karnataka bank Management discussions

Global Economic Outlook:

Weighing the Impact of Geopolitical Uncertainty and Inflation

The FY2023 narrative in the global economic arena was one of paradoxes. It was marked by a gradual attenuation of the virulent infections, considerable easing of supply chains, but also persistent geopolitical tensions and stubborn inflation. Central banks worldwide acted in unison, devising monetary strategies to counteract these challenges.

The geopolitical conflicts stirring in Europe and escalation in the Taiwan/Korean Peninsula created substantial volatility in global energy and commodity prices. In response, central banks globally chose to counter unyielding inflation by raising their key policy rates. Benchmark yields and equities fluctuated, painting a picture of a complex and intertwined global economy.

Amidst a year of paradoxes, the world grappled with persistent geopolitical tensions, stubborn inflation, and volatile commodity prices. Yet, glimmers of resilience emerged, with IMFs projections hinting at the easing of inflation and central banks globally adjusting to new economic realities.

However, even as economic heat maps flickered with instability, the International Monetary Funds (IMF) projections hinted towards a change in the weather. Indicators of inflation cooling and a slowdown in job openings emerged, but these have yet to translate into a concrete change in the central banks rate regime. The global growth rate was expected to fall from 3.4% in 2022 to 2.8% in 2023, and settle at around 3.0% in 2024. On the other hand, the global headline inflation was set to decrease from 8.7% in 2022 to 7.0% in 2023, with a full return to target inflation unlikely before 2025.

While fiscal and monetary policies remained largely accommodative, inflation ruling above targets forced several central banks of Emerging Market Economies (EMEs) followed by Advanced Economy (AE) to tighten monetary policy. In the financial markets, risk-off sentiment drove equity markets into a correction. The bearish government bond market experienced a hardening of real yields across AEs. Going forward, the global economic growth outlook depends on global headwinds from the geo-political tensions, resurgence of new variants of COVID-19, volatility in global financial markets and inflation trajectory.

Indian Economic Overview:

Driving Growth Amidst Global Economic Uncertainty

As the world grappled with economic uncertainties, India emerged as a beacon of resilience. With strong GDP growth and robust export figures, the nation proved itself as a steadfast growth engine amidst global fluctuations.

Indias domestic economic activity displayed resilience in the second half of FY2023. Real GDP growth for the year stood at 7.2%, driven by strong investment and private consumption trends. The agriculture and services sectors played instrumental roles in maintaining this growth trajectory, even though the manufacturing sector was reined in by high input costs.

The Gross Value Added (GVA) in agriculture and allied activities registered a 3.5% growth in FY2023. Despite rainfall irregularities impacting kharif production, food grains production reached a record high in FY2023. The services sector also held its own, posting a robust growth of 9.5%, powered by contact-intensive services like trade, hotels, transport, and communication, which grew by 14.0%.

Amid global economic uncertainties, India demonstrated the vitality of its growth engine, offering an optimistic outlook for global economic recovery.

The resilience and growth of the Indian economy serve as an encouraging signpost for future economic prosperity.

Indias external sector reflected a vibrant performance with merchandise exports rising by about 6% to a record US$447 billion. Despite this, inflationary pressures were hard to shake off completely, with the average CPI inflation standing at 6.7% compared to 5.5% in FY2022.

Heightened uncertainty surrounds the inflation trajectory, which is heavily contingent upon the evolving geopolitical situation. Global commodity price dynamics are driving the path of food inflation in India, including prices of inflation- sensitive items that are impacted by global shortages due to output losses and export restrictions by key producing countries. International crude oil prices remain high but volatile, posing considerable upside risks to the inflation trajectory through both direct and indirect effects. Core inflation is likely to remain elevated in the coming months, reflecting high domestic prices and pressures from the prices of essential medicines. Renewed lockdowns and supply chain disruptions due to the resurgence of COVID-19 infections in major economies could sustain higher logistics costs for longer.

Global Growth in 2023 as per IMFs forecasts	Indias GDP growth rate for FY2023	Indian Exports in FY2023 Indian Inflation in FY2023
2.8%	7.2%	US$447 Billion 6.7%

Indian Banking Sector Developments:

Adapting and Growing Amidst a Pandemic

The banking sector in India, much like the rest of the world, had to face numerous challenges in the past year due to the Covid-19 pandemic. However, as highlighted in the Reserve Bank of Indias (RBI) Annual Report 2022-23, it also saw a host of encouraging developments.

Liquidity remained stable, providing a necessary safety net against pandemic-induced disruptions. Public and private sector banks bolstered their financial health through profit retention and capital market funding. Impressively, the gross non-performing assets (GNPA) ratio for all scheduled commercial banks dipped to a six-year low.

The RBIs Report on Trend and Progress of Banking in India 2020-21, dated December 28, 2021, disclosed promising early signs of recovery in credit growth for the 2021-22 period (up to Dec 2021). Deposit growth, although slower at 10.1% at end-September 2021 compared to 11.0% the previous year, remains robust.

Several transformative developments in the banking sector emerged during this period:

• The launch of the Financial Inclusion Index and Digital Payments Index, aimed to enhance the quality of banking services and deepen digital payment penetration.

