Canara Bank - Annual Report - 2008-2009

CANARA BANK

ANNUAL REPORT 2008-2009

DIRECTOR'S REPORT

The Board of Directors have pleasure in presenting the 40th Annual Report
together with the Balance Sheet as on 31st March, 2009 and Profit and Loss
Account for the financial year ended March 31, 2009.

MANAGEMENT DISCUSSION AND ANALYSIS:

I. ECONOMIC ENVIRONMENT:

The Indian economy, after registering an impressive growth of over 9% for
three successive financials, experienced moderation in 2008-09. This
moderation was primarily caused by the downturn in the global economy. The
economic slowdown during 2008-09 was characterized by a moderation in
consumption growth and widening of trade deficit. As per the revised
estimates released by the Central Statistical Organization (CSO), the
Indian economy grew by 6.7% in 2008-09 vis-a-vis a 9% growth in the
previous fiscal.

Agriculture sector grew by 1.6% in 2008-09 compared to 4.9% growth in the
previous financial year. While growth in the manufacturing sector estimated
at 2.4% (8.2%), growth recorded for mining and quarrying was at 3.6% (3.3%)
and electricity, gas and water supply at 3.4% (5.3%).

Service sector, the engine of the country's economic growth also
decelerated in 2008-09. In the services segments, construction sector
growth moderated to 7.2% from 10.1% in 2007-08, while trade, hotels,
transport and communication registered a decline from 12.4% in 2007-08 to
9% in 2008-09. Finance, insurance, real estate and business services grew
by 7.8% as against 11.7% in the previous year.

The global slowdown impacted the country's exports. After recording an
impressive growth rate of over 20% in the last five years and 30.9% in the
first half of 2008-09, exports turned negative since October 2008 owing to
sharp fall in demand from key global markets. As per the provisional data
released by the Directorate General of Commercial Intelligence and
Statistics (DGCI&S), during 2008-09, merchandise exports of India increased
to US $169 billion, recording a y-o-y growth of 3.4% compared with 23.7%
posted a year ago. Cumulative value of imports increased to US$ 288
billion, registering a growth of 14.3%, lower than 29.9% recorded a year
ago. The trade deficit for 2008-09 rose to US$ 119 billion as against a
deficit of US$ 89 billion in the previous fiscal.

The domestic and foreign investment dipped due to credit crunch and
declining demand. External commercial borrowings (ECB) fell due to the
adverse effects of the global financial meltdown.

Economic Environment in Karnataka:

Karnataka is one of the fastest growing States in India. Widely acclaimed
for its internationally reputed Information and Bio-technology companies,
the State is home to varied industrial activities, leading research and
development institutions and a pool of skilled manpower. As per the
Economic Survey of Karnataka 2008-09, the real growth in Gross State
Domestic Product (GSDP) is anticipated to be around 5.5% during 2008-09.

Canara Bank, owing its origin to the State, is continuing its leadership
position in the State. The Bank has been playing a leading role in
extending financial services to large number of people through its over 560
branches spread across the State. The total business of the Bank in the
State stood at Rs. 51850 crore comprising Rs.27251 crore under deposits and
Rs. 24599 crore under advances.

II. MONETARY AND BANKING DEVELOPMENTS:

Growth in key monetary aggregates and money supply in 2008-09 reflected the
changing liquidity positions arising from domestic and global financial
conditions and the monetary policy response. Monetary aggregates witnessed
some moderation during the fiscal year 2008-09. Monetary and liquidity
aggregates that expanded at a strong pace during the first half of 2008-09
showed some moderation subsequently reflecting the decline in capital flows
and consequent foreign exchange intervention by the Reserve Bank. As a
response to the global financial crisis, the Reserve Bank of India (RBI)
has initiated a slew of measures to enhance liquidity, ensure credit growth
and reduce interest rates. As a result of these measures implemented by the
RBI since September 2008, the liquidity in the banking system has improved
substantially.

Money Supply (M3) growth, on y-o-y basis, increased by 18.6% during 2008-
09, lower than the projected growth of 19% by the RBI. Aggregate deposits
of scheduled commercial banks increased by 19.8% during 2008-09 as against
22.4% recorded in 2007-08. The growth in bank credit decelerated to 17.3%
y-o-y, as on March 27, 2009 from 22.3% a year ago, lower than that of the
indicative projection of 24% set by the RBI. The demand for credit
moderated reflecting the slowdown of the economy in general and the
industrial sector in particular. The y-o-y WPI inflation fell sharply from
an intra-year peak of 12.9% on August 2, 2008 to 0.26% at end-March 2009.
However, the average rate of inflation for 2008-09 works out to be 8.3% as
against 4.7% in 2007-08.

In the wake of the uncertainty in the global financial environment since
mid-September 2008, the RBI initiated several measures to maintain adequate
liquidity in domestic money and foreign exchange markets and to enable
banks to continue to lend for productive purpose while maintaining credit
quality to sustain the growth momentum. The year 2008-09 saw the following
key policy measures announced by the RBI.

Since October 2008, the RBI has reduced the CRR by 400 basis points of Net
Demand and Time Liabilities (NDTL) of banks and also slashed the repo rate
by 400 basis points and the reverse repo rate by 250 basis points.

Changes in CRR, Repo Rate and Reverse Repo Rate during the year

(Per Cent)
Effective Date CRR Reverse Repo Repo Rate
Rate
April 26, 2008 7.75 6.00 7.75
May 10, 2008 8.00 (+0.25) 6.00 7.75
May 24, 2008 8.25 (+0.25) 6.00 7.75
June 12, 2008 8.25 6.00 8.00(+0.25)
June 25, 2008 8.25 6.00 8.50(+0.50)
July 5, 2008 8.50 (+0.25) 6.00 8.50
July 19, 2008 8.75 (+0.25) 6.00 8.50
July 30, 2008 8.75 6.00 9.00(+0.50)
August 30, 2008 9.00 (+0.25) 6.00 9.00
October 11, 2008 6.50 (-2.50) 6.00 9.00
October 20, 2008 6.50 6.00 8.00(-1.00)
October 25, 2008 6.00 (-0.50) 6.00 8.00
November 3, 2008 6.00 6.00 7.50(-0.50)
November 8, 2008 5.50 (-0.50) 6.00 7.50
December 8, 2008 5.50 5.00(-1.00) 6.50(-1.00)
January 5, 2009 5.50 4.00(-1.00) 5.50(-1.00)
January 17, 2009 5.00 (-0.50) 4.00 5.50
March 5, 2009 5.00 3.50(-0.50) 5.00(-0.50)

Figures in parentheses indicate percentage change.

* On September 16, 2008, the RBI had announced, as a temporary and adhoc
measure, that scheduled banks could avail additional liquidity support
under the Liquidity Adjustment Facility (LAF) to the extent of up to 1% of
their NDTL from their SLR portfolio and seek waiver of penal interest. With
effect from November 8, 2008, RBI decided to make this reduction permanent
and accordingly the Statutory Liquidity Ratio (SLR) reduced to 24% of NDTL.

* A second LAF was re-introduced on a daily basis with effect from
September 17, 2008.

* Subsequent to the policy developments, the benchmark Prime Lending Rates
(PLR) of PSU banks reduced by 75-225 basis points, from 13.75-14.75% during
October 2008 to a range of 11.50-14.00% by March 2009.

* Term deposit rate of 1 year upto 3 years maturity of PSU banks also
reduced from 9.50-10.75% in October 2008 to 8.00-9.25% in March 2009.

* Banks were permitted to borrow funds from their overseas branches and
correspondent banks to the extent of 50% of their unimpaired Tier-I capital
or US $ 10 million, whichever is higher.

* The provisioning requirements for all types of standard assets were
reduced to a uniform level of 0.40%, except in the case of direct advances
to the agricultural and SME sectors, which continued to attract
provisioning of 0.25%.

* Refinance and restructuring facilities were provided by the RBI.

* The RBI retains the option to conduct overnight or longer term
repo/reverse repo under the LAF depending on market conditions and other
relevant factors.

OUTLOOK FOR 2009-10:

The global economic outlook continues to be uncertain. Despite wide-ranging
policy actions by governments and central banks around the world, financial
strains remain acute, which is pulling down the real economy. There is a
synchronous decline in economic growth throughout the world. However, the
effects of the global financial crisis on developing countries will differ
across regions and by the ability of individual countries to offset adverse
effects on domestic banking sectors and the broader financial market.
According to the World Economic Outlook published by International Monetary
Fund (IMF) in April 2009, world economy is expected to decline by 1.3% in
2009 as against 3.2% in 2008.

