Description
The report for the financial year 2010 - 2011 of kotak mahindra bank.
Financial Highlights Consolidated
` in crore FINANCIAL HIGHLIGHTS Advances Investments* Total Assets Net Profit * Excludes Policyholders’ investments FY2003 3,034 1,017 4,681 73 FY2006 10,420 4,082 17,967 342 FY2007 15,573 7,632 28,631 538 FY2008 21,985 9,698 40,597 991 FY 2009 22,498 9,794 40,234 652 FY 2010 29,724 13,200 55,115 1,307 FY 2011 41,242 18,279 73,681 1,567
KEY FINANCIAL INDICATORS Net Interest Margin (NIM) Return on Average Assets (RoAA) Book Value Per Share (`) Earnings Per Share (EPS) Face Value ` 5 per share Return on Equity (RoE) Capital Adequacy Ratio Gross NPA (` cr)* Net NPA (` cr)* Gross NPA Ratio* Net NPA Ratio*
FY2003 7.1% 2.1% 18 1.2 7.2% 26.0%+ 22 8 0.7% 0.3%
FY2006 5.1% 2.7% 36 5.5 20.6% 15.4% 47 21 0.5% 0.2%
FY2007 5.2% 2.3% 50 8.2 19.6% 15.6% 69 26 0.5% 0.2%
FY2008 5.6% 2.9% 84 14.6 22.3% 20.2% 183 70 0.9% 0.3%
FY2009 6.1% 1.6% 94 9.4 10.5% 22.5% 506 262 2.3% 1.2%
FY2010 6.1% 2.7% 114 18.6 18.2% 19.3% 647 338 2.2% 1.1%
FY 2011 5.6% 2.4% 149 21.6 16.4% 19.5% 469 178 1.1% 0.4%
* Excludes stressed assets acquired from other Banks and NBFCs + Standalone MARKET RELATED RATIOS Market Price (`) Market Capitalization (` cr) Price to Book Ratio Price to Earnings Ratio FY2003 16 935 0.9 12.8 FY2006 139 8,598 3.8 25.2 FY2007 240 15,644 4.8 29.1 FY2008 314 21,664 3.7 21.5 FY2009 141 9,781 1.5 15.0 FY2010 375 26,076 3.3 20.1 FY 2011 457 33,664 3.1 21.2
26
Kotak Mahindra Bank Limited Annual Report 2010-11
Its grt 2b 25
Financial Highlights Highlights
Consolidated Financial Statements
Bank Reports & Statements
Financial Highlights Standalone
` in crore FINANCIAL HIGHLIGHTS Deposits Advances Investments Total Assets Net Interest Income (NII) Fee Income Other Non-Interest Income Operating Profit Provisions and Contingencies Tax Provision Net Profit FY2003 257 1,241 707 2,153 94 3 69 90 20 25 45 FY2006 6,566 6,348 2,856 10,176 380 159 59 211 37 55 118 FY2007 11,000 10,924 6,862 19,915 620 187 131 326 123 62 141 FY2008 16,424 15,552 9,142 28,312 1,226 222 241 670 272 104 294 FY 2009 15,644 16,625 9,110 28,712 1,519 224 50 596 170 150 276 FY 2010 23,886 20,775 12,513 37,436 1,858 306 323 1,297 486 250 561 FY 2011 29,261 29,329 17,121 50,851 2,245 353 280 1,325 137 370 818
KEY FINANCIAL INDICATORS(%) Net Interest Margin (NIM) Cost to Income Ratio Return on Average Assets (RoAA) Fee / NII plus Other Income NII / NII plus Other Income Capital Adequacy Ratio Tier 1 Gross NPA Ratio * Net NPA Ratio *
FY2003 7.1% 46.2% 2.5% 2.0% 56.7% 26.0% 25.7% 0.8% 0.1%
FY2006 4.7% 64.8% 1.4% 26.6% 63.5% 11.3% 8.1% 0.5% 0.2%
FY2007 4.5% 65.3% 0.9% 20.0% 66.1% 13.5% 8.8% 0.5% 0.2%
FY2008 5.5% 60.3% 1.1% 13.1% 72.6% 18.7% 14.5% 1.0% 0.4%
FY2009 6.0% 66.8% 1.0% 12.5% 84.7% 20.0% 16.1% 2.5% 1.3%
FY2010 6.3% 47.8% 1.7% 12.3% 74.7% 18.4% 15.4% 2.4% 1.3%
FY 2011 5.5% 54.0% 1.8% 12.3% 78.0% 19.9% 18.0% 1.2% 0.5%
* Excludes stressed assets acquired from other Banks and NBFCs Its grt 2b 25
27
Consolidation at a Glance
` in Lakhs 2010-2011 Profit Profit before Tax after Tax Kotak Mahindra Bank Limited Subsidiaries Kotak Mahindra Prime Limited Kotak Securities Limited Kotak Mahindra Capital Company Limited Kotak Mahindra Old Mutual Life Insurance Limited Kotak Mahindra Investments Limited Kotak Mahindra Asset Management Company Limited Kotak Mahindra Trustee Company Limited Kotak Mahindra (International) Limited Kotak Mahindra (UK) Limited Kotak Mahindra, Inc. Kotak Investment Advisors Limited Kotak Mahindra Trusteeship Services Limited Kotak Forex Brokerage Limited Kotak Mahindra Pension Fund Ltd Kotak Mahindra Financial Services Ltd Total Add: Associates Less: Dividend, Minority interest, Inter company and other adjustment Consolidated Profit After Tax/Netwoth Consolidated Earnings per Share (`) Consolidated Book Value per Share (`) 48,188.43 27,157.26 7,022.77 10,247.45 3,320.47 1,468.03 990.14 4,727.81 1,285.56 (542.81) 4,922.24 109.69 (45.53) (57.25) (26.91) 31,786.27 18,193.79 5,188.86 10,247.45 2,399.87 1,062.00 668.10 4,605.42 918.54 (380.58) 3,271.41 72.87 (45.53) (57.25) (26.91) 25,887.29 40,387.62 3,461.57 6,922.46 4,842.33 9,905.19 1,052.25 6,833.91 1,829.46 229.16 5,982.64 96.34 (51.97) (62.18) (145.81) 16,641.22 26,010.04 2,386.18 6,922.46 3,466.24 6,551.45 694.98 6,723.80 1,317.33 138.74 3,975.15 65.62 (51.97) (62.18) (145.81) 153,757.56 169,394.91 48,934.65 41,284.54 25,433.24 5,837.47 2,924.71 18,832.91 9,555.83 2,736.14 15,607.73 286.10 43.40 1,080.57 254.63 1,175,611.59 46,220.74 125,538.21 1,096,294.12 111,971.38 151,201.12 43,745.79 31,100.71 23,033.37 5,664.86 2,605.77 14,422.81 8,715.93 3,129.83 12,336.32 213.23 18.94 1,137.82 153.76 857,963.14 43,834.51 110,703.24 791,094.41 118,770.18 81,818.21 2009-10 31st March 2011 31st March 2010 Profit Profit before Tax after Tax Networth Networth 81,110.36 56,110.57 679,647.20 448,511.50
227,537.53 159,722.52 188,280.62 130,743.82 2,386.23 (5,434.28) 156,674.47 21.60 (236.10) (192.33) 130,700.05 18.64
148.78
113.62
28
Kotak Mahindra Bank Limited Annual Report 2010-11
Its grt 2b 25
Financial Highlights
Consolidated Financial Statements Auditors’ Report
Bank Reports & Statements
Auditors’ Report
To the Board of Directors of Kotak Mahindra Bank Limited 1. We have audited the attached consolidated balance sheet of Kotak Mahindra Bank Limited (‘the Bank’) and its subsidiaries (collectively ‘the Group’) as at 31st March 2011, and also the consolidated profit and loss account and the consolidated cash flow statement for the year ended on that date, annexed thereto. These financial statements are the responsibility of the Bank’s management and have been prepared by the management on the basis of separate financial statements and other financial information regarding components. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with the auditing standards generally accepted in India. Those Standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. We did not audit the financial statements of 15 subsidiaries whose financial statements reflect total assets of ` 172,970,257 (in thousands) as at 31st March 2011, total revenues of ` 27,415,582 (in thousands) and cash outflows amounting to ` 1,449,235 (in thousands) for the year then ended. These financial statements and other financial information have been audited by other auditors whose reports have been furnished to us, and our opinion is based solely on the report of other auditors. Further, we have jointly audited the financial statements of Kotak Mahindra Old Mutual Life Insurance Limited, the life insurance subsidiary of the Bank, with other auditor, whose financial statements reflect total assets of ` 88,458,724 (in thousands) as at 31st March 2011, total revenues of ` 36,214,045 (in thousands) and cash flows amounting to `134,335 (in thousands) for the year then ended. In addition, we have relied on the un-audited financial results of one associate. The share of the Group in the net profit of this un-audited associate for the year then ended is ` 10,085 (in thousands). We, along with the joint auditor of Kotak Mahindra Old Mutual Life Insurance Limited (‘the Company’), the life insurance subsidiary of the Bank have reported in our audit opinion dated 29th April 2011, on the financial statements of the Company, which has been used in the preparation of the accompanying financial statements, that the actuarial valuation of policyholders’ liabilities is the responsibility of the Company’s Appointed Actuary (‘the Appointed Actuary’). The actuarial valuation of these liabilities as at 31st March 2011 has been duly certified by the Appointed Actuary and in his opinion, the assumptions for such valuation are in accordance with the guidelines and norms issued by the Insurance Regulatory Development Authority (‘IRDA’) and the Institute of Actuaries of India in concurrence with IRDA. We, along with the joint auditor of the Company have relied upon the Appointed Actuary’s certificate in this regard for forming an opinion on the financial statements of the Company. We report that the consolidated financial statements have been prepared by the Bank’s management in accordance with the requirements of Accounting Standard 21: Consolidated Financial Statements and Accounting Standard 23: Accounting for Investments in Associates in Consolidated Financial Statements, [notified pursuant to the Companies (Accounting Standards) Rules, 2006, as amended]. Based on our audit and on consideration of reports of other auditors on separate financial statements and on the other financial information of the components, and to the best of our information and according to explanations given to us, we are of the opinion that the attached consolidated financial statements gives a true and fair view in conformity with the accounting principles generally accepted in India: i. ii. iii. in the case of the consolidated balance sheet, of the state of affairs of the Group as at 31st March 2011; in the case of the consolidated profit and loss account, of the profit for the year ended on that date; and in the case of the consolidated cash flow statement, the cash flows for the year ended on that date.
2.
3.
4.
5.
6.
For S.R. Batliboi & Co. Firm Registration No. 301003E Chartered Accountants per Viren H. Mehta Partner Membership No.048749 Mumbai, 5th May 2011
Its grt 2b 25
29
(` in thousands)
Consolidated Balance Sheet as at 31st March 2011
Schedule CAPITAL AND LIABILITIES Capital Reserves and Surplus Minority Interest Employees’ Stock Options (Grants) Outstanding Deposits Borrowings Policyholders’ Funds Other Liabilities and Provisions Total ASSETS Cash and Balances with Reserve Bank of India Balances with Banks and Money at Call and Short Notice Investments Advances Fixed Assets Other Assets Goodwill on Consolidation Total Contingent Liabilities Bills for Collection Significant Accounting Policies and Notes to the Consolidated Financial Statements The schedules referred to above form an integral part of this Balance Sheet 17 12 6 7 8 9 10 11 21,148,573 8,793,951 260,489,873 412,419,529 5,970,011 27,955,141 34,194 736,811,272 366,400,173 10,534,742 20,940,828 4,127,315 194,847,770 297,242,869 6,104,142 27,851,026 34,194 551,148,144 381,044,916 6,493,241 5 3 4 1 2 2A 3,684,358 105,945,054 1,072,112 369,172 273,129,755 220,733,209 81,452,019 50,425,593 736,811,272 3,481,415 75,628,026 808,586 548,017 218,191,807 138,857,016 63,710,722 49,922,555 551,148,144 As at 31st March 2011 As at 31st March 2010
As per our report of even date For S. R. Batliboi & Co. Firm Registration No. 301003E Chartered Accountants per Viren H. Mehta Partner (Membership No. 048749)
For and behalf of the Board of Directors Dr. Shankar Acharya Chairman Dipak Gupta Executive Director Jaimin Bhatt Group Chief Financial Officer Bina Chandarana Company Secretary Uday Kotak Executive Vice Chairman and Managing Director
Mumbai, 5th May 2011
30
Kotak Mahindra Bank Limited Annual Report 2010-11
Its grt 2b 25
Financial Highlights
Consolidated Financial Statements Balance Sheet and P&L A/c
Bank Reports & Statements
(` in thousands)
Consolidated Profit and Loss Account for the year ended 31st March 2011
Schedule I. INCOME Interest earned Other Income Total II. EXPENDITURE Interest expended Operating expenses Provisions and Contingencies (Refer Note 10 - Schedule 17) Total III. PROFIT Net Profit for the year Less: Share of Minority Interest Add: Share in profit/(loss) of Associates Consolidated Profit for the year attributable to the Group Add : Surplus brought forward from previous year Total IV. APPROPRIATIONS Transfer to Statutory Reserve Transfer to Special Reserve u/s 45 IC of RBI Act, 1934 Transfer to Special Reserve u/s 36(1)(viii) of Income Tax Act, 1961 Transfer to General Reserve Transfer to Capital Reserve Transfer to Debenture Redemption Reserve Transfer from Debenture Redemption Reserve Transfer (from) / to Investment Reserve Account Proposed Dividend Corporate Dividend Tax Balance carried over to Balance Sheet Total V. EARNINGS PER SHARE [Refer Note 13 - Schedule 17] Basic (`) Diluted (`) Face value per share (`) The schedules referred to above form an integral part of this Profit and Loss Account Significant Accounting Policies and Notes to the Consolidated Financial Statements As per our report of even date For S. R. Batliboi & Co. Firm Registration No. 301003E Chartered Accountants per Viren H. Mehta Partner (Membership No. 048749) 17 21.73 21.60 5.00 18.84 18.64 5.00 2,045,500 683,725 290,000 426,725 6,900 381,376 (783,625) (268,300) 368,832 93,020 49,626,168 52,870,321 1,402,800 402,224 400,000 353,200 69,600 726,467 (882,804) 11,900 296,613 118 37,202,874 39,982,992 15,692,350 263,526 238,623 15,667,447 37,202,874 52,870,321 13,273,599 179,984 (23,610) 13,070,005 26,912,987 39,982,992 15 16 26,345,492 59,997,243 8,257,638 94,600,373 17,728,575 58,668,505 10,862,326 87,259,406 13 14 61,414,352 48,878,371 110,292,723 46,011,601 54,521,404 100,533,005 Year ended 31st March 2011 Year ended 31st March 2010
For and behalf of the Board of Directors Dr. Shankar Acharya Chairman Dipak Gupta Executive Director Jaimin Bhatt Group Chief Financial Officer Bina Chandarana Company Secretary Uday Kotak Executive Vice Chairman and Managing Director
Mumbai, 5th May 2011
Its grt 2b 25
31
(` in thousands)
Consolidated Cash Flow Statement
for the year ended 31st March 2011 Year Ended 31st March 2011 Year Ended 31st March 2010
CASH FLOW FROM OPERATING ACTIVITIES Net Profit After Tax Add: Provision for Income tax Profit before tax Adjustments for:Employee Stock Option Grants Depreciation on Group’s property Amortization of Premium on Investments Diminution in the value of investments (Profit)/ Loss on revaluation of investments (net) Profit on Sale of Associates Interest on debentures and other long-term borrowing Interest on subordinated debt and Upper Tier II Interest on refinance from institutions Provision for Non Performing Assets and contingencies Loss on sale of assets Decrease in Foreign Currency Translation Reserve [Refer Note 2 (F) (ix) - Schedule 17] Wealth tax 187,632 1,523,462 1,189,500 466,434 275,156 3,344,951 698,898 1,877,300 1,009,563 1,262 (29,446) 1,106 32,993,799 Adjustements for :Increase in Investments other than Associates Increase in Advances Increase in Other Assets Increase in Deposits Increase in Borrowings Increase in Policyholders’ Funds Increase in Other Liabilities & Provisions (67,074,627) (116,292,699) (1,416) 54,937,948 66,701,184 17,741,297 676,921 (43,311,392) Income Taxes Paid NET CASH FLOW FROM OPERATING ACTIVITIES (A) CASH FLOW FROM INVESTING ACTIVITIES Purchase of Fixed assets Sale of Fixed assets Proceeds on sale of Associates Increase in Investments in Associates NET CASH USED IN INVESTMENT ACTIVITIES (B) (1,455,746) 65,153 (498,566) (1,889,159) (4,281,287) 87,433 677,680 (541,128) (4,057,302) (7,068,327) (17,385,920) (56,970,843) (77,630,343) (1,025,803) 79,973,400 15,263,016 26,330,277 9,117,247 (4,943,049) (5,756,603) 15,688,588 270,676 1,429,197 1,419,804 (512,432) (5,293,992) (496,584) 3,127,445 675,524 1,562,449 5,619,714 43,917 (282,527) 1,064 26,388,240 15,667,447 6,780,534 22,447,981 13,070,005 5,753,980 18,823,985
32
Kotak Mahindra Bank Limited Annual Report 2010-11
Its grt 2b 25
Financial Highlights
Consolidated Financial Statements Cash Flow Statement
Bank Reports & Statements
(` in thousands)
Consolidated Cash Flow Statement
for the year ended 31st March 2011 (Contd.) Year Ended 31st March 2011 Year Ended 31st March 2010
CASH FLOW FROM FINANCING ACTIVITIES Dividend paid including corporate dividend tax Fresh issue of share/Money received on exercise of stock options Share issue expenses Increase in Refinance Increase in debentures and other long-term borrowings Increase/(decrease) in subordinated debt and Upper Tier II Interest on subordinated debt and Upper Tier II Interest on refinance from institutions Interest on debentures and other long-term borrowing Increase in Minority Interest NET CASH FLOW FROM FINANCING ACTIVITIES (C) NET INCREASE IN CASH AND CASH EQUIVALENTS (A + B + C) CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE YEAR (Refer Note below) CASH AND CASH EQUIVALENTS AT THE END OF THE YEAR (Refer Note below) Note: Balance with banks in India in Fixed Deposit (As per Schedule 7 I (i) (b)) Balance with banks in India in current account (As per Schedule 7 I (i) (a)) Money at call and short notice in India (As per Schedule 7 I (ii)) Cash in hand (As per Schedule 6 I) Balance with RBI in current account (As per Schedule 6 II) Balance with banks Outside India: (i) In current account (As per Schedule 7 II (i)) 804,316 2,507,136 29,942,524 265,277 1,469,187 25,068,143 29,942,524 25,068,143 (345,683) 14,983,521 (5,764) 5,026,305 9,792,429 356,275 (698,898) (1,877,300) (3,344,951) 263,526 24,149,460 4,874,381 25,068,143 (304,122) 738,708 576,768 3,497,886 (261,900) (675,524) (1,562,449) (3,127,445) 179,984 (938,094) 10,693,192 14,374,951
2,723,813 2,248,028 510,658 2,522,778 18,625,795
313,398 2,079,453 2,195,514 18,745,314
(ii) In Other Deposit Accounts (As per Schedule 7 II (ii)) CASH AND CASH EQUIVALENTS AT THE END OF THE YEAR
As per our report of even date. For S. R. Batliboi & Co. Firm Registration No. 301003E Chartered Accountants per Viren H. Mehta Partner Membership No. 048749
For and on behalf of the Board of Directors
Dr. Shankar Acharya Chairman Dipak Gupta Executive Director Jaimin Bhatt Group Chief Financial Officer
Uday Kotak Executive Vice Chairman and Managing Director
Bina Chandarana Company Secretary
Mumbai, 5th May 2011
Its grt 2b 25
33
(` in thousands)
Schedules Forming Part of Consolidated Balance Sheet as at 31st March 2011
As at 31st March 2011 SCHEDULE 1 - CAPITAL Authorised Capital 80,00,00,000 Equity Shares of ` 5/- each (31st March 2010: 40,00,00,000 Equity Shares of ` 10 each) Issued Subscribed and Paid-up Capital 73,68,71,504 Equity Shares of ` 5/- each (31st March2010: 34,81,41,477 Equity Shares of ` 10 each) fully paid-up ( Refer Note 3 and 4 - Schedule 17) Total SCHEDULE 2 - RESERVES AND SURPLUS I. Statutory Reserve Opening Balance Add: Transfer from Profit and Loss Account Total II. Capital Reserve Opening Balance Add: Transfer from Profit and Loss Account Total III. General Reserve Opening Balance Add: Transfer from Profit and Loss Account Total IV. Securities Premium Account Opening Balance Add: Received during the year (net of tax) Less: Utilised for Share Issue Expenses Total ( Refer Note 3 - Schedule 17) V. Special Reserve under Section 45IC of the RBI Act, 1934 Opening Balance Add: Transfer from Profit and Loss Account Total 1,263,479 683,725 1,947,204 861,255 402,224 1,263,479 26,554,915 15,147,055 5,764 41,696,206 25,186,388 1,368,527 26,554,915 2,018,176 426,725 2,444,901 1,664,976 353,200 2,018,176 282,203 6,900 289,103 212,603 69,600 282,203 4,470,700 2,045,500 6,516,200 3,067,900 1,402,800 4,470,700 3,684,358 3,481,415 3,684,358 3,481,415 4,000,000 4,000,000 As at 31st March 2010
34
Kotak Mahindra Bank Limited Annual Report 2010-11
Its grt 2b 25
Financial Highlights
Consolidated Financial Statements Schedules
Bank Reports & Statements
(` in thousands)
Schedules Forming Part of Consolidated Balance Sheet as at 31st March 2011 (Contd.)
As at 31st March 2011 VI. Debenture Redemption Reserve Opening Balance Add: Transfer from Profit and Loss Account Less: Transfer to Profit and Loss Account Total VII. Capital Reserve on Consolidation Opening Balance Addition during the year Total VIII.Foreign Currency Translation Reserve [Refer Note 2(F)(ix) - Schedule 17 ] Opening Balance Decrease during the year Total IX. Investment Reserve Account Opening Balance Add: Transfer from Profit and Loss Account Total X. Special Reserve under Section 36(1)(viii) of the Income Tax Act, 1961 Opening Balance Add: Transfer from Profit and Loss Account Total XI. Profit and Loss Account Total SCHEDULE 2A - Minority Interest Minority Interest at the date on which parent subsidiary relationship came into existence Subsequent Increase Total SCHEDULE 3 - DEPOSITS A. I. Demand Deposits i. From Banks ii. From Others Total II. Savings Bank Deposits i. From Banks ii. From Others Total Total Deposits ( I to III) III. Term Deposits 2,676,623 185,082,709 187,759,332 273,129,755 648,677 147,852,855 148,501,532 218,191,807 1,006,014 51,061,096 52,067,110 33,303,313 989,260 43,990,971 44,980,231 24,710,044 396,700 675,412 1,072,112 396,700 411,886 808,586 400,000 290,000 690,000 49,626,168 105,945,054 400,000 400,000 37,202,874 75,628,026 428,914 (268,300) 160,614 417,014 11,900 428,914 42,467 (29,858) 12,609 324,994 (282,527) 42,467 1,474,546 1,474,546 1,474,546 1,474,546 1,489,752 381,376 783,625 1,087,503 1,646,089 726,467 882,804 1,489,752 As at 31st March 2010
Its grt 2b 25
35
(` in thousands)
Schedules Forming Part of Consolidated Balance Sheet as at 31st March 2011 (Contd.)
As at 31st March 2011 SCHEDULE 3 - DEPOSITS (Contd.) B. I. Deposits of Branches in India II. Deposits of Branches Outside India Total Deposits ( I to II) SCHEDULE 4 - BORROWINGS I. Borrowings in India (i) (ii) (iii) Reserve Bank of India Other Banks Institutions, Agencies and others (Refer Note 15 - Schedule 17) 39,647,500 62,998,332 94,245,174 196,891,006 33,543,973 101,133,077 134,677,050 As at 31st March 2010
273,129,755 273,129,755
218,191,807 218,191,807
Total II. Borrowings outside India (i) Institutions, Agencies and others (Refer Note 15 - Schedule 17)
23,842,203 220,733,209 80,697,092
4,179,966 138,857,016 57,543,225
Total Borrowings (I & II) Secured Borrowings included in I & II above SCHEDULE 5 - OTHER LIABILITIES AND PROVISIONS I. II. Bills Payable Interest Accrued
6,188,983 5,160,966 38,663,555 412,089 50,425,593
6,691,977 4,456,915 38,477,743 295,920 49,922,555
III. Others (including provisions) (Refer Note 9 and 21 - Schedule 17) IV. Proposed Dividend (includes tax on dividend ) Total SCHEDULE 6 - CASH AND BALANCES WITH RESERVE BANK OF INDIA I. II. Cash in hand (including foreign currency notes) Balances with RBI in current account Total SCHEDULE 7 - BALANCES WITH BANKS AND MONEY AT CALL AND SHORT NOTICE I. In India (i) Balances with Banks [ Refer Note 8 - Schedule 17 ] (a) In Current Accounts (b) In Other Deposit Accounts Total (ii) Money at Call and Short Notice (a) With Banks Total Total (i + ii) II. Outside India (i) (ii) In Current Accounts In Other Deposit Accounts
2,522,778 18,625,795 21,148,573
2,195,514 18,745,314 20,940,828
2,248,028 2,723,813 4,971,841
2,079,453 313,398 2,392,851
510,658 510,658 5,482,499 804,316 2,507,136 3,311,452 8,793,951
2,392,851
265,277 1,469,187 1,734,464 4,127,315
Total Total (I & II)
36
Kotak Mahindra Bank Limited Annual Report 2010-11
Its grt 2b 25
Financial Highlights
Consolidated Financial Statements Schedules
Bank Reports & Statements
(` in thousands)
Schedules Forming Part of Consolidated Balance Sheet as at 31st March 2011 (Contd.)
As at 31st March 2011 SCHEDULE 8 - INVESTMENTS I. Investments in India in i. ii. Government Securities* Other approved Securities 144,725,282 35,578,239 40,749,514 5,700,880 30,287,161 257,041,076 105,956,983 26,350,671 29,457,022 5,202,314 25,401,318 192,368,308 As at 31st March 2010
iii. Shares iv. Debentures and Bonds v. Associates ** Security Receipts, RIDF Deposit and Pass Through Certificates (PTC)] Total *Refer Note 5 - Schedule 17 (Previous Year net of Repo ` 1,562.37 crore) II. Investments Outside India in i. ii. Shares Others [FCCBs, FCBs, Venture/ Private Equity and other similar funds] vi. Others [Units, Certificate of Deposits, Commercial Paper (CP),
104,524 3,344,273 3,448,797 260,489,873 1,052,897 29,440 3,531 1,078,806 4,622,074 5,700,880 11,026,240 57,595,021 343,798,268
61,986 2,417,476 2,479,462 194,847,770 805,107 17,287 3,531 818,863 4,383,451 5,202,314 9,714,569 33,226,015 254,302,285
Total Total Investments (I and II) ** Investment in Associates Equity Investment in Associates Add: Goodwill on acquisition of Associates (Share of pre-acquisition losses) Less: Capital reserve on Consolidation (Share of pre-acquisition profits) Cost of Investment in Associates Add: Post-acquisition profit/loss of Associates (Equity method) Total SCHEDULE 9 - ADVANCES A. (i) Bills purchased and discounted # (ii) Cash Credits Overdrafts and loans repayable on demand (iii) Term Loans # Bills purchased and discounted is net off Bills Rediscounted ` 956.38 crore (Previous Year ` 1,171.88 crore) Total B. (i) Secured by tangible assets * (ii) Unsecured Total * including advances secured against book debts C. Advances in India (i) Priority Sector
412,419,529 364,956,593 47,462,936 412,419,529
297,242,869 253,608,201 43,634,668 297,242,869
87,379,166 875,000 324,165,363 412,419,529
68,331,589 1,730,465 227,180,815 297,242,869 Its grt 2b 25
(ii) Public Sector (iii) Banks (iv) Others Total
37
(` in thousands)
Schedules Forming Part of Consolidated Balance Sheet as at 31st March 2011 (Contd.)
As at 31st March 2011 SCHEDULE 10 - FIXED ASSETS A. Premises (Including Land) Gross Block At cost on 31st March of the preceding year Additions during the year Deductions during the year Total Depreciation As at 31st March of the preceding year Charge for the year Deductions during the year Depreciation to date Net Block B. Other Fixed Assets (including furniture and fixtures) Gross Block At cost on 31st March of the preceding year Additions during the year Deductions during the year Total Depreciation As at 31st March of the preceding year Charge for the year Deductions during the year Depreciation to date Net Block ( Refer Note 22 - Schedule 17 ) Total (A) +(B) SCHEDULE 11 - OTHER ASSETS I. II. Interest accrued Advance tax (net of provision for tax) 5,979,552 269,563 36,102 67,824 54,531 21,547,569 27,955,141 4,376,984 390,356 20,729 113,288 130,755 22,818,914 27,851,026 5,143,853 1,470,481 235,853 6,378,481 3,259,332 5,970,011 4,193,636 1,382,061 431,844 5,143,853 3,340,482 6,104,142 8,484,335 1,455,746 302,268 9,637,813 6,826,572 2,220,957 563,194 8,484,335 382,058 52,981 435,039 2,710,679 334,922 47,136 382,058 2,763,660 3,145,718 3,145,718 1,085,388 2,060,330 3,145,718 As at 31st March 2010
III. Stationery and Stamps IV. Non Banking assets acquired in satisfaction of claims V. Cheques in course of collection
VI. Others (Refer Note 21 - Schedule 17) Total
38
Kotak Mahindra Bank Limited Annual Report 2010-11
Its grt 2b 25
Financial Highlights
Consolidated Financial Statements Schedules
Bank Reports & Statements
(` in thousands)
Schedules Forming Part of Consolidated Balance Sheet as at 31st March 2011 (Contd.)
As at 31st March 2011 SCHEDULE 12 - CONTINGENT LIABILITIES I. II. Claims not acknowledged as debts Liability on account of outstanding forward exchange contracts 1,215,962 82,760,346 40,312,069 563,231 34,165,842 969,619 22,316,855 19,913,093 1,162,334 24,143,148 As at 31st March 2010
III. Guarantees on behalf of constituents in India IV. Guarantees on behalf of constituents outside India V. Acceptances, Endorsements and Other Obligations
VI. Other items for which the Group is contingently liable: Liability in respect of interest rate and currency swaps and forward rate agreements Liability in respect of other Derivative contracts Capital commitments Total 189,291,144 17,273,383 818,196 366,400,173 297,089,613 13,983,691 1,466,563 381,044,916
Schedules Forming Part of Consolidated Profit and Loss Account for the year ended 31st March 2011
Year ended 31st March 2011 SCHEDULE 13 - INTEREST EARNED I. II. Interest / discount on advances/bills Income from investments 47,108,483 13,551,878 230,906 523,085 61,414,352 35,263,701 10,185,483 69,068 493,349 46,011,601 Year ended 31st March 2010
III. Interest on balances with RBI and other inter-bank funds IV. Others Total SCHEDULE 14 - OTHER INCOME I. II. Commission exchange and brokerage Profit on sale of Investments (net)
13,487,057 4,431,857 (275,156) (1,262) 47,008 29,399,087 1,265,950 523,830 48,878,371
13,510,670 4,065,552 5,293,992 (43,917) 678,743 28,493,373 2,086,864 436,127 54,521,404
III. Profit/(Loss) on revaluation of investments of Insurance business IV. Loss on sale of building and other assets (net) V. Profit on exchange transactions (net)
VI. Premium on Insurance business VII. Profit on recoveries of non-performing assets acquired VIII.Miscellaneous Income Total
Its grt 2b 25
39
(` in thousands)
Schedules Forming Part of Consolidated Profit and Loss Account for the year ended 31st March 2011 (Contd.)
Year ended 31st March 2011 SCHEDULE 15 - INTEREST EXPENDED I. II. Interest on Deposits Interest on RBI / Inter-Bank Borrowings 13,566,067 5,189,905 7,589,520 26,345,492 8,374,295 3,240,647 6,113,633 17,728,575 Year ended 31st March 2010
III. Other Interest ( Refer Note 16 - Schedule 17 ) Total SCHEDULE 16 - OPERATING EXPENSES I. II. III. IV. V. VI. VII. Payments to and provision for employees [Refer Note 7 - Schedule 17 ] Rent, taxes and lighting [Refer Note 18 - Schedule 17 ] Printing and Stationery Advertisement, Publicity and Promotion Depreciation on Group’s property Directors’ fees, allowances and expenses Auditors’ fees and expenses
15,223,449 2,158,555 466,058 1,418,094 1,523,462 11,025 40,817 227,128 1,226,569 1,242,450 254,150 729,830 1,755,345 2,909,209 260,366 17,724,621 10,361,522 2,464,593 59,997,243
12,609,547 2,254,757 342,115 1,313,012 1,429,197 4,515 35,835 211,163 1,023,490 1,005,574 185,898 581,821 1,408,780 2,876,243 200,555 26,222,536 4,966,829 1,996,638 58,668,505
VIII. Law Charges IX. X. XI. XII. Postage, telephones etc. Repairs and maintenance Insurance Travel and Conveyance
XIII. Professional Charges XIV. Brokerage XV. Stamping Expenses
XVI. Policyholders’ Reserves XVII. Insurance Business Expenses (Claims and benefits paid) XVIII. Other Expenditure Total
40
Kotak Mahindra Bank Limited Annual Report 2010-11
Its grt 2b 25
Financial Highlights
Consolidated Financial Statements Accounting Policies & Notes
Bank Reports & Statements
Schedules Forming Part of the Consolidated Balance Sheet and Profit and Loss Account
SCHEDULE 17 - SIGNIFICANT ACCOUNTING POLICIES AND NOTES TO THE FINANCIAL STATEMENTS 1. BASIS OF CONSOLIDATION a. The Consolidated Financial Statements of Kotak Mahindra Bank Limited (“the Bank” or “KMBL”) are prepared in accordance with Accounting Standard 21 (AS-21), “Consolidated Financial Statements” and Accounting Standard 23 (AS-23), “Accounting for Investments in Associates in Consolidated Financial Statements” notified under the Companies (Accounting Standard) Rules, 2006 “as amended”. The Bank consolidates entities in which it holds, directly or indirectly, more than 50% of the voting rights or where it exercises control, on a line by line basis by adding together like items of assets, liabilities, income and expenses in accordance with AS-21. The Goodwill or Capital Reserve on consolidation represents the difference between the Group’s share in the networth of the subsidiary and the cost of acquisition at the time of making the investment in subsidiary. Intragroup balances, intragroup transactions and resulting unrealised profits/ losses, if any, are eliminated in full. Minority interest representing the part of net results of operations and of the net assets of subsidiary attributable to interests not owned directly or indirectly through subsidiaries is presented separately from liabilities and the equity. The Bank and its subsidiaries which have been consolidated, constitute the “Group”. Further, the Group accounts for investments in entities where it holds 20% to 50% of the voting rights by the equity method of accounting in accordance with AS- 23. The financial statements of the subsidiaries, jointly controlled entities and associates used in consolidation are drawn up to the same date as that of the holding company i.e. 31st March 2011. The list of subsidiaries is as under: Name of the Subsidiary Country of Origin % Shareholding of group (31st March 2011) 100.00 100.00 100.00 74.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 % Shareholding of group (31st March 2010) 100.00 100.00 100.00 74.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00
b.
Kotak Mahindra Prime Limited Kotak Securities Limited Kotak Mahindra Capital Company Limited Kotak Mahindra Old Mutual Life Insurance Limited Kotak Mahindra Investments Limited Kotak Mahindra Asset Management Company Limited Kotak Mahindra Trustee Company Limited Kotak Mahindra (International) Limited Kotak Mahindra (UK) Limited Kotak Mahindra, Inc. Global Investments Opportunities Fund Limited (GIOFL) * Kotak Investment Advisors Limited Kotak Mahindra Trusteeship Services Limited Kotak Forex Brokerage Limited Kotak Mahindra Pension Fund Limited Kotak Mahindra Financial Services Limited *
India India India India India India India Mauritius U.K. USA Mauritius India India India India U.A.E
Global Investments Opportunities Fund Limited (GIOFL) is a collective investment scheme set up as a fund in Mauritius with the status of a limited company under the Mauritius Companies Act. GIOFL has a class structure wherein there are different classes of redeemable participating shares. Each class of participating shares has its own Balance Sheet and Profit and Loss account. The profit /loss of each such class belongs to the participating shareholders of that class. The management shareholder is not entitled to any beneficial interest in the profit/loss of various classes nor is required to make good any shortfall. In substance there are no direct or indirect economic benefits received by the management shareholders. The substance over form must prevail. The Group’s investment is only in management shares. Accordingly, GIOFL is consolidated in respect of management shares of the entity having regard to substance over form of the entity.
Its grt 2b 25
41
Schedules Forming Part of the Consolidated Balance Sheet and Profit and Loss Account (Contd.)
c. As per AS-23, the Consolidated Financial Statements incorporate the results of the following associates except as indicated. Name of the Associate Country of Origin % Shareholding of group (31st March 2011) 49.99 — 49.00 48.99 31.26 % Shareholding of group (31st March 2010) 49.99 30.00 49.00 48.96 31.26
Infina Finance Private Limited
India
Kotak Mahindra Asset Reconstruction Company Limited (**) India Phoenix ARC Private Limited ACE Derivatives & Commodity Exchange Limited (formerly known as Ahmedabad Commodity Exchange Limited) (#) Matrix Business Services India Private Limited (Unaudited) India India India
(**) The financial statements of Kotak Mahindra Asset Reconstruction Company Limited have not been consolidated under AS-23, as other than temporary diminution in the value of the same is fully provided for. Effective 19th March 2011 Kotak Mahindra Asset Reconstruction Company Limited has been dissolved under Section 560 of the Companies Act, 1956. (#) Effective 17th June 2010, ACE made a preferential allotment and consequently the stake of Group decreased to 42.19%. Further, on 12th August 2010, ACE made preferential allotment to selected shareholders including the Group and the Group also acquired additional stake from an existing shareholder. Consequently, the Group stake in ACE increased to 48.99%. The Group has accounted its share of profit / loss of ACE considering its effective stake on a pro rata basis.
2.
SIGNIFICANT ACCOUNTING POLICIES AND NOTES TO CONSOLIDATED FINANCIAL STATEMENTS A. ACCOUNTING METHODOLOGY The Financial Statements have been prepared on historical cost basis of accounting. The Group adopts the accrual system of accounting and the financial statements conform with the Accounting Standards notified under the Companies (Accounting Standard) Rules, 2006 “as amended”, guidelines issued by the Reserve Bank of India (“RBI”), Insurance Regulatory and Development Authority (“IRDA”) from time to time as applicable to relevant companies and the generally accepted accounting principles prevailing in India. In case the accounting policies followed by a subsidiary are different from those followed by Bank, the same have been disclosed separately. The preparation of financial statements requires the management to make estimates and assumptions considered in the reported amounts of assets and liabilities (including contingent liabilities) as on the date of the financial statements and the reported income and expenses during the reporting period. Management believes that the estimates used in preparation of the financial statements are prudent and reasonable. Actual results could differ from these estimates. B. REVENUE RECOGNITION a. Banking/ Investing Activity: i. ii. Interest income is recognised on accrual basis except in case of non-performing assets where it is recognised, upon realisation, as per RBI guidelines. Penal interest is recognised as income on realisation. Interest income in respect of retail advances {except for the subsidiary, Kotak Mahindra Prime Limited (KMPL)} is accounted for by using the internal rate of return method to provide a constant periodic rate of return on the net investment outstanding on the contract. KMPL accrues for auto finance income (including service charges and incentives) by using the internal rate of return method to provide a constant periodic rate of return after adjustment of brokerage expenses on the net investment outstanding on the contract. The volume-based incentives and brokerage are accounted as and when the said volumes are achieved. Income also includes gains made on termination of contracts. Service charges, Fees and Commission income are recognised when due except for guarantee commission which is recognised over the period of the guarantee, except as indicated in para iii above. Interest income on discounted instruments is recognised over the tenure of the instruments so as to provide a constant periodic rate of return. Gain on account of securitisation of assets is amortised over the life of the securities issued in accordance with the guidelines issued by the RBI.
iii.
iv. v. vi.
42
Kotak Mahindra Bank Limited Annual Report 2010-11
Its grt 2b 25
Financial Highlights
Consolidated Financial Statements Accounting Policies & Notes
Bank Reports & Statements
Schedules Forming Part of the Consolidated Balance Sheet and Profit and Loss Account (Contd.)
vii. Gain on account of assignment of assets on bilateral basis is recognised, based on the difference between the book value of the assigned assets and sale consideration received. In respect of non-performing assets acquired from other banks and NBFCs, collections in excess of the consideration paid at each asset level or portfolio level is treated as income in accordance with RBI guidelines and clarifications. Issue management fees, underwriting commission, financial advisory fees and placement fees are accounted on completion of milestones specified in the contract. Brokerage and clearing fees are recognised as on the date of transaction. Premium is recognised as income when it is due from policyholders except on unit linked policies, where the premium is recognised when associated units are created. Uncollected premium on lapsed policies is not recognised as income until revived. Top Up/ Lump sum contributions are accounted as a part of the single premium. Income from linked policies, which include asset management fees and other charges, if any, are recovered from the linked fund in accordance with the terms and conditions of the policies. Re-insurance premium ceded is accounted as an expense at the time of recognition of the premium income in accordance with the treaty arrangements with the re-insurers. Commission on re-insurance ceded is accounted as income in the period in which reinsurance is ceded. Re-insurance premium and re-insurance commission are recognised over the period of the risk. Placement and other fee based income are accounted for on the basis of the progress of the assignment. Brokerage Income (net of service tax):
? ? ?
viii. Dividend income is accounted on an accrual basis when the right to receive the dividend is established. ix. b.
