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Karnataka Bank Directors Report, Karnataka Bank Reports by Directors
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Karnataka Bank
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Directors Report Year End : Mar '15    « Mar 14
Dear Members,
 
 The Directors have pleasure in presenting the Ninety First Annual
 Report together with the Audited Statement of Accounts for the year
 ended 31st March 2015 and the Auditors'' Report.
 
 PERFORMANCE HIGHLIGHTS
 
 Your Directors are pleased to inform that during the year under report,
 your Bank has been able to achieve satisfactory growth in all the areas
 of operation.  Performance highlights for the financial year in the key
 financial areas are as under: -
 
                                                          (Rs. in crore)
 
 Particulars           As on / for the                   As on / for the 
                         year ended                         year ended
                         31.03.2015                         31.03.2014
 
 Deposits                 46008.61                           40582.83
 
 Advances                 31679.99                           28345.49
 
 Investments              15988.06                           15226.78
 
 Gross Income              5205.41                            4694.41
 
 Operating Profit           773.38                             687.05
 
 Net Profit                 451.45                             311.03
 
 The total business turnover of the Bank was Rs. 77688.60 crore as on
 31st March 2015, an increase of 12.71 per cent over the preceding year.
 The total assets of the Bank increased from Rs. 47028.80 crore to Rs.
 51836.60 crore recording a growth of 10.22 per cent for the year
 2014-15.
 
 The total deposits of the Bank grew from ''40582.83 crore as on 31st
 March 2014 to Rs. 46008.61 crore as on 31st March 2015, registering a
 growth of 13.37 per cent.  During the year, low cost deposits of the
 Bank, viz.  Savings and Current Account Deposits have shown growth of
 11.31 per cent and constitute 24.94 per cent of the total deposits of
 the Bank. The market share of the Bank in deposits was 0.524 per cent.
 
 The total advances grew from Rs. 28345.49 crore as on 31st March 2014
 to Rs. 31679.99 crore as on 31st March 2015, an increase of 11.76 per
 cent. The priority sector advances increased from Rs. 12996.34 crore to
 Rs. 14344.96 crore which, together with RIDF exposure, formed 46.82 per
 cent of Adjusted Net Bank Credit (ANBC) and agricultural advances
 increased from Rs. 4790.27 crore to Rs. 5145.55 crore which, together
 with eligible RIDF exposure, constituted 16.79 per cent of ANBC.
 Lending under various socio-economic schemes has shown satisfactory
 progress. The market share of the Bank in loans and advances was 0.465
 per cent.
 
 As on 31st March 2015, the total investments of the Bank stood at
 Rs.15988.06 crore as against Rs. 15226.78 crore as on 31st March 2014,
 an increase of 5.00 per cent.
 
 OPERATIONAL PERFORMANCE
 
 In the competitive and challenging business environment, the overall
 performance of your Bank during the year 2014-15 was fairly
 satisfactory. The gross income of the Bank was Rs. 5205.41 crore and
 total expenditure (excluding provisions and contingencies) was Rs.
 4432.04 crore. The net interest income was Rs. 1168.85 crore.
 
 PROFIT
 
 Your Bank earned an operating profit of Rs. 773.38 crore for the year
 2014-15 as against Rs. 687.05 crore for the previous year showing a
 growth of 12.57 per cent. The net profit of the Bank increased from Rs.
 311.03 crore to Rs. 451.45 crore on account of lesser provision
 requirement for depreciation. The net profit showed a growth of 45.15
 per cent.
 
 APPROPRIATIONS
 
 The net profit of Rs. 451.45 crore which along with a sum of Rs. 0.16
 crore brought forward from the previous year, aggregating Rs. 451.61
 crore, is appropriated as under.  The corresponding figure for the
 previous year was Rs. 311.12 crore
 
 Appropriation                                               Rs.in crore
 
 Transfer to Statutory Reserve                                   230.00
 
 Transfer to Capital Reserve                                       3.15
 
 Transfer to Revenue, General &
 
 Special Reserves                                                 84.87
 
 Transfer to Investment Reserve                                   19.25
 
 Transfer to Proposed Dividend
 
 (including tax)                                                 113.94
 
 Balance carried to Balance Sheet                                  0.40
 
 Total                                                           451.61
 
 DIVIDEND
 
 Having regard to the overall performance of the Bank and the positive
 outlook for the future, the Board of Directors recommended a dividend
 of Rs. 5 per share i.e.  50 per cent on the paid up capital (previous
 year 40 per cent) for the reporting year. The dividend payout ratio for
 the year works out to 20.87 per cent.
 
 EARNINGS PER SHARE/BOOK VALUE
 
 The earnings per share (basic) and the book value per share as on 31s
 March 2015 stood at Rs. 23.96 and Rs. 179.84 respectively.
 
 CAPITAL FUNDS AND CAPITAL ADEQUACY RATIO
 
 During the year under report, the capital funds of your Bank increased
 from Rs. 3729.55 crore to Rs. 3973.18 crore, registering a growth of
 6.53 per cent. The Capital Adequacy Ratio stood at 12.67 per cent as on
 March 31, 2015, as per BASEL II norms (Previous year 13.30 per cent)
 and 12.41 per cent as per BASEL III norms (Previous year 13.20 per
 cent). The Bank has been consistently maintaining the Ratio well above 
 the minimum of 9 per cent stipulated by the Reserve Bank of India. 
 The market capitalisation as on March 31, 2015 was Rs. 2348.99 crore.
 
