The Federal Bank Limited

DRAFT LETTER OF OFFER September 17, 2007 For Equity Shareholders of the Bank Only

THE FEDERAL BANK LIMITED (The Bank was incorporated on April 23, 1931 as the ‘Travancore Federal Bank Limited Nedumpram” under the Travancore Companies Regulation, 1916. The Bank’s name was changed to “The Federal Bank Limited” on December 2, 1949. The Bank was registered under the Indian Companies Act, 1956 on April 1, 1956 .The Bank was licensed under the Banking Regulation Act, 1949, on July 11, 1959 and became a scheduled commercial bank under the Second Schedule of Reserve Bank of India Act, 1934 in July 20, 1970. The Bank has been allotted the CIN L65191KL1931PLC000368. For further details see ‘History of the Bank and Other Corporate Matters’ on page [•].) Registered Office: Federal Towers, Aluva 683101, Kerala, India Tel: + 91 484 2623 620 – 29 Fax: + 91 484 2622 672 Contact Person: Mr. Girish Kumar Ganapathy (Company Secretary and Compliance Officer) E-mail [email protected]; Website: www.federalbank.co.in FOR PRIVATE CIRCULATION TO THE EQUITY SHAREHOLDERS OF THE BANK ONLY ISSUE OF 8,56,58,955 EQUITY SHARES OF RS.10 EACH (“EQUITY SHARES”) AT A PREMIUM OF RS. [•] PER EQUITY SHARE FOR AN AMOUNT AGGREGATING RS. [•] CRORES TO THE EXISTING EQUITY SHAREHOLDERS ON RIGHTS BASIS IN THE RATIO OF 1 FULLY PAID EQUITY SHARE FOR EVERY 1 FULLY PAID EQUITY SHARE HELD ON THE RECORD DATE i.e. [•] (“ISSUE”). THE ISSUE PRICE IS [•] TIMES OF THE FACE VALUE OF THE EQUITY SHARE. GENERAL RISKS Investments in equity and equity related securities involve a degree of risk and Investors should not invest any funds in this Issue unless they can afford to take the risk of losing their investment. Investors are advised to read the Risk Factors carefully before taking an investment decision in this Issue. For taking an investment decision, Investors must rely on their own examination of the Issuer and the Issue including the risks involved. The securities have not been recommended or approved by the Securities and Exchange Board of India (SEBI) nor does SEBI guarantee the accuracy or adequacy of this document. Investors are advised to refer to “Risk Factors” on page [•] before making an investment in this Issue. ISSUER’S ABSOLUTE RESPONSIBILITY The Issuer, having made all reasonable inquiries, accepts responsibility for and confirms that this Draft Letter of Offer contains all information with regard to the Issuer and the Issue, which is material in the context of this Issue, that the information contained in this Draft Letter of Offer is true and correct in all material respects and is not misleading in any material respect, that the opinions and intentions expressed herein are honestly held and that there are no other facts, the omission of which makes this Draft Letter of Offer as a whole or any such information or the expression of any such opinions or intentions misleading in any material respect. LISTING The existing Equity Shares of the Bank are listed on the National Stock Exchange of India Limited (“NSE”), the Bombay Stock Exchange Limited (“BSE”) and the Cochin Stock Exchange Limited (“CSE”). Global Depositary Receipts which represent underlying Equity Shares of the Bank are listed on the Official List of the United Kingdom Financial Services Authority (the “Official List”) and are traded on the Professional Securities Market of the London Stock Exchange plc (the “PSM”), and in particular on the International Order Book. The Bank has received “in-principle” approvals from the NSE, the BSE, and the CSE for listing the Equity Shares arising from this Issue vide letters dated [•] and [•] and [•] respectively. The NSE shall be Designated Stock Exchange for the Issue. LEAD MANAGER TO THE ISSUE REGISTRAR TO THE ISSUE

SBI Capital Markets Limited Integrated Enterprises (India) Limited 202, Maker Towers ‘E’ Second Floor, Kences Tower, Street no.1, Cuffe Parade, Mumbai 400 005 Ramakrishna Street, Tel: (022) 2218 9166 North Usman Road, T. Nagar, Fax: (022) 2218 8332 ChennaI – 600 017 (Tamilnadu) Website: www.sbicaps.com Tel: (044) 2814 0801-03 E-mail: [email protected] Fax: (044) 2814 3378 E-mail:[email protected] ISSUE PROGRAMME ISSUE OPENS ON LAST DATE FOR REQUEST ISSUE CLOSES ON FOR SPLIT APPLICATION FORMS [•] [•] [•] TABLE OF CONTENTS ABBREVIATIONS & TECHNICAL TERMS ...... [●]

RISK FACTORS...... [●]

SUMMARY ...... [●]

THE ISSUE...... [●]

SELECTED FINANCIAL INFORMATION...... [●]

GENERAL INFORMATION ...... [●]

CAPITAL STRUCTURE...... [●]

OBJECTS OF THE ISSUE...... [●]

BASIS FOR ISSUE PRICE...... [●]

STATEMENT OF TAX BENEFITS...... [●]

INDUSTRY OVERVIEW ...... [●]

OUR BUSINESS ...... [●]

REGULATIONS AND POLICIES ...... [●]

HISTORY OF THE BANK AND OTHER CORPORATE MATTERS ...... [●]

DIVIDENDS ...... [●]

OUR MANAGEMENT...... [●]

FINANCIAL STATEMENTS...... [●]

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITIONS AND

RESULTS OF OPERATIONS ...... [●]

DESCRIPTION OF CERTAIN INDEBTEDNESS...... [●] OUTSTANDING LITIGATION AND MATERIAL DEVELOPMENTS ………………………………….[●] GOVERNMENT APPROVALS...... [●]

STATUTORY AND OTHER INFORMATION...... [●]

TERMS OF THE ISSUE...... [●]

MAIN PROVISIONS OF THE ARTICLES OF ASSOCIATION ...... [●]

MATERIAL CONTRACTS AND DOCUMENTS FOR INSPECTION ...... [●]

DECLARATION...... [●]

NO OFFER IN THE UNITED STATES

The Rights Entitlement and the Equity Shares of the Bank have not been and will not be registered under the United States Securities Act of 1933, as amended (the “Securities Act”), or any U.S. state securities laws and may not be offered, sold, resold or otherwise transferred within the United States of America or the territories or possessions thereof (the ‘‘United States’’ or ‘‘U.S.’’) or to, or for the account or benefit of, “U.S. Persons” (as defined in Regulation S under the Securities Act), (‘‘Regulation S’’), except in a transaction exempt from the registration requirements of the Securities Act. The Rights Entitlement referred to in this Draft Letter of Offer are being offered in India, but not in the United States. The offering to which this Draft Letter of Offer relates is not, and under no circumstances is to be construed as, an offering of any shares or rights for sale in the United States or as a solicitation therein of an offer to buy any of the said shares or rights. Accordingly, this Draft Letter of Offer should not be forwarded to or transmitted in or into the United States at any time.

NO OFFER TO THE PUBLIC IN THE EUROPEAN ECONOMIC AREA

This Draft Letter of Offer has been prepared on the basis that all offers of Rights Entitlement or Equity Shares will be made pursuant to an exemption under the Prospectus Directive, as implemented in Member States of the European Economic Area (the “EEA”), from the requirement to produce a prospectus for offers of Rights Entitlement or Equity Shares. Accordingly any person making or intending to make any offer, within the EEA, of Rights Entitlement or Equity Shares which are the subject of the placement contemplated in this Draft Letter of Offer should only do so in circumstances in which no obligation arises for the Company or the Lead Manager to produce a prospectus for such offer. Neither the Company nor the Lead Manager have authorised, nor do they authorise, the making of any offer of Rights Entitlement or Equity Shares through any financial intermediary, other than offers made by the Lead Manager which constitute the final placement of Rights Entitlement and Equity Shares contemplated in this Draft Letter of Offer.

i PRESENTATION OF FINANCIAL INFORMATION AND USE OF MARKET DATA

Unless stated otherwise, the financial information used in this Draft Letter of Offer is derived from the Bank’s consolidated restated audited financial statements as of March 31 for the years ended 2007, 2006, 2005, 2004 and 2003 prepared in accordance with Indian GAAP the Act, and the BR Act, and consolidated and restated in accordance with applicable SEBI Guidelines, as stated in the report of the Bank’ statutory Auditors M/s Sundaram & Srinavasan and M/s Brahmayya & Co., included in this Draft Letter of Offer.

Unless stated otherwise, throughout this Draft Letter of Offer, all figures have been expressed in crores excepting in the section capital structure where amounts have been expressed in absolute numbers.

All numbers presented in this Draft Letter of Offer have been rounded off to two decimal places excepting in the section capital structure where amounts have been expressed in absolute numbers..

Our fiscal year and that of our Subsidiary commences on April 1 and ends on March 31 of the next year. Unless stated otherwise, reference herein to a Fiscal (Eg. Fiscal 2006) is to the fiscal year ended March 31 of a particular year.

All references to “Rupees” or “Rs.” are to Indian Rupees, the official currency of the Republic of India.

In this Draft Letter of Offer, any discrepancies in any table between the total and the sum of the amounts listed may be due to rounding off.

The exchange rate used for the purposes of converting foreign exchange currencies into Indian Rupees in the Draft Letter of Offer as per the RBI reference rate as on the date of the relevant event for which conversion is being made.

Market and industry data used in this Draft Letter of Offer, has been obtained from industry publications and governmental sources. Industry publications generally state that the information contained in those publications has been obtained from sources believed to be reliable and that their accuracy and completeness are not guaranteed and their reliability cannot be assured. Although the Bank believes that market data used in this Draft Letter of Offer is reliable, it has not been independently verified.

ii FORWARD-LOOKING STATEMENTS

The Bank has included statements in this Draft Letter of Offer which contain words or phrases such as “will”, “aim”, “is likely to result”, “believe”, “expect”, “will continue”, “anticipate”, “estimate”, “intend”, “plan”,“contemplate”, “seek to”, “future”, “objective”, “goal”, “project”, “should”, “will pursue” and similar expressions or variations of such expressions, that are “forward looking statements”.

All forward looking statements are subject to risks, uncertainties and assumptions about us that could cause actual results to differ materially from those contemplated by the relevant forward-looking statement. Important factors that could cause actual results to differ materially from our expectations include but are not limited to:

a. A variation in our operating results b. Our failure to manage our growth effectively c. A deterioration in any industry sector where the Bank has significant exposure d. Higher delinquency rates arising of regulations requiring the Bank to lend to certain sectors e. Challenges arising out of the Bank’s new businesses f. Volatility in incomes arising the Bank’s treasury operations g. Credit risk from the Bank’s retail portfolio h. Risks arising from the concentration of our loan portfolio i. An increase in the Bank’s portfolio of non performing assets

For a further discussion of factors that could cause our actual results to differ, please refer to the sections titled “Risk Factors”, “Our Business” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Draft Letter of Offer. By their nature, certain market risk disclosures are only estimates and could be materially different from what actually occurs in the future. As a result, actual future gains or losses could materially differ from those that have been estimated. Neither the Bank nor the Lead Manager nor any of their respective affiliates have any obligation to update or otherwise revise any statements reflecting circumstances arising after the date hereof or to reflect the occurrence of underlying events, even if the underlying assumptions do not come to fruition. In accordance with SEBI / Stock Exchanges requirements, the Bank and Lead Manager will ensure that investors in India are informed of material developments until the time of the grant of listing and trading permission by the Stock Exchanges.

iii ABBREVIATIONS & TECHNICAL TERMS

In this Draft Letter of Offer, the terms “we”, “us”, “our”, “the Bank” or “FBL”, unless the context otherwise implies, refer to The Federal Bank Limited and its subsidiary, and its joint ventures.

General Terms and Abbreviations

Term Description Act The Companies Act, 1956 and amendments thereto ADR American Depository Receipt AGM Annual General Meeting Articles Articles of Association of the Bank AS Indian Accounting Standard Auditor The Statutory auditors of the Bank namely M/s Sundaram & Srinavasan and M/s Brahmayya & Co. AY Assessment Year Board or Board of Board of Directors of the Bank Directors BSE Bombay Stock Exchange Limited Capital or Share Share Capital of the Bank Capital CDSL Central Depository Services (India) Limited CSE The Cochin Stock Exchange Limited Depositaries Act The Depositories Act, 1996, as amended Depository A body corporate registered under the SEBI (Depositories and Participant) Regulations, 1996, as amended DP Depository Participant Equity Share(s) or The equity share of the Bank having a face value of Rs. 10 unless otherwise specified in Share(s) the context thereof. Equity means a holder of Equity Shares Shareholder FCD Fully Convertible Debenture FEMA Foreign Exchange Management Act, 1999 FCNR Account Foreign Currency Non Resident Account FI Financial Institutions FII(s) Foreign Institutional Investors registered with SEBI under applicable laws FY / Fiscal Financial Year ending March 31 or December 31, as the case maybe GDR Global Depository Receipt FVCI Foreign Venture Capital Investors, as defined in and registered with SEBI under the SEBI (Foreign Venture Capital Investor) Regulations, 2000, as amended GOI / Government of India Government/ Central goverment Issuer / Bank The Federal Bank Limited, a company originally incorporated in 1931 under the Travancore Companies Regulation, and registered under the Indian Companies Act, 1956, with Registration No. 368. Indian GAAP Generally Accepted Accounting Principles in India IT Act The Income Tax Act, 1961 and amendments thereto ITAT Income Tax Appellate Tribunal MAT Minimum Alternate Tax Memorandum Memorandum of Association of the Bank MoU Memorandum of Understanding MoF Ministry of Finance, Government of India NBFC Non Banking Finance Company NCD Non Convertible Debenture NIC National Industry Classification NR Non Resident NRI/Non Resident A Person resident outside India, as defined under FEMA, and who is a citizen of India or a Indian Person of Indian Origin and such term as defined under the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India)

iv Regulations, 2000, as amended NRI(s) Non Resident Indian(s) NRE Account Non Resident External Account NSDL National Securities Depository Limited NSE National Stock Exchange of India Limited NRO Account Non Resident Ordinary Account OCB Overseas Corporate Bodies. A company, partnership, society or other corporate body owned directly or indirectly to the extent of at least 60% by NRIs, including overseas trusts in which not less than 60% of beneficial interest is irrevocably held by NRIs directly or indirectly as defined under Foreign Exchange Management (Deposit) Regulations, 2000, as amended. OCBs are not permitted to invest in this Issue PCD Partly Convertible Debenture RBI The Reserve Bank of India ROC Registrar of Companies at Kochi, Kerala located at Registrar of Companies, Kerala, III 292 M I Floor, Company Law Bhavan, 292 MBMC Road, Trikkakara P.O, Kochi 682 021 RRB Regional Rural Bank RRB Act Regional Rural Banks Act, 1976, as amended SEBI Securities and Exchange Board of India SEBI Act, 1992 Securities and Exchange Board of India Act, 1992 and amendments thereto SEBI Guidelines The SEBI (Disclosure and Investor Protection) Guidelines, 2000 issued by SEBI on January 19, 2000 read with amendments issued subsequent to that date SIA Secretariat of Industrial Assistance Takeover Code The SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 as amended.

Issue Related Terms and Abbreviations

Term Description FBL The Federal Bank Limited FFL Fedbank Financial Services Limited CAF Composite Application Form Designated Stock NSE Exchange Draft Letter of Draft Letter of Offer dated [●] filed with SEBI for its comments Offer Investor(s) Shall mean the holder(s) of Equity Shares of the Bank as on the Record Date, i.e. [●] and Renouncees Issue Issue of 8,56,58,955 Equity Shares of Rs.10 each for cash at a premium of Rs. [●] per share on rights basis to existing Equity Shareholders of the Bank in the ratio of 1 fully paid up Equity Share for every 1 fully paid Equity Share held on the Record Date being [●] for an amount aggregating Rs. [●] crores Issue Closing [●] Date Issue Opening [●] Date Issue Price Rs. [●] per Equity Share Letter of Offer Letter of Offer dated [●] as filed with the Stock Exchanges after incorporating SEBI comments on the Draft Letter of Offer Our Joint IDBI Fortis Life Insurance Company Limited Ventures Our Subsidiaries Fed Bank Financial Services Limited Record Date [●] Registrar to the Integrated Enterprises (India) Limited Issue or Registrar Renouncees Shall mean the persons who have acquired Rights Entitlements from Equity Shareholders as on the Record Date Rights The number of Equity Shares that a shareholder is entitled to in proportion to his/her Entitlement shareholding in the Bank as on the Record Date Stock Shall refer to the NSE, BSE and CSE where the Equity Shares of the Bank are presently Exchange(s) listed

v Ganesh Bank Ganesh Bank of Kurundawad Limited, a bank with which the assets and liabilities of the Bank were merged with effect from September 2, 2006. PSM The Professional Securities Market

Technical and Industry Terms and Abbreviations

Term Description ALM Asset Liability Management AIBEA All India Bank Employees’ Association AIBOA All India Bank Officers’ Association ALCO Asset and Liability Management Committee ARC Asset Reconstruction Company ATMs Automated Teller Machines Bank Acquisition Act Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970, as amended Banking Division Government of India, Ministry of Finance, Department of Economic Affairs (Banking Division) BR Act The Banking Regulation Act, 1949, as amended BEFI Bank Employees Federation of India BPLR Benchmark Prime Lending Rate CBS Core Banking Solution CDR Corporate Debt Restructuring CISA Certified Information Systems Auditor CPs Commercial Papers CRAR Capital to Risk weighted Assets Ratio CRR Cash Reserve Ratio ECS Electronic Clearing Services IBA Indian Banks Association IRDA Insurance Regulatory and Development Authority IT Information Technology KYC Norms Know Your Customer norms stipulated by the RBI LC Letters of Credit LFAR Long Form Audit Report NPAs Non-Performing Assets NDS-OM Negotiated Dealing System -Order Matching OTS One Time Settlement SARFAESI Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, as amended SLR Statutory Liquidity Ratio SME Small and Medium Enterprises SSI Small Scale Industries Spread The difference between the yield on the fortnightly average of interest earning assets and the cost of the fortnightly average of interest bearing liabilities Tier II Bonds Unsecured, redeemable, non-convertible, subordinated bonds in the nature of promissory notes issued by the Bank for augmenting Tier II capital for capital adequacy purposes Tier I capital The core capital of a bank, which provides the most permanent and readily available support against unexpected losses. It comprises paid-up capital and reserves consisting of any statutory reserves, free reserves and capital reserves as reduced by equity investments in subsidiaries, intangible assets, and losses in the current period and those brought forward from the previous periods Tier II capital The undisclosed reserves and cumulative perpetual preference shares, revaluation reserves (at a discount of 55.0%), general provisions and loss reserves (allowed up to a maximum of 1.25% of risk weighted assets), hybrid debt capital instruments (which combine certain features of both equity and debt securities), investment fluctuation reserves and subordinated debts

vi Abbreviations

Term Description AS Accounting Standards as issued by the Institute of Chartered Accountants of India AY Assessment Year BIFR Board for Industrial and Financial Reconstruction BSE The Bombay Stock Exchange Limited CAGR Compounded Annual Growth Rate CARE Credit Analysis & Research Limited CDSL Central Depository Services (India) Limited DIN Director Identification Number DRT Debt Recovery Tribunal(s) EPS Earnings Per Share FIPB Foreign Investment Promotion Board GIR Number General Index Registry Number HUF Hindu Undivided Family MICR Magnetic Ink Character Recognition NAV Net Asset Value NBFCs Non-Banking Finance Companies NEFT National Electronic Funds Transfer NSDL National Securities Depository Limited NSE The National Stock Exchange of India Limited PAT Profit after tax PBT Profit before tax PAN Permanent Account Number RTGS Real Time Gross Settlement SEBI The Securities and Exchange Board of India constituted under the Securities and Exchange Board of India Act, 1992, as amended SCRA The Securities Contract (Regulation) Act, 1956, as amended SCRR The Securities Contract (Regulation) Rules, 1957, as amended SICA The Sick Industrial Companies (Special Provisions) Act, 1995, as amended

vii RISK FACTORS

An investment in Equity Shares involves a high degree of risk. You should carefully consider all the information in this Draft Letter of Offer, including the risks and uncertainties described below, before making an investment in our Equity Shares. If any of the following risks actually occur, our business, results of operations and financial condition could suffer, the price of our Equity Shares could decline, and you may lose all or part of your investment. The financial and other implications of material impact of risks concerned, wherever quantifiable, have been disclosed in the risk factors mentioned below. However there are a few risk factors where the impact is not quantifiable and hence the same has not been disclosed in such risk factors.

Unless otherwise stated, the financial information used in this section is derived from our consolidated audited financial statements under Indian GAAP, as restated.

A. INTERNAL RISK FACTORS

1. The Bank is involved in legal proceedings that, if determined against the Bank, could have a material adverse impact on the Bank.

There are certain legal proceedings against the Bank, which if determined against the Bank, could have a material and adverse impact on it. The legal proceedings are summarized as follows:

• There are currently four criminal matters pending against the Bank and certain of its officials before various fora.

• There are approximately 44 civil cases filed against the Bank that are pending before various forums in respect of amounts aggregating approximately Rs. Rs.60. 89 Crores.

• There a total of 60 matters pending before various national, state and local consumer dispute redressal forums where a consolidated liability of approximately Rs. 20.16 Crores

• There are four income tax related matters pending before various fora wherein a consolidated liability of approximately Rs. 363.95 Crores.

• Further there are 32 oustanding matters pending before the Banking Ombudsman. These matters to various alleged deficiencies in service. The consolidated amounts sought under the above matters are Rs. 1.08 Crores.

For details, refer “Outstanding Litigation and Material Developments” on page [●].

2. A determination against the Bank in respect of disputed tax assessments may adversely impact its financial performance.

As of March 31, 2007, the Bank had a disputed tax liability aggregating to Rs. 216.46 Crores in relation to depreciation on investments and write-off of Share Issue expenses. The Bank has made provisions totaling Rs. 92.03 Crores in relation to this liability and has treated the balance of Rs. 124.43 Crores as a contingent liability. Although the Bank has appealed the imposition of the disputed tax liabilities there can be no assurance that the appeal will be settled in favor of the Bank or that no additional liability will arise in connection with such appeal. Any additional tax liability may adversely impact the Bank’s financial performance.

3. Contingent liabilities could adversely affect the financial condition and results of operations of the Bank

viii The contingent Liabilities not provided for as on March 31, 2007 are as follows:

Contingent Liability Amount (Rs. in crs.) Claims against the Bank not acknowledged as debts 200.33 Liability on account of outstanding Forward Exchange Contracts 4030.30 Guarantees given on behalf of Constituents in India 769.87 Acceptances, Endorsements and other Obligations 7955.00 Other items for which the Bank is contingently liable 5.27 TOTAL 12,960.77

In the event that any or all of the above contingent liabilities materialize, They may have a material and adverse affect on the Bank’s financial performance.

4. Reserve Bank of India has imposed a penalty of Rs. 5 Lacs in 2002 against the Bank for failure to comply with “Know Your Customer” norms of the Reserve Bank of India.

In 2002 the RBI levied, and the Bank paid, a penalty of Rs.5 lakhs against the Bank for failure to comply with ‘‘Know Your Customer’’ norms in connection with the opening of bank accounts. Failure to protect against fraud or breaches in security may adversely affect the Bank’s operations and future financial performance. The Bank’s reputation could be adversely affected by \fraud committed by its employees, agents, customers or third parties.

5. The Bank’s results of operations may vary from period to period.

As a result of (i) the provisions the Bank makes for non-performing assets, commitments and contingencies (such as for letters of credit and bank guarantees) and inter-branch open items, (ii) volatility of macroeconomic factors, including exchange rates and interest rates and (iii) volatility in the Bank’s trading operations, the Bank’s results of operations have varied from period to period in the past and may fluctuate in the future due to these and other factors. Such fluctuations may also adversely affect the Bank’s liquidity. In light of the above, period-to-period comparisons of the Bank’s operating results may not be as meaningful as they would be for a bank not affected by such factors.

The Bank’s results in the future are dependent upon many factors, including its ability to implement its business strategies, economic growth in India, performance of the Bank’s loan portfolio and fluctuation in interest rates and rates of exchange, among other factors. There can be no assurance that the Bank will be profitable or will not incur operating losses in the future.

6. There are operational risks associated with the Bank which, when realised, may have an adverse impact on the results of the bank.

The Bank is exposed to many types of operational risks, including the risk of fraud or other misconduct by employees or outsiders, unauthorised transactions by employees or operational errors, including clerical or recordkeeping errors or errors resulting from faulty computer or telecommunications systems. Given the high volume of transactions of the Bank, certain errors may be repeated or compounded before they are discovered and successfully rectified. In addition, the Bank’s dependence upon automated systems to record and process transactions may further increase the risk that technical system flaws or employee tampering or manipulation of those systems will result in losses that are difficult to detect. The Bank may also be subject to disruptions of the operating systems, arising from events that are wholly or partially beyond the control of the Bank (including, for example, computer viruses or electrical or telecommunication outages), which may give rise to deterioration in customer service and to loss or liability to the Bank. For discussion on how operational risk is mananged, please refer to “Our Business” on page [●].

The Bank outsources certain functions to other agencies and is exposed to the risk that external vendors or service providers may be unable to fulfil their contractual obligations to the Bank (or will be subject to the same risk of fraud or operational errors by their respective employees as the Bank) and to the risk that its (or its vendors’) business continuity and data security systems prove to be inadequate. The Bank also face the risk that the design of controls of the Bank and procedures prove inadequate, or may be circumvented, thereby causing delays in detection or errors in information. Although the Bank maintain a system of controls designed to keep operational risk at appropriate levels, but there can be no assurance that the Bank will not suffer losses from operational risks in the future.

7. The Bank’s failure to manage growth effectively may adversely impact the Bank’s business.

In the past, the Bank has witnessed steady growth in both its office infrastructure and its business. The number of branches of the Bank has grown from 472 as of March 31, 2006 to 540 as of September 14, 2007. Over the same period, the Bank’s total assets have grown from Rs. 20,643 Crores to Rs. 25,090 Crores. The Bank’s ability to sustain growth depends primarily upon its ability to manage key issues such as selecting and retaining skilled manpower, maintaining an effective technology platform that can be continually upgraded, developing a knowledge base to face emerging challenges, and ensuring a high standard of customer service. Sustained growth also puts pressure on the Bank’s ability to effectively manage and control historical and emerging risks. The inability of the Bank to effectively manage any of these issues may adversely affect the Bank’s business growth and as a result, impact future financial performance and the market price of the Bank’s equity shares.

8. The Bank is exposed to various industry sectors. A deterioration in the performance of any of these industry sectors where the Bank has significant exposure may adversely impact the Bank’s business.

The Bank’s credit exposure as of March 31, 2007 is dispersed through various sectors such as agriculture (16.58%), housing (15.83%), infrastructure (8.16%) and power (4.66%). Of the Bank’s loans to industries, the most significant were to the Textiles, Iron and Steel, Food Processing and Engineering Goods sectors, which represented 4.00%, 2.05%, 2% and 1.50% respectively, of the Bank’s outstanding loans and advances as of such date. Any significant deterioration in the performance of a particular sector, including due to regulatory action or policy announcements by Government or State government authorities, would adversely impact the ability of borrowers in that industry to service their debt obligations to the Bank. As a result, the Bank would experience increased delinquency risk which may adversely impact the Bank’s financial performance and the market price of the Bank’s equity shares.

9. Regulations in India requiring the Bank to extend a minimum level of loans to certain sectors in India may subject the Bank to higher delinquency rates.

The priority sector lending norms of the RBI require all banks in India to extend at least 40% of their net bank credit (i.e., the gross bank credit less certain foreign currency non-resident deposits) to specified sectors, including agriculture and small scale industries, which are known as ‘‘priority sectors’’. In accordance with regulatory requirements in India, at least 18% of the Bank’s net bank credit must be extended to the agricultural sector, and at least 12% towards the export sector. Although such priority sector loans are extended to borrowers who have met the Bank’s internal credit rating guidelines and against what the Bank believes to be adequate security, adverse economic circumstances, including those resulting from changes in government policies, adverse weather conditions and natural calamities, may adversely impact these priority sectors resulting in an increase in impaired loans in these sectors. In addition, the criteria for having agricultural loans as non-performing are not as stringent as compared to the criteria for non-agricultural loans. For example, loans to agricultural borrowers can only be classified as non-performing if the loan remains overdue for more than two harvest seasons. As of March 31, 2007, total credit extended to priority sectors constituted 44.72% of the Bank’s net bank credit, and credit extended to the agriculture sector constituted 16.58%, of its net bank credit, while credit extended to the export sector constituted 5.61%, of its net bank credit. Like other Indian commercial banks, if the Bank fails to achieve the prescribed lending target to the priority sectors or the agricultural sector, it is required to contribute to the Rural Infrastructure Development Fund (‘‘RIDF’’) of NABARD, investments, which offer lower rates of return. For example, during the year ended on March 31, 2007, the Bank contributed Rs.166 Crores to the RIDF at interest rates ranging from 3% to 7.5%. Continued shortfalls in the Bank’s lending to the priority and agricultural sector and increased contributions to the RIDF may adversely affect Bank’s future financial performance.

10. The Bank faces significant challenges in its new businesses.

The Bank has diversified its products and services, particularly in retail banking. For example, the Bank markets and sells co-branded credit cards, life insurance products, etc. Selling these products requires the Bank to take on additional risks in these areas. The Bank has limited experience in these new products and services markets. These new products and services may not be profitable in the initial years of operation and are subject to general risks and costs associated with such businesses.

x 11. The Bank has a regional concentration in southern India, particularly the State of Kerala, and is dependent on the economies of South India and Kerala.

The Bank has a regional concentration in southern India, particularly in the State of Kerala. As of March 31, 2007, approximately 66% of the Bank’s branches were located in the State of Kerala and 47% of the Bank’s loans and advances were to customers from the State of Kerala. Its concentration in Kerala exposes the Bank more acutely to any adverse economic and/or political circumstances in the southern region of India as compared to other public and private sector banks that have a more diversified national presence. If there is a sustained downturn in the economies of south India and Kerala, the Bank’s financial performance is likely to suffer.

12. Net interest income comprises a substantial portion of the Bank’s total income and the Bank is vulnerable to interest rate risk.

Net interest income constituted 34.81% of the Bank’s operating revenue in Fiscal 2007. Any increase in the interest rates applicable to the Bank’s liabilities (such as deposit rates), without a corresponding increase in the interest rates applicable to its assets, will result in a decline in net interest income. Further, in the event of rising interest rates, borrowers may not be willing to pay the Bank correspondingly higher interest rates on their borrowings and may choose to repay their loans with the Bank if they are able to switch to more competitively priced loans offered by other banks. Any inability of the Bank to retain customers as a result of rising interest rates may adversely impact the Bank’s earnings in future periods. In addition, if the Bank is unable to increase its deposit base of low cost deposits, its overall cost of funds could increase which could have an adverse effect on the Bank’s financial condition and results of operations, its business and its ability to grow.

Under RBI regulations, the Bank’s liabilities are subject to a statutory liquidity ratio (‘‘SLR’’) requirement which requires that a minimum specified percentage, currently 25%, of a bank’s demand and time liabilities, be invested in Government securities and other approved securities. These securities generally carry fixed coupons and, in an environment of rising interest rates, the value of Government securities and other fixed income securities depreciate. The volatility in interest rates is reflected in the movement of the annual yield on the ten-year Government bond, which was 6.15% on March 31, 2003, 5.24% on September 30, 2003, 5.16% on March 31, 2004, 6.25% on September 30, 2004, 6.72% as of March 31, 2005 and 7.11% as of September 30, 2005, 7.52 % as of March 31 2006, 7.67% as of September 30, 2006 and 7.94% as of March 31, 2007. Any increase in interest rates may adversely impact the valuation of the Bank’s trading book and so the Bank’s financial condition.

13. In recent years, income derived from the Bank’s treasury operations has exhibited volatility.

From June 30, 2001 to April 30, 2004, financial markets in India witnessed a downward movement in interest rates. During this period, the interest rate on the ten year Government bond fell from 9.57% to 5.13%. The Bank’s treasury operations generated substantial trading income as a result of this fall in interest rates, with the Bank’s profits from the sales of its investments during fiscal 2003 and fiscal 2004 totaling Rs.143.56 Crores and Rs.174.42 Crores, respectively. However, with interest rates rising from July 2004 onwards, the income from trading opportunities in treasury operations declined to a greater extent and for Fiscal 2005, Fiscal 2006 and Fiscal 2007, the Bank recorded only Rs. 64.62 Crores, Rs.33.08 Crores and Rs 49.29 Crores, respectively, from profits on the sales of investments. The Bank has thus experienced increased volatility in its income from treasury operations. Any significant or sustained decline in income generated from treasury operations would adversely impact the Bank’s financial performance and could adversely impact the market price of the Bank’s equity shares.

14. The Bank’s portfolio of retail loans and advances is growing rapidly. If the Bank is unable to address credit risk in its retail portfolio, the Bank’s financial performance may be adversely affected.

The Bank’s portfolio of retail loans and advances has grown from Rs.1986 Crores as of March 31, 2005 to Rs.4336 Crores as of March 31, 2007. As part of the Bank’s business and growth strategy, it will continue to focus on further growth in its retail banking business. Comprehensive third-party credit history reports for the majority of retail borrowers are currently not available in India. As a result, the Bank is exposed to higher credit risk in the retail business compared to banks in developed markets. If the Bank’s internal credit screening process proves to be inadequate, it may experience an increase in impaired loans and it may be required to increase its provision for defaulted loans. Historically, the Bank’s corporate lending operations have been larger than its retail operations and it is likely that there will be an increase in the Bank’s NPAs as it continues to

xi expand its retail loan operations. This may impact the Bank’s future financial performance and the market price of the Bank’s equity shares.

15. The Bank is exposed to high concentrations of loans to a few borrowers and default by any one of them would adversely affect the Bank’s business.

As of March 31, 2007, aggregate loans to the Bank’s ten largest borrowers amounted to Rs. 1,116 Crores, representing approximately 56.15 % of the Bank’s total Tier I and Tier II capital. The Bank’s single largest borrower on such date had an outstanding balance of Rs.186.92 Crores, representing 9.41% of the Bank’s total Tier I and Tier II capital. The largest borrower group of companies under the same management control accounted for 1.26 % of the Bank’s total loans outstanding as of such date. Any deterioration in the credit quality of these assets would have a significant adverse effect on the Bank’s financial condition and results of operations, as well as on the market price of the Bank’s equity shares.

16. A significant portion of the Bank’s loans and advances have a residual tenor exceeding three years exposing the Bank to risks associated with economic cycles.

As of 31 March, 2007, loans with a residual tenor exceeding three years constituted 40.63% of the Bank’s total loans and advances. The long tenor of these loans may expose the Bank to risks arising out of economic cycles. In addition, a significant portion of these loans are project finance loans. There can be no assurance that these projects will perform as anticipated or that these projects will be able to generate cash flows to service commitments under the loans. The Bank is also exposed to infrastructure projects which are still under development and are open to risks arising out of delay in execution, failure of borrowers to execute projects on time, delay in getting approvals from necessary authorities and breach of contractual obligations by counterparties, all of which may adversely impact the projected cash flows. There can be no assurance that these projects will perform as anticipated. Risks such as those arising out of a recession in the economy, or a delay in project implementation or commissioning, could lead to rise in delinquency rates and in turn, adversely impact the Bank’s future financial performance and the market price of the Bank’s equity shares.

17. Banks in India face greater credit risks than banks in developed countries. If the Bank is unable to address credit risk in its asset portfolio, the Bank’s financial performance may be adversely affected.

The Bank’s principal business is to provide financing to its customers, most of which are based in India. As of each of March 31, 2007, gross retail loans and loans to small and medium-sized enterprises comprised 68.30%of the Bank’s total outstanding loans. The Bank’s retail loans and loans to small-and-medium-sized companies can be expected to be more severely affected by adverse developments in the Indian economy than loans to large corporations. The Bank is subject to the credit risk that its borrowers may not pay in a timely fashion or at all. The credit risk of all its borrowers is higher than that in more developed countries due to the higher uncertainty in the Indian regulatory, political, economic and industrial environment and difficulties that many of its borrowers face in adapting to instability in world markets and technological advances taking place across the world. Unlike several developed countries, India does not have a fully operational nationwide credit bureau, which means that the quality of information available to the Bank about the credit history of its borrowers, especially individuals and small businesses is lower than in such developed countries. If the Bank’s screening process proves to be inadequate, it may experience an increase in impaired loans and it may be required to increase its provision for defaulted loans. Higher credit risk may expose the Bank to greater potential losses which would adversely affect the Bank’s financial performance.

18. The Bank’s funding is primarily through short-term and medium-term deposits, whereas significant portion of Bank’s loan assets have longer durations. If depositors do not roll over deposited funds on maturity or if the Bank is unable to continue to increase its deposits, the Bank’s liquidity could be adversely affected.

Most of the Bank’s funding requirements are met through short-term and medium-term funding sources, primarily in the form of term deposits. As of March 31, 2007, 86% of the Bank’s total funding consisted of deposits and 21.7% of such total funding (or 25.2% of total deposits) consisted of demand deposits and savings deposits. A significant portion of the Bank’s assets have long-term maturities, creating a potential for funding mismatches. In the Bank’s experience, a substantial portion of customer deposits has been rolled over upon maturity and has been, over time, a stable source of funding. However, in the event that a substantial number of its depositors do not roll over deposited funds upon maturity, the Bank’s liquidity position and business would

xii be adversely affected. As of March 31, 2007, the Bank’s total deposits was Rs.21,584.44 Crores, a 20.7% increase from total deposits as of March 31, 2006 of Rs.17,878.74 Crores. Any failure by the Bank to increase its deposit base or any failure of customers to roll over their deposits could give rise to funding mismatches and could have a material adverse effect on the Bank’s liquidity, business and results of operations.

19. Lending risks

Some or all of the Bank’s customers or counterparts may be unable or unwilling to meet their respective contractual commitments in relation to lending, trading, hedging, settlement and other financial transactions. This may materially and adversely affect the Bank’s operations and may require the Bank to engage in protracted litigation and recovery proceedings which may not adequately compensate the Bank for losses suffered by it.

20. Loans written off by the Bank

In Fiscal 2007, the Bank has written off 1,629 accounts falling under the categories of Agriculture, SSI, Other Priority and Non Priority sectors, amounting to Rs. 156.97 Crores. Of the above, the Bank has initiated litigation in relation to 389 accounts of suit filed cases for the recovery of an amount of Rs.107.35 Crores. For further details in relation to the same please refer to “Outstanding Litigation and Material Developments” on page. [●]. Having to write off bad debt and having to engage in litigation for recovery may adversely affect our Business and results of Operations.

21. Any increase in the Bank’s portfolio of NPAs may adversely affect its business.

As of March 31, 2007, the Bank’s gross NPAs represented 2.95% of gross loans and advances and the Bank’s NPAs, net of provisions represented 0.44% of net loans and advances. As of March 31, 2007, the Bank provided for 83.74% of its total NPAs based on applicable regulatory guidelines, the quality of the security on these NPAs available to the Bank and additional provisions consistent with the Bank’s floating provision policy. If there is any deterioration in the quality of the Bank’s security or further aging of the assets after being classified as non-performing or additional assets become non-performing, an increase in provisions will be required. This increase in provisions would adversely impact the Bank’s financial performance and the market price of the Bank’s equity shares.

A number of factors will affect the Bank’s ability to control and reduce impaired loans. Some of these factors, including developments in the Indian economy, global competition, interest rates and exchange rates, are not within the control of the Bank. Although the Bank is increasing its efforts to improve collections and to foreclose on existing impaired loans, there cannot be any assurance that it will be successful in its efforts or that the overall quality of the Bank’s loan portfolio will not deteriorate in the future. If the Bank is not successful in controlling or reducing its impaired loans, or if there is a significant increase in its impaired loans, the Bank’s future financial performance could be adversely affected.

22. The Bank’s restructured loans may become non-performing due to the way the Bank has structured loan interest payments.

The Bank’s gross restructured loans, as a proportion of gross loans and advances outstanding was 0.46% as of March 31, 2007. The Bank restructures loans and advances based upon a borrower’s potential to restore its financial health. In the restructuring of a number the loans, the Bank has agreed with borrowers to set interest payments at a relatively low levels for a certain time-frame (and on occasion by agreeing to interest rate holidays) followed by much larger payments of interest in later periods. The relatively low payments improve the likelihood that a restructured loan will be categorized as performing during the period of such payments. However, future payments that are significantly higher may cause the loan to again become non-performing if the borrower is unable to make such larger payments in the later periods. There can be no assurance that the debt restructuring criteria approved by the Bank will be adequate or successful and that borrowers will be able to meet their obligations under restructured loans. If a significant number of the Bank’s customers are unable to pay larger interest payments for their respective restructured loans, a large number of restructured loans may become non-performing, thereby requiring additional provisions, additional capital and having a material adverse effect on the Bank’s financial condition, liquidity and results of operations.

xiii 23. Inability to foreclose on collateral in the event of a default may result in the Bank’s failure to recover the expected value of the collateral.

The Bank’s loans to corporate customers for working capital credit facilities are typically secured by charges on inventories, receivables and other current assets. In certain cases, the Bank obtains security by way of a first or second charge on fixed assets, a pledge of marketable securities, corporate guarantees and personal guarantees. In addition, project loans or long-term loans to corporate customers are secured by a charge on fixed assets and other collateral security. Loans to retail customers are either unsecured or secured by the assets financed, which largely consist of property, gold ornaments and vehicles.

In India, foreclosure on collateral generally requires a written petition to a court or tribunal. An application may be subject to delays and administrative requirements that may result, or be accompanied by, a decrease in the value of the collateral. While changes in law such as the enactment of the SARFAESI, may simplify the process of recovering NPAs enforcing securities and recover amounts owed from secured borrowers without the intervention of courts, there can be no assurance that such legislation will have a favourable impact on the Bank’s efforts to recover NPAs. Any failure to recover the expected value of the collateral would adversely impact the Bank’s financial condition and results of operations.

In addition, pursuant to RBI Corporate Debt Restructuring (‘‘CDR’’) Guidelines, the Bank may not be allowed to initiate recovery proceedings against a corporate borrower where the borrower’s aggregate total debt is Rs.10 Crores or more and lenders holding 75% or more of the borrower’s debt decide to restructure their loans. In such a situation, the Bank is restricted to a restructuring process only as approved by a 75% majority of lenders. In situations where the Bank holds 25% or less of the debt of a borrower, the Bank could be forced to agree to a drawn-out restructuring of debt, in preference to foreclosure of security or a one-time settlement. One-time settlements have generally been the Bank’s practice in such situations. As of March 31, 2007, the total amount of loan assets under CDR was Rs.70.24 Crores.

As a result of the foregoing factors, realization of the full value of collateral may be more difficult, which could have an adverse effect on the Bank’s financial condition and results of operations.

24. The value of the collateral held by the Bank may be overstated and may decline in the future.

There can be no assurance that the Bank’s loans are collateralized at adequate levels. The collateral may be over-valued and not accurately reflect its liquidation value, which is the maximum amount the Bank is likely to recover from a sale of collateral less the expenses of such sale. In addition, some of the valuations in respect of collateral held by the Bank may be out of date or may not accurately reflect the value thereof. In certain instances where there are no purchasers for a particular type of collateral, it may be worthless. Consequently, the protection afforded by collateral held by the Bank may be overstated. In addition, since a portion of the Bank’s loan portfolio is secured by real property, inventory or other collateral located in India, the value of these assets may be negatively affected by political, economic and social conditions in India. Any decline in the value of the collateral securing the Bank’s loans, including with respect to any future collateral taken by the Bank, would mean that its provisioning may be inadequate and require an increase in the Bank’s provisions. Any increase in the Bank’s provisions would adversely affect the Bank’s financial condition and results of operation, as well as its capital adequacy ratio, and could require it to raise additional capital.

25. In order to grow its business, the Bank is required to maintain its capital adequacy ratio at the minimum level required by the RBI for domestic banks. There is no guarantee that the Bank will be able to access capital as and when it needs it for growth.

The RBI requires Indian banks to maintain a minimum risk weighted capital adequacy ratio of 9%. The Bank’s capital adequacy ratio was 13.43 % as of March 31, 2007. The Bank is exposed to the risk of RBI increasing the applicable risk weight for different asset classes from time to time. Furthermore, when RBI issues guidelines on the implementation of the Basel II Accord, there may be changes in capital adequacy requirements. Basel II is the international capital adequacy framework for banks that prescribes minimum capital requirements for market risk and operational risk in addition to the requirement of minimum capital for credit risk.

Unless the Bank is able to access the necessary amount of additional capital, any incremental capital requirement may adversely impact the Bank’s ability to grow its business and may even require the Bank to withdraw from or curtail some of its current business operations. There can also be no assurance that the Bank will be able to raise adequate additional capital in the future at all or on terms favourable to it.

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26. The Banks is required to maintain cash reserve and Statutory Liquidity Ratios and increases in these requirements could adversely affect its business.

As a result of the statutory reserve requirements stipulated by the RBI, the bank may be more exposed structurally to interest rate risk than banks in many other countries. In February 2007, RBI increased the cash reserve ratio by a further 50 basis points to 6.0%. The increase was implemented in two phases of 25 basis points each starting the fortnight beginning February 17, 2007 and beginning March 3, 2007. On February 23, 2007, RBI notified that it would pay interest on cash reserves above 3.0% of net demand and time liabilities (i) at 3.5% for the period June 24, 2006 to December 8, 2006, (ii) at 2.0% for the period December 9, 2006 to February 16, 2007 and (iii) at 1.0% from February 17, 2007 until further notice.

In March 2007, RBI increased the cash reserve ratio by a further 50 basis points to 6.5%. The increase was implemented in two phases of 25 basis points each starting the fortnight beginning April 14, 2007 and beginning April 28, 2007. On April 13, 2007, RBI notified that it would be discontinuing interest payments on cash reserves above 3.0% of net demand and time liabilities till further notice. RBI on July 31, 2007 further increase the cash reserve ratio by 50 basis points to 7% from the fortnight beginning July 31, 2007.

In addition, under RBI regulations, the bank’s liabilities are subject to a Statutory Liquidity Ratio requirement, according to which 25.00% of the demand and time liabilities need to be invested in GoI securities, state government securities and other approved securities. Increases in Cash Reserve Ratio and Statutory Liquidity Ratio requirements could adversely affect the bank’s business and financial performance.

The Bank does not earn any interest on the amounts deposited with the RBI towards maintenance of its Cash Reserve Ratio. Increases in the cash reserve ratio could therefore adversely affect the Bank’s future financial performance and the market price of the Bank’s equity shares.

27. The mismatch between Assets and Liabilities could affect the bottom line of the Bank

The Bank’s asset liability position as of March 31, 2007 indicates a mismatch. The material negative mismatch is for the profile of 3-6 months and 6-12 months, which amounts to -35.19% and -25.93% respectively (for details please refer to “Our Business” on page [●]), of the total outflow respectively. As of March 31, 2006, the Bank had a mismatch for the profile of 1-14 days to the extent of -35.2% as against the threshold limit of 20% and also for the profile of 15-28 days, 29 days-3 months, 3 months-6 months which amounts to -14.05%, - 19.37% and -26.52% respectively.

28. Any downgrade in the ratings by credit rating agencies of the Bank’s subordinated bonds could affect the Bank’s ability to raise funds on a competitive basis.

While the Bank is not rated, its Tier II subordinated bonds are rated by rating agencies including Fitch and Credit Analysis & Research Limited (‘‘CARE’’). The ratings of these bonds were A+ and AA respectively. The Bank’s fixed deposits and its certificates of deposit have each been rated P1+ by Crisil Limited While the Bank believes that based on its improving business performance, the Bank’s subordinated bonds and deposits should merit similar or better ratings in the future, there can be no assurance that such credit ratings will not be downgraded for future transactions. As with any bank, any downgrade in such credit ratings in future may affect the Bank’s ability to raise further capital on a competitive basis, which may adversely affect its profitability and future growth.

29. Bank’s business is highly dependent on the continuation of its management team, skilled personnel and the Bank’s ability to attract and retain talented personnel.

The Bank is highly dependent on the services of its key management personnel. The Bank’s ability to meet future business challenges depends, among other things, on their continued employment and the Bank’s ability to attract and recruit talented and skilled personnel. There can be no assurance that the Bank will be able to retain such key personnel. Competition for skilled and professional personnel in the banking industry is intense. The loss of key personnel or an inability to manage attrition levels across the Bank may have a material adverse impact on the Bank’s business, its ability to grow and its control over various business functions. The Bank’s employees are represented by employees’ unions and officers’ associations and any employee unrest could adversely affect its operations and profitability. As of March 31, 2007, the Bank had 6,364 employees,

xv including 2,763 officers, 2,348 clerks and 1,253 sub-staff. In addition to the above, there are 57 officers, 126 clerks and 59 sub-staff of Ganesh Bank, which has been merged with the Bank as per the Scheme of Amalgamation approved by the Reserve Bank of India. Approximately 90 % of the Bank’s employees are represented by unions or officers’ associations. Negotiations to set salary and benefit standards for the Bank’s employees take place at the industry level through the Indian Banks’ Association, which is an independent body and collective bargaining is undertaken at the industry level. Any employee unrest in the future could adversely affect the Bank’s business and financial performance.

30. The employees of the Bank are represented by employees unions, which have gone on strike in the past for various reasons causing disruptions in the operations of the Bank. Such strike’s or disruptions may happen in the future and the management may have to accede to the demands of the union.

Union’s representing some or all of the employees of the Bank have gone on strike on several occasions. The details of each of the strikes since May 2005 are as follows:

Date of Strike Union Reason for strike May 2, 2005 Federal Bank Employees To press settlement of their Charter of Demands Union September 29, United Forum of Bank Against certain Government policies of disinvestments, privatization of 2005 Unions (UFBU) Public Sector and attack on workers , trade unions etc October 2, 2005 Federal Bank Employees Initiation of disciplinary action and placing an employee under Union suspension July 28, 2006 All India Bank Employees Withdrawal of RBI circular on Outsourcing, withdrawal of amendment Association, All India Bank of Sec 12(2) of BR Act, one more option for pension etc Officers Association, Bank Employees Federation of India October 3, 2006 United Forum of Bank To extend solidarity to striking employees of LKB Unions (Kerala) October 27, 2006 United Forum of Bank To introduce second option on Pension, to continue compassionate Unions appointment scheme, to discontinue outsourcing etc December 14, All India Bank Employees In support of various demands raised by National Convention of 2006 Association, Bank Workers Employees Federation of India March 7, 2007 Federal Bank Employees Initiation of disciplinary action and placing an employee under Union suspension.

Although the above strikes have not had a material effect on the Bank’s operations, there can be no assurance that similar or more serious employee actions will not occur in the future and will not have a material adverse effect.

31. Significant security breaches in the Bank’s computer systems and network infrastructure, fraud, systems failures and calamities would adversely impact its business.

The Bank seeks to protect its computer systems and network infrastructure from physical break-ins as well as security breaches and other disruptive problems caused by the Bank’s increased use of networking. Computer break-ins and power disruptions could affect the security of information stored in and transmitted through these computer systems and networks. These concerns will intensify with the Bank’s increased dependence on technology. The Bank employs security systems, firewalls and password encryption, designed to minimize the risk of security breaches. However, these may not be sufficient to prevent fraud, break-ins, damage and failures. Further, the Bank does not maintain insurance to protect against such information security breaches. A significant failure in security measures would have an adverse effect on the Bank’s business.

Given the increasing share of retail products and services and transaction banking services to the Bank’s business, the importance of systems technology to its business has increased significantly. The Bank’s principal delivery channels include its branches and ATMs. With the implementation of CBS and other technology initiatives, the importance of systems technology to its business has increased significantly. Although the bank currently has the technology and facilities in place to back up its systems and the bank has established a data centre in Bangalore, any failure in its systems, particularly those utilized for its retail products and services and

xvi transaction banking, or the occurrence of natural calamities that affect areas in which the Bank has a significant presence, could have a significant adverse effect on its operations.

32. The Bank is in the process of shifting its business from distributed database system to core banking. The transition may not be smooth and may cause bottlenecks in the banking operations.

In April 2007, the Bank entered into an agreement with Infosys Technologies Limited for the implementation of a core banking solution (“CBS”) based on “Finacle” software. As on September 14, 2007, 516 branches of the Bank have been shifted to the CBS while 22 branches continue to operate on banking application software developed in house by the Bank called ‘‘Fedsoft’’ and 2 branches which originally belonged Ganesh Bank are yet to be computerized. This software has not been tested in the market and there is no assurance that this software will function effectively in the future or will successfully interoperate with the Bank’s CBS.

Further, the Bank may experience problems in the installation and implementation of its CBS across its branch and ATM networks, including problems relating to migration of information, protection of customer information and upgrading existing hardware and software. The Bank will also be required to maintain and improve in software, hardware, network architecture and asset management services, which may require substantial investment. If the Bank is unable to successfully run and maintain its CBS and its existing infrastructure, it may face problems in expanding the scope of its products and services across its distribution network, and may also not be able to realize its investment in the core banking solution in a timely manner.

33. Major fraud, lapses of control, system failures or calamities could adversely impact the Bank’s business.

The Bank is vulnerable to risk arising from the failure of employees to adhere to approved procedures, system controls, fraud, system failures, information system disruptions, communication system failure and data interception during transmission through external communication channels and networks. There can be no assurance that the Bank’s use of encrypted password-based protections and firewalls are adequate to prevent fraud or the invasion or breach of the network by an intruder. For example, in 2002 the RBI levied a penalty of Rs. 5.0 Lakhs against the Bank for failure to comply with ‘‘Know Your Customer’’ norms in connection with the opening of bank accounts. Although the Bank has put in place risk management policies and internal controls, there can be no assurance that similar occurrences will not take place in the future. Failure to protect against fraud or breaches in security may adversely affect the Bank’s operations and future financial performance. The Bank’s reputation could be adversely affected by significant fraud committed by its employees, agents, customers or third parties.

34. The Bank has limited protection of its intellectual property.

The Bank has not registered its application software, ‘‘FEDSOFT’’, either as a trademark or as a copyright. Use of the Bank’s brand name, logo or application software by third parties could adversely affect the Bank’s reputation, which could in turn adversely affect the Bank’s financial performance and the market price of the Bank’s equity shares. Intellectual property rights and the Bank’s ability to enforce them may be unavailable or limited in some circumstances. In addition, patent, copyright and trademark registration applications may not be allowed or competitors may challenge the validity or scope of the Bank’s patents, copyrights or trademarks once the same are obtained. If the Bank fails to successfully obtain or enforce intellectual property rights, its competitive position and operating results could be adversely affected.

35. The Bank may, in the future, enter into strategic alliances, investments, partnerships and acquisitions. Unsuccessful implementation of this strategy may harm its business, dilute investors’ ownership interest and cause the Bank to incur debt.

Although the Bank has historically expanded its business operations through organic growth, the Bank’s future growth may include entering into strategic alliances, making strategic investments, establishing partnerships and/or making acquisitions. The Bank may not be able to identify suitable investment opportunities, partners or acquisition candidates. If the Bank does identify suitable investment opportunities, partners or acquisition candidates, it may be unable to accurately assess these candidates and risks, place an accurate valuation on such candidates and negotiate terms commercially acceptable or favourable to the Bank or complete those transactions at all. In acquiring or merging with another company or forming a joint venture or strategic partnership, the Bank could have difficulty in integrating that company’s business, personnel, operations and

xvii technology with the Bank’s. In addition, the key personnel of an acquired company may decide not to work for the Bank. Any potential acquisition, alliance or joint venture could involve a number of specific risks, including diversion of management’s attention, higher costs, unanticipated events or circumstances, legal liabilities, failure of the business of the acquired company, fall in value of investments, amortisation of acquired intangible assets, increases in nonperforming loans and higher provisions, some or all of which could have a material adverse impact on the Bank’s business, financial condition and results of operations.

In the event that the Bank plans to acquire or invest in an overseas company, it may be required to obtain the prior approval of the RBI, other regulators and/or the Government and there can be no assurance that such approvals will be obtained in a timely manner or at all. Furthermore, international acquisitions involve additional risks for the Bank, including unfamiliar markets and regulatory regimes, additional competitors (some of which are large international banks) and foreign exchange risk, any of which could have a material adverse effect on the Bank’s business, financial condition and results of operations.

36. If ownership restrictions on private sector banks are relaxed, a single investor may acquire a controlling stake in the Bank.

If the current restrictions are further liberalized to allow either increased investment by Indian entities or greater foreign ownership, a single entity or group of investors acting in unison, may acquire equity shares of the Bank to the extent that would allow it / them to control or strongly influence the Bank. Such an entity would, subject to restrictions in the Bank’s Articles of Association, be able to determine, or would have a disproportionate influence compared to other shareholders in, the election of the Board of Directors, management policies and the outcome of corporate transactions submitted to shareholders for approval. There can be no assurance that any future controlling shareholder will have the same interests as any minority shareholder or will pursue the same strategies as the current management.

EXTERNAL RISK FACTORS

1. A slowdown in economic growth in India could cause the Bank’s business to suffer.

The Indian economy has shown sustained growth over the last few years with GDP growing at 7.5% in fiscal 2005, 8.4% in fiscal 2006 and 9.2% in fiscal 2007. However, growth in industrial and agricultural production in India has been variable. The Bank currently operates only in the domestic Indian market, and the Bank’s performance is intertwined with the overall economy, the GDP growth rate and the economic cycle in India. The Indian economy could be adversely affected by a number of factors. A significant increase in the price of crude oil could adversely affect the Indian economy. India’s economy could also be adversely affected by a general rise in interest rates and unfavourable weather conditions adversely affecting agriculture. Any slowdown in the Indian economy or volatility in global commodity prices, in particular oil and steel prices, could adversely affect the Bank’s borrowers and contractual counterparties. With the importance of retail loans to the Bank’s business, any slowdown in the growth of sectors like housing and automobiles could adversely impact its performance. Further, given the importance of the agricultural sector to the Bank’s business, any slowdown in the growth of the agricultural sector could also adversely impact the Bank’s performance.

2. There are a number of restrictions as per the Banking Regulation Act, which impede the flexibility of the Bank’s operations and affect/restrict investor’s right. Further, any material changes in the regulations that govern the bank could adversely affect the bank’s business and financial performance

Banks in India are regulated by the Banking Regulation Act, the Companies Act and SEBI (to the extent they are listed on an Indian stock exchange) and are also subject to detailed supervision and regulation by the RBI and Ministry of Finance.

a. Restrictions on the business to be carried on by the Banks: The Banks can carry on business/ activities as specified in the Act. There is no flexibility to pursue profitable avenues if they arise, in contrast with Companies under the Companies Act, 1956, where the shareholders can amend the Objects Clause by a special resolution. b. Restrictions on payment of dividend: No Banking company can pay any dividend on its shares until all its capitalized expenses (including preliminary expenses organizational expenses, share selling commission, brokerage, amounts of losses incurred and any other item of expenditure no represented

xviii by tangible assets) have been completely written off, thus preventing dividend payments unless the conditions are met. c. Restrictions limiting maximum shareholding. d. Restrictions requiring the maintenance of reserves. e. Restrictions requiring consent from the RBI to be obtained for opening new places of business and transfers of existing places of business. f. Restrictions regarding reconstruction of banks through Amalgamation or otherwise, g. Requirement to maintain assets in India equivalent to not less than 75% of its demand and time liabilities in India. h. Requirement to obtain approval of the RBI for the appointment and remuneration of its Chairman, Managing Director (or equivalent) and other whole-time directors. i. Requirement to obtain approval of the RBI for the creation of floating charges on its borrowings, thereby hampering leverage. j. Restrictions with respect to disclosures in the Profit & Loss account and Balance Sheet, production of documents and availability of records for inspection by shareholders.

The laws and regulations governing banks (or their official interpretation or application) are subject generally to changes in Indian law, as well as to changes in regulations, government policies and accounting principles, and any such changes could adversely affect the business and financial performance of the Bank.

In addition, changes to regulations that directly impact the Bank’s equity shareholders, such as regulations with regard to dividends and voting rights, could adversely affect the price of the Bank’s Equity Shares.

There are a number of restrictions under the Banking Regulation Act that impede the Bank’s operating flexibility and affect or restrict equity shareholders’ rights. These include the following:

The Bank is required to maintain certain prudential limits set by RBI. These limits require the Bank, inter alia, to maintain certain capital adequacy ratios, to limit the Bank’s exposure to single and group borrowers and other risks and to maintain certain provisions against nonperforming assets. The Bank is also subject to the directed lending norms of RBI.

3. Foreign investment in the Bank is subject to limits specified by the Government of India.

Under Indian laws, the aggregate permissible foreign investment (including foreign direct investment (‘‘FDI’’) and investment by registered foreign institutional investors (‘‘FIIs’’) and nonresident Indians (‘‘NRIs’’)) in a private sector bank, such as the Bank, is limited to an aggregate of 74% of the paid up capital of such bank and the aggregate investment by FIIs is limited to 24% of the paid up capital of such bank, although this limit may be increased to 49% by the bank’s shareholders through a special resolution. As of March 31, 2007, the level of aggregate foreign investment in the Bank was 57.58%. Accordingly, unless the current foreign investment limit applicable to the Bank is liberalized, the scope of additional foreign investment in the Bank will be limited. Once the aggregate foreign investment in the Bank reaches this cut-off point, the RBI cautions non-resident investors and authorised dealers not to further transact in equity shares of such bank without prior approval of the RBI. These restrictions may adversely affect the liquidity of the Bank’s equity shares and could result in the absence of FII buying support even in situations where there is a decline in the price of the equity shares.

4. Political instability and significant changes in the Government’s policy on liberalisation of the Indian economy could impact the Bank’s financial results and prospects.

India has been charting a course of economic liberalisation and the Bank’s business could be significantly influenced by the economic policies of the Government. The current coalition-led Government which came to power in May 2004 has announced policies and undertaken initiatives that continue the economic liberalisation policies. However, there can be no assurance that these liberalisation policies and the political stability will continue in the future. The rate of economic liberalisation could change, and laws and policies affecting banking and finance companies, foreign investment, currency exchange and other matters affecting investment in the Bank’s securities could change as well. Any significant change in liberalization and deregulation policies could adversely affect business and economic conditions in India generally and the Bank’s business in particular. If the Government introduces significant changes, the competitive position of the Bank’s borrowers may be adversely affected and this may impact the quality of the Bank’s loan portfolio.

xix 5. The Indian banking industry is very competitive and the Bank’s ability to grow depends on its ability to compete effectively.

The Indian banking industry is very competitive. The Bank competes directly with large public sector banks, which have larger customer and deposit bases, larger branch networks and more capital. The large public sector banks are also expected to improve their customer service networks and technology platforms, which will allow them to enhance their competitive position against private sector banks such as the Bank. The Bank also competes with other private sector banks in India, some of which also have larger customer bases and greater financial resources than the Bank. In particular, other private sector banks may have operational advantages in implementing new technologies, rationalizing branches and recruiting employees through incentive-based compensation. The Bank also faces competition from foreign banks that have established branches in India and have aggressively pursued a share of business in the market.

In addition, the Government of India has expressed a preference for consolidation in the banking sector in India. Mergers among public sector banks may result in enhanced competitive strengths in pricing and delivery channels for merged entities. The Government has also indicated that it may further liberalize the rules for foreign investment in private sector banks, which could result in consolidation in the banking sector. The Bank may face greater competition from larger banks as a result of such consolidation, which may adversely affect the Bank’s future financial performance.

6. Any downgrading of India’s debt rating by an international rating agency could have a negative impact on the Bank’s business.

Any adverse revision to India’s credit rating for domestic and international debt by international rating agencies may adversely impact the Bank’s ability to raise additional financing and the interest rates and other commercial terms at which such additional financing is available. This could have an adverse effect on the Bank’s financial performance and the Bank’s ability to obtain financing to fund its growth on favourable terms or at all.

7. A decline in India’s foreign exchange reserves may affect liquidity and interest rates in the Indian economy, which could adversely impact the Bank.

A decline in India’s foreign exchange reserves could result in reduced liquidity and higher interest rates in the Indian economy, which in turn could adversely affect the Bank’s business and future financial performance and the market price of the Bank’s equity shares.

8. Financial instability in other countries, particularly emerging market countries, could disrupt the Bank’s business and affect the price of the Bank’s equity shares.

Although economic conditions are different in each country, investors’ reactions to developments in one country may have an adverse effect on the securities of companies in other countries, including India. A loss of investor confidence in the financial systems of other emerging markets may cause increased volatility in Indian financial markets and the Indian economy in general. Any worldwide financial instability could also have a negative impact on the Indian economy, including the movement of exchange rates and interest rates in India, which could adversely affect the Indian financial sector in particular. Any such disruption could have an adverse effect on the Bank’s business, future financial performance, financial condition and results of operations, and affect the price of the Bank’s equity shares.

9. Interest Rate Risks. The risk of potential impact on net interest income/net interest margin/market value of the security covered by unexpected changes in market interest rates. These risks are inherent in the Banking Business. Adverse movement of interest rate will necessitate depreciation to be provided on investments affecting the profitability of the Bank. 10. Forex Risks.

As a financial intermediary, the Bank is exposed to exchange rate risk in its foreign exchange transactions. Although the Bank complies with regulatory limits on its unhedged foreign currency exposure, the Bank is exposed to fluctuation in foreign currency rates for its un-hedged exposure and any hedged exposure where the relevant counterparty fails to perform its obligations. Adverse movements in foreign exchange rates may also impact the Bank’s borrowers negatively which may in turn adversely impact the quality of the Bank’s exposure

xx to these borrowers. Volatility in foreign exchange rates could adversely affect the Bank’s financial performance and consequently the market price of the Bank’s equity shares.

11. Dis-intermediation Risk With the increasing trend towards dis-intermediation in the financial markets, many companies may access the markets directly, thereby reducing their dependence on the Banking System.

12. Hostilities, terrorist attacks, civil unrest and other acts of violence could adversely affect the financial markets and the Bank’s business.

Terrorist attacks and other acts of violence or war may adversely affect the Indian markets and the worldwide financial markets on which the Bank’s equity shares trade. These acts may result in a loss of business confidence, make travel and other services more difficult and could generally have an adverse effect on the Bank’s business. In addition, any deterioration in international relations may result in investor concern regarding regional stability which could adversely affect the price of the Bank’s equity shares.

In addition, India has witnessed localised civil disturbances in recent years and it is possible that future civil unrest as well as other adverse social, economic or political events in India could have an adverse impact on the Bank’s business. Such incidents could also create a greater perception that investment in Indian companies involves a higher degree of risk and could have an adverse impact on the Bank’s business and the market price of the Bank’s equity shares.

13. Natural calamities could have a negative impact on the Indian economy and harm the Bank’s business.

India has experienced natural calamities such as earthquakes, floods, drought and a tsunami in recent years. The extent and severity of these natural disasters determines their impact on the Indian economy. For example, as a result of drought conditions during fiscal 2003, the agricultural sector recorded negative growth of 5.2% and the erratic progress of the monsoon in 2004 adversely affected sowing operations for certain crops. Prolonged spells of abnormal rainfall and other natural calamities could have an adverse impact on the Indian economy which could adversely affect Bank’s business and the price of the Bank’s equity shares.

14. Share price of the Bank may go for a correction after the record date.

The Share price data of the Bank incorporated herein pertains to Equity Shares prior to the rights issue. The price of Equity Shares of the Bank may potentially vary significantly following the Issue and may potentially fall to levels which are below the historical price levels of the Equity Shares.

Notes to Risk Factors:

1. The RBI conducts regular inspections of banking companies under the provisions of the Banking Regulation Act. The reports of the RBI are strictly confidential. The RBI does not permit disclosure of its inspection report.

2. This Issue is of 8,56,58,955 Equity Shares for cash at a premium of Rs. [•] per Equity Share on rights basis to the existing Equity Shareholders of the Bank in the ratio of 1 fully paid up Equity Share for every fully paid up Equity Share held on the Record Date i.e. [•] in terms of this Draft Letter of Offer.

3. Net worth of the Bank on a stand alone basis as on March 31, 2007 is Rs. 1,502.20 Crore. The Issue is of an amount aggregating Rs. [●] Crores.

4. The book value per Equity Share as of March 31, 2007 was Rs. 175.48 per Equity Share.

5. The Bank has entered into certain related party transactions as disclosed in the section titled “Related Party Transaction” on page [●].

6. Before making an investment decision in respect of this Issue, you are advised to refer to the section entitled ‘Basis for Issue Price’ on page [●]

xxi . 7. The Bank has no identifiable promoters. Hence no disclosure of details in relation to the cost of acquisition of shares by the promoter and promoter group, and details of transactions by them in our securities need be made.

8. Trading in equity shares for all investors shall be in dematerialised form only.

9. Please refer to the sub section entitled ‘Basis of Allotment’ on page [●] for details on basis of allotment.

10. For transactions in Equity Shares by Directors of the Bank in the last six months, please refer to the section entitled ‘Capital Structure’ on page [●].

11. The Bank and the Lead Manager are obliged to keep this Draft Letter of Offer updated and inform the public of any material change/development.

12. The LM and the Bank shall make any clarification or any information relating to the Issue available to the investors at large and no selective or additional information would be available for a section of the investors in any manner whatsoever.

13. The Lead Manager and the Company shall update this Draft Letter of Offer and keep the shareholders/public informed of any material changes till the listing and trading commencement and the company shall continue to make all material disclosures as per the terms of the listing agreement.

xxii SUMMARY

Our fiscal year ends on March 31 of each year, so all references to a particular fiscal year are to the 12-month period ended March 31 of that year. In this section, any reference to "we", "us" or "our" refers to the Federal Bank Limited. Unless otherwise stated, the financial information used in this section is derived from our audited financial statements under Indian GAAP, as restated.

INDUSTRY OVERVIEW

(The information presented in this section has been extracted from publicly available documents, which have not been prepared or independently verified by the Bank, the Lead Manager or any of their respective affiliates or advisors.)

History The evolution of the modern commercial banking industry in India can be traced to 1786 with the establishment of Bank of Bengal in Calcutta. Three presidency banks were set up in Calcutta, Bombay and Madras. In 1860, the limited liability concept was introduced in banking, resulting in the establishment of joint stock banks like Allahabad Bank Limited, Punjab National Bank Limited, Bank of Baroda Limited and Bank of India Limited. In 1921, the three presidency banks were amalgamated to form the Imperial Bank of India, which took on the role of a commercial bank, a bankers’ bank and a banker to the government. The establishment of the RBI as the central bank of the country in 1935 ended the quasi-central banking role of the Imperial Bank of India. In order to serve the economy in general and the rural sector in particular, the All India Rural Credit Survey Committee recommended the creation of a state-partnered and state sponsored bank taking over the Imperial Bank of India and integrating with it, the former state-owned and state- associate banks. Accordingly, the State Bank of India (“SBI”) was constituted in 1955. Subsequently in 1959, the State Bank of India (Subsidiary Bank) Act was passed, enabling the SBI to take over eight former state-associate banks as its subsidiaries. In 1969, 14 private banks were nationalised followed by six private banks in 1980. Since 1991 many financial reforms have been introduced substantially transforming the banking industry in India.

Industry Structure Prior to 1991, India’s banking system was almost entirely owned by the Government, with the exception of 22 private sector banks (which were considered too small to be nationalised) and the foreign banks. After the economic crisis in 1991, the process of financial reforms has resulted in the banking system moving from a totally administered sector into a more market-driven system. This was a result of the recommendations contained in the report of the Narasimham Committee set up in 1991. In line with the established objectives of the banking sector reforms which include improving the macro economic policy framework, improving the financial health and competitive position of banks, building the financial infrastructure relating to supervision, audit technology and legal framework and improving the level of managerial competence and quality of human resources, the reforms include progressive tightening of prudential norms for asset quality and capital adequacy in line with international norms, deregulation of interest rates, reducing the statutory co-option of bank deposits to finance Government deficits, liberalising the entry norms for new intermediaries, and the development of new institutions (for trading, clearing and settlement of debt market transactions, forex and derivative instruments, credit information bureaus and asset reconstruction companies). The key drivers for this success within the Indian Banking sector have been a clear focus on the emerging opportunities in retail banking, technology architecture, relationship-based approach in Corporate/Treasury, Capitalisation and a Quality Management Team. The formal banking system in India comprises the RBI, Commercial Banks, Regional Rural Banks and the Cooperative banks. In the recent past, private non-banking finance companies also have been active in the financial system, and are being regulated by the RBI.

1 BANK OVERVIEW

Our fiscal year ends on March 31 of each year, so all references to a particular fiscal year are to the 12-month period ended March 31 of that year. In this section, any reference to "we", "us" or "our" refers to Federal Bank Limited. Unless otherwise stated, the financial information used in this section is derived from our consolidated audited financial statements under Indian GAAP, as restated.

The Bank was incorporated on April 23, 1931 as the ‘Travancore Federal Bank Limited Nedumpram” under the Travancore Companies Regulation, 1916. The Bank’s name was changed to “The Federal Bank Limited” on December 2, 1949. The Bank was registered under the Indian Companies Act, 1956 on April 1, 1956 .The Bank was licensed under the Banking Regulation Act, 1949, on July 11, 1959 and became a scheduled commercial bank under the Second Schedule of Reserve Bank of India Act, 1934 in July 20, 1970. For further details see History of the Bank and other Corporate Matters on page [●].

The Bank commenced a phase of sustained growth under the leadership of Late K. P. Hormis, who was the Chairman and Managing Director of the Bank. The Bank became an Authorised Dealer in foreign exchange in 1972. The Bank has also commenced merchant banking operations in 1989.

The Bank is currently headed by its Chairman & CEO, M. Venugopalan. In accordinace with the requirements of the regulations prescribed by the Reserve Bank of India, the Board of Directors consists of persons representing various disciplines. Over the seven decades of its service to the nation, the Bank has become one of the leading private sector banks with a strong nationwide presence. As on March 31, 2007 the Bank had 536 branches which has gone up to 540 branches as on September 14, 2007 and 12 regional offices located at various part of the country. The Bank has opened a unit office at Kurundwad to co-ordinate the activities of the branches of the Ganesh Bank. The Bank has already received an authorization vide letters dated May 25, 2007, May 23, 2007 and January 29, 2007 from the Reserve Bank of India for another 66 branches and one regional office in India and one representative office at Abu Dhabi respectively.

The Balance sheet size of the Bank as on March 31, 2007 was Rs. 25,089.93 Crore and the total business aggregating deposits and advances stood at Rs. 36,483.54 crore. As on March 31, 2007, the operating profit of the Bank stood at Rs. 612.98 crore. The Net Interest Margin of the Bank as on March 31, 2007 stood at 3.06 % notwithstanding competition and pressures faced in the market. To augment the growth of non- interest income Bank has also entered into cash management services, depository participant business, distribution of insurance products etc.

The Bank's share in total deposits of scheduled commercial banks was 0.83 % in 2007 as compared to 0.84% in 2006.

In order to minimize the pressure on interest margin, competition and quality of assets, the Bank has been increasingly looking at the retail and SME segments for fresh credit disbursals. As on March 31, 2007 over 68.30 % of Bank's total advances are in retail and SME segments. The Bank's thrust on small and mid-size loans has also sought to ensure that the yield on advances remains relatively high.

As of March 31, 2007, the said yield was 10.16 %. The percentage of net NPAs to net Advances as on March 31, 2007 was down to 0.44 %from a level of 0.95 % as on March 31, 2006, 2.21% as on March 31, 2005 and 2.89% as on March 31, 2004.

The Bank has a risk management system for identifying, measuring, monitoring and managing credit risk, market risk and operational risk. The assets and liabilities of the Bank are covered under the asset liability management (“ALM”) process. With the support of ALM information, the Bank reviews the liquidity management and pricing of both deposits and advance products, movement of net interest margin (“NIM”), etc, to manage the market risks. The Bank has sought to stabilize, monitor and control its credit risk and investment exposure rating and monitoring mechanisms, using management information systems (“MIS”), and historical data on credit risk parameters. The Bank has an internal audit system which includes concurrent audit, computer audit, credit audit and revenue audit.

The Bank has a three tier organizational structure; consisting of branches which are intended to be the profit centres for the Bank, the regional offices which are responsible for the administration, growth and development of the branches, and the central office which provides stratergies, as well as well-defined systems and procedures for the operation of the regional office and branches.

In 2007, the Bank entered into an agreement with Infosys Technoloiges Limited for the implementation of a core banking solution (“CBS”) based on “Finacle” software. As on September 14, 2007, 516 of the Bank branches operate on the CBS while 22 new branches continue to operate on in house software Fedsoft and the remaining 2 branches are yet to be computerized. For risks associated with the Bank’s migration to CBS see Risk Factors on page [●].

As on March 31, 2007 the ATM strength of the Bank was 391, which has gone upto 427 by September 14, 2007. The Bank has further obtained authorization from the Reserve Bank of India vide its letter No. DBOD No. BL.12084/22.03.034/2006-07 dated June 5, 2007 to open 70 additional offsite ATMs. The Bank also offers various value-added products like Mobile Alert service, Mobile Banking, Tele banking, Tele remittance facility, ATM cards, etc. with the object of increasing its client base and reach.

Key Financial and Performance Indicators:

The Bank’s performance in various parameters for the last three financial years is as follows: (Rs in crore) Particulars 2004-05 2005-06 2006-07 Deposits 15,192.88 17,878.74 21,584.44 Advances (Net) 8,822.59 11,736.47 14,899.10 Investments 5,799.16 6,272.38 7,032.66 Net Profit 90.09 225.21 292.73 Capital Funds* 715.95 1,242.91 1,495.58 Earning per share 13.73 32.71 34.20 Book Value 110.27 146.02 175.48 Capital Adequacy 11.27 13.75 13.43 * Excluding Revaluation reserves NPA Position

The Net NPA of the Bank as a percentage of net advances stood at 0.44 % as on March 31, 2007, as against 0.95 % a year ago.

Technological Achievements

• We are in the process of implementing a Core Banking Solution in our offices and branches. The CBS is intended to permit our customers to operate their accounts from any of our branches. • 427 own and inter connected ATMs nationwide as on September 14, 2007 • Access to 7,000 ATMs through VISA tieups • VISA debit card access worldwide • Internet Banking • Mobile Banking • Tele banking • On-line railway reservation • On-line LIC premium payments

Apart from regular banking transactions, the Bank has ventured into selling of life insurance policies in tie up with ICICI Prudential Life Insurance Company Limited and general insurance policies from United India Insurance Company Limited which are being sold through all the branches of the Bank. The Bank also distributes mutual funds of twelve asset management companies.

THE ISSUE

Equity Shares proposed to be issued by the 8,56,58,955 Equity Shares Bank Rights Entitlement 1 Equity Share for every Equity Share held on the Record Date Record Date [●] Issue Price per Equity Share Rs. [●] Equity Shares outstanding prior to the Issue 8,56,58,955 Equity Shares Equity Shares outstanding after the Issue 17,13,17,910 fully paid up Equity Shares Terms of the Issue For more information, see “Terms of Issue” on page [●].

Terms of Payment

The Issue Price of the full number of equity shares being applied for. i.e., an amount of Rs. [●] to Rs. [●] including the share premium per Equity Share being applied for, is to be paid at the time of application.

Objects of the Issue

• To improve the capital adequacy ratio by augmenting Tier I capital; • To augment long term financial resources for increasing the business; and • To meet issue expenses.

For details on the Objects of the Issue, refer to “Objects of the Issue” on page [●].

SELECTED FINANCIAL INFORMATION

The following tables set forth our selected financial information derived from our restated financial statements as of and for the fiscal years ended March 31, 2003, 2004, 2005, 2006 and 2007. These financial statements have been prepared in accordance with Indian GAAP and the Companies Act and the annual financial statements have been restated as described in the auditors’ report included therewith, in the section titled “Financial Statements” beginning on page [●]. The selected financial information presented below should be read in conjunction with our financial statements, the notes thereto and the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” beginning on page [●].

A. Statement of Profits and Losses Rs. in Crores For the Financial Year ended March 31, 2003 2004 2005 2006 2007 A INCOME 1 Interest Earned 1.1 Interest/ Discount on Advances/ Bills 660.00 714.28 772.76 916.00 1281.45 1.2 Income on Investments 423.08 436.66 378.98 458.17 482.50 1.3 Interest on Balances with RBI and other Inter- 27.76 30.42 27.72 35.94 43.81 Bank Funds 1.4 Others 0.62 10.70 11.57 26.42 9.59 Total 1,111.46 1,192.06 1,191.03 1,436.53 1,817.35 2 Other Income 2.1 Commission, Exchange & Brokerage 49.53 59.20 65.67 69.93 82.78 2.2 Net Profit on Sale of Investments) 143.56 174.42 64.61 33.08 49.29 2.3 Net Profit/(Loss) on Revaluation of Investments (8.45) (1.07) (9.76) (16.15) (15.89) 2.4 Net Profit/(Loss) on Sale of Land, Buildings & 0.23 0.06 0.08 2.44 0.71 Other Assets 2.5 Net Profit on Foreign Exchange Transactions 17.14 18.77 27.66 20.17 30.44 2.6 Income earned by way of dividends etc from 6.37 4.45 2.33 2.30 3.62 companies in India 2.7 Miscellaneous Income 26.05 42.03 61.39 105.18 135.74 Total 234.43 297.86 211.98 216.95 286.69 Total Income 1,345.89 1,489.92 1,403.01 1,653.48 2,104.04 B EXPENDITURE 1 Interest Expended 1.1 Interest on Deposits 729.18 723.05 656.80 797.40 1030.06 1.2 Interest on RBI/ Inter-Bank Borrowings 4.29 1.70 1.23 3.42 14.31 1.3 Others 38.81 45.54 30.72 35.91 40.59 Total 772.28 770.29 688.75 836.73 1,084.96 2 Operating Expenses 2.1 Payment to and Provisions for Employees 139.43 178.25 185.78 228.36 260.45 2.2 Rent, Taxes & Lighting 20.97 25.26 31.95 32.25 37.59 2.3 Printing & Stationery 3.45 3.70 4.25 4.33 5.09 2.4 Advertisements & Publicity 2.54 3.56 3.72 2.81 3.90 2.5 Depreciation on Bank's Properties 19.26 24.10 27.44 25.74 23.97 2.6 Directors' Fees, Allowances and Expenses 0.25 0.31 0.29 0.46 0.49 2.7 Auditor's Fees and Expenses 1.52 2.00 2.86 2.87 3.70 2.8 Law Charges 0.71 2.13 2.81 3.81 3.59 2.9 Postage, Telegrams and Telephones 3.04 3.77 4.31 7.23 3.87 2.1 Repairs and Maintenance 4.52 5.86 8.77 8.24 9.23 2.11 Insurance 5.13 6.27 10.75 15.81 18.66 2.12 Other Expenditure 21.30 27.68 30.93 32.66 35.56 Total 222.12 282.89 313.86 364.57 406.10 Total Expenditure 994.40 1,053.18 1,002.61 1,201.30 1,491.06 Gross Profit Before Provisions (including for 351.49 436.74 400.40 452.18 612.98 income tax & extraordinary Items Less: Extraordinary Items Nil Nil Nil Nil Nil Gross Profit Before Provisions (including for 351.49 436.74 400.40 452.18 612.98 income tax) Provisions & Contingencies * 246.48 300.44 310.31 226.97 320.25 Net Profit For The Year 105.01 136.30 90.09 225.21 292.73 Add/Less Adjustments Nil Nil Nil Nil Nil

5 Adjusted Net Profit for the year 105.01 136.30 90.09 225.21 292.73 Add: Balance of Profit Brought Forward from 2.44 2.31 0.49 2.30 13.47 previous year

Profit Available for Appropriation 107.45 138.61 90.58 227.51 306.20 APPROPRIATIONS Transfer to Statutory Reserve 31.52 34.08 22.53 56.31 73.19 Transfer to Revenue Reserve 15.00 0.00 20.83 100.57 130.21 Transfer to Capital Reserve 28.00 13.22 14.17 5.00 15.64 Transfer to Investment Fluctuation Reserve 20.82 64.64 - - 14.64 Transfer to Special Reserve u/s 36 (1)(viii) of I. -- 9.00 12.00 18.00 18.00 T. Act Proposed Dividend 8.69 15.23 16.45 29.96 34.24 Provision for Dividend Tax 1.11 1.95 2.30 4.20 5.82 Balance Carried Over to Balance Sheet 2.31 0.49 2.30 13.47 14.46 107.45 138.61 90.58 227.51 306.20 *Details of provisions and contingencies debited to profit and loss account during the said years:

Rs. in Crores For the Financial Year ended March 31, 2003 2004 2005 2006 2007 1 Provision towards NPAs & provision towards other contingencies 162.71 216.77 147.65 100.40 120.66 2 Provision for Investments 9.48 4.92 133.68 10.91 60.99 3 Provision for Standard Assets 3.00 3.75 3.00 60.10 33.10 4 Provision towards Income Tax and Wealth Tax 71.29 75.00 25.97 55.56 105.50 Total 246.48 300.44 310.30 226.97 320.25

B. Statement of Assets and Liabilities Rs. in Crores As at March 31st 2003 2004 2005 2006 2007 A Assets Cash and Balances with RBI 1i. Cash in Hand (Including foreign currency note) 87.00 121.46 155.00 157.77 201.28 ii. Balance with RBI in Current Account 522.04 604.43 534.27 1,056.81 1,030.26 2 Balances with bank and money at call and short notice i. Balances with Bank in India # 187.57 554.41 669.74 626.55 966.95 ii. Balances with Bank outside India # 41.24 11.30 48.88 6.35 49.64 iii. Money at Call & Short Notice 70.00 0.00 148.00 25.00 65.00 3 Investments i. Investments in India 4,551.68 5,507.38 5799.17 6272.38 7032.66 ii. Investments outside India ------Total Investments 4,551.68 5,507.38 5799.17 6272.38 7032.66 4 Advances i. Advances in India 6,217.52 7,700.53 8822.59 11736.47 14899.10 ii. Advances outside India - - - Total Advances 6,217.52 7,700.53 8822.59 11736.47 14899.10 5 Fixed Assets* 154.14 168.01 178.05 166.79 179.47 6 Other Assets 362.39 439.04 457.88 587.70 658.94 TOTAL (A) 12,193.58 15,106.56 16,813.58 20,635.82 25083.30 B Liabilities 1 Deposits i. Demand Deposits From Banks 75.20 58.70 22.18 8.22 21.85 From Others 512.52 641.51 838.90 930.03 1194.76 ii. Savings Bank Deposits 1,727.22 2,411.84 2864.71 3534.15 4229.67 iii. Term Deposits From Banks 297.47 293.65 298.91 588.82 523.75 From Others 8,335.01 10,070.98 11,168.18 12,817.52 15,614.41 Total Deposits (1+2+3) 10,947.42 13,476.68 15192.88 17878.74 21584.44 2 Borrowings In India 84.68 17.60 54.67 509.78 400.23 Outside India -- 109.12 131.23 100.72 369.98 Total Borrowings 84.68 126.72 185.90 610.50 770.21 3 Other Liabilities & Provisions

6 Other Liabilities & Provisions 340.06 487.03 448.83 633.69 763.07 Subordinate Debts 300.00 375.00 270.00 270.00 470.00 Sub-total 640.06 862.03 718.83 903.69 1233.07 TOTAL (B) 11,672.16 14,465.43 16,097.61 19,392.93 23587.72 C NET ASSETS (C = A-B) 521.42 641.13 715.97 1242.89 1495.58 Represented by: D Share Capital 21.72 21.76 65.60 85.60 85.60 E Reserve & Surplus 1 Statutory Reserve 209.08 243.16 265.69 322.00 395.19 2 Capital Reserve* 46.43 59.66 73.95 78.95 94.59 3 Share Premium 148.98 149.52 109.04 424.95 424.95 4 Revenue & other Reserves 92.80 166.44 199.27 317.84 480.69 (including investment fluctuation reserve) 5 Contingency Reserve 0.10 0.10 0.10 0.10 0.10 6 Balance of Profit and Loss Account (Adjusted) 2.31 0.49 2.30 13.47 14.46 TOTAL (E) 499.70 619.37 650.35 1157.31 1409.98 F TOTAL (D+E) 521.42 641.13 715.95 1242.91 1495.58 G Contingent Liabilities Claims against the Bank not acknowledged as debts 132.43 77.47 89.69 175.84 200.25 Liability for partly paid Investments ------Liability on account of outstanding forward exchange 3,906.47 4,198.83 4397.14 7014.47 4030.30 contracts Guarantees given on behalf of constituents in India 377.30 400.26 496.87 637.06 769.87 Acceptances, endorsements and other obligations 348.91 533.75 7213.03 8709.15 7955.00 Other items for which the Bank is contingently liable 17.23 9.23 7.80 7.05 5.27 Total (G) 4,782.34 5,219.54 12,204.53 16,543.57 12,960.69 BILLS FOR COLLECTION 351.17 372.52 321.39 436.12 524.75 * - excluding revaluation reserve 8.05 7.71 7.39 7.08 6.63 # - in current account/other deposit account

C. Statement of Profits and Losses (Consolidated) Rs. in Crore For the Financial Year ended March 31, 2003 2004 2005 2006 2007 A INCOME 1 Interest Earned 1.1 Interest/ Discount on Advances/ Bills 660.00 714.28 772.76 916.00 1281.45 1.2 Income on Investments 423.08 436.66 378.98 458.17 482.50 1.3 Interest on Balances with RBI and other Inter-Bank 27.76 30.42 27.72 35.94 43.81 Funds 1.4 Others 0.62 10.70 11.61 26.42 9.60 Total 1,111.46 1,192.06 1191.07 1436.53 1817.36 2 Other Income 2.1 Commission, Exchange & Brokerage 49.53 59.20 65.66 69.93 82.78 2.2 Net Profit on Sale of Investments) 143.56 174.42 64.62 33.08 49.29 2.3 Net Profit/(Loss) on Revaluation of Investments (8.45) (1.07) (9.76) (16.15) (15.90) 2.4 Net Profit/(Loss) on Sale of Land, Buildings & Other 0.23 0.06 0.08 2.44 0.71 Assets 2.5 Net Profit on Foreign Exchange Transactions 17.14 18.77 27.66 20.17 30.44 2.6 Income earned by way of dividends etc from companies 6.37 4.45 2.33 2.30 3.62 in India 2.7 Miscellaneous Income 26.05 42.03 61.39 105.18 135.74 Total 234.43 297.86 211.98 216.95 286.68 Total Income 1,345.89 1,489.92 1403.05 1653.482104.04 B EXPENDITURE 1 Interest Expended 1.1 Interest on Deposits 729.11 722.99 656.75 797.34 1029.99 1.2 Interest on RBI/ Inter-Bank Borrowings 4.29 1.70 1.23 3.42 14.31 1.3 Others 38.81 45.54 30.72 35.91 40.59 Total 772.21 770.23 688.70 836.671084.89 2 Operating Expenses 2.1 Payment to and Provisions for Employees 139.47 178.29 185.82 228.43 260.48 2.2 Rent, Taxes & Lighting 20.97 25.26 31.95 32.25 37.59 2.3 Printing & Stationery 3.45 3.70 4.25 4.33 5.09

7 2.4 Advertisements & Publicity 2.54 3.56 3.72 2.81 3.90 2.5 Depreciation on Bank's Properties 19.26 24.10 27.44 25.74 23.97 2.6 Directors' Fees, Allowances and Expenses 0.25 0.31 0.29 0.46 0.49 2.7 Auditor's Fees and Expenses 1.52 2.00 2.86 2.87 3.71 2.8 Law Charges 0.71 2.13 2.81 3.81 3.59 2.9 Postage, Telegrams and Telephones 3.04 3.77 4.31 7.23 3.87 2.1 Repairs and Maintenance 4.52 5.86 8.77 8.25 9.23 2.11 Insurance 5.13 6.27 10.75 15.81 18.66 2.12 Other Expenditure 21.30 27.68 30.93 32.66 35.56 Total 222.16 282.93 313.90 364.65 406.14 Total Expenditure 994.37 1,053.16 1,002.60 1,201.321,491.03 Gross Profit Before Provisions (including for income tax 351.52 436.76 400.45 452.16 613.01 & extraordinary Items Less: Extraordinary Items Nil Nil Nil Nil Nil Gross Profit Before Provisions (including for income tax) 351.52 436.76 400.45 452.16 613.01 Provisions & Contingencies * 246.49 300.44 310.30 226.97 320.26 Net Profit For The Year 105.03 136.32 90.15 225.19 292.75 Add/Less Adjustments Nil Nil Nil Nil Nil

Adjusted Net Profit for the year 105.03 136.32 90.15 225.19 292.75 Add: Balance of Profit Brought Forward from previous 2.63 2.52 0.72 2.59 13.74 year

Profit Available for Appropriation 107.66 138.84 90.87 227.78 306.49 APPROPRIATIONS Transfer to Statutory Reserve 31.52 34.08 22.53 56.31 73.19 Transfer to Revenue Reserve 15.00 0.00 20.83 100.57 130.21 Transfer to Capital Reserve 28.00 13.22 14.17 5.00 15.64 Transfer to Investment Fluctuation Reserve 20.82 64.64 - - 14.64 Transfer to Special Reserve u/s 36 (1)(viii) of I. T. Act -- 9.00 12.00 18.00 18.00 Proposed Dividend 8.69 15.23 16.45 29.96 34.24 Provision for Dividend Tax 1.11 1.95 2.30 4.20 5.82 Balance Carried Over to Balance Sheet 2.52 0.72 2.59 13.74 14.75 107.66 138.84 90.87 227.78 306.49 *Details of provisions and contingencies debited to profit and loss account during the said years: Rs. in Crore For the Financial Year ended March 31, 2003 2004 2005 2006 2007 1 Provision towards NPAs & provision towards other 162.71 216.77 147.66 100.40 120.66 contingencies 2 Provision for Investments 9.48 4.92 133.68 10.91 60.99 3 Provision for Standard Assets 3.00 3.75 3.00 60.10 33.10 4 Provision towards Income Tax and Wealth Tax 71.30 75.00 25.96 55.56 105.50 Total 246.49 300.44 310.30 226.97 320.25

D. Statement of Assets and Liabilities (Consolidated) Rs. in Crore As at March 31st 2003 2004 2005 2006 2007 A Assets 1 Cash and Balances with RBI i. Cash in Hand (Including foreign currency note) 87.00 121.46 154.99 157.77 201.28 ii. Balance with RBI in Current Account 522.04 604.43 534.27 1056.81 1030.26 2 Balances with bank and money at call and short notice i. Balances with Bank in India # 187.57 554.41 669.74 626.55 966.95 ii. Balances with Bank outside India # 41.24 11.30 48.88 6.35 49.64 iii. Money at Call & Short Notice 70.00 0.00 148.00 25.00 65.00 3 Investments i. Investments in India 4,551.18 5,506.88 5798.67 6271.88 7032.16 ii. Investments outside India ------Total Investments 4,551.18 5,506.88 5798.67 6271.88 7032.16 4 Advances i. Advances in India 6,217.52 7,700.53 8822.59 11736.47 14899.10 ii. Advances outside India - - - Total Advances 6,217.52 7,700.53 8822.59 11736.47 14899.10 5 Fixed Assets* 154.14 168.01 178.05 166.79 179.47 6 Other Assets 362.42 439.08 457.90 587.73 658.97 TOTAL (A) 12,193.11 15,106.10 16,813.09 20,635.35 25082.83 B Liabilities 1 Deposits i. Demand Deposits From Banks 75.20 58.70 22.18 8.22 21.85 From Others 512.21 641.21 838.52 929.67 1194.38 ii. Savings Bank Deposits 1,727.22 2,411.84 2864.71 3534.15 4229.67 iii. Term Deposits From Banks 297.48 293.65 298.91 588.82 523.75 From Others 8,333.91 10,069.88 11167.08 12816.41 15613.31 Total Deposits (1+2+3) 10,946.02 13,475.28 15191.40 17877.27 21582.96 2 Borrowings In India 84.68 17.60 54.67 509.78 400.23 Outside India -- 109.12 131.23 100.72 369.98 Total Borrowings 84.68 126.72 185.90 610.50 770.21 3 Other Liabilities & Provisions Other Liabilities & Provisions 340.07 487.03 448.84 633.70 763.08 Subordinate Debts 300.00 375.00 270.00 270.00 470.00 Sub-total 640.07 862.03 718.84 903.70 1233.08 TOTAL (B) 11,670.77 14,464.03 16,096.14 19,391.47 23586.25 C NET ASSETS (C = A-B) 522.34 642.07 716.95 1243.88 1496.58 Represented by: D Share Capital 21.72 21.76 65.60 85.60 85.60 E Reserve & Surplus 1 Statutory Reserve 209.08 243.16 265.69 322.00 395.19 2 Capital Reserve* 46.43 59.66 73.95 78.94 94.59 3 Share Premium 148.98 149.52 109.04 424.95 424.95 4 Revenue & other Reserves 93.51 167.15 199.98 318.55 481.40 (including investment fluctuation reserve) 5 Contingency Reserve 0.10 0.10 0.10 0.10 0.10 6 Balance of Profit and Loss Account (Adjusted) 2.52 0.72 2.59 13.74 14.75 TOTAL (E) 500.62 620.31 651.35 1158.28 1410.98 F TOTAL (D+E) 522.34 642.07 716.95 1243.88 1496.58 G Contingent Liabilities Claims against the Bank not acknowledged as debts 132.43 77.47 89.69 175.92 200.33 Liability for partly paid Investments ------Liability on account of outstanding forward exchange 3,906.47 4,198.83 4397.14 7014.47 4030.30 contracts Guarantees given on behalf of constituents in India 377.30 400.26 496.87 637.06 769.87 Acceptances, endorsements and other obligations 348.91 533.75 7213.03 8709.15 7955.00 Other items for which the Bank is contingently liable 17.23 9.23 7.80 7.05 5.27

9 Total (G) 4,782.34 5,219.54 12204.53 16,543.65 12960.77 BILLS FOR COLLECTION 351.17 372.52 321.39 436.12 524.75 * - excluding revaluation reserve 8.05 7.71 7.39 7.08 6.63 # - in current account/other deposit account

10 GENERAL INFORMATION

Dear Shareholder(s),

Pursuant to the resolutions passed by the Board of Directors of the Bank in their meeting held on February 12, 2007, the resolution of our directors dated May 18, 2007 and the special resolution passed by the shareholders under section 81 and 81(1A) of the Companies Act, 1956, the Bank is offering 8,56,58,955 Equity Shares of Rs.10 each for cash at a premium of Rs. [●] per Equity Share aggregating Rs. [●] Crores on rights basis to the existing Equity Shareholders of the Bank, in the ratio of One (1) Equity Share for Every One (1) Equity Shares (i.e. 1:1) held as on the record date i.e. [●].

A resolution of our shareholders approving the issue was passed through postal ballot notice dated May 18, 2007 pursuant to section 192(A)(2) of the Companies Act, 1956. The result of the postal ballot was announced by the Chairman of the Bank on July 12, 2007 based on the report of Mr.P.K. Kurian, Sr. Advocate, who was appointed as the Scrutinizer

ISSUE OF 8,56,58,955 EQUITY SHARES OF RS. 10 EACH AT A PREMIUM OF RS. [•] PER EQUITY SHARE FOR AN AMOUNT AGGREGATING RS. [●] CRORE TO THE EQUITY SHAREHOLDERS ON RIGHTS BASIS IN THE RATIO OF 1 FULLY PAID UP EQUITY SHARE FOR EVERY EQUITY SHARE HELD ON THE RECORD DATE i.e. [•] (“ISSUE”). THE ISSUE PRICE IS [•] TIMES OF THE FACE VALUE OF THE EQUITY SHARE.

