DIRECTORS' 92nd ANNUAL REPORT

Your Directors have pleasure in presenting the Ninety Second Annual Report together with the Audited Statement of Accounts for the year ended 31st March, 2016 and the Auditors' Report.

PERFORMANCE HIGHLIGHTS

Your Directors are pleased to inform that during the year under report, your Bank has been able to achieve satisfactory growth in all the areas of operation.

The total business turnover of the Bank was Rs.84390.66 crore as on 31st March 2016, an increase of 8.63 percent over the preceding year. The total assets of the Bank increased from Rs.51836.60 crore to Rs.56500.33 crore recording a growth of 8.99 percent for the year 2015-16.

The total deposits of the Bank grew from Rs.46008.61 crore as on 31st March 2015 to Rs.50488.21 crore as on 31st March 2016, registering a growth of 9.74 percent.

During the year, low cost deposits of the Bank, viz. Savings and Current Account Deposits have shown growth of 15.58 percent and constitute 26.26 percent of the total deposits of the Bank. The market share of the Bank in deposits was 0.527 percent.

The total advances grew from Rs.31679.99 crore as on 31st March 2015 to Rs.33902.45 crore as on 31st March 2016, an increase of 7.02 percent. The priority sector advances increased from Rs.14344.96 crore to Rs.16152.56 crore which, together with the Rural Infrastructure Development Fund (RIDF) exposure, formed 47.57 percent of Adjusted Net Bank Credit (ANBC) and agricultural advances increased from Rs.5145.55 crore to Rs.5838.07 crore which, together with eligible RIDF exposure, constituted 17.19 percent of ANBC. Lending under various socio-economic schemes has shown satisfactory progress. The market share of the Bank in loans and advances was 0.497 per cent.

As on 31st March 2016, the total investments of the Bank stood at Rs.16256.65 crore as against Rs.14031.67 crore as on 31st March 2015, an increase of 15.85 percent.

OPERATIONAL PERFORMANCE

In the backdrop of continued stress on the assets quality and the subdued credit off take during the year ended 31st March, 2016, the performance of your Bank can be considered satisfactory. The gross income of the Bank was Rs.5535.07 crore and total expenditure (excluding provisions and contingencies) was Rs.4680.54 crore. The net interest income was Rs.1302.87 crore.

PROFIT

Your Bank earned an operating profit of Rs. 854.53 crore for the year 2015-16 as against Rs.773.38 crore for the previous year showing a growth of 10.49 percent. The net profit of the Bank decreased from Rs.451.45 crore to Rs.415.29 crore on account of the increase in provision for loan loss.

APPROPRIATIONS

The net profit of Rs.415.29 crore which along with a sum of Rs. 0.40 crore brought forward from the previous year, aggregating Rs.415.69 crore, is appropriated as under. The corresponding figure for the previous year was Rs. 451.61 crore.

Having regard to the overall performance of the Bank and the positive outlook for the future, the Board of Directors recommended a dividend of Rs.5 per share i.e. 50 percent on the paid up capital (previous year 50 per cent) for the reporting year. The dividend payout ratio for the year works out to 22 .69 percent.

EARNINGS PER SHARE/BOOK VALUE

The earnings per share (basic) and the book value per share as on 31st March 2016 stood at Rs.22.04 and Rs. 195.83 respectively.

CAPITAL FUNDS AND CAPITAL ADEQUACY RATIO

During the year under report, the capital funds of your Bank increased from Rs.3973.18 crore to Rs. 4185.24 crore, registering a growth of 5.34 percent. The Capital Adequacy Ratio stood at 12.03 percent as on 31st March 2016, as per BASEL III norms (Previous year 12.41 percent). The Bank has been consistently maintaining the Ratio well above the minimum of 9.625 percent stipulated by the Reserve Bank of India. The market capitalisation as on March 31, 2016 was Rs. 1934.50 crore

FOREX BUSINESS

During the year under report, your Bank achieved a turnover of Rs.14277.44 crore in foreign exchange business as against Rs.15005.22 crore in the previous year. The outstanding advances to export sector stood at Rs. 1633.95 crore as on March 31, 2016.

NON-PERFORMING ASSETS AND PROVISION COVERAGE RATIO

Your Bank has been focusing on containing the non-performing assets through better credit monitoring as well as intensified efforts to recover the impaired assets. However, in view of the continuing slow down in the economy and delinquencies in select sectors, the Bank's Gross NPAs as on March 31, 2016 have increased from Rs.944.21 crore (2.95 percent) to Rs. 1180.40 crore by the year end (3.44 percent). The Net NPAs stood at Rs.795.47 crore (2.35 percent) as against Rs. 623.55 crore (1.98 percent) as on 31st March 2015. The Provision Coverage Ratio (PCR) computed in accordance with the RBI guidelines works out to 48.39 percent as on March 31, 2016 (Previous year 50.54 percent).

CREDIT RATING

ICRA Limited and Credit Analysis and Research Limited, ("CARE") who had rated the Unsecured Redeemable Non-Convertible Subordinated (Lower Tier-II) debt instruments issued during the earlier years aggregating Rs. 600 crore have retained the rating "ICRA A" and "CARE A" respectively for the aforesaid instruments. The instruments with these ratings are considered to have adequate/high degree of safety regarding timely servicing of financial obligations. Such instruments carry very low credit risk.

DISTRIBUTION NETWORK

During the year under report, your Bank has opened 50 new branches in 9 States - one each in the States of Andhra Pradesh, Chattisgarh, Haryana , Kerala and Chandigarh (U.T.), 34 in Karnataka, three in Maharashtra, four in Tamilnadu, two each in Uttar Pradesh and West Bengal. Out of the 34 new branches opened in Karnataka, 13 are in Unbanked Rural Centres under Financial Inclusion Initiatives of the Bank. Your Bank has opened two more Regional Offices at Udupi & Tumakuru during the year under report. Further, your Bank has added 275 ATM outlets at various locations during the year 2015-16. Your Bank has also 24X7 e-lobby facility at 25 locations.

