South Indian Bank Ltd Management Discussions.
Economic Scenario Global
Global growth is expected to remain over 3.0% in 2019 and 2020; however, the steady pace of expansion in the global economy masks an increase in downside risks that could potentially exacerbate development challenges in many parts of the world, according to the World Economic Situation and Prospects 2019. The global economy is facing a confluence of risks, which could severely disrupt economic activity and inflict significant damage on longer-term development prospects. These risks include an escalation of trade disputes, an abrupt tightening of global financial conditions, geo-political issues and intensifying climate risks.
After strong growth in 2017 and early 2018, global economic activity slowed notably in the second half of last year, reflecting a confluence of factors affecting major economies. Chinas growth declined following a combination of needed regulatory tightening to rein in shadow banking and an increase in trade tensions with the United States. The euro area economy lost more momentum than expected as consumer and business confidence weakened and car production in Germany was disrupted by the introduction of new emission standards; investment dropped in Italy as sovereign spreads widened; and external demand, especially from emerging Asia, softened. Elsewhere, natural disasters hurt activity in Japan. Trade tensions increasingly took a toll on business confidence and, so, financial market sentiment worsened, with financial conditions tightening for vulnerable emerging markets in the spring of 2018 and then in advanced economies later in the year, weighing on global demand. Conditions have eased in 2019 as the US Federal Reserve signalled a more accommodative monetary policy stance and markets became more optimistic about a US-China trade deal, but they remain slightly more restrictive than in the fall.
In many developed countries, growth rates have risen close to their potential, while unemployment rates have dropped to historical lows. Among the developing economies, the East and South Asia regions remain on a relatively strong growth trajectory, amid robust domestic demand conditions. Beneath the strong global headline figures, however, economic progress has been highly uneven across regions. Despite an improvement in growth prospects at the global level, several large developing countries saw a decline in per capita income in 2018. Even among the economies that are experiencing strong per capita income growth, economic activity is often driven by core industrial and urban regions, leaving peripheral and rural areas behind. While economic activity in the commodity-exporting countries, notably fuel exporters, is gradually recovering, growth remains susceptible to volatile commodity prices. For these economies, the sharp drop in global commodity prices in 2014/15 has continued to weigh on fiscal and external balances, while leaving a legacy of higher levels of debt.
Global economic growth remained steady in the coming years, as a fiscally induced acceleration in the United States of America offset slower growth in some other large economies. Economic activity at the global level is expected to expand at a solid pace of 3.0% in 2019, but there are increasing signs that growth may have peaked. The growth in global industrial production and merchandise trade volumes has been tapering since the beginning of 2018, especially in trade-intensive capital and intermediate goods sectors. Leading indicators point to some softening in economic momentum in many countries in 2019, amid escalating trade disputes, risks of financial stress and volatility, and an undercurrent of geopolitical tensions. At the same time, several developed economies are facing capacity constraints, which may weigh on growth in the short term.
Global inflation remains moderate, but is on an upward trend in the majority of countries. Rising oil prices contributed to additional inflationary pressures in oil-importing countries over the course of most of 2018, while currency depreciation against the US Dollar put upward pressure on imported prices in many countries. By contrast, some of the commodity-exporting countries in Africa and the Commonwealth of Independent States (CIS) that experienced sharp currency depreciations in response to the commodity price shocks of 2014/15 have seen inflation recede in 2018, as the exchange-rate shock has been absorbed into the price level. Ongoing trade disputes can be expected to put some upward pressure on inflation in 2019, as the impact of tariffs passes through value chains to consumer prices. In developed economies, rising capacity constraints have put some upward pressure on inflation, and headline inflation generally exceeds Central Banks targets in Europe and North America.
In South Asia, growth is projected to accelerate to 7.1% in 2019. This is, mainly a reflection of strengthening domestic demand in India, as the benefits of structural reforms such as GST harmonization and bank recapitalization take effect. Elsewhere in the region, the forecast is for a moderation in activity, notably in Bangladesh and Pakistan. Over the medium term, growth is expected to remain at 7.1%, underpinned by robust domestic demand in the region. External vulnerabilities are rising, reflected in mounting external debt, widening current account deficits, and eroding foreign reserves. Risks to the outlook are to the downside. On the domestic front, vulnerabilities are being exacerbated by fiscal slippages and rising inflation, and there is a risk of delays in structural reforms to address balance sheet issues in the banking and non-financial corporate sectors. Key external risks include a further deterioration in current accounts and a faster-than expected global financial tightening.
