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Karur Vysya Bank

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Directors Report Year End : Mar '17    Mar 16

To the Members

The Directors are pleased to present the 98th Annual Report of business and operations of your Bank together with audited financial statement of accounts for the year ended 31st March, 2017.

Key Performance indicators

This year has been a mix of opportunities and challenges for the Indian Banking sector. Despite the challenges, your Bank continues to perform well by leveraging upon its branch network, clientele and innovative electronic channel. The details of the Key Performance Indicators for the financial year 2016-17 are detailed as under:

Particulars

31.03.2017 (Rs. in cr)

31.03.2016 (Rs. in Cr)

Deposits

53,699.81

50,078.90

Advances

41,434.98

39,475.70

Investments

14,955.48

14,602.40

Total Income

6,404.57

6,150.21

Total Expenditure

4,833.60

4,847.15

Operating Profit

1,570.97

1,303.06

Net Profit

605.98

567.63

Total Business

During the year under report the total business of your Bank reached a level of Rs.95,135 Cr from a level of Rs.89,555 Cr for FY 16, posted a growth of 6.23% y-o-y.

Deposits

Bank improved its business with gross deposits growing by 7.23% to Rs.53,699.81 Cr for FY 17 against Rs.50,078.90 Cr in the previous fiscal.

Savings Bank deposits of the Bank increased by 30.35% to Rs.9,968.28 Cr from Rs.7,647.32 Cr of the previous fiscal and demand deposits grew by 22.18% from Rs.4,027.20 Cr to Rs.4,920.50 Cr. CASA deposits increased from Rs.11,675 Cr as at FY 16 to Rs.14,888 Cr as at FY 17 and recorded a growth rate of 27.52% as against the 18.62% growth in the previous fiscal. Term deposits grew by 1.06% to Rs.38,811 Cr from Rs.38,404 Cr in the FY 16.

Advances

Aggregate advances grew by 4.96% to Rs.41,434.98 Cr from Rs.39,475.70 Cr over the pervious fiscal. Average achivement in Priority Sector advances were at Rs.17,010 Cr at the end of FY 17 representing 44.21% of Bank’s Adjusted Net Bank Credit (ANBC) as against the statutory requirement of 40% of ANBC.

Your Bank’s average agriculture advances as at the end of the FY 17 were at Rs.7,458 Cr, representing 19.40% of the ANBC, as against the regulatory prescription of 18%. Bank’s average advances to micro enterprises and weaker sections were at 6.43% and 11.13% respectively. The Bank continues to comply with the regulatory guidelines under priority sector, agricultural lending and weaker section advances.

Asset Quality

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. The Bank took several initiatives to contain slippages and speed up recovery from overdue loan accounts. These include identification of stressed accounts for restructuring/rephasing in time, conduct of Adalats at Divisional Office levels, regular follow-up of over dues through call centre and e-auctions.

However, in view of the continued slowdown in the economy and delinquencies in the corporate segment, the Bank’s Net Non-Performing Assets (Net NPA) stood at 2.53% in FY 17 as against 0.55% in the pervious fiscal. The Bank’s Provision Coverage Ratio (PCR) stood at 57.83%.

Investments

The investment portfolio of the Bank registered a growth of 3.12% to touch Rs.14,955.48 Cr from Rs.14,602.40 Cr in the previous fiscal. The investment portfolio composition is consistent with the corporate requirement, risk perception and investment policy of the Bank.

Income earned on investments during FY 17 was Rs.1,106.04 Cr as against Rs.1,095.78 Cr in the previous fiscal registering a growth of 0.94%. Low growth is on account of overall fall in yields in the market and due to sale of securities from HTM category during the year. Profit on sale of investments was Rs.204.64 Cr as in FY 17 as against Rs.94.41 Cr in the previous fiscal, showing a quantum growth of 116.76%.

Liquidity position was comfortable throughout the FY 17.

Income

The interest income for FY 17 constitutes 87.79% of the total income whereas the same was 88.51% for the pervious fiscal. The gross interest income component grew by 3.29% y-o-y from Rs.5,443.43 Cr in FY 16 to Rs.5622.35 Cr in FY 17. However the Net Interest Income grew by 16.41% y-o-y from Rs.1,781.37 Cr to Rs.2,073.70 Cr. Non-interest income increased to Rs.782.22 Cr from Rs.706.81 Cr, a growth of 10.67%.

