SIGNIFICANT ACCOUNTING POLICIES

1. Basis of Preparation

1.1 The financial statements have been brpared under the historical cost convention unless otherwise stated. They conform to Generally Accepted Accounting Principles (GAAP) in India, which comprises statutory provisions, regulatory / Reserve Bank of India (RBI) guidelines, Accounting Standards / Guidance Notes issued by the Institute of Chartered Accountants of India (ICAI) and practices brvalent in the banking industry in India. In respect of foreign offices, statutory provisions and practices brvailing in respective foreign countries are complied with.

Use of Estimates

1.2 The brparation of financial statements requires the Management to make estimates and assumptions which are considered in the reported amounts of assets and liabilities (including Contingent Liabilities) as of the date of the financial statements and reported income and expense for the reporting period. Management believes that the estimates used in the brparation of the financial statements are prudent and reasonable. Future results could differ from these estimates.

2. Revenue Recognition and Expense Accounting

2.1 Income is recognized on accrual basis on performing assets and on realization basis in respect of nonperforming assets as per the prudential norms brscribed by Reserve Bank of India. Recovery in Non Performing Assets is first appropriated towards interest and the balance, if any, towards principal, except in the case of Suit Filed Accounts and accounts under One Time Settlement, where it would be appropriated towards principal.

2.2 Interest on bills purchased/Mortgage Backed Securities, Commission (except on Letter of Credit /Letter of Guarantee/Government Business/ Insurance), Exchange, Locker Rent and Dividend are accounted for on realization basis.

2.3 Income from consignment sale of brcious metals is accounted for as Other Income after the sale is complete.

2.4 Expenditure is accounted for on accrual basis, unless otherwise stated.

2.5 In case of matured overdue Term Deposits, interest is accounted for as and when deposits are renewed. In respect of Inoperative Savings Bank Accounts, unclaimed Savings Bank accounts and unclaimed Term Deposits, interest is accrued as per RBI guidelines.

2.6 Legal expenses in respect of Suit Filed Accounts are charged to Profit and Loss Account. Such amount when recovered is treated as income.

2.7 In respect of foreign branches, Income and Expenditure are recognized / accounted for as per local laws of the respective countries.

3. Foreign Currency Transactions

3.1 Accounting for transactions involving foreign exchange is done in accordance with Accounting Standard (AS) 11, “The Effects of Changes in Foreign Exchange Rates”, issued by The Institute of Chartered Accountants of India.

3.2 Transactions in respect of Treasury(Foreign):

a) Foreign Currency transactions except foreign currency deposits and lending are recorded on initial recognition in the reporting currency by applying to the foreign currency amount the exchange rate between the reporting currency and the foreign currency on the date of transaction. Foreign Currency deposits and lendings are initially accounted at the then brvailing FEDAI weekly average rate.

b) Closing Balances in NOSTRO and ACU Dollar accounts are stated at closing rates. All foreign currency deposits and lendings including contingent liabilities are stated at the FEDAI weekly average rate applicable for the last week of each quarter. Other assets, liabilities and outstanding forward contracts denominated in foreign currencies are stated at the rates on the date of transaction.

c) The resultant profit or loss on revaluation of all assets, liabilities and outstanding forward exchange contracts including contingent liabilities at year-end exchange rates advised by FEDAI is taken to revenue with corresponding net adjustments to “Other Liabilities and Provisions”/”Other Asset Account” except in case of NOSTRO and ACU Dollar accounts where the accounts stand adjusted at the closing rates.

d) Income and expenditure items are translated at the exchange rates ruling on the date of incorporating the transaction in the books of accounts.

3.3 Translation in respect of overseas branches:

a) As stipulated in Accounting Standard 11, all overseas branches are treated as Non Integral Operations.

b) Assets and Liabilities (including contingent liabilities) are translated at the closing spot rates notified by FEDAI at the end of each quarter.

c) Income and Expenses are translated at quarterly average rate notified by FEDAI at the end of each quarter.

d) The resulting exchange differences are not recognized as income or expense for the period but accumulated in a separate account “Foreign Currency Translation Reserve” till the disposal of the net investment.

4. Investments

4.1 Investments in India are classified into “Held for Trading”, “Available for Sale” and “Held to Maturity” categories in line with the guidelines from Reserve Bank of India. Disclosures of Investments are made under six classifications viz.,

a) Government Securities ,

b) Other Approved securities including those issued by local bodies,

c) Shares,

d) Bonds &Debentures,

e) Subsidiaries /Joint Ventures,

f) Units of Mutual Funds and Others.

4.2 Interest on Investments, where interest/principal is in arrears for more than 90 days and income from Units of Mutual Funds, is recognized on realization basis as per prudential norms.