As at 31st March 2016, your Bank had 2,003 Service Outlets i.e. 725 branches, 1,275 ATMs and 3 extension counters spread across 21 States and 2 Union Territories. Apart from the above, your Bank has 12 Regional Offices, an International Division, a Data Centre, a Customer Care Centre, 4 Service branches, 2 Currency Chests, 2 Central Processing Centres and 3 Asset Recovery management branches.

Further, for better ambience and improved customer service, your Bank shifted 15 branches/offices to new premises during the year 2015-16.

EMPLOYEES STOCK OPTION SCHEME

During the year under report, a total of 9266 equity shares have been allotted to the employees of your Bank, pursuant to the exercise of options vested under the Employees Stock Option Scheme of the Bank. Disclosure in respect of Employee Stock Options Scheme pursuant to SEBI (Employees Stock Options Scheme and Employees Stock Purchase Scheme) Guidelines, 1999 is given in Annexure II to this report.

MANAGEMENT DISCUSSION AND ANALYSIS

Macro- economic and industry Developments :

Macro-economic fundamentals have started to show some genuine uptick with CPI inflation declining to an average of 4.9 percent in the financial year ended March 31, 2016 and the current account deficit coming down from a peak of 6.7 percent of GDP to an estimated 0.9 percent in the financial year ended March 31, 2016. Since 2013-14, the economy has grown at 6.6 percent and 7.2 percent and is expected to reach 7.6 percent in the financial year ended March 2016, based on the new growth estimates.

Domestic economic activity is exhibiting signs of recovery, especially in the service sector with manufacturing sector also showing signs of good growth. Although Industrial Production growth is likely at around 2.6 percent, the industrial sector within GDP estimates has shown improved performance during the financial year ended 2016. Second advance estimates of the Ministry of Agriculture suggests that food grains production in 2015-16 may turn out to be better than previous year despite the second consecutive drought year. With Indian Meteorological Department's (IMD's) first monsoon forecast of 106 percent Long Period Average (LPA), hopes of an excellent Agriculture production in the coming year has gone up. This is likely to drive the rural consumption story and along with the implementation of 7th pay commission and One Rank One Pension (OROP), urban consumption is also likely to increase thus driving GDP growth in the financial year 2017.

The annual rate of inflation, based on monthly WPI and CPI stood at -2.50 percent and 4.9 percent respectively for the financial year 2016. It is estimated that for the financial year 2017 WPI inflation may be around 1.5percent and CPI inflation around 4.5-5.0 percent which should enable further cuts in the policy rates during the year.

RBI cut Repo rate by 75 basis points in the financial year 2016 and by another 25 basis on April 5, 2016, taking the total rate cuts to 150 basis points since Jan 2015. Bond yield on 10 year gilts ended the year at 7.47 percent, 28 basis points lower than previous years closing of 7.75 percent. With good monsoon and the expected rate cut scenario, the benchmark yield may be around 7.0 percent by March 2017.

Current Account Deficit (CAD) remained comfortable in the financial year 2016. Lower crude price (and hence lower oil import) was one of the main reasons for improved CAD.

Development in the banking sector

The overall growth in bank deposits and credit during the year remained sluggish. Credit expanded by 10.7 percent while deposits grew by 9.7 percent in the financial year 2016. Lower nominal interest rate was one of the main reasons for poor deposit growth while banking sector was embroiled in NPA issues which dissuaded growth of credit to industry (2.7 percent), while personal loan sector grew at 19.4 percent. Non-performing Assets of the banking system continued to increase. On the whole, the fresh accumulation to stressed assets is likely to reduce as it is expected that the issues with most sticky loans have largely been addressed.

Reserve Bank of India has issued in-principle licenses for 10 small Banks and 11 payment banks during the year ended 31st March, 2016. These banks are expected to further intensify the competition in the banking industry.

Opportunities

The improvement in India's economic fundamentals has accelerated since the year 2015 with the combined impact of strong government reforms and RBI's inflation focus supported by benign global commodity prices. India has emerged as the fastest growing major economy in the world as per the Central Statistical Organization (CSO) and International Monetary Fund (IMF). CSO has projected the GDP growth rate at constant market prices at 7.6 percent for the year 2016. The focus of the Union Budget 2016-17 on reviving the rural economy and doubling rural income could support rural consumption demand more enduringly going forward which may ultimately lead to increased business opportunities for banks. Central Government's reform oriented initiatives such as funding the unfunded" through Pradhan Mantri Micro Units Development and Refinance Agency (Mudra) Yojana, Skill Development scheme opening up job opportunities for a vast majority of young Indians, smart cities mission, 'Make in India' initiative to facilitate investment, foster innovation, enhance skill development, protect intellectual property & build best in class manufacturing infrastructure, determination to ease business environment etc. will augur well for the banking industry and your Bank is also poised to capture the opportunities to expand its business in the coming years.

Outlook

The robust economic growth of the Indian economy will also lead to robust growth in the business of banks. GDP is poised to grow by around 7.9 percent in 2016­17. With the technological advancement sweeping the banking industry leading to steady migration to digital banking, the operational landscape of Banks is likely to change for the better enhancing cost effectiveness and productivity. With the expected slide in the inflation to multi year lows and the expected improvement in export momentum, coupled with the growing service industry, good monsoon etc, there are great opportunities for the banks to improve their business. However, the continued deterioration in assets quality is haunting the banks and your bank is hopeful of containing the NPAs through vigorous monitoring efforts. The recovery of NPAs is also expected to be faster and more cost effective with the Central Government proposing to strengthen the Debt Recovery Tribunals (DRTs) by focusing on improving the existing infrastructure including computerized processing of court cases to support reduction in the number of hearings and faster disposal of cases. Further the Central Government's proposal to improve the operating conditions for asset reconstruction companies (ARCs) will help attract more investors and expedite the resolution of bad assets and support asset quality in the banking sector. Passing of the Bankruptcy Bill by the Parliament is expected to defuse the crisis of the looming bad loans in the banking sector.

