Karur Vysya Bank Ltd Management Discussions.

Economic Overview

Global economic activity slowed down notably in the second half of last year, on account of factors affecting major economies including worries over trade war - with increasing trade tensions & tariff hikes between the United States and China. This has led to a decline in business confidence, tightening of financial conditions, weak global growth and higher policy uncertainty across many economies. The World Bank sketched a gloomy outlook in the upcoming years, re-enforcing fears of a global slowdown. US Federal Reserve, in response to rising global risks, paused interest rate increases and signalled no increases for the rest of the year. The stance of other Central Banks was also more accommodative e.g. China which has ramped up its fiscal and monetary stimulus to counter the negative effect of trade tariff.

International crude oil prices have declined sharply from their October 2018 highs, though they continue to be volatile. The outlook for supply is uncertain and depends to a large extent on production decisions by OPEC and its non-OPEC partners, apart from uncertainty on the full impact of Iranian sanctions, as well as the outlook for Venezuelan production. Metal prices fell sharply in the second half and are expected to stabilize between 2019 and 2020 and agricultural prices are projected to remain broadly stable. Moderating activity and heightened risks are clouding global economic prospects. Faced with these headwinds, recovery in Emerging & Developing Market Economies (EMDEs) has lost momentum. Downside risks have become more acute and include the possibility of disorderly financial market movements and an escalation of trade disputes. In a nutshell, the outlook for global economy has darkened, witnessing a synchronised deceleration and risks have increased. The global trade outlook is uncertain as the largest economies of the world struggle to strike a deal. EMDEs face some of the greatest risks and spill over effects could be profound. Inflation pressures across geographies remain benign on soft commodity prices and slowing demand. Global growth and trade concerns are expected to remain the dominant theme of 2019, which will drive markets & future monetary and fiscal actions. IMF projects global economic growth at 3.3% for 2019 and 3.6% during 2020 factoring in the challenging economic situations and short term uncertainties in many countries.

Indian Economic Scenario

Indian economy started the fiscal year 2018–19 with a healthy 8.2% growth in the first quarter on the back of domestic resilience.

Growth eased to 7.3% in subsequent quarter and hovered around 7% at the end of FY 19, due to subdued expansion in agriculture, manufacturing and government expenditure. Furthermore, the Indian rupee suffered on account of crude price shock, and conditions exacerbated as recovery in some advanced economies caused faster investment outflows. Despite softer growth, the Indian economy remains one of the fastest growing globally. It has also demonstrated resilience and has thus far been maintained a level of de-coupling from global economic trends. In fact, the effects of the aforementioned external shocks were contained in part by Indias strong macroeconomic fundamentals and policy changes such as amendments to the Insolvency and Bankruptcy Code, Bank recapitalization etc. There is no doubt that Indias recent budget has tried to strike a balance between fiscal prudence and growth. Further, India jumped up 23 notches in the World Banks Ease of Doing Business Index 2018, achieving a rank of 77, denoting the favourable business conditions in the country. The various welfare schemes - Ayushman Bharat (National Health Protection Scheme covering 10 Crore poor families), GOBAR-Dhan Yojana (an effort by the government to make Indian villages open-defecation free) will improve the quality of life of Indians. The Indian economy, according to RBI, is buoyed by narrowing of current account deficit, higher foreign portfolio investments, decline in fuel inflation and improvement in disbursement of credit to large industries.

Notwithstanding the above, the economy remains vulnerable to domestic and geopolitical risks. While expectations of inflationary pressures remain benign, concerns have risen on the twin deficit problem viz., current account deficit and fiscal deficit, especially as portfolio investments remain subdued while trade deficit stays high. The governments fiscal deficit for the full-year is estimated at 3.4%, as against the set target of 3.3%. Indias current account deficit moderated in Q4 and trade deficit for the entire year is likely to be the highest since 2012-13. Indias foreign exchange reserves were at US$ 412.9 billion on March 31, 2019.

Inflation remained within the RBI band of 4% (+/-2%) mainly on the back of benign food and oil prices. CPI inflation was at 2.86% in March 2019 and Core CPI inflation was 5.4%. International oil prices and rainfall pattern of the current monsoon season with its impact on food production, will be the key factors driving inflation in FY 20. However, CPI inflation is expected to remain below the RBI target mid-point of 4% for the year.

The newly re-elected Government at the Centre is expected to continue its agenda vis--vis reform and infrastructure development, this is likely to result in recovery of GDP growth rates. An added boost is expected from the benefits arising from the stabilisation of GST, increased formalisation of the economy and improvement in ease of doing business. Further, downside risks in the form of subdued private and public consumption, moderation in manufacturing, pharmaceuticals, machinery and equipment industries, muted credit flow to small and medium enterprises by the banks, contraction in sales of commercial vehicles (indicative of slowing demand in the economy), could have a bearing on the growth prospects. However India is expected to remain the fastest growing emerging market economy, and is expected to grow at 7.3% during FY 20.

Developments in the Banking Sector

Indias banking sector has undergone a paradigm shift in the last two decades - evolving from physical banking to becoming almost fully digital. This has been facilitated by the development of technologies – eg. Open API, improvements in mobile technologies etc. – and by the rapid proliferation of validate-able information – e.g. Aadhar, GST etc. The Indian digital infrastructure is today enabling banks to become fully digital – not merely the automation of branch paperwork, but the elimination of paper through the use of new technologies. Technology is playing a central role in the evolution of banking practices, products and services. The centrality of technology in defining not only the products, services and delivery mechanism – i.e. the business model in itself - cannot be overemphasised. While technology redefines banking, new entrants – fintechs, new age NBFCs – are innovating with newer products, services and delivery frameworks. This will further reduce the protection that the regulatory framework has historically provided to the banks.

The credit portfolio of the banking industry witnessed a growth of 13.1% during FY 19 with a deposit growth of 10%, despite the continuing challenges in the fronts of deteriorated asset quality, slowdown in profit levels and challenging economic conditions. The bank credit is expected to accelerate and continue its double digit growth in fiscal 2019-20 also.

Retail segment is expected to continue to grow at a rapid pace, led by strong consumer demand and increase in penetration by banks. Within retail, non-housing retail segment may see relatively strong growth. The regulators move to benchmark the retail loans with external rate is expected to bring transparency and better understanding of loan products.

Overall profitability in the banking system is expected to remain subdued on account of higher provisioning due to ageing of NPAs and high level of haircuts on many of the NPAs referred to National Company Law Tribunal (NCLT) for resolution. The NPA situation in the Indian banking system has been stabilizing. Amendments to the Insolvency and Bankruptcy Code is expected to further strengthen the NPA recovery efforts by banking sector.

Further, additional capitalization of PSBs for a total of 1.06 lakh Cr during FY19 will improve the CRAR of these banks.

RBI modified its stance from "calibrated tightening" to "neutral" during FY 19 and reduced the Repo Rate by 25 bps each time in February and April 19. During FY 19, RBI reduced the SLR from 19.5% to 19.25%, further announced a phased reduction in SLR by 25 bps each quarter until it reaches 18% from 1st January 2019, while CRR remain unchanged. Further, the 10 year G-Sec yield came down gradually from 7.57% to 7.35% during FY 19. RBI permitted banks to reckon an additional 2% of government securities within the mandatory SLR requirement, as FALLCR for the purpose of computing LCR, in a phased manner, for harmonization of effective liquidity requirements with LCR. A separate ombudsman scheme for digital payments was launched to redress complaints raised by customers for digital transaction and RBI commenced the process of setting up an extensive database of credit information viz., Public Credit Registry (PCR), which will be accessible to all stakeholders. Further, the definition of bulk deposits were revised to र 2.00 Cr and above instead of existing र 1.00 Cr.

