Kotak Mahindra Bank - 2007-2008 Annual Report

KOTAK MAHINDRA BANK LIMITED

ANNUAL REPORT 2007-2008

DIRECTOR'S REPORT

To The Members ofKOTAK MAHINDRA BANK LIMITED

The Directors present their Twenty Third Annual Report together with the audited accounts of your Bank for the year ended 31st March 2008.

FINANCIAL HIGHLIGHTS

(A) Kotak Mahindra Bank Limited - Consolidated financial highlights:

31st March 2008 31st March 2007 Rs. crore Rs. crore

Total income 7,678.47 4,352.30Total expenditure, excluding provisions and contingencies 5,907.53 3,421.11Operating Profit 1,770.94 931.19Provisions and contingencies,excluding provision for tax 363.02 152.50Profit before tax 1,407.92 778.69Provision for taxes 449.19 254.21Profit after tax 958.73 524.48Less: Share of minorityinterest (18.69) 0.66Add: Share in profit ofAssociates 13.81 14.42Consolidated profit for theGroup 991.23 538.24Earnings per Equity ShareBasic (Rs.) 29.62 16.60Diluted (Rs.) 29.18 16.47

(B) Kotak Mahindra Bank Limited - Standalone financial highlights:

31st March 2008 31st March 2007 Rs. crore Rs. crore

Total Income 2,998.83 1,637.76Operating Profit 669.89 325.8Total expenditure, excludingprovisions and contingencies 2,328.94 1,311.94Provisions and contingencies,excluding tax provisions 272.11 122.57Profit before tax 397.78 203.25Provision for taxes 103.85 61.88Profit after tax 293.93 141.37Add: Surplus broughtforward from the previous year 354.18 286.36Add: Transfer from KotakMahindra CapitalCompany Limited on demerger - 216.76Amount available for appropriation 648.12 644.49

Appropriations:

Transfer from Kotak MahindraCapital Company Limited ondemerger appropriated to General Reserve - 216.76Statutory Reserve underSection 17 of the Banking Regulation Act, 1949 73.50 35.50General Reserve 14.70 7.25Transfer to Capital Reserve 1.48 4.05Proposed Dividend 25.87 22.86Corporate Dividend Tax 4.40 3.89Surplus carried to Balance Sheet 528.17 354.18

DIVIDEND

Keeping in mind the overall performance and the outlook for your Bank, the Directors recommend a dividend of 7.5% (previous year 7%), entailing a payout of Rs. 25.87 crore (previous year Rs. 22.86 crore). The dividend would be paid to all the shareholders, whose names appear on the Register of Members/Beneficial Holders list on the Book Closure date.

CAPITAL

Tier - I Capital

During the year, your Bank raised Rs. 1,615 crore through issue of 1,70,00,000 equity shares to Qualified Institutional Buyers (QIBs) at an issue price of Rs. 950/- per share.

Also, during the year, your Bank has allotted 15,17,134 shares arising out of the exercise of Employees Stock Options granted to the employees, employees of your subsidiaries and Executive Directors of your Bank.

Tier - II Capital

Subordinated debt:

During the year your Bank has issued Unsecured, Redeemable, Non-Convertible Subordinated Debt Bonds in the form of Promissory Notes/Debentures through private placement for an amount aggregating to Rs. 35.80 crore to augment the Tier-II capital to meet the growth in assets of your Bank and to enhance overall Capital Adequacy Ratio. These Bonds were issued in demat and were listed on the Wholesale Debt Market segment of the National Stock Exchange of India Limited. Your Bank has appointed IDBI Trusteeship Services Limited as the Trustees for these Bonds, as aforesaid. Outstanding Unsecured, Redeemable Non- Convertible, Subordinated Debt Bonds as at 31st March 2008 stood at Rs. 465.70 crore.

Hybrid debt capital instruments: Upper Tier - II Capital

During the year your Bank has issued and allotted Unsecured, Non Convertible, Redeemable Debt Capital Instruments through private placement for an amount aggregating to Rs. 136 crore to augment the Upper Tier-II capital to meet the growth in assets of your Bank and to enhance overall Capital Adequacy Ratio. These Bonds were listed on the Wholesale Debt Market segment of the National Stock Exchange of India Limited. Your Bank has appointed IDBI Trusteeship Services Limited as the Trustees for these Bonds, as aforesaid. Outstanding Unsecured, Non-Convertible, Redeemable Debt Capital Instruments Upper Tier II as at 31st March 2008 stood at Rs. 136 crore.

During the year your Bank has not issued any Foreign Currency denominated Subordinated Debt Bonds or Debt Capital Instruments Upper Tier-II to augment the Tier-II capital of the bank.

OPERATIONS

The Branch Banking Business completed its fifth year of operations. The network expansion momentum has significantly increased in the current year with addition of 73 new full fledged branches & 179 new ATMs, taking the network size to 178 branches & 314 ATMs in 107 locations. The momentum of expansion will continue with addition of 80 -100 branches in the next year. The Branches and ATMs have helped expand our reach and increase our brand presence in the minds of customers. The pace of acquisition of customers and deposits from the branch network continued to be very satisfactory and in line with the best in the industry. Currently, the network acquires about 40000 deposit accounts every month & has more or less doubled the account base from 3,50,000 last year to around 7,00,000 this year. The penetration into Corporate Salary segment of Customers has given a significant impetus to the customer acquisition programme.

Your Bank added new products & services like Gold debit card, Smart fee (a fee solution for Educational Institutions), GPRS based mobile banking, Bill presentment and payment facility, online term deposits etc. to meet the needs of the customers. Several new initiatives were taken during the year to improve the operations and service levels to customers, through mystery shopping, customer feedback surveys and dedicated Control Unit. The customer response to our service levels continues to be heartening. Your Bank has won several awards for high quality implementation of various technology aspects of the business which help your Bank in delivering its proposition to customers in a manner most secure & most desirable to them, yet keeping it cost efficient for your Bank.

The distribution of third party products remains strong from the Branch Network, contributing to a good mix of Fee Income to Net Interest Income. Overall the progress of the business gives us the confidence to invest in further network expansion.

The year saw a continued increase in coverage of top corporate and mid market corporate clients and your bank widened and deepened its franchise in these segments. The year continued to see a surge in credit demand from the corporate and mid market business segments both for working capital and term facilities. Your Bank was able to tap this opportunity by offering a variety of products from plain vanilla debt issuance to structured products and loan syndication.

The year also saw an increase in demand for trade finance both domestic and international and your Bank was able to tap this opportunity through structured product offerings to customers. Volumes saw a significant increase.

Your Bank increased its thrust in offering customized solutions on foreign exchange, and cash management services across the spectrum of customers. Your Bank was also able to provide products and services to segments of financial institutions group through customized credit and transaction banking offerings. Your Bank continued its presence as a 'collection banker' in a number of the Initial Public Offers and New Fund Offers.

Disbursements in the Commercial Vehicles and Infrastructure Finance divisions grew in line with the industry trends. Whereas the commercial vehicle sector showed a marked tapering down of growth rates, the construction equipment sector continued its robust growth. Keeping in view the opportunities in both the sectors, in addition to traditional asset funding, the businesses focused on growing its book on the transaction banking and non fund based products. The thrust given on cross sell of other banking products also got further momentum during the year. The businesses will continue to give focus on building customer value, going forward. A risk control unit was established during the year to supplement its robust risk management practices.

The Agri Business has further consolidated comprising short term and long term loans, working capital facilities to farmers and other agri intermediaries. Funding was extended for improved agriculture projects like horticulture, poultry, floriculture, bee keeping and other allied activities. Working capital facilities were extended to distinctive agri sectors like oils, cotton, agro processors, rice millers and sugar. The division also has developed the portfolio & expertise in funding against commodities. The agri division is becoming the predominant vehicle for identifying & servicing the financial requirements for agriculture & other rural segments.

The Home Finance business saw the continued growth rate it has witnessed since inception as a result of the growth in the real estate market. Similarly the Personal loan business grew significantly and your Bank improved its presence across newer geographies.

Last year several auctions of the NPA portfolios by banks/NBFCs and institutions failed due to pricing mismatch between the buyers and sellers. Your bank made an entry in purchasing retail assets by acquiring a portfolio, as there is good opportunity in this space, moving forward. Your bank resolved several accounts resulting in good recoveries and continued to invest in attractive single asset transactions with good turnaround prospects.

Your Bank has an active proprietary desk trading in all products such as Fixed Income, Money Markets, Derivatives, Foreign Exchange and Bullion. The treasury plays an important role in balance sheet management and implementation of Funds Transfer Price between various business units. In the area of Debt Capital Markets (DCM) the Bank offered the following products: Securitisation, Loan and Bond syndication, mezzanine financing, promoter funding and acquisition financing. The Bank is one of the active players in the Securitisation market particularly in Corporate Loan securitization.

In respect of forex derivatives transactions with corporate customers of the Bank, as on May 8, 2008 customers of the Bank had negative MTM exposures aggregating Rs. 612 crore. As on March 31, 2008, Bank carries a provision of Rs. 86 crore towards stressed cases.

After many months of market research and product development, your bank launched the Credit Cards business on April 15th 2008. Kotak Cards has taken a fresh approach to card design, and has introduced India's 1st vertical card. Kotak Cards have been built on 3 core tenets - Relevant benefits that reflect what customers do most, Simplified credit that is easy to use and Transparent communication of charges. The Credit Cards are available in 4 variants to cater to the specific needs of distinct customer segments. With the launch of its credit cards, your Bank now offers a complete range of retail financial services.

As at the end of the year, your Bank's capital adequacy was 18.65% and the Tier 1 capital adequacy ratio was 14.46% and the net NPAs were at 0.38% of net advances excluding stressed assets portfolio. The Net NPAs of the Bank including stressed assets portfolio were at 1.78%.

SUBSIDIARIES

Your Bank along with its subsidiaries offers complete financial solutions to its customers. The key business segments where the subsidiaries operate include investment banking, stock broking, car finance, asset management and life insurance.

Kotak Mahindra Capital Company Limited and Kotak Securities Limited posted a good financial performance on the back of strong capital markets and the robust overall economic growth. The life insurance subsidiary, Kotak Mahindra Old Mutual Life Insurance Limited continued its growth momentum in premium income. The international subsidiaries have gained impetus and have now become gainful contributors to the profits of the Group. Kotak Mahindra Asset Management Company Limited, Kotak Mahindra Prime Limited and the other subsidiaries also posted growth in profits and had a good year.

The various activities of the subsidiaries are outlined in the Management Discussion and Analysis section appended to this Report.

In the year 2006-07 a petition was filed before the Hon'ble High Court of Judicature at Bombay in respect of a Scheme of Arrangement between Kotak Mahindra Securities Limited (KMSL), Kotak Mahindra Capital Company Limited (KMCC) for demerger of undertaking comprising of the trading and clearing operations and strategic investments of KMSL to KMCC. Upon receipt of all necessary approvals, the demerger was completed on 3rd September, 2007 to take effect from 31st March, 2007.

During the year, the name of KMSL was changed to Kotak Investment Advisors Limited (KIAL). With effect from 1st October, 2007, the alternate asset management business i.e. management of private equity and realty funds of Kotak Mahindra Group was assigned to KIAL.

In terms of the approval granted by the Central Government vide their letter dated 14th January 2008 under Section 212(8) of the Companies Act, 1956, abridged Annual Report which consists of the financial statements of your Bank on standalone basis as well as consolidated financial statements of the group for the year ended 31st March 2008, have been sent to all the members of the Bank. It does not contain Annual Reports of the Bank's subsidiary companies. The Bank will make available full Annual Report (including the Annual Reports of all subsidiaries) upon request by any member of the Bank. These Annual Reports will be available on Bank's website and will also be available for inspection by any member at the Registered Office of the Bank.

