Kotak Mahindra Bank

MBFI Project Report

Table of Contents

The Banking Industry......................................................................................................................3

Market size...................................................................................................................................3
Structure of the banking industry.................................................................................................3
Porters Analysis of the Banking Industry...................................................................................4
Performance analysis of Kotak Mahindra bank...............................................................................5
Background..................................................................................................................................5
Vision Statement..........................................................................................................................5
Business Overview.......................................................................................................................0
Performance comparison with Competitors....................................................................................5
Liquidity and Credit Analysis..........................................................................................................6
NIM..............................................................................................................................................6
Capital Adequacy Ratio (CAR)....................................................................................................7
Credit to Deposit..........................................................................................................................8
NPA..............................................................................................................................................8
Risk management practices at Kotak Mahindra..............................................................................8
Different risks faced by bank.......................................................................................................8
Organization Structure of the Market Risk Management functions..........................................10
Computation of operational risk capital.....................................................................................12
Corporate governance practices of Kotak Mahindra Bank............................................................13
Fulfillment of different regulatory provisions by chosen bank.....................................................13
APPENDIX....................................................................................................................................15

The Banking Industry

The banking industry according to RBI is one the most regulated industries in India. It has
adequate capital and low exposure to forex. This was one the chief reasons why India survived
the global economic meltdowns of 2008. It has also emerged as one of the strongest drivers of
economic growth.1 There has been lot of optimism in general about the banking industry and its
future outlook. The optimism is chiefly due the fact that the government is currently doing a lot
to boost the positivity in the market about the industry in general 2. RBI has been especially active
and vigilant about inflation and a positive outlook has led to rate cuts and a growth in the
economy.
Market size
The Indian banking industry has a total asset size of Rs. 81 trillion and is burgeoning cautiously.
The rise in NPAs has led to lenders going slow in terms of credit offtake. The Indian banking
space consists of 46 commercial banks along with foreign banks as well as rural and co-operative
lenders. State banks control approximately 80% of the market leaving small ground for private
rivals to share. Standard & Poors estimates that credit growth in Indias banking sector would
improve to
12-13 per cent in FY16 from less than 10% in the second half of CY14
Structure of the banking industry
RBI
Schedul
ed
Unscheduled
Cooper
ative

Commercial
Public

1
2

Priv
ate

Foreign

RRB

Rural

Urb
an

http://www.isesec.com/Admin/Research/1659808644_Indian%20Banking%20Industry.pdf
http://www.ibef.org/industry/banking-india.aspx

Porters Analysis of the Banking Industry3

Bargaining Power of Suppliers to Banking industryThe Bargaining Power of Suppliers is medium however it has been on the rise for the last few
years. There are a lot of suppliers who provide the banking industry with their general resources
however when it comes to their critical resources such as ABMs, system applications, number of
suppliers has decreased tremendously. Since the industry firms have high switching costs the
bargaining power usually tilts towards suppliers.
Bargaining power of customersBargaining power of customers is very high especially with so many players in the landscape.
Moreover banks have also forayed into the long-term finance. Bargaining power of suppliers.
With the RBI regulation of priority sector lending banks are increasingly focussing on high
margin individuals. So HNIs, NRIs have been given special importance by banks. Also there are
a wide array of banks from which customers can choose from now. Moreover banks are
increasingly customizing their offerings which establishes the fact that customers are gaining
greater significance.
Threat of New Entrants for banking industryLow as there are stringent norms by RBI both for capital and the degree of risk that they can
take. Moreover the banking industry is capital intensive and require lot of investment in
technology, security and skills. The banking industry employs a lot of skilled people in their
management division. Moreover setting up of branches are a major expense as good distribution
and network is mandatory. So a prolonged period is needed for a financial institution to develop
the means to become a bank. The other factors are typically:
Existing players are operationally experienced and have established practices. Moreover
due to long term operations they have depreciated assets which leads to asset light
balance sheet and better market valuations
In the past few years there has been an emergence in the term Relationship-banking.
Banks tend to form close relationships with the customer because trust factor is
paramount and bankers tend to get into long term financial contracts with other banks.

http://www.scribd.com/doc/22498809/Porter-s-Five-Forces-Model-of-Competition#scribd

Threat of substitutesHigh due to the presence of a large numbers of investment and borrowing avenues such a Unit
Trust, investment banks, Post Office, Credit unions etc. Small co-operative banks and especially
the unorganized sector is also posing a major threat to the bank as people with limited money
will not get enough return if they keep money in banks, so they keep money in NBFCs and chitfunds. So there are alternative banking services available with lower operating costs and no
capital requirement as mandated by RBI. This category also relates to complementary products.
The threat of substitutes is determined by factors such as risk appetite of investor and during a
bull run in the market people are usually not satisfied by the return they get from banks.
Competitive Rivalry between Existing Players for banking industry- There are numerous
informal financing in the rural area. There is intense competition due to the large number of
capital markets in India for investing. High competitive pressure results in pressure on prices and
margins and thus on profitability for every finance organization in the segment. Competition
between existing players is likely to be high when:
There is not much differentiation between players and their products, hence, there is
much price competition. Currently the trend has been to differentiate on the basis of
services offered. So private banks usually charge a premium as they offer customized
packages.
The market is mature. So banks have to indulge in disruptive innovation and market
cannibalization
High exit barriers so banks will strive to stay in the market
Performance analysis of Kotak Mahindra bank
Background:
Kotak Mahindra Group was established way back in 1985 and today has become one of Indias
top financial services conglomerates. Kotak Mahindra Finance Ltd. was the groups flagship
company which was a non-banking finance company. It received a banking licence from the
Reserve Bank of India (RBI) in February 2003 and was glorified as Indias first non-banking
financial company (NBFC) to become a bank Kotak Mahindra Bank Limited.
Vision Statement:
To be the most trusted Global Indian Financial Services brand and the most preferred financial
services employer with focus on creating value.4

http://www.kotak.com/our-vision.html

Business Overview:

Kotak Mahindra bank provides following services1:

1. Consumer Banking
o

Provides plethora of liabilities and assets products to retail customers and small
businesses

Also offers many products and services, right from savings accounts, investment
services, loan products to innovative digital solutions

Helps business community by delivering comprehensive business solutions, like

current accounts, trade services, cash management services and credit facilities

2. Commercial Banking
o

Plays a vital role in fulfilling the mission of funding deep into Bharat through an
expanding network of branches and associates

Meets a substantial portion of the priority sector lending requirement including

agricultural and tractor financing

Offers a range of products for purchase and operations of commercial vehicles

and construction equipment and contributes to Indias development

Participates in Indias growth by partnering small and medium enterprises (SMEs)

in the country

3. Corporate Banking
o

Caters to the diverse needs of major Indian corporate bodies, financial

institutions, public sector undertakings, multinational companies, mid-market
companies and realty business

Offers a comprehensive portfolio of products and services working capital

financing, medium term finance, export credit, transaction banking, custody
services, debt capital markets, forex and treasury services

4. Wealth Management
o
One of the largest and the most respected wealth management businesses in India
Provides customised financial solutions to high net worth families (covers 44% of
Indias top 100 families featuring in Forbes India Rich List 2014)
o

1 Kotak Mahindra Group Annual Report, 2014- 2015

5. Car Loan
o Offers finance options in the form of lease and loans for the entire range of passenger
cars and multi-utility vehicles
o Provides finance to car dealers for their working capital requirements towards
inventory funding and term loans
With RBIs approval, on 1st April 2015, ING Vyasa Bank Limited merged with Kotak Mahindra
Bank Limited. This merger resulted in creation of a 2,00,000 crore institution. This merger
brought together two strong players in the banking industry to form a more robust and
fundamentally sound bank. ING Vyasa who had been in the industry for last eight decades carries
an inspiring legacy to the merged entity- Kotak Mahindra Bank Limited who has also been
successful in building a comprehensive financial services conglomerate in around thirty years of
time.
With this merger Kotak Mahindra Bank became Indias fourth largest private bank, along with
the expansion of nationwide geographic reach. With more than 1250 branches and 1900+ ATMs
across more than 640 locations in India along with best-in-class products and services with
continuous thrive for better technology architecture, Kotak Mahindra Bank has remained true to
its vision of sustainable value creation.
As per the current market capitalisation, Kotak Mahindra stands 4th in private sectors banks in
India with 15.49% market share, HDFC Bank (32.55%) being the market leader.

Analyzing Bank Performance with Financial Ratios:

Capital Adequacy Ratios:
Year

2011

2012

2013

2014

Tier 1

17.99

15.74

14.71

17.77

Capital (%)
Tier 2
Capital (%)

1.93

1.78

1.34

1.06

2015
16.18

0.99

Total CRAR

19.92

17.52

16.05

18.83

17.17

(%)

Profitability Ratios:
Year

2011

2012

2013

2014

2015

Return on

14.13

13.83

15.65

14.72

14.51

Equity (%)
Return on
Assets (%)

1.93

1.75

1.82

1.86

1.85

Net Interest

4.36

4.34

4.29

4.31

4.75

49.9

59.3

60.1

57.6

56.5

Margin (%)
Interest
Expense/
Interest
Income (%)

Non-Interest

27.1

28.0

26.6

27.3

32.4

Income/ Net
Income
DuPont Analysis of Return on Equity:
Return on Equity = Net Income/Operating Revenue * Operating Revenue/Total Assets * Total
Assets/Total Equity
Year

NI/OR

OR/TA

TA/TE

ROE

2011
2012

1.048
1.110

0.018
0.017

7.826
7.904

14.51%
14.72%

2013
2014

1.172
1.073

0.016
0.016

8.587
7.885

15.65%
13.83%

2015

0.920

0.021

7.329

14.13%

Risk Ratios:
Year

2011

2012

2013

2014

2015

Capitalization
Leverage
Ratio (%)

12.78

12.65

11.64

12.68

13.64

Total Capital

13.35

13.19

12.12

13.06

13.96

0.08

0.05

0.07

0.08

0.06

Ratio (%)
Loan Ratio
(%)

66.44

67.08

64.90

61.92

68.35

Loss Ratio

0.01

-0.01

0.00

-0.02

-0.03

0.27

0.18

0.16

0.18

0.19

2.15

1.64

1.53

1.54

1.68

31.11

32.18

31.00

33.88

34.13

Ratio (%)
Asset Quality
Provision for
Loan Loss

(%)
NonPerforming
Ratio (%)
Operating
Efficiency
(%)
Tax Rate (%)

Asset-Liability Profile:
Year

2011

2012

2013

2014

2015

Loans/Deposit

100.2

101.4

95.0

89.8

88.4

Ratio
Loans/(Deposits 71.6
+Borrowings)

70.9

67.8

73.7

CASA Ratio

32.2

29.2

31.9

30.0

76

36.4

Investment/
Deposit Ratio

58.5

56

56.6

43.1

40.6

Strong management, business model, controlled asset quality

KMB has one of the most stable asset qualities with NNPA ratio of 1% and negligible
restructured assets. The bank is well capitalized with tier I of 16.2% (maintained 15-18% since
start). It has grown credit by 15x in FY02-08 to 15520 crore and post that at 25% CAGR to |
48468 crore by FY13 with profit surging to | 1360 crore from 54 crore in FY02. PAT growth in
FY15 remained healthy at 1866 crore (up 24% YoY). We expect PAT to grow at 22% CAGR to
2783 crore while on a merged basis, PAT may grow at 18% CAGR over FY15-17E to 3489
crore.

Performance comparison with Competitors2

Key Financial Ratios

Credit-Deposit (%)
Investment / Deposit (%)
Cash / Deposit (%)
Interest Expended / Interest Earned
(%)
Other Income / Total Income (%)
Operating Expenses / Total Income
(%)
Interest Income / Total Funds (%)
Interest Expended / Total Funds (%)
Net Interest Income / Total Funds (%)
Non Interest Income / Total Funds
(%)
Operating Expenses / Total Funds
(%)
Profit before Provisions / Total Funds
(%)
Net Profit / Total funds (%)
Dupont Model
2 https://www.capitaline.com

HDFC
Bank

ICICI
Bank

Kotak
Axis
Mahindr
Bank
a
As of March 2015

IndusIn
d Bank

Yes
Bank

81.71
35.13
6.46

104.72
52.43
6.85

84.71
40.75
6.11

88.99
41.74
5.13

92.02
34.48
6.28

79.33
52.95
5.92

53.79
15.66

61.22
19.87

59.91
19.08

56.55
17.27

64.71
19.87

69.86
15.03

24.34
8.96
4.82
4.14

18.76
7.88
4.82
3.06

20.99
8.39
5.03
3.37

27.7
10.04
5.68
4.36

22.54
9.9
6.41
3.49

16.78
9.44
6.59
2.85

1.66

1.95

1.98

2.1

2.46

1.67

2.58

1.85

2.18

3.36

2.78

1.86

3.22
1.89

3.17
1.79

3.17
1.74

3.1
1.93

3.16
1.83

2.65
1.64

PBIDT/Sales (%)
Sales/Net Assets
PBDIT/Net Assets
PAT/PBIDT (%)
Net Assets/Net Worth
ROE(%)
Valuation Ratios
Price Earning (P/E)
Price to Book Value ( P/BV)
Price/Cash EPS (P/CEPS)
EV/EBIDTA
Market Cap/Sales

63.15
0.34
0.21
28.15
2.73
19.37

67.29
0.32
0.22
27.11
2.38
14.55

65.26
0.33
0.21
25.72
3.02
17.75

62.67
0.37
0.23
25.35
2.24
14.12

66.68
0.46
0.31
22.24
2.54
18.98

74.09
0.29
0.22
19.88
4.02
21.33

26.14
4.13
24.5
17.02
4.46

16.76
2.27
15.81
14.5
2.98

18.61
2.97
17.61
15.25
3.03

54.76
7.17
49.59
21.38
8.63

26.69
4.56
24.89
14.35
3.86

17.69
2.92
16.94
12.99
2.5

The company exhibits high valuation ratios, primarily because it exhibits a lower earnings per
share when compared to its share price. It trades at 5.9 times its book value of the share.
ROE:
ROE is the return on equity capital invested in a corporation by its stockholders, measured by
after-tax net income divided by total equity capital. Kotak Mahindra bank exhibits one of the
lowest return on equity compared to its peers.
Liquidity and Credit Analysis3
Industry : Banks - Private Sector
Year
NIM Ratio
Capital Adequacy Ratio
Net Non Performing Assets (Rs.
Cr)
% of Net Non-Performing Assets to
Net Advance
Credit-Deposit (%)
Investment / Deposit (%)
Cash / Deposit (%)
Interest Expended / Interest Earned
(%)
Other Income / Total Income (%)
Operating Expenses / Total Income
(%)
Interest Income / Total Funds (%)
Interest Expended / Total Funds (%)
Net Interest Income / Total Funds
(%)

Mar 11

Mar 12

Mar 13

Mar 14

Mar 15

5.20
19.90
211.16

4.60
17.50
237.38

4.60
16.00
311.41

4.60
19.00
573.56

4.70
19.00
609.08

0.72

0.61

0.64

1.08

0.92

94.27
55.76
7.89
49.94

100.9
57.06
6.08
59.35

97.75
56.32
4.72
60.14

92.18
49.37
4.68
57.57

88.99
41.74
5.13
56.55

15.7
31.25

13.65
25.64

12.61
24.01

13.77
25.01

17.27
27.7

9.49
4.74
4.75

10.61
6.3
4.31

10.77
6.48
4.29

10.24
5.89
4.34

10.04
5.68
4.36

3 http://ir.kotak.com/downloads/annual-reports-2014-15/pdf/Kotak%20Mahindra
%20Bank%20Limited%20-%20Standalone.pdf and Capitaline Database

Operating Expenses / Total Funds

(%)
Profit before Provisions / Total Funds
(%)
Net Profit / Total funds (%)
RONW (%)

3.52

3.15

2.96

2.97

3.36

2.84

2.89

3.01

3.1

1.85
14.39

1.86
14.65

1.82
15.6

1.75
13.82

1.93
14.12

NIM4: All government financial institutions want to lend or advance money at a higher rate than
the rate at which they had taken deposits. Net Interest Margin or NIM is computed by dividing
the difference between Interest earned (on advances) and interest expended (on deposits) by the
amount of (average) Invested Assets. If the value of this ratio rises from one period to the other,
it only means that the bank is able to use its funds more efficiently which is thus resulting in
greater profitability. A negative value usually means that the bank did not take the right decision
and that the interest expenses were greater than what was earned in advances.
We can see here that the NIM has remained almost the same YoY. Post-merger the NIM is
expected to decrease due to the ING Vysya merger deal where significant provisions had to be
made for paying interest to the acquired companys savings deposits. Moreover there has been a
rise in NPAs of the bank thus leading to lower income on assets5.
Capital Adequacy Ratio (CAR)6: or Capital to Risk Weighted Assets Ratio (CRAR) is a metric
of a bank's capital (net worth plus subordinated debt) expressed as a percentage of a bank's risk
weighted credit exposures (loans).
CAR = (Tier 1 Capital + Tier 2 Capital)/ Risk Weighted Assets
Two types of capital are measured: tier I capital, which can absorb losses without a bank being
required to cease trading (such as ordinary share capital and free reserves); and tier II capital,
which can absorb losses in the event of a winding-up and so provides a lesser degree of
protection to depositors (such as long term unsecured loans and revaluation reserves which is
taken at a discount of 55 % while determining its value for inclusion in Tier II capital).
Quantifying exposures of credit demands adjustments to the amount of assets shown on a bank's
balance sheet. This is done by weighting the loans made by a bank according to their degree of
riskiness, e.g. loans to Governments are given a 0 % weighting whereas loans to individuals are
weighted at 100 %. Similarly off-balance sheet items such as guarantees and foreign exchange
contracts are also weighted for their riskiness. On-balance sheet and off-balance sheet credit
exposures are added to get total risk weighted credit exposures
4 http://www.investopedia.com/terms/n/netinterestmargin.asp
5 http://www.livemint.com/Companies/nia5Fk3BXXp69uVC9O0mCL/Kotak-MahindraBank-Q1-profit-at-Rs51657-crore.html
6 http://www.investopedia.com/terms/c/capitaladequacyratio.asp

As per the Basel II norms the minimum capital adequacy ratios that apply are7:
Tier I capital to total risk weighted credit exposures to be not less than 4 %;
Total capital (Tier I plus Tier II less certain deductions) to total risk weighted credit exposures to
be not less than 8%. The RBI currently prescribes a minimum capital of 9 % of risk-weighted
assets, which is higher than the internationally prescribed percentage of 8 %. Applying minimum
capital adequacy ratios serves to protect depositors and promote the stability and efficiency of
the financial system.
Kotak Mahindra bank is well capitalized with an overall capital adequacy ratio (CAR) of 19 %
for FY 2015, well above the benchmark requirement of 9% stipulated by Reserve Bank of India
(RBI). Of this, Tier I CAR was 17.9 %, while the Tier II CAR was at 1.1 %.
Credit to Deposit8: It is the ratio of how much a bank lends out of the deposits it has mobilised.
It indicates how much of a bank's core funds are being used for lending, the main banking
activity. A higher ratio indicates more reliance on deposits for lending and vice-versa. It also
indicates as to how much of a banks core funds are being used for lending which is the main
banking activity. There is no such benchmark for this ratio but a very low ratio indicates that
banks are not making full use of their resources. A very high ratio is also alarming because it
indicates pressure on resources and capital adequacy issues thus forcing banks to raise more
money.9
The very high Credit Deposit ratio of Kotak Mahindra Bank (88.4%) is a cause of concern for
Kotak Mahindra because it means that out of every 100 INR it receives as loan it is giving 88.4
INR as loan. Its peers have lower credit deposit ratio bordering around 80s.
NPA10: Non Performing Asset or NPA is a classification used by financial institutions that refer
to loans that are in jeopardy of default. Once the borrower has failed to make interest or principal
payments for 90 days the loan is considered to be a non-performing asset. Any rise in the
percentage of NPAs results in a sharp decline in the overall profitability.
Kotak Mahindra Bank has exhibited weakening in asset quality, on consolidated as well as
standalone basis, in the quarter ended June 2015 due to an increase in NPA.
On standalone basis, GNPA ratio stood at 2.31% and NNPA ratio at 1.04% at end June
2015

7 http://rbidocs.rbi.org.in/rdocs/notification/PDFs/62CB300611FL.pdf
8 http://www.investopedia.com/terms/l/loan-to-deposit-ratio.asp
9 http://articles.economictimes.indiatimes.com/2012-1019/news/34584360_1_credit-deposit-ratio-credit-deposit-adequacy
10 Capitaline Database

Outstanding standard restructured assets were Rs 418 crore (40 bps of advances) at end
June 2015. The restructured advances includes Rs 271 crore of restructured advances
from IVBL

Risk management practices at Kotak Mahindra11

Different risks faced by bank:
Credit Risk: Credit risk is the risk of default in part of its customers to fulfil hteir contractual
obligations. Kotak Mahindra manages its credit risk through committees that approve credit and
an enterprise wide risk management framework which sets out policies and procedures covering
the measurement and management of credit risk.
The bank focuses on ensuring that credit risk is in line with the approved policies while looking
at the risk reward profile.
The credit approval authority lies with the Management committee and a Credit Committee.
These committees ensure that the credit processes are in compliance with both regulatory as well
as internal norms. They also ensure that same policy is adopted across the company in an
uniform manner.
Credit process is divided into three stages:

Pre sanction Independent credit appraisal at business level and credit rating is assigned
Sanction based on the above credit rating appropriate credit decision is taken by
sanctioning authorities.
Post sanction In accordance with the credit policies, borrowers are subject to periodic
review.

Apart from this bank has Early Warning System that helps identify signs of credit weakness at
early stages. In addition to this the bank has also implemented a Loan review Mechanism that
does a comprehensive assessment of the entire credit appraisal process.
The bank also reviews its concentration across borrowers, groups, geography, sectors and ratings
to maintain a well-diversified portfolio.
Credit Risk Measurement: The bank uses a two scale internal rating model (obligor and facility
ratings). Ratings are then supplemented with financials are used to arrive at the final rating for
the borrower.

Obligor rating: gives the probability of default of the borrower, it is independent of the
collateral
Facility rating: This provides an estimate of Loss given default.

Combining these two Bank arrives at expected losses.

Total credit risk exposures as at 31st March, 2015: Rs 1,050,460.7 million

11 Basel Pillar III disclosure Mar 31-2015

Market Risk: It is the risk that earning or capital will be affected by adverse changes in market
risk factors, namely interest rates, foreign exchange rates, volatilities, credit spreads, commodity
and equity prices.
Kotak Mahindra calculates its Market Risk Capital as per the Calculation Rules under the
Standardized Measurement Method (SMM).
Market Risk scope: The following comes under the purview of managing market risk:

Managing Interest Rate Risk in Trading & Banking Books

Managing Currency & other Trading Book Risks
Proper Valuation & Measurement
Compliance with regulatory & Board guidelines
Oversight over the operation and execution of market transactions

Market Risk for the Bank and each of its major subsidiaries is managed in accordance with
policies approved by the respective Boards or ALCO. This ensures that all the transactions are in
accordance with the acceptable business practices and abide by all the rules and regulations.
Organization Structure of the Market Risk Management functions:
The Groups Risk Management Architecture is overseen by the Board of Directors. The Board
defines Risk Appetite of the group and approves the policies to manage risks. The Asset
Liability Management Committee (ALCO) oversees the Market Risks involved in the Trading
Book and in the Banking Book.
Risk limits are monitored and utilizations are reported by the Market Risk Management unit.
This unit is independent of the dealing function and the settlements function and reports directly
to the Group Chief Risk Officer thus helps them operate independently. The unit is also
responsible for identifying and escalating any limit excesses on a timely basis. This unit ensures
that all market risks are identified, assessed, monitored and reported for management decision
making.
The Group uses a comprehensive range of quantitative tools and metrics for monitoring and
managing risks. The Group continually assesses the appropriateness and the reliability of the
quantitative tools and metrics in the light of the changing risk environment. Limit framework is
used to manage the maximum risk exposure. This is calculated by calculating various risk
parameters like: PV01, Delta gamma, etc.
Liquidity Risk: Liquidity refers to the ability to fund increase in assets or withdrawals of
liabilities and meet both expected and unexpected cash and collateral obligations at reasonable
cost and within the specified time.
There is a Group liquidity risk management policy which lays down the structure for liquidity
risk governance and its management for the Group. The Group follows a decentralized model of
liquidity management where in each entity is responsible for its own liquidity planning and fund
management.

Liquidity risk management in the Bank is governed by Asset Liability Management (ALM)
policy which provides the framework for its monitoring & management.
Management of Risk: The Bank manages the daily queue of payments by forecasting the
quantum and timing of cash flows, prioritizing critical payment transactions. The Bank uses
various approaches like stock approach, cash flow approach & stress test approach to assess
liquidity risk.
The Bank uses liquidity gap analysis to measure cash flow mismatches at different time bands.
The cash flows are bucketed based on the residual maturity of the cash flows or the projected
behavior of assets, liabilities and off-balance sheet items. Bank also manages its liquidity on a
dynamic basis to supplement the liquidity gap analysis by estimating net cash outflow or inflows
for business units considering their business projection for the next 3 months. The Bank also
employs stock approach to assess various aspects of liquidity risk such as stability of funds,
liquid assets cover, funding concentration, etc.
Contingency Liquidity Plan (CLP) is another liquidity measurement and management
framework. CLP articulates the management action plan to be adopted in case of liquidity crises.
The Bank has established and actively uses ratio-based Early Warning Indicators (EWI)
framework for tracking impending liquidity stresses.
The Bank has implemented Basel III liquidity standards i.e. liquidity coverage ratio (LCR) and
net stable funding ratio (NSFR) to measure liquidity under stress conditions.

Operational Risk: The Group has well defined operational risk management objectives,
strategies and governance structures. The Bank has a comprehensive ORM Framework that
covers all activities and governance structure that helps manage operational risk effectively.
Through implementation of the Operational Risk Framework and related policies, businesses are
able to adopt a structured approach to identify, assess and monitor Operational Risk exposures
On the basis of the Enterprise wide Risk Management policy, operational risk policies are
prepared for the Bank. These policies outline the ORM governance structure, key risk
assessment, risk monitoring and risk mitigating activities. The policy applies to all business lines
within the Bank.
The Bank has Risk Management Committee to manage operational risks. Separate sub
committees also exist in a few entities to screen all potential new regulatory requirements. Senior
Management is involved actively in the management of operational risk and implementation of
the respective ORM Frameworks / policies.
The internal control framework regularly monitors and assesses the operations of all the
businesses. Auditing is done following RBIs risk based audit methodology. Also the group
compliance department provide sound platform for operational risk management along with risk
management unit.
The following are some of the key techniques applied by Bank to manage operational risks -

The Bank has clear segregation of duties, reporting structures and verification of high
value transaction.
New products and offerings are reviewed by all the departments like compliance, risk and
legal. They discuss collectively to assess the overall impact of any new offering.
The risk team performs a detailed root cause analysis on all kinds of operational risk so
that the bank can prepare for them in coming future.
The bank has Risks and controls Self-assessment programme to process and assess
areas with high risks.
The Bank continuously takes various steps to increase the overall level of operational risk
awareness amongst staff at all levels using various tools like trainings, workshops.
Risk is mitigated using Insurance. The operational Risk team assesses the quantum of
insurance cover required.

Computation of operational risk capital

The Bank has adopted the Basic Indicator Approach for calculation of operational risk capital
for capital adequacy purposes.
The Capital charge associated with operational risk is calculated as 15% of average positive
annual gross income of the previous three years. The Groups operational risk capital charge is
Rs 11,228.0 million as at 31st March, 2015.
The Group also plans to adopt the AMA approach for maintaining operational risk capital. Under
this approach, operational risk capital is computed on a VaR methodology by evaluating risks on
the basis of their likelihood (probability) and the financial consequence (severity) of such an
event.

Interest Rate Risk in the Banking Book (IRRBB)

Reputation risk
Strategic & Business Risk
Model Risk
Compliance Risk
Group Risk

Corporate governance practices of Kotak Mahindra Bank

The Bank believes in adopting and adhering to the best standards of corporate governance to all
the stakeholders. The Banks corporate governance is, therefore based on the following
principles:

Appropriate composition, size of the Board and commitment to adequately discharge its
responsibilities and duties.

Transparency and independence in the functions of the Board.

Independent verification and assured integrity of financial reporting.
Adequate risk management and Internal Control.
Protection of shareholders rights and priority for investor relations.
Timely and accurate disclosure on all matters concerning operations and performance of
the Bank.

The Banks philosophy on corporate governance enshrines the goal of achieving the highest
levels of transparency, accountability and equity in all spheres of its operations and in all its
dealing with the shareholders, employees, the government and other parties. The Bank
understands and respects its fiduciary role and responsibility to shareholders.
The Bank was ranked among the Top 5 in the category of Corporate Governance Practices
across the globe in the IR Global Rankings 2013 conducted by the MZ Consult NY, a leading
investor relations and financial communications firm.
Fulfillment of different regulatory provisions by chosen bank:
Kotak Mahindra follows Basel 3 (pillar 3) for regulatory disclosures. Capital requirements for
various risk categories as at 31st March, 2015:

The Group manages its capital position to maintain strong capital ratios well in excess of
regulatory and Board Approved minimum capital adequacy at all times
In accordance with the guidelines of RBI, the Group has adopted standardised approach for
credit risk, basic indicator approach for operational risk and standardised duration approach for
market risk for computing capital adequacy.
Basel III Capital regulations are applicable to Banks in India from 1st April, 2013 and will be
fully phased in by 31st March, 2019. With a view to strengthen the financial system and improve
the shock absorbing capability, going forward, Banks are also expected to hold Capital buffers
(Capital conservation buffer, countercyclical capital buffer and additional buffer for Domestic
Systemically Important Banks) out of common equity.
Detailed guidelines on Basel III Capital Regulations and Guidelines on Composition of Capital
Disclosure Requirements are issued by RBI and consolidated under the Master Circular Basel
III Capital Regulations July 2014

Items
(a) Capital requirements for credit risk
Portfolios subject to standardised approach
Securitisation exposures
(b) Capital requirements for market risk
Using standardised duration approach
Interest rate risk
Equity position risk
Foreign exchange risk (including gold)
(c) Capital requirements for operational risk

Amount
88,390.4

6,420.0
5,585.1
383.5

Measured using basic indicator approach

Capital Adequacy
Ratios
Common Equity Tier I
Tier I
Total CRAR

11,228.0

Standalone
16.2%
16.2%
17.2%

As at 31st March, 2015 the Bank and all of its subsidiaries are adequately capitalised. There are
no capital deficiencies in consolidated as well as non-consolidated subsidiaries in the Group. The
Bank maintains an oversight over its subsidiaries through its representation on their respective
Boards and the Management Committee of the Bank is regularly updated.

APPENDIX