Andhra Bank Financial Stmt

Dear Shareholders,

I feel delighted in presenting to you the Directors’ Report of your Bank for the financial year ended March 31, 2008. The year 2007-08 was characterized by several developments in the global and domestic economies and financial markets. The deepening of subprime crisis in the USA and increasing inflationary expectations around the major economies coupled with a slowdown in growth rates led to stern policy actions from the monetary authorities. Reserve Bank of India (RBI), too, increased the cash reserve ratio of banks by 150 basis points during the year. Domestic equity, bond and foreign exchange markets witnessed high volatility while credit demand remained subdued throughout the year. This has impacted the profitability margins of banks in general. Nevertheless, I am happy to share with you that even in this business environment your Bank could post healthy financials while maintaining high asset quality and strong capital base. During the year, your Bank alongwith Bank of Baroda and Legal & General Group Plc of UK has decided to form a joint venture Life Insurance Company. The shareholders’ agreement has already been signed and necessary formalities are being completed for setting up the company and seeking approval from the relevant authorities. Your Bank will have shareholding of 30% in the proposed company. Your Bank is also set to open its second Representative (overseas) Office after successful experience of Dubai (U.A.E.) Representative Office. The second office will be located in Jersey City in the State of New Jersey in USA. The State of New Jersey has granted their approval and license of authority for the proposed office on January 29, 2008 and once the approval of the Federal Reserve Bank of New York is obtained, representative office in Jersey City will become operational. These initiatives are set to provide your Bank a larger canvas in the Indian banking space. Coming to the business and financial performance during the year 2007-08, your Bank has reported a healthy growth in major business and profitability parameters. I am glad to share with you some of the performance highlights of the Bank for the year ended March 31, 2008: 1. 2. 3. 4.

Total business of Andhra Bank (“the Bank”) increased by 20.5% to Rs.83,993 crore as on 31.3.2008 from Rs.69,687 crore as on 31.03.2007.

Total Deposits increased by 19.3% to Rs.49,437 crore from Rs. 41,454 crore

Low-cost deposits (CASA) increased by 15.9% to Rs.16,594 crore from Rs.14,314 crore. CASA share in total deposits stood at 33.6% Gross Bank Credit increased by 22.4% to Rs.34,557 crore from Rs.28,233 crore

5. 6.

7.

8. 9.

Credit-Deposit ratio improved to 70.1% from 68.3%

Priority sector advances increased by 16.4% to Rs.13,298 crore from Rs.11,427 crore. Priority sector advances constituted 47.1% of Adjusted Net Bank Credit (RBI norm: 40%), up from 41.1% in the previous year. Agriculture advances increased by 19.5% to Rs.6,156 crore from Rs.5,150 crore. Agriculture advances constituted 21.8% of Adjusted Net Bank Credit (RBI norm: 18%), up from 18.5%. All productive sectors including agriculture, in tune with the government’s objective, received priority in credit allocation.

Advances to micro, small and medium enterprises increased by 22.7% to Rs.3,989 crore from Rs. 3,250 crore The Bank extended finance to 1,48,288 Self-Help Groups (SHGs) and the outstanding credit to such groups as on 31.03.2008 was Rs.1,005 crore

10. A drive for financial inclusion was initiated by the Bank in the districts of Srikakulam (A.P.) and Ganjam (Orissa) and 100% financial inclusion was achieved in both the districts. As a related measure, number of mobile ATMs increased to 4 and biometric ATMs increased to 3. 11. Lending to retail sector, housing and education remained the focus areas. Retail lending increased by 17.2% to Rs.7,765 crore as on 31.03.2008 from Rs.6,623 crore as on 31.03.2007. 12. Loans to housing sector increased by 18.6% to Rs.4,720 crore from Rs.3,980 crore

13. Educational loan portfolio increased by 29.1% to Rs.1,167 crore from Rs.905 crore 14. On profitability front, Bank’s Operating Profit increased by 13.5% to Rs.1,057 crore for the financial year ended March 31, 2008 from Rs.931 crore in the previous financial year.

15. Net Profit also improved by 7% to Rs.576 crore from Rs.538 crore 16. Total Income increased by 29.5% to Rs.4,871 crore from Rs.3762 crore, of which non-interest income increased by 30.1% to Rs.581 crore from Rs.447 crore

17. Higher income and efficient cost-management helped in bringing down cost-to-income ratio to 47.2% from 50.1% 18. Return On Assets (ROA) stood at 1.16% compared to 1.31% in the previous year while Net Interest Margin (NIM) stood at 2.86% compared to 3.20%. Decline in ROA and NIM was a general banking phenomenon during 2007-08 due to increased cost of funds and subdued credit demand 19. Net worth of the Bank stood at Rs.3,249 crore and Return On Average Net Worth improved to 17.97% from 17.78%.

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20. Earning per share increased to Rs. 11.9 from Rs.11.1 while book value per share increased to Rs.67.0 from Rs.65.1

21. The Bank raised tier II capital of Rs.700 crore during the year and including this, capital adequacy ratio of the Bank improved to 11.61% from 11.33% 22. Continued focus on maintaining a healthy asset quality helped in reducing Gross NPAs to Gross Advances to 1.07% from 1.41% in the previous year while Net NPAs to Net Advances also came down to 0.15% from 0.17%. 23. The Clientele base of the Bank increased to 17.1 million.

Your Bank’s network of delivery channels increased to 2128 by end-March 2008, i.e., 198 additional delivery channels during the year. The focus has been on ensuring higher presence at all-India level while covering minority-dominated districts, rural and semi-urban centres. A phasedimplementation of the core-banking solution (CBS) across all the branches has also been started. Keeping in view the needs of the debt-ridden borrowers, your Bank launched two debt swapping schemes, namely, ‘AB Kisan Rakshak’ for farmers and ‘AB Mahila Soubhagya’ for SHGs. These special schemes are intended to reduce the interest burden on select category of borrowers.

Your Bank has a comfortable Capital Adequacy Ratio and has also put in place robust risk management systems. The preparedness for migration from Basel-I to Basel-II capital adequacy norms is underway and Bank is set to meet the challenges of the new system, which will become effective

for your Bank from March 31, 2009. Besides Risk Management, proper systems are in place for approval, sanction and monitoring of credit.

It is indeed a matter of immense pleasure to share with you that your Bank’s ranking amongst world’s top 1000 banks has further improved to 532 in 2007, as is surveyed by ‘The Banker’, London. Also, recently released ‘India’s Best Banks 2007’ survey of ‘Financial Express-Ernst & Young (FE-EY)’ ranked your Bank 5th amongst public sector banks. FE-EY has ranked your Bank 8th under the ‘Credit Quality’ parameter amongst 56 public, private and foreign banks. Your Bank was also ranked First under “LIC of India- Bancassurance business” in the country amongst all Agency Banks of LIC on the basis of number of Life Insurance Policies mobilised. These recognitions are a testimony to the sound performance of the Bank.

Your Bank is committed to all its stakeholders. Their continued support has been of immense value to the Bank. I place on record sincere gratitude to all our shareholders, customers, regulators and all concerned for being our strength and motivation for a healthy performance year after year. I also take this opportunity to express my sincere appreciation to all the members of the Andhra Bank family who, with their unstinted efforts ensured yet another year of sound financial performance. With best wishes,

Yours sincerely,

(Dr. K. Ramakrishnan) Chairman & Managing Director

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Head Office: Dr. Pattabhi Bhavan, 5-9-11, Saifabad, Hyderabad – 500 004

NOTICE

Notice is hereby given that the Eighth Annual General Meeting of the shareholders of Andhra Bank will be held on Monday, the 23rd June, 2008 at SHILPA KALA VEDIKA, SHILPARAMAM, CRAFTS VILLAGE, NEAR HI-TECH CITY, MADHAPUR, HYDERABAD-500 081 at 10.00 A.M., to transact the following business:

To discuss, approve and adopt the Balance Sheet of the Bank as at 31st March 2008 and the Profit and Loss Account for the year ended on that date, the Report of the Board of Directors on the working and activities of the Bank for the period covered by the Accounts and the Auditors Reports on the Balance Sheet and Accounts. To declare dividend on Equity Shares. Place: Hyderabad

(K. Ramakrishnan)

Date : 25.04.2008 Notes:

1. A MEMBER ENTITILED TO ATTEND AND VOTE AT THE MEETING IS ENTITLED TO APPOINT A PROXY OR PROXIES TO ATTEND AND VOTE THERE AT INSTEAD OF HIMSELF / HERSELF. A PROXY NEED NOT BE A MEMBER.

2. A Proxy, in order to be effective, must be deposited / lodged at the Head Office of the Bank at least four days before the date of the meeting. No employee of the Bank shall be appointed as duly authorized representative or a proxy.

3. Appointment of a representative: No person shall be entitled to attend or vote at the meeting as a duly authorized representative of a Company, unless a copy of the resolution appointing him as a duly authorized representative certified to be a true copy by the Chairman of the meeting at which it was passed shall have been deposited at the Head Office of the Bank at Hyderabad not less than four days before the date of the meeting. 4. Attendance slip cum entry pass: For the convenience of the members, attendance slip is enclosed to this report. Members are requested to fill in and affix their signatures in the space provided therein and handover the attendance slip cum Entry pass at the entrance of the venue of the meeting. Proxy / Representative of the shareholder should mark on the attendance slip as proxy or representative as the case may be.

5. Dividend: The Board of Directors recommend a final dividend of 20% for the financial year 2007-2008 and the dividend shall be paid on 2nd July, 2008 to the shareholders whose names appeared in the Register of Shareholders as on 11th June, 2008. 6. Holding Bank shares in electronic form with National Securities Depository Limited and Central Depository Services (India) Limited: The Bank has entered into agreement with National Securities Depository Limited (NSDL) and Central Depository Services (India) Limited (CDSL) as an issuer Company for Dematerialization of Bank’s Shares. Request for Dematerialization may be sent through respective Depository Participants to our Registrars and Transfer Agents, M/s. MCS Limited, Mumbai. 7. Bank mandate for dividend or Electronic Clearing Service: In order to protect the investors from fraudulent encashment of their dividend warrants, the Bank has offered Electronic

Chairman & Managing Director Clearing Service facility to the shareholders having Bank accounts at the following centers: Mumbai, New Delhi, Kolkata, Chennai, Ahmedabad, Bangalore, Hyderabad, Nagpur, Chandigarh, Thiruvanathapuram, Bhubaneswar, Guwahati, Jaipur, Kanpur and Patna. 8. Consolidation of Folios: The shareholders who are holding shares in identical order of names in more than one account are requested to intimate to the Registrars and Transfer Agent, the ledger folio of such accounts together with the share certificates to enable the Bank to consolidate all the holdings into one account. The share certificates will be returned to the members after making necessary endorsement in due course.

9. Lodgment for Transfers: Share Certificates along with transfer deed should be forwarded to the Registrars and Transfer Agent of the Bank at the following address: M/s. MCS Limited (Unit: Andhra Bank) Kashiram Jamnadas Building Office No. 21/22 Ground Floor 5, P.D’Mello Road, (Ghadiyal Godi)

Mumbai – 400 009 10. Request to Shareholders

a. Please note that copies of the Annual Report will not be distributed at the Annual General meeting as an Economy measure. Hence, shareholders are requested to bring their copies of the Annual Report to the meeting. b. Shareholders may kindly note that no gifts / coupons will be distributed at the venue of the meeting.

c. Shareholders are advised to avoid bringing bags / brief cases/ tape records / cameras etc. as these items are subject to a security check and may not be allowed at the venue. Note: Bank shall highly appreciate if shareholders, desirous of making any suggestion, seeking clarification, etc. at the Annual General Meeting, relating to the item of agenda only may send their suggestions. Queries, etc. so as to reach the shares Division & Investors Services Cell at Head Office of the Bank atleast 15 days before the date of meeting.

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DIRECTORS’ REPORT

Directors of your Bank have pleasure in presenting the Annual Report of the Bank together with the audited Statement of Accounts and Auditors’ Report for the financial year ended March 31, 2008.

PROFITABILITY During the financial year 2007-08, Bank sustained its growth momentum of the previous years. Business as well as profitability parameters witnessed satisfactory growth. Net Profit increased by 7% to Rs.575.57 crore in 2007-08 from Rs.537.90 crore in the previous year (2006-07). Continued buoyancy in the Bank’s core business income, increased feebased income and focus on healthy asset-quality contributed to the improvement in profitability. Operating Profit of the Bank increased to Rs.1056.94 crore from Rs.931.24 crore, registering an increase of 13.5%. Total income increased by 29.5% from Rs.3,762.21 crore to Rs.4,871.21 crore while noninterest income registered a healthy growth of 30.1% and stood at Rs.581.35 crore compared to Rs.446.89 crore in the previous year. Table 1: Performance at a glance (Rs.in crore, except for percentages) Business Deposits Advances Operating Profit Net profit Total Income Interest income Non Interest income

31.03.2007 69687.44 41454.02 28233.42 931.24 537.90 3762.21 3315.33 446.89

31.03.2008 % change 83993.12 20.5 49436.55 19.3 34556.57 22.4 1056.94 13.5 575.57 7.0 4871.21 29.5 4289.87 29.4 581.35 30.1

APPROPRIATIONS The appropriations made out of net profit are shown in Table 2. Rs.144.00 crore was transferred to statutory reserves during 2007-08, and with this, statutory reserves stood at Rs.947.68 crore. Transfer towards dividend (including dividend tax) amounted to Rs.226.97 crore. Table 2: Appropriations out of Net Profit

Net Profit for the year 2007-08 Profit brought forward from the previous year Total Appropriations Transfer to Statutory Reserves Transfer to Revenue and Other Reserves Proposed Dividend Tax on Dividend Profit brought forward Total

(Rs. in crore) 575.57 76.23 651.80 144.00 204.00 194.00 32.97 76.83 651.80

KEY FINANCIAL RATIOS The Bank continues to have a healthy asset-profile and a strong capital base. Net non-performing assets to Net Advances have come down to 0.15% and gross nonperforming assets to Gross Advances also came down to

1.07%. Net interest margin stood at 2.86% while capital adequacy ratio improved to 11.61%. Cost-to-income ratio has further improved to 47.18% from 50.05%, reflecting increasing operational efficiency. Buoyed by improved profitability, earning per share also increased to Rs.11.87 from Rs.11.09 and Book value per share increased to Rs.67.00 from Rs.65.08 in the previous year. Table3: Key Financial Ratios Net NPA (%) Gross NPAs (%) CRAR (%) Net Interest Margin (%) Return on Assets (%) Yield on Advances (%) Cost of Deposits (%) Cost-to-income ratio (%) Earning per share (Rs.) Book value per share (Rs.)

