Dhanlaxmi Bank Ltd Management Discussions.

GLOBAL ECONOMY

The global economic upswing that began around mid-2016 has become broader and stronger. This new World Economic Outlook report projects that advanced economies as a group will continue to expand above their potential growth rates this year and next before decelerating, while growth in emerging market and developing economies will rise before leveling off. For most countries, current favorable growth rates will not last. Policy makers should seize this opportunity to bolster growth, make it more durable and equip their governments better to counter the next down turn. The up growth has been driven by an investment recovery in advanced economies, continued strong growth in emerging Asia. The growth is expected to tick up by 3.9 percent this year and next, supported by strong momentum, favorable. Thou the World Economy continues to show a broad based momentum, the prospect of a similarly broad based conflict over trade presents a jarring picture.

Looking at the largest economies, our 2018 growth projections, compared with October 2017 projections, are 2.4 percent for the euro area (up by 0.5 percentage point), 1.2 percent for Japan (up by 0.5 percentage point), 6.6 percent for China (up by 0.1 percentage point), and 2.9 percent for United States (up by 0.6 percentage point). U.S. growth will be boosted in part by a largely temporary fiscal stimulus, which explains over one third of our upgrade over last October for 2018 global growth.

Despite the good near term news, longer term prospects are more sobering. Advanced economies facing aging populations, falling rates of labor force participation, and low productivity growth will likely not regain the per capita growth rates they enjoyed before the global financial crisis. Emerging and developing countries present a diverse picture, and among those that are not commodity exporters, some can expect longer term growth rates comparable to pre-crisis rates. Many commodity exporters will not be so lucky, however, despite some improvement in the outlook for commodity prices. Those countries will need to diversify their economies to boost growth and resilience.

It has been deliberated that while the current cyclical upswing offers policy makers an ideal opportunity to make loner term growth stringer, more resilient and more inclusive. The present good times will not last for long, but sound policies can extend the upswing while reducing the risks of a disruptive unwinding. Countries need to rebuild fiscal buffers, enact structural reforms, and steer monetary policy cautiously in an environment that is already complex and challenging.

INDIAN ECONOMY

India has become the worlds sixth-biggest economy, pushing France into seventh place, according to updated World Bank figures for 2017. Indias economy rebounded strongly from July 2017, after several quarters of slow down blamed on economic policies pursued by government. India, with a round 1.34 billion inhabitants, is poised to become the Worlds most population nation, whereas the French population stands at 67 million.

The country ranks 139th in per capita GDP (nominal) with $2,134 and 122nd in per capita GDP (PPP) with $7,783 as of 2018. After the 1991 economic liberalization, India achieved 6-7% average GDP growth annually, In FY 2015 and 2018 Indias economy became the worlds fastest growing major economy, surpassing China.

GDP per capita rank: 139th (nominal); 122nd (PPP)

GDP rank: 6th (nominal); 3rd (PPP)

GDP Growth: 7.7% (Q4, 2017-18) (MOSPI)

GDP per capita: $2,134 (nominal; 2018 est); $7,783 (PPP; 2018 est)

According to International Monetary Fund, India is projected to generate growth of 7.4 percent this year and 7.8 percent in 2019, boosted by household spending and a tax reform. This compares to the worlds expected average growth of 3.9 percent.

The London based Centre for Economics and Business Research, a consultancy, said at the end of last year that India would overtake both Britain and France this year in terms of GDP, and has a good chance to become the worlds third biggest economy by 2032.

KERALA ECONOMY

Kerala has the eighth largest economy in India. Service Industry dominates Kerala economy, The theme of Kerala Economy 2017-18 is entitled "Towards a Clean Kerala". The theme chapter touches upon the state of sanitation and environment in the State, the measures undertaken in this regard, the lessons learnt from various experiments and the way forward. Kerala is one of the three states to have been declared Open- Defecation Free."

Its statistics as follows:

GDP: 7.73 Lakh crore (US $120 billion) (2018-19 est)

GDP Rank: 8th GDP growth: 7.4%

GDP per capita: $2,400

GDP per capita rank: 7

GDP by sector: Agriculture 11.3%

Industry 25.6%

Services 63.1%

Unemployment: 12.5%

Kerala is getting very close to the developed countries in the world. Although positive signs of growth are visible in the agriculture sector, this growth must be characterized as inadequate. The situation was exacerbated by drought in Kerala in 2017. In the Industrial sector, public sector undertakings under chemical and electronic sectors are being transformed from Loss making to Profit making enterprises. Steps have also been initiated to improve the image of State as an investment destination.

REGULATORY MEASURES AND MONETORY POLICIES

Banking regulation is a form of government regulation which subjects banks to certain requirements, restricts and guidelines, designed to create market transparency between banking institutions and the individuals and corporations with whom they conduct business, among other things. As regulating focusing on key actors in the financial markets, it forms one of the three components of financial law, the other two being case law and self regulating market practices.

It is important for regulatory agencies to maintain control over the standardized practices of financial institutions to hold control over the economy to fail without enormous consequences. This is the premise for government bailouts, in which governments financial assistance is provided to banks or other financial institutions that appear to be on the brink of collapse. The belief is that without this aid, the crippled banks would not only become bankrupt, but would create rippling effects throughout the economy leading to systemic failure.

Monetary Policies

Monetary policy is a policy formulated by the central bank, i.e. RBI (Reserve Bank of India) and relates to the monetary matter of the country. The policy involves measures taken for regulating the money supply, availability and cost of credit in the economy, The policy also oversees distribution of credit among users as well as borrowing and lending rates of interest. In a developing country like India, its significant in the promotion of economic growth.

The various Instruments of Monetary policy include variations in bank rates, other interest rates, selective credit controls, supply of currency, variations in reserve requirements and open market operations.

Objectives of Monetary Policy:

• Promotion of saving and investment

• Controlling the imports and exports

• Managing business cycles

• Regulation of aggregate demand

• Generation of employment

• Helping with the development of infrastructure

• Allocating more credit for the priority segments

• Managing and developing the banking sector

Opportunities and Threats

Indian banking strategies are presently undergoing various transformations, as the overall scenario has changed over the last couple of years. Till the recent past, most of the banks had adopted fierce cost cutting measures to sustain their competitiveness. This strategy however has become obsolete in the new light of immense growth opportunities for banking industry, Most bankers are now confident about their high performance in terms of organic growth and in realizing high returns. Nowadays, the growth strategies of banks revolve around customer satisfaction. Improved customer relationship management can only lead to fulfillment of long-term, as well as, short-term objectives of the bankers. This requires, efficient and accurate customer database management and development of well-trained sales force to develop and sustain long-term profitable customer relationship. In short there is much opportunity for Indian Banks to grow rapidly and equally faces some challenges towards the same.

• Extensive reach: the vast networking & growing number of branches & ATMs. Indian banking system has reached even to the remote corners of the country.

• In terms of quality of assets and capital adequacy, Indian banks are considered to have clean, strong and transparent balance sheets relative to other banks in comparable economies in its region.

• The market is seeing discontinuous growth driven by new products and services that include opportunities in credit cards, consumer finance and wealth management on the retail side, and in fee-based income and investment banking on the wholesale banking side. These require new skills in sales & marketing, credit and operations.

• With increased interest in India, competition from foreign banks will only intensify,

• With the growth in the Indian economy expected to be strong for quite some time especially in its services sector- the demand for banking services, especially retail banking, mortgages and investment services are expected to be strong.

• Liberalization of ECB norms: The government also liberalized the ECB norms to permit financial sector entities engaged in infrastructure funding to raise ECBs. This enabled banks and financial institutions, which were earlier not permitted to raise such funds, explore this route for raising cheaper funds in the overseas markets.

