Bank of Rajasthan Ltd merged Management Discussions

THE BANK OF RAJASTHAN LIMITED ANNUAL REPORT 2009-2010 MANAGEMENT DISCUSSION AND ANALYSIS MACROECONOMIC OVERVIEW: The country noticed slowdown of economic activities in 2008-09 and economic growth decelerated to 6.7 per cent compared to 9 per cent in 2007-08 and 9.7 per cent in 200607 and despite the deepen economic crisis, Indian economy registered an impressive growth indicating that it may expand faster in the current fiscal. The Indian banking system was not directly exposed to the sub-prime mortgage assets hence the public sector and the private sector, remained basically financially sound and well capitalized. The average capital to risk-weighted assets ratio (CRAR) for the Indian banking system, as at end- March 2008, was 12.6 per cent, as against the regulatory minimum of nine per cent and the Basel norm of eight per cent. Even so, the country experienced knock-on effects of the global crisis, through the monetary, financial and real channels all of which came on top of the already expected cyclical moderation in growth. Our financial markets - equity, money, forex and credit markets - came under pressure mainly because of the substitution effect of: (i) drying up of overseas financing for Indian banks and Indian corporate; (ii) constraints in raising funds in a bearish domestic capital market; and (iii) decline in the internal accruals of the corporate. All these factors added to the pressure on the domestic credit market. The up trend in industrial activity continues. The index of industrial production (IIP) recorded a growth of 17.6 per cent in December 2009, 16.7 per cent in January 2010 and 15.1 per cent in February 2010. The recovery has also become more broad-based with 14 out of 17 industry groups recording accelerated growth during April 2009-February 2010. The sharp pick-up in the growth of the capital goods sector, in double digits since September 2009, points to the revival of investment activity. After a continuous decline for eleven months, imports expanded by 2.6 per cent in November 2009, 32.4 per cent in December 2009, 35.5 per cent in January 2010 and 66.4 per cent in February 2010. The acceleration in non-oil imports since November 2009 further evidences recovery in domestic demand. After contracting for twelve straight months, exports have turned around since October 2009 reflecting revival of external demand. Various lead indicators of service sector activity also suggest increased economic activity. On the whole, the economic recovery, which began around the second quarter of 200910, has since shown sustained improvement. Industrial recovery has become more broad-based and is expected to take firmer hold on the back of rising domestic and external demand. After a continuous decline fox nearly a year, exports and imports have expanded since October/November 2009. Flow of resources to the commercial sector from both bank and non- bank sources has picked up. Surveys by the RBI as well as others suggest that business optimism has improved. On balance, under the assumption of a normal monsoon and sustained good performance of the industry and services sectors, for policy purposes, the Reserve Bank projects real GDP growth for 2010-11 at 8.0 per cent with an upside bias. DEVELOPMENTS IN BANKING INDUSTRY: In the Union Budget 2009-10, the Finance Minister had announced as under: - To facilitate flow of credit at a reasonable rates, provided Rs. 4000 crore as a special fund out of Rural Infrastructure Development Fund (RIDE) to Small Industrial Development Bank of India (SIDBI). This will incentives Banks and State Financial Corporations (SFCs) to lend to Micro and Small Enterprises (MSEs) by refinancing 50% of incremental lending to MSEs during the current financial year. - Interest subvention of 2% on pre-shipment credit for seven employment oriented export sectors extended beyond the current deadline of September 2009 to March, 31st, 2010. - Target for agriculture credit flow set at Rs. 325000 crore for the year 2009-10 from Rs. 287000 crore in 2008-09. - Interest subvention scheme for short-term crop loans up to Rs. 3 lacs per farmer at the interest rate of 7 percent per annum to be continued. Additional subvention to be paid from this year, as incentive to those farmers who repay short term crop loans on schedule. - Under Debt Relief for Farmers further time given to the farmers having more than two hectares of land to pay 75 percent of their overdue under Debt waiver and Debt Relief Scheme extended from 30.6.09 to 1.12.09. The banking sector continued to adapt itself to rapid innovations in technology particularly on the information technology front to impart efficiency in providing wide range of products & services to the public at large. Banks endeavored for including their