SEGMENT REPORTING

Pursuant to the Guidelines issued by RBI on Accounting Standard 17 (Segment Reporting), the Bank has identified four business segments viz., Treasury, Corporate/Wholesale Banking, Retail Banking and Other Banking Operations for the year ended 31st March 2016 as under:

Treasury Operations

During the year ended 31st March 2016, your Bank has earned total revenue of Rs.1299.25 crore from Treasury operations with a contribution of Rs.67.94 crore to profit before tax and un-allocable expenditure.

Corporate / Wholesale Banking

The revenue earned by the Bank during year under report from this Segment was Rs.1745.57 crore with a contribution of Rs.169 crore to profit before tax and un­allocable expenditure.

Retail Banking

During the year 2015-16, this Segment has earned revenue of Rs.2242.83 crore with a contribution of Rs.349.20 crore to profit before tax and un-allocable expenditure.

Other Banking Operations

During the year ended 31st March 2016, this segment has generated revenues of Rs.247.42 crore with a contribution of Rs. -15.90 crore to profit before tax and un­allocable expenditure.

RISKS AND CONCERNS

In the normal course of business banks are exposed to various risks, namely, Credit Risk, Market Risk and Operational Risk, besides other residual risks such as Liquidity Risk, Interest Rate Risk, Concentration Risk, Strategic Risk, Reputation Risk etc. With a view to efficiently manage such risks, your Bank has put in place various risk management systems and practices. In line with the guidelines issued by the Reserve Bank of India from time to time, your Bank continues to strengthen various risk management systems that include policies, tools, techniques, systems and other monitoring mechanisms.

Your Bank aims at enhancing and maximizing the shareholder value by achieving appropriate trade-off between risks and returns. Your Bank's risk management objectives broadly cover proper identification, assessment, measurement, monitoring, controlling, mitigation and reporting of the risks across various business segments of the Bank. The risk management strategy adopted by your Bank is based on a clear understanding of the risks and the level of risk appetite, which is dependent on the willingness of your Bank to take risks in the normal course of business. A Board level committee, viz., Integrated Risk Management Committee periodically reviews the risk profile, evaluates the overall risks faced by the Bank and develops policies and strategies for its effective management.

Various senior management committees such as Credit Policy Committee (CPC), Asset-Liability Management Committee (ALCO), Operational Risk Management Committee (ORMC) etc operate within the broad policy framework of the Bank to ensure and enhance the risk control and governance framework within the Bank.

The Risk Management Department at Head Office oversees the overall implementation of various risk management initiatives across the Bank.

In line with the guidelines issued by RBI, your Bank has implemented the New Capital Adequacy Framework and is Basel II compliant with effect from March 31, 2009, by adopting the basic approaches available under the guidelines. While complying with all the requirements of the basic approaches under Basel II, your Bank has taken the necessary steps to move over to Basel II Advanced Approaches as per the Road Map approved by the Bank's Board in this regard. As a part of the Basel III, Pillar III - Market Disclosure requirement, your Bank has made a detailed Pillar III Disclosure, which is appended to this report as Annexure III. The Bank conforms to the Basel III guidelines from April 1, 2013 and has also assessed the future capital impacts.

In compliance with Basel guidelines, the Bank has put in place a policy document for Internal Capital Adequacy Assessment Process (ICAAP) to evaluate its capital adequacy relative to its risks. Stress testing framework for various stress scenarios is also put in place for better understanding of the likely impact of adverse market movements/events on the capital and earnings. The results of the ICAAP and Stress testing are reviewed periodically to assess the capital requirement for the projected business growth, keeping in view the risk appetite and risk profile of the Bank. A Board level committee, viz., Internal Capital Adequacy Assessment Committee (ICAAC), reviews the risk appetite, risk profile, business projections as well as capital assessment of your Bank at periodical intervals. To evaluate and review the performance of various business units/ products/customers, your Bank has introduced scientific Fund Transfer Pricing (FTP) and Customer Profitability Management System (CPMS) for better management of risk and return.

In line with guidelines issued by RBI, your Bank has nominated a Chief Information Security Officer (CISO), who is responsible for articulating and enforcing the policies that Bank uses to protect the information assets apart from coordinating security related issues in implementation of new systems under Information Technology in the Bank.

INTERNAL CONTROL SYSTEMS, THEIR ADEQUACY AND COMPLIANCE

Your Bank has put in place an effective and robust internal control apparatus, commensurate with its size, geographical spread and complexity of operations. At the apex level guidance and direction on the control aspects is vested with the Audit Committee of the Board of Directors which takes an overall view on the internal control aspects and formulates all the related policy guidelines. The Bank has put in place an independent Compliance Department in charge of the entire compliance functions of the Bank.

An effective and sound internal audit function provides independent assurance to the board of directors and senior management on the quality and effectiveness of Bank's internal control, risk management and governance systems and processes, thus helping the board and the senior management in protecting the organization and its reputation.

Historically, the internal audit system in the Bank has been concentrating on transaction testing, testing of accuracy and reliability of accounting records and financial reports, integrity, reliability and timeliness of control reports and adherence to legal and regulatory requirements. With the implementation of Risk-Based Internal Audit (RBIA), greater emphasis is placed on the internal auditor's role in mitigating various risks. While continuing with the traditional risk management and control methods involving transaction testing etc., the risk-based internal audit would, not only offer suggestions for mitigating current risks but also on potential future risks, thereby playing an important role in the risk management process of the Bank.