REGISTERED OFFICE OF THE BANK Federal Towers Aluva 683101 Kerala, India Tel: + 91 484 2623 620 – 29 Fax: + 91 484 2622 672 E-mail [email protected] Website: www.federalbank.co.in

Corporate Identification Number: L65191KL1931PLC000368

ADDRESS OF THE ROC

Registrar of Companies, Kerala XIII 292, M I Floor, Company Law Bhavan 292 MBMC Road, Trikkakara P.O, Kochi 682 021

The Equity Shares of the Company are listed on the NSE, BSE and CSE.

Statutory Declaration

In the reasonable opinion of the Board, there are no circumstances that have arisen since the date of the last financial statement disclosed in the Draft Letter of Offer, that materially affect or are likely to affect the performance or profitability of the Bank or value of its assets or its ability to pay its liabilities within the next twelve months.

Important

• This offer of equity shares is being made pursuant to the resolution passed by the Board of Directors on February 12, 2007 and May 18, 2007 and the shareholders resolution passed as special resolution under section 81 and 81(1A) of the Companies Act, 1956 in the ratio of 1 (one) equity shares of Rs.10/- each for every 1 (one) equity share of Rs.10/- each held on the Record Date [●], 2007 at a premium of Rs. [●] per share. The shareholders resolution was passed through postal ballot notice dated May 18, 2007 pursuant to section 192(A)(2) of the Companies Act, 1956. The result of the postal ballot was announced by the Chairman of the Bank on July 12, 2007 based on the report of Mr.P.K. Kurian, Sr. Advocate, who was appointed as the Scrutinizer.

11 • This Issue is applicable to those Equity Shareholders whose names appear as beneficial owners as per the list to be furnished by the depositories in respect of the shares held in the electronic form and on the Register of Members of the Company at the close of business hours on the Record Date i.e. [●], after giving effect to the valid share transfers lodged with the Company upto the Record Date i.e. [•].

• Your attention is drawn to the section entitled ‘Risk Factors’ appearing on Page [●] of this Draft Letter of Offer.

• Please ensure that you have received the Composite Application Form (“CAF”) with this Draft Letter of Offer.

• Please read the Draft Letter of Offer and the instructions contained therein and in the CAF carefully before filling in the CAF. The instructions contained in the CAF are, each an integral part of this Draft Letter of Offer and must be carefully followed. An application is liable to be rejected for any non- compliance of the provisions contained in the Draft Letter of Offer or the CAF.

• All enquiries in connection with the Draft Letter of Offer or CAF should be addressed to the Registrar to the Issue, quoting the Registered Folio number/ DP and Client ID number and the CAF numbers as mentioned in the CAF.

• All information shall be made available to the Investors by the Lead Managers and the Issuer, and no selective or additional information would be available by them for any section of the Investors in any manner whatsoever including at road shows, presentations, in research or sales reports, etc.

• The Lead Managers and the Company shall update the Draft Letter of Offer and keep the public informed of any material changes till the listing and trading commences.

BOARD OF DIRECTORS

Name Designation Age Address M Venugopalan Chairman & CEO/ Executive Director 62 Mannil House, P O Melur, Via Panamanna, Palghat 679 501, Kerala, India K. S. Harshan Executive Director 55 10A, Marine Drive Ernakulam 682 031 Kerala, India T N Jayachandran Independent Director 71 Anuranjanam, D 21, Pillaveedu Nagar Kesavadasapuram Trivandrum 695 004 Kerala, India S Santhanakrishnan Independent Director 56 No.98A, Auras Corporate Centre, 4th Floor, Dr. R.K.Salai, Mylapore Chennai 600 004 Tamil Nadu, India Prof A M Salim Independent Director 66 Nessis, House No.48 MSP Nagar, Thirumala Trivandrum 695 006, Kerala India P C Cyriac Independent Director 65 28/3653, Soonoro Church Road, Elamkulam, Kochi 683 020 Kerala, India P H Ravikumar Independent Director 56 501, Yashowan Towers Plot No.FP 96/97 B/h Mahim Head Post Office, T.H. Kataria Marg, Mahim (W) Mumbai 400 016, Maharashtra India Suresh Kumar Independent Director 57 C/o Emirates Bank Group 76, Safa Villa Jumeirah 3 Personal Box No. 71342

12 Name Designation Age Address Dubai U.A.E. Abraham Koshy Independent Director 54 House No.409 IIM Campus Ahmedabad 380 015, Gujarat India P. Surendra Pai Independent Director 65 Third Floor, Kedar, No.15 Sivaganga Road, Nungambakkam Chennai 600 034 Tamil Nadu, India

For more details regarding our Directors please refer to “ Our Management” on page [●].

Company Secretary and Compliance Officer

Mr. Girish Kumar Ganapathy Company Secretary The Federal Bank Limited Secretarial Department Post Bag No. 103, Federal Towers Aluva 683 101, Kerala, India Tel No.: + 91 484 2623 620 - 29 Fax No.: + 91 484 2622 672 E-mail.: [email protected]

Investors may contact the Compliance Officer for any pre-Issue / post-Issue related matters.

Lead Manager to the Issue

SBI Capital Markets Limited 202, Maker Towers ‘E’ Cuffe Parade, Mumbai 400 005 India Tel: +91 22 2218 9166 Fax: +91 22 2218 8332 Website: www.sbicaps.com E-mail: [email protected] Contact Person: Mr. Gitesh Vargantwar

Legal Advisor to the Issue Amarchand & Mangaldas & Suresh A. Shroff & Co. Fifth Floor, Peninsula Chambers Peninsula Corporate Park 201, Midford House Midford Garden (Off M. G. Road) Ganpatrao Kadam Marg, Lower Parel Bangalore 560 001 Mumbai 400 013 Tel: (91 80) 2558 4870 Tel: (91 22) 2496 4455 Fax: (91 80) 2558 4266 Fax: (91 22) 2496 3666

Registrar to the Issue

Integrated Enterprises (India) Limited 2nd Floor, Kences Tower, Street No.1 Ramakrishna Street North Usman road, T. Nagar Chennai 600 017, Tamilnadu, India Tel: (91 44) 2814 0801-03 Fax: (91 44) 2814 3378 E-mail: fblrights@ iepindia.com Contact Person: Mr. Suresh Babu K. Website: www.iepindia.com

Note: Investors are advised to contact the Registrar to the Issue/ Compliance Officer in case of any pre- issue/post-issue related problems such as non-receipt of Letter of Offer/letter of allotment/ share certificate(s)/ refund orders.

Banker to the Issue

The Federal Bank Limited Financial Services Division Federal Towers, Marine Drive, Ernakulam 682 031, Kerala, India Tel No.: (91 484) 238 5582, 238 5581 Fax No.: (91 484) 2385 500 Contact Person: Mr. Viny Abraham E-mail: [email protected] Website : www.federalbank.co.in

Auditors of the Bank M/s. Brahmayya & Co. M/s. Sundaram & Srinivasan Chartered Accountants Chartered Accountants No.48, Masilamani Road, III Floor 23, C.P.Ramaswamy Road, Alwarpet (Ehrilch Laboratories), Balaji Nagar, Royapettah Chennai 600 018, Tamilnadu, India Chennai 600 014. Tamilnadu, India Tel No.: (91 44) 2498 8762, 2498 8463 Tel No.: (91 44) 2813 1128, 2813 1138 Fax No.: (91 44) 2498 8463 Fax No.: (91 44) 2813 1158. E-mail: [email protected] E-mail: [email protected]

Monitoring Agency No monitoring agency has been appointed for this Issue.

Appraising Agency No Appraising agency has been appointed for this Issue.

14 Statement of Inter-se allocation of responsibilities

SBI Capital Markets Limited is the sole Lead Manager to the Issue. Hence, ‘the Statement of Allocation of Responsibilities among Lead Managers’ is not applicable.

Credit rating

This being a Rights issue of Equity Shares, no credit rating is required.

Minimum Subscription

i. If the Bank does not receive the minimum subscription of 90% of the issue the Bank shall forthwith refund the entire subscription amount received within 42 days from the date of closure of the issue. ii. If there is a delay in the refund of subscription by more than 8 days after the Bank becomes liable to pay the subscription amount (i.e. 42 days after closure of the issue), the Bank shall pay interest for the delayed period at rates prescribed under sub-sections (2) and (2A) of Section 73 of the Companies Act, 1956. iii. All moneys received out of this Rights issue of equity shares through this Draft Letter of Offer shall be transferred to a separate bank account.

UNDERWRITING ARRANGEMENTS

The Issue is not underwritten.

No Offer in the United States

The Rights Entitlement and the Equity Shares of the Bank are not registered under the Securities Act and the Issue is not, and under no circumstances is to be construed as, an offering of any shares or rights for sale in the United States. For further details please see “Terms of the Issue” on page [●] of this Draft Letter of Offer.

ISSUE SCHEDULE

ISSUE OPENS ON LAST DATE FOR RECEIVING ISSUE CLOSES ON REQUESTS FOR SPLIT FORM [●],2007 [●],2007 [●],2007

15 CAPITAL STRUCTURE

Our Share Capital as on the date of filing the Draft Letter of Offer with SEBI and the Stock Exchanges is set forth below:

Aggregate Aggregate Value at nominal value Issue Price (In Rs. Crore) (In Rs. Crore) Authorized share capital 20,00,00,000 Equity Shares of Rs. 10/- each 200.00 TOTAL 200.00

Issued capital 8,56,58,955* Equity Shares of Rs. 10/- each, fully paid up 85.66 Subscribed and paid-up capital 8,56,03,667** Equity Shares of Rs. 10/- each, fully paid up 85.60 Present Issue being offered to the Equity Shareholders through the Letter of Offer 8,56,58,955 Equity shares of Rs. 10/- each at a premium of Rs. [●] 85.66 [●] i.e. at a price of Rs. [●] Paid up capital after the issue 17,12,62,622*** Equity shares of Rs. 10/- each 171.26 [●]

Share premium Account Existing share premium account 424.95 Share premium account after the issue [●]

* In the Issued capital of 8,56,58,955 Equity Shares, subscription to and allotment of the following has been kept in abeyance pursuant to the orders of various courts. a. Allotments of 1,306 Equity Shares pertaining to the rights issue made by the Bank in 1993 at a premium of Rs.25 per share b. Allotments of 53,982 shares of Rs.10 each pertaining to the rights issue made by the Bank in 1996 issued at a premium of Rs.140 per share

** In the subscribed and paid up capital of 8,56,03,667 Equity Shares, the issue of certificates/ credit in demat account with reference to 98,036 Equity Shares of Rs.10 each out of the bonus issue made by the Bank in 2004 has been kept in abeyance pursuant to the orders of various courts.

*** Paid-up Share Capital after the Issue is based on the assumption that the Issue will be 100% subscribed.

Note: Our paid up and issued capital Includes: - An allotment of 1,659 equity shares of Rs. 20 each for consideration other than cash to the shareholders of the erstwhile St. George Union Bank Limited, Puthepally, Kerala, India pursuant to the take over of the said bank. - 2,00,00,000 Equity Shares underlying Global Depositary Receipts, which are listed on the Official List and traded on the PSM.

Note : 3,02,745 partly paid equity shares of our Bank were forfeited pursuant to Articles 23 to 26 of our Articles of Association, by means of a resolution of our Board dated December 29, 2004.

Changes in our Authorized Share Capital

Date of change Nature of Change February 3, 1945 Our share capital was increased to Rs.15 Lakhs divided into 75,000 shares of Rs.20 each by a resolution of our shareholders passed in their Annual General Meeting. July 16, 1974 Our share capital was Increased from Rs. 15 Lakhs consisting of 75,000 shares of Rs. 20 each to Rs.25 Lakhs consisting of 1,25,000 shares of Rs.20 each by a resolution of our shareholders passed in their Annual General Meeting. June 17, 1975 Our share capital was Increased from Rs.25 Lakhs consisting of 125,000 shares of Rs.20 each to Rs. 50 Lakhs consisting of 2,50,000 shares of Rs. 20 each by a resolution of our shareholders passed in their Annual General Meeting. July 27,1976 Our share capital was Increased from Rs.50 Lakhs consisting of 250,000 shares of Rs.20 each

16 to Rs..1,00,00,000 consisting of 5,00,000 shares of of Rs.20 each by a resolution of our shareholders passed in their Annual General Meeting. July 31, 1978 Our share capital was increased from Rs.1,00,00,000 consisting of 5,00,000 shares of of Rs.20 each to Rs.3,00,00,000 consisting of 15,00,000 shares of Rs.20 each by a resolution of our shareholders passed in their Annual General Meeting. September 7, 1989 Our share capital was increased and reclassified from Rs.3,00,00,000 consisiting of 15,00,000 shares of Rs. 20 each to Rs.15,00,00,000 consisting of 1,50,00,000 of Rs.10 each by a resolution of our shareholders passed in their Annual General Meeting. November 16, 1992 Our share capital was increased from Rs.15,00,00,000 consisting of 1,50,00,000 shares of Rs.10 each to Rs.50,00,00,000 consisitng of 5,00,00,000 shares of Rs.10 each by a resolution of our shareholders passed in their Annual General Meeting. September 27, 2004 Our share capital was increased from Rs.50,00,00,000 consisitng of 5,00,00,000 shares of Rs.10 each to Rs.2,00,00,00,000 divided into 20,00,00,000 of Rs.10 each by a resolution of our shareholders passed in their Annual General Meeting.

Notes to the Capital Structure

1. The build up of our Equity Share Capital as of September 7, 2007 is as follows;

Date of No. of Face Issue Nature of Reasons for Cumulative Cumulative Allotment Equity value price Consideration Allotment Number of Subscribed Shares shares capital 1949* Preferential 7,143 Rs.20/- Rs.20/- Cash Allotment 7,143 142,860 1959 Preferential 6,455 Rs.20/- Rs.20/- Cash Allotment 13,598 271,960 1960 Preferential 5,688 Rs.20/- Rs.20/- Cash Allotment 19,286 385,720 1962 Preferential 5,714 Rs.20/- Rs.20/- Cash Allotment 25,000 500,000 January 27, Consideration Preferential 1965 1,659 Rs.20/- Rs.20/- other than cash a Allotment 26,659 533,180 1973 Preferential 26,659 Rs.20/- Rs.20/- Cash Allotment 53,318 10,66,360 1974 Preferential 21,682 Rs.20/- Rs.20/- Cash Allotment 75,000 15,00,000 1975 Preferential 49,500 Rs.20/- Rs.20/- Cash Allotment 1,24,500 24,90,000 1976 Preferential 500 Rs.20/- Rs.20/- Cash Allotment 1,25,000 25,00,000 1977 Preferential 3,75,000 Rs.20/- Rs.20/- Cash Allotment 5,00,000 1,00,00,000 1978 Preferential 1,25,000 Rs.20/- Rs.20/- Cash Allotment 6,25,000 1,25,00,000 1979 Preferential 69,286 Rs.20/- Rs.20/- Cash Allotment 6,94,286 1,38,85,720 1980 Preferential 4,377 Rs.20/- Rs.20/- Cash Allotment 6,98,663 1,39,73,260 1986 Preferential 4,64,598 Rs.20/- Rs.20/- Cash Allotment 11,63,261 2,32,65,220 1987 Preferential 18,984 Rs.20/- Rs.20/- Cash Allotment 11,82,245 2,36,44,900 1989 Preferential 3,17,420 Rs.20/- Rs.20/- Cash Allotment 14,99,665 2,99,93,300 1990 Preferential Allotment and sub 335 b Rs.10/- Rs.10/- Cash division of shares 30,00,000a 3,00,00,000 1991 Preferential 20,50,000 Rs.10/- Rs.10/- Cash Allotment 50,50,000 5,05,00,000 June 12, Rights in the ratio of 1993 26,69,913c Rs.10/- Rs.35/- Cash 1: 2 77,19,913 77,199,130 June, 12, Preferential 1993 Allotment to 3,77,981c Rs.10/- Rs.35/- Cash Employees 80,97,894 8,09,78,940

17 June 12, Preferential 1993 allotment to ICICI 26,67,000 Rs.10/- Rs.60/- Cash Bank 1,07,64,894 10,76,48,940 June 12, Preferential 1993 allotment to ICICI 3,33,000 Rs.10/- Rs.60/- Cash Bank 1,10,97,894 1,10,978,940 May 18, Initial Public 1994 37,18,100 Rs.10/- Rs.90/- Cash Offering 1,48,15,994 1,48,159,940 July 4, Shares kept in 1994 abeyance from 250 Rs.10/- Rs.35/- Cash rights issue issued 1,48,16,244 14,81,62,440 March 16, Rights Issue in the 1996 73,53,240d Rs.10/- Rs.150/- Cash ratio of 1:2 2,21,69,484 22,16,94,840 June 20, The shares kept in 1996 abeyance from 1993 350 Rs.10/- Rs.35/- rights issue issued. 22169834 22,16,98,340 February The shares kept in 28, 2002 abeyance from 1993 200 Rs.10/- Rs.35/= Cash rights issue issued 22170034 22,17,00,340 November The shares kept in 30, 2004 abeyance from 1996 700 Rs.10/- Rs.150/= Cash rights issue issued 2,21,70,734 22,17,07,340 December 3,02,745 shares 29, 2004 forfeited as calls in - - - - arrears 2,18,67,989e 21,86,79,890 December Bonus 29,2004 4,36,27,490 Rs.10/- Nil Bonus 65495479 65,49,54,790 March 31, Bonus shares kept in 2005 1,07,288 Rs.10/- Nil Bonus abeyance issued. 6,56,02,767 65,60,27,670 December Shares kept in 8, 2005 abeyance from rights issue made in 200 Rs.10/- Rs.150/- Cash 1996 issued. 6,56,02,967 65,60,29,670 December Bonus shares issued 8, 2005 pursuant to allotment of shares 400 Rs.10/- Nil Bonus kept in abeyance 65603367 65,60,33,670 January 31, Shares issued 2006 pursuant to issue of global depositary 1,80,00,000 Rs.10/- US$3.97 Cash receipts 8,36,03,367 83,60,33,670 February 6, Shares issued 2006 pursuant to overallotment under issue of Global 20,00,000 Rs.10/- US$3.97 Cash Depositary Receipts 8,56,03,367 85,60,33,670 May 4, Shares issued 2006 pursuant to rights issue in 1996 and kept in abeyance 100 Rs.10/- Rs.150/- Cash allotted 8,56,03,467 85,60,34,670 May 4, Shares issued under 2006 bonus issue in 1996 and kept in 200 Rs.10/- Nil Bonus abeyance issued 8,56,03,667 85,60,36,670 a. Allotment of 1,659 equity shares of Rs. 20 each for consideration other than cash to the shareholders of the erstwhile St. George Union Bank Limited, Puthepally, Kerala, India pursuant to the take over of the said bank. b. Our share capital consisting of 1,500,000 shares of Rs. 20 each was divided into 3,00,000 shares of Rs. 10 each. c. Consisted of an offering of 25,25,000 Equity Shares in the issue 1: 2 to the existing shareholders of the Bank and 5,25,000 shares to the employees of the bank. Of the above 3,77,981 shares were allotted to employees of the Bank, and 26,70,713 shares which included shares renounced by the employees were allotted to the existing shareholders of the Bank. Further allotments of 800 shares kept in abeyance from this issue have taken place in three tranches of 250, 350 and 200 shares on July 4, 1994, June 20, 1996 and February 28, 2002 respectively.The allotment of 1,306 shares issued under this rights issue continues to be kept in abeyance.

18 d. Consisted of an offering of 74,08,122 Equity Shares is the ratio of 1 equity share for every two shares held by the existing shareholders of the Bank. Of the above, the allotment of 53,982 shares continues to be kept in abeyance. e. Forfeiture of 3,02,745 shares pursuant to Articles 23 to 26 of our Articles of Association, by means of a resolution of our Board dated December 29, 2004.

The Bank is unable to ascertain the dates of allotments of shares prior to 1993 as the relevant filings with the Registrar of Companies, Kerala at Kochi are unavailable.

2. Shareholding pattern of the Bank as of September 7, 2007

Category Category of Number of Total number Number of Total shareholding as a percentage Code shareholder shareholder of shares shares of total number of shares held in dematerialized form As a percentage As a percentage of (A+B) of (A+B+C) (A) Shareholding of Promoter and Promoter Group (1) Indian (a) Individuals/ Hindu Undivided Family 0 0 0 0 0 (b) Central Government/ State Government(s) 0 0 0 0 0 (c) Bodies Corporate 0 0 0 0 0 (d) Financial Institutions/ Banks 0 0 0 0 0 (e) Any Other (specify) 0 0 0 0 0 Sub-Total (A)(1) 0 0 0 0 0 (2) Foreign (a) Individuals (Non- Resident Individuals/ Foreign Individuals) 0 0 0 0 0 (b) Bodies Corporate 0 0 0 0 0 (c) Institutions 0 0 0 0 0 (d) Any Other (specify) 0 0 0 0 0 Sub-Total (A)(2) 0 0 0 0 0 Total Shareholding of Promoter and Promoter Group (A)= (A)(1)+(A)(2) 00 0 0 0 (B) Public shareholding (1) Institutions (a) Mutual Funds/ UTI 37 10514868 10505340 14.20 12.30 (b) Financial Institutions/ Banks 18 31,956 17,306 0.04 0.04 (c) Central Government/ State Government(s) 0 0 0 0 0 (d) Venture Capital Funds 0 0 0 0 0 (e) Insurance Companies 3 37,19,267 37,19,267 5.02 4.35 (f) Foreign Institutional Investors 84 3,24,37,830 3,24,08,405 43.82 37.94 (g) Foreign Venture Capital Investors 0 0 0 0 0 (h) Any Other (specify) 0 0 0 0 0 Sub-Total (B)(1) 142 4,67,03,921 4,66,50,318 63.09 54.62 (2) Non-institutions (a) Bodies Corporate 825 21,25,210 19,47,382 2.87 2.49

19 Category Category of Number of Total number Number of Total shareholding as a percentage Code shareholder shareholder of shares shares of total number of shares held in dematerialized form As a percentage As a percentage of (A+B) of (A+B+C) (b) Individuals - Individual shareholders holding nominal share capital up to Rs. 1 lakh. 38645 15014150 9430015 20.28 17.56 Individual shareholders holding nominal share capital in excess of Rs. 1 lakh. 101 5091178 4944001 6.88 5.95 (c) Any Other (specify) NRI 496 657,592 604,864 0.89 0.77 Trust 20 70380 20450 0.10 0.08 Overseas Corporate Bodies 1 600 0 0 0 Foreign National 1 20000 20000 0.03 0.02 Foreign Body Corporate 1 4266721 4266721 5.76 4.99 Clearing Member 116 76705 76705 0.10 0.09 Sub-Total (B)(2) 40,206 27,322,536 21,310,138 36.91 31.95 Total Public Shareholding (B)= (B)(1)+(B)(2) 40,348 7,40,26,457 6,79,60,456 100.00 86.57 TOTAL (A)+(B) 40,348 7,40,26,457 6,79,60,456 100.00 86.57 (C) Shares held by Custodians and against which depository Receipts have been issued 13 1,14,79,174 1,14,79,174 0 13.43 Grand Total (A+B+C) 40,361 8,55,05,631 7,94,39,630 100.00

3. Details of the shareholding of the promoters and promoter Group The Bank has no identifiable promoters. Hence no disclosure of details in relation to the shareholding of the promoter and promoter group, and details of transactions by them in our securities need be made.

4. Details of the transactions in Equity Shares by the directors during the last six months

There have been no transactions in the Equity Shares by the Directors of the Bank in the last six months except the following.

Price at which Nature of shares Transferred Date of Transaction Purchaser Transaction Number of Shares (Per Equity Share) August 24, 2007 P. Surendra Pai Market Purchase 930 306.15 August 27, 2007 P. Surendra Pai Market Purchase 3682 314.40 August 28, 2007 P. Surendra Pai Market Purchase 1770 319.64 August 28, 2007 P. Surendra Pai Market Purchase 123 319.64

20 5. Top ten Shareholders

a) Top ten shareholders as on date of filing Draft Letter of Offer

Name of the Shareholder Total Shares % of pre issue capital Deutsche Bank Trust Company Americas 60,46,446* 7.06 International Finance Corporation 42,66,721 4.98 HSBC Financial Services (Middle East) 42,58,155 4.97 UBS Securities Asia Limited. A/c Swiss c/o HSBC cnc 31,39,380 3.67 FID Funds (Mauritius) Limited 30,46,149 3.56 Acacia Partners, LP 30,00,000 3.50 Kuroto Fund LP 26,89,230 3.14 Prudential ICICI Trust Limited - Dynamic 21,01,250 2.45 Templeton Mutual Fund A/c Franklin India 20,00,000 2.34 General Insurance Corporation of India 18,28,891 2.14 *Includes 60,46,646 Equity Shares underlying Global Depositary Receipts, held in the capacity of the domestic custodian.

b) Top ten shareholders as of ten days before date of filing Draft Letter of Offer

Name of the Shareholder Total Shares % of pre issue capital Deutsche Bank Trust Company Americas 60,46,446* 7.06 International Finance Corporation 42,66,721 4.98 HSBC Financial Services (Middle East) 42,58,155 4.97 UBS Securities Asia Limited. A/c Swiss c/o HSBC cnc 31,39,380 3.67 FID Funds (Mauritius) Limited 30,46,149 3.56 Acacia Partners, LP 30,00,000 3.50 Kuroto Fund LP 26,89,230 3.14 Prudential ICICI Trust Limited - Dynamic 21,01,250 2.45 Templeton Mutual Fund A/c Franklin India 20,00,000 2.34 General Insurance Corporation of India 18,28,891 2.14 *Includes 60,46,446 Equity Shares underlying Global Depositary Receipts, held in the capacity of the domestic custodian.

c) Top Ten shareholders as of two years before date of filing Draft Letter of Offer

Name of the Shareholder Total Shares % of pre issue capital ICICI Bank Limited 1,35,97,200 20.76 Templeton Mutual Fund A/C Franklin India Flexi Cap Fund 24,21,667 3.70 HDFC Trustee Company Limited-HDFC Equity Fund 14,00,000 2.14 FID Funds (Mauritius) Limited 13,37,479 2.04 Emerging Markets Management, L.L.C A/c The EMM UMBRELLA FUNDS 12,98,881 1.98 Uno Metals Limited 11,88,000 1.81 Jhunjhunwala Rakesh Radheshyam 11,02,500 1.68 Premier Investment Fund Limited 10,83,000 1.65 AKG Finvest Liimited 9,52,800 1.45 HDFC Trustee Company Limited - HDFC Prudence Fund 9,00,000 1.37

d) Largest shareholders of the Bank registered with SEBI

Name of the Shareholder Total % of pre issue SEBI Registration Nature of Shares capital Number Entity 1. HSBC Financial Services (Middle East) Limited A/c HSBC Iris Investments (Mauritius) Limited 42,58,155 4.98 IN-UE-FD-0765-02 FII-others 2. UBS Securities Asia FII -Mauritius Limited. A/c 31,39,380 3.67 IN-HK-FM-0606-00 Based

21 3. FID Funds (Mauritius) FII -Mauritius Limited 30,46,149 3.56 IN-UK-FA-0574-99 Based 4. Acacia Partners, LP 30,00,000 3.51 IS-US-FA-0833-03 FII -others 5. Kuroto Fund LP 26,89,230 3.15 IS-US-FA-0856-04 FII -others 6. Templeton Mutual Fund A/C Franklin India Prima Mutual Funds – Fund 20,00,000 2.34 MF/026/96/8 MF 7. Merrill Lynch Capital Markets Espana S.A. S.V. 16,55,600 1.94 IN-SP-FA-0643-00 bank-foreign 8. Equinox Partners 15,46,800 1.81 IN-US-FA-856-04 FII -Others 9. HDFC Trustee Company Limited - HDFC Prudence Mutual Funds – Fund 14,60,950 1.71 MF/044/006 Mf 10. Goldman Sachs FII -Mauritius Investments (Mauritius) 12,74,358 1.49 IN-US-FA-220-95 Based

8. The present issue being a rights Issue, as per extent SEBI guidelines, and the Bank having no identifiable promoter, the requirement of Promoters’ contribution and lock-in are not applicable.

9. The Bank has not availed “bridge loans” to be repaid from the proceeds of the issue for incurring expenditure on the Objects of the issue.

10. The Bank and Directors of the Bank and Lead Manager of the Issue have not entered into buy-back, standby or similar arrangements for any of the securities being issued through this Draft Letter of Offer.

11. The terms of issue to Non-Resident Equity Shareholders / Applicants have been presented under the section “Terms of the Issue” on page [●].

12. No options have been granted or issued under any scheme of employee stock option or employee stock purchase scheme.

13. There will be no fractional entitlement, since the ratio of the Rights entitlement is 1:1.

14. The Bank has not revalued its assets since its inception and hence issue of shares out of revaluation reserve does not arise. Bonus issues have been made by the Bank by capitalization of its reserves.

15. The number of shareholders of the Bank as on September 7, 2007 was 40,361.

16. At any given time, there shall be only one denomination of the Equity Shares of the Bank. The Equity Shareholders of the Bank do not hold any warrant, option or convertible loan or debenture, which would entitle them to acquire further shares in the Bank.

17. The attention of the investors is drawn to section 12 (2) of the Banking Regulation Act 1949, as amended which states that: “No person holding shares in the banking company shall in respect of any shares held by him, exercise voting rights on poll in excess of 10% of the total voting rights of all the shareholders of the banking company.” As per Article 31A of the Articles of association of the Bank “acquisition of shares by a person/group which would take his/its holding to a level of 5% or more of the total paid up capital of the bank or such other percentage as may be prescribed by the RBI from time to time should be with the prior approval of the Reserve Bank of India”.

18. No further issue or allotment of capital by way of issue of bonus shares, preferential allotment, rights issue or public issue or in any other manner which will affect the Bank, shall be made by the Bank till the securities referred to in this draft letter of offer have been listed or application money refunded on account of non-listing or undersubscriptions, except allotment of upto 153,324 Equity Shares including 98,036 bonus equity share which are in abeyance pursuant to various court orders. Further, presently the Bank does not have any intention to alter the equity capital structure by way of split/ consolidation of the denomination of the shares on a preferential basis or issue of bonus or rights or public issue of shares or any other securities within a period of six months from the date of opening of the Issue.

22 19. The Issue will remain open for 30 days. However, the Board will have the right to extend the Issue period as it may determine from time to time but not exceeding 60 days fom the Issue Opening Date.

23 OBJECTS OF THE ISSUE

The Bank intends to deploy the net proceeds from the Issue of Rs [●] crore after meeting Issue expenses of approximately Rs [●] crore to augment its capital base in line with its growth strategy.

The main objects and objects incidental or ancillary to the main objects as set out in our Memorandum of Association enable us to undertake our existing activities and permit the utilization of funds proposed herein.

The details of the proceeds of the Issue are summarized below: Particulars Estimated Amount (In Rs. Crore) Gross proceeds of the Issue [●] Issue related expenses* [●] Net Proceeds of the Issue [●] * The details of Issue related expenses are provided later within this section of the Draft Letter of Offer

Utilization of the Issue Proceeds

The Bank is subject to the capital adequacy requirements of the Reserve Bank of India, which, based on the guidelines of the Basel Committee on Banking Regulations and Supervisory Practices, 1998, currently require us to maintain a minimum ratio of capital to risk adjusted assets and off-balance sheet items of 9.0%, at least half of which must be Tier I capital. See “Regulations and Policies – Reserve Bank of India Regulations – Capital Adequacy Requirements” on page [●]. Our total capital adequacy ratio was 13.43% at March 31, 2007 including Tier-1 capital adequacy ratio of 8.94% and Tier-2 capital of 4.49% of risk-weighted assets. Additional capital is required for future asset growth and compliance with regulatory requirements. The objects of the Issue are to augment our capital base to meet the capital requirements arising out of growth in our assets, primarily our loan and investment portfolio due to the growth of the Indian economy, compliance with regulatory requirements and for other general corporate purposes including meeting the expenses of the Issue.

The details of capital vis-à-vis risk weighted assets for the previous five financial years is as under: (Rs. in crores) Financial Year ended March 31 2003 2004 2005 2006 2007 Eligible Tier I Capital 428.88 483.95 558.79 1,081.50 1,323.75 Eligible Tier II Capital 295.79 403.89 421.74 448.90 663.83 Total Capital 724.67 887.84 980.53 1,530.40 1,987.58 Total Risk-Adjusted Assets 6,450.93 7,731.64 8,700.71 11,128.51 14,798.92 Capital Adequacy Ratio (%) 11.23 11.48 11.27 13.75 13.43

The present rights issue is expected to achieve the objective of augmenting Tier I capital of Bank and to further strengthen the capital adequacy ratio.

A portion of the Rights Issue proceeds will be used to meet Issue expenses estimated at Rs. [●]. Following are the estimated issue expenses.

Particulars Rs. Fee to Intermediaries [●] o Fees paid to the Lead Manager [●] o Fees paid to the Registrar to the Issue [●] Statutory Fee [●] Advertising [●] Printing, Stationery and Despatch [●] Others [●] Total [●]

Interim Use of Proceeds

Pending utilization of issue proceeds, the management, in accordance with the policies set up by the Board, will have the flexibility in deploying the proceeds received from the present Issue and during this period the Bank intend to temporarily invest the funds in interest/dividend bearing liquid instruments including money market mutual funds, deposits with banks for the necessary duration. Such investments would be in accordance with investment policies approved by the Board from time to time.

Monitoring of Utilization of Funds

As the Rights Issue is being made with an objective to improve the capital adequacy ratio, to augment the long- term resources for increasing the business and to defray the issue expenses, no appraisal of the same is required and therefore no monitoring agency has been appointed.

No part of the Issue proceeds will be paid by the Bank as consideration to the Directors or the Bank’s key management personnel except in the usual course of business.

BASIS FOR ISSUE PRICE

Investors should also refer to the section “Risk Factors” and “Auditors’ Report” to get a more informed view before making the investment decision. The price per share has been provided for Rs. 10/- share face value.

Quantitative Factors

1. Earning per Share (EPS)

Financial Year EPS (Rs.) Weight used 2004-05 13.73 1 2005-06 32.71 2 2006-07 34.20 3 Weighted Average 30.29

2. Price Earnings Ratio (P/E Ratio) Based on EPS for the year ended on March 31, 2007 [●] Based of weighted average EPS of Rs. 30.29 [●]

3. Industry P/E

Highest 143.6 (Kotak Mahindra Bank) Lowest 7.1 (City Union Bank) Average 30.7 (Source: Capital Market - Vol. XXII/14 dated September 10-23, 2007, Sector: Banks – Private Sector)

4. Return on networth

Year RONW (%) Weight Used 2004-05 12.58 1 2005-06 18.12 2 2006-07 19.57 3 Weighted Average 17.92

5. Net Asset Value (NAV) per share

As at March 31, 2007 Rs. 174.71 After the Issue [●] Issue Price [●]

6. Minimum Return on Networth required to maintain Pre-Issue EPS of Rs. [●]: [●]

7. Peerset Analysis

Name of the Bank Equity Capital (Rs.in Crs.) EPS (Rs.) P/E RONW (%) BV (Rs.) Bank of Rajasthan 134.46 8.00 11.00 28.80 31.70 Karnataka Bank 121.36 14.00 12.00 15.10 102.10 Karur Vaishya Bank 53.94 27.90 10.40 16.50 197.90 South Ind. Bank 70.41 14.40 9.20 15.30 102.80 ING Vysya Bank 90.98 9.30 23.70 9.40 109.10 Centurion Bank of Punjab 156.73 0.80 --- 10.60 8.80 Federal Bank 85.60 33.50 9.3 21.40 174.70

(Source: Capital Market - Vol. XXII/09 dated Jul 02-15, 2007, Sector: Private Sector Bank)

The Lead Manager believes that the issue price of Rs. [●] per share is justified in view of the above quantitative parameters. The investors may also want to peruse the risk factors and financials of the Bank including important profitability and return ratios, as set out in the Auditors Report in the Draft Letter of Offer to have a more informed view about the investment proposition.

26 STATEMENT OF TAX BENEFITS

STATEMENT OF GENERAL TAX BENEFITS

To,

The Board of Directors, The Federal Bank Limited, Head Office, Federal Towers, Aluva-683101.

Dear Sir,

Subject: Proposed Rights Issue of the Bank.

This has reference to the captioned subject, we have to advise that the following general tax benefits would be available to the Bank and its shareholders under the provisions of the current direct tax laws:

A. INCOME-TAX

The information provided below sets out the possible tax benefits available to the Bank and its shareholders under the current tax laws presently in force in India. Several of these benefits are dependent on the Bank and its shareholders fulfilling the conditions prescribed under the relevant tax laws. Hence, the ability of the Bank and its shareholders to derive the tax benefits is dependent upon fulfilling such conditions, which based on business imperatives the Bank faces in the future, it may or may not choose to fulfill. The benefits discussed below are not exhaustive. This statement is only intended to provide general information to the investors and is neither designed nor intended to be a substitute for professional tax advice. In view of the individual nature of the tax consequences and the changing tax laws, each investor is advised to consult his or her own tax consultant with respect to the specific tax implications arising out of their participation in this issue and we are absolved of any liability to the shareholder for placing reliance upon the contents of this material.

The Income-tax Act, 1961 (the Income-tax Act) is amended every year by the Finance Act of the relevant year. The tax benefits given below include amendments introduced by Finance Act, 2007 to be effective from April 1, 2007. Some or all of the tax consequences of described herein may be amended or modified by future amendments to the Income-tax Act.

I. To the Bank:

1. The Bank’s taxable income would not include dividend income from shares or units of Mutual Funds specified under section 10(23D) of the Income-tax Act in accordance with and subject to the provisions of Section 10(34) read with Section 115-O or section 10(35) respectively, of the Income tax Act. As per the provisions of Section 14A of the Income-tax Act, no deduction is allowed in respect of any expenditure incurred in relation to such dividend income to be computed in accordance with such method as may be prescribed subject to and in accordance with the provisions contained therein. Also, Section 94(7) of the Income-tax Act provides that losses arising from the sale/transfer of shares or units purchased within a period of three months prior to the record date and sold/ transferred within three months or nine months respectively after such date, will be disallowed to the extent dividend income on such shares or units are claimed as tax exempt.

2. Under Section 35DD of the Income-tax Act, for any expenditure incurred wholly and exclusively for the purposes of amalgamation, the Bank is eligible for deduction of an amount equal to one-fifth of such expenditure for each of the five successive years beginning with the year in which amalgamation takes place.

3. Under Section 36(1)(vii) of the Income-tax Act, any bad debts or part thereof written off as irrecoverable in the Bank’s accounts, would be allowed as a deduction from the total income in

27 accordance with and subject to the provisions contained therein. The amount subsequently recovered would be chargeable to income-tax in the year of recovery in accordance with the provisions of section 41(4) of the Income-tax Act.

4. Under Section 36(1)(viia) of the Income-tax Act, and subject to the conditions specified therein, deduction in respect of any provision for bad and doubtful debts made by the Bank is allowed at 7.5% of the total income (computed before making any deduction under this Section and Chapter VIA of the Income-tax Act) and 10% of the aggregate average advances made by its rural branches.

5. Under the provisions of Section 36(1)(viii) of the Income-tax Act, the Bank is allowed a deduction at 20% of the profits derived from the business of providing long-term finance in India computed in the manner specified under the Section and carried to a Special Reserve account created and maintained by it. The deduction is allowed subject to the aggregate of the amounts transferred to the Special Reserve Account for this purpose from time to time not exceeding twice the paid-up share capital and general reserves. The amount withdrawn from such a Special Reserve Account would be chargeable to income tax in the year of withdrawal, in accordance with the provisions of Section 41(4A) of the Income-tax Act.

6. Under Section 43D of the Income-tax Act, interest on certain categories of bad and doubtful debts as specified in Rule 6EA of the Income-tax Rules, 1962, shall be chargeable to tax only in the year of receipt or credit to the Profit and Loss Account, whichever is earlier.

7. Capital gains arising on transfer of long-term capital assets, being equity shares in a company or units of equity oriented mutual fund on sale on which securities transaction tax is paid, is exempt under Section 10(38) of the Income-tax Act whereas short-term capital gains is subject to a concessional rate of tax under Section 111A of the Income-tax Act at the rate of 10% (plus applicable surcharge, education cess and secondary and higher education cess). If the shares or units on which securities transaction tax has been paid are treated as stock-in-trade liable to tax as business profits, rebate can be claimed from the income tax payable in accordance with provisions of Section 88E of the Income-tax Act towards such securities transaction tax.

8. The benefit of exemption from tax under Section 10(38) of the Income-tax Act on long-term capital gains, or, concessional rate of tax under Section 111A of the Income-tax Act on short-term capital gains will not be available where no securities transaction tax is applicable. In such cases, under the provisions of Section 112 of the Income-tax Act, taxable long-term capital gains, if any, on sale or transfer of listed securities or units or zero coupon bonds issued in accordance with the specified scheme would be charged to tax at the concessional rate of 20% (plus applicable surcharge, education cess and secondary and higher education cess) after considering indexation benefits or at 10% (plus applicable surcharge, education cess and proposed secondary and education cess) without indexation benefits in accordance with and subject to the provision of Section 48 of the Income Tax Act. Under Section 48 of the Income-tax Act, the long-term capital gains arising on sale or transfer of capital assets excluding bonds and debentures (except capital indexed bonds issued by the Government) will be computed after indexing the cost of acquisition/improvement.

9. As per Section 54EC of the Income-tax Act, subject to the conditions specified therein, tax on capital gains arising from the transfer of a long-term capital asset is exempt from tax, provided that the Bank has at any time within a period of six months after the date of the transfer, invested the whole of the capital gains in any long-term specified asset for the purposes of Section 54EC of the Income tax Act. However, if the long-term specified asset are transferred or converted into money within a period of three years from the date of their acquisition, the amount of capital gains exempted earlier would become chargeable to tax as long term capital gains in the year in which the long term specified asset are transferred or converted into money. The Finance Act, 2007 has introduced ceiling on investments in such long term specified asset of upto fifty lakh rupees in a financial year with effect from April 1, 2007. If only a portion of capital gains is so invested, then the exemption is available proportionately.

10. As per the provisions of Section 80LA of the Income tax Act where the Bank’s gross total income, in any previous year, includes income from an offshore banking unit (OBU) in a Special Economic Zone shall, subject to the fulfilment of the conditions specified in Section 80LA of the Income-tax Act, be entitled to 100% deduction of such income for five consecutive assessment years, beginning with the assessment year relevant to the previous year in which RBI’s permission to open the offshore unit has

28 been obtained, that is, upto March 31, 2008 and, 50% deduction for a period of five consecutive assessment years thereafter in accordance with and subject to conditions prescribed therein.

II. To Resident Shareholders

1. Dividend income of shareholders is exempt from income tax under Section 10(34) read with Section 115-O of the Income-tax Act. As per the provisions of Section 14A of the Income-tax Act, no deduction is allowed in respect of any expenditure incurred in relation to such dividend income to be computed in accordance with such method as may be prescribed subject to and in accordance with the provisions contained therein. Also, Section 94(7) of the Income-tax Act provides that losses arising from the sale/transfer of shares purchased up to three months prior to the record date and sold or transferred within three months after such date, will be disallowed to the extent dividend income on such shares are claimed as tax exempt by the shareholder.

2. Long-term capital gains would arise to resident shareholders where the equity shares are held for a period of more than 12 months prior to the date of transfer of the shares. In accordance with and subject to the provisions of Section 48 of the Income-tax Act, in order to compute capital gains, the following amounts would be deductible from the full value of consideration:

a. Cost of acquisition/improvement of the shares as adjusted by the Cost Inflation Index notified by the Central Government and b. Expenditure incurred wholly and exclusively in connection with the transfer of the shares.

3. Capital gains arising on transfer of long-term capital assets, being equity shares in a company on sale of which securities transaction tax is paid, is exempt under Section 10(38) of the Income- tax Act whereas short-term capital gains is subject to tax under Section 111A of the Income-tax Act at the rate of 10% (plus applicable surcharge, education cess and secondary and higher education cess). If the equity shares on which securities transaction tax has been paid are treated as stock-in-trade liable to tax as business profits at the maximum marginal rate, rebate can be claimed in accordance with provisions of Section 88E of the Income-tax Act towards such securities transaction tax.

4. The benefit of exemption from tax under Section 10(38) of the Income-tax Act on long-term capital gains, or, concessional rate of tax under Section 111A of the Income-tax Act on short-term capital gains will not be available where no securities transaction tax is applicable. In such cases, under the provisions of Section 112 of the Income-tax Act, taxable long-term capital gains, if any, on sale or transfer of listed securities would be charged to tax at the concessional rate of 20% (plus applicable surcharge, education cess and secondary and higher education cess) after considering indexation benefits or at 10% (plus applicable surcharge, education cess and secondary and higher education cess) without indexation benefits in accordance with and subject to the provision of Section 48 of the Income-tax Act. Under Section 48 of the Income-tax Act, the long-term capital gains arising out of sale or transfer of shares will be computed after indexing the cost of acquisition/improvement.

5. As per Section 54EC of the Income-tax Act, subject to the conditions specified therein, tax on capital gains arising from the transfer of a long-term capital asset (including the equity shares) is exempt from tax, provided that the shareholder has at any time within a period of six months after the date of the transfer, invested the whole of the capital gains in any specified long-term asset for the purposes of Section 54EC of the Income-tax Act. However, if the long-term specified asset are transferred or converted into money within a period of three years from the date of their acquisition, the amount of capital gains exempted earlier would become chargeable to tax as long term capital gains in the year in which the long-term specified asset are transferred or converted into money. The Finance Act, 2007 has introduced ceiling on investments in such long-term specified asset of upto fifty lakh rupees in a financial year with effect from April 1, 2007. If only a portion of capital gains is so invested, then the exemption is available proportionately.

29 then the exemption is available proportionately. However, if the residential house in which investment has been made is transferred within a period of three years from the date of its purchase or construction, the amount of capital gains exempted earlier would become chargeable to tax as long term capital gains in the year in which such residential house is transferred.

III. To non-resident shareholders including NRIs, OCBs and FIIs

1. Dividend income of shareholders is exempt from income tax under Section 10(34) of the Income tax Act read with Section 115-O of the Income-tax Act. As per the provisions of Section 14A of the Income-tax Act, no deduction is allowed in respect of any expenditure incurred in relation to such dividend income to be computed in accordance with such method as may be prescribed subject to and in accordance with the provisions contained therein. Also, Section 94(7) of the Income-tax Act provides that losses arising from the sale/transfer of shares purchased up to three months prior to the record date and sold or transferred within three months after such date, will be disallowed to the extent dividend income on such shares are claimed as tax exempt by the shareholder.

2. Long-term capital gains would arise to non-resident shareholders where the equity shares are held for a period of more than 12 months prior to the date of transfer of the shares. In accordance with and subject to the provisions of Section 48 of the Income-tax Act, in order to compute capital gains, the following amounts would be deductible from the full value of consideration:

As per the provisions of the first proviso to Section 48 of the Income-tax Act, capital gains arising from the transfer of equity shares acquired by non-residents in foreign currency are to be computed by converting the cost of acquisition/improvement, expenditure incurred wholly and exclusively in connection with such transfer and the full value of the consideration received or accruing into the same foreign currency as was initially utilised in the purchase of equity shares and the capital gains so computed in such foreign currency shall then be re-converted into Indian currency. Cost indexation benefits will not be available in such case. Further, the aforesaid manner of computation of capital gains shall be applicable in respect of every reinvestment thereafter in and sale of, shares in, or debentures of an Indian company.

3. Capital gains arising on transfer of long-term capital assets, being equity shares in a company on sale of which securities transaction tax is paid, is exempt under Section 10(38) of the Income-tax Act whereas short-term capital gains is subject to tax under Section 111A of the Income-tax Act at the rate of 10% (plus applicable surcharge, education cess and secondary and higher education cess). If the equity shares on which securities transaction tax has been paid are treated as stock-in-trade liable to tax as business profits at the maximum marginal rate, rebate can be claimed in accordance with provisions of Section 88E of the Income-tax Act towards such securities transaction tax.

4. The benefit of exemption from tax under Section 10(38) of the Income-tax Act on long-term capital gains, or, concessional rate of tax under Section 111A of the Income-tax Act on short-term capital gains will not be available where no securities transaction tax is applicable. In such cases, under the provisions of Section 112 of the Income-tax Act, taxable long-term capital gains, if any, on sale or transfer of listed securities would be charged to tax at the concessional rate of 20% (plus applicable surcharge, education cess and secondary and higher education cess) after considering indexation benefits or at the rate of 10% (plus applicable surcharge, education cess and secondary and education cess) without indexation benefits in accordance with and subject to the provisions of Section 48 of the Income-tax Act.

30 which the long-term specified asset are transferred or converted into money. The Finance Act, 2007 has introduced ceiling on investments in such long term specified asset of upto fifty lakh rupees in a financial year with effect from April 1, 2007. If only a portion of capital gains is so invested, then the exemption is available proportionately.

6. As per the provisions of Section 54F of the Income-tax Act, subject to the conditions specified therein, long-term capital gains arising to an individual or a Hindu undivided family on transfer of long-term capital asset (including the equity shares) shall be exempt from tax, provided that the net consideration is utilised in the purchase of a residential house within a period of one year before or two years after the date of transfer, or in the construction of a residential house within a period of three years after the date of transfer of the long-term capital asset. If only a portion of the net consideration is so invested, then the exemption is available proportionately. However, if the residential house in which investment has been made is transferred within a period of three years from the date of its purchase or construction, the amount of capital gains exempted earlier would become chargeable to tax as long term capital gains in the year in which such residential house is transferred.

7. Capital gains arising to Non Resident Indians (NRIs) on sale of shares on which securities transaction tax is not paid, is governed by Chapter XII-A of the Income-tax Act, subject to fulfilling the conditions stipulated therein:

a. In accordance with and subject to the provisions of Section 115D read with Section 115E of the Income-tax Act, long-term capital gains arising on transfer of specified capital assets (including the Equity Shares) acquired out of convertible foreign exchange, are taxable at the rate of 10% (plus applicable surcharge, education cess and secondary and higher education cess). Cost indexation benefits will not be available in such case. b. In accordance with and subject to the provisions of Section 115F of the Income-tax Act, longterm capital gains arising on sale of shares acquired by a NRI shareholder out of convertible foreign exchange shall be exempt from income tax entirely/proportionately, if the entire/part of the net consideration is invested for a period of three years in any savings certificates specified under Section 10(4B) or specified assets as defined in Section 115C(f) of the Incometax Act, within six months from the date of transferring the shares. The amount so exempted will be chargeable to tax under the head ‘Capital Gains’ if these new assets are transferred or converted (otherwise than by way of transfer) into money within three years from the date of its acquisition in accordance with the provisions of Section 115F(2) of the Income-tax Act. c. As per Section 115G of the Income-tax Act, a NRI would not be required to file a return of income under Section 139(1) of the Income-tax Act, where the total income consists only of investment income and/or long-term capital gains and tax deductible at source has been deducted from such income as per provisions of Chapter XVIIB of the Income-tax Act. d. As per the provision of Section 115I of Income-tax Act, a NRI may elect not to be governed by the provisions of Chapter XII-A for any assessment year by furnishing his return of income for that assessment year under Section 139 of the Income-tax Act, declaring therein that the provisions of Chapter XII-A shall not apply to him for that assessment year and accordingly his total income for that assessment year will be computed in accordance with the provisions of the Income-tax Act.

8. Capital gains arising to FIIs on sale of shares on which securities transaction tax is not paid is governed by Section 115AD of the Income-tax Act. As per Section 115AD of the Income-tax Act, long-term capital gains arising on transfer of shares purchased by FIIs, are taxable at the rate of 10% (plus applicable surcharge, education cess and secondary and higher education cess). Short-term capital gains are however, taxable at the rate of 30% (plus applicable surcharge, education cess and secondary and higher education cess). Cost indexation benefits will not be available. Further, the provisions of the first proviso of Section 48 of the Income-tax Act as stated above will not apply.

9. In accordance with and subject to the provisions of Section 115AD read with Section 196D(2) of the Income-tax Act, no deduction of tax at source is applicable in respect of capital gains arising from the transfer of the equity shares payable to FIIs.

10. In the case of all non-resident shareholders, the above tax rates are subject to the benefits, if any, available under the double taxation avoidance agreements signed by India with the country of which

31 the non-resident shareholder may be a tax resident, subject to fulfilment of conditions prescribed thereunder.

IV. To Mutual Funds

As per the provisions of Section 10(23D) of the Income-tax Act, tax exemption is available on income of a mutual fund registered under the Securities and Exchange Board of India Act, 1992 and Regulations made thereunder, or, mutual funds set up by the public sector banks or public financial institutions / authorised by RBI and subject to the conditions as the Central Government may specify by notification in the Official Gazette.

B. WEALTH TAX

Shares are not treated as assets within the meaning of Section 2(ea) of the Wealth Tax Act, 1957 and accordingly, the equity shares are not liable to Wealth-tax in the hands of the shareholders.

C. GIFT TAX

The Gift-tax Act, 1958, has ceased to apply to gifts made on or after October 1, 1998. Gift of the equity shares would therefore, be exempt from gift-tax.

Thanking you,

Yours sincerely,

For Sundaram & Srinivasan For Brahmayya & Co., Chartered Accountants Chartered Accountants (K.Srinivasan) (P.S.Kumar) Partner Partner M.No.5809 M.No.15590

Date: August 3, 2007

INDUSTRY OVERVIEW

The banking sector reflected a pick-up in the real economic activity during 2005-06. In the backdrop of robust macroeconomic environment, bank credit witnessed a strong expansion for the second year in succession. The demand for credit was also broad-based led by the housing and the retail sectors. The growth in deposits, though higher than the previous year, was insufficient to meet the high credit demand forcing the banks to liquidate their holdings of Government securities.

It was the first time since the nationalisation of banks in 1969 that investment by commercial banks in Government securities declined inabsolute terms (by Rs.19,514 crore) in any single year. Similarly, investments by the commercial banks in bonds/debentures/shares of the corporate sector also declined during the year. Commercial banks’ holdings of Government and other approved securities declined from 38.2 per cent of their net demand and time liabilities (NDTL) at end-March 2005 to 31.3 per cent at end-March 2006. While the excess SLR holdings amounted to Rs.1,45,297 crore at end-March 2006, several banks now seem to be operating their SLR portfolios close to the statutory minimum level of 25.0 per cent.

Interest rates on deposits of over one year maturity of public sector banks (PSBs) moved up from 5.25-7.25 per cent in April 2005 to 5.50-7.75 per cent in March 2006. During the same period, the benchmark prime lending rates (BPLRs) of public sector banks and foreign banks remained unchanged in the range of 10.25-11.25 per cent and 10.00-14.50 per cent, respectively. The BPLRs of private sector banks moved up to a range of 11.00- 14.00 per cent from 11.00-13.50 per cent in the same period. The median lending rates for term loans (at which maximum business is contracted) in respect of major PSBs, which remained unchanged at 8.00-11.63 per cent during December 2005 to March 2006, increased to 8.00-12.00 per cent in June 2006 and further to 8.50-12.00 per cent in September 2006 (provisional)

Policy Developments in Commercial Banking during the year 2005-06

Globalisation, financial deregulation and improvement in technology have had a profound effect on the financial landscape in recent years. These developments have intensified competition and resulted in financial engineering through product innovation and business strategies. While market participants have now greater scope to diversify risk and manage it efficiently, this has also posed new risks and challenges to the financial system. Growth of financial firms across different business lines and across national boundaries has made the task of designing appropriate policies more challenging. Regulatory and supervisory policies are, therefore, constantly assessed regarding their capabilities to meet the challenges of containing systemic risk in the financial system. The main challenge for the supervisory authorities has been to maintain financial stability without curtailing the incentive to innovate.

Keeping in view the changing landscape in the financial sector, the Reserve Bank has been suitably focusing its regulatory and supervisory framework to promote a stable and efficient financial sector. The main focus of the Reserve Bank’s recent regulatory and supervisory initiatives has been on prudential regulation and financial infrastructure broadly in line with international best practices. However, while focusing on a globally competitive and the robust banking sector, the Reserve Bank has also emphasised financial inclusion, whereby banking services are accessed easily by the underprivileged sections of the society. The overall approach to reforms has been sequenced and arrived at through consultative process with all the stakeholders. Various reform measures initiated from time to time have imparted resilience to the financial system.

The Reserve Bank had indicated on February 15, 2005 that banks in India would start implementing Basel II with effect from March 31, 2007. Several initiatives, therefore, were taken during the year to facilitate the smooth transition to Basel II. The Reserve Bank permitted banks to raise capital through new instruments to enable them to meet capital requirements prescribed under Basel II. The Reserve Bank also issued a guidance note for operational risk management. Taking into account the state of preparedness of the banking system, however, it was announced in the Midterm Review of the Annual Policy for 2006-07 on October 31, 2006 that Indian banks with presence outside India and foreign banks operating in India would be required to migrate to

33 Basel II framework with effect from March 31, 2008, while all other Indian banks would be encouraged to migrate to these norms by March 31, 2009.

With a view to providing basic banking services to common man, the Reserve Bank took several measures to incentivise banks. Improvement in customer service was another area of focus of the Reserve Bankís regulatory policy during 2005-06.

Monetary and Credit Policy

Bank Rate and Repo/Reverse Repo Rate

In the Mid-term Review of Annual Policy Statement released on October 31, 2006, it was indicated that the Reserve Bank will ensure to maintain appropriate liquidity in the system so that all legitimate requirements of credit are met, particularly for productive purposes, consistent with the objective of price and financial stability. In view of the prevailing current macroeconomic and overall monetary conditions, the fixed repo rate under the LAF was raised by 25 basis points from 7.0 per cent to 7.25 per cent. The reverse repo rate, the Bank Rate and the CRR were left unchanged. As a result, the spread between the repo and reverse repo rate increased to 125 basis points. Several measures were also announced to (i) further develop and integrate financial markets, with a view to enhancing allocative efficiency; (ii) improve and expand credit delivery oriented towards financial inclusion and extension of financial services to the under-privileged segments of the population; (iii) strengthen the capital base of banks with a view to preparing them to migrate to Basel II norms and implement prudential measures in consonance with international best practices in the financial sector; and (iv) keep up the pace of liberalisation of the external sector within the framework for fuller capital account convertibility recommended by the Committee (Chairman: Shri S.S. Tarapore) appointed by the Reserve Bank Pursuing the medium-term objective of reducing the C RR, the Reserve Bank had reduced the CRR progressively from the peak of 15 per cent of NDTL in 1992 to 4.5 per cent by 2003. The CRR, however, was raised by one-half of one percentage point of NDTL in two stages of 0.25 percentage points each to 4.75 per cent effective September 18, 2004 and further to 5.0 per cent effective October 2, 2004 to combat inflationary expectations. The CRR has remained unchanged since then. However, the recent amendment to Section 42 of the RBI Act, 1934, in June 2006, vests the Reserve Bank with the power to prescribe CRR for scheduled banks without any floor or ceiling rate. Further, the amendment removes the statutory minimum CRR and the Reserve Bank cannot pay interest on any portion of CRR balances of banks once the Act comes into force. RBI on July 31, 2007 further increased the cash reserve ratio by 50 basis points to 7% from the fortnight beginning August 4, 2007.

Table: Repo and Reverse Repo Rate (since April 2005)

(Source: RBI Report on Trend and Progress of Banking 2005-06)

Deposit Rates

The interest rates on domestic term deposits, except for saving bank accounts, have been deregulated since October 1997. Banks are now free to determine their own deposit rates depending on commercial judgment, subject to the approval of their boards. Banks have also been given the freedom to decide the rates on various non-resident deposits, subject to the ceiling prescribed by the Reserve Bank. Banks were also allowed to offer differential rates of interest on wholesale domestic term deposits of Rs.15 lakh and above, i.e., the interest rate offered on the wholesale domestic term deposits can differ from those offered on the retail domestic term deposits.

The interest rate on savings bank deposits is regulated by the Reserve Bank and is currently prescribed at 3.5 per cent per annum. Based on a review of prevailing monetary and interest rate conditions, including a careful

34 consideration of the suggestions received from the Indian Banks Association (IBA), the Annual Policy Statement for 2006-07 considered it appropriate to maintain status quo while recognising that the deregulation of savings bank deposit rate was essential for product innovation and price discovery in the long run.

35 Credit Delivery

A critical issue facing the banking sector is the flow of credit to all productive sectors of the economy. Therefore, it has been the endeavour of the Reserve Bank to create a conducive environment for banks to provide adequate credit to all productive sectors at reasonable cost. In continuance with the general focus on sectoral credit allocation, especially to the priority sector, the Reserve Bank took several measures to improve credit delivery mechanism during the year.

The Reserve Bank issued additional guidelines to banks on August 9, 2006 to provide special relief measures in areas affected by natural calamities. The guidelines included: (i) operating from temporary premises in areas where the bank branches are affected by natural calamity and are unable to function normally; (ii) waiving the penalties relating to accessing accounts such as fixed deposits to satisfy customerís immediate requirements; (iii) restoring the functioning of ATMs at the earliest and putting in place arrangements for allowing customers to access other ATM networks and mobile ATMs; (iv) simplifying the procedure for opening of new accounts for persons affected by natural calamities; (v) restructuring the existing loans; and (vi) enhancing the limit on consumption loans. Further, banks were advised on September 4, 2006 that the instructions on moratorium, additional collateral for restructured loans and asset classification in respect of fresh finance would be applicable to all affected restructured borrowal accounts, including accounts of industries and trade, besides agriculture.

Credit Flow to Small and Medium Industries

Unlike large industries, which have access to various domestic and international sources of finance, small and medium enterprises (SMEs) are dependent largely on bank finance. However, credit to the SME sector has tended to stagnate in recent years. This is a cause of concern given the importance of small scale industries in the overall economy, especially its employment generating potential. The Reserve Bank, therefore, has been making constant efforts to increase the credit flow to SMEs.

Export Credit

In pursuance of the recommendations of the Working Group to Review Export Credit (Chairman: Shri A. Sinha), scheduled commercial banks (excluding RRBs) were advised in February 2006 to review their existing procedure for export credit, Gold Card Scheme (GCS), export credit for non-star exporters and certain other aspects. The review of existing procedure for export credit was required to include the following: (i) attitudinal change in the approach to small and medium exporters; (ii) putting in place a control and reporting mechanism for early disposal of application; (iii) raising all queries in one shot while processing applications as opposed to piece-meal queries; (iv) facilitating training along with SSI/export organisations; (v) devising of a simplified loan application form by IBA; (vi) evolving guidelines to obviate need for collateral security; and (vii) promoting coordination between banks and exporters through the mechanism of State Level Export Promotion Committees (SLEPCs), which have been reconstituted as sub-committees of the SLBCs.

Capital adequacy

Foreign banks operating in India and Indian banks having presence outside India are to migrate to the standardised approach for credit risk and the basic indicator approach for operational risk under Basel II with effect from March 31, 2008. All other scheduled commercial banks are encouraged to migrate to these approaches under Basel II in alignment with them but in any case not later than March 31, 2009. The Steering Committee of banks would continue to interact with banks and the Reserve Bank, and guide the smooth implementation of Basel II. They are required to follow standardised approach for credit risk and basic indicator approach for operational risk.

In view of transition to the new capital adequacy framework, banks would need to furthershore up their capital funds to meet the requirements under the revised Framework.Under Basel II, the capital requirements are not only more sensitive to the level of credit risk, but are also applicable to operational risks. Thus, banks would need to raise additional capital for Basel II requirements, as well as to support the expansion of their balance sheets. For smooth transition to Basle II and with a view to providing banks in India additional options for raising capital funds, banks were advised in January 2006 that they could augment their capital funds by issue of additional instruments such as (i) innovative perpetual debt instruments (IPDI) eligible for inclusion as Tier I capital; (ii) debt capital instruments eligible for inclusion as Upper Tier II capital; (iii) perpetual non-cumulative preference shares eligible for inclusion as Tier I capital; and (iv) redeemable cumulative preference shares

36 eligible for inclusion as Tier II capital. Detailed guidelines for instruments at (i) and (ii) above have already been issued. Guidelines for instruments at (iii) and (iv) will be issued separately in due course.

Basel II aims at encouraging the use of modern risk management techniques and ensuring that bank’s risk management capabilities are commensurate with the underlying risks of their business. Basel II requires that the design of risk management framework be oriented towards banks’ own requirements dictated by the size and complexity of business, risk philosophy, market perception and the expected level of capital. The risk management systems in banks should, however, be adaptable to changes in business, size, market dynamics and introduction of innovative products by banks in future.

Following table throws light on the Bank Group-wise Capital Adequacy Ratio:

Table: Capital Adequacy Ratio-Bank Group-wise

(Source: RBI Report on Trend and Progress of Banking 2005-06)

Exposure Norms and Risk Weights

In view of the increase in growth of advances to the real estate sector in the recent period, banks were advised to put in place a proper risk management system to contain the risks involved. Banks were also advised to put in place a system for ensuring proper checking and documentation of related papers before sanctioning/disbursing of such loans. On June 29, 2005, the Reserve Bank advised banks to have a board mandated policy in respect of their real estate exposure covering exposure limits, collaterals to be considered, margins to be kept, sanctioning authority/level and sector to be financed. Banks were also advised to report their real estate exposure under certain heads and disclose their gross exposure to the real estate sector as well as the details of the break-up in their annual reports.

With effect from July 26, 2005, the risk weight for credit risk on the capital market exposures was increased from 100 per cent to 125 per cent. The capital market exposure comprises:(a) direct investment by a bank in equity shares, convertible bonds and debentures and units of equity oriented mutual funds; and (b) advances against shares to individuals for investment in equity shares (including IPOs/ESOPs), bonds and debentures, units of equity oriented mutual funds; and (c) secured and unsecured advances to stock brokers and guarantees issued on behalf of stock brokers and market makers.

Guidelines on Securitisation of Standard Assets

The Reserve Bank had issued draft guidelines on securitisation of standard assets in April 2005. Based on the feedback received from all stakeholders, the final guidelines on securitisation of standard assets were issued on February 1, 2006. The guidelines are applicable to financial institutions, including non-banking financial companies

Know Your Customer Guidelines and Anti-Money Laundering Standards

The Reserve Bank had issued comprehensive guidelines to banks on November 29, 2004 relating to ‘know your customer’ (KYC) and ‘anti-money laundering’ (AML). Banks were later advised to ensure that they were fully compliant with the provisions of the norms before December 31, 2005. On August 23, 2005, revised guidelines were issued regarding opening of accounts with a view to enabling persons belonging to low-income group to easily access

Fuller Capital Account Convertibility and the Banking Sector

Given the changes that had taken place over the last two decades, there is merit in moving towards Fuller Capital Account Convertability (FCAC) within a transparent framework. In consultation with the Government of India, the Reserve Bank, therefore, constituted a Committee on Fuller Capital Account Convertibility (Chairman: Shri S.S. Tarapore) in March 2006 for suggesting measures for further liberalization of the capital account. The Committee submitted its Report on July 31, 2006, which was placed in public domain on September 1, 2006. The Committee recommended a broad timeframe of a five year period in three phases for fuller capital account liberalisation; 2006-07 (Phase I), 2007-08 and 2008-09 (Phase II) and 2009-10 and 2010- 11 (Phase III). The Committee observed that under a FCAC regime, the banking system will be exposed to greater market volatility. Hence, it is necessary to address the relevant issues in the banking system, including the need for enhancing the risk management capabilities in the banking system and the regulatory and supervisory aspects to enable the system to become more resilient to shocks and sustain their operations with greater stability. Given the importance that the commercial banks occupy in the Indian financial system, the banking system, according to the Committee, should be the focal point for appropriate policy measures. In this regard, the Committee made several specific recommendations

Branch Authorisation Policy

In terms of the existing provisions, banks are not allowed, without the prior approval of the Reserve Bank, to open a new place of business in India or change the location of the place of business, other than within the same city, town or village. While the current policy for authorisation of overseas branches of Indian banks would continue, the branch authorization policy was liberalised and rationalised in September 2005 in order to give reasonable freedom to banks and rationalise the policy for opening of new branches in India. A comprehensive framework for branch authorisation policy consistent with the mediumterm corporate strategy of banks and public interest was put in place effective September 8, 2005 . Financial Inclusion

The Mid-term Review of Annual Policy Statement for the year 2005-06 while recognizing the concerns with regard to the banking practices that tend to exclude rather than attract vast sections of population, urged banks to review their existing practices with a view to aligning them with the objective of financial inclusion. In many banks, the requirement of a minimum balance and charges levied, although accompanied by a number of free facilities, deter a sizeable section of population from opening/maintaining bank accounts.

With a view to achieving the objective of greater financial inclusion, all banks were advised in November 2005 to make available a basic banking ‘no-frills’ account either with ‘nil’ or very low minimum balances as well as charges that would make such accounts accessible to vast sections of population. The nature and number of transactions in such accounts could be restricted, but made known to the customer in advance in a transparent manner.

Technological and Other Developments

The financial sector has been a large user of information technology (IT). Banks, in particular, have been increasingly using IT in their day to day operations. Over the years, banks have (a) extended the reach of core banking solutions (CBS) to more branches so as to facilitate ‘anywhere banking’; (b) introduced technology based products and services such as mobile banking; and (c) expanded the internet banking facilities. Banks have been increasingly using the NEFT for ensuring wider reach for electronic funds movement.

With enhanced level of IT usage by banks, the Reserve Bank is gradually moving away from micro- management of IT related matters of banks. Instead, the Reserve Bank has begun to frame guidelines and standards which relate to common inter-bank requirements. During the year 2005-2006, the Financial Sector Technology (FST) Vision Document, 2005-08 was released to all banks in July 2005. The document outlines the approach to be followed by the Reserve Bank as far as IT implementation for the immediate future is concerned. The Vision Document has helped banks to formulate their IT policies in a manner which are in line with the direction given by the Reserve Bank. At the same time, it also facilitated banks’ overall movement in a unified manner towards common inter-operable standards for IT systems and inter-bank messaging. In order to follow-up the implementation of the tenets of the FST Vision Document, a Conference of IT Chiefs of all categories of banks was organized by the Reserve Bank in January 2006.

Legal Reforms in the Banking Sector

An efficient financial system requires a regulatory framework with well-defined objectives, adequate and clear legal framework and transparent supervisory procedure. A comprehensive legislation is also a pre-requisite for the regulatory authority to discharge its responsibilities effectively. Keeping this in view, the Reserve Bank has been making constant efforts to upgrade and strengthen the legal framework in tune with the changing environment.The Central Government, on the recommendation of the Reserve Bank, has initiated a number of measures in this respect over the past few years.

In order to facilitate the task of monetary management and provide operational flexibility, a greater empowerment of the Reserve Bank in the wielding of policy instruments was considered necessary. Keeping this in view, the Reserve Bank of India Act, 1934 was amended by the Parliament. This amendment, inter-alia, has empowered the Reserve Bank to determine the CRR without any ceiling or floor rate.

The Credit Information Companies (Regulation) Act, 2005 has been enacted for regulation of Credit Information Companies and facilitating efficient distribution of credit and for matters connected therewith or incidental thereto.

Operations and Performance of Commercial Banks

Bank group-wise, new private sector banks grew at the highest rate during 2005-06 (43.2 per cent), followed by foreign banks (31.2 per cent), public sector banks (13.6 per cent) and old private sector banks (12.2 per cent) (Table: ‘Growth of Balance Sheet of Scheduled Commercial Banks - Bank Group-wise’). As a result, the relative significance of PSBs declined significantly with their share in total assets of SCBs declining to 72.3 per cent at end-March 2006 from 75.3 per cent at end-March 2005, while that of new private sector banks increasing to 15.1 per cent from 12.5 per cent. This mainly reflected the trend in deposits on the liabilities side

Table: Growth of Balance Sheet of Scheduled Commercial Banks - Bank Group-wise

(Source: RBI Report on Trend and Progress of Banking 2005-06)

The following charts depict the Bank Group-wise Composition of Time Deposits and Bank Group-wise Share in Aggregate Deposits. Deposits of new private sector banks grew at the highest rate (50.7 per cent), followed by foreign banks 31.7 per cent), PSBs (12.9 per cent) and old private sector banks (11.4 per cent). The share of new private sector banks in total deposits has been rising gradually, while that of PSBs has been declining over the years.

Bank Group-wise Composition of Time Deposits Share in Aggregate Deposits - Bank (Fortnight ended June 23, 2006) Group-wise (As at end-March, 2006)

(Source: RBI Report on Trend and Progress of Banking 2005-06)

Among bank groups, new private sector banks had the highest exposure to the sensitive sectors (measured as percentage to total loans and advances of banks) mainly due to the increase in exposure to the real estate market, followed by foreign banks, old private sector banks and public sector banks. Following table depict the exposure to the sensitive sectors.

Table: Lending to the Sensitive Sector by Scehduled Commercial Banks

(Source: RBI Report on Trend and Progress of Banking 2005-06)

Table: Lending to the Sensitive Sectors – Bank Group-wise*

(Source: RBI Report on Trend and Progress of Banking 2005-06)

Among bank-groups, foreign banks had the highest C-D ratio (in terms of outstanding amount) at end-March 2006, followed by new private sector banks, old private sector banks and public sector banks. The following chart succinctly explains the picture:

Credit-Deposit Ratio- Bank Group-wise

40 (As at end-March)

(Source: RBI Report on Trend and Progress of Banking 2005-06) Interest Rate Scenario The high credit demand during 2005-06 exerted an upward pressure on lending rates as well as deposit rates of banks Interest rates offered on deposits by banks, in general, firmed up during 2005-06. However, the increase was more pronounced at the short-end of the maturity. The spread between deposits of up to one year maturity and above three years maturity offered by PSBs narrowed down to 75 basis points at end-March 2006 from 100 basis points at end-March 2005. Likewise, the spread between interest rates on deposits up to one year and three year maturity offered by private sector banks narrowed down to 50 basis points from 100 basis points. The hike in deposit rates was indicative of the increased competition from other saving instruments and firming up of interest rates in general. Banks increased their deposit rates further by about 25-75 basis points across various maturities between March 2006 and June 2006. A majority of PSBs adjusted their deposit rates (up to three years maturity) upwards by 25 to 50 basis points, while deposit rates for over three year maturity remained unchanged.

Table: Movements in Deposit and Lending Interest Rates(Source: RBI Report on Trend and Progress of Banking 2005- 06)

Cost of Deposits and Return on Advances

Notwithstanding the rise in deposit rates of SCBs during the year, the cost of deposits declined marginally due to increase in the share of low cost deposits in the form of current and savings deposits. The movements in the cost of deposits reflect the average rate at which different deposits are contracted rather than the movement in INTEREST RATES (PERCENT) MARCH 2004 MARCH 2005 MARCH 2006 JUNE 2006 Domestic Deposit Rates Public Sector Banks a) Upto 1 year 3.75-5.25 2.75-6.00 2.25-6.50 2.75-6.50 b)1 year & upto 3 years 5.00-5.75 4.75-6.50 5.75-6.75 5.75-7.00 c) Over 3 years 5.25-6.00 5.25-7.00 6.00-7.25 6.00-7.25 Private Sector Banks a) Upto 1 year 3.00-6.00 3.00-6.25 3.50-7.25 3.50-6.75 b)1 year & upto 3 years 5.00-6.50 5.25-7.25 5.50-7.75 6.50-7.75 c) Over 3 years 5.25-7.00 5.75-7.00 6.00-7.75 6.50-8.25 Foreign Banks a) Upto 1 year 2.75-7.75 3.00-6.25 3.00-5.75 3.25-6.50 b)1 year & upto 3 years 3.25-8.00 3.50-6.50 4.00-6.50 5.00-6.50 c) Over 3 years 3.25-8.00 3.50-7.00 5.50-6.50 5.50-6.75 BPLR Public Sector Banks 10.25-11.50 10.25-11.25 10.25-11.25 10.75-11.50 Private Sector Banks 10.50-13.00 11.00-13.50 11.00-14.00 11.00-14.50 Foreign Banks 11.00-14.85 10.00-14.50 10.00-14.50 10.00-14.50 Actual Lending Rates* Public Sector Banks 4.00-16.00 2.75-16.00 4.00-16.50 4.00-16.50 Private Sector Banks 3.00-22.00 3.15-22.00 3.15-20.50 3.15-26.00 Foreign Banks 3.75-23.00 3.55-23.50 4.75-26.00 4.75-25.00

41 deposit interest rates as such. The cost of borrowings, however, moved up somewhat mainly due to tightening of liquidity conditions in the market. The overall cost of funds remained unchanged at the previous year’s level. Bank group-wise, while the overall cost of funds for foreign banks and new private sector banks increased, the cost of funds for the public sector banks remained unchanged. Return on advances of SCBs increased marginally during 2005-06, reflecting the increase in lending rates. Return on investment, on the other hand, remained at the previous year’s level. Overall return on funds, however, was slightly higher than the overall cost of funds, resulting in increase in spread.

Table: Cost of Funds and Returns on Funds - Bank Group-wise

(Source: RBI Report on Trend and Progress of Banking 2005-06)

Regional Distribution of Bank Branches as at June 2006

(Source: RBI Report on Trend and Progress of Banking 2005-06)

Maturity Profile of Assets and Liabilities of Banks

The maturity profile of deposits, advances and Total Income between the various banks at the end of financial year 2006, within the commercial bank segment was as under:

Bank Group-wise Maturity Profile of Select Liabilities/Assets (As at end-March 2006)

42 (Per cent)

Assets/Liabilities Public Sector Old Private New Private Foreign Banks Sector Banks Sector Banks Banks

2005 2006 2005 2006 2005 2006 2005 2006 I. Deposits a) Up to 1 year 36.3 39.7 53.3 48.0 53.9 58.7 54.2 53.2 b) Over 1 year and up to 3 years 35.3 30.6 37.6 38.2 43.1 36.9 39.2 43.6 c) Over 3 years and up to 5 years 11.9 11.7 3.4 6.0 2.1 3.0 0.9 0.4 d) Over 5 years 16.5 17.9 5.7 7.7 0.9 1.4 5.7 2.8 II. Borrowings a) Up to 1 year 41.8 42.1 80.7 81.5 51.2 55.5 84.4 84.6 b) Over 1 year and up to 3 years 20.2 26.3 4.1 3.7 34.1 18.7 12.3 13.7 c) Over 3 years and up to 5 years 12.7 10.9 7.1 6.2 7.6 20.8 3.3 1.5 d) Over 5 years 25.3 20.7 8.2 8.5 7.0 5.0 – 0.3 III.Loans and Advances a) Up to 1 year 36.7 35.5 42.3 43.0 39.7 30.7 55.9 55.8 b) Over 1 year and up to 3 years 34.6 35.2 33.7 36.1 32.2 40.2 17.9 25.7 c) Over 3 years and up to 5 years 12.0 11.5 9.0 10.0 9.5 11.3 6.5 5.3 d) Over 5 years 16.6 17.8 15.0 10.9 18.6 17.9 19.7 13.2

IV. Investment

a) Up to 1 year 13.4 11.9 21.9 20.2 47.6 50.5 53.1 58.8 b) Over 1 year and up to 3 years 12.7 14.3 11.1 9.7 27.5 25.5 27.3 29.4 c) Over 3 years and up to 5 years 17.3 16.8 12.6 14.3 6.2 7.1 6.1 4.7 d) Over 5 years 56.6 56.9 54.4 55.7 18.8 16.8 13.6 7.1

– : Nil/Negligible.

(Source – Report on Trends and Progress of Banking in India, 2005-06 –RBI) The maturity structure of commercial banks’ assets and liabilities reflect a combination of various concerns of banks relating to business expansion, liquidity management, cost of funds, return on assets, asset quality and the risk appetite. Broadly, major components of balance sheet such as deposits, borrowings, loans and advances, and investments of major bank groups depicted a non-linear pattern across the maturity spectrum during 2005- 06. The maturity structure of loans and advances of public sector banks and old private sector banks depicted a synchronous pattern with that of deposits. However, loans and advances of new private sector banks and foreign banks were more in higher maturity buckets as compared with their deposits. New private sector and foreign banks held most of their investments in shorter maturity bucket, while PSBs and old private sector banks held most of their investment in a longer maturity bucket.

A trend that portends well for Indian banking sector is the growth of credit in retail segments like housing and consumer durables and the fall in the market share of NBFCs in retail businesses. This growing retail assets opportunity would drive future credit growth for banks. India also maintains a comparatively low deposit/GDP ratio. This presents opportunities for banks to scale up their deposit base by targeting under-banked and under- penetrated second and third tier towns. With increased competition in the corporate banking industry due to entry of foreign banks and new private sector banks, the sector has witnessed a squeeze in margins. In a move to safeguarding their margins, the banks are looking at retail banking as a potential growth area.

Non-Performing Assets

The key NPA parameters for the various banks within the Scheduled Commercial Bank segment during the financial years 2002, 2003, 2004 and 2005 is as under:

Table : Gross & Net NPAs of Scheduled Commercial Banks – Bank Group-wise (as at March 2006)

(Source – Report on Trends and Progress of Banking in India, 2005-06 –RBI)

There was a notable reduction in the ratio of non-performing assets (NPAs) to advances in response to various initiatives, such as improved risk management practices and greater recovery efforts, driven, interalia, by the recently enacted Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002. The level of non-performing loans is recognised as a critical indicator for assessing banks’ credit risk, asset quality and efficiency in allocation of resources to productive sectors. Reflecting the success of financial sector reforms, regulatory and supervisory process, in particular, banks have made substantial progress in cleaning up the NPAs from their balance sheets.

The sharp rise in credit growth was underpinned by a steady improvement in asset quality. Following the trend of the previous year, reductions in NPAs for SCBs outpaced additions to NPAs during 2005-06. This trend was observed across all bank groups.

In view of several options available to banks for dealing with NPAs, banks have been able to recover a significant amount of NPAs. An improved industrial climate contributed to a better recovery position. The course to aggressive restructuring by banks in 2005-06 also helped in reducing the level of NPAs. The setting up of the Asset Reconstruction Corporation of India (ARCIL) has provided a major boost to banks’ efforts to recover their NPAs.

Increased recovery of NPAs, decline in fresh slippages and a sharp increase in gross loans and advances by SCBs led to a sharp decline in the ratio of gross NPAs to gross advances to 3.3 per cent at end-March 2006 from 5.2 per cent at end-March 2005. Likewise, net NPAs as percentage of net advances declined to 1.2 per cent from 2.0 per cent at end-March 2005. A significant decline in gross and net NPAs was evident across all bank groups

FINANCIAL SECTOR AND ITS OUTLOOK Reserve Bank of India The RBI is the central banking and monetary authority in India. The RBI manages the country’s money supply and foreign exchange and also serves as a bank for the Government of India and for the country’s

44 commercial banks. In addition to these traditional central banking roles, the RBI undertakes certain developmental and promotional roles. The RBI issues guidelines on various areas including exposure standards, income recognition, asset classification, provisioning for non-performing assets, investment valuation and capital adequacy standards for commercial banks, long-term lending institutions and non-bank finance companies. The RBI requires these institutions to furnish information relating to their businesses to the RBI on a regular basis. The Scheduled Commercial Banks (SCBs) consist of 28 public sector banks (State Bank of India and its seven asscociates, nationalized banks and other public sector bank (one)), 27 private sector banks (19 old and 8 new) and 29 foreign banks. During 2005-06, two domestic banks and one foreign bank were amalgamated, and one foreign bank was closed reducing the number of scheduled commercial banks from 88 at end-March 2005 to 84 at end-March 2006. On the recommendations of the Reserve Bank, the Central Government placed the Ganesh Bank of Kurundwad Limited. under a moratorium for a period of 3 months effective January 7, 2006 under Section 45 of the Banking Regulation (B. R.) Act, 1949 The scheme of amalgamation of the bank with the Federal Bank Ltd. prepared by the Reserve Bank was sanctioned by the Government on January 24, 2006. Following the Supreme Court order dated August 28, 2006, dismissing the Petition filed by the bank, the Central Government issued necessary notification on September 1, 2006 to effect the merger from September 2, 2006. The voluntary amalgamation of the Bank of Punjab Ltd. with the Centurion Bank Ltd. was approved by the Reserve Bank in terms of Section 44A of the B. R. Act, and became effective from October 1, 2005. The Centurion Bank subsequently changed its name to Centurion Bank of Punjab Ltd. Among foreign banks, while ING Bank NV closed its business in India, UFJ Bank Ltd. merged its banking business globally with Bank of Tokyo-Mitsubishi Ltd. As a result, ING Bank NV and UFJ Bank Ltd. were excluded from the Second Schedule to the Reserve Bank of India Act, 1934 with effect from October 28, 2005 and January 1, 2006. Besides two amalgamations of domestic banks in 2005-06, another amalgamation took place in 2006-07 (up to October 31, 2006). The United Western Bank Ltd. (UWB) was placed under moratorium by the Central Government under Subsection (2) of Section 45 of the B. R. Act, 1949, for a period of three months effective September 2, 2006 because the CRAR of UWB had turned negative. During the period of moratorium, the Reserve Bank received expression of interest from 17 entities. Subsequently, the Government notified the Scheme for amalgamation of United Western Bank Ltd. with Industrial Development Bank of India Ltd., which came into effect on October 3, 2006.

Public Sector Banks

Public sector banks make up the largest category in the Indian banking system. They include State Bank of India and its seven associate banks, 19 nationalized banks and 102 regional rural banks. Excluding the regional rural banks,the remaining public sector banks have 48,800 branches, and accounted for 70.8% of the outstanding gross bank credit and 71.0% of the aggregate deposits of the scheduled commercial banks as at December 31, 2006. The public sector banks’ large network of branches enables them to fund themselves out of low cost deposits.

State Bank of India is the largest bank in India in terms of total assets. At December 31, 2006, State Bank of India and its seven associate banks had 13,978 branches. They accounted for 22.4% of aggregate deposits and 23.3% of outstanding gross bank credit of all scheduled commercial banks. Regional rural banks were established from 1976 to 1987 by the central government, state governments and sponsoring commercial banks jointly with a view to develop the rural economy. Regional rural banks provide credit to small farmers, artisans, small entrepreneurs and agricultural labourers. The National Bank for Agriculture and Rural Development is responsible for regulating and supervising the functions of the regional rural banks. In 1986 the Kelkar Committee made comprehensive recommendations covering both the organizational and operational aspects of regional rural banks, several of which were incorporated as amendments to the Regional Rural Banking Act, 1976. As part of comprehensive restructuring programme, recapitalization of the regional rural banks was initiated in fiscal 1995, a process which continued until fiscal 2000 and covered 187 regional rural banks with aggregate financial support of Rs. 21.88 billion from the stakeholders. Simultaneously, prudential norms on income-recognition, asset classification and provisioning for loan-losses following customary banking benchmarks were introduced.

At December 31, 2006, there were 102 regional rural banks with 14,404 branches, accounting for 3.2% of aggregate deposits and 2.5% of gross bank credit outstanding of scheduled commercial banks. During fiscal

45 2006 and the first nine months of fiscal 2007, the number of regional rural banks was reduced from 173 to 102 through amalgamations of several regional rural banks.

Private Sector Banks

After the first phase of bank nationalization was completed in 1969, public sector banks made up the largest portion of Indian banking. The focus on public sector banks was maintained throughout the 1970s and 1980s. In addition, existing private sector banks that showed signs of an eventual default were merged with state-owned banks. In July 1993, as part of the banking reform process and as a measure to induce competition in the banking sector, RBI permitted entry of the private sector into the banking system. This resulted in the introduction of private sector banks. These banks are collectively known as the “new” private sector banks. At year-end fiscal 2007, there were eight “new” private sector banks. In addition, 18 private sector banks existing prior to July 1993 were operating at year-end fiscal 2007. There were a total of 26 private sector banks at year- end fiscal 2007.

At December 31, 2006, private sector banks accounted for approximately 19.9% of aggregate deposits and 20.2% of gross bank credit outstanding of the scheduled commercial banks. Their network of 6,567 branches accounted for 9.4% of the total branch network of scheduled commercial banks in the country.

Foreign Banks

At December 31, 2006, there were 29 foreign banks with 247 branches operating in India. Foreign banks accounted for 5.9% of aggregate deposits and 6.5% of outstanding gross bank credit of scheduled commercial banks at December 31, 2006. As part of the liberalization process, RBI has permitted foreign banks to operate more freely, subject to requirements largely similar to those imposed on domestic banks. The primary activity of most foreign banks in India has been in the corporate segment. However, some of the larger foreign banks have made consumer financing a larger part of their portfolios. These banks offer products such as automobile finance, home loans, credit cards and household consumer finance. Foreign banks operate in India through branches of the parent bank. Certain foreign banks also have wholly-owned non-bank finance company subsidiaries or joint ventures for both corporate and retail lending. In a circular dated July 6, 2004, RBI stipulated that banks should not acquire any fresh stake in any other bank’s equity shares, if by such acquisition, the investing bank’s holding exceeded 5.0% of the investee bank’s equity capital. This also applies to holdings of foreign banks with a presence in India, in Indian banks.

RBI issued a notification on “Roadmap for presence of foreign banks in India” on February 28, 2005, announcing the following measures with respect to the presence of foreign banks:

• During the first phase (up to March 2009), foreign banks will be allowed to establish a presence by setting up wholly-owned subsidiaries or by converting existing branches into wholly-owned subsidiaries. • In addition, during the first phase, foreign banks would be allowed to acquire a controlling stake in a phased manner only in private sector banks that are identified by RBI for restructuring. • For new and existing foreign banks, it has been proposed to go beyond the existing World Trade Organization commitment of allowing increases of 12 branches per year. A more liberal policy will be followed for underbanked areas. • During the second phase (from April 2009 onwards), after a review of the first phase, foreign banks would be allowed to acquire up to 74.0% in private sector banks in India.

Cooperative Banks

Cooperative banks cater to the financing needs of agriculture, small industry and self-employed businessmen in urban and semi-urban areas of India. The state land development banks and the primary land development banks provide long-term credit for agriculture. In the light of liquidity and insolvency problems experienced by some cooperative banks in fiscal 2001, RBI undertook several interim measures, pending formal legislative changes, including measures related to lending against shares, borrowings in the call market and term deposits placed with other urban cooperative banks. Presently RBI is responsible for supervision and regulation of urban cooperative banks, and the National Bank for Agriculture and Rural Development for state cooperative banks

46 and district central cooperative banks. The Banking Regulation (Amendment) and Miscellaneous Provisions Act, 2004 provides for the regulation of all cooperative banks by RBI. A task force appointed by the Government of India to examine the reforms required in the cooperative banking system submitted its report in December 2004. It recommended several structural, regulatory and operational reforms for cooperative banks, including the provision of financial assistance by the government for revitalizing this sector. In the Union Budget for fiscal 2006, the Finance Minister accepted the recommendations of the Task Force in principle and proposed to call state Governments for consultation and begin to implement the recommendations in the states willing to do so. During fiscal 2006 RBI outlined a Medium- Term Framework for Urban Cooperative Banks. Subsequently a Task Force for Urban Co-operative Banks has been set up in select states for identification of and drawing up of a time bound action plan for revival of potentially viable Urban Co-operative Banks and for non-disruptive exit for non-viable Urban Co-operative Banks.

Long-Term Lending Institutions

The long-term lending institutions were established to provide medium-term and long-term financial assistance to various industries for setting up new projects and for the expansion and modernization of existing facilities. These institutions provided fund-based and non-fund-based assistance to industry in the form of loans, underwriting, direct subscription to shares, debentures and guarantees. The primary long-term lending institutions included Industrial Development Bank of India (now a bank), IFCI Limited, Industrial Investment Bank of India as well as ICICI prior to the amalgamation.

The long-term lending institutions were expected to play a critical role in Indian industrial growth and, accordingly, had access to concessional government funding. However, in recent years, the operating environment of the long term lending institutions has changed substantially. Although the initial role of these institutions was largely limited to providing a channel for Government funding to industry, the reform process required them to expand the scope of their business activities, including into:

• fee-based activities like investment banking and advisory services; and • short-term lending activity including making corporate finance and working capital loans.

Pursuant to the recommendations of the Narasimham Committee II and the Khan Working Group, a working group created in 1999 to harmonize the role and operations of long-term lending institutions and banks, RBI, in its mid-term review of monetary and credit policy for fiscal 2000, announced that long-term lending institutions would have the option of transforming themselves into banks subject to compliance with the prudential norms as applicable to banks. In April 2001, RBI issued guidelines on several operational and regulatory issues which were required to be addressed in evolving the path for transition of a long-term lending institution into a universal bank. In April 2002, ICICI merged with ICICI Bank. The Industrial Development Bank (Transfer of Undertaking and Repeal) Act, 2003 converted the Industrial Development Bank of India into a banking company incorporated under the Companies Act, 1956 on September 27, 2004 with exemptions from certain statutory and regulatory norms applicable to banks, including an exemption for a certain period from the statutory liquidity ratio. IDBI Bank Limited, a new private sector bank that was a subsidiary of the Industrial Development Bank of India, was merged with the Industrial Development Bank of India in April 2005.

Non-Bank Finance Companies

There are over 13,000 non-bank finance companies in India, mostly in the private sector. All non-bank finance companies are required to register with RBI. The non-bank finance companies may be categorized into entities which take public deposits and those which do not. The companies which take public deposits are subject to strict supervision and capital adequacy requirements of RBI. The primary activities of the non-bank finance companies are consumer credit, including automobile finance, home finance and consumer durable products finance and wholesale finance products such as bill discounting for small and medium-sized companies, and fee-based services such as investment banking and underwriting.

Over the past few years, certain non-bank finance companies have defaulted to investors and depositors, and consequently actions (including bankruptcy proceedings) have been initiated against them, many of which are currently pending.

Housing Finance Companies

47 Housing finance companies form a distinct sub-group of the non-bank finance companies. As a result of the various incentives given by the government for investing in the housing sector in recent years, the scope of this business has grown substantially. Until recently, Housing Development Finance Corporation Limited was the premier institution providing housing finance in India. In recent years, several other players including banks have entered the housing finance industry. The National Housing Bank and the Housing and Urban Development Corporation Limited are the two government-controlled financial institutions created to improve the availability of housing finance in India. The National Housing Bank Act provides for securitization of housing loans, foreclosure of mortgages and setting up of the Mortgage Credit Guarantee Scheme.

Other Financial Institutions

Specialized Financial Institutions

In addition to the long-term lending institutions, there are various specialized financial institutions which cater to the specific needs of different sectors. They include the National Bank for Agricultural and Rural Development (“NABARD”) , Export Import Bank of India (“EXIM Bank”) , Small Industries Development Bank of India (“SIDBI”), Risk Capital and Technology Finance Corporation Limited, Tourism Finance Corporation of India Limited, National Housing Bank, Power Finance Corporation Limited, the Infrastructure Development Finance Corporation Limited (“IDFC”) and India Infrastructure Finance Company Limited.

State Level Financial Institutions

State financial corporations operate at the state level and form an integral part of the institutional financing system. State financial corporations were set up to finance and promote small and medium-sized enterprises. The state financial institutions are expected to achieve balanced regional socio-economic growth by generating employment opportunities and widening the ownership base of industry. At the state level, there are also state industrial development corporations, which provide finance primarily to medium-sized and large-sized enterprises.

Insurance Companies

Currently, there are 32 insurance companies in India, of which 16 are life insurance companies, 15 are general insurance companies and one is a re-insurance company. Of the 16 life insurance companies, 15 are in the private sector and one is in the public sector. Among the general insurance companies, nine are in the private sector and six (including the Export Credit Guarantee Corporation of India Limited and the Agriculture Insurance Company of India Limited) are in the public sector. The re-insurance company, General Insurance Corporation of India, is in the public sector. Life Insurance Corporation of India, General Insurance Corporation of India and public sector general insurance companies also provide long-term financial assistance to the industrial sector.

The insurance sector in India is regulated by the Insurance Regulatory and Development Authority. In December 1999, the parliament passed the Insurance Regulatory and Development Authority Act, 1999 which also amended the Insurance Act, 1938. This opened up the Indian insurance sector for foreign and private investors. The Insurance Act allows foreign equity participation in new insurance companies of up to 26.0%. A new company should have a minimum paid up equity capital of Rs. 1.0 billion to carry on the business of life insurance or general insurance or Rs. 2.0 billion to carry on exclusively the business of reinsurance.

In the monetary and credit policy for fiscal 2001, RBI issued guidelines governing the entry of banks and financial institutions into the insurance business. The guidelines permit banks and financial institutions to enter the business of insurance underwriting through joint ventures provided they meet stipulated criteria relating to their net worth, capital adequacy ratio, profitability track record, level of non-performing loans and the performance of their existing subsidiary companies. The promoters of insurance companies have to divest in a phased manner their shareholding in excess of 26.0% (or such other percentage as may be prescribed), after a period of 10 years from the date of commencement of business or within such period as may be prescribed by the Indian government. The Indian government, while presenting its budget for fiscal 2005, proposed an increase in the limit on foreign equity participation in private sector insurance companies from 26.0% to 49.0%. However, this requires an amendment to the laws and has not been implemented as yet.

48 Gross premiums underwritten by all general insurance companies increased by 22.4% in fiscal 2007 to Rs. 250.0 billion, compared to an increase of 16.5% in fiscal 2006. The share of private sector general insurance companies in gross premiums underwritten increased from 26.6% in fiscal 2006 to 34.9% during fiscal 2007 (Source: IRDA). First year premium underwritten in the life insurance sector recorded a growth of 100.6% to Rs. 754.1 billion in fiscal 2007 compared to a 40.6% growth in fiscal 2006 with the private sector’s retail market share (on weighted received premium basis) increasing from 34.2% in fiscal 2006 to 35.5% in fiscal 2007 (Source: IRDA).

Mutual Funds

At the end of fiscal 2007, there were 30 mutual funds in India with total assets under management of Rs. 3,263.9 billion. Total assets under management of all mutual funds increased by 40.8% from Rs. 2,318.6 billion at year-end fiscal 2006 to Rs. 3,263.9 billion at year-end fiscal 2007. From 1963 to 1987, Unit Trust of India was the only mutual fund operating in the country. It was set up in 1963 at the initiative of the government and RBI. From 1987 onwards, several other public sector mutual funds entered this sector. These mutual funds were established by public sector banks, the Life Insurance Corporation of India and General Insurance Corporation of India. The mutual funds industry was opened up to the private sector in 1993. The industry is regulated by the SEBI (Mutual Fund) Regulation, 1996.

At the end of fiscal 2007, there were 25 private sector mutual funds with an 80.3% market share in terms of total assets under management.

In 2001, Unit Trust of India, with a high level of investment in equity securities, started to face difficulties in meeting redemption and assured return obligations due to a significant decline in the market value of its securities portfolio. In response, the Government of India implemented a package of reform measures for Unit Trust of India, including guaranteeing redemption and assured return obligations to the unit holders, subject to restrictions on the maximum permissible redemption amount. As part of the reforms, Unit Trust of India was divided into two mutual funds structured in accordance with the amendment to the special law governing Unit Trust of India and as per the regulations of the Securities and Exchange Board of India, respectively, one comprising assured return schemes and the other comprising net asset value based schemes. New Paradigms in the Indian Banking Industry

1) Changing nature of corporate banking

The corporate banking business has become increasingly competitive, with most banks targeting large corporate clients for loans and fee-based services. This has caused a fall in margins as well as non-fund business margins. Going forward, success will hinge on maximizing value from corporate relationships through a range of product offerings.