31.3.2007 0.17 1.41 11.33 3.20 1.31 9.88 5.32 50.05 11.09 65.08

31.3.2008 0.15 1.07 11.61 2.86 1.16 10.81 6.58 47.18 11.87 67.00

CAPITAL & NET WORTH Paid-up capital of the Bank is Rs.485 crore while reserves and surplus increased from Rs.2,671.28 crore as on 31.03.2007 to Rs.2,764.29 crore as on 31.03.2008. There was an adjustment of Rs.255.58 crore (net of taxes) from revenue reserves under revised AS-15 guidelines. The net worth (capital plus reserves & surplus) increased to Rs.3,249.29 crore from Rs.3156.28 crore.

CAPITAL ADEQUACY The Bank raised subordinated debt of Rs.700 crore at coupon of 9.15% during January 2008 to augment its capital funds in order to be able to meet the emerging challenges. The total capital funds now stand at Rs. 4,221.34 crore, up 18.4% from Rs. 3,565.41 crore in the previous year. With this, capital adequacy ratio stands at 11.61%, which has been above 11% for sixth year in a row when compared to RBI prescribed norm of 9%. Coupled with this, a high Tier I capital ratio of 8.54% provides the Bank sufficient headroom for future business expansion. According to RBI guidelines, Bank should shift to Basel-II capital adequacy norms from existing Basel-I norms with effect from March 31, 2009. Preparedness for the migration to new norms is underway. Bank has also put in place a ‘Capital Adequacy Assessment Process’ (CAAP) for assessing the adequacy of capital levels keeping in view the expected increase in business levels and the additional capital requirement for market risks and operational risks. The assessment process also includes a framework for inclusion of Pillar-II risks under Basel-II guidelines, such as credit concentration risk, interest rate risk in the banking book, business cycle risks etc. DIVIDEND The Board of Directors of the Bank has recommended a final dividend of 20% for the financial year 2007-08. With the interim dividend of 20% announced in February 2008, the total dividend for the year would be 40%, subject to the approval of final dividend by the shareholders in the Annual General Meeting of the Bank.

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MANAGEMENT’S DISCUSSION & ANALYSIS 1. MACROECONOMIC DEVELOPMENTS

The global economy witnessed a marked slowdown, with greatest impact on advanced economies, particularly in the United States where the sub-prime crisis continues to deepen the financial stress. Similar is the situation in European economies. According to International Monetary Fund (IMF), the financial market crisis that erupted in August 2007 has developed into the largest financial shock since the Great Depression, inflicting heavy damage on markets and institutions at the core of the financial system. However, emerging and developing countries, including India, have been less affected so far although economic activities in these countries are coming off the peak. Headline inflation has increased around the world, led mainly by the food and energy prices. Commodity markets have continued to boom despite global slowdown. This has been supported by the strong demand for commodities from the emerging economies and also bio-fuel related demand for food crops. World Economic Outlook, released in April 2008 by the IMF, projects a slowdown in world output to 3.7% in 2008 from 4.9% in 2007; of which growth in advanced economies will slowdown to 1.3% from 2.7% while growth in emerging and developing countries (including India) is projected at 6.7% in 2008 compared to 7.9% in 2007. Despite global slowdown, Indian economy continued to exhibit robust growth during 2007-08. Though there was some moderation in the domestic growth rates, too, when compared to the previous two years, GDP (gross domestic product) growth rate for 2007-08 has been estimated by the Central Statistical Organisation at 8.7% compared to the growth rate of 9.6% in 2006-07 and 9.4% in 2005-06. The ‘agriculture & allied activities’ sector is likely to show a growth rate of 2.6% during 2007-08, as against the previous year’s (PY) growth rate of 3.8% while growth for Industrial sector is estimated at 9.7% (PY: 11.0%) and estimates for Services sector is 10.3% (PY: 11.1%). GDP at market prices for 2007-08 is estimated at Rs.46,93,602 crore and, therefore, under market exchange rate, size of the Indian economy has now crossed US $ 1 trillion. The per capita income (PCI) is a broad quantitative indicator of the well being of the people and in real terms (at 1999-2000 prices) PCI, during 2007-08, is estimated at Rs. 24,256 compared to Rs. 22,553 for 2006-07, i.e., an increase of 7.5%. Faster economic growth of the immediate past is also translating into more inclusive growth, both in terms of employment generation and poverty reduction. Rising domestic savings and investments have been the chief engines of growth for the Indian economy. India has been a domestic-driven economy and as such it has largely been insulated from adverse developments in the global economy. On fiscal side, key deficit indicators for 2007-08 are estimated to be better than budgeted, backed by buoyancy in revenue receipts. Revised estimates for fiscal deficit stand at 3.1% for 2007-08 against budgeted 3.3%. In absolute terms, too, fiscal deficit for 2007-08 has improved to Rs. 1,43,653 crore

against budgeted figure of Rs. 1,50,948 crore. Budget Estimates of fiscal deficit for 2008-09 is Rs. 1,33,287 crore, which amounts to 2.5% of GDP.

The growth forecasts from leading agencies demonstrate that Indian economy would continue to see growth in the range of 7.5%-8%, a bit lower than the near-9% average growth rate of previous three years. Goldman Sachs has also revealed similar growth forecasts while domestic agencies like CSO, CRISIL and ICRA have pegged growth estimates between 8.0%-8.5%. More fiscal and monetary policy steps are expected in the current year for bringing down the inflation in the range of 4.5-5.0%. This will ensure that while inflation is managed in the comfortable range, growth prospects are not hurt. 2. FINANCIAL & BANKING SECTOR DEVELOPMENTS

Indian economy could contain the inflationary pressures despite global rise in commodity and energy prices and higher capital inflows. However, monetary and liquidity aggregates have shown high growth during 2007-08. RBI’s ‘Annual policy statement’ for the year 2007-08 made projections, inter-alia, for money supply growth, deposits growth and credit demand. Broad money (M3) increased by 20.7% during 2007-08 against projection of 17.0-17.5%, deposits recorded growth of Rs. 5,80,208 crore (projection: Rs.4,90,000 crore) while adjusted non-food credit increased by 21.9%, lower than projection of 24-25% growth. Reserve money increased by 24.6%, higher than the increase of 22.0% in the previous year. Inflation, measured by the wholesale price index, remained benign for major part of the year, but increased to 7.41% for the week ended March 29, 2008.

One of the leading developments on the domestic front during the financial year 2007-08 was appreciation of the Rupee by more than 10% against the US Dollar. This has resulted in several sectors taking a hit on their bottom-line. Interest subvention scheme for export credit was extended to needy sectors. The Annual Foreign Trade Policy also announced several sops for the export sectors hit by the Rupee appreciation.

Interest rates on deposits of over one-year maturity of public sector banks (PSBs) moved up from 7.50-9.00% in April 2007 to 8.25-9.00% in March 2008. The decline in benchmark prime lending rates was effected by many banks taking a cue from the third quarter review of monetary and credit policy announced by the RBI on January 29, 2008. With higher deposit rates and lower lending rates, the margins of banks have come under further pressure. In 2007-08, RBI used various tools such as MSS bonds and open-market operations in managing the liquidity. In addition to the above, RBI raised the Cash Reserve Ratio (CRR) in various stages by 150 basis points to 7.50%. The RBI has also introduced several new measures aimed at development of the financial system. One such measure is the permission granted to the FIIs for short selling as well as lending and borrowing of shares. This is aimed at providing the capital market with the much needed depth as well as liquidity. Other measures include taking the

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‘when-issued transactions’ outside the NDS-OM market, permitting intra day short sale in central government securities etc. 3. PERFORMANCE HIGHLIGHTS OF THE BANK

•

• • • • • •

• •

During the financial year 2007-08, Andhra Bank’s Business increased to Rs.83,993.12 crore from Rs.69,687.44 crore in the previous financial year (200607), recording an annual growth rate of 20.5%

Total Deposits increased by 19.3% from Rs.41454.02 crore as on 31.03.2007 to Rs.49,436.55 crore as on 31.03.2008

Gross Bank Credit increased by 22.4% from Rs.28233.42 crore to Rs.34,556.57 crore

Operating Profit improved to Rs. 1056.94 crore compared to Rs. 931.24 crore in the previous year, recording a growth rate of 13.5% Net Profit also improved to Rs. 575.57 crore vis-a-vis Rs.537.90 crore in the previous year, registering a growth rate of 7.0% Net Interest Income stood at Rs. 1,419.88 crore

Gross NPAs to Gross Advances came down to 1.07% and the Gross NPAs stood at Rs. 372.43 crore in absolute terms from 1.41% and Rs. 397.01 crore respectively in the previous year

Net NPAs stood at Rs. 53.70 crore (constituting 0.15% of net advances) from Rs.47.25 crore (constituting 0.17% of net advances) in 2006-07

Capital Adequacy Ratio of the Bank (CRAR) stood at 11.61% as on 31.03.2008, as against 11.33% as on 31.3.2007.

4. BUSINESS REVIEW

The total business (deposits plus gross bank credit) of the Bank registered a growth of 20.5% from Rs. 69687.44 crore as on 31.3.2007 to Rs. 83,993.12 crore as on 31.3.2008. This was on top of 23.55% growth recorded in the year 2006-07. 4.1. Deposits

Total deposits (aggregate deposits plus inter-bank deposits) registered a growth of 19.3% from Rs. 41,454.02 crore as on 31.3.2007 to Rs. 49,436.55 crore as on 31.3.2008. Total deposits included Rs.4,409.66 crore of current deposits, Rs. 12,184.18 crore of savings bank deposits and Rs. 32,842.71 crore of term deposits. The composition of low-cost deposits (current and savings deposits) in total deposits stood at 33.6%.

Table 4: Category-wise classification of deposits (Rs. in crore, except for percentages) Sl. Type of Deposits Amount Percentage of No. total deposits 1

Current Deposits

2

Savings Bank Deposits

3

Term Deposits

4

TOTAL (1+2+3)

4409.66 (20.4%) 12184.18 (14.4%) 32842.71 (21.0%) 49436.55 (19.3%)

8.92

24.65 66.43 100.00

Note: Figures in ( ) indicate annual growth rate

Area-wise distribution of aggregate deposits (total deposits less inter-bank deposits) as on 31.03.2008 is set forth in Table 5.

Table 5: Area-wise classification of aggregate deposits (Rs. in crore, except for percentages)

Sl. Category of branches No. 1

Rural

2

Semi-Urban

3

Urban

4

Metro

5

TOTAL (1+2+3+4)

Amount

% to total

3579.2 (20.0%) 9701.7 (16.8%)

7.26

13117.2 (16.8%)

22919.2 (21.7%)

49317.3

Note: Figures in ( ) indicate annual growth rate

19.67 26.60 46.47 100.00

4.2 Advances

Advances (gross bank credit) increased by 22.4% from Rs.28,233.42 crore as on 31.3.2007 to Rs. 34,556.57 crore as on 31.3.2008. Non-food credit increased by 23.2% to Rs. 33,675.51 crore from Rs.27,335.85 crore. Credit to agriculture, SME and large industries constituted 17.81%, 11.54% and 22.67% of gross bank credit respectively. Like in the previous years, Bank achieved its priority sector lending targets including those under agriculture and also achieved the self-set targets under lending to MSME sector.

Table 6 sets forth the broad classification of the advances portfolio of the Bank for the last two fiscals: Table 6: Classification of Advances portfolio (Rs. in crore, except for percentages)

Category 31.03.07 1. Food Credit 897.57 2 Non-Food Credit (2.1 to 2.4) 2.1 Advances to Agricultural Sector 4975.05 2.2 Advances to MSME sector 3249.74 2.3 Advances to Large Industries 7341.77 2.4 Other Advances 11769.29 GROSS BANK CREDIT (1+2) 28233.42 Of which, Lending to Priority sector 11427.23

31.03.08 881.06

Growth % -1.84

5998.35 3988.79 7833.18 15855.19 34556.57 13297.56

20.57 22.74 6.70 34.72 22.40 16.37

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4.2.1 Priority sector lending

The Bank’s priority sector lending increased to Rs. 13298 crore as on last reporting Friday of March 2008 from Rs. 11,427 crore as on the last reporting Friday of March 2007, i.e. an annual increase of 16.4%. As a percentage to adjusted net bank credit (as defined by RBI), priority sector advances of the Bank stood at 47.1%, compared to 41.1% in the previous year. This is above the RBI’s norm of Banks’ priority sector advances to be minimum 40% of Adjusted Net Bank Credit. RBI, during 2007-08, introduced definitional changes for priority sector lending by banks. Accordingly, priority sector lending comprises lending to agriculture, small enterprises, retail trade, micro credit, housing loans and educational loans. Table 7 sets forth the details of priority sector lending of the Bank for 2007-08. Table 7: Priority sector lending

(Rs. in crore, except for percentages)

Category 1. Priority sector advances (2 to 7) 2. Agriculture (2.1 + 2.2) 2.1 Agriculture loans 2.2 Eligible investments 3. Small enterprises 4. Retail Trade 5. Micro credit 6. Educational Loans 7. Housing Loans Memo items I. Priority sector advances (%) II. Agriculture advances (%)

2007-08 13297.56 6156.42 5998.35 158.07 2632.24 300.42 69.32 1106.81 3032.35

47.1 21.8

Lending to agriculture under priority sector increased to Rs. 6156.42 crore as on last reporting Friday of March 2008 from Rs.5149.78 crore as on last reporting Friday of March 2007. This included agriculture loans of Rs. 5998.35 crore (Previous Year - PY: Rs.4975.05 crore) and eligible investments of Rs. 158.07 crore (PY: Rs. 174.73 crore). Lending to agriculture constituted 21.8% of adjusted net bank credit (RBI norm: 18%) during 2007-08 compared to 18.5% in the previous year. 4.2.2 Credit to Women & Weaker Sections

With a view to encourage women entrepreneurs to make them self-supportive, Bank has been encouraging the flow of credit to women beneficiaries. Credit to women entrepreneurs stood at Rs.2123.09 crore as on 31.03.2008, i.e. an increase of 25.1% from Rs.1696.87crore as on 31.3.2007. In percentage terms, exposure increased to 7.5% of adjusted net bank credit during 2007-08 from 6.01% in the previous year. The Bank provides concessions in interest rates to women borrowers under various loan schemes. The lending to borrowers under “weaker sections” increased by 25.2 % to Rs. 3317 crore as 31.03.2008 from Rs. 2,649 crore as on 31.03.2007. Loans to weaker sections now constitute 11.75% of adjusted net bank credit compared to 9.54% in the previous year. Beneficiaries under weaker sections include SC/ST borrowers, small & marginal farmers, SHGs, benficiaries of SGSY, SJSRY, SLRS, DRI Schemes etc.