 FOREX BUSINESS
 
 During the year under report, your Bank achieved a turnover of
 Rs.15005.22 crore in foreign exchange business as against Rs. 12840.35
 crore in the previous year. The outstanding advances to export sector
 stood at Rs. 1680.42 crore as on March 31, 2015.
 
 NON-PERFORMING ASSETS AND PROVISION COVERAGE RATIO
 
 Your Bank has been focusing on containing the non- performing assets
 through better credit monitoring as well as intensified efforts to
 recover the impaired assets.  However, in view of continuing slow down
 in the economy and delinquencies in select sectors, the Bank''s, Gross
 NPAs as on March 31, 2015 has increased from Rs. 835.93 crore (2.92 per
 cent) to Rs. 944.21 crore by the year end (2.95 per cent). The Net NPAs
 stood at Rs. 623.55 crore (1.98 per cent) as against Rs. 538.04 crore
 (1.91 per cent) as on 31st March 2014.  The Provision Coverage Ratio
 (PCR) computed in accordance with the RBI guidelines works out to 50.54
 per cent as on March 31, 2015 (Previous year 53.21 per cent).
 
 CREDIT RATING
 
 ICRA Limited and Credit Analysis and Research Limited, (CARE) who had
 rated the Unsecured Redeemable Non-Convertible Subordinated (Lower
 Tier-II) debt instruments issued during the earlier years aggregating
 Rs. 600 crore have retained the rating ICRA A and CARE A
 respectively. The instruments with these rating are considered to have
 adequate/high degree of safety regarding timely servicing of financial
 obligations. Such instruments carry very low credit risk.
 
 DISTRIBUTION NETWORK
 
 During the year under report, your Bank has opened 75 new branches in
 15 states - 6 in Andhra Pradesh, 2 in Delhi, 1 in Gujarat, 1 in
 Haryana, 44 in Karnataka, 1 in Kerala, 2 in Madhya Pradesh, 3 in
 Maharashtra, 1 in Odisha, 1 in Punjab, 1 in Rajasthan, 8 in Tamilnadu,
 1 in Telangana, 1 in Uttarakhand and 2 in West Bengal. Out of 44 new
 branches opened in Karnataka, 19 are in Unbanked Rural Centres under
 Financial Inclusion Initiatives of the Bank. Further, your Bank has
 added 300 ATM outlets at various locations during the year 2014-15.
 
 As at 31st March 2015, your Bank had 1,679 Service Outlets i.e. 675
 branches (which include 2 Corporate Finance branches at Fort Mumbai &
 New Delhi- Connaught Place, 10 Agricultural Development branches, 160
 specialised MSME Branches and 79 Financial Inclusion Branches), 4
 Extension Counters & 1,000 ATMs spread across 21 States and 2 Union
 Territories. Apart from the above, your Bank has 10
 
 Regional Offices, an International Division, a Data Centre, a Customer
 Care Centre, 4 Service branches, 2 Currency Chests, 2 Central
 Processing Centres and 3 Asset Recovery management branches. Your Bank
 has also successfully launched 24X7 e-lobby facility at 4 locations.
 
 Further, for better ambience and improved customer service, your Bank
 shifted 16 branches/offices to new premises during the year 2014-15.
 
 EMPLOYEES STOCK OPTION SCHEME
 
 During the year under report, a total of 32,263 equity shares have been
 allotted to the employees of your Bank, pursuant to the exercise of
 options vested under the Employees Stock Option Scheme of the Bank.
 Disclosure in respect of Employee Stock Options Scheme pursuant to SEBI
 (Employees Stock Options Scheme and Employees Stock Purchase Scheme)
 Guidelines, 1999 is given in Annexure I to this report.
 
 BUSINESS GOALS FOR THE CURRENT YEAR
 
 Your Bank has projected a growth rate at 17.1 per cent in its business
 during the financial year 2015-16. While deposits are projected to grow
 at 16.3 per cent, advances growth has been estimated at 18.3 per cent.
 Your Bank is confident of achieving the growth through better customer
 service and operational efficiency.  Besides, the Bank also plans to
 increase its number of branches to 725 by opening of 50 new branches
 (including 13 Financial Inclusion branches) and ATMs to 1275 by opening
 275 new ATMs. Your Bank is also aiming at rolling out innovative
 technology based products to suit the changing profile of our customers
 such as Social Media Banking, Student Combo Card, Card Less Cash,
 Mobile Apps, New Version of Internet Banking, Image Card Solution,
 M-POS etc.
 
 SEGMENT REPORTING
 
 Pursuant to the Guidelines issued by RBI on Accounting Standard 17
 (Segment Reporting), the Bank has identified four business segments
 viz., Treasury, Corporate/Wholesale Banking, Retail Banking and Other
 Banking Operations for the year ended 31st March 2015 as under:
 
 Treasury Operations
 
 During the year ended 31st March 2015, your Bank has earned total
 revenue of Rs. 1341.19 crore from Treasury operations with a net result
 of Rs. 124.90 crore.
 
 Corporate / Wholesale Banking
 
 The revenue earned by the Bank during year under report from this
 Segment was Rs. 1728.21 crore with a contribution of Rs. 125.33 crore.
 