Increase penetration of banking in India- tackle demand supply mismatch: Primarily supply side constraints are responsible for the high levels of financial exclusion in the country, as they have a causal effect in keeping demand low from certain factions of the population, The demand supply mismatch, which is reflected in measures of financial exclusion, shows the limitations on the banks ability to supply products and services

• Credit disbursement to the priority sector: One of the major challenges faced by the banking system in India is to provide timely and cost effective credit to the priority sectors especially the agriculture and small scale industries, which are critical in generating employment and support the growth momentum of the economy,

• Maintain asset quality: A major challenge in the current economic scenario for the Indian banks is to maintain the gains made with respect to asset quality over the past few years,

• Improve risk management mechanism: Increased usage of rating services must be employed to reduce risk, Besides, SME specific risk management procedures must be setup to make the business more viable, as the risk perception associated with lending to small enterprises is generally very high. Further, the banks would also be required to acquire skill for managing emerging risks resulting from innovations in financial products as well as technological advancements.

• Technology adoption: The problem of resistance from workforce has largely been neutralized over the years, but the primary issue involved with the adoption and rapid integration of technological processes within banks still related to human resources - the availability of technically skilled resources is scarce.

Financial Performance

The Banks operating profit during the year was 146.18 crore as against 94.07 crore during the previous year. The total Business of the Bank as on 31.03.2018 stood at 17436.06 crore as against 17976.69 crore as on 31.03.2017. The total Deposits of the Bank stood at 10919.66 crore and total advance stood at 6516.40 crore as on 31.03.2018. Net NPA increased to 3.19% on 31.03.2018 as against 2.58% as on 31.03.2017 and Gross NPA increased to 7.35% as against 4.78% as on 31.03.2017. The capital adequacy ratio as per Basel II and Basel III was 14.15% and 13.87% respectively, The Bank declared a net loss of 24.87 crore for the year ended March 31, 2018 as against profit of 12.38 crore during the previous year. The book value per share was 29.62.

CREDIT SANCTION & MONITORING DEPARTMENT

Credit Risk is defined as the possibility of losses associated with attenuation in the credit quality of borrowers or counterparties. Credit risk is managed through a framework which sets out Policies and procedures covering its measurement and management.

To manage the credit risk, a comprehensive Credit Policy has been put in place in the Bank with the following broad objectives:

• Maintain quality of loan assets.

• Ensure reasonable return on the assets.

• Ensure an acceptable risk profile.

• Achieve proper sectoral / geographical distribution of assets.

• Compliance with regulatory norms in respect of exposure caps, pricing, IRAC guidelines, targeted credit etc.

Bank is adopting a careful assessment of risk-return tradeoff, which is critical to its success. Bank has also created dedicated and distinct teams to take care of various functions and sub functions. Branch centric model has been introduced and branches are given more delegated financial powers for sanctioning the loans.

The practice of providing an internal rating to borrowers, besides the external rating, has been put in place by the bank. The credit policy of the bank has prescribed exposure cap to ensure a fairly diversified spread of the credit portfolio to avoid credit concentrations either to a sector or to any borrower/group. Bank expects to achieve its earnings objectives and to satisfy its customers needs while maintaining a sound portfolio.

As part of these exercises, the credit dispensation function was trifurcated as Credit Sourcing, Credit Sanction and Credit Monitoring. Branches are allocated to individual credit officers for speedy decision. Recovery of the non-performing assets was handled by a separate team with the requisite expertise. To enable taking a focused view within the credit portfolio, Bank has fixed targets for the following segments and achievement under these segments is monitored regularly:

• Corporate Banking

• SME

• Retail Assets

• Agri & Microcredit

CORPORATE BANKING

Bank provides its corporate and institutional clients a wide range of commercial and transactional banking products, backed by high quality service and relationship management. Funded and non-funded products including working capital finance, term loan finance, trade services, foreign exchange, cash management, distribution products and syndication services for debt and equity are offered by the Bank.

The main focus is on growth sectors like pharmaceuticals, Traders, infrastructure, hospitality, education, NBFCs etc. The Credit policy framework is intended to provide efficient delivery of products and services to corporates with all possible safeguards for prudent management of credit portfolio under this segment. Since the advances are of varied nature under this segment and deeper understanding of the industry is required for the management of credit portfolio, the central credit team takes care of the exposure under this segment.

MICRO, SMALL AND MEDIUM ENTERPRISES

The Micro, Small and Medium Enterprises (MSME) segment is a key business area for the Bank. MSMEs play a vital role in the development of the economy and generation of employment, Bank is able to participate in both fund and non-fund based credit limits, diversification of risk and cross-selling.

Importantly, Bank can also fulfill their priority sector obligations by lending to MSME, One of the routes for achieving financial inclusion is by supporting small and micro enterprises, which in turn provide employment opportunities to the financially excluded. The Bank offers complete banking solutions to micro, small and medium scale enterprises across industry segments, including manufacturers, retailers, wholesalers / traders and services, The entire suite of financial products - including cash credit, overdrafts, term loans, bills discounting, letter of credit, bank guarantees, cash management services and other structured products - is made available to these customers, Bank has entered into agreement with Credit Guarantee Trust Fund for Micro and Small Enterprises to provide collateral free credit facilities to the borrowers in this segment, The credit facilities to MSEs have been covered under the Banks scheme of lending as per the Board approved Credit Policy, Our Bank has adopted the BCSBI Code in Toto and the Bank has not been accepting any collateral for lending up to 10 lakhs to MSE Sector,

In the light of RBI First Bi monthly Monetary Policy Statement our field level functionaries have been equipped to guide MSME entrepreneurs / potential MSME entrepreneurs to get benefited from the scheme for activities like preparation of project reports in professional manner and any other credit related matters which would in turn help entrepreneurs for submitting application to the bank properly,

Credit Guarantee Fund Trust for Micro & Small Enterprises (CGTMSE)

Credit Guarantee Fund Trust For Micro & Small Enterprises (CGTMSE) is launched to reassure the lender that, in the event of a MSE unit, which availed collateral free credit facilities, fails to discharge its liabilities to the lender, the Guarantee Trust would make good the loss incurred by the lender up to 75 per cent of the credit facility, Your Bank is one of the Member Lending Institution, This year your bank has enrolled 48 borrowers under the scheme,

CGTMSE has now introduced a new "Hybrid Security" product allowing guarantee cover for the portion of credit facility not covered by collateral security, In the partial collateral security model, the MLIs will be allowed to obtain collateral security for a part of the credit facility, whereas the remaining part of the credit facility, up to a maximum of 200 lakh, can be covered under Credit Guarantee Scheme of CGTMSE,

For becoming more responsive and pro-active to the needs of the Micro and Small Enterprises (MSE) sector CGTMSE has included MSE Retail Trade as an eligible activity under Credit Guarantee Scheme LIs can now cover the credit facility extended by them to MSE Retail Traders under Credit Guarantee

Scheme of CGTMSE, Exposure limit for credit facility of retail trade segment will be from 10 lakh to 100 lakh per MSE borrower, Extent of guarantee coverage to such credit facility would be 50% irrespective of the category of the borrower,

In order to enhance the effectiveness of the Credit Guarantee Scheme for financial inclusion programme, CGTMSE has increased the extent of guarantee coverage from 50% to 75% for credit facilities of 50 lakh and above with an increase in the Annual Guarantee Fee (AGF) on the outstanding amount as per CGTMSE,

We have implemented the above modifications in our bank during FY 17-18,

To Improve MSME lending we had introduced Mudra scheme

Under the aegis of Pradhan Mantri Mudra Yojana (PMMY) , MUDRA has formulated following three schemes to signify the stage of growth/development and funding needs of the beneficiary micro unit/entrepreneur :

1, Shishu :- Loans up to 50000/-

2, Kishore :- Loans above 50000/- and up to 5,00 Lakhs

3, Tarun :- Loans above 5,00 lakhs to 10,00 Lakhs

All non farm sector income generating activities such as manufacturing, trading and services whose credit needs below 10,00 lakhs are known as MUDRA loans under Pradhan Manthri Mudra Yojana (PMMY),

RETAIL ADVANCES

Retail exposure is mostly in the segments of mortgage, vehicle loan, education loan and other commercial loans, Bank has developed an array of parameterized retail credit products to suit the requirements of retail customers, Customized credit products are available for individuals, traders, contractors, businessmen, professionals, etc, The products are mostly decentralized and are offered through the branch channels,

MICROFINANCE AND AGRICULTURE LENDING

The Bank has been working with various Self Help Groups to cater to a wide consumer base through its own branch network, Bank has NGO partners who work with the objective of providing credit for income generation activities by providing training, vocational guidance, and marketing support to their members, The Bank continued to focus on agriculture lending as a large portion of Indias un-banked population relies on agriculture as their main source of livelihood, The Bank provides various loans to farmers through its suite of specifically designed products - such as Kissan Credit Card plus SB scheme, crop loans, livestock loans, plantation loans, supply chain financing etc, The Bank targets specific sectors to capture supply chain of certain crops from the production stage to the sales stage, On the basis of these cash flows, the Bank is able to finance specific needs of the farmers, Bank has given specific focus on lending to poultry farmers, rubber, pineapple and other fruit growers through government agriculture departments, associations, commodity board etc.