EMPLOYEE STOCK OPTION SCHEME

The stock options granted to the employees currently operate under three schemes, namely Kotak Mahindra Equity Option Plan 2002 - 2003 ('Plan 2002-03'), Kotak Mahindra Equity Option Scheme 2005 ('Scheme 2005') and Kotak Mahindra Equity Option Scheme 2007 ('Scheme 2007'). The disclosures below are in respect of the year ended 31st March 2008.

Options granted during the year Plan 2002 - 03 Nil Scheme 2005 Nil Scheme 2007 50,08,050 options-Series 1 to 11.

Options Vested Plan 2002-03 9,41,325 options. Scheme 2005 9,28,970 options.

Options exercised Plan 2002-03 8,23,904 options. Scheme 2005 6,93,230 options.

Total number of shares Plan 2002-03arising as a result of 8,23,904 equity shares of exercise of options Rs. 10/- each. Scheme 2005 6,93,230 equity shares of Rs. 10/- each.

Options lapsed Plan 2002-03 1,03,318 options. Scheme 2005 3,56,380 options. Scheme 2007 2,59,500 options.Variation of terms of No variations made in the terms options of the options granted except in respect of Scheme 2002-03 and Scheme 2005 with respect to recovery from the relevant eligible employees, the Fringe Benefit Tax on exercise of options as permitted by regulations.

Money realized by Exercise amount received:exercise of options Plan 2002-03 Rs. 6,59,12,320/- Scheme 2005 Rs. 6,68,42,500/-

Total number of options Plan 2002-03in force Outstanding options not yet vested: 8,12,812 options. Scheme 2005 Outstanding options not yet vested: 42,74,990 options. Scheme 2007 Outstanding options not yet vested: 47,48,550 options.

Details of options Plan 2002-03 granted during the Nil year to Scheme 2005 (i) Senior management Nil personnel Scheme 2007 Name of Senior No. of options Management granted Personnel Mr. C. Jayaram 97,000 Mr. Dipak Gupta 1,00,000

(ii) Any other employee Plan 2002-03 who receives a grant Nil in any one year of options amounting Scheme 2005 to 5% or more of Nil options granted during that year Scheme 2007 Nil
(iii) Identified Plan 2002-03 employees who Nil were granted option, during any Scheme 2005 one year, equal Nil to or exceeding 1% of the issued Scheme 2007 capital (excluding Nil outstandingwarrants andconversions) of thecompany at the timeof grant

Diluted Earnings Per * The diluted Earnings Per Share (EPS) pursuant Share (EPS) pursuant to to issue of shares on issue of shares on exerciseexercise of options of options calculated in calculated in accordance accordance with AS20 is with AS20 Earnings Per 29.18 (Consolidated) 8.65 Share (standalone).

Where the company has * Had the Bank (Consolidated) calculated the employee followed the fair value methodcompensation cost for accounting the stock using the intrinsic value option compensation expense of stock options, the would have been higher by difference between the Rs. 291,509,467, with employee compensation consequent lower cost so computed Consolidated profits. and the employee On account of the same compensation cost the diluted EPS of the that shall have been Bank (Consolidated) recognized if it had would have been less by used the fair value of Rs. 28.32 per share. the options, shall bedisclosed. The impactof this difference onprofits and on EPS ofthe company shall alsobe disclosed.

Weighted - average * The weighted average priceexercise prices and of the stock options weighted - average fair exercised is Rs. 87.50 and values of options shall the weighted average fair be disclosed separately value is Rs. 193.48. for options whoseexercise price eitherequals or exceeds oris less than the marketprice of the stock.

* Note: Above figures are derived by considering the Kotak group as awhole (Consolidated).

A description of the A. Stock price method and significant assumptions used It is the closing market priceduring the year to on the National Stock Exchangeestimate the fair values of India Limited (NSE) on the of options, including the date of the respective grant. following weighted - average information: B. Volatility Volatility is a measure of the amount by which a price has fluctuated or is expected to fluctuate during a period. The measure of volatility used in the Black-Scholes option-pricing model is the annualized standard deviation of the continuously compounde rates of return on the stock over a period of time. Accordingly, daily volatility of the Bank's stock price on the NSE for the period corresponding to the respecti expected live of the differented vests, prior to the grant date has been considered. C. Risk free interest rate The risk-free interest rate being considered for the calculation is the interest rate applicable for maturity equal to the expected life of the options based on the zero-coupon yield curve for Government Securities as on the date of the respective grant. D. Time to Maturity/Expected Life of options The minimum life of a stock is the vesting period and the maximum life is vesting period plus the exercise period. The Expected life of the options has been calculated as the average of the two extremes - the minimum life and the maximum life. Since each vest has been considered as a separate grant, the expected life has been calculated for each vest separately. E. Dividend yield The dividend yield for each year has been derived by dividing the dividend per share by the average market price per share.

CORPORATE GOVERNANCE

Pursuant to Clause 49 of the Listing Agreement with the Stock Exchanges, a separate section entitled Corporate Governance' has been included in this Annual Report.

DIRECTORS

Mr. Shivaji Dam retires at the Twenty Third Annual General Meeting and is eligible for re-appointment.

The Reserve Bank of India ('RBI'), vide its letter no. DBOD No. 17/08.140.001/2006-07 dated July 14, 2006 had approved the continuation of Mr. K. M. Gherda as a Director till he retires by rotation. Mr. Gherda retires by rotation at this Annual General Meeting and accordingly the term of

Mr. Gherda expires at this Meeting. Mr. Asim Ghosh was appointed as an Additional Director of the Bank with effect from 9th May 2008 and, pursuant to the proviso to Section 260 of the Companies Act, 1956, holds office as a Director up to the date of this Annual General Meeting but is eligible to be appointed as a Director. In terms of Section 257 of the Companies Act, 1956 the Bank has received notice in writing from the member along with a requisite deposit of Rs. 500/- proposing the candidature of Mr. Asim Ghosh for his appointment as a Director.

Mr. Asim Ghosh is an MBA from Wharton School, University of Pennsylvania and a B.Tech from IIT Delhi. Mr. Ghosh commenced his career in consumer goods marketing with Procter & Gamble in the U.S. and Canada, and worked subsequently with Rothmans International as a Board member of one of Canada's major breweries. He moved to Asia in 1989 as CEO of the Frito Lay (Pepsi Foods) start up in India. Thereafter, he was in executive positions with Hutchison in Hong Kong and India for the past 16 years, and is currently CEO of Vodafone Essar Limited since 1998.

The Board of Directors of the Bank, at its meeting held on 9th May 2008, has re-appointed Mr. Uday Kotak as the Executive Vice-Chairman and Managing Director for a period up to 21st March 2012, subject to the approval of the Members and of the Reserve Bank of India. Mr. Dipak Gupta and Mr. C. Jayaram have been appointed as Executive Directors for a further period up to 31st December 2011, subject to the approval of the shareholders and of the Reserve Bank of India. The approval of the shareholders in this regard is being sought at the ensuing Annual General Meeting of the Bank.

AUDITORS

Messrs S. R. Batliboi & Co., Chartered Accountants, auditors of your Bank, retire on the conclusion of Twenty Third Annual General Meeting and are eligible for reappointment. You are requested to appoint auditors for the current financial year and to fix their remuneration.

STATUTORY INFORMATION

The Companies (Disclosure of Particulars in the Report of Board of Directors) Rules, 1998, are not applicable to your Bank.

EMPLOYEES

There was a significant increase in your Bank's staffing particularly in the Retail Banking business. The employee strength of your Bank along with its subsidiaries as of 31st March 2008 was around 20,000, as compared to 10,800 employees a year ago.

The Bank standalone had around 9,000 employees as of 31st March 2008 (previous year around 5,400). 177 employees employed throughout the year and 82 employees employed for part of the year were in receipt of remuneration of Rs. 24 lacs or more per annum.

Your Bank has in place policies relating to employee service conditions, welfare and training which are reviewed on an ongoing basis by your Bank's Management Committee.

Your Bank continues to focus on training its employees on a continuing basis by deputation to reputed training institutions by holding workshops on various areas including Regulatory Compliance, Risk Management, Customer Care and Communication, Trade Finance, Foreign Exchange Rules and Treasury.

In accordance with the provisions of Section 217(2A) of the Companies Act, 1956 and the rules framed thereunder, the names and other particulars of employees are set out in the annexure to the Directors' Report. In terms of the provisions of Section 219 (1)(b)(iv) of the Companies Act, 1956, the Directors' Report is being sent to all the shareholders of the Bank excluding the aforesaid annexure. The annexure is available for inspection at the Registered Office of the Bank. Any shareholder interested in obtaining a copy of the said annexure may write to the Company Secretary at the Registered Office of the Bank.

DIRECTORS' RESPONSIBILITY STATEMENT

The Directors, based on the representations received from the operational management, confirm in pursuance of Section 217 (2AA) of the Companies Act, 1956, that:

(i) your Bank has, in the preparation of the annual accounts for the year ended 31st March 2008, followed the applicable accounting standards along with proper explanations relating to material departures, if any;

(ii) they have selected such accounting policies and applied them consistently and made judgements and estimates that are reasonable and prudent so as to give a true and fair view of the state of affairs of the Bank as at 31st March 2008 and of the profit of your Bank for the financial year ended 31st March 2008;

(iii) they have taken proper and sufficient care to the best of their knowledge and ability, for the maintenance of adequate accounting records in accordance with the provisions of the Act for safeguarding the assets of the Bank and for preventing and detecting fraud and other irregularities; and

(iv) the annual accounts have been prepared on a going concern basis.

ACKNOWLEDGEMENTS

Your Directors would like to place on record their gratitude for the valuable guidance and support received from the Reserve Bank of India, Securities and Exchange Board of India, Insurance Regulatory and Development Authority and other Government and Regulatory agencies. Your Directors acknowledge the support of the shareholders and also wish to place on record their appreciation of employees for their commendable efforts, teamwork and professionalism.

For and on behalf of the Board of Directors

Dr. Shankar AcharyaMumbai, 9th May 2008. Chairman

MANAGEMENT DISCUSSION AND ANALYSIS

MACRO-ECONOMIC AND INDUSTRY DEVELOPMENTS:

India continued to grow at a rapid pace in 2007-08, albeit slightly slower than in the previous financial year. The advance estimates from the Central Statistical Organization placed the rise in GDP for 2007-08 at 8.7%, compared to a rise of 9.6% in 2006-07. Agriculture and allied activities clocked a growth of 2.6% in 2007-08 (3.8% in the last year) while industry GDP slowed to 8.6% in 2007-08 (10.6% in 2006-07). Services sector grew by 10.6% in 2007-08 as against 11.2% a year ago.

The Index of Industrial Production (IIP) rose by 8.7% in April-February 2007-08 as against 11.2% a year ago. The growth in output of the manufacturing sector was at 9.1% in the first 11 months of FY08, slower than 12.2% recorded in the same period last year. The industry groups that registered slower growth in 2007-08 were textiles, paper and products, non-metallic mineral products and transport equipments and parts. On the other hand, while mining grew by 5.1% (5.0% last year), electricity generation rose by 6.6% (7.2% last year).

In terms of the use-based classification of industries, capital goods production continued to expand at a rapid pace, rising 17.5% in April-February 2007-08 on top of a rise of 18.3% a year ago. The basic, intermediate and consumer non-durable goods segments recorded lower growths of 7.4%, 9.2% and 8.9%, respectively, as against 10.1%, 11.7% and 9.5% a year ago. On the other hand, the production of consumer durables declined by 1% compared to a rise of 9.7% a year ago, mostly a result of the monetary policy tightening and the consequent hardening of interest rates during 2007-08.