In an attempt to improve the economic and monetary conditions in the wake
of the global financial crisis, the RBI and the Central Government
initiated a slew of measures to enhance liquidity, ensure credit growth and
reduce interest rates. These measures would help to increase the credit
growth and would provide a significant thrust to the process of economic
recovery. Despite downside risks, such as, continued slowdown in industrial
activity and weakening external demand as reflected in decline in exports,
Indian economy will remain one of the fastest growing economies in the
world and is expected to show fairly strong recovery in growth in the
second half of 2009-10 in response to the fiscal and monetary policy
stimulus and abatement of recession in the international economy.

III. CANARA BANK IN 2008-09:

FINANCIAL PERFORMANCE:

Profits and Profitability:

Financial year 2008-09 was marked by a robust performance on the business
front coupled with unprecedented gains in profits and profitability.
Continued buoyancy in core business operations and costs containment helped
the Bank to sustain and enhance the topline earnings while maintaining a
stronger bottomline.

Net profit reached an all time high of Rs. 2072 crore, signifying a strong
32% growth y-o-y and substantially higher than Rs. 1565 crore recorded
during the preceding year. Operating profit recorded a 34% growth to
reach a level of Rs. 3964 crore.

Return on average assets (RoAA) for the year stood at 1.06%. Containment of
operating expenses was reflected in the ratio of operating expenses to
Average Working Funds (AWF), which was 1.63% as at March 2008, declining to
1.56% as at March 2009. Cost to Income ratio declined by 493 basis points
to 43.61% in 2008-09 from 48.54% last year. Profit per employee, moved up
to Rs.4.97 lakh compared to Rs.3.65 lakh in the previous financial year.

Operating and Net Profit:

Year Operating Profit Net Profit

2006-07 2912 1421
2007-08 2959 1565
2008-09 3964 2072

Dividend 80% of for 2008-09:

Dividend and Earning per Share:

Year Dividend Earning
per Share per Share

2006-07 34.65 7.0
2007-08 38.17 8.0
2008-09 60.55 8.0

Enhancing Shareholder Value:

In conformity with its commitment to enhance value for shareholders, the
Bank showed steady improvement in Earnings Per Share (EPS) and Book Value.
While Book Value increased to Rs.244.87 as at March 2009 as compared with
Rs.202.33 recorded for the previous financial, EPS rose to Rs.50.55 for the
year ended March 2009 compared to Rs.38.17 a year ago. A dividend of 80%,
amounting to Rs.328 crore, was declared by the Board of Directors of the
Bank for 2008-09.

Key Financial Ratios (%) March.2008March.2009Cost of Funds6.246.32Yield on
Funds 8.318.73Cost of Deposits 6.806.87Yield on Advances 10.2210.79Yield on
Investments 7.897.94Spread as a % to AWF*2.072.41Net Interest Margin
(NIM)2.422.78Operating Expenses to AWF1.631.56Return on Avg. Assets
(RoAA)0.921.06Return on Networth 19.0822.61Business per Employee (Rs. in
Crore)6.107.80Profit per Employee (Rs. in Lakh)3.654.97Book Value
(Rs.)202.33244.87Earnings per Share (Rs.) 38.1750.55AWF - Average Working
Funds

Income and Expenditure Analysis:

Resulting from buoyancy in the core operations and lending to productive
segments, the Bank's interest income recorded a y-o-y growth of 21% to
reach Rs.17119 crore compared to Rs.14201 crore recorded during the
previous financial. Interest income was driven by a 30% growth in income
from loans/advances, which accounted for 66% of the total income. While
non-interest income increased to Rs. 2311 crore, fee-based income rose to
Rs. 1361 crore, recording a higher growth at 18% during the year.



Concerted focus on mobilization of low cost deposits and strong resistance
to high cost preferential rate deposits helped the Bank to contain the cost
of deposits at 6.87% with a marginal rise over March 2008 level of 6.80%.
Yield on advances rose by 57 basis points to 10.79% as against 10.22% in
March 2008. Interest spread increased to 2.41% from 2.07% as at March 2008.

While interest expenditure increased to Rs.12401 crore, the Bank reasonably
contained its rise in non-interest expenditure at 9.8%. Notably, the net
interest income of the Bank registered a significant 33.4% growth to reach
Rs. 4718 crore and Net Interest Margin (NIM) also rose by 36 basis points
to 2.78% as at March 2009.

Capital and Reserves

Networth of the Bank, as at March 2009, stood at Rs.10040 crore compared to
Rs.8296 crore as at March 2008. With the paid-up capital at Rs.410 crore,
reserves and surplus increased to Rs.11798 crore. To augment the capital
resources, the Bank raised Rs. 240 crore through the Innovative Perpetual
Tier I Bonds and Rs. 325 crore through lower Tier II Bonds during the year.

(Amt. in Rs. Crore)
Composition of Capital March 2008 March 2009
Basle II Basle II

Risk Weighted Assets 116220 125111
Tier I Capital 8148 10023
CRAR (%)(Tier I) 7.01 8.01
Tier II Capital 7250 7623
CRAR (%)(Tier II) 6.24 6.09
Total Capital 15398 17646
CRAR (%) 13.25 14.10

As at March 2009, Capital to Risk Weighted Assets Ratio (CRAR) of the Bank
under Basle II stood at 14.10%, well above the 9% regulatory benchmark.
Significantly, the Bank has attained a Tier I capital ratio of 8.01%. The
medium term objective of the Bank is to maintain the CRAR ratio above 12%.
With the still undiluted 73.17% Government of India shareholding, the Bank
has large headroom available under Tier I and Tier II options to raise
capital and support business growth momentum.

BUSINESS GROWTH:

Deposits:

Total Deposits of the Bank registered a growth of 21.3% to reach
Rs.1,86,893 crore as at March 2009. In accordance with the strategic focus,
the Bank's core deposits recorded a growth of 37.8%, supported by 55.5%
growth in retail term deposits and 18.6% in savings deposits.

Unrelenting focus on augmenting of low cost resources yielded good results.
The quantum addition in savings deposits was Rs. 6544 crore during 2008-09,
as against Rs.2832 crore in 2007-08. The share of CASA (current and
savings bank deposits) deposits in domestic deposits stood at 30.7%. With a
CASA per branch at Rs.20.55 crore, the Bank continues to be one of the best
among the peers. Pursuing a strategy of broad basing deposit clientele, all
the branches together added nearly 2.2 million deposit accounts, taking the
total tally under deposit accounts to 30.5 million.

Advances (net):

The Bank's advances (net) witnessed a robust 28.9% growth in 2008-09 to
reach Rs. 1,38,219 crore. In quantum terms, credit increased by about
Rs.31000 crore. Responding to emergent credit needs of varied segments of
the economy that evolved during post September 2008 scenario, the Bank
stepped up credit to all productive segments of the economy like
agriculture and Micro, Small and Medium Enterprises (MSME), exposure to
corporate and infrastructure segments. The number of borrowal accounts, as
at March 2009, rose to 4.30 million. Backed by strong growth in advances,
the credit to deposit ratio further improved to 73.96% as at March 2009
against 69.6% in the previous year.

Global Business of the Bank grew by 24.4% to reach Rs. 3,25,112 crore as at
March 2009 as against Rs. 2,61,310 crore during the preceding year.
Productivity, as measured by business per employee, increased to Rs.7.80
crore from Rs.6.10 crore a year ago, continuing to be one of the best among
the peers. With several enterprise-wide initiatives and measures, the Bank
added 2.45 million clientele during the year.

Retail Lending Operations:

Retail lending operations of the Bank regained the growth momentum during
the year. While disbursals under the retail lending stood at Rs. 4558
crore, the outstanding advances rose to Rs. 19798 crore, accounting for
14.66% of the net credit.

(Amt. in Rs. Crore)
Retail Lending March 2008 March 2009 Growth (%)

Retail Lending 17665 19798 12.1
Housing (Direct) 6658 7896 18.6
Retail Trade 3789 4451 17.2
Other Personal 7209 7451 3.4

The Bank took several measures during the year to expand retail credit,
including special packages for housing and auto loans. To facilitate speedy
disposal of proposals and credit flow, 21 Centralised Processing Units
(CPU) for housing and personal loans were functioning at major centres
apart from a Retail Asset Hub in Bangalore. This apart, the Bank introduced
retail sale of gold coins through selected branches across the country.