4.2.3 Credit to Minorities

The Bank has presence in 38 minority-dominated districts across the country. Number of Bank’s branches in such districts as on 31.03.2008 stood at 165, including 11 new branches opened during the year. However, with focused approach for minority communities, Bank promotes lending to these communities across all branches. The Bank is also following the “Prime Minister’s new 15-point programme for the welfare of the minorities” by encouraging lending to borrowers from these communities under self-employment and wage-employment programmes like SGSY, SSRY, SGRY and NREGP. An important objective of the aforesaid programme is to ensure that an appropriate percentage of the priority sector lending is targeted for the minority communities and that the benefits of various Government sponsored schemes reach the under-privileged, which include the disadvantaged sections of the minority communities. Accordingly, Bank has set targets so that lending to minorities as a percentage of priority sector lending is 13% and 15% by March 2009 and March 2010 respectively.

With a view to ensure smooth flow of credit to these communities, Bank has created a “Special Minorities Cell’ with a ‘Nodal Officer’, which monitors the credit flow to minorities on a regular basis. Total loans given by the Bank to persons from minority communities, all over the country, increased by 13.1% to Rs.512.49 crore (1,27,030 borrowal accounts) as on 31.03.2008 from Rs.453.19 crore (1,12,614 borrowal accounts) as on 31.03.2007. During the same period, loans to minorities in the minority-dominated districts increased to Rs.111.39 crore (13,481 borrowal accounts) from Rs.17.13 crore (9325 borrowal accounts). The Bank is also encouraging the educational loans to students from such communities. Educational loans to minorities also increased by 39.4% to Rs.94.03 crore (4,895 borrowal accounts) from Rs.67.47 crore (3501 borrowal accounts). 4.2.4 Lending to Self-Help Groups (SHGs)

Self-help group (SHG) formation and their linkage with the Bank has acquired a significant importance in Bank’s efforts to uplift the weaker sections of the society. Linkage of SHGs has been seen as an important activity for the economic development of the rural areas and for reaching out to the rural poor. Andhra Bank since 1998 is actively participating in SHG-bank linkage programme. During 2007-08, Bank has linked 1,48,288 groups and provided financial assistance to the extent of Rs.1005.17 crore. All the groups financed are women groups. Rural indebtedness has remained the most persistent constraint for the development of rural economy in India too. With this background, a new scheme “AB Mahila Soubhagya”, to reduce the indebtedness of SHGs, was launched by Hon’ble Union Finance Minister, Sri P. Chidambaram on 15.12.2007.

4.2.5 Lending to Micro, Small & Medium Enterprises (MSME) The Bank has a focused approach for MSME sector which comprises micro enterprises and SME sector. While there is

15

no sub-target fixed for lending to small enterprises sector, as per the policy package announced by the Government of India for stepping up credit to MSME sector, banks were advised to fix self-set target for growth in advances to MSME sector in order to achieve a minimum 20% year-on-year growth in credit to MSMEs with the objective to double the flow of credit to the MSME sector within a period of 5 years i.e. from 200506 to 2009-10. Following the spirit of government guidelines for development of MSME sector, Bank is having continuous thrust on this sector. Consequently, credit to MSME sector was more than doubled within three years itself from Rs.1,915 crore as on 31.03.2005 to Rs. 3989 crore as on 31.03.2008, registering a compound annual growth rate of 27.4%. In order to encourage the women borrowers in MSME sector, Bank is extending a concession of 0.50% in the interest rate. The Bank also provides finer rates to SMERA-rated borrowers. 15 specialised SME branches are functional to have special focus on this sector.

Sugar Educational Institutions Tobacco Cement and Cement Products Total

Table 8: Area-wise classification of gross bank credit

4.3 Investments

4.2.6 Table 8 sets forth the area-wise position of gross bank credit as on 31.03.2008:

(Rs. in crore, except for percentages)

Sl. No.

Category of branches

Amount

% to total

2

Semi-Urban

16.33

3

Urban

5642.3 (21.5%)

4

Metro

1

Rural

4387.4 (21.1%) 7098.2 (15.1%)

17428.7 (26.3%)

5 TOTAL 34556.6 Note: Figures in ( ) indicate annual growth rate

12.70

20.54 50.43 100.00

4.2.7 Industry-wise exposure of advances

Bank’s major loan exposure is to sectors like textiles, power, iron & steel, rice mills, construction & contractors, diamonds, gems & jewelry etc. Exposure to top 10 industries constitutes only 33.05% of gross bank credit, signifying a diversified loan portfolio. No single industry has exposure of more than 6% of gross bank credit as on 31.03.2008. Table 9: Industry-wise exposure of advances Type of industry

(Rs. in crore, except percentages)

Textiles Power Iron and Steel Rice Mills Construction and Contractors Diamonds, Gems and Jewellery Drugs and Pharmaceuticals Engineering (Heavy & Light) Real Estate and Hotels

Fund-based exposure % to gross as on 31.03.2008 bank credit 1827.85 1792.57 1502.10 917.22 1270.38 673.45 881.08 810.50 720.13

5.29 5.19 4.35 2.65 3.68 1.95 2.55 2.34 2.08

4.2.8 Retail lending

495.18 238.85 195.42 95.21 11419.94

1.43 0.69 0.57 0.28 33.05

Retail credit portfolio of the Bank increased from Rs. 6,622.56 crore as on 31.3.2007 to Rs. 7764.65 crore as on 31.3.2008, registering an increase of 17.2%. Retail loans now form 22.5% of gross bank credit. There was a healthy growth in the housing loans and educational loans portfolio. Housing loans to individuals increased by 12.6% to Rs. 1,995 crore from Rs.1,772 crore in the previous year. Similarly, educational loans increased by 29.1% to Rs. 1,167 crore from Rs.905 crore. The Bank encourages loans to students, both for studies in India and abroad. A concession of 0.50% in interest rate is extended to the women borrowers under educational loan scheme. Educational loans to women increased by 39.5% to Rs. 249.06 crore (15797 borrowal accounts) as on 31.03.2008 from Rs.178.56 crore (12170 borrowal accounts). The Bank is required to make investments as a statutory requirement as per norms of the RBI. Bank’s investment decisions are based on risk-return trade-off and the regulatory and internal guidelines. Statutory prescriptions relating to cash reserve ratio (CRR) and statutory liquidity ratio (SLR) are also maintained. Risk Management in treasury operations has been strengthened further by undertaking the stress testing and back testing of the investment portfolio at quarterly intervals besides daily monitoring of duration and value-atrisk (VaR). External rating migration of the bonds and debentures portfolio is also being monitored on quarterly basis. The capital charge has been computed for market risk for investment portfolio under available for sale (AFS) and held for trading (HFT) (including the derivatives transactions for trading purposes and the hedging positions whose underlyings are in AFS) for the year ended March 31, 2008 as per RBI guidelines. As on 31st March, 2008, the Investments (net of depreciation) increased by 4.18% to Rs. 14898.2 crore from Rs.14,300.7 crore as on 31.03.2007. Of the total investments, SLR investments were Rs.13156 crore, which was 25.82% of net demand and time liabilities (NDTL). Interest income from investments increased from Rs.896.4 crore during 2006-07 to Rs. 1048.2 crore in 2007-08, i.e. an annual increase of 16.9%. Profit on sale of investments increased to Rs. 119.18 crore during 2007-08 from Rs.53.71 crore during 2006-07, registering an increase of 121.9%. A high growth in profit on sale of investments was possible due to favourable market conditions and prudent portfolio management. Yield on investments increased to 8.27% during 2007-08 from 7.34% in 2006-07. The classification of Bank’s investment portfolio for the last two years is set forth in Table 10.

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Table 10: Classification of investments

(Rs. in crore, except for percentages)

2006-07 1. Government Securities 11357.02 2. Other Approved Securities 148.54 3. Shares 216.29 4. Debentures & Bonds 947.47 5. Subsidiaries and/ or Joint Ventures 9.31 6. Others 1622.09 TOTAL (1 to 6) 14300.72

2007-08 13086.90 129.13 207.75 889.65

% change 15.2 -13.1 -3.9 -6.1

9.31 575.50 14898.24

0 -64.5 4.2

4.3.1. International treasury and Forex business

The Bank has a license as an ‘Authorised Dealer’, issued by the RBI to deal in foreign exchange business through bank’s 47 designated branches. Accordingly, the Bank maintains independent Nostro accounts with overseas correspondent in its own name. The Bank also has rupee drawing arrangements with 5 Exchange Houses and ‘Speed Remittance’ facility has been introduced with one of the exchange houses. Systems have been put in place for management of country risk, exchange risk and other foreign exchange risks. The country risk exposures for single country risk limit and aggregate risk limits for the group of countries under each risk category are fixed and are being monitored on daily basis.

During the year 2007-08, the profit on foreign exchange transactions has increased to Rs. 33.41 crore from Rs. 32.27 crore in the previous year. The Bank recorded a merchant turnover of Rs. 25,077 crore during 2007-08 compared to Rs.20,859 crore in the previous year, i.e. an increase of 20.2%. Inter-bank turnover increased by 15.45% to Rs. 1,44,674 crore during 2007-08 from Rs. 1,25,306 crore during the previous year. Export finance of the Bank stood at Rs.1918 crore as on 31.3.2008. 4.4. Credit card business

The Bank is also engaged in ‘Credit Card Business’. The Bank offers four types of cards, namely, VISA Classic, VISA Gold, MasterCard and MasterCard Electronic. All these cards are accepted in India and Nepal at merchant establishments that display a VISA or MasterCard acceptance logo. The VISA Gold Card is accepted worldwide. Several initiatives have been taken during recent years for increasing the reach and profitability of the credit card business, like launch of cobranded cards. Credit card business turnover increased by 16.55% to Rs. 1,380 crore as on 31.03.2008 from Rs.1,184 crore in the previous year. Net profit earned by the credit card business for the year 2007-08 stood at Rs. 27.6 crore, which is 19.7% increase over the previous year’s profit. 4.5. Demat Services

Since 2005, Bank is offering depository Services to the public under the brand name of “AB Demat”. The Bank is a Depository Participant (DP) with Central Depository Services (India) Limited (CDSL) as well as with National Securities Depository Limited (NSDL). 26 branches of the Bank are authorized to open demat accounts.

4.6. Merchant Banking Services

The Bank is registered with SEBI to act as the collecting/ paying banker for public/rights offerings, paying banker for the payment of dividend warrants and as issuing and paying agent for commercial papers. Bank acted as a “paying Banker” for payment of Dividend Warrants for 7 companies during the just concluded financial year. The Bank also continued to act as Debenture Trustees during the period under review.

5. FINANCIAL INCLUSION

i. Financial inclusion is the delivery of banking services at an affordable cost to the vast sections of disadvantaged and low-income groups. The Bank has a ‘no-frills’ savings bank account facility for the unbanked population, where minimum balance requirement is only Rs.5. The Bank launched a scheme for achieving 100 percent “Financial inclusion” by providing a “no-frills” savings bank account in ’Srikakulam’ district of Andhra Pradesh and ‘Ganjam’ district in Orissa. Both, Srikakulam and Ganjam districts have been declared 100% financially included by the State Level Bankers’ Committee (SLBC) of Andhra Pradesh and Orissa respectively. So far, Bank’s branches have opened 1.94 lakh ‘no-frills’ accounts and outstanding deposits in such accounts as on 31.03.2008 was Rs. 9.16 crore. ii. In order to mitigate acute distress faced by the farmers due to heavy burden of debt from non-institutional lenders (moneylenders), Reserve Bank of India desired that banks should provide relief to them. With this background a new scheme “AB Kisan Rakshak” was launched by Hon’ble Union Finance Minister, Sri. P. Chidambaram on 15.12.2007 for farmers to help them come out of heavy interest burden on loans taken by them.

iii. A Pilot project on ‘AB Smart Cards’ with use of Business Correspondents & IT connectivity in consultation with Govt. of Andhra Pradesh has been launched in July 2007. The Bank is participating in a pilot project along with select banks for payments to pensioners & wage earners through AB smart cards. The scheme is proposed to be extended to 6 districts in the State of Andhra Pradesh. iv. Presently, the Bank is having interconnectivity of branches including many rural branches. ATMs are also installed in semi-urban and rural areas. Other measures taken up by the Bank include launch of fingerprint-enabled biometric ATMs, mobile ATMs and mobile biometric ATMs. v. The Bank has started at Srikakulam (Andhra Pradesh) a “Financial literacy-cum-credit counseling centre”. The centre works with the following objectives:

• • • •

educate the weaker sections of the society about the benefits of financial services making people aware of various schemes of the financial institutions and to inculcate the habit of savings help the people in opening of savings bank accounts

building awareness about the services rendered and various products of the banks.