2) Retail Banking- huge growth potentialities

Traditionally, the retail market has been overlooked as a Low Cost Deposits segment. However, structural changes in last couple of years resulted in significant growth in retail lending business. Factors which induce the focused growth of retail business are changing lifestyles, strong economic growth prospects coupled with higher disposable income etc. contributing towards the changing demographics. Indian retail market is still miniscule and nascent compared to Asian peers, in terms of per capita usage of retail product offerings such as housing finance, credit cards, auto loans, consumer finance etc. Other factors like the mammoth size of the Indian market couple with an unexplored base for retail finance products and increasing propensity of the urban populace to take credit.

3) Technology offering the competitive edge

Technology has revolutionized the delivery chains for financial products and services with ATMs, Home Banking, Telephone banking which have replaced banking only at branches. Operating on a strong technology platform is increasingly becoming imperative for the launch of innovative products and services by banks in today’s e-age.

4) Mergers and Acquisitions

49 The domestic banking sector has witnessed mergers and acquisitions take place both in public sector banks (owing to the need to support weak banks) and private sector banks (focused towards the need to expand). Apart from providing the private players an effective route to fortify their reach and presence in the sector, merger and acquisition trend may also intensify the proposed reduction in government shareholding in public sector banks and provide international banks an opportunity to expand business in India.

Impact of Liberalization on the Indian Financial Sector

Until 1991, the financial sector in India was heavily controlled and the two dominant financial intermediaries viz. the commercial banks and long-term lending institutions, the two dominant financial intermediaries, had mutually exclusive roles and objectives and operated in a largely stable environment, with little or no competition. Long-term lending institutions were focused on the achievement of the Indian government’s various socio-economic objectives, including balanced industrial growth and employment creation, especially in areas requiring development. Long-term lending institutions were extended access to long-term funds at subsidized rates through loans and equity from the Government of India and from funds guaranteed by the Government of India originating from commercial banks in India and foreign currency resources originating from multilateral and bilateral agencies.

The focus of the commercial banks was primarily to mobilize household savings through demand and time deposits and to use these deposits to meet the short-term financial needs of borrowers in industry, trade and agriculture. In addition, the commercial banks provided a range of banking services to individuals and business entities. However, since 1991, there have been comprehensive changes in the Indian financial system. Various financial sector reforms, implemented since 1991, have transformed the operating environment of the banks and long-term lending institutions. In particular, the deregulation of interest rates, emergence of a liberalized domestic capital market, and entry of new private sector banks, along with the broadening of long-term lending institutions’ product portfolios, have progressively intensified the competition between banks and long-term lending institutions. RBI has permitted the transformation of long-term lending institutions into banks subject to compliance with the prudential norms applicable to banks.

Committee on the Financial System (Narasimham Committee I)

The Committee on the Financial System (The Narasimham Committee I) was set up in August 1991 to recommend measures for reforming the financial sector. Many of the recommendations made by the committee, which addressed organizational issues, accounting practices and operating procedures, were implemented by the Government of India. The major recommendations that were implemented included the following:

• with fiscal stabilization and the Government increasingly resorting to market borrowing to raise resources, the statutory liquidity ratio or the proportion of the banks’ net demand and time liabilities that were required to be invested in government securities was reduced from 38.5% in the pre-reform period to 25.0% in October 1997; • similarly, the cash reserve ratio or the proportion of the bank’s net demand and time liabilities that were required to be deposited with RBI was reduced from 15.0% in the pre-reform period to low of 4.5%. Cash Reserve Ratio has since been increased to 6.5%. • special tribunals were created to resolve bad debt problems; • most of the restrictions on interest rates for deposits were removed. Commercial banks were allowed to set their own level of interest rates for all deposits except savings bank deposits; and • substantial capital infusion to several state-owned banks was approved in order to bring their capital adequacy closer to internationally accepted standards. By the end of fiscal 2002, aggregate recapitalization amounted to Rs. 217.5 billion. The stronger public sector banks were given permission to issue equity to further increase capital.

Committee on Banking Sector Reform (Narasimham Committee II)

The second Committee on Banking Sector Reform (Narasimham Committee II) submitted its report in April 1998. The major recommendations of the committee were in respect of capital adequacy requirements, asset classification and provisioning, risk management and merger policies. RBI accepted and began implementing many of these recommendations in October 1998.

Recent Structural Reforms

Amendments to RBI Act

In May 2006, the Indian Parliament approved amendments to RBI Act removing the minimum cash reserve ratio requirement of 3.0%, giving RBI discretion to reduce the cash reserve ratio to less than 3.0%. Further, the amendments also created a legal and regulatory framework for derivative instruments.

Recent Amendments to Laws Governing Public Sector Banks

The Indian Parliament recently amended the laws governing India’s public sector banks permitting these banks to issue preference shares and make preferential allotments or private placements of equity. The amendments also empower RBI to prescribe ‘fit and proper’ criteria for directors of these banks, and permit supercession of their boards and appointment of administrators in certain circumstances.

Proposed Amendments to the Banking Regulation Act

Legislation seeking to amend the Banking Regulation Act has been introduced in the Indian Parliament. As presently drafted, the main amendments propose to:

• permit all banking companies to issue preference shares that will not carry any voting rights; • make prior approval of RBI mandatory for the acquisition of more than 5.0% of a banking company’s paid up capital or voting rights by any individual or firm or group; • remove the minimum statutory liquidity ratio requirement of 25.0%, giving RBI discretion to reduce the statutory liquidity ratio to less than 25.0%; and • remove the limit of 10.0% on the maximum voting power exercisable by a shareholder in a banking company.

Legislative Framework for Recovery of Debts due to Banks

In fiscal 2003, the Indian Parliament passed the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. This Act provides that a secured creditor may, in respect of loans classified as non-performing in accordance with RBI guidelines, give notice in writing to the borrower requiring it to discharge its liabilities within 60 days, failing which the secured creditor may take possession of the assets constituting the security for the loan, and exercise management rights in relation thereto, including the right to sell or otherwise dispose of the assets. This Act also provides for the setting up of asset reconstruction companies regulated by RBI to acquire assets from banks and financial institutions. RBI has issued guidelines for asset reconstruction companies in respect of their establishment, registration and licensing by RBI, and operations. Asset Reconstruction Company (India) Limited, set up by ICICI Bank Limited, Industrial Development Bank of India, State Bank of India and certain other banks and institutions, has received registration from RBI and commenced operations in August 2003. Foreign direct investment is now permitted in the equity capital of asset reconstruction companies and investment by Foreign Institutional Investors registered with the Securities and Exchange Board of India is permitted in security receipts issued by asset reconstruction companies, subject to certain conditions and restrictions.

Several petitions challenging the constitutional validity of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 were filed with the Supreme Court of India. The Supreme Court, in April 2004, upheld the constitutionality of the Act, other than the requirement originally included in the Act that the borrower deposit 75.0% of the dues with the debt recovery tribunal as a pre- condition for appeal by the borrower against the enforcement measures. In November 2004, the Government of India issued an ordinance amending the Securitization Act. The Indian Parliament has subsequently passed this ordinance as an Act. This Act, as amended, now provides that a borrower may make an objection or representation to a secured creditor after a notice is issued by the secured creditor to the borrower under the Act demanding payment of dues. The secured creditor has to give reasons to the borrower for not accepting the objection or representation. The Act also introduces a deposit requirement for borrowers if they wish to appeal the decision of the debt recovery tribunal. Further, the Act permits a lender to take over the business of a borrower under the Securitization Act under certain circumstances (unlike the earlier provisions under which only assets could be taken over).

51 Earlier, following the recommendations of the Narasimham Committee, the Recovery of Debts due to Banks and Financial Institutions Act, 1993 was enacted. This legislation provides for the establishment of a tribunal for speedy resolution of litigation and recovery of debts owed to banks or financial institutions. The Act creates tribunals with which the banks or the financial institutions can file a suit for recovery of the amounts due to them. However, if a scheme of reconstruction is pending before the Board for Industrial and Financial Reconstruction, under the Sick Industrial Companies (Special Provision) Act, 1985, no proceeding for recovery can be initiated or continued before the tribunals. This protection from creditor action ceases if the secured creditor takes action under Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act. While presenting its budget for fiscal 2002, the Government of India announced measures for the setting up of more debt recovery tribunals and the eventual repeal of the Sick Industrial Companies (Special Provision) Act, 1985. To date, however, this Act has not been repealed.

Corporate Debt Restructuring Forum

To put in place an institutional mechanism for the restructuring of corporate debt, RBI has devised a corporate debt restructuring system. The objective of this framework is to ensure a timely and transparent mechanism for the restructuring of corporate debts of viable entities facing problems, outside the purview of the Board of Industrial and Financial Rehabilitation, debt recovery tribunals and other legal proceedings. In particular, this framework aims to preserve viable corporates that are affected by certain internal and external factors and minimize the losses to the creditors and other stakeholders through an orderly and coordinated restructuring program. The corporate debt restructuring system is a non-statutory mechanism and a voluntary system based on debtor-creditor and intercreditor agreements.

Universal Banking Guidelines

Universal banking in the Indian context means the transformation of long-term lending institutions into banks. Pursuant to the recommendations of the Narasimham Committee II and the Khan Working Group, RBI, in its mid-term review of monetary and credit policy for fiscal 2000, announced that long-term lending institutions would have the option of transforming themselves into banks subject to compliance with the prudential norms as applicable to banks. If a long-term lending institution chose to exercise the option available to it and formally decided to convert itself into a universal bank, it could formulate a plan for the transition path and a strategy for smooth conversion into a universal bank over a specified time frame. In April 2001, RBI issued guidelines on several operational and regulatory issues which were required to be addressed in evolving the path for transition of a long-term lending institution into a universal bank.

52 Pension Reforms

Currently, there are three categories of pension schemes in India: pension schemes for Government employees, pension schemes for employees in the organized sector and voluntary pension schemes. In case of pension schemes for Government employees, the Government pays its employees a defined periodic benefit upon their retirement. Further, the contribution towards the pension scheme is funded solely by the Government and not matched by a contribution from the employees. The Employees Provident Fund, established in 1952, is a mandatory program for employees of certain establishments. It is a contributory program that provides for periodic contributions of 10% to 12% of the basic salary by both the employer and the employees. The contribution is invested in prescribed securities and the accumulated balance in the fund (including the accretion thereto) is paid to the employee as a lump sum on retirement. Besides these, there are voluntary pension schemes administered by the Government viz. the Public Provident Fund to which contribution may be made up to a maximum of Rs. 70,000 or offered by insurance companies, where the contribution may be made on a voluntary basis. Such voluntary contributions are often driven by tax benefits offered under the scheme.

In 1998, the Government commissioned the Old Age Social and Income Security (OASIS) project and nominated an expert committee to suggest changes to the existing policy framework. The committee submitted its report in January 2000, recommending a system for private sector management of pension funds to provide market-linked returns. It also recommended the establishment of a separate pensions regulatory authority to regulate the pensions system. Subsequently, in the budget for fiscal 2001, the Government announced that a high level committee would be formulated to design a contribution-based pension scheme for new Government recruits. The Government also requested the Insurance Regulatory and Development Authority to draw up a roadmap for implementing the OASIS Report. The Insurance Regulatory and Development Authority submitted its report in October 2001. The report suggested that pension fund managers should constitute a separate legal entity to conduct their pension business. In August 2003, the Government announced that it would be mandatory for its new employees (excluding defense personnel) to join a new defined contribution pension scheme where both the government and the employee would make monthly contributions of 10% of the employee’s salary. The Government also announced that a Pension Fund Development and Regulatory Authority would be set up to regulate the pension industry. The Government constituted the interim Pension Fund Development and Regulatory Authority on October 11, 2003. In December 2003, the Government announced that the new pension scheme would be applicable to all new recruits to Indian Government service (excluding defense personnel) from January 1, 2004. Further, on December 30, 2004, the Government promulgated an ordinance establishing the statutory regulatory body, Pension Fund Regulatory and Development Authority (PFRDA) to undertake promotional, developmental and regulatory functions with respect to the pension sector. In March 2005, the Government tabled the Pension Fund and Development Authority Bill in Parliament. The Union Budget for fiscal 2006 recognized the opportunities for foreign direct investment in the pension sector and it has also announced that the Government would issue guidelines for such investment.

Credit Policy Measures

RBI issues an annual policy statement setting out its monetary policy stance and announcing various regulatory measures. It issues a review of the annual policy statement on a quarterly basis.

Annual Policy Statement for Fiscal 2007

In its annual policy statement for fiscal 2007 which was announced in April 2006, the RBI:

• Raised the requirement of general provisioning on standard advances to specific sectors like residential housing loans beyond Rs. 20 lakhs and commercial real estate loans from 0.40% to 1.0%. • Increased the risk weight on commercial real estate exposure from 125.0% to 150.0%. • Proposed to include banks’ total exposure to venture capital funds as a part of capital market exposure with a risk weight of 150.0%. • Raised the ceiling on non-resident external deposit rates to LIBOR/SWAP rates of US Dollar of corresponding maturities plus 100 basis points from the then existing level of 75 basis points above LIBOR/SWAP rates.

53 First Quarter Review of Annual Policy Statement for Fiscal 2007

In its first quarter review of the annual policy statement announced on July 25, 2006, RBI raised the reverse repo rate (i.e., the annualized interest earned by the lender in a repurchase transaction between a bank and RBI) by 25 basis points to 6.0%. The bank rate remained unchanged at 6.0%.

Mid-Term Review of Annual Policy Statement for Fiscal 2007

In its mid-term review of the annual policy statement announced on October 31, 2006, RBI raised the repo rate by 25 basis points to 7.25%. The bank rate remained unchanged at 6.0%. The RBI also extended the time frame for full compliance with Basel II norms to March 31, 2008 for foreign banks operating in India and Indian banks present overseas. All other scheduled commercial banks are required to be in full compliance with Basel II norms by no later than March 31, 2009.

In December 2006, RBI increased the cash reserve ratio by 50 basis points from 5.0% to 5.5%.

Third Quarter Review of Annual Policy Statement for Fiscal 2007

In its third quarter review of the annual policy statement announced on January 31, 2007, RBI raised the repo rate by 25 basis points to 7.5%. Further, RBI increased the general provisioning requirement for real estate sector loans (excluding residential housing loans), credit card receivables, loans and advances qualifying as capital market exposure and personal loans to 2.0%. RBI also increased the general provisioning requirement for banks’ exposures to non-deposit taking systemically important non-banking financial companies from 0.4% to 2.0% and the risk weight on banks’ exposure to these entities from 100% to 125%. RBI also reduced the interest rate ceiling on non-resident rupee deposits by 50 basis points to LIBOR/SWAP rates plus 50 basis points.

In February 2007, RBI increased the cash reserve ratio by a further 50 basis points to 6.0%. The increase was implemented in two phases of 25 basis points each starting the fortnight beginning February 17, 2007 and beginning March 3, 2007. On February 23, 2007 RBI notified that it would pay interest on cash reserves above 3.0% of net demand and time liabilities (i) at 3.5% for the period June 24, 2006 to December 8, 2006, (ii) at 2.0% for the period December 9, 2006 to February 16, 2007 and (iii) at 1.0% from February 17, 2007 until further notice.

In March 2007 RBI increased the repo rate by 25 basis points to 7.75% to address inflation expectations. At the same time, RBI increased the cash reserve ratio by a further 50 basis points to 6.5%. The increase was implemented in two phases of 25 basis points each starting the fortnight beginning April 14, 2007 and beginning April 28, 2007.On April 13, 2007, RBI notified that it would be discontinuing interest payments on cash reserves above 3.0% of net demand and time liabilities till further notice. In addition, RBI announced the removal of the statutory minimum CRR maintenance requirement of 3.0%.

Annual Policy Statement for Fiscal 2008

In its annual policy statement for fiscal 2008 announced in April 2007, RBI:

• Raised the aggregate ceiling on overseas investment by mutual funds to US$ 4.00 billion from US$ 3.00 billion. • Reduced interest rate ceiling on non-resident rupee deposits by 50 basis points to LIBOR/SWAP rates and reduced interest rate ceiling on non-resident dollar deposits by 50 basis points to LIBOR minus 75 basis points. • Reduced the risk weight on residential housing loans to individuals up to Rs. 20 lakhs to 50.0% as a temporary measure. • Permitted banks and primary dealers to begin transactions in single-entity credit default swaps. • Enhanced the overseas investment limit for domestic companies to 300.0% of their net worth and listed companies’ limit for portfolio investment abroad to 35.0% of their net worth.

54 Reforms of the Non-Bank Finance Companies

Standards relating to income recognition, provisioning and capital adequacy were prescribed for non-bank finance companies in June 1994. Registered non-bank finance companies were required to achieve a minimum capital adequacy of 6.0% by year-end fiscal 1995 and 8.0% by year-end fiscal 1996 and to obtain a minimum credit rating. To encourage the companies complying with the regulatory framework, RBI announced in July 1996 certain liberalization measures under which the non-bank finance companies registered with it and complying with the prudential norms and credit rating requirements were granted freedom from the ceiling on interest rates on deposits and amount of deposits. Other measures introduced include requiring non-bank finance companies to maintain a certain percentage of liquid assets and to create a reserve fund. The percentage of liquid assets to be maintained by non-bank finance companies has been revised uniformly upwards and, since April 1999, 15.0% of public deposits must be maintained. From January 1, 2000 the requirement should not be less than 10.0% in approved securities and the remaining in unencumbered term deposits in any scheduled commercial bank, the aggregate of which shall not be less than 15.0% of the “public deposit” outstanding at the close of business on the last working day of the second preceding quarter. The maximum rate of interest that non-bank finance companies could pay on their public deposits was reduced from 12.5% per annum to 11.0% per annum effective March 4, 2003.

Efforts have also been made to integrate non-bank finance companies into the mainstream financial sector. The first phase of this integration covered measures relating to registrations and standards. The focus of supervision has now shifted to non-bank finance companies accepting public deposits. This is because companies accepting public deposits are required to comply with all the directions relating to public deposits, prudential norms and liquid assets. A task force on non-bank finance companies set up by the Government of India submitted its report in October 1998, and recommended several steps to rationalize the regulation of non-bank finance companies. Accepting these recommendations, RBI issued new guidelines for non-bank finance companies, which were as follows:

• a minimum net owned fund of Rs. 25 lakhs is mandatory before existing non-bank finance companies may accept public deposits; • a minimum investment grade rating is compulsory for loan and investment companies accepting public deposits, even if they have the minimum net owned funds; • permission to accept public deposits was also linked to the level of capital to risk assets ratio. Different capital to risk assets ratio levels for non-bank finance companies with different ratings were specified; and • non-bank finance companies were advised to restrict their investments in real estate to 10.0% of their net owned funds

In the monetary and credit policy for fiscal 2000, RBI stipulated a minimum capital base of Rs. 200 million for all new non-bank finance companies. In the Government of India’s budget for fiscal 2002, the procedures for foreign direct investment in non-bank finance companies were substantially liberalized.

During fiscal 2003, RBI introduced a number of measures to enhance the regulatory and supervisory standards of non-bank finance companies, especially in order to bring them at par with commercial banks, in select operations, over a period of time. Other regulatory measures adopted and subsequently revised in November 2004 included aligning interest rates in this sector with the rates prevalent in the rest of the economy, tightening prudential norms and harmonizing supervisory directions with the requirements of the Companies Act, procedural changes in nomination facilities, issuance of a Know Your Customer policy and allowing non-bank finance companies to take up insurance agency business.

In 2005, RBI introduced stricter regulatory measures for non-bank finance companies, including stringent reporting requirements and revised Know Your Customer guidelines.

On December 12, 2006, RBI issued guidelines on the financial regulation of systematically important non- banking financial companies and banks’ relationships with them with a view to remove the possibility of regulatory arbitrage leading to an uneven playing field and potential systemic risk. Within non-deposit taking non-banking financial companies, the guidelines classify those with an asset size above Rs. 1.00 billion as per the last audited balance sheet as systemically important. These non-banking financial companies are required to maintain a minimum capital to risk weighted assets ratio (CRAR) of 10.0%, in addition to conforming with single and group exposure norms. The guidelines restrict banks’ holdings in a deposit taking non-banking

55 financial company, excluding housing finance companies, to 10.0% of the paid up equity capital of the non- banking financial company. The total exposure to a single non-banking financial company has been limited to 10.0% of the bank’s capital funds (15.0% in the case of an asset finance company). The limit may be increased to 15.0% and 20.0%, respectively, provided that the excess exposure is on account of funds lent by the non- banking financial company to the infrastructure sector.

As per the existing instructions of RBI, non-banking finance companies in India having assets of Rs. 50 Crores and above as per their last audited results are required to constitute an audit committee, consisting of no less than three members of its board of directors. In May 2007 the Reserve Bank of India announced that non- banking finance companies with deposit base of Rs. 20 Crores and above might also consider constituting an audit committee on similar lines as aforesaid. Further, RBI has also instructed non-banking finance companies with public deposits of Rs. 20 Crores and above or having an asset size of Rs. 1.00 billion or above to form a nomination committee to ensure ‘fit and proper’ status of proposed/existing directors for such companies. RBI also instructed such nonbanking finance companies to form a risk management committee. Additionally, RBI also prohibited such non-banking finance companies from extending loans, advances or non-fund based facilities or any other financial accommodation/ facilities to their directors and/ or certain other connected persons.allowing conversion of 60.0% of the foreign exchange received on trade or current account at a market-determined rate and the remaining 40.0% at the official rate. All importers were, however, required to buy foreign exchange at the market rate except for certain specified priority imports. In March 1993, the exchange rate was unified and allowed to float. In February 1994 and again in August 1994, RBI announced relaxations in payment restrictions in the case of a number of transactions. Since August 1994, the Government of India has substantially complied with its obligations owed to the International Monetary Fund, under which India is committed to refrain from using exchange restrictions on current international transactions as an instrument in managing the balance of payments. Effective July 1995, the process of current account convertibility was advanced by relaxing restrictions on foreign exchange for various purposes, such as foreign travel and medical treatment. In December 1999, the Indian parliament passed the Foreign Exchange Management Act, 1999, which became effective on June 1, 2000, replacing the earlier Foreign Exchange Regulation Act, 1973. This legislation indicated a major shift in the policy of the Government with regard to foreign exchange management in India. While the Foreign Exchange Regulation Act, 1973 was aimed at the conservation of foreign exchange and its utilisation for the economic development of the country, the objective of the Foreign Exchange Management Act, 1999 was to facilitate external trade and promote the orderly development and maintenance of the foreign exchange market in India.

The Foreign Exchange Management Act, 1999 regulates transactions involving foreign exchange and provides that certain transactions cannot be carried out without the general or special permission of RBI. The Foreign Exchange Management Act, 1999 has eased restrictions on current account transactions. However, RBI continues to exercise control over capital account transactions (i.e., those which alter the assets or liabilities, including contingent liabilities, of persons). RBI has issued regulations under the Foreign Exchange Management Act, 1999 to regulate the various kinds of capital account transactions, including certain aspects of the purchase and issuance of shares of Indian companies. RBI has also permitted authorized dealers to freely allow remittances by individuals up to US$ 25,000 per calendar year for any permissible current or capital account transactions or a combination of both.

Restrictions on Sale of the Equity Shares and Repatriation of Sale Proceeds

Under Indian regulations and practice, the approval of RBI is required for the sale of Equity Shares by a non- resident of India to a resident of India as well as for renunciation of rights to a resident of India. However, sale of such shares under the portfolio investment scheme prescribed by RBI does not require the approval of RBI, provided that the sale is made on a recognized stock exchange and through a registered stock broker.

If the prior approval of RBI has been obtained for the sale of the Equity Shares, then the sale proceeds may be remitted in accordance with the terms of such an approval. However, if the Equity Shares are sold under the portfolio investment scheme, then the sale proceeds may be remitted through an authorised dealer, without the approval of RBI provided that the Equity Shares are sold on a recognised stock exchange through a registered stock broker and a no objection/tax clearance certificate from the income-tax authority has been produced.

56 Technology

Technology is emerging as a key-driver of business in the banking and financial services industry. Banks are developing alternative channels of delivery such as ATMs, telebanking, remote access and Internet banking. Indian banks have been making significant investments in technology. In addition to computerisation of front- office operations, the banks have moved towards back-office centralisation. Banks are also implementing "Core Banking" or "Centralised Banking", which provides connectivity between branches and helps to offer a large number of value-added products, benefiting a larger number of customers. The RBI Annual Report for the year 2004-05 states that the use of ATMs has been growing rapidly and this has helped to optimise the investments made by banks in infrastructure. Banks have joined together in small clusters to share their ATM networks during the year. There are five such ATM network clusters functioning in India. The total number of ATMs installed by the public sector banks stood at 8,219 at March 31, 2004, compared with 5,963 ATMs at March 31, 2003.

The payment and settlement system is also being modernised. As described above, RBI is actively pursuing the objective of establishing a Real Time Gross Settlement (RTGS) system, on par with other developed economies.

Corporate Governance

Adoption of good corporate governance practices has been getting the attention of banks as well as the regulators and owners in India. Banks in India now typically have an audit committee of the board of directors, which is entrusted with the task of overseeing the organisation, operationalisation and quality control of the internal audit function, reviewing financial accounts and follow-up with the statutory and external auditors of the bank as well as examinations by regulators. Disclosure levels in bank balance sheets have been enhanced, while measures have also been initiated to strengthen corporate governance in banks.

Consolidation

Indian banks are increasingly recognising the importance of size. These efforts have received encouragement from the views publicly expressed by the current Government favouring consolidation in the Indian banking sector. Although there have been instances of mergers, these have usually involved financially distressed banks. Mergers and acquisitions are seen by banks as a means of achieving inorganic growth in size and attaining economies of scale and scope. Notwithstanding the Government ownership of public sector banks, the government has indicated that it would not stand in the way of mergers of public sector banks, provided the bank boards come up with a proposal of merger, based on synergies and potential for improved operational efficiency. The Government has also provided tax breaks aimed at promoting mergers and acquisitions (Section 72(A) of the I.T. Act enables the acquiring entity (which could be a company, a corresponding new bank, a banking company or a specified bank) the benefit of "carry forward and set-off of accumulated losses and unabsorbed depreciation" of the acquired entity, subject to specified conditions being fulfilled). Further, under the Finance Act, 2005 a new Section 72AA has been incorporated into the I.T. Act pursuant to which, during the amalgamation of a banking company with any other banking institution under a scheme sanctioned and brought into force by the Government under Section 45 (7) of the Banking Regulation Act, the accumulated loss and the unabsorbed depreciation of such banking company shall be deemed to be the loss or, as the case may be, allowance for depreciation of such banking institution for the previous year in which the scheme of amalgamation was brought into force and other provisions of the I.T. Act relating to the set-off and carry forward of loss, and allowance, for depreciation shall apply accordingly. It is envisaged that the consolidation process in the public sector banks is likely, particularly as banks will be required to attain higher capital standards under Basel II and meet the pressures of competition by adoption of the extended universal banking model.

OUR BUSINESS

Our fiscal year ends on March 31 of each year, so all references to a particular fiscal year are to the 12-month period ended March 31 of that year. In this section, any reference to "we", "us" or "our" refers to Federal Bank Limited. Unless otherwise stated, the financial information used in this section is derived from our consolidated audited financial statements under Indian GAAP, as restated.

The Bank is currently headed by its Chairman & CEO, M. Venugopalan. In accordinace with the requirements of the regulations prescribed by the Reserve Bank of India, the Board of Directors consists of persons representing various disciplines. Over the seven decades of its service to the nation, the Bank has become one of the leading private sector banks with a strong nationwide presence. As on March 31, 2007 the Bank had 536 branches which has gone up to 540 branches as on September 14, 2007 and 12 regional offices located at various part of the country. The Bank has opened a unit office at Kurundwad to co-ordinate the activities of the branches of the erstwhile Ganesh Bank which was merged with the Bank as per scheme of amalgamation approved by the Reserve Bank of India. The Bank has already received an authorization vide letters dated May 25, 2007, May 23, 2007 and January 29, 2007 from the Reserve Bank of India for another 66 branches and one regional office in India and one representative office at Abu Dhabi respectively.

The Balance sheet size of the Bank as on March 31, 2007 was Rs. 25,089.93 crore and the total business aggregating deposits and advances stood at Rs. 36,483.54 crore. As on March 31, 2007, the operating profit of the Bank stood at Rs. 612.98 crore. The Net Interest Margin of the Bank as on March 31, 2007 stood at 3.06 % notwithstanding competition and pressures faced in the market. To augment the growth of non- interest income Bank has also entered into cash management services, depository participant business, distribution of insurance products etc.

The Bank's share in total deposits of scheduled commercial banks was 0.83 % in 2007 as compared to 0.84% in 2006.

The Bank has a three tier organizational structure; consisting of branches which are intended to be the profit

58 centres for the Bank, the regional offices which are responsible for the administration, growth and development of the branches, and the central office which provides stratergies, as well as well-defined systems and procedures for the operation of the regional office and branches.

In 2007, the Bank entered into an agreement with Infosys Technoloiges Limited for the implementation of a core banking solution (“CBS”) based on “Finacle” software. As on September 14, 2007, 516 of the Bank branches operate on the CBS while 22 branches continue to operate on in house software Fedsoft and the remaining 2 branches are yet to be computerized. For risks associated with the Bank’s migration to CBS see Risk Factors on page [●].

INFORMATION TECHNOLOGY- PRODUCTS & SERVICES

The following table outlines the status of computerization of the branches/offices of the Bank as on September 14, 2007:

Particulars As on March 31, 2006 As on September 14, 2007 Branches 472 540* Data Centre 1 1 International Division 1 1 ATM Operations Cell 1 1 Central Office 1 1 Regional Offices 12 12 Extension Counters 12 12 Satellite Offices 1 1 Total 501 569

Note *: out of the 32 branches of erstwhile Ganesh Bank of Kurundwad, 2 are yet to be computerized

No. of ATMs installed

ATMs As on March 31, 2005 As on March 31, 2006 As on March 31, 2007 On site 112 153 209 Off site 144 167 182 Total 256 320 391

No. of Networked Branches/Offices

As on March As on March As on March 31, 2007 Particulars 31, 2005 31, 2006 All branches, except 31 branches of erstwhile Number of Networked All Branches All Branches Ganesh Bank of Kurundwad which was branches / Offices amalgamated with the Bank.

No. of VSATs Installed

Particulars As on March 31, 2005 As on March 31, 2006 As on March 31, 2007 Number of VSATs 170 210 259

No. of ATM cards issued Particulars As on March 31, 2005 As on March 31, 2006 As on March 31, 2007 ATM Card 214,128 215,626 217,324 Visa International Debit Card 456,214 675,658 928,924 Harita Card 159 4523 6252

PLANNING & DEVELOPMENT

BRANCH AND OFFICE NETWORK

As on September 14, 2007, the Bank had 540 branches at various locations across the country (including funds & investment branches, ten service branches, three asset recovery branches, one industrial finance branch). The Bank further has one satellite office, 12 extension counters, and 12 Regional Offices., two depository services divisions functioning at Mumbai and Ernakulam and a unit office. The Bank has obtained approval from the Central Bank of the U.A.E to open a representative office at Abu Dhabi, Dubai, United Arab Emirates. The Bank has opened a Unit Office at Kurundwad to co-ordinate the activities of the branches of Ganesh Bank.

The state wise break-up of the spread of branches and business in terms of deposits and advances as on March 31, 2007 is as follows:

Amt. in Rs. Crores State No. of Branches Total Deposits Advances Andhra Pradesh 10 421.34 366.89 Assam 5 251.11 89.22 Bihar 1 50.36 6.83 Chandigarh 1 34.49 52.06 Chattisgarh 1 19.67 30.94 Goa 2 98.63 38.51 Gujarat 6 87.32 132.90 Haryana 5 116.20 79.27 Jharkhand 2 69.29 30.12 Karnataka 26 546.43 821.86 Kerala 352 14054.90 6972.96 Madhya Pradesh 2 100.47 40.31 Maharashtra 51 2403.71 2422.35 Meghalaya 1 84.93 5.66 Nagaland 1 140.33 11.16 New Delhi 13 1115.49 986.49 Orissa 2 88.65 59.54 Puducherry 1 10.77 22.51 Punjab 2 26.05 35.19 Rajasthan 1 28.77 114.62 Tamilnadu 32 751.40 1371.22 Uttar Pradesh 5 232.05 246.29 Uttarakhand 1 7.26 7.68 West Bengal 13 844.81 954.55 536 21584.44 14899.10

As on March 31, 2007, the distribution of the Regional offices, branches, service branches, satellite offices of the Bank is as follows:

STATE Regional Branch Funds & Service Extension Asset Industrial Satellite Grand Office Investment Branch Counter Recovery Finance office Total branch branch branch Andhra 10 10 pradesh Assam 5 5 Bihar 1 1 Chandigarh 1 1 Chattisgarh 1 1 Goa 2 2 Gujarat 6 1 7 Haryana 5 5 Jharkhand 2 1 3 Karnataka 1 25 1 27 Kerala 7 341 10 4 1 1 364 Madhya 2 2 pradesh Maharashtra 1 49 1 1 52 Meghalaya 1 1 Nagaland 1 1 New delhi 1 12 1 1 15 Orissa 2 1 3 Puducherry 1 1 Punjab 2 1 3 Rajasthan 1 1 Tamilnadu 1 28 1 2 2 1 35 Uttar 5 5 pradesh Uttarakhand 1 1 West bengal 1 12 1 1 15 Grand Total 12 516 5 10 12 4 1 1 561

The demographic network of branches as on March 31, 2007 is as under:

No. of Branches Metro 80 Rural 107 Semi Urban 235 Urban 114 Grand Total 536

Forex Operations

The Bank has been an authorized dealer in foreign exchange since 1972. As on September 14, 2007, the Bank has 2 Category ‘A’ Branches and 54 Category ‘B’ Branches. All other branches of the Bank except Asset recovery Branches, Service branches and Funds & Investment branches are Category ‘C’ branches.. The Bank extends trade, finance and other credit facilities to exporters and importers.

The Bank has an International Banking Department at Kochi which handles transaction in forex. The Bank also has a a Forex Treasury Desk at Treasury Department, Kochi which takes care of Inter-bank transaction in forex. .

(Rs.in crores) Year Export credit Export credit as % to total gross credit 2006-07 769.1 5.03 2005-06 677.5 5.56 2004-05 682.8 7.34 2003-04 588.4 7.29 2002-03 535.3 8.32

Remittance Business from the Middle East

The Bank extends services related to the inward remittance business from the Middle East. The Bank has established foreign inward remittance arrangements with 20 Exchange houses and 8 banks in the Middle East. During Fiscal 2007, the total number of remittances were 20.42 lakh aggregating to Rs. 6969 crores.

NRI Portfolio

The Bank’s portfolio of deposits by NRI customers has grown by 12% during the financial year 2006-07 and stands at Rs.5,514.92 Crores as on March 31, 2007.

Comparative analysis of Interest bearing Assets and Liabilities A table showing average balances and interest rates of interest earning assets and interest bearing liabilities for the last three financial years is given below: (Rs. in crores) Year/Period ended on March 31, 2005 March 31, 2006 March 31, 2007 Avg Bal Avg Interest Avg Bal Avg Interest Avg Bal Avg rate rate Interest rate Interest Earning Assets 13924.61 9.08% 16796.54 8.75% 20481.47 9.11% Interest Bearing Liabilities 13479.26 5.11% 16203.87 5.16% 19356.40 5.60%

Fixed and Floating rate liabilities of the Bank

Break up of fixed and floating rate liabilities as on March 31, 2007 is furnished in the following table: Fixed Rate liabilities Saving Deposits 4,229.67 Demand Deposits 1,216.61 Time Deposits 16,138.16 Total 21,584.44 II. Floating Rate Liabilities

Total Nil Grand Total (I+II) 21,584.44

Integrated Risk Management

The primary responsibility of laying down risk parameters and establishing an integrated risk management and control system rests with the Board of Directors. A committee of the Board called the Risk Management Committee (“RMC”) oversees the credit, market and operational risks associated with our operations. In addition to the RMC, three separate committees of the senior management of the Bank namely the Credit Risk Management Committee (CRMC), Asset Liability Management Committee (ALCO) and Operational Risk Management Committee (ORMC) are formed to look after the credit, market and operational risks respectively.

A) Credit Risk Management Committee (CRMC)

CRMC of the Bank is constituted for supporting Risk Management Committee (RMC) on credit risk management aspects. CRMC is headed by the Chairman of the Bank.

Functions of CRMC a) Be responsible for implementation of credit risk policy/strategy approved by the Board. b) Monitor Credit risk on a bank wide basis and ensure compliance with limits approved by the Board. c) Recommend to the Board for approval, clear policies on standards for presentation of credit proposals, financial covenants rating standards and benchmarks. d) Decide delegation of credit approving powers prudential limits on large credit exposures, standards for loan collateral, portfolio management, loan review mechanism, risk concentrations, risk monitoring and evaluation, pricing of loans provisioning regulatory/legal compliance etc.

B) Asset Liability Management Committee (ALCO) The Asset-Liability Management Committee (ALCO) is responsible for ensuring adherence to the limits set by the Board as well as for deciding the business strategy of the bank in line with bank’s budget and decided market risk management objectives. ALCO is headed by Chairman.

Functions of the Asset Liability Management Committee

a) Ensuring adherence to the limits set by Board/RMC as well as deciding the business strategy of the Bank in line with Bank’s budget and decided risk management objectives. Product pricing both for deposit and advances considering the various elements influencing such pricing. b) Deciding on desired maturity profile and mix of incremental assets and liabilities. c) Articulating interest rate view of the Bank and deciding on future business strategy. d) Reviewing and articulating funding policy. e) Decide transfer-pricing policy of the Bank. f) Reviewing economic and political impact on Balance Sheet of the Bank. Balance sheet and capital adequacy management with due regard to various risks impacting the balance sheet. g) Balance sheet and capital adequacy management with due regard to various risks impacting the balance sheet.

C) Operational Risk Management Committee (ORMC)

ORMC Review monitors the development and implementation of operational risk methodologies and tools, including assessments, reporting, capital and loss event databases. ORMC will set standards for forming database and bank level preparations for moving to advanced measurement approach for computing operational risk minimum capital requirements for the Bank.ORMC is headed by Chairman

Key Functions of ORMC

a) Review the risk profile, understand future changes and threats, and concur on areas of highest priority and related mitigation strategy. b) Assure adequate resources are being assigned to mitigate risks as needed c) Communicate to business areas and staff components the importance of operational risk management,

63 and assure adequate participation and cooperation d) Review and approve the development and implementation of operational risk methodologies and tools, including assessments, reporting, capital and loss event databases. e) Receive and review reports/presentations from the business lines and other areas about their risk profile and mitigation programs. f) To monitor and ensure that appropriate operational risk management frameworks are in place. g) To proactively review and manage potential risks which may arise from regulatory changes/or changes in economic /political environment in order to keep ahead. h) To set controls/mitigations for managing operational risk. i) To analyse frauds, potential losses, non-compliance, breaches etc. and recommend corrective measures to prevent recurrences. j) Setting/review of operating policy and procedures for all activities. k) Identification of operational risk exposures of each unit (branch, department, credit, treasury etc. l) Putting in place the mitigants for all identified risks. m) Mapping of residual risk and review of residual risk aggregates. n) Vetting operational risk features of all new products o) Setting and review of operational features of existing products p) Operational risk surveillance q) Oversight of internal inspection practices r) Setting middle office at critical areas for on line monitoring s) Review of middle office arrangements

RISK MANAGEMENT PROCESS The management of credit risk encompasses measurement of risks through credit rating/scoring, quantifying the risk through estimating expected loan losses through tracking portfolio behaviour over a time horizon, say, the last five years or so. The Bank adopts a credit exposure mix with different risk levels adequate enough to optimise the yield, which at the same time keeps the aggregate counterparty risk at affordable levels. Concentration of risk in any portfolio is avoided. The default risks is minimised by proper assessment of financial, managerial, industrial, and external factors at pre-credit stage, adequacy of documentation at disbursal stage and follow up or exit at post-disbursal stage. The Bank also uses collaterals as a major tool for keeping default risk at low levels.

The Credit Risk Management (CRM) policies of the Bank addresses the areas of establishing an appropriate environment of credit risk; operating under a sound credit granting process; maintaining an appropriate credit administration, measurement and monitoring process; and ensuring adequate controls over credit risk. The CRM practices encompass the following four processes. a) Measurement of risk through credit rating/scoring; b) Quantifying the risk through estimating expected loan losses i.e. the amount of loan losses that the Bank would experience over a chosen time horizon (through tracking portfolio behaviour for over 5 or more years) and unexpected loan losses i.e. the amount by which actual losses exceed the expected loss (through standard deviation of losses); c) Risk-pricing on a scientific basis, and d) Controlling the risk through effective loan review mechanism (LRM) and portfolio management system (PMS).

CREDIT RISK MANAGEMENT AND ASSESSMENT PROCEDURE Credit approving authority (CAA), Prudential exposure limits (PEL), Risk-rating system (RRS), Risk-pricing system (RPS), Portfolio management system (PMS) and Loan review mechanism (LRM) are the instruments used for credit risk management.

Credit approving authority (CAA)

All credit proposals above a cut-off limit of Rs.10 crore (both funded and non-funded put together; whether fresh, enhancement, restructuring or renewal) have a multi-tier credit approving system where a committee called CAA screens/clears and/ or endorses the proposals before being recommended to the sanctioning authority on the basis of the credit risk assessment of the proposal. Chief Risk Officer who has no compulsions of targets for volume of advances or profits would be the convenor.

The CAA comprises:

1. General Manager (Inspection) 2. Dy. General Manager (Asset Recovery Department) 3. Dy General Manager (SME and Agricultural Credit Department) 4. Head of Integrated Risk Management Department

All exposures for Rs.10 crore and above are subject to CAA vetting. CFD provides IRMD with all data for processing proposals of Rs.10 crore and above. IRMD independently confirms proposals of Rs.10 crore and above and places its confirmation/views before the CAA for its recommendation. Corporate Finance Department also provides its process note to the members of the CAA well in advance. The CAA records its comments about the proposal and CFD submits the proposal with the comments of CAA to the sanctioning authority. The CRA format has to be invariably submitted along with the proposal B) Prudential exposure limits (PEL)

As a prudential measure aimed at better risk management and to avoid excessive credit risks arising from concentration of credit exposures on individuals/groups, Reserve Bank of India requires banks to fix ceiling on Bank’s credit exposures to single borrower and group borrowers. In addition, banks are also required to observe certain ceilings on exposure limits in respect of advances to specific industry, sectors and exposure to capital markets by way of advances against/investment in shares, debentures and bonds. Banks are also required to review the exposure ceilings every year based on the capital funds of the Bank as per the audited balance sheet of 31st March of every year.

The total regulatory capital (i.e., Tier I + Tier II capital) is computed as per the capital adequacy norms of RBI, which came into force from April 1, 2002. The exposure ceilings are arrived at as follows:

Individual Exposure Limit 15% of capital funds Individual Exposure Limit for Infrastructure 20% of capital funds Group Exposure Limit 40% of capital funds Group Exposure Limit for Infrastructure 50% of capital funds Substantial Exposure Limit 500% of Net Owned Funds Aggregate Exposure to ` 5% of the outstanding advances as on March 31 of the previous year.

With effect from April 1, 2007 we have restricted our aggregate capital market exposure to 40 per cent of our net worth and our direct capital market exposure to 20 per cent of our networth

Maximum exposure to industry/sector

The prudential guidelines on exposure limit states that banks may consider fixing internal limits for aggregate commitments to specific sectors, so as to avoid concentration. The Bank has decided to fix a cap of 5% of total advances as at the end of the previous year, as exposure ceiling to an industry/sector excluding sectors like housing loan, retail advances, agriculture and infrastructure

C) Risk-rating system (RRS)

RBI requires banks to have a comprehensive internal risk-rating system that serves as a single-point indicator of diverse risk factors and for taking credit decisions in a consistent manner. It should reveal the overall risk of lending, should provide critical inputs for setting price and non-price terms and should provide the credit granting authorities with some comfort by indicating the loan quality at any point of time.

The rationale behind credit rating is to arrive at loan asset distribution in various grades, decide ideal maximum exposures in each grade, conduct migration studies, analyse asset distribution, conduct industry/sector studies, risk price linkage, portfolio management etc. For assessing minimum capital requirements by aligning more closely with underlying risks in the credit portfolio, internal credit ratings are becoming increasingly important.

Ratings are initially done at the branches and confirmed by controller or sanctioning authority/IRMD at HO. It

65 is used as a standard for approving loans. It is also used for monitoring the quality of the portfolio and for regular review of individual exposures. Risk ratings serve as the primary indicator of risk for bank’s individual credit exposures.

All funded and non-funded limits above Rs.2 lakh (excluding retail loans, advance against deposits, advance against other approved securities and BD under LC) are rated at the time of sanction, renewal or enhancement. In addition to this, periodic rating of outstanding accounts of Rs.50 lakh and above is also done with position as at 30th September based on the audited balance sheet as at preceding 31st March of the immediately preceding financial year. Investment proposals are also subjected to rating as any loan proposal.

Risk pricing system (RPS)

Risk-return pricing is a fundamental tenet of risk management. Functioning in a risk-return setting, it is essential for banks to appropriately price their products to ensure that banks are adequately compensated for the risk exposure. In a risk-return setting, borrowers with weak financial position and hence placed in high-risk category should be priced high.

The Bank has evolved a mechanism for pricing loans. The Bank credit pricing has a direct linkage to risk ratings through differential interest rates. The credit risk assessment (CRA) system introduced in the Bank has direct linkage with pricing. Bank has decided to go with the basic principle of "higher the risk, higher the price". Sufficient flexibility has been built into the pricing mechanism, for deciding the actual pricing based on several other strategic considerations/competitive factors.

Portfolio management system (PMS)

Bank has systems in place for identification of credit weaknesses well in advance. Clear guidelines are in place for tracking the early warning signals and the surveillance and the monitoring approach to be adopted at various stages of lending operations.

Loan review mechanism (LRM)/Credit Audit a. LRM is an effective tool for constantly evaluating the quality of credit portfolio and to bring about qualitative improvements in credit administration.

Key functions of the LRM: a. Spotting deficiencies in credit appraisal; b. Ensuring adherence to the Bank’s loan policies, procedures and relevant laws and regulations; c. Ensuring sufficiency of loan documentation; d. Detecting and correcting non-adherence to loan sanction conditions; e. Detecting and correcting deficiencies in post-sanction supervision; f. Identification of loans which develop credit weakness or potential problem areas;

The Bank has a separate risk assessment scoring mechanism for retail loan products. The approvals of retail loans are subject to such loans meeting the criteria set forth by the risk assessment mechanism and Bank’s loan policy. Loans above Rs 2.00 crore are subject to credit audit mechanism. Country Exposure Limit As per RBI guidelines on country risk management, with effect from March 1, 2005, banks whose net funded exposure is more than 1% of its total assets are required to formulate appropriate Country Risk Management (CRM) policy with the approval of the Board. The Country Risk Management (CRM) policy should address the following issues

• Identifying, measuring, monitoring and controlling country exposure risks. • Policy should specify the responsibility and accountability of the various levels for the country risk management decisions. • Banks should ensure that necessary steps are taken in accordance with the CRM policy. • The CRM policy should be periodically reviewed by the Board. • CRM policy should stipulate rigorous application of the ‘Know Your Customer’ (KYC) principle in International activities which should not be compromised by availability of collateral or shortening of maturities. • Banks should have in place contingency plans and clear exit strategies. • Based on the internal rating system, Banks should fix limits on country exposures. • Banks should monitor country risk exposure on a weekly basis before switching over to real time monitoring. • Exposures to high-risk categories should be monitored on a real-time basis. The Bank does not have an exposure of more than 1% against any country. Hence, country risk management policy is yet to be formulated.

Market Risk Management Market Risk is defined as the possibility of incurring loss due to changes in market variables such as interest rate, Currency exchange rates, Equity & Commodity prices etc. Thus, Market Risk is the risk to earnings and capital due to changes in the market level of interest rates or prices of securities & commodities, foreign currency exchange rates. Besides market risk includes risk arising on account of inability to meet obligations as and when it fall due. In other words, Market Risk for Banks comprises Liquidity Risk, Interest Rates, Forex Risk and Equity & Commodity Price Risk.

Bank has put in place Board approved policies viz. Asset Liability Management Policy and Investment Policy for managing the above referred market risks. These policies discuss in detail the various tools and guidelines for identification, measurement and mitigation of market risks. The policy prescriptions and operating guidelines as laid down in the above policies shall be followed for market risk management. A brief outline of the various risk management measures adopted by the Bank are given below.

Liquidity Risk Liquidly risk arises on account of inability to generate enough cash from either assets or liabilities to meet deposit withdrawals or contractual loan funding. The risk arises due to mismatch in the inflows and outflows of funds and from funding of long term assets by short-term liabilities. Absence of an effective liquidity management will create far-reaching consequence as it ends on disturbing the confidence of public on entire Banking system of the country. A proper liquidity management framework helps the banks to prevent the reputation risk and improve the profitability.

Liquidity Risk has different components such as Funding Risk, Time Risk and Call Risk.

Funding Risk: Funding the outflows on account of unanticipated withdrawal of deposits. For example the variation on renewal pattern of retail deposits, premature closure of renewal and wholesale deposits.

Time Risk: Compensating the non-receipt of expected inflows of funds. i.e. performing assets turning into non- performing assets and

Call Risk: Funding the crystallization of contingent liabilities. e.g. Guarantees invoked and bills devolving under LC facilities or higher utilization of sanctioned Cash Credit limits in the Indian context.

Bank has put the following liquidity risk management systems in place:

− For measuring and managing the net funding requirements, the use of a maturity ladder and calculation of cumulative surplus or deficit of funds at selected maturity dates is adopted as a standard tool. − Bank has set up tolerance limits for various time buckets to manage the liquidity risk. Tolerance limits are monitored periodically. The strategy for longer term mismatches are decided by ALCO. • Contingency plan is to be prepared to measure the ability to withstand liquidity crisis and it has to be reported to ALCO on a quarterly basis.

67 • The following prudential limits are to be put in place for managing the liquidity crisis: − Cap on inter-bank borrowings, especially call borrowings; − Purchased funds vis-à-vis liquid assets; − Core deposits vis-à-vis Core Assets i.e. Cash Reserve Ratio, Liquidity Reserve Ratio and Loans; − Duration of liabilities and investment portfolio; − Swapped Funds Ratio, i.e. extent of Indian Rupees raised out of foreign currency sources. • Bank shall endeavour to fine tune its measurement of liquidity analysis by tracking impact of prepayment of loans, premature closure of deposits etc. and cash flows arising out of contingent liabilities in normal situation and also during periods of stress.

B) Interest Rate Risk

Interest Rate Risk is defined as the risk arising on account of adverse movement of interest rates. The immediate impact of changes in interest rates is on the Net Interest Income. A long term impact of adverse movement of interest rates is on the bank’s net worth since the economic value of banks’ assets, liabilities and off-balance sheet positions get affected. Hence interest rate risk is analyzed from two different perspectives known as ‘earnings perspective’ and economic value perspective.

Interest rate risk has different components such as gap risk or mismatch risk, option risk, basis risk, yield curve risk, reinvestment risk and price risk.

Gap Risk: A Gap Risk or Mismatch risk arises from holding assets, liabilities and off-balance sheet items with different principal amounts or repricing dates. Option Risk: refers to the risk arising from the options embedded in many of the bank’s assets, liabilities and off-balance sheet portfolio. Basis Risk: refers to the risk arising from the variations in change in interest rate of assets and liabilities. In other words it is the risk arising out of unmatched changes in interest rates of assets and liabilities. Yield Curve Risk: arises from a non-parallel shift in the yield curve that results in an unequal impact on the interest cost/yield of the debt instruments of different maturities. Reinvestment Risk: Uncertainty with regard to interest rate at which the future cash flows can be reinvested is called reinvestment risk. Price Risk: arises on account of reduction in price of fixed coupon investments against adverse movement of interest rates in the market.

Foreign Exchange Risk

Foreign Exchange Risk may be defined as the risk that a bank may suffer losses as a result of adverse exchange rate movements during a period in which it has an open position, either spot or forward, or a combination of the two, in an individual foreign currency. Apart from Interest Rate and Gap Risk, Foreign Exchange exposure has Settlement Risk and Time-zone Risk.

The following risk management measures are adopted by the Bank in containing the Forex risk:

• Credit risk associated with Forex credit facilities and Foreign Currency Loan is subjected to credit risk assessment analysis as laid down in case of all credit limits. • A bank rating format is to be developed based on which counter-party limits can be fixed. • All forex operations are as per guidelines of RBI/FEDAI. • Exchange Rate Risk arising out of changes on forex spot rates and forex forward rates is managed through limits fixed at the individual currency level as well as aggregate currencies. • Forward Rate Risk caused due to Gap/mismatches in the merchant transactions and the corresponding cover operations in respect of maturities and quantum, is managed by Individual Gap Limit, Aggregate Gap Limit and by assessing VaR on daily basis. • Clear guidelines are in place for - Documentation and record keeping to address Legal Risk in forex transactions - Reconciliation of Nostro accounts - Reconciliation of Vostro accounts - Monitoring of operations of Rupee Drawing Arrangement entered into Private Exchange

68 Houses.

Operational Risk With the implementation of the New Capital Adequacy Framework, operational risk has begun to evolve into a distinct discipline with its own risk management structure, tools and processes. In view of the growing attention on operational risk, Bank has formulated a separate Operational Risk Management (ORM) Policy so as to improve the operational risk management systems.

The business units will be primarily responsible for taking and managing Operational Risk on a day-to-day basis. ORMD shall provide guidance and assistance in the identification of risk and in ongoing management process.

The ORM Policy codifies the core governing principles for operational risk management and provides the framework to identify, control, assess, monitor, measure, and report operational risks in a consistent manner across the Bank. The RBI guidance note on operational risk management serves as the basis on which the ORM Policy is formulated (ORM Policy is cleared by RMC)

Operational Risk Management Process The key elements in the Operational Risk Management process include A. Risk Identification − Identify Operational Risks − Evaluate Operational Risks − Identify Key Risk Indicators B. Measurement − Measurement Methodology C. Monitoring

Following are the broad areas of operational risk to which the Bank is exposed.

− Process risk − Transaction risk - Operation Manual to execute transaction, frequency of execution errors in transactions, product complexity, frequency of booking/settlement error, competitive disadvantage − Operational Control Risks - Frequency of violation of operational controls, efficacy of information flows, frequency of operational disruptions, risk due to loose security at operational points − Model risk - Mark to model error, Model methodology error − System Risk A) Technology Risk - Systems failure, Systems security, Programming errors, Telecommunications failures/errors, Validity of IT systems, back up and disaster recovery plans, IT related frauds. B) Information technology related risks C) MIS risk

− People Risk – Placement, competency, work environment, employee motivation, frequency and impact of Staff turnover/rotation.

− Legal & Regulatory Risk – includes but not limited to exposure to files, penalties or punitive damages resulting from supervisory actions as well as private settlements. It also would cover failure to comply with laws and regulations (e.g. data protection, labour, taxation, money laundering etc.)

− Event Risk - Operating Environment Risk due to unanticipated changes in external environment other than macro economic factors.

Internal audit provides an independent assessment of the adequacy of, and compliance with, the bank’s established policies and procedures. The internal audit function would independently evaluate the control systems within the organisation. Bank should put in place adequate internal audit coverage to verify that operating policies and procedures have been implemented effectively. There should be appropriate segregation of duties and personnel are not to be assigned conflicting responsibilities. All departments should ensure that the operational risk management department is kept fully informed of new developments; initiatives, products

69 and operational changes to ensure that all associated risks are identified at an early stage. Board should ensure that the independence of the audit function is maintained. Audit function should not be directly involved in the risk management process.

ASSET LIABILITY MANAGEMENT (ALM) The Bank has a documented ALM Policy, which is reviewed annually so as to articulate the changes in the financial and economic scenario. The ALCO of the Bank meets regularly and decides upon the pricing of various products by timely changes the composition of assets and liabilities.

The entire assets and liabilities are covered under the asset liability management system. Prudential risk limits, review mechanisms and reporting systems have been put in place with the objective of effectively manage the various components of market risk. The Bank has a documented contingency plan for meeting liquidity crises. Value at Risk (VaR), Aggregate Gap Limits (AGL), Open Position Limits, Earnings at Risk (EaR) and GAP statements are some of the tools used for market risk management.

Maturity Profile of the Asset Liability for the last three years is as follows:

Statement of Structural Liquidity as on March 31, 2007 29days Over 3 Over 6 Over 1 Over 3 and months months year and years and 1 to 14 15 to 28 upto and upto 6 and upto 1 upto 3 upto 5 Over 5 Outflows days days 3 months months year years years years Total 1. Capital 0.00 150.00 14.00 391.60 555.60 2. Reserves & Surplus 1459.60 1459.60 3. Deposits 484.37 680.56 1266.13 2075.17 2197.48 6321.10 189.68 6618.60 19833.09 3.1. Current Deposits 63.56 0.00 0.00 0.00 0.00 1040.77 0.00 0.00 1104.32 3.2. Savings Bank Deposits 31.72 0.00 0.00 0.000.00 4197.900.00 0.00 4229.63 3.3. Term Deposits 389.09 242.53 677.02 1189.70 1603.49 1082.43 189.68 6618.60 11992.54 3.4. Certificates of Deposits 0.00 438.03589.11 885.47 593.990.00 0.00 0.00 2506.60 4. Borrowings 212.82 38.80 343.70 7.96 3.55 363.75 1.05 0.53 972.15 4.1. Call and Short Notice 0.00 0.00 0.00 0.00 0.00 0.000.00 0.00 0.00 4.2. Inter Bank (Term) 131.50 38.80 343.23 7.70 2.50 0.00 0.00 0.00 523.73 4.3. Refinances/CBLO 0.00 0.00 0.47 0.26 1.05 321.86 1.05 0.53 325.21 4.4. Others (Vostro & Inter Bank CD) 81.32 0.00 0.00 0.00 0.00 41.89 0.00 0.00 123.21 5. Other Liabilities & Provisions 432.94 0.00 0.00 0.00 0.00 431.25 0.00 0.00 864.20 5.1. Bills Payable 77.10 0.00 0.00 0.00 0.00 29.98 0.00 0.00 107.09 5.2. Inter-Office Adjustment 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 5.3. Provisions 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 5.4. Others 355.84 0.00 0.00 0.00 0.00 401.27 0.00 0.00 757.11 5.5. Interest Payable 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 6. Lines of Credit - committed to 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 6.1. Institutions 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 6.2. Customers 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 7. Letters of Credit/ Guarantees 1.18 1.18 5.23 7.76 15.44 0.00 0.00 0.00 30.79 8. Repos 100.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 100.00 9.Bills Rediscounted (DUPN) 0.00 0.00 0.12 0.13 0.28 0.10 0.00 0.00 0.62 10.SWAPS (Sell/Buy) 340.41 20.81 642.25 230.63 285.02 331.71 27.09 0.00 1877.92 12.Others 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 A. TOTAL OUTFLOWS 1571.72 741.35 2257.44 2321.64 2501.75 7597.91 231.82 8470.34 25693.97

70 Over 3 Over 6 Over 1 Over 3 29days months months year and years and 1 to 14 15 to 28 and upto and upto 6 and upto 1 upto 3 upto 5 Over 5 Inflows days days 3 months months year years years years Total 1. Cash 195.21 0.00 0.00 0.00 0.00 0.00 0.00 0.00 195.21 2. Balances with RBI 24.15 33.70 64.05 104.58 114.25 352.19 12.74 324.61 1030.26 3. Balances with other Banks 272.80 565.80 180.85 10.35 0.00 0.00 0.00 0.00 1029.80 3.1. Current Account 56.45 0.00 0.00 0.00 0.00 0.00 0.00 0.00 56.45 3.2. Money at Call, Short Notice, Term Deposits & Other placements 216.35 565.80 180.85 10.35 0.00 0.00 0.00 0.00 973.35 4. Investments (including those under Repos but excluding Reverse Repos) 144.75 108.92 92.28 27.27 61.30 848.83 670.26 5205.82 7159.43 4A. Held to Maturity 0.50 0.00 0.00 0.00 2.35 170.38 236.50 3646.09 4055.82 5. Advances (Performing) 747.74 296.38 1294.86 1250.16 1608.70 5619.20 1205.05 1727.28 13749.36 5.1. Bills Purchased and Discounted (including bills under DUPN) 300.48 115.36 399.78 64.98 - - - - 880.60 5.2. Cash Credits, Overdrafts and Loans Repayable on Demand 392.48 139.73 736.81 933.06 1074.54 3821.49 35.96 18.94 7153.00 5.3. Term Loans 54.78 41.29 158.27 252.12 534.16 1797.71 1169.09 1708.34 5715.76 6. NPAs (Advances and Investments) * 0.00 0.00 0.00 0.00 0.00 0.00 78.40 0.00 78.40 7. Fixed Assets 0.00 0.00 0.00 0.00 0.00 0.00 0.00 189.79 189.79 8. Other Assets 33.15 0.00 0.00 0.00 0.00 1045.08 0.00 0.00 1078.23 8.1. Inter-office Adjustment 33.15 0.00 0.00 0.00 0.00 0.00 0.00 0.00 33.15 8.2. Others 0.00 0.00 0.00 0.00 0.00 1045.08 0.00 0.00 1045.08 9. Reverse Repos 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 10. SWAPS (Buy/Sell) / maturing forwards 245.25 46.69 874.11 112.38 68.88 4.49 0.00 0.00 1351.80 11. Bills Rediscounted (DUPN) 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 12. Interest Receivable 0.00 0.00 0.00 0.00 0.00 0.00 0.00 68.80 68.80 13. Committed Lines of Credit 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 14. Others 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 15 Export Refinance (unavailed) 90.42 0.00 0.00 0.00 0.00 0.00 0.00 0.00 90.42 B.Total Inflows 1753.46 1051.49 2506.15 1504.73 1853.13 7869.78 1966.45 7516.29 26021.50 * Net of provisions, interest suspense and claims received from ECGC / DICGC

C. Mismatch ( B - A) 181.74 310.14 248.71 -816.91 -648.62 271.87 1734.64 -954.04 D. Cumulative Mismatch 181.74 491.88 740.59 -76.32 -724.94 -453.07 1281.57 327.53 E. C as % to A 11.56% 41.83% 11.02% -35.19% -25.93% 3.58% 748.28% -11.26% Tolerance Level -20% -20% -40% -50% -50% -50% 0.00% *0.00% * Net of Capital and Reserve

Statement of Structural Liquidity as on March 31, 2006 Over 6 Over 1 29days Over 3 months year Over 3 and months and and years and 1 to 14 15 to 28 upto 3 and upto upto 1 upto 3 upto 5 Over 5 Outflows days days months 6 monthsyear years years years Total 1. Capital 0.00 164.00 191.60 355.60 2. Reserves & Surplus 1178.88 1178.88 3. Deposits 698.32 476.28 1939.94 1553.95 963.84 5241.83 111.93 5212.06 16198.15 3.1. Current Deposits 147.07 0.00 0.00 0.00 0.00 705.88 0.00 0.00 852.96 3.2. Savings Bank Deposits 35.34 0.00 0.00 0.00 0.00 3498.81 0.00 0.00 3534.15 3.3. Term Deposits 515.90 476.28 1208.95 676.05 963.84 1037.14 111.93 5212.06 10202.15 3.4. Certificates of Deposits 0.00 0.00 730.99 877.90 0.00 0.00 0.00 0.00 1608.89 4. Borrowings 693.31 298.70 152.96 6.41 1.18 33.10 1.21 1.98 1188.85 4.1. Call and Short Notice 2.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 2.00 4.2. Inter Bank (Term) 132.00 298.70 152.41 5.61 0.00 0.00 0.00 0.00 588.72 4.3. Refinances/CBLO 499.68 0.00 0.55 0.80 1.18 2.38 1.21 1.98 507.78 4.4. Others (Vostro & Inter Bank CD) 59.63 0.00 0.00 0.00 0.00 30.72 0.00 0.00 90.35 5. Other Liabilities & Provisions 420.84 0.00 0.00 0.00 0.00 305.67 0.00 0.00 726.51 5.1. Bills Payable 47.04 0.00 0.00 0.00 0.00 18.29 0.00 0.00 65.33 5.2. Inter-Office Adjustment 118.95 0.00 0.00 0.00 0.00 0.00 0.00 0.00 118.95 5.3. Provisions 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 5.4. Others 254.85 0.00 0.00 0.00 0.00 287.38 0.00 0.00 542.23 5.5. Interest Payable 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 6. Lines of Credit - committed to 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 6.1. Institutions 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 6.2. Customers 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 7. Letters of Credit/ Guarantees 1.88 1.88 8.32 12.34 24.55 0.00 0.00 0.00 48.97 8. Repos 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 9.Bills Rediscounted (DUPN) 0.00 0.00 0.03 0.10 0.21 0.71 0.00 0.00 1.05 10.SWAPS (Sell/Buy) 537.94 194.88 554.37 787.94 633.34 271.73 14.93 0.07 2995.21 12.Others 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 A. TOTAL OUTFLOWS 2352.28 971.74 2655.62 2360.75 1623.13 5853.04 292.07 6584.59 22693.22

29days Over 3 Over 6 Over 1 and upto months months year and Over 3 1 to 14 15 to 28 3 and upto and upto upto 3 years and Over 5 Inflows days days months 6 months 1 year years upto 5 years years Total 1. Cash 155.56 0.00 0.00 0.00 0.00 0.00 0.00 0.00 155.56 2. Balances with RBI 47.71 32.54 82.60 106.18 65.86 358.15 7.65 356.12 1056.81 3. Balances with other Banks 383.10 95.00 173.45 0.00 0.00 0.00 0.00 0.00 651.55 3.1. Current Account 34.65 0.00 0.00 0.00 0.00 0.00 0.00 0.00 34.65 3.2. Money at Call, Short Notice, Term Deposits & Other placements 348.45 95.00 173.45 0.00 0.00 0.00 0.00 0.00 616.90 4. Investments (including those under Repos but excluding Reverse Repos) 52.63 2.00 196.30 16.22 26.45 458.08 862.14 4685.82 6299.64 4A. Held to Maturity 2.18 0.00 0.00 0.00 0.00 13.22 218.51 3480.57 3714.48 5. Advances (Performing) 546.46 202.62 1061.69 813.60 1043.37 4608.55 1003.56 1462.00 10741.86

72 5.1. Bills Purchased and Discounted (including bills under DUPN) 275.74 93.76 463.67 73.81 - - - - 906.98 5.2. Cash Credits, Overdrafts and Loans Repayable on Demand 232.56 74.46 463.05 493.41 592.04 2990.19 14.38 11.33 4871.41 5.3. Term Loans 38.17 34.40 134.97 246.38 451.33 1618.36 989.19 1450.68 4963.47 6. NPAs (Advances and Investments) * 0.00 0.00 0.00 0.00 0.00 0.00 111.76 35.92 147.68 7. Fixed Assets 0.10 0.00 0.51 0.61 1.11 0.28 0.00 173.45 176.06 8. Other Assets 0.00 0.00 0.00 0.00 0.00 631.38 0.00 0.00 631.38 8.1. Inter-office Adjustment 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 8.2. Others 0.00 0.00 0.00 0.00 0.00 631.38 0.00 0.00 631.38 9. Reverse Repos 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 10. SWAPS (Buy/Sell) / maturing forwards 264.87 503.04 626.54 798.00 707.14 0.00 0.00 0.00 2899.59 11. Bills Rediscounted (DUPN) 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 12. Interest Receivable 0.00 0.00 0.00 0.00 0.00 0.00 0.00 206.22 206.22 13. Committed Lines of Credit 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 14. Others 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 15 Export Refinance (unavailed) 73.82 0.00 0.00 0.00 0.00 0.00 0.00 0.00 73.82 B.Total Inflows 1524.25 835.20 2141.10 1734.61 1843.92 6056.44 1985.11 6919.53 23040.16 * Net of provisions, interest suspense and claims received from ECGC / DICGC

C. Mismatch ( B - A) -828.03 -136.54 -514.52 -626.14 220.80 203.40 1693.04 334.94 - - - D. Cumulative Mismatch -828.03 -964.58 1479.10 -2105.24 1884.44 1681.04 12.00 346.94 E. C as % to A -35.20% -14.05% -19.37% -26.52% 13.60% 3.48% 579.66% 5.09% Tolerance Level -20% -20% -40% -50% -50% -50% 0.00% *0.00% * Net of Capital and Reserve

Statement of Structural Liquidity as on March 31, 2005 Over 3 months Over 6 Over 1 Over 3 29 days and months year and years 1 to 14 15 to 28 and upto upto 6 and upto upto 3 and upto Over 5 Outflows days days 3 months months 1 year years 5 years years Total 1. Capital 0.00 150.00 185.50 335.50 2. Reserves & Surplus 647.06 647.06 3. Deposits 404.34 189.62 1454.54 861.60 1967.35 4300.16 58.79 5583.85 14820.25 3.1. Current Deposits 135.92 0.00 0.00 0.00 0.00 651.05 0.00 0.00 786.96 3.2. Savings Bank Deposits 85.94 0.00 0.00 0.00 0.00 2778.76 0.00 0.00 2864.71 3.3. Term Deposits 182.49 189.62 1369.31 861.60 1105.58 870.35 58.79 5583.85 10221.58 3.4. Certificates of Deposits 0.00 0.00 85.23 0.00 861.77 0.00 0.00 0.00 947.00 4. Borrowings 128.11 85.50 158.07 2.81 2.34 4.25 1.25 1.61 383.94 4.1. Call and Short Notice 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 4.2. Inter Bank (Term) 54.00 85.50 157.20 1.50 0.00 0.71 0.00 0.00 298.91 4.3. Refinances 0.00 0.00 0.87 1.31 2.34 3.54 1.25 1.61 10.92 4.4. Others (Vostro & Inter Bank CD) 74.11 0.00 0.00 0.00 0.00 0.00 0.00 0.00 74.11 5. Other Liabilities & Provisions 250.84 0.00 0.00 0.00 0.00 340.17 0.00 0.00 591.02

73 5.1. Bills Payable 33.63 0.00 0.00 0.00 0.00 9.49 0.00 0.00 43.12 5.2. Inter-Office Adjustment 118.44 0.00 0.00 0.00 0.00 0.00 0.00 0.00 118.44 5.3. Provisions 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 5.4. Others 98.78 0.00 0.00 0.00 0.00 330.69 0.00 0.00 429.46 5.5. Interest Payable 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 6. Lines of Credit - committed to 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 6.1. Institutions 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 6.2. Customers 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 7. Letters of Credit/ Guarantees 2.63 2.63 11.66 17.30 34.41 0.00 0.00 0.00 68.62 8. Repos 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 9.Bills Rediscounted (DUPN) 0.00 0.12 0.21 0.26 0.40 0.96 0.10 0.00 2.05 10.SWAPS (Sell/Buy) 9.19 23.62 92.97 68.22 50.71 0.00 0.00 0.00 244.71 12.Others 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 A. TOTAL OUTFLOWS 795.12 301.49 1717.45 950.19 2055.21 4645.54 210.14 6418.02 17093.15 Over 3 months Over 6 Over 1 Over 3 29days and months year and years 1 to 14 15 to 28 and upto upto 6 and upto upto 3 and upto Over 5 Inflows days days 3 months months 1 year years 5 years years Total 1. Cash 152.35 0.00 0.00 0.00 0.00 0.00 0.00 0.00 152.35 2. Balances with RBI 15.57 7.30 52.73 33.18 42.58 165.60 2.26 215.04 534.27 3. Balances with other Banks 292.53 65.70 359.50 100.00 0.00 0.00 0.00 0.00 817.73 3.1. Current Account 33.03 0.00 0.00 0.00 0.00 0.00 0.00 0.00 33.03 3.2. Money at Call, Short Notice, Term Deposits & Other placements 259.50 65.70 359.50 100.00 0.00 0.00 0.00 0.00 784.70 4. Investments (including those under Repos but excluding Reverse Repos) 170.80 198.27 530.41 28.73 80.03 299.56 860.36 3354.15 5522.31 4A. Held to Maturity 2.18 0.00 0.00 13.46 0.00 89.38 142.95 2567.42 2815.39 5. Advances (Performing) 374.08 221.10 618.70 362.28 1011.21 3231.02 219.32 1719.83 7757.53 5.1. Bills Purchased and Discounted (including bills under DUPN) 244.34 154.28 367.17 26.35 0.13 - - - 792.27 5.2. Cash Credits, Overdrafts and Loans Repayable on Demand 110.98 36.64 157.49 195.03 319.90 2739.72 16.72 16.31 3592.78 5.3. Term Loans 18.75 30.18 94.05 140.90 691.18 491.30 202.60 1703.52 3372.48 6. NPAs (Advances and Investments) * 0.00 0.00 0.00 0.00 0.00 0.00 63.92 98.78 162.70 7. Fixed Assets 0.10 0.00 0.51 0.61 1.11 0.28 0.00 165.23 167.84 8. Other Assets 0.00 0.00 0.00 0.00 0.00 722.12 0.00 0.00 722.12 8.1. Inter-office Adjustment 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 8.2. Others 0.00 0.00 0.00 0.00 0.00 722.12 0.00 0.00 722.12 9. Reverse Repos 250.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 250.00 10. SWAPS (Buy/Sell) / maturing forwards 55.16 55.84 91.62 35.72 1.45 7.17 0.00 0.00 246.96 11. Bills Rediscounted (DUPN) 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 12. Interest Receivable 0.00 0.00 0.00 0.00 0.00 0.00 0.00 188.34 188.34 13. Committed Lines of Credit 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 14. Others 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 15 Export Refinance (unavailed) 0.00 64.29 0.00 0.00 0.00 0.00 0.00 0.00 64.29

74 B.Total Inflows 1310.59 612.50 1653.48 560.52 1136.37 4425.74 1145.86 5741.36 16586.43 * Net of provisions, interest suspense and claims received from ECGC / DICGC C. Mismatch ( B - A) 515.47 311.02 -63.97 -389.67 -918.84 -219.80 935.72 -676.66 D. Cumulative Mismatch 515.47 826.49 762.52 372.85 -545.99 -765.78 169.94 -506.72 E. C as % to A 64.83% 103.16%-3.72% -41.01% -44.71% -4.73% 445.29% -10.54% Tolerance Level -20% -20% -40% -50% -50% -50% 0.00% *0.00% * Net of Capital and Reserve

Treasury Operations Treasury Department of the Bank is entrusted with the responsibility of overseeing and ensuring compliance with the following

• Maintenance of CRR/SLR • Liquidity Risk Management • Call Money, REPO, CBLO (Money Market) Operations • Investment Portfolio Management • Cash and Currency Chest Management • Rupee Interest Rate Derivative transactions.

Maintenance of CRR/SLR

Investments of the bank are categorized into following three categories with sub-classification under each category viz., (i) government securities, (ii) other approved securities, (iii) shares, (iv) debentures & bonds, (v) subsidiary and joint ventures and (vi) others units of mutual funds, certificates of deposits etc., in accordance with the guidelines issued by the RBI.

• Held to Maturity (HTM) • Held for Trading (HFT) • Available for sale (AFS)

The category under which the investments would be classified is decided at the time of acquisition. Shifting of securities among the categories are accounted at the least of the acquisition cost/ book value/ market price prevailing on the date of shifting and depreciation, if any, on such shifting is fully provided for. Investments classified under HTM category are carried at acquisition cost except in cases where the acquisition cost is higher than the face value, in which case the premium is amortized over the remaining period to maturity. Investments classified under HFT and AFS categories are marked to market at regular intervals as per the quotations put out by Fixed Income Money Market and Derivatives Association (FIMMDA) from time to time and net depreciation with each sub-classification is recognized and provided for, while net appreciation is ignored.

The following table shows the pattern of our investments in the last three years (Rs. in crore) Fiscal 2005 2006 2007 Gross Investments 5816.27 6299.64 7124.44 SLR Investments Total 4904.61 5507.03 5923.28 • Permanent Investments /Held to Maturity 2814.51 3707.30 4160.75 • Current Investments /Available for Sale 2072.35 1792.94 2956.41 • Current Investments /Held for Trading 17.75 6.79 7.28 • Current Investments - Total 2090.08 1799.73 2963.69

Current Investments to total SLR Investments (%) 42.61 32.68 50.03

75 The Following table shows aggregate value of quoted and unquoted Non-SLR Investments (Rs. in crore)

Particulars Fiscal 2005 Fiscal 2006 Fiscal 2007 Quoted Non SLR investments 648.47 488.06 858.06 Unquoted Non SLR investments 263.19 792.61 343.10

Yield on Investments The yield on investments (%) for the last three years is given below:

Fiscal 2005 Fiscal 2006 Fiscal 2007 Yield including profit on sale of investments (%) 8.71 7.82 8.15 Yield excluding profit on sale of investments (%) 7.54 7.28 7.38

Call Money, Repo and CBLO operations:

The Department operates in the call money, Repo and CBLO markets besides also utilizing the Reverse Repo window under the liquidity adjustment facility provided by the RBI for modulating its day-to-day ALM mismatches.

The Department has fixed overall exposure limit for each counterparty bank/FI/PD encompassing compartmentalized limits for call money market, term money market, derivatives and outstanding spot and forward forex transactions. The same is being monitored on a daily basis. Anything exceeding the limit is brought to the knowledge of the top management adducing reasons therefor and seeking ratification. The limits thus fixed are subjected to periodical review.

Investment Portfolio Management

Types of investment

The Bank’s investments may be made in the following broad categories of financial assets:

SLR Securities

• Central Government securities • State government securities • Treasury bills • Certain categories of bonds guaranteed by the Central Government or a state government • Other securities approved by RBI

Non-SLR Securities

• Central Government securities • Securities guaranteed by the Central Government or a state government • All forms of debt instruments such as bonds, debentures, and notes of public sector undertakings, private sector companies, and financial institutions (not guaranteed by the Central Government or a state government), including passthrough certificates (PTCs), mortgage-backed securities and other securitized paper. • Subordinated Debt issued by Banks • Investments in the shares of the Bank’s subsidiaries or joint ventures • Equity Shares • Preference shares • Units of mutual funds • Securitised Paper • Money market instruments (other than those included in SLR securities)

Investments may be made in various ways: through participation in an auction/bid process (generally in the case of government securities), direct subscription to public issues or private placements, or purchase on the secondary market either direct or through approved brokers.

Classification of investments

RBI guidelines require that the entire investment portfolio of the Bank (both SLR and NSLR) should be classified as follows: i. Held to maturity (HTM) ii. Held for trading (HFT) iii. Available for Sale (AFS)

The category of an investment shall be decided by the authority empowered to sanction the investment at the time of approval. Investments made under ‘buy and hold’ strategy are normally classified under HTM. These investments are not subject to market risk, as these are not marked to market periodically. Investments made with an interest rate view and periods of horizon are normally classified under AFS. Investments acquired mainly for trading in anticipation of or in response to price movements are classified as HFT. i. Held to maturity

The investments included under 'Held to Maturity' should not exceed 25 per cent of the bank’s total investments. However this limit may be exceeded provided the excess comprises only of SLR securities and the total SLR securities held in the HTM category is not more than 25% of Bank’s net Demand and Time Liabilities as on the Last Friday of the second preceding fortnight. The securities under HTM can be sold to realise capital gai ns or to book losses and can be moved to / from other categories once a year with the approval of the Board. No fresh NSLR securities shall be included in the HTM category. ii. Held for trading (HFT)

Up to 25% of the total investments can be held in this category to take advantage of potential trading opportunities. As these are often intended to help manage short-term asset-liability mismatches, due care is necessary in selecting the securities. The following rules apply to this category.

• As far as possible, these investments should be in securities that are actively traded and have adequate liquidity, with a maximum remaining maturity normally up to 12 years (and not more than 15 years in special circumstances with the approval of the Department Committee).

• Non-SLR debt investments under HFT should have an ‘AAA’ or equivalent rating by a recognised rating agency. Equity and equity-related investments should be quoted above par.

• The defeasance period is 15 days. The maximum holding period of the investments is 90 days, beyond which, if the securities cannot be sold within that period for any special reasons/ circumstances, they should be transferred to the AFS category with the Investment Committee’s approval.

iii. Available for Sale (AFS)

All investments other than those under HTM or HFT fall in this category. Such investments can be shifted to the HFT category with the approval of the Investment Committee.

The treasury department has been investing in central, state government and other approved securities for maintenance of SLR, for deployment of surplus funds and to tap trading opportunities.

The investment policy of our Bank is reviewed and suitably amended with the approval of the Board at periodical intervals in the light of the various guidelines/suggestions issued by the RBI from time to time. The department periodically revises the Investment Policy and places it before the Board for approval.

The investment policy of our Bank aims at increasing the average yield of our total investment portfolio. Though the major chunk of investment will have necessarily to be in SLR securities to comply with the provisions of section 24 of the Banking Regulation Act 1949, the Bank proposes to utilize opportunities to invest in non-convertible debentures, equity shares, Mutual Fund units and commercial papers privately placed by companies to increase yields whie complying with applicable internal risk tolerance limits.

The treasury department complies with the policy prescriptions and RBI guidelines in the conduct of Investment Portfolio management. Policy, which include detailed prescriptions relating to criteria for selecting an investment, desired investment mix, trading volumes, desired maturity profile, categorization of investments, acceptable level of investments to total investments, NSLR fixed income investments, equity and mutual fund investments.

The policy has also prescriptions relating to trading book such as volumes, maximum maturity, defeasance period, stop loss limit, book profit limits etc. Besides prescribing Desired Modified Duration levels, the Policy also has prescribed Value-at-Risk model to track the market risk of investment portfolio on a real time basis. The same has been put in place. The Department submits a Monthly Risk Report bringing out the VaR levels and Modified Duration levels to the Board quantifying the risk.

As per RBI guidelines, a monthly certificate is submitted to the Audit Committee of the Board stating that the balances of individual securities as per books of Central Office are tallied with the SGL A/c statement furnished by RBI once in a month. All security and money transactions are subjected to concurrent audit every month. The observations by the auditors are addressed by the Department. The action taken report is placed before the Chairman and position is appraised to Inspection and Audit Department.

Cash and Currency Chest Management

The Bank has 2 currency chests. The Treasury Department has functional control on these chests.

Derivative Transactions

In terms of Derivative Policy of the Bank, the treasury department is authorized to undertake derivative transactions for the Bank. The Bank has complied with the quantitative and qualitative disclosure requirements prescribed by the RBI in this regard while preparing annual financial statements.

The risk in the derivatives portfolio is monitored by assessing the mark to market (MTM) position of the portfolio on a weekly basis and the impact on account of probable market movements. The overall portfolio is operated within the risk limit fixed by the Bank. The Board reviews the risk profile of the outstanding portfolio at regular intervals. Accounting Policies as per RBI guidelines have been adopted. The swaps are marked to market every month and the MTM losses in the basket are accounted in the books while MTM profits are ignored.

Dealing in derivatives is centralized in the treasury of the Bank. Risk monitoring on derivatives portfolio is done on a weekly basis. The Bank measures and monitors risk using PVBP (Price Value of a Basis Point) approach. Risk reporting on derivatives forms an integral part of the management information system and the marked to market position and the PVBP of the derivatives portfolio is reported on a weekly basis to the top management.

Taxation

The Accounts Department makes provision for taxation and deferred taxation in line with AS22 prescribed by the Institute of Chartered Accountants of India. The Department is also responsible for making advance payments of income tax in every quarter.

Appointment of Central Statutory and Branch Auditors

Accounts department secures RBI approval for appointment of Central Statutory and branch Auditors. The Department collects Long Form Audit Report . The Department also arranges for limited review by Central Statutory Auditors of quarterly financial results and filing of necessary returns as per the time schedule.

Preparation of P&L A/c and Balance Sheet

Accounts department prepares P&L a/c and Balance Sheet of the Bank every quarter based on the data collected from branches. The Department seeks to ensure compliance with the Accounting Standards

78 prescribed by ICAI, relevant provisions of Companies Act, Banking Regulation Act and guidelines issued by the RBI from time to time in the preparation of these statements.

The Department prepares Capital Adequacy Ratio and other disclosures as per guidelines of the RBI. Banks are subject to the capital adequacy requirements stipulated by the RBI, which are primarily based on the capital adequacy accord reached by the Basel Committee of the Bank of International Settlements in 1988. Banks are required to maintain a minimum ratio of total capital to risk adjusted assets as determined by a specified formula of 9.0%, at least half of which must be Tier I capital. Our regulatory capital and capital adequacy ratios based on our restated financial statements are as follows:

March 31, 2005 March 31, 2006 March 31, 2007 Tier I capital 558.79 1081.50 1323.75 Tier II capital 421.74 448.90 663.83 Total capital 980.53 1530.40 1987.58 Total risk adjusted assets 8700.71 11128.51 14798.92 Capital adequacy ratios: Tier I 6.42 9.72 8.94 Tier II 4.85 4.03 4.49 Total capital ratio 11.27 13.75 13.43 Minimum capital ratios required by the RBI: Tier I 4.50 4.50 4.50 Total capital ratio 9.00 9.00 9.00

Collection and Submission of Off-site Surveillance (OSMOS) data to RBI

The Credit Control Department has been collecting Off-site Surveillance Data from all offices including all the Departments. Based on this data, monthly, quarterly and yearly DSB returns are prepared as prescribed by Reserve Bank of India. Such returns (DSB Tranche I and Tranche II returns) are submitted by this department direct to RBI. The Department has always submitted the DSB returns to RBI within the prescribed time limit.

Merchant Banking business

The Bank is registered as Category-I Merchant Banker with Securities & Exchange Board of India. During the year 2006-07, our merchant banking activities focused on At Par Payment arrangements for Dividend Warrants/Refund Orders.

Loan Policy

The Bank has laid out a credit policy for lending to various sectors. The Board approves policy documents which lay out the lending philosophy of the Bank. The policy aims at maintaining a well-diversified portfolio of credit that would give no cause for concern and ensure quality of loan assets and aims to ensure that loanable funds are deployed to maximise profitability keeping in view inter alia risk factors - market risk, credit risk, legal risk, operational risk and systemic risk, as also the policy guidelines of the Reserve Bank of India relating to purveyance of credit particularly allocative regulations, viz., credit to priority sector, export sector etc. The Bank’s loan policy is guided by the following broad objectives: a. Contributing to the Bank’s profitability by efficient and profitable utilization of a prudent proportion of the Bank’s resources through an expanding loan portfolio. b. Maintaining a reasonably balanced portfolio through diversification of credit risks. c. Ensuring that the returns are commensurate with the risks undertaken. d. Ensuring that the loan portfolio is of a high quality as would help optimize returns from the portfolio, yielding a satisfactory spread over funding costs and overheads. e. Ensuring that the maturity pattern of the portfolio does not result in a major misalignment with the maturity pattern of the Bank’s resources, particularly deposits. f. Adhering to statutory and regulatory requirements.

79 From time to time, the Bank reviews and fine-tunes its loan policy to effectively meet the challenges posed by emerging market conditions and to conform to changing regulatory and statutory requirements.

Internal Credit Rating Mechanism The Bank’s Integrated Risk Management Department has an established system of covering all advances above Rs 2 Lakh under a credit rating structure. The comprehensive internal risk-rating system serves as a single-point indicator of diverse risk factors for taking credit decisions in a consistent manner. In the context of the new capital adequacy framework recommended by the Basel Committee on Banking Supervision, a sound credit rating framework is an essential prerequisite for an effective credit risk management system and for credit risk capital assessments. The Bank uses various formats for rating various accounts based on the quantum and categorization. Various risk elements like Industry risk, Business Risk, Management Risk, Security Risk, Financial Risk etc. are covered and offer a holistic view of the account/ relationship. Migration studies are also carried out at periodic intervals to study the health of credit portfolio and aids in taking effective control steps, if required.

Industry exposure

The Bank revises its exposure limits based on the capital funds every year. The Bank fixes suitable single/ group exposure limits, sectoral ceilings and ceilings for lending to sensitive sectors like capital markets and real estate. The exposure ceilings are imposed with a view to contain risks and in order to avoid concentration of risks.

The exposure norms duly approved by the Board of the Bank with ceilings based on capital funds as on March 31, 2006 are given below:

Category Ceiling in Rs. Crore For single enterprises other than in the form of Sole proprietorship or Partnership Single Enterprise Exposure (SEL) FB1 / FB2 150 FB3 120 FB4 75 FB5 & below 30 Single Enterprise Exposure-Infrastructure FB1 &FB2 190 FB3 125 FB4 75 FB5 & below 30 Individual exposure limit for Sole Proprietorships. 25 Individual exposure limit for Partnerships. 35 Group Exposure Limit 400 Group Exposure to Infrastructure 480 Substantial Exposure 3000 Sectoral ceiling 580 (Excluding agriculture, infrastructure & sensitive sectors) Sectoral ceiling for agriculture 2800 Sectoral ceiling for NBFCs Single NBFC With / without on-lending to infrastructure FB 1 100 FB 2 100 FB 3 80 FB 4 50 FB 5 & below 20 Aggregate exposure ceiling to all NBFCs With out on-lending to infrastructure 500 Aggregate exposure ceiling to all NBFCs with on-lending to infrastructure 625 Overall exposure ceiling to infrastructure 3000 Of which Sub ceiling to: i) Power sector (Generation, Transmission, Distribution) 750 ii) Road & Bridges 580 iii) Airport/Seaport 580 iv) Water supply 580

80 v) Railway 580 vi) Hospitals 580 vii) Education 580 viii) Other sectors 580 Subject to I) to viii) within the overall ceiling of Rs.3000 cr. Real Estate 30% of total advances Of which Commercial Real Estate 10% of total advances including MBS & Indirect Exposure to HFCs. Individual exposure ceiling 50 Group Exposure ceiling 75 Capital Market 440 Sub-ceiling on direct investment by the Bank 200 Sub-ceiling for advance/BG against shares 240 Of which ceiling for advance/BG to Brokers 200 Individual exposure ceiling to brokers FB1 & FB2 20 Individual exposure ceiling to brokers FB3 &FB4 10 Individual exposure ceiling ? Shares in physical form 0.10 Shares held in demat form 0.20 Subscribing to IPOs 0.10 Unsecured Guarantees and 20% of the bank’s outstanding Unsecured Advances unsecured guarantees plus the total of outstanding unsecured advances shall not exceed 15 percent of total outstanding advances. Term Loan Exposure (fixed vide BR 5/A10/360 dated 25.8.2006) Exposure for Term Loans for FY 2007 6961 The rating based distribution of additional term loans FB 1&2 35% FB 3 55% FB 4 10% Overseas Exposure Exposure to Indian Joint Ventures/Wholly-owned 300 Subsidiaries abroad (20% of the bank’s unimpaired capital funds) Sub-BPLR Exposure 75 per cent of total advances excluding export advances and small loans.

Corporate Finance

Corporate Finance Department was set up to give added thrust to the credit delivery system, improve quality of appraisals and to ensure effective post credit supervision of large borrowal accounts. The appraisal of all large limits of Rs 5 crore and above irrespective of the constitution and category of the borrower is being done by the department. The processing matrix is based on the industry-wise exposures so that core competencies are built in appraisal techniques on an industry-wise model.

The appraisal system adopted by the department is calibrated to capture the various risks in large credit proposals and also to identify suitable risk mitigants. The pricing of loans and advances is linked to credit rating generally and depending upon the market conditions, pricing is suitably aligned. The credit risk is being managed through minimum acceptable credit ratings for borrowers, dispersion of risk through segmental exposure limits to various industries and sectors, prudential exposure ceilings, internal risk rating of borrowers and other risk mitigation factors.

The Bank classifies loans and advances of Rs.10 crore and above to a single borrower as corporate lending. The Bank provides commercial banking products and services to corporate customers, consisting primarily of private and public limited companies. Loans and advances provided to corporate customers include project loans for infrastructure and industrial and commercial enterprises, term loans for the acquisition, construction or improvement of assets as well as short term loans, cash credit, export credit and other working capital financing and bill discounting facilities. The Bank also provides credit substitutes such as letters of credit and guarantees. All proposed loans and advances to corporate customers are subject to the Bank’s internal credit rating procedures and facilities of Rs.10 crore and above must be reviewed and approved by the Bank’s Credit Approving Authority before they can be considered for approval by the Bank

81 The major sector-wise exposure of the large value advances (Rs. 5 crore and above) handled by the Department as on March 31, 2007 is as follows: (Rs. in Crore) Sector Balance outstanding Industry 2112 Infrastructure 1138 Services 1159 Traders 427 Others 938 Total 5774

Credit risk rating of the borrowers is done on a ten-point scale as noted below:

Category Qualitative Definition FB 1 Highest safety FB 2 High safety FB 3 Adequate safety FB 4 Moderate safety FB 5 Marginal safety FB 6 Threshold safety FB 7 Potential weakness FB 8 Definite weakness FB 9 Default FB 10 Loss

Retail Loan Products and procedures

The Bank offers a variety of retail credit products, including home loans, mortgage loans, automobile loans, two-wheeler loans, personal loans, consumer loans, education loans, loans against liquid securities, loans against shares and loans against gold ornaments.

Agricultural Financing

In light of future business prospects in the Indian agricultural and related sectors, the Bank has identified agricultural lending as an area of potential growth.

The Bank has a diverse range of schemes/packages under Kisan Credit Card (both working capital and term loans) to cater to the varied requirements of the agricultural and allied sectors like dairying, poultry etc. The Bank is also financing commission agents in agricultural commodities, agro- input dealers, etc

In addition, the Bank has established relationships with various companies and co-operatives in the plantation, agro – processing, allied sectors and agricultural marketing sector and meets their project financing and working capital requirements.

The Bank’s strategy in agricultural lending is based on a comprehensive view of the agricultural value chain and partnerships with other companies in the agricultural sector, micro finance and other rural institutions and non- governmental organisations that have close links to the agricultural sector. The Bank is in the process of leveraging upon the Bank’s rural network of branches and technology platform to distribute the Bank’s offerings in rural areas in a convenient and cost effective manner

Some of the recent initiatives by the Bank in the area of Agricultural Lending are given below:

• Federal Haritha Card- ATM enabling of KCC Scheme • Tie-up with leading tractor manufacturers for financing Tractors • The Bank is implementing a Scheme for financing of delivery-based transaction/trade executed through commodity exchanges by taking professional clearing membership in NCDEX, NMCE & MCX.

82 • Scheme for financing Rubber Producers’ Societies (RPS) formed by small rubber growers and Rubber Trading Companies (RTC) promoted jointly by the Rubber Board & RPS aimed at capturing the entire value chain of rubber production, processing and marketing by small rubber growers. • ‘Samrudhi”- A mass banking initiative by the Bank for extending total banking support to selected Grama Panchayats involving local self governments & Self Help Groups (SHGs) / Kudumbashree Community Development Societies and other reputed NGOs.

Lending to SMEs

The Bank’s SME business comprises Small Scale Industries (“SSI”), Small Scale Service and Business Enterprises (“SSSBE”) and Medium Enterprises (“ME”). The SME segment is a key segment of our credit portfolio and the Bank is seeking to expand in this growing business. The growth of the SME business is important to the Bank as SME advances generate higher yields and help to disperse risk. At the same time, the Bank carefully monitors and mitigates the credit risk that is typically associated with advances to this sector by applying stringent credit selection and assessment criteria.

The Bank has initiated the following measures to improve lending to SME’s

1) The Bank has carved out a separate department for promoting SME & Agricultural Lending, which started functioning with effect from January 1, 2007. 2) Bank has already implemented cluster based approach in SME lending 3) The Bank is participating in Credit Guarantee Trust Fund Scheme for Small Industries, enabling Small Entrepreneurs to avail of limits upto Rs.25.00 lacs without offering collateral security. 4) Tie-up with SIDBI for joint financing/co-financing SME projects. MoU signed on January 17, 2007.

Priority Sector Lending (Directed Lending)

Commercial banks in India are required by RBI to lend 40% of their net bank credit to specified sectors known as “priority sectors”, subject to certain exemptions permitted by RBI from time to time. Priority sector advances include loans to agriculture, small-scale industry and services, loans to sectors deemed “weaker” by RBI, housing and education finance up to certain ceilings, lending for specific infrastructure projects and investments in instruments issued by specified institutions. In addition to the above the Bank’s priority sector advances also include lending to SHGs (micro credit)

The Bank is required to comply with the priority sector lending requirements as of the last reporting Friday of March of every fiscal year. Any shortfall in the amount required to be lent to the priority sectors may be required to be deposited with Government sponsored Indian developmental banks such as the National Bank for Agriculture and Rural Development (“NABARD”) and SIDBI.

As on March 31, 2007, Bank had a portfolio of Rs. 6153 Crore in priority sector lending, which consisted of Rs. 2281 Crore in agricultural advances, Rs. 1,208 Crore to SSI and services and Rs. 2,664 Crore in other priority sector lending. As of March 31, 2007, agricultural loans constituted 16.58% of our Net Bank Credit (NBC) as against RBI benchmark of 18% of net bank credit to the agricultural sector. (Rs. in Crore) Year ended March 31, March 31, 2004 March 31, March 31, March 31, 2003 2005 2006 2007 Agriculture * 369 500 684 1470 2281 Small Scale Industry 637 722 861 915 1208 Other Priority Sector 1020 1272 1648 2045 2664 Advances Gross Priority Sector 2026 2494 3193 4431 6153 Advances % to Net Bank Credit 43.68 38.91 40.45 41.44 44.72 Targets (%) 40 40 40 40 40 *including RIDF

83 Category of financing activity by the Bank for the last 5 years (Rs. in Crore) Category March 2003 March 2004 March 2005 March 2006 March 2007 Agriculture 346 470 620 1347 2098 SSI 607 690 817 853 1161 Small Road and Water 41 39 32 35 41 Transport Operators Retail Trade 186 207 211 216 326 Small Business 58 74 94 120 292 Self Employed 22 23 26 30 35 Software and others 2 3 3 3 2 Food and Agro 15 26 17 21 16 Self help group 2 3 9 23 32 Other Priority Sectors 651 840 1117 1448 1755 Total - Priority Sector 1930 2375 2946 4096 5758 Other than Priority Sector 4288 5326 5877 7640 9141 Total Net Advances 6,218 7,701 8,823 11,736 14,899 Total Advances represent Net Advances as on that date.

