Karnataka Bank

1.  Reconciliation of Branch Adjustments and Balancing of Subsidiary
 Ledgers.
 
 a) Reconciliation of branch adjustments/Inter Bank accounts has been
 completed upto 31 -03-2009 and steps are being taken to give effect to
 consequential adjustments of pending items.
 
 b) Balancing of Subsidiary Ledgers are completed in all
 branches/offices.
 
 2.  Net profit or Loss for the period, Prior period items and changes
 in Accounting policies (Accounting Standard 5)
 
 There are no significant prior period items which are required to be
 disclosed as per RBI guidelines. However during the year, the Bank has
 made some changes in Accounting Policies as detailed below: a) The Bank
 hitherto has been accounting for interest on overdue deposits at the
 time of renewal. During the year the Bank has changed the accounting of
 such interest on overdue deposits by making a provision at the rate of
 interest applicable to saving bank deposits and the balance overdue
 interest is accounted for at the time of renewal. Due to this change
 the Bank has provided Rs 1.59 crore and consequently the profit for the
 year is lower by the said amount (subject to tax).
 
 b) As per the RBI guidelines the Banks are permitted voluntarily to
 make specific provisions for advances at the rate which are higher than
 the rate prescribed under existing regulation provided such higher
 rates are approved by the Board of Directors and consistently adopted
 year to year. Accordingly, during the year the Bank has made higher
 provision for doubtful secured-1 at 40% on secured and 100% on
 unsecured portion (against 20% on secured and 100% on unsecured portion
 specified by RBI), for Doubtful-ll at 100% (against 30% on secured and
 100% on unsecured portion specified by RBI). Due to this change, the
 profit for the year is lower by Rs 47.00crore (Subject to tax).
 
 3.  Employee Benefits (Accounting Standard 15)
 
 Various Benefits made available to the Employees are:-
 
 a) Pension: The Bank has defined benefit plan under Pension Trust to
 employees who have opted for Pension Scheme under the Pension & Group
 Schemes unit of LIC of India, by purchasing annuity for optants
 separated after completion of 20 years of service. The Benefits under
 this plan are based on last drawn salary and the tenure of employment.
 The Liability for the pension is determined and provided on the basis
 of actuarial valuation.
 
 b) Gratuity: In accordance with the applicable Indian Laws, the Bank
 provides for defined gratuity benefit retirement plan (the gratuity
 Plan) covering eligible employees. This plan provides for a lump sum
 payment to the eligible employees on retirement, death, incapacitation
 or termination of employment of amounts that are based on the last
 drawn salary and tenure of employment. Liabilities with regard to the
 gratuity plan are determined by actuarial valuation and contributed to
 the gratuity fund trust. Trustees administer the contribution made to
 the trust and invest in specific designated securities as mandated by
 law, which generally comprise of Central and State government bonds and
 debt instruments of government owned corporations.
 
 c) Leave Encashment (PL): The bank permits encashment of leave
 accumulated by employees on retirement,
 
 resignation and during the course of service. The liability of
 encashment of such leave is determined and provided on the basis of
 actuarial valuation performed by an independent actuary at the balance
 sheet date
 
 d) Provident Fund: The Bank pays fixed contribution to Provident Fund
 at predetermined rates to a separate trust, which invests the funds in
 permitted securities. The contribution to the fund is recognised as
 expense and is charged to the profit and Loss account. The obligation
 of the Bank is limited to such contributions. As on 31st March 2009,
 there was no liability due and outstanding to the fund by the Bank.
 
 e) Other Long term Employee Benefits : Other than the employees
 benefits listed above, the Bank also gives certain long term benefits
 to the employees which include Medical aid, reimbursement of
 hospitalization expenses to the employees / their family members,
 compensated absence such as sick leave and casual leave etc. The bank
 has made provision for such liabilities on an adhoc basis.
 
 Note:
 
 1.  The estimates of future salary increases considered in actuarial
 valuation, take account of inflation, seniority, promotion and other
 relevant factors, such as supply and demand in employee market.
 