Expenditure

The interest expenditure fell from Rs.3,662.03 Cr in FY 16 to Rs.3,548.65 Cr in FY 17 showing a decline of 3.10% (Rs.113.38 Cr). Operating expenses increased from Rs.1,185.12 Cr in FY 16 to Rs.1,284.95 Cr in FY 17 with an increase of 8.42% (Rs.99.83 Cr).

Cost of deposits fell from 7.40% in FY 16 to 6.60% in FY 17.

The reduction in interest expenditure helped Net Interest Margin increase from 3.43% in FY 16 to 3.70% in FY 17.

During the FY 17 the spread on funds increased from 2.71% to 3.09%.

Profit

Your Bank displayed a healthy growth in business and earnings with a operating profit of Rs.1,570.97 Cr for the FY 17, registering a growth of 20.56% over the operating profit of Rs.1,303.06 Cr in the pervious fiscal. The net profit of the Bank registered a growth of 6.76% (grew by Rs.38.35 Cr) and stood at Rs.605.98 Cr as against Rs.567.63 Cr in the previous fiscal.

Appropriations

The net profit of Rs.605.98 Cr which along with a sum of Rs.2.20 Cr brought forward from the previous year aggregating Rs.608.18 Cr is appropriated as under:

Appropriation - Transfer to

Amount (Rs. in Cr)

- Statutory Reserve

152.00

- Capital Reserve

73.87

- General Reserve

164.00

- Special Reserve

25.00

Balance carried to Balance Sheet*

193.31

*Including Proposed Dividend and dividend distribution tax amount of Rs.190.67 Cr.

Sub-division of equity shares

The Board of Directors at its meeting held on 19th September, 2016 considered and approved the sub-division of one equity share of the Bank having face value of Rs.10/- each into five equity shares of face value of Rs.2/- each and consequential alteration in the relevant clauses of Memorandum and Articles of Association of the Bank and the same was approved by the Members of the Bank through postal ballot on October 27, 2016. Board of Directors of the Bank fixed November 18, 2016 as Record Date for the purpose of sub-division of face value of equity shares of the Bank. Accordingly equity shares of face value of Rs.2/- each were issued to all the members who were holding equity shares of Rs.10/- each on November 18, 2016.

Share capital

Pursuant to sub-division, the Authorised Capital of the Bank was Rs.200.00 Cr comprising of 100 Cr Equity Shares of face value of Rs.2/- each and the Paid-up Capital of the Bank was Rs.121.86 Cr comprising of 60,93,22,270 Equity Shares of face value of Rs.2/- each fully paid up.

The net owned funds of the Bank increased from Rs.4,572.95 Cr to Rs.4,845.02 Cr, a rise of Rs.272.07 Cr registering a growth rate of 5.95%.

The market capitalization of your Bank’s shares at the end of FY 17 was Rs.6,824.41 Cr.

Debt instruments

The Bank had issued Unsecured Redeemable Non-convertible Subordinated (Lower Tier II) Bonds to the value of Rs.150.00 Cr in September 2009. During the year under report, Bank did not raise any TIER II capital.

Capital Adequacy

Capital Adequacy ratio stood at 12.54% as per BASEL III norms. The Bank’s Capital Adequacy Ratio is well above the statutory limit of 9% (10.25% including capital conservation buffer) prescribed by the Reserve Bank of India.

Credit Rating

ICRA Limited had rated the Unsecured Redeemable Non-convertible Subordinated (Lower Tier II) debt instruments issued in the year 2009 by re-affirming its A rating. Investment with such rating are considered to have adequate degree of safety regarding timely servicing of financial obligations.

CRISIL has re-affirmed A1 rating (pronounced CRISIL A one plus) for Rs.30 bn Certificate of Deposits Programme of your Bank. ICRA Limited has confirmed ICRA A1 (Pronounced ICRA A one plus) rating to the Bank’s Certificate of Deposits Programme for Rs.30 bn. Both the ratings indicate a very strong degree of safety regarding timely payment of financial obligations.

Dividend

The Board recommended dividend of Rs.2.60 per Equity Share of face value of Rs.2/- each i.e., 130% for the FY 17, thus maintaining 100% or more dividend for the fourteenth year in succession. The total dividend payment works out to Rs.158.42 Cr excluding dividend tax and payout ratio works out to 26.14% excluding dividend tax. The dividend is subject to the approval of the shareholders at the Annual General Meeting. Bank had formulated Dividend Distribution Policy as per the Regulation 43A of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, (‘Listing Regulations’) and the same is available in your Bank’s website.

