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Karnataka Bank Ltd.

BSE: 532652 | NSE: KTKBANK |

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Series: EQ | ISIN: INE614B01018 | SECTOR: Banks - Private Sector

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Annual Report

For Year :
2019 2018 2017 2016 2015 2014 2013 2012 2011

Director’s Report

DIRECTOR’S. 95th ANNUAL REPORT

The Directors have the pleasure in presenting the 95th Annual Report of the Bank together with the Audited Statement of Accounts for the year ended 31stMarch 2019 and the Auditors’ Report.

PERFORMANCE HIGHLIGHTS

Performance highlights for the reporting financial year are as under: (Rs. in crore)

Particulars

As on / for the year ended 31.03.2019

As on / for the year ended 31.03.2018

Deposits

68452.12

62871.29

Advances

54828.20

47251.75

Investments

16184.99

15444.45

Gross Income

6907.92

6378.09

Operating Profit

1449.81

1473.16

Net Profit

477.24

325.61

The total business turnover of the Bank stood at Rs.123280.32 crore as on 31st March 2019, registering a growth of 11.95 percent as against the turnover of Rs.110123.04 crore as on 31st March 2018. The total assets of the Bank increased from Rs.70373.68 crore to Rs.79045.76 crore recording a growth of 12.32 percent for the year 2018-19. The market share of the Bank in business turnover has increased to 0.56 percent as compared to 0.54 percent as on 31st March 2018.

The total deposits of the Bank grew to Rs.68452.12 crore as on 31st March 2019 from Rs.62871.29 crore as on 31st March 2018, registering a growth of 8.88 percent.

During the year, low cost deposits of the Bank, viz., Savings and Current Account Deposits have shown growth of 9.17 percent and constituted 28.06 percent of the total deposits of the Bank as on 31st March, 2019.

The total advances grew to Rs.54828.20 crore as on 31st March 2019 from Rs.47251.75 crore as on 31st March 2018 an increase of 16.03 percent. The Credit Deposit Ratio increased from 75.16 percent to 80.10 percent reflecting robust credit growth. The priority sector advances increased from Rs.20594.27 crore to Rs.21878.22 crore forming 48.05 percent of Adjusted Net Bank Credit (ANBC) and agricultural advances increased from Rs.6877.51 crore to Rs.7082.90 crore which, together with eligible deposit under Rural Infrastructure Development Fund (RIDF), constituted 15.73 percent of ANBC. Lending under various socio-economic schemes has shown satisfactory progress.

The total investments increased from Rs.15444.45 crore as on 31st March 2018 to Rs.16184.99 crore as on 31st March 2019. The ID ratio stood at 23.64 percent as on 31st March, 2019 as against 24.57 percent as on 31st March, 2018.

OPERATIONAL PERFORMANCE

The gross income of the Bank for the year ended 31st March 2019 stood at Rs.6907.92 crore as against Rs.6378.09 crore in the last financial year showing a growth of 8.31 percent. The total expenditure (excluding provisions and contingencies) stood at Rs.5458.11 crore for the year ended 31st March 2019 as against Rs.4904.93 Crore for the year ended 31st March 2018. The net interest income was Rs.1905.12 crore, showing a growth of 2.56 percent over the previous year.

PROFIT

Your Bank earned an operating profit of Rs.1449.81 crore for the year 2018-19 as against Rs.1473.16 crore for the previous year. The net profit of the Bank increased to an all time high of Rs.477.24 crore during the year 2018-19 from Rs.325.61 crore during the previous year, showing a robust growth of 46.57 percent.

APPROPRIATIONS

The net profit of Rs.477.24 crore which along with a sum of Rs.102.23 crore brought forward from the previous year, aggregating to Rs.579.47 crore, is appropriated as under:

Appropriation

Rs. in crore

Transfer to Statutory Reserve

180.00

Transfer to Capital Reserve

0.00

Transfer to Revenue and Special Reserves

109.70

Transfer to Investment Fluctuation Reserve

67.91

Dividend of 2018 paid during the year 2019

84.78

Tax on dividend paid as above

17.43

Balance carried over to Balance Sheet (including proposed Dividend and tax)

119.65

Total

579.47

DIVIDEND

Having regard to the overall performance of the Bank, the Board of Directors recommends a dividend of Rs.3.50 per share i.e., 35 percent on the paid up capital (previous year 30 percent) for the reporting year. The dividend payout ratio for the year works out to 20.73 percent as against last year’s 26.04 percent. In accordance with the revised Accounting Standard (AS)-4 ‘Contingencies and Events occurring after the Balance Sheet date’ notified by MCA on 30th March 2016, the proposed dividend including dividend distribution tax amounting to Rs.119.24 crore has not been shown as an appropriation from the Profit for the year ended 31st March 2019.