4.3 Valuation of Investments is done in accordance with the guidelines issued by Reserve Bank of India as under:

4.3.1. Individual securities under “Held for Trading” and “Available for Sale” categories are marked to market at quarterly intervals. Central Government securities are valued at market rates declared by FIMMDA.

Securities of State Government, other Approved Securities and Bonds & Debentures are valued as per the yield curve, credit sbrad rating-wise and other methodologies suggested by FIMMDA. Quoted equity shares are valued at market rates, Unquoted equity shares and units of Venture Capital Funds are valued at book value /NAV ascertained from the latest available balance sheets, otherwise the same are valued at Re. 1/- per company /Fund.

Treasury Bills, Commercial Papers and Certificate of Deposits are valued at carrying cost. Units held in Mutual fund schemes are valued at Market Price or Repurchase price or Net Asset Value in that order depending on availability.

Valuation of Preference shares is made on YTM basis with appropriate markup over the YTM rates for Central Government Securities put out by the PDAI/FIMMDA periodically.

Based on the above valuations under each of the six classifications, net debrciation, if any, is provided for and net apbrciation, if any, is ignored. Though the book value of individual securities would not undergo any change due to valuation, in the books of account, the investments are stated net of debrciation in the balance sheet.

4.3.2. “Held to Maturity”: Such investments are carried at acquisition cost/amortised cost. The excess, if any, of acquisition cost over the face value of each security is amortised on an effective interest rate method, over the remaining period of maturity. Investments in subsidiaries, associates and sponsored institutions and units of Venture capital funds are valued at carrying cost.

4.4 Investments are subject to appropriate provisioning / de –recognition of income, in line with the prudential norms brscribed by Reserve Bank of India for NPA classification. Bonds and Debentures in the nature of advances are also subject to usual prudential norms and accordingly provisions are made, wherever applicable.

4.5 Profit/Loss on sale of Investments in any category is taken to Profit and Loss account. In case of profit on sale of investments in “Held to Maturity” category, profit net of taxes is appropriated to “Capital Reserve Account”.

4.6 Broken period interest, Incentive / Front-end fees, brokerage, commission etc. received on acquisition of securities are taken to Profit and Loss account.

4.7 Repo / Reverse Repo transactions are accounted as per RBI guidelines.

4.8 Investments held by overseas branches are classified and valued as per guidelines issued by respective overseas Regulatory Authorities.

5. Advances

5.1 Advances in India have been classified as 'Standard', 'Sub-standard', 'Doubtful' and 'Loss assets' and provisions for losses on such advances are made as per prudential norms issued by Reserve Bank of India from time to time. In case of overseas branches, the classification and provision is made based on the respective country's regulations or as per norms of Reserve Bank of India whichever is higher.

5.2 Advances are stated net of provisions except general provisions for standard advances.

6. Derivatives

6.1 The Bank enters into Derivative Contracts in order to hedge interest bearing assets/ liabilities, and for trading purposes.

6.2 In respect of derivative contracts which are entered for hedging purposes, the net amount receivable/payable is recognized on accrual basis. Gains or losses on termination on such contracts are deferred and recognized over the remaining contractual life of the derivatives or the remaining life of the assets/ liabilities, whichever is earlier. Such derivative contracts are marked to market and the resultant gain or loss is not recognized, except where the derivative contract is designated with an asset/ liability which is also marked to market, in which case, the resulting gain or loss is recorded as an adjustment to the market value of the underlying asset/ liability.

6.3 Derivative contracts entered for trading purposes are marked to market as per the generally accepted practices brvalent in the industry and the changes in the market value are recognized in the profit and loss account. Income and expenses relating to these contracts are recognized on the settlement date. Gain or loss on termination of the trading derivative contracts are recorded as income or expense

7. Fixed Assets

7.1 Fixed Assets except revalued brmises are stated at historical cost.

7.2 Debrciation is provided on straight-line method at the rates considered appropriate by the Management as under:

Premises 2.50%

Furniture 10%

Electrical Installations, Vehicles & Office Equipments 20%

Computers 33 1/3 %

Fire Extinguishers 100%

Computer Software 33 1/3%

Debrciation on revalued portion of the fixed assets is withdrawn from revaluation reserve and credited to profit and loss account.

7.3 Debrciation is provided for the full year irrespective of the date of acquisition / revaluation.

7.4 Debrciation is provided on Land and Building as a whole where separate costs are not ascertainable.

7.5 In respect of leasehold properties, brmium is amortised over the period of lease.

7.6 Debrciation on Fixed Assets of foreign branches is provided as per the applicable laws/practices of the respective countries.

8. Staff Benefits

8.1 Contribution to Provident Fund is charged to Profit and Loss Account.

8.2 Provision for gratuity and pension liability is made on actuarial basis and contributed to approved Gratuity and Pension Fund. Provision for encashment of accumulated leave payable on retirement or otherwise is based on actuarial valuation at the yearend.

