Kotak Mahindra Bank - 2008-2009 Annual Report

KOTAK MAHINDRA BANK LIMITED

ANNUAL REPORT 2008-2009

DIRECTOR'S REPORT

To
The Members of
KOTAK MAHINDRA BANK LIMITED.

The Directors present their Twenty Fourth Annual Report together with the
audited accounts of your Bank for the year ended 31st March 2009.

FINANCIAL HIGHLIGHTS:

A) Kotak Mahindra Bank Limited - Consolidated financial highlights:

31st March 31st March
2009 2008
Rs. crore Rs. crore

Total income 7,286.90 7,678.47

Total expenditure, excluding provisions
and contingencies 5,940.90 5,907.53

Operating Profit 1,346.00 1,770.94

Provisions and contingencies, excluding
provision for tax 329.79 363.02

Profit before tax 1,016.21 1,407.92

Provision for taxes 363.53 449.19

Profit after tax 652.68 958.73

Less: Share of minority interest 3.73 (18.69)

Add: Share in profit of Associates 3.44 13.81

Consolidated profit for the Group 652.39 991.23

Earnings per Equity Share

Basic (Rs.) 18.90 29.62

Diluted (Rs.) 18.87 29.18

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

Total Income 3,423.01 2,998.83

Operating Profit 679.99 669.89

Total expenditure, excluding provisions
and contingencies 2,743.02 2,328.94

Provisions and contingencies, excluding
tax provisions 253.93 272.11

Profit before tax 426.06 397.78

Provision for taxes 149.96 103.85

Profit after tax 276.10 293.93

Add: Surplus brought forward from the
previous year 528.17 354.18

Amount available for appropriation 804.27 648.12

Appropriations:

Statutory Reserve under Section 17 of
the Banking Regulation Act, 1949 69.03 73.50

General Reserve 13.81 14.70

Transfer to Investment Reserve Account 41.70 -

Transfer to Capital Reserve 2.97 1.48

Proposed Dividend 25.96 25.87

Corporate Dividend Tax 1.86 4.40

Surplus carried to Balance Sheet 648.94 528.17

DIVIDEND:

Keeping in mind the overall performance and the outlook for your Bank, the
Directors recommend a dividend of Rs. 0.75 per share (previous year Rs.0.75
per share), entailing a payout of Rs. 27.82 crore including dividend
distribution tax (previous year Rs. 30.27 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:

The Bank has a high Capital Adequacy Ratio ('CAR'). The CAR as at 31st
March 2009 was 19.86% with Tier I being 16.01%. The CAR under Basel II was
20.01% with Tier I being 16.13%. At a consolidated level the CAR is 22.84%
under Basel I.

During the year, your Bank has not issued any Capital under Tier II. As on
31st March 2009, outstanding Unsecured, Redeemable Non-Convertible,
Subordinated Debt Bonds was Rs. 465.70 crore and outstanding Unsecured,
Non-Convertible, Redeemable Debt Capital Instruments Upper Tier II stood at
Rs. 364.24 crore.

OPERATIONS:

Against the backdrop of the economic slowdown not only in India but across
the globe, coupled with uncertainty around its depth and duration, the
Branch Banking business realigned its business plans in the Financial Year
2008-09 by moderating the network expansion plans. This will also enable
your Bank to take advantage of optimized rental costs. The network
expansion was scaled down to 39 branches and 74 ATMs in the year. The
overall network now stands at 217 branches and 387 ATMs (including 175 off
site ATMs). However, your Bank continued to expand its customer base and
added over four lakh new customers during the year to cross the ten lakh
retail customer mark in branch banking segment. Your Bank continued to add
good quality corporate salary customers through some important mandates and
empanelment from very large and reputed companies.

This year your Bank focused on leveraging the Bank branches for
distribution of asset products. This has improved the overall quality of
earnings at an enterprise level for your Bank, due to better quality credit
and lower distribution costs. Your Bank also focused on small businesses by
reaching out to them through its expanded branch network. A holistic
proposition on trade services coupled with credit facilities helped your
Bank create a profitable segment of customers.

Your Bank continued its focus on the Non-Resident Indian segment. To
facilitate the NRIs to interact with your Bank, the NRI section on the
website has been revamped and a Web Chat facility has been offered wherein
customers can interact on real time basis with our dedicated service desk.
In the Financial Year 2008-09 your Bank was also successful in growing its
business with Retail Institutional segment comprising, trusts,
associations, societies, clubs and governmental departments and
organizations.

The volatility of the equity and investment markets did have an impact on
the revenue from distribution of third party products, mainly mutual funds
and structured products. Distribution of insurance products through branch
network however reached a new peak and your Bank has established itself as
a key player in bancassurance space in the country, Your Bank continues to
offer a best in class bouquet of investment products to its customers.

Your Bank has won several awards for high quality implementation of various
technology aspects of the business in this year as well. Your Bank
continues to invest in technology which helps in delivering its proposition
to customers in a cost effective and secure manner. Your Bank is in the
process of implementing a world class CRM platform which will go a long way
in providing smooth and prompt customer service across its network.

Your Bank continues its focus on multiple channels like Net banking, ATMs,
Mobile/SMS banking, Home banking, Debit Cards etc. During the year several
new features like, On line password, two factor authentication, improved
features for security of fund transfers, e-tax payment facility, auto
payment of bills, PIN based IVR were introduced.

As we move ahead the primary focus areas for your Bank would be to enhance
throughput and further improve productivity and efficiency of its branch
network, and establish the branch as a single point of contact for the
customers for all products of the group.

Your Bank continued and intensified its coverage of large corporate and mid
market corporate clients during the year and your Bank widened and deepened
its franchise in these segments. The year saw a surge in credit demand from
the corporate and mid market business segments both for working capital and
term facilities. Given the developments in the global markets and the fall
in availability in cross border trade finance and foreign currency loans,
corporate across segments reverted to the domestic banking segment to meet
their demand for working capital finance and trade credit. Your Bank was
able to tap this opportunity by offering a variety of products and made
significant inroads.

Trade Finance volumes & revenue for the year increased by 40% compared to
last year. This was made possible by continuing to efficiently service our
existing clients as well as by adding many new customers across the
country. This year your Bank penetrated the large corporate segment by
providing these customers tailored structured trade solutions and best in
market customer service.

Your Bank added 275 new Cash Management Services customers during the
Financial Year 2008-09 by offering them technology driven solutions to
effectively enhance and optimize their cash flows and liquidity through an
entire gamut of CMS products and services. This has been made possible
through constant innovation coupled with high degree of customization to
cater to the dynamic business scenario.

The Commercial Vehicle division and Infrastructure division realigned its
business during the year, in line with the market realities. Both the
sectors saw a sharp drop in sales due to depressed demand for vehicles and
equipments from the operators, particularly in the third quarter, although
there was a marked improvement in the fourth quarter. However, conditions
remain uncertain. Under these conditions, the division focused on careful
customer selection through revised risk management guidelines. The emphasis
was on building long term business sustainability through improved
operational efficiencies. The year saw increased focus on cross sell and
fee based activities.

The Agri business continued to maintain its portfolio & income growth
during this year. Its focus on identifying farmers engaged in scientific
farming and post production activities ensured that the portfolio was not
affected despite the stress in the economy. The division successfully
completed the exercise to pass the benefit of loan waiver to eligible
farmers as proposed by the finance minister in the budget. The exercise was
completed well, before the due date set by the government. The agri
portfolio quality has continued to remain strong reposing your Bank's
growing confidence in agri and agro based sectors. The Agri business is now
becoming a large portion of your Bank's advances portfolio. The portfolio
is contributing to the profitability and ensuring that the priority sector
requirements of your Bank are met. The Agri business also commenced its
exposure to the micro finance loans segment aimed at servicing the lower
strata of the society. The micro finance loans are also extended to ensure
financial inclusion of the weaker segments as desired by the government.

The growth rate in Home Finance business witnessed a declining trend in
line with the market; especially in the salaried segment, as the customer
adopted a policy of wait & watch.

Similarly, the Personal Loan business tapered as a result of reduced demand
& external market scenario. NPAs showed an increasing trend and your Bank
responded by timely allocation of resources & adopting a customer centric
approach in recoveries. Your Bank continued its stress on quality based
underwriting for fresh bookings.

It has been a challenging year for the Asset Reconstruction business. The
year passed by witnessed several auctions of the NPA portfolios by banks.
Many of these auctions failed due to serious price mismatch between the
buyers and sellers. Your Bank purchased a retail portfolio, and there are
good opportunities in the coming few years, in this space. Your Bank
resolved several accounts and made reasonably good recoveries. However, the
recoveries in few accounts were delayed due to depressed real estate market
and tight liquidity position in the market place.

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) your Bank offered the following
products: syndication of loans, bonds, mezzanine financing, promoter
funding and acquisition financing and securitisation.

Your Bank launched credit card business and reached the milestone of 1 lac
cards in the first year of operations. A sizable business was contributed
by your Bank's existing high end premium customers. The card design and
product benefits have received overwhelming response from customers. The
customer spends across all variants of cards have been amongst the top
three in industry. This has reaffirmed the customer acceptability of the
product. As a testimony to this, Kotak Royale Signature Credit Card won
'Product of the Year 2009' award in the credit cards category. Credit Card
business clocked Rs. 493 crore of total spends in the year with a book size
of Rs. 258 crore. Industry credit cards spends growth rate has witnessed
slowdown owing to current market conditions.