 2.  Impact of employee benefits on the provision of wage revision has
 not been considered in the actuarial valuation.
 
 3.  The financial assumptions considered for the calculations are as
 under:
 
 Discount Rate: The discount rate has been chosen by reference to market
 yield on government bonds as on the date of valuation.  (Balance sheet
 dated 31.03.2009)
 
 Expected Rate of Return: The expected rate of return is taken on the
 basis of yield on government bonds.
 
 Salary Increase : On the basis of past data provided by the bank.
 
 4.  Segment reporting (Accounting Standard 17).
 
 For the purpose of segment reporting in terms of AS 17 of ICAI and as
 prescribed in RBI guidelines, the business of the Bank has been
 classified into 4 segments i.e.(a) Treasury operations (b) Corporate /
 Wholesale Banking (c) Retail Banking and (d) Other Banking Operations.
 Since the Bank does not have any overseas branch, reporting under
 geographic segment does not arise. Segment assets have been identified
 and segment liabilities have been allocated on the basis of segment
 assets.
 
 5.  Impairment of Assets (Accounting Standard 28)
 
 Fixed Assets possessed by the bank are treated as Corporate Assets
 and are not Cash Generating Units as defined by AS - 28 issued by the
 Institute of Chartered Accountants of India (ICAI). In the opinion of
 the management, there is no impairment of the fixed assets of the Bank.
 
 b) Contingent Liabilities
 
 Liabilities at SI. No. (I) to (V) of schedule 12 are dependent upon,
 the outcome of Court / arbitration / out of court settlement, disposal
 of appeals, the amount being called up, terms of contractual
 obligations, devolvement and raising of demand by concerned parties,
 respectively. Reimbursement is expected except in item no (I).
 
 c) Contingent Assets:- Nil
 
 6.  ADDITIONAL DISCLOSURE:
 
 In terms of RBI guidelines, the following additional disclosures have
 been made:
 
  Capital Adeauacy Ratio(%)     31.03.2009         31.03.2008
 	
   - Basel- 1                    13.54%             12.17%
   - Basel -II	                13.48%	              NA
 
 ii) Capital Adequacy Ratio - Tier - I Capital (%)
 	
   - Basel - 1	                10.65%	           10.36%
   - Basel - II	                10.60%                NA
 
 ii) Capital Adequacy Ratio - Tier - II Capital (%)
 	
   - Basel - 1	                 2.89%	            1.81%
   - Basel - II	                 2.88%	              NA
 
 iii) Amount of subordinated debt raised as Tier II capital (Rs in crore)
 			       350.00	          150.00
 
 							   (Rs in crore)
 b) Investments               Items	    31.03.2009	     31.03.2008
 
 Value of Investments
  i)Gross Value of Investments
  (a)In India                                9009.32              Nil
  (b)Outside India			    6008.02              Nil
 
 ii) Provisions for Depreciation
  (a)    In India                              47.83              Nil
  (b)   Outside India	                      44.31              Nil
 
 iii) Net Value of Investments
  (a)    In India                            8961.49              Nil
  (b)   Outside India                        5963.71              Nil
 	
 	
 
 
 Movement of provisions held towards depreciation on investments (i)
 Opening balance (ii) Add: Provisions made during the year (iii) Less :
 Write-off/write-back of excess provisions during the year (iv) Closing
 balance 44.31 33.35 29.83 47.83 70.78 0.00 26.47 44.31
 
 Note: (i) Interest rate swap (fix v/s. fix) was undertaken for the
 purpose of clients hedging requirements, the underlying for the
 transaction being FCCB and ECB exposures of the client.
 
 (ii) The entire interest rate swap covered on back-to-back basis with
 counter party bank and there is no open position.  However the
 contingent liability is recognised.
 
 g) Disclosure on Risk Exposures in Derivatives (i) Qualitative
 Disclosure:
 
 Operations in the Treasury are segregated into three functional areas,
 i.e. Front office, Mid office and Back office, equipped with necessary
 infrastructure and trained officers, whose responsibilities are well
 defined.
 
