City Union Bank Ltd Management Discussions

MANAGEMENT DISCUSSION AND ANALYSIS REPORT

ECONOMIC SCENARIO Global

The world continued to witness the negative effects of the ongoing Russia-Ukraine war in the beginning of FY2024. This was further aggravated in October 2023 when another catastrophe in the form of Israel - Palestine war erupted. Regular clashes between Israeli forces and Hamas in the West Bank area cast a severe adverse impact on the trade and commerce in the Asian region, displacing many people from their homes, robbing them of their livelihood. Frequent attacks by Pirates in the Red Sea Zone on Merchant Ships have resulted in trade being rerouted along the Cape of Good Hope leading to cost escalation for shipping companies with around 51% dip in the average daily container vessels between January- March 2024 than the last quarter of 2023. As per the estimate of Organization for Economic Cooperation and Development, the re-alignment of shipping routes has affected 9% of world maritime trade and 18% of long distance ocean trade especially between Europe and Asia. The drought in the Panama Canal area of Latin America has also affected the journey time and escalated cost by 60% compared to 2023.

On the Economic front, a threat of potential debt crisis looms large over the global economic landscape. The Global Debt Monitor unit of The International Monetary Fund (IMF) reported that the total global debt has increased to US$ 235 trillion which comes to 238% of Global GDP. As most of the countries are facing elections in 2024, expenditures are expected to surpass budgets severely impacting fiscal prudence. Debt servicing costs are spiraling and interest rates are likely to remain at an elevated level, adversely impacting financial stability by straining government finances and household budgets leading to shortage of funds for credit growth and investments. This can severely impact sovereign ratings and constrain governments ability to raise resources for productivity-enhancing public investments.

In the Emerging Market Economies, there is a boom in consumer confidence especially in India, Indonesia, Vietnam and Mexico. In China, high frequency indicators of consumer spending have moderated and the growth of industrial production has remained subdued. Among the emerging Asian economies, according to OECD, India and Indonesia are expected to experience stable and rapid growth, while inflation is expected to moderate further, provided food prices remain insulated from extreme weather events. Internationally there is a growing optimism that India is on the cusp of a long awaited economic takeoff. The World Economic Outlook (WEO) has predicted a robust economic growth for India, supported by a growth in domestic demand and a rising working age population.

Indian

The domestic economy is experiencing a strong positive momentum. The Gross Domestic Product (GDP) expanded at 7.6 per cent in FY 2023-24, from 7.0 per cent in FY 2022-23, supported by robust fixed investment. On the supply side, economic activity was lifted by the boost to the manufacturing sectors profitability from the correction in input prices. While the services activity sustained momentum, the agricultural sector activity exhibited a slowdown. The Manufacturing sector is expected to maintain the momentum on the back of sustained profitability. The headline inflation softened to 5.1 percent in January - February 2024 from 5.7 per cent in December 2023. The core (CPI excluding food and fuel) inflation stood at 3.2 per cent in April 2024. The food price uncertainties would get exacerbated by the increasing incidence of climate shocks, lower reservoir levels especially in the southern states and the extremely hot weather conditions during April - May 2024 and this would weigh on inflation outlook.

The services exports were predominantly driven by software exports and travel exports during FY 2023-24. The new phenomenon of Global Capability Centres (GCC) in India which has been set up in FY 2025, has provided a significant boost to our software exports. India with an expected 15.2 percent share in world remittances in the FY 2024 continues to be the largest recipient of remittances globally. Overall the current account deficit in FY 2024-25 is expected to remain well within its sustainable level. Touching a new milestone, Indias Foreign Exchange reserves reached a historical high of US$ 651.5 billion as on May 31, 2024.

During FY 2023-24, while the global banking institutes faced testing times, Indian banks displayed great resilience. They have held their ground in the face of uncertain global macroeconomic environment and interest rate volatility, posing record levels of profitability. There has been a notable progress in Deposit growth with a healthy increase of 13.5 per cent during FY 2023-24. Among the Total Deposits, the Term Deposits of Scheduled Commercial Banks experienced a faster growth of 13.7 per cent compared to the 12.1 per cent growth observed in Demand Deposits. The Credit growth during FY 2023-24 hit a decadal high of around 16 per cent, driven by strong retail demand deposits, despite high interest rates, supported by corporate loan book on the back of higher capacity utilization, by the private sector. Credit growth is expected to remain healthy at 13-15 per cent in FY 2024-25, driven by strong demand in the services and retail segments. Rising government and private capex in FY 2024-25 will also lead to increased demand for corporate credit.

MONETARY POLICY AND INTEREST RATES

The Monetary Policy Committee ("MPC") of the Reserve Bank of India (RBI) in its assessment and outlook noted that the global economic activity is rebalancing and is expected to grow at a stable pace in 2024. Equity markets have touched new highs both in advanced and emerging market economies. Non - energy commodity prices have firmed up, while the US Dollar and Bond yields are exhibiting two-way movement with spillovers to emerging market currencies. Gold prices have surged to record highs on safe haven demand.