A major theme in Information Technology at your Bank during the year has
been 'Consolidation'. This included the merger of software applications,
convergence of databases, virtualization of hardware servers and the
consolidation of the datacenter itself. All of which have ensured cost
savings and technology operational efficiencies for the Group. Another
thrust area was to enhance the different channels to provide improved
customer service. Your Bank has received several awards for its Information
Security including an Asia Pacific wide 'Financial Insights' award for
innovation in Information Security.

The technology team at your Bank received the 'IT Team of the Year' award
given by the Indian Bankers' Association, for the third year in a row. This
is addition to three other IBA awards, bring the tally to 19 awards
in the last three years proving that innovation and optimal use of
technology is institutionalized in your Bank.

Your Bank was ranked among the top five in Corporate Governance Practices
in Asia/Pacific in the IR Global Rankings 2009 conducted by the MZ Consult
NY, a leading investor relations and financial communications firm. Your
Bank has achieved this ranking for the second year in a row. For the
current year, your Bank has been ranked as No 1 in Asia/Pacific and No 2 in
the Financial services industry across all the regions covered.

Your Bank was the proud recipient of the prestigious Hewitt-Outlook
Business 'Best Employers in India' award for the second time in a row.

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 Prime Limited posted a good financial performance. The life
insurance subsidiary, Kotak Mahindra Old Mutual Life Insurance Limited has
controlled growth in premium and branch infrastructure and has recorded
profit for the first time. Kotak Mahindra Capital Company Limited,

Kotak Mahindra Asset Management Company Limited, Kotak Securities Limited
and the international subsidiaries posted lower profits due to weak global
capital markets and the economic slowdown. Kotak Investment Advisors
Limited has gained impetus.

Kotak Mal Pension Fund Limited, subsidiary of the Bank has been selected by
the Pension Fund Regulatory and Development Authority for the pension fund
management business.

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

In terms of the approval granted by the Central Government vide their
letter dated 13th February 2009 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 2009, 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 2009.

Options granted during the year:

Plan 2002-03 - Nil

Scheme 2005 - Nil

Scheme 2007 - 45,31,550 options

Pricing Formula:

As per the ESOP Scheme 2007:

The Exercise Price shall be a price, as may be determined by the
Board/ESOP/ Compensation Committee, equivalent to or discounted up to 50%
of the 'Average Market Price'.

The 'Average Market Price' for the purpose of this clause would mean the
average of the closing price of Equity Shares of the Issuer Company, during
two weeks period prior to the date of the meeting of
Board/ESOP/Compensation Committee at which 'Plan Series' under the Scheme
is approved, on the Stock Exchange on which the Equity Shares of the Issuer
Company are listed. In case the Equity shares of the Issuer Company are
listed on more than one Stock Exchange then the closing price at the Stock
Exchange where there was highest trading volume during the said two week
period shall be considered for determining the Average Market Price.

'Plan Series' would mean a documented plan framed by Board /ESOP
/Compensation Committee for each tranche of grant of Options, to all
Eligible Employees, at a specific Exercise Price (which shall be determined
by the Board/ESOP/Compensation Committee for the purpose of that particular
Plan Series) and other terms and conditions as mentioned in that Plan
Series.

The Board/ESOP/Compensation Committee could under special circumstances
decide that the Exercise Price shall be Rs. 10/- per share. In such cases,
the immediately succeeding Directors Report/Corporate Governance Report
shall carry details of the same.

Options in force at the beginning of the year:

Plan 2002-03 - 8,12,812 options

Scheme 2005 - 42,74,990 options

Scheme 2007 - 47,48,550 options

Options Vested:

Plan 2002-03 - 8,12,812 options

Scheme 2005 - 8,00,470 options

Scheme 2007 - 9,44,312 options

Options exercised:

Plan 2002-03 - 3,53,351 options

Scheme 2005 - 4,91,400 options

Scheme 2007 - 1,51,266 options

Total number of
shares arising as
a result of
exercise
of options:

Plan 2002-03 - 3,53,351 equity shares of Rs. 10/- each.

Scheme 2005 - 4,91,400 equity shares of Rs. 10/- each.

Scheme 2007 - 1,51,266 equity shares of Rs. 10/- each.

Options lapsed:

Plan 2002-03 - 4,59,461 options.

Scheme 2005 - 4,03,920 options.

Scheme 2007 - 6,51,537 options.

Variation of terms of options:

No variations made in the terms 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 of options:

Exercise amount received:

Plan 2002-03 - Rs. 2,82,68,080/-

Scheme 2005 - Rs. 5,67,25,000/-

Scheme 2007 - Rs. 52,81,950/-

Total number of options in force:

Plan 2002-03 - Outstanding options - Nil.

Scheme 2005 - Outstanding options - 33,79,670

Scheme 2007 - Outstanding options - 84,77,297

Details of options granted during the year to:

(i) Senior management personnel:

Scheme 2007 - Name of senior No. of options
Management Personnel granted

Mr. C. Jayaram 1,55,000
Mr. Dipak Gupta 1,60,000

(ii) Any other employee who receives a grant in any one year of options
amounting to 5% or more of options granted during that year:

NIL

(iii) identified employees who were granted option, during any one year,
equal to or exceeding 1 of the issued capital (excluding outstanding
warrants and conversions) of the company at the time of grant:

NIL

Diluted Earnings Per Share (EPS) pursuant to issue of shares on exercise of
options calculated in accordance with AS20 Earnings Per Share:

* The diluted Earnings Per Share (EPS) pursuant to issue of shares on
exercise of options calculated in accordance with AS20 is 18.87
(Consolidated) 7.99 (Standalone).

Where the company has calculated the employee compensation cost using the
intrinsic value of stock options, the difference between the employee
compensation cost so computed and the employee compensation cost that shall
have been recognized if it had used the fair value of the options, shall be
disclosed. The impact of this difference on profits and on EPS of the
company shall also be disclosed:

* Had the Bank (Consolidated) followed the fair value method for accounting
the stock option compensation expense would have been higher by
Rs.41,16,21,010/- with consequent lower Consolidated profits. On account of
the same the diluted EPS of the Bank (Consolidated) would have been less by
Rs. 0.79 per share.

Weighted-average exercise prices and weighted-average fair values of
options shall be disclosed separately for options whose exercise price
either equals or exceeds or is less than the market price of the stock:

* The weighted average price of the stock options exercised is Rs. 90.64
and the weighted average fair value is Rs. 224.89.

* Note: Above figures are derived by considering the options granted and
exercised by employees of the Bank and its subsidiaries.

A description of the method and significant assumptions used during the
year to estimate the fair values of options, including the following
weighted - average information:

A. Stock price:

It is the closing market price on the National Stock Exchange of India
Limited prior to the meeting of the Board in which the options are granted.

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 compounded 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 respective expected live of the different
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 option 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 grant has been derived by dividing the dividend
per share by the 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. K.M. Gherda retired as a Director of the Bank at the Twenty Third
Annual General Meeting of the Bank held on 28th July 2008. At the same
meeting, Mr. Asim Ghosh who was appointed as an Additional Director of the
Bank with effect from 9th May 2008, was appointed as a Director of the
Bank.

Mr. Pradeep Kotak, Director of the Bank retires by rotation at the Twenty
Fourth Annual General Meeting. Mr. Kotak has expressed his desire not to
seek re-appointment.

Your Directors place on record their deep appreciation for the valuable
advice and guidance rendered by Mr. Gherda and Mr. Kotak during their
tenure as Directors of the Bank.

Dr. Shankar Acharya retires at this Annual General Meeting and is eligible
for re-appointment.

The Board of Directors of the Bank, at its meeting held on 12th May 2009,
has re-appointed Dr. Shankar Acharya as part-time Chairman of the Bank, for
a period of three years, with effect from 20th July 2009 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.

Mr. Shishir Bajaj was appointed as an Additional Director of the Bank with
effect from 12th May 2009 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 a member along with a requisite deposit of Rs. 500/-
proposing the candidature of Mr. Shishir Bajaj for his appointment as a
Director.

Mr. Shishir Bajaj is an MBA from the Stern School of Business, New York
University majoring in Finance. Mr. Bajaj is presently the Chairman and
Managing Director of Bajaj Hindusthan Ltd. ('BHU), the largest sugar and
ethanol manufacturing company in India. He has been looking after the
affairs of BHL since 1974 shouldering its overall responsibility and was
made the Managing Director of BHL in 1988. He has over 35 years of
extensive experience in the Indian Sugar Sector.

AUDITORS:

Messrs S.R. Batliboi & Co., Chartered Accountants, auditors of your Bank,
retire on the conclusion of Twenty Fourth Annual General Meeting and are
eligible for re-appointment. 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:

The employee strength of your Bank along with its subsidiaries as of 31st
March 2009 was around 18000, as compared to around 21000 employees a year
ago.

The Bank standalone had around 8400 employees as of 31st March 2009. 179
employees employed throughout the year and 88 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 2009, 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 2009 and of the profit of your Bank for the financial
year ended 31st March 2009;

(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 Acharya
Place: Mumbai, Chairman
Date : 12th May 2009

MANAGEMENT DISCUSSION AND ANALYSIS:

Macro-Economic And Industry Developments:

INDIAN ECONOMY LARGELY RESILIENT TO GLOBAL STORM:

The path for the Indian economy through financial year 2008-09 (FY 08-09)
was, to a very large extent, determined by the happenings in the global
economic environment. FY 08-09 can be broken down distinctly into two
phases, the first phase lasting till end-August 2008 and the other starting
from around mid-September after United States of America allowed Lehman
Brothers to fail. The global financial markets witnessed significant
changes after mid-September 2008 with large international financial
institutions either failing or being restructured or being nationalised.
This led to severe disruptions in the short-term money markets, freezing of
credit markets, widening of risk spreads and a sharp fall in the equity
prices globally. Beginning mid-September 2008 the Indian financial markets
also came under severe stress, with the contagion effects of the global
financial markets. This was initially felt through the equity market
channel as Foreign Institutional Investors started to sell in the Indian
equity markets to meet redemption pressures in their home markets.