Highlights of the Banks Microfinance and Agri-business during the year were:

• Outstandings in the area of Micro Credit was 445.87 crores as on 31.03.2018.

• The banks total agriculture advances stand at 19.36% of ANBC as against a target of 1 8%. The bank has extended 1 3.21 % of ANBC to weaker section as against a target of 1 0% of ANBC Focus on grass root level lending to SHGs through Direct SHG - Bank Linkage Lending Model in Kerala & Tamil Nadu.

• There are > 12121 number of SHGs maintaining savings bank account with our various branches. Credit facilities availed by SHGs from the Bank stood at 445.87 crore as on 31.03.2018. Kisan Credit Cards amounting to 9.53 crores were issued to 186 farmers during FY 17-18.

• Tie-up with dairies for providing cattle loans under JLG model and with NGOs for providing rural housing loans to SHG members.

PRIORITY SECTOR ADVANCES

Our Bank continued its prudent approach towards priority sector lending in conformity with the national policies, regulatory expectations and fulfillment of social objectives. The Banks priority sector advances stood at 45.34% (Target 40%) and its agricultural advance is at 19.36% (Target 18%) of the adjusted net bank credit. Under agricultural segment our lending to small and marginal farmers is at 8.92% against the target of 8%. The weaker section advances were at 13.21%, which is above the prescribed norm of 10%. We have also achieved target of lending to Micro enterprises under MSME at 13.03% against target of 7.50%. Lending under various socio-economic schemes has shown satisfactory progress.

1. For upliftment of the economically weaker sections the following schemes were introduced:

To improve the educational loans we had introduced ACSISOBCEBC SCHEME (Dr. Ambedkar Central Sector Scheme of Interest Subsidy on Educational Loan for Overseas Studies for Other Backward Classes (OBCs) and Economically Backward Classes (EBCs).

The scheme of Interest Subsidy on educational loans for overseas studies to promote educational advancement of student from Other Backward Classes (OBCs) and Economically Backward Classes (EBCs). The objective of the scheme is to award interest subsidy to meritorious students belonging to other weaker sections of the society and Economically Backward classes so as to provide them better opportunities for higher education abroad and enhance their employability,

2. To improve the lending to Minorities and weaker sections under priority sector lending we introduced Credit Enhancement Guarantee Scheme for Scheduled Castes (CEGSSC)

The modification / amendments made in the scheme guidelines which are appended below:-

Indicators Existing Guidelines Modification in the operational guidelines
Eligibility Criteria The facility shall be extended for availing term loan or composite term loan facility granted by MLIs Credit Enhancement Guarantee for Scheduled Castes Entrepreneurs shall be extended for loans for working capital also in addition to term loans or composite term loans to SC entrepreneur
Loan Amount Minimum limit of loan amount is 25.00 Lakhs Minimum limit of loan amount is reduced from 25.00 Lakhs to 15.00 Lakhs
Type of Borrower Registered companies / partnership firms / society registered / sole proprietorship firms In addition to Registered companies / partnership firms / society registered / sole proprietorship firms, Individual SC entrepreneur will also be eligible under the scheme for a guarantee cover of 0.15 crore to up to 1.00 crore only
Sector covered under the scheme The borrower engaged in Manufacturing/ Trading/Service sector may be considered for financial assistance by the MLIs The project units being set up, promoted and run by scheduled castes in primary sector such as commercial agriculture, food processing, horticulture, poultry etc. will also be considered in addition to existing Manufacturing/Trading/Service sector
Shareholding Registered companies, Societies, Partnership firms and sole proprietorship firms having more than 75% share holding by scheduled castes entrepreneurs / promoters / members with management control for past 12 months The share holding of SC entrepreneur / Promoter / Member / In the registered companies / registered partnership firms / societies / sole proprietorship firms / Individual SC entrepreneurs will be reduced from the existing 75% to 51% with management control of 6 months.
In order to meet the criteria of a women Entrepreneur, at least 50% of the total share holding held by the SC entrepreneur may be held by SC women with 6 months management control.

 

Guarantee Cover

The amount of guarantee cover is shown in the following table:

The amount of guarantee cover will be as follows:

Loan amount Guarantee Cover Loan (amount Rs in Cr) Guarantee Cover
[Rs in Cr] Rs0.15 to Rs1.00 100%
1 Rs 0.25 – Rs 2.00 80% Rs 1.00 – Rs 2.00 80%
2 Rs 2.00 to Rs 5.00 70% 3 Rs 2.00 to Rs 5.00 70%
3 Rs 5.00 and above 60% 4 Rs5.00 and above 60%

3. To improve the lending under Housing loan in priority

a) To improve the lending under Housing loan in priority we had introduced Credit Risk Guarantee Fund Scheme for Low Income Housing (CRGFS).

Credit Risk Guarantee Fund T rust for Low Income Housing (CRGFTLIH) for the purpose of providing guarantees in respect of housing loans in the Economically Weaker Section (EWS)/Lower Income Group (LIG) categories.

b) For improving the loans under Housing sector we introduced PMAY, Affordable housing for weaker section through credit linked subsidy scheme under Pradhan Manthri Awas Yojana - Housing for all (Urban) Mission

A central sector scheme and under the scheme interest subsidy at the rate of 6.5% is available on housing loans which can be availed by the beneficiaries belonging to economically weaker section [EWS] and low income group [LIG] categories. This subsidy would be provided on the loan components to the extent of 6.00 Lakhs for a tenure of 15 years.

LIG : Households having an annual income between 3,00,001 (Rupees Three Lakhs One) up to 6,00,000 (Rupees Six Lakhs).

EWS : Households having an annual income up to 3, 00,000 (Rupees Three Lakhs).

In addition to the above mentioned guidelines Ministry of Housing and Urban Poverty Alleviation (MoHUPA) released operational guidelines for Credit Linked Subsidy Scheme for Middle Income Group issued in January 2017 under PMAY. Under the Scheme, the Middle Income Group seeking housing loan for acquisition, construction of house (including re-purchase) from Banks will be eligible for an interest subsidy. We had implemented the scheme in our Bank also. Under the Scheme, the Middle Income Group seeking housing loan for acquisition, construction of house (including re-purchase) from Banks will be eligible for an interest subsidy, Towards further enhancing the opportunities to access to MIG segment, The Ministry of Housing and Urban Affairs has again Increased the carpet area of MIG - I & II under Pradhan Manthri Awas Yojana (PMAY) scheme guidelines which are appended below:

Existing Guidelines Amendments
The Carpet area for MIG - I is restricted "up to 120 Sq.mt." The Carpet area for MIG - I is increased to "up to 160 Sq.mt."
The Carpet area for MIG - II is restricted "up to 150 Sq.mt." The Carpet area for MIG - II is increased to "up to 200 Sq.mt."

The enhancement in carpet area will be effective from the date the CLSS for MIG had become effective i.e. 01.01.2017. The scheme will help to improve our priority sector housing loan portfolio and achieve the assigned targets by popularizing the schemes benefits.

