Kotak Mahindra Bank

A.  DISCLOSURES AS LAID DOWN BY RBI CIRCULARS :
 
 1.  Capital Adequacy Ratio:
 
 With effect from 31st March, 2009, the Bank is subject to the new
 capital adequacy norms (Basel II) stipulated by the Reserve Bank of
 India (RBI).In order to comply with prudential floor prescribed by
 RBI under the new guidelines (100% of minimum capital requirement
 computed as per Basel I framework as on 31st March, 2009), the Bank has
 computed and reported the capital adequacy position as per Basel I and
 Basel II norms. Since the capital adequacy ratio as per the new capital
 adequacy framework (Basel II) is higher than the Basel I framework, the
 Bank has maintained capital as per Basel I norms.
 
 C.  Disclosures on risk exposures in derivatives:
 
 Qualitative disclosures:
 
 Structure and organization for management of risk in derivatives
 trading, the scope and nature of risk measurement, risk reporting and
 risk monitoring systems and strategies and processes for monitoring the
 continuing effectiveness of hedges/ mitigants
 
 The Bank enters into derivative transactions for trading and hedging
 purposes. The Derivative policy defInes the framework for carrying out
 the derivative business and lays down the policies and processes
 adopted to measure, monitor and report risk arising from derivative
 transactions
 
 The Balance sheet Management Unit of the Bank obtains approvals from
 the Asset Liability Management Committee (ALCO) for hedging on a case
 to case basis depending on the market conditions and balance sheet
 positions. These hedges are monitored for its hedge effectiveness
 periodically
 
 The ALCO is responsible for implementing the derivative policy. To
 effect this, the ALCO
 
 > determines appropriate limits for different derivative products
 within broad policy framework
 
 > reviews the limit breaches and take appropriate actions
 
 The Risk department of the Bank is responsible for measuring, reporting
 and monitoring risk arising from Derivative transactions and functions
 independently of the Treasury. The risk management methods generally
 applied are quantitative like counter party limits, deal sizes,
 overnight, PVBP and stop-loss limits
 
 The Risk Management function undertakes the following activities:-
 
 > monitors daily derivatives operations against the set out policies
 and limits
 
 > reviews daily dealers profitability and activity reports for
 derivative operations
 
 > reports MIS to the ALCO on a periodic basis as well as exception
 reporting
 
 > approves non-vanilla derivative deals for proprietary business
 
 > ensures monitoring the continuing effectiveness of derivative deals
 identified as hedges having regard to the terms of the hedging
 instrument and the underlying hedged risk
 
 The Bank has Customer Appropriateness Policy which is used to
 classify the clients depending on their understanding of the derivative
 products. Further the Bank also has New Product Committee that is
 responsible for approving any new derivative structure and also for
 deciding to which category of clients the product can be offered
 
 II.  Accounting policy for recording hedge and non-hedge transactions,
 recognition of income, premiums and discounts, valuation of outstanding
 contracts
 
 Derivative transactions are segregated into trading or hedge
 transactions. Trading transactions outstanding as at the Balance Sheet
 dates are marked to market and the resulting profits or losses, are
 recorded in the Profit and Loss Account
 
 Derivative transactions designated as Hedges are accounted on an
 accrual basis over the life of the transaction
 
 Option premium paid / received is accounted for in the Profit and Loss
 Account on expiry of the option
 
 II.  Provisioning, collateral and credit risk mitigation
 
 Provisioning on derivative receivables is made in accordance with RBI
 guidelines. The derivative limit sanctioned to clients is part of the
 overall limit sanctioned post credit appraisal. Collateral is accepted
 on a case to case basis considering the volatility of the price of the
 collateral and any increase in operational, legal and liquidity risk.
 
 III.  No penalties or strictures have been imposed on the Bank during
 the year by the RBI.
 
 IV.  Bank has not issued any letters of comforts during the year. There
 were no outstanding letter of comforts at the year end (Previous year
 Nil).
 
 2.  Lease Disclosures:
 
 a.  The Bank has taken various premises and equipments under operating
 lease. The lease payments recognised in the Profit and Loss Account are
 Rs.105.62 crores (Previous year Rs. 68.89 crores). The sub-lease income
 recognised in the Profit and Loss Account is Rs.  6.15 crores (Previous
 year Rs. 4.42 crores).
 
 b.  The future minimum lease payments under non cancellable operating
 lease – not later than one year is Rs. 88.54 crores (Previous year Rs.
 77.76 crores), later than one year but not later than five years is Rs.
 277.18 crores (Previous year Rs. 282.81 crores) and later than five
 years Rs.136.39 crores (Previous year Rs. 138.20 crores).
 