The onset of the global financial crisis interrupted India's growth
momentum. After clocking an annual average growth of 8.9% over 2003-2008,
India was headed for a cyclical downturn in FY 08-09. However, the growth
moderation was sharper due to negative impacts of the global financial
crisis. In the third quarter of FY 08-09, GDP growth was lower at 5.3% as
compared with 8.9% in the corresponding period of FY 07-08. In Q1 and Q2 of
FY 08-09 GDP growth was at 7.9% and 7.6% respectively. The moderation in
growth was mainly felt in the industry and the services sector due to the
external shock. The services sector growth that had been the prime growth
engine for India over the past five years or so started to moderate. The
services sector growth moderated from the double digit levels but still
held up strongly at 9.5% in Q3 FY 08-09 on account of countercyclical rise
on account of government expenditures for the implementation of the 6th pay
Commission awards. A breakup of GDP by expenditures indicates that the dips
in the private consumption expenditure and investment demand are to a large
extent being made up by the government consumption demand.

The Index of Industrial Production (IIP), which witnessed an average growth
of around 5.6% in the first 4 months of FY 08-09 suddenly slipped to grow
at only 1.7% in August 2008. Even as it recovered to grow at 6.0% in
September, the IIP decelerated thereafter and even entered the negative
zones in December 2008 and February 2009. The growth in the manufacturing
segment of the IIP averaged at 6.1% in the first 4 months of the FY but
decelerated sharply to an average growth of 1.1% in the next 7 months, with
negative numbers for few months. In terms of the use-based classification,
all segments, namely the basic, capital, intermediates and consumer goods
sectors recorded lower growths in April-February FY 08-09 compared to the
same period last year. Reduction in external demand due to the slowdown in
the global economies was also responsible for the lower growth of the
manufacturing sector in India. Export growth started to decelerate since
September 2008 and turned negative in October 2008 and the negative trend
continued till February 2009.

Headline WPI inflation increased sharply from 7.75% in end-March 2008 to
peak at 12.91% per cent on 2nd August, 2008 with hikes in the domestic
administered prices of petrol, diesel and LPG on account of a sharp
increase in the international crude oil prices. Significant increases in
prices of metals, chemicals, machinery and machinery tools, oilseeds/edible
oils/oil cakes and raw cotton led to a rise in the manufacturing group's
inflation to 11.56% by 2nd August compared to 7.34% as at end-March 2008.
However, headline WPI inflation started to decline rapidly thereafter and
due to reductions in the administered prices of petroleum products and
electricity as well as due to declines in the prices of freely priced
petroleum products (such as ATF, naphtha etc). The drop in the global
commodity and food prices (since July 2008) led to reductions in the
domestic prices of oilseeds, edible oils, oil cakes, raw cotton, cotton
textiles and iron & steel. Further, aided by a large base effect, Headline
WPI inflation came down rapidly to end the FY 08-09 at 0.26% while the
inflation for primary articles, fuel group and manufacturing articles ended
the FY 08-09 respectively at 3.46%,-6.11% and 1.42%.

CPI inflation increased sharply since June 2008 mainly due to increases in
the prices of food, fuel and services (represented by the 'miscellaneous'
group). CPI-Industrial workers rose from 5.50!o in January 2008 to 7.8% by
April 2008 and further to 10.5% by November 2008. CPI-Industrial Workers
have now started to moderate but still remains high at around 9.6% for
February 2009.

Consequent to the higher trajectory of inflation in the early part of FY
08-09, the priority assigned to the monetary policy was identified to
eschew further intensification of the inflationary pressures and to firmly
anchor inflationary expectations. Consequently, RBI increased the Cash
Reserve Ratio (CRR) by 75 bps between April and May 2008. This was followed
up by increases in the Repo Rate by 75 bps in June 2008 to 8.50% from 7.75%
in two steps. In July 2008 the CRR was increased further by 50 bps to 8.75%
while the LAF Repo Rate was hiked by 50 bps to 9.00%. The monetary
tightening phase ended with CRR being raised by another 25 bps to 9.00%
from 30th August 2008.

The priority for the monetary policy changed since September 2008 from
demand management to arresting moderation in growth. With global liquidity
drying up in the days immediately after the Lehman crash, the priority
facing the RBI was to ensure that the domestic money and credit markets
functioned normally and also ensure that the liquidity stress did not
trigger solvency issues. The need to maintain a comfortable rupee liquidity
position and also to augment foreign exchange liquidity was of topmost
priority. Thus effective from 11th October 2008, the CRR was brought down
by 250 bps in one go from 9.00% to 6.50% and then again by 50 bps to 6.00%
from 25th October 2008. The Repo rate was also reduced by 100 bps from
9.00% to 8.00% from 20th October 2008. By December 2008 RBI also started to
reduce the Reverse Repo rate from its peak of 6.00%. By end March 2009, RBI
had reduced the CRR and the Repo Rate by 400 bps each (to 5.00% each by
end-March 2009) from its peak levels while the Reverse Repo rate was
reduced from 6.00% to 3.50%, a drop of 250 bps.

In the first half of FY 08-09 money market conditions remained more-or-less
orderly and the call money rates remained largely within the corridor set
by the policy rates - namely the Reverse Repo rate on the lower side and
Repo rate on the higher side. As the RBI was following a tight monetary
policy in the first half of the FY 08-09, the operative policy rate was the
Repo rate and the overnight money market rate quoted around the upper end
of the LAF corridor. In mid September 2008, there was significant tightness
of rupee liquidity and the call rate moved even above the Repo Rate. A
series of measures was initiated by the RBI to infuse liquidity into the
system, including the reduction in the CRR. These measures were effective
in reducing the weighted average call money rates to the LAF corridor from
3rd November 2008. The system remained in surplus in the rest of the
financial year and the overnight call money rate tracked the Reverse Repo
rate.

The adverse impact of the global financial market turmoil on India's BoP
was felt in terms of reversal of FIIs inflows and decline in long-term and
short-term debt flows. Even though, on the positive side, NRI flows
improved and FDI flows proved to be resilient, capital account balance
moderated during April-December 2008 to US$ 246.4 billion from US$ 291.8
billion in April-December 2007. On the other hand, gross capital outflows
increased to US$ 231.1 billion from US$ 209.8 billion during the same
period. Q3 of FY 08-09 thus showed up with a negative quarterly capital
account balance, a scenario last encountered in Q1 1998-1999. The negative
shocks transmitting to India through the external sector accounts were
contained by the RBI through a loss of foreign exchange reserves. The
foreign exchange reserves of India, excluding valuation effects, fell by
US$ 20.4 bn in April-December 2008.

Rupee was under pressure to weaken against the Dollar from the beginning of
the financial year as rising crude oil prices (WTI reached a peak of
US$140/bbl on 6th June 2008) led to a significant deterioration of the
trade balances in an atmosphere of lower capital inflows. As international
crude oil prices started to come off significantly starting July 2008 and
dropped to only around US$ 40-45 a bbl in December 2008, the pressure on
the rupee failed to abate in any meaningful way as a lower oil import bill
was largely negated by falling exports and capital outflows. The
strengthening of the US$ vis-a-vis other major currencies also implied
meant that INR would weaken against the US$. The Rupee/US$ exchange rate
was Rs 39.99/$ at end-March 2008 and fell to Rs. 52.09 per dollar on 5th
March 2009, before recovering to Rs. 50.95 per dollar at end-March 2009.
The Indian rupee had depreciated by 21.5% against the US$ by end-March 2009
over its level at end-March 2008. In the same period, the rupee depreciated
by 6.5% against the Euro, 22.8% against the Japanese Yen and 23.6% against
the Chinese yuan. However, the rupee appreciated by 9.1% against the pound
sterling.

Yields in the secondary government securities market hardened from April
2008 till the first fortnight of July 2008 on account of heightened
inflationary expectations and concomitant monetary policy tightening such
as CRR and LAF repo rate increases. The yield on the 10-year benchmark bond
touched its peak of around 9.5% on 11th July 2008, compared to 7.93% as at
end-March 2008 and almost the same time when international crude oil prices
peaked. Thereafter, the government securities' yields softened till around
mid-September 2008 as the inflationary pressures abated significantly. The
yields however temporarily hardened around end-September 2008 as liquidity
conditions tightened due to the adverse developments in the international
financial markets and advance tax outflows. As RBI eased monetary policy,
liquidity became surplus and Headline WPI inflation eased, the yield on the
10-year benchmark Central Government security eased substantially till end-
December 2008 to 5.31%, compared to 8.63% as at end-September 2008.