Earnings per share / Book Value

The earnings per share (Basic) and the book value per share of Rs.2/- each fully paid as on 31.03.2017 were at Rs.9.95 and Rs.79.51 respectively.

Foreign Exchange Transactions

The merchant turnover of the Bank grew by 9.08% to reach Rs.22,516 Cr in FY 17 as against Rs.20,642 Cr in FY 16.

Export credit stood at Rs.1,581 Cr in FY 17 as against Rs.1,286 Cr in FY 16, a growth of 22.94% over the previous fiscal.

Your Bank earned a total income of Rs.95.97 Cr in FY 17 on forex transactions against Rs.111.17 Cr in FY 16. Of the total income earned to the tune of Rs.95.97 Cr, exchange profit accounted for Rs.38.38 Cr and Commission and others accounted for Rs.57.59 Cr.

System for internal Financial Control and its Adequacy

The Bank is operating in a fully computerized environment with Core Banking System supported by diverse application platforms for handling special business such as treasury, trade finance, retail loans etc. The process of recording of transactions in each application platforms is subject to various forms of control such as in-built system checks, maker checker authorisations and independent post transactions reviews etc. The financial statements are prepared based on computer system outputs. Responsibility of preparations of financial statements is entrusted to a dedicated unit which is independent of business. The Bank has implemented adequate procedures and internal controls which provide reasonable assurance regarding reliability of financial reporting and preparation of financial statements and were operating effectively during the year.

Subsidiaries and Associates

Your Bank does not have any Subsidiaries or Associates to report.

Board Meetings

During the year, twenty four meetings of the Board were held, the details of which are given in the Corporate Governance Report which is forming part of this report.

Board Evaluation

Pursuant to the provisions of the Companies Act, 2013 and the Listing Regulations, the Board has carried out annual evaluation

The manner of evaluation conducted by the Bank has been reported in the Corporate Governance Report.

Disclosure to be made under Sub-Section 8 of Section 178 of the companies Act, 2013.

The Board of the Bank had constituted the Audit Committee under the extant guidelines of Reserve Bank of India (RBI), provisions of the Companies Act, 2013 and Listing Regulations and the details of the composition of the Audit Committee is furnished in the Corporate Governance Report.

Network of branches

Your Bank has 711 branches and 1747 ATMs as on 31.03.2017. The Bank had added 44 branches and 115 ATMs during the year to improve its footprint throughout the country including un-banked centres in tune with RBI guidelines.

Technology Initiatives

Your Bank continued to actively leverage its proven IT initiatives to offer a wide array of advanced financial services and products embedded with the latest technology and security features, to cater to the needs of its customers and target group and further their banking convenience.

Your Bank introduced a number of significant IT driven initiatives during the FY 17 covering various facets of banking system. They are as under:

- BNA Recyclers

All the Cash Deposit Machines are migrated as Recyclers with the machines functioning as ATMs also as cash withdrawal can be made in the same machine and the cash deposited by the customers can be recycled for withdrawals. Our Bank has 444 cash recyclers.

- Tablet Based Account Opening

We have implemented on-line opening of Savings and Current accounts for individuals using tablet systems based on Aadhaar details to enable immediate enrolling of customers at their doorstep.

- Multifunction KIOSK

We have launched self-service KIOSKs through which customer himself can deposit outward cheques through the KIOSK. The customer cheques so deposited are immediately scanned and available for participating in the clearing in the immediate next settlement cycle thereby reducing the collection time drastically.

Customers can use this Automatic Passbook Printing KIOSKs for getting their passbooks printed automatically and immediately. The customer on inserting their Passbook into the printer, the printer will automatically print the passbook by turning pages without any hassles to the customers. Thus passbook printing can be done at any time of the day.

The pass book KIOSKs are deployed in 156 branches of your Bank and the Bank proposed to roll out the same in more branches in FY 18.

- Digitization of Loan Proposals

We have implemented Digitization of Loan Proposals in order to enable a quick transition of loan documents for processing at loan processing cells and in an electronic form. This helps to reduce the turnaround time to process credit proposals. There will be minimal physical movement of checklist documents from the branches to Central Loan Processing Centre (CLPC)/ Divisional Office (DO)/Central Office (CO).