Sector wise Disbursements (D) for the last 5 years are as under:

AMOUNT IN RS CRORE AS ON THE LAST FRIDAY OF JUNE Sector Disbursements in Rs. Crore 2002 2003 2004 2005 2006 Agriculture 127.19 103.88 409.07 245.56 1398.31 SSI 554.52 506.49 1267.07 405.46 1508.41 Other priority 190.96 372.44 853.35 624.22 1234.09 Total Priority 872.67 982.81 2529.49 1275.24 4140.81

The Bank has initiated the following measures to Priority Sector Lending (other than Agriculture & SSI)

• Scheme for financing traders in association with Kerala State Vypari Vyvasaya Ekopana Samithi((KVVES) • Scheme for financing both working capital and term loans to Private Bus Operators, in association with Kerala State Private Bus Operators Federation • Swarojgar Credit Card Scheme was implemented by the Bank. • Tie-up with Tata Motors Ltd., for financing Tata Commercial Vehicles. • The Bank is also actively participating in Centrally Sponsored Schemes like SGSY, PMRY & SJSRY. Loan Portfolio As of 31.03.2007, our total outstanding loan portfolio was Rs.14899.10 crores. The following table sets forth the loan portfolio classified by the product group. (Rs. In Crore) As on March 31, As on March 31, 2006 As on March 31, 2007 2005 Amount % Amount % Amount % Bills Purchased/ Discounted 1210.71 13.72 1293.74 11.02 1361.99 9.14 Cash Credit, overdrafts and others 3800.96 43.08 5291.87 45.09 6526.61 43.81 Term Loans 3810.92 43.20 5150.86 43.89 7010.50 47.05 Total Advances (Net) 8822.59 11736.47 14899.10

84 Classification of Advances based on security The table below shows the amount of net advances as at fiscal 2005, 2006 and 2007, which are secured or covered by guarantees or unsecured. (Rs. in crore) As on March 31, As on March 31, As on March 31, 2005 2006 2007 Amount % Amount % Amount % Secured by tangible assets (including advances against 6937.38 78.63 9617.60 81.95 13193.26 88.55 book debts) Covered by bank or Government guarantees 1021.37 11.58 558.53 4.76 526.76 3.54 Unsecured 863.84 9.79 1560.34 13.29 1179.08 7.91 Total 8822.59 100 11736.47 100 14899.10 100

Sector wise Advances The assets portfolio of the Bank is well diversified. The Bank’s exposure to any single borrower/ group is well within the exposure limits prescribed by RBI. Wherever it exceeds, RBI approvals are obtained. (Rs. in crore) Sector Amount (As on March Amount (As on March Amount (As on March 31, 2005) 31, 2006) 31, 2007) Agriculture 647 1369 2115 Small Scale Industries (SSI) 861 915 1208 Other Priority sector 1630 2027 2665 Large & Medium 2108 2578 2990 Export (excluding SSI) 397 394 379 Educational Loan 51 67 97 Housing Loan 1096 1679 2419 Others 2513 3151 3404 Total Gross Advances 9303 12180 15277

Export/Import Export is a key area of economic activity and is one of the main drivers of growth in Indian economy. Loans are provided to exporters to meet their working capital requirements in the form of pre-shipment credit and post- shipment credit. Export credit loans are given in Rupees as well as in Foreign Currency. Loans are also provided for setting up manufacturing facilities, processing units and packing centers. Bank has introduced Exporters’ Gold Card Scheme to provide easy access to credit on better terms to genuine exporters. Highlight of the scheme is sanctioning working capital limits for 3 years at a time. There is also built in provision for ad-hoc increases to execute unexpected orders. Bank also extends ‘Running account’ facility to exporters with good track record. This facility enables exporters to avail of pre-shipment credit even before getting an order or letter of credit. Facilities for receiving/advising letters of credit and for sending agency commission or any other remittance related to export are available. Bank provides number of facilities to importers. Apart from handling import documents from across the globe, credit facilities like import loan, letters of credit, standby letters of credit etc. are provided. Bank also facilitates availing of supplier’s/buyer’s credit by importers. Facility of advance remittance or deferred payment is also available. RBI provides export credit refinance for eligible export credit at bank rate and such refinance is a source of funds for further deployment. Apart from the interest earned on export/import credit, bank earns fees and commission on letters of credit, guarantees, collection, remittances, handling of documents etc.

85 Industry wise outstanding as on March 31, 2007 is as follows (Rs. in Crore) Industry Total Total outstanding of the Total Outstanding of Top 10 Companies as a Outstanding top 10 companies % of the total exposure to the Industry Textiles 614 264 43.00 Infrastructure 1216 609 50.08 Chemicals, Dyes, 214 68 31.78 Paints Etc., Food Processing 314 23 7.32 NBFC 238 150 63.02

Iron and Steel 314 221 70.38 Other Metal and 195 50 25.64 Metal Products

Construction 68 62 91.18 Electricity 694 502 72.33 All Engineering 230 89 38.70 Gems and Jewellery 12 9 75.00 Paper and Paper 107 90 84.11 Products

Leather and Leather 47 19 40.42 Products

Mining 37 30 81.08 Sugar 8 7 8.97

Petroleum 50 0 0

Industry wise (top 10) exposure of the bank for the last three years is as follows (amount in Rs. crore): As on March 31, 2005 (Rs. in crore) Industry Amount % of total assets Infrastructure 582 3.46 Iron & Steel 302 1.80 Food Processing 273 1.62 Cotton Textiles 208 1.24 Engineering 192 1.14 Drugs & Pharmaceuticals 116 0.69 Other Metal & Metal Products 115 0.68 Other textiles 114 0.68 Paper & Paper Products 76 0.45 Rubber & Rubber Products 71 0.42 *Total assets as on March 31, 2005 : Rs.16,820.96 Crore.

As on March 31, 2006 (Rs. in crore) Industry Amount % of total assets Infrastructure 1047 5.07 Iron & Steel 292 1.41 Cotton Textiles 269 1.30 Food Processing 223 1.08 Engineering 180 0.87 Drugs & Pharmaceuticals 161 0.78 Other textiles 157 0.76 Rubber & Rubber Products 134 0.65 Other Metal & Metal Products 110 0.53 Paper & Paper Products 84 0.41

86 *Total assets as on March 31, 2006: Rs.20,642.91 Cr.

As on March 31, 2007 (Rs. in crore) Industry Amount % of total assets Infrastructure 1216 4.85 Iron & Steel 314 1.25 Cotton Textiles 339 1.35 Food Processing 314 1.25 Engineering 230 0.92 Drugs & Pharmaceuticals 143 0.57 Other textiles 275 1.10 Rubber & Rubber Products 173 0.69 Other Metal & Metal Products 195 0.78 Paper & Paper Products 107 0.43 *Total assets as on March 31, 2007: Rs 25,089.93 Cr.

(Rs. in crores) Details of Top 15 Borrowers for the last three years S.No. Name of the Borrower Industry Total Exposure - March 2007 1 Borrower 1 Hsg Finance institution 186.92 2 Borrower 2 PSU/Service 174.88 3 Borrower 3 Agriculture 150.00 4 Borrower 4 Infrastructure/power 141.35 5 Borrower 5 Rubber 123.00 6 Borrower 6 Consumer Goods 114.50 7 Borrower 7 Iron & Steel 111.00 8 Borrower 8 Agriculture 100.00 9 Borrower 9 Agriculture 100.00 10 Borrower 10 Infrastructure/Water Supply 100.00 11 Borrower 11 Iron & Steel 94.41 12 Borrower 12 Infrastructure/Power 85.71 13 Borrower 13 Infrastructure/LNG Terminal 80.01 14 Borrower 14 Infrastructure/Power 78.39 15 Borrower 15 Contractor 68.80

(Rs. in crores) Sl.No. Name of the Borrower Industry Total Exposure - March 2006 1 Borrower 1 Housing Finance Institution 178 2 Borrower 2 Agriculture 166 3 Borrower 3 Infrastructure/Power 137 4 Borrower 4 Agriculture 100 5 Borrower 5 Infrastructure/Power 100 6 Borrower 6 Rubber 98 7 Borrower 7 PSU/Service 97 8 Borrower 8 NBFC 80 9 Borrower 9 Infrastructure/Power 79 10 Borrower 10 Pharmaceuticals 75 11 Borrower 11 Iron & Steel 71 12 Borrower 12 PSU/Finance 70 13 Borrower 13 Contractor 55 14 Borrower 14 Real Estate 51 15 Borrower 15 PSU/Finance 50

87 (Rs. in crores) (Rs. in crores) Sl.No. Name of the Borrower Industry Total Exposure - March 2005 1 Borrower 1 Housing Finance Institution 170 2 Borrower 2 Infrastructure/Power 100 3 Borrower 3 Agriculture 100 4 Borrower 4 PSU/Finance 90 5 Borrower 5 Iron & Steel 75 6 Borrower 6 Infrastructure/Power 65 7 Borrower 7 Contractor 58 8 Borrower 8 Iron & Steel 57 9 Borrower 9 Houisng Finance institution 52 10 Borrower 10 PSU – Trader 51 11 Borrower 11 Banking 50 12 Borrower 12 Pharmaceuticals 50 13 Borrower 13 PSU – Finance 50 14 Borrower 14 Other Metals/Aluminium 50 15 Borrower 15 Housing Finance Institution 44

Loans and advances granted to any person /companies in which the Directors are interested and outstanding as on March 31, 2007 : NIL

Details of top 15 borrowers as on March 31, 2007 (Rs. in Crore) Borrower Industry Amount % to total Default/ write Quality of outstanding advances off, if any assets Borrower 1 Hsg finance institution 187 1.26 NIL STD Borrower 2 PSU/service 175 1.17 NIL STD Borrower 3 Agriculture 122 0.82 NIL STD Borrower 4 Infrastructure/power 118 0.79 NIL STD Borrower 5 Rubber 78 0.52 NIL STD Borrower 6 Consumer goods 83 0.56 NIL STD Borrower 7 Iron & steel 37 0.25 NIL STD Borrower 8 Agriculture 99 0.66 NIL STD Borrower 9 Agriculture 91 0.61 NIL STD Borrower 10 Infrastructure/water supply 52 0.35 NIL STD

Borrower 11 Iron & steel 58 0.39 NIL STD STD Borrower 12 Infrastructure/power 86 0.58

Borrower 13 Infrastructure/lng terminal 29 0.19 NIL STD

Borrower 14 Infrastructure/power 77 0.52 NIL STD

Borrower 15 Contractor 37 0.25 NIL STD *Total Advances as on March 31, 2007 amount to Rs.14, 899.10 Cr.

Asset Classification

The Bank classifies and accounts for its assets in accordance with the RBI guidelines. Under these guidelines, term loans are regarded as non-performing if any amount of interest or principal remains overdue for more than 90 days; overdrafts and cash credits are regarded as non-performing if the account balance remains out of order for a period of 90 days; and bills are regarded as non-performing if the account remains overdue for more than 90 days. Prior to fiscal 2004, these assets were deemed nonperforming if the irregularity continued for 180 days. Prior periods have not been restated to reflect this. In respect of agricultural loans, the loan is classified as non- performing if any installment of principal or interest thereon remains overdue for two crop seasons for short duration crops or one crop season for long duration crops. Crops with a crop season longer than one year are long duration crops, and other crops are treated as short duration crops.

88 NPAs are further categorised into three groups i.e. Sub-standard, Doubtful and Loss Asset depending upon the period of delinquency and availability of tangible security. The table below gives the criteria for asset classification viz., standard, sub-standard, doubtful and loss assets.

Category Definition

Performing Standard An asset which is currently performing and in respect of which interest and principal payments are Assets received regularly and where arrears of interest and principal, if any do not exceed 90 days/crop season/s as given below Non Performing An asset, including a leased asset, becomes non-performing when it ceases to generate income for Assets the bank.

A non-performing asset (NPA) is a loan or an advance where; i. interest and/ or instalment of principal remain overdue for a period of more than 90 days in respect of a term loan,

ii. the account remains ‘out of order’, in respect of an Overdraft/Cash Credit (OD/CC), An account should be treated as 'out of order' if the outstanding balance remains continuously in excess of the sanctioned limit/drawing power. 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'.

iii. the bill remains overdue for a period of more than 90 days in the case of bills purchased and discounted,

iv. A loan granted for short duration crops* will be treated as NPA, if the instalment of principal or interest thereon remains overdue for two crop seasons. A loan granted for long duration* crops will be treated as NPA, if the instalment of principal or interest thereon remains overdue for one crop season. #

v. any amount to be received remains overdue for a period of more than 90 days in respect of other accounts # For the purpose of these guidelines, "long duration" crops would be crops with crop season longer than one year and crops, which are not "long duration" crops, would be treated as "short duration" crops. The crop season for each crop, which means the period up to harvesting of the crops raised, would be as determined by the State Level Bankers' Committee in each State.

In respect of advances against term deposits, NSCs eligible for surrender, IVPs, KVPs and Life policies need not be treated as NPAs. Advances against gold ornaments, government securities and all other securities are not covered by this exemption.

Similarly, interest on advances against term deposits, NSCs, IVPs, KVPs and Life policies may be taken to income account on the due date, provided adequate margin is available in the accounts i. Sub- A sub-standard asset is one, which has remained NPA for a period less than or equal to 12 months. standard In such cases, the current net worth of the borrower/ guarantor or the current market value of the assets security charged is not enough to ensure recovery of the dues to the banks in full. In other words, such an asset will have well defined credit weaknesses that jeopardise the liquidation of the debt and are characterised by the distinct possibility that the banks will sustain some loss, if deficiencies are not corrected

An asset is to be classified as doubtful, if it has remained NPA for a period exceeding 12 months. A loan classified as doubtful has all the weaknesses inherent in assets that were classified as sub- standard, with the added characteristic that the weaknesses make collection or liquidation in full, – on the basis of currently known facts, conditions and values – highly questionable and improbable

ii. Doubtful A loss asset is one where loss has been identified by the bank or internal or external auditors or the assets RBI inspection but the amount has not been written off wholly. In other words, such an asset is

considered uncollectible and of such little value that its continuance as a bankable asset is not

warranted although there may be some salvage or recovery value

iii. Loss assets

As per extant RBI Guidelines, the provision has to be provided for at rates given below:

Provision for Sub standard asset -

A general provision of 10 percent on total outstanding should be made without making any allowance for DICGC/ECGC guarantee cover and securities available. The ‘unsecured exposures’ which are identified as ‘substandard’ would attract additional provision of 10 per cent, i.e., a total of 20 per cent on the outstanding balance. Unsecured exposure is defined as an exposure where the realisable value of the security, as assessed by the bank/approved valuers/Reserve Bank’s inspecting officers, is not more than 10 percent, ab-initio, of the outstanding exposure. ‘Exposure’ shall include all funded and non-funded exposures (including underwriting and similar commitments). ‘Security’ will mean tangible security properly discharged to the bank and will not include intangible securities like guarantees, comfort letters etc.

Provision for Doubtful asset - i) 100 percent of the extent to which the advance is not covered by the realisable value of the security to which the bank has a valid recourse and the realisable value is estimated on a realistic basis. ii) In regard to the secured portion, provision may be made on the following basis, at the rates ranging from 20 percent to 100 percent of the secured portion depending upon the period for which the asset has remained doubtful:

Period for which the advance has remained in ‘doubtful’ category Provision requirement (%) Up to one year 20 One to three years 30 More than three years 100

Loss asset -

The entire asset should be written off. If the assets are permitted to remain in the books for any reason, 100 percent of the outstanding should be provided for

Once the account is classified as an NPA, interest already debited to the account but remaining uncollected is de-recognized and further interest is recognized on cash basis and not on accrual basis.

Floating Provisions

In addition to specific provisions made towards identified NPAs in accordance with RBI guidelines, the Bank has adopted a policy of making a “floating provision” over and above the RBI-required norms in accordance with its internal provisioning policy. Floating provisions can be used to meet future specific provisions required to be made in accordance with RBI guidelines towards existing and future NPAs. Considering that higher loan loss provisioning adds to the overall financial strength of banks and to the stability of the financial sector, the RBI has urged banks to voluntarily set apart provisions above the minimum prudential levels. Such floating provisions built over different periods of time may not, however, be used for any smoothing of profits or dividend equalisation across different accounting periods. At the end of a financial quarter, the Bank's management may deem it appropriate to increase or decrease floating provisions based on a review of the Bank's loan portfolio. This evaluation process is subject to numerous subjective estimates and judgments. Determining the amount of floating provisions is a significant estimate and is regularly evaluated by the Bank's management and its auditors for adequacy by taking into consideration factors such as a borrower’s repayment record, resources, business prospects, financial condition and ability to repay, and consideration of the guidelines prescribed by the RBI regarding the quality of the earning assets. Over the past three years, the Bank has maintained provisions significantly in excess of the minimum required by the RBI. Bank held a Floating Provision of Rs.179.52 crore as at March 31, 2006, as well as March 31, 2007. RBI had revised, in June 2006 a

90 revised set of guidelines on Banks’ creations and maintenance of Floating Provisions. Major guidelines include the following:

(i) Principle for utilisation of floating provisions by banks

Floating provisions should not be used for making specific provisions as per the extant prudential guidelines in respect of non-performing assets or for making regulatory provisions for standard assets. The floating provisions can be used only for contingencies under extraordinary circumstances for making specific provisions in impaired accounts after obtaining board’s approval and with prior permission of RBI. The boards of the banks should lay down an approved policy as to what circumstances would be considered extraordinary.

(ii) Principle for creation of floating provisions by banks

The bank's board of directors should lay down approved policy regarding the level to which the floating provisions can be created. The bank should hold floating provisions for ‘advances’ and ‘investments’ separately and the guidelines prescribed will be applicable to floating provisions held for both ‘advances’ & ‘investment’ portfolios.

(iii) Accounting

Floating provisions cannot be reversed by credit to the profit and loss account. They can only be utilised for making specific provisions in extra-ordinary circumstances as mentioned above. Until such utilisation, these provisions can be netted off from gross NPAs to arrive at disclosure of net NPAs. Alternatively, they can be treated as part of Tier II capital within the over-all ceiling of 1.25% of total risk-weighted assets.

(iv) Disclosures

Banks should make comprehensive disclosures on floating provisions in the “notes on accounts” to the balance sheet on (a) opening balance in the floating provisions account, (b) the quantum of floating provisions made in the accounting year, (c) purpose and amount of draw down made during the accounting year, and (d) closing balance in the floating provisions account.

(v) Provisions for advances at higher than prescribed rates

A bank may voluntarily make specific provisions for advances at rates which are higher than the rates prescribed under existing regulations provided such higher rates are approved by the Board of Directors and consistently adopted from year to year. Such additional provisions are not to be considered as floating provisions.

The Bank's provisioning policy generally involves the following:

» 100 per cent provision for all NPAs with net dues of Rs.1 lakh and less irrespective of the NPA asset category. » 100 per cent provision for all NPAs of over Rs.100 lakh in Doubtful 2 category. » 75 per cent provision in all NPAs of over Rs. 1 lakh but less than Rs.100 lakh, classified under Doubtful 2 category for the secured portion and 100 per cent for the unsecured portion. » 50 per cent provision for all NPAs of over Rs. 1 lakh, classified under Doubtful1 category for the secured portion and 100 per cent for the unsecured portion. » 25 per cent provision for all NPAs of over Rs. 1 lakh, classified under Sub Standard category for the secured portion and 100 per cent for the unsecured portion. » Remaining amount of Floating Provisions to be kept aside as Floating Provisions to help the Bank reach Zero Net NPA level.

91 Asset Classification for the last five financial years. (Rs. in crore) Nature of Assets March 31, 2003 March 31, 2004 March 31, 2005 March 31, 2006 March 31, 2007 Sub-standard 157.49 186.07 162.99 127.54 152.80 Doubtful – I 91.68 67.95 144.14 107.72 78.85 Doubtful – II 124.06 134.08 97.94 138.03 113.66 Doubtful – III 120.68 163.88 142.79 130.66 71.79 Loss Assets 34.08 48.77 129.93 59.10 33.70 Standard Assets 5904.97 7472.98 8625.02 11616.76 14825.81 Gross Advances 6432.96 8073.73 9302.81 12179.81 15276.61 Gross NPAs 527.99 600.75 677.79 563.05 450.80

The Bank's total loan loss provision coverage as of March 31, 2007 was 83.74 % of gross NPAs as of March 31, 2007.

Sector wise analysis of gross NPAs for last three years (Rs. in Crore) March 31, 2005 March 31, 2006 March 31, 2007 Agriculture 30.94 28.08 20.41 SSI 99.89 78.55 56.27 Housing Sector 39.66 53.06 101.76 Transport operator 6.82 6.02 5.15 Retail traders 30.02 34.36 32.26 Business enterprises 26.29 19.53 16.38 Non Banking Finance Companies 10.99 0.54 0.08 Real Estate Loans 38.49 2.19 1.03 Traders in Non Priority Sector 75.94 65.31 24.68 Contractors 31.47 32.77 19.95 Loans against Shares 6.40 6.13 2.07 Medium & Large Industries 74.71 36.88 10.50 Other NPAs 206.17 199.63 160.26 TOTAL 677.79 563.05 450.80

Top 20 NPAs as on 31.3.2007 Net Balance Outstand- Provision S.No Industry Asset Class ing (Rs. in Crore) (Rs. in Crore) 1 Sea Foods Industry 6.74 2.34 D1 2 Engg. Contractors 6.22 1.24 D1 3 Vehicle Sales & Service 4.45 3.93 D3 4. Resorts 4.40 0.44 S 5. Rubber Products Industry 3.49 1.05 D2 6. Contractor 2.50 1.00 D2 7. Tea Estate 2.49 0.75 D2 8. Garments Industry 5.70 1.71 D2 9. Textile Trading 1.90 1.50 D2 10. Timber Industry 1.87 1.17 D2 11. IMFL Bottling 1.84 0.90 S 12. Garments 3.02 0.60 D1 13. Quarry 1.99 0.40 D1 14. Construction 1.60 0.16 S 15. Hotel 1.84 0.55 D2 16. Timber Traders 1.37 0.14 S 17. Educational Institution 1.42 0.14 S 18. Gas bottling 1.30 0.39 D2 19. Gold Jewellery 1.63 0.16 S 20. Garments Industry 1.15 0.20 D2 56.92 18.77

Details of the category wise advances in absolute and percentage wise for the last five years:

92 (in Rs. crore) Categor As on March 31, As on March 31, As on March 31, As on March 31, As on March 31, y of 2003 2004 2005 2006 2007 assets Amount % of Amount % of Amount % of Amount % of Amount % of gross total gross gross gross advances assets advances advances advances Standard 5904.97 91.79 7472.98 92.56 8625.02 92.72 11616.76 95.38 14825.81 97.05 Sub- standard 157.49 2.45 186.07 2.30 162.99 1.75 127.54 1.05 152.80 1.00 Doubtful 336.42 5.23 365.91 4.53 384.87 4.13 376.41 3.09 264.30 1.73 Loss 34.08 0.53 48.77 0.61 129.93 1.40 59.10 0.48 33.70 0.22 Total 6432.96 100 8073.73 100 9302.81 100 12179.81 100 15276.61 100

Movement of NPAs (Rupees in crore) Particulars March 31, March 31, March 31, March 31, March 31, 2003 2004 2005 2006 2007 Opening balance 638.36 527.99 600.75 677.79 563.05 Reduction in NPAs 227.41 145.08 113.69 274.19 294.54 New Additions 117.04 217.84 190.73 159.45 182.29 Closing balance 527.99 600.75 677.79 563.05 450.80

RECOVERY INITIATIVES:

The Bank has devised a strategic policy for the recovery of NPAs. The various measures recommended for recovery include one-time settlements, out-of-court settlements, filing of suits before the Debt Recovery Tribunals and courts, actions under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002 and Lok Adalats, which is a system for out-of-court settlements of impaired loans through mutual consent in accordance with the Legal Services Act 1987.

Additionally, NPA accounts of Rs. 1 crore and above are reviewed periodically by the senior management of the Bank or the Board of Directors and appropriate measures are taken for their early recovery or upgradation. Non-performing loans, cannot be upgraded or recoved, are considered for write-off on a case-by-case basis, although recovery efforts continue to be undertaken on accounts that have been written off. As a result of these efforts, gross NPAs as a percentage of gross loans declined 8.21 % as of March 31, 2003, to 7.44% as of March 31, 2004, to 7.29% as of March 31, 2005 and to 4.62% as of 31 March 2006, and stood at 2.95% as of March 31, 2007. Similarly, the percentage of net NPAs decreased from 4.95% as of March 31, 2003 to 2.89% as on 31 March 2004, to 2.21% as on 31 March 2005 and to 0.95% as on 31 March 2006, and stood at 0.44% as of March 31, 2007

Over the years, the Bank has been successful in improving the recoveries in the impaired loans portfolio as set forth in the accompanying table.

YEAR ENDED MARCH 31, 2005 MARCH 31, 2006 MARCH 31, 2007 Recovery from Interest Unrealized 49.25 75.69 61.43 Accounts...... Recovery from NPAs classified under loss and already written off 11.56 44.58 66.00 ...... Recovery in Gross NPAs 89.45 141.02 167.11 Total Recoveries...... 150.26 261.29 294.54

The Bank believes that the healthy level of recoveries from NPAs and in unrealized interest was primarily due to the collateral that has been provided to secure the impaired loans, which encourages borrowers to repay loans and interest rather than forfeit their property.

Summary of Technical Write offs over the past Seven Financial Years. (Rs in Crore) ECGC Provisions Recoveries Write Off as at FY ended Net Balances Claims/Others Held Effected # March 31, 2001 83.47 0.00 83.47 7.52 March 31, 2002 114.74 0.55 114.19 19.79 March 31, 2003 122.08 0.96 121.12 20.78 March 31, 2004 50.85 0.67 50.18 7.39 March 31, 2005 24.29 0.34 23.95 1.59 March 31, 2006 123.13 0.00 123.13 20.22 March 31, 2007 155.63 5.11 150.52 134.33 TOTAL WRITE OFF 674.19 7.63 666.56 211.62 # Indicates subsequent recoveries made in these accounts over the years

Recoveries in the written off loans as a percentage to the amount of write off was 131.39. Bank continues to regularly follow up all loans remaining to be fully resolved.

94 BUSINESS OF THE BANK & ITS PRODUCTS AND SERVICES

Business of the Bank, its Products and Services

Products

(i) Technology Products

(a) AnyWhere Banking

The Bank has operationalised its Any Where Banking service, enabling customers to bank at any branch of his/ her choice regardless of the place where the account is maintained.

(b) Easy Pay

The Bank offers an EasyPay facility wherein the customers can pay the school fees of his children, using the bank’s internet delivery channel. Fee payment is currently possible only for select institutions in Kerala.

FedFast is the Bank’s rapid remittance service intended to enable speedy remittance of funds from locations in the UAE to India.

(d) RTGS

Bank has enabled RTGS facility in all its computerized branches in August 2004. RTGS is the Real Time Gross Settlement system hosted by RBI to enable inter bank fund transfers. RTGS provides for continuous settlements, which are immediate, final and irrevocable. The Bank offers the RTGS facility for all Inter Bank transfers above Rs. 1,00,000/-.

(e) Fed+Amrita

The Bank in association with Amrita Institute of Medical Sciences (AIMS), a super speciality hospital in Kochi, Kerala offers its customers, priority in appointments and personalized services at the hospital.

(f) Fed e-Pay

Fed e-Pay is an Electronic Bills Presentment & Payment system (EBPP), whereby the customers of the Bank can pay different types of bills like telephone, water, electricity, etc through the Bank’s various channels like ATM’s, Internet, etc.

(ii) Deposit Products

(a) Aiswarya Deposit

This is a deposit scheme that requires no reminder for renewal and continues to earn interest till its closure. The main highlights and benefits of Aiswarya Deposit benefits are (i) Automatic renewal permitting customers to benefit from the latest interest rate revisions. (ii) Liquidity and enhanced continuity (iii) Advance against deposit facility upto 90% of the balance outstanding (v) Automatic compounding of interest on completion of each renewal term.

(b) Cash Certificate Deposits

This is a market independent, growth oriented scheme. The benefits of the Federal Cash Certificate Deposits include (i) enhanced returns due to quarterly compounding of interest earned (ii) advance upto 90% of deposit (iii) premature withdrawal facility at a penalty of 1% in the interest.

The benefits and features of this scheme include (a) recurring scheme for fixed income group, with high returns (b) no TDS (c) optional monthly/ quarterly/ half yearly or yearly installments. Another innovative product, FED

95 JEEVAN, adds the benefit of life insurance cover to FSF. Members under the Scheme FED JEEVAN will be entitled for the maturity value of FSF as insurance cover in case of death. The premium for the said coverage is paid by the Bank initially and renewed on an yearly basis and the same is deducted from the maturity value at the time of closing the account

(d) Current Deposit Account

Federal Current Deposit Account is designed to support its customers in their business deals. Federal Current Account gives the customers, access to a large network of Branches in India and also through our delivery channels. The benefits and features of the scheme include (a) flexibility (b) no restriction on remittance (c) no restriction on withdrawal (d) option to transact through anywhere banking services (AWB) (e) Low minimum balance (f) Daily / weekly / monthly statements through E-mail.

(e) Suraksha Deposits

The Suraksha Deposit Scheme has been designed for the benefit of those customers of the Bank who are senior citizens. This scheme provides for enhanced rates of interest, discounts on issues of Demand Drafts and discounted collection charges for instruments. All resident Indian customers of the bank aged 60 years and over are eligible for this scheme.

(f) Privilege Current Account

The Privilege Current Account is a product designed for the Bank’s business clients. This account provides facilities like personalised cheque books, free collection/ transfer facilities with low minimum balance stipulation and free execution of standing instruction/stop payment instruction. This facility is offered to customers of the Bank who maintain a stipulated monthly minimum balance in their account.

(2) SERVICES

(a) E com Services

The Bank provides an online payment system for its FedNet customers, which enables online payments for purchases made over the internet. The Bank has tied up with some of the leading shopping marts and establishments in India, of which some are exclusive for FedNet. The FedNet payment gateway enables the customers of the Bank to shop at more than 2000 web sites by making payments from their FedNet account. The Bank has tied up with IRCTC (Indian Railway Catering & Tourism Corporation Ltd.) for online railway reservations across India, which enables customers of the Bank to buy their the railway tickets. Similarly, the LIC premium payment system enables the customers to register their LIC policies with the Bank and make payments through FedNet. The Bank offers its customers the facility of paying their LIC premiums online from anywhere in the world at their convenience through FedNet. Customers are required to register the relevant LIC policies through FedNet prior to making payments. Any number of policies can be added to the customer's account.

(b) Retail Treasury Services

The Bank’s retail treasury desk at Kochi & Mumbai exclusively cater to the needs of the retail customers of the Bank. The Bank offers CSGL facility to those who desire to invest in government securities. The Bank offers the following services to the gilt account holders (i) dematerialisation of securities, (ii) subscription to government securities through competitive and non-competitive bidding, (iii) Provide market related quotes for security transaction on request, (iv) Undertake purchase and sale of government securities in the secondary market (v) Funds transfer facility for enabling securities’ transaction, (vi) Collection of periodical interest and redemption amount of the securities for credit to the savings bank/ current account (vii) Advisory services for purchase/sale of securities and for placing bids in security auctions.

The Bank presently offers structured derivative products to some of its customers. These products are typically used by them to hedge and manage their interest rate/ currency exposures/ balance sheet risks. In the present market scenario, where interest rate/ exchange rate movements are highly volatile, there is a growing demand for these products from the Bank’s customers including companies, institutions and high net worth individuals. The Derivative Desk at the Treasury Department caters to the needs of such customers of the Bank.

(d) Cash Management

The Cash Management Service (CMS) is provided by the Bank to needy customers for managing their funds by fast clearing of outstation cheques and instruments. In addition it also enables to centrally manage or pool the funds at a preferred branch. The facilities available under cash management services include (i) Collection of Local/ Outstation/Other Banks cheques/ demand drafts (ii) Payment of cheques at par (iii) Payment of Dividend Warrants (iv) Instant credit facility (v) Salary disbursal and (vi) Bill collection.

(e) Depository Services

The Bank is registered as Depository Participant with SEBI under SEBI (Depositories and Participants) Regulations, 1996 and in association with the National Securities Depository limited (NSDL), offers the whole range of depository services to investors such as (i) opening of accounts (ii) dematerialisation of shares (iii) holding securities in custody (iv) trading in electronic shares (v) rematerialisation of securities (vi) pledge/ hypothecation (vii) freezing/locking (viii) corporate action, etc.

(f) Lock Box Facility

The Bank offers its Lock box facility to its NRI clients in USA, in association with Bank of America. This service permits the prompt realization of the US$ personal cheques of Bank’s customers. The service permits customers of the Bank to deposit their personal cheques in a local Post Box of Bank of America in USA and get credits in their Federal Bank account in India expeditiously. Lock Box services avoid delay in realization, and additional cost on account of bank charges, postage etc.

(g) Insurance / Mutual Fund products

The Bank distributes life insurance policies through a tie up with ICICI Prudential Life Insurance Company Ltd. and for General Insurance, the Bank has a separate tie up with United India Insurance Co Ltd. The Bank also sells the mutual fund products of some of the well-known Asset Management Companies.

(3) DELIVERY CHANNELS

(a) Mobile Banking

The Bank's Mobile Banking Services enables customers to access their account details over their cellular phones. The Bank also has the Mobile Alert facility, which enables customers in any part of the world to receive instant alerts on transactions in their account in India on their cellular phone. The Mobile Banking facility is available to all savings bank, current deposit and overdraft account holders of the Bank.

(b) ATM

All the Bank’s ATMs are connected to the VISA network. Consequently, VISA cards (Debit or Credit) issued by the Bank can be used at the Bank’s ATM network for cash withdrawal or balance enquiry. Customers of the Bank can access banking facilities through the network of Bank’s interconnected ATMs spread across the country. Customers of the Bank can also utilise various banking services at any of the Bank’s ATMs irrespective of the Branch where their account is maintained. Apart from the normal features like cash withdrawal and remittance, customers can deposit cheques, transfer funds and make payments to third party accounts from the Bank’s ATM’s. Federal Bank has the second largest number of ATMs in Kerala, taking round-the-clock banking convenience to even rural areas.

The Bank offers VISA Electron Gold and Silver International Debit Cards, which permit customers to access their accounts from networked VISA ATM’s across the world. The Bank has a tie-up with ICICI Bank and offers co-branded credit cards to its customers for use at ATM’s / POS terminals.

97 d) FedNet (Internet Banking)

FedNet enables customers of the Bank to access their accounts and engage in transactions like funds transfers, opening of fixed deposits, obtain statements of accounts, request for Demand Drafts using an internet based interface. The FedNet facility is available to all customers of the Bank, free of cost. e) Call Centre

The Bank has maintained a centralized call centre to enable its customers to clarify their queries on any of the products or services offered by the Bank. The customer relationship managers at the Bank’s call centre collect relevant information from the Bank’s customers and resolve issues based on the same. The Bank’s call centre may be accessed through the telephone or by means of the internet. The call center has been established to provide round the clock services through out the year.

(f) Tele Banking

The centralised telebanking service provided by the bank enables its customers to carry out operations in relation to their accounts, like balance enquiry, cheque book request, etc over the telephone. The Bank provides this facility on a round the clock basis and has given a toll free number for this facility.

(4)DEPOSITS The category-wise break-up of total deposits during the last 5 years is as follows: (Rs. in crores) As at March 31, March 31, March 31, March 31, March 31, 2003 2004 2005 2006 2007 Demand Deposits 587.71 700.21 861.08 938.25 1,216.61 Savings Deposits 1,727.22 2,411.84 2,864.71 3,534.15 4,229.67 Term Deposits 8,632.49 10,364.63 11,467.09 13,406.34 16,138.16 Total Deposits 10,947.42 13,476.68 15,192.88 17,878.74 21,584.44

The total deposits of the Bank grew from Rs. 15193 crs. as on 31.03.2005 to Rs.21584 crs as on 31.03 07. The deposits for following the last three years are as under: (Rs. in crores) As on March 31, 2005 March 31, 2006 March 31, 2007 Deposits 15,192.88 17,878.74 21,584.44 Growth: Amount 1,716.20 2,685.86 3,705.70 Percent 12.73% 17.68% 20.73% Cost of Deposits (%) 5.08 5.11 5.55

The average cost of deposits (in percentage) is shown in the following table: As on March 31, 2005 March 31, 2006 March 31, 2007 Current Deposits 0 0 0 Savings Deposits 2.54 2.96 2.87 Term Deposits 6.08 6.03 6.66 Total Deposits 5.08 5.11 5.55

Maturity profile of the deposits for the last three years: (Rs. Crores) Residual Maturity March 31, 2005 March 31, 2006 March 31, 2007 Amount % Amount % Amount % 1 – 14 days 696.27 4.58 1028.02 5.75 1001.66 4.64 15 – 28 days 437.07 2.88 835.67 4.67 924.64 4.28 29 days to 3 months 2090.88 13.76 2557.20 14.30 2365.43 10.96 Over 3 months to 6 months 1636.71 10.77 2395.40 13.40 3524.17 16.33 Over 6 months to 1 year 3168.33 20.86 2311.28 12.93 4154.71 19.25 Over 1 year to 3 year 6654.63 43.80 8006.71 44.78 8685.13 40.24 Over 3 year to 5 year 240.66 1.58 471.45 2.65 688.50 3.19 Over 5 year 268.33 1.77 273.01 1.52 240.20 1.11 Total 15192.88 100.00 17878.74 100.00 21584.44 100.00

Category-wise break-up of Term Deposits as on March 31, 2007 is given below: (Break up of row 3.3 under ‘Outflows’ in the Statement of Structural Liquidity as on 31.03.2007) (Rs. Crores) Residual Maturity Retail Bulk Total 1 to 14 days 123.66 265.43 389.09 15 to 28 days 79.93 162.60 242.53 29 to 3 months 272.34 404.68 677.02 3 months to 6 months 536.16 653.54 1189.70 6 months to 1 year 659.31 944.18 1603.49 1 year to 3 years 736.37 346.06 1082.43 3 yr to 5 yr 180.35 9.33 189.68 Over 5 yr 6,611.85 6.75 6618.60 Total 9,199.97 2,792.57 11,992.54

Note: 1. The above figures relate to Term Deposits denominated in Rupee only and Term Deposits such as FCAB are excluded from the above figure. 2. Retail deposits in the above table include Resident Term Deposits of less than Rs. One Crore and all NRE Term Deposits, irrespective of the amount of Deposit. 3. The figures under ‘Bulk Deposits’ in the above table include only Resident Term Deposits of Rs. One Crore and above. 4. The Residual maturity pattern of Retail deposits given above is arrived at after treatment of behavioral pattern of renewal of term deposits, used in the Statement of Structural Liquidity.

REGULATORY SUPERVISION BY RBI

The Reserve Bank of India is the regulatory body for the Bank and the Bank strictly follows the norms laid down, guidelines and instructions issued by the Reserve Bank of India.

RBI conducts an annual financial inspection of the Banks based on the audited accounts. Simultaneously, RBI carries out branch inspection on a selective basis under Section 35 of the Banking Regulation Act, 1949. RBI also conducts offsite and periodic onsite surveillance of the branches of the Bank. Discussions with the management and replies given by the Bank to the issues raised by RBI also form part of the inspection and surveillance process.

The last inspection of the Bank under Section 35 of the Banking Regulation Act, 1949 was conducted by RBI with reference to its position as on 31 March 2006.

The inspection by RBI is a regular exercise and is carried out periodically by RBI for all banks and financial institutions. The reports of RBI are strictly confidential.

COMPETITION

The Bank faces competition in all its business areas. Bank’s primary competitors are public sector banks, and existing and new private sector banks.

Commercial Banking The Bank’s principal competitors in wholesale banking are public sector and new private sector banks as well as foreign banks. In commercial banking, the large public sector banks have traditionally been the market leaders.

Retail Banking In retail banking, the Bank’s principal competitors are the large public sector banks, as well as existing and new private sector banks and foreign banks that offer retail loan products. Although foreign banks have a small market penetration, they have a significant presence among the non-resident Indian community and also compete for non-branch based products such as auto loans and credit cards. Private sector and foreign banks compete through a wider product range offering greater technological sophistication.

Agriculture and Priority Segment In the agriculture and priority segments, the Bank’s principal competitors are the large public sector banks and RRBs. This is due to the extensive physical presence of public sector banks and RRBs throughout India vide their large branch networks and their continuing focus on agriculture and priority sectors that has traditionally existed among public sector banks.

Competition Policy

The competition has grown manifold after the economic liberalization, globalization, deregularization and subsequent opening up of the economy . The service industry is no exception to the philosophy that competition enhances efficiency. The banking industry in India has been facing stiff competition after the opening up of economy and liberalization that led to the entry of the new generation banks and foreign banks. The old private sector banks in the country are prone to the competition not only from their peers but also from new generation private sector banks, foreign banks and public sector banks apart from other financial institutions and NBFCs.

BUSINESS STRATEGY

The Bank is committed to become a technology driven bank having high standards in the banking industry. The bank is committed to provide high quality of service to the customers and maintain high corporate responsibility.

Increase Bank’s presence in retail banking The Bank offers value added products like ATM, internet banking, anywhere banking and mobile banking to improve the customer satisfaction levels and attract new customers, thereby increasing its presence in the high yielding retail sector. Bank intends to further enhance its retail deposit position by extensive marketing of its products and leveraging on its branch network in potential centres.

Fee based revenue The Bank aims to increase the fee based income by sale of life insurance products, general insurance products, and sale of mutual funds. Towards this goal, the Bank has entered into tie-ups with ICICI Prudential Life Insurance Company Limited, SBI Life Insurance, United India Insurance Company Limited and several asset management companies.

100 REGULATIONS AND POLICIES

The main legislation governing commercial banks in India is the Banking Regulation Act. Other important laws include the Reserve Bank of India Act, the Negotiable Instruments Act and the Banker’s Books Evidence Act. Additionally, the Reserve Bank of India, from time to time, issues guidelines to be followed by banks. Compliance with all regulatory requirements is evaluated with respect to financial statements under Indian GAAP.

Reserve Bank of India Regulations

Commercial banks in India are required under the Banking Regulation Act to obtain a license from the Reserve Bank of India to carry on banking business in India. Before granting the license, the Reserve Bank of India must be satisfied that certain conditions are complied with, including (i) that the bank has the ability to pay its present and future depositors in full as their claims accrue; (ii) that the affairs of the bank will not be or are not likely to be conducted in a manner detrimental to the interests of present or future depositors; (iii) that the bank has adequate capital and earnings prospects; and (iv) that the public interest will be served if such license is granted to the bank. The Reserve Bank of India can cancel the license if the bank fails to meet the above conditions or if the bank ceases to carry on banking operations in India.

The Bank, being licensed as a banking company are regulated and supervised by the Reserve Bank of India. The Reserve Bank of India requires us to furnish statements, information and certain details relating to our business. It has issued guidelines for commercial banks on recognition of income, classification of assets, valuation of investments, maintenance of capital adequacy and provisioning for non-performing assets. The Reserve Bank of India has set up a Board for Financial Supervision, under the chairmanship of the Governor of the Reserve Bank of India. The appointment of the auditors of banks is subject to the approval of the Reserve Bank of India. The Reserve Bank of India can direct a special audit in the interest of the depositors or in the public interest.

Regulations relating to the Opening of Branches

Section 23 of the Banking Regulation Act provides that banks must obtain the prior approval of the Reserve Bank of India to open new branches. Permission is granted based on factors such as the financial condition and history of the banking company, its management, adequacy of capital structure and earning prospects and the public interest. The Reserve Bank of India may cancel the license for violations of the conditions under which it was granted. Under the banking license granted to us by the Reserve Bank of India, the Bank is required to have at least 25.0% of its branches located in rural and semi-urban areas. A rural area is defined as a center with a population of less than 10,000. A semi-urban area is defined as a center with a population of greater than 10,000 but less than 100,000. These population figures relate to the 2001 census conducted by the Government of India. In September 2005, the Reserve Bank of India issued a new branch authorization policy in terms of which the system of granting authorizations for opening individual branches from time to time was replaced by a system of aggregated approvals on an annual basis. The Reserve Bank of India discusses with individual banks their branch expansion strategies and plans over the medium term. The term “branch” for this purpose has been defined to also include extension counters, offsite ATMs, administrative offices and back offices. While processing authorization requests, the Reserve Bank of India gives importance to the nature and scope of banking services particularly in under-banked areas, actual credit flow to the priority sector and efforts to promote financial inclusion, the need to induce enhanced competition in the banking sector, the bank’s regulatory compliance, quality of governance, risk management and relationships with subsidiaries and affiliates.

Capital Adequacy Requirements

The total capital of a banking company is classified into Tier I and Tier II capital. Tier I capital, the core capital, provides the most permanent and readily available support against unexpected losses. It comprises paid-up capital, reserves consisting of any statutory reserves, other disclosed free reserves as reduced by equity investments in subsidiaries, intangible assets and losses in the current period and those brought forward from the previous period. In fiscal 2003, the Reserve Bank of India issued a guideline requiring a bank’s deferred tax asset to be treated as an intangible asset and deducted from its Tier I capital.

101 Tier II capital includes undisclosed reserves, revaluation reserves (at a discount of 55.0%), general provisions and loss reserves (allowed up to a maximum of 1.25% of risk weighted assets), hybrid debt capital instruments (which combine certain features of both equity and debt securities and are able to support losses on an ongoing basis without triggering liquidation), subordinated debt. Any subordinated debt is subject to progressive discounts each year for inclusion in Tier II capital and total subordinated debt considered as Tier II capital cannot exceed 50.0% of Tier I capital. Tier II capital cannot exceed Tier I capital.

In January 2006, the Reserve Bank of India issued guidelines permitting banks to issue perpetual debt with a call option which may be exercised after not less than 10 years, with its prior approval, for inclusion in Tier I capital up to a maximum of 15% of total Tier I capital, The Reserve Bank of India also permitted banks to issue debt instruments with a minimum maturity of 15 years and a call option after not less than 10 years, to be exercised with its prior approval, for inclusion in Tier II capital. In July 2006, the Reserve Bank of India issued guidelines permitting the issuance of Tier I and Tier II debt instruments denominated in foreign currencies.

Risk adjusted assets and off-balance sheet items considered for determining the capital adequacy ratio are the risk weighted total of specified funded and non-funded exposures. Degrees of credit risk expressed as percentage weighting have been assigned to various balance sheet asset items and conversion factors to off- balance sheet items. The value of each item is multiplied by the relevant weight or conversion factor to produce risk-adjusted values of assets and off-balance-sheet items. Standby letters of credit and guarantees are treated as similar to funded exposure and are subject to similar risk weight. All foreign exchange open positions carry a 100.0% risk weight. Capital requirements have also been prescribed for open positions in gold. Since fiscal 2004, the Reserve Bank of India has increased risk weights on various categories of loans. Currently residential mortgages are risk weighted at 75.0% (other than loans below Rs 20 lakhs with loan-to-values ratio below 75.0%, which are risk weighted at 50.0%), consumer credit and advances included in capital market exposure at 125.0%, exposure to commercial real estate and venture capital funds at 150.0% and other loans/credit exposures at 100.0%. The Reserve Bank of India issued guidelines on securitization of standard assets on February 1, 2006. The guidelines define true sale, criteria to be met by special purpose vehicles set up for securitization, policy on provision of credit enhancement facilities, liquidity facilities, underwriting facilities and provision of services. The guidelines also cover capital requirements on securitization, prudential norms for investment in securities issued by special purpose vehicles, accounting treatment of the securitization transactions and disclosure requirements.

Effective March 31, 2001, banks and financial institutions were required to assign a risk weight of 2.5% in respect of the entire investment portfolio to cover market risk, over and above the existing risk weights for credit risk in non-government and non-approved securities. In fiscal 2002, with a view to the building up of adequate reserves to guard against any possible reversal of the interest rate environment in the future due to unexpected developments, the Reserve Bank of India advised banks to build up an investment fluctuation reserve of a minimum of 5.0% of the bank’s investment portfolio within a period of five years, by fiscal 2006. This reserve had to be computed with respect to investments in held for trading and available for sale categories. Investment fluctuation reserve is included in Tier II capital. In June 2004, the Reserve Bank of India issued guidelines on capital for market risk. The guidelines prescribe the method of computation of risk-weighted assets in respect of market risk. The aggregate risk weighted assets are required to be taken into account for determining the capital adequacy ratio. Banks were required to maintain a capital charge for market risk in respect of their trading book exposure (including derivatives) by year-end fiscal 2005 and securities included under available for sale category by year-end fiscal 2006. In October 2005, the Reserve Bank of India specified that banks that maintain capital for both credit risk and market risk for both held for trading and available for sale categories at year-end fiscal 2006 would be permitted to treat the entire balance in the investment fluctuation reserve as Tier I capital.

In April 2007, the Reserve Bank of India issued final guidelines for the implementation of a revised capital adequacy framework that would be effective year-end fiscal 2008 for us.The guidelines for the capital adequacy framework include an increase in the minimum Tier-1 CAR from 4.5% to 6.0% and, the introduction of capital for operational risk as per Basel II. Further, the risk weight for consumer credit and residential mortgages will continue to remain at 125% and 75% (risk weights for residential mortgage loans of less than Rs. 20 lakhs with loan-to-value ratio of less than 75% would be 50%). The capital adequacy norms stipulate a capital charge on undrawn commitments. The norms also increase the risk-weightage for domestic corporates (for loans greater than Rs. 10 Crores) without a solicited external rating to 150% in a phased manner as compared to 100% currently. Similarly, non-resident corporates (for loans greater than Rs. 10 Crores) without a rating from an international rating agency would attract 150% risk weightage in a pahased manner compared to 100% currently.

102 Loan Loss Provisions and Non-Performing Assets

In April 1992, the Reserve Bank of India issued formal guidelines on income recognition, asset classification, provisioning standards and valuation of investments , which are revised from time to time.

The principal features of these Reserve Bank of India guidelines, which have been implemented with respect to our loans, debentures, lease assets, hire purchases and bills are set forth below.

The Reserve Bank of India guidelines stipulate the criteria for determining and classifying a non-performing asset set forth below:

Asset Classification

A non-performing asset is an asset in respect of which any amount of interest or principal is overdue for more than 90 days (180 days until year-end fiscal 2003). In particular, an advance is a non-performing asset where:

• interest and/or installment of principal remains overdue for a period of more than 90 days in respect of a term loan;

• the account remains “out-of-order” (as defined below) for a period of more than 90 days in respect of an overdraft or cash credit;

• the bill remains overdue for a period of more than 90 days in case of bills purchased and discounted;

• installment of principal or interest remains overdue for two harvest seasons for short duration crops or for one harvest season for long duration crops; or

• any amount to be received remains overdue for a period of more than 90 days in respect of other accounts.

An account should be treated as “out-of-order” if the outstanding balance remains continuously in excess of the sanctioned drawing limit. In circumstances where the outstanding balance in the principal operating account is less than the sanctioned drawing limit, but (i) there are no credits continuously for a period of 90 days as of the date the balance sheet of the Bank or (ii) the credits are not sufficient to cover the interest debited during the same period, these accounts should be treated as “out-of-order”.

Interest in respect of non-performing assets is not recognized or credited to the income account unless collected.

Non-performing assets are classified as described below.

Sub-Standard Assets. Assets that are non-performing assets for a period not exceeding 12 months (18 months until year-end fiscal 2004). In such cases, the current net worth of the borrower/guarantor or the current market value of the security charged is not enough to ensure recovery of dues to the banks in full. Such an asset has well-defined credit weaknesses that jeopardize the liquidation of the debt and are characterized by the distinct possibility that the bank will sustain some loss, if deficiencies are not corrected.

Doubtful Assets. Assets that are non-performing assets for more than 12 months (18 months until year-end fiscal 2004). A loan classified as doubtful has all the weaknesses inherent in assets that are classified as sub-standard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently known facts, conditions and values, highly questionable and improbable.

Loss Assets. Assets on which losses have been identified by the bank or internal or external auditors or the Reserve Bank of India inspection but the amount has not been written off fully.

There are separate guidelines for projects under implementation which are based on the achievement of financial closure and the date of approval of the project financing.

The Reserve Bank of India also has separate guidelines for restructured loans. A fully secured restructured standard loan can be restructured by reschedulement of principal repayment and/or the interest element, but must be separately disclosed as a restructured loan. The amount of sacrifice, if any, in the element of interest, measured in present value terms, is either written off or provision is made to the extent of the sacrifice involved. Similar guidelines are applicable to sub-standard assets. The sub-standard accounts which have been subjected to restructuring, whether in respect of principal installment or interest amount, by whatever modality, are eligible to be upgraded to the standard category only after the specified period, i.e., a period of one year after the

103 date when first payment of interest or of principal, whichever is earlier, falls due, subject to satisfactory performance during the period.

To put in place an institutional mechanism for the restructuring of corporate debt, the Reserve Bank of India has devised a corporate debt restructuring system. See “Industry Overview—Corporate Debt Restructuring” on page [z].

Provisioning and Write-Offs

Provisions are based on guidelines specific to the classification of the assets. The following guidelines apply to the various asset classifications:

Standard Assets. A general provision of 0.40% (0.25% upto fiscal 2005) is required (excluding direct advances to the agriculture and small and medium enterprise sectors for which the requirement continues to be 0.25%). In fiscal 2007, the Reserve Bank of India increased the general provisioning requirement for standard advances in specific sectors from 0.40% to 1.00%.

i) 0.55% by June 30, 2006;

ii) 0.70% by September 30, 2006;

iii) 0.85% by December 31, 2006; and

iv) 1.00% by March 31, 2007.

In January 2007, the Reserve Bank of India increased the general provisioning requirement for real estate sector loans (excluding residential housing loans), credit card receivables, loans and advances qualifying as capital market exposure, personal loans and exposures to non-deposit taking systemically important non-banking financial companies to 2.0%.

1. Sub-Standard Assets. A general provision of 10.0% of the total outstanding is required. However, unsecured exposures which are identified as substandard would attract an additional provision of 10.0%, i.e., a total of 20.0% on the outstanding balance.

2. Doubtful Assets. A 100.0% write-off is required to be taken against the unsecured portion of the doubtful asset and charged against income. The value assigned to the collateral securing a loan is the amount reflected on the borrower’s books or the realizable value determined by third party appraisers. 100.0% provision is required for the secured portion of assets classified as doubtful for more than three years.

3. Loss Assets. The entire asset is required to be written off or provided for, i.e., a 100.0% provision.

4. Restructured Loans. The amount of sacrifice, if any, in the element of interest, measured in present value terms, is either written off or provision is made to the extent of the sacrifice involved.

In June 2006, the Reserve Bank of India issued prudential norms on creation and utilization of floating provisions (i.e., provisions which are not made in respect of specific non-performing assets or are made in excess of regulatory requirements for provisions for standard assets). The norms state that floating provisions can be used only for contingencies under extraordinary circumstances for making specific provisions in impaired accounts after obtaining approval from the Board of Directors and with the prior permission of the Reserve Bank of India. Floating provisions for advances and investments would be held separately and cannot be reversed by credit to the profit and loss account. Until utilization of such provisions, they can be netted off from gross non performing assets to arrive at disclosure of net non performing assets. Alternatively, floating provisions can be treated as part of Tier II capital within the overall ceiling of 1.25% of total risk-weighted assets. Floating provisions do not include specific voluntary provisions made by banks for advances which are higher than the minimum provision stipulated by the RBI guidelines.

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Regulations relating to making Loans

The provisions of the Banking Regulation Act govern the making of loans by banks in India. The Reserve Bank of India issues directions covering the loan activities of banks. Some of the major guidelines of the Reserve Bank of India, which are now in effect, are as follows:

The Reserve Bank of India has prescribed norms for bank lending to non-bank financial companies and financing of public sector disinvestment.

Banks are free to determine their own lending rates but each bank must declare its prime lending rate as approved by its Board of Directors. Banks are required to declare a benchmark prime lending rate based on various parameters including cost of funds, non-interest expense, capital charge and profit margin. Each bank should also indicate the maximum spread over the prime lending rate for all credit exposures other than retail loans. The interest charged by banks on advances up to Rs. 200,000 to any one entity (other than certain permitted types of loans including loans to individuals for acquiring residential property, loans for purchase of consumer durables and other non-priority sector personal loans) must not exceed the prime lending rate. Banks are also given freedom to lend at a rate below the prime lending rate in respect of creditworthy borrowers and exposures. Interest rates for certain categories of advances are regulated by the Reserve Bank of India.

In May 2007 the Reserve Bank of India notified that the boards of banks should lay down internal principles and procedures so that interest rates charged by banks are in conformity with normal banking prudence.

In terms of Section 20(1) of the Banking Regulation Act, a bank cannot grant any loans and advances against the security of its own shares, a banking company is prohibited from entering into any commitment for granting any loans or advances to or on behalf of any of its directors, or any firm in which any of its directors is interested as partner, manager, employee or guarantor, or any company (not being a subsidiary of the banking company or a company registered under Section 25 of the Companies Act, 1956, or a government company) of which, or the subsidiary or the holding company of which any of the directors of the bank is a director, managing agent, manager, employee or guarantor or in which he holds substantial interest, or any individual in respect of whom any of its directors is a partner or guarantor. There are certain exemptions in this regard as the explanation to the section provides that ‘loans or advances’ shall not include any transaction which the Reserve Bank of India may specify by general or special order as not being a loan or advance for the purpose of such section.

There are guidelines on loans against equity shares in respect of amount, margin requirement and purpose.

In June 2005, the Reserve Bank of India issued guidelines requiring banks to put in place a policy for exposure to real estate with the approval of their boards. The policy is required to include exposure limits, collaterals to be considered, collateral cover and margins and credit authorization. The Reserve Bank of India has also permitted banks to extend financial assistance to Indian companies for acquisition of equity in overseas joint ventures or wholly owned subsidiaries or in other overseas companies, new or existing, as strategic investment. Banks are not permitted to finance acquisitions by companies in India.

Regulations relating to Sale of Assets to Asset Reconstruction Companies

The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, as amended, provides for sale of financial assets by banks and financial institutions to asset reconstruction companies. The Reserve Bank of India has issued guidelines to banks on the process to be followed for sales of financial assets to asset reconstruction companies. These guidelines provide that a bank may sell financial assets to an asset reconstruction company provided the asset is a non-performing asset. These assets are to be sold on ‘without recourse’ basis only. A bank may sell a standard asset only if the borrower has a consortium or multiple banking arrangement, at least 75.0% by value of the total loans to the borrower are classified as non- performing and at least 75.0% by value of the banks and financial institutions in the consortium or multiple banking arrangement agree to the sale. The banks selling financial assets should ensure that there is no known liability devolving on them and that they do not assume any operational, legal or any other type of risks relating to the financial assets sold. Further, banks may not sell financial assets at a contingent price with an agreement to bear a part of the shortfall on ultimate realization. However, banks may sell specific financial assets with an agreement to share in any surplus realized by the asset reconstruction company in the future. While each bank is required to make its own assessment of the value offered in the sale before accepting or rejecting an offer for purchase of financial assets by an asset reconstruction company, in consortium or multiple banking

105 arrangements where more than 75.0% by value of the banks or financial institutions accept the offer, the remaining banks or financial institutions are obliged to accept the offer. Consideration for the sale may be in the form of cash, bonds or debentures or security receipts or pass through certificates issued by the asset reconstruction company or trusts set up by it to acquire the financial assets. See also “Overview of the Indian Financial Sector—Recent Structural Reforms—Legislative Framework for Recovery of Debts Due to Banks”on page [ z].

Guidelines on Sale and Purchase of Non-performing Assets

In July 2005, the Reserve Bank of India issued guidelines on sales and purchases of non-performing assets between banks, financial institutions and non-bank finance companies. These guidelines require that the Board of Directors of the bank must establish a policy for purchases and sales of non-performing assets. Purchases and sales of non-performing assets must be without recourse to the seller and on a cash basis, with the entire consideration being paid upfront. An asset must have been classified as non-performing for at least two years by the seller to be eligible for sale. The purchasing bank must hold the non-performing asset on its books for at least 15 months before it can sell the asset to another bank. The asset cannot be sold back to the original seller.

Classification of SMEs

Directed Lending

Priority Sector Lending

Till fiscal 2007 the Reserve Bank of India’s directed lending norms required commercial banks to lend a certain percentage of their net bank credit to specific sectors (the priority sectors), such as agriculture, small-scale industry, small businesses and housing finance. Total priority sector advances were set at 40.0% of net bank credit with agricultural advances required to be 18.0% of net bank credit and advances to weaker sections required to be at 10.0% of the net bank credit, and 1.0% of the previous year’s total advances outstanding is required to be lent under the Differential Rate of Interest scheme. Any shortfall in the amount required to be lent to the priority sectors may be required to be deposited with the National Bank for Agriculture and the Rural Development. These deposits have a maturity period of one year to seven years.

Effective fiscal 2008 the Reserve Bank of India has linked the priority sector lending targets to adjusted net bank credit (net bank credit plus investments made by banks in non-statutory liquidity bonds included in the held to maturity category and excluding recapitalisation bonds floated by the government) or credit equivalent amount of off-balance sheet exposure, whichever is higher.

Export Credit

The Reserve Bank of India also requires commercial banks to make loans to exporters at concessional rates of interest. This enables exporters to have access to an internationally competitive financing option. Pursuant to existing guidelines, 12.0% of a bank’s net bank credit is required to be in the form of export credit. The Bank provides export credit for pre-shipment and post-shipment requirements of exporter borrowers in rupees and foreign currencies.

Credit Exposure Limits

As a prudent measure aimed at better risk management and avoidance of concentration of credit risk, the Reserve Bank of India has prescribed credit exposure limits for banks and long-term lending institutions in respect of their lending to individual borrowers and to all companies in a single group (or sponsor group).

The limits currently set by the Reserve Bank of India are as follows:

1. The exposure ceiling for a single borrower is 15.0% of capital funds and group exposure limit is 40.0% of capital funds. In case of financing for infrastructure projects, the exposure limit to a single borrower is extendable by another 5.0%, i.e., up to 20.0% of capital funds and the group exposure limit is extendable by another 10.0%, i.e., up to 50.0% of capital funds. Banks may, in exceptional circumstances, with the approval of their Board of Directors, consider enhancement of the exposure to a borrower up to a maximum of further 5.0% of capital funds, subject to the borrower consenting to the banks making appropriate disclosures in their annual reports.

2. Capital funds is the total capital as defined under capital adequacy norms (Tier I and Tier II capital).

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3. Exposure shall include credit exposure (funded and non-funded credit limits) and investment exposure (including underwriting and similar commitments). Non-fund based exposures are calculated at 100.0% and in addition, banks include forward contracts in foreign exchange and other derivative products, like currency swaps and options, at their replacement cost value in determining individual or group borrower exposure ceilings, effective April 1, 2003.

To ensure that exposures are evenly spread, the Reserve Bank of India requires banks to fix internal limits of exposure to specific sectors. These limits are subject to periodical review by the banks. The Bank has fixed a ceiling of 5% on its exposure to any one industry (other than retail loans) and monitors our exposures accordingly.

Limits on exposure to Non-Banking Finance Companies

On December 12, 2006, the Reserve Bank of India issued guidelines on the financial regulation of systemically important non-banking financial companies and banks' relationship with them with a view to remove the possibility of regulatory arbitrage leading to an uneven playing field and potential systemic risk. Within non deposit taking non-banking financial companies, the guidelines classify those with an asset size above Rs. 1.00 billion as per the last audited balance sheet as systemically important. These non-banking financial companies are required to maintain a minimum capital to risk weighted assets ratio of 10.0%, in addition to conforming with single and group exposure norms. The guidelines restrict banks' holding in a deposit taking non-banking financial company, excluding housing finance companies, to 10.0% of the paid up equity capital of the entity. The total exposure to a single non-banking financial company has been limited to 10.0% of the bank's capital fund while exposure to a non-banking asset finance company has been restricted to 15.0% of the bank's capital fund. The limit may be increased to 15.0% and 20.0% respectively provided that the excess exposure is on account of funds lent by the non-banking finance company to infrastructure sectors.

Regulations relating to Investments and Capital Market Exposure Limits

Pursuant to the Reserve Bank of India guidelines, a bank’s exposure to capital markets by way of investments in shares, convertible debentures, units of equity oriented mutual funds and loans to brokers, should not exceed 40% of its net worth on a solo and consolidated basis and the consolidated direct capital market exposure to 20% of the consolidated net worth. Within this limit direct investments in shares, convertible bonds/ debentures, units of equity oriented mutual funds and all exposures to venture capital funds have been restricted to 20.0% of their net worth.

In November 2003, the Reserve Bank of India issued guidelines on investments by banks in non-Statutory Liquidity Ratio securities issued by companies, banks, financial institutions, central and state government sponsored institutions and special purpose vehicles. These guidelines apply to primary market subscriptions and secondary market purchases. Pursuant to these guidelines, banks are prohibited from investing in non-Statutory Liquidity Ratio securities with an original maturity of less than one year, other than commercial paper and certificates of deposits. Banks are also prohibited from investing in unrated securities. A bank’s investment in unlisted non-Statutory Liquidity Ratio securities may not exceed 10.0% of its total investment in non-Statutory Liquidity Ratio securities as at the end of the preceding fiscal year with a sub-ceiling of 5.0% for investments in bonds of public sector undertakings. These guidelines do not apply to investments in security receipts issued by securitization or reconstruction companies registered with Reserve Bank of India and asset backed securities and mortgage backed securities with a minimum investment grade credit rating. These guidelines were effective April 1, 2004, with provision for compliance in a phased manner by January 1, 2005.

In April 1999, the Reserve Bank of India, in its monetary and credit policy, stated that the investment by a bank in subordinated debt instruments, representing Tier II capital, issued by other banks and financial institutions should not exceed 10.0% of the investing bank’s capital including Tier II capital and free reserves. In July 2004, the Reserve Bank of India imposed a ceiling of 10.0% of capital funds (Tier I plus Tier II capital) on investments by banks and financial institutions in equity shares, preference shares eligible for capital status, subordinated debt instruments, hybrid debt capital instruments and any other instrument approved as in the nature of capital, issued by other banks and financial institutions. Investments in the instruments which are not deducted from Tier I capital of the investing bank or financial institution, are subject to a 100.0% risk weight for credit risk for capital adequacy purposes. The risk weight for credit risk exposure in capital markets has been increased to 125.0% from 100.0% in July 2005. Further, banks and financial institutions cannot acquire any fresh stake in a bank’s equity shares, if by such acquisition, the investing bank’s or financial institution’s

107 holding exceeds 5.0% of the investee bank’s equity capital. Banks with investments in excess of the prescribed limits were required to apply to the Reserve Bank of India with a roadmap for reduction of the exposure.

Consolidated Supervision Guidelines

In fiscal 2003, the Reserve Bank of India issued guidelines for consolidated accounting and consolidated supervision for banks. These guidelines became effective April 1, 2003. The principal features of these guidelines are:

Consolidated Financial Statements. Banks are required to prepare consolidated financial statements intended for public disclosure.

Consolidated Prudential Returns. Banks are required to submit to the Reserve Bank of India, consolidated prudential returns reporting their compliance with various prudential norms on a consolidated basis, excluding insurance subsidiaries. Compliance on a consolidated basis is required in respect of the following main prudential norms:

• Single borrower exposure limit of 15.0% of capital funds (20.0% of capital funds provided the additional exposure of up to 5.0% is for the purpose of financing infrastructure projects);

• Borrower group exposure limit of 40.0% of capital funds (50.0% of capital funds provided the additional exposure of up to 10.0% is for the purpose of financing infrastructure projects);

• Deduction from Tier I capital of the bank, of any shortfall in capital adequacy of a subsidiary for which capital adequacy norms are specified; and

• Consolidated capital market exposure limit of 2.0% of consolidated total assets and 10.0% of consolidated net worth.

In June 2004, the Reserve Bank of India published the report of a working group on monitoring of financial conglomerates, which proposed the following framework:

• identification of financial conglomerates that would be subjected to focused regulatory oversight;

• monitoring intra-group transactions and exposures and large exposures of the group to outside counter parties;

• identifying a designated entity within each group that would collate data in respect of all other group entities and furnish the same to its regulator; and

• formalizing a mechanism for inter-regulatory exchange of information.

The framework covers entities under the jurisdiction of the Reserve Bank of India, the Securities and Exchange Board of India, the Insurance Regulatory and Development Authority and the National Housing Bank and would in due course be extended to entities regulated by the proposed Pension Fund Regulatory and Development Authority.

Banks’ Investment Classification and Valuation Norms

The key features of the Reserve Bank of India guidelines on categorization and valuation of banks’ investment portfolio are given below.

• The entire investment portfolio is required to be classified under three categories: (a) held to maturity, (b) held for trading and (c) available for sale. Held to maturity includes securities acquired with the intention of being held up to maturity; held for trading includes securities acquired with the intention of being traded to take advantage of the short-term price/interest rate movements; and available for sale includes securities not included in held to maturity and held for trading. Banks should decide the category of investment at the time of acquisition.

• Held to maturity investments compulsorily include (a) recapitalization bonds received from the Government of India towards their re-capitalization requirement and held in their investment portfolio, (b) investments in subsidiaries and joint ventures and (c) investments in debentures deemed as advance. Held to maturity investments also include any other investment identified for inclusion in this category

108 subject to the condition that such investments cannot exceed 25.0% of the total investment excluding recapitalization bonds and debentures.

• Profit on the sale of investments in the held to maturity category, net of tax and statutory reserve, is appropriated to the capital reserve account after being taken in the income statement. Loss on any sale is recognized in the income statement.

• The market price of the security available from the stock exchange, the price of securities in subsidiary general ledger transactions, the Reserve Bank of India price list or prices declared by Primary Dealers Association of India jointly with the Fixed Income Money Market and Derivatives Association of India serves as the “market value” for investments in available for sale and held for trading securities.

• Investments under the held for trading category should be sold within 90 days; in the event of inability to sell due to adverse factors including tight liquidity, extreme volatility or a unidirectional movement in the market, the unsold securities should be shifted to the available for sale category.

• Profit or loss on the sale of investments in both held for trading and available for sale categories is taken in the income statement.

• Shifting of investments from or to held to maturity may be done with the approval of the Board of Directors once a year, normally at the beginning of the accounting year; shifting of investments from available for sale to held for trading may be done with the approval of the Board of Directors, the Asset Liability Management Committee or the Investment Committee; shifting from held for trading to available for sale is generally not permitted.

In September 2004, the Reserve Bank of India announced that it would set up an internal group to review the investment classification guidelines to align them with international practices and the current state of risk management practices in India, taking into account the unique requirement applicable to banks in India of maintenance of a statutory liquidity ratio equal to 25.0% of their demand and time liabilities. In the meanwhile, the Reserve Bank of India has permitted banks to exceed the limit of 25.0% of investments for the held to maturity category provided the excess comprises only statutory liquidity ratio investments and the aggregate of such investments in the held to maturity category do not exceed 25.0% of the demand and time liabilities. The Reserve Bank of India permitted banks to transfer additional securities to the held to maturity category as a one time measure, in addition to the transfer permitted under the earlier guidelines. The transfer has to be done at the lower of acquisition cost, book value or market value on the date of transfer.

Held to maturity securities are not marked to market and are carried at acquisition cost or at an amortized cost if acquired at a premium over the face value.

Available for sale and held for trading securities are valued at market or fair value as at the balance sheet date. Depreciation or appreciation for each basket within the available for sale and held for trading categories is aggregated. Net appreciation in each basket, if any, that is not realized is ignored, while net depreciation is provided for.

Investments in security receipts or pass through certificates issued by asset reconstruction companies or trusts set up by asset reconstruction companies should be valued at the net asset value announced periodically by the asset reconstruction company based on the valuation of the underlying assets.

Limit on Transactions through Individual Brokers

Guidelines issued by the Reserve Bank of India require banks to empanel brokers for transactions in securities. These guidelines also require that a disproportionate part of the bank’s business should not be transacted only through one broker or a few brokers. The Reserve Bank of India specifies that not more than 5.0% of the total transactions through empanelled brokers can be transacted through one broker. If for any reason this limit is breached, the Reserve Bank of India has stipulated that the Board of Directors of the bank concerned should ratify such action.

Prohibition on Short-Selling

The Reserve Bank of India does not permit short selling of securities by banks excluding intra-day short selling in Central Government securities. The Reserve Bank of India has permitted banks to sell Government of India securities already contracted for purchase provided the purchase contract is confirmed and the contract is

109 guaranteed by Clearing Corporation of India Limited or the security is contracted for purchase from the Reserve Bank of India. Each security is deliverable or receivable on a net basis for a particular settlement cycle.

In February 2006, the Reserve Bank of India introduced intra-day short selling in Central Government securities as a measure to develop the Central Government securities market. In its Annual Policy Statement for fiscal 2007, the Reserve Bank of India proposed to introduce a ‘when issued’ market in government securities in order to further strengthen the debt management framework. In January 2007 the Reserve Bank of India permitted Scheduled Commercial Banks and Primary Dealers (PDs) to undertake short sale of Central Government dated securities, subject to the short position being covered within a maximum period of 5 trading days, including the day of trade. The short positions shall have to be covered only by outright purchase of an equivalent amount of the same security.

Subsidiaries and Other Financial Sector Investments

The Bank needs the prior permission of the Reserve Bank of India to incorporate a subsidiary. We are required to maintain an “arms’ length” relationship with its subsidiaries and with mutual funds sponsored by us in regard to business parameters such as taking undue advantage in borrowing/lending funds, transferring/selling/buying of securities at rates other than market rates, giving special consideration for securities transactions, in supporting/financing the subsidiary and financing the Bank’s clients through them when the Bank is not able or not permitted to do so itself. The Bank has to observe the prudential norms stipulated by the Reserve Bank of India, from time to time, in respect of its underwriting commitments. Pursuant to such prudential norms, our underwriting or the underwriting commitment of our subsidiaries under any single obligation shall not exceed 15.0% of an issue. We also need the prior specific approval of the Reserve Bank of India to participate in the equity of financial services ventures including stock exchanges and depositories notwithstanding the fact that such investments may be within the ceiling (the lower of 30.0% of the paid-up capital of the investee company and 30.0% of the investing bank’s own paid up capital and reserves) prescribed under Section 19(2) of the Banking Regulation Act. Our investment in a subsidiary company, financial services company, financial institution and stock and other exchanges cannot exceed 10.0% of its paid-up capital and reserves and the Bank’s aggregate investments in all such companies, financial institutions, stock and other exchanges put together cannot exceed 20.0% of its paid-up capital and reserves. In August 2006, the Reserve Bank of India issued guidelines which included banks’ investments in venture capital funds in this limit

Regulations relating to Deposits

The Reserve Bank of India has permitted banks to independently determine rates of interest offered on term deposits. However, banks are not permitted to pay interest on current account deposits. Further, banks may only pay interest of up to 3.5% per annum on savings deposits.

Domestic time deposits have a minimum maturity of seven days. Time deposits from non-resident Indians denominated in foreign currency have a minimum maturity of one year and a maximum maturity of three years.

Starting April 1998, the Reserve Bank of India has permitted banks the flexibility to offer varying rates of interests on domestic deposits of the same maturity subject to the following conditions:

• Time deposits are of Rs.15 lakhs and above; and

• Interest on deposits is paid in accordance with the schedule of interest rates disclosed in advance by the bank and not pursuant to negotiation between the depositor and the bank.

Interest rates on non-resident rupee term deposits of one to three years maturity are not permitted to exceed the LIBOR/SWAP rates for US dollar of corresponding maturity. Interest rates on non-resident rupee savings deposits are not permitted to exceed the LIBOR/SWAP rate plus 50 basis points for six months maturity on US dollar deposits and are fixed quarterly on the basis of the LIBOR/SWAP rate of US dollar on the last working day of the preceding quarter. In the Annual Policy Statement for fiscal 2008 the Reserve Bank of India reduced the interest rates on non-resident foreign currency savings deposits by 50 basis points to LIBOR/SWAP minus 75 basis points. On November 17, 2005, the Reserve Bank of India had revised the interest rate on non-resident rupee term deposits of one to three years to LIBOR/SWAP rate plus 75 basis points. In the Annual Policy Statement for fiscal 2008 announced in April 2008 the Reserve Bank of India reduced the interest rate on non- resident rupee term deposits of one to three years by 50 basis points to the LIBOR/SWAP rate. The interest rate on non-resident savings deposits is at rate applicable to domestic savings deposits.

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Regulations relating to Knowing the Customer and Anti-Money Laundering

The Reserve Bank of India issued a notification dated November 29, 2004 prescribing guidelines for Know Your Customer and anti money laundering procedures. Banks are required to have a customer acceptance policy laying down explicit criteria for acceptance of customers and defining risk parameters. A profile of the customers should be prepared based on risk categorization. Banks have been advised to apply enhanced due diligence for high-risk customers. The guidelines provide that banks should undertake customer identification procedures while establishing a banking relationship or carrying out a financial transaction or when the bank has a doubt about the authenticity or the adequacy of the previously obtained customer identification data. Banks need to obtain sufficient information necessary to establish the identity of each new customer and the purpose of the intended banking relationship. The guidelines also provide that banks should monitor transactions depending on the account’s risk sensitivity. In February 2006, the Reserve Bank of India issued guidelines on the obligations of banks under the Prevention of Money Laundering Act, 2002. The Reserve Bank of India also issued anti money laundering guidelines to other entities such as non-bank finance companies and authorized money changers.

In August 2005, the Reserve Bank of India has simplified the KYC procedure for opening accounts for those persons who intend to keep balances not exceeding Rs. 50,000 in all their accounts taken together and the total credit in all the accounts taken together is not expected to exceed Rs. 100,000 in a year in order to ensure that the implementation of the KYC guidelines do not result in the denial of the banking services to those who are financially or socially disadvantaged.

The Indian Parliament had enacted the Prevention of Money Laundering Act in 2002. Effective July 1, 2005, the provisions of this Act have come into force. The Act seeks to prevent money laundering and to provide for confiscation of property derived from, or involved in, money laundering. In addition, the applicable exchange control regulations prescribe reporting mechanisms for transactions in foreign exchange and require authorized dealers to report identified suspicious transactions to the Reserve Bank of India. In December 2004, the Indian Parliament passed the Unlawful Activities (Prevention) Amendment Ordinance/Act, 2004 incorporating the provisions considered necessary to deal with various facets of terrorism. The Narcotic Drugs and Psychotropic Substances Act, 1985 deals with proceeds of drug related crime.

Regulations on Asset Liability Management

At present, the Reserve Bank of India’s regulations for asset liability management require banks to draw up asset-liability gap statements separately for rupee and for four major foreign currencies. These gap statements are prepared by scheduling all assets and liabilities according to the stated and anticipated re-pricing date, or maturity date. These statements have to be submitted to the Reserve Bank of India on a quarterly basis. The Reserve Bank of India has advised banks to actively monitor the difference in the amount of assets and liabilities maturing or being re-priced in a particular period and place internal prudential limits on the gaps in each time period, as a risk control mechanism. Additionally, the Reserve Bank of India has asked banks to manage their asset-liability structure such that the negative liquidity gap in the 1-14 day and 15–28 day time periods does not exceed 20.0% of cash outflows in these time periods. This 20.0% limit on negative gaps was made mandatory with effect from April 1, 2000. In respect of other time periods, up to one year, the Reserve Bank of India has directed banks to lay down internal norms in respect of negative liquidity gaps. In April 2006, the Reserve Bank of India issued draft guidelines on improvements to banks’ asset liability management framework.

Foreign Currency Dealership

The Reserve Bank of India has granted us a full-fledged authorized dealers’ license to deal in foreign exchange through its designated branches. Under this license, the Bank has been have been granted permission to:

• engage in foreign exchange transactions in all currencies;

• open and maintain foreign currency accounts abroad;

• raise foreign currency and rupee denominated deposits from non resident Indians;

• grant foreign currency loans to on-shore and off-shore corporations;

• open documentary credits;

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• grant import and export loans;

• handle collection of bills, funds transfer services;

• issue guarantees; and

• enter into derivative transactions and risk management activities that are incidental to its normal functions authorized under its organizational documents.

Further, we have been permitted to hedge foreign currency loan exposures of Indian corporations in the form of interest rate swaps, currency swaps and forward rate agreements, subject to certain conditions. In the Annual Policy statement for fiscal 2008 the Reserve Bank of India permitted banks and primary dealers to begin transactions in single-entity credit default swaps. Further in April 2007 the Reserve Bank of India published comprehensive guidelines on derivatives.

Our foreign exchange operations are subject to the guidelines specified by the Reserve Bank of India in the exchange control manual. As an authorized dealer, we are required to enroll as a member of the Foreign Exchange Dealers Association of India, which prescribes the rules relating to foreign exchange business in India.

Authorized dealers, like us, are required to determine their limits on open positions and maturity gaps in accordance with the Reserve Bank of India’s guidelines and these limits are approved by the Reserve Bank of India.

Ownership Restrictions

The government of India regulates foreign ownership in Indian banks. The total foreign ownership in a private sector bank, like the Bank, cannot exceed 74.0% of the paid-up capital and shares held by foreign institutional investors under portfolio investment schemes through stock exchanges cannot exceed 49.0% of the paid-up capital.

The Reserve Bank of India’s acknowledgement is required for the acquisition or transfer of a bank’s shares which will take the aggregate holding (both direct and indirect, beneficial or otherwise) of an individual or a group to the equivalent of 5.0% or more of its total paid up capital. The Reserve Bank of India, while granting acknowledgement, may take into account all matters that it considers relevant to the application, including ensuring that shareholders whose aggregate holdings are above specified thresholds meet fitness and propriety tests. In determining whether the acquirer or transferee is fit and proper to be a shareholder, the Reserve Bank of India may take into account various factors including, but not limited to, the acquirer or transferee’s integrity, reputation and track record in financial matters and compliance with tax laws, proceedings of a serious disciplinary or criminal nature against the acquirer or transferee and the source of funds for the investment.

While granting acknowledgement for acquisition or transfer of shares that takes the acquirer’s shareholding to 10.0% or more and up to 30.0% of a private sector bank’s paid-up capital, the Reserve Bank of India may consider additional factors, including but not limited to:

• the source and stability of funds for the acquisition and ability to access financial markets as a source of continuing financial support for the bank,

• the business record and experience of the applicant including any experience of acquisition of companies,

• the extent to which the acquirer’s corporate structure is in consonance with effective supervision and regulation of its operations; and

• in case the applicant is a financial entity, whether the applicant is a widely held entity, publicly listed and a well established regulated financial entity in good standing in the financial community.

While granting acknowledgment for acquisition or transfer of shares that takes the acquirer’s shareholding to 30.0% or more of a private sector bank’s paid-up capital, the Reserve Bank of India may consider additional factors, including but not limited to, whether or not the acquisition is in the public interest, and shareholder agreements and their impact on the control and management of the bank’s operations.

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In February 2005, the Reserve Bank of India issued guidelines on ownership and governance in private sector banks. Certain of the key provisions of the guidelines on ownership are:

1. No single entity or group of related entities would be permitted to directly or indirectly hold or control more than 10.0% of the paid up equity capital of a private sector bank and any higher level of acquisition would require the Reserve Bank of India’s prior approval;

2. In respect of corporate shareholders, the objective will be to ensure that no entity or group of related entities has a shareholding in excess of 10.0% in the corporate shareholder. In case of shareholders that are financial entities, the objective will be to ensure that it is widely held, publicly listed and well regulated;

3. The Reserve Bank of India may permit a higher level of shareholding in case of restructuring of problem banks or weak banks or in the interest of consolidation in the banking industry;

4. Banks would be responsible for compliance with the “fit and proper” criteria for shareholders on an ongoing basis; and

5. Banks with shareholders with holdings in excess of the prescribed limit would have to indicate a plan for compliance.

The Reserve Bank of India has recently announced guidelines stating that these regulations would also apply in the event an existing shareholder’s shareholding exceed the specified limit as a result of a rights issue of shares where other shareholders do not subscribe to the issue.

Legislation introduced in the Parliament to amend the Banking Regulation Act provides that prior approval of the Reserve Bank of India shall be mandatory for the acquisition of more than 5.0% of a banking company’s paid up capital or voting rights by any individual or firm or group.

Restrictions on Payment of Dividends

In May 2005, the Reserve Bank of India issued guidelines stating that a bank may declare dividends only if all of the following conditions are met:

• Capital adequacy ratio is at least 9.0% for the preceding two completed years and the accounting year for which the bank proposes to declare a dividend.

• Net non-performing asset ratio is less than 7.0%.

• The bank is in compliance with the prevailing regulations and guidelines issued by the Reserve Bank of India, including the creation of adequate provision for the impairment of assets, staff retirement benefits, transfer of profits to statutory reserves, etc.

• The proposed dividend will be paid out of the current year’s profit.

• The Reserve Bank of India has not placed any explicit restrictions on us for declaration of dividends.

Banks that are eligible to declare dividends under the above rules can do so subject to the following:

• The dividend payout ratio (calculated as a percentage of dividend payable in a year to net profit during the year) must not exceed 40.0%. The maximum permissible dividend payout ratio would vary from bank to bank, depending on the capital adequacy ratio in each of the last three years and the net non-performing asset ratio.

• In case the profit for the relevant period includes any extraordinary income, the payout ratio must be calculated after excluding that income for compliance with the prudential payout ratio.

• The financial statements pertaining to the financial year for which the bank is declaring a dividend should be free of any qualification by the statutory auditors, which might have an adverse effect on the profit

113 during that year. In case there are any such qualifications, the net profit should be suitably adjusted while computing the dividend payout ratio.

Moratorium, Reconstruction & Amalgamation of Banks

The Reserve Bank of India can apply to the Government of India for suspension of business by a banking company. The Government of India after considering the application of the Reserve Bank of India may order a moratorium staying commencement of action or proceedings against such company for a maximum period of six months. During such period of moratorium, the Reserve Bank of India may (a) in the public interest; or (b) in the interest of the depositors; or (c) in order to secure the proper management of the bank; or (d) in the interests of the banking system of the country as a whole, prepare a scheme for the reconstruction of the bank or amalgamation of the bank with any other bank. In circumstances entailing reconstruction of the bank or amalgamation of the bank with another bank, the Reserve Bank of India invites suggestions and objections on the draft scheme prior to placing the scheme before the Government of India for its sanction. The Central Government may sanction the scheme with or without modifications. The law does not require consent of the shareholders or creditors of such banks.

Regulations on Mergers of Private Sector Banks and Banks and Non-banking Finance Companies

In May 2005, the Reserve Bank of India issued guidelines to facilitate mergers between private sector banks and between banks and non-banking finance companies. The guidelines particularly emphasize the examination of the rationale for amalgamation, the systemic benefits arising from it and the advantages accruing to the merged entity. With respect to a merger between two private sector banks, the guidelines require the draft scheme of amalgamation to be approved by the shareholders of both banks with a two-thirds majority after approval by the boards of directors of the two banks concerned. The draft scheme should also consider the impact of amalgamation on the valuation, profitability and capital adequacy ratio of the amalgamating bank and verify that the reconstituted board conforms to the Reserve Bank of India norms. The approved scheme needs to be submitted to the Reserve Bank of India for valuation and sanction in accordance with the Banking Regulation Act, along with other documentation such as the draft document of proposed merger, copies of all relevant notices and certificates, swap ratio, share prices, etc. With respect to a merger of a bank and a non-banking company, the guidelines specify that the non-banking finance company has to comply with Know Your Customer norms for all accounts and all relevant norms issued by the Reserve Bank of India and the Securities and Exchange Board of India. The non-banking finance company should also conform to insider trading norms issued by the Securities and Exchange Board of India, whether it is listed or not, in order to regulate the promoter’s trading of shares before and after the amalgamation discussion period.

Credit Information Bureaus

The Parliament of India has enacted the Credit Information Companies (Regulation) Act, 2005, pursuant to which every credit institution, including a bank, has to become a member of a credit information bureau and furnish to it such credit information as may be required of the credit institution by the credit information bureau about persons who enjoy a credit relationship with it. Other credit institutions, credit information bureaus and such other persons as the Reserve Bank of India specifies may access such disclosed credit information.

Deposit Insurance

Demand and time deposits of up to Rs. 100,000 accepted by Indian banks have to be mandatorily insured with the Deposit Insurance and Credit Guarantee Corporation, a wholly-owned subsidiary of the Reserve Bank of India. Banks are required to pay the insurance premium for the eligible amount to the Deposit Insurance and Credit Guarantee Corporation on a semi-annual basis. The cost of the insurance premium cannot be passed on to the customer.

Statutes Governing Foreign Exchange and Cross-Border Business Transactions

The foreign exchange and cross border transactions undertaken by banks are subject to the provisions of the Foreign Exchange Management Act. All branches should monitor all non-resident accounts to prevent money laundering.

The Reserve Bank of India issued guidelines on External Commercial Borrowings via its Master Circular in July 2005, which stated that no financial intermediary, including banks, will be permitted to raise such borrowings or provide guarantees in favor of overseas lenders for such borrowings. Eligible borrowers may raise such borrowings to finance the import of equipment and to meet foreign exchange needs of infrastructure

114 projects. In a guideline dated August 1, 2005 the Reserve Bank of India announced that external commercial borrowing proceeds can be utilized for overseas direct investment in joint ventures/wholly owned subsidiaries subject to the existing guidelines on Indian Direct Investment in joint ventures/wholly owned subsidiaries abroad. Further utilization of external commercial borrowing proceeds is not permitted for lending, capital market investments or acquisitions in India or real estate investments.

In March 2006, in view of enhanced stability in India’s external and financial sectors and increased integration of the financial sector in the global economy, the Reserve Bank of India constituted a Committee to set out a roadmap towards fuller capital account convertibility. The Committee has submitted its report in July 2006.

In October 2006, the Reserve Bank of India permitted banks to borrow funds from their overseas branches and correspondent banks up to a limit of 50.0% of unimpaired Tier I capital or US$ 1 Crore, whichever is higher, as against the earlier overall limit of 25.0%. However, short-term borrowings up to a period of one year or less should not exceed 20.0% of unimpaired Tier I capital within the overall limit of 50.0%. Capital funds raised by issue of innovative perpetual debt instruments and other overseas borrowings with the specific approval of the Reserve Bank would continue to be outside the limit of 50.0%.

Legal Reserve Requirements

Cash Reserve Ratio

A bank is required to maintain a specified percentage of its net demand and time liabilities, excluding inter-bank deposits, by way of cash reserve with itself and by way of balance in current account with the Reserve Bank of India. Following the enactment of the Reserve Bank of India (Amendment) Bill 2006, the floor and ceiling rates (earlier 3.0% and 20.0% respectively) on the cash reserve ratio were removed.

The following liabilities are excluded from the calculation of the demand and time liabilities to determine the cash reserve ratio:

1. inter-bank liabilities; 2. liabilities to primary dealers; 3. refinancing from the Reserve Bank of India and other institutions permitted to offer refinancing to banks; and 4. perpetual debt qualifying for lower Tier I capital treatment.

The cash reserve ratio is 6.5% effective April 28, 2007. Further, effective April 13, 2007 the Reserve Bank of India does not pay any interest on cash reserve ratio balances.

The cash reserve ratio has to be maintained on an average basis for a fortnightly period and should not be below 70.0% of the required cash reserve ratio on any day of the fortnight.

Statutory Liquidity Ratio

In addition to the cash reserve ratio, a bank is required to maintain a specified percentage of its net demand and time liabilities by way of liquid assets like cash, gold or approved unencumbered securities. The percentage of this liquidity ratio is fixed by the Reserve Bank of India from time to time, and it can be a minimum of 25.0% and a maximum of 40.0% pursuant to section 24 of the Banking Regulation Act. At present, the Reserve Bank of India requires banking companies to maintain a liquidity ratio of 25.0%. The Banking Regulation (Amendment) Bill, 2005 introduced in the Indian Parliament proposes to amend section 24 of the Banking Regulation Act to remove the minimum Statutory Liquidity Ratio stipulation, thereby giving the Reserve Bank of India the freedom to fix the Statutory Liquidity Ratio below this level.

Requirements of the Banking Regulation Act

Prohibited Business

The Banking Regulation Act specifies the business activities in which a bank may engage. Banks are prohibited from engaging in business activities other than the specified activities.

Reserve Fund

Any bank incorporated in India is required to create a reserve fund to which it must transfer not less than 25.0% of the profits of each year before dividends. If there is an appropriation from this account, the bank is required

115 to report the same to the Reserve Bank of India within 21 days, explaining the circumstances leading to such appropriation. The Government of India may, on the recommendation of the Reserve Bank of India, exempt a bank from requirements relating to its reserve fund.

Payment of Dividend

Pursuant to the provisions of the Banking Regulation Act, a bank can pay dividends on its shares only after all its capitalized expenses (including preliminary expenses, share selling commission, brokerage, amounts of losses and any other item of expenditure not represented by tangible assets) have been completely written off. The Indian government may exempt banks from this provision by issuing a notification on the recommendation of the Reserve Bank of India. The Bank has been exempted from this provision in respect of expenses relating to the Early Retirement Option offered by the Bank in fiscal 2004. The Bank has obtained permission from the Reserve Bank of India to write off these expenses over a five-year period in its Indian GAAP accounts. Further, the payment of the dividend by banks is subject to the eligibility criteria specified by the Reserve Bank of India from time to time.

Restriction on Share Capital and Voting Rights

Banks can issue only ordinary shares. The Banking Regulation Act specifies that no shareholder in a banking company can exercise voting rights on poll in excess of 10.0% of total voting rights of all the shareholders of the banking company.

Legislation recently introduced in the Indian Parliament proposes to amend the Banking Regulation Act to remove the limit of 10.0% on the maximum voting power exercisable by an shareholder in a banking company and allow banks to issue redeemable and non-redeemable preference shares.

Restrictions on Investments in a Single Company

No bank may hold shares in any company exceeding 30.0% of the paid up share capital of that company or 30.0% of its own paid up share capital and reserves, whichever is less.

Regulatory Reporting and Examination Procedures

The Reserve Bank of India is empowered under the Banking Regulation Act to inspect a bank. The Reserve Bank of India monitors prudential parameters at quarterly intervals. To this end and to enable off-site monitoring and surveillance by the Reserve Bank of India, banks are required to report to the Reserve Bank of India on aspects such as:

• assets, liabilities and off-balance sheet exposures;

• the risk weighting of these exposures, the capital base and the capital adequacy ratio;

• the unaudited operating results for each quarter;

• asset quality;

• concentration of exposures;

• connected and related lending and the profile of ownership, control and management; and

• other prudential parameters.

The Reserve Bank of India also conducts periodical on-site inspections on matters relating to the bank’s portfolio, risk management systems, internal controls, credit allocation and regulatory compliance, at intervals ranging from one to three years. We have been and, at present are, subject to the on-site inspection by the Reserve Bank of India at yearly intervals. The inspection report, along with the report on actions taken by us, has to be placed before our Board of Directors. On approval by our Board of Directors, we are required to submit the report on actions taken by us to the Reserve Bank of India. The Reserve Bank of India also discusses the report with the management team including the Chairman & CEO.

The Reserve Bank of India also conducts on-site supervision of selected branches with respect to their general operations and foreign exchange related transactions.

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Appointment and Remuneration of the Chairman, Managing Director and Other Directors

We are required to obtain prior approval of the Reserve Bank of India before it appoints its chairman and managing director and any other wholetime directors and fixes their remuneration. The Reserve Bank of India is empowered to remove an appointee to the posts of chairman, managing director and wholetime directors on the grounds of public interest, interest of depositors or to ensure the proper management of the bank. Further, the Reserve Bank of India may order meetings of our Board of Directors to discuss any matter in relation to us, appoint observers to such meetings and in general may make such changes to the management as it may deem necessary and may also order the convening of a general meeting of the shareholders to elect new directors. The Bank cannot appoint as a director any person who is a director of another banking company. In July 2004, the Reserve Bank of India issued guidelines on ‘fit and proper’ criteria for directors of banks.

Penalties

The Reserve Bank of India may impose penalties on banks and its employees in case of infringement of regulations under the Banking Regulation Act. The penalty may be a fixed amount or may be related to the amount involved in any contravention of the regulations. The penalty may also include imprisonment. A press release has been issued by the Reserve Bank of India giving details of the circumstances under which the penalty is imposed on the bank along with the communication on the imposition of the penalty in public domain. The bank is also required to disclose the penalty in its annual report.

Assets to be Maintained in India

Every bank is required to ensure that its assets in India (including import-export bills drawn in India and Reserve Bank of India approved securities, even if the bills and the securities are held outside India) are not less than 75.0% of its demand and time liabilities in India.

Restriction on Creation of Floating Charge

Prior approval of the Reserve Bank of India is required for creating floating charge on our undertaking or property. Currently, allour borrowings including bonds are unsecured.

Maintenance of Records

The Bank is required to maintain books, records and registers. The Banking Regulation Act specifically requires banks to maintain books and records in a particular manner and file the same with the Registrar of Companies on a periodic basis. The provisions for production of documents and availability of records for inspection by shareholders would apply to us as in the case of any company. The Know Your Customer Guidelines framed by the RBI also provide for certain records to be maintained for a minimum period of five years.

Secrecy Obligations

Our obligations relating to maintaining secrecy arise out of common law principles governing its relationship with its customers. The Bank cannot disclose any information to third parties except under clearly defined circumstances. The following are the exceptions to this general rule:

• where disclosure is required to be made under any law;

• where there is an obligation to disclose to the public;

• wherewe need to disclose information in our interest; and

• where disclosure is made with the express or implied consent of the customer.

The Bank is also required to disclose information if ordered to do so by a court. The Reserve Bank of India may, in the public interest, publish the information obtained from the bank. Under the provisions of the Banker’s Books Evidence Act, a copy of any entry in a bankers’ book, such as ledgers, day books, cash books and account books certified by an officer of the bank may be treated as prima facie evidence of the transaction in any legal proceedings.

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Regulations and Guidelines of the Securities and Exchange Board of India

The Securities and Exchange Board of India was established to protect the interests of public investors in securities and to promote the development of, and to regulate, the Indian securities market. We and our subsidiaries, affiliates are subject to the Securities and Exchange Board of India regulations for its public capital issuances, as well as its underwriting, custodial, depositary participant, investment banking, registrar and transfer agents, brokering and debenture trusteeship activities. These regulations provide for its registration with the Securities and Exchange Board of India for each of these activities, functions and responsibilities. We and our subsidiaries are required to adhere to a code of conduct applicable for these activities.

Special Status of Banks in India

The special status of banks is recognized under various statutes including the Sick Industrial Companies Act, 1985, Recovery of Debts Due to Banks and Financial Institutions Act, 1993, and the Securitization Act. As a bank, we are entitled to certain benefits under various statutes including the following:

• The Recovery of Debts Due to Banks and Financial Institutions Act, 1993 provides for establishment of Debt Recovery Tribunals for expeditious adjudication and recovery of debts due to any bank or Public Financial Institution or to a consortium of banks and Public Financial Institutions. Under this Act, the procedures for recoveries of debt have been simplified and time frames have been fixed for speedy disposal of cases. Upon establishment of the Debt Recovery Tribunal, no court or other authority can exercise jurisdiction in relation to matters covered by this Act, except the higher courts in India in certain circumstances.

• The Sick Industrial Companies Act, 1985, provides for reference of sick industrial companies to the Board for Industrial and Financial Reconstruction. Under the Act, other than the Board of Directors of a company, a scheduled bank (where it has an interest in the sick industrial company by any financial assistance or obligation, rendered by it or undertaken by it) may refer the company to the BIFR.

• The Securitization Act focuses on improving the rights of banks and financial institutions and other specified secured creditors as well as asset reconstruction companies by providing that such secured creditors can take over management control of a borrower company upon default and/or sell assets without the intervention of courts, in accordance with the provisions of the Securitization Act.

Income Tax Benefits

As a banking company, we are entitled to certain tax benefits under the Indian Income Tax Act including the following:

• We are allowed a deduction of up to 40.0% of its taxable business income derived from the business of long-term financing (defined as loans and advances extended for a period of not less than five years) which is transferred to a special reserve, provided that the total amount of this reserve does not exceed two times the paid-up share capital and general reserves. We are entitled to this benefit because it is a financial corporation. Effective fiscal 1998, if a special reserve is created, it must be maintained and if it is utilized, it is treated as taxable income in the year in which it is utilized.

