karur vysya bank ltd share price Management discussions


1. ECONOMY REVIEW 1.1 Global economy

The first half of Calendar Year 2021 depicted a hesitant and asymmetrical global economic recovery, which was impacted by the continuing and pervasive effect of COVID-19, especially with the advent of new variants causing increased fatalities. The year was also marked by supply side disruptions and the onset of a super cycle of commodity price increases. Global trade recovered during second half of the year, despite the supply and logistics bottlenecks and the unprecedented collective policy efforts by governments and central banks helped minimise the lasting economic damage across the world.

With Russia invading Ukraine in February 2022, oil and other commodity prices have surged significantly, thereby worsening the already high inflation dynamics across the globe. The escalation in the geo-political tension has also led to increased financial volatility. According to the I nternational Monetary Fund (IMF) report of April 2022, global growth during the year was 6.1%. Rising supply chain disruptions, shortages for semiconductors and containers, rise in shipping costs and the continued energy crisis complicated by the ongoing geopolitical conflict are creating short-term challenges for business.

Combining the effects of the COVID-19 pandemic, the recent geopolitical tensions has slowed the global economy, which is entering what could be a prolonged period of slow growth and high inflation. The Fed raised its benchmark rate by 75 basis points - the largest increase since 1994 - to a range of 1.5% - 1.75%, signaling larger rate hikes to come that would increase the risk of another recession.

Outlook

The global recovery appears to have lost a significant momentum during Calendar Year 2022 and the outlook appears to be grim. The uncertainty about the direction of Russia-Ukraine crisis, shortage of key intermediaries, lockdowns in China, creeping up of stagflation and the increased likelihood of recession in advanced economies pose large & downside risk for growth. Full economic revival seems to be further away and in this backdrop, IMF has marked down the global growth outlook at 3.6%.

Global growth forecast (%)

Particulars Actual Projections
2021 2022 2023
World Output 6.1 3.6 3.6
Advanced Economies 5.2 3.3 2.4
Emerging Market and Developing Economies 6.8 3.8 4.4

1.2 Indian economy

I ndias economic growth bounced back after the COVID induced shock in 2020, reflecting a strong recovery - led by favourable monetary and fiscal policy, mass vaccinations and significant progress on structural reforms. The strong recovery is commendable considering the fact that first the Delta-driven and then the Omicron- induced waves of the pandemic unsettled the recovery in domestic economic activity. The third wave turned out to be shorter-lived and less debilitating in terms of impact on economic activity than the first two waves due to the efficacy of the nationwide vaccination drive and learning & adaptation from the previous waves. The year witnessed strong growth momentum in exports and improvement in credit uptake driven by agricultural and industrial sectors. In spite of formidable headwinds, Indias merchandise exports touched a record of US$ 421.9 billion during FY 2021-22, with a volume expansion of 16.6% over prepandemic level. The Reserve Bank of India (RBI) continued to provide adequate monetary support by keeping policy rates unchanged and by keeping liquidity at a large surplus in FY2022.

According to the provisional estimates released by the National Statistical Office (NSO) on May 31, 2022, Indias real Gross Domestic Product (GDP) growth in FY 2021-22 was 8.7% which is 1.5% above the prepandemic level (FY 2019-20). The recovery has been uneven with the informal sector still reeling under pressure, with a large extent of the labour migration yet to reverse fully. Tense geopolitical situation and the consequent elevated commodity and global food prices are imparting considerable uncertainty to domestic inflation outlook and hence RBI in June 2022 has revised inflation projection upwards by 100 bps to 6.7% for FY23 from 5.7% estimated earlier in April 2022. Recent fiscal measures like ban on domestic wheat exports, reduction in excise duty on oil and lifting the ban on export of edible oil by global suppliers will help in offsetting some inflationary risk. To control the surge in inflation, which is beyond the comfort zone of the Regulator, the stance of RBI is now focused on withdrawal of accommodative policy. In line with the shift in priority to control inflation overgrowth RBI has increased the policy rates.

Outlook

The recovery in domestic economic activity is gathering strength and rural consumption should benefit from the likely normal south-west monsoon and the expected improvement in agricultural prospects. A rebound in contact-intensive services is likely to bolster urban consumption, going forward. Investment activity is expected to be supported by improving capacity utilisation, the governments capex push, and strengthening of bank credit. Growth of merchandise and services exports is set to sustain the recent buoyancy. Spillovers from prolonged geopolitical tensions, elevated commodity prices, continued supply side bottlenecks and tightening global financial conditions nevertheless weigh on the outlook.

I MD has projected a normal south-west monsoon and this is expected to strengthen the agricultural prospects. With the rural consumption likely to benefit from a normal monsoon, the recovery in domestic economic activity is gaining momentum and the revival will be aided by increase in urban demand arising from rebound in contact-intensive services. Growth of merchandise and services exports is set to sustain the recent buoyancy.

However, the commodity price hikes, supply constraints, tightening global financial conditions and the spillover effects of geopolitical tensions would weigh on the outlook and RBI has projected the GDP to grow by 7.2% during FY 2023.

2. INDIAN BANKING INDUSTRY

Bank credit growth increased steadily in FY 2021-22 as a result of increased retail demand, economic recovery, and co-ordinated efforts by the RBI and the Government. The resolution frameworks announced by the RBI in the wake of COVID-19 enabled a flexible system to help COVID stressed borrowers and provided for rescheduling of payments, conversion of any interest accrued into another credit facility and granting of moratorium for up to two years. The Resolution Framework 2.0 announced by the RBI post second wave primarily targeted individuals, small businesses and MSMEs as the impact was much limited.

The regulatory interventions, ample banking system liquidity, and the governments fiscal spending and higher level of social and consumer activities following the relaxation of the lockdown boosted credit demand conditions in the economy, leading to higher credit offtake in various sectors. The credit offtake momentum has been mostly positive in the second half of the year, and it increased by 9.6% in FY 2021-22 as compared to 5.6% in the previous year.

Additionally, various reforms to the banking system occurred during the year, including the establishment of bad bank to address non-performing asset issues, harmonising corporate structure for banks, and aligning risk parameters for large NBFCs, among others. The governments fiscal spending and the RBIs liquidity continue to boost consumer and business sentiment.

Growth drivers

Over the past few years, the business of banking has witnessed a shift from traditional branch banking to digital banking. This paradigm shift has been possible due to innovations in Information Technology (IT), growth in mobile and internet connectivity, market-based financial intermediation, and the advent of Fintech. Financial service providers are now devising new products and services and are adopting new business models for reaching out to the target customers.

• Rise of technology

The most prevalent trend in the banking industry today is the shift to digital, specifically mobile and online banking. The ever-evolving high-tech world has left humans desiring for high-touch — the involvement of personal attention and service. High- touch refers to situations where trust between the customer and employed individual is necessary. And with the growing impact of millennials — both customers and new-age banking employees — personal touch will be crucial factor in maintaining important relationships in the financial services sector alongside the evolving technologies.

Technology adoption has boosted financial inclusion and tech-enabled public goods delivery such as Direct Benefit Transfer (DBT). Anywhere-anytime banking has become common and the indigenously developed Unified Payments Interface (UPI) and Aadhaar Enabled Payment Service (AePS) have become the backbone of retail payments system. Apart from these, the RBI has supported innovations in a proactive manner by providing regulatory guidelines for account aggregators and peer-to-peer lending operators and the introduction of a Central Bank Digital Currency (CBDC) is on the cards.

Given the growing role of technology, the banks are developing capabilities of a technology company, while offering banking services, and are increasingly factoring in risks relating to cyber security, software development, limitations in transaction capacity, privacy of customer data and data security.

• Financial inclusion

Indias current financial inclusion index stands at 53.9. Government efforts through the Pradhan Mantri Jan Dhan Yojana (PMJDY) and the RBIs continuous efforts to bring banking to a large mass of people continues to intensify financial inclusion in India. The increasing use of artificial intelligence (AI) and machine learning (ML) to determine the creditworthiness of clients for small ticket loans by analysing data from a wide range of structured and unstructured data has the potential to enhance access to credit for marginalised customers.

Budget 2022-23 - key announcements

• The Finance Minister announced a major push in digitisation by enabling all the post offices to move into the core banking system for financial inclusion and has also proposed to set-up 75 digital banking units in 75 districts by Scheduled Commercial Banks. This will create a large footprint for digital banking in the rural areas for farmers and senior citizens and bolster ease of banking which could have a positive impact on the banking sector.

• Revealed plans for a Central Bank Digital Currency (CBDC) which will be possibly known as Digital Rupee.

• National Asset Reconstruction Company (NARCL) will take over, 15 Non-Performing Loans (NPLs) worth ^50,000 Crore (US$ 6.70 billion) from the banks.

• The government will further disinvest its stake in IDBI Bank and privatise two public sector banks.

Policy measures by RBI

• RBI maintained congenial financial conditions and ample liquidity for sustaining the economic recovery during major part of FY 2022.

• Special refinance facilities for All-India Financial institutions (AIFIs).

• Term liquidity facility to support COVID-related healthcare infrastructure and services.

• Special Long-term Repo Operations (SLTRO) for small finance banks (SFBs).

• On-tap liquidity window to mitigate the adverse impact of the pandemic on certain contact intensive sectors.

• Rolled out an Integrated Ombudsman Scheme, 2021 by adopting a ‘One Nation One Ombudsman approach in November 2021 and the Internal Ombudsman mechanism was extended to eligible NBFCs.

