MANAGEMENT DISCUSSION AND ANALYSIS REPORT

Macro Economic Scenario

A. Global Economy

During the year 2015-16, the Global economic activity remained subdued despite some momentum it had at the beginning. The Chinese economy slowed down which resulted in further weakening of global trade activity. The US Federal Reserve increased the Fed Funds rate by 25 bps in December 2015 monetary policy. The European Central Bank had cut down the interest rate to Zero and reduced key deposit rate into negative territory. The Bank of Japan also surprised the market by adopting negative interest rate in January 2016. The three key transitions continued to influence the global economic outlook viz., the gradual slowdown and rebalancing of economic activity in China away from investment and manufacturing towards consumption and services, lower prices for energy and other commodities and gradual tightening in monetary policy in the United States in the context of a resilient U.S. recovery as several other major advanced economy central banks continued to ease monetary policy. While macroeconomic stability is returning to some emerging market economies (EMEs), geo-political tensions and high volatility in financial markets impede the resumption of momentum and the outlook remains challenging.

Oil prices declined markedly since September 2015, reflecting expectations of sustained increases in production by Organization of the Petroleum Exporting Countries (OPEC) members amid continued global oil production in excess of oil consumption. Futures markets are currently suggesting only modest increases in prices in 2016 & 2017. Prices of other commodities especially metals fell as well. Lower oil prices strained the fiscal positions of fuel exporters and weighed on their growth prospects, while supporting household demand and lowering business energy costs in importers, especially in advanced economies, while prices declines are fully passed on to end users.

Headline inflation has broadly moved sideways in most countries, but with renewed declines in commodity prices and weakness in global manufacturing weighing on traded goods prices it is likely to soften again. The Core inflation rates remained well below inflation objectives in advanced economies. Mixed inflation developments in emerging market economies reflect the conflicting implications of weak domestic demand and lower commodity prices vs marked currency debrciations over the past year.

B. Indian Economy

In the financial year 2015-16, the general economic slowdown continued, especially in the Banking sector and asset quality of almost all banks remained under stress throughout the year. India recorded GDP at a growth of 7.5% during the year as against the projected level of 7.6% for the period in the midst of global headwinds and truant monsoon. During the period 2015-16, inflation measured by the CPI (consumer price index) averaged around 4.9% as against above 6% in FY2015 with steep fall in crude and commodity prices and better food supply management. The level was maintained within the RBI projected level. The wholesale price index (WPI) remained in the negative territory and averaged at 2.8% against 2.1% during FY2015.

As a result of slowing down of the world economy, India's exports declined throughout the year. The rupee declined to Rs. 68 to the US dollar as the country found itself out performed in export markets by much smaller countries like Bangladesh and Vietnam. As on 31st March 2016 the INR was trading at around Rs. 66. The foreign reserves were at about $350 bn in March 2016 as against $341.6 bn in FY2015.

The index of industrial production decelerated in 2015-16, due to weak manufacturing in an environment of subdued investment demand and weak rural consumption. Except for natural gas and crude oil, the core sector registered strong growth in April 2016 on account of a seasonal pick up in industries like electricity also supported by a low base. There were signs of improvement in the corporate performance.

C. How your Bank is positioned

The Bank credit remained subdued during the period and RBI allowed the policy rates to remain steady and later in the year Repo rate was brought down by 75 bps to 6.75%. The growing stressed assets in public sector banks are major cause of concern for further lending. RBI also advised banks to tackle growing NPA and make suitable provision to clean up the books by March 2017. Despite weak global economy and moderate growth witnessed in Indian economy, during the period, the Bank had fared well and improved its business by 15% with an increase of Deposits and Advances by 13% and 17% respectively.

Your Bank during this year had entered its 111th year and has been consistently rewarding its shareholders with dividends. The Bank has always focused on customer centric banking aimed at overall growth. It is committed to best practices in terms of product offerings, technology, service levels, risk management, audit and compliance. Your Bank is committed to do so while ensuring the highest levels of ethical standards, professional integrity, corporate governance and regulatory compliance. The Bank understands and respects its fiduciary role and responsibility to all stakeholders and strives to meet their expectations. The cardinal principles of Independence, accountability, responsibility, transparency, fair and timely disclosures serve as the basis of our approach to good corporate governance.

Your Bank believes that diversity and independence of the Board, transparent disclosures, shareholder communication and effective regulatory compliance are necessary for creating and sustaining shareholder value. The Bank has infused these principles into all its activities. Also it has a well documented Code of Conduct which defines the high business responsibility and ethical standards to be adhered to while conducting the business of the Bank and mandates compliance with legal and regulatory requirements.

The financial performance of your Bank during the financial year ended 31st March 2016 remained healthy with a total income of Rs. 3,354.19 crore as compared to Rs. 3,102.96 crore during the brvious year recording a growth of 8.10% and the total net revenues (net interest income plus other income) increased by 14.82% to Rs. 1,391.01 crore from Rs. 1,211.47 crore in the brvious financial year. The net interest income grew by 21.51% supported by loan growth of 17.49% coupled with a net interest margin (NIM) of 3.81% for the year ended 31st March 2016.