In the first 6 months of FY 08-09, barring a few instances, issuances of
dated securities of the Central Government were in accordance with the
assurance calendar for H1 of FY 08-09. However, in the H2, the Government
of India raised Rs.1,16,000 crore to meet the additional expenditure
approved by the Parliament by way of two supplementary demands for grants
and various stimulus packages. Not with standing continuing monetary policy
easing by the RBI, market sentiment worsened in January and February 2009,
following the large and abrupt increase in the Central Government's market
borrowing programme for FY 08-09 that led to fears of excess supplies of
SLR securities. The large market borrowing requirement of the Central
Government for 2009-10, as was announced in the Interim Budget on 16th
February 2009, also affected the bond market entiments negatively. RBI
sought to conduct the borrowing program of the Central Government in a
'non-disruptive' fashion by initiating a series of auction-based OMO
purchases of government dated securities and announcing de-sequestering of
MSS bonds to the extent of Rs. 45,000 crore. Despite such measures, the 10-
year benchmark Central Government yield hardened to 6.02% by end-February
2009 and continued to move higher - early March 2009, despite a cut in the
LAF interest rates effective 5th March 2009. The announcement of enhanced
amounts of auction-based Durchases of the government dated securities by
the RBI on March 16 and 19, 2009, helped to improve market sentiments. The
ten-year yield stood at 7.01% as at end-March 2009.

In FY 08-09, the yield on 5-year AAA-rated corporate bonds witnessed a
hardening trend up to October 2008, softened thereafter but inched back up
since February 2009 due to the general negative sentiments in the bond
markets. The credit spread between the yields on 5-year AAA-rated bonds and
year Government Securities have been wider in the 2nd half of FY 08-09 as
compared to the 1st half. However, it narrowed in the 4th quarter of FY 08-
09, the spread being 179 bps an 31st March 2009 as compared to 312 bps on
31st December 2008.

Bank deposit and lending rates that had firmed up till October 2008 started
to ease from November 2008, reflecting monetary easing measures opted by
RBI. Interest rates offered by PSU banks on deposits of maturity of 1-3
years were in the range of 8.00-9.25% in March 2009 as compared with the
range of 8.50-10.75% in December 2008, while those on deposits of maturity
of over 3 years were in the range of 7.50-9.00% as compared with 8.50-9.75%
in the same period. Similarly, the range of interest rates offered by
private sector banks and foreign banks on deposits of varying maturity
declined in March 2009 as compared with the range in December 2008.

The benchmark prime lending rates (BPLRs) of PSU banks and private sector
banks declined from the range of 12.50-14.00% and 13.00-17.25%
respectively, in December 2008 to a range of 11.50-14.00% and 12.75-16.75%,
respectively, in March 2009. The range of BPLRs of foreign banks remained
unchanged at 10.00-17.00% in the same period. The weighted average BPLR of
PSU banks and private sector banks decreased from 14.00% and 16.48%
respectively in October 2008 to 12.48% and 16.03%, respectively, in March
2009. The weighted average BPLR of foreign banks decreased marginally from
15.32% to 15.07% in the same period. The share of sub-BPLR lending
(excluding export credit and small loans) for PSU banks decreased to 68% in
December 2008 from 70.6% in March 2008. The sub-BPLR lending of private
sector banks, at 87.90l0, decreased from March 2008 level of 88.7%. The
sub-BPLR lending of foreign banks, however, declined significantly from the
high of 77.6% in March 2008 to 61.3% in December 2008. Together, the share
of sub-BPLR lending for all SCBs (excluding export credit and small loans)
declined from 75.9% in March 2008 to 71.5% in December 2008.

CONSOLIDATED FINANCIAL PERFORMANCE:

Overview:

Consequent to the effects of the global slowdown and slowing domestic
economy, the Bank along with its subsidiaries consciously slowed down
growth during the year. The Group continues to invest significantly in
building two of its key businesses - branch banking and life insurance.

During the year, the Bank won the following awards:

> Was named among Hewitt Best Employers in India, 2009 (second successive
time).

> 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.

> The Best IT team of the year at the Banking Technology Awards, 2008
(third year in a row).

As at 31st March 2009, the Bank has built a network of 217 full fledged
branches spread across 126 cities and towns and had 387 ATMs.

Due to subdued capital market conditions, Kotak Mahindra Capital Company
and Kotak Securities have shown a drop in profits.

The life insurance subsidiary, Kotak Mahindra Old Mutual Life Insurance
continued its growth momentum and posted a first full year profit.

Assets under management (AUM) as at 31st March 2009 was over Rs. 33,900
crore (approximately USD 6.7 bn) comprising assets managed and advised by
he Group. Of this, equity assets managed / advised by the Group were around
Rs. 16,790 crore. The AUM with Kotak Mahindra Mutual Fund (Kotak Mutual)
was over Rs. 15,900 crore. This crossed the Rs. 25,000 crore mark in April
2009.

Consolidated Financials:

The consolidated financial performance of the Bank for the year ended 31st
March 2009 including key ratios is summarized below:

Rs. crore

Income and Profit 2008-09 2007-08

Total income* 7,249.18 7,549.39

Operating profit 1,346.00 1,770.94

Consolidated Profit after tax (PAT) 652.67 991.23

* Income is considered net of sub-brokerage.
Rs. crore

Particulars 2008-09 2007-08

Net worth after minority interest (Rs. crore) 6,522.54 5,823.91

Earnings per share (diluted) (Rs.) 18.87 29.18

Book value per share (Rs.) 188.7 168.97

Net Interest Margins (NIMs) % 6.0% 5.6%

Return on Average Net Worth % 10.5% 22.3%

Net NPA % excluding stressed assets portfolio 1.18% 0.33%

Consolidated capital adequacy ratio (%) 22.8% 20.2%

Consolidated profit after tax (after minority interest and share of profit
in associates) was Rs. 652.38 crore for FY 08-09. (Rs. 991.23 crore in FY
07-08).

The consolidated total income was Rs. 7,249.18 crore during FY 08-09 and
Rs. 7549.39 crore in FY 08-09. Other income was Rs. 2,882.61 in FY 08-09
and Rs. 3,901.00 crore in FY 07-08. Consolidated 'other income' had three
main components: Commission, fees, exchange & brokerage, profit-onsale of
investments and premium on life insurance business. Commission, fees,
exchange & brokerage net of sub brokerage reduced to Rs. 1,034.07 crore in
FY09 from Rs. 1,676.29 crore in FY08, due to reduced volumes and
transactions in capital markets and investment banking. Premium income from
life insurance business grew by over 39% to Rs. 2307.09 crore reflecting
significant momentum in the business.

Operating expenses other than policy holders reserves increased from
Rs.2,929.22 crore in FY 07-08 to Rs. 3,052.08 crore in FY 08-09.

Consolidated advances were Rs. 22,497.62 crore as at 31st March 2009
(Rs.21,984.68 crore as at 31st March 2008). As at 31st March 2009,
consolidated net NPAs excluding acquired stressed assets portfolio were
1.18% of net advances (0.33% as at 31st March 2008). The breakup of the
consolidated advances is given below:

Rs. crore
Advances 31-Mar-09 31-Mar-08

Commercial Vehicles & Construction Equipments 3,334.54 3,628.51

Auto Loans 4,774.17 4,735.36

Personal Loans 2,394.78 3,112.65

Home Loans 3,166.42 2,639.98

Corporate Banking 2,773.53 2,386.69

Agriculture Finance 2,365.02 1,664.25

Stressed Assets Portfolio 359.36 549.36

Others 3,329.79 3,267.60

Total Advances 22,497.62 21,984.68

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 six full years of operation as a commercial
bank in FY 08-09. 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 four broad business
segments:

> Lending

> Retail liabilities and branch banking

> Corporate banking (including small and medium enterprises -SME)

> Treasury and investments

The profit before tax of the Bank for FY 08-09 was Rs. 426.06 crore in FY
08-09 and Rs. 397.78 crore in FY 07-08. The profit after tax of the Bank
was Rs. 276.09 crore and Rs. 293.93 crore in FY 07-08. The break up of
segmental results are as follows:

Rs. crore
31-Mar-09 31-Mar-08

Treasury & BMU* 129.29 (5.83)

Corporate/Wholesale Banking 225.34 333.63

Retail Banking

(i) Lending 366.42 216.63

(ii) Branch Banking (225.34) (146.68)

(iii) Credit Cards (69.80) (7.66)

Sub-total 71.28 62.29

Other Banking business - 2.92

Sub-total 425.91 393.01

Unallocated income 0.15 4.77

PBT 426.06 397.78

* Balance Sheet Management Unit.

Capital adequacy ratio of the Bank as at 31st March 2009 was 19.86% (31st
March 2008 - 18.65%). Tier I ratio was 16.01%. As per BASEL II Capital
adequacy ratio of the Bank as at 31st March 2009 was 20.01%. Consolidated
Capital Adequacy ratio as at 31st March 2009 was 22.8%.

The advances of the Bank as at 31st March 2009, stood at Rs. 16,625.34
crore (Rs. 15,552.22 crore as at 31st March 2008). As at 31st March 2009,
the net NPAs of the Bank excluding the acquired stressed assets portfolio
were at 1.26% of net advances (0.38% as at 31st March 2008). The Net NPAs
of the Bank including stressed assets portfolio were at 2.39% of advances
as at 31st March 2009 (1.78% as at 31st March 2008).

As at 31st March 2009, the deposits of the Bank were Rs. 15,644.93 crore
(Rs. 16,423.65 crore as at 31st March 2008).