Slippages & Recovery

Gross Non-Performing Assets (NPAs) of the banking sector dropped below 6% as of March 2022 — the lowest since 2016 — and Net NPAs fell to 1.7% during the same period, indicating that the sector has remained largely unscathed from the ill-effects of the Covid-19 pandemic.

Not only has there been an improvement in the asset quality of the banking system, but banks have also shored up their capital base to deal with any untoward situation that may arise going forward. Banks are also well placed to support the economy with a rise in credit demand.

The banks have also facilitated timely credit offtake to support the economic recovery and the Governments ECLGS scheme helped in mitigating the risk aversion. Most of the banks have a comfortable capital position which should place them well to support economic recovery.

Outlook

After years of muted credit growth, the outlook for bank credit growth is expected to remain positive owing to low- base effect, economic expansion, increased government and private capital expenditure, extended ECLGS support, and retail credit push. The medium-term prospects appear promising, with reduced corporate stress and a significant buffer for provisions. The banking industrys quick adaptability, combined with the power of technology and timely government action, has laid the groundwork for credit growth improvement in the coming year. The Retail loan segment is expected to outperform the Industry and Service segments. RBI is monitoring the inflationary situation and a sharp increase in interest rates could have an impact on credit growth.

3. CORPORATE OVERVIEW

Karur Vysya Bank Limited (KVB) is one of Indias leading private sector banks and was founded in 1916 by two great visionaries, Late Shri M. A. Venkatarama Chettiar and Late Shri Athi Krishna Chettiar, with the primary goal of meeting the financial needs of merchants and the agriculturists. We have evolved as a financial conglomerate with operations spanning across treasury, corporate/wholesale banking, commercial, agriculture and retail banking. Our clientele include small and medium-sized businesses, agriculture, and the retail sector. We offer a diverse range of products in these categories and have a national presence with 822 branches/offices.

SWOT analysis

Strengths Weaknesses Opportunities Threats
a) Tailor made products to suit diverse needs of customers. a) Relatively lesser presence in the lucrative retail segment a) Rapid digitalisation of the banking sector a) Intensifying competition in most product categories
b) Customer-centric approach with a personalised touch. b) Brand recall as a regional bank b) Immense growth potential of the retail (housing, vehicle, personal loans, gold loans) and MSME segments b) Uncertainty in macroeconomic environment
c) Best-in-class digital platforms and offerings c) Huge, underserved segment in the country
d) Strong presence in India?s southern hinterlands
e) Robust risk management and governance framework
f) Consistent strengthening of capital and Adequate liquidity
g) Well experienced management team

4. FINANCIAL PERFORMANCE

We crossed milestone business number of T1,25,000 Crore this year. The net profit for the year stands at T673 Crore, which is the highest ever recorded by the Bank.

Crore

FY22 FY21 % Change
Net Interest Income (1) 2,715 2,360 15
Other Income (2) 769 919 (16)
Total Income (1+2) # 3,484 3,279 6
Net Income from Advances & Others 2,498 2,059 21
Net Income from Treasury Operations 986 1,220 (19)
Operating Expenses 1,854 1,987 (7)
Operating Profit 1,630 1,292* 26
Provisions 699 757 (8)
Profit Before Tax 931 534 74
Tax (net of DTA/DTL) 258 175 47
Net Profit 673 359 87

# Total Income is the sum of Net Interest Income and Other Income.

* after reclassification of depreciation on investments as an item of other income.

Total Income increased by 6% y-o-y to T 3,484 Crore in FY 2021-22 driven by rise in Net interest income (NII). However, the fee and other income declined by 16% y-o-y to T769 Crore.

NII accounted for 78% of the Total Income and its increase during the year was primarily due to growth in interest earning assets. During the year, yield on Advances and the cost of funds declined by 46 bps to 8.47% and 67 bps to 4.32% respectively. During the year, we focused on growing our CASA and Retail term deposits, achieving a growth of 10% y-o-y in CASA and 9% y -o-y in total deposits. As a result, our cost of deposits declined by 66 bps to 4.30%. The Net Interest Margin for the year increased by 29 bps to 3.69%.

Fee Income accounted for 18% of our Total Income and increased by 16% y-o-y to T634 Crore. The growth was driven primarily by increase in credit related segment. The other income was impacted mainly due to reduction in profits from treasury operations.

Operating expenses declined 7% y-o-y to Rs.1,854 Crore during the year and the Operating cost to Income declined to 53.2% from 60.6%. We have initiated various measures to control operations cost as well as to improve employee productivity and continue to closely monitor various items of expenses and are working towards maintaining cost- to-income levels of around 50%.

Healthy growth in Total Income along with lower Operating Expenses led to a growth in the Banks Operating Profit by 26% y-o-y to Rs.1,630 Crore. During the year, Provisions decreased by 8% to Rs.699 Crore and the Net Profit for the year increased by 87% and stood at Rs.673 Crore, on account of higher Operating Profit and lower Provisions. This is the highest ever Net Profit reported by the Bank.

Asset Quality

The asset quality metrics has been consistently improving for the past three years. During the year, on account of lower slippages, higher recoveries and aggressive collection strategy followed by the bank, the Gross NPA ratio decreased sharply to 5.96%, at the end of March 2022 from 7.85% as at end of March 2021 and Net NPA ratio decreased to 2.28% from 3.41%.

We maintained net negative slippages during the last three quarters of FY 2022 and also curtailed the SMA 30+ at less than 1%. The provision coverage increased consistently and stood at 80.27% including technical write-offs.

We are also encouraging OTS schemes with defaulters wherever possible and recovered Rs.199.15 Cr during the year. Our aim is to reduce the GNPA and NNPA below 5% and 2% levels respectively by FY 2023.

FY 2021-22 FY 2020-21 FY 2019-20 FY 2018-19 FY 2017-18
GNPA (%) 5.96 7.85 8.68 8.79 6.56
NNPA (%) 2.28 3.41 3.92 4.98 4.46
PCR (%) 80.27 72.70 68.90 56.86 56.50

Balance sheet parameters

Advances grew by 9% (after technical write off) to ^ 57,550 Crore, largely driven by growth across all segments including Agriculture, Retail, Commercial and Corporate advances. We plan to increase our presence in Retail and MSME segments and harness fintech and NBFC partnerships to improve co-lending business.

FY 2021-22 ^ in Crore FY 2020-21 ^ in Crore % Change
Agriculture 13,044 11,531 13
Retail (Personal Banking) 13,265 12,257 8
Commercial 18,698 16,687 12
Corporate (after Tech. W/off) 12,543 12,345 2
Advances 57,550 52,820 9

Investment Composition

The Gross investment portfolio grew by 8% y-o-y to ^ 17,755 Crore. The portfolio primarily comprises of low duration AFS, SLR book and we do not expect any significant MTM losses based on the current yield structure.

Deposit Mix

The Total Deposits of the Bank increased by 9% to ^68,676 Crore. Savings Bank deposits reported a growth of 12% to ^16,983 Crore while term deposits grew at 8% to ^44,772 Crore. As on March 31, 2022, low-cost CASA deposits increased by 10% y-o-y to ^23,904 Crore, and constituted 35% of total deposits. Overall, the liability franchise is granular and predominantly retail. Over 92% of the term deposit are retail and top 20 deposit holders account for about 5% of the total deposits.

^ in Crore

FY 2021-22 FY 2020-21 % Change
Demand Deposit 6,921 6,439 7
Saving Deposit 16,983 15,215 12
CASA 23,904 21,654 10
CASA(%) 35 34 -
Term Deposit 44,772 41,624 8
Total Deposit 68,676 63,278 9

Capital Management

We strive for greater capital efficiency and increasing our capital adequacy to enhance shareholder value. The Banks capital position continues to grow strong with overall Capital Adequacy Ratio (CAR) increasing to 19.46% at the end of the year, well above the benchmark requirement of 11.5% stipulated by Reserve Bank of India (RBI). The Banks Risk Weighted Assets (RWA) to Asset ratio improved to 52% at the end of FY 2021-22.

Key financial and operating ratios (%)

Basic Earnings Per Share (EPS) was Rs. 8.42 compared to Rs.4.50 a year ago. Return on Equity (RoE) and Return on Assets (RoA) improved during the year and were 8.86% and 0.86% respectively.

FY 2021-22 FY 2020-21 Change %
Return on asset 0.86 0.49 75
Return on equity 8.86 5.16 71
EPS (^) 8.42 4.50 87
FY 2021-22 FY 2020-21
Book value (^) 94.95 86.57
Cost of deposits 4.30 4.96
Yield on Advances 8.47 8.93
Yield on Funds 7.34 7.67
Cost of Funds 4.32 4.99
Net Interest Margin 3.69 3.40
Cost to Income 53.20 60.60

Details of change in return on Networth as compared to the immediately previous financial year and reasons thereof

The Return on Networth / Return on Equity grew from 5.16% as on March 31, 2021 to 8.86% as on March 31, 2022, owing to growth in our Net Profit.

Reasons for significant changes (i.e. change of 25% or more as compared to the immediate previous financial year) in key financial ratios

Operating Profits of the Bank for the Financial Year 2021-22 has improved by 26% to T1,630 Crore from the previous year figure of T1,292 Crore and the Net Profits for the Financial Year 2021-22 has improved by 87% to T673 Crore from T359 Crore, registered during the previous Financial Year 2020-21. Hence, the growth is reflected in the Return on Assets (ROA), Return on Equity (ROE) and Earnings Per Share (EPS).