branches on Core Banking Solutions, which enabled anywhere banking services to facilitate quick transfer of funds in an efficient manner and at reasonable cost. MONETARY & CREDIT POLICY: The annual policy statement for 2009-10 is set in the context of a deep global economic slump and financial market turmoil. Governments and central banks around the world have responded to the crisis through both conventional and unconventional fiscal and monetary measures. And there is unprecedented coordinated policy action globally. Like all emerging economies, India too has been impacted by the crisis, and much more than was expected earlier. GDP growth has moderated reflecting lower industrial production, negative exports, deceleration in services activities, dented corporate margins and diminished business confidence. There are some comforting factors - well-functioning financial markets, robust rural demand, low inflation and comfortable foreign exchange reserves - which buffered us from the worst impact of the crisis. The fiscal stimulus packages of the Government and monetary easing and regulatory action of the Reserve Bank have helped to arrest the moderation in growth and keep our financial markets functioning normally. The thrust of the Reserve Banks policy stance since midSeptember 2008 has been aimed at providing ample rupee liquidity, ensuring comfortable dollar liquidity and maintaining continued credit flow to productive sectors. Taken together, the policy measures of the Reserve Bank have ensured that the Indian financial markets continue to function in an orderly manner. These measures have augmented actual/ potential liquidity in the financial system by over Rs.420,000 crone. This should assure financial markets that the Reserve Bank will continue to maintain comfortable liquidity. The main high lights of the policy statement are: I. To ensure price stability, well-anchored inflation expectations and orderly conditions in financial markets while sustaining the growth momentum. II. To focus on credit quality and financial market conditions to support export and investment demand in the economy. III. To respond swiftly on a continuous basis to evolving adverse international and domestic developments through both conventional and unconventional measures. IV. To emphasis on credit quality and credit delivery while pursuing financial inclusion V. To bring inflation around 4.00 per cent by end of March 2010. VI. To achieve GDP growth for 2009-10 around 6.00 percent with the assumption of a normal monsoon. VII. To increase deposits around 18.0 per cent and to increase non-food credit around 20.0 per cent during 2008-09, banks with strong deposit base should endeavour to expand credit beyond 20 per cent. VIII. To increase usages of electronic system of payment nd increase utilization of ATMs. IX. To strengthen rural credit RRBs were allowed to sell loan assets to other banks in excess of prescribed priority sector exposure. X. Policy measures relating to interest rate include constitution of a Working Group to review the present BPLR system to make credit pricing more transparent. XI. Payment of interest on savings bank accounts on a daily product basis with effect from April 1, 2010. The Reserve Bank of India continued with its policy of liquidity management through open market operations including the market stabilization scheme, liquidity adjustment facility, Repo, Reverse Repo and cash reserve ratio. Quarterly reviews of the annual policy statement were undertaken to promote effective and vibrant communication with the various economic agencies. RBI had also acted swiftly to pump out and bring liquidity in financial system as and when required. PERFORMANCE OF THE BANK DURING 2009-10: FINANCIAL PERFORMANCE: The Bank has posted a net loss( after provisions & taxes of Rs. 102.13 crones for the year 2009-10 against a net profit of Rs.117.71 crones for the previous year. The operating loss for the FY 2009-10 amounted to Rs. 27.90 crones as against operating profit of Rs. 193.77 crones for the Financial Year 2008-09. The appropriations for the net loss have been effected as shown in the performance highlights. The total income of the Bank remained at Rs.1489.48 crones as compared to an income of Rs. 1507.23 crones for the previous year. DEPOSITS: The total deposits of your Bank decreased from a level of Rs. 15187.15 crones to Rs. 15062.35 crones showing a decrease of 0.82%. The Core Deposits (excluding inter bank deposits) showed an increase from Rs. 13832.25 crones as on 31st March 09 to Rs. 14204.23 crones as on 31st March 10. The Bank continued to lay emphasis on a sustained growth in retail deposits by expanding client base with a focus on Savings Bank and Current Account. Saving Deposits, which constitute the core of stable retail liabilities increased by 25% to