lakshmi vilas bank ltd Management discussions

Industry Developments:

Key investments and developments in Indias banking industry include:

• In August 2019, the Government announced major mergers of public sector banks, which included United Bank of India and Oriental Bank of Commerce to be merged with Punjab National Bank, Allahabad Bank to be amalgamated with Indian Bank and Andhra Bank and Corporation Bank to be consolidated with Union Bank of India.

• As per Union Budget 2019-20, the Government proposed fully automated GST refund module and an electronic invoice system that will eliminate the need for a separate e-way bill.

• The Indian banking sector embarked on the digital transformation journey a few years ago. While the initial objective may have been to counter the competition from tech-savvy, new-age players, the COVID-19 crisis could be a game changer, pushing banks to adopt digital technology.

• RBI introduced mobile app, ‘MANI, for visually challenged people to help them identify currency notes.

• SEBI allowed mutual funds to invest an additional 15% of Assets Under Management (AUM) of corporate bond, banking and PSU and credit risk funds in government securities and treasury bills.

• RBI announced the creation of a Payments Infrastructure Development Fund.

• RBI directed member banks to waive charges to their savings bank account holders for funds transfers done through NEFT system which are initiated online effective from January 1, 2020.

• Growth of Agriculture and allied activities & Public Administration, Defence, and other services was higher in the first half of 2019-20 in comparison to second half 2018-19.

• The Income Tax Department has launched a new tool for the banks and post offi ces that will ensure Tax Deduction at Source (TDS) on the cash withdrawals beyond the threshold.

Opportunities and Threats: Opportunities

The banking industries have many opportunities within the industry and for consumers:

• Technological Advancements

The banking industry has always been dependent on technology. This is evident in the slew of digital services being offered by banks today. However, instead of resting on their laurels, banks should continue to adopt the latest technological innovations. They should concentrate on bringing out newer products and services in order to attract future generations.

• Rural Expansion Opportunities

The limited presence in rural areas is one of the weak points of the banking industry. But it can actually convert this weakness into an opportunity. By expanding into villages and offering their services to the rural population, banks can expand their customer base considerably.

• Social Evolution

Human society is evolving both economically and culturally. In this dynamic landscape, the needs and demands of customers with rising income levels are bound to change. Banks need to adapt to this changing society. By providing better services the industry can solidify its place in the future.

Threats

• The biggest threat of all – recession

The biggest threat to any industry handling money is a recession. Its the most critical threat that can make or break a business. If small and big businesses fall, itll have a direct consequence on the banking industry. The COVID pandemic has severely impacted the economy and as a result the Banks have also been affected. While RBI and Government have initiated measures such as moratorium, line of credit, the actual result will be visible once the economy is fully opened up post lockdown.

• Data breaches

Customers expect banks to provide an expert level of security when it comes to their sensitive data. This requires Banks to ensure that the payment gateways used by these companies are highly secured and in compliance with The Payment Card Industry Data Security Standard (PCI DSS). However, it is seen that customers give other websites details/access to their bank accounts/cards to receive and transfer money. Any breach of these companies security systems can compromise and allow unauthorized access to their personal bank accounts. Although there is nothing banks can do for breaches on other websites they can make sure their own systems are adequately secured and also continuously educate their customers about the risk of sharing their account details with other entities.

• Lack of Proper Cyber Security

The modern banking industry is entirely dependent on the cyber-world. Everything is stored digitally whether it be data storage, monetary transactions or personal information. This makes the banking industry a prime target for hackers who seek to gain financially by exploiting weaknesses in the digital infrastructure of the banks. Unless the banks take proper cyber security measures to protect their data, they can face a serious threat from cyberspace.

• Stiff Competition

Banks worldwide face stiff competition. Not only from other banks but also institutions such as Non-Banking Financial Corporations and Small Finance Banks which also offer a number of financial products. This has led to a shifting of the customer base from the banks to NBFCs which fi nd greater acceptance among the new breed of professionals.

• Global Economic Instability

Currently, the world is going through tough economic times. Trade wars, protectionist policies, and global downturns have all had an effect on the international banking system. Unless the world economic conditions improve, banks can be facing a dire future. The lockdown post COVID-19 has made countries more inward looking and it may take years before the old order is restored.

Outlook of the Bank:

• PCA has been imposed on the Bank on 27^th September 2019, in view of continuing losses, mounting NPAs and inadequate capital adequacy ratio. However, PCA will not restrict our operations for taking/repaying deposits or granting of loans.

• The Board approved merger of 7 branches, 6 in Mumbai and 1 in Chennai and RBI also gave general approval to the Bank to close Metro/Urban branches. Accordingly, 6 branches in Mumbai were merged in the fourth quarter of FY 2019-20, with nearby branches after following the relevant RBI guidelines in this regards.

• To have the optimization of cost, branches were merged where all the customers were shifted to the nearby branches, so that customers are not inconvenienced, at the same time branch gets the benefit on rent and other operating expenses. More such mergers are planned.