In the challenging times confronting the global order, the Reserve Bank of India (RBI) has continued to focus on preserving price and financial stability, and ensuring adequate flow of financial resources to all the productive sectors of the economy.

The RBI took the following measures at the MPC meeting held on June 07, 2024 based on the assessment of the current and evolving macroeconomic situation:

• Policy Repo rate and Liquidity Adjustment Facility (LAF) kept unchanged at 6.50 per cent

• Bank Rate and Marginal Standing Facility Rate kept unchanged at 6.75 per cent

• Standing Deposit Facility rate kept unchanged at 6.25 per cent

The MPC decided to remain focused on gradual withdrawal of accommodation to ensure that inflation progressively aligns with the target while supporting the growth impulses of the economy. Domestic financial markets have moved broadly in sync with the accommodative monetary policy stance and remain conducive to growth as credit off take is gaining momentum. The Banking sector being the pillar of economy has to play a role of catalyst in the development of the Indian economy if India has to become a developed nation by 2047 in line with the Governments vision of "Viksit Bharat" and thus placing India in the comity of developed nations. The Banking Sector in India at the present juncture is financially sound and healthy and it is the best time for the sector to further strengthen the governance frameworks, assurance functions and strategize for better times ahead.

NOTABLE UPDATES IN BANKING INDUSTRY

The RBI through its Statement on Developmental and Regulatory Policies initiated various measures. The notable among them are as follows :

• RBI has decided to upwardly revise limit of Bulk Deposits for Scheduled Commercial Banks (excluding Regional Rural Banks) and Small Finance Banks (SFBs) from Rs.2 crore to Rs.3 crore.

• RBI has decided to set up a Digital Payments Intelligence Platform which will harness advanced technologies to mitigate payment fraud risks. A Committee under the Chairmanship of Shri A.P. Hota, former MD of NPCI, has been constituted to examine various aspects of setting up a digital public infrastructure.

• It is proposed to introduce an automatic replenishment facility under the e-mandate framework for UPI Wallet, Fastag, National Common Mobility Card (NCMC), whenever the balance falls below a threshold amount set by the customer.

• RBI Retail Direct Scheme was launched in November 2021, to provide access to individual investors to maintain gilt accounts with RBI and invest in Government Securities. To improve ease of access to customer, a New Mobile App for the Retail Direct Portal is being developed.

• Cash Deposit Machines (CDMs) were deployed by banks to enhance customer convenience and to reduce cash handling load on branches. Considering the growing popularity of UPI, it has been proposed to offer UPI Facility for cash deposits in Cash Deposit machines.

• Central Bank Digital Currency (CBDC) was started as a pilot project in the Retail and Wholesale Segments among select participating banks in select cities in December 2022. RBI has decided to offer CBDC wallets through Non - Bank Payment System Operators to a broader segment of users in a sustained manner. Functions of Programmability and Offline Functionality have been introduced as pilot projects in a gradual manner.

• Small Finance Banks have been permitted to deal in Rupee Interest Rate Derivative Products to expand their avenues for hedging interest rate risk in their Balance sheet and commercial operations more effectively.

• Key Fact Statements (KFS) for Retail and MSME Loans and Advances containing detailed information regarding a Loan agreement, such as all - in - cost of the loan need to be provided to all the borrowers by all Regulated Entities.

• Setting up of Fintech Repository for capturing essential information about Fintechs, encompassing their products, activities, technology stack, financial information etc. This Repository will be operationalized by RBI Innovation Hub.

• Monetary Ceiling of Gold Loans that can be granted under the Gold Loan - Bullet Repayment Scheme has been increased from Rs.2.00 lakh to Rs.4.00 lakh for all such Urban Co-Operative Banks (UCBs) who have met their overall Priority Sector Lending targets for March 31, 2023.

• Comprehensive Review of Regulatory framework for Financial Benchmark Administrators has been decided covering risk based framework of all benchmarks related to foreign exchange, interest rates, money markets and government securities such as Certificate of Deposits (CDs) Rates, Repo Rates etc., and other benchmarks on Governments Securities.

• Launch of an Innovative Payment Mode viz, "Conversational Payments" on UPI whereby users can engage in conversation with AI - powered system to initiate and complete transactions in a safe and secure environment. The facility will initially be available in Hindi & English and will subsequently be made available in more Indian languages.

• Framework for Responsible Conduct in Lending by providing greater transparency in Interest Rate Reset of Equated Monthly Instalments (EMI) for Floating Interest Rate Loans. The framework envisages that lenders should clearly communicate with borrowers for resetting the tenor or EMI and provide options of switchover to fixed rate loans or foreclosure of loans and proper communication of key information to the borrowers.

• The Regulator is exploring appropriate Deposit Insurance coverage for Green Deposits, Climate Risk- based differential premiums and ex ante funding needs for climate sustainability.