With a view to bringing convergence of the Priority Sector Lending guidelines for housing loans with the Affordable Housing Scheme, and to give a filip to low-cost housing for the Economically Weaker Sections and Low Income Groups, the housing loan limits for eligibility under priority sector lending has been revised to 35 lakhs in metropolitan centres (with population of ten lakh and above), and 25 lakhs in other centres, provided the overall cost of the dwelling unit in the metropolitan centre and at other centres does not exceed 45 lakhs and 30 lakhs, respectively, The revised guidelines shall come into effect from the date of RBI Circular dated as 19,06,2018,

4. To Improve the lending under Education loan in priority

a) To promote the skill development loans under priority sector lending under MSME our Bank has approved for implementing CGFSSD Credit Guarantee Fund Scheme for Skill Development, We have introduced/ implemented the following schemes during the year 2016-17,

Board has accorded approval for implementing the Credit Guarantee Fund Scheme for Skill Development, Government of India has approved credit guarantee funds to promote skill development loans, The fund/scheme will be managed and operated by National Credit Guarantee Trustee Company Ltd, (NCGTC) which is a wholly-owned Trustee Company of Department of Financial Services, Ministry of Finance, GOI.

Salient features

The credit guarantee will be available for skill development loans up to 1,50 lakhs (Rupees One Lakh Fifty Thousand Only) extended without any collateral security and / or third party guarantee, Such loans should confirm to the IBA model scheme for vocational education and training,

• Annual guarantee fee of 0,50% p,a, on outstanding loan amount can be absorbed by the banks,

• The maximum interest rate to be charged by Bank is MCLR plus spread up to maximum of 1,50%,

• The guarantee would be available for 75% of default which would be settled, on claim, in one go after the Bank submits a certificate stating to the effect that all avenues of recovering the amount in default have been exhausted, that there is no further scope for recovering the default amount and that the claim is found in order and complete in all respects,

b) To Promote Educational Loans under priority sector CGFSEL (CREDIT GUARANTEE FUND SCHEME

FOR EDUCATION LOANS (CGFSEL) schemed has been introduced,

Government of India through Ministry of Human Resource Development, Department of Higher

Education has notified the Credit Guarantee Fund Scheme for Education Loans (CGFSEL) vide Gazette Notification No, 18-1/2013-U,5 (Vol, III) dated September 16, 2015 under the Trust Fund, Credit Guarantee Fund for Education Loans (CGFEL), The Fund and the Scheme will be managed and operated by National Credit Guarantee Trustee Company Ltd, (NCGTC) which is a wholly-owned trustee company of Government of India, Our Board has approved the scheme for implementing the same in our Bank and Authorized official has signed the undertaking with NCGTC,

Salient features of the scheme are as follows:

1, The credit guarantee will be available for education loans up to 7,5 lakhs without any collateral security and third party guarantee, Such loans should conform to the "IBA Model Educational Loan Scheme for pursuing Higher Education in India and Abroad",

2, Annual Guarantee Fee will be 0,50% p,a, of the outstanding loan amount which would be absorbed by the banks,

3, The maximum interest rate to be charged by the Bank on Education loan shall be MCLR plus up to 2%,

4, The guarantee cover would be available for 75% of the amount in default which would be settled as under:

a) 75 per cent of the guaranteed amount will be paid on preferring of eligible claim by the Bank, within 30 days, subject to the claim being otherwise found in order and complete in all respects,

b) The balance 25% of the guaranteed amount will be paid after obtaining a certificate from the Bank that all avenues for recovering the amount have been exhausted,

CREDIT CARDS

A robust system as per international standards is in place for credit card operations in the Bank, Bank is issuing globally valid Platinum and Gold credit cards in association with the Visa International Service Association (VISA), The end to end activity of credit card operations is managed by a well experienced vendor and closely monitored by the Bank, All credit card processes, such as online authorization, cardholder alerts on the credit card activities are automated and the system is functioning smoothly, The core activities like sourcing and sanctioning of applications are managed by the Bank and non-core activities are outsourced to a vendor, 24/7 customer care center is in place to assist the cardholders instantaneously, Regulatory guidelines pertaining to credit card operations are complied with,

CREDIT MONITORING

In order to ensure safety and quality of credit portfolio, Credit Monitoring Team plays a key role in the post sanction credit process such as, timely and orderly dispensation of credit, security creation, account management, monitoring the conduct of the assets, quality of asset portfolio, safeguarding securities charged to the bank, reporting of irregularities and adherence to terms of sanction through continuous liaison with the branches. This team helps to strengthen the post sanction activities in the weak prone areas and plug the gaps. Remedial measures are taken proactively to prevent slippages. A 3-tier monitoring process is available in your bank commencing from the branch to the Region/Central office levels. All Management Information systems are in place and the data automation is done in most of the critical areas.

Detailed guidelines and well defined procedures as amended from time to time as per the regulatory guidelines / directives of Board on the process flow for credit disbursement / administration are put in place by the department.

BUSINESS DEVELOPMENT AND PLANNING

This department is serving as a research team, in introduction of new products/business lines designed on the basis of a broad assessment of market trends to satisfy growing needs of customers. It also acts as an effective coordinator between the Management, various regional administrative offices and the branches which are the business generating units.

The department is also responsible for implementing the RBI/ BCSBI guidelines on customer service and management of complaints.

PUBLIC RELATIONS AND PUBLICITY

It is very evident that the existence of the bank has little value without the existence of the customer. The key task of the bank is not only to create and win more and more customers but also to retain them through effective customer service. Customers are attracted through promises and are retained through satisfaction of expectations, needs and wants. Marketing as related to banking is to define an appropriate promise to a customer through a range of services (products) and also to ensure effective delivery through satisfaction. Bank had consciously kept a tight leash on our expenditures during the last financial year. To ensure that the bank continues its publicity and marketing efforts, despite the financial limitations, it concentrated on localized and regional initiatives in reaching out to its customers. As a part of its community involvement, bank participated in and encouraged local events and functions thereby growing with the society,

BANKS OPERATIONS AT SABARIMALA

Your Bank became the principal bankers to Travancore Devaswom Board in late 1970s. Your bank accepted to become the Banker to Lord Ayyappa and the temples administered by TDB in a spirit of public service. Since then the Bank has been extending the best of services to the TDB and other temples under TDB by establishing ATMs and branches in their premises.

Bank also handles prasadam distribution counters at Sabarimala Sannidhanam, Pampa and Erumeli during the season.

THIRD PARTY PRODUCTS DISTRIBUTION

We started the year by restructuring and rechristening the Third party department of our bank as Associate product department.

FY 17-18 was a kick start year for the department after a long gap. The department reconstituted itself and we started operation for with one life insurance partner and one general insurance partner.

In less than 4 month we expanded by adding new partners. We signed up with

Life Insurance

Bajaj Allianz life Insurance Co. Ltd.

Canara HSBC OBC Life Insurance Co. Ltd.

DHFL Pramerica Life Insurance Co. Ltd.

General Insurance

Bajaj Allianz General Insurance Co. Ltd.

In Mutual Fund front, we have empanelled with almost all the leading Fund Houses of India.

Though we started the year slow we could manage to source 44.80 Cr. of premium in Life insurance, 4 Cr. of premium and general insurance, 150 cr of AUM in Mutual funds and 30000 SIPs in FY 17 -18. The department is also given the responsibility of managing Locker sales.

The department could in generate a great amount of enthusiasm among the same branch staff and could manage to generate 14.50 cr of revenue for the bank.

Sovereign Gold Bonds

Government of India has issued Sovereign Gold Bonds in various tranches to individuals residing in India, Trusts, Charitable Institutions and Universities in India. The Bonds issued in the form of Government of India Stock in physical and Demat form.

The Bonds shall be denominated in units of one gram of gold and multiples thereof. Minimum investment in the Bonds shall be one gram with a maximum limit of subscription of 4 kg for individuals, 4 kg for Hindu Undivided Family (HUF) and 20 kg for trusts and similar entities notified by the government from time to time per fiscal year, provided that:

a) Annual ceiling will include bonds subscribed under different tranches during initial issuance by Government and those purchased from the secondary market;

b) The ceiling on investment will not include the holdings as collateral by banks and other financial institutions.

During the FY 2017-18, our Bank has sold 0.04 million grams.