Investment Banking Activity: i. ii.
c.
Insurance Activity: i. ii. iii. iv. v. vi. vii.
d.
Broking Activity: i. ii.
On fixed deposit is accounted on completion of the transaction. On primary market subscription / mobilisation is accounted on receipt of intimation of allotment. On secondary market transaction is recognised on the date of the transaction.
iii. iv. v.
Incentive on primary market subscription / mobilisation is accounted on the basis of receipt of intimation of allotment. In respect of depository activity, transaction fees (net of service tax) are recognised on completion of transaction. Account maintenance charges are recognised on time basis over the period of contract. Portfolio management fees are accounted on accrual basis as follows: a. b. c. In case of fees based on fixed percentage of the corpus / fixed amount, income is accrued over the period of the agreement. In case of fees, based on the returns of the portfolio, income is accounted on the termination of the portfolio agreement/ on each anniversary as per the agreement, whichever is earlier. In case of upfront non-refundable fee, income is accounted in the year of receipt.
e.
Asset Management: i. Management fee from mutual funds is recognised at specific rates agreed with the relevant schemes, applied on the average daily net assets of each scheme (excluding inter-scheme investments, where applicable, and investments made by the Company in the respective scheme), and are in conformity with the limits specified under SEBI (Mutual Funds) Regulations, 1996. Management fee from venture funds, private equity funds and other similar funds is recognised on accrual basis at the rates specified in the investment management agreement from the date of initial closing of funds under management. Portfolio Advisory Service income is recognised on accrual basis as per the terms of the contract.
ii. iii. C.
FIXED ASSETS AND INTANGIBLE ASSETS Fixed assets/Intangible assets have been stated at cost inclusive of incidental expenses less accumulated depreciation/amortisation. DEPRECIATION/ AMORTISATION: The Group has adopted the Straight Line Method of depreciation so as to write off 100% of the cost of the assets at rates higher than those prescribed under Schedule XIV to the Companies Act, 1956 for all assets other than premises, based on the Management’s estimate of useful lives of these assets. Estimated useful lives over which assets are depreciated are as follows: Its grt 2b 25
43
Schedules Forming Part of the Consolidated Balance Sheet and Profit and Loss Account (Contd.)
Asset Type Premises Improvement to leasehold premises Office equipments (chillers, transformers, UPS & DG set) Office equipments (other than above) Computers Furniture and Fixtures Vehicles ATMs Software (including development) expenditure Forex Broking Business Rights Goodwill (Other than on consolidation) Membership Card of the Bombay Stock Exchange Limited Useful life in years 58 Over the period of lease subject to a maximum of 6 years 10 5 3 6 4 5 3 10 5 20
Assets costing less than ` 5,000 are fully depreciated in the year of purchase. D. EMPLOYEE BENEFITS i Provident Fund – Defined Contribution Plan: Contribution as required by the Statute made to the Government Provident Fund is debited to the Profit and Loss Account when incurred. ii Gratuity – Defined Benefit Plan: The Group accounts for the liability for future gratuity benefits based on an actuarial valuation conducted by an independent actuary. The Bank makes contribution to a Gratuity Fund administered by trustees and managed by a life insurance company. In other entities gratuity obligation is wholly unfunded. The net present value of the Group’s obligation towards the same is actuarially determined based on the projected unit credit method as at the Balance Sheet date. iii iv Actuarial gains/losses are recognised immediately in the Profit and Loss account and are not deferred. Superannuation Fund – Defined Contribution Plan: The Group contributes a sum equivalent to 15% of eligible employees’ salary subject to a maximum of ` 1 lakh per eligible employee per annum, to the Superannuation Funds administered by trustees and managed by a Life Insurance Company. The Group recognises such contributions as an expense in the year they are incurred. v Compensated Absences - Other Long-Term Employee Benefits: The Group accrues the liability for compensated absences based on the actuarial valuation as at the Balance Sheet date conducted by an independent actuary. The net present value of the Group’s obligation is determined based on the projected unit credit method as at the Balance Sheet date. vi Other Employee Benefits: The undiscounted amount of short-term employee benefits expected to be paid in exchange for the services rendered by employees is recognised during the period when the employee renders the service. These benefits include performance incentives. E. INVESTMENTS For The Bank 1. Classification: In accordance with the RBI guidelines, investments are categorised into “Held for Trading”, “Available for Sale” and “Held to Maturity” and further classified under six groups, namely, Government Securities, Other Approved Securities, Shares, Debentures and Bonds, Investments in Associates and Other Investments for the purpose of disclosure in the Balance Sheet. i. ii. Investments that are held for resale within 90 days from the date of purchase are classified as “Held for Trading”. Investments that the Bank intends to hold to maturity are classified as “Held to Maturity”.
44
Kotak Mahindra Bank Limited Annual Report 2010-11
Its grt 2b 25
Financial Highlights
Consolidated Financial Statements Accounting Policies & Notes
Bank Reports & Statements
Schedules Forming Part of the Consolidated Balance Sheet and Profit and Loss Account (Contd.)
iii. 2. Investments which are not classified in the above categories are classified as “Available for Sale”. Valuation: The cost of investments is determined on weighted average basis. Broken period interest on debt instruments is treated as revenue item. The transaction costs including brokerage, commission etc. paid at the time of acquisition of investments is charged to profit and loss. The valuation of investments is made in accordance with the RBI guidelines as indicated hereunder: a. Held for Trading / Available for sale – Each security in this category is revalued at the market price or fair value and the net depreciation of each group is recognised in the Profit and Loss Account. Net appreciation, if any, is ignored. Further, provision for diminution other than temporary is made for, at the individual security level. Held to Maturity – These are carried at their acquisition cost. Any premium on acquisition of debt instruments is amortised over the balance maturity of the security on a straight-line basis. Any diminution, other than temporary, in the value of securities, is provided for. The market value of investments where market quotations are not available is determined as per the norms laid down by the RBI. c. Repurchase and reverse repurchase transactions – Securities sold under agreements to repurchase (Repos) and securities purchased under agreements to resell (Reverse Repos) are accounted as collateralised borrowing and lending transactions respectively. The difference between the consideration amount of the first leg and the second leg of the repo is recognised as interest income/interest expense over the period of the transaction (Refer Note 5).
b.
3.
Transfer between categories: Transfer between categories is done, in accordance with RBI guidelines, at the lower of acquisition cost/ book value / market value on the date of the transfer and depreciation, if any, on such transfer is fully provided for.
4.
Profit or loss on sale / redemption of investments a. b. Held for Trading and Available for Sale: Profit or loss on sale/redemption is included in the Profit and Loss Account. Held to Maturity: Profit on sale/redemption of investments is included in the Profit and Loss Account and is appropriated to Capital Reserve after adjustments for tax and Statutory Reserve transfer. Loss on sale/redemption is charged off to the Profit and Loss Account. For the insurance company: a. b. Investments are recorded at cost on trade which includes brokerage, transfer charges, transaction taxes as applicable, etc. but excludes preacquisition interest, if any and service tax where cenvat credit is being claimed. Investments maturing within twelve months from the Balance Sheet date and investments made with the specific intention to dispose them off within twelve months from the Balance Sheet date are classified as ‘Short Term Investments.’ Investments other than Short Term Investments are classified as ‘Long Term Investments.’ Valuation – Shareholders’ Investments and non-linked policy-holders’ investments c. All debt securities are considered as “held to maturity” for the purpose of valuation and are accordingly recorded at historical cost (excluding interest paid, if any). Debt securities including Government securities are stated at net amortised cost. The premium/discount, if any, on purchase of debt securities is amortised / accreted over the period to maturity on a straight line basis. Listed equity shares as at Balance Sheet date are stated at fair value being the lower of last quoted closing price on Bombay Stock Exchange Limited (“BSE”) and the National Stock Exchange Limited (“NSE”). Equity shares awaiting listing are stated at historical cost subject to provision for diminution, if any. Unrealised gains/ losses arising due to changes in the fair value of listed equity shares are taken to “Fair Value Change Account” and carried forward to Balance Sheet where the net balance is positive. Negative balance in the “Fair Value Change Account” is recognised in the Profit and Loss Account to the extent of negative balance in “Fair Value Change Account” as reduced by the amount previously provided in the Profit and Loss Account. The profit or loss on actual sale of listed equity includes the accumulated changes in the fair value previously recognised under “Fair Value Change Account”. In case of impairment in the value of investment as at the balance sheet date which is other than temporary, the amount of loss is recognised as an expense in the Profit and Loss Account to the extent of difference between the remeasured fair value of the investment and its acquisition cost as reduced by any previous impairment loss is recognised as expense in Profit and Loss Account. Any reversal of impairment loss, earlier recognised in Profit and Loss Account, is recognised in the Profit and Loss Account.
d.
Its grt 2b 25
45
Schedules Forming Part of the Consolidated Balance Sheet and Profit and Loss Account (Contd.)
Valuation – Unit linked Business e. All Government securities, except treasury bills, for linked business are valued at prices obtained from Credit Rating Information Service of India Limited (CRISIL). Debt Securities other than Government Securities are valued on the basis of CRISIL Bond valuer. Floating rate instruments are valued at cost. The discount on purchase of treasury bills, certificate of deposit and commercial papers are amortised over the period to maturity on a straight-line basis. Listed equity shares are valued at fair value, being the last quoted closing price on the NSE (In case of securities not listed on NSE, the last quoted closing price on the BSE is used). Equity shares awaiting listing are stated at historical cost subject to provision for diminution, if any, in the value of such investment determined separately for each individual investment. Unrealised gains and losses are recognised in the Profit and Loss Account. Mutual Fund Units are valued at the previous day’s closing Net Asset Value (NAV) of the fund in which they are invested. Transfer of investments from shareholders’ fund to the policyholders’ fund is at the book value or market price whichever is lower. Transfer of debt securities from shareholders’ fund to the policyholders’ fund is transacted at the lower of net amortised cost or market price. Transfer of investment between unit linked funds is done at market price. Gain/ Loss on transfer/ sale of securities is the difference between the transfer/sale price and the net amortised cost/ book value which is computed on a weighted average basis as on the date of transfer/sale. Sale consideration for the purpose of realised gain/loss is net of brokerage and taxes, if any. For other entities: As required by Accounting Standard 13 (AS-13) notified under the Companies (Accounting Standard) Rules, 2006 “as amended”, “Accounting for Investments”, investments are classified into long term investments and current investments. Investments, which are intended to be held for more than one year, are classified as long term investments and investments, which are intended to be held for less than one year, are classified as current investments. Long term investments are accounted at cost and any decline in value, other than temporary is provided for. Current investments are valued at cost (calculated by applying weighted average cost method) or market / fair value whichever is lower. Securities acquired with the intention to trade are considered as Stock-inTrade. Investments classified as “Stock-in-Trade” by some of the subsidiaries are valued at cost (calculated by applying weighted average cost method) or market price, whichever is lower. Brokerage, stamping and additional charges paid are included in the cost of investments. F. FOREIGN CURRENCY AND DERIVATIVE TRANSACTIONS For the bank: i. ii. iii. Foreign currency assets and liabilities are translated at the Balance Sheet date at rates notified by the Foreign Exchange Dealers’ Association of India (FEDAI). Income and Expenditure items are translated at the rates of exchange prevailing on the date of the transaction except for representative office expenses which are translated at the monthly average rate of exchange. Foreign Exchange contracts (other than deposit and placement swaps) outstanding at the Balance Sheet date are revalued at rates notified by FEDAI and resulting profits or losses are included in the Profit and Loss Account. Foreign exchange swaps “linked” to foreign currency deposits and placements are translated at the prevailing spot rate at the time of swap. The premium / discount on the swap arising out of the difference in the exchange rate of the swap date and the maturity date of the underlying forward contract is amortised over the period of the swap and the same is recognised as income/ expense. Notional amounts of derivative transactions comprising of forwards, swaps, futures and options are disclosed as off-balance sheet exposures. The swaps are segregated into trading or hedge transactions. Trading swaps outstanding as at the Balance Sheet dates are marked to market and the resulting profits or losses, are recorded in the Profit and Loss Account. Outstanding derivative transactions designated as “Hedges” are accounted on an accrual basis over the life of the transaction. Option premium paid/ received is accounted for in the Profit and Loss Account on expiry of the option. Contingent liabilities at the Balance Sheet date on account of outstanding foreign exchange contracts are restated at year end rates reported by FEDAI. Transactions in foreign currencies are recorded at the rate of exchange prevailing on the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are restated at the rate of exchange ruling at the Balance Sheet date.
f.
g. h.
i.
iv.
v.
For other entities: vi. vii.
viii. Exchange differences arising on settlement of the transaction and on account of restatement of assets and liabilities are dealt with in the Profit and Loss Account. In case of items which are covered by forward exchange contracts entered to hedge the foreign currency risk, the difference between the year end rate and the rate on the date of the contract is recognised as
46
Kotak Mahindra Bank Limited Annual Report 2010-11
Its grt 2b 25
Financial Highlights
Consolidated Financial Statements Accounting Policies & Notes
Bank Reports & Statements
Schedules Forming Part of the Consolidated Balance Sheet and Profit and Loss Account (Contd.)
exchange difference in Profit and Loss Account and the premium paid on forward contracts is recognised over the life of the contract. ix. The financial statements of all subsidiaries incorporated outside India which are in the nature of non-integral foreign operations are converted on the following basis: (a) Income and expenses are converted at the average rate of exchange applicable for the year and (b) All assets and liabilities are translated at the closing rate as on the Balance Sheet date. The exchange difference arising out of year end translation is debited or credited as “Foreign Currency Translation Reserve” forming part of “Reserves and Surplus”. Interest rate/ Currency swaps: x. The outstanding swap trades at the Balance Sheet date are disclosed at the contract amount. The swaps which are in the nature of hedges are accounted on an accrual basis; these contracts are not marked to market. Accrued interest is adjusted against the interest cost/income of the underlying liability/asset. The foreign currency balances on account of principal of currency swaps outstanding as at the Balance Sheet date are revalued using the closing rate. Currency options: xi. The outstanding option trades, in the nature of hedge, at the Balance Sheet date are disclosed at the contract amount. The premium paid is amortised over the life of the contract. Equity index/ equity futures/ equity index/ equity options/embedded derivatives: xii. Outstanding derivative contracts, including embedded derivatives, are measured at fair value as at each Balance Sheet date. Fair value of derivatives is determined using quoted market prices in an actively traded market, for the instrument, wherever available, as the best evidence of fair value. In the absence of quoted market prices in an actively traded market, a valuation technique is used to determine the fair value. In most cases the valuation techniques use as input parameters observable market data in order to ensure reliability of the fair value measure.
xiii. The marked to market on derivative contracts is determined on a portfolio basis with net unrealised losses being recognised in the Profit and Loss Account. Unrealised gains are not recognised in Profit and Loss Account on grounds of prudence as enunciated in Accounting Standard – 1, (AS-1) Disclosure of Accounting Policies notified under the Companies (Accounting Standard) Rules, 2006 “as amended”. xiv. Initial Margin-Equity/ Index Derivative Instrument representing the initial margin paid and /or additional margin paid over and above the initial margin, for entering into contracts for equity index/ stock futures and equity index/ stock options, which are released on final settlement / squaring–up of the underlying contracts, are disclosed under other assets. “Deposit for Mark to Market Margin - Equity / Index Derivative Instrument” representing the deposit paid in respect of mark to market margin is disclosed under other assets. xv. On final settlement or squaring up of contracts for equity index/ stock futures, the realised profit or loss after adjusting the unrealised loss already accounted, if any, is recognised in the Profit and Loss Account and shown as Profit / (Loss) on derivatives.
xvi. On settlement or squaring up of equity index/ stock options before expiry, the premium paid or received outstanding on that date is recognised in the Profit and Loss Account. xvii. When more than one contract in respect of the relevant series of equity index/ stock futures or equity index/ stock options contract to which the squared-up contract pertains is outstanding at the time of the squaring-up of the contract, the contract price of the contract so squared-up is determined using the weighted average cost method for calculating the profit/loss on squaring-up. G. ADVANCES i. ii. Advances are classified into standard, sub-standard, doubtful and loss assets in accordance with the RBI guidelines and are stated net of provisions made towards non-performing assets. Provision for non-performing assets comprising sub-standard, doubtful and loss assets is made in accordance with the RBI guidelines. In addition, the Group adopts an approach to provisioning that is based on past experience, evaluation of security and other related factors. In accordance with RBI guidelines the Bank has provided general provision on standard advances at uniform rate of 0.40% except in case of direct advances to agricultural and SME sectors which are provided at 0.25%, commercial real estate sector at 1.00% and teaser rate housing loans at 2.00%. Excess standard asset provision resulting from revision in provisioning rates is not written back in Profit and Loss Account in accordance with the RBI guidelines and clarifications. Effective 17th January, 2011, the Non-Banking Finance Company (NBFC) subsidiaries provide general provision on standard assets at 0.25% in accordance with RBI guidelines. iv. Amounts paid for acquiring non-performing assets from other banks and NBFCs are considered as advances. Actual collections received on such non-performing assets are compared with the cash flows estimated while purchasing the asset to ascertain
iii.
Its grt 2b 25
47
Schedules Forming Part of the Consolidated Balance Sheet and Profit and Loss Account (Contd.)
overdue. If the overdue is in excess of 90 days, the Bank classifies such assets into sub-standard, doubtful or loss as required by the RBI guidelines on purchase of non-performing assets. In respect of NBFCs, if the overdue is in excess of 180 days, then the assets are classified into sub-standard, doubtful and loss as required by the RBI guidelines on purchase of non performing assets. H. STRUCTURED LIABILITIES The Group has issued structured liabilities wherein the return on these liabilities is linked to non-interest benchmarks. Such structured liabilities have an embedded derivative which is the non-interest related return component. The embedded derivative is separated and accounted separately {Refer Note 2 (F)(xii)}. The resultant debt component of such structured liabilities is recognised in the Balance Sheet under Secured loans and is measured at amortised cost using yield to maturity basis. I. LIABILITY FOR POLICIES i Provision is made for policy liabilities in respect of all “in force” policies and “lapsed policies” that are likely to be revived in future based on actuarial valuation done by the Appointed Actuary in accordance with accepted actuarial practices, requirements of IRDA and the Institute of Actuaries of India. Liabilities in respect of unit-linked policies which have lapsed and are not likely to be revived, are shown as Policyholders’ liabilities until expiry of the revival period. Linked liabilities comprise of unit liability representing the fund value of policies. Actuarial method and assumptions: The actuarial liabilities have been calculated in accordance with generally accepted actuarial principles, the requirements of the Insurance Act 1938, IRDA regulations and the prescribed guidance notes of the Institute of Actuaries of India. In respect of unit linked policies, a unit reserve equal to the value of units as on the Balance Sheet date and an additional non-unit reserve calculated on gross premium prospective valuation method is created. The method adopted for par policies (accumulation contracts) is the value of the accumulated fund and an additional non-unit reserve calculated on gross premium prospective valuation method. For non-par conventional business the gross premium prospective method is used. Additional reserve on lapsed unit-linked policies is created and shown as ‘Policyholders’ Funds’. The assumptions used in the Gross Premium valuation are based on conservative best estimates together with appropriate margins for adverse deviations from experience. The principal assumptions are interest, inflation, return to policyholders’ accounts, lapses, expenses, mortality and morbidity. Reserves for group life business are calculated as the risk premium for the unexpired term with an allowance for expenses and a margin for adverse deviations.
ii iii J. i
ACTUARIAL METHOD – LIFE INSURANCE
ii
iii K.
DISCOUNTED INSTRUMENTS The liability is recognised at face value at the time of issuance of discounted instruments. The discount on the issue is amortised over the tenure of the instrument.
L.
ACQUISITION COSTS Acquisition costs such as commission and medical fees are costs that vary with and are primarily related to the acquisition of new and renewal insurance contracts. Such costs are recognised in the year in which they are incurred.
M.
TAXES ON INCOME The Income Tax expense comprises Current tax and Deferred tax. Current tax is measured at the amount expected to be paid in respect of taxable income for the year in accordance with the Income tax Act, 1961. Deferred tax adjustments comprises of changes in the deferred tax assets and liabilities. Deferred tax assets and liabilities are recognised for the future tax consequences of timing differences being the difference between the taxable income and the accounting income that originate in one period and are capable of reversal in one or more subsequent periods. Deferred tax assets arising mainly on account of carry forward losses and unabsorbed depreciation under tax laws are recognised only if there is virtual certainty of its realisation, supported by convincing evidence. Deferred tax assets on account of other timing differences are recognised only to the extent that there is reasonable certainty that sufficient future taxable income will be available against which such deferred tax assets can be realised. Deferred tax assets and liabilities are measured using tax rates and tax laws that have been enacted or substantially enacted at the Balance Sheet date. Changes in deferred tax assets / liabilities on account of changes in enacted tax rates are given effect to in the Profit and Loss Account in the period of the change. The carrying amount of deferred tax assets are reviewed at each Balance Sheet date. The Group writes-down the carrying amount of a deferred tax asset to the extent that it is no longer reasonably certain or virtually certain, as the case may be, that sufficient future taxable income will be available against which deferred tax asset can be realised. Deferred tax assets and deferred tax liabilities across various entities are not set off against each other as the Group does not have a legal right to do so.
48
Kotak Mahindra Bank Limited Annual Report 2010-11
Its grt 2b 25
Financial Highlights
Consolidated Financial Statements Accounting Policies & Notes
Bank Reports & Statements
Schedules Forming Part of the Consolidated Balance Sheet and Profit and Loss Account (Contd.)
N. SEGMENT REPORTING In accordance with guidelines issued by RBI vide DBOD.No.BP.BC.81/21.01.018/2006-07 dated 18th April 2007 and Accounting Standard 17 (AS-17) on “Segment Reporting” notified under the Companies (Accounting Standard) Rules, 2006 “as amended”, the Group’s business has been segregated into the following segments whose principal activities were as under: Segment Treasury, Investments and BMU Principal activity Dealing in debt, equity, money market, forex market, derivatives and investments and primary dealership of Government securities and Balance Sheet Management unit (BMU) responsible for Asset Liability Management Includes: (1) Lending Commercial vehicle finance, personal loans, home loans, agriculture finance, other loans/services and exposures which fulfill the four criteria for retail exposures laid down in Basel Committee on Banking Supervision document “International Convergence of Capital Measurement and Capital Standards : A Revised Framework” (2) Branch Banking Retail borrowings covering savings, current and term deposit accounts and Branch Banking network and services including distribution of financial products. (3) Corporate/ Wholesale Banking Vehicle Financing Other Lending Activities Broking Advisory and Transactional Services Credit cards Receivables/loans relating to credit card business. Wholesale borrowings and lendings and other related services to the corporate sector which are not included in Retail Banking. Retail vehicle finance and wholesale trade finance Financing against securities, securitisation and other loans/ services not included under Retail Banking and Corporate/Wholesale Banking Brokerage income on market transactions done on behalf of clients, interest on delayed payments, distribution of financial products and forex broking. Providing financial advisory and transactional services such as mergers and acquisition advice and equity/debt issue management services and revenue from being a professional clearing member. Management of investments on behalf of clients and funds. Life insurance
Retail Banking
Asset Management Insurance
The above segments have been identified based on the organisation structure, the customer segment, products and services offered and its relation to risk and reward, and the internal reporting process. A transfer pricing mechanism between segments has been established to arrive at interest cost on the borrowings of the segments based on borrowing costs, maturity profile of assets/liabilities etc. and which is disclosed as part of Segment Revenue. Segment revenues consists of earnings from external customers and inter-segment revenue as stated above. Segment expenses consist of interest expenses including those allocated, operating expenses and provisions. Segment results are net of segment revenue and segment expenses. Segment assets include assets related to segments and exclude tax related assets. Segment liabilities include liabilities related to the segment excluding net worth, minority interest and employees’ stock option (grants outstanding), proposed dividend and dividend tax thereon. Since the business operations of the Group are primarily concentrated in India, the Group is considered to operate only in the domestic segment. O. EMPLOYEE STOCK OPTION SCHEME Equity-settled scheme: The Bank has formulated Employee Stock Option Schemes (ESOSs) in accordance with Securities and Exchange Board of India (Employee Stock Option Scheme) Guidelines, 1999. The Schemes provide for grant of options to employees of the Group to acquire the equity shares of the Bank that vest in cliff vesting or in a graded manner and that are to be exercised within a specified period. In accordance with the SEBI Guidelines and the guidance note on “Accounting for Employee Share-based payments” issued by The Institute of Chartered Accountants of India, the excess, if any, of the market price of the share preceding the date of grant of the option under ESOSs over the exercise price of the option is amortised on a straight-line basis over the vesting period. Its grt 2b 25
49
Schedules Forming Part of the Consolidated Balance Sheet and Profit and Loss Account (Contd.)
Where the terms of an equity–settled award are modified, the minimum expense recognised in ‘Payments to and provision for employees’ is the expense as if the terms had not been modified. An additional expense is recognised for any modification which increases the total intrinsic value of the share–based payment arrangement, or is otherwise beneficial to the employee as measured at the date of modification. Cash-settled scheme: The cost of cash-settled transactions (stock appreciation rights) is measured initially using intrinsic value method at the grant date taking into account the terms and conditions upon which the instruments were granted. This intrinsic value is amortised on a straight-line basis over the vesting period with a recognition of corresponding liability. This liability is remeasured at each Balance Sheet date up to and including the settlement date with changes in intrinsic value recognised in Profit and Loss Account in ‘Payments to and provision for employees’. P. CLAIMS/ BENEFITS Benefits paid comprise of policy benefit amount, surrenders and specific claims settlement costs where applicable and change in the outstanding provision for claims at the year end. Surrender and claims by death are accounted when intimated. Survival benefits are accounted when due. Maturity claims are accounted on the date of maturity. Amounts recoverable from reinsurers are accounted for in the same period as the related claim. Repudiated claims disputed before judicial authorities are provided for based on the best judgment of the management considering the facts and evidence in respect of each such claim. Withdrawals under unit-linked policies are accounted in respective schemes when the associated units are cancelled. Q. SECURITISATION The Group enters into arrangements for sale of loans through Special Purpose Vehicles (SPVs). In most cases, post securitisation, the Group continues to service the loans transferred to the SPV. The Group also provides credit enhancement in the form of cash collaterals and / or by subordination of cash flows to Senior Pass Through Certificate (PTC) holders. In respect of credit enhancements provided or recourse obligations (projected delinquencies, future servicing etc.) accepted by the Group, appropriate provision / disclosure is made at the time of sale in accordance with Accounting Standard 29, (AS-29) “Provisions, Contingent Liabilities and Contingent Assets” notified under the Companies (Accounting Standard) Rules, 2006 “as amended”. The gain/ premium on account of securitisation of assets at the time of sale is computed as the difference between the sale consideration and the book value of the securitised asset amortised over the tenure of the securities issued. The loss on account of securitisation is recognised immediately in Profit and Loss Account. R. LEASES Leases where the lessor effectively retains substantially all the risks and benefits of ownership of the leased term, are classified as operating leases. Operating lease payments are recognised as an expense in the Profit and Loss Account on a straight-line basis over the lease term. Assets subject to operating leases are included in fixed assets. Lease income is recognised in the Profit and Loss Account on a straight-line basis over the lease term. Initial direct costs in respect of operating leases such as legal costs, brokerage costs, etc. are recognised immediately in the Profit and Loss Account. Assets given under a finance lease are recognised as a receivable at an amount equal to the net investment in the lease. S. PROVISIONS AND CONTINGENCIES Provision is recognised when there is a present obligation as a result of past event; it is probable that an outflow of resources will be required to settle the obligation, in respect of which a reliable estimate can be made. Provisions are not discounted to its present value and are determined based on best estimate required to settle the obligation at the balance sheet date. These are reviewed at each balance sheet date and adjusted to reflect the current best estimates. Provision is made for Credit card reward points based on reward points accrued to the customer at balance sheet date. Contingent Liabilities are not recognised but are disclosed in the notes unless the outflow of resources is remote. Contingent assets are neither recognised nor disclosed in the financial statements. T. EARNINGS PER SHARE Basic earnings per share are calculated by dividing the net profit or loss for the period attributable to equity shareholders (after deducting attributable taxes) by the weighted average number of equity shares outstanding during the period. The weighted average number of equity shares outstanding during the period are adjusted for events of bonus issue and stock split. For the purpose of calculating diluted earnings per share, the net profit or loss for the period attributable to equity shareholders and the weighted average number of shares outstanding during the period are adjusted for the effects of all dilutive potential equity shares. U. IMPAIRMENT The carrying amounts of assets are reviewed at each Balance Sheet date if there is any indication of impairment based on internal/ external factors.
50
Kotak Mahindra Bank Limited Annual Report 2010-11
Its grt 2b 25
Financial Highlights
Consolidated Financial Statements Accounting Policies & Notes
Bank Reports & Statements
Schedules Forming Part of the Consolidated Balance Sheet and Profit and Loss Account (Contd.)
V. CASH AND CASH EQUIVALENTS Cash and cash equivalents in the balance sheet comprise Cash in hand, Balances with Reserve Bank of India and Balances with Banks and Money at Call and Short Notice (including the effect of changes in exchange rates on cash and cash equivalents in foreign currency). 3. In August 2010, the Bank allotted 1,64,00,000 equity shares of ` 10 each at a premium ` 823 per equity share for a total consideration of ` 1366.12 crore on a preferential basis to Sumitomo Mitsui Banking Corporation. The net issue expenses of ` 0.58 crore related to the aforesaid issue have been charged to the securities premium account as allowed under section 78 of the Companies Act, 1956. The above expenses include ` 0.08 crore paid to the auditors in connection with the issue. Pursuant to the approval of the shareholders at the Annual General Meeting held on 21st July 2010, each equity share of the Bank having face value of ` 10 fully paid up was sub-divided into two equity shares of the face value of ` 5 each fully paid up as at 14th September 2010. Till 31st March 2010, the Bank used to account for market repurchase and reverse repurchase transactions in government securities and corporate debt securities, if any, as “sale and repurchase” transactions. However, as per RBI circular no. RBI/2009-2010/356 IDMD/ 4135/ 11.08.43/2009-10 dated 23rd March 2010, the Bank has started accounting for such transactions as “borrowing and lending” transactions, effective 1st April 2010. If the Bank had continued to account the repurchase and reverse repurchase transactions as “sale and repurchase” at 31st March 2011, the investments would have been lower by ` 561.89 crore and the ‘Balances with Banks and Money at call and short notice’ and ‘Borrowings’ would have been lower by ` 51.07 crore and ` 612.96 crore respectively. The Group charges off to the Profit and Loss Account all expenses related to acquisition costs of advances in the year in which they are incurred. KMPL, a subsidiary of the Bank, charges off such costs based on the Internal Rate of Return of a contract. On account of this difference in accounting policy, unamortised brokerage amounting to ` 53.79 crore (previous year ` 47.76 crore) is carried forward in the Balance Sheet under “Other Assets”. EMPLOYEE BENEFITS a. The Group has recognised the following amounts in the Profit and Loss Account towards contributions to Provident Fund and Other Funds. Provident Fund Superannuation Fund b. ` 54.46 crore (Previous Year ` 44.39 crore) ` 0.95 crore (Previous Year ` 0.96 crore)
4.
5.
6.
7.
In accordance with Indian regulations, the Group provides for gratuity, a defined benefit retirement plan covering all employees. The plan provides a lump sum payment to vested employees at retirement or on termination of employment based on the respective employee’s salary and the years of employment with the Group subject to maximum of ` 0.10 crore. The gratuity benefit is provided to the employees of the Bank through a fund administered by a Board of Trustees and managed by a life insurance company. The Bank is responsible for settling the gratuity obligation through contributions to the fund. The plan is fully funded. In respect of other companies in the Group, the gratuity obligation is wholly unfunded.
c.
Reconciliation of opening and closing balance of the present value of the defined benefit obligation for gratuity benefits is given below. ` in crore As on 31st March 2011 Funded Change in benefit obligations Liability at the beginning of the year Current Service cost Interest cost Actuarial (gain)/loss on obligations Past Service cost Actuarial (gain)/loss due to curtailment Liability assumed on transfer of employees Benefits paid Liability at the end of the year 22.19 6.43 2.15 4.12 9.01 — 0.43 (4.48) 39.85 17.15 5.24 1.71 (0.37) 6.42 — (0.57) (2.78) 26.80 19.75 6.09 1.73 (0.49) — — (0.58) (4.31) 22.19 13.79 4.42 1.24 (0.42) — (0.20) 0.20 (1.88) 17.15 Others As on 31st March 2010 Funded Others
Its grt 2b 25
51
Schedules Forming Part of the Consolidated Balance Sheet and Profit and Loss Account (Contd.)
` in crore As on 31st March 2011 Funded Change in plan assets Fair value of plan assets at the beginning of the year Expected return on plan assets Actuarial Gain Benefits paid Employer contributions Fair value of plan assets as at the end of the year 25.63 1.94 0.64 (4.48) 10.93 34.66 — — — — — — 15.39 1.17 4.61 (4.31) 8.77 25.63 — — — — — — ` in crore As on 31st March 2011 Funded Fair value of plan assets as at the end of the year Liability at the end of the year Net Asset/ (Liabilities) included in “Others” under “Other Assets” and “Others Liabilities” Expenses recognised for the period Current service cost Interest cost Expected return on plan assets Actuarial (gain)/loss Actuarial (gain)/loss due to curtailment Past Service cost Net gratuity expense included in “[payments to and provision for employees]” under “Operating Expenses” [Schedule 16 (I)] Actual return on plan assets 6.43 2.15 (1.94) 3.48 — 9.01 5.24 1.71 — (0.37) — 6.42 6.09 1.73 (1.17) (5.10) — 4.42 1.24 — (0.42) (0.20) — 34.66 39.85 Others — 26.80 As on 31st March 2010 Funded 25.63 22.19 Others — 17.15 Others As on 31st March 2010 Funded Others
Reconciliation of present value of the obligation and the fair value of the plan Assets
(5.19)
(26.80)
3.44
(17.15)
19.13 2.57
13.00 —
1.55 5.78
5.04 — ` in crore
As on 31st March 2011 Funded Reconciliation of the Liability recognised in the Balance Sheet Net (Asset)/ Liability at the beginning of the year Expense recognised Liability assumed on transfer of employees Employer contributions/ Transfers Net (Asset)/ Liability is included in “Others” under “Other Assets” and “Other Liabilities” Investment details of plan assets The plan assets are invested in insurer managed funds. (3.44) 19.13 0.43 (10.93) 17.15 13.00 (0.57) (2.78) Others
As on 31st March 2010 Funded Others
4.36 1.55 (0.58) (8.77)
13.79 5.04 0.20 (1.88)
5.19
26.80
(3.44)
17.15
52
Kotak Mahindra Bank Limited Annual Report 2010-11
Its grt 2b 25
Financial Highlights
Consolidated Financial Statements Accounting Policies & Notes
Bank Reports & Statements
Schedules Forming Part of the Consolidated Balance Sheet and Profit and Loss Account (Contd.)
Actuarial assumptions used As on 31st March 2011 Interest rate Salary escalation rate 8.26% p.a 15% p.a. for first 2 yr, 10% p.a. for next 2 yrs & 6% p.a. thereafter Expected rate of return on plan assets 7.50% p.a. As on 31st March 2010 8.01% p.a. 15% p.a. for first 2 yr, 10% p.a for next 2 yrs & 6% p.a. thereafter 7.50% p.a.
The estimates of future salary increases, considered in actuarial valuation, take account of inflation, seniority, promotion and other relevant factors. The overall expected rate of return on assets is determined based on the market prices prevailing on that date, applicable to the period over which the obligation is to be settled. Experience adjustments Amounts for the current and previous four years are as follows: ` in crore Gratuity 2011 Defined benefit obligation Plan assets Surplus / (deficit) Experience adjustments on plan liabilities Experience adjustments on plan assets 66.65 34.66 (31.99) 2.11 0.64 2010 39.34 25.63 (13.71) (0.93) 4.61 Year ended 31st March 2009 33.54 15.39 (18.15) (4.95) (3.58) 2008 25.55 13.96 (11.59) 0.76 1.38 2007 15.95 9.26 (6.69) 1.68 0.49
The Bank expects to contribute ` 6.00 crore to gratuity fund in financial year 2011-2012 The above information is as certified by the actuary and relied upon by the auditors. 8. 9. Balance in Banks in other deposit accounts include ` 8.07 crore (previous year ` 7.64 crore) which are under lien. “Others” in Other Liabilities and Provisions (Schedule 5) include the following items shown as “Provision for Contingencies”, which have been recognised in the accounts in respect of obligations arising from past event, the settlement of which is expected to result in an outflow embodying economic benefits. Provision for Contingencies: ` in crore Description Stamp duty on Trades Total Balance as on 1st April 2010 30.19 30.19 Addition during the year 5.38 5.38 Reversed/ paid during the year 17.52 17.52 Balance as on 31st March 2011 18.05 18.05
Based on legal opinion, the Management is of the view that certain provisions for earlier years are no longer required and have reversed ` 17.52 crore (Previous Year ` 9.12 crore). ` in crore Description Stamp duty on Trades Total Balance as on 1st April 2009 27.72 27.72 Addition during the year 11.59 11.59 Reversed/ paid during the year 9.12 9.12 Balance as on 31st March 2010 30.19 30.19
Its grt 2b 25
53
Schedules Forming Part of the Consolidated Balance Sheet and Profit and Loss Account (Contd.)
10. Provisions and Contingencies: Breakup of “Provisions and Contingencies” shown under the head Expenditure in Profit and Loss Account ` in crore Year ended 31 March Provision for taxation (Refer Note 11) Provision for Non-performing Assets and Contingencies (including write-offs and net of recoveries) Provision for Standard Assets Provision for Diminution in value of Investments Provision Others* Total
st
2011 678.16 111.60 6.11 46.64 (16.75) 825.76
2010 575.50 536.38 5.92 (51.24) 19.67 1,086.23
(*) For the year ended 31st March 2011 includes write-back of provisions against derivatives contracts ` (21.41) crore (Previous Year provision of ` 14.83 crore) and provision for fees receivable ` 4.66 crore (Previous Year ` 4.84 crore) 11. PROVISION MADE FOR TAXES DURING THE YEAR: ` in crore Year ended 31st March Current tax Deferred tax Wealth Tax Total 12. DESCRIPTION OF CONTINGENT LIABILITIES: Sr. No. 1. Contingent Liability* Claims not acknowledged as debts Brief Description This includes liability on account of income tax, interest tax, sales tax, lease tax demands and legal cases filed against the Group. The Group is a party to various legal proceedings in the normal course of business. The Group does not expect the outcome of these proceedings to have a material adverse effect on the Group’s financial conditions, result of operations or cash flows. Against the above ` 34.56 crore (previous year ` 19.00 crore) have been paid, which shall be refunded to the Group, if the outcome of the legal proceedings will be in the favour of the Group. 2. Liability on account of outstanding The Group enters into foreign exchange contracts with inter-bank participants on its forward exchange contracts own account and for customers. Forward exchange contracts are commitments to buy or sell foreign currency at a future date at the contracted rate. Guarantees on behalf of constituents in and outside India As a part of its banking activities, the Group issues guarantees on behalf of its customers. Guarantees generally represent irrevocable assurances that the Group will make payments in the event of customer failing to fulfill its financial or performance obligations. These includes Documentary credit such as letters of obligations, enhance the credit standing of the customers of the Group, contingent liabilities on account of bills re-discounted by the Group and cash collateral provided by the Group on assets which have been securitised. These include liabilities in respect of interest rate swaps, currency swaps, forward rate agreements, futures and options contracts. The Group enters into these transactions on its own account and for customers. Currency Swaps are commitments to exchange cash flows by way of interest/principal in one currency against another, based on predetermined rates. Interest rate swaps are commitments to exchange fixed and floating interest rate cash flows. The notional amounts that are recorded as contingent liabilities are amounts used as a benchmark for the calculation of interest component of the contracts. This also includes liability in respect of Capital commitments relating to fixed assets and undrawn commitments in respect of investments. 2011 682.30 (4.25) 0.11 678.16 2010 616.20 (40.81) 0.11 575.50
3.
4.
Acceptances, endorsements and other obligations
5.
Other items for which the Group is contingently liable
* Also refer Schedule 12 – Contingent Liabilities
54
Kotak Mahindra Bank Limited Annual Report 2010-11
Its grt 2b 25
Financial Highlights
Consolidated Financial Statements Accounting Policies & Notes
Bank Reports & Statements
Schedules Forming Part of the Consolidated Balance Sheet and Profit and Loss Account (Contd.)