• CASA increased to 26.60%, marginally up from 25.67% in the last year. Our concentration was mainly on the retail deposits with the bulk deposits constituting around 4.86% of the total deposits only. The bank has very good liquidity coverage of 273% and another important indicator is that our provision coverage ratio (PCR), stands high at 71.25%.

• Bank has shifted all its ATMs to OPEX model from CAPEX model and they are now operated by two identified vendors. The new ATMs belong to the latest technology, state-of-art ATMs with windows 10, having all the security requirement which banks have been asked to provide by Reserve Bank of India. Outsourcing would result in lower costs for the Bank as there is no need to incur capital expenditure to purchase and maintain ATMs. Further, deployment of ATMs under OPEX model with end-to-end solution, e-surveillance capabilities and committed high uptimes, Bank will be able to focus on its core business, reduce costs and increase resultant fee income.

• Government introduced guarantee backed loan, based on which our Bank has introduced Lakshmi Guaranteed Emergency Credit Line. Our Credit Department has been very active in selecting the customers, and extending the benefits.

• Bank introduced a VRS for the employees and about 69 employees opted for the VRS. Another 300 employees have chosen to pursue other careers.

• Bank has also withdrawn the mandate given to IBA for the 11^th Bipartite Settlement that has been going on since November 2017.

• Bank has now signed a preliminary non-binding letter of intent with Clix Capital Services Pvt. Ltd and Clix Finance India Pvt . Ltd (collectively CLIX group) for amalgamation of Clix Group with the Bank and due diligence is underway.

Risk & Concern:

During the year the Bank has taken steps to strengthen its risk management framework in order to keep pace with requirements in terms of RBI guidelines and Basel prescriptions. Towards this, the Bank has strengthened the risk management team during the year through induction of senior and experienced professionals. During the year there have been several meetings of executive level risk committees headed by the MD & CEO. A number of steps have been taken under their aegis to improve the control environment. The Bank has also conducted studies in the area of IT Risk and steps are being taken to improve the Banks capabilities in the IT area from twin perspectives of business partnership and control environment. A comprehensive project to upgrade the risk management framework and practice and align to the advanced approach of Basel has been taken up during the year.

This will improve the Banks maturity level in the domain of risk. The risk management framework has been interlinked with process improvements to bring about lasting impact on the Banks operations. For the year ended March 31, 2020 the Bank maintained a Capital Adequacy Ratio of 1.12% as against the regulatory required threshold of 10.875%. In order to meet regulatory requirements and business requirements, the Bank is working on raising further capital, subject to requisite approval of shareholders and regulators.

Internal Control Systems:

The Bank has put in place well-articulated internal control measures in tune with the complexity of business operations, organizations size and supervisory compliance standards. The financial transactions are under maker/checker concepts, Monitoring of High value transactions at Controlling Office, Surprise visits and periodical branch visits by the Controlling Offices, Monitoring of branches by Audit Department showing spurt in advances for ensuring proper conduct of business as per the laid down systems and procedures, Increase in frequency of the Jewel reappraisals and increase in periodicity of audits of high risk branches for a better compliance, staff awareness is impressed up on for timely reporting of unethical incidents happening in the branches through secretalert@lvbank.in are few of the control measures implemented for effective control mechanism.

There is continuous review of the effi cacy of the systems and the following audit & inspections are carried out:

• Risk based internal audit to measure the risk in branches and work out mitigation.

• Credit Audit (Post Disbursement), Stock & Receivable Audit and Legal Audit.

• Revenue Audit / Income leakage audit and various snap audits to review specific areas of operation including compliance to inspection observation.

• Concurrent Audit is carried out by empanelled Chartered Accountant firms.

• Information System Audit is carried out by information system auditors and qualified external auditors.

• Statutory Audit of branches and controlling offi ces by Chartered Accountant firms in terms of guidelines of the Reserve Bank of India.

• Management Audit of controlling offi ces/departments at Corporate Office by trained internal inspectors of branches.

• Vigilance Audit of select branches by internal inspectors of branches.

Software application has been implemented to enhance the efficiency and effectiveness of risk based internal audit and to have robust MIS on the risks and controls. Compliance function is strengthened through an independent compliance department and implementation of application software for monitoring statutory, regulatory and internal compliance. An executive level committee consisting of top executives, reviews every inspection report and the minutes of the said committee meetings are reviewed by Audit Committee of the Board. The Audit Committee of the Board oversees the entire audit function of the Bank and the compliance thereof.

Discussion on Financial Parameters with respect to Performance: Business Segmentation: As on 31.03.2020

Deposit	in Crore	%	Advances (Net)	in Crore	%
Demand Deposit	1383.97	6.45	Bills purchased & discounted	92.89	0.67
Savings Deposit	4327.59	20.19	Cash Credits, overdrafts & loans repayable on demand	7130.96	51.57
Term Deposit	15731.63	73.36	Term Loan	6604.04	47.76
Total	21443.19	100.00	Total	13827.89	100.00

• Business mix reduced by 13118.87 crore (-25.61%) from 51235.40 crore to 38116.53 crore Y-o-Y.

