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RBL Bank

BSE: 540065|NSE: RBLBANK|ISIN: INE976G01028|SECTOR: Banks - Private Sector
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Notes to Accounts Year End : Mar '19

BACKGROUND

RBL Bank Limited(‘the Bank’), incorporated in Kolhapur, India is a banking company governed by the Banking Regulation Act, 1949 with the Reserve Bank of India (‘RBI’) as its principal regulator. The Bank is engaged in providing a wide range of banking and financial services including commercial banking, retail banking, agriculture finance, financial inclusion, treasury operations and other banking related activities. The Bank commenced its operations at its International Financial Services Centre Banking Unit (IBU) in Gujarat International Finance Tec (GIFT) City, Gujarat in April 2017. Ordinary shares ofthe Bank were listed on August 31, 2016 on the National Stock Exchange of India Limited (‘NSE’) & BSE Limited (‘BSE’).

BASIS OF PREPARATION:

The accompanying financial statements have been prepared under the historical cost convention and on the accrual basis of accounting, unless otherwise stated, and comply with the requirements prescribed under the Third Schedule (Form A and Form B) of the Banking Regulation Act, 1949. The accounting and reporting policies of the Bank used in the preparation of these financial statements conform to the Generally Accepted Accounting Principles in India (Indian GAAP’), the guidelines issued by RBI from time to time, the Accounting Standards notified under section 133 of the Companies Act 2013, read together with paragraph 7 of the Companies (Accounts) Rules, 2014, to the extent applicable, and practices generally prevalent in the banking industry in India.

USE OF ESTIMATES:

The preparation of financial statements in conformity with Indian GAAP requires the management to make estimates and assumptions that are considered in the reported amount of assets, liabilities and disclosure of contingent liabilities on the date of the financial statements and reported income and expenses during the reporting period. The estimates and assumptions used in the accompanying financial statements are based upon the management’s evaluation ofthe relevant facts and circumstances as of the date of the financial statements. Actual results may differ from the estimates used in preparing the accompanying financial statements. Any revision to accounting estimates is recognized prospectively in the current and future periods.

1. Capital

During the current year, the Bank allotted 7,042,181 equity shares aggregating to Rs. 100.54 crore on various dates to the employees who exercised their stock options.

During the previous year, the Bank issued 32,621,354 equity shares of Rs. 10/- face value on preferential basis, each share allotted at a price of Rs. 515/- aggregating to Rs. 1,680.00 crore. Further the bank allotted 11,843,057 equity shares aggregating to Rs. 122.06 crore on various dates to the employees who exercised their stock options.

2. Proposed Dividend

The Board of Directors at their meeting on April 18, 2019, proposed a dividend of Rs. 2.70 per share (27%) [previous year - Rs. 2.10 per share (21%)], subject to the approval of members at the ensuing Annual General Meeting.

In accordance with the revised Accounting Standard (AS) - 4 ‘Contingencies and Events occurring after the Balance Sheet Date’, the Bank has not accounted for proposed dividend Rs. 115.21 crore (previous year - Rs. 88.13 crore) and corporate dividend tax Rs. 23.68 crore (previous year Rs. 18.12 crore), as a liability in the balance sheet both in the current year and the previous year.

3. Employee Stock Option Plan (“ESOP”)

The shareholders of the Bank have approved and enabled the Board and / or the Human Resource Committee to grant stock options to employees under one or more Employee Stock Option Plan (ESOP). The ESOP is equity settled where the employees will receive one equity share per option. The stock options granted to employees vest over a period of two years, three years or four years in the proportion of either 20:80,40:30:30,30:30:40 or 10:20:30:40, as the case may be. Vested options can be exercised within a period of three years from the date of vesting or within a period of one year from the date on which the shares of the Bank gets listed on a recognized stock exchange (listed since August 31, 2016), whichever is later.

Under Intrinsic Value method there is no charge to the profit and loss account for the current year (previous year - Nil) on account of grant of the ESOPs, since exercise price of the stock options granted is more than the underlying value of the shares (prior to listing) or at the market price (listed since August 31, 2016), as the case may be. If the Bank had adopted the Black-Scholes model based fair valuation, compensation cost for the year ended March 31, 2019, would have increased by Rs. 106.96 crore (previous year Rs. 47.75 crore) and the profit before tax would have been lower correspondingly. Accordingly, on a pro-forma basis, basic and diluted earnings per share for the year ended March 31, 2019 would have been Rs. 18.83 and Rs. 18.43, respectively (Previous year Rs. 14.60 and Rs. 14.03, respectively).

