DIRECTORS’ REPORT

Your Directors have pleasure in presenting the One Hundredth Annual Report of the Bank with the audited Balance Sheet, Profit & Loss Account and the Report on Business and Operations for the year ended March 31, 2008 (FY08).

PERFORMANCE HIGHLIGHTS

• Total Business (Deposit+ Advances) increased to Rs 2,58,735.45 crore reflecting a growth of 24.07%.
• Gross Profit and Net Profit were Rs 3,028.55 crore and Rs 1,435.52 crore respectively. Net Profit registered a growth of 39.85% over previous year.
• Credit-Deposit Ratio stood at 77.32% as against 74.35%.
• Retail Credit posted a decent growth of 17.97% constituting 19.79% of Gross Domestic Credit against 20.98% last year.
• Net Interest Margin (NIM) as per cent of interest earning assets was at the level of 2.90%.
• Net NPAs to Net Advances declined from 0.60% last year to 0.47%.
• Capital Adequacy Ratio (CAR) as per Basel I stood at 12.91% & as per Basel II at 12.94%.
• Net Worth improved to Rs 9,526.97 crore registering a rise of 12.93%.
• Book Value improved from Rs 231.59 to Rs 261.54
• Business per Employee moved up from Rs 548 lacs to Rs 704 lacs.

KEY FINANCIAL RATIOS

SEGMENT-WISE PERFORMANCE

The Segment Results for the year 2007-08 of Rs. 3,301.52 crore have been contributed by the Treasury Operations to the extent of Rs.788.79 crore, Rs.175.14 crore by Corporate/Wholesale banking, Rs 937.37 crore by Retail Banking and Rs 1,400.22 crore by Other Banking Operations. The Bank earned Profit after Tax of Rs.1,435.52 crore after deducting Rs.1,094.37 crore of unallocated expenditure and Rs.771.63 crore as provision for tax.

DIVIDEND:

The Directors have proposed a dividend of 80.0% for the year ended March 31, 2008.Total outgo in the form of dividend, including taxes, will be Rs 340.94 crore.

CAPITAL ADEQUACY RATIO (CAR)

The Bank’s Capital Adequacy Ratio (CAR) is comfortable at 12.91% on 31st March 2008. During the year, the Bank strengthened its capital-base by raising Rs 2,703.62 crore through Tier –II bonds out of which Rs 1,203.62 crore were raised overseas. As per the Basel-II, Capital Adequacy Ratio works out to 12.94%.

The Bank’s Net Worth as at 31st March 2008 was Rs 9,526.97 crore comprising of paid-up equity capital of Rs 365.53 crore and reserves (excluding revaluation reserves) of Rs 9,161.44 crore. An amount of Rs.1,094.58 crore was transferred to reserves from the profits earned.

OTHER PRUDENTIAL MEASURES

As a prudent measure, the Bank has made provision towards contribution to gratuity (Rs 78.60 crore), pension funds (Rs 365.00 crore), leave encashment (Rs 53.20 crore) and additional retirement benefits (Rs 60.40 crore) on actuarial basis. The total provisions under these four categories amounted to Rs 557.20 crore during the year, against Rs 486.46 crore during 2006-07. The total corpus available with the Bank at end March 2008 under these heads is: Rs 711.43 crore (gratuity), Rs 2,062.70 crore (pension funds), Rs 240.64 crore (leave encashment), and Rs 193.54 crore (additional retirement benefits).

MANAGEMENT DISCUSSION AND ANALYSIS:

Economic Scenario in 2007-08

Indian economy grew by 9.0 per cent in 2007-08 supported by the growth of 4.5 per cent in agriculture, 8.5 per cent in industry and 10.8 per cent in services. The current growth phase of the economy is powered by the rise in capital investments. During April-February, 2007-08 the capital goods production recorded a robust growth of 17.5 per cent. The continued capacity addition by manufacturing firms helped this growth of capital goods.

Corporate activity remained quite healthy during 2007-08, though in comparative terms, it witnessed some moderation in growth over the previous year. While the sales of a representative sample of private sector companies grew by 17.4 per cent in April-December 2007, the net profits grew by a robust 29.8 per cent.

Inflation, however, emerged as the major macro risk towards the end of 2007-08. On an annual average basis, inflation (measured in terms of WPI) at 4.7 per cent during 2007-08 was lower than 5.4 per cent in 2006-07. However, on a year-on-year basis, it stood at 7.4 per cent at end-March 2008 as against 5.9 per cent a year ago. Major contributors to rising inflation have been high prices of foodgrains, fruits, vegetables, edible oils, crude oil and metals. International crude oil prices have been rising sharply since June 2007, reflecting tight supply situation, geo-political tensions, weakening of the dollar, etc. During the year 2007-08, the global crude oil price reached a high of $110.2 a barrel on March 13, 2008 on the back of a sharp decline in the U.S. crude inventories.