 Retail Banking
 
 During the year 2014-15, this Segment has earned revenue of Rs. 2028.88
 crore with a net result of Rs. 215.43 crore.
 
 Other Banking Operations
 
 During the year ended 31st March 2015, this segment has generated
 revenues of Rs. 107.13 crore and a net result of Rs. 79.57 crore.
 
 RISKS AND CONCERNS
 
 In the normal course of business a Bank is exposed to various risks,
 namely, Credit Risk, Market Risk and Operational Risk, besides other
 residual risks such as Liquidity Risk, Interest Rate Risk,
 Concentration Risk, Strategic Risk, Reputation Risk etc. With a view to
 efficiently manage such risks, your Bank has put in place various risk
 management systems and practices.  In line with the guidelines issued
 by the Reserve Bank of India from time to time, your Bank continues to
 strengthen various risk management systems that include policies,
 tools, techniques, systems and other monitoring mechanisms.
 
 Your Bank aims at enhancing and maximizing the shareholder value by
 achieving appropriate trade-off between risks and returns. Your Bank''s
 risk management objectives broadly cover proper identification,
 assessment, measurement, monitoring, controlling, mitigation and
 reporting of the risks across the various business segments of the
 Bank. The risk management strategy adopted by your Bank is based on a
 clear understanding of the risks and the level of risk appetite that is
 dependent on the willingness to take risks in the normal course of
 business. A Board level committee, viz., Integrated Risk Management
 Committee of your Bank periodically reviews the risk profile, evaluates
 the overall risks faced by the Bank and develops policies and
 strategies for their effective management.
 
 Various senior management committees such as Credit Policy Committee
 (CPC), Asset-Liability Management Committee (ALCO), Operational Risk
 Management Committee (ORMC) etc operate within the broad policy
 framework of the Bank to ensure and enhance the risk control and
 governance framework within the Bank. The Risk Management Department at
 Head Office oversees the overall implementation of various risk
 management initiatives across the Bank.
 
 In line with the guidelines issued by RBI, your Bank has implemented
 the New Capital Adequacy Framework and is Basel II compliant with
 effect from March 31, 2009, by adopting the basic approaches available
 under the guidelines. While complying with all the requirements of the
 basic approaches under Basel II, your Bank has taken the necessary
 steps to move over to Basel II Advanced Approaches as per the Road Map
 approved by the Bank''s Board in this regard. As a part of the Basel
 III, Pillar III -Market Disclosure requirement, your Bank has made a
 detailed Pillar III Disclosure, which is appended to this report as
 Annexure II. The Bank conforms to the Basel III guidelines from April
 1, 2013 and has also assessed the future capital impacts.
 
 In compliance with Basel guidelines, the Bank has put in place a policy
 document for Internal Capital Adequacy Assessment Process (ICAAP) to
 evaluate its capital adequacy relative to its risks. Stress testing
 framework for various stress scenarios is also put in place for better
 understanding of the likely impact of adverse market movements/events
 on the capital and earnings. The results of the ICAAP and Stress 
 testing are reviewed periodically to assess the capital requirement for
 the projected business growth, keeping in view the risk appetite and 
 risk profile of the Bank. A Board level committee, viz., Internal 
 Capital Adequacy Assessment Committee(ICAAC), reviews the risk 
 appetite, risk profile, business projections as well as capital 
 assessment of your Bank at periodical intervals.
 
 In line with guidelines issued by RBI, your Bank has reviewed the
 set-up of Chief Information Security Officer (CISO), who is responsible
 for articulating and enforcing the policies that Bank uses to protect
 the information assets apart from coordinating the security related
 issues/implementation within the Bank.
 
 To evaluate and review the business performance of various business
 units/customers, your Bank has initiated the Fund Transfer Pricing
 (FTP) and Customer Profitability Management System (CpMS).
 
 INTERNAL CONTROL SYSTEMS AND COMPLIANCE
 
 Your Bank has put in place an effective and robust internal control
 apparatus, commensurate with its size, geographical spread and
 complexity of its operations.  The macro level guidance and direction
 on the control aspects is vested with the Audit Committee of the Board
 of Directors which takes an overall view on the internal control
 aspects and formulates all the related policy guidelines. The Bank has
 put in place an independent Compliance Department in charge of the
 entire compliance functions of the Bank.
 
 An effective and sound internal audit function plays an important role
 in contributing to the effectiveness of the internal control system.
 The audit function would provide high quality counsel to the management
 on the effectiveness of risk management and internal controls,
 including the regulatory compliance by the Bank.  Historically, the
 internal audit system in the Bank has been concentrating on transaction
 testing, testing of accuracy and reliability of accounting records and
 financial reports, integrity, reliability and timeliness of control
 reports and adherence to legal and regulatory requirements. With the
 implementation of Risk-Based Internal Audit (RBIA), greater emphasis is
 placed on the internal auditor''s role in mitigating various risks.
 While continuing with the traditional risk management and control
 methods involving transaction testing etc., the risk-based internal
 audit would, not only offer suggestions for mitigating current risks
 but also on potential future risks, thereby playing an important role
 in the risk management process of the Bank.
 
