Annual Report - State Bank of Mysore - 2009-2010

STATE BANK OF MYSORE

ANNUAL REPORT 2009-2010

DIRECTOR'S REPORT

To
The State Bank of India,

Reserve Bank of India and the Central Government, in terms of Section 43(1)
of State Bank of India (Subsidiary Banks) Act, 1959.



1. MANAGEMENT DISCUSSIONS AND ANALYSIS

1.1. Macro Economic Scenario and Banking Environment:

1.1.1 The global economy has shown increasing signs of stabilization during
the year as compared to global financial crisis experienced in the previous
years. The year began in the back drop of many advanced economies
experiencing recessionary conditions and emerging economies showing
weakened growth due to collapse of the US sub-prime mortgage market. Global
trade has gradually picked up, but other indicators of economic activity,
particularly capital flows and asset and commodity prices were more
buoyant. However, even as most of the forecasts on recovery were generally
optimistic, significant risks remained. The recovery in many economies was
driven largely by Government spending, with the private sector yet to begin
playing a significant part. There were signs that high levels of global
liquidity were contributing to rising asset prices as well as rising
commodity prices. The Asian region experienced a relatively stronger
rebound growth outlook in all economies necessitating a upward revision.
Global economic performance improved during the third and fourth quarters
of 2009, prompting the IMF to reduce the projected rate of economic
contraction in 2009 from 1.1 per cent made in October 2009 to 0.8 per cent.
The IMF has also revised upwards its projection of the real GDP growth of
emerging and developing economies for 2009 to 2.1 per cent from its earlier
estimate of 1.7 per cent.

1.1.2 India's macro economic context is different from that of advanced
countries in at-least four respects. One, India is facing rising
inflationary pressures, albeit largely due to supply side factors. Two,
households, firms and financial institutions in India continue to have
strong balance sheets. Three, since the Indian economy is supply-
constrained, pick-up in demand. could exacerbate inflationary pressures.
Four, India is one of the few countries with twin deficits fiscal deficit.
and current account deficit.

1.1.3 Financial markets have remained orderly. Overnight money market rates
remainedbelow-or'. close to the floor of the liquidity adjustment facility
(LAF) corridor. Liquidity .conditions remained comfortable. 'Equity markets
have behaved consistent with global patterns. Real estate prices have
firmed up as has been the trend in several other countries.
Increasing optimism about the recovery and high, levels of liquidity have
driven real estate prices-upwards although they are-still some distance
away from the pre crisis peaks.

1.1.4 On the fiscal front he stimulus by the Government in the second half
of 2008-09 has clearly contributed significantly to the recovery. The
stimulus by-way of reduction in excise levies, interest rate subventions
and additional capital expenditure came on top of structural measures
already built into the budget such as the Sixth Pay Commission Award and
Farm Debt Waiver.

1.1.5 On the external front, exports have begun responding, to the revival
in global demand. The- Reserve' Bank initiated some conventional and non-
conventional measures to ease the-pressure on forex and rupee liquidity in
the space of a year, the situation has-stabilised.

1.1.6 The current account deficit during April-September 2009 was US$ 18.6
billion, up from US$ 15.8 billion during April-September 2008: Over the
first half of 2009-10, capital inflows resumed, but were not significantly
in- excess of the current account,deficit. India's improving growth
prospects, combined with persistently high,levels of global liquidity, may,
result in a significant increase in net inflows over the coming months.

1.1.7 During 2009-10, real GDP growth accelerated from 6.1 per cent in Q1
to 7.9 per cent in 02 driven by revival in industrial growth, and pick-up
in services sector growth, aided by payment of arrears arising out of the
Sixth Pay Commission Award. It is expected that Q3 growth, which will
reflect the full impact of the deficient south-west monsoon rainfall on
kharif crops, would be lower than that of Q2.

1.1.8 As a result of. the improvement in the global economic situation,
exports expanded in November 2009, after contracting for 13 straight
months. The industrial sector recovery has now consolidated. The
performance of the corporate sector has picked up. Services sector
activities have improved. Domestic and international financing. conditions
have eased considerably supporting domestic demand.

1.1.9 The base-line projection for GDP growth for 2009-10 was placed at 6.0
per cent earlier, with an upside bias. Assuming a near zero growth in
agricultural production and continued recovery in industrial production and
services sector activity, the baseline projection for GDP growth for 2009-
10 is expected to cross 7.2 per cent.

1.1.10 For several months, rapidly rising food inflation has been a cause
for concern. There were indications that the sustained increase in food
prices is beginning to spill over into other commodities and services as
well. While food products contribute significantly to this, pressures in
other sectors are also visible. Further, prices of non-administered fuel
items have increased significantly in line with rising international
prices. Headline wholesale price index (WPI) inflation was 1.2 per cent in
March 2009. Between April-December 2009, WPI moved up by 8 percent. The
deficient monsoon rainfall and drought conditions in several parts of the
country have accentuated the pressure on food prices, pushing up the
overall inflation rate - both of the WPI and Consumer Price Indices (CPIs).
Keeping in view the global trend in commodity prices and the domestic
demand-supply balance, the baseline projection for WPI inflation for end-
March 2010 is expected to be in the vicinity of 10 per cent.

1.1.11 In the Banking sector, the growth in both deposits and advances
moderated considerably. The growth in deposits as on 26th March 2010 stood
at 17.02% as against the growth of 19.93% achieved in the previous year.
Similarly, in the case of. Bank Credit also the growth was lower at 16.75%
during the year from 17.51% witnessed in the previous year. The indicative
adjusted non-food credit growth projection for 2009-10 is expected to be at
around 17 per cent as against 18 per cent projected earlier. Based on this
projected credit growth and the market borrowing of the government, the
projected M3 growth in 2009-10 is estimated at .a reduced level of 16.5 per
cent. Consistent with this, aggregate deposits of scheduled commercial
banks are estimated to grow by 17.5 per cent.

1.1.12 While Reserve Bank of India has ensured sufficient liquidity in the
market, it has effected certain changes in their policy rates in the latter
part of the year to anchor inflation expectations/keep a vigil on the
trends in inflation; to actively manage liquidity; to ensure that credit
demands of productive sectors are adequately met consistent with price
stability and to maintain an interest rate environment consistent with
price stability and financial stability and to support the growth process:

* Repo Rate: The repo rate under the Liquidity Adjustment Facility (LAF) at
the beginning of the year was-reduced by 25 basis points to 4.75 percent
and subsequently at the end of the year increased by 25 basis points to
retain at 5.00 per cent.

* Reverse Repo Rate: The reverse repo rate under the LAF at the beginning
of the year was reduced by 25 basis points to 3.25 percent and subsequently
at the end of the year increased by 25 basis points to retain at 3.50 per
cent.

* Cash Reserve Ratio: Cash Reserve Ratio (CRR) of scheduled banks increased
by 75 basis points from 5.0 per cent to 5.75 per cent in two stages - 50
basis points effective from February 13, 2010, followed by increase of 25
basis points effective from February 27, 2010.

* Statutory Liquidity Ratio: Increased by 100 basis points to retain at the
level of 2008 i.e. 25 per cent effective from 7th November 2009.

The overall monetary and liquidity conditions prevailing in the system
continue to reflect the accommodative monetary policy stance of the,Reserve
Bank.

1.1:13 To sum up, growth of the economy in 2009-10 has the following
features:

* The Index of Industrial Production (IIP) which was flat in the initial
months of the financial year is up by 15.1 % for the month of February
2010, on a year oh year basis. While the manufacturing sector (16.00%) and
mining/quarrying sectors (12.2%) contributed largely for this spurt, power
sector is a laggard showing a growth of 6.7%. The cumulative growth for the
period of 11 months stands at 10.1 % over the corresponding period 'of the
previous year.

* Service Sector recorded a moderate growth rate of 8.3% for the first half
of the year, coming out of- a continuous deceleration in the second half
year.

* A continued decline of growth rate in Agriculture Sector for the third
consecutive year is seen;. the sector is estimated to show near zero
growth.

* Inflation continues. to firm up and i's inching towards 10% mark.

* Exports, which witnessed negative growth continuously for 13 months
period up to October 09, showed a positive growth in November 09. Overall,
however, there is a decline of 22.4% year on year, up to November 09.

* Though there had been a slow down in growth of Bank credit up to
December-2009, growth rate has improved and moderated in the third week of
March 2010 to 16.75%, mainly due to increased consumption.