• The UPI123Pay implementation, opening the doors of formal banking to forty crore feature phone users, transitioning from a cash economy.

• Amendments to the Deposit Insurance and Credit Guarantee Corporation (DICGC) Act 1961, requiring DICGC to pay insured amounts to depositors within ninety days of RBIs withdrawal restrictions imposition on troubled banks.

• The establishment of the National Asset Reconstruction Company Ltd. (NARCL) aims to accelerate the resolution of high-value stressed assets.

Opportunities and Outlook:

The Union Budget 2022-23 further amplified the sectors momentum by focusing on hard infrastructure like roads, railways, and housing, which would generate employment, spur development, and boost the banking sectors growth. Various budget proposals, such as connecting 1.5 lakh post offices to the Core Banking System, setting up 75 Digital Banking Units (DBUs) in 75 districts, and additional allocations under ECLGS for the Hospitality Sector, among others, are set to catalyze economic recovery and facilitate healthier credit flow to major sectors.

Our banking segments:

Pursuant to the Guidelines issued by RBI on Accounting Standard 17 (Segment Reporting), the Bank has identified four business segments viz., Retail Banking, (including DBUs) Corporate /Wholesale Banking, Treasury and Other Banking Operations for the year ended March 31, 2023. Details about aforesaid business segments are discussed hereafter:

Retail Banking: Comprehensive Retail Banking Services: Tailoring Financial Solutions

Your Bank offers an extensive range of personal banking products within the retail segment encompassing home loans, automobile loans, personal loans, education loans, loans against term deposits and securities, gold loans, small business banking loans, and agriculture loans.

Retail Banking includes credit of up to 7.50 Crore to industry, service, agriculture, forex, and other business activities. To manage this portfolio, the Division comprises four specialized wings: Agriculture, Forex, SMEs, and Others. An exclusive Agriculture Credit Support Group within the Retail Finance Division deals solely with agriculture credit, emphasizing our commitment to this crucial sector.

In addition to this, we lend extensive support to the MSME sector through our retail banking arm. Our range of banking products includes Working Capital Finance, Term Loans, and Business Finance Products, both fund-based and non-fund based, tailored to fit needs of every industry/sector. We are a registered financier on the TreDS platform, providing an additional financing avenue to MSMEs.

Your Bank has marked its presence in more than 200 out of 388 clusters identified by the United Nations Industrial Development Organization (UNIDO) as having significant MSME concentration and caters to the credit needs of these MSME units through our dedicated branch teams spread across these clusters.

Efficient Credit Management:

In an effort to streamline and standardize our credit underwriting practices, we established three Centralised Loan Processing Hubs (CLPHs) in Mangaluru, Bengaluru, and Ahmedabad. Alongside this, a Centralised Loan Sanctioning Centre (CLSC) was set up at Mangaluru. To further speed up the loan sanctioning process, Bank upgraded the existing three CLPHs as Regional Loan Sanctioning Centres (RLPCs) and introduced two new RLPCs. This set up manages credit proposals of up to Rs 5 Crore, considering product or facility specifics under Retail, MSME, Agri, and Forex credit facilities.

During the reporting year, our Retail Segment delivered strong performance. It generated revenue of 3755.78 crores (Previous year: 2910.17 crore), contributing Rs 1634.08 crores (Previous year: 920.35 crore) to the profit before tax and un-allocable expenditure, further attesting to our robust retail banking strategy.

Corporate and Wholesale Banking:

Nurturing Large-Scale Business Growth

Our Bank extends its financial expertise to meet the specific needs of corporate and wholesale banking business clients, with a focus on serving entities with an individual exposure exceeding 7.50 crore. This includes catering to the banking necessities of large-sized corporations across diverse industries.

Our portfolio of corporate banking products and services is comprehensive, featuring a variety of fund-based products such as term loans, working capital facilities, foreign exchange services, structured finance, trade financing, and bill discounting. Additionally, we provide non-fund-based products including letters of credit and guarantees, broadening our offering to fully cater to the diverse needs of our corporate clients.

In the fiscal year under report, the Corporate and Wholesale Banking Segment demonstrated satisfactory financial performance. It generated revenue amounting to 2691.29 crores (Previous year: 2506.24 crores). Furthermore, it significantly contributed to the Banks profit, yielding 462.62 crores (Previous year: 526.63 crore) before tax and un-allocable expenditure. This strong performance underscores the value of our tailored financial solutions for the corporate and wholesale banking clientele.

Treasury Operations: Streamlining Financial Management

The Banks treasury operations primarily manage statutory reserves, such as Statutory Liquidity Ratio (SLR) and Cash Reserve Ratio (CRR), while ensuring effective liquidity management. Alongside these core functions, our treasury operations are responsible for investment and trading activities and the execution of foreign exchange operations.

In the pursuit of optimizing liquidity, the Treasury invests primarily in sovereign debt instruments and other fixed- income securities. Moreover, the Bank utilizes instruments such as commercial papers, mutual funds, certificates of deposits, and floating-rate instruments to manage short-term surplus liquidity. In terms of foreign exchange, our operations are centralized in Mumbai and extend the scope of our Integrated Treasury. We provide our clients with a broad array of products and services, including forward contracts and diverse foreign exchange solutions.