 The RBIA assessment is undertaken, inter-alia, for the purpose of
 drawing the annual audit plan. The risk assessment would, as an
 independent activity, cover risks at various levels (corporate and
 branch; portfolio and individual transactions etc.) as also the
 processes in place to identify, measure, monitor and control the risks.
 The internal audit department is devising the RBIA risk assessment
 methodology, with the approval of the Board of Directors, keeping in 
 view the size and complexity of the business undertaken by the Bank. 
 The risk assessment process would include the identification of 
 ''inherent business risks'' in the various activities undertaken by the 
 Bank, and evaluate the effectiveness of the control systems for 
 monitoring the inherent risks of the business activities 
 (''Control Risk'') and then draw up a risk-matrix by taking into account 
 both the factors viz., inherent business and control risks.
 
 In pursuance of seeking periodic assurances on the adequacy and
 efficacy of internal control functions, the Bank causes periodic
 Regular Inspections and Information System (IS) Audit of all the
 branches and offices. Your Bank also covers select branches under
 concurrent audit, the aggregate turnover of which account for over 66%
 of the gross bank credit and over 51% of aggregate deposits of the
 Bank. Short Inspection of all the branches which are not subjected to
 concurrent audit is also caused besides, concurrent audit of treasury
 functions (both domestic and forex), International Division, Forex
 designated offices, Central Processing Centre, Currency Chests,
 Information Systems audit of Data Centre and DR Site etc. Besides, the
 Bank has also been causing Stock and Credit audits of large borrowal
 accounts by external, professional audit firms in furtherance of
 effective credit administration. The Bank has also taken prompt action
 on the implementation of the RBI Guidelines on Information Security,
 Electronic Banking, Technology Risk Management and Cyber Frauds. Bank
 may also be covered under Risk Based Supervision under Supervisory
 Programme for Assessment of Risk and Capital (SPARC) of Reserve Bank of
 India in the coming years.
 
 As an important element in Corporate Governance structure, the Bank has
 set up a robust Compliance function with sufficient independence
 supported by a healthy compliance culture within the organization. The
 Bank''s compliance function ensures strict observance of, all statutory
 provisions, guidelines from RBI & other regulators, standards and codes
 prescribed by regulatory bodies besides Bank''s internal policies and
 fair practices code. Further, the compliance function includes
 interpretation/ dissemination of regulatory and statutory guidelines,
 observing proper standards of market conduct, managing conflicts of
 interest and treating customers fairly. The Bank''s compliance function
 assists the top management in managing the Compliance Risk effectively.
 The risk- based compliance programme of the bank, subject to the
 oversight by head of compliance, ensures appropriate coverage across
 businesses and co-ordination among risk management functions besides
 verifying the level of compliance through ''Compliance Testing'' of
 branches. The Bank carries out an annual compliance risk assessment to
 identify and assess major compliance risks faced by it and takes steps
 to manage the risks effectively.
 
 HUMAN RESOURCES
 
 The present banking system is a result of reforms and policy changes
 that have taken place in the past.  A globally competitive economy
 requires a robust and competitive banking system.
 
 Efficient human resource management is one of the most essential
 requirements for banking sector to succeed in this competitive world.
 Technology plays an important role in the development of able human
 resource management system. In this regard your Bank is in the process
 of implementing a comprehensive Human Resource Management System (HRMS)
 encompassing a robust employee information and streamline various HR
 functions ultimately aiming at improving the efficiency of the
 employees.
 
 Recognizing the vital role the training plays in improving the
 productivity and efficiency, shouldering higher responsibilities and to
 understand fast changing scenario of banking industry, your Bank has in
 place a well equipped training college with experienced faculty members
 to impart training to the various categories of staff members
 throughout the year. Apart from conducting training programmes at its
 staff training college your Bank deputes its staff members to the
 training programmes conducted by reputed institutions such as IIM,
 Ahmedabad, National Institute of Bank Management (NIBM), Pune, College
 of Agricultural Banking (CAB), Pune, Institute for Development and
 Research in Banking Technology (IDRBT), Hyderabad, SIBSTC, Bengaluru,
 Indian Institute of Banking and Finance (IIBF), Mumbai etc. During the
 year 2014-15, the Bank has deputed as many as 1476, 652 and 161
 personnel to various trainings/ workshops/ conferences in the category
 of Officers, Clerks & Attenders respectively.
 
 Maintaining cordial industrial relations is one of the top priorities
 of your Bank and your Bank was able to keep a very amiable industrial
 relationship during the year under report. The number of employees in
 the Bank stood at 7382 as on 31st March 2015. The Business per employee
 (excluding inter bank deposits) has improved from Rs. 958.76 lakh as on
 31st March 2014 to Rs. 1051.78 lakh as on 31st March 2015.
 
 Your Bank has put in place institutional mechanism for protection of
 women employees at the workplace and adopted a policy pursuant to
 Section 22 of the Sexual Harassment of Women at Workplace (Prevention,
 Prohibition and Redressal) Act, 2013, providing for protection of women
 employees against the sexual harassment of women at workplace and
 redressal of such complaints. The details of the complaints received
 under the above Policy for the year under report are as under:
 
 Number of complaints pending as at the beginning of the financial   NIL
 year
 
 Number of complaints filed during the financial year                NIL
 
 Number of complaints pending as on end of the financial year        NIL
 
 DIRECTORS
 
 Your Bank has ten Directors, all of them except Mr. P Jayarama Bhat,
 Managing Director and CEO are Independent Directors as on March 31,
 2015. The details of the criteria for appointment and remuneration of
 Directors are provided in the report on Corporate Governance forming
 part of this report.
 