Outlook

We expect a broad-based growth in the ensuing year both under deposits front and Advances, with equitable contribution from all the verticals. Considering the need for building up deposits to meet our asset growth and to further strengthen our CASA franchise, we have made certain structural changes. We have brought together the Personal Banking Liabilities and Personal Banking Assets groups under a single Business Head for better operations synchronisation between the teams and to expedite growth in Retail Assets, Liabilities, Third Party Products and Government Business.

Our focus will be on the following areas during FY 2022-23:

• focus on lending to mid-corporates, MSMEs and Retail segments.

• harness our fintech & NBFC partnerships to improve co-lending business.

• drive the Branches/Recovery units for continuing the net negative slippages in NPAs during this year also and reduce the GNPA & NNPA levels.

• prioritise on cost optimisation both on operations front and also the employee costs by improving productivity.

• improve the NIM and ROA further.

5. REVIEW OF BUSINESS VERTICALS

We have always been overweight on our CBG segment in view of its vitality both in terms of growing topline business and also for improving the yields. The commercial business constituted 32% of the advances of the Bank and grew by 12% over the previous year and stood at ^18,698 Crore.

We have 16 Business Banking Unit (BBUs) with dedicated Relationship Managers (RMs) and also formed three new Clusters covering the branches under 9 Divisional Offices for expediting sanctions. At the same time, BBU structure has been revamped with Sales RMs to focus on new business and Service RMs to meet out the requirements of existing borrower requirements.

We have also transformed the lending system from physical to digital lending process with introduction of Loan Origination System (LOS) and introduced hassle-free process for renewal of working capital limits under SBG segment with introduction of fast-track renewal model.

We are continuously refining our corporate card features to meet the emerging business needs of MSMEs and small traders.

FY 2021-22 key highlights

• Introduced Fast Track Renewal for working capital limits under SBG business segment for smooth credit flow to existing customers.

• Restructured the eligible loans of MSME borrowers to alleviate the stress of borrowers, by adhering to RBIs guidelines - Resolution Framework - 2.0 for MSMEs.

• Tie-ups with NBFCs for co-lending and pool buyout portfolio.

• Supported the borrowers who are impacted by economic disruptions by providing Guaranteed Emergency Credit Line (GECL) facilities.

• Formed Cluster Committee at Cluster Level and Executive Credit Committee (ECC) at CO level for quick sanctions.

Outlook

We plan to offer "Drop line Overdraft (OD)" facility to attract NBFC customers. We are decentralising credit processing to Divisional Offices, Commercial Business Clusters and Business Banking Units by providing credit team for processing and delivering the credit proposals with best TAT.

The Retail Advances Business registered growth of 8% during the year under review. Despite the pandemic threats during first quarter of the year, the total Retail Advances grew to ^ 13,265 Crore and constituted 23% of the Banks total advances.

There has been a significant demand for retail loans, particularly for Home Loans and we have streamlined our rates in tune with the market.

Based on the experience gained out of the Corporate Credit card business, we have ventured into the Retail Credit Card business this year. Besides being an additional offering in the retail bouquet of products, the Retail Credit Card seeks to improve the customer product holding, retail lending business and generate additional income. Two variants of the Retail Credit Card - ‘Honour & ‘Platinum were launched on 15.08.2021.

FY 2021-22 key highlights

• Home Loan grew by 9% and the growth in Mortgage Loans was 8%. The housing loan portfolio grew to ^ 5,823 Crore and Mortgage Loan books increased to ^ 1,832 Crore.

• Vehicle loan and jewel loan portfolio have grown by 4% and 7% respectively during the fiscal.

Outlook

We have chalked out plans to grow our Retail advances during the year. To grow our home loan book, we plan to improve our footprint among the builders by approving more of their projects for funding. We are building pan- India relationships with DSAs for sourcing of secured personal loan portfolio.

We are also planning to introduce surrogate product for Home loan and PL (Secured). In vehicle loans, we are rolling out special schemes for various makes and models of cars. We are partnering with leading NBFCs for colending of Gold Loans, Housing Loans and Mortgage Loans and engaging with a leading start-up for offering education loans for abroad studies.

CIG accounts for about 22% of Banks total advances and has grown by about 2% during the year. The business has begun to return to pre-COVID levels during the year, thanks to the additional assistance provided to the borrowers under ECLGS extensions. Borrowers are meeting repayment obligations on time as a result of improved cash flows and asset quality has improved. Borrowers are actively pursuing capex plans that were stalled due to the pandemic and the bank finds funding opportunities for expansion plans.

FY 2021-22 key highlights

• The portfolio grew to ^ 12,543 Crore.

• Granular average ticket size of ^ 38.81 Crore.

• Supported the borrowers for their expansion plans/ capacity addition in Textile, NBFC and Renewable energy etc.

Outlook

We continue to follow cautious approach in lending to the corporate segment, focusing primarily on rated corporates with minimum of Investment grade rating. We are identifying value chain to participate in funding the forward/backward integration. We are also exploring regular working capital limits to corporate borrowers under Transaction Banking Group (TBG) platform.

We look to on-board Loans & Advances in the range of ^ 25 Crore to ^ 75 Crore to further granulise the portfolio. Also, we will continue weeding out exit marked accounts and maintain efforts on monitoring and recovery of SMA accounts.

Agriculture credit continues to be the backbone of Indian economy and the primary source of livelihood for majority in rural areas. The key to increasing farmers income in a sustainable manner would be in adopting farmer-centric approach with focus on agriculture and farmers welfare.

The ABG loan books grew to ^ 13,044 Crore during the year with a growth of 13% y-o-y and accounted for 23% of Banks total advances portfolio. The portfolio grew despite the redemptions in Gold Loans after the opening up of economy.

FY 2021-22 key highlights

• Achieved all the targets and sub-targets under Priority sector for all the quarters of the year and Priority advances as a percentage to ANBC as on March 31, 2022 stood at 47.04%

• We have tied up with a leading Fintech company for sourcing Cattle loans to Farmers in the business of rearing of cattle and selling milk and the scheme was digitally implemented initially at Karur Division in September 2021.

• Divisional Office-wise special focus made to expand our Direct Agricultural Lending like Poultry in Salem Division, Warehouse Receipt Loan lending to farmers storing Chillies in Vijayawada Division, Warehouse Receipt Loan lending scheme to Farmers storing Bengal gram & Paddy in Tirupathi Division and nursery cultivation from Visakhapatnam Division.

• As per RBI guidelines, we also implemented KCC- Animal Husbandry and Fisheries schemes which will be focussed in Salem, Tirupathi, Coimbatore Divisions to expand our Direct Agri lending reach to farmers.

• NPAs and SMAs in Agriculture books had reduced compared to previous year.

• Warehouse Receipt loans relaunched with revised checks & balances.

• Focused on extending construction finance for Warehouse/Cold Storage construction, in order to improve the storage facilities.

Outlook

We are one of the first banks to launch a separate product for the "Agri Infra Fund" scheme and will continue to take up viable projects during the 4 years i.e validity period of the scheme. We plan to increase tie ups with starts ups and fintechs for extending agricultural loans and also accord top preference to projects with tie-ups/lease agreements with corporate firms involved in procurement/processing of agricultural commodities.

Further, we will also focus on financing FPOs under various Credit Guarantee Fund Schemes as well increase our network of growers through various growers/ plantation associations for lending opportunities. We have also planned to engage with Fintech/BCs with adequate risk mitigation model to explore into microloans so as to reachout to SF/MF and other marginal sections and explore the opportunities that exist for the bank at the bottom of pyramid of the society.

The scope of treasury management function is quite vast and it continues to expand. A treasury manager should be able to understand and appreciate the link between business strategy, and organisation goals. Treasury management includes the management of cash flows, banking, money-market and capital-market transactions; the effective control of the risks associated with those activities; and the pursuit of optimum performance consistent with those risks.

I n a volatile market, the department took the following steps to reduce the risks:

• Modified duration is maintained cautiously in the range of 3.05-3.30 years so as to minimise the MTM risk.

• Meagre SLR provisions due to sanitisation of portfolio.

• Miniscule exposure to MTM risk in SLR portfolio.

FY 2021-22 key highlights

• In the rising yield scenario during the last financial year, a lower duration/minimal holding in AFS portfolio enabled us to manage interest rate volatility effectively.

• Investments in new products were undertaken such as InvITs/AIFs, which gave higher rate of return. Partial booking of profits were made in InvITs/AIFs.

• Additional interest income was generated by placing deposits through USD-INR swaps.

NEO was conceptualised for on-boarding new customers to Bank through Non-Branch channel sources and thus operates through a standalone open market acquisition channel for the bank instead of operating through Banks distribution network. NEO is focusing on expanding the distribution network by creating significant footprint in Tier-2 & Tier-3 cities and exploring Alliances & Partnerships under co-lending & co-origination with NBFCs in consumer banking space.

The digital partnerships for loan origination and colending enhances our acquisition strategy with low cost and high traction along with high market visibility creating digital footprint at par with peer banks. Also, the strategy to skim the market and operate niche segments increases our geographical presence and penetration in the retail banking space.

NEO has entered into strategic partnerships to strengthen its distribution network as below:

• On-boarded a leading equipment renting company towards assignment of receivables on nonrecourse basis.

• Engaged with a NBFC under co-lending model for funding the Medical Equipment Finance Products which will create significant scope to enter Medical Equipment segment with other products catering to the Medical and Hospital segment.