YOUR BANKS PERFORMANCE

In the midst of war and economic turmoil impacting the world economy at large, your Bank adopted a cautious approach and recorded a reasonable growth rate during the year. Despite the various challenges, your Bank was able to post 6% growth in its total business with Deposits growing by 6% to Rs.55,656.64 crore and Advances growing by 6% to Rs.46,481.47 crore. The total business of the Bank as on March 31, 2024 stood at Rs.1,02,138.11 crore, surpassing the target of Rs.1,00,000 crore which was a landmark achievement in the history of the Bank, happening in the 120^th year existence of the Bank, it holds a special significance.

Financial Performance

The performance of the Bank during the financial year ended March 31, 2024 largely remained stable with the Total Income of the Bank at Rs.6,012.22 crore as compared to Rs.5,524.70 crore last year recording a growth of 9%. The Net Interest Income stood at Rs.2,123.46 crore as compared to Rs.2,162.80 crore during the previous year.

As on March 31, 2024, the Deposits of the Bank increased to Rs.55,656.64 crore as compared to Rs.52,397.86 crore as at March 31, 2023 registering a growth of 6%. The total CASA deposits stood at Rs.17,050.16 crore as against Rs.15,656.89 crore last year recording a growth of 9%. The proportion of CASA to total deposits was at 31% as on March 31, 2024. The cost of deposits increased to 5.59% in FY 2024 against 4.66% in FY 2023.

The Gross Advances of the Bank increased by 2,510.67 crore to Rs.46,481.47 crore from Rs.43,970.80 crore, posting a growth of 6% in FY 2024. The Net Interest Margin (NIM) of the Bank stood at 3.65% for the year ended March 31, 2024 as against 3.89% in the previous year. The yield on advances increased to 9.72% from 9.23% during the financial year. Other income earned for the financial year ended March 31, 2024 stood at Rs.741.66 crore as against Rs.810.36 crore for March 31, 2023.

The investment portfolio of the Bank rose to Rs.15,672.66 crore in FY 2024 as against Rs.14,360.18 crore in FY 2023 recording a growth of 9%. During FY 2024, operating expenses increased by 17% to Rs.1,348.39 crore from Rs.1,155.18 crore in FY 2023. The other operating expenses increased from Rs.624.81 crore to Rs.734.58 crore. The Cost to Income ratio increased to 47.06% for the year ended March 31, 2024 as against 38.85% in the previous year ended March 31, 2023. The staff expenses increased from Rs.530.37 crore last year to Rs.613.81 crore for this FY 2024.

The Banks Operating Profit decreased from Rs.1,817.98 crore in FY 2023 to Rs.1,516.73 crore in FY 2024 mainly due to increase in Operating Expenses. The Operating Profit to NII constitutes 71.43%. The total provision decreased by Rs.380 crore to Rs.501 crore from Rs.881 crore in the previous year. The provision for tax for the reporting year stood at Rs.215 crore. The provision for NPA for the financial year was Rs.327 crore. The Bank recorded a Net Profit of Rs.1,015.73 crore as on March 31, 2024 as against Rs.937.48 crore in March 31, 2023 registering a growth of 8%.

Return on Assets of the Bank for the FY 2024 stood at 1.52% as against 1.46% last year and Return on Equity was at 12.86% for FY 2024 as against 13.42% for FY 2023. The basic earnings per share stood at Rs.13.72 per share as compared to Rs.12.67 per share last year.

Operational Performance

The incremental growth in the operational performance of the Bank and certain key percentages are as follows :

Particulars	Incremental Growth over Previous year
	FY 2024	FY 2023
Deposits ( in cr)	3,258.78	4,708.19
Gross Advances ( in cr)	2,510.67	2,814.79
Profit after Tax ( in cr)	78.25	177.31
Number of Branches (in Nos.)	48	25
Particulars	FY 2024	FY 2023
Cost of Deposits (%)	5.59%	4.66%
Yield on Advances (%)	9.72%	9.23%
Total Yield on Investments (%)	6.27%	5.89%

Segmentwise Performance

A. Deposits of the Bank comprise of the following :

	FY 2023-24		FY 2022-23
Sl. No. Particulars	Amount (Rs. in crore)	Percentage to total (%)	Amount (Rs. in crore)	Percentage to total (%)
1. Demand Deposit	5,488.84	9.86	4,763.70	9.09
2. Savings Deposit	11,561.32	20.77	10,893.19	20.79
3. Term Deposit	38,606.48	69.37	36,740.97	70.12
Total	55,656.64	100.00	52,397.86	100.00

B. Investments of the Bank consist of the following :

Sl. No. Particulars	Amount (Rs. in crore)	Percentage to total (%)
Investments in India	15,672.44	100.00
1. Government Securities	15,520.32	99.03
2. Other Approved Securities	NIL	NIL
3. Shares, Debentures/Bonds and Mutual funds	120.22	0.77
4. Security Receipts	31.90	0.20
Investments outside India	0.22	NIL
5. Investments in Equity Shares of SWIFT (Investment outside India)	0.22	NIL
Total Investments	15,672.66	100.00

The total investments stood at Rs.15,672.66 crore as at March 31, 2024 against 14,360.18 crore as at March 31, 2023.

C. Performance of various Business Segments

The Bank operates under four Business Segments namely Treasury, Corporate/Wholesale Banking, Retail Banking, and Other Banking Operations.

