ING Vysya Bank Ltd Merged Management Discussions

MACRO ECONOMIC AND BANKING INDUSTRY DEVELOPMENTS

The financial year 2013-14 was a challenging one in many ways. Economic activity stayed more subdued than expected, compounded by volatility in currency and interest rate markets. Gross Domestic Product (GDP) for 2013-14 has been estimated to grow at 4.7%, the second consecutive year of sub-5% growth. While Financial Markets stabilised in the second half of the year, although at a different level of interest rates and exchange rates than at the beginning of the year, economic activity has continued to remain muted.

The initial announcement by the US Federal Reserve in May 2013 tapering its asset purchase program had a large impact on India’s external account, reflecting in pressure on the currency. The Rupee briefly breached 68 Rupees to the US Dollar. The underlying macro economic conditions of high fiscal deficit, high current account deficit and an inflationary environment left India in a more vulnerable situation than most other countries. The Reserve Bank of India resorted to unconventional monetary measures to stem the slide in rupee and arrest speculative positions. The increase in the Marginal Standing Facility (MSF) rate by 200 bps, a larger corridor of 300 bps for policy rates and restricted access to repo windows caused a significant gap in both money market and bond yields. While liquidity was available in reasonable quantity, the cost of funds went up significantly across the system. But these measures helped stabilise the currency, with the Rupee stabilising between 62 and 64 for some time; more importantly they gave much required time for some structural measures to take effect.

As a part of addressing structural issues for the medium term, the Reserve Bank of India and the government initiated a series of measures. To control the current account deficit, curbs were imposed on gold imports and external remittances. Weak rupee helped in reducing imports and played some part in stabilising exports. By the time these measures had their full impact by the third quarter of last fiscal year, the current account deficit moderated to more manageable levels. In a effort to boost the capital inflows and mitigate the risk of potential portfolio outflows, an attractive scheme was announced for NRI deposits and bank borrowings. The RBI announced a subsidised swap window for long tenor FCNR deposits and to a smaller extent for foreign currency borrowings by banks, which together saw a net inflow of USD 34bio by November 2013, leaving the balance of payments in a slight surplus from an earlier estimated deficit.

The concerns on the fiscal side were also allayed by the third quarter. Even while expenditure controls could have had a impact on investments, the short term impact of this was positive for the fiscal deficit. Increased focus on tax collections helped the income side, even while the subdued economy made it more difficult to meet budget estimates. The net result was a lower than budgeted fiscal deficit for the year. The Government expects the 2013-14 fiscal deficit to be at 4.6% of GDP, lower than the budgeted 4.8% in the beginning of the year. The Interim Union Budget for 2014 -15 continued the commitment to fiscal consolidation with the fiscal deficit for 2014-15 targeted at 4.1% of GDP. While the deterioration in quality of fiscal austerity still remains a cause for worry, for the time being, the concerns on the fiscal side have been managed till a new government is formed in June 2014.

Inflation continued to be a concern for the Reserve Bank. Inflation and inflation expectations were elevated for most part of the year. The Reserve Bank of India moderated some of the unconventional monetary actions undertaken earlier in response to depreciating currency by about the end of second quarter, but in an approach markedly different from the earlier stand of growth revival, the monetary policy stance focused much more heavily on inflation moderation. Even as the monetary policy corridor was reduced from 300 bps to earlier normal of 100 bps, policy rates were hiked by 75 bps leaving rates at higher levels than before. As a consequence cost of funds in the system and costs for borrowers remained elevated for most of the year.

An important structural change of the monetary side was the introduction of Term Repos for government securities. These have been mostly for short tenors of 7 and 14 days, with some attempts for 21 and 28 days. A well established term structure in these securities could eventually lead to a more defined and accessible term structure for the system as a whole.

The RBI has also adopted an explicit medium term inflation target of 8% by January 2015 and 6% by January 2016. The reference index is increasingly shifting to the Consumer Price Index (CPI) from the earlier Wholesale Price Index (WPI). This has effectively defined the basic monetary policy stand for the near term, with significant rate reductions possible only in case of a sharper than anticipated fall in inflation or significant downside risks to growth. The underlying economy though hasn’t shown much revival even as there are signals that the slowdown has bottomed out. The policies of the new government to facilitate investment, the supply side management of inflation and the progress on fiscal consolidation will be critical for a sustainable economic recovery.

OVERVIEW OF FINANCIAL AND BUSINESS PERFORMANCE

During the financial year 2013-14, the Bank continued to grow its key businesses and revenues. The Bank reported healthy improvement in its financial, business and other operating parameters.

The Bank recorded a net Profit After Tax (PAT) of Rs. 6,579 million for the year 2013-14 from Rs. 6,130 million reported in the Previous year.

The Net Total Income of the Bank for the year grew by 16% to Rs. 26,203 million from Rs. 22,655 million reported during the Previous year. During this period, the Net Interest Income (NII) grew by 14% to Rs. 17,532 million from Rs. 15,386 million reported in the Previous year. Fee and Other Income increased by 19% to Rs. 8,671 million from Rs. 7,269 million. Operating expenses increased by 17% to Rs. 14,927 million from Rs. 12,728 million in the Previous year. The Cost to Income Ratio increased from 56% in the Previous year to 57% in the current year. Current year operating expenses included additional charge of Rs. 611 million on account of retirement provision. Adjusting for additional retirement charge of Rs. 611 million in FY 2013-14, the Cost to Income Ratio declined from 56% to 55%.

