Axis Inspection Report FY13-14

RESERVE BANK OF INDIA
Axis Bank Limited

Assessment as on March 31, 2014
Risk Assessment Report (RAR)

Major Areas of Financial Divergence
Findings on Capital and Earnings
Major Areas of Non Compliance
Confidential
Table of Contents
Introduction.................................................................................................................... 2
Part I: Risk Assessment Report .................................................................................. 2
Summary of Aggregate Risk at Bank Level .............................................................. 2
Findings on Risks and Control Gaps Assessed ........................................................ 3
Governance & Oversight........................................................................................... 3
Credit Risk ................................................................................................................ 9
Market Risk ............................................................................................................. 12
Liquidity Risk ........................................................................................................... 16
Operational (Non- IT) Risk ...................................................................................... 19
Operational (IT) Risk ............................................................................................... 22
Pillar II Risk ............................................................................................................. 23
Part II: Major Areas of Financial Divergence ............................................................. 26

Part III: Findings on Capital and Earnings................................................................. 27
Pillar I Capital & CRAR ........................................................................................... 27
Capital Management, ICR, ICAAP and Stress Tests .............................................. 28
Assessment of Internal Generation of Capital......................................................... 30
Scope & ability to infuse capital .............................................................................. 31
Assessment of Leverage Ratio ............................................................................... 31
Part IV: Major Areas of Non-Compliance ................................................................. 32

Part V: Annex ................................................................................................................. 1
Annex-1: Major Areas of Financial Divergence ......................................................... 1
Annex-2: Computation of Outside Liabilities ............................................................. 4
Annex-3: Assessed Net Worth .................................................................................. 6
Annex-4: Computation of Assessed Capital.............................................................. 7
Annex-5: Assessment of Internal Generation of Capital ......................................... 10
Annex-6: Leverage Ratio ........................................................................................ 13
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INTRODUCTION
The Preliminary Risk Assessment of Axis Bank Ltd. for 2013-14 under the Supervisory
Programme for Assessment of Risk and Capital (SPARC) was completed with March
31, 2014 as the reference date. The assessment has been made based on the off-site
analysis of the data and information furnished by the bank as well as the findings of the
on-site Inspection for Supervisory Evaluation (ISE) undertaken between September 1,
2014 and October 14, 2014 and various explanations offered by the bank in the course
of inspection.
As per the SPARC process, the aggregate Risk Score of the bank is arrived at 2.175,
which is indicative of medium risk. On applying the assessed CRAR 15.959% to the
aggregate risk score, the Risk of Failure score of the bank is arrived at 1.932.
PART I: PRELIMINARY RISK ASSESSMENT REPORT
Summary of Aggregate Risk at Bank Level
Inherent Risk Control Gap Aggregate Risk

Risk Category
A (1-4) B (1-4) A+B
Board 1.650
Senior Management 1.924
Risk Governance 2.489
Internal Audit 1.560
Credit Risk 2.436 2.137 2.346
Market Risk 2.099 2.331 2.168
Liquidity Risk 2.487 2.447 2.475
Operational (non-IT) Risk 2.057 2.109 2.072
Operational (IT) Risk 1.907 1.940 1.917
Other Pillar II Risk 1.572 1.552 1.566
BANK LEVEL AGGREGATE RISK 2.175
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FINDINGS ON RISKS AND CONTROL GAPS ASSESSED
1. Governance & Oversight: Aggregate Score (1.906)
Major findings/ observations

1.1 Board Score: 1.650
1.1.1 (a) As on March 31, 2014, there were 14 directors of which four were nominated
by promoters, three whole time directors and seven independent directors.
However, as on the actual date of completion of inspection (October 14, 2014),
there were 12 directors with one vacancy in each of the nominated and
independent categories. In terms of the bank’s Articles of Association, Specified
Undertaking for Unit Trust of India (SUUTI) was conferred powers to nominate
four directors (including the chairman) of which one director was conventionally
being nominated by LIC – a co-promoter (the right not substantiated by any legal
document). However, these powers were not reviewed in the light of present
holding of SUUTI (11.7% of shareholding as compared to 87.0% at the time of
promotion of the bank). The bank had sought SUUTI’s concurrence, though not
required, for reduction in the number of its nominees. The bank had not initiated
process for an amendment to the relative clause of its Articles of Association to
broad-base its board in order to leverage its position as one of the leading
private sector banks in the country. (b) The bank had not taken a periodical
update on the declarations by the members of the Board, for ensuring their
continued adherence to the fit and proper criteria.
1.1.2 (a) The bank was yet to ensure compliance with RBI observations in the RAR-
2013 in regard to having a charter for the Board, evaluation of the board
members and performance of the committees and many other important
aspects. (b) The Risk Management Committee (RMC) met five times during FY-
14 with wide time gap between last two meetings and some of the critical
agenda items were still deferred to the next meetings on two occasions. (c)
There were 11 policies reviewed with an avoidable delay of two to five months
which included KYC/AML related policies meant for overseas branches
(Hongkong, Dubai and Singapore). (d) Intra-day Liquidity Management Policy
was pending for review for the last eight months.
1.1.3 Some of the risk policies (Reputational Risk Management policy, Strategic Risk
Management policy and Operational Risk Management framework) were yet to
be approved. There were deficiencies in certain policies (Corporate Credit
Policy, KYC/AML policy and NPA Management and Recovery Policy). There
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were some inconsistencies in certain risk related policies (details mentioned in
respective paras).
1.1.4 The process of sensitization of the Board regarding regulatory changes was
considered inadequate, as information on the issues (emanating from the
circulars related to donations by companies, accelerated provisions against
SMA-2 accounts, intra-group transactions and exposures, liquidity coverage
ratio, un-hedged foreign currency exposure, etc.) raised by the bank with RBI
was not presented to the board.
1.1.5 The minutes of the Board meetings did not reveal the process of arriving at the
decisions and the dissents, if any, to reflect the extent of role played by the
Board members. There was one long pending direction of the Board (relating to
evaluation process of the Board) which remained unimplemented since April 27,
2012.
1.1.6 (a) Some agenda notes were placed before Committee of Whole Time Directors
(COWTD) instead of Committee of Directors (COD) - (i) reviewing loans
sanctioned by Senior Management Committee (SMC), (ii) grant of loans and
advances aggregating ` 2.5 mn and above to directors (including the Chairman
/ Managing Director) of other banks; any firm in which any of the directors of
other banks is interested as a partner or guarantor; and any company in which
any of the directors of other banks holds substantial interest or is interested as a
director or as a guarantor, and (iii) the quarterly report on non-SLR portfolio. (b)
The note on delay in security creation was submitted to Audit committee of
Board (ACB) instead of COD. (c) The inspection reports received from overseas
regulators as well as the bank's compliance thereto were not placed before the
ACB/ Board.
1.2 Senior Management Score: 1.924
1.2.1 There were certain issues where conflict of interest was observed e.g. (a) Chief
Risk Officer's (CRO) role was not compliant with the charter for RMC as he was
mandated to be independent like Chief Audit Executive and not involved in
business decisions, whereas he was a member of credit sanctioning
committees. (b) The Governance Risk and Compliance Coordinators had
reporting lines to the business heads, though they were performing the function
of compliance testing on behalf of Compliance Department. (c) Process Quality
Department, having reporting line to Retail Banking Operations, oversaw the
functioning of Product Management Committee (PMC)/Change Management
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Committee (CMC) which was a function of Risk Department. (d) The base rate
computation was done by Finance & Accounts department whereas it should be
done by the ALM unit which was already assisting/aiding the ALCO. (e)
Regarding investments by the bank in issuances arranged by itself, there was
conflict of interest as investment portfolio (non-SLR) and Debt & Capital Market
(DCM) function were headed by the same person.
1.2.2 (i) Fresh loans were sanctioned to some of the borrowers appearing in the list of
SMAs and the fact was not disclosed in the review note put up to COWTD, (ii)
RAROC for the equity portfolio was wrongly reported to the Board, (iii) The bank
reported deal exceptions under internal derivative deals that were in excess of
actual derivative deals, (iv) Information Note on regulatory changes submitted to
the Board did not include details of representations made to RBI on some of the
new regulations, (v) Note on delay in security creation submitted to ACB did not
contain account wise information, (vi) There were multiple breaches in liquidity
ratios mandated for overseas centers, but reported to ALCO as being within
limits.
1.2.3 (a) The information was not placed though directed by the RMC on concerns
related to enhanced credit risk. (b) Monthly report on compliance failures was
submitted to COD in a bunch without any mention of the remedial steps even
when deviations were reported. (c) The quarterly review of quick mortality cases
as at the end of December 2013 and for March 2014 was put up to COD after
undue delay in September 2014. (d) The rate scan exceptions were not reported
to the senior management / Board and were closed without due diligence.
1.2.4 The minutes of the meetings of Board / Board level committees and other
Committees of Executives were not being properly recorded; the bank was yet to
institute a process for tracking the commitments / timelines given in the agenda
notes placed before the board / committees; the business related periodical
mandated review notes put up to board did not contain comparison between
targets achieved and remaining to be achieved under CAP and further action
points.
1.2.5 (a) The KRAs for senior management did not provide matrix for achieving the
targets. (b) Achievement of goals was measured only at year end through the
performance management exercise. (c) The KRAs of senior business line
managers did not include weightage on compliance risk. (d) The KRAs of the
controllers did not include the compliance risk and responsibility for restoration
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of the rating of the branches where the audit rating was downgraded and
improvement where the rating was low. (e) KRAs were not adjusted when
performance was reviewed against the goals through dashboard reporting and
business review meetings.
1.2.6 (a) The compliance with some of the critical observations of RBI in RAR-2013
was open. (b) There was no sustenance review (audit) from time to time in the
areas of supervisory actions and regulatory breaches to ensure that systemic
corrections put in place were actually effective in order to reduce / mitigate the
compliance risk (details given under different risk parameters). (c) The bank did
not have some of the non-significant and internal policies, and wherever it had,
there were certain gaps. Some of the internal policies were not complied with
(details under respective risk paras).
1.3 Risk Governance Score: 2.489
1.3.1 (a) The ATRs of Risk Management Committee (RMC), Operational Risk
Management Committee (ORMC) and Credit Risk Management Committee
(CRMC) were either not recorded or not properly recorded. (b) There was no
prescribed hierarchy for monitoring the risk limits at ORMC and CRMC levels.
(c) ICAAP document was prepared merely for regulatory compliance as the bank
included present policies and procedures followed for risk mitigation instead of
actual assessment of all Pillar II risks. (d) The working of PMC and CMC
continued to be a matter of concern despite observations in the RAR-2013 as
there were inherent deficiencies in many products like plot loans, mobile
banking, home saver products, TCDC Cards, Multi-currency Cards, derivative
deals with deferred premium, facilitating loans through partner banks by marking
lien against NRE deposits in overseas jurisdictions, etc. At the time of launch of
the product, it was not being verified if there were regulatory or other
environmental changes since the date of approval. (e) There was no list of pre-
requisites factoring the audit findings that should be reckoned before considering
any new product / process. (f) The inventory in respect of withdrawn products
was not available with the bank.
1.3.2 (a) ALCO meetings were conducted without proper quorum of the eligible
members. (b) There were incidents of serious nature having major governance
implications in changing interest rates.
1.3.3 (a) There was no action taken on the RMC’s directions for a review of list of
cautious segments or risk mitigants because of increase in such exposure, the
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level of restructured assets of the bank, current process of rating over-rides and
need to document the rationale in each instance, etc. (b) The potential risks
arising out of CDR cases, accounts involving extension of DCCO, number of
accounts pending security perfection, cases of fresh slippages to NPAs and
quick mortality, PD estimation, etc. were not deliberated in any risk management
committees.
1.3.4 The review of risk management policies did not take into account relevant
factors such as breach of risk limits during the year, fungibility of limits allowed,
etc. There were some inconsistencies in the ALM policy, Market Risk
Management Policy, Credit Risk Management Policy and Operational Risk
Management policy (details under respective risk paras).
1.3.5 (a) The RAR 2013 had pointed out deficiencies in certain areas but the RMD
had not extended the rationale to other areas to ensure adequate oversight. In
this regard, the action appeared to be reactive rather than proactive in identifying
risks. (b) There were several deficiencies in (i) risk identification particularly
regarding operational risk events, (ii) policies and practices for fixation of risk
limits with correlation to capital appetite, (iii) allocation of the limits to business
departments, (iv) monitoring and closure of breaches of the prescribed limits, (v)
oversight over risk management functions at treasury and at overseas branches
and (vi) review by any risk related committee of potential risks to credit portfolio.
(vii) Variable incentives were largely given on the basis of self-certification and
probability of opacity in performance evaluation was high in some of the areas in
Treasury. (c) RMD had not identified several regulatory violations (details in
Part IV).
1.3.6 The bank was not fixing limits as per its risk appetite; rather risk exposures were
dictating capital provisions. There was no threshold fixed by the bank for review,
monitoring and calibration of the limits in respect of appetite for Tier I capital,
Total Capital Ratio, EaR and sub-limit for EaR for credit/market/operational risks,
etc. The portfolio delinquency limit (3.0%) was breached (4.98%) but there was
no evidence of any discussion in any risk related committee on the accentuated
level of credit risk.
1.3.7 (a) Counterparty limit setting was initiated by Treasury directly and Risk
Department was not involved at inception. (b) Loan Equivalent Risk (LER) limits
did not completely capture the exposures since the deferred premium aspect
was not addressed. (c) There was no centralized oversight over risk
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management operations of overseas branches. (d) The closure of audit reports
was unduly delayed.
1.3.8 There were several areas such as pass back to investors of a part of fee income
by DCM function in Treasury, variable incentives to dealers in Treasury largely
given on the basis of self-certification, quoting deposit rates in excess of card
rates, waiver of penal rates on premature withdrawal of bulk deposits without
approvals, not exercising adequate oversight over portfolio compression
exercise, TFC pre-deal limit checking at branches, inability to identify the off
market deals through present rate scan process, etc. which may lead to
enhanced financial and / or operational risks.
1.4 Internal Audit Score: 1.560
1.4.1 (a) There were several instances of regulatory breaches in branch audit reports,
snap audit reports, thematic audit reports and supervisory actions, despite zero
tolerance policy of the bank. (b) The auditee units were taking corrective steps
only for the purpose of closing the audit findings but did not identify causative
factors which might require changes in processes / procedures or for creating
awareness among other operating units. (c) The Management Audit reports for
the years FY-12 and FY-13 carried out by E & Y in FY-13 were first received
with undue delay and still the implementation of the recommendations had taken
unduly longer time as the reports were placed before ACB in April 2014 and
were not yet closed. (d) In 12% cases, there was delay in receipt of concurrent
audit reports too. The entire DCM function and payment of interest on domestic
deposits beyond card rates was not covered by concurrent audit.
1.4.2 The rating of 51 branches had been downgraded from AAA whereas 78
branches were rated 'C' by the internal audit. The efficiency ratio range of 55%
to 75% assigned to C rating was considered to be too wide. There were as many
as eight branches (C rating) with efficiency ratio of less than 65% but the
controllers had not ensured any special support to them so that functioning of
these branches could be improved in the next audit cycle. The reasons for such
downgrades and the continued low grades of the branches were not analysed in
the note put up to ACB.
1.4.3 Seven high risk areas emanating from the audit findings were pending for
periods between 2-6 months. The reasons for delay were not reviewed by ACB.
1.4.4 The bank had not sensitized controllers and branches about the introduction of
snap audits so that they could also suggest such audits if the irregularities,
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warranting such an audit, came to their notice in any branch / activity.
1.4.5 Audit reports of some of the branches revealed many violations of KYC/AML
norms, deficiencies in documentation for loans, etc. While there was focus on
rectification of irregularities for closure of the reports, the Risk Mitigation Plan
(RMP) prepared by Audit Department did not include 100% review of the
KYC/AML issues in the legacy accounts. There were some products (mobile
banking, TCDC cards and multi-currency forex cards) on which the thematic
studies conducted by the bank discovered serious irregularities but no RMP was
suggested for new products.
1.4.6 The audit system had not brought out in its reports the breaches of various limits
or control gaps in internal policies and / or violations of the RBI instructions with
regard to the irregularities having financial implications relating to payment of
interest higher than the card rates and waiver of penal interest in case of
premature withdrawal of bulk deposits, misclassification of PSLs, passback
benefits in DCM function, open compliances with RBI observations contained in
RAR-2013, non-review of the internal rating during the course of the year
despite triggers, etc.
2. Credit Risk: Aggregate Score (2.346)
2.1 Inherent Risk Score: 2.436