Global financial markets witnessed turbulent conditions during 2007-08 as a result of deepening crisis in the U.S. sub-prime mortgage market. The Indian financial markets remained largely orderly during 2007-08 except the equity market, which witnessed bouts of volatility in tandem with trends in major international equity markets. The domestic stock markets, which remained strong till early January 2008, witnessed a sharp correction beginning January 11, 2008 due to rising concerns over the severity of sub-prime crisis and its spill-over to other countries. As a result of the huge volatility witnessed during the year 2007-08, the Sensex gained 19.7 per cent and Nifty added 23.9 per cent on an annual basis. The Foreign Institutional Investors (FIIs) invested $12.7 billion in the Indian stock markets during 2007-08 as against net purchases of $5.7 billion during 2006-07. The Mutual funds made net investments of Rs 15,775 crore during 2007-08 as against Rs 9,062 crore in 2006-07. The major gainers in the stock markets during 2007-08 were metals, oil & gas, capital goods, fast moving consumer goods, public sector undertakings, banking and consumer durable stocks. Resources raised through public issues by the corporate sector increased sharply by 158.5 per cent to Rs 83,707 crore in 2007-08 over those in last year. All public issues during 2007-08 were in the form of equity except three, which were in the form of debt.

According to the Ministry of Commerce, total foreign direct investment (FDI) inflows into India rose to $24.6 billion in 2007-08 from $21.9 billion in 2006-07. The Commerce Ministry expects FDI inflows to India to rise to $35 billion in 2008-09 despite the growing uncertainties in the world economy.

Even though the rupee appreciated 7.8 per cent against the U.S. dollar in 2007-08, India’s merchandise exports grew 23.02 per cent in 2007-08 to $155.51 billion. The imports, however, stood at $235.91 billion primarily due the pressure of high oil import bill. The India basket of crude oil witnessed a rise of 27.0 per cent in 2007-08. As a result, the trade deficit for 2007-08 expanded to $80.40 billion from $59.32 billion a year ago.

IIndia’s total external debt was placed at $201.5 billion at end-December 2007. However, foreign exchange reserves remained in excess of the stock of external debt at end-December 2007. India’s foreign exchange reserves were $309.7 billion as at end-March 2008, showing an increase of $110.5 billion over end-March 2007. India holds the third largest stock of reserves among the emerging market economies.

The government’s fiscal deficit in the first eleven months of 2007-08 declined 13.5 per cent on year-on-year basis and accounted for 73.4 per cent of the revised budget target for the entire financial year. In the Union Budget for 2008-09, the government has projected that the central government’s fiscal deficit would narrow from 3.1 per cent of GDP in 2007-08 to 2.5 per cent in 2008-09.

Banking Sector: Performance, Opportunities & Challenges in 2007-08

Credit Penetration

Indian banking industry witnessed some slowdown in credit expansion during 2007-08. The non-food credit extended by the scheduled commercial banks (SCBs) increased by 22.3 per cent as against 28.5 per cent the previous year. The incremental non-food credit-deposit ratio of the banking system declined to 72.3 per cent from 83.2 per cent in the previous year. The sectoral deployment of credit shows that the credit to services sector recorded the highest growth (28.4%, Y-o-Y), followed by industry (25.9%) and agriculture sector (16.4%). However, the growth in personal loans decelerated to 13.2 per cent (30.6% last year). Growth in housing and real estate loans decelerated to 12.0 per cent (25.8%) and 26.7 per cent (79.0%), respectively. Within the industrial sector, there was a sizeable credit pick-up in respect of infrastructure (42.1% as against 28.2% a year ago), food processing (32.0% as against 27.6%) and engineering (26.2% as against 18.1%). There was a moderation in credit growth to basic metals and metal products (19.0% as against 33.3%), textiles (23.0% as against 35.5%), petroleum (23.3% as against 64.4%), and chemicals (13.9% as against 19.2%).

Investment by SCBs

While SCBs’ investment in bonds/debentures/shares of public sector undertakings and the private corporate sector and commercial paper (CP) increased by 14.2 per cent in 2007-08, their investment in government and other approved securities increased by 22.9 per cent This raised the proportion of SLR securities in net demand and time liabilities to 27.4 per cent in 2007-08.

Resource Mobilisation

Aggregate deposits of SCBs increased by 22.2 per cent during 2007-08 as against 23.8 per cent the previous year. While the demand deposit growth at 20.2 per cent was higher than 17.9 per cent in 2006-07, the time deposit growth moderated to 22.6 per cent from 25.1 per cent the previous year. In addition to the mobilization of deposits, the banking sector's lendable resources were augmented substantially by capital raised through public issues and innovative capital instruments.

Challenges and Opportunities for Banks in 2007-08

During the year 2007-08, successive increases in the CRR and zero interest on CRR balances have had significant impact on interest yields for banks. According to CRISIL, the SCBs had to take a hit of 7 basis points (annualized) on their spreads and net profit margins solely due to these RBI measures. Operating cost pressures weighed on banks throughout 2007-08 due to higher investments in franchise, manpower, etc. The state-owned banks still face a greater burden due to the impending wage agreement.