Your Bank is all set to translate the opportunities into business and thereby expects the year to be characterized by quality growth both under assets & liabilities front. To progress in this direction, your Bank has rolled out the following initiatives during the year under report:

• Fully digitalized, end-to-end, loan approvals under retail and commercial segments with strong underwriting metrics.

• KVB Dlite, a fully loaded Mobile Application, enabled with online savings account opening, FASTag purchase, e-ASBA and an unique shopping experience, apart from other regular financial/non-financial services.

• KVB NEO, a dedicated arm for exploring the untapped distribution channels, marking a shift from the age-old branch based banking.

• Co-origination and co-lending of retail loans by way of tie-ups with established fintech companies.

• Portfolio purchase of select NBFCs to build a healthy asset book.

• A new sales structure dedicated for acquiring New To Bank customers to build a strong liability base for the Bank.

Opportunities and Threats

As mentioned earlier, banking is digitising at a rapid pace. This offers ample opportunities to your Bank as it is an acknowledged pioneer in this area.

Your Bank currently offers fully paperless loans for commercial and personal purposes using the very latest in digital technologies. Using this system, your Bank has enabled its branches to approve loans in minutes as against the days/ weeks it used to take earlier. This has not only empowered our branches to serve our customers better, it has also improved the control environment by ensuring that credit acceptance processes are driven through statistically validated scorecards. Your Banks business model has always been customer centric with the branch playing a key role – both features are maintained in the digital business model that has been adopted. Not only can your Bank process credit applications quickly, it can also do so at low cost – resulting significant strategic benefits in the future. We expect this new system to set-us up for rapid high quality growth in the future while keeping operating costs low. Finally, the new scorecards enable your Bank to understand the risk being accepted better than before, which in turn makes it possible for the bank to ensure appropriate pricing of risk. The liquidity crunch faced by the NBFC sector is expected to give banks an opportunity to broad-base their presence in the retail and commercial space. While your Bank is all set to increase its presence in the retail & commercial segment, it has taken a cautious approach on lending to corporates, keeping in mind the asset quality exhibited by this portfolio. Bank is deploying all available resources to enhance the recovery rate on this portfolio. However, the NCLT processes are still at their infancy and are as yet to mature. Marked slowdown in recovery processes will result in a downside risk for the Bank.

Opportunities are always accompanied with underlying risk also. While digital way of lending has its own unique strengths, possibilities of its inappropriateness with certain products/ customer segments do exist and your Bank is committed to continuously update/modify the sanctioning metrics. Further, digital processes are vulnerable to cyber-attacks, posing operational & reputation risk, and your Bank has a well-defined cyber security policy supported with upgraded cyber technology to mitigate the risks.

Business Segment Overview

Despite a challenging macro-economic environment, your Bank has made progress in most of the core parameters for the year ended 31st March 2019. Banks Total Business stood at 1,10,483.61 Cr recording an increase of 7,620.38 Cr from 1,02,863.23 Cr as on 31st March 2018, a y-o-y growth rate of 7.41%.

Deposits increased to 59,867.95 Cr from 56,890.09 Cr, recording an incremental growth of 2,977.86 Cr over the previous fiscal.

CASA share in the aggregate deposit stood at 29.92% as on 31st March 2019 as against 29.14% at the end of the previous fiscal.

Savings Bank deposits grew to 12,101.39 Cr as on 31st March 2019 from 11,000.57 Cr as on 31st March 2018 with a growth of 10.01%.

Demand Deposits grew by 4.07% over previous fiscal and stood at 5,813.59 Cr as on 31st March 2019.

Retail Deposits viz., Term Deposits of less than 1.00 Cr constitute 85.00% and Term Deposits less than 5.00 Cr constitute 93.00% of the total Term Deposits as at 31st March 2019. During FY 19, the concentration of top twenty deposits were reduced to 6%.

Corporate and Institutional Group (CIG)

Your Banks Corporate and Institutional Group (CIG) provides comprehensive client focused services comprising of Working Capital finance, Term Loans, Specialized Corporate Finance products, Trade and Transaction Banking Services and liquidity management solutions.

In your Bank, exposures above र 25 Cr or Consortium Advances or Loans to Corporates having a turnover of र 150 Cr and above are handled by CIG vertical. The Banks customers under this segment are mostly mid corporates. Your Bank prioritized credit quality and all sanctions are made following an appropriate credit appraisal of the clients risk profile as well as pro-active monitoring of credit risk.

CIG advances requires skilled workforce who should be well versed with the latest guidelines/market requirements and hence a dedicated team is expected to take care of the entire gamut of corporate advances, including monitoring and ensuring higher asset quality of the corporate book. Your Bank has formed Corporate Business Unit (CBU) at major centres which is staffed by a dedicated team, experienced/trained in corporate credit, which takes care of the entire requirements of the corporate clients.

The CBUs were originally started at Bengaluru, Chennai, Coimbatore, Delhi, Hyderabad & Mumbai centres; are now extended to Ahmedabad, Madurai & Vijayawada also. With the establishment of the new CBUs in the current year, the entire credit portfolio under CIG vertical is now handled by the CBUs. During FY 19, performance of CIG is as below:

• As on 31st March 2019, your Banks CIG advances were at र 14,168 Cr, which accounted for 28% of the Advances portfolio of the Bank.

• Fresh releases made during the year was र 2,057 Cr, which consists of र 1,286 Cr from New to Bank portfolio; and771 Cr from existing clientele.

• CIG vertical of your Bank concluded syndication deal for390 Cr. during FY 2019. Fee income earned on the above syndication deal is र 3 Cr.

• Your Bank, under CIG portfolio, recovered र 701 Cr from various NPA accounts through NCLT resolution process, full cash sale to ARC, Cash Recovery/OTS etc.

• Your Bank, under the CIG portfolio, is also effecting limit reduction/exit of the accounts wherever it is felt necessary based on the internal/external ratings and risk perception of these accounts.

Your Banks Corporate sector advances is being given a push in the fiscal 2019-20 with more thrust on mid-corporate segment. A separate vertical viz., Emerging Mid Corporate Group has been formed within the Corporate Business Unit and separate Relationship Managers have been posted exclusively for this segment with specific business targets to cater to the existing and New To Bank relationships. Going by the increased investment in infrastructure and additional focus on completion of smart city projects pan India, financing requirement is set to increase. Capitalising this area, mid corporate/corporate business is expected to be bullish in FY 20.

Commercial Banking Group (CBG)

Your Bank is ensuring continuous flow of credit to MSME customers and traders having credit requirements up to 25 Cr.

Your Bank has aligned its products & services, in line with market trends & expectations, adding more flexibility and value to the facility. It is more so with the advent of digitalization process last year, using automated customer interface, your Bank has considerably reduced TAT in sanctioning credit facilities, working capital limits up to 2.00 Cr, to begin with.

The loan underwriting parameters are strengthened and risk based pricings have been implemented, resulting in constructive build-up of quality asset portfolio. The response from the customers are overwhelming and this enabled the Bank to take forward the digital lending journey to the next step of including both fund based and non-fund based facilities in this segment. When fully operationalized, the suite of products in digital lending platform is expected to catapult the Banks MSME franchise to higher growth trajectory.

In line with its commitment to extend need based assistance to MSMEs, Bank has promptly adopted and implemented the RBI guidelines dated 1st January 2019 on One Time Restructuring of Advances of MSMEs facing temporary stress in handling disruptive changes ushered in by demonetization and introduction of GST. Further, your Bank continues to support eligible MSME customers in availing the benefits of various Government sponsored programmes like TUFS/CLCSS/MUDRA, Start-up India, Stand-up India etc.

Your Bank has implemented the Interest Subvention Scheme to Micro, Small and Medium Enterprises (MSMEs) as per RBI instructions dated 21st February 2019. Interest subvention of 2.00% is eligible under this Scheme for all GST registered MSMEs availing fresh or incremental loans upto र 100 lakhs from 2nd November 2018 in FY 2018-19 and FY 2019-20. Bank has taken required measures to cover all the eligible MSME accounts under the scheme.