13. EARNINGS PER EQUITY SHARE Particulars * Reconciliation between weighted shares used in the computation of basic and diluted earnings per share: Weighted average number of equity shares used in computation of basic earnings per share Effect of potential equity shares for stock options outstanding Weighted average number of equity shares used in computation of diluted earnings per share Following is the reconciliation between basic and diluted earnings per share: Nominal value per share (`) Basic earnings per share (`) Effect of potential equity shares for stock options (`) Diluted earnings per share (`) Earnings used in the computation of basic and diluted earnings per share (` in crore) 5.00 21.73 0.13 21.60 1,566.74 5.00 18.84 0.20 18.64 1,307.00 72,10,33,537 43,68,154 72,54,01,691 69,37,75,204 74,00,562 70,11,75,766 As on 31st March 2011 As on 31st March 2010
*The number of shares have been adjusted for split of the underlying equity shares from `10 paid up to ` 5 paid up per share in accordance with Accounting Standard (AS) 20, Earnings Per Share notified under the Companies (Accounting Standard) Rules, 2006 “as amended”. The effect of the share split has been given effect in computing earnings per share for the previous periods (Refer Note 4). 14. ESOPs At the General Meetings of the holding company, Kotak Mahindra Bank Limited, the shareholders of the Bank had unanimously passed Special Resolutions on 28th July 2000, 26th July 2004, 26th July 2005, 5th July 2007 and 21st August 2007, to grant options to the eligible employees of the Bank and its subsidiaries companies. Pursuant to these resolutions, the following four Employees Stock Option Schemes had been formulated and adopted: (a) (b) (c) (d) Kotak Mahindra Equity Option Scheme 2001-02; Kotak Mahindra Equity Option Scheme 2002-03; Kotak Mahindra Equity Option Scheme 2005; and Kotak Mahindra Equity Option Scheme 2007.
Consequent to the above, the Bank has granted stock options to the employees of the Group. The Bank under its various plan/ schemes, has granted in aggregate 5,40,24,680 options as on 31st March 2011 (Previous year 4,92,75,440) Stock appreciation rights The management has approved the grant of stock appreciation rights (SARs) to eligible employees as and when deemed fit. The SARs are settled in cash and vest on the respective due dates in a graded manner as per the terms and conditions of grant. The contractual life of the SARs range from 0.34 to 4.36 years. Detail of activity under SARs is summarised below Year Ended 31st March 2011 Outstanding at the beginning of the year Granted during the year Settled during the year Forfeited during the year Outstanding at the end of the year Equity-settled options The Bank has granted options to employees of the Group vide various employee stock option schemes. During the year ended 31st March 2011, the following schemes were in operation: 2,70,300 8,89,098 3,46,630 77,880 7,34,888 Year Ended 31st March 2010 — 2,70,300 — — 2,70,300
Its grt 2b 25
55
Schedules Forming Part of the Consolidated Balance Sheet and Profit and Loss Account (Contd.)
Plan 2005 Date of grant Date of Board Approval Date of Shareholder’s approval Various Dates Various Dates 26th July 2005 as amended on 5th July 2007 1,09,73,200 Equity 1 – 4.13 years 0.42 – 0.92 years Graded/Cliff vesting Plan 2007 Various Dates Various Dates 5th July 2007 as amended on 21st August 2007 2,41,34,480 Equity 1 – 4.31 years 0.17 – 1.01 years Graded/Cliff vesting
Number of options granted Method of Settlement (Cash/Equity) Vesting Period Exercise Period Vesting Conditions The details of activity under Plan 2005 have been summarised below: Year ended 31st March 2011 Number of Shares Weighted Average Exercise Price (`) Outstanding at the beginning of the year Granted during the year Forfeited during the year Exercised during the year Expired during the year Outstanding at the end of the year Out of the above exercisable at the end of the year Weighted average remaining contractual life (in years) Weighted average fair value of options granted The details of activity under Plan 2007 have been summarised below: Year ended 31st March 2011 Number of Shares Weighted Average Exercise Price (`) Outstanding at the beginning of the year Granted during the year* Forfeited during the year Exercised during the year Expired during the year Outstanding at the end of the year* Out of the above exercisable at the end of the year Weighted average remaining contractual life (in years) Weighted average fair value of options granted 1,28,14,250 47,49,240 9,29,424 31,46,430 67,626 1,34,20,010 13,65,190 236.42 308.63 282.17 175.78 463.92 271.88 235.82 1.82 206.73 49,88,600 — 2,81,200 46,42,120 65,280 — — 164.36 — 162.84 165.71 75.00 — — — —
Year ended 31st March 2010 Number of Shares 67,59,340 — 3,26,500 14,39,500 4,740 49,88,600 3,53,600 Weighted Average Exercise Price (`) 147.86 — 157.93 91.76 75.00 164.36 86.17 0.72 —
Year ended 31st March 2010 Number of Shares 1,69,54,594 3,06,040 8,62,972 35,05,736 77,676 1,28,14,250 16,70,738 Weighted Average Exercise Price (`) 224.54 198.59 238.89 173.04 326.68 236.42 147.14 1.98 260.04
56
Kotak Mahindra Bank Limited Annual Report 2010-11
Its grt 2b 25
Financial Highlights
Consolidated Financial Statements Accounting Policies & Notes
Bank Reports & Statements
Schedules Forming Part of the Consolidated Balance Sheet and Profit and Loss Account (Contd.)
The weighted average share price at the date of exercise for stock options exercised during the year was ` 437.07 (Previous year ` 363.99). The details of exercise price for stock options outstanding at the end of the year are: 31st March 2011 Range of exercise prices (`) Number of options outstanding Weighted average Weighted average remaining exercise price contractual life of (`) options (in years) 1.34 2.00 1.73 1.78 2.09 5.00 140.45 220.66 334.38 449.52
0-100 101-200 201-300 301-400 401-500 31st March 2010 Range of exercise prices (`)
30,854 28,87,906 24,14,450 80,34,800 52,000
Number of options outstanding
Weighted average Weighted average remaining exercise price contractual life of (`) options (in years) 0.52 1.40 1.89 2.06 1.20 1.42 55.63 154.55 206.43 341.66 492.24 625.00
0-100 101-200 201-300 301-400 401-500 601-700
4,23,680 97,16,674 24,26,496 50,74,000 87,000 75,000
In May 2010, the ESOP/Compensation Committee of the Bank accorded approval to the changes in exercise price of two stock option series granted on 10th May 2010. In addition to reduction in exercise price, in respect of one of the series, the vesting date of the last tranche has been preponed by 0.58 years in May 2010. The incremental intrinsic value resulting from the above modifications amounted to ` 55 and ` 30 (post split) respectively. The incremental intrinsic value is amortised from the modification date till the vesting date or the revised vesting date as the case may be. The incremental intrinsic value is measured as the difference between the intrinsic value of the modified stock options and that of the original stock options, both estimated as at the date of the modification. The fair value of the equity-settled and cash-settled options is estimated on the date of grant using Black-Scholes options pricing model taking into account the terms and conditions upon which the options were granted. The fair value of the cash-settled options is remeasured at the each Balance Sheet date. The following table lists the inputs to the model used for equity-settled and cash-settled options: Year ended 31st March Exercise Price ` Weighted Average Share Price ` Expected Volatility Historical Volatility Life of the options granted (Vesting and exercise period) in years Risk-free interest rate Expected dividend rate 2011 Equity-settled 200-422 401.14 31.56%-65.43% 31.56%-65.43% 1.00-4.44 5.54%-7.66% 0.09%-0.11% Cash-settled 5 379.40 20.22%-57.98% 20.22%-57.98% 0.04-3.09 7.28%-7.86% 0.10% 2010 Equity-settled 5-475 381.04 57.71%-77.02% 57.71%-77.02% 1.06 – 4.42 4.65% - 7.22% 0.09% - 0.19% Cash-settled 5-147.5 382.06 16.94%-67.54% 16.94%-67.54% 0.04 – 4.09 4.25% - 7.37% 0.10%
The expected volatility was determined based on historical volatility data; historical volatility includes early years of the Bank’s life; the Bank expects the volatility of its share price to reduce as it matures. The above information has been prepared by the Bank and relied upon by the auditors.
Its grt 2b 25
57
Schedules Forming Part of the Consolidated Balance Sheet and Profit and Loss Account (Contd.)
Effect of the employee share-based payment plans on the Profit and Loss Account and on the financial position: ` in crore Year ended 31st March Total Employee Compensation Cost pertaining to share-based payment plans Compensation Cost pertaining to equity-settled employee share-based payment plan included above Liability for employee stock options outstanding as at year end Deferred Compensation Cost Closing balance of liability for cash-settled options Expense arising from increase in intrinsic value of liability for cash stock appreciation plan 2011 52.87 18.76 70.43 33.52 18.05 0.20 2010 28.26 27.07 76.56 21.76 1.20 —
Had the Group recorded the compensation cost computed on the basis of Fair Valuation method instead of intrinsic value method, employee compensation cost would have been higher by ` 39.39 crore (Previous year ` 43.41 crore) and the profit after tax would have been lower by ` 26.30 crore (Previous year ` 28.66 crore). Consequently the basic and diluted EPS would have been ` 21.36 (Previous year ` 18.43) and ` 21.24 (Previous year ` 18.23) respectively. The above number of ESOPs / SARs, exercise price, fair value and share price have been adjusted for split of the underlying equity shares from ` 10 paid up to ` 5 paid up per share. In computing the above information, certain estimates and assumptions have been made by the Management which have been relied upon by the auditors. 15. Tier II Bonds a. b. Lower Tier II Bonds outstanding as on 31st March 2011 ` 591.80 crore (previous year ` 554.80 crore). Upper Tier II Bonds outstanding as on 31st March 2011 ` 336.68 crore (previous year ` 338.05 crore) of which bonds issued outside India ` 200.68 crore (previous year ` 202.05 crore).
16. Interest Expended-Others {Schedule 15(III)} includes interest on subordinated debt (Lower and Upper Tier II) ` 69.89 crore (Previous Year ` 67.55 crore). 17. Segment reporting The Summary of the operating segments of the Group for the year ended 31st March 2011 are as given below. ` in crore 31st March Segment Revenues: Treasury, Investments and BMU Retail Banking (a) (b) (c) Lending Branch Banking Credit Card 2,073.84 987.29 51.74 1,603.87 922.74 534.92 586.52 135.05 356.86 3,621.03 12,533.89 1.89 (1,506.51) 11,029.27 1,742.30 755.36 60.39 1,156.39 760.91 288.65 566.67 89.56 469.66 3,935.11 11,267.43 1.70 (1,215.83) 10,053.30 1,660.03 1,442.43 2011 2010
Corporate Banking Vehicle Financing Other Lending Activities Broking Advisory and Transactional Services Asset Management Insurance Sub-total Add: Unallocated Income Less: inter-segment revenues Total Income
58
Kotak Mahindra Bank Limited Annual Report 2010-11
Its grt 2b 25
Financial Highlights
Consolidated Financial Statements Accounting Policies & Notes
Bank Reports & Statements
Schedules Forming Part of the Consolidated Balance Sheet and Profit and Loss Account (Contd.)
31st March Segment Results: Treasury, Investments and BMU Retail Banking (a) (b) (c) Lending Branch Banking Credit Card 664.98 (263.25) (63.01) 543.89 261.19 235.56 122.19 41.22 136.56 101.37 2,245.51 1.89 2,247.40 377.51 (189.05) (127.41) 385.46 202.17 97.11 177.21 20.86 287.54 66.44 1,904.12 (1.26) 1,902.86 464.81 606.28 2011 2010
Corporate Banking Vehicle Financing Other Lending Activities Broking Advisory and Transactional Services Asset Management Insurance Sub-total Add: Unallocated Income/ (Expense) Total Profit before tax, before minority interest and associates Segment Assets Treasury, Investments and BMU Retail Banking (a) (b) (c) Lending Branch Banking Credit Card
22,298.50
17,443.69
17,481.22 15,567.29 141.10 12,869.42 8,200.74 3,822.48 320.95 44.44 836.04 8,773.43 90,355.61 (16,998.05) 73,357.56 323.57 73,681.13
13,074.54 11,713.92 197.81 10,931.75 6,683.06 2,125.77 489.02 27.94 680.88 6,946.17 70,314.55 (15,531.19) 54,783.36 331.45 55,114.81
Corporate Banking Vehicle Financing Other Lending Activities Broking Advisory and Transactional Services Asset Management Insurance Sub-total Less: inter-segment assets Total Add: Unallocated Assets Total Assets as per Balance Sheet Segment Liabilities Treasury, Investments and BMU Retail Banking (a) (b) (c) Lending Branch Banking Credit Card
18,734.41
13,911.90
14,517.83 15,655.54 23.98
11,392.90 11,902.97 22.61
Its grt 2b 25
59
Schedules Forming Part of the Consolidated Balance Sheet and Profit and Loss Account (Contd.)
31st March Corporate Banking Vehicle Financing Other Lending Activities Broking Advisory and Transactional Services Asset Management Insurance Sub-total Less: inter-segment liabilities Total Add : Unallocated liabilities Add: Share Capital, Reserves and Surplus and Minority Interest Total Capital and Liabilities as per Balance Sheet Capital Expenditure Treasury, Investments and BMU Retail Banking (a) (b) (c) Lending Branch Banking Credit Card 8.47 59.05 0.59 3.74 1.28 0.10 17.86 2.86 5.57 18.65 145.57 43.12 6.95 40.53 3.83 4.02 1.76 0.19 17.98 2.36 4.28 27.33 152.35 3.65 29.39 1.91 2.63 27.16 0.13 63.78 2.44 3.59 20.96 428.13 37.90 7.61 35.30 4.75 4.73 1.62 0.23 19.64 1.96 4.14 25.04 142.92 27.40 272.49 2011 11,086.11 8,788.19 992.15 860.38 24.95 385.82 8,452.32 79,521.68 (16,998.05) 62,523.63 87.35 11,070.15 73,681.13 2010 9,789.53 6,288.50 1,068.19 1,132.22 22.52 210.44 6,782.30 62,524.08 (15,531.19) 46,992.89 130.12 7,991.80 55,114.81
Corporate Banking Vehicle Financing Other Lending Activities Broking Advisory and Transactional Services Asset Management Insurance Total Depreciation Treasury, Investments and BMU Retail Banking (a) (b) (c) Lending Branch Banking Credit Card
Corporate Banking Vehicle Financing Other Lending Activities Broking Advisory and Transactional Services Asset Management Insurance Total
Segment information is provided as per the MIS available for internal reporting purposes, which includes certain estimates and assumptions. The methodology adopted in compiling and reporting the above information has been relied upon by the auditors.
60
Kotak Mahindra Bank Limited Annual Report 2010-11
Its grt 2b 25
Financial Highlights
Consolidated Financial Statements Accounting Policies & Notes
Bank Reports & Statements
Schedules Forming Part of the Consolidated Balance Sheet and Profit and Loss Account (Contd.)
18. Assets taken on lease (i) The Group has taken various premises and equipment under operating lease. The lease payments recognised in the Profit and Loss Account are ` 160.75 crore (previous year ` 172.32 crore). (ii) The future minimum lease payments under non cancelable operating lease – not later than one year is ` 149.45 crore (previous year ` 116.66 crore), later than one year but not later than five years is ` 423.50 crore (previous year ` 363.29 crore) and later than five years ` 143.06 crore (previous year ` 121.08 crore). The lease terms include renewal option after expiry of primary lease period. There are no restrictions imposed by lease arrangements. There are escalation clauses in the lease agreements. 19. Assets given on lease The lease income recognised in the Profit and Loss Account in respect of premises and equipment under operating lease is ` 1.64 crore (previous year `1.57 crore). The future minimum lease payments under non cancelable operating lease – not later than one year is ` 1.14 crore (previous year ` 1.14 crore), later than one year but not later than five years is ` 0.95 crore (previous year ` 2.09 crore). Details of gross investments, unearned finance income in respect of assets given under finance lease are as under: ` in crore As on 31st March Gross Investments: (i) Not later than 1 year 32.58 85.45 118.03 10.54 13.72 24.26 22.04 71.73 93.77 0.02 7.80 21.31 29.11 2.65 3.95 6.60 5.15 17.36 22.51 0.04 (ii) Between 1-5 years Total Unearned Finance Income: (i) Not later than 1 year (ii) Between 1-5 years Total Present Value of Rentals (i) Not later than 1 year (ii) Between 1-5 years Total Accumulated provision on the Gross Investments 2011 2010
20. The Group enters into various types of derivative contracts such as interest rate swaps, cross currency interest rate swaps, foreign currency swaps, forwards, index/ equity futures and options. The details of such derivatives for subsidiaries other than bank are as under: Derivative instrument outstanding as on 31st March 2011 As on 31st March Particulars of Derivatives Futures S&P CNX Nifty Futures S&P CNX Nifty Futures Bank Nifty Futures Stock Futures Stock Futures Interest Rate Futures Commodity Futures Options S&P CNX Nifty Options Long S&P CNX Nifty Options Long S&P CNX Nifty Options Short S&P CNX Nifty Options Short Stock Options Long Stock Options Long Stock Options Short 650,300 530,600 816,900 350,000 — — — 620,250 26,300 518,250 254,300 32,318 8,500 88,218 Trading Hedging Trading Hedging Trading Hedging Trading 194,700 166,750 4,000 746,250 441,125 170 Lots 6,800 100,350 4,150 — 3,061,738 86,700 — — Trading Hedging Trading Trading Hedging Hedging Hedging 2011 Quantity 2010 Quantity Purpose
Its grt 2b 25
61
Schedules Forming Part of the Consolidated Balance Sheet and Profit and Loss Account (Contd.)
As on 31st March Particulars of Derivatives Interest Rate Swaps Currency Swaps Forward Exchange Contracts USD-INR Long USD-INR Short USD-GBP Long USD-GBP Short USD-EURO Long Foreign Currency Option USD-INR Unhedged forex exposure outstanding as on the Balance Sheet date ` in crore Particulars Amount Receivable in foreign currency As on 31st March 2011 As on 31st March 2010 2011 2010 Purpose Hedging Hedging Hedging Hedging Hedging Hedging Hedging Hedging Notional Amount — INR 500,000,000 USD 84,500,985 USD 122,801,651 USD 14,750,000 USD 5,500,000 — — USD 4,033,500 USD 5,500,000 USD 27,712,657 USD 2,261,975 USD 1,339,002 USD 1,579,292 — USD 5,000,000
7.69 (USD 1,282,399) 3.22 (EURO 413,625) (JPY 36,668,996) (USD 160,337)
21. Other Liabilities and Provisions (Schedule 5.III) includes Deferred Tax Liability and “ Others – Other Assets”(Schedule 11.VI) includes Deferred Tax Assets as follows: ` in crore Particulars Deferred Tax Assets Provision for non-performing and doubtful debts, standard advances and contingencies Depreciation on assets Unabsorbed capital losses/ business losses/ provision for investments* Unamortised Income Expenditure allowed on payment basis and others Total Deferred Tax Assets Deferred Tax Liabilities Deferred expenses Depreciation on assets Others Total Deferred Tax Liabilities Net Deferred Tax Assets/(Liabilities) 17.87 0.91 4.85 23.63 293.19 15.86 0.85 2.49 19.20 288.99 220.46 21.92 3.02 6.87 64.55 316.82 237.47 23.82 0.63 2.60 43.67 308.19 Year ended 31st March 2011 Year ended 31st March 2010
(*) Deferred Tax assets on Unabsorbed Capital Loss is recognised as there are investments which are intended to be sold and the capital gains arising there from will be used for setting off the unabsorbed capital loss. 22. Fixed Assets Fixed Assets as per Schedule 10 include intangible assets, details of which are as follows: ` in crore Particulars SOFTWARE Gross Block At cost on 31st March of the preceding year Additions during the year Deductions during the year Total 159.65 28.32 0.04 187.93 117.12 42.60 0.07 159.65 Year ended 31st March 2011 Year ended 31st March 2010
62
Kotak Mahindra Bank Limited Annual Report 2010-11
Its grt 2b 25
Financial Highlights
Consolidated Financial Statements Accounting Policies & Notes
Bank Reports & Statements
Schedules Forming Part of the Consolidated Balance Sheet and Profit and Loss Account (Contd.)
` in crore Particulars Depreciation As on 31st March of the preceding year Charge for the year Deductions during the year Depreciation to date Net Block MEMBERSHIP CARDS OF STOCK EXCHANGE Gross Block At cost on 31st March of the preceding year Total Depreciation As on 31st March of the preceding year Charge for the year Depreciation to date Net Block GOODWILL Gross Block At cost on 31st March of the preceding year Total Depreciation As on 31st March of the preceding year Depreciation to date Net Block FOREX BROKING BUSINESS RIGHTS Gross Block At cost on 31st March of the preceding year Total Depreciation As on 31st March of the preceding year Charge for the year Depreciation to date Net Block 3.47 0.36 3.83 — 3.09 0.38 3.47 0.36 3.83 3.83 3.83 3.83 1.88 1.88 — 1.88 1.88 — 1.88 1.88 1.88 1.88 3.00 0.21 3.21 1.45 2.79 0.21 3.00 1.66 4.66 4.66 4.66 4.66 105.39 35.00 — 140.39 47.54 77.65 27.80 0.06 105.39 54.26 Year ended 31st March 2011 Year ended 31st March 2010
Its grt 2b 25
63
Schedules Forming Part of the Consolidated Balance Sheet and Profit and Loss Account (Contd.)
23. RELATED PARTY DISCLOSURES: Nature of relationship A Individual having significant influence over the enterprise Name of Related Party Uday S. Kotak along with relatives and enterprises in which he has beneficial interest holds 45.56% of the equity share capital of Kotak Mahindra Bank Limited as on 31st March 2011.
B
Other Related Parties: Associates Business Standard Limited (till 16th June 2009) Kotak Mahindra Asset Reconstruction Company Limited (till 18th March2011) ACE Derivatives and Commodity Exchange Limited (Formerly known as Ahmedabad Commodity Exchange Limited) Regency Hospitals Limited (till 30th March 2010) Infina Finance Private Limited Phoenix ARC Private Limited Matrix Business Services India Private Limited Investing Party of the subsidiaries Old Mutual Plc. Old Mutual Life Assurance Company (South Africa ) Limited Aero Agencies Limited Kotak and Company Limited Kotak Commodity Services Limited Komaf Financial Services Limited Asian Machinery & Equipment Private Limited Cumulus Trading Company Private Limited Palko Properties Private Limited Harisiddha Trading and Finance Private Limited Kotak Trustee Company Private Limited Kotak Chemicals Limited Kotak Ginning & Pressing Industries Limited Insurekot Investments Private Limited Key Management Personnel Mr. Uday S. Kotak – Executive Vice Chairman and Managing Director- KMBL Mr. C. Jayaram - Executive Director- KMBL Mr. Dipak Gupta - Executive Director- KMBL Relatives of Key Management Personnel Ms. Pallavi Kotak Mr. Suresh Kotak Ms. Indira Kotak Mr. Jay Kotak Mr. Dhawal Kotak Ms. Aarti Chandaria Ms. Usha Jayaram Ms. Anita Gupta Ms. Urmila Gupta
Enterprises over which relatives of Key Management Personnel have control/ significant influence
64
Kotak Mahindra Bank Limited Annual Report 2010-11
Its grt 2b 25
Financial Highlights
Consolidated Financial Statements Accounting Policies & Notes
Bank Reports & Statements
Schedules Forming Part of the Consolidated Balance Sheet and Profit and Loss Account (Contd.)
C. Details of related party transactions: ` in crore Items/Related Party Associates Investing Party of the subsidiaries Enterprises over which relatives of Key Management Personnel have control/ significant influence Key Management Personnel Relatives of Key Management Personnel
I.
Liabilities Other Liabilities Deposits Interest Payable 20.38 (25.64) 364.87 (514.71) 4.87 (7.53) 107.87 (81.90) — (0.02) 0.37 (2.92) — (0.03) 0.24 (0.11) 7.35 (6.69) 1.59 (0.71) 42.70 (32.13) 4.19 (0.68) 3.98 (7.28) 4.54 (1.35) 1.84 (1.43) 0.08 (—) 1.60 (0.35) 0.01 (—) 14.21 (12.53) 0.03 (0.02) 3.80 (1.12) 18.84 (30.77) — (7.55) 0.08 (0.01) # (0.06) 1.52 (1.33) 12.49 (8.94) — (52.87) 0.02 (—) 0.23 (0.18) 0.04 (0.03) # (—) 0.08 (0.08) 0.81 (0.80) 0.23 (0.34) 91.95 (8.80) 2.31 (0.56) 0.01 (—) 13.50 (4.14) 0.31 (0.16) 0.74 (0.52) 0.02 (0.01)
II.
Assets Investments -Gross Diminution on Investments Others
III. Expenses Salaries/fees (Include ESOP cost)* Others Interest Paid IV. Income Others V. Other Transactions Dividend paid Reimbursement to companies Reimbursement from companies Purchase of Investments Sale of Investment Purchase of Fixed Assets Sale of Fixed Assets
Its grt 2b 25
65
Schedules Forming Part of the Consolidated Balance Sheet and Profit and Loss Account (Contd.)
D. Material transactions with related parties: ` in crore Items / Related Party Associates Investing Party of the subsidiary Enterprises Key over which Management relatives personnel of Key Management Personnel have control/ significant influence Relatives of Key Management Personnel Total
I. Liabilities: Other liabilities Old Mutual Life Assurance Company (South Africa) Limited Aero Agencies Limited Kotak Commodity Services Limited Infina Finance Private Limited Others II. Assets: Investments ACE Derivatives and Commodity Exchange Limited Phoenix ARC Private Limited Others Diminution on investments Kotak Mahindra Asset Reconstruction Company Limited Others Kotak Commodity Services Limited Old Mutual Plc ACE Derivatives and Commodity Exchange Limited Infina Finance Private Limited Others III. Expenses: Other liabilities Mr. Uday Kotak* Mr. C. Jayaram* Mr. Dipak Gupta* 20.17 (25.39) 0.21 (0.25)
0.81 (0.80) 0.04 (0.02) 0.19 (0.32)
0.01 (—)
0.81 (0.80) 0.04 (0.02) 0.19 (0.32) 20.17 (25.39) 0.22 (0.25)
51.66 (25.67) 51.45 (51.45) 4.76 (4.78)
51.66 (25.67) 51.45 (51.45) 4.76 (4.78)
— (0.02) 0.24 (0.11) — (0.03) 0.03 (1.15) 0.33 (1.73) 0.01 (0.04)
— (0.02) 0.24 (0.11) — (0.03) 0.03 (1.15) 0.33 (1.73) 0.01 (0.04)
# (—)
1.78 (1.13) 2.73 (2.75) 2.84 (2.81)
1.78 (1.13) 2.73 (2.75) 2.84 (2.81)
66
Kotak Mahindra Bank Limited Annual Report 2010-11
Its grt 2b 25
Financial Highlights
Consolidated Financial Statements Accounting Policies & Notes
Bank Reports & Statements
Schedules Forming Part of the Consolidated Balance Sheet and Profit and Loss Account (Contd.)
` in crore Items / Related Party Associates Investing Party of the subsidiary Enterprises Key over which Management relatives personnel of Key Management Personnel have control/ significant influence Relatives of Key Management Personnel Total
Interest Paid Infina Finance Private Limited Phoenix ARC Private Limited Others Others Aero Agencies Limited Kotak and Company Limited Matrix Business Services India Private Limited Others IV. Income: Others Fee Income Phoenix ARC Private Limited Kotak Commodity Services Limited Others Premium Income ACE Derivatives and Commodity Exchange Limited Kotak Commodity Services Limited Others Brokerage Income Infina Finance Private Limited Others 1.84 (0.68) # (—) 0.01 (—) # (—) Its grt 2b 25 1.84 (0.68) 0.01 (—) # (—) 0.01 (—) # (0.01) 0.01 (—) # (0.01) # (—) # (—) 2.34 (—) 1.84 (1.41) — (0.01) # (—) 2.34 (—) 1.84 (1.41) # (0.01) 3.53 (6.87) 0.45 (0.41) 1.59 (0.70) — (0.01) 0.08 (—) 3.53 (6.87) 0.45 (0.41) 1.59 (0.70) 0.08 (0.01) 35.07 (28.23) 5.43 (3.82) 2.20 (0.08) 4.54 (1.35) 1.60 (0.35) 0.04 (0.03) 35.07 (28.23) 5.43 (3.82) 8.38 (1.81)
67
Schedules Forming Part of the Consolidated Balance Sheet and Profit and Loss Account (Contd.)
` in crore Items / Related Party Associates Investing Party of the subsidiary Enterprises Key over which Management relatives personnel of Key Management Personnel have control/ significant influence Relatives of Key Management Personnel Total
V. Other Transactions: Dividend Paid Mr. Uday Kotak Mr. C Jayaram Mr. Dipak Gupta Ms. Pallavi Kotak Ms. Indira Kotak Others Reimbursements made Infina Finance Private Limited Kotak Commodity Services Limited Others Reimbursements received Old Mutual Life Assurance Company (South Africa) Limited Kotak Commodity Services Limited ACE Derivatives and Commodity Exchange Limited Others Purchase of Investments Phoenix ARC Private Limited Komaf Financial services Limited Sale of Investment Infina Finance Private Limited Komaf Financial services Limited Purchase of Fixed Assets Kotak Commodity Services Limited 0.02 (—) 0.01 (0.02)
14.16 (12.49) 0.03 (0.02) 0.02 (0.02) 0.02 (0.02) 0.05 (0.05) 0.01 (0.01) 0.02 (—) # (0.06)
14.16 (12.49) 0.03 (0.02) 0.02 (0.02) 0.02 (0.02) 0.05 (0.05) 0.01 (0.01) 0.02 (—) # (0.06) 0.01 (0.02)
0.08 (—) 1.52 (1.33) 3.69 (1.03) 0.11 (0.09) 18.84 (30.77) 12.49 (8.94) — (7.55) — (52.87)
0.08 (—) 1.52 (1.33) 3.69 (1.03) 0.11 (0.10) 18.84 (30.77) 12.49 (8.94) — (7.55) — (52.87) 0.02 (—)
— (0.01)
68
Kotak Mahindra Bank Limited Annual Report 2010-11
Its grt 2b 25
Financial Highlights
Consolidated Financial Statements Accounting Policies & Notes
Bank Reports & Statements
Schedules Forming Part of the Consolidated Balance Sheet and Profit and Loss Account (Contd.)
` in crore Items / Related Party Associates Investing Party of the subsidiary Enterprises Key over which Management relatives personnel of Key Management Personnel have control/ significant influence Relatives of Key Management Personnel Total
Sale of Fixed Assets ACE Derivatives and Commodity Exchange Limited * includes incentive paid during the year E. Maximum balance outstanding ` in crore Items / Related Party Associates Investing Party of the subsidiary Enterprises over which relatives of Key Management Personnel have control/ significant influence Key Management personnel Relatives of Key Management Personnel 0.23 (0.18) 0.23 (0.18)
I.
Liabilities Deposits Other Liabilities 3,259.23 (3,390.73) 25.64 (25.64) 0.81 (0.80) 26.79 (75.76) 0.34 (0.34) 64.69 (18.93) 0.81 (0.81)
II.
Assets Investments-Gross Diminution on Investments Others 107.88 (81.90) — (0.02) 2.92 (2.91) 0.03 (0.03) 0.24 (0.11)
# In the above table denotes amounts less than ` 50,000.00 Note: Figures of previous year are given in bracket. 24. Figures for the previous year have been regrouped / reclassified wherever necessary to conform to current year’s presentation. For and on behalf of the Board of Directors Dr. Shankar Acharya Chairman Dipak Gupta Executive Director Jaimin Bhatt Group Chief Financial Officer Bina Chandarana Company Secretary Uday Kotak Executive Vice Chairman and Managing Director
Mumbai, 5th May 2011
Its grt 2b 25
69
Financial Information of Subsidiaries for the year ended 31st March 2011 ` in Lakhs
Kotak Mahindra Capital Company Limited Limited 160.00 48,523.04 48,934.65 51,552.53 2,617.88 843,196.70 79,214.82 4,072.37 376.63 18,776.77 16,448.04 94.57 830.67 10.88 884,587.24 104,648.06 9,909.84 3,301.34 37,609.68 26,003.87 2,830.71 0.09 16,438.40 296.98 41,390.54 25,433.24 5,837.47 2,924.71 18,832.91 9,555.83 2,736.14 0.09 15,607.73 286.10 43.40 65.66 22.26 (9,638.48) 25,128.21 3,857.47 2,919.70 17,216.94 8,855.05 2,729.15 15,148.53 281.10 (366.60) 411.61 51,029.02 305.03 1,980.00 5.01 1,615.97 700.78 6.99 0.09 459.20 5.00 410.00 1,200.00 (119.43) 1,080.57 1,114.36 33.79 Limited 443.38 (188.75) 254.63 365.99 111.36 Insurance Company Limited Limited Limited Ltd Life Limited Management Company Limited Limited Fund Limited Services Limited Fund Ltd Services Old Mutual Investments Asset Trustee (International) (UK) Inc. Opportunities Advisors Trusteeship Brokerage Pension Financial Mahindra Mahindra Mahindra Mahindra Mahindra Mahindra Mahindra, Investment Investment Mahindra Forex Mahindra Mahindra Limited Kotak Kotak Kotak Kotak Kotak Kotak Kotak Kotak Global Kotak Kotak Kotak Kotak Kotak
70
9,960.62 15,530.76 7,022.77 1,833.91 5,188.86 10,247.45 2,399.87 1,062.00 668.10 4,605.42 918.54 (380.58) 920.60 406.03 322.04 122.39 367.02 (162.23) 10,247.45 3,320.47 1,468.03 990.14 4,727.81 1,285.56 (542.81) 362,140.45 12,528.39 10,811.06 1,083.51 5,624.02 6,663.01 1,091.40 808,834.10 5,543.21 2,500.00 987.35 34,446.25 31.28 14,543.93 9,609.82 4,922.24 1,650.83 3,271.41 138.40 109.69 36.82 72.87 57.45 (45.53) (45.53) 1,050.11 3.90 (57.25) (57.25) 782.67 (172.72) (172.72) 8,963.47 Nil Nil Nil Nil 693.00 300.42 Nil Nil Nil Nil Nil Nil Nil Nil Nil
Particulars
Kotak
Mahindra
Securities
Prime
Limited
Capital
349.52
Reserves
153,308.04
169,234.91
Total Networth
153,657.56
169,394.91
Total Assets
1,191,861.65
283,703.52
Total Liabilites
1,038,204.09
114,308.61
Investments
(excluding investment
in subsidiaries)
32,358.61
31,282.61
Turnover
136,476.08
73,755.35
Kotak Mahindra Bank Limited Annual Report 2010-11
Dr. Shankar Acharya Chairman Dipak Gupta Executive Director Bina Chandarana Company Secretary Uday Kotak Executive Vice Chairman and Managing Director Jaimin Bhatt Group Chief Financial Officer
Profit before taxation
48,188.43
27,157.26
Provision for taxation
16,402.16
Profit after taxation
31,786.27
18,193.79
Proposed Dividend
(Equity)
Nil
(1)
Total liabilities include current liabilities and provision and exclude capital and reserves.
(2)
Turnover is the total income reported by each of the entities in the financial statements.
(3)
Investments include investments and Stock in Trade reported by the above entities and also include investments held to cover policy holders’ liabilities and unit linked liabilities.
(4)
Dividend excludes corporate dividend tax.
(5)
Networth does not include Preference Share capital. The same is included in total liabilities.
(6)
The figures in respect of Kotak Mahindra, Inc., Kotak Mahindra (UK) Limited, Kotak Mahindra (International) Limited, Global Investment opportunities Fund Limited and Kotak Mahindra Financial Services Limited are based on the accounts prepared under Indian Accounting Standards.
(7)
The figures in respect of Kotak Mahindra Financial Services Ltd are for the period from 17th November, 2009 to 31st March 2011.
Mumbai, 5th May 2011
Its grt 2b 25
Financial Highlights
Consolidated Financial Statements Basel II (Pillar 3) Disclosures
Bank Reports & Statements
Basel II (Pillar 3) Disclosures
1. Scope of Application Pillar 3 disclosures apply to Kotak Mahindra Bank Limited (KMBL) and its consolidated entities for regulatory purposes, wherein KMBL is the controlling entity in the group. Basis of Consolidation for capital adequacy The consolidated capital adequacy is based on consolidated financial statements of Kotak Mahindra Bank and its subsidiaries, prepared in accordance with guidelines for consolidated accounting and other quantitative methods vide circular DBOD.No.BP.BC.72/21.04.018/ 2001-02 dated 25th February 2003 issued by Reserve Bank of India (RBI). The capital charge is computed as per RBI guidelines for implementation of the New Capital Adequacy Framework (Basel II) released in April 2007. In accordance with the guidelines issued by RBI, the insurance subsidiary has been excluded from consolidation for the purpose of capital adequacy. The entities which carry on activities of financial nature are considered for consolidation for capital adequacy purpose as stated in the scope for preparing consolidated prudential reports laid down in RBI guidelines. The Bank consolidates all subsidiaries as defined in Accounting Standard (AS) -21 Consolidated Financial Statements on a line by line basis by adding together like items of assets, liabilities, income and expenses. Further, Bank’s investments in Associates are consolidated using the equity method of accounting as defined by Accounting Standard – 23 Accounting for Investments in Associates in Consolidated Financial Statements. Kotak Mahindra Bank Limited (KMBL) and its subsidiaries/ associates which have been consolidated, constitute the “Group”. The list of subsidiaries/ associates consolidated as per AS 21 alongwith their treatment in consolidated capital adequacy computation is as under: Name of the Subsidiary Kotak Mahindra Prime Limited Kotak Securities Limited Kotak Mahindra Capital Company Limited Kotak Mahindra Old Mutual Life Insurance Limited Country of Origin India India India India Activity Non Banking Finance Company Securities Broking Investment Banking Life Insurance Status of consolidation Fully consolidated Fully consolidated Fully consolidated Fully consolidated for financial reporting but not for capital adequacy. Investment deducted from regulatory capital for capital adequacy Fully consolidated Fully consolidated Fully consolidated Fully consolidated Fully consolidated Fully consolidated Fully consolidated Fully consolidated
Kotak Mahindra Investments Limited Kotak Mahindra Asset Management Company Limited Kotak Mahindra Trustee Company Limited Kotak Mahindra (International) Limited Kotak Mahindra (UK) Limited Kotak Mahindra, Inc. Global Investments Opportunities Fund Limited (GIOFL)* Kotak Investment Advisors Limited
India India India Mauritius U.K USA Mauritius India
Non Banking Finance Company Asset Management Company – Mutual Funds Trustee of mutual funds Brokerage and advisory services Brokerage and advisory services Brokerage and advisory services Investment company Asset manager of venture capital, private equity and similar funds Trustee of venture capital, private equity and similar funds Foreign exchange brokerage services Pension fund management Advising on financial products for Middle East Non Banking Finance Company
Kotak Mahindra Trusteeship Services Limited Kotak Forex Brokerage Limited Kotak Mahindra Pension Fund Limited Kotak Mahindra Financial Services Limited Infina Finance Private Limited
India India India Dubai India
Fully consolidated Fully consolidated Fully consolidated Fully consolidated Consolidated by equity method Its grt 2b 25
71
Its grt 2b 25
Financial Highlights
Consolidated Financial Statements Basel II (Pillar 3) Disclosures
Bank Reports & Statements
Basel II (Pillar 3) Disclosures
1. Scope of Application Pillar 3 disclosures apply to Kotak Mahindra Bank Limited (KMBL) and its consolidated entities for regulatory purposes, wherein KMBL is the controlling entity in the group. Basis of Consolidation for capital adequacy The consolidated capital adequacy is based on consolidated financial statements of Kotak Mahindra Bank and its subsidiaries, prepared in accordance with guidelines for consolidated accounting and other quantitative methods vide circular DBOD.No.BP.BC.72/21.04.018/ 2001-02 dated 25th February 2003 issued by Reserve Bank of India (RBI). The capital charge is computed as per RBI guidelines for implementation of the New Capital Adequacy Framework (Basel II) released in April 2007. In accordance with the guidelines issued by RBI, the insurance subsidiary has been excluded from consolidation for the purpose of capital adequacy. The entities which carry on activities of financial nature are considered for consolidation for capital adequacy purpose as stated in the scope for preparing consolidated prudential reports laid down in RBI guidelines. The Bank consolidates all subsidiaries as defined in Accounting Standard (AS) -21 Consolidated Financial Statements on a line by line basis by adding together like items of assets, liabilities, income and expenses. Further, Bank’s investments in Associates are consolidated using the equity method of accounting as defined by Accounting Standard – 23 Accounting for Investments in Associates in Consolidated Financial Statements. Kotak Mahindra Bank Limited (KMBL) and its subsidiaries/ associates which have been consolidated, constitute the “Group”. The list of subsidiaries/ associates consolidated as per AS 21 alongwith their treatment in consolidated capital adequacy computation is as under: Name of the Subsidiary Kotak Mahindra Prime Limited Kotak Securities Limited Kotak Mahindra Capital Company Limited Kotak Mahindra Old Mutual Life Insurance Limited Country of Origin India India India India Activity Non Banking Finance Company Securities Broking Investment Banking Life Insurance Status of consolidation Fully consolidated Fully consolidated Fully consolidated Fully consolidated for financial reporting but not for capital adequacy. Investment deducted from regulatory capital for capital adequacy Fully consolidated Fully consolidated Fully consolidated Fully consolidated Fully consolidated Fully consolidated Fully consolidated Fully consolidated
Kotak Mahindra Investments Limited Kotak Mahindra Asset Management Company Limited Kotak Mahindra Trustee Company Limited Kotak Mahindra (International) Limited Kotak Mahindra (UK) Limited Kotak Mahindra, Inc. Global Investments Opportunities Fund Limited (GIOFL)* Kotak Investment Advisors Limited
India India India Mauritius U.K USA Mauritius India
Non Banking Finance Company Asset Management Company – Mutual Funds Trustee of mutual funds Brokerage and advisory services Brokerage and advisory services Brokerage and advisory services Investment company Asset manager of venture capital, private equity and similar funds Trustee of venture capital, private equity and similar funds Foreign exchange brokerage services Pension fund management Advising on financial products for Middle East Non Banking Finance Company
Kotak Mahindra Trusteeship Services Limited Kotak Forex Brokerage Limited Kotak Mahindra Pension Fund Limited Kotak Mahindra Financial Services Limited Infina Finance Private Limited
India India India Dubai India
Fully consolidated Fully consolidated Fully consolidated Fully consolidated Consolidated by equity method Its grt 2b 25
71
Name of the Subsidiary Kotak Mahindra Asset Reconstruction Company Limited ** Phoenix ARC Private Limited ACE Derivatives and Commodity Exchange Limited (formerly known as Ahmedabad Commodity Exchange Limited) Matrix Business Services India Private Limited
Country of Origin India
Activity Not operational
Status of consolidation The company is not operational and Other than temporary diminution is provided for Consolidated by equity method Consolidated by equity method
India India
Securitisation and asset Reconstruction Commodity Exchange
India
Business service provider
Consolidated by equity method for financial reporting but not for capital adequacy purpose
*
GIOFL is a collective investment scheme set up as a fund in Mauritius with the status of a limited company under the Mauritius Companies Act. GIOFL has a class structure wherein there are different classes of redeemable participating shares. Each class of participating shares has its own Balance Sheet and Profit and Loss Account. The Profit / Loss of each such class belongs to the participating shareholders of that class. The management shareholder is not entitled to any beneficial interest in the profit / loss of various classes nor is required to make good any shortfall. In substance there are no direct or indirect economic benefits received by the management shareholders. The substance over form must prevail. The Groups investment is only in Management Shares. Accordingly, GIOFL is consolidated in respect of management shares of the entity having regard to substance over form of the entity. Effective 19th March 2011 Kotak Mahindra Asset Reconstruction Company Limited has been dissolved under Section 560 of the Companies Act, 1956. Capital Deficiencies As at 31st March 2011 there is no deficiency of capital in any of the subsidiaries of the Bank. The Bank maintains an oversight over its subsidiaries through their respective Boards and the Management Committee of the Bank is regularly updated.