1.2 Economy of Karnataka:

1.2.1 The Karnataka economy is one of the leading economies among all the
states in the country in terms of economic development. It is the eighth
largest state in terms of geographical area (1.92 lakh km) and Population
(5.27 crore - 2001 census) Karnataka economy is largely service oriented
with the agricultural and the industrial sector contributing substantially
(while agricultural and industrial sectors each are contributing about 25%
of the state GDP, service sector contributes about 50%). The' state is the
largest producer of coffee, raw silk and sandalwood in the country and also
adding considerably to the horticulture production of the country. The
major manufacturing oriented industries in the state include sugar, paper
and cement. The cottage and mineral based industries also add a good
percentage of revenues to the state.

1.2.2 Karnataka has become one of the country's global economic players
owing to its various industries in the field of electronics, software,
biotechnology and other small and medium scale industries. The capital city
Bangalore (now called Bengaluru) is the silicon valley of India. Most of
the global IT companies have their offices in Bangalore and the city has
the reputation of having maximum number of R&D centres in the country. The
state accounts for approximately 38% of India's software exports. The
software industry in the state is expected to generate US $ 20 billion for
the year 2010.

1.2.3 Global recession and slowdown in the Indian economy notwithstanding,
the gross state domestic product (GSDP) of Karnataka is estimated to be 5.5
percent this fiscal (2009-10) as against 4.5 percent last fiscal (2008-09).
The state has the reputation of having a CAGR of 6.5% for the past 10
years. The decline in the rate in the recent past as compared to national
average is caused by the negative growth registered by agricultural sector
(caused by deficient and then excessive rains).

1.2.4 Karnataka's gross income is expected to be Rs.189,773 crore this
fiscal (FY 2010) as against Rs.179,809 crore last fiscal (FY 2009). The net
'state domestic product (NSDP) is 'anticipated to; be Rs.:168,022 'crone
as against Rs.159,452 crone, an increase .of:~5:4 .percent:'

1.2.5 The per capita income is projected to be at Rs.32,411 this fiscal as
against Rs.31,041, a growth rate of 4:4 percent compared to 3.4 percent
last fiscal.

1.2.6 As the ,country's premier IT sector, software. exports /increased to
Rs.70,375 .crone in 2008-09 from Rs.59,500 crone in 2007-08, while BPO
(business 'process outsourcing) exports more than doubled to Rs.15, 014
crore from Rs.7,600 crone in the same period.

1.2.7 The Business growth of the-Bank depends to a large extent on the
Karnataka economy.since:more than 80% branches are located in Karnataka
(554 out of 689 as, on, 31 st March 2010). Karnataka is. emerging as a
major investment .destination in the southern ,part of the country: To
accelerate development of the State, the Government has given special
thrust on infrastructural facilities such as large scale improvement of
roads with private partnership, construction.of airports at various places,
and setting up of power projects. Irrigation has also been getting adequate
thrust. 1000 new Industrial Training Institutes (ITI) are proposed to be
opened under Public Private Partnership (PPP) in rural. areas. While an
Industrial Export Centre is proposed in the city of Mysore, a Steel Zone is
proposed in Bellary, at a cost of Rs 15,440 crores. Substantial investments
are being proposed in the city'of Bangalore also, to improve the
infrastructural facilities. Investments of over Rs 2.4 lacs crores are
committed in different industries including steel, power and tourism in the
state, by reputed. industrial groups, in the coming years. These aspects of
state of economy offer good growth opportunity for the Bank.

2. REVIEW OF BANK'S OPERATIONS

2.1 Market Share and Business Growth:

2.1.1 A performing and growing organization is identified by the growth in
its market share on a continuous and sustained basis. The business levels
of the Bank, both under deposits and advances and consequently the market
share have been registering satisfactory growth till last year as under:

(Rs in Crore)

Year ended 31st March 2006 2007 2008 2009

Aggregate Deposits 16,179 21,395 26,781 32,388
Percentage of growth 21.25 32.25 25.17 20.94
Market share% 0.77 0.82 0.84 0.84
Total Advances 12,063 16,772 21,315 25,880
Percentage of growth 32.21 39.03 27.09 21.42
Market share% 0.81 0.87 0.90 0.93

2.1.2 The Bank has seen continuity in growth during the current year also
with aggregate deposits reaching Rs.38437 crores, a growth of Rs.6049
crores at 18.68%. Total advances are ~ at Rs.29874 crores recording a
growth of Rs.3994 crores at 15.43%. Going by the trends in ASCB growth up
to 26'' March 2010 during the current year, the levels of business are
expected to result in a market share of 0.86% in deposits and 0.90 % in
advances as of 315' March, 2010. The share in respect of advances has
declined during .the current year owing to our shedding of certain large
corporate advances which were low yielding.'

2.2 Key Performance Indicators:

Sl. Key Indicators 2007-08 2008-09 2009-10
No.

1. Net Profit (Rs. in Crores) 318.86 336.91 445.77
2. Return on Assets (%) 1.08 0.91 1.06
3. Return on Equity (%) 23.14 20.16 21.50
4. Expenses-Income Ratio.(%) 52.08 50.43 43.60
5. Earnings per Share (in Rs.) 88.57 93.59 123.83

Face value of the Share was Rs.100
as on 31.03.2008 and Rs.10/- from
31.03.2009. Suitable adjustments in,
EPS effected for the year 2007-08.

6. Gross NPA to Gross Advances (%) 1.68 1.42 2.00

7. Net NPA to Net Advance (%) 0.42 0.50 1.02


2.3 Income:

The Total Income of the Bank increased by 6.89% from Rs.3728 crores at
March, 2009 to Rs.3985 crores in March, 2010. Interest income increased
from Rs.3247 crores to Rs.3559 crores (9.60%). The Average Yield on
Advances decreased from 10.68% in March, 2009 to 10.24% in March, 2010,
while Average Yield on Investments stood at 6.80% in the. same period. Non
Interest Income decreased by Rs.55 crores (11.37%) from Rs.480 crores to
Rs.426 crores, mainly owing to reduction in profit from sale of securities
(This is caused partly by hardening of yields on government securities and
partly owing to our switching over to investment in dividend bearing liquid
mutual funds as against ,growth oriented liquid mutual funds for deployment
of short term surplus, funds). The ratio of Non-Interest Income to Total
Income also therefore stood at a lower level of 10.69% (12.88%, last
year). Efforts are being made to improve this ratio, in the coming years.

2.4 Expenses:

The Total Expenditure (before provisions and , contingencies) decreased by
0.88% from Rs.3074 crones in 2008-09 to Rs.3047 crores in 2009-10. While
Interest Expenses decreased by Rs:86.66 crores (3.60%) the Operating
Expenses increased by Rs.59.78 crores (8.99%) during the current year. The
Average Cost of Deposits decreased from 6.92% in March, 2009 to 6.01% in
March, 2010 due to soft interest rates prevailing in the market during the
year.

2.5 Profit:

While. the Operating Profit increased from Rs. 653.52 crores in 2008-09 to
Rs.937.40 crores (43.44%) in 2009-10, the ' Net Profit increased from
Rs.336.91 crores to Rs.445.77 crores (32.31%). Return on Assets (ROA)
increased from 0.91% to 1.06% and the Return on Equity (ROE) increased from
20.16% to 21.50%.

2.6 Capital Adequacy Ratio:

The Capital Adequacy Ratio under Basel II guidelines stands at 12.42% as on
31 s' March 2010, against 12.99 % as on 31st March 2009. The Bank had
proposed raising equity Share Capital through a right issue, to shore up
Tier-I Capital and Capital Adequacy Ratio and had filed Draft Offer
Document with SEBI. Clearances in this regard, however, are still awaited.

2.7 Dividend:

Keeping in mind the need to strengthen Tier I capital of the Bank in the
current economic scenario, the Board of Directors has declared a dividend
of 100% for the year 2009-10. This will involve a pay-out of Rs.41.98
crores including the tax component. The pay out ratio for 2009-10 was 8.08%
- as against 10.69% for 2008-09.

3. BUSINESS REVIEW:

3.1 Deposits:

3.1.1. The Total Deposits of the Bank grew by Rs.5965 crores to reach the
level of Rs. 38,880 crores and Average Total Deposits grew by Rs:- 5,832
crores (20.04%) during . the year 2009-10. The share: of CASA deposits to.
Total Deposits increased from 28.88% in March 2009 to 31.58%. in March
2010. The Aggregate .Deposits (total deposits excluding inter bank
deposits) of the Bank stood. at Rs.38,437 crores as at the end of March
2010, recording a growth of Rs.6,049 crores .(.18.68%). Deposits under
Personal Segment increased by. Rs. 2,228 crores (14.80%) to reach a level
of Rs. 17,274 crores as on 31st March 2010. Term Deposits and Savings Bank
under. personal segment. stood at Rs.11,140 crores and Rs, 5,738 crores
forming a share of 64.49% and 33.21% of the total personal segment deposits
respectively.

