Sbi Afi 2012

AFI Report 2012 – SBI - Confidential
1 Introduction
An inspection of SBI under Section 35 of the Banking Regulation (BR) Act, 1949,
with reference to its position as on March 31, 20121 was conducted between
September 10, 2012 and December 7, 2012.
1.1 Significant positive features: The bank reported more than 100 bn profit as
third highest profit earners in the country and with 3.85 % reported NIM.
1.2 Unique Position: The bank contributed 39.52% in terms of market value of GOI
shareholding in 21 PSBs and was the only Indian bank in the Fortune Global 500 list.
It managed world’s largest online transaction processing database / CBS from a
single location with second largest ATM installations.
1.3 Aggregate Risk Abstract
Risks Level Direction
Capital High (Moderate) Increasing (Increasing)
Credit High (High) Increasing (Increasing)
Management Moderate (Moderate) Increasing (Increasing)
Earnings Moderate (Moderate) Increasing (Stable)
Market Moderate (Moderate) Increasing (Stable)
Liquidity Moderate (Moderate) Stable (Increasing)
Operational High (High) Increasing (Increasing)
1.4 Synoptic Graphs
ASSETS
0% Balance with bank

1%
6% 7%
Money at call and short notice
22%
Standard advances
Standard Investment
64%
Fixed Assets
Other Assets
1
All figures refer to position of the bank as on March 31, 2012 or for period April 1, 2011 to March 31, 2012
and figures in parenthesis refer to corresponding previous year position unless otherwise specified.
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Interesit/disco Expenditure
Interest
Total Income unt earned on
loans and expended on
advances deposits
Other interest Interest
10% 2% 10% expended on
16% borrowings
46% Staff expenses
20% Interest on
67% Investments
8%
1% Other overheads
14% 6%
Commission,
Exchange and
Provisions and
Brokerage
contingencies
Capital Utilisation Pillar I

Credit Risk
Market Risk
35.06% Operational Risk
Pillar II
56.77% Credit Concentration Risk
Interest Rate Risk (Banking Book)
0.01% Liquidity risks
5.13% Other material P II risks
3.03% Capital cushion
2 Solvency and Capital Adequacy

2.1 Compliance
2.1.1 Solvency: The assessed net worth at 756153 mn ( 632754 mn) fell short of
the book value by 54295 mn ( 11019 mn). To meet the outside liabilities of
12468038 mn ( 11561476 mn), the bank was considered to have adequate assets
as required under Section 22(3)(a) of BR Act 1949. It continued to maintain in ‘real or
exchangeable value’, the minimum capital required as per statutory requirements.
2.1.2 Risk Weighted Assets (RWA) and Capital
2.1.2.1 Systems: The bank lacked the capability for ongoing computation of capital
charge and computed it quarterly with about a month’s lag by manual consolidation
of returns. Persisting lack of standard controls /validation of input data told upon the
reliability of the reported capital adequacy ratios. The counterparty credit risk charge
was not computed for the outstanding sold CDS positions in the books of overseas
branches. (DBOD.BP.BC.No.61/21.06.203/2011-12 November 30, 2011). (EN 206)
2.1.2.2 Impact: The capital funds were over-reported by 60361 mn due to non-
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adjustment of tax liabilities and under-provisioning. Under-computation of RWAs by
about 451636 mn was assessed owing to incorrect reckoning of credit rating,
ECGC cover, capital market exposure, cash-in-hand, collaterals with central counter
parties, items for which the bank was contingently liable, capital commitments and
incorrect capital charge on market risk/ counter-party credit risk.
2.1.3 Capital Ratios
Ratio Reported by Bank Assessed by AFI
Basel I Basel II Basel I Basel II
Core CRAR 8.51% 9.81% 7.56 8.65
CRAR 12.07% 13.89% 10.97 12.52
2.2 Capital Adequacy
2.2.1 Quality of Capital: The diversified base of equity shares shrunk as the
combined shares of GOI and LIC increased to 61.30% (59.40%) and 11.05%
(11.26%) respectively, without approval of RBI for the latter. The tier I capital
included eligible IPDIs of 47948 mn of which a major portion ( 31797 mn)
denominated in foreign currency ($625 mn) was subject to exchange risk and had
step up options excluded from tier I under Basel III norms. (EN 207)
2.2.2 Leverage: The leverage ratio of the bank was 4.20% (5.13%)
2.2.3 Group Capital: The consolidated CRAR and core CRAR of the group at
13.68% (12.26%) and 9.65% (8.02%) respectively lagged behind the bank even after
capital enhancements. In respect of SBI Pension Funds Pvt. Ltd., PFRDA (Regn. of
PFs for Private Sector) Guidelines 2012 raised the minimum net worth requirement
from 100 mn to 250 mn against the net worth of the subsidiary at 197 mn.
2.2.4 Scope for raising capital: Paid-up capital of 6710 mn and authorized capital
of 50000 mn lent scope for further augmenting Tier I capital to the tune of 43290
mn with dilution of GOI’s shareholding to 51%. Tier II capital at 342003 mn had
headroom by another 137238 mn. Against a proposal for GoI approval for infusion
of 210280 mn capital to achieve core CRAR of 9%, the bank received 79000 mn.
2.3 ICAAP Assessment
2.3.1 Process: The approved capital plan document of October 2011 envisaged
further need for 346000 mn of Tier I without reckoning stressed scenarios,
business-segment/activity wise return on capital and overseas regulatory
environment. The stressed capital requirement as assessed in capital planning
differed from that in ICAAP. Stress tests for various risks in ICAAP were not
independently validated. (Action)
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2.3.2 Inadequacies in Pillar I risks: The additional capital for credit risk assessed
under two different stress scenarios for ICAAP at 1459 mn and 1506 mn was low
compared to the business volume and dynamics. The additional capital for market
risk assessed at 5652 mn and 7378 mn under two different stress scenarios did
not factor in illiquidity of instruments, concentrated positions, one-way markets, non-
linear/deep out-of-the money positions, and the potential for significant shifts in
correlations (para 13.3 of the NCAF circular). Non identification of stress scenario for
operational risks persisted. The ICAAP exercise yielded low capital cushion available
to the bank at 130600 mn and 6210 mn under moderate and severe stress
scenarios respectively even as the impact analysis was restricted to 6 risk factors
excluding 11 other identified risk factors. (Action)
2.3.3 Pillar II risks: In absence of articulation of materiality threshold for 17 identified
material risks under ICAAP, the bank omitted additional internal capital requirement
on risks such as securitization, model, country, credit mitigants, settlement,
compliance, strategic and contagion as other risk factors. Stress scenario for
earnings impact from changes in interest rate was not identified from both long and
short term perspectives (Ref. para 13.5 of the NCAF). The stress testing for liquidity
risk did not look beyond regulatory prescription or account for intraday liquidity risks
and management of collateral positions (para 13. 7 of the NCAF circular).
2.3.4 Residual risks: No residual risk had been identified by the bank. Un-hedged
foreign currency exposure of customers at $ 21987 mn was not accounted for as a
risk factor. Capital cushion on these counts as well as for indirect country risks,
strategic risks arising out of overseas growth plans and reputation risks arising out of
inadequate systems and controls was assessed to be inadequate.
2.4 Advanced approach under Basel II: The bank was yet to seek RBI permission
to migrate to advanced approaches. There were several unachieved milestones for
credit and market risks whereas no timeline had been set for operational risk.
2.5 Risk Assessment - Capital
2.5.1 Level: In view of the suspect data quality used for capital computation,
computational errors, under-reported RWAs and deficiencies in capital planning, the
correctness of the computed CRAR could not be relied upon. The bank’s efforts to
plug the capital-consuming methods of lending had not been effective in respect of
available options. The level of risk for capital was assessed to be “High”.
2.5.2 Direction: The divergence between the reported CRAR and the assessed
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CRAR over last few years had been showing widening gap. The assessment of
increasing credit risks, earnings pressure and high operational risks accentuated the
rising risk on capital adequacy. The impending capital requirements under the Board
mandated CAR of 12% and tier I capital of 8% was assessed at 880500 million till
March 2016 with no clear blue print to raise it and the overseas operations had been
presenting high capital adequacy position as risk mitigant to many host country
regulators for various compliance / business deficiencies. In view of the above, the
direction of capital risk was perceived to be “increasing”.
3 Asset Quality
3.1 Loan Assets

3.1.1 Statutory / Regulatory Compliance
3.1.1.1 Credit Restrictions:(a) Advance payment guarantees were issued/ assigned
in a few cases in favour of suspect entities overlooking internal / regulatory
guidelines / international Uniform Rules for Demand Guarantees (Ref. para 2.3.6 of
MC on guarantees and co-acceptances and specific mail box caution dated April 19,
2007/ Article 4) resulting in substantial loss to the bank. (b) The bank had financed
acquisition of domestic companies/financing share buy-backs (ref. para 2.3.1.6 /2.1.4
of MC on statutory and other restrictions on loan and advances) in case of a large
mining group. (c) The bank had financed promoters' contribution towards equity
capital of overseas borrowers for acquisition of companies which were not JV/WOS
of Indian companies. (Ref. para 2.3.1.6 of MC on Loans & Advances & para 2.2.3.1
of MC on Exposure Norms) (d)The bank had extended bridge loans against
subsidies receivable from Government, reimbursements, capital contributions etc.
(Ref. para 2.3.24 (a) of MC). (e) The bank extended gold loans for tenor exceeding
180 days (Ref. Para 2.3.12.1(i) of MC) (f) The bank discounted bills of non
constituents (Ref. para 2.3.10 of MC on discounting / rediscounting of bills and the
internal policy guidelines) without advising the existing bankers. The bank extended
standalone NFB facilities to certain borrowers and negotiated unrestricted LC’s of
non constituents. (g) There were deviations in complying with instructions in respect
of SMEs/SSIs and the bank continued to demand collaterals for loans below 1mn
or agriculture loans below 0.10 mn. (Action)
3.1.1.2 Exposure Norms
(a) Single and group exposure: (i) Single borrower limits were breached in respect
of 3 oil companies; in 2 cases on a regular basis rather than under exceptional
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circumstances. There were 9 (12) single borrowers and 8 (9) borrower groups
exceeding internally fixed substantial exposure limits i.e 7.5% and 15% of capital
funds respectively. (ii) The bank did not have any system of capturing the intra
month excesses. (iii) Though the bank made disclosures on permissible additional
exposure of 5% with the approval of Board of Directors, such loans were sanctioned
by ECCB rather than the Board (Ref. para 2.1.1.3 of MC dated July 1, 2011 on
exposure norm). (iv) The exceeding of single borrower limit in one case in January
2012 i.e to 15.59% was not reported to the Board but the sanctioned capex LC limit
of 50000 mn to the company was reduced 10000 mn to reduce the exposure to
14.58% before year end. Against the relevant capital funds of 988466 mn, the
unaudited 985550 mn was reckoned for the computation. (Action)
(b) Unsecured exposure: The internal limit of 35% for unsecured exposure of total
exposure was without monitoring at whole bank level. The sanction terms were
reckoned for assessing securedness rather than actual realizable value of the
securities.
(c) Country exposure: The country limits of Australia had been breached by $ 301
mn against ECCB approved limits of $ 1000 mn during May 2011. The bank did not
factor in indirect country risks in its portfolio and in a particular case, enhanced
exposure on the borrower based in Egypt, categorized as high risk and was under
caution list.
3.1.1.3 IRAC norms: Non-adherence to IRAC norms resulted in understatement of
NPAs by 122512 mn and under-provisioning of 43437 mn. The major deficiencies
in recognition included overlooking overdues for more than 90 days or recognising
solitary credits around balance sheet date in such accounts, restructuring and
retaining loans under standard category even after NPA date, repeated restructuring
/part-implementation or improper upgradation of restructured accounts, faulty
recognition of DCCO, non-review of accounts beyond 180 days etc. EMIs for floating
rate home loans were not changed / interest rate hikes not intimated to borrowers
and in some cases, changed EMI did not even cover the monthly interest amounting
to default in principal repayments vis-a-vis original repayment schedule. In the USA,
loans were classified facility-wise, rather than borrower-wise. (Action)
3.1.1.4 Priority Sector Lending (PSL): The bank had been over-reporting the PSL
performance to RBI in the previous years by including higher figures as of 31st March
as that for last reporting Friday. Reckoning more than 12.10% misclassification
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among reported PSLs of 2594503 mn, the assessed overall PSL stood at
2280836 mn constituting 34.35% of ANBC against reported 39.07 %, and 40%
regulatory target. The bank had not achieved the sub-targets of agriculture, with
assessed overall and direct agriculture loans at 16.15% and 12.99 % against
reported 17.61% and 13.1% respectively. The growth in direct agriculture credits
were achieved through target linked incentive to employees for ‘agriculture gold
loan’, including those extended to NRIs, which in a large number of instances were
parked in fixed deposits earning higher interest compared to the cost of loans
counted for subvention / priority sector even without any proof of ownership of land
or occupation. There were other compliance issues with the product. The bank even
continued to classify certain loans under IRDP scheme which was closed in 1999.
(EN 304, 305) (Action)
3.1.2 Internal Policies and Procedures
3.1.2.1 Framework / Limits Adequacy: The bank continued to sanction intra-day
TODs without any policy guidelines and underwrote loans without policy on time
frame for downsale. In respect of a loan product ‘SBI Home Equity (Personal Loan)’ /
gold loans, the prescription for monitoring end use of funds was unclear and in case
of reverse mortgage loan the repayment trigger was not defined in specific terms.
The requirement for hall marking in gold loans had not been stipulated. (Action)
3.1.2.2 Deviations from framework: (a) Deviations in interest rates, rating linked
parameters, financial risk scores, internal norms, takeover norms etc. were routinely
permitted in about 87% of corporate and 69% of mid-corporate accounts. (b) Bridge
loans were sanctioned, at times for more than one year and rolled over, contrary to
internal norms including interest rate and reporting requirements. (c) new / existing
accounts rated below SB-10 were sanctioned loans / given enhancements contrary
to internal guidelines. Guarantees were issued for more than 18 months in many
cases without taking necessary approval for deviations. (d) The bank extended loans
to diamond traders in deviation from extant internal instructions (e) There were
instances of deviations from credit risk framework facilitating frauds. (Action)
3.1.2.3 Portfolio Preference: The share of term loans in net loan portfolio steadily
declined over last 5 years from 54.74% to 47.98% with loans with residual maturity of
30 years and more at 25899 mn forming 0.87% of the portfolio. Funded exposure
to infrastructure sector at 15.07% of domestic advances breached the internal ceiling
of 15%. Exposure to power and diamond sectors increased by 9% and 14.71%
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respectively despite stress and non-performance in bank’s books. (Action)
3.1.3 Credit Administration
3.1.3.1 Appraisal Standards: (a) The bank sanctioned short term loans / ad hoc
limits for cash flow mismatches and substitution of high cost funds, refinancing of
short term borrowings and payment of licence/ spectrum fee to DoT without
assessing the cash flow mismatches / source of repayment, outside the consortium
/MBA without any exchange of information. In some accounts, WCDL up to 100% at
concessionary rate of interest was being carved out of the sanctioned CC limits and
rolled over regularly. Calculation and provision of NPV loss was not done for such re-
phasing of CC limits at concessionary rates and the carving out of CC was also not
brought out in the regular appraisals. In a few cases, CCs were sanctioned for tenors
up to 32 months. Gold loans issued in addition to regular working capital facilities
from other banks were not treated as MBA. (b) In a large number of cases, the
financial Indicators were over-projected or credit facilities enhanced/renewed despite
weak financials, i.e. current ratio, debt equity ratios, total outside liabilities/total net
worth ratios below benchmark, decline in sales/profits, non achievement of projected
sales etc. LC bill limits at branches were sanctioned beyond the apprised maximum
bank finance. The housing loans included registration fees / stamp duties in many
cases and were higher than the agreement value with the builders in some other
cases. The bank had not observed many of the guidelines stipulated under para 2.6
of MC DBOD. No. Dir. BC. 8 /13.03.00/2011-12 July 1, 2011 (c) Deficient appraisal
standards in case of non-funded credit facilities such as BG/ LCs included
interchangeability between BG and LC limits sanctioned for different purposes and
conversion of NFB facility to FB allowed to regularize the account. BGs sanctioned to
clients of co-operative banks against counter-guarantee of the latter did not involve
any credit appraisals of the end borrowers. Required undertakings were not
incorporated in the personal guarantee format or in terms and conditions for
sanctioning of credit limits (Ref. para 2.2.9.1.C of MC on Guarantees and Co-
acceptances dated July 1, 2011). (d) In respect of infrastructure projects,
deficiencies in credit appraisals included sanction of fresh loans against toll
receivables to extinguish existing term loans, ignoring intra-group transactions for
possible diversion of funds. (e) There were 265 borrowing companies where the
names of directors featured in RBI defaulter list/CIBIL list or ECGC caution list with
instances of fresh financing and enhancement to such companies. In many cases,
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the bank assumed the named defaulters to be a namesake of the borrower without
any independent verification. Sanctions / renewals in all the cases did not involve
confirming/ obtaining the details of litigations (Ref. DBOD.BC.DL.104/ 20.16.002/ 99-
2000 dated October 23, 1999). Declarations of relationship of the individual
borrowers / partners of borrower firms/ directors of borrowing companies with the
directors and senior officers of the bank were not being obtained before appraisal.
(Ref. para no 2.2.1.10 and 2.2.2.5(ii) of the MC on ‘Loans and Advances - Statutory
and other Restrictions’ dated July 1, 2011). (f) Sanctions in retail loan portfolio
disregarded benchmark credit scores and wrongly computed LTVs for housing loans.
3.1.3.2 Risk-pricing Framework: The bank extended at least 8010 mn of loans at
sub-base rates violating RBI guidelines. The bank had adopted an explicit
‘competitive’ pricing framework without any discernible co-relationship with risk rating
of the borrower/facility. The loan policy prescribed pricing to take into account
marginal cost of funds, acceptable rate of return and business consideration without
providing benchmark on risk-adjusted acceptable rate of return. There were
paradoxical and opportunistic pricing of loan e.g. lower rated loans getting finance at
lower RoI compared to borrowers with better rating and unsecured loans getting
better RoI than secured loans, ceteris paribus. In certain instances, interest charged
on agriculture gold loans exceeded that charged to comparable agriculture
unsecured loans (ref. BP.BC.130/C.464 (M) 81 dated 15/10/1981). Concessional
interest to certain priority sector lending was not applied to SME contrary to bank’s
internal instructions. Contrary to regulations (Ref. para 2.7.1 of MC on Interest Rates
on Advances dated July 1, 2011), a cash management product (viz. SBI FAST)
allowed withdrawals against uncleared effects between 1-7 days or beyond and
permitted credit against uncleared instruments presented in general /MICR/ High
value clearing without indicating charge of interest. The interest rates for bills
discounted were not audited for compliance with policy. Risks arising out of
unhedged foreign currency exposure of the corporate were not evaluated and priced
in the credit risk premium while extending fund / non-fund based facilities as
stipulated in DBOD circular ibid. (EN 315) (Action)
3.1.3.3 Delegation: The delegated authority structure continued to be plain volume
based rather than risk based. The bank released credit facilities with the approval of
the Chairman in case of emergency pending ECCB sanctions which were often
obtained subsequently with varying delays. There were instances of exceeding of
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delegated powers and/or non-reporting to controllers. In some cases post facto
ratification was obtained after up to one year. Certain branch spot audits revealed
large number of sanctions beyond delegated authority.
3.1.3.4 Borrower Complexity: The bank was yet to integrate the risks arising out of
several borrower groups with complex structures and intra-group transactions spread
across domestic and overseas branches with its credit appraisal / supervision.
3.1.3.5 Credit Supervision: (a) The quality of credit related data in the CBS / MIS
server was an antithesis for effective credit supervision. (b) The deficiencies in post
sanction supervision pointed out in earlier AFIs persisted in large scales. These
included non-exchange of information among multiple banking arrangements, non-
conduct of consortium meeting, compliance with various statutory prescriptions, due
diligence in issue of bank guarantees, compliance with sanction terms and
conditions, monitoring end use of funds, obtaining of credit information report,
regular analysis of balance sheets, non-routing of sales proceeds through accounts,
not obtaining / non-renewal of insurance cover, not monitoring stock/ book debt
statements and financial follow up reports / net worth, non-conduct of stock audits or
non-rectification of defects found, non creation / perfection of charge over security,
obtaining balance confirmations / other declarations, etc. (c) There were several
deficiencies seen in STLs sanctioned under food credit and corresponding stock
audit. (d) Out of 2750 NPAs above 50 mn liable for mandatory stock audit, in
respect of 578 accounts, i.e. 21.02% stock audit had not been conducted. (e) The
bank had neither any information on corporate hedging of ECB nor complied with
regulatory guidelines for monthly review and monitoring of unhedged portion of FX
large exposures above $ 25 mn (Ref. DBOD circular 376 dated October 27, 2001
and 96 dated December 10, 2008). Further bank did not have a board approved
policy stipulating a limit on unhedged position of corporate. In the light of volatility in
USD-INR FX rates during the year, some of the corporate customers of the bank had
incurred losses. Although prescribed in the policy, un-hedged foreign currency
exposure of clients was not reviewed separately every quarter. Further, the bank did
not discharge the responsibility of monitoring un-hedged foreign currency exposure
in consortium/ multiple banking accounts as the leader/ largest lender (para 2.2.1.2
of DBOD.Dir.BC.14/13.03.00/2010-11 dated July 01, 2010). (Action)
3.1.3.6 Credit Reviews: Out of 8907 accounts due for review / renewal, 1857
accounts were pending for renewal of which 77 accounts were overdue for more
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than 180 days. Half yearly reviews required as per bank’s loan policy were not
submitted in the case of listed companies with SB-8 and lower ratings or SB-10 or
lower for others. The loan policy prescription for review of CRA ratings of NBFCs with
SB-7 or lower rating was not complied with. (Action)
3.1.3.7 Loan Book Management
(a) Portfolio Buy-outs: The bank purchased IBPCs of 180 days on risk sharing
basis from their sponsored RRBs to achieve target under agriculture after on-lending
for the same purpose. Higher refinance limits were released to RRBs in one circle
despite their request for lesser limits due to comfortable liquidity position. Amounts
debited to refinance account were transferred to FDs for 7 days from which the loans
were liquidated. In a case, while the refinance was disbursed at 10 %, term deposits
were created at 10.25%. Disaggregated data on housing loans of employees by TN
Govt. for 3500 mn taken over in Aug 2004 were not available till date. (Action)
(b) Sale / Purchase of NPAs: The bank continued to sell NPAs without any
guidelines stipulated in the loan policy for UK or for overseas operations. The bank
had reversed provisions of $ 2.71 mn to its P&L accounts as the sale value of NPAs
was higher than the net book value. The bank had sold 9 NPAs with an outstanding
balance of 2522 mn; 319 mn domestic and 2203 mn overseas. There was no
system overseas for calculating the NPV of the NPAs before sale overseas or
holding the account in books for 2 years. (Action)
(c) Account Take-over: The bank relied on certification on performance status of
the accounts from borrower’s auditors rather than status report from the existing
bank for take-over accounts. The internal norms of not taking over accounts rated
below SB 6 and financial score below 40/65, net profit-making in the immediately
preceding 3 years was not adhered to in about 50% of the cases. In a few cases,
irregular accounts taken over met quick mortality in the bank. (EN 316) (Action)
(d) Intra-day exposures: The bank did not have any system to monitor its intraday
exposure to capital market on an ongoing basis (Ref. para 2.3.6 in circular DBOD.
No.Dir.BC.19/13.03.00/2008-09 dated July 1, 2008). (Action)
3.1.4 Quality of Loan Portfolio
3.1.4.1 Internal Rating
(a) Framework Adequacy: The manual rating model had 65% objective and 35%
subjective parameters with defined discretionary ranges but lacked parameters like
deviations allowed from the loan policy which could alter the risk profile of the
account. There was no separate model for rating of borrowers of the MSME sector in
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the bank. There was no rating model in place for Mutual Funds. (Action)
(b) Rating Distribution: Of 59 % of the advances internally rated, 54% (51%) were
rated above the hurdle rate i.e. SB-10. The median rating i.e. 9 % of borrowers was
SB-7.Out of the fresh slippages of 247122 mn the maximum outstanding pertained
to SB-8 followed by SB-15, SB-6 and SB-7. External rating in respect of borrowers
with a thresh hold exposure as per bank’s policy / terms of sanctions was not
insisted in most cases. (EN 317)
3.1.4.2 Non Performing Assets
(a) Level and Trend: The reported Gross NPA Ratio of 4.44% (3.28%) and Net NPA
Ratio of 1.82% (1.63%) trended upward. With additional 1,22,512 mn of fresh
NPAs classified by the AFI, the assessed Gross NPA ratio stood at 5.84% (3.28%)
and Net NPA ratio at 3.26% (1.63%). (EN 319)
NPA Ratios Net NPA

6.00
5.00 Gross NPA
4.00
3.00
Gross NPA +
2.00
Technical Write off
1.00
-
2008 2009 2010 2011 2012
With fresh slippages increasing to 247122 mn ( 181457 mn), the reported slippage
ratio deteriorated to 2.57% (2.17%) with assessed slippage ratio of 4.95% (3.32%).
(b) Quick Mortality: No consolidated reviews were put up to the top management
on quick mortality cases. CAG, MCG and IBG did not have a system of identifying
quick mortality accounts despite extant instructions. (EN 329) (Action)
(c) NPA Management
0.60
NPA in Wholesale Advance
0.40
0.20
0.00
2009-10
2010-11
2011-12
2009-10
2010-11
2011-12
2009-10
2010-11
2011-12
2009-10
2010-11
2011-12
2009-10
2010-11
2011-12
2009-10
2010-11
2011-12
Iron and Steel Textile %Gems

NPA to Total Infrastructure
and Advances Sugar-Tea- Trading
Jewellery Food Proc.
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0.40
NPA in Retail Advances
0.30
0.20
0.10
% NPA to
0.00
Total
2009-10
2009-10
2010-11
2011-12
2009-10
2010-11
2011-12
2009-10
2010-11
2011-12
2009-10
2010-11
2011-12
2010-11
2011-12
Advances
Auto Laons Education Personal Home Loans Others

Write-offs, as a percent of gross reduction in NPAs, fell to 5.91% (32.43%). The bank
deviated from extant guidelines on compromise settlement inasmuch as valuations
from two independent valuers were not taken for accounts with outstanding more
than 500 mn; NPV of the settlement amount was not calculated keeping in view the
regulatory guidelines in several cases (Ref. in para 7.5 (iii) of DBOD BP BC
12/21.04.048 /2011-12 of July 1, 2011) and in few cases security values were more
than the settlement amount. (EN 327) (Action)
3.1.4.3 Restructuring: There were 2520 (10794) accounts aggregating 92717 mn
( 56581 mn) restructured of which 1223 i.e. 49% accounts slipped to NPA during
the year. (a) Such reporting was considered to be majorly understatement as
extension of DCCO / rephasements were not treated / reported as restructuring.
Restructured agriculture loans were also not considered as restructured for reporting
purposes. (b)The discount rate used to calculate diminution in fair value did not
conform to para 11.4.2 (i) of the circular DBOD BP BC 12 /21.04.048/2011-12 dated
July 1, 2011 in respect of term premium applied over BPLR / Base Rate. The bank
used the same discount rate for cash flows before and after restructuring even when
the term of the repayment was significantly elongated. Norms for computing
diminution in fair value was not even stipulated for overseas accounts. (c)The need
for value impairment provision was avoided by arbitrarily increasing the interest rate.
Diminution in fair value was not computed and provided for in large number of cases
at circle level. Viability studies were not conducted before restructuring in several
cases. (d) Accounts were continued as standard in the non-infrastructure sector
even after six months/one year (in case of restructuring) from the date of original
DCCO without commercial production. Restructuring was highest in the textiles
sector followed by Power, Iron and Steel, aviation, and trading sector. (EN 325)
3.1.4.4 Potential NPAs: Among standard restructured accounts with moratorium on
Page 13 of 48
repayment beyond 1012-13, there was concentration of moratorium till second half of
2013-14 with outstanding of 28720 mn of 40832 mn i.e. 70.34% among CAG
and 9693 mn of 17010 mn i.e. 56.98 % among MCG accounts. The balances of
special mention accounts increased by 8.37% to 143588 mn ( 141630 mn) against
14.65% growth in net loans. The quality of retail loan portfolio, including education
loans, underlined large unidentified non-performance. (Action)
3.1.5 Counterparty Credit Risk: Lack of a holistic policy for counterparty limits
under credit, investments, derivatives, forex operations etc. resulted in control risks
notwithstanding its piecemeal coverage under derivative policy. The bank dealt with
certain counterparties without set limits. The non-primacy of limit monitoring was
evident from recurring/ large breaches with certain parties, unjustified ratification of
breaches in forward limits against unutilised spot limits, post facto rationalisation of
breaches against borrowed/ carved-out limits from other desks without authorisation
and audit trail. The monthly reporting of breaches lacked dissection of repeated/
sequential breaches or examination of potential collusion angles.
3.2 Investments
3.2.1 Statutory / Regulatory Compliance : The statutory auditors of the bank had
not certified the reconciled status of the proprietary investment or the PMS portfolio
(except EPFO) with SGL / CSGL statements of PDO or the custody or use of BR
forms (Ref.para 1.3.1/1.1.4.(h) of MC on Investments dated July 2011). The 10%
prudential limit in respect of equity investments in non- financial services companies
was breached and did not have RBI approval in certain cases (Ref. para 8.(i) of
circular no DBOD.FSD.BC.62/24.01.001/2011-12 dated December 12, 2011). The
prudential limits in terms of the total outstanding stock of the security on undertaking
short selling in G-sec was not monitored. The investment policy of the bank,
including those for overseas offices, had not covered certain regulatory prescriptions.
The AFI had suggested additional provision of 1140 mn on certain preference
shares details of which are given in EN 331. (Action)
3.2.2 Non-SLR Portfolio
3.2.2.1 Composition: The main shift in the composition of the domestic book was
divestment of corporate bonds and debentures by 12.72% and scaling up of the G-
secs holding by 11%. Though this reduced the credit risk, the rating profile of the
non-SLR portfolio deteriorated with sub- AAA/AA rated/unrated instruments rising to
5.38% (4.13%). About 54.80% of investments had maturity of over 5 years
Page 14 of 48
underlining primary interest rate risk. (EN 330)
3.2.2.2 Appraisal and Monitoring: The role of the Treasury in appraising
investments in subsidiaries/ associates/JVs, those arising out of restructured
advances and Private Equity /Venture Capital funds was not clearly defined.
Absence of policy specifications on prudential limits on investments in Govt.
guaranteed bonds and IPO investments pre-empted any monitoring of such
investments. Regular tracking of the financial position of the investee companies of
CPs and corporate bonds was lacking. A system to track the CME at an
individual/group level for each investment was not in place (Ref. para 1.2.1 (iii) (a),
(c) and (e) of the MC on Investments). (Action)
3.3 Credit Risk Concentration
3.3.1 Concentration Profile: Major Industry exposure of the top 20 single borrowers
was towards Hydrocarbon (37.76%), Power (14.09%), Engineering (12.63%) and
Iron and steel (9.72%). (EN 324)
3.3.2 Sensitive Sectors
3.3.2.1 Capital Market Exposure (CME) : The assessed capital market exposure
(CME) increased to 256919 mn ( 103362 mn ) constituting 40.64% (12.70%) of its
net worth as against reported exposure of 7.85% (12.70%). While computing the net
worth for the purpose of CME, it had not deducted intangible assets such as deferred
tax asset to the extent of 11673 mn (Ref. para 2.3.4 of MC on Exposure Norms
dated July 1, 2011). CME exposure included facilities sanctioned for refinancing of
acquisition financing, repayment of NCDs, FCCBs. The bank did not insist on
obtaining shares of promoters of borrowing companies only in dematerialized form in
many cases (para 2.4.7.1 of circular ibid). The review of CME did not cover quality of
brokers, interrelated parties, etc., (para 2.5.3 ibid). Overdraft facilities were extended
by many branches against MF units without reporting them as CME. (Action)
3.3.2.2 Commercial Real Estate (CRE): The CRE exposure reported to the Board
stood at 1446340 mn and that disclosed in the annual report stood at 1446684
mn ( 1346235 mn). The portfolio grew at 7.5% and constituted 19.09% of domestic
advances as against internal limit of 25%. Deviations from regulatory and internal
guidelines in taking CRE exposure (domestic) included sanction to private builders
for purchase of land. While the under-reckoning of CRE exposure was assessed at
3959 mn ( 7897 mn), there were other categories of CRE such as loans for 3 rd and
4th unit of house including to staff which could be not quantified. (Action)
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3.3.2.3 NBFCs: Contrary to internal policies, loans were sanctioned to NBFCs which
were not Asset Finance Companies and did not comply with minimum prescribed
parameters on financial ratios / tenor/rating /NOF etc. (Action)
3.4 Other Assets: In a number of cases, receivables included claims for additional
interest subvention given to borrowers who were not prompt in repayment.
Subvention claims were made for loan above 0.30 mn or multiple accounts of same
borrower adding up to more than that or not meeting the eligibility criteria. In the
absence of policy on pre-paid expenses, amortization of revenue items, centralized
reconciliation/ age-wise details, etc., the tangibility/realisability of the other assets
could not be assessed comprehensively. Computation of MTM gains under Other
Assets in respect of derivatives lacked comprehensive audit trails and evidence of
independent audit for its correctness. (Action)
3.5 Risk Assessment – Credit Risk
3.5.1 Level: Based on high under-reporting of NPAs, lack of adequate diligence in
credit originations, high level of restructured and special mention accounts, the credit
risk was assessed to be continuing to be ‘high’. Apart from this, the bank had higher
off-balance sheet exposure as a percentage of total assets at 66.38% as against
48.98% of its peer group. The RWAs as a percentage to total assets at 77.02%
exceeded that of peer banks at 70.97%.
3.5.2 Direction: In view of the increasing trend in divergence in compliance with
IRAC norms and credit costs, the direction of credit risk was assessed to be
‘increasing’.
4 Management
4.1 Organisational Set up

4.1.1 Adequacy: The five-tier divisional structure adopted by the bank lacked
functional matrix relationship in certain core and control areas resulting in sub-
optimal efficiency and conflict of interest / synergy, seepage in reporting lines. The
restructured framework with restoration (5 additional networks, 6 zones and 28
RBOs created) of the administrative tiers flattened previously and proliferated
groups, the co-ordination / ownership issues were yet to settle down. The improved
efficiency of creating separate verticals such as Corporate / Mid Corporate groups
were not fully tested as re-alignment of certain accounts were held up due to legacy
reasons. The processing centres, still attached to the business groups rather than
Page 16 of 48
operations, created to improve turnaround time or quality of the processes was yet
to deliver desired results despite the number of processing centres for deposit
accounts going up to 14(4) linked to 13729 (13223) branches. The back offices/
processing centres routinely undertook customer interfacing activities. The
proportion of branches not opened despite obtaining RBI authorization rose to 35%
(27%). (EN 401)
4.1.2 Control Functions: The corporate office essentially acted the part of an
aggregator of management information from circles / business verticals with issue of
circulars forming the staple control tool. The poor quality of information flow,
ineffective control infrastructure and non-transmission of compliance culture down
the line aggravated the controls. Despite having the world’s largest single-location
CBS in place, all control functions were still distributed and declaration-based,
creating inefficiencies and inaccuracies. Despite multiple audit processes in vogue,
efficiency of overall control functions with synergetic integration, addressing
persistent / repetitive compliance issues was not in evidence.
4.2 Corporate Governance
4.2.1 Board of Directors: The number of Directors with special knowledge
appointed as per Section 19(d) of SBI Act remained at the thresh hold level of two.
The Board composition vis-à-vis business concentration/ strategy of the bank missed
experienced representation from diversified industries or international commerce. A
few Local Boards had number of members barely forming quorum. (EN 403)
4.2.2 Board Committees: The Directors appointed under Section 19(e) of the SBI
Act attended only one meeting out of nine held. The ACB had not carried out annual
review of the adequacy of internal audit functions for March 2011 and quarterly
review of the implementation of Ghosh and Jilani Committee recommendations for
June 2011 onwards.
4.2.3 Clause 49 of Listing Agreement: Contrary to compliance submitted, the deed
of covenants was yet to be signed by the Board members. The bank had been
displaying inertia in posting of Company Secretary to handle Board Secretarial
functions despite ACB directions since May 2011.
4.2.4 Transparency and Disclosure: There was no corporate communication policy
for the bank. There were instances of press reports quoting top management making
public statements on ALM matters, upcoming changes in interest rates of the bank,
individual account information and other potentially market sensitive issues some of
Page 17 of 48
which were counter-factual. The commercial or public interest it intended to serve
was not clear while making these statements (EN 403).
4.2.5 Decision Making Process: Decisions on critical approvals was taken without
being vetted by the concerned HO group in a few cases such as the foreign offices
loan policy being approved bypassing Credit Policy and Procedure Department
(CPPD) and bandwidth upgraded for branches approved bypassing IT Strategy
Committee (EN 403).
4.2.6 Strategic Planning: The domestic assets growth of the bank had been slower
at 12.28% (12.80%) with interest spread and pre-tax RoA increasing to 3.85%
(3.29%) and 1.35% (1.26%) respectively in a contrast to the trend between 2008-
2010 when the assets growth was between 20-10% with lower interest spread upto
2.81% and pre-tax RoA upto 1.68%. The bank undertook non-core activities such as
installing printing press, hiring staff for software coding without any business case.
The bank had installed and operated windmills in three states for stated captive use
but 33/51 mn mw of power generated were traded with the SEBs for 279 mn. This
was considered as a violation of Sec. 33 of SBI Act (Sec. 6 of B R Act) (EN 403).
4.2.7 I.T Governance: The bank was yet to fully integrate its business model with its
IT architecture in terms of focused functions for technology strategy, development, IT
operations and IT assurance. This has resulted in unclear returns on investments
and enhanced operational risks. In all IT departments, the supervision of accounting
rested with the same set of persons responsible for software development and a few
business functions included complement of IT staff with inadequate segregation of
duties between IT and business functions for managing applications. Though the gap
analysis was conducted, the bank had no detailed time bound action plan to address
governance issues as required in terms of DBS.CO.ITC.BC. No.6/31.02.008 /2010-
11dated April 29, 2011. The bank had complied with only 46% of the observations
made by the gap analysis (310 of 670). Instead of complying with, some of the
deviations observed by the IS audit were approved by the management. (Action)
4.2.8 Risk Oversight: The LIC of India had been categorizing its investments in
NCDs of the bank as ‘Sub-Standard’ in its published accounts of Schemes posing
reputation / rating risk though the bank reported to have honored its liability. The
enterprise risk management structure was yet to be integrated into independent
function as the ALM, international risk management, mid office and global markets
continued outside the RMD. The Credit Risk Management Department (CRMD) and
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CPPD had assigned roles not strictly in conformity with RBI guidance note on Credit
Risk Management. The risk policies relating to Value at Risk, loan / policy for foreign
offices, ALM Policy for domestic / foreign offices, group compliance policy were
overdue for review. There were 69 concurrent auditor positions lying vacant due to
manpower shortage. Centralized transaction monitoring system was yet to be set up
for managing operational risks. The risks arising out of under-providing for loan
losses, security valuation/ perfection, deficient KYC/AML compliance, outsourcing
risks, false compliances were areas where risk oversight was found lacking. The
mandate of ‘Project Ganga’, a drive meant to set right the customer data
discrepancies was later changed to indentify capital optimization scopes without first
ensuring minimum data integrity. (Action)
4.2.9 Management Decision Transmission: The management decision
transmission of the bank followed the conventional method of issuing e-circulars and
the feed-back line which mostly covered the action taken process than the outcomes
or specific compliance or timeframe thereof. The ACB had expressed concerns on
the action taken reports to their directions for falling short of compliance. Despite one
of the independent directors’ writing to the bank about lack of ownership in tracking
and resolving fraud issues by the Banking Operations Department, or the ACB’s
concern on KYC compliance in respect of high risk category branches, there was no
concrete time bound action plan initiated.
4.2.10 Manpower Planning: The shift of focus to retail / branch expansion did not
accompany proper manpower planning with many new branches being manned by
newly recruited managers. The bank appointed industry specialists on retainership
basis to compensate lack of in- house skills for industries with significant exposures.
4.3 Top Management Oversight: There was delay of 3-12 months in reviewing 13
items as per RBI calendar. The ACB reviewed quarterly position of investments
reconciliations on simple declaration by the relative operational unit without auditor’s
certification. Significant amount of securities were not held in the name of the bank /
in the CSGL account of NSDL, contrary to regulations (ref. para II (2) of DGBA
notification no.237 dated December 4, 2009).
4.4 Corporate Mission and Vision: The bank used a few customer service slogans
coined in 2006 as its mission and vision statements with employees as its sole
audience. This was neither integrated with business strategy and plans nor
translated into any improvement in customer services. The bank still recognized
Page 19 of 48
customer services being more attitudinal rather than systems/processes issue even
after 6 years since the coining of the statements. (EN 405).
4.5 Controlling Authority Mechanism: The stretched pyramidal structure of

hierarchy resulted in transmission loss under controlling authority mechanism. In the
absence of a single line of control, multiple layers between branch and circle heads,
the circle GMs spent most of time in co-ordinating and sorting out various issues
among the three verticals of DGM (O&C), RMs and AGMs (Admn) and their span of
control had stretched too much for control effectiveness and strategic
contribution.RBI (PAD) audit revealed instances of excess commissions claimed by
many branches in absence of minimum controlling authority mechanism over such
business (Ref. DGBA.GAD.No.H.1800/31.12.010/2010-11 dated 01/07/2009 and
GAD No. H.3903 /31.12.00(9) /2009-10 dated 11/11/2009. Many CGMs, GMs and
other controllers did not carry out required number of branch visits and submit the
reports on line as required.
4.6 Executive Committees: There were a few instances of the Central Management
Committee giving directions towards business strategies without rationalizing the
fairness/ compliance perspective of such directions.
4.7 Top Management Reviews: The reviews placed before the top management
was fragmented and there were only few reviews which conveyed the whole bank
position. There were gaps in the quality and timeliness of the reviews. While
reviewing analysis of rising customer complaints and grievance redressal, the
directions were given to minimize resolution cost. The report on disruptions due to
system downtime placed to IT Strategic Committee after adverse comments by RBI
did not even include duration of such downtime. The review of credit rating of loan
accounts for 31/03/2011 was placed before the Board only on 24/03/2012 and the
review for penalties imposed/ penal action taken during 2010-11 before the ACB in
August 2012. Record retention policy approved by the ECCB in 2003 had not been
reviewed in spite of the changed requirements under provisions of RTI Act, 2005 and
PML Rules 2005 (EN 406). (Action)
4.8 Management of Subsidiaries: The Board had made a strategic review to

decide on continuation of certain subsidiaries, in view of the continuing and
increased demand for capital from them. The review was, however, sketchy and did
Page 20 of 48
not elicit any strategic direction from the management. The change of name from
SBI Custodial Services (SCS) to SBI –Societe Generale Securities Services Pvt.
Ltd.(SBI-SGSSPL) was not reported to RBI. As a result, FDI reported by SCS was
not accounted for SBI-SGSSPL. The policy to offer license for use of its registered
trademark for earning royalty at higher of 0.20% of total income or 2.00% of PAT,
from entities including JVs, Exchange Companies, and Licensees was in
contravention of Sec.33 of SBI Act / Sec.6 of BR Act. The bank earned 121 mn
( 114 mn) of business income from such domestic sources as the overseas entities
were exempted. The policy stipulated grant of license to JVs for use of the bank’s
name without considering compliance with Sec. 7 of B.R Act.
4.9 Risk Assessment – Management

4.9.1 Level: In view of the pertinent issues discussed variously in the report,
especially those on continuing data quality issues, non-identification of hidden non-
performance in credit portfolio and several systems / controls issues, the risk level
arising out of the functioning of management was assessed to be ‘Moderate’.
4.9.2 Direction: In the absence of concrete action in respect of issues pointed out in
previous AFIs and the increasing gap in management direction vis-à-vis ground
realities, the direction of management risk was assessed to be ‘increasing’.
5 Earnings Appraisal
5.1 Earnings Break-up

5.1.1 Interest Income: There was near parallel growth in the interest income by
30.87% (from 813944 to 1065215 mn) and interest expenditure by 29.39% (from
488680 mn to 622306 mn). The corresponding growth in the average interest
earning assets by 13.94% and average interest bearing liabilities by 13.44% also
kept similar pace. Average cost of rupee funds rose to 8.23% (6.16%), which was
partly off-set by the decline in the cost of FCY to 2.24% (2.31%), resulting in the
overall cost of funds increasing to 5.33%(4.73%). (EN 502)
5.1.2 Profit Influencing Factors: The Net Operating Profit rose by 23.74% (7.45%)
to 35546 mn ( 10362 mn), 81.77% (65.01%) of which was contributed by domestic
operations. Price rather than volume was responsible for growth in NII. .
Page 21 of 48
2,00,000
1,50,000
1,00,000
50,000
-
2011 NII Other Oprtng Prov Sale of 2012
Income Exp Misc.
Assets
Net Profit Growth Path
5.1.3 Yield Enhancement: Rise in yield on advances to 9.81% (8.49%) was
accompanied by rising contribution of funded interest from advances i.e 0.97%
(0.85%) and negative amortization in non-staff housing loans (e.g. 1691 mn during
the month of March 2012) and other retail loans (e.g. 600 mn during March 2012)
(EN 502). Of several complaints of compounding of interest on education loan during
moratorium period, the bank confirmed a few such incidents due to non-rescheduling
of repayment start date at the time of top up of the loan / opening of account with
wrong product code. The instances of similar data deviations were large in the retail
loan portfolio. The bank allowed one time option of floating rate to home loan
borrowers to switch over to new card rates against 1% fees. Benefits of interest
subvention to eligible exporters were not passed on up front in a few cases. (ref.
para 4.3 of MC DBOD No. Dir.(Exp) BC.04/04.02.002/2011-12 dated 01/07/2011)
and subsidy received under PMEGP scheme, instead of being credited into
beneficiary a/c, were kept in interest free FDs in circles and interest was charged
without netting the subsidies. (Action)
5.2 Key Earning Ratios (EN 505)
5.2.1 Net Interest Margin (NIM) : The NIM and RANIM at 3.27% (2.78%) and 2.40%
(2.03%) respectively represented increasing credit cost i.e. 0.49% (0.37%) for the
bank in generating a higher interest spread of 3.38% (2.92%).
5.2.2 Return on Assets (ROA): The reported post-tax ROA increased by 17 bps at
0.88% (0.71%) mainly due to increase in the net profit by 41.66% (-9.84%). The
assessed ROA stood at 0.49%.
5.2.3 Return on Equity (ROE): Reported post-tax ROE increased to 16.05%
(12.75%). The assessed ROE stood at 8.85%.
5.2.4 Cost Income Ratio: The cost-income ratio improved to 45.19% (47.58%)
despite increase in staff expenses by 11.59% (19.26%) and total overheads by
16.54% (3.17%) due to the increase in the total income by 93171 mn.
Page 22 of 48
5.2.5 Peer Group Standing: The bank lagged in a few earning parameters vis-à-vis
its peer group, particularly on ROA at 0.86% against 0.87% of the peer group and
1.06% of all banks; overhead efficiency ratio at 65.80% against 53.92% of peer
group and 60.55% for all banks; staff expenses to total income ratio of 14.60%
against 10.75% for peers and 11.23% for all banks.
5.3 Segment Earnings (EN 506)
5.3.1 Impact of Interest Rate Movements: Domestic interest rates, proxied by RBI
repo rate underwent six revisions from 6.75% to 8% (5% to 6.75%). Increase in Base
Rate by the bank from 8.50% to 10% resulted in a yield pick-up by 1.49% in
advances against increase of 0.65 % in average cost of term deposits resulting in
widened interest spread to 3.38 % (2.92 %).
5.3.2 Trading / Derivatives Revenues: The bank incurred loss of 51 mn ( 4 mn)
in derivative transactions with other banks but earned profit of 758 mn ( 1050 mn)
with its own offices / branches. The bank earned a trading loss of 9197 mn (profit of
9256 mn) in respect of investments.
5.3.3 Subsidiaries’ Contribution: With 7673 mn ( 8277mn) received by way of
dividends from associate banks, subsidiaries and JVs, its contribution to total income
slipped to 0.49 % (0.68 %). (EN 507)
5.3.4 Para-banking Revenues: The para-banking revenues declined by 29.40% to
2677 mn ( 3792 mn) to 3-years’ lowest and contributed to 0.22% (0.39%) of the
total income and 1.86% (2.39%) of non-interest income. With increased expenses on
ATMs, the bank paid more than its earnings from this segment. (EN 508)
5.4 Provisions and Retained Earnings (EN 510)
5.4.1 Growth of Retained Earnings: The growth of Earnings Retention ratio by
3.64% (-2.87%) to 77.41% (73.77%) as against growth in net profit by 41.66%
(-9.84%) underlined dividend pressure.
5.4.2 General Provisioning Policy: The bank followed the regulatory-minimum
approach towards various provisioning. In the absence of any policy guideline to
provide for claims not acknowledged as debt, fraud / operational losses etc., there
was no consistency in the matter. The bank had so far transferred 37370 mn to a
special reserve u/s 36(1) (viii)(a) of Income Tax Act against actual total claims of
16356 mn for tax exemption and the Board passed a resolution that the bank would
not withdraw from the Reserve.
5.4.3 Accounting Consistency: At least 1025 office accounts (branch general
Page 23 of 48
ledgers) were opened as customer (saving/current) accounts distorting the grouping
of account heads in the published balance sheet. There were instances of overseas
branches accounting inter-office balances without netting and amortising
expenses/upfront premium for raising MTNs. The bank grouped non-advance related
recalled assets i.e. 6038 mn ( 5687 mn) under Advances and 405 mn of interest
on LAF placements accounted as interest on additional balance with RBI. CDs were
not grouped under deposits, contrary to regulatory guidelines. (Action)
5.4.4 Provisioning Adequacy Assessment (EN 511)
5.4.4.1 Employee Liabilities: The methodology for assessing employee liability
under defined benefit plans was not based on the past trends in salary / pension
escalation rates. It also did not take cognisance of the future estimates from the due
date of succeeding settlement. There were no documented rationale for assumptions
made or discount rate applied matching the yield of currency while estimating the
term of the post-employment benefit obligations. The net actuarial loss in pension
and gratuity was 6513 mn ( 9060 mn) and 3350 mn ( 7293 mn), respectively.
The bank funded 95180 mn liabilities during the year. (Action)
5.4.4.2 Understatement of other liabilities: The AFI assessed 3402 mn as
understatement of liabilities/expenditures. The claims against bank not
acknowledged as debt increased by 13.59% to 11512 mn ( 10135 mn). The
branches transferred bankers’ cheques issued to vendors but outstanding beyond 3
years to revenue account without any control mechanism or disclosing them as items
for which the bank was contingently liable. The bank failed to disclose various capital
commitments for more than 2362 mn as contingent liabilities. (Action)
5.5 Risk Assessment – Earnings
5.5.1 Level
5.5.1.1 Profit / Performance Planning and Evaluation: The profit / performance
planning process of the bank including that for the ‘Statement of Intent’ entered into
with the GOI were essentially a top-down progression rather than an integrated
process reckoning inter se linkages among parameters. The bank had failed to
achieve a number of SoI targets. The bank recorded a decline of 9.31% growth of
other income against planned benchmark of 21%. Against the planned expense to
income ratio of 45%, the bank clocked a higher ratio of 45.23% despite a 33.10%
increase in NII in the denominator. (EN 513)
5.5.1.2 Risky Earnings: The Management Audit had observed for certain circles
that due to emphasis of Controllers on immediate results in growth of business,
Page 24 of 48
some branch managers booked low quality business with evidence of excellent
growth in advances followed by abnormal growth in NPAs.
5.5.1.3 Risk Aggregation & Mitigation: The bank did not adequately factor in the
impact of liquidity risk on its earnings profile. The impact of the likely credit losses
arising from NPAs and special mention accounts had been considered to be
substantial with negative impact on earnings.
In view of the above, the risk level for earning was assessed as ‘moderate’.
5.5.2 Direction
5.5.2.1 Earnings Sustainability: The bank had undiversified reliance on interest
income with declining non-interest income and the risk adjusted NIM under stress.
With revenue leakage detected by internal audits and shortfalls in various provisions
as assessed by AFIs showing an upward trend, the sustainability of high NIM was
assessed to be limited. The bank did not aggregate various risks to understand its
impact on earnings and diversify earnings base to sustain the earnings in an
acceptable range. Number of loss making branches for over 2 years increased to
624 (389).
5.5.4 Earnings at Risk : The Earnings at Risk by way of impact on NII with the
change in 1% interest rate was 32960 mn( 31400 mn) while interest rate change of
2% impacted the change by 65910 mn ( 62800 mn) as against ALM Policy
prescription of 41980 mn ( 32490 mn).
In view of the above the earnings risk was assessed to be ‘increasing’ in direction.
6 Treasury, Funds and Liquidity Management
6.1 Treasury and Trading Activities

6.1.1 Integrated Treasury: The rupee and forex desks operated in silos without any
formal arrangement between the two desks for efficient management of funds. In
absence of formal revenue sharing arrangement for derivative deals, the dealers
used discretion on the margin to be passed to the respective branches. The
systems, both domestic and overseas, lacked automated deal flows/ STP in the
integrated treasury environment in certain scenarios (EN 603). (Action)
6.1.2 Fund Transfer Pricing: In the absence of a workable FTP mechanism in the
bank, the funding centre continuously ran in loss during April 2009–March 2011 and
in surplus during December 2011-March 2012. To arrive at offer curve, the bank had
added a fixed spread to its daily bid curve based on MIBOR/ G-secs till September
Page 25 of 48
2011 and later by changing the curve based spreads to a product based spread. The
resultant losses /surpluses of funding centre was being re-distributed among
branches and the bank had little information on the contribution of various business
segments to its large NIM (604). (Action)
6.1.3 Proprietary Trading: There was an instance wherein a trainee dealer was
allowed to do the proprietary trading in cross currency spot. In the absence of deal
size limits, the daylight position limit as well as the Cut Loss limit was breached by
him. In April 2011, while sourcing a deal of EUR/USD 0.25 mn, the dealer sold an
EUR/USD 25 mn which had to be reversed with a loss of $ 20900. The rationale of
sizeable number of deals being squared up immediately for 1 ‘Pip’ or lesser margin
without even covering transaction costs was not clear.
6.2 Market Risk - Trading Book
6.2 1 Investments
6.2.1.1 Internal Controls: There were several deficiencies in control environment of
the treasury, both in IT systems and off-line processes deviating from ICG
guidelines, both in domestic and overseas Treasuries. (Action)
6.2.1.2 Limits Management: At the London Branch, (for interest rate trading) the
bond trading in cash and derivatives segments was undertaken without proper risk
management infrastructure. In the absence of tools to monitor PV01 limit of $ 25000,
loss or gains from the intra-day trades in the bond futures became a fait acompli and
there was no way the chief dealer or the back office could prevent the dealer from
taking positions over and above the limit. This resulted in excess losses by a dealer
before the branch prohibited trading in bond futures in July 2011 after incurring
losses amounting to $ 371000 against a stop loss limit of $ 50000. There was no
audit trails to reconstruct the excessive trading loss. (Action)
6.2.1.3 Accounting Issues: About 93 short sale deals during January-March 2012
were reported as normal sales. Certain auction deals were accounted as short sale
deals as the purchase deals were entered after the sale deals. Distortion of profit
and loss from the deals arising from such wrong-booking was not rectified during the
reference period.
6.2.2 Forex
6.2.2.1 Internal Controls: London and Bahrain branches undertook sale and
purchase of rupee against dollar and pounds to non-resident banks across overseas
centres in violation of Sec.3 of FEMA and the regulations in vostro accounts through
its Mumbai Treasury. (Action)
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6.2.2.2 Risk Limits: The calculation of NOOP was not system driven and didn’t
include accrued interest on advances, accrued interest expenses on deposits, PV
adjustments, interest component of the open gold position. The NOOP comprising of
forex open positions, gold open positions, delta positions for derivatives was not
considered for CAR. (Action)
6.2.3 Derivatives
6.2.3.1 Policy and Products : The derivative policies, particularly overseas, missed
out on listing the eligible underlying, limiting CDS sold positions, MIS on gross
exposures, inclusion of non-permissible products and suitable & appropriateness
norms.
6.2.3.2 Internal Controls: There were gaps in concurrent audit coverage, control
over overnight open orders, deal-input lags, revenue sharing mechanism with
branches, arriving at PV01, etc. The bank had breached the weekly stop loss limit in
derivatives trading book on August 11, 2011. In Singapore branch, the daylight limit
was breached on February 20, 2012 and the overnight limit was exceeded on 62
other occasions. The approved overnight limit of $ 2 mn was exceeded by more
than $ 9 mn from April 13, 2011 to April 17, 2011 remained uncovered. The bank
had not set any limits for derivative maturities in order to reduce market/liquidity risk
on its derivatives book (Ref. para 8.7 of Comprehensive Guidelines on Derivatives);
for strike price and expiration dates in order to mitigate concentration risk from the
options portfolio. The bank did not have a framework for monitoring the rate
reasonability of its derivative trades. In UK, bond trading in cash and derivatives
segments was undertaken without proper risk management infrastructure. In the
absence of tools to monitor PV01 limit of $ 25000, loss or gains from the intra-day
trades in the bond futures became a fait acompli and there was no way the Chief
Dealer or the Back Office could prevent a dealer from taking positions over and
above the limit. This resulted in excess losses by a dealer before the branch
prohibited trading in bond futures in July 2011 after incurring losses amounting to $
371000 against a stop loss limit of $ 50000. There was no audit trails to reconstruct
the excessive trading loss EN 608. (Action)
6.2.3.3 Derivative Trading
(a) Forwards : There were a few compliance gaps in forward contracts entered on
both past-performance and underlying basis. This included post facto verification of
eligibility for past-performance rather than before booking forwards, non-review of
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past performance limits annually and erroneous reporting to RBI. There were INR
based and cross currency forward contracts which were neither utilized nor
cancelled even after 15 days from their maturity. Other persisting deficiencies
included not obtaining quarterly certificates from statutory auditors, declarations from
clients, marking of forward contracts booking on the ‘underlying’ document, etc.
(EN614). (Action)
(b) Currency Derivatives: The bank undertook arbitrage trades between currency
future exchanges and OTC markets in two separately located accounting units
obscuring the accurate returns from the trades. (Action)
6.2.4 Equities: The equity shares were generally acquired under ‘AFS’ category.
Despite a stop loss limit of 20 %, the bank continued to hold certain shares even
when there was decline in its market value beyond the limits. The bank had applied
for 5400 mn (allotted 594 mn) of shares in three IPOs through ASBA route by
creating a current a/c by debit to ‘Other Assets – Bank’s Investment Account’.
Though the current a/c balance was taken for arriving at NDTL / deposit insurance
premium, the bank had created fictitious liabilities and assets in the process and the
resultant CME was not subjected to capital charge. (Action)
6.2.5 Stress Testing of Trading Book: The bank conducted stress tests with shifts
in yield curve without scenarios of adverse movements in index, equity, forex etc.
6.3 Interest Rate Risk – Banking Book
6.3.1 Duration Gap: For monitoring the Interest Rate Sensitivity under Duration Gap
approach (IRSD), the current and saving account balances were not being bucketed
as per behavioural maturity. (Ref. para 4(i), 4(ii) of Appendix I of RBI circular DBOD.
No.BP.BC. 59/21.04.098/ 2010-11 dated Novemeber 04, 2010). Instead of using the
carrying rate of term deposit rates, card rates for corresponding maturities were used
as yields for computation of modified duration (MD) of TDs and interbank placements
(Ref. para 4 (iii) of Appendix I of the above circular). The bank had not studied the
trend in the growth of the fixed income portfolio in its balance sheet and possible
impact on the earnings/capital position from adverse interest rate changes. There
was no independent review of the interest rate risk mechanism. (EN 610) (Action)
6.3.2 Stress Testing – Banking Book : The vulnerability to loss in stressed market
conditions viz. changes in interest rates in individual time band to different relative
levels, pre-mature withdrawal of the core portion of deposits, etc. were not being
measured for establishing limits and policies (Ref. para 5.5 of circular ibid)
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6.4 Risk Assessment – Market Risk
6.4.1 Level
6.4.1.1 Risk Appetite: Total capital charge of 35237 mn ( 45813 mn) for market
risk included capital charge of 34697 mn ( 45273 mn) for interest rate risk and
540 mn ( 540 mn)for forex and gold risk. The MD of the HTM, AFS and HFT
portfolio were 4.00 (4.14), 2.89 (3.41) and 4.55 (NIL) respectively. The portfolio MD
of 3.74 (3.96) implied 1% change in interest rate resulting in a change in the value of
the total portfolio and the AFS and HFT portfolios combined by 128313 mn and
by 23157 mn respectively. (EN 607)
6.4.1.2 ALM Policy: The policy did not specify limits for monitoring impact of change
in interest rate on the NIM of the bank and wrongly set the limit to monitor impact on
NII with 1% change in interest rates for both assets and liabilities at 5% of capital
and reserves of the last audited balance sheet (Ref. Para 5.1 of circular DBOD. No.
BP.BC. 59 / 21.04.098/ dated November 4, 2010). In the absence of prescribed
periodicity for policy review for interest rate sensitivity, limits for both types of interest
rate sensitivity have not been updated in the last 7 years (EN 615). (Action)
6.4.1.3 Model Risk: Deficiencies in modular and parametric structure of Murex
aggravating the model risks included non-availability of yield curve to arrive at NPV
and delta equivalent in option report; non-activation of day-light limits, incorrect
configuration of holiday, large no. of missing deal ticket numbers, NOOP calculation
for derivatives without NPV adjustments. The application suffered from control issues
in the event of breach in counterparty limit and STP through multiple folders. The
bank had not conducted back testing of its models used for Interest rate risk
In view of the above the risk level of market risk was considered to be Moderate.
6.4.2 Direction In view of the continued lack of internal controls for market risk and
non-rectification of the issues listed above, the direction of market risk was assessed
to be ‘increasing’.
6.5 Funds and Liquidity Management
6.5.1 Statutory and Regulatory Compliance
6.5.1.1 Regulatory Statements (EN 616)
(a) Structural Liquidity Statements (SLS): Liquidity deficit in 2-7 days and 8-14
days buckets got covered on a cumulative basis by the surplus in the first bucket
owing to large excess SLR securities. The bank’s largest negative mismatches were
apparent in ‘6 months - 1 year’, followed by ‘3-5 years’ and then ‘3-6 months’
buckets. Certain deficiencies in bucketing under SLS by domestic / overseas
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treasuries had potential impacts on actual liquidity management (EN 616). (Action)
(b) Dynamic Liquidity Statements (DLS) : The Dynamic Liquidity Statement was
not prepared as per the regulatory guidelines on ALM System amendments (Ref.
DBOD. No. BP.BC. 38 / 21.04.098/ 2007-08 October 24, 2007). Certain items such
as ‘interest on investments’, ‘off-balance sheet items excluding repos’, and ‘others’
were omitted.
6.5.1.2 Overnight Money: The bank was mostly a net lender in the call/notice
money market with the average LAF borrowing increasing by 76.29% to 186602
mn ( 105845 mn), constituting about 15-33% of the total LAF market volume.
6.5.1.3 CRR/ SLR: The bank depended heavily on LAF borrowings to maintain CRR.
6.5.1.4 Base Rate: The methodology for computing base rate was pegged to
existing/proposed card rate for 180-days term deposits and inelastic to actual cost of
deposits/funds. The bank had reckoned 1.46% increase in cost of deposit in four
base rate reviews during first half of the year against actual of 0.69% and assumed
cost of deposit at 7% against actual 5.95% during the year. The computation of
negative carry of deposits from CRR/SLR to determine effective cost ignored the
positive carry of SLR investments rather than setting-off against the negative carry.
For computing average return on net worth, while the numerator excluded the net
profit to be derived from treasury activities, etc, the denominator carried the entire
deployable deposits. The advances being priced with reference to the base rate
constituted 28% (19%) of total number of accounts and 64% (46%) of total amount
outstanding. (Action)
6.5.2 Internal Policies and Compliance
6.5.2.1 Policy Adequacy: The ALM Policy neither covered (i) asset quality, (ii)
capital adequacy, (iii) desired growth and profitability nor prescribed the frequency of
presenting SLS, MAP, SIR, DLS, Liquidity Ratios and Liquidity stress testing to the
ALCO. On occasions, a section of the ALCO met only to decide rates on various
types of deposits (bulk, retail, NRE, etc). The quality of MIS and depth of
deliberations in the ALCO were sometimes short of required standard warranted by
the issues at hand. Liquidity ratios were reported to be within limits by not computing
them as per revised formulae of ALM policy of August 2011. (Action)
6.5.2.3 Foreign Currency Liquidity: The balances in 137 (169) nostro accounts
declined to $147 mn ($285 mn). Apart from the foreign currency denominated
deposits, the bank’s overseas borrowing (excluding FCY borrowings used for
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financing export credit) stood at $252 mn constituting 1.56 % of the tier I capital.
Short term lines from banks were utilized for its foreign currency requirement.
6.5.2.4 Liquidity Stress Testing: The bank’s liquidity stress testing covered only
domestic operations and the results were not presented to the Board. The stress test
policy did not prescribe an action plan in case of a breach of capital stress loss limits.
Instead of defining each of the three scenarios in scenario stress test, the SLS was
prepared by stressing risk parameters in each scenario. The bank assessed the
cumulative impact of scenarios over 90 days and came up with a funding plan for
liquidity gaps in 90 days without mapping to various buckets as per liquidity
requirements. Despite being bank-specific stress scenarios/ risk factors, the funding
plan had assumed generation of CDs and bulk deposits equal to 20% of the liquidity
mismatch in each scenario. The basis of fixing the capital stress loss limits at 5%,
10%, 15% in each of scenarios was not specified in the stress testing policy.
6.5.3 Resource Mobilization and Deployment (EN 619)
6.5.3.1 Short Term Liquidity : The short term liquidity deteriorated as the ratio of
cash and liquid assets to total assets at 13.53% (15.67%); ratio of purchased funds
to liquid assets at 91.89 % (115.12 %); and ratio of purchased funds to total assets
at 13.57 %( 13.85 %) reflected decline of short term liquidity coverage.
6.5.3.2 Liability Profile
(a) Liability Mix: The loss of average CASA deposits as a percentage of total
average liabilities (deposits and borrowings) to 44.81% (46.42%) had to be
replenished by increased average share of term deposits at 55.19%(50.58%) and
borrowings, mainly under LAF, to 2.60% (2.30%). The share of domestic deposits in
total deposits shrunk to 94.11% (94.99%).
(b) Deposit Profile
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The CASA deposits ratio of the bank fell to 44.81% (49.42%) due to a sharp fall i.e.
24.96 % or 327451 mn in current accounts. The deposit profile presented higher
degree of concentration with top 20 depositors contributing to 5.68% (4.31%), top 50
and top 100 depositors contributing to 7.41% (6.16%) and 8.91% (8.14%)
respectively of total deposits. (EN 622)
(c) Liability Pricing: There was disconnect between bank’s pricing process/ policy /
card rates and actual interest being paid, particularly in bulk deposits (i.e. 10 mn &
above). During April – May 2011, 299 bulk deposits were paid 0.25-1.75% additional
interest over card rates arbitrarily. Even after introduction of differential interest rates
for bulk deposits from June 02, 2011, in 88 / 398 of the sample cases of June 2011,
similar arbitrary application of higher interest rate was evident. This violated the
regulatory guidelines on paying interest on deposits (Ref. para 2.27 (c) (ii) of RBI
circular DBOD.No. 9 /13.03.00/2011-12 dated July 01, 2011) (EN 621) (Action)
(d) Domestic CD Ratios : The higher CD ratio of 78.51%(76.32%) was a function
of lower growth in deposits at 10.72% (16.01%) vis-à-vis 13.08% (21.08%) growth in
advances and was reflected in incremental CD Ratio of 92.43 %( 98.13%) as well as
the adjusted CD Ratio of 68.61% (67.35%). The major factor influencing the
denominator came from transfer of captive term deposit of 232590 mn to bank’s
Trust of Pension & Provident Funds.
6.5.3.3 Fund Management: The cost of funds went up to 6.15% (5.35%) and cost of
deposits was 5.95 % (5.26%). The bulk deposits i.e. those above 10 mn, stood at
1141050 mn ( 968460 mn). The global average yield on assets increased to
9.07% (7.90%) and cost of funds to 5.69% (4.98%).
6.5.3.4 Swapped Funds: The bank had swapped rupee equivalent of $798 mn for
funding its PCFC advances.
6.5.4 Liquidity Management
6.5.4.1 Models and Assumptions: The bank did not review the assumptions and
update the emerging situations as well as regulatory action overseas to assess the
liquidity risk at global level. (Action)
6.5.4.2 Group Liquidity: The bank’s overseas branches/subsidiaries showed high
dependence on purchased funds vis-a-vis illiquid loans and intra-group placements
implying dependence on HO funds. The contingency funding plan did not include the
course of action to be adopted for associates and subsidiaries in the event of a
contingency for the parent.
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6.5.4.3 Key Liquidity Ratios: Prime assets to total assets ratio increased to 8.49%
(7.51%) largely on account of a 50% increase in cash between the two periods. The
ratio of liquid assets to total assets declined to 13.53% (15.67%) on the back of
increase in net loans to customer deposits to 85.12% (83%). The liquid assets as a
percentage of short-term liabilities declined to 54.33% (59.32%). The funding
volatility ratio declined to 38.65% (41.55%) (EN 624).
6.5.4.4 Contingency Plan: Liquidity crisis, as defined in the ALM policy, had been
triggered twice during the last quarter of the year but the bank did not activate any
contingency plans in anticipation of CRR cut by RBI. A review of Contingency
Funding plan did not scale the amount that might be raised from each source and
the impact of such raising on the P&L of the bank and was not reviewed quarterly, as
internally required (EN625).
6.5.5 Liquidity Risk
6.5.5.1 Level: In view of the continuing excess liquidity position and other systems
in place, the level liquidity risk of the bank was considered Moderate.
6.5.5.2 Direction: In view of no serious disruption in liquidity profile, the direction of
liquidity risk was considered ‘stable’.
7 Systems and Controls
7.1 KYC, AML and CFT

7.1.1 Policy Adequacy: The risk profiles of bank’s customers were non-compliant
with regulatory guidelines as the operative risk categorization was auto-generated
from an AML software (viz. AMLOCK) based on 5 undeveloped parameters. The
visible risk categories in CBS had mere decoy value and were of no relevance to the
AML process leading to false assurance and precluding enhanced due diligence
wherever warranted e.g all accounts in the branch with highest numbers of STRs
filed in India continued to be categorized a ‘Low” risk and certain STR filed accounts
were still without KYC documents. The policy skipped the stipulation for periodical
review of risk categorisation of customers’ at least semiannually, periodical updation
of identification data as well as setting trigger limits for transactions in accounts.
(Ref.para 2.10(a)/2.4(e) of MC). Without policy guidelines on turn-around time for
alerts management, certain alerts were processed for up to one year from
transaction date. (Action)
7.1.2 HO Oversight: The structural integrity and systems / resource allocation for
KYC/AML surveillance was not commensurate with size and complexity of the
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operations. The KYC/ AML Cell had no role to play in the KYC process and operated
during the year without any standard operating procedures, time stamp on process
flows, procedure to deal with media reports / pointers. In a sample study, 34 of 36
cases were not noticed by the cell in respect of reports in public domain where
specific accounts of the bank were quoted as involved in AML activities.
Management audit of December 2011 had adversely commented that processing
sensitive media reports for back-check and the system not being robust enough to
capture sensitive scenario. The Cell followed white-listing certain alerts of false
positive nature that excluded them from surveillance for specified period thereafter.
On an average, a base level officer handled more than 1800 alerts in one day. Only
42 scenarios were used to generate alerts. The AML system was not enabled to
identify money mule / MLM accounts / integrally connected cash transactions / walk-
in customer transactions. False compliance by LHOs, incomplete information on
KYC compliance level, non-carrying out of specific instructions on the subject, finding
of large scale KYC non-compliance by internal auditors were not matched by HO
action. Deficient oversight was manifest by audit findings of KYC related deficiencies
in high risk branches in high risk accounts rising to 36.78% (34.55%) and in terms of
number of such accounts, to 37.32% (27.34%). Deficiencies in monitoring / reporting
cash transactions / remittances increased to 12.59% (5.85%). Copies of monthly
CTR filed by HO were not made available to branches for audit / inspection purpose.
Lack of exception report mechanism and concurrent audit coverage aggravated
control regime for KYC compliance. While the LCPCs returned about 10.56% KYC
papers to branches for defects rectification, the accounts were allowed normal
operations and there were 401443 of 419455 such cases pending at branches for
beyond 30 days. In Chandigarh circle, there were 62 border area branches sensitive
to fake currency notes but were not supplied adequate infrastructure / training to
tackle the challenges. The reporting of counterfeit currency notes to the controllers
was also observed in certain branches. In certain circles, about 49% branches in
PAN and 33.50% branches in TAN breached the 2 % tolerance limits fixed by the
HO without much follow up. There were more than 2833 random savings bank
accounts of ineligible entities, despite a reported cleansing exercise by the HO
business department in respect of 8244 customers in the month of February /March
2012. (EN 701). (Action)
7.1.3 Compliance Level: The bank refused to share with the AFI team STRs
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reportedly filed by the bank on grounds of confidentiality, in violation of Sec. 35(2) of
BR Act, 1949 and GOI notification G.S.R 381(E) dated June 27, 2006 under PML
Act, 2002. Very large number of deposit accounts were KYC non-compliant despite
regulatory instructions issued in 2003 for time-bound compliance of old accounts. At
least 1156 deposit accounts were maintained without name/s of depositor/s and
operations were allowed in some of them. There were other areas of non-compliance
with the regulatory KYC/AML/CFT guidelines in the matters of customer identification
and acceptance, scrubbing of names with UNSCR lists, de-duplication of customer
IDs, monitoring proprietary firms, etc. A large number of depositors / borrowers were
allocated multiple customer IDs. The bank did not monitor large value transactions
in newly opened accounts which, in a few cases, led to alleged money laundering
activity. In certain cases, the information in the identification document and accounts
did not match. In a large number of deposits / retail loan cases sampled, the
evidence of verification of identity / address proof documents with originals were not
in evidence. Majority of bank’s lockers were without identification codes inscribed on
the keys. The cash transactions put through by UCBs on behalf of its customers
were not considered for ALM alerts. The regulatory prohibition on issue of DDs etc
against cash above 50000 was violated in 16773 (6927) instances involving issue
of DD/NEFT amounting to 4198 mn ( 6770 mn). The bank had not examined the
risk categorization of 2058 branches in districts affected by naxalism from CFT
perspective. In respect of 8 such regions, the annual spurt of small loan NPAs was
more than 100% accompanied by quick mortality. The sampled data indicated NPAs
of 27880 mn out of which 27799 mn i.e 99.71% were cases of quick mortality.
Certain Circles lagged in compliance with FCRA including a case of non-reporting of
foreign contribution to a Trust of Madressa. (Action)
7.2 Audit and Control
7.2.1 Control Mechanism: The delegated audit functionaries at ZIOs / circle audit
cells reported to the circle heads rather than the Internal Audit Department. There
were instances of deputing Inspecting Officers to units where they were involved in
operations / decision taking in the past, contrary to internal guidelines and revision of
score allotted by Inspecting Officers by approving authorities on grounds which were
not explicitly mapped to the detailed observations in the report. In some branches
credit audit scores were integrated to RFIA to improve the audit rating. (Action)
7.2.2 Scope and Coverage: Out of 8485 risk based internal audits and 580 credit
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audits scheduled in the audit plan, 8336 and 482 audits respectively could be
completed. Credit audit (offsite) could be carried out in only 67 out of 124 auditable
units, a target achievement of only 54.03%. The bank had not ensured completion of
IS Audit of all systems as envisaged in Audit Plan for 2011-12. No detailed risk
assessment of IT systems was carried out by IS Audit function for developing an
audit plan for undertaking IS Audit as required (ref. DBS.CO.PP.BC.10 /11.01.005/
2002-03 dated December 27, 2002). The coverage of concurrent audit was short of
the areas indicated by RBI. (Action)
7.2.3 Quality of Reports and Compliance: Compliance audits by the bank revealed
false compliance to the extent of 60-88 % in certain branches in high and medium
risk areas and compliance to concurrent audit reports were not on record in certain
other cases. Spot audit reports in a few cases were reported closed without actual
compliance. The HO had introduced a system of ‘forced closure’ of credit audit
reports, without actual compliance within prescribed time line, against negative score
in following audit cycle with 20 % of the reports so closed between January and
December 2012. While RFIA reports were closed subject to rectification of a number
of irregularities, there was no system of recognizing the timeframe for the same. The
SCAs had found the reports of various auditors of foreign branches worded in a
vague manner. (Action)
7.2.4 Rating Migration: Of 8419 units for which ratings were available, 70% were
rated ‘adequately controlled’ whereas a 27.21% (28.24%) were rated as ‘well
controlled’. In terms of overall migration in ratings 1338 auditable units migrated to
improved ratings and 1087 units migrated to lower ratings.
7.3 I T Systems
7.3.1 Systems Assessment
7.3.1.1 General: The fragmented IT landscape was aggravated by certain
unmitigated security and control issues of critical nature with the CBS and other
systems including evidence of access by more than 100 retired employees, frequent
back end updation, deficient user / secured access controls.
7.3.1.2 System identification of NPA: Despite implementation of CBS induced
identification of NPAs and provisioning through a separate application viz. CCDP,
the process remained essentially manual, both from the systems and data
perspectives. There were evidences of unjustified data manipulation resulting in
understatement of NPAs. LFARs of certain circles had pointed out interest accrual in
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NPAs by the system which had to be reversed through MOCs. The system based
identification of quick mortality accounts was flawed. (Action)
7.3.2 Cyber Security: Bank-wide security metrics/ arrangement with ISPs for
protection against Distributed /Denial of Service attacks were not in place. Forensic
audit capability across systems / blue print for the same was not available. (Ref.
DBS. CO.FrMC. BC.No.10/23.04.001/2010-11 dated May 31, 2011)
7.3.3 IT Controls: There were inadequacies in the control processes and monitoring
mechanism in respect of outsourced operations. Owing to errors by one such
outsourced vendor in maintaining the currency rates on ATM switches, lower rupee
amounts were debited to accounts of international debit card users during Dec.2011-
Jan.2012 period resulting in excess payment of 156 mn. In November, 2012,
incorrect generation of transaction log file by an ATM switch vendor during
reconciliation process led to 3604 entries wrongly being credited to customer
accounts. The system audit report of CBS had pointed out variance between system
computed interest and that calculated outside the system. (Action)
7.4 Technology Risks
7.4.1 BCP/ DRM: The BCP as well as its testing standards of the bank glossed over
several critical aspects stipulated under regulatory guidelines and were not tested at
branch level in certain circles. There were 109 branches functioning without any
back-up for primary connectivity. (Action)
7.4.2 Dependency Factor: The bank had high dependence on vendors in areas like
system administration, database administration, network architecture and
administration. The bank did not have specific documented plans to address issues
in the event of non-availability of services from the concerned vendors performing
critical activities and the same was not a part of periodic BCP testing.
7.4.3 Risk Impacts: The bank had experienced a system outage on October 1, 2011
due to which CBS, internet banking and ATM system were impacted almost the
entire day. There were 15 instances where transaction details on CBS could not be
uploaded to AMLOCK package within T + 2 working days. Test check of ATM uptime
status report for first fortnight of November, 2012 indicated percentage of ATMs out
of service ranged between13% to 18%.
7.5 Management Information System
7.5.1 Infrastructure Assessment: Due to poor data quality of bank’s online
systems, the RMD maintained its own mini Data warehouse after cleansing the data.
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The MIS continued to be operating in silos across multiple systems requiring manual
intervention as well as outside the systems. The Enterprise Data Warehouse project
had been a work in process since 2009. In regard to regulatory automated data flow
infrastructure, though the bank had initially planned to complete 101 reports by
September, 2012, only 52 reports had been automated as of end of October, 2012.
Buyers Credit, Devolved LCs and invoked guarantee data were maintained in excel
sheets rather than on CBS or any other system. (Action)
7.5.2 Quality and Integrity: The published number of branches included at least 4
defunct / closed branches due to non-cleansing of bank’s data base. The quality and
integrity of the data under various MIS formats was unreliable in view of the
incomplete / inconsistent base data in the CBS and other systems. Variance
between bank’s control returns and DSB data was common across all circles,
particularly for exposure to capital market, real estate and NBFCs as such data
reported in various other control returns and DSB IV varied at most circles. The
reported lending to priority sectors including direct agriculture, the compliance with
LTV ratio, unsecured lending, lending to sensitive sectors, capital charge, quick
mortality, etc were certain critical areas which were being significantly mis-stated due
to MIS quality. The data quality in respect of the retail loans potentially covered up
substantial non-performance, of which under-provisioning of 5115 mn had been
crystallized by AFI. The exception reporting system of the bank was one of the most
under-used control tools both in terms of enhancing the exception generation and
subsequent disposal/monitoring. Certain branches did not generate exception
reports or voucher verification or EOD reports for internal control. (Action)
7.5.3 Strategic Support: Due to fragmented and un-correlated nature of various
MIS used for decision-making aggravated by the reliability issues, the strategic
support capability of MIS was limited.
7.6 Regulatory Reporting: There was significant differences between the DSB
Returns filed for unaudited balance sheet and that for audited balance sheet. The
difference between asset quality data submitted in DSB Returns and input in data
collector / BSA data for March 2012 had undergone 8 revisions during June-
December 2012. (Action)
7.7 Balance Sheet Disclosure: As regard disclosure on advances secured by
intangible assets, assignment of telecom licences of telecom service providers had
not been mentioned as part of the disclosures.
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7.8 House-keeping
7.8.1 The reported cash balances of the bank were incorrect by an unascertained
amount. The control account for currency chest transactions was used for non
currency chest transactions and even by non currency chest branches. The bank
maintained a single pool account for all types of cash shortages or excesses
including those at branches or ATMs, thus netting excesses of one place with
shortages in another. The HO had neither any policy nor information on transfer of
such excess/short cash to P&L by branches. The internal audit of currency chests
observed that the currency chest bins in 8(3) chests did not match with balance
reported under CBS. The bank was imposed penalties of 17 mn and charged penal
interest of 5 mn which was internally reported as 1 mn and 11 mn to the
management. (Action)
7.8.2 The reconciliation status between the CBS application, CS Eximbills (Trade
Finance System), Murex (Treasury operations), and Finance One (accounting
consolidation) were not being independently controlled. The Reconciliation of Import
LC liabilities of EXIM platform & CBS were not carried out periodically with continued
differences. There were difference in classification of accounts in Murex and CBS.
Mapping issues between branch and Corporate GLs persisted. System Suspense
remained unreconciled for long periods e.g. 142 technical suspense accounts as of
end of October, 2012 was pending beyond 3 months. Clubbing of many inoperative
accounts into a single account and the issue of disappearance of names since
migration in 2007 was unresolved posing significant operational risk. (Action)
7.9 Frauds and Vigilance
7.9.1 Fraud Trends: Increase in outstanding fraud cases by 10.60% and the
amounts involved by 36.28% indicated rising trend of high value frauds. The number
of fraud cases reported increased by 19.86% and the fraud amounts by 180.77%
owing to a few major frauds taking place in mid corporate loan accounts. The bank
did not have a system of mapping the accounts involved in the frauds to the fraud
folio number i.e. fraud incident number hence lacked holistic monitoring
effectiveness. Delays between 6-268 days beyond prescribed 21 days in reporting of
frauds were observed for which no staff accountability was examined. (EN 702).
7.9.2 Fraud Risk Management: The bank did not implement fraud monitoring in
respect of transactions carried out in one of the switches (Base 24) till date, (ref.
DPSS.PD.CO.No.513/02.14.003/2011-2012 dated September 22, 2011). In respect
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of about 13 mn accounts, no customer signature was uploaded in the system. No
mobile numbers were available with the bank in respect of 33 mn or 95 mn active
ATM customers and as of end of October, 2012, 400 of 23121 ATMs of the bank
were without camera and 5190 of 12657 identified ATMs without caretakers. Fraud
Analysis Cell, though operative since March 2010 had still been examining the AML
alerts for fraud detection, revenue leakage aspects of non-staff deposits receiving
higher interest, ATM withdrawals of 0.20 mn or more and additional work of
scrutinizing voucher verification reports. The November 2009 proposal of
implementing fraud detection software was yet to be implemented. Despite incident
of fraud, the bank continued the fraud prone practice of releasing metal loans without
confirming the genuineness of BGs. (Action)
7.9.3 Vigilance cases: Officers listed as “with doubtful integrity” were posted in
sensitive positions in certain cases. Suo moto investigations by circle vigilance
departments were not completed for all selected branches. In many major penalty
cases, reports were submitted with delay ranging between 1-9 months beyond CVC
stipulation of 6 months and 240 of 321 suspension cases were pending beyond 6
months. The monitoring of high value transactions / balances in the staff accounts
were left to the respective branches. There was lack of controls and surveillance
over various fraud prone deposit accounts such as inoperative, deceased, subsidies
/ subvention etc. and instances of debits being made from such accounts to staff
accounts were not being independently monitored. Despite large value single bid
orders being placed with existing vendors, adequate standards for ensuring rate
reasonability had not been addressed. (Action)
7.10 Customer Service
7.10.1 Assessment: The bank had not conducted any annual survey of customer
service. As per independent surveys available in public domain, the services of the
bank were not rated as best among PSBs. The CIBIL report persistently showed
certain old loan accounts of the bank as long outstanding after the bank migrated to
a new CBS and changed the account numbers without closing the old account
numbers until the customers complained. Claims in respect of deceased deposit a/c
were pending for more than 46 days against prescribed timeframe of 15 days. The
improved turnaround time for retail / SME loan applications after carving out of CPCs
was 20 days more against stipulated 7 days, but reported as ‘within 7 days’ by
certain offices. In certain SMECCCs, return/ reject rates for loan applications topped
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50%. Of deposit accounts singly held in individual names, more than 88 mn of 147
mn accounts i.e about 60% were without nomination. The legal validity of many of
the nominations was in doubt as the bank did not receive DA1 form (Ref. Sec.45ZA
of the BR Act, 1949/Rule 2(1) of the Banking Companies (Nomination) Rules, 1985).
Certain branches refused to accept cheques, etc. over counter against
acknowledgement on grounds that drop boxes had been provided. (Ref. para 13 of
MC/ DBOD No.Leg.13953 of 16/03/2012) (Action)
7.10.2 Fair Practice Compliance: There were instances of housing loans rejected
for not obtaining insurance from SBI Life and in certain other loans, obtaining of
insurance from the company were made terms of sanction without borrower’s
consent. The bank published photographs with names/ addresses of loan
defaulters, including home loans / SMEs, without framing any objective criteria / SOP
or entering into contractual agreement with borrowers in advance to ensure that this
sensitive issue was not resorted to as a matter of routine. The bank omitted reporting
willful default of many borrowal accounts, including those involving frauds or
diversion of funds, on various subjective grounds. The bank had advertised its tax
saving deposits with misleading effective annual yield claims. The bank did not hand
over copies of the loan agreement with enclosures to the borrowers (Ref. 2.4.2 (ii) c
of the MC on ‘Loans and Advances’ - and BCSBI guidelines on Lenders’ fair practice
code.) The bank charged higher fees for ‘tatkal’ remittance services, under financial
inclusion, through certain BCs compared to its standard charges. The bank did not
publish the names of the recovery agents on its website. (Action)
7.10.3 Clean Note Policy: The internal audit of currency chests observed increasing
trend of non-sorting of notes through NSM at 54(18) and non-provision of note
exchange facilities at 105 (18) chest branches. While non-compliance with RBI
directives on detection and impounding of counterfeit notes were observed in 27(6)
cases, counterfeit notes were found in soiled note packets in 44 (0) branches. Non-
implementation of clean note policy at certain branches was also reported. (Action)
7.11 Complaints
7.11.1 Trend: The trend of complaints received and redressed reported to the
management and publicly disclosed were not only at variance but also understated
due to deficient infrastructure. ATM related complaints received by the 14 LHOs (till
December 2011) and those received by groups like MCG, IBG, CAG etc were not
included. The complaints received and disposed of by the branches were not
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consolidated by certain LHOs. The bank did not recognize complaints received from
its customers who were sold third party products in its capacity as a corporate agent.
The reported number of complaints booked marked a 1396% increase to 462381
(30904) partly because of inclusion of ATM related complaints and unresolved
complaints at the year- end by 1528% to 13414 (824).
7.11.2 Redressal Mechanism: There was no on-line system of complaints
management till September 2012. Due to the disparate systems of booking and
redressal of complaints, the control/monitoring mechanism was nearly absent.
Unresolved complaints were required to be escalated by the complainant afresh in
absence of auto-escalation process. There were no reliable MIS on unresolved
complaints, employee accountability for non-redressal. The top management was
not apprised of the aging / turnaround time analysis of pending complaints. Highly
publicized channels like ‘email response within 48 hours’ or ‘SMS ‘unhappy’ scheme
remained without any process flow or monitoring mechanism. Branches identified as
complaints-prone were not being given special attention by the controllers. (Action)
7.11.3 Banking Ombudsman (BO) : Against rise in number of BO cases by 11.29%
to 12188 (10952), the proportion awards against bank at 124 (86) constituted 1.01%
(0.79%) of the cases filed. The compensation paid by the bank grew still higher by
77.14% to 8 mn ( 5 mn).
7.12 Outsourcing: The bank did not maintain centralized data for all material
outsourced activities and conduct half-yearly review thereof. The IT Outsourcing
Policy did not define criteria for determining materiality and with several areas of
non-compliance in monitoring. The extension of record retention requirements had
not been articulated in the outsourced agreements either. The bank had outsourced
a certain FEMA related compliance functions from a CA firm without RBI approval.
While the outsourcing policy provided for preservation of records in accordance with
legal / regulatory obligations of the bank, none of the SLAs specified the period of
preservation for records/documents handled by the agent. SLAs in respect of certain
outsourced vendors entrusted with material and critical roles didn’t provide clause for
bank’s / regulators right to conduct audits. There were frequent audit finding of
outsourced vendors’ free access to bank’s intranet. Audit by internal / external
auditors of robustness of risk management practice adopted in overseeing and
managing outsourcing arrangement was absent. Valuation reports of authorized
valuers gave vague terms to arrive at the given value rather than specific basis of
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arriving at values on different basis. The bank was yet to initiate steps in respect of
ATMs from a specific vendor being targeted to serial theft since January 2012 due to
certain design vulnerability known to the miscreants. Despite significant
developments in appointment and operations of BCs, bank’s policy of March 2007
had not been reviewed yet. (Action)
7.13 Risk Assessment – Operational Risk
7.13.1 Level
7.13.1.1 Framework Adequacy: A 59.56 % rise in number of operational loss
incidents resulting in loss amounts going up by 167.33% highlighted the inadequacy
of the operational risk framework. The largest contributor to such events remained
lapses in execution delivery and process management. Despite the risk drivers
above 40 % risk set by self assessment exercise at 5.04% in June 2011 increasing
to 15.00% of auditable units in June 2012, such scores were yet to be validated and
necessary action initiated.
7.13.1.2 Top Management Oversight: Accounting of operational loss incidents
revealed instances where the booking of the loss in GL was done many days after
the date of discovery of losses and many instances where the losses were booked
prior to the date of recorded discovery of the losses by the branches.
In view of the large number of deficiencies in systems and controls including KYC/
AML framework, IT governance and fraud prevention/ detection systems, the
operational risk was assessed to be ‘High’
7.13.2 Direction
7.13.2.1 People Risk : Posting of inadequately trained staffs for positions handling
powers delegated to ADs were contrary to regulatory directions (Ref. para 6.1 and
6.4 of Annex to AP (DIR Series) Circular No.16 dated October 04, 2004).
7.13.2.2 Degrees and Tracking of Deviations: There was near absence of
deviation tracking by HO in respect of operational risks.
In view of increasing fraud loss and lack of improvement in the systems / controls/
data quality / compliance pointed out earlier, the direction of operational risk was
assessed as ‘Increasing’.
8 Foreign Exchange Business
8.1 Nostro Accounts: In a few cases, nostro accounts were overdrawn due to
wrong/non-reporting by branches or deal failure of counterparty. The smart stream
reconciliation system was not used in all category I branches and though the entries
Page 43 of 48
not system-reconciled were required to be reconciled by the LHOs, certain LHOs did
not have the break-up of debit / credit entries. The internal system did not mark
nostro accounts as closed after actual closure. 33 nostro accounts had overdrafts on
103 occasions exposing bank to attendant risks and overdraft cost of $840 mn.
8.2 Vostro Accounts: There was no policy to periodically assess credit risk of the
correspondent banks. There were 26 accounts inoperative for 6 months and longer,
including 10 with no balance, without being closed. The balance confirmation
exercise had been done for only 143 of 270 accounts with no evidence of receiving
confirmations (or acceptance) from the account holders.
8.3 Remittance Facilities: The annual review of the exchange houses was filed with
RBI with a delay of over 2 months. The inward remittance register in a few branches
did not record the purpose of remittances / account details and in a few cases,
compliance with regulatory guidelines including those on KYC/AML.
8.4 Authorised Dealership: Despite a large network of AD branches there was no
apex oversight structure for transactions relating to FDI, ODI and trade finance. Lack
of MIS on critical transaction data rendered the monitoring of delegated power
exercised by AD bank branches under FEMA, 1999 ineffective. No Board approved
policy to deal with import follow up (ref. para C.10 of MC on ‘Import of Goods and
Services’ dated July 01, 2011) was in place and ECB cases were processed by
different verticals. RBI authorization for PIS operation by 12 branches was not
available. The FC-TRS data compiled by nodal branch for 51 transactions were
incomplete in fields critical for determining compliance with reporting timeframe and
were yet to be reported to RBI for regularisation. Reference to EXIM Policy clauses
in respect of OGL quoted by the applicants was not in evidence. (Action)
8.5 Audit : Specialized FEMA audit was not conducted for all the AD branches and
the existing audit process lacked focus in areas involving exercise of delegated
power by AD like FDI - transfer of shares, escrow account and pledge of shares;
portfolio investment; ECB; overseas investment, etc. Concurrent auditors certified
adherence to FEMA guidelines on verification of A1/A2 forms or documents
evidencing import without conducting 100% checks (Ref. Para C.9 (i) of RBI MC
No.07/2011-12 dated July 01, 2011). Audit of advance remittances received for
imports or exports, interest subvention for export credits, verification of XOS
statements were not scoped under concurrent audit. Persistent deficiencies pointed
out by auditors did not receive intervention at systems level. (Action)
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8.6 ECB / Trade Credits (TC): There were at least 112 instances of breach of all-in-
cost ceiling in TCs, one instance of violation of the maturity limit of one year for non
capital goods and 6 instances of breach of “all-in cost ceiling” of LIBOR + 200/350
bps. Pricing of ECB was decided by HO and overseas offices were chosen for
parking the facility rather than seeking rates from foreign offices and allotting ECB to
lowest quote. The bank had no guidelines for operational issues like ECB-2 return
follow up, exercise of delegated power, etc. Contrary to internal policy, ECBs were
sanctioned to 3 companies with internal rating of SB-8. No approval under FEMA
was given by the AD bank for security for ECB like fixed asset, equity shares and
personal/corporate guarantee of borrower, required to be pledged in favour of
overseas lender in terms of the delegated power subject to stipulated conditions (ref.
para 1(A)(vii) of Part I MC on ECB and TC) (Action)
8.7 Export Business: Persistent irregularities included areas of maintenance of
registers, allocation of serial numbers, MIS, and proper documentation, follow-up in
export related business. There was significant pendency, some since 1993-94, for
effective follow up for compliance with various regulatory instructions.
Comprehensive data on export bills written off was not available. (Action)
8.8 Foreign Direct Investment: The bank received FII / FDI for companies eligible
to engage in agricultural activities as per their MoA. In the absence of internal
mechanism to monitor two-stage FDI reporting (Ref. AP (DIR) Circular No. 13 dated
September 14, 2010), there were delays up to 33 months in reporting of FDI of
40890 mn and non-reporting in case of receipt of FDI indirectly through an AD other
than where the corporate had its account. (Action)
8.9 Overseas Direct Investment: Due diligence for ODIs lacked details e.g. activity
for 8 Indian companies and 21 JV/WoS were missing. Filing of APR by Indian
company was not scrutinised to cull out information on repatriated profit/dividend.
Investment in overseas JV/WOS engaged in financial services was allowed contrary
to Regulation 7 of Notification No. FEMA 120 dated July 7, 2004. (Action)
8.10 Non-Resident Accounts : In sampled 16 of 524 NRO current accounts,
majority in existences for more than 5 years, were for non- NRIs like resident entity /
individual and foreign citizen in violation of FEMA regulations (Ref. Schedule 3 to
Notification No. FEMA 5). There were instances of improper maintaining of NR
accounts such as opening a/c on the basis of mere visa stamp, deposits opened with
local funds etc., renewal of deposits after change of residential status etc. The bank
Page 45 of 48
had violated the regulatory limits and internal margin requirements on loans to NRIs
including those against NR deposits in several cases and lent in currency different
from deposits / deposits with another bank (EN 802). (Action)
8.11 Off-shore Banking Unit: The bank had not reviewed the business strategy for
OBUs with declining business volumes.
9 Overseas Operations
9.1 Scale of Operations: Against the management strategy of increasing the share
of international business in bank’s balance sheet to 50% during 2013-16, the
overseas assets grew by 25.25% (12.59%) to 1833252 mn ( 1464251 mn) against
12.38 % (16.57%) growth of global balance sheet and formed 13.14% (11.80%) of
the latter. In Sri Lanka, oldest among overseas presence, the bank had a market
share of 0.50% as against total foreign banks shares of 11.50%. (EN 901)
9.2 Statutory / Regulatory Compliance: Host supervisors had adversely observed
on compliance functions and control frameworks of the overseas branches and some
recommended appointment of external consultants. Other concerns included poor
credit quality in California and CRE exposure in USA, lack of overarching risk
management in Australia, improper classification of loans in Bangladesh,
inadequate monitoring of deterioration of counterparties, financial qualities and
management decisions in France, monitoring of the overnight currency position in
Germany, large exposures and inadequate identification of NPAs in Maldives,
inadequate segregation of duties in retail banking in Singapore, liquidity
management/ under-payment of tax in Antwerp, under-reporting of exposure in
Tokyo . The MAS had stipulated higher AMR prescriptions on SBI, Singapore based
on supervisory assessment of credit, liquidity risk management and AML controls.
9.3 Asset Quality: Proportion of investments in corporate bonds and debentures by
overseas branches rose to 57.39 % (45.95%) mainly by reducing investments from
G-secs by about 39.74%. The overseas investment book with 42.87% (37.68%) of
investments rated BBB-/Baa3 and 13.51% (10.58%) sub- investment grade carried
significant downgrade risk. The rating profile of derivatives too went down with
drastic reduction of AA rated derivatives to 17.37% (55.60%) with increase in lower/
underrated derivatives. Norms for calculation of diminution in fair value in case of
restructured assets overseas was not stipulated.
9.4 Funds Management: Money market placements were considered as liquidity
management tools and not a profit making activity and hence went without
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performance analysis. The overseas branches did not have an effective FTP
mechanism to use it as a business signaling or strategic tool for pricing, performance
measurement and approval of new products / services. The Singapore Branch did
not prepare Dynamic Liquidity Report as required (para 13.2.2 of ALM policy for
foreign offices). High value deposits ($10 mn from non-banks) constituted 49.43% of
deposits in overseas territories. The FCY borrowing accounted for 0.001% (0.001%)
of the total borrowings at $ 813071 mn ($ 702316 mn) as the ratio of purchased
funds to total assets rose 31.55 % (22.32 %) at overseas centres. As per system
audit of system treasury in October 2011, profits from money market operations were
being calculated arbitrarily and did not reflect the correct picture in UK. (EN 902, 903,
905)
9.5 Strategic Concerns: The Return on Average Equity in foreign offices trended
downward to 12.81% (13.58%) with growth in operating profit declining by 9.80%
(43.40%). The bank’s efforts to expand by way of new products or business in UK
had to face sudden ends due to lack of commensurate market knowledge and
adequate systems and processes. Sudden spurt in NPAs at overseas branches were
attributed by the bank to regulatory intervention leading to valuation of assets,
bilateral trade restrictions, change in duty structure, more stringent norms for
identifying stressed assets, highly leveraged structure of borrowers, poor loan
structure, ambitious financial projections / repayment obligations exceeding cash
flows and adverse liquidity.
10 Subsidiaries / Associates
10.1 Regulatory Compliance: The financial penalties paid by the associate banks,
domestic /overseas subsidiaries stood at 71 mn ( 74 mn, excluding the fine of CAD
12,500 imposed on SBI Canada) including that for FERA violations by SBBJ and
AML violations by SBM. The IRDA inspection of SBI Life had revealed 22 violations
apart from payment of up to 20 % of single premium to SBI and associate banks as
corporate agents for group insurance policies purchased by them as insured entities
for which it was levied a penalty of 7 mn in July 2011.
10.2 Governance: The top management of the bank essentially relied upon the
governance structure of the subsidiaries / associates.
10.3 Group Risk Management: The documentation in respect of loan accounts of
erstwhile banking associates since merged was not traceable in many cases. A
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subsidiary viz. SBI Cards had to write off 222 mn receivables on the grounds of
non-reconciliation with GL and over-statement of profits in the past.
11 Compliance Review
11.1 A compliance re-engineering project outsourced to E&Y in January 2009 to

align with regulatory guidelines issued in 2007 was still a work-in-progress while the
bank continued non-compliance with certain guidelines and the compliance policy for
the bank was approved only in December 2011. The Group Compliance Policy was
not being reviewed as required. The core compliance monitoring remained with the
business groups and the Compliance Officer merely collated the declarations of
compliance without any direct reporting line from there. The compliance function was
not being involved in certain critical decision taking processes. The sustenance of
the past compliance to AFIs was not ensured in several cases. (Action)
11.2 The bank continued to violate section 19(2) of BR Act, 1949 on 30% statutory
cap in respect of equity in respect of at least 6 companies. The INR sale and
purchase with non-resident banks overseas were also continued despite being
pointed out in AFI 2010. (Action)
11. 3 The bank ceded first charge on many fixed deposits in favour of its subsidiary
despite the opinion of its legal department of lien on fixed deposit ‘not being possible
in the eyes of the law’. The clearance of such a product from compliance perspective
was not available. (Action)
Page 48 of 48

Sbi Afi 2012

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AFI Report 2012 – SBI - Confidential

1.4 Synoptic Graphs

0% Balance with bank

Capital Utilisation Pillar I

2 Solvency and Capital Adequacy

3.1 Loan Assets

NPA Ratios Net NPA

Iron and Steel Textile %Gems

Auto Laons Education Personal Home Loans Others

4.1 Organisational Set up

4.5 Controlling Authority Mechanism: The stretched pyramidal structure of

4.8 Management of Subsidiaries: The Board had made a strategic review to

4.9 Risk Assessment – Management

5.1 Earnings Break-up

6 Treasury, Funds and Liquidity Management

6.1 Treasury and Trading Activities

7.1 KYC, AML and CFT

11.1 A compliance re-engineering project outsourced to E&Y in January 2009 to

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