The segment wise contributions are as under :

Segments	Total Revenue FY 2024	(Rs. in crore) FY 2023	Gross Profit (Rs. in crore)	Percentage to total (%)
Treasury	1,236.55	1,033.87	632.38	41.69
Corporate Banking	1,141.10	964.06	213.93	14.10
Retail Banking	3,558.38	3,470.48	602.39	39.72
Other Banking Operations	76.19	56.29	68.03	4.49
Total	6,012.22	5,524.70	1,516.73	100.00

ASSET QUALITY AND LOAN COMPOSITION

A. Asset Quality

The Gross NPA as at March 31, 2024 decreased to Rs.1,854 crore as against Rs.1,920 crore in FY 2023. The percentage of Gross NPA has decreased from 4.37% in 2023 to 3.99% in FY 2024. The Net NPA decreased to Rs.899 crore (1.97%) in FY 2024 as against Rs.1,018 crore (2.36%) in FY 2023. The Provision coverage was 72% as at March 31, 2024 (Previous year 69%).

Priority Sector Advances amounted to Rs.26,914.66 crore as on March 31, 2024 as compared to previous year amount of 28,029.47 crore. The total agricultural advances stood at Rs.8,351.51 crore as on March 31, 2024 against Rs.8,540.97 crore as on March 31, 2023. During the year the Bank had

achieved all its targets/sub-targets as specified by RBI on Priority Sector Lending.

B. Loan Composition

The Bank closely monitors the performance of various Industrial sectors periodically to assess the sector- wise potential risks for facilitating informed decision making regarding advances. As aforesaid, the Bank improved its Gross Advances to Rs.46,481.47 crore as at March 31, 2024 of which Rs.11,321.10 crore were directed to major industries and Rs.35,160.37 crore to other sectors. There has been a greater emphasis on Advances to MSME Sector by RBI & Government of India. As of March 31, 2024 our total credit to MSMEs amounts to Rs.17,649.19 crore which constitute around 38% of Total Advances.

A comparative position of Banks Industrial & Sectoral Deployment portfolio is set out here under :

Industry Name	Amount (Rs. in cr.)		% to Total Advances
	March 31, 2024	March 31, 2023	March 31, 2024	March 31, 2023
A. Major Industries	11,321.10	11,272.70	24%	26%
Textile	4,166.70	4,649.24	9%	11%
Metal	1,877.56	1,968.27	4%	4%
Paper & Paper Products	547.16	662.95	1%	2%
Food Processing	557.75	620.65	1%	1%
Chemicals	440.04	498.37	1%	1%
Rubber & Plastics	381.30	410.26	1%	1%
Engineering	620.38	734.87	1%	2%
Automobiles	203.17	170.31	1%	0%
Other Industries	2,527.04	1,557.78	5%	4%
B. All other Advances	35,160.37	32,698.10	76%	74%
(Agri., Trade Service, Gold Loan etc.)
TOTAL (A + B)	46,481.47	43,970.80	100%	100%

Figures of the previous period have been regrouped/reclassified wherever considered necessary.

Sectoral Deployment

	Amount (Rs. in cr.)		% to Total Advances
Sector	March 31, 2024	March 31, 2023	March 31, 2024	March 31, 2023
Agriculture	8,351.51	8,540.97	18%	19%
MSME	17,649.19	18,854.03	38%	43%
Large Industries	484.93	668.70	1%	2%
Retail Traders	701.68	794.12	1%	2%
Wholesale Traders	1,119.41	1,569.42	2%	4%
Commercial Real Estate	2,728.81	3,091.29	6%	7%
JL Non Agriculture	4,857.93	4,027.72	10%	9%
Housing Loans	2,113.31	2,071.39	5%	5%
Personal Loan	1,363.34	947.34	3%	2%
Loans Collateralized by deposits	824.89	659.40	2%	1%
Infrastructure	303.24	319.75	1%	1%
NBFC	1,194.54	488.89	3%	1%
Others	4,788.69	1,937.78	10%	4%
TOTAL	46,481.47	43,970.80	100%	100%

Figures of the previous period have been regrouped/reclassified wherever considered necessary.

OPPORTUNITIES AND THREATS

Indias Banking Sector with its mix of Foreign, Private Sector and Public Sector Banks, reflects the countrys diverse economy. The large network of the Post Offices throughout the length and breadth of the country offering banking services through the India Postal Payment Bank poses a formidable challenge to other Scheduled Commercial banks. Regulatory reforms by the Reserve Bank of India aim to strengthen the banking sector, addressing the grave issues of Non Performing Assets (NPAs), augmenting cyber security, and improving governance. Initiatives, like the United Payments Interface (UPI) have revolutionized payment systems, promoting seamless and instant fund transfers. Financial Inclusion remains a focal point, with Payment Banks and Small Finance Banks exerting influence to bring the unbanked and underbanked within the ambit of formal Banking channels. The growth of the Credit function both Retail and Corporate emphasizes on responsible lending with focus on credit growth and prudent risk management. The presence of various Small Finance Banks and Urban Co-Operative Banks catering to niche segments have intensified the competition in Retail Banking space over the last few years especially with the RBI policy on "On Tap" licensing of Small Finance

Banks. In addition Urban Co-operative Banks (UCBs) have been permitted to extend doorstep banking services to their customers on par with Scheduled Commercial Banks. All these leads to fierce competition in the retail banking space demanding better customer service. During the year our Bank launched "NEW SALARY ACCOUNT PRODUCTS" to augment our CASA Base in the Salary segment with various features such as CUB Salary Plus and CUB Salary Prime. Our Bank has also launched a New credit product "Pre - Qualified Unsecured Personal Loan" scheme for our existing salary account customers under the age category of 23-56 years with a repayment tenure of 1-4 years. The new products will further augment the customer base and profitability of our Bank.