3.2 Credit Expansion:

3.2.1 While the Total-Advances of the Bank increased from Rs.25880 crores
to Rs. 29874 crores registering a. growth of Rs.3994-crores (15.43%) during
the year, Net Advances (i.e. net of NPA related/floating provisions,
outstandings under, staff . festival advance and Interest Not Collected
Account) of. the Bank increased, from Rs:-25616 crores in March 2009 to Rs.
29536 crores. Credit Deposit Ratio, of the Bank decreased from 79.91% in
March 2009 to 77.72% in March 2010, partly owing to general slowdown in the
credit off take and partly owing to reduction of low yielding advances.
Average Total Advances grew by Rs.3296 crores (14.17%) during the year.

3.2.2 The Head Office Credit Committee-I, (HOCC-I) with the Managing
Director as Chairman and Head Office Credit Committee II (HOCC-II) with the
Chief General Manager as Chairman, which have been set up in order to make
the credit process speedier and to take decisions through a committee
approach, held 89 and 57 meetings respectively and facilitated growth in
Non-food Advances. Zonal Office Credit Committees are functioning at all
the five Modules of the Bank and HOCC-III examines proposals of DGM -
headed branches.

3.3 Personal Segment Advances:

3.3.1. Personal segment advances grew by 19.30% to reach a level of Rs.4758
crores. Housing loans grew by 18.73% and reached a level of Rs.2595 crores.
Vehicle loans grew by 36.54% to reach a level of Rs.398 crores. Education
loans grew by 25.42% to reach a level of Rs.491 crores and Mortgage loans
grew by 24.08% to reach a level of Rs.239 crores.

3.3.2 To stimulate growth in Housing/Car loan segment the bank has
introduced SBM Easy Home Loan, SBM Advantage Home Loan and SBM Ezee Car
loan scheme during the year. The scheme envisages fixed rate of interest on
the loans for the first 3 years and an option to the borrower to have fixed
or floating rate after 3 years. With a view to targeting mid size and above
car segments and also providing a suitable' scheme to the affluent
customers, a new car loan scheme called . SBM Advantage Car loan scheme was
introduced.

3.4 Priority Sector Lending and Social Banking:

The total credit provided to the Priority Sector for the year ended March,
2010 stood at Rs.9314.22 crores constituting 35.99% of Adjusted Net Bank
Credit (ANBC) of Rs.25,881 crores as against the Bench mark of 40%. In
order to achieve the desired bench mark, .the following action has been
drawn up for the .year 2010-11.

a) Renewed efforts will be made to cover all farmers in the villages
financed by our Branches under Kisan Credit Cards.

b) A target of Rs.770 crores .has been taken for financing of Micro and
Small - Industrial units both towards Manufacturing and Service, Sectors:
Efforts will be made to cover loans under CGTMSE wherever industrial units
are not. able to offer the required Security to Bank.

3.5 Agricultural Finance

3.5.1 The agricultural advances of the Bank increased from Rs.3,839 crores
to Rs.4,123 crores as at the end of March 2010, registering a growth of
Rs.284 crores . (7.40%). This constitutes 15.36% of the Adjusted Net Bank
Credit (ANBC).

3.5.2 During the year 2009-10, Bank implemented new loan schemes to assist
farmers viz., Tractor Naveekarana (for renovation/repairs to tractors),
Comprehensive relief measures to persons affected by natural calamities and
Organic Coffee Scheme. An OTS within OTS Scheme to assist farmers and to
enable them to avail benefit under the extended Debt Relief Scheme of the
Government of India is currently in force.

3.6 Micro and-Small Enterprises (MSE) Lending:

3.6.1 Government of 'India, Ministry of MSME has conferred to our Bank
'National Award for Excellence in MSE Lending' and 'National Award for
Excellence in lending to Micro Enterprises' (amongst Associate Banks) for
the year 2008-09. This special award is conferred to us in recognition of
our creditable performance in lending to MSE sector and Micro Enterprises.

3.6.2 Micro and Small Enterprises (Manufacturing):

The Bank's advances to Micro and Small Enterprises (Manufacturing) sector
has increased from Rs.1290.26 crores in March 2009 to Rs.1476.08 crores as
at the end of March 2010 registering a growth of 14.40% . The impact of the
economic slowdown had its effects during this year also. The Bank has
extended all the initiatives of the Government of India and Reserve Bank of
India to the MSE sector this year also to help them to tide over the
problems.

3.6.3 The prominent steps taken are:

* Reduction in the rate of interest on working capital limits.

* Sanction of additional credit limits of 20% of the fund based working
capital limits.

* Relaxing the norms for carry inventory and receivables to support , the
elongated working capital cycle.

* Reduction in the margin requirements for issuing Letters of Credit and
Bank Guarantees.

* Rescheduling the installments of term loans wherever felt necessary.

* Extending term loans for purchase of gensets, machineries, tools at a
concessional rate of interest @ 9% p.a. for the first year.

* Setting of MSE Care Centers at all Zonal/Controlling Offices to address
the grievances of the entrepreneurs.

3.6.4 While continuing all the existing products. and schemes introduced to
take care of the varying financial needs of the sector, the Bank has also
introduced following schemes to extend finance at a concessionary rate of
interest to all the new accounts for a period of one year.

* SME Help

* SME Care

* Micro Sector Collateral Free Loan upto Rs.5.00 lacs (this facility is
continued on an ongoing basis).

3.6.5 Micro and Small Enterprises (Services):

Bank's lending to this sector increased from Rs.958.38 crores as at the end
of March 2009 to Rs.999.83 crores as at the end of March 2010 registering a
growth of 4.33%. Bank has several schemes to cater to the needs of Small
Business Customers. Important among the schemes are as under:

* Laghu Udyami Credit Card (LUCC) Scheme

* My Bank Professional Plus

* Small Retail Trades.

* Small Road Transport Operators

* REMOT (upgradation of Coir Industry)

* Contractors Plus

3.7 Credit Guarantee Scheme:

The Bank continued to extend Collateral Free financial assistance to MSE
sector by participating in Credit Guarantee Scheme of CGTMSE. The coverage
under the scheme is 1555 accounts amounting to Rs.99.60 crores.

3.8 Assistance to Weaker Sections of the Society:

The Bank continued to extend financial assistance to Weaker Sections of the
Society comprising of small & marginal farmers with land holdings of 5
acres or less, landless labourers, tenant farmers etc., village & cottage
industries whose individual limits does not exceed Rs.50,000/-, SJSRY,
SGSY, SLRS, DRI, Self-Help Groups and advances to SC/ST beneficiaries. The
outstanding amount under lending to Weaker Sections at Rs.2593.27 crores as
at the end of March 2010 constitutes 10.02.% as against stipulated
benchmark of 10% of ANBC.

3.9 Assistance to Women Entrepreneurs:

A booklet on 'Charter for Women' containing the details of concessions
available to women has been supplied to all the branches for display and
distribution. The Bank's total credit to women as at the end of March 2010
stood, at Rs.1527.11 crores covering 127760 beneficiaries, which works out
to 5.90% of Adjusted Net Bank Credit as against the stipulated benchmark of
5%.

3.10 Measures to improve: the economic conditions of Minority Communities:

The Bank's assistance to the minorities under various schemes as at the end
of March 2010 stood at Rs. 1189.78 crores covering 99014 beneficiaries,
which forms 12.97% of Priority Sector Advances.

3.11 Government Sponsored Schemes:

3.11.1 The position of assistance rendered under various Government
sponsored schemes by our Bank as at the end of March 2010 is as detailed
below.,

3.11.2 Prime Minister's Employment Generation Programme (PMEGP)

The Government of India has -launched the new scheme 'Prime Minister's
Employment Generation .Programme (PMEGP)' to empower first generation
entrepreneurs to set. up micro enterprises. across . the country by merging
the existing Prime Minister's Rozgar Yojana (PMRY) and Khadi & Village
Industries Commission's Rural Employment Generation Programme (REGP) from
the financial year 2008-09. The Bank's total credit under -PMEGP Scheme as
at the end of -March 2010 stood at Rs.15.06 crores covering 481
beneficiaries while total credit under PMRY scheme is Rs.60.84 crores
covering 11568 beneficiaries.

3.11.3 Svuarna Jayanthi Shahar Rojgar Yojana (SJSRY):

The Bank has extended financial assistance of Rs.3.57 - crbres under SJSRY
during the year - to 469 beneficiaries. Total amount outstanding under
SJSRY scheme as at the. end of March 2010 is Rs.12.82 crores covering 3356
beneficiaries.