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6. NEW PRODUCTS

a. The Bank introduced two schemes, namely, AB Kisan Rakshak (Debt Swapping Scheme for Farmers) and AB Mahila Soubhagya (Debt Swapping Scheme for SHGs) during 2007-08. These schemes were launched by Hon’ble Union Finance Minister, Shri P. Chidambaram. Two schemes are intended to reduce the indebtedness of the borrowers in specific categories.

b. The Bank re-launched the ‘kiddy bank’ scheme with value added features for young children, with an idea of inculcating savings habit at an early stage instilling the value of money in them. This account has facilities such as accidental insurance coverage to the child and parent alongwith life insurance cover for the parent in the specified age group. 7. MARKETING

The Bank has been constantly focusing on augmenting noninterest income through diversification of income streams by taking up marketing of life and non-life insurance products, mutual fund products, collection of telephone bills, direct taxes, municipal taxes, utility payments etc. The Bank has 21 Financial Service Centres (FSC), including 5 added during 2007-08, throughout the country to cater to the needs of clients related to financial investments. FSCs function as a branch within a branch. 7.1 Bancassurance

The Bank is selling insurance policies through a ‘Corporate Agency’ arrangement with LIC for life cover and with United India Insurance Company Ltd. for sale of non-life insurance products. The Bank has achieved Number 1 position in terms of number of policies mobilised amongst all agency banks dealing with the LIC. The Bank has covered 1.65 lakh lives under this arrangement. The commission earned by the Bank through sale of life insurance polices amounted to Rs. 29.7 crore during 2007-08 compared to Rs. 14.9 crore in the previous year. Similarly, commission earned on non-life business stood at Rs. 16.1 crore during 2007-08 from Rs. 10.3 crore in the previous year. 7.2 Distribution of Mutual Fund products The Bank is having tie ups with five Mutual Fund companies, namely, UTI Mutual Fund, SBI Mutual Fund, Principal Mutual Fund, Tata Mutual Fund and Sundaram Mutual Fund. Commission income earned through this service stood at Rs.1.91 crore in 2007-08, up from Rs.1.38 crore in the previous year. 7.3 Cash Management Services (CMS)

AB Cash Track is the premier cash management system that is being extended by the Bank to various corporate clients all over India for collection of their receivables. The Bank has 143 clients as on 31.3.2008 and the business turnover under AB Cash Track is Rs. 1155 Crore. Number of branches covered by CMS facility across the country is 149. 8. IT INITIATIVES

•

The Bank has decided to migrate to Core Banking System. The Bank has signed, on 22 nd October 2007, an

• • •

• • • • • •

•

agreement with Hewlett Packard (HP) India for implementation of a comprehensive core banking solution (CBS) at its branches. As per the contract, the pilot project will be done in about 25 branches and within 24 months, nearly 550 branches will be brought under CBS, covering around 80% of the Bank’s business. Hyderguda became the first branch where CBS was implemented on 31.03.2008. At present, “Cluster Banking” module is operational in 1195 Units including 1122 branches, 56 Extension Counters and 17 Service Centres Branches linked to Instant Fund Transfer facility increased from 1045 to 1162

Number of ATMs increased from 505 as on 31.03.2007 to 656 as on 31.03.2008. The Bank also has three biometric ATMs (including two with mobile facility) in the twin cities of Hyderabad & Secunderabad as an initiative towards financial inclusion and one Mobile ATM at Kottayam, Kerala. 1161 branches / ECs as on 31.03.2008 are linked to ATM Switch Number of ATM/Debit Cards increased from 23.35 lakh to 28.42 lakh Branches connected to RTGS for customer transactions increased from 650 in the previous year to 736 as on 31.03.2008.

All the controlling offices and 1366 branches are having e-mail connectivity.

ECS has been implemented in RBI-identified 9 Service Centres.

1130 branches, 60 ECs, 17 Service Centres, 16 Zonal Offices and Head Office are connected to the data centre.

The Bank has installed 608 voice-over-internet protocol (VoIP) telephones at administrative offices and branches. This has helped in reducing the telecommunications expenditure. The Bank has established a “Centralized Pension Processing Centre” to handle all pension payment processes.

9. NETWORK EXPANSION

During the year, Bank opened 79 branches (including upgradation of 31 extension counters) and 151 ATMs. With this, as at the end of 31st March 2008, Bank had 2128 delivery channels consisting of 1366 branches, 68 extension counters, 38 satellite offices and 656 ATMs spread over 22 States and 2 Union territories. The Bank has 40 specialised branches, catering to the needs of the specific segments of clientele. The Bank also has one Representative (overseas) office at Dubai (U.A.E), which was opened in May 2006.

9.1 The population group-wise classification of branches is set forth in Table 11.

21

Table 11: Classification of branches

•

9.2 As on March 31, 2008, the Bank had 40 Specialised Branches, as set forth in Table 12. Table 12: Classification of specialised branches

The Bank has in place comprehensive risk rating system for various categories of exposures. • The Bank utilizes industry reports from CRISIL and the industry risk score service from CRISINFAC • The Bank undertakes portfolio studies on industries/ sectors where the exposures are substantial and the findings of such studies are discussed at ‘Credit Risk Management Committee’ and put up to Board for information. 10.2 Market Risk

1 2 3 4 5 6 7 8 9 10

A high level executive committee, namely, Asset-liability Committee (ALCO) oversees the ALM in the Bank and deliberates on liquidity and interest rate scenario in the market and decides upon the pricing of various products. ALCO does identification, measurement, monitoring and mitigation of market risk in liquidity, interest rates, equity and currency areas.

S.No. 1 2 3 4

Category Rural Semi-urban Urban Metro TOTAL

Number 402 399 366 199 1366

Sl. Category of Specialized Branches No.

Specialized SME Branches Specialized Agriculture Finance Branches Specialized Agri-Hitech Branches Specialized Housing Finance Branches Personal Banking Branches Corporate Finance Branches Auto Tech Branch Overseas Branch Hitech Branch Specialized Asset Recovery Management Branch TOTAL

9.3 Presence in minority-dominated districts

% to total 29.43 29.21 26.79 14.57 100.00

Number of branches 15 3 6 6 4 2 1 1 1 1 40

The Bank has presence in 38 minority-dominated districts. Number of branches in such districts increased from 154 as on 31.03.2007 to 165 as on 31.03.2008, i.e. almost 12% of Bank’s total branch network across the country. The Bank is planning to open about 15 more branches in such districts during 2008-09. 10. RISK MANAGEMENT

The Bank has put in place a comprehensive “Integrated Risk Management Policy” for the management of credit risk, market risk and operational risk as per the guidance notes/guidelines of RBI. Accordingly, all the risk management functions, viz., credit Risk, asset-liability management (ALM), mid-office of the domestic treasury and operational risk functions have been integrated. The “Integrated Risk Management Policy” of the Bank is being reviewed every year in tune with the notifications given by the RBI. 10.1 Credit Risk

• •

The Bank has constituted ‘Credit Risk Management Committee’ for analyzing all issues relating to credit matters and for recommending to the Board. The Bank has a well defined ‘Loan Policy’ duly approved by the Board. The Bank has formulated policies on standards for presentation of credit proposals, financial covenants, rating standards and benchmarks, delegation of credit approving powers, prudential limits on large credit exposures, asset concentrations, standards for loan collateral, portfolio management, loan review mechanism, risk concentrations, risk monitoring and evaluation, pricing of loans, provisioning, regulatory/legal compliance, etc.

The Bank has in place a well-defined ‘Market Risk Management Policy’ and organizational structure for market risk management functions. The Bank manages market risk through ‘asset-liability management’ (ALM) policy and ‘investments/forex policy’.

The ‘liquidity risk’ is measured and managed through ‘gap analysis’ for maturity mismatches based on residual maturity. For assets and liabilities, which are of non-maturity nature, Bank is conducting behavioural studies and factoring the observations in the gap analysis. The behavioural study findings are subjected to back-testing and validated regularly. Prudential limits are fixed for net gaps and also for cumulative gap up to one year and these limits are measured and monitored regularly. Liquidity profile of the Bank is also measured regularly through various liquidity ratios and monitoring of the same is done with the help of prudential limits fixed thereon.

The ’interest rate risk’ is managed through ’gap analysis’ and ‘duration gap analysis’. Tolerance limits have been fixed for impact on net interest income (NII) due to adverse changes in interest rates. To measure the impact of interest rate changes on Bank’s equity, duration gap analysis is done and prudential limit is set for modified duration of equity. Modified duration of equity is within the prudential limits set for this purpose. VaR and duration analysis are used for measuring market risk including treasury operations. 10.3 Operational Risk

Management of Operational Risk (OR) is a part of the ‘Integrated Risk Management Policy’ and the Bank has focused attention for the management of OR in the light of RBI’s guidelines. Bank has taken many initiatives in tune with the notification of “Management of Operational Risk”. ‘Operational Risk Management Committee’ (ORMC) is responsible for controlling/mitigating the ORs through periodical reviews and directions. Operational Risks in the areas of credit, people and technology are reviewed on quarterly basis. Rating of the branches is being done under Risk-Based Internal Audit (RBIA) and the ratings are reviewed

23

every quarter. The Bank has developed a system of capturing historical data on operational losses. A separate sub-head in the Profit & Loss Account named “Operational Losses” has been created and all the losses incurred under this category are being debited to this head. 10.4 Basel – II Preparedness RBI has issued final guidelines on ‘New Capital Adequacy Framework’ during April 2007. As per the final guidelines, all commercial banks in India shall follow the Standardised Approach for credit risk, Standardised Duration Approach for market risk and Basic Indicator Approach for operational risk. Foreign banks and the banks which are having operational presence outside India should migrate to above selected approaches with effect from March 31, 2008. All other commercial banks are encouraged to migrate to these approaches in alignment with them, but in any case not later than March 31, 2009. The Bank is preparing to migrate to these approaches by 31.03.2009. An executive level committee headed by the Executive Director of the Bank is monitoring the progress in this regard. Credit Risk: For moving to standardised approach for credit risk, Bank has been conducting a parallel run beginning quarter ended June 2006. So far CRAR has been calculated on a parallel basis for 8 quarters. The Bank is in a position to migrate to standardised approach for credit risk and is also in the process of entering into memorandum of understanding with the External Credit Assessment Institutions (ECAIs) for rating the corporate borrowers. The Bank has also developed a Credit Risk Rating Model (CRRM) with the consultancy assistance of National Institute of Bank Management (NIBM), Pune. This model is capable of providing transition matrices and default probabilities and would help the Bank in moving to the Advanced Measurement Approach in future. Market Risk: The Bank is applying the standardised duration method for computing capital requirement for market risks (investments in HFT and AFS categories) as per RBI’s guidelines. Operational Risk: While the Bank is required to provide capital for operational risk under the Basic Indicator Approach (BIA) with effect from 31.03.2009, the Bank is in a position to adopt the BIA and is working towards requirements under the Advanced Measurement Approach. For this, process of segregating the gross income into eight business lines to arrive at capital charge is under progress. 11. ASSET QUALITY MANAGEMENT The Bank has been consistently maintaining a healthy asset quality. Gross and net Non Performing Assets (NPAs) of the Bank are at lower levels when compared to industry standards. For better management of impaired assets, Bank has been taking measures like monitoring of borrowal accounts under the mechanism of ‘Early Alert System’ (EAS) and ‘Special Mention Accounts’ (SMA), restructuring of viable NPAs and impaired asset accounts under CDR (Corporate Debt Restructuring) scheme, focused attention on upgradation of assets, recovery through persuasion and legal remedies, recovery through compromise route in accordance with the corporate compromise policy etc.

Under SARFAESI Act, during the financial year 2007-08, 588 new notices were issued involving an amount of Rs. 196.47 crore. The Bank recovered an amount of Rs.90.3 crore under SARFAESI Act. As on March 31, 2008, a total of 494 secured assets worth Rs. 145.96 crore (cumulative) were sold. Through concerted efforts, the Bank could bring down the level of Gross NPAs from Rs. 397.01 crore as on 31.03.2007 to Rs. 372.43 crore as on 31.03.2008. Gross NPAs as percentage to gross advances came down from 1.41% (31.3.2007) to 1.07% (31.3.2008) and Net NPA as a percentage to net advances stood at 0.15% as on 31.03.2008, down from 0.17% as on 31.03.2007. The provision coverage of NPAs as on March 31, 2008 was 85.39%. The Movement of NPAs is set forth in Table 13. Table 13: Position of non-performing assets

(Rs. in crore, except for percentages)

Gross NPAs at the beginning of year Additions during the year Reduction during the year Gross NPAs at the end the year Net NPAs

2006-07 436.91 243.66 283.56 397.01 47.25

2007-08 397.01 201.52 226.10 372.43 53.70

The segment-wise distribution of NPAs as on 31st March, 2008 is set forth in Table 14. Table 14: Segment-wise non-performing assets Segment

(Rs. in crore, except for percentages)

1. Agriculture 2. Small Enterprises 3. Other Priority Sector Total Priority Sectors 4 Medium & Large Scale Industry 5. Other Non-priority Sectors Total Non-priority sectors Grand Total

Amount % to Bank’s Gross NPAs Total Advances 12.74 70.40 53.43 136.57 93.23 142.63 235.86 372.43

0.04 0.20 0.15 0.39 0.27 0.41 0.68 1.07

Provisions held under different classes of NPAs are set forth in Table 15. Table 15: Provisions held for non-performing assets

Nature of Asset Sub-standard Assets Doubtful Assets Loss Assets Total

(Rs. in crore)

Amount Provision Held 186.25 131.85 184.59 184.59 1.59 1.59 372.43 318.03

12. LENDING PRACTICES The Bank has a Board approved ‘Loan Policy’ in place and guidelines contained therein are invariably followed. There is a credit approval department which deals with sanctions and there is also a Credit Monitoring department as well to monitor the post-sanction status of accounts. As a prudent measure aimed at better risk management and avoidance of concentration of credit risk, the Bank has a prescribed credit

25

exposure limits for lending to individual borrowers and to all companies in a single group. Bank also has internal limits of exposure to specific sectors and regularly reviews party-wise exposure and industry-wise credit exposure. 13. INSPECTION AND AUDIT At Head-office level, Bank has centralised inspection system, which is responsible for internal audit/inspection of operational and non-operational areas. It includes inspection of all branches of Bank and also of all its departments. Bank has an audit plan duly approved by the Board and all the inspections and audits are carried out as per the same. The audit functions of the Bank come under the scrutiny of the Audit Committee of the Board. The frequency of inspection is according to the ‘Inspection Manual’ of Bank and Concurrent Audit, i.e. audit of select branches and operational departments on daily basis, forms part of Bank’s internal inspection system. The inspection and monitoring system is treated as an important feed-back and control mechanism for the management. The Inspection system continues to remain dynamic to the ever-changing needs of the organisation and in meeting corporate goals. In compliance with Reserve Bank of India guidelines, Bank has introduced Risk Based Internal Audit (RBIA) in the organisation. Other than the Concurrent Audit, inspection of all branches of Bank, Controlling Offices and Head Office is done at annual frequency. A system of Concurrent Audit (done on daily basis) at large and other select branches is in vogue in most banks for quite long. Concurrent Audit of branch is conducted, wherein the transactions of the branch is verified on a dayto-day basis in all respects. A day’s transaction of the branch is examined fully on the next day. Besides branches, other important functional areas of the Bank like Investments and International Banking and Credit Card departments are subject to concurrent audit. The auditor reports his findings once in a month to the controlling office of the Bank. The total number of Bank’s branches as on 31.03.2007 was 1289, of which 1267 branches were due for inspection during 2007-08. Besides various internal inspections at 1267 branches, bank entrusted Concurrent audit to professional audit firms at 209 branches covering more than 60% of bank’s total business. The annual inspection covers all aspects of branch functioning such as business development, credit management and house-keeping etc. Based on the risk level, branches are rated as low/moderate/fair/high risk under Risk Based Internal Audit (RBIA) system. The rating awarded to the branch under RBIA is integrated with the overall rating of the branch for arriving at a composite rating as very good/good/satisfactory/ unsatisfactory. 14. COMPLIANCE POLICY The Bank has a policy on “Compliance & Compliance Functions” and timely reports are reviewed by the board. An executive of the Bank in the rank of General Manager has been appointed as the “Compliance Officer”. As per the policy, all the regulatory, statutory and internal compliances are being monitored.