Rs 3360.00 crones as against Rs. 2687.99 crones in the previous year. The cost of deposits decreased from 7.10% in the previous financial year to 6.55 % during the year under review due to the general downward movement in interest rates and increase in savings and current deposits. ADVANCES: The Bank continued its focus on retail loan products. As a result of this strategy the retail advances grew to Rs.1014.18 crones which helped in maintaining reasonable yield and spread. The average yield on advances is 11.68%. Retail Advances constitute 11.95 % of the Banks total advances as on 31st March 2010. The focus on retail also helped the Bank in diversifying the inherent risks in lending. In corporate advances the Bank continued its policy of targeting selected borrowers of high credit standing. The net advances of the Bank during the year under report increased to Rs.8329.47 crones as against Rs. 7780.75 crones in 2008-09. PRIORITY SECTOR: In terms of the directives from the Government of India and the Reserve Bank of India, the Bank is giving utmost importance to lending under Priority Sector and Agriculture Sector. The Banks advances to Priority Sector (inclusive of eligible investments) as a proportion of Adjusted Net Bank Credit at the end of previous year stood at 35.31% as on 31st March 2010. INCOME ANALYSIS: The interest income on advances has decreased from Rs. 917.10 crones in FY 2008-09 to Rs. 906.02 crones in FY 2009-10. The total income of the Bank decreased from Rs. 1507.23 crones in FY 2008-09 to Rs. 1489.48 crones in FY 2009-10. The percentage of non interest income excluding profit on sale of investments to total income for the year worked out to 6.55 . SEGMENT- WISE PERFORMANCE: The Bank operates in two segments, namely, banking operations and treasury operations which have been recognized as primary segments .As per RBI guidelines, the Banking operations segment has further been bifurcated into three segments i.e. corporate/ wholesale banking, retail banking and Other banking operations. The working results in respect of the four segments are as under (Rs. in crores) Business Segment For the For the Particular Year ended Year ended 31st March 10 31st March 09 Segment Revenue: Treasury Operations 485.60 489.73 Corporate / Wholesale 591.59 564.66 Banking Retail Banking 392.89 435.43 Other Banking 19.60 17.51 Operations Total 1489.68 1507.33 Business Segment For the For the Particular Year ended Year ended 31st March 10 31st March 09 Less: Inter Segment Revenue Net Sales/ Income 1489.68 1507.33 from Operations Segment Result Profit / (Loss) before Tax and Interest from each Segment Treasury Operations (15.49) 57.39 Corporate / Wholesale (89.25) 55.71 Banking Retail Banking (59.37) 42.91 Other Banking 19.29 17.18 Operations Total (144.82) 173.19 Add / (less) Other (0.20) (0.10) Unallocated Income / (Expenditure) Net Off Total Profit Before Tax (145.02) 173.09 Capital Employed Treasury Operations 251.28 323.64 Corporate / Wholesale 215.52 225.75 Banking Retail Banking 74.28 93.71 Other Banking 0.26 0.37 Operations Total 541.34 643.47 INTERNAL CONTROL SYSTEM & THEIR ADEQUACY: The Bank has put in place adequate and effective systems & controls, covering all areas in operations such as Credit, Deposits, Depository and other Para-banking Products, to ensure safety of assets, adherence to business strategy, economic use of resources, reliability of M/S, correctness of financial reports, and compliance with laws & regulations. The Audit Committee of Board effectively monitors the working and gives appropriate directions. INSPECTION AND AUDIT: The function of the internal inspection and audit comes under the oversight of the Audit Committee of the Banks Board with the objective of verifying adherence to systems and procedure, quality and value of assets/ liabilities and compliance of various statutory and regulatory requirements at branches which were subject to inspection. The Bank prepares an inspection programme every year and the inspections are carried out in accordance with the programme. Besides this, the Bank conducts an IS Audit with a view to ascertain the compliance with the security aspect related to computerize environment. The Bank also has a mechanism for conducting concurrent audit to keep operations of selected branches under close scrutiny. In addition, Revenue Audit is also conducted for checking revenue leakage at the branches. IS SECURITY: Your Bank has been making extensive use of computers and telecommunications systems to provide safe, secure & continuous best services to its customers at all the offices of the Bank. It has also been our endeavour to cater needs of customers related to financial products which include banking services, multiple delivery channels and value added products by employing latest IT systems. The Bank is