During FY 22-23, our Treasury operations earned a total revenue of 1276.83 crores (Previous year: 1315.30 crores) from these operations, contributing 182.23 crores (Previous year: 256.12 crores) to profit before tax and un-allocable expenditure.

Other Banking Operations: Comprehensive Financial Services

Our Bank offers a wide variety of products and services, including savings accounts, current accounts, wholesale term deposits, international debit cards, locker facilities, depository services, Application Supported by Blocked Amount (ASBA) facility, and Sovereign Gold Bonds. Further Bank offers services such as co-branded credit cards, online trading facility, Point of Sale terminals, Fastag, distribution of life insurance, general insurance products and social security schemes, distribution of Mutual Fund units, Wealth Management services and payment gateway services through tie- ups with the respective channel partners.

These offerings are made accessible to our customers through both physical banking channels and digital platforms, including Internet or E-banking, Mobile Banking, ATMs/Cash Recyclers, E-lobbies, digital banking solutions, QR payments, Aadhar Enabled Payment System, UPI and 24*7 Contact Centre. Our aim is to ensure the availability and convenience of banking services for all customers, irrespective of their preferred banking method.

In the fiscal year under report, this segment generated revenues of 424.58 crores (Previous year: 427.66 crores) and delivered a net result of -48.63 crores (Previous year: -11.59 crores).

Banking Outlets and Alternate Delivery Channels: Expanding our Reach

While your Banks presence is notably strong in South India, we have been conscientiously expanding our network of branches and control offices across various regions of the country. In making these expansion decisions, we rigorously evaluate potential business opportunities, earnings, and customer reach.

As of 31^st March 2023, your Bank had 2376 service outlets including 901 branches (including two Digital Banking Units), 871 ATMs, 603 cash recyclers (CRs) and one extension counter, with a presence in 578 centres spread across 22 States and 2 Union Territories.

Apart from these customer-facing outlets, our robust infrastructure includes one co-located Data Centre equipped with a Disaster Recovery Centre and Near Line Site (NLS), two service branches, four Currency Chests, two Central Processing Centers, one Digital Centre of Excellence, one Analytical Centre of Excellence and eight Asset Recovery Management Branches.

Over the past year, we have continued to broaden our reach. We have opened 24 new branches and made the strategic decision to move our integrated treasury to Mumbai by merging it with our domestic treasury. To further speed up the loan sanctioning process, the Bank upgraded the existing three CLPHs as Regional Loan Sanctioning Centres (RLPCs) and introduced two new RLPCs. Our ongoing expansion highlights our commitment to enhancing accessibility, improving customer experience, and continually evolving to meet the changing needs of our customer base.

Mobile Banking and Net Banking:

Besides ATM/CRs, the Mobile banking app-KBL Mobile Plus and Net banking-KBL Money Click are the prominent delivery channels. During FY2023, value-added features like Mobile Banking in Hindi & Marathi languages, Travel Ticket Booking, Sovereign Gold Bond (SGB), Online Locker booking facility, Fraud reporting and channel blocking option, and Adaptive Authentication were launched. As on March 31,2023, 93.48 percent of transactions were performed through digital channels.

For improved coordination and delivery, Bank has recently opened an IT and Digital Hub in Bengaluru which houses Banks entire Information Technology vertical.

Bancassurance Business: Offering Comprehensive Insurance Solutions

Life Insurance: Your Bank has been committed to providing comprehensive life insurance solutions through well- established partnerships. We have maintained an association with PNB Metlife Insurance Company Limited for over two decades, partnered with Life Insurance Corporation of India since 2017, and joined forces with Bharti AXA Life Insurance Limited since 2019. These collaborations enable us to offer our customers a diverse range of life insurance products that cater to their unique needs.

General Insurance: In the realm of general insurance, we have expanded our portfolio by joining hands with Universal Sompo General Insurance Co Ltd and Bajaj Allianz General Insurance Company Limited. Through these alliances, we offer a broad spectrum of health and non-life insurance products to our customers.

As part of our commitment to providing financial security, your Bank introduced the Group Personal Accident (GPA) Insurance scheme, "KBL Suraksha". This program, in collaboration with M/s Universal Sompo General Insurance

Company Ltd, provides Personal Accident Insurance coverage for accidental death. Launched with a vision to extend social security to our eligible Savings Bank (SB) account holders, the scheme is attractively priced with a minimal premium.

Additionally, we extend the benefits of various Social Security Schemes at all our branches. These include Pradhan Mantri Jeevan Jyoti Bima Yojana [PMJJBY], Pradhan Mantri Suraksha Bima Yojana [PMSBY], National Pension Scheme (NPS), and Atal Pension Yojana (APY). These schemes reflect our commitment to contributing to general as well as our customers financial stability and well-being.