During the current year, options were granted at the price determined by the HR&R Committee and was based on the market price per share as on date of grant of options which carried exercise price of Rs. 479.85, Rs. 490.20, Rs. 503.50 Rs. 501.40, Rs. 510.00, Rs. 511.90, Rs. 512.65, Rs. 51 5.90, Rs. 518.08, Rs. 526.45, Rs. 530.55, Rs. 545.35, Rs. 552.05, Rs. 562.75, Rs. 564.1 5, Rs. 577.80 and Rs. 580.45. During the year corresponding market value of the shares for these grants at the time of respective grant was Rs. 479.85, Rs. 490.20, Rs. 503.50, Rs. 501.40, Rs. 510.00, Rs. 511.90, Rs. 51 2.65, Rs. 51 5.90, Rs. 545.35, Rs. 526.45, Rs. 530.55, Rs. 545.35, Rs. 552.05, Rs. 562.75, Rs. 564.15, Rs. 577.80 and Rs. 580.45 respectively.

Options granted during the previous year carry an exercise price of Rs. 506.95, Rs. 507.75, Rs. 510.10, Rs. 516.75, Rs. 525.40, Rs. 527.70, Rs. 534.75, Rs. 544.60 and Rs. 564.45 and were issued at the closing market price as at the date of the grant.

The fair value of options granted during the year has been estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions:

Expected volatility is a measure of the amount by which the equity share price is expected to fluctuate during the period. The measure of volatility used in Black-Scholes option pricing model is the annualized standard deviation of the continuously compounded rates of return on the share over a period of time. Expected volatility has been computed by considering the historical data on daily volatility in the closing equity share price on NSE of similar listed banks over the expected tenor of each tranche.

4. Appropriation to/from Reserves

For the year ended March 31, 2019, the Bank has appropriated Rs. 217.00 crore (previous year: Rs. 158.80 crore) towards Statutory Reserves, Rs. 9.00 crore (previous year: Rs. 9.39 crore) towards Capital Reserves, Rs. 78.36 crore (previous year: Nil) towards Investments Fluctuation reserves (IFR), Rs. 400.00 crore (previous year: Rs. 360.00 crore) towards Revenue & other Reserves.

For the year ended March 31, 2019, the Bank has transferred Nil (previous year - Rs. 2.20 crore) from Investment Reserve Account (IRA) to Profit and Loss account, in accordance with RBI guidelines.

5. Disclosures as per Accounting Standards

5.1. Disclosures under AS -15 on employee benefits Defined Contribution Plans:

Employer’s contribution recognized and charged off for the year to defined contribution plans are as under:

Defined Benefit Plans:

The following table sets out the status ofthe defined benefit Pension and Gratuity Plan as required under Accounting Standard15.

Compensated absences

The Bank does not have a policy of encashing unavailed leave for its employees, except for employees under Indian Banks-’ Association (‘IBA’) structure. The actuarial liability of compensated absences of accumulated privileged and sick leaves of the employees of the Bank is given below:

5.2. Segment Reporting: Information about business segments

In terms ofthe AS-17 (Segment Reporting) issued by ICAI and RBI circular Ref. DBOD.No. BP.BC.81/21.04.018/2006-07 dated April 18, 2007 read with DBR.BP.BC No.23/21.04.018/2015-16 dated July 1, 2015 and amendments thereto, the following business segments have been disclosed:

- Corporate/Wholesale Banking: Includes lending, deposits and other banking services provided to corporate customers of the Bank.

- Retail Banking: Includes lending, deposits and other banking services provided to retail customers of the Bank through branch network or other approved delivery channels.

- Treasury: includes investments, all financial markets activities undertaken on behalf of the Bank’s customers, proprietary trading, bullion business, maintenance of reserve requirements and resource mobilization from other Banks and financial Institutions. Intersegment earnings of Balance Sheet management function are included in the Treasury segment.

- Other Banking Operations: Includes para banking activities like Bancassurance, Credit Cards etc.

Segment revenues include earnings from external customers and earnings from other segments on account of funds transferred at negotiated rates, which are determined by the management. Segment results includes segment revenues as reduced by interest expense, charge from other segments on account of funds transferred at negotiated rates and operating expenses and provisions either directly identified or allocated to each segment..

5.3. Related Party Transactions

As per AS 18 “Related Party Disclosures”, the Bank’s related parties for the year ended March 31, 2019 are disclosed below:

1. Key Management Personnel (‘KMP’)

Mr. Vishwavir Ahuja (Managing Director & Chief Executive Officer)

Mr. Rajeev Ahuja (Executive Director)

2. Relatives of Key Management Personnel

Mrs. Reva Ahuja, Mr. Dharam Bir Ahuja, Ms. Vasudhaa Ahuja, Ms. Vrinda Ahuja, Mrs. Dipeeka Dhand, Ms. Kanika Ahuja, D.

B. Ahuja & Sons (HUF)

Ms. Aishwarya Ahuja, Mrs. Priti Ahuja, Mr. Raman Ahuja, Ms. Nandita Ahuja, Miss Asavari Ahuja

3. Associates

RBL Finserve Limited (RFL) (formerly Swadhaar Finserve Private Limited (SFPL)) (till November 7, 2017)

4. Subsidiary

RBL Finserve Limited (RFL) (formerly Swadhaar Finserve Private Limited (SFPL)) (w.e.f. November 8, 2017)

5.4. Operational Leases

The Bank has taken certain premises on operating lease. The agreements entered into provide for renewal and rent escalation. Particular of future minimum lease payments in respect ofthe same are as mentioned below:

6. Small and Micro Industries

Under the Micro, Small and Medium Enterprises Development Act, 2006 which came into force from October 2, 2006, certain disclosures are required to be made relating to Micro, Small and Medium enterprises. There have been no reported cases of delays in payments to micro and small enterprises or of interest payments due to delays in such payments during the years ended March 31, 2019 and March 31, 2018. The above is based on the information available with the Bank which has been relied upon by the statutory auditors.