Financial Inclusion

The main objectives of Financial Inclusion are to provide the following :

• Basic Savings Bank Deposit Accounts

• Servicing products (including investment and pension)

• Simple credit products and overdrafts linked with no frills account

• Remittance and money transfer facilities

• Pension and Insurance products

Your Bank has witnessed tremendous progress in the successful implementation of financial inclusion, especially to the citizens in rural areas. The Bank has already implemented Pradhan Mantri Jan Dhan Yojana (PMJDY) scheme and there are 83,370 accounts as on March 31, 2024. The Bank has 3,73,519 Basic Savings Bank Deposit Accounts, including 1,03,756 accounts sourced through Business Correspondents (BCs) as on March 31, 2024. To cater the needs of customers of unbanked areas, the Bank has established BC Outlets in those places and is providing Basic banking services through Business Correspondents (BCs). Your Bank has 137 BCs and 3 BC outlets for rendering services to the village level beneficiaries. The Business Correspondents of the Bank make regular visits to the villages and provides doorstep banking services.

Your Bank creates awareness on Financial Inclusion and also promotes the Government schemes for Social Welfare, Pension, Insurance viz Atal Pension Yojana (APY), MUDRA, PMJJBY, PMSBY etc., The Bank has 48,860 APY Accounts, 44,089 PMJJBY Accounts, 94,230 PMSBY Accounts under the scheme as on March 31, 2024.

Your Bank has got e-KYC facility and Aadhaar enabled Payment System (AePS), for rendering quick services to the public in rural areas. Besides, the Bank has deployed POS machines at various locations, which are very much helpful for doing merchant transactions. The Bank has ensured uninterrupted Banking services in the unbanked areas with the help of digital banking services. Your Bank is proud of extending contribution to the social welfare schemes of the Government, for our Nation building.

As done in the past, Financial Literacy Week is being conducted by the Bank with the aim of furthering Financial Literacy, developing credit discipline and encourage availing credit from formal Financial Institutions by the customers. As per the objectives of the National Strategy for Financial Education 2020-25, focus of the Bank will be on the following three topics with a view to promote digital transactions in a more secured manner :

• Convenience of digital transactions

• Security of digital transactions

• Protection of customers

Your Bank has conducted campaigns more particularly in rural and semi-urban areas for creation of awareness about Financial Literacy in an effective manner and to educate its customers properly. The theme for this years Financial Literacy Week observed during Feb 26, 2024 to Mar 1, 2024 is "Make a Right Start, Become Financially Smart", with emphasis on "Savings and power of Compounding", "Banking Essentials for Students" and "Digital and Cyber Hygiene". Further, as a part of FLW campaign 2024, branches conducted more than 375 Financial Literacy awareness meeting and disseminated information on the above theme through pamphlets and posters to more than 10,000 people.

AUTOMATION

New age technologies such as application programming interfaces (APIs), Artificial Intelligence (AI) and Machine Learning (ML), biometric based identification and authentication (biometrics), Cloud Computing (CC) and Distributed Ledger Technology (DLT) are currently powering innovations in the financial sector worldwide. In response to the evolving financial landscape, Indian Banks are actively undergoing Digital transformation, to enhance customer experience and Fintech collaboration has gained prominence as traditional banks partner with fintech firms to incorporate innovative solutions in payments, lending and risk management. Banking services has moved from brick and mortar branch banking to palm of customer, to do banking based on their convenience and comfort. In order to meet the Digital challenges and enhance customer service, our Bank has launched the NEWGEN Retail Loan Software for Housing Loan and Loan against Property under the Retail segment. Under this Digital Transformation Initiative, our Bank has launched Digital Documentation Process, for e-signing processes. Central Government under the aegis of National e-Governance Services Limited (NeSL) introduced Digital Document Execution (DDE). DDE helps to perform Digital e-stamping and affixing digital signatures of parties to contract. A separate para on Digital Lending initiatives of the Bank is given in the beginning of the Annual Report.

Digital technology always contains inherent risks and banking transactions through digital channels are no exception. New types of cyber frauds are emerging with the introduction of new digital channels. As the custodians of Depositors money, your Bank takes utmost care to ensure necessary security measures to protect public interest and necessary mitigation measures are implemented.