Banks Commercial Banking Group Advances were at 17,056 Cr constituting 33.98% of the total advances as on 31st March 2019.

Corporate Credit Card

Your Bank has always been at the forefront in evolving products which are fine-tuned to the emerging business needs of MSMEs and Small Traders. The Bank launched for the first time, an unique Credit Card product viz., KVB Corporate Credit Card to help business entities in managing and controlling their business expenses more effectively with a revolving credit period of up to 45 days. KVB Corporate Credit Card is backed by highly secure technology. The best-in-class partnerships and alliances offer convenience to business and privileges that suit the lifestyle of our corporate and commercial customers. Proprietors, Partners, Directors and Employees of business enterprises can use the cards for their business spends.

The product facilitates effective payment solutions to banks business customers offering them highly customizable and simplified expense management solutions. Your Bank has introduced a very effective credit management framework to support the credit card business. With highly differentiated & customized product offerings and leveraging on its branch distribution in SME clusters, the business is well placed to register a robust growth.

Personal Banking Group (PBG)

Your Bank has taken digital technology for end-to-end processing of retail loans with the launch of KVB NEXT, aimed at simplifying the process for the retail loan customers.

KVB NEXT is the first of its kind in the Indian banking sector, to process the retail loan requests using a tab-based application, which offers in-principle loan sanction to eligible customers within 15 minutes and the loan disbursement in two-three days. KVB NEXT leverages the information obtained from a variety of sources such as GST returns, Income Tax filings, Annual Reports and CIBIL score (in case of individuals), to generate score card for loan applicants.

The digital loan processing solution covers products such as home loans, personal loans, vehicle loans and loans against property in the retail segment.

Your Banks Retail Advances business registered a growth of 48% in the year under review. Total Retail advances grew from 7,620 Cr to 11,278 Cr. (Excluding Interbank Participation Certificate (IBPC) deals 2,050 Cr, the Retail Advances grew by 24%).

Growth in Retail Assets was contributed by Housing Loans at 29.48%, Mortgage Loan at 22.90% and Personal Loan at 43.24%. Your Bank has digitalized the major Retail Loans (Housing, Mortgage, Four Wheeler, Two Wheeler and Personal Loans). The Bank is also building its retail books through direct assignment of loans.

During the financial year, your Bank has introduced the following variants under Retail Loan products:

• Pre-approved Personal Loan for the existing CASA customers

• KVB Digital Top up Home loans/Reimbursement/Takeover

• Digital Mortgage Loans

• Digital Four Wheeler and Two Wheeler loans

• Digital Personal Loans.

Risk based pricing and product features are reviewed and revised from time to time based on the market trends, demand and customer needs.

As at 31st March, 2019, the total retail advances portfolio of the bank stood at 11,278 Cr constituting 22.28% of the total advances. Home loan segment contributed 7.15%, Mortgage loan 3.38%, Vehicle Loan 2.06%, Personal loans 0.83% and IBPC deals & Direct Assignments contributed 7.15% of the total advances.

On the liabilities front, your Bank introduced the following retail liability products during this Financial Year 2018-19:

• "KVB Co-Op" was launched on 12th June 2018 for targeting the co-operative societies.

• "KVB Arogya Card" for senior citizen customers with an aim to provide ‘Cashless hospitalization against fixed deposit was launched on 23rd August 2018 and 4,697 Arogya cards were issued to senior citizen customers.

• "KVB Fleet" Current Account for catering to the needs of Transport/Fleet Operators was launched on 02.10.18, and 3,656 fleet accounts were opened.

• KVB DLite SB Account – digital and paperless hassle free instant account opening through mobile application by keying-in Aadhaar Number and PAN number, was launched on 04.09.2018 and 57,849 DLite SB accounts were opened.

CASA

Your Bank opened a total of 7,08,934 new CASA accounts during FY19. The current account levels stood at 5,813.59 Cr and Saving accounts moved to 12,101.39 Cr as on 31st March 2019 taking the CASA base of the bank to 17,914.98 Cr. Incremental growth in savings was 10.01% while in current accounts the growth was 5.01%. The CASA to Gross Deposit ratio as on 31st March 2019 stood at 29.92% as against 29.14% as on 31st March 2018.

POS

Your Bank deployed 4,672 new Point of Sales (POS) machines during the year, taking the total number of machines deployed to 21,959. Total number of transactions through the machines during the year was 314.11 lakh with a volume of 4,860.73 Cr.

FASTag

Your Bank has been certified by NPCI to issue FASTag (a contactless card, operates on RFID technology and is linked to a prepaid account) along with few other banks in the industry and subsequently launched FASTag for the public with the prime objective to adopt "Cashless Payment" at toll plazas. During FY 18-19, your Bank issued 36,546 tags and the number of transactions through FASTag at Toll plazas is 48.84 lakh.

Debit Cards

On the cards front, your Bank issued 18.78 lakh debit cards during FY 18-19. During the period 959.50 lakh transactions amounting to 33,144.15 Cr were put through the debit cards of the bank. In line with the RBI guidelines, your Bank had replaced all magnetic stripe debit cards with EMV chip cards, which are more secure than magnetic stripe cards. In a further push to cashless banking, 2,03,446 new customers signed in for internet banking facility. In respect of Mobile banking 3,04,210 new users registered for the facility, which is a growth of 99.12% over the previous fiscal. In terms of total number of transactions across internet/mobile banking, the growth was by 75.67% and in volume terms, the growth was by 36.22%.

Demat Services

The Bank has 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.

Bancassurance & Credit Cards

As you are aware, your Bank has partnered with Aditya Birla Sun Life Insurance Co. Ltd for sale of life insurance products and Bajaj Alliance General Insurance Co., for sale of their general insurance products. Also, for the benefit of our customers, Bank has empanelled with Aditya Birla Health Insurance Co Ltd., and Max Bupa Health Insurance Co Ltd., during the year. ABSLI Guaranteed Milestone and Monthly Income Plan have been launched by ABSLI during the financial year. Sampad Suraksha, Super Suraksha, Swarna Suraksha, M-Care, Tax gain & Two wheeler insurance through QR code were launched by BAGIC during the financial year. Your Bank reached a new benchmark level of र 125 Cr fresh premium under life, non-life and health insurances. Your Bank issued 4,030 new Credit Cards (co-branded with SBI) during the year.

Agricultural Banking Group (ABG)

Agriculture is the backbone of our country and it is the focus area for your Bank as well for serving the farming community. Agricultural Banking Group plays a major role in extending helping hand for the improvement of farm production in the country thereby contributing to nations objective of increasing agriculture production. Your Bank is associated in the Evergreen revolution (Crop loans), White revolution (Dairy loans), Blue revolution (Fishery loans), Silver revolution (Poultry loans) and Golden revolution (Horticulture loans). With its widespread presence across the country and predominantly in rural, semi-urban locations, your Bank extended warehouse receipt loans to farming community to avoid distress sale of farm produce thereby protecting the interest of the farmers. Your Bank is offering a bouquet of products for agriculture and its allied sector in line with the emerging market requirements.

Your Bank is having a dedicated team of Agricultural Officers positioned at Divisional Offices and at cluster branches. They are effectively utilized for promoting the banks agricultural loans and for improving the business of the bank. Your Bank has also funded high-tech projects under agriculture and horticultural sector. Specialized products are being offered for food and agro based processing units which generates additional employment opportunities in the local area.

In order to improve the livelihood and socio economic conditions of the rural population, your Bank continues to support them in the form of Self Help Group, Joint Liability Group loans and through various government sponsored schemes emanating from central and state governments.