Investors may become particularly wary of countries with significant domestic vulnerabilities, such as high current account and fiscal deficits, large external financing needs, a lack of transparency in their debt obligations, or limited policy buffers. Financial stress can also spread between countries through banking channels and other financial market linkages. In addition, there is evidence of recent financial market contagion through discrete shifts in investor confidence, irrespective of underlying fundamentals, placing emerging markets more broadly at risk. Compared to the beginning of 2018, major stock markets in China have seen declines of more than 20% while the renminbi has weakened by about 6% against the US Dollar. Most other East Asian economies also experienced equity market losses and currency depreciations but to varying extents, as investors increasingly differentiated between countries based on their strength of macroeconomic fundamentals. Despite heightened financial market volatility, however, financial intermediation generally remained undisrupted in the region, supported by sufficient liquidity in domestic banking systems.
The Indian economy retained its tag of the fastest growing major economy in the world in FY 2018-19 for a second year in a row as it continued its climb on an upward growth path. The economy registered a growth rate of 6.8% during the 2018-19 period as per quarterly (Q4) estimates of the Central Statistical Office. The 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 the subsequent quarter due to rising global volatility, largely from financial volatility, normalized monetary policy in advanced economies, externalities from trade disputes, and investment rerouting. Further, the Indian rupee suffered because of the crude price shock, and conditions exacerbated as recovery in some advanced economies caused faster investment outflows. However, economic activity decelerated sharply to 5.8% in Q4, as compared to 6.6% in Q3 Despite softer growth, the Indian economy remains one of the fastest growing, and possibly the least affected by global turmoil. In fact, the effects of the aforementioned external shocks were contained in part by Indias strong macroeconomic fundamentals and policy changes (including amendments to the policy/code related to insolvency and bankruptcy, bank recapitalization, and foreign direct investment).
The economy is projected to grow at the rate of 7.5% during 2019, expanding further to 7.7% during 2020 as per the International Monetary Fund (IMF) World Economic Outlook. The growth rates for the economy are pegged much higher than the global growth rates for the same years, at 3.5% and 3.6% for 2019 and 2020 respectively, thus placing the economy on a solid footing even amidst growing global uncertainties. The Reserve Bank of India has revised downwards the GDP growth from 7.2% to 7.0% for 2019-20, due escalation in trade wars, subdued consumption demand and weakened investment activity
The Indian economy witnessed robust industrial growth during FY 2018-19 and the momentum is expected to continue next year as well. The Index of Industrial Production (IIP) with base 2011-12 for the April-January period for 2018-19 registered a 4.4% increase over the corresponding period for the previous year.
Eleven out of twenty-three industry-groups exhibited positive growth during 2018-19 over the previous year, with the industry groups "Manufacture of Food Products" and "Manufacture of Wearing Apparel" recording highest growth rates at 17% and 16.4% respectively. Among other positives, industries such as capital goods and infrastructure/construction goods expanded significantly. Healthy growth in core sectors such as steel and cement is expected to strengthen further.
Growth in the agriculture sector is expected to moderate as the Gross Value Added (GVA) at basic prices for the sector is estimated at 2.7% for 2018-19 on a high base of 5% in 2017-18. The Indian Meteorological Department has indicated that monsoons will not be abnormal in India during this year and this would assist in growth of the farming sector.
The manufacturing sector is expected to post robust growth in 2019-20 with the sectors gVa growth estimated at 8.1% in 2018-19 as compared to 5.9% during 2017-18. Growth in the sectors including trade, hotel, transport, communication and services related to broadcasting, which moderated during the first half of the year is expected to pick up on account of improved domestic demand conditions. GVA growth for these sectors is estimated to grow by 7.3% in 2018-19 in contrast to 6.2% in 2017-18. Construction sector is expected to grow by 8.9% during 2018-19 as compared to 5.6% during 2017-18.
The consumer durables market is expected to pick up supported by rising disposable incomes, greater electrification and FDI investments. The FMCG sector continues to perform well and is expected to grow further, fueled by rising consumption and investment patterns. Retail businesses also continue to grow and present more growth opportunities as new retail outlets and malls open up.
On the trade front, Indian exports grew by 3.74% over January 2018 to reach US$ 26.36 billion in January 2019. Drugs and pharmaceuticals, organic and inorganic chemicals and ready made garments were the top performing commodity groups with growth rates of 15.2%, 15.56% and 9.33% respectively. Overall trade including services trade for India is estimated at around US$ 440 billion for April-January 2019, exhibiting a positive growth rate of 9.07% over the corresponding period during last year. Export growth is expected to gain further pace as global trade tensions ease.
While higher Government investments have helped retain a healthy sentiment for capital formation, the stretch in government expenses has already become evident in the expansion of fiscal deficit net. The fiscal deficit target was amended previously, but the recent budget announcement expanded it further to 3.4% of GDP for both FY 2018-19 and FY 2019-20 (from 3.3% and 3.1% earlier, respectively). This became necessary given the expected higher expenditure toward income support scheme for farm households, pension scheme for the unorganized sector workers, and income tax rebate.