As at 31st March 2009, total deposits comprised of Rs. 3,418.16 crore of
current account deposits (Rs. 3,152.36 crore as at 31st March 2008),
Rs.1,700.91 crore of savings deposits (Rs. 1,517.54 crore as at 31st March
2008) and Rs. 10,525.86 crore of term deposits (Rs. 11,753.74 crore as at
31st March 2008). The demand and savings deposits as at 31st March 2009
(excluding monies held as collection banker) increased by 20% to
Rs.5,086.77 crore from Rs. 4,251.06 crore as at 31st March 2008. The Bank
crossed the one million deposit accounts mark during the year.

Advances:

The bank was cautious in increasing its total loans and advances during the
current financial year. Consequently, the total advances of the Bank
increased by about 7% from Rs. 15,552.22 crore in FY 07-08 to Rs.16,624.34
crore in FY 08-09. The break up of the advances of the Bank is given below:

Rs. crore
31-Mar-09 31-Mar-08
A. Lending

Commercial Vehicles & Construction Equipments 3,334.54 3,628.52

Personal Loans 2,261.60 2,896.24

Home Loans 3,166.42 2,639.98

Agriculture Finance 2,365.02 1,664.25

B. Corporate Banking 2,773.53 2,386,69

C. Others 2,724.22 2,336.55

Total Advances 16,625.33 15,552.231

Lending:

The Lending segment continues to account for over 80% of the total advances
of the Bank. The segment registered a significant growth in profit before
tax, growing by more than 69% from Rs. 216.66 crore in FY 07-08 to
Rs.366.41 crore in FY 08-09.

Retail and commercial advances grew only 5% from Rs. 13,165.54 crore in FY
07-08 to Rs.13,851.80 crore in FY 08-09. The Bank has consciously slowed
down lending in some of the segments, especially the unsecured personal and
business loans, due to increasing delinquency. However, significant
traction was witnessed in some of the products like home finance, tractor
loans and agricultural finance.

Growth in advances against commercial vehicles & construction equipments
was also controlled due to the slowing down of the industry. Delinquencies
increased due to increased fuel costs, lack of freight availability and low
freight rates. While the total advances in this segment recorded a decline
of about 8% to Rs. 3,334.54 crore in FY 08-09, the bank used the
opportunity to widen the relationship base with existing customers by
offering a broader set of banking products including working capital loans,
guarantees and other non fund services.

The Agri business division recorded a growth in advances of over 40% to
Rs.2,365.02 crore in FY 08-09 and significantly improved its profitability.
Delinquencies were under control and the bank offered a range of project
finance and working capital funding products to meet the financing
requirements of agricultural machinery, horticultural projects, storage
warehouses and farmers implementing new farming techniques.

Corporate Banking:

Kotak Bank offers a wide range of Corporate Banking products and services
to the following categories of clients:

* Large corporate & mid market corporates

* Multinational companies

* Financial institutions

* Public sector undertakings

The Bank was able to add close 200 clients during the year during the year
and increased its focus towards high end corporates including Public Sector
Undertakings. The Bank used the opportunity during the phase of tight
liquidity conditions in Q3 of FY 08-09 to penetrate several such
relationships. This will be a continued focus going forward.

Kotak Bank's corporate banking revenues are derived from loan products and
other value-added services. These products include working capital
facilities, Medium-Term Financing, Trade finance & services, 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 customize instruments &
structures, develop innovative products and then deliver these through high
level of execution capabilities and a wide distribution network across the
country.

Branch Banking:

The Bank added 39 branches, 38 offsite and 36 onsite ATMs this financial
year, taking the total number of branches to 217, 175 Offsite ATMs and 212
ATMs. The bank had a debit card base of 722,560 customers as of 31st March
2009 compared to a base of 536,767 as of 31st March 2008.

During the year, on account of weakness in the capital markets, third party
equity distribution was affected. This was partially offset by improving
and increasing the distribution of debt mutual funds. Further, fresh life
insurance premium collections also improved during the year. The other
initiatives that the business undertook this year were:

* Account activation team was put in place to improve early engagement and
usage of the account. This team was set up in the Top six cities.

* A formal Customer Engagement Program (CEP) was started wherein the bank
has a systematic calendar for contacting customers and periodically
reviewing their banking needs.

* A new statement software was launched which provides customized view of
the total portfolio held by the customers.

* A new facility where customers can view and download preceding 18 months
statements online was also introduced.

* Sunday banking was launched in select branches which cater only to
residential localities.

* In order to increase service quality and improve complaint handlings, a
zonal service quality team was set up.

* In net banking, a new two factor authentication process was put in place
to counter phishing attacks and enhance security of transactions.

* Online tax payment facility was launched which provides our customers
ability to pay their advance taxes online.

* A new facility for obtaining the net banking password for customers was
developed. Through a combination of online authentication and SIMS on the
mobile, the password can be generated instantly saving a lot of time for
the customer.

* The process for online third party transfers has also been strengthened
whereby customers can add beneficiaries through an authentication process.

* In our continuing endeavor to offer best in class products and services
we added several products, futures and services like ACE Deposit (a deposit
cum MFSIP instrument), Auto Bill Pay system, Financial planning software,
Account Blocked Share Application (ASBA) process for share application
through the IPO process, Get Money feature to move money from the
customer's Non Kotak account to the Kotak account.

* In the retail institution business which focus on the trust, association,
Clubs, Societies and Government bodies we added many new clients.

* Increased focus on Transaction, Trade and Forex saw an increase in fee
income.

* Penetration of net banking, debit cards usage etc continued to show a
positive trend.

Treasury:

The global economic outlook deteriorated sharply post the global financial
meltdown witnessed in the third quarter of FY09. The failure of Lehman
Brothers Lehman bust led to an unprecedented increase in counterparty risk
and freezing of the credit markets worldwide. Contrary to the 'decoupling
hypothesis', emerging economies too were hit hard by the crisis including
India. The contagion effect led to a sharp fall in India's GDP growth to
5.3% in the period between October to December 2008. Unfortunately, the
tightening up of global liquidity was co-timed with a tightening of Rupee
liquidity in India due to the second quarter advance tax outflows in mid-
September, leading call rates to overshoot the upper end of the 9% LAF
ceiling.

The treasury responded to the above developments by increasing, amongst
others, focus on liquidity and counter-party risk management. Proactive
raising of liquidity through customer deposits, Refinances (from
refinancing agencies like SIDBI, NHB and NABARD) and consolidation of group
liquidity resulted in the Bank being surplus during most part of the tight
liquidity phase. The Bank continued its focus on deposits from household
sector to lend stability to the liabilities side. The Treasury and ALCO
increased the frequency of review of counter-party limits (both inter-bank
and customer counterparties) and actual utilization against the limits to
ensure that there is no contagion impact on the Bank. 'Country Risk' limits
were also tightened to guard against possible sovereign failures. Since the
foreign exchange markets were extremely volatile the Bank significantly
downsized cross currency foreign exchange and derivatives trading limits.
As a proactive risk management measure the Bank's participation in the
Securitization markets were also consciously moderated.

Governments and central banks across countries responded to the crisis
through big, aggressive and unconventional stimulus packages to prop up
economic growth. In India, the stimulus response was two pronged. The
Government of India responded with three fiscal stimulus packages while the
RBI resorted to aggressive easing of interest rates and liquidity enhancing
measures since early September till the end of the current financial year.

During the financial year, RBI decreased the Repo Rate by 400 bps to 5%,
Reverse Repo Rate by 250 bps to 3.5%, CRR by 400 bps to 5% and SLR by 1% to
24%. A further rate cut of 25 bps was administered in RBI's annual monetary
policy in April taking the Reverse Repo and the Repo rate to the present
level of 3.25% and 4.75% respectively. Unwinding of Market Stabilization
Scheme and Open Market Operations were also used to maintain an easy
liquidity environment.

Liquidity conditions which had tightened considerably during the third
quarter of FY09 turned comfortable in the fourth quarter of FY09 due to
these liquidity enhancing measures.

The treasury responded to the change in monetary situation by a calibrated
reinstatement of trading limits while continuing the heightened vigil on
liquidity, counter-party and sovereign risks. Falling interest rates also
presented trading opportunities in the Fixed Income markets which the
treasury was fully geared to capitalize. In the foreign exchange and
derivatives markets the focus of the treasury shifted from trading to
customer flow business. Consequently, cross border trade transactions of
customers also witnessed a surge and flows generated from the business
significantly increased the FX turnover of treasury. The treasury
consolidated its position in the bullion market by significantly increasing
number of customers and its presence across cities in India. The Debt
Capital Markets business shifted focus from securitization to bond and loan
syndication resulting in an increase in fee income. During this fiscal the
focus of the treasury was also on up gradation of technology platforms and
re-engineering of various operating processes.

KOTAK MAHINDRA CAPITAL COMPANY (Investment Banking):

Kotak Mahindra Capital Company (KMCC) primarily operates as a full service
investment bank and is also a trading cum clearing member of the National
Stock Exchange on all three segments viz. Cash, F&O and WDM.

On account of the slump in the global markets, the investment banking
business was severely affected. In this challenging environment, KMCC
managed to remain profitable for the year. KMCC believes it has the
required strength to overcome the near term uncertainty and pain and be
ready for positioning itself as the leading Investment Bank in India once
the markets revive.

