ahmedabad mercantile cooperative bank ltd Management discussions

THE AHMEDABAD MERCANTILE CO-OPERATIVE BANK LIMITED ANNUAL REPORT 2007-2008 MANAGEMENT DISCUSSION AND ANALYSIS 1. THE ECONOMIC SCENARIO: As I had predicted in the Annual Report last year, the Indian economy did show signs of some slowdown in FY 2007-08. The real GDP growth in 2007-08 declined to 9% as per the revised estimates of the Central) Statistical Organisation, as against the real GDP growth of 9.6% in 2006-07, thereby recording a .deceleration of almost 6.25% over the year 2006-07. However, there was nocause for concern as the services and industrial sectors continued to perform well even as indications of overheating of the economy started emerging in the last quarter of 2007-08. As I had anticipated and warned in my last report, inflation started raising its ugly head and the WPI rose by 7.4% as at the end of March 2008 and has been rising further even as I write this report. The prices of crude, metals and commodities have increased rapidly. Inflation hurts the common man the most, particularly the prices of food, energy and shelter. The response of government and RBI to check the menace of inflation has been quick and a number of fiscal and monetary measures have been taken. Fiscal measures such as banning of export of certain items of food and commodities, raising export duties, slashing import duties and issue of oil bonds to oil marketing companies have helped rein in prices. The RBIs response to evolving situation has been one of active demand management of liquidity through use of CRR stipulation and Open Market Operation including the MSS and LAF. In the face of mounting challenges the RBI has been moderately successful in the pursuit of the twin objectives of economic growth and price. stability. 2. BANKING SCENARIO: The performance of domestic banking sector in FY 2007-08 was reasonably good and in line with expectations. The pace of credit growth slowed down. Cost of funds and return on advances remained , by and large, stable and NIMs were maintained at healthy levels. Scheduled co-operative banks including your bank consolidated their position in the Industry. Technology upgradation, introduction of new and innovative products, mergers and amalgamations, proactive steps to protect and expand niche markets have all helped Scheduled Co-operative Banks to withstand competition from aggressive private sector and public sector banks. The RBI has played positive and active part in creating a level playing field for co-operative banks so as to enable them to compete effectively with other commercial banks. Scheduled Co-operative Banks, however, are placed at a disadvantage in relation to other co-operative banks in the matter of percentage of Cash Reserve Ratio to be maintained as also in the matter of not being able to set off loans against own deposits from deposit liabilities while arriving at NDTL for the calculation of CRR. I appeal to government and to RBI to treat all co-operative banks at par in the matter of CRR, if need be, by making suitable legislative and regulatory changes. In order that co-operative banks may attain a sound financial structure in the shortest- possible time they must be exempted from payment of Income Tax as was the position two years ago. Abolition of Income Tax will go a long way in strengthening Balance Sheets of co- operative banks as retained earnings will be higher. Co- operative banks must also be enabled to access capital market for raising capital, which could reduce cost of funds and would strengthen their capital structure. 3. PROFIT AND DISTRIBUTION: Despite the adverse scenario of co-operative sector till date, our bank has been able to make Gross Profit of Rs.21.63 Crores before Income Tax, nearly Rs.3/- Crores more than the Gross Profit of the previous year. The Gross Profit is arrived at after deducting Interest Expenses, Administration Expenses, Depreciation and other Expenses from the Total Income, Out of this the following amounts are transferred to reserves, other funds & Income Tax Liability: Particulars Amount Rs. Building Fund 1,00,00,000.00 General Reserve 3,55,56,809.00 Bad & Doubtful.Debt Reserve 1,61,68,000.00 Investment Fluctuation Reserve 4,00,00,000.00 Standard Assets Reserve 10,00,000.00 Income Tax Provision 6,13,26,400.00 Deferred Income Tax Provision 12,72,266.00 Fringe Benefit Tax 10,31,986.00 Total 16,63,55,461.00 After above provisions, the Net Profit of the Bank is arrived at Rs.5.00 Crores. The Directors recommend the following appropriation of the profit for the current year, which I request you to approve. Appropriations from the Net Profit Amount Rs. Statutory Reserve Fund 3,24,04,000.00 Unforeseen Losses Reserve 50,00,000.00 Education Cess 5,00,000.00 Dividend 70,96,000.00 Shareholder Benefit Fund 50,00,000.00 TOTAL 5,00,00,000.00 4. CAPITAL ADEQUACY RATIO: The Reserve Bank of India requires disclosure of Capital Adequacy Ratio(CRAR) by the Co-operative banks as a measure of their financial strength. All commercial and scheduled co-operative banks have to achieve CRAR of 9% every year. I am glad to inform you that for the year ended on 31.03.2008, our Banks Capital Adequacy Ratio is 49.54% which is substantially higher than the R.B.I, requirement of 9%. This Is one concrete evidence of the strength of our Bank. 5. RESERVE FUND,DEPOSITS,LOANS AND RECOVERIES AS COMPARED TO THE PREVIOUS YEAR: Rs.in Crores Particulars 31.03.2007 31.03.2008 Reserve Funds (Incl.Share Capital) 220.50 234.25 Deposits 360.14 410.60 Advances 147.06 155.65 Recoveries 9.68 6.67 Investments 193.73 232.90 In spite of the adverse conditions,our Bank has been able to maintain the faith & loyalty of deposit holders as in past and we are confident that it will continue to do so in future. We assure you that based on our Banks vast Reserves and Surplus and a sound Investment strategy, our bank is fully geared to meet any liability.