The Indias economic expansion behaved in line with the global trend. The first half of Fy 2018-19 saw GDP growth at 7.5%. However, as per implied Central Statistical Organizations (CSOs) forecast for the full financial year, GDP growth momentum could slip sharply to 6.4-6.6% in the second half of FY 2018-19. Increase in crude oil prices during the course of the financial year to USD 70 per barrel from USD 56 per barrel in FY 201718 and adverse (albeit transient) spillover impact of recent tightness in financial conditions for the Non-Banking Financial Company (NBFC) sector provided headwinds for domestic growth momentum.
The implementation of structural reforms like the Goods and Services Tax (GST) and the Insolvency and Bankruptcy Code (IBC) framework have been of critical importance. While GST collections have lagged the initial budget estimates on account of ongoing adjustments in the tax framework, it has certainly widened the tax base. These reforms hold promise for improving tax buoyancy in the year FY 2019-20. The IBC framework has churned out closures for 586 Corporate Insolvency Resolution Process (CIRPs) as of December 2018, thereby helping financial creditors realize र658 billion in the due process.
The domestic retail inflation continued to moderate, despite an increase in global crude oil price. Average CPI inflation in FY 2018-19 decelerated to 3.4% from 3.6% in FY 2017-18. This will mark the second successive year of below target (4%) inflation out-turn for Indias economy. This while boosting credibility in Reserve Bank of Indias (RBIs) inflation targeting framework, would also help in anchoring household and business expectations of inflation.
Indian Banking industry
The Indian banking system is in a state of flux and 2019 will be a critical year. The banking system has struggled since late 2015, when the Reserve Bank of India revised the asset quality review. This has led to full recognition of non-performing loans (NPLs). The deteriorating asset quality had implications for higher provisioning, falling profitability and weak capital position. However, significant improvement in asset quality of scheduled commercial banks and the gross non-performing assets declined to 9.3% in March 2019. There were a host of changes in the retail banking and FinTech spaces from the Supreme Courts restrictions on the use of Aadhaar for e-KYC to the exit of high profile execs from leading private banks plagued with governance and performance issues to the RBI ban on cryptocurrency.
Economic and Banking outlook
The global expansion continues to lose momentum. Global growth is projected to ease further to 3.3% in 2019 and 3.4% in 2020, with downside risks continuing to build. Growth has been revised downwards in almost all G20 economies, with particularly large revisions in the euro area in both 2019 and 2020. High policy uncertainty, ongoing trade tensions, and a further erosion of business and consumer confidence are all contributing to the slowdown.
Macroeconomic conditions in the region appear to be more challenged as Asia-Pacific Banks prepare to exit the extraordinarily long credit cycle. Potential deterioration in credit conditions exacerbated by higher interest rates in the US and volatile domestic currencies pave way for more difficult financing conditions in 2019. High debt and high asset prices fuelled by the past excesses of cheap lending pose additional risks, should there be a sharp correction in asset prices and withdrawal of market liquidity.
Although most banks are well capitalized and pose strong balance sheets to weather any economic shocks, the region reflects an array of banking risks. Strong growth of debt, particularly household debt in Australia, Korea, Malaysia, New Zealand, Singapore and Thailand and property market- downturn related risks in jurisdictions of China and Hong Kong are of particular concern. Resolution of Non-performing loans (NPL) and recapitalization of systemically important public sector banks (PSBs) in India whereas the ongoing trade skirmish between US and China could erode corporate profitability and asset quality of Chinese banks. For Japanese banks, the Negative Interest Rate Policy (NIRP) is yet to translate into higher lending and increased profitability.
Looking ahead, it will be critical for policy makers and multilateral institutions across the globe to insulate economic activity from build-up in financial vulnerabilities and inward-looking trade protectionist policies, which could impinge on trade flows and overall economic productivity.
Opportunities and threats
The Bank has a strong and experienced leadership, competitive product offerings, and technology-driven operations and services across Corporate, MSME and Retail segments. India is among of the fastest growing major economies in the world with the potential to become one of the top three global economies over the next decade. As a full service commercial bank with products across Corporate, MSME, Retail and Transaction Banking segments, among others and various markets, the bank is geared to benefit from this opportunity.
As India moves ahead with its vision to become an economic behemoth in the next few years, the average level of prosperity among its populace and the degree of equitable distribution of wealth will, to a large extent, be determined by the scale of inclusive growth achieved. In response to the evolving forces of customer expectations, regulatory requirements, technology, demographics, new competitors and shifting economics, much of the landscape will change significantly. Banks need to choose what posture to adopt against this change - whether to be an architect of the future, a fast follower, or to manage defensively, putting off change. In the field of technology based banking, information technology and electronic funds transfer system have emerged as the twin pillars of modern banking development.