• Expanded BNPL programme for segment such as Travel, D2C, Edtech and Wellness and Healthcare.

FY 2021-22 key highlights

• Total book size grew to T 2,556 Crore with an incremental growth of 84%.

• Robust insurance penetration is a reflection of maintaining the products per borrower and focusing on other income.

• Expanding the partnership base for leasing business with flagship companies in the industry has helped us maintain overall higher portfolio yield.

• Active BNPL customer base of 3.2 million.

Outlook

NEO is under discussion with various partners for digital as well as non-digital based solutions for expanding the sourcing channels for advances growth. NEO plans to expand geographically by opening new locations in MP, UP, Kolkata, Rajasthan and Punjab etc.,

The TBG offers collection and payment products under our Cash Management Services (CMS) to large, mid and small corporates. With a complete electronic platform, we offer products like Virtual Account and bulk payments with customised MIS, which supports the customers in collection and reconciliation. Our CMS products act as an enabler for sourcing current accounts.

The Transaction Banking Group support the customers in unlocking their working capital blocked in the supply chain through various supply chain finance programmes like vendor finance, dealer finance and specific factoring programs. The supply chain finance programmes are hosted in an electronic platform to ensure seamless operations.

We are forging new relationships with FinTech companies to improve the customer base. We are one of the early and

active participants in all the three RBI licensed "TReDS platforms" for financing MSME vendors under Priority Sector Lending.

FY 2021-22 highlights

• Introduced a new variant of vendor funding in the name of "Freight Finance" for funding logistics operators.

• Share of MSME lending as a percentage of portfolio has improved.

Outlook

Going forward, we will enlarge our target segments to encompass wide range of industries such as FMCG, logistics etc.,

Precious Metal Division, since its business commencement in February 2020, has moved a long way ahead and have imported several tons of bullion during the year. Our services are covered in several states across India and we have witnessed impressive growth in our bullion business turnover, with special focus on the SME sector.

The division has got a robust system of onboarding clients with proper systems in place to manage this price sensitive and volatile business. The team handling the business are well conversant and experienced personnel with reach to customers spread across India.

Your bank provides products and services in line with the regulatory provisions. With the increase in client base, demography and business turnover, this vertical has witnessed positive revenues in its first year of full-fledged operations. We have seen a Five-fold growth in business compared to last year as a growing business vertical. We are further constantly increasing our customer base and turnover with our objective to be one of the top bullion banks in India.

Outlook

We plan to increase our consignment supplies, market penetration, and customer base by offering products to suit client needs within regulatory framework. We plan to take a greater share of the market and be one amongst the top bullion banks in India.

The retail liability business of the bank constitutes to 54% of the total business of the bank. Our growing digital ecosystem now covers a large portion of services offered by our liabilities group. PBLG is forefront in introducing new customers to the Bank and the Banks foray in handling government business would provide a fillip to the liabilities book.

FY 2021-22 key highlights

• Total Liabilities Book grew by ^ 5,398 Crore, 9% growth over last year.

• Banks term deposits are primarily retail in nature and 80% of the Deposits are less than ^1 Crore. Only about 8% of the Banks deposits are above ^ 5 Crore.

• CASA Book grew by ^ 2,250 Crore, 10% over last year.

• CASA ratio has increased to around 35%.

• Term deposits recorded incremental growth of ^ 3,148 Crore during FY 2021-22 versus R 1,056 Crore for the previous fiscal.

• New business premium of ^ 152.24 Crore earned during the year under Life, Non-Life and Health Insurances.

• New to Bank (NTB) incremental growth under CA stood at ^ 556 Crore (versus ^ 441 Crore for the last year).

New products and services launched

• Online payment of Customs Duty through ICEGATE

portal: We have been appointed as an Agency Bank for Government business and collection of Direct Taxes & Indirect Taxes. We have successfully integrated with the ICEGATE portal of Central Board of Indirect Taxes & Customs (CBIC) and have facilitated online payment of Customs Duty to customers. Presently, we are working on integration for GST Collection which is all set to go live at the earliest, offering ease of banking to our bank customers. MOU is signed with State Governments such as Tamil Nadu HR & CE and Maharashtra Government for various services. We are also in the process of integrating TIN Version 2.0 for collecting direct taxes from customers on behalf of CBDT.

• KVB Smart Trade & Exim Current Account: KVB

Smart Trade & EXIM Current Account is a one-stop solution, specially curated to offer ease of banking to trade and business customers, logistics companies, importers & exporters and clearing & forwarding agents with best-in-class features inbuilt. Online

payment of customs duty through ICEGATE portal of Customs Department, hassle free reconciliation through virtual account facility, entire gamut of Cash Management Services including doorstep banking and finer trade & forex rates and charges are the hallmark of this product.

• NETC FASTag option in pre-login screen of DLite Mobile app - This option can be exclusively used by KVB FASTag customers who do not have any other relationship with KVB. Customers can make use of this option for managing their KVB FASTags. This will also increase the downloads of KVB DLite app and also has the potential to attract non-customers to open DLite account with KVB.

• KVB - Payment Gateway Services - As a part of the banks initiative to offer technology services to suit each and every segment, we have been imparting continuous focus on offering digital products / services from time to time in tune with customer expectations and preferences. Our bank has introduced KVB - Payment Gateway Services, for providing essential infrastructure and facilitating payment for goods and services purchased through multiple payment modes such as Credit card, Debit card, Internet Banking.

Digital push

We have been very active on the Digital push to move towards cashless payments and actively advertised the availability of product offerings in the digital space. In a further push to cashless banking, the number of Registered Net banking users has crossed 9.84 Lakh during FY 202122 and the Mobile banking user base crossed 1.79 Million. Total number of transactions across internet / mobile banking surged past 3.98 Crore transactions.

UPI

I n terms of UPI transactions, our bank has registered a new high of 43.94 Crore transactions during FY 202122, which comprises both beneficiary and remitter. Through this we have witnessed a growth rate of 103% in UPI transactions.

POS

We deployed 2,808 new Point of Sales (POS) machines during the year. Transactions worth ^3,470 Crore of payments were made through the machines issued by your bank.

Debit Cards

On the cards front, we issued 4,92,151 debit cards during FY 2021-22. During the period, 873.98 Lakh transactions amounting to ^ 33,551.34 Crore were put through the debit cards of the bank.

Demat Services

We have registered with National Securities Depository Limited as a Depository Participant (DP) and offering demat services to the participants in the security market. The Bank also has tied up with M/s IDBI Capital Markets & Securities Ltd., and M/s Religare Securities Ltd., for providing trading accounts facility.

The bank has also partnered with M/s SMC Global Securities Ltd., in January 2022 for offering trading account facility.

Government Sponsored & Pension Schemes

We offer various government sponsored schemes (from Pension schemes to Insurance schemes) to cater to the need of wide range of people for social security.

Pradhan Mantri Jeevan Jyoti Bima Yojana (PMJJBY)

The Pradhan Mantri Jeevan Jyoti Bima Yojana (PMJJBY) is a one year life insurance scheme, renewable from year to year, offering coverage for death due to any reason and is available to people in the age group of 18 to 50 years (life cover upto age 55) having a savings bank account and who give their consent to join and enable auto-debit. We have enrolled 86,563 customers under Pradhan Mantri Jeevan Bima Yojana.

Pradhan Mantri Suraksha Bima Yojana (PMSBY)

Pradhan Mantri Suraksha Bima Yojana (PMSBY) is aimed at covering the population who are not covered in any insurance plans. This scheme was available at a highly affordable premium of just ^12/- per year. The Scheme is available to people in the age group 18 to 70 years with a savings bank account and who give their consent to join and enable auto-debit on or before May 31, for the coverage period June 01, to May 31, on an annual renewal basis. We have enrolled 1,44,490 customers under this scheme.

Atal Pension Yojana (APY)

Atal Pension Yojana (APY) is a pension scheme for citizens of India. This scheme is primarily focused on benefitting the unorganised sector workers. Under this scheme, a guaranteed pension of ^1,000/- to ^5,000/- will be given to the subscriber at the age of 60 years. The pension amount depends on the contribution made by the subscriber. We have enrolled 1,697 customers under this scheme during the year.

Sovereign Gold Bond Scheme (SGB)

SGB is a government security denominated in grams of gold and is a substitute for holding physical gold. Investors have to pay the issue price in cash and the bonds will be redeemed in cash on maturity. The Bond is issued by Reserve Bank on behalf of Government of India.

We have sourced 61,236 grams of gold amounting to ^29.5 Crore in 10 tranches during the year.

National Pension System (NPS)

National Pension System (NPS) is a pension cum investment scheme launched by Government of India to provide old age security to Citizens of India. It brings an attractive long-term saving avenue to effectively plan your retirement through safe and regulated market- based return. The Scheme is regulated by Pension Fund Regulatory and Development Authority (PFRDA). National Pension System Trust (NPST) established by PFRDA is the registered owner of all assets under NPS. KVB is providing online NPS a/c opening through K-fintech (CRA). We have covered totally 609 customers including conversions from NSDL to kfintech as on March 31, 2022.

Outlook

With the economy expected to bounce back sharply, we are focusing on accelerated growth of Retail liabilities in general and CASA deposits in particular. We are committed to benchmark our products in line with market offerings and grow our liability books. We will also focus on further improving our CASA book size and are committed to enhance our total TPP income.