** a.
b.
Investment in insurance subsidiary The Group’s investment in insurance subsidiary is deducted from regulatory capital for capital adequacy purpose under Basel II as given below: ` in crore Name of the Entity Kotak Mahindra Old Mutual Life Insurance Limited % shareholding of the Group 74% Investment value 377.62
The quantitative impact on regulatory capital of using risk weights investments versus using the deduction method is given below: ` in crore Method Deduction method Capital at 10% based on risk weighted assets 2. Capital Structure The capital adequacy norms issued by RBI classify capital funds into Tier-1 and Tier-2 capital. Tier-1 capital includes paid-up equity apital, statutory reserves, other disclosed free reserves, capital reserves and Elements of Tier-2 capital include investment reserve, general provision and loss reserve, eligible upper Tier-2 instruments and subordinate debt instruments (lower Tier -2 bonds). Group has issued debt instruments that form part of Tier-2 capital. The terms and conditions that are applicable for these instruments comply with the stipulated regulatory requirements Details of Upper Tier 2 and Lower Tier 2 Capital KMBL has issued debt instruments that form a part of Tier-2 capital. The terms and conditions that are applicable for these instruments comply with the stipulated regulatory requirements. The upper Tier-2 bonds are cumulative and have an original maturity of 15 years with call option after 10 years. The interest on upper Tier-2 bonds is payable either annually or semi-annually. Some of the upper Tier-2 debt instruments have a step-up clause on interest payment ranging up to 50 bps. The lower Tier-2 Subordinated bonds issued by Bank are cumulative and have an original maturity between 5 to 15 years. The lower Tier-2 Subordinated bonds issued by a subsidiary have an original maturity between 6 to 10 years and interest on these lower Tier-2 capital instruments is payable annually. Quantitative Impact 377.62 37.76
72
Kotak Mahindra Bank Limited Annual Report 2010-11
Its grt 2b 25
Financial Highlights
Consolidated Financial Statements Basel II (Pillar 3) Disclosures
Bank Reports & Statements
a.
Amount of Tier I and Tier II Capital ` in crore Amount (a) Tier I Capital Paid-up share capital Reserves and Surplus excluding translation and investment reserve Deductions: Investment in paid-up capital of subsidiaries/ associates (50%) Intangible assets other than Goodwill Goodwill Net Tier I Capital (b) Total eligible Tier II Capital (i) Debt instruments eligible for inclusion in Upper Tier II Capital Total amount outstanding Of which raised during the current financial year Amount eligible to be reckoned as capital (ii) Subordinated debt eligible for inclusion in Tier II capital Total amount outstanding Of which raised during the current financial year Amount eligible to be reckoned as capital (iii) (iv) General Provisions and loss reserves Investment reserve Deductions: Investment in paid-up capital of subsidiaries/ associates (50%) Net Tier II Capital 190.64 817.88 ` in crore Amount Tier I Capital Tier II Capital Total eligible Capital 10,498.66 817.88 11,316.54 591.80 — 472.98 182.80 16.06 336.68 — 336.68 190.64 322.24 3.42 10,498.66 368.44 10,646.52
b.
Total eligible capital as at 31st March 2011
3.
Capital Adequacy The Group has made considerable progress in capturing data and implementing systems with regards to computing capital adequacy as per the standardised approach of Basel II for credit risk. Efforts are on to automate the process of capital computation as per Basel II and application system is being implemented to that effect. In accordance with the guidelines of the Reserve Bank of India, the Group has adopted standardised approach for credit risk, basic indicator approach for operational risk and standardised duration approach for market risk for computing capital adequacy. The legal minimum as per license conditions stipulates that the capital base of the bank (Tier I + Tier II) must correspond to at least 10 percent of its risk-weighted assets. The Bank supplements the Capital Adequacy computation by performing stress tests, based on Scenarios approved by its Risk Management Committee, to assess how its businesses perform under Stress Conditions. These tests help the Bank to design appropriate risk response to meet stressed conditions. Approach to Capital Adequacy Assessment to support business activities The diversified business activities require the Group to identify, measure, aggregate and manage risks effectively and to allocate capital among its businesses appropriately. The risk management framework lays emphasis on the Group’s risk philosophy, proper organisational structure, risk and reward balance and is supported by dedicated monitoring and risk measuring mechanism. The Key risks the Group is exposed to are Credit Risk, Market Risk, Interest Rate Risk, Liquidity Risk and Operational risk. Its grt 2b 25
73
Basic principles and risk and capital management The Bank undertakes sound risk management in achieving its purpose, objectives and strategies. The Board of Directors approves risk appetite for the Bank. The approved risk appetite sets the boundaries for risk taking and translates into business management limits and policies. Performance against approved Risk Appetite is reviewed periodically by the Risk Management Committee and the Board. Development of the risk strategy and risk appetite is an ongoing process and is based on past experience and future plans. The risk strategy is consistent with the Board’s overall risk tolerance, management’s expertise in each business unit and the total financial amount that the Bank is prepared to place at risk of loss (capital at risk). The Management Committee provides overall risk management supervision for the consolidated Group as a whole. Various risk committees, namely Asset Liability Management Committee (ALCO), Credit Committee, First Tier Audit Committee, Risk Management Committee, Information Security Committee etc, review specific risk areas and supervise the activities of enterprise wide risk management. Other capital adequacy assessment aspects:
?
Capital adequacy ratio (CAR) of the Bank is maintained at levels well over the 10% required in accordance with the license conditions. The Bank has put in place the ICAAP Policy and the same is being reviewed on a yearly basis which enables the Bank to maintain capital in line with the risks undertaken.
?
CAR has been worked out based on Basel-I and Basel-II guidelines (parallel run) and CAR is above the regulatory minimum level of 10% Capital requirements for various risk categories as at 31st March 2011 ` in crore Items (a) Capital requirements for credit risk Portfolios subject to standardised approach Securitisation exposures (b) Capital requirements for market risk Using standardised duration approach Interest rate risk Foreign exchange risk (including gold) Equity position risk (c) Capital requirements for operational risk Measured using basic indicator approach Total capital required at 10% Total capital funds of the Group Total risk weighted assets Capital adequacy ratio Computed as per Basel II guidelines 4. Credit Risk Credit Risk is defined as the possibility of losses associated with diminution in the credit quality of borrowers or counterparties. In a bank’s portfolio, losses stem from outright default due to inability or unwillingness of a customer or counterparty to meet commitments in relation to lending, trading, settlement and other financial transactions. Credit risk is managed through a framework which sets out policies and procedures covering the measurement and management of credit risk. The Bank’s credit policies and process notes articulate the credit risk strategy of the Bank and thereby the approach for credit origination, approval and maintenance. These policies define the Bank’s overall credit sanction criteria, including the general terms and conditions. The policies / processes generally address such areas as target markets / customer segmentation, qualitativequantitative assessment parameters, portfolio mix, prudential exposure ceilings, concentration limits, structure of limits, approval authorities, exception reporting system, prudential accounting and provisioning norms, etc. They take cognisance of prudent and prevalent banking practices, relevant regulatory requirements, nature and complexity of the Bank’s activities, market dynamics, etc. 627.67 5,813.89 11,316.54 58,138.86 19.46% 205.12 20.00 354.11 4,605.17 1.82 Amount
74
Kotak Mahindra Bank Limited Annual Report 2010-11
Its grt 2b 25
Financial Highlights
Consolidated Financial Statements Basel II (Pillar 3) Disclosures
Bank Reports & Statements
The Bank’s credit exposure is primarily categorised into retail and wholesale borrowers. Retail exposure is mostly term loans and asset backed other than personal loans. Wholesale borrowers are internally categorised into emerging corporate, corporate and financial institutional group. While retail credit lending is largely based on predefined parameters and is mostly decentralised, credit appraisal is undertaken by an independent dedicated credit risk team for wholesale exposure. Credit risk management processes The Bank has made risk management a part of the management and governance of the Bank with a greater focus on risks and how those relate to the capital the Bank is holding. The Bank expects to achieve its earnings objectives and to satisfy its customers’ needs while maintaining a sound portfolio. Credit exposures are managed through target market identification, appropriate credit approval processes, post-disbursement monitoring and remedial management procedures. Proactive managing of risks on its portfolio has helped the Bank foresee and restrict the impact of the global turmoil on its credit operations. Periodic portfolio review, clear identification of early warning signals and prompt action on the legal and recovery front ensure that defaults are minimal. Timely and in-depth research on industries and sectors ensure that funds are directed to positive outlook sectors. Adverse developments in sectors are tracked to facilitate timely decisions to exit Companies in negative outlook sectors. The above processes ensure that the Bank maintains a well diversified portfolio mitigating any risks on account of sector, region or borrower concentration. The bank has also put in place a rating based approval matrix for sanctioning wholesale bank loans. Nature of reporting and measurement systems The Bank has an internal rating model which is an integral part of every lending decision and is capable of rating large and emerging corporates, traders, brokers, NBFCs and services. The rating model is being further enhanced to give required inputs to estimate Probability of Default (PDs) and Loss Given Default (LGDs) based on the Bank’s own experience. On the retail side, the Bank has initiated implementation of a comprehensive internal credit rating model for the risk assessment of retail loan exposures. Application scorecards for major businesses in retail loans are ready. The parameters used for these scorecards and their individual weight-ages have been decided based on past experience of the Bank. These parameters are both qualitative and quantitative in nature. Credit rating frameworks using these application scorecards are at different stages of implementation in different businesses in retail loans. The final output of the rating will help the Bank to assess the expected probable loss number attached to each rating category. The internal rating systems are being further developed and validated as part of the Bank’s endeavor to move towards advanced approaches of Basel II. The Bank has also implemented its stress testing framework for the Corporate as well as Retail portfolio. The Bank also uses scenario analysis for stress testing. Loss analysis and expected loss forecasting on a static pool basis is continuously being refined to meet the demand of the current volatile market. The Bank complies with the norms on exposure stipulated by RBI for both single borrower as well as borrower group at the consolidated level. Limits have been set by the risk management group as a percentage of the Bank’s consolidated capital funds and are regularly monitored. The Bank monitors the level of credit risk (Low/Moderate/High/Very High) and direction of change in credit risk (increasing / decreasing/stable) at the portfolio level on the basis of the following parameters which also indicate level of concentration risk the portfolio might be exposed to: ? Exposure to Top 20 accounts as a percentage of Credit Risk Exposure (CRE). ? Percentage of term loans with residual maturity more than 3 years to total loans and advance. ? Percentage of unsecured loans to total loan and advances. ? Number of single borrower exposures exceeding 15% of capital funds. ? Number of group exposures exceeding 40% of capital funds. ? Percentage of credit in low risk grades to total credit exposure ? Rating wise distribution of borrowers and ? Exposure migrating from investment grade to non-investment grade During the year, the Bank maintained a well diversified portfolio. As part of the ICAAP, the Bank periodically reports the ICAAP outcomes in terms of the risk appetite statements and assessment of credit concentration risk and underestimation of credit risk under the standardised approach to the Board. Credit Risk Management Principles The Bank measures and manages its credit risk based on the following principles: ? The extension and renewal of any credit facility to a particular borrower requires credit approval at the appropriate authority level. The rating tool, which is already in place, not only indicates the concerned sanctioning authorities but also helps the authorities in such decisions. ? The approval of all limits to counterparties should be in line with the corporate credit policy and collateral risk management policy of the Bank. Such approval should generally be within the Bank’s portfolio guidelines and credit strategies. ? The credit worthiness of borrowers is regularly reviewed and monitored. Customers with emerging credit problems are identified early and classified accordingly. Remedial action is initiated promptly to minimise the potential loss to the Bank.
Its grt 2b 25
75
Definition and classification of non-performing assets (NPA) The Bank classifies its advances into performing and non-performing advances in accordance with extant RBI guidelines. A NPA is defined as a loan or an advance where; ? interest and/ or installment of principal remain overdue for a period of more than 90 days in respect of a term loan; ? the account remains ‘out of order’ – in respect of an overdraft/cash credit (OD/CC); and ? the bill remains overdue for a period of more than 90 days in the case of bills purchased and discounted. Out of Order An account should be treated as ‘out of order’ if the outstanding balance remains continuously in excess of the sanctioned limit/ drawing power for a continuous period of 90 days. In cases where the outstanding balance in the principal operating account is less than the sanctioned limit/drawing power, but there are no credits continuously for 90 days as on the date of balance sheet or credits are not enough to cover the interest debited during the same period, these accounts should be treated as ‘out of order’. Overdue Any amount due to the Bank under any credit facility is ‘overdue’ if it is not paid on the due date fixed by the Bank. Further, NPAs are classified into sub-standard, doubtful and loss assets based on the criteria stipulated by RBI. A sub-standard asset is one, which has remained NPA for a period less than or equal to 12 months. An asset is classified as doubtful if it has remained in the sub-standard category for a period exceeding 12 months. A loss asset is one where loss has been identified by the Bank or internal or external auditors or during RBI inspection but the amount has not been written off fully. The loans of subsidiaries have been classified as non-performing in accordance with the guidelines prescribed by their respective regulators. Total credit risk exposures as at 31st March 2011 ` in crore Overall credit exposure Total gross credit exposures Includes all entities considered for Basel II capital adequacy computation Credit exposure include term loans, working capital facilities (i.e. funded facilities like cash credit, demand loans, temporary limits and non-funded facilities like letter of credits, acceptances and guarantees). Geographic distribution of exposures as at 31st March 2011 ` in crore Exposures Domestic Overseas Total Includes all entities considered for Basel II capital adequacy computation Industry-wise distribution of exposures ` in crore Industry Auto loans Personal loans Home loans/Loan against property Credit cards Other retails loans Iron and steel Engineering Chemical, dyes, paints etc Construction Automobiles Infrastructure NBFC’s Other industries (i) Total Includes all entities considered for Basel II capital adequacy computation Fund based 14,046.48 1,790.45 6,922.29 164.22 4,906.60 162.10 266.28 535.18 2,261.74 1,042.20 2,697.28 388.43 6,520.52 41,703.77 Non-fund based — — — — — 491.62 1,509.65 523.32 179.32 587.71 1,358.45 579.47 2,274.57 7,504.11 Total 14,046.48 1,790.45 6,922.29 164.22 4,906.60 653.72 1,775.93 1,058.50 2,441.06 1,629.91 4,055.73 967.90 8,795.09 49,207.88 Fund based 41,703.77 — 41,703.77 Non-fund based 7,447.79 56.32 7,504.11 Total 49,151.56 56.32 49,207.88 Fund based 41,703.77 Non-fund based 7,504.11 Total 49,207.88
76
Kotak Mahindra Bank Limited Annual Report 2010-11
Its grt 2b 25
Financial Highlights
Consolidated Financial Statements Basel II (Pillar 3) Disclosures
Bank Reports & Statements
(i)
Other industries include entities from sectors such as cotton textiles, sugar, food processing, vegetable oils and vanaspati, paper and paper products, rubber and rubber products, cement, IT-related, gems and jewellery, capital markets, media publication etc. ` in crore
Residual contractual maturity break-down of assets as at 31st March 2011 Maturity Pattern Cash and balances with monetary authority 587.12 116.37 233.67 198.54 302.06 572.16 40.33 59.06 2,109.31 Balances with other banks 366.46 — — 0.25 — 2.59 — 0.09 369.39 Investments Advances Fixed Assets Other Assets
0 to 14 days 15 to 28 days 29 days to 3 months Over 3 months & upto 6 months Over 6 months & upto 1 year Over 1 year & upto 3 years Over 3 year & upto 5 years Over 5 years Total
6,451.92 1,488.42 1,256.74 1,065.47 2,486.24 3,305.29 361.96 1,138.42 17,554.46
2,626.24 1,833.47 3,744.41 3,850.40 5,656.10 15,083.68 3,547.78 4,894.74 41,236.82
— — — — — — — 453.63 453.63
216.78 13.86 215.57 12.14 1.47 15.30 33.29 1,246.23 1,754.64
Consolidated figures for Kotak Mahindra Bank Limited, Kotak Mahindra Prime Limited and Kotak Mahindra Investments Limited Amount of non-performing loans as at 31st March 2011 including NPAs acquired from other banks and NBFCs ` in crore Items Amount Gross NPA Substandard Doubtful 1 Doubtful 2 Doubtful 3 Loss Total NPA Ratio (%) Movement of NPAs Opening balance as at 1st April 2010 Additions Reductions Closing balance as at 31st March 2011 Includes all entities considered for Basel II capital adequacy computation Gross NPA ratio is computed as a ratio of gross non-performing loans to gross advances Net NPA ratio is computed as a ratio of net non-performing loans to net advances Movement of provisions for NPAs ` in crore Amount Opening balance as at 1st April 2010 Provisions made during the year Write-off / Write back of excess provisions Closing balance as at 31st March 2011 475.83 232.23 (238.75) 469.31 Its grt 2b 25 916.67 259.55 (464.24) 711.98 440.84 27.32 (225.49) 242.67 228.56 171.08 163.69 94.94 53.71 711.98 1.71% Net NPA 101.02 81.09 60.56 — — 242.67 0.59%
77
Amount of non-performing loans as at 31st March 2011 excluding NPAs acquired from other banks and NBFCs ` in crore Items Amount Gross NPA Substandard Doubtful 1 Doubtful 2 Doubtful 3 Loss Total NPA Ratio (%) Movement of NPAs (gross) Opening balance as at 1st April 2010 Additions Reductions Closing balance as at 31st March 2011 Gross NPA ratio is computed as a ratio of gross non-performing loans to gross advances Net NPA ratio is computed as a ratio of net non-performing loans to net advances Movement of provisions for NPAs ` in crore Amount Opening balance as at 1st April 2010 Provisions made during the year Write-off / write back of excess provisions Closing balance as at 31st March 2011 Amount of Non-performing investments (NPI) ` in crore Amount Gross NPI as at 31st March 2011 Amount of provisions held for NPI Net NPI as at 31st March 2011 Movement of provisions for depreciation on investments ` in crore Amount Opening balance as at 1st April 2010 Write off / Write back of provisions during the year* Closing balance as at 31st March 2011 *After considering appreciation in investments 5. Credit risk – portfolios subject to the standardised approach External Ratings In accordance with RBI Basel II guidelines, the Bank has identified the following External Credit Assessment Agencies (ECAI’s) as approved rating agencies: 6.29 (2.61) 3.68 3.68 3.68 — 308.98 197.26 (215.20) 291.04 646.81 244.77 (422.98) 468.60 337.83 47.51 (207.78) 177.56 215.37 125.47 73.79 0.26 53.71 468.60 1.13% Net NPA 94.33 52.39 30.84 — — 177.56 0.43%
78
Kotak Mahindra Bank Limited Annual Report 2010-11
Its grt 2b 25
Financial Highlights
Consolidated Financial Statements Basel II (Pillar 3) Disclosures
Bank Reports & Statements
a. b.
Domestic credit rating agencies: CRISIL, ICRA, CARE and FITCH India International rating agencies: S&P, FITCH and Moody’s
The Bank uses the external credit ratings to calculate risk weights for exposures on corporates. The issue/issuer ratings of the ECAI’s are considered for the borrowers and the risk weights are then derived on a case by case basis based on a variety of factors (Seniority, Maturity of rating, etc) based on RBI’s New Capital Adequacy Framework. Credit exposures by risk weights ` in crore Exposure category Below 100% risk weight 100% risk weight More than 100% risk weight TOTAL Fund based 16,005.04 13,533.76 11,886.76 41,425.56 Non-fund based 3,089.74 2,256.12 796.88 6,142.74 Total 19,094.78 15,789.88 12,683.64 47,568.30
Includes all entities considered for Basel II capital adequacy computation 6. Credit Risk Mitigation The Bank has put in place a comprehensive credit risk mitigation policy. The policy lists possible credit risk mitigation techniques and associated haircuts as envisaged in RBI guidelines. The objective of this Policy is to enable classification and valuation of credit risk mitigants in a manner that allows regulatory capital adjustment to reflect them. The Policy adopts the Comprehensive Approach, which allows full offset of collateral (after appropriate haircuts), wherever applicable against exposures, by effectively reducing the exposure amount by the value ascribed to the collateral. In the standardized capital computation process, the Bank has taken ` 1,639.58 crore of collateral benefit. 7. Securitisation a. Securitisation objectives and policies Securitisation of assets is undertaken with the following objectives: ? Meeting credit needs of borrowers – Due to various constraints such as single party and group exposure norms, paucity of capital, internal sectoral exposure norms, etc, at times the Bank is unable to meet the entire credit requirements of the borrowers. Securitisation helps the Bank to overcome such constraints and meet customer’s credit needs. ? Assistance in management of asset-liability mismatches – With traditional on Balance Sheet borrowing and lending, the maturity of assets tends be much longer than that of the liabilities. Securitisation effectively makes Bank’s assets more liquid providing scope to more flexibly manage maturity mismatches. ? Reduction of credit risk, interest rate and liquidity risk – Through Securitisation, the Bank can transfer credit, interest rate and liquidity risks to third parties. ? Freeing up of capital and Improvement in return on capital - Securitisation removes assets from the Bank’s Balance Sheet and hence frees up capital for other uses. It also improves return on capital. ? Contingency plan – Securitisation of retail asset portfolio is considered as an important element of the contingency funding plan of the Bank. Role played by the Group in the securitisation process: ? Structurer: The Bank scans the market to identify potential investors and structures the transaction to meet their requirements in compliance with the extant guidelines. ? Collection and paying agent: The SPV may appoint the concerned entity in the Bank as the collection and paying Agent. In such cases, the Bank collects the amounts due from the underlying obligors on the due dates and remits the same into the account of the SPV. b. Summary of Bank’s accounting policies for securitisation activities In terms of RBI guidelines Bank sells assets to SPV only on cash basis and the sale consideration is received not later than the transfer of the asset to the SPV. Any loss arising on account of the sale is accounted immediately and reflected in the profit and loss account for the period during which the sale is effected and any profit/premium arising on account of sale is amortised over the life of the securities issued or to be issued by the SPV. i) In case the securitised assets qualify for derecognition from the books of the Bank, the entire expenses incurred on the transaction e.g. legal fees, etc., is expensed at the time of the transaction and is not deferred. ii) Where the securitised assets do not qualify for derecognition the sale consideration received is treated as a secured borrowing. Rating of the securitisation transactions: The Bank uses the ratings provided by external credit rating agencies viz. CRISIL, FITCH (India), ICRA and CARE for the securitization of corporate loans and retail pools. Its grt 2b 25
c.
79
d.
Breakup of the exposure securitised by the Bank during the year and subject to securitization framework: A. Banking Book ` in crore S No. 1 Exposure type Total amount of exposures securitised Corporate Loans Auto Loans (Car and commercial vehicles) Mortgage Loans Total 2 3 Loss recognized during the period on securitisation Amount of assets intended to be securitised within a year Of which - Amount of assets originated within a year before securitisation 4 Unrecognised gain on securitisation Corporate Loans Auto Loans (Car and commercial vehicles) Mortgage Loans Includes all entities considered for Basel II capital adequacy computation 15.00 0.28 0.89 — 2,075.00 218.18 220.70 2,513.88 — — Amount
e.
Aggregate amount of securitisation exposures retained or purchased and outstanding as on 31st March 2011 is given below: ` in crore S No. 1 2 3 4 5 Exposure type Total amount of exposures retained Securities purchased Liquidity facility Credit commitments (cash collateral) Other commitments On Balance Sheet Amount — — — — — Off Balance Sheet Amount — — — — —
f.
Risk-weight wise and bucket wise details of the securitization exposures on the basis of book value ` in crore Exposure type Below 100% risk weight 100% risk weight More than 100% risk weight Deductions - Entirely from Tier I capital - Credit enhancing I/Os deducted from total capital - Credit enhancement (cash collateral) B. Trading Book — — — — — — Amount — — — Capital charge — — —
Breakup of the exposure securitised by the Bank during the year and subject to securitisation framework: Sr.No. 1. Type of Securitisation Aggregate amount of exposures securitised by the bank for which the Bank has retained some exposures and which is subject to the market risk approach Amount NIL
80
Kotak Mahindra Bank Limited Annual Report 2010-11
Its grt 2b 25
Financial Highlights
Consolidated Financial Statements Basel II (Pillar 3) Disclosures
Bank Reports & Statements
g.
Aggregate amount of securitisation exposures retained or purchased and outstanding as on 31st March 2011 is given below: ` in crore S No. 1 2 3 4 5 Exposure type Total amount of exposures retained Securities purchased Auto Loans (Car and commercial vehicles) Liquidity facility Credit commitments (cash collateral) Other commitments 69.82 — — — — — — — ` in crore Exposure type Below 100% risk weight 100% risk weight More than 100% risk weight Deductions Entirely from Tier I capital Credit enhancing I/Os deducted from total capital Credit enhancement (cash collateral) — — — — — — Amount 69.82 — — Capital charge 1.82 — — On Balance Sheet Amount — Off Balance Sheet Amount —
h.
Risk-weight wise and bucket wise details of the securitisation exposures on the basis of book value
Includes all entities considered for Basel II capital adequacy computation 8. Market Risk in Trading Book Market risk management policy Market risk is defined as the risk to earnings arising from the movement in market risk factors, namely interest rates, foreign exchange rates, credit spreads or equity prices. For regulatory capital purposes, the Bank calculates its market risk capital requirements according to the Standardised methodology. The objective of the risk management function is risk identification, measurement and reporting them to the management. The Bank has designed and implemented policies and procedures to ensure that market risk exposures are managed within the approved risk management framework. Embedded within these is a framework of management responsibilities. The Board oversees the market risk management process. The Bank’s risks are managed through a framework that related the Bank’s integrated risk management policy and structure of risk management to the Bank’s strategy and objectives. The risk management framework lays emphasis on the Groups risk philosophy, proper organizational structure, risk and reward balance and is supported by dedicated monitoring and risk measurement mechanism. This framework for market risk management ensures that appropriate controls, policies and senior management oversight form the basis of the Bank’s approach to market risk management. The market risk for the Bank and each of its major subsidiaries is managed in accordance with the investment policy, which is approved by the respective Boards. These policies ensure that transactions in capital and foreign exchange markets and derivatives are conducted in accordance with sound and acceptable business practices and are as per the extant regulatory guidelines, laws governing transactions in financial markets and the financial environment. The policies are reviewed regularly to incorporate changes in regulatory guidelines and business and economic environment. Risk management objectives The o o o o o o o Bank manages its risk with the objectives listed below: Achieving risk return balance Managing and optimising interest rate risk in banking and trading book Ensuring that mismatches between rate sensitive assets and liabilities is kept within limits Managing and optimising currency and liquidity risk Proper recognition, classification, measurement and accounting of investments Compliance with regulatory guidelines Oversight over the operation and execution of market transactions Its grt 2b 25
81
Structure and organisation of the market risk management function The Bank’s risk management architecture is overseen by the Board of Directors and appropriate policies to manage risks are approved by the Board. The Board is involved in defining risk appetite and capital at risk for the Bank, at an integrated level, covering all activities of the Bank. The Board has also delegated to the Group Head - Risk, the responsibility for middle office and risk management. Risk Management department is entirely independent of Treasury Department. Development of the risk strategy and risk appetite is an ongoing process and is based on past experience and future plans. The risk strategy is consistent with the Board’s overall risk tolerance, management’s expertise in each business unit and the total financial amount that the Bank is prepared to place at risk of loss (Capital at risk). The Bank uses a comprehensive range of quantitative tools and metrics for monitoring and managing risks. Some of these tools are common to a number of risk categories whereas the others are tailored to address the particular features of specific risk categories. Both with a view to bringing in risk sensitivity through policies and to duly meet the regulatory requirements, the Bank continually assesses the appropriateness and the reliability of the quantitative tools and metrics in the light of the changing risk environment. Value at Risk The Bank is computing the market risk capital charge for the trading book as per the standardised approach as per the regulator’s guidelines. To complement this, Bank also calculates value at risk on its portfolio. Value at risk is computed for each type of market risk i.e. interest rate, foreign currency, equity etc taking into effect the various correlations between the risk factors. The internal model is also capable of undertaking stress testing and back-testing. The Risk Management Committee is appraised of the capital that would have to be maintained under the Internal Models Approach. Stress Testing Losses beyond the set confidence level are not captured by the value at risk calculation. The Bank periodically stresses the portfolio to highlight the potential risks that may arise due to events that are rare but plausible. The Bank conducts various tests like the impact of shock to one risk factor, extreme events that may change various risk factors simultaneously and worst case scenario that captures the potential damaging shift in various market risk factors. The stress test results and the subsequent capital requirement is placed before the Board for their perusal. Liquidity Risk Effective Liquidity Risk Management ensures the Bank’s ability to meet all payment obligations when they become due in both normal and stressed environments. The Bank’s Board defines the Liquidity Risk Management Strategy of the Bank. The Asset Liability Management Committee (ALCO) is entrusted with the responsibility of setting tolerances for and closely overseeing the management of liquidity risk. The Balance Sheet Management Unit (BMU) in Treasury is responsible for the management of Liquidity Risk in accordance with the overall strategy and tolerances. Funding mismatches are a natural outcome of the Liquidity Transformation function of the Bank. The Bank has a framework for accurately projecting cash flows from on and off Balance Sheet items over different time horizons - to ensure that funding mismatches are within acceptable tolerances. The Bank monitors the immediate short term (3 month) liquidity mismatches using the Statement of Short Term Dynamic Liquidity Statement and the long-term structural mismatches using the Structural Liquidity Statement. The ALM team carries out comprehensive analysis of its asset and liability portfolios to track the non-contractual behavior of customers. These Behavioral Analyses are integral to planning for the Bank’s future funding requirements. The Bank has in place a comprehensive set of Early Warning Indicators (EWIs) designed to forewarn of impending liquidity stresses. These EWIs are defined in the Bank’s Board Approved Contingency Liquidity Plan (CLP). The overall Liquidity Risk level of the Bank is determined through the levels of the various individual EWIs. The CLP also sets out alternative actions to be taken at levels of increased Liquidity Risk. Special teams, which would potentially be activated in times of heightened liquidity stress, have been defined. The Basel Committee of Banking Supervisors (BCBS) issued its International Framework for Liquidity Risk, Measurement, Standards and Monitoring in December 2010. These guidelines include 2 minimum standards for funding liquidity - a short term liquidity metric {the Liquidity Coverage Ratio (LCR)} and a longer term liquidity metric {the Net Stable Funding Ratio (NSFR)}. These metrics are not yet regulatory standards in India. The Bank has proactively set tolerances for these metrics and reviews compliance regularly. Active management of intraday liquidity is another key element in the Bank’s Liquidity Risk Management structure. The Bank also conducts Liquidity Stress Testing on a periodic basis using different Bank-specific and Market-wide stress scenarios. These stress tests are conducted on a quarterly basis and the results are reviewed by top management. Hedging and risk mitigation The Bank has defined limits on the positions that can be taken and all the business groups are required to adhere to the same. The hedging transactions are periodically assessed for hedged effectiveness in accordance with the applicable guidelines.
82
Kotak Mahindra Bank Limited Annual Report 2010-11
Its grt 2b 25
Financial Highlights
Consolidated Financial Statements Basel II (Pillar 3) Disclosures
Bank Reports & Statements
Market risk capital charge ` in crore Risk category Interest rate risk Equity position risk Foreign exchange risk Total capital required Includes all entities considered for Basel II capital adequacy computation 9. Operational Risk Management (ORM) The Bank and the group subsidiaries have well defined operational risk management objectives, strategies and governance structures. The Bank has a comprehensive ORM Framework that covers all activities and governance structure that helps manage operational risk effectively. Through implementation of the Operational Risk Framework and related policies, businesses are able to adopt a structured approach to identify, assess and monitor Operational Risk exposures, design appropriate mitigation strategies, and provide timely and effective reporting to Risk Committee & the Board. The Operational risk framework is supported by policies and processes that help business manage operational risk within approved tolerances, on behalf of its stakeholders. On the basis of the Enterprise wide Risk Management policy, operational risk policies are prepared for the Bank. These policies outline the ORM governance structure, key risk assessment, risk monitoring and risk mitigating activities. The policy applies to all business lines within the Bank. Most Group entities, including the Bank, have Risk Management Committees to manage operational risks. Separate sub committees also exist in a few entities to screen all potential new mandates for profitability and to ensure that compliance, legal and reputational issues are addressed before accepting any mandate. Hence, depending upon the size of the group entity, the operational risk governance structure is adequate to manage material operational risks. Senior Management in all group entities is actively involved in the management of operational risk and implementation of the respective ORM Frameworks/policies. Some group entities have separate operational risk management department. Remaining entities manage operational risk through internal control departments that vary in sophistication depending upon the business needs. The internal control framework ensures that process related operational risks are minimised by way of regular monitoring and audits. The Group internal audit team, following RBI’s risk based audit methodology, and the Group compliance department provide sound platform for operational risk management along with risk management unit. The following are some of the key techniques applied by Bank and / or Group companies to manage operational risks ?
Capital charge 205.12 354.11 20.00 579.23
?
The Bank has built into its operational process segregation of duties, clear reporting structures, well defined processes, operating manuals, staff training, verification of high value transactions and strong audit trails to control and mitigate operational risks. New Product & activity notes prepared by business units are reviewed by all concerned departments including compliance, risk management and legal. All concerned departments coordinate and discuss key operational risk issues involving people, process, technology, external factors, etc. so as to minimise them or ensure adequate controls over them. In subsidiaries, internal controls unit reviews the product notes in consultation with the respective departments, including compliance and legal. The Operational risk team performs detailed risk analysis and root cause analyses on operational risk events, reported by business units, to identify inherent areas of risk and suggest suitable risk mitigating actions which are monitored for resolution. The Bank wide unusual event reporting and capture system forms the basis for this analysis. The Operational risk team also proactively scans information on external events occurring in the industry to ensure that the Bank can respond suitably to similar incidents. Bank has in place a ‘Risks and Controls Self Assessment’ programme for formally assessing operational risks and related controls to mitigate these risks. The self assessments are performed by individual business units and functions. As part of the annual Risks and Controls Self Assessment (“RCSA”) process, areas with high risk potential are highlighted and business unit / function either proposes mitigating measures to resolve the issue or provides a rationale for why the risk is acceptable. The Bank is taking various steps to increase the overall level of operational risk awareness amongst staff at all levels using various tools like trainings, workshops, risk assessment exercise and process related compliance certification / testing, etc. Operational risk profile reports for business divisions are reviewed and discussed with the department’s senior management. This enables the Bank to detect changes to the units risk profile at an early stage and take necessary corrective actions The Bank believes that this process helps build a strong risk management culture and increased level of risk awareness amongst work force. The Group level IT Security Committee provides direction for mitigating the operational risk in IT security. There is group wide IT security programme (ARISTI) to ensure complete data security and integrity. Disaster recovery and Business Continuity Plans (BCP) have been established for significant businesses to ensure continuity of operations and minimal disruption to customer services. These plans are periodically tested and reviewed to ensure their effectiveness to mitigate unforeseen risks arising out of disruptions. Its grt 2b 25
?
?
?
?
?
83
?
?
In the larger group entities, in order to control customer fraud in the lending business, a Risk Containment Unit has been setup for Retail lending, which identifies document related fraud submitted by customers. Also, customers Central Bureau (CIBIL) scores are examined before executing any financial transaction with the borrower. Risk transfer via insurance is a key strategy to mitigate operational risk exposure at the Bank. The Operational Risk team helps assess the quantum of insurance cover required and aligns it to the Bank’s current and projected operational risk exposures.
Approaches for computation of operational risk capital In accordance with the guidelines issued by RBI, the Bank has adopted the “Basic Indicator Approach” for calculation of operational risk capital for capital adequacy purposes. As per these guidelines, the capital for operational risk is based on a single indicator: income. The Capital charge associated with operational risk is calculated as 15% of average positive annual gross income of the previous three years.The Bank’s operational risk capital charge using basic indicator approach is ` 627.67 crore as at 31st March 2011. At an appropriate time, the Bank also plans to adopt the AMA approach for maintaining operational risk capital. Under this approach, operational risk capital is computed on a VaR methodology by evaluating risks on the basis of their likelihood (probability) and the financial consequence (severity) of such an event. 10. Interest Rate Risk in the Banking Book (IRRBB) The exposure of the Bank’s financial condition to adverse movements in interest rates is referred to as interest rate risk. The impact of market risk (including Interest Rate Risk) on the Bank’s trading book is actively measured through a variety of risk metrics like PV01, option greeks and VaR. The Bank’s tolerance with respect to its exposure to market risk in the trading book is articulated through various risk limits and monitored through different MIS reports. The Bank also provides for capital for exposure to market risk in the trading book. In the context of banking book, interest rate risk is interpreted as the current or prospective risk to both the earnings and capital of the Bank arising from adverse movements in interest rates, which affect the Bank’s banking book. Changes in interest rates affect a Bank’s earnings by altering interest-sensitive income and expenses, and the underlying value of a Bank’s assets, liabilities, and off-balance sheet instruments because the present value of future cash flows changes when interest rates change. Although, the very nature of the financial intermediation business makes the Bank susceptible to interest rate risk, excessive risk could potentially pose a significant threat to the Bank’s earnings and capital. The main bodies in charge of management of interest rate risk in the banking book in the Bank are the Asset Liability Management Committee (ALCO) and the Balance Sheet Management Unit (BMU). BMU is part of the Bank’s treasury. The Bank’s ALCO is broadly responsible for the financial management of the Balance Sheet. The ALCO sets the overall policy and limit framework within which the BMU operates. The responsibility of controlling of Interest Rate Risk in the banking book is vested with the BMU. Various asset and liability divisions in the Bank disburse assets and mobilise liabilities of varying types, tenors and rates. These divisions may be net users of fund or net providers of fund to the Bank. Individually and together, they lead to the creation of Interest rate risk in the Banking Book. Through the Funds Transfer Pricing (FTP) mechanism, the management of interest rate risk is taken out of the hands of individual asset and liability divisions and entrusted to a competent interest rate risk management body i.e. the BMU. The BMU analyses the risks inherent in the Balance sheet, determines appropriate hedging strategies in consultation with the ALCO and executes these strategies. FTP rates are reviewed by the ALCO in its meetings periodically and are calibrated to encourage the mobilisation of desirable deposits and the disbursement of favorable assets. If the directional movement or volatility of interest rate is determined to be potentially adverse, the BMU may decide to hedge the risk using derivative products like IRS/CIRS. A properly constructed hedge would insulate the Economic Value of Equity (EVE) from dissipating to a great extent. The Bank views Interest Rate Risk from two different but complementary perspectives, namely the Earnings Perspective and the Economic Value Perspective. ? The Bank uses gap analysis to determine the interest rate risk on the banking book from the earnings perspective. ? The duration gap approach is used by the Bank to determine the sensitivity of the Economic Value of Equity (EVE) of the Bank to changes in interest rates. Modified duration is computed on an account-wise basis for the interest rate sensitive assets and liabilities of the Bank. A 100 bps shock is applied on the Leveraged MDuration Gap to arrive at the EVE impact due to on-balance sheet items. The impact of 100 bps shock on off-balance sheet items is also incorporated. Through constant monitoring, risk limits, FTP, and hedging, management has constantly strived to keep the level of IRR in the Bank within acceptable levels. ? Details of increase (decline) in earnings and economic value for upward and downward rate shocks based on balance sheet as on 31st March 2011 are given below: o o Earnings Perspective Impact on earnings of 100 bps parallel shift in yield curve Economic Value of Equity Impact on MVE of 100 bps adverse parallel shift in yield curve Impact as a percentage of Tier1 + Tier2 Capital ` 245.75 crore 2.17% ` 34.25 crore
84
Kotak Mahindra Bank Limited Annual Report 2010-11
doc_731696578.pdf
The report for the financial year 2010 - 2011 of kotak mahindra bank.