The above indicates that aggregate demand conditions were dominated by investment spending in 2007-08. Real private final consumption expenditure rose by 6.8% compared to 7.1% in the previous year while its share in GDP in nominal terms declined from 55.5% to 55.8% at current market prices. On the other hand, real gross fixed capital formation increased by 15.7% compared to 15.1% in the previous year with the corresponding share in GDP in nominal terms increasing from 32.5% in 2006-07 to 34.6% in 2007-08.

The overall moderation in real sector activity was also reflected in the monetary and banking developments of 2007-08. Non-food credit growth moderated to 22.3%, much lower than 28.5% in the previous year. The incremental non-food credit-deposit ratio for the banking system dropped to 72.3% in 2007-08 from 83.2% in 2006-07, 109.3% in 2005-06 and 130% in 2004-05. Data on sectoral deployment of bank credit available till February 2008 indicates a gradual deceleration in housing and real estate loans to 12.0% (25.8% last year) and 26.7% (79% last year) respectively. On the other hand, there was a sizeable increase in loans to areas such as infrastructure, food processing and engineering.

Reserve money increased by 30.9%, much higher than 23.7% in the previous year. Among the sources of reserve money, the Reserve Bank's foreign currency assets (adjusted for revaluation) increased sharply by Rs. 3,70,550 crore as compared with the increase of Rs. 1,64,601 crore in the previous year. RBI used a combination of LAF, Market Stabilization Scheme and CRR increases (raised by 150 bps in 2007-08) to moderate the huge surge in rupee liquidity resulting out of dollar buying by the RBI to prevent a significant appreciation in the Indian Rupee against the USD. Consequent to the use of instruments to moderate rupee liquidity, the growth in the Money Supply (M3) was restricted to 20.7% in 2007-08 as against 21.5% rise in 2006-07.

Inflation flared near to the close of FY08 to end the year at 7.4% compared to 5.9% at end-March 2007. This was despite WPI inflation declining from 6.4% in the beginning of FY08 to a low of 3.1% in mid-October 2007. The average WPI inflation for 2007-08 was at 4.7% compared to the average of 5.4% in 2006-07. WPI inflation surged from around mid-February 2008 due to a sharp increase in the prices of food articles and non-food articles such as cotton and oilseeds on the primary side. On the manufactured articles side, a sharp rise in prices was evident in edible oils, oil cakes, basic metals, alloys and metal products and heavy inorganic chemicals. Despite the average price of the Indian basket of international crude oil increasing by 27.6% in 2007-08, domestic retail prices of petrol and diesel were revised up only once in 2007-08 in February 2008. Indian inflation was thus anyways repressed to a large extent by administrative measures. Ex-fuel inflation (a measure for core inflation) ended 2007-08 at 7.6% compared to 7.4% a year ago.

Despite a moderation in growth, the Indian economy's performance was commendable given the sharply lower growth in the rest of the world (the US economy is already thought to be exhibiting recessionary trends) and also against the backdrop of the global financial markets witnessing turbulent conditions. The genesis of the crisis in the global financial markets was the sharp rise in defaults on US sub-prime mortgages as US housing prices started to correct sharply lower. This deepened over the course of 2007-08 and spilled over to other asset categories. On the other hand, confidence between players in the financial markets waned and the uncertainties of the situation led to a seizing of the credit markets, leading to a very sharp increase in the short-term money market rates. In August 2007, central banks in US and other affected economies injected liquidity in various ways to stabilize the inter-bank market. Important among these measures were an enhancement in the type of securities against which the banks could borrow, including the mortgage back securities.

The significant volatility of the global financial markets, unlike previous occasions, failed to translate in a too-severe impact on the financial markets in the Emerging Market Economies (EME). Between end-October 2007 and January 23 2008, the MSCI developed markets index declined by 17% while the equity markets in the EMEs recorded gains in most part of 2007-08 though with sharp intermittent corrections. However, some pronounced weakness in the EME equity markets was witnessed from January 2008 as risk aversion took over and earning expectations reduced. Overall in end-March 2007 to end-March 2008, the MSCI emerging market index rose by 18.9% but the MSCI developed markets index fell by 5.1%.

The Indian equity market witnessed large swings in 2007-08 with the BSE Sensex increasing by 19.7% to 15,644 at end-March 2008 but with the intra-year peak at 20,873. Sound macroeconomic fundamentals, increase in corporate profitability and foreign fund inflows through the FIIs could be some of the reasons for the general positive sentiments that prevailed in the Indian equity markets.

On the other hand, 2007-08 saw alternating ease and tightness in rupee liquidity conditions. To a large extent these fluctuations were conditioned by policy changes by the monetary authority. On a net basis, average daily LAF repo injections stood at Rs. 4,568 crore in Q1, 2007-08 and increased to Rs. 13,472 crore in Q2 but dropped significantly to Rs. 7,820 crore in Q3 and further to Rs. 2,116 crore in the last quarter. The above alternating rupee liquidity conditions also implied that the overnight money market rates swung between the lower and the upper end of the LAF corridor. The weighted average call market rates declined from 8.33% in April 2007 to 0.73% in July 2007 on account of a ceiling of Rs. 3,000 crore placed on daily Reverse Repo from March 5, 2007. However, once this ceiling was removed, the overnight money market rate moved up in August but broadly stayed within the LAF corridor till December 2007. Liquidity conditions tightened in the 4th quarter and overnight money market rates moved above the Repo Rate in the last fortnight of February and in March 2008. The CBLO rates and the market repo rates moved in tandem with the overnight money market rates.

The interest rates offered by the PSU banks on deposits for greater than 1 year tenor moved from the range of 7.25-9.50% in March 2007 to 8.00-9.25% in March 2008, while deposit rates for shorter term deposits of upto 1 year maturity moved lower from 2.75-8.75% to 2.75-8.50% in the same period. Private Sector banks increased interest rates for long-term deposits of > 1 year maturity from 6.75-9.75% to 7.25-9.75% in the above period. On the lending side, the benchmark PLR of PSU banks increased by 75 bps from a range of 12.25-12.75% to 12.25-13.50% in 2007-08. The private sector banks increased their BPLR from a range of 12.00-16.50% to 13.00-16.50% in the same period. The range of BPLRs for foreign banks, however, remained unchanged at 10.00-15.50%. The median lending rates for term loans (at which maximum business is contracted) in respect of PSU banks moved from a range of 9.13-12.50% in March 2007 to 10.00-13.00% by March 2008.

In the G-Sec market, primary market yields of 91-day, 182-day and 364-day T-bills softened in 2007-08, declining by 63-84 bps to 7.23%, 7.36% and 7.35% respectively by end-March 2008. In the secondary market, G-Sec yield with 1-year residual maturity declined from 7.55% at end-March 2007 to 7.49% in March 2008. The yield on G-Sec with 10-year residual maturity declined marginally from 7.97% in March 2007 to 7.93% in March 2008. Consequently, the yield spread between 10-year and 1-year G-sec increased from 42 bps at end-March 2007 to 44 bps at end-March 2008.

The positive development on the external front included a sharp increase in the net capital inflows through Foreign Direct Investments, FII flows to equity markets, short-term credit as also through External Commercial Borrowings. The inflows on the capital account side were more than enough to accommodate a significant rise in the trade deficit for 2007-08 to USD 80 billion compared to around USD 59 billion in 2006-07, thereby leading to a total accretion to foreign currency reserves of the RBI at around USD 110 billion (including valuation changes) for 2007-08.

The Indian foreign exchange market witnessed generally orderly conditions in 2007-08 with the exchange rate exhibiting two-way movements. The exchange rate of the Rupee against the USD was at Rs. 43.59 at end-March 2007 and appreciated by 5.6% to Rs. 41.29 at end-April 2007 and further to Rs. 39.27 by January 8, 2008. In the subsequent period the exchange rate depreciated, easing to Rs. 39.97 per USD by end-March 2008. The Rupee-Euro exchange rate depreciated from Rs. 58.14 at end-March 2007 to Rs. 63.09 by end-March 2008. Overall, during 2007-08, the Rupee appreciated by 9.1% against the USD and by 7.5% against Pound Sterling but depreciated by 7.7% against the Japanese Yen and by 7.8% against the Euro.

Source: 'Macroeconomic and Monetary Developments in 2007-08' published by RBI on April 29, 2008

CONSOLIDATED FINANCIAL PERFORMANCE

Overview

The Bank along with its subsidiaries continues to grow and this year saw the Bank and the subsidiaries progressing well in terms of reach, customer acquisition, addition of employees and improving its market position in the various new businesses. The Group continues to invest significantly in building two of its key businesses - branch banking and retail liabilities, and life insurance. As on March 31, 2008, the Group employed around 20,000 people (10,800 people as on March 31, 2007) in its various businesses and has a distribution network of branches, franchisees, representative offices and satellite offices across 370 cities and towns in India and offices in New York, London, San Francisco, Dubai, Mauritius and Singapore. The Group services around 4.4 million customer accounts.

During the year Kotak Mahindra Bank was in the Top 5 for Corporate Governance amongst companies by technical criteria in the IR Global Rankings 2008 for the Asia Pacific / Africa region and Kotak's Investor Relation website was adjudged the most voted company in Asia Pacific / Africa by IR Global Rankings 2008 in five categories: Corporate Governance Practices, Financial Disclosure Procedures, IR Team, IR Program and IR Website.

Kotak Mahindra Bank completed 5 years as a scheduled commercial bank in 2007-08. The Bank opened its 150th branch in January 2008. As on March 31, 2008, the Bank has built a network of 178 full fledged branches spread across 109 cities and towns and had 313 ATMs. The Bank proposes to open another 100 branches in the next year.

Kotak Mahindra Capital Company and Kotak Securities continued to report good financial performance on the back of strong capital markets and the robust overall economic growth.

The life insurance subsidiary, Kotak Mahindra Old Mutual Life Insurance continued its growth momentum but posted an accounting loss.

Assets under management (AUM) as on March 31, 2008 was over Rs. 36,500 crore comprising assets managed and advised by the Group. Of the above AUM, equity assets managed / advised by the Group as on March 31, 2008 were around Rs. 23,970 crore. AUM of Kotak Mahindra Mutual Fund (Kotak Mutual) was over Rs. 16,100 crore as on March 31, 2008.

The stressed assets portfolio acquired from other banks/ NBFCs was Rs. 677 crore with principal outstanding of over Rs. 4,100 crore as on March 31, 2008.

In October 2007, the Bank raised Rs. 1,615 crore (approximately USD 410 million) by allotting 1,70,00,000 equity shares through a Qualified Institutional Placement (QIP). The QIP issue was priced at Rs. 950 per equity share.

Consolidated Financials

The consolidated financial performance of the Bank for the year ended March 31, 2008 including key ratios is summarized below:

Rs. crore

Income and Profit 2007-08 2006-07 Growth %

Total income * 7,549.39 4,293.95 76%

Operating profit 1,770.94 931.19 90%

Consolidated Profitafter tax (PAT) 991.23 538.24 84%

* Brokerage income is considered net of sub-brokerage

Rs. croreKey Financial Indicators 2007-08 2006-07Consolidated

Net worth after minority interest(Rs. crore) 5,823.91 3,233.02

Earnings per share (diluted) (Rs.) 29.18 16.47

Book value per share (Rs.) 168.97 99.12

Net Interest Margins (NIMs) % 5.6% 5.2%

Return on Average Net Worth %(Rs.) 22.3% 19.6%

Net NPA % excluding stressed assetsportfolio 0.33% 0.17%

Consolidated capital adequacy ratio (%) 20.2% 15.6%

Consolidated profit after tax (after minority interest and share of profit in associates) was up 84% to Rs. 991.23 crore for 2007-08 from Rs. 538.24 crore in 2006-07 on account of strong growth shown by Bank, car finance business, investment banking and securities broking,

For 2007-08 the consolidated earnings per share was Rs. 29.18 (Rs. 16.47 for 2006-07). The consolidated book value per share was Rs. 168.97 as on March 31, 2008 (Rs. 99.12 as on March 31, 2007).