Co-Branded Credit Cards: Enhancing Consumer Convenience

In a bid to offer enhanced financial flexibility to our customers, your Bank initiated the offering of co-branded credit cards. Launched on March 31,2017, this initiative was established in partnership with SBI Cards, and we are currently issuing two card variants: the Simply Save Card and the Prime Card.

Throughout the past year, we have successfully achieved a significant milestone by issuing over one lakh cards. During the year, Bank issued 1.25 lakh co-branded credit cards with total outstanding cards at 2.42 lakh.

Sovereign Gold Bonds

Your Bank is distributing Sovereign Gold Bonds to its customers since 2015. The experience has been made totally digital since December 2022 through Banks Mobile Banking app- KBL Mobile Plus.

Demat and Online Trading Services: Streamlining for Our Customers

Marking its registration with SEBI as a Depository Participant (DP) back in 2006, your Bank has been consistently providing efficient Demat services for over a decade. In a bid to enhance our offerings and streamline operations for our valued customers, we currently have a cooperative arrangement with Way2Wealth Securities Pvt. Ltd and IIFL Securities Ltd. This 2-in-1 partnership facilitates seamless online Demat and trading services, bolstering the ease of banking and financial management for our customers.

Mutual Fund Unit Distribution: Customised for Client Requirements

As an AMFI-registered mutual fund distributor, your Bank has partnered with eight leading asset management companies and we have leveraged our branch network to provide these services to meet the customers requirements. Bank has partnered with Finwizard Technology Private Limited to offer online distribution of mutual fund units through their digital platform -FISDOM mobile application.

Point of Sale (POS) Network: Streamlined Payment Collection and Cash Withdrawals

Your Bank actively serves as a comprehensive solutions provider for merchant partners, leveraging the Point of Sale (PoS) services enabling automated collection of payments for our partners. Bank has partnered with Mswipe Technologies Private Limited and Bijilipay to expand service offerings in this space.

Bank has also launched Cash@POS facility which is available at over 9,311 PoS terminals installed across various merchant establishments nationwide, where customers or non-customers of our Bank can withdraw cash using their debit cards or open system prepaid cards (issued by Banks in India) at our PoS terminals.

FASTag Facility: Smoothing Out Toll Transactions

In our continuing efforts to enhance customer convenience, your Bank offers KBL-FASTag facility and has enabled KBL FASTag recharge facility through multiple platforms such as Mobile Banking, UPI, and the NETC FASTag portal.

Prioritizing Customer Service

Your Banks primary focus has always been on elevating the customer service to new heights, thereby setting benchmarks in the banking industry. This pursuit demands the creation of unique, efficient, and cost-effective mechanisms to deliver banking services. Bank has embarked upon offering its services through digital platforms by providing self and assisted journeys across asset and liability products further enhancing customer experience and convenience.

We understand the importance of effective systems and procedures for the services we render to our customers. This understanding extends to a proficient grievance redressal mechanism, including an Internal Ombudsman [IO] aligned with guidelines provided by the Reserve Bank of India (RBI) and the Indian Banks Association (IBA).

In our quest to make banking accessible to everyone, we provide doorstep banking services for our Senior Citizen customers aged 70 or above, and differently-abled or infirm individuals, including visually impaired persons. These services are available at all our branches in metro centres and, on a best-effort basis, at all other branches. This initiative demonstrates our commitment to cater to the banking needs of our customers, ensuring they can access banking services from the comfort of their homes.

Digital Initiatives under KBL-Vikaas

During the reported year, we have launched multiple initiatives as part of the KBL-Vikaas project. Here are some significant new launches:

a. Digital Journeys/ Products/Services:

• Online Account Opening with Video KYC Process

• Launching Account Aggregator

• Whatsapp Banking

• KBL Mobile Plus enhancements with multi-language support

• Honey Deposit Automation

• Online solutions for Sovereign Gold Bond investments and NPS

• Implementation of insurance platform- Banca Edge to provide comprehensive solutions for sales, service and MIS

• e -Connect Platform on the Banks Website

• Trade Finance Automation for outward remittance and processing of export credit

b. Digital Tools & Enablers:

To improve and redefine the internal processes, a suite of internal tools has been introduced and during FY 202223, the following were added:

• Digitization of Audit Activities.

• CERSAI-API,

• E-ticketing system for timebound redressal of grievances from operational teams.

• Automation of MIS Dashboards.

c. Digital Marketing and Digital Customer Survey:

Bank conducted several digital marketing campaigns for our products through social media, our website, Mobile and Internet Banking, and ATMs. Branding exercises have also been undertaken, with the usage of hashtags, blogs, hosting of videos of CSR activities, customer testimonials, etc. Regular digital customer surveys help us understand our customers needs and evaluate the effectiveness of our products. We have also listed the location of all our branches on Google Maps and local search results using the Google My Business tool.

d. Digital Adoption:

As of March 31, 2023, digital channels were used for 93.48% of transactions. Further, digital adoption in loan underwriting was in the range of 73% to 79% across digital products and 100% in KBL Xpress Cash.

Human Resources

In the face of rapidly advancing digitalization, the banking industry faces many changes and challenges. The survival and prosperity of any industry hinge upon the quality of its human resources, and banking is no exception. Human Resource Development is a continuous, systematic, and planned process geared towards fostering employee competencies, dynamism, motivation, and effectiveness.