- Unified Payment Interface (UPI)

We have introduced a mobile application, Unified Payment Interface (UPI), a new initiative by National Payments Corporation of India (NPCI) in the payment system which aims to simplify by enabling both sender and receiver to initiate a payment in a secured manner via Mobile application.

- Bharat Interface for Money (BHIM) is another mobile application provided by M/s NPCI that lets the users to make simple, easy and quick payment transactions using Unified Payments Interface (UPI). Users can easily make direct bank to bank payments instantly and collect money using just Mobile number or Payment address.

- Bharat Bill Payment System (BBPS) is an integrated bill payment system in the country that offers interoperable and accessible bill payment / utility bill payments such as electricity, water, gas, DTH, telecom etc. Other types of payments such as School / University fees, Municipal taxes/ Statutory payments and other bills, mutual funds and insurance premium, various Government taxes will be included as and when Reserve Bank of India approves the same. We are one of the pilot Banks identified by NPCI for this initiative.

- National Electronic Toll Collection (NETC) - FASTAG

Electronic Toll Collection is a secure and interoperable solution for NHAI toll collection. NETC system will reduce wait time at toll counters, reduce fuel consumption and cash handling considerably. NETC system will use RFID tag which is pasted on the windshield of vehicle. The RFID Tag on the vehicle is read by the long range RFID reader hoisted on the NETC lanes which will allow vehicle without manual intervention. FASTAG (stickable) with different color variant for different types of vehicles (as prescribed by NPCI) will be issued to the customers. We are one of the five Banks identified by NHAI & NPCI for this initiative and the only Bank in the South.

Financial inclusion

In our efforts to provide the expanded services to the existing and new customers in the rural as well as in urban India, we have successfully implemented Financial Inclusion Scheme. Under the PMJDY scheme the Bank was required to cover 409 Wards in semi urban and urban areas in addition to 117 villages and 2 urban locations allotted in Tamil Nadu State under Urban Financial Inclusion.

Your Bank has covered all the 409 Wards, 117 villages and 2 urban locations through Business Correspondents spread over Tamil Nadu, Andhra Pradesh, Telangana and Karnataka States. The Bank has 39 Ultra Small Branches as at 31.03.2017. Financial literacy has been identified as a pre-requisite for effective financial inclusion and an integral part of Pradhan Mantri Jan-Dhan Yojana in order to let the beneficiaries make best use of the financial services being made available to them. Your Bank has conducted 72 financial literacy camps in rural/ unbanked rural branches.

Your Bank introduced a separate Savings Bank Product for PMJDY, through which the Bank opened 28,599 accounts with an outstanding balance of Rs.3.05 Cr as at 31.03.2017. In FY 17, your Bank enrolled 87,484 customers under Pradhan Mantri Suraksha Bima Yojana, 1,36,865 customers under Pradhan Mantri Jeevan Jyoti Bima Yojana and 509 customers in Atal Pension Yojana.

Performance under Sovereign Gold Bond Scheme, 2015

Your Bank could mobilise total subscription denominated in units of gold of 65,350 grams amounting to Rs.19.72 Cr in four tranches. Management discussion and Analysis

The Management Discussion and Analysis Report for the year under review as stipulated under Regulation 34(2)(e) of the Listing Regulations is presented in a separate section forming part of this Annual Report.

Risk Management

The Bank has Risk Management Department, independent of business functions, covering Credit Risk, Market Risk, Operational Risk and Assets-Liabilities Management (ALM) functions. Risk Management functions in the Bank has been

The Bank has comprehensively articulated various risk policies which specify the risk appetite / strategies, risk measurement methodologies, monitoring and control measures for the respective business segments. The policies have been framed keeping risk appetite as the central objective and business strategies have been aligned to risk policies.

The Bank has implemented “Internal Capital Adequacy Assessment Process” (ICAAP) in line with the Basel III requirements. The Bank has set up a Board-level Committee, viz., “Risk Management & Asset Liability Management Committee” to examine risk policies and procedures developed by the Bank and to monitor adherence to various risk parameters and prudential limits by different operating Departments.

Vigil Mechanism/Whistle Blower Policy

The Bank has in place the “Whistle Blower Policy” since 2011. The said Policy is in compliance with RBI Guidelines, provisions of the Companies Act, 2013 and the Listing Regulations. The Vigil Mechanism at the Bank requires submission of Quarterly Reviews before the Audit Committee of the Board.