3.11.4 Scheme' For Rehabilitation Of Manual Scavengers (SRMS):

The Bank has extended financial assistance of Rs.0.11 *crores under SRMS to
35 beneficiaries as at the end of March 2010. -

3.11.5 Differential Rate of Interest (DRI) Scheme:

The Bank's advances under DRI scheme stood at Rs.18.18 crores (Rs.14.53
crores) as at the end of March 2010 covering 18095 beneficiaries (13134),
of which advances to SC/ST beneficiaries is at about 51.02% (Rs.9.27
crores).

3.12 Investments:

3.12.1 The total investments of the Bank in Government, approved - and
other securities increased from Rs.11476 crores as at the end of March,
2009 to Rs. 11525 crores as at the end of March, 2010.

3.12.2 Profit on sale of investment decreased from Rs. 121.22 crores in
2008-09 to Rs. 32.41 crores in 2009-10 mainly due to hardening of yields .
on debt securities. During the year, interest & dividend income from
investments net of amortisation charges registered a growth of Rs. 68.35
crores (9.69%) over March, 2009 level.

3.12.3 Yield on investments including profit on sale of securities is at
6.98% as on 31 st March 2010, as compared to 8.75% as on 31st March 2009.

3.13 International Banking:

3.13.1 The knock-on effects of the global financial crisis, economic
slowdown and falling commodity prices in the global market has affected the
Indian economy to some extent. International credit channels continue to be
constrained; capital market valuations remain unimproved over the previous
year. Industrial production growth has slackened and the anticipated export
growth has not been registered during the first two quarters of the
financial year. However, there was growth in export credit business during
the latter half of the current financial year.

3.13.2 The level of Export Credit as at the end of 2009-10 was Rs. 1214
crores as against Rs. 1158 crores of the previous year constituting 4.69%
of ANBC. In order to encourage exports, more number of exporting units have
been offered Gold Card Scheme on competitive terms and consequent benefit
of subsidized interest rates of 0.15%. Exporters' meets were arranged at
strategic branches.

3.13.3 As per Bank's BPR objectives, the Bank has set up five TFCPCs at
Bangalore, Chennai, Hyderabad, Mumbai and New Delhi. During the current
financial year (2009-10), more branches have been linked to TFCPCs in order
to . consolidate the front line processing and for extending quality
service to Exporters.

3.13.4 In.the current financial year, due to, easy ,availability of dollars
in the International- Market, the export credit denominated in foreign
currency stood at USD 89.98 mio as at the end of the current financial
year, as against USD 55.21 mio in 2008-09.

3.13.5 The Bank has also been offering foreign currency loans (FCNR, Loans)
to its customers at LIBOR related rates which stood at USD 38.18 mio as at
the end of 2009-10 as against USD 35.14 mio as at the end of previous year.
,

3.13.6 NRI Deposits as on 31.03.2010 stood at Rs.627.72 crores, of which
FCNR.(B) deposit,is at Rs.188.54 crores and NRE deposits at Rs.439.18
crores.

3.13.7 The Foreign Exchange turnover of the Bank during 2009-10 improved to
Rs.155835 crores (Merchant Turnover Rs.30678 crores and Trading Turnover
Rs.125157 crores) - .recording , an increase of Rs. 44030 crores over the
previous year level of Rs. 101805 crores (Merchant Turnover - Rs.19608
crores and Trading Turnover - Rs.82197 crores).

3.13.8 The exchange profit generated from Foreign Exchange business during
2009-10 was at Rs. 39.17 crores.

3.14 Cross selling:

3.14.1 During the year over 26000 lives were insured through various
products of SBI Life Insurance Company Limited with a premium collection of
Rs.49.38 crores. Bank has- collected a premium of Rs.17.53 crores while
marketing general insurance products. In respect of investment products,
Bank is extending mutual fund products of SBIMF and UTIMF. Bank also
sourced applications for SBI Credit Cards.

3.15 Government Business:

3.15.1 State Government Transactions:

The bank has been handling a major share (55.11% during the year 2009-10)
of Government of Karnataka Transactions for the past many years. Around 86%
of its total government business comes from State Government transactions
which is linked to the budget of the State Government for the year. A
Turnover of Rs.50,856 crore (provisional) with a growth rate of 12.54% has
been achieved during the year 2009-10.

3.15.2 Central Government Transactions:

During the year 2009-10, business from various Central Govt. departments
like Postal, Railways, Defence, Central Board of Direct Taxes, Central
Board of Excise and business from various Central Schemes like Public
Provident Fund,, Senior Citizens Savings scheme etc. constituted
approximately 14% of the Banks' total Govt. Business turnover. The turnover
(provisional) of Central Government business during the year 2009-10 has
increased by Rs.1,038.81 crores registering a growth of 13.86% and .reached
a level of Rs 8531.15 crores. Previous year the turnover had increased by
Rs 881.41 crores registering a growth of 13.33% and reached a level of
Rs.7,492 crores.

3.15.3 Income from Government Business:

The average yield on Government transactions for the year is 0.09%.

3.15.4 Qualitative improvements achieved:

Special attention was given during the year 2009-10 to bring in improvement
in the reporting and reconciliation of Government business and the
following measures were initiated leveraging the technology available.

* Funds settlement at Focal'.Point branches for most Government
Transactions were brought online based on the string generated at CDC after
the transactions are put through by the dealing branches.

* Accounting and settlement. procedure for all Government transactions was
streamlined and revised with effect from 1st February, 2010 to facilitate
prompt reconciliation of the transactions between the dealing branches and
Focal Point Branches.

* Link Cell, Nagpur,,which is the.focal point branch for settlemehf of
Central Govt. transactions, was brought,under, core-banking, solution.

* Payment of Commercial Taxes (VAT & CST) through e-mode was introduced in
the State Maharashtra.

* An add on utility was, provided to G-Seva Branch for reporting of the
ICCOM, transactions to RBI after reconciliation of the data with CBS.

3.16 Marketing:

3.16.1 A full fledged Marketing Department is functioning in the Bank.
Marketing Officers have been placed in all the Regions. This initiative has
increased the visibility and marketing of Bank's products and services.

3.16.2. The marketing initiatives have resulted in getting a large number
of accounts from various Government Departments/Agencies.

3.16.3 A Toll Free Contact Centre set up to help ,the customers, has been
functioning actively. Bank has been giving adequate publicity in electronic
media through news papers and hoardings regarding establishment of our
contact centre to enable the general public/customers to call and collect
the necessary information on various products and services of our Bank.

3.17 NPA Management:

3.17.1 Global recession and slowing down of the economy affected the
performance of all segments This resulted in increase in NPAs from
Rs.368 crores as on 31st Mardi 2009 to Rs.595' crores as on 31st March
2010. The gross NPA ratio increased-from 1.42% to 2.00%. The net NPA ratio
also increased from 0.50% to 1.02%. The provision for NPAs stood at Rs.293
crores: Aggressive measures including effective use of SARFAESI Act,
rehabilitation of viable units,-vigorous follow. up of DRT cases will be
taken this year to reduce NPA levels.

3.17.2 Restructuring of Debt:

The global' recession of 2008 had contagion effect on the Indian economy
too. Industries across different sectors were affected by the downturn with
decline in sales; delay/default in realizations etc. As part of the
regulatory action, to protect the affected industries and provide a
stimulus for them to sustain and revive, Reserve Bank of India permitted a
Special Regulatory Treatment' by allowing restructure of accounts of such
affected companies, without affecting their IRAC (Income Recognition Asset
Classification) status. Against this back drop with a view to helping the
affected sectors, our Bank extended the, special dispensation to 19592
borrowal accounts with dues amounting to Rs.2330 crores. Towards diminution
in their fair value on account of economic loss caused in the process of
restructuring, provision to an extent of Rs.83 crores has been made by the
Bank.

3.18 Lead Bank Scheme:

3.18.1 The Bank has been discharging Lead Bank responsibilities in three
districts viz., Mysore, Tumkur and Chamarajanagar. Annual Credit Plans for
2010-11 have been launched. The combined annual credit plan target for
2010-11 for all banks in the three districts has gone up to Rs.4327.09
crores from Rs.3422.64 crores showing a growth of Rs.904.45 crores (26.43%
growth).

3.18.2 To impart entrepreneurial guidance to Educated Unemployed Youth, in
general and rural youth in particular and enabling them to become gainfully
self-employed in their own ventures, the bank has established RUDSETI type
Training Centres viz., Mybank Institute for Promotion of Self Employment
and Development (MI PSED) at Hirehally Industrial Estate, Tumkur. A similar
institute has been established at Mariyala, Chamarajanagar.Taluk, in
association with JSS Mahavidyapeetha viz., RUDSETI, Mariyala: Both the
institutes are. being managed by personnel on deputation from the Bank.
Both the institutes impart training to candidates selected under various
Government Sponsored Schemes, such as PMEGP, SGSY, BCM Corporation,
Watershed Development Program, Stree Shakthi SHG Programs, Bee Keeping,
Sericulture, Farmers Club Program, Dairy Development Program etc. During
the year, both the centres have conducted 166 programs, wherein 5678
trainees were given training.