 The lease terms include renewal option after expiry of primary lease
 period. There are no restrictions imposed by lease arrangements.  There
 are escalation clauses in the lease agreements.
 
 3.  Interest Expended-Others (Schedule 15(III)) includes interest on
 subordinated debt (Lower and Upper Tier II) Rs.64.78 crores (Previous
 Year Rs. 59.68 crores).
 
 4.  The Bank has agreed with International Finance Corporation (IFc)
 in a loan agreement dated 8th November, 2004 that it shall (i) not
 create or permit to exist any lien over and above what was existing
 prior to the Bank converting into a scheduled commercial Bank (ii)
 request IFCs consent before granting any lien which is not
 pre-authorised, should the RBI allow the Bank to grant liens and (iii)
 grant in favour of IFC a similar lien which shall rank pari passu with
 the lien created in case it creates any such lien which is not a
 pre-authorized lien.
 
 5.  The Bank receives deposits from customers as part of margin
 requirements in respect of its professional clearing member (PCM)
 business with National Securities Clearing Corporation Ltd (NSCCL).
 Correspondingly, the Bank is required to maintain margins / deposits
 with NSCCL.  For the said purpose of placing margins / deposits, the
 Bank has issued its own Fixed Deposit receipts amounting to Rs. 844.61
 crores (Previous year Rs. 694.02 crores) in favour of NSCCL which have
 not been included in Term Deposits from Others [Schedule 3 (III)
 (ii)] .
 
 6.  Lower Tier II Bonds
 
 Lower Tier II Bonds outstanding as at 31st March, 2009 Rs. 465.70
 crores (Previous year Rs. 465.70 crores).
 
 During the year, the Bank did not raise (Previous year Rs. 35.80
 crores) Lower Tier II bonds. In accordance with the RBI requirements
 Lower Tier II bonds of Rs. 38.74 crores (Previous year Rs 12.00 crores)
 are not considered as Tier II capital for the purposes of capital
 adequacy computation.
 
 7.  Upper Tier II Bonds
 
 Upper Tier II Bonds outstanding as at 31st March, 2009 Rs. 364.24
 crores (Previous year Rs. 316.54 crores).  During the year, the Bank
 did not raise Upper Tier II bonds. (Previous Year Rs. 136.00 crores).
 
 8.  Description of Contingent Liabilities:
 
 Sr.  Contingent Liability* Brief Description
 No.
 
 1.  Claims not acknowledged as debts This includes liability on account
 of income tax, interest tax, sales tax and lease tax demands and legal
 cases fled against the Bank.The Bank is a party to various legal
 proceedings in the normal course of business. The Bank does not expect
 the outcome of these proceedings to have a material adverse effect on
 the Banks financial conditions, result of operations or cash flows.
 Against the above Rs. 8.62 crores have been paid, which shall be
 refunded to the Bank, if the outcome of the legal proceedings will be
 in the favour of the Bank.
 
 2.  Liability on account of outstanding forward exchange contracts The
 Bank enters into foreign exchange contracts with inter Bank
 participants on its own account and for customers. Forward exchange
 contracts are commitments to buy or sell foreign currency at a future
 date at the contracted rate.
 
 3.  Guarantees on behalf of constituents in India As a part of its
 Banking activities, the Bank issues documentary credit and guarantees
 on behalf of its customers. Documentary credits such as letters of
 obligations, enhance the credit standing of the customers of the Bank.
 Guarantees generally represent irrevocable assurances that the Bank
 will make payments in the event of customer failing to fulfill its
 financial or performance obligations.
 
 4.  Acceptances, endorsements and other obligations These include
 contingent liabilities on account of bills re-discounted by the Bank
 and cash collateral provided by the Bank on assets which have been
 securitised.
 
 5.  Other items for which the Bank is contingently liable These include
 Liabilities in respect of interest rate and currency swaps and forward
 rate agreements, liability in respect of options contracts and Capital
 commitments, which includes undrawn commitments in respect of
 investments. The Bank enters into currency options, forward rate
 agreements, currency swaps and interest rate swaps with inter Bank
 participants on its own account and for customers. Currency Swaps are
 commitments to exchange cash flows by way of interest / principal in
 one currency against another, based on predetermined rates.  Interest
 rate swaps are commitments to exchange fixed and floating interest rate
 cash flows. The notional amounts that are recorded as contingent
 liabilities are amounts used as a benchmark for the calculation of
 interest component of the contracts.
 
 9.  The Bank has not received any intimation from suppliers
 regarding their status under the Micro, Small and Medium Enterprises
 Development Act, 2006 and hence disclosures, if any, relating to
 amounts unpaid as at the year end together with interest paid / payable
 as required under the said Act have not been given.
 
 10.  Figures for the Previous year have been regrouped / wherever
 necessary to conform to current years presentation.