Financial Highlights Consolidated
` in crore FINANCIAL HIGHLIGHTS Advances Investments* Total Assets Net Profit * Excludes Policyholders’ investments FY2003 3,034 1,017 4,681 73 FY2006 10,420 4,082 17,967 342 FY2007 15,573 7,632 28,631 538 FY2008 21,985 9,698 40,597 991 FY 2009 22,498 9,794 40,234 652 FY 2010 29,724 13,200 55,115 1,307 FY 2011 41,242 18,279 73,681 1,567
KEY FINANCIAL INDICATORS Net Interest Margin (NIM) Return on Average Assets (RoAA) Book Value Per Share (`) Earnings Per Share (EPS) Face Value ` 5 per share Return on Equity (RoE) Capital Adequacy Ratio Gross NPA (` cr)* Net NPA (` cr)* Gross NPA Ratio* Net NPA Ratio*
FY2003 7.1% 2.1% 18 1.2 7.2% 26.0%+ 22 8 0.7% 0.3%
FY2006 5.1% 2.7% 36 5.5 20.6% 15.4% 47 21 0.5% 0.2%
FY2007 5.2% 2.3% 50 8.2 19.6% 15.6% 69 26 0.5% 0.2%
FY2008 5.6% 2.9% 84 14.6 22.3% 20.2% 183 70 0.9% 0.3%
FY2009 6.1% 1.6% 94 9.4 10.5% 22.5% 506 262 2.3% 1.2%
FY2010 6.1% 2.7% 114 18.6 18.2% 19.3% 647 338 2.2% 1.1%
FY 2011 5.6% 2.4% 149 21.6 16.4% 19.5% 469 178 1.1% 0.4%
* Excludes stressed assets acquired from other Banks and NBFCs + Standalone MARKET RELATED RATIOS Market Price (`) Market Capitalization (` cr) Price to Book Ratio Price to Earnings Ratio FY2003 16 935 0.9 12.8 FY2006 139 8,598 3.8 25.2 FY2007 240 15,644 4.8 29.1 FY2008 314 21,664 3.7 21.5 FY2009 141 9,781 1.5 15.0 FY2010 375 26,076 3.3 20.1 FY 2011 457 33,664 3.1 21.2
26
Kotak Mahindra Bank Limited Annual Report 2010-11
Its grt 2b 25
Financial Highlights Highlights
Consolidated Financial Statements
Bank Reports & Statements
Financial Highlights Standalone
` in crore FINANCIAL HIGHLIGHTS Deposits Advances Investments Total Assets Net Interest Income (NII) Fee Income Other Non-Interest Income Operating Profit Provisions and Contingencies Tax Provision Net Profit FY2003 257 1,241 707 2,153 94 3 69 90 20 25 45 FY2006 6,566 6,348 2,856 10,176 380 159 59 211 37 55 118 FY2007 11,000 10,924 6,862 19,915 620 187 131 326 123 62 141 FY2008 16,424 15,552 9,142 28,312 1,226 222 241 670 272 104 294 FY 2009 15,644 16,625 9,110 28,712 1,519 224 50 596 170 150 276 FY 2010 23,886 20,775 12,513 37,436 1,858 306 323 1,297 486 250 561 FY 2011 29,261 29,329 17,121 50,851 2,245 353 280 1,325 137 370 818
KEY FINANCIAL INDICATORS(%) Net Interest Margin (NIM) Cost to Income Ratio Return on Average Assets (RoAA) Fee / NII plus Other Income NII / NII plus Other Income Capital Adequacy Ratio Tier 1 Gross NPA Ratio * Net NPA Ratio *
FY2003 7.1% 46.2% 2.5% 2.0% 56.7% 26.0% 25.7% 0.8% 0.1%
FY2006 4.7% 64.8% 1.4% 26.6% 63.5% 11.3% 8.1% 0.5% 0.2%
FY2007 4.5% 65.3% 0.9% 20.0% 66.1% 13.5% 8.8% 0.5% 0.2%
FY2008 5.5% 60.3% 1.1% 13.1% 72.6% 18.7% 14.5% 1.0% 0.4%
FY2009 6.0% 66.8% 1.0% 12.5% 84.7% 20.0% 16.1% 2.5% 1.3%
FY2010 6.3% 47.8% 1.7% 12.3% 74.7% 18.4% 15.4% 2.4% 1.3%
FY 2011 5.5% 54.0% 1.8% 12.3% 78.0% 19.9% 18.0% 1.2% 0.5%
* Excludes stressed assets acquired from other Banks and NBFCs Its grt 2b 25
27
Consolidation at a Glance
` in Lakhs 2010-2011 Profit Profit before Tax after Tax Kotak Mahindra Bank Limited Subsidiaries Kotak Mahindra Prime Limited Kotak Securities Limited Kotak Mahindra Capital Company Limited Kotak Mahindra Old Mutual Life Insurance Limited Kotak Mahindra Investments Limited Kotak Mahindra Asset Management Company Limited Kotak Mahindra Trustee Company Limited Kotak Mahindra (International) Limited Kotak Mahindra (UK) Limited Kotak Mahindra, Inc. Kotak Investment Advisors Limited Kotak Mahindra Trusteeship Services Limited Kotak Forex Brokerage Limited Kotak Mahindra Pension Fund Ltd Kotak Mahindra Financial Services Ltd Total Add: Associates Less: Dividend, Minority interest, Inter company and other adjustment Consolidated Profit After Tax/Netwoth Consolidated Earnings per Share (`) Consolidated Book Value per Share (`) 48,188.43 27,157.26 7,022.77 10,247.45 3,320.47 1,468.03 990.14 4,727.81 1,285.56 (542.81) 4,922.24 109.69 (45.53) (57.25) (26.91) 31,786.27 18,193.79 5,188.86 10,247.45 2,399.87 1,062.00 668.10 4,605.42 918.54 (380.58) 3,271.41 72.87 (45.53) (57.25) (26.91) 25,887.29 40,387.62 3,461.57 6,922.46 4,842.33 9,905.19 1,052.25 6,833.91 1,829.46 229.16 5,982.64 96.34 (51.97) (62.18) (145.81) 16,641.22 26,010.04 2,386.18 6,922.46 3,466.24 6,551.45 694.98 6,723.80 1,317.33 138.74 3,975.15 65.62 (51.97) (62.18) (145.81) 153,757.56 169,394.91 48,934.65 41,284.54 25,433.24 5,837.47 2,924.71 18,832.91 9,555.83 2,736.14 15,607.73 286.10 43.40 1,080.57 254.63 1,175,611.59 46,220.74 125,538.21 1,096,294.12 111,971.38 151,201.12 43,745.79 31,100.71 23,033.37 5,664.86 2,605.77 14,422.81 8,715.93 3,129.83 12,336.32 213.23 18.94 1,137.82 153.76 857,963.14 43,834.51 110,703.24 791,094.41 118,770.18 81,818.21 2009-10 31st March 2011 31st March 2010 Profit Profit before Tax after Tax Networth Networth 81,110.36 56,110.57 679,647.20 448,511.50
227,537.53 159,722.52 188,280.62 130,743.82 2,386.23 (5,434.28) 156,674.47 21.60 (236.10) (192.33) 130,700.05 18.64
148.78
113.62
28
Kotak Mahindra Bank Limited Annual Report 2010-11
Its grt 2b 25
Financial Highlights
Consolidated Financial Statements Auditors’ Report
Bank Reports & Statements
Auditors’ Report
To the Board of Directors of Kotak Mahindra Bank Limited 1. We have audited the attached consolidated balance sheet of Kotak Mahindra Bank Limited (‘the Bank’) and its subsidiaries (collectively ‘the Group’) as at 31st March 2011, and also the consolidated profit and loss account and the consolidated cash flow statement for the year ended on that date, annexed thereto. These financial statements are the responsibility of the Bank’s management and have been prepared by the management on the basis of separate financial statements and other financial information regarding components. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with the auditing standards generally accepted in India. Those Standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. We did not audit the financial statements of 15 subsidiaries whose financial statements reflect total assets of ` 172,970,257 (in thousands) as at 31st March 2011, total revenues of ` 27,415,582 (in thousands) and cash outflows amounting to ` 1,449,235 (in thousands) for the year then ended. These financial statements and other financial information have been audited by other auditors whose reports have been furnished to us, and our opinion is based solely on the report of other auditors. Further, we have jointly audited the financial statements of Kotak Mahindra Old Mutual Life Insurance Limited, the life insurance subsidiary of the Bank, with other auditor, whose financial statements reflect total assets of ` 88,458,724 (in thousands) as at 31st March 2011, total revenues of ` 36,214,045 (in thousands) and cash flows amounting to `134,335 (in thousands) for the year then ended. In addition, we have relied on the un-audited financial results of one associate. The share of the Group in the net profit of this un-audited associate for the year then ended is ` 10,085 (in thousands). We, along with the joint auditor of Kotak Mahindra Old Mutual Life Insurance Limited (‘the Company’), the life insurance subsidiary of the Bank have reported in our audit opinion dated 29th April 2011, on the financial statements of the Company, which has been used in the preparation of the accompanying financial statements, that the actuarial valuation of policyholders’ liabilities is the responsibility of the Company’s Appointed Actuary (‘the Appointed Actuary’). The actuarial valuation of these liabilities as at 31st March 2011 has been duly certified by the Appointed Actuary and in his opinion, the assumptions for such valuation are in accordance with the guidelines and norms issued by the Insurance Regulatory Development Authority (‘IRDA’) and the Institute of Actuaries of India in concurrence with IRDA. We, along with the joint auditor of the Company have relied upon the Appointed Actuary’s certificate in this regard for forming an opinion on the financial statements of the Company. We report that the consolidated financial statements have been prepared by the Bank’s management in accordance with the requirements of Accounting Standard 21: Consolidated Financial Statements and Accounting Standard 23: Accounting for Investments in Associates in Consolidated Financial Statements, [notified pursuant to the Companies (Accounting Standards) Rules, 2006, as amended]. Based on our audit and on consideration of reports of other auditors on separate financial statements and on the other financial information of the components, and to the best of our information and according to explanations given to us, we are of the opinion that the attached consolidated financial statements gives a true and fair view in conformity with the accounting principles generally accepted in India: i. ii. iii. in the case of the consolidated balance sheet, of the state of affairs of the Group as at 31st March 2011; in the case of the consolidated profit and loss account, of the profit for the year ended on that date; and in the case of the consolidated cash flow statement, the cash flows for the year ended on that date.
2.
3.
4.
5.
6.
For S.R. Batliboi & Co. Firm Registration No. 301003E Chartered Accountants per Viren H. Mehta Partner Membership No.048749 Mumbai, 5th May 2011
Its grt 2b 25
29
(` in thousands)
Consolidated Balance Sheet as at 31st March 2011
Schedule CAPITAL AND LIABILITIES Capital Reserves and Surplus Minority Interest Employees’ Stock Options (Grants) Outstanding Deposits Borrowings Policyholders’ Funds Other Liabilities and Provisions Total ASSETS Cash and Balances with Reserve Bank of India Balances with Banks and Money at Call and Short Notice Investments Advances Fixed Assets Other Assets Goodwill on Consolidation Total Contingent Liabilities Bills for Collection Significant Accounting Policies and Notes to the Consolidated Financial Statements The schedules referred to above form an integral part of this Balance Sheet 17 12 6 7 8 9 10 11 21,148,573 8,793,951 260,489,873 412,419,529 5,970,011 27,955,141 34,194 736,811,272 366,400,173 10,534,742 20,940,828 4,127,315 194,847,770 297,242,869 6,104,142 27,851,026 34,194 551,148,144 381,044,916 6,493,241 5 3 4 1 2 2A 3,684,358 105,945,054 1,072,112 369,172 273,129,755 220,733,209 81,452,019 50,425,593 736,811,272 3,481,415 75,628,026 808,586 548,017 218,191,807 138,857,016 63,710,722 49,922,555 551,148,144 As at 31st March 2011 As at 31st March 2010
As per our report of even date For S. R. Batliboi & Co. Firm Registration No. 301003E Chartered Accountants per Viren H. Mehta Partner (Membership No. 048749)
For and behalf of the Board of Directors Dr. Shankar Acharya Chairman Dipak Gupta Executive Director Jaimin Bhatt Group Chief Financial Officer Bina Chandarana Company Secretary Uday Kotak Executive Vice Chairman and Managing Director
Mumbai, 5th May 2011
30
Kotak Mahindra Bank Limited Annual Report 2010-11
Its grt 2b 25
Financial Highlights
Consolidated Financial Statements Balance Sheet and P&L A/c
Bank Reports & Statements
(` in thousands)
Consolidated Profit and Loss Account for the year ended 31st March 2011
Schedule I. INCOME Interest earned Other Income Total II. EXPENDITURE Interest expended Operating expenses Provisions and Contingencies (Refer Note 10 - Schedule 17) Total III. PROFIT Net Profit for the year Less: Share of Minority Interest Add: Share in profit/(loss) of Associates Consolidated Profit for the year attributable to the Group Add : Surplus brought forward from previous year Total IV. APPROPRIATIONS Transfer to Statutory Reserve Transfer to Special Reserve u/s 45 IC of RBI Act, 1934 Transfer to Special Reserve u/s 36(1)(viii) of Income Tax Act, 1961 Transfer to General Reserve Transfer to Capital Reserve Transfer to Debenture Redemption Reserve Transfer from Debenture Redemption Reserve Transfer (from) / to Investment Reserve Account Proposed Dividend Corporate Dividend Tax Balance carried over to Balance Sheet Total V. EARNINGS PER SHARE [Refer Note 13 - Schedule 17] Basic (`) Diluted (`) Face value per share (`) The schedules referred to above form an integral part of this Profit and Loss Account Significant Accounting Policies and Notes to the Consolidated Financial Statements As per our report of even date For S. R. Batliboi & Co. Firm Registration No. 301003E Chartered Accountants per Viren H. Mehta Partner (Membership No. 048749) 17 21.73 21.60 5.00 18.84 18.64 5.00 2,045,500 683,725 290,000 426,725 6,900 381,376 (783,625) (268,300) 368,832 93,020 49,626,168 52,870,321 1,402,800 402,224 400,000 353,200 69,600 726,467 (882,804) 11,900 296,613 118 37,202,874 39,982,992 15,692,350 263,526 238,623 15,667,447 37,202,874 52,870,321 13,273,599 179,984 (23,610) 13,070,005 26,912,987 39,982,992 15 16 26,345,492 59,997,243 8,257,638 94,600,373 17,728,575 58,668,505 10,862,326 87,259,406 13 14 61,414,352 48,878,371 110,292,723 46,011,601 54,521,404 100,533,005 Year ended 31st March 2011 Year ended 31st March 2010
For and behalf of the Board of Directors Dr. Shankar Acharya Chairman Dipak Gupta Executive Director Jaimin Bhatt Group Chief Financial Officer Bina Chandarana Company Secretary Uday Kotak Executive Vice Chairman and Managing Director
Mumbai, 5th May 2011
Its grt 2b 25
31
(` in thousands)
Consolidated Cash Flow Statement
for the year ended 31st March 2011 Year Ended 31st March 2011 Year Ended 31st March 2010
CASH FLOW FROM OPERATING ACTIVITIES Net Profit After Tax Add: Provision for Income tax Profit before tax Adjustments for:Employee Stock Option Grants Depreciation on Group’s property Amortization of Premium on Investments Diminution in the value of investments (Profit)/ Loss on revaluation of investments (net) Profit on Sale of Associates Interest on debentures and other long-term borrowing Interest on subordinated debt and Upper Tier II Interest on refinance from institutions Provision for Non Performing Assets and contingencies Loss on sale of assets Decrease in Foreign Currency Translation Reserve [Refer Note 2 (F) (ix) - Schedule 17] Wealth tax 187,632 1,523,462 1,189,500 466,434 275,156 3,344,951 698,898 1,877,300 1,009,563 1,262 (29,446) 1,106 32,993,799 Adjustements for :Increase in Investments other than Associates Increase in Advances Increase in Other Assets Increase in Deposits Increase in Borrowings Increase in Policyholders’ Funds Increase in Other Liabilities & Provisions (67,074,627) (116,292,699) (1,416) 54,937,948 66,701,184 17,741,297 676,921 (43,311,392) Income Taxes Paid NET CASH FLOW FROM OPERATING ACTIVITIES (A) CASH FLOW FROM INVESTING ACTIVITIES Purchase of Fixed assets Sale of Fixed assets Proceeds on sale of Associates Increase in Investments in Associates NET CASH USED IN INVESTMENT ACTIVITIES (B) (1,455,746) 65,153 (498,566) (1,889,159) (4,281,287) 87,433 677,680 (541,128) (4,057,302) (7,068,327) (17,385,920) (56,970,843) (77,630,343) (1,025,803) 79,973,400 15,263,016 26,330,277 9,117,247 (4,943,049) (5,756,603) 15,688,588 270,676 1,429,197 1,419,804 (512,432) (5,293,992) (496,584) 3,127,445 675,524 1,562,449 5,619,714 43,917 (282,527) 1,064 26,388,240 15,667,447 6,780,534 22,447,981 13,070,005 5,753,980 18,823,985
32
Kotak Mahindra Bank Limited Annual Report 2010-11
Its grt 2b 25
Financial Highlights
Consolidated Financial Statements Cash Flow Statement
Bank Reports & Statements
(` in thousands)
Consolidated Cash Flow Statement
for the year ended 31st March 2011 (Contd.) Year Ended 31st March 2011 Year Ended 31st March 2010
CASH FLOW FROM FINANCING ACTIVITIES Dividend paid including corporate dividend tax Fresh issue of share/Money received on exercise of stock options Share issue expenses Increase in Refinance Increase in debentures and other long-term borrowings Increase/(decrease) in subordinated debt and Upper Tier II Interest on subordinated debt and Upper Tier II Interest on refinance from institutions Interest on debentures and other long-term borrowing Increase in Minority Interest NET CASH FLOW FROM FINANCING ACTIVITIES (C) NET INCREASE IN CASH AND CASH EQUIVALENTS (A + B + C) CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE YEAR (Refer Note below) CASH AND CASH EQUIVALENTS AT THE END OF THE YEAR (Refer Note below) Note: Balance with banks in India in Fixed Deposit (As per Schedule 7 I (i) (b)) Balance with banks in India in current account (As per Schedule 7 I (i) (a)) Money at call and short notice in India (As per Schedule 7 I (ii)) Cash in hand (As per Schedule 6 I) Balance with RBI in current account (As per Schedule 6 II) Balance with banks Outside India: (i) In current account (As per Schedule 7 II (i)) 804,316 2,507,136 29,942,524 265,277 1,469,187 25,068,143 29,942,524 25,068,143 (345,683) 14,983,521 (5,764) 5,026,305 9,792,429 356,275 (698,898) (1,877,300) (3,344,951) 263,526 24,149,460 4,874,381 25,068,143 (304,122) 738,708 576,768 3,497,886 (261,900) (675,524) (1,562,449) (3,127,445) 179,984 (938,094) 10,693,192 14,374,951
2,723,813 2,248,028 510,658 2,522,778 18,625,795
313,398 2,079,453 2,195,514 18,745,314
(ii) In Other Deposit Accounts (As per Schedule 7 II (ii)) CASH AND CASH EQUIVALENTS AT THE END OF THE YEAR
As per our report of even date. For S. R. Batliboi & Co. Firm Registration No. 301003E Chartered Accountants per Viren H. Mehta Partner Membership No. 048749
For and on behalf of the Board of Directors
Dr. Shankar Acharya Chairman Dipak Gupta Executive Director Jaimin Bhatt Group Chief Financial Officer
Uday Kotak Executive Vice Chairman and Managing Director
Bina Chandarana Company Secretary
Mumbai, 5th May 2011
Its grt 2b 25
33
(` in thousands)
Schedules Forming Part of Consolidated Balance Sheet as at 31st March 2011
As at 31st March 2011 SCHEDULE 1 - CAPITAL Authorised Capital 80,00,00,000 Equity Shares of ` 5/- each (31st March 2010: 40,00,00,000 Equity Shares of ` 10 each) Issued Subscribed and Paid-up Capital 73,68,71,504 Equity Shares of ` 5/- each (31st March2010: 34,81,41,477 Equity Shares of ` 10 each) fully paid-up ( Refer Note 3 and 4 - Schedule 17) Total SCHEDULE 2 - RESERVES AND SURPLUS I. Statutory Reserve Opening Balance Add: Transfer from Profit and Loss Account Total II. Capital Reserve Opening Balance Add: Transfer from Profit and Loss Account Total III. General Reserve Opening Balance Add: Transfer from Profit and Loss Account Total IV. Securities Premium Account Opening Balance Add: Received during the year (net of tax) Less: Utilised for Share Issue Expenses Total ( Refer Note 3 - Schedule 17) V. Special Reserve under Section 45IC of the RBI Act, 1934 Opening Balance Add: Transfer from Profit and Loss Account Total 1,263,479 683,725 1,947,204 861,255 402,224 1,263,479 26,554,915 15,147,055 5,764 41,696,206 25,186,388 1,368,527 26,554,915 2,018,176 426,725 2,444,901 1,664,976 353,200 2,018,176 282,203 6,900 289,103 212,603 69,600 282,203 4,470,700 2,045,500 6,516,200 3,067,900 1,402,800 4,470,700 3,684,358 3,481,415 3,684,358 3,481,415 4,000,000 4,000,000 As at 31st March 2010
34
Kotak Mahindra Bank Limited Annual Report 2010-11
Its grt 2b 25
Financial Highlights
Consolidated Financial Statements Schedules
Bank Reports & Statements
(` in thousands)
Schedules Forming Part of Consolidated Balance Sheet as at 31st March 2011 (Contd.)
As at 31st March 2011 VI. Debenture Redemption Reserve Opening Balance Add: Transfer from Profit and Loss Account Less: Transfer to Profit and Loss Account Total VII. Capital Reserve on Consolidation Opening Balance Addition during the year Total VIII.Foreign Currency Translation Reserve [Refer Note 2(F)(ix) - Schedule 17 ] Opening Balance Decrease during the year Total IX. Investment Reserve Account Opening Balance Add: Transfer from Profit and Loss Account Total X. Special Reserve under Section 36(1)(viii) of the Income Tax Act, 1961 Opening Balance Add: Transfer from Profit and Loss Account Total XI. Profit and Loss Account Total SCHEDULE 2A - Minority Interest Minority Interest at the date on which parent subsidiary relationship came into existence Subsequent Increase Total SCHEDULE 3 - DEPOSITS A. I. Demand Deposits i. From Banks ii. From Others Total II. Savings Bank Deposits i. From Banks ii. From Others Total Total Deposits ( I to III) III. Term Deposits 2,676,623 185,082,709 187,759,332 273,129,755 648,677 147,852,855 148,501,532 218,191,807 1,006,014 51,061,096 52,067,110 33,303,313 989,260 43,990,971 44,980,231 24,710,044 396,700 675,412 1,072,112 396,700 411,886 808,586 400,000 290,000 690,000 49,626,168 105,945,054 400,000 400,000 37,202,874 75,628,026 428,914 (268,300) 160,614 417,014 11,900 428,914 42,467 (29,858) 12,609 324,994 (282,527) 42,467 1,474,546 1,474,546 1,474,546 1,474,546 1,489,752 381,376 783,625 1,087,503 1,646,089 726,467 882,804 1,489,752 As at 31st March 2010
Its grt 2b 25
35
(` in thousands)
Schedules Forming Part of Consolidated Balance Sheet as at 31st March 2011 (Contd.)
As at 31st March 2011 SCHEDULE 3 - DEPOSITS (Contd.) B. I. Deposits of Branches in India II. Deposits of Branches Outside India Total Deposits ( I to II) SCHEDULE 4 - BORROWINGS I. Borrowings in India (i) (ii) (iii) Reserve Bank of India Other Banks Institutions, Agencies and others (Refer Note 15 - Schedule 17) 39,647,500 62,998,332 94,245,174 196,891,006 33,543,973 101,133,077 134,677,050 As at 31st March 2010
273,129,755 273,129,755
218,191,807 218,191,807
Total II. Borrowings outside India (i) Institutions, Agencies and others (Refer Note 15 - Schedule 17)
23,842,203 220,733,209 80,697,092
4,179,966 138,857,016 57,543,225
Total Borrowings (I & II) Secured Borrowings included in I & II above SCHEDULE 5 - OTHER LIABILITIES AND PROVISIONS I. II. Bills Payable Interest Accrued
6,188,983 5,160,966 38,663,555 412,089 50,425,593
6,691,977 4,456,915 38,477,743 295,920 49,922,555
III. Others (including provisions) (Refer Note 9 and 21 - Schedule 17) IV. Proposed Dividend (includes tax on dividend ) Total SCHEDULE 6 - CASH AND BALANCES WITH RESERVE BANK OF INDIA I. II. Cash in hand (including foreign currency notes) Balances with RBI in current account Total SCHEDULE 7 - BALANCES WITH BANKS AND MONEY AT CALL AND SHORT NOTICE I. In India (i) Balances with Banks [ Refer Note 8 - Schedule 17 ] (a) In Current Accounts (b) In Other Deposit Accounts Total (ii) Money at Call and Short Notice (a) With Banks Total Total (i + ii) II. Outside India (i) (ii) In Current Accounts In Other Deposit Accounts
2,522,778 18,625,795 21,148,573
2,195,514 18,745,314 20,940,828
2,248,028 2,723,813 4,971,841
2,079,453 313,398 2,392,851
510,658 510,658 5,482,499 804,316 2,507,136 3,311,452 8,793,951
2,392,851
265,277 1,469,187 1,734,464 4,127,315
Total Total (I & II)
36
Kotak Mahindra Bank Limited Annual Report 2010-11
Its grt 2b 25
Financial Highlights
Consolidated Financial Statements Schedules
Bank Reports & Statements
(` in thousands)
Schedules Forming Part of Consolidated Balance Sheet as at 31st March 2011 (Contd.)
As at 31st March 2011 SCHEDULE 8 - INVESTMENTS I. Investments in India in i. ii. Government Securities* Other approved Securities 144,725,282 35,578,239 40,749,514 5,700,880 30,287,161 257,041,076 105,956,983 26,350,671 29,457,022 5,202,314 25,401,318 192,368,308 As at 31st March 2010
iii. Shares iv. Debentures and Bonds v. Associates ** Security Receipts, RIDF Deposit and Pass Through Certificates (PTC)] Total *Refer Note 5 - Schedule 17 (Previous Year net of Repo ` 1,562.37 crore) II. Investments Outside India in i. ii. Shares Others [FCCBs, FCBs, Venture/ Private Equity and other similar funds] vi. Others [Units, Certificate of Deposits, Commercial Paper (CP),
104,524 3,344,273 3,448,797 260,489,873 1,052,897 29,440 3,531 1,078,806 4,622,074 5,700,880 11,026,240 57,595,021 343,798,268
61,986 2,417,476 2,479,462 194,847,770 805,107 17,287 3,531 818,863 4,383,451 5,202,314 9,714,569 33,226,015 254,302,285
Total Total Investments (I and II) ** Investment in Associates Equity Investment in Associates Add: Goodwill on acquisition of Associates (Share of pre-acquisition losses) Less: Capital reserve on Consolidation (Share of pre-acquisition profits) Cost of Investment in Associates Add: Post-acquisition profit/loss of Associates (Equity method) Total SCHEDULE 9 - ADVANCES A. (i) Bills purchased and discounted # (ii) Cash Credits Overdrafts and loans repayable on demand (iii) Term Loans # Bills purchased and discounted is net off Bills Rediscounted ` 956.38 crore (Previous Year ` 1,171.88 crore) Total B. (i) Secured by tangible assets * (ii) Unsecured Total * including advances secured against book debts C. Advances in India (i) Priority Sector
412,419,529 364,956,593 47,462,936 412,419,529
297,242,869 253,608,201 43,634,668 297,242,869
87,379,166 875,000 324,165,363 412,419,529
68,331,589 1,730,465 227,180,815 297,242,869 Its grt 2b 25
(ii) Public Sector (iii) Banks (iv) Others Total
37
(` in thousands)
Schedules Forming Part of Consolidated Balance Sheet as at 31st March 2011 (Contd.)
As at 31st March 2011 SCHEDULE 10 - FIXED ASSETS A. Premises (Including Land) Gross Block At cost on 31st March of the preceding year Additions during the year Deductions during the year Total Depreciation As at 31st March of the preceding year Charge for the year Deductions during the year Depreciation to date Net Block B. Other Fixed Assets (including furniture and fixtures) Gross Block At cost on 31st March of the preceding year Additions during the year Deductions during the year Total Depreciation As at 31st March of the preceding year Charge for the year Deductions during the year Depreciation to date Net Block ( Refer Note 22 - Schedule 17 ) Total (A) +(B) SCHEDULE 11 - OTHER ASSETS I. II. Interest accrued Advance tax (net of provision for tax) 5,979,552 269,563 36,102 67,824 54,531 21,547,569 27,955,141 4,376,984 390,356 20,729 113,288 130,755 22,818,914 27,851,026 5,143,853 1,470,481 235,853 6,378,481 3,259,332 5,970,011 4,193,636 1,382,061 431,844 5,143,853 3,340,482 6,104,142 8,484,335 1,455,746 302,268 9,637,813 6,826,572 2,220,957 563,194 8,484,335 382,058 52,981 435,039 2,710,679 334,922 47,136 382,058 2,763,660 3,145,718 3,145,718 1,085,388 2,060,330 3,145,718 As at 31st March 2010
III. Stationery and Stamps IV. Non Banking assets acquired in satisfaction of claims V. Cheques in course of collection
VI. Others (Refer Note 21 - Schedule 17) Total
38
Kotak Mahindra Bank Limited Annual Report 2010-11
Its grt 2b 25
Financial Highlights
Consolidated Financial Statements Schedules
Bank Reports & Statements
(` in thousands)
Schedules Forming Part of Consolidated Balance Sheet as at 31st March 2011 (Contd.)
As at 31st March 2011 SCHEDULE 12 - CONTINGENT LIABILITIES I. II. Claims not acknowledged as debts Liability on account of outstanding forward exchange contracts 1,215,962 82,760,346 40,312,069 563,231 34,165,842 969,619 22,316,855 19,913,093 1,162,334 24,143,148 As at 31st March 2010
III. Guarantees on behalf of constituents in India IV. Guarantees on behalf of constituents outside India V. Acceptances, Endorsements and Other Obligations
VI. Other items for which the Group is contingently liable: Liability in respect of interest rate and currency swaps and forward rate agreements Liability in respect of other Derivative contracts Capital commitments Total 189,291,144 17,273,383 818,196 366,400,173 297,089,613 13,983,691 1,466,563 381,044,916
Schedules Forming Part of Consolidated Profit and Loss Account for the year ended 31st March 2011
Year ended 31st March 2011 SCHEDULE 13 - INTEREST EARNED I. II. Interest / discount on advances/bills Income from investments 47,108,483 13,551,878 230,906 523,085 61,414,352 35,263,701 10,185,483 69,068 493,349 46,011,601 Year ended 31st March 2010
III. Interest on balances with RBI and other inter-bank funds IV. Others Total SCHEDULE 14 - OTHER INCOME I. II. Commission exchange and brokerage Profit on sale of Investments (net)
13,487,057 4,431,857 (275,156) (1,262) 47,008 29,399,087 1,265,950 523,830 48,878,371
13,510,670 4,065,552 5,293,992 (43,917) 678,743 28,493,373 2,086,864 436,127 54,521,404
III. Profit/(Loss) on revaluation of investments of Insurance business IV. Loss on sale of building and other assets (net) V. Profit on exchange transactions (net)
VI. Premium on Insurance business VII. Profit on recoveries of non-performing assets acquired VIII.Miscellaneous Income Total
Its grt 2b 25
39
(` in thousands)
Schedules Forming Part of Consolidated Profit and Loss Account for the year ended 31st March 2011 (Contd.)
Year ended 31st March 2011 SCHEDULE 15 - INTEREST EXPENDED I. II. Interest on Deposits Interest on RBI / Inter-Bank Borrowings 13,566,067 5,189,905 7,589,520 26,345,492 8,374,295 3,240,647 6,113,633 17,728,575 Year ended 31st March 2010
III. Other Interest ( Refer Note 16 - Schedule 17 ) Total SCHEDULE 16 - OPERATING EXPENSES I. II. III. IV. V. VI. VII. Payments to and provision for employees [Refer Note 7 - Schedule 17 ] Rent, taxes and lighting [Refer Note 18 - Schedule 17 ] Printing and Stationery Advertisement, Publicity and Promotion Depreciation on Group’s property Directors’ fees, allowances and expenses Auditors’ fees and expenses
15,223,449 2,158,555 466,058 1,418,094 1,523,462 11,025 40,817 227,128 1,226,569 1,242,450 254,150 729,830 1,755,345 2,909,209 260,366 17,724,621 10,361,522 2,464,593 59,997,243
12,609,547 2,254,757 342,115 1,313,012 1,429,197 4,515 35,835 211,163 1,023,490 1,005,574 185,898 581,821 1,408,780 2,876,243 200,555 26,222,536 4,966,829 1,996,638 58,668,505
VIII. Law Charges IX. X. XI. XII. Postage, telephones etc. Repairs and maintenance Insurance Travel and Conveyance
XIII. Professional Charges XIV. Brokerage XV. Stamping Expenses
XVI. Policyholders’ Reserves XVII. Insurance Business Expenses (Claims and benefits paid) XVIII. Other Expenditure Total
40
Kotak Mahindra Bank Limited Annual Report 2010-11
Its grt 2b 25
Financial Highlights
Consolidated Financial Statements Accounting Policies & Notes
Bank Reports & Statements
Schedules Forming Part of the Consolidated Balance Sheet and Profit and Loss Account
SCHEDULE 17 - SIGNIFICANT ACCOUNTING POLICIES AND NOTES TO THE FINANCIAL STATEMENTS 1. BASIS OF CONSOLIDATION a. The Consolidated Financial Statements of Kotak Mahindra Bank Limited (“the Bank” or “KMBL”) are prepared in accordance with Accounting Standard 21 (AS-21), “Consolidated Financial Statements” and Accounting Standard 23 (AS-23), “Accounting for Investments in Associates in Consolidated Financial Statements” notified under the Companies (Accounting Standard) Rules, 2006 “as amended”. The Bank consolidates entities in which it holds, directly or indirectly, more than 50% of the voting rights or where it exercises control, on a line by line basis by adding together like items of assets, liabilities, income and expenses in accordance with AS-21. The Goodwill or Capital Reserve on consolidation represents the difference between the Group’s share in the networth of the subsidiary and the cost of acquisition at the time of making the investment in subsidiary. Intragroup balances, intragroup transactions and resulting unrealised profits/ losses, if any, are eliminated in full. Minority interest representing the part of net results of operations and of the net assets of subsidiary attributable to interests not owned directly or indirectly through subsidiaries is presented separately from liabilities and the equity. The Bank and its subsidiaries which have been consolidated, constitute the “Group”. Further, the Group accounts for investments in entities where it holds 20% to 50% of the voting rights by the equity method of accounting in accordance with AS- 23. The financial statements of the subsidiaries, jointly controlled entities and associates used in consolidation are drawn up to the same date as that of the holding company i.e. 31st March 2011. The list of subsidiaries is as under: Name of the Subsidiary Country of Origin % Shareholding of group (31st March 2011) 100.00 100.00 100.00 74.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 % Shareholding of group (31st March 2010) 100.00 100.00 100.00 74.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00
b.
Kotak Mahindra Prime Limited Kotak Securities Limited Kotak Mahindra Capital Company Limited Kotak Mahindra Old Mutual Life Insurance Limited Kotak Mahindra Investments Limited Kotak Mahindra Asset Management Company Limited Kotak Mahindra Trustee Company Limited Kotak Mahindra (International) Limited Kotak Mahindra (UK) Limited Kotak Mahindra, Inc. Global Investments Opportunities Fund Limited (GIOFL) * Kotak Investment Advisors Limited Kotak Mahindra Trusteeship Services Limited Kotak Forex Brokerage Limited Kotak Mahindra Pension Fund Limited Kotak Mahindra Financial Services Limited *
India India India India India India India Mauritius U.K. USA Mauritius India India India India U.A.E
Global Investments Opportunities Fund Limited (GIOFL) is a collective investment scheme set up as a fund in Mauritius with the status of a limited company under the Mauritius Companies Act. GIOFL has a class structure wherein there are different classes of redeemable participating shares. Each class of participating shares has its own Balance Sheet and Profit and Loss account. The profit /loss of each such class belongs to the participating shareholders of that class. The management shareholder is not entitled to any beneficial interest in the profit/loss of various classes nor is required to make good any shortfall. In substance there are no direct or indirect economic benefits received by the management shareholders. The substance over form must prevail. The Group’s investment is only in management shares. Accordingly, GIOFL is consolidated in respect of management shares of the entity having regard to substance over form of the entity.
Its grt 2b 25
41
Schedules Forming Part of the Consolidated Balance Sheet and Profit and Loss Account (Contd.)
c. As per AS-23, the Consolidated Financial Statements incorporate the results of the following associates except as indicated. Name of the Associate Country of Origin % Shareholding of group (31st March 2011) 49.99 — 49.00 48.99 31.26 % Shareholding of group (31st March 2010) 49.99 30.00 49.00 48.96 31.26
Infina Finance Private Limited
India
Kotak Mahindra Asset Reconstruction Company Limited (**) India Phoenix ARC Private Limited ACE Derivatives & Commodity Exchange Limited (formerly known as Ahmedabad Commodity Exchange Limited) (#) Matrix Business Services India Private Limited (Unaudited) India India India
(**) The financial statements of Kotak Mahindra Asset Reconstruction Company Limited have not been consolidated under AS-23, as other than temporary diminution in the value of the same is fully provided for. Effective 19th March 2011 Kotak Mahindra Asset Reconstruction Company Limited has been dissolved under Section 560 of the Companies Act, 1956. (#) Effective 17th June 2010, ACE made a preferential allotment and consequently the stake of Group decreased to 42.19%. Further, on 12th August 2010, ACE made preferential allotment to selected shareholders including the Group and the Group also acquired additional stake from an existing shareholder. Consequently, the Group stake in ACE increased to 48.99%. The Group has accounted its share of profit / loss of ACE considering its effective stake on a pro rata basis.
2.
SIGNIFICANT ACCOUNTING POLICIES AND NOTES TO CONSOLIDATED FINANCIAL STATEMENTS A. ACCOUNTING METHODOLOGY The Financial Statements have been prepared on historical cost basis of accounting. The Group adopts the accrual system of accounting and the financial statements conform with the Accounting Standards notified under the Companies (Accounting Standard) Rules, 2006 “as amended”, guidelines issued by the Reserve Bank of India (“RBI”), Insurance Regulatory and Development Authority (“IRDA”) from time to time as applicable to relevant companies and the generally accepted accounting principles prevailing in India. In case the accounting policies followed by a subsidiary are different from those followed by Bank, the same have been disclosed separately. The preparation of financial statements requires the management to make estimates and assumptions considered in the reported amounts of assets and liabilities (including contingent liabilities) as on the date of the financial statements and the reported income and expenses during the reporting period. Management believes that the estimates used in preparation of the financial statements are prudent and reasonable. Actual results could differ from these estimates. B. REVENUE RECOGNITION a. Banking/ Investing Activity: i. ii. Interest income is recognised on accrual basis except in case of non-performing assets where it is recognised, upon realisation, as per RBI guidelines. Penal interest is recognised as income on realisation. Interest income in respect of retail advances {except for the subsidiary, Kotak Mahindra Prime Limited (KMPL)} is accounted for by using the internal rate of return method to provide a constant periodic rate of return on the net investment outstanding on the contract. KMPL accrues for auto finance income (including service charges and incentives) by using the internal rate of return method to provide a constant periodic rate of return after adjustment of brokerage expenses on the net investment outstanding on the contract. The volume-based incentives and brokerage are accounted as and when the said volumes are achieved. Income also includes gains made on termination of contracts. Service charges, Fees and Commission income are recognised when due except for guarantee commission which is recognised over the period of the guarantee, except as indicated in para iii above. Interest income on discounted instruments is recognised over the tenure of the instruments so as to provide a constant periodic rate of return. Gain on account of securitisation of assets is amortised over the life of the securities issued in accordance with the guidelines issued by the RBI.
iii.
iv. v. vi.
42
Kotak Mahindra Bank Limited Annual Report 2010-11
Its grt 2b 25
Financial Highlights
Consolidated Financial Statements Accounting Policies & Notes
Bank Reports & Statements
Schedules Forming Part of the Consolidated Balance Sheet and Profit and Loss Account (Contd.)
vii. Gain on account of assignment of assets on bilateral basis is recognised, based on the difference between the book value of the assigned assets and sale consideration received. In respect of non-performing assets acquired from other banks and NBFCs, collections in excess of the consideration paid at each asset level or portfolio level is treated as income in accordance with RBI guidelines and clarifications. Issue management fees, underwriting commission, financial advisory fees and placement fees are accounted on completion of milestones specified in the contract. Brokerage and clearing fees are recognised as on the date of transaction. Premium is recognised as income when it is due from policyholders except on unit linked policies, where the premium is recognised when associated units are created. Uncollected premium on lapsed policies is not recognised as income until revived. Top Up/ Lump sum contributions are accounted as a part of the single premium. Income from linked policies, which include asset management fees and other charges, if any, are recovered from the linked fund in accordance with the terms and conditions of the policies. Re-insurance premium ceded is accounted as an expense at the time of recognition of the premium income in accordance with the treaty arrangements with the re-insurers. Commission on re-insurance ceded is accounted as income in the period in which reinsurance is ceded. Re-insurance premium and re-insurance commission are recognised over the period of the risk. Placement and other fee based income are accounted for on the basis of the progress of the assignment. Brokerage Income (net of service tax):
? ? ?
viii. Dividend income is accounted on an accrual basis when the right to receive the dividend is established. ix. b.