 INDEPENDENT AND NON-EXECUTIVE DIRECTORS
 
 Pursuant to the provisions of Section 149(6) of the Companies Act, 2013
 and Clause 49 of the Listing Agreement entered into with the Stock
 Exchanges, your Bank has received necessary declarations from all the
 non-executive directors viz., Messrs.  Ananthakrishna, S V Manjunath, D
 Harshendra Kumar, Dr. H Ramamohan, T R Chandrasekaran, Ashok
 Haranahalli, Mrs. Usha Ganesh, Rammohan Rao Belle and B A Prabhakar
 confirming that they meet the criteria of independence for Independent
 Directors.
 
 WOMAN DIRECTOR
 
 Mrs. Usha Ganesh is on the Board of the Bank since July 31, 2013 and
 thus the Bank complies with the requirement of having a woman director
 on the Board as per Section 149 of the Companies Act, 2013 and Clause
 49 of the Listing Agreement.
 
 MANAGING DIRECTOR AND CHIEF EXECUTIVE OFFICER (MD & CEO)
 
 Mr. P Jayarama Bhat has been the MD & CEO of the Bank since July 14,
 2009 with the approval of the Reserve Bank of India and the members of
 the Bank from time to time and his present term would come to an end on
 July 13, 2015. The Board at the meeting held on March 27, 2015 has
 re-appointed him for a further period of three years and also revised
 the remuneration etc., subject to the approval of the Reserve Bank of
 India and the members of the Bank. Accordingly approval of the members
 is being sought for his re- appointment and revision in the
 remuneration etc., subject to approval of Reserve Bank of India.
 
 OTHER CHANGES IN THE BOARD
 
 Mr. T S Vishwanath, after completing the term of eight years, has
 retired from the office of Director in accordance with Section
 10A(2A)(i) of the Banking Regulation Act, 1949 on January 4, 2015. The
 Board places on record its appreciation of the active involvement and
 useful contributions made by Mr. T S Vishwanath during his tenure.
 
 Further, the Board has appointed Mr. B A Prabhakar, former Chairman &
 Managing Director of Andhra Bank as an additional director on September
 6, 2014 and as per Section 161 of the Companies Act, 2013 would hold
 office upto the date of ensuing Annual General Meeting. Bank has
 received necessary notice under Section 160 of the Companies Act, 2013
 he proposing his candidature for appointment as an Independent Director
 of the Bank at the ensuing Annual General Meeting. Having regard to his
 vast and rich knowledge and experience in the field of Banking and
 Finance, your Directors recommend his appointment. The brief resume and
 other details relating to Mr. B A Prabhakar are furnished in the notice
 of the Annual General Meeting.
 
 NUMBER OF BOARD MEETINGS
 
 During the year under report the Board had met 16 times and the details
 thereof are provided in the report on Corporate Governance forming part
 of this report.
 
 COMMITTEES OF THE BOARD
 
 The Bank has several Committees which were constituted as part of the
 best corporate practices and to comply with the requirements of
 relevant provisions of the applicable laws.
 
 Details of the meetings of the Board and the Committees, their
 composition, terms of reference, powers, roles etc are furnished in the
 report on Corporate Governance forming part of this report.
 
 CORPORATE GOVERNANCE
 
 Your Bank is committed to follow the best practices of corporate
 governance to protect the interests of all the stakeholders of the
 Bank, viz. shareholders, depositors, other customers, employees and the
 society in general and maintain transparency at all levels. A detailed
 report on corporate governance practices is given as Annexure III to
 this report.
 
 EXTRACT OF THE ANNUAL RETURN
 
 Pursuant to Section 92(3) of the Companies Act, 2013 read with Rule
 12(1) of the Companies (Management and Administration) Rules, 2014, an
 extract of the Annual Return of the Bank as on March 31, 2015 is
 annexed (Annexure IV).
 
 PERFORMANCE EVALUATION OF THE BOARD
 
 The Nomination and Remuneration Committee at its meeting held on
 November 22, 2014 and the Board of Directors at its meeting held on
 December 29, 2014 respectively, had laid down criteria for performance
 evaluation of Directors, Chairman, MD & CEO, Committees of the Board
 and Board as a whole and also the evaluation process for the same. The
 statement indicating the manner in which formal annual evaluation of
 the Directors, the Board and Committees of the Board etc., are given in
 detail in the report on Corporate Governance, which forms part of this
 Annual Report. In pursuance to the above, Independent Directors in
 their separate meeting held on March 27, 2015 have reviewed and
 evaluated the performance of Board as a whole, Chairman of the Board
 and the Managing Director and CEO.
 
 Further, the Board also reviewed the performance of committees of the
 Board and that of individual Independent Directors at its Meeting held
 on March 27, 2015.
 
 DIRECTORS'' RESPONSIBILITY STATEMENT
 
 In accordance with Section 134(3)(c), 134(5) of the Companies Act, 2013
 read with Rule 8 of the Companies (Accounts) Rule, 2014, your Directors
 state that:
 
 (a) in the preparation of the annual accounts, the applicable
 accounting standards have been followed along with proper explanation
 relating to material departures;
 
 (b) the directors have selected such accounting policies and applied
 them consistently and made judgments and estimates that are reasonable
 and prudent so as to give a true and fair view of the state of affairs
 of the Bank as at the end of financial year March 31, 2015 and profit
 and loss account for that period.
 