TREASURY AND INTERNATIONAL OPERATIONS:

Aggregate investments of the Bank, as at March 2009, were of the order of
Rs.57777 crore. As a strategy to improve yield on investment portfolio, the
modified duration of the total portfolio was increased from 3.21 to 4.08
through the fresh investments made in long dated and comparatively high
yield coupon securities. The modified duration of the Available for Sale
(AFS) portfolio increased to 1.87 as at March 2009 from 1.29 a year ago on
account of investments made in dated securities and reduction of
investments in treasury bills. The trading profit during the year was
higher at Rs.675 crore, as against Rs.435 crore in the previous year. The
yield on investments improved to 7.94% vis-a-vis 7.89% a year ago.

The Bank continues to be an active player in securities market by
participating in Government Securities auctions. The total amount of
underwriting commitment for the year was Rs. 15251 crore and received
Rs.8.49 crore as underwriting commission. During the year, the Bank
achieved 95% success ratio as against mandatory 40% of its obligation as a
Primary Dealer.

The Bank is engaged in financing and facilitating foreign trade through its
16 foreign departments and 128 designated branches across the country.

Foreign Business Turnover of the Bank, as at 31st March 2009, aggregated to
Rs. 1,42,301 crore.

(Amt. in Rs. Crore)
Foreign Business Turnover March March
2008 2009

Exports 43759 49113
Imports 41765 44182
Remittances 51233 49006
Total Foreign Business Turnover 136757 142301

Outstanding export credit of the Bank moderated to Rs.8967 crore, compared
to Rs. 9162 crore during the corresponding period a year ago, indicating
economic downturn and decline in exports demand.

Across the borders, the Bank's presence covered three branches at London,
Hong Kong and Shanghai (opened during the year) and a joint venture bank,
namely, Commercial Bank of India LLC in association with State Bank of
India in Moscow. Canara Bank has also an Offshore Banking Unit at Special
Economic Zone (SEZ) NOIDA, Uttar Pradesh.

The Bank has already obtained approval from the RBI to open 11
branches/offices in Johannesburg, Frankfurt, Muscat, Manama, QFC-Qatar,
Leicester, New York, Sao Paulo, Dar-er-Salam, Tokyo and Sharjah, out of the
21 international financial centres identified for global expansion in the
medium term. The Bank is in the process of obtaining regulatory approvals
from the host countries for opening branches in the above centres.

The Bank's international operations are supported by a wide network of 395
correspondent banks, spread across 80 countries. The Bank has rupee drawing
arrangements with 19 exchange houses and 18 banks in the Middle East for
channelising the remittances of expatriates. The Bank has been managing two
exchange houses viz., Al Razouki International Exchange Company, Dubai and
Eastern Exchange Est., Qatar, under secondment and management agreement
respectively. The Bank, during the year, expanded its arrangement under
'Remit Money', a web based product by extending to 11 Exchange
Companies/Banks and continues to have Electronic Funds Transfer (EFT)
arrangement with 10 Exchange Houses/ Banks.

OTHER SERVICES:

The Bank's Merchant Banking Division handled diverse assignments as Co-Lead
Manager/ Lead Manager/Manager/Arrangers/ Escrow Bankers/ Collecting
Bankers. The Bank also handled four specialized assignments of Fair
Valuation of Equity' and acted as Issuing and Paying Agents for Commercial
Paper Placements to supplement fee based income. The Bank recorded a gross
income of about Rs. 76 lakh from merchant banking assignments.

The Syndication Group has syndicated/arranged total debt to the tune of
Rs.5217 crore with project cost amounting to Rs.8052 crore. The debt
component of the current projects under placement is to the tune of Rs.2066
crore. The Group is also having projects to the extent of debt component
of Rs. 2065 crore under various stages of syndication. The Group generated
a substantial increase in the fee based income and syndicated/ arranged
funds for diverse projects from manufacturing, logistics, hospitals and
hotel sectors.

The Bank has tie-up arrangements in both life and non-life insurance
segments under its bancassurance' arm. The Bank earned a commission
income of Rs. 17.91 crore from its newly formed Canara HSBC Oriental Bank
of Commerce Life Insurance Company Limited. The total commission income
received from life insurance business including Aviva life insurance was
over Rs. 22 crore. The Bank is also a Corporate Agent for United India
Insurance Company Ltd (UIICL) for general insurance business since February
2005, from which it earned a commission income of Rs 5.5 crore during the
year.

For the augmentation of non-interest income and to provide various
financial services under one roof, the Bank has entered into corporate
agency agreement with Export Credit Guarantee Corporation of India Ltd.
(ECGC) for soliciting and procuring export credit insurance business.

Corporate Cash Management Services (CCMS) network of the Bank, covering 94
Operating Centres and 595 Pooling Branches, provides services related to
local and upcountry cheque collection, bulk cheques collection and zero
balance account facility. The aggregate turnover under CCMS amounted to
Rs.1823 crore and income earned was Rs. 1.1 crore during 2008-09.

Under Card Business, the Bank took several initiatives to expand its credit
and debit-cum-ATM card base. The Bank almost doubled its profit under card
business during 2008-09 at Rs. 20.85 crore compared to Rs. 10.58 crore in
2007-08.

The Bank is extending depository services from 43 DP Service Centres spread
across 30 cities in the country.

Executor, Trustee and Taxation Services outfit of the Bank provides
services like Debenture/Security Trusteeship, Will and Executorship,
Trusteeship, Personal Tax Assistance and Power of Attorney Services. During
the year under review, it secured 11 new debenture/security trusteeship
issues, amounting to Rs.6003 crore and generated fee-based income of
Rs.2.42 crore.

Under Government Business, comprising Direct and Indirect Tax collections,
payment of pensions to various departments, handling Ministry Accounts,
Postal Transactions and Treasury, collection of Senior Citizen's Deposit,
Public Provident Fund Scheme and sale of RBI and Government bonds, the Bank
achieved a total turnover of Rs.40017 crore.

The Bank has been authorized to handle accounts of Department of Education,
Department of Culture, Department of Arts and Department of Youth Affairs
and Sports under Ministry of Human Resources Development (HRD), Government
of India. The Bank has developed a Web-Portal for Ministry of HRD for e-
tracking the funds under the Sarva Shiksha Abhiyan Scheme, which has been
well appreciated by the Ministry.

The Bank has developed the software for formation of Central Pension
Processing Centre (CPPC) for easier calculation, disbursement and
reimbursement of pension payments all over India. Initially, the CPPC will
cater to the needs of the Central and Civil and Defence pensioners and will
be set up in Bangalore for the Bank as a whole shortly.

Agricultural Consultancy Services (ACS) outfit of the Bank handled more
than 104 assignments during the year under review. ACS appraised projects
to the tune of Rs. 233 crore. The notional income earned during the year
was about Rs. 179 lakh. Important assignments handled during the year
included appraisal/viability studies in agriculture and allied activities
like floriculture, dairy, poultry, food processing, plantation and export
oriented production units.

ASSET QUALITY AND RISK MANAGEMENT:

Asset Quality:

Given the sharp rise in credit during the previous quarters and the present
economic slowdown, the asset quality of the Bank came under stress.

The gross NPA level rose to Rs. 2168 crore during the year. However, with a
gross NPA ratio of 1.56%, the Bank continues to be one of the lowest among
the peers. With a net NPA level of Rs.1507 crore, net NPA ratio stood at
1.09% as at March 2009.

Cash recovery during the year aggregated to an all time high of Rs. 1289
crore, well exceeding the preceding year's cash recovery of Rs. 1030 crore.

The Bank restructured a total number of 72184 accounts during 2008-09,
aggregating to a total outstanding of Rs.2066 crore under the special
regulatory treatment.

Risk Management:

Risk Management Initiatives:

The Bank has put in place a unified risk management architecture to attain
global best practices for effective implementation of risk management
initiatives in consistence with the Basle II framework and RBI guidelines.
The Board of Directors drives the Risk Management initiatives in the Bank.
The Risk Management Committee of the Board is constituted and operational.
Top Executive Committees for Credit Risk, Operational Risk and Market Risk
management oversee and monitor the respective risk management processes and
procedures. Asset Liability Committee (ALCO) meets periodically for
effective and pro-active ALM in the Bank.

An exclusive Risk Management Wing at the Head Office is functioning as a
nodal centre for overall implementation of various risk management
initiatives across the Bank. Integrated Mid Office of both domestic and
Forex Treasury are functioning under the Risk Management Wing for effective
and independent supervision and monitoring of Market Risk in investment and
forex functions. Risk Management Sections are functioning at all the 30
Circle Offices of the Bank as an extended arm of the Risk Management Wing
at the Corporate Office.