7. Capital Adequacy

The Bank’s capital to risk-weighted asset ratio (‘Capital Adequacy Ratio’) as at March 31, 2019 is calculated in accordance with the RBI guidelines on Basel III capital regulations (‘Basel III’). The phasing-in ofthe minimum capital ratio requirement under Basel III is as follows:

7.1. Capital Adequacy Ratio as per RBI guidelines as per Basel III Capital Regulations dated July 1, 2015 and amended thereafter, as at March 31, 2019 is given below:

For the computation of CRAR the Bank has reduced the proposed dividend and corporate dividend tax thereon, totaling Rs. 138.89 crore and Rs. 106.25 crore for the year ending March 31, 2019 and of March 31, 2018 respectively, from CET Capital funds.

7.2. Tier II Capital

During the current year, the Bank did not issue any Basel III compliant Tier II bonds (previous year NIL). Basel III compliant Tier II bonds outstanding as at March 31, 2019 are as below:

8. Investments:

8.1. During the current year and the previous year there has been no sale/transfer from HTM categories in excess of 5% of the book value of investments held in the HTM category. The 5% threshold referred to above does not include onetime transfer of securities to/from HTM category with the approval of Board of Directors permitted to be undertaken by banks as per extant RBI guidelines, sale of securities under pre-announced Open Market Operation (OMO) auction to the RBI and sale of securities or transfer to AFS / HFT consequent to the reduction of ceiling on SLR securities under HTM.

8.2. In the financial year ending March 31, 2016, with RBI’s permission, the Bank acquired the shares of a company (investee Company) to realize it’s dues by exercising a pledge of investee company’s shares in its favor by one of the defaulting borrowers of the Bank. The Bank’s shareholding in the said investee company stands at 24.38% as at March 31, 2019 (previous year 24.38%). Investments in the shares of the investee company have been acquired and held exclusively with a view to its subsequent disposal in the near future and accordingly has not been accounted for as an associate under the purview of AS-23 - Accounting for Investments in Associates in Consolidated Financial Statements’. These equity shares have been classified under AFS category and have been valued as per the extant RBI guidelines for the valuation of investments. Accordingly, these exposures have not been considered as intra-group exposures.

8.3. During the year ended March 31, 2019, the Bank has increased its holding in RBL Finserve Limited (RFL) (formerly Swadhaar Finserve Private Limited (SFPL)) from 60.48% to 100%, following which the company has become a “Wholly Owned Subsidiary” (WOS) of the Bank w.e.f. June 28, 2018. The investment is classified in Held to Maturity (HTM) category, in accordance with the RBI guidelines.

During the previous year ended March 31, 2018, the Bank had increased its holding in RBL Finserve Limited (RFL) (formerly Swadhaar Finserve Private Limited (SFPL)) from 30.00% to 60.48%, following which the company had become a “Subsidiary” of the Bank w.e.f. November 8, 2017. The investment was classified in Held to Maturity (HTM) category, in accordance with RBI guidelines.

8.4. Repo / Reverse Repo Transactions:

During the year, the Bank has undertaken Repo / Reverse Repo transactions including Repo / Reverse Repo transactions under the Liquidity Adjustment Facility (LAF) / Marginal Standing Facility (MSF) with RBI. Outstanding lending under Reverse Repo deals with RBI under LAF / MSF as at March 31, 2019 stood at Rs. 2,315.00 crore (previous year: Rs. 628.00 crore). Outstanding borrowing under Repo deals with RBI under LAF / MSF as at March 31, 2019 stood at Nil (previous year: Rs. 500.00 crore). Outstanding lending under Reverse Repo deals with COIL as at March 31, 2019 were Nil (previous year: Rs. 214.99 crore). Outstanding borrowing under Repo deals with COIL as at March 31, 2019, Nil (previous year: Rs. 684.98 crore).

8.5. Collateralized Borrowing and Lending Obligation (CBLO) \ Tri-party Repo Transactions

CBLO is a discounted money market instrument, established by COIL and approved by RBI, which involves secured borrowings and lending transactions. At March 31, 2019, the Bank had outstanding net borrowings at Nil (March 31, 2018: Rs. 399.80 crore) in the form of CBLO. The amortized book value of securities given as collateral by the Bank to CCILfor availing the CBLO facility was Nil at March 31, 2019 (March 31, 2018: Rs. 412.79 crore).

At March 31, 2019, the Bank had net outstanding borrowings Nil (March 31, 2018: Nil), and net lending Rs. 99.93 crore (March 31, 2018: Nil) under Tri-party Repo transaction.