Investment Banking Activity: i. ii.
c.
Insurance Activity: i. ii. iii. iv. v. vi. vii.
d.
Broking Activity: i. ii.
On fixed deposit is accounted on completion of the transaction. On primary market subscription / mobilisation is accounted on receipt of intimation of allotment. On secondary market transaction is recognised on the date of the transaction.
iii. iv. v.
Incentive on primary market subscription / mobilisation is accounted on the basis of receipt of intimation of allotment. In respect of depository activity, transaction fees (net of service tax) are recognised on completion of transaction. Account maintenance charges are recognised on time basis over the period of contract. Portfolio management fees are accounted on accrual basis as follows: a. b. c. In case of fees based on fixed percentage of the corpus / fixed amount, income is accrued over the period of the agreement. In case of fees, based on the returns of the portfolio, income is accounted on the termination of the portfolio agreement/ on each anniversary as per the agreement, whichever is earlier. In case of upfront non-refundable fee, income is accounted in the year of receipt.
e.
Asset Management: i. Management fee from mutual funds is recognised at specific rates agreed with the relevant schemes, applied on the average daily net assets of each scheme (excluding inter-scheme investments, where applicable, and investments made by the Company in the respective scheme), and are in conformity with the limits specified under SEBI (Mutual Funds) Regulations, 1996. Management fee from venture funds, private equity funds and other similar funds is recognised on accrual basis at the rates specified in the investment management agreement from the date of initial closing of funds under management. Portfolio Advisory Service income is recognised on accrual basis as per the terms of the contract.
ii. iii. C.
FIXED ASSETS AND INTANGIBLE ASSETS Fixed assets/Intangible assets have been stated at cost inclusive of incidental expenses less accumulated depreciation/amortisation. DEPRECIATION/ AMORTISATION: The Group has adopted the Straight Line Method of depreciation so as to write off 100% of the cost of the assets at rates higher than those prescribed under Schedule XIV to the Companies Act, 1956 for all assets other than premises, based on the Management’s estimate of useful lives of these assets. Estimated useful lives over which assets are depreciated are as follows: Its grt 2b 25
43
Schedules Forming Part of the Consolidated Balance Sheet and Profit and Loss Account (Contd.)
Asset Type Premises Improvement to leasehold premises Office equipments (chillers, transformers, UPS & DG set) Office equipments (other than above) Computers Furniture and Fixtures Vehicles ATMs Software (including development) expenditure Forex Broking Business Rights Goodwill (Other than on consolidation) Membership Card of the Bombay Stock Exchange Limited Useful life in years 58 Over the period of lease subject to a maximum of 6 years 10 5 3 6 4 5 3 10 5 20
Assets costing less than ` 5,000 are fully depreciated in the year of purchase. D. EMPLOYEE BENEFITS i Provident Fund – Defined Contribution Plan: Contribution as required by the Statute made to the Government Provident Fund is debited to the Profit and Loss Account when incurred. ii Gratuity – Defined Benefit Plan: The Group accounts for the liability for future gratuity benefits based on an actuarial valuation conducted by an independent actuary. The Bank makes contribution to a Gratuity Fund administered by trustees and managed by a life insurance company. In other entities gratuity obligation is wholly unfunded. The net present value of the Group’s obligation towards the same is actuarially determined based on the projected unit credit method as at the Balance Sheet date. iii iv Actuarial gains/losses are recognised immediately in the Profit and Loss account and are not deferred. Superannuation Fund – Defined Contribution Plan: The Group contributes a sum equivalent to 15% of eligible employees’ salary subject to a maximum of ` 1 lakh per eligible employee per annum, to the Superannuation Funds administered by trustees and managed by a Life Insurance Company. The Group recognises such contributions as an expense in the year they are incurred. v Compensated Absences - Other Long-Term Employee Benefits: The Group accrues the liability for compensated absences based on the actuarial valuation as at the Balance Sheet date conducted by an independent actuary. The net present value of the Group’s obligation is determined based on the projected unit credit method as at the Balance Sheet date. vi Other Employee Benefits: The undiscounted amount of short-term employee benefits expected to be paid in exchange for the services rendered by employees is recognised during the period when the employee renders the service. These benefits include performance incentives. E. INVESTMENTS For The Bank 1. Classification: In accordance with the RBI guidelines, investments are categorised into “Held for Trading”, “Available for Sale” and “Held to Maturity” and further classified under six groups, namely, Government Securities, Other Approved Securities, Shares, Debentures and Bonds, Investments in Associates and Other Investments for the purpose of disclosure in the Balance Sheet. i. ii. Investments that are held for resale within 90 days from the date of purchase are classified as “Held for Trading”. Investments that the Bank intends to hold to maturity are classified as “Held to Maturity”.
44
Kotak Mahindra Bank Limited Annual Report 2010-11
Its grt 2b 25
Financial Highlights
Consolidated Financial Statements Accounting Policies & Notes
Bank Reports & Statements
Schedules Forming Part of the Consolidated Balance Sheet and Profit and Loss Account (Contd.)
iii. 2. Investments which are not classified in the above categories are classified as “Available for Sale”. Valuation: The cost of investments is determined on weighted average basis. Broken period interest on debt instruments is treated as revenue item. The transaction costs including brokerage, commission etc. paid at the time of acquisition of investments is charged to profit and loss. The valuation of investments is made in accordance with the RBI guidelines as indicated hereunder: a. Held for Trading / Available for sale – Each security in this category is revalued at the market price or fair value and the net depreciation of each group is recognised in the Profit and Loss Account. Net appreciation, if any, is ignored. Further, provision for diminution other than temporary is made for, at the individual security level. Held to Maturity – These are carried at their acquisition cost. Any premium on acquisition of debt instruments is amortised over the balance maturity of the security on a straight-line basis. Any diminution, other than temporary, in the value of securities, is provided for. The market value of investments where market quotations are not available is determined as per the norms laid down by the RBI. c. Repurchase and reverse repurchase transactions – Securities sold under agreements to repurchase (Repos) and securities purchased under agreements to resell (Reverse Repos) are accounted as collateralised borrowing and lending transactions respectively. The difference between the consideration amount of the first leg and the second leg of the repo is recognised as interest income/interest expense over the period of the transaction (Refer Note 5).
b.
3.
Transfer between categories: Transfer between categories is done, in accordance with RBI guidelines, at the lower of acquisition cost/ book value / market value on the date of the transfer and depreciation, if any, on such transfer is fully provided for.
4.
Profit or loss on sale / redemption of investments a. b. Held for Trading and Available for Sale: Profit or loss on sale/redemption is included in the Profit and Loss Account. Held to Maturity: Profit on sale/redemption of investments is included in the Profit and Loss Account and is appropriated to Capital Reserve after adjustments for tax and Statutory Reserve transfer. Loss on sale/redemption is charged off to the Profit and Loss Account. For the insurance company: a. b. Investments are recorded at cost on trade which includes brokerage, transfer charges, transaction taxes as applicable, etc. but excludes preacquisition interest, if any and service tax where cenvat credit is being claimed. Investments maturing within twelve months from the Balance Sheet date and investments made with the specific intention to dispose them off within twelve months from the Balance Sheet date are classified as ‘Short Term Investments.’ Investments other than Short Term Investments are classified as ‘Long Term Investments.’ Valuation – Shareholders’ Investments and non-linked policy-holders’ investments c. All debt securities are considered as “held to maturity” for the purpose of valuation and are accordingly recorded at historical cost (excluding interest paid, if any). Debt securities including Government securities are stated at net amortised cost. The premium/discount, if any, on purchase of debt securities is amortised / accreted over the period to maturity on a straight line basis. Listed equity shares as at Balance Sheet date are stated at fair value being the lower of last quoted closing price on Bombay Stock Exchange Limited (“BSE”) and the National Stock Exchange Limited (“NSE”). Equity shares awaiting listing are stated at historical cost subject to provision for diminution, if any. Unrealised gains/ losses arising due to changes in the fair value of listed equity shares are taken to “Fair Value Change Account” and carried forward to Balance Sheet where the net balance is positive. Negative balance in the “Fair Value Change Account” is recognised in the Profit and Loss Account to the extent of negative balance in “Fair Value Change Account” as reduced by the amount previously provided in the Profit and Loss Account. The profit or loss on actual sale of listed equity includes the accumulated changes in the fair value previously recognised under “Fair Value Change Account”. In case of impairment in the value of investment as at the balance sheet date which is other than temporary, the amount of loss is recognised as an expense in the Profit and Loss Account to the extent of difference between the remeasured fair value of the investment and its acquisition cost as reduced by any previous impairment loss is recognised as expense in Profit and Loss Account. Any reversal of impairment loss, earlier recognised in Profit and Loss Account, is recognised in the Profit and Loss Account.
d.
Its grt 2b 25
45
Schedules Forming Part of the Consolidated Balance Sheet and Profit and Loss Account (Contd.)
Valuation – Unit linked Business e. All Government securities, except treasury bills, for linked business are valued at prices obtained from Credit Rating Information Service of India Limited (CRISIL). Debt Securities other than Government Securities are valued on the basis of CRISIL Bond valuer. Floating rate instruments are valued at cost. The discount on purchase of treasury bills, certificate of deposit and commercial papers are amortised over the period to maturity on a straight-line basis. Listed equity shares are valued at fair value, being the last quoted closing price on the NSE (In case of securities not listed on NSE, the last quoted closing price on the BSE is used). Equity shares awaiting listing are stated at historical cost subject to provision for diminution, if any, in the value of such investment determined separately for each individual investment. Unrealised gains and losses are recognised in the Profit and Loss Account. Mutual Fund Units are valued at the previous day’s closing Net Asset Value (NAV) of the fund in which they are invested. Transfer of investments from shareholders’ fund to the policyholders’ fund is at the book value or market price whichever is lower. Transfer of debt securities from shareholders’ fund to the policyholders’ fund is transacted at the lower of net amortised cost or market price. Transfer of investment between unit linked funds is done at market price. Gain/ Loss on transfer/ sale of securities is the difference between the transfer/sale price and the net amortised cost/ book value which is computed on a weighted average basis as on the date of transfer/sale. Sale consideration for the purpose of realised gain/loss is net of brokerage and taxes, if any. For other entities: As required by Accounting Standard 13 (AS-13) notified under the Companies (Accounting Standard) Rules, 2006 “as amended”, “Accounting for Investments”, investments are classified into long term investments and current investments. Investments, which are intended to be held for more than one year, are classified as long term investments and investments, which are intended to be held for less than one year, are classified as current investments. Long term investments are accounted at cost and any decline in value, other than temporary is provided for. Current investments are valued at cost (calculated by applying weighted average cost method) or market / fair value whichever is lower. Securities acquired with the intention to trade are considered as Stock-inTrade. Investments classified as “Stock-in-Trade” by some of the subsidiaries are valued at cost (calculated by applying weighted average cost method) or market price, whichever is lower. Brokerage, stamping and additional charges paid are included in the cost of investments. F. FOREIGN CURRENCY AND DERIVATIVE TRANSACTIONS For the bank: i. ii. iii. Foreign currency assets and liabilities are translated at the Balance Sheet date at rates notified by the Foreign Exchange Dealers’ Association of India (FEDAI). Income and Expenditure items are translated at the rates of exchange prevailing on the date of the transaction except for representative office expenses which are translated at the monthly average rate of exchange. Foreign Exchange contracts (other than deposit and placement swaps) outstanding at the Balance Sheet date are revalued at rates notified by FEDAI and resulting profits or losses are included in the Profit and Loss Account. Foreign exchange swaps “linked” to foreign currency deposits and placements are translated at the prevailing spot rate at the time of swap. The premium / discount on the swap arising out of the difference in the exchange rate of the swap date and the maturity date of the underlying forward contract is amortised over the period of the swap and the same is recognised as income/ expense. Notional amounts of derivative transactions comprising of forwards, swaps, futures and options are disclosed as off-balance sheet exposures. The swaps are segregated into trading or hedge transactions. Trading swaps outstanding as at the Balance Sheet dates are marked to market and the resulting profits or losses, are recorded in the Profit and Loss Account. Outstanding derivative transactions designated as “Hedges” are accounted on an accrual basis over the life of the transaction. Option premium paid/ received is accounted for in the Profit and Loss Account on expiry of the option. Contingent liabilities at the Balance Sheet date on account of outstanding foreign exchange contracts are restated at year end rates reported by FEDAI. Transactions in foreign currencies are recorded at the rate of exchange prevailing on the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are restated at the rate of exchange ruling at the Balance Sheet date.
f.
g. h.
i.
iv.
v.
For other entities: vi. vii.
viii. Exchange differences arising on settlement of the transaction and on account of restatement of assets and liabilities are dealt with in the Profit and Loss Account. In case of items which are covered by forward exchange contracts entered to hedge the foreign currency risk, the difference between the year end rate and the rate on the date of the contract is recognised as
46
Kotak Mahindra Bank Limited Annual Report 2010-11
Its grt 2b 25
Financial Highlights
Consolidated Financial Statements Accounting Policies & Notes
Bank Reports & Statements
Schedules Forming Part of the Consolidated Balance Sheet and Profit and Loss Account (Contd.)
exchange difference in Profit and Loss Account and the premium paid on forward contracts is recognised over the life of the contract. ix. The financial statements of all subsidiaries incorporated outside India which are in the nature of non-integral foreign operations are converted on the following basis: (a) Income and expenses are converted at the average rate of exchange applicable for the year and (b) All assets and liabilities are translated at the closing rate as on the Balance Sheet date. The exchange difference arising out of year end translation is debited or credited as “Foreign Currency Translation Reserve” forming part of “Reserves and Surplus”. Interest rate/ Currency swaps: x. The outstanding swap trades at the Balance Sheet date are disclosed at the contract amount. The swaps which are in the nature of hedges are accounted on an accrual basis; these contracts are not marked to market. Accrued interest is adjusted against the interest cost/income of the underlying liability/asset. The foreign currency balances on account of principal of currency swaps outstanding as at the Balance Sheet date are revalued using the closing rate. Currency options: xi. The outstanding option trades, in the nature of hedge, at the Balance Sheet date are disclosed at the contract amount. The premium paid is amortised over the life of the contract. Equity index/ equity futures/ equity index/ equity options/embedded derivatives: xii. Outstanding derivative contracts, including embedded derivatives, are measured at fair value as at each Balance Sheet date. Fair value of derivatives is determined using quoted market prices in an actively traded market, for the instrument, wherever available, as the best evidence of fair value. In the absence of quoted market prices in an actively traded market, a valuation technique is used to determine the fair value. In most cases the valuation techniques use as input parameters observable market data in order to ensure reliability of the fair value measure.
xiii. The marked to market on derivative contracts is determined on a portfolio basis with net unrealised losses being recognised in the Profit and Loss Account. Unrealised gains are not recognised in Profit and Loss Account on grounds of prudence as enunciated in Accounting Standard – 1, (AS-1) Disclosure of Accounting Policies notified under the Companies (Accounting Standard) Rules, 2006 “as amended”. xiv. Initial Margin-Equity/ Index Derivative Instrument representing the initial margin paid and /or additional margin paid over and above the initial margin, for entering into contracts for equity index/ stock futures and equity index/ stock options, which are released on final settlement / squaring–up of the underlying contracts, are disclosed under other assets. “Deposit for Mark to Market Margin - Equity / Index Derivative Instrument” representing the deposit paid in respect of mark to market margin is disclosed under other assets. xv. On final settlement or squaring up of contracts for equity index/ stock futures, the realised profit or loss after adjusting the unrealised loss already accounted, if any, is recognised in the Profit and Loss Account and shown as Profit / (Loss) on derivatives.
xvi. On settlement or squaring up of equity index/ stock options before expiry, the premium paid or received outstanding on that date is recognised in the Profit and Loss Account. xvii. When more than one contract in respect of the relevant series of equity index/ stock futures or equity index/ stock options contract to which the squared-up contract pertains is outstanding at the time of the squaring-up of the contract, the contract price of the contract so squared-up is determined using the weighted average cost method for calculating the profit/loss on squaring-up. G. ADVANCES i. ii. Advances are classified into standard, sub-standard, doubtful and loss assets in accordance with the RBI guidelines and are stated net of provisions made towards non-performing assets. Provision for non-performing assets comprising sub-standard, doubtful and loss assets is made in accordance with the RBI guidelines. In addition, the Group adopts an approach to provisioning that is based on past experience, evaluation of security and other related factors. In accordance with RBI guidelines the Bank has provided general provision on standard advances at uniform rate of 0.40% except in case of direct advances to agricultural and SME sectors which are provided at 0.25%, commercial real estate sector at 1.00% and teaser rate housing loans at 2.00%. Excess standard asset provision resulting from revision in provisioning rates is not written back in Profit and Loss Account in accordance with the RBI guidelines and clarifications. Effective 17th January, 2011, the Non-Banking Finance Company (NBFC) subsidiaries provide general provision on standard assets at 0.25% in accordance with RBI guidelines. iv. Amounts paid for acquiring non-performing assets from other banks and NBFCs are considered as advances. Actual collections received on such non-performing assets are compared with the cash flows estimated while purchasing the asset to ascertain
iii.
Its grt 2b 25
47
Schedules Forming Part of the Consolidated Balance Sheet and Profit and Loss Account (Contd.)
overdue. If the overdue is in excess of 90 days, the Bank classifies such assets into sub-standard, doubtful or loss as required by the RBI guidelines on purchase of non-performing assets. In respect of NBFCs, if the overdue is in excess of 180 days, then the assets are classified into sub-standard, doubtful and loss as required by the RBI guidelines on purchase of non performing assets. H. STRUCTURED LIABILITIES The Group has issued structured liabilities wherein the return on these liabilities is linked to non-interest benchmarks. Such structured liabilities have an embedded derivative which is the non-interest related return component. The embedded derivative is separated and accounted separately {Refer Note 2 (F)(xii)}. The resultant debt component of such structured liabilities is recognised in the Balance Sheet under Secured loans and is measured at amortised cost using yield to maturity basis. I. LIABILITY FOR POLICIES i Provision is made for policy liabilities in respect of all “in force” policies and “lapsed policies” that are likely to be revived in future based on actuarial valuation done by the Appointed Actuary in accordance with accepted actuarial practices, requirements of IRDA and the Institute of Actuaries of India. Liabilities in respect of unit-linked policies which have lapsed and are not likely to be revived, are shown as Policyholders’ liabilities until expiry of the revival period. Linked liabilities comprise of unit liability representing the fund value of policies. Actuarial method and assumptions: The actuarial liabilities have been calculated in accordance with generally accepted actuarial principles, the requirements of the Insurance Act 1938, IRDA regulations and the prescribed guidance notes of the Institute of Actuaries of India. In respect of unit linked policies, a unit reserve equal to the value of units as on the Balance Sheet date and an additional non-unit reserve calculated on gross premium prospective valuation method is created. The method adopted for par policies (accumulation contracts) is the value of the accumulated fund and an additional non-unit reserve calculated on gross premium prospective valuation method. For non-par conventional business the gross premium prospective method is used. Additional reserve on lapsed unit-linked policies is created and shown as ‘Policyholders’ Funds’. The assumptions used in the Gross Premium valuation are based on conservative best estimates together with appropriate margins for adverse deviations from experience. The principal assumptions are interest, inflation, return to policyholders’ accounts, lapses, expenses, mortality and morbidity. Reserves for group life business are calculated as the risk premium for the unexpired term with an allowance for expenses and a margin for adverse deviations.
ii iii J. i
ACTUARIAL METHOD – LIFE INSURANCE
ii
iii K.
DISCOUNTED INSTRUMENTS The liability is recognised at face value at the time of issuance of discounted instruments. The discount on the issue is amortised over the tenure of the instrument.
L.
ACQUISITION COSTS Acquisition costs such as commission and medical fees are costs that vary with and are primarily related to the acquisition of new and renewal insurance contracts. Such costs are recognised in the year in which they are incurred.
M.
TAXES ON INCOME The Income Tax expense comprises Current tax and Deferred tax. Current tax is measured at the amount expected to be paid in respect of taxable income for the year in accordance with the Income tax Act, 1961. Deferred tax adjustments comprises of changes in the deferred tax assets and liabilities. Deferred tax assets and liabilities are recognised for the future tax consequences of timing differences being the difference between the taxable income and the accounting income that originate in one period and are capable of reversal in one or more subsequent periods. Deferred tax assets arising mainly on account of carry forward losses and unabsorbed depreciation under tax laws are recognised only if there is virtual certainty of its realisation, supported by convincing evidence. Deferred tax assets on account of other timing differences are recognised only to the extent that there is reasonable certainty that sufficient future taxable income will be available against which such deferred tax assets can be realised. Deferred tax assets and liabilities are measured using tax rates and tax laws that have been enacted or substantially enacted at the Balance Sheet date. Changes in deferred tax assets / liabilities on account of changes in enacted tax rates are given effect to in the Profit and Loss Account in the period of the change. The carrying amount of deferred tax assets are reviewed at each Balance Sheet date. The Group writes-down the carrying amount of a deferred tax asset to the extent that it is no longer reasonably certain or virtually certain, as the case may be, that sufficient future taxable income will be available against which deferred tax asset can be realised. Deferred tax assets and deferred tax liabilities across various entities are not set off against each other as the Group does not have a legal right to do so.
48
Kotak Mahindra Bank Limited Annual Report 2010-11
Its grt 2b 25
Financial Highlights
Consolidated Financial Statements Accounting Policies & Notes
Bank Reports & Statements
Schedules Forming Part of the Consolidated Balance Sheet and Profit and Loss Account (Contd.)
N. SEGMENT REPORTING In accordance with guidelines issued by RBI vide DBOD.No.BP.BC.81/21.01.018/2006-07 dated 18th April 2007 and Accounting Standard 17 (AS-17) on “Segment Reporting” notified under the Companies (Accounting Standard) Rules, 2006 “as amended”, the Group’s business has been segregated into the following segments whose principal activities were as under: Segment Treasury, Investments and BMU Principal activity Dealing in debt, equity, money market, forex market, derivatives and investments and primary dealership of Government securities and Balance Sheet Management unit (BMU) responsible for Asset Liability Management Includes: (1) Lending Commercial vehicle finance, personal loans, home loans, agriculture finance, other loans/services and exposures which fulfill the four criteria for retail exposures laid down in Basel Committee on Banking Supervision document “International Convergence of Capital Measurement and Capital Standards : A Revised Framework” (2) Branch Banking Retail borrowings covering savings, current and term deposit accounts and Branch Banking network and services including distribution of financial products. (3) Corporate/ Wholesale Banking Vehicle Financing Other Lending Activities Broking Advisory and Transactional Services Credit cards Receivables/loans relating to credit card business. Wholesale borrowings and lendings and other related services to the corporate sector which are not included in Retail Banking. Retail vehicle finance and wholesale trade finance Financing against securities, securitisation and other loans/ services not included under Retail Banking and Corporate/Wholesale Banking Brokerage income on market transactions done on behalf of clients, interest on delayed payments, distribution of financial products and forex broking. Providing financial advisory and transactional services such as mergers and acquisition advice and equity/debt issue management services and revenue from being a professional clearing member. Management of investments on behalf of clients and funds. Life insurance
Retail Banking
Asset Management Insurance
The above segments have been identified based on the organisation structure, the customer segment, products and services offered and its relation to risk and reward, and the internal reporting process. A transfer pricing mechanism between segments has been established to arrive at interest cost on the borrowings of the segments based on borrowing costs, maturity profile of assets/liabilities etc. and which is disclosed as part of Segment Revenue. Segment revenues consists of earnings from external customers and inter-segment revenue as stated above. Segment expenses consist of interest expenses including those allocated, operating expenses and provisions. Segment results are net of segment revenue and segment expenses. Segment assets include assets related to segments and exclude tax related assets. Segment liabilities include liabilities related to the segment excluding net worth, minority interest and employees’ stock option (grants outstanding), proposed dividend and dividend tax thereon. Since the business operations of the Group are primarily concentrated in India, the Group is considered to operate only in the domestic segment. O. EMPLOYEE STOCK OPTION SCHEME Equity-settled scheme: The Bank has formulated Employee Stock Option Schemes (ESOSs) in accordance with Securities and Exchange Board of India (Employee Stock Option Scheme) Guidelines, 1999. The Schemes provide for grant of options to employees of the Group to acquire the equity shares of the Bank that vest in cliff vesting or in a graded manner and that are to be exercised within a specified period. In accordance with the SEBI Guidelines and the guidance note on “Accounting for Employee Share-based payments” issued by The Institute of Chartered Accountants of India, the excess, if any, of the market price of the share preceding the date of grant of the option under ESOSs over the exercise price of the option is amortised on a straight-line basis over the vesting period. Its grt 2b 25
49
Schedules Forming Part of the Consolidated Balance Sheet and Profit and Loss Account (Contd.)
Where the terms of an equity–settled award are modified, the minimum expense recognised in ‘Payments to and provision for employees’ is the expense as if the terms had not been modified. An additional expense is recognised for any modification which increases the total intrinsic value of the share–based payment arrangement, or is otherwise beneficial to the employee as measured at the date of modification. Cash-settled scheme: The cost of cash-settled transactions (stock appreciation rights) is measured initially using intrinsic value method at the grant date taking into account the terms and conditions upon which the instruments were granted. This intrinsic value is amortised on a straight-line basis over the vesting period with a recognition of corresponding liability. This liability is remeasured at each Balance Sheet date up to and including the settlement date with changes in intrinsic value recognised in Profit and Loss Account in ‘Payments to and provision for employees’. P. CLAIMS/ BENEFITS Benefits paid comprise of policy benefit amount, surrenders and specific claims settlement costs where applicable and change in the outstanding provision for claims at the year end. Surrender and claims by death are accounted when intimated. Survival benefits are accounted when due. Maturity claims are accounted on the date of maturity. Amounts recoverable from reinsurers are accounted for in the same period as the related claim. Repudiated claims disputed before judicial authorities are provided for based on the best judgment of the management considering the facts and evidence in respect of each such claim. Withdrawals under unit-linked policies are accounted in respective schemes when the associated units are cancelled. Q. SECURITISATION The Group enters into arrangements for sale of loans through Special Purpose Vehicles (SPVs). In most cases, post securitisation, the Group continues to service the loans transferred to the SPV. The Group also provides credit enhancement in the form of cash collaterals and / or by subordination of cash flows to Senior Pass Through Certificate (PTC) holders. In respect of credit enhancements provided or recourse obligations (projected delinquencies, future servicing etc.) accepted by the Group, appropriate provision / disclosure is made at the time of sale in accordance with Accounting Standard 29, (AS-29) “Provisions, Contingent Liabilities and Contingent Assets” notified under the Companies (Accounting Standard) Rules, 2006 “as amended”. The gain/ premium on account of securitisation of assets at the time of sale is computed as the difference between the sale consideration and the book value of the securitised asset amortised over the tenure of the securities issued. The loss on account of securitisation is recognised immediately in Profit and Loss Account. R. LEASES Leases where the lessor effectively retains substantially all the risks and benefits of ownership of the leased term, are classified as operating leases. Operating lease payments are recognised as an expense in the Profit and Loss Account on a straight-line basis over the lease term. Assets subject to operating leases are included in fixed assets. Lease income is recognised in the Profit and Loss Account on a straight-line basis over the lease term. Initial direct costs in respect of operating leases such as legal costs, brokerage costs, etc. are recognised immediately in the Profit and Loss Account. Assets given under a finance lease are recognised as a receivable at an amount equal to the net investment in the lease. S. PROVISIONS AND CONTINGENCIES Provision is recognised when there is a present obligation as a result of past event; it is probable that an outflow of resources will be required to settle the obligation, in respect of which a reliable estimate can be made. Provisions are not discounted to its present value and are determined based on best estimate required to settle the obligation at the balance sheet date. These are reviewed at each balance sheet date and adjusted to reflect the current best estimates. Provision is made for Credit card reward points based on reward points accrued to the customer at balance sheet date. Contingent Liabilities are not recognised but are disclosed in the notes unless the outflow of resources is remote. Contingent assets are neither recognised nor disclosed in the financial statements. T. EARNINGS PER SHARE Basic earnings per share are calculated by dividing the net profit or loss for the period attributable to equity shareholders (after deducting attributable taxes) by the weighted average number of equity shares outstanding during the period. The weighted average number of equity shares outstanding during the period are adjusted for events of bonus issue and stock split. For the purpose of calculating diluted earnings per share, the net profit or loss for the period attributable to equity shareholders and the weighted average number of shares outstanding during the period are adjusted for the effects of all dilutive potential equity shares. U. IMPAIRMENT The carrying amounts of assets are reviewed at each Balance Sheet date if there is any indication of impairment based on internal/ external factors.
50
Kotak Mahindra Bank Limited Annual Report 2010-11
Its grt 2b 25
Financial Highlights
Consolidated Financial Statements Accounting Policies & Notes
Bank Reports & Statements
Schedules Forming Part of the Consolidated Balance Sheet and Profit and Loss Account (Contd.)
V. CASH AND CASH EQUIVALENTS Cash and cash equivalents in the balance sheet comprise Cash in hand, Balances with Reserve Bank of India and Balances with Banks and Money at Call and Short Notice (including the effect of changes in exchange rates on cash and cash equivalents in foreign currency). 3. In August 2010, the Bank allotted 1,64,00,000 equity shares of ` 10 each at a premium ` 823 per equity share for a total consideration of ` 1366.12 crore on a preferential basis to Sumitomo Mitsui Banking Corporation. The net issue expenses of ` 0.58 crore related to the aforesaid issue have been charged to the securities premium account as allowed under section 78 of the Companies Act, 1956. The above expenses include ` 0.08 crore paid to the auditors in connection with the issue. Pursuant to the approval of the shareholders at the Annual General Meeting held on 21st July 2010, each equity share of the Bank having face value of ` 10 fully paid up was sub-divided into two equity shares of the face value of ` 5 each fully paid up as at 14th September 2010. Till 31st March 2010, the Bank used to account for market repurchase and reverse repurchase transactions in government securities and corporate debt securities, if any, as “sale and repurchase” transactions. However, as per RBI circular no. RBI/2009-2010/356 IDMD/ 4135/ 11.08.43/2009-10 dated 23rd March 2010, the Bank has started accounting for such transactions as “borrowing and lending” transactions, effective 1st April 2010. If the Bank had continued to account the repurchase and reverse repurchase transactions as “sale and repurchase” at 31st March 2011, the investments would have been lower by ` 561.89 crore and the ‘Balances with Banks and Money at call and short notice’ and ‘Borrowings’ would have been lower by ` 51.07 crore and ` 612.96 crore respectively. The Group charges off to the Profit and Loss Account all expenses related to acquisition costs of advances in the year in which they are incurred. KMPL, a subsidiary of the Bank, charges off such costs based on the Internal Rate of Return of a contract. On account of this difference in accounting policy, unamortised brokerage amounting to ` 53.79 crore (previous year ` 47.76 crore) is carried forward in the Balance Sheet under “Other Assets”. EMPLOYEE BENEFITS a. The Group has recognised the following amounts in the Profit and Loss Account towards contributions to Provident Fund and Other Funds. Provident Fund Superannuation Fund b. ` 54.46 crore (Previous Year ` 44.39 crore) ` 0.95 crore (Previous Year ` 0.96 crore)
4.
5.
6.
7.
In accordance with Indian regulations, the Group provides for gratuity, a defined benefit retirement plan covering all employees. The plan provides a lump sum payment to vested employees at retirement or on termination of employment based on the respective employee’s salary and the years of employment with the Group subject to maximum of ` 0.10 crore. The gratuity benefit is provided to the employees of the Bank through a fund administered by a Board of Trustees and managed by a life insurance company. The Bank is responsible for settling the gratuity obligation through contributions to the fund. The plan is fully funded. In respect of other companies in the Group, the gratuity obligation is wholly unfunded.
c.
Reconciliation of opening and closing balance of the present value of the defined benefit obligation for gratuity benefits is given below. ` in crore As on 31st March 2011 Funded Change in benefit obligations Liability at the beginning of the year Current Service cost Interest cost Actuarial (gain)/loss on obligations Past Service cost Actuarial (gain)/loss due to curtailment Liability assumed on transfer of employees Benefits paid Liability at the end of the year 22.19 6.43 2.15 4.12 9.01 — 0.43 (4.48) 39.85 17.15 5.24 1.71 (0.37) 6.42 — (0.57) (2.78) 26.80 19.75 6.09 1.73 (0.49) — — (0.58) (4.31) 22.19 13.79 4.42 1.24 (0.42) — (0.20) 0.20 (1.88) 17.15 Others As on 31st March 2010 Funded Others
Its grt 2b 25
51
Schedules Forming Part of the Consolidated Balance Sheet and Profit and Loss Account (Contd.)
` in crore As on 31st March 2011 Funded Change in plan assets Fair value of plan assets at the beginning of the year Expected return on plan assets Actuarial Gain Benefits paid Employer contributions Fair value of plan assets as at the end of the year 25.63 1.94 0.64 (4.48) 10.93 34.66 — — — — — — 15.39 1.17 4.61 (4.31) 8.77 25.63 — — — — — — ` in crore As on 31st March 2011 Funded Fair value of plan assets as at the end of the year Liability at the end of the year Net Asset/ (Liabilities) included in “Others” under “Other Assets” and “Others Liabilities” Expenses recognised for the period Current service cost Interest cost Expected return on plan assets Actuarial (gain)/loss Actuarial (gain)/loss due to curtailment Past Service cost Net gratuity expense included in “[payments to and provision for employees]” under “Operating Expenses” [Schedule 16 (I)] Actual return on plan assets 6.43 2.15 (1.94) 3.48 — 9.01 5.24 1.71 — (0.37) — 6.42 6.09 1.73 (1.17) (5.10) — 4.42 1.24 — (0.42) (0.20) — 34.66 39.85 Others — 26.80 As on 31st March 2010 Funded 25.63 22.19 Others — 17.15 Others As on 31st March 2010 Funded Others
Reconciliation of present value of the obligation and the fair value of the plan Assets
(5.19)
(26.80)
3.44
(17.15)
19.13 2.57
13.00 —
1.55 5.78
5.04 — ` in crore
As on 31st March 2011 Funded Reconciliation of the Liability recognised in the Balance Sheet Net (Asset)/ Liability at the beginning of the year Expense recognised Liability assumed on transfer of employees Employer contributions/ Transfers Net (Asset)/ Liability is included in “Others” under “Other Assets” and “Other Liabilities” Investment details of plan assets The plan assets are invested in insurer managed funds. (3.44) 19.13 0.43 (10.93) 17.15 13.00 (0.57) (2.78) Others
As on 31st March 2010 Funded Others
4.36 1.55 (0.58) (8.77)
13.79 5.04 0.20 (1.88)
5.19
26.80
(3.44)
17.15
52
Kotak Mahindra Bank Limited Annual Report 2010-11
Its grt 2b 25
Financial Highlights
Consolidated Financial Statements Accounting Policies & Notes
Bank Reports & Statements
Schedules Forming Part of the Consolidated Balance Sheet and Profit and Loss Account (Contd.)
Actuarial assumptions used As on 31st March 2011 Interest rate Salary escalation rate 8.26% p.a 15% p.a. for first 2 yr, 10% p.a. for next 2 yrs & 6% p.a. thereafter Expected rate of return on plan assets 7.50% p.a. As on 31st March 2010 8.01% p.a. 15% p.a. for first 2 yr, 10% p.a for next 2 yrs & 6% p.a. thereafter 7.50% p.a.
The estimates of future salary increases, considered in actuarial valuation, take account of inflation, seniority, promotion and other relevant factors. The overall expected rate of return on assets is determined based on the market prices prevailing on that date, applicable to the period over which the obligation is to be settled. Experience adjustments Amounts for the current and previous four years are as follows: ` in crore Gratuity 2011 Defined benefit obligation Plan assets Surplus / (deficit) Experience adjustments on plan liabilities Experience adjustments on plan assets 66.65 34.66 (31.99) 2.11 0.64 2010 39.34 25.63 (13.71) (0.93) 4.61 Year ended 31st March 2009 33.54 15.39 (18.15) (4.95) (3.58) 2008 25.55 13.96 (11.59) 0.76 1.38 2007 15.95 9.26 (6.69) 1.68 0.49
The Bank expects to contribute ` 6.00 crore to gratuity fund in financial year 2011-2012 The above information is as certified by the actuary and relied upon by the auditors. 8. 9. Balance in Banks in other deposit accounts include ` 8.07 crore (previous year ` 7.64 crore) which are under lien. “Others” in Other Liabilities and Provisions (Schedule 5) include the following items shown as “Provision for Contingencies”, which have been recognised in the accounts in respect of obligations arising from past event, the settlement of which is expected to result in an outflow embodying economic benefits. Provision for Contingencies: ` in crore Description Stamp duty on Trades Total Balance as on 1st April 2010 30.19 30.19 Addition during the year 5.38 5.38 Reversed/ paid during the year 17.52 17.52 Balance as on 31st March 2011 18.05 18.05
Based on legal opinion, the Management is of the view that certain provisions for earlier years are no longer required and have reversed ` 17.52 crore (Previous Year ` 9.12 crore). ` in crore Description Stamp duty on Trades Total Balance as on 1st April 2009 27.72 27.72 Addition during the year 11.59 11.59 Reversed/ paid during the year 9.12 9.12 Balance as on 31st March 2010 30.19 30.19
Its grt 2b 25
53
Schedules Forming Part of the Consolidated Balance Sheet and Profit and Loss Account (Contd.)
10. Provisions and Contingencies: Breakup of “Provisions and Contingencies” shown under the head Expenditure in Profit and Loss Account ` in crore Year ended 31 March Provision for taxation (Refer Note 11) Provision for Non-performing Assets and Contingencies (including write-offs and net of recoveries) Provision for Standard Assets Provision for Diminution in value of Investments Provision Others* Total
st
2011 678.16 111.60 6.11 46.64 (16.75) 825.76
2010 575.50 536.38 5.92 (51.24) 19.67 1,086.23
(*) For the year ended 31st March 2011 includes write-back of provisions against derivatives contracts ` (21.41) crore (Previous Year provision of ` 14.83 crore) and provision for fees receivable ` 4.66 crore (Previous Year ` 4.84 crore) 11. PROVISION MADE FOR TAXES DURING THE YEAR: ` in crore Year ended 31st March Current tax Deferred tax Wealth Tax Total 12. DESCRIPTION OF CONTINGENT LIABILITIES: Sr. No. 1. Contingent Liability* Claims not acknowledged as debts Brief Description This includes liability on account of income tax, interest tax, sales tax, lease tax demands and legal cases filed against the Group. The Group is a party to various legal proceedings in the normal course of business. The Group does not expect the outcome of these proceedings to have a material adverse effect on the Group’s financial conditions, result of operations or cash flows. Against the above ` 34.56 crore (previous year ` 19.00 crore) have been paid, which shall be refunded to the Group, if the outcome of the legal proceedings will be in the favour of the Group. 2. Liability on account of outstanding The Group enters into foreign exchange contracts with inter-bank participants on its forward exchange contracts own account and for customers. Forward exchange contracts are commitments to buy or sell foreign currency at a future date at the contracted rate. Guarantees on behalf of constituents in and outside India As a part of its banking activities, the Group issues guarantees on behalf of its customers. Guarantees generally represent irrevocable assurances that the Group will make payments in the event of customer failing to fulfill its financial or performance obligations. These includes Documentary credit such as letters of obligations, enhance the credit standing of the customers of the Group, contingent liabilities on account of bills re-discounted by the Group and cash collateral provided by the Group on assets which have been securitised. These include liabilities in respect of interest rate swaps, currency swaps, forward rate agreements, futures and options contracts. The Group enters into these transactions on its own account and for customers. Currency Swaps are commitments to exchange cash flows by way of interest/principal in one currency against another, based on predetermined rates. Interest rate swaps are commitments to exchange fixed and floating interest rate cash flows. The notional amounts that are recorded as contingent liabilities are amounts used as a benchmark for the calculation of interest component of the contracts. This also includes liability in respect of Capital commitments relating to fixed assets and undrawn commitments in respect of investments. 2011 682.30 (4.25) 0.11 678.16 2010 616.20 (40.81) 0.11 575.50
3.
4.
Acceptances, endorsements and other obligations
5.
Other items for which the Group is contingently liable
* Also refer Schedule 12 – Contingent Liabilities
54
Kotak Mahindra Bank Limited Annual Report 2010-11
Its grt 2b 25
Financial Highlights
Consolidated Financial Statements Accounting Policies & Notes
Bank Reports & Statements
Schedules Forming Part of the Consolidated Balance Sheet and Profit and Loss Account (Contd.)