Migration to Basle II Norms:

The Bank has smoothly transited to Basle II Norms as on 31.03.08. The
Capital to Risk Weighted Assets Ratio (CRAR) is being computed as per
Pillar 1 requirement of Basle II Norms, adhering to the New Capital
Adequacy Framework guidelines stipulated by the RBI.

The Bank has framed its Policy on ICAAP (Internal Capital Adequacy
Assessment Process) consistent with the RBI guidelines under Pillar 2 of
Basle II Norms. A Capital Planning Committee is in place at the Corporate
Office which meets periodically to assess capital requirement of the Bank,
ensure maintenance of appropriate level of CRAR and evaluate various
options for raising Capital.

The Bank adheres to the Disclosure norms as per the RBI guidelines under
Pillar 3 of Basle II Norms. A Board approved Disclosure Policy is in place.
To ensure adherence to the policy guidelines, a Disclosure Committee
comprising of Top Executives is in place.

Credit Risk Management:

The Bank has adopted 'Standardized Approach' to estimate Credit Risk
Weighted Assets (RWA) for computing CRAR from the year 2007-08 onwards as
required under the New Capital Adequacy Framework (NCAF). The data in this
regard is collected from the branches and validated by internal/external
auditors. The Bank has embarked upon a software solution, viz., 'CDCRM'
(Centralized Database and System Architecture for Credit Risk Management),
to get the system support for requirements to compute RWA, generate various
credit related statements, help conducting various analysis of credit
portfolio and to facilitate continuous monitoring. The implementation of
CDCRM project is in the final phase.

The Bank has an effective risk management system for managing credit risk.
The various initiatives taken by the Bank are as follows:

- A comprehensive Credit Risk Management Policy in tune with the regulatory
guidelines and best practices in the industry.

- Credit risk management policies for the overseas branches and Offshore
Banking Unit, NOIDA are also subjected to comprehensive reviews.

- Four credit risk rating models are in place, developed internally, for
rating borrowal accounts based on the exposure limits. Rating of eligible
account has been made mandatory as a pre-sanction exercise. Migration
analysis of rated accounts is done periodically.

- Pricing based on rating has been initiated.

- Entry barriers fixed based on risk rating.

- Core credit group in all major Circles for effective credit evaluation
and segregation of appraisal and relationship functions.

- Fixation of various exposure ceiling / prudential norms to avert
concentration risk, such as single and group borrowers, substantial
exposures, term loans, unsecured advances, exposure to various industries,
NBFCs, real estate sector and capital market.

- Stipulating financial covenants / standards / benchmarks for appraisal /
sanction / renewal of limits.

- Credit Monitoring Wing has been formed for strengthening the loan review
mechanism. An excusive Credit monitoring policy has been framed
incorporating the loan review mechanism through various credit monitoring
tools, such as, credit monitoring formats, mid-term reviews, stock audits,
quarterly information system / half yearly operating systems, special watch
list accounts, intense monitoring of quick mortality accounts and review
of sanctions by higher authorities.

- Nomination of trained Credit Monitoring Officers (CMOs) at branches for
focused/dedicated monitoring of high value exposures of Rs. 1 crore and
above.

- Introduction of Credit Audit system by external / internal auditors of
all borrowal accounts of Rs.1 crore and above.

The Bank is using / mapping the ratings assigned by recognized external
credit rating agencies to the exposures of the concerned borrowers to
optimize capital under standardized approach. The Bank has initiated steps
to encourage the borrowers to get the facilities rated.

Operational Risk Management:

The Bank has computed capital charge for operational risk by adopting
'Basic Indicator Approach' as stipulated by the RBI.

A proper organizational structure is in place to oversee and guide the
operational risk initiatives of the Bank. To move towards advanced
approaches for operational risk measurement, the Bank has put in place the
following:

* Operational Risk Management Policy which covers the objectives,
identification, assessment, monitoring and control of operational risk loss
incidents.

* Training is imparted to staff to create awareness on operational risk
management system.

* The Bank has compiled detailed Best Practices Codes (Manual of
Instructions) and Desk Cards on all the activities carried out at branches
for their guidance.

Market Risk Management:

The Bank has been computing capital charge for market risk on 'Available
For Sale' (AFS) and 'Held For Trading' portfolio under investments, by
adopting 'Standardised Modified Duration' approach.

Integrated Mid Office at Risk Management Wing is monitoring market risk
through on-line connectivity with the domestic and forex treasury.
Exposure limits, such as, Stop Loss limits on trading books, Dealer-wise
limits, limits on Money Market Operations, M-duration limits for AFS
category, Aggregate Gap limit, Intra day and overnight limit for various
currency positions are fixed to act as risk mitigants and are monitored.
Reporting system has been strengthened for effective market risk
management.

Towards implementation of internal models based approach for calculation of
capital charge for market risk, the Bank has put in place a VaR based model
for estimating volatility.

Asset Liability Management:

With liberalization in the Indian financial markets over the last few years
and growing integration of domestic markets and with external markets, the
risks associated with Bank's operations have become complex and large,
requiring strategic management. The Bank has put in place an effective
Asset Liability Management system that addresses issues related to
liquidity and interest rate risks. The Board of Directors of the Bank has
constituted an Asset Liability Committee (ALCO) to oversee ALM functions,
including fixation of interest rates for various components of assets and
liabilities, its composition, maturity and duration. A comprehensive
software solution has been installed for quantifying risks and to analyze
Maturity Gap, Duration and Sensitivity of Assets and Liabilities to
interest rate variations.

Periodical studies are being undertaken to analyze the behavioral patterns
of various components of assets and liabilities to estimate the liquidity
on a dynamic basis. To evaluate the impact of changes in interest rate on
Bank's earnings, an analysis of Earnings at Risk (EAR) and its impact on
Net Interest Income (NII) are being done on an ongoing basis. Stress
testing exercises by simulating scenarios of liquidity and interest rates
are undertaken to estimate the stress cost as also the Economic Value of
Equity (EVE). The change in the composition and residual maturity of assets
and liabilities is evaluated by the Traditional Gap Method (TGA) as also by
the Duration Gap Method (DGA).

The liquidity position of the Bank is tracked on a daily basis by means of
residual maturity of assets and liabilities.

The ALCO meets regularly to discuss various issues pertaining to the
liquidity position by considering the residual maturity profile of various
assets and liabilities, takes stock of the dynamic interest rate scenario,
discusses at length the changes evolving in economic and financial
parameters, which have a direct or indirect bearing on the banking industry
and focuses on the impact of all these factors on the business profile of
the Bank.

NATIONAL PRIORITIES:

Priority Sector Advances:

As a strategic player in the domestic banking industry, the Bank's
relentless pursuit of varied goals under national priorities has been well
recognized. The remarkable performance during 2008-09 further reinforced
the Bank's commitment to the large and growing productive segments of the
economy, including agriculture, small enterprises, education, micro-credit,
weaker sections, SC/STs and minorities.

Priority Sector Advances of the Bank as at March 2009 increased by Rs.5560
crore to Rs.48763 crore, covering 35 lakhs borrowers recording a y-o-y
growth of 13%. Priority Sector Advances formed over 46% of the Bank's
Adjusted Net Bank Credit (ANBC), well above the 40% stipulated norm.

(Amt. in Rs. Crore)
Priority Sector Advances As of 31st March Growth
2008 2009 Amount Percentage

Agriculture 17996 20144 2148 11.9
Small Enterprises 14175 16316 2141 15.1
Other Priority Segments 11032 12303 1271 11.5
Total Priority Sector O/s 43203 48763 5560 12.9

With a focus on credit delivery to agriculture, the Bank's advances under
agriculture rose by Rs. 2148 crore to reach Rs. 20144 crore, covering 26
lakh farmers. Agriculture credit as a proportion of ANBC rose to 19.01%,
surpassing the mandatory targeted level of 18%. Advances to agriculture
(direct) reached a level of Rs. 15510 crore, with a 20% y-o-y growth and
accounting for 14.64% of ANBC.

Under Kisan Credit Card Scheme, the Bank issued 2.51 lakh cards during the
year, with credit coverage of Rs.1815 crore. As at March 2009, the
cumulative number of Kisan Credit Cards reached 26.97 lakhs, involving
credit coverage of Rs.12075 crore.

The Bank continues to support human capital formation in the country
through financing higher education. Sustaining the highest education loan
portfolio among nationalized banks in India, the Bank's advances under
Vidyasagar Education Loan Scheme recorded a growth of 32.5% to reach
Rs.2301 crore, covering more than 1,46,800 students as at March 2009.