taking all necessary measures to minimise the vulnerability of the Information Systems like interruption, disaster, error & abuse and to ensure business continuity. This is being done by deploying the industry standards Firewall, Intrusion Detection System, Anti-virus Softwares and by putting in place IT Security Policy and various controls & procedures related to computerized operations. Monitoring of security status is done through IS Audits & network penetration testing to assess effectiveness & compliance of controls & security measures. To achieve the objective and ensure continuity / restoration of business at Branches, Data Centre, Central Depository and Administrative offices, Business Continuity Plans Disaster Recovery Plans fox computerised functions / operations have been framed & circulated. The plans provide procedures to take care of interruptions and quick recovery to normal business and also defines roles & responsibilities of staff posted at Branches and Administrative Offices. Disaster Recovery Site (DRS of Data Centre with sufficient capacity is functional at different seismic zone to take care of Core Banking operations at branches & other service outlets and mock trials also conducted to assess the preparedness of DRS & BCP External Service Provider undertaking credit card transactions on our behalf is also maintaining DR Site. Data of critical applications running at Data Centre are periodically replicated to DRS and it is also ensured that at the end of day complete data of the day is available at DRS. To create awareness related to IT Security Business Continuity Plans - Disaster Recovery Plans for computerised operations at the grass root level, training sessions for various field functionaries are arranged and instructions are issued through circulars, guidelines & various communications. IT Security Policy Business Continuity Plans - Disaster Recovery Plans for computerised operations at branches and Guidelines for computerised operations are also displayed at Banks internal website (RajBankPortal) for ready availability to the Bank personnel. Moreover, to take care of new developments in the ever changing IT Sector and to ensure Banks preparedness in IT systems, IT Security policy and various plans & guidelines are also periodically reviewed and circulated. VIGILANCE: An elaborate and well-structured vigilance system is in place covering all areas of operations. The system is functioning in a proactive manner and in consonance with Reserve Bank of Indias guidelines to take appropriate steps in controlling and containing fraud, forgery, malpractices etc. to minimize losses arising out of such eventualities. The Bank recognizes vigilance as an integral managerial function. In order to ensure meticulous compliance of the laid down system & procedures at field level, branches are subjected to surprise inspection and visits by controlling authorities on regular basis. In training sessions, due emphasis is laid on compliance of various measures of internal control and preventive vigilance. Expeditious disposal of complaints and resultant vigilance cases are ensured at all levels by effective monitoring and supervision. A Board level special committee has been constituted to review and monitor large value frauds involving Rs.25 lacs and above. RISK BASED SUPERVISION (RBS): The RBS process essentially involves continuous monitoring and evaluation of the Banks risk profile in relation to its business strategy and risk exposures, which is facilitated by the construction of a Risk Matrix. The Bank has made significant progress in critical areas such as quality and reliability of data, soundness of systems & technology, appropriateness of risk control mechanism, etc. for ensuring effectiveness of Risk Based Supervision. The Bank has re-oriented its organizational set up towards RBS and put in place efficient risk management architecture and strengthened the management information system. RISK MANAGEMENT: The Reserve Bank of India has issued guidelines on Risk Management System advising banks to put in place risk management policies, procedures & systems duly approved by their Board. The guidelines require banks to evaluate risks in their portfolios and adopt systems for management of risks keeping in view the size & complexity of their business operations. In compliance with the RBI guidelines the Bank has put in place required risk management framework to actively manage and control risks. The Bank is primarily exposed to three kinds of risks viz., Credit Risk, Market Risk and Operational Risks and for these risks the Bank has devised and implemented policies, procedures, organizational structure and control system. The policies are reviewed keeping in view the developments taking place from time to time and experience gained by the Bank