• We are entitled to a tax deduction on the provisioning towards bad and doubtful debts equal to 7.5% of our total business income, computed before making any deductions permitted pursuant to Chapter VIA of the Indian Income Tax Act, and to the extent of 10.0% of the aggregate average advances made by its rural branches computed in the manner prescribed. We have the option of claiming a deduction in excess of the specified limits, for an amount not exceeding the income derived from redemption of securities in accordance with the scheme framed by the Central Government.

• We are entitled to a tax deduction, for income from an offshore banking unit in a special economic zone, at the rate of 100% for a period of five consecutive years beginning with the year in which permission under Banking Regulation Act, 1949 is obtained, i.e., up to March 31, 2008 for OBU in SEEPZ, Mumbai and 50% deduction for a period of five consecutive years thereafter in accordance with and subject to the conditions prescribed therein.

• Subject to application for and receipt of certain approvals, we are eligible to issue tax saving bonds approved in accordance with and subject to the provisions of the Indian Income Tax Act and is also eligible to issue zero coupon bonds in accordance with the applicable guidelines.

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• For income tax purposes, Our bonds are prescribed modes of investing and depositing surplus money by charitable and religious trusts subject to and in accordance with the provisions contained therein.

Representative Offices

Our proposed representative office in Abu Dhabi in the United Arab Emirates, for which we have received an approval from the Central Bank of the United Arab Emirates, will be licensed and regulated by the laws of the United Arab Emirates and the Central Bank of the United Arab Emirates.

119 HISTORY OF THE BANK AND OTHER CORPORATE MATTERS

The Bank was incorporated under the Travancore Companies Regulation, 1916, as the Travancore Federal Bank Limited, Nedumpuram at Nedumpuram, Tiruvalla, Central Travancore, Kerala, India on April 23, 1931. The Bank received its certificate of commencement of business on the same date. In 1944, a controlling interest in the Bank was acquired by K P Hormis and his associates. Subsequently, the paid up capital of the Bank was increased to Rs.15,00,000 in 1945, its Board of Directors was reconstituted and fresh Articles of Association were adopted. The registered office of the Bank was relocated from Nedumpuram to its present location at Aluva, Ernakulam District, Kerala, India. The Bank opened its first branch at Aluva on August 18, 1945.

The name of the bank was changed to "The Federal Bank Limited" pursuant to a resolution of its shareholders and government approval on December 2, 1949.

The Bank was licensed under Sec.22 of the Banking Companies Act, 1949 on July 11, 1959.

In 1964, the Bank took over the assets and liabilities of the three banks, i.e. The Chalakudy Public Bank Limited., Chalakudy, The Cochin Union Bank Limited, Trichur and The Alleppey Bank Limited, Alleppey. In 1965, the St. George Union Bank Limited, Puthenpally was merged with the Bank. The Bank issued 1,659 equity shares of Rs. 20 each for consideration other than cash to the shareholders of the St. George Union Bank Limited, Puthenpally under the terms of the merger arrangement with St. George Union Bank Limited. The above amalgamation was followed by the amalgamation of The Marthandom Commercial Bank Limited. Trivandrum with the Bank in 1968.

The Bank was notified as a scheduled commercial bank under the Second Schedule of the RBI Act on July 20, 1970. The Bank expanded beyond Kerala in 1973 by opening branches at Mumbai and Coimbatore. In the same year, the Bank received permission to deal in foreign exchange as an authorised dealer and in the next year, the international banking department of the Bank started functioning from Mumbai and was relocated to Cochin in 1982.

The Bank commenced merchant banking operations in 1989. The Bank made a preferential allotment to ICICI Limited in 1993 and made an initial public offering of its equity shares in 1994. The bank also commenced its leasing business in 1993.

In January 2000, the Bank started Any Where Banking (AWB) facility at Bangalore connecting all branches located in the Bangalore metro. Depository Services was launched in association with NSDL in February 2000. In April 2000, the Bank commenced Internet Banking 'FedNet' with software support from Infosys Technologies Limited. The Bank inaugurated its first online ATM at its head office in January, 2001.

As of March 31, 2002, all of the Bank’s 412 branches were fully computerised using the Bank’s in-house software FedSoft. In 2004, the Bank achieved 100% networking of its branches and extended the RTGS facility to all its branches. Online Reservation of Railway Tickets through Fednet was also launched.in the same year,

In 2006, Bank floated ia GDR issue and listed its depositary receipts on the official . In the same year, Bank entered into a scheme of amalgamation with the Ganesh Bank of Kurundwad Limited, a bank with 32 branches. The Central Government issued necessary notification on September 1, 2006 to effect the merger from September 2, 2006

In November, 2006, the Bank has executed a joint venture agreement with Fortis Insurance International and IDBI for the formation of a joint venture entity and the provision of life insurance services from such entity.

As on September 14, 2007, the Bank has 540 operational branches, 12 Extension Counters and 427 ATMs of which 201 are offsite. The Bank incorporated a subsidiary Federal Financial Services Limited on April 17, 1995 with the objective of providing certain non banking financial services.While Fedfina has stopped carrying out active business for some time, the Bank has obtained an approval dated December 22, 2006 bearing reference number 5863/24.40.001/2006-2007 from the RBI for the revival of its subsidiary with the object of providing direct marketing services in relation to products of the Bank and mutual fund products.

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Key Events and Milestones

Year Event April 23, 1931 The Bank was incorporated as the Travancore Federal Bank Limited, Nedumpuram, April, 1947 The third branch of the Bank was opened at Perumbavoor December, 1949 The name of the Bank was changed to "The Federal Bank Limited". July 11, 1959 The Bank was licensed under Sec.22 of the Banking Companies Act,1949 1964 The Bank took over the assets and liabilities of The Chalakudy Public Bank Limited., Chalakudy, The Cochin Union Bank Limited., Trichur and The Alleppey Bank Limited., Alleppey January, 1965 The St.George Union Bank Limited, Puthenpally was merged with the Bank. 1968 The Marthandom Commercial Bank Limited Trivandrum was amalgamated with the Bank. July 20, 1970 The Bank was notified as a schedule commercial bank 1973 The Bank’s International Banking Department started functioning from Mumbai. 1972 The Bank became an Authorised Dealer in Foreign Exchange May, 1987 The Bank completed construction of its administrative block at Aluva, Kerala. 1989 The Bank commenced merchant Banking operations March, 1994 The Bank made its initial public offering of 35,45,500 Equity Shares of Rs. 10 each at a premium of Rs. 80 per share. February, 1999 The Bank's 400th branch was inaugurated at Calcutta- Shakespear Sarani on February, 2000 The Bank launched depository services in association with NSDL. January, 2000 The Bank launched Any Where Banking (ABB) facilities at Bangalore connecting all branches located in the Bangalore metro. April, 2000 The Bank has commenced its Internet Banking gateway 'FedNet'. January, 2001 Bank's first online ATM was inaugurated at Federal Towers March, 2001 A wide area network connecting Regional Offices at Mumbai, Bangalore, Chennai, Ernakulam with the Head Office was launched March, 2002 All the 412 branches of the Bank operative as of then were fully computerised using FedSoft, the Bank’s in house software July, 2003 The Bank inauguarated its premises at Federal Towers, Marine Drive, Kochi. The Bank introduced the Federal Bank International Visa Card December, 2003 The Bank introduced new services like Fed-Alert and inaugurated its premises at Federal Towers, Marine Drive, Kochi 2004 The Bank began to offer Online Reservation of Railway Tickets through FedNet January 2004 The Bank achieved 100% networking of its branches and extended RTGS facilities to all of its branches. October, 2004 The Bank extended RTGS facilities to all of its branches. December, 2004 The Bank made a bonus issue in the ratio of two fresh bonus shares for every outstanding equity shares issued by the Bank. June, 2005 The Bank launched its Federal Amrita product, enabling its customers to avail of certain preferential benefits in relation to specific hospitals February, 2005 During the year the Bank was awarded (runner up).for "Best Use of Information Technology in Retail Banking" by IBA and Infosys. January, 2006 The Bank made an offering Global Depositary Receipts which were listed on the London Stock Exchange. April, 2006 The Bank entered into an agreement for the implementation ot its CBS system. September, 2006 The Ganesh Bank of Kurundwad Limited.was amalgamated with Federal Bank as per the scheme of amalgamation notified by the central government. November, 2006 The Bank signed a joint venture agreement with Fortis Insurance International and IDBI with the object of providing life insurance services. July, 2007 The Bank received a clearance to open a representative office in Abu dhabi, dubai from the UAE Central Bank.

Awards and Accreditations

a. The Bank is adjudged the “Most Efficient Bank in India” in the large bank category by the annual survey conducted by Business Today in association with KPMG Consulting. The award was presented to the Bank in February 2007. b. The Bank won the banking technology award instituted by Indian Banks Association for the Best clearing & Settlement System in January 2007.

121 c. In June, 2007. the Bank was adjudged one of the top three banks in the old private sector bank category conducted by The Financial Express in association with Ernst & Young, on the basis of five parameters, viz. strength & soundness, growth, profitability, efficiency and credit quality, d. The Bank was awarded the “Suvarna Kerala Puraskaram” on October 7, 2006 for its notable contribution for the development of the state of Kerala e. The Bank was adjudged as Second in MKK Nayar Memorial Productivity Awards competition for the year 2005-06, held by Kerala State Productivity Council, in the category of Service Sector. f. In 2005 and 2006, the Bank was awarded the runner up and winner awards respectively for "Best Use of Information technology in Retail Banking" by the Indian Banking Association and Infosys Technologies Limited. g. In 2006, the Bank won best payment initiative award from the Indian Banking Association for outstanding achievement in banking Technology.

Objects of our Bank

Our objects inter-alia as contained in our Memorandum of Association include:

1. To establish and carry on business of banking at the registered office of the company and at such branches, agencies, or offices in the State of Travancore Cochin, and any other part of India or elsewhere, as may from time to time be determined by the Directors of the Company.

2. Carrying on the business of accepting for the purpose of lending or investment of deposits of money, repayable on demand or otherwise, and withdrawable by cheque, draft, or otherwise and to carry on the business of banking in all its branches and departments.

3. The borrowing, raising or taking up of money, the lending or advancing of money either upon or without security, the drawing, making, accepting, discounting, buying, selling, collecting and dealing in bills of exchange, hundies, promissory notes, coupons, drafts, bills of lading, railway receipts, warrants, debentures, certificates, scrips and other instruments, and securities whether transferable or negotiable or not; the granting and issuing of letters of credit, traveller’s cheques and circular notes; the buying selling and dealing in bullion and specie; the buying and selling of foreign exchange including foreign bank notes; the acquiring, holding, issuing on commission, underwriting and dealing in stock, funds, shares, debentures, debenture stock, bonds, obligations, securities and investments of all kinds; the purchasing and selling of bonds, scrips or other forms of securities on behalf of constituents ,or others; the negotiating of loans and advances; the receiving of all kinds of bonds, scrips or valuables on deposit or for safe custody or otherwise; the providing of safe deposit vaults; the collecting and transmitting of money and securities;

4. Acting as agents for any Government or local authority or any other person or persons; the carrying on of agency business of any description including the clearing and forwarding of goods, giving of receipts and discharges and otherwise acting as an attorney on behalf of customers, but excluding the business of a managing agent of a company; 5. Contracting for public and private loans and negotiating and issuing the same;

6. The promoting, effecting, insuring, guaranteeing, underwriting, participating in Managing and carrying out of any issue, public or private, of State, Municipal or other loans or of shares, stock, debentures or debenture stock of any company, corporation or association and the lending of money for the purpose of any such issue;

7. Carrying on and transacting every kind of guarantee and indemnity business;

8. Managing, selling and realizing any property which may come into the possession of the Bank in satisfaction or part satisfaction of any of its claims;

9. Acquiring and holding and generally dealing with any property or any right, title or interest in any such property which may form the security or part of the security for any loans or advances or which may be connected with any such security;

122 10. Undertaking and executing trust;

11. Undertaking the administration of estates as executor, trustee or otherwise;

12. Establishing and supporting or aiding in the establishment and support of associations, institutions, funds, trusts and conveniences calculated to benefit employees or ex-employees of the company or the dependents or connections of such persons, granting pensions and allowances and making payments towards insurance; subscribing to or guaranteeing moneys for charitable or benevolent objects or for any exhibition or for any public, general or useful object; 13. The acquisition, construction, maintenance and alteration of any building or works necessary or convenient for the purposes of the company.

14. Selling, improving, managing, developing, exchanging, leasing, mortgaging, disposing of or turning into account or otherwise dealing with all or any part of the property and rights of the company. 15. Acquiring and undertaking the whole or any part of the business, property and liabilities of any person or company carrying on or proposing to carry on any business which this Company is authorized to carry on or possessed of property suitable for the purposes of this Company or which can be carried on in conjunction therewith or which is capable of being conducted so as directly or indirectly to benefit this Company;

16. Doing all such other things as are incidental or conducive to the promotion or advancement of the business of the company; carrying on or undertaking any other form of business which the Central Government may by notification in the official Gazette, specify as a form of business which is lawful for a banking company to engage;

17. Amalgamating with any other company

18. To establish, float, promote or set up one or more subsidiary companies of the Bank for the purpose of carrying on the business of leasing, hire purchase, merchant banking, factoring, executor and trusteeship, stock broking, portfolio Management, Managing issues, acting as Registrars to issue and transfer agents, housing finance or undertaking of any business which, under Section (6) of the Banking Regulation Act, 1949, is permissible for a Banking Company to undertake and such other business as can be carried on in unison with one or more of objects of the Bank.

19. To open, establish, maintain and operate currency chests and small coin depots on such terms and conditions as may be required by the Reserve Bank of India established under the Reserve Bank of India Act, 1934 and enter into all administrative or other arrangements for undertaking such functions with the Reserve Bank of India.

Changes in our Memorandum of Association –

The following changes have been made to our Memorandum of Association since incorporation : Date of change Nature of Change February 3, 1945 Our share capital was to Rs.15 Lakhs divided into 75,000 shares of Rs.20 each by a resolution of our shareholders passed in their Annual General Meeting. December, 1949 The name of our Bank was changed from the Travancore Federal Bank Limited, Nedumburam to the Federal Bank Limited August 30, 1991 The main objects of our bank were altered by the addition of the following clauses

r) To establish, float, promote or set up one or more subsidiary companies of the Bank for the purpose of carrying on the business of leasing, hire purchase, merchant banking, factoring, executor and trusteeship, stock broking, portfolio Management, Managing issues, acting as Registrars to issue and transfer agents, housing finance or undertaking of any business which, under Section(6) of the Banking Regulation Act, 1949, is permissible for a Banking Company to undertake and such other business as can be carried on in unison with one or more of objects of the Bank.

s) To open, establish, maintain and operate currency chests and small coin depots on such terms and conditions as may be required by the Reserve Bank of India

123 established under the Reserve Bank of India Act, 1934 and enter into all administrative or other arrangements for undertaking such functions with the Reserve Bank of India. July 16, 1974 Our share capital was Increased from Rs. 15 Lakhs consisting of 75,000 shares of Rs. 20 each to Rs.25 Lakhs consisting of 125,000 shares of Rs.20 each by a resolution of our shareholders passed in their Annual General Meeting. June 17, 1975 Our share capital was Increased from Rs.25 Lakhs consisting of 125,000 shares of Rs.20 each to Rs. 50 Lakhs consisting of 250,000 shares of Rs. 20 each by a resolution of our shareholders passed in their Annual General Meeting. July 27.1976 Our share capital was Increased from Rs.50 Lakhs consisting of 250,000 shares of Rs.20 each to Rs..1,00,00,000 consisting of 5,00,000 shares of of Rs.20 each by a resolution of our shareholders passed in their Annual General Meeting. July 31, 1978 Our share capital was increased from Rs.1,00,00,000 consisting of 5,00,000 shares of of Rs.20 each to Rs.3,00,00,000 consisting f 1,500,000 shares of Rs.20 each by a resolution of our shareholders passed in their Annual General Meeting. September 7, 1989 Our share capital was increased and reclassified from Rs.3,00,00,000 consisiting of 15,00,000 shares of Rs. 20 each to Rs.15,00,00,000 consisting of 1,50,00,000 of Rs.10 each by a resolution of our shareholders passed in their Annual General Meeting. November 16, 1992 Our share capital was increased from Rs.15,00,00,000 consisting of 1,50,00,000 shares of Rs.10 each to Rs.50,00,00,000 consisitng of 5,00,00,000 shares of Rs.10 each by a resolution of our shareholders passed in their Annual General Meeting. September 27, 2004 Our share capital was increased from Rs.50,00,00,000 consisitng of 5,00,00,000 shares of Rs.10 each to Rs.200,00,00,000 divided into 20,00,00,000 of Rs.10 each by a resolution of our shareholders passed in their Annual General Meeting.

The details of the capital raised by our Company are given in the section entitled “Capital Structure” on page [●] of this Draft Letter of Offer.

Summary of Key Agreements

Amalgamations In January 2006, the Central Government placed the Ganesh Bank. under a moratorium for a period of 3 months effective January 7, 2006 under Section 45 of the BR Act pursuant to a recommendation from the RBI. The scheme of amalgamation of the Ganesh Bank with the Bank prepared by the RBI was sanctioned by the Government on January 24, 2006. Following the Supreme Court order dated August 28, 2006, dismissing a petition opposing the scheme, the Central Government issued necessary notification on September 1, 2006 to effect the merger from September 2, 2006.

Subsidiaries

Fedbank Financial Services Limited (“Fedfina”) Fedfina was incorporated on April 17, 1995. It received its certificate for commencement of business on the same date. It has its registered office at Federal Towers, Aluva, Kerala 683 101, India

Shareholders as of September 14, 2007

The shareholding pattern of equity shares of Fedfina is as follows: S.No Shareholder Number of shares of face value Percentage (%) Rs.10 each 1. The Federal Bank Limited 4,99,595 100.00 2. M Venugopalan 200 0.001 3. P C Cyriac 100 0.001 4. K S Harshan 100 0.001 5. Antony M.M 1 0.001 6. John P.C. 1 0.001 7. George John 1 0.001 8. Nair Chandrashekharan K.P. 1 0.001 9. Girish Kumar Ganapathy 1 0.001 TOTAL 5,00,000 100.00 1 Less than 0.01%

Directors as of September 14, 2007

124

The board of directors of Fedfina comprises of M. Venugopalan (Chairman) , Prof. A.M. Salim, P.H. Ravikumar, Suresh Kumar, T.N. Jayachandran, Mr. P.C. Cyriac, and Mr. K.S. Harshan.

Financial performance (Rupees in Lakh, except share data) Twelve months ended Twelve months ended Twelve months ended March 31, 2007 March 31, 2006 March 31, 2005 Sales and Other income 6.94 6.13 10.06 Profit/Loss after tax 3.18 (2.06) 6.55 Reserves and Surplus 100.32 98.26 93.76 Equity capital (par value Rs. 50.00 50.00 50.00 10) Earnings per share (Rs.) 0.41 (0.41) 1.31 Book value per share 30.06 29.65 30.06

Fedfina is an unlisted company and it has not made any public or rights issue in the preceding three years. It has not become a sick company within the meaning of SICA nor is it subject to a winding-up order or petition. It does not have a negative net worth.

Fedfina was incorporated with the object of providing non banking financial services. The company was subsequently converted into a shell company. Pursuant to an application made by us, we received an approval dated December 22, 2006 bearing reference number 5863/24.40.001/2006-2007 from the Reserve Bank of India permitting the revival of Fedfina by the infusion of Rs. 10 Crores as capital of the company. We have received permission to use the revived entity for

a. Direct marketing of asset products of the Bank with emphasis on the retail, SME and agricultural sectors b. Direct marketing of mutual fund products of certain asset management companies

Joint Ventures / Joint Venture Agreements

IDBI Fortis Life Insurance Company Limited (“IDBI – Fortis”) The Bank has associated with Industrial Development Bank of India Ltd., and Fortis Insurance International N.V in setting up a Life Insurance Company. Reserve Bank of India, vide DBOD FSD.No.4780/24.01.018/2006-07 dated November 23, 2006 has conveyed in-principle approval to the Bank to invest up to 26% of the Share Capital in the proposed Life Insurance Joint Venture with Industrial Development Bank of India Ltd., and Fortis Insurance International N.V. The proposed J.V has received R1 approval from Insurance Regulatory and Development Authority and is awaiting R2 approval.

IDBI Fortis has been incorporated with the object of designing, marketing and selling life insurance products. Under the terms of the agreement dated November 23, 2006 entered into between the Bank, IDBI Limited and Fortis Insurance International N.V, each of the parties is required to contribute a certain percentage of shareholding to the joint venture entity and use their individual experience, knowledge and contracts to benefit the JV. The JV is to distribute its products through distribution channels of the Bank and IDBI limited.

Pursuant to the above agreement, IDBI - Fortis was incorporated on January 23, 2007. It has its registered office at First Floor, Tradeview, Oasis Complex, Kamala City, P.B.Marg, Lower Parel (W), Mumbai 400 013, India.

Shareholders as of September 14, 2007

The shareholding pattern of equity shares of IDBI - Fortis is as follows: (Rupees in Lakhs, except share data)

125 S.No Shareholder Number of shares of face value Percentage (%) Rs.10 each 1. IDBI 4,79,99,995 48.00% 2. The Federal Bank Limited 2,60,00,000 26.00% 3. Fortis Insurance International N.V 2,60,00,000 26.00% 4. Others (Nominees’ of IDBI Bank Ltd.) 5 0.001% TOTAL 10,00,00,000 100.00% 1 Less than 0.01%

Directors as of September 14, 2007

The board of directors of IDBI - Fortis comprises of Mr.G.V.Nageswara Rao (Managing Director and Designated Chief Executive Officer), Mr.Sunil Mathur, Mr.S. Santhanakrishnan and Mr.Gary Crist.

Financial performance

No financial results have been prepared for IDBI fortis as the company was incorporated in January, 2007. IDBI - Fortis is an unlisted company and it has not made any public or rights issue in the preceding three years. It has not become a sick company within the meaning of SICA nor is it subject to a winding-up order or petition. It does not have a negative net worth.

126 DIVIDENDS

The declaration and payment of dividends will be recommended by our Board of Directors and approved by our shareholders, at their discretion, and will depend on a number of factors, including but not limited to our profits, capital requirements and overall financial condition. The Board may also from time to time pay interim dividends. All dividend payments are made in cash to the shareholders of the Company.

The dividends declared by our Bank during the last five fiscal years have been presented below:

Year ended March 31, March 31, March 31, March March 2003 2004 2005 31, 2006 31, 2007 Number of shares (in crore) 2.217 2.217 6.56 8.56 8.56 Rate of Dividend (%) 40.00 70.00 25.00 35.00 40.00 Amount of Dividend (Rs. in crore) 8.69 15.23 16.44 29.96 34.24

The amounts paid as dividends in the past are not necessarily indicative of our dividend policy or dividend amounts, if any, in the future.

127 OUR MANAGEMENT

Board of Directors

The following table sets forth details regarding our Board of Directors as on September 14, 2007:

Director’s Other Name, Father's Name, Address, Nationality Identification Age Directorships/Partnerships/ Designation, Occupation and Term Number Board of Trusts M. Venugopalan Indian 0255575 62 1. Fedbank Financial services S/o (Late) S. Achuthan Nair Limited 2. IDBI Fortis Life Insurance Mannil House, Company Limited P O Melur, Via Panamanna, Palghat, Kerala 679 501, India

Chairman and Chief Executive Officer

Service

Not liable to retire by rotation.

Appointed as Chairman & CEO w.e.f. May 1, 2005 for a period of three years, till April 30, 2008. The Board of Directors at its meeting held on March 31, 2007 extended his term for a period of two years with effect from May 1, 2008 on expiry of his present term subject to RBI’s approval. K S Harshan Indian 01519810 55 1. Fedbank Financial S/o (Late) K.C. Sankara Kutty Services Limited

10A, Marine Drive, Ernakulam – 682 031, Kerala, India

Executive Director

Service

Not liable to retire by rotation T.N. Jayachandran Indian 01046930 Nil. S/o T.K. Narayanan

Anuranjanam, D 21, Pillaveedu Nagar Kesavadasapuram Trivandrum 695 004, Kerala, India 71

Independent Director

Service

Liable to retire by rotation S. Santhanakrishnan Indian 00032049 56 1. 3i Infotech Limited S/o Mr. R. Sankaran 2. IDBI Fortis Life Insurance Company Limited No.98A, Auras Corporate Centre, 3. SDG Software Limited 4th Floor, Dr. R.K.Salai, Mylapore Chennai 600 004 Tamil Nadu, India

Independent Director

128 Director’s Other Name, Father's Name, Address, Nationality Identification Age Directorships/Partnerships/ Designation, Occupation and Term Number Board of Trusts

Consultant

Liable to retire by rotation A.M. Salim Indian 01145420 66 Nil S/o Mr V.A. Abdul Aziz

Nesis, House No.48 MSP Nagar, Thirumala Trivandrum 695 006, Kerala India

Independent Director

Service

Liable ot retire by rotation P H Ravikumar Indian 00280010 56 1. Bharat Forge Ltd. S/o (Late) P V Subrahmanyam 2. Eveready Industries India Limited 501, Yashowan Towers 3. National Commodity & Plot No.FP 96/97 Derivatives Exchange B/h Mahim Head Post Office, T.H. Kataria Limited Marg, Mahim (W) 4. National Collateral Mumbai 400 016, Maharashtra Management Services India Limited 5. NABARD Consultancy Independent Director Services (P) Limited 6. SKS Microfinance Limited Service 7. Akruti Nirman Limited 8. NCDEX Spot Exchange Liable to retire by rotation Limited P C Cyriac Indian 0022973 65 1. Kochivaartha Private S/o (Late) P K Chacko Limited. 2. South Indian Green 28/3653, Soonoro Church Road, Elamkulam, Cardamom Company Kochi 683 020 Limited Kerala, India

Independent Director

Service

Liable to retire by rotation Suresh Kumar Indian 00494479 57 1. 3i Infotech Limited S/o (Late) R M Krishna Iyer 2. IIBU Fund Plc, Ireland 3. Tricolour Investments Ltd Suresh Kumar (TIL), Mauritius C/o Emirates Bank Group 4. TCW/ICICI Investment 76, Safa Villa, Jumeirah 3 Partners LLC Mauritius Personal Box No. 71342 5. ICICI International Ltd., Dubai, U.A.E. Mauritius

Independent Director

Service

Liable to retire by rotation Abraham Koshy Indian 00471385 54 1. Malayala Manorama S/o (Late) Mathai Koshy Limited 2. Autoline Industries Limited House No.409 3. Deepak Cements &

129 Director’s Other Name, Father's Name, Address, Nationality Identification Age Directorships/Partnerships/ Designation, Occupation and Term Number Board of Trusts IIM Campus Chemicals Limited Ahmedabad 380 015, Gujarat 4. Bammo Polymers Limited India 5. S.B. Press Private Limited

Independent Director

Service

Liable to retire by rotation P Surendra Pai Indian 01226193 65 1. Asia Cruo Cell Private S/o Mr. P.K. Pai Limited 2. Nutra Specialities Private Limited Third Floor, Kedar, No.15 Sivaganga Road, Nungambakkam Chennai 600 034, Tamil Nadu, India

Independent Director

Business

Not liable to retire by rotation

Brief Biography of Our Directors Mr. M Venugopalan, 62, is our Chairman and Chief Executive Officer. He completed his Bachelor’s degree in Commerce from Kerala University where he secured a gold medal. Prior to joining the Bank, he was the Chairman and Managing Director of Bank of India and was an executive director of the Union Bank of India. He has over 42 years of experience, in the fields of Banking and finance and has held several important positions in India and overseas. Mr. Venugopalan has been the Chairman of our Bank from May 1, 2005 and is in overall charge of the operations of our Bank.

Mr. K. S. Harshan, 55, is an Executive Director on our Board. He holds a bachelors degree in Economics from Calicut Universityand Master’s in Economics from Mumbai University. He started his career in the Industrial Finance Corporation of India. He moved on to commercial banking in 1976 and joined Union Bank of India. In Union Bank of India he has handled varying assignments predominantly in foreign exchange besides branch banking and an assignment in London where he was one of the core team members to set up the branch. After serving Union Bank of India for about 18 years he shifted to ICICI Bank as a core team member to set up the bank in 1994. He served about 8 ½ years in various capacities including Head of International Banking & Forex. In 2002 he shifted to Union Bank of California as its Regional Head for South Asia. In this capacity he was overseeing the bank’s business in India, Bangladesh, Sri Lanka and Mauritius. He has been a member of the guest faculty in Bankers’ Training College, National Institute of Bank Management, UTI Institute for Capital Markets etc over the last several years. Mr. Harshan has been appointed as an Executive Director on our Board in May 2007 and was designated as an executive director of the Bank from November 2004.

Mr. T N Jayachandran, 71, is an independent director on our Board. He holds a Masters degree in Art's from Kerala university, a Master Diploma in Public Administration degree from the Indian School of Public Administration and a Diploma in Development studies from the University of Cambridge. He is a retired member of the Indian Administrative Services and has served as the vice chancellor of Calicut University, Chairman of the Cochin Port Trust, a first member of the Board of revenue and a director of the Kerala Agricultural Development Unit. He has over 42 years of experience in the fields of business and administration. He is on our Board since September, 2000.

Prof A M Salim, 66. Is an independent director on our Board. He holds a Bachelor’s Degree in Science in Engineering from Kerala university, A post graduate diploma in Post Graduate Diploma In Town And Country Planning (PGDTCP) From School Of Planning & Architecture (Hons.) from the School of Planning and Administration, New Delhi and a Post Graduate Diploma in Business Administration from the Indian Institute of Management, Ahmedabad. He has served as the director of the T.K.M. Institute of Management, Kollam and

130 has served in the faculties of the College of Engineering, Thiruvananthapuram, and the School of Management Studies, Cochin University of Science and Technology. He was a member of the Kerala State Planning Board from 1977 to 1995, and also served as chief of projects, industries and infrastructure. He has over 46 years of experience in the fields of planning, academics and industryand has been has been a director of the Bank since August, 2001.

Mr. S Santhanakrishnan, 56, is an independent director on our Board. He has a Bachelor’s degree in science from Madras university, a Bachelor’s degree in Law from Madras university and is a member of the association of chartered accountant. He has over 30 years of experience in the fields of accounting and finance and has served as the Chairman of Information Technology Committee of the Institute of Chartered Accountants of India and member of Information Technology Committees of the South Asian Federation of Accountants and the Department of Company Affairs. He is the Chairman of the Professional Development Committee of the Institute of Chartered Accountants of India. He is also a member of Committee on Computer Audits in Banks, Reserve Bank of India. He has been a director on our Board since January, 2002.

Mr P H Ravikumar, 56, is an independent director on our Board. He holds a Bachelor’s degree in commerce from Osmania university and a Diploma in French from AIB, London and the CAIB. Prior to joining our board, he served as a Senior Executive Vice President in ICICI Bank Limited overseeing corporate banking. As a Senior General Manager in ICICI Ltd., his responsibilities extended to corporate banking in south and west India, and operations relating to small and medium enterprises and agri-businesses. For six years, he was with the Bank of India’s Paris branch, where he received an award for excellence in his profession from the French Chamber of Commerce, Industry and Economy. He is also an associate member of the Indian and British Institute of Bankers. He has over 36 years of experience in fields of Banking and finance. He is currently the Managing Director and Chief Executive Officer of the National Commodity & Derivatives Exchange Ltd. (NCDEX), Mumbai and has been a director on our Board since September, 2004.

Mr. P C Cyriac, 65, is an independent director on our Board. He has a Bachelor’s degree in Engineering from Kerala University. He is a retired member of the Indian Administrative Service and has held several senior positions in the Tamil Nadu State Government and the Central Government, including Principal Commissioner of Commercial Taxes, the Principal Secretary of the Tamil Nadu Industries Department, Chairman and Managing Director of Tamil Nadu Industrial Explosives Ltd., Chairman of the Tamil Nadu Electricity Board and Chairman of the Rubber Board. He was also the Managing Director of the Jeevan Telecasting Corporation. He has over 35 years of experience in the fields of planning and management and has been a director on our Board since September, 2004.

Mr. Suresh Kumar, 57, is an independent director on our Board. He holds a Bachelor’s degree in Commerce (Hons.) from the University of Bombay. He has been part of the senior management of Emirates Bank Group since 1989 and prior to that held senior treasury and general management positions in a Government of Dubai projects and in the banking sector in India. He is a Fellow of the Indian Institute of Bankers and the Vice Chairman of the Indian Business and Professional Council. He is also a member of the regional Chief Executive Forum of the Institute of International Finance (IIF), a Washington DC based organisation, linked to the IMF and the World Bank. He is currently the CEO, Emirates Financial Services (EFS) PSC. He has been a director on our Board since November, 2005.

Prof. Abraham Koshy, 54, is an independent Director on the Board of the Bank. He holds a Post Graduate Degree in Business Administration from Cochin University and a doctoral degree with specialization in Marketing from the Indian Institute of Management, Ahmedabad. He was a member of the faculty at the School of Management Studies, Cochin University and thereafter the Centre for Management Development, Trivandrum. He subsequently became a member of the faculty of the Indian Institute of Management, Ahmedabad. He currently serves there as a Professor of Marketing, He serves as a visiting professor of various european business schools/universities and is engaged in participating in training programmes for senior executives and advisory services for various companies. Apart from publishing several research papers in reputed journals, Prof. Koshy has co-authored a book on Marketing Management. He has been a member of our Board since May 2007.

Mr. P. Surendra Pai, 65, is an Independent Director on the Board of the Bank. He holds a Bachelor’s Degree in Engineering from Mysore University and a Post Graduate Degree in Industrial Engineering from the Indian Institute of Technology, Madras. He has over four decades of experience in the FMCG and Engineering Industry and has served in various positions including Group President, Vice Chairman and a member of the

131 Board of Directors of Wipro Industries Limited and worked as an Executive chairman with the Murugappa Group from 2002 to 2006. He has been associated with our Bank as a director since May 2007

Compensation of our Directors

Remuneration of Chairman and Chief Executive Officer

The RBI has, by way of its letter bearing reference no. DBOD No. 1160 / 08.38.001 / 2004 - 05 dated April 28, 2005 accorded its approval for the appointment of Mr. M.Venugopalan as Chairman and Chief Executive Officer of the Bank for a period of three years w.e.f May 1, 2005, on the terms and conditions as proposed by the bank. The remuneration payable to him is given below.

S. No. Head Amount 1. Pay (Consolidated) Rs.2,25,000/- per month with an annual increment of 15% of the pay. 2. Variable Pay Up to 50% of the annual salary as may be decided by the Board based on achievement of such performance parameters as may be laid down by the Board subject to such other approvals as may be necessary. 3. Dearness Allowance, Sitting Nil Fees, Bonus, and Pension 4. Provident Fund 10% of pay, to be matched by the Chairman’s contribution 5. Gratuity As applicable to other bank staff 6. Travel insurance Rs.10 lakh on official travel by road, rail or air. 7. Leave encashment As applicable to other officers of the bank. Encashment will be allowed only at the time of final demission of office.

Note : a. An increase in the remuneration of Chairman to Rs. 2,25,000/- p.m. was approved with effect from May 1, 2007 in terms of RBI approval obtained vide letter DBOD No. 398 / 08.38.001 / 2007 – 08 dated July 11, 2007. The Board has also revised the remuneration as approved by Reserve Bank of India vide its letter DBOD NO. 1120/08/38/001/2006-07 dated July 31, 2007.

b. The Appointment of the Chairman has been extended till March 31, 2010 by a resolution of our board dated March 31, 2007. The Bank has made an application to the RBI seeking its approval in relation to the same.

Remuneration of Mr. Harshan, our Executive Director

S. No. Head Amount 1. Pay (Consolidated) Rs. 150,000 per month with an annual increment of 15% of the pay. 2. Variable Pay Up to 50% of the annual salary as may be decided by the Board based on achievement of such performance parameters as may be laid down by the Board subject to such other approvals as may be necessary. 3. Dearness Allowance, Nil Sitting Fees, and Bonus 4. Provident Fund 10% of pay, to be matched by the Executive Director’s contribution 5. Pension As applicable to other bank staff

6. Gratuity As applicable to other bank staff 7. Travel insurance Rs.10 lakh on official travel by road, rail or air. 8. Leave encashment As applicable to other officers of the bank. Encashment will be allowed only at the time of final demission of office.

The above remuneration is to be placed before our shareholders for the approval at their annual general meeting.

Note: 1. No Director is related to any other Director on the Board. 2. The Bank does not have any scheme for grant of stock options to its Directors or Employees.

All Directors of the Company may be deemed to be interested to the extent of fees, if any, payable to them for attending meetings of the Board or a Committee. The Managing Director and other Whole -time Directors will be interested to the extent of remuneration paid to him for services rendered by him as officer of the Company. All our directors may also be deemed to be interested to the extent of Equity Shares, if any, already held by

132 them or their relatives in the Company, or that may be subscribed for and allotted to them, out of the present Issue in terms of the Draft Letter of Offer and also to the extent of any dividend payable to them and other distributions in respect of the said Equity Shares. The Directors may also be regarded as interested in the Equity Shares, if any, held by or that may be subscribed by and allotted to the companies, firms and trust, in which they are interested as directors, members, partners and/or trustees..

Borrowing Powers of the Board

In terms of the resolution passed by the shareholders of the bank at their Annual General Meeting of the Bank dated September 27, 2004 the Board of Directors of the Bank is empowered to borrow moneys upto a limit Rs.1,500 Crores.

Shareholding of Our Directors in our Company

The following table details the shareholding of our Directors in their personal capacity and either as sole or first holder, as at the date of this Draft Letter of Offer.

Number of Number of Name of Directors Equity Shares Equity Shares (Pre-Issue) (Post-Issue)* M. Venugopalan 500 1,000 P. H. Ravikumar 1000 2,000 S. Santhanakrishnan 25 50 P. Surendra Pai 6,505 13,010 * The number of shares for the column entitled Number of Equity Shares (Post-Issue) has been calculated assuming full subscription to rights entitlement in this Issue.

Changes in Our Board of Directors During the Last Three Years

FINANCIAL WHETHER ANY NAME OF DATE OF CHANGE REASON YEAR CHANGE IN DIRECTOR THEREOF DIRECTORSHIP DATE OF DATE OF (YES/NO) APPOINTMENT CESSATION 2004-05 Y M Joseph 27-9-2004 On attaining the age of 70 years 31-12-2004 K.P.Padma Kumar On completion of term of -- appointment as -- Chairman & P.C.Cyriac 27-9-2004 -- CEO P.H.Ravikumar 27-9-2004 -- K.P.Fabrian 27-9-2004 4-2-2005 As per CLB C.J.George 27-9-2004 4-2-2005 Order. As per CLB Order. 2005-06 Y M.Venugopalan 26-4-2005 -- Appointed as Chairman & CEO of the Bank w.e.f.1-5-2005

M.J. Subbaiah 31-10-2005 Resignation

-- Suresh Kumar 15-11-2005 2006-07 Y C.K.George -- 11-4-2006 On expiry of term on 10-4- 2006

133 Up to 25 July Y K S Harshan 1-5-2007 Appointed as 2007 Whole Time Director as per clause 84A of the Articles of Association of the Bank. Abraham Koshy 18-5-2007 Surendra Pai 18-5-2007 Appointed as Additional Directors.

Corporate Governance

In line with the guidelines issued by the RBI from time to time & the provisions of Clause 49 of the Listing Agreement entered into with the Stock Exchanges, the Board of Directors have constituted the following committees with suitable mixture of both Executive & Non-Executive Directors. The Board has also defined the role & function /power entrusted to each of the committees, frequency and quorum for the meeting. The Committee act as the bridge between the various departments of the Bank and the Board of Directors of the Bank.

1. Finance Committee 2. Audit Committee 3. Risk Management Committee 4. Ethics & Corporate Governance Committee 5. Share Transfer & Investor Grievance Committee 6. Nomination Committee 7. Remuneration Committee 8. Customer Service Committee 9. Information Technology Committee 10. Committee for review of fraud cases of Rs.1 crore

Audit Committee

The Audit Committee of the Bank consists of four non-executive, independent Directors and is chaired by CA. S. Santhanakrishnan, a practicing chartered accountant. The other members of the audit committee are Prof. A.M. Salim, P.H. Ravikumar, and T.N. Jayachandran.

The terms of reference of the Audit Committee are as follows;

1. Review the bank's financial and risk management policies and where necessary, recommend changes for the Board’s approval. 2. Review periodically the adequacy of internal control systems (including the asset liability management and risk management and management systems) with the management and external and internal auditors, assure itself that the systems are being effectively observed and monitored and where necessary, approve changes or recommend changes for the Board’s approval; 3. Review the adequacy of internal audit function including the structure of the internal audit department, staffing and the suitability and seniority of the official heading it, reporting structure & coverage, and the frequency of internal audit and where necessary, approve changes; 4. Review the findings of any investigations by internal auditors or vigilance officials into actual or suspected fraud or irregularity or a failure of internal control systems of a material nature, and convey to the Board any comments of the Committee or action initiated by it on the findings; 5. Oversee the Bank’s financial reporting process and the disclosure of its financial information to ensure that the financial statements are correct, sufficient, and credible and present a true and fair view of the state of affairs and of the profit or loss of the bank for the relevant financial year or other period as the case may be; 6. Recommend, for shareholders’ approval, the appointment, reappointment, removal or replacement of the external auditors and the fee payable to them for the audit, taking into consideration any relationship between the auditors and the bank that may impact the independence of the auditors in carrying out the audit;

134 7. Discuss the external auditors, before they commence the audit the nature and scope of the audit and ensure coordination where more than one audit firm is employed; 8. Review the draft quarterly, half-yearly and annual financial statements with the external auditors and the management before submission to the Board for approval; and 9. Discuss with the management the auditor’s report and assessment, their qualifications and concerns, if any, and the management’s response to the auditor’s management report and/or long form audit report.

Customer Service Committee

The Customer service committee is chaired by M. Venugopalan, Chairman and Chief Executive Officer. The other members of the Committee are T.N. Jayachandran, A.M. Salim, and P.C. Cyriac

The terms of reference of the Committee includes addressing the formulation of a comprehensive Deposit Policy, incorporating the issues such as the treatment of death of a depositor for operations of his account, the product approval process, the annual survey of depositor satisfaction and the triennial audit of such services. Besides the committee also examine any other issues having a bearing on the quality of customer service rendered.

Finance Committee

The Finance committee is chaired by M. Venugopalan, Chairman and Chief Executive Officer. The other members of the Committee are P.H. Ravikumar, A.M. Salim, and P.C. Cyriac

The terms of reference of the Committee is to consider proposals for the approval, renewal, or modification of various types of funded and non-funded credit facilities to clients within such authority as is delegated to the Committee by the Board from time to time

Risk Management Committee

The Risk Management committee is chaired by M. Venugopalan, Chairman and Chief Executive Officer. The other members of the Committee are P.H. Ravikumar, T N Jayachandran, P.C. Cyriac and Suresh Kumar.

The terms of reference of the Committee are to:

1) Devise the policy and strategy for integrated risk management containing various risk exposure of the Bank. 2) Effectively coordinate between the credit risk management committee (CRMC), Asset liability management committee (ALMC) and operation risk management committee (ORMC). 3) Setting policies and guidelines for credit risk measurement, management and reporting. 4) Ensuring the credit risk management processes satisfy the Bank's policy. 5) Set risk parameters and prudential limits for credit exposure. 6) Appointment of qualified and competent staffs; ensuring posting of qualified and competent staff and of independent credit risk manager's, etc. 7) Ensure that adequate training is made available to the staff in Credit Risk Management Department, which handles this complex function. 8) Ensuring that market risk management processes (including people, systems, operations, limits and controls) satisfy bank's policy. 9) Reviewing and approving market risk limits, including triggers or stop-losses for traded and accrual portfolios 10) Ensuring robustness of financial models, and the effectiveness of all systems used to calculate market risk. 11) Ensure that adequate training is made available to the staff handling Operational Risk Management functions, which is of great importance to the Bank.

Shareholders/Investors Grievances & Share Transfer Committee

The Shareholders/Investors Grievances & Share Transfer Committee is chaired by M. Venugopalan, Chairman and Chief Executive Officer. The other members of the Committee are A.M. Salim and P.C. Cyriac. In addition

135 to the members, the company secretary and compliance officer of the Bank acts as the compliance officer of the committee.

The terms of reference of the Committee are:

1) to review, where necessary, complaints received from shareholders or others regarding transfer of shares, non-receipt of declared dividends, non-receipt of annual accounts or reports, or other matters relating to shareholding in the Bank, and any action taken by the bank on such complaints; monitoring and timely redressal of the investor/shareholders grievances and complaint related matters; 2) to initiate such (further) action on the complaints as is considered necessary or desirable by way of redressal or to prevent similar complaints arising in the future; and 3) to approve or reject applications for transfer of share referred to the Committee by the Bank’s Registrar & Share Transfer Agents in terms of such criteria as may be determined by the Committee and conveyed to the Agents.

There were 179 complaints in all, pertaining to the transfer of shares, non-receipt of dividend warrants and balance sheets, etc and all 179 complaints have been redressed. As a result, there were no investor ccomplaints pending as on September 8, 2007.

Information Technology Committee

The Information Technology Committee is chaired by M. Venugopalan, Chairman and Chief Executive Officer. The other members of the Committee are S. Santhanakrishnan, P.H. Ravikumar A.M. Salim and P.C. Cyriac. The terms of reference of the Committee are to review and monitor various matters relating to the implementation and upgradation of the Bank’s information Technology initiatives.

Nomination Committee

The Nomination Committee is chaired by T.N. Jayachandran. The other members of the Committee are S. Santhanakrishnan, P.H. Ravikumar and A.M. Salim. The terms of reference of the Committee are to :

1) develop, for Board approval, a policy on the size and composition of the Board taking into account the available and needed diversity and balance in terms of experience, knowledge, skills, and judgment of the Directors 2) review, from time to time, possible candidates for current or potential Board vacancies, including Directors who are to retire and are eligible for reappointment or re-election and other persons who may be recommended by the Chairman or other Directors, shareholders, senior officers of the Bank, or others; and 3) recommend to the Board candidates for election (including re-election) or appointment (including reappointment) to the Board.

Ethics Committee

The Information Technology Committee is chaired by T.N. Jayachandran. The other members of the Committee are S. Santhanakrishnan and P.H. Ravikumar. The Ethics Committee is formed to look into the complaints and allegations against the top management of the Bank.

Committee for Review of Fraud Cases Of Rs.1 Crore & Above

The Committee for review Of Fraud Cases of Rs.1 Crore & Above is chaired by M. Venugopalan, Chairman and Chief Executive Officer. The other members of the Committee are P.H. Ravikumar, A.M. Salim and P.C. Cyriac. This committee reviews large value frand cases which involve the Bank.

136 Management Organizational Structure Chart

BOARD OF DIRECTORS

CHAIRMAN AND CEO

EXECUTIVE DIRECTOR

CHIEF FINANCIAL GENERAL GENERAL OFFICER MANAGER GENERAL GENERAL INSPECTION)( MANAGER MANAGER ( MANAGER (CREDIT) TREASURY )

REGIONAL HEADS

Key Managerial Personnel

The details of our key managerial personnel are as follows:

1. George John, 57, is the Chief Financial Officer of the Bank and is responsible for Banks Planning, Finance and Accounting functions. He holds a post-graduate degree in Science from Bhopal University and a Master’s Degree in Business Administration from the Cochin University of Science and Technology. He is also a Certified Associate of the Indian Institute of Bankers. He has over 34 years of experience in the field of Branch Banking, Credit and Treasury Operations. He has served with the Bank in various capacities including as General Manager (Credit) and General Manager (Treasury). His remuneration for the Fiscal 2007 was Rs. 5,84,608

2. P.C. John, 56, is the General Manager (Credit) of the Bank and is responsible for overseeing Bank’s Credit Operations. He secured a post-graduate degree in Chemistry from University of Kerala. He has over 34 years of experience in the field of Branch Banking, Credit and Treasury functions and as Regional head. He has worked with the Bank in various capacities, including as General Manager in charge of investments, accounts and international banking and as Regional Head of Chennai and Alapuzha Regions. His remuneration for the Fiscal 2007 was Rs. 5,66,479

3. Abraham Thariyan, 55, is General Manager (Treasury) of the Bank and is responsible for overseeing Bank’s Treasury, International Banking operations. He secured a post-graduate degree in Arts from Sagar university and a Master’s Degree in Business Administration from Cochin University. He is also a Certified Associate of the Indian Institute of Bankers. He has over 35 years of experience in the field of Branch Banking and International Banking and as Regional Head. He has worked with the Bank in various capacities, including as Regional Head of Thrissur and Chennai Regions. His remuneration for the Fiscal 2007 was Rs. 5,31,519 .

4. C. Sreekumar, 56, is the General Manager (Regional Head, Kolkata Region) of the Bank and is responsible for overseeing the operations of Bank’s Branches in Kolkata Region. He secured a Bachelor’s degree in Economics from Kerala university. He is also a Certified Associate of the Indian Institute of Bankers. Prior to joining the Bank in 1973, he was working with Centre for Development Studies as Stenographer. He has over 34 years of experience in the field of Branch Banking and General Advance, Corporate Finance and as Regional Head. He has worked with the Bank in various capacities, including as Regional Head of Ernakulam and Mumbai Regions and as Head of Credit Department at Head Office. His remunderation for part of Fiscal 2008 was 2,57,374

5. C. V. John, 58, is the General Manager (Inspection) and is responsible for the Audit Functions of the Bank. He is a matriculate. He has over 41 years of experience in the field of Branch Banking and Human Resources functions and as Regional Head. He has worked with the Bank in various capacities,

137 including as Regional Head of Ernakulam, Chennai and Mumbai Regions and as controller of HR Departments. His remuneration for part of Fiscal 2008 was 2,64,620.

6. Sebastian. K. J, 57, is a General Manager. He is currently on deputation with the Bank’s subsidiary, Fedbank Financial Services Limited where he is designated Senior Vice President. He secured a Masters degree in Arts from Kerala University. He is also a Certified Associate of the Indian Institute of Bankers. He has over 35 years of experience in the field of Branch Banking, Planning and Development and as Regional Head. He has worked with the Bank in various capacities, including as Regional Head of Alapuzha, Bangalore and Thiruvananthapuram Regions and as Head of Planning Department of Head Office. His remuneration for part of Fiscal 2008 was 2,76,364.

7. George Varghese. K., 56, is a General Manager. He secured a Bachelor’s Degree in Agriculture and Masters degree in Business Administration from Kerala university. He is also a Certified Associate of the Indian Institute of Bankers. He has over 36 years of experience in the fields of Branch Banking and Credit functions and as Regional Head. He has worked with the Bank in various capacities, including as Regional Head of Kolkata, New Delhi and Thrissur Regions and as Head of Credit Departments at Head Office. His remuneration for part of Fiscal 2008 was 2,61,768

8. Thomas Joseph. C, 56, is a General Manager and is designated Regional Head, Mumbai Region of the Bank and is responsible for overseeing the operations of Bank’s Branches in Mumbai Region. He secured a Masters Degree in Science from Calicut University. He is also a Junior Associate of the Indian Institute of Bankers. Prior to joining the Bank in 1975, he worked with Catholic Syrian Bank as Clerk cum Cashier. He has over 31 years of experience in the field of branch banking and general advance and as regional head. He has worked with the Bank in various capacities, including as Regional Head of Alapuzha and Kolkata Regions and as a part of its credit department. His remuneration for part of Fiscal 2008 was 2,53,766.

The remuneration of each of our key personnel for year ended March 31, 2007 and is as per the statement pursuant to Section 217(2A) of the Act and the Companies (Particulars of Employees) Rules, 1975. All the abovementioned key managerial personnel are permanent employees of our Company.

Shareholding of Key Managerial Personnel in the Bank

Name of Key Managerial Personnel No. of Equity Shares held (Pre-Issue) George John 450 John P.C. 531 Abraham Thariyan 1,000 Sreekumar C. 121 Sebastian K.J. 1,050 George Varghese 100 Thomas Joseph 450

Interest of promoters, Directors and key managerial personnel All the Key Managererial Personnel are permanent employees of the Bank. The key managerial personnel of our Company do not have any interest in our Company other than to the extent of the remuneration or benefits to which they are entitled to as per their terms of appointment and reimbursement of expenses incurred by them during the ordinary course of business and to the extent of the Equity Shares held by them in our Company, if any.

Except as stated otherwise in this Draft Letter of Offer, we have not entered into any contract, agreement or arrangement during the preceding two years from the date of this Draft Letter of Offer in which our Directors are interested directly or indirectly and no payments have been made to them in respect of these contracts, agreements or arrangements or are proposed to be made to them.

138 Changes in our key managerial employees during the last three years

S. OFFICE NAME DESIGNATION DATE OF REASON FOR NO APPOINTMENT / APPOINTMENT/CESSATION CESSATION 1. Head Padmakumar K P Chairman December 31, 2004 Retirement Office 2. Head Akbar A General Manager March 19, 2005 Voluntary retirement Office (Operations) 3. Head General Manager Promotion Office Abraham Thariyan (Treasury) May 19, 2006 4. Head Sankaranarayanan P Executive Director July 31, 2006 Retirement Office R 5. Head Ipe Peter K General Manager January 1, 2007 Retirement Office (Inspection) 6. Head M. M. Antony Chief General May 31, 2007 Retirement Office Manager 7. Kolkata Regional Head Promotion Region Sreekumar C (Kolkata Region) June 1, 2007 8. Head General Manager Promotion Office John C V (Inspection) June 1, 2007 9. Head Promotion Office Sebastian K J General Manager June 1, 2007 10. Head Promotion Office George Varghese K General Manager June 1, 2007 11. Mumbai General Manager, Promotion Region Regional Head Thomas Joseph C (Mumbai) June 1, 2007

139 FINANCIAL STATEMENTS

Auditors Report

The Board of Directors, The Federal Bank Limited. Head Office, Federal Towers, Aluva 683 101.

Dear Sirs,

1. We have been engaged to examine and report on the financial information of The Federal Bank Limited (the Bank) annexed to this report, which have been prepared in accordance with Paragraph B(1) of Part II of Schedule II of the Companies Act, 1956 (the act) and the Securities and Exchange Board of India (Disclosure and Investor Protection) Guidelines, 2000 (the Guidelines) issued by Securities and Exchange Board of India (SEBI) on January 19, 2000 and the amendments thereto from time to time, in pursuance of section 11 of the Securities and Exchange Board of India Act 1992, to the extent they are not inconsistent with the Banking Regulation Act, 1949 (the Banking Regulation Act).The preparation and presentation of this financial information is the responsibility of the Bank’s management. We have reported on the above statement on the basis of information and explanations provided by the management, books and records produced to us, so as to obtain a reasonable assurance that such statements are free of material misstatements. These financial information are proposed to be included in the offer document of the Bank in connection with its proposed rights issue of equity shares.

2. For our examination, we have placed reliance on the audited financial statements of the Bank for the financial years ended March 31, 2003 and March 31, 2004 audited by the other Auditors and for the financial years ended March 31, 2005, March 31, 2006 and March 31, 2007 audited by us and its subsidiary company, Fedbank Financial Services Ltd, for the five years ended March 31, 2007 audited by other auditors.

3. These statements have been prepared in accordance with the provisions of the Banking Regulation Act, 1949.

4. We have performed such tests and procedures, which, in our opinion, were necessary for the purpose of our examination. These procedures, mainly involve comparison of the attached financial information with the bank’s audited financial statements for the financial years 2002-03 to 2006-07 as prepared by the bank.

5. We have examined the following financial information relating to the Bank to be included in the Letter of Offer and annexed to this report:

5.1 The financial statements for the five years ended March 31, 2007 in Parts I & II of Annexure A. 5.2 The Consolidated financial statements for the five years ended March 31, 2007 in Parts III & IV of Annexure A. 5.3 The dividends declared by the Bank in respect of the five financial years ended March 31, 2007 in Part V of Annexure-A 5.4 Break up of Investments made by the Bank in Part VI of Annexure-A. 5.5 Financial ratios of the Bank in Part VII and of the consolidated statements in Part VIII of Annexure A. 5.6 Adjustments as per Auditor’s Report carried out/not carried out in the statements of Profit & Loss and Assets & Liabilities in Part IX of Annexure-A. 5.7 Significant Accounting Policies of the Bank, other information and Notes to Accounts for the five years ended March 31, 2007 in Part I & II of Annexure B. 5.8 The Capitalisation Statement in Part I, Statement of Taxes (Tax Shelter Statement) in Part II and Principal terms of Borrowings in Part III of Annexure-C. 5.9 The cash flow statements for the five years ended March31,2007 in Part IV of Annexure C.

140 5.10 The consolidated cash flow statements for the five years ended March31,2007 in Part V of Annexure C. 5.11 Statement of tax benefits in Part VI of Annexure C.

6. There are no discontinued activities of the Bank during the period covered in our report having a material impact on the accounts.

7. Particulars of significant changes in accounting policies and practices of the Bank during the period of five financial years ended March 31, 2007 are given in Part III of Annexure-B. Based on our examination we confirm that no adjustments for the same have been made in the financial statements for the reasons given in the said annexure.

8. In our opinion, the financial information of the Bank as stated in Annexure-A above read with the respective significant accounting policies and subject to non-adjustment of certain matters as stated in the said Annexure have been prepared in accordance with the SEBI guidelines.

9. We confirm that subject to non-adjustment of certain matters as stated in Part IX of Annexure-A, the Statement of Profit and Loss and Assets and Liabilities of the Bank have been prepared by the Bank in accordance with the requirements of Clause B(1) of Part II of Schedule II of the Companies Act, 1956 and the Securities and Exchange Board of India (Disclosure & Investors Protection) Guidelines, 2000 as amended till date after charging all expenses and making adjustments and re-grouping which in our opinion are appropriate.

For Sundaram & Srinivasan For Brahmayya & Co., Chartered Accountants Chartered Accountants (K.Srinivasan) (P.S.Kumar) Partner Partner M.No.5809 M.No.15590

Date: August 3, 2007

141

Annexure - A Part – I - Statement Of Profits And Losses Rs. in Crores For the Financial Year ended March 31, 2003 2004 2005 2006 2007 A INCOME 1 Interest Earned 1.1 Interest/ Discount on Advances/ Bills 660.00 714.28 772.76 916.00 1281.45 1.2 Income on Investments 423.08 436.66 378.98 458.17 482.50 1.3 Interest on Balances with RBI and other 27.76 30.42 27.72 35.94 43.81 Inter-Bank Funds 1.4 Others 0.62 10.70 11.57 26.42 9.59 Total 1,111.46 1,192.06 1191.03 1436.53 1817.35 2 Other Income 2.1 Commission, Exchange & Brokerage 49.53 59.20 65.67 69.93 82.78 2.2 Net Profit on Sale of Investments) 143.56 174.42 64.61 33.08 49.29 2.3 Net Profit/(Loss) on Revaluation of (8.45) (1.07) (9.76) (16.15) (15.89) Investments 2.4 Net Profit/(Loss) on Sale of Land, Buildings 0.23 0.06 0.08 2.44 0.71 & Other Assets 2.5 Net Profit on Foreign Exchange Transactions 17.14 18.77 27.66 20.17 30.44 2.6 Income earned by way of dividends etc from 6.37 4.45 2.33 2.30 3.62 companies in India 2.7 Miscellaneous Income 26.05 42.03 61.39 105.18 135.74 Total 234.43 297.86 211.98 216.95 286.69 Total Income 1,345.89 1,489.92 1403.01 1653.48 2104.04 B EXPENDITURE 1 Interest Expended 1.1 Interest on Deposits 729.18 723.05 656.80 797.40 1030.06 1.2 Interest on RBI/ Inter-Bank Borrowings 4.29 1.70 1.23 3.42 14.31 1.3 Others 38.81 45.54 30.72 35.91 40.59 Total 772.28 770.29 688.75 836.73 1084.96 2 Operating Expenses 2.1 Payment to and Provisions for Employees 139.43 178.25 185.78 228.36 260.45 2.2 Rent, Taxes & Lighting 20.97 25.26 31.95 32.25 37.59 2.3 Printing & Stationery 3.45 3.70 4.25 4.33 5.09 2.4 Advertisements & Publicity 2.54 3.56 3.72 2.81 3.90 2.5 Depreciation on Bank's Properties 19.26 24.10 27.44 25.74 23.97 2.6 Directors' Fees, Allowances and Expenses 0.25 0.31 0.29 0.46 0.49 2.7 Auditor's Fees and Expenses 1.52 2.00 2.86 2.87 3.70 2.8 Law Charges 0.71 2.13 2.81 3.81 3.59 2.9 Postage, Telegrams and Telephones 3.04 3.77 4.31 7.23 3.87 2.1 Repairs and Maintenance 4.52 5.86 8.77 8.24 9.23 2.11 Insurance 5.13 6.27 10.75 15.81 18.66 2.12 Other Expenditure 21.30 27.68 30.93 32.66 35.56 Total 222.12 282.89 313.86 364.57 406.10 Total Expenditure 994.40 1,053.18 1002.61 1201.30 1491.06 Gross Profit Before Provisions (including for 351.49 436.74 400.40 452.18 612.98 income tax & extraordinary Items Less: Extraordinary Items Nil Nil Nil Nil Nil Gross Profit Before Provisions (including for 351.49 436.74 400.40 452.18 612.98 income tax) Provisions & Contingencies * 246.48 300.44 310.31 226.97 320.25 Net Profit For The Year 105.01 136.30 90.09 225.21 292.73 Add/Less Adjustments Nil Nil Nil Nil Nil

Adjusted Net Profit for the year 105.01 136.30 90.09 225.21 292.73 Add: Balance of Profit Brought Forward 2.44 2.31 0.49 2.30 13.47 from previous year

Profit Available for Appropriation 107.45 138.61 90.58 227.51 306.20 APPROPRIATIONS Transfer to Statutory Reserve 31.52 34.08 22.53 56.31 73.19

142 Transfer to Revenue Reserve 15.00 0.00 20.83 100.57 130.21 Transfer to Capital Reserve 28.00 13.22 14.17 5.00 15.64 Transfer to Investment Fluctuation Reserve 20.82 64.64 - - 14.64 Transfer to Special Reserve u/s 36 (1)(viii) of -- 9.00 12.00 18.00 18.00 I. T. Act Proposed Dividend 8.69 15.23 16.45 29.96 34.24 Provision for Dividend Tax 1.11 1.95 2.30 4.20 5.82 Balance Carried Over to Balance Sheet 2.31 0.49 2.30 13.47 14.46 107.45 138.61 90.58 227.51 306.20 *Details of provisions and contingencies debited to profit and loss account during the said years:

Rs. in Crores For the Financial Year ended March 31, 2003 2004 2005 2006 2007 1 Provision towards NPAs & provision towards other 162.71 216.77 147.65 100.40 120.66 contingencies 2 Provision for Investments 9.48 4.92 133.68 10.91 60.99 3 Provision for Standard Assets 3.00 3.75 3.00 60.10 33.10 4 Provision towards Income Tax and Wealth Tax 71.29 75.00 25.97 55.56 105.50 Total 246.48 300.44 310.30 226.97 320.25

143 Part – II - Statement of Assets and Liabilities Rs. in Crores As at March 31st 2003 2004 2005 2006 2007 A Assets 1 Cash and Balances with RBI i. Cash in Hand (Including foreign currency 87.00 121.46 155.00 157.77 201.28 note) ii. Balance with RBI in Current Account 522.04 604.43 534.27 1056.81 1030.26 2 Balances with bank and money at call and short notice i. Balances with Bank in India # 187.57 554.41 669.74 626.55 966.95 ii. Balances with Bank outside India # 41.24 11.30 48.88 6.35 49.64 iii. Money at Call & Short Notice 70.00 0.00 148.00 25.00 65.00 3 Investments i. Investments in India 4,551.68 5,507.38 5799.17 6272.38 7032.66 ii. Investments outside India ------Total Investments 4,551.68 5,507.38 5799.17 6272.38 7032.66 4 Advances i. Advances in India 6,217.52 7,700.53 8822.59 11736.4 14899.10 7 ii. Advances outside India - - - Total Advances 6,217.52 7,700.53 8822.59 11736.4 14899.10 7 5 Fixed Assets* 154.14 168.01 178.05 166.79 179.47 6 Other Assets 362.39 439.04 457.88 587.70 658.94 TOTAL (A) 12,193.58 15,106.56 16,813.58 20,635. 25083.30 82 B Liabilities 1 Deposits i. Demand Deposits From Banks 75.20 58.70 22.18 8.22 21.85 From Others 512.52 641.51 838.90 930.03 1194.76 ii. Savings Bank Deposits 1,727.22 2,411.84 2864.71 3534.15 4229.67 iii. Term Deposits From Banks 297.47 293.65 298.91 588.82 523.75 From Others 8,335.01 10,070.98 11168.18 12817.5 15614.41 2 Total Deposits (1+2+3) 10,947.42 13,476.68 15192.88 17878.7 21584.44 4 2 Borrowings In India 84.68 17.60 54.67 509.78 400.23 Outside India -- 109.12 131.23 100.72 369.98 Total Borrowings 84.68 126.72 185.90 610.50 770.21 3 Other Liabilities & Provisions Other Liabilities & Provisions 340.06 487.03 448.83 633.69 763.07 Subordinate Debts 300.00 375.00 270.00 270.00 470.00 Sub-total 640.06 862.03 718.83 903.69 1233.07 TOTAL (B) 11,672.16 14,465.43 16,097.61 19,392. 23587.72 93 C NET ASSETS (C = A-B) 521.42 641.13 715.97 1242.89 1495.58 Represented by: D Share Capital 21.72 21.76 65.60 85.60 85.60 E Reserve & Surplus 1 Statutory Reserve 209.08 243.16 265.69 322.00 395.19 2 Capital Reserve* 46.43 59.66 73.95 78.95 94.59 3 Share Premium 148.98 149.52 109.04 424.95 424.95 4 Revenue & other Reserves 92.80 166.44 199.27 317.84 480.69 (including investment fluctuation reserve) 5 Contingency Reserve 0.10 0.10 0.10 0.10 0.10 6 Balance of Profit and Loss Account 2.31 0.49 2.30 13.47 14.46 (Adjusted) TOTAL (E) 499.70 619.37 650.35 1157.31 1409.98 F TOTAL (D+E) 521.42 641.13 715.95 1242.91 1495.58 G Contingent Liabilities

144 Claims against the Bank not acknowledged as 132.43 77.47 89.69 175.84 200.25 debts Liability for partly paid Investments ------Liability on account of outstanding forward 3,906.47 4,198.83 4397.14 7014.47 4030.30 exchange contracts Guarantees given on behalf of constituents in India 377.30 400.26 496.87 637.06 769.87 Acceptances, endorsements and other obligations 348.91 533.75 7213.03 8709.15 7955.00 Other items for which the Bank is contingently 17.23 9.23 7.80 7.05 5.27 liable Total (G) 4,782.34 5,219.54 12204.53 16,543. 12960.69 57 BILLS FOR COLLECTION 351.17 372.52 321.39 436.12 524.75 * - excluding revaluation reserve 8.05 7.71 7.39 7.08 6.63 # - in current account/other deposit account

145 Part – III - Statement of Profits and Losses (Consolidated) Rs. in Crore For the Financial Year ended March 31, 2003 2004 2005 2006 2007 A INCOME 1 Interest Earned 1.1 Interest/ Discount on Advances/ Bills 660.00 714.28 772.76 916.00 1281.45 1.2 Income on Investments 423.08 436.66 378.98 458.17 482.50 1.3 Interest on Balances with RBI and other 27.76 30.42 27.72 35.94 43.81 Inter-Bank Funds 1.4 Others 0.62 10.70 11.61 26.42 9.60 Total 1,111.46 1,192.06 1191.07 1436.53 1817.36 2 Other Income 2.1 Commission, Exchange & Brokerage 49.53 59.20 65.66 69.93 82.78 2.2 Net Profit on Sale of Investments) 143.56 174.42 64.62 33.08 49.29 2.3 Net Profit/(Loss) on Revaluation of (8.45) (1.07) (9.76) (16.15) (15.90) Investments 2.4 Net Profit/(Loss) on Sale of Land, Buildings 0.23 0.06 0.08 2.44 0.71 & Other Assets 2.5 Net Profit on Foreign Exchange 17.14 18.77 27.66 20.17 30.44 Transactions 2.6 Income earned by way of dividends etc from 6.37 4.45 2.33 2.30 3.62 companies in India 2.7 Miscellaneous Income 26.05 42.03 61.39 105.18 135.74 Total 234.43 297.86 211.98 216.95 286.68 Total Income 1,345.89 1,489.92 1403.05 1653.48 2104.04 B EXPENDITURE 1 Interest Expended 1.1 Interest on Deposits 729.11 722.99 656.75 797.34 1029.99 1.2 Interest on RBI/ Inter-Bank Borrowings 4.29 1.70 1.23 3.42 14.31 1.3 Others 38.81 45.54 30.72 35.91 40.59 Total 772.21 770.23 688.70 836.67 1084.89 2 Operating Expenses 2.1 Payment to and Provisions for Employees 139.47 178.29 185.82 228.43 260.48 2.2 Rent, Taxes & Lighting 20.97 25.26 31.95 32.25 37.59 2.3 Printing & Stationery 3.45 3.70 4.25 4.33 5.09 2.4 Advertisements & Publicity 2.54 3.56 3.72 2.81 3.90 2.5 Depreciation on Bank's Properties 19.26 24.10 27.44 25.74 23.97 2.6 Directors' Fees, Allowances and Expenses 0.25 0.31 0.29 0.46 0.49 2.7 Auditor's Fees and Expenses 1.52 2.00 2.86 2.87 3.71 2.8 Law Charges 0.71 2.13 2.81 3.81 3.59 2.9 Postage, Telegrams and Telephones 3.04 3.77 4.31 7.23 3.87 2.1 Repairs and Maintenance 4.52 5.86 8.77 8.25 9.23 2.1 Insurance 5.13 6.27 10.75 15.81 18.66 1 2.1 Other Expenditure 21.30 27.68 30.93 32.66 35.56 2 Total 222.16 282.93 313.90 364.65 406.14 Total Expenditure 994.37 1,053.16 1002.60 1201.32 1491.03 Gross Profit Before Provisions (including 351.52 436.76 400.45 452.16 613.01 for income tax & extraordinary Items Less: Extraordinary Items Nil Nil Nil Nil Nil Gross Profit Before Provisions (including 351.52 436.76 400.45 452.16 613.01 for income tax) Provisions & Contingencies * 246.49 300.44 310.30 226.97 320.26 Net Profit For The Year 105.03 136.32 90.15 225.19 292.75 Add/Less Adjustments Nil Nil Nil Nil Nil

Adjusted Net Profit for the year 105.03 136.32 90.15 225.19 292.75 Add: Balance of Profit Brought Forward 2.63 2.52 0.72 2.59 13.74 from previous year

Profit Available for Appropriation 107.66 138.84 90.87 227.78 306.49 APPROPRIATIONS

146 Transfer to Statutory Reserve 31.52 34.08 22.53 56.31 73.19 Transfer to Revenue Reserve 15.00 0.00 20.83 100.57 130.21 Transfer to Capital Reserve 28.00 13.22 14.17 5.00 15.64 Transfer to Investment Fluctuation Reserve 20.82 64.64 - - 14.64 Transfer to Special Reserve u/s 36 (1)(viii) -- 9.00 12.00 18.00 18.00 of I. T. Act Proposed Dividend 8.69 15.23 16.45 29.96 34.24 Provision for Dividend Tax 1.11 1.95 2.30 4.20 5.82 Balance Carried Over to Balance Sheet 2.52 0.72 2.59 13.74 14.75 107.66 138.84 90.87 227.78 306.49 *Details of provisions and contingencies debited to profit and loss account during the said years: Rs. in Crore For the Financial Year ended March 31, 2003 2004 2005 2006 2007 1 Provision towards NPAs & provision towards other 162.71 216.77 147.66 100.40 120.66 contingencies 2 Provision for Investments 9.48 4.92 133.68 10.91 60.99 3 Provision for Standard Assets 3.00 3.75 3.00 60.10 33.10 4 Provision towards Income Tax and Wealth Tax 71.30 75.00 25.96 55.56 105.50 Total 246.49 300.44 310.30 226.97 320.25

147 Part – IV - Statement of Assets And Liabilities (Consolidated) Rs. in Crore As at March 31st 2003 2004 2005 2006 2007 A Assets 1 Cash and Balances with RBI i. Cash in Hand (Including foreign currency 87.00 121.46 154.99 157.77 201.28 note) ii. Balance with RBI in Current Account 522.04 604.43 534.27 1056.81 1030.26 2 Balances with bank and money at call and short notice i. Balances with Bank in India # 187.57 554.41 669.74 626.55 966.95 ii. Balances with Bank outside India # 41.24 11.30 48.88 6.35 49.64 iii. Money at Call & Short Notice 70.00 0.00 148.00 25.00 65.00 3 Investments i. Investments in India 4,551.18 5,506.88 5798.67 6271.88 7032.16 ii. Investments outside India ------Total Investments 4,551.18 5,506.88 5798.67 6271.88 7032.16 4 Advances i. Advances in India 6,217.52 7,700.53 8822.59 11736.4 14899.10 7 ii. Advances outside India - - - Total Advances 6,217.52 7,700.53 8822.59 11736.4 14899.10 7 5 Fixed Assets* 154.14 168.01 178.05 166.79 179.47 6 Other Assets 362.42 439.08 457.90 587.73 658.97 TOTAL (A) 12,193.11 15,106.10 16,813.09 20,635. 25082.83 35 B Liabilities 1 Deposits i. Demand Deposits From Banks 75.20 58.70 22.18 8.22 21.85 From Others 512.21 641.21 838.52 929.67 1194.38 ii. Savings Bank Deposits 1,727.22 2,411.84 2864.71 3534.15 4229.67 iii. Term Deposits From Banks 297.48 293.65 298.91 588.82 523.75 From Others 8,333.91 10,069.88 11167.08 12816.4 15613.31 1 Total Deposits (1+2+3) 10,946.02 13,475.28 15191.40 17877.2 21582.96 7 2 Borrowings In India 84.68 17.60 54.67 509.78 400.23 Outside India -- 109.12 131.23 100.72 369.98 Total Borrowings 84.68 126.72 185.90 610.50 770.21 3 Other Liabilities & Provisions Other Liabilities & Provisions 340.07 487.03 448.84 633.70 763.08 Subordinate Debts 300.00 375.00 270.00 270.00 470.00 Sub-total 640.07 862.03 718.84 903.70 1233.08 TOTAL (B) 11,670.77 14,464.03 16,096.14 19,391. 23586.25 47 C NET ASSETS (C = A-B) 522.34 642.07 716.95 1243.88 1496.58 Represented by: D Share Capital 21.72 21.76 65.60 85.60 85.60 E Reserve & Surplus 1 Statutory Reserve 209.08 243.16 265.69 322.00 395.19 2 Capital Reserve* 46.43 59.66 73.95 78.94 94.59 3 Share Premium 148.98 149.52 109.04 424.95 424.95 4 Revenue & other Reserves 93.51 167.15 199.98 318.55 481.40 (including investment fluctuation reserve) 5 Contingency Reserve 0.10 0.10 0.10 0.10 0.10 6 Balance of Profit and Loss Account 2.52 0.72 2.59 13.74 14.75 (Adjusted) TOTAL (E) 500.62 620.31 651.35 1158.28 1410.98 F TOTAL (D+E) 522.34 642.07 716.95 1243.88 1496.58 G Contingent Liabilities

148 Claims against the Bank not acknowledged as 132.43 77.47 89.69 175.92 200.33 debts Liability for partly paid Investments ------Liability on account of outstanding forward 3,906.47 4,198.83 4397.14 7014.47 4030.30 exchange contracts Guarantees given on behalf of constituents in 377.30 400.26 496.87 637.06 769.87 India Acceptances, endorsements and other obligations 348.91 533.75 7213.03 8709.15 7955.00 Other items for which the Bank is contingently 17.23 9.23 7.80 7.05 5.27 liable Total (G) 4,782.34 5,219.54 12204.53 16,543. 12960.77 65 BILLS FOR COLLECTION 351.17 372.52 321.39 436.12 524.75 * - excluding revaluation reserve 8.05 7.71 7.39 7.08 6.63 # - in current account/other deposit account

Part – V - Statement of Dividend Declared by the Federal Bank Limited

Year ended March 31, 2003 2004 2005 2006 2007 For the Year 2002-2003 2003-2004 2004-2005 2005-2006 2006-2007 Number of shares (in crore) 2.217 2.217 6.56 8.56 8.56 Rate of Dividend (%) 40.00 70.00 25.00 35.00 40.00 Amount of Dividend (Rs. in crore) 8.69 15.23 16.44 29.96 34.24

Part – VI - Break Up Of Investments

As on March 31, 2003 2004 2005 2006 2007 Gross investments 4555.51 5510.58 5816.27 6299.64 7124.44 SLR Investments 3507.06 4283.88 4904.61 5507.03 5923.28 Non-SLR Investments 1048.45 1226.70 911.66 792.61 1201.16 Held Till Maturity (HTM) 897.09 798.23 2859.37 3815.91 4159.01 Available For Sale 3644.53 4710.35 2931.33 2473.88 2958.15 Held For Trading 13.89 2.00 25.58 9.85 7.28 % of HTM to entire portfolio 19.69 14.49 49.16 60.57 58.38

Part – VII Accounting Ratios of The Federal Bank Limited

Year ended 31st March 2003 2004 2005 2006 2007 a. Basic Earnings Per Share (in Rs.) 16.12* 20.88* 13.73 32.71 34.20 b. Return on Net Worth (in %) 20.14 21.26 12.58 18.12 19.57 c. Net Asset Value per equity share (in Rs.) 235.19 289.18 109.14 145.31 174.71 OTHER RATIOS Net NPA to Net Advances Ratio (%) 4.95 2.89 2.21 0.95 0.44 Interest Income / Working Funds (%) 10.37 9.01 8.14 8.18 8.58 Non-Interest Income / Working Funds (%) 2.19 2.25 1.45 1.24 1.35 Return on Average Assets (%) 0.86 0.90 0.62 1.28 1.38 Business Per Employee (Rs. In Crore) 2.70 3.27 3.66 4.31 5.44 Net Profit per Employee (Rs.in Lakhs) 1.69 2.14 1.39 3.54 4.43 Capital Adequacy Ratio (%) 11.23 11.48 11.27 13.75 13.43 Tier I 6.65 6.26 6.42 9.72 8.94 Tier II 4.58 5.22 4.85 4.03 4.49 Credit / Deposit Ratio (%) 56.79 57.14 58.07 65.64 69.03 Operating Expenses / Average Working Funds (%) 2.07 2.14 2.15 2.07 1.92 Operating Profit / Average Working Funds (%) 3.28 3.30 2.74 2.57 2.89 Yield on Advances (%) 12.48 10.96 9.86 9.80 10.16 Yield on Invetsments (%) 13.57 12.19 8.71 7.82 8.15 Cost of Depsoits (%) 7.63 6.24 5.08 5.11 5.55 Gross Profit per Employee (Rs. In Lakh) 5.65 6.86 6.18 7.11 9.28 Business per Branch (Rs. In Crore) 40.87 48.13 52.67 62.74 68.07 * EPS for years ended March 31, 2005 and March 31, 2004 are restated consequent to issue of bonus shares during the year ended March 31, 2005.

149 Part – VIII - Accounting Ratios (Consolidated )

YEAR ENDED 31st MARCH 2003 2004 2005 2006 2007 a. Basic Earnings Per Share (in Rs.) 16.12* 20.88* 13.74 32.70 34.20 b. Return on Net Worth (in %) 20.14 21.26 12.59 18.10 19.56 c. Net Asset Value per equity share (in Rs.) 235.61 289.61 109.29 145.31 174.83 * EPS for years ended March 31, 2003 and March 31, 2004 are restated consequent to issue of bonus shares during the year ended March 31, 2005.

Part –IX

1) AUDITOR’S QUALIFICATION FOR WHICH ADJUSTMENTS COULD BE CARRIED OUT

Nil

2) AUDITOR’S QUALIFICATION FOR WHICH ADJUSTMENTS COULD NOT BE CARRIED OUT

Inter Branch Adjustments

1. For the years March 31, 2003 and March 31, 2004

Reconciliation of debit notes Receivable, and Accounts Receivable in progress, which could not be ascertained and hence not adjusted.

2. For financial years ended March 31, 2003 to March 31, 2007

The effect, if any, in respect of reconciliation/adjustment of outstanding entries of Inter branch accounts/office transactions, could not be ascertained and hence not adjusted

150 ANNEXURE – C

Part – I - Capitalisation Statement (Rs. in crore) Particulars Pre-issue as at March 31, 2006 Pre-issue as at March 31, 2007 Loan Funds Long Term 275.57 493.54 Short Term 604.92 746.67 Total Debt 880.49 1240.21 Shareholders’ Funds Share Capital 85.60 85.60

Reserves and Surplus (Net of Revaluation Reserve) 1157.31 1409.98 Total Equity 1242.91 1495.58 Long Term Debt/ Equity Ratio 22.17% 33.00%

Notes: 1.Debts maturing within the next one year from 31-03-2006/31-03-2007 are considered as short term debts. 2.Loan funds include subordinated debts raised for Tier II Capital

Part – II - Tax Shelter (Rs. in crore) For the Year ended March 31 2003 2004 2005 2006 2007 Profit before Tax 176.30 211.30 116.08 280.76 398.23 Tax Rate 36.75% 35.875% 36.5925% 33.66% 33.66% Tax at actual rate on profit 64.79 75.80 42.48 94.50 134.04 Adjustments Permanent Differences i) Exempt income (Interest & dividend) -8.77 -6.23 -14.92 -7.60 -3.44 ii) NPA Provision/write off - -15.75 -15.29 -119.06 -160.47 iii) Others 3.00 3.75 0.79 - -11.75 Timing Difference i) Difference between book Depreciation 1.53 -5.12 -1.07 2.17 3.20 IT Depreciation on Fixed Assets ii) Interest accrued but not due 4.12 0.82 25.19 -27.86 -13.92 iii) NPA Provision 10.00 - - - - iv) Depreciation on Investments 11.94 -31.09 -130.85 -107.71 -67.02 v) Provision for Leave encashment 1.78 2.76 6.79 7.22 24.97 vi) Salary Arrears - 12.41 20.86 -33.27 - vii) Other Adjustments 3.30 -1.79 4.20 61.40 112.07 Net Adjustments 26.90 -40.24 -104.30 -224.71 -116.36 Tax Saving thereon * 14.43 38.17 75.64 39.16 MAT - - 3.62 4.23 - Total Taxation 74.68 61.37 7.93 23.09 94.88 * No Tax Saving in these years

Part – III - Principal Terms Of Borrowings

Details of Borrowings as on 31 March 2007

Name Outstanding Rate of Duration (No. Date of Repayment terms amount interest (%) of days) borrowing (Rs. crore) SIDBI 22.29 Various rates Various periods Various dates Quarterly instalments NHB- Refinance 300.00 9.75% to one year 28/03/2007 Principal Lumpsum – 10.75% Interest-Quarterly NABARD 2.94 6.50% to 5 years to 14 Various dates Half yearly instalments 13.50% years Refinance from 75.00 9.75 180 20/02/07 Principal – Lumpsum EXIM Bank Interest - Monthly Overseas borrowings:- Canara London 43.47 5.94 365 08/08/2006 Lumpsum with interest

151 Syndicate London 43.47 5.62 181 09/02/2007 - do - Syndicate London 4.35 5.6 182 15/02/2007 - do - SBI, London 13.04 5.59 179 26/02/2007 - do - Syndicate London 26.08 5.55 186 08/03/2007 - do - BOI, Singapore 43.47 5.6725 184 14/03/2007 - do - Canara London 43.47 5.82 366 27/02/2007 - do - Canara London 8.69 5.84 366 27/02/2007 - do - Canara London 43.47 5.69 369 21/03/2007 - do - BOI, Singapore 43.47 5.735 366 26/03/2007 - do -

Others 57.00 Credit bal in nostro mirror accounts. Overseas Borrowing 369.98 (Total) Total Borrowings 770.21

Details of Secured Borrowings as on 31 March 2007

Nil

Servicing Behaviour

The Bank has not defaulted in the payment of interest and repayment of principal to other Banks, institutions, deposit holders etc. The Bank has not defaulted in meeting statutory dues, institutional dues and dues on fixed deposits and other arrears.

152 ANNEXURE- C

PART – IV – Cash Flow Statement (Rs. In Crore) As at March 31 2003 2004 2005 2006 2007 CASH FLOW FROM OPERATING ACTIVITIES Net profit before Tax and Other Provisions 351.49 436.74 400.39 452.18 612.98 Adjustments for Depreciation on Fixed Assets 19.26 24.10 27.44 25.74 23.97 Others 0.22 0.31 (0.40) (2.74) (1.16)

OPERATING PROFIT BEFORE WORKING CAPITAL CHANGES 370.97 461.15 427.43 475.18 635.79

Adjustments for working capital changes:- Investments (805.33) (960.61) (411.81) (484.13) (750.85) Funds advanced to customers (1185.87) (1690.98) (1257.83) (3009.45) (3188.65) Other operating assets 13.39 (20.85) 18.79 (39.15) (29.57)

Deposits from customers 2082.11 2529.26 1716.19 2685.86 3510.59 Borrowings from banks & FIs (289.43) 42.05 59.17 424.59 159.68 Other operating liabilities 174.50 197.58 (177.95) 74.22 249.70

Cash generated from operations 360.34 557.60 373.99 127.12 586.69 Direct taxes paid (71.21) (127.47) (60.85) (118.24) (118.93)

NET CASH GENERATED FROM OPERATIONS 289.13 430.13 313.14 8.88 467.76

CASH FLOW FROM INVESTING ACTIVITIES Purchase of fixed assets (57.19) (40.04) (40.00) (21.01) (27.59) Sale of fixed assets 5.53 1.77 2.92 9.27 2.97 Investment in Subsidairy/Joint Venture - - - - (0.01) NET CASH GENERATED FROM INVESTING ACTIVITIES (51.66) (38.27) (37.08) (11.74) (24.63) CASH FLOW FROM FINANCING ACTIVITIES Equity Capital including Premium 0.01 0.58 3.50 335.90 - Dividend paid (8.41) (8.69) (15.27) (16.44) (29.96)

Net cash generated from financing activities (8.40) (8.11) (11.77) 319.46 (29.96)

INCREASE/DECREASE IN CASH & CASH EQUIVALENTS 229.07 383.75 264.29 316.60 413.17 Cash & Cash equivalents as at March 31 of the Previous Fiscal 678.78 907.85 1291.60 1555.89 1899.97 Cash & Cash equivalents as at March 31 of the Reporting Fiscal 907.85 1291.60 1555.89 1872.49 2313.14

153 PART – V – Cash Flow Statement (Consolidated )

Rs. In Crore As at March 31 2003 2004 2005 2006 2007 CASH FLOW FROM OPERATING ACTIVITIES Net profit before Tax and Other Provisions 351.52 436.76 400.45 452.16 613.01 Adjustments for Depreciation on Fixed Assets 19.26 24.10 27.44 25.74 23.97 Others 0.22 0.31 (0.40) (2.74) (1.16) OPERATING PROFIT BEFORE WORKING CAPITAL CHANGES 371.00 461.17 427.49 475.16 635.82 Adjustments for working capital changes:- Investments (805.33) (960.61) (411.81) (484.13) (750.85) Funds advanced to customers (1185.87) (1690.98) (1257.83) (3009.45) (3188.70) Other operating assets 13.39 (20.85) 18.79 (39.15) (29.57)

Deposits from customers 2082.10 2529.26 1716.11 2685.88 3510.57 Borrowings from banks & FIs (289.43) 42.05 59.17 424.59 159.68 Other operating liabilities 174.49 197.57 (177.95) 74.23 249.7 Cash generated from operations 360.35 557.61 373.97 127.13 586.7 Direct taxes paid (71.22) (127.48) (60.83) (118.25) (118.94) NET CASH GENERATED FROM OPERATIONS 289.13 430.13 313.14 8.88 467.76 CASH FLOW FROM INVESTING ACTIVITIES Purchase of fixed assets (57.19) (40.04) (40.00) (21.01) (27.59) Sale of fixed assets 5.53 1.77 2.92 9.27 2.97 (0.01) NET CASH GENERATED FROM INVESTING ACTIVITIES (51.66) (38.27) (37.08) (11.74) (24.63) CASH FLOW FROM FINANCING ACTIVITIES Equity Capital including Premium 0.01 0.58 3.50 335.90 - Dividend paid (8.41) (8.69) (15.27) (16.44) (29.96) Net cash generated from financing activities (8.40) (8.11) (11.77) 319.46 -29.96 INCREASE/DECREASE IN CASH & CASH EQUIVALENTS 229.07 383.75 264.29 316.60 413.17 Cash & Cash equivalents as at March 31 of the Previous Fiscal 678.78 907.85 1291.60 1555.89 1899.97 Cash & Cash equivalents as at March 31 of the Reporting Fiscal 907.85 1291.60 1555.89 1872.49 2313.14

154

ANNEXURE – B

Part – i & ii -. Principal Accounting Policies for the Year Ended March 31, 2007

1. General

The financial statements have been drawn up on historical cost convention and on accrual basis of accounting (unless otherwise stated) and conform to the statutory provisions and practices followed in the banking industry in India.

2. Advances

a) Advances are classified as Standard, Sub-standard, Doubtful, or Loss assets, and provisions required for possible losses on such advances are made as per the guidelines of the Reserve Bank of India (RBI) on matters relating to prudential norms.

b) Advances shown in the Balance Sheet are net of:

(i) bills rediscounted, (ii) provisions made for non performing advances.

3. Investments

Investments are classified under three categories, viz ‘Held for Trading’ (HFT), ‘Available for Sale’ (AFS), and ‘Held to Maturity’ (HTM) as per RBI guidelines and disclosed in the Balance Sheet under six classifications. Non-performing investments are identified and depreciation/provision made as per RBI guidelines.

Valuation

(a) Investments classified as HFT have been marked to market and valued scrip-wise under each classification at monthly intervals, excluding equities which are done on a weekly basis. Within a classification net appreciation is ignored and net depreciation is provided for.

(b) Investments classified as AFS have also been marked to market, and valued quarterly excluding equities which are done on a weekly basis. Within a classification net appreciation is ignored and net depreciation is provided for.

(c) Investments classified as HTM are stated at acquisition cost except in cases where the acquisition cost is higher than the face value, in which case the excess, i.e. premium on acquisition, is amortised over the period remaining to maturity on equated basis.

(d) The investments (other than shares) are valued based on market value on the trade date immediately succeeding year end taking into consideration the announcements if any made by Reserve Bank of India.

4. Derivatives

Interest rate swaps/currency swaps pertain to trading position and which are outstanding as on Balance Sheet date are marked to market and net appreciation is ignored and net depreciation is recognised in the Profit and Loss Account.

5. Transactions Involving Foreign Exchange

(e) All monetary assets and liabilities denominated in foreign currencies are translated at the exchange rates prevailing at the close of the year as advised by the Foreign Exchange Dealers’ Association of India (FEDAI).

155 (f) Income and expenditure denominated in foreign currencies have been accounted at the exchange rates prevailing on the dates of the transactions.

(g) Outstanding foreign exchange forward contracts are revalued at the rates applicable on the closing date as advised by FEDAI. The resultant profit/loss is taken into Profit and Loss account.

(h) Contingent liabilities on guarantees, letters of credit, acceptances and endorsements are reported at the rates prevailing on the Balance Sheet date.

6. Fixed Assets

(i) Premises, except those revalued, and other fixed assets have been stated at their historical cost. Premises which were revalued are stated at such values on revaluation and the appreciation credited to the Capital Reserve.

(j) Depreciation has been provided for on the diminishing balances at the rates as per Schedule XIV to the Companies Act, 1956, except on computers, which are depreciated under the straight line method at 33.33% per annum as per RBI guidelines. Depreciation is not provided for on assets sold/disposed off during the year except for vehicles. Depreciation on assets costing less than Rs.5000 each has been fully written off other than computers, mobile phones and EPBX for which depreciation is provided from the date of addition.

(k) Depreciation on assets revalued has been charged on their written-down value including the addition made on revaluation, and an equivalent amount towards the additional depreciation provided consequent upon revaluation has been transferred from the Capital Reserve to the Profit & Loss Account.

(l) License fee and implementation expenditure for Core Banking Solution is amortised on the straight line basis over a period of three years, on a pro rata basis.

7. Leasing

Accounting Standard on Leases (AS19) issued by the Institute of Chartered Accountants of India (ICAI) is applicable to leases entered into on or after April 1, 2001. Since all the Bank’s outstanding lease transactions were entered into prior to that date, the Bank has followed the earlier ICAI guidelines in respect of these leases.

Depreciation on non-performing leased assets (NPAs) is provided on written-down value as per the Companies Act 1956, by directly charging to Profit & Loss Account without any corresponding adjustment in the Lease Adjustment Account. In addition to depreciation, provision is also made for non-performing leased assets as per RBI guidelines.

8. Employee Benefits i) Post –Employment benefit Plans

Payments to defined contribution retirement benefit schemes are charged as an expense as they fall due

For defined benefit schemes, the cost of providing benefits is determined using the Projected Unit Credit Method, with actuarial valuations being carried out at each Balance Sheet date. Actuarial gains and losses are recognized in full in the Profit and Loss account for the period in which they occur. Past service cost is recognized immediately to the extent that the benefits are already vested, and otherwise is amortized on straight-line basis over the average period until the benefits become vested.

The retirement benefit obligation recognized in the Balance Sheet represents the present value of the defined obligation as adjusted for unrecognized past service cost, and as reduced by the fair value of scheme assets. Any asset resulting from this calculation is limited to past service cost, plus the present value of available refunds and reductions in future contributions to the scheme.

156 ii) Short-term employee benefits

The undiscounted amount of short-term employee benefits expected to be paid in exchange for the services rendered by employees is recognized during the period when the employee renders the service.

9. Recognition of Income and Expenditure

Items of income and expenditure are accounted for on accrual basis, except as stated hereunder: (a) Interest on loans and advances is recognised on accrual basis other than on those stipulated in RBI’s prudential norms on income recognition, asset classification and provisioning relating to NPAs, where the income is recognised on realisation.

(b) Commission is accounted on cash basis except income from guarantee commission which is recognised over the period of the guarantees. Dividends are recognised as and when declared by the investee companies.

10. Provision for Income Tax

Provision for income tax is made for the current tax, and adjustment is made for deferred tax for the year representing the net change in the deferred tax asset or deferred tax liability, in accordance with Accounting Standard 22 issued by the Institute of Chartered Accountants of India (ICAI) Deferred tax assets are recognised on the basis of the management’s judgment of reasonable certainty of future profits

11. Earnings per Share

Basic Earnings per share (EPS) reported is computed by dividing net profit after tax by the weighted average number of equity shares outstanding for the year.

12. Segment Information

The Bank’s operations are classified into two reportable business segments, viz. Treasury Operations (investment and trading in securities, shares, debentures, etc.) and Other Banking Operations (other than Treasury) and segment information is reported accordingly. Foreign Exchange operations are included in Banking operations.

13. Net Profit

The net profit disclosed in the Profit and Loss Account is after:

(a) provision for taxes; (b) provision for possible losses on Standard Assets, NPAs, and other contingencies; (c) depreciation on investments; and (d) other usual and necessary provisions.

157

SCHEDULE 19 – NOTES ON ACCOUNTS

1. i) As per the Scheme of amalgamation, notified by the Central government, and communicated by the Reserve Bank of India, The Ganesh bank of Kurundwad Ltd has been amalgamated with the Bank, with effect from 02 September 2006, and the figures relating to the erstwhile Bank, with effect from 02 September 2006 are incorporated in the above statements. Hence the previous year figures are not comparable of current year.

ii) The excess of liabilities over assets of the erstwhile Bank as on 02 September 2006, based on the audited statements certified by the auditors appointed by the RBI, amounting to Rs.23.28 Crore has been fully provided for in the current year and included under ‘Provisions & Contingencies’ in the Profit & Loss A/c, as against the normal practice of writing off the same over a period of years or at the end of twelve years, as prescribed in the scheme of amalgamation.

2. Retirement benefits to employees

(i) Payments to provision for employees includes a sum of Rs.28.43 crore being the employees benefits upto 31 March 2006 as per the Revised Accounting Standard 15 (AS 15) on “ Employee Benefits” issued by the Institute of Chartered Accountants of India. The said sum has been debited to the Profit & Loss A/c instead of adjusting against the opening balance of Reserves & Surplus as per the said standard.

(ii) (a) Defined Contribution Plan

Provident Fund

Eligible employees (employees not opted for pension plan) receive benefits from a provident fund, which is a defined contribution plan. Aggregate contributions along with interest thereon are paid at retirement, death, incapacitation or termination of employment. Both the employee and the Bank make monthly contributions to the Federal Bank Employees’ Provident Fund equal to a specified percentage of the covered employee’s salary. The Bank has no other obligation than the monthly contribution.

The Bank recognized Rs.6.44 Crore for provident fund contribution in the Profit and Loss account

(b) Defined benefit plan

1) Gratuity The Bank provides for gratuity, a defined benefit retirement plan (the “Gratuity Plan”) covering eligible employees. The Gratuity Plan provides a lump sum payment to vested employees at retirement, death, incapacitation or termination of employment, of an amount based on the respective employee’s salary and the tenure of employment. Vesting occurs upon completion of five years of service as per Payment of Gratuity Act, 1972 or as per the provisions of the Federal Bank Employees’ Gratuity Trust Fund Rules/Award. Liabilities with regard to the Gratuity Plan are determined by actuarial valuation as of the Balance Sheet date, based upon which, the company contributes all the ascertained liabilities to the Federal Bank Employees’ Gratuity Trust Fund (the “Trust”). Trustees administer contributions made to the Trust and contributions are invested in specific investments as permitted by law.

2) Superannuation/ Pension The Bank provides for monthly pension, a defined benefit retirement plan (the “pension Plan”) covering eligible employees. The pension Plan provides a monthly pension after retirement of the employees till death and to the family after the death of the pensioner. The monthly pension is based on the respective employee’s salary and the tenure of employment. Vesting occurs upon completion of ten years of service. The bank pays the monthly pension by purchasing the annuity from Life Insurance Corporation of India (LIC). Liabilities with regard to the pension Plan are determined by actuarial valuation as of the Balance Sheet date, based upon which, the company contributes all the ascertained liabilities to the Federal Bank (Employees’) Pension Fund (the “Trust”). Trustees administer contributions made to the Trust and contributions are invested in specific investments as permitted by law.