EARNINGS PER SHARE/ BOOK VALUE

The earnings per share (basic) and the book value per share as on 31st March 2019 stood at Rs.16.89 and Rs. 204.71 respectively. This was Rs.11.52 and Rs.191.44 respectively during last year.

CAPITAL FUNDS AND CAPITAL ADEQUACY RATIO

The capital funds of the Bank increased from Rs.5414.25 crore to Rs.6306.95 crore, registering a growth of 16.49 percent. The Capital Adequacy Ratio (CAR) stood at 13.17 percent as on 31st March 2019, as per BASEL III norms (Previous year 12.04 percent). The Bank has been consistently maintaining the Ratio well above the minimum CAR of 10.875 percent stipulated by the Reserve Bank of India. The market capitalization as on 31st March 2019 was Rs.3777.05 crore with a high of Rs.3777.05 crore as on 29th March 2019 and a low of Rs.2657.92 crore as on 23rd October 2018.

NON-PERFORMING ASSETS AND PROVISION COVERAGE RATIO

Your Bank has been focusing on containing the non-performing assets through a better credit monitoring as well as intensified efforts to recover the impaired assets. The Bank’s Gross NPAs as on 31st March 2019 was at Rs.2456.38 crore (4.41 percent) as on 31st March 2019 as against Rs.2376.07 crore (4.92 percent) as on 31st March 2018. The net NPAs stood at Rs.1616.71 crore (2.95 per cent) as against Rs.1400.51 crore (2.96 per cent) as on 31st March 2018. The Provision Coverage Ratio (PCR) improved to 58.45 percent as on 31st March 2019 from 54.56 percent as on 31st March 2018.

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 31stMarch 2019 as under:

- Treasury Operations: Bank has earned total revenue of Rs.1307.60 crore from Treasury operations with a contribution of Rs.293.06 crore to profit before tax and un-allocable expenditure.

- Corporate / Wholesale Banking: The revenue earned by the Bank during the year under report from this Segment was Rs.2840.48 crore with a contribution of Rs.28.36 crore to profit before tax and un-allocable expenditure.

- Retail Banking: This Segment has earned revenue of Rs.2356.29 crore with a contribution of Rs. 235.84 crore to profit before tax and un-allocable expenditure.

- Other Banking Operations: This segment has generated revenues of Rs.386.34 crore with a contribution of Rs.87.48 crore to profit before tax and un-allocable expenditure.

FOREX BUSINESS

During the year under report, your Bank achieved a turnover of Rs.12560.49 crore in foreign exchange business as against Rs.14932.52 crore in the previous year. The outstanding advances to export sector stood at Rs.1574.28 crore as on 31stMarch 2019.

‘IND AS’ IMPLEMENTATION

As per the roadmap given by Reserve Bank of India (RBI) vide circular dated 11th February, 2017, transition to “Indian Accounting Standards (Ind AS)” in banks were to commence from the accounting period beginning 1st April, 2018 onwards. However, the regulator had deferred the implementation of Ind AS for Scheduled Commercial Banks by one year i.e., from the accounting period beginning 1st April, 2019. Now the RBI vide its circular No.DBR.BP.BC.No.29/21.07.001/2018-19 dated 22nd March, 2019 has deferred implementation of Ind AS till further notice.

However, your Bank is prepared to implement Ind AS and towards this direction, Bank has conducted diagnostic study on various disparities between current Accounting framework and Ind AS and ascertained various areas having an impact on measurement, accounting and disclosure of financial assets & liabilities and provisioning requirements. Besides, changes required to carried out in CBS and IT systems of the Bank, to accommodate Ind AS are also being looked into and as stipulated by RBI, Bank has been submitting the Proforma Ind AS Financial statements from time to time.

SUBORDINATED DEBT INSTRUMENTS

With a view to maintain a healthy capital position on an ongoing basis, Bank raised an amount of Rs.720.00 crore by issuing subordinated debt instruments (i.e. Unsecured Non-Convertible Subordinated (Lower Tier-2) BASEL III Debt Instruments) as part of Tier 2 Capital under two series i.e. Series V (Rs.400 crore) in the month of November 2018 and Series VI (Rs.320 crore) in the month of February 2019 on private placement basis. Further, below table provides debt instruments outstanding as on 31stMarch 2019:

Series

Date of Issue

Face Value per Bond

Number of Bonds

Amount (Rs. crore)

Tenure from date of issue

Coupon Rate (% p.a.)

Credit

Rating

Listing

ISIN of the Bonds

IV

17.11.2012

10,00,000

2,500

250.00

120

months

11

ICRA A &

CARE A

Listed

on

NSE-

Debt

Segment

INE614B08021

V

16.11.2018

1,00,000

40,000

400.00

12

INE614B08039

VI

18.02.2019

1,00,000

32,000

320.00

12

INE614B08047

Notes:

1. Your Bank has paid interest on these debt instruments on a timely basis since the issue of respective debt instruments.

2. During the reporting year, bonds issued under Series III (Rs.200 crore) were redeemed upon maturity on 27th September, 2018 along with payment of interest.

3. Series I (Rs.120.50 crore) and Series II (Rs.29.50 crore) were since redeemed during FY2017-18.

4. CREDIT RATING: ICRA Limited (“ICRA”) and Credit Analysis and Research Limited, (“CARE”) have retained the rating at “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.

Further, during the reporting year, Bank had issued Certificate of Deposits (CDs) in different tranches to meet the short term liquidity mismatch and the amount outstanding under CDs as on 31st March 2019 stood at Rs.811.57 crore. The ICRA has rated these CDs assigned A . The instruments with this rating are considered to have very strong degree of safety regarding timely payment of financial obligations. Such instruments carry lowest credit risk. The modifier “ ” reflect the comparative standing within the category.

DIVIDEND DISTRIBUTION POLICY

Your Bank has adopted a Policy on distribution of Dividend to the shareholders pursuant to the Regulation 43A of the SEBI (LODR) Regulations, 2015. Gist of the Dividend Distribution Policy is as under:

- Being a Banking entity, Dividend Distribution Policy is guided by the RBI Circular DBOD.No.BP.BC.8821.02.67/2004-05 dated 5th May, 2005 with regard to eligibility criteria for distribution of dividend.

- Factors considered for recommendation of dividend include both internal factors such as financial performance, dividend payout trends, tax implications, corporate actions and external factors such as shareholders’ expectations, macro environment etc.

- Factors considered for determining the quantum of dividend include financial performance, capital fund requirements to support future business growth, having regard to the dividend payout ratio prescribed under the aforesaid RBI Guidelines etc.

The Dividend Distribution Policy of the Bank is available in our Bank’s website at https:// karnatakabank.com/investor-portal/corporate-governance.

INTEGRATED REPORTING

Your Bank being a listed entity, has made an attempt to address the concept introduced under the framework of International Integrated Reporting Council and detailed Integrated Report has been hosted on the Bank’s website under Investor Portal section and the same can be accessed here: www.karnatakabank.com> Investor Portal>Corporate Governance.

As on 31st March 2019, Bank had 8275 employees. The Business per employee (excluding inter-bank deposits) has improved from Rs.13.44 crore as on 31st March 2018 to Rs.14.90 crore as on 31st March 2019. Further, your Bank has maintained cordial industrial relations and employee discipline. Your Bank has put in place an 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 the workplace and redressal of such complaints. The details of the complaints under the above Policy for the year under report are as under:

Number of complaints pending as at the beginning of the financial year

Nil

Number of complaints filed during the financial year

Nil

Number of complaints pending as on end of the financial year

Nil

VIGIL MECHANISM

The Bank has implemented the Protected Disclosure Policy (Whistle Blower Policy) since the year 2007 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 Banks and any events/ acts detrimental to the interest of the Bank, depositories 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 Chief of Internal Vigilance (CIV) in general and Chairman of the Audit Committee, in exceptional cases. The Vigil mechanism is reviewed periodically. The details of Whistle Blower Policy is posted in our website and available at the link https://kamatakabank.com/sites/default/files/2017-09/PoNcy%20on%20Disdosure%20Scheme.pdf

CENTRALISED PAYMENT & RECONCILIATION CELL (CPRC)

To enable timely reconciliation of various transactions carried out through technology enabled payment channels like NEFT, RTGS, IMPS, UPI etc., a separate centralized cell namely Centralised Payment and Reconciliation Cell(CPRC) has been set-up in the Bank which has improved the reconciliation and resolution of disputes, if any, in relation to these transactions.

INVESTOR RELATION CELL

In view of the changed business dynamics, shareholders’ expectations and regulatory and reporting mechanism, a regular connect with the shareholders is necessary. In this regard, Bank’s Investor Relation Cell has been disseminating corporate information on voluntary basis to the shareholders through email about financial results, major events, articles about the Bank in the media etc. During the reporting financial year, quarterly update of financial results of the Bank were disseminated to the shareholders besides, four earnings’ related conference calls were held to discuss with analysts and also one analyst meet at Mumbai. In addition, Bank’s Management participated in various earnings’ related discussions and the presentation made to the analysts during the participation have been hosted on the Bank’s website www.karnatakabank.com>Investor Portal > Analyst Presentations.

DIRECTORS AND CHANGES IN THE BOARD

As on 31st March 2019, your Bank had a total of 9 Directors, including one woman director. All of them, except Mr. P Jayarama Bhat, Part-Time Non-Executive Chairman and Mr. Mahabaleshwara M S, Managing Director & CEO are Independent Directors. The details of the criteria for appointment and remuneration of Directors are provided in the report on Corporate Governance under Annexure III.

During the year under report, upon attainment of upper age limit of 70 years of age, Mrs. Usha Ganesh retired from office of the Independent Director on 04th July, 2018 as per extant guidelines of Reserve Bank of India. The Board places on record its appreciation for the valuable contribution and the guidance given by her during her tenure in office.

Mr. P Jayarama Bhat Part time Non-Executive Chairman, was reappointed as a Non Executive Director, liable to retire by rotation, at the 94th Annual General Meeting of the Bank held on 21st July, 2018 and being eligible for re-appointment, Mr. P Jayarama Bhat has offered himself for reappointment. Considering his experience, knowledge and expertise and the contribution made during his tenure as Non-executive Chairman of the Bank, your Directors recommend for approval of his re-appointment as a Director of the Bank who is liable to retire by rotation at the ensuing 95th Annual General Meeting. A brief resume of Mr. P Jayarama Bhat is furnished in the notice of the Annual General Meeting.

Mr. B A Prabhakar, Independent Director, who was appointed as a Director on the Board of the Bank on 06th September, 2014, will be completing the tenure of 5 years as Independent Director on 05th September, 2019. Considering his participation in the Board deliberations and to the overall directions given by the Board, your Directors recommend for approval of his re-appointment as an Independent Director of the Bank as a special resolution at the ensuing 95th Annual General Meeting. Necessary explanatory statement has been furnished in the notice of the Annual General Meeting.

MANAGING DIRECTOR AND CHIEF EXECUTIVE OFFICER (MD & CEO)

Mr. Mahabaleshwara M S has been appointed as the Managing Director & CEO of the Bank for a period of three years w.e.f.15th April , 2017, pursuant to the approval received from the Reserve Bank of India vide their letter DBR Appt.No.11838/08040.001/2017-18 dated 05th April , 2017, in accordance with Section 35B of the Banking Regulation Act, 1949.

INDEPENDENT AND NON-EXECUTIVE DIRECTORS

Pursuant to the provisions of Section 149(6) of the Companies Act, 2013, your Bank has received necessary declarations from all the non-executive directors, except Mr. P Jayarama Bhat, confirming that they meet the criteria of independence for Independent Directors.

