Karnataka Bank Ltd Management Discussions.

During the year 2017-18, global economic growth is estimated to have reached 3.7%, a significant acceleration compared to growth of 3.2% in 2016 and the highest growth rate since 2011. At the global level, growth is expected at 3.9% in 2018. However, economic prospects remain vulnerable to changes in the trade policy, a sudden deterioration in global financial conditions and rising geopolitical tensions. Further, higher interest rates in the US and any changes in the trade treaties generally lead to outflow of foreign funds from emerging markets. Global inflation is also likely to rise in 2018.

Against the back drop of turbulent international economic scenario, the Indian financial system showed resilience, amidst stressed balance sheets in Banking and Corporate Entities. A cyclical economic recovery has taken hold as the effects of demonetization and the GST receded. This trend is seen extending into FY19 with growth benefiting from higher public capital spending and recovering private business sentiment. Incoming economic data remains largely encouraging, which may improve the GDP growth in the coming fiscal. International Monetary Fund (IMF), in its latest World Economic Outlook, has estimated India to grow at 7.4 per cent in 2018.

Consumer Price Inflation (CPI) stood at 4.28% in Mar18 compared to 3.89 % in the previous year showing an increasing trend. However, the Wholesale Price Inflation (WPI) eased from 5.17% as on March 2017 to 2.47% as of March 2018. In FY18, the Index of Industrial Production (IIP) grew by 4.3%, lower than 4.6% growth recorded in the previous year. It is the highest growth recorded in the past 6 years barring FY17. Electronics, pharma and automobiles continue to be the main drivers of growth during the last financial year.

In view of various factors such as global crude oil prices, fiscal slippage, significant rise in households inflation expectations, HRA revisions by various state governments, revision in the MSP formula for kharif crops and IMD forecast of normal monsoon, RBI has increased the policy repo rate under the LAF by 25 bps to 6.25% after 4 years in its second bi-monthly Monetary Policy statement 2018-19. The medium-term target for headline inflation is kept at 4% on a durable basis.


The financial year 2017-18 was yet another challenging year for Indian banks with slow deposit growth and slow but improved credit growth, continued stress on asset quality, large scale frauds, high provisioning costs and compliance with stringent regulatory requirements etc. However, access to banking system has improved over the years due to persistent government efforts to promote banking- technology and to promote expansion in unbanked and under-banked areas. Also, some of Payment Banks, Small Financial Banks, Payment apps, Fintech/Startup Companies, etc. have started offering innovative financial/payment products and your Bank treats it as an opportunity for co-operation and collaboration wherever necessary in furthering the agenda of financial inclusion.

Domestic financial market segments have been mainly driven by idiosyncratic factors, barring phases of overwhelming global spillovers that impacted equity and forex markets intermittently. Excess liquidity, which had persisted for a few months following demonetization, turned into deficit towards close of the year. Bond markets have experienced some drying up of liquidity as yields rose amidst concerns about inflation and the fiscal situation. The credit market, which was overcast with risk aversion and disintermediation, has exhibited a steady improvement in recent months with credit growth being in double digits since December 2017. Sizeable investments by mutual funds into equity displaced the hitherto dominant position of foreign investors.

In the banking sector as such, credit expanded by 10.3 per cent while deposits grew by 6.7 per cent in the financial year 2017-18. Banking sector was embroiled in NPA issues and a large number of frauds which dissuaded growth of credit to industry. On the whole, distressed assets are posing serious problems and the Central Government, Regulator and Banks are making coordinated efforts to overcome the said menace.

Besides, the Government of India has made an attempt to streamline the process of resolution of NPA and stressed assets by amending the Insolvency and Bankruptcy Code (IBC), which is emerging as a good tool in the hands of lenders. Further, RBI has also made an attempt to rationalize the system of treating the stressed assets through its circular viz. "Resolution of Stressed Assets - Revised Framework" dated February 12, 2018.


Union Budget of 2018-19 has given emphasis on agriculture and rural development, healthcare to under privileged, education, MSME and infrastructure in order to set the tone for future growth. Besides, Governments Policy initiatives are focused on building a strong, stable and resilient financial system and thrust on institutional farm credit etc., which are expected to support Banks credit growth. Further, Governments plans to onboard Banks and corporates on TReDS [Trade Electronic Receivable Discounting System] platform. TReDS is an institutional mechanism for facilitating the financing of trade receivables of MSMEs through multiple financiers and will enable discounting of invoices/bills of exchange of MSME sellers against large corporates.