The risk assessment under RBIA would cover risks at various levels (corporate and branch; portfolio and individual transactions etc.) as also the processes in place to identify, measure, monitor and control the risks. The internal audit department is devising the RBIA risk assessment methodology, with the approval of the Board of Directors, keeping in view the size and complexity of the business undertaken by the Bank. The risk assessment process would include the identification of 'inherent business risks' in the various activities undertaken by the Bank, and evaluate the effectiveness of the control systems for monitoring the inherent risks of the business activities ('Control Risk') and then draw up a risk-matrix by taking into account both the factors viz., inherent business and control risks.

In pursuance of seeking periodic assurances on the adequacy and efficacy of internal control functions, the Bank causes periodic Regular Inspections and Information System (IS) Audit of all the branches and offices. Your Bank also covers select branches under concurrent audit, the aggregate turnover of which account for over 63.86 percent of the gross bank credit and over 50.21percent of aggregate deposits of the Bank. Short Inspection of all the branches which are not subjected to concurrent audit is also caused besides, concurrent audit of treasury functions (both domestic and forex), International Division, Forex designated offices, Central Processing Centre, Currency Chests, Information Systems audit of Data Centre and DR Site etc. Besides, the Bank has also been causing Stock and Credit audits of large borrowal accounts by external, professional audit firms in furtherance of effective credit administration. The Bank has also taken prompt action on the implementation of the RBI Guidelines on Information Security, Electronic Banking, Technology Risk Management and Cyber Frauds.

To appraise the effectiveness of management at different levels in accomplishing the assigned tasks towards achieving the overall corporate objectives, Management Audit is also introduced by your Bank for Departments at Head Office & Regional Offices.

Your Bank has put in place the policies and procedures for ensuring orderly and efficient conduct of its business, safeguarding of its assets, prevention and detection of frauds and errors, accuracy and completeness of the accounting records and timely preparation of reliable financial information. The Audit Committee of the Board has assessed the effectiveness of the internal financial controls and their adequacy and directed the strengthening of the same wherever found necessary.

Considering the need for having a strong collection mechanism and to contain slippages of borrowal accounts into NPAs and improve asset(s) quality, Bank has set up a Credit Monitoring Department which inter alia ensures adherence of post sanction compliance requirements and follow up of advance through effective control and communication mechanisms.

RISK BASED SUPERVISION (RBS)

In view of the growing complexities in the processes, product offerings and systems & procedures in the Indian banking sector, pursuant to the recommendation of the High Level Steering Committee, Reserve Bank of India has shifted supervisory stance to risk-based approach called Supervisory Assessment of Capital and Risk (SPARC) which is focusing on evaluating both present and future risks, identifying incipient problems and facilitating prompt intervention/ early corrective action. Your Bank has been included under the same and migrated to Risk Based Supervision for the position as on 31st March 2015.

Compliance Function

As an important element in Corporate Governance structure, the Bank has set up a robust Compliance function with sufficient independence supported by a healthy compliance culture within the Bank. The compliance function in the Bank ensures strict observance of all statutory provisions, guidelines from RBI & other regulators, standards and codes prescribed by regulatory bodies besides Bank's internal policies and fair practices code. Further, the compliance function includes interpretation/ dissemination of regulatory and statutory guidelines, observing proper standards of market conduct, managing conflicts of interest and treating customers fairly. The Bank's compliance function assists the top management in managing the Compliance Risk effectively. The risk-based compliance programme of the Bank, subject to the oversight by head of compliance, ensures appropriate coverage across businesses and co­ordination among risk management functions besides verifying the level of compliance through 'Compliance Testing' of branches. The Bank carries out an annual compliance risk assessment to identify and assess major compliance risks faced by it and takes steps to manage the risks effectively.

MANAGEMENT INFORMATION SYSTEM

The growth of Bank's business, introduction of prudential norms and Basel requirements, increasing regulatory and internal reporting and the various business decision making requirements have necessitated the Bank to build a well coordinated information transmission system. Management Information System makes available information for various requirements of branches/offices, top management, regulators and external agencies, Balance sheet reporting, Capital computation, Risk based supervision, Internal business reviews etc. The Bank has also implemented a Centralised Data Repository forAutomatic Data Flow to RBI.

HUMAN RESOURCES

The Banking System in India has undergone a sea-change with the advent of deregulation, liberalization and globalization. As a consequence, it had to cope up with newer challenges posed by increased competition and changing business conditions on account of adopting higher financial standards and upgrading of technology while trying to retain its trained workforce.

Periodical training and re-skilling is very much essential to equip the workforce with the latest developments in the field and enhance its efficiency. Your Bank has taken various steps to improve the quality of training provided at its Staff Training College like designing newer programmes to suit the need and enhancing the quality of inputs. Besides, your bank also deputes its employees to various training programmes, seminars, workshops and conferences conducted by various institutions of repute like Center For Advanced Financial Research and Learning (CAFRAL), National Institute Of Bank Management (NIBM), Pune, College of Agricultural Banking (CAB), Pune, Institute for Development and Research in Banking Technology (IDRBT) Hyderabad, Southern India Banks' Staff Training College, Bengaluru, Indian Institute of Banking and Finance(IIBF) Mumbai among others. During the year your Bank has trained as many as 2884 of its personnel consisting of executives, officers, clerical and subordinate staff under various programmes.

Banking being a service industry, the quality of service offered by its workforce plays a major role in establishing good customer relationship and thereby enhancing the business growth prospects. Efficient management of human resources is essential to achieve this objective. Your Bank has embarked upon adopting a software solution 'Peoplesoft' for this purpose and the project is in an advanced stage of implementation. The adoption of this Human Resource Management System (HRMS) is expected to streamline various HR functions, assimilate various employee functions, ensure faster delivery of employee benefits/services and improve the efficiency of the workforce.

