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Canara Bank

BSE: 532483|NSE: CANBK|ISIN: INE476A01014|SECTOR: Banks - Public Sector
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Notes to Accounts Year End : Mar '19

1. Investments:

The percentage of investments under “Held to Maturity” category - SLR as on 31.03.2019 was 14.29% of Net Demand and Time Liability of the Bank (Previous year 19.01%), which is within the permissible limit as per RBI guidelines.

2. Inter-Branch Transactions:

The matching and setting of entries under InterBranch / office transactions are carried out by the system itself based on Core Banking Solutions (CBS) for the whole of the Bank through Inter Office Adjustment account.

3. Premises:

Premises include certain properties capitalized and carrying book value of Rs.39.93 Crore (Previous year Rs.40.07 Crore) as they have been put to use though conveyance of title deeds is still to be completed.

4. Disclosure as per RBI Requirements:

4.1 Capital:

4.2 Investments:

(1) Value of Investments:

(2) Movement of Provisions held towards depreciation and for NPI on Investments:

4.2.3 Sale and transfers to/from HTM Category:

During the Financial Year 2018-19, the Bank sold securities from HTM category not in excess of 5% of the book value of HTM category. (In the previous year the sale exceeded 5% of HTM category).

4.3.3 Disclosure on risk exposure in derivatives: I Qualitative Disclosure:

The Credit Risk Management Policy approved by the Board of Directors, on the use of Derivative Instruments to hedge / trade is in place.

A) The Investment Portfolio of the Bank consists of assets with characteristics such as fixed interest rate, zero coupon and floating interest rates and is subject to interest rate risk. The Bank also has issued Tier I and Tier II bonds and this capital cost is at fixed rate with no exit option. The policy permits hedging the interest rate risk on this liability as well.

Bank is permitted to use FRA and IRS and only plain vanilla transactions are permitted. These instruments are used not only for hedging the interest rate risk in the investment portfolio but also for market making.

During the year the bank has not undertaken derivative trades in IRS under the investment portfolio.

Buy-Sell Swaps (Proprietary) were undertaken during the year. No FRAs were undertaken during the year.

The Bank has been undertaking derivatives trades like IRS and FRAs, for the purpose of hedging the Bank’s Foreign Currency liabilities. Options and swaps are also undertaken on behalf of clients on back to back basis.

B) The risk management policies and major control limits like stop loss limits, counterparty exposure limits, PV01, etc. approved by the Board of Directors are in place. These risk limits are monitored and reviewed regularly. MIS/Reports are submitted periodically to Risk Management Committee. The hedge effectiveness of the outstanding derivative deals are monitored in relation to the underlying asset / liability on fortnightly basis.

C) Accounting Policy:

Hedge Positions:

- Accrual on account of interest expenses / income on the IRS are accounted and recognized as expenses / Income.

- Hedge effectiveness of the outstanding derivatives deals are monitored in relation to the fair value of the Swap and underlying asset / liability. The Bank has used the relevant INBMK yield Spread as declared by FIMMDA for arriving at the fair value of the underlying assets/liability. If the Hedge is not effective, hedge swaps is accounted as trading swaps. If swap is terminated before maturity, the MTM loss / gain and accruals till such dates are accounted as income / expenses under interest paid / received on IRS.

Trading Positions:

- Trading swaps are marked to market at frequent intervals and changes are recorded in the income statements.

- Accrual on account of interest expenses / income on the IRS are accounted and recognized as income / expenses.

- Gains or losses on termination of swaps are recorded as immediate income or expenses under the above head.

4.4.4 Divergence in the asset classification and provisioning:

In terms of the RBI circular no. DBR.BP.BC. No.32/21.04.018/2018-19 dated 1st April 2019, banks are required to disclose the divergences in asset classification and provisioning consequent to RBI’s annual supervisory process in their notes to accounts to the financial statements, wherever either or both of the following conditions are satisfied:

(a) the additional provisioning for NPAs assessed by RBI exceeds 10 per cent of the reported profit before provisions and contingencies for the reference period and

(b) the additional Gross NPAs identified by RBI exceed 15 per cent of the published incremental Gross NPAs for the reference period.

In our Bank divergences are within threshold limit specified above, hence no disclosure on divergence in asset classification and provisioning for NPAs is required with respect to RBI’s annual supervisory process for FY2018.