The India Meteorological Department (IMD) has predicted normal monsoon this year with a "very less probability" for 2018 to be a drought year. Normal rainfall boosts farm production which, in turn, increases rural demand and helps the overall economy. Further, Governments thrust on infrastructure development besides technological advancement in the manufacturing and MSME sectors may open up avenues to Banks to finance these projects. The improved employment in the country, higher income levels, introduction of Rs.Housing For All scheme etc. augur well for the long term sustainable growth of retail lending in the Indian market. Governments inclusive growth agenda may also bring additional business to banks.


Economic activity is expected to gather pace in 2018-19, benefiting from a conducive domestic and global environment. First, the teething troubles relating to implementation of the GST are receding. Second, credit off-take has improved in the recent period and is becoming increasingly broad-based, which portends well for the manufacturing sector and new investment activity. Third, large resource mobilization from the primary market could strengthen investment activity further in the period ahead. Fourth, the process of recapitalization of public sector banks and resolution of distressed assets under the Insolvency and Bankruptcy Code (IBC) may improve the business and investment environment. Fifth, global trade growth has accelerated, which is expected to encourage exports. Sixth, the thrust on rural and infrastructure sectors in the Union Budget could rejuvenate rural demand.


In the normal course of business, banks are exposed to various risks, namely, Credit Risk, Market Risk and Operational Risk, besides other residual risks such as Liquidity Risk, Interest Rate Risk, Concentration Risk, Strategic Risk, Reputation Risk etc. With a view to efficiently manage such risks, your Bank has put in place various risk management systems and practices. In line with the guidelines issued by the Reserve Bank of India from time to time, your Bank continues to strengthen various risk management systems that include policies, tools, techniques, systems and other monitoring and forewarning mechanisms.

Your Bank aims at enhancing and maximizing the shareholder value by achieving appropriate trade-off between risks and returns. Your Banks risk management objectives broadly cover proper identification, assessment, measurement, monitoring, controlling, mitigation and reporting of the risks across various business segments of the Bank. The risk management strategy adopted by your Bank is based on a clear understanding of the risks and level of risk appetite, which is dependent on the willingness of your Bank to take risks in the normal course of business. A Board level committee, viz., Integrated Risk Management Committee periodically reviews the risk profile, evaluates the overall risk faced by the Bank and develops policies and strategies for its effective management.

Various senior management committees such as Credit Policy Committee (CPC), Asset-Liability Management Committee (ALCO), Operational Risk Management Committee (ORMc) etc operate within the broad policy framework of the Bank to ensure and enhance the risk control and governance framework within the Bank.

The Risk Management Department at Head Office oversees the overall implementation of various risk management initiatives across the Bank.

In line with the guidelines issued by RBI, your Bank has taken the necessary steps to move over to Basel II Advanced Approaches as per the Road Map approved by the Banks Board in this regard. As a part of the Basel III, Pillar III-Market Disclosure requirement, your Bank has made a detailed disclosure, which is appended to this report as Annexure I. The Bank conforms to the Basel III guidelines from April 1,2013.

In compliance with Basel guidelines, the Bank has put in place a policy document for Internal Capital Adequacy Assessment Process (ICAAP) to evaluate its capital adequacy relative to its risks. Stress testing framework for various stress scenarios is also put in place for better understanding of the likely impact of adverse market movements/events on the capital and earnings. The results of the ICAAP and Stress testing are reviewed periodically to assess the capital requirement for the projected business growth, keeping in view the risk appetite and risk profile of the Bank. A Board level Committee, viz., Internal Capital Adequacy Assessment Committee (ICAAC), reviews the risk appetite, risk profile, business projections as well as capital assessments of your Bank at periodical intervals To evaluate and review the performance of various business units/products/customers etc., your Bank has introduced Fund Transfer Pricing (FTP) and Customer Profitability Management Systems (CPMS) for better management of risk and return. FTP and CPMS enable the Bank to assess the profitability at various levels like branch, product, customers, accounts, regions etc. The system enables the Bank to perform various profitability related analyses and helps the Bank to make more business-focused decisions to increase the long-term profitability.

For continuous monitoring of customer induced transactions under various Alternate Delivery Channels (ADC) and Core Banking Solution (CBS), your Bank has implemented Enterprise Level Fraud Risk Management System (ELFRMS) in September 2016. This is an automated transaction monitoring system which, based on a range of scenarios, triggers various alerts for carrying out analysis from various risks and fraud angles. The system acts as a check on potential fraud incidents as a preventive measure and is intended to identify the potential fraudulent transactions covering various channels like internet banking, mobile banking, debit card, POS, CBS etc. on real time basis, based on predefined probable fraud scenarios.