The consolidated total income was Rs. 7,549.39 crore up 76% during 2007-08. Other income grew 69% from Rs. 2,311.92 crore in 2006-07 to Rs. 3,901.10 crore in 2007-08. Consolidated 'other income' had three main components: Commission, fees, exchange & brokerage, profit-on-sale of investments and premium on life insurance business. Commission, fees, exchange & brokerage net of sub brokerage increased by 59% to Rs. 1,676.29 crore in FY08 from Rs. 1,052.77 crore in FY07, with key growth drivers being fee income from the stock broking business, asset management/ advisory fees and investment banking. Premium income from life insurance business grew by over 75% to Rs. 1,661.99 crore reflecting significant momentum in the business.

Operating expenses other than policy holders reserves increased from Rs. 1,803.75 crore in 2006-07 to Rs. 2,929.22 crore in 2007-08, driven primarily by an increase in employee costs by 74% from Rs. 688.08 crore to Rs. 1,197.89 crore, expenses pertaining to rent taxes & lighting by 83% to Rs. 150.54 crore and the expenses pertaining to advertisement, publicity and promotion by 79% from Rs. 72.22 crore in 2006-07 to Rs. 129.26 crore in 2007-08.

Consolidated advances were up 41% from Rs. 15,573.44 crore as on March 31, 2007 to Rs. 21,984.68 crore as on March 31, 2008. As on March 31, 2008, consolidated net NPAs were 0.33% of net advances (0.17% as on March 31, 2007) excluding stressed assets portfolio. The breakup of the consolidated advances is given below:

Rs. croreAdvances March 31, March 31, Growth % 2008 2007Commercial Vehicles &Construction Equipments 3,628.51 2,578.07 41%Auto Loans 4,735.36 3,610.79 31%Personal Loans 3,112.65 1,976.29 58%Home Loans 2,639.98 1,753.32 51%Corporate Banking 2,386.69 2,378.49 -Agriculture Finance 1,664.25 677.63 146%Stressed Assets Portfolio 549.63 512.30 7%Others 3,267.60 2,086.55 57%Total Advances 21,984.68 15,573.44 41%

BANK AND ITS KEY SUBSIDIARIES: FINANCIAL AND OPERATING PERFORMANCE

The Bank along with its subsidiaries, offers wide range of financial products and services to its customers. The key businesses are commercial banking, investment banking, stock broking, car finance, asset management and life insurance.

Kotak Mahindra Bank (Commercial Banking)

Kotak Mahindra Bank completed 5 full years of operation as a commercial bank in 2007-08. The Bank is the central platform for customer relationships across the Group. The banking business model is directed towards maximising revenue generation from customers by offering a wide range of products and services to address all their banking needs.

The Bank has five broad business segments:

* Lending* Retail liabilities* Corporate banking (including small and medium enterprises - SME)* Treasury and investments* Venture fund management (up to September 30, 2007)

The profit before tax of the Bank after taking a provision of Rs. 86 crore towards stressed cases in forex derivatives for 2007-08 was Rs. 397.78 crore up 96% as compared to Rs. 203.25 crore in 2006-07. The profit after tax of the Bank was up 108% to Rs. 293.93 crore as compared to Rs. 141.37 crore in 2006-07.

From the year ended 31st March, 2008, the Bank has adopted RBI's revised guidelines issued in April 2007 on segment reporting, however In order to facilitate comparison, given below is the summary of the operating segments of the Bank for the year ended 31st March, 2007 in accordance with Accounting Standard 17 (AS-17) on Segment Reporting issued by the Institute of Chartered Accountants of India & the comparative numbers for the year ended 31st March, 2008: Rs. crore

Segmental Results 2007-08 2006-07 Growth %

Lending 339.95 112.41 202%Corporate Banking 202.64 101.65 99%Retail liabilities (146.68) (42.33) -Treasury and investments (5.83) 23.61 -Venture Fund Management 2.92 7.88 -Un-allocable revenue (net) 4.78 0.03 -Profit before tax 397.78 203.25 96%Profit after tax 293.93 141.37 108%

The capital adequacy of the Bank as on March 31, 2008 was 18.65% (Previous year 13.46 %). Tier I ratio was 14.46% (Previous year 8.81%).

The advances of the Bank as on March 31, 2008, stood at Rs. 15,552.22 crore up 42% YoY. As on March 31, 2008, the net NPAs of the Bank were at 0.38% of net advances excluding stressed assets portfolio (0.18% of net advances excluding stressed assets portfolio as on March 31, 2007). The Net NPAs of the Bank including stressed assets portfolio were at 1.78% (1.98% of net advances excluding stressed assets portfolio as on March 31, 2007).

As on March 31, 2008, the deposits of the Bank increased by 49% to Rs. 16,423.65 crore as compared to Rs. 11,000.09 crore as on March 31, 2007. Excluding the monies held as collection bankers, the deposits of the Bank increased by 56% to Rs. 16,004.80 crore as compared to Rs. 10,251.41 crore as on March 31, 2007.

As on March 31, 2008, total deposits comprised of Rs. 3,152.36 crore of demand deposits (Rs. 2,108.68 crore as on March 31, 2007), Rs. 1,517.54 crore of savings deposits (Rs. 887.70 crore as on March 31, 2007) and Rs. 11,753.74 crore of term deposits (Rs. 8,003.71 crore as on March 31, 2007). The demand and savings deposits as on March 31, 2008 (excluding monies held as collection banker) increased by 89% to Rs. 4,251.06 crore from Rs. 2,247.70 crore as on March 31, 2007. The Bank had over 7,49,000 deposit accounts as on March 31, 2008 (3,50,000 as on March 31, 2007).

Lending

The Bank continues to leverage its experience in the field of retail lending business and has shown a robust growth in disbursements and advances in this area. The total advances of the Bank increased by 42% from Rs. 10,924.07 crore in 2006-07 to Rs. 15,552.22 crore in 2007-08. The break up of the advances of the Bank is given below:

Rs. crore

Advances March 31, March 31, Growth 2008 2007 %Commercial Vehicles & ConstructionEquipments 3,628.52 2,578.07 41%Personal Loans 2,896.24 1,955.34 48%Home Loans 2,639.98 1,753.32 51%Corporate Banking 2,386.69 2,382.54 -Agriculture Finance 1,664.25 677.63 146%Others 2,336.55 1,577.17 48%Total Advances 15,552.22 10,924.07 42%

Retail and commercial advances grew 54% from Rs. 8,541.53 crore in 2006-07 to Rs. 13,165.53 crore in 2007-08. The Bank has witnessed significant traction in some of the products like home finance, personal loans and agri-finance. The Bank has a widespread geographical distribution network to distribute its retail lending products.

Commercial vehicles & construction equipments advances recorded a growth of 41% to Rs. 3,628.52 crore in 2007-08. Margins continue to be under pressure due to the competitive nature of the industry. However, the Bank has maintained operating economies and delinquency levels comparable to among the best in the industry. Now, commercial vehicles & construction equipments division has become a one stop shop for the needs of transportation industry through the unique set of products to meet their specific requirements.

Saral loans which are essentially targeted at asset backed lending to customers, where organized credit does not reach easily, continued to expand its scope during 2007-08 to prime category of customers through business loans with or without asset backed security.

In 2006-07, personal loans grew by 48% to Rs. 2,896.24 crore and the Bank improved its presence across newer geographies. The Bank had launched home loans in 2003, which has grown 51% YoY to Rs. 2,639.98 crore.

With a view to focus on the agricultural sector, the Bank has a full fledged agri business division which has the required expertise and offers a range of project finance and working capital funding to meet the financing requirements of agricultural machinery, horticultural projects, storage warehouses and farmers implementing new farming techniques. The agriculture finance recorded a growth of 146% to Rs. 1,664.25 crore in 2007-08.

Asset reconstruction business is one of the key focus areas of the Bank, and the Bank has a pre-eminent position in the industry. The asset reconstruction division purchases NPAs from various banks, financial institutions, non-banking finance companies and corporates at prices that it believes are at a significant discount to the recoverable amount. Besides purchasing stressed assets, Kotak Bank also engages in the recovery of NPAs on behalf of other banks, NBFCs and financial institutions and provides advisory services to distressed companies.

The profit before tax for the lending segment grew by more than 200% from Rs. 112.41 crore in 2006-07 to Rs. 339.95 crore in 2007-08.

Retail Liabilities:

As on March 31, 2008, the Bank had 178 full-fledged branches across 109 towns and cities (105 branches across 69 cities as on March 31, 2007) and 313 ATMs.

The Bank offers a very wide range of products and services targeted at retail customers, delivered through a state-of-the-art technology platform. In addition to branch banking, it offers a wide range of products and advisory services from everyday banking to long-term investments which are delivered with a genuine understanding of the specific needs of the customer. The focus is on establishing a wider distribution network and operational efficiency thereby ensuring a controlled and profitable growth in business. In line with the concept of instant banking, the Bank has developed fully integrated free of cost Internet Banking Services with a host of value-added services. Kotak Internet Banking permits transfer of funds to accounts with the Bank as well as other banks across the country through savings and current accounts and complete access to Investment accounts and demat accounts. Kotak Bill Pay - a value added service, offers the convenience of paying over 115 service providers across the country. This includes telephone service providers, insurance, charities and many more.

As part of its platform, Kotak Bank offers depository services that allow customers to hold equity shares, Government securities, bonds and other securities in electronic form or DMAT form. Kotak Bank offers certified gold coins and bars, locker facilities, home banking, telephone banking, mobile banking, internet banking, SMS banking, direct pay services for online payments and debit cards, which are aided by a toll free, multi-product and multi-service contact centre that allows customers ease of accessing various products made available through Kotak Bank.

Kotak Bank offers home banking services to its customers which allows a customer to have cash or instruments picked up or delivered to the customer. Kotak Bank was among the first banks in India to offer home banking services. Kotak Bank also offers beat services which provides customers the facility of predefining the services and the time at which such services are required and unlike in home banking services the customer does not need to call Kotak Bank on need. Kotak Bank also has customised offerings for its corporate salary customers under the office banking services.

Kotak Bank's online platform also offers a number of services and payment solutions. The online trading platform of Kotak Bank is integrated with Kotak Securities. Kotak Bank also offers an online remittance service for non-resident Indians, called Funds to Home', along with other remittance services.

The retail liabilities segment reported a loss of Rs. 146.68 crore in 2007-08 as compared to a loss of Rs. 42.33 crore in 2006-07. The Bank continues to invest in this segment and expand its branch network with the objective of building a long-term, low-cost and stable deposit base.

The Bank proposes to have around 275 full-fledged branches by next year.

Corporate Banking

Kotak Bank's corporate banking revenues are derived from loan products and other value-added services offered by Kotak Bank to large and medium-sized corporations, financial institutions and public sector undertakings. These products include working capital facilities, medium-term financing, trade

services, transaction banking, fixed-income and foreign exchange services, as well as cash management services and the distribution of third party products.

The Bank offers the entire range of debt and fixed-income products with a team of experienced and highly qualified professionals who structure products to suit the dynamic and varied needs of customers across segments. The Bank's strength lies in its ability to customise instruments & structures, develop innovative products and then deliver these through high level of execution capabilities and a wide distribution network across the country.