8.6. Issuer Composition of Non-SLR investments (investments not qualifying for the purpose of Statutory Liquidity Ratio (SLR) prescribed by RBI):

Issuer composition as at March 31, 2019 of non-SLR investments

9.1. Risk Exposure in Derivatives:

Qualitative disclosures:

Derivatives are financial instruments whose characteristics are derived from underlying asset or interest rates or exchange rates or indices. The Bank deals in interest rate and foreign exchange (Fx) derivatives for balance sheet management, proprietary trading and market making purposes whereby the Bank offers derivative products to its customers, enabling them to hedge their risks.

Proprietary Traders manages trading positions within the approved risk limits. It deals in fixed income, equity and forex markets. The Bank transacts in derivative products such as forex options, currency swaps, interest rate swap, foreign currency interest rate swaps and long term foreign exchange contracts (LTFX) with its customers to hedge their market risk. The Bank also undertakes derivative transactions to hedge its balance sheet assets or liabilities.

These transactions expose the Bank to various risks, primarily credit, market and operational risk. The Bank has adopted the following mechanism for managing risks arising out ofthe derivative transactions.

a) The structure and organization for management of risk in derivatives trading.

The Bank has separate Treasury Front Office, Treasury Middle Office, Treasury Back Office and Market Risk functions. The derivative transactions are originated by Treasury Front Office, which ensures compliance with the trade origination requirements as per the RBI guidelines and the Bank’s derivatives policy. The Treasury Middle Office and Market Risk groups are responsible for identifying, measurement, monitoring, and analysis of derivative related risks. Treasury Back Office undertakes activities such as confirmations, settlements, documentation and accounting. Treasury functions are also subject to a concurrent audit.

b) The scope and nature of risk measurement, risk reporting and risk monitoring systems.

Derivative transactions are governed by the Bank’s Derivative Policy, Commercial Credit Policy, Market Risk Policy, Liquidity Risk Management, ALM Policy and Client Suitability and Appropriateness Policy as well as by the extant RBI regulations.

The Bank has set up various risk limits taking into account market volatility, business strategy and management experience. The Bank measures and monitors risk of its derivatives portfolio using risk metrics such as Value at Risk (VaR), stop loss limits, PV01 and other risk measures. All exposures are monitored against these limits on a daily basis and breaches, if any, are reported to senior management/Asset and Liability Committee (ALCO) for corrective action/ratification.

All counterparty exposures are monitored against counterparty credit limits on a daily basis and breaches, if any, are reported to senior management/ALCO for corrective action/ratification.

c) Policies for hedging and/ or mitigating risk and strategies and processes for monitoring the continuing effectiveness of hedges / mitigants,

The Bank has a Board approved Hedge and Hedge effectiveness Policy, which govern the use of derivative for hedging purpose. Hedging transactions are undertaken by the Bank to protect the variability in the cash flow of the underlying Balance Sheet item. These deals are accounted on an accrual basis.

d) Accounting policy for recording hedge and non-hedge transactions, recognition of income, premiums and discounts, valuation of outstanding contracts.

The Bank undertakes derivative transactions for market making/trading and hedging purposes. Transactions for trading and hedging are recorded separately. The Bank revalue its trading positions on a daily basis and the resulting gain/loss is recorded in the Profit and Loss Account. The receivable and payable on marking the contracts to market are shown under “Other Assets” and “Other Liabilities” in the Balance Sheet.

Foreign exchange forward contracts not intended for trading, that are entered into to establish the amount of reporting currency required or available at the settlement date of a transaction, and are outstanding at the Balance Sheet date, are effectively valued at the closing spot rate. The premia or discount arising at the inception of such forward exchange contract is amortized as expense or income over the life of the contract.

The Bank follows the option premium accounting framework prescribed by FEDAI guidelines. Premium on option transaction is recognized as income/ expense on expiry or unwinding of the transaction. MTM gain/ loss, is recorded under ‘Other Income’. The amounts received/paid on cancellation of option contracts are recognized as realised gains/ losses on options.

Charges receivable/payable on cancellation/termination of foreign exchange Forward contracts and swaps are recognized as income/ expense on the date of cancellation/ termination under ‘Other Income’. Pursuant to the RBI guidelines, any receivables (crystallised receivables and positive MTM) under Forex & derivatives contracts, which remain overdue for more than 90 days, are reversed through the Profit and Loss Account and are held in a separate Suspense account.

e) Counterparty Credit Risk Mitigation

The credit risk on customer derivative transactions is mitigated through a laid down policy on sanction of Loan Equivalent Risk (LER) limits, monitoring mechanism for LER limits and trigger events for escalations, margin calls and terminations.

The Bank measures the counterparty risk using current exposure method as stipulated by RBI. Counterparty limits are approved as per the Bank’s Credit Policies. The sanction terms may include the requirement, on a case to case basis, to provide upfront collateral, or place collateral if the mark to market (MTM) exceeds a specified threshold. The Bank retains the right to terminate transactions as a risk mitigation measure, in case the client does not adhere to the agreed terms.

