.67 crore).

Despite rising interest rate scenario, the Company continued to maintain Net InterestMargin at above 3% throughout the year by controlling cost of funds. Total Net Worth ofthe Company as on 31st March, 2011 was Rs. 326 crore and the CRAR was 20.83%. Gross NPAswere contained at 1.31% and Net NPAs were 0.94% of the net loans outstanding.

The Company has undertaken a business transformation project in consultation with KPMGAdvisory Services Pvt Ltd, which will bring positive changes in process and delivery in2011-12.

b. PNB GILTS LIMITED

In the Govt securities market, monetary policy, inflationary concerns and supply issueswere the major factors influencing yields on govt securities. Initially, higher thanbudgeted collections from auctions of 3G and BWA licences receded the concerns on fiscaldeficit with yield on 10 year G sec touching a low of 7.35% in mid May from 7.87% as onMarch 31, 2010. Improved sentiments were, however, offset by high inflation and tightmonetary policy stance by RBI and 10 year yield rose to as high as 8.25% in mid Januarybefore closing the year at 7.98% as on March 31, 2011. Moreover, with consistently tightliquidity conditions prevailing almost throughout the year, the short term rates remainedhigh resulting in a flat yield curve with spread between 1 year and 30 year securitydeclining to 102 bps from 300 bps in the beginning of the year.

Against the above backdrop of tight money market rates and firm G sec yields, PNB GiltsLtd continued to fulfill all its obligations as a Primary dealer in Primary &secondary market. In Treasury bill auctions, as against the stipulated success ratio of40%, company achieved 58.83% and 49.66% in first and second half of the FY 2010-11.Company also fulfilled its commitments under Additional committed Underwriting (ACU) andMinimum Underwriting Commitment (MUC) in G sec auctions. Total turnover of the companyamounted to Rs 87,858 Crore during the year as against Rs 63,726 crore in the previousyear. Total Profit before tax of the company stood at Rs 44.04 crore in 2010-11 whilecompany continued to strengthen its fee based and non core activities.

c. PUNJAB NATIONAL BANK (INTERNATIONAL) LIMITED (PNBIL)

During the year 2010-11, PNBIL added two more branches at Ilford and Wembley, to takethe total number of branches to seven. Deposits increased from $405.13 million to $654.66million, thus recording growth of 61.59%. As a result of major focus on increasing theretail base, the number of accounts has gone up from 17,931 to 28,135. During the sameperiod, advances have gone up from $ 569 million to $ 705.36 million. Thus total businesshas gone up from $ 974 million as on 31^st March 2010 to $1360 million as on31.03.2011, registering a growth of 39.58%. Operating profit has gone up from $6.68million to $ 10.78 million, registering growth of 61.38%. The Bank is planning to add onemore office at Wolverhampton, in UK in the year 2011-12.

Rating of PNBIL by Moody’s continues to remain at investment grade with Baa3/P3for local and foreign currency deposits and D- for BFSR (Bank Financial Strength Rating)with stable outlook.

Bank’s strength is on account of its clear strategic plan and well identifiedretail customer base for penetrating the Indian sub sector of the UK market with potentialfor money transfers and related non interest income. Strategic integration, parentalsupport, niche positioning and competitive advantage in its targeted customer base are thekey advantages the Bank is enjoying in UK.

Bank has in place its well defined and clearly laid down policies on Risk Management,Audit and Compliance. It has its own dedicated dealing room at London and a back office inIndia. Bank is complying with all regulatory and capital adequacy guidelines of FinancialServices Authority of UK.

To improve our share of income in various fee based activities relating to the CapitalMarket, Project Appraisal, Loan Syndication and Security Trustee Business, Bank had set upa 100 % owned subsidiary named as PNB investment Services Limited (PNBISL) in the FY2009-10.

PNBISL is registered as a Category I Merchant Banker with SEBI and offers a basket offinancial services such as Issue Management for IPO/FPO/Rights issues, Advisory to PublicIssue, Syndicate Member, Placement of Equity Shares with Qualified Institutional Buyers(QIBs), Private Placement of Debt/Equity and fair market valuation of shares/businesses.In addition to the above mentioned services, PNBISL is offering Debt / Loan Syndication,Project Appraisal, Financial Restructuring, Security/Debenture Trustee services andAdvisory to SME. PNBISL also has a dedicated Doctors’ Cell to provide end-to-endadvisory solutions for doctors who aspire to become entrepreneurs and are keen to set uphospital network across the country. Company has recently decided to commence brokingbusiness in a phased manner.

e. REGIONAL RURAL BANKS

After amalgamation of our sponsored RRBs, presently bank has 6 RRBs operating in 6States covering 67 districts with a network of 1483 branches. 75 new branches have beenopened during 2010-11.

During the year, RRBs have made fresh disbursement of Rs 7276crore to Agriculture andAllied Sector registering a growth of 36.94% over the previous year. Core advances of RRBsincreased to Rs 9576 crore showing a growth of 15.32% and core Deposits of all the RRBsincreased to Rs 15604 crore, registering growth of 17.14%. During the year 2010-11, profitof the RRBs grew by 15.89 % to Rs.266.78 crore.

The process of migration of our RRBs to CBS has since been completed and all branchesof all our RRBs stand migrated to CBS system. Further, all the new branches are beingopened under CBS system only. Towards provision of improved customer service, process forimplementation of NEFT / RTGS in RRBs has since been initiated. Further, issuance of ATMcards to customers of RRBs is also in progress.