Despite these challenges, Indian banking industry continues to remain strong on structural ground on the back of relatively stronger macro fundamentals, under-tapped potential in rural and semi-urban areas for credit penetration, favourable demographic profile and a stronger institutional and regulatory framework. During the year 2007-08, infrastructure and SME segments emerged as the major growth drivers for the Indian banking industry. The banks witnessed an encouraging fee income momentum as well. In the backdrop of relatively benign liquidity conditions, the banks significantly reduced their dependence on higher-cost funds. On the whole, the outlook for the sector remains positive despite heightened uncertainties in the economic environment.

Risk Management

The management of risk is a major determinant of success in any business and therefore your Bank places particular focus on actively managing and controlling the Bank’s risk exposures. In the financial services industry, the three main risk exposures the Bank faces are credit risk, market risk and operational risk. For all of these risks, the Bank has devised and implemented policies, procedures, organisational structures and control systems for their identification, measurement, monitoring and control. These systems are not static but are flexible enough to allow modifications, when necessary, in accordance with changes in the Bank’s risk profile.

Risk Management Architecture in the Bank consists of Risk Management Structure, Risk Management Polices and Risk Management implementation and monitoring systems. The Board of the Bank is the ultimate authority to provide strategies and policies on risk management system in the Bank. The Board is supported by the Sub-committee of the Board on ALM and Risk Management which in turn is assisted by the Asset Liability Management Committee, the Credit Policy Committee and the Operational Risk Management Committee.

In order to provide ready reference and guidance to the various functionaries of the Risk Management System in the bank , the bank has in place Asset Liability Management Policy, Domestic Loan Policy, Mid Office Policy, Off Balance Sheet Exposure Policy (domestic), Business Continuity Planning Policy, Pillar III Disclosure Policy, Stress Test Policy and Stress Test Framework, Operational Risk Management Policy, Internal Capital Adequacy Assessment Process (ICAAP), Credit Risk Mitigation and Collateral Management Policy duly approved by the Board

CREDIT RISK

Credit risk is a risk inherent in the banking business and involves the risk of loss arising as a result of the diminution in credit quality of a borrower or counter-party and the risk that the borrower or counter-party will default on contractual repayments under an advance. The Bank has a sub-committee of Directors constituted by the Board of Directors who specifically oversee and co-ordinate the Bank’s credit risk management functions. Reporting to this sub-committee is a Credit Policy Committee, whose role is to formulate and implement various risk management strategies and monitor the Bank’s risk management functions on a regular basis.

There are several credit risk management cells which work together to identify, measure, monitor and control the Bank’s credit risk exposure. These are the Corporate Research Cell, Portfolio Review Cell and Credit Review Cell.

Corporate Research Cell

The primary function of the Corporate Research Cell is the preparation and update of industry reports, which are used by credit officers at all levels, central management, zonal management, regional management, as well as at each branch. This cell conducts studies of all industries identified by the RBI for controlling sectoral deployment of credit and prepares over 135 industry and product reports, updated annually or half yearly, for use by the Bank.

Portfolio Review Cell

CThe role of the Portfolio Review Cell is to conduct studies on various aspects of credit risk management at the portfolio level, such as sectoral credit deployment, monitoring single borrower/group borrower exposure and monitoring industry-wide credit exposures. The functions of this cell include conducting studies on the performance of specific loan portfolios and submission of reports to the Credit Policy Committee and Sub Committee of the Board on ALM and Risk Management

Credit Review Cell

The primary responsibility of the Credit Review Cell is to monitor the credit risk management techniques the Bank deploys and to provide recommendations for improvements to current credit management practices encompassing, among other responsibilities, the necessary policy preparation and roll out of credit rating models.

The bank has a robust rating model for various types of segments of borrowers for assessing risk at individual level at the time of appraisal of the loan. Risk measurement for the business portfolio is assessed on a risk rated basis and for the consumer portfolio on a scoring basis. An independent rating validation team functioning at various levels in the bank is validating the rating. The bank has a well-defined credit process, which encompasses the pre sanction process as well as post sanction processes.

Credit Exposure Ceilings

Credit exposure ceilings are a prudential measure mandated by RBI aimed at improving risk management and avoiding concentration of credit risks. Ceilings are set in relation to single/group borrowers, unsecured borrowers and with respect to each industry sector.

The Bank has set its own credit exposure ceilings based on the guidelines for substantial exposure limits set by RBI, but which are typically more conservative than those prescribed by RBI. Broadly, the Bank’s credit exposure ceilings are as follows:

The aggregate substantial exposure limit is set at 500 per cent of the Bank’s capital funds as per the previous year’s balance sheet. For the purposes of aggregating single borrower exposure for substantial exposure limit the threshold is 5% or more of capital funds.

As per RBI’s guidelines, the credit exposure ceiling is fixed in relation to the Bank’s capital funds under capital adequacy standards (Tier I and Tier II capital).

MARKET RISK

Market risk is the risk that exposure to price movements of financial instruments arising as a result of changes in market variables, such as interest rates, exchange rates and other asset prices, will result in loss suffered by the Bank. The objective of market risk management is to avoid excessive exposure of the Bank’s earnings and equity to loss and to reduce the Bank’s exposure to the volatility inherent in financial instruments such as securities, foreign exchange contracts, equity and derivative instruments, as well as balance sheet or structural positions. The primary risk that arises for the Bank as a financial intermediary is interest rate risk due to the Bank’s asset-liabilities management activities. Other market related risks to which the Bank is exposed are foreign exchange risk on foreign currency positions, liquidity, or funding risk, and price risk on trading portfolios.