Total deposits of the Bank aggregated to Rs. 412,168 million. The Bank continued to focus on growing low cost deposits during the year. The Current and Savings Account (CASA) deposits increased from Rs. 134,351 million at March 2013 to Rs. 137,587 million at March 2014.

Total assets increased by 10% to Rs. 604,132 million from Rs. 548,364 million at March 2013. While Net Advances increased by 13% to Rs. 358,289 million from Rs. 317,720 million at March 2013, Net Customer Assets increased by 12% to Rs. 379,225 million from Rs. 337,892 million at March 2013.

During the year, the Bank raised equity capital of Rs. 18,360 million through a combination of qualified institutional placement (QIP) and Preferential issue to ING Group. The capital adequacy of the Bank as per Basel III stood at 16.76% as of 31 March 2014 with Tier 1 Capital ratio at 14.63%.

INTERNAL CONTROL SYSTEMS

The internal control framework of the Bank is based on the ‘three lines of defence’ model, which is a comprehensive risk governance framework that provides clarity on roles and responsibilities in terms of risk ownership and its management. Under this model: The Executive Board members, Senior Management and Business Managers who are the risk takers in the business collectively form the first line of defence. They are primarily responsible for the day-to-day management of risk in accordance with agreed policies, appetite and internal controls at operational level.

The second line of defence consists of all units / functions that are responsible for risk oversight and risk guidance in the Bank. These functions includes Credit Risk, Market Risk, Operational Risk, Compliance, Legal, Finance, Human Resource, etc. and is responsible for development of specific risk policies, risk processes and risk controls that are in line with the regulatory requirements and the agreed risk appetite.

The Internal Audit Department, which is independent of the risk and business functions, forms the third line of defence. They are responsible to provide an independent assurance of the design and effectiveness of internal controls over the risks.

The framework is supported with policies and minimum standards that are adopted and implemented uniformly across the Bank.

BUSINESS REVIEW

An overview of various business segments along with their key performance achievements in 2013-14 is presented below.

RETAIL BANKING

The key priorities for the Retail Bank are acquisition of new customers, ensuring we become the Primary Bank by meeting the financial needs of our customers, growing CASA & Retail Deposits and increasing cross-sell of all products offered by the Bank.

(i) Branch Banking

During the year the Bank opened 11 new branches across India, taking the number of branches and extension counters from 542 to 553. In terms of the mix of the branches, the network is fairly spread with 32% in Metro areas, 31% in Urban areas, 20% in Semi Urban and 17% in Rural locations. The Bank expanded its ATM network from 500 to 638 during the year.

During the year, the Bank added a dedicated vertical for the Institutional segment. This team is focused on acquiring and managing various institutional clients, including trusts, associations, clubs, societies as well as larger private limited companies.

The Bank also launched three new premium debit MasterCard variants. These new Debit Cards come with two unique features: a milestone-based rewards program and the facility to choose a debit card background from a gallery of images. We also launched EMV (Europay, MasterCard and VISA), a Chip enabled Debit Cards which provide a higher level of security.

The Bank underlined its focus on offering an easier banking experience by launching a state-of-the-art mobile banking platform for iOS (Apple) and Android phones. With cutting edge design, market leading functionality and a strong technology platform, the mobile app has been extremely well received by customers with nearly 35,000 downloads in a short span of time. The application allows customers to view their accounts, balances & transactions, transfer funds using National Electronic Funds Transfer (NEFT), Real Time Gross Settlement (RTGS) and Immediate Payment Service (IMPS), book/close fixed deposits, access their mutual funds, loans and demat accounts and more.

The Bank completed a partnership with Indian Railway Catering and Tourism Corporation (IRCTC) for online booking of railway tickets. This now permits customers of the bank to book rail tickets on the IRCTC website using ING Net banking or Debit cards for payment. Such initiatives have enabled the Bank to witness strong growth in online payment transactions.

During the year the Bank introduced "Invest Xpress", an innovative process of booking mutual funds over the phone. Through this initiative, the Bank has been successful in removing the infrastructure bottlenecks faced by customers in remote locations, making mutual fund investments easier and accessible to them. The Bank has also been able to reduce the paperwork and time taken for all customers to book mutual fund transactions.

The Bank also started offering a complete online trading solution to all its customers through a tie-up with Kotak Securities. With the new 3-in-1 Online Trading Account our customers are now in a position to do trades and invest instantaneously using their linked ING Vysya Bank & ING Demat account.

(ii) Business Banking (SME)

The Bank has traditionally focused on Micro, Small and Medium Enterprise business, partnering in their growth through decades. The Business Banking segment serves the needs of business enterprises with annual sales turnover of up to Rs. 1,500 million for both domestic and export credit requirements. Apart from regular working capital facilities, the Bank also offers structured products to cater to the needs of clients. This segment has also contributed significantly towards priority sector advances of the Bank. The clear focus, strategy, underwriting capability backed with a strong relationship and acquisitions team, has helped ensure a healthy and profitable growth in this segment.

(iii) Consumer Loans

The Bank’s consumer lending products include home loans, loan against commercial & residential property, loans for commercial vehicles & construction equipment, auto loans, personal loans, gold loans and education loans. Mortgage loans continue to be the largest portfolio in the consumer business and will continue to fuel the consumer loan portfolio. However during the year there was greater emphasis on loan against property. The personal loan business has grown steadily focusing mainly on salaried customers and will continue to have the same segmental focus.

(iv) Credit Card

The Bank has recently launched Credit Card that will be cross sold to existing customers of the Bank. This fills a gap in the overall product offering to our customers. The Bank has tied up with Master Card for the offering. Segments to be targeted include Salary and Savings Account customers, fixed deposit customers and Business Banking customers. The focus on internal customer base with strong policy norms will ensure that a profitable business is built up.