The Policy also incorporates suggestions of the Protected Disclosure Scheme for Private Sector Banks, instituted by the Reserve Bank of India. In compliance with RBI guidelines on “Staff Empowerment”, the Board of Directors has reviewed the Whistle Blower Policy of the Bank during the FY 17.

Related Party transactions

All transactions entered with ‘Related Parties’ during the year under review were on “arm’s length basis” and in the ‘ordinary course of business’ and therefore do not attract the provisions of Section 188 of the Companies Act, 2013. Accordingly AOC-2 is not applicable to the Bank.

Employee Stock option Scheme

During the year under report, your Bank has not granted any stock options under Employee Stock Option Scheme (ESOS).

Compensation Policy

The Bank has in place a Compensation Policy for its Whole Time Directors, Chairman and President & COO, in terms of the Section 178 of the Companies Act, 2013, the rules made thereunder and Listing Regulations.

Particulars of Loans, Guarantees and Investments

The provisions relating to Section 134(3)(g) of the Companies Act, 2013 on particulars of loans, guarantees and investments are not applicable to Banking Company and as such no disclosures are being made in this regard.

Auditors

Statutory Auditors

The Members of the Bank at the 97th Annual General Meeting of the Bank held on 21st July, 2016, have approved the appointment of M/s Abarna & Ananthan, Chartered Accountants, Bengaluru as Statutory Auditors of the Bank for a period of two years, subject to the approval of the Reserve Bank of India, to hold office from the conclusion of the 97th AGM till the conclusion of the 99th AGM of the Bank to be held in 2018, subject to ratification of the appointment by the Members at the 98thAnnual General Meeting. Accordingly the appointment of M/s Abarna & Ananthan, Chartered Accountants, Bengaluru as Statutory Auditors of the Bank is required to be ratified by the Members at the 98th Annual General Meeting of the Bank, subject to the approval of Reserve Bank of India. The Bank has received the consent from the Auditors and confirmation to the effect that they are not disqualified to be appointed as the Auditors of the Bank in terms of the provisions of the Companies Act, 2013 and rules made thereunder. Accordingly, the Board of Directors has recommended the ratification of appointment of M/s Abarna & Ananthan, Chartered Accountants, Bengaluru as Statutory Auditors of the Bank, to hold office from the conclusion of the ensuing Annual General Meeting till the conclusion of the 99th Annual General Meeting of the Bank on remuneration to be decided by the Board thereof, to the members for approval. There are no qualifications, reservations or adverse remarks made by the Statutory Auditors in their report for the FY 17.

During FY 17, no frauds were reported by Auditors under Sub-section (12) of Section 143 of the Companies Act, 2013.

Secretarial Audit

Pursuant to the provisions of Sec 204 of the Companies Act, 2013 and the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014, the Bank, with the approval of its Board appointed “Solaiyappan & Associates” Company Secretaries, Salem to conduct the Secretarial Audit of the Bank for the FY 17. The Secretarial Audit Report is annexed herewith as Annexure 1.

There are no qualifications, reservations or adverse remarks made by the Secretarial Auditors in their report for the FY 17.

Statutory Disclosures

The Disclosures to be made under sub-section (3)(m) of Sec 134 of the Companies Act, 2013 read with Rule (8)(3) of the Companies (Accounts) Rules, 2014 by your Bank are explained as under:

Conservation of Energy, Technology Absorption, Foreign Exchange Earnings and Outgo Conservation of Energy

Considering the nature of its activities as an entity in the Financial Services sector, the Bank has voluntarily taken steps towards conservation of energy and technology absorption thus ensuring compliance of the provisions of Section 134 of the Companies Act, 2013. However the Bank has adopted the following in the areas of conservation of energy, technology absorption:

Your Bank has undertaken various energy efficiency improvement initiatives for energy conservation across all its premises. Your Bank owns 850 KW Wind Turbine Generator at Govindanagaram, Theni District, Tamil Nadu. Installed in the year 2011, the Bank is utilizing the power generated by Wind Turbine Generator for its Registered & Central Office at Karur and also its Divisional Office, Chennai premises. 18,21,049 units were generated during the fiscal under report by wind mill.

Technology Absorption

Technology is a key enabler and core facilitator to the goals of your Bank and is identified as one of the strategic pillars of the Bank. Your Bank has been at the forefront of leveraging technology to provide better products and services to its customers, ever since technology entered into the banking industry in the country. Your Bank has a state-of-the-art technology. All Departments within the Bank use IT to deliver superior products and services to the customers.