3.18(a) Regional Rural Bank:

Cauvery Kalpatharu Grameena Bank, the RRB sponsored by the Bank is having
its Head Office at Mysore, and covers 7 districts viz., Mysore, Hassan,
Chamarajanagar, Tumkur, Bangalore Urban, Bangalore Rural and Ramanagara.
The Bank is having a net work of 210 branches. The total deposits and
advances of the RRB, as on 31st March 2010, stood at Rs. 1799 crores and
Rs. 1413 crores respectively (provisional). The RRB has been the winner of
the Best Bank Award instituted by NABARD under RRB category for its
performance under SHG Bank Linkage Program for the past four years
continuously from March 2006 to March 2009.

3.19 Financial Inclusion.:

3.19.1 In terms of the Reserve Bank of India directives, the Bank completed
the first phase of the Financial Inclusion programme well before the cut
off date fixed by RBI in the lead districts. The Bank actively implemented
the programme in non lead districts also. The Number of No Frill Accounts
increased to 2,39,230 as on. March 31st 2010 from 1,80,404 as on March
31st 2009 with an increase of Rs.1.68 crores in the balance outstanding
during the year.

3.19.2 The Bank is actively participating in the Renewed Drive programme
under Financial Inclusion, to cover all the house holds who have been
issued with Photo Identity Ration Cards from Food and Civil Supplies
Department of Government of Karnataka. Under this project the bank has
opened more than 13,000 No Frill Accounts during the period January to
March 2010, when the programme was undertaken.

3.19.3 The Bank has achieved the benchmark of operationalising 50% of its
No Frill Accounts maintained as on 31st March 2009 by sanctioning of GCCs /
KCCs / Small Overdrafts and also by means of effecting payments from GOK
like SSP and NREGP through the No Frills Accounts during the year.

3.19.4 The Bank has participated in implementing the second. phase of..the;
Financial Inclusion Programme by issue' of Smart Cards that will herald
branch less banking in the remote rural,areas; in' 25 villages through 11
rural branches covering 3019 rural folks on a pilot basis in the districts
of Bellary; Chitradurga arid Tumkur under'One district- Many Banks Model'.

3.19.5 Further the bank has shouldered the responsibility of implementing
the Smart Card based EBT scheme under 'One district - One Bank Model'
successfully in Chamarajanagar district wherein, 2800 Smart Cards have
already been issued while enrolments were to a tune of 43570 accounts. The
number of villages covered in this project is 39 in 2 taluks.

3.20 Self Help Group Lending:

The Bank has credit linked 37454 groups with an advance amount of Rs.337.70
crores during the current year and taking the cumulative total of such
credit linkage programme to 1,16,040 groups with'a financial outlay of
Rs.897.19 crores upto 31st March 2010. These efforts of the Bank have been
recognized and the Bank has been awarded the 1st Best Bank Award instituted
by NABARD under the Commercial Banks Category for its performance under SHG
Bank Linkage Programme for the year 2008-09. The Bank has been the winner
of either the 1st or the 2nd prize award since March 2000 continuously.

3.21 Corporate Social Responsibility - Green Banking:

As a part of the national initiative, the Bank has adopted a policy on
'Corporate Social Responsibility, Sustainable Development and Non-Financial
Reporting - Role of Banks'. As part of the policy, Green Banking Committees
have been formed at Head Office, Zonal Offices and all Regional Offices of
the Bank. More emphasis is being given through Farmer's Clubs, the need to
concentrate on Organic Farming and Rain. Water Harvesting. Further, a
campaign has been started in a number of branches, to replace all fused GSL
bulbs into CFL bulbs.

4. HUMAN RESOURCES:

4.1 Manpower Profile:-

4.1.1 Staff Strength: The total staff strength of the Bank as at the end of
March, 2010 stood at 10111 as against 9,671 as at the end of March, 2009.
The staff strength comprised of 3158 Officers, 4678 Clerical Staff and 2275
Subordinate. Staff. Of these 882 are Ex-defence personnel, 121 belonging to
Physically Handicapped Category and 575 belong to Minority Communities.

4.1.2 Women's Representation:

As at the end of March, 2010, there were 2527 women employees (comprising
of 361 officers and 2166'other employees) compared to 2360 as at the end of
March, 2009.' (comprising of 342 officers and 2018 other employees). The
share of women employees rose from 24.40% as at 31st March 2009 to 25% as
at March 2010; The Bank continued to provide equal opportunity to women in
their career progression.

4.1.3 Scheduled Castes/ Scheduled:

Tribes - Representation:

As at the end of March, 2010, there were 1870 Scheduled Caste employees
comprising of 538 Officers, 697 Clerical Staff and 635 Sub-ordinate Staff.
There were 596 Scheduled Tribe employees comprising of 234 Officers, 219
Clerical Staff and 143 Subordinate Staff as at the end of March; 2010. The
guidelines of the Government of.lndia for safeguarding the interests of
SC/ST-employees are complied with..

4.1.4 Human Resources Management Solutions:

The Bank has formed a Human Resources Management Solutions Cell to
integrate salary, perquisites, pensions and leave details of the employees
in line with State Bank of India. The Cell is in the process of compiling
the data and will if integrate the salary process at the earliest for all
employees under one roof. from April 2010.

4.2 Training:

4.2.1 Training Activities and Coverage; The training activities were based
on policy guidelines, exposure of operating staff to, thrust areas and
training needs identified by the Bank.

4.2.2 Towards achieving these,abovegoals, the Bank has revamped Bank's
Training strategy & content; accordingly course contents of each Programme
to be conducted at both STCs, are redrawn to provide various .inputs on-
technology development like internet banking & other alternate delivery
channels, marketing; communication skills, behavioral science, product
knowledge of various loan and deposit products of the. Bank to each of the
participants.

4.2.3 Our Staff training centres at Bangalore and Mysore have conducted in
total 121 trainings/workshops both functional and computer based
programmes, the details of number of personnel trained are as under:

Category Trained during
2009-10

Officers 1407

Clerical 1781

Subordinate Staff 357
(including Armed Guards)

No of staff/Officers trained 1790
under On-site NFS Programmes

TOTAL 5335

4.2.4 Deputation to Apex Training

Institutes:-

Bank is effectively utilizing the seats allotted by State Bank Apex
Training Institutes for all specialized programmes by selecting
participants based, on the present role played by the officer. Further,
Bank is deputing officers of various 'grades to several other training
institutes like College of Agricultural Banking, Pune, BIRD, NIBM and other
reputed institutions for important programmes, found useful to the Bank.
The number of officials deputed during the year 2009-10 with details is as
under;

Institute Trained during
2009-10

SBA, Gurgaon 110
SBSC, Hyderabad, 96
SBIICM, Hyderabad 121
SBIRD, Hyderabad 87
Other Institutes 102

TOTAL 516

4.2.5 Jagruti Abhiyaan:

Jagruti Abhiyaan - an HR initiative covering all our employees in general
and operational staff at branches in particular with the objective to
create awareness against frauds, forgery and malpractices at the branches,
and also to motivate & build a responsible team in branches for extending
quality customer service was conducted in the Bank during the year.

4.2.6 Pre-recruitment and Pre-promotional training:

Pre-Examination training for SC/ST/ Ex-servicemen & Minority Community
candidates appearing for both Clerical Cadre and Officers cadre in
Associate Banks of State Bank of India was conducted during the year. The
faculties of Staff Training Centres imparted training and also guided the
participants to enable them to face the written examination.

4.2.7 Also, Pre-promotional training for: SC/ST employees who appeared for
promotion (in house promotion)from Sub staff to Clerical cadre and from
Clerical cadre to Officers cadre and also for officers who appeared for
promotion from JMGS I to MMES II were conducted in both the STCs during the
year.

4.2.8 Special Programme for Retiring: Officials:

As a part of the HR initiative, to enable our employees to lead a happy,
and peaceful retired life, Bank has conducted 4 special programmes for
retiring officers and clerks at STC, Mysore covering 103 officials during
the year 2009-10.

5. INDUSTRIAL RELATIONS:

The-industrial relations in the -Bank remained harmonious and cordial
through out the year.

6. SUPPORT FUNCTIONS

6:1 Technology Up-gradation:

6.1.1 Core Banking Solution:

The bank is fully on Core Banking Platform since 1st January 2006. The
software provides for Anywhere Banking, Internet Banking, ATM,Real Time
Gross Settlement, National Electronic Funds Transfer etc. The new
functionalities introduced -during the year under CBS include:

* Mobile Banking Service

* SC automation for direct credit of collection proceeds to customer
accounts.