The Bank has a clearly articulated integrated treasury management policy and asset liability management policy to address market risk. These policies comprise management practices, procedures, prudential risk limits, review mechanisms and reporting systems. These policies are revised periodically in line with changes in financial and market conditions.

Interest rate risk is measured through interest rate sensitivity gap report and Earning at Risk. Further, Bank is calculating duration, modified duration, Value at Risk for its investment portfolio consisting of fixed income securities, equities and Forex positions on monthly basis. The bank monitors the short term Interest rate risk by NII (Net Interest Income) perspective and long term interest rate risk by EVE (Economic Value of Equity) perspective. Value at Risk for the treasury positions is calculated for 10 days holding period at 99% confidence level. Stress testing of fixed interest investment portfolio through sensitivity analysis and equities through scenario analysis is regularly conducted. Based on the RBI directions the bank is also estimating the Economic value of equity impact on a quarterly basis.

Liquidity Risk

The primary aim of the Bank’s liquidity management is to maintain the Bank’s liquidity level in order to meet its liabilities as they become due and also to ensure that it is sufficient for the Bank’s normal operations as well as to overcome any liquidity crisis that may arise. The Overall responsibility for managing and monotoring the liquidity risk rests with Asset Liability Management Committee (ALCO) and Asset Liability management (ALM) Cell.

To ensure that adequate liquidity is maintained consistently, the RBI has stipulated that in the time buckets of 1day, 2 to 7 days, 8 to 14 days and 15 to 28 days, the cumulative negative liquidity gap should not exceed 5, 10, 15 and 20 per cent of cash outflows in the respective time periods. The Bank reviews the liquidity position on a daily basis to ensure that the negative liquidity gap does not exceed the tolerance limit in the first four time buckets.

As a part of its liquidity risk management, the Bank focuses on a number of internal and external variables, including all available sources of liquidity, preserving necessary funding capacity and contingency planning. Maturity gap reports and liquidity assessment reports are prepared to facilitate the maintenance of an appropriately liquid combination of assets and liabilities. Liquidity risk is managed by flow approach as well as by stock approach process. Liquidity risk is measured by flow approach on a daily basis through Structural liquidity Gap reports and on a dynamic basis by Dynamic Gap reports on fortnightly basis for the next three months. In the stock approach, the Bank has established a series of caps on activities such as daily call lending, daily call borrowings, net short term borrowings and net credit to customer deposit ratio and prime asset ratio.

OPERATIONAL RISK

The Bank faces operational risk on account of inadequate or failed internal process, people and systems or external events. To monitor operational risk on an on-going basis, the Bank has established an Operational Risk Management Committee (ORMC) under the overall supervision of Sub- Committee of Board on ALM and Risk Management. ORMC meets on a regular basis to review matters relating to operational risk.

The Bank monitors operational risk by reviewing whether its internal systems and procedures are duly complied with. The Bank collects and analyses data on operational risk based on various different parameters on a half yearly basis and, where necessary, corrective steps are taken.

BANK’S COMPLIANCE WITH BASEL-II:

Your Bank has the largest overseas presence amongst the Indian banks and hence it was required to implement the Basel-II Guidelines from 31st March 2008. In keeping with the guidelines of the Reserve Bank of India, the Bank has adopted Standardized Approach for Credit Risk, Basic Indicator Approach for operational risk, and Standardized Duration Approach for Market Risk for computing CRAR. The Bank has therefore been computing the Capital to Risk Weighted Assets Ratio (CRAR) on parallel basis under Basel-I and Basel-II Guidelines. Your bank is happy to report that it has attained the status of Basel II Compliance as on 31.03.2008 with a healthy CRAR of 12.91% under Basel I and 12.94% after providing for the additional capital charge for operational risk under Basel II

Roadmap:

The Bank has laid roadmap for implementing the advanced approaches under Basel-II Guidelines. With an objective to move to “Internal Rating Based Approach” the bank has already started rating of borrowal accounts in a New Credit Rating Model. The New Basel II compliant Rating Model is integrated with Core Banking Solution and facilitates estimation of “Migration of Rating”, “Calculation of PD (Probability of Default)” and “LGD (Loss Given Default)”. Therefore with build up of data over a period of time, the bank shall smoothly migrate to Internal Rating Based Approach under Basel-II in due course.

Economic Intelligence Unit

At the Corporate Office of the Bank, a specialized Economic Intelligence Unit supports the Top Management in critical areas like Strategic Business Planning, Investor Relations and Credit and Market Risk Management. The Unit regularly provides the Top Management and the Bank’s various operational units a periodic outlook on key macro variables like industrial and infrastructural growth, inflation, interest rates, credit penetration and resource mobilization of the banking industry, liquidity and exchange rates. By providing better understanding of macroeconomic aspects, corporate sector health and financial sector policies, this department supports the Bank’s efforts in tapping business opportunities and swiftly responding to market dynamics.