Your Bank was qualified by National Payment Corporation of India and National Highways Authority of India for the National Electronic Toll Collection (NETC) project as one of the Pilot Banks. Very few Banks in India were qualified for this digital initiative of National Highways wherein your Bank can issue and acquire RFID based tags which can be used by vehicles to pay the toll fee digitally across the country.

Similarly, your Bank was qualified by National Payment Corporation of India for the Bharat QR (Quick Response) Code project as one of few Pilot Banks wherein dynamic and fixed payments can be effected through Mobile phones without using any debit/credit card. The payment can also be initiated through UPI (Unified Payment Interface) launched by Government of India.

Your Bank has also been qualified by the National Payment Corporation of India for the Bharat Bill Payment System (BBPS) as one of the pilot banks where all utility bills across the Banks and merchants can be paid through us under one umbrella.

With a view to support new and innovative methods for ensuring customer delight, your Bank has been upgrading various systems which are already in place as also implemented new systems and platforms. Your Bank has augmented direct channels infrastructure and further embarked on upgrading its core banking system. To ensure highly resilient IT infrastructure and its optimum utilization, the Bank has implemented virtualization in its data centres which has reduced its carbon footprint. Foreign Exchange Earnings and outgo Foreign exchange earnings and Outgo form part of the normal banking operations. The Bank supports and encourages the country’s export efforts through its export financing operations. The details of foreign exchange earnings and outgo are mentioned elsewhere in the report.

Material events that have happened after the Balance Sheet date

No material changes and commitments affecting the financial position of the Bank have occurred between the end of the Financial Year to which the Financial Statements relate and the date of report.

There are no significant and material orders that were passed by the Regulators or Courts or Tribunals against the Bank impacting its going concern status or the Bank’s operations in future. Extracts of Annual Return

Pursuant to sub-section 3(a) Sec 134 and sub-section 3 of Sec 92 of the Companies Act, 2013, read with Rule 12 of the Companies (Management and Administration) Rules, 2014 the extract of the Annual Return as at March 31, 2017 in Form MGT-9 forms part of this report as Annexure 2.

Particulars of Employees

The ratio of remuneration of each Director to the median employee’s remuneration and other details and the statement containing particulars of employees in terms of sub-section 12 of Sec 197 of the Companies Act, 2013 read with Rules 5(1) and (2) of the Companies (Appointment & Remuneration of Managerial Personnel) Amendment Rules, 2016 forms part of this report as Annexure 3.

No employee of the Bank was in receipt of the remuneration as specified in Rule 5(2) of the Companies (Appointment & Remuneration of Managerial Personnel) Amendment Rules, 2016 under section 197(12) of the Companies Act, 2013 and further in terms of the said rules no employee of the Bank holds

Corporate Social responsibility (CSR)

The Bank has constituted the Corporate Social Responsibility (CSR) Committee of the Board, in accordance with the provisions of Section 135 of the Companies Act, 2013, read with Companies (Corporate Social Responsibility policy) Rules, 2014 as amended. The Bank has in place a CSR policy which was reviewed by the Board annually. CSR expenditure and details of the amounts spent by the Bank on CSR activities during the year has been enclosed to this report as Annexure 4.

Business responsibility report (BRR)

The Securities & Exchange Board of India (SEBI), vide their Circular dated November 4, 2015, have published revised format of the Business Responsibility Report and have mandated the top 500 listed entities, based on market capitalization in Stock Exchanges, to include the ‘Business Responsibility Report’ (BRR) as part of the Annual Report, describing the initiatives taken by the listed entity from an environmental, social and governance perspective, in the format as specified by SEBI.

In view of the above and in compliance with Regulation 34(2)(f) of the Listing Regulations, the Business Responsibility Report (BRR) of the Bank forms part of this Report as Annexure 5.

Criteria for determining qualifications, positive attributes for Appointment/re-appointment of directors

Pursuant to Section 178(3) of the Companies Act, 2013, the Nomination and Remuneration Committee (NRC) formulated the criteria for determining qualifications, positive attributes and independence of a director to adhere the various provisions and guidelines as detailed below:

- Fit and Proper criteria as per Dr Ganguly Committee Norms which stipulates age, educational qualification, experience, track record, integrity etc., and various circular instructions and guidelines issued by Reserve Bank of India from time to time.