6.1.2 Automated Teller Machines (ATMs):

The Bank installed 227 new ATMs during this year taking the total number of
ATMs installed to 608 as on 3151 March 2010. Our ATMS are part of over
21465 strong ATM network of the State Bank Group: The card base has crossed
15.87 Lacs as-on 31st March 2010, as against 11.81 Lacs as on 31st March
2009. The ATM availability is around 95%. The daily average hit per ATM is
227 as of 31st March 2010.

6.1.3 Internet Banking:

Internet Banking facility is an alternate delivery channel which caters to.
the needs of both retail and corporate customers. As on 31st March 2010,
78141 customers have registered for Retail Internet Banking and.4928
Corporate Customers are covered under Corporate Internet Banking. During
the financial year, all the billers and merchant establishments are made
available for our online banking customers also. Online tax payment. limit
for retail banking customers is increased to Rs. 200 lacs from Rs. 10 lacs
and per transaction limit for Vyapar customers is increased to Rs. 50 lacs
from Rs.5 lacs during the financial year. Payment of Maharashtra Government
Taxes is also enabled through Internet Banking in addition to
direct/indirect Taxes. RTGS/ NEFT facility has been enabled in Internet
Banking to facilitate our customers to transfer funds to other bank
accounts.

* All the billers and merchants as available for SBI online, now made
available for our bank customers.

* Now, as a security feature, users can not have multiple logins
simultaneously.

* High Security password is now made mandatory if the payment to billers is
more than Rs.5000/- per day.

6.1.4 Mobile Banking Service:

Mobile Banking Service has been rolled out in our Bank on 31.08.2009. All
personal segment customers with satisfactorily run savings/current account
(non-dormant) are eligible to avail this service. All the branches are
provided with a blue tooth dongle to enable the branches to provide MBS
software into the customers' mobile. A link has been provided through
external links under SBM nest to select the appropriate software for the
customers' mobile.

6.1.5 Real Time Gross Settlement (RTGS) & National Electronic Funds
Transfer (NEFT):

This facility enables seamless transfer of funds between accounts of
customers of different Banks/ branches. RTGS and NEFT are promoted by RBI.
RTGS caters to bulk payments of Banks and customers, while NEFT caters to
retail payments. All our branches are RTGSNEFT enabled. An internal group
is overseeing the usage/performance of these electronic payment systems.

6.1.6 State Bank Group Payment Transactions (SBGRPT):

Electronic Fund Transfer between branches of State Bank Group is
implemented in the Bank. It enables State Bank Group Branches to send and
receive inter-bank customer remittances in the group.

6.1.7 Network:

All the branches, administrative offices including Head office and ATMs of
the Bank are networked through 'State Bank Connect'.. The projects like
NEFT, RTGS and Internet Banking are also implemented through State Bank
Connect', which is the back bone of connectivity supporting various
technology initiatives that are implemented.

6.1.8 Bank's Website:

* The Bank's web site http:// www.statebankofmysore.co.in hosts contents on
products and schemes of P&SB, C&I, SME, Agriculture and NRI services,
Interest rates, Calculators, downloadable forms, service charges and fees,
statutory codes, policies, acts, online loan enquiry form, information on
Bank's financials etc., and is functional in English, Hindi and Kannada.,

* The home page is changed to give a new look and feel with links for
information on Internet Banking, Mobile Banking and ATM. .

Special links have been provided to Reserve Bank of India, Indian Banks'
Association, State Bank of India, SBI Life, SBI Cards, SBI- Mutual Funds,
SBI Capital and Security, RBI Financial Inclusion sites. Online forms for
education loan, customer complaints _and feedback are available.

6.1.9 Software Development:

Various software requirements of the Bank are being developed in-house by
the in-house software development team. In-house software packages
developed include Banks Intranet (SBMNest) which is the central
repositoryfor all information regarding day to day reference. Bank has
introduced e-circulars through the intranet and printing of paper circulars
has been dispensed with. Paper less online ATM customer complaints
reporting and redressing has been introduced through the Banks intranet
which has drastically reduced the time gap between reporting and redressing
of customer complaints relating to ATM transactions. Bank is striving to
adhere to the RBI guidelines on ATM customer complaints time lines using
these in-house developed packages.

6.1.10 New programs and reports have been added in the MIS module built in
the Banks' intranet to cater to the various MIS requirements. Monthly
performance review, Balance sheet etc. are being centrally compiled and
sent to branches through intranet thereby reducing the workload at the
branches.

6.2 Information Security, Business Continuity and Disaster Recovery

6.2.1 In the backdrop of growing complexity of financial products and the
increased leveraging of technology, operational risks have assumed critical
importance in recent times. The treatment of operational risks as a
distinct risk category along with credit and market risks in the Basel II
framework is a manifestation of the. significance of operational risk in
impacting risk profile of a Bank. Working in this direction our Bank has:-

* Adopted well defined IT Policy and IS Security Policy which is being
periodically reviewed and updated.

* Become a part of well established (common for State Bank Group) stateof-
the-art IT infrastructure which is certified as BS7799 by BSI.

6.2.2 Our,Bank has taken proactive measures to respond to business
discontinuities and ensure uninterrupted availability of all key business
resources that support critical banking functions. In this connection and
in order to ensure continuity in business services to the customers, the
Bank has adopted a well defined Business Continuity Plan and Disaster
Recovery Plan Policy. Our Bank is part of well established very high end
Business continuity and Disaster Recovery Infrastructure which ensures
seamless continuity in case of need.. The Disaster Recovery drill is being
conducted on a quarterly basis during which the transactions of our
branches were routed through DR site. In addition to this, the Bank has a
nearby site to ensure zero data loss in the event of a disaster. The Bank
has implemented Business Continuity Plan in all the branches and also in
the administrative offices with periodical reviews and updates.

6.3 Management Information System (MIS):

6.3.1 The MIS Department consolidates and maintains the Credit Information
System (CIS) database apart from collating information from branches and
Head Office departments for submission of various statements to
Reserve Bank of India like submission of Basic Statistical Returns,
Sectorial Deployment of Funds etc. The department also provides information
to the Top Management and other user Departments in Head Office.

6.3.2 The scope of CIS has also been extended to submission of data
relating to Credit Information Bureau (India) Limited (CIBIL) to whom the
Department is submitting individual borrower-wise credit information every
month after due processing. In turn, the Credit Information Reports (CIRs),
drawn from the CIBIL database, serve as important fraud prevention tool to
the credit appraisal/ sanction functionaries.

6.3.3 The Bank has developed a webpage in the SBM NEST, providing useful
information to the controlling offices and the branches. The Department has
also developed the software/ formats of Balance Sheet, Profit and Loss
Account, MOC etc. and has hosted the same in the SBM Nest for use by the
branches.

7. Systems and Procedures:

7.1 Systems and Procedure Department is a special resource available at
Head Office for effective management of work organization concerning Bank's
Systems and Procedures. Some of the attributes that help the -S & P
Department to perform its role are:

a. Considerable conceptual skills;

b. Good grounding in practical banking;

c. Ability to apply itself intensively with system approach;

d. Rationalize work methods and office layouts.

7.2 During the year, the department has brought out the revised Directory
of Offices of the Bank. To facilitate efficient functioning of the
operative staff Job Cards were also revised and brought out.

8. CONTROL AND SUPERVISION

8.1 Risk Management:

8.1.1 Risk is an integral part of banking business and management of all
types of risks through the best risk-return tradeoff can only ensure higher
profitability in our operations.

8.1.2. Bank has achieved substantial progress in the implementation of risk
management systems, envisaged in RBI guidelines., An integrated Risk
Management approach is followed, with a well-designed organisational
structure consisting of committees, viz. Risk Management Committee of the
Board (RMCB) at the apex level, Asset Liability Management Committee
(ALCO), Credit Risk Management Committee (CRMC), Market Risk Management
Committee (MRMC), Operational Risk Management Committee (ORMC). These
committees meet at periodic intervals to oversee the implementation of Risk
Management practices and Asset Liability Management in the Bank.

8.1.3 With regard to credit risk, a Credit:

Risk Management Policy is in place. To make best use of the risk mitigation
avenues provided in the Basel-II framework, a Credit Risk Mitigation and
Collateral Management Policy have also been formulated.

8:1.4 The loan policy document that addresses credit risk management is
reviewed and revised periodically.

8.1.5 A revised system of credit risk assessment has been introduced in
which separate models are designed,for trading and non-trading/service
sectors. While limits aggregating to Rs.5 crores and above will
warrant borrower as'well-as facility ratings, limits from Rs. 25 lacs and
upto Rs. 5 crores will carry only borrower rating. The revised CRAS has
been, introduced with effect from 1st July.2008. Independent review groups
have been set up to vet the risk assessed credit rating of individual
borrower, accounts at Head Office and-all the modules.