(v) Agricultural and Rural Banking (ARB)

The Bank has traditionally focused on Agriculture and Rural Banking (ARB), partnering with the farmers for their growth through the decades. ARB serves the farmers for all their needs spanning crop loans, investment loans and farm equipment loans, etc. Along with the regular revolving credit the Bank also offers the farmers a debit card (under KCC). This segment has contributed significantly towards direct agriculture which is a critical component of priority sector advances of the Bank.

The Bank has introduced farm equipment funding to its existing Kissan Credit Card (KCC) customer base. This business has started in Punjab and will be scaled up to other potential locations during the next financial year. Farm equipment financing has tremendous potential for growth as various factors like adoption of precision farming techniques, migration of agricultural workforce to urban centers, growing tractor industry, MNREGA scheme etc. are fueling the rise in farm mechanization.

The Bank has had its association with the MSME segment since its inception and has partnered their growth for nearly eight decades now. The ARB segment apart from serving the needs of the farmers serves the other MSE businesses in its catchment areas. The business covers the agriculture value chain apart from other business falling under the purview of priority sector. The good practices of clear focus, strategy, underwriting capability backed with a strong relationship team and support team will ensure that our portfolio continues to remain healthy.

Under the Financial Inclusion (FI) Programme, the Bank has promoted Rural Self Employment Training Institute (RSETI), Bagalkot as a co-sponsor. During the year RSETI has conducted 26 training programs and covered 683 beneficiaries, of which 591 are now employed. Since inception in 2003, RSETI has conducted 655 training programs, covering 24,385 beneficiaries of which 18,011 are now employed. The Institute has been graded as "AA" this year, which is the highest grading basis annual audit of all such institutes across the country & was felicitated by the Ministry of Rural Development, Government of India.

The Bank is actively participating in ABPS (Aadhaar Based Payment System) whereby beneficiaries can receive centrally disbursed funds directly into their linked bank accounts. The Bank has seeded 49,882 beneficiary account numbers this year under this scheme.

PRIVATE BANKING

Private Client Group is focused on building a strong foundation offering core banking, wealth planning, investment services, credit products, estate planning and investment banking. The aim is to offer entire suite of products for clients with minimum investable amounts of USD 1 million. The competitive edge lies in a strong advisory, product innovation and highly customized engagement. Private Client Group is looking to further strengthen the team in various centers as part of the growth strategy. The focus would continue to be on offering strong advisory services on a comprehensive platform.

WHOLESALE BANKING

The Wholesale Banking business (WSB) provides a wide range of banking products and services to India’s leading corporates and fast growing businesses. The fund-based products include working capital finance, term finance and structured finance facilities. The non-fund based products mainly consist of letter of credit, financial and performance guarantees etc. WSB’s fee-based high-value added products are cash management services, financial market transactions and structured hedge products, trade services, corporate finance and debt syndication advisory. The Bank also accepts rupee and foreign currency deposits from corporate customers.

The Wholesale Bank is organized into two overlapping groups, (i) Client Coverage and (ii) Products and Services. While the Client Coverage group is responsible for managing relationships with identified client sub-groups, the Products and Services group is responsible for product and service delivery to the Wholesale Banking client base. WSB’s customer segments are as follows:

(i) Large Corporates Group (LCG)

The LCG is responsible for managing relationships with large Corporates typically with sales turnover exceeding Rs. 15,000 million. The primary focus is to market High Value Added (HVA) products viz. Debt Capital Markets, Corporate Finance, Financial Markets and Advisory services.

(ii) International Clients Group (ICG)

ICG is a separate group to provide greater focus to servicing our multinational clients who have operations in India. The ICG currently services over 350 clients. This has enabled the Bank to bring seamless servicing capability, thus helping its global clients in their business in India. This group benefits from the global reach of ING’s network, which helps it in gaining access to ING’s core clients. While the whole range of the bank’s products are available to International Clients, a key focus for ICG is to be the main transactional banker to our clients resulting in being a stable source of liabilities and significant fee income. The business is currently present in 6 major cities.

(iii) Emerging Corporates Group (EC)

The Emerging Corporates clientele is serviced from ten cities within the Bank’s extensive network and focuses on managing relationships with manufacturing, processing and services sector companies with an annual sales turnover between Rs. 1,500 million and Rs. 15,000 million.

A wide range of products are offered to meet the needs of this business segment, with special focus on export credit, working capital finance, cash management services, term loans, non-fund based facilities like letters of credit, guarantees and structured finance products. In partnership with Retail and Private Banking, the EC group provides wealth management solutions, loans, advances, salary accounts, and allied services to the employees & promoters /directors of the companies. Debt Capital Market (DCM) & Corporate Finance (CF) launched to cater to the specific requirements of the EC segment has paid good dividends despite sluggish market conditions. Both the products helped EC team to tap new revenue streams.

Given the global reach of ING’s global network, EC also caters to the cross border needs of its clients in supporting their business requirements outside India via funding and advisory services. Whilst offering complete financial services solutions both at corporate as well as individual level, the EC segment also plays a substantial role in meeting the Bank’s export credit commitments.

(iv) Banks and Financial Institutions Group (BFIG)

The Banks and Financial Institutions (BFI) Group is responsible to leverage the business opportunities with Financial Institutions. The clientele includes international and domestic banks, non-bank finance companies, insurance companies and mutual funds. BFIG uses ING’s global expertise and offers a complete product suite which includes funding, trade, clearing and cash management, bond placements, loan syndications and Financial Market products.