13. EARNINGS PER EQUITY SHARE Particulars * Reconciliation between weighted shares used in the computation of basic and diluted earnings per share: Weighted average number of equity shares used in computation of basic earnings per share Effect of potential equity shares for stock options outstanding Weighted average number of equity shares used in computation of diluted earnings per share Following is the reconciliation between basic and diluted earnings per share: Nominal value per share (`) Basic earnings per share (`) Effect of potential equity shares for stock options (`) Diluted earnings per share (`) Earnings used in the computation of basic and diluted earnings per share (` in crore) 5.00 21.73 0.13 21.60 1,566.74 5.00 18.84 0.20 18.64 1,307.00 72,10,33,537 43,68,154 72,54,01,691 69,37,75,204 74,00,562 70,11,75,766 As on 31st March 2011 As on 31st March 2010
*The number of shares have been adjusted for split of the underlying equity shares from `10 paid up to ` 5 paid up per share in accordance with Accounting Standard (AS) 20, Earnings Per Share notified under the Companies (Accounting Standard) Rules, 2006 “as amended”. The effect of the share split has been given effect in computing earnings per share for the previous periods (Refer Note 4). 14. ESOPs At the General Meetings of the holding company, Kotak Mahindra Bank Limited, the shareholders of the Bank had unanimously passed Special Resolutions on 28th July 2000, 26th July 2004, 26th July 2005, 5th July 2007 and 21st August 2007, to grant options to the eligible employees of the Bank and its subsidiaries companies. Pursuant to these resolutions, the following four Employees Stock Option Schemes had been formulated and adopted: (a) (b) (c) (d) Kotak Mahindra Equity Option Scheme 2001-02; Kotak Mahindra Equity Option Scheme 2002-03; Kotak Mahindra Equity Option Scheme 2005; and Kotak Mahindra Equity Option Scheme 2007.
Consequent to the above, the Bank has granted stock options to the employees of the Group. The Bank under its various plan/ schemes, has granted in aggregate 5,40,24,680 options as on 31st March 2011 (Previous year 4,92,75,440) Stock appreciation rights The management has approved the grant of stock appreciation rights (SARs) to eligible employees as and when deemed fit. The SARs are settled in cash and vest on the respective due dates in a graded manner as per the terms and conditions of grant. The contractual life of the SARs range from 0.34 to 4.36 years. Detail of activity under SARs is summarised below Year Ended 31st March 2011 Outstanding at the beginning of the year Granted during the year Settled during the year Forfeited during the year Outstanding at the end of the year Equity-settled options The Bank has granted options to employees of the Group vide various employee stock option schemes. During the year ended 31st March 2011, the following schemes were in operation: 2,70,300 8,89,098 3,46,630 77,880 7,34,888 Year Ended 31st March 2010 — 2,70,300 — — 2,70,300
Its grt 2b 25
55
Schedules Forming Part of the Consolidated Balance Sheet and Profit and Loss Account (Contd.)
Plan 2005 Date of grant Date of Board Approval Date of Shareholder’s approval Various Dates Various Dates 26th July 2005 as amended on 5th July 2007 1,09,73,200 Equity 1 – 4.13 years 0.42 – 0.92 years Graded/Cliff vesting Plan 2007 Various Dates Various Dates 5th July 2007 as amended on 21st August 2007 2,41,34,480 Equity 1 – 4.31 years 0.17 – 1.01 years Graded/Cliff vesting
Number of options granted Method of Settlement (Cash/Equity) Vesting Period Exercise Period Vesting Conditions The details of activity under Plan 2005 have been summarised below: Year ended 31st March 2011 Number of Shares Weighted Average Exercise Price (`) Outstanding at the beginning of the year Granted during the year Forfeited during the year Exercised during the year Expired during the year Outstanding at the end of the year Out of the above exercisable at the end of the year Weighted average remaining contractual life (in years) Weighted average fair value of options granted The details of activity under Plan 2007 have been summarised below: Year ended 31st March 2011 Number of Shares Weighted Average Exercise Price (`) Outstanding at the beginning of the year Granted during the year* Forfeited during the year Exercised during the year Expired during the year Outstanding at the end of the year* Out of the above exercisable at the end of the year Weighted average remaining contractual life (in years) Weighted average fair value of options granted 1,28,14,250 47,49,240 9,29,424 31,46,430 67,626 1,34,20,010 13,65,190 236.42 308.63 282.17 175.78 463.92 271.88 235.82 1.82 206.73 49,88,600 — 2,81,200 46,42,120 65,280 — — 164.36 — 162.84 165.71 75.00 — — — —
Year ended 31st March 2010 Number of Shares 67,59,340 — 3,26,500 14,39,500 4,740 49,88,600 3,53,600 Weighted Average Exercise Price (`) 147.86 — 157.93 91.76 75.00 164.36 86.17 0.72 —
Year ended 31st March 2010 Number of Shares 1,69,54,594 3,06,040 8,62,972 35,05,736 77,676 1,28,14,250 16,70,738 Weighted Average Exercise Price (`) 224.54 198.59 238.89 173.04 326.68 236.42 147.14 1.98 260.04
56
Kotak Mahindra Bank Limited Annual Report 2010-11
Its grt 2b 25
Financial Highlights
Consolidated Financial Statements Accounting Policies & Notes
Bank Reports & Statements
Schedules Forming Part of the Consolidated Balance Sheet and Profit and Loss Account (Contd.)
The weighted average share price at the date of exercise for stock options exercised during the year was ` 437.07 (Previous year ` 363.99). The details of exercise price for stock options outstanding at the end of the year are: 31st March 2011 Range of exercise prices (`) Number of options outstanding Weighted average Weighted average remaining exercise price contractual life of (`) options (in years) 1.34 2.00 1.73 1.78 2.09 5.00 140.45 220.66 334.38 449.52
0-100 101-200 201-300 301-400 401-500 31st March 2010 Range of exercise prices (`)
30,854 28,87,906 24,14,450 80,34,800 52,000
Number of options outstanding
Weighted average Weighted average remaining exercise price contractual life of (`) options (in years) 0.52 1.40 1.89 2.06 1.20 1.42 55.63 154.55 206.43 341.66 492.24 625.00
0-100 101-200 201-300 301-400 401-500 601-700
4,23,680 97,16,674 24,26,496 50,74,000 87,000 75,000
In May 2010, the ESOP/Compensation Committee of the Bank accorded approval to the changes in exercise price of two stock option series granted on 10th May 2010. In addition to reduction in exercise price, in respect of one of the series, the vesting date of the last tranche has been preponed by 0.58 years in May 2010. The incremental intrinsic value resulting from the above modifications amounted to ` 55 and ` 30 (post split) respectively. The incremental intrinsic value is amortised from the modification date till the vesting date or the revised vesting date as the case may be. The incremental intrinsic value is measured as the difference between the intrinsic value of the modified stock options and that of the original stock options, both estimated as at the date of the modification. The fair value of the equity-settled and cash-settled options is estimated on the date of grant using Black-Scholes options pricing model taking into account the terms and conditions upon which the options were granted. The fair value of the cash-settled options is remeasured at the each Balance Sheet date. The following table lists the inputs to the model used for equity-settled and cash-settled options: Year ended 31st March Exercise Price ` Weighted Average Share Price ` Expected Volatility Historical Volatility Life of the options granted (Vesting and exercise period) in years Risk-free interest rate Expected dividend rate 2011 Equity-settled 200-422 401.14 31.56%-65.43% 31.56%-65.43% 1.00-4.44 5.54%-7.66% 0.09%-0.11% Cash-settled 5 379.40 20.22%-57.98% 20.22%-57.98% 0.04-3.09 7.28%-7.86% 0.10% 2010 Equity-settled 5-475 381.04 57.71%-77.02% 57.71%-77.02% 1.06 – 4.42 4.65% - 7.22% 0.09% - 0.19% Cash-settled 5-147.5 382.06 16.94%-67.54% 16.94%-67.54% 0.04 – 4.09 4.25% - 7.37% 0.10%
The expected volatility was determined based on historical volatility data; historical volatility includes early years of the Bank’s life; the Bank expects the volatility of its share price to reduce as it matures. The above information has been prepared by the Bank and relied upon by the auditors.
Its grt 2b 25
57
Schedules Forming Part of the Consolidated Balance Sheet and Profit and Loss Account (Contd.)
Effect of the employee share-based payment plans on the Profit and Loss Account and on the financial position: ` in crore Year ended 31st March Total Employee Compensation Cost pertaining to share-based payment plans Compensation Cost pertaining to equity-settled employee share-based payment plan included above Liability for employee stock options outstanding as at year end Deferred Compensation Cost Closing balance of liability for cash-settled options Expense arising from increase in intrinsic value of liability for cash stock appreciation plan 2011 52.87 18.76 70.43 33.52 18.05 0.20 2010 28.26 27.07 76.56 21.76 1.20 —
Had the Group recorded the compensation cost computed on the basis of Fair Valuation method instead of intrinsic value method, employee compensation cost would have been higher by ` 39.39 crore (Previous year ` 43.41 crore) and the profit after tax would have been lower by ` 26.30 crore (Previous year ` 28.66 crore). Consequently the basic and diluted EPS would have been ` 21.36 (Previous year ` 18.43) and ` 21.24 (Previous year ` 18.23) respectively. The above number of ESOPs / SARs, exercise price, fair value and share price have been adjusted for split of the underlying equity shares from ` 10 paid up to ` 5 paid up per share. In computing the above information, certain estimates and assumptions have been made by the Management which have been relied upon by the auditors. 15. Tier II Bonds a. b. Lower Tier II Bonds outstanding as on 31st March 2011 ` 591.80 crore (previous year ` 554.80 crore). Upper Tier II Bonds outstanding as on 31st March 2011 ` 336.68 crore (previous year ` 338.05 crore) of which bonds issued outside India ` 200.68 crore (previous year ` 202.05 crore).
16. Interest Expended-Others {Schedule 15(III)} includes interest on subordinated debt (Lower and Upper Tier II) ` 69.89 crore (Previous Year ` 67.55 crore). 17. Segment reporting The Summary of the operating segments of the Group for the year ended 31st March 2011 are as given below. ` in crore 31st March Segment Revenues: Treasury, Investments and BMU Retail Banking (a) (b) (c) Lending Branch Banking Credit Card 2,073.84 987.29 51.74 1,603.87 922.74 534.92 586.52 135.05 356.86 3,621.03 12,533.89 1.89 (1,506.51) 11,029.27 1,742.30 755.36 60.39 1,156.39 760.91 288.65 566.67 89.56 469.66 3,935.11 11,267.43 1.70 (1,215.83) 10,053.30 1,660.03 1,442.43 2011 2010
Corporate Banking Vehicle Financing Other Lending Activities Broking Advisory and Transactional Services Asset Management Insurance Sub-total Add: Unallocated Income Less: inter-segment revenues Total Income
58
Kotak Mahindra Bank Limited Annual Report 2010-11
Its grt 2b 25
Financial Highlights
Consolidated Financial Statements Accounting Policies & Notes
Bank Reports & Statements
Schedules Forming Part of the Consolidated Balance Sheet and Profit and Loss Account (Contd.)
31st March Segment Results: Treasury, Investments and BMU Retail Banking (a) (b) (c) Lending Branch Banking Credit Card 664.98 (263.25) (63.01) 543.89 261.19 235.56 122.19 41.22 136.56 101.37 2,245.51 1.89 2,247.40 377.51 (189.05) (127.41) 385.46 202.17 97.11 177.21 20.86 287.54 66.44 1,904.12 (1.26) 1,902.86 464.81 606.28 2011 2010
Corporate Banking Vehicle Financing Other Lending Activities Broking Advisory and Transactional Services Asset Management Insurance Sub-total Add: Unallocated Income/ (Expense) Total Profit before tax, before minority interest and associates Segment Assets Treasury, Investments and BMU Retail Banking (a) (b) (c) Lending Branch Banking Credit Card
22,298.50
17,443.69
17,481.22 15,567.29 141.10 12,869.42 8,200.74 3,822.48 320.95 44.44 836.04 8,773.43 90,355.61 (16,998.05) 73,357.56 323.57 73,681.13
13,074.54 11,713.92 197.81 10,931.75 6,683.06 2,125.77 489.02 27.94 680.88 6,946.17 70,314.55 (15,531.19) 54,783.36 331.45 55,114.81
Corporate Banking Vehicle Financing Other Lending Activities Broking Advisory and Transactional Services Asset Management Insurance Sub-total Less: inter-segment assets Total Add: Unallocated Assets Total Assets as per Balance Sheet Segment Liabilities Treasury, Investments and BMU Retail Banking (a) (b) (c) Lending Branch Banking Credit Card
18,734.41
13,911.90
14,517.83 15,655.54 23.98
11,392.90 11,902.97 22.61
Its grt 2b 25
59
Schedules Forming Part of the Consolidated Balance Sheet and Profit and Loss Account (Contd.)
31st March Corporate Banking Vehicle Financing Other Lending Activities Broking Advisory and Transactional Services Asset Management Insurance Sub-total Less: inter-segment liabilities Total Add : Unallocated liabilities Add: Share Capital, Reserves and Surplus and Minority Interest Total Capital and Liabilities as per Balance Sheet Capital Expenditure Treasury, Investments and BMU Retail Banking (a) (b) (c) Lending Branch Banking Credit Card 8.47 59.05 0.59 3.74 1.28 0.10 17.86 2.86 5.57 18.65 145.57 43.12 6.95 40.53 3.83 4.02 1.76 0.19 17.98 2.36 4.28 27.33 152.35 3.65 29.39 1.91 2.63 27.16 0.13 63.78 2.44 3.59 20.96 428.13 37.90 7.61 35.30 4.75 4.73 1.62 0.23 19.64 1.96 4.14 25.04 142.92 27.40 272.49 2011 11,086.11 8,788.19 992.15 860.38 24.95 385.82 8,452.32 79,521.68 (16,998.05) 62,523.63 87.35 11,070.15 73,681.13 2010 9,789.53 6,288.50 1,068.19 1,132.22 22.52 210.44 6,782.30 62,524.08 (15,531.19) 46,992.89 130.12 7,991.80 55,114.81
Corporate Banking Vehicle Financing Other Lending Activities Broking Advisory and Transactional Services Asset Management Insurance Total Depreciation Treasury, Investments and BMU Retail Banking (a) (b) (c) Lending Branch Banking Credit Card
Corporate Banking Vehicle Financing Other Lending Activities Broking Advisory and Transactional Services Asset Management Insurance Total
Segment information is provided as per the MIS available for internal reporting purposes, which includes certain estimates and assumptions. The methodology adopted in compiling and reporting the above information has been relied upon by the auditors.
60
Kotak Mahindra Bank Limited Annual Report 2010-11
Its grt 2b 25
Financial Highlights
Consolidated Financial Statements Accounting Policies & Notes
Bank Reports & Statements
Schedules Forming Part of the Consolidated Balance Sheet and Profit and Loss Account (Contd.)
18. Assets taken on lease (i) The Group has taken various premises and equipment under operating lease. The lease payments recognised in the Profit and Loss Account are ` 160.75 crore (previous year ` 172.32 crore). (ii) The future minimum lease payments under non cancelable operating lease – not later than one year is ` 149.45 crore (previous year ` 116.66 crore), later than one year but not later than five years is ` 423.50 crore (previous year ` 363.29 crore) and later than five years ` 143.06 crore (previous year ` 121.08 crore). The lease terms include renewal option after expiry of primary lease period. There are no restrictions imposed by lease arrangements. There are escalation clauses in the lease agreements. 19. Assets given on lease The lease income recognised in the Profit and Loss Account in respect of premises and equipment under operating lease is ` 1.64 crore (previous year `1.57 crore). The future minimum lease payments under non cancelable operating lease – not later than one year is ` 1.14 crore (previous year ` 1.14 crore), later than one year but not later than five years is ` 0.95 crore (previous year ` 2.09 crore). Details of gross investments, unearned finance income in respect of assets given under finance lease are as under: ` in crore As on 31st March Gross Investments: (i) Not later than 1 year 32.58 85.45 118.03 10.54 13.72 24.26 22.04 71.73 93.77 0.02 7.80 21.31 29.11 2.65 3.95 6.60 5.15 17.36 22.51 0.04 (ii) Between 1-5 years Total Unearned Finance Income: (i) Not later than 1 year (ii) Between 1-5 years Total Present Value of Rentals (i) Not later than 1 year (ii) Between 1-5 years Total Accumulated provision on the Gross Investments 2011 2010
20. The Group enters into various types of derivative contracts such as interest rate swaps, cross currency interest rate swaps, foreign currency swaps, forwards, index/ equity futures and options. The details of such derivatives for subsidiaries other than bank are as under: Derivative instrument outstanding as on 31st March 2011 As on 31st March Particulars of Derivatives Futures S&P CNX Nifty Futures S&P CNX Nifty Futures Bank Nifty Futures Stock Futures Stock Futures Interest Rate Futures Commodity Futures Options S&P CNX Nifty Options Long S&P CNX Nifty Options Long S&P CNX Nifty Options Short S&P CNX Nifty Options Short Stock Options Long Stock Options Long Stock Options Short 650,300 530,600 816,900 350,000 — — — 620,250 26,300 518,250 254,300 32,318 8,500 88,218 Trading Hedging Trading Hedging Trading Hedging Trading 194,700 166,750 4,000 746,250 441,125 170 Lots 6,800 100,350 4,150 — 3,061,738 86,700 — — Trading Hedging Trading Trading Hedging Hedging Hedging 2011 Quantity 2010 Quantity Purpose
Its grt 2b 25
61
Schedules Forming Part of the Consolidated Balance Sheet and Profit and Loss Account (Contd.)
As on 31st March Particulars of Derivatives Interest Rate Swaps Currency Swaps Forward Exchange Contracts USD-INR Long USD-INR Short USD-GBP Long USD-GBP Short USD-EURO Long Foreign Currency Option USD-INR Unhedged forex exposure outstanding as on the Balance Sheet date ` in crore Particulars Amount Receivable in foreign currency As on 31st March 2011 As on 31st March 2010 2011 2010 Purpose Hedging Hedging Hedging Hedging Hedging Hedging Hedging Hedging Notional Amount — INR 500,000,000 USD 84,500,985 USD 122,801,651 USD 14,750,000 USD 5,500,000 — — USD 4,033,500 USD 5,500,000 USD 27,712,657 USD 2,261,975 USD 1,339,002 USD 1,579,292 — USD 5,000,000
7.69 (USD 1,282,399) 3.22 (EURO 413,625) (JPY 36,668,996) (USD 160,337)
21. Other Liabilities and Provisions (Schedule 5.III) includes Deferred Tax Liability and “ Others – Other Assets”(Schedule 11.VI) includes Deferred Tax Assets as follows: ` in crore Particulars Deferred Tax Assets Provision for non-performing and doubtful debts, standard advances and contingencies Depreciation on assets Unabsorbed capital losses/ business losses/ provision for investments* Unamortised Income Expenditure allowed on payment basis and others Total Deferred Tax Assets Deferred Tax Liabilities Deferred expenses Depreciation on assets Others Total Deferred Tax Liabilities Net Deferred Tax Assets/(Liabilities) 17.87 0.91 4.85 23.63 293.19 15.86 0.85 2.49 19.20 288.99 220.46 21.92 3.02 6.87 64.55 316.82 237.47 23.82 0.63 2.60 43.67 308.19 Year ended 31st March 2011 Year ended 31st March 2010
(*) Deferred Tax assets on Unabsorbed Capital Loss is recognised as there are investments which are intended to be sold and the capital gains arising there from will be used for setting off the unabsorbed capital loss. 22. Fixed Assets Fixed Assets as per Schedule 10 include intangible assets, details of which are as follows: ` in crore Particulars SOFTWARE Gross Block At cost on 31st March of the preceding year Additions during the year Deductions during the year Total 159.65 28.32 0.04 187.93 117.12 42.60 0.07 159.65 Year ended 31st March 2011 Year ended 31st March 2010
62
Kotak Mahindra Bank Limited Annual Report 2010-11
Its grt 2b 25
Financial Highlights
Consolidated Financial Statements Accounting Policies & Notes
Bank Reports & Statements
Schedules Forming Part of the Consolidated Balance Sheet and Profit and Loss Account (Contd.)
` in crore Particulars Depreciation As on 31st March of the preceding year Charge for the year Deductions during the year Depreciation to date Net Block MEMBERSHIP CARDS OF STOCK EXCHANGE Gross Block At cost on 31st March of the preceding year Total Depreciation As on 31st March of the preceding year Charge for the year Depreciation to date Net Block GOODWILL Gross Block At cost on 31st March of the preceding year Total Depreciation As on 31st March of the preceding year Depreciation to date Net Block FOREX BROKING BUSINESS RIGHTS Gross Block At cost on 31st March of the preceding year Total Depreciation As on 31st March of the preceding year Charge for the year Depreciation to date Net Block 3.47 0.36 3.83 — 3.09 0.38 3.47 0.36 3.83 3.83 3.83 3.83 1.88 1.88 — 1.88 1.88 — 1.88 1.88 1.88 1.88 3.00 0.21 3.21 1.45 2.79 0.21 3.00 1.66 4.66 4.66 4.66 4.66 105.39 35.00 — 140.39 47.54 77.65 27.80 0.06 105.39 54.26 Year ended 31st March 2011 Year ended 31st March 2010
Its grt 2b 25
63
Schedules Forming Part of the Consolidated Balance Sheet and Profit and Loss Account (Contd.)
23. RELATED PARTY DISCLOSURES: Nature of relationship A Individual having significant influence over the enterprise Name of Related Party Uday S. Kotak along with relatives and enterprises in which he has beneficial interest holds 45.56% of the equity share capital of Kotak Mahindra Bank Limited as on 31st March 2011.
B
Other Related Parties: Associates Business Standard Limited (till 16th June 2009) Kotak Mahindra Asset Reconstruction Company Limited (till 18th March2011) ACE Derivatives and Commodity Exchange Limited (Formerly known as Ahmedabad Commodity Exchange Limited) Regency Hospitals Limited (till 30th March 2010) Infina Finance Private Limited Phoenix ARC Private Limited Matrix Business Services India Private Limited Investing Party of the subsidiaries Old Mutual Plc. Old Mutual Life Assurance Company (South Africa ) Limited Aero Agencies Limited Kotak and Company Limited Kotak Commodity Services Limited Komaf Financial Services Limited Asian Machinery & Equipment Private Limited Cumulus Trading Company Private Limited Palko Properties Private Limited Harisiddha Trading and Finance Private Limited Kotak Trustee Company Private Limited Kotak Chemicals Limited Kotak Ginning & Pressing Industries Limited Insurekot Investments Private Limited Key Management Personnel Mr. Uday S. Kotak – Executive Vice Chairman and Managing Director- KMBL Mr. C. Jayaram - Executive Director- KMBL Mr. Dipak Gupta - Executive Director- KMBL Relatives of Key Management Personnel Ms. Pallavi Kotak Mr. Suresh Kotak Ms. Indira Kotak Mr. Jay Kotak Mr. Dhawal Kotak Ms. Aarti Chandaria Ms. Usha Jayaram Ms. Anita Gupta Ms. Urmila Gupta
Enterprises over which relatives of Key Management Personnel have control/ significant influence
64
Kotak Mahindra Bank Limited Annual Report 2010-11
Its grt 2b 25
Financial Highlights
Consolidated Financial Statements Accounting Policies & Notes
Bank Reports & Statements
Schedules Forming Part of the Consolidated Balance Sheet and Profit and Loss Account (Contd.)
C. Details of related party transactions: ` in crore Items/Related Party Associates Investing Party of the subsidiaries Enterprises over which relatives of Key Management Personnel have control/ significant influence Key Management Personnel Relatives of Key Management Personnel
I.
Liabilities Other Liabilities Deposits Interest Payable 20.38 (25.64) 364.87 (514.71) 4.87 (7.53) 107.87 (81.90) — (0.02) 0.37 (2.92) — (0.03) 0.24 (0.11) 7.35 (6.69) 1.59 (0.71) 42.70 (32.13) 4.19 (0.68) 3.98 (7.28) 4.54 (1.35) 1.84 (1.43) 0.08 (—) 1.60 (0.35) 0.01 (—) 14.21 (12.53) 0.03 (0.02) 3.80 (1.12) 18.84 (30.77) — (7.55) 0.08 (0.01) # (0.06) 1.52 (1.33) 12.49 (8.94) — (52.87) 0.02 (—) 0.23 (0.18) 0.04 (0.03) # (—) 0.08 (0.08) 0.81 (0.80) 0.23 (0.34) 91.95 (8.80) 2.31 (0.56) 0.01 (—) 13.50 (4.14) 0.31 (0.16) 0.74 (0.52) 0.02 (0.01)
II.
Assets Investments -Gross Diminution on Investments Others
III. Expenses Salaries/fees (Include ESOP cost)* Others Interest Paid IV. Income Others V. Other Transactions Dividend paid Reimbursement to companies Reimbursement from companies Purchase of Investments Sale of Investment Purchase of Fixed Assets Sale of Fixed Assets
Its grt 2b 25
65
Schedules Forming Part of the Consolidated Balance Sheet and Profit and Loss Account (Contd.)
D. Material transactions with related parties: ` in crore Items / Related Party Associates Investing Party of the subsidiary Enterprises Key over which Management relatives personnel of Key Management Personnel have control/ significant influence Relatives of Key Management Personnel Total
I. Liabilities: Other liabilities Old Mutual Life Assurance Company (South Africa) Limited Aero Agencies Limited Kotak Commodity Services Limited Infina Finance Private Limited Others II. Assets: Investments ACE Derivatives and Commodity Exchange Limited Phoenix ARC Private Limited Others Diminution on investments Kotak Mahindra Asset Reconstruction Company Limited Others Kotak Commodity Services Limited Old Mutual Plc ACE Derivatives and Commodity Exchange Limited Infina Finance Private Limited Others III. Expenses: Other liabilities Mr. Uday Kotak* Mr. C. Jayaram* Mr. Dipak Gupta* 20.17 (25.39) 0.21 (0.25)
0.81 (0.80) 0.04 (0.02) 0.19 (0.32)
0.01 (—)
0.81 (0.80) 0.04 (0.02) 0.19 (0.32) 20.17 (25.39) 0.22 (0.25)
51.66 (25.67) 51.45 (51.45) 4.76 (4.78)
51.66 (25.67) 51.45 (51.45) 4.76 (4.78)
— (0.02) 0.24 (0.11) — (0.03) 0.03 (1.15) 0.33 (1.73) 0.01 (0.04)
— (0.02) 0.24 (0.11) — (0.03) 0.03 (1.15) 0.33 (1.73) 0.01 (0.04)
# (—)
1.78 (1.13) 2.73 (2.75) 2.84 (2.81)
1.78 (1.13) 2.73 (2.75) 2.84 (2.81)
66
Kotak Mahindra Bank Limited Annual Report 2010-11
Its grt 2b 25
Financial Highlights
Consolidated Financial Statements Accounting Policies & Notes
Bank Reports & Statements
Schedules Forming Part of the Consolidated Balance Sheet and Profit and Loss Account (Contd.)
` in crore Items / Related Party Associates Investing Party of the subsidiary Enterprises Key over which Management relatives personnel of Key Management Personnel have control/ significant influence Relatives of Key Management Personnel Total
Interest Paid Infina Finance Private Limited Phoenix ARC Private Limited Others Others Aero Agencies Limited Kotak and Company Limited Matrix Business Services India Private Limited Others IV. Income: Others Fee Income Phoenix ARC Private Limited Kotak Commodity Services Limited Others Premium Income ACE Derivatives and Commodity Exchange Limited Kotak Commodity Services Limited Others Brokerage Income Infina Finance Private Limited Others 1.84 (0.68) # (—) 0.01 (—) # (—) Its grt 2b 25 1.84 (0.68) 0.01 (—) # (—) 0.01 (—) # (0.01) 0.01 (—) # (0.01) # (—) # (—) 2.34 (—) 1.84 (1.41) — (0.01) # (—) 2.34 (—) 1.84 (1.41) # (0.01) 3.53 (6.87) 0.45 (0.41) 1.59 (0.70) — (0.01) 0.08 (—) 3.53 (6.87) 0.45 (0.41) 1.59 (0.70) 0.08 (0.01) 35.07 (28.23) 5.43 (3.82) 2.20 (0.08) 4.54 (1.35) 1.60 (0.35) 0.04 (0.03) 35.07 (28.23) 5.43 (3.82) 8.38 (1.81)
67
Schedules Forming Part of the Consolidated Balance Sheet and Profit and Loss Account (Contd.)
` in crore Items / Related Party Associates Investing Party of the subsidiary Enterprises Key over which Management relatives personnel of Key Management Personnel have control/ significant influence Relatives of Key Management Personnel Total
V. Other Transactions: Dividend Paid Mr. Uday Kotak Mr. C Jayaram Mr. Dipak Gupta Ms. Pallavi Kotak Ms. Indira Kotak Others Reimbursements made Infina Finance Private Limited Kotak Commodity Services Limited Others Reimbursements received Old Mutual Life Assurance Company (South Africa) Limited Kotak Commodity Services Limited ACE Derivatives and Commodity Exchange Limited Others Purchase of Investments Phoenix ARC Private Limited Komaf Financial services Limited Sale of Investment Infina Finance Private Limited Komaf Financial services Limited Purchase of Fixed Assets Kotak Commodity Services Limited 0.02 (—) 0.01 (0.02)
14.16 (12.49) 0.03 (0.02) 0.02 (0.02) 0.02 (0.02) 0.05 (0.05) 0.01 (0.01) 0.02 (—) # (0.06)
14.16 (12.49) 0.03 (0.02) 0.02 (0.02) 0.02 (0.02) 0.05 (0.05) 0.01 (0.01) 0.02 (—) # (0.06) 0.01 (0.02)
0.08 (—) 1.52 (1.33) 3.69 (1.03) 0.11 (0.09) 18.84 (30.77) 12.49 (8.94) — (7.55) — (52.87)
0.08 (—) 1.52 (1.33) 3.69 (1.03) 0.11 (0.10) 18.84 (30.77) 12.49 (8.94) — (7.55) — (52.87) 0.02 (—)
— (0.01)
68
Kotak Mahindra Bank Limited Annual Report 2010-11
Its grt 2b 25
Financial Highlights
Consolidated Financial Statements Accounting Policies & Notes
Bank Reports & Statements
Schedules Forming Part of the Consolidated Balance Sheet and Profit and Loss Account (Contd.)
` in crore Items / Related Party Associates Investing Party of the subsidiary Enterprises Key over which Management relatives personnel of Key Management Personnel have control/ significant influence Relatives of Key Management Personnel Total
Sale of Fixed Assets ACE Derivatives and Commodity Exchange Limited * includes incentive paid during the year E. Maximum balance outstanding ` in crore Items / Related Party Associates Investing Party of the subsidiary Enterprises over which relatives of Key Management Personnel have control/ significant influence Key Management personnel Relatives of Key Management Personnel 0.23 (0.18) 0.23 (0.18)
I.
Liabilities Deposits Other Liabilities 3,259.23 (3,390.73) 25.64 (25.64) 0.81 (0.80) 26.79 (75.76) 0.34 (0.34) 64.69 (18.93) 0.81 (0.81)
II.
Assets Investments-Gross Diminution on Investments Others 107.88 (81.90) — (0.02) 2.92 (2.91) 0.03 (0.03) 0.24 (0.11)
# In the above table denotes amounts less than ` 50,000.00 Note: Figures of previous year are given in bracket. 24. Figures for the previous year have been regrouped / reclassified wherever necessary to conform to current year’s presentation. For and on behalf of the Board of Directors Dr. Shankar Acharya Chairman Dipak Gupta Executive Director Jaimin Bhatt Group Chief Financial Officer Bina Chandarana Company Secretary Uday Kotak Executive Vice Chairman and Managing Director
Mumbai, 5th May 2011
Its grt 2b 25
69
Financial Information of Subsidiaries for the year ended 31st March 2011 ` in Lakhs
Kotak Mahindra Capital Company Limited Limited 160.00 48,523.04 48,934.65 51,552.53 2,617.88 843,196.70 79,214.82 4,072.37 376.63 18,776.77 16,448.04 94.57 830.67 10.88 884,587.24 104,648.06 9,909.84 3,301.34 37,609.68 26,003.87 2,830.71 0.09 16,438.40 296.98 41,390.54 25,433.24 5,837.47 2,924.71 18,832.91 9,555.83 2,736.14 0.09 15,607.73 286.10 43.40 65.66 22.26 (9,638.48) 25,128.21 3,857.47 2,919.70 17,216.94 8,855.05 2,729.15 15,148.53 281.10 (366.60) 411.61 51,029.02 305.03 1,980.00 5.01 1,615.97 700.78 6.99 0.09 459.20 5.00 410.00 1,200.00 (119.43) 1,080.57 1,114.36 33.79 Limited 443.38 (188.75) 254.63 365.99 111.36 Insurance Company Limited Limited Limited Ltd Life Limited Management Company Limited Limited Fund Limited Services Limited Fund Ltd Services Old Mutual Investments Asset Trustee (International) (UK) Inc. Opportunities Advisors Trusteeship Brokerage Pension Financial Mahindra Mahindra Mahindra Mahindra Mahindra Mahindra Mahindra, Investment Investment Mahindra Forex Mahindra Mahindra Limited Kotak Kotak Kotak Kotak Kotak Kotak Kotak Kotak Global Kotak Kotak Kotak Kotak Kotak
70
9,960.62 15,530.76 7,022.77 1,833.91 5,188.86 10,247.45 2,399.87 1,062.00 668.10 4,605.42 918.54 (380.58) 920.60 406.03 322.04 122.39 367.02 (162.23) 10,247.45 3,320.47 1,468.03 990.14 4,727.81 1,285.56 (542.81) 362,140.45 12,528.39 10,811.06 1,083.51 5,624.02 6,663.01 1,091.40 808,834.10 5,543.21 2,500.00 987.35 34,446.25 31.28 14,543.93 9,609.82 4,922.24 1,650.83 3,271.41 138.40 109.69 36.82 72.87 57.45 (45.53) (45.53) 1,050.11 3.90 (57.25) (57.25) 782.67 (172.72) (172.72) 8,963.47 Nil Nil Nil Nil 693.00 300.42 Nil Nil Nil Nil Nil Nil Nil Nil Nil
Particulars
Kotak
Mahindra
Securities
Prime
Limited
Capital
349.52
Reserves
153,308.04
169,234.91
Total Networth
153,657.56
169,394.91
Total Assets
1,191,861.65
283,703.52
Total Liabilites
1,038,204.09
114,308.61
Investments
(excluding investment
in subsidiaries)
32,358.61
31,282.61
Turnover
136,476.08
73,755.35
Kotak Mahindra Bank Limited Annual Report 2010-11
Dr. Shankar Acharya Chairman Dipak Gupta Executive Director Bina Chandarana Company Secretary Uday Kotak Executive Vice Chairman and Managing Director Jaimin Bhatt Group Chief Financial Officer
Profit before taxation
48,188.43
27,157.26
Provision for taxation
16,402.16
Profit after taxation
31,786.27
18,193.79
Proposed Dividend
(Equity)
Nil
(1)
Total liabilities include current liabilities and provision and exclude capital and reserves.
(2)
Turnover is the total income reported by each of the entities in the financial statements.
(3)
Investments include investments and Stock in Trade reported by the above entities and also include investments held to cover policy holders’ liabilities and unit linked liabilities.
(4)
Dividend excludes corporate dividend tax.
(5)
Networth does not include Preference Share capital. The same is included in total liabilities.
(6)
The figures in respect of Kotak Mahindra, Inc., Kotak Mahindra (UK) Limited, Kotak Mahindra (International) Limited, Global Investment opportunities Fund Limited and Kotak Mahindra Financial Services Limited are based on the accounts prepared under Indian Accounting Standards.
(7)
The figures in respect of Kotak Mahindra Financial Services Ltd are for the period from 17th November, 2009 to 31st March 2011.
Mumbai, 5th May 2011
Its grt 2b 25
Financial Highlights
Consolidated Financial Statements Basel II (Pillar 3) Disclosures
Bank Reports & Statements
Basel II (Pillar 3) Disclosures
1. Scope of Application Pillar 3 disclosures apply to Kotak Mahindra Bank Limited (KMBL) and its consolidated entities for regulatory purposes, wherein KMBL is the controlling entity in the group. Basis of Consolidation for capital adequacy The consolidated capital adequacy is based on consolidated financial statements of Kotak Mahindra Bank and its subsidiaries, prepared in accordance with guidelines for consolidated accounting and other quantitative methods vide circular DBOD.No.BP.BC.72/21.04.018/ 2001-02 dated 25th February 2003 issued by Reserve Bank of India (RBI). The capital charge is computed as per RBI guidelines for implementation of the New Capital Adequacy Framework (Basel II) released in April 2007. In accordance with the guidelines issued by RBI, the insurance subsidiary has been excluded from consolidation for the purpose of capital adequacy. The entities which carry on activities of financial nature are considered for consolidation for capital adequacy purpose as stated in the scope for preparing consolidated prudential reports laid down in RBI guidelines. The Bank consolidates all subsidiaries as defined in Accounting Standard (AS) -21 Consolidated Financial Statements on a line by line basis by adding together like items of assets, liabilities, income and expenses. Further, Bank’s investments in Associates are consolidated using the equity method of accounting as defined by Accounting Standard – 23 Accounting for Investments in Associates in Consolidated Financial Statements. Kotak Mahindra Bank Limited (KMBL) and its subsidiaries/ associates which have been consolidated, constitute the “Group”. The list of subsidiaries/ associates consolidated as per AS 21 alongwith their treatment in consolidated capital adequacy computation is as under: Name of the Subsidiary Kotak Mahindra Prime Limited Kotak Securities Limited Kotak Mahindra Capital Company Limited Kotak Mahindra Old Mutual Life Insurance Limited Country of Origin India India India India Activity Non Banking Finance Company Securities Broking Investment Banking Life Insurance Status of consolidation Fully consolidated Fully consolidated Fully consolidated Fully consolidated for financial reporting but not for capital adequacy. Investment deducted from regulatory capital for capital adequacy Fully consolidated Fully consolidated Fully consolidated Fully consolidated Fully consolidated Fully consolidated Fully consolidated Fully consolidated
Kotak Mahindra Investments Limited Kotak Mahindra Asset Management Company Limited Kotak Mahindra Trustee Company Limited Kotak Mahindra (International) Limited Kotak Mahindra (UK) Limited Kotak Mahindra, Inc. Global Investments Opportunities Fund Limited (GIOFL)* Kotak Investment Advisors Limited
India India India Mauritius U.K USA Mauritius India
Non Banking Finance Company Asset Management Company – Mutual Funds Trustee of mutual funds Brokerage and advisory services Brokerage and advisory services Brokerage and advisory services Investment company Asset manager of venture capital, private equity and similar funds Trustee of venture capital, private equity and similar funds Foreign exchange brokerage services Pension fund management Advising on financial products for Middle East Non Banking Finance Company
Kotak Mahindra Trusteeship Services Limited Kotak Forex Brokerage Limited Kotak Mahindra Pension Fund Limited Kotak Mahindra Financial Services Limited Infina Finance Private Limited
India India India Dubai India
Fully consolidated Fully consolidated Fully consolidated Fully consolidated Consolidated by equity method Its grt 2b 25
71
Its grt 2b 25
Financial Highlights
Consolidated Financial Statements Basel II (Pillar 3) Disclosures
Bank Reports & Statements
Basel II (Pillar 3) Disclosures
1. Scope of Application Pillar 3 disclosures apply to Kotak Mahindra Bank Limited (KMBL) and its consolidated entities for regulatory purposes, wherein KMBL is the controlling entity in the group. Basis of Consolidation for capital adequacy The consolidated capital adequacy is based on consolidated financial statements of Kotak Mahindra Bank and its subsidiaries, prepared in accordance with guidelines for consolidated accounting and other quantitative methods vide circular DBOD.No.BP.BC.72/21.04.018/ 2001-02 dated 25th February 2003 issued by Reserve Bank of India (RBI). The capital charge is computed as per RBI guidelines for implementation of the New Capital Adequacy Framework (Basel II) released in April 2007. In accordance with the guidelines issued by RBI, the insurance subsidiary has been excluded from consolidation for the purpose of capital adequacy. The entities which carry on activities of financial nature are considered for consolidation for capital adequacy purpose as stated in the scope for preparing consolidated prudential reports laid down in RBI guidelines. The Bank consolidates all subsidiaries as defined in Accounting Standard (AS) -21 Consolidated Financial Statements on a line by line basis by adding together like items of assets, liabilities, income and expenses. Further, Bank’s investments in Associates are consolidated using the equity method of accounting as defined by Accounting Standard – 23 Accounting for Investments in Associates in Consolidated Financial Statements. Kotak Mahindra Bank Limited (KMBL) and its subsidiaries/ associates which have been consolidated, constitute the “Group”. The list of subsidiaries/ associates consolidated as per AS 21 alongwith their treatment in consolidated capital adequacy computation is as under: Name of the Subsidiary Kotak Mahindra Prime Limited Kotak Securities Limited Kotak Mahindra Capital Company Limited Kotak Mahindra Old Mutual Life Insurance Limited Country of Origin India India India India Activity Non Banking Finance Company Securities Broking Investment Banking Life Insurance Status of consolidation Fully consolidated Fully consolidated Fully consolidated Fully consolidated for financial reporting but not for capital adequacy. Investment deducted from regulatory capital for capital adequacy Fully consolidated Fully consolidated Fully consolidated Fully consolidated Fully consolidated Fully consolidated Fully consolidated Fully consolidated
Kotak Mahindra Investments Limited Kotak Mahindra Asset Management Company Limited Kotak Mahindra Trustee Company Limited Kotak Mahindra (International) Limited Kotak Mahindra (UK) Limited Kotak Mahindra, Inc. Global Investments Opportunities Fund Limited (GIOFL)* Kotak Investment Advisors Limited
India India India Mauritius U.K USA Mauritius India
Non Banking Finance Company Asset Management Company – Mutual Funds Trustee of mutual funds Brokerage and advisory services Brokerage and advisory services Brokerage and advisory services Investment company Asset manager of venture capital, private equity and similar funds Trustee of venture capital, private equity and similar funds Foreign exchange brokerage services Pension fund management Advising on financial products for Middle East Non Banking Finance Company
Kotak Mahindra Trusteeship Services Limited Kotak Forex Brokerage Limited Kotak Mahindra Pension Fund Limited Kotak Mahindra Financial Services Limited Infina Finance Private Limited
India India India Dubai India
Fully consolidated Fully consolidated Fully consolidated Fully consolidated Consolidated by equity method Its grt 2b 25
71
Name of the Subsidiary Kotak Mahindra Asset Reconstruction Company Limited ** Phoenix ARC Private Limited ACE Derivatives and Commodity Exchange Limited (formerly known as Ahmedabad Commodity Exchange Limited) Matrix Business Services India Private Limited
Country of Origin India
Activity Not operational
Status of consolidation The company is not operational and Other than temporary diminution is provided for Consolidated by equity method Consolidated by equity method
India India
Securitisation and asset Reconstruction Commodity Exchange
India
Business service provider
Consolidated by equity method for financial reporting but not for capital adequacy purpose
*
GIOFL is a collective investment scheme set up as a fund in Mauritius with the status of a limited company under the Mauritius Companies Act. GIOFL has a class structure wherein there are different classes of redeemable participating shares. Each class of participating shares has its own Balance Sheet and Profit and Loss Account. The Profit / Loss of each such class belongs to the participating shareholders of that class. The management shareholder is not entitled to any beneficial interest in the profit / loss of various classes nor is required to make good any shortfall. In substance there are no direct or indirect economic benefits received by the management shareholders. The substance over form must prevail. The Groups investment is only in Management Shares. Accordingly, GIOFL is consolidated in respect of management shares of the entity having regard to substance over form of the entity. Effective 19th March 2011 Kotak Mahindra Asset Reconstruction Company Limited has been dissolved under Section 560 of the Companies Act, 1956. Capital Deficiencies As at 31st March 2011 there is no deficiency of capital in any of the subsidiaries of the Bank. The Bank maintains an oversight over its subsidiaries through their respective Boards and the Management Committee of the Bank is regularly updated.