during the operations of the policy. The goal in risk management is to understand, identify, measure, monitor and control various risks that arise in Banks operations with the objective to strike balance between risk and rewards. Risk Management is a Board driven function in the Bank. At the apex level there is a Board level Risk Management Committee of Directors. The Bank has put in place risk management organization structure and has set up high- level committees with participation of Top Management Team, which include Risk Management Committee of Executives (RMC), Asset Liability Management Committee (ALCO), Credit Policy Committee (CPC and Information System Security Committee (ISSC), Investment Committee. With a view to have an integrated view for all kind of risks, the Bank has set up an Integrated Risk Management Department. The Bank has M/S to keep the Board / RMC of Directors / other risk committees informed about the progress achieved by the Bank towards implementation of Risk Management System, identifying the gaps in implementation, steps being taken to bridge the gaps etc. Besides the quarterly progress reports, various other reports are also placed before the Board or RMC of Directors periodically which keep them informed about different types of risks and the actions taken by the Bank to manage the same. Detailed Risk Profile of the Bank, designed by the Reserve Bank of India for the purpose of Risk Based Supervision, is also placed before the Board / RMC of Directors classifying the operations of the Bank in various risk categories, to enable them to take a view about the level of risks and their directions. Risk Profile of the Bank is updated quarterly. The Bank has put in place Loan Review Mechanism to evaluate the quality of its credit portfolio through review of sanctions made, renewal process, submission of monitoring reports and credit related M/S. OUTLOOK, OPPORTUNITIES AND CHALLENGES: OUTLOOK: The up trend in industrial activities continues and flow of resources to the commercial sector from both bank and non bank sources will picked up, survey also suggest that business optimism will improve. Assumption of a normal monsoon and sustained performance of the industry and service sector will provide opportunities, for the Indian banking system to accept challenges for the growth. OPPORTUNITIES: Your Banks strong fundamentals, a country wide network of 463 fully computerized, on line branches, full range of financial products, strong customer franchise in markets served by it around 4000 dedicated employees and services rendered with a traditional, yet modern touch will continue to be key drivers of performance in the coming years. Today, Bank is poised for a major jump in business growth and is looking at facing the challenges with greater confidence through strategic planning and focused action. CHALLENGES: Increasing competition both from domestic and international banks , technological upgradation to meet ever changing customer requirements, managing risk in the context of changing global financial markets, information security, enterprise management systems , benchmarking of services, managing human resources, are some of the key challenges identified by the Bank, for which effective steps have been already initiated. BANKS BUSINESS STRATEGY & INITIATIVES: The Bank has drawn plans in the existing presence to increase its clientele base and business volume and to stress more in the state of Rajasthan. In its attempt to enhance competitive capabilities, the Bank is focusing on adoption of modern technology. The networking of branches and the state-of- art technological platform has enabled the Banks customers to leverage multiple channels for their banking needs. With a view to showcase the rapid progress made by the Bank, the competitive products and services offered and the national presence, the Bank had undertaken an aggressive advertisement campaign with Ms. Hema Malini as Brand Ambassador. The appearance has been ensured through regular adequate visibility on leading national news & entertainment channels, print and other media and on various important websites dealing in finance sectors. HUMAN RESOURCES & INDUSTRIAL RELATIONS: The Bank accords top priority to the development of the Human Resources, which form the core strength of the organization. The Banks HRD strategy is centered around optimum utilization of human resources in-step with the induction of new technology in banking operations and redeployment of staff at new branches, extension counters and administrative offices. Recruitment & promotion policies are accordingly reviewed allowing the individuals to remain motivated and excel in their job responsibilities. The HR efforts are concentrated on skill development and attitudinal change besides knowledge dissemination.