The Bank also extended financial assistance to other priority sectors, such
as, retail traders, housing and micro credit. As at March 2009, advances
to these sectors reached a level of Rs.12303 crore.

During the year, the Bank actively participated in various Government
Sponsored Schemes, such as, PMRY, SGSY, SJSRY, SLRS and DRI. As at 31st
March 2009, the outstanding advances under these schemes aggregated to
Rs.553 crore, involving 1.32 lakh beneficiaries.

Performance under Various Government Sponsored Schemes:

Name of the No. of Accounts Amt. in Rs.
Schemes Crore

PMRY 73235 338
SGSY 28688 118
SJSRY 11686 47
SLRS 963 2
DRI 17333 48
Total 131905 553

In support of the underprivileged sections of the society, the Bank's
advances to SC/ST beneficiaries reached Rs.2863 crore as at March 2009.
Advances to weaker sections aggregated to Rs.10809 crore, with 22 lakh
borrowers, forming 10.20% of ANBC against the norm of 10%. As at March
2009, advances by the Bank to minority communities aggregated to Rs. 5452
crore.

During the year, the Bank has formed 64659 Self-Help Groups (SHGs) taking
the cumulative number of SHGs formed to 2.75 lakhs as at March 2009. With
52,358 SHGs credit linked during the year, the cumulative tally under
credit linking reached 2.25 lakhs since inception.

The Bank established an exclusive institute in Karnataka to extend training
to SHGs.

The total exposure of the Bank under SHG finance rose to Rs. 728 crore,
spreading over 87,627 SHGs. Konnur branch in Hubli, Karnataka was adjudged
the second best branch under SHG finance by NABARD for the year 2007-08.

Advances to MSME reached Rs.23823 crore, registering a y-o-y growth of over
28%. The Bank easily surpassed the mandatory y-o-y growth of 20%.

The Bank covered 29,684 accounts with an exposure of over Rs. 638 crore as
at March 2009 under Credit Guarantee Scheme for Micro and Small Enterprises
(CGMSE), occupying No.1 position among the nationalized banks in terms of
number of accounts covered.

Considering the importance of MSME sector in the national economy, the Bank
has developed specific loan products to meet the diverse requirements of
entrepreneurs in the segment. Cluster based lending is adopted to cater to
the units in industrial clusters. Area/ cluster specific loan products
introduced to meet specific requirements.

The Bank has implemented Prime Minister's Employment Generation Programme
(PMEGP), the ambitious project of Government of India for employment
generation through enterprise creation. Another scheme for rejuvenation,
modernization and technology upgradation of Coir Industry was also taken up
for implementation by the Bank.

To enable the MSME sector to face the challenges of economic slowdown, the
Bank acted swiftly and rolled out a Special Package to provide relief to
MSME. The comprehensive package includes, among other facilities,
additional/adhoc working capital, extended tenability for receivables,
concession in interest and debt restructuring. MSME Care Centers were
established across the country to resolve the grievances of MSME.

The Bank received an amount of Rs. 5.4 crore from the Ministry of Micro,
Small and Medium Enterprises, Government of India, during the year as a
Nodal Agency for Technology Upgradation of SSI units under Credit Linked
Capital Subsidy Scheme (CLCSS) and amount utilized during the year stood at
Rs. 8.8 crore.

Financial Inclusion:

The Bank continued its thrust on enhancing financial inclusion across the
country. Notably, the Bank achieved Total Financial Inclusion in all the 25
Lead Districts spread over five States, namely, Karnataka, Kerala, Tamil
Nadu, Bihar and Uttar Pradesh. The State of Kerala, where Canara Bank is
the Convenor of State Level Bankers Committee, was the first major State to
achieve total financial inclusion in the year 2007.

The Bank mobilized 5.62 lakhs no-frill accounts (CanSaral) during 2008-09
and reached a cumulative level of 17.29 lakhs since inception. The total
savings in the no-frill accounts reached a level of Rs. 276 crore in
16,57,749 accounts. The Bank took several technology initiatives to further
financial inclusion process like multi-lingual bio-metric ATMs, voice-
enabled mobile bio-metric ATM and launching of Smart Card project. The Bank
signed a memorandum of understanding with the Government of Karnataka for
implementation of the Smart Card based payment system for National Rural
Employment Guarantee Programme (NREGP)/ Social Security Pension in
Chitradurga, Bellary and Gulbarga districts.

As a measure of taking the financial products to the excluded, the Bank
also sanctioned 1,24,732 General Credit Cards (GCC) since inception and the
total exposure under GCC as at March 2009 stood at Rs.217 crore spread over
1,08,069 GCC accounts. In a novel initiative, the Bank has launched 'Gramin
Vikas Vahini'- vehicles to spread financial literacy. Under the initiative,
50 vans were operational in 50 districts across India. The Bank has so far
formed 1056 Farmers' Clubs to promote financial inclusion. The Bank started
Credit Counseling Centre in three districts in Karnataka to enhance
financial literacy. The Bank also brought out two comic books, titled
Money' and Savings' in its attempt to step up financial literacy.

Lead Bank Scheme:

Canara Bank has lead bank responsibilities in 25 districts in the country,
viz., eight in Karnataka, six in Tamil Nadu, five in Kerala, five in Uttar
Pradesh and one in Bihar. The Bank also works as the Convenor of the State
Level Bankers' Committee (SLBC) in the State of Kerala.

Entrepreneurship Development among Women:

The Centre for Entrepreneurship Development for Women was established
during 1988 at Head Office, Bangalore. At present 30 such Centres are
functional at various Circles across the country. These Centres cater to
the needs of the women by providing counselling services, conducting
entrepreneurship development/skill training programmes, conducting seminars
and providing marketing support by organizing exhibitions like
Canutsav/Canmela/Canbazar. To cater to the banking needs of women, 3
exclusive Mahila Banking Branches and 6 Mahila Banking Divisions have been
set up by the Bank in the State of Karnataka, Kerala, Tamil Nadu and Uttar
Pradesh. The Bank has established a training institute for women at
Harohalli, Karnataka to impart training to rural women in various self
employment ventures. During the year, as many as 44 Canbazaars/Canutsavs
(exhibition-cum-sale of products manufactured by women) were conducted
through these branches/divisions. As at March 2009, the total amount of
advances to nearly 10.05 lakh women stood at a level of Rs.12147 crore,
constituting 8.97% of the Bank's net credit, well above the 5% stipulation
by the Government of India.

CORPORATE SOCIAL RESPONSIBILITY:

The Bank, as a responsible corporate social citizen, has been paying due
attention to varied corporate social responsibilities since inception.
Through a judicious mix of commercially sound banking practices with social
banking initiatives, Canara Bank has distinguished itself in terms of
numerous community oriented activities. The Bank has been taking various
initiatives over the years for societal development concerning
underprivileged, especially in the countryside. Following the principles
of corporate philanthropy, the Bank has set up many self-employment
training institutes to counter poverty and unemployment among rural youth.
The Bank has been addressing the need for basic amenities in the rural
areas through encouraging setting up of rural clinics, providing drinking
water facilities and engaging rural volunteers for betterment of the
society.

Rural Development:

The Bank, through its Canara Bank Centenary Rural Development Trust, has
established exclusive training institutes to promote entrepreneurship
development among rural youth and encourage them taking up self-employment
activities. During the year, 4 new training institutes were opened at
Hassan, Chikkaballapur, Davangere and Thrissur, taking the tally to 18 such
training institutes. These institutes have so far trained 75227 unemployed
youth, comprising 60% women and recording an impressive settlement rate of
72%. The Trust is also supporting the activities of Society for
Educational and Economic Development (SEED), a voluntary organization based
in Sriperambadur working for the welfare of the socially marginalized
children.

The Bank, under the Rural Development and Self Employment Training
Institutes (RUDSETIs), has been engaged in training of rural youth for
taking up self-employment programmes. 23 RUDSETIs, co-sponsored by the
Bank, have trained more than 2,19,000 unemployed youth, with a settlement
rate of 68%. In a noteworthy initiative, a National Academy of RUDSETI, co-
sponsored by Canara Bank, Syndicate Bank and Sri Dharmasthala
Manjunatheshwara Educational Trust was set up during the year. It is an
apex level resource institution to train directors, trainers, faculty of
RUDSETI type institutions and bankers across the country.

Canara Bank's Rural Clinic Service Scheme provides basic health care
services in remote areas, lacking basic medical infrastructure facilities.
Under the Scheme, the Bank encourages doctors to set up clinics in
identified rural areas. As at March 2009, the total number of such clinics
rose to 515. The Bank under 'Jalayoga', a scheme to provide safe drinking
water, has so far implemented 35 projects in its lead districts.