15. DISCLOSURE POLICY

The Bank has a Disclosure Policy as per the disclosure requirements contained in the guidance note on the implementation of the new capital adequacy framework. The guidelines therein are strictly adhered to and compliance is reported to the competent authorities. 16. ADHERENCE TO ‘RIGHT TO INFORMATION ACT’

The Bank is in compliance with the directives and principles of the Right to Information Act. Accordingly, all ‘General Managers’ are designated as ‘Public Information Officers’. The Bank is committed to provide information to the public on information sought by them. During the year 2007-08, Bank received 182 requests for information under the RTI Act. All the requests were suitably responded to within the stipulated time frame. 17. CUSTOMER SERVICE

Bank operates on the principle of ‘care and concern’ towards all its customers. The Bank has constituted a customer service Committee as well as a mechanism for redressal of customer grievances. A Citizen Charter is in place and new initiatives are being taken to ensure a higher degree of customer satisfaction. As a part of enhancing information to customers, Bank prints and distributes booklets and brochures on unique features of ATM, Clean Note Policy, Deposit Schemes, Personal Banking Schemes and facilities available to NRIs. During 2007-08, as per RBI guidelines, Bank conducted special coin distribution programme and distributed coins worth Rs. 5 crore across the country through special outlets, besides conducting training programmes to traders and public for identification of counterfeit notes. The Bank has also conducted Clearance fortnight twice during 2007-08. There is a well-defined policy in place for addressing the complaints of the customers and their timely disposal. The position of “Customer Complaints” and “Awards passed by the Banking Ombudsman” is as under: A. Customer Complaints a) No. of complaints pending at the beginning of the year (as on 01-04-07) 261 b) No. of complaints received during the year 12,649* c) No. of complaints redressed during the year 11,595 d) No. of complaints pending at the end of the year 1315 * Complaints received during the year includes 11,696 ATM related complaints, 156 Credit Card related complaints and 797 complaints of general nature. B. Awards passed by the Banking Ombudsman a) No. of unimplemented Awards at the beginning of the year b) No. of Awards passed by the Banking Ombudsman during the year c) No. of Awards implemented during the year d) No. of unimplemented Awards at the end of the year

NIL NIL NIL NIL

17.1 Member of BCSBI: The Bank became a member of Banking Code & Standards Board of India (BCSBI) in June 2006. “Code of Commitment to Customers” has been printed

27

in Hindi, Telugu and English and is made available at all branches for use of the customers. It is also available on Bank’s website. As a part of compliance to BCSBI guidelines, a profile of deposit schemes of the Bank (for resident individuals) has been designed and is provided to customers.

18. HUMAN RESOURCES MANAGEMENT During the year 2007-08, a ‘Manpower Planning Policy’ for the Bank was formulated covering succession planning, recruitments as well as training requirements. The Bank recruited 611 officers (including 163 specialists officers) in various grades and 123 clerks and 117 sub-staff during 200708. The Bank has also introduced performance-linked incentive schemes for branch managers and zonal managers. A new fast-track promotion policy was also introduced for young deserving officers. 18.1 Training The Bank continued to lay emphasis on training and development of its human resources through in-house training and external training. The in-house training mainly takes care of the induction of new recruits and other officers in reinforcement of skill and knowledge in traditional banking operations as well as in the application of information technology in banking. Separate sessions were conducted exclusively for newly posted managers and credit officers with due emphasis on functions like credit approval, sanction and monitoring. The training programmes were restructured catering to the present day requirements in areas of retail banking, SME etc. Number of employees trained in-house and at outside institutions (including foreign institutions) during the year 2007-08 was 7196, higher than 6232 trained during 2006-07. The Bank has embarked on giving training in the areas of leadership development, motivation, negotiating skills to middle-level and senior-level officers both in-house and at reputed institutions. Senior and top executives were also nominated to various programmes in India and abroad. Suitable training programmes were also arranged during the year for the Directors of the Bank at external institutions. 18.2 SC/ST Profile The Bank has been implementing the reservation policy for SCs & STs as per guidelines of the Government of India. The representation of SCs & STs in the Bank’s workforce is 2636 and 788 respectively, forming 18.5% and 5.5% of the total workforce as on 31.03.2008. Officers’ strength in the Bank as at end-March 2008 is 8437, of which 1343 officers belong to SC category and 497 belong to ST category. Meetings with the representatives of the SC & ST Employees’ Welfare Association are held regularly for discussion on the matters related to the reservation policy and other constitutional safeguards. 18.3 Physically challenged persons The Bank is following the Govt. of India guidelines with respect to reservation policy for physically challenged persons. As on 31.03.2008, Bank has 233 staff under this category. 18.4 Human Resource Management System and Employee Payroll System Bank has completed the process of putting in place a Human

Resources Management System (HRMS). The HRMS will bring greater efficiency and convenience in HR operations and would ensure better delivery of HR services. The HRMS package will not only improve the efficiency in transactions for managing personnel in the Bank but also aims to serve Management Information System (MIS) which is a tool for talent management. 18.5 Industrial Relations

The industrial relation in the Bank has been cordial and harmonious. The joint consultative machinery is active and quarterly meetings are being held with the representatives of the recognized officers’ federation and the award employees union. Regular meetings are also conducted with the representatives of the SC/ST and OBC employees’ welfare associations. As a result, during the year 2007-08, many of the HR Policies of the Bank were reviewed and improvements were made on par with the peer banks’ policies. Number of welfare measures and enhancement in ceilings/limits in rentals and lodging expenses were considered for the benefit of the employees. Apart from the Central Joint Consultative Mechanism, meetings were also held at zonal level to sort out the local issues and improvements were made in the areas of customer service and work related matters. 18.6 Sports and games

Bank is encouraging sports in order to facilitate promotion of sports and games to achieve excellence. During the year 2007-08, Bank won several trophies and medals in various sports events at State & National level. Bank is also having a music team. 19. OFFICIAL LANGUAGE IMPLEMENTATION

As per the directives of Govt. of India, the Bank formulates action-plan for implementation of Hindi. The Bank regularly conducts Hindi workshops and general banking training programmes through Hindi medium and also imparts desk training to staff members. The Bank has achieved regionwise targets under various parameters of Official Language implementation. In order to popularise various schemes and products of the Bank, brochures, pamphlets and banners are printed in Hindi and regional languages. The Bank also publishes a quarterly magazine in Hindi, namely ‘Rajbhasha Sarita’ and a half-yearly Hindi magazine, ‘Bharati’ on behalf of ‘Town Official Language Implementation Committee – Banks (TOLIC)’. During the year, Bank complied with the guidelines related to Official Language. The Bank was awarded by the RBI for implementation of Official Language in ‘Region C’. The Bank also received First Prize for its Hindi in-house magazine, ‘Rajbhasha Sarita’. The Bank is the convenor of TOLIC, Hyderabad and was awarded First Prize by the Ministry of Home Affairs, Dept. of Official Language for TOLIC activities. The Bank has taken corporate license for ‘Akruti Multilingual Word Processing Software’ and training is imparted to staff on an ongoing basis. ATM screens have interface in Hindi, Telugu and Tamil along with English. Website of the Bank is also available in Hindi. In core banking solution, too, facility for use of Hindi has been provided. During the year,

29

Parliamentary Sub-Committees on Official Language visited three of Bank’s offices and found the performance satisfactory. 20. VIGILANCE

The Bank recognizes vigilance as an integral management function. Preventive, detective and punitive vigilance are accorded importance. Greater emphasis has been laid down for implementation of preventive vigilance at all levels. A session on preventive vigilance is invariably included in all in-house training programmes. As part of the ‘Vigilance Awareness’ week, customer awareness meets were conducted at the Head Office and various Zonal Offices of the Bank.

In tune with the guidelines of the Central Vigilance Commission, a committee of General Managers has been constituted to scrutinize and determine existence of vigilance related functions. All cases of frauds of Rs.1 lakh and above are monitored individually by the Audit Committee of the Board. Large value frauds are also being closely monitored. The Bank has also constituted a Board-level special Committee to review large value frauds involving Rs.100 lakh and above 21. SECURITY ARRANGEMENTS

Due to constant security enforcement efforts and awareness amongst the staff at branches, ATMs, ECs, currency chests etc. crime rate against the Bank has decreased with no loss reported during the year 2007-08.

22. ANDHRA BANK RURAL DEVELOPMENT TRUST The Andhra Bank Rural Development Trust (ABRDT) is another initiative of the Bank, started in the year 1989. There are 9 ‘Institutes of Rural Development’ under ABRDT, spread across the States of Andhra Pradesh, Orissa and Kerala. The objective is to address some major issues confronting the rural population such as low productivity in agriculture and animal husbandry, unemployment of educated youth, lack of infrastructure/technical skills, lack of entrepreneurial qualities and market knowledge etc

The objective of providing training to youth in rural and semiurban areas is to enable them to take up self employment ventures, to conduct various vocational and human resource development training programmes, to provide consultancy services, etc. This would enable them to settle down in their villages with gainful employment instead of migrating to urban areas. So far, training has been imparted to 71,666 participants in self-employment ventures and in capacity building. 23. LEAD BANK RESPONSIBILITY

Bank is having Lead Bank responsibilities in six districts, viz., Guntur, West Godavari, East Godavari and Srikakulam districts in the State of Andhra Pradesh and Ganjam and Gajapathi districts in the State of Orissa. In all the six districts, ‘District Credit Plans’ for the year 2008-09, were launched before 31st March, 2008.

24. STATE LEVEL BANKERS’ COMMITTEE (SLBC)

The Bank is the Convenor of the State Level Bankers’ Committee (SLBC) in the State of Andhra Pradesh since 1984.

In the year 2007-08, a total of 35 meetings were organised (as against the prescribed level of 12 meetings in a year). There is continuous, regular and timely follow-up and review of progress in the implementation of government sponsored schemes. Besides central sponsored schemes like Prime Minister Rozgar Yojana (PMRY), Swarna Jayanthi Gram Swarozgar Yojana (SGSY), Swarna Jayanthi Shahari Rozgar Yojana (SJSRY), etc. many State-specific schemes are being implemented under the aegis of SLBC. The progress made in regard to the flow of credit to the minority communities is also reviewed regularly at the meetings of the SLBC. 25. SUBSIDIARIES AND REGIONAL RURAL BANKS (RRBs)

The Bank has one subsidiary, namely, Andhra Bank Financial Services Limited (ABFSL), which is wholly-owned by the Bank. During the year 2007-08, ABFSL did not conduct any business.

Bank has sponsored two RRBs, namely, Chaitanya Godavari Grameena Bank located in Guntur (Andhra Pradesh), covering the districts of Guntur and East Godavari & West Godavari and Rishikulya Gramya Bank in Ganjam district of Orissa. The combined business of the two RRBs as on 31.03.2008 stood at Rs.1720 crore with a total branch network of 166. Both the RRBs are profit making with an aggregate profit of Rs. 13.11 crore for 2007-08. 26. PARLIAMENTARY COMMITTEES

Three Parliamentary Standing Committees and three Parliamentary Sub-committees visited various offices of the Bank during the year 2007-08. Standing committee on ‘personnel, public grievance, law & justice’ visited during January 2008 to discuss the implementation of RTI Act and reservation policy in appointments and promotions. The ‘Standing Committee on Industry’ visited during February 2008 with the purpose of studying the SME sector. During February itself, ‘Standing Committee on urban development’ also visited. Parliamentary sub-committee on official language visited thrice during the year at three different places to study the performance and implementation of the Official Language. 27. NEW INITIATIVES 27.1. Life Insurance Joint Venture

During the year, the Bank alongwith Bank of Baroda and Legal & General Group Plc of UK has decided to form a joint venture Life Insurance Company. The shareholders’ agreement has already been signed and necessary formalities are being completed for setting up of the company and seeking approval from the relevant authorities. The Bank will have shareholding of 30% in the proposed company while Bank of Baroda will hold 44% and 26% will be held by Legal and General Group Plc. 27.2. Representative Office at New Jersey

The Bank’s first Representative Office at Dubai was opened in May 2006. The Bank is set to open its second Representative (overseas) Office after successful experience of Dubai (UAE) Representative Office. The second office will be located in Jersey City in the State of New Jersey in USA. The State of New Jersey has granted their approval and

31

license of authority for this office in January, 2008 and once the approval of the Federal Reserve Bank of New York is obtained, Representative Office in Jersey City will become operational.

was also awarded ‘Indira Gandhi Rajbhasha Puraskar’ for the overall performance in implementation of the Official Language. These recognitions are testimony to the sound performance of the Bank.