In line with this, your bank places paramount importance on employee satisfaction, well-being, and human resource development activities. We have appointed a Chief Learning Officer specifically to oversee skill development and training needs. We have also implemented an Employee Career and Development System (ECDS) by operationalizing the Performance Management System (PMS). This system lays out role-based, measurable and behavioural Key Result Areas (KRAs) against which an employees performance is assessed on a monthly basis.

Moreover, we have put a Talent Management Committee (TMC) in place to identify and groom talent, fostering succession planning in the process.

For various HR Processes, Bank has introduced Robotic Process Automation (RPA). For Executives/Officers in sensitive positions, Mandatory Leave has been introduced as a risk mitigation measure. For the benefit of women employees, Bank has Sabbatical Leave Scheme in place and 58 employees have availed of this benefit during the FY.

We value opinions and suggestions from all employees, encouraging their inputs, thoughts, and innovative ideas, which help create a highly productive, competitive, and reliable workforce.

Training and Development:

Training is a key factor in human resource development. For any organization aiming to gain a competitive edge through increased performance and outstanding service from its employees, effective training is crucial. Its essential for staff members to be equipped with the required knowledge and skills to meet current challenges, perform tasks efficiently, and prepare them for higher responsibilities.

So far, the Bank has hosted 108 e-learning modules on the ELM platform, covering all facets of banking, essential products/processes of the Bank, Para banking, IT, Information and Cyber Security, Risk, etc. E-learning gives staff members a valuable opportunity to gain knowledge on various subjects at their location, using easy learning techniques without the need for classroom training. These modules are in simple and clear language, understandable to everyone, and upon successful completion, an e-Certificate is awarded.

Our bank regularly deputes its employees to various training and development programs to enhance their skills, competencies, and contributions to the Banks growth. We have a well-established Staff Training College, awarded the prestigious ISO 9001:2015 certification for Compliance Quality Management Standards. We depute officers and staff to elite institutes for specialized training like the Indian Institute of Management (IIM) Ahmedabad, State Bank Institute of Leadership (SBIL) Kolkata, Centre for Advanced Financial Research & Learning (CAFRAL) Mumbai, National Institute of Bank Management (NIBM) Pune, and others.

During the year 2022-23, 5873 employees were nominated for various trainings/e-workshops/conferences covering 72.63% of the total staff strength. Further, a total of 5030 members of staff including executives have undergone the training at our Staff Training College and 2647 members of staff have been trained at the external training Centres (1804 Staff members have attended training at both STC and external training centres.) such as SIBTSC, IIBF, RBI- CAB etc., either offline or online mode. Further, Leadership Development Programme was conducted at SBIL (State Bank Institute of Leadership) for executives. Under our Capacity Building initiative, areas like Treasury Operations, Risk Management, Credit Management, Accounting, Human Resource Management, and Information Technology have been identified for specialized training, and staff members are encouraged to acquire certification courses from institutions approved by IBA.

Review Of Financial Performance (Standalone):

a. Summary:

As on March 31,2023, the Business Turnover of the Bank reached a new high of 147319.63 crores. During the FY 2022-23, Bank registered an all-time high net profit of 1180.24 crores. The share of CASA was at 32.97%. The asset quality improved with a 16 bps and 72 bps reduction respectively under Gross NPAs and Net NPAs. The Bank has further consolidated its position in Provision Coverage Ratio (PCR) which improved to 80.86% and CRAR which improved to an all-time high of 17.45%. Overall, the year 2022-23 was a year of business excellence witnessing further strengthening of the fundamentals of the Bank.

Net Interest Income increased by 27.86 % to 3185.10 crores from 2,491.03 crores as Interest income increased by 16.05 % to 7220.23 crores from 6221.66 crores. As a result, Net profit increased by 132.05 % to 1180.24 crores from 508.62 crores.

The following table sets forth the analysis of Net interest income and Interest spread:

>

(in crores)	FY23	FY22	Change(%)
Interest earned	7220.23	6221.66	16.05
Interest expended	4035.13	3730.63	8.16
Net Interest Income	3185.10	2491.03	27.86
(in crores)	FY23	FY22	Change(%)
Net Interest Margin (%)	3.70	3.18	52 bps
Yield on Advances (%)	9.41	8.84	57 bps
Cost of Deposits (%)	4.62	4.66	-4 bps
Interest Spread in Lending (%)	4.79	4.18	61 bps

Net interest margin and Interest spread have improved by 52 bps and 61 bps respectively as there was a 57 bps increase in yield on advances while the cost of funds moderated.

b. Interest Earned

During FY23, your Bank earned an interest income of 7220.23 crores up by 16.05% over 6,221.66 crores earned in FY22.