4.4.5 MSME Accounts Restructured:

In accordance with RBI vide circular no. DBR.No.BP. BC.18/21.04.048/2018-19 dated 1st January 2019, on “Relief for MSME borrowers registered under Goods and Service Tax (GST)” the details of MSME restructured accounts as on 31.03.2019 as under:

4.5.1 Risk Category-wise Country Exposure:

Only in respect of the Country where a Bank’s net funded exposure is 1% or more of its total assets, the Bank is required to make provision for Country Risk. As on 31.03.2019 in the case of USA (Low Risk category - A2), the Net funded exposure exceeds 1% of the total assets of the Bank (1% of the total assets as on 31.03.2019 -Rs.6947.66 Crore), for which the required provision is made.

4.5.2 Details of Single Borrower Limit (SGL) / Group Borrower Limit (GBL) exceeded by the Bank:

The Bank has not exceeded the prudential credit exposure limits prescribed for Single Borrower accounts. However bank has exceeded the prudential credit exposure limits prescribed for L & T group accounts.

4.6. Miscellaneous:

4.6.1 Amount of Provisions made for Income Tax during the year:

4.6.2 Disclosure of Penalties imposed by RBI:

During the financial year 2018-19, RBI imposed a monetary penalty of Rs.2.00 Crore (Rupees Two Crore Only) on our Bank for non-compliance of RBI’s directive regarding “Time bound Implementation and Strengthening of SWIFT - related to operational controls” under Section 46(4) of the Banking Regulation Act, 1949. The Bank has paid the penalty on 14.03.2019

Financial Conduct Authority, United Kingdom regulator has imposed penalty on Canara Bank United Kingdom (CBUK) an amount of GBP 896,100 (approx Rs.8.40 Crore) on account of Draft Warning Notice issued on the Bank. Our London Branch has made the payment of GBP 896100 to FCA on 06.06.2018.

5. Accounting Standards:

In compliance with the guidelines issued by the RBI regarding disclosure requirements of the various Accounting Standards issued by Institute of Chartered Accountants of India (ICAI), the following information is disclosed:

5.1 Accounting Standard 5 - Net Profit / Loss for the period, prior period items and changes in accounting policies:

5.1.1 There are no material prior period items.

5.2 Accounting Standard 15 - Employee Benefits:

The actuarial assumptions in respect of gratuity, pension and privilege leave, for determining the present value of obligations and contributions of the bank, have been made by fixing various parameters for

- Salary escalation by taking into account inflation, seniority, promotion and other factors mentioned in Accounting Standard 15(Revised) issued by ICAI.

- Attrition rate by reference to past experience and expected future experience and includes all types of withdrawals other than death but including those due to disability.

- Provision towards sick leave has been made in the books of account on the basis of Actuarial valuation.

New Pension Scheme Contribution:

The Bank has a Defined Contribution Pension Scheme (DCPS) applicable to all categories of officers joining the Bank on or after August 1, 2010. The Scheme is managed by NPS Trust under the Pension Fund Regulatory and Development Authority. National Securities Depository Limited has been appointed as the Central Record Keeping Agency for the NPS. During F.Y. 2018-19, the Bank has contributed Rs.153.63 crore (Previous Year Rs.126.82 crore).

5.3 Accounting Standard-18 - Related Party Disclosures: Names of Related parties and their relationship with the Bank- Parent - Canara Bank

5.3.1 Key Management Personnel -

i) Shri Rakesh Sharma, Managing Director & Chief Executive Officer (Till 31.07.2018)

ii) Smt. P V Bharathi, Executive Director (Till 31.01.2019)

iii) Shri Matam Venkata Rao, Executive Director

iv) Shri Debashish Mukherjee, Executive Director

v) Ms. A. Manimekhalai, Executive Director (From 11.02.2019)

5.3.2 Parent-

i) Canara Bank

5.3.3 Subsidiaries -

i) Canbank Financial Services Ltd.

ii) Canbank Venture Capital Fund Ltd.

iii) Canbank Factors Ltd.

iv) Canara Robecco Asset Management Company Ltd.

v) Canbank Computer Services Ltd.

vi) Canara Bank Securities Ltd.

(formerly GILT Securities Trading Corpn. Ltd)

vii) Canara HSBC Oriental Bank of Commerce Life Insurance Company Ltd

viii) Canara Bank (Tanzania) Ltd.

