DIRECTORS’ REPORT 2015-16

The Board of Directors has pleasure in presenting the Annual Report together with Audited Balance Sheet and Profit & Loss Account of the Bank for the year ended 31st March, 2016.

Global Business Performance

Growth in India remained robust, buoyed by strong investor sentiment and the positive effect on real incomes of the recent fall in oil prices. As the economy was struggling to break its shackles and aim for a double digit growth, the banking industry is still feeling the adverse impact. Our Bank, as a part of the banking system, could not stay untouched by this impact. Hence, the Global Business level st stood at Rs.3,97,241 crore as on 31 March 2016 against st Rs. 4,25,090 crore as on 31 March 2015. The global deposits and gross advances stood at Rs. 2,24,514 crore st and Rs. 1,72,727 crore respectively as on 31 March 2016 against Rs. 2,46,049 crore and Rs. 1,79,041 crore as on st 31 March 2015.

The Bank progressed well in a few parameters during this year - improvement in CASA, sharp decline in high cost deposits, shift towards retail lending and growth in retail deposits. The Bank also underwent a major technological overhaul by migrating to a new CBS platform from its inhouse CBS platform. The Bank was able to complete the migration process within the desired time frame. The new software once familiarized would become a back bone for efficient counter service, flexible products and sound data management which would eventually place the Bank at a higher level. Bank's alternate delivery channels are now being better utilized by the customers compared to last year, and therefore we shall strive to increase the registrations in these channels.

Financial Performance

The global operating profit has stood at Rs. 2,885 crore in 2015-16 compared to Rs.3,322 crore in 2014-15 mainly due to constraints on interest spread and higher NPAs. The Gross NPAs stood at Rs. 30,049 crore for March 2016 as against Rs. 14,922 crore in March 2015. The resultant higher provision requirement of Rs. 5,782 crore during the year forced the Bank to report a Net Loss of Rs. 2,897 crore for the year. The Bank had reported Rs. 454 crore of loss during 2014-15.

Income and Expenditure Analysis

The year 2015-16 continued to have challenges on account of burgeoning NPAs apart from sluggish credit growth. The Bank took concerted efforts to reduce the cost of deposits by shedding high cost deposits, improving CASA and pruning the deposit rates in line with the industry.

The domestic CASA deposits were at Rs. 63,609 crore as st on 31 March 2016 as against Rs. 60,787 crore as on st 31 March 2015. The CASA % also increased to 29.10% s t as on 31 March 2016 as against 25.35% as on st 31 March 2015.

The initiatives on account of improving CASA and shedding of high cost deposits reduced the domestic cost of deposits to 7.28% in 2015-16 from 7.84% in 2014-15. The quarter wise domestic cost of deposits which stood at 7.62% in Q1 2015-16 gradually came down to 7.43% in Q2 2015-16, 7.26% in Q3 2015-16 and 6.79 % in Q4 2015-16. RBI had reduced Repo rates by 75 basis points during the period under review which also helped in reducing the card rates in a gradual manner. The domestic cost of borrowings ended at 7.74 % in 2015-16 as against 9.65% in 2014-15 which is also in line with the fall in the repo rates induced by RBI.

The Bank's base rate which stood at 10.25% as of March 2015 was brought down to 9.70 % in three tranches during the review period as per the industry trend. Further, the incremental NPAs had higher impact on the revenues. As a result of the above factors, the yield on domestic advances came down to 9.87% for FY 2015-16 as against 10.62% in the previous year.

Despite volatile market conditions, the yield on investments were maintained at 7.41% for the whole year 2015-16 compared to 7.38% in 2014-15. The Bank was able to maintain the global Net interest margin at 1.94% in 2015-16. The Bank maintained a Provision Coverage Ratio of 47.39 % for FY 2015-16.

Capital Raised during 2015-16

The Bank issued 48,56,17,597 equity shares of Rs.10/- each for cash at issue price of Rs.41.37 per equity share (including premium of Rs.31.37 per equity share) aggregating upto Rs.2,009 crore to Government of India on Preferential Basis and 8,62,99,771 equity shares of Rs.10/- each for cash at issue price of Rs.23.45 per equity share (including premium of Rs.13.45 per equity share) aggregating upto Rs.202.37 crore to Life Insurance Corporation of India on Preferential Basis. Hence, the paid up capital of the Bank has increased from Rs.1235.35 crore to Rs.1807.27 crore. Government of India's shareholding has increased from Rs.911.71 crore (73.80%) to Rs.1397.33 crore (77.32%) and the Public shareholding stood at Rs.409.94 crore (22.68%).