 The Integrated Treasury policy of the Bank clearly lays down the types
 of financial derivative instruments, scope of usages, approval process
 as also the limits like the open position limits, deal size limits and
 stop loss limits for trading in approved instruments.
 
 The Mid Office is handled by Risk Management Department. Daily report
 is submitted to Risk Management department, who, in turn appraises the
 risks profile to the senior management on the assets and liability
 management.
 
 The Bank ensures that the transactions with the corporate clients are
 undertaken only after the inherent credit exposures are quantified and
 approved in terms of the approval process laid down in the Derivative
 Policy for customer appropriateness and suitability and necessary
 documents like ISDA agreements etc. are duly executed. The Bank has
 adopted Current Exposure Method for monitoring the credit exposures.
 
 The Bank also uses financial derivative transactions for hedging its on
 or off Balance Sheet exposures. The Integrated Treasury Policy of the
 Bank spells out the approval process for hedging the exposures. The
 hedge transactions are monitored on a regular basis and the notional
 profits or losses are calculated on MTM basis.  PV01 and VaR on these
 deals are reported to the ALCO every month.
 
 The hedged/non hedged transactions are recorded separately. The hedged
 transactions are accounted for on accrual basis.
 
 In case of Option contracts, guidelines issued by FEDAI from time to
 time for recognition of income, premium and discount are being
 followed.
 
 While sanctioning the limits, the competent authority may stipulate
 condition of obtaining collaterals/margin as deemed appropriate. The
 derivative limits are reviewed periodically along with other credit
 limits.
 
 The customer related derivative transactions for notional value (at
 market rate) of Rs. 279.73 crore are covered with counter party banks,
 on back- to- back basis for identical amount and tenure and the Bank
 does not have any market risk.
 
 x) Employee Stock Option (ESOP)
 
 The shareholders of the Bank had approved the Employees Stock Options
 Scheme (ESOS) at the Annual General Meeting held on 15.7.2006 for grant
 to eligible employees upto 15,00,000 stock options in aggregate.
 During the year under report, a total of 517400 stock options have been
 granted under the Scheme to the eligible employees. These stock options
 would vest in a graded manner i. e 40% after end of the first year, 30%
 in the second year and the remaining 30% before the end of third year
 from the date of grant. The vested options are exercisable within a
 period of 5 years from the respective dates of vesting at an exercise
 price of Rs 50 per option. Accordingly the Bank has transferred a sum
 of Rs 6.45 crore being the proportionate compensation expenses.
 
 z) Government of India has notified Agricultural Debt Waiver and Debt
 Relief Scheme 2008 for giving debt waiver to marginal and small
 farmers and relief to other farmers who have availed direct
 agricultural loans.  The claim for agricultural debt waiver amounting
 to Rs 23.13 crore lodged by the Bank subject to certification by
 statutory auditors of the Bank, Rs 9.48 crore being 41 % of the amount
 claimed has been reimbursed by the RBI during the year ending 31st
 March 2009.
 
 7 (a) Tax demands under appeal: -
 
 A sum of Rs 101.76 crore (Previous year Rs. 96.14 crore) is outstanding
 on account of demands raised by the Income Tax Department in earlier
 years which have been paid under protest.  No provision is considered
 necessary in respect of these demands, as the Bank has been advised
 that there are good chances of success in appeals/ considering
 favourable appellate orders on identical issues for earlier
 assessments.
 
 (b) Provision for income tax for the year has been made after due
 consideration of decisions of appellate authorities and advice of
 counsels.
 
 8.  Premises include buildings in possession and occupation of the
 Bank pending execution of title deeds and/or Co-operative Societies yet
 to be formed amounting to Rs.0.22 crore (Previous year Rs.0.22 crore)
 
 9.  Draw down from Reserves
 
 The Bank has not made any draw down during the year from the Reserves.