Products offered by banks have moved way beyond conventional banking and access to these services have become round the clock. This, indeed, is a revolution in Indian banking industry. Payments banks will open another alternative channel after internet and mobile banking, and help improve efficiencies and reduce costs involved in catering to customers in the rural and semi-urban areas.
Another extremely important issue is the infrastructure financing. Banks have been the primary source of funding for the infrastructure sector. As a result, banking sector credit to the infrastructure sector has also increased. Infrastructure advances have grown at a compound annual growth rate (CAGR) of around 25% in the last 10 years, which is higher than the banking sector advances growth. Indias financial regulators have helped build one of the worlds strongest banking and financial systems that has sailed past international crises. They are now injecting more competition by allowing different classes of banks and financial service providers. The Government is also stepping in with the bankruptcy law and the Bank Boards bureau, which will make it easier to do business. Some of the major trends and the threats and opportunities of the same is detailed below:
Corporate banking to make a comeback: In the last few years, the retail engine was growing robustly. There are now expectations of corporate lending to make a comeback. Infrastructure (especially roads, metro etc.), commodities (steel, cement etc.) and consumption companies are set to see action.
Peaking of NPAs: The NPAs are almost peaked. As the banks have made huge provisions for stressed assets, year 2019 may see writing back of some provisions as resolution of assets will also gather steam.
More realization through IBC: In the last two years, the Insolvency and Bankruptcy Code (IBC) saw a lot of action in terms of amendments, challenges and counter claims. The law is now stabilizing and could see more cases are being resolved. This will help the banks recover good value.
Engaging the 2020 customer "Digital footprint" will be the way forward for all banks. How well banks engage in competition with FinTech startups playing in emerging technologies will determine how they can differentiate in an increasingly crowded market that will likely see high customer churn. The success of these banks will largely depend on the customer base they target, adapt to, and the types of alliances payment banks form. Therefore, judicious selection of partners, e.g., partners with similar brand values, for scaling their businesses is key to ensuring the success of these new age banks.
FinTech or Financial Technology has become a buzzword in financial circles. FinTech players are challenging the status quo of the financial services industry by bringing in a fresh take on problems faced by customers, as seen through the lens of technology. Tie-up with correct FinTech firms, will help the banks to take advantage of the technological changes in industry.
Some of the key innovations for 2020 as far as the banking industry is concerned are:
1. Artificial Intelligence & Cognitive Opportunities: Cognitive engagement improves customer understanding and activation through personalization, influencing desired actions. Companies have explored cognitive engagement solutions-interactive computing systems that use artificial intelligence to collect information, automatically build models of understanding and inference, and communicate in natural ways.
2. Block Chain and Distributed Ledger Technology (DLT): Block chain and distributed ledgers have a bright future. As realtime, open-source and trusted platforms that securely transmit data and value, they can help banks not only reduce the cost of processing payments, but also create new products and services that can generate important new revenue streams.
3. Robotic Process Automation (RPA): The spectrum of automation expands from simple rule based automation to advanced cognitive and artificial intelligence automation. Hence, the task of exploring and understanding automation can often appear more daunting than it is. RPA allows companies to automate processes that were difficult to automate using existing technology tools. RPA is easier to implement and has a quicker payback period as compared to traditional IT programs and hence has the potential to help companies reap significant business benefits quickly. Together, with other emerging technologies, (e.g., Blockchain, Internet of Things), RPA and Cognitive Automation have the potential to redraw the competitive landscape of many industries. However, there is no one- size-fits-all solution to RPA; business leaders worldwide will need to try out this evolving technology in their organizations with a diligent and ambitious intent to fundamentally transform their business outcomes and value proposition and thus fortify their competitive positioning in the rapidly transforming global economic environment.
4. Cyber Security: The very innovation that drives business growth and value also creates first order cyber risks. Innovative technologies such as Chip-based cards and SMS-based OTP have helped banks to implement security controls to mitigate traditional cyber risks. However, as the technology has evolved, attack vectors have also become more sophisticated. Questions are now being raised on technologies that were previously thought as secure. Looking at cyber threats in isolation, severely limits our ability to understand the complete impact of cyber risk. There is a need for enhanced cyber risk assessment framework and testing methodology to continuously detect and protect against evolving cyber threats. While being secure is more important than ever, there is a need to also be constantly vigilant and resilient in face of evolving cyber threats.