The Bank donated a hi-tech, custom built, solar powered 'Mobile Sales Van'
to assist women entrepreneurs, SHGs and artisans to market their products.

Visits by Parliamentary Committees:

During 2008-09, Parliamentary Committee on Subordinate Legislation,
Industry, Official Language, Petitions and Personnel, Public Grievances,
Law and Justice visited the Bank. Parliamentary committee on Government
Assurances reviewed the implementation of Agricultural Debt Waiver and Debt
Relief Scheme and the performance of the Bank under Educational Loan
Scheme.

Department related Parliamentary Committee on Industry conducted two visits
to review implementation of Credit Guarantee Scheme for Micro and Small
Enterprises (CGMSE) and Interest Subsidy Eligibility Certificate (ISEC)
scheme of Khadi and Village Industries Commission.

A Parliamentary Standing Committee on Personnel, Public Grievances, Law and
Justice visited the Bank to review/hold discussions with representatives of
the Bank on Vigilance and Containment of Corruption'.

ORGANISATION AND SUPPORT SERVICES:

Branch Network:

Delivery channels, including branches and ATMs, were further expanded for
closer customer proximity and increasing business potentiality. The Bank
has a pan India presence of 2729 branches, with an addition of 54 branches
during the year. Composition of the Bank's domestic branch network is as
follows:

Category No. of Branches
31.03.2008 31.03.2009

Metropolitan 612 629
Urban 650 674
Semi-urban 680 691
Rural 733 735
Total Branches 2675 2729
Extension Counters 195 170

As in the previous year, the Bank has 111 specialized branches catering to
the specific financial needs of different clientele categories. Break-up of
such branches is given in the following Table:

Categories of Specialized Branches 31.03.2009

1. SMEs 38
2. Overseas 17
3. Agri-Finance 10
4. Savings 7
5. NRIs 7
6. Asset Recovery Management 7
7. Prime Corporate 7
8. Industrial Finance 5
9. Stock Exchange 4
10. Capital Market 3
11. Mahila Banking 3
12. Consumer Finance 1
13. Housing Finance 1
14. Branch for Physically Challenged 1
TOTAL 111

InfoTech Progress:

The Bank took several initiatives in the InfoTech arena during the year. As
at the end of March 2009, Core Banking Solution (CBS) has been implemented
in 1053 Branches, 128 Extension Counters, 59 Currency Chests and 42 Service
Units (Accounts Sections/Clearing Sections/Local Processing Centres/Foreign
Departments) along with Integrated Voice Recording System (IVRS) and
Internet and Mobile Banking (IMB). Several modules/ facilities come along
with CBS like SPEED-e-module for enabling clients to deliver instruction
through internet, Funds Transfer Facility for the purpose of online
trading, sales and marketing module for marketing purposes, Lending
Automation Processing System (LAPS) for Retail and Corporate and Anti-Money
Laundering (AML) modules.

The Bank's IT initiatives have brought significant gains in business apart
from enhancing customer convenience. As at March 2009, the Bank had 2019
ATMs spread across 705 centres, including 609 offsite ATMs and 187 ATMs in
railway stations. It has also set up 150 e-kiosks for booking railway
tickets. Bank also has 24X7 ATM cheque deposit facility for the debit card
holders. Focusing on increasing ATM usage, the Bank could add a significant
2.46 million debit cards during the year, taking the tally under debit card
base to 5.75 million as at March 2009.

The Bank implemented Centralized Online Tax Accounting System (Government
Business module) in 375 branches and Excise and Service Tax modules in 113
branches, under CBS setup. Sales Tax module has been implemented in 62 CBS
and 109 non-CBS branches. E-payment of excise and service tax, direct tax
and custom duty has also been implemented in a number of branches under CBS
setup. The Bank has a well-designed and secured Corporate Network, covering
all the Branches/Offices for rolling out network-based delivery channels.
All the Circle Offices have been provided with the video conference
facility.

Infotech Progress 31.03.2008 31.03.2009

Core Banking Branches 569 1053
AnyWhere Banking Branches 1911 2062
Internet and Mobile Branches 1200 1362
Tele Banking Branches 600 1053
NEFT and RTGS 2675 2729
Customer Terminals 1752 1812

Manpower Profile:

As at March 31, 2009, the Bank had 44,090 employees on its rolls. The
break-up of staff is as under:

March March
2008 2009

Total No. of Employees 45260 44090
Officers 18186 17551
Clerks 16776 16500
Sub-Staff* 10298 10039

* Includes part-time employees.

Women employees comprising 9,381 constituted over 21% of the Bank's total
staff. The Bank appointed 66 women employees and promoted 94 women
employees during the year.

During the year, the Bank recruited 74 persons and promoted 216 employees
to various cadres belonging to the Scheduled Caste (SC) and Scheduled Tribe
(ST) categories. The total number of ex-servicemen as at the end of March
2009 stood at 2,051 and 81 of them were recruited in various cadres during
the year. There were 843 Physically Challenged Employees on the rolls of
the Bank.

Training / Human Resource Development (HRD):

Human resource policies have been reinvented and refocused time and again
to suit to the changing banking scenario. HR interventions like SPANDAN for
bringing attitudinal change among front line staff, PRATIBHA for grooming
in-house talents in varied specialized areas and executive grooming through
reputed institutes like NIBM were continued in 2008-09. Other significant
HR tools like Quality Circles, Study Circles, Staff Meetings and Brain
Storming Sessions have been implemented for effective team building and
collective excellence. Out of the 8 Quality Circle teams nominated to the
National Convention of Quality Circles at Vadodara, one team was awarded
Par Excellence' rating and the remaining 7 teams won Excellence' award.

A Governing Body has been constituted to give directions to the training
set-up for its re-orientation and effective functioning on an ongoing
basis. The Bank trained 47,692 employees during the year, covering a wide
range of functional areas including some of the new training programmes
like Control aspects of CBS, IT product awareness, CBS Security awareness,
Quality reporting for inspecting officials and Programme on Credit Audit.
Out of the trained staff, 9,871 personnel were women employees, 10,847
personnel belonged to the Scheduled Caste category and 3,355 personnel who
received training were under the Scheduled Tribe category.

To ease human resource management process, the Bank implemented Human
Resource Management Solution (HRMS), an efficient centralized solution
covering all HR activities. Annual Performance Appraisal System has been
modified, envisaging a more realistic approach to Performance Management
System, through more objective parameters and evaluation.

Changes in the Organizational Setup:

The Bank brought out further changes in its organizational/ operational
set-up to facilitate smooth functioning and effective results. In order to
provide a One-stop Shop' for meeting all banking needs of Prime
Corporates, a new Wing called Prime Corporate Credit Wing' was carved out
of the existing Corporate Credit Wing at Head Office.

The changing corporate expectations from the business environment and the
consequent need to reposition ourselves in the market induced the Bank to
make several changes. Such changes included:

Treasury and International Operations (T&IO) Wing has been renamed as
Treasury Wing by carving out non-treasury related functions, viz.,
International Division and Overseas Banking Division.

The functions of International Division, viz., Correspondent Banking
Division and Systems and Procedures Section along with Overseas Banking
Division have been brought under Financial Management Wing by renaming the
Wing as Financial Management and International Operations (FM&IO) Wing.

Foreign Departments were brought under the functional control of the Circle
concerned for effective monitoring. The administrative control of Foreign
Departments is already with respective Circles.

Compliance Department was delinked from Risk Management Wing and made
functional as an independent Compliance Department at Head Office.

In order to ensure a closer watch on the quality of individual high value
credits through the process of review and monitoring, prevent any downward
migration and also considering the prime focus on implementation of
advanced approaches for Basle II, Credit Monitoring Wing has been formed at
Head Office by carving out the functions of Credit Review and Monitoring
from Risk Management Wing.

Customer Orientation:

The Bank has initiated several measures in improving customer service. Most
importantly, the M/s Gallup Organization has completed the Survey for the
year 2008 and the final report is submitted to IBA. As part of the internal
survey to assess the quality of customer service rendered by our branches,
a self contained, prepaid questionnaire titled Contact Questionnaire (At
Canara Bank We Love to Listen) is designed and is made available on the
Bank's website to enable customers to give their feedback on services
online. The feedback received analyzed and corrective measures are taken
immediately. The Banking Codes and Standards Board of India (BCSBI) which
sets minimum standards for fair and transparent treatment to individual
customers, availing of banking services is adopted by the Bank. The Bank
made arrangements for providing copies of the Code of Bank's Commitment to
Customers' to customers at branches. An informative booklet containing all
the relevant information on 'Frequently Asked Questions by Customers' was
made available at all branches towards better Customer Service. The Policy
guidelines relating to Collection of Cheques/Instruments, Grievance
Redressal Mechanism and Compensation Policy were placed on the Bank's
website for use of the customers. The Bank has started a Call Centre for
providing information on various products/services which has reached an
average of 1200 calls per day.