- Norms laid down by the Banking Regulation Act, 1949 as amended from time to time which stipulates substantial interest, sectoral representation as per Section 10A(2)(a), restrictions as per Section 16 and 20 of the Banking Regulation Act, 1949 etc.,

- Disqualification / Conflict of Interest of Directors and other norms as per the provisions of Companies Act, 2013 and rules made thereunder from time to time.

- Criteria of Independence of a Director as per the provisions of Companies Act, 2013 and rules made thereunder and other applicable provisions as amended from time to time.

- Applicable regulations of Listing Regulations as amended from time to time.

- Articles of Association of the Bank.

- Any other factors as the NRC may deem fit and in the best interest of the Bank and its stakeholders.

The terms and conditions of appointment of Independent Director is disclosed on the website of the Bank at the link http://www.kvb. co.in/pdf/ID_Terms_and_Conditions.pdf.

Board of directors

In terms of Sec 152 of the Companies Act, 2013, Non-Executive Non-Independent Directors Shri G Rajasekaran (DIN: 00035582) and Shri A K Praburaj (DIN: 07004825), retire by rotation and being eligible offer themselves for re-election at the ensuing Annual General Meeting (AGM).

In terms of the provisions of Sec 149(10) and Sec 152 read with Companies (Appointment and Qualification of Directors) Rules, 2014, the Non-Executive Independent Directors Shri N S Srinath (DIN: 01493217) and Dr V G Mohan Prasad (DIN: 00002802) shall be eligible for re-appointment and seeking re-appointment for a second term.

Shri N S Srinath, an Independent Director of the Bank, was co-opted as an Additional Director on 29.06.2012. He was appointed as a Director in the AGM held on 30.07.2012. Pursuant to Sections 149 and 152 of the Companies Act, 2013 read with the Companies (Appointment and Qualification of Directors) Rules, 2014, Shri N S Srinath was appointed as an Independent Director of the Bank, upto a period of 3 years in the AGM held on 23.07.2014. The three years term of his appointment ends on 22.07.2017.

Dr V G Mohan Prasad, an Independent Director of the Bank, was co-opted as an Additional Director on 15.06.2014. Pursuant to Sections 149, 152 and 161 of the Companies Act, 2013 read with the Companies (Appointment and Qualification of Directors) Rules, 2014, Dr V G Mohan Prasad was appointed as an Independent Director of the Bank upto a period of 3 years in the AGM held on 23.07.2014. The three years term of his appointment ends on 22.07.2017.

In terms of Section 149(10) of the Companies Act, 2013, an Independent Director shall hold office for a term upto five consecutive years on the Board of a company but shall be eligible for re-appointment for a further period upto five years on passing of a special resolution by the company. Further, in terms of Section 10A(2A) of the Banking Regulation Act, 1949, no director of a banking company, other than its Chairman or whole-time Director, by whatever name called, shall hold office continuously for a period exceeding eight years.

Shri N S Srinath is completing his five years period on 28.06.2017 and in compliance of Section 10A(2A) of the Banking Regulation Act, 1949 he may be re-appointed for a second term upto the completion of his continuous period of eight years.

Dr V G Mohan Prasad is completing three years period on 14.06.2017 and in compliance of Section 10A(2A) of the Banking Regulation Act, 1949 he may be re-appointed for a second term upto the completion of his continuous period of eight years.

In the opinion of the Board of Directors they fulfil the conditions specified in the Companies Act, 2013 and the Rules made thereunder and meet the criteria of independence as provided under Section 149(6) of the Companies Act, 2013. Further their appointment is in compliance with the provisions of Sec 10A of the Banking Regulation Act, 1949, in particular, on account of Shri N S Srinath and Dr V G Mohan Prasad have the requisite experience/ expertise required under Section 10A(2) of the Banking Regulation Act, 1949. The said Independent Directors are not liable to retire by rotation.

The tenure of Shri K Venkataraman (DIN: 02443410), MD & CEO of the Bank concluded at the close of the office hours on 31st May 2017 as per the terms of his re-appointment. Bank had already taken initiatives to select suitable successor for being appointed as MD & CEO of the Bank which is at final stage. In view of the importance of ensuing statutory compliances of the Bank for the year ending March 2017, Board in the meeting held on 21.03.2017 resolved to extend the tenure of Shri K Venkataraman, MD & CEO of the Bank for a period of three months effective from 1st June 2017 to 31st August 2017, subject to the approval of Reserve Bank of India.