RISK MANAGEMENT

The Bank is exposed to a variety of risks in the normal course of business, mainly, Credit Risk, Market Risk and Operational Risk. The main objective of Risk Management is to strike a proper balance between risk and return. The Risk Management department operates within the Board approved risk policy, which is communicated to all the departments. The identification, measurement, monitoring and management of risks remain the main focus areas of our Bank. Business and revenues are to be weighed in the context of the risks implicit in the banks growth.

A. Framework

The Bank has in place, a sound Risk Management Architecture, established by the active involvement and supervision of Board of Directors. The Board of the Bank has constituted a Risk Management Committee of Directors which assesses the Banks risk profile and key areas of risk in particular. Under the supervision of the Risk Management Committee of the Directors, the Risk Management Committee of Executives (RMCE) functions to ensure that the policy guidelines approved by the Board are implemented in toto. It guides the policies, procedures and systems for managing and controlling various types of risks.

The Bank has a Risk Management team headed by the Chief Risk Officer, who reports directly to MD & CEO and Risk Management Committee of Directors (RMCD) of the Board on a quarterly basis. The overall risks faced by the Bank and the risk appetite are evaluated by the team which frames policies and procedures. Risk Management practices have been aligned with the industry practices and are adaptable to the dynamic operating environment and market conditions.

B. Compliance to Standards

The Bank is BASEL II compliant since March 31, 2009. The Bank has implemented the BASEL III Capital Regulations from April 1, 2013, by computing the Capital and Risk Weighted Assets as per RBI guidelines dated May 2, 2012. Under the Basel III Capital Regulations, Banks are required to maintain a minimum Pillar 1 Capital (Tier-1 + Tier-II) to Risk Weighted Assets Ratio (CRAR) of 9% on an on-going basis. Besides this minimum capital requirement, Basel III also provides for creation of Capital Conservation Buffer (CCB) to be implemented in phases. The CCB requirement of 2.50% are to be fully implemented from October 1, 2021 as per RBI circular dated February 5, 2021. The required CRAR is 11.50% (9%+2.50%). The Bank is well placed in complying with Basel III Capital Regulation and has maintained a CRAR of 23.73% as on March 31, 2024 which is well above the said minimum of 11.50%. Tier I Capital and Tier II Capital is Rs.8,103.80 crore and Rs.371.85 crore respectively as on March 31, 2024 and shareholders may kindly refer to the "Capital Adequacy" para under the Directors Report.

The Bank presently adopts Standardized Approach for Credit Risk, Standardized Duration Approach for Market Risk and Basic Indicator Approach for Operational Risk. The Risk Management Department of the Bank effectively functions to measure, monitor and control all risks paving way for effective Enterprise-wide Risk Management. Further, RBI has informed the banks to get ready to migrate to the New Standardised Approach for calculation of Operational risk vide Master Direction on Minimum Capital Requirements for Operational Risk dated June 26, 2023. We have computed the operational risk as per the new guidelines for March 2023 and reported the same to RBI on July 27, 2023.

The Bank has prepared "Internal Capital Adequacy Assessment Process" (ICAAP) document and implemented the same in line with the Basel III requirement commensurate with the Banks size, level of complexity, risk profile and scope of operations. The ICAAP document includes the capital adequacy assessment and projections of capital requirement for the next three financial years from FY 2025, along with the plans and strategies for meeting the same. The purpose of the document is to inform the Board and the Reserve Bank of India about the Banks internal capital adequacy assessment process and the Banks approach to capital and risk management.

The document also endeavours to furnish detailed information on the Banks assessment of the holistic risks, how the Bank intends to identify, assess, monitor, manage and control those underlying risks besides maintaining adequate capital necessary for its current and future internal capital requirements. Thus ICAAP is an important component of Supervisory Review Process (SRP) under Pillar 2 of Basel III Framework.

The Pillar 3 Disclosures under Basel III Framework are reported in the Banks website on Quarterly basis and also in the Annual Report in the prescribed format as per the Disclosure Policy and RBI norm.

The Banks are expected to maintain a "Leverage Ratio" in excess of 3.50% (from June 30, 2019) under Basel III Framework prescribed by Reserve Bank of India. The Basel III Leverage Ratio Framework aims to prevent Banks from having an over reliance on leverage. This ratio is meant to be a supplementary measure to risk based capital requirements. For the year ended March 31, 2024, Leverage Ratio of our Bank stood at 11.02%, well above the prescribed norm of 3.5%, the computation of which is duly disclosed in Templates DF - 17 and DF - 18 of Basel III - Pillar 3 Disclosure as per the extant guidelines of RBI.

RBI has introduced Liquidity Coverage Ratio (LCR) under Basel III guidelines from January 1, 2015. The LCR promotes short-term resilience of banks to potential liquidity disruptions by ensuring that they have sufficient High Quality Liquid Assets (HQLAs), which are unencumbered and can be converted into cash to meet its liquidity needs for a 30-calendar day time horizon under a significantly severe liquidity stress scenario. The Bank has been maintaining the LCR above 100% (which was the minimum requirement prescribed by RBI before April 17, 2020). The LCR for the position as of March 31, 2024 is arrived at 229.43%.