Internal Control Systems

The Bank has a well established Central Inspection and Audit Division that examines the adherence to systems, policies and procedures of the Bank. The guidelines received on various issues of internal control from Reserve Bank of India, Government of India, Board and Audit Committee of the Board (ACB) have become part of the internal control system for better risk management. The Central Inspection & Audit Division through -10- Zonal Inspection Centres carry out inspection of branches/offices as per the periodicity decided by the ACB and examine adherence to such systems of internal control and risk management including various aspects like KYC/AML (i.e., Know Your Customers and Anti-money laundering) etc.

The Regular Branch Inspection Report is the most comprehensive feed back to the Management about the degree of compliance of the Bank’s norms at the operational level and hence the most important tool for control. The compliance is monitored through Rectification Certificate.

In 2007-08, all the branches were covered under Risk Based Internal Audit. The assessment of the level of risk and its directions is as per the risk matrix prescribed by RBI which helps the management in identifying areas of high risk requiring attention on priority basis. The position of the risk categorization of branches is reviewed by the ACB on quarterly basis.

Besides regular inspection of the branches, various other inspections are also carried out in the Bank like inspection of subsidiaries, associate units, functional departments at Corporate, Head Office, Training Centres, Administrative Offices and Overseas branches through Bank’s Internal Auditors posted at those centres & the Management Audit of the Controlling Offices of the Bank, its subsidiaries and RRBs.

The Central Inspection and Audit Division oversees the credit risk management through the Credit Audit. It covers large borrowal accounts both fund-based and non-fund-based as per the direction of the RBI.

All the reports during the current year of the eligible accounts for credit audit have been attended and closed after compliance/necessary directions to the concerned Zones.

In 2007-08, 2,214 Regular Branch inspections of domestic branches were carried out by inspecting officers attached to various Zonal Inspection Centres across the country, 434 inspections of overseas branches by Internal Inspectors posted overseas besides the Management Audit at Brussels branch. The Concurrent Audit of the Bank covers 461 branches including Specialized Integrated Treasury Branch which handles funds and investment management and forex dealing operations of the Bank.

The Concurrent Audit covers more than 63.0 per cent of the total business of the Bank besides 100.0 per cent business of forex dealing and domestic investments.

The Central Inspection and Audit Division compiles Risk Profile Templates on quarterly basis as per the direction of the RBI. As per the risk Profile templates of the RBI, the Bank’s overall risk level is low and the direction is stable.

The Central Inspection and Audit Division also shoulders the crucial responsibility of IS Audit and Data Migration Audit of branches shifting to the CBS platform.

In 2007-08, the Bank upgraded its data base ASCROM for entire domestic credit portfolio from fox Pro to window. The migration has been audited by the IS auditors attached to CIAD.

The Bank conducted training programme of its Inspecting Officers attached to Zonal Inspection Centres on IS Audit, Data Migration Audit and Risk Based Internal Audit.

The Audit Committee of the Board comprises of five Directors. The Chairman is an Independent Non-executive Director.

The Inspection and Audit Division also ensures the Compliance of the Provision of SEBI (Prohibition of Insider Training) Regulations, 1992.

The Agenda placed before the Audit Committee of the Board for review includes total audit function of the Bank.

The compliance of direction of the Audit Committee of the Board is monitored through Action Taken Report System (ATRS).

The compliance of direction received from the Reserve Bank of India, Government of India are placed before the Audit Committee of the Board for review.

In 2007-08, the Bank framed “The Compliance Policy” as per the direction of the RBI with due approval of the Board.

OPERATIONS AND SERVICES

Compliance

The Bank has initiated measures for implementation of “Banking Codes & Standards Board of India” (BCSBI). The Bank has proactively implemented the Code for widespread awareness about the Code amongst its staff. The Bank has got printed a large number of copies of the Code for distribution amongst the customers for their awareness and benefit. This has also been put up on the Bank’s website. The branches are now distributing the “Guidance Note” on deposits and advances to new customers.

Customer-centric Initiatives taken in 2007-08

In order to offer the basic banking services (such as issuance of drafts, remittance of funds and other essential banking services) to individuals, the relevant service charges have been reduced.

The Bank has introduced the following four Model Policy Documents, which have also been placed on the Bank’s web site.

a. Model Policy on cheque collection

b. Model Policy on compensation

c. Model Policy on collection of dues and repossession of security

d. Model Policy on grievance redressal mechanism.

In order to strengthen the corporate governance, the Bank has set up a Standing Committee on Procedures and Performance Audit on Customer Services having -4- General Managers of the Bank and -3- other eminent public personalities as members. The Committee is chaired by the Chairman and Managing Director of the Bank.

This Committee has been set up to focus on inadequacies in banking services available to common person and looking into the need to (i) benchmark the current level of service, (ii) review the progress periodically, (iii) enhance the timeliness and quality, (iv) rationalize the processes taking into account technological developments, and (v) suggest appropriate incentives to facilitate change on an ongoing basis.