FOREX BUSINESS

FOREX Business is one of the most important focus areas of the bank in deposit mobilization and exchange earnings. At the end of the year 2017-18 Bank had Rupee Drawing arrangement (RDA) with 6 exchange houses under the DDA Procedure and 6 exchanges House under Speed Remittance Arrangement.

The Bank earned 5.22 Crore exchange income during 2017-18.

The average yield on investment for the year ended March 31, 2018 was 6.48% on the average investment of 4513.66 Crores.

During the year, the Bank had booked 10.83 Crore profit by sale of investments (including 6.24 Crore profit by sale of securities from HTM category amounting to FV 625.00 Crore). Sale from HTM category is more than 5% of the investment at beginning of the year.

Investment under HTM is valued at carrying cost. Its premium is being amortized at Constant Yield Method and is charged to P/L account.

CENTRAL PROCESSING CENTRE

Achievements of CPC for the financial year 2017-18

• Started dispatching Combi kit and Reissue cheque books from Vendor (Seshaasai Chennai) directly to Customers which was earlier dispatched to CPC and from CPC to customers. This helped us to reduce TAT from 8 to 9 days to 3 or 4 days.

• Reduced in salary cost of one out source staff (90000 per annum) and courier charges.

• Reduced destruction % of cards and cheque books at overseas due to follow up with branches regarding address confirmation and Post/Pre dispatch verification from CPC which results in reduction of overseas courier cost.

• Introduced new process of Dispatching ATM cards and cheque books pertains to same customer in single envelope resulting courier cost especially to the overseas dispatches.

• Introduced Automation process of Cheque book Reissue process. Automated Cheque GEFU rejected report introduced (helps to avoid manual intervention to find out rejected cheque series which was time consuming).

• Initiated for opening speed post National Account Facility to get maximum discount. Presently discount is for individual BNPL account and for NAF all BNPL account will be clubbed and treat as ingle account.

• Introduced dispatch Alert to customer post dispatch of debit cards.

• One of the stake holder in the implementation DCAMS. With the introduction major work in account opening shifted to RPC from CPC which paved the way to transfer of 8 clerks to different RPC and their by expense of CPC reduced to 33.60 lakh per annum.

• Region wise support team was setup in CPC when DCAMS was introduced.

• Tallied CMS routing account which was pending for reconcile for past three years.

• 51 SIPs canvassed by team CPC during BIG day campaign.

• Audit comments are reduced to 7 from 11000 for accounts opened up to 30.06.2017.

• Renewed 1564 SOD accounts with 2600 limits.

• Collected 40 lakh income from NPCI related activity,

• Take over of Bulk uploads of Kerala Region from RPCs to CPC.

• Introduction of SGB loans and Physical IPPO/ASSBA service.

INFRASTRUCTURE MANAGEMENT

Bank has adopted optimum measures to curtail rental and operational expenditure. Bank has undertaken shifting of branches to new premises as a part of rent reduction and facelift. During the financial year Bank has shifted its branches to new premises at Gurgaon, Pathanamthitta, Bhopal, Mavelikkara and Kakinada.

Infrastructure department takes care of management of Premises, Fixed Assets, Equipments, Security aspects etc. and getting coordinated through Regional Offices.

CURRENCY CHESTS

"Bank is having two Currency Chests, one attached to Pushagiri Branch, Thrissur and the other one attached to Attukal Branch, Thiruvananthapuram. Both the Chests are equipped with state of the art machines for currency counting, sorting and counterfeit detection".

ALTERNATE CHANNELS ATMs

Bank has deployed 346 ATMs across the country to cater to the requirements of the customers. Bank has introduced many cost effective measures during the year, there by streamlined the ATM operations.

With a view to further bring down the Monthly Management Fee on ATMs, Bank migrated the cash loading and FLM (First Level Maintenance) activities of 17 Onsite ATMs from CRA to branches, thereby saving an amount of 1,05,400/- on a monthly basis. As on March 2018, there were 189 ATMs handled by the branch for cash loading and FLM.

With a view to bringing down the operational cost on ATMs, Bank has re-deployed 19 low hit ATMs to more viable locations thereby saving the operational cost of ATMs. This has directly contributed to the Banks profitability,

Following Value added services have been introduced through ATMs to enhance the customer service

a. Aadhaar Seeding (offline)

b. Account Statement Request

c. Cheque Book Request

d. Mobile Banking Registration

e. Green Pin

Introduced Green Pin facility in the ATMs, a step towards paperless banking, which is a convenient way for the customers to generate the ATM/Debit Card PIN securely and instantly, This helps to avoid the delay in obtaining the physical PIN mailer and to enhance the customer delight. Further, the Bank can reduce cost related to generating the ATM PIN and expenses related to the postal charges for sending the PIN mailers to customer address.

Bank has completed calibration of lower denomination and new currency denomination (50s & 200s) in 24 locations. This has helped to increase the hits and attract more acquiring footfalls.

POS

Bank has launched Point of Sale (PoS) business in the FY 2013-14, as a part of merchant acquisition service. Compared to the previous year, the total number of transactions increased to 1227833 as on March 31st 2018. The PoS service helped to acquire new customers and to increase the CASA value, which contributed to the Banks profitability,

The following value additions were introduced in the FY 2017-18:

• The latest version Terminal Models are made available to our customers which includes mPoS, Digital GPRS, Paper GPRS and PSTN PoS.

• Bank has introduced Cash@POS - A Mini ATM feature for allowing merchants to tender cash after swiping customers debit card.

• Bharat QR based payments has been enabled in POS to make the device a one stop payment solution.

• New POS terminals can accept Rupay/Amex (on GPRS devices)/Visa/MasterCard/Maestro Transactions.

• Option for EMI conversions of high value purchases on GPRS PoS has been launched.

We have introduced PoS referral model (income sharing), which helps to lower the risk & loss to the Bank, as all the disputes will be handled by the service provider.

Debit & Gift Cards

For avoiding frauds, the Bank has introduced the process of verifying VBV registration through Customer Care, by calling the customers who have successfully completed the Debit Card VBV Registration.

As per the RBI guidelines, the revision in the maximum amount to be loaded in gift card is implemented as follows:

• For individual applicants, the maximum amount to be loaded in gift card is reduced from 50,000/- to 10,000/- and maximum number of cards to be issued per customer is reduced to Ten (10) Numbers aggregating to 1.00 Lakh per annum per customer.

• For Corporate Customers, maximum loadable amount is 5,000/- per card and shall not exceed the total value of 50.00 Lakhs per annum with a maximum number of 5000 cards per customer.

FINANCIAL INCLUSION AND BUSINESS CORRESPONDENTS MODEL

Financial inclusion is delivery of banking services at an affordable cost (no frills / Basic Savings Bank Deposit Accounts) to the vast sections of disadvantaged and low income group. Our Bank has initiated number of measures to promote financial inclusion widely, State Level Bankers Committee (SLBC) and Reserve Bank of India had allotted four villages in Kerala and three villages in Tamil Nadu for the purpose of financial inclusion activities.

As on 31st March, 2018, there were 25 Business Correspondents in various parts of Kerala and Tamilnadu.

Business Correspondents have actively participated in the following Campaigns:

• Actively Sourced Loan products and Third Party products viz. Life Insurance, General Insurance and Mutual Funds.

• As on 31.03.2018 BCs have sourced 40464 Accounts with CASA balance of 724.00 Lakhs, 162 active FDs amounting to 201.6 Lakhs and 178 RDs with cumulative balance of 30.1 Lakh.

• 39000 Rupay Debit Cards have been issued to our Financial Inclusion customers, who have opened BSBD accounts (PMJDY) through Business Correspondents. These Rupay Debit Cards can be used in the micro ATMs (TABs operated) through Business Correspondents as well as in ATMs.

• Your Bank has been honored with Certificate of Recognition, at a premiere function held at the launch of ‘Financial Inclusion Casebook on 19th January, 2018. The Program was organized by ‘Governance now, Indias premier governance and public policy magazine from SAB TV group. The Certificate was awarded as a recognition to our effort in popularizing the cashless transaction model in a big way and banks contribution to the development of Financial Inclusion measures in our country, Its an acknowledgment for digital financial services of our Bank to empower the beneficiaries.