• Although CASA portfolio has reduced by 1803.99 crore from 7514.76 crore to 5710.77 crore, on account of reduction in total deposits, CASA % increased from 25.67% to 26.63%.

• NIM for 2019-20 stood at 1.56% (PY 1.65%).

• Operating loss was 15.46 crore as against 11.97 crore

• Net Loss of 836.04 crore for 2019-20 as against the net loss of 894.10 crore for 2018-19

• Cost to Income ratio increased to 101.98% (PY 101.48%)

• Asset Quality – Gross NPA 25.39% (PY 15.30%) and Net NPA 10.04% (PY 7.49%)

• Provision Coverage Ratio improved to 71.25% (PY 62.08%)

• Capital Adequacy Ratio (Basel III) stood at 1.12% (PY 7.72%)

• ROA and ROE stood at (-) 2.59% (PY (-) 2.32%) and (-) 60.54% (PY (-) 46.19%)

Staff / Industrial Relations:

The Banks staff strength was 4349 at the end of the financial year 2019-20. Specialist Officers / Executives have been recruited in the areas of Credit, Law, Information Technology, Treasury, MSME and other specialized verticals. Manpower requirements are assessed on a continuous basis.

Training is imparted towards reskilling and up skilling of the employees so as to develop the manpower to meet the emerging business challenges and newer forms of risk driven by technology and market. Credit skills enhancement, NPA Management, Risk Management, KYC compliance, IT & Cyber Security and Enhanced Customer Service are given emphasis by nominating the employees for training in the Banks Staff Learning and Development Centre or in the reputed external training institutions.

Bank has evolved training and succession planning with a view to build an internal pool for managing the Banks ambitious growth plans by I. Identifi cation of employees career growth plan through HRMS.

II. Analysis of training requirements for shouldering higher positions.

III. Mentoring the Successor on the job by assigning additional responsibilities.

The Bank maintains cordial relations with the Employees Union and Officers Association and working for fast-tracking the growth and augment the productivity of the Bank.

Key Financial Ratios:

Key Financial Ratios & details of significant changes (i.e. change of 25% or more as compared to the immediately previous financial year) in Key Financial Ratios, along with detailed explanations therefor, or sector-specifi c equivalent ratios, as applicable.

Sr.No. Particulars	FY 2019-20	FY 2018-19
i CRAR%	1.12%	7.72%
ii Tier I Capital	(-)0.88%	5.72%
iii Tier II Capital	2.00%	2.00%
iv Gross NPA	25.39%	15.30%
v Net NPA	10.04%	7.49%
vi ROA	(-)2.59%	(-)2.32%
vii NIM	1.56%	1.65%
viii Interest Income as a % to Working Funds	6.84%	7.41%
ix Operating Profit as a % to Working Funds	(-)0.05%	(-)0.03%
x Leverage Ratio	(-)0.46%	3.01%
xi Book Value Per Share () *	31.21	53.48
xii Earning Per Share ()	(-)25.16	(-)34.66

* Book value adjusted for DTA, Intangible assets is (-) 5.63 (31.03.2020) and 25.08 (31.03.2019).

The Banks Gross Non Performing Loans (GNPA) have increased from 3358.99 crore as on 31.03.2019 to 4233.21 crore as on 31.03.2020 due to general stress in the economy coupled with some loan accounts in the stressed sectors falling in to the NPA category. The Net NPA (NNPA) reduced from 1506.29 crore an on 31.03.2019 to 1387.86 crore as on 31.03.2020.

Further the Banks loan book had to be narrowed for want of sufficient capital support. These happenings have affected the interest margins and earnings of the Bank. Added to this, depreciation on the Banks investments also increased due to unrelenting rise in the market yield of Bonds. Consequent upon the above factors, the Banks operating margins, net profit, NPA levels and Capital Adequacy Ratios impacted and the ratios representing GNPA, NNPA, CRAR, ROA, NIM, Operating Profit, Leverage Ratio and Book Value per Share at the end of March 2020 were lower/adverse by more than 25% when compared to the position as on 31.03.2019.

Details of change in Networth:

• Return on Networth (RONW) for the year 2019-20 was (-) 60.54% as compared to (-) 46.19% for the year 2018-19, due to Net Loss of 836.04 crore for the year 2019-20.

Disclosure of Accounting Treatment:

• The financial statements are prepared following the going concern concept, on historical cost basis and confirm to the Generally Accepted Accounting Principles (GAAP) in India which encompasses applicable statutory provisions, regulatory norms prescribed by Reserve Bank of India (RBI) from time to time, notified Accounting Standards (AS) issued under Section 133 of the Companies Act, 2013 read together with paragraph 7 of the Companies (Accounts) Rules, 2014 to the extent applicable to Banks and current practices prevailing in the banking industry in India. Income and Expenditure are generally accounted on accrual basis, unless otherwise stated and comply with requirements as per RBI guidelines and the provisions of Banking Regulation Act, 1949. Accounting Policies adopted in the preparation of financial statements are consistent with those followed in the previous year.