The Bank has also constituted a sub-committee of the Board, known as the ‘Customer Service Committee of the Board’. The Committee has the following members:

1. The Chairman and Managing Director

2. Executive Directors

3. Shri A. Somasundaram - Director

The functions of the sub-committee of the Board include suggesting and implementing innovative measures for enhancing the quality of customer services and improving the level of satisfaction for all the categories of clientele, at all times. Apart from the above, the terms of reference of the committee are as follows.

i. to oversee the functioning of the Standing Committee on Procedure and Performance Audit on Public Services and also the compliance with the recommendation of the Standing Committee on Customer Services.

ii. to review the status of the Awards remaining unimplemented for more than three months from the date of Awards and also the deficiencies in providing Banking services as observed by the Banking Ombudsman therein.

iii. to review the status of the number of deceased claims remaining pending/outstanding for settlement beyond 15 days pertaining to deceased depositors/locker hirers/depositor of safe custody articles.

The details of the attendance of the meeting of ‘Customer Service Committee of the Board’ during the year ended 31.03.08 is as under:

Know Your Customer (KYC)/Anti-Money Laundering (AML) Measures

The Bank has been implementing KYC-AML Policy as approved by its Board of Directors in accordance with the PMLA 2002 (Prevention of Money Laundering Act 2002) and RBI/IBA (Reserve Bank of India/Indian Banks’ Association) guidelines. Accordingly, Cash Transaction Reports (CTR) are being submitted electronically every month for the entire Bank to Financial Intelligence Unit (FIU), New Delhi. The Bank receives error free validation report from FIU-IND of CTRs submitted to them. The Bank is also expected to go live shortly with AML solution for the purpose of generating Alerts and detecting / reporting of Suspicious Transactions (STR) to FIU, New Delhi, presently attended manually.

The Bank has also implemented Risk Categorization of Accounts considering the money laundering risk perceptions to enable its branches to effectively monitor “high risk” accounts. The KYC/AML Department has been established at the Bank’s Head Office with trained/experienced officers. The audit of KYC compliance by branches is carried out during branch inspection by Internal Inspectors/Concurrent Auditors on continuous basis. The staff members are imparted training on KYC/AML aspects at the Bank’s Staff College at Ahmedabad and its various Training Centres. Senior level executives are regularly deputed to workshops/ seminars conducted by RBI, IBA and NIBM (National Institute of Bank Management) to enhance their awareness in these aspects.

Vigilance:

The vigilance activity is a part of the success story of the Bank. It is used as an aid to quality decision making with an objective of instilling confidence in the employees.

A careful distinction is made between cases with malafide intentions/gross negligence, which put the Bank’s funds into avoidable jeopardy and cases of business decisions gone awry. More pragmatic view is taken while dealing with cases of bonafide business decisions, which has resulted in removing fear psychosis amongst operational functionaries at various levels. This has had a salutary effect on the confidence level of decision making authorities

The various initiatives/proactive steps taken towards improvement of vigilance administration have led to significant reduction of pending vigilance cases in general and long pending enquiries beyond six months in particular, which have drastically come down to a bare minimum.

The ongoing review of systems and procedures in vogue is undertaken with a view to minimizing severity and recurrence of frauds. It is heartening to note that with the extraordinary alertness and vigil displayed by the operating staff, -63- attempts of defrauding the Bank by unscrupulous elements were thwarted during the year 2007-08, which saved the Bank from substantial monetary losses.

BUSINESS PERFORMANCE

Resource Mobilisation

The share of the Bank’s deposits to total resources was at 84.65 per cent as of 31st March 2008. Total deposits grew from Rs 1,24,915.98 crore to Rs 1,52,034.12 crore, reflecting a growth of 21.71% over the previous year. Of this, Savings Bank Deposits – an important constituent of low cost deposits – grew by Rs 4,199.1 crore from Rs 31,577.28 crore to Rs 35,776.38 crore. The share of low cost deposits (Current and Savings) in Global (Total) Deposits stood at 31.22 per cent and in Domestic Deposits at 35.93 per cent. The banking industry as a whole witnessed a movement from low cost deposits to term deposits during the year 2007-08, as a result of a sharp increase in the term deposits rates.

Global Advances:
Particulars	End-March 2008(Rs crore)	End-March 2007(Rs crore)	Growth (%)
Advances	1,06,701.33	83,620.87	27.60
- Domestic	84,503.31	67,262.69	25.63
- Overseas	22,198.02	16,358.18	35.70

Wholesale Banking

Wholesale Banking business has emerged as one of the most competitive business segments due to the aggressive role being played by large private and foreign banks. However, considering the fact that half of the Bank’s lending business is generated from Wholesale Banking, a strategy was adopted to penetrate into this segment with a different kind of business model, service standards, faster response and better accessibility.

The setting up of Wholesale banking branches for large corporates and mid corporates separately, Centralised Processing Center at the Bank’s Corporate Office, Client Service Teams at field level are some of the steps in this direction. During the current year ending March 2008, the Bank has already added more than 50 new clients and expects more additions to the list.

With a view to retain and improve the asset quality by effective credit monitoring as well as containment of slippages, the Credit Monitoring and Assets Health Check System (CREMAS) and Early Warning Alert System (EWAS) are extensively used. While ‘Hunting Limit Policy’ is used for securing new corporate business, ‘Exit Policy’ is used for shedding weak assets. The Bank has adopted Basel-II compliant risk rating model and has migrated to ‘Standardized Approach’ by end-March 2008 as per the regulatory norms.