Systems and Procedures:

During the year under review, 1412 branches/ units were subjected to on-
site Risk Based Internal Audit (RBIA) and IS Audit. Concurrent/ Continuous
Audit was conducted in all the 331 identified branches/units, covering 52%
of deposits and 69% of advances of the Bank. 291 branches were subjected to
income/revenue audit. System Audit and Surprise Inspection was conducted
in high risk branches in between two RBIAs. Snap Audits of fraud prone
areas were conducted in 302 sensitive branches, apart from regular RBIA.
Several new measures were introduced including snap audit of Zonal
Inspectorates (ZIs) in between two regular inspections, monthly review of
frauds vis-a-vis observations in RBIA/Concurrent Audit at Wing level, six
point matrix Action Plan for compliance by Circles, self inspection of
Wings for preparedness of ensuing Annual Financial Inspection by RBI and
trial exercise of conducting midterm audit of Circle Offices.

The Bank has ensured 100% Know Your Customer (KYC) compliance by all
branches through continuous monitoring by conducting snap audits and
executive visits to the branches. In compliance with Prevention of Money
Laundering Act, 2002, the Bank has put in place a software to generate Cash
Transaction Reports, Counterfeit Currency Detected Reports and Suspicious
Transaction Reports and the same are submitted to the Financial
Intelligence Unit - India, Ministry of Finance, New Delhi.

In addition to the above, a Fraud Review Cell and a Committee of 5 General
Managers have been formed to review and prevent the incidence of frauds.
Further, a compendium/ handbook on RBIA on areas of income leakage was
released for improving on the job efficiency.

Vigilance Setup:

The Bank's Vigilance Wing at its Corporate Office is headed by Chief
Vigilance Officer (CVO) in the rank of General Manager. The CVO is ably
aided by Vigilance Officers at all Circles, RRBs and most of the Bank
Subsidiaries. Guidelines on review, reporting and monitoring of frauds have
been issued and all the reported cases of frauds were reviewed from
adequacy of existing systems and procedures angle and necessary preventive
measures taken to prevent frauds. Fraud awareness circulars were issued to
enhance awareness on prevention of frauds. During the year, a special
communication was issued highlighting the need to strengthen the internal
control and initiate fraud prevention measures. As directed by the Central
Vigilance Commission, Vigilance Awareness Week' was observed from 3rd
November 2008 to 7th November 2008.

Security Arrangements:

The security environment in the Bank remained, by and large, normal during
2008-09. There were 41 incidents of crime during the year involving a loss
of Rs. 17 lakh. There were also three major fire incidents during the year
and loss approximated to Rs. 4.33 lakh.

Right to Information:

During 2005-06, under the Right to Information Act, 2005, the Bank set up
an exclusive Right to Information Act outfit to provide information and
bring transparency. During the year under review, the Bank dealt with all
the 1445 applications/ appeals received as per the provisions of the Act.

Implementation of Official Language:

During the year, the Bank made noteworthy progress under the implementation
of official language and won many prizes at various levels. The Town
Official Language Implementation Committee at Trivandrum won the First
prize instituted by the Government of India. Apart from this, many Circles/
Regional Offices and branches have received awards from Official Language
Department, Government of India and the respective Town Official Language
Committees.

In addition to the impressive percentage of trained employees as at March
2009, the Bank has notified 2201 of its branches under Rule 10 (4) of
Official Language Act, 1976. Official Language Implementation Committees
have been constituted at 2726 branches to motivate and guide the employees
towards effective implementation of Official Language Policy of the
Government of India.

The Bank has enhanced the use of Shabdaratna and Akruthi package for word
processing, usage of Bankscript package for data processing and also made
provision in ATM screens of the Bank for carrying transactions in 10 Indian
languages. Telebanking facility has also been provided in Hindi and English
and other 6 major regional languages. The corporate website of the Bank is
fully bilingual. 'Rajbhasha Net' was released in the internal network
'Cannet' of the Bank and electronic address booklet of the Bank 'Canpata'
has been developed bilingually and has also been hosted on Cannet.

Promotion of Sports:

In line with its rich tradition of promoting Sports, the Bank has on its
roll 48 sportspersons of outstanding calibre in various disciplines. During
the year, many of the sportspersons have participated in International /
National events. Some of the achievements of teams/ team members are as
under:

* The Bank's Cricket Team won the prestigious Corporate T20 Tournament
organized by Mumbai Cricket Association and also the Karnataka State
Cricket Association (KSCA) first Division League Championship.

* Sri Sunil B. Joshi, International Cricketer, reached the milestone of 400
wickets and 4000 runs in the Ranji Trophy Championships.

* Sri B.K. Venkatesh Prasad, former International Cricketer, continues his
successful stint as the Bowling Coach of the Indian Cricket Team.

* Smt H.M. Jyothi was part of the Indian 4x100 relay team, which secured
3rd position in the Asian Grand Prix at Bangkok during June 2008.

FINANCIAL SUPERMARKET:

Subsidiaries, Sponsored Entities and Joint Ventures:

Canara Bank, with an objective of offering One Stop Banking Mart' for the
customers forayed into diversified business activities by opening
subsidiaries during late 1980s. Today, the Bank functions as a Financial
Supermarket' with as many as nine subsidiaries/ sponsored entities/ joint
ventures in diversified areas. The Bank has taken significant steps
towards strengthening fundamentals of these entities so as to emerge as a
strong 'Financial Supermarket' in India. The performance of the Bank's
subsidiaries/ sponsored entities/ joint ventures was satisfactory during
the financial.

Commercial Bank of India LLC (CBIL):

CBIL, a joint venture of Canara Bank and State Bank of India, has been
operational since April 2004 at Moscow, Russia. The Company earned a profit
after tax of USD 1 million as at 31st March 2009.

Canbank Venture Capital Fund Limited (CVCFL):

CVCFL, the Trustee and Manager of Canbank Venture Capital Fund (CVCF), is a
wholly owned subsidiary of the Bank. Currently, it manages three Funds with
a corpus of Rs. 39.6 crore. During the financial year 2008-09, CVCFL
assisted 95 Ventures involving a sum of Rs. 107.57 crore. The Company
recorded a profit after tax of Rs.79.67 lakh for the year 2008-09. CVCF is
all set to float 5th Fund with a corpus of Rs. 500 crore.

Can Fin Homes Limited (CFHL):

CFHL, a sponsored entity of Canara Bank, is one of the premier housing
finance entities in the country. The Company sanctioned and disbursed loans
amounting to Rs.356.27crore and Rs.300.55crore respectively, taking
cumulative sanctions to Rs.5518.78 crore and disbursement to Rs.4782.31
crore as at March 2009. As at March 2009, the company posted a profit after
tax of Rs.31.52 crore, as against Rs.28.40 crore during the previous year.

Canbank Factors Limited (CFL):

Canbank Factors Limited, which is a factoring subsidiary of the Bank, is a
member of Factors Chain International. Factors Chain International is an
umbrella organization for factoring companies across the world. The
Company achieved a total business turnover of Rs. 3178.54 crore as at March
2009 and posted a profit after tax of Rs. 19.68 crore.

Canbank Computer Services Limited (CCSL):

CCSL is the only Software Subsidiary floated by a Public Sector Bank in the
country. CCSL is primarily engaged in IT and software development services,
training/consultancy and Registrar and Share Transfer Agency Services. The
Company is a member of the NASSCOM and registered as a Software Solution
Provider for World Bank projects. During the year, CCSL undertook the
launching of new ATM centers and its related services, Core Banking
Solution for RRBs, co-operative banks and Call Centre management. The
Company recorded a profit after tax of Rs. 120.96 lakh as at March 2009.

Canara Bank Securities Limited (CBSL):

Canara Bank Securities Limited, formerly Gilt Securities Trading
Corporation Limited) has hived off Primary Dealer business to the parent
bank. The Company diversified into capital market related activities,
mainly stock broking services to both institutional and retail clients.
Online Trading Counter for retail customers is its flagship product. It has
launched Futures and Options trading during November 2008. The Company
posted a profit after tax of Rs. 5.37 crore as at March 2009.