2.1.1 The bank’s exposure to top 10 groups as a percentage of total exposure
declined during the year but the Risk Weighted Assets (RWAs) for these
groups increased.
2.1.2 The enhanced credit risk in the bank was contributed by incremental exposure
to sensitive sectors, exposure to the top three industries accounting for around
30% of the total exposure, increased share of stressed sector exposure and
project loan exposure, etc. The unhedged foreign currency corporate exposure
at 64.17% of total corporate foreign currency corporate loans was also high.
2.1.3 The fully unsecured exposure was 23.49% of the total exposure in the bank.
This, coupled with the under- collateralized exposure in the bank’s portfolio
may lead to heightened credit risk in case of default.
2.1.4 The bank’s restructured standard exposure increased from `39979.1 mn to
`70204.7 mn over FY-13. The slippages from restructured standard (accounts
restructured upto March 31, 2013) were at 6.47%. The bank had not conducted
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any study of the stress in these accounts to assess the potential risk.
2.1.5 The bank’s standard exposure around hurdle rate constituted 64.92% of total
standard rated exposure. This aspect was noted in the previous inspection as
well. The up-gradation from sub-standard to standard was low at 9.19%. The
total standard exposure identified as SMA-1 and 2 formed 2.75% of total
exposure classified as standard as at March 31, 2014.
2.1.6 The bank’s sacrifice of principal in compromised high value accounts formed
32.18% of outstanding in such accounts. Waivers in settled high value
accounts formed more than 100% of total unapplied interest. The difference
between the aggregate assessed value of the collateral at the time of sanction
of loan and aggregate value realized on the sale of collaterals for recovery was
very high.
2.2 Control Gap Score: 2.137
2.2.1 Some borrowers whose names appeared in SMA statements were also
granted fresh sanction or their limits were renewed with enhancements but
there was no disclosure in the notes put up to the sanctioning authority that
these accounts appeared in SMA list.
2.2.2 Some large value frauds in borrowal accounts detected during FY-14 indicated
that there was failure of internal processes which included disbursements being
made without following the laid down procedure, discrepancies in documents
ignored by the concerned officials, etc.
2.2.3 Facility rating was yet to be fully operationalised and was not used for decision-
making. There was no system to review rating during the course of the year
even though the policy of the bank allowed it. Review of rating was not
triggered even if adverse events came to the notice of the bank. Of 38 large
value accounts restructured during FY-14, in as many as 20 accounts, the risk
rating had not changed between March 2013 and March 2014 and in the case
of two borrowers, the rating was constant for the last four years. Thus the
internal rating system did not identify early weaknesses in the accounts. The
rating of accounts reported as NPAs to the Board was also not changed to
default grade immediately.
2.2.4 The NPA identification system of the bank CrisMac was calibrated to identify
NPAs as on the last day of the quarter; the date was subsequently manually
changed to reflect the exact date of NPA. There were many instances where
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the date was adjusted by 45 days and more. The time lag in identifying NPAs,
non-recognition of cheque returns and consequential non- reversal of credit on
the same day by CrisMac facilitated retention of standard asset classification. It
also enabled borrowers to remain in their respective rating grade till the end of
the quarter. The CrisMac software was also used to identify irregular accounts
on a weekly basis as a projection of accounts likely to be NPAs as at the
quarter-end; it did not identify the number of days the account was irregular on
the date of running of the process.
2.2.5 In case of some of the NPAs, the bank made efforts to collect the critical
amount near the quarter end to retain the standard asset classification,
sanction additional facilities at quarter end to regularise the accounts, use
accounts of associates for transfer of funds even when the accounts were
irregular, etc.
2.2.6 For identification of SMAs, the bank was not using CrisMac; it was culling out
information from Finacle and consolidation was being done manually. Hence, it
was only partially system-driven.
2.2.7 The mechanism to identify a wilful defaulter under NPA Management and
Recovery Policy was unclear.
2.2.8 The bank had disbursed upto 100% of the limit sanctioned pending security
creation in a large number of cases though the internal policy permitted such
deviations on a case to case basis. Long delays in security creation continued;
more than 66% (`184722 mn) of the total outstanding (`279102 mn) for which
security creation was pending, was unsecured; more than 32% (`90336 mn)
was pending for a period exceeding 6 months of which `7725 mn was pending
for more than 2 years. The accounts of as many as 29 borrowers (`2222.16
mn), which became NPAs during FY-14, were classified as loss asset for want
of security details or defects in security creation. It was yet to put in place a
system to centrally capture details of covenants (including registration of
charge under the Companies Act) to be tracked and securities to be created.
2.2.9 The exposure management in the bank was not on a real-time basis. An
annual review of the implementation of exposure management measures for
FY-13 was put up to the Board after delay of 2 months. Moreover, the note did
not contain details about the measures taken to manage exposure. The review
note for FY-14 was yet to be put up.
2.2.10 The bank was not centrally collating data/information on the nature of
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irregularities observed in the stock audit reports for consideration of SMC or
CRMC to articulate the changes required, if any, in the processes or
procedures or any other action to be taken.
2.2.11 The on-site RBS assessment has identified two accounts as NPAs with
aggregate balance of `1185 mn. There was divergence in provisioning for
NPAs in five accounts. In all, an additional provision of ` 193 mn was
suggested.
3. Market Risk: Aggregate Score (2.168)