Despite bad markets, KMCCs performance enabled it to win a few awards:

1. 'Best Investment Bank 2008' - Finance asia

2. 'Best Equity House in India 2008' - Finance Asia

3. 'Best Domestic Equity House 2008' - Asia Money

4. 'India Equity House of the Year 2008' - IFR Asia

5. 'Best Domestic Investment Bank 2008' - Triple A Country Awards

During the year FY 08-09, Kotak Investment Banking continued with its
philosophy of maintaining strong client relationships for long term growth
and success. KMCC also ventured overseas to build cross border capabilities
in the M&A space by tieing up with GCA Savvian Corporation, japan;s sixth
largest Investment bank by transaction value. KMCC focused on structured
products like FCCB buybacks, FCEBs, Domestic bonds etc. Some of the notable
deals that were concluded during the year by KMCC as Financial Advisor,
were:

(1) Reliance Industries - amalgamation of
Reliance Petroleum with itself USD 9,400 mn

(2) State Bank of India rights issue USD 4,198 mn

(3) CRH Plc acquisition of My Home Industries USD 825 mn

(4) Tech Mahindra acquisition of Satyam Computers USD 351 mn

(5) KSK Energy Initial Public offering USD 193 mn

(6) Mahindra & Mahindra private placement to
Goldman Sachs USD 175 mn

(7) Mahindra Finance preferential allotment to
TPG Axon & Std Chartered PE USD 105 mn

(8) Thomas Cook acquisition of Thomas Cook
(India) & Thomas Cook Egypt USD 80 mn

(9) Kei-Rsos Maritime sale of 100% equity to
Great Offshore Limited USD 63 mn

(10) M&M acquisition of Yangcheng Tractor, China USD 50 mn

KMCC has a strong pipeline of mandates in various sectors for mergers and
acquisitions as also equity capital markets. The company expects fund
raising activity through QIPs and rights to pick up speed soon and IPO's to
be back in the second half of FY 09-10. With zero leverage, no risky
exposures, high capital availability, strong pipeline and excellent client
relationships, we are confident of our ability to deal with opportunities
and challenges that lie ahead.

Highlights:

The financial position of KMCC for the current and previous financial year
is given below:

Rs. crore

Particulars 2008-09 2007-08

Income 97.82 286.31

Profit before tax 21.59 175.19

Profit after tax 12.81 115.31

KOTAK SECURITIES (Stock broking):

On account of the slump in capital markets, average daily volumes in FY 08-
09 were - 500% lower than the year FY 07-08 in cash market segment and 34%
in the derivatives segment. This resulted in a sharp decline in the
company's revenues. The national outlet network stood at 783 (down from
877) due to a rationalization of branch/franchisee outlets. The number of
trading accounts added during the year was - 55,000. Portfolio Management
Services were also affected. The AUM of funds under management stood at
Rs.2,237 crore as at 31st March 2009 (Rs. 3,379 crore as at 31st March
2008). Primary market issuances of equity products were virtually absent
with only a few small issues hitting the market. The mobilization for KS
for these issues was good but negligible compared to the previous year. The
Company's Institutional Division continues to be one of the leading
institutional brokers in India. The division caters to specific
requirements of foreign and domestic institutional investors in local
shares, derivatives and overseas depository receipts. It has a full-fledged
research division, which comprehensively covers macro-economic, industry
and company research, effectively encompassing all the major areas of the
Indian economy. The division offers various services including corporate
access to investors, direct market access and algorithmic trading in
addition to research and tradeexecution services. The division has
dedicated sales desks in London, Mumbai and New York covering almost all
large global institutional investors.

Financial Highlights:

The financial position of Kotak Securities for the current and previous
financial year is given below:

Rs. crore

Particulars 2008-09 2007-08

Income 719.87 1,330.03

Profit before tax 166.77 580.22

Profit after tax 106.48 408.69

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. In addition to car finance,
KMP also carries out other lending activities. Other Lending activities
include financing against securities, securitisation and other loans
/services. There was a slow down in the automobile industry and it
registered a decline of 1.7% during FY 08-09 as compared to a growth of 11%
for FY 07-08. Total unit sales of cars and MUV's were around 14.9 lac units
in FY 08-09 versus 15.2 lac units during FY 07-08.

Consequently, KMPs gross advances declined to Rs. 5,675 crs in FY 08-09
from around Rs. 5,925 crs in FY 07-08. However, despite the slowdown in the
auto industry and the turmoil faced by the financial market participants,
KMP registered record profits during the year, registering a growth of 56%
in PAT in these tough market conditions.

KMP continued to focus on maintaining margins in the retail car finance
business, fee based income, controlling costs and credit losses, while
maktaining its positioning in the car finance market. KMP has been a part
of the car finance industry since more than 18 years. Over this period, it
has carved out a niche for itself and is considered a thought leader in the
industry. It has strong relationships with key stake holders in the
industry viz. manufacturers, dealers and customers. Its firm commitment to
value add to all its stake holders are key drivers for KMP's performance.
During the year KMP settled a large stressed asset transaction. The profit
and provision write back from the same have been included in the current
year profits.

Financial Highlights:

The financial position of KMP for the current and previous financial year
is given below:

Rs. crore
Particulars 2008-09 2007-08

Income 982.21 739.97

Profit before tax 243.21 154.63

Profit after tax 157.00 100.62

KOTAK MAHINDRA ASSET MANAGEMENT COMPANY LIMITED KOTAK MAHINDRA TRUSTEE
COMPANY LIMITED (Mutual Fund):

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

On account of the global slump, the mutual fund industry also went through
a period of turbulence. The year saw a large variance in the total assets
of the mutual fund industry seeing a high of Rs. 6,00,525 crore in May 2008
and a low of Rs. 4,02,030 crore in November 2008. The total corpus was
Rs.4,93,287 crore in March 2009, a fall of 13% for the year. Considering
the situation, during the year SEBI brought in a variety of changes on the
way Mutual funds carry out their businesses.

The average Assets under Management for the month of March 2009 was
Rs.18,204 crore, as compared to Rs. 18,071 crore for the month of March
2008, posting a marginal growth. The Average Assets under Management of the
industry has seen a reduction of 6.5% over the same period. This has led to
an increase in overall market share for the firm from 2.68% in March 2008
to 3.62% in March 2009.

The number of folios as at 31st March 2009 was about 11.25 lakhs as
compared to about 9.39 lakhs as at 31st March 2008, a growth of 19%. KMAMC
now has a presence in 25 states with the number of branches having
increased to 80 from 66 in the financial year 2009.

During the year under review, the mainstream debt schemes of the Fund
performed well. The performance on the debt side was characterized by a
softening trend in the yields due to rate cuts by the RBI. As a result,
'duration funds' out performed 'short tenure funds'. Some of our debt
schemes won awards at the ICRA Mutual Fund Awards 2009. Kotak Liquid
Regular Plan was ranked 7-star and has been awarded the Gold Award for Best
Performance in the category of open-ended liquid funds for one year as well
as 3-year period ending 31st December 2008. Kotak Flexi Debt was ranked 5
Star by ICRA.

Kotak Floater Long-Term was ranked 5 star fund by Value research Online-
indicating performance among the top 10% funds of its category in terms of
historical risk adjusted returns.

The debt schemes managed by your Company have received over 18 Performance
awards over the past nine years from CNBC, CRISIL, Outlook Money, ICRA
online and Lipper Fund Awards.

Performance of equity funds reflected the poor sentiment of the market
caused by the impact of the sub prime and credit crisis. Conservative
diversified and large cap oriented funds relatively performed better as
compared to schemes in the thematic and other aggressive categories.
Performance of our equity schemes remained satisfactory with Kotak 30
showing better relative performance as reflected by the award it won. Kotak
30 was ranked 5 star at ICRA Mutual Funds Awards 2009-indicating
performance among the top 10% in the category of open ended diversifies
equity-defensive for a three year period ending 31st December 2008. Kotak
30 also got a CPR 1 under the open-ended equity scheme, December 2008
indicating 'very good' in the consistent CPR performer that ranks within
10% of the 29 schemes ranked in the category.

In the year under review, KMAMC won the mandate to manage Pension Funds
through its subsidiary under the New Pension Scheme (NPS) regulated by the
Pension Funds Regulatory and Development Authority (PFRDA).

Financial Highlights:

The financial position of KMAMC and KMTC for the current and previous
financial year is given below:

Rs. crore
KMAMC 2008-09 2007-08

Total income 85.29 68.0

Profit before tax 15.88 2.22

Profit after tax 10.33 1.03

KMTC 2008-09 2007-08

Total income 9.89 10.98

Profit before tax 8.72 10.11

Profit after tax 5.80 6.89

Innovative product offerings, continued focus on fund performance and
franchise building in terms of geographical expansion, penetration and
distributor tie ups would be the key drivers of growth during FY 09-10.

KOTAK INVESTMENT ADVISORS LIMITED (Formerly Kotak Mahindra Securities
Limited) (Alternate asset management & advisory):

Kotak Investment Advisors Ltd. (KIAL) is the investment manager / advisor
for private equity and realty funds.

The aggregate alternate assets managed / advised by KIAL as at 31st March
2009 was around Rs. 6,500 crore (USD 1.3 billion). The Company manages five
domestic funds and advises three offshore funds.

Private Equity Funds:

(a) Kotak SERF India Fund:

Kotak SEAF India Fund was formed in August 2004. 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 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 has made three
investments till date.

(c) Kotak India Growth Fund II:

Kotak India Growth Fund II had its first closing in March 2008 and is aimed
at investing in mid sized corporates with a growth orientation. KIGF-II has
made one investment till date.

Realty Funds:

(a) Kotak Mahindra Realty Fund:

Kotak Mahindra Realty Fund (KMRF) was formed in May 2005. 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 fully committed its capital
in nine investments.

(b) Kotak Alternate Opportunities (India) Fund:

Kotak Alternate Opportunities (India) Fund (KAOIF) was 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
has till date made seven investments in a diversified portfolio.