158 The following table as furnished by actuary sets out the funded status of gratuity/pension plan and the amounts recognized in the Bank’s financial statements as at March 31,2007 i) Change in benefit obligations: in Rs. crores Particulars Gratuity Plan Pension Plan Projected benefit obligation, beginning of the year (April 1, 2006) 91.43 151.79 Service Cost 2.41 4.50 Interest cost 7.34 12.46 Actuarial (gain)/ loss 4.81 1.27 Benefits paid (7.34) (5.84) Projected benefit obligation, end of the year 98.65 164.18 ii) Change in plan assets:

Particulars Gratuity Plan Pension Plan Plans assets at beginning of the year at fair value (April 1, 2006) 91.43 151.79 Expected return on plan assets 7.53 12.52 Actuarial gain/(loss) (0.07) (3.09) Employer’s Contributions 7.10 8.80 Benefits paid (7.34) (5.84) Plans assets at end of the year, at fair value 98.65 164.18 iii) Reconciliation of present value of the obligation and the fair value of the plan assets

Fair value of plan assets at the end of the year 98.65 164.18 Present value of the defined benefit obligations at the end of the 98.65 164.18 period Asset recognized in the Balance Sheet - - iv) Gratuity/pension cost for the year ended March 31 2007

Particulars Gratuity Plan Pension Plan Service cost 2.41 4.50 Interest cost 7.34 12.46 Expected return on plan assets (7.53) (12.52) Actuarial (gain)/loss 4.88 4.36 Net cost Debit to Profit and Loss account 7.10 8.80 Actual return on plan assets 7.48 9.45 v) Investment details of plan assets

Particulars Gratuity Plan Pension Plan Central and state Government bonds 42.30 56.02 Other debt securities 45.88 55.78 Balance in Saving bank account with the Bank 7.42 2.47 Receivable from Bank Nil 5.77 Net current assets 3.05 3.78 Balance with LIC Nil 6.32 Contra account of Annuity purchased from LIC Nil 34.04 Total 98.65 164.18

159 vi) Assumptions

Particulars Gratuity Plan Pension Plan Discount rate 8.25% 8.25% Annuity rate per Rupee - 132.2314 Salary escalation rate 5% 5% Estimated rate of return on plan assets 8.25% 8.25% Note: This being the first year of disclosure, previous year figures have not been furnished.

The employees of the Bank are entitled to compensated absence. The employees can carry forward a portion of the unutilized accrued compensated absence and utilize it in future periods or receive cash compensation at retirement or termination of employment for the unutilized accrued compensated absence for a maximum of 240 days. The Bank records an obligation for compensated absences in the period in which the employee renders the services that increase this entitlement. The Bank measures the expected cost of compensated absence as the additional amount that the Bank expects to pay as a result of the unused entitlement that has accumulated at the balance sheet date based on actuarial valuations.

3. The Bank has introduced a voluntary separation scheme for its employees during the year. An amount of Rs.14.32 crore has been paid as a compensation and debited to Profit & Loss A/c under Payments to & provisions for employees.

4. On March 30, 2007 after the trading hours Reserve Bank of India made certain announcements which affected the prices of Government Securities/bonds on the next trading day. Hence as a prudent measure the bank has made a provision of Rs.19.32 crore over and above the minimum requirement based on the prices on April 3, 2007, being the next trading day, as against the practice of valuing the securities based on the market value as on 31 March. As a result of the above change the profit for the year is lower and the provision for depreciation on investment is higher by Rs.19.32 crore with consequential impact on Reserves and Surplus and Investments.

5. Reconciliation

The reconciliation of transactions between branches, Regional Offices and Head Office have been drawn up to 31 March 2007. Steps for adjustments/elimination of outstanding entries are in progress. There were no debit entries outstanding for more than three months as of 31 March 2007.

6. Investments

a. Investments under HTM (excluding specified investments as per RBI norms) account for 18.87% of demand and time liabilities as at the end of March 2007 as against permitted ceiling of 25% stipulated by RBI.

b. In respect of securities held under HTM category premium of Rs.15.90 crore (previous year Rs. 16.15 crore) has been amortised during the year and shown under other income in Profit & Loss Account as loss on revaluation of investments.

c. Profit on sale of securities from HTM category amounting to Rs.31.43 crore (previous year Rs.10.05 crore) has been taken to Profit and Loss Account and a sum of Rs.15.64 crore (previous year Rs.5.00 crore) being net of taxes and transfer to statutory reserve of such profit, appropriated to Capital Reserve.

7. Fixed Assets

i. During the year 1995-96, the appreciation of Rs 9.65 crore in the value of land and buildings consequent upon revaluation by approved valuers was credited to Capital Reserve. Depreciation for the year on the net addition to value on such revaluation of assets at Rs 0.28 crore (previous year Rs 0.31 crore) has been transferred from Capital Reserve to Profit & Loss Account. There has been no revaluation of assets during this year.

160 ii. Land and premises include flats Rs.6.81 crore (previous year Rs.6.79 crore), written down value Rs. 5.69 crore (previous year Rs.5.99 crore), taken possession of and being used by the Bank, for which documentation/registration formalities are to be completed.

iii. Safe & Furniture includes cost of software relating to Core Banking solution of Rs.4.94 crore (written down value Rs.4.53 crore ).

8. Taxation.

i. Provision for taxation for the year has been made taking into account the favourable decisions of judicial/appellate authorities.

ii. The Disputed income tax/interest tax amounting to Rs.124.43 crore (Previous year Rs.119.44 crore) has been paid/adjusted and has been included in “Tax paid/Tax deducted at source (net of provision)” in “Other Assets” Schedule V (previous year Rs.116.91 crore). Provision for taxation is not considered necessary in respect of the above disputed demands based on various judicial decisions on such disputed issues. Management does not envisage any liability in respect of the said disputed issues.

iii. The Bank has accounted for income tax in compliance with ICAI’s Accounting Standard 22. Accordingly, timing differences resulting in deferred tax assets and deferred tax liabilities are recognised. The major components of deferred tax liabilities and assets as on 31 March 2007 are shown below: (Rs. In Crores) Details of Tax Liability Current Previous Year Year Tax effect of timing difference in the assessment of (i) Interest income 46.66 37.28 (ii) Depreciation on Fixed Asset 9.44 9.71

(iii) Depreciation on Investments 91.18 50.01

(A) 147.28 97.00 Deferred Tax Asset Tax effect on timing difference in allowance of (i) Interest/premium paid on purchase of Securities 9.79 4.86 (ii) Provision for salary arrears 0.00 11.21

(iii) Provision for Standard Assets 27.55 ` 7.32 (iv) Others 11.88 7.74 (B) 49.22 31.13 Net Deferred tax liability (A-B) 98.06 65.87

9. Investment Fluctuation Reserve

As a prudent policy Bank has decided to make appropriation of 5% of its net profit every year towards the marked to market losses on the investments held in the HTM category. After appropriating Rs.14.64 crore (previous year NIL) during the year the Bank holds Rs.171.31 crore under its Investment Fluctuation Reserve as on 31 March 2007 (Previous year Rs.156.67 crore).

10. Related party transactions

The following are the significant transactions with related parties during the year ended March 31, 2007

Name of the Party Nature of Relationship ICICI Bank Limited Associate (for the previous year upto 31.12.2005)

ICICI Securities Limited Associate (for the previous year upto 31.12.2005) ICICI Prudential Limited Associate (for the previous year upto 31.12.2005)

IDBI Fortis Life Insurance Company Limited Joint Venture

161 Fed Bank Financial Services Limited Subsidiary Sri.M Venugopalan Key Management Personnel (Rs.In crores) Particulars Associates/Joint Venture Subsidiaries Key Management Personnel* Current Previous Current Previous Current Previous Year Year Year Year Year Year Placement of deposits 1.50 Investments/advances 3.91 310.16 Interest rate swaps 925.00 Interest/Dividend received 0.35 Interest paid 0.07 0.06 Profit/Loss on sale of investments 1.70 Other income 0.98 Rendering of service 0.07 Remuneration 0.19 0.20 Dividend paid 3.40 Bonus shares issued 0.00 Balance outstanding 0.01 3838.00 1.48 1.46 Interest free advance against equity 3.90 *The normal transactions of the Bank with the above persons as constituents are not reckoned for the purpose

11. Segment Information.

In terms of the Accounting Standard 17 of ICAI, the Bank’s operations are classified into two business Segments (see Principal Accounting Policy no. 12) and the information on them is as under. (Rs. crore) Business Segments Treasury Other Banking Operations Total March 31, March 31, March 31, March March 31, 2007 2006 2007 March 31, 2005 31, 2007 2006 Revenue 523.98 483.50 1580.06 1169.98 2104.04 1653.48

Result (net of provisions) -0.97 37.06 399.20 243.71 398.23 280.77 Unallocated expenses 0 0 Operating profit (PBT) 398.23 280.77 Income taxes 105.50 55.56 Extraordinary profit/loss 0 0 Net Profit 292.73 225.21 OTHER INFORMATION

Segment Assets 2650.72 2311.29 22439.21 18331.62 25089.93 20642.91 Unallocated assets 0 0 Total assets 25089.93 20642.91

Segment liabilities 2492.01 2171.33 21095.71 17221.58 23587.72 19392.91 Unallocated liabilities 0 0 Total liabilities 23587.72 19392.91

The Bank has only the Domestic geographic segment. Under business segments, residual operations, being of insignificant volume, have not been considered as a separate reportable segment and have been included in Other Banking operations.

12. Earnings per share

162

Earnings per share is reported in accordance with AS 20 issued by the ICAI. The Bank has no dilutive potential equity shares outstanding during the year and the basic earnings per equity share of Rs 34.20 (Previous Year Rs.32.71) has been computed by dividing the net profit after tax of Rs.292.73 crore (Previous Year Rs.225.21 crore) by the weighted average number of equity shares (8.56 crore). (Previous Year 6.89 Crore)

13. Country Risk (As compiled by the Management)

The net funded exposure of the Bank in respect of foreign exchange transactions with each country is within 1% of the total assets of the Bank and hence no provision is required to be made in respect of country risk as per the RBI circular DBOD.BP.BC.96/21.04.103/2003-04 dated 17 June 2004.

Risk Category wise Country Exposure (Rs. crore) Risk Category* Exposure (net) as at Provision held as at Exposure (net) as at Provision held as at March 31, 2007 March 31, 2007 March 31, 2006 March 31, 2006 Insignificant 514.52 0.00 434.85 0.00 Low 229.82 0.00 205.81 0.00 Moderate 32.11 0.00 15.71 0.00 High 7.82 0.00 30.40 0.00 Very High 0.61 0.00 10.40 0.00 Restricted 0.40 0.00 0.66 0.00 Off-credit NIL 0.00 10.32 0.00 Total 785.28 0.00 708.15 0.00 * The above figures include both funded as well as non-funded exposures.

14. Additional Disclosures.

14.1.Capital

Item March 31, 2007 March 31, 2006 i) CRAR (%) 13.43% 13.75%

ii) CRAR - Tier I capital (%) 8.94% 9.72% iii) CRAR - Tier II Capital (%) 4.49% 4.03% iv) Percentage of the shareholding of the Government of India in nationalized banks Nil Nil v) Amount of subordinated debt raised as Tier-II capital (Rs. crore) 470.00 270.00

14.2 Investments (Rs. crore) Item March 31, 2007 March 31, 2006 (1) Value of Investments Gross Value of Investments (a) In India 7124.43 6299.64 (b) Outside India, Nil Nil Provisions for Depreciation (c) In India 91.77 27.26 (d) Outside India, Nil Nil

) Net Value of Investments 7032.66 6272.38 (a) In India Nil Nil (b) Outside India.

(2) Movement of provisions held towards depreciation on investments.

(i) `Opening balance 27.26 17.10 (ii) Add: Provisions made during the year 64.51 10.69 (iii) Less: Write-off/ write-back of excess rovisions uring the year 0.00 0.53 (iv) Closing balance 91.77 27.26

163

14.3 Particulars of REPO Transactions (Rs. Crore) Outstanding during the year Outstanding as on March Minimum Maximum Daily 31, 2007 average Securities sold under market REPOs 56.00 108.00 0.60 Nil Securities sold under REPOs (LAF) 31.50 682.50 58.67 105.00 Securities purchased under reverse REPOs 10.50 735.00 88.84 Nil (LAF)

14.4 Issuer Composition of Non-SLR Investments as on 31 March 2007 (Rs. crore)

No.(1) Issuer(2) Amount(3) Extent of Extent of ‘below Extent of Extent of private investment grade’ ‘unrated’ ‘unlisted’00 placement (4) securities (5) securities (6) Securities (7) 1 PSUs + 300.89 97.96 10.00 8.00 62.96 2 FIs 99.91 69.71 36.72 0.00 54.72 3 Banks 118.79 33.59 2.00 1.00 13.27 4 Private 187.20 49.47 0.00 3.76 18.76 corporates 5 Subsidiaries/ 0.51 0.00 0.00 0.00 0.00 Joint ventures 6 Others 493.85 0.00 0.00 0.00 0.00 7 Less -34.03 Provisions Xxx xxx Xxx Xxx held towards depreciation Total 1167.12 250.73 48.72 12.76 149.71 ** excluding investments in shares – Rs. 161.85 crore *** excluding investments in pass through certificates Rs. 13.87 crore + includes Rs.181.05 crore (previous year Rs. 181.05 crore) being investments in Central Government Special Bonds classified as Government Securities in Schedule but treated as Non SLR Securities)

14.5 Non-performing Non-SLR investments

(Rs. Crore) As at March 31, 2006 11.07 Additions during the year since April 1, 2006 5.00 Reductions during the above period 2.37 As at March 31, 2007 13.70 Total Provisions held 13.70

164 14.6 Derivatives

Forward Rate Agreement/ Interest Rate Swap (Rs. crore) Item March 31, 2007 March 31, 2006 i) The notional principal of swap agreements 7050.00 7990.00

ii) Losses which would be incurred if counter parties failed to fulfil their 163.30 107.24 obligations under the agreements

iii) Collateral required by the bank upon entering into swaps Nil Nil

iv) Concentration of credit risk arising from the swaps Nil Nil v) The fair value of the swap book -0.93 0.03

Exchange Traded Interest Rate Derivatives: (Rs. Crore) Sl.No. Particulars Amount (i) Notional principal amount of exchange traded interest rate derivatives undertaken NIL during the year (instrument-wise) (ii) Notional principal amount of exchange traded interest rate derivatives outstanding NIL as on 31st March 2007 (iii) Notional principal amount of exchange traded interest rate derivatives outstanding NIL and not "highly effective" (iv) Mark-to-market value of exchange traded interest rate derivatives outstanding and NIL not "highly effective"

Structure, organization, scope and nature of management of risk in derivatives etc

The organizational structure consists of Treasury Department which is segregated into three functional areas, i.e., front office, mid office and back office. Derivative deals are executed for hedging and market making.

The risk in the derivatives is monitored by regularly assessing Marked to Market Position (MTM) of the entire portfolio and the impact on account of the probable market movements. Various risk limits have been put in place under different segments of the derivatives, as approved by Board. The risk profile of the outstanding portfolio is reviewed by Board at regular intervals. For own balance sheet management, hedging policies are devised to mitigate risks; lower borrowing costs and enhance yields. The current outstanding under the derivatives portfolio were executed for trading only.

Accounting:

Board Approved Accounting Policies as per RBI guidelines have been adopted. The hedge swaps are accounted for like a hedge of the asset or liability. The hedge swaps are accounted on accrual basis except where swaps for hedging marked to market asset/liability. Such hedge swaps are marked to market on a monthly basis and the gain/losses are recorded as an adjustment to the designated asset/liability. The Non hedge swaps are marked to market every month and the MTM losses in the basket are accounted in the books while MTM profits are ignored.

Collateral Security:

As per market practice, no collateral security is insisted on for the contracts with counter parties like Banks/PDs etc. For deals with Corporate Clients, appropriate collateral security/margin etc. are stipulated wherever considered necessary.

165 Credit Risk Mitigation:

Quantitative Disclosures (Rupees) S.No Particulars Currency Interest rate Derivatives Derivatives 1 Derivatives (Notional Principal Amount) a, For hedging NIL NIL b, For trading 50 crore 7000 crore 2 Marked to Market positions (1) a, Asset (+) -- 0.93 crore b, Liabilities (-) -- -- 3 Credit Exposure (2) 2.50 crore 194.43 crore 4 Likely impact of one percentage change in interest rate (100*PV01) a, on hedging derivatives -- -- b, on trading derivatives NIL 0.43 crore 5 Maximum and Minimum of 100*PV01 observed during the year a, on hedging -- -- b, on trading -- Max. - 6.05 crore Min. 0.07 crore

14.7 Asset Quality

Non-Performing Asset (Rs. Crore) Items March 31, 2007 March 31, 2006

(i) Net NPAs to Net Advances (%) 0.44% 0.95%

(ii) Movement of NPAs (Gross) 563.05 677.79 (a) Opening balance 182.29 159.45 (b) Additions during the year 294.54 274.19 (c) Reductions during the year 450.80 563.05 (d) Closing balance

(iii) Movement of Net NPAs (a) Opening balance 111.60 194.51 (b) Additions during the year 134.17 127.75 (c) Reductions during the year 180.72 210.66 (d) Closing balance 65.05 111.60

(iv) Movement of provisions for NPAs (excluding provisions on standard assets) 443.35 480.22 (a) Opening balance 90.60 95.58 (b) Provisions/adjustments made during the year 156.44 132.45 (c) Write-off/ write-back of excess provisions 377.51 443.35 (d) Closing balance

166 14.8 Details of Loan Assets subjected to Restructuring (Rs. crore) Item 2006-07 2005-06 (i) Total amount of loan assets subjected to restructuring, rescheduling, 162.89 97.88 renegotiation; Nil 25.92 - of which under CDR

(ii) The amount of Standard assets subjected to restructuring, rescheduling, 162.20 74.02 renegotiation; Nil 7.19 - of which under CDR (iii) The amount of Sub-Standard assets subjected to restructuring, 0.57 16.70 rescheduling, renegotiation; Nil 12.32 - of which under CDR (iv) The amount of Doubtful assets subjected to restructuring, rescheduling, 0.12 7.16 renegotiation; Nil 6.41 of which under CDR

14.9 Details of assets sold to securitisation/reconstruction companies for Asset Reconstruction NIL 14.10 Movement of Provision for Standard Assets (Rs. crore) Item 2006-07 2005-06 (a) Opening Balance 81.85 21.75 (b) Addition/Adjustments during the year 33.28 60.10 (c) Deduction during the year Nil Nil (d) Closing Balance 115.13 81.85

14.11 Movement of Floating Provision (Rs. crore) Item Standard Assets Provision NPA Provision 2006-07 2005-06 2006-07 2005-06 (a)Opening Balance 38.00 Nil 179.52 151.36 (b)Addition during the year Nil 38.00 Nil 28.16 (c)Deduction during the year Nil Nil Nil Nil (d)Closing Balance 38.00 38.00 179.52 179.52

14.12 Business Ratio Item March 31, 2007 March 31, 2006 (i) Interest Income as a percentage to Working Funds 8.58 8.18

(ii) Non-interest income as a percentage to Working Funds 1.35 1.24 (iii) Operating Profit as a percentage to Working Funds Return on Assets 2.89 2.57 (iv) Return on Assets 1.38 1.28 (v) Business (Deposits plus advances) per employee (Rs. crore) (vi) Profit per employee (Rs. lakh) 5.44 4.31

4.43 3.54

14.13. Maturity Pattern of assets and liabilities (As compiled by the Management) (Rs. crore) 1-14 15-28 29 days Over 3 Over 6 Over 1 Over 3 Over 5 Total days days to 3 to 6 months yr to yrs to yrs months months to 1 yr 3 yrs 5 yrs Advances 637.20 306.61 1230.31 822.58 1092.04 6913.78 1655.36 2241.22 14899.10 Investments 141.30 108.92 96.58 27.82 60.32 850.72 667.41 5079.59 7032.66 Deposits 1001.66 924.64 2365.43 3524.17 4154.71 8685.13 688.50 240.20 21584.44

167 Borrowings 56.18 0.00 0.59 249.27 440.43 171.95 15.05 306.54 1240.01 (Including Subordinated Debt) Foreign 53.47 19.64 105.49 317.18 474.05 386.90 61.34 0.00 1418.07 Currency Assets Foreign 379.83 52.43 56.42 5.02 12.63 369.01 52.43 0.00 927.77 Currency Liabilities

14.14 Lending to Sensitive Sector (As compiled by Management)

Exposure to Real Estate Sector Category 2006-07 2005-06 a) Direct exposure (i) Residential Mortgages – Lendings fully secured by mortgages on residential property that is or 2441.99 1659.49 will be occupied by the borrower or that is rented;

(of which Individual housing loans up to Rs.15 lakh) (1791.45) (781.26) (ii) Commercial Real Estate –

Lendings secured by mortgages on commercial real estates (office

buildings, retail space, multi-purpose commercial premises, multi- family residential buildings, multi-tenanted commercial premises, 392.35 227.83 industrial or warehouse space, hotels, land acquisition, development

and construction, etc.). Exposure would also include non-fund based (NFB) limits; (iii) Investments in Mortgage Backed Securities (MBS) and other securitised exposures –

a. Residential, 12.82 20.62 b. Commercial Real Estate. Nil Nil b) Indirect Exposure

Fund based and non-fund based exposures on National Housing Bank (NHB) and Housing Finance Companies (HFCs). 276.67 342.88 Exposure to Capital Market (As compiled by the Management) Item 2006-07 2005-06 1. investments made in equity shares, 169.24 87.88 2. investments in bonds/ convertible debentures 0.00 0.00 3. investments in units of equity–oriented mutual funds 0.00 6.97 4. advances against shares to individuals for investment in equity shares 9.67 7.87 (including IPOs/ESOPS), bonds and debentures, units of equity oriented mutual funds 5. secured and unsecured advances to stockbrokers and guarantees issued 106.92 70.23 on behalf of stockbrokers and market makers: Total Exposure to Capital Market 285.83 172.95 6. Of (v) above, the total finance extended to stockbrokers for margin trading. Nil Nil

14.15 Details of Credit Exposure where the bank has exceeded the prudential exposure during the year.

168 S.No Name of Borrower Limit sanctioned Position as on March 31, 2007 Nil

14.16. Details of provisions and contingencies debited in Profit and Loss Account during the year: (Rs. Crore) For the year ended / As at March 31, 2007 March 31, 2006 i) Provision towards NPAs 89.29 95.58 Other contingencies 31.37 4.82 ii) Provision for Investments 60.99 10.91 iii) Provision for Standard Assets 33.10 60.10 iv) Provision for Taxation Current Tax 90.65 23.10 Deferred tax 1.62 32.19 Fringe benefit tax 9.00 4.50 v) MAT Credit Entitlement 4.23 -4.23 Total 320.25 226.97

14.17 Details of customer complaints and awards passed by the Banking Ombudsman

a. Customer Complaints

(a) No. of complaints pending at the beginning of the year 11 (b) No. of complaints received during the year 199 (c) No. of complaints redressed during the year 200 (d) No. of complaints pending at the end of the year 10

b. Awards passed by the Banking Ombudsman

(a) No. of unimplemented awards at the beginning of the year Nil (b) No. of awards passed by the Banking Ombudsman 4 (c) No. of awards implemented during the year 3 (d) No. of unimplemented awards at the end of the year 1(under appeal)

15.Details of penalties imposed by RBI under the provision of Section 46 (4) of BR Act, 1949

NIL

16.Previous year’s figures have been regrouped and recast wherever necessary

169

II. PRINCIPAL ACCOUNTING POLICIES FOR THE YEAR ENDED MARCH 31, 2006

1 General

2 Advances

c) Advances are classified as Standard, Sub-standard, Doubtful, or Loss assets, and provisions required for possible losses on such advances are made as per the guidelines of the Reserve Bank of India (RBI) on matters relating to prudential norms.

d) Advances shown in the Balance Sheet are net of:

(i) bills rediscounted, (ii) provisions made for non performing advances.

3 Investments

Valuation

4. Derivatives

5 Transactions Involving Foreign Exchange

a) All monetary assets and liabilities denominated in foreign currencies are translated at the exchange rates prevailing at the close of the year as advised by the Foreign Exchange Dealers’ Association of India (FEDAI).

b) Income and expenditure denominated in foreign currencies have been accounted at the exchange rates prevailing on the dates of the transactions.

170 c) Outstanding foreign exchange forward contracts are revalued at the rates applicable on the closing date as advised by FEDAI. The resultant profit/loss is taken into Profit and Loss account.

e) Contingent liabilities on guarantees, letters of credit, acceptances and endorsements are reported at the rates prevailing on the Balance Sheet date.

6 Fixed Assets

(m) Premises, except those revalued, and other fixed assets have been stated at their historical cost. Premises which were revalued are stated at such values on revaluation and the appreciation credited to the Capital Reserve.

(n) Depreciation has been provided for on the diminishing balances at the rates as per Schedule XIV to the Companies Act, 1956, except on computers, which are depreciated under the straight line method at 33.33% per annum as per RBI guidelines. Depreciation is not provided for on assets sold/disposed off during the year except for vehicles. Depreciation on assets costing less than Rs.5000 each has been fully written off other than computers, mobile phones and EPBX for which depreciation is provided from the date of addition.

(o) Depreciation on assets revalued has been charged on their written-down value including the addition made on revaluation, and an equivalent amount towards the additional depreciation provided consequent upon revaluation has been transferred from the Capital Reserve to the Profit & Loss Account.

7 Leasing

8 Staff retirement benefits

(a) Gratuity to employees is covered by an approved Gratuity Trust Fund Scheme. Liability for Gratuity is determined on actuarial basis and the incremental liability is charged to Profit & Loss Account. (b) The Bank has introduced a pension scheme for its employees from 1995-96 onwards. The liability is ascertained on actuarial basis, and the incremental liability, is charged to the Profit & Loss Account. Payment of pension to employees is covered under the Annuity Scheme of the Life Insurance Corporation of India. (c) The liability towards leave encashment on retirement of employees is ascertained on actuarial valuation and accounted on accrual basis.

9 Recognition of Income and Expenditure

Items of income and expenditure are accounted for on accrual basis, except as stated hereunder:

(a) Interest on loans and advances is recognised on accrual basis other than on those stipulated in RBI’s prudential norms on income recognition, asset classification and provisioning relating to NPAs, where the income is recognised on realisation.

171 (b) Commission is accounted on cash basis except income from guarantee commission which is recognised over the period of the guarantees. Dividends are recognised as and when declared by the investee companies.

10. Provision for Income Tax Provision for income tax is made for the current tax, and adjustment is made for deferred tax for the year representing the net change in the deferred tax asset or deferred tax liability, in accordance with Accounting Standard 22 issued by the Institute of Chartered Accountants of India (ICAI) Deferred tax assets are recognised on the basis of the management’s judgment of reasonable certainty of future profits

11. Earnings per Share Basic Earnings per share (EPS) reported is computed by dividing net profit after tax by the weighted average number of equity shares outstanding for the year.

12 Segment Information The Bank’s operations are classified into two reportable business segments, viz. Treasury Operations (investment and trading in securities, shares, debentures, etc.) and Other Banking Operations (other than Treasury) and segment information is reported accordingly. Foreign Exchange operations are included in Banking operations.

13 Net Profit

The net profit disclosed in the Profit and Loss Account is after:

(a) provision for taxes; (b) provision for possible losses on Standard Assets, NPAs, and other contingencies; (c) depreciation on investments; and (d) other usual and necessary provisions.

NOTES ON ACCOUNTS FOR THE YEAR ENDED MARCH 31. 2006

1 The Government of India has sanctioned a scheme of amalgamation of the Ganesh Bank of Kurundwad Ltd with the Bank, which came in to force w.e.f January 25, 2006. However, pending the decision of the Hon. Supreme Court in respect of the appeal filed against the above scheme, the scheme has not been given effect in the accounts

2. Reconciliation

The reconciliation of transactions between branches, Regional Offices and Head Office have been drawn up to March 31, 2006. Steps for adjustments/elimination of outstanding entries are in progress. There were no debit entries outstanding for more than three months as of March 31, 2006.

a) 3. a) The Bank had issued during the year 2 crore underlying equity shares of Rs.10 each towards Global Depository Receipts (including over allotment option of 20 lakh equity shares) at a premium of Rs.164.9976 per share aggregating to Rs.329,99,52,000

b) The expenses of Rs.1409.54 lakh connected with the issue of Global Depository Receipts has been deducted from Share Premium Account. The details of the said amount are as under.

Sl.No. Particulars Amount (Rs. Lakh) 1 Underwriting Commission 1049.99 2. Legal Fee 187.02

3. Auditors’ fees and expenses 19.50 4. Others Printing, Road show expenses etc 153.03 Total 1409.54

4. Investments

172 a. Investments under HTM (excluding specified investments as per RBI norms) account for 22.06% of demand and time liabilities as at the end of March 2006 as against permitted ceiling of 25% stipulated by RBI. b. In respect of securities held under HTM category premium of Rs.16.15 crore (previous year Rs. 9.76 crore) has been amortised during the year. c. Profit on sale of securities from HTM category amounting to Rs.10.05 crore (previous year Rs.29.78 crore) has been taken to Profit and Loss Account and a sum of Rs.5.00 crore (previous year Rs.14.17 crore) being net of taxes and transfer to statutory reserve of such profit, appropriated to Capital Reserve.

5. Fixed Assets

i. During the year 1995-96, the appreciation of Rs 9.65 crore in the value of land and buildings consequent upon revaluation by approved valuers was credited to Capital Reserve. Depreciation for the year on the net addition to value on such revaluation of assets at Rs 0.31 crore (previous year Rs 0.32 crore) has been transferred from Capital Reserve to Profit & Loss Account. There has been no revaluation of assets during this year.

ii Land and premises include flats Rs.6.79 crore (previous year Rs.6.59 crore), written down value Rs. 5.99 crore (previous year Rs.6.11 crore), taken possession of and being used by the Bank for which documentation/registration formalities are to be completed.

6. Taxation.

iv. Provision for taxation for the year has been made taking into account the favourable decisions of judicial/appellate authorities.

v. Out of the Disputed income tax/interest tax amounting to Rs.119.44 crore (Previous year Rs.34.10 crore) a sum of Rs.116.91 crore (Previous year Rs. 30.57 crore) has been paid/adjusted and has been included in “Tax paid/Tax deducted at source (net of provision)” in “Other Assets” Schedule V. Provision for taxation is not considered necessary in respect of the above disputed demands based on various judicial decisions on such disputed issues. Management does not envisage any liability in respect of the said disputed issues.

vi. During the year the Bank has provided for Tax in accordance with the Minimum Alternate Tax as per the Income tax Act, which is available as tax credit set off in subsequent years. In accordance with the “Guidance Note on Accounting for Credit Available in respect of Minimum Alternate Tax under the Income Tax Act, 1961” issued by the Institute of Chartered Accountants of India ,the said sum has been credited to Profit & Loss under Provisions and Contingencies by debiting “MAT credit entitlement Account”

vii. The Bank has accounted for income tax in compliance with ICAI’s Accounting Standard 22. Accordingly, timing differences resulting in deferred tax assets and deferred tax liabilities are recognised. The major components of deferred tax liabilities and assets as on March 31, 2006 are shown below:

173 (Rs. In Crores) Details of Tax Liability Current Previous Year Year Tax effect of timing difference in the assessment of (i) Interest income 46.66 37.28 (ii) Depreciation on Fixed Asset 9.44 9.71

(iii) Depreciation on Investments 91.18 50.01

(A) 147.28 97.00 Deferred Tax Asset Tax effect on timing difference in allowance of (i) Interest/premium paid on purchase of Securities 9.79 4.86 (ii) Provision for salary arrears 0.00 11.21

(iii) Provision for Standard Assets 27.55 ` 7.32 (iv) Others 11.88 7.74 (B) 49.22 31.13 Net Deferred tax liability (A-B) 98.06 65.87

7. Advances

The Bank holds floating provision of Rs.179.52 crore (Previous Year Rs.151.36 crore) in respect of non- performing advances and Rs.38.00 crore (previous year Rs.. Nil) in respect of standard advances over and above the minimum prescribed by RBI.

8.Investment Fluctuation Reserve

As required by RBI Guidelines, the bank is having a balance in Investment Fluctuation Reserve (IFR) amounting to Rs.156.67 crore (Previous year Rs.156.67 crore) as at the year end which constitute 6.38 % (Previous year 5.31 %) of the book value of the total investments (excluding Held to Maturity category)

9. Subordinated Debt

In accordance with RBI guidelines, unsecured debentures aggregating Rs. 270 crore (Previous Year Rs.270 crore) have been included in “Other Liabilities and Provisions” in Schedule 5 to the Balance Sheet. This being subordinated debt, the discounted value thereof is reckoned as Tier II Capital for capital adequacy purposes.

10. Related party transactions

The following are the significant transactions with related parties during the year ended 31 March 2006.

Name of the Party Nature of Relationship ICICI Bank Limited Associate (for the period upto 31.12.2005) ICICI Securities Limited Associate (for the period upto 31.12.2005) Sri.M Venugopalan Key Management Personnel (May 1, 2005 to M.2006) Sri.P.R.Sankaranarayanan Key Management Personnel (01.04.2005 to 30.04.2005) Sri.K.S.Harshan Key Management Personnel (01.04.2005 to 30.04.2005) ICICI Prudential Limited Associate (for the period upto 31.12.2005) Fed Bank Financial Services Limited Subsidiary

174 (Rs. crore) Particulars Associates Subsidiaries Key Management Personnel* Current Previous Current Previous Current Previous Year Year Year Year Year Year Placement of deposits 1.50 60.00 0.08 Investments 310.16 487.12 Interest rate swaps 925.00 2070.00 Interest/Dividend received 0.35 6.65 Interest paid 0.06 0.06 Profit/Loss on sale of 1.70 0.97 investments Other income 0.98 0.36 Rendering of service 0.07 0.04 Remuneration 0.20 0.21 Dividend paid 3.40 3.17 Bonus shares issued 0.00 0.91 Balance outstanding 3838.00 3473.01 1.46 1.48

*The normal transactions of the Bank with the above persons as constituents are not reckoned for the purpose

11. Segment Information. In terms of the Accounting Standard 17 of ICAI, the Bank’s operations are classified into two business Segments (see Principal Accounting Policy no. 12) and the information on them is as under. (Rs. crore)

Business Segments Treasury Other Banking Operations Total March 31, March 31, March 31, March 31, March 31, March 31, 2006 2005 2006 2005 2006 2005 Revenue 483.50 444.46 1169.98 958.55 1653.48 1403.01 Result (net of provisions) 37.06 -54.67 243.71 170.73 280.77 116.06 Unallocated expenses 0 0 Operating profit (PBT) 280.77 116.06 Income taxes 55.56 25.97 Extraordinary profit/loss 0 0 Net Profit 225.21 90.09 OTHER INFORMATION

Segment Assets 2311.29 1364.33 18331.62 15456.63 20642.91 16820.96 Unallocated assets 0 0 Total assets 20642.91 16820.96

Segment liabilities 2171.33 1305.67 17221.58 14791.95 19392.91 16097.62 Unallocated liabilities 0 0 Total liabilities 19392.91 16097.62

12. Earnings per share

Earnings per share is reported in accordance with AS 20 issued by the ICAI. The Bank has no dilutive potential equity shares outstanding during the year and the basic earnings per equity share of Rs 32.71 (Previous Year Rs.13.73) has been computed by dividing the net profit after tax of Rs.225.21crore (Previous Year Rs.90.09 crore) by the weighted average number of equity shares (6.88572 crore). (Previous Year 6.56 Crore)

175 13. Country Risk (As compiled by the Management)

Risk Category wise Country Exposure (Rs. crore) Risk Category* Exposure (net) Provision held as Exposure (net) as Provision held as as at March at March 31, at March 31, 2005 at March 31, 31, 2006 2006 2005 Insignificant 434.85 0.00 376.57 0.00 Low 205.81 0.00 255.03 0.00 Moderate 15.71 0.00 7.97 0.00 High 30.40 0.00 7.85 0.00 Very High 10.40 0.00 3.41 0.00 Restricted 0.66 0.00 0.00 0.00 Off-credit 10.32 0.00 5.41 0.00 Total 708.15 0.00 656.24 0.00 * The above figures include both funded as well as non-funded exposures.

14. Additional Disclosures.

14.1.Capital

Item March 31, March 31, 2006 2005 i) CRAR (%) 13.75% 11.27%

ii) CRAR - Tier I capital (%) 9.72% 6.42% iii) CRAR - Tier II Capital (%) 4.03% 4.85%

iv) Percentage of the shareholding of the Government of India in Nil Nil nationalized banks v) Amount of subordinated debt raised as Tier-II capital * (Rs. crore) 270.00 270.00

14.2 Investments (Rs. crore) Item March March 31, 2006 31, 2005 (1) Value of Investments ) Gross Value of Investments (a) In India 6,299.64 5,816.27 (b) Outside India, Nil Nil Provisions for Depreciation (c) In India 27.26 17.10 (d) Outside India, Nil Nil v) Net Value of Investments 6,272.38 5,799.17 (a) In India Nil Nil (b) Outside India.

(2) Movement of provisions held towards depreciation on investments. 17.10 3.20 (v) Opening balance 10.69 63.90 (vi) Add: Provisions made during the year 0.53 50.00 (vii) Less: Write-off/ write-back of excess provisions during the year 27.26 17.10 (viii) Closing balance

176 14.3 Particulars of REPO Transactions (Rs. crore) Outstanding during the year Outstanding as on Minimum Maximum Daily average March 31, 2007 Securities sold under market REPOs 17.09 142.24 1.93 Nil Securities sold under REPOs (LAF) 75.00 585.00 49.74 Nil Securities purchased under reverse 30.00 550.00 80.01 Nil REPOs (LAF)

14.4 Issuer Composition of Non-SLR Investments as on 31 March 2006 (Rs. crore)

No. Issuer(2) Amount(3) Extent of Extent of ‘below Extent of Extent of (1) private investment grade’ ‘unrated’ ‘unlisted’ placement(4) securities(5) securities (6) Securities ** (7)*** 1 PSUs + 319.36 116.00 10.00 10.00 73.29 2 Fis 99.91 69.71 36.72 0.00 54.72 3 Banks 92.77 37.26 0.00 1.00 16.77 4 Private corporates 157.24 33.16 0.00 4.13 19.12 5 Subsidiaries/ 0.50 0.00 0.00 0.00 0.00 Joint ventures 6 Others 122.83 0.00 0.00 0.00 0.00 7 Less Provisions held -27.08 towards depreciation xxx xxx xxx xxx Total 765.53 256.13 46.72 15.13 163.90 ** excluding investments in mutual funds Rs 11.97 crore and shares – Rs87.38 crore *** excluding investments in pass through certificates Rs.46.13 crore + includes Rs.181.05 crore (previous year Rs. 181.05 crore) being investments in Central Government Special Bonds classified as Government Securities in Schedule but treated as Non SLR Securities)

14.5 Non-performing Non-SLR investments (Rs. Crore) As at March 31, 2005 9.92 Additions during the year since April 1, 2005 1.58 Reductions during the above period 0.43 As at March 31, 2006 11.07 Total Provisions held 11.07

14.6 Derivatives Forward Rate Agreement/ Interest Rate Swap (Rs. crore) Item March 31, 2006 March 31, 2005 i) The notional principal of swap agreements 7990.00 6715.00 107.24 82.67 ii) Losses which would be incurred if counter parties failed to fulfil

their obligations under the agreements Nil Nil iii) Collateral required by the bank upon entering into swaps Nil Nil iv) Concentration of credit risk arising from the swaps v) The fair value of the swap book 0.03 6.45

Exchange Traded Interest Rate Derivatives: (Rs. Crore) S.No. Particulars Amount (i) Notional principal amount of exchange traded interest rate derivatives undertaken during the year NIL (instrument-wise) (ii) Notional principal amount of exchange traded interest rate derivatives outstanding as on 31st March NIL 2006 (iii) Notional principal amount of exchange traded interest rate derivatives outstanding and not "highly NIL effective" (iv) Mark-to-market value of exchange traded interest rate derivatives outstanding and not "highly NIL effective"

177

Structure, organization, scope and nature of management of risk in derivatives etc

The organizational structure consists of Treasury Department which is segregated into three functional areas, ie, front office, mid office and back office. Derivative deals are executed for hedging and market making. The risk in the derivatives is monitored by regularly assessing Mark to Market Position (MTM) of the entire portfolio and the impact on account of the probable market movements. Various risk limits have been put in place under different segments of the derivatives, as approved by Board. The risk profile of the outstanding portfolio is reviewed by Board at regular intervals. For own balance sheet management, hedging policies are devised to mitigate risks; lower borrowing costs and enhance yields. The current outstanding under the derivatives portfolio were executed for trading only.

Accounting:

Collateral Security:

Credit Risk Mitigation:

Quantitative Disclosures (Rupees) S.No Particulars Currency Derivatives Interest rate Derivatives 1 Derivatives (Notional Principal Amount) a, For hedging NIL NIL b, For trading 90 crore 7900 crore 2 Marked to Market positions (1) a, Asset (+) -- 0.03 crore b, Liabilities (-) -- -- 3 Credit Exposure (2) 2.90 crore 140.86 crore 4 Likely impact of one percentage change in interest rate (100*PV01) a, on hedging derivatives -- -- b, on trading derivatives NIL -6.07 crore 5 Maximum and Minimum of 100*PV01 observed during the year a, on hedging -- -- b, on trading -- Max. - 6.07 crore Min. 0.02 crore

178 14.7 Asset Quality

Non-Performing Asset (Rs. Crore) Items March 31, 2006 March 31, 2005 (i) Net NPAs to Net Advances (%) 0.95% 2.21%

(ii) Movement of NPAs (Gross) 677.79 600.75 (e) Opening balance 159.45 190.73 (f) Additions during the year 274.19 113.69 (g) Reductions during the year 563.05 677.79 (h) Closing balance

(iii) Movement of Net NPAs (e) Opening balance 194.51 222.75 (f) Additions during the year 127.75 140.54 (g) Reductions during the year 210.66 168.78 (h) Closing balance 111.60 194.51

(iv) Movement of provisions for NPAs (excluding provisions on standard assets) 480.22 373.20 (e) Opening balance 95.58 135.77 (f) Provisions made during the year 132.45 28.75 (g) Write-off/ write-back of excess provisions 443.35 480.22 (h) Closing balance

14.8 Details of Loan Assets subjected to Restructuring (Rs. crore) Item 2005-06 2004-05 (i) Total amount of loan assets subjected to restructuring, rescheduling, 97.88 98.72 renegotiation; - of which under CDR 25.92 24.75 (ii) The amount of Standard assets subjected to restructuring, rescheduling, renegotiation; 74.02 74.59 - of which under CDR (iii) The amount of Sub-Standard assets subjected to restructuring, rescheduling, 7.19 1.60 renegotiation; - of which under CDR 16.70 24.13 ) The amount of Doubtful assets subjected to restructuring, 12.32 23.15 rescheduling, renegotiation 7.16 Nil ;of which under CDR 6.41 Nil

14.9 Details of assets sold to securitisation/reconstruction companies for Asset Reconstruction NIL

14.10 Business Ratio Item March 31, 2006 March 31, 2005 Interest Income as a percentage to Working Funds 8.18 8.14

Non-interest income as a percentage to Working Funds 1.24 1.45

Operating Profit as a percentage to Working Funds Return on Assets 2.57 2.74 ) Return on Assets 1.28 0.62 Business (Deposits plus advances) per employee (Rs. crore) 4.31 3.66 ) Profit per employee (Rs. lakh)

3.54 1.39

179

14.11. Maturity Pattern of assets and liabilities (As compiled by the Management) (Rs. crore)

14.12 Lending to Sensitive Sector (As compiled by Management)

1-14 15-28 29 days Over 3 Over 6 Over 1 Over 3 Over 5 Total days days to 3 to 6 months yr to yrs to yrs months months to 1 yr 3 yrs 5 yrs Advances 668.08 239.72 1239.92 801.34 910.46 5092.01 1174.51 1610.43 11736.47 Investments 52.53 2.00 196.30 16.22 28.10 458.08 859.70 4659.45 6272.38 Deposits 1028.02 835.67 2557.20 2395.40 2311.28 8006.71 471.45 273.01 17878.74 Borrowings 526.55 0.00 40.70 36.49 1.18 2.38 165.21 107.98 880.49 (Including Subordinated Debt) Foreign 103.36 4.01 121.89 129.00 45.21 122.40 49.29 24.89 600.05 Currency Assets Foreign 167.43 27.94 38.31 94.41 258.33 459.73 39.36 0.00 1085.51 Currency Liabilities Exposure to Real Estate Sector Category 2005-06 2004-05 a) Direct exposure (i) Residential Mortgages – Lendings fully secured by mortgages on residential property that is or will be 1659.49 1095.83 occupied by the borrower or that is rented;

(of which Individual housing loans up to Rs.15 lakh)

(ii) Commercial Real Estate – 781.26 568.89 Lendings secured by mortgages on commercial real estates (office buildings,

retail space, multi-purpose commercial premises, multi-family residential buildings, multi-tenanted commercial premises, industrial or warehouse space, hotels, land acquisition, development and construction, etc.). Exposure would also include non-fund based (NFB) limits; 227.83 53.21 (iii) Investments in Mortgage Backed Securities (MBS) and other securitised exposures – a. Residential, b. Commercial Real Estate. b) Indirect Exposure 20.62 20.35 Fund based and non-fund based exposures on National Housing Bank (NHB) Nil Nil and Housing Finance Companies (HFCs).

342.88 293.27 Exposure to Capital Market (As compiled by the Management) Item 2005-06 2004-05 7. investments made in equity shares, 87.88 60.94 8. investments in bonds/ convertible debentures 0.00 0.00 9. investments in units of equity–oriented mutual funds 10. advances against shares to individuals for investment in equity 6.97 0.32

180 shares (including IPOs/ESOPS), bonds and debentures, units of 7.87 9.32 equity oriented mutual funds 11. secured and unsecured advances to stockbrokers and guarantees issued on behalf of stockbrokers and market makers:

Total Exposure to Capital Market

12. Of (v) above, the total finance extended to stockbrokers for margin trading. 70.23 33.83

172.95 104.41

Nil Nil

14.13 Details of Credit Exposure where the bank has exceeded the prudential exposure during the year.

S.No Name of Borrower Limit sanctioned Position as on March 31, 2006 1 Housing Development Foreign Currency Demand Loans US $ Foreign Currency Demand Finance corporation 40 Million (equivalent to Rs.178.44 Loans US $ 40 Million Crore) (equivalent to Rs.178.44 crore) 2. NAFED Cash credit Rs.175.00 crore Rs.166.12 crore

14.14. Details of provisions and contingencies debited in Profit and Loss Account during the year: (Rs. Crore) For the year ended / As at March 31, 2006 March 31, 2006 i) Provision towards NPAs 95.58 135.77 Other contingencies 4.82 11.89 ii) Provision for Investments 10.91 133.68 iii) Provision for Standard Assets 60.10 3.00 iv) Provision for Taxation Current Tax 23.10 7.27 Deferred tax 32.19 18.70 Fringe benefit tax 4.50 0.00 v) MAT Credit Entitlement - 4.23 0.00 Total 226.97 310.31

15.Details of penalties imposed by RBI under the provision of Section 46 (4) of BR Act, 1949

NIL

16.Previous year’s figures have been regrouped and recast wherever necessary

III. PRINCIPAL ACCOUNTING POLICIES FOR THE YEAR ENDED MARCH 31, 2005

1 General

181

2 Advances

e) Advances are classified as Standard, Sub-standard, Doubtful, or Loss assets, and provisions required for possible losses on such advances are made as per the guidelines of the Reserve Bank of India (RBI) on matters relating to prudential norms.

f) Advances shown in the Balance Sheet are net of:

(i) bills rediscounted, (ii) provisions made for non performing advances.

3 Investments

Valuation

(d) Investments classified as HFT have been marked to market and valued scrip-wise under each classification at weekly intervals. Within a classification net appreciation is ignored and net depreciation is provided for.

(e) Investments classified as AFS have also been marked to market, and valued quarterly. Within a classification net appreciation is ignored and net depreciation is provided for.

(f) Investments classified as HTM are stated at acquisition cost except in cases where the acquisition cost is higher than the face value, in which case the excess, i.e. premium on acquisition, is amortised over the period remaining to maturity.

4. Derivatives

6 Transactions Involving Foreign Exchange

d) All monetary assets and liabilities denominated in foreign currencies are translated at the exchange rates prevailing at the close of the year as advised by the Foreign Exchange Dealers’ Association of India (FEDAI).

e) Income and expenditure denominated in foreign currencies have been accounted at the exchange rates prevailing on the dates of the transactions.

f) Outstanding foreign exchange forward contracts are revalued at the rates applicable on the closing date as advised by FEDAI. The resultant profit/loss is taken into Profit and Loss account.

f) Contingent liabilities on guarantees, letters of credit, acceptances and endorsements are reported at the rates prevailing on the Balance Sheet date.

6 Fixed Assets

(p) Premises, except those revalued, and other fixed assets have been stated at their historical cost. Premises which were revalued are stated at such values on revaluation and the appreciation credited to the Capital Reserve.

182

(q) Depreciation has been provided for on the diminishing balances at the rates as per Schedule XIV to the Companies Act, 1956, except on computers, which are depreciated under the straight line method at 33.33% per annum as per RBI guidelines. Depreciation is not provided for on assets sold/disposed off during the year.

(r) Depreciation on assets revalued has been charged on their written-down value including the addition made on revaluation, and an equivalent amount towards the additional depreciation provided consequent upon revaluation has been transferred from the Capital Reserve to the Profit & Loss Account.

7 Leasing

8 Staff retirement benefits

(b) The Bank has introduced a pension scheme for its employees from 1995-96 onwards. The liability is ascertained on actuarial basis, and the incremental liability, is charged to the Profit & Loss Account. Payment of pension to employees is covered under the Annuity Scheme of the Life Insurance Corporation of India.

(c) The liability towards leave encashment on retirement of employees is ascertained on actuarial valuation and accounted on accrual basis.

9 Recognition of Income and Expenditure

Items of income and expenditure are accounted for on accrual basis, except as stated hereunder: (c) Interest on loans and advances is recognised on accrual basis other than on those stipulated in RBI’s prudential norms on income recognition, asset classification and provisioning relating to NPAs, where the income is recognised on realisation.

(d) Commission is accounted on cash basis except income from guarantee commission which is recognised over the period of the guarantees. Dividends are recognised as and when declared by the investee companies.

10 Provision for Income Tax Provision for income tax is made for the current tax, and adjustment is made for deferred tax for the year representing the net change in the deferred tax asset or deferred tax liability, in accordance with Accounting Standard 22 issued by the Institute of Chartered Accountants of India (ICAI) Deferred tax assets are recognised on the basis of the management’s judgment of reasonable certainty of future profits

11 Earnings per Share Basic Earnings per share (EPS) reported is computed by dividing net profit after tax by the weighted average number of equity shares outstanding for the year.

183 12 Segment Information The Bank’s operations are classified into two reportable business segments, viz. Treasury Operations (investment and trading in securities, shares, debentures, etc.) and Other Banking Operations (other than Treasury) and segment information is reported accordingly. Foreign Exchange operations are included in Banking operations.

13 Net Profit The net profit disclosed in the Profit and Loss Account is after: (a) provision for taxes; (b) provision for possible losses on Standard Assets, NPAs, and other contingencies; (c) depreciation on investments; and (d) other usual and necessary provisions.

NOTES ON ACCOUNTS FOR THE YEAR ENDED MARCH 31. 2005

1 Reconciliation The reconciliation of transactions between branches, Regional Offices and Head Office have been drawn up to 31 March 2005. Steps for adjustments/elimination of outstanding entries are in progress. There were no debit entries outstanding for more than six months as of March 31, 2005.

2. Investments

a. In pursuance of Reserve Bank Circular, investments amounting to Rs.1,805.30 crore in SLR Securities were shifted from AFS category to HTM category in September 2004 and resultant depreciation of Rs.69.97 crore on account of such shifting has been debited to “provisions and contingencies” in the Profit and Loss Account.

b. Investments under HTM (excluding specified investments as per RBI norms) account for 20.45% of demand and time liabilities as at the end of March 2005 as against permitted ceiling of 25% stipulated by RBI.

c. In respect of securities held under HTM category premium of Rs.9.76 crore (previous year Rs. 1.07 crore) has been amortised during the year.

d. Profit on sale of securities from HTM category amounting to Rs.29.78 crore (previous year Rs.27.48 crore) has been taken to Profit and Loss Account and a sum of Rs.14.17 crore (previous year Rs.13.22 crore) being net of taxes and transfer to statutory reserve of such profit, appropriated to Capital Reserve.

3. Fixed Assets

i. During the year 1995-96, the appreciation of Rs 9.65 crore in the value of land and buildings consequent upon revaluation by approved valuers was credited to Capital Reserve. Depreciation for the year on the net addition to value on such revaluation of assets at Rs 0.32 crore (previous year Rs 0.34 crore) has been transferred from Capital Reserve to Profit & Loss Account. There has been no revaluation of assets during this year.

iv. Land and premises include flats Rs.6.59 crore (previous year Rs.6.89 crore), written down value Rs. 6.11 crore (previous year Rs.6.71 crore), taken possession of and being used by the Bank, for which documentation/registration formalities are to be completed.

184

4. Taxation.

i. Provision for taxation for the year has been made taking into account the favourable decisions of judicial/appellate authorities.

ii. Out of the Disputed income tax/interest tax amounting to Rs.34.10 crore (Previous year Rs.39.55 crore) a sum of Rs.30.57 crore (Previous year Rs.38.50 crore) has been paid/adjusted and has been included in “Tax paid/Tax deducted at source (net of provision)” in “Other Assets” Schedule V. Provision for taxation is not considered necessary in respect of the above disputed demands based on various judicial decisions on such disputed issues. Management does not envisage any liability in respect of the said disputed issues.

iii. The Bank has accounted for income tax in compliance with ICAI’s Accounting Standard 22. Accordingly, timing differences resulting in deferred tax assets and deferred tax liabilities are recognised. The major components of deferred tax liabilities and assets as on 31 March 2005 are shown below: Rs. In Crore Details of Tax Liability Current Previous Year Year Tax effect of timing difference in the assessment of (i) Interest income 37.28 48.77 (ii) Depreciation on Fixed Asset 9.71 9.96

(iii) Depreciation on Investments 50.01 Nil (A) 97.00 58.73 Deferred Tax Asset Tax effect on timing difference in allowance of (i) Interest/premium paid on purchase of Securities 4.86 5.44 (ii) Provision for salary arrears 11.21 4.45 (iii) Provision for Standard Assets 7.32 Nil (iv) Others 7.74 1.67 (B) 31.13 11.56 Net Deferred tax liability (A-B) 65.87 47.17

5. Advances

The bank holds floating provision of Rs.151.36 crore (Previous Year Rs.137.71 crore) in respect of non-performing advances over and above the minimum prescribed by RBI.

6. Salary Arrears

A provision of Rs. 20.86 crore for the year (previous year Rs.12.41crore) has been made towards estimated arrears of remuneration payable to employees pending settlement.

7. Investment Fluctuation Reserve

As required by RBI Guidelines the bank is having a balance in Investment Fluctuation Reserve amounting to Rs.156.67 crore (Previous Year 156.67 crore) as at the year end which constitutes 5.31% (Previous Year 3.32%) of the book value of the total investments (excluding “Held to Maturity” category).

8. Subordinated Debt

In accordance with RBI guidelines, unsecured debentures aggregating Rs. 270 crore (Previous Year Rs.375 crore) have been included in “Other Liabilities and Provisions” in Schedule 5 to the Balance Sheet. This being subordinated debt, the discounted value thereof is reckoned as Tier II Capital for capital adequacy purposes.

185 9. Related party transactions

The following are the significant transactions with related parties during the year ended March 31, 2005. Name of the Party Nature of Relationship ICICI Bank Limited Associate ICICI Securities Limited Associate ICICI Prudential Limited Associate Fed Bank Financial Services Limited Subsidiary Sri.K.P.Padmakumar Key Management Personnel (January 1, 2005 to March 31, 2005) Sri.P.R.Sankaranarayanan Key Management Personnel (January 1, 2005 to March 31, 2005) Sri.K.S.Harshan Key Management Personnel (January 1, 2005 to March 31, 2005)

(Rs. crore) Particulars Associates Subsidiaries Key Management Personnel* Current Previous Current Previous Current Previous Year Year Year Year Year Year Placement of Deposits 60.00 52.00 0.08 Investments 487.12 1691.85 Interest rate swaps 2070.00 3050.00 Interest/dividend received 6.65 0.78 Interest paid 0.06 0.04 Profit/Loss on sale of investments 0.97 5.82 Other income 0.36 0.14 Rendering of Service 0.04 0.04 Remuneration 0.21 0.17 Dividend paid 3.17 1.81 Bonus shares issued 0.91 Nil Balance Outstanding 3473.01 1968.00 1.48 1.40 *The normal transactions of the Bank with the above persons as constituents are not reckoned for the purpose

10. Segment Information. In terms of the Accounting Standard 17 of ICAI, the Bank’s operations are classified into two business segments (see Principal Accounting Policy no. 13) and the information on them is as under. (Rs. in Crore) Business Segments Treasury Other Banking Operations Total March 31, March 31, March 31, March 31, March 31, March 31, 2005 2004 2005 2004 2005 2004 Revenue 444.46 615.02 958.55 874.90 1403.01 1489.92 Result (net of provisions) -54.67 159.13 170.73 52.17 116.06 211.30 Unallocated expenses - - Operating profit (PBT) 116.06 211.30 Income taxes 25.97 75.00 Extraordinary profit/loss - - Net Profit 90.09 136.30 OTHER INFORMATION

Segment Assets 1364.33 1552.67 15456.63 13561.60 16820.96 15114.27 Unallocated assets - - Total assets 16820.96 15114.27

Segment liabilities 1305.67 1486.02 14791.95 12979.42 16097.62 14465.44 Unallocated liabilities - - Total liabilities 16097.62 14465.44

186

11. Earnings per share Earnings per share is reported in accordance with AS 20 issued by the ICAI. The Bank has no dilutive potential equity shares outstanding during the year and the basic earnings per equity share of Rs.13.73 (Previous Year Rs.20.88) has been computed by dividing the net profit after tax (Rs.90.09 crore) (Previous Year Rs.136.30 crore) by the weighted average number of equity shares (6.56 crore). (Previous Year 2.17 Crore, adjusted to 6.53 crore consequent on bonus issue during the current year)

12. Country Risk The net funded exposure of the Bank in respect of foreign exchange transactions with each country is within 1% (Previous Year 2%)of the total assets of the Bank and hence no provision and disclosure is made in respect of country risk as per the RBI circular DBOD.BP.BC.96/21.04.103/2003-04 dated 17 June 2004.

13. Additional Disclosures.

13. 1. In terms of RBI guidelines, the following additional disclosures are made. (Rs.Crore) For the year ended / As at March 31, 2005 March 31, 2004 a) Capital Adequacy Ratio 11.27% 11.48% b) Percentage of net NPAs to net advances 2.21 2.89% c) Details of provisions and contingencies debited in Profit and Loss Account during the year: i) Provision towards NPAs 135.77 207.96 Other contingencies 11.89 8.81 ii) Provision for Investments 133.68 4.92 iii) Provision for Standard Assets 3.00 3.75 iv) Provision towards Income Tax and Wealth Tax (including deferred Tax) 25.97 75.00 Total 310.31 300.44 d) Subordinated Debt raised as Tier II Capital 270.00 375.00 e) i) Gross value of investments in India 5816.27 5,524.23 Less: Aggregate provision for depreciation on investments in India 17.10 3.20 Net value of investments in India 5799.17 5,521.03 The above investments include: Investments in: Equity shares 61.44 36.32 Preference shares 0.00 51.50 Investments in convertible debentures Nil Nil Investments in units of equity-oriented mutual funds 0.32 8.04 ii) Gross value of investments outside India Nil Nil Less: Aggregate provision for depreciation on investments outside India N A NA Net value of investments outside India Nil Nil f) Business Ratios i) Capital Adequacy ratio: Tier I capital 6.42 6.26% ii) Capital Adequacy ratio: Tier II capital 4.85 5.22% iii) Interest income as a percentage to average working funds 8.14 9.01% iv) Non-interest income as a percentage to average working funds 1.45 2.25% v) Operating profit as a percentage to average working funds 2.74 3.30% vi) Return on Assets 0.54 0.90% vii) Business (Deposits plus Advances less Inter-bank deposits) per employee (Rs. crore) 3.66 3.27 viii) Profit per employee (Rs. lakh) 1.39 2.14

187 13. 2. Maturity Pattern of assets and liabilities (As compiled by the Management) (Rs. crore) 1-14 15-28 29 days Over 3 to Over 6 Over 1 Over Over 5 Total days days to 3 6 months months yr to 3 yrs months to 1 yr 3 yrs yrs to 5 yrs Advances @ 1005.63 253.13 754.69 390.11 1041.93 2959.57 363.91 2055.67 8824.64 Investments 498.55 198.27 530.41 28.25 73.17 299.56 857.55 3313.41 5799.17 Deposits 696.27 437.07 2090.88 1636.71 3168.33 6654.63 240.66 268.33 15192.88 Borrowings 0.00 0.00 175.85 1.31 2.34 3.54 151.25 121.61 455.90 (Including Subordinated Debt) Foreign Currency 141.10 105.27 117.85 107.19 103.07 260.91 55.40 16.61 907.40 Assets Foreign Currency 24.70 16.46 220.18 132.99 254.51 521.04 0.00 0.00 1169.88 Liabilities

@ Inclusive of bills re-discounted under Bill Re-discounting Scheme and provisions.

13. 3. Lending to sensitive sectors- (As compiled by the Management) (Rs. Crore) As at March 31, 2005 March 31, 2004 Capital Market *104.41 * 70.06 Real Estate ** 346.48 **248.26 Commodities 175.92 110.49 Advances for margin trading Nil Nil

* Includes Rs.61.26 core Investments (Previous Year Rs 44.95 Crore) ** Includes Rs.293.27 crore in FY 2005 (Previous Year Rs.194.69 crore) in housing finance institutions

13.4. Restructured/Rescheduled Loans (other than CDR) during the year -(Compiled from unaudited statements) (Rs. crore) 2004-2005 2003-2004 Total amount of loan assets subjected to restructuring/rescheduling 68.51 62.21 Amount of Standard Assets subjected to restructuring/rescheduling 67.53 56.01 Amount of Sub-standard Assets subjected to restructuring/rescheduling 0.98 6.20

13.5.Corporate Debt Restructuring (CDR) during the year – (Compiled from unaudited statements) (Rs. Crore) 2004-2005 2003-2004 Total amount of loan assets subjected to restructuring 30.21 20.01 under CDR Amount of Standard Assets subjected to CDR 7.06 20.01 Amount of Sub-standard Assets subjected to CDR 23.15 0.00 Amount of Doubtful Assets subjected to CDR 0.00 0.00

13.6.Movement of NPAs (Rs crore) Gross NPA Net NPA As at 31 March 2004 600.75 222.75 Additions during the year 190.73 140.54 Deductions during the year 113.69 168.78 As at 31 March 2005. 677.79 194.51 13.7.Movement of provision for NPAs (Rs crore)

188 As at 31 March 2004 373.20 Add: Provisions made during the year 135.77 Less: Write-offs, write-backs during the year 28.75 As at 31 March 2005 480.22

13.8.Non-performing Non-SLR investments (Rs.Crore)

As at 31 March 2004 4.36 Additions during the year since April 1, 2004 5.56 Reductions during the above period 000 As at 31 March 2005 9.92 Total Provisions held 9.92

13.9.Movement of Provisions for Depreciation on Investments (Rs crore) As at 31 March 2004 3.20 Add: Provision made during the year 63.90 Less: Write off, write back during the year 50.00 As at 31 March 2005 17.10

13.10. Structure, Organisation, Scope, Nature of risk management in derivatives etc.

The organisation structure consists of Treasury Department which is segregated in to three functional areas i.e. front office, mid office and back office. The derivative deals are executed for hedging or for trading. The risk in the derivative portfolio is monitored by regularly assessing the mark to market (MTM) position of the portfolio and the impact on account of probable market movements. The overall portfolio is operated within the risk limit fixed by the Bank. The Interest rate swaps/Currency swaps undertaken during the year were for trading only. The risk profile of the outstanding portfolio are reviewed by the Board at regular intervals.

Accounting:

Accounting Policies as per RBI guidelines have been adopted. The hedge swaps are accounted for like a hedge of the asset or liability. The income/expense on hedge swaps are accounted on accrual basis except where swaps transactions whose underlying is subjected to mark to market. Such hedge swaps are marked to market on a monthly basis and the gain/losses are recorded as an adjustment to the designated asset/liability. The Non hedge swaps are marked to market every month and the MTM losses in the basket are accounted in the books while MTM profits are ignored.

Collateral Security:

As per market practice, no collateral security is insisted on for the contracts with counter parties like Banks/ PDs etc. For deals with Corporate Clients, appropriate collateral security/margin etc. are stipulated wherever considered necessary.

Credit Risk Mitigation:

Most of the deals have been contracted with Banks/ Major PDs and no default risk is anticipated on the deals with them. In the case of deals with corporate clients, the outstanding positions are closely monitored for the default risks and appropriate measures are initiated. Quantitative Disclosures (Rupees in crore) S.No. Particulars Currency Derivatives Interest rate Derivatives 1 Derivatives (Notional Principal Amount) a, For hedging NIL NIL b, For trading 140 crore 6575 crore 2 Marked to Market positions (1) a, Asset (+) -- 6.45 crore b, Liabilities (-) -- -- 3 Credit Exposure (2) 1.20 crore 110.79 crore 4 Likely impact of one percentage change in interest rate (100*PV01)

189 a, on hedging derivatives -- -- b, on trading derivatives NIL Rs.0.16 lakh 5 Maximum and Minimum of 100*PV01 observed during the year a, on hedging -- Rs.16.00 lakh b, on trading -- Max: Rs.62.10 lakh Min: Rs.3 lakh

13.11 Details of Credit Exposure where the bank has exceeded the prudential exposure during the year.

S.No Name of Borrower Limit sanctioned Position as on March 31, 2005 1 Housing Development Foreign currency Loans USD 35 Million USD 35 Million (equivalent to Finance corporation (equivalent to Rs.169.75 Cr) Rs.169.75 Cr) 2. Indian Railway Finance Term Loan Rs.125 Cr Rs.90 Cr Corporation Ltd Treasury Exposure Rs.55 Cr Total Rs.180 Cr 3 * MMTC Ltd Letter of Credit Rs.250 Cr Rs.51 Cr 4 * Handicrafts & handloom Letter of Credit Rs.200 Cr Rs.22Cr Export Corporation Ltd (HHEC)

* Fully secured by deposits.

14. Issuer Composition of Non-SLR Investments as on 31 March 2005 (Rs. crore)

No.(1) Issuer(2) Amount(3) Extent of Extent of ‘below Extent of Extent of private investment ‘unrated’ ‘unlisted’ placement(4) grade’ securities Securities(7)*** securities(5) (6)** 1 PSUs + 361.18 140.44 10.00 10.00 94.46 2 FIs 150.01 69.71 36.72 0.00 54.72 3 Banks 89.88 52.51 0.00 7.00 26.01 4 Private corporates 184.11 33.60 0.00 4.56 19.56 5 Subsidiaries/ 0.50 0.00 0.00 0.00 0.00 Joint ventures 6 Others 125.98 0.00 0.00 0.00 0.00 7 Less Provisions held -16.04 towards depreciation xxx xxx xxx xxx Total 895.62 296.26 46.72 21.56 194.75 ** excluding investments in mutual funds Rs.88.32 crore and shares – Rs.61.44 crore *** excluding investments in pass through certificates Rs.53.06 crore + includes Rs.181.05 crore (previous year Rs.201.97 crore) being investments in Central Government Special Bonds classified as Government Securities in Schedule but treated as Non SLR Securities)

15. Particulars of REPO Transactions (Rs. crore) Outstanding during the year Outstanding as on Minimum Maximum Daily average 31 March 05 Securities sold under market 20.00 145.00 6.89 Nil REPOs Securities sold under REPOs (LAF) 100.00 150.00 4.11 Nil Securities purchased under reverse 25.00 550.00 92.77 250.00 REPOs (LAF)

16.Details of assets sold to securitisation companies NIL

17.Previous year’s figures have been regrouped and recast wherever necessary

190

IV. PRINCIPAL ACCOUNTING POLICIES FOR THE YEAR ENDED MARCH 31, 2004

1 General

The Balance Sheet and Profit & Loss account have been drawn up on historical cost convention and on accrual basis of accounting (unless otherwise stated) and conform to the statutory provisions and practices followed in the banking industry in India.

2 Advances

g) Advances are classified as Standard, Sub-standard, Doubtful, or Loss assets, and provisions required for possible losses on such advances are made as per the guidelines of the Reserve Bank of India (RBI) on matters relating to prudential norms. h) Advances shown in the Balance Sheet are net of:

(i) bills rediscounted, (ii) provisions made for advances in accordance with RBI guidelines, except the provision for standard assets.

c) Non-interest bearing loans/advances granted to Bank’s staff are included in ‘Others’ (item VI) under ‘Other Assets’ (Schedule 11 to the Balance Sheet) as per RBI guidelines.

3 Investments Investments are classified under three categories, viz ‘Held for Trading’, ‘Available for Sale’, and ‘Held to Maturity’ as per RBI guidelines and disclosed in the Balance Sheet under six groups as required by statute. Non-performing investments are identified and depreciation/provision made as per RBI guidelines.

Valuation (a) Investments classified as ‘Held for Trading’ have been marked to market and valued scrip-wise under each group at weekly/monthly intervals. Within a group, any net appreciation is ignored and any net depreciation is recognised in the Profit & Loss Account. (b) Investments classified as ‘Available for Sale’ have also been marked to market, and revalued quarterly. Depreciation/appreciation on such investments in each group is aggregated and any net depreciation is provided for and any net appreciation ignored. (c) Investments classified as ‘Held to Maturity’ are stated at acquisition cost except in cases where the acquisition cost is higher than the face value, in which case the excess, i.e. premium on acquisition, is amortised over the period remaining to maturity.

Accounting for REPO transactions The Bank has adopted the uniform accounting treatment prescribed by the RBI for accounting of REPO and reverse REPO transactions other than transactions under the Liquidity Adjustment Facility (LAF) with RBI.

4 Transactions Involving Foreign Exchange a) Income and expenditure have been accounted at the exchange rates prevailing on the dates of the transactions. b) Monetary assets and liabilities have been translated at the exchange rates prevailing at the close of the year as advised by the Foreign Exchange Dealers’ Association of India (FEDAI). c) Profit or loss on forward contracts has been accounted for as per FEDAI guidelines. d) Contingent liabilities on forward exchange contracts outstanding at the Balance Sheet date are reported at contracted rates.

191 5 Fixed Assets (a) Premises, except those revalued, and other fixed assets have been stated at their historical cost. Premises which were revalued are stated at such values on revaluation and the appreciation credited to the Capital Reserve. (b) Depreciation has been provided for on the diminishing balances at the rates as per Schedule XIV to the Companies Act, 1956, except on computers, which are depreciated under the straight line method at 33.33% per annum as per RBI guidelines. Depreciation is not provided for on assets sold/disposed off during the year. (c) Depreciation on assets revalued has been charged on their written-down value including the addition made on revaluation, and an equivalent amount towards the additional depreciation provided consequent upon revaluation has been transferred from the Capital Reserve to the Profit & Loss Account.

6 Leasing Accounting Standard on Leases (AS19) issued by the Institute of Chartered Accountants of India (ICAI) is applicable to leases entered into on or after April 1, 2001. Since all the Bank’s outstanding lease transactions were entered into prior to that date, the Bank has followed the earlier ICAI guidelines in respect of these leases.

7 Staff benefits Statutory provision for Bonus has been made in the accounts.

Retirement benefits: (a) Gratuity to employees is covered by an approved Gratuity Trust Fund Scheme. Liability for Gratuity is determined on actuarial basis and the incremental liability is charged to Profit & Loss Account. (b) The Bank has introduced a pension scheme for its employees from 1995-96 onwards. The liability is ascertained on actuarial basis, and the incremental liability, if any, is charged to the Profit & Loss Account. Payment of pension to employees is covered under the Annuity Scheme of the Life Insurance Corporation of India. (c) The liability towards leave encashment on retirement of employees is ascertained on actuarial valuation and accounted on accrual basis.

8 Recognition of Income and Expenditure Items of income and expenditure are accounted for on accrual basis, except as stated hereunder: (a) Interest on loans and advances is recognised on accrual basis other than on those stipulated in RBI’s prudential norms on income recognition, asset classification and provisioning relating to NPAs, where the income is recognised on realisation. (b) Commission is accounted on cash basis except income from guarantee commission which is recognised over the period of the guarantees. Interest on income tax refunds is recognised to the extent granted by the Tax Department; dividends are recognised as and when declared by the investee companies.

9 Provision for Income Tax Provision for income tax is made for the current tax, and adjustment is made for deferred tax for the year representing the net change in the deferred tax asset or deferred tax liability, in the year in accordance with Accounting Standard 22 issued by the ICAI. Deferred tax assets are recognised on the basis of the management’s judgment of reasonable certainty of future profits for realisation of the deferred tax assets.

10 Software Expenses. The cost of operating software purchased along with hardware is treated as part of the related hardware and capitalised. Cost of other soft ware is charged to the Profit & Loss account as and when incurred.

11. Earnings per Share Earnings per share (EPS) reported is basic computed by dividing net profit after tax by the weighted average number of equity shares outstanding for the year.

192 12 Segment Information The Bank’s operations are classified into two reportable business segments, viz. Treasury Operations (investment and trading in securities, shares, debentures, etc.) and Other Banking Operations (other than Treasury) and segment information is reported accordingly. Foreign Exchange operations are included in Banking operations.

1 3 Net Profit The net profit disclosed in the Profit and Loss Account is after: (a) provision for taxes; (b) provision for possible losses on Standard Assets, NPAs, and other contingencies; (c) depreciation on investments; and (d) other usual and necessary provisions.

NOTES ON ACCOUNTS FOR THE YEAR ENDED MARCH 31. 2004

1 Reconciliation (a) The reconciliation of transactions between branches, Regional Offices and Head Office have been drawn up to 31 March 2004. Steps for adjustments/elimination of outstanding entries are in progress. There were no debit entries outstanding for more than six months as of March 31, 2004. (b) Adjustments of outstanding entries in Debit Note Receivable and Account Receivable Accounts as on 31 March 2004 are in progress.

2. Investments

a) Investments under ‘Held to Maturity’ category (excluding specified investments as per RBI norms) account for 14.49 % of the total investments, well within the admissible limit of 25%. b) Provision for investments classified as NPAs has been charged to the Profit & Loss Account.

3 Fixed Assets a) During the year 1995-96, the appreciation of Rs 9.65 crore in the value of land and buildings consequent upon revaluation by approved valuers was credited to Capital Reserve. Depreciation for the year on the net addition to value on such revaluation of assets at Rs 0.34 crore (previous year Rs 0.36 crore) has been transferred from Capital Reserve to Profit & Loss Account. There has been no revaluation of assets during this year.

b) Land and premises include flats Rs 6.89 crore, written-down value Rs 6.71 crore, taken possession of and being used by the Bank, for which documentation/ registration formalities are to be completed.

4. Taxation. (i) Income /Interest / Wealth Tax assessments up to the financial year 2001-2002 have been completed. Provision has been made for all admitted demands and to the extent considered necessary taking into account the favourable decisions of judicial/appellate authorities. Disputed Income Tax demands to the extent of Rs. 39.55 crore relating to prior years not accepted by the Bank and against which its appeals are pending and in respect of which the Bank is expecting favourable decisions from appellate authorities have been treated as contingent liabilities and not provided for.

(ii) The Bank has accounted for income tax in compliance with ICAI’s Accounting Standard 22. Accordingly, timing differences resulting in deferred tax assets and deferred tax liabilities are recognised. The major components of deferred tax liabilities and assets as on 31 March 2004 are shown below: Rs. In Crore Details of Tax Liability Current Previous Year Year Tax effect of timing difference in the assessment of (i) Interest income 48.77 49.06 (ii) Depreciation on Fixed Asset 9.96 8.38 (iii) Depreciation on Investments 58.73 57.44 (A) 117.46 114.88 Deferred Tax Asset Tax effect on timing difference in allowance of (i) Interest/premium paid on purchase of Securities 5.44 15.58

193 (ii) Provision for salary arrears 6.12 8.24 (iii) Provision for Standard Assets 11.56 23.82 (iv) Others 47.17 33.62 (B) 49.22 31.13 Net Deferred tax liability (A-B) 68.24 83.75

5. Accounting of Foreign Exchange Transactions.

a) The FEDAI guidelines on conversion of foreign currency, valuation of forward exchange contracts, etc. which are approved by RBI and are mandatory, have been followed in preference to AS 11 of ICAI.

b) The Bank has no foreign branches.

6. Salary arrears. A provision of Rs. 12.41 crore has been made towards estimated arrears of remuneration payable to employees on conclusion of the ongoing negotiations between bank employees’ organisations and the Indian Banks’ Association.

7. Investment Fluctuation Reserve

As required by RBI guidelines, the Bank has adopted a policy of utilizing gains realized on investment sales to build up its Investment Fluctuation Reserve to a level equivalent to not less than 5% of the total investment portfolio (excluding those held to maturity) over a period of five years. In line with this policy, the Bank transferred Rs.64.64 crore from the net profit for the year to the Reserve, raising it to Rs.156.67 crore as at 31 March 2004, which represented 3.32% of the total investment portfolio (excluding those held to maturity).

8. Subordinated Debt In accordance with RBI guidelines, unsecured debentures aggregating Rs. 375 crore have been included in “Other Liabilities and Provisions” in Schedule 5 to the Balance Sheet. This being subordinated debt, the discounted value thereof is reckoned as Tier II Capital for capital adequacy purposes.

9. Related party transactions The following are the significant transactions with related parties during the year ended 31 March 2004.

Name of the related Nature of relationship Nature of transactions Amount party (Rs. crore) ICICI Bank Ltd Shareholder holding more than (1) Investment by the Bank in ICICI Bank’s 18.00 20% of the Bank’s capital bonds/shares Interest earned on the above 3.32 (2) Income from cash management services 0.14 Fedbank Financial 100% subsidiary of the Bank (1) Term deposit made with the Bank 1.10 Services Ltd Interest paid on the above 0.06 (2) Balance in current account with the Bank 0.30 (3) Rent received Rs.12,000/- .. (4) Payments and benefits to an employee of the Bank on deputation to the subsidiary 0.04 Shri. K.P. Key management personnel Remuneration 0.17 Padmakumar

The normal transactions of the Bank with the above parties as constituents are not reckoned for the purpose.

194 10. Segment Information. In terms of the Accounting Standard 17 of ICAI, the Bank’s operations are classified into two business segments (see Principal Accounting Policy no. 12) and the information on them is as under. (Rs. crore) Other Banking Business Segments Treasury Operations Total March 31, March 31, March 31, March 31, March 31, March 31, 2004 2003 2004 2003 2004 2003 Revenue 615.02 564.61 874.90 781.28 1489.92 1345.89 Result (net of provisions) 159.13 126.09 52.17 50.21 211.30 176.30 Unallocated expenses - - Operating profit (Profit before tax) 211.30 176.30 Income taxes 75.00 71.29 Extraordinary profit/loss - - Net Profit 136.30 105.01

Other Information

Segment Assets 1,552.67 1,234.80 13,561.60 10,966.83 15,114.27 12,201.63 Unallocated assets - Total assets 15,114.27 12,201.63

Segment liabilities 1,486.02 1,181.22 12,979.42 10,490.94 14,465.44 11,672.16 Unallocated liabilities - - Total liabilities 14,465.44 11,672.16

11. Earnings per share

Earnings per share is reported in accordance with AS 20 issued by the ICAI. The Bank has no dilutive potential equity shares outstanding during the year and the basic earnings per equity share of Rs. 62.65 has been computed by dividing the net profit after tax (Rs.136.30 crore) by the weighted average number of equity shares (2.17 crore).

12. Country Risk

The net funded exposure of the Bank in respect of foreign exchange transactions with each country is within 2% of the total assets of the Bank and hence no provision and disclosure is made in respect of country risk as per the RBI circular DBOD.BP.BC.71/21.04.103/2002-03 dated 19 February 2003.

13. Additional Disclosures.

In terms of RBI guidelines, the following additional disclosures are made. (Rs.Crore) For the year ended / As at March 31, 2004 March 31, 2003 a) Capital Adequacy Ratio 11.48% 11.23% b) Percentage of net NPAs to net advances 2.89% 4.95% c) Details of provisions and contingencies debited in Profit and Loss Account during the year: i) Provision towards NPAs 207.96 160.02 other contingencies 8.81 2.69 ii) Provision for Investments 4.92 9.48 iii) Provision for Standard Assets 3.75 3.00 iv) Provision towards Income Tax and Wealth Tax 75.00 71.29

195 Total 300.44 246.48 d) Subordinated Debt raised as Tier II Capital 375.00 300.00 e) i) Gross value of investments in India 5,510.58 4,555.50 Less: Aggregate provision for depreciation on investments in India 3.20 3.82 Net value of investments in India 5,507.38 4,551.68 The above investments include: Investments in : Equity shares 36.32 27.58 Preference shares 51.50 56.50 Investments in convertible debentures Nil Nil Investments in units of equity-oriented mutual funds 8.04 0.65 ii) Gross value of investments outside India Nil Nil Less: Aggregate provision for depreciation on investments outside India NA NA Net value of investments outside India Nil Nil f) Business Ratios i) Capital Adequacy ratio: Tier I capital 6.26% 6.65% ii) Capital Adequacy ratio: Tier II capital 5.22% 4.58% iii) Interest income as a percentage to average working funds 9.01% 10.37% iv) Non-interest income as a percentage to average working funds 2.25% 2.19% v) Operating profit as a percentage to average working funds 3.30% 3.28% vi) Return on Assets 0.90% 0.86% vii) Business (Deposits plus Advances less Inter-bank deposits) per employee (Rs. crore) 3.27 2.70 viii) Profit per employee (Rs. lakh) 2.14 1.69

Maturity Pattern of assets and liabilities* (Rs. crore) 1-14 15-28 29 days Over 3 Over 6 Over 1 Over 3 Over 5 Total days days to 3 to 6 months yr to yrs to yrs months months to 1 yr 3 yrs 5 yrs Advances @ 584.05 97.71 636.94 332.23 476.56 2696.07 1221.65 1655.32 7700.53

Investments 215.91 194.98 134.24 41.16 78.40 190.55 534.67 4117.47 5507.38

Deposits 877.75 344.52 1775.75 1709.60 2181.05 5982.21 343.07 262.73 13476.68 Borrowings 0.00 46.08 40.61 26.54 3.03 6.60 2.00 1.86 126.72

Foreign 105.84 154.71 131.30 137.18 115.23 156.64 27.03 62.27 890.20 Currency Assets Foreign 11.00 33.46 113.76 143.95 227.60 455.20 0.00 0.00 984.97 Currency Liabilities (* 80.80 % of this data is based on the unaudited statements received from branches) @ Inclusive of bills re-discounted under Bill Re-discounting Scheme, net of provisions.

Lending to sensitive sectors** (Rs. crore) As at March 31, 2004 March 31, 2003 Capital Market 70.06 49.66 Real Estate * 248.26 92.50 Commodities 110.49 105.28 Advances for margin trading Nil Nil

** Includes Rs.194.69 crore to housing finance institutions

196 Restructured/Rescheduled Loans (other than CDR)** during the year (Rs. crore) 2003-2004 2002-2003 Total amount of loan assets subjected to 62.21 119.69 restructuring/rescheduling Amount of Standard Assets subjected to 56.01 107.22 restructuring/rescheduling Amount of Sub-standard Assets subjected to 6.20 12.47 restructuring/rescheduling

** compiled from unaudited statements.

Corporate Debt Restructuring (CDR)** during the year (Rs. crore)

2003-2004 2002-2003 Total amount of loan assets subjected to restructuring under 20.01 36.66 CDR Amount of Standard Assets subjected to CDR 20.01 36.66 Amount of Sub-standard Assets subjected to CDR 0.00 0.00 Amount of Doubtful Assets subjected to CDR 0.00 0.00

** compiled from unaudited statements.

Movement of NPAs (Rs crore) Gross NPA Net NPA As at March 31, 2003 527.99 307.81 Additions during the year 217.84 138.40 Deductions during the year 145.08 223.46 As at 31 March 2004. 600.75 222.75

Movement of provision for NPAs (Rs crore) As at March 31, 2003 215.44 Add: Provisions made during the year 213.10 Less: Write-offs, write-backs during the year 55.34 As at March 31, 2004 373.20

Non- performing Non-SLR investments (Rs crore) Opening balance 4.36 Additions during the year since April 1 5.00 Reductions during the above period 5.00 Closing balance 4.36 Total provisions held 3.11

Movement of Provisions for Depreciation on Investments (Rs crore) As at March 31, 2003 3.82 Add: Provision made during the year 4.85 Less: Write off, write back during the year 5.47 As at March 31, 2004 3.20

197 Derivatives: Interest Rate Swaps

Nature of Contracts Interest Rate Swaps Total notional amount Rs.3300 crore (Rs.2900 crore NSE MIFOR trading swaps Rs. 400 crore NSE MIBOR trading swaps) Terms of contract Receiving/ Paying fixed rates against NSE MIBOR/ 6 months MIFOR in Indian Rupees. All are trading swaps Accounting Policies Board-approved accounting policies as per RBI guidelines have been adopted. The trading swaps are marked to market every month and the losses are accounted in the books while profits are not. Default Risk Since all the deals have been contracted with scheduled commercial banks and major primary dealers (PDs) , no default risk is anticipated Market Risk Considered low, as the net price variance per basis point (PVBP) of outstanding swaps is less than Rs.0.04 crore. Concentration of Amount contracted with scheduled commercial banks is Rs.1,700 crore and major PDs is Rs.1600 credit risk crore. Highest single counterparty concentration among Banks was 24% of total outstanding and that of PDs 35% of total outstanding. Collateral Security As per market practice, no collateral security is insisted on for the contracts. Fair value Net fair value of the swaps (loss) Rs.0.54 crore as on 31 March 2004

14. Issuer Composition of Non-SLR Investments as on 31 March 2004 (Rs. crore)

No. (1) Issuer(2) Amount(3) Extent of Extent of ‘below Extent of Extent of private investment ‘unrated’ ‘unlisted’ placement(4) grade’ securities(6) Securities (7) securities(5) 1 PSUs * 556.37 297.85 68.26 19.58 241.67 2 FIs 302.44 144.71 36.72 50.24 180.22 3 Banks 75.14 43.01 0.00 19.64 40.26 4 Private corporates 209.92 57.87 0.00 35.15 38.36 5 Subsidiaries/ 0.50 0.00 0.00 0.50 0.50 joint ventures 6 Others 82.33 0.00 0.00 68.04 0.00 7 Less Provisions held 3.20 0.00 0.00 0.00 0.00 towards depreciation Total 1223.50 543.44 104.98 193.15 501.01

* Includes Rs.201.97 crore being investment in central Government Special Bonds classified as Government securities in Schedule VIII, but treated as non-SLR securities.

15. Particulars of REPO Transactions (Rs. crore)

For 2003-04 Outstanding during the year Outstanding as on Minimum Maximum Daily average March 31, 2004 Securities sold under market 8.18 197.56 25.76 0.00 REPOs Securities purchased under 25.00 625.00 116.67 150.00 REPOs (LAF)

16. Previous year’s figures have been regrouped and recast wherever necessary

V. PRINCIPAL ACCOUNTING POLICIES FOR THE YEAR ENDED MARCH 31, 2003

1 General

The Balance Sheet and Profit and Loss Account have been drawn up on historical cost convention and on accrual basis of accounting (unless otherwise stated) and conform to the statutory provisions and practices followed in the banking industry in India.

198 2 Advances

i) Advances are classified as Standard, Sub-standard, Doubtful, or Loss assets, and provisions required for possible losses on such advances are made as per the guidelines of the Reserve Bank of India (RBI) on matters relating to prudential norms. j) Advances shown in the Balance Sheet are net of:

(i) bills rediscounted, (ii) provisions made for advances in accordance with RBI guidelines, except the provision for standard assets.

c) Non-interest bearing loans/advances granted to Bank’s staff are included in ‘Others’ (item VI) under ‘Other Assets’ (Schedule 11 to the Balance Sheet) as per RBI guidelines.

3 Investments

Investments are classified under three categories, viz ‘Held for Trading’, ‘Available for Sale’, and ‘Held to Maturity’ as per RBI guidelines and disclosed in the Balance Sheet under six groups as required by statute.

Valuation (a) Investments classified as ‘Held for Trading’ have been marked to market and revalued scripwise under each group at monthly intervals. Any net appreciation is ignored and any net depreciation is recognised in the Profit & Loss Account. (b) Investments classified as ‘Available for Sale’ have also been marked to market, and revalued quarterly. Depreciation/appreciation on such investments under each group is aggregated and any net depreciation is provided for and any net appreciation is ignored. (c) Investments classified as ‘Held to Maturity’ are stated at acquisition cost except in cases where the acquisition cost is higher than the face value, in which case the excess, i.e. premium on acquisition, is amortised over the period remaining to maturity.

4 Transactions Involving Foreign Exchange

a) Income and expenditure have been accounted at the exchange rates prevailing on the dates of the transactions.

b) Monetary assets and liabilities have been translated at the exchange rates prevailing at the close of the year as advised by the Foreign Exchange Dealers’ Association of India (FEDAI).

c) Profit or loss on forward contracts has been accounted for as per FEDAI guidelines.

d) Contingent liabilities on forward exchange contracts outstanding at the Balance Sheet date are reported at contracted rates.

5 Fixed Assets

(a) Premises, except those revalued, and other fixed assets have been stated at their historical cost. Premises which were revalued are stated at such values on revaluation and the appreciation credited to the Capital Reserve.

(b) Depreciation has been provided for under the diminishing balance method at the rates as per Schedule XIV to the Companies Act, 1956, except on computers, which are depreciated under the straight line method @ 33.33% per annum as per RBI guidelines. Depreciation is not provided for on assets sold/disposed of during the year.

(c) Depreciation on assets revalued has been charged on their written down value including the addition made on revaluation, and an equivalent amount towards the additional depreciation provided consequent upon revaluation, has been transferred from the Capital Reserve to the Profit and Loss Account.

199

6 Leasing

Accounting Standard on leases (AS19) issued by the Institute of Chartered Accountants of India (ICAI) is applicable to leases entered into on or after April 1, 2001. Since all the Bank’s outstanding lease transactions were entered into prior to that date, the Bank has followed the earlier ICAI guidelines in respect of these leases.

Depreciation on non-performing leased assets (NPAs) is provided on written down value as per the Companies Act 1956, by directly charging to Profit and Loss Account without any corresponding adjustment in the Lease Adjustment Account. In addition to depreciation, provision is also made for non-performing leased assets as per RBI guidelines.

7 Staff benefits

Statutory provision for Bonus has been made in the accounts.

Retirement benefits:

(a) The gratuity to employees is covered by an approved Gratuity Trust Fund Scheme. Liability for Gratuity is determined on actuarial basis and the incremental liability is charged to Profit & Loss Account.

(b) The Bank has introduced a pension scheme for its employees from 1995-96 onwards. The liability is ascertained on actuarial basis, and the incremental liability, if any, is charged to the Profit & Loss Account. Payment of pension to employees is covered under the Annuity Scheme of the Life Insurance Corporation of India.

(c) The liability towards Leave encashment on retirement of employees is ascertained on actuarial valuation and accounted on accrual basis.

8 Recognition of Income and Expenditure

Items of income and expenditure are accounted for on accrual basis, except as stated hereunder:- (a) Interest on loans and advances is recognised on accrual basis other than for those stipulated in the prudential norms on Income recognition, asset classification and provisioning relating to NPAs issued by Reserve Bank of India where the income is recognised on realisation.

(b) Commission earned is accounted for on cash basis; interest on income tax refunds is recognised to the extent granted by the Tax Department; dividends are recognised as and when declared by the investee companies and income from guarantee commission is recognised over the period of the guarantees.

9 Provision for Income Tax

Provision for income tax is made for the current tax, and adjustment is made for deferred tax for the year representing the net change in the deferred tax asset or deferred tax liability, in the year in accordance with Accounting Standard 22 issued by the ICAI. Deferred tax assets are recognised on the basis of the management’s judgment of reasonable certainty of future profits for realisation of the deferred tax assets.

10 Earnings per Share

Earnings per share (EPS) reported is basic computed by dividing net profit after tax by the weighted average number of equity shares outstanding for the year.

200 11 Segment Information

The Bank’s operations are classified into two reportable business segments, viz. Treasury Operations (investment and trading in securities, shares, debentures, etc) and Other Banking Operations (other than Treasury) and segment information is reported accordingly. Foreign Exchange operations are included under Banking operations.

12 Net Profit

The net profit disclosed in the Profit and Loss Account is after:

(a) provision for taxes; (b) provision for possible losses on Standard Assets, NPAs, and other contingencies; (c) depreciation on investments; and (d) other usual and necessary provisions.

NOTES ON ACCOUNTS FOR THE YEAR ENDED MARCH 31. 2003

1 Reconciliation

(a) Transactions between Branches, Regional Offices and Head Office have been initially matched up to 31 March 2003. Steps for adjustments/elimination of outstanding entries are in progress. There are no entries outstanding for more than six months as of March 31, 2003. (b) All accounts have been tallied with subsidiary ledgers/registers in all the branches (c) Adjustments of outstanding entries in Debit Note Receivable and Account Receivable Accounts as on 31 March 2003 are in progress.

2. Investments

c) Investments under ‘Held to Maturity’ category (excluding specified investments as per RBI norms) account for 19.69% of the total Investments as against the admissible limit of 25%. d) Provision for investments classified as NPAs has been charged to the Profit & Loss Account.

3 Revaluation of Fixed Assets

a) During the year 1995-96, the appreciation in the value of land and buildings consequent upon revaluation by approved valuers amounting to Rs.9.65 crore was credited to Capital Reserve. Depreciation for the year on the net addition to value on such revaluation of assets Rs.0.36 crore (previous year Rs.0.38 crore) has been transferred from Capital Reserve to Profit and Loss Account. There has been no revaluation of assets during this year.

b) Land and premises include a flat (Rs.0.37 crore, written-down value Rs. 0.28 crore) taken possession of and being used by Bank since 1997, for which documentation/ registration formalities are to be completed.

4. Taxation.

(i) Income Tax/Interest Tax/ Wealth Tax assessments up to the financial year 2000-2001 have been completed. Provision has been made for all admitted demands and to the extent considered necessary taking into account the favourable decisions of judicial/appellate authorities. Disputed Income Tax/Interest Tax demands to the extent of Rs.95.03 crore relating to prior years not accepted by the Bank and against which its appeals are pending and in respect of which the Bank is expecting favourable decisions from appellate authorities have been treated as contingent liabilities not provided for.

(ii) The Bank has accounted for Income tax in compliance with Accounting Standard-22 issued by the Institute of Chartered Accountants of India. Accordingly timing differences resulting in deferred tax assets and deferred tax liabilities are recognised. The major components of deferred tax liabilities and assets as on 31 March 2003 are shown below:

201 (Rs crore) (Rs. In Crores) Details of Tax Liability Current Previous Year Year Tax effect of timing difference in the assessment of (i) Interest income 49.06 51.77 (ii) Depreciation on Fixed Asset 8.38 9.44 (A) 57.44 61.21 Deferred Tax Asset Tax effect on timing difference in allowance of (i) Interest/premium paid on purchase of Securities 15.58 13.80 (ii) Provision for salary arrears 8.24 2.75 ` (B) 23.82 16.55 Net Deferred tax liability (A-B) 33.62 44.66

5. Accounting of Foreign Exchange Transactions.

a) The FEDAI guidelines on conversion of foreign currency, valuation of forward exchange contracts, etc, which are approved by RBI and are mandatory, have been followed in preference to AS 11 of ICAI.

b) The Bank has no foreign branches.

6. Accounting for Leave encashment on retirement of employees

In terms of the Accounting Standard no. 15 on Accounting for Retirement Benefits, the Bank has changed the method of accounting for leave encashment on retirement of employees from cash basis to accrual basis in accordance therewith. The accrued liability in this regard is determined on actuarial valuation and the liability so determined for the period upto 31 March 2002, Rs.14.23 crore is made by debit to Revenue Reserves, after appropriating the sum of Rs.15 crore from the profit of the year, and the accrued liability for the year Rs.1.78 crore is provided by debit to Profit & Loss account of the year. Due to this change, the net profit for the year is lower by Rs.1.78 crore and the Reserves & Surplus are lower by Rs.16.01 crore.

7. Investment Fluctuation Reserve

As required by RBI guidelines, the Bank has adopted a policy of utilizing gains realized on investment sales to build up its Investment Fluctuation Reserve to a level equivalent to not less than 5% of the total investment portfolio (excluding those held to maturity) over a period of five years. In line with this policy, the Bank transferred Rs.20.82 crore from the net profit for the year to the Reserve, raising it to Rs.92.03 crore as at 31 March 2003, which represented 2.52% of the total investment portfolio (excluding those held to maturity).

8. Subordinated Debt

In accordance with RBI guidelines, unsecured debentures aggregating to Rs.300 crore have been included under “Other Liabilities and Provisions” in Schedule 5 to the Balance Sheet. This being subordinated debt, the discounted value thereof is reckoned as Tier II Capital for capital adequacy purposes.

202 9. Related party transactions

The following are the significant transactions with related parties during the year ended 31 March 2003.

Interest earned on the above 3.32 (2) Income from cash management services 0.08 (3) Investment by ICICI Bank in the Tier II bonds issued by the Bank 24.75

Interest paid on the above 1.85 Fedbank Financial 100% subsidiary of the Bank (1) Term deposit made with the Bank 1.10 Services Ltd Interest paid on the above 0.08 (2) Balance in current account with the Bank 0.30 (3) Rent received (Rs.12,000/-) (4) Payments and benefits to an employee of the Bank on deputation to the subsidiary 0.04 Shri. K.P. Key management personnel Remuneration 0.11 Padmakumar

The normal transactions of the bank with the above parties as constituents are not reckoned for the purpose.

10. Segment Information

In terms of the Accounting Standard 17 of ICAI, the Bank’s operations are classified into two business segments (see Principal Accounting Policy no. 11) and the information on them is as under. (Rs. crore) Other Banking Business Segments Treasury Operations Total Current Previous Previous Previous year year Current year year Current year year

Revenue 564.61 521.77 781.28 741.04 1345.89 1262.81 Result (net of provisions) 126.09 105.60 50.21 20.74 176.30 126.34 Unallocated expenses - - Operating profit (Profit before tax) 176.30 126.34 Income taxes 71.29 44.33 Extraordinary profit/loss - - Net Profit 105.01 82.01

Other Information

Segment Assets 1234.80 1235.61 10966.83 8909.00 12201.63 10144.61 Unallocated assets - - Total assets 12201.63 10144.61

Segment liabilities 1181.22 1180.95 10490.94 8514.87 11672.16 9695.82 Unallocated liabilities - - Total liabilities 11672.16 9695.82

203 The Bank has only the Domestic geographic segment. Under business segments, residual operations being of insignificant volume have not been considered as separate reportable segment and included under Other Banking operations.

11. Earnings per share

Earnings per share is reported in accordance with AS 20 issued by the ICAI. The Bank has no dilutive potential equity shares outstanding during the year and the basic earnings per equity share of Rs.48.36 has been computed by dividing the net profit after tax (Rs.105.01 crore) by the weighted average number of equity shares (2.17 crore).

12. Country Risk

13. Additional Disclosures.

In terms of RBI guidelines, the following additional disclosures are made.