Collateral requirements for derivative transactions determined through a usual credit appraisal process and are laid down in the credit sanction terms of the transactions. The Bank retains the right to terminate transactions as a risk mitigation measure in certain cases.

10. Restructured / Rescheduled / Renegotiated Investments

During the year Nil (Previous year: Nil)

11.1. Divergence in Asset Classification and Provisioning for NPAs

RBI vide its circular dated 18th April 2017, has directed banks to make suitable disclosures, wherever either (a) the additional provisioning requirements assessed by RBI exceed 15 percent of the published net profits after tax for the reference period or (b) the additional Gross NPAs identified by RBI exceed 15 percent of the published incremental Gross NPAs for the reference period, or both. The disclosure requirements were amended by RBI circular dated April 1, 2019, where the banks are required make suitable disclosures, wherever either (a) the additional provisioning for NPA assessed by RBI exceeds 10 percent of the reported profits before provisions and contingencies for the reference period or (b) the additional Gross NPAs identified by RBI exceed 15 percent of the published incremental Gross NPAs for the reference period, or both.

The divergence observed by RBI for the financial year 2017-18 and for the financial year 2016-17 in respect of the Bank’s asset classification and provisioning under the extant prudential norms on income recognition asset classification and provisioning (IRACP) did not exceed the relevant prescribed thresholds as per the aforesaid circulars in force.

11.1.1.Disclosures on Change in Ownership outside SDR Scheme (accounts which are currently under the stand-still period)

The Bank did not implement any scheme relating to change in the ownership outside the SDR during the current year and the previous year.

11.1.2.Disclosures on Change in Ownership of Projects Under Implementation (accounts which are currently under the stand-still period)

The Bank did not implement any scheme relating to change in the ownership of Projects under Implementation during the current year and the previous year.

11.1.3.Disclosures on Flexible Structuring of Existing

The Bank did not do any flexible structuring of existing loans during the current year and the previous year.

11.1.4.The Bank has not acquired any equity shares under SDR scheme during the current year (previous year Nil).

11.1.5.During the current year ended March 31, 2019, there are no cases of resolution under the RBI circular RBI/ 2017-18/131 /DBR. NO.BP.BC.l 01/21.04.048/2017-18 dated February 12, 2018 on ‘Resolution of Stressed Assets - Revised Framework’ (previous year Rs. 55.65 crore). The said RBI circular has been subsequently quashed by the Honorable Supreme Court vide its judgement dated April 2, 2019.

12. The Bank has not done any securitization of loan assets during the current and the previous year.

13. Details of Single / Group Borrower limit exceeded by the Bank

During the current year and the previous year, the Bank has complied with the applicable RBI guidelines with regard to exposure to a single borrower and a group of the borrower. As per the exposure limits permitted under the extant RBI regulation, the Bank, with the approval of the Board of Directors, can enhance exposure to a single borrower or borrower group by a further 5 percent of capital funds.

During the current year and the previous year, the Bank’s credit exposures to single borrowers and group borrowers were within the prudential limits prescribed by RBI.

14. Penalties imposed by RBI

During the year ended March 31, 2019, RBI had levied penalties on the Bank totaling Rs. 4,100/- relating to currency chest transactions towards detection of counterfeit notes and soiled notes.

For the previous year ended March 31, 2018, RBI levied following penalties:

The Bank received cash deposits from various customers during the demonetisation period and subsequently deposited under chest guarantee scheme with RBI. RBI regional offices counted the deposited cash subsequently and levied penalty of Rs. 0.04 crore for various reasons e.g. mutilated notes & cash shortage, etc.

15. Drawdown from Reserves

The Bank has not undertaken any drawdown from any reserves during the current year and the previous year except for Rs. 2.20 crore drawdown from Investment Reserve Account (IRA) in the previous year, in accordance with RBI guidelines.

16. Floating Provisions

The Bank has not created or utilized any floating provisions during the current year ended March 31, 2019 and the previous year ended March 31, 2018. The floating provision as at March 31, 2019 was Nil (previous year: Nil).

17. Disclosure on Remuneration

Qualitative Disclosures

A. Information relating to the composition and mandate of the Remuneration Committee.

The Bank’s Human Resources and Remuneration Committee (HR&RC) comprises of the following Directors:

1. Mr. P. Sudhir Rao - Chairman of Committee

2. Mr. Prakash Chandra

3. Mr. Jairaj Purandare

4. Mr. Ishan Raina

All members of the HR&RC are independent directors. Mr. P. Sudhir Rao, Mr. Prakash Chandra and Mr. Jairaj Purandare are also members of the Risk Management Committee of the Board. Mr. Vishwavir Ahuja is a permanent attendee.

Following are the terms of reference of Human Resources and Remuneration Committee:

- To assist and advice the MD & CEO in planning for senior management build-up of our Bank so as to ensure appropriate leadership is in place for our Bank’s growth strategy, including identifying persons who may be appointed as senior management in accordance with the laid down criteria, and recommend to the Board their appointment or removal, as applicable

- Formulation of the criteria for determining qualifications, positive attributes and independence of a director and recommend to the board of directors a policy relating to, the remuneration of the key managerial personnel and other employees

- To evaluate and approve HR policies of our Bank

- To evaluate and approve various employee stock ownerships schemes that may be required from time to time to ensure that our Bank gets the rights talent and it is able to retain high-performing employees

- To award stock options to employees, whether in the form of joining ESOPs or performance ESOPs. The Committee may determine the level/grade of employees it desires to review and award

- To oversee the framing, review and implementation of compensation policy of our Bank on behalf of our Board

- To work in close co-ordination with the Risk Management Committee of our Bank, in order to achieve effective alignment between remuneration and risks

- To ensure that the cost/income ratio of our Bank supports the remuneration package consistent with maintenance of sound capital adequacy ratio

- To appoint/discontinue trustees on the board of trustees of The Ratnakar Bank Limited Employees Provident Fund, The Ratnakar Bank Limited Employees Gratuity Fund’ and The Ratnakar Bank Limited Employees Pension Fund’ and to approve operational changes in the related trust deeds and/or decide on related matters

- To decide on grating of mandate to the Indian Bank Association for negotiating industry level wage settlements for workmen employee.

B. Information relating to the design and structure of remuneration processes and the key features and objectives of remuneration policy.

Bank’s remuneration policy is designed and aimed at attracting & retaining best possible / available talent that it requires to effectively grow the business and become a highly respected institution. It comprises of a balanced mix of fixed & variable cash and noncash compensation and benefits / perquisites to deliver maximum value to the employee and other stakeholders.

The remuneration is divided into following components:

Fixed Remuneration:

For employees governed by Indian Banking Association’s employment and compensation rules (IBA rules), their remuneration is based on the industry-wide bi-partite wage settlement agreements signed with the employees’ union. These rules provide for basic salary, allowances and certain retirement benefits to the employees which are uniformly applicable for the employees covered under the IBA scale.

For the employees governed by the ‘Cost to Company’ (CTC) remuneration structure (i.e. Non-IBA scale employees), the CTC represents the total direct and fixed cost incurred by the Bank across all components of compensation including contributions paid by the Bank towards retiral benefits, and loans at concessional interest rates. It consists of Basic Salary, House Rent Allowance, Personal Allowance / Special Allowances, Car Related Benefits, Medical Reimbursement, Leave Travel Assistance, Conveyance Allowance, Food Allowance and Retiral Benefits.

Employee Stock Options:

In order to align the interest of the Bank, the senior management, its shareholders and the employees, there is an effort to create long term ownership and commitment for the senior officers of the Bank. This is also done with a view to recognize and compensate senior officers for intellectual capital, the domain expertise in terms of product, market knowledge and the business relationships that they bring along. Accordingly, the Bank has formulated Employee Stock Option Program.

The underlying philosophy of Employee Stock Option Plan is to enable the present and future employees to share the value that they help to create for the Bank over a period of time. Joining Employee Stock Options (JESOPs) are granted based on the role in the Bank as well as experience, domain knowledge, current ability, future potential and expertise of the candidate. Further, to reward the performance and recognize the contribution of employees, the Bank has a Performance Employee Stock Option Program (PESOPs). PESOPs are given after periodic evaluation of the individual performance, business unit as well as overall Bank performance during the review period.

These plans are designed and implemented in such a way that an equity component in the compensation goes a long way in aligning the objectives of an individual with those ofthe Bank.

These stock option programs are administered by the HR&RC.

Annual Performance Linked Variable Compensation (APLVC):

APLVC is paid as a percentage of CTC as defined in the Compensation Policy ofthe Bank.

As per the guidelines issued by RBI vide circular ref. RBI/2011 -12/349, APLVC is capped at 70% of CTC for Whole-time Directors / CEO / Senior Executive Team and 40% for Risk Management & Compliance Staff. Also, the APLVC could be paid in a staggered manner based on the quantum of APLVC as a percentage of the CTC. APLVC does not include value of ESOPs.

C. Description of the ways in which current and future risks are taken into account in the remuneration processes.

Key determinant ofthe total variable pool is the overall performance ofthe Bank in any given year.

Further, the following principles apply:

i. In order for incentive-based remuneration to work, the variable part of remuneration should be truly and effectively variable and can even be reduced to zero.

ii. Methodologies for adjusting remuneration to risk and performance will be based on the general risk management and corporate governance framework adopted by the Bank.

iii. Risks taken need to be estimated (ex ante), risk outcomes observed (ex post) and both ex ante estimates and ex post outcomes would have a bearing on the payoffs.

iv. Risk adjustments would take into account the nature ofthe risks involved and the time horizons over which they could emerge. The impact of remuneration adjustments would be linked to actions taken by employees and / or business units, and their impact on the level of risk taken on by the Bank.

v. Both ESOP as well as APLVC provides long term remuneration benefits to employees. JESOP/ PESOP are equity settled where the employees will receive one equity share per option. JESOPs and PESOPs granted to employees vest over a period of three / four years, in the following proportion, 40:30:30, 30:30:40, 10:20:30:40 each year. Further, JESOP/PESOP and APLVC are subject to suitable claw-back and malus clauses to protect the Bank against misconduct, sub-optimal performance or decisions or actions leading to adverse financial consequence to the Bank.

D. Description of the ways in which the bank seeks to link performance during a performance measurement period with levels of remuneration.

The Bank has a performance management system in place. The Performance management system has goals on four themes namely Shareholder Value as the Focus, Customer at the Heart, Employee as the Pillar and Community as the Cause. Employees are appraised against the goals set at the beginning of the year. Employee performance and competence assessment are both considered for the performance rating. Performance Rating has a direct correlation with the increments and APLVC as well as PESOPs.

E. Description of the ways in which the Bank seeks to adjust remuneration to take account of the longer term performance

A discussion of the bank’s policy on deferral and vesting of variable remuneration and a discussion of the bank’s policy and criteria for adjusting deferred remuneration before vesting and after vesting:

As per the guidelines issued by RBI, APLVC is capped at 70% of CTC for Whole-time Directors / CEO / Senior Executive Team and 40% for Risk Management & Compliance Staff. Also, the APLVC could be paid in a staggered manner based on the quantum of APLVC as a percentage of the CTC. APLVC does not include ESOPs/PESOPs.

Schedule for APLVC vesting and payout is as per pay schedule defined in the Compensation Policy of the Bank.

Deferred APLVC vests only in the year of payment. Voluntary Cessation of employment by the employee or termination with cause as defined in employment contract will result in forfeiture of the remaining APLVC. APLVC is subject to claw-back and malus clauses.

F. Description of the different forms of variable remuneration that the bank utilizes and the rationale for using these different forms.

Various forms of variable remuneration used by the Bank are:

APLVC: APLVC provides cash bonus in short to medium term to employees. The bank utilizes APLVC to reward superior performance.

Employee stock option (ESOP) plan: Employee stock option plan is a long term remuneration benefit. ESOP is equity settled where the employees will receive one equity share per option after vesting/ exercise. The stock options granted to employees vest over a period of three / four years, generally. ESOP is used to reward superior performance, aligning employee interests with the Bank, create long term ownership and commitment.

18. Contingent Liabilities

Description of nature of contingent liabilities is set out below:

i) Claims against the Bank not acknowledged as debts: These represent claims filed against the Bank in the normal course of business relating to various legal cases currently in progress.

ii) Liability for partly paid investments:

These represent contingent liability on account of possible claims for uncalled amount by the issuer of the securities held by the Bank.

iii) Liability on account of forward exchange and interest rate contracts:

The Bank enters into foreign exchange contracts currency options, forward rate agreements, currency swaps with inter-bank participants on its own account and for the customers. Forward exchange contracts are commitments to buy or sell foreign currency at a future date at the contracted rate. Currency swaps are commitments to exchange cash flows by the way of interest/principal in one currency against another, based on pre-determined rates. Interest rate swaps are commitments to exchange fixed and floating interest rate cash flows.The amount recorded as contingent liability with respect to these contracts represents the underlying notional amounts of these contracts.

iv) Guarantees given on behalf of Constituents, Acceptances, Endorsement and other obligations:

As a part of its corporate banking activities, the Bank issues documentary credit and guarantees on behalf of its customers. Documentary credits such as letters of credit enhance the credit standing of the customer ofthe Bank. Guarantees generally represent irrevocable assurances that the Bank will make the payment in the event of the customer failing to fulfill its financial or performance obligations.

v) Acceptances, endorsements and other obligations: These include documentary credit issued by the Bank on behalf of its customers and bills drawn by the Bank’s customers that are accepted or endorsed by the Bank.

vi) Other contingent items:

a. Commitments for settlement date accounting for securities transactions;

b. Demands raised by income tax and other statutory authorities and disputed by the Bank.

c. Amount transferred to RBI under the Depositor Education and Awareness Fund (DEAF).

The Bank makes provident fund contributions to an independently administered Trust. The Bank is currently in dispute with the Provident Fund authorities regarding applicability of the Employees Provident Funds and Miscellaneous Provisions Act, 1952 (the Act’) on the Bank and the matter is pending with Central Government Industrial Tribunal, Mumbai for further adjudication. Additionally, in light ofthe recent Honorable Supreme Court of India judgement on 28th February 2019, which clarified that any emolument paid universally, necessarily and ordinarily to all employees across the board are to be considered as basic wage and accordingly needs to be considered for calculation of Provident Fund contribution.

Any potential likely impact on the financial statements in view of the above will be ascertained on the decision of the Central Government Industrial Tribunal, Mumbai and on clarification from the Provident Fund authorities / courts, if any.

Refer Schedule 12 for amounts relating to contingent liabilities.

19. Bank has not issued any Letters of comfort and Letters of Undertaking during the year (previous year - NIL)

20. The disclosure regarding details of specified bank notes held and transacted during 8 November 2016 to 30 December 2016 has not been made in these financial statements since the requirement does not pertain to financial year ended 31 March 2019.

21. Liquidity Coverage Ratio (LCR)

Qualitative disclosure around LCR

Liquidity Coverage Ratio (LCR) is a global minimum standard aimed at measuring and promoting short-term resilience of banks to potential liquidity stress by ensuring maintenance of sufficient high quality liquid assets (HQLAs) to survive net cash outflows over next 30 days under stress conditions. It is a ratio of Bank’s High Quality Liquid Assets (HQLA) to the estimated net outflows over next 30 day period of significant liquidity stress.

The Board of Directors has the overall responsibility for liquidity risk management. The Board at overall level decides the liquidity risk tolerance and accordingly decides the strategy, policies and procedures of the Bank. The Board has constituted a Risk Management Committee (RMC) consisting of Managing Director & Chief Executive Officer (MD&CEO) /Chairman and other Board members. The committee is responsible for evaluating the overall risks faced by the Bank including liquidity risk. The potential interaction of liquidity risk with other risks is included in the risks addressed by the Risk Management Committee. At the executive level, Asset Liability Management Committee (ALCO) ensures adherence to the risk limits set by the Board and implements the liquidity risk management strategy of the Bank. ALM team within Treasury function of the Bank is responsible for the day-to-day / intra-day liquidity management. ALCO channelizes various business segments of the Bank to target good quality asset and liability profile to meet the Bank’s profitability as well as liquidity requirements.

High quality liquid assets (HQLA) under LCR are divided into two parts i.e. Level 1 and Level 2 HQLA.

Level 1 HQLA comprises primarily of cash, excess CRR, government securities in excess of SLR , Marginal Standing Facility (Currently 2% of NDTL) and Facility to Avail Liquidity for Liquidity Coverage Ratio (FALLCR) as permitted under prudential guidelines Previously FALLCR was 9% of NDTL, this was increased to 11 % with effect from June 15, 2018. This has been further increased to 13% w.e.f. October 1, 2018.

Level 2 HQLA comprises of investments in highly rated non-financial corporate bonds, debentures, commercial papers issued by non-financial institutes and are further considered at prescribed haircuts.

Cash outflows are calculated by applying prescribed outflow run-off factors to contractual outflows on account of various categories of liabilities and cash inflows are calculated by applying prescribed weights and factors to the contractual inflows. Additionally, probable outflows on account of contingent liabilities such as letters of credit (LC) and bank guarantees (BGs) and undrawn commitments both for fund & non fund based exposures are considered by applying prescribed run-off factors. The Bank has a very limited exposure to liquidity risk on account of its derivatives portfolio. Further, the Bank is not taking any benefit of classifying any deposit as Operational Deposit on a conservative basis.

The Bank computes LCR on a daily basis in accordance with RBI guidelines. Effective January 1, 2017, the LCR is reported as a simple average of daily observations for the quarter. The Bank believes that all inflows and outflows which might have a material impact under the liquidity stress scenario have been considered for the purpose of LCR.

22 Corporate Social Responsibility (CSR)

Operating expenses include Rs. 10.55 crore for the current year, towards CSR (previous year Rs. 6.98 crore), in accordance with the Companies Act, 2013.

As a responsible organisation, the Bank has approached the mandatory requirements of CSR spends positively by laying a foundation on which it would build and scale future projects and partnerships. The Bank continues to evaluate strategic avenues for CSR expenditure in order to deliver maximum impact. In the years to come, the Bank will further strengthen its processes as per requirement.

Gross Amount required to be spent by the Bank on CSR activities during the current year - Rs. 13.83 crore (previous year Rs. 9.36 crore).

23 Un-hedged Foreign Currency Exposure (UFCE) of Bank’s Customer

The UFCE of corporate borrowers is assessed on a quarterly basis. The assessment includes foreign currency borrowings, foreign currency hedges, natural hedges available, as well as other foreign currency assets and liabilities on the balance sheet. RBI guidelines prescribe the methodology for computation of provision for UFCE. As per the guideline, UFCE leads to the determination of likely loss’. The ratio of likely loss’ to clients’ Earnings Before Interest and Depreciation (EBID), determines the provision as per the following grid.

The Bank has maintained an additional provision of Rs. 8.56 crore (previous year Rs. 6.83 crore) towards UFCE of customers. Further, the Bank has maintained an additional capital of Rs. 18.70 crore (previous year Rs. 26.28) towards UFCE of customers.

24 Credit Default Swap

The Bank has not entered into Credit Default Swap during the current year and the previous year.

25 The Bank has a process whereby periodically all long term contracts (including derivative contracts) are assessed for material foreseeable losses. At the year end, the Bank has reviewed and recorded adequate provision as required under any law / accounting standards for material foreseeable losses on such long term contracts (including derivative contracts) in the books of account and disclosed the same under the relevant notes in the financial statements.

26 Figures for the previous year have been regrouped / reclassified wherever necessary to conform to current years’ presentation.

Source : Dion Global Solutions Limited
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