Other income earned for the financial year ended 31st March 2016 stood at Rs. 409.98 crore. In other income front, the integrated treasury operations played a major role in earning exchange profit as surplus cash were deployed in overseas market to earn increased return. The other income also included an amount of Rs. 13.60 crore being the incentive received from RBI on account of installation of BNA (Bulk Note acceptor) at our Branches.

Operating non interest expenses increased from Rs. 518.82 crore in the brvious financial year to Rs. 557.73 crore in the year under consideration. During the year, Bank opened 50 new branches and installed 254 ATMs which resulted in higher infrastructure and staffing expenses. Staff expenses increased to Rs. 213.17 crore. Cost to income ratio was at 40.10% for the year ended 31st March 2016 as against 42.83% for the brvious year.

Total provisions and contingencies were Rs. 388.59 crore for the financial year ended 31st March 2016 as compared to Rs. 308.52 crore during the brvious year. The provision coverage ratio was 60.01%.

Your Bank's profit before tax was Rs. 602.69 crore, an increase of 15.68% over the year ended 31st March 2015. The net profit for the year ended 31st March 2016 was Rs. 444.69 crore, up by 12.57% over the year ended 31st March 2015. Return on equity was 15.60% while the basic earnings per share increased from Rs. 6.82 to Rs. 7.44 per equity share and the diluted earnings per share stood at Rs. 7.27. The book value per share of the Bank increased from Rs. 45.18 to Rs. 51.02 as on 31st March 2016, as compared with brvious year.

The total balance sheet of the Bank stood at Rs. 31,251.96 crore as on 31st March 2016, an increase of 12.13% over the brvious year figure of Rs. 27,871.13.

The deposits of the Bank increased to Rs. 27,158 crore as on 31st March 2016 compared to Rs. 24,075 crore as on 31st March 2015. The total demand deposits (CASA) increased by 19.48% to Rs. 5532.56 crore. The proportion of current and savings deposits to total deposits was at 20.37% as on 31st March 2016. During the financial year under review, gross advances grew by 17.49% to Rs. 21,253 crore. Your Bank's credit deposit ratio was at 78% as on 31st March 2016.

The number of branches has increased by 50 in the brvious year to reach 525 mark. Your Bank has proposed to widen its network by opening more number of new branches and ATMs during this financial year.

D.  Risk Management

Integral to Bank business, the Bank takes on various types of risk, the most important of which are credit risk, market risk and operational risk. The identification, measurement, monitoring and management of risk remain a key focus area for the Bank. Sound risk management and balancing risk-reward trade-offs are critical to the Bank's success. Business and revenue growth are therefore to be weighed in context of the risks implicit in the Bank's business strategy. Your Bank has in place, a sound Risk Management Architecture established by the active involvement and supervision of Board of Directors. The Board of the Bank has constituted a Risk Management Committee which lays down the parameters establishing the frame work for Risk Management. Under the Board level Committee, the Risk Management Committee of Executives functions to ensure the policy guidelines approved by the Board are implemented and adhered to. It guides the policies, procedures and systems for managing and controlling various risks. The Committee reviews the risk level and direction, portfolio composition, risk appetite for all risks and also the stress tests for each risk.

Your Bank has a Risk Management team that reports directly to the Senior Management who work under the guidance of Board of Directors. The overall risks faced by the Bank and the risk appetites are evaluated by the team which develops policies and procedures, verifying the models that are used for pricing products, identifying new risks etc. Risk Management practices have been aligned with the best industry practices and are adaptable to a dynamic operating environment and market conditions.

The Bank is BASEL II compliant since 31st March 2009. The Bank has implemented the BASEL III Capital Regulations from 01.04.2013, by computing the Capital and Risk weighted Assets as per RBI guidelines dated May 2, 2012. The Bank brsently adopts Standardized Approach for credit and market risks and Basic Indicator Approach for operational risks. Necessary initiatives have been taken for moving over to advanced approaches under BASEL II as per the timelines indicated by RBI. An independent Risk Management Department is functioning to measure, monitor and control all risks paving way for effective Enterprise-wide Risk Management. The Bank has implemented "Internal Capital Adequacy Assessment Process" (ICAAP) in line with the Basel III requirement.

The overall risk of the Bank is being managed through three Committees viz.

i) Credit Risk Management Committee (CRMC)

ii) Asset and Liabilities Management Committee (ALCO)

iii) Operational Risk Management Committee (ORMC)

The Bank has put in place the following policies to manage various types of Risks apart from the overall Integrated Risk Management Policy to measure, monitor and control all the enterprise-wide risks and with the objective of integrating all the risks of the Bank.