28.1 The Bank has been continuously and actively engaged in building up and enhancing its corporate brand image. The Bank co-sponsored the Brand Summit held by the Confederation of Indian Industry in Hyderabad. As a part of the Financial Inclusion Programme, Bank inaugurated its first Bio-Exhibition Stall at all-India Industrial Exhibition at Hyderabad and received wide appreciation from the public.

Being an integral part of society, Bank is aware of its corporate social responsibilities and has engaged in community and social investments. During the year, Bank has taken many initiatives with the objective of providing philanthropic assistance for development, education etc. Under the aegis of Andhra Bank Rural Development Trust, Bank is imparting training to youth in rural and semi-urban areas so that the poor people can take up self-employment ventures. This also conducts various vocational and human resource development training programmes. So far, training has been imparted to 71,666 participants in self-employment ventures and in capacity building.

28. BRANDING AND COMMUNICATIONS

28.2 Further, as part of image building exercise, the Bank also carried out publicity activities by exploring the print and electronic media and out-door advertising through new wave publicity channels like branding through hoardings, passenger trolleys at airports, bus shelters, websites, posters at supermarket chains, railway tickets, scrollers etc. Wide range of advertising through TV Channels has been taken up through sponsoring popular programmes. 28.3 Greater interaction with the representatives of the print and electronic media and investors has always been focused upon as they constitute a powerful medium of external communication. Press meets are organised regularly where Bank’s top management led by the Chairman and Managing Director discusses the quarterly results of the Bank. Investors’ meet were also organised in USA, UK and Hong Kong where Bank’s international investors interacted with the Chairman & Managing Director and the Executive Director and shared the vision and mission of the Bank. Such meets have helped in building a strong brand name for the Bank even outside India. 29. BANK’S WEBSITE

The Bank’s website (www.andhrabank.in) has valuable information for the customers, investors and other stakeholders. There is continuous updation of the information on the website. Details on branch network, deposit products, loan products, service charges, citizen charter, Right to Information Act and other important policies are available on the Bank’s website and can be accessed in a user-friendly way. The website is available in Hindi, English and Telugu and is serving as a storehouse of information and also as a tool of transparency. 30. AWARDS AND RECOGNITIONS

The Bank was ranked 532nd for the year ended 31.03.2007 amongst the Top 1000 Banks in the world by “The Banker”, a London-based Financial Times’ publication. This ranking is based on strength of ‘Tier I Capital’ as defined by Basel’s Bank of International Settlements (BIS). Recently released ‘India’s Best Banks 2007’ survey of ‘Financial Express-Ernst & Young’ ranked the Bank 5th amongst public sector banks and was ranked 8th under the ‘Credit Quality’ parameter amongst 56 public, private and foreign banks. The Bank was ranked First under “LIC of India- Bancassurance business” in the country amongst all Agency Banks of LIC on the basis of number of Life Insurance Policies mobilised. The Bank

31. CORPORATE SOCIAL RESPONSIBILITY

The Bank has taken initiatives towards implementing ‘financial inclusion’ in some of the districts for bringing more and more people of the marginalized and the downtrodden sections into banking system. The Bank has already implemented 100% financial inclusion in the districts of Srikakulam (Andhra Pradesh) and Ganjam (Orissa). During the year 2007-08, Bank has adopted the Gundugolanu village in the district of West Godavari in Andhra Pradesh for improving health, sanitation, education and social service facilities in the village, with a comprehensive budget of Rs.5.50 crore. In a move towards encouraging higher studies, Bank is setting up ‘Andhra Bank School of Business’ in the campus of Andhra University, Visakhapatnam (Andhra Pradesh). The Bank along with Government of Andhra Pradesh, NABARD and other select banks sponsored the “Andhra Pradesh Banker’s Institute of Rural & Entrepreneurship Development (APBIRED)”, which will offer training to unemployed youth for improving their skills. This is located at Hyderabad. The Bank is also making donations to charitable trusts and other institutions engaged in the upliftment of the society. During 2007-08, an amount of Rs.2.14 crore was donated to 9 such trusts/institutions. 32. OUTLOOK

The Bank looks forward to strengthening its network and customer base while also focusing on further enhancement in the customer service through innovative products and services. True to its vision, Bank will continue leveraging technology for an all-round performance, in order to meet the expectations of millions of its stakeholders. It will be in lookout for the opportunities that come its way and will translate them into realities. The Bank is also aware of the challenges from its competitors, markets and the challenge of maintaining the highest standards of service and would continue to take appropriate steps from time to time for meeting such challenges. 33. CHANGES IN THE BOARD 1. Sri Madhusudan Prasad was appointed as the Govt. of India nominee Director with effect from 20.08.2007, in place of Sri G.B.Singh

33

2. Sri Ramchandra Kuntia, Part-time Non-official Director, resigned from the Board, which was accepted on 14.03.2008

34. DIRECTORS’ RESPONSIBILITY STATEMENT The Board of Directors hereby states that:

a. The applicable accounting standards have been followed in the preparation of the annual accounts and proper explanations have been furnished, relating to material departures.

b. Accounting policies have been selected, and applied consistently and reasonably, and prudent judgments and estimates have been made so as to give a true and fair view of the state of affairs of the Bank and of the Profit & Loss of the Bank for the financial year ended 31 March 2008. c. Proper and sufficient care has been taken for the maintenance of adequate accounting records, in accordance with the provisions of the Companies (Amendment) Act, 2000, for safeguarding the assets of the Bank and for preventing and detecting fraud and other irregularities.

d. The annual accounts have been prepared on a going concern basis. 35. ACKNOWLEDGEMENT

Andhra Bank is grateful to the Government of India, RBI, SEBI and other authorities/agencies, financial institutions and correspondent banks for their valuable support and guidance. The Directors also express their deep sense of appreciation to all the staff members of the Bank for their dedicated service, outstanding professionalism and commitment towards Bank’s vision for a sustainable growth. Finally, the Directors wish to sincerely thank all the customers, shareholders and other stakeholders for their valuable support. For and on behalf of the Board, Place: Hyderabad Date: April 25, 2008

(Dr. K. Ramakrishnan) Chairman & Managing Director

35

CORPORATE GOVERNANCE REPORT 1.

CORPORATE GOVERNANCE - PHILOSOPHY

The Philosophy of Andhra Bank is to continue to remain dynamic to the ever changing needs of the customers. The Bank believes that proper Corporate Governance facilitates effective management and control of business. This, in turn, enables the Bank to maintain a level of business ethics and to optimize the value for all its stakeholders. The principles of Corporate Governance require the commitment of the Bank to attain high level of transparency, accountability, responsibility and financial stability with the ultimate objective of building up values to the stakeholders. The objectives can be summed up as under:

n to enhance shareholders value; n to protect interest of shareholders and other stakeholders including customers, employees and society at large; n to ensure transparency and integration in communication and to make available full, accurate and clear information

2.

2.1 2.2 2.3

2.4

2.5 2.6

to all concerned.

BOARD OF DIRECTORS

Andhra Bank has been constituted as corresponding new Bank under the Banking Companies (Acquisition & Transfer of Undertakings) Act 1980.

The Board is constituted in accordance with the Banking Companies (Acquisition & Transfer of Undertakings) Act 1980 and Nationalised Banks (Management and Miscellaneous Provisions) Scheme 1980.

The Board is headed by the Chairman & Managing Director who is appointed by the Central Government in consultation with the Reserve Bank of India. The Chairman & Managing Director is appointed in exercise of the powers conferred by Clause (a) of sub section (3) of Section 9 of the Banking Companies (Acquisition & Transfer of Undertakings) Act, 1970/1980 read with sub-clause (1) of clause 3, clause 5, clause 6, clause 7 and sub-clause (1) of clause 8 of Nationalized Banks (Management and Miscellaneous Provisions) Scheme 1970/1980.

A whole time director (Executive Director) of the Bank appointed by the Central Government in consultation with Reserve Bank of India is also a member of the Board. The Executive Director of the Bank is appointed in exercise of the powers conferred by Clause (a) of sub-section (3) of Section 9 of the Banking Companies (Acquisition & Transfer of Undertakings) Act, 1970/1980 read with sub-clause (1) of clause 3 and sub-clause (1) of clause 8 of the Nationalized Banks (Management and Miscellaneous Provisions) Scheme, 1970/1980. As on 31st March, 2008 there were 9 other directors (non executive) out of which 6 were independent directors as the members of the Board represented by persons with diversified professional experience.

The Board has constituted various committees as under, which provides specific and focused governance in the important functional areas and control the affairs of the Bank:

n n n n n n n n n n 2.7 2.8 2.9

Management Committee Audit Committee Shareholders’ and Investors’ Grievances Committee Special Committee for monitoring large value of frauds Departmental Promotion Committee Risk Management Committee Customer Service Committee Share Transfer Committee Remuneration Committee Nomination Committee of Board

The details of the committees of the Board are provided in the following pages.

The Board and its Committees meet at frequent intervals and guide the Bank to achieve its objectives in a prudent and efficient manner to ensure high standards of customer services, ethical practices and professional Management of the Bank. The responsibilities such as policy formulations, performance review and analysis are discharged by the Board. The Board has delegated various powers to the Executives, and Committees of Executives of the Bank in tune with the policies laid down by the Bank. The delegated powers are periodically reviewed by the Board and necessary revision is made for effective functioning of the Bank.

37

PROFIT & LOSS ACCOUNT FOR THE YEAR ENDED 31ST MARCH, 2008 (Á. 000 ¼ßëÝ Rs in ‘000s) àËßËßÀ¢ß Particulars

31.03.2008 ‰~íë Year Ended 31.03.2008

31.03.2007 ‰~íë Year Ended 31.03.2007

2777,82,64

1810,78,06

II. ºßßÀ£ßã¾ß àÀÌßËßà ¹ßì݉~ / Þ£ßÀ ¹ßì݉~ ƒ±ßßÀíëÝ µßÀ ¹¾ßßÌß INTEREST ON RESERVE BANK OF INDIA/INTER-BANK BORROWINGS

42,03,48

40,21,18

III. ²¾ß OTHERS

50,13,47

46,79,37

2869,99,59

1897,78,61

I. ‰~¼ßýßßàÀ¾ßíëÝ ‰~íë ºßäß£ßß²ß ßìÀ ƒ²ß‰ë~ àÉ߈ µßÆßËß±ßß²ß PAYMENTS AND PROVISIONS FOR EMPLOYEES

509,38,98

548,80,25

II. à‰~Àß¾ßß, ‰~À ßìÀ ÀíëÍß²ßã RENT, TAXES AND LIGHTING

112,51,21

93,74,39

III. ¼ßä§Æ¢ß ßìÀ ÉßëÛß²ß Ðß߼ߐßÆã PRINTING AND STATIONERY

14,40,37

12,65,83

9,89,18

12,39,52

61,32,93

55,72,80

53,87

59,50

13,13,19

10,10,97

2,57,91

1,51,27

IX. Ê߉~ ˾߾ß, £ßßÀ ßìÀ ÖëÉßã¶~íë²ß ßৠPOSTAGE, TELEGRAMS, TELEPHONES ETC.

18,68,07

14,18,73

X. ¼ßÀ¼¼ß£ß ßìÀ ²ßäÀß¢ß REPAIRS AND MAINTENANCE

34,15,94

32,60,03

XI. ¹ßã¼ßß INSURANCE

49,70,17

37,71,50

117,95,65

113,13,84

944,27,47

933,18,63

²ßäÐßæ½ßã SCHEDULE - 15 :: Ë¾ß¾ß à‰~¾ßß ß¾ßß ¹¾ßßÌß INTEREST EXPENDED I. Ìß¼ßßÀßàÍß¾ßíëÝ µßÀ ¹¾ßßÌß INTEREST ON DEPOSITS

‰ä~Éß TOTAL ²ßäÐßæ½ßã SCHEDULE - 16 :: µßàÀ½ßßÉß²ß Ë¾ß¾ß OPERATING EXPENSES

IV. àËßÒßßµß²ß ßìÀ µßƽßßÀ ADVERTISEMENT AND PUBLICITY V. ¹ßì݉~ ‰~ã ÐßÞµßà££ß µßÀ ¼ßæɾßÑÅßÐß DEPRECIATION ON BANK’S PROPERTY VI. à²ß§ëÍ߉~ßëÝ ‰~ã ¶~ãÐß, ºß££ßë ßìÀ Ë¾ß¾ß DIRECTORS’ FEES, ALLOWANCES AND EXPENSES VII. ÉßëÛßß µßÀãß‰~íëÝ ‰~ã ¶~ãÐß ßìÀ Ë¾ß¾ß (ÍßßÛßß ÉßëÛßß µßÀãß‰~ ÐßàÑ£ß) AUDITORS’ FEES AND EXPENSES (Including Branch Auditors) VIII àËßà±ß µßƺßßÀ LAW CHARGES

XII. ²¾ß Ë¾ß¾ß OTHER EXPENDITURE ‰ä~Éß TOTAL

81

SCHEDULE –17 SIGNIFICANT ACCOUNTING POLICIES 1.

GENERAL:

a)

b) c)

The financial statements are prepared on historical cost convention and accrual basis, unless otherwise stated, by following going concern concept and conform to the statutory provisions, accounting standards/guidance notes issued by Institute of Chartered Accountants of India and practices prevailing in the banking industry in India.

Interest on overdue deposits is accounted on renewal.

In the case of suit filed accounts, legal expenses are charged to profit and loss account. At the time of recovery of legal expenses in respect of suit filed accounts, the amount recovered is accounted as income.

d.

e.

f. 4.

A)

2. REVENUE RECOGNITION: a. b.

c.

Interest on non-performing advances and investments is recognised as per the norms laid down by Reserve Bank of India.

Income arising from commission on the issuance of letter of guarantee and letter of credit is recognised at the issuance of such documents in view of the performance of service having been achieved on such date. Interest on overdue bills, other commission, exchange, brokerage and rent on lockers are accounted on realization.

b.

c.