For the year ended / As at March 31, 2003 March 31, 2002 a) Capital Adequacy Ratio 11.23% 10.63% b) Percentage of net NPAs to net advances 4.95% 8.60% c) Details of provisions and contingencies debited in Profit and Loss (Rs. crore) Account during the year: i) Provision towards NPAs 160.02 154.00 other contingencies 2.69 3.41 ii) Provision for Investments 9.48 20.15 iii) Provision for Standard Assets 3.00 1.50 iv) Provision towards Income tax and Wealth Tax 71.29 44.33 Total 246.48 223.39 d) Subordinated Debt raised as Tier II Capital 300.00 150.00 e) i) Gross value of investments in India 4555.50 3758.47 Less: Aggregate provision for depreciation on investments in India 3.82 2.64 Net value of investments in India 4551.68 3755.83 The above investments include: Investments in shares: Equity shares 27.58 17.22 Preference shares 56.50 64.52 Investments in convertible debentures Nil Nil Investments in units of equity-oriented mutual funds 0.65 1.54 ii) Gross value of investments outside India Nil Nil Less: Aggregate provision for depreciation on Investments outside India NA NA Net value of investments outside India Nil Nil f) Business Ratios i) Capital Adequacy ratio: Tier I capital 6.65% 6.96% ii) Capital Adequacy ratio: Tier II capital 4.58% 3.67% iii) Interest income as a percentage to average working funds 10.37% 11.11% iv) Non-interest income as a percentage to average working funds 2.19% 2.35% v) Operating profit as a percentage to average working funds 3.28% 3.25% vi) Return on Assets 0.86% 0.81% vii) Business (Deposits plus Advances less Inter-bank deposits) per employee (Rs. crore) 2.70 2.19 viii) Profit per employee (Rs. lakh) 1.69 1.31

204 Maturity Pattern of assets and liabilities* (Rs. crore) 1-14 15-28 29 days Over 3 Over 6 Over 1 Over 3 Over 5 Total days days to 3 mths to 6 mths to 1 yr to 3 yrs to 5 yrs mths yr yrs yrs Advances @ 269.61 354.58 531.47 276.74 552.15 2200.08 690.68 1342.21 6217.52 Investments 15.23 34.58 33.90 19.57 158.96 560.01 264.81 3464.62 4551.68 Deposits 534.29 316.16 1363.22 1222.50 1683.03 5292.72 322.07 213.43 10947.42 Borrowings - - 16.58 50.60 7.34 4.70 2.63 2.83 84.68 Foreign Currency Assets 100.51 65.50 135.17 22.41 16.22 - 30.03 30.05 399.89 Foreign Currency Liabilities 16.15 15.01 69.38 157.90 161.56 402.61 - - 822.61 (* 80.23% of this data is based on the unaudited statements received from Branches) @ Inclusive of bills re-discounted under BRDS, net of provisions.

Lending to sensitive sectors** (Rs. in crore) As at March 31, 2003 March 31, 2002

Capital Market 49.66 35.01 Real Estate 92.50 135.13 Commodities 105.28 112.14 Advance for margin trading Nil Nil ** compiled from unaudited statements.

Restructured/Rescheduled Loans (other than CDR)** (Rs. crore) As at March 31, 2003 March 31, 2002 Total amount of loan assets subjected to restructuring/rescheduling 119.69 72.73 Amount of Standard Assets subjected to restructuring/rescheduling 107.22 66.27 Amount of Sub-standard Assets subjected to restructuring/rescheduling 12.47 6.46 ** compiled from unaudited statements.

Corporate Debt Restructuring (CDR)** (Rs. crore) As at March 31, 2003 March 31, 2002 Total amount of loan assets subjected to restructuring under CDR 36.66 0.00 Amount of Standard Assets subjected to CDR 36.66 0.00 Amount of Sub-standard Assets subjected to CDR 0.00 0.00 Amount of Doubtful Assets subjected to CDR 0.00 0.00 ** compiled from unaudited statements. Movement of NPAs (Rs crore) Gross NPA Net NPA As at 31 March 2002 638.36 445.84 Additions during the year 117.04 82.43 Deductions during the year 227.41 220.46 As at 31 March 2003. 527.99 307.81

Movement of Provision for depreciation on investments (Rs. Crore) As at March 31, 2002 2.64 Add: Provision made during the year 9.48 Less: Write off, write back during the year 8.30 As at 31 March 2003 3.82

205 Movement of provision for NPAs (Rs Crore) As at March 31, 2002 186.44 Add: Provision made during the year 157.46 Less: Write-off, write-back during the year 128.46 As at March 31, 2003 215.44

Derivatives: Interest Rate Swaps

Nature of Contracts Interest Rate Swaps Total notional amount Rs. 50 crore Terms of contract 1. Receiving fixed rate against payment of floating rate (NSE MIBOR) for Rs.25 crore. 2. Pay fixed rate against receipt of floating rates (NSE MIBOR) for Rs.25 crore. All are trading swaps Accounting Policies Board-approved accounting policies as per RBI guidelines have been adopted. The trading swaps are marked to market every fortnight and the losses are accounted in the books while profits are ignored. Default Risk Nil as on 31 March 2003 Market Risk Considered as NIL since swaps are maturing in the first week of April 2003. Concentration of credit All swaps have been contracted with a primary dealer in the money market. risk Collateral Security As per market practice, no collateral security is insisted on for the contracts. Fair value Net fair value of the swaps (loss) Rs.0.88 lakh as on 31 March 2003

14. Previous year’s figures have been regrouped and recast wherever necessary.

ANNEXURE – B

PART – III

ADJUSTMENTS INCORPORTED IN THE SUMMARISED AUDITED FINANCIAL RESULTS GIVEN IN PART I & II CONSEQUENT TO CHANGE IN ACCOUNTING POLICIES AND QUALIFICATIONS IN AUDITORS’ REPORT

CHANGE IN ACCOUNTING POLICIES

1. Particulars of significant changes in accounting policies & practices and its re-statement 1.1 For the financial year March 31, 2007

During the year ended 31.03.2007, the bank had valued its investments (other than shares) based on market value immediately succeeding the year end taking into consideration the announcements, if any, made by RBI as against the practice of valuing the same based on the market value at the year end. Consequent on the above change the net profit for the year was lower by Rs.19.32 crore with consequential impact on Reserves & Surplus and Investments.

No adjustment for the above has been made in the restated financial statements for the years ended March 31, 2003 to March 31, 2006 since the amount of provision relating to the said years have not been separately quantified.

1.2 For the financial year March 31, 2007

1.3 During the year ended March 31, 2007, the bank changed the policy of charging software expenses to Profit & Loss Account by amortising the same in 3 years on straight line basis as against the policy of charging it off fully followed in earlier years. Consequent on the above change the profit for the year is higher by Rs.4.53 crore with consequential impact on Reserves & Surplus and Fixed assets.

No adjustment for the above has been made in the restated financial statements for the years ended March 31, 2003 to March 31, 2006 since the amounts relating to the said years have not been separately quantified.

206 MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS AS REFLECTED IN THE FINANCIAL STATEMENTS:

Shareholders should read the following discussion of Bank’s financial condition and results of operations together with audited financial statements which appear in the section titled “Financial Information” in this Draft Letter of Offer .The following discussion is based on audited financial statements for financial year 2004, 2005, 2006 and 2007. The Bank’ financial year ends on March 31 of each year, so all references to a particular fiscal are to the twelve-month period ended March 31 of that year. Unless otherwise indicated, all financial and statistical data relating to the banking industry in the following discussion are derived from various industry reports.

Our fiscal year ends on March 31 of each year, so all references to a particular fiscal year are to the 12-month period ended March 31 of that year. In this section, any reference to "we", "us" or "our" refers to Federal Bank Limited. Unless otherwise stated, the financial information used in this section is derived from our consolidated audited financial statements under Indian GAAP, as restated.

The Bank was incorporated on April 23, 1931 as the ‘Travancore Federal Bank Limited Nedumpram” under the Travancore Companies Regulation, 1916. The Bank’s name was changed to “The Federal Bank Limited” on December 2, 1949. The Bank was registered under the Indian Companies Act, 1956 on April 1, 1956 .The Bank was licensed under the Banking Regulation Act, 1949, in 1959 and became a scheduled commercial bank under the Second Schedule of Reserve Bank of India Act, 1934 in 1970.

The Bank is currently headed by its Chairman & CEO, M. Venugopalan. In accordinace with the requirements of the regulations prescribed by the Reserve Bank of India, the Board of Directors consists of persons representing various disciplines. Over the seven decades of its service to the nation, the Bank has become one of the leading private sector banks with a strong nationwide presence. As on March 31, 2007 the Bank had 536 branches which has gone up to 540 branches as on September 14, 2007 and 12 regional offices located at various part of the country. The Bank has opened a unit office at Kurundwad to co-ordinate the activities of the branches of the erstwhile Ganesh Bank which was merged with the Bank as per scheme of amalgamation approved by the Reserve Bank of India. The Bank has already received an authorization vide letters dated May 25, 2007, May 23, 2007 and January 29, 2007 from the Reserve Bank of India for another 66 branches and one regional office in India and one representative office at Abu Dhabi respectively.

The Bank's share in total deposits of scheduled commercial banks was 0.83 % in 2007 as compared to 0.84% in 2006.

207 The Bank has sought to stabilize, monitor and control its credit risk and investment exposure rating and monitoring mechanisms, using management information systems (“MIS”), and historical data on credit risk parameters. The Bank has an internal audit system which includes concurrent audit, computer audit, credit audit and revenue audit.

In 2007, the Bank entered into an agreement with Infosys Technoloiges Limited for the implementation of a core banking solution (“CBS”) based on “Finacle” software. As on September 14, 2007, 516 of the Bank branches operate on the CBS while 22 branches continue to operate on in house software Fedsoft and the remaining 2 branches are yet to be computerized. For risks associated with the Bank’s migration to CBS see Risk Factors on page [●].

The net NPA position of the Bank is comfortable and the Bank has aggressively tried to reduce the size of the NPAs which as a percentage of net advances stood at 0.44% as on March 31, 2007 as against 0.95 % on March 31, 2006.

For the Financial Year ended March 31, 2003 2004 2005 2006 2007 A INCOME 1 Interest Earned 1.1 Interest/ Discount on Advances/ Bills 660.00 714.28 772.76 916.00 1281.45 1.2 Income on Investments 423.08 436.66 378.98 458.17 482.50 1.3 Interest on Balances with RBI and other Inter- 27.76 30.42 27.72 35.94 43.81 Bank Funds 1.4 Others 0.62 10.70 11.57 26.42 9.59 Total 1,111.46 1,192.06 1191.03 1436.53 1817.35 2 Other Income 2.1 Commission, Exchange & Brokerage 49.53 59.20 65.67 69.93 82.78 2.2 Net Profit on Sale of Investments) 143.56 174.42 64.61 33.08 49.29 2.3 Net Profit/(Loss) on Revaluation of Investments (8.45) (1.07) (9.76) (16.15) (15.89) 2.4 Net Profit/(Loss) on Sale of Land, Buildings & 0.23 0.06 0.08 2.44 0.71 Other Assets 2.5 Net Profit on Foreign Exchange Transactions 17.14 18.77 27.66 20.17 30.44 2.6 Income earned by way of dividends etc from 6.37 4.45 2.33 2.30 3.62 companies in India 2.7 Miscellaneous Income 26.05 42.03 61.39 105.18 135.74 Total 234.43 297.86 211.98 216.95 286.69 Total Income 1,345.89 1,489.92 1,403.01 1,653.48 2,104.04 B EXPENDITURE 1 Interest Expended 1.1 Interest on Deposits 729.18 723.05 656.80 797.40 1030.06 1.2 Interest on RBI/ Inter-Bank Borrowings 4.29 1.70 1.23 3.42 14.31 1.3 Others 38.81 45.54 30.72 35.91 40.59 Total 772.28 770.29 688.75 836.73 1084.96 2 Operating Expenses 2.1 Payment to and Provisions for Employees 139.43 178.25 185.78 228.36 260.45 2.2 Rent, Taxes & Lighting 20.97 25.26 31.95 32.25 37.59 2.3 Printing & Stationery 3.45 3.70 4.25 4.33 5.09 2.4 Advertisements & Publicity 2.54 3.56 3.72 2.81 3.90 2.5 Depreciation on Bank's Properties 19.26 24.10 27.44 25.74 23.97 2.6 Directors' Fees, Allowances and Expenses 0.25 0.31 0.29 0.46 0.49 2.7 Auditor's Fees and Expenses 1.52 2.00 2.86 2.87 3.70 2.8 Law Charges 0.71 2.13 2.81 3.81 3.59 2.9 Postage, Telegrams and Telephones 3.04 3.77 4.31 7.23 3.87

208 2.1 Repairs and Maintenance 4.52 5.86 8.77 8.24 9.23 2.11 Insurance 5.13 6.27 10.75 15.81 18.66 2.12 Other Expenditure 21.30 27.68 30.93 32.66 35.56 Total 222.12 282.89 313.86 364.57 406.10 Total Expenditure 994.40 1,053.18 1002.61 1201.30 1491.06 Gross Profit Before Provisions (including for 351.49 436.74 400.40 452.18 612.98 income tax & extraordinary Items Less: Extraordinary Items Nil Nil Nil Nil Nil Gross Profit Before Provisions (including for 351.49 436.74 400.40 452.18 612.98 income tax) Provisions & Contingencies * 246.48 300.44 310.31 226.97 320.25 Net Profit For The Year 105.01 136.30 90.09 225.21 292.73 Add/Less Adjustments Nil Nil Nil Nil Nil

Adjusted Net Profit for the year 105.01 136.30 90.09 225.21 292.73 Add: Balance of Profit Brought Forward from 2.44 2.31 0.49 2.30 13.47 previous year

Comparison of significant items of income and expenses for the financial year ended March 31, 2007 and the financial year ended March 31, 2006

Net Profit: Net Profit of the Bank increased from Rs. 225.21 crores in 2005-06 to Rs. 292.73 crores in 2006-07 showing a growth of 29.98 %. This was mainly on account of increase in interest income and other income earned.

The net profit for the year 2006-07 was calculated after making a provision of Rs.24.10 crore on account of the loss on amalgamation of the erstwhile Ganesh Bank of Kurundwad with the Bank.

Interest Income: Interest income from advances improved by 39.90% from Rs.916.00 crores in 2005-06 to Rs 1281.45 crores in the year 2006-07 due to increase in advances as well as increase in general rate of interest. Interest earned on investment increased by 5.31% from Rs 458.17 crores in the year 2005-06 to Rs 482.50 crores. The reduction in Other Interest income from Rs.26.42 crore in the year 2005-06 to Rs.9.59 crore in the year 2006-07 is due to the reduction in the interest received on income tax refund.

Other Income: Commission and exchange income of the Bank increased by 18.38% from Rs. 69.93 crores in 2005-06 to Rs. 82.78 crores in 2006-07. Due to favorable market condition profit on sale of investments also increased from Rs. 33.08 crores in 2005-06 to Rs. 49.29 crores in 2006-07. The profit on sale of investments for the year 2006-07 include Rs.24.36 crore earned on sale of its shareholding in the Bharat Overseas Bank which was merged with Indian Overseas Bank. Recoveries in written off assets increased by 49.04% from Rs.44.88

209 crore in 2005-06 to Rs.66.89 crore in 2006-07. Consequently total other income of the Bank increased by 32.15% from Rs.216.95 crores in 2005-06 to Rs.286.69 crores in 2006-07.

Interest Expenses: Interest paid on deposits increased by 29.18% from Rs.797.40 crores in 2005-06 to Rs 1030.06 crores in 2006-07 due to increase in deposits by 20.73% from Rs.17878.74 crore in 2005-06 to Rs.21584.44 crore in 2006-07 and also due to increase in interest rates generally.

Operating Expenses: Operating expenses increased by 11.39% from Rs.364.57 crores in 2005-06 to Rs. 406.10 crores in 2006-07 and the rise was mainly attributed to increase in employee cost resulted from absorbing the total cost of VSS Rs.14.32 Crore and the additional provision of Rs.28.43 crore required on account of the new Accounting Standard 15 on Employee Benefits issued by the Institute of Chartered Accountants of Inida, in the P&L Account fully.

Total Income: Total income of the Bank went up by Rs.450.56 crores (ie by 27.25%) from Rs.1653.48 crores in 2005-06 to Rs.2104.04 crores in 2006-07.

Total Expenditure: While the total income of the Bank went up by Rs.450.56 crores, the total expenditure of the Bank increased by Rs.289.76 crores (ie by 24.12%) from Rs.1201.30 crores to Rs.1491.06 crores.

Consequent to the above the Gross profit increased by 35.56% from Rs.452.18 crore in 2005-06 to Rs.612.98 crore in 2006-07.

Comparison of significant items of income and expenses for the financial year ended March 31, 2006 and the financial year ended March 31, 2005

Net Profit: Net Profit of the Bank increased by 149.98% from Rs. 90.09 crores in 2004-05 to Rs. 225.21 crores in 2005-06. Besides general growth in business, the reduction in provisions required also helped to improve the net profit. The increase in provision was due to the Bank’s recording a one-time loss of Rs. 70.68 crore during 2004-05 in relation to the transfer of Government securities from the AFS category to the HTM category in accordance with RBI guidelines. The transfer was undertaken based on management’s assessment of the need to mitigate the potential impact of rising interest rates on these securities on the Bank’s future results of operations. Further, the Bank’s investment of Rs. 50 crore in the preference shares issued by a public sector undertaking (“PSU”) was classified as NPA during 2004-05 and since there was no security for this investment, it was written off as per RBI guidelines.

Interest Income: Interest income from advances increased by 18.54% from Rs. 772.76 crores in 2004-05 to Rs. 916.00 crores in 2005-06 due to increase in advances of the Bank from Rs.8822.59 crore as on 31 March 2005 to Rs.11736.47 crore as on 31 March 2006. Interest earned on Investments increased by 20.90% from s.378.98 crore in 2004-05 to Rs.458.17 crore in 2005-06. The other interest income has increased from Rs.11.57 crore in 2004-05 to Rs.26.42 crore in 2005-06 mainly due to increase in interest received on Income Tax refund.

Other Income: Commission and exchange income of the Bank increased by 6.49% from Rs. 65.67 crores in 2004-05 to Rs. 69.93 crores in 2005-06. Due to unfavorable market condition profit on sale of investments decreased from Rs. 66.61 crores in 2004-05 to Rs. 33.08 crores in 2005-06. Recoveries in assets written off increased from Rs.12.38 crore in 2004-05 to Rs.44.88 crore in 2005-06. Consequently total other income of the Bank increased from Rs. 211.98 crores in 2004-05 to Rs. 216.95 crores in 2005-06.

Interest Expenses: Interest paid on deposits increased by 21.41% from Rs.656.80 crores in 2004-05 to Rs. 797.40 crores in 2005-06. Other interest expenses increased from Rs.31.95 crore in 2004-05 to Rs.39.33 crore in 2005-06.

Operating Expenses: Operating expenses increased by 16.16% from Rs. 313.86 crores in 2004-05 to Rs. 364.57 crores in 2005-06. The staff cost increased by 22.92% from Rs.185.78 crore in 2004-05 to Rs.228.36 crore in 2005-06 mainly due to increase in contribution to Pension Fund by Rs.26 crore and contribution to Provident Fund by Rs.7.02 crore on account of the increase in salary from November 2002 consequent to the industry level agreement entered into between the employees’ unions and IBA for revision of salary. Other operating expenses increased by 6.35% from Rs.128.08 crore in 2004-05 to Rs.136.21 crore in 2005-06.

210 Total Income: Total income of the Bank went up by Rs 250.47 crores (ie by 17.85%) from Rs.1403.01 crores in 2004-05 to Rs.1653.48 crores in 2005-06.

Total Expenditure: While the total income of the Bank went up by Rs. 250.47 crores, the total expenditure of the Bank increased by Rs.198.69 crores (by19.82%) from Rs.1002.61 in 2004-05 to Rs.1201.30 crores in 2005- 06.

Gross Profit has increased from Rs.400.40 crore in 2004-05 to Rs.452.18 crore in 2005-06 as a result of the all the above.

Comparison of significant items of income and expenses for the financial year ended March 31, 2005 and the financial year ended March 31, 2004

Net Profit: Net Profit of the Bank decreased by 33.90% from Rs. 136.30 crores in 2003-04 to Rs. 90.09 crores in 2004-05. The reduction in profit on sale of investments and increase in provision required for investments has led to reduction in net profit. The increase in provision was due to the Bank’s recording a one-time loss of Rs. 70.68 crore during 2004-05 in relation to the transfer of Government securities from the AFS category to the HTM category in accordance with RBI guidelines. The transfer was undertaken based on management’s assessment of the need to mitigate the potential impact of rising interest rates on these securities on the Bank’s future results of operations. Further, the Bank’s investment of Rs. 50 crore in the preference shares issued by a public sector undertaking (“PSU”) was classified as NPA during 2004-05 and since there was no security for this investment, it was written off as per RBI guidelines.

Interest Income: Interest income from advances improved from Rs. 714.28 crores in 2003-04 to Rs. 772.76 crores in 2004-05. Interest earned on investment went down to Rs.378.98 crores in 2004-05 from Rs. 436.66 crores in 2003-04.

Other Income: Commission and exchange income of the Bank increased from Rs.59.20 crores in 2003-04 to Rs. 65.66 crores in 2004-05. Profit on sale of investment declined considerably from Rs.174.42 crore in 2003- 04 to Rs.64.61 crore in 2004-05. The total other income of the Bank decreased from Rs. 297.86 crores in 2003- 04 to Rs. 211.97 crores in 2004-05.

Interest Expenses: Interest paid on deposits decreased from Rs. 723.05 crores in 2003-04 to Rs. 656.80 crores in 2004-05 even though the average deposit has inceased by 11%. This is due to re-pricing of high cost deposit matured during the year at a comparatively lower rates during 2004-05.

Operating Expenses: Operating expenses increased by Rs.30.97 crores (i.e. from Rs. 282.89 crores in 2003-04 to Rs.313.86 crores in 2004-05), an increase of 10.9%.

Total Income: Total income of the Bank was down by Rs.86.92 crores from Rs. 1053.18 crores in 2003-04 to Rs.1403.00 crores in 2004-05.

Total Expenditure: While the total income of the Bank went down by Rs.86.92 crore, the total expenditure of the Bank decreased by Rs.50.57 crores ie from Rs. 1053.18 crores to Rs. 1002.61 crores.

FACTORS THAT MAY AFFECT RESULTS OF OPERATIONS

Unusual or infrequent events or transactions

Other than as described in this Draft Letter of Offer, particularly in “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, to our knowledge there are no events that may be described as unusual or infrequent events and transactions.

Significant economic / regulatory changes that may affect income from operations Other than as described in this Draft Letter of Offer, particularly in “Risk Factors” and “Business”, there are no significant economic / regulatory changes that materially affect or are likely to affect the income from continuing operations.

211 Known trends or uncertainties that have had or are expected to have a material adverse impact on sales, revenue or income from continuing operations Other than as described in this Draft Letter of Offer, there are no trends or uncertainties that have or had or are expected to have a material adverse impact on revenues or income of the Bank from continuing operations.

Future relationship between costs and income Other than as described in this Draft Letter of Offer, there are no known factors which will have a material adverse impact on our operation and finances.

Extent to which material increases in net sales or revenue are due to increased sales volume, introduction of new products Other than as described in this Draft Letter of Offer, the Bank has not launched any new product or has entered into business segments.

Total turnover of each major industry segment All the revenue of the Bank accrues from normal banking business

New Products or business segments Other than as described in this Draft Letter of Offer, the Bank has not launched any new product or has entered into business segments.

Seasonality of Business Bank’s business is not likely to be affected by seasonality

Dependence on single or few suppliers or customers

The Bank has a diversified credit portfolio to prevent any concentration in exposures both industry-wise and client wise. For further details on the Industry exposure of the Bank refer to the chapter Business Overview on page 58 of this Draft Letter of Offer.

Competitive conditions

The bank expects competition to intensify further both from the existing public and the private sector banks. With the margins thinning down the bank would have to consistently upgrade itself technologically and innovate new products to be able to compete with other private and public sector banks.

WORKING RESULTS

Information relating to the Bank’s sales, gross profit etc. as required by the Ministry of Finance Circular No. F2/5/SE/76 dated February 5, 1977 read with the amendments of No. dated March 8, 1977 as under:

The unaudited working results of the Bank for the period April -June, 2007 are as given as under:

(Rs. in crores) a) (i) Interest Income 559.22 (ii) Other income 100.48 b) Operating Profit 188.43 c) (i) Provision and Contingencies * 66.99 (ii) Provision for taxes 54.50 d) Net profit 66.94

212 DESCRIPTION OF CERTAIN INDEBTEDNESS

Details of Tier II Capital of the Bank (Rs. in Crore) Issue Date of Issue Amount Outstanding as of Date of Repayment Coupon Security Series* March 31, 2007 (%) II March 20, 2003 150.00 June 20, 2009 8.00 Nil III August 30, 2003 14.00 April 30, 2010 6.90 Nil III August 30, 2003 61.00 April 30, 2012 7.10 Nil IV July 26, 2004 15.00 April 26, 2012 6.75 Nil IV July 26, 2004 30.00 April 26, 2012 6.85 Nil V December 16, 2004 200.00 December 16, 2016 9.25 Nil Total 470.00

* The said bonds have been issued on a private placement basis and the Bank is prohibited from declaring/paying any dividend during the period the bonds are outstanding unless all dues to the bondholders/trustees have been paid.

Details of Secured Liabilities Name Outstanding Rate of Duration (No. Date of Repayment terms amount interest (%) of days) borrowing (Rs. crore) CCIL- 300.00 5.75-5.84% 3 September 10, Principal and interest CBLO Borrowings 2007 to be paid at a lumpsum on expiry of term

Details of Unsecured Liabilities

Set forth below is a brief summary of our aggregate unsecured borrowings as on September 10, 2007

Name Outstanding Rate of Duration (No. of Date of Repayment terms amount interest days) borrowing (Rs. crore) (%) Borrowings in India SIDBI 222.01 Various Various periods Various dates Quarterly rates instalments NHB- Refinance 300.00 9.75% to One Year March 28, 2007 Principal Lumpsum 10.75% – Interest-Quarterly NABARD 2.77 6.50% to 5 years to 14 years Various dates Half yearly 13.50% instalments EXIM bank – refinance 0 - - - - Overseas borrowings:- Syndicate Bank, London 24.43 5.55 186 March 8, 2007 - do - Bank of India, Singapore 40.72 5.67 184 March 14, 2007 - do - February 27, - do - Canara Bank, London 40.72 5.82 366 2007 February 27, - do - Canara Bank, London 8.14 5.84 366 2007 Canara Bank, London 40.72 5.69 369 March 21, 2007 - do - Bank of India, Singapore 40.72 5.735 366 March 26, 2007 - do - Others 15.75 8.25 3 September 10, To be settled on American Express Bank New 2007 next working day York Overseas Borrowing (Total) Total Borrowings 735.85

213 Details of unsecured Borrowings as on September 10, 2007

Name Outstanding Rate of Duration (No. Date of Repayment terms amount interest (%) of days) borrowing (Rs. crore) Call Money 106.00 5.65% to 3 September 7, Principal and interest 5.90% 2007 to be paid at a lumpsum on expiry of term

Borrowings in India

Borrowings within India comprise of borrowings from the banks and financial institutions and agencies. These borrowings are in the ordinary course of the Bank’s business comprising of money market operations and refinance arrangements. All of these borrowings are unsecured.

Borrowings in Foreign Exchange

In order to cater to the foreign currency demand, the Bank has borrowed the amounts in under unsecured facilities from various lenders located overseas:

Servicing Behaviour

214 OUTSTANDING LITIGATION AND MATERIAL DEVELOPMENTS

Except as described below, there is no outstanding litigation, suits or civil proceedings, or criminal proceedings, or prosecutions or tax liabilities against our Bank or our Directors, Subsidiaries or our Associates, and there are no defaults, non-payment or overdues of statutory dues, overdues to banks / financial institutions, defaults against banks / financial institutions, defaults in dues payable to holders of any debentures, bonds, or fixed deposits, and arrears on preference shares issued by the Bank, defaults in creation of full security as per terms of issue/ other liabilities, proceedings initiated for economic/ civil/ and other offences (including past cases where penalty may or may not have been awarded) that would result in a material adverse effect on our business. None of the aforesaid persons/ companies is on RBI’s list of wilful defaulters.

Litigation against the Bank

Criminal and Enforcement Proceedings

As at September 14, 2007, there are three criminal and enforcement cases filed against the Bank that are pending before various fora.

1. M/s Birla Jute and Industries Limited has filed a miscellaneous criminal case no. 3755/1994 against the Bank, before the Magistrate Court,Satna on account of alleged marking of cheques as good for payment by officials of our Bank Branch at Guwahati. Against cognizance of the case, the Bank has filed Miscellaneous Criminal Case No.1505/94 before the Hon. High Court of Madhya Pradesh at Jabalpur. The High court quashed the proceedings with reference to Chairman and the Chief Manager of Branch Guwahati, against which no appeal was filed by the complainant. However, the High Court was of the view that proceeding against the Bank and the manager, who is alleged to have made the endorsement on the cheques, should be allowed to continue. On September 6, 2000 the Magistrate Court, Satna pronounced its judgement and Bank was acquitted from all the charges. Against this decision the complainaint has filed an appeal before High Court of Madhya Pradesh at Jabalpur. and also filed a civil suit no. 3B/04 also against the Bank claiming an amount of Rs.2.45 Crores with interest, cost etc before the District Court, Satna in respect of the alleged transaction. This appeal is yet to be listed for hearing.

2. The Enforcement Directorate (ED), while investigating an alleged FERA violation, on Novemebr 20, 2000 issued show cause notice to 82 persons including HAMCO. Nine of the Bank's officers of the Dadar branch were included in the notice. It is alleged that the Bank abetted Hamco in contravening certain provisions of Exchange Control Manuel and FERA, which amounts to a total pentalty of Rs. 35 Lakhs. Special enforcement directorate held the bank and its seven officials (along with sever other Banks and Officials) guilty. The Bank has preferred an appeal before the appellate Tribunal, New Delhi, against the order dated September 18, 2003. The appeal was numbered as 563/2003 and the same is pending to be listed.

3. Consortium Finance Limited has filed a case bearing no. 257 of 2002 against the Bank at the High Court of Madras for the recovery of an amount of Rs. 22.44 Lakhs and interest theron. In this connection, the complainant also filed a criminal case against the Bank on various grouds including cheating, criminal conspiracy etc. The said criminal case was dismissed and an filed appeal before the High Court, along with a petition for condonation of delay involved in filing the appeal. This petition is pending and yet to be listed for hearing.

4. The Bank has filed a Criminal Case no. No.2567/2006 1128 JFM-1 against Mr. Radhamaniamma and four others before the before the Metropolitan Magistrate Court Bandra , Mumbai for an amount of 4.11 Lakhs under section 138 of NI Act on July 11, 2004 in connection with dishonor of a cheque purchased by the Bank. The accused in the instant matter have subsequently further filed a criminal case against the officials of the Bank, alleging various offenses including criminal breach of trust and forgery Metropolitan Magistrate Court Bandra , Mumbai.The said criminal case against Bank stands adjourned to 31.7.2007 in the light of the stay order passed by the Hon’ble High Court of Kerala in a petition filed by bank under section 482 of Cr.P.C ( Quashing Petition). Smt.Radhamaniamma and Sh.Unnikrishnan filed a Transfer petition before Supreme Court with a request to transfer the Sec.138 case filed by Bank, to the Magistrate Court, Ernakulam. Supreme Court ordered stay in the Sec.138 case and the Transfer Petition is pending before Supreme Court.

215 Civil Cases

As at September 14, 2007, there are approximately 44 civil cases filed against the Bank that are pending before various forums in respect of amounts aggregating approximately Rs. Rs.6,089.25 Lakhs. These include the cases described below. 1. Atcom Technologies has filed a suit no. 22/2005 against the Bank before the Court of Civil Court Daman/Diu for an amount of Rs 4,101.29 Lakhs. M/s Atcom Technologies had borrowed a sum or 4.00 crores from the Bank under a term loan of Rs. 4.00 Crores under a consortium lending agreement. The loan became a non performing asset and the plaintiff requested the Bank for additional facilities and the restructuring of their existing loan. As the Bank has not considered the said request. The Plaintifff has alleged financial losses due to the non-sanctioning of the additional limitThe civil suit is posted for hearing on transferring the suit to DRT Mumbai. The consortium banks have filed joint OA against the borrower before DRT Mumbai. The next date of hearing in this matter is yet to be notified.

2. UBS AG A/c.Hamco Mining and Smelting Ltd has filed a summary suit no. 1515/ 2000 against the Bank before the High Court of Mumbai for an amount of Rs. 2,049 Lakhs. The Bank had refused payment of bills drawn by Frobevia (a company registered in Switzerland) on HAMCO under 4 Letters of Credit, based on an alleged of fraud committed by the complainant and hence repudiated the Bank's liabilities on the Letters of Credit to Union Bank of Switzerland (UBS AG), the negotiating bank. UBS AG filed a summary suit on Feburary 21, 2000 before Bombay High Court for Rs.2049.00 Lakhs with interest in respect of the 3 repudiated Letters of Credit for which they have allegedly effected payments. The plaint amount was subsequently amended to Rs.1761.00 Lakhs with interest. The High Court granted the Bank unconditional leave to defend the suit, against which M/s UBS AG preferred a Special Leave Petition (Civil Appeal No.2580 of 2006) before the Supreme Court. The Supreme Court vide its order dated May 10, 2006 allowed the petition and the unconditional leave granted by the High Court was withdrawn. Subsequently, the Bank filed a clarification application (IA No.2 in Civil Appeal No.2580 of 2006) and Supreme Court vide its order dated August 4, 2006 allowed the Bank to defend the suit on depositing the plaint claim with interest @ 5.7% with High Court of Bombay within 8 weeks which the UBS AG was permitted to withdraw after furnishing guarantee. On September 27, 2006 we deposited Rs.2411.39 L before the High Court of Bombay. The Board vide resolution No.6/A05/500 dated October 23, 2006 has approved to write off the loss totaling to Rs.2411.39 Lakhs. So far UBS AG has not withdrawn the sum of Rs.24,11,39,044.60 deposited by the bank before the Prothonotary of the High Court. In the alternative they have filed an interim application before the Supreme Court of India seeking a direction to deposit the amount of deposited by our Bank with an international bank in India by way of an Fixed Deposit at the best available rate of interest till such time as the suit is decreed and also to direct to pay the said amount with interest to the party in whose favour the suit is decided. The Bank has appeared before the Supreme Court for retaining the amount deposited in the High Court as a deposit with the Bank at the interest rate to be ordered / fixed by Supreme Court. The next date of hearing is yet to be posted.

3. M/.S Shoes East Limited has filed a claim against the bank before the sole arbitrator, New Delhi for an amount of Rs. 783.83 Lakhs, on grounds of the Bank not honoring a writing support undertaking to a total extent of Rs. 199.99 Lakhs allegedly made by the Bank in relation to an issue of debentures. A Suit bearing reference no. 11299/97 was filed before the High Court of Delhi pending on March 14, 2007 in this regard and .the Court has appointed a sole arbitrator to decide the disputes and parties are directed to appear before the arbitrator. The arbitrator directed the complainant company to file its statement of claim on July 13, 2007. Proceedings are pending and posted on October 6, 2007 for filing written statement.

4. Yogesh Mathrudad Kothari has filed a suit R.A.E. Suit no. 272/790 of 1985 against the Bank, before the Court of Small Causes, Mumbai seeking eviction The suit is in connection with the eviction of Mumbai Dadar branch premises admeasuring 3,737.50 sq. ft. The suit was finally disposed of on July 15, 2005 with the directions that (i) the Bank shall hand over the peaceful and vacant possession of the suit premises to the plaintiff trust within 6 months from the date of the order without creating any third party interest over the same and (ii) Separate enquiry be held under the Code of Civil Procedure for mense profits. The Bank branch was shifted to new premises on April 3, 2006. Hereafter, the complainant filed Misc. application no.1/06 claiming a total sum of Rs.4,38,43,366 being the mesne profit from December 1, 1985 till April 7, 2006 with cost and interest thereon and other relieves such as cost and incidental expenses. On December 22, 2006 this suit was dismissed for default, against which the complainant filed a restoration petition. The bank has filed its objections to this restoration petition which are yet to be disposed of.

216 5. Cosmos Steels Ltd has filed a case against the Bank before the Debt Recovery Tribunal, Kolkatta for an amount of Rs. 211.73 Lakhs. The suit relates to imported copper/brass scrap and dross kept in bonded godown of West Bengal State Warehousing Corporation, the warehouse receipts of which were pledged with the Bank and others. The complainant has claimed Rs.91.82 Lakhs and Rs.32.75 Lakhs for loss of goods stored in the space allotted to the Bank Federal bank and PNB respectively and loss on account of sale of the goods at Rs.87.16 Lakhs. The Bank has filed written statement denying all allegations and this case has been transferred to Debt Recovery Tribunal, Kolkata and the proceedings are going. The next date of hearing in this matter is October 9, 2007.

6. Syndicate Bank has filed a recovery application no. O.A. 60/61 of 2004 before the Debt Recovery Tribunal, Hyderabad for Rs.112.00 Lakhs. The Complainant alleged that the Bank had returned 4 cheques presented in clearing, which were discounted by the complainant amounting to Rs. 76.36 lakhs out of time. The case is posted for evidence on September 20, 2007.

7. Shah Deepak has filed a Civil Suit No. 240/2004 against the Bank at the High Court of Kolkatta and has claimed an amount of Rs.98,44,981 as it is alleged that he suffered this loss due to the an allegedly erroneous relaease of guarantee amounts deposited with it by the Bank. The matter is yet listed for hearing.

5. M/s G.K. Granites has filed a suit bearing O.S. No’s 295 and 139 of 2006 against the Bank before the Sub Court North Parur for an amount of Rs. 66.73 Lakhs. These suits had been filed to restrain the payment of a bank guarantee which was invoked prior to the bank being served with an injunction to not pay the same. Subsequently another suit bearing O.S. No. 379 of 2007 has been filed for a declaration on account of alleged violation of the injunction order the bank to pay damages to the tune of Rs. 57 Lakhs with interest at 14.75%. The bank has filed a written statement in this matter. The next date of hearing in this matter is yet to be notified from the Court

8. Mujibour Rehman has filed Money Suit no. 1 of 2007 against the Bank before the 1st Court of Joint District Judge, Khulna, Bangladesh for the recovery of an amount of Rs.36.13 Lakhs on the grounds of wrongful return of import bills to an importer. The written statement in this matter has been filed directly with the Court at Bangladesh on February 24, 2007, with a copy to the plaintiff. No date of hearing has been notified as of date.

9. Dalbir Gulati has filed a civil suit no. 821/2004 against the Bank at the High Court of Delhi for an amout of Rs. 25.01 Lakhs. The plaintiff herein has alleged that the Bank permitted withdrawals from the account of the partnership firm of the plaintiff for Rs. 19.40 Lakhs, against the signature of one of the partners as against the instruction to permit operation in the account under the joint signature of both the partners. The case is posted to December 17, 2007 for cross examination of the complainant's witness.

10. Consortium Finance Limited has filed a case no. 257 of 2002 against the Bank at the High Court of Madras for an amount of Rs. 22.44 Lakhs inclusive of interest. The complainant is the drawer of 3 cheques for a total amount of Rs.10.91 lakhs, payable to Sri Gajalakshmi Industries encashed account of M/s. Gajalakshmi Industries maintained with the Bank Branch at Raja Ram Mehta Nagar/Chennai. This petition is pending and is yet listed for hearing.

11. Capital Business Systems Limited has filed a suit no. 226/1990 against the Bank at the Distrcit Court of Delhi for an amout of Rs. 19.88 Lakhs. The main allegation is that the Bank returned the cheques issued by complainats drawn on the Bank stating reasons that "effects not cleared, present again” and “refer to drawer”, suppressing the true picture that there was no balance in the account. The case currently stands posted for orders.

12. Rajiv Agarwal has filed a suit no. 576/2003 against the Bank before the Civil Judge, Agra for an amount of Rs. 17.95 Lakhs with rate of interest at the rate of 24% per annum. The complainant alleges that the Bank failed to occupy the newly constructed premises owned by the complaiiant, for accommodating its Agra Branch, violating the terms of the agreement entered in to with the Bank. The suit is one for compensation for breach of contract. The case currently stands posted to September 26, 2007 for production of further evidence.

217 13. Corporation Bank has filed a suit O.A. no 42 of 2007 against the Bank before the Debt Recovery Tribunal, Mumbai for an amout of Rs. 17.93 Lakh. The suit pertains to certain claims in relation to a housing loan, wherein the borrowers have allegedly defrauded the Plaintiff. The Bank has been made a party to the suit for the reason that certain of the accused encashed the pay order for Rs.13.70 Lakhs through the C.D account maintained with the Mumbai/Dadar branch of the erstwhile Ganesh Bank. The matter has been posted to November 22, 2007 for hearing and filing of written statement.

14. The Uttar Pradesh Financial Corporation (UPFC) has filed a suit no. O.S. 29/1984 against the Bank before the Debt Recovery Tribunal, Lucknow for an amout of Rs. 11.07 Lakhs with interest of 15.5% chrageable per annum. The Bank had issued a Bank Guarantee for Rs. 19 Lakhs in 1980 favouring UPFC on behalf of M/s Divya Cold Storage, Bank’s customer. The amount of Bank Guarantee was subsequently reduced and a fresh Bank Guarantee for Rs.16 Lakhs was issued in 1981. The Bank Guarantee was invoked on November 28, 1981and Bank paid Rs.8.26 Lakh, the amount outstanding under deposit of the party and issued another Bank Guarantee for 8.75 Lakhs. This Bank Guarantee was invoked on May 3, 1983. The Bank did not pay any amount and hence the complainant filed the said suit. The matter is posted for on September 20, 2007 for filing written arguments of UPFC.

15. The State Bank of India has filed suit No. CS/445/98 before High Court, Calcutta against Madhumitha Constructions Pvt. Ltd and 56 others including the Bank. The case pertains to the defrauding of the SBI with about Rs.112 crores through fake Letters of Credit and other borrowings. SBI has prayed for a decree for Rs.643.18 Lakhs against the Bank. Concurrent matters initiated by the Defendants in this matter are pending before various Debt Recovery Tribunals. The Bank has filed original documents before the DRT in 2004. Matters before the High Court of Calcutta have been posted for arguments. The next date of hearing in this regard is yet to be posted.

16. Cosmos Steels Ltd has filed a Writ Petition no. CO. No. 13305(w)/1992 against the Bank before the High Court of Kolkata for an amount of 81.44 Lakhs challenging the levy of customs duty etc and the payment of amounts due under certain bank guarantee’s issued by the Bank to the customs department. The Bank has preferred an appeal (FMAT No. 3030/92) and obtained a stay of the trial court order directing it to make certain payments on November 18, 1992. This matter has been for non-appearance on behalf of the Bank and the Bank has subsequently filed a restoration petiton in this regard. The matter is yet to be posted for hearing.

6. N.S.Sebastian, has filed a petition before State Consumer Disputes Redressal Commission, Trivandrum claiming a sum of Rs.9.85 Lakhs together with interest at 18% p.a. from April 3, 2000 till date and Rs. 1.00 Lakh as cost for mental agony onm grounds of a loss of a cheque which was deposited by the complainant in transit. The Commission disposed of the petition on October 3, 2002 with a direction to pay interest @ 18% for the cheque amount of Rs. 9.85 Lakhs from April 3, 2000 till date of payment together with cost of Rs. 2,000.00 The appeal filed by the Bank before the National commission, New Delhi challenging the order of the Commission was finally heard and dismissed on April 10, 2007 confirming the order of the State Commission. Appeal was filed before the Supreme Court on July 9,2007 which is pending.

Other Civil Matters

In addition to the above, as of September 7, 2007 the following matters are pending against the Bank in various courts : (Rs. In Lakhs) Forum No. of Cases Liability Supreme Court of India 2 4.90 High Courts 4 12.84 Workmen’s Compensation Tribunal 2 6.50 District Courts/. City Civil Courts 9 30.72 Miscellanous Courts 11 19.69 MotorAccident Claims Tribunals 3 4.37

218 Consumer Matters

1. Mukesh Kumar has filed original petition No. 12 of 2005 before the National Consumer Dispute Redressal Commission, New Delhi against the Bank for an amount aggregating approximately Rs. 17,98,76,698/- with interest and cost until the date of realization of the amount. The complainant had two fixed deposits with the Nagercoil Branch of the Bank. The allegation of the complainant is that the Nagercoil branch has unlawfully and unauthorisedly closed the said deposits and transferred the proceeds to a joint account with State Bank of India, Nungambakkam branch, Chennai, purportedly in the name of the complainant along with one. one AJK Fernandez It is alleged that the complainant had not given any instruction for the said premature closure and transfer of the funds. It is further alleged that the said Shri. AJK Fernandez had siphoned off the entire amounts from the account with SBI. Therefore, the complaint has been filed alleging deficiency of service by both the banks and seeking compensation. The Bank has filed its reply version. The case is posted to October 4, 2007 for final hearing.

2. Mrs. Bhavana K. Thacker has initiated a consumer dispute before the State consumer redressal forum Mumbai, Maharashtra seeking to recover an amount of Rs. 33.98 Lakhs on grounds of the Bank not making a timely sale of securities which were pledege by the complainit towards towards an overdraft limit of Rs.10.00 lakhs.. A suit has been filed by the Bank to recover dues. The Consumer Case has been adjourned sine die.

3. Mr. Matthew Pallithanam has filed a suit O.P. No. 9 of 2005 against the Bank before the Sate Consumer Disputes Redressal Commission, Thruvananthapuram for an amount of Rs. 30 Lakhs. The Complainant, an NRI account holder, filed a complaint stating that the Bank failed to carry out his instructions to buy and sell shares and securities of specified companies, in time and that it is due to this lapsehe suffered huge lossesan has sought a direction to the Bank to furnish the details of shares and stocks standing to the credit of the complainant and to furnish documents relating to his portfolio account. He has claimed an amount of Rs. 30L, as compensation for the loss sustained by him in view of the alleged deficiency of service on the part of the Bank. Complainant lodged complaint with SEBI. Bank filed its version before SEBI stating the facts and no further proceeding has emanated from SEBI in the matter. The case is not posted for hearing yet.

4. Mr. Lakshmi Narayan Patanik has filed a case no. 79/2004 against the Bank before the Consumer Disputes Redressal Forum for an amount of Rs. 19.90 Lakhs. The complainant was the Banks customer having a cash credit and a bank guarantee facility. It is alleged that the Bank had not issued a Bank Guarantee for Rs.11.46 Lakhs, as promised by it, thereby depriving the chance of the complainant from participating in a global tender and It is also alleged that Bank had received payments due to the complainant, from various departments, under an forged power of attorney. This case was dismissed on August 2, 2006 in favour of the Bank, but the Complainant filed an appeal. The appeal stands posted to October 22, 2007 for hearing

5. Mr. A. N. Palanippan has filed a suit no. 177/2005 agiant the Bank and others before the District Consumer Disputes Redressal Forum, Trichirappali for an amount of Rs. 15,00,000. The complainant borrowed Rs. 50,000 on December 22, 1994 against mortgaged property by way of a deposit of title deeds and security of pledge of shares which includes 100 shares of Satyam Computers. Against this a recovery suit was filed against before the sub court, Tiruchirappalli, as the complainant in repayment, the Bank sold 50 shares of Satyam Computers and loan account was closed on March 22, 2000 and matter was settled out of court on March 25, 2000. Hereafter, the complaintant filed the present suit alleging that even though he requested branch to sell the pledged shares of Satyam Computers and close his loan account, branch was negligent in not selling the same, in time. The case is currently posted for September 19, 2007.

6. Mr. Inderjit Singh has filed a suit no. 192/06 against the Bank before the National Commission, New Delhi for an amount of Rs. 74.46 Lakhs. The complainant enjoyed substantial credit facilities for their export business since 2003. and had two FUBP bills purchased/discounted by the bank on July 30, 2004 and July 3, 2004. The State Commission with out serving any has disposed of the case on December 20, 2006 on merit with a direction to the bank to return the dishonoured cheque to the complainant with in one month, if already not returned. Appeal no. 148/07 was filed before the National Commission, New Delhi to set aside the order of the State Commission to the extent of

219 direction given to the appellant bank to return the cheque sent for collection, which is posted on September 23, 2007 for hearing.

In addition to the above, as of September 7, 2007

1. There a total of 10 matters before the State Consumer Redressal Forum wherein a consolidated claim or Rs. 9.25 lakhs has been raised against the Bank. 2. There a total of 34 matters pending before various consumer dispute redressal forum’s where a consolidated liability of Rs. 34.91

Taxation related litigation

1. The income tax department has filed an income tax appeal bearing ITA No. 549/c/07 before the income tax appellate tribunal. The matter pertains to disputed items of Rs. 521.99 Crores for the assessment year 2005 – 2006 and a tax liability of Rs. 191 Crores in relation to disallowance of interest due on investments, disallowances under S. 14A of the IT Act, disallowance of claims under S. 36(1)(viia) for non performing assets, depreciation of investments and the disallowance of proportionate expenses in relation to income. The matter is yet to be posted for hearing. 2. The income tax department has filed an income tax appeal bearing ITA 459/C/06 before the income tax appellate tribunal. The matter pertains to disputed items of Rs. 248.08 Crores for the assessment year 2004 – 2005 and a tax liability of Rs. 89 Crores in relation to disallowances off interest due on investments, disallowances under S. 14A of the IT Act, disallowance of claims under S. 36(1)viia for non performing assets, bad debts written off and the disallowance of claims under S. 36(1)viii. The matter is posted for hearing on September 25, 2007. 3. The income tax department has filed an income tax appeal bearing ITA 366/C/07 before the income tax appellate tribunal. The matter pertains to disputed items of Rs.97.55 Crores for the assessment year 2002- 2003 and a tax liability of Rs. 34.83 Crores in relation to disallowance of writing off of certain bad debt. The matter is yet to be posted for hearing. 4. The income tax department has filed an income tax appeal bearing ITA 1110/C/04 before the income tax appellate tribunal. The matter pertains to disputed items of Rs.137.59 Crores for the assessment year 2002 – 2003 and a tax liability of Rs. 49.12 Crores in relation to certain disallowances pertaining to interest accrued on investments. The next date of hearing in this matter is yet to be informed.

Proceedings before the Omudsman

As of September 14, 2007 there a 31 oustanding matters pending before the Banking Ombudsman. These matters to various alleged deficiencies in service. The consolidated amounts sought under the above matters are Rs. 1.08 Crores

Litigation by the Bank

Civil Matters

The Bank has initiated a total of 547 cases pending before various Debt Recovery Tribuanls (DRT) throughout India. The amount Involved in these matters is Rs. 599.11Crores.

Details of certain of the mattters pending before Debt Recovery tribunals in each of the regions are as follows.

DRT, Ernakulam

1. The Bank has filed a suit bearing number O.A. 361/04 against M/S Sait Nagjee Purshottam & Co. before the DRT, Ernakulam for an amount of Rs. 1581.82 Lakhs. The bank issued a notice under the SARFAESI Act on October 14, 2005. The defendant has filed an appeal against this proceeding. The matter is now posted for hearing on November 6, 2007.

2. The Bank has filed a suit no. 133/05 against M/S Kainady Tanneries Private Limited before the DRT, Ernakulam for an amount of Rs. 1256.89 Lakhs. The matter is now posted for hearing on October 23, 2007.

220 3. The Bank has filed a suit no. O.A. 65/01 against M/S Premier Cashew Industries & Co. before the DRT, Ernakulam for an amount of Rs. 984.24 Lakhs. The bank issued a notice under the SARFAESI Act on October 3, 2005 . The defendant has filed an appeal against this proceeding. The matter is now posted for hearing on September 18, 2007.

In addition to the above cases, there are 199 cases pending before the DRT, Ernakulam under which the Bank has claimed a consolidated amount of Rs. 9,204.64 Lakhs.

Chennai Region

1. The Bank has filed a suit no. O.A. 167/02 against M/S Mafatlal Finance Company Limited before the DRT, Chennai for an amount of Rs. 1665. 56 Lakhs. The defendant has filed an appeal against this proceeding. The matter is now posted for hearing on October 11, 2007.

2. The Bank has filed a suit no. O.A. 55/05 against Intergrated Finance Company Limited before the DRT, Chennai for an amount of Rs. 661. 86 Lakhs. The defendant has filed an appeal against this proceeding. The matter is now posted for hearing on October 9, 2007.

3. The Bank has filed a suit no. T.A. 402/07 against M/S Sree Saraswathi Mills Ltd. before the DRT, Chennai for an amount of Rs. 300.18 Lakhs. The defendant has filed an appeal against this proceeding. The matter is now posted for hearing on September 29, 2007.

In addition to the above cases, there are 51 cases pending before the DRT Chennai under which the Bank has claimed a consolidated amount of Rs. 3,518.00 Crores.

Mumbai Region

1. The Bank has filed a suit no. OA 124/ 04 against M/S Sun Earth Ceramics Limited before the DRT, Membai for an amount of Rs. 2,608 Lakhs. The defendant has filed an appeal against this proceeding. The matter is now posted for hearing and the date of hearing is yet to be notified.

2. The Bank has filed a suit no. O.A.54/03 against M/S Alpic Finance Limited before the DRT, Mumbai for an amount of Rs. 4,166.68 Lakhs. The defendant has filed an appeal against this proceeding. The matter is now posted for hearing on September 14, 2007.

3. The Bank has filed a suit no. O.A. 1804/00 against M/S BSI Limited before the DRT, Membai for an amount of Rs. 5240.28 Lakhs. The defendant has filed an appeal against this proceeding. Proceedings under the SARFESI Act are yet to commence.

In addition to the above cases, there are 52 cases pending before the DRT, Mumbai Region under which the Bank has claimed a consolidated amount of approximately Rs. 20,756.66 Lakhs.

Kolkata Region

1. The Bank has filed a suit no. 160/03 against M/S Uniworth Ltd. before the DRT, Kolkatta for an amount of Rs. 1586.40 Lakhs. The matter is now posted for hearing on September 24, 2007.

2. The Bank has filed a suit no. 118/ 05 against M/S Nicco Ucco Alliance Credit Ltd.before the DRT, Kolkatta for an amount of Rs. 1079 Lakhs. The matter is now posted for hearing on September 14, 2007.

3. The Bank has filed a suit no. O.A. 206/02 against M/S Sunderban Sea Foods Ltd. before the DRT, Kolkatta for an amount of Rs. 700.98 Lakhs. The next date of hearing in this matter is yet to be notified.

In addition to the above cases, there are 77 cases pending in the Kolkata Region under which the Bank has claimed a consolidated amount of approximately Rs. 7810.20 Lakhs.

221 New Delhi Region

1. The Bank has filed a suit no. OA. 632/00 against M/S Mesco India Ltd. before the DRT, Delhi for an amount of Rs. 702.01 Lakhs. The matter is now posted for hearing on October 11, 2007.

2. The Bank has filed a suit no. T.A. 840/96 against M/S Makkan Agro Oils Ltd. before the DRT, Delhi for an amount of Rs. 733.24 Lakhs. The matter has been decreed in the Bank’s favor and is currently in the execution phase. The matter is now posted for hearing on September 19, 2007.

In addition to the above cases, there are 48 cases pending in the New Delhi under which the Bank has claimed a consolidated amount of Rs. 7,871.21 Lakhs.

Bangalore Region

1. The Bank has filed a suit no. OA 961/99 against Das Lagerway Wind Turbines Ltd. before the DRT, Banglore for an amount of Rs. 729.74 Lakhs. The next date of hearing for this matter is yet to be notified.

2. The Bank has filed a suit no. OA 909/99 against M/s Kitti Steels Ltd. before the DRT, Banglore for an amount of Rs 618.44 Lakhs. The matter is now posted for hearing on October 25, 2007.

In addition to the above cases, there are 67 cases pending before the DRT Bangalore, under which the Bank has claimed a consolidated amount of approximately Rs. 4755.79 Lakhs.

In addition to the above, the Bank has further intiated the following matters before other DRT’s:

S, No. Debt Recovery Tribunal No. of Matters Amount Claimed (in Rs. Crores) 1. Hyderabad 12 19.62 2. Vishakapatnam 9 2.50 3. Jabalpur 8 20.37 4. Chandigarh 2 0.87 5. Allahabad 2 0.85 6. Lucknow 2 2.65 7. Jaipur 2 0.39 8. Ahmedabad 1 0.47 9. Coimbatore 74 38.83 10. Madurai 6 2.89 11. Kolkata 61 75.98 12. Cuttack 11 1.09 13. Guwahati 4 1.00 14. Jamshedpur 1 0.04 15. Ahmedabad 8 54.17

Taxation Matters Disputes pertaining to Income Tax:

1. The Bank filed an appeal before the Commissioner of Income Tax on January 19, 2007 against the assessment order disallowing proportionate expenses relating to exempt income under Section 14 A of the Income Tax Act, 1961 and bad debts written off for the assessment year 2003- 04. The total disputed amount is Rs 139.07 Crores and the disputed tax liability thereon is Rs. 51.11 Crores.

2. The Bank has filed an appeal before the Income Tax appellate tribunal against an assessment pertaining to assessment year 2005-06 disallowing certain write off’s of bad debt and deduction under S. 36 (1) viii of the Income Tax Act, 1961. The disputed amount in this matter is Rs. 39.05 crores and the disputed tax liability in this matter is Rs. 14.29 Crores.

In addition to the above the Bank has filed 10 appeals before the Kerala High Court, Income Tax Appellate Tribunal, Kochi and Commissioner (Appeals), Kochi in relation to disputed tax liability for various assessment years. The total disputed tax liability in relation to these matters is Rs. 18.63 Crores.

222 Disputes pertaining to Service Tax:

As of September 14, 2007 there a 21 cases relating to Service Tax before CESTAT, Bangalore and Commissioner (Appeals), Kochi. The total amount involving these disputes is Rs. 0.85 Crores.

Disputes pertaining to share capital:

There are 49 matters pertaining to ownership over shares or in relation to share certificates pending before various fora including civil courts, high courts, Dispute redressal fora and the company law board. The said matters pertain to ownership over shares and injunctions are operative in certain of these cases directing the Bank to keep shares in abeyance. No claims for damages have been made against the Bank in these matters.

223

GOVERNMENT APPROVALS

On the basis of the indicative list of approvals provided below, we can undertake this Issue and our current business activities and no further major approvals from any government authority/RBI are required to continue these activities. It must be distinctly understood that, in granting these licenses, the GoI and/or the RBI does not take any responsibility for our financial soundness or for the correctness of any of the statements make or opinions expressed in this behalf.

Approvals for the Issue 1. In-principle approval from the National Stock Exchange of India Limited dated [●];

2. In-principle approval from the Bombay Stock Exchange Limited dated [●].and

3. In-principle approval from the Cochin Stock Exchange Limited dated [●].

Licenses and Approvals from the RBI 1. License bearing reference number Tn/4 dated July 11, 1959 issued by the RBI, permitting the Bank to carry on the business of banking in India.

2. RBI notification No.DBO.19/Incl.C.302/52 dated May 08, 1952 whereby the Bank was included in the second schedule to the RBI Act 1934. 3. Letter dated November 20, 1995 received by the Bank from the Reserve Bank of India permitting the Bank to make an offering of 74,08,122 equity shares of Rs. 10 each at a premium of Rs. 140 per share on a rights basis to the shareholders of the Bank.

4. Letter from the Reserve Bank of India dated March 22, 2006 relating to raising of investments in Private Sector Banks for FII's, NRI's/PIO's under portfolio investment schemes stating that as the Bank has passed the necessary resolutions in relation to the raising of investment limit for FII's to 49% and that equity shares and convertible debentures of the Bank can be purchased provided the total purchase of all FII's shall not exceed the overall ceiling limit to (a) 49% of total paid-up equity capital of this bank and (b) 49% of the total paid-up value of each series of convertible debentures. Further, the purchase of equity shares by a single SEBI approved FII/sub-account of a registered FII in the above bank shall not exceed 10% of the paid-up capital of the Bank.

5. Approval letter issued by the RBI, number DBOD.IBD.No.1101/23.10.060/2006-07, dated January 29, 2007 for approval for opening of Representative Office in United Arab Emirates, valid till Feburary 14, 2008 and subject to the terms and conditions conveyed in RBI letter number DBOD.IBD.No.1295/23.01.060/2005-06 dated February 14, 2006.

6. Approval letter issued by the RBI, number DBODFSD.No.5863/24.40.001/2006-07, dated December 22, 2006 for approval of revival of Fedbank Financial Services Ltd. (Fedfina) and the infusion of Rs. 10 Crores as the capital of the Company, subject to the terms and conditions given the Annexure and the Bank adhering to the guidelines contained in RBI Circular No.DBOD.FSD.BC.46/24.01.028/2006- 2007 dated December 12, 2006.

We require prior approval from RBI for opening a new place of business in India or abroad. We have obtained the necessary approvals from the appropriate statutory and regulatory authorities for carrying out our business and operations through our branches and no further approvals are required from any Indian government authority/RBI to continue our business and operations. Except as disclosed hereunder, there are no approvals which have expired, or which have been applied for and have not been granted to the Indian branches of the Bank.

224 Licenses and approvals pertaining to appointment and remuneration of our Directors

1. Letter issued by the RBI, number DBOD.No.116C/08.38.001/2004-05 under section 35B of the Banking Regulation Act, 1949, dated April 28, 2005 for appointment of Mr. M. Venugopalan chairman and chief executive officer of the Bank for a period of 3 years from May 1, 2005.

2. Letter issued by the RBI, number DBOD.No.398/08.38.001/2007-08, dated July 11, 2007 for revision in remuneration of Mr. M. Venugopalan chairman and chief executive officer of the Bank with effect from May 1, 2007.

3. Letter issued by the RBI, number DBOD.No.288/08.38.001/2007-08 under section 35B of the Banking Regulation Act, 1949, dated July 6, 2007 for appointment of Mr. K.S. Harshan as whole time Executive Director for a period of 3 years from May 1, 2007 and slo for the amendment carried out to the Articles 84A and 84B of the Memorandum and Articles of Association as approved by the shareholders.

Taxation Related Approvals 1. Permanent Account Number (PAN) AABCT0020H issued by the Department of Income Tax, GOI.

2. Tax deducted at source Account Number CHNT00969D issued by the Department of Income Tax, GoI to the Bank.

3. Value Added Tax Registration Certificate Number under Section 22 of the Karnataka Value Added Tax Act, 2003 on May 16, 2005.

4. Certificate of Registration issed by the the Commercial Tax Officer, Royapettah for registartion as a dealer under the Tamil Nadu Tax Act, 2006 with Tax Payer's Identification Number (TIN) 33510721588 to be valid from May 11, 2007.

5. Value Added Tax Registration Certificate, VAT TIN number 28636542209, issued by the Commercial Tax Department, Hyderabad on May 11, 2007 in accordance with the Andhra Pradesh Value Added Tax Act, 2005.

6. Value Added Tax Registration Certificate, VAT TIN number 32070233542, issued under the Kerala Value Added Tax Rules 2005, to be vaild from October 7, 2005

In addition to the above registration obtained for the head office and the regional offices of the Bank, it Bank obtains separate tax deduction at source numbers and VAT registrations for each of its branches. As of date, the Bank has obtained the relevant tax deduction at source numbers and VAT registrations for each of its operating branches.

Registrations with SEBI 1. Certificate of Registration dated Feburary 25, 2005 granted by SEBI to the Bank for carrying on activities as merchant bankers under the SEBI (Merchant Bankers) Regulations, 1992 with the Registration Code INM000008811.

2. Certificate of Registration dated May 18, 2005 granted by SEBI to the Bank to act as a registered particiapant under the SEBI (Depositiries & Participants) Regulations, 1996 with the Registration Number IN-DP-NSDL127-2000.

3. Certificate of Registration dated June 18, 2007 granted by SEBI to the Bank to act as bankers to an issue under the SEBI (Bankers to an Issue) Regulations, 1994 with registration Code INB100000083.

Registration with AMFI

Certificate of Registration granted by AMFI enrolling the Bank as an AMFI Registered Mutual Fund Advisor enabling them to carry on the activities of intermediaries with the AMFI Registration No. ARN-11193.

225

STATUTORY AND OTHER INFORMATION

Authority for the Issue

This offer of equity shares on rights basis is being made pursuant to the resolution passed by the Board of Directors on February 12, 2007 and May 18, 2007 and the shareholders resolution passed as special resolution under section 81 and 81(1A) of the Companies Act, 1956 in the ratio of 1 (one) equity shares of Rs.10/- each for every 1 (one) equity share of Rs.10/- each held on the Record Date [●], 2007 at a premium of Rs. [●] per share. The shareholders resolution was passed through postal ballot notice dated May 18, 2007 pursuant to section 192(A)(2) of the Companies Act, 1956. The result of the postal ballot was announced by the Chairman of the Bank on July 12, 2007 based on the report of Mr.P.K. Kurien, Sr. Advocate, who was appointed as the Scrutinizer. As per circular No. DBOD. No. PSBS. BC. 79/16.13.100/2001-02 dated March 20, 2002, issued by the Department of Banking Operations and Development, RBI, RBI approval would not be required for Rights Issues by both listed and unlisted Banks. However, the Bank has written to the RBI vide its letted dated August 9, 2007 to inform it of the proposed issue.

Prohibition by SEBI

Neither we, nor our Directors, or companies with which our Directors are associated with as directors or promoters, have been prohibited from accessing or operating in the capital markets under any order or direction passed by SEBI. Further, none of the directors have been prohibited from accessing the capital market under any order or directon passed by SEBI. Further none the Bank, its subsidiaries or the directors have been declared as wilful defaulters by RBI / Government authorities.

Eligibility for the Issue

The Bank is registered under the Act, and its Equity Shares are listed on the NSE, BSE and CSE. It is eligible to offer this Issue in terms of Clause 2.4.1(iv) of the SEBI (DIP) Guidelines.

Disclaimer Clause

AS REQUIRED, A COPY OF THIS DRAFT LETTER OF OFFER HAS BEEN SUBMITTED TO THE SECURITIES AND EXCHANGE BOARD OF INDIA (SEBI). IT IS TO BE DISTINCTLY UNDERSTOOD THAT THE SUBMISSION OF THIS DRAFT LETTER OF OFFER TO SEBI SHOULD NOT, IN ANY WAY BE DEEMED / CONSTRUED THAT THE SAME HAS BEEN CLEARED OR APPROVED BY SEBI. SEBI DOES NOT TAKE ANY RESPOSIBILITY EITHER FOR THE FINANCIAL SOUNDNESS OF ANY SCHEME OR THE PROJECT FOR WHICH THE ISSUE IS PROPOSED TO BE MADE, OR FOR THE CORRECTNESS OF THE STATEMENTS MADE OR OPINIONS EXPRESSED IN THIS DRAFT LETTER OF OFFER. THE LEAD MANAGER SBI CAPITAL MARKETS LIMITED HAS CERTIFIED THAT THE DISCLOSURES MADE IN THIS DRAFT LETTER OF OFFER ARE GENERALLY ADEQUATE AND ARE IN CONFORMITY WITH SEBI GUIDELINES FOR DISCLOSURE AND INVESTOR PROTECTION IN FORCE FOR THE TIME BEING. THIS REQUIREMENT IS TO FACILITATE INVESTORS TO TAKE AN INFORMED DECISION FOR MAKING INVESTMENT IN THE PROPOSED ISSUE. IT SHOULD ALSO BE CLEARLY UNDERSTOOD THAT WHILE THE ISSUER COMPANY IS PRIMARILY RESPONSIBLE FOR THE CORRECTNESS, ADEQUACY AND DISCLOSURE OF ALL RELEVANT INFORMATION IN THE DRAFT LETTER OF OFFER, THE LEAD MANAGER IS EXPECTED TO EXERCISE DUE DILIGENCE TO ENSURE THAT THE COMPANY DISCHARGES ITS RESPONSIBILITY ADEQUATELY IN THIS BEHALF AND TOWARDS THIS PURPOSE THE LEAD MANAGER SBI CAPITAL MARKETS LIMITED HAS FURNISHED TO SEBI A DUE DILIGENCE CERTIFICATE DATED SEPTEMBER 17, 2007WHICH READS AS FOLLOWS:

226 1. WE HAVE EXAMINED VARIOUS DOCUMENTS INCLUDING THOSE RELATING TO LITIGATION LIKE COMMERCIAL DISPUTES, DISPUTES WITH COLLABORATORS, ETC. AND OTHER MATERIALS MORE PARTICULARLY REFERRED TO IN THE ANNEXURE HERETO IN CONNECTION WITH THE FINALISATION OF THE DRAFT LETTER OF OFFER PERTAINING TO THE SAID ISSUE; 2. ON THE BASIS OF SUCH EXAMINATION AND THE DISCUSSIONS WITH THE COMPANY, ITS DIRECTORS AND OTHER OFFICERS, OTHER AGENCIES, INDEPENDENT VERIFICATION OF THE STATEMENTS CONCERNING THE OBJECTS OF THE ISSUE, PRICE JUSTIFICATION AND THE CONTENTS OF THE DOCUMENTS MENTIONED IN THE ANNEXURE AND OTHER PAPERS FURNISHED BY THE COMPANY; WE CONFIRM THAT:

a) THE DRAFT LETTER OF OFFER FORWARDED TO SEBI IS IN CONFORMITY WITH THE DOCUMENTS, MATERIALS AND PAPERS RELEVANT TO THE ISSUE;

b) ALL THE LEGAL REQUIREMENTS CONNECTED WITH THE SAID ISSUE AS ALSO THE GUIDELINES, INSTRUCTIONS ETC., ISSUED BY SEBI, THE GOVERNMENT AND ANY OTHER COMPETENT AUTHORITY IN THIS BEHALF HAVE BEEN DULY COMPLIED WITH;

c) THE DISCLOSURES MADE IN THE DRAFT LETTER OF OFFER ARE TRUE, FAIR AND ADEQUATE TO ENABLE THE INVESTORS TO MAKE A WELL-INFORMED DECISION AS TO INVESTMENT IN THE PROPOSED ISSUE;

3. WE CONFIRM THAT BESIDES OURSELVES, ALL THE INTERMEDIARIES NAMED IN THE DRAFT LETTER OF OFFER ARE REGISTERED WITH SEBI AND TILL DATE SUCH REGISTRATION IS VALID; AND

4. WE CERTIFY THAT WRITTEN CONSENT FROM SHAREHOLDERS HAS BEEN OBTAINED FOR INCLUSION OF THEIR SECURITIES AS PART OF PROMOTERS’ CONTRIBUTION SUBJECT TO LOCK-IN AND THE SECURITIES PROPOSED TO FORM PART OF PROMOTERS’ CONTRIBUTION SUBJECT TO LOCK-IN, WILL NOT BE DISPOSED/ SOLD/ TRANSFERRED BY THE PROMOTERS DURING THE PERIOD STARTING FROM THE DATE OF FILING THE DRAFT LETTER OF OFFER WITH THE BOARD TILL THE DATE OF COMMENCEMENT OF LOCK-IN PERIOD AS STATED IN THE DRAFT LETTER OF OFFER – NOT APPLICABLE

5. IF UNDERWRITTEN, WE SHALL SATISFY OURSELVES ABOUT THE WORTH OF THE UNDERWRITERS TO FULFIL THEIR UNDERWRITING COMMITMENTS. – NOT APPLICABLE.

The filing of this Draft Letter of Offer does not, however, absolve the Company from any liabilities under Section 63 or Section 68 of the Companies Act or from the requirement of obtaining such statutory or other clearance as may be required for the purpose of the proposed Issue. SEBI further reserves the right to take up, at any point of time, with the Lead Manager any irregularities or lapses in this Draft Letter of Offer. Caution

The Company and the Lead Manager accept no responsibility for statements made otherwise than in this Draft Letter of Offer or in any advertisement or other material issued by the Company or by any other persons at the instance of the Company and anyone placing reliance on any other source of information would be doing so at his own risk. The Lead Manager and the Company shall make all information available to the Equity Shareholders and no selective or additional information would be available for a section of the Equity Shareholders in any manner whatsoever including at presentations, in research or sales reports etc. after filing of this Draft Letter of Offer with SEBI.

227

Disclaimer with respect to jurisdiction

This Draft Letter of Offer has been prepared under the provisions of Indian Laws and the applicable rules and regulations thereunder. Any disputes arising out of this Issue will be subject to the jurisdiction of the appropriate court(s) in Mumbai, India only.

This Draft Letter of Offer has been prepared under the provisions of Indian Laws and the applicable rules and regulations thereunder. The distribution of the Draft Letter of Offer and the Issue of Equity Shares on a Rights basis to persons in certain jurisdictions outside India may be restricted by legal requirements prevailing in those jurisdictions. Persons in whose possession this Draft Letter of Offer may come are required to inform themselves about and observe such restrictions. Any disputes arising out of this issue will be subject to the jurisdiction of the appropriate court(s) in Mumbai, India only.

No action has been or will be taken to permit this Issue in any jurisdiction where action would be required for that purpose, except that this Draft Letter of Offer has been filed with SEBI for observations and SEBI has given its observations. Accordingly, the Equity Shares represented thereby may not be offered or sold, directly or indirectly, and this Draft Letter of Offer may not be distributed in any jurisdiction, except in accordance with the legal requirements applicable in such jurisdiction. Neither the delivery of this Draft Letter of Offer nor any sale hereunder, shall under any circumstances create any implication that there has been no change in our affairs from the date hereof or that the information contained herein is correct as of any time subsequent to this date.

The Draft Letter of Offer has been filed with SEBI. After SEBI gives its observations, the final Letter of Offer will be filed with the Designated Stock Exchange as per the provisions of the Act

United States Restrictions NEITHER THE RIGHTS ENTITLEMENT NOR THE EQUITY SHARES THAT MAY BE PURCHASED PURSUANT THERETO HAVE BEEN REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED, OR ANY U.S. STATE SECURITIES LAWS, AND MAY NOT BE OFFERED, SOLD, RESOLD OR OTHERWISE TRANSFERRED WITHIN THE UNITED STATES OF AMERICA OR THE TERRITORIES OR POSSESSIONS THEREOF OR TO, OR FOR THE ACCOUNT OR BENEFIT OF, “U.S. PERSONS” (AS DEFINED IN REGULATION S UNDER THE SECURITIES ACT), EXCEPT IN A TRANSACTION EXEMPT FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT. THE RIGHTS ENTITLEMENT REFERRED TO IN THIS DRAFT LETTER OF OFFER ARE BEING OFFERED IN INDIA, BUT NOT IN THE UNITED STATES. THE OFFERING TO WHICH THIS DRAFT LETTER OF OFFER RELATES IS NOT, AND UNDER NO CIRCUMSTANCES IS TO BE CONSTRUED AS, AN OFFERING OF ANY SHARES OR RIGHTS FOR SALE IN THE UNITED STATES OR AS A SOLICITATION THEREIN OF AN OFFER TO BUY ANY OF THE SAID SHARES OR RIGHTS. ACCORDINGLY, THIS DRAFT LETTER OF OFFER SHOULD NOT BE FORWARDED TO OR TRANSMITTED IN OR INTO THE UNITED STATES AT ANY TIME, EXCEPT IN A TRANSACTION EXEMPT FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT. NEITHER THE COMPANY NOR ANY PERSON ACTING ON BEHALF OF THE COMPANY WILL ACCEPT SUBSCRIPTIONS FROM ANY PERSON, OR THE AGENT OF ANY PERSON, WHO APPEARS TO BE, OR WHO THE COMPANY OR ANY PERSON ACTING ON BEHALF OF THE COMPANY HAS REASON TO BELIEVE IS, A RESIDENT OF THE UNITED STATES AND TO WHOM AN OFFER, IF MADE, WOULD RESULT IN REQUIRING REGISTRATION OF THIS DRAFT LETTER OF OFFER WITH THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION. THE COMPANY IS INFORMED THAT THERE IS NO OBJECTION TO A UNITED STATES SHAREHOLDER SELLING ITS RIGHTS IN INDIA.

228 European Economic Area Restrictions

In relation to each Member State of the European Economic Area which has implemented the Prospectus Directive at any relevant time (each, a “Relevant Member State”), no offer of the Rights Entitlement or the Equity Shares is or will be made by the Company (or any person on its behalf) to the public within a Relevant Member State at any time and it is a condition of the offer of the Rights Entitlement and the Equity Shares that investors certify that:

1. they did not receive the Draft Letter of Offer from the Company while they were within a Relevant Member State; 2. they acknowledge that the Company has not authorised the making of any offer of the Rights Entitlement and the Equity Shares in a Relevant Member State; and 3. if notwithstanding the forgoing they are situated in a Relevant Member State, they:

(a) are a legal entity which is authorised or regulated to operate in the financial markets or, if not so authorised or regulated, whose corporate purpose is solely to invest in securities; (b) are a legal entity which has two or more of (1) an average of at least 250 employees during the last financial year; (2) a total balance sheet of more than €43,000,000 and (3) an annual net turnover of more than €50,000,000, as shown in its last annual or consolidated accounts; or (c) are an investor in the existing equity shares and are applying to acquire new Equity Shares for a total consideration of at least €50,000; or (d) in any other circumstances falling within Article 3(2) of the Prospectus Directive. provided that no such offer of the Rights Entitlement or the Equity Shares shall require the Company to publish a prospectus pursuant to Article 3 of the Prospectus Directive.

For the purposes of this provision, the expression an “offer” of the Rights Entitlements or the Equity Shares in relation to any Rights Entitlement or Equity Shares in any Relevant Member State means the communication in any form and by any means of sufficient information on the terms of the offer and the Rights Entitlement and the Equity Shares so as to enable an investor to decide to purchase or subscribe for the Rights Entitlement and the Equity Shares, as the same may be varied in that Member State by any measure implementing the Prospectus Directive in that Member State and the expression “Prospectus Directive” means Directive 2003/71/EC and includes any relevant implementing measure in each Relevant Member State.

United Kingdom (Additional)

Each investor has represented and agreed that:

(a) (i) it is a person who is a qualified investor within the meaning of Section 86(7) of the Financial Services and Markets Act 2000 (the “FSMA”), being an investor whose ordinary activities involve it in acquiring, holding, managing or disposing of investments (as principle or agent) for the purposes of its business and (ii) it has not offered or sold and will not offer or sell the Rights Entitlement or Equity Shares other than to persons who are qualified investors within the meaning of Section 86(7) of the FSMA or who it reasonably expects will acquire, hold, manage or dispose of investments (as principal or agent) for the purposes of their businesses where the issue of the Rights Entitlement or Equity Shares would otherwise constitute a contravention of Section 19 of the FSMA by the Company; (b) it has only communicated or caused to be communicated and will only communicate or cause to be communicated an invitation or inducement to engage in investment activity (within the meaning of Section 21 of the FSMA) received by it in connection with the issue of the Rights Entitlement or Equity Shares in circumstances in which Section 21(1) of the FSMA does not apply to it; and (c) it has complied and will comply with all applicable provisions of the FSMA with respect to anything done by it in relation to the Rights Entitlement or Equity Shares in, from or otherwise involving the United Kingdom. This document is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation. In particular, in the United Kingdom this document is intended for persons with professional experience in matters relating to investments within Article

229 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (as amended, the “Order”) or persons who are within Article 49(2) of the Order. Securities referred to in this document will only be available to such persons, and other persons should not act on or rely upon this document.

Designated Stock Exchange

The Designated Stock Exchange for the purposes of this Issue will be the NSE.

Disclaimer Clause of the BSE [●]

Disclaimer Clause of the NSE [●]

Disclaimer Clause of the CSE [●]

Impersonation

As a matter of abundant caution, attention of the applicants is specifically drawn to the provisions of subsection (1) of Section 68A of the Companies Act which is reproduced below:

“Any person who makes in a fictitious name an application to a Company for acquiring, or subscribing for, any shares therein, or otherwise induces a Company to allot, or register any transfer of shares therein to him, or any other person in a fictitious name, shall be punishable with imprisonment for a term which may extend to five years”

Dematerialised dealing

The Bank has entered into agreements dated January 12, 1998 and November 4, 1999 with the National Securities Depository Limited (NSDL) and the Central Depository Services (India) Limited respectively, and its Equity Shares bear the ISIN INE171A01011.

Listing

The existing Equity Shares are listed on the NSE, BSE and CSE. The Company has made applications to the NSE, BSE and CSE for permission to deal in and for an official quotation in respect of the Equity Shares being offered in terms of this Draft Letter of Offer. The Company has received in-principle approvals from NSE, BSE and CSE by letters dated [●], [●] and [●], repsectively. The Company will apply to the NSE, BSE and CSE for listing of the Equity Shares to be issued pursuant to this Issue.

If the permission to deal in and for an official quotation of the securities is not granted by any of the Stock Exchanges mentioned above, within 42 days from the Issue Closing Date, the Company shall forthwith repay, without interest, all monies received from applicants in pursuance of this Draft Letter of Offer. If such money is not paid within eight days after the Company becomes liable to repay it, then the Company and every Director of the Company who is an officer in default shall, on and from expiry of eight days, be jointly and severally liable to repay the money with interest as prescribed under the Section 73 of the Act.

Consents

Consents in writing of the Auditors, Lead Manager, Legal Advisors, Registrar to the Issue and Banker to the Issue to act in their respective capacities have been obtained and filed with SEBI, along with a copy of the Draft Letter of Offer and such consents have not been withdrawn up to the time of delivery of this Draft Letter of Offer to SEBI.

M/s Sundaram & Srinavasan and M/s Brahmayya & Co., Chartered Accountants, the Auditors of the Company have given their written consent for the inclusion of their Report in the form and content as appearing in this Draft Letter of Offer and such consents and reports have not been withdrawn up to the time of delivery of this Draft Letter of Offer to SEBI.

230

M/s Sundaram & Srinavasan and M/s Brahmayya & Co., Chartered Accountants, have given their written consent for inclusion of tax benefits in the form and content as appearing in this Draft Letter of Offer, accruing to the Company and its members.

To the best of our knowledge there are no other consents required for making this Issue. However, should the need arise, necessary consents shall be obtained by us.

Expert Opinion, if any

Except in the sections titled “Financial Statements” and “Statement of Tax Benefits” on page [●] and [●] of this Draft Letter of Offer, no expert opinion has been obtained by the Company in relation to this Draft Letter of Offer.

Expenses of the Issue

The expenses of the Issue payable by the Company including brokerage, fees and reimbursement to the Lead Manager, Auditors, Legal Advisors, Registrar to the Issue, printing and distribution expenses, publicity, listing fees, stamp duty and other expenses are estimated at Rs. [•] crore (around [•]% of the total Issue size) and will be met out of the proceeds of the Issue.

Particulars In Rs. Crore S. No. Particulars Amount(*) % of net proceeds of the Issue Fees of the Lead Manager, Registrar to the Issue, Legal [•] [•] 1. Advisors, Auditors and other advisors* 2. Printing and stationery, distribution, postage, etc.* [•] [•] 3. Advertisement and marketing expenses* [•] [•] 4. Other expenses* [•] [•] Total [•] [•]

* Will be filled in the Letter of Offer.

Fees Payable to the Lead Manager to the Issue

The fees payable to the Lead Manager to the Issue are set out in the engagement letters issued by the Bank to the Lead Manager and the Memorandum of Understanding entered into by the Bank with the Lead Manager, copies of which are available for inspection at the registered office of the Bank.

Fees Payable to the Registrar to the Issue

The fee payable to the Registrar to the Issue is as set out in the relevant documents, copies of which are available for inspection at the Registered Office of the Bank.

Previous Issues by the Company

The Company has not undertaken any previous public or rights issue during the last five years. In 2006, the Bank made an issuance of 20,00,00,000 Equity shares, underlying an equal number of GDR’s which are listed on the Official List and traded on the PSM.

231 Date of listing on the Stock Exchange

The Equity Shares of our Company are listed on the NSE, BSE and CSE. Details of the dates of listing are as follows

S.No Various issue Date of Listing at Various Exchanges BSE NSE CSE 1 Public issue 1994 June 3, 1994 February 8, 1995 June 6, 1994 2. Rights Issue 1996 April 3, 1996 April 17, 1996 March 27, 1996 3 Bonus Issue 2004 January 14, 2005 January 27, 2005 January 25, 2005 4 GDR : 180,00,000 March 23, 2006 March 17, 2006 March 17, 2006 GDR : 20,00,000 March 29, 2006 March 27, 2006 March 27, 2006 Listed on the official list on:31.01.2006 and traded on the PSM

Outstanding Preference Shares and Tier II Capital

The Bank has no outstanding preference shares. For details of our Outstanding Tier II capital refer to Financial Indebtedness on page [●].

Issues for consideration other than cash

The Company has not issued Equity Shares for consideration other than cash or out of revaluation reserves, other than issuances mentioned in the section “Capital Structure” on page [●].

Promise Vs Performance of The Last Three Issues

1994 Public Issue

Promise Vs Performance (Rs. in Crores) No. Promise Performance Variance 1 Share Capital March 31, 1994 11 11.10 0.91 March 31, 1995 15 14.81 -1.27 March 31, 1996 15 16.87 12.47 2 Reserves & Surplus March 31, 1994 56 55.98 -0.04 March 31, 1995 108 124.71 15.47 March 31, 1996 140 193.57 38.26 3 Deposits March 31, 1994 2100 2433.09 15.86 March 31, 1995 2500 2790.96 11.64 March 31, 1996 3000 3697.16 23.24 4 Advances March 31, 1994 1100 1197.34 8.85 March 31, 1995 1400 1631.51 16.54 March 31, 1996 1800 2228.45 23.80 5 Total Income March 31, 1994 258 253.81 -1.62 March 31, 1995 325 384.73 18.38 March 31, 1996 410 507.39 23.75 6 Profit After Tax March 31, 1994 17.57 17.86 1.65 March 31, 1995 23.77 43.30 82.16 March 31, 1996 35.01 45.19 29.08 7 E P S (Rs.) March 31, 1994 15.83 16.09 1.64 March 31, 1995 15.85 29.22 84.35 March 31, 1996 23.34 30.31 29.86 8 Book Value (Rs.)

232 March 31, 1994 60.40 61.81 2.33 March 31, 1995 81.92 95.09 16.08 March 31, 1996 103.26 148.55 43.86 9 Dividend (%) March 31, 1994 20 25 25.00 March 31, 1995 20 30 50.00 March 31, 1996 20 35 75.00

1996 Rights Issue

Performance vs Promises (Rs. in Crores) No. Promise Performance Variance % 1 Share Capital March 31, 1996 22 16.87 -23.32 March 31, 1997 22 21.65 -1.59 March 31, 1998 22 21.71 -1.32 2 Reserves & Surplus March 31, 1996 288 193.57 -32.79 March 31, 1997 379 298.59 -21.22 March 31, 1998 507 337.39 -33.45 3 Deposits March 31, 1996 3500 3697.16 + 5.63 March 31, 1997 5000 4603.40 - 7.90 March 31, 1998 6600 6424.42 - 2.70 4 Advances March 31, 1996 1900 2228.45 + 17.29 March 31, 1997 2700 2999.41 + 11.10 March 31, 1998 3600 3921.17 + 8.90 5 Total Income March 31, 1996 500 507.39 + 1.48 March 31, 1997 800 658.98 - 17.60 March 31, 1998 1100 794.12 - 27.80 6 Profit After Tax March 31, 1996 65 45.19 - 30.48 March 31, 1997 100 46.23 - 53.80 March 31, 1998 137 50.28 - 63.30 7 E P S (Rs.) March 31, 1996 43.85 30.31 - 30.88 March 31, 1997 45.25 23.01 - 49.20 March 31, 1998 61.68 23.16 - 62.50 8 Book Value (Rs.) March 31, 1996 139.67 148.55 + 6.36 March 31, 1997 180.64 152.78 - 15.40 March 31, 1998 238.28 168.74 - 29.20 9 Dividend (%) March 31, 1996 35 35 Nil March 31, 1997 40 40 Nil March 31, 1998 45 35 - 22.20 Explanations for variance

• 1995 – 96 :

(1) The Bank had provided an amount of Rs. 19.54 Crore (Previous year Rs. 5 Crore) towards depreciation on current investments, as per RBI directives, which was not anticipated at the time of the issue of the offer document. (2) The sharp increase in the SWAP cost of Foreign Currency (Non Resident) Accounts (Banks) Scheme impacted on the overall cost of funds.

233 • 1996 – 97 :

(1) The underachievement of projected profits is largely the result of a squeezing of the interest-rate spreads as the cost of deposits, particularly NRI deposits, moved up sharply while returns on advances and investments improved only marginally. Conservatively assessed provisions for possible loan losses and investment depreciation also reduced the level of profits.

• 1997 – 98

(1) The main reason for the variation between the projections and actuals, is the fall in spread.

The Bank made no projections / promises on future performance in relation to its 2006 issue of Global Depositary Receipts.

Outstanding Debentures or Bonds and Preference Shares

The Company has no outstanding debentures or bonds and preference shares.

Option to Subscribe

Other than the present Issue, the Company has not given any person any option to subscribe to the Equity Shares of the Company.

Stock Market Data for Equity Shares

As our Bank’s shares are actively traded on the NSE and BSE, our Company’s stock market data have been given separately for each of these Stock Exchanges.

The high and low closing prices recorded on the NSE and BSE for the preceding three years and the number of Equity Shares traded on the days the high and low prices were recorded are stated below:

A.BSE:

The following table is the movement in the share price of the Bank on BSE during the last three years:

Year High Low Average Price (Rs.) Date Rs. Volume Date Rs. Volume 2006 December 6, 2006 237.25 119600 13.06.2006 137.10 243070 196.26 2005 August 8, 2005 207.10 399667 25.01.2005 133.15 102346 166.63 2004 April 22, 2004 404.40 67087 29.11.2004 125.00 153682 280.29 (Source: BSE website)

Movement of the share price of the Bank during the last six months at BSE: Month ending High Price Date of High Volume of Low Price Date of Low Volume of Average (Rs.) shares traded (Rs.) shares price on the high date traded on the for the date of low period (Rs.) March, 2007 230.90 March 21, 2007 24485 188.00 March 7, 2007 23144 211..21 April, 2007 250.00 April 24, 2007 77842 198.00 April 2, 2007 12758 231.78 May, 2007 301.00 May 22, 2007 105797 240.00 May 7, 2007 24881 265.54 June, 2007 305.05 June 22, 2007 115027 267.00 June 8, 2007 11726 285.11 July, 2007 364.40 July 31, 2007 86983 296.50 July 11, 2007 28945 323.07 August, 2007 375.00 August 3, 2007 147889 294.00 August 22, 2007 25050 333.50 (Source: BSE website)

234 Details of Volume of shares transacted during the past six months are as follows: Month Volume (No. of shares) March, 2007 18,58,440 April, 2007 30,51,657 May, 2007 24,88,369 June, 2007 13,15,194 July, 2007 13,48,692 August, 2007 20,30,111 (Source: BSE website)

Week end price of equity Shares of the Bank on the BSE:

Week ended Highest Price Lowest Price Average price Total during the during the for the period (Rs.) Volume (No. of Shares) week (Rs.) week (Rs.) August 1`7, 2007 341.35 315.00 330.125 515379 August 24, 2007 333.50 294.00 309.62 130145 August 31, 2007 353.50 300.00 329.60 200053 September 7, 2007 362.00 340.00 349.19 103463 (Source: BSE website) B.NSE: The following table is the movement in the share price of the Bank on NSE during the last three years:

Year High Low Average Price (Rs.)

Date Rs. Volume Date Rs. Volume 2006 December 6, 2006 237.80 411670 June 8, 2006 134.00 144,559 192.79 2005 August 8, 2006 207.70 1181426 February 8, 2005 120.00 346,665 169.53 2004 April 23, 2004 404.80 242998 November 29, 2004 121.00 549,700 292.18 (Source: BSE website)

Movement of the share price of the Bank during the last six months at NSE:

Month ending High Price Date of High Volume of Low Price Date of Low Volume of Average (Rs.) shares (Rs.) shares price traded traded on for the on the high the period date date of low March, 2007 231.05 March 2, 2007 1,32,991 190.15 March 7, 2007 90,674 211.47 April, 2007 252.00 April 24, 2007 2,36,891 197.00 April 2, 2007 50,868 231.86 May, 2007 293.90 May 22, 2007 3,46,756 240.90 May 3, 2007 96,476 265.73 June, 2007 305.90 June 22, 2007 2,72,050 246.00 June 18, 2007 68,144 285.05 July, 2007 364.8 July 31, 2007 3,12,305 300.00 July 2, 2007 265,982 July 2, 2007 67,425 322.99 July 11, 2007 80,112 August, 2007 374.90 August 3, 2007 4,39,951 294.25 August 22.2007 1,42,809 336.50

(Source: NSE website)

Details of Volume of shares transacted during the past six months are as follows:

Month Volume (No. of shares)

February, 2007 49,27,931 March, 2007 25,67,464

235 April, 2007 31,46,550 May, 2007 50,80,967 June, 2007 27,86,706 July, 2007 50,25,335 (Source: NSE website)

Week end price of equity Shares of the Bank on the NSE:

Week ended Highest Price Lowest Price Average price Total during the during the for the period (Rs.) Volume week (Rs.) week (Rs.) (No. of Shares) August 17, 2007 344.00 313.00 330.06 5,70,054 August 24, 2007 337.45 294.25 310.02 4,56,195 August 31, 2007 353.75 308.10 329.88 6,90,020 September 7, 2007 362.40 338.00 349.42 4,44,796 (Source: NSE website)

C. CSE:

There has not been any trading of Equity Shares of the Bank on the CSE since January 1, 2007

The market price of the equity shares of the Bank as on February 12, 2007, the date on which the resolution of the Board of Directors approving the issue was passed was Rs. 238 on BSE and Rs. 238.15 on NSE.

The closing price of the equity shares of the Bank on Febuary 13, 2007 (i.e. one day after the Board of Directors approved the Rights Issue) was Rs. 247.65 on BSE and Rs. 246.40 on NSE.

The equity shares of the Bank were in no delivery period from [●] to [●]. The cum-rights closing price of the shares of the Bank as on [●] was Rs. [●] on BSE and [●] on NSE. The ex-rights closing price of the shares of the Bank as on [●] was Rs. [●] on BSE and [●] on NSE.

Changes in Auditors during the last three years We have changed Varma & Varma, Chartered Accountants, Central Statutory Auditors in the year 2004-05. We have appointed M/s. Sundaram & Srinivasan and Brahmayya & Co Chartered Accountants, Central Statutory Auditors.

Capitalisation of Reserves or Profits

The Company has not capitalized any of its reserves or profits for the last five years other than those mentioned in the section “Capital Structure” on page [●] of the Draft Letter of Offer.

Revaluation of Fixed Assets

There has been no revaluation of the Company’s fixed assets for the last five years.

Minimum Subscription

If the Company does not receive the minimum subscription of 90% of the issue amount, the Company shall forthwith refund the entire subscription amount received within 42 days from the date of the Issue. If there is a delay beyond eight days after the date from which the Company becomes liable to pay the amount, the Company shall pay interest for the delayed period as prescribed under Section 73 of the Companies Act.

236 Investor Grievances and Redressal System

The Bank has constituted a Committee of Board of Directors of the Bank specifically to look into redressal of shareholders and investors complaints like transfer of shares, non-receipt of declared dividends, non-receipt of Bonus Share Certificates etc.

Further, the secretarial department of the Bank headed by the Company Secretary also looks into investor complaints and ensures that the investor/shareholder grievance is redressed within a short period of time to the fullest satisfaction of the investors/shareholders.

The following are the quarter wise details of status of disposal of Investors requests/complaints and redressal thereof during Fiscal 2006 and Fiscal 2007

Quarter Fiscal 2007 Fiscal 2006 Complaints Received Complaints Resolved Complaints Received Complaints Resolved I 24 24 68 66 II 25 25 III 37 39 IV 49 49 Total 179 179

All the investors complaints are dealt immediately and maximum time taken to redress an investor complaint or a query is seven days and as of September 14, 2007 no complaint is pending with the Share Department of the Bank.

Investors may contact the Compliance Officer in case of any pre-issue / post-issue related matters such as non- receipt of Draft Letter of Offer/ Letter of Allotment / CAF / share certificate(s)/ refund orders / demat credit, etc. The Bank has appointed Mr. Girish Kumar Ganapathy , Company Secretary of the Bank as the Compliance Officer.

Complaint letters should be either type written or legibly hand written quoting Folio number/beneficiary account number, application number, number of shares applied for, name and address of the first applicant, name and address of the Bank, Branch where application was submitted with date thereof, and the date of receipt by the Registrars to the Issue in case application was sent by Post. Envelopes containing the complaints should be addressed to:

Company Secretary

Issue Schedule

Issue Opening Date: [•] Last date for receiving requests for split forms: [•] Issue Closing Date: [•]

237 TERMS OF THE ISSUE

The Bank is offering on a rights basis through this Draft Letter of Offer 8,60,00,000 Equity Shares of Rs. 10 each at a premium of Rs. [●] per share aggregating Rs. [●] Crore. The Equity Shares, now being issued, are subject to the terms and conditions contained in this Draft Letter of Offer, the enclosed Composite Application Form ("CAF"), the Memorandum and Articles of Association of the Bank, approvals, if any, from the RBI, the provisions of the Companies Act, 1956, guidelines issued by SEBI or the RBI, guidelines, notifications and regulations for issue of capital and for listing of securities issued by Government of India and/ or other statutory authorities and bodies from time to time, terms and conditions as stipulated in the allotment advice or letter of allotment or security certificate and rules as may be applicable and introduced from time to time.

Authority For The Present Issue This offer of equity shares on a rights issue is being made pursuant to the resolution passed by the Board of Directors on February 12, 2007 and May 18, 2007 and the shareholders resolution passed as special resolution under section 81 and 81(1A) of the Companies Act, 1956 in the ratio of 1 (one) equity shares of Rs.10/- each for every 1 (one) equity share of Rs.10/- each held on the Record Date [●], 2007 at a premium of Rs. [●] per share. The shareholders resolution was passed through postal ballot notice dated May 18, 2007 pursuant to section 192(A)(2) of the Companies Act, 1956. The result of the postal ballot was announced by the Chairman of the Bank on July 12, 2007 based on the report of Mr.P.K. Kurien, Sr. Advocate, who was appointed as the Scrutinizer. As per circular No. DBOD. No. PSBS. BC. 79/16.13.100/2001-02 dated March 20, 2002, issued by the Department of Banking Operations and Development, RBI, RBI approval would not be required for Rights Issues by both listed and unlisted Banks. However, the Bank has written to the RBI vide its letted dated August 9, 2007 to inform it of the proposed issue.

Ranking Of Equity Shares

The Equity Shares shall be subject to the Memorandum and Articles of Association of the Bank. The Equity Shares allotted in this Issue shall be pari passu with the existing Equity Shares in all respects including dividend.

For more details see “Main Provisions of Articles of Association” on page [●].

Basis of the Issue In accordance with the Board resolution referred to above, Equity Shares are being offered on Rights basis in the ratio of one (1) equity share of Rs. 10/- each for every one (1) equity shares of Rs. 10/- each at a premium of Rs.[●] per share to all the existing equity shareholders whose names appear as beneficial owner as per the list to be furnished by depositories in respect of the shares held in electronic form and on the Register of Members of the Bank in respect of the shares held in physical form at the close of business hours on the Record Date i.e. [●].