5.3.4 Joint Ventures:

i) Commercial Indo Bank LLC., Moscow (formerly Commercial Bank of India LLC., Moscow)

5.3.5 Associates:

i) Canfin Homes Ltd.

ii) Commonwealth Trust (India) Ltd.

iii) Regional Rural Banks sponsored by the Bank

a) Pragati Krishna Gramin Bank (Erstwhile Pragati Gramin Bank)

b) Kerala Gramin Bank

(Erstwhile South Malabar Gramin Bank)

HIGHER EDUCATION FUNDING AGENCY (HEFA):

The Ministry of Human Resources Development (MHRD), GoI with an object to build world class higher educational institutions and to set up research facilities, intended to provide a platform, through a special purpose vehicle, for improvement of the infrastructure standards of the higher educational institutions like IIM, IIT, AIIMS, IISER, IISc, NIT etc of the country.

Based on this the MHRD proposed to set up Higher Education Financing Agency (HEFA) a Joint Venture Company with an initial authorized capital of Rs.2000 Cr. MHRD has contributed Rs.1,000 Cr. and Canara Bank has contributed proportionately Rs.100 Cr.

Subsequently, MHRD extended the scope of existing mandate of HEFA equity base and range of institutions to be financed. Accordingly, the authorized capital has been increased to Rs.10,000 Cr wherein Govt. will provide an additional equity of Rs.5,000 Cr. and Canara Bank will contribute Rs.500 Cr. As on 31.03.2019, MHRD has infused Capital of Rs.2,512.50 Cr. and Canara Bank has contributed Rs.251.25 Cr, respectively. As at 31.03.2019, Company has sanctioned Term Loans to the extent of Rs.17,340 Cr with a disbursement at Rs.2,534.47 Cr.

5.4 Accounting Standard-20 - Earnings Per Share:

Basic and diluted earnings per equity share are computed in accordance with Accounting Standard 20, “Earnings per Share”.

5.5 Accounting Standard-22 - Accounting for Taxes on Income:

The Bank has recognized Deferred Tax Assets/ Liabilities (DTA / DTL) and has accounted for the Net Deferred Tax as on 31.03.2019. Major components of Deferred Tax Assets and Deferred Tax Liabilities are as under:

During the year, the Bank has recognized DTA relating to cumulative carry forward tax losses (including for the current year) amounting to Rs.1575.94 Crore based on virtual certainty of availability of future taxable income against which DTA can be adjusted.

5.6 As a part of strategic initiatives for rationalization of International Operations, which is also in consonance with the Government of India directives, the Bank has decided to exit from certain geographies. During the year 2018-19, the Bank has closed its operations in Manama, Bahrain and Leicester, UK. Further, Bank has initiated closure of its operations in Shanghai (China) and Johannesburg (South Africa).

5.7 Accounting Standard 27 - Financial Reporting of Interests in Joint Ventures:

Investment includes Rs.73.22 Crs (at the exchange rate of the transaction date) in the Commercial Bank of India LLC (incorporated in Russia) wherein the bank owns 40% of the equity.

5.8 Accounting Standard 28 - Impairment of Assets:

Assets are reviewed for impairment at the end of the year whenever events or changes in circumstances warrant that the carrying amount of an asset may not be recoverable. Recoverability of an asset to be held and used is measured by a comparison for the carrying amount of an asset to future net discounted cash flows expected to be generated by the asset. If such an asset is considered to be impaired, the impairment to be recognized and is measured by the amount by which the carrying amount of the asset exceeds the recoverable amount of the asset. However, in the opinion of the Bank’s Management, there is no indication of material impairment to the assets during the year to which Accounting Standard 28 - “Impairment of Assets” applies.

6. Additional Disclosures:

6.1 Details of Provisions and Contingencies made during the year:

6.2. B Drawdown from Reserves:

In terms ofRBI circular DBR. No. BP.BC.92/ 21.04.048/201516 dated 18.04.2016, unamortized provision for fraud accounts amounting to Rs.322.40 crore has been debit to Other Reserve.

6.3 Disclosure of Complaints / unimplemented awards of Banking Ombudsmen:

6.4 Letters of Comfort issued:

Bank has not issued any letter of comforts / Letter of Undertakings during the financial year 2018-19. There are no letter of Comforts / Letter of Undertakings outstanding as on date.