On entering into a forward exchange contract, to establish the amount of the reporting currency required at the time of settlement of transaction, the premium or discount arising on the inception of such contract is amortized as income or expenses over the life of the contract. Such forward contracts are revalued on the basis of prevailing exchange rate at the end of each month and profit or loss on such revaluation is recognised as income or expenses as the case may be. Any profit and loss arising on cancellation of a forward exchange contract is recognized as income or expense as the case may be.

The exchange rates used for this purpose are those notified by FEDAI. INVESTMENTS:

The Investment portfolio of the Bank is classified into the following three categories: ii) Available for Sale (AFS) iii) Held for Trading (HFT)

“Held to Maturity” category comprises of securities acquired with the intention to hold them up to maturity. “Held for Trading” category comprises securities acquired with the intention of trading. “Available for Sale” securities are those which are not classified in either of the above two categories. B.

Investments are grouped and shown in Balance Sheet under the following six heads: i) Government Securities

ii) Other Approved Securities

Income and Expenditure items are recorded at the exchange rates prevailing on the date of transaction.

Monetary items are recorded at weekly average rate. Such monetary items are reported at closing rates as at balance sheet date. Exchange differences arising on the reporting of such monetary items at rates prevailing at the year end or on the settlement of monetary items at rates different from those at which they were initially recorded, are recognized as income or expenses, as the case may be.

Derivative contracts undertaken on back-to-back basis are recorded at the rate prevailing on the date of the contract and are reported at the closing rates at the balance sheet date. The revenue in respect of these transactions is recognised on expiry of the contract or for the proportionate period on early termination of the contract.

i) Held to Maturity (HTM)

3. FOREIGN EXCHANGE TRANSACTIONS: a.

Foreign letters of credit and letters of guarantee are recorded at the rates prevailing on the date of entering into such commitment. Outstanding items are re-stated at the rate prevailing at the balance sheet date.

iii) Shares

iv) Debentures and Bonds

v) Subsidiaries and Joint Ventures vi) Others

C. Valuation:

The securities in each classification are valued in accordance with Reserve Bank of India guidelines on the following basis:i) Held to Maturity: a.

b. ii) a.

Investments classified under this category are stated at acquisition cost net of amortisation. The excess of acquisition cost over the face value, if any, is amortised over the remaining period of maturity. Any diminution, other than temporary in nature, in the value of investments is determined and provided for, each investment individually.

Available for Sale:

Investments classified under this category are marked to market on quarterly basis and valued as per Reserve

83

Bank of India guidelines at the market rates available on the Balance Sheet date from trades/quotes on the Stock Exchanges, prices/yields declared by the Fixed Income Money Market and Derivatives Association of India (FIMMDA). Unquoted securities are also valued as per the Reserve Bank of India guidelines.

b.

The net depreciation under each of the six heads (Para B above) is fully provided for, whereas the net appreciation, if any, under any of the aforesaid heads is ignored. The book value of the individual securities does not undergo any change after marking to market. iii) a)

b) c) D

E

Held for Trading:

Investments classified under this category are valued at market price based on market quotations, prices/yields declared by FIMDA at the end of every month.

Depreciation is recognised scrip wise and appreciation, if any is ignored.

The book value of the individual securities does not undergo any change after marking to market.

Prudential Norms:

The identification of non performing investments and provision made thereon is as per Reserve Bank of India guidelines. Provision requirement in respect of nonperforming investments is not set off against the appreciation of other performing investments.

Profit / Loss on sale of Investments: i)

ii) iii)

iv)

Profit or Loss on sale of investments is recognised on the trade dates on the basis of weighted average cost. Premium on redemption of Debentures/ Bonds is recognised on the date of redemption.

Profit on sale of investments held in “Available for Sale” and “Held for Trading” categories is recognised in the Profit and Loss Account.

Profit on sale of investments in “Held to Maturity” category is first taken to the Profit and Loss Account and an equivalent amount of profit is appropriated to the Capital Reserve.

iii) 5.

a)

b)

a) b) c) d) 6.

A) i. ii.

iii.

B)

ii)

Upfront fee / Incentives on subscription of securities are reduced from the cost of securities. The incentives received after sale of securities is credited to Profit and Loss account.

Income on continuing swap transactions is recognised on accrual basis except the swap designated with an asset or liability that is carried at market value or lower of cost or market value in the financial statements. In that case, the swap is marked to market with the resulting gain or loss recorded as an adjustment to the market value or designated asset or liability.

Gains/ losses on terminated swap transactions are recognised when the offsetting gain or loss is recognised on the designated asset or liability. Thus, the gain or loss on the terminated swap is deferred and recognised over the shorter of the remaining contractual life of the swap or the remaining life of the asset/liability.

Trading swaps are marked to market with changes recorded in the Profit and Loss account;

Income and expenses relating to these swaps are recognized on the settlement date; Fee is recognized as income or expenses as the case may be;

Gains or losses on the termination of the swaps are recorded immediately as income or expenses on such termination. ADVANCES

Advances are stated in accordance with the Prudential Norms issued by Reserve Bank of India: Advances are classified into standard, sub-standard, doubtful and loss assets borrower-wise. Provisions are made for non performing assets and

General provision is made for standard assets.

Advances stated in the Balance Sheet are net of provisions made for : (i)

Loss on sale of investments in any of the three categories is recognized in Profit and Loss Account. Transfer of securities from one category to another is done at lower of acquisition cost/book value/ market value on the date of transfer. Depreciation, if any, on such transfer is provided for and the book value of the security is changed accordingly.

A. INTEREST RATE SWAPS: (Hedging)

B. INTEREST RATE SWAPS (Trading)

(ii)

F General i)

Brokerage, Commission and Stamp Duty paid in connection with the acquisition of securities are treated as revenue expenditure.

C) 7.

Non performing assets

Additional Provision made for Non-performing Assets

(iii) Standard Assets

Partial recoveries in Non Performing Assets are apportioned first towards charges and interest, thereafter towards principal. FIXED ASSETS

Premises and other Fixed Assets are stated at historical cost net of depreciation.

85

(c) Other Long Term Benefits:

A. DEPRECIATION (i)

(ii)

B.

8.

The depreciation on Computers and other Peripherals is provided @ of 33.33 % on straight line method.

(iii) Depreciation on ATM s is provided on straight line method based on the useful life of ATMs which is estimated by the Bank as seven years. AMORTIZATION

i)

Premium paid for acquisition of leasehold land for a period of less than 60 years and cost of the buildings constructed thereon is amortised over the period of lease.

ii) Software acquired is amortised in the year of acquisition. EMPLOYEES BENEFITS

(a) Short Term Employee Benefits

Short Term Employee Benefits such as short-term compensated absences are recognized as an expense on an undiscounted basis in the Profit &Loss Account of the year in which the related service is rendered.

(b) Post Employment Benefits i)

ii)

Other Long Term Benefits such as Leave Encashment, Sick Leave, LFC/LTC availment/ encashment, Employee Incentive Scheme, Exgratia to retirees and Relocation of expenses on exit are recognized on the basis of actuarial valuation made as at the end of the year.

Depreciation on premises and on other assets except Computers and ATM’s is provided on written down value method at the rates specified in Schedule XIV of the Companies Act 1956.

Defined Contribution Plans:

Defined Contribution Plans such as Provident Fund are recognized as an expense and charged to the Profit &Loss Account Defined Benefit Plans

(a) Gratuity:

The employees Gratuity Fund Scheme is funded by the Bank and managed by LIC through a separate trust. The present value of the Bank’s obligations under Gratuity is recognized on the basis of an actuarial valuation as at the year end and the fair value of the Plan assets is reduced from the gross obligations to recognize the obligation on a net basis. (b) Pension:

The employees Pension Fund is funded by the Bank and is managed by a separate trust. The present value of the Bank’s obligations under Pension is recognized on the basis of an actuarial valuation as at the year end and the fair value of the Plan assets is reduced from the gross obligations to recognize the obligation in this case on a net basis.

9.

PROVISION FOR TAXATION:

I.

II.

Provision for taxation includes current tax, Fringe benefit tax and deferred tax.

In compliance with AS-22 Accounting for Taxes on Income, issued by the Institute of Chartered Accountants of India, accounting for deferred income tax is made after considering tax rates and laws that have been enacted or substantively enacted as of balance sheet date.

10. IMPAIRMENT OF ASSETS

An assessment is made at each balance sheet date whether there is any indication that an asset is impaired. If any such indication exists an estimate of the recoverable amount is made and impairment loss, if any is provided.

11. CONTINGENT LIABILITIES AND PROVISIONS

Past events leading to, possible or present obligation is treated as contingent liabilities. Provision is recognised in the case of present obligation where the reliable estimate can be made and where there are probable out flow of resources embodying forgoing of economic benefits to settle the obligation.

12. Earnings per Share

Basic earnings per share (EPS) reported is computed by dividing net profit after tax by the weighted average number of equity shares outstanding for the year.

13. NET PROFIT

The Net Profit disclosed in the Profit and Loss Account is after:(a) Provision for depreciation on Investments. (b) Provision for Taxation. (c)

Provision on loan losses as per prudential guidelines.

(d) Provision for non-performing investments as per Reserve Bank of India guidelines. (e) Other usual and necessary provisions. Place: Hyderabad

Date : 25.04.2008

87

Rs.50.36 crores and transferred to a Special Purpose Vehicle (SPV) Trust pursuant to the Deed of Assignment executed between National Housing Bank (NHB) and the Bank, the NHB has issued Pass Through Certificates (PTCs) of said amount, out of which part was subscribed by various Banks/Financial Institutions as PTC Class-A investments and the balance was subscribed by the bank as PTC Class B. Such PTC class B investment with a book value of Rs. 4.82 crores (Rs. 5.53 crores) has been shown as a part of investments by the bank at the year end.

SCHEDULE 18 - NOTES ON ACCOUNTS 1.

2.

3.

Reconciliation of Inter Branch and Inter Bank transactions has been done up to 31.03.2008.

Legal formalities with regard to the registration of property in favour of Bank are yet to be completed in respect of one property valued at Rs. 0.06 crores (Rs. 0.06 crores). a) No provision is considered necessary towards disputed tax demand of Rs.297.60 crores (Rs. 44.69 crores) in view of judicial pronouncements in similar cases.

The present outstanding balance of the pool as on 31.03.2008 is Rs.20.04 crores (Rs.25.13 crores).

b) Deferred Income Tax:

Pursuant to Accounting Standard –22 issued by The Institute of Chartered Accountants of India in respect of “Accounting for taxes on Income”, necessary deferred tax liability and deferred tax assets have been recognized. The major components as on 31.03.2008 are as follows:(Amount in crores)

Timing Difference

31.03.2008 31.03.2007 DTA DTL DTA DTL

(1) Provision created in books but not Claimed in Income Tax 35.00 (2) Excess/Less Depreciation claimed as per I.T. Act

3.14

(3) DTL on Special Reserve created u / s 36(1) (viii) of I.T. Act

25.56

--

--

0.41

--

31.95

--

16.49

(4) DTA on transitional provision as per AS-15(R)

131.60

--

--

--

Total

169.74

31.95

4.

5.

6.

7.

25.56 16.90

(c) Deferred Tax Asset of Rs.131.60 crores has been recognized on the amount of Rs.387.18 crores being the transitional liability on implementation of AS-15(R)– “Employee Benefits” draw down from opening Revenue Reserves.

(d) Provision for Income Tax has been made on the basis of the applicable laws and various judicial pronouncements in this regard.

Investments include Rs. 8.26 crores invested in Regional Rural Banks as Share Capital Deposit pursuant to a letter by Government of India. Since RRBs are not companies there is no requirement for issue of shares in certificate form. Additional Provision of Rs. 167.47 crores (Rs.167.47 crores), is held as at 31.03.2008 in respect of gross non performing advances over and above the minimum prescribed as per RBI guidelines with a view to strengthening the financial stability of the Bank. Such additional provision is netted off from Advances.

There is no material prior period item included in Profit and Loss account required to be disclosed as per AS5 issued by the Institute of Chartered Accountants of India read with RBI guidelines. In respect of 1437 individual housing loan accounts securitised during the year 2003-04 amounting to

The bank is acting as service provider to the SPV Trust. An amount of Rs.68 lakhs has been provided by the bank as cash collateral in addition to Investment in PTCB as Credit Enhancement.

8.1. Capital Items 1. 2. 3. 4.

2007-08

2006-07

51.55

51.55

700

NIL

CRAR (%) CRAR - Tier I capital (%) CRAR - Tier II Capital (%) Percentage of the shareholding of the Government of India in nationalized banks 5. Amount of subordinated debt raised as Tier-II capital (Rs. Crores) 8.2. Investments

Items

11.61 8.54 3.07

11.33 9.98 1.35

(Rupees in crores) 2007-08

2006-07

(1) Value of investments (i) Gross Value of Investments In India 14987.95 14406.30 Outside India *0.00 0.00 (ii) Provisions for Depreciation In India 89.72 105.58 Outside India 0.00 0.00 (iii) Net Value of Investments In India 14898.23 14300.72 Outside India *0.00 0.00 (2) Movement of provisions held towards depreciation on investments. i) Opening balance 105.58 64.26 ii) Add: Provisions made during the year 44.93 46.47 iii) Less: Write-off/(write-back) of excess provisions During the year 60.79 5.15 iv) Closing balance 89.72 105.58 * Includes investments in 21,141 shares (Class C Series – I) of Visa Inc valued at Re.1 and 2,120 shares (Class B) of Master Card Inc valued at Re. 1. These shares are allotted in kind, free of cost, as an incentive in view of the past business relation with these entities.