The Bank's strategy in this business is to align the resources with the sectors where it can deliver value-added financial advisory solutions to the clients. The focus is on orientation of all organisational silos to customer service through greater cross-functional synergies. The Bank has managed to improvise the solutions approach' to meet varied needs of the clients.

In spite of intense competition, the Bank witnessed a significant growth in corporate bank advances (including SME). The profit before tax for the Corporate Banking segment was up 99% from Rs. 101.65 crore in 2006-07 to Rs. 202.64 crore in 2007-08.

Treasury

Global financial markets witnessed significant volatilities in 2007-08, precipitated mainly by the emergence of sub-prime mortgage crisis in the US. Credit markets were in the danger of seizing up and major central banks injected liquidity in a collaborated manner. As the risks to economic growth increased, US Federal Reserve Board started to reduce the Fed Funds Target Rate in September 2007. Bank of England and Bank of Canada reduced policy rates in December 2007. In contrast, economies such as China and India faced pressures of foreign capital flows and maintained a tight monetary policy. The RBI increased the Repo Rate by 25 bps to 7.75% on 3rd April 2007 and also increased CRR from 6.50% to 7.50% in August and November 2007. Market Stabilization Scheme was used to a significant extent in 2007-08 to moderate rupee liquidity.

Consequently, 2007-08 saw alternating ease and tightness in rupee liquidity conditions dependant on policy changes of the RBI. On a net basis, average daily LAF repo injections stood at Rs. 4,568 crore in Q1, 2007-08 and increased to Rs. 13,472 crore in Q2 but dropped significantly to Rs. 7,820 crore in Q3 and further to Rs. 2,116 crore in Q4. Overnight money market rates swung between the lower and the upper end of the LAF corridor to reflect the conditions on rupee liquidity. The weighted average call market rates declined from 8.33% in April 2007 to 0.73% in July 2007 on account of a ceiling of Rs. 3,000 crore placed on daily Reverse Repo from March 5, 2007. However, once this ceiling was removed, the call money rate moved up in August and broadly stayed within the LAF corridor till December 2007. Liquidity conditions tightened in the Q4 and overnight money market rates moved above the Repo Rate in the last fortnight of February and in March 2008. The CBLO rates and the market Repo Rates moved in tandem with the overnight money market rates.

In the G-Sec market, primary market yields of 91-day, 182-day and 364-day T-bills softened in 2007-08, declining by 63-84 bps to 7.23%, 7.36% and 7.35% respectively by end-March 2008. In the secondary market, G-Sec yield with 1-year residual maturity declined from 7.55% at end-March 2007 to 7.49% in March 2008. The yield on G-Sec with 10-year residual maturity declined marginally from 7.97% in March 2007 to 7.93% in March 2008. Consequently, the yield spread between 10-year and 1-year G-sec increased from 42 bps at end-March 2007 to 44 bps at end-March 2008.

A sharp rise was witnessed in net capital inflows through FDI, FII flows to equity markets, short-term credit and through ECBs. These inflows were more than enough to accommodate a trade deficit of the size of USD 80 billion. The accretion to FX reserves of RBI was at USD 110 billion (including valuation changes) in 2007-08. The Indian rupee exhibited two-way movements in 2007-08. Rupee was at Rs. 43.59 per USD at end-March 2007 and appreciated by 5.6% to Rs. 41.29 by end-April 2007 and further to Rs. 39.27 by January 8, 2008. The Rupee depreciated thereafter to Rs. 39.97 per USD by end-March 2008. The Rupee-Euro exchange rate depreciated from Rs. 58.14 at end-March 2007 to Rs. 63.09 by end-March 2008. Overall, in 2007-08, the Rupee appreciated by 9.1% against USD and by 7.5% against Pound Sterling but depreciated by 7.7% against the Japanese Yen and by 7.8% against the Euro.

The Bank Treasury continued its endeavour of diversifying revenue sources. Bullion desk and Custodial services consolidated its operation during the year and contributed towards treasury revenues.

Venture Fund Management

The Bank has co-sponsored Kotak SEAF India Fund which has been set up as a Trust registered with the Securities and Exchange Board of India (SEBI) as a Venture Capital Fund. India Growth Fund (the Fund) was set up as a unit scheme of Kotak SEAF India Fund. The Private Equity division has an experienced investment management team with a successful track record in the venture capital industry. With effect from October 1, 2007 the investment management function for private equity funds has been assigned by the Bank to Kotak Investment Advisors Limited (erstwhile Kotak Mahindra Securities Limited), which is 100% beneficially owned by Bank.

Kotak Mahindra Capital Company(Investment Banking)

Kotak Mahindra Capital Company (KMCC) primarily operates as a full service Investment Bank. KMCC is also a trading cum Clearing Member of the National Stock Exchange on all three segments viz. Cash, F&O and WDM. KMCC has two main segments of business (a) Advisory and Transactional Services (b) Trading and Principal Investments.

Rs. croreSegment Results 2007-08 2006-07 Growth %

Advisory and Transactional Services 160.36 64.72 148%Trading and Principal Investments 13.55 28.58 -Add Unallocated Income 1.58 0.60 -Less Unallocated expenses 0.30 - -Profit before tax 175.19 93.90 175%Profit after tax 115.31 67.88 70%

The year under review saw KMCC regaining its top slot for IPOs in India with a market share of 79% in a market which saw 85 IPOs (previous year 76) worth Rs. 41,358 crores. KMCC also retained its number one position in QIPs (including Government divestments) for the third year in a row with a market share of 58% of the total value of issuances. Notable deals where Kotak Investment Banking played the book runner role were:

IPOs

* Rs. 10,123 crore Reliance Power

* Rs. 9,188 crore DLF

* Rs. 2,984 crore Power Grid

* Rs. 1,771 crore Mundra Port & Special Economic Zone Ltd.

* Rs. 1,708 crore HDIL

* Rs. 856 crore Purvankara Projects

* Kotak Mahindra Bank Limited VIII

* Rs. 816 crore Central Bank of India

* Rs. 778 crore IVR Prime Urban Developers Ltd.

* Rs. 692 crore Edelweiss Capital Ltd.

* Rs. 494 crore Fortis Healthcare Ltd.

* Rs. 491 crore Future Capital Holdings Ltd.

* Rs. 439 crore BGR Energy Systems Ltd.

QIPs

* Rs. 3,966 crore GMR Infrastructure Ltd.

* Rs. 2,100 crore IDFC Ltd.

* Rs. 1,615 crore Kotak Mahindra Bank Ltd.

* Rs. 1,360 crore Bank of India

* Rs. 1,221 crore GVK Power & Infrastructure Ltd.

* Rs. 1,200 crore PTC India Ltd.

* Rs. 814 crore Punj Lloyd Ltd.

KMCC was also awarded the 'Best Investment Bank' in the domestic category in India by Finance Asia for the second year in a row. KMCC also successfully completed the divestment of the Government stake in Maruti Udyog Limited valued at USD 582 million through an innovative French auction sale. KMCC helped corporates raise over ~USD 1,600 million of private equity funding with 18% market share.

During the year 2007-08, Kotak Investment Banking was very active in the M&A space and was ranked no. 1 in the India Advisory Partners League Tables for India Deals and ranked no. 4 in the Bloomberg M&A Financial Advisory League Tables for India Announced deals with a 22.9% market share. Some of the notable deals where KMCC was exclusive Financial Advisor were :

* SREI Infrastructure Finance Limited - Joint venture with BNP Paribas Leasing Group in a transaction valued at approx USD 190 million

* Gokaldas Exports sale of 50.1% stake to Blackstone and consequential open offer in a transaction with a aggregate value of USD 165 million

* Nagarjuna Construction Company Limited - Private Placement of Shares to Blackstone for USD 150 million

* Kotak Investment Banking was Financial Advisor to the Sheth Family in restructuring their shareholding in Great Offshore Limited in a transaction valued at approx USD 145 million

* Apollo Hospitals Enterprise Limited - Private placement of shares to Apax Partners for USD 104 million

* Pioneer Asset Management Company Limited Joint Venture with BOB AMC

* CAMS - sale of 30% equity stake to Private Equity investor Advent International

* Mahindra & Mahindra - merger of all its forging entities into Mahindra Forgings Limited creating the 2nd largest forging company in India.

* Wadhawan Retail - acquisition of 'Sabka Bazaar' and 'Home Store' chains of retail operations

* Private Equity Placement of Luminous Power Technologies Limited

* The following deals were announced and are expected to close in the first quarter of FY 09.

* CRH Plc - acquisition of MyHome Industries for a transaction value of Rs. 1,850 crore

* Thomas Cook- acquisition of Thomas Cook (India) & Thomas Cook Egypt etc for a transaction value of Rs. 1,500 crore.

KMCC has a healthy pipeline of mandates in various sectors for both equity offerings and Mergers & Acquisitions which are expected to be closed in 2008-09.

Kotak Securities (Stock broking)

Kotak Securities (KS) is India's leading stock broking company and accounted for 7.3% of total average daily market volumes in 2007-08 (9.0% in2006-07).

Whereas the year 2006-07 was an historic year for the Indian economy, as the benchmark BSE Sensex crossed the 14,800 mark, the year 2007-08, saw the benchmark BSE Sensex crossing the 21,200 mark on 10th January, 2008. Similarly the benchmark Nifty which had touched the year's high of 4,200 in 2006-07 crossed the 6,300 mark in the year 2007-08.

KS clocked average daily volumes of over Rs. 5,300 crore during FY08 as compared to around Rs. 3,700 crore during FY07.

Rs. croreParticulars 2007-08 2006-07 Growth

Total Income 1,330.03 833.93 59%Profit before Tax 580.21 365.12 59%Profit after Tax 408.69 255.71 60%

The profit after tax grew by 60% YoY to Rs. 408.69 crore in 2007-08. The growth was achieved due to increased volumes.

As on March 31, 2008, in the retail segment, KS had around 4,30,000 secondary market customers and serviced them through a network of 870 offices (own and franchised) across 309 cities.

The online trading portal continued to do well. A number of new schemes and products for online customers were launched. The number of online registered customers as on March 31, 2008 was in excess of 1,60,000. The online volumes continued to grow and crossed the Rs. 1,400 crore mark in the year 2007-08.

In the Portfolio Management Services (PMS), two of the close-ended schemes launched in earlier years matured in 2007-08. KS continues to focus on increasing product offerings and improving service standards.

The buoyant capital markets saw the number of primary market issues increasing over the last year. KS participated in the distribution of 90 public offer issues, mobilizing in excess of Rs. 73,200 crore in the retail segment itself.

KS's institutional equities division has made steady growth during the year. This was achieved through a larger customer base and servicing of global and domestic asset managers. Kotak Institutional Equities strives to provide high quality fundamental equity research and globally compliant execution service to clients. It has a strong research team with wide research coverage of over 130 companies. Kotak Institutional Equities clientele includes Foreign Institutional Investors, Financial Institutions, Banks, Mutual Funds and Insurance companies. Significant focus on Futures & Options segment contributed substantially to the revenue growth and market share.

Kotak Mahindra Prime Limited

(Car finance, Other lending)

Kotak Mahindra Prime Limited (KMP) is into car finance, engaged in financing of retail customers of passenger cars and multi-utility vehicles and inventory and term funding to car dealers.The Company finances new and used cars under retail loan, hire purchase and lease contracts. In addition to car finance, KMP also carries out other lending activities.

During 2007-08, KMP's gross advances crossed Rs. 5,900 crore mark recording an increase of 44% as compared to FY07.