During the Financial Year, your Bank has surpassed the regulatory targets stipulated by RBI with respect to Priority Sector, Agricultural Sector, Small and Marginal Farmer Category, Micro Enterprises and Weaker Section Advances. Total Priority Sector Advances (Net of PSLC) as on March 2019 stood at 19,684.52 Cr constituting 43.01% of Adjusted Net Bank Credit as against the mandated target of 40%. Banks Agricultural advances were at 8,457.12 Cr, constituting 18.48% of Adjusted Net Bank Credit as against the mandated target of 18%. Bank has continuously achieved and surpassed the statutory Agri target of 18% for the 9th year in a row by lending to agriculturists and other allied sectors. Average Total Priority Sector and Average Agriculture Advances for FY 2018-19 is tabulated below:

Particulars Amount % to
( in Cr) ANBC
Average Total Priority Sector (Net of PSLC) 19,960.29 45.00%
Average Agriculture & Allied activities (Net of PSLC) 8,345.83 18.82%

Transaction Banking Group (TBG)

Your Banks Transaction Banking Group is offering Cash Management Services (Collection and Payment) on electronic platform. Your Bank is providing customized MIS and a customer front end (CBX – Customer Business Exchange) portal to CMS clients. Your Bank is leveraging the CMS capabilities to improve the current account portfolio by on boarding mid and large sized corporates.

Under Supply Chain Finance, your Bank is offering vendor and dealer finance products to automobile majors, engineering and agriculture equipment manufacturer. Your Bank has actively tied up with some of the leading auto majors & engineering industries in this regard. Further in order to cater their requirements and to strengthen the Supply Chain Finance, your Bank has added factoring products also.

Your Bank is actively participating in all the three "TReDS Platforms" for financing MSME vendors. Your Bank is expecting the TReDS business to gain momentum due to a host of Government initiatives. Central Government has made it mandatory that all companies registered under the Companies Act, 2013 with a turnover of more than 500 Cr and all Central Public Sector Enterprises should register in TReDS platforms.

Digital Transformation Journey

Digital Banking is an adoption of various existing and emerging technologies by the banks, in concert with associated changes in internal operations as well as external relationships for providing superior customer services and experiences, effectively and efficiently.

The new innovative digital technologies and futuristic thought processes have given birth to whole new businesses opportunities. Currently, there are several technologies, infrastructure and processes available to enable banks to provide efficient and dependable service. Adaptation and implementation of highly capital intensive global technologies, infrastructure and processes are decisive in order to remain ahead of the curve. Transition and Interoperability related issues viz. from traditional banking to state-of-the-art digital banking such as data integrity, authentication (including third party authentication) and trust factors in a digital banking environment are gaining importance. Digital banking provides mission critical solutions for the short term and long term business and technological requirements. Today, aspects such as enhanced customer satisfaction and value through unified customer experiences, faster output, infinite banking volumes, financial inclusion, operational efficiencies, scale of economy etc., are being sought after, by leveraging digital banking and mobile technologies. Becoming a digital bank can improve efficiency and provide a better customer experience.

Digital Transformation Journey continues to be a key initiative and thrust area of your Bank. Bank continues to enhance its reputation and offering in the digital space. About a million customers have downloaded the KVB Dlite application and registered for mobile banking. Your Bank is proud to inform you that about 80% of commercial and retail portfolio (excluding jewel loans and agricultural loans) is today being sourced through digital platform.

Some of the key benefits of the program are:

• Quick turnaround for customers. Bank has been successful in giving same day sanctions and disbursements across digital lending portfolio.

• Automated credit checks and underwriting with enhanced credit controls in place.

• Direct integration with GST enabling reliable and real time authentication of customer sales.

• Data driven decisions enriched by multiple third party data sources to support credit process (bureaus, vehicle pricing, fraud checks, etc. to authenticate customer information).

• Tightly managed credit risk. EMV/ abled,

• Reduced paperwork – end to end paperless process.

Information Technology

Technology in the banking industry is highly dynamic, and your Bank continues to leverage the latest of these technologies to address the changing needs of customers. Your Bank has been constantly upgrading its IT infrastructure and implementing new process, systems and structures for improved customer experience, and to ensure the safety and integrity of the institution.

Your Bank has embarked upon digital transformation journey to offer value added services to the customers and enhance customer experiences.

Your Banks digital transformation initiative, ‘KVB NEXT, has revolutionised the lending process for commercial and retail segments, by infusing automation to the loan disbursement process with built in credit checks and other balances, to extend loans, of the right quality, with steeply reduced turn around time. The loans are originated at the branches, or at customers premises, using mobile end points that access native cloud applications, which are highly scalable to allow for future growth, with security architected in.

Your Bank has a well-established Data Centre at Chennai and a Disaster Recovery Site at Hyderabad with updated infrastructure, being located at different seismic zones, apart from a Near Data Centre site at Chennai. In addition your bank has undertaken a successful upgradation of the Core Banking Application (FlexCube) to its latest version (11.7) so that your bank benefits from the latest features such as Open API enabling the CBS to connect securely with numerous born in the cloud, digital native, mobile first applications, that will help your bank improve customer experiences and reach out to newer segments of customers for growth and profitability. This new version, additionally, integrates Relationship pricing for customers, IMPS gateway, and few such modules, as part of CBS thereby reducing the cost of operation. Another key feature is the consolidation of corporate and retail modules into a single application helping your bank gain a single view of a customer across their products and services.

Your Bank is constantly upgrading its security measures in all its cash dispensing machines (ATMs included) as per regulatory compliance such as upgradation to the latest operating systems, voice guidance facility for differently authentication and other such security features for the safety and security of the customer accounts/cards.

Analytics

Your Banks Analytics department is further strengthened during FY 18-19 to increase the use of analytics and to promote greater understanding of data across the bank. Analytics Department also supports Risk Management Department on Retail Credit Policy formulation, portfolio tracking, scorecard development and data management.

A few key deliverables during last year were:

• Bank delivered Pre-Approved Personal Loan for improving customer engagement and enhance the cross-selling opportunities.

• Customer Sourcing Analysis to understand new customers better for offering improved service and engagement. Non Starter Analysis for identification of stress accounts at an early stage and take remedial measures.

• Bank strengthened credit monitoring by designing an in-house Early Warning System (EWS) for the commercial portfolio for proactive monitoring.

Project NEO

Your Bank has been predominantly delivering its products and services through branch network and there are several opportunities to scale up the business using other distribution channels. Growing market is an opportunity and introduction of new products will help the Bank to grow both the asset/liabilities portfolio.

Based on the need of hour, your Bank introduced a new project in the name of KVB – NEO. The aim of NEO is to expand the operations through non-branch outlets. Under the project, tie-ups will be made with other large loan aggregators. There are multiple global examples of similar effort which has successfully built business and also the revenue path. NEO will target principally NTB customers.

The Project will concentrate on establishing new channels of distribution through digital technology and develop digitally enabled feet on street which can acquire customers as a part of traditional sourcing. Both the above are equipped with digital tools to ensure highest level of productivity. Products and the services to be offered in NEO will be in digital and on a ‘self-service mode.

Outlook for the fiscal 2019-20

Indian economic activity weakened in the second half of 2018-19. Going forward, favourable factors such as increase in financial flows to the commercial sector, expected hastening of private consumption, increase in public spending in rural areas and increase in disposable incomes of the households and anticipation of a normal monsoon are expected to boost economic activity. However, there could be headwinds from greater than expected moderation in global growth & trade, unanticipated volatility in global financial markets, sub-dued investment activity, slowdown in production and lower exports due to slowdown in global economic growth.