6. REVIEW OF OPERATIONS VERTICALS Data Center - DRS functions

The Data Center transformation is one of the most important processes being undertaken by us, as we are adopting new technology to streamline regular DC functions. Data center transformation is an ongoing process, wherein new technology is being adopted for transforming the regular DC functions, for operating in a conventional and more efficient way. We have implemented several new initiatives leveraging new technologies including virtualisation, Cloud computing, image processing, Artificial intelligence, Open-API, e- kyc, open-source platforms, VPN and storage-based backup solutions. New initiatives are being rolled out after ensuring compliance of all cyber security frame works as mandated by the regulator.

Key initiatives

In order to implement the appropriate project governance and to bring-in more professionalism, the IT organisation structure has been redefined with formation of new verticals as well as enhancing the scope of the existing team viz., IT Management Pillar, Application Pillar and Technology Pillar.

• IT Management Pillar comprises of IT Strategy and IT procurement and is responsible for IT Governance.

• Application Pillar is responsible for maintaining the software life cycle management of the business applications which includes the major areas like version upgrade, additional customisations, application patches and the Level 3 support for the applications.

• Technology Pillar is responsible for Technology Infrastructure Management.

Security related implementations

• Privileged Access Management has been introduced to make sure that people have only the necessary levels of access to do their jobs.

• DAM (Database Activity Monitoring) is introduced to do the real-time analysis of database transactions and to identify, report on fraudulent, illegal or other undesirable behaviour, with minimal impact on user operations and productivity.

• Baseline implementation is being implemented to ensure the minimum security controls for a low-impact, moderate-impact, or high-impact information system.

• Customer facing critical web applications traffic are routed through A10 device for the purpose of protecting the applications and infrastructure against cyber-attacks, including multi-vector DDoS attacks and malware in encrypted traffic.

• Core banking system is the heart of any banks operations and mounting security threats in todays digital world have resulted in creating the need of tightening the security of core banking. Hence we have introduced finger print enabled biometric system integrated with the existing traditional security system to build a strong security mechanism.

Technology related implementations

We have implemented several new technology initiatives in our Data Centre Operations to ensure the business continuity and provide seamless service to customers.

We are in the process of cloud adoption by hosting the historical data which occupies large volume to cloud in order to reduce the IOPS, CPU, on-premises database licensing and infrastructure costs.

New initiatives viz., AI and Machine Learning, open source platforms are being rolled out after ensuring compliance of all cyber security frame works as mandated by the regulator.

Infrastructure maintenance:

We have strengthened our infrastructure during the fiscal at various levels such as:

Server Level- Old servers have been replaced with high end power series servers for increased scalability to accommodate the larger loads.

Link level- Network links have been upgraded both in Data Centre and Branches.

Device level- Replacement of Security devices is done with the Next Generation Firewall. Latest Load Balancers have been deployed with higher capacity and scalability for increased traffic handling.

Technology level- Introduction of 4G connectivity at Remote locations where wired links are unavailable.

Security Level- Patching all the systems through multiple products like Bigfix for servers and SCCM for Desktops and improving the monitoring of systems.

Backup level- High end backup technologies introduced for quicker processing.

In addition to above, various Database, Operating System and Application are upgraded to latest technology. Further, OEM security patches are applied on regular basis and regular VAPT is conducted on all applications to assess and address the security risks.

Outlook

Going forward, we will implement cloud migration of applications to ease customer journey. To build higher productivity, we are undertaking automation of day- to-day activities. We are also strengthening our backend to ensure privacy of customer data and enhanced protection against cyberattacks. We are planning SD WAN implementation to enhance our connectivity and optimising our power use as part of our ESG initiatives.

Collections

To have PAN India coverage for recovery through Asset Recovery Branches (ARB), we have opened two new ARBs, to have special team for high concentration on recoveries. We have also engaged recovery agencies and enforcement agencies for Divisional Offices and ARBs in south zone for effective tracking and follow-up.

Early Warning Signals are generated on daily basis in SAS application. These signals are verified and based on signals, the loan account which may ultimately turn out as stressed asset are scrutinised and communicated to concerned Business units and verticals for effective monitoring.

Apart from early warning signals, we also verify RBIs CFR Portal, CRILC portal to check inclusion of any of our customers (banking under MBA/Consortium arrangement) in this list by other banks and regular review of account statements, stock statements, etc. are carried out every month to identify anomalies / abnormal operations in the accounts. Instances of frauds reported in News Media are regularly monitored on daily basis.

FY 2021-22 key highlights

• Taken steps for effective delinquency management like close monitoring of delinquency, root-cause analysis (product wise, location wise and sector wise study of delinquencies), prioritisation on apt recovery strategy and system automations.

• Initiated systemisation process to have effective tracking of recovery process from the date of NPA till the type of closure/up-gradation of NPA accounts.

Outlook

Various new IT initiatives have been rolled out in recovery vertical for better monitoring and follow-up of stressed accounts. We have initiated rolling out of LMS (Litigation Management System), for better monitoring of legal recourses undertaken in the stressed accounts for accelerating recovery. We will further strengthen the transparency and efficiency of the process.

Marketing and branding

Brand Recognition is a prime requirement of any business venture. This can be ensured only by way of constant presence and promotion in the various media. Though our Bank is a popular brand across the country, in order to keep our visibility on par with the other competing brands, a suitable branding strategy has been put in place. We are positioning ourselves as a tech-savvy bank offering the best of digital products and services. Our DLite app and digital retail and corporate loans are the best in class. These products are the highlights of our marketing strategy. Accordingly the DLite app and quick & paperless retail loans are promoted extensively in print and television media. The digital media, being a favourite among the Gen Z, we are using our social media handles to exclusively market the products with regular posts on almost a daily basis. (Read more on page 40)

Customer Service

The customer is at the heart of our business strategy and we have implemented the following measures to improve customer service:

• Our customers will be shortly able to remit direct & indirect taxes through Banks net banking channel and are actively engaging with government departments for completing system integration.

• Introduced new features in DLite App to enable the customers to submit account related requests on the go.

• ATMs and Cash Recyclers were maintained with maximum uptime.

7. RISK MANAGEMENT

A robust risk management system and continuous adoption of latest initiatives ensures long-term financial security and stability. The overall responsibility of setting our Banks risk appetite and effective risk management rests with the Board and leadership team.

Governance Board of Directors

RM ALM Committee of the Board MD & CEO Special Committee for Fraud Monitoring
Chief Risk Officer (CRO)
1. Asset Liability Management Committee (ALCO) Group/cells reporting to CRO Risk Management Desk
1. Information Security Group (ISG) 1. Asset Liability Management
2. Credit Risk Management Committee (CRMC) 2. Fraud prevention and Management Cell (FPMC) 2. Risk Rating
3. Credit Risk
3. Operational Risk Management Committee (ORMC)
3. Retail Credit Risk 4. Market Risk
4. Market Risk Management Committee (MRMC) 4. Technical Valuation Cell 5. Operational Risk
5. Analytics Team 6. Industry Research
7. Integrated Risk
8. Policies

The Board focuses on:

• Approving and reviewing our Risk Management Framework and policies annually.

• Assessing the effectiveness of risk mitigation plan implemented by RMD.

• Providing strategic guidance on various initiatives undertaken / to be undertaken by our Bank towards management and mitigation of various risks.

Risk Management & Asset Liability Management Committee, being the sub - committee of the Board, plays a supportive role to the Board, by carrying out inter alia the following functions:

• Review and approve the development and implementation of risk management framework, risk assessment methodologies/processes and tools, including monitoring and reporting etc.

• Foreseeing future changes and threats and prioritise appropriate action.

• Setting and defining the Risk appetite of the Bank.

Well experienced risk management team with decades of relevant industry experience in varied segments of relevance to the bank and knowledge in various areas, handle the risk management functions.

The risk framework lays down the following components for effective risk management:

• An independent risk organisation and governance structure with a clear common framework of risk ownership and accountability.

• Governance standards and controls to identify, measure, monitor and manage risks.

• Policies to support and guide risk taking-activities across our Bank.

• Risk appetite statements.

• Periodic stress testing to assess the impact of adverse business conditions on earnings, capital and liquidity.

Risk culture of our Bank:

• A strong and consistent tone from the Board and Senior Management in respect of risk taking and risk mitigation in the Bank.

• A commitment to ethical principles - as reflected by ethical behaviour of the employees and application of ethics in business decisions.

• A clear enterprise-wide acceptance of the importance of Risk Management, including ownership and accountability of various risk areas.

• Timely flow of risk information in the organisation.

• Encouragement for the reporting of risk events, including near misses, so that appropriate lessons could be drawn from them.

• Not to engage in any activity / business that is not in line with the risk appetite of the Bank.

• Development of adequately resourced Risk Management function and recognising the values of Risk Management skills and knowledge.

• Allowing sufficient diversity of perspectives, values and beliefs to ensure that the status quo could be challenged without inhibition.

• Whistle-blower policy encourages employees, customers and vendors to communicate any information to the Top Management without fear of reprisal.

We have a dedicated Fraud Prevention and Management Cell (FPMC) for managing fraud risks reporting to Chief Risk Officer (CRO) of our Bank. FPMC submits reports to the Board and Senior Management Committees, periodically. Fraud detection, analysis, mitigation and prevention are a continuous process, and our Bank follows a structured approach as mentioned in Fraud Risk Management Policy and SoP.