In line with guidelines issued by RBI, your Bank has nominated a Chief Information Security Officer (CISO), who is responsible for articulating and enforcing the policies that Bank uses to protect the information assets apart from coordinating security related issues in implementation of new systems under Information Technology in the Bank.

Your Bank has been complying with the RBI/other regulatory instructions relating to cyber security threat advisories and during the reporting year, Bank has participated in Cyber Security Drills conducted by IDRBT and RBI-CSITE with a view to strengthen its internal cyber resilience system.


Being a time-tested Bank and in its endeavor to continue to be a "Relevant and Significant Bank" your Bank has initiated a transformation project namely - Rs.Project Vikaas to meet the growth aspirations by focusing on people and driven by technology.

The transformation exercise is mainly focusing on (a) growth with improved sales productivity and designing new products (b) cost optimization with process automation and digitization as well as NPA management (c) profitability boosters with pricing optimization and focus on fee income and (d) shareholder value enhancement through investor engagement, communication and corporate branding. Human resources, digital and IT transformation are identified as the main enablers for transformation by focusing on the entire ecosystem of the Bank.

Your Bank has parterned with Boston Consultancy Group (BCG), a leading global management consulting firm and worlds leading advisor on business strategy. BCG has the experience of guiding business transformation of more than 750 large as well mid-sized organisations.

Towards this direction, Bank has formed an internal core team consisting of executives to implement and monitor the progress of the transformation milestones and fortnightly meetings are held to ensure that the actions taken are in the desired direction with quarterly briefing to the Board. Project Vikaas is a long term plan and expected to play a major role in realizing aspirational goals culminating in emergence of new KBL coinciding with the celebration of centenary year of the Bank in 2024.


During the year under report, your Bank has opened 36 new branches in 11 states - one each in the states of Punjab, Tamil Nadu, Rajasthan, Delhi and Sikkim, 2 each in the states of Kerala, West Bengal, Andhra Pradesh and Telangana, 4 in Maharashtra and 19 in Karnataka. Out of these 36 branches, 8 branches have been opened in unbanked rural centres under financial inclusion initiatives of the Bank.

As at 31st March 2018, your Bank has 800 banking outlets and 2 extension counters spread across 22 States and 2 Union Territories. Apart from the above, your Bank has 12 Regional offices, an International Division, a Data Centre, a Customer Care Centre, 4 Service branches, 2 Currency Chests, 2 Central Processing Centres and 5 Asset Recovery Management branches. Further, New Delhi - Kalkaji branch has been merged with New Delhi - Chittaranjan Park branch.

Further, for better ambience and improved customer service, your Bank has shifted 21 branches/offices to new premises during the year 2017-18.


Every customer is important to us. Keeping this in mind, several customer-centric initiatives have been introduced by your Bank during the year under report.

Bank has rolled out the Single Window Service concept at 44 branches during the Financial Year 2017-18 thus extending this facility to 64 branches as on March 31st 2018.

Further, the Government has amended the "Prevention of Money Laundering (Maintenance of Records) Rules 2005" with effect from June 1, 2017 to facilitate linking of Aadhaar to bank accounts. Aadhaar (Enrolment and Update) Regulations 2016 has been amended to enable all the scheduled commercial Banks to act as Registrars for carrying out Enrolment and Updation Service inside the premises of bank branches and banks are directed to have such enrolment centres in minimum of 10% of their branches. As such your bank has identified 80 centers for facilitating aadhaar enrolment.

Bank is actively involved in putting in place system and procedures on banking services rendered to customers as per the guidelines received from RBI, IBA and BCSBI from time to time.


Bank has adopted the strategy of Rs.Managing channels instead of Managing Branches and has been pioneer in adapting technology driven delivery channels i.e., digital channels and bringing out innovations and value additions in its existing digital channels. The major digital initiatives taken by the bank during the FY 2017-18 are:

• Introduction of "KBL Image Debit Card" a personalised image debit card.

• Introduction of Cash Recyclers to use a single machine for Deposit/Withdrawal of cash.

• Stepping into social Media Channels by opening Banks official pages in FaceBook, Twitter, Instagram & YouTube.

• Revamping of Banks Corporate Website to enhance the features and keep the customers engaged.

• Integration of KBL Locator to enable tracking of Bank branches/ATMs through Banks Corporate Website and Mobile Banking Applications.

• Introduction of Debit Card Blocking facility, Domestic/International usage Switch On/Off and Card limit setting through IVR, Internet Banking and Mobile Banking.

• Enhancement in Internet Banking UI/UX.