Your Bank was able to keep a very amiable industrial relationship during the year under report. The number of employees in the Bank stood at 7792 as on 31st March 2016. The Business per employee (excluding interbank deposits) has improved from f1051.78 lakh as on 31st March 2015 to f1082.78 lakh as on 31st March 2016.

Your Bank has put in place an institutional mechanism for protection of women employees at the workplace and adopted a policy pursuant to Section 22 of the Sexual Harassment of Women at Workplace (Prevention, Prohibition and Redressal) Act, 2013, providing for protection of women employees against the sexual harassment at the workplace and redressal of such complaints.

DIRECTORS

As on March 31, 2016, your Bank had a total of twelve Directors, including a woman director. All of therm except Messrs U R Bhat and Keshav K Desai, Additional Directors and Mr. P Jayarama Bhat, Managing Director and CEO, are Independent Directors. The details of the criteria for appointment and remuneration of Directors are provided in the report on Corporate Governance forming part of this report.

INDEPENDENT AND NON-EXECUTIVE DIRECTORS

Pursuant to the provisions of Section 149(6) of the Companies Act, 2013, your Bank has received necessary declarations from all the non-executive directors confirming that they meet the criteria of independence for Independent Directors. Two Additional Directors have also furnished similar declarations and subject to their approval of their appointment at the ensuing Annual General Meeting, they also meet the criteria of independence for Independent Directors.

MANAGING DIRECTOR AND CHIEF EXECUTIVE OFFICER (MD & CEO)

Mr. P Jayarama Bhat, MD & CEO of the Bank has been re-appointed by the Board for a further period of three years effective from July 14, 2015 as approved by the Reserve Bank of India vide their letter DBR.Appt. No. 18976/08.40.001/2014-15 dated June 15, 2015 and the members of the Bank at the Annual General Meeting held on July 16, 2015.

OTHER CHANGES IN THE BOARD

The Board of Directors has appointed Mr. U R Bhat, Mumbai a well known investment advisor and Mr. Keshav K Desai an entrepreneur from Hubballi as Additional Directors on February 19, 2016 and as per Section 161 of the Companies Act, 2013 they would hold office upto the date of ensuing Annual General Meeting. Bank has received necessary notices under Section 160 of the Companies Act, 2013 proposing their candidature for appointment as Independent Directors of the Bank at the ensuing Annual General Meeting. Having regard to their vast experience, rich knowledge and expertise, your Directors recommend their appointment. A brief resume and other details of the above Directors are furnished in the notice of the Annual General Meeting.

NUMBER OF BOARD MEETINGS

During the year under report the Board had met 13 times and the details thereof are provided in the report on Corporate Governance forming part of this report.

COMMITTEES OF THE BOARD

The Bank has 12 Committees which were constituted to comply with the requirements of relevant provisions of the applicable laws and for operational efficiency.

Details of the meetings of the Board and the Committees, their composition, terms of reference, powers, roles etc are furnished in the report on Corporate Governance forming part of this report.

CORPORATE GOVERNANCE

Your Bank is committed to follow the best practices of corporate governance to protect the interests of all the stakeholders of the Bank, viz. shareholders, depositors, other customers, employees and the society in general and maintain transparency at all levels. A detailed report on corporate governance practices is given as Annexure IV to this report.

EXTRACT OF THE ANNUAL RETURN

Pursuant to Section 92(3) of the Companies Act, 2013 read with Rule 12(1) of the Companies (Management and Administration) Rules, 2014, an extract of the Annual Return of the Bank as on March 31, 2016 is annexed (Annexure V).

PERFORMANCE EVALUATION OF THE BOARD

Your Board of Directors has laid down criteria for performance evaluation of Directors, Chairman, MD & CEO, Committees of the Board and Board as a whole and also the evaluation process for the same. The statement indicating the manner in which formal annual evaluation of the Directors, the Board and Committees of the Board etc., are given in detail in the report on Corporate Governance, which forms part of this Annual Report. In pursuance to the above, Independent Directors in their separate meeting held on March 18, 2016 have reviewed and evaluated the performance of Board as a whole, Chairman of the Board and the Managing Director and CEO.

Further, the Board also reviewed the performance of committees of the Board and that of individual Independent Directors at its Meeting held on March 18, 2016.

DIRECTORS' RESPONSIBILITY STATEMENT

In accordance with Section 134(3)(c), 134(5) of the Companies Act, 2013 read with Rule 8 of the Companies (Accounts) Rule, 2014, your Directors state that:

(a) in the preparation of the annual accounts, the applicable accounting standards have been followed along with proper explanation relating to material departures;

(b) the directors have selected such accounting policies and applied them consistently and made judgments and estimates that are reasonable and prudent so as to give a true and fair view of the state of affairs of the Bank as at the end of financial year March 31, 2016 and profit and loss account for that period.

(c) the directors have taken proper and sufficient care for the maintenance of adequate accounting records in accordance with the provisions of the Companies Act, 2013 for safeguarding the assets of the Bank and for preventing and detecting fraud and other irregularities.

(d) the directors have prepared the annual accounts on a going concern basis.

(e) the directors have laid down the internal financial controls followed by the Bank and that such internal financial controls are adequate and are operating effectively.

(f) the directors have devised proper systems to ensure compliance with the provisions of all applicable laws and that such systems were adequate and operating effectively.

Management Discussion and Analysis

The Management Discussion and Analysis Report for the year under review pursuant to Regulation 34(3) read with Schedule V of the SEBI(Listing Obligations and Disclosure Requirements) Regulations 2015 is presented in a separate section forming part of this report.

WHISTLE BLOWER POLICY

The Bank has implemented the Protected Disclosure Policy (Whistle Blower Policy) since the year 2007 intended to promote participation of employees at all levels and detection of corruption, misuse of Office, criminal offences, suspected /actual fraud, failure to comply with the rules and regulations prescribed by the Bank and any events /acts detrimental to the interest of the Bank, depositors and the public resulting in financial loss/operational risk, loss of reputation etc.