8.1.6 Portfolio ,analysis s of all borrowal accounts with sanctioned limits
of Rs. 25 lacs & above is,carried out at half-yearly intervals. Committee
approach has been adopted for sanction of large loans with the constitution
of Head Office Credit Committees and Zonal Office Credit Committees that
has enabled speedy disposal. and improved risk assessment. Specialized loan
processing cells for retail, SME and. agricultural loans have also been
established.

8.1.7 The country risk management policy has been drawn up-and is being
reviewed. annually. Countries are classified into risk categories ranging
from insignificant to restricted/off=credit and category wise' exposure
limits have been set.

8.1.8 With a view to controlling the risk relating to exposure on domestic
and foreign counter party banks, detailed guidelines are laid down and
bank-wise exposure limits have been fixed- and allocated among the various
user departments/branches. The exposures taken at the branches/departments
are being monitored at periodical intervals.

8.1.9 For managing the risks arising out of adverse movement in market
interest rates, currency exchange rates, equity price. risk and, commodity
price risk, the Market Risk Management Policy has been, framed. A Back
Testing Policy envisaging testing of market risk measurement models, has
been included in this policy.

8.1.10 Operational Risk Management Policy duly; approved by the Board is
put in place. Monitoring through the process of audit has been tightened.
The Audit Report Format (ARF), has been suitably modified and adopted. A
Fraud Risk Management Policy covering identification and control,
accountability, reporting, and follow up measures has also been formulated
for effective control over incidences, of fraud.

8.1.11. Bank. has, migrated to the New Capital,. Adequacy: Framework (Basel
II) as on 31,03.2008 With Standardised Approach for credit risk,
Standardised Duration Approach for market risk and Basic Indicator Approach
for Operational risk. Basel II framework contains three approaches for
credit and operational risk in the order of; sophistication under Pillar 1
and we have migrated with the basic appreaches as, per RBI guidelines.

8.1.12. The Standardised Approach for credit risk is based on, external
ratings assigned to the, corporates by the rating agencies recognised by
Reserve Bank of India. Mayor, portion of the Bank's claims on corporates
have been rated and investment grade,ratings have facilitated better
capital adequacy ratio under Basel II for the Bank.

8.1.13. In the case of market risk, in order to migrate to Internal Models
approach, Bank calculates Value at Risk for fixed income securities and for
equities.

8.1.14. Though, at present Basic Indicator Approach is being adopted for
computation of capital charge for operational risk, steps have been
initiated to migrate to advanced approaches for operational risk. Risk and
Control Self Assessment process, a .qualitative operational risk management
tool, with a bottom up approach has been employed for assessment and
mitigation of operational, risk.

8.1.15. The Bank has put in place a Policy on Disclosures as required by
RBI, under Pillar-3 of Basel-II and necessary disclosures are being made
periodically as stipulated.

8.1:16. RBI, under Supervisory Review Process (Pillar - 2 of Basel=II), has
directed to introduce a Board Approved Policy on Stress Testing. Stress
Testing is a management tool to evaluate Bank's potential vulnerability
to certain unlikely but plausible events or movements in financial
variables which have direct impact on profitability and/or capital
adequacy. Accordingly, we have adopted a policy and periodical stress tests
are being carried out for credit risk, market risk, liquidity risk and
interest rate risk in banking book.

8.1.17. Bank has also put in place an Internal Capital Adequacy Assessment
Process (ICAAP) Policy to assess the adequacy of capital and internal
control for mitigating the material risks. The Policy. will serve as a
documentation. of Bank's strengths and weaknesses and will also serve as a
tool to gauge the bank's capacity to withstand possible shocks arising out
of all types of risks. ICAAP is'intended to capture all the remaining
residual risks not addressed under Pillar-I like concentration risk,
liquidity risk, interest rate risk in banking book, reputation risk,
strategic risk and compliance risk.

8.1.18. Banks are advised to assess capital requirement under ICAAP on a
yearly basis commencing, from 31.03.2008. In addition, capital adequacy
projection has to be made for the ensuing year. While making projections,
we have also taken into account the potential vulnerability of the Bank's
profitability and capital adequacy in stressed conditions, as envisaged
under the Stress Testing Policy.

8.1.19. A steering committee has been formed to oversee the preparations
for migration to advanced approaches, to chalk out the roadmap and give
necessary instructions to the functionaries involved.

9. BUSINESS PROCESS RE-ENGINEERING (BPR):

9.1.. With a..view to providing excellent services to our customers by
leveraging technology and to ward off competition, various BPR initiatives
have been rolled out since 2004, in consonance with the design principles
provided by the Corporate Centre. The BPR initiatives rolled out over the
years have stabilized and started yielding desired results. During the year
2009-10, the Bank has further strengthened the existing BPR initiatives and
rolled out a few more initiatives.

9:2. Retail Asset and Small & Medium Enterprises City Credit Centre with
SARC wing has been rolled out in Kolkata during the year, in addition to
the existing RASMECCCs at Mysore, Chennai, Hyderabad, Hubli, Shimoga,
Mumbai and Delhi. In addition to the existing Multi Product Sales Teams
(MPST) in Bangalore, Mysore and Chennai, the initiative has been rolled out
at Shimoga, Hubli, Hyderabad, Mumbai, Kolkata and Delhi centers also during
the year.

9.3. Liability Central Processing Centre (LCPC), for opening accounts,
established at Mangalore has since stabilized, and all the branches of the
Bank have been linked for optimum utilization of the initiative. Central
Pension Processing Centre (CPPC) is now handling all the state and central
pensions of the entire Bank. The Centralized Clearing Processing Centre
(CCPC) in Bangalore is now undertaking the entire clearing work of all the
branches linked to Bangalore clearing.

9.4. Mid Corporate Central Processing Centre (MCCPC) has been rolled out in
Bangalore to handle the mid-corporate and corporate accounts of the
branches situated in Bangalore city.

9.5. Ten existing branches in Bangalore and Mysore cities have been
redesigned during the year, taking the total number of redesigned branches
to eleven. All the new branches are opened with the BPR redesign format
only.

10. ASSET LIABILITY MANAGEMENT:

The Asset-Liability Management Committee (ALCO) of the Bank is entrusted
with the task of managing market risks (liquidity risk and interest rate
risk). The committee meets regularly to monitor the market risks and Net
Interest Margin (NIM), on an ongoing basis. The tolerance limits for
mismatches are fixed in accordance with RBI guidelines and the bank has
ensured that adequate liquidity is available at all times.

11. AUDIT AND INSPECTION

11.1 Audit;

11.1.1. During the year 471 branches and 28 BPR entities were subjected to
internal audit and is Audit. One Zonal Office and two DGM headed Regions
were subjected to Management Audit and Expenditure Audit. 27 newly opened
branches and two BPR entities were subjected to spot audit in addition to
eight Head Office Departments were subjected to internal audit. Select 469
branches with the advance level of more than Rs. 10.00 crores were
subjected to Special Revenue Audit to detect the income leakages.

11.1.2. One hundred eight (108) branches/offices covering 51.25% of
Deposits and 68.04% of Advances and eight HO departments were subjected to
concurrent audit for bringing improvement in functioning, compliance with
the laid down systems and procedures. The findings of these reports are
reported to the Audit Committee of the Board and follow-up actions are
ensured.

11.2. Credit Audit:

During the year 976 loan accounts were covered under Credit Audit. Out of
976 accounts 66 accounts are rated as High Risk, 92 accounts are rated as
Medium Risk and rest are Low and Very Low Risk Accounts.

11.3 Vigilance:

11.3.1. Vigilance administration as an important aspect of management
function is carried out as per the directives of the Central Vigilance
Commission so as to achieve good Corporate Governance for the overall
growth of the bank.

11.3.2. To create better vigilance awareness and to prevent incidence of
frauds various preventive vigilance activities like surprise visit to
branches, formation of preventive vigilance committees at all major
branches, sessions in the staff training centers, surprise verification of
cash etc., are being undertaken by the Vigilance Department.

11.3.3. As a new initiative, the 'Fraud Cell' has been revamped,
strengthened and christened as 'Fraud Monitoring and Investigation Cell
(FMIC)' and brought under the Vigilance Department. The FMIC will monitor
certain critical areas of branch functioning on regular basis as part of
surveillance responsibilities. Besides, the Chief Managers, General
Banking/Administration at the Zonal/ Regional Office level were designated
as Zonal Vigilance Officers as an extension of the Vigilance structure at
Head Office.