The complete embargo on importing oil from Iran would mean that India has to shift to other markets for sourcing oil and the possible increase in oil import bills shall put pressure on the Indian Rupee. Brexit shall impact the Indian economy by way of increased demand for skilled labour – an expectation based on statements which may not reflect the intent of the Government of the UK - from India and possibility of a free trade agreement with UK. However, there could be possible FPI outflows, which could negatively impact growth.

The large corporate borrowers having long term borrowings more than र 100.00 Cr (excluding foreign loans and inter-corporate deposits) with rating of AA and above are required to raise 25% of their long funding requirement via corporate bonds, as per the framework for Large Corporate Borrowers announced by SEBI effect from 1st April 2019. Hence, banks will be required to re-strategize their credit growth through more active participation in the bond market and consequential impact on profit margins is anticipated. However, the positive impact is expected to be limited since these corporates are already in the bond market. In the NPA resolution process, the Insolvency and Bankruptcy Code (IBC) has been a game changer, having facilitated resolution of assets worth approximately 3 lakh Cr, leading to a recovery of about 71,000 Cr. The IBC is a new system and many of its provisions are being tested legally, leading to some delay. However, the resolution has been faster than earlier and will have a major impact on the banking system in future. Higher farm sector productions, higher contribution to GDP by manufacturing sector, enhancing business vibrancy through Start-up India and Stand up India, introduction of water transport, creating better road and rail network etc. together with higher FDIs are expected to make Indian Economy grow faster in future. Your Bank will address the issue of tackling potential slippages by having a resilient approach of persistent follow ups and leverage on the enactments including IBC proceedings and wherever possible will adopt a realistic approach in recovering NPAs, including settlements.

Your Bank has set up a large team for non-branch distribution, a shift from its traditional distribution through branch outlets, and is confident that this sweet spot is expected to perform substantially well, adding escalated revenues on the asset side.

Your Bank continues to change its organisation structure and established dedicated Business Banking Units (BBUs) for the commercial customers requiring credit between 3.00 Cr to 15.00 Cr, with a view to bring consistency in processing, improve credit quality and to create specialised skillset for quick delivery. BBUs will house committed Relationship Managers, taking care of specialised needs of these customers.

To further strengthen the retail books, your Bank has forayed into co-origination and co-lending of retail loans with established NBFCs and Fintech companies, having deep market penetration, without compromising on the standards of underwriting metrics adopted by the Bank.

Going forward, your Bank envisages a robust credit growth with escalated asset quality standards, widening market presence and improved loan yield.

Risks & Concerns

A robust risk management system will ensure long term financial security, stability and success of the Bank. Risk Management Department of the Bank has been taking initiatives on a continuous basis for fine tuning the functioning and to further strengthen the risk management framework.

The overall responsibility of setting the Banks risk appetite and effective risk management rests with the Board and Top Management of the Bank.

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

• 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 the Bank

• Risk Appetite statements

• Periodic stress testing to assess the impact of adverse business conditions on earnings, capital and liquidity The major risks namely Credit, Market, Liquidity and Operational risk are managed through following Committees viz:

• Risk Management and Asset Liability Management Committee of the Board (RM&ALM),

• Credit Risk Management Committee (CRMC),

• Asset and Liability Management Committee (ALCO),

• Operational Risk Management Committee (ORMC) and

• Market Risk Management Committee (MRMC).

These Committees work within the overall guidelines and policies approved by the Board.

Chief Risk Officer in the rank of General Manager has been engaged in creating a more dynamic Risk Management Department that has broad oversight of the various risks that the bank takes. Major key functional groups like Credit Monitoring, Information Security Group, Data Analytics, Collections, Alternate Channel Risk Cell are reporting to Chief Risk Officer directly. An exclusive Fraud Prevention and Management Cell (FPMC) has been established to provide timely guidance towards strengthening the internal control systems and procedures. Risk Management Department acts as a nodal centre for coordination with other Departments/ operating units engaged in managing risk in their respective business areas.

Whilst the above activity is being undertaken, your Bank is leveraging its existing risk management architecture to ensure that risks assumed by it are within the defined risk appetite, and are closely monitored.

The Bank has policies for identification, measurement and management of major risks - liquidity risk, market risk, credit risk and operational risk. The functional efficiency of these policies are regularly assessed and the policies are refined, keeping in view the dynamic business environment and emerging risks.

Credit Risk Management

Macro level factors such as slowdown in economic growth, imbalances in the economy, stress in certain industries etc. and micro level factors such as deficiencies in the underwriting standards, weak recovery mechanism etc. are few elements that contribute to the credit risk of a bank.

Your Bank has a centralized credit risk management division, independent of its business functions, to manage credit risk. Appropriate credit underwriting standards, risk mitigation processes, post-disbursement monitoring, strong collection and recovery mechanism via call centres and timely remedial actions ensure that credit risk is contained within acceptable level. Loan Policy of your Bank contains broad guidelines documenting the lending philosophy of the Bank, management of its diversified credit portfolio, and various aspects of credit dispensation and credit administration. The Bank monitors its exposures periodically to ensure that there are no breaches in the exposure ceilings fixed by the Board. A research unit functions within the Risk Department for conducting portfolio studies, industry/sector analysis and to capture up-to-date information. Internal Credit Risk Rating of proposals is mandatory for sanction of credit facilities in the Bank.

• For retail and small value loans – e.g. Home Loans, LAP and other retail loans, the Bank uses risk scoring models.

• For other advances, the Bank has a number of Board approved Credit Risk Rating Models for rating Manufacturers, Traders, Corporates etc.

Your Bank has moved the credit approval process of all the retail loans and SME working capital and term loan limits with certain caps, in the digital platform, a completely paperless solution which is in place for more than 12 months. With the experience gained and the working of the enhancements made on the platform, your Bank is contemplating on further digitalising the credit approval process. The process of digitalisation aims to:

• Improve the quality of credit underwriting process by placing various gating conditions tested based on the historic data base of the Bank and thus eliminating subjectivity in the credit approval process.

• Ensure better due diligence through system designs, sanity and bureau checks etc., on boarding risks shall get minimised substantially.

• Improve the credit delivery process by bringing down the TAT.

Besides the above, a spate of measures is implemented to minimise the risks at each level and every process in the flow of credit.

• Divisional Credit Risk Officers are placed in each Division and credit proposals are evaluated by them before approval.

• Rapid reviews of key industries are made regularly to manage existing and additional exposures.

• Huddle internal rating grades are stipulated for Corporate and Commercial segments based on Banks risk appetite.

• Exposure caps are applied to individual and group borrowers, with exceptions being referred to Board for approval.

Currently, credit risk capital is computed using the Standardized Approach. RBI Guidelines on Basel III Capital Regulations have been implemented and your Bank is sufficiently capitalized as per the current requirements under Basel III.

Market Risk Management

Your Bank has a well-developed framework, comprising of Board approved policies and established practices, for management of market risk. Your Bank is using various tools like stress testing, duration, modified duration, VaR, etc. to measure and control interest rate risk, liquidity risk and other market related risks. Your Bank has established an independent Mid-Office, as part of Market Risk Division, which reports directly to the Risk Management Department and functions as the risk control unit for its Treasury activities. The Mid-Office scrutinizes the treasury deals and transactions from the point of view of market risk and operational risk management. Detailed policies are put in place for the conduct of business exposed to market risk and also 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.

Value at Risk (VaR) is a tool for monitoring risk in your Banks trading portfolio. The VaR of various investment portfolios are monitored on a daily basis. Asset Liability Management of the Bank in respect of all its assets and liabilities is carried out on a daily basis to eliminate the possibility of any risk eventuality in this area.

Liquidity Risk Management & Interest Rate Risk Management

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 Banks 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.

The policy framework for management of liquidity risk and interest rate risk is established vide the Banks ALM policy. Your Bank has established various Board approved limits viz., maturity gap limits, limits on stock ratios and Liquidity Coverage Ratio for liquidity risk management and limits on the impact of adverse movement in interest rates in the net interest income and market value of its equity, for interest rate risk management. A comprehensive Asset Liability Management (ALM) System is in place for effective management of Liquidity Risk and Interests Rate Risk, which are identified, measured and monitored by the ALCO through the prescribed statements viz: Statement of Structural Liquidity, Liquidity Coverage Ratio Statement, Statement of Interest Rate Risk Sensitivity (Traditional and Duration Gap methods) and Stress Testing on Liquidity and Earnings etc. ALCO discusses these statements in detail and takes corrective action wherever necessary.

Interest Rates for various types of Deposits and Advances are discussed and decided by ALCO on a monthly basis as per RBI guidelines.

Your Bank has strong Contingency Funding Plan (CFP) for taking action to ensure that the bank has adequate liquid financial resources to meet its liabilities as they fall due. Contingency Funding Plan is reviewed on quarterly basis by ALCO.

The Capital Charge for Market risk is computed under the Standardized Duration Approach.

Operational Risk Management

Operational Risk is managed by having a well-established internal control system, which includes segregation of duties, standardized operating procedures, clear lines of authority and reporting etc. Operational risk events are typically associated with weak links in internal control systems or laxity in complying with the existing internal control systems and procedures. The Bank has put in place a structured Internal Audit mechanism. The Bank also has a Board approved Business Continuity and Disaster Recovery (BCP&DR) policy to manage disruptions to its operations.

Product, process and outsourcing committees have representation from Risk Department for recording their views & perception besides suggesting mitigations for the identified risks in those products and process.

The Capital Charge for Operational Risk is computed under Basic Indicator Approach prescribed by RBI.

The Bank has implemented the Basel III capital framework and is calculating the Capital to Risk Weighted Assets Ratio (CRAR) as per the guidelines laid down by Reserve Bank of India.

Cyber Risk

Data-driven decision-making, cloud adoption, digital transformation, mobility, and implementation/integration of other new technologies are integral to how your bank functions today. The concept of a secured Data Centre (DC) is fast changing to an environment where data is spread across DC and cloud - hybrid clouds are the industry norm allowing banks the flexibility of operating within the security of their own DC, and the ability to scale, on-demand, through pubic clouds. Mobile and edge computing has become ubiquitous. All these rapid advancements in technology has increased the cyber-attack surface, and the pathways into the Banks computer network.

Cyber crime is an epidemic plaguing every company in the world. Banks and financial institutions are prone to cyber attacks – lot more than companies in other industries - because of highly interconnected networks and the nature of business. RBI has viewed Cyber threat a key risk for banks across India, and has, therefore, followed a policy of no-compromise with plenty of policies and safeguards to be pro-active against Cyber criminals. US treasury, views cyber attacks as one of the key threats to the US economy. IMF, in one of its recent publications, categorised Cyber risk as a systemic risk to the industry.

Cyber attack leads to breach in customers data, non-availability of data, fraud, financial losses, business disruptions, theft of intellectual property etc. DDoS, data breaches, card cloning are all examples of few of the types of cyber attacks.

Cyber-attacks and threats are evolving every day, with attackers using robots and technologies like Machine Learning to launch precision attack. Additionally, given the evolving nature of this industry (cyber security) trained, skilled manpower is an industry wide challenge. Given this backdrop that your bank has accorded the highest priority to implementing an effective cyber security framework.

Your Bank has a Board approved Cyber Security Policy that mandates, inter alia, requirements such as network security, advanced real-time threat defence, vulnerability management, cyber security awareness and compliance. Your Bank has invested on sophisticated security technologies such as network & web application firewalls with intrusion prevention, advanced threat protection, privileged access control, vulnerability assessment, a Security Incident and Event Management. All these technologies have been procured from leading software vendors to combat cyber threats and provide resilience. Your Bank has established a Security Operations Centre (SOC), that operates 24x7 by leveraging all the above mentioned security technologies, to identify threats and undertake timely remedial response measures. Your Banks Board and Executive Management periodically oversees the effectiveness of the Cyber Security Program and provides direction to fortify the cyber security controls. To cover the eventuality of any miss, your Bank has also taken Cyber Security Risk Insurance Policy from a leading Insurance Company.

Internal Control systems and their adequacy

The Bank has in place a well-established independent audit system and structure to ensure adequate internal control for safe and sound operations. Your Banks Inspection and Audit Department (IAD) performs independent and objective assessment to monitor adequacy, effectiveness and adherence to internal control systems and procedures laid down by the management and extant regulations. This function supports the Banks role in safeguarding its assets. The macro level guidance and direction on the control aspects is provided by the Audit Committee of the Board (ACB).

An efficient and sound internal audit provides high quality counsel to the management on the effectiveness of risk management practices and internal control mechanisms as also the regulatory compliance by the Bank.

Internal Audit is carried out under Risk Based Internal Audit (RBIA) as envisaged under Risk Based Supervision of RBI with focus on assessment of risks on the basis of inherent business/ control risk and internal control mechanism. RBIA lays greater emphasis on the internal auditors role in mitigating various risks while at the same time continuing the traditional risk management and control methods involving transaction testing etc. RBIA not only offer suggestions to the management for mitigating current risks but also on potential future risks, thus playing a vital role in the risk management process of the Bank.

Under RBIA, branches have been categorized into five groups as per risk perception and are subject to varying degrees of audit.

IAD reports to MD & CEO for day to day activities and to the Audit Committee for audit planning and reporting. Your Bank had conducted the RBIA Audit of all the targeted Branches & Divisional Offices for the year.

Your Bank also subjects its operations to concurrent audit by various experienced audit firms to complement its Internal Audit function.

Concurrent Audit also covers core activities such as Treasury operations, International Division, Regional Processing Centres, ATM cell, Demat cell, other operations and branches.

Concurrent Audit of select branches are done by external audit firms taking into account risk perception and business turnover. During FY 2018-19, 170 branches covering 50% of the total deposit and 62% of total advance of the Bank were subjected to concurrent audit. Besides this all Corporate Business Units (CBU) were also subject to concurrent audit.

In addition to the regular inspection (RBIA) and concurrent audit, the Bank also conducted surprise inspection by the Bank Officers at identified branches and Extremely/Very high risk rated branches, as and when the need arose for such audits. Apart from the RBIA and concurrent audits, your Bank also conducts revenue audit of identified branches once in a year. During FY 2018-19, all branches except concurrent audit branches were subjected to revenue audit.

Your Bank has also ventured into a unique area of integrating all audit systems under single software called e-THIC to enhance and provide focused attention in the audit mechanism taking cognizance of the various requirements borne out of experience. Your Bank has also conducted SNAP audit in 631 branches to ensure that the compliance aspects in respect of internal control are followed at the branch level.

Your Bank has a system of re-appraisal of jewels pledged under Jewel Loan portfolio once in a year covering all branches having this portfolio. During FY 2018-19, re-appraisals including surprise re-appraisal totalling 794 appraisals were conducted in 754 branches. Further, during RBIA inspection, inspecting officials will carry out verification of purity of jewels on 10% of the outstanding jewel bags as of inspection date, subject to a minimum of 50 bags from the date of reappraisal with help of nearby branch appraisers.

Currency chests of the Bank are subjected to inspection at periodical intervals as per extant guidelines of RBI. Inspections of all the seven currency chests of the Bank were covered during the year under report.

Information Security Audit is conducted once in a year covering all branches and back offices viz., Central Office, Divisional Offices, Regional Processing Centres etc. During the year under report, the Bank conducted IS Audit across 823 branches/offices. Your Bank is also ensuring the genuineness of compliance submitted by the branch for RBIA report by conducting Compliance Audit at the branches.

Your Bank has sharpened internal controls by instituting vigilance functions and a separate Staff Accountability Policy.

Credit Audit for advances with a fund based limits of 5 Cr and above or total exposure of 10 Cr and above, has been introduced from the fiscal 2017 onwards with the objective of improving the quality of credit portfolio with resultant favourable impact on the profitability and reduce stressed assets.

Your Bank has conducted Credit Audit for 317 accounts for the fiscal 2018-19. Credit Audit will provide feedback to the Top Management of the Bank, based on the information gathered from reports of the various Credit Audits conducted, on the state of compliance with:

• Instructions/directives from the Government and Reserve Bank of India and;

• Banks extant Credit Policy/procedures

Credit Monitoring Group (CMG)

Your Bank has a well-structured credit monitoring arrangement for continuous tracking of performance of loan asset. There is a dedicated team to maintain and improve on the monitoring standards as practiced in the industry. It takes care of regulatory requirements, identifies early warning signals and is positioned to monitor the end use of credit lines sanctioned. It is a two tier arrangement at Central Office & Divisional Office where the former takes the overall responsibilities for the effectiveness of monitoring. Prompt follow up action to plug the pit falls, prevent slippages and minimize credit risks are the perpetual focus points. The Credit Monitoring Group comes under the overall Risk Management Department led by the Chief Risk Officer of the Bank.

Compliance Function

Your Bank has put in place a comprehensive Compliance Policy and the same was also reviewed during the year under report. Your Bank has followed the guidelines issued by RBI on various functions in the bank. Bank has also ensured that Statutory/ Regulatory and all other mandatory information required to be forwarded to RBI and other regulators are submitted.

Bank is focusing on employee education through circulars, frequent training sessions etc. to sensitize them of the need for a strong compliance culture and also striving to develop a robust compliance culture in the Bank. Department is functioning as a focal point for regulators and statutory authorities – Income Tax, Sales Tax, Customs etc. for all compliance related matters. Nodal Compliance Officers (NCOs) are identified and appointed at Branches, Divisional Offices, back offices and departments at Central Office for better compliance on an on-going basis. Quarterly Self-Assessment Report (SAR) for the Departments/ branches/Back offices is put in place in order to ensure the adherence to the regulatory guidelines.

Your Bank has also put in place KYC/AML Policy approved by the Board of Directors. The Bank has an AML Cell at Central Office which uses AMLOCK software for transaction monitoring. The customer accounts are profiled into different risk categories and alerts are generated based on predefined parameters. These alerts help in identification of suspicious transactions which are further reported to FIU-IND. Further, e-learning module on KYC/AML is implemented for the benefit of all the employees across India.

Financial Performance with respect to Operational Performance

During the fiscal 2018-19, the Interest income rose to 5,815.82 Cr, as against 5,699.65 Cr of previous fiscal, reflecting a growth of 116.17 Cr. Interest expenditure stood at 3,453.00 Cr as against the previous year figure of 3,401.54 Cr, showing an increase of 1.51%. The Net Interest Income increased to 2,362.82 Cr from 2,298.11 Cr, y-o-y growth of 2.82%.

Non-Interest Income (NII) increased by 62.84 Cr (6.98%) from 899.93 Cr in FY 2017-18 to 962.77 Cr.

Your Bank posted an Operating Profit of 1,710.78 Cr compared to 1,777.32 Cr in the previous fiscal, recorded a marginal decrease of 3.74%.

Operating Revenue of your Bank recorded a y-o-y growth of 3.98% and stood at 3,325.59 Cr as against previous year figure of 3,198.04 Cr.

The operating expenses increased from 1,420.72 Cr to 1,614.81 Cr, recording a growth of 13.65%. In the operating expenses, establishment expenditure registered an increase of 19% from 639.08 Cr in FY 18 to 761.17 Cr in FY 19 and other operating expenses increased to 853.64 Cr (14.00%) from 781.64 Cr.

For the year ended March 19, Net Interest Margin of the Bank decreased by 19 basis points from 3.86% to 3.67%, compared to the previous fiscal.

The Banks Net Profit for FY 2018-19 registered a decrease of 39.00% from 345.67 Cr in FY 18 to 210.87 Cr.

The Return on Assets was 0.31% at the end of the fiscal under report as against 0.53% in the previous fiscal.

The Earning Per Share (EPS) and Book value of shares as on 31st March 2019 stood at 2.64 and 79.56 respectively as against 4.98 and 85.49 as on 31st March 2018. The Banks Return on Equity was 3.31% as against 5.52% for the previous fiscal FY 18.

Net owned funds of your Bank were 6,364.98 Cr as on 31st March 2019, showing an absolute increase of 153.27 Cr over the previous fiscal on account of plough back of profits during the year.

Key Financial Ratios

• Key Financial Ratios & details of significant changes (i.e. change of 25% or more as compared to the immediately previous financial year) in key financial ratios, along with detailed explanations therefor, or sector-specific equivalent ratios, as applicable.

Sr. No Particulars FY 2018-19 FY 2017-18
i CRAR % 16.00% 14.43%
ii Tier I Capital 14.28% 13.92%
iii Tier II Capital 1.72% 0.51%
iv Gross NPA 8.79% 6.56%
v Net NPA 4.98% 4.16%
vi ROA 0.31% 0.53%
vii NIM 3.67% 3.86%
vii Interest Income as a % to Working Funds 8.45% 8.79%
viii Operating Profit as a % to Working Funds 2.49% 2.74%
ix Leverage Ratio 8.53% 8.49%
x Book Value Per Share (र ) 79.56 85.49
xi Earning Per Share (Rs.) 2.64 4.78

Basel III Tier II ratio has increased from 0.51% as on 31st March 2018 to 1.72% as on 31st March 2019, as Bank had issued Basel III compliant Tier II bonds to the tune of र 487 crore during FY 2018-19. CRAR (Basel III) as on 31st March 2019 was 16.00% as compared to 14.43% as on 31st March 2018.

Increase in slippages, especially those in Corporate Sector, due to stress, macroeconomic conditions and other factors has resulted in Gross NPA ratio going up to 8.79% as on 31st March 2019 from 6.56% as on 31st March 2018.

The above resulted in higher provision requirements, due to which net profit for the year declined and Return on Assets stood at 0.31% for the year 2018-19 as compared to 0.53% for the year 2017-18. Resultant of decline in Net Profit has impacted the fall in EPS during the year 2018-19 to र 2.64 as compared to4.78 during the previous year.

Interest Income and Operating Profit, both as % of Working Funds, have declined marginally and hence changes therein are not significant.

• Details of any change in Return on Net Worth as compared to the immediately previous financial year along with a detailed explanation thereof.

RONW for the year 2018-19 was 3.31% as compared to 5.56% for the year 2017-18, which was on account of decline in net profit for the year. Net Worth of the Bank has increased during the year by र 154 Cr.

Disclosure of Accounting Treatment

The financial statements are prepared following the going concern concept, on historical cost basis and confirm to the Generally Accepted Accounting Principles (GAAP) in India which encompasses applicable statutory provisions, regulatory norms prescribed by 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 industry in India. Income and Expenditure are generally accounted on 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.

Recovery

Your Bank has been consistently taking measures for effective monitoring of its credit portfolio to avert stressed accounts and avoid delinquency. Banks well defined recovery policy comprehending all areas of NPA management coupled with system triggered alerts, deployment of prudent credit monitoring tools and timely recovery actions has successfully contained the SMA levels of your Bank.

Board reviews the credit portfolios regularly and analyses the asset quality behaviour based on cohort analysis. Board evaluates the credit quality in each segment using various benchmarks viz., DPD, non-starter analysis, ever count quantum for better monitoring and early identification of stress. Further, your Bank has established ARBs for dedicated recovery process, reducing TAT in realising the mortgaged securities and to have a turnaround in NPA levels. The recovery performance is being monitored regularly by top Executives at Central Office by way of con-calls with respective Divisional heads, Branches, ARBs, apart from personally visiting the top NPA accounts for enhanced recovery possibilities.