Further, the mechanism adopted by the Bank encourages the Whistle Blower to report genuine concerns or grievances and provides for adequate safeguards against victimization of Whistle Blower who avails such mechanism and also provides for direct access to the Chairman of the Audit Committee, in exceptional cases. There was no occasion when an employee was denied access to the Audit Committee for reporting any events under the aforesaid policy. The functioning of the Vigil mechanism is reviewed by the Audit Committee periodically. The details of Whistle Blower Policy is posted in our website and available at the link: www.karnatakabank.com/ktk/Protected > Disclosure.jsp

CONTRACTS OR ARRANGEMENTS WITH RELATED PARTIES

All related party transactions that were entered into during the financial year were in the ordinary course of the business of the Bank and were on arm's length basis. There were no materially significant related party transactions entered into by the Bank with Directors, Key Managerial Personnel or other persons which may have a potential conflict with the interest of the Bank. As such disclosure in Form AOC-2 is not applicable.

The policy on dealing with Related Party Transactions as approved by the Audit Committee / Board has been placed in the website of the Bank.

STATUTORY DISCLOSURES

The disclosures under sub-section (3) of Section 134 of the Companies Act, 2013 read with Rule 8 (3) of the Companies (Accounts) Rules, 2014 are furnished below:

a) Conservation of Energy and technology absorption

Considering the nature of the Bank's business, the provisions of Section 134(3)(m) of the Companies Act, 2013 relating to conservation of energy and technology absorption are not applicable to your Bank. The Bank has, however, used information technology in its operations extensively.

b) Foreign Exchange Earnings and outgo: During the year ended March 31, 2016, the Bank has earned f53.69 crore and spent f17.24 crore in foreign currency.

c) There were no significant and material orders passed by the regulators or courts or tribunals impacting the going concern status and Bank's operations in future.

d) Internal Financial Control Systems and their adequacy: Your Bank has laid down standards, processes and structure facilitating the implement­ation of internal financial control across Bank and ensure that same are adequate and operating effectively.

e) Key Managerial Personnel: Mr. P Jayarama Bhat, MD & CEO, Mr. Raghurama, CFO and Mr. Y V Balachandra, Company Secretary of the Bank were the Key Managerial Personnel of the Bank as on March 31, 2016 as per the provisions of the Companies Act, 2013. None of the Key Managerial Personnel has resigned. However, the Board has designated Mr. Chandrashekar Rao B as CFO in place of Mr. Raghurama w.e.f. April 23, 2016.

f) Remuneration of directors: Disclosures pursuant to Section 197(12) of the Companies Act, 2013 read with Rule 5 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014 are given in Annexure VIII to this report.

g) Employees who are in receipt of remuneration exceeding rupees sixty lakhs etc.: Statement showing the particulars of employees who were in receipt of remuneration during the year 2015-16 requiring disclosure under Rule 5(2) of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014 is annexed.

AUDITORS

a. Statutory Auditors

M/s. Kamath & Rau, Chartered Accountants, Karangalpady, Mangaluru-575003 and M/s. Abarna & Ananthan, Chartered Accountants, # 521, 3rd Main, 6th Block, 2nd Phase, BSK 3rd Stage, Bengaluru-560085 would retire as joint Statutory Central Auditors of the Bank at the ensuing Annual Meeting of the members of the Bank and are eligible for re-appointment subject to the approval of Reserve Bank of India. The Bank has received consent from the above auditors and necessary confirmation from them that they are not disqualified to be appointed as auditors of the Bank pursuant to the provisions of the Companies Act, 2013 and the Rules made thereunder. Accordingly having regard to the provisions of the Companies Act, 2013, extant guidelines of Reserve Bank of India and as approved by the Reserve Bank of India, the Board of Directors of the Bank has recommended the re-appointment of aforesaid auditors.

b. Secretarial Auditor and Secretarial Audit Report

Pursuant to Section 204 of the Companies Act, 2013 and the rules thereunder, your Bank had appointed M/s. Ullas Kumar Melinamogaru, Practising Company Secretary, Mangaluru as Secretarial Auditors to conduct the Secretarial Audit for the year ended March 31, 2016. The audit report from the Secretarial Auditor is annexed to this report as Annexure VI.

CORPORATE SOCIAL RESPONSIBILITY

Businesses are an integral part of society and play a critical role in the sustenance and improvement of a healthy ecosystem, in fostering social inclusiveness and equity and in upholding the ethical practices and good governance. It is believed that integrating social, environmental and ethical responsibilities into governance of business ensures long term successes, competencies and sustainability. With this in mind, your Bank continues to fulfil its various social responsibilities. The Corporate Social Responsibility initiatives of the Bank are designed to ensure that the Bank adds social, environmental and economic value in all its activities to make a positive, sustainable impact on both society and business. In this direction, your Bank has been responding well over the years through various social initiatives and has identified some core areas of intervention like healthcare, education/ livelihood enhancement, empowering women/socially and economically disadvantaged, environmental sustainability/green initiatives, protection of heritage/ culture, promotion of sports, rural development etc. aimed at improving the overall development of the society. The Bank firmly believes that being an integral part of society, it is the inclusive growth of society which contributes ultimately to the growth of the Bank and in this direction, your Bank has been strengthening its rural orientation through initiatives aimed at imparting financial literacy and extending banking services to the people in rural unbanked areas, in a fair and transparent manner, at an affordable cost. Towards this end, your Bank had opened 13 branches in unbanked rural centres during the financial year 2015-16 as part of its financial inclusion initiative, thus taking the total Financial Inclusion branches to 92.