Early Warning Signal (EWS): A number of Early Warning Signals (EWS) are studied regularly, and the results are shared with concerned business verticals by the Credit Monitoring Vertical. We have installed specialised applications to fetch different EWS in an orderly manner. On-line transactions are also monitored by specialised computer applications and processed until the logical end.

Red Flagged Accounts (RFA): Some of the borrowal accounts that exhibit a number of EWS are studied in detail for a period of six months, and appropriate decisions are taken, either to lift the account from RFA or to declare the account as fraud.

Risk and Control Self-Assessment (RCSA): RCSA is a proactive tool in identifying lacuna, if any, among different processes of our Bank. The processes of our Bank are being studied for gaps (if any), controls available, adequacy of corresponding controls, lead and lag indicators etc. Corrective steps required are being initiated by the concerned stakeholder departments based on the RCSA.

Root Cause Analysis: Root cause analysis is comprehensively carried out to study the transactions to understand the weaknesses in the system and suggest additional controls to prevent recurrence.

Key Risk Indicators- KRIs under key business and support functions are identified and compared with the threshold levels on a quarterly basis. The threshold levels are reviewed/new KRIs are identified periodically besides reviewing breaches if any, facilitating for taking corrective actions.

Whistle-Blower Policy: Bank encourages employees, customers and vendors to communicate any information they may come across about serious malpractices or impropriety/ abuse of powers etc. to the Top Management without fear of reprisal. The policy is popularised through various measures such as internal circulars, e-mail advisories, training sessions etc. to spot aberrations and deal with it at the earliest.

Bank weighs all new products and processes, the embedded options or enhancements of the existing products critically before it is offered to the public to avoid systemic lacuna, if any.

Besides the above, we are subject to several audits, periodic visits by Divisional Heads, Divisional Operating Officers, and Central Office personnel for effective monitoring and continuous surveillance of all operations.

During FY 2021-22, we reported 44 frauds amounting to R 653.50 Crore. Of which, 30 are Credit related frauds amounting to R 652.81 Crore (94.88% of the amount falls under Consortium/Multiple Banking Arrangement) and out of this, R 537.48 Crore pertains to corporate exposures which were classified as NPA before December 2018. There were 14 Operations related frauds amounting to R 0.69 Crore.

We have a Fraud Risk Management Policy to detect, control and monitor frauds and ensure continuous surveillance to prevent frauds, besides managing the risk of loss arising from both internal and external fraudulent events. The macro level guidance and directions on the above aspects is provided by the Board and Committees of the Board viz., Special Committee for Fraud Monitoring and Audit Committee.

RBI has created a Central Repository namely Central Payment Fraud Information Registry (CPFIR), for recording payment frauds. As per the guidelines, all payment related frauds, irrespective of value of the fraud, either reported by the customer to the Bank or detected by the bank shall be reported within 7 days from the date of reporting/detection including attempted frauds.

During the FY 2021-22, our Bank has reported 880 cases of payments frauds involving an amount of R 121.40 Lakh to RBI through Electronic Data Submission Portal (EDSP). Mostly Phishing/Vishing type of payment frauds were reported. In none of the cases, Bank incurred any liability. Customers shared their credentials with fraudsters in all the reported cases.

Bank is engaged continuously in enhancing the Risk Management Standards on par with the best practices in the banking sector. The Risk Management Process in our Bank is subjected to a review by an external consulting agency to evaluate the level of effectiveness and to bring fresh perspectives to the Risk Management approach adopted by our Bank.

Role of technology in managing risk: CLS/LOS (Loan Origination System) Credit processing system has been digitised end-to-end with automated checking process viz., verification of account statements, GST data, Bureau report, income statements duly supported by well- designed score cards and a process flow document. Field visits, verification of veracity of the documents are handled effectively supported by a Fraud Control Unit (FCU). Improvements/enhancements are in place continuously to get complete benefit of the technology. This helps in minimising the manual intervention for its authenticity or genuineness. Further Internal Rating is undertaken in CRISIL IKON models besides internal rating models and portfolio monitoring by appropriate applications.

Risks Mitigation Steps
Credit Risk Macro factors including pandemic hit in economy, geopolitical tensions in the neighbouring countries, stress in certain industries and micro level factors, underwriting process, recovery measures. • Bank has a centralised credit risk management division, independent of our business functions, to manage credit risk with well-defined policies, caps on exposures to various industries, single & group borrowers? sensitive sectors. Appropriate credit underwriting standards, risk mitigation processes, post-disbursement monitoring, strong collection and recovery mechanism via call centers and timely remedial actions ensure that credit risk is contained within acceptable levels.
• Retail Credit Risk Team is responsible for retail credit portfolio and parameterised lending, basis product specific gating parameters and score cards. The parameters and gating conditions are being reviewed/ enhanced periodically.
• A Business analytics team provides comprehensive analytical reports with analysis and inferences to the top management, for taking appropriate policy and business decisions.
• Bank has a system of monitoring the exposures periodically to ensure that those are within the Policy ceilings approved by the Board.
• Portfolio studies, industry/sector analysis are carried out to capture up-to-date information.
• Internal credit risk rating of proposals is mandatory for sanction of credit facilities with hurdle rating grades for new & take over exposures. Bank has deployed CRISIL IKON models and other models for rating our borrowers.
• LOS (Loan Origination System) has been designed and structured
- to bring in better controls from a system perspective on TATs
- building better underwriting capability based on analytical feed and creating a digital workflow for risk mitigation
- better due diligence through system designs, sanity and automated bureau checks to minimise onboarding risks
- stipulation of gating conditions tested based on historical data of the Bank, eliminating subjectivity in the credit approval process
- well-designed score cards, as a part of decision-making tools apart from gating conditions
• Periodic product and portfolio reviews facilitate course corrections and product / process flow changes.
• Divisional credit risk officers are placed in each divisional office to get a ground zero perspective of credit proposals.
• Comprehensive delegation of powers for various authorities with inbuilt matrix both for risk and non - risk deviations; spread policy takes care of the pricing based on components such as Credit risk premium, business strategy premium, tenor premium, BRE scores / Risk rating grades
• Credit and risk related policies are drafted and reviewed periodically as per the Bank?s requirements and regulations.
• Committee level approach to credit approval process promotes qualitative discussions and collective wisdom allowing 360-degree analysis of the credit proposals.
• Clusters headed by Senior Executives are formed in select centers with business potentials, for guiding the BBUs in the matters of credit dispensation, administration and monitoring
• PQI (Portfolio Quality Index) concept for monitoring the performance of the business units and relationship officers in an effective manner has been tested and shall be implemented with more precision during FY23.
• Bank is also monitoring developments in neighboring/other countries, including UN sanctions, sanction by USA/ EU and our Government restrictions.
Market Risk • Our Bank investment portfolio is having more of Central and State Government Securities.
Market Risk arises largely from the Bank?s trading activity in interest rate instruments, equity and forex market. We have well-developed framework, comprising of Board approved policies and established practices, for management of the market risk. • Bank has established an independent mid office, as the risk control unit for the treasury & PMD activities reporting to Chief Risk Officer.
• Mid-Office scrutinises the treasury deals and transactions from market risk and operational risk aspects.
• Policies are in place for conduct of business exposed to market risk and liquidity risk with appropriate risk limits, stop loss limits etc. and for effective management of all market risk exposures.
• The policies and practices also take care of monitoring and controlling of liquidity risk arising out of its banking book, trading book and off-balance sheet exposures.
• To measure and control market risk, interest rate risk, Equity price risk and forex risk, Bank has set various risk appetite limits. Bank is using various tools like stress testing, modified duration, PVBP, VaR, position limits, stop loss limits, NOOP limit, AGL etc to monitor and contain market risk. Currently, capital charge for market risk is computed under the Standardised Duration Approach.
Risks Mitigation Steps
Liquidity & Interest Rate Risk Liquidity risk is the potential inability to fund increase in assets, decrease in liabilities or meet obligations as they fall due, without incurring unacceptable losses. Interest rate risk is the risk where changes in market interest rates affect the Bank?s earnings through changes in its net interest income (NII) and the market value of equity through changes in the economic value of its interest rate sensitive assets, liabilities and off-balance sheet positions • Bank?s Asset Liability Management policy provides framework for management of liquidity risk and interest rate risk. Bank has established risk appetite limits and other tolerance limits for both liquidity risk and interest rate risk. Further, our Bank also has necessary framework in place to manage and monitor intraday liquidity risk.
• Our Bank?s Asset Liability Committee (ALCO) is periodically reviewing pricing of assets and liabilities, monitoring adherence to liquidity risk and interest rate risk limits.
• While the maturity gap and stock ratio limits help manage liquidity risk, assessment of impact on the net interest income and economic value of equity help to mitigate interest rate risk. This is complemented by a stress testing framework covering both liquidity and interest rate risk.
• Bank conducts various studies to assess the behavioural pattern of non-contractual assets and liabilities and embedded options available to customers, which are used while managing maturity gaps.
• Liquidity Coverage Ratio (LCR), a global standard to assess organisation?s ability to meet its payment obligations, is used to measure a Bank?s liquidity position. LCR level ensures that the Bank has an adequate stock of unencumbered High-Quality Liquid Assets (HQLA) that can be converted into cash easily and immediately to meet its liquidity needs under a 30-day calendar liquidity stress scenario.
• NSFR (Net Stable Funding Ratio) return is submitted to RBI effective 1st Oct 2021. NSFR promotes resilience over a longer-term time horizon by requiring banks to fund their activities with more stable sources of funding on an ongoing basis.
• Our Contingency Funding Plan (CFP) ensures that Bank has adequate liquid financial resources to meet our liabilities as they fall due. The CFP is reviewed quarterly by the Board/ALCO.
• Country risk and Counterparty (Bank) exposure limits are reviewed periodically.
Operational Risk Risk arises from inadequate or failed internal processes, controls and systems, and procedures due to employee error or breach, fraud or external events or a combination of these factors • Bank has a well-established internal control system, Books of instructions, internal circulars on policy matters and procedures, guidelines which include segregation of duties & responsibilities, systems and procedures, standardised operating procedures, clear lines of authority and reporting, among others.
• Bank has adopted a structured internal audit mechanism carried out at pre-defined intervals based on well-designed parameters & existing ratings; apart from regular inspection, Bank also has Concurrent audit, Information Security Audit, Credit Audit, Revenue Audit and statutory audit. All the audits and inspections also help in understanding the working of the controls, breaches and the need for improving the controls and its effectiveness.
• Risk and control Self-Assessment exercise and Key Risk Indicators support in putting in place additional measures to improve the existing systems and controls.
• Bank has a Business Continuity and Disaster Recovery (BCP & DR) policy to manage disruptions to our operations.
• Product, process and outsourcing committees have representation from the risk department for their views besides suggesting mitigations for the identified risks in those products and process.
• Bank has implemented the Basel III capital framework and calculates the Capital to Risk Weighted Assets Ratio (CRAR) as per the guidelines laid down by the RBI
Fraud Risk Financial institutions in general and Banks in particular are vulnerable and prone to several frauds perpetrated through internal and external forces. All the Banks are taking initiatives continuously to strengthen their internal control systems and procedures to guard against the frauds • Bank has put in place a fraud risk management policy and standard operating procedure clearly defining the roles and responsibilities of all the related stake holders in the matters relating to detection / identification, classification and reporting of frauds to RBI, other regulatory bodies, Board of the Bank and Sub committees of the Board, and the process of investigation, apart from recovery including insurance claims, provisioning, disciplinary action against the fraudsters, closure of fraud etc.
• Reasons are analysed to study the transactions, understand the weaknesses in the system and suggest additional controls to prevent recurrence. A number of Early Warning Signals (EWS) are studied and the results are shared with concerned verticals.
• Besides internal data, public domain data are also analysed as a preventive and monitoring mechanism.
• On-line transactions are also monitored by specialised computer applications and processed until the logical end.
• Some of the large loan accounts that exhibit a number of EWS are studied in detail for a period of six months, and appropriate decisions are taken based on the results of the study.
Risks Mitigation Steps
COVID-19 pandemic It poses additional risks for our Bank, both directly as well as indirectly through the global and domestic macroeconomic factors, and external operating environment • Bank had extended all the relief measures announced by Union Government and Reserve Bank of India, be it extension of moratorium, approval of FITL, GECL, Resolution framework for all types of loan including MSMEs.
• Comprehensive study to identify industries / sectors that are affected & likely to be impacted by the pandemic was undertaken by Risk Management Department followed by quick assessments on subsequent periods. Fresh proposals are handled with additional due diligence and other key parameters and the capabilities of achieving the estimates.
• Credit flow to these industries / sectors were monitored (and continue to be monitored) to avoid any concentration risks, while ensuring that viable businesses under temporary financial stress were extended necessary credit facilities within the risk appetite of our Bank.
• The advances portfolio of our Bank is under close monitoring, both at the portfolio level as well as at individual borrower / account level, to ensure that it stays healthy including pandemic related impact on various portfolios.