Capital Adequacy Ratio

The Bank's capital adequacy ratio as on 31 March 2016 stood at 9.66% as per Basel III norms.

Branch Network

During the year under review, the Bank opened 34 branches across the country. Out of these, 26 branches (76.47%) are located in Rural and Semi Urban centres, of which 8 branches are located in Unbanked Rural centres.

As on 31st March 2016, the Bank had 3,397 domestic st branches, as against 3,381 branches as on 31 March 2015, comprising of 1,036 Rural branches (30.50%), 960 Semi Urban branches (28.26%), 748 Urban branches (22.02%) and 653 Metropolitan branches (19.22%). Besides, the Bank has 7 Zonal Offices, 49 Regional Offices, 41 Rapid Retail Centres, 4 Extension Counters, 20 Satellite Offices, 14 City Back Offices, 18 MSME Processing Centres and 6 Inspectorates.

During the year under review, the Bank has closed 10 Regional Offices, 3 specialized financial inclusion branches, 15 specialized mid corporate branches and 26 City Back Offices with a view to rationalize administrative costs.

Corporate Governance

Corporate Governance reflects the built in value system of the Bank in conducting its day to day affairs. The Bank lays emphasis on ensuring that, structures and processes are put in place to help in compliance of the government responsibilities.

IOB – Code of Conduct for Prohibition of Insider Trading, 2015

Pursuant to Regulation 9 of Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 2015, the Bank formulated a new code called IOB Code of Conduct for Prohibition of Insider Trading, 2015 that came into effect from May 15, 2015 replacing IOB Directors and Employees Code of Conduct for Prohibition of Insider Trading 2004 (As amended upto 2009), to regulate, monitor and report trading by the Directors, employees and other connected persons of the Bank with a view to comply with provisions of the Regulations.

Securities and Exchange Board of India - Listing Obligations and Disclosure Requirements Regulations, 2015 (LODR)

During the year, SEBI has made the following Regulations namely, Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015 (LODR). These regulations came into force effective from 1st Dec 2015. The existing SEBIL is ting Agreement / Clauses / various circulars stood  repealed/rescinded on 1st Dec 2015. As per Regulation 44 of LODR, the listed entity shall provide the facility of remote evoting facility to its shareholders, in respect of all shareholders' resolutions. Accordingly, the Bank has implemented e-voting facility since Extraordinary General rd th Meetings held on 23 Sept 2015 and 24 March 2016.

In compliance with Regulations 17 and 26 of LODR, the code of conduct put in place by the Bank which is applicable to all members of the Board and the Senior Management (i.e., General Managers of the Bank). The Bank is also submitting a quarterly compliance report on Corporate Governance to the Audit Committee of the Board and to Stock Exchanges.

In compliance with Regulation 13 of LODR, the Bank is submitting Quarterly Investor Grievance Report to the BSE Limited and National Stock Exchange Limited, where Bank's shares are listed.

Investor Education & Protection Fund (IEPF)

Ministry of Corporate Affairs (MCA), Government of India has amended the Investor Education and Protection Fund (IEPF) Rules and advised the Bank the process of transfer of unpaid dividend amount to the Central Government. Accordingly, Unpaid Dividend amount pertaining to 2007-08 has been transferred to IEPF by the Bank and complied with the Government of India guidelines. The unpaid Dividend data pertaining to the years 2008-09 to 2013-14 is ported in MCA website and is also available at www.iob.in .

Bank is complying with all guidelines/regulations laid down by Regulatory authorities and Government of India. Bank regularly redresses the shareholders grievances without any time delay.

Vision-Mission: 2013-2020

With the changing dynamics in the competitive environment, the Bank has reviewed its medium term Vision-Mission outlook for the period 2013 – 2020. The Bank has convened an exclusive meeting of the Board of Directors to discuss the Strategic Business Plan for the next year 2016-17 covering all the key aspects. The Bank expects that the targets would be achieved with the support of migration to new CBS.

Acknowledgement

The Board of Directors are grateful for the valuable guidance and support received from the Government of India, Reserve Bank of India, Securities and Exchange Board of India (SEBI), Stock Exchanges, State Governments, Financial Institutions and all Overseas Regulators. The Board of Directors acknowledge with thanks the valued Customers, Employees Union, Officers Association, domestic and international banking group, the shareholders & other stake holders for their valued support and continued patronage with the Bank.

The Board also wishes to place on record its profound appreciation for the valuable contribution of the Bank's Staff at all levels and looks forward to their continued involvement with commitment towards achieving the future goals.

For and on behalf of the Board of Directors

R. KOTEESWARAN

Managing Director & Chief Executive Officer

Chennai

May 27, 2016