Financial Performance Vs Operational Performance
The total gross business of the Bank grew from र1,27,138.58 crores to र1,44,056.04 crore. While the deposits grew from र72,029.59 crore to र80,420.12 crore, gross advances grew from र55,108.99 crore to र63,635.92 crore. Food credit decreased from र144.59 crore to र140.00 crore and non-food credit stood at र63,495.92 crore vis-a-vis र54964.44 crore in the last year, posting an increase of र8,531.48 crore. Operating profit of the Bank had decreased by र241.81crore during the year, i.e. decreased from र1,480.79 crore to र1,238.98 crore. The Net Profit decreased to र247.53 crore as against र334.89 crore reported in last year. The Board has recommended a dividend of 25% i.e. @ र0.25 per equity share of र1/- each, subject to approval of the shareholders.
The percentage of Gross NPA to Gross Advances stood at 4.92% and the Net NPA to Net Advances at 3.45% as on March 31, 2019. The Capital Adequacy Ratio of the Bank was 12.61% under Basel III norms as on March 31, 2019, as against the RBI mandated level of 10.875%. Book value per share increased from र28.98 to र29.48 during the year 2018-19.
The gross revenue from Treasury Operations segment increased from र1,483.89 crore to र1,484.82 crore , Corporate/ Wholesale Banking segment increased from र3,018.42 crore to र3,302.28 crore , Retail Banking segment increased from र2,288.81 crore to र2,564.70 crore and Other Banking Operations segment increased from र 238.94 crore to र 250.93crore .
Segment results net of allocated/apportioned cost and provisions from Treasury segment increased from र(117.71) crore to र(41.97) crore, Corporate/wholesale Banking segment decreased from र(40.83) crore to र(126.64) crore and Other Banking Operations increased from र194.86 crore to र201.19 crore, whereas segment results net of allocated/apportioned cost and provisions from the Retail Banking segment decreased from र463.57 crore to र347.92 crore.
UPDATE ON IND-AS IMPLEMENTATION
The Institute of Chartered Accountants of India has issued Ind AS (a revised set of accounting standards) which largely converges the Indian accounting standards with International Financial Reporting Standards (IFRS). The Ministry of Corporate Affairs (MCA) has notified these accounting standards (Ind AS) for adoption. The Reserve Bank of India (RBI) through vide notification DBR.BP.BC.No. 29/21.07.001/2018-19 dated March 22, 2019, has deferred the implementation of Indian Accounting Standards (Ind AS) till further notice.
The Bank has a well-planned strategy for this implementation and has made good progress in this financial year. As per RBI directions, the Bank has taken following steps so far:
In line with the guidance issued by the Reserve Bank of India in August 2016, the Bank has set up a Steering Committee headed by the Executive Vice President (Operations) that monitors the progress of implementation.
Submitted Proforma Ind AS financial statements to the RBI for each quarters of FY 2018-19 as per extant regulatory guidelines.
Further, the Bank is in the process of negotiation with various vendors for implementation Ind AS solution in the bank.
Even though the regulator has extended the effective date of implementation, the Bank is continuing its preparedness towards adopting Ind-AS.
The significant accounting policy of the Bank is mentioned in Schedule 17 of the financial statements. There is no change in the accounting policy having financial impact during the FY 2018-19.
KEY BUSINESS RATIOS
The operating Profit as a percentage to the Working Funds for the FY 2018-19 was decreased by 25.13% from 1.91% to 1.43% mainly on account of the lower contribution from the Non Interest Income especially due to lower Trading Profit from Treasury activities and reduced opportunity to earn income from sale of Priority Sector Lending Certificates. The Employee cost for the FY 2018-19 was also higher compared to the previous year considering the higher superannuation provisions and the provisions for wage revision. The return on Assets (based on working fund) for the FY 2018-19 was down by 32.56% from
0.43% to 0.29% and Return on Equity for the FY 2018-19 was down by 27.39% from 6.39% to 4.64% due to lower Operating Profit on account of lower contribution from Non Interest Income and higher Employee Cost. Further GNPA during the FY 2018-19 has increased by 36.95% from 3.59% to 4.92% mainly on account of slippages of a few large value corporate accounts during the year.
RISK MANAGEMENT PRACTICES:
It is imperative to have robust and effective risk management practices not only to manage risks inherent in the banking business but also the risks emanating from financial markets as a whole. The Bank has in place a robust risk management structure which proactively identifies the risks faced by the Bank and helps in mitigating the same, while maintaining proper trade-off between risk and return thereby maximizing shareholder value.