11.3.4. The officers from Vigilance Department conducted surprise
inspections of 79 offices/branches during the year under report. The main
areas of scrutiny are adherence to systems and procedures, rotation of
staff and deficiencies in fraud-prone areas. The deviations and other
irregularities are brought to the notice of.the Module/ Regional Heads for
taking corrective actions. Vigilance Department is bringing out a Quarterly
House Magazine, which contains vital information on vigilance related
matters useful to the operating staff.

11.3.5. In accordance with the guidelines of the Central Vigilance
Commission, the Vigilance Awareness Week' was observed at all the offices
of the Bank from 3.11.2009 to 7.11.2009. The focus of observing the
Vigilance Awareness Week was oriented towards evolving and effectively
implementing preventive techniques in vigilance administration, which '
includes transparency, accountability and fair play, objectivity and timely
response in dealing. with matters relating to public administration.
Besides, the role of leveraging of technology in respect of all systems and
processes for deliverance of services, which has to be synchronized through
use of technology was strongly emphasized.

11.3.6. The Vigilance Department is maintaining liaison with outside
agencies like the Central Vigilance Commission and Central Bureau of
Investigation and also effectively coordinating with various departments
within the bank so that vigilance cases are disposed off speedily.

11.3.7. As per the directions of Government of India, a vigilance set up
has been established in Cauvery Kalpatharu Grameena Bank sponsored by the
bank and the Chief Vigilance Officer of the bank is overseeing the
vigilance administration in that Bank.

12. OTHER ASPECTS

12.1 Customer Service:

12.1.1 The Bank's vision and mission emphasizes a healthy customer
relationship' and customer service continues to be accorded the highest
priority in the Bank. Customer Service Committee of the Board oversees
implementation of customer service initiative/direction of Government of
India/ Reserve Bank of India.

12.1.2. The Ad-hoc committee on Procedures and Performance Audit on Public
Services (CPPAPS) formed to initiate innovative measures 'for enhancing the
quality of customer service has been set up. This Committee headed by Chief
General Manager among others, has two customers also as members.
Depositors' Rights and Citizens' Charter are formulated and posted on the
Bank's website for dissemination in the public domain.

12.1.3. A separate Head Office Customer Service Committee under the
Chairmanship of the Chief General Manager, with representation from the
Officers Association and Employees Union and Departmental Heads, monitor
the implementation of customer service guidelines across the Bank. '

12.1.4 The Fair Practices Code for Lenders voluntarily adopted by the Bank,
aims to achieve the highest standards in credit delivery and to facilitate
effective interaction 'between customer and the Bank. The code is also
hosted on the Bank's website.

12.1.5 Right to Information Act 2005 has been implemented in the Bank, as
per the time. schedule fixed by the government. The guidelines of the Act
are being followed in letter,and spirit. The Bank has put in place the
required Authority Structure for implementation of the Act, prompt disposal
of requests for information within the time frame and effective monitoring.
The Bank's website also carries all the relevant information on the
implementation of the Act.

12.1.6. The Banking Codes and Standards Board of India (BCSBI) is set 'up
as a society promoted by banks to formulate comprehensive code of conduct
for fair treatment to customers. The Board's Code on Bank's commitment to
customers which was revised in August 2009 has been adopted by the Bank and
is made available to all the existing and new customers. The code is also
placed on the website of the Bank. During the current year, the Bank has
revised Cheque collection policy in tune with the recommendations of
BCSBI/RBI.

12.2 Productivity:

Business per employee increased from Rs.608 lakhs as at the end of March,
2009 to Rs.680 lakhs as at the end of March, 2010. The business per branch
increased from- Rs.8725 lakhs in March 2009 to Rs.9979.lakhs in March,
2010.

12.3 Public Relations:

12.3.1. Effective publicity of the Bank's schemes and services was carried
out through the medium of hoardings at important places, advertisements in
print and electronic media, glow sign displays at railway and bus stations
in important cities/towns and advertisements on modern bus shelters, autos
and police kiosks.

12.3.2. Special media campaigns covering the educational loan scheme, loan
utsavs for housing, vehicle, personal and other retail loans and new
deposit schemes were carried out in the print and electronic media and
through boardings. We have-also done the TV Commercials through
professionals to advertise our products and services.

12.3.3. The Bank sponsored various State Level Seminars, District utsavs,
musical, cultural and sporting events. The Bank also sponsored Mysore
Dasara Festivities - 2009 in a big way. These activities have resulted in-
good publicity besides further enhancing the Bank's image.

12.3.4. The Bank's performance highlights, launching of new products and
services, opening of branches, ATMs, BPR initiatives and technological
achievements were extensively covered in print and electronic media.

12.4. Organisational Development:

12.4.1 Branch Expansion:-

The Bank has opened 15 (fifteen) new branches during the year 2009-10. ,
With this, the Bank's network of branches stands at 689 spread over 15
states. As at the end of March, 2010; the branch network. comprised of 187
Metro, 148 Urban, 139 semi-urban and 215 rural branches.

12.4.2 Branches in Under-banked Districts:-

During the year, the-Bank has opened 3 Branches-in-Under-banked Districts.

As on 31st March 2010, out of the 689 branches the Bank has 78 branches in
Under Banked Districts constituting 11.32% of the branch network.

12:5 Implementation of Official Language Policy:

12.5.1. In pursuance of constitutional provisions, Bank is making all its
efforts to speed up propagation of Official Language Hindi and its
progressive use in day-to-day official work. Bank is progressively
improving Hindi and Regional Languages to serve the customers to their best
satisfaction bringing transparency in administration. Efforts have also
been made to create favourable atmosphere for use of our own languages.

12.5.2. Hindi option has been introduced in CBS platform which helps the
customers to have their statement of accounts in Hindi, with provision to
issue passbooks with particulars of transaction given in Hindi besides
providing Unicode supported Software 'Baraha' for word processing. Staff
members have been imparted functional Hindi and computer training in Hindi
by organizing workshops at different places.

12.5.3. Special campaign was conducted to write subject matters on file
covers/registers in Hindi and encourage noting in Hindi. During the
campaign 4225 hotings were made in Hindi.

12.5.4. Parliamentary Committee on Official Languages has reviewed the
progress of Vishakapattanam branch and appreciated our efforts made in
implementation.

12:5.5. Kannada being the Official Language of Karnataka, occupies the
place of prominence in the Bank. Account opening forms, pay in slips,
withdrawal forms, DD and pay order challans, all Agricultural and SHG loan
applications are in Kannada in trilingual form. Our ATMs display
operational instructions in Kannada also. Correspondence with the State
Government and its departments is done in Kannada. Bank has Kannada version
for its website.

12.5.6. All press releases of the-Bank, including quarterly and annual
financial results are being published in' Kannada. Reports of community
services and cultural programmes-at Branches are published in Kannada in
the Bank's house magazines like Sambhrama and Bhasha Darshini.

12.5.7. Kannada Rajyotsava is celebrated every year at Head Office, Zonal
Offices and Regional Offices during the month of November: Renowned Kannada
writers and artists are felicitated on the occasion.

12.5.8. Our Kannada Department conducts Kannada language classes for the
Non-Kannadiga staff members.

12.6 Community Services Banking

12.6.1. As a committed and 'responsible Corporate Citizen', the Bank
effectively associates with/participates in various community
development activities/ programme. The Bank has sponsored 181 programmes
during the year with a financial outgo of Rs.84.18 lacs including
contributions for purchase of utility assets by' various social and
charitable institutions, various infrastructure facilities to
Government Schools particularly ,in flood affected areas. Bank has honored
meritorious students in different schools and colleges:

12.6.2. The other activities/programmes include conducting health check, up
camps for senior citizens, eye camps, Asthma camp, animal health check up
camps, distribution of artificial limbs/ tricycles to physically
handicapped, sponsoring District Level Kabbadi and State Level Chess
Tournament, conducting photography competition for wild life at Mysore Zoo,
conducting-dance programme for blind children etc.

13. AUDIT:

M/S PKKG Balasubramaniam & Associates, Chennai, M/s. Dhawan & Company, New
Delhi, M/S Gopala Iyer & Subramanian, Coimbatore, M/S Ramraj & Co.,
Bangalore and M/S Grover, Lalla & Mehta, New Delhi have been appointed as
the Statutory Central Auditors of the Bank for the accounting period ended
31st March, 2010 by State Bank of India, with the approval of Reserve Bank
of India. 660 branches of the Bank were subjected to statutory audit as
against 639 branches audited last year.

14. ACKNOWLEDGEMENTS:

The Board wishes to place on record its sincere appreciation of the
patronage and support of the customers, shareholders, members of staff,
Employees' Union and Officers' Association for their contribution to the
overall development of the Bank.

By the Order of the Board

DILIP MAVINKURVE
Managing Director
Place: Bangalore

Date : 13-04-2010