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.

Financial Highlights:

The financial position of KIAL for the current and previous financial year
is given below:
Rs. crore

Particulars 2008-09 2007-08

Income 114.78 37.81

Profit before tax 74.77 20.71

Profit after tax 48.04 13.47

Since this business was carried out in the Company for only part of the
previous year the financial results are not comparable.

KOTAK MAHINDRA OLD MUTUAL LIFE INSURANCE:

Kotak Mahindra Old Mutual Life Insurance is a 74:26 joint venture
partnership between Kotak Mahindra Group and Old Mutual Plc; South Africa,
an international savings and wealth management company based in UK and
amongst the top 100 in the FTSE 100.

Kotak Life insurance is in the business of distributing life insurance,
deferred annuity and employee benefit products to its individual and group
clientele. The company has developed a multi-channel distribution to cater
to its customers and presently markets through tied, alternate, group and
direct marketing channels on a pan-India basis.

The Indian life insurance industry is bracing itself to tackle the economic
challenges that have unfolded in the previous year. After several years of
unbridled expansion, the sector is experiencing certain moderation. The
focus of most insurers is shifting from large-scale expansion to sustained
value creation and efficient use of capital.

Innovation and a competitive product basket along with service delivery
have been the focus of Kotak Life Insurance during FY 08-09. Keeping in
mind changing consumer needs, the company has introduced two new plans and
revised four existing plans. New plans introduced are 'Kotak Long Life
Secure Plus'-A comprehensive protection plan with triple death benefit and
'Kotak Long Life Wealth Plus'-Investment oriented plan that encourages
corpus creation for post retirement needs. The plans revised include 'Kotak
Term Plan and 'Kotak Preferred Term Plan' (Revision of premium rates). Both
these plans provide an economical way to attain high level of life cover
for the customers. Other plan revisions are 'Kotak Platinum Advantage
Plus'-Unique investment plan created for the wealth creation needs of High
Net worth Individuals and 'Kotak Secure Retirement Plan' -A without cover
retirement plan further strengthening the pension basket of the company.
The key change in the above two plans enables to provide more flexibility
to the customers.

Over the year, Kotak Life insurance provided special emphasis on customer
service and there have been several initiatives in the service delivery and
customer interface. Some key Initiatives taken during FY 08-09 are:

* A pan-India single toll free number, followed with streamlining of the
complaints management process.

* Increased accessibility for its customers over the internet and the
mobile phone-'Online Policy Manager' and various services and alert systems
via SMS.

* The highlights of the calibrated expansion done Kotak Life are as below:

* Over 43,000 life advisors with significant efforts directed toward their
training and increasing their qualifications.

* 103 corporate agents and 127 empanelled brokers.

* Widened its reach and operates from 197 branches in 141 cities.

* 46 branches were added with focused expansion in Tier II cities which
provided favorable business potential.

* Achieved 43% growth in rural policies.

Kotak Life insurance has shown consistent value based growth in such
challenging environment. Highlights of its performance in FY 08-09 are:

* The Gross Total Premium Received has grown from Rs. 1691.13 Crore to
Rs.2343.21 Crore, a growth of 39%.

* New Business Premium, Adjusted Premium Equivalent (single premium
weighted at 1/10th) has grown by 23% to Rs. 1292.98 Crore.

* Renewal income has grown by 71% to Rs. 1,000 Crore.

* The company sold over 490,000 policies, an increase of 57% over the
number of policies sold in the previous year.

Financial Highlights:

The financial position of Kotak Life Insurance for the current and previous
financial year is given below:

Rs. crore
Particulars 2008-09 2007-08

Gross premium Income 2,343.19 1,691.14

First year premium 1,287.39 1,045.57

Profit before tax 14.34 (72.71)

Profit after tax 14.34 (71.87)

International Subsidiaries:

The Bank has overseas subsidiaries with offices in Mauritius, London,
Dubai, Singapore, New York and San Francisco.

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 year saw a decline in assets under management/adviced. During the year
the Indian regulators permitted Foreign Institutional Investors (FIIs) a
brief and limited window to invest in the debt markets in India. The
international entities were able to garner $ 282 million for investments
into Indian debt through its funds. As at the balance sheet date the
international operations manage/advise funds aggregating to USD 1.1 million
(USD 2.1 million as at 31st March 2008).

The subsidiaries also made significant progress in their relationships with
a variety of distributors in various geographies. This should help the
operations in future as and when business conditions improve. The
international operations are well capitalized and this provides a good
buffer in withstanding turbulent market conditions.

Financial Highlights:

The combined financial position of International subsidiaries for the
current and previous financial year is given below:

Rs. crore
Particulars 2008-09 2007-08

Income 97.91 154.45

Profit before tax 34.83 87.77

Profit after tax 24.29 64.50

Technology:

A major theme in technology at the Kotak group over this last year has been
consolidation. This includes the merger of software applications,
convergence of databases, virtualization of hardware servers and the
consolidation of the datacenter. These have ensured cost savings and
technology operational efficiencies for the Group.

To bring greater value to its customers, the group has used best-in-class
technology solutions. In the process, a robust network infrastructure has
been implemented and multiple data centers have been consolidated into a
single one, which is centralized, green and can scale up to the growing
needs. This solution is designed to ensure 100 percent concurrent
maintainability in its power and cooling function, and offers optimal
uninterruptible power supply (UPS) configuration for energy efficiency.
This also has a new-generation switching technology and IP convergence
solution which caters to over 3,000 users and help in achieving higher
productivity using cutting edge technology.

The bank and brokerage business took on the initiative to virtualize
servers, resulting in a decrease in hardware. This in turn, has lead to
decreased space requirements in the data center, lowered power consumption,
decreased system software license costs and improved efficiencies in
maintenance and operations of the servers.

The brokerage business launched a program to merge applications to leverage
common functionality across systems and upgrade the technology stack. The
outcome of this is decreased needs for system licenses and lowered
maintenance costs.

In the life insurance business, databases for all systems have been
converged to run on a single instance. This has resulted in improved
availability of business critical data and significantly improved
performance of all system batch processes.

Customer service continued as a focus area. The bank upgraded its IVR
capability to include credit cards and to increase the automated self help
capabilities for the customers. The life insurance business launched
customer portals for both individual and group businesses, to serve as a
one-stop shop for customer queries/servicing requests. SMS and Email
channels were successfully used to proactively send notifications to
customers and agents. Kotak Securities created services for a Franchisee
Portal.

Technology innovation was visible in a number of projects. A Portfolio
Analytics Tool, was launched, to be used by fund management business from
PMS, wealth management, life insurance, asset management and the
international business. Thus providing analytical capability for them all,
on a single platform. The insurance business launched an online rewards and
recognition system for the Tied Channel. And the bank focused on providing
warehousing and analytics MIS and dashboards for its credit card and retail
customers

Information Security measures were further enhanced. Two factor
authentication was extended to the Corporate Banking business. End user
equipment security was upgraded with data encryption software and constant
monitoring for antivirus upgrades. As in previous years, this year as well,
Kotak received validation that Information Security at the Bank, is state
of the art, when it received 4 awards in this area. The most recent one
being an Asia Pacific wide, Financial Insights award for Innovation in
Information Security.

The technology team at the bank received the 'IT Team of the year' award
given by the Indian Bankers Association, for the third year in a row. This,
in addition to 3 other awards, brings the tally to 19 awards in the last 3
years. Proving that innovation and optimal use of technology is
institutionalized in the bank/group.

RISK MANAGEMENT:

The Bank's risks are managed through a framework that relates the Bank's
Integrated Risk Management policy and structure of risk management to the
risk strategy and objectives. 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 Governance:

The Bank's risk management architecture is overseen by the Board of
Directors and appropriate policies to manage risks are approved by the
Board.

The Board is involved in defining risk appetite and capital at risk for the
Bank, at an integrated level, covering all activities of the Bank.
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 Wizard'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
group. 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.

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.

The Bank is fully compliant with the standardized approach and has in place
sound risk management policies and processes. As regards moving to the
advanced approaches under Basel II, your bank has completed a gap analysis
and is zealously working towards compliance within the defined timelines.
The internal rating model which is an integral part of every lending
decision and is capable of rating large and emerging Corporates, traders,
brokers, NBFCs and services is being further enhanced to give required
inputs to estimate Probability of Defaults (PDs) and Loss Given Defaults
(LGDs) based on the Bank's own experience. On the retail side, the bank has
initiated implementation of a comprehensive internal credit rating model
for the risk assessment of retail loan exposures. Application scorecards
for major businesses in retail loans are ready. The parameters used for
these scorecards and their individual weight-ages have been decided based
on past experience of the bank. These parameters are both qualitative and
quantitative in nature. Credit rating frameworks using these application
scorecards are at different stages of implementation in different
businesses in retail loans. The final output of the rating will help the
bank to assess the expected probable loss number attached to each rating
category. The internal rating systems are being further developed and
validated as part of the Bank's endeavor to move towards advanced based
approaches of Basel II.

During the year your Bank has also implemented its stress testing framework
for the Corporate as well as Retail portfolio in accordance with the Board
approved Stress testing Policy. Loss analysis and expected loss forecasting
on a static pool basis is continuously being refined to meet the demand of
the current volatile market. Such stress tests supplement credit efforts in
building and maintaining a healthy portfolio.