(Rs in crores)	FY23	FY22	Change (%)
Interest on advances and Discount on bills	5,584.91	4,737.88	17.88
Income on investments	1,422.35	1,310.12	8.57
Interest on balances with RBI and inter-bank funds	1.58	31.89	-95.05
Other interest income	211.39	141.77	49.11
Interest earned	7,220.23	6,221.66	16.05

The increase in Interest on advances and Discount on bills by 17.88% was on account of an increase in MCLR and other External Benchmark Lending rates, while Income on investments went up by 8.57% due to an increase in average investments from 22845.56 crore during 2021-22 to Rs 23855.88 crore during 2022-23.

c. Other Income

(Rs in crores)	FY23	FY22	Change(%)
Other Income	992.58	953.88	4.06

Other income increased to Rs 992.58 crore from Rs 953.88 crore i.e., by 4.06 % primarily due to an increase in nonfund business and other para-banking activities during the FY 2022-23.

d. Interest Expense

The following table sets forth the details of interest expense.

(Rs in crores)	FY23	FY22	Change(%)
Interest on deposits	3786.86	3584.65	5.64
Interest on borrowings from RBI and Banks	53.35	39.42	35.34
Other interest	194.92	106.56	82.92
Interest expended	4035.13	3730.63	8.16

e. Operating Expenses

The following table sets forth the broad lines of operating expenses.

(Rs in crores)		FY23	FY22	Change (%)
Employee cost		1069.19	1014.95	5.34
Depreciation		86.41	73.67	17.29
Other administrative expenses		813.85	722.3	12.67
Total operating expenses	A	1969.45	1810.92	8.75
Total income (Less) Interest	B	4177.68	3444.91	21.27
Expenditure
Cost to income Ratio (%)	C = A/B	47.14	52.57	-543 bps

The Cost to Income Ratio has decreased mainly on account of an increase in Net interest income.

f. Provisions and contingencies

The following table sets forth the details of provisions for NPA etc.

(Rs in crores)	FY23	FY22	Change(%)
NPA	889.95	590.61	50.68
Standard advances (including NPV of Restructured	-121.49	327.08	-137.14
Standard advances)
Investments	0	10	-100.00
Others	-1.28	11.75	-110.89
Provision for Tax	260.8	185.94	40.26
Total provisions	1027.98	1125.38	-8.65

During FY23, Bank has resorted to accelerated provisioning for non-performing advances banking on the strength of its Balance Sheet thereby increasing its PCR above 80% levels and moderating Net NPAs to below 2% levels. The provision on Restructured advances has decreased as there was a reduction in Restructured portfolio by 28.51% thereby reducing the provisioning requirement for such advances. Also, with effect from the Assessment year 2021-22, the Bank has opted for the new regime of tax under section 115 BAA of the Income tax Act 1961.

g. Deposits

The following table sets forth the details of the deposits.

(Rs in crores)	FY23 ¦	FY22	Change (%)
CASA deposits	28807.07	26499.59	8.71
Retail term deposits	58560.94	53886.79	8.67
Others	---	0.47	--
Total	87,368.01	80,386.85	8.68

Higher growth in CASA deposits helped the bank to reduce its overall cost of deposits from 4.66% in FY22 to 4.62% in FY23.

h. Advances

During FY 2022-23, advances grew by 5.58%. The details are as under:

(Rs in crores)	FY23	FY22	Change (%)
Advances	59951.62	56783.14	5.58

i. Asset quality / Provisioning

Asset quality refers to the recoverability of an advance, measured by the behaviour of the borrower in timely payment of interest and instalments and other parameters. As per RBI guidelines, we have classified our advances into Standard, Substandard, Doubtful and Loss assets depending upon how long a loan has remained a nonperforming asset (NPA) and made provisions as per those guidelines.

Classification of NPAs is as follows: (Rs in crores)

	Gross NPA	Provision held & other netting items	Net NPA
Sub-standard	681.15	144.78	536.37
Doubtful	1381.03	873.51	439.83
Loss	230.73	182.90	45.07
Total NPA	2292.91	1201.19	1,021.27
NPA%	3.74	-	1.70

j. Capital Adequacy

Your Bank maintained a strong capital position and capital adequacy ratios were well above the minimum regulatory requirements of 11.50% as per Basel III capital adequacy guidelines stipulated by RBI.

Capital-To-Risk Weighted Assets Ratio (CRAR) under Basel III:

	(Rs in crores)		As on 31.3.2023	As on 31.3.2022
A	Tier I Capital
	Paid-up Equity Capital		312.35	311.17
	Reserves under Tier I Cap.		7258.31	6,247.02
	Total Tier I Capital		7570.66	6,558.19
B	Tier II Capital
	General Provisions & Reserves		721.87	540.35
	Subordinated Debts		1020.00	1020.00
	Eligible Tier II Capital		1741.87	1,560.35
C	Total Capital Tier I and II	A+B	9312.53	8118.55
D	Risk-Weighted Assets		53378.41	51,855.44
E	CRAR Tier I Capital	A/D	14.18%	12.65%
F	CRAR Tier II Capital	B/D	3.27%	3.01%
G	CRAR Tier I and Tier II Capital	C/D	17.45%	15.66%