We are happy to inform you that our Bank had conducted a whole week awareness programme in connection with the Financial Literacy Week from June 5th to June 9th , 2017. The metro, urban and semi urban branches have conducted customer awareness activities within the branch premises and educated the customers about the four broad themes viz; KYC, Exercising Credit Discipline, Grievance Redressal and Going Digital (UPI and *99#). The posters related to Financial Literacy Week have been displayed in the notice board for public awareness. All the rural branches conducted awareness camps on Financial Literacy to the general public and customers of different segments of the society, The Financial Literacy Centres also conducted Camps on all the days during Financial Literacy Week, We are taking this opportunity to express the sincere gratitude towards all Regional Heads, Branch Team, RO Team and IT Department for the support rendered towards conducting the Financial Literacy Week successfully,

• Rural Branches:

Bank has total 21 Rural Branches across India have conducted more than 25 awareness activities for the customers and public,

• Financial Literacy Centres:

Bank has four Financial Literacy Centres in Kerala State, All the FLCs conducted daily camps for the general public and customers,

• Urban and semi urban branches across the country have communicated the four broad themes for the Financial Literacy week to the customers by distributing flyers,

• ATM screens were displayed with four broad themes during the Financial Literacy week,

Others

Certification for acceptance of Japan Credit Bureau (JCBI) / Union Pay International (UPI) Cards at NFS ATM Network has been obtained,

CORPORATE WEBSITE

• Bank maintains its corporate website (www,dhanbank,com) with a dedicated internal team,

• The website is updated on a daily basis with product updates, information to customers, latest news while also ensuring availability of information as required by regulators in an easy fashion,

• The corporate website has approximately 1,82 lakh page views / hits for the year,

PAYMENT GATEWAYS

Payment gateway throws wider options for the acceptance of payments and a key component to do business and accept online payments, Payment gateways allows multiple payment options like Credit or Debit Cards of Master, Visa, Maestro, Diners, AMEX, Rupay etc, Currently our Bank has integrated 8 payment gateways in online banking covering almost 95% of online merchants/service providers,

MOBILE BANKING/PAYMENTS AND SMS BANKING

Interbank Mobile Payment Service (IMPS) is an instant interbank electronic fund transfer service through mobile phones, IMPS facilitate customers to use mobile instruments as a channel for accessing their banks accounts and remitting funds there from, Bank is a member of NPCI and is listed for offering IMPS services, The users shall be able to receive funds via IMPS, IMPS can be done from any user of other bank via Mobile or Internet as their Banks IMPS function availability, Bank has also launched Phase 2 of Mobile Banking which includes m-Commerce, Bill Payment, Credit Card Payment and Debit Card blocking/Card/ PIN reissuance requests via Mobile,

NACH (NATIONAL AUTOMATED CLEARING HOUSE)

NACH is owned by NPCI (National Payments Corporation of India) and promoted by Finance Ministry of India, The main objective of this system to execute DIRECT CASH TRANSFER SCHEME or any same kind of scheme to the eligible citizens of India based on AADHAAR CARD NUMBER [Aadhar Based Payment System] or to execute the same scheme to Non-AADHAAR CARD Holders also; based on bank account number [ECS & NACH-Debit/Credit],

Your Bank has become beneficiary / destination bank to receive subsidy to the customer account based on the Aadhaar Number or Bank Account Number, Your eligible customers can receive funds from the government agencies under the respective schemes to their accounts in our bank, Your Bank has already started receiving direct benefit transfers into accounts of customers who have provided their Aadhaar numbers for linkage to their accounts, As part of the NACH operations for digitising the ECS management - both Mandates and the transactions - NPCI has introduced Mandate Management System [MMS],

Information Technology Department Highlights of Developments during FY 2017-18

The major events that happened in various projects during the FY 2017-18 are summarized below:

• Towards reinforcing our customer service and safeguarding the customer data, especially on the background of increased digital transactions, we have further strengthened our network equipments and monitoring of our information assets with special focus on uptime management,

• Our systems showed good resilience against serious malware attacks consequent to effective data security protection mechanisms, patch maintenance and pro-active end point protection especially during occasions when few organizations were badly hit by the attack of ransomware- wannacry,

Daily NPA Identification and reverse flagging of NPA status to Core Banking System

Bank has started identification and flagging of NPA status on 91st day of delinquency from 01st March, 2018, This change has helped the Bank to align to the compliance to income recognition and asset classification norms. Further, it helps the branch to assess the position regarding asset quality on real time basis.

• Automation of GST return preparation

Consequent to the introduction of GST in our nation, Bank has automated GST return preparation collating data from core banking systems and other channels.

• New application for Loan origination

Towards a better tracking and MIS on Loan origination process as well as statutory / internal reporting, a new application is developed; the first phase is launched in March 2018 covering the gold loan portfolio, the largest with respect to the number of accounts.

• e-KYC services using Aadhaar Authentication

We have introduced the necessary technology platform to comply with the regulatory directions to perform e-KYC authentication of resident individual customers who submits Aadhaar as KYC document before on-boarding. For existing resident customers, demographic authentication is performed as well.

• Aadhaar Seeding

As per the regulatory guidelines to capture the Aadhaar numbers of all existing relationships, we have facilitated an online portal so that our customers can seed and link their Aadhaar numbers with their accounts maintained with the Bank. Such seeded Aadhaar numbers would be subjected to demographic authentication before actually linking with the respective customers account numbers. Using this facility, the customer can conveniently register their Aadhaar Number without visiting their home branch.

• Daily Advance Activity Recorder

With a view to have focused approach towards building robust advance portfolio we have developed an in-house web based system to capture the lead details and its related Advance MIS.

• Personalised Debit Card

We have extended the popular personalized debit card option, to all Savings Bank customers which were hitherto available only for special savings bank products. Through Banks website, customers can upload his/her photo to personalize their debit card.

• Customer Acquisition & Management Software

For meeting UCIC/AML requirements as per RBI guidelines, we have implemented an application named DCAMS (Dhanam Customer Acquisition & Management System) that went live with full branches on 15.07.2017 with modules for Customer Creation, KYC and Service Requests with ability to capture digitalised images.

• Enhancements in Retail Internet Banking

Banks internet banking system has been enhanced with the following facilities:

1. BBPS (Bharat Bill Pay System)

Bharat Bill Pay System (BBPS) was released to Retail Internet Banking customers on 10th April, 2017. By the introduction of this facility our Net Banking customers can perform various bill payments facilitated by NPCI through our Net Banking platform.

2. Online closure of TD/RD

Through this online facility, customers can close the FD (whose receipt is not printed)/RD without visiting the branch.

• Enhancements in Mobile Banking

Bill Pay Module has been released for Android, IOS & Windows version and made available to Mobile Banking customers on 28th November, 2017. Through this facility, our Mobile Banking customers can perform various bill payments through our Mobile Banking platform.

INSPECTION DEPARTMENT

Department has introduced audit software (eTHIC) for Risk Based Internal Audit (RBIA) effective from September 2017. It is a web based application which enables risk-free auditing, effortless status tracking and comprehensive coverage of the entire audit life cycle. By implementing the audit software, adequacy and effectiveness of the internal audit has been improved.

Department has conducted training programme to all the branch inspectors and other staff at audit department to enable them to conduct the RBIA and monitoring of the audit process in the automated platform. Inspector of branches, internal concurrent auditors and ARCOs at regional offices were given external training at SIBSTC, Bangalore.

Department has reviewed Inspection & Audit policy, Modified version covering the entire audit activities, objective and organizational setup and working of inspection department, were approved by the board.

Department has conducted an external review of the internal audit function of the bank. Review covered effectiveness of internal audit functions, compliance to the regulatory guidelines, review of audit formats, risk assessment methodology, identification of material risk area, process, scope and coverage of audit, inspection policy, inspection manual etc. Bank will implement the suggestions for improvement in the system in a time bound manner.