Commodity price risks and foreign exchange risks and hedging activities

We have a Market Risk Policy, an Integrated Treasury Policy and Precious Metals Division Policy approved by the Board specifying risk control framework for undertaking any Commodity price risk and Foreign exchange risk. The Board of the Bank has defined overall Net Overnight Open Position (NOOP) Limit, Stop Loss Limit, Aggregate Gap limit (AGL), Value at Risk (VaR) limit to control the Foreign exchange risk within its risk control framework. The Bank maintains adequate margin while lending against commodities and has put in place a system of monitoring the commodity price.

In addition, Bank is authorised by Reserve Bank of India to import gold and silver and the exposure arising out of import of gold and silver on consignment basis is covered on back-to-back basis.

Bank uses Derivatives including Forwards & Swaps for hedging its currency risk in its balance sheet, customer offerings and proprietary trading, in compliance with overall risk limit and control framework. The management of these products and businesses is governed by Board approved Policies of the Bank.

8. HUMAN CAPITAL

Our people are the driving force behind our success and the key differentiators in an intensely competitive sector. We are committed to providing them with growth oriented work environment and have established transparent and well-defined people policies and meritocratic practices, be it in staff augmentation, deployment or development. We have also been continuously digitalising our people processes over the past few years for the convenience of employees and to ensure effectiveness of the processes.

(For more details, read page 30 of this report.)

9. COMPLIANCE

We have a transparent and comprehensive Compliance Policy and a robust KYC/AML/CFT Policy, duly approved by the Board and subject to an annual review. Compliance, to us, is non-negotiable and Compliance Department independently tracks, monitors, assesses and ensures that we meet regulatory guidelines and internal standards. The department works closely with the Compliance Coordinators of business/ Operations teams and Divisional Offices. The Department is headed by the Chief Compliance Officer (CCO), who assists the Board, Audit Committee of the Board and Leadership Team in managing the compliance risk, that is, the risk of legal or regulatory sanctions, financial loss or reputational loss arising out of any failure to comply with the applicable laws, regulations or code of conduct applicable to Banks activities.

The team at Compliance Department remains up to date with regulatory developments and acts swiftly to ensure timely adherence to guidelines by respective business/ operation teams. We also participate in industry working groups that discuss evolving regulatory requirements and impart training on matters related to compliance to employees on an on-going basis. The CCO is a member of various executive committees for exchange of information. The Compliance Department keeps the Management/Board/ACB informed about compliance related matters through monthly, quarterly and annual compliance reviews. The Board and Leadership Team are committed to implementing, promoting and maintaining a robust compliance culture.

Strong governance oversight

• Process to ensure implementation of new regulations.

• Reporting of compliance breaches.

• Risk Assessment results - gaps in controls.

Good compliance culture

• Issuance of E-services / advisories.

• Providing training on-line / classroom.

• Giving guidance, views through interactions and discussions etc.

Comprehensive risk management practice

• Compliance Risk Assessment.

• ML-TF Risk Assessment.

• Mystery shopping framework.

Zero tolerance for non-compliances

• Defining ownership / responsibility.

• Approach for fixing compliance accountability.

• Implementation of key compliance indicators.

10. INFORMATION SECURITY GROUP

Our Board and leadership team has instituted an Information Security function for designing, developing, implementing and maintaining an Information Security Management System (ISMS) to protect our information assets in accordance with the determined risk profile of the assets. The Chief Information Security Officer (CISO) is responsible for providing leadership and oversight in the effective implementation and operation of ISMS in accordance with approved policies and procedures. The ISMS considers the nature of our business along with internal and external factors and is aligned with the overall objectives and policies. The ISMS promotes security awareness amongst staff members and service providers, and aims to facilitate all the constituents such as IT Department (ITD), Data Centre (DC), Disaster Recovery Site (DRS), Branches and Offices to implement the controls and monitors its effectiveness. Top priority is accorded for regulatory compliance and timely action is taken on all regulatory guidelines received from time to time. Compliance status is regularly reviewed by Top Management and Board as part of routine governance.

We continue to invest in modern technology solutions for timely application of security patches in the IT systems, prevention of intrusions, segregation of network segments, management of privileged access to production systems and management of firewalls rules. Thus, vulnerabilities in the IT systems are prevented from being exploited across the network and hence are minimal.

Notwithstanding these preventive control measures, we have a reliable Vulnerability Assessment (VA) and Penetration Testing (PT) process to assess the IT systems periodically, detect vulnerabilities and undertake timely remediation measures.

We are approaching the future with a focus on key strategic areas like Business Continuity Resilience while leveraging AI / ML capabilities for prevention of security risks. Additionally, we are also looking to concentrate on process amendment and adherence to regulatory compliance.

During the year, there was a boost in digital growth and an upsurge in the use of technology and the internet around the world. This has also resulted in increased cyber threats and attacks which require proactive, continuously integrated and automated approach to cyber security. The ISMS has advanced and utilised new and emerging technologies such as security orchestration, automation, AI/ML and predictive analytics to ensure cyber resilience. We will leverage on these advancements for enhanced cyber security risk management.

We have taken necessary steps to eradicate the Cyber Risk as a result of Work From Home operations. These include the following:

• Secured VPN connection (end-to-end encryption) is facilitated along with multi-factor authentication

• Only one device is allowed to connect with an employee at a time

• Data Leakage prevention tool is implemented to restrict data ex-filtration through mail, web and removable media

• Data copying is restricted to the local system of an employee

• Dedicated Engineers assigned to provide technical support during remote connection

• Work from home guidelines related to security have been disseminated to all the employees through e-mails on regular basis

• BYOD policy has been defined and communicated.

We received Merit Award from SKOCH group for current year. We also received BFSI award from Express Computer in the Category "Data Centers - Networking".

Key Initiatives during the year:

• Compromise and special Red Teaming exercise carried out for the first time in the Bank to assess the Banks preparedness for timely incident response and to identify the presence of malicious actors in the network.