Under the internal Capital Adequacy Assessment Plan (ICAAP), material
Pillar II credit risks such as credit concentration, collateral management
risk have been identified and appropriate assessment methodologies to
quantify them and allocate Capital if required have been developed.

The Asset Liability Committee and the Risk Management committee of the Bank
are the two bodies that give direction on market risk.

The Bank is computing the market risk capital charge for the trading book
as per the standardized approach as per the regulator's guidelines. To
complement this, Bank also calculates value at risk on its portfolio. Value
at risk is computed for each type of market risk i.e. interest rate,
foreign currency, equity etc. The Bank intends to use this value at risk
number for maintaining capital as per internal model approach when
permitted by the regulator. The Bank periodically stresses the portfolio to
highlight the potential risks that may arise due to events that are rare
but plausible. The Bank conducts various tests like the impact of shock to
one risk factor, extreme events that may change various risk factors
simultaneously and worst case scenario that captures the potential damaging
shift in various market risk factors. To ensure the predictive power of the
value at risk model they are back tested periodically.

The main bodies in charge of management of Interest Rate Risk in the
Banking Book in the Bank are the Asset Liability Management Committee
(ALCO) and the Balance Sheet Management Unit (BMU).

Through the Funds Transfer Pricing (FTP) mechanism, the management of
interest rate risk is taken out of the hands of individual asset &
liability divisions and entrusted to a the BMU. The BMU analyses the risks
inherent in the Balance sheet, determines appropriate hedging strategies in
consultation with the ALCO.

The Bank views Interest Rate Risk from two different but complementary
perspectives, namely the Earnings Perspective and the Economic Value
Perspective.

The Liquidity Management Framework safeguards the ability of the Bank to
meet all payment obligations when they come due. It is designed to identify
measure and manage the liquidity risk position of the Bank based on the
underlying policies which are approved and reviewed by the ALCO and the
Board. Treasury is responsible for the management of Liquidity Risk.

In order to ensure adequate liquidity availability and healthy funding
profile, the Bank uses various metrics and internal controls.

The Liquidity Risk Management approach starts at the intraday level.
Further to the intra day management, the Bank's Contingency Liquidity Plan
(CLP) is a key element of its liquidity measurement and management
framework. The CLP is intended to forewarn / mitigate adverse liquidity
impacts. It is designed to address liquidity stresses posed by Bank-
Specific Factors and Market-Specific Factors. The CLP defines several Early
Warning Indicators (EWIs).

The Bank has a board approved operations risk management policy that
outlines the governance structure, key risk assessment, risk monitoring and
risk mitigating activities. Additionally, set of other board approved
policies supporting operational risk management, Senior Management
oversight over businesses/operations, well documented processes and high
level of process automation support creation of robust Risk Management
systems and practices. Remedial steps are undertaken to improve process
gaps when identified.

The internal control framework ensures that process related operational
risks are minimized byway of regular monitoring and audits. The Group
internal audit team, following RBI's Risk based audit methodology, and the
compliance department provide sound platform for operational risk
management, along with Independent Operational Risk Management unit.

In the recent years, outsourcing risk has assumed greater importance. This
fact is reflected in RBI's efforts in strengthening the outsourcing
guidelines and ensuring that outsourcing risk across the banking industry
is well managed. In this respect, the Bank has a 'Outsourcing Policy'. The
policy deals with various aspects like managing and monitoring the
outsourcing arrangements, establishing controls and ensuring protection of
bank's information, establishing a viable contingency plan, auditing of
outsourcing process, reporting of transactions to FIIJ or other competent
authorities, activities that should not be outsourced and applicability to
related parties.

Other aspects of outsourcing risk management include formal contracts with
service providers, clearly laying the scope of work including Non
Disclosure Agreements, Periodic visits to service provides to review and
assess systems and controls at their end. Exit strategy and adequate back
up plans are in place to face failure of outsourcing arrangements.

All material outsourcing activities are being reviewed on a regular basis.
Operations/ business units are responsible for reviewing and monitoring
performance of their vendors.

The Bank has a Fraud Risk Management policy. Committee on frauds has been
constituted for monitoring and reviewing all the frauds involving amount
Rs.1 Crore and above. The Bank has identified fraud prone areas and fraud
control measures. Various preventive and detective techniques are used to
minimize the risk of frauds.

In the aftermath of the recent financial crisis, there is an upward trend
in fraud instances globally. India has also witnessed increase in frauds in
the consumer segment especially personal loans and credit cards. To counter
this increased fraud risk, the Bank has taken additional measures to
monitor suspicious transactions, review cases of attempted and actual
frauds. The Bank plans to counter frauds by contributing to the CIBIL
detect and using the database for improving processes, implementing and
modifying necessary controls.

Capital Adequacy and Basel II:

Capital is a Bank's ultimate protection against potential losses due to
various risk types. The Bank's high level of capital adequacy ratio
provides its customer a positive assurance against unexpected losses. In
this respect, the regulator has been urging banks to adopt some of the best
practices in risk management. Having established the standardized approach
under Basel II for Market and Credit Risk, the Basic Indicator approach for
Operational Risk and getting banks to adopt the ICAAP process under Pillar
II of the new Basel capital adequacy framework, the Reserve Bank of India
has now come out with draft timelines for implementation of the advanced
approaches. Your Bank is well positioned to meet the RBI set timelines in
this regard.

Compliance:

An independent and comprehensive compliance structure addresses the Group's
compliance and reputation risk.

A Group/ Enterprise-wide Compliance framework, approved by the Board of
Directors, broadly sets out the compliance risk management processes and
tools to be used by businesses, management and compliance officers for
managing its compliance risks. Based on this Enterprise-wide Compliance
Framework each unit has its Compliance Manual.

The Compliance Group is responsible for all aspects of compliance across
the Group and the 46 professionals cover the entire Group's line of
business, including banking, broking, asset management, investment banking,
life insurance and car financing. There are dedicated teams across the
Group that focus on AML and compliance monitoring.

The Group Compliance Structure approach dovetails with the regulators'
increased focus on enterprise-wide-risk, and their concern that financial
conglomerates should not look solely at risks within individual business
silos. The Group Head - Compliance oversees the Compliance function at the
group level and reports to the Board of Directors of the Bank. The Group
Head-Compliance coordinates compliance assistance and support to Management
and Compliance Officers, manages and supervises group's compliance
framework and Compliance Officer network as a whole, and advises on
specific compliance issues with Group-wide relevance.

Compliance works with business units to develop procedures to implement the
requirements of the various regulations and policies. It also works closely
with other support functions including the legal department and outside
counsel.

The company uses the Knowledge Management Tools to assist it with
monitoring for new or revised regulations. The company also looks at
regulatory websites and participates in industry working groups that
discuss evolving regulatory requirements. The Group Compliance remains in
constant touch with the firm's regulators across all geographies where the
Group has its offices. In-house Compliance Newsletter keeps the employees
abreast of the key regulatory updates affecting the businesses of the
Group. Training on compliance matters is imparted to employees on an
ongoing basis both online and classroom.

Internal Controls:

The Bank's internal audit department assesses business and control risks of
all branches and businesses to formulate a risk-based internal audit plan,
as recommended by the Reserve Bank of India. The audit process followed is
as below:

* 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 audit plan is prioritised based on areas which pose a higher risk to
the bank and such areas and branches are targeted for more frequent audits
The Internal Audit Policy includes the risk assessment methodology which
provides for coverage of all auditable areas once in three years.

* 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.

* Post issue of Audit reports there is a detailed process for monitoring of
progress on implementation of action plans.

* Status of resolution tracking as well as pending issues is reported to
senior management on a regular basis and a formal report on pending issues
is issued once every half year.

The Bank also 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 internal audit department also seeks assistance
from external firms, who are specialists in their field, in respect of
Information Technology audits.

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 audit for 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 at 31st March 2009, the Bank along with its subsidiaries employed around
18,000 employees at various locations in India and abroad. The Bank was
adjudged amongst the Top 25 Best Employers in India by Hewitt Associates
for the second consecutive time as part of the Best Employer in India 2009
Study. The Bank was also adjudged amongst Top 50 Best Workplaces in India
2008 by Great Place to Work Institute, India.

In line with the HR Vision of Value Creation AND Architect of Best
Employment Experience, the Bank continued to invest in, invent and adapt
best people practices and policies and designed several employee touch-
points.

Comprehensive work has been completed on linkages between Kotak's Culture,
Core Values, Employee and Customer Value Proposition and the alignment of
our policies, people practices and initiatives to the same.

Leadership capability building, succession planning, individual development
plans for top talent and an overall robust and aligned performance
management system has enabled the Bank and its subsidiaries to build a
highly engaged work force which continues to deliver best-in-class products
and services.

OPPORTUNITIES AND THREATS:

Opportunities:

> Being part of the India's growth story.

> Utilise the emerging opportunity of getting the wallet share of the
burgeoning middle class.

> Utilise technology to provide solutions to customers.

> Increase distribution strength.

Threats:

> Volatile environment.

> Fiscal deficit.

> Volatile interest rate movements.

> Competition.

Outlook:

The current year's results indicate the pressures faced by the financial
sector, specifically stock broking, investment banking and asset management
activities.

Financing activities have continued to demonstrate strength growth.
However, thanks to the slow down in the West having a rub off effect on the
Indian economy, pressures have built up across sectors.

With stability returning to the government, the Group believes the
integrated business model and the high capital adequacy will enable it take
advantage of the 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 regulatior and Government policies that may impact the
businesses of Kotak Mahindra Group as welt 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 there under.

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