VIGILANCE DEPARTMENT

The Vigilance department of the Bank is responsible for implementing policies laid down in this regard by the Government of India, RBI and the Banks Board and monitoring it periodically, The watchfulness enforced by the Vigilance function is required to ensure that Public money is not misused by delinquent elements, The Department aims to attain high levels of integrity in Systems and Procedure by creating Awareness and developing Commitment and Probity at all levels, contributing towards an organization with high standards of efficiency and professionalism,

Preventive Vigilance is one of the major domain of the Department, Preventive Vigilance focuses on taking pro active measures through Putting in place best Practices and Procedure, Strict implementation of KYC/AML norms, inculcating an ingrained habit of alertness among employs, periodical trainings to Employees and through customer awareness programmes,

All fraud related issues are handled by Vigilance Department as per regulatory norms, which includes Investigation on frauds/ Serious irregularities and timely reporting of frauds to the RBI and The Board, The Department is responsible for conducting investigation, wherever necessary, based on the complaint/ input from the Whistle Blowers, It also conducts surprise check at branches to check the compliance level of process and security norms, The department try to identify the system flaws, if any, and suggests control mechanism and remedial measures to avoid recurrence of incidence,

INFORMATION SECURITY

Bank has established a robust information security framework for securing its IT infrastructure and systems, The Bank has an Information Security Group (ISG) functioning at Corporate Office, ISG is primarily responsible for identifying, assessing and proposing mitigation for every information-security-related risk, This responsibility is carried out by interacting with various committees and stakeholders and preparing plans, proposals, policies, procedures and guidelines, ISG is also responsible for the Education, Awareness and Promotion of Information Security initiatives across the bank,

As per the RBI guideline on Cyber Security, Bank has formulated Cyber Security Policy and Cyber Crisis Management Plan, Also Bank has established Security Operation Centre to detect and respond to Cyber incidents, Bank has provided awareness sessions to staff on various cyber threats and the mitigation steps, The Bank has been implementing guidelines by RBI on Cyber Security Framework,

LEGAL

The Bank has its credit a well defined Legal Policy which defines and takes care of the functions of the Legal Department of the Bank inter-alia the following:

• to devise ways and means to suggest and implement preventive legal measures in tune with the statutory provisions, regulatory prescriptions and judicial expositions,

• to suggest best legal practices in documentation and legal steps to be initiated from time to time to secure the interests of the Bank,

• to minimize the legal risks in the decision making process of the Bank in general and other Departments of the Bank in particular, thus mitigating the legal and operating risks in a time bound manner,

The Bank is also having a well structured and defined Manual on Documentation, updated from time to time, in tune with the statutory changes and judicial decisions, Legal Department takes care of the updation of legal knowledge among the field functionaries by circulating an internal journal called "Legal Pro" which conveys latest judicial decisions and statutory changes affecting bankers, Legal Department of the Bank is well equipped and has put in place all the necessary and statutory checks and balances to protect and safeguard the interests of the Bank,

KYC - "KNOW YOUR CUSTOMER" AND AML - "ANTI MONEY LAUNDERING"

The Bank has attached great importance to Know Your Customer and Anti-Money Laundering, The transactions of all the branches of the Bank have been brought under the ambit of AML software, The alerts generated from the AML software are monitored on a daily basis and suspicious transactions are reported to FIU- India, Apart from that, all monthly reports like Cash Transaction Report (CTR), Non Profit Organization Transaction Report (NTR), Counterfeit Currency Report (CCR) and Cross Boarder Wired Transfer Report (CBWTR) are also submitting to FIU-IND through their online gateway,

Transactions processed through the Core Banking Solution is monitored for identifying the transaction of suspicious nature, if any, using Infra Soft Technologies Ltd, - AML application, to discharge the obligation cast on the Bank under Prevention of Money Laundering Act, New software from M/s, Ospyn Technologies P, Ltd, is made use of for customer on-boarding, which takes care of the need for compliance of various regulations under PML Rules/ Banking Regulation Act, Income Tax rules etc,

Bank has also got registered with Central KYC Registry and started the upload of the KYC records of all Individual relationships entered into from January 2017,

RISK MANAGEMENT

Bank has adopted an integrated approach for the management of risk, Effective internal policies are developed in tune with the business requirements and best practices, which address the risk management aspects of the different risk classes namely, credit risk, market risk and operational risk, The Policies, procedures and practices adopted in the Bank are benchmarked to the best in the industry on a continuous basis and the Bank has a clear goal to reach an advanced level of sophistication in risk management,

The Banks risk management structure is overseen by the Board of Directors and appropriate policies to manage various types of risks are in place. The Bank has a Board level subcommittee for Risk Management. At the executive level, the Bank has a Risk Management Committee of Executives (RMCE), Asset Liability Committee (ALCO), Credit Risk Management Committee (CRMC) and Operational Risk Management Committee (ORMC). These Committees along with the Investment Committee and the Credit Committees ensures adherence to the implementation of the risk management policies and controlling credit commitments on behalf of the Bank within prescribed limits.

The risk management policies like ICAAP (Internal Capital Adequacy Assessment Process) Policy, Credit Risk Management Policy, Asset Liability Management Policy, Operational Risk Management Policy and Integrated Risk Management Policy were comprehensively reviewed during the year. The Stress Testing Policy of the bank formulated to define different stress scenarios according to the RBI guidelines. The impact of various risks under stress situation on the profitability of the Bank and on the CRAR of the Bank are analyzed and reviewed periodically. The Bank has also developed various other Risk Policies such as Reputation Risk Management Policy, Strategic Risk Management Policy, Stressed Industry Risk Management Policy, Key Person Risk Policy, Fund Transfer Pricing Policy, Model Risk Management Policy, RCSA document and Risk Appetite Framework for better monitoring of Risk Management. The Credit Policy and Integrated Treasury Policy are also reviewed annually,

BASEL II and Basel III guidelines

The Bank is Basel II compliant and assesses the capital adequacy under the New Capital Adequacy Framework on a quarterly basis as per RBI guidelines. Under Pillar I, the Bank computes capital for credit risk under Standardized Approach, for market risk under Standardized Duration Approach and for Operational Risk under Basic Indicator Approach. Under Pillar II, the Bank has put in place the Internal Capital Adequacy Assessment Process framework for integrating capital planning with budgetary planning and to capture the residual risks which are not addressed in Pillar I like credit concentration risk, interest rate risk in the banking book, liquidity risk, earnings risk, strategic risk, reputation risk etc. Bank has adopted a common framework for additional disclosures under Pillar III for adhering to market discipline of Basel II and Basel III guidelines. This requires the Bank to disclose its risk exposures, risk assessment processes and its capital adequacy to the market in a more consistent and comprehensive manner. The Bank has taken necessary steps to comply with the Guidelines on implementation of Basel - III capital regulations in India in a phased manner as directed by the RBI.

CREDIT RISK

The Bank is exposed to credit risks through its lending and investment activities. The Bank assesses the credit risk at the portfolio level as well as at the exposure or counterparty level. It has a robust credit risk management framework comprising of the three distinct building blocks namely Policy & Strategy, Organisational Structure and Operations/Systems.

The Credit Risk Management policy, which is reviewed annually deals with various areas of credit risk, goals to be achieved, current practices and future strategies. It further details credit risk identification, measurement, monitoring/controlling mechanisms and concentration risk. The credit risk management aims at ensuring sustained growth of healthy credit portfolio. Bank has stipulated minimum standards for origination, benchmarks for certain key financial risk parameters, and has a multi-tier credit approval system based on exposure, rating and transaction risks. Exposure caps in terms of individual, group, industry/sector and segment level are defined to control risk concentrations and to ensure a fairly diversified spread of credit portfolio.

Bank has developed comprehensive risk rating system that serves as a single point indicator of diverse risk factors of counterparty and for taking credit decisions in a consistent manner. Bank currently has 28 rating/scoring Formats covering Corporate, SME, Traders, NBFC, Small Loans, Non-SLR Investments, inventory/ construction finance, asset buy out, individuals and micro credit. All these models were reviewed and revised during the year based on the portfolio specific characteristics of the bank, best practices prevalent in the industry and market scenario. All exposures of 2 lakhs and above will come under the purview of rating.