The final guidelines on "Net Stable Funding Ratio (NSFR)" under the Basel III Framework on Liquidity Standards was issued by RBI on May 17, 2018 and was implemented from 2021. The NFSR promotes resilience over a longer-term time horizon by requiring banks to fund their activities with more stable sources of funding on an ongoing basis. It is defined as the amount of available stable funding relative to the amount of required stable funding. The Bank is maintaining NSFR of above 100%, which is the minimum requirement prescribed by RBI. The NSFR for the position as of March 31, 2024 is arrived at 147.14%.

C. Risk Management-Process

The overall risk of the Bank is being managed through RMCE which in turn is supported by the three Committee of Executives viz.

1. Credit Risk Management Committee (CRMC)

2. Asset-Liability Committee (ALCO) and

3. Operational Risk Management Committee (ORMC)

Each Committee has been supported by the function group from each of the Department.

Further, the Bank has put in place the following Policies/Standards to manage various types of Risks apart from the overall Integrated Risk Management Policy to measure, monitor and control all the enterprise-wide risks and with the objective of integrating all the risks of the Bank.

1. Loan Policy (Including Recovery Policy, MSME Policy, etc.)

2. Integrated Risk Management Policy

3. Credit Risk Management Policy

4. Asset and Liability Management Policy

5. Operational Risk Management Policy

6. Stress Testing Policy

7. Pillar 3 Disclosure Policy

8. Business Continuity Plan Policy

9. Internal Capital Adequacy Assessment Process (ICAAP) Policy

10. Credit Risk Mitigation and Collateral Management Policy

11. Integrated Treasury Policy

12. Policy on Unhedged Foreign Currency exposures of corporates including SMEs

13. Market Risk Management Policy

14. New Product Assessment Policy

15. Risk & Control Self-Assessment Standards (RCSA)

16. Pricing Policy

17. Risk Rating Framework

18. Information Technology Risk Framework

19. Financing Framework for Green Deposits

20. Climate Risk Policy

These policies are subject to review on a periodical basis depending upon the guidelines/directions are given by RBI from time to time or whenever any situations warranting review.

Based on the respective policy norms, the Bank is able to identify, measure, monitor, analyze, control and mitigate the risks at every stage, prescribe and monitor prudential limits and manage them to face the changing risk environment.

Stress Tests and Scenario Analysis are conducted on a periodical basis to gauge the level of risk in the assumed crisis situation and remedial/preventive steps have been taken to mitigate risks in all areas. Further, the results of Stress tests are being duly factored into, under Pillar 2 Risks while preparing the Internal Capital Adequacy Assessment Process (ICAAP) document on an annual basis.

In order to further familiarize the operational staff on the various risk aspects, the Bank has formulated RCSA (Risk Control Self Assessment) standards. Workshops followed by questionnaires have been conducted on periodical basis highlighting the operational risks involved in these areas.

During the period, RCSA had been conducted on the following areas :

1. Bulk Deposits

2. Assessment on Branch operations

The Operational Risk Management Policy suggest for KRI framework to provide effective monitoring tool to track change in risk levels and minimize the occurrence of risk event/loss and give the Bank a complete view of its operations. Key Risk Indicators (KRIs) are early warning signals, which enable the Management to monitor and mitigate operational risks that are beyond acceptable levels. These are metrics, which can provide insight into Banks operational risk profile and its changes. Based on the metrics, a list of KRIs have been suggested along with threshold for review and the same to be done on a quarterly basis.

The Framework for identifying, recording, reporting and quantifying loss data are governed by Operational Risk Policy of the Bank.

RBI in its circular dated June 26, 2023 on Master Direction on Minimum Capital Requirements for Operational Risk, came up with draft guidelines, with introduction of the New Standardised Approach replacing all existing approaches for Operational Risk with effective date to be announced later.

As per guidelines, Operational Risk Loss events have to be recorded for minimum of past ten years. The Framework for identifying, recording, reporting and quantifying loss data are governed by Operational Risk Policy of the Bank. The branches are advised to report immediately, loss event if any, to RMD through all branch circulars. The loss data/events are classified as per the draft guidelines and near miss events are also captured.

The loss data for the past years has been compiled and external validation is under process to validate the process of capturing the loss & data compilation.

In the comprehensive circular issued by RBI dated November 7, 2012 on Liquidity Risk Management by Banks, detailed guidelines have been given in respect of Contingency Funding Plan (CFP). Accordingly, the Bank had formulated a CFP for responding to severe disruption which might affect the Banks ability to fund its activities in a timely manner and at a reasonable cost. Contingency plans envisage the Banks readiness to manage a range of Bank specific as well as market wide liquidity stress scenarios, indicating the available sources and quantum of funds that can be drawn, besides clear escalation/prioritization procedures to tap funds from contingency sources.

The CFP is being carried out on a half yearly basis during June/December every year besides making an annual review. The CFP Policy has been revised which is forming part of ALM policy and an external validation was also conducted during FY 2024.

The Bank has, over the years, fine-tuned its approach to detect and control risk. In general controls are exercised closest to the point of risk origination (each department owner) through study of periodic data and MIS, proactively discuss potential risks.