FY08 witnessed volatile interest and increased interest rates being charged to the car finance customer. The pressure continued on maintaining the margins in the retail car finance business. KMP continued to focus on control over cost and credit losses, while maintaining its positioning in the car finance market. KMP also maintained its good relationships across car manufacturers, dealers and channel partners in the country.

Rs. croreParticulars 2007-08 2006-07 Growth

Total Income 739.97 443.63 67%Profit before tax 154.63 84.25 84%Profit after tax 100.62 57.34 75%

The passenger car market in India saw a growth of 11% for financial year 2007-08 as compared to a growth of 21% for 2006-07. Total unit sales of cars and MUV's crossed 15.18 lac units in financial year 2007-08. The car market has grown at a rapid pace due to robust economic growth, launch of new and improved models and stable automotive prices.

KMP has, carved out a niche for itself in the car-financing segment focusing on distribution and relationship management across manufacturers, dealers, channel partners and customers. Fee based income is an important initiative of KMP. Dedicated infrastructure is in place to give a further impetus to the growth of fee based income with a twin objective of offering value added services to customers and leveraging the large existing customer database to generate further fee based income.

Customer knowledge, easy accessibility through its wide network of branches and a firm commitment to deliver superior customer service are key drivers for KMP's performance.

KOTAK MAhINDRA ASSET MANAGEMENT COMPANY LIMITED KOTAK MAhINDRA TRUSTEE COMPANY LIMITED

(Mutual Fund)

Kotak Mahindra Asset Management Company Limited (KMAMC) and Kotak Mahindra Trustee Company Limited (KMTC) are wholly owned subsidiaries of Kotak Mahindra Bank. KMAMC is the asset manager of Kotak Mahindra Mutual Fund (KMMF) and KMTC is the trustee company.

Indian mutual funds industry is evolving, in terms of breadth and depth. It is broadening in terms of total number of investors it is catering to and deepening in terms of its product offering and investment and distribution practices.

The following is the list of policy level changes effected during 2007-2008 that had an influence on the mutual funds industry:

* With effect from April 16, 2007, guidelines have been introduced for parking of funds in short term deposits of scheduled commercial banks, pending deployment.

* With effect from July 2, 2007, Permanent Account Number (PAN) would be the sole identification number for all participants transacting in the securities market irrespective of the amount of transaction with a view to strengthen Know Your Client (KYC) norms, identify every participant in the securities market and ensure a sound audit trail.

* The applicable limits for overseas investments by mutual funds has been increased to USD 7 billion subject to a maximum of USD 300 million per mutual fund. The overall ceiling for investment in overseas exchange traded funds that invest in securities has been limited to USD 1 billion subject to a maximum of USD 50 million per mutual fund.

* With effect from January 4, 2008, No entry load will be charged for direct applications received by an asset management company either through the internet, submitted to the asset management company or collection centre/investor services centre which are not routed through any distributor/ broker.

* With effect from January 31, 2008, the provision of charging initial issue expense and amortization of the same has been removed. All mutual fund schemes shall meet the sales, marketing and other such expenses connected with sales and distribution of schemes only from the entry load.

The Average Assets under Management (AAUM) for the year 2007-2008 was Rs. 19,739 Crores, as compared to Rs. 12,829 crores for the year 2006-2007 a growth of 54%. The number of folios as on March 31, 2008 was about 9.40 lakhs as compared to about 5.36 lakhs as of March 31, 2007, a growth of 75%.

The year saw the launch of several new schemes and facilities, increased distribution reach and market expansion. During the year under review, the mainstream debt schemes of the Fund continued their satisfactory performance. Debt schemes of Kotak Mahindra Mutual Fund won awards at the ICRA Mutual Fund Awards 2008. Kotak Bond Short Term was ranked 7-star and has been awarded the Gold Award for Best Performance in the category of open-ended debt -short term for one year as well as 3 year period ending December 31, 2007. Kotak Flexi Debt was ranked 5 Star - indicating performance among the top 10% in the category of open ended liquid plus for three year period ending December 31, 2007. Kotak Floater Long Term was ranked 5 star fund - indicating performance among the top 10% in the category of Open Ended Floating Rate Fund for one year period ending December 31, 2007.

The debt schemes managed by Kotak Mahindra Mutual Funds have received over 14 Performance awards over the past eight years from CNBC, CRISIL, OUTLOOK MONEY, ICRA online and Lipper Fund Awards.

Kotak Mutual Fund was also adjudged the Best Debt Fund House at Outlook Money Awards 2007.

The performance of the diversified equity schemes remained satisfactory with Kotak Opportunities showing commendable performance. Kotak Opportunities was rated 5 Star by value research as on 31st March 2008. It was also ranked 56th in the Lipper's list of worlds 100 top performing stock funds of 2007 out of a set of 24, 887 funds tracked by it. During the year under review, Kotak 30, Kotak Opportunities, Kotak Tax Saver, Kotak Balance paid out dividends.

Rs. crore

KMAMC 2007-08 2006-07 Growth

Total Income 68.08 54.43 25%Profit before tax 2.22 10.60 -Profit after tax 1.03 6.83 -

Rs. croreKMTC 2007-08 2006-07 Growth %

Total Income 10.98 7.35 49%Profit before tax 10.11 6.74 50%Profit after tax 6.89 4.64 48%

The two key growth drivers would be to increase visibility further in metro and non-metro regions and focus on geographic expansion. New product offerings, value added service initiatives and continued focus on fund performance would also hold key to growth.

KOTAK INVESTMENT ADVISORS LIMITED (FORMERLY KOTAK MAHINDRA SECURITIES LIMITED)

(Alternate asset management & advisory)

Demerger and restructuring

During 2006-07, a petition was filed before the Hon'ble High Court of Judicature at Mumbai in respect of a Scheme of Arrangement between the Company (i.e. erstwhile Kotak Mahindra Securities Limited), Kotak Mahindra Capital Company Limited (KMCC) and their respective shareholders and creditors (Scheme) for demerger of undertaking comprising of the Trading and Clearing operations and strategic investments of the Company to KMCC.

Upon receipt of necessary approvals, the demerger was completed on 3rd September, 2007.

The name of the Company was changed from Kotak Mahindra Securities Limited to Kotak Investment Advisors Limited from August 20, 2007. The new name is in consonance with the Company's new main objects and business activity i.e. alternate asset management/ advisory services.

The Group wanted to expand its presence in the alternate asset management business. To facilitate and expedite the same, all alternate asset management / advisory activities of the Group were assigned to Kotak Investment Advisors Limited (KIAL or the Company).

With effect from October 1, 2007, KIAL became the investment manager and advisor for all private equity and realty funds of Kotak Mahindra Group. The Private Equity team (which was earlier functioning as part of Kotak Mahindra Bank Limited ('the Bank')) and the Realty Fund team (which was part of Kotak Mahindra Investments Limited, a subsidiary of the Bank) have move to KIAL.

The aggregate alternate assets managed / advised by the Company as March 31, 2008 was Rs. 5,636 crore (USD 1.4 billion). During 2007-08, the Group raised Rs. 4,471 crore (USD 1.1 billion) as commitments for private equity and realty funds. The funds were primarily raised from the Group's customer base.

Since this business was not carried out in the Company during the previous year the financial results are not comparable.

Rs. croreParticulars 2007-08 2006-07

Total Income 37.81 2.73Profit before tax 20.71 0.60Profit after tax 13.47 0.35

Private Equity Funds

(a) Kotak SEAF India Fund

Kotak SEAF India Fund was formed in August 2004 and is registered with SEBI as a Venture Capital Fund. India Growth Fund (IGF) was set up as a unit scheme of Kotak SEAF India Fund with investors from select institutional and high net worth investors, from both India and abroad, on a private placement basis.

IGF had its final closing in September 2005 with aggregate capital commitments of Rs. 707 crores. IGF has made 15 investments across diversified sectors such as logistics, technology services, retail, media and entertainment, engineering, bio-technology, textiles, aviation, telecom and power infrastructure and financial exchanges.

(b) Kotak India Venture Fund I

Kotak India Venture Fund I (KIVF-I) is a domestic venture capital fund with the investment objective of making investments primarily in companies operating in Biotechnology and Life Sciences sector. KIVF-I held its final closing in July 2007 with a total corpus of Rs. 205 crore. KIVF-I has made three investments till date.

(c) Kotak India Growth Fund II

During the year, Kotak Private Equity Group launched its second growth fund named, Kotak India Growth Fund II (KIGF-II) and KIAL was appointed as the Investment Manager. The investment objective of KIGF-II is to provide long-term capital appreciation to its investors by investing in privately negotiated equity and equity related instruments in mid-sized corporates and working with the managements of such corporates to accelerate their growth. KIGF-II shall target companies with strong management teams and stable cash flows that are seeking capital for their organic and inorganic growth plans.

KIGF-II held its closing on March 27, 2008 with aggregate capital commitments of Rs. 1,749 crore from Kotak Group's customers on a private placement basis.

Realty Funds

(a) Kotak Mahindra Realty Fund

Kotak Mahindra Realty Fund (KMRF) was formed in May 2005 as a trust and registered as a venture capital fund with SEBI.

KMRF is an umbrella trust and the trustees have the power to form various schemes. The primary objective of KMRF is to invest in and provide finance to real estate sector and allied services sectors in India with an intention to generate long-term capital appreciation. Kotak India Real Estate Fund-I (KIREF-I) has been set up as a unit scheme of KMRF. KIREF-I had its final closing in February 2006 with committed contributions of Rs. 458 crore from the domestic, institutional and HNI investors Rs. KIREF-I has drawn down 100% of its commitments and has fully committed its capital (net of expenses and management fees) in 8 investments across various assets classes in the real estate sector. KIREF-I made a part divestment from one of its portfolio investments and distributed Rs. 23.76 crore to its investors. KIREF-I's investments have begun to mature, and KIAL expects to harvest some of the investments over the next couple of years.

(b) Kotak Alternate Opportunities (India) Fund

Kotak Alternate Opportunities (India) Fund (KAOIF) is the second domestic real estate fund of the alternate assets business group set up with an objective of investing in the securities of companies operating in real estate, infrastructure and allied services sectors in India with an intention to provide long-term capital appreciation to its investors. KAOIF held its closing in July 2007 with the aggregate capital commitments of Rs. 1,577 crore from Kotak Group's customers on a private placement basis. KAOIF has drawn down 37% of its corpus and has till date made five investments. KAOIF is a 7-year fund with an option to increase up to two additional one year periods. KAOIF proposes to have a well diversified portfolio of its investments in large integrated residential townships, state-of-the-art IT parks, contemporary shopping mall destinations and hospitality projects.

Apart from acting as investment manager to the above domestic private equity and realty funds, the Company also provides non-binding advisory services to offshore funds managed by Kotak Group's international subsidiaries.

During the next financial year i.e. 2008-09, the Group plans to raise an infrastructure fund from domestic and offshore investors.

Kotak Mahindra Old Mutual Life Insurance

Kotak Mahindra Old Mutual Life Insurance is a 74:26 joint venture between Kotak Mahindra Group & Old Mutual Plc; South Africa Kotak Life Insurance offers life insurance, deferred annuity and employee benefit products to individuals and groups. The business is distributed through three distribution channels viz. Tied Agency, Alternate Channels and Group Insurance. The business is value-driven with a focus on long-term shareholder value and an aspiration to meet policyholder expectations.

Since its inception in 2001, Kotak Life Insurance has been witnessing a steady growth and is expected to continue these upward trends.

Currently the penetration of life insurance in India is 4% (approx) and 3/4th of the insurable population is without life insurance cover. This signifies a huge potential for growth for the insurance industry. And factors like a burgeoning middle & affluent class, rise in disposable income, lack of social security and the governments support through tax benefits have only added to this growth story.