The Bank has put in place Rating Migration Analysis of all credit exposures of 1 crore and above on a quarterly basis. Rating migration analysis covering all advances above ?25 lakhs is also being conducted on half yearly basis. Credit risks inherent in investments in non-SLR Bonds are being assessed independently by mid office treasury using the internal rating models. The Bank has been conducting industry analysis / study as a proactive credit risk management practice, which would facilitate an effective review of distribution of credit portfolio across various industries/sectors, assessing the degree of credit concentration, basis for selection of industry to which increased exposure can be considered and provide necessary information to increase/ hold/decrease exposure.

The CRMC which is involved in implementing Credit Risk Management Policy and controlling credit commitments on behalf of the Bank consists of the Banks senior management including MD & CEO as members.

MARKET RISK

Market Risk is defined as the possibility of loss to a bank caused by changes in the market variables. Market risk arises from changes in interest rates, foreign exchange rate, equity prices and commodity price. Small changes in these market variables can cause substantial changes in income and economic value of the Bank. Besides, market risk is also about the banks ability to meet its obligations as and when they fall due, which can vary with market conditions.

Liquidity risk which is the risk to a banks earnings and capital arising from its inability to timely meet obligations when they come due without incurring unacceptable losses. Liquidity obligation of the Bank arises from withdrawal of deposits, repayment of borrowed funds at maturity and meeting credit and working capital needs. The primary tool of monitoring liquidity is the mismatch/ gap analysis, which is monitored over successive time bands on a static basis. The Bank is generating daily Structural Liquidity Statement which is used by the Treasury Department for effective liquidity management. Apart from the above, the trend in the major liquidity ratios are measured and analyzed on a weekly basis. The Bank also prepares liquidity projections on a weekly basis. Moreover, the funds readily available as a back stop to meet contingency situations are measured and analyzed on a continuous basis.

Interest Rate Risk is another major risk involved in market risk. It is the exposure of a Bank to financial loss through movements in interest rates. The immediate impact of changes in interest rates is on banks earnings due to change in Net Interest Income (NII). The change in net interest income in the event of adverse change in interest rates is measured in terms of EAR (Earning at Risk) using Traditional Gap Analysis. A long term impact of changing interest rates is on banks market value of equity (MVE) or Networth as the economic value of banks assets, liabilities and off-balance sheet positions get affected due to variation in market interest rates. The Bank measures the impact on EVE on a monthly basis using Duration Gap Analysis. Bank uses VaR limits in the trading portfolios to determine the potential loss on a 10 day holding period basis with a 99% confidence level.

The ALCO consisting of the Banks senior management is responsible for reviewing Banks liquidity position and ensuring/ adhering to the limits set by the Board. ALCO plays an important role in deciding the business strategy of the Bank in line with the Banks budget, Corporate Goals and risk tolerance levels decided by the Board having regard to the Capital Adequacy and Regulatory prescriptions.

OPERATIONAL RISK

Operational risk is the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. The Bank has a comprehensive policy on Operational Risk Management to ensure that all the operational risks within the Bank are identified, monitored and reported in a structured manner. The ORMC consisting of the Banks senior management including MD & CEO is responsible for the implementation of the Operational risk policy/strategy approved by the Board.

Every new product or service introduced is subject to risk review and sign-off process where all relevant risks are identified and assessed. To mitigate operational risks arising from frauds, the Bank has put in place "Fraud Risk Management policy". The above framework lays down the steps to be adopted for preventive vigilance. People risk is mitigated by implementation of directives laid down in operational risk, human resources and training policies. The risk of probable losses due to technical failures and business disruptions are mitigated through business continuity planning, adequate backup facilities, the existence of disaster setup and regular testing rolled out by the Department of Information Technology, Operational risk from external events, were brought down by transferring the risk outside the Bank by means of appropriate insurance cover.

Bank had rolled out the Risk Control Self Assessment (RCSA) to proactively identify emerging risks at operational level for devising mitigants at source itself during 2010-11 and has successfully completed RCSAs in majority of the branches and other business functions. Collation of Loss Events is also being continued as a measure to move towards The Standardized Approach for capital calculation.

COMPLIANCE

Banks Compliance Department, consisting of experienced officers headed by Chief Compliance Officer, is setup at Corporate Office, Thrissur. The main function of Compliance Department is to ensure strict observance of all statutory provisions contained in various legislations such as Banking Regulation Act, Reserve Bank of India Act, Foreign Exchange Management Act, Prevention of Money Laundering Act, etc. as well as to ensure observance of other regulatory guidelines issued from time to time, standards and codes prescribed by IBA, FEDAI, FIMMDA, etc. and also Banks internal policies and fair practices code. The activities of Compliance function is based on a well-defined Compliance Framework approved by the Board of Directors. Compliance function conducts compliance testing at various functional units and failures, if any, are brought to the notice of the Board of Directors.

The Bank moved to Risk Based Supervision (RBS), the revised supervisory framework of RBI, from the Financial Year 2015-16. Compliance Department facilitated the smooth transition to the new framework in a phased manner. For the Financial Year 2016-17, RBI conducted Inspection for Supervisory Evaluation (ISE), in connection with RBS, during August 2017 and the final report was submitted in October 2017. Bank complied with almost all major observations.

HUMAN RESOURCES

Bank has been taking steps constantly to increase the momentum of its growth, profitability and better customer service. Bank is continuously aiming to increase the productivity of the workforce and per employee business to achieve the desired objectives. The Banks employee strength, which was

2021 as on 31st March, 2017, has been reduced to 1884 as on 31st March, 2018. The number of Sales Executives including Business Development Executives also reduced to 82 as on 31st March, 2018 from 100 as on 31st March, 2017.

Bank has provided training to the employees on various areas to improve their efficiency to accelerate the growth. More thrust was given to training and majority of the employees was given at least one training programme during the year. 2636 employees were trained through in-house programmes and 159 employees were trained through external training programmes during the year. As part of e-learning initiatives, Bank introduced online Training program through "Finitiatives Learning India Pvt. Ltd (FLIP)", which has been well accepted by the employees. The online training was assigned to Branch Managers/Assistant Branch Managers in credit analysis and retail advances. This has facilitated self paced learning and helped to develop a learning culture among the employees. The feedbacks received from participants are really encouraging and build in confidence to grow the credit portfolio. Bank also as a regular practice conduct online exams to the employees. This is done on the basis of internal circulars/policies to imbibe the content.

Human Resources policies are systems of codified decisions, established by an organization to support administrative personnel functions, performance management, employee relations and resource planning. Monitoring and ensuring the strict compliance of policies enables strengthening and developing employee efficiency, morale and productivity. The Banks Staff Training College identifies the skill gap in employees productivity and up skill them to achieve the business goals. The Bank has a highly co-operative work force and the industrial relations have been very cordial during the year ended report.

CORPORATE SOCIAL RESPONSIBILITY

Bank continued the DLB-TMA scholarship programs for the deserving two MBA students seeking financial assistance to meet their educational requirements.

The bank had participated in the event, "TCS Fit4life Corporate Challenge" to promote awareness on physical fitness amongst the work force and to contribute towards a social cause. More than 130 employees from the Bank participated in the 10 kms marathon held on February 18th, 2018 at Kochi. Bank had won the Trophy for the highest number of female participation by a Corporate.

Border Security Force (BSF), which was formed in 1 965, is the Worlds largest Border Guarding Force serving our nation with utmost dedication and devotion. In the memory of our Martyrs, BSF had conducted a Half Marathon and a 5 km Run throughout the country on 22nd October, 2017. More than 50 employees from our Bank participated in the event so as to raise funds for the families of those Martyrs who had sacrificed their lives on duty while safeguarding our motherland.

INTERNAL CONTROL SYSTEM AND THEIR ADEQUACY

Internal controls

The Bank is having a full-fledged Inspection and Vigilance Department, which ensures adherence to the set rules and regulations by the Branches/Regional Offices/Departments at the Administrative Office. Internal Inspectors conduct inspection at regular intervals and such reports are placed to Audit Committee of Executives (ACE)/Audit Committee of Board (ACB) as the case may be. ACE/ACB reviews the reports and ensures that corrective steps are taken to rectify the lapses/irregularities pointed out.