This, we believe, will help establish a sound risk culture that enables prudent risk taking.

INTERNAL CONTROL SYSTEMS

Our Bank has an exclusive Compliance Department headed by a Chief Compliance officer to ensure effective implementation and compliance of all the directives issued by various Regulators, its Board of Directors and its own Internal Control Policy. Our Bank has always recognized the importance of strong internal control mechanism which is pivotal to long term sustainability of any organization.

The Inspection Department ensures the adherence to the laid down systems and procedures of the Bank. Moreover there exists a system of periodical Risk Based Inspection of the Branches, Concurrent Audit, Jewel Loan Inspection and Credit Inspection. Risk Based Internal Audit (RBIA) conducted at branches focuses on prioritizing the audit assignment and audit resources based on the level of control risks and inherent business risks. The Concurrent Audit serves as an early warning system to ensure detection of lapses, irregularities and as a tool to prevent frauds. The system of regular KYC inspection is being carried out to ensure compliance of all KYC and AML Regulations. Periodic cash inspection is carried out at our Currency Chest to test the accuracy of Chest transactions and also at Branch level to ensure the correctness of cash position of the Branches. Management Audit focuses on identifying the adequacy and effectiveness of processes adopted for decision making at various Departments in Head Office, Currency Chest, Computer System Department, Business Development Centre, International Banking Division, Central Processing Centers (CPCs) etc. The Information Systems Audit (ISA) focuses on the system risks and assesses the adequacy of controls implemented for mitigating the risks.

The Audit Committee of the Board reviews the adequacy of internal audit function, including its reporting structure, coverage and frequency of audits and provides guidance and direction. Self-assessment audits are undertaken of the Banks internal financial controls, by testing and validating the effectiveness of controls on an on-going basis. The Inspection Department organizes incognito visit to certain large and prominent Branches chosen randomly on a yearly basis to ensure effective functioning of the Branches and also to ensure adherence of RBI guidelines like display of information to public, issue of coins etc. Inspection and Audit independently evaluates the adequacy, operational effectiveness and efficiency of all internal controls, risk management, governance systems and processes of our Bank.

A good system of internal control ensures that all the regulatory guidelines are strictly adhered to by all the departments of the Bank which hugely helps the growth process of the Bank mitigating the operational risk.

HUMAN RESOURCE DEVELOPMENT/INDUSTRIAL RELATIONS

Human Resource Development and Industrial atmosphere play a prominent role in an organizations growth and our Bank is maintaining cordial relationship with its employees at all times. As part of HR strategy, the Bank offers its employees various monetary and nonmonetary benefits, based on their performance in the form of ESOP, Performance Linked Pay (PLP) and Ex-Gratia thereby ensuring that each employee feels himself/herself as part and parcel of the Bank and strives hard to deliver to the best of his/her abilities. It is pertinent to note here that there has not even been a single occasion of employees unrest in the Banking history of CUB.

In line with the Banks expansion plans, 48 new branches were opened in various States during the FY 2024 for which the Human Resource Department provided adequate manpower. In order to identify the right person for the right job, Psychometric tests are also included in recruitment process of the Bank. Specific efforts were made towards talent acquisition, skill development, and manpower training. As part of the skill development effort, employees are identified and imparted trainings in various areas of banking. Job Rotation is also being followed to ensure that each and every employee gains experience across major areas of banking, apart from understanding the interlinkages.

In tune with the future expansion, the Bank is constantly upgrading and revisiting its manpower requirements by developing a talent pool. The members of the talent pool are offered trainings on an ongoing basis at the Banks Staff colleges at Chennai and Kumbakonam, apart from training at various centres of excellence like SIBSTC, NIBM, CAFRAL, IRDBT, FEDAI, BITS, NIBM, IIM etc.

Continuous efforts are being made to enhance the quality of existing personnel and to attract quality new talent. As on March 31, 2024, the Bank has 7,188 employees on rolls, the details of which are given below :

Cadre	Number of Employee(s)
Executives cadre	79
Management cadre	2,918
Workmen cadre	4,191
TOTAL	7,188

The Bank has a policy on Prevention of Sexual Harassment at Workplace, which provides protection for Women employees working in the organization. An internal compliance committee has been set up to redress the complaints received under Sexual Harassment.

Further, there exists a separate menu in the Banks Intranet portal wherein all Women employees of the Bank can lodge their grievances under the POSH Act. In addition, a separate menu has been provided for all employees to report their genuine concerns under Whistle Blower/Vigil mechanism.

OUTLOOK

The Annual Financial Results for FY 2024 indicate that our banking system remained sound and resilient, backed by improvement in asset quality, enhanced provisioning for bad loans, sustained capital adequacy and rise in profitability. The Non Banking Finance Companies (NBFCs) also displayed strong financials, in line with banking sector. The Gross Non Performing Assets (GNPAs) of Scheduled Commercial Banks are below 3 per cent of total advances as at March 31, 2024. Going forward, your bank will continue to focus on further improving the governance standards, risk management practices, and compliance culture across the organization.