PERFORMANCE EVALUATION OF THE BOARD

Your Board of Directors has 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 under Annexure III. In pursuance to the above, Nomination and Remuneration Committee (NRC) of the Board and Independent Directors in their separate meetings held on 22nd March, 2019 have reviewed and evaluated the performance of Board as a whole and the Managing Director & CEO.

Further, the Board has also reviewed the performance of committees of the Board and that of individual Independent Directors at its meeting held on 22nd March, 2019.

CONTRTACTS OR ARRANGEMENTS WITH RELATED PARTIES

All related party transactions that were entered into 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. As such disclosure in Form AOC-2 is not applicable. The policy on dealing with Related Party Transactions as approved by the Audit Committee/ Board has been placed in the website of the Bank.

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 judgements 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 31st March 2019 and profit and loss 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 provision of all applicable laws and that such systems were adequate and operating effectively.

STATUTORY DISCLOSURES

The disclosures under sub-section (3) of Section 134 of the Companies Act, 2013 and Companies (Accounts) Rules, 2014 are furnished below:

a) Conservation of energy and technology absorption: Considering the nature of the Bank’s business, the provisions of Section 134(3) 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) During the year ended 31st March 2019, the Bank has earned Rs.20.15 crore and spent Rs.1.58 crore in foreign currency.

c) There were no significant and material orders passed by the regulators or courts of 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. Mahabaleshwara M S, MD & CEO, Mr. Y V Balachandra, CFO and Mr. Prasanna Patil, Company Secretary of the Bank were the Key Managerial Personnel of the Bank as on 31st March 2019 as per the provisions of the Companies Act, 2013. None of the Key Managerial Personnel has resigned during the year under report.

Upon elevation of Mr. Balachandra Y V to the post of Chief Operating Officer (COO) of the Bank and entrustment of other functional reallocation to him, Mr. Muralidhara Krishna Rao, General Manager, has been designated as the Chief financial Officer of the Bank w.e.f. 13th May, 2019 in place of Mr. Y V Balachandra.

f) Remuneration of Directors: Disclosure 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 VI to this report.

g) During the financial year 2018-19, there was no employee who was in receipt of remuneration requiring disclosure as per the limits prescribed under Section 197 of the Companies Act, 2013 read with Rule 5 of Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014.

NUMBER OF BOARD MEETINGS

During the year under report the Board met 12 times and the details thereof are provided in the report on Corporate Governance attached to this report.

COMMITTEES OF THE BOARD

The Bank had 9 Committees which were constituted to comply with the requirements of relevant provisions of the applicable laws and for operational efficiency. 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 attached to this report.

CORPORATE GOVERNANCE

Your Bank is committed to follow the best practice of corporate governance to protect the interest of all the stakeholders of the Bank, viz. shareholders, depositors and 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.

AUDITORS

a. Statutory Auditors

At the 94th Annual General Meeting, M/s Badari, Madhusudhan & Srinivasan, (Firm Registration No.005389S) Chartered Accountants and M/s Manohar Chowdhry & Associates, (Firm Registration No. 001997S) Chartered Accountants were appointed as joint Statutory Central Auditors of the Bank to hold office upto the ensuing 95th Annual General Meeting.

The Board of Directors proposes to the members the appointment of M/s Badari, Madhusudhan & Srinivasan, (Firm Registration No.005389S) Chartered Accountants, No. 132, II Floor, Kantha Court, Lalbagh Road, Bengaluru-560027 and M/s Manohar Chowdhry & Associates, (Firm Registration No.001997S) Chartered Accountants, New No.27, Subramaniam Street, Abiramapuram, Chennai-600018 jointly as Statutory Central Auditors of the Bank to hold office upto the conclusion of 96th Annual General Meeting. Pursuant to Section 30(1A) of the Banking Regulation Act, 1949, approval from Reserve Bank of India has been sought for the above appointments. 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.

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.Gopalakrishnaraj H H & Associates, Practising Company Secretary, Bengaluru as Secretarial Auditors to conduct the Secretarial Audit for the year ended 31st March 2019. The audit report from the Secretarial Auditor is annexed to this report as a part of Annexure III.

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

P Jayarama Bhat

Chairman

Place : Bengaluru

Date : June 17, 2019

Director’s Report