Rights Entitlement As your name appears as beneficial owner as per the list furnished by depositories in respect of the shares held in electronic form and on the Register of Members of the Bank in respect of the shares held in physical form as an equity shareholder on the Record Date i.e. [●], you are offered Equity Shares as shown in Block I of Part A of the enclosed Composite Application Form (CAF).

Rights Entitlement on Equity Shares held in the pool account of the clearing members on the Record Date shall be considered, and such claimants are requested to:

1. approach the concerned depository through the clearing member of the Stock Exchange with requisite details; and 2. depository in turn should furnish details of the transaction to the Registrar.

238 Only upon receipt of the aforesaid details, Rights Entitlement of the claimants shall be determined.

Rights of the Equity Shareholders

The rights available to the shareholders of the Bank are as under the provisions of the BR Act. The same are as under:

1. Right to receive dividend, if declared 2. Right to attend general meeting and vote thereat, unless prohibited by law 3. Right to vote personally or by proxy, unless prohibited by law 4. Right to receive offers for rights shares and be allotted bonus shares, if issued 5. Right to receive surplus on liquidation; 6. Right to free transferability; and 7. Any other rights available under the Act

Note: Only the registered equity shareholders or in case of joint holders, whose name appears first on the Register of Members / list of beneficial owners in the record of the depository, shall be entitled to these rights.

For a detailed description of the main provisions of our Articles of Association dealing with voting rights, dividend, forfeiture and lien, transfer and transmission and/or consolidation/splitting, see section titled “Main Provisions of Articles of Association” on page [●].

Joint-Holders

Where two or more persons are registered as the holders of any Equity Shares, they shall be deemed to hold the same as joint-holders with benefits of survivorship subject to provisions contained in the Articles of Association of the Company.

Market Lot

The Equity Shares of the Bank are tradable only in dematerialized form. The market lot for Equity Shares held in demat mode is one share. In case of physical certificates, the Bank would issue one consolidated certificate for the Equity Shares allotted to one folio ("Consolidated Certificate"). In respect of the Consolidated Certificate, the Bank will, upon receipt of a request from the Equity Shareholder, split such Consolidated Certificate into smaller denomination. No fee would be charged by the Bank for splitting the Consolidated Certificate.

Nomination

In terms of Section 109A of the Companies Act, nomination facility is available in case of Equity Shares. The applicant can nominate any person who is not an excluded U. S. Person as defined in the CAF by filling the relevant details in the CAF in the space provided for this purpose.

A sole Equity Shareholder or first Equity Shareholder, along with other joint Equity Shareholders being individual(s) may nominate any person(s) who, in the event of the death of the sole holder or all the joint- holders, as the case may be, shall become entitled to the Equity Shares. A Person, being a nominee, becoming entitled to the Equity Shares by reason of the death of the original Equity Shareholder(s), shall be entitled to the same advantages to which he would be entitled if he were the registered holder of the Equity Shares. Where the nominee is a minor, the Equity Shareholder(s) may also make a nomination to appoint, in the prescribed manner, any person to become entitled to the Equity Share(s), in the event of death of the said holder, during the minority of the nominee. A nomination shall stand rescinded upon the sale of the Equity Share by the person nominating. A transferee will be entitled to make a fresh nomination in the manner prescribed. When the Equity Share is held by two or more persons, the nominee shall become entitled to receive the amount only on the demise of all the holders. Fresh nominations can be made only in the prescribed form available on request at the registered office of the Company or such other person at such addresses as may be notified by the Company. The Applicant can make the nomination by filling in the relevant portion of the CAF.

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Only one nomination would be applicable for one folio. Hence, in case the Shareholder(s) has already registered the nomination with the Company, no further nomination needs to be made for Equity Shares to be allotted in this Issue under the same folio. However, new nominations, if any, by the Equity Shareholder(s) shall operate in supersession of the previous nomination, if any.

In case the allotment of Equity Shares is in dematerialised form, there is no need to make a separate nomination for the Equity Shares to be allotted in this Issue. Nominations registered with respective depository participant of the Applicant would prevail. If the applicant requires to change the nomination, they are requested to inform their respective DP. Minimum Subscription i. If the Bank does not receive the minimum subscription of 90% of the issue the Bank shall forthwith refund the entire subscription amount received within 42 days from the date of closure of the issue. ii. If there is a delay in the refund of subscription by more than 8 days after the Bank becomes liable to pay the subscription amount (i.e. 42 days after closure of the issue), the Bank shall pay interest for the delayed period at rates prescribed under sub-sections (2) and (2A) of Section 73 of the Companies Act, 1956. iii. All moneys received out of this Rights issue of equity shares through this Draft Letter of Offer shall be transferred to a separate bank account.

For details of the other provisions relating to calls on our shares , refer to to “Material Provisions of our Articles of Association” on page [●].

FRACTIONAL ENTITLEMENT There will be no fractional entitlement, as shares in the Rights Issue are being offered in a 1:1 ratio. Arrangements For Disposal Of Odd Lots The Bank's shares will be traded in dematerialized form only and therefore the marketable lot is 1 (ONE) share. Therefore, there is no possibility of any odd lots. Restriction On Transfer Of Equity Shares As per RBI Circular No. DBOD. PSBS.BC.64/16.13.100/2003-04 dated February 3, 2004 any acquisition of shares by a person or group which would take his or its holding to a level of 5 percent or more of the total paid up capital of the Bank (or such percentage as may be prescribed by the RBI from time to time) should be with the prior approval of RBI.

No Offer In The United States

The Rights Entitlement and the Equity Shares of the Bank have not been and will not be registered under the Securities Act, or any U.S. state securities laws and may not be offered, sold, resold or otherwise transferred

240 within the United States of America or the territories or possessions thereof or to, or for the account or benefit of, “U.S. Persons” (as defined in Regulation S under the Securities Act), except in a transaction exempt from the registration requirements of the Securities Act. The Rights Entitlement referred to in this Draft Letter of Offer are being offered in India, but not in the United States. The offering to which this Draft Letter of Offer relates is not, and under no circumstances is to be construed as, an offering of any shares or rights for sale in the United States or as a solicitation therein of an offer to buy any of the said shares or rights. Accordingly, this Draft Letter of Offer should not be forwarded to or transmitted in or into the United States at any time.

Neither the Bank nor any person acting on behalf of the Bank will accept subscriptions from any person, or the agent of any person, who appears to be, or who the Bank or any person acting on behalf of the Bank has reason to believe is, a resident of the United States and to whom an offer, if made, would result in requiring registration of this Draft Letter of Offer with the United States Securities and Exchange Commission. The Bank is informed that there is no objection to a United States shareholder selling its rights in India. Offer To Non Resident Equity Shareholders / Applicants As per notification No. FEMA 20/2000-RB dated May 3, 2000; RBI has given general permission to Indian companies to issue Rights/Bonus shares to Non-Resident Indians. Hence the Bank does not need permission from RBI for issue of shares to Non -Resident Indians, up to their entitlement. The Bank has received a communication from the Reserve Bank of India dated March 22, 2006 relating to raising of investments in Private Sector Banks for FII's, NRI's/PIO's under portfolio investment schemes stating that as the Bank has passed the necessary resolutions in relation to the raising of investment limit for FII's to 49% and that equity shares and convertible debentures of the Bank can be purchased provided the total purchase of all FII's shall not exceed the overall ceiling limit to (a) 49% of total paid-up equity capital of this bank and (b) 49% of the total paid-up value of each series of convertible debentures. Further, the purchase of equity shares by a single SEBI approved FII/sub-account of a registered FII in the above bank shall not exceed 10% of the paid-up capital of the Bank.

Applications received from NRIs and non-residents for allotment of Equity Shares shall be, inter alia, subject to the conditions imposed from time to time by the RBI under the Foreign Exchange Management Act, 1999 (FEMA) in the matter of refund of application moneys, allotment of Equity Shares, issue of letter of allotment/share certificates, payment of interest, dividends, etc. The Board of Directors may at its absolute discretion, agree to such terms and conditions as may be stipulated by RBI while approving the allotment of Equity Shares, payment of dividend etc. to the non-resident shareholders. The rights shares purchased by non-residents shall be subject to the same conditions including restrictions in regard to the repatriability as are applicable to the original shares against which rights shares are issued.

By virtue of Circular No. 14 dated September 16, 2003 issued by the RBI, overseas corporate bodies ("OCBs") have been derecognized as an eligible class of investors and the RBI has subsequently issued the Foreign Exchange Management (Withdrawal of General Permission to Overseas Corporate Bodies (OCBs)) Regulations, 2003. The circular stipulates that an OCB shall not be eligible to purchase equity or preference shares or convertible debentures offered on right basis by an Indian company, and no Indian company shall offer equity or preference shares or convertible debentures on right basis to an OCB. Accordingly, OCBs shall not be eligible to subscribe to the Equity Shares. The RBI has however clarified in its circular, A.P. (DIR Series) Circular No. 44, dated December 8, 2003 that OCBs such as those entities which are incorporated and are not under adverse notice of RBI will be considered, for undertaking fresh investments, as incorporated non- resident entities in terms of Regulation 5(1) of RBI Notification No.20/2000-RB dated May 3, 2000 under FDI Scheme with the prior approval of Government if the investment is through Government Route and with the prior approval of RBI if the investment is through Automatic Route on case by case basis. Thus, OCBs desiring to participate in this Issue must obtain prior approval from the RBI. On providing such approval to the Bank at its registered office, the OCB shall receive the Draft Letter of Offer and the CAF.

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Principal Terms And Conditions Of The Equity Shares Face Value

Each Equity Share shall have the face value of Rs. 10/- each.

Price Each Equity Share of the face value of Rs.10/- each is being offered at Rs. [●] each (including premium of Rs. [●] per share).

Entitlement Ratio

The Equity Shares are being offered on Rights basis to the existing Equity Shareholders in the ratio of one (1) Equity Share of Rs. 10/- each for every one (1) Equity Shares of Rs. 10/- being offered at Rs. [●] each held as on the Record Date. Option Available to the Equity Shareholders The Composite Application Form clearly indicates the number of Equity Shares that the Equity Shareholder is entitled to. If the Equity Shareholder applies for an investment in Equity Shares, then he can: • Apply for his entitlement in part • Apply for his entitlement in part and renounce the other part • Apply for his entitlement in full • Apply for his entitlement in full and apply for additional Equity Shares

As per the notification issued by RBI under FEMA, existing non-resident shareholders may apply for issue of additional equity shares over and above the rights entitlements and the Bank may allot the same subject to condition that overall issue of shares to non-resident in the total paid up capital of the Bank does not exceed the sectoral cap.

The Board of Directors shall agree to such terms and conditions as may be stipulated by RBI while approving the allotment of Equity Shares, subject to the same conditions including restrictions in regard to the reparability as are applicable to the original shares against which Rights shares are issued. Where the number of Equity Shares applied for exceeds the number available for allotment, the allotment of shares would be made in consultation with the Designated Stock Exchange.

Renouncees for Equity Shares can apply for the Equity Shares renounced to them and do have an option to apply for additional Equity Shares.

Option to Subscribe Other than the present Rights Issue, the Bank has not given any option to subscribe for any equity shares of the Bank. The investor shall have the option either to receive the security certificates in physical form or to hold the securities with a depository in an electronic form.

242 UTILISATION OF ISSUE PROCEEDS The Board of Directors states that: a. The funds received against this Issue will be transferred to a separate bank account other than the bank account referred to sub-section (3) of Section 73 of the Companies Act. b. Details of all moneys utilised out of the Issue shall be disclosed under an appropriate separate head in the balance sheet of the Company indicating the purpose for which such moneys has been utilised. c. Details of all such unutilised moneys out of the Issue, if any, shall be disclosed under an appropriate separate head in the balance sheet of the Company indicating the form in which such unutilised moneys have been invested. The funds received against this Rights Issue will be kept in a separate Bank account and the Bank will not have any access to such funds unless it satisfies the Designated Stock Exchange with suitable documentary evidence that the Bank has received the minimum subscription of 90 per cent of the Issue. The funds raised through this Rights Issue of Equity Shares would be utilized only towards satisfactory fulfillment of the "Objects of the Issue" as mentioned on page [●]. Undertaking By The Bank The Bank undertakes: a. That the complaints received in respect of the Issue shall be attended to by the Bank expeditiously and satisfactorily; b. That all steps for completion of the necessary formalities for listing and trading at all stock exchanges where the securities are to be listed are taken within 7 working days of finalization of the basis of allotment; c. That the funds required for dispatch of refund orders/allotment letters/certificates by registered post shall be made available to the Registrar to the Issue; d. That where refunds are made through the electronic transfer of funds, a suitable communication shall be sent to the applicant within 30 days or 15 days of the closure of the issue, as the case may be, giving details of the bank where the refunds shall be credited along with the amount and expected date of electronic credit of refund; e. That the certificates of the securities/refund orders shall be dispatched within specified time; f. Certificates of securities/refund orders of the Non-Resident/Non Resident Indians shall be dispatched within the specified time subject to receipt of approval from RBI/FIPB, if required; g. The Bank accepts full responsibility for the accuracy of information given in this Draft Letter of Offer and confirms that to best of its knowledge and belief, there are no other facts the omission of which makes any statement made in this Draft Letter of Offer misleading and further confirms that it has made all reasonable inquiries to ascertain such facts; All information shall be made available by the Lead Manager and the Issuer to the Investors at large and no selective or additional information would be available for a section of the Investors in any manner whatsoever including at road shows, presentations, in research reports, etc.

243 ISSUE PROCEDURE How to apply Resident Equity Shareholders Application should be made only on the enclosed CAF provided by the Bank. The enclosed CAF should be completed in all respects, as explained in the instructions indicated in the CAF. Applications will not be accepted by the Lead Manager or by the Registrar to the Issue or by the Bank at any offices except in the case of postal applications as per instructions given in this section of the Draft Letter of Offer. The CAF consists of four parts:

Part A: Form for accepting the Equity Shares offered and for applying for additional Equity Shares Part B: Form for renunciation Part C: Form for application for renouncees Part D: Form for request for split application forms Non-resident Equity Shareholders

Applications received from the non-resident Equity Shareholders for the allotment of Equity Shares shall, inter alia, be subject to the conditions as may be imposed from time to time by the RBI, in the matter of refund of application moneys, allotment of Equity Shares, issue of letters of allotment/certificates/payment of dividends etc. Draft Letter of Offer and CAF shall be dispatched only to non-resident Equity Shareholders with a registered address in India.

Options available to the Equity Shareholders

The Equity Shareholders will be having the following five options:

(a) Apply for his entitlement in part (b) Apply for his entitlement in part and renounce the other part (c) Renounce his entire entitlement (d) Apply for his entitlement in full (e) Apply for his entitlement in full and apply for additional Equity Shares

Acceptance of the Issue You may accept the Offer and apply for the Equity Shares offered, either in full or in part by filling Block III of Part A of the enclosed CAF and submit the same along with the application money payable to the Bankers to the Issue or any of the branches as mentioned on the reverse of the CAF before the close of the banking hours on or before the Issue Closing Date or such extended time as may be specified by the Board thereof in this regard. Applicants at centers not covered by the branches of collecting bank can send their CAF together with the cheque drawn on a local bank at Chennai /demand draft payable at Chennai to the Registrar to the Issue by registered post. Such applications sent to anyone other than the Registrar to the Issue are liable to be rejected. Renunciation

As an Equity Shareholder, you have the right to renounce your entitlement for the Equity Shares in full or in part in favour of one or more person(s). Your attention is drawn to the fact that the Company shall not allot and/or register any Equity Shares in favour of:

• More than three persons including joint holders • Partnership firm(s) or their nominee(s) • Minors • Hindu Undivided Family • Any Trust or Society (unless the same is registered under the Societies Registration Act, 1860 or any other applicable Trust laws and is authorized under its Constitutions to hold Equity Shares of a Company)

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The right of renunciation is subject to the express condition that the Board/ Committee of Directors shall be entitled in its absolute discretion to reject the request for allotment to renouncee(s) without assigning any reason thereof. Any renunciation from Resident Indian Shareholder(s) to Non-Resident Indian(s) or from Non-Resident Indian Shareholder(s) to another Non-Resident Indian or from Non-Resident Indian Shareholder(s) to Resident Indian(s) is subject to the renounce(s)/renounce(s) obtaining the approval of the FIPB and/or necessary permissions of the RBI under the Foreign Exchange Management Act, 1999 (FEMA) and other applicable laws and such permissions to be attached with the CAF. Applications not accompanied by the aforesaid approvals are liable to be rejected.

Renouncee(s) have the right to apply for additional shares provided they have accepted the shares renounced in their favour in full. The renouncee cannot further renounce his/her entitlement. Procedure For Renunciation a. To renounce the whole offer in favour of one renouncee If you wish to renounce the offer indicated in Part A, in whole, please complete Part B of the CAF. In case of joint holding, all joint holders must sign Part B of the CAF. The person in whose favour renunciation has been made should complete and sign Part C of the CAF. b. To renounce in part/or to renounce the whole to more than one renouncee If you wish to either accept this offer in part and renounce the balance or renounce the entire offer in favour of two or more renouncees, the CAF must be first split into requisite number of forms. For this purpose you will have to apply to the Registrars to the Issue. Please indicate your requirement of split forms in the space provided for this purpose in Part D of the CAF and return the entire CAF to the Registrars to the Issue so as to reach them latest by the close of business hours on the last date of receiving requests for split forms. On receipt of the required number of split forms from the Registrar, the procedure as mentioned in para (a) above shall have to be followed. In case the signature of the shareholder(s) who has renounced the Rights Shares, does not agree with the specimen registered with the Bank, the application will be rejected and the Rights offer will lapse. c. Renouncee(s) The person(s) in whose favour the equity shares are renounced should fill in and sign Part C and submit the entire application form to the Bankers or to the collection centres to the Issue on or before the closing date of the Issue along with the application money. d. Change and/or introduction of additional holders If you wish to apply for equity shares jointly with any other person or persons, not more than three, who is/are not already joint holders with you, it shall amount to renunciation and the procedure as stated above for renunciation shall have to be followed. Even a change in the sequence of the name of joint holders shall amount to renunciation and the procedure, as stated above for renunciation shall have to be followed. However, this right of renunciation is subject to the express condition that the Board of Directors of the Bank shall be entitled in its absolute discretion to reject the request for allotment from the renouncee(s) without assigning any reason therefor.

245 Splitting of Application Forms Request for split forms should be sent to the Registrar to the Issue, Integrated Enterprises (India) Limited, before the closure of business hours on or before [•] by filling in part D of the CAF along with entire CAF. Split forms cannot be re-split. The renouncee(s) shall not be entitled to split form(s). The split form shall be sent to the applicant by post at the applicant's risk. Please note that: a. Part A of the CAF must not be used by any person(s) other than those in whose favour this offer has been made. If used otherwise, this will render the application invalid. b. Request for split form should be made for 50 Equity Shares or in multiples thereof. c. Only the person to whom this Draft Letter of Offer has been addressed and not the renouncee(s) shall be entitled to apply for split forms. Forms once split cannot be split again. d. Split form(s) will be sent to the applicant(s) by post at the applicant’s risk. Additional Equity Shares You are also eligible to apply for additional equity shares over and above the number of equity shares offered to you, provided that you have applied for all the equity shares offered without renouncing them in whole or in part in favour of any other person. If you desire to apply for additional Equity Shares, please indicate your requirement in Block IV of Part 'A' of the CAF. As per the notification issued by RBI under FEMA, existing non-resident shareholders may apply for issue of additional equity shares over and above the rights entitlements and the Bank may allot the same subject to condition that overall issue of shares to non -resident in the total paid up capital of the Bank does not exceed the sectoral cap. The Board of Directors may at its absolute discretion, agree to such terms and conditions as may be stipulated by RBI while approving the allotment of Equity Shares, subject to the same conditions including restrictions in regard to the reparatibility as are applicable to the original shares against which Rights shares are issued. Where the number of Equity Shares applied for exceeds the number available for allotment, the allotment of shares would be made in consultation with the Designated Stock Exchange.

Option Available Action Required 1. Accept whole or part of your entitlement Fill in Block I and sign Part A (all joint holders must sign) without renouncing the balance. 2. Accept your entitlement to all the equity Fill in and sign Part A including Block II relating to additional shares offered to you and apply for additional shares (all joint holders must sign) equity shares. 3. Renounce your entitlement to all the equity Fill in and sign Part B (all joint holders must sign) indicating shares offered to you, to one person (joint the number of equity shares renounced and hand it over to the renouncees are considered as one). renouncee. The renouncees must fill in and sign Part C (all joint renouncees must sign). 4. Accept a part of your entitlement to the equity Fill in and sign Part D (all joint holders must sign) for the shares offered to you and renounce the balance required number of split forms and send the CAF to the to one or more renouncee(s). Registrars to the Issue so as to reach them on or before the last date for receiving requests for split forms.

Renounce your entitlement to all the equity Splitting will be permitted only once. shares offered to you to more than one

renouncee. Request for split forms must be in multiples of 50 Equity shares only and one split form for the balance shares, if any. On receipt of the split form take action as indicated below. a) For the equity shares you wish to accept, if any, fill in and sign Part A. b) For the Equity shares you wish to renounce, fill in and sign Part B indicating the number of equity shares renounced and hand it over to the renouncees. Each of the renouncees should fill in and sign Part C for the equity shares accepted by them. 5. Introduce joint-holder or change the sequence of This will be treated as a renunciation. joint holder

246 Applicants must provide information in the CAF as to their Savings Bank/Current account number and the name of the Bank with whom such account is held, to enable the Registrar to print the said details in the refund orders after the names of the payee(s). Failure to comply with this may lead to rejection of the application. Bank account details furnished by the depositories will be printed on the refund warrant in case of shares held in electronic form.

Applicants must write their CAF Number at the back of the cheque/demand draft.

Issue of Duplicate Share Certificate If any Equity Share(s) is/are mutilated or defaced or the cases for recording transfers of Equity Share are fully utilized, the same may be replaced by the Bank against the surrender of such Certificate(s). Provided, where the Equity Share Certificate(s) are mutilated or defaced, the same will be replaced as aforesaid only if the certificate numbers and the distinctive numbers are legible. If any equity shares certificate is destroyed, stolen or lost, then upon production of proof thereof to the satisfaction of the Bank and upon furnishing such indemnity/ surety and/or documents as the Bank may deem adequate, duplicate equity share certificate(s) shall be issued. Notices All notices to the Equity Shareholder(s) required to be given by the Bank shall be published in one English National daily with wide circulation, a malayalam language daily with wide circulation in Kerala being the place where the registered/corporate office of the Bank is situated. General Instructions a. Please read the instructions printed on the enclosed CAF carefully. b. The CAF would be printed in black ink for all shareholders. c. Application should be made on the printed CAF, provided by the Bank except as under the head "Application on Plain Paper" in this Draft Letter of Offer and should be completed in all respects. d. The CAF found incomplete with regard to any of the particulars required to be given therein, and/or which are not completed in conformity with the terms of this Draft Letter of Offer are liable to be rejected and the money paid, if any, in respect thereof will be refunded without interest and after deduction of Bank commission and other charges, if any. e. The CAF must be filled in English and the names of all the applicants, details of occupation, address, father's/husband's name must be filled in block letters. f. Signatures should be either in English or Hindi or the languages specified in the Eighth Schedule to the Constitution of India. Signatures other than in the aforesaid languages or thumb impression must be attested by a Notary Public or a Special Executive Magistrate under his/her official seal. h. The CAF together with cheque/demand draft should be sent to the Bankers to the Issue/collection centers or to the Registrars and not to the Bank or Lead Manager. Applicants residing at places other than cities where the branches of the Bankers to the Issue have been authorised by the Bank for collecting applications, will have to make payment by Demand Draft payable at Chennai and send their application forms to the Registrars to the Issue by REGISTERED POST after deducting DD and postal charges. If any portion of the CAF is detached or separated, such application is liable to be rejected. i. All applications regardless of value, should mention his/her PAN number allotted under the Income-Tax Act, 1961 and also submit a photocopy of the PAN card(s) or a communication from the Income Tax authority indicating allotment of PAN ("PAN Communication") along with the application for the purpose of verification of the number. Applicants who do not have PAN are required to provide a declaration in Form 60/Form 61 prescribed under the I. T. Act along with the application. Composite Application Forms without this photocopy/PAN Communication/declaration will be considered incomplete and are liable to be rejected j. In case of an application under power of attorney or by a body corporate or by a society, a certified true copy of the relevant power of attorney or relevant resolution or authority to the signatory to make the relevant investment under this Offer and to sign the application and a copy of the Memorandum and Articles of Association and/or bye laws of such body corporate or society must be lodged with the Registrar to the Issue giving reference of the serial number of the CAF. In case these papers are sent to

247 any other entity besides the Registrar to the Issue or are sent after the Issue Closing Date, then the application is liable to be rejected. k. In case of joint holders, all joint holders must sign the relevant part of the CAF in the same order and as per the specimen signature(s) recorded with the Bank. Further, in case of joint applicants who are renouncees, the number of applicants should not exceed three. l. In case of joint applicants, reference, if any, will be made in the first applicant's name and all communication will be addressed to the first applicant at the address given in the CAF. m. The shareholders must sign the CAF as per the specimen signature recorded with the Bank. n. Application(s) received from Non-Resident/NRIs, or persons of Indian origin residing abroad for allotment of Equity shares shall, inter alia, be subject to conditions, as may be imposed from time to time by the RBI under FEMA in the matter of refund of application money, allotment of equity shares, subsequent Issue and allotment of Equity shares, dividend, export of share certificates, etc. In case a Non-Resident or NRI shareholder has specific approval from the RBI, in connection with his shareholding, he should enclose a copy of such approval with the CAF. o. All communication in connection with application for the equity shares, including any change in address of the shareholders should be addressed to the Registrars to the Issue prior to the date of allotment in this issue quoting the name of the first/sole applicant shareholder, folio numbers/beneficiary identity number and CAF number. p. Applicants must write their CAF number at the back of the cheque/demand draft. q. Bank Account Details: It is mandatory for the applicant to mention the applicant's Savings Bank/Current Account number and the name of the Bank with whom such account is held in the space provided in the CAF, to enable the Registrars to the Issue, to print the said details in the refund orders after the name of the payees. Such applications not containing the above details are liable to be rejected. r. Only one mode of payment per application should be used. The payment must be either in cash or by cheque / demand draft drawn on any of the banks, including a co-operative bank, which is situated at and is a member or a sub member of the Bankers Clearing House located at the centre indicated on the reverse of the CAF where the application is to be submitted. s. A separate cheque/draft must accompany each CAF. Outstation cheques/demand drafts or post-dated cheques and postal/money orders will not be accepted and applications accompanied by such cheques/demand drafts/ money orders or postal orders will be rejected. The Registrar will not accept payment against application if made in cash. (For payment against application in cash please refer point (u) below) t. No receipt will be issued for application money received. The Bankers to the Issue/Collecting Bank/Registrar will acknowledge receipt of the same by stamping and returning the acknowledgment slip at the bottom of the CAF. u. Payment by cash: The payment against the share application should not be effected in cash if the amount to be paid is Rs. 20,000/- or more. In case payment is effected in contravention of this, the application will be deemed invalid and the application money will be refunded and no interest will be paid thereon. Payment against the application if made in cash, subject to conditions as mentioned above, should be made only to the Bankers to the Issue.

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GROUNDS FOR TECHNICAL REJECTION Applicants are advised to note that applications are liable to be rejected on technical grounds, including the following: 1. Amount paid does not tally with the amount payable for; 2. Bank account details (for refund) are not given; 3. Age of First Applicant not given; 4. Applications by Minors; 5. PAN photocopy / PAN communication / Form 60 / Form 61 declaration not given. 6. In case of application under power of attorney or by limited companies, corporate, trust, etc., relevant documents are not submitted; 7. If the signature of the existing shareholder does not match with the one given on the CAF and for renouncees if the signature does not match with the records available with their depositories; 8. If the Applicant desires to have shares in electronic form, but the application form (CAF) does not have the Applicant's depository account details; 9. CAF are not submitted by the applicants within the time prescribed as per the instructions in the CAF and the Draft Letter of Offer; 10. Applications not duly signed by the sole/joint applicants; 11. OCBs who cannot apply in terms of RBI restrictions; 12. In case no corresponding record is available with the Depositories that matches three parameters, namely, names of the applicants (including the order of names of joint holders), the depositary participant's identity (DP ID) and the beneficiary's identity; 13. Applications by ineligible Non –resident Indians (including on account of restriction or prohibition under applicable local laws) and where registered address in India has not been provided or is not available. 14. Applications by certain U.S. Persons

MODE OF PAYMENT

For Resident Shareholders Only one mode of payment per application should be used. The payment must be either in cash (not more than Rs.20,000/-) or by cheque/ demand draft drawn on any of the Banks (including a co-operative Bank), which is situated at and is a member or a sub member of the Bankers Clearing House located at the centre indicated on the reverse of the CAF where the application is to be submitted. The payment against the share application should not be effected in cash if the amount to be paid is Rs. 20,000/- or more, as per Section 269 SS of the Income-Tax Act, 1961. In case payment is effected in contravention of this, the application may be deemed invalid and the application money will be refunded and no interest will be paid thereon. Outstation cheques/money orders/postal orders will not be accepted and CAFs accompanied by such cheques/ money orders/postal orders are liable to be rejected. All cheques/drafts accompanying the CAF should be drawn in favour of "Federal Bank Limited Ltd. A/c. FBL - Rights Issue" and crossed "A/C Payee only". No receipt will be issued for application money received. The Bankers to the Issue/Collecting Bank/Collection centres will acknowledge receipt of the same by stamping and returning the acknowledgement slip at the bottom of the CAF. Applicants residing at places other than places where the Collection Centres have been opened by the Bank for collecting applications, are requested to send their applications together with Demand Draft (net of DD charges) favouring "Federal Bank Limited Ltd. A/c. FBL - Rights Issue" payable at Chennai, directly to the Registrars to the Issue by REGISTERED POST so as to reach them on or before the closure of the Issue. The Bank or the Registrars will not be responsible for postal delays, if any.

249 New demat account shall be opened for holders who have had a change in status from Resident Indian to NRI. For Non-Resident Indian Shareholders As regards the application by NRI shareholders, the following further conditions shall apply. Payment by NRIs/FIIs must be made by demand draft/cheque payable at or funds remitted from abroad in any of the following ways: Application on repatriation basis (only by existing shareholders and renouncees having the requisite permission of RBI) a. By Indian Rupee drafts purchased from abroad and payable at Chennai or funds remitted from abroad; OR b. By cheque/draft on a Non -Resident External Account (NRE) or FCNR Account; OR c. Rupee draft purchased by debit to NRE/FCNR Account maintained elsewhere in India and payable in Chennai; OR d. FIIs registered with SEBI must remit funds from special non -resident rupee deposit account. e. For all categories of Non-Residents, the entire amount of Rs.[●] per Equity Shares will be payable on application. All cheques/Drafts by NRIs/FIIs should be drawn in favour of "Federal Bank Limited Ltd. A/c. FBL - Rights Issue-NR" payable at Chennai and must be crossed “A/c Payee only” for the amount Payable .

All cheques/drafts submitted by NRIs/ FIIs should be drawn in favour of "Federal Bank Limited Ltd. A/c. FBL - Rights Issue-NR" payable at Chennai and must be crossed "A/c Payee only" for the amount payable. A separate cheque or Bank draft must accompany each application form. Applicants may note that where payment is made by drafts purchased from NRE/FCNR accounts as the case may be, an Account Debit Certificate from the Bank issuing the draft confirming that the draft has been issued by debiting the NRE/FCNR account should be enclosed with the CAF. In the absence of the above the application shall be considered incomplete and is liable to be rejected. In case where repatriation benefit is available, dividend and sales proceeds derived from the investment in shares can be remitted outside India, subject to tax, as applicable according to the Income-tax Act, 1961 and subject to the permission of the RBI, if required. In the case of NRI's who remit their application money from funds held in FCNR/NRE Accounts, refunds and other disbursements, if any shall be credited to such account details of which should be furnished in the appropriate columns in the CAF. In the case of NRIs who remit their application money through Indian Rupee Drafts from abroad, refunds and other disbursements, if any will be made in US Dollars at the rate of exchange prevailing at such time subject to the permission of RBI. The Bank will not be liable for any loss on account of exchange rate fluctuation for converting the Rupee amount into US Dollars or for collection charges charged by the applicant's Bankers. This Draft Letter of Offer and the CAF shall be dispatched only to non-resident Equity Shareholders with a registered address in India. Applications received from NRs (Non -Residents), NRIs and persons of Indian origin resident abroad, for allotment of Equity Shares shall be inter-alia, subject to the conditions imposed from time to time by the RBI under the Foreign Exchange Management Act, 1999 (FEMA) in the matter of refund of application moneys, allotment of Equity Shares, issue of Letter of Allotment / Share Certificates, Warrant Certificate, dividends, etc. Application on non-repatriation basis As far as NRIs holding shares on non-repatriation basis are concerned, in addition to the ways specified above, payment may also be made by way of cheque drawn on Non-Resident (ordinary) account or Rupee Draft purchased out of NRO Account maintained elsewhere in India but payable at Chennai. In such cases, the allotment of Equity shares will be on non-repatriation basis. All cheques/drafts submitted by NRIs/ FIIs should be drawn in favour of "Federal Bank Limited Ltd. A/c. FBL - Rights Issue" payable at Chennai and must be crossed "A/c Payee only" for the amount payable. The CAF duly completed together with the amount payable on application must be deposited with the collecting Bank indicated on the reverse of the CAF before the close of banking hours on the Issue closing date. A separate cheque or Bank draft must accompany each application form.

250 Applicants may note that where payment is made by drafts purchased from NRE/FCNR/NRO accounts as the case may be, an Account Debit Certificate from the Bank issuing the draft confirming that the draft has been issued by debiting the NRE/FCNR/NRO account should be enclosed with the CAF. Otherwise the application shall be considered incomplete and is liable to be rejected. Note: In case where repatriation benefit is available, dividend and sales proceeds derived from the investment in shares can be remitted outside India, subject to tax, as applicable according to the Income Tax Act, 1961. In case shares are allotted on non -repatriation basis, the dividend/sale proceeds of the equity shares cannot be remitted outside India. The CAF duly completed together with the amount payable on application must be deposited with the collecting Bank indicated on the reverse of the CAF before the close of banking hours on the aforesaid Issue closing date. A separate cheque or Bank draft must accompany each application form. In case of applications received from Non-Resident Indians, refunds and other distribution, if any, will be made in accordance with the guidelines/rules prescribed by RBI as applicable at the time of making such remittance and subject to necessary approvals.

Availability of Duplicate CAF In case the original CAF is not received, or is misplaced by the applicant, the Registrar to the Issue will issue a duplicate CAF on the request of the applicant who should furnish the registered folio number/DP and Client ID number and his/her full name and address to the Registrar to the Issue. Please note that the request for duplicate CAF should reach the Registrar to the Issue within 15 days from the Issue Opening Date. Please note that those who are making the application in the duplicate form should not utilize the original CAF for any purpose including renunciation, even if it is received/found subsequently. If the applicant violates any of these requirements, he/ she shall face the risk of rejection of both the applications as well as forfeiture of amounts remitted along with the applications. Application on Plain Paper A shareholder who has neither received the original CAF nor is in a position to obtain the duplicate CAF may make an application to subscribe to the Rights Issue on plain paper, along with an Account Payee Cheque drawn on a local Bank at Chennai/ Draft payable at Chennai and send the same by Registered Post directly to the Registrars to the Issue. The application on plain paper, duly signed by the applicants including joint holders, in the same order as per specimen recorded with the Bank, must reach the office of the Registrars to the Issue before the date of closure of the Issue and should contain the following particulars: - 1. Name of the Issuer, being The Federal Bank Limited ; 2. Name of the shareholder including joint holders; 3. Address of sole/first holder; 4. Registered Folio Number/DP ID number and client ID number; 5. Number of shares held as on Record Date; 6. Certificate numbers and distinctive numbers, if held in physical form; 7. Number of Rights Equity Shares entitled (One Equity Share for every One Equity Shares held); 8. Number of Rights Equity Shares applied for; 9. Number of additional equity shares applied for, if any; 10. Total number of equity shares applied for; 11. Total amount paid at the rate of Rs.[●] per Equity Share on application; 12. Copy of PAN number 13. Particulars of Cheque/Draft enclosed; 14. Savings/Current Account Number and Name and Address of the Bank where the shareholder will be depositing the refund order;

251 15. PAN/GIR number, Income Tax Circle/Ward/District, photocopy of the PAN card/ PAN communication / Form 60 / Form 61 declaration, and 16. In case of Non-resident shareholders, NRE/FCNR/NRO account no., Name and address of the Bank and branch; 17. Signature of shareholders to appear in the same sequence and order as they appear in the records of the Bank.

Payments in such cases should be through a cheque/demand draft payable at Chennai to be drawn in favour of the "Federal Bank Limited Ltd. A/c. FBL - Rights Issue" and must be crossed "A/c Payee" in case of resident shareholders and non-resident shareholders applying without repatriation basis. Payment in case of non-resident shareholders holding on repatriable basis shall be drawn in favour of the "Federal Bank Limited Ltd. A/c. FBL - Rights Issue-NR"and the marked "A/c Payee". The envelope should be superscribed "FBL -Rights Issue".

Please note that those who are making the application on plain paper shall not be entitled to renounce their rights and should not utilise the CAF for any purpose including renunciation even if it is received subsequently. If the applicant violates any of these requirements, he/she shall face the risk of rejection of both the applications. The Bank shall refund such application amount to the applicant without any interest thereon.

Last date for submission of CAF The last date for receipt of the CAF by the Banker to the Issue at its Collecting Branches, together with the amount payable, is on or before the close of banking hours on [•]. The Board will have the right to extend the said date for such period as it may determine from time to time but not exceeding sixty days from the date the Issue opens. If the CAF together with the amount payable is not received by the Banker to the Issue/ Registrars to the Issue at its Collection Branches on or before the close of Banking hours on or before [•], the offer contained in this Draft Letter of Offer shall be deemed to have been declined, and the Board shall utilise this entitlement for allotting the Equity Shares as mentioned below under the heading "Basis of Allotment". Investors may please note that the equity shares of the bank can be traded on the stock exchanges only in dematerialized form.

Disposal of Application & Application Money The Board reserves its full, unqualified and absolute right to accept or reject any application, in whole or in part, and in either case without assigning any reason thereto. In case an application is rejected in full, the whole of the application money received will be refunded to the first named applicant. Wherever an application is rejected in part, the balance of application money, if any, after adjusting any money due on shares allotted, will be refunded to the first named applicant within six weeks from the date of closure of the subscription list in accordance with Section 73 of the Act. If there is delay in refund of application money by more than 8 days after the Bank becomes liable to pay (i.e. forty two days after the closure of Issue), the Bank will pay interest for the delayed period at the rate prescribed under subsection (2) and (2A) of Section 73 of the Act. The subscription monies received in respect of this Issue will be kept in a separate bank account and the Bank will not have access to nor appropriate the funds until it has satisfied the Designated Stock Exchange with suitable documentary evidence that minimum subscription of 90 percent of the application money for the Issue has been received. No separate receipt will be issued for the application money. However, the Banker to the Issue at its collecting branches physically receiving the application will acknowledge its receipt by stamping and returning the perforated acknowledgement slip at the bottom of each CAF. Except for the reasons stated under "GROUNDS FOR TECHNICAL REJECTIONS" in this Draft Letter of Offer and subject to valid application, acknowledgement of receipt of application money given by the Bankers to the issue shall be valid and binding on issuer and other persons connected with the Issue.

252

Basis Of Allotment The Board, subject to provisions contained in this Draft Letter of Offer and the Articles of Association of the Bank and the approval of the Designated Stock Exchange will proceed to allot the equity shares in the following order of priority: a. Full allotment to those equity shareholders who have applied for their rights entitlement either in full or in part and also to the renouncee(s) who has/have applied for Equity shares renounced in their favour, in full or in part. b. To the shareholders who having applied for all the Equity shares offered to them as their rights entitlement, have also applied for additional equity shares, provided there is an under subscribed portion after making full allotment in (a) above. The allotment of such additional shares will be made with reference to the number of equity shares held by those shareholders on the Record Date within the overall size of the Rights Issue in consultation with the Designated Stock Exchange, as a part of the Rights Issue and not as a preferential allotment. c. To the renouncees who having applied for the Equity Shares renounced in their favour have also applied for additional Equity shares, provided there is an under-subscribed portion after making full allotment in (a) and (b) above. The allotment of such additional Equity shares will be made on a proportionate basis at the sole discretion of the Board/Committee of Directors but in consultation with the Designated Stock Exchange, as a part of the Rights Issue and not as a preferential allotment.

After taking into account the allotments made under (a), (b) and (c) above, if there is still any under subscription, the un-subscribed portion shall be disposed off by the Board/Committee of Directors upon such terms and conditions and to such person/persons and in such manner as the Board/Committee of Directors may in its absolute discretion deem fit. The basis of allotment shall be finalized by the Board in consultation with NSE, which is the Designated Stock Exchange, within a period of 42 days from the date of closure of the Issue. In case of delay in allotment the Bank shall, as stipulated under Section 73(2A) of the Act, be required to pay interest on the same at a rate of 15 per cent p.a.

No over subscription shall be retained by the Bank. Allotment/Refund The Bank shall give credit to the beneficiary account with Depository Participants within two working days from the date of the allotment of Equity Shares. Applicants having bank accounts at any of the 15 centers where clearing houses are managed by the Reserve Bank of India (RBI) will get refunds through Electronic Credit Service (ECS) only, except where applicant is otherwise disclosed as eligible to get refunds through direct credit or Real Time Gross Settlement (RTGS). In case of other applicants, the Bank shall ensure dispatch of refund orders, if any, of value up to Rs.1,500/- by “Under Certificate of Posting”, and shall dispatch refund orders of Rs.1,500/- and above, if any, by registered post or speed post. Applicants to whom refunds are made through electronic transfer of funds will be sent a letter (refund advice) through “Under Certificate of Posting” intimating them about the mode of credit of refund within 42 days of closure of Issue.

The Bank shall ensure dispatch of refund orders/refund advice, if any, by “Under Certificate of Posting” or registered post or speed post or ECS or Direct Credit or RTGS, as applicable, only at the sole or First shareholder’s sole risk within 42 days of the Issue Closing Date, and adequate funds for making refunds to unsuccessful applicants as per the mode(s) disclosed shall be made available to the Registrar by the Issuer.

Save and except refunds effected through the electronic mode i.e. ECS, direct credit or RTGS, refunds will be made by cheques, pay orders or demand drafts drawn on the Refund Bank and payable at par at places where applications are received. The bank charges, if any, for encasing such cheques, pay orders or demand drafts at other centers will be borne by the shareholders.

Payment of Refund

Applicants should note that on the basis of name of the applicants, Depository Participant’s name, Depository Participant- Identification (DP ID) number and Beneficiary Account Number provided by them in the

253 Composite Application Form, the Registrar to the Issue will obtain from the Depository, the bank account details including the nine digit Magnetic Ink Character Recognition (MICR) code as appearing on a cheque leaf. Hence, applicants are advised to immediately update their bank account details as appearing on the records of the depository participant. Please note that failure to do so could result in delays in credit of refunds to shareholders at the shareholders sole risk and neither the Lead Manager nor the Bank nor the Registrar shall have any responsibility and undertake any liability for the same.

In case of applicants applying for physical shares, refunds will be made on the basis of the bank account details provided by them in the Composite Application Form.

Mode of Making Refunds

The payment of refund, if any, would be made through various modes in the following order of preference:

I. ECS - Payment of refund would be made through ECS for applicants having an account at any of the 15 centers where clearing houses for ECS are managed by Reserve Bank of India, namely Ahmedabad, Bangalore, Bhubaneshwar, Chandigarh, Chennai, Guwahati, Hyderabad, Jaipur, Kanpur, Kolkata, Mumbai, Nagpur, New Delhi, Patna and Thiruvananthapuram. This mode of payment of refunds would be subject to availability of complete bank account details including the nine digit MICR code as appearing on a cheque leaf, from the depository. The payment of refund through ECS is mandatory for applicants having a bank account at any of the 15 centers named hereinabove, except where applicant is otherwise disclosed as eligible to get refunds through direct credit or RTGS

II. Direct Credit – Applicants having their bank account with the Refund Banker, i.e. [●] shall be eligible to receive refunds, if any, through direct credit. The refund amount, if any, would be credited directly to the eligible applicant’s bank account with the Refund Banker.

III. RTGS – Applicants having a bank account at any of the 15 centers detailed above, and whose application amount exceeds Rs. 10 lakhs, shall be eligible to exercise the option to receive refunds, if any, through RTGS. All applicants eligible to exercise this option shall mandatorily provide the IFSC code in the CAF. In the event of failure to provide the IFSC code in the CAF, the refund shall be made through the ECS or direct credit, if eligibility disclosed.

IV. NEFT (National Electronic Fund Transfer) – Payment of refund shall be undertaken through NEFT wherever the applicants’ bank has been assigned the Indian Financial System Code (IFSC), which can be linked to a Magnetic Ink Character Recognition (MICR), if any, available to that particular bank branch. IFSC Code will be obtained from the website of RBI as on a date immediately prior to the date of payment of refund, duly mapped with MICR numbers. Wherever the applicants have registered their nine digit MICR number and their bank account number while opening and operating the demat account, the same will be duly mapped with the IFSC Code of that particular bank branch and the payment of refund will be made to the applicants through this method. The process flow in respect of refunds by way of NEFT is at an evolving stage and hence use of NEFT is subject to operational feasibility, cost and process efficiency. The process flow in respect of refunds by way of NEFT is at an evolving stage hence use of NEFT is subject to operational feasibility, cost and process efficiency. In the event that NEFT is not operationally feasible, the payment of refunds would be made through any one of the other modes as discussed in the sections.

Please note that only applicants having a bank account at any of the 15 centres where clearing houses for ECS are managed by the RBI are eligible to receive refunds through the modes detailed in I, II and III hereinabove. For all the other applicants, including applicants who have not updated their bank particulars alongwith the nine digit MICR Code, the refund orders would be despatched “Under Certificate of Posting” for refund orders of value up to Rs.1,500/- and through Speed Post/Registered Post for refund orders of Rs. 1,500/- and above.

254 Letters Of Allotment / Equity Share Certificates /Regret Letters Along With Refund Orders /Demat Credit Letter(s) of allotment/ share certificates/ demat credit or letters of regret will be dispatched to the registered address of the first named applicant or respective beneficiary accounts will be credited within 6 (six) weeks, from the date of closure of the subscription list. In case the Bank issues letters of allotment, the relative share certificates will be dispatched within three months from the date of allotment. Allottees are requested to preserve such letters of allotment (if any) to be exchanged later for share certificates. Export of letters of allotment (if any)/ share certificates/ demat credit to non-resident allottees will be subject to the approval of RBI.

As regards allotment/refund to NRIs, the following further conditions shall apply: In case of NRIs, who remit their application monies from funds held in NRE/FCNR accounts, refunds and/or payment of dividend and other disbursement, if any, shall be credited to such accounts, details of which should be furnished in the CAF and as furnished by the depository in case shares are held in electronic form. Subject to the approval of the RBI, in case of NRIs, who remit their application monies through Indian Rupee draft purchased from abroad, refund and/or payment of dividend and any other disbursement, will be made net of bank charges/commission in U.S. Dollars, at the rate of exchange prevailing at such time and shall be credited to such accounts, details of which should be furnished in the CAF as furnished by the depository in case shares are held in electronic form. The Bank will not be responsible for any loss on account of exchange fluctuations for converting the Indian Rupee amount into U.S. Dollars. The share certificates for the Equity shares will be sent by registered post at the address of the NRI applicant.

Interest in case of delay on Allotment/Despatch

The Bank agrees that as far as possible allotment of securities offered to the existing shareholders on Rights basis shall be made within 30 days of the closure of the issue. The Bank further agrees that it shall pay interest at the rate of 15% per annum from the expiry of the eighth day after the company becomes liable to refund as per sec 73(2A) of the Companies Act, 1956, if the allotment letters/refund orders have not been despatched to the applicants within 42 days of the closure of the issue or if in a case where the refund or portion thereof is made in electronic manner, the refund instructions have not been given to the clearing system in the disclosed manner within 30 days of the date of closure of the issue. Share certificate, letter of allotment or letter of regret as the case may be will be despatched to the registered address of the first named applicant and/or the respective beneficiary accounts will be credited within six weeks, from the date of closure of the Issue. In case of delay beyond eight days, the Bank agrees that it shall pay interest at the rate of 15% per annum.

Bank account details of the applicant Applicants who are holding shares in physical form are advised to provide information as to their savings/current account number and the name of the Bank with whom such account is held in space provided in the CAF to enable the Registrar to print the said details in the refund orders, if any, after the names of the payees. Application not containing such details is liable to be rejected.

Option to Receive the Rights Equity Shares In Dematerialised Form

Applicants to the Equity Shares of the Company issued through this Rights Issue shall be allotted the securities in dematerialised (electronic) form at the option of the applicant. The Bank has signed a tripartite agreement with National Securities Depository Limited (NSDL) and Integrated Enterprises (India) Limited on January 12, 1998 and with Central Depository Services (India) Limited (CDSL) and Integrated Enterprises (India) Limited on November 4, 1999, which enables the Investors to hold and trade in securities in a dematerialised form, instead of holding the securities in the form of physical certificates. Applicants may note that they have the option to subscribe to the Rights Equity Shares in demat or physical form, or partly in demat and physical form, in the same application, in the space provided. No separate applications for demat and physical shares are to be made. If such application is made, the applications for physical shares will be treated as multiple applications and rejected accordingly. In case of partial allotment, allotment will be first done in demat form, and the balance, if any, will be allotted in physical form. The equity shares of the Bank have been included in the Compulsory Demat list with effect from October 15, 1998 for certain classes of investors and with effect from May 31, 1999 for the remainder of our investors as

255 per SEBI directives for all classes of investors. Hence, investors may note that the equity shares of the Bank can be traded on the stock exchanges only in demat form.

The procedure for opting for this facility for allotment of equity shares arising out of this Issue in electronic form is as under:

1. Open a Beneficiary Account with any Depository Participant (care should be taken that the Beneficiary Account should carry the name of the holder in the same manner as is exhibited in the records of the Bank. In case of joint holding, the Beneficiary Account should be opened carrying the names of the holders in the same order and style as are appearing in the records of the Bank). In case of Investors having various folios in the Bank with different joint holders, the investors will have to open separate beneficiary accounts for such holdings. This step need not be adhered to by those shareholders who have already opened such Beneficiary Account(s). 2. For shareholders holding shares in dematerialised form as on the Record Date, the beneficial account number shall be printed on the CAF. For those who open accounts later or those who change their accounts and wish to receive their Rights equity shares by way of credit to such account the necessary details of their beneficiary account should be filled in the space provided in the CAF. It may be noted that the allotment of equity shares arising out of this Issue can be received in demat form even if the original equity shares of the Bank are not dematerialised. Nonetheless, it should be ensured that the Depository Account is in the name(s) of the shareholders and the names are in the same order and style as are appearing in the records of the Bank. 3. Responsibility for correctness of applicant's age and other details given in the CAF vis-a-vis those with the applicant's Depository Participant would rest with the applicant. Applicants should ensure that the names of the applicants and the order in which they appear in CAF should be same as registered with the applicant's Depository Participant. 4. If incomplete/incorrect Beneficiary Account details are given in the CAF or where the investor does not opt to receive the Rights equity shares in demat form, the Bank will issue equity shares in the form of physical certificate(s). 5. The Rights equity shares allotted to investors opting for demat form, would be directly credited to the Beneficiary Account as given in the CAF after verification. Allotment advice, refund order (if any) would be sent directly to the applicant by the Registrars to the Issue but the confirmation of the credit of the Rights equity shares to the applicant's Depository Account will be provided to the applicant by the applicant's Depository Participant. 6. Renouncees can also exercise this option to receive equity shares in the demat form by indicating in the relevant block and providing the necessary details about their Beneficiary Account. NOTE: Shareholders/applicants are advised to apply for receiving the new equity shares that may be allotted to them in the demat form only, since trading in the equity shares of the Bank is permissible only in the demat form. Details of the Registrar Integrated Enterprises (India) Limited

2nd Floor, Kences Tower, Street no.1,

Ramakrishna Street, North Usman road, T. Nagar, ChennaI – 600 017 (Tamilnadu) Tel: (044) 2814 0801-03 Fax: (044) 2814 3378 E-mail: fblrights@ iepindia.com Website:www.iepindia.com

256 In case the original CAF is not received, or is misplaced by the applicant, the Registrars will issue a duplicate CAF on the request of the applicant who should furnish the Registered Folio Number/ DP ID and Beneficiary ID and his/her full name and address to the Registrars to the Issue. Please note that those who are making the application in the duplicate form should not utilise the standard CAF for any purpose including renunciation, even if it is received subsequently. If the applicant violates any of these requirements, he/she shall face the risk of rejection of both the applications. 1. It is to be specifically noted that the issue of equity shares is subject to Risk Factors appearing on page no.[●] - [●] of this Draft Letter of Offer. 2. The Rights Issue will be kept open for at least 30 days and maximum of 60 days. 3. Investors are advised to contact the Compliance Officer in case of any pre-issue/ post-issue related problems.

257 RESTRICTION ON FOREIGN OWNERSHIP OF INDIAN SECURITIES

Foreign investment in Indian securities is regulated through the Industrial Policy, 1991 of the Government of India and FEMA. While the Industrial Policy, 1991 prescribes the limits and the conditions subject to which foreign investment can be made in different sectors of the Indian economy, FEMA regulates the precise manner in which such investment may be made. Under the Industrial Policy, unless specifically restricted, foreign investment is freel permitted in all sectors of the Indian economy up to any extent and without any prior approvals, but the foreign investor is required to follow certain prescribed procedures for making such investment. As per current foreign investment policies, foreign investment in the private banking sector is permitted up to 74% under the automatic route. The aggregate FII holding in a private sector bank cannot exceed 24% of the total issued capital.

Further, Non-Residents can bid for partly paid Equity Shares only if they have obtained the approval of the RBI to subscribe to partly paid Equity Shares and the said approval is submitted along with the Bid-cum-Application Form.

The Bank has received a communication from the Reserve Bank of India dated March 22, 2006 relating to raising of investments in Private Sector Banks for FII's, NRI's/PIO's under portfolio investment schemes stating that as the Bank has passed the necessary resolutions in relation to the raising of investment limit for FII's to 49% and that equity shares and convertible debentures of the Bank can be purchased provided the total purchase of all FII's shall not exceed the overall ceiling limit to (a) 49% of total paid-up equity capital of this bank and (b) 49% of the total paid-up value of each series of convertible debentures. Further, the purchase of equity shares by a single SEBI approved FII/sub-account of a registered FII in the above bank shall not exceed 10% of the paid-up capital of the Bank.

The shareholding of any person, whether direct or indirect, beneficial or otherwise (together with existing shareholding) and/or the shareholding of any “Associated Enterprise” (as defined under Section 92A of the Income-Tax Act, 1961) should not exceed 5% our total issued share capital post this Issue or such percentage prescribed under RBI circular dated February 3, 2004 without having obtained the acknowledgement from RBI for the same in terms of RBI circular dated February 3, 2004. The exact Non-Resident shareholding may vary depending on actual allotments made to various categories.

258

MAIN PROVISIONS OF THE ARTICLES OF ASSOCIATION

Capitalised terms used in this section have the meaning that has been given to such terms in the Articles of Association. Pursuant to Schedule II of the Companies Act, 1956 and SEBI Guidelines, the main provisions of the Articles of Association of the Bank are set forth below.

1. The regulations contained in Table A in the Schedule I of the Companies Act, 1956, shall not apply to the Bank except so far as they or any of them are adopted in these Articles.

2. The regulations for the management of the Company and for the observance by the Members thereof and their representatives shall, subject as aforesaid and to any exercise of the statutory powers of the Bank in reference to the repeal or alteration of or addition to its regulations by Special Resolution, as prescribed or permitted by the Act, be such as are contained in these presents.

The provisions of the Banking Regulation Act, 1949, shall have effect notwithstanding anything to the contrary contained in the Memorandum and Articles of Association of the Company.

Capital, Shares and Rights of Members

As to Capital

Article 5 provides that

The Bank, in general meeting, may by an ordinary resolution from time to time increase the capital by creation of new shares of such amount as may be deemed expedient.

As to Share Certificates

Article 14(1) provides that

Share certificates shall be issued in market lots and no fee shall be charged for the same.

Article 14(2) provides that

Every person whose name is entered as a member in the register of members shall be entitled to receive within three months after allotment or within two months after the application for registration of transfer (or within such other period as the conditions of issue provide)

(a) One or more certificates for all his shares without payment, subject to clause (1) above.

(b) Several certificates, each for one or more of his shares, upon request without making any charge for such splitting or consolidation into market units of trading.

(c) Every certificate shall be under the seal and shall specify the shares to which it relates and the amount paid up thereon.

(d) In respect of any share or shares held jointly by several persons, the Bank shall not be bound to issued certificates separately to each one of the joint holders and delivery of one or more certificates as the case may be for shares to any one of several joint holders shall be sufficient delivery to all such holders.

Provided that in the issue of share certificates, the Board shall comply with the provisions of the Companies (issue of share certificate) Rules, 1960 or any statutory modifications thereof.

Article 15 provides that

If any certificate be worn out, defaced or torn or otherwise rendered useless or difficult of handling, then, upon

259 production thereof to the Directors, they may order the same to be cancelled and may issue a new certificate in lieu thereof. If any certificate be lost or destroyed, then upon proof thereof to the satisfaction of the Directors and on such indemnity as the Directors deem adequate being given, a new certificate in lieu thereof shall be given to the party entitled to such lost or destroyed certificate.

As to Dividend

Article 95 provides that

The Board may from time to time pay to the members such interim dividends as appear to it to be justified by the profits of the Bank.

Article 96 provides that

All dividend shall be declared and paid according to the amounts paid or credited as paid on the shares in respect whereof the dividend is declared, but no amount paid or credited as paid on any share in advance of calls shall be treated for the purpose of this article, as paid or credited as paid.

Article 97 provides that

The Board may deduct from any dividend payable to any member all sums of money, if any, presently payable by him to the Company on account of a call.

Article 98 provides that

Any dividend, interest or other moneys payable in cash in respect of shares may be paid by cheque or warrant sent through post to the registered address of the holder or in case of joint holders to any one of the joint holders. Any one of the several persons who are joint holders of any shares may give effectual receipts for all dividends and payments on account of dividends or interest or other moneys in respect of such shares every cheque or warrant in respect of dividend, interest or other moneys shall be made payable to the order of the persons to whom it is sent.

Article 99 provides that

No unclaimed or unpaid dividend shall be forfeited by the Board and the Bank shall in respect of such dividend comply with the provisions of Sec. 205A of the Companies Act and/or such other statutory provisions as may be applicable from time to time.

Article 21 provides that

The Board (a) may, if it thinks fit, receive from any member all or any part of the moneys uncalled and unpaid upon any shares held by him; and (b) upon all or any of the moneys so advanced, may (until the same would but for such advance become presently payable) pay interest at such rate and in such manner as may be prescribed as per Securities and Exchange Board of India listing regulations for the time being in force, provided that money paid in advance of calls shall not in respect thereof confer a right to dividend or to participate in the profits of the Company.

Article 37 provides that

The holders of stock shall, according to the amount of stock held by them, have the same rights, privileges and advantages as regards dividends, voting at meetings of the Company and other matters, as if they held the shares from which the stock arose, but no such privileges or advantages (except participating in the dividends and profits of the Company) shall be conferred if such stock existing in shares would not have conferred that privilege or advantage.

260 As to voting rights

Article 51 provides that

Subject to any rights or restrictions for the time being attached to any class or classes of shares-

(a) On a show of hands every member present in person shall have one vote;

(b) On a poll, the voting rights of members shall be as laid down in the Companies Act 1956 subject to the provisions of Banking Regulation Act 1949 and other applicable statutory regulations.

Article 52 provides that

No member shall be entitled to be present or vote either personally or by proxy upon a poll, or be reckoned in a quorum at any general meeting or exercise any privilege as a member unless all calls or other money due and payable, in respect of any share of which he is the holder, have been paid.

Article 53 provides that

In the case of joint holders, the vote of the Senior who tenders a vote, whether in person or by proxy, shall be accepted to the exclusion of the votes of the other joint holders. For this purpose, seniority shall be determined by the order in which the names stand in the register of members.

Article 54 provides that

A member of unsound mind or in respect of whom order has been made by any court having jurisdiction in lunacy may vote whether on show of hands or on a poll by his committee or other legal guardian and any such committee or guardian may, on a poll, vote by proxy.

Article 55 provides that

No member, not personally present, shall be entitled to vote on a show of hands unless such member is a corporation present by a proxy, or a company present by a representative, duly authorised under Section 187 of the Companies Act, 1956 in which case such proxy or representative may vote on the show of hands as if he were a member of the company.

Article 56 provides that

Votes may be given either personally or by proxy or in the case of a company by a representative duly authorised as aforesaid.

Article 57 provides that

The instrument appointing a proxy shall be in writing under the hand of the appointor or by his attorney duly authorised in writing or if such appointor is a corporation under its common seal or the hands of its attorney.

Article 58 provides that

The instrument appointing a proxy shall be deposited at the Registered Office of the Company not less than 48 hours before the time for holding the meeting and in default the instrument of proxy shall not be treated as valid.

Article 59 provides that

(a) No objection shall be raised to the qualification of any voter except at the meeting or adjourned meeting at which the vote objected to is given or tendered and every vote not disallowed at such meeting shall be valid for all purposes (b) Any such objection made in due time shall be referred for the Chairman of the meeting, whose decision shall be final and conclusive.

261 Article 60 provides that

A vote given in accordance with the terms of instrument of proxy shall be valid notwithstanding the previous death or insanity of the principal or revocation of the proxy or transfer of the shares in respect of which vote is given, provided no intimation in writing of the death, insanity, revocation or transfer shall have been received at the Registered Office of the Bank or by Chairman of the meeting before the vote is given.

Article 61 provides that

An instrument appointing a proxy shall be in either of the forms in Schedule IX to the Companies Act, 1956 or a form as near thereto as circumstances admit.

Capital and Shares

Article 6 provides that

Subject to the provisions if any in the Memorandum of Association of the Bank and without prejudice to the provisions of the Banking Regulation Act, new shares may be issued on such terms and conditions which the Bank may from time to time by special resolution determine.

Article 7 provides that

All further issue of shares shall be in accordance with the provisions of the Companies Act and other applicable provisions of law.

Article 8 provides that

Subject to any special rights, privileges, or advantages which may be attached to any new shares under the powers hereinbefore contained, any capital raised by the creation of new shares shall be considered as part of the original capital, and such new shares shall be subject to the same provisions with reference to the payments of calls, forfeiture, transmission, lien, surrender, or otherwise and shall confer such rights and privileges as to voting qualifications as if they had formed part of the original capital.

Article 9 provides that

The Bank may, by a special resolution, subject to confirmation by Court, reduce its capital in anyway, and in particular by paying off capital which is in excess of the wants of the Company, cancelling capital which has been lost or is unrepresented by available assets, reducing the liability on the shares in respect of share capital not paid up, cancelling shares not taken or agreed to be taken by any person, or otherwise as may seem expedient and the capital may be paid off upon the footing that it may be called up again or otherwise.

Article 10 provides that

The Bank may, by ordinary resolution, from time to time, subdivide or consolidate the shares in the bank into shares of smaller or larger nominal amount than is fixed by the Memorandum of Association, provided that the same proportionate liability shall continue on the shares so reduced or increased as existed on the original shares before such subdivision or consolidation.

Article 11 provides that

(1) The Bank may at any time pay a commission, brokerage, discount or remuneration in any form to any person for subscribing or agreeing to subscribe (whether absolutely or conditionally) for any shares, debentures or debenture stock of the bank or for procuring or agreeing to procure subscriptions (whether absolute or conditional) for any share, debentures or debenture stock of the Bank, but so that if the commission, brokerage, discount or remuneration in any form in respect of shares shall be paid or payable out of the capital, statutory conditions and requirements shall be observed and complied with and the amount or rate of commission, brokerage, discount or remuneration in any form shall not in the aggregate exceed the limits that may be prescribed from time to time by the regulatory authorities. The commission, brokerage, discount or remuneration may be paid or satisfied in cash or in shares,

262 debentures or debenture stock of the Bank subject to such statutory provisions that may be applicable.

(2) The Bank shall also be entitled to make bulk placement of shares, debentures, or debenture stock to national or trans-national financial institutions on such terms and conditions in accordance with the statutory regulations applicable to such issues or placements.

Article 12 provides that

The joint holders of a share shall be severally as well as jointly liable for the payment of all installments and calls due in respect of such shares.

Article 13 provides that

Save as herein otherwise provided, the Bank shall be entitled to treat the registered holder of any share as the absolute owner thereof, and accordingly shall not, except as ordered by a court of competent jurisdiction, or as by law required, be bound to recognise any equitable or other claim to or interest in such share on the part of any other person.

Forfeiture and Lien

Article 8 provides that

Article 22 provides that

The Company shall have first and paramount lien upon all the shares (other than fully paid-up shares) registered in the name of each member (whether solely or jointly with others) and upon the proceeds of sale thereof for all moneys and (whether presently payable or not) called or payable at a fixed time in respect of such shares and no equitable interest in any share shall be created except upon the footing and condition that Article 13 hereof will have full effect. And such lien shall extend to all dividends and bonuses from time to time declared in respect of such shares. Unless otherwise agreed the registration of a transfer of shares shall operate as a waiver of the Company’s lien if any, on such shares. The Directors may at any time declare any shares wholly or in part to be exempt from the provisions of this clause.

Article 23 provides that

If a member fails to pay any call, or installment of a call, on the day appointed for payment thereof, the Board may, at any time thereafter during such time as any part of the call or installment remains unpaid, serve notice on him requiring payment of amounts of the call or installment as is unpaid, together with any interest which may have accrued.

Article 24 provides that

The notice aforesaid shall (a) name a further day (not being earlier than the expiry of fourteen days from the date of service of notice) on or before which the payment required by notice is to be made, and (b) state that in the event of non-payment on or before the day so named, the shares in respect of which the call was made will be liable to be forfeited.

Article 25 provides that

(1) A forfeited share may be sold or otherwise disposed of on such terms and in such manner as the Board thinks fit.

(2) At any time before a sale or disposal as aforesaid, the Board may cancel the forfeiture on such terms as it thinks fit.

263 Article 26 provides that

(1) A person whose shares have been forfeited shall cease to be a member in respect of the forfeited shares, but shall, not withstanding the forfeiture, remain liable to pay to the Company all moneys which, at the date of forfeiture, were presently payable by him to the company in respect of the shares.

(2) The liability of such person shall cease if and when the company shall have received payment in full of all such moneys in respect of the shares.

Article 27 provides that

(1) A duly verified declaration in writing that the declarant is a director or the secretary of the company and that a share in the company has been duly forfeited on a date stated in the declaration shall be conclusive evidence of the facts therein stated as against all persons claiming to be entitled to the share.

(2) The company may receive the consideration, if any, given for the shares on any sale or disposal thereof and may execute a transfer of the shares in favour of the person to whom the share is sold or disposed of.

(3) The transferee shall thereupon be registered as the holder of the share.

(4) The transferee shall not be bound to see to the application of the purchase money, if any, nor shall his title to the share be affected by any irregularity or invalidity in the proceedings in reference to the forfeiture, sale or disposal of the share.

Article 28 provides that

The provisions of these regulations as to forfeiture shall apply in the case of non payment of any sums which, by the terms of issue of a share, becomes payable at a fixed time, whether on account of the nominal value of the share or by way of premium, as if the same had been payable by virtue of a call duly made and notified.

Calls on Shares

Article 16 provides that

(1) The Board may, from time to time, make calls upon the members in respect of any moneys unpaid on their shares whether on account of the nominal value of the shares or by way of premium.

(2) Each member shall subject to receiving at least 14 days notice specifying the time or times and place of payment, pay to the Bank at the time or times and place so specified, the amount called on his shares.

(3) A call may be revoked or postponed at the discretion of the Board, provided that option or right to call of share shall not be given to any person without the sanction of the Company in General Meeting.

Article 17 provides that

A call shall be deemed to have been made at the time when the resolution of the Board authorising the call was passed and may be required to be paid by installments.

Article 18 provides that

The joint holders of a share shall be jointly and severally liable to pay all calls in respect thereof.

Article 19 provides that

(1) If a sum called in respect of a share is not paid before or on the day appointed for payment thereof, the persons from whom the sum is due shall pay interest thereon from the day appointed for payment thereof to the time of actual payment at such rate of interest per annum as the Board may determine in accordance with the regulations that are applicable from time to time.

264 (2) The Board shall be at liberty to waive payment of any such interest wholly or in part.

Article 20 provides that

(1) Any sum which by the terms of issue of a share become payable on allotment or at any fixed date, whether on account of the nominal value of the share or by way of premium, shall, for the purposes of these regulations, be deemed to be a call duly made and payable on the date on which by the terms of issue such sums becomes payable.

(2) In case of nonpayment of such sum, all the relevant provisions of these regulations as to payment of interest and expenses, forfeiture or otherwise shall apply as if such sum had become payable by virtue of a call duly made and notified.

Article 21 provides that

Transfer and Transmission of Shares

Article 29 provides that

The Company shall keep a book called the “Register of Transfers” and therein shall be entered the particulars of every transfer or transmission of any share in the Company, in accordance with the regulations applicable from time to time, provided, however, the Bank shall be entitled to keep and maintain such registers through electronic media in accordance with law. Subject to the provisions of the Companies Act, the register of members may be closed for any period not exceeding in the aggregate 45 days in a year but not exceeding 30 days at any one time.

Article 30 provides that

(1) Subject to the provisions of the Companies Act, 1956, the instrument of transfer of any share in the Company shall be executed by or on behalf of both the transferor and transferee in such form as may be prescribed by the relevant statutory provisions. (2) The Transferor shall be deemed to be the holder until the name of the transferee is entered in the register of members in respect thereof.

Article 31 provides that

The Board may decline to register any transfer of shares not being fully paid up shares, to a person of whom they do not approve and may also decline to register the transfer of shares on which the Company has a lien. Subject to the provisions of the Companies Act, the Register of Members may be closed for any period not exceeding in the aggregate 45 days in a year, but not exceeding 30 days at any one time. The directors may decline to register any instrument of transfer:-

Unless the instrument of transfer is accompanied by the Certificate of shares to which it relates, and such other evidence as the Directors my reasonably require to show the right of the transferor to make the transfer; provided that registration of transfer of shares shall not be refused on the ground of the transferor being either alone or jointly with any other person or persons indebted to the Company on any account whatsoever except a lien on the shares.

265 Article 31A provides that

The acquisition of shares by a person/group which would take his/its holding to a level of 5 percent or more of the total paid-up capital of the Bank (or such other percentage as may be prescribed by the Reserve Bank of India from time to time) should be with the prior approval of Reserve Bank of India.

Article 32 provides that

(1) On the death of a member the survivor or survivors where the member was a joint holder and his legal representatives where he was a sole holder shall be the only persons recognised by the Company as having any title to his interest in the shares.

(2) Nothing in clause (1) shall release the estate of a deceased joint holder from any liability in respect of any share which had been jointly held by him with other persons.

Article 33 provides that

(1) Any person becoming entitled to a share in consequence of the death or insolvency of a member may, upon such evidence being produced as may from time to time properly be required by the Board as subject to as hereinafter provided, elect, either.

(a) to be registered himself as a holder of the share or

(b) to make such transfer of the shares as the deceased or insolvent member could have made.

(2) The Board shall in either case have the same right to decline or suspend registration as it would have had if the deceased or insolvent member had transferred the share before his death or insolvency.

(3) In the case of death of a joint holder his name shall be deleted from the register of members on production of proof to the satisfaction of the Board.

Article 34 provides that

(1) If the person so becoming entitled shall elect to be registered as holder of the shares himself, he shall deliver or send to the company a notice in writing signed by him stating that he so elects.

(2) If the person aforesaid shall elect to transfer the share, he shall testify his election by executing a transfer of the shares.

(3) All the limitations, restrictions and provisions of these regulations relating to the right to transfer and the registration of transfer of shares shall be applicable to any such notice or transfer as to aforesaid as if the death or insolvency of the member had not occurred and the notice of transfer were a transfer signed by that member.

Conversion of Shares into Stock

Article 35 provides that

The Company may by ordinary resolution (a) convert any paid up shares into stock, (b) reconvert any stock into paid up shares of any denomination.

Article 36 provides that

The holders of stock may transfer the same or any part thereof in the same manner and subject to the same regulation as, and subject to which, the shares from which the stock arose previously to conversion have been transferred, or as near to as circumstances admit; but the Directors from time to time may fix the minimum amount of stock transferable and restrict or forbid the transfer of fractions of that minimum, but the minimum shall not exceed the nominal amount of the shares from which the stock arose.

266 Article 38 provides that

Such regulations of the Company as are applicable to paid up shares apply to stock and words ‘shares’ and ‘share holders’ therein shall include ‘stock’ and ‘stock holders’.

Directors

Article 62 provides that

The number of Directors shall be not less than five and not more than twelve until otherwise determined by the Bank in General Meeting. not less than fifty-one per cent of the total number of Directors shall be persons who satisfy the conditions laid down in Section 10 A of the Banking Regulation Act, 1949.

Article 63 provides that

(a) (i) Two-thirds of the total number of Directors shall be persons whose period of office shall be liable to determination by retirement by rotation (hereinafter referred to as “rotational Directors”), and be appointed by the Bank in General Meeting or by way of additional directors. One-third of such Directors for the time being as are liable to retire by rotation, or if their number is not three or a multiple of three, then the number nearest to one-third, shall retire from office at every Annual General Meeting.

(ii) The Directors to retire by rotation under this Article at every Annual General Meeting shall be those who have been longest in office since their last appointment but as between persons who became Directors on the same day, those who are to retire shall, in default of and subject to any agreement among themselves be determined by lot.

(iii) At the annual general meeting at which a Director retires as aforesaid, the Bank may fill the vacancy by appointing the retiring Director or some other person thereto in accordance with the applicable provisions of the Companies Act.

(b) The Board is authorised to appoint the remaining Directors (hereinafter referred to as “non-rotational Directors”) including any whole-time Director(s). Such Directors shall not be liable to retirement by rotation or taken into consideration in determining the retirement of Directors by rotation. Their period of office shall be determined by the Board, provided, however, none of them, other than whole-time Directors, shall hold office as a non-rotational Director for more than three years in one or more terms. A person appointed as a non-rotational Director may, however, offer himself for election as a rotational Director under Article 63 (a) (i), and on appointment as a rotational Director shall cease to be a non-rotational Director. If at any time the number of non-rotational Directors exceeds one-third of the total number of Directors for the time being, then one or more of such non-rotational Directors as the Board may determine shall be liable to retirement by rotation in accordance with the provisions of the Companies Act so that the total number of non-rotational Directors shall not exceed one-third of the total number of Directors for the time being.

Article 63A provides that

The Board may appoint one or more additional Directors provided that the total number of Directors, including the additional Director(s), shall not exceed the maximum strength of the Board as provided in Article 62. Such additional Director(s) shall hold office only up to the date of the next Annual General Meeting of the Bank.

Article 64 provides that

(a) Subject to the provisions of the Companies Act, the B R Act and applicable regulations, the Board shall determine the remuneration of the Directors, whether whole-time or otherwise, other than the Chairman and Chief Executive Officer, and such determination by the Board will be deemed to be determination by the Articles of Association of the Bank for the purposes of Section 309 of the Companies Act.

(b) As remuneration, Directors other than whole-time Director(s) shall be paid a sitting fee as may be determined by the Board from time to time for attending meetings of the Board or of committees constituted by the Board.

267

(c) Directors other than whole-time Director(s) shall be paid such sum as the Board may consider fair compensation for travelling, hotel, and other incidental expenses incurred by them for attending and returning from meetings of the Board or of committees constituted by it or General Meetings of the Bank, or in connection with the business of the Bank.

Article 65 provides that

If any Director devotes to the business of the Company either his whole time and attention or more of his attention and time than in the opinion of the Board would usually be so devoted by a person holding such office or shall undertake and perform any duties or services other than those which in the opinion of the Board would usually be undertaken or performed by a person holding such office, then such Director may be remunerated either by a fixed sum or by way of salary or percentage of profits or in such other manner or as may be determined by the General Body, subject to the applicable statutory provisions.

Article 66 provides that

The Chairman and/or the Directors need not be required to hold shares in the Bank.

Article 67 provides that

Any casual vacancy occurring in the Board of Directors may be filled up by the Board but the person so chosen shall be subject to retirement at the same time as if he had become a Director on the day on which the Director in whose place he is appointed was last elected as a Director.

Article 68 provides that

The continuing Directors may act notwithstanding any vacancy in the Board; but; if and so long as their number is reduced below the quorum fixed by the Act for a meeting of the Board, the continuing Directors or director may act for the purpose of increasing the number of Directors to that fixed for the quorum, or of summoning a general meeting of the Company, but for no other purpose.

Article 69 provides that

The Directors shall comply with the provisions of Section 303 of the Companies Act 1956 in regard to keeping a register of directors or Managers.

Disqualification of directors

Article 70 provides that

The office of a Director shall be vacated if a Director is disqualified under the provisions of the Companies Act, 1956 and/or Banking Regulation Act, 1949 and/or under the provisions of any law for the time being in force.

Contracts with directors

Article 100 provides that

No Director shall be disqualified from his office by contracting with the Company either as vendor, purchaser, or otherwise, nor shall any such contracts, or any contract or arrangement entered by or on behalf of the Company in which any Director shall be in any way interested be avoided nor shall any Director so contracting or being so interested be liable to account to the Company for any profit realised by any such contract or arrangements by reason of such Director holding that office or the fiduciary relation thereby established, but it is declared that the nature of his interest shall be disclosed by him at the meeting of the Directors at which the contract or arrangement is determined on, if his interest then exists or in any other case at the first meeting of the Directors after acquisition of his interest and that no Director shall as a Director vote in respect of any contract or arrangement in which he is so interested as aforesaid, nor shall his presence count for the purpose of forming a quorum at the time of any such vote and if he so does vote, his vote shall not be counted. A general notice that a Director is a member of any specified firm or company, and

268 is to be regarded as interested in any subsequent transaction with such firm or company, shall be sufficient disclosure under this clause and after such general notice it shall not be necessary to give any special notice relating to any particular transaction with such firm or company.

Powers and duties of directors

Article 81 provides that

The business of the Bank shall be managed by the Board of Directors who may exercise all such powers of the Bank as are not, by the Companies Act, 1956 or by these articles required to be exercised by the Company in General Meeting, subject nevertheless to any regulation of these articles, to the provisions of the said Act and to such regulations being not inconsistent with the aforesaid regulations or provisions as may be prescribed by the Bank in General Meeting, but no regulations made by the Bank in General Meeting shall invalidate any prior act of the Directors which would have been valid if that regulation had not been made.

Article 82 provides that

Without prejudice to the general powers conferred by the last preceding clause, and the other powers conferred by these presents it is hereby expressly declared that the Board shall have the following powers, that is to say, power:

(i) To purchase or otherwise acquire for the Bank and/or to sell any property, rights privileges which the Bank is authorised to acquire at such price and generally on such terms and conditions, as they think fit.

(ii) At its discretion, to pay for any property, rights or privileges acquired by, or service rendered to, the Bank wholly or partially in cash or in shares, bonds, debentures or other securities of the Company and any such shares may be issued either as fully paid up or with such amount credited as paid up thereon as may be agreed upon, and any such bonds, debentures, or other securities may be either specifically charged upon all or any part of the property of the Bank or not so charged.

(iii) To secure the fulfillment of any contracts or engagements entered into by the Bank by mortgage or charge of all or any of the property of the Bank for the time being or in such other manner as they think fit.

(iv) To authorise or empower the Managers or other officers for the time being of the Bank to exercise and perform all or any of the powers, authorities and duties conferred or imposed upon the Board by the Memorandum or Articles of Association subject to such restrictions and conditions if any, as the Board may think proper.

(v) From time to time nominate and appoint and if necessary to remove or suspend as the Directors deem best for management of the business of the Bank, Managers, Officers, Clerks, workmen and all other employees of the Company and to fix the remuneration, salaries and wages to be paid by the Bank to Officers of the Bank and other employees generally.

(vi) Subject to the provisions of Companies Act, 1956 and Banking Regulation Act, 1949, to raise or borrow money from time to time by bonds, debentures, or promissory notes or by any such instruments which may emerge in the financial markets from time to time or by opening current account or by reserving advances with or without security or by mortgaging any lands, buildings, machinery, goods, or other property of the Bank or by such other means that the Board may deem expedient.

(vii) To draw, accept, endorse, negotiate, buy/or sell bills of exchange and other negotiable instruments with or without security.

(viii) To undertake on behalf of the Bank the payment of all rent and the performance of all covenants, conditions and agreements contained in or reserved by any lease that may be granted or assigned to or otherwise acquired by the Bank.

(ix) To insure or keep insured if deemed expedient all or any of the buildings, goods, stores or other property or any securities of the bank, either separately or conjointly for such period and to such extent as the Directors may think proper and to sell, assign, surrender or discontinue any policies of assurance

269 effected in pursuance of this power.

(x) To purchase the reversion, or reversions and otherwise acquire the free- hold or fee simple of all or any of the lands of the Bank for the time being held under lease or for an estate less than a free hold estate by the Bank.

(xi) To accept from any member on such terms and conditions as shall be agreed, a surrender of his shares or any part thereof if permissible as per the regulations in force.

(xii) To institute, conduct, defend, compound or abandon any legal proceedings by or against the Bank, or its officers, or otherwise concerning the affairs of the Bank, and also to compound and allow time for payment or satisfaction of any debts due and of any claims or demands by or against the Bank.

(xiii) To refer any claims or demands by or against the Bank to arbitration, and observe and perform the awards subject to judicial review of such final awards.

(xiv) To make and give receipts, releases and other discharges for money payable to the Bank and for the claims and demands of the Bank.

(xv) To authorise officers or other persons to sign on the Bank’s behalf, bills, notes, receipts, acceptances, endorsements, cheques, releases, contracts and documents.

(xvi) From time to time to provide for the management of the affairs of the Bank in all its branches in such manner as the Directors thinks fit, and in particular appoint any person to be the attorneys or agents of the Bank with such powers (including power to subdelegate) and upon such terms as may be thought fit.

(xvii) To appoint one or more qualified men as legal advisors whose duties shall be to give opinions on questions referred to them, and to give notices and to conduct and defend suits on behalf of the Bank and to do all that may be done by them in the interests of the Bank and in their capacity as such advisors.

(xviii) The Directors may appoint any qualified person as legal advisor and remuneration may be fixed by the Directors. The Directors shall have also power to replace any legal advisor by another at any time they think fit.

(xix) To invest and deal with any of the moneys of the Company upon such shares and securities (not being shares in this company) and in such manner as they may think fit, and from time to time to vary or realise such investments in accordance with the enabling statutory regulations.

(xx) To execute in the name and on behalf of the Bank in favour of any Director or other person who may incur or be about to incur any personal liability for the benefit of the Bank such mortgages of the Bank’s property as they think fit and any such mortgage may contain a power of sale and such other powers, covenants and provisions as shall be agreed on.

(xxi) From time to time to make, vary, repeal byelaws for the regulation of the business of the Bank, its officers and servants and provident fund, pension funds, and any other welfare funds.

(xxii) To enter into all such negotiations and contracts, and rescind and vary all such contracts and execute and do all such acts, deeds, and things in the name and on behalf of the Company as the Board may consider expedient for or in relation to any of the matters aforesaid or otherwise for the purpose of the Company.

(xxiii) From time to time to decide and cause to be kept at any of its branches, a branch register of members or a copy of the register of its members and to make such regulations as they think fit respecting the keeping or discontinuance of such registers.

(xxiv) To appoint one or more whole-time executives, who may be designated as Executive Director(s) without being member(s) of the Board, or any other managerial personnel, by whatever name called on such terms and conditions and for such purposes as the Board may decide from time to time.

(xxv) And generally to do, sanction and authorise all such matters and things as may be necessary to be done, authorised or sanctioned in or about the general business and affairs of the Company in or about the general business and affairs of the Company or in or about the execution of all or any of the powers hereinbefore conferred on the Board.

270

Article 83 provides that

The Directors shall comply with the provisions of the Banking Regulation Act 1949 and it subsequent amendments as well as the provisions in the Companies Act 1956 or other statutes relating to Companies as to registration and keeping of the copies of the mortgages and charges and keeping of the register of members and sending to the Registrar of Companies the annual list of members and summary notices as to the increase of capital, returns of allotments and contracts relating thereto, copies of special resolutions and other particulars connected with the above.

Chairman

Article 84 provides that

The Board may, form time to time, appoint or re-appoint one of its members who satisfies the conditions prescribed under Section 10-B of the Banking Regulation Act 1949 as the whole time Chairman and Chief Executive Officer for such a period not exceeding 5 years at a time.

Article 84A provides that

Subject to the provisions of these Articles, one or more non-rotational Directors appointed or reappointed by the Board, apart from the Chairman and Chief Executive Officer, may be in the whole-time employment of the Bank appointed to assist the Chairman in the management of the Bank’s affairs. The Board shall determine, subject to such approval of the Reserve Bank of India as may be necessary under the Banking Regulation Act, the terms and conditions of appointment and duties of such whole-time Director, who may be designated as an Executive Director or otherwise.

Article 84B provides that

The Chairman and Chief Executive Officer and any whole-time Director appointed by the Board under Article 84 or 84 A shall be subject to the provisions of the Companies Act and the Banking Regulation Act and any employment contracts between them and the Bank, and also be subject to the same provisions as to disqualification or removal from, or vacation or resignation of, the office of Director as the other Directors of the Bank. Either or any of them shall ipso facto and immediately cease to be :

(i) in the whole-time employment of the Bank if he ceases to hold the office of a Director of the Bank for any cause; and

(ii) a Director if he ceases to be in the employment of the Bank for any cause, unless the Board decides otherwise.

Subject to the provisions of the said Acts and contract, the Board shall be entitled to remove the Chairman and Chief Executive Officer or any other whole-time Director from office upon giving him reasonable notice of such removal and appoint another person in his place.

Article 85 provides that

The Chairman shall be entrusted with the management of the whole of the affairs of the Bank and he shall be in whole time employment of the Bank.

Article 86 provides that

The remuneration of the Chairman of the Board of Directors shall, subject to the provisions of law for the time being in force, be determined by the company in General Meeting.

Article 87 provides that

Without prejudice to the generality of Article 84, the Board may from time to time entrust to and confer upon

271 the Chairman such of the powers exercisable under these presents by the Board as it deem fit, and may confer such powers for such time and to be exercised for such objects and purposes and upon such terms and conditions and with such restrictions as it deems expedient and the Board may confer such powers either collaterally with or to the exclusion of and substituting all or any of the powers of the Board in that behalf and may from time to time revoke, withdraw, alter or vary all or any such powers.

Article 88 provides that

The Chairman by virtue of office shall, subject to the control of the Board have the engagement and dismissal of the staff of the Bank and general direction and the management and superintendence of the business of the Bank with power to do all acts, and things deemed necessary, proper or expedient for carrying on the business of the Bank including power to appoint attorneys to make and sign all contracts and to draw, accept, endorse and negotiate on behalf of the company all such bills of exchange, promissory notes, hundies, cheques, drafts and other instruments as shall be necessary, proper or expedient for the carrying, on the business of the bank, and to operate on the Bank accounts of the Bank and to represent the Bank in all suits and to sign the necessary papers and documents and other instruments of authority and generally to exercise all such powers and authorities of the company except those that are by the Companies Act or other regulations for the time being in force or by these articles expressly directed to be exercised by the Board of Directors or by the bank in General Meeting.

Article 89 provides that

The Chairman may with the sanction of the Board of Directors delegate all or any of his powers to such other officer or officers of the Bank, jointly or severally, as he thinks fit, and shall have power to grant such officer or officers such powers of attorney as the Chairman may subject to the approval of the Board of Directors deem expedient and such powers at pleasure to revoke.

Article 90 provides that The Chairman shall not while he continues to hold that office be subject to retirement by rotation, but his appointment shall be subject to determination by the Bank in General Meeting or ipso facto if he ceases on account of any act or omission on his part to be a director as per any regulation.

Article 91 provides that

The Board may from time to time provide for the management and transaction of the affairs of the Bank in any specified locality whether in India or abroad, in such manner as it think fit and the provisions contained in the three next following articles shall be without prejudice to the general powers conferred by this paragraph.

Article 92 provides that

The Board may from time to time and at any time establish any local Boards or agencies for managing any of the affairs of the company in and such specified locality, and may appoint any persons including any Director to be member of such local Board and may fix his qualification if any or may appoint any Managers or agents and may fix their remuneration. And the Board from time to time and at any time may delegate to any person so appointed any of the powers, authorities and discretion for the time being vested in the Board other than the powers of making calls and may authorise the members for the time being of any such local Board or any of them to fill up any vacancies therein and to act notwithstanding vacancies therein, and any such appointment or delegation may be made on such terms and subject to such conditions as the Board may think fit and the Board may at any time remove any person so appointed and may annul or vary any such delegation.

Article 93 provides that

The Board may at any time and from time to time by power of attorney under the Company’s seal appoint any person or persons to be the attorneys of the Bank for such purposes and with such powers authorities and discretion (not exceeding those vested in or exercisable by the Board under these presents) and on such terms and subject to such conditions as the Directors may from time to time think fit, and any such appointment may (if the Board may think fit) be made in favour of the members or any of the members of any local Board established as aforesaid or in favour of any company or of the members, directors, nominees or managers of any company or firm or in favour of any fluctuating body of persons, whether nominated directly or indirectly by

272 the Board and any such power of attorney may contain such provisions for the protection or convenience of the persons dealing with such attorney or attorneys as the Board may think fit.

Article 94 provides that

Any such delegate or attorneys as aforesaid may be authorised by the Board to sub-delegate all or any of the powers, authorities and discretions for the time being vested in them.

General Meetings

Article 39 provides that

The Board shall in each year hold in addition to any other meeting a General Meeting as its Annual General Meeting and shall specify the meeting as such in the notices calling it.

Article 40 provides that

(1) All General Meetings other than Annual General Meetings shall be called Extra-ordinary General Meetings.

(2) The Board may, whenever it thinks fit call an extra-ordinary general meeting.

Article 41 provides that

The Board may, whenever it thinks fit, convene a general meeting and it shall, on the requisition of the holders of shares representing not less than one tenth of the issued share capital of the company upon which all calls or other sums then due have been paid, or upon the requisition of not less than 20 members who among themselves hold shares of not less than one twentieth of the issued share capital upon which all calls or other sums then due have been paid forthwith proceed to convene a general meeting of the company. In the case of such requisition the following provisions shall have effect:

(a) The requisition must state the object of the meeting and must be signed by the requisitionists and deposited at the office and may consist of several documents in like form each signed by one or more of the requisitionists.

(b) If the Board does not, within twenty one days from the date of the requisition being so deposited, proceed to convene a meeting not later than 45 days from the date of deposit of the requisition, the requisitionists or a majority of them in regard to the paid up capital may themselves convene the meeting but in either case any meeting so convened shall not be held after three months from the date of such deposit.

(c) In the case of a meeting at which a resolution is to be proposed as special resolution the Board shall be deemed not to have duly convened the meeting, if they do not give such notice as required by Sec. 171 of the companies act.

(d) Any meeting convened under this clause by the requisitionists shall be convened in the same manner as nearly as possible as that in which meetings are to be convened by the Board

(e) The provisions of Section 170 to 186 of the Companies Act, 1956 shall apply to the meetings called either by the Board or by the requisitionists or by the Company Law Board.

Article 44 provides that

(1) No business shall be transacted at any general meeting unless a quorum of members is present at the time when the meeting proceeds to business.

(2) Five members present in person shall be a quorum.

Article 45 provides that

(1) The Chairman of the Board shall preside as Chairman at every Annual

273 General Meeting of the Company

(2) If there is no such Chairman, or if he is not present within thirty minutes after the time appointed for holding the meeting or is unwilling to act as Chairman of the meeting, the directors present shall elect one of their member to be the Chairman of the Meeting.

(3) If at any meeting no director is willing to act as Chairman or if no Director is present within thirty minutes after the time appointed for holding the meeting, the members present shall choose one of their members to be Chairman of the meeting.

Proceedings of the Board

Article 71 provides that

The Board may meet for the despatch of business, adjourn or otherwise regulate its meetings and proceedings as it thinks fit.

Article 73 provides that

The Chairman may at his discretion or he shall upon the request of at least two Directors, convene a meeting of the Board. If the Chairman fails to convene a meeting of the Board on requisition of two or more Directors, the requisitionists may themselves convene a meeting of the Board provided however the requisitionists shall explicitly mention the purpose of the requisitioned meeting and the proposed agenda in the requisition.

Article 75 provides that

The Chairman of the Board shall preside over the meeting. If the Chairman is not present within thirty minutes after the time appointed for holding the meeting, the Directors present may choose one of their member to be the Chairman of the Meeting

Article 76 provides that

A meeting of the Board of Directors for the time being at which a quorum is present shall be competent to exercise all or any of the authorities and powers vested in or exercisable by the Board generally.

Capitalisation of profits

Article 103 provides that

(1) The Bank in the meeting of shareholders may, upon the recommendation of the Board resolve.

(a) to capitalise any part of the amount for the time being standing to the credit of the Bank’s any reserve accounts, or to the credit of the profit and loss account, or otherwise available for distribution among shareholders and

(b) that such sums be accordingly be set free for distribution in the manner specified in clause (2) below amongst the members who would have been entitled thereto if distributed by way of dividend and in such proportion as may be decided.

(2) The sum aforesaid shall not be paid in cash but shall be applied, subject to the provisions contained in clause (3) below, either in or towards paying up in full unissued shares of the Bank to be allotted and distributed, credited as fully paid-up to and amongst such members in the proportions aforesaid.

(3) The share premium account, capital reserve account and also capital redemption reserve account may also for the purposes of this capitalisation of profits be applied in the paying up of unissued shares to be issued to members of the Bank as fully paid bonus shares in addition to the reserves mentioned in clause 1(a) above.

(4) The Board shall give effect to the resolution passed by the bank in pursuance of this regulation.

274

Indemnity

Article 105 provides that

Every Officer or Manager for the time being of the Bank shall be indemnified out of the assets of the Bank against any liability incurred by him in defending any proceedings, whether civil or criminal in which judgement is given in his favour or in which he is acquitted or in connection with any applications under Section 633 of the Companies Act, in which relief is granted to him by the Court.

275 MATERIAL CONTRACTS AND DOCUMENTS FOR INSPECTION

The contracts referred to below (not being contracts entered into in the ordinary course of business carried on by the Bank or entered into more than two years prior to the date of the Draft Letter of Offer) which are or may be deemed material have been entered into by the Bank or to be entered into by the Bank. Copies of these contracts, together with the copies of the documents referred to below, may be inspected at the Registered and Head Office of the Bank between 10.00 A.M. and 3.00 p.m.on any working day of the Bank from the date of the Draft Letter of Offer until the date of closing of the subscription list. MATERIAL CONTRACTS 1. The Memorandum of Understanding between the Bank and SBI Capital Markets Limited dated August 2, 2007. 2. The Memorandum of Understanding between the Bank and Integrated Enterprises (India) Limited , Registrar to the Issue, dated August 3, 2007. MATERIAL DOCUMENTS 3. Memorandum and Articles of the Bank. 4. RBI has granted a license to carry on banking business vide license Tri/4 dated July 11, 1959 5. Copy of RBI letter DBOD. No.1160/08.38.001/2004-05 dated April 28, 2005 granting approval for appointment of Mr. M. Venugopalan as Chairman and Chief Executive Officer of the Bank. 6. Copy of the Shareholders Resolution passed at the Annual General Meeting held on September 18, 2006 appointing M/s.Sundaram & Srinivasan and M/s Brahmayya & Co. as statutory auditors for the financial year 2006-07. 7. Copy of the Board Resolutions dated February 12, 2007 and May 18, 2007 approving the Issue and the special resolution passed by the shareholders under section 81 and 81(1A) of the Company’s Act, 1956 through postal ballot notice dated May 18, 2007 8. Consents of the Directors, Company Secretary, Lead Manager to the Issue, Legal Advisors, Registrars to the Issue and Bankers to the Issue to include their names in the Draft Letter of Offer to act in their respective capacities. 9. Resolution appointing Company Secretary as Compliance Officer. 10. Consent from M/s.Sundaram & Srinivasan and M/s Brahmayya & Co., the Auditors to the Bank, for inclusion of their report on the Accounts in the form and context in which they appear in the Draft Letter of Offer and also on the Tax Benefits mentioned therein. 11. Auditor’s report dated August 3, 2007 on Unconsolidated Summary Statements of Assets And Liabilities, Profit and Loss and Cash Flows, as restated, under Indian GAAP (including subsidiary) for the period of 5 (five) financial years ended March 31st, 2007 and Consolidated Summary Statements of Assets and Liabilities, Profit and Loss and Cash Flows, as restated for the above years. 12. Statement of Tax Benefits 13. Annual Report of the Bank for last five (5) Financial Years. 14. In-principle listing approval obtained from the NSE vide letter dated [●], the BSE vide letter dated [●] and the CSE vide letter dated [●] 15. Due Diligence Certificate dated September 17, 2007from SBI Capital Markets Ltd. 16. Tripartite Agreement between the National Securities Depository Ltd., the Bank and Integrated Enterprises (India) dated January 12, 1998 17. Tripartite Agreement between the Central Depository Services (India) Ltd., the Bank and Integrated Enterprises (India) dated November 4, 1999 18. Copy of the Board Resolution dated August 4, 2007 approving the Draft Letter of Offer 20. A copy of the SEBI’s observation letter no.[●] dated [●] Any of the contracts or documents mentioned above may be amended or modified any time without reference to the shareholders in the interest of the Bank in compliance with the applicable laws.

276 DECLARATION

We, the Directors of the Bank hereby declare that all the relevant provisions of the Act and the guidelines, instructions issued by the Government of India and any other competent authority and guidelines issued by Securities & Exchange Board of India established under Section 3 of the SEBI Act, as the case may be, have been complied with and all the legal requirements connected with the issue has been complied with and no statement made in this Draft Letter of Offer is contrary to the provisions of the Act, SEBI Act or the rules made or guidelines issued thereunder, as the case may be. We further certify that all disclosures in the Draft Letter of Offer are true and correct. For The Federal Bank Limited

Mr. M Venugopalan Chairman

Mr. K S Harshan Executive and Wholetime Director

Mr. T N Jayachandran Independent Director

Mr. S Santhanakrishnan Independent Director

Prof.A M Salim Independent Director

Mr P H Ravikumar Independent Director

Mr. P C Cyriac Independent Director

Mr. Suresh Kumar Independent Director

Prof. Abraham Koshy Independent Director

Mr. P. Surendra Pai Independent Director

Mr. M Venugopalan Chief Executive Officer

Mr. George John Chief Financial Officer

Date: September 17, 2007 Place: Aluva Encl: Composite Application Form

277 ALLY BLANK

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