• Enhancement in KBL Mobile Banking with features of Online Fixed Deposits/Recurring Deposits Opening, AADHAAR Seeding, Online Debit Card Blocking services.

• Bharat Bill Payment System (BBPS) - is an integrated bill payment system which will offer interoperable online bill payment service to customers.

• KBL-eCOLLECT which enables institutions to collect fees online.

• Launching of Fixed Asset Management System - To manage and automate the various Fixed Assets of the Bank at Treasury and Accounts Department.

• Automation of Inspection & Audit Process.

Besides, Bank will continue to put efforts in the direction of introducing products/services to cater to the needs of present and prospective customers base and to be a Rs.one-stop-shop for all financial requirements.


With an aim to provide diversified financial products and services to maximize value added services to the customers, Bank provides Para-Banking, third party products such as Life Insurance, General Insurance, Mutual Funds etc. Bank has tied up with LIC of India, PNB MetLife India Insurance Co. Ltd., Universal Sompo General Insurance Co. Ltd., Bajaj Allianz General Insurance Co. Ltd. for distribution of insurance products and with various Mutual Fund houses for selling unites of Mutual Funds. Also, the NPS facility(National Pension Scheme) is extended to all 800 branches.


Your Bank has bagged following awards during the year under report in recognition of its achievement under technology initiatives, social banking, export performance etc.

• IBA- Banking Technology Awards 2018, under the Small Bank Category.

[a] Runner up - Technology Bank of the Year.

[b] Runner up - Best use of Digital and Channels Technology.

[c] Runner up - Best Payment Initiatives.

• ASSOCHAM Social Banking Excellence Award 2017 under the category "Overall Best Social Bank for Small Bank Class".

• ET NOW BFSI (Banking Financial Services and Insurance) Awards, 2018 under the categories Rs.Bank with more Rural Branch expansion and Rs.Bank with leading Financial Inclusion initiatives.

• Award for achieving 100% Branch activation of the social security scheme Atal Pension Yojana, in the Rs.Atal Pension Yojana, People First Campaign - Uttar Pradesh, organized by Pension Fund Regulatory Development Authority (PFRDA).

• Best Financial Services and Foreign Exchange Earner in Southern Region award for the year 201617 under GOLD Category, instituted by FIEO (Federation of Indian Export Organisations).

• ASSOCHAM India - SMEs Excellence Award 2017, for rendering Excellent Service in SME Sector under Private Sector category, instituted by ASSOCHAM, India.

• Appreciation certificate "Impactful Financial Inclusion through Innovations and Process" for the banks contribution in the Financial Inclusion space, instituted jointly by Union Bank of India and CNBC Tv18.

• Atal Pension Yojana - Golden Trophy" under Private Bank Category in the Challengers Gold campaign for the Atal Pension Yojana Social Security Scheme, conducted by PFRDA.

• Best Bank Award among Small Banks for use of Technology for Financial Inclusion, instituted by IDRBT.

• Winner in Rs.Atal Pension Yojana - Brand Ambassador Trophy contest, for the Atal Pension Yojana - Social Security Scheme, conducted by PFRDA.

• ISO 9001: 2015 Certification: bagged by Staff Training College, Mangaluru, for compliance to quality management standards, instituted by TVE Certification Services Pvt. Ltd., Trichy.

• Atal Pension Yojana Award: Winner under other private sector banks category, in the Atal Pension Yojana campaign conducted by PFRDA, and bagged Rs.Indian Pension League [IPL]-Become the Best of the Best trophy.

• STP Award 2016: 2nd Prize in recognition of Banks outstanding payment formatting and straight through rate, instituted by Bank of New York, Mellon.

• MSME Banking Excellence Awards 2016, under the category - CSR Initiatives and Business Responsibility Award- Runner Up-(Emerging Category), instituted by Chamber of Indian Micro, Small and Medium Enterprises.


Financial Inclusion means making available the full range of banking services at an affordable cost to the people who do not have access to banking services. It mainly focuses on the section of society not having formal financial institutional support. Through the Financial Inclusion Plan, Bank aims at Rs.connecting people with the Bank and not just opening accounts. This includes meeting the small credit needs of the rural public, giving them access to the payments system, providing remittance facility and life and health insurance. Efforts are being made to optimize the resources to achieve the goal of extending banking facilities to the un-banked areas/deprived sections.

Your Bank has 171 branches located in the rural areas and offer banking facilities to the rural clientele in the gram panchayats or villages where these branches are located. All the rural branches are also acting as Financial Literacy Centers (FLCs) and imparting banking literacy among the rural populace.