All these factors were favourable to the industry in the year 2007-08, which is reflected in the growth in premium income over last year.

The premium income for the year grew to Rs. 1691.14 crore (previous year Rs. 971.51 crore). During the year, Kotak Life Insurance wrote over 3,13,771 policies (previous year 1,65,203 policies) of adjusted first year annualized premium (single premium weighted at 1/10th) of Rs. 1,051.68 crore (previous year Rs. 572.62 crore), representing a sum assured of Rs. 33,102 crore (previous year Rs. 20,163 crore).

Introduction of new products and focus on service delivery were primary drivers for the growth of the private life insurers during 2007-08. Keeping with our product philosophy of delivering innovative & pragmatic financial solution to our customers, Kotak Life Insurance introduced four new products, targeted at different consumer needs.

(i) Kotak Platinum Advantage Plan - A unique blend of safety and returns, featuring capital protection and embedded investment advice which works to maximize customer's wealth. Features like aggressive market-linked growth options and life cover make this plan a wellrounded financial solution.

(ii) Kotak Eternal Life Plans - Participating whole life plans that provide enhanced protection till the golden age of 99. The plans provide for a high cover at lower premiums, cash lumpsum benefits at desired stage and also the means to care for loved ones in the second innings of life.

(iii) Kotak Surakshit Jeevan - An enhanced protection & long-term savings plan with the assurance of delivering financial independence. This plan keeps pace with the customer's changing needs at every step of life, be it protection for the family or savings for the future.

(iv) Kotak Smart Advantage - This plan offers guaranteed returns on the first year premium and upto 100% premium allocation from second year onwards. This Unit-Linked plan also gives guaranteed bonus additions at regular intervals helping the customer to accumulate wealth systematically, over the long-term.

As of March 31, 2008, Kotak Life Insurance had around 35,000 active life advisors who are continuously being trained to facilitate them to advise customers in a proper manner. As on 31st March, 2008, the Company had 235 corporate agents and 143 empanelled brokers. In addition, the Company also had referral bancassurance tie-ups with 36 co-operative banks during the year under review

Currently, Kotak Life Insurance operates from 150 branches in 109 cities with a primary focus on the mass affluent and affluent population. During the year 76 new branches were opened and this expansion was in second tier cities which offer good opportunity and also provide a window to

Rs. crore

2007-08 2006-07 Growth

Premium income 1,691.14 971.51 74%New Business (Gross) 1,106.62 614.94 80%New Business (APE) 1,051.68 572.62 84%First year regular premium 1,045.57 553.04 89%Deficit 71.81 58.35 -

International Subsidiaries

The Bank has overseas subsidiaries with offices in Mauritius, London, Dubai, Singapore, New York and San Francisco. Kotak Mahindra Inc set up a branch in San Francisco in September 2007.

The overseas subsidiaries are mainly engaged in investment advisory and investment management of funds, management of GDR/FCCB issuances, broker and broker dealer activities as well as investments.

The assets under management through international operations increased from USD 1.4 billion as on March 31, 2007 to USD 2.1 billion as on March 31, 2008 translating to an increase of 26%. During the year under review, the Kotak Mahindra (UK) was appointed Investment Manager to a number of India focussed funds including Kotak India Focus Fund, Kotak Fund - Indian Multicap Fund, Kotak India Concentrated Growth Fund. The Kotak Fund - Indian Multicap Fund will be the principal vehicle for raising funds from European Investors. During the forthcoming year, the international business intends to launch a number of niche asset management products, which shall increase the presence and penetration of the Group in the international markets.

Buoyancy in the Indian capital markets led to an increased activity level during the year. The Company has increased staff levels in the UK, Dubai and Singapore and foresees significant increase in fund flows.

It is expected that sustained investment activity into the Indian Equity markets will result in a substantial increase in the assets under management and this will provide a significant boost to the revenues of the Company.

The Company proposes to shift some of its Investment Management activities to Singapore on receiving permission from the Monetary Authority of Singapore.

Technology

Scaling business volumes in 2007-2008, were ably supported by technology with a concentration on customer service, information security, and, as in previous years, innovation.

New services were launched, and existing services were extended to serve customers better. A new statementing engine provided customers with information across products availed by them. Services such as RTGS and NEFT payments were made available on the internet and through the branches. In addition, to ensure that the customer gets an improved (and similar) experience across the Group, implementation of a common CRM platform was commenced. The first stage of which went live this year, making Kotak the second largest Siebel-CRM installation in India.

The year also saw a launch of an extensive Information Security Program, to strengthen processes and further raise awareness. Continuous patrolling of Kotak websites was instituted, 2-factor authentication for the complete security of our online trading customers was introduced, and the Bank acquired ISO 27001 certification in DC operations & Network operations.

The efficacy of these measures, have been validated by multiple external sources. Kotak Bank received the Asian Banker Summit award for the Best Banking Securities Systems Project, the Best IT Implementation Award for the Security Assurance Program, the Microsoft Security Strategist award for Outstanding Leadership in the field of information security, and the Banking Technology Award 2008 for its security policy & procedures.

Technology innovation was lead by the launch of Mobile Banking Services. The bank architected an operator independent, device independent platform that can be extended to multiple products and launched payment and mutual fund transactions on it.

The Brokerage business launched account information available on mobile phones.

Productivity improvements resulting from workflow automation was a focus for the year. A state of the art product was evaluated and procured, to be implemented across the Group. The life insurance business proved the business benefits of workflow automation, with enhancements that resulted in straight through processing proposals increasing from 32% to 50%, and total processing time decreasing from 4 hours to 2 hours per proposal.

The strategy of integrated technology platforms, to provide synergies across the Kotak Group was extended during the year. 13 entities of the Kotak Group migrated to a common General Ledger system, and the Anti-Money Laundering solution already in use by the Bank, was extended to Kotak Life Insurance and Kotak Securities. In addition, a common Document Management System was introduced for the Group.

As the business scaled, technology upgraded its infrastructure for firewalls, storage, processors, backups and desktop management across the Group. With centralization of datacenters (for life insurance, asset management, treasury and international businesses) and common networks, infrastructure is now shareable across the Group. Unified procurement arising from centralizing was leveraged to obtain improved terms for purchasing from vendors.

Ultimately, there is no better acknowledgement of excellence, than one conferred by peers. The Indian Banking Associating bestowed 6 of its 15 awards, including the prestigious IT Team of the Year' to Kotak Bank. Thus, setting it apart, as a leader in technology solutions.

RISK MANAGEMENT

The diversified business activities require the Bank to identify, measure, aggregate and manage risks effectively and to allocate capital among its businesses appropriately. The risk management framework lays emphasis on the Group's risk philosophy, proper organizational structure, risk and reward balance and is supported by dedicated monitoring and risk measuring mechanism.

Risk Control systems are being enhanced with a view to enable business gain and maintain competitive advantage while growing assets profitably. Consumer Banking continues to take initiatives to further improve its risk management capability.

Basic Principles and Risk and Capital Management

The Board is involved in defining risk appetite and capital at risk for the Bank, at an integrated level, covering all activities of the Bank. Development of the risk strategy and risk appetite is an ongoing process and is based on past experience and future plans. The risk strategy is consistent with the Board's overall risk tolerance, management's expertise in each business unit and the total financial amount that the Bank is prepared to place at risk of loss (Capital at risk).

The Management Committee provides overall risk management supervision for the consolidated Group as a whole. Various risk committees, namely Asset Liability Committee (ALCO), Credit Committee, First Tier Audit Committee, Risk Management Committee, Information Security Committee etc, review specific risk areas and supervise the activities of enterprise wide risk management.

Categories of Risk

The most important risks are specific banking risks and reputation risk as well as risk arising from the general business environment.

Specific Banking Risks

In consonance with the guidelines of Reserve Bank of India with regards to BASEL II, the risk management processes of the Bank distinguish among four kinds of banking risk: credit, market, liquidity and operational risk.

Risk Management Tools

The Bank uses a comprehensive range of quantitative tools and metrics for monitoring and managing risks. Some of these tools are common to a number of risk categories whereas the others are tailored to address the particular features of specific risk categories.

Both with a view to bringing in risk sensitivity through policies and to duly meet the regulatory requirements, the Bank continually assesses the appropriateness and the reliability of the quantitative tools and metrics in the light of the changing risk environment

Credit Risk

Credit risk arises from all transactions that give rise to actual, contingent or potential claims against any counterparty, borrower or obligor. The Bank's credit exposure is primarily categorized into retail and wholesale borrowers. Retail exposure is mostly term loans and asset backed other than personal loans. Wholesale borrowers are internally categorized into emerging corporate, corporate and financial institutional group. While retail credit lending is largely based on predefined parameters and is mostly decentralized, credit appraisal is undertaken by an independent dedicated credit risk team for wholesale exposure. XV Kotak Mahindra Bank Limited

Credit Risk Management Tools

During the year the Bank has put in place an internal credit rating model for the comprehensive risk assessment of the wholesale banking credit exposures. Each obligation is evaluated on two dimensions to assign obligor and facility rating. The rating tool rates Large Corporates, SMEs, Brokers, Traders and Services separately. The parameters in each risk entity (viz. business risk, industry risk, management risk and financial risk) to evaluate ratings and appropriate weight-age to these parameters have been decided based on past experience and after assessing the rating methodology. The final output of the model helps the bank to assess the expected probable loss number attached to each borrower after duly considering the securities provided to mitigate the risk. The internal credit rating system would facilitate Bank's migration to internal rating-based approaches of Basel II Accord in due course. The rating tool grades obligors into 18 categories and each rating category has been assigned a Probability of Default (PD) number. The facility extended by the bank to the borrower is also rated on a comprehensive scale of 30 categories of ratings. Such a facility rating provides the Loss Given Default (LGD) number to each facility rating category. The combination of Obligor and Facility Rating provides Combined Rating which is divided into 18 categories.

Internal rating is assigned to each obligor based on quantitative and qualitative factors and forms an important element of credit lending decision. These ratings are reviewed at least annually.

Independent credit appraisal, credit administration, credit monitoring, credit measurement and industry research group are in place encompassing the entire gamut functions facilitating integrated credit risk management.

The Bank's Credit Appraisal process incorporates a review of all aspects of the proposals including all risks to ensure that it is within the acceptable risk framework decided by the Board and earns the indicated risk-adjusted return.

The Credit Administration team ensures that all credit covenants are properly fulfilled prior to disbursal. Once a credit has been extended, adherence of the same to sanctioned terms is scrupulously monitored by the Credit Monitoring team.

The Industry Research Group guides the bank in building its portfolio with emphasis on reducing sector concentration and identifying sectors to grow the business. The Group conducts regular portfolio reviews tracks significant change in the operating environment and undertakes rapid impact analysis on the portfolio.

The robustness of the risk management systems put in place is evident from the healthy portfolio maintained by the Bank.

Counterparty credit risk arising out of derivatives and forward contracts

The bank has adopted current exposure method to measure counterparty credit exposure. This comprises marked to market value of outstanding contracts and potential future exposure for the remaining maturity. The bank earmarks an estimated maximum exposure against a counterparty limit at the time of entering into a transaction based observed movement of various risk factors.

Credit Risk Management Principles

The Bank measures and manages its credit risk based on the following principles

* The extension & renewal of any Credit Facility to a particular borrower requires Credit Approval at the appropriate authority level. The Rating Tool, which is already in place, helps the authorities in such decision

* The approval of all the limits to the counterparties should be in line with the Corporate Credit Policy and Collateral Risk Management Policy of the bank. Such approval should generally be within the Bank's portfolio guidelines and credit strategies

* There will be a regular review of the credit worthiness of the borrowers not only using the rating tool of the bank but also by its Credit Risk Management team

Market Risk

Market risk arises from the uncertainty concerning changes in market prices and rates viz. interest rates, equity prices, foreign exchange rates, the correlations among them and their levels of volatility.