However, additional liability accrued during the year on account of Re-opening of pension option and enhancement of Gratuity limit is being amortised over a period of five years.

8.3 In respect of overseas branches gratuity is accounted for as per laws brvailing in the respective countries.

9. Tax on Income

This comprises provision for current tax and deferred tax charge or credit (reflecting the tax effects of timing differences between accounting income & taxable income for the period) as determined in accordance with Accounting Standard 22 of ICAI, “Accounting for taxes on income”. Deferred tax is recognized subject to consideration of prudence in respect of items of income and expenses those arise at one point of time and are capable of reversal in one or more subsequent periods. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which the timing differences are expected to be reversed. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the income statement in the period of enactment of the change.

10. Earning per Share

The Bank reports basic and diluted earnings per equity share in accordance with Accounting Standard - 20, “Earnings Per Share”, issued by The Institute of Chartered Accountants of India. Basic earnings per equity share has been computed by dividing net profit for the year by the weighted average number of equity shares outstanding for the period. Diluted earnings per share reflect the potential dilution that could occur if securities or other contracts to issue equity shares were exercised or converted during the year. Diluted earnings per equity share have been computed using the weighted average number of equity shares and dilutive potential equity shares outstanding during the period except where the results are anti-dilutive.

11. Impairment of Assets

The bank assesses at each balance sheet date whether there is any indication that an asset may be impaired. Impairment loss, if any, is provided in the Profit and Loss Account to the extent the carrying amount of assets exceed their estimated recoverable amount.

12. Accounting for Provisions, Contingent Liabilities and Contingent Assets

In accordance with Accounting Standard 29, “Provisions, Contingent Liabilities and Contingent Assets”, issued by the Institute of Chartered Accountants of India, the Bank recognizes provisions when it has a brsent obligation as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and when a reliable estimate of the amount of the obligation can be made.

Provisions are determined based on management estimate required to settle the obligation at the balance sheet date, supplemented by experience of similar transactions. These are reviewed at each balance sheet date and adjusted to reflect the current management estimates. In cases where the available information indicates that the loss on the contingency is reasonably possible but the amount of loss cannot be reasonably estimated, a disclosure is made in the financial statements.

Contingent Assets, if any, are not recognized or disclosed in the financial statements.

NOTES ON ACCOUNTS

1. Investments

1.2 SLR Securities (domestic) under “Held to Maturity” accounted for 19.71 % (brvious year 22.26%) of bank's Demand and Time liabilities as at the end of March 2016 as against ceiling of 21.50% [brvious year 23.50%] stipulated by RBI.

1.3 In respect of Held to Maturity category of Investments, brmium of Rs.103.87 crore was amortized during the year (brvious year Rs. 88.37 crore)

1.4 Securities of Face Value for Rs.1050 crore (brvious year Rs.1050 crore) towards Settlement Guarantee Fund and securities for Rs.20455 crore (brvious year Rs. 9455 crore) towards collateral for borrowing under Collateralized Borrowing and Lending Obligations have been kept with Clearing Corporation Of India Limited. We have placed securities of face value Rs.1500 crore [brvious year Rs. 2500 crore] with RBI for intra day borrowing. We have also placed Securities to the extent Rs.10550 crore [brvious year Rs.10600 crore] with Reserve Bank of India for our borrowing under the LAF window. Besides, a sum of Rs.15 crore (brvious year Rs.15 crore) has been lodged with CCIL towards default fund for Forex operations and Rs.12 crore [brvious year Nil] held with NSCCL for Currency derivative segment.

1.5 Shares under Investments in India in Regional Rural Banks is Rs.222.04 crore (brvious year Rs.222.04 crore) including amount towards share capital Deposits.

1.6 The Bank sold Government Securities from HTM category during the year, both outright and under RBI's Open Market Operations (OMO). The extent of sale by the Bank under OMO was Rs. 3285.00 crore (BV) [brvious year Rs.20.00 crore] and earned a profit of Rs. 18.90 crore [brvious year Rs.0.11 crore]. The Bank has also sold Government Securities (other than OMO), to the extent of Rs 1642.35 crore (BV) [brvious year Rs.1769.86 crore](within 5%, brscribed limit of RBI) and booked a profit of Rs 55.70 crore (brvious year Rs.53.69 crore).

2. Advances

2.1 The Classification for advances and provisions for possible loss has been made as per prudential norms issued by Reserve Bank of India.

2.2 Claims pending settlement and claims yet to be lodged with Guarantee Institutions identified by the branches have been considered for provisioning requirements on the basis that such claims are valid and recoverable.

2.3 In assessing the realisability of certain advances, the estimated value of security, Central Government guarantees etc. have been considered for the purpose of asset classification and income recognition.

2.4 The classification of advances, as certified by the Branch Managers have been incorporated, in respect of unaudited branches.