• Privileged access management was further strengthened.

• Network Behaviour Analyser has been implemented and it is an Autonomous Response technology that calculates the best action to take, in the shortest period of time, to effectively respond to in-progress cyber-threats, limiting damage and stopping their spread in real time.

• Next Generation firewalls has been implemented to enhance the network security to the next level.

Outlook

The emerging technologies posing many security challenges and also creating so many opportunities which led the Information Security functions to use emerging technologies such as security orchestration, automation, Artificial Intelligence, Machine Learning and predictive analytics to ensure cyber resilience.

We will focus on:

• Timely detection of security incidents, immediate counter response measures to contain the risks and minimise the impacts, and implementation of proper prevention techniques to ensure better cyber resilience.

• Leveraging AI / ML capabilities for prevention of security risks.

• Regulatory compliance.

11. INTERNAL CONTROLS SYSTEMS AND THEIR ADEQUACY

We have put in place an independent inspection and audit process cutting across various functions to ensure adequate internal control in the day-to-day functioning, in line with Regulatory and Internal guidelines. The Audit Committee of the Board is continuously providing macro level guidance to the Inspection and Audit Department (IAD) and also periodically reviews its functioning. We also have an Internal Audit Policy approved by the Board. IAD is equipped with adequate skilled man power and technical support to ensure an effective audit process. IAD functions also supports our efforts in fostering asset quality.

Risk Based Internal Audit (RBIA) as envisaged under Risk Based Supervision of RBI is one of the major activities undertaken by IAD. It covers branches, Business Units (CBUs, BBUs, Precious Metal Division, NEO, TBG etc) and other Back Offices (BOs). RBIA focuses on assessment and measuring of risks on the basis of inherent business risks and control gap in areas like Credit, Operations and Market risks. RBIA also identifies triggers, enforceability of Loan documents and monitors security/ charge created in favour of the Bank. In the entire RBIA, right from identification of branches/business units to be inspected during the year, inspection/audit process, risk categorisation of branches, and upto reporting to ACB, we make effective use of analytic and technical capabilities of

Technical capabilities are made use in inspection follow-up and also for easy reference of remarks by business units during their rectification process. This has considerably reduced TAT for the file closure and also in improved compliance culture. We have conducted the RBIA of all the branches and BUs and BOs identified for inspection for the FY 2021-22, in spite of various challenges faced on account of COVID-19. We are also ensuring the genuineness of compliance submitted by the branches for RBIA report by conducting Compliance Audit at the branches by a separate team.

To overcome the challenges of any scenario similar to lockdowns, off-site surveillance and audit tools are also widely used. SWIFT audit, transaction monitoring, Gold Loan monitoring, selected GL heads monitoring, spurt in business etc. are all brought under off-site surveillance. Various audits like surprise verification, Reappraisal of Jewel Loans etc. were initiated from the inputs received from off-site surveillance. These initiatives helped us in restricting frauds/attempted frauds. IAD undertakes audit of co-lending activities, pool buyouts, management audit of central office departments, inspection of all currency chests in line with RBI guidelines and special audit through external auditors like NPA audit, important department audits etc.

Concurrent audit covers branches, Business Units (CBUs, BBUs, Precious Metal Division, NEO, TBG etc) and other Back Offices (BOs). Currently experienced external auditors are used for conducting concurrent audit.

During FY 2021-22, 147 branches are covered under Concurrent Audit. Besides this 9 Corporate Business Units (CBU), 16 Business Banking Units (BBU) and NEO were also subjected to Concurrent Audit, covering 52.10% of the total deposit and 56.20% of total advance of the Bank Branches. Credit Audit is being carried out for high value accounts and findings are taken for logical conclusion.

We have also ventured into strengthening and sharpening of audit process after shifting to digitalised lending process taking cognisance of the various requirements borne out of digitalisation. Offsite audit mechanism and monitoring process is being explored and enhanced, with an objective to complete the activities on near real time basis. This helps in reducing the credit risk to the bank and will also be helpful in reduction of number of remarks in RBIA, and improved compliance culture at BUs.

We have a system of re-appraisal of jewels pledged under Jewel Loan portfolio once in a year covering all branches which have the Jewel Loan portfolio. During 2021-22, 782 re-appraisals including surprise re-appraisal was conducted. Further, during RBIA inspection, purity of jewels will be verified on 10% of the outstanding jewel bags as of inspection date.

During the year, we have conducted Process Audit on selected process/products for examining the effectiveness and efficiency. Examination of significant Processes i.e. business and operational key risks, the controls established to mitigate those risks, including compliance with regulations and established policy, procedures have been carried in this activity. The audit is conducted to provide an opinion on both the design and control effectiveness of the process.

Information System Audit is conducted once in a year covering branches, back offices, applications and critical process viz., Central Office, Divisional Offices, Data Centre, and other back offices etc. During the year, we have conducted IS Audit across 594 branches, 21 offices and 18 other specialised audits. We have an IS audit Team of qualified executives/ officers to conduct / manage various IS audits, VAPT, Continuous IS Audit of Data Center, DRS, Alternative Channel Cell and other vendor audit etc. External expertise, preferably through Cert-in empanelled firms, is being utilised for the activities, wherever required. Macro level guidance for IS audit is provided by IT Strategy and Digital Transaction Monitoring Committee of the Board and Audit Committee of the Board.

FY 2021-22 key highlights

• RBIA for 594 branches and all other Business Units identified for inspection for the FY 2021-22 are completed.

• 147 branches are covered under Concurrent Audit. Besides this 9 Corporate Business Units (CBU), 16 Business Banking Unit (BBU) and NEO were also subjected to Concurrent Audit.

• Credit Audit is being carried out for high value accounts and findings are taken for logical conclusion.

• Process audit conducted on selected process/products for examining the effectiveness and efficiency.

• Strengthening offsite surveillance by including more monitoring areas under near real time basis.

• To reduce credit risk and increase compliance culture "RADAR" monitoring implemented with selected areas.

• Introduction of onsite and offsite audit for RBIA.

• Brought in improvement in file closure and also reduced the overall risk rating of the branches.

Outlook

• Audit planning for selection of branches shall be system driven. Analytic inputs shall be used as a tool.

• Technology will be leveraged to enhance the coverage of off-site surveillance and off-site audit.

• New initiatives proposed for near real time compliance.

• More number of process audits to ensure proper system behaviour and adequacy of controls to be put in place.

• Focus of RBIA shall be on picking up triggers of risk, Gaps in controls and processes, identifying operational risk etc.

We will pursue our strategy by utilising the following means:

People

• Nurturing in-house talent

• Continuous capacity building of officers in credit appraisal, risk management, loan recovery

• Digital enablers to sales force at the field level

• Talent acquisition through lateral hires

• Talent management through appropriate retention measures

Processes

• Digital adoption A2Z customer journey through technology to deliver a seamless personalised customer centric experience

• Improved decision making and operational excellence by leveraging data, business intelligence & advanced analytics

• Adoption of technologies including RPA and AI

Practices

• Strong governance and oversight

• Developing a good compliance culture

• Zero tolerance for non- adherence to process and compliance

• Comprehensive risk management practices

Planning

• Optimise the use of financial resources

• Improved efficiency of capital deployment

• Ensuring adequate competitive funding is available

Partnerships

• Co-lending partnerships with NBFCs

• Fintech partnerships for sourcing, and to provide digital customer experience across multiple channels

Our strategy is to deliver sustainable and consistent financial performance by providing superior services to our targeted customers and our goal is to achieve a RoA of 1% plus by March 31, 2024.

We will:

Offer our customers appropriate financial solutions/products/services, by focusing on the Southern and Western Markets, attracting Small & Medium Entrepreneurs, self-employed & professionals, and the entire spectrum of individual savers.

Establish a sole-banking or preferred banking relationship by providing positive customer experience through delivery of quick and efficient services, leveraging our digital channels backed by our experienced and dedicated team.

Disclosure of Accounting Treatment

The financial statements are prepared on a going concern concept, on historical cost basis, and conform to the Generally Accepted Accounting Principles (GAAP) in India which encompasses applicable statutory provisions, regulatory norms prescribed by the Reserve Bank of India (RBI) from time to time, notified Accounting Standards (AS) issued under Section 133 of the Companies Act, 2013 read together with paragraph 7 of the Companies (Accounts) Rules, 2014 to the extent applicable to banks and current practices prevailing in the banking sector in India. Income and Expenditure are generally accounted on an accrual basis, unless otherwise stated and comply with requirements as per RBI guidelines and the provisions of Banking Regulation Act, 1949. Accounting Policies adopted in the preparation of financial statements are consistent with those followed in the previous year.

13. CAUTIONARY STATEMENT

Certain statements in the ‘Management discussion and analysis describing our objectives, estimates and expectations may be ‘forward-looking statements within the meaning of applicable securities laws and regulations. Actual results could differ substantially from those expressed or implied. These statements are subject to risks and uncertainties, including the effect of economic and political conditions in India and outside India, volatility in interest rates and in the securities market, new regulations and government policies that may impact our businesses as well as our ability to implement the strategy. We do not undertake to update these statements. Figures for the previous year have been regrouped wherever necessary to conform to current years presentation. Important factors that could make a difference include economic conditions in the domestic and overseas markets, changes in laws/ regulations and other incidental facts. This document also does not constitute an offer or recommendation to buy or sell any financial products offered by KVB.