k. Key Ratios

Ratio	UoM	As on/FYE 31.03.2023	As on/FYE 31.03.2022
Productivity ratios
Operating Profit per employee	Rs in crores	0.26	0.19
Operating Profit per branch	Rs in crores	2.45	1.86
Business per employee	Rs in crores	17.03	16.10
Business per branch	Rs in crores	163.51	156.41
Profitability
Net interest margin	%	3.70	3.18
Interest spread	%	4.79	4.18
Cost to income	%	47.14	52.57
Asset quality
Gross NPA	%	3.74	3.90
Net NPA	%	1.70	2.42
Capital efficiency
Business turnover	Rs in crores	147319.63	137169.99
Credit deposit ratio	%	68.62	70.64
Return on assets	%	1.21	0.56
Return on equity	%	15.42	7.41
Provision coverage ratio (PCR)	%	80.86	73.47
Capital-To-Risk Weighted Assets Ratio (CRAR)	%	17.45	15.66
Shareholder value
Earnings per share		37.88	16.36
Book value per share		262.96	228.01

As provided in the above table, significant changes i.e., variation of more than 25%, were observed in Key ratios such as Net NPA, return on assets, return on equity and Earnings per Share during the FY 2022-23.

Risk and Mitigation

A Gist of how the Bank manages the key risks associated with its operations is provided hereunder:

Type of Risk	Mitigation Process	Strategy
CREDIT RISK
Credit risk is the possibility of a banks borrower or counterparty failing to meet their obligations in accordance with agreed terms.	Your Bank has developed an online comprehensive credit risk rating system for quantifying and aggregating the credit risk of all borrower accounts across various exposures. Bank has introduced Specialized lending rating models, Retail Scorecard model (Pool based approach) and Facility Rating Model. Further, score card models under Business Rule Engine (BRE) approach have also been introduced for the digital underwriting process. Credit Audits, Legal Audits and Stock Audits of large credit exposures are conducted to limit the magnitude of credit risk.	Ensuring healthy asset quality by continuous monitoring and collection follow-ups through Credit Monitoring Department (CrMD).
MARKET RISK
Market risk is the risk to earnings and capital resulting from movements in market prices, particularly changes in interest rates, foreign exchange rates and equity and commodity prices, including the volatilities resulting from those changes.	Bank has put in place Board approved Policy on Integrated Treasury, Policy on Asset Liability Management (ALM), Policy on Market Risk Management and Policy on Fund Transfer Pricing for effective management of Market Risk in the Bank. Besides, there are inbuilt thresholds for close monitoring of the market movement.	Optimizing returns from various assets and market-linked instruments, treasury operations etc.
LIQUIDITY RISK
Liquidity risk arises when a bank fails to meet its contractual obligation in its daily operations due to inadequate funds flow	Proactive analysis of different circumstances viz. Funding risks, Time risks, and call risks which would cause liquidity risk to the banks. Liquidity risks is assessed using gap analysis for maturity mismatch based on residual maturity in different time buckets. Advanced techniques such as Stress testing, simulation, sensitivity analysis etc. are conducted at regular intervals to monitor the liquidity and to draw the action plan if required.	Advanced assessment of the need for funds and coordinating with various sources of funds available to the Bank under normal and stressed conditions.
INTEREST RATE RISK
This is a Risk that arises when the financial value of assets or liabilities (or inflows/outflows) is altered because of fluctuations in interest rates.	An analysis is conducted by applying various shocks on product-wise weighted average interest rates in each time band. The interest rate risk is viewed from different perspectives viz. Earnings Perspective and Economic Value Perspective. The former is measured using Earnings-at-Risk (EaR) under Traditional Gap Analysis (TGA) while the latter is measured through changes in the Market Value of Equity (MVE) under Duration Gap Analysis (DGA).	Ensuring appropriate trade-off between the cost of deposits and interest rate on advances.
Type of Risk	Mitigation Process	Strategy
CYBER RISK
This is a Risk associated with financial/data loss, disruption or damage to the reputation of an organization from unauthorized / deliberate malafide or erroneous use of information systems.	Bank has adopted a layered security model for protecting the customer data and is aligned to cyber security framework of RBI & CIS standards. Bank has deployed multiple security solutions such as End point security solutions, Endpoint Detection and Response solution, Network firewalls with Anti-malware / Antibot capabilities, Application firewalls, Intrusion Prevention Systems, Advanced Persistent Threat detection system, e-mail security, Secured Proxy, Data Leak Prevention solutions, Honey Pot systems, and Privilege Identity Management (PIM) to protect its information systems. Bank has also availed cyber security services for DNS security, Anti-DDOS services, Dark Web Monitoring Services, Anti-phishing simulation services. Bank has also put in place adequate data security measures such as data encryption, Data Leak Prevention etc. Bank has a robust vulnerability management & penetration testing practices and automated patching solution. Bank has a 24/7*365 captive Cyber Security Operation Centre (C-SOC), wherein, the logs are pro-actively monitored through Security Information Event Management (SIEM) tools and incident response measures undertaken to prevent cyber security attacks.	Strengthening Banks internal cyber resilience system while keeping a watch on the cyber risk associated incidents in the outside world.
Type of Risk	Mitigation Process	Strategy
	Bank has adopted the cyber security controls prescribed by RBIs cyber security framework and also have implemented Digital Payment Security Controls for its Alternate Delivery Channel (ADC) products. All other regulatory compliances are also being strictly adhered to. Bank has also availed adequate cyber security insurance for handling its cyber risk.
	Bank is certified under ISO/IEC 27001:2013 standards for the Information Security Management System (ISMS) for the systems and procedures related to Information Technology services of the Bank.
	Bank has taken active measures to impart cyber security awareness to its staff, customers by the way of cyber security trainings, e-mail news letters, social media adverts and through SMS alerts.
	Bank is also keeping pace with latest technologies for suitable adoption as part of its cyber security preparedness. Board and top management of the Bank closely reviews cyber security preparedness through various internal forums and advises for adoption of best practices.
Operational Risk
Operational risk is the risk of direct or indirect loss resulting from breakdowns in internal processes, people, systems and external events.	Bank has initiated several measures to manage operational risk through the identification, assessment and monitoring of inherent risks in all its business processes. Systems and controls have been built in the Core Banking Solution to avert probable fraud incidents. Bank has also implemented the Enterprise Level Fraud RiskManagement System (ELFRMS) to identify potential fraudulent transactions under various Alternate Delivery Channels (ADC) and Core Banking Solutions (CBS). The system is intended to identify potentially fraudulent transactions on a real-time basis, based on predefined probable fraud scenarios. ELFRMS operates 24*7 with a DR set up to ensure business continuity.	Introduction/modifications of products/ processes would be taken up postassessments primarily using the Risk and Control Self-Assessment (RCSA) to identify, evaluate, monitor, and mitigate key operational risks within the Bank. Bank has implemented the Operational Risk Management application Kalypto/ Ops to effectively manage the operational risk.