The Bank has put in place independent risk management architecture and practices that is overseen by Risk Management Committee of the Board (RMCB). Appropriate policies to manage various types of risks are approved by the Board of Directors after review by Risk Management Committee of the Board (RMCB), which provides strategic guidance while reviewing portfolio behaviour. The senior level executive committees like Credit Risk Management Committee (CRMC), Market Risk Management Committee (MRMC), Operational Risk Management Committee
(ORMC) and Asset Liability Management Committee (ALCO) develop the risk management policies and vet the risk limits to ensure better control. EWIRM solution will facilitate suitable alignment of risk and capital to the overall business strategy.
a) Credit Risk Management:
The Bank has a comprehensive credit risk management framework, which deals with identification, assessment, measurement and mitigation of credit risk. The framework includes Credit Risk Management Policy, Credit Risk Mitigation Policy, Model Risk & Rating Policy and Model Validation Framework. The Bank has devised two dimensional rating system and retail scoring system in line with RBIs guideline on Internal Rating Based (IRB) approach. Further the Banks Board has approved the methodology for estimation of risk components namely Probability of Default (PD), Loss Given Default (LGD) and Exposure At Default (EAD) for its Corporate and Retail exposures. Banks credit risk management policy defines credit risk as the possibility of losses associated with the diminution in the credit worthiness of the borrower or the counter-party or the failure on the part of the borrower to meet its obligations in accordance with the agreed terms.
The Credit risk of the Bank is overseen by RMCB (Risk Management Committee of Board) at Board level and Credit Risk Management Committee (CRMC) at executive level. Of the strategic measures employed in managing credit risk, risk rating occupies a position of prominence, as it involves the rating of borrowers from a risk perspective for the purpose of credit decision, pricing and supervision. RMCB/CRMC approves hurdle-rating system and the launch/modification of new rating models/scorecards, sets exposure ceilings, oversees monitoring of size and concentration of credit exposures, and timely amendments/review of Credit Risk Management Framework. Credit Risk Management cell, which functions under their guidance executes the directions of RMCB/CRMC and it ensures that appropriate system level changes (including IT) are also implemented.
For the purpose of credit risk assessment, the Banks exposure is broadly classified into retail and non-retail. All corporate loans are rated using dual rating models/specialized lending rating models and retail exposures are scored using different score cards. Ratings and scorings are performed in proprietary automated platforms which ensure integrity, objectivity and consistency of ratings. Further, rating/scoring data is captured in core IT systems of the Bank to facilitate seamless reporting and timely validation of rating models/score cards. The Bank has deployed system level validations/checks to ensure timely review of borrower ratings and capture of scoring information of all retail loans at granular level. Bank has eight non-default rating grades and one default rating grade. The customers are assessed based on their financial performance, industry characteristics, business positioning, project risks, operating performance and other non-financial parameters, such as quality of management
and conduct of account. As required under IRB guidelines, Bank validates its rating models and score cards on an annual basis.
Appropriate credit approval processes, risk mitigation, postdisbursement monitoring and timely remedial actions are part of the credit risk management. Segment-wise and borrower category-wise exposure limits are fixed and monitored by the Bank to address the risk of concentration. Rating migration studies and default rate analysis based on the credit risk rating of the borrowers are undertaken on a periodic basis to analyze the changes in credit risk profile of the borrowers and to provide input for policy and strategic decisions. Portfolio analysis of various products/industries, covering various credit quality indicators are being carried out on a periodic basis for identifying portfolio trends, and generating portfolio level MIS. The Bank has commenced to calculate the risk components (PD, LGD and EAD) in line with board approved methods, which also serves as an input for prudent pricing of its advances.
b) Market Risk Management:
The Bank has laid down comprehensive policies, framework and procedures to manage market risk in a holistic manner. The Investment Management Policy lays down broad guidelines to proactively manage market risk. The Board, supported by the Market Risk Management Committee (MRMC) frames the Market risk management policy, which details the methods to identify, measure, monitor and control market risks. The Bank has dedicated independent mid-offices for forex and domestic treasury at Treasury Department reporting directly to the head of the Risk Management Department. The mid-offices closely monitor market risk inherent in treasury dealings.
The market risk at an overall level is measured by applying techniques, such as VaR and Modified Duration. The stop loss levels for individual securities and limit framework for different categories of investments play a pivotal role in controlling market risk associated with different securities at micro level.
c) Operational Risk Management:
The Bank has developed and implemented an operational risk management framework that is fully integrated into the Banks overall risk management system. The Bank has put in place processes, systems and procedures to actively mitigate operational risks and to optimize resources not only to protect the interests of the Bank but also to ensure return commensurate with the risk profile adopted. With respect to operational risk management, identification and assessment of risk together with assessment of control effectiveness are key to the risk management process and towards this end the Bank has put in place risk management tools like Risk and Control Self Assessment (RCSA) and Key Risk Indicator (KRI) frameworks to ensure continuous monitoring & evaluation of various risk elements.