3.1.1 The bank countenanced high interest rate risk emanating out of its trading
portfolio as evidenced from concentration in tenor wise PV01 as well as trend
in quarterly consumption of risk limits.
3.1.2 The bank exhibited high equity price risk on account of high proportion of
unlisted equity stocks, convertible investment instruments as well as trend in
quarterly consumption of risk limits.
3.1.3 The bank faced high FX risk on account of trends in peak quarterly NOOP
utilization as well as trends in quarterly consumption of risk limits.
3.1.4 The bank was susceptible to risks in IRRBB mainly from earnings perspective.
It also faced high embedded optionality risk from avenues such as tenor and
premature withdrawal of deposits.
3.2.1 Market Risk Management policy did not define certain products that were
being dealt by Treasury. The policy of the bank was not in alignment with
bank’s business strategy. While the bank provided capital charge for market
risk RWAs on the basis of outstanding positions, there was no indication that
the positions were based on bank’s risk appetite. The policy did not include
guidelines on portfolio compression exercise thereby conferring full authority to
Treasury without any independent oversight. The bank did not follow the policy
objective of maximizing RAROC of the derivative deals as it was not monitored
dealwise.
3.2.2 The bank did not have Board approval for cost reduction option structures
with deferred premium but had undertaken these new derivative products
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without providing adequate capital and that too without correctly assessing its
counterparty exposure as its internal LER computation was not equipped to
calculate exposure on account of these products. It had undertaken the first
such transaction even before approval of the product from CMC. The option
delta for this transaction was higher than that permitted as per internal
derivative policy indicating inappropriate control systems at multiple levels.
3.2.3 The functional separation between Front Office and Back Office at branches
was absent as demarcations got blurred with the Back Office unit namely
Trade Finance Cell (TFC) undertaking pre-deal activities like limit checking.
3.2.4 (a) The bank did not monitor the dealer–wise breaches of Board approved risk
limits. (b) Information on limit breaches was neither used for review of risk
limits for subsequent years nor was its impact on risk return trade-off
assessed. (c) Revision in risk limits was driven by objective of regularizing
breaches (such as corporate bond VaR) rather than by increase in risk
appetite of the bank.
3.2.5 (a) The variable incentives were given largely on the basis of self-certification
of target achievement by the business department without any independent
verification. Incentives were not based on factors such as dealers’ disciplinary
records, deal-wise positive RAROC for the bank, amortised income, etc. (b)
There were possibilities of double counting of income towards budget
achievement and the probability of opacity in performance evaluation was high
in the areas like - FX customer handling desk (CTFG and FXTRI), origination
of investment through DCM function, derivative deals priced for overseas
centres, informal sharing arrangements such as limit carve-outs (including in
FI business under Treasury) and fixing of LER limits, derivative trades
(including those with deferred premium), the derivative trades with negative
RAROC, etc.
3.2.6 (a) The bank’s rate scan process was ineffective in identifying deals done at
off-market rates which could hide genuine off-market deals and resultant
financial loss to the bank. The bank had not carried out any due diligence for
the exceptions as the internal derivative deals were reported higher than the
actual deals. Further, the rate scan process was ineffective as it did not cover
deals done after 5pm. (b) The bank did not have any policy regarding rate
scan framework on (i) capital consumption limits for derivative deals, (ii)
threshold limits for each asset class, (iii) escalation matrix and resolution
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mechanism in case of off-market deals, etc.
3.2.7 The bank did not have concentration limits in terms of unlisted, unrated and
illiquid assets. Since the bank did not compute total returns on portfolio, the
impact of illiquidity on the portfolio was not captured.
3.2.8 (a) The RAROC of equity portfolio was (-) 57% for FY -14. This was wrongly
reported by including the profit of `1310 mn booked on account of strategic
disinvestment. (b) There was no strategic direction from management
regarding quality of the portfolio in keeping with overall risk inclination of the
bank which was apparently predicated on subjectivity of portfolio managers.
(c) The bank did not have clear demarcation between strategic trades and
view based trades (e.g. investment in shares of Usher Agro based on site visit,
Alok Industries in which the bank had large concentration despite trigger of
stop loss). The impact of such inter-linkages on its profitability had not been
analyzed/assessed by the bank. Regarding QIP of SBI, Treasury had acted
contrary (by trading) to the approved purpose of investment. Further the
transaction had been booked under AFS whereas the objective of Treasury
was trading which should have meant booking the investment under HFT. (d)
The performance of the bank’s equity trading portfolio and that of individual
dealers’ trading book appeared to be in opposite directions. (e) There were no
concentration limits in terms of scrips, industries, sectors, listed, unrated,
illiquid assets, etc. for the purpose of curbing subjectivity. There were no
directions regarding investments in scrips that had faced continuous stop loss
breaches.
3.2.8 Regarding DCM function (origination) of Treasury, there was complete lack of
independent oversight and all relevant information was available with Treasury
alone. The bank could generate fee income while making investments itself.
However, there was no evidence of due diligence of such investment as the
bank would be taking additional market risk with concomitant capital
requirement (in its non-SLR portfolio) only for the purpose of generating fee
income. There was high opacity in regard to fee income due to the bank, the
pass-back of a part of such fee income to investors and use of discretionary
powers without any policy backing for underlying expenditure.
3.2.9 As regards Investment Committee, three AVPs could constitute the quorum of
the committee which was not prudent. There was no mention, in the minutes,
of any discussion on investments made on the bank’s own behalf as part of
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DCM function or on the large deals related to SBI QIP or Prizm Payment
Services which indicated that the decision was not reflected in the minutes of
the committee.
3.2.10 The bank was undertaking derivative transactions without independent and
upfront RAROC assessment. However, all such deals were considered for
budget achievement. There was no independent oversight of day one P&L in
respect of these transactions; the compliance for RAR-2013 given by the bank
in this regard was found to be open.
3.2.11 The bank had reported a total of 16 breaches (aggregated in all asset classes)
in back testing of VaR. However, the policy was silent on the tolerance level or
acceptable trigger warranting a review. While the reviews were undertaken,
the acceptability of the results was not measured in absence of pre-defined
thresholds and hence there was no usefulness of such reviews. In this regard,
the ALCO was not provided firm inferences by indicating action points.
3.2.12 The bank was conducting stress tests periodically. However, there was no
integration of the results thereof with business strategy or capital planning.
3.2.13 (a) There existed two customer desks in FX of which one segment was
covering a large number of customers but the interactions with these
customers were not on recorded media i.e. audit trail. (b) The deviations with
regard to deals entered in the system in the name of another dealer or those
entered in the system with a delay and the deals in excess of limit allotted by
the customer to the bank in terms of their Board Resolutions were closed with
unjustifiable reasons. (c) There was no system in the Treasury to obtain
approval of desk head for handling portfolios/books in the absence of dealer
for any reason. (d) The current systems/practices in TMO were inadequate for
timely and accurate risk identification and reporting.
3.2.14 There was no system of immediate confirmation with the counterparty to
acknowledge the derivative deal. As regards Mutual fund investments, the
internal system did not facilitate raising of a request from Treasury as a deal
post which Back Office could initiate the settlement activity.
3.2.15 The bank was not monitoring and reporting the breaches of internal NOOP
limits by its overseas branches (DIFC branch breached the limit on 43/79 days
and Colombo branch had also breached the internal limit on two days). The
compliance given by the bank for RAR-2013 was found to be open.
3.2.16 As observed in RAR-2013, the bank did not have any policy covering basis
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risk and embedded optionality. IRRBB impact was not factored into CAP of
FY-15. IRRBB breaches were being approved by ALCO sub-committee
instead of by ALCO itself. The IRRBB measures were reported to ALCO in all
its meetings but no discussions were evidenced.
4. Liquidity Risk: Aggregate Score (2.475)

4.1.1 The bank countenanced risks on account of structural liquidity gaps at global
level as well as from its overseas operations. It had limited liquidity available to
it from its foreign currency operations as evident from its unswapped foreign
currency funds.
4.1.2 (a) The bank used a high proportion of short term funding as indicated by its
volatile CASA component. (b) The bank was exposed to higher liquidity risk on
account of higher proportion of short-term, interest sensitive funds. (c) The
bank had high reliance on bulk deposits. (d) The bank's average cost of term
deposits was higher than the median rate as well as average rate offered by
major banks in the market. The bank’s liquidity position was weakened due to
reliance on top depositors for funding short term assets that could be
liquidated within 14 days. The liquidity available to the bank through
unencumbered G-secs was limited and it was hampered due to higher
proportion of loans other than demand loans.
4.2.1 (a) Some of the ALCO meetings were conducted without quorum and no
distinction was made between members and invitees. (b) The meetings were
not scheduled to ensure participation of senior management for obtaining
appropriate guidance on business matters.
4.2.2 (a) The decisions regarding change in interest rates on deposits were effected
by (i) Treasury directly with post facto ratification by ‘ALCO sub-committee’, (ii)
administrative substitutes instead of designated members with post facto
ratification by the ‘sub-committee’, (iii) officiating business Head alone who
also signed as CRO, (iv) one member of the ‘sub-committee’ though the
internal policy required two members, (v) making the change effective from a
back date, (vi) changing the rates twice on the same day, etc. This resulted in
Page 16 of 39
many unexplained consequences of serious nature having governance
implications. Similarly, Treasury had also fixed rates for MIBOR linked floating
rate deposits without routing it through sub-committee. (b) The reasons for
rate changes were not recorded anywhere including in ALCO minutes during
ratification.
4.2.3 (a) The bank had raised several bulk deposits at rates higher than applicable
card rates and had also given additional benefits to certain customers in
excess of prescribed rate. (b) There were several cases (aggregating to over `
10000 mn) where penal interest had been waived in case of premature closure
of deposits in breach of the requirements of the internal policy viz. business
expediency. (c) In several cases, funding desk of Treasury had directly waived
penal interest without following internal policies thereby acting without
delegated powers. (d) There was no analysis of financial implications and
impact on the bank’s income due to several cases of deposits being offered
higher than card rates and waivers of penalty on premature withdrawal of bulk
deposits which could have resulted in bank itself bearing the cost due to
sudden ALM mismatch. (e) In the ALM policy, the roles and composition of
sub-committees were defined differently at different places within the same
policy document.
4.2.4 There was no documentary evidence to establish any linkage between the
liquidity management strategy of the bank and its overall business strategy.
The bank did not use the results of Stress testing (NII impact and Stress Gap)
and variance study of Behavioural analysis in determining its liquidity risk
appetite and for capital planning exercise in any manner. The bank did not use
the results of liquidity stress test in reviewing liquidity risk limits.
4.2.5 The bank had neither studied liquidity cost impact nor included it in its
business strategy. The bank did not estimate the cost of maintaining the
liquidity buffer and its impact on P&L.
4.2.6 In the absence of system level monitoring, the bank could not estimate/assess
total outflow on account of intraday funding for any corporate at any point of
time or intra-day facility being rolled over by customer as overnight facility.
This exposed the bank to additional liquidity risk due to probability of shortage
in its day-to-day funding and replacement cost. The bank did not have any
controls for preventing roll-over of intra-day facility availed by bank's
customers as overnight exposure. The bank provided to M/s Ruchi Soya the
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facility to rollover intraday facility as overnight or longer (2-3 days) on 46
occasions out of total 48 instances of overdrafts allowed to three corporates.
The bank had not conducted due diligence of the facility extended to a single
user in violation of its internal policy which provided only for temporary
enhancement of intra-day limit.
4.2.7 There was no documentary linkage between ALCO directives on funding and
actual liquidity management (say through bulk deposits or issuance of CDs).
Therefore, at any point of time, it was not possible to estimate independently
how much of ALCO directives had been implemented and at what cost. The
role of Market Risk department in this regard remained restricted to policy.
4.2.8 IRS limits were breached by Hongkong, Singapore and Sri Lanka branches on
12, 2 and 20 occasions respectively; EaR limit 8 times by Dubai branch and
STL limits once by both the Hongkong and Singapore branches.
4.2.9 (a) The bank did not perform variance analysis of different schemes of CA and
SA deposits while conducting behavioural analysis. Hence, actual figures used
for estimation of maturity mismatches had not been subjected to variance test.
(b) The bank had not set internal tolerance limit for variance warranting
adjustment/ action vis-a-vis Structural Liquidity. There was no end use for
results of variance analysis.
4.2.10 (a) MIS framework for liquidity management still involved manual inputs
through Excel which entailed operational risk, and the observation in this
regard in RAR-2013 remained open. (b) Contingency Funding Plan (CFP) had
several deficiencies viz. (i) amount expected from each of the sources was not
mentioned, (ii) sequential initiation of action plan was not specified, (iii) CFP
envisaged line of credit arrangement with other banks even in the absence of
any such formal arrangements, (iv) inputs from internal analysis of liquidity
risks were not evident, (v) Reserve Bank was reckoned as a contingent source
for liquidity while considering stress scenarios, (vi) timelines for decisions by
Crisis Management Team along with COWTD were not indicated. (c) Further,
no concrete action plan/strategy to improve the funding quality of the bank was
evident, despite supervisory concerns conveyed to the bank in February 2014.
4.2.11 (a) The performance of newly constituted ALM desk still could not be
assessed in isolation from that of Treasury because the transfer of costs and
funds did not happen in tandem. Consequently, mapping of strategy and
execution could not be conclusively established and performance of Treasury
Page 18 of 39
could not be assessed on market factors alone. (b) It was not possible to
distinguish between strategy and execution since there was no evidence of
strategic directions. (c) The FTP methodology was not revised in line with
business strategy of the bank. For instance, the CAP of the bank for FY -15
mentioned reducing reliance on bulk deposits as one of the strategies whereas
the FTP provided for additional incentive for bulk deposits. (d) FTP rates were
generated daily by Treasury instead of automatic updation of rates from
Reuters or the rates being updated by RMD.
4.2.12 The bank had not aligned its investment in SLR securities with strategies for
LCR preparedness, growing advances portfolio by 23% in current FY and
liquidity carrying cost involved in maintaining excess SLR on an ongoing basis.
5. Operational (Non- IT) Risk: Aggregate Score (2.072)

5.1.1 A high number of instances (14) of regulatory actions against the bank by the
regulators were observed during FY-14. The monetary penalties aggregated to
an amount of `56.24 mn.
5.1.2 The bank had higher dependence on external agencies. It was facing shortage
of manpower, largely on account of high attrition rate in sales and front office
cadre coupled with increasing size of the bank. Training was not imparted to
officers at reasonable periodicity for development of appropriate skills.
5.1.3 The number of fresh consumer and legal cases together with the number of
customer complaints indicated reputational risk for the bank.
5.1.4 The amount involved in external frauds by customers (`4321.48 mn) and
non-customers (`437.32 mn) indicated control gaps in the bank in various
processes and systems.
5.1.5 The number of cases of KYC non-compliance identified by auditors indicated
that the process of first examination of KYC documents was deficient in the
bank.
5.2.1 There was delay in submission to RBI of the bank’s replies in 43 cases apart
from 19 Returns. Some internal circulars based on regulatory guidelines were
also issued with undue delay.
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5.2.2 (a) The compliance for RAR-2013 given by the bank in several cases was
inaccurate and inadequate; it remained open on certain critical aspects. (b)
The compliance department did not sign off all the new policies and existing
policies at the time of review. (c) The compliance testing framework resulted
into noticeable deficiencies in the sampling and testing methods, used for
compliance testing of RBI instructions in respect of Tranche III data. (d) The
Compliance Monitoring Programme, prepared in March-2014, was yet to be
fully implemented. (e) There were inherent deficiencies in certain products and
some of the products’ features were violative of the regulatory guidelines at the
time of launch itself. (f) Disclosure on restructured accounts in the balance
sheet for FY-14 was incorrect.
5.2.3 (a) The bank did not have any policy on job-rotation in place. (b) 33.6% of
eligible employees had not availed mandatory leave; 520 employees out of
1849 eligible employees posted in sensitive desks had not availed such leave.
(c) The succession plan prepared for senior business line managers was not
yet approved.
5.2.4 The bank did not have any approved plan for BCP testing of the critical
vendors for FY-14. The plan prepared for FY-15 was not adhered to for 2 out
of 9 activities scheduled upto September 2014.
5.2.5 The bank did not have any defined policy for procuring insurance cover and
there was no periodic analysis of insurance claims.
5.2.6 The bank did not have an integrated Complaint Handling Software. There were
no guidelines for the branches/units to escalate the repeat complaints, if the
customer was not satisfied with the resolution of the complaint.
5.2.7 The Risk Control Self Assessment (RCSA) framework did not include audit
findings, observations in RBI inspections / scrutiny reports, supervisory actions
taken by the regulatory authority in the form of seeking explanations and issue
of SCNs or warning/ caution letters or imposition of monetary penalties. RCSA
was not conducted for all the Assessment Units during FY-14. The framework
did not result into KRAs and KRIs and there was no linkage of its findings with
HR. The KRIs were not mapped to a particular risk or a set of risks.
5.2.8 The RBI instructions related to legal audit of title deeds, though prescribed by
RBI in June 2013 were implemented with much delay. There was no
aggregation of the discrepancies pointed out, if any, in the title deeds for
corrective steps; there was no end use of information by Fraud Control and
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Management Department to ascertain the efficacy and efficiency of the legal
audit. Further, the bank had rather ignored the RBI advice issued in June
2011, as a fraud prevention measure, for verification of other documents like
CA certificate, certificates issued by other authorities/third parties, etc. and
relied upon by the bank for grant of any loan.
5.2.9 No analysis of frauds at aggregate level was carried out for providing inputs for
changes in policies or the processes. There was no structured mechanism in
the bank to proactively examine the market information with potential to result
into a fraud / risk and impact the bank. Frauds were not being monitored
centrally – there was no web solution for reporting of frauds and further
developments, by the branches or circles offices for MIS. The process of
sending deliverables like account opening kits, pin, password, etc. was
address specific instead of both address and customer specific; it was
considered to be fraud prone as the customer credentials could fall into wrong
hands.
5.2.10 The bank's KYC/AML policy did not prescribe any time frame for closure of
alerts and for completing the periodical review of risk categorization. The half
yearly reviews for June and December 2013 were completed with delay of 3-4
months. In January-2014, approximately 2.5 mn cases were identified for re-
KYC, whereas it was completed only in respect of approximately 30,000
accounts till September 2014 and pendency was not monitored. The Annual/
Quarterly compliance review also did not include the status of KYC
updation/Re-KYC. Risk-categorization for the legacy customers was found to
be wrong in some Audit Reports. Various Authorities and RBI scrutiny reports
had also pointed out serious deficiencies in monitoring of transactions and
review of risk profile of the customers based on the monitoring of transactions
in their accounts.
5.2.11 The bank was allotting new cust-id even to the existing account holders in the
case of sale of Foreign (Single/Multi) Currency Cards through FFMCs.
5.2.12 The system in place to identify the foreign contributions received in customers’
accounts was inadequate to ensure that those accounts were having requisite
permission from MHA as required under FCRA.
5.2.13 The bank could not attain targets for overall PSLs and advances to direct
agriculture for the last three FYs. As regards, FY-14, though the bank had
achieved the overall PSL target (45.77% as against target of 40%), the sub-
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target of advances to direct agriculture was achieved to the extent of only
6.79% (target 13.5%) indicating a shortfall of 6.71% in this regard.
6. Operational (IT) Risk: Aggregate Score (1.917)

6.1.1 26.80% of the total frauds and operational risk related losses were contributed
by IT.
6.1.2 The bank had high unscheduled CBS downtime at 532 minutes, which may
lead to significant transactional / reputational issues for the bank.
6.2.1 The bank did not have a formal IT Strategy Policy. It did not have any policy on
SLA. The SLAs were entered into on a case to case basis. Change
Management Policy on IT lacked defined roles and responsibilities of all key
stakeholders. Backup policy and procedures were not available for a few
applications i.e. Base24, DCMS, Green PIN, Message24, ATM MIS, etc.
6.2.2 The bank was not quantifying financial impact due to errors/ bugs. In various
applications, multiple instances of dormant user IDs, junk customer IDs, weak
user access management controls, generic user IDs, shared user IDs, multiple
customer IDs of same user, user ID different from employee code, etc. were
prevalent in the bank, which may lead to unauthorized access or difficulty in
fixing accountability in case of leakage of internal and client related information.
There was undue delay in compliance to PCI-DSS standards. The files in clear
text format for credit card payments from Finacle & ATM received by IT
department were uploaded manually in the Prime Software which posed
heightened risk to sensitive data such as amount, card number, etc.
6.2.3 Absence of STP was observed between Finacle and MMS application, Credit
Card payments from Finacle to Prime application, Finacle and FinnOne, data
transfer from Money Integra to the Finacle application, etc. The bank was using
excel sheets for uploading to various applications, which meant manual
intervention.
6.2.4 A number of vishing attacks were evident during the year, but the bank took
delayed action leading to increase in number of frauds. There was no fraud
loss limit for the new products to enable the bank to take early preventive
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action. The bank was not monitoring IT frauds through system, rather decided
the nature of fraud by manual eye-balling of total frauds for reports.
6.2.5 Un-authorized and unlicensed software / freeware were installed on the
application server operating system viz. (a) WinZip and Winrar were installed
on the Paypro application server 192.168.106.56. (b) Microsoft Office 2000
Premium was installed on the RPay application server 192.165.106.39.
6.2.6 In a few cases, background verification checks of vendor employees were not
conducted, code of conduct for vendor staff was not documented and non-
disclosure agreement was not signed by vendor staff. In several instances, the
bank did not have signed contracts with vendors. For Merchant Acquiring
Payment System (MAPS), vendor team was granted full access to the
application setup files, connection strings and all application server drives
through default shares on the application server. There was delay in acquiring
data wiping software. These deficiencies represented violation of bank’s
internal policy on Acceptable Usage.
7. Pillar II Risk: Aggregate Score (1.566)

7.1.1 (a) The revenue growth of the bank was at 12.8% over the previous year. (b)
The growth in total number of customers was at 1.5% over previous year.
7.1.2 The growth in number of customer litigations at 22.3% over the previous year
was a matter of concern.
7.2.1 The Long Term Vision (LTV) document was not formally approved by the Board.
Moreover, it was not clear as to how CAP for each of the upcoming years would
lead to achievement of goals outlined in LTV. The LTV was not reviewed in any
committee for midcourse corrections. Further, the bank did not have any defined
method for assessment of strategic risk. The discussions in the strategy meet of
the board did not include, inter alia, key characteristics like authority/
responsibilities for Board / Senior Management / Executives / key stakeholders
in management of execution, planning and processes in case of slippages from
the desired outcomes so as to proactively shape the strategy at the time of next
review. The quarterly reviews of CAP by ALCO were more in the nature of
Page 23 of 39
mandatory agenda items.
7.2.2 The hierarchies for performance evaluation (earnings, NIM etc.) for identifying/
reporting and escalation for corrective action were not evidenced.
7.2.3 The triggers for reputation risk management were based on an adverse event
and market report; the bank's approach was largely reactive. The bank had a
Quick Response Team framework to deal with any crisis. However, the process
for dubbing an event as a crisis was nebulous and required more specific
definition. The escalation process was too long and there were no guidelines for
internal communication during crisis times.
7.2.4 The surveys conducted by the bank were not targeted at customer protection
and grievances redressal. Further, there appeared to be subjectivity in the
choice of customers for attending customer service committee meetings. The
management of customer service in the bank was not centralized. The analysis
of the complaints against the subsidiaries was inadequate for taking holistic
corrective steps.
7.2.5 The basis of price for subscription to the shares of different subsidiaries was at
variance; there were no guidelines in this regard. The documents made
available were apparently inadequate to evidence that the transactions to sell
down of loan assets by overseas branches to UK subsidiary were priced on
arms' length basis.
7.2.6 The VaR model for market risk was yet to be validated by an external agency
though it was back-tested internally. The deviations observed in back testing of
VaR model were merely noted by ALCO without any guidance in terms of action
required and hence, the question of triggers and responsibility for identifying the
slippages as also escalations to higher authorities did not arise.
7.2.7 The IRB model allowed for over-ride of rating by 3 notches and also permitted
notching up the borrower rating based on collateral coverage in the form of non-
business collateral or other credit enhancements / mitigants (EL ratings) like
rating of the guarantor, issuer of SBLC, LC, lessee, etc. The EL Ratings would
normally apply to a credit facility and not at the borrower level. But the bank had
been upgrading ratings based on such EL ratings backed by eligible credit
enhancements. The bank had not operationalised the back testing of rating
pricing framework and monitoring of RAROC, which are part of the IRB model.
7.2.8 The bank’s definition of default required the use of audited list of NPAs.
Accordingly, restructured advances for estimation of PD, LGD, CCF and the
Page 24 of 39
NPAs were being identified only at the quarter-end. As such, internal rating
system was precluded from taking into account defaults as and when they
occur. It was biased towards under-estimating the credit risk in the bank. PD
estimation was not done as on March 31, 2014 despite audit having been
completed in April 2014.
7.2.9 The Model Risk Governance Framework was silent on the tolerance level of the
bank or its acceptable trigger for number of breaches in back testing of VaR
model beyond which a review would be mandated. The policy also did not
prescribe any time limit for PD estimations. Further, , there was no linkage of the
model results with the CAP/business plan for mid course correction though the
Framework provided for periodic feedback to business departments, calibrations
based on their inputs and updation of the models. . As such, it was evident that
the model risk was not monitored.
Page 25 of 39
PART II: MAJOR AREAS OF FINANCIAL DIVERGENCE
The summary of major areas of financial divergence, including assessed risk weighted
assets, which determined assessed capital of the bank, is given below. Details are in
Annex-1.
1. Divergences (shortfall) in Provisioning
Areas/ Description Shortfall

(In ` mn)
Reclassification of Standard Loan Assets as NPAs 115
Reclassification of Existing Loan related NPAs 78
Shortfall in Standard Asset Provisioning 0*
Other Assets 26
Others – claims not acknowledged as debt 12
Total Additional Provisions 231
*shortfall in standard asset provisioning of `0.25 mn reported as ‘0’ on rounding off
2. Divergence in Risk Weighted Assets (RWAs)
RWAs (In ` mn)

Risks Reported Assessed
Credit Risk 2415935 2426955

Market Risk 202228 202228
Operational Risk 219913 219913
Total RWAs 2838076 2849096
Page 26 of 39
PART III: FINDINGS ON CAPITAL AND EARNINGS
1. Pillar I Capital & CRAR

The summary of reported and assessed capital position of the bank is given below.
Details are in Annex-4.
A. Basel III Capital as relevant for current year (2013-14)

Admissible Capital under Basel III (In ` mn)
Particulars Reported Assessed
Total capital (TC) 455960 454694
Common Equity Tier 1 (CET1) capital 358055 356789
Tier 1 (T1) capital 358055 356789
Tier 2 (T2) capital 97905 97905
Admissible CRAR under Basel III (in %)

Total capital (TC) 16.07 15.96
Common Equity Tier 1 (CET1) capital 12.62 12.52
Tier 1 (T1) capital 12.62 12.52
Tier 2 (T2) capital 3.45 3.44
B. Basel III Capital as relevant for next year (2014-15)

Available Capital under Basel III (In ` mn)
Total capital (TC) 455960 454694
Common Equity Tier 1 (CET1) capital 358055 356789
Tier 1 (T1) capital 358055 356789
Tier 2 (T2) capital 97905 97905
Available CRAR under Basel III (in %)

Total capital (TC) 16.07 15.96
Common Equity Tier 1 (CET1) capital 12.62 12.52
Tier 1 (T1) capital 12.62 12.52
Tier 2 (T2) capital 3.45 3.44
Page 27 of 39
2. Capital Management, ICR, ICAAP and Stress Tests
(a) Bank’s Capital Planning and Business Projections
(i) Capital planning exercise was carried out by the bank for regulatory capital
requirements for the FY -15 and FY -16 under the scenarios of high stress - moderate
growth and moderate stress - moderate growth. Business projection was done for the
FY -15 which projected around 18% growth in the total assets/ liabilities, around 17%
growth in deposits and around 23% growth in advances.
(ii) The bank had considered the increase in Risk Weights due to the Credit
Valuation Adjustments (CVA) on the portfolio trades with counterparty which is effective
from April, 2014 as a part of Basel III guidelines which would impact the CAR by 29
bps. The phasing out of non equity Basel III, non- compliant bonds (IPDI and Tier 2
bonds), which would impact the CAR by 34 bps and the phased deduction of bank’s
investments in subsidiary companies, reciprocal cross holdings would impact CAR by 3
bps. Considering the above deductions, the bank had estimated a total CAR of 14.24%,
CET 1 CAR of 11.87%, and Tier I CAR of 11.87% and Tier 2 CAR of 2.37% as on
March 31, 2015. However, the additional risk weight on unhedged forex exposure
applicable from April 2014 was not considered by the bank in calculating the impact on
CAR. Further, the adjustment in case of valuation of illiquid positions which was to be
deducted from the CET1 was not done by the bank and also not considered in ICAAP
to assess the impact on CAR.
(iii) The bank had undertaken an exercise to determine capital requirements of

various business segments considering the business goals for FY -15. However, the
bank could not provide estimation of capital required as if all the risk limits are
consumed by the businesses which indicated that the bank had fixed risk appetite and
the risk limits without any correlation with the capital.
(b) Assessment of Pillar I & II Capital and Internal Capital Ratio

The reported and assessed Pillar I risk weighted assets stood at `2838076 mn and
`2849096 mn respectively as on March 31, 2014. In addition to Regulatory Capital
Ratio (covering pillar I risk) which was reported at 16.07%, the bank had also
calculated the additional risk weight for pillar II risk (`70410 mn). The ICR of the bank
stood at 15.68%. The ICR being higher than the prescribed minimum regulatory capital
of 9%, no additional capital was proposed by the bank’s ICAAP.
Page 28 of 39
(c) ICAAP and User Test
(i) As per para 12.6 of ‘DBOD.No.BP.BC. 9/21.06.001/2013-14’ dated July 1, 2013
on ‘Prudential Guidelines on Capital Adequacy and Market Discipline- New
Capital Adequacy Framework (NCAF)’, the implementation of ICAAP should be
guided by principles of proportionality. The bank needed to define its activities
and risk management practices as Simple, Moderately complex or Complex and
prepare the ICAAP accordingly. The bank had not carried out this exercise.
(ii) As per para 12.3.2 of ‘NCAF’, the ICAAP should be prepared, on a solo basis, at
every tier for each banking entity within the banking group, as also at the level of
the consolidated bank (i.e., a group of entities where the licensed bank is the
controlling entity). The bank prepared ICAAP only at solo level and separate
ICAAP at consolidated level was not prepared.
(iii) Under the Reputational risk Assessment framework in ICAAP, the bank had kept
almost all levels of perceptions relating to reputational risk as ‘Low’ and not
taken into consideration the number of incidents weighing against the reputation
of the bank (a. Litigation by a customer , where the bank was directed to pay
compensation of `0.5 mn by consumer court b. Penalty of `50 mn by RBI for
KYC/AML guideline violations c. Temporary ban on issuing of Prepaid card, etc)
(iv) Under Compliance Risk in ICAAP, only policies and procedures followed were
mentioned. The assessment of risk was not evident.
(v) Under Management Risk, more than assessment of risk, it contained only the
steps the bank was taking and the risk level was kept as ‘Low’. It did not take
into consideration, the remarks of regulator especially w.r.t. ‘Fit and Proper’
criteria. The bank was self certifying itself for being compliant with ‘Fit and
Proper criteria’ prescribed by RBI whereas an adverse observation was made in
RAR2013.
(vi) The bank had not included Model Risk in its ICAAP to have as a part of its
comprehensive assessment of all risks.
(vii) There were deficiencies identified in Stress Testing carried out by the bank,
leading into inadequate assessment of risk capital by the bank under ICAAP.
(viii) Along with other material risks, the bank identified Settlement risk, Reputational
Risk, Business and Strategic Risk as material risks. The bank assessed these
risks qualitatively and no capital requirement was calculated for the same.
Page 29 of 39
(ix) The preparedness of the bank for moving towards advanced approaches was
not articulated in the ICAAP document.
(x) Systems Risk was not captured under Operational Risk.
(d) Stress Testing

(i) The bank did not use the results of Stress testing (NII impact and Stress Gap) in
determining its liquidity risk appetite.
(ii) For Liquidity Risk, in building scenarios for stress testing, the bank was not using
historical stress events witnessed in financial markets such as Financial Crisis of
2007-08, European Sovereign Debt Crisis, etc. Such an approach would help the
bank build more realistic scenarios.
(iii) For Market Risk, the stress test conducted by the bank covered interest rate risk,
exchange risk and equity price risk. However, the capital provided for equity
portfolio loss was found to be inadequate (except in March 2014 when it was just
adequate) throughout the year under stress conditions. While the bank was
conducting the tests periodically, there was no integration of the stress test
results with business strategy.
(iv) Operational risk events were not incorporated in bank's stress testing carried out
as a part of ICAAP.
(v) There was no evidence that the stress test results were used in capital planning
exercise in any manner.
(vi) The bank had stopped presenting quantified impact assessment to RMC on
stress test results and had instead submitted generic descriptions.
(vii) The audit also pointed out inadequacies in linkage between stress testing and
risk limits framework.
3. Assessment of Internal Generation of Capital

The details of the components of income contributing to the internal generation of
capital are given in Annex 5:
(i) The gross stable income and net stable income saw an increasing trend over the
past 3 years. The gross stable income grew by 11.88% and net stable income
grew by 18.04% over last year.
(ii) The reported profit of the bank increased by 20.05% over last year.
(iii) Dividend payout ratio was 15.15% for FY-14. It stood at 16.21% for FY-12 and
16.77% for FY-13.
Page 30 of 39
(iv) The bank projected a net profit of `73440 mn for the next FY -15 (a projected
growth of around 18%). The actual profit was less by 1.59% over the budgeted
profit for the FY -14.
(v) The present inspection identified additional provisioning requirement of `193 mn

on account of NPAs, `0.25 mn for shortfall in standard asset provisioning, `26
mn for shortfall in providing for other assets and `12 mn claims not
acknowledged as debt.
4. Scope & ability to infuse capital
(i) The bank’s paid up capital was `4698 mn against authorized capital of `8500
mn. Thus, there was an additional head room of `3802 mn for infusion of equity.
Also the head room available for Perpetual Debt Instruments (Additional Tier I
capital) was `102270 mn. Similarly, the head room available for raising Tier 2
bonds was `7914 mn.
(ii) The bank had not planned to infuse equity or raise any debt for the FY -15.
However, the bank had planned to infuse capital of `2550 mn towards
capitalization of its subsidiaries – Axis Bank UK Ltd (`900 mn), Axis Finance Ltd
(`1000 mn), Axis AMC Ltd (`564 mn) and Axis securities Europe Ltd (`86 mn).
(iii) Going ahead, in medium term, the bank may raise capital to meet Basel III
requirements. It may be challenging for the bank to raise capital due to similar
demand from most of the banks in the industry.
5. Assessment of Leverage Ratio

The bank reported a leverage ratio 6.98% as on March 31, 2014 as against the
leverage ratio of 6.65% reported by the bank in the previous year. The assessed
leverage ratio was 6.95% against the assessed leverage ratio of 6.62% the last year.
However, the leverage ratio maintained was above the minimum mandatory
requirement of 4.5%. Details are given in Annex-6.
Page 31 of 39
PART IV: MAJOR AREAS OF NON-COMPLIANCE (REGULATORY GUIDELINES)
Sl. Regulation Area / Subject of Non-Compliance Nature & Description

No Reference of Non- Compliance
(Para &
Circular no.)
Identified by SSM
1 Part 1 B.11(ii) - Part Drawings /Undrawn Balances - In The bank does not have a
RBI/2012-13/14 cases where the exporter has not been able system in place to identify the
Master Circular to arrange for repatriation of the undrawn undrawn balances separately
No. 14 /2012-13 balance in spite of best efforts, AD Category and hence monitoring was
– I banks, on being satisfied with the bona not in line with the guideline.
fides of the case, should ensure that the
exporter has realised at least the value for
which the bill was initially drawn (excluding
undrawn balances) or 90 per cent of the
value declared on GR/PP/SDF form,
whichever is more and a period of one year
has elapsed from the date of shipment.
2 C.15 (i) - Follow-up of Overdue Bill - AD Category I The bank was submitting
RBI/2012-13/14 banks should closely watch realization of reports monthly to RBI for
Master Circular bills and in cases where bills remain delays beyond 12 months in
No. 14 /2012-13 outstanding, beyond the due date or 12 realization of bills. As a
months from the date of export, the matter onetime measure, in
should be taken up with the exporter. If the November 2013, the bank
exporter fails to arrange for delivery of the submitted all the pending
proceeds within 12 months or seek cases to RBI and from next
extension of time beyond 12 months, the month onwards, only
matter should be reported to the Reserve incremental reporting was
Bank stating the reason for the delay in done by the bank, instead of
realizing the proceeds. submitting all the pending
cases.
3 Section V (i) - Reporting of inflow - The bank should A number of cases were not
Master Circular report the actual inflows on account of fresh reported beyond 30 days and
No.15/2012-13 issuance of shares and the Indian company several instances were found
dated July 02, receiving investment under FDI scheme where reporting was not
2012 should report the details of consideration to done even beyond 3 months.
RBI through its AD Category bank, not later
than 30 days from the date of receipt.
Page 32 of 39
(Para &
Circular no.)
4 Section V(ii) - Time frame within which shares have to There were several
Master Circular be issued - The equity instruments should occasions where shares
No.15/2012-13 be issued within 180 days from the date of were not issued for 180 days
dated July 02, receipt of the inward remittance or by debit and even up to 1 year. There
2012 to the NRE/FCNR (B) /Escrow account of the were many other cases of
non-resident investor. If not, the amount of FCGPR pending submission.
consideration so received should be
refunded immediately to the non-resident
investor.
5 5.11 - DBOD Opening of Current Accounts Need for In sample cases (four out of
No.Leg.BC. 21 discipline - Banks should scrupulously ten), No-Objection Certificate
/09.07.006/2012- ensure that their branches do not open was not obtained for opening
13 current accounts of entities which enjoy current accounts though the
credit facilities (fund based or non-fund borrower had credit facilities
based) from the banking system without with other banks (FCI, RIL,
specifically obtaining a No-Objection Bharati International,
Certificate from the lending bank(s). Banks Singapore & Netherlands).
should note that non-adherence to the above
discipline could be perceived to be abetting
the siphoning of funds and such violations
which are either reported to RBI or noticed
during our inspection would make the
concerned banks liable for penalty under
Banking Regulation Act, 1949.
6 Para 4.2.10 - Indirect Finance for Agriculture and Allied The bank sanctioned an
RPCD.CO.RRB.B Activities - In terms of master circular on overdraft against deposit
C.No.7/ priority sector, bank lending to primary (100% margin) of `250 mn to
03.05.33/2013-14 agricultural credit societies in excess of `20 the Jila Sahakari Kendriya
dated July 1, 2013 mn can be classified as indirect finance to Bank Maryadit, Mandsaur, a
agriculture. The mandate of DCCBs is District Co-operative Central
essentially to grant loans to PACS. Loans Bank of MP. The advance
only to MFIs and RRBs for on-lending to was classified as indirect
agriculture and allied activities can be finance to agriculture under
classified as PSL under Indirect Finance to priority sector whereas only
Agriculture. loans to MFIs and RRBs for
on-lending to agriculture and
allied activities could be
Page 33 of 39
(Para &
Circular no.)
classified as indirect finance
to agriculture. Therefore this
advance is declassified from
priority sector.
7 Para 1.11 (h) - Rate-Scan Reports - In those banks where The bank conducted rate
FE.CO.FMD. No. the system does not provide the facility, scan process only once at
18380 Rate-Scan reports are prepared at least 5pm, as against the
/02.03.137/2010- thrice a day (viz. at opening hours, afternoon requirement of minimum
11 dated February and closing hours) and deals at wide thrice a day as per internal
3, 2011 variance with the ongoing market rates are control guidelines.
enquired into.
8 Para 1.1.8 - Review of Investment Transactions - Half yearly investment review

DBOD No BP.BC. Banks should undertake a half-yearly review was submitted to Board with
8/ 21.04.141/ (as of March 31 and September 30) of their a delay of more than a month
2013-14 dated investment portfolio, which should, apart (in June instead of by April
July 1, 2013 from other operational aspects of investment 2014).
portfolio, clearly indicate amendments made
to the Investment Policy and certify
adherence to laid down internal investment
policy and procedures and the Reserve Bank
guidelines, and put up the same before their
respective Boards within a month, i.e. by
end-April and end-October.
9 Para 5 - Net Open Position Limit Calculation: Regarding calculation of

RBI/2012- 13/426 Transactions undertaken by Authorised NOPL, the bank did not have
A. P. (DIR Series) Dealers till the end of business day may be end of business day time
Circular No. 86 computed for calculation of Foreign approved by the Board.
dated March 1, Exchange Exposure Limits. The transactions
2013 undertaken after the end of business day
may be taken into the positions for the next
day. The end of day time may be approved
by the bank's Board.
10 Para 8.3.4 (d) - Derivative Deals: As regards In some cases, derivative

RBI/2011-12/243 documentation with counterparty banks and deals were undertaken
DBOD.No.BP.BC. with clients, banks should enter into ISDA. without ISDA.
44
Page 34 of 39
(Para &
Circular no.)
/21.04.157/2011-
12 dated
November 2, 2011
11 Para 24 - Liquidity Stock Ratio - Certain critical ratios The bank had not set Board
DBOD.BP.No.56/2 in respect of liquidity risk management and approved limits for liquidity
1.04.098/ 2012-13 their significance for banks are calculated stock ratios till date.
dated November through Liquidity stock ratios. Banks may
7, 2012 monitor these ratios by putting in place an
internally defined limit approved by the
Board for these ratios.
12 Para 56 - Report on Structural Liquidity - STL for overseas operations

DBOD.BP.No.56/2 Management of operational liquidity or was monitored on weekly
1.04.098/2012-13 liquidity in the short-term is expected to be basis instead of daily basis.
dated November delegated to local management as part of
7, 2012 local treasury function. For measuring and
managing net funding requirements, a
statement on structural liquidity in respect of
overseas operations may be prepared on a
daily basis and should be reported to the
Reserve Bank on monthly basis.
13 Para 6 – Centralised List of Outsourced Agents - If The bank had terminated

Guidelines on a service providers services are terminated contracts of some third party
Managing Risks by a bank, IBA would have to be informed vendors for certain breaches
and Code of with reasons for termination. IBA would be but it had not informed IBA
Conduct in maintaining a caution list of such service as required in the RBI
Outsourcing of providers for the entire banking industry for Guidelines on Outsourcing.
Financial Services sharing among banks.
by banks Dated
November 3, 2006
14 Table 14 - Standard Supervisory Haircuts – Domestic The haircuts applied for

DBOD.No.BP.BC. debt securities (Bonds with AAA rating) for stress scenarios to bonds
2 greater than 5 year residual maturity should rated AAA with tenor greater
/21.06.201/2013- attract 8% haircut. than 5 years were lower at
14 5% instead of 8% haircut.
Page 35 of 39
(Para &
Circular no.)
15 Para 54 - Contingency Funding Plan - Contingency CFP was not actually tested
DBOD.BP.No.56/2 plans must be tested regularly to ensure to ensure its effectiveness
1.04.098/ 2012-13 their effectiveness and operational feasibility and operational feasibility for
dated November and should be reviewed by the Board at further review by the Board at
7, 2012 least on an annual basis. least on an annual basis
16 Para 6.13 - Annual Report on Breaches - An Annual The annual report on all
Compliance Report on compliance failures/breaches compliance failure/ breaches
function in banks should be compiled and placed before the was not placed before the
dated April 20, Board/ACB/Board Committee and circulated board / ACB as mandated in
2007 to all the functional heads. RBI guidelines
17 Para 1 (1.1) - Fixing of Interest rates - RBI has given the Though bank’s own board
DBOD.No.Dir.BC. freedom to commercial banks to fix their own approved internal policy
10/13.03.00/2013- Interest rates on domestic term deposits of required that deposit rates
14 dated July 1, various maturities with the prior approval of could be changed by ALCO
2013 their respective Board of Directors/Asset sub-committee (2 members)
Liability Management Committee. (ALCO). which itself was a violation of
regulatory guidelines, the
rates were changed by
Treasury on several
occasions with post facto
ratification by sub-committee
which indicated that the bank
was still bidding for deposits.
18 Para 1 (1.1) - Fixing of Interest rates - RBI has given the The bank had several
DBOD.No.Dir.BC. freedom to commercial banks to fix their own MIBOR linked floating rate
10/13.03.00/2013- Interest rates on domestic term deposits of deposits with RITES Ltd. –
14 dated July 1, various maturities with the prior approval of the rates for which had been
2013 their respective Board of Directors/Asset fixed directly by Treasury in
Liability Management Committee. (ALCO). violation of regulatory and
internal guidelines
19 Para 57 (iii) – Monitoring of Overseas Limits - The limits The bank was not monitoring
DBOD.BP.No.56/2 on maturity mismatches shall be established ratios mandated for overseas
1.04.098/ 2012-13 within the following tolerance levels: (a) long centres resulting in several
dated November term resources should not fall below 70% of breaches in long term
7, 2012 long term assets; and (b) long and medium resource requirements.
term resources together should not fall below
80% of the long and medium term assets.
Page 36 of 39
(Para &
Circular no.)
These controls should be undertaken
currency-wise, and in respect of all such
currencies which individually constitute 10%
or more of a bank’s consolidated overseas
balance sheet. Netting of inter-currency
positions and maturity gaps is not allowed.
20 Annex II (B) (2)- Excess SLR under Day 1 bucket - While In preparing the structural
DBOD.No.BP.BC. the excess balance over the required liquidity statement, the bank
38/21.04.098/200 CRR/SLR may be shown under Day 1 was bucketing the excess
7-08 dated bucket, the Statutory Balances may be SLR (daily average approx
October 24, 2007 distributed amongst various time buckets `100000 mn) in day one
corresponding to the maturity profile of DTL bucket instead of bucketing
with a time-lag of 14 days. as per defeasance period.
Identified by the bank

1 2.4 - Customer Identification Procedure (CIP) - There were gaps observed in
DBOD.AML.BC.N In case of legal entity, banks should identify capturing the BO details in
o.11/14.01.001/20 the Beneficial Owners (BO?) and verify their the declaration, Finacle
12-13 dated July identities. System and Customer IDs
2, 2012 was not created for beneficial
owners. As Customer IDs are
not created for BOs, ongoing
screening against the
negative lists of RBI was not
being done. For the accounts
tested as of April 2014,
irregularities found in the BO
details captured in Finacle,
and in the declaration.
2 2 - A.P. (DIR Money changing activities - APs may Manual control was
Series) Circular receive payment only by crossed cheque ineffective to ensure cash
No.33 dated drawn on the bank account of the applicant's deposit in tranches by non-
24/09/2012 firm / company sponsoring the visit of the customers which do not
applicant / Banker's cheque / Pay Order breach the regulatory limit of
/Demand Draft / debit cards / credit cards / `50,000 within 30 days from
prepaid cards, if the rupee payment exceeds the first date of his journey
`50,000/-. For sale of foreign exchange to a outside India for travel
Page 37 of 39
(Para &
Circular no.)
person within his/her eligibility through more purpose.
than one drawal within 30 days or for a
single journey/visit abroad, APs may receive
second and subsequent payments only by
crossed cheque drawn on the bank account
of the applicant's firm/company sponsoring
the visit of the applicant/Bank's cheque / Pay
Order / Demand Draft / debit cards / credit
cards / prepaid cards, if the total rupee
payment, including payments on earlier
drawal /s, exceeds `50,000/- on the second
or subsequent drawals.
3 Annexure I Para Reporting to Financial Intelligence Unit The MTSS transactions

4.12 (iv) a - India - In terms of the PML rules, APs effected for walk in
Master Circular (Indian Agents) are required to report customers were not
No. 1 /2012-13 information relating to cash and suspicious monitored or reported under
July 02, 2012 transactions to the Director, Financial CTR.
Intelligence Unit-India (FIU-IND) in respect of
transactions referred to in Rule 3.
4 2 - RBI/2013- Reporting of Cross Border Wire Transfer With regard to Cross Border
14/544 DBOD. Report on FINnet Gateway - Every Wire Transfer reporting, the
AML. No. reporting entity is required to maintain the system enablement for
16415/14.01.001/ record of all transactions including the record generating the said report
2013-14 dated of all cross border wire transfers of more was absent.
28.03.2014 than ` 0.5 mn or its equivalent in foreign
currency, where either the origin or
destination of the fund is in India. FIU-IND
has advised that the information of all such
transactions may be furnished to Director,
FIU-IND by 15th of the succeeding month
5 2- Beneficial Owner - Banks shall identify the There were gaps observed in
DBOD.AML.BC.N Beneficial Owner (BO) and take all capturing the BO details in
o.71/14.01.001/20 reasonable steps to verify his identity. Where the declaration, Finacle
12-13 dated the client or the owner of the controlling System and Customer IDs
January 18, 2013 interest is a company listed on a stock were not created for
exchange, or is a majority-owned subsidiary beneficial owners. As
of such a company, it is not necessary to Customer IDs were not
Page 38 of 39
(Para &
Circular no.)
identify and verify the identity of any created for BOs, ongoing
shareholder or beneficial owner of such screening against the
companies. Banks may review their KYC negative lists of Beneficial
policy in the light of the above instructions Owners was not being done.
and ensure strict adherence to the same. For the accounts tested as of
April 2014, irregularities were
found in the BO details
captured in Finacle, and in
the declaration.
6 A.1 - Master Remittance exceeding the specified limits No system in place to

Circular No. - In respect of transactions included in integrate outward remittance
6/2012-13 dated Schedule III to the Foreign Exchange by the customer according to
July 2, 2012 Management (Current Account Transactions) client and purpose to ensure
Rules, 2000, prior approval of the Reserve that the regulatory caps were
Bank would be required for remittance not breached for all
exceeding the specified limits. remittances namely outward
remittance, foreign currency,
FCY DD, foreign travelers’
cheques (including TCDC).
7 2 (A) (i) - DPSS Security and Risk Mitigation Measures for It was observed that 252
(CO) PD Card Present Transactions - The banks magnetic stripe credit cards
No.1462/02.14.00 should issues all new debit and credit cards were issued with a provision
3 / 2012-13 dated only for domestic usage unless international for usage internationally.
February 28, 2013 use is specifically sought by the customer.
Such cards enabling international usage will
have to be essentially EMV Chip and Pin
enabled. (By June 30, 2013)
Page 39 of 39
Part V: Annex
Annex-1: Major Areas of Financial Divergence
Divergence in Provisioning
A – Re-classification of Standard Assets

(In ` mn)
Borrower Date Faci Net Date of NPA Classific Security/ Provision Remarks
Name of Last lity Out ation valuation
Sanc- Type Stan details
tion ding
As per Bank
As per Bank
As per Bank
As per SSM
As per SSM
As per SSM
Required
Shortfall
Held
Sabari Roller 25.3.13 Fund 59 - 29.1.14 Std SS 51 51 - 9 9
Flour Mills Based Details in
Vibha Agrotech 30.9.13 Fund 1126 - 30.9.13 Std SS 2081 2081 63 169 106 Appendix I
Ltd. Based
Total 1185 63 178 115
B – Re-classification / Short Provisions of NPAs

(In ` mn)
Borrower Date of Facility Net Date of NPA Classificati Securi Provision Remar
Name Last Type Out on ty/valu k
Sanction Stan ation
ding details
As per Bank
As per Bank
As per Bank
As per SSM
As per SSM
As per SSM
Required
Shortfall
Held
MMS
Fund SS
Infrastructure 28.6.13 21 31.3.14 31.3.14 Loss - - 3 21 18
Based
Ltd
Ajai Kumar & Fund
20.3. 12 50 18.9.12 18.9.12 D1 Loss - - 35 50 15
Co Based
Fund Detail
Abhay Traders 20.3. 12 50 16.9.12 16.9.12 D1 Loss - - 35 50 15
Based s in
Appe
Abhay Trading Fund
16.3. 12 50 13.9.12 13.9.12 D1 Loss - - 35 50 15 ndix I
Co Based
Fund
20.3. 12 50 17.9.12 17.9.12 D1 Loss - - 35 50 15
Based
Total 221 143 221 78
Page 1 of 13
Other Assets
(In ` mn)
Details of Receivables Remarks
Provision
Held Required Shortfall
ATM/BNA Short Cash 32 34 2 Full amount to be provided on account of

ATM cash shortage
Claims against Bank for 303 311 8 The shortfall pertains to items under ‘others’
Fraud & Others for which the bank was not able to provide
the details. Hence considered intangible.
Others 4 18 14 Provision on account of suit expenses
recoverable, lost card claims beyond 90 days
and the item ‘others’ for which details were
not furnished. Hence considered intangible.
Clearing 0 2 2 Pending for more than 3 months. Mostly the
cases of payment due to oversight.
Total 339 365 26
Claims Not Acknowledged as Debt

The outstanding legal cases were classified into
a) Probable –100% provisioning is made
b) Possible – Disclosed as contingent liability under Schedule 12 of Balance Sheet
c) Remote - No action/ disclosure (In ` mn)
d)
e)
f)
Details of Non- Acknowledged Debts Provision Remarks
Held Required Shortfall

Complaint w.r.t misplacement of Title 0 2 2 The bank has classified it as
Deeds was filed by possible case. However, the legal
against RAC branch department mentioned ‘high
chance”. Hence Probable case
Allegation of fraudulent withdrawal of cash 3 11 8 These cases appear to be
from the account. ‘probable’ as the District Forum
had passed judgments against
There are quite a few cases of this nature. the bank.
Complainants - Branch Name details are
 - Madhyamarg
 – Madhyamarg
 - Madhyamarg
 Madhyamarg
 - Madhyamarg
 - Madhyamarg
 – Madhyamarg
– complaint on 0 2 2 Though it appears as a ‘probable
auctioning of fraudulent property by the case’ the bank has classified it as
bank remote case
g)
Total 3 15 12
h)
Page 2 of 13
Standard Asset Provision
(In ` mn)
Standard Assets- Out Standing Provision Remarks
Portfolio details Held Required Shortfall
Trader’s accounts were
PSL (Direct
165.69 0.41 0.66 0.25 wrongly included on
Agriculture)
Priority Sector Lending
Total 165.69 0.41 0.66 0.25
Divergence in RWA
(In ` mn)
As per NCAF
Particulars
As per bank As per SSM
Remark
Additional risk weights due to wrong rating of
counterparties, wrong risk weights for claims on
Credit Risk – RWA 2415935 2426955
foreign banks, CME, CRE and non- inclusion of risk
charge for counterparty risk on ‘sold’ options.
Market Risk – RWA 202228 202228
Operational Risk – RWA 219913 219913
Total RWA 2838076 2849096
Page 3 of 13
Priority Sector Classification
(In ` mn)
Sl. Parameters Amount reported Misclassifi- Actual Shortfall Reasons for
No by bank cation Achievement declassification
identified by as assessed by
Target Achieved SSM SSM
Total
1 Priority 651,845 747,542 1,704 745,838
Sector
ECGC claims
received and
Direct
2 219,998 110,943 211 110,732 Traders' accounts
Agriculture 109,266
were wrongly
included
Indirect
3 73,333 73,333 - 73,333
Agriculture
4 Education 363 - 363
Ineligible borrowers
5 SME 275,234 273,787
1,447 included under SME
6 Housing 199,944 - 199,944
Others Loan to a DCCB

7 Priority 66,390 46 66,344 wrongly included in
Sector Indirect Agriculture
Investment
in
Securitised
8 assets 21,336 - 21,336
eligible for
PSL (PTC
investments)
As per Bank As per SSM

Adjusted Net Bank Credit 1629612 1629612
Page 4 of 13
Annex-2: Computation of Outside Liabilities
Sr.
Particulars Amount (In ` mn)
No.
A Total Liabilities excluding capital & reserves as
on March 31, 2014 3477039
Upper Tier II Instruments 15649
Subordinated debt 103508
Deposits 2809446
Borrowings 383752
Other liabilities and provisions 164684
B Internal Liabilities 48121
Provision for standard assets 12970
Provision for diminution in fair value of
4424
restructured accounts
Provision for NPAs 19622
Floating provision 33
Provision for NPI 1241
Provision for depreciation in investments 1233
Balance in Sundry Liabilities – Interest Capitalisation
241
FITL NPA Accounts
Provision for frauds & Contingencies 8357
C Total outside liabilities [A-B] 3428918
Page 5 of 13
Annex-3: Assessed Net Worth
Sr.
Particulars Amount (In ` mn)
No.
A Paid up capital [including ESOP outstanding & interest 4698
free funds from H.O. (foreign banks)]
B Reserves and Surplus 377507
Statutory Reserve 66919
Share Premium 158972
Capital Reserve (excluding revaluation reserve) 9849
Special Reserve 0
Revenue Reserve 0
General Reserve 3543
Investment Allowance Reserve/Investment Reserve 1035
Remittable surplus retained in Indian books [Foreign banks] 0
Credit Balance in P&L A/c 135014
Foreign Currency Translation Reserve 2138
Reserve Fund 37
C Intangible assets (including net deferred tax assets) & 17336
accumulated losses
D Net Worth (book value) [A+B-C] 364869
E Adjustments following inspection findings 1266
Investment Reserve Account 1035
Additional Loan Loss Provision 193
Shortfall in Standard Asset Provisioning 0*
Net Deferred Tax Asset 0
Understatement of Liabilities 0
Any other Item to be specified – (shortfall in the
provisioning of other assets and claims not acknowledged as
debt) 38
F Assessed net worth or real/exchangeable value of paid 363603
up capital and reserves [D-E]
G Reported net worth of the bank [if different from (D)] -
* Standard asset provisioning being `0.25 mn reported as ‘0’ after rounding off
Page 6 of 13
Annex-4: Computation of Assessed Capital
Eligible
Sr. No. Particulars / Items amount
(In ` mn)
Computation of Common Equity Tier 1 capital (CET1)

A Common Equity Tier 1 capital (CET1): instruments and 379032
reserves before regulatory / supervisory adjustments
B Total regulatory adjustments / deductions 20977

C Reported Common Equity Tier 1 capital (CET1) [A-B] 358055
D Adjustments / deductions applied on CET 1 following 1266

Inspection for Supervisory Evaluation (ISE) findings under RBS
1 Additional Loan Loss Provision 193

2 Shortfall in Standard Asset Provisioning 0*
3 Understatement of Liabilities 0
4 Net Deferred Tax Asset 0
5 Investment Reserve Account 1035
6 Any other item to be specified-(shortfall in the provisioning of other 38
assets and claims not acknowledged as debt)
E Assessed Common Equity Tier 1 capital (CET1) [C-D] 356789
Computation of Additional Tier 1 capital (AT1)

F Additional Tier 1 capital (AT1) : instruments before regulatory 3962
adjustments
G Total regulatory adjustments to Additional Tier 1 capital 13911
H Reported AT1 capital available [F-G] 0

I Adjustments / deductions applied on AT1 following ISE 0
findings
1 Net Deferred Tax Assets 0
2 Any other item to be specified 0
J Assessed AT1) capital available [H-I] 0
K Reported AT1 admissible for capital adequacy (Basel III Cap) 0
Page 7 of 13
L Assessed AT1 admissible for capital adequacy (Basel III Cap) 0
Computation of Tier 1 Capital (T1)

M Reported Total Tier 1 (T1) capital available [C+H] 358055
N Assessed Tier 1 (T1) capital available [E+J] 356789

O Reported Tier 1 capital (T1 ) admissible for capital adequacy 358055
[C + K]
P Assessed Tier 1 capital (T1) admissible for capital adequacy 356789
[E+L]
Computation of Tier 2 Capital (T2)
Q Tier 2 capital: instruments and provisions 102100
R Tier 2 capital: regulatory adjustments 4195
S Tier 2 capital available [Q-R] 97905
T Reported Total Tier 2 (T2) capital available, including excess 97905
AT1
U Adjustments / deductions applied on T2 following ISE findings 0
1 Add: Additional Standard asset provisions 0*

V Assessed Tier 2 (T2) capital available (T + U) 97905
W Reported T2 admissible for capital adequacy (Basel III Cap) 97905
X Assessed T2 admissible for capital adequacy (Basel III Cap) 97905
Computation of Total Capital (TC)

Y Reported Total capital (TC) available [M+T] 455960
Z Assessed Total capital (TC) available [N +V] 454694
AA Reported Total capital (TC) admissible for capital adequacy 455960

[O+W]
BB Assessed Total capital (TC) admissible for capital adequacy 454694
[P + X]
Risk Weighted Assets (RWAs)
Page 8 of 13
CC Total risk weighted assets (RWAs) 2838076
DD Adjustments / additions applied on RWAs following Inspection 11020
for Supervisory Evaluation (ISE) findings under RBS
1 Additional RWAs 11020

EE Assessed RWAs [CC-DD] 2849096
Capital Ratios / Summary [based on admissible capital]
FF Reported Common Equity Tier 1 (CET1) Ratio [C/CC*100%] 12.62
GG Reported Tier 1 (T1) or Core Capital Ratio [O/CC*100%] 12.62
HH Reported Tier 2 (T2) Capital Ratio [W/CC*100%] 3.45
II Reported Total capital (TC) Ratio or CRAR [AA/CC*100%] 16.07
JJ Assessed Common Equity Tier 1 (CET1) Ratio [E/EE*100%] 12.52
KK Assessed Tier 1 (T1) or Core Capital Ratio [P/EE*100%] 12.52
LL Assessed Tier 2 (T2) Capital Ratio [X/EE*100%] 3.44
MM Assessed Total capital (TC) Ratio or CRAR [BB/EE*100%] 15.96
*standard asset provisioning being `0.25 mn reported as ‘0’ after rounding off.
Capital Ratios / Summary [based on available capital]
NN Reported Common Equity Tier 1 (CET1) Ratio [C/CC*100%] 12.62
OO Reported Tier 1 (T1) or Core Capital Ratio [M/CC*100%] 12.62
PP Reported Tier 2 (T2) Capital Ratio [T/CC*100%] 3.45
QQ Reported Total capital (TC) Ratio or CRAR [Y/CC*100%] 16.07
RR Assessed Common Equity Tier 1 (CET1) Ratio [E/EE*100%] 12.52
SS Assessed Tier 1 (T1) or Core Capital Ratio [N/EE*100%] 12.52
TT Assessed Tier 2 (T2) Capital Ratio [V/EE*100%] 3.44
UU Assessed Total capital (TC) Ratio or CRAR [Z/EE*100%] 15.96
Page 9 of 13
Annex-5: Assessment of Internal Generation of Capital
(In ` mn)
Sr. No Break-up of income and expenditure Current FY (T-1) FY (T-2)
FY (T) (Mar-13) (Mar-12)
(Mar 14)
1 Total Interest/discount Income (2+3+4+5) 306411 271826 219947
2 Interest/discount on advance/bills 219504 191662 153794
3 Income on investments 83431 77470 63943
4 Interest on balances with RBI 1668 1113 984
Interest on market lending/ Income on other 1808 1581 1226
5 interest earning assets
6 Fee based & stable misc. income [6(a)+6(b) 54081 50399 43618
6a Fee based income 53938 50251 43417
6b Misc. income from stable sources 143 148 201
7 Gross stable income (1+6) 360492 322225 263565
8 Interest Expended (9+10) 186895 175163 139769
9 Interest on deposits/ all other interest expense 154589 150155 121836
10 Interest on borrowings 32306 25008 17933
11 Net Stable Income (7-8) 173597 147062 123796
12 Income from trading 3276 5863 728
Realised gains on derivatives (P&L on forex 15177 6641 6740
13 operations)
14 Gains on sale of asset -348 -103 187
15 recovery from w/offs 1839 2685 2918
Extra-ordinary income/ Dividend income & 28 26 11
16 other miscellaneous income
17 Gross volatile income (12+13+14+15+16) 19972 15112 10584
Provisions and contingencies (excluding 11879 8895 4212
18 tax) (19+20+21)
19 Provisions for Loan losses 3764 3182 1386
20 Provisions for depreciation in investments/NPI -1003 -1039 581
21 Other provisions 9118 6752 2245
22 Extra-ordinary expenses 0 0 0
23 Write-offs 9196 8610 7219
Page 10 of 13
24 Net Volatile Income (17-18-22-23) -1103 -2393 -847
Assessed provision by supervisor 231 1439 1539
25 (26+27+28+29+30+31+32+33)
26 Provisions for frauds 0 0 0
193 1364 1475
27 Provisions for understatement of NPAs
Provisions for divergence in evaluation of 0 0 0
investments and other assets between the
assessment made by the bank and the
28 supervisory officer
29 Provisions for un-reconciled entries 0 0 0
Provisions for claims not acknowledged as 12 30 13
30 debt
31 Provisions for derivatives 0 0 0
Provisions for wage settlements, pension & 0 0 0
32 gratuity
33 Other Provisions (other assets) 26 45 51
34 Assessed net volatile Income (24-25) -1334 -3832 -2386
35 Reported net total income (11+24) 172494 144669 122949
36 Assessed net total income (11+34) 172263 143230 121410
37 Operational expenses (38+39+40) 79008 69142 60071
Staff expenses, Director’s fees/Board 26024 23785 20810
38 Members’ fees & expenses
39 Depreciation on bank’s property and repairs 9897 9376 8717
40 Other Operating Expenses 43087 35981 30544
41 Provisions for tax 31309 23733 20456
42 Reported profit (35-37-41) 62177 51794 42422
43 Assessed profit (36-37-41) 61946 50355 40883
44 Dividend paid (excluding tax) 9414 8441 6628
45 Assessed Retained Earnings (43-44) 52532 41914 34255
Page 11 of 13
Earnings Stability / Volatility Assessment
Sr. Earnings / Profit Ratios Current FY T-1 FY T-2

No FY T (Mar-13) (Mar-12)
(Mar 14)
46 Gross Stable Income / Interest Expended
[7/8*100%] 192.88 183.96 188.57
47 Net Stable Income / Assessed Profit
[11/43*100%] 280.24 292.05 302.81
48 Gross Volatile Income / (Provisions &
Contingencies + Extraordinary Expenses +
Write-offs) [17/(18+22+23)*100%] 94.77 86.33 92.59
49 Assessed Net Volatile Income / Assessed Profit
[34/43*100%] -2.15 -7.61 -5.84
50 Assessed Retained earnings / Assessed Profit
[45/43*100%] 84.80 83.24 83.79
51 Actual vs. budgeted income [expressed as +ve /
-ve percentage] -2.09 -1.31 1.52
52 Actual vs. budgeted profit [expressed as +ve / -
ve percentage] -1.59 0.07 3.85
53 Gross MTM Gains on Derivatives [as shown in
Balance sheet as on March 31, 2014) 12,712 6,679 3,849
54 Gross MTM Losses on Derivatives [as shown in
Balance sheet as on March 31, 2014) -2,112 -1,220 0
Page 12 of 13
Annex-6: Leverage Ratio
Sr. No. Particulars Reported by Assessed by
Bank SSM
A Basel III Tier 1 Capital (T1) 358055 356789
B Total Assets 5132691 5132691

On balance sheet 3904968 3904968
Derivatives 102224 102224
Credit Contingent Commitments 1125499 1125499
Any other component 0 0
C Leverage Ratio (A/B*100%) 6.98% 6.95%
Page 13 of 13

Axis Inspection Report FY13-14

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Axis Inspection Report FY13-14

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RESERVE BANK OF INDIA

Axis Bank Limited

Risk Assessment Report (RAR)

Findings on Risks and Control Gaps Assessed ........................................................ 3

Governance & Oversight........................................................................................... 3

Credit Risk ................................................................................................................ 9

Market Risk ............................................................................................................. 12

Liquidity Risk ........................................................................................................... 16

Operational (Non- IT) Risk ...................................................................................... 19

Operational (IT) Risk ............................................................................................... 22

Pillar II Risk ............................................................................................................. 23

Part II: Major Areas of Financial Divergence ............................................................. 26

Capital Management, ICR, ICAAP and Stress Tests .............................................. 28

Assessment of Internal Generation of Capital......................................................... 30

Scope & ability to infuse capital .............................................................................. 31

Assessment of Leverage Ratio ............................................................................... 31

Part IV: Major Areas of Non-Compliance ................................................................. 32

Annex-2: Computation of Outside Liabilities ............................................................. 4

Annex-3: Assessed Net Worth .................................................................................. 6

Annex-4: Computation of Assessed Capital.............................................................. 7

Annex-5: Assessment of Internal Generation of Capital ......................................... 10

Annex-6: Leverage Ratio ........................................................................................ 13

PART I: PRELIMINARY RISK ASSESSMENT REPORT

Summary of Aggregate Risk at Bank Level

Inherent Risk Control Gap Aggregate Risk

Senior Management 1.924

Risk Governance 2.489

Internal Audit 1.560

Credit Risk 2.436 2.137 2.346

Market Risk 2.099 2.331 2.168

Liquidity Risk 2.487 2.447 2.475

Operational (non-IT) Risk 2.057 2.109 2.072

Operational (IT) Risk 1.907 1.940 1.917

Other Pillar II Risk 1.572 1.552 1.566

BANK LEVEL AGGREGATE RISK 2.175

1. Governance & Oversight: Aggregate Score (1.906)

Major findings/ observations

2. Credit Risk: Aggregate Score (2.346)

2.1 Inherent Risk Score: 2.436

3. Market Risk: Aggregate Score (2.168)

3.1 Inherent Risk Score: 2.099

4. Liquidity Risk: Aggregate Score (2.475)

4.1 Inherent Risk Score: 2.487

5. Operational (Non- IT) Risk: Aggregate Score (2.072)

5.1 Inherent Risk Score: 2.057

6. Operational (IT) Risk: Aggregate Score (1.917)

6.1 Inherent Risk Score: 1.907

7. Pillar II Risk: Aggregate Score (1.566)

7.1 Inherent Risk Score: 1.572

1. Divergences (shortfall) in Provisioning

Areas/ Description Shortfall

2. Divergence in Risk Weighted Assets (RWAs)

RWAs (In ` mn)

Credit Risk 2415935 2426955

1. Pillar I Capital & CRAR

A. Basel III Capital as relevant for current year (2013-14)

Common Equity Tier 1 (CET1) capital 358055 356789

Tier 1 (T1) capital 358055 356789

Tier 2 (T2) capital 97905 97905

Admissible CRAR under Basel III (in %)

Common Equity Tier 1 (CET1) capital 12.62 12.52

Tier 1 (T1) capital 12.62 12.52

Tier 2 (T2) capital 3.45 3.44