 (c) the directors have taken proper and sufficient care for the
 maintenance of adequate accounting records in accordance with the
 provisions of the Companies Act, 2013 for safeguarding the assets of
 the Bank and for preventing and detecting fraud and other
 irregularities.
 
 (d) the directors have prepared the annual accounts on a going concern
 basis.
 
 (e) the directors have laid down the internal financial controls
 followed by the Bank and that such internal financial controls are
 adequate and are operating effectively.
 
 (f) the directors have devised proper systems to ensure compliance with
 the provisions of all applicable laws and that such systems were
 adequate and operating effectively.
 
 Management Discussion and Analysis
 
 The Management Discussion and Analysis Report for the year under review
 pursuant to Clause 49 of the Listing Agreement with the Stock Exchanges
 is presented in a separate section forming part of this report.
 
 WHISTLE BLOWER POLICY
 
 The Bank has implemented a Whistle Blower Policy intended to promote
 participation of employees at all levels and detection of corruption,
 misuse of Office, criminal offences, suspected /actual fraud, failure
 to comply with the rules and regulations prescribed by the Bank and any
 events /acts detrimental to the interest of the Bank, depositors and
 the public resulting in financial loss/operational risk, loss of
 reputation etc.
 
 Further, the mechanism adopted by the Bank encourages the Whistle
 Blower to report genuine concerns or grievances and provides for
 adequate safeguards against victimization of Whistle Blower who avails
 such mechanism and also provides for direct access to the Chairman of
 the Audit Committee, in exceptional cases. The functioning of the Vigil
 mechanism is reviewed by the Audit Committee from time to time. The
 details of Whistle Blower Policy is posted in our website and available
 at the link www.karnatakabank.com/ktk/ProtectedDisclosure.jsp
 
 CONTRACTS OR ARRANGEMENTS WITH RELATED PARTIES
 
 All related party transactions that were entered during the financial
 year were in the ordinary course of the business of the Bank and were
 on arm''s length basis.  There were no materially significant related
 party transactions entered into by the Bank with Directors, Key
 Managerial Personnel or other persons which may have a potential
 conflict with the interest of the Bank.
 
 The policy on dealing with Related Party Transactions as approved by
 the Audit Committee / Board has been placed in the website of the Bank.
 
 Considering the fact that all related party transactions were entered
 into by the Bank in the ordinary course of the business of the Bank and
 were on arm''s length basis, form AOC-2 is not applicable to the Bank.
 
 STATUTORY DISCLOSURES
 
 The disclosures under sub-section (3) of Section 134 of the Companies
 Act, 2013 read with Rule 8 (3) of the Companies (Accounts) Rules, 2014
 are as under:
 
 a) Conservation of Energy and technology absorption
 
 Considering the nature of the Bank''s business, the provisions of
 Section 134(3)(m) of the Companies Act, 2013 relating to conservation
 of energy and technology absorption are not applicable to your Bank.
 The Bank has, however, used information technology in its operations
 extensively.
 
 b) Foreign Exchange Earnings and outgo: During the year ended March 31,
 2015, the Bank has earned Rs. 44.79 crore and spent Rs. 10.98 crore in
 foreign currency.
 
 c) There were no significant and material orders passed by the
 regulators or courts or tribunals impacting the going concern status
 and Bank''s operations in future.
 
 d) Internal Financial Control Systems and their adequacy: Your Bank has
 laid down standards, processes and structure facilitating the
 implementation of internal financial control across Bank and ensure
 that same are adequate and operating effectively.
 
 e) Key Managerial Personnel: Mr. P Jayarama Bhat, MD & CEO, Mr. P
 Jairama Hande, CfO and Mr. Y V Balachandra, Company Secretary of the
 Bank were the Key Managerial Personnel of the Bank as on March 31, 2015
 as per the provisions of the Companies Act, 2013. None of the Key
 Managerial Personnel has resigned. However, the Board has designated
 Mr. Raghurama as CFO in the place of Mr. P Jairama Hande w.e.f. May 7,
 2015.
 
 f) Remuneration of directors: Disclosures pursuant to Section 197(12)
 of the Companies Act, 2013 read with Rule 5 of the Companies
 (Appointment and Remuneration of Managerial Personnel) Rules, 2014 are
 given in Annexure VII to this report.
 
 g) Employees who are in receipt of remuneration exceeding rupees sixty
 lakhs etc.: There were no employees who were in receipt of remuneration
 during the year 2014-15 requiring disclosure under Rule 5(2) of the
 Companies (Appointment and Remuneration of Managerial Personnel) Rules,
 2014.
 