1. Credit Risk Management Policy

2. Asset and Liability Management Policy

3. Operational Risk Management Policy

4. Stress Testing Policy

5. Pillar III Disclosure Policy

6. Business Continuity Plan Policy

7. Inspection and Audit Policy

8. Internal Capital Adequacy Assessment Process (ICAAP) Policy

9. Credit Risk Mitigation and Collateral Management Policy

10. Integrated Risk Management Policy

11. Loan Policy (Including Recovery Policy)

12. Integrated Treasury Policy (Rupee & Forex)

13. Policy on Unhedged Foreign currency exposures of corporate including SME's

On the advice of the said three Committees and based on the said policy norms your Bank is able to identify, measure, monitor, analyze, control and mitigate the risks at every stage, brscribe and monitor prudential limits and manage them to face the changing risk environment. The disclosures on Quarterly / Half Yearly / Annual Basis as per the Pillar III Disclosure Policy are reported/incorporated in the Bank's website / Annual Report. Stress tests are conducted to gauge the level of risk in the assumed crisis situation and remedial / brventive steps have been taken to mitigate risks in all areas.

F. Internal Control Systems and their Adequacy

Your bank recognizes the importance of good internal control mechanism which is the key to sustainability of any organization. The system ensures that all internal regulations and regulatory guidelines are strictly complied and adhered to by all the business units while achieving the targeted business and profitability parameters. The inspection department of the bank ensures adherence to laid out systems and procedures are regularly followed by the branches. There is a system of periodical overall inspection of the branches, special credit inspection, jewel loan inspection and concurrent audit. The compliance of KYC & AML regulations and the system of regular KYC inspection has been introduced in all the branches to ensure effective control in account opening process to monitor and report unusual and high value suspicious transactions. The Audit Committee of the Board reviews the internal inspection and concurrent audit report of the branches on a monthly basis and also reviews the performance and status of the compliance with regard to regulatory / internal guidelines. Your bank has an effective credit monitoring system including offsite monitoring of operations on a real time basis, stock audit of large borrowal accounts by external audit agencies and credit audit to ensure compliance of sanctioned terms and conditions. Proper record maintenance, customer confidentiality, strong vigilance and alert system, zero tolerance policy of fraud, corruption and financial irregularities which receive focused attention of the top management as per the bank's internal control policy.

As per Reserve Bank of India's guidelines risk based internal audit system has been introduced in all the branches with the periodicity of inspection varying as per the risk category of the respective branches. The computer systems department is subjected to System Audit by external agencies an ongoing basis to mitigate risk under computerized environment. Identified branches contributing more than 70% of the business are under concurrent audit.

Your Bank is having an exclusive Compliance Department headed by a compliance officer to ensure implementation and compliance of all the directives issued by the regulators, the bank's Board of Directors and those contained in the Bank's internal control policy.

G. Human Resource Development / Industrial Relations

The Bank attaches very high value for its dedicated and loyal human resources across all cadres. Providing congenial working atmosphere, extending mutual trust, recognizing talents, rewarding the sincere and hardworking, addressing problems and motivating them to achieve the goals of the organization are some of the policies successively pursued by the Bank over a period of time. The Bank strongly believes that fundamental values governing the attitude and self respect of the employees across all cadres must be respected and nurtured.

Employee engagement and imparting knowledge, enhancing productivity, development of leadership qualities and integrating new generation employees in the system were the highlights of the policies followed by the Bank.

All employees of the Bank periodically undergo in-house training or in reputed institutions for developing their special functional and behavioral skills to align with the fast changing business models. They are also sponsored for various seminars to sharpen their operational functions. As part of succession planning recruitment and promotion including lateral entries are undertaken periodically. Rewards and recognition play a key role to attract, retain and engage employees. Your Bank also grants employee stock options in order to align employee efforts to the creation of shareholder value.

As in the past the Bank has maintained a cordial and healthy industrial state with the employees. The number of employees on roll of the Bank as on 31st March 2016 was 4,517.

H. Outlook

As per the Second Bi-monthly monetary policy statement 2016-17 issued by RBI, the repo rate under the liquidity adjustment facility (LAF) was at 6.5%, CRR (Cash Reserve Ratio) of Scheduled Banks remained unchanged at 4.0% of net demand and time liabilities (NDTL) and the reverse repo rate under the LAF stood adjusted to 6% and the marginal standing facility (MSF) rate and the Bank rate at 7%.

Reserve Bank of India would continuously monitor macroeconomic and financial developments for any further scope of policy action. Incoming data reflected a sharper than anticipated upsurge in inflationary brssures emanating from a number of food items (beyond seasonal effects), as well as a reversal in commodity prices. A strong monsoon continued astute food management as well as steady expansion in supply capacity, especially in services, could help offset the upward brssures. The stance of monetary policy remains accommodative. To support the revival of growth, more monetary transmission continues to be critical. The Government's reform measures on small savings rates combined with the Reserve Bank refinements in the liquidity management framework would help the transmission of past policy rate reductions into lending rates of banks. The Reserve Bank would shortly review the implementation of the Marginal Cost Lending Rate framework by banks. Timely capital infusions into constrained public sector banks will also aid credit flow.

Your Bank has proposed to add more branches and ATMs to garner a higher percentage of growth in the current financial year. With the economy's expected GDP growth of 8% for the current year, the Bank is confident of achieving a higher share of business and profits ably supported by sophisticated technology, trained and motivated work force besides of course, the needed capital funds.