FINANCIAL MARKETS (FM)

FM has integrated its offerings with other units of the bank to provide more comprehensive solutions to clients thereby strengthening the bank’s franchise. The FM unit in the Bank consists of four key units – FX Trading, Interest Rates Trading and Sales and Asset & Liability Management (ALM)

The FX and Rates Trading units focus on their chosen asset classes and have been active market makers internally and externally. These units have demonstrated agility and consistency in exploiting trading opportunities in volatile markets, while being prudent in managing risks.

The Sales and Relationship Management unit of Financial Markets has provided significant value to our client set. Our research, analysis and dissemination continue to get wide appreciation and have contributed to both enhancing relationships and furthering the business. In close co-ordination with the trading desks, sales desk offers solutions that are optimal for client needs. Equally importantly, Sales desks have provided efficient and seamless execution for all client transactions.

The Asset & Liability Management (ALM) Desk is also managed within the Financial Markets unit. It continues to play a pivotal role in managing the balance sheet, both on liquidity and interest rate risks. The ALM unit has been proactive in its approach and provides valuable feedback to Asset Liability Committee (ALCO) for timely decisions and towards making the balance sheet of the bank more robust.

RISK MANAGEMENT AND PORTFOLIO QUALITY

The risk management policy of the Bank, monitored at the highest levels, is based on a thorough review of key risk areas of Credit Risk, Market Risk and Operational Risk.

(i) Credit Risk

Credit Risk Management (CRM) is an important component of risk management in banks. The Bank has a robust risk governance framework in place, addressing all aspects of credit risk management viz, origination, underwriting, administration, monitoring, reporting and recovery.

The Risk Management and Review Committee of the Board is primarily responsible for owning and managing Credit Risk through Policies, Processes and Controls in the Bank. The Chief Risk Officer (CRO) manages the Risk Policies and Processes, Credit MIS & Infrastructure, Credit Risk Assessment on Credit submissions through the Risk Analysts and Credit Approvers. CRO also oversees the Loan Review functions and Structured Credits Group (erstwhile Special Loans Monitoring Group (SLMG)). The Policy/Reporting/ Credit Risk Infra Desk (loan review department has been merged with Policy/Reporting/CRI) performs Portfolio reviews, Sector/ Industry analysis, conducts sample reviews of approvals and provides monthly reports on delinquencies in performing assets, flags off Early Warning Signals (EWS) in Wholesale Banking clients (Early Warning System in Retail assets are flagged off by Retail Mid Office), it also provides a suite of Credit related MIS and dashboards, in addition to regulatory reporting. During the last year, the scope of SLMG has been increased, the department has been named Structured Credits Group (SCG), this department now ensures early intervention in stressed assets, in addition to managing delinquent/ irregular accounts.

Credit Risk Management below CRO level is organized vertical-wise in line with the business segments, namely Large Clients Group (LCG), International Clients Group (ICG), Emerging Corporates Group (ECG), Banks and Financial Institutions (BFIG), Financial Markets (FM) and Retail Banking. The Credit Policy document which defines the Risk Appetite of the Bank is generally reviewed annually. The Bank has in place both overarching Policy documents e.g. Credit Risk Policy, Signature Approval Process, as well as detailed guidelines/manuals originating from the Policies.

Most credit exposures have primary and/or collateral securities, with appropriate legal documentation. Other risk mitigating measures, like escrowing cash-flow, Electronic Clearing Service (ECS) mandates, financial or other covenants as stipulated, depending on the type of borrower and facilities availed are also in place.

Financial Markets products are offered to corporate clients in accordance with the Bank’s Board approved ‘Client Appropriateness and Suitability Policy’.

Portfolio across each business segment is reviewed periodically for course-correction. Retail Assets are reviewed monthly and appropriate corrective actions are taken based on portfolio trends. There are dedicated collections and recovery teams which look into recovery aspects of all assets (except Consumer Assets, which is handled by the Debt Collections team). Recoveries are made by enforcement of securities, foreclosure of mortgages, and other legal remedies, if no settlement can be reached.

In the Wholesale Bank, the Bank has built strong relationships with several top-tier names, quality of services and turnaround time have enabled the Bank to achieve significant cross-sell/up-sell and enable customer retention. Credit risk in Emerging and Large Corporates has shown some deterioration due to macro-economic tailwinds. However Early Warning mechanism and early intervention in stressed assets have been put in place, to help the bank improve its’ response to client’s needs, effect timely exits wherever feasible and improve the asset quality.

In Retail Bank, rigorous monthly monitoring mechanism has put in place by introduction of a risk dashboard at a borrower level and also at a portfolio level. When a particular industry or activity is facing problems, a rapid performance review of the portfolio is conducted to mitigate and control the risk. Implementation of Early Warning portfolio triggers and grading system enable proactive identification of problem accounts and enable corrective action on time.

In Retail Bank and Wholesale Bank as monitoring has been institutionalized, based on early warning signals and churn in the accounts, exits are planned and portfolio is kept healthy. The Bank is confident that the robust risk management practices put in place will enable the Bank to manage issues arising out of unforeseen events.

(ii) Market Risk

Market Risk focuses on various risks: Trading and Market Making, Structured Products and Sales and Asset and Liability Management. The positions in the Trading Book are valued and monitored on an ongoing basis. Market Risk is monitored on a daily basis to ensure adherence to limits and framework as laid down by the Board. To monitor risk in regards to risk capacity, Market risk is determined using VaR approach combined with various other controls. The impact of market risk exposure under stress scenario in relation to the Bank’s risk capacity is also reported to the management on a periodic basis.