Internal Control Systems - Adequacy and Compliance

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 of the internal control aspects and formulates all the related policy guidelines.

Your Bank has put in place an independent Compliance Department headed by a Chief Compliance Officer who is Incharge of the entire compliance functions of the Bank to ensure effective implementation and compliance with all the directives issued by various Regulators, its Board of Directors and its own Internal Control Policy.

Risk-Based Internal Audit (RBIA):

Your Bank has adopted a Risk-Based Internal Audit (RBIA) mechanism which ensures greater emphasis 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 risk, thereby playing an important role in the risk management process of the Bank. The risk assessment under RBIA covers 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 has put in place the RBIA risk assessment methodology, with the approval of the Audit Committee of the Board of Directors, keeping in view the size and complexity of the business undertaken by the Bank. The risk assessment process includes the identification of Inherent Business Risk in various activities undertaken by the Bank and evaluating the effectiveness of the control systems for monitoring the Inherent Risks of the business activities. The Internal Audit function of the Bank, operates independently under the supervision of the Audit Committee of the Board, thereby ensuring its independence.

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

Concurrent Audit, Credit & Stock Audit

Besides, your Bank also covers select branches under concurrent audit as per the Concurrent Audit Policy of the Bank and Short Inspection of all the branches as well. Concurrent Audit of Treasury functions (both domestic and forex), Integrated Treasury, Forex designated branches, Centralised Loan Processing Hub, Centralised Loan Sanctioning Centre, Centralized Account Verification Cell, SWIFT reconciliation, and external Integrated Audit of Centralised Reconciliation Cell is also undertaken.

Besides, the Bank has also been causing Stock/Credit Audits and Legal Audits of large borrowal accounts by external professionals in furtherance of effective credit administration. Banks Credit Monitoring Department and Risk Management Department are acting as Risk resilient systems for effectively monitoring and managing for mitigation of various risks.

Testing of Internal Financial Controls over Financial Reporting (ICFR)

As per the requirement of the Companies Act, 2013, Bank has formulated Internal Financial Controls framework by documenting risks and controls associated with each process in the Bank and testing of Internal Financial Controls over Financial Reporting (ICFR) is done annually.

Information Systems Audit

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) audits of all the branches and Offices. IS Audit of Data Centre and DR Site is done by CERT-In empanelled external security auditing firm besides conducting other regular IS Audits by internal CISA qualified and ISO 27001 Lead Auditors etc. Your Bank has implemented a Defence in Depth security architecture with continuous monitoring by the Securities Operations Centre (SOC) integrated with SIEM to safeguard the interest of the banks assets and its stakeholder. The systems and processes of the Data Centre, NLS & IT, and RMD departments of the Bank are ISO 27001:2013 certified.

Your Bank has put in place the policies and procedures for ensuring 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.

l. The Path Ahead

During FY 2022-23, Bank achieved new highs in major parameters and further improved most of the benchmark ratios. During the fiscal FY 2023-24, the Bank will continue its focus on retail loans, gold loans, Agri, MSME and Mid Corporate Sectors to achieve sustainable and remunerative business growth. Bank will further expand its branch network in identified centres to increase customer outreach in potential areas.

As your bank is set to celebrate its 100th anniversary during the fiscal year of 2023-24, numerous activities have been lined up to mark this milestone year. The Bank is readying itself for its second-century saga, Bank envisions transforming itself into a new age entrepreneurial start-up like digital Bank.