Further, pursuant to Section 135 of the Companies Act, 2013 read with Companies (Corporate Social Responsibility Policy) Rules, 2014, the Board has setup a Committee of Directors namely, 'Corporate Social Responsibility (CSR) Committee' and has also put in place a Policy on Corporate Social Responsibility (CSR Policy) to undertake projects/programmes in pursuance to the above Policy. The contents of the CSR Policy along with the report on amount spent on various projects/programmes during the financial year 2015-16 is detailed in Annexure VII to this report pursuant to Rule 8 of the Companies (Corporate Social Responsibility Policy) Rules, 2014.

CUSTOMER SERVICE

The customer has always been the focal point of our initiatives. We have been endeavoring to empower our customers by rolling out innovative products and services through optimal use of technology without compromising on the quality of service rendered across the counter and without losing sight of the safety and security aspects. During the year 2015-16, your Bank has introduced several technology based new products and solutions such as KBL mPassBook & KBL ApnaApp (two tailor made mobile Apps), KBL Direct Pay (Mobile Recharge/Utility Bill Payment Interface), Online Account Opening Facility and facility of e-Filing of Income Tax Return in association with M/s Clear Tax.

In pursuit of enhancing customer convenience, the Bank has introduced 'Online Account Opening' portal, which facilitates the customers to open an account Online. The process is quicker and easier to open an account through Online Account opening process from any where and any time at customers convenience.

Your Bank is actively involved in putting in place systems and procedures to comply with the recommendations of the Damodaran Committee on Customer Service, constituted by the Reserve Bank of India, to look into the banking services rendered to customers and the grievance redressal mechanism prevalent in banks. In this direction, the Bank has introduced the Online Customer Grievance Redressal System to ensure quick and speedy redressal of complaints of the customers in order to provide hassle free banking experience. Through this system, the customer can lodge a complaint and track the status of the complaint online, through the Bank's website. Most of the recommendations made by the said Committee have been complied with and the remaining few which require up-gradation of the Bank's Core Banking Solution are being pursued for early compliance.

Facility of Online application system and credit proposal tracking system for Micro, Small and Medium Enterprises (MSME) has also been put in place under which entrepreneurs/applicants can submit applications Online for credit facility from any branch of their choice and track the status of such applications besides tracking the status of their applications submitted directly at branches.

Your Bank has also established a special purpose vertical called IT enabled Business Solution Cell i.e "IT Bus Cell" which shall identify/provide/enable IT based solutions to the business and other units of the Bank by conceiving/conceptualizing new products, services and processes ultimately to enhance the customers satisfaction and their experience with the product / services offered by the Bank.

FINANCIAL INCLUSION

Financial Inclusion means making available the full range of banking services at an affordable cost to the people who do not have access to banking services. It mainly focuses on the section of society not having formal financial institutional support. Through the Financial Inclusion Plan, Bank aims at 'connecting people' with the Bank and not just opening accounts. This includes meeting the small credit needs of the rural public, giving them access to the payments system, providing remittance facility and life and health insurance. Efforts are being made to optimize the resources to achieve the goal of extending banking facilities to the unbanked areas/deprived sections.

All the branches of the Bank are under Core Banking Solution (CBS) and all the branches to be opened in future will also be under CBS. Out of 725 branches, Bank has 163 rural branches and all these branches are provided with CBS offering all banking facilities to the rural clientele in the gram panchayats or villages where these branches are located. All the rural branches are also acting as Financial Literacy Centers (FLCs) and imparting Banking literacy among the rural Populace.

In accordance with announcement of Prime Minister Jan Dhan Yojana (PMJDY) on August 15, 2014 revised Strategy & Guidelines of Department of Financial Services (DFS), Ministry of Finance, Govt. of India, has been considered for implementation of Financial Inclusion activity of the Bank. PMJDY takes in to account both rural sub service areas (SSAs) and urban wards for Financial Inclusion. Under the revised financial inclusion plan, in rural areas, Bank is allocated with 214 Gram Panchayats (GPs) for Financial Inclusion, covering 297 Sub service Areas (SSAs) consisting of 1039 villages in the states of Karnataka, Chattisgarh Maharashtra and Andhra Pradesh and in urban areas 313 wards are allocated in Karnataka and other States. The Gram Panchayats are being financially included through Brick and Mortar Branches and Business Correspondents (BC). Your Bank has been issuing RuPay PMJDY Debit Cards under the domestic card payment scheme launch by the National Payments Corporation of India (NPCI).

Brick and Mortar Branches:

As on March 31, 2016 Bank has covered 547 villages of 102 GPs through Brick & Mortar Branches.

Business Correspondent Services (BC Services):

Bank has entered into an agreement with M/s BASIX Sub-ki Transaction Ltd and M/s Integra Micro Systems Pvt. Ltd. to provide online transaction facility and as on March 31, 2016, 121 GPs with 149 SSAs covering 561 villages of Karnataka, Andhra Pradesh and Chhattisgarh States were covered under the above arrangement.

Ultra Small Branches (USBs):

As permitted by the Reserve Bank of India Bank had opened USBs where business correspondents (BCs) could conduct operations and thereby boost confidence of customers to use their financial services. As on 31st March 2016, your Bank has 37 USBs.

Electronic Benefit Transfer (EBT) - Pilot Project of Govt. of Karnataka:

Bank is participating in Govt. of Karnataka (GOK) EBT Pilot project for NREGA/SSP beneficiaries under - "One District - Many Bank Model" and is disbursing the payments under the above schemes to the beneficiaries using smart card and hand held machines at 5 Gram Panchayat locations in Chitradurga and Yadgir districts.

Direct Benefit Transfer (DBT):

Bank is actively participating in Direct Benefit Transfer (DBT) Programme of Govt. India, wherein, the Govt. would transfer benefits of various Schemes directly to the beneficiaries Aadhaar enabled bank accounts and also accounts seeded with LPG ID in case of transfer of subsidy for LPG. For this purpose, Bank has on boarded with NPCI for Aadhaar Payment Bridge System (APBS) under National Automated Clearing House (NACH). Revised DBTL was introduced on November 15, 2014 and launched throughout the country on January 1, 2015. Both the Aadhaar based and LPG ID based approaches are made available to customers across all branches of the Bank.