Canbank Financial Services Limited (Canfina):

Canfina has confined its activities to legal matters arising out of past
transactions in securities, besides concentrating on collection of lease
rentals and recovery of dues under decreed accounts. During the year,
Canfina recorded a profit after tax of Rs. 10.43 crore.

Canara Robeco Asset Management Company Limited (CRAMC):

To manage assets of Canbank Mutual Fund, M/s Canbank Investment Management
Services Limited (CIMS) was established in 1993. In the year 2007, Canara
Bank divested 49% stake of Asset Management Company in favour of M/s Robeco
Groep N V forming a joint venture, for managing the assets of Canbank
Mutual Fund. The Company has since been renamed as Canara Robeco Asset
Management Company Limited. The JV aims to capture a decent market share of
Mutual Fund industry by bringing best international practices and expertise
supported by the vast network of the Bank. With a majority share of 51%
held by the Bank, Assets Under Management (AUM) of the Company stood at Rs.
3234 crore and with investor base of 2.98 lakhs as at March 2009. The
Company is currently managing 20 schemes. Canara Robeco Asset Management
Company Ltd has won Prestigious LIPPER Award for the Bond Fund House of the
year 2008.

Canara HSBC Oriental Bank of Commerce Insurance Company Limited:

An Insurance Joint Venture floated by the Bank in association with
internationally reputed HSBC (Asia Pacific) Holdings and Oriental Bank of
Commerce. The Company commenced its business operations during June 2008.
With a majority shareholding of 51% in the Company, the Bank has ventured
into niche segment, with a fine blend of international expertise and its
own domestic out-reach. The Company launched 6 products during 2008-09 and
aims to float 2 group products and 7 individual Plans in the ensuing
financial year. Out of the 21 private players in the insurance field in
India, the Company ranked the 13th position as at March 2009.

Regional Rural Banks (RRBs):

Canara Bank sponsored 3 RRBs in three States with a network of 780
branches, viz., Pragathi Gramin Bank in the State of Karnataka, Shreyas
Gramin Bank in the State of Uttar Pradesh and South Malabar Gramin Bank in
the State of Kerala. All RRBs sponsored by Canara Bank are profit making as
at March 2009 with a combined operating profit level at Rs.139.19 crore and
profit after tax of Rs. 83.30 crore. Aggregate business level of these
RRBs crossed the Rs.14,000 crore mark to reach Rs.14184 crore, comprising
Rs.7559 crore under deposits and Rs.6625 crore under advances as at March
2009. Reflecting financial soundness and asset quality, gross NPA ratio of
all RRBs further came down to 2.25% as at March 2009 from 2.88% as at March
2008. In tune with policy focus to double the credit flow to agriculture
sector, the RRBs disbursed an amount of Rs.4008 crore, recording a y-o-y
growth of 23.5% during the year under review. Priority sector advances
constituted 89.54%. All these RRBs totally have made 1096 villages as money
lender free and promoted 1661 Farmers Clubs.

During 2008-09, Pragathi Gramin Bank has achieved No.1 position in the
State of Karnataka in terms of total business. South Malabar Gramin Bank
continues to enjoy its No.1 status in the State of Kerala. Shreyas Gramin
Bank is No.1 under Employees productivity in the State of UP.

BRAND INITIATIVES:

To make the Bank more contemporary and attractive to the new generation
customers, all channels of communication including advertising, marketing
collaterals and stationery have been used to enhance brand image.
Differently designed cheque books were provided for premium customers
availing the facility under SB Gold Scheme and Canara Premium Current
account scheme. The brand value is being propagated internally through
screen savers, posters and through workshops.

Brand Finance Plc, London which has evaluated the top 500 brands pertaining
to the Banking Industry across the Globe has ranked Brand 'Canara' at 251
for the period ending 31st December 2008.

New initiatives in the pipeline to further enliven the Brand 'Canara'
include the facility of payment of Electricity bills through ATMs and
internet, Payment of utility bills through internet, facility of funds
transfer and purchases through mobiles.

AWARDS/ACCOLADES:

In recognition of the varied initiatives, the Bank was conferred with
several awards and accolades during the year. Some prominent awards
received are as under:

* Golden Peacock National Training Award 2008 for excellence in training.

* Global HR excellence in Training, an award conferred by the Asia Pacific
HR Congress, the largest rendezvous of HR Professionals, at its employer
Branding Talent Management Congress held on 22nd and 23rd August 2008,
Delhi.

* Best Corporate Social Responsibility Practice Award, instituted by BSE,
NASSCOM and Times Foundation.

* The Bank won two Silver Corporate Collateral Awards for Best Corporate Ad
in the Print Media and Best Corporate Film on Corporate Social
Responsibility at the Public Relations Council of India Awards 2009.

VARIOUS POLICIES OF THE BANK:

There is a system of well-defined policies and procedures of the Bank.
During the year, concerted efforts were made to streamline the policies and
procedures of the Bank in the light of regulatory requirements of the RBI,
the directions of the Government of India and the emergent requirements of
the Bank in the present day context. Accordingly, there has been a sharper
focus on policies relating to, among others, Credit Risk Management, Market
Risk Management, Operational Risk Management, Asset Liability Management,
Liquidity Risk Management, Country Risk, Counterparty Bank Risk, Corporate
Governance, Disclosures, Collateral Management, Stress Testing, Compliance
Functions, Disaster Recovery and Business Continuity Planning, Business
Lines, Outsourcing and Internal Capital Adequacy Assessment Process
(ICAAP), Know Your Customers (KYC), Anti-Money Laundering (AML), Recovery
and Investments.

CHANGES IN THE BOARD OF DIRECTORS:

Year 2008-09 saw changes in the composition of the Board of Directors of
the Bank.

Dr. K.P. Krishnan was nominated as Director representing Government of
India, in the place of Shri Amitabh Verma on 10.06.2008.

Shri A.C. Mahajan was appointed as Chairman and Managing Director of the
Bank on 01.07.2008, after Shri M.B.N. Rao attained superannuation on
30.06.2008.

Shri B.B. Tandon resigned as Shareholder Director of the Bank on
26.07.2008.

The terms of Shri. Shabbeer Pasha and Shri. Pankaj Gopalji Thakker as Non-
Official Directors on the Board ended on 15.09.2008.

Shri Devender Dass Rustagi was nominated as Workman Employee Director on
the Board of the Bank on 15.09.2008.

Shri G.S. Vedi, Executive Director, moved to Punjab and Sind Bank as
Executive Director on 16.10.2008.

Shri D.L. Rawal, Executive Director, moved to Dena Bank on his elevation as
Chairman and Managing Director on 01.01.2009.

Shri Jagdish Pai K.L. was appointed as Executive Director of the Bank on
04.02.2009.

Shri S. Shabber Pasha and Shri Pankaj Gopalji Thakker were nominated as
Non-Official Directors on the Board of the Bank on 20.02.2009.

Shri H.S. Upendra Kamath was appointed as Executive Director of the Bank on
26.03.2009.

DIRECTORS' RESPONSIBILITY STATEMENT:

The Directors, in preparation of the annual accounts for the year ended
March 31, 2009, confirm the following:

* That in the preparation of the annual accounts, the applicable accounting
standards had been followed along with proper explanation relating to
material departures.

* That they had selected such accounting policies and applied them
consistently and made judgments and estimates that are reasonable and
prudent so as to give a true and fair view of the state of affairs of the
Bank at the end of the financial year and of the profit or loss of the Bank
for the period.

* That they had taken proper and sufficient care for the maintenance of
adequate accounting records in accordance with the provisions of applicable
laws governing banks in India for safeguarding the assets of the Bank and
for preventing and detecting fraud and other irregularities.

* That they had prepared the annual accounts on a going concern basis.

ACKNOWLEDGEMENT:

The Bank is making concerted efforts to maximize its latent potential to
the benefit of all its stakeholders, viz., shareholders, customers,
investors, Government, RBI, employees and the public at large.

The Board sincerely appreciates the significant contribution made by the
Directors on the Bank's Board who completed their tenure during the
financial year under review, to customers for their patronage, to the
shareholders for their support, to the Government and the RBI for their
valuable guidance and support, to the Bank's correspondents inland and
abroad for their cooperation and goodwill and to all the staff members, who
rendered whole-hearted support. In its determined attempt to significantly
upscale its activities, explore new vistas, enhance the balance-sheet and
achieve a good growth in both the top-line and the bottom-line, the Bank
received unstinted support from all sections and gratefully acknowledges
their unqualified help and support.

A.C. MAHAJAN
CHAIRMAN AND MANAGING DIRECTOR