2.5 The Reserve Bank of India, vide Circular No. DBR.No.BP.BC.79/21.04.048/ 2014-15 dated 30.03.2015, allowed banks to utilize upto 50% of Counter-cyclical Provisioning Buffer / Floating Provisions held by them as at the end of 31.12.2014. Accordingly, during the year 2015-16, Bank has utilized Rs. 170.00 crore [25.83%] (brvious year Rs.150 crore [22.79%]) of Counter-cyclical Provisioning Buffer of Rs.658.22 crore held (as on December 31, 2014) for meeting specific provisions for Non-performing Assets.

3. Fixed Assets

3.1 During the year 2015-16, the entire land and building of the bank (including leasehold properties) were revalued based on the valuation reports of the approved valuers. The net apbrciation of Rs. 800.55 crore was added to the carrying value of the assets and credited to the revaluation reserve. The revalued amount on leasehold brmises is being amortised over the remaining period of the lease.

3.2 Profit on Sale of Assets for Rs.1.25 crore (brvious year Rs.1.15 crore), has been appropriated to Capital Reserve.

4. Rupee Interest Rate Swap

An amount of Rs.0.02 crore (brvious year Rs.0.99 crore) is kept on deferred income on account of gains on termination of Rupee Interest Rate Swaps taken for hedging and would be recognized over the remaining contractual life of Swap or life of the Assets/Liabilities, whichever is earlier.

5. Capital and Reserves

5.1 The Bank has issued 48,56,17,597 equity shares of Rs.10/- each for cash at issue price of Rs.41.37 per equity share (including brmium of Rs.31.37 per equity share) aggregating upto Rs.2009 crore to Government of India on Preferential Basis on 16.10.2015 and 8,62,99,771 equity shares of Rs.10/- each for cash at issue price of Rs.23.45 per equity share (including brmium of Rs.13.45 per equity share aggregating upto Rs.202.37 crore to LIC of India on 29.03.2016 on Preferential Basis. Hence, the paid-up capital of the Bank has increased from Rs.1235.35 crore to Rs.1807.27 crore. Government of India's shareholding has increased from Rs.911.71 crore (73.80%) to Rs.1397.33 crore (77.32%) and the Public shareholding stood at Rs.409.94 crore (22.68%).

5.2 During the Financial Year 2015-16, Bank had not raised Additional Tier I/Tier II Bonds.

6. Taxes

6.1 Taking into consideration the decisions of Appellate Authorities, judicial pronouncements and the opinion of tax experts, no provision is considered necessary in respect of disputed and other demands of income tax aggregating Rs.1086.10 crore (brvious year Rs. 1031.31 crore).

6.2 Tax expense for the year is Rs. -830.78 crore net of deferred tax (Previous year Rs. 565.76 crore).

7. Reconciliation

7.1 Reconciliation of Inter Bank and Inter Branch transactions has been completed up to the date of migration to new operating system during the year and steps for elimination of outstanding entries are in progress. The management does not anticipate any material consequential effect on reconciliation / elimination of outstanding entries.

7.2 Migration to New Operating System

During the year, the bank has migrated to a new Operating System viz., 'Finacle'. The Bank has got the migration audit of top 20 branches done by engaging an external consultant and has resolved the issues pointed out by them. During the course of audit certain other issues were identified, most of which also have been resolved, except with regard to balances lying in inter-branch reconciliation, migration account, interest suspense and interest receivable account which have not been reconciled. Considering the nature of issues identified, there could be some more unidentified issues as well. Hence the management intends to conduct a combrhensive migration audit in the near future to address all issues connected with such migration. However, the management does not anticipate any material impact emanating out of such exercise on the financial statements of the bank.

8. Information relating to vendors registered under Micro, Small and Medium Enterprises Development Act, 2006 and from whom goods and services have been procured by the Bank, is being ascertained.

9  Unhedged Foreign Currency Exposure (UFCE) As per RBI Circular ref No. RBI/2013-14/620 & RBI/2013-14/448, data relating to UFCE of borrowers from individual branches is obtained through online and consolidated working of the required additional provision and capital for Exposures to entities with Unhedged Foreign Currency Exposure is done at Risk Management Department.

For the year 2015-16, the provision requirement is to the tune of Rs.25.35 crore (brvious year Rs.9.96 crore) and the incremental RWA requirement is to the tune of Rs.1194.44 crore (brvious year Rs.606.87 crore) which is included as part of the Credit Risk Capital assessment.

10  Strategic Debt Restructuring (SDR)

Bank has approved invocation of SDR scheme in 8 standard accounts with a fund based outstanding of Rs. 2034.09 crore during the year. Out of this, in 2 cases, loans amounting to Rs. 42.51 crore have been converted into Equity Shares in accordance with SDR Scheme

11 Comparative Figures

Previous year's figures have been regrouped / rearranged wherever necessary.