Market risk management framework is laid down in the investment and ALM policy of the bank. The bank runs exposure on interest rates, equity, foreign exchange and a combination of them through derivatives. Exposure is managed through a set of risk limits such as open position, PVO1, gap limits, cash value etc. These limits are monitored on daily basis by the independent mid-office cell and are reviewed based on market conditions on frequent basis by ALCO.

The Bank computes value at risk (VAR) for the aforesaid risk on an individual portfolio basis as well as on aggregated portfolios basis after considering correlation effect. Value at risk is reported on a daily basis and back testing and stress testing is undertaken to confirm the validity of the measurement models.

Value at Risk:

Value at Risk (VaR) is among one of the techniques used to monitor and measure the market risk. The VaR approach derives a quantitative measure of market risk under normal market conditions, estimates the potential future loss that will not be exceeded in a defined period of time and with a defined confidence level. VaR is calculated for internal reporting purpose using a 99% confidence level and 10 days holding period on daily basis. The VaR model takes into account all the material risk factors assuming normal market conditions. We calculate VaR using the historical observation techniques giving more weights to the recent observed movements.

Value at Risk Analysis for the year 2007-08 is as below:

Rs. croreValue at Risk Amount crore

Maximum 65.73Minimum 11.58Average 30.90Year End 31.03.2008 28.89

Back Testing:

We use back testing to verify the accuracy of the VaR calculations. We compare the actual movement in the portfolio with the VaR estimates.

Stress Testing:

While Value at Risk, calculated on the daily basis, measures the maximum potential loss in the normal market conditions, we also value our portfolio under the extreme market condition by using the Stress testing methodology. According to the predefined stress scenarios, underlying risk factors are stressed for sudden and extreme change in the market movement rate risk of the balance sheet is managed through gap analysis, especially duration gap of the assets and liabilities.

Liquidity Risk

Liquidity risk is the risk arising from the potential inability of the Bank to meet all payment obligations when they become due. Liquidity risk is managed through setting limits on the negative gap for maturity bucket. As part of liquidity risk management the bank conducts behaviour analysis of its CASA, term deposits and other products to analyze the impact of the inbuilt option. The Bank has also put in place a formal Contingency Liquidity Plan to forewarn/mitigate adverse liquidity situations.

Operational Risk

Operational risk is the potential for incurring losses due to failure of employees, technology, system or a process and disasters, projects, external factors, frauds etc, including legal and regulatory risk. The bank seeks to ensure that key operational risk are managed in a timely and effective manner through a framework of policies, procedures and tools to identify, assess, monitor, control and report such risks. The Group internal audit team and the compliance department have set a sound platform for operational risk management, along with the operational risk management unit.

The following techniques are applied by bank to manage operational risks

- All products and process notes need review by all concerned departments including Compliance, Legal and Risk Management.

- Unusual event reporting and creation of loss database have been institutionalized as a stepping stone towards measurement of operational risk. Analysis of unusual events assists identifying sources of operational risks and taking adequate risk mitigating measures to minimize those risks.

- During the year, bank launched the focus initiative'. Through this initiative, Bank aims to increase the overall level of operational risk awareness amongst staff using various tools. The workshops conducted as part of the initiative rolled out bank's Risks and Controls Self Assessment' program for formally assessing the operational risks and related key risk indicators to monitor these risks. These workshops were attended by large number of participants representing different business/ operations/ support functions from across bank. Bank plans to hold more such programs to cover all business/operating/support functions.

Bank is already calculating operational risk capital charge using Basic Indicator Approach' as prescribed under the guidelines issued by the Reserve Bank of India. Above measures will equip bank in adopting more sophisticated risk based approaches in future for the purpose of computing operational risk capital charge (subject to regulatory review and approval).

Basel II

The Bank has made considerable progress in capturing data and implementing systems with regards to computing capital adequacy as per the standardized approach of Basel II for credit risk. Efforts are on to automate the process of capital computation as per Basel II and application system is being implemented to that effect. As on March 31, 2008 the estimated capital adequacy ratio as per the new guidelines is 17.53% as compared to 17.36% under the current guidelines.

The revised framework of capital adequacy norms is applicable to Indian banks having operational presence outside India and foreign banks with

effect from March 31, 2008 and other scheduled commercial banks have been encouraged to migrate with effect from March 31, 2008, but not later than March 31, 2009. A multi-disciplinary group having members from various department of the banks have been formed to ensure setting process and develop infrastructure to comply with the requirements of Basel II.

During the year the Bank has successfully implemented the K-Ram rating system. The rating is based on management, industry, financial and business risk parameters all of which are evaluated to give an obligor rating to the borrower. In addition, a separate facility risk rating is also undertaken by K-RAM, which assists in appropriate structuring of facilities. This issuer and facility rating is in line with Basel II requirements. All customers are compulsorily rated and these ratings are subject to periodic reviews. The Bank also has in place a system to track rating migration.

A stress testing policy has also been formulated to periodically review the impact of the dynamic external environment on the portfolio. The Bank is also compiling a document on the RAROC framework for pricing of loans as is required by the Reserve Bank of India.

Bank's Operational risk capital charge using Basic Indicator Approach as per Reserve Bank of India guidelines worked out to Rs. 160.23 Crores (Rs. 1,602.30 million) as on March 31, 2008.

In addition to the regular monitoring and oversight, in the coming years, the focus of risk function would be to develop sophisticated measurement tools to statistically quantify risk in all lending businesses and operations.

Compliance

The Group has in place an independent and comprehensive compliance structure to address compliance and reputation risk on a group wide basis. The Board of the Bank has adopted during the year a Group Wide Compliance Policy. The compliance function is headed by a senior resource in all Group companies. The Compliance function in the Bank was also suitably strengthened to meet the requirements of the RBI guidelines on Compliance Management issued during the year. The Compliance function for international subsidiaries was enhanced significantly by recruitment of several senior resources. The Group Head Compliance reports to the Board of Directors of the Bank. The Compliance Department oversees adherence to all regulatory prescriptions both domestic and international. The department is also responsible for ensuring adherence to Know Your Customer (KYC) and Anti-Money Laundering (AML) standards. The senior compliance resource in each of the Group companies is also designated as the Principal Officer under the Prevention of Money Laundering Act 2002. The Bank and the Insurance subsidiary have implemented a sophisticated AML application. The application is being rolled across all key subsidiaries.

Dissemination of regulatory information in the Bank is done on an online basis by using knowledge management tools. Dissemination of regulatory information in key subsidiaries was also enhanced significantly during the year. The department also brings out a quarterly compliance newsletter to update employees on regulatory developments. The Department is actively involved in both onsite and online training for the employees in Compliance matters. During the year the Department has brought a Handbook on Foreign Exchange Transactions to facilitate education of employees and customers.

The department is also responsible for ensuring adherence to standards and codes by Reserve Bank of India (RBI), Banking Codes and Standards Board of India (BCSBI), Indian Banks Association (IBA), Foreign Exchange Dealers' Association of India (FEDAI), Fixed Income Money Market and Derivatives Association (FIMMDA), Securities and Exchange Board of India (SEBI), Association of Mutual Funds in India (AMFI), Insurance Regulatory and Development Authority (IRDA), and international regulators / SRO's.

The Bank and its subsidiaries have adequate compliance monitoring and reporting systems in place. They have also adopted a Whistle Blower Policy' encouraging employees to report any instances of irregularity to senior management.

The Group has hired a reputed consulting firm to benchmark the compliance processes and practices with the best in the world. During the year the exercise has been completed in Kotak Securities Limited.

Internal Controls

The Bank's internal audit department undertakes a comprehensive audit of all branches and businesses under a risk-based internal audit model recommended by the Reserve Bank of India and approved by the Audit Committee of the Board of Directors. An annual risk-based internal audit plan is drawn up on the basis of risk profiling of Bank's branches and businesses/ departments which is approved by the Audit Committee. The internal audit department seeks assistance from external firms in respect of Information Technology audits.

After assessing the overall risk of a branch or business or department, the Bank takes measures to minimize such risk. Senior officers also assess and evaluate the mitigating measures taken by the branch during their visits. Higher risk areas and branches are targeted for more frequent audits.

The Bank has a process of concurrent audit of critical functions using external consulting and/or accounting firm(s). Concurrent audit is also carried out for the Bank's treasury operations, in particular for sovereign and corporate debt investments and foreign exchange operations. This has been undertaken to ensure the existence of and adherence to internal and regulatory controls.

The subsidiaries of the Bank, are also subjected to internal audit, either by internal teams or by external auditors. All auditors report to the respective Audit Committees. The scope of all companies is approved by the respective Audit Committees. All audit reports are placed before the Audit Committee of the respective companies and key and significant issues communicated to the Bank (the holding company). Mitigating measures are taken where risk is more than acceptable levels.

human Resources

As on March 31, 2008, the Bank along with its subsidiaries employed around 20,000 employees at various locations in India and abroad, an addition of around 9,000 employees over 2007-08. The Bank was adjudged the 10th Best Employer in India by the Hewitt Best Employer Survey in 2007.

The Bank and its subsidiaries continue to invest substantially in people development and have in place policies & processes to ensure employee welfare and skill development. The training programs ensure holistic development of the employees by equipping them with not only functional skills, but with skills necessary for leadership effectiveness and self-development. A robust performance and Talent Management system ensures that the best talent is acquired, nurtured and developed. This year the Bank through its Corporate Social Responsibility initiative has also embarked on projects relating to Environment protection and helping the cause of the underprivileged.

Through some best-in-class and innovative HR practices, the Bank and its subsidiaries strive to build a work force that is committed to delivering world class products & services to its customers across the globe.

Opportunities and Threats

Opportunities

* Scalability through increased brand awareness, market penetration and service offerings across all categories of financial services

* Increase in customer's wallet share

* Leveraging the latest technology for providing quality and client centric services

Threats

* Oil prices and rising inflation

* Increasing interest rate scenario

* Competition from local and multinational players

* Changing global financial markets

Outlook

Kotak Mahindra Group's results for the financial year demonstrate the strong fundamental growth in the India story. However, the economy inhibits the concerns over the impact of inflation, the weakening of the global economy and rising crude oil prices.

The Group believes that the present economic scenario offers immense opportunities for it to grow in scale and reach coupled with value creation. The Group is confident that with its integrated business model it shall be able to take advantage of the significant growth opportunities in the coming years.

Safe harbour

This document contains certain forward-looking statements based on current expectations of Kotak Mahindra management. Actual results may vary significantly from the forward-looking statements contained in this document due to various risks and uncertainties. These risks and uncertainties include the effect of economic and political conditions in India and outside India, volatility in interest rates and in the securities market, new regulations and Government policies that may impact the businesses of Kotak Mahindra Group as well as its ability to implement the strategy. Kotak Mahindra does not undertake to update these statements.

This document does not constitute an offer or recommendation to buy or sell any securities of Kotak Mahindra Bank or any of its subsidiaries and associate companies. This document also does not constitute an offer or recommendation to buy or sell any financial products offered by Kotak Mahindra, including but not limited to units of its mutual fund and life insurance policies.

All investments in mutual funds and securities are subject to market risks and the NAV of the schemes may go up or down depending upon the factors and forces affecting the securities market. The performance of the sponsor, Kotak Mahindra Bank Limited, has no bearing on the expected performance of Kotak Mahindra Mutual Fund or any schemes thereunder.

Figures for the previous year have been regrouped wherever necessary to conform to current year's presentation.