OVERSEAS:

The Bank has not issued any LOC favoring host country regulators during the financial year 2018-19.

LOCs / Undertaking / Guarantee issued in the past:

- China Banking Regulatory Commission, China (on behalf of our Shanghai Branch) - issued on April 19th, 2008.

- Central Bank of UAE (on behalf of our Representative office, Sharjah) - issued on August 3rd, 2009.

- Central Bank of Bahrain (on behalf of our Manama branch, Bahrain) - issued on June 7th, 2010 and

- South African Reserve Bank (on behalf of our Johannesburg branch, South Africa) - issued on November 19th, 2011.

Financial Impact:

Bank has so far not issued any LOC / undertaking on behalf of the subsidiaries or Joint Ventures (JVs). Hence, the financial impact on issue of LOC / undertaking by the Bank does not exist.

With regard to branches the assets and liabilities of overseas branches are merged with the domestic operation and a consolidated Balance Sheet is drawn for the Bank as a whole. The total liability of overseas branches forms part of the liabilities of the Bank’s annual balance sheet.

Hence, there is no additional financial impact of LOCs issued on behalf of branches. In respect of representative

Office, there are no commercial operations undertaken and hence no financial impacts of LOC issued to host country regulator.

As at 31st March 2019, there is no financial impact of LOCs issued favoring the overseas Regulators for our Bank since the same are issued on behalf of branches and Representative offices. In terms of RBI guidelines, we propose to disclose the details of LOCs issued by the Bank so far and “NIL” financial impact on account of such LOCs, under “Notes to Accounts” in the Balance Sheet as at March 2019.

6.4.1 Provision Coverage Ratio is 68.13% as on 31.03.2019 (Previous Year 58.06%).

6.5 Fees / Remuneration received by the Bank from Bancassurance Business etc:

6.6 Concentration of Deposits, Advances, Exposures and NPAs:

6.7 Reserve Bank of India vide its communication Number DBOD.No.BP.BC. 85 /21.06.200/2013-14 dated January 15 2014 advised the Bank to provide incremental provision and capital with regard to bank’s exposure to entities with unhedged foreign currency exposures. Accordingly for the financial year 2018-19 bank is holding a provision of Rs.23.11 Crore (Rs.25.66 Crore) towards unhedged foreign currency exposure. Further Bank is also holding a capital of Rs.150.86 Crore (Rs.127.67 Crore) as on 31.03.2019 towards the risk on unhedged foreign currency exposure.

Policies to manage currency induced credit risk with regard to Unhedged Foreign Currency Exposure:

In respect of borrower entities having foreign currency exposure, Bank is computing Unhedged Foreign Currency Exposure (UFCE); Annual Earnings before interest and Depreciation (EBID); expected loss in case of movement in USD-INR exchange rate using annualized volatilities. Expected loss on account of exchange rate movements is expressed as a percentage of EBID i.e likely loss/ EBID percentage. As a prudential measure Bank is holding incremental capital and made incremental provisioning (over and above the extant standard assets provisioning) on the total credit exposure to such entities at the specified rates.

Qualitative disclosure around LCR:

Liquidity Coverage Ratio (LCR) standard is introduced to test the liquidity resilience of the Bank, for a minimum stress period of 30 days. The standard ensures, the Bank maintains adequate stock of unencumbered high-quality liquid assets (HOLA) that can be converted into cash to meet liquidity needs (net cash-out flows). The LCR is defined as:

Stock of high quality liquid assets (HOLAs)

LCR =--------------------------------------------------------------

Total net cash outflows over the next 30 calendar days

The minimum LCR requirement for the calendar year 2018 was 90 per cent and is stepped up to 100 per cent for the calendar year 2019.

HOLA comprises of Level 1(0% hair-cut), Level 2A (15% hair-cut) and Level 2B assets (50% hair-cut). Level 1 assets comprising of cash, excess CRR, excess SLR securities, government securities to the extent allowed by RBI under Marginal Standing Facility (MSF) [presently 2 per cent of the Bank’s NDTL] and Facility to Avail Liquidity for Liquidity Coverage Ratio (FALLCR) [as on 31st March 2019 13 per cent of the Bank’s NDTL].

Level 2A assets comprises of sovereign guaranteed marketable securities, corporate bonds or commercial papers which are rated AA- and more are issued other than by financial institutions. Level 2B assets include investments in common equity shares included in NSE CNX Nifty and / or S&P BSE Sensex indices.