All new products and processes are vetted by Risk Management Department and thus, it is ensured that all risks involved in new products and processes are clearly documented and adequate procedures and controls are implemented before the product/ process is launched.
In order to ensure adequate and timely identification, measurement, monitoring, control and mitigation of reputation risk posed by banking operations at the business line and firmwide levels, a board approved reputation risk management policy is put in place. Risk drivers for reputation risk is identified and monitored on a quarterly basis. Quantification of reputation risk is accomplished through Reputation risk score card and is undertaken on a quarterly basis along with the ICAAP process. Further a reputation risk matrix is prepared to identify the magnitude and direction of various risk drivers. With a view to monitor reputation risk emanating from various forms of media, a Media monitoring mechanism is put in place to ensure timely and proactive identification and mitigation of risk.
d) Liquidity Risk
Liquidity risk refers to the risk that the Bank is unable to meet its obligations as and when they fall due. The Asset Liability Management Policy of the Bank stipulates broad framework for liquidity risk management to ensure that the Bank is in a position to manage its daily liquidity requirements and to withstand stress situations stemming from, bank-specific factors, market-specific factors or a combination of both. Asset Liability Management Committee (ALCO) of the Bank, comprising of senior executives of the Bank oversees Asset Liability Management (ALM) functions within the framework prescribed under our ALM Policy and other relevant policies and guidelines. The core objective of the ALM policy adopted by ALCO is to ensure planned and profitable growth in business through appropriate management of the liquidity risk and interest rate risk. The ALCO is responsible for (i) recommending pricing of deposits and advances, (ii) preparing forecasts showing the effects of various possible changes in market conditions, (iii) recommending appropriate actions in anticipation of such forecasts, (iv) deciding on the desired maturity profile and mix of assets and liabilities, and (v) conducting funding, capital planning, profit planning and growth projection.
The liquidity profile of the Bank is analyzed on a static as well as on a dynamic basis by using the gap analysis technique supplemented by monitoring of key liquidity ratios and periodic liquidity stress tests. The Bank has put in place a liquidity risk management framework adhering to the guidelines issued by RBI on liquidity risk management and the best practices. These include the intraday liquidity management and monitoring of the Liquidity Coverage Ratio (LCR).
e) Cyber Risk Management
In order to provide guidelines for cyber security related initiatives, a Board approved Cyber Security policy is in place. Also, Cyber Crisis Management Plan (CCMP) is in place, to provide the requisite strategy, direction and roadmap towards cyber threat mitigation. The Cyber Security governance is a part of banks Information Security framework. In order to consider cyber security from the bank-wide perspective, a steering committee of executives known as Information Security Committee is formed with formal terms of reference. The Chief Information Security Officer (CISO) is the member secretary of the committee. The committee serves as an effective communication channel for managements cyber security aims and directions. The Committee also guides and monitors development and facilitation and implementation of Cyber security policies, standards and procedures to ensure that all identified risks are managed within the banks risk appetite. Also, Bank has a comprehensive Incident Management procedure which proactively address potential threats/ risks arising out of cyber security incidents. The incident management procedure specifies the requirements for establishing, implementing, maintaining and continually improving incident management process as applicable to IT in the bank. Key Risk Indicators are used to track various security parameters and their progress/ changes. Regular IS audits and VA/PT is carried out to assess the vulnerabilities, if any, in the IT systems. The CISO office and IRMD maintain a close working relationship to ensure a holistic approach to risk management.
f) Business Continuity Plan
The Bank is having a comprehensive Business Continuity Plan (BCP) to ensure continuity of critical business operations of the Bank (identified through criticality assessment using Business impact analysis (BIA) at times of disruptions. In line with the Business Continuity Plan, Bank has constituted a BCP Committee incorporating the heads of all major departments to exercise, maintain and invoke business continuity plan as needed. A core team called Emergency Operation Team is also in place to act immediately upon a crisis and for supervision of recovery under alternative operations arrangements during a disaster and the team ensures that the business functions are back to normalcy with minimum delay. Disaster Recovery drill for the core banking system (CBS) of the Bank is conducted at regular intervals to ensure the competence of the same during emergency situations apart from undertaking periodical testing of recovery speed of critical applications from alternate locations.
INTERNAL FINANCIAL CONTROL AND ITS ADEQUACY Internal Financial Controls:
The Bank has put in place adequate internal control measures and processes with respect to its financial record keeping procedure to provide reasonable assurance regarding the reliability of financial reporting and the preparation and presentation of financial statements. These controls and processes are driven through various policies, procedures and certifications. The processes and controls are reviewed periodically and strengthened wherever considered necessary. The bank also ensures that internal controls are operating effectively, through the robust internal inspection and vigilance system.