In accordance with announcement of Prime Minister Jan Dhan Yojana (PMJDY) on August 15, 2014 revised Strategy and Guidelines of Department of Financial Services (DFS), Ministry of Finance, Govt. of India, are considered for implementation of Financial Inclusion activities in the Bank. PMJDY takes in to account both rural sub service areas (SSAs) and urban wards for Financial Inclusion. Under the revised financial inclusion plan, in rural areas, Bank is allocated with 214 Gram Panchayats (GPs) for Financial Inclusion, covering 297 Sub service Areas (SSAs) consisting of 1039 villages in the states of Karnataka, Chattisgarh, Maharashtra and Andhra Pradesh and in urban areas, 313 wards are allocated in Karnataka and other states. The Gram Panchayats are covered under Brick and Mortar Branch approach and Business Correspondents (BC) Model. Your Bank has been issuing RuPay PMJDY Debit Cards under the domestic card payment scheme launched by the National Payments Corporation of India (NPCI) and has also introduced Aadhaar Enabled Payments System (AEPS) at all BC locations of the Bank.


As on 31st March 2018 Bank has covered 547 villages of 106 GPs through Brick & Mortar Branches.


Your Bank has entered into an agreement with M/s BASIX Sub-ki Transaction Ltd and M/s Integra Micro Systems Pvt. Ltd. to provide online transaction facility and as on 31st March 2018, 113 GPs with 141 SSAs covering 517 villages of Karnataka, Andhra Pradesh and Chattisgarh States were covered under the above arrangement.


As permitted by the Reserve Bank of India your Bank had opened USBs where business correspondents (BCs) could conduct operations and thereby boost confidence of customers to use their financial services. As on 31st March 2018, your Bank has 35 USBs.


Your Bank is participating in Govt. of Karnataka (GOK) EBT Pilot project for NREGA/SSP beneficiaries under -"One District - Many Bank Model" and is disbursing the payments under the above schemes to the beneficiaries using smart card and hand held machines at 5 Gram Panchayat locations in Chitradurga and Yadgiri districts in Karnataka State.


Your Bank is actively participating in Direct Benefit Transfer (DBT) Programme of Govt. Of India, wherein, the Govt. would transfer benefits of various Schemes directly to the beneficiaries Aadhaar enabled bank accounts and also accounts seeded with LPG ID in case of transfer of subsidy for LPG. For this purpose, Bank has on boarded with NPCI for Aadhaar Payment Bridge System (APBS) under National Automated Clearing House (NACH). Revised DBTL was introduced on November 15, 2014 and launched throughout the country on January 1,2015.


Your Bank has sponsored 5 FLCs at B.C Road, Tiptur, Hangal, Kundagol and Alur in a joint venture with M/s Jnana Jyothi Financial Literacy and Credit Counseling Trust, Manipal. During the financial year 5 FLCs sponsored by the Bank have conducted 1680 Financial Literacy campaigns and 64129 participants had been covered. In adherence to RBI guidelines all the rural branches of our Bank are also conducting financial literacy Camps.


Three Social Security Schemes-Prime Minister Jeevan Jyothi Bima Yojana (PMJJBY), Prime Minister Suraksha Bima Yojana (PMSBY) and Atal Pension Yojana (APY) have been launched by Honble Prime Minister on 1st June 2015. All the branches of your Bank are actively involved in providing schemes to the customers across the country.

1. PMJJBY provides life insurance coverage of Rs. 200000/- by paying yearly premium of Rs. 330/-. A person aged between 18 to 50 years holding account in a Bank is eligible for the scheme. A total of 149185 lives have been covered till 31.03.2018.

2. PMSBY provides Accidental insurance coverage of Rs. 200000 by paying yearly premium of Rs. 12/-. A person aged between 18 to 70 years holding account in a Bank is eligible for the scheme. A total of 217339 lives have been covered till 31.03.2018.

3. APY: This scheme was launched by the Government of India on 9th May 2015 to address the old age income security needs of the citizen in an affordable manner linked to auto debit facility from the banks savings account of the subscriber. Your Bank is actively participating in the scheme, with all branches being registered as Point of Presence- Service Provider (POP-Sp) for APY. As on 31.03.2018 Bank has opened 45947 APY accounts.


In accordance with announcements of Prime Minister Jan Dhan Yojana (PMJDY) on August 15, 2014, revised Strategy and Guidelines of Department of Financial Services (DFS), Ministry of Finance, Govt. of India, has been considered for implementation of Financial Inclusion activity of the Bank. PMJDY takes in to account both rural, semi urban, urban wards and metro for providing basic banking facilities to the unbanked populace. PMJDY also provides scope for RuPay debit card that is inclusive of Rs. 1 lakh accidental insurance.

All the branches across the country have opened accounts under PMJDY and are issuing RuPay Debit Card under the domestic card payment scheme launched by the National Payment Corporation of India (NPCI).

During the year under report, 214,076 PMJDY accounts have been opened with an outstanding balance of Rs. 44.30 crore.


Your Bank has introduced AEPS transaction services offered by National Payments Corporation of India (NPCI) at all Business Correspondent (BC) locations of the Bank. Banks customer having any type of SB account that is Aadhaar enabled can now transact at the BC point.


Businesses play an important role in the growth of an economy. The growth of the economy becomes meaningful only when the economic output generated contributes to the overall welfare of the society. Towards this end, business establishments have to embed sustainability into the core of their business operations to create shared value for business and society. The Corporate Social Responsibility initiatives of the Bank are designed to make a positive impact on a wide range of areas of social life like healthcare, education/ livelihood enhancement, empowering women/ socially and economically disadvantaged, environmental sustainability/ green initiatives, protection of heritage/ culture, promotion of sports, rural development etc. aimed at promoting the overall development of the society. Further, to minimize the urban - rural divide, your Bank has been strengthening its rural orientation through initiatives aimed at imparting financial literacy and extending banking services to the people in rural unbanked areas, in a fair and transparent manner, at an affordable cost.

Further, pursuant to Section 135 of the Companies Act, 2013 read with Companies (Corporate Social Responsibility Policy) Rules, 2014, the Board has set-up a Committee of Directors namely, Rs.Corporate Social Responsibility (CSR) Committee and has also put in place a Policy on Corporate Social Responsibility (CSR Policy) to undertake projects/programmes in pursuance to the above Policy. The contents of the CSR Policy along with the report on amount spent on various projects/ programmes during the financial year 2017-18 is detailed in Annexure V to this report pursuant to Rule 8 of the Companies (Corporate Social Responsibility Policy) Rules, 2014.


An effective and sound internal audit function provides independent assurance to the Board of Directors and Senior Management on the quality and effectiveness of Banks internal control, risk management and governance systems and processes, thus helping the Board and the Senior Management in protecting the organization and its reputation.

Your Bank has put in place an effective and robust internal control apparatus, commensurate with its size, geographical spread and complexity of operations. At the apex level, guidance and direction on the control aspects is vested with the Audit Committee of the Board of Directors which takes an overall view on the internal control aspects and formulates all the related policy guidelines. The Bank has put in place an independent Compliance Department in charge of the entire compliance functions of the Bank.

Historically, the internal audit system in the Bank has been concentrating on transaction testing, testing of accuracy and reliability of accounting records and financial reports, integrity, reliability and timeliness of control reports and adherence to legal and regulatory requirements. With the implementation of Risk- Based Internal Audit (RBIA), greater emphasis is placed on the internal auditors role in mitigating various risks. While continuing with the traditional risk management and control methods involving transaction testing etc., the risk-based internal audit would, not only offer suggestions for mitigating current risk but also on potential future risk, thereby playing an important role in the risk management process of the Bank.

The risk assessment under RBIA would cover risks at various levels (corporate and branch; portfolio and individual transactions etc.) as also the processes in place to identify, measure, monitor and control the risks. The internal audit department is devising the RBIA risk assessment methodology, with the approval of the Board of Directors, keeping in view the size and complexity of the business undertaken by the Bank. The risk assessment process would include the identification of Rs.inherent business risk in the various activities undertaken by the Bank and evaluate the effectiveness of the control systems for monitoring the inherent risks of the business activities (‘Control Risk) and then draw up a risk-matrix by taking into account both the factors viz., inherent business and control risks.

With a view to seek periodic assurances on the adequacy and efficacy of internal control functions, the Bank causes periodic Regular Inspections and Information System (IS) Audit of all the branches and offices. Besides, your Bank also covers select branches under concurrent audit, the aggregate turnover of which account for over 65.76% of the gross bank credit and over 50.10% of aggregate deposits of the Bank. Short Inspection of all the branches which are not subjected to concurrent audit is also caused besides, concurrent audit of treasury functions (both domestic and forex), International Division, Forex designated offices, Central Processing Centre, Currency Chests, Monthly IS audit of Data Centre and quarterly IS audit of DR Site by CERT-In empanelled external security auditing firm, monthly external Integrated Audit of Customer Care Centre besides handling other regular Internal Audits by CISA qualified and ISO 27001 Lead Auditors etc. During the current financial year, it is proposed to bring the SWIFT messaging system and Regional Loan Processing Centre (RLPC) under the purview of concurrent audit.

Besides, the Bank has also been causing Stock and Credit audits of large borrowal accounts by external, professional audit firms in furtherance of effective credit administration. The Bank has also taken prompt action on the implementation of the RBI Guidelines on Information Security, e-Banking, Technology Risk Management and Cyber Frauds.

To apprise the effectiveness of management at different levels in accomplishing the assigned tasks towards achieving the overall corporate objectives, Management Audit is also introduced by your Bank for Departments at Head Office and Regional Offices.

Your Bank has put in place the policies and procedures for ensuring an orderly and efficient conduct of its business, safeguarding of its assets, prevention and detection of frauds and errors, accuracy and completeness of the accounting records and timely preparation of reliable and transparent financial information. The Audit Committee of the Board periodically assesses the effectiveness of the internal financial controls and their adequacy and issues directions for its strengthening wherever found necessary.

Your bank has automated audit process of Risk Based Internal Audit (RBIA) with effect from 11.12.2017.

Considering the need for having a strong collection mechanism and to contain slippages of borrowal accounts into NPAs and improve asset quality, the Credit Monitoring Department at Head Office and Credit Monitoring Teams at Regional Offices ensure adherence of post-sanction compliance requirements and follow-up of advance through effective control and communication mechanisms.


In view of the growing complexities in the processes, product offerings and systems and procedures in the Indian banking sector, pursuant to the recommendation of the High Level Steering Committee, Reserve Bank of India has shifted supervisory stance to risk-based approach called Supervisory Program for Assessment of Risk and Capital (SPARC) which is focusing on evaluating both present and future risks, identifying incipient problems and facilitating prompt intervention/ early corrective action etc. Your Bank has been included under the same and migrated to Risk Based Supervision since 31st March, 2015 and the system is working satisfactorily. A plan of action for monitoring various risks as advised by RBI has also been put in place.


As an important element in Corporate Governance structure, the Bank has formed a robust Compliance Department with sufficient independence to promote healthy compliance culture within the Bank. The compliance function in the Bank ensures strict observance of all statutory provisions, guidelines from RBI and other Regulators, standards and codes prescribed by BCSBI, Banks internal policies and fair practices code. Further, the compliance function includes interpretation/ dissemination of regulatory and statutory guidelines, observing proper standards of market conduct. The Banks compliance function assists the Top Management in managing the Compliance Risk effectively. The risk-based compliance programme of the Bank, under the supervision of head of compliance department, ensures appropriate coverage across businesses and co-ordination among risk management functions, besides verifying the level of compliance through Rs.Compliance Testing of branches. The Bank carries out an annual compliance risk assessment to identify and assess major compliance risks faced by it and takes steps to manage the risks effectively.


The growth of Banks business, introduction of prudential norms, Basel requirements, increasing regulatory and internal reporting and the various business decision making requirements have necessitated the Bank to build a well-coordinated information transmission system. Management Information System of the Bank (MIS) provides information to branches/offices, top management, regulators and external agencies, financial reporting, capital computation, Risk Based Supervision (RBS), internal business reviews etc. The Bank has also implemented a Centralized Data Repository for Automatic Data Flow to RBI.


The Core Banking System (CBS) covers all the branches and offices of the Bank as on 31.03.2018. Further, Alternate Delivery Channels like ATM, Internet Banking, Mobile Banking, UPI App etc., have also been integrated with CBS. Disaster Recovery (DR) facilities for all the critical applications are established to ensure business continuity in the event of primary site failure. A three-way data replication aimed at zero data loss is also implemented for applications such as CBS, ATM and Internet Banking.

The other technology enabled initiatives include the Asset Liability Management System (ALM), Central Data Repository (CDr), Lending Automation Processing Solution (LAPS) and Anti Money Laundering (AML) system, Enterprise Level Fraud Risk Management System(ELFRMS) for real time monitoring of Alternate Delivery Channel and CBS transactions, Mobile Banking, Unified Payment Interphase (UPI) Application, Integrated Treasury, Interactive Voice Response (IVR) System, Solutions for managing Market Risk and Operational Risk etc.

During the year under report, your Bank has undertaken several IT projects like Aadhaar linking to Bank account through ATM, Mobile and SMS, revamped Corporate Website, Alternative Network Lines for important business centres for ensuring business continuity, Goods and Services Tax (GST) and FATCA implementation, Aadhaar Enabled Payment System(AEPS), Image Based Debit Card etc. In order to upgrade the IT infrastructure, Bank has also taken up the replacement of more than 3000 Computers. Bank has also taken up e-Waste management to ensure safe disposal of hazardous electronic waste like used computers, servers, printers etc.

Your Bank will continue to observe technological revolutions and take appropriate decision at the right time to provide premier banking services and also continue to be a tech-savvy Bank.

Further, in view of increased dependency on IT products and services and also increase in the volume of fraud/ attacks observed in the industry, Bank has put in place a robust Rs.Cyber Security Policy and also initiated steps to further strengthen its IT, Cyber, and Information Security systems by putting in place required hardware/ software/ appliances in line with the industry best practices.


The Banking industry across the country is now being exposed to various changes which have a direct impact on the existing systems and sphere of activities. The survival and prosperity of any industry depends upon the quality of its human resource and banking industry is not an exception to this. Human Resource Development is the process of increasing the capacity of human resources through the development and thus, adds value to individuals, teams and the organization as a human system. Accordingly your Bank attributes the greatest importance to employee satisfaction andhuman resource development activities.

Your Bank deputes its employees to various training and development programmes to upgrade their skills and competencies and contribute towards the growth of the Bank. The Bank has a well-established Staff Training College having state of the art infrastructure facilities and expertise in conducting training programmes. Besides, Officers requiring specialized training are being deputed to various programmes conducted at Indian Institute of Management (IIM) at Bengaluru and Ahmedabad, Centre for Advanced Financial Research and Learning (CAFRAL) at Mumbai, National Institute of Bank Management (NIBM) at Pune, Reserve Banks College of Agricultural Banking (CAB) at Pune, Institute for Development and Research in Banking Technology (IDRBT) at Hyderabad, Foreign Exchange Dealers Association of India (FEDAI) at Mumbai, BQ Academy at Mumbai, Southern India Banks Staff Training College (SIBSTC) at Bengaluru, Indian Institute of Banking and Finance (IIBF) at Mumbai, Bankers Institute of Rural Development (BIRD) at Mangaluru, etc. During the year 2017-18, the Bank has deputed the employees to various trainings/workshops/conferences to update/improve their knowledge and skills. There were 2543, 641 and 94 nominations to various programmes in the category of Officers, Clerks and Sub-staff respectively covering 40% of the total staff strength during the year under report. Apart from traditional methods of training, your Bank has implemented eLearning module which enables the staff members to acquire knowledge on the subjects at a convenient location through easy learning techniques without the necessity of attending classroom training.

‘Capacity Building is the process which involves development and strengthening the skills, instincts, abilities, processes and resources of the organization. Your Bank has put in place Capacity Building Policy, under which the specialized areas such as Treasury Operations, Risk Management, Credit Management, Accounting, Human Resource Management and Information Technology have been identified as the key areas for which acquiring of certificate course from the institutions approved by RBI have been made mandatory.

As on 31st March 2018, Bank had 8185 employees. The Business per employee (excluding inter-bank deposits) has improved from Rs. 11.74 crore as on 31st March 2017 to Rs. 13.44 crore as on 31st March 2018. Further, your Bank has maintained cordial industrial relations and employee discipline.

Your Bank has put in place an institutional mechanism for protection of women employees at the workplace and adopted a policy pursuant to Section 22 of the Sexual Harassment of Women at Workplace (Prevention, Prohibition and Redressal) Act, 2013, providing for protection of women employees against the sexual harassment of women at the workplace and redressal of such complaints. The details of the complaints under the above Policy for the year under report are as under:

Number of complaints pending as at the beginning of the financial year NIL
Number of complaints filed during the financial year NIL
Number of complaints pending as on end of the financial year NIL


The Bank has implemented the Protected Disclosure Policy (Whistle Blower Policy) since the year 2007 intended to promote participation of employees at all levels and detection of corruption, misuse of Office, criminal offences, suspected/actual fraud, failure to comply with the rules and regulations prescribed by the Banks and any events/ acts detrimental to the interest of the Bank, depositories and the public resulting in financial loss/operational risk, loss of reputation etc. Further, the mechanism adopted by the Bank encourages the Whistle Blower to report genuine concerns or grievances and provides for adequate safeguards against victimization of Whistle Blower who avails such mechanism and also provides for direct access to the Chief of Internal Vigilance (CIV) in general and Chairman of the Audit Committee, in exceptional cases. The Vigil mechanism is reviewed periodically. The details of Whistle Blower Policy is posted in our website and available at the link https://kamatakabank.com/sites/default/files/2017- 09/PoNcy%20on%20Disclosure%20Scheme.pdf

For and on behalf of the Board of Directors


P Jayarama Bhat


Place: Mangaluru

Date: June 18, 2018.