Structured Products and Sales mainly provide corporate clients with a range of instruments to hedge their business exposures that are sensitive to foreign exchange and/or interest rate fluctuations. MRM is responsible for the independent valuation, monitoring, and reporting of the mark to market value of these products. MRM is the gatekeeper of all new products with regard to the Financial Markets activities.

For effective Asset and Liability management, an Asset Liability Committee (ALCO) has been operating in the Bank to manage the capital position, liquidity and interest rate risks in the Bank’s Balance Sheet. ALCO monitors Balance sheet analysis and movement in various risk parameters such as Value at Risk, Event Risk, Earnings at Risk etc, under normal as well as stress scenarios. MRM monitors adherence to limits and relevant prudential norms laid down by the Board.

The Fund Transfer Pricing (FTP) framework and policies are designed to ensure that the interest rate and liquidity risks emanating out of various business activities of the Bank are transferred to a centralized Treasury unit, which then actively manages the same to optimize the risk-return framework.

(iii) Operational Risk Management (ORM)

The Operational Risk Management (ORM) function manages the Operational, Information and Security risks. The Bank has developed a comprehensive Operational Risk Management framework supporting the process of identifying, measuring and monitoring Operational, Information and Security risks. The Bank’s Operational Risk Management framework is approved by the Risk Management and Review Committee of the Board and is reviewed on a periodic basis.

The Board and the Senior Management of the Bank are kept informed about the key Operational Risk issues on a regular basis. For effective management of the Operational Risk, Operational Risk Committees have been formed at Country level and Business Line level. The Country Operational Risk Committee meets on a quarterly basis and the Business Line Operational Risk Committees meet on a monthly basis to discuss and take effective actions for operational risk issues. Business managers are actively involved in operational risk management through participation in Risk and Control Self assessments and implementing necessary mitigation through product, process and system design.

INFORMATION TECHNOLOGY (IT)

The IT Service Management Group (ITSMG) is the technology unit responsible for the Bank’s IT strategy and execution. ITSMG’s responsibilities extend from conceptualizing technology strategy in harmony with business strategy, to running day to day operations at the workplace and data centers. ITSMG plays an active role in not just running efficient operations, but also in assisting business in winning at the marketplace, true to its mission "To be a strategic business partner based on service excellence through technical leadership in a secure and cost effective manner."

The Bank rolled out ING Mobile, it’s state of the art mobile banking solutions on iOS and android smart phones / tablets for Retail customers. The application has market-leading functionalities, complete sync with ING’s Net Banking, and robust cross-platform compatibility, thereby making its application suite a clear game-changer in the way mobile banking is offered in India. More development is on in this space, focused towards offering differentiated solutions for Business and Wholesale banking clients.

Two key initiates viz., Core Banking Transformation and Data Center Modernization were implemented this year. These upgrades have provided a high runtime efficiency leading to increased availability of services for business users and customers. The Bank now has a world class, Tier 3+ data center to ensure robust and secure operations of IT Services.

Many of the above initiatives were recognized at various local & international industry forums. During the course of the year, the Bank was bestowed with several awards in areas of Technology innovation, and adoption. Notable awards include, The prestigious CIO 100 award (fifth consecutive year) for being the first Issuer Bank in India to implement Risk-based Authentication Solution Mastercard’s Best E-commerce Program – industry first OTAC based security model, resulting in zero fraud.

Tech Target’s Top 10 Business Intelligence Implementations: SAP Business Objects Implementation.

OPERATIONS

Operations continued its journey towards operational excellence keeping the customer benefits as the key priority. Few milestones achieved during the year were: Electronic Bank Realization Certificates (e-BRC), which is a pre-requisite for exporters to claim benefits under various schemes of the Foreign Trade Policy, was mandated by Director General of Foreign Trade (DGFT), and implemented at quick speed. Our turnaround time is 24 hours and amongst the best in industry. TDS certificates are made available on internet banking platform. Customers can access them without depending on branches or Phone Banking.

We upgraded our core banking platform during the year which improves our processing time and will translate into quick disposal of transactions at the branch counters. CTS (Cheque truncation system) grid for Mumbai, which is clearing based on scanned images has gone live in tune with the RBI’s mandate and we were amongst the first to be 100% compliant. Customers who want to pay their import bills in parts have to submit the documents only once, instead of submitting the entire set each time.

INTERNAL AUDIT

Internal Audit Department (IAD) provides an independent, objective assurance and consulting services designed to add value and improve the Bank’s operations. It is designed to extend support to the management to accomplish its strategic objectives by bringing in a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, internal control and governance processes.

IAD applies a value driven assurance programme of audit work to provide value added recommendations which improve operating effectiveness as well as controlling risks effectively. IAD reports directly to the Audit Committee of the Board (ACB). The ACB approves the rolling Annual Audit Plan and oversees the functioning of the Department, besides giving directions based on audit findings.

In the current year, certain changes were made in the audit approach to focus on risk based value chain (end to end) audits rather than audits on specific areas / process / products. The process audits will also include application control testing to provide a complete overview of the processes and the inbuilt controls.

The scope of the Branch audits was also changed from product based to activity based – Customer Acceptance, Transaction processing, Monitoring, Branch Administration and Information System Controls. Continuous monitoring unit was set up exclusively for branch activities. The unit performs data analytics which enables continuous monitoring of branch activities and immediate escalation of red flag indicators.

In line with the Regulator’s guidelines to cover a minimum of 50% of business volume under concurrent audit and also keeping view of business needs, select Branch offices and certain centralized support functions are subject to concurrent audit year on year basis. External Audit Firms are engaged to undertake concurrent audit exercise at these offices and Units. IAD would identify Audit firms for this exercise based on the Profile & standing of firms and ensure tracking and compliance of the audit issues reported.

COMPLIANCE

We have a robust compliance risk management framework covering all the elements of risk management which is aligned to RBI requirements and also other international best practices. In the current year, we further strengthened it with a risk based monitoring plan to bring more focus on the business tracking controls and testing, development of data analytics and initiation of scheduled analytics for various obligations. A customer based activity monitoring model and enhancement of the scope of transaction monitoring through integration of various customer transaction applications and other data analytics was introduced. The Bank also updated the existing Financial Economic Crime (FEC) Policy and introduced minimum standards for facilitating Business to draft the processes accordingly. Focus on training on the FEC policy with extensive face to face training conducted at various locations across the country, in addition to other modes of trainings.

Apart from the above, our Bank is one of the 30 banks identified by RBI for implementing risk based approach to supervision from the supervisory cycle 2013-14 in the first phase and was subjected to the RBS exercise during the year. Risk Based supervision (RBS) entails a marked departure from the erstwhile supervisory approach of Annual Financial Inspection (AFI), with greater emphasis and reliance on off-site monitoring based on preliminary risk assessment on various parameters with the help of inputs taken from periodical data submitted by the Bank to RBI and sourced by RBI under the automated data flow.

HUMAN CAPITAL MANAGEMENT

One of the key measures employed in assessing effectiveness of managing of human capital is the Sustainable Engagement Index, which is a barometer of the bonding that an employee demonstrates towards the organization. The Bank continued to improve its high scores on this critical metric in the Winning Performance Culture survey, an annual employee engagement initiative conducted globally by ING for all its group entities by an independent organization Towers Watson. Based on the feedback on various parameters last year several actions were initiated which also contributed to the improved Index Score.

Trainings to up skill employees offered a structured approach and focused on functional and behavioral skills. Learning interventions were focused on freshers as well as lateral hires and programs were designed to provide employees the skills required to perform their roles and to progress into roles with higher accountability. Development tracks were put into place to help internal progression into senior roles within the Branch Banking network. We are also reinforcing the status of compliance and standards as an important element of how we do our business and all our trainings are focused to ensure that our employees understand and meet their responsibilities. A series of functional specific programs were rolled out with internal subject matter experts taking the lead in design and delivery.

This year we also launched ING Young Banker Program (IYBP), an initiative designed to prepare fresh graduates to join the Bank as Customer Care Managers. ING Vysya Bank has tied up with Manipal Global Education to create the ING Young Banker Program offering a Post Graduate Diploma in Banking Operations and Finance (PGDBOF). It provides the selected Young Bankers structured training in various aspects of Banking and Management disciplines and overall development of personality. This is one of a series of initiatives that we have taken towards strategic shift in the focus of Talent Acquisition from "BUY" to the "MAKE" mode.

The Bank has an institutionalized approach to identifying a group of top performers with potential to become future leaders referred to as a Talent Pool. These employees are categorized into three categories viz.: Young Talents, Emerging Leadership Talents and Leadership Talents. This year saw a high level of engagement for the junior pool of talents. There was increasing focus on providing non training as well as training interventions. A key initiative in this area was the Guest Auditor Programme delivered by the Internal Audit and Talent Management departments together. The first batch of 25 Guest Auditors started off this year and over 80% have completed their cross functional 7 day branch audit. This year the talent management team launched a new mobile learning application called Orange Owl for senior leaders which won an award at the CLO Summit (Chief Learning Officer) organized by Tata Institute of Social Science & Leapvault. This year the Leadership conference (for the top 150 Leaders of the Bank) LEAP 2013 focused on Building Customer Experience across the bank.

OUTLOOK

The Bank expects GDP growth for the year 2014-15 to be 5.50% due to gradual pick up in investment and consumption. CPI inflation is estimated at 8.20% YoY, compared to 9.50% this year, with upside risks due to adverse weather conditions. On the banking front, the Bank expects the sector to grow advances by around 15.50% and deposits around 15% in FY 2015. Rupee is expected to remain stable in the beginning of the year on the election linked euphoria and easing trade deficit trends; however, global uncertainty on withdrawal of loose monetary policy by the developed markets may begin to weigh on sentiments towards the latter part of FY 2015. Also, easing of restrictions on gold imports and pick-up in domestic demand may begin to again widen the trade deficit. It is probable that interest rates may have an uptick, whilst prospects for a significant decline in FY 2015 appear remote.

NON-FINANCIAL REPORTING

Corporate Social Responsibility and Sustainable Development Performance Report

Your Directors are pleased to present the Non Financial Report for the year 2013-14. The Report deals with Corporate Social Responsibility and Sustainable Development.

As a responsible financial services provider, your Bank has consistently reported in line with the guidelines of the banking regulator under RBI/2007-08/216 DBOD. No. Dir. BC. 58/13.27.00/2007-08 dated 20 December 2007 - Corporate Social Responsibility, Sustainable Development and Non-Financial Reporting – Role of Banks. The advent of the National Voluntary Guidelines (NVGs) on Social, Environmental and Economic Responsibilities of Business, issued by the Indian Institute of Corporate Affairs under the aegis of the Ministry of Corporate Affairs, encourages companies to report voluntarily according to the spirit of the NVGs. Our scope of non-financial reporting respects both recommendations.

In line with the NVG guidelines, your Bank for the first time, is voluntarily hosting a Business Responsibility Report (BRR) as per the format provided by the Securities and Exchange Board of India (SEBI) circular – CIR/CFD/DIL/8/2012. Your Bank’s BRR is available and can be downloaded from its website, www.ingvysyabank.com

1.0 CORPORATE SOCIAL RESPONSIBILITY (CSR)

ING Vysya Bank is committed to being a responsible corporate citizen. Our approach to CSR is primarily implemented through the ING Vysya Foundation (IVF) which acts as a catalyst to make a positive social difference by promoting and providing primary education to children from a disadvantaged socio-economic background. This focus is part of the worldwide "Chances for Children" program (CFC) of the ING Group. IVF was established as a Trust in October 2004 to promote CSR of ING Group entities in India. ING Vysya Bank was the primary contributor to IVF during the year 2013-14. Your Bank recognizes the importance of nurturing partnerships with Civil Society Organizations (CSOs) to achieve its social giving mission. Over the reporting period of the last year, IVF has worked with 16 CSO partners, across India, who are engaged in: • Enrolling children (never been to school and out of school) back to school

• Preparing children through bridge schools and pre-primary schools for enrollment in formal schools

• Retaining and continuing education of children who are already enrolled.

During the year, IVF has continuted its engagement in the following programmes:

No.	CSO Partner	Location	Program
1	Akshara Foundation	Bengaluru	Community Library program and pre-school program
2	Sukrupa	Bengaluru	Residential program for children with single parents/orphans
3	MakkalaJagriti	Bengaluru	Community Learning centre for children living in slums
4	Christel House	Bengaluru	Formal School for children living in slums
5	Samarthanam Trust	Bengaluru	Higher education for visually impaired youth
6	Ashraya	Bengaluru	Residential school for children from migrant communities
7	Humane Touch	Bengaluru	Educating children from minority communities with focus on girl children
8	Aurobindo Chaudhari Memorial Great Indian Dream Foundation	Delhi	Pre-school program for children living in slums
9	Kutumb Foundation	Delhi	Bridge school to develop language skill for children living on streets
10	Hamari Muskaan	Kolkata	Learning centre for children in red-light area
11	Pratham Council for Vulnerable Children	Mumbai	Residential program for former child labourers
12	SUPPORT	Mumbai	Residential program for rehabilitated drug addicted street children
13	Room to Read	Andhra Pradesh	Libraries in Government schools to promote learning habits
14	IIMPACT	Lucknow	Learning centre for girl children
15	UNICEF	India	Chances for Children program
16	Jan Jagran Samasthan	Bihar	Bridge school for flood affected children, living in slums

Our active engagement in these projects has positively impacted a large number of deserving children across the country. This helps us leverage our resources, both funds as well as skills to create long-term impact in the lives of these children. Further, this involvement engages our employees, who volunteer their time on various projects to share their skills. During the year, several volunteer initiatives were organized under the ‘Hope Brigade’ program. Activities ranged from teaching children spoken English, garden cleanup activities, painting/marking trees and planting saplings, raising awareness on reducing the spread of bacteria during the monsoon, taking children on educational tours, story-telling classes to develop reading habits among children and donating books to libraries. Around 4,000 employees volunteered for 12,000 hours (average 3 hours per volunteer) in these initiatives. In India, ‘ING Global Challenge–Chances for Children’ with a theme on ‘Spreading financial Literacy among children’ involved 2,500 employees across 230 branches.

Many programs extend beyond a timeline and in the year 2013–2014, IVF continued to implement some programs that were initiated during 2011-2012. Financial literacy: The program teaches children the basics of money, banking and explains the importance of savings. During this year, the program has conducted refresher course for parents. A core group of 16 mothers and 16 youth were trained as facilitators to impart training on financial literacy to a wider group of parents and also children, studying between 5th to 12th std. Our efforts on this project were led by a group of 30 Bank employees, during this period. Financial Inclusion: The Bank is committed to promote financial inclusion under its Board approved plan. All its branches are authorized to open Basic Savings Bank deposit accounts to encourage unbanked populations to become a part of the formal banking channel and generate savings. The Bank is also undertaking a biometric based transaction system where basic banking services are provided at the doorstep with the help of a business correspondent. Training, Empowerment and Livelihoods: Established by the bank in association with BVV Sangha at Bagalkot, the Rural Self Employment Training Institute (RSETI) continues to identify, motivate, train and assist unemployed youth to embrace self-employment ventures as an alternative vocation. During the year, 683 rural youth have benefited under the Institute’s programs of which 512 trainees were women. Our RSETI has been awarded an "AA+" rating by The Ministry of Rural Development. Govt. of India.

Sensitizing Children: The Bank hosts a children’s portal titled as www.kidzzbank.com to educate children on nature and environment, money and savings. The website features a unique and informative virtual tour of a bank.

2.0 SUSTAINABLE DEVELOPMENT

Your bank is committed to the sustainable development of India. IVBL believes in promoting triple-bottom lines (economic, environmental and social) where possible. Social materiality is an important element of sustainable development, particularly from a risk perspective which we address comprehensively. Environment, natural resources and energy efficiency are important to both the bank and its clients. The Bank embraces various facets of sustainability, including:

2.1 Policies and Risk Management

The Bank strives to ensure that the projects financed by it are environmentally and socially sound and sustainable. IVBL being part of the ING Group N.V. ("ING") has adopted the Equator Principles (EP) and Environmental and Social Risk (ESR) Policies of ING, after adapting them to the Indian environmental and legal framework. The ESR is a prescriptive regulatory framework and IVBL has adopted these policies and integrated them into its appraisal, approval and monitoring mechanisms.

General ESR Policy and Framework

The Bank has integrated the following commitments to its G-ESR policy - Sustainability, Do No Harm, Responsibility, Accountability and Transparency. The Bank has specified rigorous standards for providing finance and services to several segments to ensure adherence to strict social responsibility principles. These include: • No financing for activities that would abuse human rights or violate rules

• Zero tolerance for controversial weapons like cluster bombs and land mines

• Restrictions on use of genetic engineering and modification

• Non progressing finance for sectors such as gambling, animal testing or pornography

The Bank declines proposals that are deemed unsuitable from a Sustainable Development perspective, especially so if they are categorized under sensitive sectors or areas not supported by the Bank. Equator Principles

The Bank is an early adopter of the Equator Principles (EP) which is a set of voluntary international environmental and social guidelines for ethical project finance. Its scope includes child labour, involuntary resettlement and protection of natural heritage. Bank has adopted the upgraded version of the EP referred to as EP II which is widely perceived as a global standard benchmark for ethical management of environmental and social issues in project funding. Specific ESR Principles

The S-ESR Policy reflects the Bank’s concern for sensitive markers such as Forestry and Plantations, Natural Resources and Chemicals. Proposals are reviewed based on Risk Filters and evaluated through questionnaires. This enables us to screen and not progress funding of projects in protected areas and vulnerable sectors. We monitor issues such as labour and human rights violations or adverse impact on the environment. We also conduct sector analysis and higher due diligence on sectors that may be detrimental to the environment and/or local communities. ESR Assessment is a key part of the overarching risk assessment process. Training on risk including sustainability risk is imparted across relevant teams.

2.2 Energy Management

The Bank has sustained its efforts in the area of energy conservation and has registered an overall saving of 2.08 million KWh since 2009 across its two corporate locations at Bengaluru and Mumbai. Over the last year we saved about 15.5% at our Mumbai Office amounting to over 0.24 million units.

We are also proud to share that we have actively embraced the green buildings concept. Our Corporate Office in Mumbai is a LEED certified Gold rated building. Our Corporate Office in Bengaluru, has qualified for LEED certification and is scheduled to be audited by USGBC.

2.3 Stakeholder Engagement

Our human capital connects to the Bank’s global motto "ING for Something Better". We undertake extensive employee engagement and a best practice is our Winning Performance Culture (WPC) Survey conducted by an independent organization ‘Towers Watson’. Last year, we identified two focus areas- Customer Service and Compliance Culture. In 2013 as part of the action points two cross functional teams of Leadership Talents was setup to drive initiatives across the bank in these areas. As part of the same 22 workshops called Unmute were run by Young Talents across the country.

The 2013 WPC was conducted in October 2013 with a healthy participation of 84%. The survey is measured by the Sustainable Engagement Index (which represents the bond or attachment the employee has to the company). This year we scored 79% on this index (5% more than global ING peers). We have improved over 2012 scores in the focus areas and overall in all categories. The focus of 2014 is the Net Promoter Score (NPS) and engagement for employees in Band / Level E14. We include employees in the Bank’s evolution through our magazine ‘Intouch’, a periodic e-magazine featuring accomplishments, milestones and events across the organization. Our Learning and Development Team engages with employees regularly on subjects of finance, management and professional development. Townhalls on a multitude of subjects are also hosted. We believe that such interaction contributes to effective stakeholder engagement and encourages staff to join in the Bank’s sustainability journey.

2.4 Sustainability projects

a. As we extend our work and deepen our understanding of sustainable development, we appreciate the inter-connectedness of issues. Education has been our primary focus through IVF. While it can be seen stand-alone, education is intrinsically related to inclusion, energy, water, health, mobility and community folkways. We find that we are often operating at the intersection of these dynamics with differing stresses which we welcome as a responsible corporate citizen. In the following instances, we have supported eco-friendly projects among indigenous communities (also protected under the Equator Principles). Under the umbrella of the IVF, our employees: Installed 250 eco-friendly, smokeless stoves in 12 tribal villages of Bandipur. These 12 villages are now 100% smokeless stove villages with lower fuel consumption requirement, helping to protect the health of over 250 women and around 120 girl children who bear the brunt of the home chores and collect firewood walking long distances. This initiative saves 3.5 tonnes of firewood per stove/year (equal to two fully grown trees) and helps protect forests, sequesters carbon and minimizes human-animal conflict in a sensitive ecosystem. With this, we have been able to make 32 villages of Bandipur 100% smokeless stove villages, ensuring higher health standards and reduced in-room air pollution.

Provided solar lights in one of our Partner NGOs Inclusive school building that focuses on enabling children with disability to access quality education. Provided solar lights to 20 villages in Gajapati, Odisha. This was an unique initiative to light up 20 villages in Gajapati District of Odisha aimed towards promoting education for children and also to enable safe -living for the tribal community who resides in the deep jungle areas. b. Earth Hour¹ For the 6th year in succession, the Bank has supported the Earth Hour movement in creating awareness through it’s customers and employees. Our Bank organized road shows across 5 cities in 50 companies, to encourage their employees to pledge support and in turn share their photo message on Earth Hour with friends on social media. Further harnessing the power of social media, the Bank took the message of Earth Hour online with contests, videos and direct messages to over 1 million people.

1Earth Hour is WWF’s global campaign inspiring individuals, businesses, institutions and organizations around the world with a simple message to switch off non-essential lights for one hour on the last Saturday of March. This year, the Earth Hour was on 29 March 2014 between 8.30 to 9.30 pm.