The Bank is having a full-fledged Inspection and Vigilance Department, which ensures adherence to the set rules and regulations by the Branches/Regional Offices/Departments at the Administrative Office. Internal inspectors conduct inspection at regular intervals to ensure that the internal control systems put in place is working effectively. The reports of internal inspections are placed to Sub/Audit Committee of Executives (SACE/ACE)/Audit Committee of Board (ACB) as the case may be. SACE/ACE/ACB reviews the reports and ensures that corrective steps are taken to rectify the shortcomings in the report and recommends for strengthening the internal control over various processes.
VIGILANCE MECHANISM/WHISTLE BLOWER POLICY IN THE BANK
Vigilance Mechanism of the Bank is functioning as a separate vertical, viz., Vigilance Division and reporting directly to the MD & CEO of the Bank. Vigilance Division has twin roles to play namely, investigation of frauds and putting in place a dynamic mechanism for detection of fraud, in order to have more controls over the incidence of frauds.
The Bank has in place a vibrant Whistle Blower Policy (WBP) and a Protected Disclosure Scheme (PDS), which are reviewed from time to time. Whistle Blower Policy and the Protected Disclosure Scheme of the Bank are published in the website of the Bank and thereby awareness is given to all the stake holders about the same so as to make the said Policy and the Scheme an effective tool in the reporting and prevention of frauds.
As a part of the preventive mechanism to reduce the instances of frauds, especially on cyber field, various customer awareness measures are undertaken by the Bank on a continuous basis through advertisements in the media, publications in Banks website and through SMS messages to customers. Staff at branches are regularly updated with the modus operandi adopted by fraudsters at various banks so as to be more vigilant and cautious, while dealing with similar situations.
The Bank has a separate Transaction Monitoring Team at two levels-HO Level and RO Level. The said teams monitor transactions using alerts generated from software on pre-set rules. During the year Inspection Department has upgraded the system for transaction monitoring. The new software is capable of generating near real time alert generation & other features which assists effective monitoring of transactions. Based on the alerts, clarifications are called from the branches wherever necessary and the alerts are closed on a daily basis.
Fraud Risk Monitoring Cell (FRM Cell) is established to prevent fraudulent activity in the customer accounts through all the channel transaction such as debit cards, Internet banking and mobile banking activities, by generating rule based alerts. Current year adequate staffing is done in FRM division to ensure monitoring 24 X7 and 365 days in year.
HUMAN RESOURCE DEVELOPMENT/INDUSTRIAL RELATIONS
As on March 31, 2019, the Bank had 8,440 personnel on its rolls. Human Resources policies and practices of the Bank focus on attracting, motivating and retaining qualified and skilled manpower. Concurrent with these objectives, steps are taken to improve manpower efficiency. Given the market challenges, there has been considerable focus on optimising the existing resources - through internal job postings, transfers and skill development initiatives. Our Human Resources Department has been awarded with the ISO 9001:2008 Certification in the year 2015 and this certification has been upgraded to ISO 9001:2015 on 27.03.2018. Training has assumed significant importance in the present banking scenario. The Banks Staff Training College identifies the gaps in resource capability of the personnel and trains them for qualitative improvement.
The development of employees is essential to the future strength of our business. We have implemented a systematic approach for identifying, developing and deploying talented employees through a new initiative Talent pool in HRMS System. This will further motivate our employees by providing opportunities according to their skills and area of interest.
To motivate the employees further and to inculcate in them a sense of ownership, Employees Stock Option Scheme (ESOS) was approved by the shareholders at the Annual General Meeting held on August 18, 2008. The Bank introduced Tranche 1 of the scheme in 2009-10, Tranche 2 of the scheme in 2010-11, Tranche 3 of the scheme in 2011-12, Tranche 4 and Tranche 5 during 2012-13, Tranche 6 during 2013-14, Tranche 7 during 2014-15 and Tranche 8 and Tranche 9 during 2017-18, subject to the regulator guidelines in this regard. An aggregate of 8,51,071 options were exercised by the employees during the current financial year and equal number of shares have been allotted against those exercised. In order to ensure enhanced productivity and efficiency in all areas of operations and cultivate motivation among employees in all cadres, the Bank implemented the Performance Linked Incentive Scheme (PLIS) from the Financial year 2007-08 onwards. PLIS calculation will be based on the score obtained by each employee in respective score card. We have implemented score card based performance evaluation system in our Bank from FY 18-19. Score cards are used for performance appraisal, incentive, Promotion etc.
By Order of the Board
|(SALIM GANGADHARAN )||(V G MATHEW)|
|CHAIRMAN||MANAGING DIRECTOR & CEO|
|DIN : 06796232||DIN : 05332797|