Considering the importance of higher skill requirement in the fast changing environment, effective steps have been taken to groom a talent pool in the area of credit through extensive in-house training and by nominating them to external training establishments.

Retail Business

Retail continued to be the thrust area for achieving business growth during the year 2007-08. For achieving sustained growth on both liabilities and assets side, the Bank initiated various customer centric measures besides launching special products. The performance highlights for the year 2007-08 are as under:

The Bank’s overall Retail Credit stood at Rs 16,892.32 crore as at the end of March, 2008, registering the growth of Rs 2,573.31 crore over previous year. The primary objective of the Bank during the period was to maintain or improve the quality and to build a healthy “Retail Loan” portfolio, and, therefore, the emphasis was laid on Baroda Car Loan and mortgage-based products viz. Baroda Home Loan, Baroda Traders Loan and Baroda Advance against Property. In our quest to bring youth into the Bank’s fold, the thrust was also given on Baroda Education Loan product during the year.

Home Loans for the Bank increased by Rs 1,195.88 crore during the year, registering the growth rate of 19.66 per cent over March, 2007. Traders Loan, Advances against Mortgages, Education Loans and Car Loans achieved a spectacular growth of 39.35 per cent, 56.06 per cent, 35.59 per cent and 37.61 per cent during the year ended March, 2008, respectively.

It has always been the endeavour of the Bank to review the norms and features of all existing products on an ongoing basis and modify, wherever required, to suit the changing needs of the customers. New products have also been launched during the year to cater to the needs of different segments of the society/clientele.

New Retail Products

As a part of the Bank’s Centenary Year celebrations, the Bank had launched following new deposits products with effect from 20 July, 2007.

1. Baroda Centenary Savings Account – An improved version of our existing Super Savings Account product, having following distinguishing features, was introduced in all the CBS branches.

(a) Default threshold limit for triggering auto sweep to term deposits reduced to Rs 10,000 from Rs 20,000. This, we feel would increase the yield to Centenary Savings Accounts holders.

(b) The customer has been given liberty to decide the amount of auto sweep subject to minimum amount of Rs 5,000 and, thereafter, in multiple of Rs 1,000 and the frequency of triggering auto sweep during a month.

2. Baroda Centenary Term Deposit – A new term deposit product was made available for a limited period offering higher rate of interest.

3. In terms of guidelines circulated by the National Housing Bank (NHB), Baroda Ashray, a Reverse Mortgage Loan product was launched on the eve of the Annual Bankers’ Conference – Bancon, i.e., 26 November 2007. The product provides loan to Senior Citizens against residential properties acquired by and standing in their name and also self occupied.

4. Economic reforms have opened up huge opportunities for young executives to take up challenging positions. Therefore, many working executives generally go for pursuing Business Management courses. For catering to the financial needs of such working executives, a special product known as Baroda Career Development was launched on 6 December 2007.

Products Modification

Baroda Traders Loan - a product meant for providing hassle free credit to traders, has received a good response from the target segment. For enlarging the scope of the product, credit limit ceiling was raised to Rs 2 crore.

Similarly, a single rate of interest was introduced for Baroda Car Loan to make it more competitive.

Campaigns organized:

Centenary Retail Loan Festival

In order to canvass a large number of retail loan accounts, the Bank organized special campaigns across all the domestic branches from 17 September 2007 to 31 December 2007. The Bank provided concession in the rate of interest and processing charges to customers during the campaign period. The Bank sanctioned 21,707 loans amounting to Rs 1,891.93 crore under this campaign.

Traders Loan Campaign

A special campaign for Baroda Traders Loan was organized from 1 January 2008 through 25 March 2008. The branches sanctioned 5,603 loans aggregating Rs 992 crore during the campaign period.

Structural Changes

1. In order to strengthen the Retail Credit Delivery System, the Bank opened two new Urban Retail Loan Factories (URLFs) at Varanasi and Indore during the year, thus raising the total URLFs to 15.

2. Gen-Next Branch - Focusing the youth segment, the Bank launched Gen-Next branch, a new format of branch banking for the youth and young IT professionals at Pune (April, 2007) and Bangalore (November, 2007). The branches are equipped with modern gadgets, ambience and all other facilities, which a youth requires in today’s modern era. Encouraged with the response, the Bank plans to open more branches at other centers in the country.

Other Initiatives

Technology Enabled Delivery Channels

Online Education Loan Application facility – To facilitate the student community in getting hassle free loans for pursuing higher education, the Bank has introduced an “On Line Education Loan Application Facility”. This facility will enable applicants to apply online and get in principle approval within 48 hours through the system.

Baroda Easy Pay – This is an electronic bill presentment and payment service launched from 4th June 2007. This system enables our customers to pay their bills online.

Promotion of Internet Banking – The Bank aggressively promoted Baroda Connect, an e-Banking channel, during the year. The response from its retail customers has been very encouraging.