 AUDITORS
 
 a.  Statutory Auditors
 
 M/s. Kamath & Rau, Chartered Accountants, Karangalpady,
 Mangaluru-575003 and M/s. Abarna & Ananthan, Chartered Accountants, #
 521, 3rd Main, 6th Block, 2nd Phase, BsK 3rd Stage, Bengaluru-560085
 would retire as joint Statutory Central Auditors of the Bank at the
 ensuing Annual Meeting of the members of the Bank and are eligible for
 re-appointment subject to approval from Reserve Bank of India. The Bank
 has received consent from the above auditors and necessary confirmation
 from them that they are not disqualified to be appointed as auditors of
 the Bank pursuant to the provisions of the Companies Act, 2013 and the
 Rules made thereunder. Accordingly the Board of Directors of the Bank
 has recommended their re-appointment as Statutory Central Auditors of
 the Bank to hold office from the conclusion of ensuing AGM till the
 conclusion of next AGM on remuneration to be decided by the Board/Audit
 Committee for the approval of the shareholders.
 
 b.  Secretarial Auditor and Secretarial Audit Report
 
 Pursuant to Section 204 of the Companies Act, 2013 and the rules
 thereunder, your Bank had appointed M/s. Ullas Kumar Melinamogaru,
 Practising Company Secretary, Mangaluru as Secretarial Auditors to
 conduct the Secretarial Audit for the year ended March 31, 2015. The
 audit report from the Secretarial Auditor is annexed to this report as
 Annexure V.
 
 CORPORATE SOCIAL RESPONSIBILITY
 
 Businesses are an integral part of society and play a critical role in
 the sustenance and improvement of a healthy ecosystem, in fostering
 social inclusiveness and equity and in upholding the ethical practices
 and good governance. It is believed that integrating social, 
 environmental and ethical responsibilities into governance of business 
 ensures long term successes, competencies and sustainability. With this
 in mind your Bank continues to fulfil its various social 
 responsibilities. The Corporate Social Responsibility initiatives of 
 the Bank are designed to ensure that the Bank adds social, 
 environmental and economic value in all its activities to make a 
 positive, sustainable impact on both society and business. In this 
 direction, your Bank has been responding well over the years through 
 various initiatives like participation in social, cultural, 
 educational, environment awareness activities etc., aimed at improving 
 the social values, promotion of cultural heritage, knowledge, standard 
 of living and the quality of life of the people and the environment at 
 large.  The Bank firmly believes that being an integral part of 
 society, it is the inclusive growth of society which contributes 
 ultimately to the growth of the Bank and in this direction,
 your Bank has been strengthening its rural orientation through
 initiatives aimed at imparting financial literacy and extending banking
 services to the people in rural unbanked areas, in a fair and
 transparent manner, at an affordable cost. Towards this end, your Bank
 had opened 19 branches in unbanked rural centres during the financial
 year 2014-15 as part of its financial inclusion initiative, thus taking
 the total Financial Inclusion branches to 79.
 
 Further, pursuant to Section 135 of the Companies Act, 2013 read with
 Companies (Corporate Social Responsibility Policy) Rules, 2014, the
 Board has setup a Committee of Directors namely, ''Corporate Social
 Responsibility (CSR) Committee'' and has also put in place a Policy on
 Corporate Social Responsibility (CSR Policy) to undertake
 projects/programmes in pursuance to the above Policy. The contents of
 the CSR Policy along with the report on amount spent on various
 projects/programmes during the financial year 2014-15 is detailed in
 Annexure VI to this report pursuant to Rule 8 of the Companies
 (Corporate Social Responsibility Policy) Rules, 2014.
 
 CUSTOMER SERVICE
 
 The customer has always been the focal point of our initiatives. We
 have been endeavouring to empower our customers by rolling out
 innovative products and services through optimal use of technology
 without compromising on the quality of service rendered across the
 counter and without losing sight of the safety and security aspects. In
 this direction, the Bank has introduced the Online Grievance Redressal
 System to ensure quick and speedy redressal of complaints of the
 customers in order to provide hassle free banking experience. Through
 this system, the customer can lodge a complaint and track the status of
 the complaint online, through the Bank''s website. The Bank is actively
 involved in putting in place systems and procedures to comply with the
 recommendations of the Damodaran Committee on Customer Service,
 constituted by the Reserve Bank of India, to look into the banking
 services rendered to customers and the grievance redressal mechanism
 prevalent in banks. Most of the recommendations made by the said 
 Committee have been complied with and the remaining few which require 
 up-gradation of the Bank''s Core Banking Solution are being pursued for 
 early compliance.
 
 FINANCIAL INCLUSION
 
 Financial Inclusion means making available the full range of banking
 services at an affordable cost to the people who do not have access to
 banking services. It mainly focuses on the section of society not
 having formal financial institutional support. Through the Financial
 Inclusion Plan, Bank aims at ''connecting people'' with the Bank and not
 just opening accounts.  This includes meeting the small credit needs of
 the rural public, giving them access to the payments system, providing
 remittance facility and life and health insurance. Efforts are being
 made to optimize the resources to achieve the goal of extending banking
 facilities to the un-banked areas/deprived sections.
 
 All the branches of the Bank are under Core Banking Solution (CBS) and
 all the branches to be opened in future will also be under CBS. Out of
 675 branches, Bank has 140 rural branches and all these branches are
 provided with CBS offering all banking facilities to the rural
 clientele in the gram panchayats or villages where these branches are
 located. All the rural branches are acting as financial literacy
 centers (FLCs) and imparting Banking literacy among the rural Populace.
 