Expected net cash outflows under stress are the weighted sum of outflows minus inflows in the next 30 days. Funding from retail and small business customers carries lower run-off factor as compared to wholesale funding.

The prime drivers of the LCR are the level of surplus SLR held by the Bank and the proportion of retail and wholesale funding source.

Weighted Level 1 assets of the Bank constitutes around 96 per cent of the total HOLA, and the remaining 4 per cent comprises of Level 2A and Level 2B assets. Excess SLR securities (part of level 1 assets) forms around 18 per cent of the total HOLA.

During the FY 2018-19, the LCR of the Bank remained above the minimum requirement on all observed counts. The LCR moved down marginally year on year from average of 108.27% (FY2017-18) to 107.47% (FY 2018-19).

Quarter on quarter, the LCR (3 months average) of the Bank moved from 105.69% (JuneRs.18) to 110.84% (SeptemberRs.18) and to 106.93% (DecemberRs.18). For the quarter ended MarchRs.19 the LCR of the Bank stood at 106.63%.

6.8 Provision pertaining to Fraud Accounts:

In terms of RBI guidelines, the banks are permitted to amortize the provision towards fraud cases in four quarters beginning from the date of detection of fraud and where the provision is made in two different financial years, the unprovided amount has to be charged to Revenue Reserve vide RBI circular DBR. No. BP.BC.92/21.04.048/2015-16 dated 18.04.2016 as on the relevant year end

During the quarter ended 31st March 2019, out of 23 cases, only for six no. of frauds amounting of Rs.704.06 crores wherein Bank is required to provide Rs.429.87 crores, in addition to the provision of Rs.274.19 crores already provided upto 31-12-2018. The total amount provided during the quarter is Rs.107.47 crores, representing 25 % of the provision to be made. Further, the remaining unamortised provision amount is debited to Other Reserves, which will be amortised during first three quarters of next financial year. The unamortized provision on such accounts is Rs.322.40 crores and this unamortized amount is reckoned for calculation of Provision Coverage Ratio.

6.9 Reward Points of Credit Card & Debit Card:

6.9.1 Position of outstanding reward points and provision regarding Credit Cards:

6.9.2 Position of outstanding reward points and provision thereon regarding Loyalty Reward Points-Debit Cards:

6.10 During the year the Bank has made an offer of Two Crore number of Equity shares to its employee under “Employee Share Purchase Scheme” at Rs.186/per share with discount of Rs.92.64 per share (33.33%). Allotment of the shares was made on 6th February 2019. The total discount of Rs.185.28 crore is charged to Profit & Loss account.

6.11 Considering the ageing provision of NPA, extent of fresh slippages and consequent provisioning requirements, the existing additional provision held for NPA amounting to Rs.500 crore over and above the IRAC norms are utilized towards current year provision for NPA on account of improvement in PCR from 58.06% as at 31.03.2018 to 68.13% as at 31.03.2019.

6.12 Our Bank has sold 82,696 units under Priority Sector Lending Certificates (PSLCs) to the tune of Rs.20,674 Crore under Agriculture and Small and Marginal Farmers category as at March 2019.

6.13 The RBI had permitted Banks vide its Circular D BR. No.B P. BC. 113/21.04.048 / 2017-18 dated 15th June, 2018, to spread MTM losses on investments held in AFS and HFT category for the quarter ended 30th June 2018, over four quarters commencing from that quarter, in which loss has been incurred. The bank had incurred such loss amounting to Rs.603.84 Crore during the quarter ended 30th June, 2018 and provided 1/4th of such loss each in June and September 2018 quarters by availing the benefit permitted for staggering of provision and un-amortised balance was Rs.301.92 Crore. Since the Bond rate has eased as on 31st December, 2018, deferred provision was not required. Consequent to the above, entire MTM Losses stands fully covered as on 31.03.2019.

6.14 In pursuant to Accounting Standard -10 “Property Plant & Equipment”, depreciation of Rs.119.15 crore during the year on the revalued portion of the fixed assets has been debited to the Profit & Loss account. Equivalent amount has been transferred from Revaluation Reserve to Revenue Reserve.

7. Figures of the previous year have been regrouped / rearranged / reclassified wherever necessary.

Source : Dion Global Solutions Limited
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