Bank has given a call to its entire rank and file, to fight against Special Mentioned Accounts (SMAs) and the move is named as "SMA HATAO" (Eliminate SMA). Every Branch has to call the Borrowers on the Day-1 of the due date of the interest/ instalment (SMA-0) and should reach the Guarantor on first day of the delinquency (SMA-1). Entire process is systemized and automated SMS and e-mails will be sent to both Borrowers and Guarantors to remind about their due date to pay the arrears. Borrowers committed dates for the payments will be recorded in the system and an automated alert will be sent to the borrower/ guarantor if not paid within the promised date. Borrowers and guarantors are also explained about the impact on their credit scores with delayed payments.

Your Bank also started Centralised Collection Call Centre at Chennai for regular follow up and collections from SMA and NPA borrowers in addition to the Branch follow up. These initiatives will control the delinquency numbers and yield the desired results in the days to come.

Penalties

Reserve Bank of India, under Sections 35, 35A, 46 and 47A of Banking Regulation Act, 1949, levied penalty of र 5.00 Cr for the violations of RBI guidelines observed during statutory inspection of the Bank with reference to financial position as on March 31, 2016 and March 31, 2017 and र 1.00 Cr for non-compliance of regulatory guidelines on time bound implementation & strengthening of SWIFT related operational controls. The Bank paid the penalty amounts to RBI within the stipulated timelines.

Human Resource Management

Human Resources play an important part in the performance of any organization. Banking being a service industry, it acts as a differentiator between competitors. The main emphasis of Human Resources Department (HRD) of your Bank is on attracting the right talent, developing and retaining the same. HR Department of your Bank focuses on talent acquisition, skill development, motivation, retention and employee engagement.

Recruitment

Manpower requirements of your Bank are systematically assessed during the beginning of the financial year and the hiring plan is approved by the Board. Entry level hiring is done through different modes including campus hiring. Ability cum Psychometric test is conducted as a part of recruitment process. Skillset based recruitment is implemented during the financial year. 28 special skillsets are identified which includes Risk Management, Compliance, Credit Processing, Analytics, Treasury Management, IT & Cyber Security, Direct Sales, Industrial Relation, Forex Management, Retail Credit, Branch Banking, Bancassurance, Inspection, Legal, Credit Card, Networking etc. Distributed state wise recruitment started and have already recruited for Karnataka, Gujarat and Maharashtra.

Know Your Employee (KYE)

Bankers deal with public money and any employee joining a Bank should have impeccable character and should possess high ethical and moral values. Hence to understand the history and background of new recruits, Bank is doing background verification through external agencies on the aspects like Education Check, Employment Check, Criminal Check, Address Check, Database Check, Social Media Check, Character Reference Check and Gap Verification Check.

Succession Planning

Your Bank has done a detailed succession planning exercise for senior management positions with the guidance and approval of the Board. Succession planning helps the Bank in mitigating the risk associated with attrition, retirement, and cultivates existing talent by matching promising employees with future organizational needs. The succession plan includes grooming the mid-level executives by providing specialized training and ‘on the job exposure. Wherever skilled internal resources are not available the Bank hires skilled resources laterally from the market. Your Bank has already hired a few executives during the financial year by lateral hiring process, based on this succession plan.

Individual Sales Target

Your Bank believes in the philosophy of motivating the employees through monetary and non-monetary rewards. Key Responsibility Areas (KRA) are defined for every job role. Based on their KRAs, measurable Key Performance Indicators (KPI) are defined and individual targets set for each employee. All branch employees are given sales targets which are monitored through Daily Sales Report (DSR). Based on achievement of sales numbers against their individual targets, quarterly incentives are paid to branch employees. The employees who achieve all their KPIs are favourably considered for promotion and postings. Half yearly and annual performance appraisal is done every year and Career Development Scores (CDS) on a 5 point rating scale is given.

Business per employee of the Bank significantly increased to14.42 Cr as on 31st March 2019, as against the र 12.92 Cr as on 31st March 2018. Profit per employee decreased from र 4.35 lakh as at 31st March 2018 to र 2.75 lakh as at 31st March 2019.

Training & Development

Developing the knowledge, skills and attitude of employees to perform to their potential and to face the challenges in the market are the main objectives of training programs.

Training/E-Learning conducted during FY 2018-19
S. No. Program Type No. of Programs No. of Learners
1 Internal Programs at Staff Training College 338 5004
2 External Training Programs at various institutes 172 1235
3 Internal Programs conducted at Branches/Offices 953 9437
4 E-Learning on KYC & AML NA 3482
5 E-Learning on Cyber Security Awareness NA 4321

• The focus of training is on Compliance, Adherence to Systems and Procedures, Risk Management, Sales Effectiveness, Cyber Security Awareness, Service Excellence and other role based functional programs.

• Out of the total 7,515 employees, your Bank has trained 6,273 (unique) employees during the financial year; hence the training penetration works out to 83.50% for FY 2018-19.

• The total training man-days is 32,015 days and the average training man-days per employee works out to 4.26 days for the FY 2018-19.

The training content is reviewed at least once in a year, by a committee of General Managers/Vertical Heads. Based on the suggestions received by the committee members and the need, the program content is updated.

Online feedback of the trainer by the trainees and for the trainees by the trainer is obtained session wise, the method of delivery is revised based on the feedback.

New Initiatives

• Various new processes are introduced during the financial year such as Learning Diary, Group Discussion, Online Quiz, In Camera Role Plays, Team Way Review, Business Management Games etc. for improving and helping the new employees in your Bank.

• Freshers are assigned with a seasoned senior as a mentor for career guidance and seamless integration with the organizational culture.

• Talent Tagging for Employees are done based on the special skillsets of the individual employees.

Capacity Building

• Capacity Building is implemented in your Bank to improve the quality of work and for efficiency in the specialized departments such as Credit, Forex, Treasury, Accounting and Cyber Security.

• As per RBI instruction, employees working in Commercial Business Group, Corporate and Institutional Group, Central Loan Processing Cell, Corporate Business Unit, Divisional Office Credit Processing, and Business Banking Units are insisted for Certified Credit Professional Certification.

• Employees working in Risk Management Departments, Central Forex Processing Cell, Treasury, Accounting and Cyber Security Departments are insisted to do Risk in Financial Services Certification, Forex Certification, Certified Treasury Professional, Certified Accounting and Audit Professional, IT Security & Cyber Security Certifications respectively within a specified timespan. Course fee reimbursements are also provided by your Bank for the special certifications mentioned above.

Revamped HR Website - Paperless Regime

• HR department website is revamped with full of informative details from personal to professional is provided for each individual employee.

• All approvals, from Recruitment to Resignations, are made system based to minimize the TAT and to improve efficiency and quality of the work.

• Daily Huddle meeting, DSR monitoring and New Incentive scheme announcements are made through new www.hr.com.

• IRDA specified person enrolment for examination is carried out online through our revamped www.hr.com for more than 1,500 employees.

• Staff benefits such as staff loans, terminal benefits details including individual e-vidal card can be downloaded from the website.

• Career guidance is provided through Banking Terminology, Management Jargons, JAIIB, CAIIB and various other study materials for knowledge enrichment.

• All India Open Quiz is being conducted in the new HR website. The quiz is conducted online mode and the winner is selected based on "Fastest Finger First". The results are being published automatically once the quiz is completed.

Safe Harbour

Certain statements in the "Management Discussion and Analysis" describing the Banks 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, include 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 the businesses of The Karur Vysya Bank Limited as well as its ability to implement the strategy. The Karur Vysya Bank Limited does 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 facto. This document also does not constitute an offer or recommendation to buy or sell any financial products offered by The Karur Vysya Bank Limited.