 In accordance with announcement of Prime Minister Jan Dhan Yojana
 (PMJDY) on August 15, 2014 revised Strategy & Guidelines of Department
 of Financial Services (DFS), Ministry of Finance, Govt. of India, has
 been considered for implementation of Financial Inclusion activity of
 the Bank. PMJDY takes in to account both rural sub service areas (SSAs)
 and urban wards for Financial Inclusion. Under the revised financial
 inclusion plan, in rural areas Bank is allocated with 214 Gram
 Panchayats (GPs) for Financial Inclusion, covering 297 Sub service
 Areas (SSAs) consisting of 1039 villages in the states of Karnataka,
 Chattisgarh Maharashtra and Andhra Pradesh and in urban areas 313 wards
 are allocated in Karnataka and other states. The Gram Panchayats are
 being financially included through Brick and Mortar Branches and
 Business Correspondents (BC). Your Bank has been issuing RuPay PMJDY
 Debit Card under the domestic card payment scheme launch by the
 National Payments Corporation of India (NPCI).
 
 Brick and Mortar Branches:
 
 As on March 31, 2015 Bank has covered 529 villages of 101 GPs through
 Brick & Mortar Branches.
 
 Business Correspondent Services (BC Services):
 
 Bank has entered into an agreement with M/s BASIX Sub-ki Transaction
 Ltd and M/s Integra Micro Systems Pvt. Ltd. to provide online
 transaction facility and as on March 31, 2015, 121 GPs with 149 SSAs
 covering 561 villages of Karnataka, Andhra Pradesh and Chhattisgarh 
 States were covered under the above arrangement.
 
 Ultra Small Branches (USBs):
 
 The Reserve Bank of India has allowed banks to open ''ultra small
 branches'' in rural areas of the country such that business
 correspondents (BCs) can conduct operations and thereby boost
 confidence of customers to use their financial services. Bank has 37
 USBs as on March 31, 2015.
 
 Electronic Benefit Transfer (EBT) - Pilot Project of Govt. of
 Karnataka:
 
 Bank is participating in Govt. of Karnataka (GOK) EBT Pilot project for
 NREGA/SSP beneficiaries under - One District - Many Bank Model and is
 disbursing the payments under the above schemes to the beneficiaries
 using smart card and hand held machines at 5 Gram Panchayat locations
 in Chitradurga, Ballary and Yadgir districts.
 
 Direct Benefit Transfer (DBT):
 
 Bank is actively participating in Direct Benefit Transfer (DBT)
 Programme of Govt. India, wherein, the Govt.  would transfer benefits
 of various Schemes directly to the beneficiaries Aadhaar enabled bank
 accounts and also accounts seeded with LPG ID in case of transfer of
 subsidy for LPG. For this purpose, Bank has on boarded with NPCI for
 Aadhaar Payment Bridge System (APBS) under National Automated Clearing
 House (NACH).  Revised DBTL was introduced on November 15, 2014 and
 launched throughout the country on January 1, 2015. Both the Aadhaar
 based and LPG ID based approaches are made available to customers
 across all branches of the Bank.
 
 Financial Literacy and Credit Counseling Centers (FLCCs)
 
 Bank has sponsored four FLCs at BC Road, Hangal, Tiptur and Kundagol in
 Karnataka. During the financial year FLCs sponsored by the Bank have
 conducted 757 Financial Literacy campaigns and 33,910 participants had
 been covered. In adherence to RBI guidelines, all the rural branches of
 our Bank are conducting financial literacy Camps.
 
 AWARDS AND RECOGNITIONS
 
 Your Bank bagged the following awards during the year under report in
 recognition of its achievement under HR, technology initiatives as well
 as for social banking.
 
 * Certificate of Excellence for Social Banking by ASSOCHAM, India, at
 10th Annual Banking Summit cum Social Banking Excellence Awards 2014.
 
 * MSME BANKING EXCELLENCE AWARDS - 2014, initiated by CIMSME [Chamber
 of Indian Micro Small & Medium Enterprises], under the following
 categories:
 
 i.  Best Bank Award for New Initiatives - Runner Up
 
 ii.  Best Bank Award for CSR & Green Initiatives - Runner Up.
 
 * Your Bank''s MD & CEO, Mr. P Jayarama Bhat, has been awarded the Asia
 Pacific HRM Congress Awards 2014, under the category CEO with HR
 Orientation.
 
 * Your Bank''s MD & CEO has been honoured with the New Year Award,
 2015, by the President of Academy of Higher Education, Manipal
 University, Manipal.
 
 Further NQA, a leading assessment, verification and certification body
 accredited to the United Kingdom Accreditation Service (UKAS) has
 renewed ISO 27001:2013 certificate for our three IT set-ups viz. Data
 Centre, Near Line Site and Head Office-IT Department including Disaster
 Recovery Site.
 
 ACKNOWLEDGEMENTS
 
 Your Directors would like to place on record their sincere gratitude to
 the Reserve Bank of India, other government and regulatory authorities,
 financial institutions and correspondent banks for their continued
 guidance and support. Your directors also place on record their
 gratitude to the Bank''s shareholders, depositors and other customers
 for their continued support, patronage and goodwill. Your directors
 express their deep sense of appreciation to all the staff members, for
 their contribution in your Bank''s quest for sustained growth and
 profitability and look forward to their continued contribution in
 scaling greater heights.
 
 For and on behalf of the Board of Directors
 
 Place: Mangaluru                                                Sd/-
 Date : May 22, 2015                                      Ananthakrishna
                                                              Chairman
Source : Dion Global Solutions Limited
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