The Bank made an application to Reserve Bank of India for approval for extension of term of Shri K Venkataraman, MD & CEO of the Bank under the existing terms & conditions. Reserve Bank of India vide their letter DBR.Appt.No.11915/08.41.001/2016 - 17 dated April 7, 2017 accorded their approval for extension of tenure of Shri K Venkataraman to continue as MD & CEO of the Bank for a period of three months from 1st June 2017 to 31st August 2017, under the existing terms & conditions.

Shri K K Balu, Independent Director of the Bank demitted office consequent to the completion of his two years tenure ended on 22.07.2016.

Board places on record its appreciation for the valuable services rendered by Shri K K Balu during his tenure.

Apart from the above, there were no changes in the directors holding office.

Declaration by independent directors

The Bank has received necessary declaration from each Independent Director under Sec 149(7) of the Companies Act, 2013 and the Listing Regulations that they meet the criteria of independence laid down in the Companies Act, 2013 and Listing Regulations.

Confirmation as to Compliance of applicable laws

It is hereby confirmed that the Bank has proper systems in place to ensure compliance of all laws applicable to the Bank. Corporate Governance

A separate section on Corporate Governance standards followed by your Bank and the relevant disclosures as stipulated under Listing Regulations and Companies Act, 2013 and the rules made thereunder forms part of this report.

A certificate from Shri CS S Solaiyappan, Practicing Company Secretary, confirming compliance to the conditions of Corporate Governance as stipulated under Listing Regulations is annexed to this report.

Directors’ responsibility Statement

Pursuant to Sec 134(5) of the Companies Act, 2013 with respect to the Directors’ Responsibility Statement, it is hereby confirmed that

(a) In the preparation of the annual accounts, the applicable accounting standards had been followed along with proper explanation relating to material departures;

(b) The Directors had 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 at the end of the financial year and of the profit and loss of the Bank for that period;

(c) The Directors had 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 had prepared the annual accounts on a going concern basis;

(e) The Directors had laid down internal financial controls to be followed by the Bank and that such internal financial controls are adequate and were operating effectively.

(f) The Directors had devised proper systems to ensure compliance with the provisions of all applicable laws and that such systems were adequate and operating effectively.

Awards and Accolades

Your Bank received the following Awards and Accolades during the year 2016-17.

1. Business Today - KPMG Best Small Bank Award for 2015-16.

2. Best Bank in National Level under Private Sector Category for 2015-16 from the State Forum of Bankers’ Club of Kerala.

3. Best Bank Award among the Small Banks for Digital Banking from the Institute for Development and Research in Banking Technology (IDRBT) for the year 2015-16.

4. Best Bank among Small Banks for Managing IT Ecosystems from the Institute for Development and Research in Banking Technology (IDRBT) for the year 2015-16. Your Bank receiving the IDRBT award for the eight year in succession.

5. Dun & Bradstreet award for Best Private Sector Bank for Priority Sector Lending.

6. Best Bank Award for Credit Quality from Financial Express for the year 2013-14.

7. Star Performer Award for new accounts opened under Bank Category from National Securities Depository Limited (NSDL) - Second Place.

8. First Prize for achieving highest disbursal under Solar Irrigation Pumps - Off Grid & Decentralized Solar Applications Programme for FY 16 from Ministry of New & Renewable Energy, Govt. of India.

9. Second Prize under Branch Wise Performance (for Belgaum Branch) for achieving highest disbursal under Solar Irrigation Pumps - Off Grid & Decentralized Solar Applications Programme for FY 16 from Ministry of New & Renewable Energy, Govt. of India.

Acknowledgements

The Board of Directors places on record its sincere thanks to the Government of India, Reserve Bank of India, various State Governments and regulatory authorities in India for their valuable guidance, support and co-operation. The Board also acknowledges with gratitude the co-operation and support received from Stock Exchanges, rating agencies and other banking /financial institutions.

The Board takes this opportunity to place on record its deep sense of gratitude to its loyal shareholders for extending their support during the year and looks forward to their continued association in the years ahead.

The Board thanks the valued customers for their goodwill, patronage and continued support and looks forward to their continued patronage in scaling greater heights.

During the fiscal the Bank has received various recognitions and accolades for its excellence in the Banking domain. The Board is thankful to all such organisations and agencies for formally recognising the Bank’s efforts.

The Board appreciates the sincere and dedicated services displayed by its entire staff and highly values their commitment in improving the Bank’s performance.

For and on behalf of the Board of Directors,

Place: Karur B Swaminathan

Date: 08.06.2017 Chairman

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