RBBs also share the vision of PNB on financial inclusion. Our RRBs have been allocated1924 unbanked villages having population of more than 2000 for undertaking ICT basedfinancial inclusion by 31^st March 2012. Out of these allotted villages, ourRRBs selected 131 villages for financial inclusion implementation during the financialyear 2010-11. Out of this, financial inclusion has been implemented in 147 villages and4155 new accounts have been opened in these villages till 31^st March 2011.

20. Awards and Accolades Conferred on the Bank

During the year, in recognition of its performance and initiatives, Bank receivedvarious awards, some of which are:

• Gold trophy of SCOPE Meritorious Award for Best Managed Bank, FinancialInstitution or Insurance Company by Standing Conference of Public Enterprises.

• Wind Power India 2011 Awards -Second Prize under the category of "Best WindPower Project Financier" 2011 by World Institute of Sustainable Energy.

• Golden Peacock Award for Corporate Social Responsibility 2010 by Institute OfDirectors (IOD).

• Golden Peacock National Training Award 2010 by IOD.

• Rolta Corporate Award 2010 by Dun and Bradstreet.

• 6^th BML Munjal Award for Excellence in Learning & KnowledgeDevelopment-2010 by Hero Mindmine Institute.

• Best Corporate Social Responsibility practice Award 2011 for 2nd year in a rowby Bombay Stock Exchange.

• Skoch Awards 2010 for "Computerization of RRBs".

• Outlook Money Award 2010 for " Best Home and Education Loan Provider"

• "Global HR Excellance Award 2010" for the outstanding Contribution tothe cause of Education and "Asia Best Employer Brand Award" by World HRDCongress.

• "Award for Brand Excellance" under Banking & Financial Services ByCMO Asia.

• "CSR Excellence Award 2010" by ASSOCHAM.

Opportunities

Having successfully withstood the global economic crisis, the focus now is on shiftingback the economy to the high growth trajectory. The emerging trends give rise to optimismthat the economy will continue to show stellar performance despite pressures on the pricefront. This promises significant business opportunities for the banking system.

With rising middle class and disposable incomes, new opportunities for financialservices are emerging. India is set to reap the benefits of demographic dividend and asyounger population which wields increasing purchasing power and as lifestyles change,demand for financial planning and wealth management will increase. Income levels in ruralareas are also improving and as quality of life improves, demand for innovative financialproducts will gain momentum. Retail banking, therefore, will be a key driver of businessgrowth in the coming period.

India continues to face significant deficit in infrastructure. To meet the hugeinvestment demand, private investment in commercially viable infrastructure projects isbeing encouraged. Infrastructure financing by banks has shown consistent increaseindicating a strong demand for such finance. Considering the unique nature ofinfrastructure assets – they are typically natural monopolies, are not subject tocyclical fluctuations and provide regular and fixed stream of income – financinginfrastructure projects provide ample opportunities for business growth of the Bank.

Despite rapid spread of banking, large chunk of the population does not have access tobanking services. Financial inclusion is aimed at bringing the benefits of banking andother financial services to the people at the bottom of the pyramid. With cost-effectiveand scalable technology, reaching the unbanked population would be faster and this willgive a big push to growth of banking business.

Challenges

While the fundamentals of banks are getting strengthened, it is imperative that thefocus on asset quality remains strong. The management and swift resolution of NPAs will berequired and banks need to avail of all available means for the same including use ofSARFEASI Act, sale of impaired assets to Asset reconstruction companies, negotiatedsettlements, remedial measures through Lok Adalats, Recovery Camps/Rin Mukti Shivirs, etc.

Even though reasonably well capitalized at present, banks will be facing the challengeof growing their business due to capital constraints. Achieving allocational efficiency ofthe banking system is strongly predicated on the capital strength of banks. Withrequirements of Basel III looming large, banks would be facing challenges in raisingadditional capital for meeting the financing needs of the economy potentially growing at9% plus.

Core banking has emerged as the most used technology platform amongst banks and inbuilding their technology infrastructure banks have made huge investments. While this hascontributed to growth of business, the return on investment is yet to be realized. As corebanking technology is versatile, banks need to move up in the technology value chain andoffer value-added services. While development of alternative channels is important, banksneed to guard against de-personalization of service and ensure that they provideconsistent banking experience to customers irrespective of the channel used. Thoughtechnology would help in building large data repository which could be used forcross-selling purposes, banking continues to remain essentially a service business wherecustomers prefer to feel the personal touch.

Risks

Maintaining the quality of asset portfolio, particularly, in case of accounts earlierrestructured will be a major risk before banks. Banks will have to exercise constantvigilance to avoid slippage of such accounts into impaired category. While technologybrings about efficiencies in service delivery, it also unsettles business processes,propels competitive forces and leads to innovation. Use of technology also would requirere-skilling of employees. Management of discontinuity and change pose risks which banksneed to address.

As the second largest bank in the country, Punjab National Bank recognizes theaforesaid challenges and risks and is fully prepared to proactively address them. The Bankhas put in place a well articulated risk management system to protect asset quality andimprove earnings. Bank’s strategy to ensure channel integration is aimed at reapingthe benefits of technology and providing cost-effective, secure and convenient bankingsolutions. Innovative product offerings are aimed at moving up the value chainfacilitating customer acquisition and topline growth. At the same time, the Bank issharply focused on maintaining and improving its bottom line by seeking opportunities forrevenue maximization while keeping costs under strict control.