Financial Literacy and Credit Counseling Centers (FLCCs)

Bank has sponsored 5 FLCs at B.C Road, Tiptur, Hangal, Kundagol and Alur in a joint venture with M/s Jnana Jyothi Financial Literacy and Credit Counseling Trust, Manipal. During the financial year 5 FLCs sponsored by the Bank have conducted 1321 Financial Literacy campaigns and 58161 participants had been covered. In adherence to RBI guidelines all the rural branches of your Bank are also conducting financial literacy Camps.

SOCIAL SECURITY SCHEMES:

Three Social Security Schemes- Prime Minister Jeeven Jyothi Bima Yojana (PMJJBY), Prime Minister Suraksha Bima Yojana (PMSBY) and Atal Pension Yojana (APY) have been launched by Hon'ble Prime Minister on 1st June 2015. All the branches of your Bank are actively providing the above schemes to the customers across the country.

1) PMJJBY provides Insurance coverage of Rs.2,00,000/- by paying yearly premium of Rs.330/-. A person aged between 18 to 50 years holding account in a bank is eligible for the scheme. A total of 1,42,647 lives have been covered till 31.03.2016.

2) PMSBY provides Accidental insurance coverage of Rs.2,00,000 by paying year premium of Rs.12/-. A person aged between 18 to 70 years holding account in a Bank is eligible for the scheme. A total of 2,07,053 lives have been covered till 31.03.2016

3) APY : This scheme was launched by the Government of India on 9th May, 2015 to address the old age income security needs of the citizen in an affordable manner linked to auto debit facility from the bank's savings account of the subscriber. Your Bank is actively participating in the scheme, with all branches being registered as Point of Presence - Service Provider (POP-SP) for APY.'

Prime Minister Jan Dhan Yojana (PMJDY):

In accordance with announcement of Prime Minister Jan Dhan Yojana (PMJDY) on August 15, 2014 revised Strategy & Guidelines of Department of Financial Services (DFS), Ministry of Finance, Govt. of India, has been considered for implementation of Financial Inclusion activity of the Bank. PMJDY takes in to account both rural semi urban, urban wards and metro for providing basic banking facilities to the unbanked populace. PMJDY also provides scope for RuPay debit card that is inclusive of Rs.1 Lakh accidental insurance.

All the branches across the country have opened accounts under PMJDY and are issuing RuPay Debit Card under the domestic card payment scheme launched by the National Payments Corporation of India (NPCI).

A total of 15,60,754 accounts have been opened under PMJDY since 15.08.2014 till 31.03.2016, with outstanding balance of Rs.1,266.42 crore. A total of 1,06,247 RuPay cards have been issued so far by the Bank.

KBL VISION 2020

During the financial year ended March 31, 2016, the Bank has unveiled its long term Vision document - KBL Vision 2020 reflecting the aspirations of all the stakeholders for achieving various targets taking advantage of emerging opportunities, upgrading IT infrastructure, strengthening audit, vigilance and risk management practices and compliance culture and taking steps to improve efficiency of people, processes and products by continuously evolving new strategies and policies and create value for our shareholders by optimally utilizing capital resources. As per the KBL Vision 2020 document, Bank's total business turnover is projected to increase in a progressive manner to touch f1,80,000 crore with deposits of f1,00,000 crore and advances of f80,000 crore by March 2020.

AWARDS AND RECOGNITIONS

Your Bank bagged the following awards during the year under report in recognition of its achievement under technology initiatives, social banking, export performance etc.

0 IBA Banking Technology Award 2014-15, Runner up in the category of Best Risk and Fraud Management Initiative, amongst Small Banks.

0 ASSOCHAM Social Banking Excellece Awards 2015, under the following categories:

• Winner - Urban Banking [Small Bank] Category.

• Winner-Agricultural Banking [Small Bank] Category

• Runner Up - Participation in government schemes [Small Bank] category

• Runner Up - Overall Best Social Bank[ Small Bank] category

0 MSME Banking Excellence Awards 2015 [Runner Up] for Eco -Technology "Emerging Banks", instituted by CIMSME [Chamber of Indian Micro Small & Medium Enterprises].

0 Banking Technology Excellence Award - "Best Bank for Evangelising Technology Adoption" among Small Banks for the year 2014-15, instituted by IDRBT.

0 "Export Excellence award for MSME" by the Federation of Indian Export Organisations -Western Region.

0 "STP AWARD" from Bank of New York, Mellon in recognition to the improved payment formatting and straight - Through Processing success rate.

0 "Outstanding Performance in MSME Funding" by the Federation of Industry, Trade and Services (FITS).

Further UKAS, Management Systems, a UK based accreditation certifying body has renewed ISO 27001:2013 certificate for our three IT set-ups viz. Data Centre, Near Line Site and Head Office-IT Department including Disaster Recovery Site.

Further, your Bank has been awarded with 'Sanman Patra' by the Central Excise & Service Tax Commissionerate, Mangaluru, for compliance to service tax provisions, at the Central Excise Day 2016.

ACKNOWLEDGEMENTS

Your Directors would like to place on record their sincere gratitude to the Reserve Bank of India, other government and regulatory authorities, financial institutions and correspondent banks for their continued guidance and support. Your Directors also place on record their gratitude to the Bank's shareholders, depositors and other customers for their continued support, patronage and goodwill. Your Directors express their deep sense of appreciation to all the staff members, for their contribution in your Bank's quest for sustained growth and profitability and look forward to their continued contribution in scaling greater heights.

For and on behalf of the Board of Directors

Sd/-

Ananthakrishna

Chairman

Place: Bengaluru

Date : June 21, 2016