89

8.2.1. Repo Transactions Particulars Securities sold under repos Securities purchased under reverse repos

(Rupees in crores) Minimum outstanding during the year 0.00 (157.50 ) 0.00 ( 49.88)

Maximum outstanding during the year 0.00 (525.00) 2520.00 (2772.00 )

Daily Average outstanding during the year 0.00 (4.36) 149.33 (730.16)

8.2.2. Non S.L.R. Investment Portfolio i) Issuer composition of Non SLR Investments Sr. No. (1)

Issuer

1

PSUs

3

2 4 5 6 7 8 9

(2)

Amount (3)

Balance As on 31st March 2007 0.00 ( 0.00) (0.00 ) ( 0.00)

(Rupees in crores) Extent of Private Placement (4)

Extent of ‘below Investment Grade securities’ (5)

Extent of ‘unrated’ securities (6)

Extent of ‘unlisted’ securities (7)

16.02

9.00

25.02

327.88

297.63

13.60

Banks

583.30

312.18

—

—

5.00

Subsidiaries/ Joint Ventures

14.31

14.31

—

—

—

FIs

Private Corporates

Others

359.07 426.78

180.34

—

29.20

29.20

—

58.33

xxxxxxx

xxxxxx

Total

1740.54

Total

1682.21

Less: Provision held Towards Depreciation

320.78

1154.44

1154.44

29.62

29.62

—

—

—

9.00 xxxxxx

9.00

—

—

12.50 42.52

xxxxxxx

42.52

91

Total under column 3 include the following categories of investments specified in Schedule 8 to the Balance Sheet: Particulars

Net Value

Debentures & Bonds

889.65

Others

575.50

Shares

Subsidiaries / Joint Ventures Total

ii) Non Performing Non SLR Investments Particulars

Opening Balance

Additions during the year

Reduction during the period Closing Balance

Total provisions held

(Rupees in crores)

207.75 9.31

1682.21 (Rupees in crores)

2007-08

2006-07

0.47

1.31

0.01

——-

0.48

0.47

—-

0.84

0.48

0.47

8.2.3. During the year, the Bank has shifted certain SLR securities aggregating to Rs. 741.16 crores from “Available for Sale” (AFS) category to “Held to Maturity “ (HTM) category at lower of acquisition cost/book value /market value and the resultant depreciation of Rs. 9.12 crores has been provided.

8.2.4. The Bank has shifted certain securities aggregating to Rs. 35.41 crores relating to investment in IFCI Ltd from “Held to Maturity” (HTM) category to “Available for Sale”(AFS) category and consequent depreciation of Rs. 18.91 crores in accordance with the RBI letter DBOD. NO. FID. 202/03.01.03/2007-08 dated 5th July 2007, has been provided till 31st March 2008.

8.3.

The Bank has also shifted certain Zero Coupon Optionally convertible Debentures (ZCOCD) aggregating to Rs. 23.56 crores relating to investments in IFCI Ltd from “Held to Maturity” (HTM) category to “Available for Sale”(AFS) category and depreciation of Rs. 10.28 crores (as computed on 30.09.07) in accordance with the RBI letter DBOD. NO. FID. 202/03.01.03/ 2007-08 dated 5th July 2007 has been provided. Derivatives

8.3.1. Forward Rate Agreement / Interest Rate Swaps of Investment portfolio Items

The notional principal of swap agreements

Losses which would be incurred if counter parties failed to fulfill their obligations under the agreements Collateral required by the bank upon entering into swaps Concentration of credit risk arising from the swaps The fair value of the swap book

8.3.2 Exchange Traded Interest Rate Derivatives: S.No. (i)

(ii) (iii) (iv)

2007-08

575.00

2006-07

600.00

0.37

0.99

3.24

3.99

0.00

(14.21)

Particulars

Notional principal amount of exchange traded interest rate derivatives undertaken during the year (instrument-wise)

Notional principal amount of exchange traded interest rate derivatives outstanding as on 31st March 2008 (instrument-wise) Notional principal amount of exchange traded interest rate derivatives outstanding and not “highly effective” (instrument-wise)

(Rupees in crores)

Mark-to-market value of exchange traded interest rate derivatives outstanding and not “highly effective” (instrument-wise)

0.00

(29.30)

(Rupees in Crores) Amount NIL NIL NIL NIL

93

8.3.3. Disclosures on risk exposure in derivatives A) Qualitative Disclosures:

a) Structure and Organization for Management of risk in derivatives trading: i)

In terms of Reserve Bank of India guidelines on Interest Rate Swaps (IRS) and Forward Rate Agreements (FRA) dated 7th July 1999, the Bank approved policies and procedures, Counter party exposure limits, delegation of powers, Accounting Policy, policy for valuation, ISDA documentation, cut loss, reporting etc., for Interest Rate Swaps and fixed a cap of Rs.3000 crores for interest rate swaps (sub-limit of Rs. 1500 crores for Trading Book). Bank has conducted the derivative operations within the overall framework of these guidelines.

ii) The Bank has approved policies and procedures, counter party exposures limits delegation of powers, accounting policy, ISDA documentation, reporting etc., for undertaking forex derivatives in various forms of currency swaps & various types of interest rates swaps not specifically prohibited by RBI with the corporate borrower customers, other banks and non-borrower customers to be converted on back to back basis. Bank’s policy also permits entering into Plain Vanilla Europeon Style Option to Bank’s customers for hedging / pricing their forward exposures on back to back basis.

Mark to Market valuation are sent to customers on monthly basis and capital charge is provided as per current exposure method.

Derivative contracts undertaken on back to back basis are recorded at the closing rates on the balance sheet date. The revenue in respect at these transactions is recognized over proportionate period for running contracts and in case of contracts terminated before maturity revenue is recognized on termination date.

b) Scope and nature of risk measurement, risk reporting and risk monitoring systems:

Bank is availing the services of a consultant in respect of the derivative transactions undertaken. The consultant firm is

providing daily mark to market position of all the outstanding swaps and the Bank, at periodical intervals, is reviewing the same. The position of all outstanding swaps, new swaps entered, swaps exited, Mark to Market value of swaps etc., is being reviewed by the Bank’s Investment Committee and the Board at monthly intervals. Details of transactions undertaken in IRS are also reported to RBI on a fortnightly basis. c) Policies for hedging and / or mitigating and strategies and processes for monitoring the continuing effectiveness of hedges / mitigants:

Depending on the market opportunities and in consultation with the Consultant, a view on interest rate movement is taken and acted upon. Though the settlement of swaps takes place on due date/dates as per the terms of the swaps, the value monitoring is carried out daily to know the impact of market changes on Swap Book. When unfavorable market movements are unidirectional, swaps are exited cutting loss. Cut loss limits, exit powers, reviewing authority etc., are prescribed.

d) Accounting policy for recording the hedge and nonhedge transactions, recognition of income, premiums and discounts, valuation of outstanding contracts, provisioning, collateral and credit risk mitigation:

Detailed accounting policy and valuation policy are approved by Board. Transactions for hedging purposes are accounted for on accrual basis except the swap designated with an asset / liability that is carried at lower of cost or market value. In that case, the swap is marked to market, with the resultant gain or loss recorded as an adjustment to the market value of designated asset or liability. On termination of swap, gain or loss is recognized when the offsetting gain or loss is recognized on the designated asset or liability. Any gain or loss on the terminated swap was deferred and recognized over the shorter of the remaining contractual life of the swap or the remaining life of the asset / liability. Trading transactions have to be marked to market with charges recorded in the income statement. Income, expenditure, fee, gains or losses on termination of swaps are all recorded as immediate income or expenses.

95

B) Quantitative Disclosure Sr No. 1

2

Particulars

Derivatives (Notional principal Amount) a) For Hedging

4

5

8.4

300.88

(iv)

575.00

575.00

a) Asset (+) b) Liability(-)

— —

— (0.48)

a) Asset(+)

—

—

43.22

3.24

—

(22.23)

Market to Market Positions A. Hedging

b) Liability(-)

Credit Exposure

Likely Impact of one percentage change in Interest rate (100*PV01) a) On hedging derivatives

—

—

b) On trading derivatives Maximum and Minimum of 100*PV01 observed during the year

—

a) On hedging

—

Max : (48.23)

b) On trading

—

Max : —

—

Min : (2.89)

Min : —

Bank is having Mark to Market position of Rs. 34.45 crores (Negative with counter party banks) on account of derivative deals. All derivative deals are covered Back to Back. Hence there is no net Mark to Market Profit or Loss for the bank on outstanding deals. Asset Quality

Items

(iii)

Interest Rate Derivatives

—

8.4.1. Non-Performing Asset (i) (ii)

(Rupees in Crores)

300.88

b) For Trading

B. Trading

3

Currency Derivatives

Net NPA to Net Advances Movement of NPAs (Gross) (a) Opening Balance (b) Additions during the year (c) Reductions during the year (d) Closing Balance

Movement of Net NPAs (a) Opening Balance (b) Additions during the year (c) Reductions during the year (d) Closing Balance

Movement of provisions for NPA’s (a) Opening Balance (b) Additions during the year (c) Reductions during the year (d) Closing Balance

(Rupees in Crores) 2007-08

2006-07

0.15%

0.17%

397.01 201.52 226.10 372.43

436.91 243.66 283.56 397.01

47.25 6.45 0.00 53.70

52.46 0.00 5.21 47.25

343.49 98.67 118.38 323.78

381.00 92.59 130.10 343.49

97

8.4.2 Details of Loan Assets subjected to Restructuring

(i) (ii) (iii) (iv)

Item Total amount of loan assets subjected to restructuring, rescheduling, renegotiation; - of which under CDR The amount of Standard assets subjected to restructuring, rescheduling, renegotiation; - of which under CDR The amount of Sub-Standard assets subjected to restructuring, rescheduling, renegotiation; - of which under CDR The amount of Doubtful assets subjected to restructuring, rescheduling, renegotiation; - of which under CDR Note: [ (i) = (ii)+(iii)+(iv) ]

(Rupees in crores) 2007-08

2006-07

143.55 24.87

332.70 0

143.55 7.47

332.70 0

17.40 17.40

0 0

0 0

0 0

8.4.3 Details of Loan Assets (MSME sector) subjected to Restructuring (i) (ii) (iii) (iv)

Item Total amount of loan assets subjected to restructuring, rescheduling, renegotiation; - of which under CDR The amount of Standard assets subjected to restructuring, rescheduling, renegotiation; - of which under CDR The amount of Sub-Standard assets subjected to restructuring, rescheduling, renegotiation; - of which under CDR The amount of Doubtful assets subjected to restructuring, rescheduling, renegotiation; - of which under CDR Note: [ (i) = (ii)+(iii)+(iv) ]

2007-08

(ii) (iii) (iv)

Item Total amount of loan assets subjected to restructuring, rescheduling, renegotiation; - of which under CDR The amount of Standard assets subjected to restructuring, rescheduling, renegotiation; - of which under CDR The amount of Sub-Standard assets subjected to restructuring, rescheduling, renegotiation; - of which under CDR The amount of Doubtful assets subjected to restructuring, rescheduling, renegotiation; - of which under CDR Note: [ (i) = (ii)+(iii)+(iv) ]

2006-07

14.14 NIL

27.70 NIL

14.14 NIL

27.46 NIL

NIL NIL

0.24 NIL

NIL NIL

NIL NIL

8.4.4 Details of Loan Assets (Priority sector) subjected to Restructuring (i)

(Rupees in crores)

2007-08

(Rupees in crores)

2006-07

15.77 NIL

NIL NIL

15.77 NIL

NIL NIL

NIL NIL

NIL NIL

NIL NIL

NIL NIL

99

8.4.5 (a) Details of financial assets sold to Securitisation / Reconstruction Company for Asset Reconstruction ( Rupees in crores) Item

No. of accounts

Aggregate value (net of provisions) of accounts sold to SC/ RC Aggregate consideration

Additional consideration realized in respect of accounts transferred in earlier years Aggregate gain over net book value. (b)

2007-08

2006-07

20.14

NIL

1

25.88

NIL

5.74

NIL

NIL

Details of non performing financial assets sold

Sl. No.

Particulars

1

NIL

NIL

( Rupees in crores) 2007-08

2006-07

No. of accounts sold

NIL

NIL

2

Aggregate outstanding

NIL

NIL

3

Aggregate consideration received

NIL

NIL

8.4.6 Provisions on Standard Asset

Particulars Provisions towards Standard Assets

( Rupees in crores) 2007-08

2006-07

150.00

125.00

2007-08

2006-07

8.61%

8.08%

8.5.1. Business Ratios Particulars (i)

Interest income as percentage to average working funds

(iii)

Operating profit as percentage to working funds

(ii)

(iv) (v)

(vi)

Non-interest income as percentage to average working funds

Return on assets

Business (deposits plus advances) per employee (Rs. in lakhs) Profit per employee ( Rs. in lakhs)

1.17%

2.12%

1.16%

626.53

4.30

1.09%

2.27%

1.31%

536.06

4.14

101

ABRIDGED FINANCIAL STATEMENT OF ANDHRA BANK IN FOREIGN CURRENCY BALANCE SHEET AS ON MARCH 31, 2008

(Amount in Indian Rupee converted into US dollar at RBI Reference rate for two currencies applicable as on the date of balance sheet i.e. US$ 1= Indian Rs.40.12) CAPITAL AND LIABILITIES Capital

Reserves & Surplus Deposits

Borrowings

Other Liabilities & Provisions Total

(Indian Rupees in crore)

(US $ in million)

485.00

120.89

49436.55

12322.17

3316.04

826.53

2764.29

590.51

689.00

147.19

56592.39

14105.78

4901.67

1221.75

Investments

14898.24

3713.42

Fixed Assets

219.46

54.70

Assets

Cash & Balances with RBI

Balances with banks & Money at call & Short Notice Advances

Other Assets Total

Contingent Liabilities Bills for collection

Profit and Loss account for the year ended 31.03.2008 Income

792.65

34238.38

1541.99

197.57

8534.00

384.34

56592.39

14105.78

2898.72

722.51

19730.00

4917.75

Interest earned

4289.87

1069.26

Total

4871.22

1214.16

Interest Expended

2870.00

715.36

Other Income Expenditure

Operating Expenses

Provisions & Contingencies Total

Net Profit for the year

Profit Brought Forward

581.35

144.90

944.28

235.36

4295.65

1070.70

76.23

19.00

481.37 575.57

119.98

143.46

Total

651.80

162.46

Tr to Statutory Reserve

144.00

35.89

Tr to Proposed Dividend

194.00

48.35

76.83

19.15

Appropriations

Tr to Revenue Reserve Tax on Dividend

Balance carried to Balance Sheet

204.00 32.97

50.85 8.22

127