Online booking of Railway Tickets - In our pursuit of providing convenience to our customers, a technology enabled online booking of Railway Tickets facility has been launched in collaboration with Indian Railway Catering and Tourism Corporation Ltd. The Bank’s customers can now make an on line payment of their Railway Bookings through the Bank’s Gateway.

Other Strategic Initiatives

The Bank also launched the Sale of Gold coins as a new initiative to augment its non-fund-based income from 23 October 2007 through select branches, presently 250 branches acting as POS across various Regions/Zones.

SME Business

The Small and Medium Enterprises (SMEs), are the primary growth engine for Indian Economy. This segment plays a vital role and has contributed significantly in the progress of the Indian Economy since independence. The sector has provided a sound industrial base to exports as well as to Gross Domestic Product. The SMEs in India contribute over 46.0 per cent of industrial output and about 50.0 per cent of the country’s exports.

The Bank has always been a forerunner in the development of small-scale industries and has formulated liberal and comprehensive SME Loan Policy for the SME customers. Furthermore, to give a focused attention to emerging SMEs in India besides the enterprises covered under the regulatory definition of SMEs, the Bank has been considering other commercial units also with a turnover up to Rs 100 crore at par with the SMEs.

SME Loan Factories

The Bank has introduced a SME Loan Factory (SLF) model as a fast delivery channel for the benefit of SME units. This “model” incorporates an innovative concept of “Sale & Delivery Model” based on the assembly line principle, engaging the Bank’s staff and supported by simplified processes and technology. The SLF has two separate branches, viz., “Sales” and “Credit” for credit marketing and credit processing. The concept has been received quite well by the business communities. The Bank opened a record number of eleven new factories on foundation day of the Bank, i.e., 20th July 2007 taking the total number of SLFs to 27.

At present, the Bank has SLFs at several business centres across the country. The centres are Agra, Ahmedabad, Banglore, Baroda, Bhilwara, Bulsar, Chennai, Coimbtore, Delhi, Ghaziabad, Hyderabad, Indore, Jaipur, Jamshedpur, Kanpur, Kolhapur, Kolkata, Lucknow, Ludhiana, Mumbai (3 SLFs), Nagpur, Noida, Pune, Rajkot and Surat.

Bank has planned to establish five new SME Loan Factories during the year 2008-09 including one additional Loan Factory at New Delhi.

In aggregate, total loan sanctioned through SME Loan Factories during the year ended March 2008 increased to Rs 5956 crores from Rs 2016 crores in previous year.

SME Credit Growth

Initiatives taken during the year in SME financing

The Bank entered into a MOU with “Dun & Bradstreet” in May 2007 for carrying out credit rating of SSI units at concessional rate.

The Bank redesignated 22 general branches as specialized SME branches. With this, the Bank has 60 Specialized SME branches across the country.

The Bank introduced many new customer centric area specific products to suit the local needs of the SME clusters.

The Bank liberalized systems and procedures with a view to provide a simplified process for faster credit appraisal.

The Bank designed Special Training Programme for grooming its officers in the SME business.

The Bank tied up with Bhartiya Yuva Shakti Trust to impart training to SME entrepreneurs for sponsoring them to Bank for finance.

The Bank organised customers’ meets by all SLFs. It also undertook continuous knowledge updating and skill building of officers attached to SLFs.

Rural and Agricultural Lending

The Bank has always been a frontrunner in the area of Priority Sector and Agriculture Lending, harnessing the vast potential of the rural market through its wide network of 1,097 rural branches and 624 semi-urban branches. The Bank has opened 60 new branches in rural and semi-urban areas during 2007-08.

The Bank is the convener of State Level Banker’s Committee (SLBC) in UP and Rajasthan. The Bank has Lead Bank Responsibility in 43 districts in the states of Gujarat (12), Rajasthan (12), Uttar Pradesh (14), Uttaranchal (2), Madhya Pradesh (1), and Bihar (2).

The Bank has sponsored five Regional Rural Banks (RRBs) in various states with a branch network of 1,190 branches and total business of Rs 11,999.70 crore as of end-March 2008.

Performance of Priority Sector Lending in 2007-08

Priority Sector Advances of the Bank surged from Rs. 25,290.84 crore as at end-March 2007 to Rs 31,681.26 crore as at end-March 2008 and formed 47.10 per cent of the Net Bank Credit (NBC) against the mandated target of 40.0 per cent. The Agriculture Advances of the Bank recorded a growth of 28.0 per cent over the previous year and rose to Rs 13,269 crore as at end-March 2008.

Under its flagship agriculture loan product “Baroda Kisan Credit Card”, the Bank issued as many as 1,48,547 credit cards during 2007-08 to provide credit to farmers. The Bank has financed as many as 1,90,511 new farmers during the year 2007-08. As a part of its microfinance initiatives, the Bank credit linked 13,256 Self Help Groups with an amount of Rs122.77 crore during 2007-08, out of which 77.0 per cent are women SHGs, thereby taking the total number of credit linked SHGs to 70,995 amounting to Rs 422.28 crore.

Business Initiatives and Strategies

The Bank introduced various initiatives/strategies during 2007-08 to harness the emerging opportunities for rural/agricultural lending such as: