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You can view full text of the latest Director's Report for the company.

BSE: 532652ISIN: INE614B01018INDUSTRY: Finance - Banks - Private Sector

BSE   ` 225.00   Open: 230.80   Today's Range 224.05
230.80
-3.60 ( -1.60 %) Prev Close: 228.60 52 Week Range 124.10
286.35
Year End :2023-03 

Your Directors have the pleasure of presenting the 99th Annual Report of the Bank together with the Audited Statement of Accounts for the year ended March 31, 2023, and the Auditors' Report thereon. The highlights of the operational performance are as under:

OPERATIONAL PERFORMANCE

Rs. in Crore

MARCH 31, 2023

MARCH 31, 2022

Net Profit

1180.24

508.62

Operating Profit

2208.23

1634.00

Net Interest Income (NII)

3185.10

2491.03

Gross Income

8212.81

7175.54

Deposits (A)

87368.01

80386.85

Advances (B)

59951.62

56783.14

Business Turnover (A) (B)

147319.63

137169.99

Investments

23326.37

22041.00

CASA deposits (as a share of total deposits) (%)

32.97

32.97

Gross NPA (%)

3.74

3.90

Net NPAs (%)

1.70

2.42

Provision Coverage Ratio (%)

80.86

73.47

Capital Adequacy Ratio (CRAR) (%)

17.45

15.66

Return on Assets (%)

1.21

0.56

Note: The figures mentioned are on a standalone basis. The consolidated financial statements are furnished separately as part of this report.

BUSINESS OVERVIEW

As on March 31, 2023, the Business Turnover of the Bank has reached a new high of '147319.63 crore with a YoY growth of 7.40%. During FY 23, Bank registered an all-time high net profit of '1180.24 crore with an impressive 132.05% YoY growth. The deposits and advances grew by 8.68% and 5.58% YoY respectively. As of March 31,2023 the CD ratio was 68.62%. Despite the northward movement of interest rates, Bank maintained the share of CASA at 32.97%. The asset quality improved with a 16 bps and 72 bps reduction, respectively, under Gross NPAs and Net NPAs. The Bank has further consolidated its position in Provision Coverage Ratio (PCR), which improved to 80.86% and CRAR, which improved to an all-time high of 17.45%. Overall, the year 2022-23 was yet another year of satisfactory performance, witnessing further strengthening of the fundamentals of the Bank.

DEPOSITS AND CASA

The total deposits grew by 8.68% during the FY under report, with CASA deposits at 32.97% of the total deposits. The CASA deposits grew by 8.71% YoY. The deposits below '2 crore accounted for about 92% of the total deposits, reflecting a strong retail franchise.

ADVANCES

The advances grew by 5.58% YoY. The lending profile was well balanced with the share of retail advance at 50.34% and mid corporate advances at 29.48% and the share of Large corporate advances was at 20.18% of the loan book.

The priority sector advances increased from '32077 crore to '32181.73 crore forming 50.78% of applicable Adjusted Net Bank Credit (ANBC). The agricultural advances increased from ' 10474 crore to '11305 crore, which, together with eligible deposits under the Rural Infrastructure Development Fund (RIDF), constituted 17.84 % of ANBC during Q4FY23. Bank also focuses on lending under various socio-economic schemes, weaker section schemes, MSMEs etc.

Your Bank has been focusing on improving the asset quality through better credit appraisal and effective monitoring, as well as intensified recovery efforts. In terms of absolute numbers, the GNPAs slightly increased to '2292.91 crore as on March 31, 2023, from ' 2250.82 crore as on March 31, 2022. However, the percentage of Gross NPAs reduced from 3.90 % as on March 31,2022, to 3.74 % as on March 31, 2023.

The amount of Net NPAs (NNPAs) reduced to '1021.27 crore as against '1376.97 crore as on March 31, 2022 and during the period, the percentage of NNPAs substantially improved to 1.70% as against 2.42% last year. The Provision Coverage Ratio (PCR) improved to 80.86 % on March 31,2023 from 73.47 % on March 31,2022, thus further strengthening the fundamentals.

INVESTMENTS

The total investments increased by 5.83% and the ID ratio stood at 26.70 % as on March 31,2023 as against 27.42 % on March 31, 2022.

OPERATIONAL METRICS

The Bank's gross income for the year ended March 31,2023, stood at '8212.81 crore compared to '7175.54 crore last year recording a YoY growth of 14.46%.

The total expenditure (excluding provisions and contingencies) increased by 8.36 % to '6004.58 crore for the year ended March 31, 2023, as against '5541.54 crore for the last financial year. The cost to income ratio improved by 543 bps to 47.14%.

During the FY, Net Interest Income (NII) grew by 27.86 % over the previous year. The Net Interest Margin (NIM) also improved to 3.70 % from 3.18 % last year.

The operating profit increased by 35.14 % to ' 2208.23 crore for FY 2022-23 from ' 1634.00 crore for the previous year due to improved Net Interest Income. The provisions (other than tax) and contingencies for FY 2022-23 were ' 767.19 crore vis-a-vis '939.44 Crore for the previous year.

The net profit reached an all-time high of '1180.24 crore from ' 508.62 crore during the previous year, registering a growth of 132.05 %.

APPROPRIATIONS

The net profit of ' 1180.24 crore, along with a sum of '135.82 crore brought forward from the previous year, aggregating to ' 1316.06 crore, has been appropriated as under:

Appropriation

' in crore

Transfer to Statutory Reserve

296.00

Transfer to Capital Reserve

NIL

Transfer to Revenue and Special Reserves

665.47

Transfer to Investment Fluctuation Reserve

64.15

Dividend of 2021-22 paid during the year

124.52

Balance carried over to Balance Sheet

165.92

DIVIDEND

Having regard to the overall performance of the Bank, the Board of Directors has recommended a dividend of '5/-per share (50%) for the year ended 31st March 2023 (previous year '4/- per share (40%). The dividend payout ratio for the year works out to 13.30% as against 24.47% for the previous year. In accordance with Accounting Standard (AS)4-Contingencies & Event occurring after the balance sheet date, the proposed dividend amounting to ' 157 crores (Previous year '124.47 Crores) has not been shown as an appropriation from the profit for the year ended March 31, 2023.

EARNINGS PER SHARE (EPS) and BOOK VALUE

The Earnings Per Share stood at '37.88 (basic) and '37.66 (diluted) for the year ended March 31,2023. This was '16.36 (basic) and '16.29 (diluted) during the previous year. The Book Value per share has further improved to '262.96 as on March 31,2023 as against '228.01 during the last year.

The Bank's capital funds increased from '8118.55 crore to '9312.53 crore. The Capital to Risk- Weighted Assets (CRAR) Ratio improved to a high of 17.45 % as on March 31, 2023, as against the previous year's 15.66 %. The Bank has consistently maintained the CRAR ratio well above the minimum requirement of 11.50 %, including the Capital Conservation Buffer of 2.50 % stipulated by the Reserve Bank of India and the Bank's internal policy of maintaining the CRAR one per cent over and above the regulatory requirement.

EQUITY CAPITAL BASE

As on March 31,2023, the paid-up capital of your Bank stood at ' 312,34,26,210 comprising 31,23,42,621 equity shares of '10/- each. During the year, 11,78,761 equity shares of '10/- each were allotted to option grantees upon exercise of vested stock options under KBL ESOS-2018.

CHANGE IN CAPITAL BASE AFTER THE CLOSE OF THE FINANCIAL YEAR

After the Financial Year's close, 2,24,901 equity shares of '10/- each were allotted pursuant to the exercise of vested stock options by the grantees under KBL ESOS-2018.

DEBT INSTRUMENTS AND CERTIFICATE OF DEPOSITS

Bank has issued Unsecured Non-Convertible BASEL III Debt Instruments as a part of Tier-2 Capital on a private placement basis. These bonds are listed on the debt segment of National Stock Exchange of India Ltd (NSE). The details of the debt instruments outstanding as on March 31, 2023, are as under:

Series

Date of Issue

Face Value per Bond

(')

Number of Bonds

Amount (' crore)

Tenure from the date of issue

Coupon Rate(% pa.)

Credit

Rating

Listing

ISIN of the Bonds

V

16.11.2018

1,00,000

40,000

400.00

120

12

ICRA 'A' &

Listed on

INE614B08039

VI

18.02.2019

1,00,000

32,000

320.00

12

CARE 'A'

NSE Deht

INE614B08047

VII

30.03.2022

1,00,00,000

300

300.00

months

10.70

Segment

INE614B08054

Your Bank has paid interest on these debt instruments on time since the issue of respective debt instruments as per the terms of the issue. During the FY, the bonds issued under Series IV matured on 17.11.2022 and were redeemed by the Bank on the said due date.

Further, during the reporting year, Bank raised Rs. 400.00 crore for a period of 90 days by issuing Certificates of Deposits (CDs) and there was no outstanding as on March 31,2023.

TRANSFORMATION JOURNEY- 'KBL VIKAAS'

Your Bank had embarked on a holistic and aspirational transformation journey KBL-VIKAAS in November 2017 to strengthen its digital capabilities and total transformation in all the areas of its functioning. Under Phase-I of KBL-VIKAAS, many milestones were achieved like institutionalization of marketing culture, setting up of Digital Centre of Excellence (DCoE)/ Digi branch/ Digi Centres, digital underwriting of Loans, review cadence, etc.

In Phase-II, i.e., under the 'KBL NxT' concept of KBL VIKAAS 2.0, the journey is being taken up to further enhance the digital capabilities in all the banking operations to have end-to-end digital solutions. During the FY, your Bank set up an Analytical Centre of Excellence (ACoE) as a part of this initiative. Besides, over the next three years, your Bank will be focusing on digitizing various customer-facing activities and internal processes for increased efficiency.

Details about various digital initiatives introduced during the FY 2022-23 are furnished in Management Discussion and Analysis.

Leveraging through Bank's Wholly Owned Subsidiary:

Your Bank's wholly owned non-financial subsidiary-KBL Services Limited has been operationalised with effect from March 30, 2021 and has started providing its services to the Bank in augmenting its 'Feet on Street'. Presently, the subsidiary is providing the services of Business Associates as the feet on street support and for various back office processes in select areas.

RISK MANAGEMENT AND GOVERNANCE

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 managing 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 achieving an 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., Risk & Capital Management Committee (RCMC), periodically reviews the risk profile, evaluates the overall risks encountered by the Bank and develops policies and strategies for its effective management. Bank has an exclusive risk management department and a Chief Risk Officer for the overall supervision of all the risk related issues.

Various senior management committees, such as Credit Risk Committee (CRC), 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. Your Bank's Risk Management Department (RMD) has been accredited with the prestigious ISO 9001:2015 international certification for Quality Management System (QMS). Under ISO Accreditation, Quality Policy has been defined, existing procedures and Standard Operating Procedures were reviewed, and a formal Quality Management system (QMS) was established to ensure that the Risk Management processes and practices of the Bank are in line with the global standards.

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

A more elaborate discussion on how the Bank manages the key risks associated with its operations is provided under Management Discussion and Analysis attached to this report.

Basel III Capital Regulations - Implementation of Leverage Ratio:

To mitigate the risk of excessive leverage and enhance financial stability, RBI mandated the minimum Leverage Ratio (LR) under Basel III Regulations for banks in India. Both the capital measure and the exposure measure, along with the leverage ratio are to be disclosed on a quarter-end basis. However, banks must meet the minimum leverage ratio requirements at all times. As on March 31, 2023, your Bank had a comfortable leverage ratio of 6.91% as against the regulatory minimum requirement of 3.50%.

Capital Adequacy & Internal Capital Adequacy Assessment Process (ICAAP):

In compliance with Basel guidelines, Bank has put in place a policy document for Internal Capital Adequacy Assessment Process (ICAAP) to evaluate its capital adequacy requirements. A stress testing framework for various stress scenarios is also put in place for a better understanding of the likely impact of adverse market movements/events on 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 Risk & Capital Management Committee (RCMC) reviews the risk appetite, risk profile, business projections as well as capital assessments of your Bank at periodic intervals.

The Disclosure under Pillar III of the Basel III accord has been annexed to the Directors' Report as in Annexure-I. SEGMENT REPORTING

Pursuant to the Guidelines issued by RBI on Accounting Standard 17 (Segment Reporting), the Bank has identified four business segments viz., Retail Banking ('Digital Banking' as a Sub-segment under Retail Banking as per RBI circular DOR.AUT.REC.12/22.01.001/2022-23 dated April 07, 2022, on establishment of Digital Banking Unit (DBU)), Corporate / Wholesale Banking, Treasury and Other Banking Operations for the year ended March 31, 2023 as under:

' in Crore

Segment

Revenue Earned

Contribution to Profit Before Tax and un-allocable expenditure

Retail Banking

3755.78

1634.08

-Digital Banking Unit (DBU)

0.01

-0.64

-Other Retail Banking

3755.77

1634.72

Corporate / Wholesale Banking

2691.29

462.62

Treasury Operations

1276.83

182.23

Other Banking Operations

424.58

-48.63

Details about aforesaid business segments are discussed in Management Discussion and Analysis attached to this report.

Banking Outlets and Alternate Delivery Channels (ADCs):

Your Bank has a strong presence in south India and has been judiciously expanding its network of branches and controlling offices in other parts of the country after examining the potential for business, earnings and customer outreach. As of 31st March 2023, your Bank had 2376 service outlets including 901 branches (including two Digital Banking Units), 871 ATMs, 603 cash recyclers (CRs) and one extension counter, with a presence in 578 centres spread across 22 States and 2 Union Territories.

More Details are discussed in Management Discussion and Analysis attached to this report.

Government Business:

Your Bank has been appointed by RBI as Agency Bank for the conduct of government business and your Bank can now undertake revenue receipts and payments on behalf of the Central/State Governments, pension payments and collection of Stamp Duty, and any other item of work specifically approved by the concerned government department and concurred by RBI. The handling of government business augurs well for your Bank as it helps in facilitating the customers in tax payments, thus enhancing relationship stickiness and as a source of revenue through eligible agency business commission.

Now, your Bank has engaged with the Central Board of Indirect Taxes and Customs (CBIC), Central Board of Direct Taxes (CBDT) and Department of Treasuries, Government of Karnataka (GoK) for the collection of Taxes and various revenues. Bank has started collecting customs duty through the ICEGATE portal on behalf of CBIC and also integrated with Khajane II IFMS SNA 4 module for Central/ State Sponsored schemes.

Your Bank has launched exclusive products and services for Government Departments, Boards, Bodies and Corporations to suit their needs.

Third-Party Products and Insurance Business:

With an aim to provide diversified financial products & services and to maximize value-added services to the customers, your Bank provides a bouquet of Third Party Products, which include Life Insurance, General Insurance, Health Insurance, Mutual Funds, Demat Account, Trading Account, Co-branded Credit Cards, PoS Network, KBL FASTag, NPS, SGB, APY, etc. A summary of the major third-party products is provided in Management Discussion and Analysis attached to this report.

Customer Service:

Your Bank is continuously focusing on creating new benchmarks in customer service so as to make the Bank distinctly more competitive. This necessitates the designing of innovative and cost-effective mechanisms for delivering banking services efficiently. The Bank is actively involved in putting in place a system and procedures for banking services rendered to customers and an effective grievance redressal mechanism, including an Internal Ombudsman [IO] as per the guidelines received from RBI and IBA from time to time. Bank is also providing doorstep banking services to Senior Citizen customers of more than 70 years of age and differently-abled or infirm persons including the visually impaired.

Credit Monitoring Excellence:

In order to have an effective post-sanction monitoring and collection mechanism, an exclusive Credit Monitoring Department (CrMD) is set up at Head Office. Regional Collection Hubs (RCH) consisting of the Regional Retail Collection Teams (RRCT) and Regional Corporate Collection Teams (RCCT) are set up at all the Regional offices. The RRCTs and

RCCTs follow up/initiate time-bound/DPD-wise actions to ensure the collection of dues in respect of all loan accounts under the overall supervision of CrMD. Dedicated Credit Monitoring Teams (CrMT) are also functioning under RCHs at all the Regional Offices to undertake post-sanction monitoring of loan accounts of the respective regions. With a view to improve the efficiency in monitoring & follow-up activities, various digital initiatives, viz., implementation of web-based Collection Tool-"KBL-Kollect ", the introduction of Auto Sweep system for auto collection of EMI / Installment/ Interest of loans from operating accounts of borrowers, E-Connect solution for making payment to the loan accounts through UPI, Auto-capturing of Early Warning Signals etc., are put in place.

For close monitoring of the restructured advances, Bank has formed an exclusive cell, viz., "Restructured Advances Monitoring Cell" within the Credit Monitoring Department. Further, a Consortium & Multiple Banking Arrangement Cell was also formed for special monitoring of loan accounts under Consortium & Multiple Banking Arrangement.

With an integrated approach to contain stress in the portfolio, Bank has been able to contain overall stress in the advances portfolio.

SUPPORT AND CONTROL FUNCTIONS Information Technology:

The Bank has adopted Core Banking System (CBS) since the year 2000, and all its branches and offices are under the CBS network. Alternate Delivery channels, viz., ATM, Internet Banking, Mobile Banking, UPI, and PoS, have been integrated with the CBS. Disaster Recovery [DR] arrangement also exists to ensure business continuity in the event of a primary site failure. This arrangement is strengthened by implementing a three-way data replication process aimed at maintaining zero data loss. Critical applications like CBS, ATM, Internet Banking and Mobile Banking are part of this arrangement. Bank's Primary Data Centre is operating from a Tier-4 Colocation Centre. Bank's IT infrastructure as a whole is supervised by the Chief Technology Officer (CTO).

Human Resources:

As on March 31, 2023, Bank had 8652 employees, of which 2644 are women employees constituting around 30.56% of the total strength. Your Bank recognizes the significance of Human Resources as an important asset and attaches the greatest importance to employee upskilling, employee satisfaction and human resource development activities. Bank has introduced ECDS (Employee Career and Development System) by operationalizing the PMS (Performance Management System). Bank has also put in place TMC (Talent Management Committee) to identify and groom the talent as part of succession planning. Further, the Bank provides training and development opportunities to the employees, which are discussed in detail in the Managing Discussion and Analysis.

Your Bank has put in place an institutional mechanism for the 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 the protection of women employees against the sexual harassment of women at the workplace and redressal of such complaints. There was no complaint pending at the beginning of the FY, and no complaint was received during the year under report.

Your Bank values opinions and suggestions from all the employees and encourages their inputs, thoughts and innovative ideas, which help in creating a highly productive, competitive and reliable workforce, thereby emerging as a preferred destination for the competent workforce. Further, your Bank has maintained cordial industrial relations and effective employee discipline.

EMPLOYEE STOCK OPTIONS (ESOP)

Your Bank has the below-mentioned Employee Stock Option Schemes in force as on March 31,2023:

1. Employee Stock Option Scheme 2018 (ESOS 2018) was approved by the shareholders on July 21,2018. During the reporting year, there was no grant of options under ESOS 2018. However, the grantees have exercised 11,78,761 vested stock options as per the terms of the ESOP Scheme, which were granted to them during earlier years.

2. Employee Stock Option Scheme-2023 (ESOS-2023), was approved by the shareholders of the Bank on March 30, 2023, with a total of 15,00,000 stock options available for grant. During the reporting year, there was no grant of options under ESOS-2023.

Other statutory disclosures required as per SEBI guidelines/Securities and Exchange Board of India (Share Based Employee Benefits and Sweat Equity) Regulations, 2021 are provided on the website of the Bank at the link: https:// karnatakabank.com/sites/default/files/2023-08/ESOP%20Disclosure%202022-23%20.pdf

Risk Based Supervision (RBS)

In view of the growing complexities in the processes, product offerings and systems and procedures in the Indian banking sector, pursuant to the recommendation of the High-Level Steering Committee, the Reserve Bank of India has shifted its supervisory stance to a risk-based approach called the Supervisory Program for Assessment of Risk and Capital (SPARC) which is focusing on evaluating both present and future risks, identifying incipient problems and facilitating prompt intervention / early corrective action etc. Your Bank has been included under the same and migrated to Risk Based Supervision since March 31, 2015. A plan of action for complying with various findings in RBS communicated to the Bank in the Risk Assessment Report is also ensured.

Compliance Function

Your Bank is effectively addressing Compliance Risk through the Compliance function. The compliance function is one of the key elements in the Bank's Corporate Governance structure along with internal control and risk management process. Bank has set up a robust Compliance Department with sufficient independence to promote a healthy compliance culture. Bank ensures strict observance of all statutory provisions, guidelines from RBI and other Regulators, standards and codes, the Bank's internal policies and fair practices code. The compliance function includes interpretation/dissemination of regulatory and statutory guidelines and ensures that controls and procedures capture the appropriate information to the Senior Management in their risk management function. The risk-based compliance programme of the Bank, under the supervision of the Chief Compliance Officer, ensures appropriate coverage across businesses, besides verifying the level of compliance through 'Compliance Testing' of branches/business units. The Bank carries out an annual compliance risk assessment to identify and assess its significant compliance risks and take steps to manage the risks effectively. Further, the tone from the Top management continuously emphasizes the significance of compliance to usher in perceptible improvements in the overall compliance culture of the Bank.

Vigil Mechanism

The Bank has implemented the Protected Disclosure Policy (Whistle Blower Policy) since the year 2007, intended to promote the 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 Banks 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 the victimization of Whistle Blower who avails of such mechanism and also provides for direct access to the Chief of Internal Vigilance (CIV). Further, there was no occasion where a person was denied access to the Audit Committee. The details of Whistle Blower Policy are posted on Bank's website and available at the https://karnatakabank.com/sites/default/files/2023-06/Policy%20 on%20Whistle%20Blower%202023-24.pdf

Corporate Social Responsibility

Corporate Social Responsibility (CSR) initiatives of the Bank are designed to make a positive impact on a wide range of areas of social life like healthcare, education, livelihood enhancement, empowering women/socially and economically disadvantaged, environmental sustainability/ green initiatives, protection of heritage/ culture, promotion of sports, rural development, Swachh Bharath etc., aimed at promoting the overall development of the society. Further, to minimize the urban-rural divide, 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.

Further, pursuant to Section 135 of the Companies Act, 2013 read with Companies (Corporate Social Responsibility Policy) Rules, 2014, the Board has constituted a 'Corporate Social Responsibility (CSR) Committee' of the Board and has also put in place a Policy on Corporate Social Responsibility (CSR Policy) to undertake projects/programmes in pursuance of the said Policy. Under CSR activities, Bank has so far funded 1812 projects with a total financial outlay of '74.20 crore, and these projects have exhibited a positive impact on society.

Pursuant to Rule 8 of the Companies (Corporate Social Responsibility Policy) Rules, 2014, the contents of the CSR Policy, along with the report on amounts spent on various projects/ programmes during FY2022-23, are detailed in Annexure-2 to this report. Further, in terms of Rule 4(5) of the CSR rules, certification from the Chief Financial Officer has been obtained for the CSR outlay during FY 2022-23.

Financial Inclusion:

Through the Financial Inclusion Plan, your Bank aims at 'connecting people' with the Bank and and not at just opening accounts. This includes meeting the small credit needs of the rural public, giving them access to the payments system, providing remittance facilities, life insurance and health insurance etc. Your Bank has 418 branches, apart from 35 Ultra Small Branches, located in the rural and semi-urban areas and offers banking facilities to the rural clientele. Our rural branches are also acting as Financial Literacy Centers (FLCs) and imparting banking literacy among the rural populace. In accordance with Prime Minister's Jan Dhan Yojana (PMJDY), Bank has implemented the revised Strategy and Guidelines for Financial Inclusion activities. Your Bank is actively participating in the Direct Benefit Transfer (DBT) Programme of Govt. of India to transfer the benefits of various Schemes / LPG subsidies directly to the beneficiaries' Aadhaar-enabled bank accounts.

As part of the Financial Inclusion plan, Bank has been offering the following services:

1. Business Correspondent (BC) services: Bank has tied up with Sub-K Impact Solutions Limited to provide the BC services, and as on March 31,2023, 121 BC Agents are covering the allocated villages in the states of Karnataka, Andhra Pradesh and Chhattisgarh.

2. Aadhar Enabled Payment System (AEPS): Bank has introduced AEPS transaction services offered by the National Payments Corporation of India (NPCI) at all Business Correspondent (BC) locations of the Bank, and with this, the Bank's customers having an Aadhar-enabled SB account can transact at the BC point.

3. Financial Literacy and Credit Counseling Centers (FLCs): Bank is running 5 FLCs at B.C Road - Bantwal, Hangal, Kundagol, Tiptur and Alur (Karnataka). During FY23, these FLCCs have conducted 795 Financial Literacy campaigns in which 54,960 participants took part. In adherence to the RBI guidelines, all rural branches of your Bank are also conducting financial literacy Camps.

4. Social Security Schemes: All the branches of your Bank are actively involved in providing three Social Security Schemes-Prime Minister Jeevan Jyothi Bima Yojana (PMJJBY), Prime Minister Suraksha Bima Yojana (PMSBY) and Atal Pension Yojana (APY) schemes to customers across the country.

5. Prime Minister Jan Dhan Yojana (PMJDY): All the branches across the country are opening accounts under PMJDY and are issuing RuPay Debit Cards.

6. Bank is one of the trustees of Karnataka Farmers Resource Center (KFRC), Bagalkot, established to impart training and act as a resource centre for farmers under the umbrella of SLBC Karnataka. Bank has contributed ' 50.00 lakhs towards the capital expenditure/corpus of KFRC.

7. In line with the Pradhan Mantri Street Vendor's Atmanirbhar Scheme, Bank has rolled out KBL- PM - SVANidhi scheme providing working capital loans up to '50,000/- to the street vendors to support their businesses.

AWARDS AND ACCOLADES:

Your Bank has bagged the following awards during the year under report in recognition of its achievement:

i. ' Excellence Award-Runner Up' under Lending in Small Bank category by ASSOCHAM 17th Annual Summit & Awards Banking & Financial Sector Lending Companies.

ii. Three prestigious awards from Confederation of Indian Industry (CII) - Digital Transformation (DX) in BFSI segment for 'Innovative' Best Practice under the following categories:

a) 'KBL HR NxT'

b) 'KBL Operations NxT'

c) 'KBL Customer NxT'

iii. 'Award of Par Excellence' received in APY Strategy Review Meeting & Felicitation Programme organised by PFRDA held on 18.11.2022 under 'Beat the Best & Be the Best' category for South Zone.

iv. ' Best Technology Talent-Runner Up' award at the 18th IBA annual Technology Conference, Expo & Awards 2022, conferred by Indian Banks' Association (IBA) Mumbai.

v. ' Prathista Puraskar' under 'Digidhan Awards 2021-22' by Ministry of Electronics & Information Technology (MeitY), Govt. of India for achieving target with highest percentage in BHIM-UPI transactions in Private Sector Bank category.

vi. Three (3) Awards at 'MSME Banking Excellence Awards-2022' by CIMSME (Chamber of Indian Micro Small & Medium Enterprises) held on 23.02.2023 at New Delhi, as detailed herebelow:

a) CSR Initiative Bank - Winner

b) Best MSME Bank - Runner-Up

c) MSME Friendly Bank - Runner-Up

vii. The Bank stood Sixth position among all the Banks in India under Digital Payment Performance as on March 2022 as published by the Ministry of Electronics & Information Technology, Govt. of India. Our Bank stood at First position in the list under Category Specific Bank-wise Digital Payment Performance-Small & Micro Banks.

Implementation of Ind AS:

As per the roadmap given by Reserve Bank of India (RBI) vide circular dated February 11, 2017, transition to "Indian Accounting Standards (Ind AS)' in banks were to commence from the accounting period beginning April 1, 2018 onwards. However, RBI vide its circular No.DBR.BP.BC.No.29/21.07.001/2018-19 dated March 22, 2019 has deferred implementation of Ind-AS in Banks till further notice.

The Bank has set up a Steering Committee head by the Managing Director and also a sub-committee called IFRS Working Group involving stakeholder departments to facilitate on a continuous basis the process of smooth implementation of Ind AS in the Bank and to have detailed discussions and deliberations on Ind AS Standards and related RBI Circulars. As stipulated by RBI, Bank has been submitting the Proforma Ind AS Financial statements at half yearly intervals. Also, as a prudent measure, Bank is preparing Proforma Ind AS financials on a quarterly basis and the estimated impact along with latest update on the Ind AS implementation in the Bank is placed to the Audit Committee of the Board.

DIVIDEND DISTRIBUTION POLICY

Your Bank has adopted a Policy on the Distribution of Dividend to the shareholders pursuant to the Regulation 43A of the SEBI (LODR) Regulations, 2015. The Gist of the Dividend Distribution Policy is as under:

• Being a Banking entity, Dividend Distribution is guided by the RBI Circular DBOD.No.BP.BC.8821.02.67/2004-05 dated May 5, 2005, with regard to eligibility criteria for distribution of dividend.

• Factors considered for a recommendation of dividend includes both internal factors such as financial performance, dividend payout trends, tax implications, and corporate actions and external factors such as shareholders' expectations, macro environment etc.

• Factors considered for determining the quantum of dividend include financial performance, capital fund requirements to support future business growth, having regard to the dividend payout ratio prescribed under the aforesaid RBI Guidelines etc.

The Dividend Distribution Policy of the Bank is available on Bank's website at https://karnatakabank.com/sites/default/ files/2023-04/Policy%20on%20Dividend%20Distribution%202023-24.pdf

As discussed earlier, the Board of Directors has recommended payment of dividend duly complying with the Reserve Bank of India directions for payment of dividend out of the profit for the financial year ended March 31, 2023.

ANNUAL RETURN

Pursuant to Section 92(3) of the Companies Act, 2013, read with Rule 12 of the Companies (Management and Administration) Rules, 2014, a copy of the Annual Return of the Company for FY2023 prepared in accordance with Section 92(1) of the Act has been placed on the website and is available at https://karnatakabank.com/investor-portal/ annual-report

CONSOLIDATED FINANCIAL STATEMENTS

In accordance with the provisions of Section 129(3) of the Companies Act, 2013 read with Rule 8 of Companies (Accounts) Rules, 2014, the Bank has prepared Consolidated Financial Statement including its subsidiary - KBL Services

Limited and pursuant to the provisions of Accounting Standard ('AS') 21, the Consolidated Financial Statements notified under Section 133 of the Companies Act, 2013, read together with Rule 7 of the Companies (Accounts) Rules, 2014, the Consolidated Financial Statements of the Bank along with its subsidiary for the year ended March 31, 2023 forms part of the Annual Report. The financial position and performance of the subsidiary are given in Form AOC-1 attached to this Report as Annexure-3.

In accordance with the third proviso to Section 136(1) of the Companies Act, 2013, the Annual Report of the Bank, containing therein its Standalone and Consolidated Financial Statements has been hosted on the website, https:// karnatakabank.com. Further, as per the fourth proviso to the said Section, the Audited Annual Accounts of the said subsidiary company of the Bank, considered as part of the Consolidated Financial Statements have also been hosted on the Bank's website: https://karnatakabank.com. The documents/details available on the Bank's website: https:// karnatakabank.com will also be available for inspection by any member at its Registered Office.

INVESTOR RELATION CELL

To maintain a regular connect with the investors, your Bank has a dedicated Investor Relation Cell at the Registered Office. Besides redressing the grievances, if any, from the investors, the Cell proactively disseminates corporate information on a voluntary basis to the shareholders through email (wherever made available) about financial results, major events and coverage about the Bank in the media etc.

DIRECTORS AND CHANGES IN THE BOARD

As of March 31, 2023, your Bank's Board comprised of eleven Directors with one Independent woman director. Except the then Managing Director & CEO - Mr. Mahabaleshwara M S, Mr. Sekhar Rao, Executive Director and Mr. B R Ashok, Non-Executive Director, all of them are Independent Directors. The details of the criteria for appointment and remuneration of Directors are provided in the report on Corporate Governance under Annexure-4.

During the FY 2022-23, the Bank has inducted Mr Jeevandas Narayan (DIN: 07656546) and Mr Kalmanje Gururaj Acharya (DIN: 02952524) as Additional Directors (Non-Executive, Independent) w.e.f. April 26, 2022 and their appointment as Independent Directors was approved by the shareholders vide resolution dated June 02, 2022 passed via Postal ballot (e-voting). Further, Bank has also appointed Mr. Sekhar Rao (DIN: 06830595) as Executive Director w.e.f. February 01, 2023 and his appointment was approved by the shareholders vide resolution dated March 30, 2023, passed via Postal ballot (e-voting).

During the year under report, Mrs. Mythily Ramesh, Independent Director, retired on March 13, 2023 upon completion of her tenure of five years.

Further, subsequent to March 31,2023, Mr. Mahabaleshwara M S retired from the post of Managing Director & CEO on April 14, 2023 upon completion of his tenure.

The Board places on record its appreciation for the valuable contributions and the guidance given by them during their tenure in office.

Further, pursuant to the approval of RBI, your Bank has appointed Mr Srikrishnan Hari Hara Sarma (Mr Srikrishnan H) as the Managing Director & CEO of the Bank for a period of three years who has assumed charge w.e.f. June 09, 2023. The Board of Directors recommends his appointment as the Managing Director & CEO of the Bank for approval by the shareholders and accordingly, a resolution seeking appointment of Mr Srikrishnan H as the Managing Director & CEO has been included in the Notice of 99th AGM for approval of the members.

Considering the appointment of whole time Directors (WTD) i.e., MD & CEO and ED for a fixed tenure with prior approval of RBI under section 35B of Banking Regulation Act, 1949, Bank has been following the practice of the office of WTDs not being subjected to retirement by rotation. However, in view of the present constitution of the Board and provisions of Section 152(6) of Companies Act, 2013, it is proposed that the office of WTDs shall also be liable for retirement by rotation, within the overall tenure permitted by RBI. Hence, it is proposed to to partially amend the terms of appointment of the Executive Director- Mr. Sekhar Rao to this effect.

Hence, a resolution seeking shareholders' approval for the amendments to the terms of appointment of Mr. Sekhar Rao is included in the Notice of 99th AGM.

Considering the foregoing and as per Section 152(6) of Companies Act, 2013, at the ensuing AGM, Mr. B R Ashok, NonExecutive Director being the longest in office shall retire on rotation. Further, being eligible, he has offered himself for reappointment. In the opinion of the Board Mr. B R Ashok has the integrity, expertise and requisite experience, which is beneficial to the business interest of the Bank. Based on performance evaluation and the due diligence carried out under 'Fit and Proper' norms of RBI, the Board recommends his re-appointment for approval by the members of the Bank. Accordingly, a resolution seeking the reappointment of Mr. B R Ashok has been included in the Notice of 99th AGM.

MANAGING DIRECTOR AND CHIEF EXECUTIVE OFFICER (MD & CEO)

Mr. Mahabaleshwara M S (DIN: 07645317) was reappointed as the Managing Director & CEO of the Bank upon receipt of approval from RBI to hold office from April 15, 2020, for a period of three years i.e., till April 14, 2023, in accordance with Section 35B of Banking Regulation Act, 1949 and upon completion of his term, Mr. Mahabaleshwara M S retired from the position of MD & CEO on April 14, 2023. As per the approval received from RBI, Mr. Sekhar Rao was appointed as the interim MD& CEO from April 15, 2023 upto June 08, 2023.

As mentioned earlier, Mr. Srikrishnan H has assumed charge as the Managing Director & CEO of the Bank w.e.f. June 9, 2023, for a period of three years.

DECLARATION BY INDEPENDENT DIRECTORS

Pursuant to the provisions of Section 149(7) of the Companies Act, 2013 and Regulation 25(8) of SEBI (LODR) Regulations, 2015, your Bank has received necessary declarations from all the Independent Directors confirming that they meet the criteria of independence for Independent Directors as on March 31, 2023.

PERFORMANCE EVALUATION OF THE BOARD

Your Board of Directors has laid down criteria and process for performance evaluation of Directors, Chairman, Wholetime Directors, Committees of the Board and Board as a whole. The Nomination and Remuneration Committee (NRC) of the Board annually reviews and approves the criteria and the mechanism for carrying out the evaluation exercise effectively. 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 under Annexure-4. In pursuance to the above, the Independent Directors, in their separate meeting held on February 21, 2023, have reviewed and evaluated the performance of the Board as a whole and the Non-Executive Director. Further, the Board has also reviewed the performance of the Committees of the Board and that of individual Independent Directors at its meeting held on April 12, 2023.

As per Bank's Policy on Performance Evaluation, the performance evaluation of the Managing Director & CEO shall be carried out after the publication of the audited financial results. Accordingly, the performance evaluation of the MD & CEO has been carried out by the Independent Directors at their meeting held on June 16, 2023.

CONTRACTS OR ARRANGEMENTS WITH RELATED PARTIES

All transactions with the related parties that were entered into during the year under report were in the ordinary course of the business of the Bank and were on an arm's length basis. There were no materially significant related party transactions entered into by the Bank with the 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 on the website of the Bank under the Investor Portal.

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 and other applicable provisions, your Directors state that:

a) In the preparation of the annual accounts, the applicable accounting standards have been followed along with proper explanations relating to material departures.

b) The Directors have selected such accounting policies and applied them consistently and made judgements and estimates that are reasonable and prudent so as to give a true and fair view of the state of affairs of the Bank as of the end of financial year March 31, 2023, and profit and loss 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 provision of all applicable laws and that such systems were adequate and operating effectively.

STATUTORY DISCLOSURES

The disclosures under sub-section (3) of Section 134 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. Further, to promote renewable sources of energy, Bank has installed solar panels at the Corporate Office, a few Regional Offices and Bank's few owned premises.

b) During the year ended March 31,2023, the Bank earned '3.36 crore and spent '1.93 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 the 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 the Bank and ensure that same are adequate and operating effectively.

e) Key Managerial Personnel:

• Mr. Mahabaleshwara M S, MD & CEO (demitted his office on April 14, 2023 upon completion of his term), Mr. Abhishek S Bagchi, CFO and Mr Sham K, Company Secretary, were the Key Managerial Personnel of the Bank as on March 31, 2023, as per the provisions of the Companies Act, 2013.

• Mr. Prasanna Patil the then Company Secretary, resigned from the services of the Bank and was relieved w.e.f. August 31,2022.

• Mr. Sham K joined the Bank as Company Secretary & Compliance Officer of the Bank w.e.f. February 27, 2023.

• Mr. Muralidhar Krishna Rao, upon completion of his contractual term demitted the office of Chief Financial Officer on March 01,2023, and Mr. Abhishek S Bagchi assumed charge as the Chief Financial Officer w.e.f. March 02, 2023.

f) Remuneration of Directors: Disclosure 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-7 to this report.

g) During the financial year 2022-23, there was no employee who was in receipt of remuneration requiring disclosure as per the limits prescribed under Section 197 of the Companies Act, 2013, read with Rule 5 of The Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014. However, the remuneration (including variable pay determined in the subsequent financial year) pertaining to the Whole Time Directors is subject to prior approval of the Reserve Bank of India. The details of remuneration paid to Mr. Mahabaleshwara M S, the then Managing Director & CEO and Mr. Sekhar Rao, Executive Director (w.e.f. February 01,2023) are provided in the Corporate Governance Report.

I n terms of Section 197(12) of the Act, read with Rule 5(2) and 5(3) of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014, a statement showing the names and other particulars of the Top-10 employees in terms of remuneration drawn forms part of this annual report. In accordance with the provisions of Section 136(1) of the Act, the annual report excluding the aforesaid information, is being sent to the members of the Bank and others entitled thereto. The said information is available for inspection by the members at the Registered Office of the Bank during business hours of the Bank up to the date of the ensuing

Annual General Meeting. Any member interested in obtaining a copy thereof, may write to us at investor.grievance@ktkbank.com.

h) There are no material changes affecting the financial position of the Bank which have occurred between the end of the financial year of the Bank to which the financial statements relate and the date of this Report.

i) Particulars of loans, guarrentees or investments under section 186:Nil

j) Any changes in nature of business during the year under report:Nil NUMBER OF BOARD MEETINGS

During the year under report the Board met 17 times and the details thereof are provided in the report on Corporate Governance attached to this report.

COMMITTEES OF THE BOARD

As on March 31, 2023, the Bank had 12 Committees of the Board 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 (as on March 31, 2023), terms of reference, powers, roles etc., are furnished in the report on Corporate Governance attached to this report in Annexure-4.

CORPORATE GOVERNANCE

Your Bank is committed to adopt the best practice of corporate governance to protect the interests of all the stakeholders of the Bank, viz. shareholders, depositors and other customers, employees and society in general and maintain transparency at all levels. A detailed report on corporate governance practices is given in Annexure 4 to this report.

BUSINESS RESPONSIBILITY & SUSTAINABILITY REPORT:

Bank has adopted various policies that imbibe the best practices with regard to environmental, social and governance (ESG) principles. In this context, Bank has prepared a Business Responsibility and Sustainability Report (BRSR) for the Financial Year 2022-23, prepared in accordance with the requirements under Regulation 34(2)(f) of Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015 and as per the format devised by the Securities and Exchange Board of India vide Circular SEBI/HO/CFD/CMD-2/P/CIR/2021/562 dated May 10, 2021. The same is provided under Annexure-8.

AUDITORS

a. Statutory Auditors:

At the 98th Annual General Meeting M/s Sundaram & Srinivasan, Chartered Accountants (Firm Registration No. 004207S) and M/s Kalyaniwalla & Mistry LLP (Firm Registration No./ LLP No. 104607W/W100166), Chartered Accountants, were appointed as joint Statutory Auditors of the Bank to hold office upto the ensuing 99th Annual General Meeting, being their second year in office. The Board of Directors proposes to the members continuation of the aforesaid auditors to hold office upto the conclusion of 100th Annual General Meeting.

As per the extant RBI guidelines and Bank's Policy on Appointment of Statutory Auditors(SAs), the maximum tenure of SAs is for a period of three years, and FY 2023-24 (i.e., up to the 100th AGM) will be the third year in office for the existing audit firms and thereafter, the present auditors need to be rested and the Bank will be required to appoint new auditors. Therefore, with a view to ensure continuity of auditors, the Board of Directors of the Bank at its meeting held on June 17, 2023, on the recommendation of the Audit Committee approved the appointment of M/s Ravi Rajan & Co LLP, Chartered Accountants (Firm Registration No./LLP No. 009073N/ N500320), New Delhi. Thus, for the current FY 2023-24, there will be three joint auditors. As the existing two audit firms would be completing their third year of appointment by next year i.e., FY 2024-25, and having appointed one of the new audit firms this year, Bank shall appoint another new joint statutory auditor during FY 2024-25 and such two firms, with necessary approvals, will be jointly conducting the statutory audit thereafter.

Accordingly, the Board of Directors recommends the appointment of M/s. Ravi Rajan & Co LLP, Chartered Accountants, New Delhi, as third Statutory Auditor of the Bank for the financial year 2023-24 (i.e., up to the conclusion of the 100th AGM). Pursuant to Section 30(1A) of the Banking Regulation Act, 1949, approval has

been obtained from the RBI vide their letter dated July 20, 2023. The Bank has received consent from the above auditors and necessary confirmation from them that they are not disqualified from being appointed as auditors of the Bank pursuant to the provisions of the Companies Act, 2013 and the Rules made thereunder.

b. Secretarial Audit Report:

Pursuant to Section 204 of the Companies Act, 2013 and the rules thereunder, your Bank has appointed M/s. BMP & Co, LLP, Bengaluru, Company Secretaries in practice as the Secretarial Auditor to conduct the Secretarial Audit for the year ended March 31, 2023. The audit report from the Secretarial Auditor is annexed to this report as a part of Annexure-6.

Pursuant to Regulation 24A of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 read with SEBI Circular No. CIR/CFD/CMD1/27/2019 dated February 08, 2019, the Bank has obtained the Annual Secretarial Compliance Report, certified by CS Pramod S M (COP: 13784), BMP & Co. LLP, Company Secretaries in practice, Bengaluru, for the financial year ended March 31, 2023, on compliance of all applicable SEBI Regulations and circulars/ guidelines issued thereunder and a copy was submitted to the Stock Exchanges within the prescribed timeline.

During the FY 2022-23, pursuant to Section 143(12) of the Act, neither the Statutory Auditors nor the Secretarial Auditor of the Bank have reported any instances of fraud committed in the Bank by its officers or its employees.

ACKNOWLEDGEMENTS

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

For and on behalf of the Board of Directors P Pradeep Kumar

Part-time Chairman Place: Mangaluru Date: August 03, 2023