** a.
b.
Investment in insurance subsidiary The Group’s investment in insurance subsidiary is deducted from regulatory capital for capital adequacy purpose under Basel II as given below: ` in crore Name of the Entity Kotak Mahindra Old Mutual Life Insurance Limited % shareholding of the Group 74% Investment value 377.62
The quantitative impact on regulatory capital of using risk weights investments versus using the deduction method is given below: ` in crore Method Deduction method Capital at 10% based on risk weighted assets 2. Capital Structure The capital adequacy norms issued by RBI classify capital funds into Tier-1 and Tier-2 capital. Tier-1 capital includes paid-up equity apital, statutory reserves, other disclosed free reserves, capital reserves and Elements of Tier-2 capital include investment reserve, general provision and loss reserve, eligible upper Tier-2 instruments and subordinate debt instruments (lower Tier -2 bonds). Group has issued debt instruments that form part of Tier-2 capital. The terms and conditions that are applicable for these instruments comply with the stipulated regulatory requirements Details of Upper Tier 2 and Lower Tier 2 Capital KMBL has issued debt instruments that form a part of Tier-2 capital. The terms and conditions that are applicable for these instruments comply with the stipulated regulatory requirements. The upper Tier-2 bonds are cumulative and have an original maturity of 15 years with call option after 10 years. The interest on upper Tier-2 bonds is payable either annually or semi-annually. Some of the upper Tier-2 debt instruments have a step-up clause on interest payment ranging up to 50 bps. The lower Tier-2 Subordinated bonds issued by Bank are cumulative and have an original maturity between 5 to 15 years. The lower Tier-2 Subordinated bonds issued by a subsidiary have an original maturity between 6 to 10 years and interest on these lower Tier-2 capital instruments is payable annually. Quantitative Impact 377.62 37.76
72
Kotak Mahindra Bank Limited Annual Report 2010-11
Its grt 2b 25
Financial Highlights
Consolidated Financial Statements Basel II (Pillar 3) Disclosures
Bank Reports & Statements
a.
Amount of Tier I and Tier II Capital ` in crore Amount (a) Tier I Capital Paid-up share capital Reserves and Surplus excluding translation and investment reserve Deductions: Investment in paid-up capital of subsidiaries/ associates (50%) Intangible assets other than Goodwill Goodwill Net Tier I Capital (b) Total eligible Tier II Capital (i) Debt instruments eligible for inclusion in Upper Tier II Capital Total amount outstanding Of which raised during the current financial year Amount eligible to be reckoned as capital (ii) Subordinated debt eligible for inclusion in Tier II capital Total amount outstanding Of which raised during the current financial year Amount eligible to be reckoned as capital (iii) (iv) General Provisions and loss reserves Investment reserve Deductions: Investment in paid-up capital of subsidiaries/ associates (50%) Net Tier II Capital 190.64 817.88 ` in crore Amount Tier I Capital Tier II Capital Total eligible Capital 10,498.66 817.88 11,316.54 591.80 — 472.98 182.80 16.06 336.68 — 336.68 190.64 322.24 3.42 10,498.66 368.44 10,646.52
b.
Total eligible capital as at 31st March 2011
3.
Capital Adequacy The Group has made considerable progress in capturing data and implementing systems with regards to computing capital adequacy as per the standardised approach of Basel II for credit risk. Efforts are on to automate the process of capital computation as per Basel II and application system is being implemented to that effect. In accordance with the guidelines of the Reserve Bank of India, the Group has adopted standardised approach for credit risk, basic indicator approach for operational risk and standardised duration approach for market risk for computing capital adequacy. The legal minimum as per license conditions stipulates that the capital base of the bank (Tier I + Tier II) must correspond to at least 10 percent of its risk-weighted assets. The Bank supplements the Capital Adequacy computation by performing stress tests, based on Scenarios approved by its Risk Management Committee, to assess how its businesses perform under Stress Conditions. These tests help the Bank to design appropriate risk response to meet stressed conditions. Approach to Capital Adequacy Assessment to support business activities The diversified business activities require the Group to identify, measure, aggregate and manage risks effectively and to allocate capital among its businesses appropriately. The risk management framework lays emphasis on the Group’s risk philosophy, proper organisational structure, risk and reward balance and is supported by dedicated monitoring and risk measuring mechanism. The Key risks the Group is exposed to are Credit Risk, Market Risk, Interest Rate Risk, Liquidity Risk and Operational risk. Its grt 2b 25
73
Basic principles and risk and capital management The Bank undertakes sound risk management in achieving its purpose, objectives and strategies. The Board of Directors approves risk appetite for the Bank. The approved risk appetite sets the boundaries for risk taking and translates into business management limits and policies. Performance against approved Risk Appetite is reviewed periodically by the Risk Management Committee and the Board. Development of the risk strategy and risk appetite is an ongoing process and is based on past experience and future plans. The risk strategy is consistent with the Board’s overall risk tolerance, management’s expertise in each business unit and the total financial amount that the Bank is prepared to place at risk of loss (capital at risk). The Management Committee provides overall risk management supervision for the consolidated Group as a whole. Various risk committees, namely Asset Liability Management Committee (ALCO), Credit Committee, First Tier Audit Committee, Risk Management Committee, Information Security Committee etc, review specific risk areas and supervise the activities of enterprise wide risk management. Other capital adequacy assessment aspects:
?
Capital adequacy ratio (CAR) of the Bank is maintained at levels well over the 10% required in accordance with the license conditions. The Bank has put in place the ICAAP Policy and the same is being reviewed on a yearly basis which enables the Bank to maintain capital in line with the risks undertaken.
?
CAR has been worked out based on Basel-I and Basel-II guidelines (parallel run) and CAR is above the regulatory minimum level of 10% Capital requirements for various risk categories as at 31st March 2011 ` in crore Items (a) Capital requirements for credit risk Portfolios subject to standardised approach Securitisation exposures (b) Capital requirements for market risk Using standardised duration approach Interest rate risk Foreign exchange risk (including gold) Equity position risk (c) Capital requirements for operational risk Measured using basic indicator approach Total capital required at 10% Total capital funds of the Group Total risk weighted assets Capital adequacy ratio Computed as per Basel II guidelines 4. Credit Risk Credit Risk is defined as the possibility of losses associated with diminution in the credit quality of borrowers or counterparties. In a bank’s portfolio, losses stem from outright default due to inability or unwillingness of a customer or counterparty to meet commitments in relation to lending, trading, settlement and other financial transactions. Credit risk is managed through a framework which sets out policies and procedures covering the measurement and management of credit risk. The Bank’s credit policies and process notes articulate the credit risk strategy of the Bank and thereby the approach for credit origination, approval and maintenance. These policies define the Bank’s overall credit sanction criteria, including the general terms and conditions. The policies / processes generally address such areas as target markets / customer segmentation, qualitativequantitative assessment parameters, portfolio mix, prudential exposure ceilings, concentration limits, structure of limits, approval authorities, exception reporting system, prudential accounting and provisioning norms, etc. They take cognisance of prudent and prevalent banking practices, relevant regulatory requirements, nature and complexity of the Bank’s activities, market dynamics, etc. 627.67 5,813.89 11,316.54 58,138.86 19.46% 205.12 20.00 354.11 4,605.17 1.82 Amount
74
Kotak Mahindra Bank Limited Annual Report 2010-11
Its grt 2b 25
Financial Highlights
Consolidated Financial Statements Basel II (Pillar 3) Disclosures
Bank Reports & Statements
The Bank’s credit exposure is primarily categorised into retail and wholesale borrowers. Retail exposure is mostly term loans and asset backed other than personal loans. Wholesale borrowers are internally categorised into emerging corporate, corporate and financial institutional group. While retail credit lending is largely based on predefined parameters and is mostly decentralised, credit appraisal is undertaken by an independent dedicated credit risk team for wholesale exposure. Credit risk management processes The Bank has made risk management a part of the management and governance of the Bank with a greater focus on risks and how those relate to the capital the Bank is holding. The Bank expects to achieve its earnings objectives and to satisfy its customers’ needs while maintaining a sound portfolio. Credit exposures are managed through target market identification, appropriate credit approval processes, post-disbursement monitoring and remedial management procedures. Proactive managing of risks on its portfolio has helped the Bank foresee and restrict the impact of the global turmoil on its credit operations. Periodic portfolio review, clear identification of early warning signals and prompt action on the legal and recovery front ensure that defaults are minimal. Timely and in-depth research on industries and sectors ensure that funds are directed to positive outlook sectors. Adverse developments in sectors are tracked to facilitate timely decisions to exit Companies in negative outlook sectors. The above processes ensure that the Bank maintains a well diversified portfolio mitigating any risks on account of sector, region or borrower concentration. The bank has also put in place a rating based approval matrix for sanctioning wholesale bank loans. Nature of reporting and measurement systems The Bank has an internal rating model which is an integral part of every lending decision and is capable of rating large and emerging corporates, traders, brokers, NBFCs and services. The rating model is being further enhanced to give required inputs to estimate Probability of Default (PDs) and Loss Given Default (LGDs) based on the Bank’s own experience. On the retail side, the Bank has initiated implementation of a comprehensive internal credit rating model for the risk assessment of retail loan exposures. Application scorecards for major businesses in retail loans are ready. The parameters used for these scorecards and their individual weight-ages have been decided based on past experience of the Bank. These parameters are both qualitative and quantitative in nature. Credit rating frameworks using these application scorecards are at different stages of implementation in different businesses in retail loans. The final output of the rating will help the Bank to assess the expected probable loss number attached to each rating category. The internal rating systems are being further developed and validated as part of the Bank’s endeavor to move towards advanced approaches of Basel II. The Bank has also implemented its stress testing framework for the Corporate as well as Retail portfolio. The Bank also uses scenario analysis for stress testing. Loss analysis and expected loss forecasting on a static pool basis is continuously being refined to meet the demand of the current volatile market. The Bank complies with the norms on exposure stipulated by RBI for both single borrower as well as borrower group at the consolidated level. Limits have been set by the risk management group as a percentage of the Bank’s consolidated capital funds and are regularly monitored. The Bank monitors the level of credit risk (Low/Moderate/High/Very High) and direction of change in credit risk (increasing / decreasing/stable) at the portfolio level on the basis of the following parameters which also indicate level of concentration risk the portfolio might be exposed to: ? Exposure to Top 20 accounts as a percentage of Credit Risk Exposure (CRE). ? Percentage of term loans with residual maturity more than 3 years to total loans and advance. ? Percentage of unsecured loans to total loan and advances. ? Number of single borrower exposures exceeding 15% of capital funds. ? Number of group exposures exceeding 40% of capital funds. ? Percentage of credit in low risk grades to total credit exposure ? Rating wise distribution of borrowers and ? Exposure migrating from investment grade to non-investment grade During the year, the Bank maintained a well diversified portfolio. As part of the ICAAP, the Bank periodically reports the ICAAP outcomes in terms of the risk appetite statements and assessment of credit concentration risk and underestimation of credit risk under the standardised approach to the Board. Credit Risk Management Principles The Bank measures and manages its credit risk based on the following principles: ? The extension and renewal of any credit facility to a particular borrower requires credit approval at the appropriate authority level. The rating tool, which is already in place, not only indicates the concerned sanctioning authorities but also helps the authorities in such decisions. ? The approval of all limits to counterparties should be in line with the corporate credit policy and collateral risk management policy of the Bank. Such approval should generally be within the Bank’s portfolio guidelines and credit strategies. ? The credit worthiness of borrowers is regularly reviewed and monitored. Customers with emerging credit problems are identified early and classified accordingly. Remedial action is initiated promptly to minimise the potential loss to the Bank.
Its grt 2b 25
75
Definition and classification of non-performing assets (NPA) The Bank classifies its advances into performing and non-performing advances in accordance with extant RBI guidelines. A NPA is defined as a loan or an advance where; ? interest and/ or installment of principal remain overdue for a period of more than 90 days in respect of a term loan; ? the account remains ‘out of order’ – in respect of an overdraft/cash credit (OD/CC); and ? the bill remains overdue for a period of more than 90 days in the case of bills purchased and discounted. Out of Order An account should be treated as ‘out of order’ if the outstanding balance remains continuously in excess of the sanctioned limit/ drawing power for a continuous period of 90 days. In cases where the outstanding balance in the principal operating account is less than the sanctioned limit/drawing power, but there are no credits continuously for 90 days as on the date of balance sheet or credits are not enough to cover the interest debited during the same period, these accounts should be treated as ‘out of order’. Overdue Any amount due to the Bank under any credit facility is ‘overdue’ if it is not paid on the due date fixed by the Bank. Further, NPAs are classified into sub-standard, doubtful and loss assets based on the criteria stipulated by RBI. A sub-standard asset is one, which has remained NPA for a period less than or equal to 12 months. An asset is classified as doubtful if it has remained in the sub-standard category for a period exceeding 12 months. A loss asset is one where loss has been identified by the Bank or internal or external auditors or during RBI inspection but the amount has not been written off fully. The loans of subsidiaries have been classified as non-performing in accordance with the guidelines prescribed by their respective regulators. Total credit risk exposures as at 31st March 2011 ` in crore Overall credit exposure Total gross credit exposures Includes all entities considered for Basel II capital adequacy computation Credit exposure include term loans, working capital facilities (i.e. funded facilities like cash credit, demand loans, temporary limits and non-funded facilities like letter of credits, acceptances and guarantees). Geographic distribution of exposures as at 31st March 2011 ` in crore Exposures Domestic Overseas Total Includes all entities considered for Basel II capital adequacy computation Industry-wise distribution of exposures ` in crore Industry Auto loans Personal loans Home loans/Loan against property Credit cards Other retails loans Iron and steel Engineering Chemical, dyes, paints etc Construction Automobiles Infrastructure NBFC’s Other industries (i) Total Includes all entities considered for Basel II capital adequacy computation Fund based 14,046.48 1,790.45 6,922.29 164.22 4,906.60 162.10 266.28 535.18 2,261.74 1,042.20 2,697.28 388.43 6,520.52 41,703.77 Non-fund based — — — — — 491.62 1,509.65 523.32 179.32 587.71 1,358.45 579.47 2,274.57 7,504.11 Total 14,046.48 1,790.45 6,922.29 164.22 4,906.60 653.72 1,775.93 1,058.50 2,441.06 1,629.91 4,055.73 967.90 8,795.09 49,207.88 Fund based 41,703.77 — 41,703.77 Non-fund based 7,447.79 56.32 7,504.11 Total 49,151.56 56.32 49,207.88 Fund based 41,703.77 Non-fund based 7,504.11 Total 49,207.88
76
Kotak Mahindra Bank Limited Annual Report 2010-11
Its grt 2b 25
Financial Highlights
Consolidated Financial Statements Basel II (Pillar 3) Disclosures
Bank Reports & Statements
(i)
Other industries include entities from sectors such as cotton textiles, sugar, food processing, vegetable oils and vanaspati, paper and paper products, rubber and rubber products, cement, IT-related, gems and jewellery, capital markets, media publication etc. ` in crore
Residual contractual maturity break-down of assets as at 31st March 2011 Maturity Pattern Cash and balances with monetary authority 587.12 116.37 233.67 198.54 302.06 572.16 40.33 59.06 2,109.31 Balances with other banks 366.46 — — 0.25 — 2.59 — 0.09 369.39 Investments Advances Fixed Assets Other Assets
0 to 14 days 15 to 28 days 29 days to 3 months Over 3 months & upto 6 months Over 6 months & upto 1 year Over 1 year & upto 3 years Over 3 year & upto 5 years Over 5 years Total
6,451.92 1,488.42 1,256.74 1,065.47 2,486.24 3,305.29 361.96 1,138.42 17,554.46
2,626.24 1,833.47 3,744.41 3,850.40 5,656.10 15,083.68 3,547.78 4,894.74 41,236.82
— — — — — — — 453.63 453.63
216.78 13.86 215.57 12.14 1.47 15.30 33.29 1,246.23 1,754.64
Consolidated figures for Kotak Mahindra Bank Limited, Kotak Mahindra Prime Limited and Kotak Mahindra Investments Limited Amount of non-performing loans as at 31st March 2011 including NPAs acquired from other banks and NBFCs ` in crore Items Amount Gross NPA Substandard Doubtful 1 Doubtful 2 Doubtful 3 Loss Total NPA Ratio (%) Movement of NPAs Opening balance as at 1st April 2010 Additions Reductions Closing balance as at 31st March 2011 Includes all entities considered for Basel II capital adequacy computation Gross NPA ratio is computed as a ratio of gross non-performing loans to gross advances Net NPA ratio is computed as a ratio of net non-performing loans to net advances Movement of provisions for NPAs ` in crore Amount Opening balance as at 1st April 2010 Provisions made during the year Write-off / Write back of excess provisions Closing balance as at 31st March 2011 475.83 232.23 (238.75) 469.31 Its grt 2b 25 916.67 259.55 (464.24) 711.98 440.84 27.32 (225.49) 242.67 228.56 171.08 163.69 94.94 53.71 711.98 1.71% Net NPA 101.02 81.09 60.56 — — 242.67 0.59%
77
Amount of non-performing loans as at 31st March 2011 excluding NPAs acquired from other banks and NBFCs ` in crore Items Amount Gross NPA Substandard Doubtful 1 Doubtful 2 Doubtful 3 Loss Total NPA Ratio (%) Movement of NPAs (gross) Opening balance as at 1st April 2010 Additions Reductions Closing balance as at 31st March 2011 Gross NPA ratio is computed as a ratio of gross non-performing loans to gross advances Net NPA ratio is computed as a ratio of net non-performing loans to net advances Movement of provisions for NPAs ` in crore Amount Opening balance as at 1st April 2010 Provisions made during the year Write-off / write back of excess provisions Closing balance as at 31st March 2011 Amount of Non-performing investments (NPI) ` in crore Amount Gross NPI as at 31st March 2011 Amount of provisions held for NPI Net NPI as at 31st March 2011 Movement of provisions for depreciation on investments ` in crore Amount Opening balance as at 1st April 2010 Write off / Write back of provisions during the year* Closing balance as at 31st March 2011 *After considering appreciation in investments 5. Credit risk – portfolios subject to the standardised approach External Ratings In accordance with RBI Basel II guidelines, the Bank has identified the following External Credit Assessment Agencies (ECAI’s) as approved rating agencies: 6.29 (2.61) 3.68 3.68 3.68 — 308.98 197.26 (215.20) 291.04 646.81 244.77 (422.98) 468.60 337.83 47.51 (207.78) 177.56 215.37 125.47 73.79 0.26 53.71 468.60 1.13% Net NPA 94.33 52.39 30.84 — — 177.56 0.43%
78
Kotak Mahindra Bank Limited Annual Report 2010-11
Its grt 2b 25
Financial Highlights
Consolidated Financial Statements Basel II (Pillar 3) Disclosures
Bank Reports & Statements
a. b.
Domestic credit rating agencies: CRISIL, ICRA, CARE and FITCH India International rating agencies: S&P, FITCH and Moody’s
The Bank uses the external credit ratings to calculate risk weights for exposures on corporates. The issue/issuer ratings of the ECAI’s are considered for the borrowers and the risk weights are then derived on a case by case basis based on a variety of factors (Seniority, Maturity of rating, etc) based on RBI’s New Capital Adequacy Framework. Credit exposures by risk weights ` in crore Exposure category Below 100% risk weight 100% risk weight More than 100% risk weight TOTAL Fund based 16,005.04 13,533.76 11,886.76 41,425.56 Non-fund based 3,089.74 2,256.12 796.88 6,142.74 Total 19,094.78 15,789.88 12,683.64 47,568.30
Includes all entities considered for Basel II capital adequacy computation 6. Credit Risk Mitigation The Bank has put in place a comprehensive credit risk mitigation policy. The policy lists possible credit risk mitigation techniques and associated haircuts as envisaged in RBI guidelines. The objective of this Policy is to enable classification and valuation of credit risk mitigants in a manner that allows regulatory capital adjustment to reflect them. The Policy adopts the Comprehensive Approach, which allows full offset of collateral (after appropriate haircuts), wherever applicable against exposures, by effectively reducing the exposure amount by the value ascribed to the collateral. In the standardized capital computation process, the Bank has taken ` 1,639.58 crore of collateral benefit. 7. Securitisation a. Securitisation objectives and policies Securitisation of assets is undertaken with the following objectives: ? Meeting credit needs of borrowers – Due to various constraints such as single party and group exposure norms, paucity of capital, internal sectoral exposure norms, etc, at times the Bank is unable to meet the entire credit requirements of the borrowers. Securitisation helps the Bank to overcome such constraints and meet customer’s credit needs. ? Assistance in management of asset-liability mismatches – With traditional on Balance Sheet borrowing and lending, the maturity of assets tends be much longer than that of the liabilities. Securitisation effectively makes Bank’s assets more liquid providing scope to more flexibly manage maturity mismatches. ? Reduction of credit risk, interest rate and liquidity risk – Through Securitisation, the Bank can transfer credit, interest rate and liquidity risks to third parties. ? Freeing up of capital and Improvement in return on capital - Securitisation removes assets from the Bank’s Balance Sheet and hence frees up capital for other uses. It also improves return on capital. ? Contingency plan – Securitisation of retail asset portfolio is considered as an important element of the contingency funding plan of the Bank. Role played by the Group in the securitisation process: ? Structurer: The Bank scans the market to identify potential investors and structures the transaction to meet their requirements in compliance with the extant guidelines. ? Collection and paying agent: The SPV may appoint the concerned entity in the Bank as the collection and paying Agent. In such cases, the Bank collects the amounts due from the underlying obligors on the due dates and remits the same into the account of the SPV. b. Summary of Bank’s accounting policies for securitisation activities In terms of RBI guidelines Bank sells assets to SPV only on cash basis and the sale consideration is received not later than the transfer of the asset to the SPV. Any loss arising on account of the sale is accounted immediately and reflected in the profit and loss account for the period during which the sale is effected and any profit/premium arising on account of sale is amortised over the life of the securities issued or to be issued by the SPV. i) In case the securitised assets qualify for derecognition from the books of the Bank, the entire expenses incurred on the transaction e.g. legal fees, etc., is expensed at the time of the transaction and is not deferred. ii) Where the securitised assets do not qualify for derecognition the sale consideration received is treated as a secured borrowing. Rating of the securitisation transactions: The Bank uses the ratings provided by external credit rating agencies viz. CRISIL, FITCH (India), ICRA and CARE for the securitization of corporate loans and retail pools. Its grt 2b 25
c.
79
d.
Breakup of the exposure securitised by the Bank during the year and subject to securitization framework: A. Banking Book ` in crore S No. 1 Exposure type Total amount of exposures securitised Corporate Loans Auto Loans (Car and commercial vehicles) Mortgage Loans Total 2 3 Loss recognized during the period on securitisation Amount of assets intended to be securitised within a year Of which - Amount of assets originated within a year before securitisation 4 Unrecognised gain on securitisation Corporate Loans Auto Loans (Car and commercial vehicles) Mortgage Loans Includes all entities considered for Basel II capital adequacy computation 15.00 0.28 0.89 — 2,075.00 218.18 220.70 2,513.88 — — Amount
e.
Aggregate amount of securitisation exposures retained or purchased and outstanding as on 31st March 2011 is given below: ` in crore S No. 1 2 3 4 5 Exposure type Total amount of exposures retained Securities purchased Liquidity facility Credit commitments (cash collateral) Other commitments On Balance Sheet Amount — — — — — Off Balance Sheet Amount — — — — —
f.
Risk-weight wise and bucket wise details of the securitization exposures on the basis of book value ` in crore Exposure type Below 100% risk weight 100% risk weight More than 100% risk weight Deductions - Entirely from Tier I capital - Credit enhancing I/Os deducted from total capital - Credit enhancement (cash collateral) B. Trading Book — — — — — — Amount — — — Capital charge — — —
Breakup of the exposure securitised by the Bank during the year and subject to securitisation framework: Sr.No. 1. Type of Securitisation Aggregate amount of exposures securitised by the bank for which the Bank has retained some exposures and which is subject to the market risk approach Amount NIL
80
Kotak Mahindra Bank Limited Annual Report 2010-11
Its grt 2b 25
Financial Highlights
Consolidated Financial Statements Basel II (Pillar 3) Disclosures
Bank Reports & Statements
g.
Aggregate amount of securitisation exposures retained or purchased and outstanding as on 31st March 2011 is given below: ` in crore S No. 1 2 3 4 5 Exposure type Total amount of exposures retained Securities purchased Auto Loans (Car and commercial vehicles) Liquidity facility Credit commitments (cash collateral) Other commitments 69.82 — — — — — — — ` in crore Exposure type Below 100% risk weight 100% risk weight More than 100% risk weight Deductions Entirely from Tier I capital Credit enhancing I/Os deducted from total capital Credit enhancement (cash collateral) — — — — — — Amount 69.82 — — Capital charge 1.82 — — On Balance Sheet Amount — Off Balance Sheet Amount —
h.
Risk-weight wise and bucket wise details of the securitisation exposures on the basis of book value
Includes all entities considered for Basel II capital adequacy computation 8. Market Risk in Trading Book Market risk management policy Market risk is defined as the risk to earnings arising from the movement in market risk factors, namely interest rates, foreign exchange rates, credit spreads or equity prices. For regulatory capital purposes, the Bank calculates its market risk capital requirements according to the Standardised methodology. The objective of the risk management function is risk identification, measurement and reporting them to the management. The Bank has designed and implemented policies and procedures to ensure that market risk exposures are managed within the approved risk management framework. Embedded within these is a framework of management responsibilities. The Board oversees the market risk management process. The Bank’s risks are managed through a framework that related the Bank’s integrated risk management policy and structure of risk management to the Bank’s strategy and objectives. The risk management framework lays emphasis on the Groups risk philosophy, proper organizational structure, risk and reward balance and is supported by dedicated monitoring and risk measurement mechanism. This framework for market risk management ensures that appropriate controls, policies and senior management oversight form the basis of the Bank’s approach to market risk management. The market risk for the Bank and each of its major subsidiaries is managed in accordance with the investment policy, which is approved by the respective Boards. These policies ensure that transactions in capital and foreign exchange markets and derivatives are conducted in accordance with sound and acceptable business practices and are as per the extant regulatory guidelines, laws governing transactions in financial markets and the financial environment. The policies are reviewed regularly to incorporate changes in regulatory guidelines and business and economic environment. Risk management objectives The o o o o o o o Bank manages its risk with the objectives listed below: Achieving risk return balance Managing and optimising interest rate risk in banking and trading book Ensuring that mismatches between rate sensitive assets and liabilities is kept within limits Managing and optimising currency and liquidity risk Proper recognition, classification, measurement and accounting of investments Compliance with regulatory guidelines Oversight over the operation and execution of market transactions Its grt 2b 25
81
Structure and organisation of the market risk management function The Bank’s risk management architecture is overseen by the Board of Directors and appropriate policies to manage risks are approved by the Board. The Board is involved in defining risk appetite and capital at risk for the Bank, at an integrated level, covering all activities of the Bank. The Board has also delegated to the Group Head - Risk, the responsibility for middle office and risk management. Risk Management department is entirely independent of Treasury Department. Development of the risk strategy and risk appetite is an ongoing process and is based on past experience and future plans. The risk strategy is consistent with the Board’s overall risk tolerance, management’s expertise in each business unit and the total financial amount that the Bank is prepared to place at risk of loss (Capital at risk). The Bank uses a comprehensive range of quantitative tools and metrics for monitoring and managing risks. Some of these tools are common to a number of risk categories whereas the others are tailored to address the particular features of specific risk categories. Both with a view to bringing in risk sensitivity through policies and to duly meet the regulatory requirements, the Bank continually assesses the appropriateness and the reliability of the quantitative tools and metrics in the light of the changing risk environment. Value at Risk The Bank is computing the market risk capital charge for the trading book as per the standardised approach as per the regulator’s guidelines. To complement this, Bank also calculates value at risk on its portfolio. Value at risk is computed for each type of market risk i.e. interest rate, foreign currency, equity etc taking into effect the various correlations between the risk factors. The internal model is also capable of undertaking stress testing and back-testing. The Risk Management Committee is appraised of the capital that would have to be maintained under the Internal Models Approach. Stress Testing Losses beyond the set confidence level are not captured by the value at risk calculation. The Bank periodically stresses the portfolio to highlight the potential risks that may arise due to events that are rare but plausible. The Bank conducts various tests like the impact of shock to one risk factor, extreme events that may change various risk factors simultaneously and worst case scenario that captures the potential damaging shift in various market risk factors. The stress test results and the subsequent capital requirement is placed before the Board for their perusal. Liquidity Risk Effective Liquidity Risk Management ensures the Bank’s ability to meet all payment obligations when they become due in both normal and stressed environments. The Bank’s Board defines the Liquidity Risk Management Strategy of the Bank. The Asset Liability Management Committee (ALCO) is entrusted with the responsibility of setting tolerances for and closely overseeing the management of liquidity risk. The Balance Sheet Management Unit (BMU) in Treasury is responsible for the management of Liquidity Risk in accordance with the overall strategy and tolerances. Funding mismatches are a natural outcome of the Liquidity Transformation function of the Bank. The Bank has a framework for accurately projecting cash flows from on and off Balance Sheet items over different time horizons - to ensure that funding mismatches are within acceptable tolerances. The Bank monitors the immediate short term (3 month) liquidity mismatches using the Statement of Short Term Dynamic Liquidity Statement and the long-term structural mismatches using the Structural Liquidity Statement. The ALM team carries out comprehensive analysis of its asset and liability portfolios to track the non-contractual behavior of customers. These Behavioral Analyses are integral to planning for the Bank’s future funding requirements. The Bank has in place a comprehensive set of Early Warning Indicators (EWIs) designed to forewarn of impending liquidity stresses. These EWIs are defined in the Bank’s Board Approved Contingency Liquidity Plan (CLP). The overall Liquidity Risk level of the Bank is determined through the levels of the various individual EWIs. The CLP also sets out alternative actions to be taken at levels of increased Liquidity Risk. Special teams, which would potentially be activated in times of heightened liquidity stress, have been defined. The Basel Committee of Banking Supervisors (BCBS) issued its International Framework for Liquidity Risk, Measurement, Standards and Monitoring in December 2010. These guidelines include 2 minimum standards for funding liquidity - a short term liquidity metric {the Liquidity Coverage Ratio (LCR)} and a longer term liquidity metric {the Net Stable Funding Ratio (NSFR)}. These metrics are not yet regulatory standards in India. The Bank has proactively set tolerances for these metrics and reviews compliance regularly. Active management of intraday liquidity is another key element in the Bank’s Liquidity Risk Management structure. The Bank also conducts Liquidity Stress Testing on a periodic basis using different Bank-specific and Market-wide stress scenarios. These stress tests are conducted on a quarterly basis and the results are reviewed by top management. Hedging and risk mitigation The Bank has defined limits on the positions that can be taken and all the business groups are required to adhere to the same. The hedging transactions are periodically assessed for hedged effectiveness in accordance with the applicable guidelines.
82
Kotak Mahindra Bank Limited Annual Report 2010-11
Its grt 2b 25
Financial Highlights
Consolidated Financial Statements Basel II (Pillar 3) Disclosures
Bank Reports & Statements
Market risk capital charge ` in crore Risk category Interest rate risk Equity position risk Foreign exchange risk Total capital required Includes all entities considered for Basel II capital adequacy computation 9. Operational Risk Management (ORM) The Bank and the group subsidiaries have well defined operational risk management objectives, strategies and governance structures. The Bank has a comprehensive ORM Framework that covers all activities and governance structure that helps manage operational risk effectively. Through implementation of the Operational Risk Framework and related policies, businesses are able to adopt a structured approach to identify, assess and monitor Operational Risk exposures, design appropriate mitigation strategies, and provide timely and effective reporting to Risk Committee & the Board. The Operational risk framework is supported by policies and processes that help business manage operational risk within approved tolerances, on behalf of its stakeholders. On the basis of the Enterprise wide Risk Management policy, operational risk policies are prepared for the Bank. These policies outline the ORM governance structure, key risk assessment, risk monitoring and risk mitigating activities. The policy applies to all business lines within the Bank. Most Group entities, including the Bank, have Risk Management Committees to manage operational risks. Separate sub committees also exist in a few entities to screen all potential new mandates for profitability and to ensure that compliance, legal and reputational issues are addressed before accepting any mandate. Hence, depending upon the size of the group entity, the operational risk governance structure is adequate to manage material operational risks. Senior Management in all group entities is actively involved in the management of operational risk and implementation of the respective ORM Frameworks/policies. Some group entities have separate operational risk management department. Remaining entities manage operational risk through internal control departments that vary in sophistication depending upon the business needs. The internal control framework ensures that process related operational risks are minimised by way of regular monitoring and audits. The Group internal audit team, following RBI’s risk based audit methodology, and the Group compliance department provide sound platform for operational risk management along with risk management unit. The following are some of the key techniques applied by Bank and / or Group companies to manage operational risks ?
Capital charge 205.12 354.11 20.00 579.23
?
The Bank has built into its operational process segregation of duties, clear reporting structures, well defined processes, operating manuals, staff training, verification of high value transactions and strong audit trails to control and mitigate operational risks. New Product & activity notes prepared by business units are reviewed by all concerned departments including compliance, risk management and legal. All concerned departments coordinate and discuss key operational risk issues involving people, process, technology, external factors, etc. so as to minimise them or ensure adequate controls over them. In subsidiaries, internal controls unit reviews the product notes in consultation with the respective departments, including compliance and legal. The Operational risk team performs detailed risk analysis and root cause analyses on operational risk events, reported by business units, to identify inherent areas of risk and suggest suitable risk mitigating actions which are monitored for resolution. The Bank wide unusual event reporting and capture system forms the basis for this analysis. The Operational risk team also proactively scans information on external events occurring in the industry to ensure that the Bank can respond suitably to similar incidents. Bank has in place a ‘Risks and Controls Self Assessment’ programme for formally assessing operational risks and related controls to mitigate these risks. The self assessments are performed by individual business units and functions. As part of the annual Risks and Controls Self Assessment (“RCSA”) process, areas with high risk potential are highlighted and business unit / function either proposes mitigating measures to resolve the issue or provides a rationale for why the risk is acceptable. The Bank is taking various steps to increase the overall level of operational risk awareness amongst staff at all levels using various tools like trainings, workshops, risk assessment exercise and process related compliance certification / testing, etc. Operational risk profile reports for business divisions are reviewed and discussed with the department’s senior management. This enables the Bank to detect changes to the units risk profile at an early stage and take necessary corrective actions The Bank believes that this process helps build a strong risk management culture and increased level of risk awareness amongst work force. The Group level IT Security Committee provides direction for mitigating the operational risk in IT security. There is group wide IT security programme (ARISTI) to ensure complete data security and integrity. Disaster recovery and Business Continuity Plans (BCP) have been established for significant businesses to ensure continuity of operations and minimal disruption to customer services. These plans are periodically tested and reviewed to ensure their effectiveness to mitigate unforeseen risks arising out of disruptions. Its grt 2b 25
?
?
?
?
?
83
?
?
In the larger group entities, in order to control customer fraud in the lending business, a Risk Containment Unit has been setup for Retail lending, which identifies document related fraud submitted by customers. Also, customers Central Bureau (CIBIL) scores are examined before executing any financial transaction with the borrower. Risk transfer via insurance is a key strategy to mitigate operational risk exposure at the Bank. The Operational Risk team helps assess the quantum of insurance cover required and aligns it to the Bank’s current and projected operational risk exposures.
Approaches for computation of operational risk capital In accordance with the guidelines issued by RBI, the Bank has adopted the “Basic Indicator Approach” for calculation of operational risk capital for capital adequacy purposes. As per these guidelines, the capital for operational risk is based on a single indicator: income. The Capital charge associated with operational risk is calculated as 15% of average positive annual gross income of the previous three years.The Bank’s operational risk capital charge using basic indicator approach is ` 627.67 crore as at 31st March 2011. At an appropriate time, the Bank also plans to adopt the AMA approach for maintaining operational risk capital. Under this approach, operational risk capital is computed on a VaR methodology by evaluating risks on the basis of their likelihood (probability) and the financial consequence (severity) of such an event. 10. Interest Rate Risk in the Banking Book (IRRBB) The exposure of the Bank’s financial condition to adverse movements in interest rates is referred to as interest rate risk. The impact of market risk (including Interest Rate Risk) on the Bank’s trading book is actively measured through a variety of risk metrics like PV01, option greeks and VaR. The Bank’s tolerance with respect to its exposure to market risk in the trading book is articulated through various risk limits and monitored through different MIS reports. The Bank also provides for capital for exposure to market risk in the trading book. In the context of banking book, interest rate risk is interpreted as the current or prospective risk to both the earnings and capital of the Bank arising from adverse movements in interest rates, which affect the Bank’s banking book. Changes in interest rates affect a Bank’s earnings by altering interest-sensitive income and expenses, and the underlying value of a Bank’s assets, liabilities, and off-balance sheet instruments because the present value of future cash flows changes when interest rates change. Although, the very nature of the financial intermediation business makes the Bank susceptible to interest rate risk, excessive risk could potentially pose a significant threat to the Bank’s earnings and capital. The main bodies in charge of management of interest rate risk in the banking book in the Bank are the Asset Liability Management Committee (ALCO) and the Balance Sheet Management Unit (BMU). BMU is part of the Bank’s treasury. The Bank’s ALCO is broadly responsible for the financial management of the Balance Sheet. The ALCO sets the overall policy and limit framework within which the BMU operates. The responsibility of controlling of Interest Rate Risk in the banking book is vested with the BMU. Various asset and liability divisions in the Bank disburse assets and mobilise liabilities of varying types, tenors and rates. These divisions may be net users of fund or net providers of fund to the Bank. Individually and together, they lead to the creation of Interest rate risk in the Banking Book. Through the Funds Transfer Pricing (FTP) mechanism, the management of interest rate risk is taken out of the hands of individual asset and liability divisions and entrusted to a competent interest rate risk management body i.e. the BMU. The BMU analyses the risks inherent in the Balance sheet, determines appropriate hedging strategies in consultation with the ALCO and executes these strategies. FTP rates are reviewed by the ALCO in its meetings periodically and are calibrated to encourage the mobilisation of desirable deposits and the disbursement of favorable assets. If the directional movement or volatility of interest rate is determined to be potentially adverse, the BMU may decide to hedge the risk using derivative products like IRS/CIRS. A properly constructed hedge would insulate the Economic Value of Equity (EVE) from dissipating to a great extent. The Bank views Interest Rate Risk from two different but complementary perspectives, namely the Earnings Perspective and the Economic Value Perspective. ? The Bank uses gap analysis to determine the interest rate risk on the banking book from the earnings perspective. ? The duration gap approach is used by the Bank to determine the sensitivity of the Economic Value of Equity (EVE) of the Bank to changes in interest rates. Modified duration is computed on an account-wise basis for the interest rate sensitive assets and liabilities of the Bank. A 100 bps shock is applied on the Leveraged MDuration Gap to arrive at the EVE impact due to on-balance sheet items. The impact of 100 bps shock on off-balance sheet items is also incorporated. Through constant monitoring, risk limits, FTP, and hedging, management has constantly strived to keep the level of IRR in the Bank within acceptable levels. ? Details of increase (decline) in earnings and economic value for upward and downward rate shocks based on balance sheet as on 31st March 2011 are given below: o o Earnings Perspective Impact on earnings of 100 bps parallel shift in yield curve Economic Value of Equity Impact on MVE of 100 bps adverse parallel shift in yield curve Impact as a percentage of Tier1 + Tier2 Capital ` 245.75 crore 2.17% ` 34.25 crore
84
Kotak Mahindra Bank Limited Annual Report 2010-11
doc_731696578.pdf